Intelsat’s African Business Stabilized but Challenges Remain

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PARIS — Satellite fleet operator Intelsat said its business in Africa, where bad debt had tripled in 2013 over usual levels, has stabilized as it renegotiates contracts at lower rates but that second-tier fleet operators are offering cut-rate transponder capacity that maintains pricing pressure.

Luxembourg and McLean, Virginia-based Intelsat said its business with the U.S. government, which the company had forecast would be down 15-20 percent in 2014, is proving to be just as bad as expected, as few new bid requests for commercial capacity are being decided.

In an Oct. 30 conference call with investors, Intelsat Chief Executive David McGlade said a paralyzed U.S. Congress appears unable to move on government procurement reform that would make it easier for customers to purchase lower-cost, longer-term capacity from commercial suppliers like Intelsat. 

He said this paralysis remains despite the broad consensus among U.S. legislators that long-term leases are a better investment of U.S. taxpayer revenue.

Intelsat was not alone among commercial fleet operators in the past couple of years in flagging the trouble in African business caused by the penetration of fiber lines on the African coasts. Terrestrial connectivity continues to eat away at Intelsat’s Network Services business.

Intelsat and the other satellite fleet owners have focused on inland markets in Africa, away from fiber’s reach — such as backhauling cellular traffic — and on growing their satellite television business.

McGlade said fiber’s predictable effects on satellite demand continue but that “it really has been the entry of new satellite operators, most of which have traditional capacity, that is putting pricing pressure into the marketplace. It has been most broadly seen with the second-tier players. They have been the most aggressive in terms of pricing.”

The advent of fiber caused payment problems for many of Intelsat’s African customers who were bound by long-term leases at prices that were no longer sustainable. Bad debt issues, traditionally totaling $8 million to $10 million per year, climbed to $30 million in 2013.

Intelsat Chief Financial Officer Michael McDonnell said that situation has now calmed and a return to historical bad debt levels is occurring.

McGlade said the pricing pressure in Africa was not an issue for the company’s media business, where the company has seen modest growth so far in 2014.

McGlade has told investors that Intelsat’s main goal in 2014 is to work to limit the problems in Africa, continue its proselytizing with the U.S. government to change government procurement practices, pay down debt and prepare for growth when new satellites arrive.

The company has said it will reduce its debt by $475 million this year in addition to refinancing debt at lower interest rates. Intelsat’s total debt stood at $15.3 million as of Sept. 30. In the first nine months of 2014, the company paid $714.6 million in interest, down 17 percent from the same period a year ago.

Revenue for the nine months ending Sept. 30 was $1.85 billion, down 5.5 percent from last year. What Intelsat calls its “On Network” revenue, meaning sales of capacity on its own satellites, was down 4.7 percent during the nine-month period, to $1.69 billion.

To meet its contract obligations, Intelsat often books capacity on non-Intelsat satellites.

For the company to grow, it will need new in-orbit capacity, McGlade said. The Intelsat IS-30 was launched in mid-October and the company hopes to launch three satellites in late 2015 — but their exact launch dates, and their ability to generate revenue in 2015, remain unclear.

IS-30 operates at 95 degrees west. Its Ku-band capacity has been sold to satellite television provider DirecTV’s Latin American division as part of a $1.2 billion, 15-year agreement with Intelsat covering both IS-30 and, to a lesser extent, IS-31, to be launched in late 2015.

Intelsat has use of the satellite’s C-band payload, but McGlade said near-term prospects for it were not strong.

The first of Intelsat’s Epic line of high-throughput satellites in Ku-band, IS-29e, is scheduled for launch in late 2015 as well. McGlade said investors should change their thinking about satellite capacity leases in an Epic environment, where per-megahertz prices will be less important than what customers pay per megabit of throughput.

 

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