SES Changes Backlog Accounting To Ensure Fair Comparisons with its Competitors

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SES Global officials sought to blow the whistle Nov. 7 on what they say is an overly loose way of defining backlog among satellite-fleet operators. To make sure its standing among investors is not affected by any potentially unfavorable and what it would consider misleading comparisons with its competitors, the company is expanding the way it reports backlog. For similar reasons it also is changing the way it calculates satellite transponder fill rates.

For a commercial satellite operator, contracted backlog and fleet-occupancy levels, or fill rates, are two of the most-watched indicators of a company’s health. For many investors, a key attraction of the satellite sector lies in its stable cash flows, which are guaranteed by the multi year contracts for satellite capacity that television broadcasters sign.

Luxembourg-based SES Global was blind sided in September by competitor Eutelsat’s announcement of a billion-euro ($1.2 billion), 20-year contract with Sky Italia for satellite capacity.

SES Global officials were skeptical about the deal, saying no one signs contracts covering 20 years, which is substantially longer than the entire life of a modern telecommunications satellite.

Jean-Paul Brillaud, Eutelsat’s deputy chief executive, responded at the time that Paris-based Eutelsat counts only firm contracts as backlog, and that the Sky Italia deal includes the usual guarantees, including penalty clauses in the case of early termination. Eutelsat featured the Sky Italia deal in the prospectus it provided to prospective investors as it prepared its initial stock offering, which was subsequently cancel ed.

SES Global, which already is coping with backlog figures that rise and fall with the U.S. dollar’s value relative to the euro — the SES Americom subsidiary reports in dollars and is growing faster than the company’s European division, SES Astra — cried foul.

In a conference call with financial analysts Nov. 7, SES Global Chairman Romain Bausch said his company reports only “fully protected” backlog in its financial accounts.

Bausch explained: “We are really speaking here about revenues that are contracted, and where there is no possibility really for the customer to get out of the contract,” he said. “Eutelsat, for example, defines contract backlog by neglecting termination clauses, and simply assuming that the contracts were going until the end of the period.”

SES Global spokesman Yves Feltes said the SES backlog figures are calculated in the following way: Broadcaster X in 2005 signs a 10-year transponder-lease contract calling for payments of $10 million a year, for a total of $100 million. The contract includes a termination penalty that starts at $30 million if the broadcaster backs out of the deal in the first year. The penalty decreases each year as the contract progresses. The contract also requires a 24-month notice in the event of termination.

Using those hypothetical figures, SES Global, for example, would not include the entire $100 million figure when counting its backlog for 2005. Instead, it would count the lease revenues due on the contract in 2005 and 2006, plus the potential $30 million penalty, for a total of $50 million. In 2006, the same contract would be valued after adding the expected 2006 and 2007 revenues, plus the reduced termination liability.

As the competitive environment heats up among the global satellite-fleet operators — and especially as its competitors join SES Global in being listed on U.S. and European stock markets — SES Global does not want to suffer on Wall Street when analysts are making backlog comparisons. At the same time, however, the company also does not want to change its backlog definition to adopt what it views as its competitors’ riskier practice.

So in reporting its third-quarter earnings Nov. 7, SES Global decided to have it both ways. It reported two backlog figures — 6.5 billion euros, using the company’s long-standing accounting practice; and 7 billion euros, which is what results if it adopts the methods used by most of its competitors.

SES Global Chief Financial Officer Mark Rigolle said the company also has decided to change the way it adds up the SES satellite fleet’s fill rate.

In the past, SES Global would place into the “occupied” column a transponder that was only partially used. Henceforth, Rigolle said, the company will count fractional use more precisely. Five transponders that each are half-used will be counted as 2.5 transponders occupied, not five as in the past.

The company said under the new way of calculating fill rate, its SES Americom subsidiary is 73 percent full. Under the old method, the total would have been stated as 79 percent.