From the CFO: Maneuvering Business From Red To Black

By | January 1, 2004 | Telecom

For global satellite industry business initiatives, is there a light at the end of the tunnel? Many industry executives are cautiously optimistic about buying into such a scenario. It does, however, look as if some of the most challenging times are over and growth opportunities are emerging once again for satellite communication applications. Even so, those building a business with satellite technology are playing it smart and managing expectations in an effort to make sure future industry growth materializes in the black.

Is it a light at the end of the tunnel or is this just another false start?" asks Brian Jones, a certified financial planner and vice president at Cooper, Jones and McLeland whose clients work within the telecom arena. "In the past three years, the entire satellite industry has been absolutely shaken to the core. We have had a market that has not been conducive to a lot of financial ventures or much of R&D spending at this point."

Jones adds that even though there are enormous challenges still affecting the growth of the telecom industry, investors are just now beginning to get over the damage of 2000- 2002 and are now in a position where they are willing to spend more. When the telecom marketplace imploded in the late ’90s, it greatly affected the satellite marketplace sector. Now, many eyes are monitoring the telecom industry rebound because, as growth or stagnation materializes within the telecom arena, the outcome will directly impact the growth or stagnation of the satellite sector.

At press time, definitive 2003 satellite industry financial figures had yet to be released, but some analysts tracking the sector indicated that the compound annual growth rate for the global satellite industry will be somewhere in the four-to four-and-a-half percent level between 2003 and 2008.

So, as executives begin the first quarter with managed optimism regarding future business growth, they are ready to take conservative risks in proven markets and invest in only a few "cutting-edge" ventures. Via Satellite interviewed the CFOs of some of the major satellite operators analyzing the financial state of affairs and highlighting strategies for 2004 and beyond on how to make the coming years successfully profitable for the global satellite arena. Here is what they had to say:

Via Satellite: How would you describe the current state of the industry?

John Corbett, Intelsat CFO: It remains a healthy and robust industry. The satellite sector, however, continues to have high barriers to entry and extremely high EBITDA margins relative to other businesses. These high barriers to entry will cause the industry to not see a lot of unexpected new competition in the coming years.

Jurgen Schulte, SES Global CFO: The industry is facing a situation where we have built markets and now have to continue doing business in these mature markets, which offer fewer growth opportunities. This obviously is a challenge for any CFO working within a management team in a corporation. Those of us who have healthy balance sheets and strong cashflows, however, are able to manage these challenging business times better than others.

Michael Ingles, Panamsat executive vice president and CFO: Even though we are starting to see life again, business challenges remain. But many of us have said business would be ‘good in the middle of next year’–every year. Right now, we need to focus on what our customers want and how we can do our jobs to better serve them. As an industry, we grew up during a time when there were a lot more customers than there were satellite services. That spoiled us as an industry. Now we have reached a plateau. Now we realize that a business and an industry is only as healthy as the customers its serves. We all want to be optimistic, saying it will get better, but I do not see widespread signs of that happening. I believe data applications are going to drive the marketplace.

Via Satellite: Where are some areas where you see significant growth opportunities?

Corbett: High Definition Television (HDTV) is coming about and is causing increased demand for bandwidth for FSS providers. In addition, the data business is experiencing sustained growth for transport of complex data services. Finally, a medium-term business opportunity for satellite providers is two-way broadband access. All these areas contribute and will continue to fuel positive operating results for the FSS industry.

Schulte: The general consensus in the industry is that government services will continue to offer growth opportunities for satellite services providers. In addition, HDTV in the United States and, later on in certain parts of Europe, will be growing. We also see quite a few developments in European countries with interactive TV applications that will also use additional capacity. Finally, we see demand for broadband applications, one-way as well as two-way, increasing and opening up more commercial opportunities within the next few years, especially in those areas which are not served or are underserved by broadband terrestrial networks.

Ingles: We saw some benefits in the late 1990s from Internet via satellite and trunking opportunities and there are some growth possibilities within this application for the coming years. We also see some growth for multi-channel television in the United States and in Europe as well as increased government services.

Via Satellite: How exactly do you further see the coming of HDTV playing in favor of satellite industry growth?

Corbett: In regard to HDTV, the role of the consumer is a major stumbling block to its widespread growth. Getting enough [television] sets into homes is a significant factor, but as soon as you have one or two broadcasting programmers offering increased high-definition content, and consumers get a certain number of televisions in their households, the other broadcasters are going to have to follow suit otherwise they will be in a competitive disadvantage. So the actual price point for HDTV to the average consumer clearly is a big driver for the bandwidth demand that will occur in the future to accommodate this application.

Schulte: HDTV take-up will be driven by the prices of reception equipment, i.e. flatscreen displays and HD receivers, and their roll-out in the marketplace as well as the availability of HD programming. Obviously, all players in the value chain must make their contributions, which will drive the demand. In the end, all of these developments will result in the requirement for additional satellite capacity.

Ingles: It appears there will be benefits afforded to us as we see customers going from analog to digital. As a finance guy, I am more cautiously optimistic than others in the industry who would have you believe that HDTV will be a wild boom for the satellite sector, but opportunities do exist within this broadcasting niche.

Via Satellite: How much more consolidation will we face and what financial impacts will that have for the satellite industry?

Corbett: Consolidation will continue in the satellite industry but that will create more attractive companies, which can capitalize on the economies of scale that such consolidation brings. Strategic consolidation moves in the satellite sector should help investors focus on the FSS industry with a positive slant.

Schulte: We are closely watching the consolidation of broadcasting platforms in Europe. This will be a driver of financial backing for new opportunities in this market segment.

Ingles: We will continue to feel the affects for some time from what happens as all the DTH operators consolidate in the different parts of the world and what happens to some of that capacity as it gets freed up.

Via Satellite: What continues to worry you the most in doing business within the satellite industry?

Corbett: I guess the most significant worry I have is that the satellite industry may continue to face future challenges in demonstrating the growth of the business. Many companies, however, are poised for growth and there are a lot of reasons to be optimistic.

Schulte: I am concerned about the developments in the various business sectors we cater to and whether they continue to really use our services to the fullest of their abilities. I also see that we will have a problem in continually growing and developing new applications because success for the satellite operator is driven by the amount of usage by our customers. So I am probably looking more carefully at business developments at our customer base. I look at consolidation of our customers. We see it in Europe and the significant influence it places on capacity needs.

Ingles: Satellite health worries me a lot. I think it will be another tough year. I just wonder how long we as an industry can keep customers around when we keep having problems with the fundamentals of the delivery system of the services we provide.

Moving forward, broadcasting and data services, at least in these CFOs’ opinions will be drivers for industry growth. "The company that is able to recognize the next great revenue-generating product or service coming down the line and is the first one to bring it to market that is the company that will be in business 10 to 15 years from now," says Jones. Whether that image materializing in the crystal comes through in high definition, with complex data attachments, Internet delivery applications or merely a bank of global programming remains to be seen.

Nick Mitsis is the editor of Via Satellite magazine.

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