NSS CEO Predicts FSS Ownership Rotation In 2004

New Skies Satellites [NSK] CEO Dan Goldberg was named chairman of the European Satellite Operators Association (ESOA) earlier this month, and soon thereafter he gave an exclusive interview to Satellite News International Editor Mark Holmes to discuss plans for the trade association and his own company. One of the association’s top goals will be to promote the benefits of satellite services in Europe, Goldberg said. For New Skies, the focus this year is on continuing its trend of respectable revenue growth. Goldberg also offered an industry-wide prediction that forecasted ownership “rotation” at fixed satellite services (FSS) companies during the year ahead.

Satellite News: Previously, you stated 2003 had been a busy year for deals (Eutelsat ownership changes, Intelsat buying Loral assets, for example). Do you expect a similar level of activity in 2004?

Goldberg: This will be an interesting year. I draw a distinction between ownership change and consolidation. Certainly, Intelsat’s acquisition of the (Loral) Skynet assets, which was approved this year, serves as a good example of consolidation. What we also saw last year was ownership rotation. That is what happened with Inmarsat as well as Eutelsat. I think we are going to see more of that this year. Having said that, I think ownership rotation may be a precursor to more consolidation. Some of these businesses may need to have a rotation in their ownership that will then facilitate further consolidation down the road.

There are some opportunities out there right now. I think that, to the extent companies are going through an ownership transition, it is difficult for them to capitalize on acquisition opportunities that might be out there because you need a stable shareholder structure before you start consolidating. I think these ownership structures are going to rationalize themselves over the course of this year. Then we’re likely to see more merger-and-acquisition activity.

Satellite News: You recently became chairman of the European Satellite Operators Association (ESOA). What role can this association have in promoting satellite services?

Goldberg: ESOA was formed two years ago. Prior to that time, Europe never had its own trade association for satellite operators, and having one can be a real benefit. Even though we compete against the other European operators, we have shared interests in many areas, particularly regulatory affairs, trade issues and providing universal access to broadband communications services. Over the past three years, Europe has become pre-eminent in terms of satellite services with the acquisitions that SES Global [SESG] has made, with Eutelsat growing and New Skies growing. It occurred to us that we lacked an organization that represented our common interests. With 11 of us now, it was appropriate that we form such an organization.

Satellite News: What are the major objectives for ESOA this year?

Goldberg: First, there are trade-related matters and making sure that markets around the world, including here in Europe, are open for satellite services in a coherent way so that all of us are allowed access. Markets should not be open just for European satellite operators. Competition is a good thing, and all of our companies are equipped to compete on a level playing field.

Second, other regulatory-related issues, such as spectrum allocation, are important. It has long been a critical issue to make sure that frequency allocations are made in a coherent and transparent way that serves the public interest more broadly.

Third, the European Commission (EC) in Brussels and other regulatory authorities are studying ways to bridge the digital divide, and they are looking for ways to make sure all citizens and enterprises throughout Europe have access to broadband services.

We European satellite operators believe satellites can play an important role in delivering broadband services throughout Europe and the world. We are working with the authorities in Brussels and the different European countries to make sure that as they fashion their policies, they take into account the role satellites can play.

Satellite News: How does the work of ESOA benefit such operators as New Skies? Is there still a general perception problem in terms of the role that satellites can play in a digital society?

Goldberg: One of the things we are doing is educating policymakers on the capabilities that satellites have, such as the technical characteristics; the complementary nature of satellites and various terrestrial networks; and the costs associated with providing broadband services via satellite, etc. We are also underscoring to them just how many households and enterprises in Europe are beyond the reach of terrestrial-based broadband services, and that the most logical way that those businesses are going to be brought into the broadband world is through satellite-based solutions.

Is there a perception that satellites are inefficient or overly costly? I am not sure it is a broadly held belief. When regulatory bodies are making judgments about what media can best provide broadband services to people in different parts of Europe, they have to look at the different technologies and make judgments as to which technologies could be best suited for serving people in different places throughout Europe. This is a key area where ESOA can play an important role in ensuring that these regulatory entities have the most accurate and comprehensive information on which to make informed decisions. Further, policymakers outside of Europe are also considering these same issues, so whatever work we can do here to make European policymakers think through these issues certainly has applicability outside of Europe.

Satellite News: If we could talk about New Skies, what levels of revenue growth are you looking for in 2004? In the first four months, are you seeing evidence that business is picking up in the FSS industry?

Goldberg: I would say, by and large, that it was our anticipation when we gave our guidance for 2004 in February, this was going to continue to be another difficult year. I think that is a view shared by the other operators. I can’t say we have taken a meaningfully different view of that now that we are halfway through April. We are seeing certain areas where demand is pretty promising and, frankly, those are areas where we have seen good demand in prior periods — specifically from a geographical perspective in terms of the Middle East and Africa, and government services more broadly.

New Skies is well-positioned to operate and execute in a difficult environment. I think we did an excellent job last year growing our revenues 7 percent and our EBITDA (earnings before interest, taxes, depreciation and amortization) 8 percent. We are focusing on the top line and those areas where we see some opportunities. At the same time, we are focused on keeping our costs well in hand and trying to do things on a corporate level to make sure our shareholders are seeing value. We have announced a second share-buyback as well as our first-ever dividend, so we are trying to be very proactive in terms of returning value to shareholders.

Satellite News: What are the company’s major capital-expenditure plans during the next 12 months?

Goldberg: We have the one satellite program, NSS-8, still under construction. We have about $120 million of capital expenditure remaining on that program. Some portion of that will be paid this year, and some portion of that will be paid next year. We expect that satellite to enter commercial service in the first half of 2005. I would say that is really the last major committed capital expenditure that New Skies has.

We launched two satellites in 2002: NSS-7 and NSS-6. Having done that, our capital expenditure program has been somewhat reduced and probably the best reflection of that is how the company has moved into a strong positive free cashflow position. As the company comes to the end of its ‘cap-ex cycle,’ money that used to go out the door to fund satellite purchases then turns into free-cash flow. New Skies went from a negative free-cash flow position in 2002 to being $66 million positive free-cash flow last year. We are expecting another meaningful positive free-cash flow this year. When we pay off the $120 million for NSS-8, our free-cash flow profile will accelerate even more.

Satellite News: Whether in terms of geography (Latin America, Asia, Europe) or applications (video, data, Internet), what do you see as the single best growth opportunity for the company?

Goldberg: We look at it from both perspectives. We segment our business from a geographical perspective and then we look at what applications are taking root and in demand in each of those regions. I mentioned that we are seeing some promising opportunities in Africa and the Middle East. Most of those prospects are what I would call a combination of basic telecom services and IP services — specifically corporate networks — and that can be services for banks or corporate enterprises, such as VSAT networks. But some of that also consists of VoIP services. In addition, in Africa we have certainly seen demand driven by the GSM networks that are being built throughout the region.

Then, as I mentioned before, government services primarily for U.S. governmental communications requirements are in strong demand. These are the areas where I think we will see some solid growth this year. I would also say that on the Indian subcontinent, there are potentially new DTH services that are going to be introduced this year, and perhaps we will be able to secure one of those opportunities.

Satellite News: How do you view the broadband opportunity for the company? How would you compare your European broadband strategy to others in Europe, including SES and Eutelsat?

Goldberg: I am not intimately familiar with their strategies but both SES and Eutelsat, but it appears to me they are either taking investments in companies that are further up or down the value chain or they are doing some of these things internally. SES has a meaningful participation in SatLynx, through which they commercialize most of their broadband offerings. Eutelsat is developing things internally.

From New Skies’ perspective, while we do have a meaningful amount of value-added broadband services offered under our IPsys brand, they tend to be providing services to large ISPs, network integrators, etc., that in turn have the relationships with the enterprises and the actual end users. Our approach is to look for ways to create more value for these customers as well as for prospective customers by allowing them to bundle such additional services as VoIP with their existing offerings. We have also developed tools, such as our IPsys NetBuilder, that give them greater control and flexibility in managing their networks. Finally, we are looking to introduce more two-way broadband capabilities in various markets around the world that will enable our customers to target the enterprise sector more aggressively. In most cases, we provide the raw space segment capacity to network integrators and other channels that use our capacity to provide broadband services. This model tends to deliver the most attractive margins.

Satellite News: Finally, what are the major challenges for the company in 2004?

Goldberg: The major challenges are not meaningfully different from last year. We have a (satellite) fill rate that is roughly 50 percent. We are very focused on increasing that fill rate by selling our incremental capacity at the most desirable rates possible to the most desirable customers possible. I would say that in a market that is still characterized by excess capacity and somewhat sluggish demand, that is a meaningful challenge.

Contact: Jeff Bothwell, New Skies Satellites, e-mail: [email protected]