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Intelsat Reports Third Quarter 2011 Results

 

8 November 2011

 

Intelsat S.A., the world’s leading provider of satellite services, today reported results for the three months ended September 30, 2011.

 

Intelsat S.A. reported revenue of $652.9 million and a net loss of $0.4 million for the three months ended September 30, 2011. Included in the quarterly results were a $20.2 million pre-tax non-recurring charge from a loss on previously unconsolidated affiliates and a $42.7 million income tax benefit, largely attributable to non-recurring items. 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 $466.5 million, and Intelsat S.A. Adjusted EBITDAi of $502.1 million, or 77 percent of revenue, for the three months ended September 30, 2011.

 

"Intelsat delivered steady results in the third quarter, supported by the visibility provided by our $10.7 billion contracted backlog. Several trends influenced our results in the third quarter, as in recent periods, including strength in our government business and solid performance from our media business. Our overall business activity is strong, and we are achieving success in obtaining long-term commitments from blue chip customers for capacity in the fastest growing markets, such as our recently announced services agreement with DIRECTV Latin America. This contract builds quality backlog and adds two new satellite programs for the attractive Latin America region," said Intelsat CEO David McGlade.

 

"We continue to leverage our satellite fleet and unmatched collection of orbital rights, actively grooming and redeploying our in-orbit assets to deliver satellite capacity to regions of improved opportunity, such as our decision to move the Horizons 2 satellite from North America to serve Russia, which is experiencing attractive growth," McGlade continued. "Following the successful launch of Intelsat 18 in early October 2011, our fleet investment program progresses, with six satellites planned for launch through the first half of 2013 that will provide growth capacity and new beams, and two additional satellites, launching in 2014 and 2015, to support the DIRECTV agreement."

 

Financial Results for the Three Months Ended September 30, 2011

On-Network revenues generally include revenues from any services delivered via our satellite or ground network. Off-Network and Other revenues generally include revenues from transponder services, MSS and other satellite-based transmission services utilizing capacity procured from other operators, often in frequencies not available on our network. Off-Network and Other revenues also include revenues from consulting and other services.

 

Revenue for the three months ended September 30, 2011 increased by $8.6 million, or 1 percent, to $652.9 million as compared to $644.3 million for the three months ended September 30, 2010. By service type, revenue increased or decreased due to the following:

 

On-Network Revenues:

• Transponder services — an aggregate increase of $13.6 million, due primarily to a $9.2 million increase in revenue resulting from growth in capacity sold for media customers primarily in the North America and the Latin America and Caribbean regions and a $9.1 million increase in revenue from capacity sold by our Intelsat General business. These increases were partially offset by a $4.6 million net decrease in revenue from network services customers, reflecting declines in revenue from the Africa and Middle East and the Europe regions, together with a lesser increase in the Latin America and Caribbean region.

• Managed services — an aggregate decrease of $1.4 million, primarily due to a $4.3 million decrease in revenue from network services customers related to non-renewal of contracts for Internet trunking and private line solutions largely in the Africa and Middle East and the Asia-Pacific regions, a trend which we expect will continue due to the migration of services in these regions to fiber optic cable, partially offset by a $3.8 million increase in solution-related hardware sold by our Intelsat General business to North American customers.

• Channel — an aggregate decrease of $3.6 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:

• Transponder, MSS and other off-network services — an aggregate decrease of $1.9 million, primarily due to a $9.0 million decline in usage-based MSS revenue, partially offset by a $7.5 million increase in transponder services, largely related to contracts being implemented by our Intelsat General business.

• Satellite-related services— an aggregate increase of $2.0 million, primarily due to an increase in professional fees earned for providing flight operations for third-party satellites and government professional services.

Changes in direct costs of revenue, selling, general and administrative expenses, depreciation and amortization, and interest expense, net are described below. 5

 

 Direct costs of revenue increased by $5.9 million, or 6 percent, to $110.7 million for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. The increase was primarily due to $10.6 million of higher costs attributable to purchases of off-network fixed satellite capacity services and other third party services, a $3.5 million increase in staff-related expenses and a $2.4 million increase in the cost of equipment. These increases were partially offset by a $7.8 million decline in the cost of MSS capacity purchased, primarily related to solutions sold by our Intelsat General business. In addition, there was a $3.8 million decrease in other expenses largely due to a reduction in satellite insurance costs in 2011 resulting from the expiration of pre-paid in-orbit insurance coverage that was being amortized as well as a decrease in licenses and fees.

 

 Selling, general and administrative expenses increased by $4.8 million, or 10 percent, to $50.8 million for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. The increase was primarily due to a $2.8 million increase in bad debt expense and a $1.0 million increase in staff-related expenses.

 

 Depreciation and amortization expense decreased by $5.2 million, or 3 percent, to $193.8 million for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010. This decrease was primarily due to variation from year to year in the pattern of consumption of amortizable intangible assets and the effect of certain assets becoming fully depreciated, offset by increases due to satellites placed into service in 2011.

 

 Our income from operations increased by $17.7 million to $292.2 million for the three months ended September 30, 2011 as compared to $274.6 million for the three months ended September 30, 2010. In addition to the impacts described above, our financial results were affected by a $5.4 million loss recognized on our derivative financial instruments for the three months ended September 30, 2011, as compared to a loss on derivative financial instruments of $20.0 million for the three months ended September 30, 2010.

 

 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. Interest expense, net decreased by $28.1 million, or 8 percent, to $317.4 million for the three months ended September 30, 2011 as compared to $345.5 million for the three months ended September 30, 2010. The decrease in interest expense was principally due to the following:

•a decrease of $22.0 million as a result of our refinancing activities, including a series of refinancing transactions, redemptions and offerings in 2010 and 2011; and

•a decrease of $8.7 million resulting from higher capitalized interest due to an increase in capitalized satellite related costs.

 

 Non-cash items in interest expense were $13.3 million for the three months ended September 30, 2011, 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.

 

 Loss on early extinguishment of debt was $75.8 million for the three months ended September 30, 2010, with no similar charge during the three months ended September 30, 2011. The 2010 loss was recognized in connection with the previously reported purchase by Intelsat Corporation of certain of its bonds, together with related fees and a write-off of unamortized debt discounts and debt issuance costs.

 

 Loss from previously unconsolidated affiliates was $20.2 million for the three months ended September 30, 2011 as compared to earnings of $0.1 million for the three months ended September 30, 2010. The decrease of $20.3 million was primarily due to a $20.2 million charge as a result of the remeasurement of our investment in Horizons to fair value upon the consolidation of the joint venture on September 30, 2011.

 

 Other income, net was $0.6 million for the three months ended September 30, 2011 as compared to income of $3.5 million for the three months ended September 30, 2010. The decline of $2.9 million was primarily due to a $1.0 million of exchange rate losses during the three months ended September 30, 2011, as compared to $1.8 million of exchange rate gains during the three months ended September 30, 2010, primarily related to our business conducted in euros and Brazilian reais.

 

 Benefit from income taxes was $42.7 million for the three months ended September 30, 2011, as compared to a benefit from income taxes of $35.8 million for the three months ended September 30, 2010. The difference was principally due to the tax benefit associated with the release of certain valuation allowances on Intelsat Corporation’s deferred state tax assets related to internal subsidiary mergers during the three months ended September 30, 2011, which exceeded the benefit recorded in relation to the reduction in unrecognized tax benefits during the three months ended September 30, 2010.

 

EBITDA, Intelsat S.A. Adjusted EBITDA and Other Financial Metrics

Intelsat S.A. EBITDA of $466.5 million for the three months ended September 30, 2011 reflected a decrease of $10.7 million from $477.2 million for the same period in 2010. Intelsat S.A. Adjusted EBITDA decreased by $4.2 million, or 1 percent, to $502.1 million, or 77 percent of revenue, for the three months ended September 30, 2011 from $506.3 million, or 79 percent of revenue, for the same period in 2010.

 

At September 30, 2011, Intelsat’s contracted backlog, representing expected future revenue under contracts with customers, was $10.7 billion, as compared to $9.8 billion at June 30, 2011.

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.