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Intelsat Announces Second Quarter 2016 Results

27 July 2016

Intelsat S.A. operator of the world’s first Globalized Network, powered by its leading satellite backbone, today announced financial results for the three months ended June 30, 2016.

Intelsat reported total revenue of $542.0 million for the three months ended June 30, 2016. Net income attributable to Intelsat S.A. was $116.4 million for the three months ended June 30, 2016.

Intelsat reported EBITDA1, or earnings before net interest, taxes and depreciation and amortization, of $403.6 million and Adjusted EBITDA1 of $410.7 million, or 76 percent of revenue for the three months ended June 30, 2016.

Intelsat Chief Executive Officer, Stephen Spengler said, “Our 2016 business objectives are progressing on plan, with two of our four planned launches successfully completed and continued momentum on our next generation high throughput Intelsat EpicNG® platform. Our launch and in-service timelines remain on track. We are loading traffic onto our Intelsat 29e satellite, which entered into service in late March, and placed Intelsat 31 into service in late July. We recently signed our first global contract for our managed mobility service, IntelsatOne® Flex, an important milestone as we continue to build a differentiated, global high throughput service platform.”

“With $542 million in revenue and $411 million in Adjusted EBITDA, our second quarter financial results are consistent with our expectations for 2016,” continued Mr. Spengler. “Second quarter performance by customer set reflects the trends and operational accomplishments that were anticipated in the 2016 guidance established in February, and which we are reaffirming in totality today. As new capacity enters service over the balance of this year, we expect both our network services and media businesses to improve. In addition, the solid renewals and the six-month extension of an expiring contract will benefit our government business.”

Mr. Spengler added, “Our backlog continues to provide visibility into future revenue and cash flows that allows us to invest in our fleet and pursue our long-term business strategy. Backlog at June 30, 2016 was $9.2 billion, over four times our annual revenue. We are focused on effectively managing our capital structure while continuing to invest in initiatives that will drive customer growth.”

Second 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 $228.3 million (or 42 percent of Intelsat’s total revenue) for the three months ended June 30, 2016, a decrease of 16 percent compared to the three months ended June 30, 2015.

Media Media revenue was $211.0 million (or 39 percent of Intelsat’s total revenue) for the three months ended June 30, 2016, a decrease of 5 percent compared to the three months ended June 30, 2015.

Government Government revenue was $93.6 million (or 17 percent of Intelsat’s total revenue) for the three months ended June 30, 2016, a decrease of 2 percent compared to the three months ended June 30, 2015.

Average Fill Rate Intelsat’s average fill rate on our approximately 2,125 station-kept wide-beam transponders was 76 percent at June 30, 2016, a slight increase compared to the average fill rate as of March 31, 2016. Because we report our high throughput Intelsat EpicNG capacity separately, the station-kept count reported above excludes the 270 units of high throughput capacity related to our first Intelsat EpicNG satellite, Intelsat 29e, which entered into service late in the first quarter.

Satellite Launches Intelsat 31 successfully launched in early June and entered into service in late July 2016. Currently, we have two other satellites launching in 2016: Intelsat 36 and Intelsat 33e, which are scheduled to launch on August 24, 2016. We currently have eight satellite programs in the development and design phase that are covered by our capital expenditure program.

Contracted Backlog At June 30, 2016, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $9.2 billion, as compared to $9.3 billion at March 31, 2016. The balance of backlog reflects lower overall net new contracts.

Capital Structure Updates and Debt Transactions During the second quarter of 2016, we repurchased $459.7 million in aggregate principal amount of Intelsat Jackson Holdings S.A.’s (“Intelsat Jackson”) outstanding 6 ⅝% Senior Notes due 2022 (the “2022 Jackson Notes”). In connection with these repurchases, we recognized a gain on early extinguishment of debt of $131.4 million in the second quarter of 2016, consisting of the difference between the carrying value of the debt repurchased and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt premium and unamortized debt issuance costs. On June 30, 2016, Intelsat Jackson completed an issuance of $490 million aggregate principal amount of 9.5% Senior Secured Notes due 2022 (the “New Jackson Secured Notes”), with an original issue discount of 2.0%. On July 15, 2016, the net proceeds from the sale of the New Jackson Secured Notes were used to repurchase $673.5 million in aggregate principal amount of the 2022 Jackson Notes, pursuant to previously commenced tender offers. In connection with this repurchase, we expect to recognize a gain on early extinguishment of debt of approximately $216.3 million during the three months ending September 30, 2016, consisting of the difference between the carrying value of the debt repurchased and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt premium and unamortized debt issuance costs.

Financial Results for the T hree Months Ended June 30 , 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 $52.2 million, or 10 percent, to $493.7 million as compared to the three months ended June 30, 2015:
 Transponder services reported an aggregate decrease of $48.1 million, primarily due to a $38.3 million decrease in revenue from network services customers, together with a $9.3 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 of $9.3 million resulted primarily from lower volumes due to certain North American customers migrating to new compression standards and single format distribution. The aggregate decrease also reflects $1.3 million in currency-related reductions of our contracts in Brazil and Russia, primarily in our media business. 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 aggregate increase of $5.3 million, largely due to an increase of $10.2 million in revenue from network services customers for broadband services for air and maritime mobility applications, partially offset by declines of $5.1 million in revenues primarily from network services customers for trunking applications and from media customers for video solutions.
 Channel reported an aggregate decrease of $9.4 million due to the continued migration of international point-to-point satellite traffic to fiber optic cable. This legacy product is no longer actively marketed to our customers.
Total Off-Network and Other Revenue reported an aggregate decrease of $4.0 million, or 8 percent, to $48.2 million as compared to the three months ended June 30, 2015:
 Transponder, MSS and other off-network services reported an aggregate decrease of $2.9 million, primarily due to decreases in services for government applications, largely related to sales of off-network managed services.
 Satellite-related services reported an aggregate decrease of $1.1 million, primarily due to decreased revenue from support for third-party satellites and other services.
For the three months ended June 30, 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) decreased by $3.5 million, or 4 percent, to $78.4 million, as compared to the three months ended June 30, 2015. This reflects a decrease of $5.3 million largely due to declines in the cost of off-network fixed satellite services and managed capacity purchased primarily in support of the company’s government business, partially offset by an increase of $1.4 million in staff-related expenses.

Selling, general and administrative expenses increased by $5.1 million, or 9 percent, to $59.2 million, as compared to the three months ended June 30, 2015. This was primarily due to an increase of $4.7 million in bad debt expense largely related to a limited number of customers in the Latin America and Caribbean region, and an increase of $1.7 million in staff-related expenses consistent with our expectations; partially offset by a $2.5 million reduction in development expense related to our antenna innovation initiatives. Depreciation and amortization expense increased by $5.8 million, or 3 percent, to $177.1 million, as compared to the three months ended June 30, 2015, primarily related to an increase of $12.6 million in depreciation expense due to the impact of satellites placed in service in the fourth quarter of 2015 and the first quarter of 2016. The increase was partially offset by a net decrease of $4.2 million in depreciation expense due to the timing of certain satellites and ground equipment becoming fully depreciated, and other satellite related expenses and a decrease of $2.9 million in amortization expense primarily 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. 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 increased by $12.2 million, or 6 percent, to $235.0 million for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. The increase in interest expense, net was principally due to a net increase of $21.4 million in interest expense primarily resulting from the issuance of new secured debt in 2016. This was partially offset by a decrease of $8.6 million from higher capitalized interest of $29.9 million for the three months ended June 30, 2016, primarily resulting from increased levels of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $5.9 million for the three months ended June 30, 2016, due to the amortization of deferred financing fees and the accretion and amortization of discounts and premiums.
Gain on Early Extinguishment of Debt was $131.4 million for the three months ended June 30, 2016 with no comparable gain or loss for the three months ended June 30, 2015. In the second quarter of 2016, Intelsat Jackson repurchased $459.7 million in aggregate principal amount of the 2022 Jackson Notes. The gain of $131.4 million, consisted of the difference between the carrying value of the debt repurchased and the total cash amount paid (including related fees and expenses), together with a write-off of unamortized debt premium and unamortized debt issuance costs.

Other Expense, net was $0.8 million for the three months ended June 30, 2016, as compared to other income, net of $0.3 million for the three months ended June 30, 2015. The difference of $1.1 million was primarily due to a $0.6 million increase in expenses mainly related to our business conducted in Brazilian reais .

Provision for income taxes was $5.5 million for the three months ended June 30, 2016, as compared to $7.1 million for the three months ended June 30, 2015. The decrease was principally due to the recognition of previously unrecognized tax benefits related to our U.S. subsidiaries in the three months ended June 30, 2016. Cash paid for income taxes , net of refunds, totaled $2.5 million for the three months ended June 30, 2016, compared to $5.3 million for the three months ended June 30, 2015.

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

Net income attributable to Intelsat S.A. was $116.4 million for the three months ended June 30, 2016, compared to $60.2 million for the same period in 2015.

Net income per diluted common share attributable to Intelsat S.A. was $0.98 for the three months ended June 30, 2016, compared to $0.47 per diluted common share for the same period in 2015.

EBITDA was $403.6 million for the three months ended June 30, 2016, compared to $462.3 million for the same period in 2015.

Adjusted EBITDA was $410.7 million for the three months ended June 30, 2016, or 76 percent of revenue, compared to $473.4 million, or 79 percent of revenue, for the same period in 2015.

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.
 
Revenue Comparison by Customer Set and Service Type ($ in thousands)

Free Cash Flow Used in Operations
Free cash flow used in operations1 was $201.9 million for the three months ended June 30, 2016. Free cash flow 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, 2016, were $190.5 million.

Financial Outlook 201 6
Today, Intelsat reaffirmed, in all material respects, its 2016 financial outlook previously provided in guidance issued 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 eight satellites in the manufacturing and design or recently launched phases during the Guidance Period. In addition, we are developing capacity on three other satellites for which we do not incur capital expenditures. This includes custom payloads being built for us on two third-party satellites, as well as our Horizons 3e joint venture, which is building a satellite for the Asia-Pacific region. Following Intelsat 29e’s successful entry into service in March 2016 and Intelsat 31 being placed into service in late July 2016, we plan to launch two more satellites in 2016, two satellites in 2017 and one satellite in 2018, and will continue work on the 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, thereby increasing our total transmission capacity. Over the course of the Guidance Period, 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.