Citing Multiple Factors, Intelsat Lowers 2013 Revenue Forecast

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PARIS — Satellite fleet operator Intelsat on Oct. 31 trimmed its 2013 revenue forecast following what it said is a surprising collapse in satellite-bandwidth prices in Africa, a U.S. government-ordered shutdown of service to an Iranian customer and the ongoing effects of U.S. Defense Department budget cuts.

Luxembourg- and Washington-based Intelsat said the recent confirmation of protested Intelsat wins of U.S. government contracts under the Custom Satellite Solutions, or CS2, program, was not enough to overcome the slackening U.S. Defense Department contract volume.

In a conference call with investors, Intelsat said it probably will not reach the low end of its previous revenue forecast of between $2.62 billion and $2.64 billion. Intelsat Chief Financial Officer Michael McDonnell said the company likely will miss the low end by no more than 0.5 percent.

Because of the type of business that is under pressure, however — it includes lots of non-Intelsat satellite capacity that Intelsat bundles into its contracts when needed — the effect on profit margins is likely to be minimal, McDonnell said. 

In the conference call and in an Oct. 31 filing with the U.S. Securities and Exchange Commission, Intelsat pointed to three issues that forced its hand on the full-year forecast. 

The first is that, during the three months ending Sept. 30, the U.S. State Department ordered Intelsat to cease carrying broadcasts from Islamic Republic of Iran Broadcasting (IRIB). Other satellite operators, most recently Eutelsat of Paris, have faced similar orders from government regulators.

The U.S. government decision, part of a broader policy of sanctions seeking to stop international commerce with Iranian government entities, came despite the fact that Intelsat was operating under an existing, valid license.

McDonnell said halting the IRIB broadcasts deprived Intelsat of around $2.25 million in revenue during the quarter.

An Intelsat official said that because the Iranian customer’s relations with Intelsat stretch back to the days when Intelsat was an intergovernmental organization, it benefits from Intelsat’s policy of not billing for services until they are fully delivered. In this case, the official said, Intelsat had already provided the contracted services to IRIB when the State Department issued its order, and now is unable to collect the associated payments.

The second issue was the degradation of the satellite-bandwidth market in Africa as a combination of fiber optic cable and the arrival of additional satellite operators has forced down transponder prices.

Intelsat Chief Executive David McGlade said that while the company has long been aware of the effects of fiber and the newly arriving satellite competitors in the fast-growing African satellite market, it had not expected these competitors to cut prices to the extent that they have.

The result, for the three months ending Sept. 30, was more than $8 million in bad debt generated when Intelsat customers failed to make good on their contracted payments.

“What happened over the past few months is that the prices dropped and some of our customers, particularly the smaller ones, were locked into contracts that were uncompetitive in the marketplace,” McGlade said. “Some actually went out of business. Others needed price concessions and we are working with them.

“What was surprising was the degree that other operators, some of them large operators, used price rather than other capabilities to drive performance on their assets.”

Intelsat and other satellite operators have said it will take some time before the still-growing African demand for satellite capacity, now mainly inland rather than on the coasts, catches up with the existing supply.

Intelsat in July ended a legacy from its days as an intergovernmental organization by ceasing what it called its Lifeline Connectivity Obligation, under which it provided below-market satellite bandwidth to nations for which satellites were the only viable communications links.

The third problem for Intelsat is the U.S. government’s budget turmoil, especially the across-the-board budget cuts known as sequestration. 

About 60 percent of Intelsat’s U.S. government business is done using Intelsat’s own satellites or the company’s fiber network. The remaining 40 percent consists of Intelsat-managed contracts that include areas not covered by Intelsat spacecraft, or mobile services Intelsat does not provide, or some other capability not in Intelsat’s portfolio.

For the three months ending Sept. 30, U.S. government revenue was down 10 percent, to $122 million, compared with the same period a year ago.

McDonnell said the sequestration-caused cutbacks continue to affect Intelsat contracts involving third-party capacity more than those using Intelsat’s own satellites. These contracts, which require no capital expenditure on Intelsat’s part, are less profitable than contracts using the company’s in-house capacity. This has the effect of mitigating sequestration’s impact on Intelsat’s gross profit.

McGlade told investors not to expect an immediate turnaround in the government budget situation.

Intelsat reported revenue of $652 million for the three months ending Sept. 30, flat from a year ago. EBITDA, or earnings before interest, taxes, depreciation and amortization, was stable at 78 percent of revenue.

 

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