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Intelsat Reports Third Quarter 2010 Results

 

November 8, 2010

Intelsat S.A., reported results for the three and nine months ended September 30, 2010.

 

Intelsat S.A. reported revenue of $644.3 million and a net loss of $106.4 million for the three months ended September 30, 2010. The company also reported Intelsat S.A. EBITDAi, or earnings before net interest, loss on early

extinguishment of debt, taxes and depreciation and amortization, of $478.1 million, and Intelsat Luxembourg Adjusted EBITDAi of $506.0 million, or 79 percent of revenue, for the three months ended September 30, 2010.

 

Intelsat CEO Dave McGlade stated, “Today’s report, with solid revenue growth of 4.3 percent in the third quarter of 2010, as compared to the third quarter of 2009, is in line with our previous indications that we expected to achieve a

higher revenue growth profile in the second half of 2010. Extending the trends of the past several quarters, strong performance in our government business outpaced that of our network services and media businesses.”

 

McGlade continued, “We remain focused on increasing the value of our video neighborhoods, and on executing our business strategies with respect to growing applications, such as maritime and government, among others. We are

successfully maintaining our strong contracted backlog, with pre-commitments from customers for capacity on soon to be launched satellites contributing to our $9.3 billion backlog at September 30, 2010, and providing visibility and

stability of future cash flows.”

 

Business Highlights

 

• Intelsat continues to build its leadership in providing capacity and services for government applications, with strong renewal rates and contract expansions supporting growth. Intelsat General Corporation, a wholly-owned subsidiary

of Intelsat S.A., received a contract for on-network transponder services to support unmanned aerial vehicle communications in North America.

Separately, integration of the Australian Defence Force hosted payload with Intelsat 22 is proceeding according to schedule. Intelsat expects to deliver the hosted payload on-orbit when Intelsat 22 launches in early 2012.

 

• Intelsat remains focused on renewing and expanding service agreements on its valuable regional video neighborhoods. HBO Latin America Group (HBO LAG) signed a multi-year, multitransponder contract for capacity to increase its program distribution to viewers across Latin America. In addition to services on Intelsat’s three leading video neighborhoods serving Latin America, the agreement also includes a comprehensive teleport restoration program for HBO LAG via IntelsatONE, Intelsat’s IP/MPLS fiber and teleport network. Separately, ViewAfrica, a leading provider of global broadcast and transmission services for television and radio channels, extended its commitment to Intelsat’s leading African video neighborhood at 68.5 degrees East longitude.

 

The multi-transponder agreement extends ViewAfrica’s current commitment on the Intelsat 10 satellite onto Intelsat 20 following its launch and entry into service in 2012.

 

• Intelsat is executing its global maritime strategy, which includes deploying customized Ku-band satellite beams that support always-on broadband connections, by building relationships with the world’s largest providers of maritime data services. Intelsat announced a multi-transponder, multiyear agreement with NewWave Broadband, a provider of high-speed maritime services, for mobility beams on the Intelsat 18 and Intelsat 22 satellites expected to be launched in 2011 and 2012, respectively. In addition, network services provider Vizada expanded and renewed a multiyear agreement for capacity supporting its global operations, including its Marlink unit, which supplies voice and data solutions to the maritime industry.

 

• Cellular backhaul and telecommunications infrastructure continue to be important applications in Latin America and Africa. Telefónica subsidiary, Colombia Telecomunicaciones S.A. E.S.P., Colombia’s leading provider of local and long-distance data and voice services, signed a multiyear agreement for capacity on three Intelsat satellites supporting cellular backhaul, rural Internet access and distance learning applications. Separately, France Telecom S.A. renewed and expanded a portfolio of services that support its global communications network.

 

• In August 2010, Intelsat announced a replacement satellite for Intelsat 805, to be known as Intelsat 27. In total, Intelsat currently has nine satellites in development, including Intelsat New Dawn. Intelsat has three launches scheduled before year-end 2011: Intelsat 17, expected to launch in the fourth quarter of 2010, Intelsat New Dawn, expected to launch late in the first quarter of 2011, and Intelsat 18, for which the launch has been rescheduled to late second quarter 2011, due to manufacturing delays.

 

• On September 30, 2010, Intelsat Jackson Holdings S.A. completed an offering of $1.0 billion principal amount of 7¼% Senior Notes due 2020. The majority of the proceeds were used to repurchase $546.3 million principal amount of Intelsat Corporation’s 9¼% Senior Notes due 2014 and $124.9 million principal amount of Intelsat Corporation’s 6 % Senior Secured Debentures due 2028. Subsequent to the quarter close, $34.1 million of the proceeds were used

to repurchase and cancel some of the remaining outstanding Intelsat Subsidiary Holding Company S.A. 8½% Senior Notes due 2013 via an open market purchase transaction. After giving effect to the debt repurchases, $227.8 million of the proceeds from the offering remain available for general corporate purposes, which could include the repayment, redemption, retirement or repurchase in the open market of other indebtedness of Intelsat S.A. and its

subsidiaries.

 

• The management of the Galaxy 15 satellite anomaly continues, as the satellite drifts eastward of 111º West longitude. All attempts to recover this satellite are currently expected to be completed within the next several months; if remaining attempts to recover the Galaxy 15 are unsuccessful, Intelsat may write down the remaining carrying value of the satellite, which was $34.2M at September 30, 2010.

 

• Intelsat’s average fill rate on its approximately 2,125 station-kept transponders was 80 percent at September 30, 2010.

 

Financial Results for the Three Months Ended September 30, 2010 Total revenue for the three months ended September 30, 2010 increased by $26.4 million, or 4 percent, to $644.3 million as compared to the three months ended September 30, 2009.

 

By service type our revenue increased or decreased due to the following:

On-Network Revenues:

 

• Transponder Services—an aggregate increase of $13.0 million, due primarily to a net increase of $20.2 million in revenue resulting from favorable terms, new business and renewals from network services customers primarily in the Africa and Middle East and Latin America and Caribbean regions, as well as the migration of a customer from managed services to transponder services and growth in capacity sold by our Intelsat General business. These increases were partially offset by an aggregate decrease of $7.2 million in revenues related to the IS-4 satellite anomaly, which primarily affected revenue from customers in the Europe and the Africa and Middle East regions, and the Galaxy 15 satellite anomaly, which primarily affected revenue from media customers in the North

America region.

 

• Managed services— an aggregate decrease of $6.7 million primarily due to the migration of a network services customer from managed services to transponder services.

 

• Channel— an aggregate decrease of $3.1 million related to a continued decline from the migration of point-to-point satellite traffic to fiber optic cables, a trend which we expect will continue.

 

Off-Network and Other Revenues:

 

• An aggregate increase of $23.0 million, due primarily to a $13.5 million increase in revenues from transponder services and a $6.9 million increase in mobile satellite services (“MSS”) revenues from usage-based mobile services, both of which were sold by our Intelsat General business.

Changes in direct costs of revenue, selling, general and administrative expenses, depreciation and amortization, losses on derivative financial instruments and interest expense, net are described below.

 

• Direct costs of revenue increased by $18.0 million, or 21 percent, to $104.7 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. The increase was primarily due to an increase of $17.4 million for purchases of offnetwork FSS and MSS capacity, primarily related to increased transponder services sold by our Intelsat General business. Increases in direct costs of revenue also included an increase of $1.9 million in satellite-related insurance costs related to recently launched satellites, partially offset

by a decrease of $2.0 million in cost of equipment primarily related to products sold by our Intelsat General business.

 

• Selling, general and administrative expenses decreased by $10.3 million, or 18 percent, to $46.0 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. The decrease was primarily due to a $5.0 million decrease in bad debt expense, $2.1 million in lower stock compensation costs associated with the amended and restated Intelsat Global, Ltd. 2008 Incentive Plan, and a decrease of $1.2 million in staff-related expenses.

 

• Depreciation and amortization expense decreased by $1.0 million to $199.0 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009.

 

The decrease was primarily due to the following:

o a decrease of $16.7 million in depreciation expense due to certain satellites becoming

fully depreciated and the impairment of our IS-4 and Galaxy 15 satellites following the

anomalies that occurred in 2010; and

o a decrease of $3.8 million in amortization expense primarily due to changes in the expected pattern of consumption of amortizable intangible assets; partially offset by o an increase of $15.5 million in depreciation expense resulting from the impact of satellites placed into service during the second half of 2009 and the first quarter of 2010.

 

• Losses on derivative financial instruments were $19.9 million for the three months ended September 30, 2010 compared to $38.8 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, the loss on derivative financial instruments related to a $31.7 million loss on our interest rate swaps, partially offset by an $11.8 million gain on our put option embedded derivative.

 

• Interest expense, net consists of the gross interest expense we incur less the amount of interest we capitalize related to capital assets under construction and less interest income earned. As of September 30, 2010, we also held interest rate swaps with an aggregate notional amount of $2.3 billion to economically hedge the variability in cash flow on a portion of the floating-rate term loans under our senior secured and unsecured credit facilities. The swaps have not been designated as hedges for accounting purposes. Interest expense, net increased by $8.0 million, or 2 percent, to $345.5 million for the three months ended September 30, 2010, as compared to $337.5 million for the three months ended September 30, 2009. The increase in interest expense, net was principally

due to the higher net principal amount of debt outstanding.

 

• The non-cash portion of total interest expense, net was $81.3 million for the three months ended September 30, 2010 and included $57.4 million of payment-in-kind interest expense. The remaining non-cash interest expense was primarily associated with the amortization of deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums.

 

EBITDA, Intelsat Luxembourg Adjusted EBITDA and Other Financial Metrics

Intelsat S.A. EBITDA of $478.1 million for the three months ended September 30, 2010, reflected an increase of $38.3 million from $439.8 million for the same period in 2009. Intelsat Luxembourg

 

Adjusted EBITDA increased by $15.1 million, or 3 percent, to $506.0 million, or 79 percent of revenue, for the three months ended September 30, 2010 from $490.9 million, or 79 percent of revenue, for the same period in 2009.

 

Intelsat’s backlog, representing expected future revenue under contracts with customers and Intelsat’s pro rata share of backlog in its joint venture investments, was $9.4 billion and $9.3 billion as of June 30, 2010 and September 30, 2010, respectively.

 

Intelsat management has reviewed the data pertaining to the use of the Intelsat network and is providing revenue information with respect to that use by customer set and service type in the following tables. Intelsat management believes this provides a useful perspective on the changes in revenue and customer trends over time.