SES Eyes Improved Gross-Profit Margins Following Sale of ND Satcom Unit

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PARIS — SES will be selling its ND Satcom subsidiary within weeks and expects to be able to show investors an immediate improvement in gross-profit margins as a result, company officials said June 1.

The divestiture of Friedrichshafen, Germany-based ND Satcom, which specializes in the sale of satellite ground gear and related services and has a long-term contract with the German military, is part of a broader strategy SES is putting into place that puts limits on the satellite fleet operator’s vertical expansion.

SES Chief Executive Romain Bausch said ND Satcom is no longer bringing new business to SES’s satellite fleet, which was one of the rationales for buying the company in 2006. A second reason for purchasing ND Satcom was to help SES gain access to government satellite telecommunications markets by virtue of ND Satcom’s experience in selling ground gear to European governments.

Bausch said that function is no longer needed because SES has learned what it needs about European government markets, where it hopes to increase its business.

ND Satcom in 2009 accounted for 25 percent of what SES calls its “services” revenue, which totaled 363 million euros, or $443 million at current exchange rates.

The services divisions, which SES distinguishes from its “infrastructure” business of selling satellite capacity, have a much lower profitability than the core satellite-bandwidth business and have frequently been a source of confusion among some SES investors.

That should ease with the sale of ND Satcom. Bausch said that if ND Satcom had not been part of SES in 2009, SES’s profit margin, as measured in earnings before interest, taxes, depreciation and amortization, would have been 73.7 percent of revenue instead of the reported 69.9 percent of revenue.

Bausch did not disclose information on the potential ND Satcom buyer beyond saying the deal will be completed by the time the company reports its second-quarter financial results.

Turning away from a vertical expansion into services markets to refocus on selling satellite bandwidth is also driving a change of focus at the SES World Skies U.S. Government Solutions division in the United States.

Like its biggest rival, Intelsat of Washington and Luxembourg, SES had until recently positioned its U.S. government sales division to become more involved in the kinds of services offerings now provided by companies including Artel, CapRock, Globecomm Systems and Segovia in the United States.

That has now changed. Bausch said SES will continue to work with these companies when government satellite-capacity contracts call for it.

But Bausch said the U.S. government, particularly the U.S. Defense Department, is changing how it purchases commercial satellite capacity and dealing more directly with satellite fleet operators for raw bandwidth.

“We are changing our approach to the U.S. government because the U.S. government has changed its procurement practices,” Bausch said. “As of this year, the government is coming to us, so we will phase out our services and give some business to companies that might otherwise lose business” because they are no longer needed as intermediaries in a strict satellite-bandwidth transaction.

Bausch noted that Intelsat appears to be headed in the opposite direction with its Intelsat General subsidiary, which is taking on more contracts that require end-to-end services and not just satellite capacity.

“We are differentiating ourselves in the market,” Bausch said. “But we will keep some technical services capabilities, which are sometimes needed for large infrastructure contracts.”

Bausch sought to reassure investors about the stability of the  government market for commercial satellite capacity, saying that while many of these contracts technically last for just one or two years, “the reality is that they are always renewed, so they are long-term contracts.”

One of the benefits of SES’s core video-distribution business is that broadcasters typically sign up for services in multiyear contracts, and sometimes for as long as the full 15-year life of a satellite.