Intelsat Reports Third Quarter 2013 Results

31 October 2013

Intelsat S.A. reported revenue of $651.8 million and net income attributable to Intelsat S.A. of $87.8 million, or $0.75 per share on a diluted basis, for the three months ended September 30, 2013. The company also reported EBITDA1, or earnings before net interest, taxes and depreciation and amortization, of $493.6 million, and Adjusted EBITDA1 of $508.4 million, or 78 percent of revenue, for the three months ended September 30, 2013.

Intelsat CEO Dave McGlade said, “Intelsat’s third quarter performance was led by growth in its media and network services customer sets. We generated free cash flow from operations of $333 million, reflecting the benefits of lower interest rates as a result of our refinancing activities and the debt retirements achieved thus far in 2013, as we furthered our progress on reducing leverage and creating equity value.

“Despite the solid performance, we are managing through two trends affecting our revenue growth and our operating expense profile. These include revenue declines due to on-going effects of the U.S. government reduced spending and budget sequestration. It also includes the impact of fiber deployments and the oversupply environment in Africa, which affects our network services business.

McGlade continued, “While these issues will continue to influence near-term results, our long-term outlook remains positive as we execute on our two-phase strategy to deliver returns to equity investors: use near-term improving cash flows to de-lever our balance sheet, while positioning the company for organic growth upon the entry into service of our new Intelsat Epic NG satellites beginning in 2016, which support the growth plans for existing and future customers. During the quarter, we announced the first customer for Intelsat 33e, the second Intelsat Epic NG satellite, launching in 2016. This contributed to our strong backlog of $10.3 billion, which provides visibility into revenue and cash flow, and stability to our business.”

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.

 Intelsat’s network services business, which provides broadband infrastructure for fixed and
wireless telecommunications and enterprise and mobility applications, accounted for 46 percent of Intelsat’s total third quarter 2013 revenue, and at $299.9 million, increased one percent as compared to the third quarter 2012. In the third quarter 2013, growth in transponder and managed services revenue for mobility, enterprise, and wireless telecommunications backhaul applications was offset by reduced revenue from channel services, which has been declining due to migration to fiber.

o Intelsat’s large and diversified infrastructure is used by leading fixed and wireless
telecommunications providers to extend their service regions and enhance backbone
networks. Demand is especially strong in emerging regions, with subscriber growth,
expanding service territories, and data connectivity requirements creating need for expanded
2G and 3G infrastructure. In the third quarter, Intelsat received multi-year, multitransponder
new and renewed contracts from a number of wireless operators in Latin America, including Consorcio Ecuatoriano de Telecomunicaciones S.A. and Telefónica Móviles S.A.C.

o Subsequent to quarter end, GCI, the largest telecommunications company in Alaska, recently signed a long-term agreement for a portfolio of new and renewed C- and Ku-band services. GCI uses Intelsat’s capacity to provide telecommunications infrastructure throughout Alaska, supporting critical distance learning and telemedicine solutions.
Mobility applications are a major source of new demand within our network services business, particularly for Ku-band spectrum. This business includes broadband connectivity for maritime and commercial aeronautical consumer networks. In the third quarter, new activity included:
o Panasonic Avionics Corporation, a global leader in in-flight entertainment and
communications, signed a long-term contract for services on the Intelsat 33e satellite, the
second of Intelsat’s planned next generation Epic NG satellites expected to launch in 2016.

As was announced in September 2013, Panasonic Avionics will use the capacity to extend its global network from Europe through the Middle East and North and South East Asia, complementing the North America to Europe infrastructure provided by the previously contracted capacity on Intelsat 29e.

The business environment in Africa is increasingly competitive with respect to network services applications. This region is characterized primarily by oversupply from traditional satellite operators and fiber alternatives, both of which serve to slow our aggregate network services revenue growth. Intelsat is closely monitoring our business in the region while continuing our focus on furthering our long-term strategic relationships with the continent’s most intensive users of satellite capacity.

 Intelsat’s media business, which provides satellite capacity and terrestrial services for the transmission of entertainment, news, sports and educational programming for approximately 300 broadcasters, content providers and direct-to-home (“DTH”) platform operators worldwide, accounted for 34 percent of our revenue for the quarter ended September 30, 2013. Third quarter revenue of $221.8 million increased four percent as compared to the third quarter of 2012, as service volume increased for DTH and cable and broadcast program distribution applications.

Contracts with media customers in the third quarter and October 2013 included:
o Discovery Communications, the world’s #1 nonfiction media company, recently signed an agreement for capacity for new and renewed transponder services on the Intelsat 19 satellite, expanding the distribution of its programming. Intelsat 19 hosts the leading video neighborhood in the Pacific Ocean region, and reaches more than 37 million Pay TV subscribers.
o Deutsche Telecom affiliate Slovak Telecom, the largest telecom company operating in Slovakia, signed a long-term agreement for multiple transponders at the Intelsat 1 West neighborhood, which is a leading hot-spot for Eastern Europe media applications. Slovak Telecom will use the capacity to provide DTH services.
o Globecast France, signed a long-term renewal for multiple transponders on Intelsat 903 for use in providing DTH services distributed by Orange to the French Caribbean islands.
o The European Broadcasting Union (“EBU”), signed a long-term commitment for capacity on our video distribution neighborhood at 304.5◦ East, on the Intelsat 805 satellite that will be replaced by Intelsat 34 when it launches in 2015. Intelsat 805, with its high penetration of cable headends, will provide the EBU with transmission capacity to support its coverage of various sports events scheduled to take place in Latin America from 2014 to 2016.
 Intelsat’s government business, which provides highly customized, secure commercial satellite-based solutions to value-added service providers, government and military customers, accounted for 19 percent of our revenue for the quarter ended September 30, 2013. Third quarter revenue of $121.7 million decreased ten percent as compared to third quarter 2012 results, with the majority of the decline in lower-margin off-network revenue.
o Two previously awarded, but protested, contracts have been resolved in the favor of our Intelsat General Corporation subsidiary and its prime contractors. The two awards under the Custom SatCom Solutions contract feature the provisioning of over 350 MHz of on-
network capacity on nine Intelsat satellites providing various regional coverages, as well as use of the IntelsatOneSM ground infrastructure. Implementation of both networks will span a 4-month period with all services activated by December 2013. Intelsat’s capacity is used to provide broadband infrastructure for use in regional and global networks. With respect to the effects of sequestration, the pace of RFP issuance and awards remains slower than usual and customers continue to consolidate services and evaluate requirements. Visibility remains limited for the government business for the balance of 2013 and into 2014. Intelsat expects limited short-term effects directly related to the October 2013 U.S. government shutdown.
 In October 2013, Intelsat prepaid $100 million of debt under our Intelsat Jackson secured term loan facility for a 2013 year-to-date total reduction of debt of $617 million. Intelsat’s cash balance at September 30, 2013 was $404 million.
 Intelsat’s average fill rate on our approximately 2,175 station-kept transponders was 78 percent at September 30, 2013. No significant fleet changes occurred during the period.
 Intelsat has no satellite launches planned for the balance of 2013. Our next launch planned for second half of 2014 is Intelsat 30, the first of two satellites providing services for

DTH service provider DirecTV-Latin America.
Financial Results for the Three Months ended September 30, 2013
On-Network revenue generally includes revenue from any services delivered via our satellite or ground network. Off-Network and Other revenue generally includes revenue 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 Revenue also includes revenue from consulting and other services and sales of customer premises equipment.
Total revenue for the three months ended September 30, 2013 decreased by $3.1 million to $651.8 million, as compared to $654.9 million for the three months ended September 30, 2012. By service type, our revenue increased or decreased due to the following:
On-Network Revenue increased by $9.9 million, or 2 percent, to $589.4 million:
 Transponder services—an aggregate increase of $7.9 million, primarily due to an $8.1 million increase in revenue from capacity sold to media customers largely in the Latin America and Caribbean, the Asia-Pacific and the Africa and Middle East regions for DTH and programming-distribution applications. An additional $2.4 million of the increase reflects growth in revenue from network services customers for wireless telecommunications infrastructure primarily in the Latin America and Caribbean region, and for enterprise network applications in the Asia-Pacific and North America and Europe regions, offset by declines in the Africa and Middle East region. Also, revenues from government applications declined by $2.6 million due to pressures from the U.S. government budget sequestration.
 Managed services—an aggregate increase of $7.3 million, largely due to a $5.8 million increase in revenue from network services customers for new broadband services for mobility applications, primarily in the Europe and North America regions, wireless telecommunications backhaul infrastructure in the Asia-Pacific region, and a $1.8 million increase in revenue from hybrid infrastructure solutions sold to government customers.
 Channel—an aggregate decrease of $5.3 million related to the continued migration of international point-to-point satellite traffic to fiber optic cable, a trend that we expect will continue.
Off-Network and Other Revenue decreased by $13.0 million, or 17 percent, to $62.4 million:
 Transponder, MSS and other off-network services—an aggregate decrease of $10.4 million, primarily due to declines in services for government applications, including reduced sales of off-network transponder services, customer premises equipment and mobile satellite services (“MSS”).
 Satellite-related services— an aggregate decrease of $2.6 million, primarily due to decreased revenue from flight operations support for third-party satellites and government professional services.

Changes in operating expenses, interest expense, net, and other significant income-statement items are described below.
 Direct costs of revenue decreased by $9.2 million, or 9%, to $93.7 million for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. The decrease was primarily due to $5.3 million in lower cost of MSS and off-network fixed satellite services (“FSS”) capacity purchased primarily related to solutions sold to our government customer set, a decrease of $3.8 million in cost of sales for customer premises equipment, and $2.9 million in staff-related expense. These decreases were partially offset by an increase of $4.1 million in costs related to a joint venture.
 Selling, general and administrative expenses increased by $9.2 million to $56.3 million for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. The increase was principally due to an $11.0 million increase in bad debt expense due to collection challenges with a limited number of customers, primarily in the Africa and Middle East region. Also contributing to the increase was an incremental $3.0 million in staff-related expenses, primarily share-based compensation costs, partially offset by a decrease of $5.3 million in professional fees.
 Depreciation and amortization expense decreased by $6.1 million to $185.9 million for the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. This decrease was primarily due to a net decrease of $20.1 million in depreciation expense due to the timing of certain satellites becoming fully depreciated and changes in estimated remaining useful lives of certain satellites, and a decrease of $2.4 million in amortization expense primarily due to changes in the expected pattern of consumption of amortizable intangible assets, largely offset by an increase of $16.6 million in depreciation expense resulting from the impact of satellites placed into service during 2012.
 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, 2013, we also held interest rate swaps with an aggregate notional amount of $1.6 billion to economically hedge the variability in cash flow on a portion of the floating-rate term loans under our senior secured credit facilities. The swaps have not been designated as hedges for accounting purposes. Interest expense, net decreased by $63.3 million, or 20%, to $249.4 million for the three months ended September 30, 2013, as compared to $312.7 million for the three months ended September 30, 2012. The decrease in interest expense, net was principally due to the following:
o a net decrease of $67.9 million in interest expense as a result of our debt offerings, debt prepayments and redemptions in 2013;
o a net decrease of $7.9 million in interest expense as a result of the decrease in the interest rate under the Intelsat Jackson Secured Credit Agreement; and
o a net decrease of $6.1 million in interest expense as a result of our debt offerings and redemptions in 2012; partially offset by
o an increase of $20.7 million resulting from lower capitalized interest of $10.8 million for the three months ended September 30, 2013, as compared to $31.5 million for the three months ended September 30, 2012, resulting from decreased levels of satellites and related assets under construction.

Non-cash items in interest expense, net were $5.9 million for the three months ended September 30, 2013, primarily for 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 $3.1 million for the three months ended September 30, 2012 with no comparable amount for the three months ended September 30, 2013. The 2012 loss included the write-off of unamortized debt issuance costs in connection with the prepayment of $112.2 million of New Dawn Satellite Company, Ltd. debt from cash proceeds of an insurance claim.
 Other expense, net was $0.4 million for the three months ended September 30, 2013, as compared to $22.0 million for the three months ended September 30, 2012. The 2012 third quarter included $21.0 million of expenses related to the expiration of an unconsummated third-party investment commitment.
 Our benefit from income taxes was $30.3 million for the three months ended September 30, 2013, as compared to a benefit of $1.5 million for the three months ended September 30, 2012. The difference was principally due to a discrete benefit related to foreign tax credits that we recognized in the three months ended September 30, 2013.
 Cash paid for income taxes, net of refunds, totaled $5.8 million and $7.6 million for the three months ended September 30, 2013 and 2012, respectively.

EBITDA, Adjusted EBITDA and Other Financial Metrics
EBITDA of $493.6 million for the three months ended September 30, 2013 reflected an increase of $22.6 million from $471.0 million for the same period in 2012. Adjusted EBITDA decreased by $2.7 million to $508.4 million, or 78 percent of revenue, for the three months ended September 30, 2013, from $511.1 million, or 78 percent of revenue, for the same period in 2012.
At September 30, 2013, Intelsat’s contracted backlog, representing expected future revenue under contracts with customers, was $10.3 billion, as compared to $10.4 billion at June 30, 2013. The mix of backlog continues to reflect proportionally less backlog from government customers, related in part to the U.S. budget sequestration.
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.

Financial Outlook 2013 with Updated Revenue Guidance
Today, Intelsat updated its revenue guidance to primarily reflect the adverse influence of sequestration and reduced U.S. government spending on commercial satellite communications services, as well as competitive pressures on network services in Africa. Intelsat now expects full-year 2013 revenue will be below the lower end of the previously communicated range of $2.615-$2.640 billion by roughly one half percent. The company’s current view is that these conditions will continue as we plan for 2014. Intelsat confirmed that it expects Adjusted EBITDA margin performance for the full year 2013 will be consistent with recent periods.
Our 2013 capital expenditure guidance for the three calendar years 2013 through 2015 (the “Guidance Period”) is unchanged, and assumes investment in ten satellites in the manufacturing or design phase during the Guidance Period, including one destroyed in a launch failure in February 2013. We expect to launch four satellites in 2014 and 2015, during the Guidance Period, with construction on the five remaining satellites extending beyond the Guidance Period. By the conclusion of the Guidance Period in 2015, our total transmission capacity is expected to increase modestly from levels at year end 2012. The first of our new Intelsat EpicNG high-throughput satellites is expected to launch in 2015 and enter service in 2016, significantly increasing our total transmission capacity.
Consistent with prior guidance, we expect our capital expenditures to range from $600 million to $675 million in 2013, and $575 million to $650 million in 2014. For 2015, we anticipate capital expenditures of $775 million to $850 million. Our capital expenditures guidance includes capitalized interest.

During the Guidance Period, we expect to receive significant customer prepayments under our existing customer service contracts, for which we are confirming existing guidance. Significant prepayments are currently expected to range from $100 million to $125 million in 2013, and from $75 million to $100 million in 2014. Our 2015 prepayment guidance is $25 million to $50 million.
The annual classification of capital expenditure and prepayments could be affected by the timing of achievement of contract, satellite manufacturing, launch and other milestones.