Intelsat Reports Third Quarter 2014 Results

30 October 2014

Intelsat S.A.  reported total revenue of $608.6 million and net income attributable to Intelsat S.A. of $67.6 million, or $0.58 per common share on a diluted basis, for the three months ended September 30, 2014. The company reported adjusted net income per diluted common share1 of $0.79 for the three months ended September 30, 2014.

Intelsat S.A. reported EBITDA1, or earnings before net interest, taxes and depreciation and amortization, of $477.8 million, or 79 percent of revenue, and Adjusted EBITDA1 of $485.3 million, or 80 percent of revenue, for the three months ended September 30, 2014.

Intelsat Chairman and CEO, Dave McGlade, said, “While our third quarter revenue of $609 million reflects the current environments for our African network services and our government businesses, we continue to demonstrate our ability to deliver attractive Adjusted EBITDA margins. At $485 million, or nearly 80% of revenue, our robust margins contribute to strong cash flow generation.

“The successful launch of Intelsat 30 represents a return to the launch pad after nearly a year and a half, the first of a series of launches over the next 18 months that will result in a significant enhancement to our marketable capacity. In advance of these launches, we are working on critical elements of our service offerings to ensure that we have access to unique technologies and capabilities that will enable new services on our network. These services will position us to address much larger end-markets than today, particularly in the areas of broadband infrastructure, mobility and new media applications.

McGlade continued, “Our future satellite programs remain on track, with Intelsat 30 expected to enter service later in the fourth quarter. With the benefits of strong Adjusted EBITDA margins, a confirmed 2014 debt pay down of approximately $475 million and reduced interest costs producing strong cash flows, we continue to demonstrate progress on the first phase of our two-phase investment thesis.”

Third Quarter 2014 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 government applications.

Network Services comprised 47 percent of Intelsat’s total third quarter 2014 revenue, and at $287.8 million, decreased 4 percent as compared to the third quarter of 2013.

Media comprised 36 percent of the company’s revenue for the quarter ended September 30, 2014, and at $216.1 million, declined 3 percent as compared to the third quarter of 2013.
Government comprised 16 percent of our revenue for the quarter ended September 30, 2014, and at $97.9 million, decreased 20 percent as compared to third quarter 2013 results.

Average Fill Rate
Intelsat’s average fill rate on our approximately 2,150 station-kept transponders was 75 percent at September 30, 2014, as compared to 76 percent at the end of the second quarter of 2014. Units under contract declined primarily due to decreases in government and Africa customer usage.

Satellite Launches
Intelsat 30 was successfully launched in mid-October and is presently undergoing in-orbit testing. It is expected to enter service in the fourth quarter of 2014. Our next launches, planned for the second half of 2015, are Intelsat 31, the second of two satellites providing services primarily for DTH service provider DIRECTV® Latin America; Intelsat 34 and Intelsat 29e, the first Intelsat EpicNG high throughput satellite. Excluding Intelsat 30, we currently have ten satellite programs in development, one of which is a payload and will not require capital expenditure.

Contracted Backlog
At September 30, 2014, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $10.1 billion, as compared to $10.3 billion at June 30, 2014.

Capital Markets Activity
On September 30, 2014, Intelsat announced its intention to redeem all of the $500.0 million aggregate principal amount of the 8 1/2% Senior Notes due 2019 (the “Notes”) issued by its subsidiary, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”). The redemption of the Notes on November 1, 2014 is expected to be funded by general corporate funds.

Financial Results for the Three Months ended September 30, 2014
On-Network revenue generally includes revenue from 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 On-Network Revenue decreased by $33.4 million, or 6 percent, to $556.0 million, as compared to the three months ended September 30, 2013:
 Transponder services reported an aggregate decrease of $26.9 million, primarily due to a $13.5 million decrease in revenue from capacity sold for government applications, an $8.8 million decrease in revenue from network services customers, primarily in the North America and the Africa and Middle East regions, and a $4.6 million decrease in revenue from media applications due primarily to the renewal at lower volumes from customers in the North America region.

 Managed services reported an aggregate decrease of $3.6 million, largely due to a $1.8 million decrease in revenue from media customers for occasional use services and a $1.3 million net decrease from network services customers for broadband services, primarily in the North America region, as well as declines in international trunking in the Africa and Middle East region, partially offset by growth in mobility applications.
 Channel reported an aggregate decrease of $2.9 million due to the continued migration of international point-to-point satellite traffic to fiber optic cable, a trend we expect to continue.

Total Off-Network and Other Revenue decreased by $9.8 million, or 16 percent, to $52.6 million:
 Transponder, MSS and other off-network services reported an aggregate decrease of $8.8 million, primarily due to declines in services for government applications, largely related to reduced sales of off-network transponder services and MSS.

 Satellite-related services reported an aggregate decrease of $1.0 million, primarily due to decreased revenue from flight operations support for third-party satellites and other services.
For the three month period ended September 30, 2014, changes in operating expenses, interest expense, net, and other significant income statement items are described below.

Direct costs of revenue decreased by $9.4 million, or 10 percent, to $84.3 million, as compared to the three months ended September 30, 2013. The decline was primarily due to a decrease of $4.4 million in the cost of off-network fixed satellite services (“FSS”) capacity purchased, primarily related to solutions sold to our government customer set, and a decrease of $3.7 million in direct costs related to a joint venture.
Selling, general and administrative expenses decreased by $12.3 million, or 22 percent, to $44.0 million, as compared to the three months ended September 30, 2013. This was primarily due to an $11.2 million decrease in bad debt expenses, due to improved collections experience principally in the Africa and Middle East region.

Depreciation and amortization expense decreased by $16.4 million, or 9 percent, to $169.5 million, as compared to the three months ended September 30, 2013. This decrease primarily resulted from a $12.9 million decline due to the timing of certain satellites becoming fully depreciated and a decrease of $3.5 million in amortization expense related to changes in the expected pattern of consumption of amortizable intangible assets, as these assets primarily include acquired backlog, which relates to contracts covering varying periods that expire over time, and acquired customer relationships, for which the value diminishes over time.

Interest expense, net consists of the gross interest expense we incur together with gains and losses on interest rate swaps (which reflects net interest accrued on the interest rate swaps as well as the change in their fair value), offset by interest income earned and the amount of interest we capitalize related to assets under construction. Interest expense, net decreased by $22.7 million, or 9%, to $234.5 million for the three months ended September 30, 2014, as compared to $257.3 million for the three months ended September 30, 2013.

The decrease in interest expense, net was principally due to the following:
 a decrease of $8.6 million resulting from higher capitalized interest of $19.3 million for the three months ended September 30, 2014, as compared to $10.8 million for the three months ended September 30, 2013, resulting from increased levels of satellites and related assets under construction;
 a decrease of $8.4 million related to the interest expense accrued and the change in fair value on our interest rate swaps; and
 a net decrease of $5.3 million in interest expense as a result of the decrease in the interest rate for borrowing under the Secured Credit Agreement of Intelsat Jackson.

The non-cash portion of interest expense, net was $5.7 million for the three months ended September 30, 2014. The non-cash interest expense consisted of the amortization of deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums.
Other expense, net was $2.5 million, as compared to other expense, net of $0.4 million, for the three months ended September 30, 2013. The difference of $2.1 million was due to an increase in exchange rate losses primarily related to our business conducted in Brazilian reais.

Provision for income taxes was $5.1 million, as compared to a benefit from income taxes of $30.3 million for the three months ended September 30, 2013. The difference was principally due to an internal subsidiary reorganization in the three months ended September 30, 2013, as a result of which we recognized a significant tax benefit related to foreign tax credits we intend to elect to claim on our U.S. subsidiaries’ tax returns. These foreign tax credits primarily relate to taxes paid in prior years and are expected to reduce our future tax obligations. Cash paid for income taxes, net of refunds, totaled $6.8 million compared to $5.8 million for the three months ended September 30, 2013.

EBITDA, Adjusted EBITDA, Net Income, Net Income per Diluted Common Share and Adjusted Net Income per Diluted Common Share
EBITDA was $477.8 million for the three months ended September 30, 2014, compared to $501.4 million for the same period in 2013.

Adjusted EBITDA was $485.3 million for the three months ended September 30, 2014, or 80 percent of revenue, compared to $508.4 million, or 78 percent of revenue, for the same period in 2013.
Net income attributable to Intelsat S.A. was $67.6 million for the three months ended September 30, 2014, compared to net income of $87.8 million for the same period in 2013.

Net income per diluted common share attributable to Intelsat S.A. was $0.58 for the three months ended September 30, 2014, compared to a net income per diluted common share of $0.75 for the same period in 2013.

Adjusted net income per diluted common share was $0.79 for the three months ended September 30, 2014, compared to $0.81 for the same period in 2013.

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.

Free Cash Flow from (used in) Operations
Free cash flow from (used in) operations was $303.5 million during the three months ended September 30, 2014. Free cash flow from (used in) 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 September 30, 2014, totaled $150.5 million. Cash and cash equivalents at September 30, 2014 was $656.0 million.

Financial Outlook 2014
Today, Intelsat reaffirmed its 2014 financial outlook in all material respects:
Revenue: Intelsat forecasts full-year 2014 revenue of $2.45 billion to $2.50 billion.
Adjusted EBITDA: Given continued favorable collections experience year to date, Intelsat increased the guidance for Adjusted EBITDA margin performance for the full year 2014 to range from 79 percent to 80 percent.
Capital Expenditures: We expect capital expenditures ranges of:
 2014: $625 million to $700 million;
 2015: $775 million to $850 million; and
 2016: $625 million to $700 million.
Capital expenditure guidance assumes investment in nine satellites in the manufacturing or design phase for the three year calendar “Guidance Period” of 2014 through 2016. Of the nine satellites, we expect to launch three satellites in 2015, two satellites in 2016, and will continue work on four remaining satellites for which construction will extend beyond the Guidance Period. We expect to launch two of our new Intelsat EpicNG high-throughput satellites in the 2015 and 2016 periods, increasing our total transmission capacity.
The number of transponder equivalents is expected to increase over the period 2013-2018 by a compound annual growth rate (CAGR) of 4.7 percent as a result of the launch of the satellites covered by the Guidance Period, with the growth heavily weighted to later in the period. The growth also includes capacity on a payload which we will procure from another operator and which we expect will be launched in 2016, but which is not covered by our Capital Expenditure guidance.
Our capital expenditures guidance includes capitalized interest.
Prepayments: During the Guidance Period, we expect to receive significant customer prepayments under our existing customer service contracts.
We expect prepayment ranges of:
 2014: $125 million to $150 million;
 2015: $125 million to $150 million (updated from February 2014 guidance of $75 million to $100 million); and
 2016: $0 million to $25 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.

Prepayments during the three months ended September 30, 2014 totaled $56.5 million.
Debt Reduction: Intelsat expects to repay approximately $475 million in indebtedness during the year ending December 31, 2014, inclusive of $24.0 million of amortization payments made over the course of the year under a credit facility related to a joint venture, and net of any revolver borrowings that may be outstanding at the end of 2014. This is consistent with the company’s investment thesis of equity value creation through the use of organic free cash flow for debt reduction.