Inmarsat Finds Itself on the Right End of Capex Cycle

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  Space News Business

Inmarsat Finds Itself on the Right End of Capex Cycle

By PETER B. de SELDING
Space News Staff Writer
posted: 18 November 2008
03:20 pm ET






PARIS

Mobile
satellite services provider Inmarsat reported growth in every one of its business segments and said it sees no sign of any serious slowdown in its major markets.

London-based Inmarsat launched its third and last Inmarsat-4 satellite in August. The satellite is scheduled to be in commercial operations by February and will give Inmarsat global coverage for its BGAN, or broadband global area network, broadband service, which in addition to land-based BGAN includes Fleet Broadband for maritime users and Swift Broadband for aeronautical customers. These are the services Inmarsat is counting on to drive its growth in the coming years.

The third satellite also will give Inmarsat the global coverage it wants for a hand-held telephone service, which Inmarsat Chief Executive Andrew Sukawaty said is targeting a 10-percent market share for satellite phones by late 2010. Inmarsat aims to offer lower prices and take customers away from mobile satellite-fleet operators Globalstar and Iridium.

The Inmarsat hand-held service is expected to debut in late 2009, with telephones retailing for $500 and individual users paying $1 per minute.

Inmarsat
has spent $1.5 billion on its three Inmarsat-4 satellites and has no near-term need for additional spacecraft. The company contrasts its relatively capital-expense-free future with the plans of its competitors – ICO Global, TerreStar and SkyTerra/MSV in the
United States
, in addition to Globalstar and Iridium. All of them face major cash demands they cannot meet on their own, at a time when the capital markets are unfavorable.

“If there was ever a year to be completing, and not entering into, a capex cycle, this is it,” Inmarsat Chief Financial Officer Rick Medlock said during a Nov. 10 conference call on the company’s financial results.

Coordinating placement of the third Inmarsat 4 spacecraft with the two others will force the company to shut down its BGAN broadband service, which is provided only by the Inmarsat-4 spacecraft, for 26 days in the
Atlantic Ocean
region, starting Jan. 7. For the
Pacific Ocean
region, the BGAN outage will be for 18 days beginning Feb. 6.

In the conference call, Sukawaty said the satellite shift and resulting BGAN service outages “will have no material revenue impact.”

And so far, the global financial crisis and economic slowdown appear to be sparing Inmarsat. Revenue for the three months ending Sept. 30 totaled $162.5 million, a 16.4 percent increase during the same period a year earlier. Net profit, at $37.6 million, was up 58.6 percent.

All three of Inmarsat’s main business lines – maritime, land-mobile and aeronautical services, in order of revenue importance – grew.

The BGAN land-based service via terminals that deliver up to nearly 500 kilobits per second of throughput continued to grow. Total BGAN revenue, which today is dominated by the land-based service, was $20.9 million, up 6.6 percent from the three months ending June 30. The number of BGAN subscribers, as of Sept. 30, grew by 19.5 percent to some 26,200.

Each BGAN subscriber pays an average of $290 per month of service.

Maritime fleet owners have the option of purchasing conventional very small aperture terminals, or VSAT, to communicate via Ku-band telecommunications satellites in addition to offerings from mobile satellite companies, including Inmarsat.

But Sukawaty said the company’s Fleet and Fleet Broadband products are maintaining their growth. More than 1,000 Fleet Broadband terminals are now in service and Inmarsat has seen no canceled orders for new ships, he said.

That is one of Inmarsat’s advantages in its aeronautical and maritime businesses. Unlike land-based customers, maritime and aeronautical subscribers tend to keep their equipment as long as they operate the ship or aircraft.

“A terminal goes into a ship for 10 years,” Sukawaty said. “For aircraft, once it’s in the cockpit, it’s there for the life of the plane.”

Military customers make up about a third of Inmarsat’s revenue base, another factor that gives the company a defense against an economic downturn.

With the Inmarsat-4 satellites now in orbit, the next major change for Inmarsat occurs in April 2009, when its current five-year contract with its distributors expires and Inmarsat is free to discard what it views as overly harsh conditions in the current arrangement.

One feature of the current contract is that Inmarsat distributors are given discounts to standard Inmarsat pricing once they pass sales milestones in a given year. That means Inmarsat’s revenue later in the year is reduced as these milestone sales volumes are reached, especially by its largest distributors, Stratos Global Corp. of
Bethesda
,
Md.
, and Vizada of France.

Coincident with the end of the current contract, Inmarsat is expected to purchase Stratos Global in April under an arrangement both companies have approved.

Sukawaty
said Inmarsat expects that in 2008, volume discounts will be equivalent to $60 million to $70 million.

But with the new distribution agreement taking effect in April, the current volume-discount scheme will be scrapped. Sukawaty said one-third of the savings will be redistributed to Inmarsat service partners in such a way as to reward them if they increase business. Another third of the savings will be used to reduce prices for Inmarsat customers. The last third, he said, “will go back into our pockets but not immediately. It will be recaptured over two to three years.”