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Eutelsat Communications First Half 2016-2017 Results

The Board of Directors of Eutelsat Communications chaired by Michel de Rosen, reviewed the financial results for the half-year ended 31 December 2016.

Key Financial Data 6 months to Dec. 2015 6 Months to Dec. 2016 Actual
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Like-for-like
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Revenues - €m 774.4 755.1 -2.5% -0.9%

EBITDA²- €m
600.3 588.0 -2.0%

EBITDA margin - % 77.5 77.9 +0.4 pt

Group share of net income - €m 188.0 192.2 +2.2%

Financial structure

Discretionary Free-Cash-Flow³
256.7 324.8 +26.5%

Net debt^-€m 3,723.3 3,885.0 +€161.7m

Net debt/EBITDA - X 3.18x 3.37x

Backlog – €bn 5.8 5.3 -8.0%

Commenting on the First Half, Rodolphe Belmer Chief Executive Officer of Eutelsat Communications, said: “First Half revenues were in line with expectations, and we are on track to reach our current and three year objectives thanks to a solid commercial performance. We are also on target to deliver on our commitment to reduce capital expenditure, notably thanks to the highly effective application of ‘design-to-cost’ for satellite procurement. This semester we have also launched the ‘LEAP’ cost-savings plan, aimed at generating €30 million in annualised savings by fiscal year 2018-19, contributing to the robustness of our Free Cash Flow generation targets and enabling us to raise our EBITDA margin outlook.

“We are making strong progress in our newly defined ‘Connectivity’ business line, with the lease of the HTS payload on EUTELSAT 3B for in-flight connectivity on Saudi Arabian Airlines, and contracts on KA-SAT for in-flight connectivity for SAS and Finnair. By securing Ka-band capacity from Yahsat we will also launch our African broadband initiative with only a slight delay relative to the original plan. Finally, we are about to close a joint-venture with ViaSat which paves the way for a step-up in broadband and mobile connectivity from the early 2020s, with no change to our Capex framework.”

Group First Half revenues stood at €755.1 million, down 0.9% at constant currency and perimeter. On a reported basis, revenues were down 2.5% reflecting a 1.6 point negative perimeter effect (disposal of Alterna’TV, Wins/DHI⁸ and DSAT Cinema). There was no significant currency effect in the first half.

Second quarter revenues stood at €370.2 million, down 2.4% like-for-like and by 4.3% on a reported basis.

Core businesses

Video Applications (64% of revenues)

Video Applications revenues in the first half were down 2.0% like-for-like to €455.4 million. The decline was fully attributable to lower revenues in Professional Video. Broadcast revenues were stable on the back of the contribution from incremental capacity launched during the course of last year (EUTELSAT 8 West B for MENA and EUTELSAT 36C for Sub-Saharan Africa), which more than offset the negative impact of rationalisation of capacity at the HOTBIRD position and lower revenues from FRANSAT following the completion of the transition to HD in France.

Second quarter revenues stood at €228.9 million, down 3.5% on a year-on-year basis, and up by 0.9% quarter-on-quarter. Professional Video also experienced a quarter-on-quarter improvement.

At 31 December 2016, the total number of channels broadcast by Eutelsat satellites stood at 6,339 up 5.6% year-on-year. HD penetration continued to increase, standing at 997 channels versus 757 a year earlier (+32%), and representing a penetration rate of 15.7% compared to 12.6% a year earlier. HD penetration at HOTBIRD stood at 24% up from 18% a year ago.

Fixed Data (12% of revenues)

In the first half, Fixed Data revenues stood at €84.9 million, down 15.9% like-for-like. This reflects, as anticipated, ongoing pricing pressure in all geographies. All fast-growing Broadband and Mobility revenues which were previously included in the former Data Services application have now been transferred to new Fixed Broadband and Mobile Connectivity applications.

Second quarter revenues stood at €41.4 million, down 16.0% on a year-on-year basis, and by 5.3% quarter-on-quarter.

Government Services (12% of revenues)

In the first half, Government Services revenues stood at €86.1 million, down 9.1% like-for-like, reflecting the carry-over effect of lower renewals in the US Department of Defense Spring 2016 campaign.

Second quarter revenues stood at €43.8 million, down 7.7% on a year-on-year basis, but up by 2.7% quarter-on-quarter, reflecting the positive outcome of the Fall 2016 campaign with a renewal rate for existing contracts of above 90% and new contracts representing an additional four 36-MHz equivalent transponders.

Connectivity

Fixed Broadband (7% of revenues)

In the first half, Fixed Broadband revenues stood at €48.6 million, up 18.3% like-for-like. The negative impact of the termination of the contract for the Ka payload on EUTELSAT 3B in the previous fiscal year (subsequently leased to Taqnia and classified under Mobile Connectivity) was more than offset by the positive effect of the entry into service in May 2016 of EUTELSAT 65 West A, on which the Ka payload is fully leased. European revenues on KA-SAT were resilient. Elsewhere, the Russian consumer broadband service launched on EUTELSAT 36C in the first quarter is contributing modestly to revenues and is expected to ramp up progressively.

Second quarter revenues stood at €23.7 million, up 20.0% year-on-year and down by 4.9% quarter-on-quarter. Excluding a positive one-off in the first quarter relating to the phasing of payments by a specific customer, revenues would have been flat quarter-on-quarter.

Mobile Connectivity (5% of revenues)

In the first half, Mobile Connectivity revenues stood at €38.5 million, up 19.3% like-for-like, reflecting mainly new capacity leases or volume increases at several orbital positions (10° East, 21° East, 70° East and 172° East).

Second quarter revenues stood at €17.9 million, up 17.9% on a year-on-year basis, and up 21.5% quarter-on-quarter.

⁸ Alterna TV (Video) deconsolidated from April 2016, Wins/DHI (Mobile Connectivity) deconsolidated from end-August 2016 and DSAT Cinema (Video) from end-October 2016.

Other Revenues⁹

Other revenues amounted to €41.6 million in the first half. In addition to the revenues related to the agreements with SES at 28.5° East (which will cease as of the third quarter), they included termination fees related to the rationalisation of the distribution at HOTBIRD as well as fees in respect of technical and engineering services.

OPERATIONAL AND LEASED TRANSPONDERS

The number of operational transponders at 31 December 2016 rose by 58 to 1,326 year-on-year, mainly due to the entry into service of EUTELSAT 36C, EUTELSAT 9B and EUTELSAT 65 West A. The fill rate stood at 70.9% compared to 73.9% a year earlier, reflecting mainly the impact of this new capacity.

31 Dec 2015 30 Jun 2016 31 Dec 2016

Operational transponders¹⁰
1,268 1,328 1,326

Leased transponders¹¹
938 942 940

Fill rate 73.9% 70.9% 70.9%

Note: Based on 36 MHz-equivalent transponders excluding high throughput capacity (KA-SAT 82 spotbeams, EUTELSAT 3B 5 Ka-band spotbeams, EUTELSAT 65 West A 24 Ka-band spotbeams and EUTELSAT 36C 18 Ka-band spotbeams).

ORDER BACKLOG

The order backlog¹² stood at €5.3 billion at 31 December 2016, down by 8.0% year-on-year and 5.3% on end June. It was equivalent to 3.5 times 2015-16 revenues. Video Applications represented 84% of the backlog.

The evolution of Backlog over the last six months reflected on the one hand its natural consumption and on the other, contracts signed including the agreement with Taqnia for HTS capacity on EUTELSAT 3B.

31 Dec 2015 30 Jun 2016 31 Dec 2016

Value of contracts (in billions of euros) 5.8 5.6 5.3

In years of annual revenues based on previous fiscal year 3.9 3.7 3.5

Share of Video Applications 83% 85% 84%

PROFITABILITY

EBITDA amounted to €588 million as of 31 December 2016 compared to €600 million a year earlier, down 2%. The EBITDA margin stood at 77.9%, an improvement compared to last year (77.5%). On top of the usual favourable phasing of operating costs, the first half margin also reflected the high level of ‘Other Revenues’ mostly with no associated costs.

Group share of net income stood at €192 million versus €188 million a year earlier, a 2.2% increase, and represented a margin of 25.5%. This reflected:

Higher depreciation and amortisation, up €36 million year-on-year, principally due to the entry into service of new capacity during the previous fiscal year (EUTELSAT 8 West B and EUTELSAT 115 West B in October 2015, EUTELSAT 36C in February 2016, EUTELSAT 9B in March 2016 and EUTELSAT 65 West A in May 2016);

‘Other operating income’ of €23 million (versus ‘other operating costs’ of €1 million last year) reflecting mainly the capital gain on the disposal of Wins/DHI;

A broadly stable net financial result (-€60 million versus -€63 million a year earlier);

A tax rate of 28.2% versus 37.7% last year, reflecting the recognition of a positive non-cash one-off related to deferred tax liabilities following the vote to reduce French corporate tax rate to 28% in 2020 and the partial tax-exemption of the capital gain in respect of the disposal of Wins/DHI.

The absence of income from associates (compared to €10 million in H1 2015-16), as the stake in Hispasat is henceforth classified as an asset held for sale.

⁹ Other revenues include mainly compensation paid on the settlement of business-related litigation, the financing of certain research programmes by the European Union and other organisations, the impact of EUR/USD currency hedging, the provision of various services or consulting/engineering fees as well as termination fees.
¹⁰Number of transponders on satellites in stable orbit, back-up capacity excluded.
¹¹Number of transponders leased on satellites in stable orbit.
¹² The backlog represents future revenues from capacity lease agreements and can include contracts for satellites under procurement.

CASH FLOW

Net cash flow from operating activities amounted to €482 million versus €447 million in H1 2015-16. This reflected mainly a more favourable impact from working capital requirement notably with an improvement in days’ sales outstanding (DSO) and a lower tax bill thanks to the evolution of the pre-tax profit and the timing of tax payments.

Cash Capex amounted to €130 million, down from €171 million a year earlier, reflecting the success of measures to reduce investments through a ‘design-to-cost’ approach for capacity procurement and the rationalisation of ground capex as well as the phasing of various satellite programmes.

‘Interest and other fees paid net of interest received’ amounted to €27 million compared to €19 million last year, reflecting the interests related to the financial lease on the EUTELSAT 36C satellite which entered service in February 2016.

As a result, Discretionary Cash-Flow amounted to €325 million, up 27% on last year.

FINANCIAL STRUCTURE

At 31 December 2016, net debt was slightly down at €3,885 million, versus €4,007 million at 30 June 2016. Discretionary free cash-flow largely covered the dividend payment (€266 million including dividends paid to minority interests) while equity asset disposals (disposal of Wins/DHI and sale of a minority stake in Broadband for Africa) generated a cash inflow of €54 million.

The net debt to EBITDA ratio stood at 3.37 times, a slight improvement on end-June 2016 (3.44x times).

The weighted average maturity of the Group’s debt stood at 2.9 years, compared to 3.6 years at end-December 2015. The average cost of debt after hedging was 3.1% (3.6% in H1 2015-16).

Liquidity remains strong, with undrawn credit lines of €650 million and cash of €338 million on top of the €850 million earmarked for the redemption at maturity of the March 2017 Bond.

DIVIDEND

The Annual General Meeting of Shareholders held on 4 November 2016 approved the payment of a dividend of €1.10 per share in respect of the financial year ended 30 June 2016, up from €1.09 the previous year. The dividend, totaling €256 million, was fully paid in cash on 18 November 2016.

‘LEAP’ COST-SAVINGS PLAN

Consistent with its objective of maximising cash-flow generation, Eutelsat is implementing ‘LEAP’, a wide-ranging cost-savings plan with a focus on external costs, both direct and indirect. LEAP’s objective is to achieve annualised savings of €30 million by FY 2018-19, and with half of the savings (€15 million) captured in FY 2017-18.

FINANCIAL OUTLOOK

Based on the performance of the First Half, the group confirms revenue objectives published on 29 July 2016.

Revenues for FY 2016-17 (at constant currency and perimeter) are expected in the range of -3% to -1%. In FY 2017-18 they are expected broadly flat with a return to modest growth in FY 2018-19.

Following the implementation of the ‘LEAP’ cost-savings plan, the EBITDA margin (at constant currency) is now expected above 76% for both FY 2016-17 and FY 2017-18 and heading towards 77% in FY 2018-19 (versus ‘above 75%’ previously for each of the three financial years).

Cash Capex is maintained at an average of €420 million¹³ per annum for the period July 2016 to June 2019 after taking account of future investments in VHTS capacity.

Discretionary Free Cash Flow¹⁴ is expected to see three-year CAGR in excess of 10%, with FY 2015-16 as the base year¹⁵.

The Group is committed to maintaining a sound financial structure to support its investment grade credit rating and aims at a net debt / EBITDA ratio below 3.3x.

It also commits to serving a stable to progressive dividend to shareholders.