Alcatel Space CEO ‘Surprised’ At Performance

Alcatel Space, the satellite manufacturing arm of Paris-based Alcatel [NYSE: ALA], outperformed its expectations in 2003. It has signed a number of key contracts with operators such as XM Satellite Radio [Nasdaq: XMSR], Eutelsat and Arabsat. While conditions for satellite manufacturers remain difficult, the company hopes to continue its progress over the next 12 months.

Alcatel Space CEO Pascale Sourisse does not expect a full-blown market recovery in 2004, but she does expect continued progress next year. In an exclusive interview with SATELLITE NEWS International Editor Mark Holmes, Sourisse talks about the company’s plans and expectations.

SN: You have signed a number of manufacturing contracts this year with satellite operators. Has the company performed above expectations in terms of gaining new orders?

Sourisse: We have certainly been positively surprised in terms of how the year has turned out in the commercial arena. Everybody remembers that 2002 was very bad in the commercial sector and we started 2003 with cautious expectations. In the end, the year has turned out a bit better than expected. We have announced three satellite contracts: Eutelsat/Hot Bird 7, Rascom, Koreasat 5. We have also announced the modification and expansion of the STAR ONE order with our Brazilian customer. In terms of payload, we have signed five contracts. We started the year with two orders for Russian satellites. We signed an order from XM Radio last summer. Then we signed two additional orders for Arabsat. So, it has been a good year in terms of orders. I admit that the level of orders is above the expectations we had at the start of the year.

SN: What are your expectations in terms of commercial orders as we go into 2004?

Sourisse: It will all depend on how active the market is in 2004. For the time being, we are expecting a market that will be around the same size as 2003. We still want to be cautious. We need to keep in mind the fact that even if the situation is improving in 2003, compared to 2002, we are not yet completely out of the crisis. We see the recovery as something progressive. At the end of 2002, things were very low. The market was so poor last year. Certainly, 2003 was a substantial improvement. For the time being, we are staying on the safe side, so we think the market expectations for next year should be about the same size as 2003.

SN: Are your revenues likely to increase in 2003 compared to 2002? With market conditions still tough for satellite manufacturers, do you anticipate further restructuring in 2004? When will the replacement satellite market to pick up?

Sourisse: In terms of revenues, for the time being, we can’t say that we are expecting an increase in revenues in 2003 because those revenues depend on the level of orders of 2002 and even 2001 … There are only a fraction of the orders, which have been taken in 2003 that will generate revenues in 2003. We expect substantial growth in revenues for 2004, but not for 2003. In terms of restructuring, we have had a very substantial restructuring program, which began in the second half of 2001. At that time we could see there was a crisis emerging in the satellite sector. In 2001, there was already a crisis in the telecom sector. We were right about that. Our expectations were that the crisis would expand from the telecom sector to the satellite sector. So, we started restructuring our activities in 2001. We continued in 2002 and 2003. Now our plan is complete, so we don’t expect any more restructuring next year.

In terms of the replacement market, we are seeing that operators are not that satisfied to freeze their investments for a long period of time. There was no replacement market last year. But, already this year, we are seeing operators trying to start again and planning on replacing satellites and this will continue next year. It is hard to tell exactly what is strictly replacement, and sort things out between replacement and additional capacity. In most cases, satellites can do a variety of things. In 2005, we expect to go back to a level of satellite orders of more than 20 in the open market. It doesn’t mean that there will not be a certain level of replacement satellites in 2004. We are already seeing orders in 2003 that are actually for replacement satellites.

SN: Could you give us an update of your collaboration with WorldSpace and TowerCast to provide satellite radio services in Europe?

Sourisse: We think that deploying [satellite radio in Europe] is a very good idea. We are very impressed by the success that XM in particular has had in the United States. They have more than one million users. This service is really taking off very successfully. We would certainly like to have something similar, although not exactly the same, because you need to adapt to the European market, which has a number of different characteristics from the U.S. market. But, we think it is an attractive opportunity for Europe, so we are continuing our collaboration with WorldSpace. We are looking for partners at the moment. We are getting some favorable feedback from content providers and car manufacturers. The key element to deploy this kind of solution in Europe is to really secure adequate types of relationships with key partners that could play a role in deploying the services … We are making progress but it is too soon to know when we can announce something in particular for this project.

SN: Your competitor EADS Astrium gains around 20 percent of its revenues from the military sector. Does Alcatel Space gain a similar amount from the military side?

Sourisse: We generate about the same percentage of revenues in the military domain. We are involved in a number of activities. In particular, we are the prime contractor for the French Syracuse system, which is the military telecom system. The difference between Syracuse and Skynet [in the UK] is primarily in terms of schedule. Syracuse started in 2000 and we were awarded a contract at that time. Since then, we have been working on it. The first satellite is nearly complete. It is being tested in our factory. We are also working on the second model – Syracuse 3B. The other domains we are involved in with the Ministry of Defence (MOD) is Earth observation/remote sensing, in particular, using optical instruments built by Alcatel for the Helios 2 system. We are also involved in a number of demonstrations for the MOD. All together we generate 20 percent of our revenues from the military field. We expect that to continue to be a significant part of our revenues. It is an important sector for us. Something that we hope we will succeed in is the joint offer that France, the UK and Italy submitted to NATO for their next generation military telecom satellite program. This joint venture is based on Syracuse on the French side, Skynet in the UK and Sicral for the Italian side. Our competition is from the U.S., but we hope the European offer will succeed.

SN: In a recent interview, EADS Astrium CEO Antoine Bouvier said that he doesn’t expect to see a market recovery before 2005. Do you agree with this sentiment?

Sourisse: It depends on how you define market recovery. I think we are already seeing some kind of market recovery in 2003 even if the number of satellite orders won’t be 20 or more as we have seen in the late 1990s. It is still much better than last year. The real recovery will come progressively. In terms of the number of satellite orders you have to make a distinction between open and closed markets. When I say open, I mean there is a distinction between what is really open to competition and those markets that are reserved to certain players. In terms of the open competition market, we will probably wait until 2005 to see figures of 20 satellites awarded per year. In the late 1990s, we saw more than that.

In terms of consolidation, our position on this is that further consolidation is required. It would be useful to strengthen the satellite sector. It is unclear how consolidation will really take place. There are still many discussions involving many players. It is a bit too soon to tell what will really come out of that. But, we at Alcatel consider further consolidation is something that is required and will be useful.

SN: What are your views on small satellites as developed by Orbital Sciences [NYSE: ORB]? Would Alcatel Space look to develop smaller satellites?

Sourisse: We certainly see a market for small satellites. You need to make the distinction between “extra small” satellites and “rather small.” We have a satellite that fits well with rather small types of satellites. We call this our Spacebus B2 or even B1 satellites. If we look at our product range in terms of satellite platforms, we have the large size satellites such as the Spacebus 4000 platform and there are various versions of this. Below that, we have the Spacebus 3000 that we also call B3. Below that, we have B2 and B1, which we used to offer some time ago, but we are working on these platforms to really submit attractive and competitive proposals to our customers. We have solutions, not for extra small satellites, but for rather small satellites.

SN: What are the main challenges for the company as we go into 2004?

Sourisse: Our main challenge is to continue to improve our competitiveness. It is very clear that for European suppliers like Alcatel, the dollar [exchange} rate is not healthy. But, we still want to remain very active in the market place, which means that we need to continue to improve our competitiveness. We launched a program more than a year ago in terms of competitiveness. In additional to restructuring activities within the company to adapt to the market, we also had a competitiveness plan in order to be able to supply satellites at a lower price. We are continuing this with a strong focus and a number of actions, which enables us to reduce our satellite costs. It is still a major objective of ours to continue to do this. Another thing that is also very important is to maintain our very high level of quality to our customers. The major focus for 2004 is the combination of competitiveness and a very high level of quality.

(Laurent Zimmermann, Alcatel Space, e-mail: [email protected] )