Despite Reduced Forecast, Inmarsat Expects Record Year

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PARIS — Mobile satellite services operator Inmarsat on Aug. 4 said it is reducing its estimate of 2011 revenue following lower use of its aeronautical and land-based services by military forces in Afghanistan and a slower-than-expected pickup in demand among existing customers transitioning to the company’s maritime broadband service.

London-based Inmarsat said its profit would not be affected by the two phenomena and that its revenue for the year likely would set a record.

With its debt at manageable levels and financing for its next-generation, $1.2 billion Ka-band broadband satellite project in place and featuring below-market loan rates, Inmarsat said it is increasing its dividend by 10 percent and preparing to repurchase $250 million of its stock.

Traded on the London Stock Exchange, the company’s shares nonetheless were hammered from the opening bell Aug. 4, dropping by 20 percent, as investors apparently focused on Inmarsat’s suggestion that it would not meet its anticipated annual revenue-growth rate of 5 to 7 percent between 2010 and 2014.

In a conference call with investors, Inmarsat Chief Executive Andrew Sukawaty said the company now expects 2011 revenue to be flat relative to 2010. The five-year revenue projection, he said, will be reviewed at the end of the year before being reset to account for the performance in 2011.

During the conference call and in its financial report, Inmarsat highlighted several points in its operations:

  • Its 12.5-year, $700 million loan from the U.S. Export-Import Bank carries a fixed interest rate of 3.11 percent, to be paid back over 8.5 years, in equal installments, starting in 2015. The loan follows Inmarsat’s selection of Boeing Space and Intelligence of Seal Beach, Calif., as prime contractor for the three Inmarsat-5 satellites, which will provide commercial and military Ka-band broadband services as part of Inmarsat’s Global Xpress program.
  • Inmarsat’s first entry into the hand-held satellite-telephone market, the ISatPhone Pro, has drawn 30,000 active subscribers in its first year of availability. Inmarsat said its handset accounts for “at least a third” of all new satellite telephone sales in recent months.
  • The U.S. Air Force, which has leased an aging Inmarsat 3 satellite for its own use, has recently learned how to maximize use of this spacecraft over the Middle East and South Asia, thereby reducing its need to lease on-demand capacity aboard the newer Inmarsat 4 spacecraft. As a result, Inmarsat’s aeronautical services revenue, which has been among the fastest-growing in percentage terms, fell by 2 percent in the six months ending June 30 compared to the previous year.

Inmarsat had warned investors in May that maritime customers moving to higher-speed services with the company’s new Fleet Broadband terminals would take several months before they began increasing the volume of bandwidth they used each month. Fleet Broadband is less expensive per megabyte than the Inmarsat B and Fleet 77 services it replaces.

Using data from previous transitions in Inmarsat’s 30-year history, the company said ship owners would begin by using the new gear as they used the previous hardware before they fully understood the lower pricing. Then they would extend use of the equipment to crews for emails or video downloading, increasing bandwidth volume and revenue to Inmarsat.

Inmarsat had said this transition would take 12 to 24 months once the new Fleet Broadband terminals caught on in the market and were installed on ships. These installations picked up sharply in 2010 and are continuing at a rapid pace, but the pickup in volume and revenue per ship has not followed as quickly as expected.

“It will be 2012 before we see that growth picking up,” Inmarsat Chief Financial Officer Rick Medlock said during the conference call.

Encouraging customers to move to the higher-speed service helps protect Inmarsat’s market share from encroachment by VSAT, or very small aperture terminal, services using conventional Ku-band satellite capacity. Inmarsat is trying to match VSAT offers with package-based pricing that offers a flat monthly rate for services.

Inmarsat’s Global Xpress service, to be launched in 2013, is the company’s longer-term response to the VSAT market challenge. More immediately, the company’s distributors are offering packages whose antennas can switch easily from Ku-band to Global Xpress’s Ka-band, Medlock said, allowing Inmarsat to secure long-term customers even as it facilitates, for a couple of years, the use of other satellite operators’ Ku-band capacity.

For North American maritime customers, Inmarsat has a special interest in moving customers off the older systems toward Fleet Broadband.

Inmarsat and startup mobile broadband provider LightSquared of Reston, Va., have agreed to rearrange their shared use of L-band spectrum over the United States to permit LightSquared to maximize its offer to customers. For the six months ending June 30, LightSquared paid Inmarsat $197.8 million in return for Inmarsat’s willingness to accommodate LightSquared, and to compensate Inmarsat for having to adjust some of its customers’ equipment as a result.

The more customers it moves to Fleet Broadband, the easier and less costly it will be for Inmarsat to meet the terms of its agreement with LightSquared.

Inmarsat currently books between $20 million and $30 million in annual revenue from U.S. and allied military use of Inmarsat capacity in Afghanistan. How quickly this revenue will decline with the winding down of the allied presence in Afghanistan is unknown, but it has already started for both aeronautical and land-based services.

Medlock said that for the past six months, an average of $1 million per month of revenue has been withdrawn as the U.S. Defense Department learns how to maximize use of a leased satellite rather than making spot purchases of capacity on Inmarsat’s newer spacecraft.