Intelsat Reports Second Quarter 2011 Results
4 August 2011
Intelsat S.A., the world’s leading provider of satellite services, today reported results for the three months ended June 30, 2011.
Intelsat S.A. reported revenue of $642.4 million and a net loss of $213.4 million for the three months ended June 30, 2011. Included in the quarterly results was a $158.0 million non-recurring charge for loss on early extinguishment of debt resulting from refinancing activity. 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 $464.4 million, and Intelsat S.A. Adjusted EBITDAi of $500.8 million, or 78 percent of revenue, for the three months ended June 30, 2011.
"Business activity is strong, driven by favorable demand trends for broadband infrastructure and media distribution for direct-to-home (DTH) and cable applications. Overall growth was muted in the second quarter, as a result of reduced mobile satellite services revenues in our government business and decreased network services revenues. Still, we experienced strong revenue growth of 9 percent in our government business and modest growth in our media business, resulting in steady overall revenue and maintenance of our 78 percent Adjusted EBITDA margin in the period," said Intelsat CEO David McGlade.
"We are experiencing good renewals and continued progress in building the value of our video neighborhoods and our revenue backlog on recent and upcoming satellite launches, such as Intelsat 17 and Intelsat 18. We ended the quarter with $9.8 billion in contracted services backlog, underscoring the stability and visibility inherent in our business." McGlade continued, "We plan to launch seven satellites through the first half of 2013. As we add new transponders, enhanced beams, and refreshed capacity, we will be able to support our customers’ expansion plans and emerging services with attractive growth profiles, such as broadband connectivity for maritime and other mobile communications."
Financial Results for the Three Months Ended June 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 June 30, 2011 increased by $7.2 million, or 1 percent, to $642.5 million as compared to $635.3 million for the three months ended June 30, 2010. By service type, revenue increased or decreased due to the following:
On-Network Revenues:
•Transponder services — an aggregate increase of $17.6 million, due primarily to a $9.7 million increase resulting from growth in capacity sold by our Intelsat General business and an $8.4 million increase in revenue from media customers primarily in the Europe and North American regions.
•Managed services — an aggregate decrease of $14.9 million, primarily due to a $6.3 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 $5.6 million decrease in managed video services sold to media customers primarily in the Latin America and Caribbean and the Africa and Middle East regions in comparison to strong revenues during the comparable period in 2010 related to a global sporting event; and a $3.6 million decrease in solution-related hardware sold by our Intelsat General business to North American customers.
•Channel — an aggregate decrease of $3.8 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 increase of $2.9 million, primarily due to a $7.1 million increase in transponder services largely related to customers of our Intelsat General business, partially offset by a $5.0 million decline in usage-based MSS revenue.
•Satellite-related services— an aggregate increase of $5.4 million, due primarily 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.
Direct costs of revenue increased by $0.5 million, or 1 percent, to $101.1 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase was primarily due to $10.9 million of higher costs attributable to purchases of off-network fixed satellite capacity services and other third party services, partially offset by a $7.0 million decline in the cost of equipment and 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 due to a reduction in satellite insurance costs in 2011 resulting from the expiration of in-orbit insurance coverage that was being amortized. 5
Selling, general and administrative expenses increased by $1.7 million, or 3 percent, to $55.1 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase primarily was due to $2.7 million in higher non-cash compensation costs associated with the Intelsat Global, Ltd. 2008 Share Incentive Plan, partially offset by a $1.0 million decrease in other miscellaneous expenses.
Depreciation and amortization expense decreased by $6.8 million, or 3 percent, to $194.4 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This decrease was primarily due to the net effect of certain assets becoming fully depreciated and the 2010 impairment of the Galaxy 15 satellite due to an anomaly, offset by increases due to satellites placed into service in 2010 and 2011.
Our income from operations increased by $136.1 million to $271.4 million for the three months ended June 30, 2011 as compared to $135.2 million for the three months ended June 30, 2010. In addition to the impacts described above, our financial results were affected by certain material pre-tax charges incurred during the three months ended June 30, 2010 and June 30, 2011, as discussed below:
•a $104.1 million non-cash impairment charge recorded in the second quarter of 2010 to write down our Galaxy 15 satellite, after an anomaly which occurred in April 2010 but from which the satellite subsequently fully recovered, as compared to no such charge in the second quarter of 2011; and
•a $20.5 million loss recognized on our derivative financial instruments for the three months ended June 30, 2011 due to cash settlements for interest, representing the difference between the amount of floating rate interest we receive and the amount of fixed rate interest we pay, together with the impact of marking the instruments to fair value, as compared to a loss on derivative financial instruments of $40.8 million for the three months ended June 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 $23.8 million, or 7 percent, to $325.9 million for the three months ended June 30, 2011 as compared to $349.7 million for the three months ended June 30, 2010. The decrease in interest expense was principally due to the following:
•a decrease of $16.1 million in interest expense as a result of our refinancing activities, including a series of refinancing transactions, redemptions and offerings in 2010 and 2011; and
•a decrease of $9.4 million resulting from higher capitalized interest due to an increase in capitalized satellite related costs.
Non-cash items in interest expense were $15.0 million for the three months ended June 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 $158.0 million for the three months ended June 30, 2011 with no similar charge during the three months ended June 30, 2010. The 2011 loss was recognized in connection with the second quarter refinancing activity. The loss was primarily driven by the difference between the carrying value of the debt repurchased or redeemed and the total cash amount paid for the purchase or redemption, including related fees and a write-off of unamortized debt discounts and debt issuance costs.
Other expense, net was $1.3 million for the three months ended June 30, 2011 as compared to income of $1.6 million for the three months ended June 30, 2010. The decrease of $2.9 million was primarily due to a $4.7 million increase in equity method losses related to our equity method investments, offset by a $2.2 million increase in exchange rate gains, primarily related to our business conducted in Brazilian reais and Euros.
EBITDA, Intelsat S.A. Adjusted EBITDA and Other Financial Metrics
Intelsat S.A. EBITDA of $464.4 million for the three months ended June 30, 2011 reflected an increase of $126.4 million from $338.0 million for the same period in 2010. Intelsat S.A. Adjusted EBITDA increased by $4.1 million, or 1 percent, to $500.8 million, or 78 percent of revenue, for the three months ended June 30, 2011 from $496.7 million, or 78 percent of revenue, for the same period in 2010.
At June 30, 2011, Intelsat’s backlog, representing expected future revenue under contracts with customers, was $9.8 billion, as compared to $9.9 billion at March 31, 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. 7
Free Cash Flow from Operations and Capital Expenditures
Free cash flow from operations i was zero during the three months ended June 30, 2011. Free cash flow from operations is defined as net cash provided by operating activities, less payments for satellites and other property and equipment (including capitalized interest). Payments for satellites and other property and equipment during the three months ended June 30, 2011 totaled $236.9 million.
Intelsat is in the process of procuring and building seven satellites that are expected to be launched from 2011 to 2013. In addition to these announced programs, the company expects to procure one additional replacement satellite during the guidance period ending in 2013. By the conclusion of 2013, our total station-kept transponder count is expected to increase modestly from current levels. Our capital expenditure guidance includes capitalized interest but excludes capital expenditures associated with the Intelsat New Dawn satellite that launched in April of 2011. Intelsat expects 2011 total capital expenditures to range from $725 million to $800 million. Expected annual capital expenditure ranges for fiscal years 2012 and 2013 are $575 million to $650 million, and $175 million to $250 million, respectively.
