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Intelsat Reports Fourth Quarter and Full Year 2014 Results

Intelsat S.A. reported total revenue of $619.1 million and net income attributable to Intelsat S.A. of $16.2 million, or $0.14 per share on a diluted basis, for the three months ended December 31, 2014. The company reported adjusted net income per diluted common share1 of $0.79 for the three months ended December 31, 2014.


Intelsat S.A. reported EBITDA1, or earnings before net interest, losses on early extinguishment of debt, taxes and depreciation and amortization, of $462.0 million, and Adjusted EBITDA1 of $477.1 million, or 77 percent of revenue, for the three months ended December 31, 2014. 

For the year ended December 31, 2014, Intelsat reported total revenue of $2,472.4 million and a net income attributable to Intelsat S.A. of $232.5 million, or $1.99 per share on a diluted basis. The company reported adjusted net income per diluted common share of $3.30 for the year ended December 31, 2014. Intelsat also reported EBITDA of $1,924.0 million, and Adjusted EBITDA of $1,958.7 million, or 79 percent of revenue, for the year ended December 31, 2014.


Intelsat Chairman and CEO, Dave McGlade said, “In 2014, we were able to deliver strong Adjusted EBITDA and cash flow in a challenging environment, meeting our guidance targets on all metrics. We also completed a debt pay down of $475 million and funded investments in our network. However, the continuation of the trends we experienced in 2014, such as pricing pressures in certain regions and applications, reduced U.S. government spending, and rising geopolitical challenges, compounded with services nearing the end of lifecycle, is creating ongoing headwinds for our business in 2015 and into 2016. We are taking action to counterbalance these trends, focusing our resources on laying the groundwork that will position us to return to growth as our new media satellites and next generation satellites enter service in mid-2016 and 2017.


The path forward for us is clear: design, build and place into service new satellite capacity; introduce services that leverage our ground network and networking capabilities; and develop advanced ground technologies and other innovations that will simplify access to our satellites. Through these initiatives, combined with supporting the growth of our core customers and optimizing the use of our orbital rights
and global presence, we will enhance our ability to address larger and higher growth applications. By executing on these priorities, we will be positioned for success once our new inventory becomes available.”


Fourth Quarter and Full Year 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 fixed and mobile government applications.


Network Services
Network Services comprised 46 percent of Intelsat’s total fourth quarter 2014 revenue, and at $284.1 million, decreased 5 percent as compared to the fourth quarter of 2013. For the year ended December 31, 2014, Network Services comprised 46 percent of Intelsat’s total revenue, and at $1,149.5 million, decreased 4 percent compared to the year ended December 31, 2013.


Media
Media comprised 37 percent of the company’s revenue for the quarter ended December 31, 2014, and at $226.0 million, increased 3 percent as compared to the fourth quarter of 2013. For the year ended December 31, 2014, Media comprised 36 percent of Intelsat’s total revenue, and at $881.0 million, declined 0.3 percent compared to the year ended December 31, 2013.


Government
Government comprised 16 percent of our revenue for the quarter ended December 31, 2014, and at $99.7 million, decreased 14 percent as compared to fourth quarter 2013 results. For the year ended December 31, 2014, Government comprised 17 percent of Intelsat’s total revenue, and at $410.2 million, decreased 16 percent compared to the year ended December 31, 2013.


Average Fill Rate
Intelsat’s average fill rate on our approximately 2,200 station-kept transponders was 75 percent at December 31, 2014, in line with the average fill rate as of September 30, 2014. The transponder count reflects the entry into service of Intelsat 30 in fourth quarter of 2014.


Satellite Launches
Intelsat 34, a replacement satellite for our 304.5°E video neighborhood, is currently expected to launch in the third quarter 2015. Intelsat 31, the second of two satellites providing services primarily for direct-to-home (“DTH”) service provider, DIRECTV® Latin America, is now scheduled to launch in the first quarter 2016. Intelsat 29e, the first Intelsat EpicNG high throughput satellite, is expected to launch in the first quarter 2016. We currently have twelve satellite programs in development. In addition, a custom payload is being built for us on a third-party satellite which will not require capital expenditure.


Contracted Backlog
At December 31, 2014, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $10.0 billion, as compared to $10.1 billion at September 30, 2014. The mix of backlog reflects lower overall net new contracts. At 4.0 times trailing 12 months revenue (from January 1, 2014 to December 31, 2014), our backlog remains sizeable and a foundation for predictable cash flow and investment in our business.

Capital Markets and Finance Activities
On November 1, 2014, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”) redeemed the entire $500.0 million aggregate principal amount of its 8 ½% Senior Notes due 2019 (the “2019 Senior Notes”). Our secured revolving credit facility had a $49 million outstanding balance at December 31, 2014. This balance was repaid in early 2015.


Financial Results for the Three Months ended December 31, 2014
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 On-Network Revenue decreased by $24.2 million, or 4 percent, to $560.7 million as compared to the three months ended December 31, 2013:
 Transponder services reported an aggregate decrease of $19.1 million, primarily due to a $15.2 million decrease in revenue from network services customers, largely in the North America, the Africa and Middle East and the Asia-Pacific regions, and an $11.8 million decrease in revenue from capacity sold for government applications for customers in the North America region. These declines were partially offset by an increase in revenue for DTH and distribution services sold to media customers, largely in the North America and the Latin America and Caribbean regions.
 Managed services reported an aggregate decrease of $1.4 million, primarily due to a $3.0 million decrease in revenue from media customers for occasional use services, largely in the North America and the Europe regions, partially offset by growth in revenue for mobility applications.
 Channel reported an aggregate decrease of $3.7 million related to the continued migration of international point-to-point satellite traffic to fiber optic cable, a trend which we expect will continue.
Total Off-Network and Other Revenue increased slightly by $0.5 million, or 1 percent, to $58.4 million as compared to the three months ended December 31, 2013:
 Transponder, MSS and other off-network services reported an aggregate increase of $0.4 million, primarily due to higher revenue from media customers in the Latin America and Caribbean and the Europe regions, partially offset by declines in services for government applications, largely related to reduced sales of off-network transponder services and mobile satellite services.
 Satellite-related services reported an aggregate increase of $0.1 million, primarily due to revenue from professional services and flight operations support for third party satellites.
For the three month period ended December 31, 2014, changes in operating expenses, interest expense, net, and other significant income-statement items are described below.
Direct costs of revenue increased by $9.1 million, or 11 percent, to $93.2 million, as compared to the three months ended December 31, 2013. The increase was primarily due to an increase of $5.4 million in staff and related expenses as compared to the fourth quarter of 2013, which included a credit for certain expenses, and an increase of $3.0 million in costs primarily due to an adjustment to certain vendor payments in 2013.

Selling, general and administrative expenses increased by $13.1 million, or 27 percent, to $61.9 million, as compared to the three months ended December 31, 2013. The increase was primarily due to an $11.5 million increase in staff and related expenses as compared to the fourth quarter of 2013, which included a credit for certain expenses, and an increase of $5.0 million in development expenses. These increases were partially offset by a $2.5 million decrease in bad debt expense related to collection challenges in 2013 with a limited number of customers in Africa and the Middle East.


Depreciation and amortization expense decreased by $5.2 million, or 3 percent, to $171.3 million, as compared to the three months ended December 31, 2013. This was primarily related to a $3.5 million decrease in amortization expense largely due 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 and a decrease of $3.4 million in depreciation expense due to the timing of certain satellites becoming fully depreciated. These decreases were partially offset by an increase of $1.9 million in depreciation expense resulting from the impact of satellites placed into service during 2014.


Interest expense, net consists of the interest expense we incur together with gains and losses on interest rate swaps, which reflect 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. As of December 31, 2014, 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 $17.3 million, or 7 percent, to $230.2 million compared to $247.5 million for the three months ended December 31, 2013.


The decrease in interest expense, net was principally due to the following:
 a net decrease of $7.4 million as a result of our debt offerings, prepayments, redemptions and amendments in 2013 and 2014;
 a decrease of $6.2 million resulting from higher capitalized interest of $18.9 million compared to $12.7 million for the three months ended December 31, 2013, resulting from increased levels of satellites and related assets under construction; and
 a net decrease of $2.6 million in interest expense as a result of the decrease in the interest rate for borrowing under the Intelsat Jackson Secured Credit Agreement.
The non-cash portion of total interest expense, net was $5.3 million for the three months ended December 31, 2014, due to 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 $40.4 million for the three months ended December 31, 2014, compared to $1.3 million for the three months ended December 31, 2013. In November 2014, Intelsat Jackson redeemed all $500.0 million aggregate principal amount of the 2019 Senior Notes.
Other expense, net was $2.0 million for the three months ended December 31, 2014, compared to other expense, net of $0.7 million for the three months ended December 31, 2013. The difference of $1.3 million was primarily due to an increase in exchange rate losses mainly related to our business conducted in Brazilian reais.

Provision for income taxes was $2.9 million for the three months ended December 31, 2014, as compared to an expense of $10.3 million for the three months ended December 31, 2013. The difference was principally due to the effect of a 2013 internal subsidiary reorganization on the three months ending December 31, 2013, with no comparable effect on the three months ending December 31, 2014.

Cash paid for income taxes, net of refunds, totaled $7.2 million, compared to $9.0 million for the three months ended December 31, 2013.
EBITDA, Adjusted EBITDA, Net Income, Net Income per Diluted Common Share and Adjusted Net Income per Diluted Common Share
EBITDA was $462.0 million for the three months ended December 31, 2014, compared to $509.2 million for the same period in 2013.


Adjusted EBITDA was $477.1 million for the three months ended December 31, 2014, or 77 percent of revenue, compared to $509.8 million, or 79 percent of revenue, for the same period in 2013.
Net income attributable to Intelsat S.A. was $16.2 million for the three months ended December 31, 2014, compared to $72.6 million for the same period in 2013.


Net income per diluted common share attributable to Intelsat S.A. was $0.14 for the three months ended December 31, 2014, compared to $0.62 per diluted common share for the same period in 2013.
Adjusted net income per diluted common share attributable to Intelsat S.A. was $0.79 for the three months ended December 31, 2014, compared to $0.84 adjusted net income per diluted common share 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 used in operations1 was $47.6 million during the three months ended December 31, 2014. Free cash flow from operations was $400.7 million for the year ended December 31, 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 December 31, 2014, totaled $142.4 million. Payments for satellites and other property and equipment during the year ended December 31, 2014, totaled $645.4 million.


Financial Outlook 2015
Today, Intelsat issued its 2015 financial outlook, in which the company expects the following:
Revenue: Intelsat forecasts full year 2015 revenue of $2.330 billion to $2.380 billion. Revenue performance reflects:
 growth of 2-3 percent in our media business, which will benefit from new capacity that entered service in late 2014;
 a decline in our network services business of 7-10 percent, which faces competitive pressures in Africa and on-going declines in the legacy channel and international trunking business; and
 a decline in our government business of 8-12 percent as compared to full year 2014, as a result of challenges due to reduced spending by the U.S. government and troop withdrawals.
Intelsat’s 2015 revenue guidance reflects the impacts noted above as well as the impact from no new capacity expected to be placed into service in 2015.
Adjusted EBITDA: Intelsat forecasts Adjusted EBITDA performance for the full year 2015 to be in a range of $1.81 billion to $1.86 billion.
Capital Expenditures: Intelsat issued its 2015 capital expenditure guidance for the three calendar years 2015 through 2017 (the “Guidance Period”).
We expect capital expenditures ranges of:
 2015: $775 million to $850 million, consistent with prior guidance;
 2016: $625 million to $700 million, consistent with prior guidance; and
 2017: $725 million to $825 million, introduced today.
Capital expenditure guidance for 2015 through 2017 assumes investment in twelve satellites in the manufacturing or design phase during the Guidance Period. In addition, a custom payload is being built for us on a third-party satellite which will not require capital expenditure. We expect to launch one satellite in 2015, four satellites in 2016, and two satellites in 2017, and will continue work on five remaining satellites for which construction will extend beyond the Guidance Period.
We expect to launch two of our new Intelsat EpicNG high-throughput satellites during the 2016 and 2017 Guidance Period years, increasing our total transmission capacity. By the conclusion of the Guidance Period in 2017, the net number of transponder equivalents will increase by a compound annual growth rate (CAGR) of 7.8 percent as a result of the satellites entering service during the Guidance Period.

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:
 2015: $125 million to $150 million, consistent with prior guidance;
 2016: $0 million to $25 million, consistent with prior guidance; and
 2017: $0 million, as no prepayments are currently contracted for this period.


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 December 31, 2014 totaled $44.5 million, and for the year-ended December 31, 2014 totaled $145.1 million.


Debt Repayment: Intelsat made a $49 million revolver repayment in early 2015. Based upon the guidance provided above, Intelsat expects no further material debt repayment in 2015.
Cash Taxes: Expected to be approximately 1.5 percent of revenue for each of the next several years.