SES Q3 Results are not Surprising, but What About Video?

SES headquarters. Photo: SES

SES saw a significant fall in its net profits for the first nine months of 2018. This was one of the highlights of the company’s results announced Oct. 26. Net profits for this period were just under $346.6 million (304 million euros), which compares to just under $456 million (400 million euros) in the same period last year. In this nine-month period, the operator also achieved revenues of $1.66 billion (1.46 billion euros), a fall of just under 4 percent compared to the same stage last year.

While there has been a feel-good factor around SES this year, particularly since the appointment of Steve Collar as the Chief Executive Officer (CEO), as well as the strong performance of its Networks business, there is clearly still much work to do. Many analysts have remained positive about these latest set of results. Sarah Simon, a satellite equity analyst at Berenberg said in a research note  “The overall results were in line, video distribution trends worsened, with 5.8 percent underlying decline in Quarter 3 (Q3), versus 4.2 percent in Q1 and Q2. Management attributed this to the termination of some short-term capacity contracts in Q3. While this may not be relevant to the long-term contracted business, there may be other short-term contracts that could also terminate at some point, and with demand subdued, that revenue is unlikely to be compensated for in future. Management notes that video should come in at the low end of the forecast range for 2018 (having previously cut the target for 2020).”

However, it is the Networks business which is becoming the new star of SES. SES Networks saw underlying growth of 14 percent year-to-date and almost 20 percent in Q3 2018. For the first time in a number of years, all three of the SES Networks’ business verticals delivered growth this quarter, including a positive contribution from Fixed Data. “Q3 also saw Fixed Data return to positive territory for the first time in several years, as new business (largely from O3b) offset the continued decline in point to point and low value-added legacy business,” Simon added. “We note that a very weak Q3 2017 provided easy comps, and thus Fixed Data might slip back into negative territory in Q4. However, the trend of improvement is clearly there, as we expected, with the simple mathematical formula of ‘bad stuff shrinking, good stuff growing.’ Indeed, this is the theme for the group: growth in Networks more than offsetting slow erosion in video.”

The contrast between Networks and Video is really the main theme behind SES’ results. It has been the main theme throughout its results this year, as the Networks business continues to gain momentum. Giles Thorne, a satellite equity analyst at Jefferies added in a research note that the performance of the video business “continues to irk.” He said, “We are itching to argue that SES continues to rehabilitate the fundamentals side of its equity story but the Video business continues to irk. While it does, it will continue to overshadow what’s being delivered by Networks. A tipping point will be reached, but that is still a number of years away. For completeness, we see nothing in today’s Video print that talks to the secular decline debate.”

When looking deeper into the performance of the Video business, Thorne added, “Management flagged two issues: ongoing challenges in selling expansion capacity in international markets, in particular SES-9 and SES-10, from fewer new platforms entering the market and inertia around existing customers willing to invest; the expiration of a number of short-term capacity contracts in Europe. For us, the former is of greater concern, equally neither signals for us the type of secular decline some fear (and the consensus is already anticipating a decline out to FY20).”

Laurie Davison, a satellite equity analyst at Deutsche Bank added in a research note about the whole Video topic and bought in a comparison with its fellow satellite operator, Eutelsat. “SES attributed the worsening conditions in its Video Distribution in Q3 to intensifying pressures in its international Video operations (ie. outside of Europe). It cited a number of factors across a number markets, including Africa, Asia, Latin America, and North America. Our discussions with SES suggest the greatest declines in revenues have been seen in Asia and Africa,” Davison said. “We have discussed key exposures for Eutelsat in their Video division, and their greatest exposure is Africa and Middle East. So, they are also likely to similarly see an impact on their Video from these intensifying pressures from fewer satellite platform launches, pricing declinesm and loss of subscribers to Over-the-Top (OTT_ services for existing satellite clients.”

Davison added, somewhat ironically, that he believed Eutelsat would be more exposed to the bad points from SES results (Video distribution) and lacks the positive areas (Video Services and O3B/MEO boost to Networks). “In short, if this were Eutelsat’s operations, we would be looking at a miss,” he said.