Eutelsat’s Results: The ‘Other’ Side of the Story Fails to Impress

During Eutelsat’s third quarter results, issued May 14, the main subject of conversation was the revenues in the “other” category — usually a footnote in many results. Eutelsast’s revenues are broken down into video, government services, fixed data, mobile connectivity and fixed broadband. In the three months to the end of March, however, “other” revenue added up 0.1 million euros. This compares to 7.5 million euros ($8.97 million) in the same quarter last year. Analysts across the board were shocked.

In other highlights of its results, Eutelsat showed similar trends to what we have seen elsewhere, in other words falling revenues across the board, except in the area of mobile connectivity which showed an increase.

In the three months to the end of March, the operator reported overall revenues of 337.4 million euros ($403.58 million), down almost 7.5 percent compared to the same stage of last year. However, despite the overall fall in revenues, video services pretty much remained the same at 225 million euros ($269.13 million) for the quarter. This is important given the ongoing significance of video to Eutelsat. It is still the major growth driver for the company, representing 67 percent of overall revenues for the company.

Government services revenues stood at 38 million euros ($45.45 million), a 2.3 percent decrease compared to the same stage last year. In areas of data and broadband, again the operator struggled. In fixed broadband, which represents only 7 percent of its revenues, it achieved revenues of 21.5 million euros ($25.72 million) for the three months to the end of March, a fall of almost 8 percent compared to the same stage last year. In fixed data, the fall was even more pronounced. Revenues for the quarter reached 34.9 million euros ($42.75 million), down almost 10 percent compared to the same stage last year.

Analysts’ Verdict

So, what did analysts make of these results? All of them mentioned the surprise in the revenues in the “other” revenue category.

“The 3Q18 results will be remembered as one of Eutelsat’s more idiosyncratic. The point of debate was the ‘other’ revenue line. Total revenue of 337.4 million euros was weak (-3 percent behind consensus) but excluding the ‘other’ revenue line (which was an unprecedented, 0.1 million euros, consensus of 6 million euros, 3Q17 of 7.5 million euros) then results would have been only -1.4 percent behind. Mobility noticeably soft (-10.5 percent, but on small absolute numbers) but critically, video, almost exactly in-line. What adds to the mystique is that Eutelsat has felt the need to caveat its FY18 guidance due to the performance of ‘other’ in the quarter,” said Giles Thorne, a satellite equity analyst at Jefferies, in a research note.

Thorne thought Eutelsat’s performance in the video arena, was however positive. “There were a number of positive soundings on the video business, and Hotbird in particular. The fill rate has returned to slight growth, underpinned by favorable renewals and new business; the TVN ‘favorable renewal’ means that revenue post renewal is stable-to-slight-growth,” he added.

Laurie Davison, a satellite equity analyst at Deutsche Bank, wrote in a research note that the biggest concern really was the virtually zero revenues from “other.” Davison pointed out that this is first quarter in more than 10 years that Eutelsat has registered zero “other” revenues. Davison gave a good description of “other” in the research note: “According to the annual report, the main categories are (i) compensation paid on the settlement of business related litigation, (ii) the financing of certain research programs by the EU and other organizations, (iii) the impact of EUR/USD currency hedging, (iv) the provision of various services or consulting/ engineering fees; and v) termination fees,” Davidson wrote.

Davison shared a number of concerns related to Eutelsat’s guidance as a result of this. He said it brings into question the unchanged guidance of a return to growth for next fiscal year (‘18-19) and the following (‘19-20). “Consensus still believes this; standing at +1 percent/+2 percent respectively. The company has already started to talk down next year, refining ‘slight growth’ as ‘very slight’ while refusing to state what ‘other’ revenues this is based on. We continue to see this at risk primarily from a continuation of video declines against company expectations of a return to growth. Management refused to rule out pricing cuts in CEE following the TVN renewal and video revenues continue to decline despite higher channel count and HD penetration,” he said.

Andrew Spinola, a satellite equity analyst at Wells Fargo, spoke about Eutelsat’s changing relationship with Viasat, and how it could impact the company’s broadband ambitions. Spinola said Eutelsat had spoken on a conference call about this and how Eutelsat believes that the wholesale model is preferable to the retail model that it was going to pursue with Viasat.

“In our view, large wholesale partnerships like the relationship with Orange are positive as they give Eutelsat a certain amount of committed revenue, but are not the optimal long-run solution for consumer broadband. We agreed with Eutelsat’s prior view that a retail venture is the best go-to-market strategy as it allows for the most control and has had the most success. We are more concerned about the roughly 80 percent of the new European broadband satellite that doesn’t have pre-commitments than we are bullish on the possibly 20 percent that does. We have been bullish on Eutelsat’s focus on cash flow, capex reductions, and focus on consumer broadband and emerging market video. We are less bullish on the company’s new strategy on consumer broadband, but we still believe Eutelsat has the right end-market focus,” Spinola added.