Competitor’s Inmarsat Service Price Cuts Affect Stratos’ Bottom Line

Mobile satellite-services provider Stratos Global Corp., seeking to calm investor concerns, said the recent market-share and revenue declines in its Inmarsat business have been caused by a single, unnamed competitor that slashed prices to an extent that cannot be sustained.

The Bethesda, Md.-headquartered company, whose stock is traded on the Toronto Stock Exchange, has seen its Inmarsat business attacked since April by a dramatic price drop on the part of a competitor. The price promotion is for Inmarsat’s Global Area Network (GAN) service, the voice, data and video communications links provided users equipped with small, portable terminals.

Stratos had warned investors in mid-July that pressure on its Inmarsat sales, as well as slower-than-expected expansion of its business-oriented mobile-broadband service, would prevent the company from reaching its financial targets. Stratos stock tumbled on the news and has since been trading near its 52-week low at 7.11 Canadian dollars ($5.81). Stratos announced Aug. 2 that its mobile-satellite division’s earnings dropped by 8 percent, to $10.7 million, for the three months ending June 30 compared to the previous three-month period. Sales for the division, at $61.9 million, were down 4 percent.

Stratos reported company-wide earnings, before accounting for one-time events, of $2.5 million on revenues of $92.7 million — flat over the previous quarter despite the January purchase of a German broadband satellite-services supplier.

Stratos is the biggest of London-based Inmarsat plc’s 31 global distributors. These companies purchase Inmarsat satellite capacity at fixed rates at the beginning of each year and then win discounts during the year when they hit preset sales-milestone targets.

Each distributor thus is aware of the wholesale cost of the services its competitors are buying from Inmarsat.

Stratos President Jim Parm said during an Aug. 2 conference call with financial analysts that “the intelligence we have” suggests that only one Stratos competitor has sharply cut GAN service prices.

Stratos in 2004 had a 25.3 percent share of the global market for Inmarsat services. Next was Telenor of Norway, with 23.5 percent; Xantic, a joint venture of KPN of The Netherlands and Telstra of Australia, with 18.8 percent; France Telecom Mobile Satellite Communications, with 13.9 percent; and KDDI of Japan, 5.2 percent.

Several Inmarsat distributors owned by large telecommunications operators are now on the market as their parent companies focus on core businesses.

According to Stratos, pressure to show a high Inmarsat market share to prospective buyers is driving the competitor in question to reduce GAN prices to levels that provide little or no profit.

Parm said Stratos’ other competitors have resisted the temptation to match the GAN price promotion. He said the problem should be resolved by the end of the year as Stratos and the other distributors respond to the challenge by sweetening their service offers — but not through dramatic price cuts.

“We won’t match that price” level, Parm said. “But we are working with our government and military distributors to create customized prices and value-added services for this market. Our [sales] volumes have stabilized since April.”

As he has said in the past, Parm said Stratos is keeping a relatively large cash balance to take advantage of opportunities as competitors seek to exit the business. Stratos, he said, would be a buyer, not a seller.

“Stratos is the natural consolidator — we’re the low-cost leader” in the Inmarsat-distribution sector, Parm said. “I feel that this is the year of consolidation for the mobile satellite services market. There are significant cost synergies from consolidation.”

Accelerating the move toward consolidation is the drop in global Inmarsat business following the peak U.S.-led military activity in the Middle East, centered on Afghanistan and Iraq. Inmarsat sales peaked in 2003 and have since drifted down.

Stratos Chief Financial Officer Alfred C. Giammarino said the company’s January purchase of Plenexis Holding GmbH of Bonn, Germany, a supplier of corporate and government satellite services, will take time to realize its potential.

Plenexis reported $40 million in revenues in 2004, but Giammarino forecast about $30 million for 2005. “This was a financially challenged business,” Giammarino said. “It will take six months to re-establish Plenexis’ momentum. We expect modest growth in the second half” of this year.