[Satellite News 02-02-09] Avanti Communications Group, the U.K.-based fixed satellite services operator, is set for a crucial year as the countdown starts to the launch of its HylasOne satellite, which is designed to serve the satellite broadband markets of Europe.
“The satellite procurement is going reasonably well,” said David Williams, CEO of Avanti. “It is a very complicated satellite. I am very glad that we have passed the critical design review and the technology risks of the program have been retired. So we are now into the last leg, which is a comparatively straight forward process of assembly and test.”
Williams discussed the operator’s plans for its first satellite and what impact he hopes the operator will have in markets throughout Europe.
“The satellite procurement is going reasonably well,” said David Williams, CEO of Avanti. “It is a very complicated satellite. I am very glad that we have passed the critical design review and the technology risks of the program have been retired. So we are now into the last leg, which is a comparatively straight forward process of assembly and test.”
Williams discussed the operator’s plans for its first satellite and what impact he hopes the operator will have in markets throughout Europe.
Satellite News: Satellite broadband has been a market that other operators have tried to monetize in the past and failed. Why do you think things will be different this time?
Williams: The technology and the markets it was serving before were not ready. I first started looking at this when I was a banker trying to finance early generation projects in the late 1990s. The market was not ready. The demand for broadband is now overwhelming. The penetration rates in the developed economies are now incredibly high. Broadband has almost become utility like in the shape of its demand. People regard it as fundamental. That is a very big evolution in the telecoms market. The technology before the arrival of Ka-band services was frankly poor — slow speeds, high-costs and hardware and software that suffered from a lack of standardization. Vendors were unable to make the investments needed to make to affordable, reliable customer premise equipment. Now, those investments have been made, and we are buying modems that are as reliable as cable and ADSL modems. They are being made in the volumes that make it viable for the vendors to invest in them. Ka-band satellites mean you can now sell services to customers at the same price of ADSL or cable, and can provide fundamentally the same service levels.
Satellite News: How much capacity do you hope to have sold on the satellite at launch?
Williams: The commmercialization of Hylas is going exceedingly well. Our business model is to sell to telecoms companies who then sell to end users. We now have 25 of those. We have great confidence that we will meet our targets. It is my desire to have 20 percent to 25 percent capacity committed on day of launch. We are up to around 9 percent currently, but many of our distribution partners have ramp-up contracts. They expect to be buying much more capacity then they do on day one just because of their successive sales.
Our confidence is being driven by government procurement. The digital chasm has the attention of every government in Europe, and the EC (European Commission) has made available 1.8 billion euros ($2.4 billion) to fund the costs of enabling broadband access to all. We have seen the first few really big projects which have been properly procured, using EC money and following EC tendering rules, have really happened in the United Kingdom. We have won all of those. We have not yet lost a tender for a EU (European Union) funded broadband rollout project, so the projects we are expecting to see throughout Europe give us great confidence that we will meet and possibly exceed our forecasts.
Our confidence is being driven by government procurement. The digital chasm has the attention of every government in Europe, and the EC (European Commission) has made available 1.8 billion euros ($2.4 billion) to fund the costs of enabling broadband access to all. We have seen the first few really big projects which have been properly procured, using EC money and following EC tendering rules, have really happened in the United Kingdom. We have won all of those. We have not yet lost a tender for a EU (European Union) funded broadband rollout project, so the projects we are expecting to see throughout Europe give us great confidence that we will meet and possibly exceed our forecasts.
Satellite News: With the global recession have an impact on the business plan of Avanti Communications or your ability to pick up capacity contracts for HylasOne?
Williams: I think any CEO has to say that macro-economic factors have to have some impact. I don’t think it is possible for anyone to say they are truly recession proof, but we do feel that the macro-economic circumstances surrounding us are unlikely to have a strong negative impact on our ability to meet our forecasts. I say that for three reasons. Firstly, the market we are serving is vast and it is far greater than our ability to serve. We think there are 24 million households in the EU that need satellite broadband, and Hylas will be full with just half-a-million of those. So there is massive coverage there, and we are the first company to launch a broadband satellite. The market is very large. The demand coming from the mobile phone sector is very large. There are something in the order in 900,000 base stations in Europe. If we were installed in just 1 percent of these, we would be full. We only need to take a very small percentage of the available market to meet our business plan. We can afford for the market to shrink very dramatically without it having an impact on our business.
Secondly, I don’t believe that market will shrink dramatically. I think in a telecoms universe, customers are showing signs of deferring handset replacement or equipment replacements. Customers are not showing the same enthusiasm for buying the latest technology and features. I think people will hold onto their equipment a little longer. I think the replacement cycle will get longer, but I am far from convinced that people will change their habits as far as voice and data communications go. That is untested. The telecoms universe we operate in has not been tested during a big recession. Those assumptions could be challenged, but I feel the need for broadband is at the low end of the scale in terms of recession linked volatility. I don’t think demand for broadband is going to be that dramatically impacted.
Finally, the governments of Europe are very assertively moving forward with tendering processes for rural broadband enablement projects. It is also typical to see governments increasing their spending during recession. Happily, the frameworks in which government money can be spent on rural broadband already exist. The EC has been working on this for five years and the structural funding budgets are allocated. The conditions for tendering are clear. The first set of projects have happened. I am expecting to see half-a-dozen rural broadband projects happening in each country that we serve. We have already won three in the United Kingdom, and there are at least four more projects to come, and I expect to win, if not all four of them, than at least half of them.
Secondly, I don’t believe that market will shrink dramatically. I think in a telecoms universe, customers are showing signs of deferring handset replacement or equipment replacements. Customers are not showing the same enthusiasm for buying the latest technology and features. I think people will hold onto their equipment a little longer. I think the replacement cycle will get longer, but I am far from convinced that people will change their habits as far as voice and data communications go. That is untested. The telecoms universe we operate in has not been tested during a big recession. Those assumptions could be challenged, but I feel the need for broadband is at the low end of the scale in terms of recession linked volatility. I don’t think demand for broadband is going to be that dramatically impacted.
Finally, the governments of Europe are very assertively moving forward with tendering processes for rural broadband enablement projects. It is also typical to see governments increasing their spending during recession. Happily, the frameworks in which government money can be spent on rural broadband already exist. The EC has been working on this for five years and the structural funding budgets are allocated. The conditions for tendering are clear. The first set of projects have happened. I am expecting to see half-a-dozen rural broadband projects happening in each country that we serve. We have already won three in the United Kingdom, and there are at least four more projects to come, and I expect to win, if not all four of them, than at least half of them.
Satellite News: Is there enough business in the satellite broadband markets of Europe for multiple operators to build a strong business case?
Williams: We always assumed competition would arrive. I think the satellite business is traditionally not full of commercial innovation. I think the U.S. market has more commercial innovation than others, but the satellite market has not had a lot of commercial innovation for quite some time. That is probably because it has taken on the look and feel of a utility with very attractive high margin and stable cashflows. If you are in a fortunate position to have a business like that, then the incentive to innovate is quite low, so we always felt that once Avanti had proved the business model and technology, that others would follow. We are comfortable with competition here.
In the United States, there are four Ka-band competitors, three of which have satellites already. They all seem to agree that the market in the United States. is around 13 million customers. We think the market in Europe is 24 million customers, and that is just retail broadband. That does not include for institutional and corporate data, and these are also big markets. So just based on purely rural broadband alone, the market is big enough for 15 to 20 large Ka-band satellites. We were delighted when Eutelsat announced their Ka-band satellite. Eutelsat is very well regarded company in our industry, and the fact they decided to buy a Ka-band satellite somewhat validated some of the assumptions we have been talking about for a while. We believe there is room for everyone. It has worked in America, and they all seem to be happy and everyone is building a business. There are big markets in Europe. I think the demand for satellite Ka-band services will get bigger.
In the United States, there are four Ka-band competitors, three of which have satellites already. They all seem to agree that the market in the United States. is around 13 million customers. We think the market in Europe is 24 million customers, and that is just retail broadband. That does not include for institutional and corporate data, and these are also big markets. So just based on purely rural broadband alone, the market is big enough for 15 to 20 large Ka-band satellites. We were delighted when Eutelsat announced their Ka-band satellite. Eutelsat is very well regarded company in our industry, and the fact they decided to buy a Ka-band satellite somewhat validated some of the assumptions we have been talking about for a while. We believe there is room for everyone. It has worked in America, and they all seem to be happy and everyone is building a business. There are big markets in Europe. I think the demand for satellite Ka-band services will get bigger.
Satellite News: Aside from the broadband markets, are there any other potential market opportunities?
Williams: We have firmed up a new opportunity which is about providing mobile base stations for cellular backhaul. This is a relatively mature market in Africa where satellite has been used for a long time, but that has been driven by the non-availability of any kind of terrestrial backhaul. What we have discovered in Europe is that mobile phone companies have really, within the last year, experienced a dramatic surge in the peak data requirements placed on mobile phone base stations as a result of the uptake of devices such as the new Blackberries and Apple Iphones. Mobile phone base stations that were originally scaled to cope with voice and so provisioned with 2 megabits per second of backhaul now experience peak data demand of 40 megabits per second. Upgrading cable is not economically viable. In many countries, microwave is expensive and there are many licensing issues, so the mobile phone industry seems to have flipped completely from the point we were at a couple of years ago where they were saying, “We don’t like satellite, and there are latency issues for us to the point.” to where they are saying, “We need satellite, and for data transactions latency does not matter.” I believe the advantages Ka-band has will enable us to take a big chunk of this market.
Satellite News: What are the main financial challenges facing the company, and when do you expect to be profitable?
Williams: Profitability is in the market by the virtue of the brokers forecasts. The City is expecting us to be EBITDA (earnings before interest, taxes, depreciation and amortization) positive in 2009 and generating very strong EBITDA in 2010. They are expecting us to be generating positive earnings per share in 2011, so I am fairly comfortable with those forecasts. We should read bottom-line profitability at the end of second year after launch, but we will be generating positive cashflow the first year after launch.
In terms of financial challenges, I think the ones we have are the same as other businesses. There are no challenges that feel unusual or exceptional. We do have the good fortune of being fully financed. Within our business model, we are a business-to-business service provider, so we will always have a relatively small number of customers, so we have the ability to manage and control our credit risk very well. One of the glories of any satellite business model is that your customers pay you pretty often up front. The day a customer doesn’t pay you, you turn them off. Customers tend to pay for their satellite bandwidth. I don’t feel as though we have exceptional challenges.
In terms of financial challenges, I think the ones we have are the same as other businesses. There are no challenges that feel unusual or exceptional. We do have the good fortune of being fully financed. Within our business model, we are a business-to-business service provider, so we will always have a relatively small number of customers, so we have the ability to manage and control our credit risk very well. One of the glories of any satellite business model is that your customers pay you pretty often up front. The day a customer doesn’t pay you, you turn them off. Customers tend to pay for their satellite bandwidth. I don’t feel as though we have exceptional challenges.
Satellite News: While HylasOne is fully funded, is it likely now to be some time before we hear news of other new satellites?
Williams: There is no doubt that fund raising is much much harder than it was 12 to 24 months ago. We are in a very fortunate position that our largest shareholders are unleveraged funds with very long-term horizons. One is an investment trust. Its funds are locked up and committed indefinitely. Another has seven-year fundings. Our largest investors have got strong semi-permanent capital. They are unleveraged and they love our business plan and are keen to support. We are in the fortunate position of having strong supportive investors who are willing to cornerstone new projects if they are good and bankable. I think that if we were to approach the market with a strong project, I think we would get it financed, but I think the terms and conditions would be worse than they were a while ago. My share price is well below net asset value, and that does come into play, but capital is available to me if I can produce a project that deserves it.
I can’t tell you when you will hear about new satellites from us. It all depends on when I can put a project together which looks bankable. I am working on that all the time. I would hope the outcome would be sooner rather than later. In comparison, with some of the heady days of booming stock markets, it feels difficult. I think in the last few years, some bad business plans got funded. The business plans we are putting together are pretty robust, bankable, scalable and attractive, and for that reason I think we will get funding. … We want to make substantial progress with the procurement and development of our next satellite. I hope to make a HylasTwo satellite announcement sooner rather than later.
I can’t tell you when you will hear about new satellites from us. It all depends on when I can put a project together which looks bankable. I am working on that all the time. I would hope the outcome would be sooner rather than later. In comparison, with some of the heady days of booming stock markets, it feels difficult. I think in the last few years, some bad business plans got funded. The business plans we are putting together are pretty robust, bankable, scalable and attractive, and for that reason I think we will get funding. … We want to make substantial progress with the procurement and development of our next satellite. I hope to make a HylasTwo satellite announcement sooner rather than later.
