SES Says Spending on Fleet Expansion Paying Off, Will Peak This Year at $1.2 Billion

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PARIS — Satellite fleet operator SES, which is in the middle of the biggest satellite-buying spree in its history, is promising investors that the new capacity will continue to fetch about $1.5 million per year in transponder lease revenue and that the company will put the brakes on new capital spending starting next year.

The Luxembourg-based company is sticking with its earlier forecast that its revenue will grow by 5 percent per year, on average, through 2012 despite a dip likely to follow Germany’s switch, in early 2012, from analog to digital satellite transmissions.

Presenting the company’s 2009 financial results Feb. 12, SES officials said the company’s current expansion 15 new satellites will be launched between 2010 and 2014 will peak this year in terms of cash outlays, reaching 875 million euros ($1.2 billion), or half the company’s expected 2010 revenue.

Spending on new satellites then begins a sharp decline through 2015, a year when the company says it may spend as little as 225 million euros on new spacecraft. The savings will be plowed back into dividends or share buybacks or other shareholder-friendly moves at the expense of today’s beneficiaries, the providers of commercial satellites and rockets.

Despite the current high rate of spending, SES said its free cash flow has not suffered and that it is increasing, as promised, its annual dividend by 10 percent. The company reported 2009 revenue of 1.7 billion euros, up 4.4 percent from 2008. But in what SES Chief Financial Officer Mark Rigolle said is an example of the multiplier effect of investing in new satellites, the company’s operating profit rose 12 percent, to 700 million euros, and net profit rose by 23 percent, to 477 million euros.

SES’s current fleet of 41 satellites by 2014 will expand to around 50 after accounting for satellites taken out of service during the period.

 The current 15-satellite construction program will add 313 new transponders to SES’s in-orbit commercial portfolio, a 28 percent increase from today. These new transponders, many of them on satellites serving Latin America, Asia, Africa and the Middle East, will be generating more than 400 million euros in annual revenue for SES by 2015, the company said.

In conference calls with journalists and financial analysts, SES Chief Executive Romain Bausch added a small caveat to the forecast: SES still has an appetite for expansion, if at a slower pace.

 In particular, he said, the company is determined to develop orbital slots over Latin America, an example being the company’s recent agreement with several nations there to develop the position at 67 degrees west. Bausch said SES was looking at the possible purchase of Mexico’s Satmex satellite fleet operator but that this option is not high on SES’s list of likely investments.

In the conference calls, Bausch and Rigolle also touched on these points:

  • SES values the Ku-band payload on the in-orbit ProtoStar 2 satellite it purchased at auction for $185 million in late 2009 at 50 million euros. The S-band payload’s value has not yet been calculated as SES negotiates with customer Indostar of Indonesia on whether Indostar will lease the capacity or purchase that portion of the satellite from SES.
  • The Solaris Mobile joint venture with Eutelsat of Paris will be allowed to continue in operation at least through mid-2010 as it tries to develop a viable business plan for mobile S-band services in Europe despite the defective S-band antenna on its sole satellite. The defect will prevent Solaris from fully developing its service.
  • SES continues to downplay the market potential of Ka-band consumer broadband satellites and has no immediate plans to build a Ka-band satellite of its own. SES’s Astra2Connect consumer broadband service in Europe, which counts 60,000 subscribers and is growing by 10,000 subscribers every three months, has access to plenty of SES-provided Ku-band. Bausch said the service now uses about six full satellite transponders. SES has ordered the equivalent of two Ka-band transponders on each of three Astra satellites it ordered from Astrium Satellites in late 2009, but this capacity was added at a cost of less than 10 million euros per satellite and does not mean SES thinks consumer broadband is about to take off.

“Consumer broadband is an opportunity for the near term,” Bausch said. “It is not necessarily an opportunity that is staying around for a long time.”

  • High-definition television, which uses twice the satellite bandwidth of standard digital TV, is expanding just as quickly as promised. SES’s fleet carries 190 HD channels, up from 137 a year ago. Bausch said 3D TV uses about the same amount of bandwidth as HDTV and therefore will not result in the same uptick in satellite demand.

But he said broadcasters introducing 3D TV, like the early broadcast adopters of digital and HDTV, will be forced to simulcast their programming in HD and 3D formats for the period necessary to permit subscribers to purchase 3D-capable television sets. It is during this dual-broadcast transition that lies the opportunity for satellite broadcasters, he said.

  • SES expects to remain a 30 percent shareholder in satellite broadband startup O3B Networks even as that company seeks $235 million in additional equity via a solicitation of prospective investors that is now under way. SES invested $75 million in cash in O3B and is also providing satellite control engineering, sales and other services. OHB plans an initial constellation of eight satellites covering the world’s equatorial regions to deliver Ka-band connectivity to towers operated by regional telecommunications providers, who would resell the service to their customers.

The SES cash and in-kind investment will be enough to keep SES at 30 percent even as new investors arrive, Bausch said. Rigolle said O3B needs about $900 million, counting both debt and equity, to complete its system. The first eight of a planned 20 satellites are under construction and slated for launch in 2012.