Intelsat Feels Pinch of U.S. Military Withdrawal from Iraq
DUBAI, United Arab Emirates — Satellite fleet operatoron March 1 said the drawdown of U.S. troops in Iraq is cutting into the company’s revenue but that so far it is mainly affecting mobile satellite capacity that Intelsat leases from other operators.
In a conference call with investors, Intelsat Chief Executive David McGlade said that in some cases business lost in Intelsat’s mobile satellite services contracts returns in the form of contracts for Intelsat’s own Ku-band satellite capacity.
The total negative impact of the troop withdrawals is likely to be limited to less than 1 percent of Intelsat’s total revenue, he said, which would mean a hit of around $26 million in 2012.
Intelsat’s government business in 2011 totaled $517 million. The majority of this revenue is based on satellite bandwidth from Intelsat’s own fleet, but 44 percent is generated by contracts in which Intelsat bundles other fleet operators’ capacity into a service managed by Intelsat.
These so-called off-network contracts typically have operating profit margins of around 15 percent, McGlade said — substantially lower than contracts using Intelsat’s own satellite network.
Satellite operators continue to debate whether the troop drawdowns in Iraq and Afghanistan will result in a big drop in their revenue or have little effect as the U.S. Defense Department replaces troops with increased use of unmanned surveillance aircraft providing streamed video requiring lots of satellite bandwidth.
Luxembourg- and Washington-based Intelsat was in a holding pattern in 2011. It launched two satellites, but one of them, the New Dawn spacecraft over Africa, suffered a substantial loss of capacity when the antenna for its C-band broadcasts failed to deploy properly.
With no immediate engines for growth, Intelsat reported that revenue for 2011 increased by 2 percent, to $2.6 billion. The company said its adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, was 78 percent of revenue. Its 51-satellite fleet was 80 percent full after accounting for the fact that one satellite, Horizons 2, was taken out of service to be moved to a slot to cover Russia.
Intelsat’s backlog at Dec. 31 stood at $10.7 billion, up 9 percent from where it was at the end of 2010 despite the mid-2011 loss of the New Dawn satellite’s C-band antenna, which cost the company some $264 million in contracted business. About 42 percent of the backlog was for business in North America, followed by Latin America at 19 percent, Africa and the Middle East at 17 percent, Europe at 14 percent and the Asia-Pacific region at 8 percent.
The year 2012 should put Intelsat back on a growth path as it plans to launch five satellites, all of which should be in orbit by September. The first, IS-22, is set for launch in late March and carries a UHF-band payload for the Australian Defence Force. Intelsat is placing a similar payload on another satellite in hopes of attracting interest from the U.S. Defense Department.
The five satellites to be launched in 2012 are part of a 10-satellite manufacturing program that is scheduled to be completed in 2015.
Among the new areas of growth targeted by Intelsat with these new satellites are providing broadband access to maritime customers in Ku-band. Intelsat has added dedicated beams on seven of its satellites to provide a global network of Ku-band capacity to compete with the Ka-band network under construction for mobile satellite services providerof London.
Funding these satellites will peak in 2012, when Intelsat expects capital spending will be between $775 million and $850 million, compared with $798 million in 2011. Assuming the satellite launch schedules do not slip much, capital expenditures in 2013 will drop to between $550 million and $625 million, and then drop again, to $600 million or less in 2014, Intelsat Chief Financial Officer Michael McDonnell said during the conference call.
Intelsat remains heavily indebted — some $15.9 billion as of Dec. 31 — and focused on using its substantial cash flow for debt reduction. McDonnell said the company will be looking for early opportunities to call some of its high-interest bonds.
But McGlade said Intelsat has enough financial maneuvering room to pursue smaller acquisitions should the occasion arise.
“Clearly there are some tuck-ins to look at and we continue to look at those if they could be value-accretive,” McGlade said. “It has not been easy to do them historically but there are some opportunities out there today.”
Intelsat had $294 million in cash as of Dec. 31, and in February of this year borrowed $175 million from a $500 million credit line.