PARIS — Intelsat expects to increase its revenue by 2-4 percent per year on average in the coming years, a ho-hum growth rate that carries with it the promise of increasing free cash flows, lower debt and likely future cash dividends to shareholders, Intelsat Chief Executive David McGlade said.
McGlade said the company’s declining point-to-point channel and trunking businesses will be flushed from the system in terms of revenue impact in the next couple of years, but that for now their combined declines of about $30 million per year are masking the company’s inroads in aeronautical and maritime markets.
In a Nov. 21 investor presentation in Barcelona, Spain, organized by Morgan Stanley, McGlade said the company’s recent difficulties in Africa are not about to end. The entry of fiber lines and of satellite operators unafraid of a price war has put pressure on Intelsat’s dominant position.
McGlade said Intelsat, as the incumbent satellite operator with a 60 percent share of the continent’s satellite business, is bearing the brunt of the new competitive environment. Bad-debt levels among Intelsat customers there — companies that purchased Intelsat capacity at higher price levels and now are under pressure from their own customers to bring prices down — are rising, and those that can survive the current pricing environment have been granted new contract terms to help them cope.
“We have higher bad debt than we’ve ever experienced in Africa,” McGlade said. “We’re having to bring prices down and rework deals. Is it contained? Not yet.”
Despite the degraded climate for satellite bandwidth providers, which has been noted by other satellite fleet operators, McGlade said Intelsat’s overall African business volume has remained steady.
An environment in which former bandwidth prices are no longer sustainable is, ironically, confirming Intelsat’s strategy of introducing high-throughput satellites in Ku- and C-band. The company’s Epic satellites, the first of which is to launch in late 2015, will offer 10 times the raw throughput and three to four times the capacity of traditional satellites.
The market shift to lower-cost bandwidth that Epic will offer is coming more rapidly in Africa than Intelsat had predicted. “We always new we needed to lower the cost per bit to make it more cost effective for our customers,” McGlade said. “The difference is that now we have to do it on standard-capacity [satellites] rather than Epic capacity.”
The Intelsat 29e is the first Epic satellite. Panasonic Avionics, Harris CapRock and MTN have purchased a combined $500 million in Intelsat 29e capacity for 10 years. McGlade said the lease payments begin in 2016, meaning from then on the company is guaranteed $50 million in annual revenue from these customers alone.
The Epic satellites will put Luxembourg- and Washington-based Intelsat into a more direct competition with mobile satellite services operator Inmarsat of London, whose L-band low- and medium-bandwidth capacity is used by mobile platforms around the world.
Inmarsat’s own high-throughput-capacity offer, called Global Xpress, will use Ka-band frequencies. The three Global Xpress satellites are scheduled for launch starting in December, with full service scheduled by late 2014 or early 2015.
McGlade sought to convince investors that Intelsat’s move from its current business into a high-throughput business in Ku-band will be easier than Inmarsat’s move from lower-speed L-band into Ka-band broadband for land-mobile, aeronautical and maritime markets.
“We think we can exceed them in terms of speed and performance,” McGlade said. “We think that really puts us in the driver’s seat.”
Inmarsat officials say they are locking in future Global Xpress customers by signing on current maritime fleets to use Ku-band capacity from Intelsat and other third-party operators through contracts that guarantee that these customers will move to Global Xpress once it is available.
It is not just Inmarsat that is competing with Intelsat in the mobile services market. Other companies are aiming to take a piece of the broadband-mobility market, if in smaller chunks than Inmarsat and Intelsat, whose coming satellites will have near-global coverage.
McGlade said Carlsbad, Calif.-based ViaSat Inc.’s ViaSat-2 Ka-band satellite appears to be targeting mobile users “on the edge” of its coverage area.
McGlade reiterated Intelsat’s long-held view that O3b Networks, which is partly owned by fleet operator SES of Luxembourg, has technical issues that will be difficult to overcome. SES and O3b, which is deploying a fleet of low-orbiting broadband satellites to serve customers in the low to mid latitudes, have dismissed Intelsat’s claims.
Yahsat of the United Arab Emirates, Eutelsat of Paris, Telenor of Norway and other fleet operators are also eyeing mobility for their Ka-band satellite systems, either in orbit or under construction.
McGlade said Intelsat’s debt reduction program, which has already trimmed the company’s annual interest payments by refinancing in a low-interest-rate environment, is likely to take another big step forward in November 2014, when a $500 million bond currently paying an 8.5 percent annual yield will be refinanced to bring its cost down closer to the average interest on Intelsat’s overall debt, which is 6.5 percent.
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