SES Losses on German Analog Switch-Off Not as Severe as Expected

   The second quarter was a busy one for SES, which included the launch and entry into service of its SES-4 satellite and the scheduled switch-off of analog satellite TV in Germany at the end of April. SES also commenced follow-on digital and HD services on eight of the satellite’s 29 analog transponders.

   Natixis Securities Analyst Eric Beaudet said SES’ results were slightly better than he expected after a tough beginning of the year for the operator.

   “Sales were perfectly in line with expectations. Indeed, the group had well flagged the analog switch off in Germany and thus the slowdown in organic growth over the quarter of negative 0.7 percent,” Beaudet said in a July 27 research note. “Utilization rates therefore dropped to 81.4 percent, compared to 93 percent last year. Growth should accelerate from this low point as the operator has just launched its SES-4 and SES-5 satellites. SES’ EBITDA margin comes out slightly above expectations at 74.2 percent versus 71.9 percent last year as the group was able to maintain is infrastructure EBITDA margin above 83 percent, despite losing a very profitable business in the German broadcasting. This is reassuring going forward.”

   SES’ core profits rose 5.7 percent from the 2011 second-quarter to 327.8 million euros ($405.5 million), beating the market’s average 322 million-euro forecast. But the German switch-off impacted the operator’s growth rates, as SES stopped receiving revenue from the country’s analog broadcasting market, which totaled 150 million euros ($185.5 million) in 2011.

   SES President and CEO Romain Bausch said the operator made steady progress in Europe during the quarter, as the transponder capacity formerly used for analog transmissions to the German language market became available for new customers. A majority of this re-commercialized capacity is now being contracted back to the German market as high-demand HD offerings.

    “The switch-off of analog satellite TV broadcasts in Germany took place, as scheduled, at the end of April. The remarketing of the newly available capacity is on track, and HD channel growth is, as projected, an important driver of demand for this capacity,” said Bausch.

   The SES-4 satellite recently completed in-orbit testing and entered commercial service in mid-April. SES-4 carries replacement and new capacity for Europe and Africa and provides full coverage of the Americas, as well as a global beam to support mobile and maritime customers. Its regional beams aim to provide service to Europe, the Middle East, and West Africa, as well as North and South America. The SES-5 satellite, launched July 9, is currently undergoing in-orbit testing before entering commercial service, which Bausch predicted would happen in the 2012 third quarter.

   Beaudet said that SES has cleverly achieved growth throughout the economic recession by expanding in digital television in emerging markets and developing regional shifts to HD broadcasting. He also warned that SES could see leftover effects of its loss German analog revenue in its full-year results.

   “In the end, SES’ second-quarter performance is reassuring, as the sharp slowdown expected by the end of the analog switch-off in Germany is no worse than anticipated and does not weigh on margins,” said Beaudet. “On the other hand, we clearly see the drag this brings on short-term growth and this should continue for the next three quarters. In this context, we see full-year growth coming in slightly below the group’s guidance of 2 percent and the stock therefore lacks a near term catalyst.”