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Intelsat Announces First Quarter 2019 Results

First quarter revenue of $528.4 million

First quarter net loss attributable to Intelsat S.A. of $120.6 million

First quarter Adjusted EBITDA of $380.3 million or 72 percent of revenue

March 31, 2019 contracted backlog of $7.9 billion

2019 Financial Guidance Updated for Financial Impact of Intelsat 29e Satellite Failure

April 30, 2019

Intelsat S.A. announced financial results for the three months ended March 31, 2019.

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”). All financial results presented in our first quarter 2019 quarterly report are presented on a comparable basis to 2018 reported results, unless noted otherwise.

Intelsat reported total revenue of $528.4 million and net loss attributable to Intelsat S.A. of $120.6 million for the three months ended March 31, 2019.

Intelsat reported EBITDA1, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of $372.8 million and Adjusted EBITDA1 of $380.3 million, or 72 percent of revenue, for the three months ended March 31, 2019. Free cash flow from operations1 was $24.0 million.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “In the first quarter of 2019, we built momentum on our managed services strategy, which addresses new requirements in the markets we serve. We accelerated our deployment of managed services for enterprise, aeronautical and maritime applications. In the past weeks, we introduced new hybrid services for our media customers that seamlessly integrate satellite services with cloud-based solutions. Each of these managed solutions leverages the global reach of our fleet and addresses our customers’ needs for efficient and flexible connectivity.”

Spengler concluded, “In the past month we increased the transparency and provided more details of the C-Band Alliance proposal under the U.S. Federal Communications Commission C-band proceeding. We are collaborating with a number of the stakeholders in the proceeding, gaining consensus so that we can deliver to the FCC a market-based approach which is clearly recognized as the best path to protecting incumbents, while repurposing spectrum that will accelerate 5G deployment and innovation in the U.S.”

First Quarter 2019 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, available on our website.

Network Services

Network services revenue was $204.3 million (or 39 percent of Intelsat’s total revenue) for the three months ended March 31, 2019, an increase of 3 percent compared to the three months ended March 31, 2018. This increase reflects $14.3 million in accelerated revenue associated with hardware supplied and third-party services under a long-term contract subject to Accounting Standards Codification 842, Leases (“ASC 842”).

Media

Media revenue was $226.0 million (or 43 percent of Intelsat’s total revenue) for the three months ended March 31, 2019, a decrease of 6 percent compared to the three months ended March 31, 2018.

Government

Government revenue was $93.2 million (or 17 percent of Intelsat’s total revenue) for the three months ended March 31, 2019, a decrease of 4 percent compared to the three months ended March 31, 2018.

Average Fill Rate

Intelsat’s average fill rate at March 31, 2019 on our approximately 1,750 36 MHz station-kept wide-beam transponders was 78 percent, as compared to an average fill rate at December 31, 2018 of 78 percent on 1,775 transponders. In addition, at March 31, 2019 our fleet included approximately 1,475 36 MHz units of high-throughput Intelsat EpicNG capacity, as compared to 1,150 units at December 31, 2018, reflecting the entry into service of Horizons 3e. Please see Recent Events, below, for more detail regarding transponder trends following the loss of our Intelsat 29e satellite.

Satellite Launches

Intelsat conducted no satellite launches in the first quarter of 2019. The Horizons 3e satellite, Intelsat’s joint venture satellite with Japan’s leading satellite operator, SKY Perfect JSAT Corporation, entered service in January 2019. Horizons 3e provides over 30 Gbps of incremental throughput to Intelsat’s fleet, completing the initial buildout of the Intelsat EpicNG global high-throughput network with service coverage in the Asia-Pacific region. Intelsat 38, a satellite carrying replacement capacity for direct-to-home platforms serving Central and Eastern Europe as well as the Asia-Pacific region, also entered service in January 2019. For additional details regarding our satellite investment program and 2019 planned satellite launches, see our Quarterly Commentary.

Contracted Backlog

At March 31, 2019, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $7.9 billion, as compared to $8.1 billion at December 31, 2018.

C-band Proceeding at the U.S. Federal Communications Commission (“FCC”)

The C-Band Alliance (“CBA”), of which Intelsat is a founding member, submitted two significant filings in response to the Notice of Proposed Rule Making (“NPRM”) issued by the FCC, GN Docket No. 18-122. On April 3, 2019, Intelsat and CBA partner SES filed a customer commitment letter, detailing customer transition commitments from the CBA, including costs to be funded by the CBA, should its proposal for spectrum clearing be adopted by the FCC. On April 9, 2019, the CBA filed its Transition Implementation Plan for safely migrating all current services into a reduced spectrum allocation. For additional details regarding our activities on our proposal to the FCC, see our Quarterly Commentary, available on our website.

Recent Events: Intelsat 29e Satellite Failure

On April 7, 2019, the Intelsat 29e satellite propulsion system experienced damage that caused a leak of the propellant on board the satellite, resulting in a service disruption to customers on the satellite. Efforts to recover the satellite were unsuccessful. We have provided migration paths for the majority of the services on the satellite, with traffic being transitioned to other Intelsat capacity as well as third-party services.

As a result of the loss of the satellite, in the second quarter of 2019 Intelsat expects to record an impairment to asset charge of approximately $400 million. The impact on our 2019 financial guidance is discussed below in Financial Outlook 2019 and in our Quarterly Commentary.

Financial Results for the Three Months Ended March 31, 2019

Total revenue for the three months ended March 31, 2019 decreased by $15.3 million to $528.4 million, or a decrease of 3 percent as compared to the three months ended March 31, 2018. By service type, our revenues increased or decreased due to the following:

Total On-Network Revenues decreased by $26.4 million, or 5 percent, to $471.2 million as compared to the three months ended March 31, 2018 due to the following:

Transponder services reported an aggregate decrease of $18.4 million, primarily due to a $12.7 million decrease in revenue from media customers and a $6.0 million decrease in revenue from network services customers. The decrease in media revenue was primarily related to non-renewals and volume reductions from certain customers in the North America, Latin America and Africa regions for distribution applications. The decrease in network services revenue was mainly related to declines for wide-beam wireless infrastructure and enterprise services due to non-renewals and service contractions in the Latin America region and for Europe to Africa connectivity. These declines were partially offset by increases for maritime and aeronautical mobility applications and revenue from new service starts for wireless customers in the Asia-Pacific region.

Managed services reported an aggregate decrease of $7.5 million, primarily due to a decrease of

$3.8 million in revenue from government customers resulting from non-renewals and lower pricing related to 2018 contract renewals, and a $2.9 million decrease in revenue from network services customers driven by declines for mobility broadband solutions and point-to-point trunking applications, which were partially offset by $1.8 million in net increases in revenue from managed mobility services.

Total Off-Network and Other Revenues increased by $11.1 million, or 24 percent, to $57.3 million, as compared to the three months ended March 31, 2018 due to the following:

Transponder, MSS and other Off-Network services revenues increased by an aggregate of $14.9 million to $49.9 million, inclusive of $14.3 million in revenue recognized in the first quarter of 2019 from a network services customer as a result of the adoption of ASC 842, with no comparable amount in the first quarter of 2018.

Satellite-related services reported a decrease of $3.8 million, to $7.4 million, due to the completion of a contract for professional services supporting third-party satellite operations in the first quarter of 2018 with no similar contracts completed in the first quarter of 2019.

For the three months ended March 31, 2019, changes in operating expenses, interest expense, net, and other significant income statement items are described below.

Direct costs of revenue (excluding depreciation and amortization) increased by $22.8 million, or 28 percent, to $105.4 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The increase was primarily due to $16.1 million in equipment and third-party service costs recognized in the first quarter of 2019 under ASC 842 and $6.8 million in costs related to the entry into service of two non-capex satellites in January 2019, with no comparable amounts in the first quarter of 2018.

Selling, general and administrative expenses decreased by $8.6 million, or 14 percent, to $51.7 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018. The decrease was primarily due to a $10.3 million decline in professional fees, largely due to costs incurred in the first quarter of 2018 relating to liability management activities with no comparable amounts in 2019, partially offset by an increase of $2.8 million in staff-related expenses.

Depreciation and amortization expense increased by $4.6 million, or 3 percent, to $171.1 million for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018.

Interest expense, net consists of the gross 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. As of March 31, 2019, we held interest rate cap contracts with an aggregate notional amount of $2.4 billion to mitigate the risk of interest rate expense increase on the floating-rate term loans under our senior secured credit facilities. The contracts have not been designated as hedges for accounting purposes.

Interest expense, net increased by $34.1 million, or 12 percent, to $316.6 million for the three months ended March 31, 2019, as compared to $282.5 million in the three months ended March 31, 2018. The increase was principally due to:

an increase of $30.1 million corresponding to the decrease in fair value of the interest rate cap contracts;

an increase of $3.9 million from lower capitalized interest primarily resulting from decreased levels of satellites and related assets under construction; and

a net increase of $2.0 million in interest expense primarily resulting from our refinancing activities in 2018.

The non-cash portion of total interest expense, net was $47.4 million for the three months ended March 31, 2019, primarily consisting of interest expense related to the significant financing component identified in our customer contracts, amortization and accretion of discounts and premiums, the loss resulting from the decrease in fair value of the interest rate cap contracts we hold and amortization of deferred financing fees.

Other income, net was $1.4 million for the three months ended March 31, 2019, as compared to other income, net of $4.4 million for the three months ended March 31, 2018. The decrease of $3.0 million was primarily due to $3.1 million of other lease income recognized in the three months ended March 31, 2018 with no comparable amount in 2019.

Provision for income taxes was $5.1 million for the three months ended March 31, 2019, as compared to $22.4 million for the three months ended March 31, 2018. The decrease was principally attributable to the implementation in 2018 of a series of internal transactions and related steps that reorganized the ownership of certain of our assets among our subsidiaries.

Cash paid for income taxes, net of refunds, totaled $1.9 million and $2.2 million for the three months ended March 31, 2019 and 2018, respectively.

Net Income, Net Income per Diluted Common Share attributable to Intelsat S.A., EBITDA and Adjusted EBITDA

Net loss attributable to Intelsat S.A. was $120.6 million for the three months ended March 31, 2019, compared to a net loss of $66.8 million for the same period in 2018, primarily due to lower revenue and higher direct cost of revenue, as described above.

Net loss per diluted common share attributable to Intelsat S.A. was $0.87 for the three months ended March 31, 2019, compared to net loss of $0.56 per diluted common share for the same period in 2018.

EBITDA was $372.8 million for the three months ended March 31, 2019, compared to $405.4 million for the same period in 2018, primarily due to lower revenue and higher direct cost of revenue, as described above.

Adjusted EBITDA was $380.3 million for the three months ended March 31, 2019, or 72 percent of revenue, compared to $418.6 million, or 77 percent of revenue, for the same period in 2018, primarily due to lower revenue and higher direct cost of revenue, as described above.

Free Cash Flow From Operations1

Net cash provided by operating activities was $117.3 million for the three months ended March 31, 2019. Free cash flow from operations was $24.0 million for the same period. Free cash flow from (used in) operations is defined as net cash provided by operating activities and other proceeds from satellites from investing activities, less payments for satellites and other property and equipment (including capitalized interest). Payments for satellites and other property and equipment from investing activities, net during the three months ended March 31, 2019 was $93.3 million.

Financial Outlook 2019

Intelsat provided a preliminary update to its 2019 financial outlook for revenue and Adjusted EBITDA as noted below, to reflect the financial implications of the loss of the Intelsat 29e satellite, for which all restoration contractual details are not yet complete. Elements from the satellite failure affecting the financial impact include: the use of growth capacity for restoration services, the issuance of revenue credits to compensate customers for repointing costs, the reversal of accrued revenue related to certain contractual terms that will not be realized given the loss of the satellite and increased direct costs of revenue related to the purchase of third-party restoration capacity and other field services costs stemming from service migration.

Intelsat also updated its financial guidance for two other business changes that will affect our financial performance in 2019. These include lowered revenue expectations in our media and government businesses, and higher cost of goods sold related to accounting changes creating incremental impact to Adjusted EBITDA.

Revenue Guidance: Intelsat expects full-year 2019 revenue in a range of $2.000 billion to $2.060 billion.

Adjusted EBITDA Guidance: Intelsat forecasts Adjusted EBITDA performance for the full-year 2019 to be in a range of $1.430 billion to $1.480 billion.

For further details on the changes to our financial outlook, please see our Quarterly Commentary.

Capital Expenditure Guidance: Intelsat affirmed its capital expenditure guidance for the three years 2019-2021 (the “Guidance Period”). Over the next several years we are in a cycle of lower required investment, due to timing of replacement satellites and smaller satellites being built. The replacement strategy for Intelsat 29e has not yet been completed and we may update our capital expenditure guidance when our analysis is complete.

We continue to expect the following capital expenditure ranges:

2019: $250 million to $300 million;

2020: $275 million to $350 million; and

2021: $250 million to $350 million.

Our capital expenditure guidance includes capitalized interest. Capitalized interest is expected to average approximately $30 million annually during the Guidance Period.

Intelsat currently has five satellites covered by our 2019 to 2021 capital expenditure plan, two of which are in the design and manufacturing phase. For the remaining three satellites, no manufacturing contracts have yet been signed. During the Guidance Period, we expect that an increased proportion of our capital expenditures will be invested in ground infrastructure and tools needed to enhance our delivery of managed services.

Our capital expenditure plan excludes up to four satellites which we may be required to build should our C-band proposal to the FCC be adopted in all material respects.

Capital expenditure incurrence is subject to the timing of achievement of contract, satellite manufacturing, launches and other milestones.

Cash Taxes: We expect cash taxes to range from $30 million to $40 million annually.

 

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