Military Quarterly | Eutelsat Says U.S. Military Business Bounced Back During First Quarter

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PARIS — Satellite fleet operator Eutelsat on Oct. 29 said 90 percent of its satellite capacity-lease contracts with the U.S. Department of Defense that were due to be renewed in September and October have been renewed, with prices at about the level Eutelsat expected.

A 90 percent renewal rate is higher than what happened during the previous renewal period in February and March, when the U.S. military cut back on leases with Eutelsat under budgetary pressures, causing investors to fear that one of the company’s fastest-growing business lines was slowing down.

Eutelsat Chief Executive Michel de Rosen said the 90 percent renewal success was in line with Eutelsat’s forecast, both in volume and price-per-transponder terms. But the company is still feeling the effects of the February-March renewal shortfall and remains cautious about predicting U.S. military demand in the current U.S. government budget environment.

“We see some degree of price softening in the near term,” de Rosen said. “Longer-term, growth will pick up.”

Eutelsat’s Multi-Usage business, which is where the U.S. military revenue is collected, was 36.8 million euros ($52 million) for the three months ending Sept. 30, up 8 percent from the same period a year ago.

Presenting its financial results for the quarter ending Sept. 30, Paris-based Eutelsat said its Tooway consumer broadband satellite business, which uses Eutelsat’s Ka-Sat spacecraft, continued to grow after a slow start.

As of Sept. 30, 108,000 Ka-Sat terminals had been activated, up 19 percent from the terminal count three months earlier. Eutelsat said France and Spain were the regions of highest growth, and that Ukraine and Russia “started to show traction.”

The Tooway project, and the threat that Ka-Sat would never generate the incremental revenue Eutelsat had forecast, had been a second reason why investors had been wary of Eutelsat.

With the U.S. defense business and Tooway now appearing less challenged, the market reacted to Eutelsat’s announcement by pushing the stock up 5.6 percent on Oct. 30, the day after the financial release and conference call.

De Rosen said the relative weakness in the company’s revenue from video applications — flat from the same period a year ago — is almost solely a function of the fact that the company is running short of capacity to host new video channels.

The lack of in-orbit capacity is about to change. Eutelsat has leased 27 Ku-band transponders on two satellites owned by Russian Satellite Communications Co. (RSCC) and scheduled for launch by the end of the year. The capacity will be used to develop Russia’s satellite television market.

Eutelsat also will have capacity aboard five other satellites scheduled for launch between 2014 and mid-2016, including another one owned by RSCC that will be carrying Ku- and Ka-band transponders.

Most of this capacity is for markets outside Europe. In addition to Russia, the new spacecraft have beams covering Africa, the Middle East, Central Asia and Latin America.

The last of these spacecraft, the Eutelsat 65 West A to be launched in 2016, will mark Eutelsat’s first direct presence in Latin America, not including the assets to be acquired after Eutelsat closes its purchase of Mexican satellite fleet operator Satmex. The acquisition is expected to close by the end of this year. 

Until then, Eutelsat is not including Satmex in its revenue and capacity forecasts.

Eutelsat similarly declined to adjust its revenue and profit forecast downward to reflect the loss of customers at 28.5 degrees east following a long-running dispute with rival SES of Luxembourg.

As of Oct. 4, the frequency rights and associated customer base switched from Eutelsat, which had been leasing the capacity to SES, to SES itself. Eutelsat has said that if nothing changes the situation, the company faces a revenue shortfall of 20 million euros for the last three months of calendar year 2013, and 20 million euros in each of the two following years.

SES officials have questioned whether these figures are not a best-case estimate from Eutelsat, but de Rosen said the company would not discuss the matter until its ongoing negotiations with SES are completed.

Eutelsat is also continuing negotiations with French authorities over a tax dispute in which an initial judgment went against the company. French corporate tax rates are higher than the rates in Luxembourg, where both SES and Intelsat, the world’s biggest satellite operator, are headquartered.

The tax dispute with France concerns Eutelsat’s establishment in 2009 of a subsidiary in the tax-friendly Industrial Free Trade Zone of Madeira in Portugal.

The French tax authority had said Eutelsat owed 27 million euros in three years of back taxes as of the end of 2012. Eutelsat protested, and the French authority agreed to reduce the assessment by 5.5 million euros. Eutelsat continues to protest the remaining 21.5 million euros in charges.

 

Folow Peter on Twitter: @pbdes