Orbital Sciences Corp. Considers Move to Higher-Power Satellites

PARIS — Orbital Sciences Corp. expects to decide by next spring whether to invest in broadening its telecommunications satellite product line to include higher-power spacecraft, a move that could nearly triple the revenue potential of the company’s increasingly profitable commercial-satellite business, Orbital Chief Executive David W. Thompson said.

Thompson cautioned that no decision has been made, and that if the company makes the investment it would be far less costly than the research and development budget for Orbital’s Taurus 2 medium-lift rocket, whose first launch is expected to occur in late 2010, Thompson said.

But in an Oct. 16 conference call on the Dulles, Va.-based company’s financial results, Thompson said developing the ability to build satellites with 6-10 kilowatts of onboard power, while maintaining Orbital’s current Star-2 product range of 2-5 kilowatts, would greatly expand the satellite division’s addressable market.

Orbital’s
current satellites compete in the lower-power, low-weight end of the global commercial market. Satellites in this class account for between $600 million and $700 million per year in sales. Thompson said adding a higher-power product would bring the total market that Orbital could address to between $1.75 billion and $2 billion per year.

Orbital’s
telecommunications satellite production continues to improve its operating profitability, Orbital Chief Financial Officer Garrett E. Pierce said during the conference call.

The company’s entire Satellites and Space Systems division, which includes science and technology spacecraft in addition to the commercial satellites, reported an 8.1 percent operating profit margin for the three months ending Sept. 30 and a 7.5 percent margin for the first nine months of this year.

Pierce said the commercial satellite business is more profitable than the science and technology satellites, and that the commercial product’s profitability should further increase, to around 8.4 percent.

Orbital said so far this year it has captured deals to build four commercial geostationary satellites, with one of the customers refusing to be named, and Thompson said the company may get a fifth order toward the end of the year.

Thompson said eight of the world’s 10 largest commercial satellite fleet operators were at Orbital’s facilities Oct. 14-16 and gave no sign that their business plans were being trimmed because of the global financial crisis. And even if this turns out to be the case, he said, a more-conservative capital investment environment would tend to favor the purchase of Orbital’s smaller, less expensive satellites.

Orbital is maintaining its forecast that 22-25 commercial geostationary telecommunications satellites will be ordered in 2008, a figure that looks sustainable for the next two to three years. He said seven to nine of these satellites would be in Orbital’s current size and power category, and that the company’s goal is to maintain a 50 percent market share in this category.

Thompson did not give a precise figure for what it would cost to expand the satellite product line in this way, but he said it would be “a small fraction” of what the company is spending to develop Taurus 2.

Orbital in the past has estimated that Taurus 2 development costs would be between $110 million and $130 million. It forecasts that the vehicle, once it reaches steady state operations around 2012 or 2013, could be launched four to five times per year and generate $300 million in annual revenue.

Orbital is counting on NASA to be Taurus-2’s anchor customer. The U.S. space agency is expected to announce in December a winner of its Commercial Orbital Transportation Services program to deliver cargo to and from the international space station between 2011 and at least 2015.

The company has won an initial contract of $170 million from NASA. Orbital is designing a cargo-carrying orbital vehicle called Cygnus, to be launched atop a Taurus 2 to carry up to 2,300 kilograms of cargo. Cygnus is designed to return up to 1,200 kilograms of cargo from the space station.

That business alone would account for two or three Taurus 2 launches per year, which is half the launch rate Orbital is counting on to close the business case for Taurus 2.

Thompson and J.R. Thompson, Orbital’s chief operating officer, said Taurus 2 development had encountered no major roadblocks but that a final system-wide engineering review of the vehicle had been delayed, from November to February.

Orbital will be spending $60 million to $65 million in cash on Taurus 2 in 2009, more than it originally expected for the year. But the company expects to generate at least $75 million in free cash flow for the year and the boost in Taurus 2 spending will not be a strain on Orbital’s finances, Thompson said.