Intelsat Reports First Quarter 2012 Results

8 May 2012

Intelsat S.A., the world’s leading provider of satellite services, today reported financial results for the three months ended March 31, 2012.

Intelsat S.A. reported revenue of $644.2 million and a net loss of $24.4 million for the three months ended March 31, 2012. 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 $481.2 million, and Intelsat S.A. Adjusted EBITDAi of $496.7 million, or 77 percent of revenue, for the three months ended March 31, 2012.

Intelsat CEO Dave McGlade said, “In the first quarter, Intelsat achieved steady financial performance, driven by our customers’ demand for the mission-critical communications infrastructure our network offers. We successfully launched Intelsat 22 in March, carrying the Australian Defence Force hosted payload and continuing the deployment of beams for our global broadband mobility infrastructure. This continued enhancement of our network positions Intelsat to serve high-demand applications in regions where growth is strongest.
McGlade continued, “With contracted backlog of $10.5 billion providing visibility for future revenue and cash flows, we are focused on our 2012 investment program, which involves the launch of four additional satellites, providing incremental capacity to support future customer growth.”

Financial Results for the Three Months Ended March 31, 2012
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, Mobile Satellite Services (“MSS”) and other satellite-based transmission services using 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 and sales of customer premises equipment.

Revenue for the three months ended March 31, 2012, increased by $4.0 million, or 1 percent, to $644.2 million as compared to $640.2 million for the three months ended March 31, 2011. By service type, revenue increased or decreased due to the following:

On-Network Revenues:
• Transponder services—an aggregate increase of $12.7 million, primarily due to a $12.5 million increase in revenue from growth in capacity sold to media customers primarily in the Latin America and Caribbean, the Europe and the North America regions, as well as a $3.8 million increase in revenue from capacity sold by our IGC business, partially offset by a $3.6 million decrease in revenue from network services customers.

• Managed services—an aggregate decrease of $5.0 million largely due to a decrease in revenue from network services customers for international trunking solutions primarily in Africa, a trend that we expect will continue due to the migration of services in this region to fiber optic cable.

• Channel—an aggregate decrease of $3.5 million related to a continued decline from the migration of international point-to-point satellite traffic to fiber optic cables, a trend that we expect will continue.

Off-Network and Other Revenues:
• Transponder, MSS and other off-network services—an aggregate increase of $5.0 million, primarily due to a $5.0 million increase in customer premises equipment revenue and a net $2.1 million increase in off-network transponder services largely related to contracts being implemented by our IGC business, partially offset by a $2.1 million decline in usage-based mobile satellite services ("MSS") revenue sold by our IGC business.

• Satellite-related services—an aggregate decrease of $5.2 million, due primarily to lower professional fees earned for providing government professional services and flight operations support for third-party satellites following the conclusion of certain contracts.

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

 Direct costs of revenue of $105.0 million for the three months ended March 31, 2012, were flat compared to the three months ended March 31, 2011. Direct costs of revenue increased by $3.3 million due to higher costs of equipment and a net $1.4 million increase in miscellaneous expenses, partially offset by a $1.8 million decrease in the cost of MSS capacity purchased related to solutions sold by our IGC business and a $2.9 million decrease in costs related to earth station operations.

 Selling, general and administrative expenses decreased by $0.6 million, or 1 percent, to $51.0 million for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011. The decrease was primarily due to $1.2 million of lower non-cash stock compensation costs associated with our share incentive plan and a $4.0 million decrease in professional fees, partially offset by a $2.1 million increase in bad debt expense, as compared to a credit in the first quarter of 2011 due to better than expected collections, and a $1.1 million increase in other staff-related expenses.

 Depreciation and amortization expense decreased by $8.1 million, or 4 percent, to $186.9 million for the three months ended March 31, 2012, as compared to the three months ended March 31, 2011. This decrease primarily resulted from reduced depreciation expense due to the timing of certain assets becoming fully depreciated and changes in the estimated useful lives of certain satellites, together with variation from year to year in the pattern of consumption of amortizable intangible assets. Those decreases were partially offset by increases due to satellites placed into service in 2011.

 Our income from operations increased by $1.2 million to $291.5 million for the three months ended March 31, 2012, as compared to $290.3 million for the three months ended March 31, 2011, due primarily to the effects described above, including higher revenue and lower depreciation expense and selling, general and administrative expense. Income from operations was further affected by:

o a $9.9 million loss recognized on our derivative financial instruments for the three months ended March 31, 2012, related to the net loss on our interest rate swaps, primarily due to interest expense accrued on the interest rate swaps, partially offset by a gain related to the change in fair value. For the three months ended March 31, 2011, we recorded a gain of $1.7 million on derivative financial instruments.

 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 March 31, 2012, 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 decreased by $37.4 million, or 11%, to $311.4 million for the three months ended March 31, 2012, as compared to $348.8 million for the three months ended March 31, 2011. The decrease in interest expense, net was principally due to the following:

 a net decrease of $30.5 million in interest expense resulting from our refinancing transactions, redemptions and offerings in 2011; and

 a decrease of $5.1 million from higher capitalized interest resulting from increased levels of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $15.4 million for the three months ended March 31, 2012, and included $1.0 million of payment-in-kind interest expense and $14.4 million 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 $168.2 million for the three months ended March 31, 2011, with no similar charge during the three months ended March 31, 2012.
 Other income, net was $2.9 million for the three months ended March 31, 2012, as compared to $3.9 million for the three months ended March 31, 2011. The decrease of $1.0 million was primarily due to a decrease in exchange rate gains related to our business conducted in Brazilian Reais and Euros in 2012.

 Provision for income taxes was $7.2 million for the three months ended March 31, 2012, as compared to a benefit from income taxes of $7.0 million for the three months ended March 31, 2011. The difference was principally due to a release of withholding tax liabilities resulting from certain sales in the Asia-Pacific region as well as the refinancing expenses and changes in the balance of deferred taxes as a result of a 2011 reorganization, both recorded in the three months ended March 31, 2011, and due to a 2012 internal subsidiary merger which caused a re-measurement of our deferred taxes in the quarter ended March 31, 2012.

EBITDA, Intelsat S.A. Adjusted EBITDA and Other Financial Metrics
Intelsat S.A. EBITDA of $481.2 million for the three months ended March 31, 2012, reflected a decrease of $8.0 million from $489.3 million for the same period in 2011. Intelsat S.A. Adjusted EBITDA decreased by $3.0 million, or 1 percent, to $496.7 million, or 77 percent of revenue, for the three months ended March 31, 2012, from $499.7 million, or 78 percent of revenue, for the same period in 2011.

At March 31, 2012, Intelsat’s contracted backlog, representing expected future revenue under contracts with customers, was $10.5 billion, compared to $10.7 billion at December 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.