Inmarsat Scraps EMS as Supplier of Handheld Telephones

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  Space News Business

Inmarsat Scraps EMS as Supplier of Handheld Telephones

By PETER B. de SELDING
Space News Staff Writer
posted: 17 March 2009
04:33 pm ET






PARIS —
Mobile
satellite services operator Inmarsat of London reported double-digit revenue and pretax profit growth for 2008 and said 2009 also looks good for its land-mobile, aeronautical and core maritime communications services.

The company said its debt level remains easily manageable, with no substantial payment due before mid-2010. Its total debt on Dec. 31 was no more than 2.6 times its EBITDA – earnings before interest, taxes, depreciation and amortization – even accounting for the purchase of mobile satellite services distributor Stratos Global Corp.

Inmarsat
has in effect already purchased Bethesda, Md.-based Stratos, and will be exercising an option to confirm the takeover on April 15.

In a March 12 conference call with investors, Inmarsat said its long-planned hand-held satellite telephone will not be on the market before mid-2010. The company said it has scrapped the former prime contractor for the satellite phone, EMS Technologies of Norcross,
Ga.
, which encountered difficulties in developing the Inmarsat product.

Inmarsat
signed a $26 million contract with
EMS
in November 2007 to manage development of the phone, which will be Inmarsat’s first hand-held product and is intended to compete with existing satellite phones from Iridium Satellite, Globalstar and Thuraya.
EMS
had expected the Inmarsat phone to be available in early 2009.

Delays in Inmarsat’s third and final Inmarsat-4 satellite, which was needed to provide global coverage for the satellite phone, have contributed to the service delay, but
EMS
apparently encountered issues that had not been resolved.

Inmarsat
has turned to Sasken Communication Technologies Ltd. of
,
India
, to take over the satellite phone’s development. Sasken had been a subcontractor to
EMS
.

Inmarsat
Chief Executive Andrew Sukawaty said in a March 12 interview that the difficulties with
EMS
would not materially increase the cost to Inmarsat of developing the hand-held device. He declined to specify what the problems were with
EMS
, citing an agreement between the two companies.

, in reporting its 2008 financial results March 4, said it had taken a $3.4 million charge in the fourth quarter of 2008 relating to the canceled contract.
EMS
officials said the figure represents contract revenue it had expected from Inmarsat that will not be forthcoming.

But EMS Chief Financial Officer Gary Shell said the company still expects to receive “a significant payment” from Inmarsat for past satellite-telephone work despite the cancellation.

EMS Chief Executive Officer Paul Domorski, in presenting overall positive financial results and prospects for the company’s core aeronautical satellite communications business, said EMS’s profitability in 2009 will be higher without the Inmarsat contract than it would have been had the contract been continued.

Sukawaty
said Inmarsat still expects to be able to carve out a 10 percent share of the global market for satellite telephones within two years of the introduction of Inmarsat’s product.

In addition to being the effective date for purchasing Stratos, April 15 is the day that Inmarsat’s five-year agreement with its distributors comes to an end. Inmarsat has been negotiating more favorable terms from its distributors, notably a reshaped volume-discount formula that has enabled its two biggest distributors – Stratos and Vizada of France – to keep much more of their gross Inmarsat-related service revenue.

Stratos
and Vizada are both the products of mergers that have permitted the surviving companies to hit the annual volume-discount milestones much earlier each year, meaning cash that otherwise would go to Inmarsat stays with them.

Inmarsat
Chief Financial Officer Rick Medlock said when the volume-discount scheme was set in 2003,Inmarsat expected it would result in total volume-related revenue of $30 million to $40 million, or 7 percent of Inmarsat revenue.

But in 2008, volume discounts totaled nearly $65 million, or 10.2 percent of revenue. Medlock referred to the current volume-discount scheme as “a wedding present” for the merged distributors, principally Stratos and Vizada.

Stratos
accounts for about 46 percent of Inmarsat’s revenue. Inmarsat’s impending takeover of Stratos gives Inmarsat a negotiating advantage with its other distributors. But several distributors – notably Vizada, which accounts for 30 percent of revenue – have not yet agreed to the new contract terms with just one month to go before the old contract expires.

Medlock
said it was natural for negotiations to continue to the last minute as each side seeks maximum advantage. But Sukawaty warned the holdouts that Inmarsat now has the upper hand.

Sukawaty
said it would take not much more than “the flick of a switch” on a user terminal to change distributors. He said virtually all Inmarsat customers would easily find alternative Inmarsat outlets if their current distributor’s service is shut off April 15.

Sukawaty
said the expected slowdown of
U.S.
and other military activity in
Iraq
will have a minimal impact on Inmarsat because
U.S.
troops have long since switched to fixed satellite links. But in
Afghanistan
, he said, the continued
U.S.
and allied military presence and its likely increase in the coming months would provide a steady revenue source in 2009.

Not including Stratos, Inmarsat reported revenue of $634.7 million in 2008, up 13.9 percent from 2007. EBITDA, at $431.6 million, was up 12.5 percent.