Intelsat Announces First Quarter 2018 Results

Intelsat reported total revenue of $543.8 million and net loss attributable to Intelsat S.A. of $66.8 million for the three months ended March 31, 2018.

In the first quarter of 2018, we adopted the provisions of the Financial Accounting Standards Board Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). As a result of the adoption of ASC 606, total revenue for the three months ended March 31, 2018 reflects $25.1 million primarily related to the significant financing component identified in our customer contracts.

Total revenue excluding the effects of ASC 606 was $518.8 million for the three months ended March 31, 2018.

Intelsat reported EBITDA¹, or earnings before net interest, gain on early extinguishment of debt, taxes and depreciation and amortization, of $405.4 million and Adjusted EBITDA¹ of $418.6 million, or 77 percent of revenue for the three months ended March 31, 2018. Total Adjusted EBITDA excluding the effects of ASC 606 was $392.3 million, or 76 percent of revenue, for the three months ended March 31, 2018.

Intelsat’s Chief Executive Officer, Stephen Spengler, said, “We are leveraging our scale and global presence to drive returns on our network, making solid progress on our operating priorities for 2018. First quarter highlights included new broadband contracts on our Intelsat Epic^NG satellites in Africa and Asia, as well as a North American hosted payload program for the U.S. Government. In addition, we introduced a new shared services platform for our media customers that will drive incremental value at our video neighborhood in Central and Eastern Europe.”

Mr. Spengler continued, “Our two planned launches for the second half of 2018, Intelsat 38 and Horizons 3e, are further examples of creatively utilizing our global orbital rights for satellite partnerships, delivering capital expenditure efficiencies while providing for revenue continuity and high-performance inventory for growth.”

First Quarter 2018 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 $198.6 million (or 37 percent of Intelsat’s total revenue) for the three months ended March 31, 2018, a decrease of 7 percent compared to the three months ended March 31, 2017. There was an immaterial effect from ASC 606 on our network services revenue.

Media

Media revenue was $239.3 million (or 44 percent of Intelsat’s total revenue) for the three months ended March 31, 2018, an increase of 6 percent compared to the three months ended March 31, 2017. Excluding the effects of ASC 606, media revenue was $222.5 million for the three months ended March 31, 2018, a decrease of 1 percent compared to the three months ended March 31, 2017.

Government

Government revenue was $97.3 million (or 18 percent of Intelsat’s total revenue) for the three months ended March 31, 2018, an increase of 6 percent compared to the three months ended March 31, 2017. Excluding the effects of ASC 606, government revenue was $89.1 million for the three months ended March 31, 2018, a decrease of 3 percent compared to the three months ended March 31, 2017.

Average Fill Rate

Intelsat’s average fill rate on our approximately 1,850 station-kept wide-beam transponders was 80 percent at March 31, 2018, compared to 79 percent as of December 31, 2017. In addition, our fleet includes approximately 1,150 36MHz units of high-throughput Intelsat Epic^NG capacity, an increase from 825 units at December 31, 2017, reflecting the entry into service of Intelsat 37e early in the first quarter of 2018.

Satellite Launches

Intelsat has two additional satellite launches planned for the second half of 2018 on Arianespace. Intelsat 38, a satellite jointly built with Azerbaijan’s commercial satellite operator, Azercosmos OJSC, is designed to provide media and broadband services in Central and Eastern Europe, Africa, and Asia. The Horizons 3e satellite, Intelsat’s joint venture satellite with JSAT, completes the initial buildout of the Intelsat Epic^NG high-throughput global network, providing service coverage in the Asia-Pacific region.

Contracted Backlog

At March 31, 2018, Intelsat’s contracted backlog, representing expected future revenue under existing contracts with customers, was $8.6 billion, including $1.0 billion attributable to ASC 606. Excluding the effects of ASC 606, contracted backlog was $7.6 billion, as compared to $7.8 billion at December 31, 2017.

Financial Results for the Three Months Ended March 31, 2018

On-Network revenues generally include revenue from any services delivered via our satellite and ground network. 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 revenue for the three months ended March 31, 2018 increased by $5.3 million, or 1 percent, as compared to the three months ended March 31, 2017. Excluding the impact of ASC 606 adjustments, total revenue for the three months ended March 31, 2018 decreased by $19.7 million, or 4 percent, as compared to the three months ended March 31, 2017. By service type, our revenues increased or decreased due to the following:

Total On-Network Revenues increased by $6.1 million to $497.6 million as compared to the three months ended March 31, 2017. Excluding the $25.5 million attributable to ASC 606, total on-network revenues declined by $19.3 million, or 4 percent, to $472.1 million:

• Transponder services revenue of $395.7 million reflects an aggregate increase of $6.8 million, of which $23.7 million is attributable to ASC 606, comprised of $15.4 million and $8.2 million from the media and government businesses, respectively. Exclusive of these revenues attributable to ASC 606, transponder services declined by an aggregate amount of $16.9 million, due primarily to a net decrease in revenue from network services applications of $11.2 million, reflecting non-renewals and renewal pricing at lower rates for wide-beam services in Latin America and Europe, partially offset by growth in maritime and aeronautical mobility services on the Intelsat Epic^NG platform. In addition, transponder services for media applications declined by $5.3 million, due to lower termination fees from certain customers in North America and lower revenues from cash basis customers as compared to the first quarter of 2017.
• Managed services revenue of $100.7 million reflects an aggregate decrease of $0.2 million, of which $1.7 million was attributable to ASC 606, substantially all of which was related to the media business. Excluding the effects of ASC 606, managed services declined by $1.9 million, related in part to a $3.6 million decline in revenue from network services customers for point-to-point trunking, which are switching to fiber alternatives, and a $4.4 million decline related to a previously disclosed government contract which ended in the first quarter of 2017, offset somewhat by a $3.9 million increase in revenue from network services customers for mobility applications and a $1.6 million increase in revenue from managed media solutions.

Total Off-Network and Other Revenues reported an aggregate decline of $0.8 million, or a decrease of 2 percent, to $46.2 million, as compared to the three months ended March 31, 2017. Excluding adjustments attributable to ASC 606 of $0.4 million Off-Network and Other Revenues were effectively unchanged in the aggregate from the first quarter of 2017:

• Transponder, MSS and other Off-Network services reported an aggregate decrease of
  $0.5 million, inclusive of a decrease of $0.4 million attributable to ASC 606 adjustments. Excluding this, Transponder, MSS and other Off-Network services decreased slightly from the first quarter of 2017, reflecting a $3.8 million decline in revenue for third party government applications in connection with a previously disclosed termination of a maritime contract, partially offset by an increase of $2.8 million from managed off-network revenues for network services and media services and an increase of $1.4 million in revenue from MSS services.
• Satellite-related services reported a slight aggregate decrease of $0.4 million, primarily due to decreased revenue from professional services supporting third-party satellites.

For the three months ended March 31, 2018, 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 $1.9 million, or 2 percent, to $82.6 million for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The decrease was primarily due to a decrease of $2.0 million in satellite-related insurance and licensing costs.

Selling, general and administrative expenses increased by $3.0 million, or 5 percent, to $60.3 million for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase was primarily due to an increase of $5.4 million in professional fees primarily due to our liability management initiatives, and an increase of $1.6 million in bad debt expense, partially offset by a decrease of $3.7 million in staff-related expenses associated with lower share-based compensation.

Depreciation and amortization expense decreased by $12.7 million, or 7 percent, to $166.5 million, as compared to the three months ended March 31, 2017. The decrease was primarily related to a number of satellites becoming fully depreciated during the period, offset partially by new satellite and ground segment assets placed into service.

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 $36.2 million, or 15 percent, to $282.5 million for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase in interest expense, net was principally due to an increase of $29.5 million related to the significant financing component identified in customer contracts in accordance with ASC 606. In addition, interest expense, net increased by $24.7 million primarily driven by our new debt issuances and amendments to our senior secured credit facility with higher interest rates, partially offset by certain debt repurchases in 2017, and an increase of $4.2 million from lower capitalized interest primarily resulting from decreased levels of satellites and related assets under construction. These increases were partially offset by a decrease of $21.5 million corresponding to the increase in fair value of the interest rate cap contracts we entered into in 2017 and hold.

The non-cash portion of total interest expense, net was $20.1 million for the three months ended March 31, 2018, due to the amortization of deferred financing fees, accretion and amortization of discounts and premiums, and interest expense related to the significant financing component identified in customer contracts in accordance with ASC 606, as well as the gain offset from the increase in the fair value of interest rate cap contracts we hold.

Other income, net was $4.4 million for the three months ended March 31, 2018, as compared to $1.3 million for the three months ended March 31, 2017. The increase of $3.1 million was primarily related to an increase in other income related to leased service activities.

Provision for income taxes increased by $15.6 million to $22.4 million for the three months ended March 31, 2018, as compared to the three months ended March 31, 2017. The increase was principally due to additional tax expense in our U.S. subsidiaries as a result of the U.S. Tax Cuts and Jobs Act, which was enacted on December 22, 2017. Cash paid for income taxes, net of refunds, totaled $2.2 million and $16.5 million for the three months ended March 31, 2018 and 2017, respectively.

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 $66.8 million for the three months ended March 31, 2018, compared to net loss attributable to Intelsat S.A. of $34.6 million for the same period in 2017.

Net loss per diluted common share attributable to Intelsat S.A. was $0.56 for the three months ended March 31, 2018, compared to net loss per diluted common share of $0.29 for the same period in 2017.

EBITDA was $405.4 million for the three months ended March 31, 2018, compared to $398.1 million for the same period in 2017.

Adjusted EBITDA was $418.6 million for the three months ended March 31, 2018, or 77 percent of revenue, compared to $409.8 million, or 76 percent of revenue, for the same period in 2017. Excluding the effects of ASC 606, Adjusted EBITDA declined by 4 percent to $392.3 million, or 76 percent of revenue in the first quarter of 2018 as compared to the same period in 2017. Please see the table below for further detail of the impacts on Adjusted EBITDA as a result of ASC 606.

Free Cash Flow From (Used In) Operations

Net cash provided by operating activities was $80.9 million for the three months ended March 31, 2018, and free cash flow from operations¹ was $16.6 million for the same period. Free cash flow from (used in) operations is defined as net cash provided by (used in) 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, 2018 was $68.0 million.

Financial Outlook 2018

Today, Intelsat reaffirmed its 2018 revenue, Adjusted EBITDA and capital expenditure guidance issued on February 26, 2018, in which the Company expects the following results, excluding the impact of ASC 606:

Revenue: Intelsat forecasts full-year 2018 revenue to be in a range of $2.060 billion to $2.110 billion.

Adjusted EBITDA: Intelsat forecasts Adjusted EBITDA performance for the full-year 2018 to be in a range of $1.560 billion to $1.605 billion.

Capital Expenditures: Intelsat issued its 2018 capital expenditure guidance for the three calendar years 2018 through 2020 (the “Guidance Period”). Over the next three years we are in a cycle of lower than average required investment due to timing of replacement satellites and smaller satellites being built.

We expect the following capital expenditure ranges:

By early 2019, we plan to have completed the investment program in the current series of Intelsat Epic^NG high-throughput satellites and payloads, thereby increasing our total transmission capacity. By the conclusion of the Guidance Period at the end of 2020, the net number of transponder equivalents is expected to increase by a compound annual growth rate (“CAGR”) of approximately 5 percent, reflecting the net activity of satellites entering and leaving service during the Guidance Period. Capital expenditure incurrence is subject to the timing of achievement of contract, satellite manufacturing, launch and other milestones.

Our capital expenditure guidance includes capitalized interest, which is expected to average approximately $40 million annually over the Guidance Period.