New Skies CEO Mulls More Share Buybacks
It has been a good year so far for New Skies Satellites [NYSE: NSK]. It increased its revenues slightly in the first quarter to $52 million, compared to $51.8 million in the same period in 2002. The operator is still hoping to generate overall revenues of between $212 and $222 million this year, meaning double-digit growth in revenues is still a possibility for the company. New Skies has also completed a successful share buyback programme, under which it acquired 12 million shares, or 92 per cent of the total authorized buyback programme. In an exclusive interview with Interspace Senior Editor Mark Holmes, New Skies CEO Dan Goldberg talks about the challenges ahead for the operator.
Interspace: The share buyback was incredibly successful. Are you making any plans to institute a second share buyback programme in the near future?
Goldberg: Yes, the share buyback has been a great success and we are extremely pleased with the results. Through the program, we have been able to create value for the shareholders who remained our owners and, at the same time, provide an exit path to those who chose to sell. We recently received authority from our shareholders to cancel the shares we have repurchased and also to conduct a further two buybacks, each for up to 10 percent of the outstanding shares. This doesn’t mean that we necessarily will exercise this authority, but that we now have the flexibility to do so should we determine that it would be beneficial.
Interspace: What would be a realistic timeframe to execute a second programme?
Goldberg: We are in the final stages of completing this first buyback. Timing is difficult to talk about because at the end of the day, it is dictated by what the markets are doing and what our shareholders want and these are outside of our control. Once the first program is completed, we can take a step back to see whether it would be appropriate to initiate another buyback. We will look at a number of factors including whether there is demand from our shareholders to sell, where the share price is and how the market is performing more broadly. And of course, we will look at alternative uses for the money that would be devoted to share buybacks. Given that we have essentially an unlevered balance sheet, we have a fair amount of financial scope and flexibility to do additional share buybacks without impinging our strategic flexibility. It is a very nice position to be in.
Interspace: In recent weeks, we have seen operators such as PanAmSat and Intelsat talk about the evolution of their strategies, whether it is focusing on government services, satellite/fiber solutions, broadband, etc. Is there an evolution taking place at New Skies Satellites in terms of the sectors and services you are targeting?
Goldberg: We have, almost since our inception, had a well-balanced and well-diversified mix of revenues, with video comprising 41 per cent of our revenues, data and voice at 39 per cent and the transmission of IP services at 20 per cent. This is a good mix and does not make us overly reliant on any one particular segment. Going forward, and notwithstanding our desire to maintain a diversity of revenue sources, we will follow the trends in the market and then seek to be opportunistic when particularly compelling prospects arise.
Interspace: In terms of hybrid networks, does it make sense to own a fiber network or lease fiber? What is your view on the value of hybrid networks? Is there any logic in New Skies looking to acquire one of the cash-strapped cable networks as a way of deriving extra revenues from the video sector?
Goldberg: I think it makes sense to lease fiber and we do a fair amount of that. We do it when we provide all three of those services (video, Internet, corporate data). I don’t see any compelling need, at least for us, to own a fiber network. I think it is a market that is highly competitive and our interests continue to be well served by procuring fiber capacity in what has been a very competitive market. Prices have come down much more significantly than they have in the satellite market.
In terms of acquiring a cable system, it is not something we are focused on. If we were to engage in a transaction, it would more likely be a transaction that is more horizontal in nature, such as buying in-orbit satellites.
Interspace: Where do you see the company’s growth coming from over the next two years?
Goldberg: In the near term, I think growth will continue to come from the same areas where we have seen good growth in the last few quarters: the Middle East, the Indian sub- continent, and Africa. The customer could be U.S.-based, or Western European-based and one end of the transmission path is likely to be in the U.S. or Western Europe. Looking beyond that, in addition to those areas, we will also see revenue growth coming from Asia and the Pacific Rim. So, places like China, Southeast Asia, Northeast Asia. I also believe the situation will improve in Latin America, traditionally a great market for satellite services. It looks like the largest economies, Brazil and Argentina, are starting to stabilize. It might not be this year, although we have signed a very good deal within the last couple of weeks with the big Brazilian operator Embratel. I do believe that in the upcoming months and years, that market will have a resurgence.
Interspace: What trends do you see happening in transponder pricing in 2003? What utilization rates do you hope to have by the end of 2003? How much capacity do you hope to see on the NSS-6 and NSS-7 satellites?
Goldberg: We reported our first quarter new business numbers, which were $1.5 million for a 36 MHz transponder per annum. That is essentially where we have been for the last five quarters now. While our rates have held up pretty well, it would not surprise me if we see some price compression below $1.5 million. There would be two reasons for this: one is the vigorous competition we’re seeing and, secondly, we launched two new satellites last year. As is often the case with new satellites, companies provide incentives for early customers to make use of them. So, we have been providing some discounts, particularly in the early years.
While I’m not going to give fill rates on a satellite-by-satellite basis, I can give you two numbers. At the end of last year, we had a fill rate of 67 per cent. If you focus just on those satellites, at the end of first quarter, the fill rate would have been 70 per cent. But, we did add two new satellites, one at the beginning of this year and one in December of last year. When you factor those two satellites in, our fill rate is slightly less than 50 per cent. Our focus this year and next, therefore, is selling this new capacity that we’ve put in place. While we haven’t given guidance on what we expect the fill rate to be, we have given guidance on our revenues, and we expect them to be up between 6 and 11 per cent in 2003. That is going to happen on the back of increased utilization of the satellites.
Interspace: In your recent results, New Skies announced encouraging sequential gains in revenues and earnings before interest, taxes, depreciation and amortisation (EBITDA). This in some ways mirrors a trend seen in Intelsat’s results. Do you see this trend continuing? Is this the first sign that some kind of recovery is taking place?
Goldberg: We have seen good sequential results. Our revenues are up 7 per cent over a three-month period and our EBITDA is up 7.5 per cent. We have seen good growth over the past seven months and it is our expectation that that is going to continue. At best, things have maybe hit the bottom and reached a plateau. In my estimation, it is still too early to be talking about a recovery.
Interspace: In terms of consolidation, New Skies is clearly in a position to make an acquisition of some kind. Are you likely to buy another fixed satellite services (FSS) operator?
Goldberg: I do think there will probably be some more consolidation in the industry over the next 18 months. How and whether New Skies participates in it is going to be driven by one overriding question: does it creates shareholder value? It is also the case with New Skies, and I consider ourselves fortunate, that we don’t have to grow by consolidation in order to grow. We have a significant amount of organic growth potential inherent in the company, which is reflected in the fact that our fill rate is slightly less than 50 per cent. We can grow this business and its profitability significantly, just by leveraging the investments we have made to date.
Interspace: Does New Skies have the financial firepower to buy a larger FSS operator, such as PanAmSat, if it were to become available?
Goldberg: With essentially an unlevered balance sheet and strong cash flows, New Skies is well positioned to pursue a meaningful acquisition. Obviously our own cash flows would be bolstered by those of any company we were to acquire, allowing us to attract more funding still. That said, whether we’re contemplating a large transaction or a smaller one, we’re only going to proceed to the extent we’re persuaded that doing so will create real value for our shareholders.
Interspace: What are the main challenges facing the company this year? Where do you hope to position the company on the FSS landscape in the next 12 months?
Goldberg: The major challenge is to continue to fill up the satellites and to grow the business in an environment that is going to remain difficult. The estimates I have seen for our industry as a whole is that this will be another largely flat year. That said, and as reflected in the financial guidance I mentioned earlier, we’re expecting to grow our business this year, and grow in a manner that is profitable and responsible. This is the first year where we think we will achieve positive free cash flow. I do believe we have done a good job in managing our cost structure so that as we grow our top line revenues, we will be driving our EBITDA and our EBITDA margins significantly and then ultimately our net income. That is how we intend to position ourselves: as a disciplined company that is generating a significant amount of cash, has a strong and clean balance sheet, is profitable and has significant organic scope to continue to grow its revenues without growing its cost base, which will drive our profitability going forward.
(Contact: Jeff Bothwell, New Skies Satellites, e:mail: email@example.com)