PanAmSat Shows The Money

Joe Wright, the president and CEO of Wilton, Conn.-based PanAmSat [Nasdaq: SPOT], characterized his company during last week’s earnings conference call as the world’s top-performing and best-positioned fixed satellite services (FSS) operator.

Wright and his senior management team reported respectable financial results that might seem modest to those in other sectors, but compare favorably to other FSS companies. Indeed, Wright’s inspired performance during the conference call seemed akin to a football coach speaking at a pep rally to build the spirits of his players and fire up his team’s supporters.

With a powerful voice, Wright began last week’s call by telling his listeners that he was happy to say the company continues to “meet or exceed all of our guidelines.” He quickly backed up the claim with a few comparisons.

“In January a year ago, we provided guidance for [2003] revenues of $770 million to $800 million; we achieved $831 [million],” Wright said. “We said that EBITDA [earnings before interest, taxes, depreciation and amortization] would be between $580 to $600 million; we were $591 [million].”

Wright continued, “We said earnings per share would be 52 to 62 cents a share; we were 66 cents a share. We gave guidance on cap ex [capital expenditures] of $140 million to $180 million; we were $103 million. And we ended up with free cash flow, which we do not provide guidance on, of $527 million and that compares to $463 million the year before.”

PanAmSat also beat the revenue guidance of $200 million to $215 million it issued in the fourth quarter of last year by notching $218 million, Wright said. In addition, the company met its earnings per share guidance of between 9 and 14 cents a share by finishing at 12 cents a share. Earnings per share for 2003 were lower than the prior year, as expected, due to a one-time effect on satellite depreciation, combined with one-time severance and restructuring expenses, he explained.

“Compared to our competitors, we also did pretty well,” Wright said. PanAmSat’s 2003 revenues rose 2.3 percent, compared to what is likely to be flat to negative revenues for its “top competitors,” Wright said. While PanAmSat’s EBITDA held steady compared to the prior year, its rivals probably will see a 3 percent to 8 percent EBITDA decline, he said.

“We had a good year,” Wright said unequivocally.

That is no small feat in a marketplace environment weighed down by a relatively weak economy, satellite transponder overcapacity in many regions, and fierce pricing competition.

One big 2003 achievement was paying down $850 million in debt rather than just the $200 million expected, while still finishing the year with $550 million in cash, Wright said. Another plus was settling two insurance claims for $362 million, generating $260 million for the first quarter of 2004.

The satellite insurance claims settlement is a positive for the entire satellite industry, according to Bob Peck, a satellite analyst at Bear Stearns. With a number of insurance claims pending throughout the industry, PanAmSat’s deal is a sign that payments also could be forthcoming to other companies.

The company’s fourth quarter revenues of $218 million topped the Bear Stearns estimate of $208 million due to higher than expected government services revenues, Peck wrote to his clients. However, the company’s EBITDA of $144 million was shy of its estimate of $146 million, stemming from an increased mix of lower margin government services revenues and one time costs, he added.

Fourth quarter 2003 operating profit before depreciation and amortization was approximately $142 million, compared to $144 million for the same period in 2002. The decrease in dollars, as well as the percentage decrease on a year-over-year basis, was impacted in the fourth quarter by changes in bonuses, restructuring and severance charges, as well as a small reserve for a previous investment, said Michael Inglese, PanAmSat’s chief financial officer and executive vice president.

PanAmSat also reached an agreement to take its sister company DirecTV Latin America off its credit watch.

Growth Strategy

Wright laid out a three-pronged growth strategy seemingly intended to gain the attention of critics who believe he has been too cautious about investing in new projects. Rather than blaze the trail, Wright has been content to let his industry rivals test new market opportunities and then lead his company aggressively to seize what appear to be the best ones.

First, PanAmSat is going to develop its cable neighborhood in the United States by launching two more satellites with transponders to provide high-definition TV (HDTV) capacity, Wright said. The company recently launched and began operating Galaxy 13, the first of three satellites that PanAmSat is planning to deploy to meet the rising demand for HDTV, he added.

PanAmSat has the largest and “most successful” cable neighborhood in the United States, featuring five prime satellites and two backups, Wright said. The neighborhood serves 11,000-plus cable head-ends and 69 million households.

“It is now made even more valuable to broadcasters as HDTV satellites are added to it,” Wright said. “Galaxy 14 will be launched in the third quarter of this year and is already 100 percent leased out. Galaxy 15 will be launched in the first quarter of next year and is already 90 percent leased out. This neighborhood is becoming more valuable by the minute.”

The HDTV market is “booming” with the number of households having access to it expected to grow to 42 million between 2006 and 2007, compared with three million households now, Wright said.

“Our second area of focus is the U.S. government, which is the single largest user of FSS satellites in the world,” Wright said. “The government today uses $500 million a year in commercial FSS satellites.” The Congressional Budget Office recently projected that the federal government’s use of satellites would grow at 15 percent annually, without taking into account homeland security needs.

“Out of 125 transponders leased by the government several years ago, PanAmSat had only five,” Wright said. “We had to change that. So we look upon the government as a growth opportunity to fill up our international transponders and we acquired HGS [Hughes Government Services] and Esatel to [create] G2 Government Solutions, which enables us to compete in the government market.”

The total cost for PanAmSat to invest in those two businesses was only $13 million, Wright said. He described it as a good strategic and financial move.

“While the results are lower EBITDA margins in the short-term, these will increase as we sell and migrate transponders to the PanAmSat global fleet,” Wright said.

The company’s third area of growth will be through consolidation, Wright said. There currently are over 30 operators today and the number is shrinking, he explained.

The five biggest satellite operators account for almost two-thirds of the worldwide market, and their share is growing.

“As we pursue these three opportunities and some others, we are primed to exceed the expected growth of this industry,” Wright said.

Fox Hunting

PanAmSat also last week signed one of its largest video distribution contracts ever with Fox Entertainment [NYSE: FOX], a unit of News Corp [NYSE: NWS], which recently became a significant owner of PanAmSat’s parent company Hughes Electronics [NYSE: HS].

The multi-year deal for PanAmSat to carry Fox Entertainment programming domestically and internationally demonstrates that News Corp quickly is capitalizing on synergies from its acquisition of Hughes, said Doug Mitchelson, a satellite analyst with Deutsche Bank. The Fox pact, combined with the positive message conveyed about PanAmSat’s outlook by its management, suggest that the company could be put on the selling block soon, Mitchelson added.

“With PanAmSat having little overlapping synergies with [Hughes’] DirecTV, we believe it is likely that News Corp will move to monetize Hughes’ 81 percent stake in the company,” Mitchelson wrote to his clients in a research note last Wednesday. “This would have the dual benefit of simplifying the company and improving the balance sheet, placing DirecTV in an improved competitive position at a time when it is increasing its spending to acquire new customers.”

–Paul Dykewicz

(Kathryn Lancioni, PanAmSat, 203/210-8649; Doug Mitchelson, PanAmSat, 203/863-2364; Bob Peck, Bear Stearns, 212/272-6665)