Selective Price Cuts Help To Stablize Intelsat’s Africa Business

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PONTE VEDRA, Florida — Satellite fleet operator Intelsat on Aug. 4 said its business in Africa, which has suffered in the past year, is stabilizing after the company offered transponder-lease price cuts of 25-30 percent to help selected customers that might otherwise have gone bankrupt or reneged on their commitments.

The company also said some late-paying customers in Africa have since paid their bills, resulting in a one-time revenue contribution for the three months ending June 30, and that in general the bad-debt issue of 2013 appears to be dissipating.

African satellite customers in long-term contracts with Intelsat were hit by the availability of fiber on the African coasts, and by the entry into Africa of competing satellite operators that undercut Intelsat prices — or in Intelsat Chief Executive David McGlade’s words, that “lack pricing discipline.”

In a conference call with investors, Washington- and Luxembourg-based Intelsat said its focus in 2014 and 2015 is maintaining its revenue base as far as possible, paying down debt and preparing for the launch of its Epic high-throughput satellites.

The Epic spacecraft, featuring spot beams permitting the reuse of radio spectrum, will arm Intelsat to better capture the growing market for mobile applications, Intelsat officials said.

Intelsat reported that revenue for the three months ending June 30 fell 6 percent, to $616 million, as its Network Services, Media and government business lines all declined. The company’s transponder fill rate dipped to 76 percent from 77 percent, but its backlog as of June 30 stood at $10.3 billion, up 4 percent from where it was March 31.

With satellite lease prices holding steady overall and Intelsat facing a relatively soft year with respect to capital spending, the company said it would increase, to $475 million from $400 million, the amount of debt it would pay down in 2014. Intelsat has a long-term debt totaling around $15.2 billion.

Reducing debt is viewed as key to freeing up cash for new satellites and to creating value for Intelsat shareholders. The company’s stock has underperformed the broader U.S. stock market since Intelsat’s initial public offering in April 2013.

Intelsat had warned investors to expect a drop of 15-20 percent in its government business in 2014 as the U.S. Defense Department lets existing leases expire without renewal, and as renewal competitions face pricing pressure. The decline in the three months ending June 30 was 15 percent.

McGlade, who has been a vocal promoter of a revised satellite-procurement policy at the Defense Department, said these efforts are bearing fruit as the Air Force prepares to fund hosted payloads on commercial telecommunications satellites and the Pentagon makes more flexible its previous short-term-only contract commitments.

But as Intelsat has found out, helping to craft procurement policy changes does not automatically increase contract flow to Intelsat.

An example is the Air Force’s Pathfinder program for trying out alternative bandwidth procurement schemes, including longer-term leases for capacity covering a specific region. The initial Pathfinder contract was recently awarded to the Government Solutions Division of Luxembourg-based satellite operator SES, an Intelsat competitor.

SES’s firm, fixed-price Pathfinder contract is valued at $8.25 million for capacity to be used by the U.S. Africa Command.

“We originally came up with the Pathfinder idea with SMC [the Air Force’s Space and Missile Systems Center] in Los Angeles several years ago,” McGlade said during the conference call.

“At the time, we had capacity but unfortunately now we do not. It was required that we have at least five years of capacity in inclined orbit to satisfy the needs of the customer. So we had to submit a suboptimal solution and we didn’t win the deal,” McGlade said.

Satellites in inclined orbit are usually nearing the end of their service lives. To save fuel, owners no longer keep them stabilized on their north-south axis. While less suitable for some applications such as direct-broadcast television distribution, inclined-orbit satellites can serve other applications.

SES Government Solutions of McLean, Virginia, on Aug. 4 confirmed that its Pathfinder contract is for transponders in inclined orbit, with a base period of five years.

In the past, Intelsat has said its loss of U.S. government contracts has been weighted toward those contracts that use third-party satellite capacity even if it is Intelsat that manages the sale. These contracts are less profitable to Intelsat.

But this year, the cuts have bitten more deeply into contracts using Intelsat’s own satellite capacity.

In an Aug. 4 submission to the U.S. Securities and Exchange Commission, Intelsat said 58 percent of its government revenue is from contracts using Intelsat satellites, down from 60 percent a year ago.

Intelsat is looking forward to the launch, scheduled for October, of the Intelsat 30 satellite aboard a European Ariane 5 rocket. Fully booked by DirecTV Group’s Latin American division, the satellite will generate revenue immediately on entering service. The satellite’s entry into service before the end of the year is key to Intelsat’s meeting its revenue forecast for the year.