SES Global officials were forced to defend their corporate strategy against newly skeptical financial markets, saying the company’s move into end-to-end satellite services was already paying off even if it remains less profitable than SES’s core wholesale transponder-lease business.
Company officials also said they would be ordering two new telecommunications satellites within weeks: the AMC-21 satellite to be stationed at 125 degrees west longitude for full U.S. coverage; and the Ciel-2 satellite, to be located at 129 degrees west, for affiliate Ciel Satellite Communications Inc. of Canada.
A satellite for SES affiliate QuetzSat of Mexico — with EchoStar as anchor tenant — likely will be ordered by mid year, SES Chairman Romain Bausch said. Bausch was less firm on an order for an AsiaSat 5 satellite for AsiaSat of Hong Kong, in which SES has a minority stake.
Company officials say the AsiaSat 5 order may depend on how SES’s $1.1 billion purchase of competitor New Skies Satellites is integrated into the overall SES business. New Skies has operations in Asia. SES’s purchase of New Skies is expected to close by mid year.
Reporting its year-2005 financial results Feb. 20, Luxembourg-based SES said net profit rose by 12.1 percent, to 382 million euros ($456 million) for the year. Total revenues were 1.258 billion euros, a 13.4-percent increase over 2004 after one-time gains were excluded.
The world’s largest commercial satellite operator reported fleet-wide utilization at 74 percent as of Dec. 31 — flat over a year earlier, reflecting the launch of two new satellites during 2005.
Bausch said the company is not changing its forecast of at least 10-percent average revenue growth between 2005 and 2007. Similarly, SES Global Chief Financial Officer Mark Rigolle said the core business of selling wholesale satellite capacity would retain its historic earnings before interest, taxes, depreciation and amortization (EBITDA) level of 75-85 percent of revenues.
“That has not changed and will not change,” Rigolle said in a conference call with financial analysts.
By the time the conference call occurred midday Feb. 20, SES Global shares on European stock markets were plummeting and would end the day some 6 percent down. The share price stabilized Feb. 21.
The market’s reaction was due to SES Global’s disclosure that a delay in the launch of two of its satellites would reduce projected 2006 revenues by about 20 million euros. Rigolle insisted that these revenues were merely delayed by several months, and that a few months’ lag time in a satellite project lasting 15 years is not important.
Rigolle said SES had not seen fit to inform the markets of this revenue shortfall until the year-end financial report. “It is the choice of the company,” Rigolle said. “We could update guidance every other week, but I’m not sure that would add value.”
By the end of the conference call, and in light of the markets’ reaction to the SES news, Rigolle conceded that in the future the company may need to better explain itself, especially on the issue of how its growing satellite end-to-end services business fits into its long-range plans.
SES’s satellite services business includes Americom Government Services in the United States; Astra Platform services to support digital television broadcasting in German-speaking regions in Europe; and the Satlynx broadband services supplier. These companies provide satellite services to end customers using both SES and third-party satellites.
Accounting for just 6 percent of SES Global revenues in 2004, the services side in 2005 grew to 15 percent of the overall sales picture. Its EBITDA margin, which was negative in 2004, reached 4 percent in 2005 and could reach about 10 percent in 2006, Rigolle said.
This remains far short of the margins in the company’s core wholesale transponder-leasing business. Blending the two together in 2005 resulted in an EBITDA margin of 70 percent. With the decline in projected revenues due to the two late satellites , the EBITDA margin this year could slip below 70 percent, a forecast that spooked the market and resulted in the sell off of SES shares.
It was a rare misstep by SES with respect to the financial markets . The company’s stock had risen by more than 40 percent in the past year.
Bausch has long argued that the services sector helps steer business to SES satellites and is a logical extension of the company’s core business. Already some of the services businesses, including Americom Government Services and Astra Platform Services, post double-digit EBITDA margins.
Rigolle said SES in the future would spell out more clearly the different performance between the services and core satellite capacity sales businesses.
The satellite delays cited in the expected 2006 revenue shortfall, meanwhile, are partly due to the special customer profile for both spacecraft.
AMC-23, covering the Pacific Ocean region, has Connexion by Boeing, an Internet service to commercial passenger aircraft, as its anchor customer. AMC-14, intended to provide telecommunications in North America, has been fully booked by satellite-television broadcaster EchoStar Communications Corp.
Both these customers will start paying for their satellite capacity from the first day the satellite enters operations.