Citing Price Cuts by Competitors, Stratos Lowers Growth Projections

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  Space News Business

Citing Price Cuts by Competitors, Stratos Lowers Growth Projections

By PETER B. de SELDING
Space News Staff Writer
posted: 18 July 2005
01:52 pm ET


Stratos Global Corp., a major supplier of Inmarsat mobile satellite services, is lowering its 2005 growth projections sharply because of what it says is price-cutting by competitors seeking market share in advance of a broad consolidation among Inmarsat distributors.

The Bethesda, Md., company, which reported $368 million in revenues in 2004 — more than half of which was from Inmarsat-derived services — said mobile satellite services prices should stabilize once the expected industry shakeout occurs.

“[A]ggressive price cutting by certain of our competitors cannot be sustained,” Stratos President Jim Parm said in a July 11 statement. But the current mobile satellite services market, plus disappointing broadband sales from Stratos’ VSAT (very small aperture terminal) satellite business, will depress full-year financial results, he said. Stratos shares on the Toronto Stock Exchange fell some 18 percent in heavy trading in the four days following the announcement as analysts lowered their recommendations.

Stratos said its February forecast of at least 13 percent sales growth this year is no longer valid, and that the company likely will report an increase closer to 5 percent compared to 2004.

Stratos’ revenue forecast includes the effects of its January purchase of Plenexis Holding GmbH of Bonn, Germany, a supplier of VSAT network services to European energy and broadcast companies, and to European military services.

After accounting for debt, the Plenexis purchase price was $8.7 million. Stratos said Plenexis’ annual revenues are about $40 million. The steep growth anticipated by Stratos earlier this year was based in part on the addition of those revenues in 2005.

Stratos spokesman Doug Gunster said the company had expected the Plenexis purchase to lead to substantial VSAT business revenue increases in 2005. This business, he said, is growing but not as quickly as anticipated.

Parm said the company is “extremely disappointed that we have not been able to execute on our plans to win new international business beyond our core Gulf of Mexico market.”

The Inmarsat-related difficulties are more complicated. Stratos is one of 31 distribution partners for London-based Inmarsat Group, and is planning to expand the relationship to include Inmarsat’s coming mobile-broadband service. The first of three planned new-generation Inmarsat satellites is now in orbit, with the second slated for launch this autumn.

According to Stratos, some Inmarsat distributors have sharply reduced their prices to increase market share to make themselves more attractive to potential buyers. Industry officials have been saying for more than a year that the start of Inmarsat’s mobile-broadband service would be a likely occasion for a consolidation of the 31 distributors.

“When we see the price cutting being done by certain competitors, we conclude that they are trying to increase market share so that if they sell the business, they can secure a higher valuation of the business,” Gunster said in a July 14 interview.

Inmarsat spokesman John Warehand said July 15 that Inmarsat would not comment on its distributors’ business practices, but noted that “it’s not unusual for distributors to target market share” by lowering prices.

Inmarsat, which recently conducted a successful stock offering on the London Stock Exchange, is not directly affected by price wars among its distributors. These distributors pay Inmarsat a fixed rate for the capacity they lease, with the rates decreasing during the year as distributors hit sales milestones and win volume discounts. Inmarsat’s wholesale prices are then reset to pre-discount levels the following January.

Beyond the price competition among Inmarsat distributors, the mobile satellite services sector appears headed for a major shakeup as companies associated with Mobile Satellite Ventures of Reston, Va., plan new-generation satellites in L-band, the operating frequency of Inmarsat, and in S-band for later this decade.

Comments: pdeselding@compuserve.com