Jul. 30, 2015

 Intelsat S.A. reported total revenue of $598.1 million and net income attributable to Intelsat S.A. of $60.2 million, or $0.47 per common share on a diluted basis, for the three months ended June 30, 2015. The company reported adjusted net income per diluted common share¹ of $0.70 for the three months ended June 30, 2015.

Intelsat S.A. reported EBITDA¹, or earnings before net interest, taxes and depreciation and amortization, of $462.3 million, or 77 percent of revenue, and Adjusted EBITDA¹ of $473.4 million, or 79 percent of revenue, for the three months ended June 30, 2015.

Intelsat CEO, Stephen Spengler, said, “Overall, Intelsat delivered a solid second quarter with revenues of $598 million. Contract renewals in each of our network services, media and government businesses are within our expectations for the year and include promising contract expansions that use traditional and next generation Intelsat Epic^NG services. As a result, today we are re-affirming our guidance for 2015 revenue and Adjusted EBITDA. Our guidance also reflects the shifting of some of our 2015 capital expenditures to 2016, due to timing of milestone achievements.

“Progress on our operational priorities allows us to position for a return to growth over the long term. We are continuing to leverage sector innovations that will differentiate our services and enable us to address new and faster growing applications and vertical markets. In June 2015, we announced an alliance with OneWeb’s proposed low earth orbit satellite platform, which will be interoperable with our Intelsat Epic^NG fleet. This will create the first and only fully global, pole-to-pole high throughput satellite system, providing increased differentiation of our mobility networks and government services. We continued our work on introducing new services in the second quarter, announcing IntelsatOne® Flex, a fully-managed infrastructure service for the mobility sector. IntelsatOne Flex gives our customers flexibility to better manage capacity for geographic expansion and surge requirements.

Spengler continued, “Our expected satellite launches from August 2015 through the first quarter of 2016 ­ Intelsat 34, Intelsat 29e, and Intelsat 31 ­ remain on track, even after accounting for disruptions in the launch sector. We expect that the successful entry into service of these satellites will refresh existing capacity and provide significant incremental inventory, supporting the growth strategies of our media, network services and government businesses.”

Second Quarter 2015 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 45 percent of Intelsat’s total quarter 2015 revenue, and at $270.6 million, decreased 6 percent as compared to the second quarter of 2014.

Media comprised 37 percent of the company’s revenue for the quarter ended June 30, 2015, and at $222.0 million, increased 2 percent as compared to the second quarter of 2014.

Government comprised 16 percent of our revenue for the quarter ended June 30, 2015, and at $95.3 million, decreased 8 percent as compared to the second quarter of 2014.

Average Fill Rate

Intelsat’s average fill rate on our approximately 2,200 station-kept transponders was 75 percent at June 30, 2015 and at the end of the first quarter of 2015.

Satellite Launches

We have no material changes to our launch schedule since our last earnings report on April 30, 2015. Our launch schedule fully reflects updated commitments received from our launch providers following recent launch failures. Near-term launches are to be provided by Arianespace, launching Intelsat 34 and Intelsat 29e, and Proton, launching Intelsat 31. Intelsat has no near-term launches scheduled with SpaceX. The next scheduled launch is Intelsat 34, which is a replacement satellite for our 304.5°E video neighborhood. We expect it to launch in August 2015 and be in service by late 2015.

Contracted Backlog

At June 30, 2015, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $9.5 billion, as compared to $9.7 billion at March 31, 2015.

Financial Results for the Three Months ended June 30, 2015

Intelsat’s revenues are generated from the provision of On-Network services, or services delivered via our satellite or ground network, and Off-Network services, derived from sales of services sourced from other operators, such as Mobile Satellite Services (“MSS”). Effective first quarter 2015, we expanded our definition of on-network services to include commitments for third-party capacity, generally long-term in nature, that we integrate and market as part of our owned infrastructure. 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. 

Total On-Network Revenue decreased by $14.3 million, or 3 percent, to $545.9 million, as compared to the three months ended June 30, 2014:

• Transponder services reported an aggregate decrease of $6.8 million, primarily due to a $13.1 million decrease in revenue from network services customers, mainly due to reduced volumes resulting from non-renewals of point-to-point connectivity and consumer broadband services, as well as the competitive environment. Transponder services also declined due to a $2.0 million reduction in revenue from capacity sold for government applications to customers primarily in the North America region. These decreases were partially offset by an $8.3 million increase from media customers primarily related to direct-to-home (“DTH”) services delivered in Latin America.
• Managed services reported an aggregate decrease of $4.2 million, largely due to a $3.1 million decrease in revenue from media customers for occasional use services.
• Channel reported an aggregate decrease of $3.3 million due to the continued migration of international point-to-point satellite traffic to fiber optic cable, a trend we expect will continue.

Total Off-Network and Other Revenue decreased by $3.3 million, or 6 percent, to $52.2 million:

• Transponder, MSS and other off-network services reported an aggregate decrease of $5.0 million, primarily due to declines in services for government applications, largely related to reduced sales of third party off-network transponder services.
• Satellite-related services reported an aggregate increase of $1.7 million, primarily due to increased revenue from support for third-party satellites and other services.

For the three month period ended June 30, 2015, changes in operating expenses, interest expense, net, and other significant income statement items are described below.

Direct costs of revenue decreased by $5.1 million, or 6 percent, to $81.9 million, as compared to the three months ended June 30, 2014. This decrease was primarily due to a $3.3 million decline in staff-related expenses and a net decrease of $1.5 million in the cost of off-network capacity purchased, reflecting a decrease in solutions sold to our government customer set, partially offset by an increase in other direct costs of revenue.

Selling, general and administrative expenses increased by $9.4 million, or 21 percent, to $54.1 million, as compared to the three months ended June 30, 2014. This was primarily due to a $6.7 million increase in bad debt expense. Bad debt expense was $5.6 million in the second quarter of 2015, related primarily to the Africa and Middle East region, compared to a credit of $1.1 million in the second quarter of 2014, as a result of the recovery of previously reserved balances in the same region. The increase also reflected $4.0 million in costs associated with development expenses related to our antenna innovation initiatives and an increase of $2.0 million in share-based compensation costs, partially offset by a decrease of $3.7 million in other staff-related expenses.

Depreciation and amortization expense increased by $2.3 million, or 1 percent, to $171.2 million, as compared to the three months ended June 30, 2014. This increase primarily resulted from higher depreciation due to a satellite placed in service in the fourth quarter of 2014, partially offset by certain satellites, ground equipment and other assets becoming fully depreciated and a decrease in amortization expense largely due to changes in patterns of consumption of amortizable intangible assets.

Interest expense, net consists of the gross 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. Interest expense, net decreased by $16.5 million, or 7 percent, to $222.8 million for the three months ended June 30, 2015, as compared to $239.2 million for the three months ended June 30, 2014.

The decrease in interest expense, net was principally due to the following:

• a net decrease of $11.2 million as a result of our debt redemption in 2014; and
• a decrease of $3.7 million resulting from higher capitalized interest of $21.3 million for the three months ended June 30, 2015, as compared to $17.6 million for the three months ended June 30, 2014, resulting from increased levels of satellites and related assets under construction.

The non-cash portion of interest expense, net was $5.0 million for the three months ended June 30, 2015. 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 income, net decreased by $1.3 million to $0.3 million, as compared to the three months ended June 30, 2014.

Provision for income taxes was $7.1 million, as compared to $9.6 million for the three months ended June 30, 2014. The decrease was principally due to lower income in our U.S. subsidiaries in the three months ended June 30, 2015. Cash paid for income taxes, net of refunds, totaled $5.3 million for the three months ended June 30, 2015 compared to $8.2 million for the same period in 2014.

EBITDA, Adjusted EBITDA, Net Income, Net Income per Diluted Common Share and Adjusted Net Income per Diluted Common Share

EBITDA was $462.3 million for the three months ended June 30, 2015, as compared to $485.5 million for the same period in 2014. The decline was primarily due to lower revenue, as well as increased operating expenses related to an increase in bad debt expense and development expense related to our antenna innovation initiatives, as noted above.

Adjusted EBITDA was $473.4 million for the three months ended June 30, 2015, or 79 percent of revenue, compared to $490.4 million, or 80 percent of revenue, for the same period in 2014.

Net income attributable to Intelsat S.A. was $60.2 million for the three months ended June 30, 2015, compared to net income of $66.8 million for the same period in 2014, reflecting the various items discussed above.

Net income per diluted common share attributable to Intelsat S.A. was $0.47 for the three months ended June 30, 2015, compared to net income per diluted common share of $0.53 for the same period in 2014.

Adjusted net income per diluted common share attributable to Intelsat S.A. was $0.70 for the three months ended June 30, 2015, compared to $0.76 for the same period in 2014.

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) Operations¹

Free cash flow used in operations was $134.6 million during the three months ended June 30, 2015. 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 June 30, 2015, totaled $212.6 million. Cash and cash equivalents at June 30, 2015 was $114.4 million. As of June 30, 2015, we had $25.0 million of borrowings outstanding under our revolving credit facility, and $464.0 million (net of standby letters of credit) of availability remaining thereunder. The outstanding balance was fully repaid in the month of July 2015.

Financial Outlook 2015

Today, Intelsat reaffirmed its 2015 revenue and Adjusted EBITDA financial outlook as reconfirmed in April 2015, and updated Capital Expenditure Guidance as follows:

Revenue: Intelsat forecasts full year 2015 revenue of $2.330 billion to $2.380 billion.

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: We updated capital expenditures ranges to reflect timing differences with respect to certain contractual payments which will result in a shift of capital expenditures from late 2015 to early 2016:

• 2015: $675 million to $750 million;
• 2016: $725 million to $800 million; and
• 2017: $725 million to $825 million.

Capital expenditure guidance assumes investment in eleven satellites in the concept, design or manufacturing phase for the three calendar year “Guidance Period” of 2015 through 2017. In addition, two custom payloads are being built for us on third-party satellites, which will not require capital expenditure. Of the eleven satellites in our capital expenditure guidance, we expect to launch one satellite in 2015, four satellites in 2016, and two satellites in 2017, and will continue work on the four remaining satellites for which construction will extend beyond the Guidance Period.

We expect to launch two of our new Intelsat Epic^NG high-throughput satellites in 2016, 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 7.5 percent as a result of the satellites entering service during the Guidance Period. The growth also includes capacity from one of the customized payloads noted above, which we expect will be launched in 2016.

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;
• 2016: $0 million to $25 million; 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 June 30, 2015 totaled $22.0 million.

Debt Reduction: 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.