Intelsat Announces First Quarter 2017 Results

Intelsat S.A. announced financial results for the three months ended March 31, 2017.

Intelsat reported total revenue of $538.5 million and net loss attributable to Intelsat S.A. of $34.6 million for the three months ended March 31, 2017.

Intelsat reported EBITDA¹, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of $398.1 million and Adjusted EBITDA¹ of $409.8 million, or 76 percent of revenue for the three months ended March 31, 2017.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “Revenue of $538 million and Adjusted EBITDA of $410 million for the first quarter reflect our continuing business transition as we continue to make progress on the initiatives that will enable new services and create top line growth for our company. Over the course of the first quarter, Intelsat 33e and Intelsat 32e entered into service. Our managed services, IntelsatOne^® Flex, are attracting new customers and will begin to generate incremental revenues as these networks activate over the course of 2017.”

Mr. Spengler continued, “Growth in our media business was driven by the two fully-committed satellites placed into service in 2016. While we continue to work through some near-term headwinds, our network services and government businesses are leveraging the higher performance services available from the Intelsat Epic^NG network, which is now available on five continents. Backlog as of March 31, 2017 was $8.5 billion.”

Mr. Spengler concluded, “Our proposed conditional merger with OneWeb, which was announced on 28 February, is pending completion of our announced debt exchange transactions and receipt of certain other approvals. We believe the transaction creates a company with greater growth opportunities and a strong financial foundation. Importantly, we will be better positioned to achieve our shared mission to unlock new applications for satellite-based solutions, connecting people and devices everywhere.”

First Quarter 2017 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 $212.9 million (or 39 percent of Intelsat’s total revenue) for the three months ended March 31, 2017, a decrease of 7 percent compared to the three months ended March 31, 2016.

Media

Media revenue was $225.1 million (or 42 percent of Intelsat’s total revenue) for the three months ended March 31, 2017, an increase of 6 percent compared to the three months ended March 31, 2016.

Government

Government revenue was $91.9 million (or 17 percent of Intelsat’s total revenue) for the three months ended March 31, 2017, a decline of 11 percent compared to the three months ended March 31, 2016.

Average Fill Rate

Intelsat’s average fill rate on our approximately 2,050 station-kept wide-beam transponders was 78 percent at March 31, 2017, compared to 77 percent as of December 31, 2016. Note that Intelsat 31, an in-orbit spare satellite, is not included in the station-kept transponder count. Separately, our fleet includes approximately 650 36MHz units of high-throughput Intelsat Epic^NG capacity.

Satellite Launches

Intelsat 32e, the Intelsat Epic^NG Ku-band payload, was successfully launched on February 14, 2017 and entered service on March 30, 2017.

The company has two additional satellite launches scheduled for 2017: Intelsat 35e in late June 2017 on a SpaceX, Falcon 9 rocket; and Intelsat 37e in the third quarter of 2017 on an Arianespace, Ariane 5 rocket.

Contracted Backlog

At March 31, 2017, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $8.5 billion, as compared to $8.7 billion at December 31, 2016.

Conditional Combination Agreement with WorldVu Satellites Limited (“OneWeb”)

Intelsat and OneWeb announced on February 28, 2017 that they had entered into a conditional combination agreement (the “Combination Agreement”), pursuant to and subject to the terms and conditions of which, OneWeb, the builder of a new Low Earth Orbit (“LEO”) global communications system, will merge with and into Intelsat to create a next-generation communications company (the “Merger”). In addition, subject to the terms and conditions of a share purchase agreement between Intelsat and SoftBank Group Corp. (“SoftBank”), which currently owns equity in OneWeb and has additional investments in OneWeb pending subject to certain conditions, SoftBank is expected to invest an additional $1.7 billion in newly issued common and preferred equity of the combined company (the “SoftBank Investment”) to support the acceleration of the combined company’s growth strategies and strengthen Intelsat’s capital structure.

The Merger and the SoftBank Investment are expected to be completed late in the third quarter of 2017, and are conditioned upon the consummation of certain Intelsat debt exchange offers, the receipt of certain regulatory approvals, and the consent and approval by both Intelsat and OneWeb shareholders, as well as other customary closing conditions. Further details on the status of the exchange offers are provided below. There can be no assurance that the Merger or the SoftBank Investment will be completed, or whether the terms will be amended from those described above.

Capital Structure Activities

In January 2017, Intelsat (Luxembourg) S.A. completed an exchange offer whereby it exchanged $403.3 million aggregate principal amount of its 6 ¾% Senior Notes due 2018 (the “2018 Lux Notes”) for an equal aggregate principal amount of its newly issued 12.5% Senior Notes due 2024 (the “2024 Lux Notes”). This exchange consisted of the tender of $377.6 million aggregate principal amount of 2018 Lux Notes held by Intelsat Connect Finance S.A. which it acquired as a result of exchange transactions completed in December 2016, together with $25 million aggregate principal amount of 2018 Lux Notes that Intelsat (Luxembourg) S.A. repurchased in the first quarter of 2015.

On March 24, 2017, Intelsat S.A. announced that its indirect wholly-owned subsidiaries, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”), Intelsat Connect Finance S.A. (“ICF”), and Intelsat (Luxembourg) S.A. (“Intelsat Luxembourg” and, together with Intelsat Jackson and ICF, the “Issuers”) each had commenced an offer or offers to exchange (collectively, the “Exchange Offers”) certain of their respective outstanding senior unsecured notes (the “Existing Notes”) for new Exchange Notes.

The Exchange Offers and related Consent Solicitations are being conducted pursuant to the Combination Agreement. The Exchange Offers are subject to certain conditions precedent, including, among others, the tender of a minimum of 85% of the aggregate outstanding principal amount of each series of Existing Notes.

On April 21, 2017, Intelsat announced that the deadline for tenders in the Exchange Offers had been extended to May 10, 2017.

Financial Results for the Three Months Ended March 31, 2017

On-Network revenues generally include revenue from any services delivered via our satellite or ground network. On-Network services also include revenues from our channel services product, which are not detailed here as they are immaterial in size and we no longer actively market these services. Off-Network and Other Revenues generally include 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 $2.4 million to $491.4 million as compared to the three months ended March 31, 2016:

• Transponder services reported an aggregate decrease of $1.5 million, primarily due to a $19.3 million decrease in revenue from network services customers, partially offset by a $17.8 million increase from media customers. The network services decline was mainly due to previously noted lower pricing on renewing wide-beam services for enterprise and wireless infrastructure related to activity in Africa, and non-renewals of point-to-point services from customers operating in Africa and Latin America. The network services decline was also due to non-renewals of services related to the challenging economic environment in Russia. The media increase resulted primarily from growth in direct-to-home television services in the Latin America, Caribbean and Africa regions, partially offset by declines in the Asia-Pacific and North America regions.
• Managed services reported an aggregate increase of $0.3 million, largely due to a net increase of $8.1 million in revenue from network services customers for broadband services for primarily air and maritime mobility applications, largely offset by declines in revenue of $2.2 million from network services customers for point-to-point trunking applications, which are switching to fiber alternatives, and a $1.7 million decrease from media customers for occasional video solutions.

Total Off-Network and Other Revenues reported an aggregate decline of $11.8 million, or a decrease of 20 percent, to $47.0 million, as compared to the three months ended March 31, 2016:

• Transponder, MSS and other Off-Network services reported an aggregate decrease of $10.8 million, primarily due to reduced sales of customer premises equipment and decreases in services for government applications, largely related to sales of Off-Network managed services.
• Satellite-related services reported a slight aggregate decrease of $1.0 million, primarily due to decreased revenue from professional services supporting third-party satellites.

For the three months ended March 31, 2017, 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 $3.0 million, or 3 percent, to $84.5 million, as compared to the three months ended March 31, 2016. This reflects a decrease of $8.4 million largely due to lower cost of sales for customer premise equipment related to our government customer set and declines in cost of Off-Network fixed satellite services and managed services capacity purchased in support of our government business. This was partially offset by an increase of $1.8 million in staff-related expenses in relation to the company’s managed services strategy, an increase of $1.4 million in satellite-related insurance costs due to recent launches and a $1.2 million increase in licenses and fees.

Selling, general and administrative expenses remained consistent at $57.3 million, as compared to the three months ended March 31, 2016. A $6.4 million increase in professional services fees were substantially offset by a $6.6 million decline in bad debt expense from the Latin America region.

Depreciation and amortization expense increased by $10.3 million, or 6 percent, to $179.1 million, as compared to the three months ended March 31, 2016.

Interest expense, net consists of the interest expense we incur offset by interest income earned and the amount of interest we capitalize related to assets under construction. Interest expense, net increased by $29.3 million, or 14 percent, to $246.2 million for the three months ended March 31, 2017, as compared to $216.9 million in the three months ended March 31, 2016. This was principally due to a net increase of $18.1 million in interest expense primarily driven by new debt issuances in 2016, which was offset by certain discounted debt repurchases and exchanges in 2016, and an increase of $10.4 million from lower capitalized interest for the three months ended March 31, 2017, primarily resulting from a decreased number of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $11.8 million for the three months ended March 31, 2017, due to the amortization of deferred financing fees and the accretion and amortization of discounts and premiums.

Other income, net was $1.3 million for the three months ended March 31, 2017, as compared to other expense, net of $0.6 million for the three months ended March 31, 2016. The increase of $1.9 million was primarily due to a $2.0 million increase in income related to our business conducted in Brazilian reais.

Provision for income taxes was $6.8 million for the three months ended March 31, 2017, as compared to $5.4 million for the three months ended March 31, 2016. The increase was principally due to higher income for our U.S. subsidiaries for the three months ended March 31, 2017. Cash paid for income taxes, net of refunds, totaled $16.5 million for the three months ended March 31, 2017, as compared to $11.6 million for the three months ended March 31, 2016.

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

Net loss attributable to Intelsat S.A. was $34.6 million for the three months ended March 31, 2017, compared to net income attributable to Intelsat S.A. of $15.3 million for the same period in 2016.

Net loss per diluted common share attributable to Intelsat S.A. was $0.29 for the three months ended March 31, 2017, compared to net income per diluted common share of $0.13 for the same period in 2016.

EBITDA was $398.1 million for the three months ended March 31, 2017, compared to $407.5 million for the same period in 2016.

Adjusted EBITDA was $409.8 million for the three months ended March 31, 2017, or 76 percent of revenue, compared to $417.7 million, or 76 percent of revenue, for the same period in 2016.

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 Used in Operations

Net cash provided by operating activities was $178.4 million for the three months ended March 31, 2017, and free cash flow used in operations¹ was $18.4 million for the same period. 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) and other payments for satellites from financing activities. Payments for satellites and other property and equipment from investing activities during the three months ended March 31, 2017 was $178.5 million.

Financial Outlook 2017

Today, Intelsat reaffirmed its 2017 revenue and Adjusted EBITDA guidance issued on February 28, 2017, in which the company expects the following:

Revenue: Intelsat forecasts full-year 2017 revenue to be in a range of $2.180 billion to $2.225 billion.

Adjusted EBITDA: Intelsat forecasts Adjusted EBITDA performance for the full-year 2017 to be in a range of $1.655 billion to $1.700 billion.

Capital Expenditures: As disclosed on February 28, 2017, in light of the proposed Merger with OneWeb, we will defer providing guidance on capital expenditures prior to the completion of the transaction. Once the Merger is completed, the results of a thorough technical and business evaluation will be quantified to produce a combined capital expenditure plan.

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 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.