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Intelsat Announces Third Quarter 2016 Results


27 October 2016

Intelsat S.A. announced financial results for the three months ended September 30, 2016.

Intelsat reported total revenue of $542.7 million for the three months ended September 30, 2016. Net income attributable to Intelsat S.A. was $195.6 million for the three months ended September 30, 2016.

Intelsat reported EBITDA1, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of $395.6 million and Adjusted EBITDA1 of $404.9 million, or 75 percent of revenue for the three months ended September 30, 2016.

“Our third quarter financial results, $543 million in revenue and $405 million in Adjusted EBITDA, demonstrate stability in revenues and are on track with our guidance for 2016,” said Stephen Spengler, Chief Executive Officer, Intelsat. “Our objective for this year is to build a solid foundation that will support Intelsat’s strategy to deploy space-based solutions that unlock new and faster growing opportunities. We are delivering on this plan. During the third quarter, we successfully launched two satellites, bringing the total number of satellites launched to four in 2016. Intelsat 36 is now in service and Intelsat 33e is scheduled to enter into service in the first quarter of 2017.” Mr. Spengler continued, “As we build momentum in our Intelsat EpicNG program, we bring the higher performance and improved economics vitally required by our telecom and mobility customers, improving our network services business over time. Two fully incremental media satellites are now in service: Intelsat 31 and Intelsat 36. They are enhancing strong direct-to-home neighborhoods and lifting the trajectory of our media business. The extension of the CBSP contract through the end of the fiscal year, as well as strong renewal rates across this customer set, create stability for our government business. Backlog as of September 30, 2016 was $8.9 billion, over four times Intelsat’s annual revenue.”
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Mr. Spengler concluded, “Moving forward, we will build the commercial pipeline for our new Intelsat EpicNG satellites, implement a new IntelsatOne® Flex service strategy for maritime and enterprise customers, and continue our liability management initiatives.”

Third 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 $222.3 million (or 41 percent of Intelsat’s total revenue) for the three months ended September 30, 2016, a decrease of 16 percent compared to the three months ended September 30, 2015.

Media Media revenue was $216.6 million (or 40 percent of Intelsat’s total revenue) for the three months ended September 30, 2016, essentially flat when compared to the three months ended September 30, 2015.

Government Government revenue was $96.8 million (or 18 percent of Intelsat’s total revenue) for the three months ended September 30, 2016, an increase of 2 percent compared to the three months ended September 30, 2015.

Average Fill Rate Intelsat’s average fill rate on our approximately 2,125 station-kept wide-beam transponders was 77 percent at September 30, 2016, an increase compared to the average fill rate of 76% as of June 30, 2016. Note that Intelsat 31, an in-orbit spare satellite, is not included in the station-kept transponder count. 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 of 2016.

Satellite Launches On August 24, 2016, Intelsat 33e and Intelsat 36 were successfully launched. Intelsat 36 entered into service late in the third quarter of 2016. On September 9, 2016, the company announced that due to a malfunction in the primary thruster used for orbit raising, the in-service date for Intelsat 33e would be delayed. The satellite is expected to arrive at its 60°E orbital location for in-orbit testing late this year, and is currently scheduled to enter into service in the first quarter of 2017. The Intelsat 33e antennas and reflectors have been deployed; there is no evidence of any impact to the communications payload.

The company has three satellite launches scheduled for 2017: Intelsat 32e, an Intelsat EpicNG Ku-band payload in the first quarter of 2017; Intelsat 35e in the second quarter of 2017, providing that there are no changes to SpaceX’s launch manifest as a result of its recent anomaly; and Intelsat 37e in the fourth quarter of 2017.


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Contracted Backlog At September 30, 2016, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $8.9 billion, as compared to $9.2 billion at June 30, 2016.

Capital Structure Updates and Debt Transactions In September 2016, our subsidiary, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”), completed a debt exchange receiving $141.4 million aggregate principal amount of Intelsat Jackson’s 6 5/8% Senior Notes due 2022 (“2022 Jackson Notes”) in exchange for $99.7 million aggregate principal amount of newly issued Intelsat Jackson 8% Senior Secured Notes due 2024 and $17.0 million in cash. In connection with this exchange, Intelsat Jackson also received a consent from holders of $141.5 million aggregate principal amount of 2022 Jackson Notes in exchange for $9.2 million in cash to amend the indenture governing the 2022 Jackson Notes, among other things to: (i) eliminate substantially all of the restrictive covenants and certain events of default pertaining to the 2022 Jackson Notes, and (ii) waive any defaults or events of default potentially existing under the indenture governing the 2022 Jackson Notes as of September 12, 2016.

Financial Results for the Three Months Ended September 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 Revenues also include revenue from consulting and other services and sales of customer premises equipment.

Total On-Network Revenues reported a decline of $40.3 million, or 8 percent, to $493.3 million as compared to the three months ended September 30, 2015:
 Transponder services reported an aggregate decrease of $32.5 million, primarily due to a $36.3 million decrease in revenue from network services customers, partially offset by a $4.2 million increase 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 increase resulted primarily from growth in direct-tohome television services in the Latin America and Caribbean region, partially offset by declines in the Asia-Pacific and North America regions. 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 $1.7 million, largely due to an increase of $12.2 million in revenue from network services customers for broadband services for air and maritime mobility applications and for services from government customers, partially offset by declines of $6.5 million in revenues primarily from network services customers for point-to-point trunking applications, which are switching to fiber alternatives and $2.1 million from media customers for occasional video solutions.

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 Channel reported an aggregate decrease of $9.5 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 Revenues reported an aggregate increase of $2.1 million, or 5 percent, to $49.4 million as compared to the three months ended September 30, 2015:
 Transponder, MSS and other off-network services reported an aggregate increase of $1.7 million, primarily due to increases in services for government applications, largely related to sales of customer premises equipment, partially offset by lower revenue from third-party transponder services.

 Satellite-related services reported an aggregate increase of $0.5 million, primarily due to increased revenue from support for third-party satellites and other services.
For the three months ended September 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) increased by $10.5 million, or 14 percent, to $88.5 million, as compared to the three months ended September 30, 2015. This reflects an increase of $4.6 million largely due to higher costs of sales for customer premises equipment primarily in support of the company’s government business, a $1.5 million increase in staff-related expenses and a $1.4 million increase in satellite-related insurance costs due to recent launches.

Selling, general and administrative expenses increased by $12.4 million, or 27 percent, to $58.9 million, as compared to the three months ended September 30, 2015. This was primarily due to an increase of $7.9 million in bad debt expense largely related to a limited number of customers in the Latin America and Caribbean region, and an increase of $3.0 million in professional fees primarily related to the company’s liability management initiatives.
Depreciation and amortization expense increased by $3.5 million, or 2 percent, to $174.9 million, as compared to the three months ended September 30, 2015, primarily related to an increase of $16.8 million in depreciation expense due to the impact of satellites placed in service. The increase was partially offset by a net decrease of $10.5 million in depreciation expense due to the timing of certain satellites and ground equipment becoming fully depreciated, 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 mainly 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 $22.3 million, or 10 percent, to $243.0 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The increase was principally due to a net increase of $21.9 million in interest expense primarily resulting from the issuance of new debt in 2016, portions of the proceeds of which (a) are currently expected to be used for liquidity purposes in lieu of a revolving credit facility, and (b) may be used for repayment or redemption of other debt of the Company and its subsidiaries; and
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a net increase of $1.6 million from lower capitalized interest for the three months ended September 30, 2016, primarily resulting from decreased levels of satellites and related assets under construction.
The non-cash portion of total interest expense, net was $6.7 million for the three months ended September 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 $219.6 million for the three months ended September 30, 2016 with no comparable gain or loss for the three months ended September 30, 2015. In the third quarter of 2016, Intelsat Jackson repurchased $673.5 million in aggregate principal amount of the 2022 Jackson Notes. The gain of $219.6 million, consisted of the difference between the carrying value of the debt repurchased and the total cash amount paid (including related fees), together with a write-off of unamortized debt premium and unamortized debt issuance costs.
Other income (expense), net was $0.3 million for the three months ended September 30, 2016, as compared to other expense, net of $4.4 million for the three months ended September 30, 2015. The difference of $4.7 million was primarily due to a $4.5 million decrease in expenses mainly related to our business conducted in Brazilian reais.
Provision for (benefit from) income taxes was $0.7 million for the three months ended September 30, 2016, as compared to an income tax benefit of $19.2 million for the three months ended September 30, 2015. The difference was principally due to the recognition of previously unrecognized tax benefits related to our U.S. subsidiaries in the three months ended September 30, 2015. Cash paid for income taxes, net of refunds, totaled $3.9 million for the three months ended September 30, 2016, as compared to $3.1 million for the three months ended September 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 $195.6 million for the three months ended September 30, 2016, compared to $78.0 million for the same period in 2015.
Net income per diluted common share attributable to Intelsat S.A. was $1.65 for the three months ended September 30, 2016, compared to $0.66 per diluted common share for the same period in 2015.
EBITDA was $395.6 million for the three months ended September 30, 2016, compared to $452.0 million for the same period in 2015.
Adjusted EBITDA was $404.9 million for the three months ended September 30, 2016, or 75 percent of revenue, compared to $458.1 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.
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By Customer Set
Network Services 263,111 $ 45% 222,302 $ 41% Media 216,618 37% 216,637 40% Government 94,704 16% 96,825 18% Other 6,414 1% 6,963 1% 580,847$ 100% 542,727 $ 100%
By Service Type
On-Network Revenues Transponder services 420,855 $ 72% 388,372 $ 72% Managed services 101,295 17% 103,034 19% Channel services 11,386 2% 1,873 0% Total on-network revenues 533,536 92% 493,279 91% Off-Network and Other Revenues Transponder, MSS and other off-network services 37,694 6% 39,365 7% Satellite-related services 9,617 2% 10,083 2% Total off-network and other revenues 47,311 8% 49,448 9% Total 580,847 $ 100% 542,727 $ 100%
Three Months Ended September 30,
2015 2016
Three Months Ended September 30, 2015 2016
Three Months Ended September 30,
Three Months Ended September 30,

Free Cash Flow From (Used in) Operations
Free cash flow from operations1 was $33.1 million for the three months ended September 30, 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 from investing activities and payments for satellites from financing activities during the three months ended September 30, 2016 were $202.8 million and $18.3 million, respectively.

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Financial Outlook 2016 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 three 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 36’s successful entry into service in October 2016 and the expectation of Intelsat 33e entering into service in the first quarter of 2017, we plan to launch 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 two 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.