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Intelsat Announces Second Quarter 2019 Results


July 30, 2019

Intelsat S.A. announced financial results for the three and six months ended June 30, 2019.

Intelsat reported total revenue of $509.4 million and net loss attributable to Intelsat S.A. of $529.7 million for the three months ended June 30, 2019. The net loss reflects a $381.6 million asset impairment charge incurred in the second quarter of 2019 for an in-period satellite failure.

Intelsat reported EBITDA1, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of a loss of $52.1 million and Adjusted EBITDA1 of $373.8 million, or 73 percent of revenue, for the three months ended June 30, 2019. Free cash flow used in operations1 was $45.2 million.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “In the second quarter of 2019 we made progress on our operational priorities, including the expansion of our managed services platforms. The global footprint of our Intelsat EpicNG-based managed services addresses aeronautical, maritime, wireless infrastructure, enterprise and government broadband requirements. Reflecting our emphasis on the wireless sector, we ramped up services on our enhanced point-to-point solutions and on our new satellites. In particular, we signed new business on the Horizons 3e high-throughput satellite, which provides infrastructure for several of the largest wireless operators in Asia, as well as Intelsat 38, which is providing new services for government applications.”

Spengler concluded, “Over the past two months we significantly increased the public details of our C-Band Alliance proposal under the U.S. Federal Communications Commission C-band proceeding. We added to the record a committed plan for protecting incumbent users, expanded the detail of our plan for rapid implementation, and submitted additional technical analyses supporting interference mitigation. We will continue to enhance our plan, with a goal of demonstrating that the CBA plan represents the fastest path to cleared spectrum for 5G in the U.S., while maintaining the reliability of the U.S. television and radio ecosystem.”

Second 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 $185.2 million (or 36 percent of Intelsat’s total revenue) for the three months ended June 30, 2019, a decrease of 7 percent compared to the three months ended June 30, 2018.

Media

Media revenue was $223.5 million (or 44 percent of Intelsat’s total revenue) for the three months ended June 30, 2019, a decrease of 5 percent compared to the three months ended June 30, 2018.

Government

Government revenue was $93.3 million (or 18 percent of Intelsat’s total revenue) for the three months ended June 30, 2019, a decrease of 5 percent compared to the three months ended June 30, 2018.

Average Fill Rate

Intelsat’s average fill rate at June 30, 2019 on our approximately 1,750 36 MHz station-kept wide-beam transponders was 78 percent, stable as compared to our average fill rate at March 31, 2019 of 78 percent with no change in transponder count. In addition, at June 30, 2019 our fleet included approximately 1,200 36 MHz units of high-throughput Intelsat EpicNG capacity, as compared to 1,475 units at March 31, 2019, reflecting the April 2019 failure of the Intelsat 29e satellite.

Satellite Launches

Intelsat conducted no satellite launches in the second quarter of 2019. Our Intelsat 39 satellite, which will provide services from Europe and Africa to the Asia-Pacific region, is expected to launch in the third quarter of 2019, and enter service in the fourth quarter of 2019. For additional details regarding our satellite investment program and 2019 planned satellite launches, see our Quarterly Commentary.

Contracted Backlog

At June 30, 2019, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $7.5 billion after adjusting for known reductions to backlog related to the Intelsat 29e satellite failure, as compared to $7.9 billion at March 31, 2019.

Capital Market Transactions

In June 2019, our subsidiary, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”), completed an add-on offering of $400.0 million aggregate principal amount of its 9.75% Senior Notes due 2025. The net proceeds from the add-on offering are expected to be used for working capital and general corporate purposes, which may include, among other things, the funding of capital expenditures, future strategic transactions and repayment of our indebtedness.

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

The C-Band Alliance (“CBA”), of which Intelsat is a founding member, submitted several significant filings in response to the Notice of Proposed Rule Making (“NPRM”) issued by the FCC, GN Docket No. 18-122. Since April 30, 2019, the CBA added additional detail to its proposal, building consensus on its plan to clear our licensed C-band spectrum to support U.S. leadership in 5G while also protecting essential television, radio and data services currently using C-band spectrum. The filings included our proposed band plan, and a series of technical filings demonstrating our expertise on the current state of U.S. networks using C-band spectrum. For further details regarding our progress on our proposal to the FCC on the C-band proceeding, please see our Quarterly Commentary.

Intelsat 29e Satellite Failure

On April 7, 2019, the Intelsat 29e satellite experienced an anomaly that resulted in the total loss of the satellite. As a result, in the second quarter of 2019, Intelsat recorded an impairment to asset charge of approximately $381.6 million. For further details regarding the financial and operational impact of the loss of Intelsat 29e, please see our Quarterly Commentary.

Financial Results for the Three Months Ended June 30, 2019

Total revenue for the three months ended June 30, 2019 decreased by $28.3 million to $509.4 million, or 5 percent, as compared to the three months ended June 30, 2018. By service type, our revenues increased or decreased due to the following:

Total On-Network Revenues decreased by $30.5 million to $461.5 million as compared to the three months ended June 30, 2018 due to the following:

Transponder services reported an aggregate decrease of $22.8 million, primarily due to a $17.2 million decrease in revenue from network services customers as a result of non-renewals and service contractions for enterprise and cellular backhaul applications primarily for services delivered in Latin America and for Europe to Africa routes. Transponder services also declined in Latin America due to lost revenue and adjustments stemming from the Intelsat 29e satellite failure, a portion of which moved to off-network transponder services. The aggregate decrease also reflected a $7.5 million decline in revenue from media customers, primarily for distribution services in Latin America, North America and Europe. The declines were offset in part by a $1.9 million increase in revenue from government customers.

Managed services reported an aggregate decrease of $7.2 million, primarily due to a decrease of $3.4 million from media customers for occasional use and managed video solutions, and a decline of $3.2 million from government customers resulting from non-renewals and lower pricing related to 2018 contract renewals. Increases in managed services for network services customers, primarily for maritime applications, were more than offset by a decrease in managed services for trunking applications and adjustments stemming from the Intelsat 29e satellite failure, a portion of which were restored on off-network services, as discussed below.

Total Off-Network and Other Revenues increased by $2.2 million, or 5 percent, to $47.9 million, as compared to the three months ended June 30, 2018 due to the following:

Transponder, MSS and other Off-Network services revenues increased by an aggregate of $1.1 million to $37.7 million, primarily due to $5.0 million in increased off-network services largely related to the Intelsat 29e customer restoration process, partially offset by a $4.1 million decrease in off-network services primarily due to lower sales for certain government applications as a result of non-renewals of certain task orders.

Direct costs of revenue (excluding depreciation and amortization) increased by $19.0 million, or 25 percent, to $95.4 million for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The increase was primarily due to an increase of $15.0 million in cost of sales, of which $11.1 million related to the entry into service of two uncapitalized satellites in the first quarter of 2019, with no comparable amounts in the second quarter of 2018, and $4.0 million in increased costs for purchases of restoration capacity related to the Intelsat 29e satellite loss. In addition, staff-related expenses increased in the three months ended June 30, 2019 by $3.4 million as compared to the three months ended June 30, 2018.

Selling, general and administrative expenses increased by $6.0 million, or 12 percent, to $55.9 million for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018. The increase was primarily due to a $4.9 million increase in bad debt expense largely relating to customers in the Latin America and Europe regions and a $4.7 million increase in staff-related expenses. The increases were partially offset by a $3.2 million decline in professional fees largely due to costs incurred in 2018 relating to liability and tax management initiatives.

Depreciation and amortization expense decreased by $9.8 million, or 6 percent, to $163.8 million for the three months ended June 30, 2019, as compared to the three months ended June 30, 2018, primarily related to the write-off of the Intelsat 29e satellite.

Satellite impairment loss. We recognized an impairment charge of $381.6 million during the three months ended June 30, 2019 relating to the failure of Intelsat 29e. The impairment charge consisted of approximately $377.9 million related to the write-off of the carrying value of the satellite and associated deferred satellite performance incentive obligations, and approximately $3.7 million related to prepaid regulatory fees.

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 June 30, 2019, we held interest rate cap contracts with an aggregate notional amount of $2.4 billion to mitigate the risk of interest rate increases on the floating-rate term loans under our senior secured credit facilities. The cap contracts have not been designated as hedges for accounting purposes.

Interest expense, net increased by $17.5 million, or 6 percent, to $320.7 million for the three months ended June 30, 2019, as compared to $303.2 million for the three months ended June 30, 2018. The increase was principally due to:

an increase of $17.8 million corresponding to the decrease in fair value of the interest rate cap contracts; and

a net increase of $3.4 million in interest expense primarily resulting from our debt refinancing activities in 2018; partially offset by

a decrease of $1.6 million from higher capitalized interest primarily resulting from increased levels of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $49.8 million for the three months ended June 30, 2019, primarily consisting of interest expense related to the significant financing component identified in customer contracts, the loss resulting from the decrease in fair value of the interest rate cap contracts we hold, amortization and accretion of discounts and premiums and amortization of deferred financing fees.

Gain on early extinguishment of debt. No gain or loss on early extinguishment of debt was recognized for the three months ended June 30, 2019, as compared to a gain of $22.1 million for the three months ended June 30, 2018, consisting 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 issuance costs.

Other expense, net was $28.7 million for the three months ended June 30, 2019, as compared to $2.8 million for the three months ended June 30, 2018. Other expense, net for the three months ended June 30, 2019 was primarily related to a net loss of $32.0 million related to a change in value of certain investments in third parties.

Benefit from income taxes was $7.5 million for the three months ended June 30, 2019, as compared to $0.3 million for the three months ended June 30, 2018. The increase was principally attributable to the implementation of a series of internal transactions and related steps that reorganized the ownership of certain of our assets among our subsidiaries in 2018 and the tax benefit related to the satellite impairment loss in the second quarter of 2019.

Cash paid for income taxes, net of refunds, totaled $4.8 million and $37.8 million for the three months ended June 30, 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 $529.7 million for the three months ended June 30, 2019, compared to a net loss of $46.8 million for the same period in 2018, primarily due to the $381.6 million asset impairment charge related to the failure of the Intelsat 29e satellite, as well as lower revenue and higher costs of operations, as described above.

Net loss per diluted common share attributable to Intelsat S.A. was $3.76 for the three months ended June 30, 2019, compared to net loss of $0.38 per diluted common share for the same period in 2018.

EBITDA was a loss of $52.1 million for the three months ended June 30, 2019, compared to earnings of $408.5 million for the same period in 2018, primarily due to the $381.6 million asset impairment charge related to the failure of the Intelsat 29e satellite, as well as lower revenue and higher costs of operations, as described above.

Adjusted EBITDA was $373.8 million for the three months ended June 30, 2019, or 73 percent of revenue, compared to $415.6 million, or 77 percent of revenue, for the same period in 2018. Adjusted EBITDA reflects lower revenue and higher operating costs, as described above.

Free Cash Flow From (Used In) Operations1

Net cash provided by operating activities was $16.2 million for the three months ended June 30, 2019. Free cash flow used in operations was $45.2 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 June 30, 2019 was $65.2 million, and other proceeds from satellites from investing activities was $3.7 million.

Financial Outlook & Guidance 2019

Intelsat affirmed its revenue, Adjusted EBITDA, Capital Expenditure and Cash Tax guidance.

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 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.

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, one of which is expected to launch in the third quarter of 2019 and another of which is 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.

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

 


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