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SpeedCast International Ltd (ASX:SDA) FY16 Annual
Report and Consolidated Financial Statements
21 March 2017
Review of Operations
The SpeedCast Board of Directors is pleased to report the Group’s
performance for the year ended 31 December 2016. Statutory Revenue, net
profit and operating cash flow metrics have all seen strong positive
growth year-on-year growth despite the difficult market situation.
Statutory revenue increased by 30% to USD 218.0 million from USD 167.6
million in 2015, Net Profit after Tax was up 37% to USD 5.9 million from
last year’s USD 4.3 million and net cash flows from operating activities
increased by 51% to USD 27.0 million from USD 17.9 million in the prior
year. The underlying1 operational results for 2016 continue to reflect
the fundamental financial strength of our business and the acquisitions
completed in the current year. Total underlying revenue amounted to USD
218.0 million, up 30% from 2015; underlying EBITDA2 totalled USD 41.5
million, up 42% from 2015; and our underlying NPATA3 was USD 19.2
million, an increase of 30% on prior year. Refer to the Operating and
Financial Review on page 10 for further information.
Key Developments Fiscal year 2016 has been challenging, yet
transformative for SpeedCast. Significant changes in state of affairs
include:
Global Presence – SpeedCast is now the world’s leading provider of
fully managed remote communication network and IT services with an
extensive global footprint of local support, infrastructure and coverage
coupled with world-class technology and a pervasive safety culture.
SpeedCast has been added by the Standard & Poor’s Dow Jones Indices to
the S&P/ASX 300, effective after the close of market on March 18, 2016.
Financial Performance – Group revenue continued to achieve
double-digit growth year-on-year. The Group’s core service revenues grew
at a faster pace and were 34% above that of 2015.
Major Acquisitions – In 2016 SpeedCast announced or completed four
major acquisitions including Harris CapRock, NewCom International Inc.,
ST Teleport Pte. Ltd. and WINS Limited.
Expansion of Maritime Business – Revenue expanded in the Maritime
division through strategic acquisitions to build a leadership position
in the fast-growing cruise sector.
Steady Energy Business – The Energy sector experienced an extremely
difficult year but SpeedCast managed to win market share and is strongly
positioned for the upturn.
Strong Performance of EEM Business – The Enterprise and Emerging
Markets sector experienced solid growth and represents approximately
half of the Group’s core service revenues pre-Harris CapRock acquisition
with cellular backhaul, government, enterprise and NGOs being the main
revenue drivers.
New Products and Services – A number of innovative products and
services were successfully launched including a 2nd generation of SIGMA
Net and Speedmail+, an email service designed for maritime vessels and
remote sites.
Future developments and results
Likely developments in the operations of the Group have been included in
the Operating and Financial Review. The Group is presently focused on
consolidating its operations to ensure an effective operating model, and
the results for 2017 are expected to achieve a reasonable increase over
2016. Environmental issues The Group’s operations are not regulated by
any significant environmental regulations in any of the operating
countries.
Rounning of amounts The Company is of a kind referred to in the ASIC
Corporations (Rounding in Financial/Directors’ Reports) Instrument
2016/191 issued by the Australian Securities and Investments Commission,
relating to the “rounding off” of amounts in the Directors’ Report and
financial statements. Amounts in the Directors’ Report and financial
statements have been rounded off in accordance with that class order to
the nearest thousand dollars. This Directors’ Report and the
Remuneration Report are signed in accordance with a resolution of the
Board of Directors.
Pierre-Jean Beylier Chief Executive Officer, Executive Director
17March2017
OPERATING AND FINANCIAL REVIEW
Overview
Highlights of the Group’s operating and financial performance during
2016 and up to the date of this report are:
SpeedCast achieved strong double-digit year-on-year growth across all
P&L metrics. Group revenue grew 30% to USD 218.0 million period on
period.
EBITDA1 margin continued to improve through the effective delivery of
cost and operating synergies.
2016 was an exceptional year in terms of M&A activity with the signing
of four acquisitions funded by a combination of debt and equity and all
accretive immediately. Each acquisition has added important
capabilities, infrastructure, customers and reputation that will
contribute to a stronger competitive position and sustainable future
revenue growth.
The Maritime business delivered 57% service revenue growth
year-on-year, driven by continuous penetration in VSAT enabled vessels
and the impact of strategic acquisitions. The Enterprise & Emerging
Markets business grew 26% year over year, and provided a solid
foundation for service revenue growth in 2017 and beyond.
The acquisition of Harris CapRock transforms the Group into the global
leader in the Energy sector in 2017, significantly enhancing its
capabilities at an attractive stage in the industry’s business cycle,
thus preparing the Group to take full advantage as the sector recovers.
Energy service revenue grew 22% year-on-year.
During the year, the Group continued to focus on integration and
achieved significant cost synergies due to economies of scale. An
interim fully franked dividend of AU3.20 cents per ordinary share was
paid on 6 October 2016 for the six months ended 30 June 2016 and a fully
franked dividend of AU2.40 cents per ordinary share was declared for the
six months ended 31 December 2016, which equates to approximately 40% of
underlying NPATA2 per share.
2017 Outlook
The Group expects to grow organically both revenue and EBITDA in 2017
driven by continued growth trends in Maritime, diversification in EEM,
and stabilisation in the Energy sector. Key growth drivers include:
A number of delayed contract wins and activations brought forward from
2016 in the EEM division.
Newly acquired global capabilities opening opportunities in the
growing cruise market for the Maritime division. SpeedCast now has
additional customers, presence and opportunities through the
acquisitions of both Harris CapRock and WINS Limited in 2016.
Continued focus on operational efficiencies and organic growth
to deliver continuous improvement in profitability,
In addition to continued organic growth, the opportunity for further
strategic M&A opportunities will be explored amidst the growing
importance of scale and the consolidation trend in the industry.
In the medium and longer term, SpeedCast will continue to have access to
multiple growth engines and to create new ones, thanks to the diversity
of its business. This is expected to sustain double-digit EBITDA growth,
underpinned by revenue synergies and continued operational leverage.
1 EBITDA: Earnings before interest, tax, depreciation and amortisation 2
NPATA: Net profit after tax and amortisation
Business Strategy and Prospects
SpeedCast’s long-term goal is to consolidate its position as the leader
in remote communications services globally with strong market share in
energy and maritime. SpeedCast’s growth strategy is underpinned by five
pillars:
Underlying market growth;
Market share growth;
Expansion opportunities into adjacent geographic and customer markets;
Continued product innovation and value-added services growth; and
Strategic acquisitions. Maritime Industry
Despite the Energy market downturn affecting the offshore service vessel
(‘OSV’) segment in 2016, the Group achieved notable service revenue
growth year on year for its Maritime business, driven by continuous
adoption of Broadband VSAT systems and the expansion into the
passenger-carrying vessels market. In 2016, Maritime achieved
significant service revenue growth of 57% against FY2015. The number of
active VSAT vessels increased to almost 1,000 by the end of the year,
despite increased levels of churn and service suspensions observed in
the OSV sector. Including L-band and MSS services, in total, SpeedCast’s
Maritime business is now serving more than 10,000 vessels across its
network portfolios. SpeedCast has also invested heavily into research
and development activities to provide best of breed value-added services
to customers. In 2016, the Group successfully launched the 2nd
generation of SIGMA Net and Speedmail+. These R&D capabilities allow the
Group to tailor services to the needs of specific market sectors, and
expand the service portfolio to better serve Maritime customers. The
Group also further expanded its global Ku-band network, by adding new
High Throughput Satellite (HTS) beams to provide additional capacity to
the most trafficked yachting areas in the Caribbean via 3-beam
technology.
Business growth
We continuously strive to expand our subscriber base. Our success in
2016 is due to the expertise of our global team. The team consists
predominately of long-standing industry professionals with years of
experience, granting them a deep understanding of customers’ operations
that enables them to tailor solutions to specific requirements.
We secured a number of significant maritime contracts in the period of
FY2016, and a number of these have been publically announced such as
those awarded by KTsat, MMA Offshore and Ericsson.
KT Sat - continued its partnership with SpeedCast to provide global
Ku-band maritime communications services to up to 150 vessels, which
will be installed over the next 18 months. KT Sat is the largest
satellite service provider in Korea and has been leading the nation’s
satellite communication and broadcasting industry through 6 satellite
launches and service operations.
MMA Offshore - one of the largest marine service providers in the Asia
Pacific region, awarded a multi-year service agreement to SpeedCast to
provide high throughput connectivity across MMA’s expansive global
offshore fleet. MMA will be using SpeedCast’s Ku-band and C-band global
maritime network and value added maritime communication services with
SpeedCast acting as a complete solutions provider for MMA communication
services at sea.
Ericsson – Ericsson selected SpeedCast as its satellite connectivity
solution partner to provide seamless communication globally between ship
and shore, sector. The strategic agreement which leverages both
organizations' global capabilities creates a strong partnership in the
global Maritime sector, enabling both companies to expand their solution
portfolios.
In 2016 SpeedCast inked strategic partnership agreements with Axxess
Marine and e3 Systems to further expand our footprint in the growing
yachting sector.
The acquisition of WINS Limited is expected to fuel further growth in
the Maritime business by providing an entry point into the
passenger-carrying vessels market and creating a strong local presence
in Germany, a key European shipping hub. The acquisition of Harris
CapRock transforms the Group into the leading Maritime VSAT provider,
led by a strong position in the fast growing cruise segment.
These acquisitions further enhance SpeedCast’s R&D capabilities and
significantly increase the breadth and depth of our products and
services portfolio, allowing us to continue to meet and exceed
customers’ expectations and requirements.
Business challenges
As with all commercial operations, SpeedCast operates in a dynamic and
competitive landscape. The Maritime business is well positioned both
operationally and commercially to evolve in line with changing market
conditions and expectations with the objective to ensure that SpeedCast
remains cost competitive, while maintaining our product and solutions’
commercial edge and high quality.
Dropping oil price and a reduction in global trade were the major
headwinds that affected the Maritime business in 2016. Additionally, the
industry was impacted by decreased spend on ships, a high number of
scrapped or laid-up vessels – more than 1500 globally – and the
restructuring of global workforces. Despite these factors, SpeedCast
continued to regularly add vessels to its network throughout the year.
Our Maritime services are constantly expanding to keep up with our
customers’ demands – from simple mobile connectivity to the most
sophisticated tailored solution. A diversified portfolio of available
solutions and a team of experts working in the background supporting our
clients provide a high degree of technical flexibility that allows us to
adapt to any unforeseen situations we may encounter.
Outlook
The fast growing cruise market will be a major growth driver for the
Maritime vertical, proving to be one of the more direct and early
benefits from the Harris CapRock acquisition. In addition, the impact of
Fleet Xpress upon managed VSAT services is expected to show in 2017
while GSM services pricing models will be revisited to drive volume
growth. The Energy market downturn will continue to provide headwinds
into 2017 but is expected eventually to give way to increased projects
and expenditures by our customers as the sector improves.
Moving into 2017, we expect to continue adding new subscribers
organically as well as improving the diversity of our customer base. We
have also identified several target areas in the industry where we see
greater opportunity to leverage our expertise and meet customer needs.
We will also invest in new technologies to refine our offerings and
value-added services as well as into human resources where required.
Lastly, we will capitalise on the expected increase in VSAT penetration
by migrating accounts from L-band to VSAT, while also servicing their
ongoing LBand and other MSS needs.
Energy Industry
The Energy sector is impacted by oil price fluctuations, environmental
concerns and regional political stability. The Energy business
experienced a difficult and challenging year due to the macroeconomic
conditions but, despite this, managed to achieve market share growth
amid a declining market. The acquisition of Harris CapRock, made at an
attractive time in the market cycle, results in SpeedCast becoming the
global market leader in the sector with complementary geographical
presence. Post Harris CapRock acquisition, the Energy division is
expected to represent approximately 45% of the Group’s core service
revenues. Business growth
The Energy division, prior to the Harris CapRock acquisition, was the
smallest division in the Group contributing 16% of SpeedCast’s service
revenues in 2016. Revenue churn was high in the first half of the year
reflecting the challenging market conditions but came back down to
historical levels in the second half of 2016. Despite this, service
revenues for Energy in 2016 still grew 22% on the corresponding prior
period.
Some of the more notable wins for the Energy division in 2016 were:
A new sizeable multi-year service agreement was awarded to SpeedCast
by a leading global energy service company for fully managed VSAT
network services to 18 wellsite locations throughout China. This is
SpeedCast’s first service implementation for an energy customer in
China.
A multi-year service agreement was awarded to SpeedCast by a leading
global energy company engaged in the exploration and production of crude
oil and natural gas for managed satellite communications services for
the Customer's offshore sites in Malaysia.
Award of multiple contracts by one of the world’s largest oil field
services companies to expand its VSAT services in UAE, for a total of 20
sites.
INEOS, one of the world's largest manufacturers of chemicals and oil
products, signed a three-year contract with SpeedCast for fully managed
VSAT network services for its platforms in the Clipper South and Breagh
gas fields in the North Sea, United Kingdom, providing both voice
services and internet access.
A leading global energy service company appointed SpeedCast to provide
field engineering services to support and maintain remote communications
services over fibre, wireless and satellite networks, as well as IT and
related technical services to ensure continuity in the company’s remote
operations. SpeedCast leveraged its existing global Field Engineering
Team throughout these regions to provide technical support expertise and
agile field services wherever they were required, enabling the customer
to focus on mission critical operations and driving profitability.
Business challenges
The dropping oil price and macroeconomic environment adversely impacted
our Energy business in 2016 which resulted in limited growth for the
year. SpeedCast reacted to this market situation by providing tailored
service plans, world-class field services, and additional flexibility to
customers who were cold stacking rigs. The strong foundation built in
previous years has provided the necessary stability to absorb the market
downturn and position the business well as the sector improves.
Outlook
Although the Energy sector stabilised during the second half of 2016, it
has yet to show any significant signs of recovery. We believe that
SpeedCast is well positioned to benefit from the anticipated upturn of
the sector. With the successful integration of Harris CapRock, the
combined services and technologies will create new opportunities to both
SpeedCast and legacy Harris CapRock customers.
Enterprise & Emerging Markets (‘EEM’) Industry
The EEM business serves highly diversified markets including telecom,
government, NGO and media services. During 2016, EEM contributed
approximately half of the Group’s core service revenues growing at a
rate of 26% year on year.
Business growth
Several important acquisitions brought new capabilities and market
opportunities to the Group:
NewCom International Inc. added new growth opportunities in South and
Central America as well as strengthening the Group’s presence in North
America with a major office and teleport in Miami, a key hub for the
yachting, cruise and government markets. ST Teleport Pte. Ltd. has a
large base of EEM revenue with their notable track record in broadcast
media delivery and represents an area for potential growth for
SpeedCast.
Business challenges
The markets that make up the EEM business unit are often affected by
regional factors. Many regional markets were subdued in 2016, with
revenues holding steady compared to the previous year. An over-supply of
bandwidth applied price pressure in some markets including the Pacific
region. SpeedCast will react to different market situations accordingly,
by adjusting price or service offerings. Political instability worldwide
also poses a further challenge for SpeedCast due to the changing and
varied service requirements for different governments.
Outlook
There is an increasing demand for bandwidth and improved connectivity
across the markets we serve and SpeedCast is well positioned to
accommodate those needs, especially in some of the newer regional
markets identified for 2017.
Cellular backhaul is expected to experience strong growth while new
opportunities are appearing in the government services business. The
integration of Harris CapRock and WINS businesses will bring EEM access
to new business opportunities in new territories.
Business Risks
The Group takes a proactive approach to risk management. The Board is
responsible for ensuring that business risks are identified quickly and
that appropriate risk mitigation steps are taken in a proactive and
timely manner. The Board assesses the risks with the Group’s overall
strategic objectives and activities in mind. Current key risks
identified for the Group are: SpeedCast financial targets are
compromised by ongoing global reduction in bandwidth costs
Global bandwidth costs continue to decline. This is caused by bandwidth
oversupply, technological innovation, and increased competition from new
entrants. These reductions may impact SpeedCast’s future financial
performance. Consolidation of the satellite service industry could
change the competitive landscape
The satellite service industry is undergoing a period of consolidation
and vertical integration. Some of SpeedCast’s distributors have been
acquired by competitors and SpeedCast anticipates that other
distributors of its services may be acquired by competitors in the
future. Satellite service providers face competition from a range of
communications services and new technologies
Satellite communication competes with a number of different methods of
transmission, including fibre-optic, Wi-Fi and WiMax. As competing
networks expand, satellite communication’s competitive advantage in
providing connectivity to users outside established networks is reduced.
Geo-political risks
As a consequence of the geographic areas that SpeedCast operates in, the
Group is exposed to geopolitical and strategic risks. These risks have
increased as the Group has grown larger and moved into new markets. The
risks include disruption as a result of war, civil unrest, security
issues and government intervention. These risks exist predominantly in
the Middle East, Russia and certain parts of Latin America and Asia.
Loss of, or inability to attract, key personnel
SpeedCast’s success depends to a significant extent on its key
personnel. There is significant competition for strong candidates with
experience in the satellite service industry, and this competition is
expected to increase. The loss of key personnel, the inability to
recruit or retain personnel, may adversely affect SpeedCast’s future
financial performance. Risks relating to acquisitions
SpeedCast has historically experienced rapid growth through
acquisitions. This growth has placed, and may continue to place,
significant demands on management, information reporting resources, and
financial and internal controls and systems. In addition, SpeedCast’s
ongoing performance depends on the effective and timely integration of
acquisitions, including Harris CapRock during 2017 and beyond. SpeedCast
also expects to make future strategic acquisitions in circumstances
where the Directors believe that those acquisitions support SpeedCast’s
growth strategy and will create value for the Group’s shareholders.
Foreign exchange rates
SpeedCast’s financial reports are presented in United States dollars.
However, a substantial proportion of SpeedCast’s sales revenue,
expenditures and cash flows is generated in various other currencies,
including Australian dollars and Euros. Further, as SpeedCast expands
its operations it is expected that it will be exposed to additional
currencies. Any adverse exchange rate fluctuations or volatility in the
currencies in which SpeedCast generates its revenues and cash flows, and
incurs its costs, would have an adverse effect on SpeedCast’s future
financial performance and position.
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