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Intelsat Announces Second Quarter 2018 Results

31 July 2018

Intelsat S.A. announced financial results for the three months ended June 30, 2018.

Intelsat reported total revenue of $537.7 million and net loss attributable to Intelsat S.A. of $46.8 million for the three months ended June 30, 2018.

In the first quarter of 2018, we adopted the provisions of the Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). As a result of the adoption of ASC 606, total revenue for the three months ended June 30, 2018 reflects $25.2 million primarily related to the significant financing component identified in our customer contracts.

Total revenue excluding the effects of ASC 606 was $512.5 million for the three months ended June 30, 2018.

Intelsat reported EBITDA1, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of $408.5 million and Adjusted EBITDA1 of $415.6 million, or 77 percent of revenue for the three months ended June 30, 2018. Total Adjusted EBITDA excluding the effects of ASC 606 was $390.5 million, or 76 percent of revenue, for the three months ended June 30, 2018. Free cash flow from operations1 was $4.9 million.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “This is a time of great opportunity for Intelsat. We are on the cusp of completing the global deployment of our next generation Intelsat EpicNG fleet, we are introducing more managed services to address high growth mobility applications, and we are increasingly recognized for the value of our global network of satellites and terrestrial infrastructure that connects billions of people around the globe.

“Our overall financial and operational performance year-to-date is tracking to our expectations against a global landscape of increasing mobility connectivity requirements. With our highly successful capital raise of approximately $633 million completed in the second quarter, we have taken significant strides in the management of our capital structure. This allows us to focus our energy on maximizing the commercial opportunities before us, not the least of which is the sizeable opportunity for satellite communications within the global race to deploy 5G.

“We are encouraged by the thoughtful reception that the Federal Communications Commission has given to the innovative proposal that we developed in conjunction with Intel. We’ll continue to promote our market-based proposal, joining with SES and more recently, Eutelsat. Our proposal will speed wireless access to spectrum in the 3.7-4.2 GHz band known as C-band, crucial for the development of the American economy, while not compromising on the protection of the quality and reliability of television and other critical services that currently rely on this spectrum.” Second Quarter 2018 Business Highlights Intelsat provides critical communications infrastructure to customers in the network services, media and government sectors. Our customers use our services for broadband connectivity to deliver fixed and mobile telecommunications, enterprise, video distribution and fixed and mobile government applications. For additional details regarding the performance of our customer sets, see our Quarterly Commentary.

Network Services Network services revenue was $198.5 million (or 37 percent of Intelsat’s total revenue) for the three months ended June 30, 2018, a decrease of 8 percent compared to the three months ended June 30, 2017. There was an immaterial effect from ASC 606 on our network services revenue.

Media Media revenue was $234.2 million (or 44 percent of Intelsat’s total revenue) for the three months ended June 30, 2018, an increase of 5 percent compared to the three months ended June 30, 2017. Excluding the effects of ASC 606, media revenue was $217.5 million for the three months ended June 30, 2018, a decrease of 2 percent compared to the three months ended June 30, 2017.

Government Government revenue was $98.5 million (or 18 percent of Intelsat’s total revenue) for the three months ended June 30, 2018, an increase of 15 percent compared to the three months ended June 30, 2017. Excluding the effects of ASC 606, government revenue was $90.3 million for the three months ended June 30, 2018, an increase of 5 percent compared to the three months ended June 30, 2017.

Average Fill Rate Intelsat’s average fill rate on our approximately 1,850 36 MHz station-kept wide-beam transponders was 79 percent at June 30, 2018, compared to 80 percent as of March 31, 2018. In addition, at June 30, 2018 our fleet includes approximately 1,150 36 MHz units of high-throughput Intelsat EpicNG capacity, stable as compared to March 31, 2018. Satellite Launches Intelsat has two satellite launches planned for September 2018 on a single Arianespace Ariane 5 launcher. Intelsat 38, a satellite jointly built with Azerbaijan’s commercial satellite operator, Azercosmos OJSC, will provide media and broadband services in Central and Eastern Europe, Africa, and Asia. The Horizons 3e satellite, Intelsat’s joint venture satellite with Japan’s leading satellite operator, SKY Perfect JSAT Corporation, completes the initial buildout of the Intelsat EpicNG high-throughput global network, providing service coverage in the Asia-Pacific region.

Contracted Backlog At June 30, 2018, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $8.7 billion, including approximately $1.1 billion attributable to ASC 606. Excluding the effects of ASC 606, contracted backlog was $7.5 billion, as compared to $7.6 billion at March 31, 2018.

Capital Markets Activities On May 2, 2018, pursuant to a previously issued notice of redemption, our subsidiary, Intelsat (Luxembourg) S.A. (“Intelsat Luxembourg”) redeemed $46.0 million aggregate principal amount of its 6 ¾% Senior Notes due 2018, and in June 2018 repaid the remaining outstanding principal at maturity, retiring this issue in its entirety.

On June 14, 2018, Intelsat S.A. completed an offering of 15,498,652 common shares, nominal value $0.01 per share (the “Common Shares”), at a public offering price of $14.84 per common share, with total gross proceeds of approximately $230 million. In addition, on June 18, 2018, Intelsat S.A. completed an offering of approximately $403 million aggregate principal amount of its newly issued 4.5% Convertible Senior Notes due 2025 (the “2025 Convertible Notes”). These notes are guaranteed by a direct subsidiary of Intelsat Luxembourg, Intelsat Envision Holdings LLC. The net proceeds from the Common Shares offering and 2025 Convertible Notes offering were used to repurchase approximately $600 million principal amount of Intelsat Luxembourg’s 7.75% Senior Notes due 2021 in privately negotiated transactions with individual holders in June 2018. We intend to use any remaining proceeds for further debt repurchases and general corporate purposes.

Internal Tax Reorganization On July 2, 2018, we implemented a series of internal transactions and related steps that reorganized the ownership of certain of our assets among our subsidiaries in order to enhance our ability to efficiently transact business. These transactions will be accounted for in the quarter ending September 30, 2018.

Financial Results for the Three Months Ended June 30, 2018 On-Network revenues generally include revenue from any services delivered via our satellite and ground network. Off-Network and Other Revenues generally include revenue from transponder services, mobile satellite services (“MSS”) and other satellite-based transmission services using capacity procured from other operators, often in frequencies not available on our network. Off-Network and Other revenues also include revenue from consulting and other services and sales of customer premises equipment.

Total revenue for the three months ended June 30, 2018 increased by $4.5 million, or 1 percent, as compared to the three months ended June 30, 2017. Excluding the impact of ASC 606 adjustments, total revenue for the three months ended June 30, 2018 decreased by $20.7 million, or 4 percent, as compared to the three months ended June 30, 2017. By service type, our revenues increased or decreased due to the following:

Total On-Network Revenues increased by $6.2 million to $492.0 million as compared to the three months ended June 30, 2017. Excluding the $25.5 million attributable to ASC 606, total on-network revenues declined by $19.3 million, or 4 percent, to $466.6 million due to the following:

 Transponder services revenue of $392.3 million reflects an aggregate increase of $6.2 million, of which $23.8 million is attributable to ASC 606, comprised of $15.4 million and $8.2 million from the media and government businesses, respectively. Exclusive of revenues attributable to ASC 606, transponder services declined by an aggregate amount of $17.6 million, due primarily to a net decrease in revenue from network services applications of $8.5 million, reflecting nonrenewals and renewal pricing at lower rates for wide-beam services in the Latin America, Europe and Asia-Pacific regions, partially offset by growth in maritime and aeronautical mobility services on Intelsat EpicNG. In addition, transponder services for media applications declined by $7.8 million, due to non-renewals and lower termination fees from certain customers in North America and lower collections from cash basis customers as compared to the second quarter of 2017.

 Managed services revenue of $98.5 million, which includes $1.7 million attributable to ASC 606 adjustments related to the media business, reflects an aggregate decrease of $0.1 million. Excluding the effects of ASC 606, managed services revenue declined by $1.8 million, related in part to a $3.2 million decline in revenue from network services customers for point-to-point trunking services being replaced by fiber alternatives, offset partially by a $4.2 million increase in revenue from network services customers for mobility applications, a $2.9 million increase in revenue from managed media solutions, and a $1.2 million decrease in revenue from managed services sold to government customers.

Total Off-Network and Other Revenues reported an aggregate decline of $1.7 million, or a decrease of 4 percent, to $45.7 million, as compared to the three months ended June 30, 2017. There were no significant adjustments attributable to ASC 606.

 Transponder, MSS and other Off-Network services reported an aggregate increase of $2.6 million, due primarily to an increase in third-party managed services sold to government customers.

 Satellite-related services revenue was $9.1 million, or an aggregate decrease of $4.3 million, primarily due to decreased revenue from professional services supporting third-party satellites and government customers in the second quarter of 2018 as compared to the same period in 2017.
For the three months ended June 30, 2018, changes in operating expenses, interest expense, net, and other significant income statement items are described below.

 Direct costs of revenue (excluding depreciation and amortization) decreased by $3.5 million, or 4 percent, to $76.5 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The decrease was primarily due to lower costs of third-party capacity for off-network services and lower costs related to ground network enhancements for our media business.

 Selling, general and administrative expenses increased by $2.3 million, or 5 percent, to $49.9 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The increase was primarily due to an increase of $8.4 million in bad debt expense as compared to a credit in the second quarter of 2017, partially offset by a decrease of $4.5 million in professional fees as compared to the same period in 2017 and $1.9 million in decreased staff-related expenses, primarily associated with lower share-based compensation.

Depreciation and amortization expense decreased by $3.9 million, or 2 percent, to $173.6 million, as compared to the three months ended June 30, 2017. The decrease was primarily related to a number of satellites becoming fully depreciated during the period, offset partially by new satellite and ground segment assets placed into service.

Interest expense, net consists of the interest expense we incur, together with gains and losses on interest rate cap contracts (which reflect the change in their fair value), offset by interest income earned and the amount of interest we capitalize related to assets under construction. Interest expense, net increased by $55.1 million, or 22 percent, to $303.2 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The increase in interest expense, net was principally due to an increase of $28.9 million related to the significant financing component identified in customer contracts in accordance with ASC 606. In addition, interest expense, net increased by $23.9 million, primarily driven by our new debt issuances and amendments to our senior secured credit facility with higher interest rates (partially offset by certain debt repurchases in 2017 and 2018), and an increase of $9.3 million from lower capitalized interest primarily resulting from decreased levels of satellites and related assets under construction. The increases were also partially offset by a decrease of $6.9 million corresponding to the increase in fair value of the interest rate cap contracts we entered into in 2017 and hold.

The non-cash portion of total interest expense, net was $35.0 million for the three months ended June 30, 2018, due to the amortization of deferred financing fees, amortization and accretion of discounts and premiums, and interest expense related to the significant financing component identified in customer contracts in accordance with ASC 606, as well as the gain offset from the increase in the fair value of interest rate cap contracts we hold.

Gain on early extinguishment of debt was $22.1 million for the three months ended June 30, 2018, as compared to a nominal loss for the three months ended June 30, 2017. The gain of $22.1 million consisted of the difference between the carrying value of debt repurchased and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt discount and unamortized debt issuance costs.

Other expense, net was $2.8 million for the three months ended June 30, 2018, as compared to other income, net of $1.5 million for the three months ended June 30, 2017. The decline of $4.4 million was primarily related to a $4.5 million increase in foreign currency loss related to our business conducted in Brazilian reais.

Provision for income taxes decreased by $4.7 million to an income tax benefit of $0.3 million for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. The decrease was principally due to lower income in the three months ended June 30, 2018.

Net Income (Loss), Net Income (Loss) per Diluted Common Share attributable to Intelsat S.A., EBITDA and Adjusted EBITDA
Net loss attributable to Intelsat S.A. was $46.8 million for the three months ended June 30, 2018, compared to net loss attributable to Intelsat S.A. of $23.8 million for the same period in 2017.

Net loss per diluted common share attributable to Intelsat S.A. was $0.38 for the three months ended June 30, 2018, compared to net loss per diluted common share of $0.20 for the same period in 2017.

EBITDA was $408.5 million for the three months ended June 30, 2018, compared to $407.3 million for the same period in 2017.

Adjusted EBITDA was $415.6 million for the three months ended June 30, 2018, or 77 percent of revenue, compared to $417.9 million, or 78 percent of revenue, for the same period in 2017. Excluding the effects of ASC 606, Adjusted EBITDA declined by 7 percent to $390.5 million, or 76 percent of revenue in the second quarter of 2018 as compared to the same period in 2017. Please see the table below for further detail of the impacts on Adjusted EBITDA as a result of ASC 606.
Free Cash Flow From (Used In) Operations Net cash provided by operating activities was $57.2 million for the three months ended June 30, 2018, and free cash flow from operations was $4.9 million for the same period. Free cash flow from (used in) operations is defined as net cash provided by (used in) operating activities, less payments for satellites and other property and equipment (including capitalized interest) and other payments for satellites from financing activities. Payments for satellites and other property and equipment from investing activities during the three months ended June 30, 2018 was $52.4 million.

Financial Outlook 2018
 Intelsat reaffirmed its 2018 revenue and Adjusted EBITDA guidance issued on February 26, 2018.
 Intelsat reaffirmed the capital expenditure guidance updated on June 11, 2018.
 Intelsat introduced cash tax guidance for 2018 and a modeling assumption range for future periods.
Revenue: Intelsat forecasts full-year 2018 revenue to be in a range of $2.060 billion to $2.110 billion.
Adjusted EBITDA: Intelsat forecasts Adjusted EBITDA performance for the full-year 2018 to be in a range of $1.560 billion to $1.605 billion.
Capital Expenditures: On June 11, 2018, the Company updated its capital expenditure expectation for 2018-2020 (the “Guidance Period”).
We expect the following capital expenditure ranges:
 2018: $300 million to $350 million;
 2019: $325 million to $400 million; and
 2020: $300 million to $400 million.

In adjusting downward our capital expenditure guidance as compared to our previous guidance, Intelsat incorporated two primary changes: the deferral of a new satellite order from 2018 to 2019, and a reduction in assumed launch costs related to operational and supply improvements in the launcher sector.

We are committed to our 2018 operating priority to incorporate new innovations in our fleet development program. The new initiatives are planned to allow us to achieve a lower cost-per-bit for our global fleet while also attaining lower overall capital intensity to support operations. Innovations will contribute to commercial flexibility and strong competitive positioning and include:
 driving development of commercially-scaled software-definable satellites;
 leveraging new manufacturing practices;
 use of mission extension vehicles; and
 increased use of reusable rocket launchers.
By the conclusion of the Guidance Period at the end of 2020, the net number of transponder equivalents is expected to increase by a compound annual growth rate (“CAGR”) of approximately 5 percent, reflecting the net activity of satellites entering and leaving service during the Guidance Period. Capital expenditure incurrence is subject to the timing of achievement of contract, satellite manufacturing, launch and other milestones.

Our capital expenditure guidance includes capitalized interest, which is expected to average approximately $40 million annually over the Guidance Period.
Cash Taxes: We expect cash taxes in 2018 to be approximately $55 million to $65 million. In periods for the foreseeable future, we expect cash taxes to range from $30 million to $40 million annually.
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