Skynet Revenues To Be Far Short Of Expectations

Loral Space & Communications has erred on the side of being conservative with its latest guidance for 2002.

Loral is projecting that its Skynet unit’s revenues for 2002 will be $340 million, compared to $389 million last year. The company originally expected single-digit growth in 2002. Skynet’s EBITDA is expected to decline 15 per cent this year.

Loral blames the economic climate as well as the delay in demand for new applications and services, especially broadband. Skynet expects to have a capacity utilization rate of 60 per cent at year-end 2002 versus 68 per cent at year-end 2001.

William Kidd, a research equity analyst at Lehman Brothers, commented on Skynet’s woes in a research note: “We attribute the losses to an inability to replace naturally churning customers, exacerbated by a weak demand environment and a faster turning backlog cycle, StarBand’s difficulties and lower transponder rates. We are effectively assuming that Loral’s Skynet revenue base has been permanently reduced. Long-term, our revised model does not assume that Loral makes back its 2002 revenue/EBITDA shortfall.”

Loral expects overall revenues to increase 15 per cent over last year. Originally, it had expected a 20 per cent increase. The problems with Skynet are of particular concern. Marc Nabi, a research equity analyst at Merrill Lynch said in a research note about Loral’s guidance: “It is of particular concern, given the most appreciable revisions are occurring at Loral fixed satellite services unit (FSS) unit, the growth business of the company.”

In its satellite manufacturing business, the company expects revenues to increase about 20 per cent over last year’s revenues. This is line with previous guidance, although with the lack of satellite orders in the industry, this remains a tough area for Loral. The company remains confident that the satellite manufacturing market will pick up in the second half of 2002, although this in itself is perhaps surprising.

The company has admitted “progress has been slower than expected” and it is now unlikely to achieve net profit in late 2003 as originally hoped. Kidd says: “Positive free cash flow is still in sight, but not yet profitability. Our model which goes through 2003, does not show the company being profitable on a net income basis in any quarter. That said, we are optimistic that Loral will turn free cash flow positive sometime during mid to late 2003 and remain so thereafter.”

The company’s financial position is also under scrutiny and it may have to consider asset sales to improve its financial position, which is bordering on the precarious. Kidd adds: “We believe that Loral has little choice other than to divest some lesser asset to generate a cash cushion, otherwise 2003 looks too close for anyone’s comfort.” Nabi adds: “Given Loral’s weary fundamental outlook on all fronts, we see not reason to own Loral’s stock in a market with little appetite for risk.”

–Mark Holmes