Intelsat Warns Investors of Rough Ride ahead of Epic Growth

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PARIS — Satellite fleet operator Intelsat warned investors to expect a rough ride over the next year or two as the company awaits the arrival of its Epic high-throughput satellites and the revenue growth they are designed to provide.

In a Feb. 18 conference call with investors, Intelsat said the market reaction to the Epic satellites – the first of which is scheduled for launch in early 2016 – has been about as good as expected, and that any reduction in per-megahertz pricing will be offset by higher-volume contracts.

The Intelsat 29e, the first Epic high-throughput Ku-band satellite, will carry the equivalent of 230 36-megahertz transponders. Intelsat Chief Executive David McGlade said “transitional cannibalization” of existing, higher-priced Intelsat capacity is likely to be a minor issue insofar as Intelsat is able to sell customers a higher volume of bandwidth at lower prices.

Luxembourg- and Washington-based Intelsat, as expected, in 2014 lost its long-standing position as the world’s largest fixed satellite services fleet operator when measured by revenue, coming in just behind SES, also of Luxembourg.

For 2014, Intelsat reported a 5 percent drop in revenue, to $2.47 billion, and said it expects revenue to fall a further 4.7 percent this year. The company’s government services revenue decreased by 16 percent during the year, a performance similar to SES’s government division. Both were affected by the U.S. government budget freeze.

McGlade said the decline in government business may be having a domino effect in the Middle East. As U.S. and allied troops leave Afghanistan, military use of commercial satellite bandwidth declines. This capacity is then made available in the wider Middle East and puts downward pressure on a region where pricing is already under pressure.

Intelsat said its government business decline was made more severe by the fact that a higher portion of the contracts that were not renewed were for Intelsat’s own fleet capacity rather than on third-party satellites whose capacity Intelsat manages as part of a government contract.

Intelsat said its government business is likely to decline again, by 10 percent, in 2015.

Intelsat and other fleet operators continue to struggle to maintain transponder-lease prices at current levels in Africa, where many new fleet operators have entered the market and where undersea cable has reached the Africa coastline.

Intelsat has said its African business has stabilized after it re-priced contracts for certain customers to permit them to stay in business.

The company is facing a similar situation in Russia, where the sharp drop in the value of the ruble is forcing Intelsat to offer new contract terms to companies it does not want to abandon.

Intelsat said Latin America, a region of high growth for satellite operators in the past several years, remains robust as a market despite the arrival of multiple satellites. The satellites Intelsat has intended for Latin America are filling as quickly as the company had forecast, the company said.

Intelsat in 2014 was able to use the current low-interest-rate environment to reduce its $15-billion debt load by $475 million. Chief Financial Officer Michael McDonnell said that level of reduction likely will not recur in 2015 as much of the high-cost debt has already been removed from the company’s books.

Intelsat’s debt, incurred mainly from leveraged buyouts by a succession of new owners, has been limiting its ability to invest for growth. But the company has been able to use its large stock of orbital rights and frequency reservations to trade for new capacity.

Intelsat said it had struck a deal with satellite-television provider DirecTV Group of Los Angeles wherein Intelsat’s IS-32 telecommunications payload will ride on a DirecTV satellite to be located at 43.1 degrees west. The satellite is scheduled for launch in 2016.

Similarly, Intelsat and Azercosmos of Azerbaijan recently reached an agreement permitting Azercosmos to use an Intelsat slot at 45 degrees east, with Intelsat putting its own payload on board.

In both cases, Intelsat will be able to offer new in-orbit capacity without incurring any capital spending of its own.

Intelsat’s current private-equity owners, led by BC Partners, made their $5 billion purchase seven years ago. McGlade declined to speculate on what their exit strategy might be.