Intelsat Announces Third Quarter 2017 Results

26 October 2017

Intelsat S.A. announced financial results for the three months ended September 30, 2017.

Intelsat reported total revenue of $538.8 million and a net loss attributable to Intelsat S.A. of $30.4 million for the three months ended September 30, 2017.

Intelsat reported EBITDA1, or earnings before net interest, loss/(gain) on early extinguishment of debt, taxes and depreciation and amortization, of $414.6 million and Adjusted EBITDA1 of $420.5 million, or 78 percent of revenue, for the three months ended September 30, 2017.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “Our network services business is continuing to move toward a high-throughput satellite model of greater volume and lower price applications, such as mobility, while our media and government businesses are generally performing according to plan. Our third quarter 2017 revenue of $539 million, and Adjusted EBITDA of $420 million reflect the ongoing transition of our business.”

Mr. Spengler continued, “During the third quarter, we launched two satellites successfully, completing our schedule for this year. Intelsat 35e entered into service in August, and Intelsat 37e, our fifth Intelsat EpicNG satellite, launched on September 29th and is expected to enter service in the first quarter of 2018. We now have a global, resilient, highly efficient and high performance technology base that will support our efforts in mobile broadband, wireless infrastructure, government, and corporate data networks for the next decade.”

Mr. Spengler concluded, “As we look to the fourth quarter and 2018, our emphasis is on commercializing Intelsat EpicNG and promoting Intelsat EpicNG -enabled managed services, such as IntelsatOne Flex, to improve the dynamics in our fixed and mobile broadband businesses. We continue to support the development of antenna and ground technologies that will simplify access and optimize the efficiency of our satellite technology, enabling Intelsat to unlock new growth opportunities in areas such as mobility and deliver ongoing performance improvements to our customers.”

Third 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 $211.5 million (or 39 percent of Intelsat’s total revenue) for the three months ended September 30, 2017; a decrease of 5 percent compared to the three months ended September 30, 2016.

Media Media revenue was $236.7 million (or 44 percent of Intelsat’s total revenue) for the three months ended September 30, 2017; an increase of 9 percent compared to the three months ended September 30, 2016. The increase was largely a result of advance payments forfeited and fees paid by a customer upon partial termination of services.

Government Government revenue was $84.6 million (or 16 percent of Intelsat’s total revenue) for the three months ended September 30, 2017; a decline of 13 percent compared to the three months ended September 30, 2016.

Average Fill Rate Intelsat’s average fill rate on our approximately 2,025 station-kept wide-beam 36 MHz equivalent transponders was 78 percent at September 30, 2017, consistent with 78 percent as of June 30, 2017. Separately, our fleet includes approximately 825 36 MHz equivalent units of high-throughput Intelsat EpicNG capacity. Satellite Launches Intelsat 35e, the fourth of our Intelsat EpicNG next generation high-throughput satellites, completed inorbit testing and entered service at 325.5°E on August 15, 2017.

Intelsat 37e was successfully launched on September 29, 2017, on an Arianespace, Ariane 5 rocket. This satellite, which will replace Intelsat 901 in the Atlantic Ocean region, is expected to enter into service in the first quarter of 2018 following the completion of in-orbit testing.

Contracted Backlog At September 30, 2017, Intelsat’s backlog, representing expected future revenue under existing contracts with customers, was $7.9 billion, as compared to $8.2 billion at June 30, 2017.

Capital Structure Activities On July 5, 2017, Intelsat Jackson completed an offering of $1.5 billion aggregate principal amount of 9.75% Senior Notes due 2025, and used the net proceeds from the sale of the notes, along with other available cash, to satisfy and discharge all $1.5 billion aggregate principal amount of Intelsat Jackson’s senior notes due in 2019, and to pay related fees and expenses.

Financial Results for the Three Months Ended September 30, 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. OffNetwork 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 an increase of $3.3 million to $496.6 million, or an increase of 1 percent, as compared to the three months ended September 30, 2016:
 Transponder services reported an aggregate decrease of $5.1 million, primarily due to a $10.4 million decline in revenue from network services customers, which was partially offset by a $4.9 million increase in revenue from media customers. The network services decline was largely due to non-renewals and contraction of services for enterprise and wireless infrastructure in the Latin America, Europe, and Asia-Pacific regions, partially offset by revenue recovery from a customer in Latin America. The increase in media revenue resulted primarily from growth in direct-to-home (“DTH”) television services in Africa, partially offset by nonrenewals and termination of services related in part to the end of life of certain satellites. 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 $8.8 million, largely due to an increase of $13.5 million in revenue related to advance payments forfeited and fees paid by a customer upon partial termination of services and an increase of $4.3 million in revenue from network services customers for broadband solutions for maritime mobility and aero applications. These increases were partially offset by a decrease of $4.9 million in revenue from our network services customers for point-to-point trunking applications, which are switching to fiber alternatives, and a decrease of $3.8 million in managed services for our government applications, primarily related to the previously announced termination of a contract.

Total Off-Network and Other Revenues reported an aggregate decline of $7.2 million, or a decrease of 15 percent, to $42.2 million, as compared to the three months ended September 30, 2016:

 Transponder, MSS and other Off-Network services reported an aggregate decrease of $5.8 million, primarily due to decreases in services for government applications, largely related to sales of customer premises equipment that occurred in 2016. This was partially offset by increased revenue from third-party services for a media customer.

 Satellite-related services reported an aggregate decrease of $1.5 million, primarily resulting from decreased revenue from support for third-party satellites and the previously announced termination of a government contract.
For the three months ended September 30, 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 $10.3 million, or 12 percent, to $78.1 million, as compared to the three months ended September 30, 2016. Of this decrease, $8.2 million was largely due to lower cost of sales for customer premises equipment related to our government customer set; and declines in costs of our satellite-related services business, offnetwork fixed satellite services and managed services capacity purchased in support of our government business. There was also a decrease of $1.4 million in staff-related expenses.

Selling, general and administrative expenses declined by $11.1 million, or 19 percent, to $47.9 million, as compared to the three months ended September 30, 2016. The decrease was largely due to an $8.0 million decline in bad debt expense primarily in the Latin America region and a $2.3 million decline in staff-related expenses.

Depreciation and amortization expense increased by $3.8 million, or 2 percent, to $178.7 million, as compared to the three months ended September 30, 2016, due to the net increase in depreciation related to new satellites entering service over the course of the last 12 months.
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 $18.8 million, or 8 percent, to $261.8 million for the three months ended September 30, 2017, as compared to $243.0 million in the three months ended September 30, 2016. This increase was principally due to a net increase of $12.3 million driven by the Company’s new debt issuances at higher interest rates, partially offset by certain debt repurchases and exchanges in 2016 and 2017; together with a net increase of $6.3 million from lower capitalized interest for the three months ended September 30, 2017, primarily resulting from a decreased number of satellites and related assets under construction.

The non-cash portion of total interest expense, net was $12.3 million for the three months ended September 30, 2017, due to the amortization of deferred financing fees and the accretion and amortization of discounts and premiums.

Other income, net was $1.8 million for the three months ended September 30, 2017, as compared to $0.3 million for the three months ended September 30, 2016. The variance of $1.5 million was primarily due to a $1.5 million increase in income mainly related to our business conducted in Brazilian reais.

Income tax benefit increased by $1.8 million to $1.2 million for the three months ended September 30, 2017, as compared to income tax expense of $0.7 million for the three months ended September 30, 2016. The increase was principally due to lower income for the three months ended September 30, 2017. Cash paid for income taxes, net of refunds, totaled $11.4 million for the three months ended September 30, 2017, as compared to $3.9 million for the three months ended September 30, 2016.

Net Income (Loss), Net Income (Loss) per Diluted Common Share attributable to Intelsat S.A., EBITDA and Adjusted EBITDA
Net loss attributable to Intelsat S.A. was $30.4 million for the three months ended September 30, 2017, compared to net income attributable to Intelsat S.A. of $195.6 million for the same period in 2016, which included a net gain on extinguishment of debt of $219.6 million.

Net loss per diluted common share attributable to Intelsat S.A. was $0.26 for the three months ended September 30, 2017, compared to net income per diluted common share of $1.65 for the same period in 2016.
EBITDA was $414.6 million for the three months ended September 30, 2017, compared to $395.6 million for the same period in 2016.
Adjusted EBITDA increased 4 percent to $420.5 million for the three months ended September 30, 2017, or 78 percent of revenue, compared to $404.9 million, or 75 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 From (Used in) Operations Net cash provided by operating activities was $212.9 million for the three months ended September 30, 2017, and free cash flow from operations1 was $97.0 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). Payments for satellites and other property and equipment during the three months ended September 30, 2017 was $98.9 million, and payments for satellites from financing activities was $17.1 million for the three months ended September 30, 2017.

Financial Outlook 2017 Today, Intelsat provided an update on its 2017 revenue and Adjusted EBITDA guidance issued on June 16, 2017, stating that the Company expects the following:
Revenue: As a result of current business trends, the Company now expects to come in at the bottom of the previously disclosed revenue guidance range of $2.150 billion to $2.180 billion for 2017.
Adjusted EBITDA: Intelsat maintained its forecast for Adjusted EBITDA performance for the full-year 2017 to be in a range of $1.640 billion to $1.670 billion.

Capital Expenditures: Intelsat maintained its 2017 capital expenditure guidance ranges for the three calendar years 2017 through 2019 (the “Guidance Period”) issued on June 16, 2017:
 2017: $500 million to $550 million;  2018: $400 million to $475 million; and  2019: $400 million to $500 million.
Our capital expenditure guidance includes capitalized interest. The net number of transponder equivalents is expected to increase by a compound annual growth rate (“CAGR”) of 10 percent as a result of the net new capacity entering service between January 1, 2017 and December 31, 2019. This reflects the incremental capacity related to the launches of the Intelsat EpicNG high-throughput satellites, five of which are expected to enter service during the Guidance Period, net of satellites deorbited or moved to inclined service. Capital expenditure incurrence is subject to timing of achievement of contract, satellite manufacturing, launch and other milestones.