SES Reassures Investors Capital Spending Has Crested

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PARIS — Satellite fleet operator SES reported July 29 a modest growth in revenue and a slight decline in gross profit and reassured investors that its current expenditures on new satellites — five more are set for launch this year alone — are coming to an end.

Luxembourg-based SES said this year’s capital spending of 920 million euros ($1.3 billion) on new spacecraft will be the peak in the current cycle. Spending will drop to 660 million euros in 2012, to 440 million euros in 2013, and to 250 million euros in 2014, a level considered the minimum needed to replace satellites as they retire.

For now, SES is focused not so much on replacing existing capacity as adding to its portfolio of transponders to take advantage of markets outside North America and Western Europe. The company’s large QuetzSat-1 satellite, scheduled for launch in early September, is fully leased by EchoStar of Englewood, Colo., meaning it will begin delivering a major boost to revenue as soon as it is declared operational in early November.

That will be too late to add much to SES’s 2011 revenue. QuetzSat was one of several satellites built by Space Systems/Loral of Palo Alto, Calif., whose launches have been delayed while Loral verifies that a solar array deployment failure that affected a satellite owned by Telesat of Canada will not affect future satellites.

In a conference call, SES Chief Executive Romain Bausch said QuetzSat-1 uses a different solar array deployment mechanism than the one that crippled the Telesat spacecraft.

The new satellites, which are set to add more than 20 percent to SES’s in-orbit capacity, are expected to enable the company to increase what it calls its recurring revenue by between 4 percent and 5 percent a year between 2010 and 2012.

While sticking to the company’s previous forecast for a sharp reduction in spending, Bausch said the company has not excluded ordering three new satellites to be launched over Latin America, Asia and the broad Europe, Middle East and Africa region.

In particular, he said, Indian direct-to-home satellite television companies continue to press for more bandwidth that cannot be satisfied by India’s nationally produced satellites. SES has slots at 95 degrees and 108.2 degrees east with Indian satellite television customers. “These customers are asking for more capacity,” Bausch said.

For the six months ending June 30, SES reported revenue of 851.4 million euros, an increase of 0.8 percent from the same period a year ago. When currency exchange fluctuations are removed from the picture to expose recurring revenue, the growth was 3 percent, to 853.2 million euros.

EBITDA, or earnings before interest, taxes, depreciation and amortization, dropped by 0.2 percent for the period. Subtracting currency exchange effects, EBITDA grew by 4.2 percent.

Using the recurring-revenue and EBITDA figures, SES’s EBITDA margin was 75.5 percent of revenue.

Unlike some of its competitors, SES has a sizable business in providing ground services to customers that use both SES satellites and satellites owned by competitors. This services business has a much lower gross profit margin — 16.9 percent for the first six months of 2011 — and makes SES’s core satellite bandwidth business look less profitable than it is.

As a stand-alone business, the company’s satellite bandwidth sales reported an EBITDA margin of 83.6 percent for the first six months of 2011.

Backlog at June 30 stood at 7 billion euros after accounting for exchange-rate variations, up 8.3 percent from a year earlier. The SES fleet was 80.7 percent full as of June 30.

Over the long term, SES officials have said, the ups and downs of the U.S. dollar compared with the euro mean very little to the company given that much of its spending on satellites is in dollars, as is some of its debt.

Bausch said SES remains attentive to changes in the satellite landscape that may see some operators, such as the owners of the Greek-Cypriot Hellas Sat system, quit the business by ceding their satellite assets to another satellite operator to focus on growing the broadcast business.

The owners of Measat of Malaysia are considering such a move, which would allow them to focus on their growing direct-to-home television operations while leaving the business of operating satellites to someone else.

Bausch declined to discuss any specific opportunity, but said SES is interested in replicating the relationship it has with EchoStar, which has leased several SES-operated satellites for their full 15-year lives.

Bausch said the O3b Ka-band satellite constellation, in which SES is a major investor, has cleared its satellite critical design review and that the first eight O3b satellites are scheduled for launch into medium Earth orbit aboard two Europeanized Soyuz rockets in the first half of 2013.

O3b will offer wholesale Ka-band satellite links to African, Asian and South American telecommunications operators and corporations from a constellation of satellites orbiting over the equator. The satellites will hand off their signals to each other as they pass over a given O3b ground antenna from their unusual orbit. O3b service is scheduled to debut in mid-2013, Bausch said.