Inmarsat Posts Modest Gain in 2006

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PARIS — Mobile satellite services operator Inmarsat plc reported modest growth in revenues and gross profit margins in 2006 as growing data traffic from its maritime and aeronautical products overcame a sag in land-mobile services.

London-based Inmarsat identified two problems in 2006. The first is that voice traffic, particularly in its land-mobile services, is being taken by satellite competitors Globalstar, Iridium and Thuraya.

The second problem is that consolidation among its service providers and distributors enables these companies to reach volume-discount milestones earlier in the year, meaning they pay Inmarsat less per minute of traffic than otherwise.

Inmarsat is attacking the first problem by introducing its own hand-held satellite telephone starting this year. Based on the Asia Cellular service of Indonesia, which Inmarsat has taken over, the Inmarsat phones will utilize the company’s two Inmarsat-4 satellites, which together cover most of the globe outside of the polar regions.

Starting sometime in 2008, Inmarsat hopes to have its third Inmarsat 4 satellite in orbit over the Pacific Ocean, providing full global coverage outside the polar regions.

Inmarsat is counting on its hand-held telephone and the market penetration of its Broadband Global Area Network, or BGAN, high-speed two-way portable terminals to drive growth.

Inmarsat Chief Executive Andy Sukawaty, in Feb. 27 conference calls, said the Globalstar and Iridium low-orbit satellite constellations are both on the verge of collapse as their satellites, which were launched in the late 1990s, begin to fail in orbit. “The two LEOs [low Earth orbit satellite systems] are failing,” Sukawaty said. Referring to Globalstar’s announcement earlier this month that its constellation may be degrading more quickly than expected, he added: “We believe Iridium will do the same in the years ahead.”

Globalstar and Iridium say otherwise. Globalstar insists its service will remain viable, despite recent disclosures of on-board satellite degradation, until a new constellation, now under construction, is launched beginning in late 2009. Iridium has said its constellation continues to operate without problems and will do so until 2014. Iridium has not begun construction of a second-generation system.

Sukawaty said the global satellite-telephone market is unlikely to grow much. For Inmarsat to succeed with its own hand-held satellite telephone starting this year, it will need to take customers from Iridium, Globalstar and regional satellite-telephone supplier Thuraya.

Inmarsat estimates that of the 600,000 hand-held satellite phones now in use, Thuraya of Abu Dhabi has a 50 percent market share despite its lack of global reach.

“[W]e are not looking particularly to grow the market,” Sukawaty said. “We are going after the phones that are out there. We think that is soft ground.”

Inmarsat has told investors that it is targeting $50 million to $60 million in annual revenue from hand-held telephone services beginning in 2010. The company estimates that will be 10 percent of the global satellite-telephone market.

The merger of Inmarsat distributors Stratos Global and Xantic in 2005 created a company that is responsible for more than 40 percent of the traffic passing through Inmarsat’s global network of land Earth stations. The enlarged Stratos Global, hitting its volume-discount milestones earlier in the year, is pocketing about $7 million that would have gone to Inmarsat before the merger, according to Stratos and Inmarsat estimates.

The coming merger of Telenor Satellite Services and France Telecom Mobile Satellite Communications poses a similar problem.

Sukawaty said Inmarsat supported the Stratos-Xantic merger on the assumption that the volume discounts would be accompanied by growth in the overall market and reduced prices for end users. That has not happened, he said, and Inmarsat is now trying to block the Telenor-France Telecom Mobile merger.

Sukawaty said Inmarsat will address these and other issues as it renegotiates its contract with its distributors when the current contract expires in early 2009.

Inmarsat Chief Operating Officer Michael Butler said 7,100 BGAN terminals had been sold and activated as of Dec. 31. BGAN revenue for the year — a more accurate measure of the product’s success, he said — totaled $9.5 million for the year.

Revenue per BGAN user averaged $222 per month, Butler said.

Inmarsat plc reported 2006 revenues of $500.1 million, a 1.8 percent increase over 2005. Sukawaty said revenues grew by 5.5 percent if the one-time effects of the 2005 Asian tsunami are removed.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was 66 percent, up from 64 percent in 2005.

Nearly 57 percent of revenue came from the maritime sector, which reported a 7 percent increase in sales for the year.

Land-mobile applications were down 5 percent for the year, with voice-only revenues dropping 19 percent. Total land-mobile services accounted for 23 percent of Inmarsat revenues.

Aeronautical services, the smallest of Inmarsat’s three core businesses, accounted for 6 percent of company revenues in 2006 but grew by 34 percent.