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Intelsat: Quarter Ended March 31, 2015
April 30, 2015
First Quarter 2015 Performance Summary
The results of Intelsat S.A. (“Intelsat” or the “company”) in the
quarter reflect continued progress on our financial and operating
priorities.
Our first quarter performance was in line with our expectations, with
revenue of $602 million, a 4 percent decline as compared to the first
quarter of 2014. Net income attributable to Intelsat S.A. was $55
million, or $0.47 per diluted common share, in the first quarter.
Adjusted net income per diluted common share1 was $0.69 for the same
period.
Adjusted EBITDA1 for the period was $470 million, or 78 percent of
revenue, as compared to $506 million, or 80 percent of revenue, in the
first quarter of 2014. Our performance on this metric reflects reduced
revenue and modestly increased expenses reflecting a return to more
normalized bad debt experience, as compared to a credit in the like
quarter of 2014, as well as an increase in foreign exchange expense
primarily related to our revenues in Brazil. The solid Adjusted EBITDA
performance, and lower cash interest payments given the timing of our
debt service, contributed to strong free cash flow from operations1 of
over $199 million.
Launching and placing into service new inventory is essential to our
return to top line growth. Our capital investment program is on track,
with no change to our launch schedule since our last commentary. As we
add new capacity to our fleet, we will be in position to generate
organic growth.
Progress in growing applications was more than offset by the trends
affecting our business that were detailed in our February 2015 Quarterly
Commentary, such as limited inventory suited to growth opportunities,
geopolitical conditions and the strengthening of the U.S. dollar. We
have not experienced any meaningful changes to the trends since that
time.
Contracted backlog at March 31, 2015 was $9.7 billion, compared to $10.0
billion at December 31, 2014. At 4.0 times trailing twelve months
revenue, our backlog continues to provide our business with
predictability and visibility into future cash flow.
2015 Operational Priorities
Our operational focus in 2015 continues to be on the five areas outlined
in our February 2015 Quarterly Commentary. Progress specific to our 2015
priorities to date is noted below:
Maintain our design and manufacturing schedule for the next generation
Intelsat EpicNG® fleet, and other satellites in our plan, to ensure
availability of new inventory to drive revenue growth;
o There have been no changes to our launch program. Manufacturing
milestones and launch calendars remain within our expectations. We
expect to launch three satellites over the next 12 months that will
enter service over the course of 2016.
Drive innovation to create next generation solutions, including
collaborating with ground technology manufacturers and other partners to
ensure optimized performance, economics and ease of access for Intelsat
EpicNG, for applications including broadband infrastructure, mobility,
government and enterprise solutions;
o We believe that innovation in terms of ground systems, such as
antennas, will allow us to accelerate access to larger growth
opportunities. Building upon our recent investments in innovative
antenna technology and platforms, we announced that we will co-design
and produce an ultra-thin, active phased array, Ku-band satellite
antenna solution with Phasor Inc., a leading developer of high
throughput, modular, electronically steerable antennas (ESAs).
Intelsat’s investment is intended to produce a cost-effective,
fuselage-mount, Ku-band antenna suitable for installation on civil and
government small-jets, which represents an underserved segment of the
fast-growing aviation broadband market.
Develop application specific capacity and new service offerings that
support the growth objectives of our customers across our business in
the media, network services and government sectors, including mobility
applications, and invest in our video neighborhood orbital locations to
support long-term growth goals;
o Our media customers operate in an environment that requires delivering
video content in multiple formats, with changing business models. In
April, we introduced IntelsatOne® Prism, an IP content distribution
platform and managed service that is fully integrated with Intelsat’s
powerful global satellite fleet and IntelsatOne terrestrial network. The
fully automated, converged IP-based platform allows media customers to
conduct multiple content transmissions, such as linear video, file
transfer, VoIP, Internet access and data exchange, on a single platform,
increasing their flexibility and operational efficiency.
Maintain our leadership in government services, focusing on
procurements that require end-to-end network responsibilities and
complex network support, improving our value proposition to government
customers seeking affordable solutions from trusted commercial
providers;
o Intelsat continues to position for what we perceive as long-term
growth opportunities serving the U.S. military with commercial capacity
and services. The United States Strategic Command’s (“U.S. Stratcom”)
Joint Space Operations Center (“JSpOC”) recently confirmed that
approximately 80 percent of the government’s satellite communications
were conducted using commercial systems in recent years, and announced
plans to create a Commercial Integration Cell (“CIC”) to function within
the JSpOC by June 1, 2015, to enhance coordination and cooperation
between the Department of Defense (“DoD”) and commercial satellite
operators. The CIC will help coordinate operational issues between the
parties and develop a process for the two-way exchange of critical
operational data. Six companies will comprise the prototype commercial
cell, of which our subsidiary, Intelsat General Corporation (“IGC”), is
a member.
Optimize use of our spectrum rights and global presence to maximize
market access and continuity, particularly in attractive regions, while
maintaining investment discipline.
As we execute on these initiatives, we will be building the inventory
and service capabilities that will allow us to capture future growth. In
addition to our existing sectors, we see emerging opportunities that we
believe represent larger and more sustainable addressable markets for
our services.
1Q 2015 Business Highlights and Customer Set Performance
All 2015 comparisons are to the same period in 2014 unless specifically
noted otherwise.
Network Services
Network services generated revenue of $277 million in the first quarter
of 2015, a $14 million, or 5 percent, decrease from the year-ago
quarter. Declining revenues resulted from reduced point-to-point
services such as channel and certain transponder services, the effects
of the competitive environment, primarily for services in Africa, and
reduced revenue from consumer broadband services in North America, all
trends that were discussed in our fourth quarter 2014 commentary.
First Quarter Highlights and Business Trends:
Intelsat received a multi-year, multi-transponder renewal from
Compania Anonima National Telefonos de Venezuela (“CANTV”), for services
that will migrate from Intelsat 1R to the first satellite in our next
generation Intelsat EpicNG platform, Intelsat 29e. Intelsat’s satellite
services provide an essential part of the CANTV telecommunications
infrastructure, supporting applications such as cellular backhaul,
enterprise networks, oil and gas, and government.
Maritime broadband networks are forecasted to be a growing source of
demand for commercial satellite capacity. Intelsat renewed an existing
agreement for services on four satellites with the leading provider of
maritime broadband services, Airbus Defense and Space, under which
Airbus will migrate to our high performance Intelsat EpicNG capacity as
it comes into service.
On a global basis, growth opportunities for our network services
business include increased demand for aeronautical and maritime mobility
applications, and high throughput capacity for fixed and mobile
broadband applications for telecommunications providers and enterprise
networks. The launches of Intelsat 29e, Intelsat 34, Intelsat 32e and
Intelsat 33e, expected to enter service over the course of 2016 and
early 2017, are designed to provide necessary growth capacity for these
applications.
Network Services Quarterly
Media
Our media business applications generated revenue of $225 million in the
first quarter of 2015, a $3 million, or 1 percent, increase from the
year-ago quarter. Revenue increases from the entry into service of
Intelsat 30 were offset somewhat by the receipt of a non-recurring
termination fee in the first quarter of 2014 for which there was no
similar fee in 2015, reduced occasional use (“OU”) contribution services
and the effects of currency fluctuations, primarily with respect to our
revenue from Russia and Brazil.
First Quarter Highlights and Business Trends:
New business in the quarter was driven primarily by new and renewing
contracts related to Intelsat’s media distribution neighborhoods in
Africa and the Indian Ocean region.
Sentech, a South African provider of telecommunications and
broadcasting services, increased its capacity and extended its
commitments on the Intelsat 20 satellite, Intelsat’s leading
direct-to-home (“DTH”) and video distribution neighborhood at 68.5 E.
The capacity allows Sentech to continue to build its media and broadband
infrastructure services at that orbital location.
BT renewed and expanded services on five Intelsat satellites,
including services spanning Asia, Latin America and Europe. Intelsat’s
services are used by BT for media distribution and contribution,
corporate networking and government services for end users operating on
a global basis.
In addition to satellite capacity, many of Intelsat’s media customers
rely upon Intelsat to provide teleport services, allowing them to add
resilience and cost efficiency to their broadcast distribution
infrastructure. In the first quarter, Discovery Communications, LLC
expanded its use of services from one of Intelsat’s North American
teleport facilities.
Given the high fill rates on our most popular video neighborhood
satellites, the next growth catalyst for our media business is the
launch of Intelsat 31, a satellite expected to launch in 2016 and enter
service in the second quarter of 2016, with a customized Ku-band payload
in support of DIRECTV® Latin America.
Government
Sales to government customers generated revenue of $95 million in the
first quarter of 2015, a $14 million, or 13 percent, decrease from the
year-ago quarter. Overall, the decline reflects the effect of troop
withdrawals, reduced U.S. government budget spend and consolidations of
government customer requirements, resulting in fewer contract renewals
or renewals with lower unit requirements. Revenue declines were heavily
weighted to on-network services.
The current proportion of on-network services as a percentage of total
government revenue is 57 percent, as compared to the first quarter of
2014, where the proportion was 61 percent.
First Quarter Highlights and Business Trends:
A number of sizeable renewals were received in the first quarter, the
largest being for services provided on third-party satellites. The
overall volume of renewals is in line with our expectations for 2015.
IGC executed a three satellite, multi-transponder, multi-year
agreement with a global provider of mobility services. The customer,
benefiting from the reach of the Intelsat fleet, will incorporate the
capacity into its global infrastructure to provide services to its users
across two ocean regions and five continents.
As we move forward in 2015, our current view is that our government
business will continue to be affected by reduced defense spending as
compared to prior years. Visibility remains limited, with the pace of
RFP issuance and subsequent awards remaining slow.
Fleet and Operations Update
Station-kept transponders were relatively unchanged at 2,200 units at
the end of the first quarter; utilization was at 75 percent. There were
no significant fleet changes in the quarter.
Intelsat currently has twelve satellites in the concept, design and
manufacturing stages.
At present, we expect to launch one satellite in 2015, Intelsat 34, a
satellite supporting media applications in South America and mobility
services over the North Atlantic, assigned to an Arianespace launcher;
we expect this satellite to enter into service by early 2016. Intelsat
31, a second satellite to be used primarily by DIRECTV® Latin America,
is currently expected to launch on a Proton launcher in the first
quarter of 2016 and enter into service in the second quarter of 2016.
The next generation Intelsat EpicNG program begins with the Intelsat 29e
satellite, which is currently scheduled to launch on an Arianespace
rocket in the first quarter of 2016 and expected to enter into service
in mid-2016.
Details related to our satellite programs in the concept, design and
manufacturing stages are noted below and are subject to change. Please
note that our disclosure now reflects our estimated launch date, as
opposed to the previously provided earliest estimated launch date. In
addition, we have added disclosure indicating the estimated in-service
date, at which point in-orbit testing is complete and the satellite is
ready to serve customers.
In addition to these planned satellites, Intelsat 32e and Intelsat 38
are custom payloads being built for us on third-party satellites and
will not require capital expenditure. Intelsat 32e will be located at
43.1°W; the satellite is planned for launch in the first half of 2016. A
launch date is not yet set for Intelsat 38, which will be located at
45E.
First Quarter Financial Performance
Revenue
Effective first quarter 2015, on-network services are comprised
primarily of services delivered on our
owned network infrastructure, as well as commitments for third-party
capacity, generally long-term in
nature, that we integrate and market as part of our owned
infrastructure. In the case of third-party
services in support of government applications, the commitments for
third-party capacity are shorter and matched to the government
contracting period, and thus remain classified as off-network services.
Off-network services can include transponder services and other
satellite-based transmission services,
such as mobile satellite services (“MSS”), which are sourced from other
operators, often in frequencies
not available on our network. Under the category Off-Network and Other
Revenues, we also include
revenues from consulting and other services. In addition, effective
first quarter 2015, certain revenues
have been reclassified between transponder services and managed services
across our customer sets in order to better reflect the nature of the
underlying business.
A supplemental schedule of historical revenues was prepared for the
periods 2013-2014 by quarter and
full year that reflects the above classification changes. The
supplemental schedule is attached to this
quarterly commentary.
At $602 million, total company revenue declined $27 million, or 4
percent, as compared to the first quarter of 2014.
On-network services of $552 million decreased by $22 million, or 4
percent. Transponder services of
$441 million declined by $12 million, or 3 percent, most of which was
due to reduced services sold to
network services customers in the North America, Europe and Africa
regions. The decline in transponder services also reflects a decrease in
revenue from capacity sold for government applications to customers
primarily in the North America region. Managed services declined to $99
million, or 6 percent, largely due to lower sales of occasional use
services to media customers and reduced capacity sold for government
applications. Channel services declined by $4 million, to $12 million.
Off-network and other revenues of $50 million declined by $4 million, or
8 percent. Transponder, Mobile Satellite Services (“MSS”) and other
off-network services decreased by a total of $3 million, largely due to
a decline in sales of third-party off-network transponder services and
MSS capacity, both of which are primarily related to government
applications. Satellite-related services declined by $2 million,
primarily due to decreased revenue from flight operations professional
services.
Expenses
Direct costs of revenue, excluding depreciation and amortization, was
$84 million in the first quarter of 2015, constituting less than a one
percent decline as compared to the prior year quarter. The decrease was
mainly comprised of a $2 million reduction in the cost of third-party
capacity purchased related to lower sales of such services for
government applications, offset by an increase in other direct costs of
revenue. At $55 million, selling, general and administrative expenses in
the first quarter increased by $8 million as compared to the prior year
period, primarily due to increased bad debt expense of $5 million in the
first quarter of 2015, as compared to a $3 million credit in the first
quarter of 2014 as a result of the recovery of previously reserved
balances.
Interest expense, net, was $226 million in the first quarter of 2015, a
decrease of $15 million, or 6 percent, as compared to the prior year
period. The decline was primarily the result of debt reduction
activities in 2014.
At $4 million, other expense, net for the first quarter of 2015, as
compared to $0.4 million, other income, net for the three months ended
March 31, 2014. The difference was primarily due to an increase in
exchange rate losses mainly related to our business conducted in
Brazilian reais.
Provision for income taxes was $8 million as compared to a benefit from
income taxes of $5 million for the first quarter of 2014. The difference
was principally due to the recognition of previously unrecognized tax
benefits in the first quarter of 2014 as a result of the conclusion of a
U.S. Internal Revenue Service audit.
Adjusted EBITDA
Adjusted EBITDA for the period was $470 million, or 78 percent of
revenue, as compared to $506 million, or 80 percent of revenue, in the
first quarter of 2014. Our performance on this metric reflects reduced
revenue and modestly increased expenses reflecting a return to more
normalized bad debt experience, as compared to a credit in the like
quarter of 2014, as well as an increase in foreign exchange expense
primarily related to our revenues in Brazil.
Earnings
Net income attributable to Intelsat S.A. was $55 million, or $0.47 per
diluted common share, for the first quarter. Adjusted net income
attributable to Intelsat S.A.1 was $81 million for the first quarter of
2015, compared to $107 million in adjusted net income attributable to
Intelsat S.A. for the same period in 2014. Adjusted diluted net income
per common share1 was $0.69 for the first quarter of 2015, compared to
$0.92 for the same period in 2014.
Cash Flows
During the first quarter of 2015, net cash provided by operating
activities was $386 million. This included $43 million in customer
prepayments received in the first quarter. Cash interest paid in the
first quarter was $95 million, with relatively higher interest payments
due in the second and fourth quarters of the year as compared to the
first and third quarters; $19 million of interest was capitalized during
the first quarter.
Capital expenditures were $187 million, resulting in free cash flow from
operations of $199 million for the first quarter of 2015.
Our ending cash balance at March 31, 2015, was $259 million.
2015 Outlook
Intelsat reaffirmed its revenue and capital expenditures guidance issued
in February 2015.
We continue to expect full year 2015 revenue of $2.330 billion to $2.380
billion and Adjusted EBITDA of $1.81 billion to $1.86 billion.
Capital Expenditure Guidance was unchanged:
Our capital expenditure guidance includes capitalized interest. Customer
prepayments guidance reflects only that which is contracted at the
quarter end. The annual classification of capital expenditure and
prepayments could be affected by the timing of achievement of contract,
satellite manufacturing, launch and other milestones.
The net number of transponder equivalents is expected to increase by a
compound annual growth rate (CAGR) of 7.5 percent as a result of the
satellites entering service between January 1, 2015 and December 31,
2017, with the growth weighted to later in the period. This aligns to
the launches of the Intelsat EpicNG high throughput satellites, the
first two of which enter service in mid-2016 and 2017.
Stephen Spengler, Chief Executive Officer, Intelsat S.A.
Michael McDonnell, Executive Vice President and Chief Financial Officer,
Intelsat S.A.
1In this quarterly commentary document, financial measures are presented
both in accordance with GAAP and also on a non-GAAP basis. EBITDA,
Adjusted EBITDA (or AEBITDA), free cash flow from operations and related
margins, adjusted net income and adjusted net income per diluted common
share included in this commentary are non-GAAP financial measures.
Please see the consolidated financial information found in our earnings
release and available on our website for information reconciling
non-GAAP financial measures to comparable GAAP financial measures.
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