In-orbit Satellite Failures Stunt Revenue Growth at Intelsat

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PARIS — Satellite fleet operator Intelsat said its business grew just 2 percent in the first three months of 2010 compared with the same period a year ago and that the revenue picture is unlikely to improve before the second half of this year, when new satellite capacity begins delivering results.

In-orbit satellite failures are the main cause of the low growth. The IS-4 satellite failed in February, reducing first-quarter revenue and causing Intelsat to take a $6.5 million impairment charge. The Galaxy 15 satellite stopped obeying commands in April, and although its customers were all quickly transferred to the Galaxy 12 satellite, Intelsat will lose revenue customers paid to secure in-orbit backup in the event of a failure.

Announcing its first-quarter financial results May 12, Intelsat said Galaxy 15, which was not insured, had a net book value of $142.5 million. The company said it would take an impairment charge if, as looks likely, Galaxy 15 cannot be returned to service.

In a May 12 conference call with investors, Intelsat Chief Executive David McGlade said the company expects to return to a higher growth rate late this year.

“The pause in our growth is temporary,” McGlade said. “We expect growth to return in the second half of 2010.”

Luxembourg-headquartered, Washington-based Intelsat reported revenue of $621.1 million for the three months ending March 31, or a drop of 2 percent compared with a year ago. The 2009 results included a one-time sale of a launch vehicle that Intelsat acquired as part of its 2006 purchase of PanAmSat. When that $22 million sale is removed, revenue increased by about 2 percent year on year. Adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — was 78 percent of revenue.

Intelsat’s backlog on March 31 was $9.5 billion, up slightly from Dec. 31. Its satellite fleet counted 2,025 fully usable transponders — before the Galaxy 15 failure — and was 82 percent full.

Intelsat posted small declines in its two biggest markets, network services and media. But its government services business, managed by the Intelsat General subsidiary, reported a 16.4 percent increase in revenue, to $113.4 million.

McGlade said the future revenue picture for the company’s sales to the U.S. and other governments continues to show healthy growth potential, starting with a stalled U.S. Navy contract, valued at $10 million in 2010 but up to $543 million over five years.

Intelsat said that on May 11 the U.S. Government Accountability Office 

(GAO) sent notice that it had rejected protests by three companies alleging anti-competitive behavior on the part of Intelsat General, paving the way for the activation of the Commercial Broadband Satellite Program (CBSP).

The contract, awarded in January, had been stopped pending a resolution of the protests. Intelsat said it expects work to restart almost immediately.

Artel Inc. of Reston, Va., CapRock Communications of Fairfax, Va., and Segovia Inc. of Herndon, Va. — all of which had bid on the CBSP contract against Intelsat General — had argued that Intelsat’s gloves-off treatment of them during the contract competition amounted to anti-competitive behavior.

Artel and CapRock, along with two other companies, have filed separate, similar protests against Intelsat’s competitive practices to the U.S. Federal Communications Commission, whose review is ongoing. But that protest has no direct bearing on the CBSP award.

Intelsat’s Navy contract bid included satellite capacity from several other fleet operators and is an example of what McGlade said is likely to occur more frequently as Intelsat bundles other companies’ bandwidth or hardware into an Intelsat-led contract offering.

This business features much lower profit margins; Intelsat does not earn as much selling others’ capacity as it does selling its own. Intelsat Chief Financial Officer Michael McDonnell said what Intelsat calls its “Off Network” revenue — meaning revenue coming from Intelsat’s sale of someone else’s products — has an operating profit margin of perhaps between 15 percent and 20 percent.

Off-network revenue in the first three months of 2010 increased by nearly 29 percent, to $49.6 million.

In addition to selling other companies’ C- and Ku-band capacity when Intelsat’s own fleet is not able to provide the required coverage, Intelsat occasionally bids for work that requires mobile satellite services and services in X-band.

One potential source of revenue growth later this year is the IS-25 satellite, formerly named ProtoStar-1, which Intelsat purchased at auction late in 2009 for $210 million. The satellite has been moved to an Intelsat slot at 328.5 degrees east and is aimed at providing bandwidth in Africa, a growing market.

McGlade said early take-up of IS-25 has been slower than expected because of “let’s say, well-priced” competition from another satellite, which he did not name and whose prices he suggested were not sustainable.

McGlade said demand in Latin America and in the Middle East is strong, but that Intelsat does not have many satellites stationed in these regions. He said Intelsat’s available capacity in Latin America has been renewed at prices that he said rival recent renewals anywhere in the world.