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Intelsat Announces First Quarter 2016 Results

28 April 2016

Intelsat S.A. announced financial results for the three months ended March 31, 2016.

Intelsat reported total revenue of $552.6 million for the three months ended March 31, 2016. Net income attributable to Intelsat S.A. was $15.3 million, or $0.13 per share on a diluted basis for the three months ended March 31, 2016. The company reported that adjusted net income per diluted common share1 was $0.31 for the same period.

Intelsat reported EBITDA1, or earnings before net interest, taxes and depreciation and amortization, of $407.5 million and Adjusted EBITDA1 of $417.7 million, or 76 percent of revenue for the three months ended March 31, 2016.

Intelsat Chief Executive Officer, Stephen Spengler said, “The Intelsat 29e spacecraft, after undergoing comprehensive in-orbit testing, arrived on station several weeks ago. We are pleased to report that the performance is surpassing our design objectives. The tests demonstrate improved throughput on current generation platforms, delivering immediate efficiency benefits to our customers. Tests on next generation networking platforms indicate throughput improvements of up to 2.5 times above the efficiency of wide beam capacity and current platforms, demonstrating the increased value of Intelsat EpicNG SM. The performance, improved economics and simple access of Intelsat EpicNG targets higher volume applications than are served by the satellite sector today, including private enterprise networks, wireless infrastructure, government and mobility. We continue with the development of our Intelsat EpicNG managed service offerings, known as IntelsatOne® Flex, for the mobility and enterprise sectors, to make it easier to incorporate high throughput satellite services into the rapidly expanding global operations of our customers.

“With $553 million in revenue and $418 million in Adjusted EBITDA, our first quarter financial results, as well as our operational progress in the period, support our objectives for 2016,” continued Mr. Spengler. “Performance by customer set reflects a continuation of trends that began in the second half of 2015; these trends should begin to be offset as our new capacity enters service over the balance of this year. To that end, our launch and in-service timelines remain largely on track, with a short in-service delay of three weeks for our Intelsat 31 satellite program.”

Mr. Spengler added, “Our backlog continues to provide the visibility into future revenue and cash flows that allows us to invest in our fleet and pursue our long-term business strategy. Backlog at March 31, 2016 was $9.3 billion, over four times annual revenue.”

First Quarter 2016 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. For additional details regarding the performance of our customer sets, see our Quarterly Commentary.

Network Services
Network Services revenue was $227.7 million (or 41 percent of Intelsat’s total revenue) for the three months ended March 31, 2016, a decrease of 18 percent compared to the three months ended March 31, 2015.

Media
Media revenue was $212.1 million (or 38 percent of Intelsat’s total revenue) for the three months ended March 31, 2016, a decrease of 6 percent compared to the three months ended March 31, 2015.
Government
Government revenue was $103.5 million (or 19 percent of Intelsat’s total revenue) for the three months ended March 31, 2016, an increase of 9 percent compared to the three months ended March 31, 2015.
Average Fill Rate
Intelsat’s average fill rate on our approximately 2,125 station-kept transponders was 75 percent at March 31, 2016, a slight decrease compared to the average fill rate as of December 31, 2015. Because we will report our high throughput Intelsat EpicNG capacity separately, the station-kept count and fill rate reported above excludes the 250 units of high throughput capacity related to our first Intelsat EpicNG satellite, Intelsat 29e, which entered service late in the first quarter.
Satellite Launches
Intelsat 29e, the first satellite of our next generation Intelsat EpicNG fleet, successfully entered into service at the end of March 2016. Currently, we have three other satellites scheduled to launch in 2016: Intelsat 31 is now scheduled to launch on May 28, 2016, revising its in-service date to early 3Q16. Intelsat 36 and Intelsat 33e are scheduled to launch in the third quarter of 2016. Now that Intelsat 29e is in service, we currently have seven satellite programs in the development and design phase that are covered by our capital expenditure program. In addition, we have two custom payloads being built on third-party owned satellites, to be known as Intelsat 32e and Intelsat 38, which will not require capital expenditure. Intelsat 32e is currently scheduled to launch in the first quarter of 2017, and a launch date for Intelsat 38 is forthcoming. In addition, we have started work on our joint venture satellite, Horizons 3e, which was announced in the fourth quarter of 2015.

Contracted Backlog
At March 31, 2016, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $9.3 billion, as compared to $9.4 billion at December 31, 2015. The balance of backlog reflects lower overall net new contracts.

Capital Structure Updates and Debt Transactions
On March 29, 2016, our subsidiary, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”), completed an offering of $1.25 billion aggregate principal amount of 8.0% Senior Secured Notes due 2024. The net proceeds from this offering have been, and are expected to be, used for general corporate purposes, which may include repayment of indebtedness, capital expenditures and working capital and to pay fees and expenses related to the offering. A portion of the net proceeds was used to prepay in full all remaining outstanding amounts under the Intercompany Loan described below.
During the third quarter of 2015, Intelsat Jackson declared and paid a dividend of $360 million in cash to its parent, Intelsat (Luxembourg) S.A. (“Intelsat Luxembourg”), also one of our subsidiaries. Subsequent to the payment of the dividend, a subsidiary of Intelsat Luxembourg loaned an aggregate principal amount of $360 million to Intelsat Jackson (the “Intercompany Loan”) pursuant to a promissory note. During the first quarter of 2016, Intelsat Jackson prepaid in full all remaining outstanding amounts under the Intercompany Loan.

As of March 31, 2016, Intelsat Jackson had $436.5 million of undrawn capacity under its revolving credit facility. However, use of such capacity was subject to the covenants of its other debt agreements. As a result of the completion of the $1.25 billion senior secured note offering of Intelsat Jackson on March 29, 2016, the company currently does not have access to the undrawn capacity under the revolving credit facility, and instead has been relying for liquidity purposes, and intends to rely in the future, on a portion of the net proceeds of the March offering.

We currently expect that during the course of the second quarter of 2016, the same subsidiaries of Intelsat Jackson that currently guarantee its obligations under Intelsat Jackson’s secured credit facility will issue guarantees of the indebtedness under the indenture governing Intelsat Jackson’s 6 5/8% Senior Notes due 2022.

Financial Results for the Three Months Ended March 31, 2016
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 reported a decline of $58.2 million, or 11 percent, to $493.8 million as compared to the three months ended March 31, 2015:
 Transponder services reported a decline of $50.8 million, primarily due to a $39.9 million decrease in revenue from network services customers, together with an $11.0 million decline from media customers. The network services decline was mainly due to non-renewals and renewal pricing at lower rates for enterprise and wireless infrastructure services, together with reduced volumes from non-renewals of point-to-point connectivity, which is shifting to fiber alternatives. The media decrease resulted primarily from lower volumes due to certain North American customers migrating to new compression standards and a single format. The aggregate decrease also reflects $3.3 million in currency-related reductions of our contracts in Brazil and Russia across our network services and media businesses. Our sector is undergoing a period of increased supply across all regions; the resulting competitive environment is causing pricing pressure in certain regions and applications, primarily with respect to our network services business, and we expect this to continue to impact our business negatively in the near to mid-term.
 Managed services reported an increase of $1.8 million, largely due to an increase in revenue from network services customers using our broadband services for maritime applications and an increase in revenue from government customers for broadband solutions, partially offset by declines in revenues from network customers for trunking solutions and from media customers for managed video solutions.
 Channel reported an aggregate decrease of $9.2 million due to the continued migration of international point-to-point satellite traffic to fiber optic cable, a trend that we expect will continue for this legacy product, which is no longer actively marketed to our customers.
Total Off-Network and Other Revenue reported an aggregate increase of $8.5 million, or 17 percent, to $58.8 million as compared to the three months ended March 31, 2015:
 Transponder, MSS and other off-network services reported an aggregate increase of $5.5 million, primarily due to increases in services for government applications, largely related to non-recurring sales of customer premises equipment.
 Satellite-related services reported an aggregate increase of $3.0 million, primarily due to increased revenue from support for third-party satellites and other services.
For the three months ended March 31, 2016, changes in operating expenses, interest expense, net, and other significant income-statement items are described below.
Direct costs of revenue (excluding depreciation and amortization) increased by $4.0 million, or 5 percent, to $87.5 million, as compared to the three months ended March 31, 2015. This reflects an increase of $5.8 million largely due to higher cost of sales for customer premises equipment relating to our government customer set, partially offset by declines in cost of Fixed Satellite Services (“FSS”) capacity purchased in support of our government business, and a decrease of $1.8 million in pension expenses.
Selling, general and administrative expenses increased by $2.5 million, or 4 percent, to $57.1 million, as compared to the three months ended March 31, 2015, primarily due to $2.0 million in development expense related to our antenna innovation initiatives.
Depreciation and amortization expense decreased by $2.5 million, or 1 percent, to $168.9 million, as compared to the three months ended March 31, 2015, primarily related to a decrease of $3.4 million in depreciation expense due to the timing of certain satellites and ground equipment becoming fully depreciated, together with $2.9 million in amortization expense due to changes in the 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. The declines were partially offset by an increase of $3.3 million in depreciation expense resulting from the impact of a satellite placed in service during 2015.

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. Interest expense, net decreased by $9.1 million, or 4 percent, to $216.9 million for the three months ended March 31, 2016, as compared to $226.0 million for the three months ended March 31, 2015.

The decrease in interest expense, net was principally due to a decrease of $8.4 million resulting from higher capitalized interest of $27.1 million for the three months ended March 31, 2016 as compared to $18.7 million for the three months ended March 31, 2015, resulting from increased levels of satellites and related assets under construction.
The non-cash portion of total interest expense, net was $5.1 million for the three months ended March 31, 2016, 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.

Provision for income taxes was $5.4 million for the three months ended March 31, 2016, as compared to $7.5 million for the three months ended March 31, 2015. The difference was principally due to lower income in our U.S. subsidiaries for the three months ended March 31, 2016. Cash paid for income taxes, net of refunds, totaled $11.6 million for the three months ended March 31, 2016, compared to $14.1 million for the three months ended March 31, 2015.

EBITDA, Adjusted EBITDA, Net Income, Net Income per Diluted Common Share attributable to Intelsat S.A. and Adjusted Net Income per Diluted Common Share attributable to Intelsat S.A.

EBITDA was $407.5 million for the three months ended March 31, 2016, compared to $460.5 million for the same period in 2015.
Adjusted EBITDA was $417.7 million for the three months ended March 31, 2016, or 76 percent of revenue, compared to $470.5 million, or 78 percent of revenue, for the same period in 2015.

Net income attributable to Intelsat S.A. was $15.3 million for the three months ended March 31, 2016, compared to $54.7 million for the same period in 2015.

Net income per diluted common share attributable to Intelsat S.A. was $0.13 for the three months ended March 31, 2016, compared to $0.47 per diluted common share for the same period in 2015.

Adjusted net income per diluted common share attributable to Intelsat S.A. was $0.31 for the three months ended March 31, 2016, compared to $0.69 adjusted net income per diluted common share for the same period in 2015.

Free Cash Flow from Operations
Free cash flow from operations was $126.0 million for the three months ended March 31, 2016. Free cash flow from 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 March 31, 2016,
was $227.2 million.

Financial Outlook 2016
Today, Intelsat reaffirmed in all material respects its 2016 financial outlook previously provided on February 22, 2016, in which the company expects the following:
Revenue: Intelsat forecasts full year 2016 revenue of $2.14 billion to $2.20 billion.

Adjusted EBITDA: Intelsat forecasts Adjusted EBITDA performance for the full year 2016 to be in a range of $1.625 billion to $1.675 billion.

Capital Expenditures: Intelsat issued its 2016 capital expenditure guidance for the three calendar years 2016 through 2018 (the “Guidance Period”).

We expect the following capital expenditures ranges, all of which are consistent with prior guidance:
 2016: $725 million to $800 million;
 2017: $625 million to $700 million; and
 2018: $425 million to $525 million.
Capital expenditure guidance for 2016 through 2018 assumes investment in ten satellites in the manufacturing and design phase, or recently launched, during the Guidance Period. In addition, we have capacity on three other satellites in development, including custom payloads being built for us on two third-party satellites, that will not require capital expenditure, as well as our Horizons 3e joint venture, which is building a satellite for the Asia-Pacific region. Following the successful entry into service of Intelsat 29e in March 2016, we plan to launch three more satellites in 2016, two satellites in 2017 and one satellite in 2018, and will continue work on three remaining satellites for which construction will extend beyond the Guidance Period.

We are scheduled to launch three more of our new Intelsat EpicNG high throughput satellites during the Guidance Period, as well as our Intelsat 32e payload and the Horizons 3e satellite, increasing our total transmission capacity. By the conclusion of the Guidance Period at the end of 2018, the net number of transponder equivalents is expected to increase by a compound annual growth rate (“CAGR”) of approximately 10 percent as a result of the satellites entering service during the Guidance Period.
Our capital expenditures guidance includes capitalized interest.

Cash Taxes: Annual 2016 cash taxes are expected to total approximately $30 million to $35 million.
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1In this release, financial measures are presented both in accordance with U.S. GAAP and also on a non-U.S. GAAP basis. EBITDA, Adjusted EBITDA (or “AEBITDA”), free cash flow from (used in) operations, Adjusted net income per diluted common share and related margins included in this release are non-U.S. GAAP financial measures. Please see the consolidated financial information below for information reconciling non-U.S.GAAP financial measures to comparable U.S. GAAP financial measures.

Q1 2016 Quarterly Commentary
Intelsat provides a detailed quarterly commentary on the company’s business trends and performance. Please visit www.intelsat.com/investors for management’s commentary on the company’s progress against its operational priorities and financial outlook.