Sagging financial performance at SES Global [Luxembourg: SES], the world’s largest satellite operator, is a clear sign that fixed satellite service (FSS) providers are under mounting pressure.

Wall Street analysts expected 2002 would be a down year for SES, but the results released last week showed the deterioration was worse than projected. Reasons for the earnings slide include a weak economy, a transponder glut in certain regions of the world and a charge taken for the Luxembourg-based company’s acquisition of GE Americom, now operating as SES Americom.

SES Global fell short of achieving second half estimates from Bear Stearns “across all” key metrics, said Bob Peck, the satellite analyst at Bear Stearns.

SES Global’s second half revenues of 637 million euros ($683 million) did not reach Bear Stearns’ estimate of 696 million euros ($747 million), Peck wrote to his clients last week. Earnings before interest, taxes, depreciation and amortization (EBITDA) of 528 million euros ($566 million) for the last half of 2002 also dipped below his estimate of 558 million euros ($599 million). Likewise, earnings per share of .25 euros ($.27) slipped well below Peck’s estimate of .40 euros ($.43).

SES Global indicated that revenues in 2003 likely would slip lower than in 2002 due to the continuing tough economic environment, industry-wide overcapacity of transponders, expiration of some contracts, continued weakness of the dollar and non-recurring 2002 revenue items.

As a result, Bear Stearns cut 2003 revenue estimates and long-term growth rates for SES. The reasoning included a slowdown in the telecommunications market, excessive transponder capacity, and pricing pressure across data and other applications, as well as the regions of Asia and Latin America, Peck wrote.

William Kidd, a satellite analyst at Lehman Brothers, wrote to his clients last week that SES Global underperformed his already “grim expectations.” The company’s sagging stock price is expected in light of the market’s perception of deteriorating fundamentals, he added.

The weak value of the U.S. dollar prevented SES Americom from contributing as much as expected to SES Global’s performance, Kidd explained. However, that issue is only part of the reason for the parent company’s “staggering decline” compared to the rest of the industry, Kidd wrote to his clients in a March 26 research note.

“For example, New Skies is generally considered to be one of the weaker players in the industry, but its revenue declined 1 percent over the same period. PanAmSat declined 5 percent, but fell only 3 percent when looking at just operating revenues. Even some of the private operators, some perceived stronger – some weaker, experienced less precipitous declines,” Kidd explained.

Problems that have afflicted SES Global include customer insolvencies, contract restructurings and terminations at AsiaSat and SES Americom, as well as slackening demand, Kidd said. Other FSS operators have faced similar marketplace challenges, he added.

SES appears to have absorbed a disproportionate share of the impact from the financial troubles at Germany’s Premiere, U.S.-based StarBand and Israel’s Gilat Satellite Networks [Nasdaq: GILTF], Kidd said.

SES Global still maintains one of the strongest FSS business models and that edge should help the company rebound when it clears its existing trouble spots, Kidd continued. He predicted that most of the obstacles impinging upon the company’s performance would be worked through during 2003.

Revenues at SES Americom slipped to 229 million euros ($246 million) during the second half of 2002, compared to 272.5 million euros ($292 million) during the first half, a 16 percent decline. EBITDA fell to 183.7 million euros ($197 million) during 2002’s second half, compared to 224 million euros ($240 million) in the same period in 2001. As a result, SES Americium’s EBITDA margin dropped to 17.8 percent in the second half of 2002, in contrast to 23.6 percent in the first half of 2002.

Cost Structure

Besides reducing staff, SES Global could cut costs in a number of areas, Kidd said. One possible area of savings could come from scaling back on sky-high insurance expenses. The entire fleet could be self-insured, following the lead of EchoStar Communications [Nasdaq: DISH] (SN, March 24). Another option would be to reduce the insurance coverage on the in-orbit satellites. SES Global insures all of its satellites for at least book value.

SES Global also addressed a pet peeve of Kidd’s by ending the off-balance sheet accounting treatment for the Satlynx broadband venture. However, the inclusion of those results in the parent company’s financial statements could be short-lived, he warned.

The off-balance sheet accounting of Satlynx’s results ended during the latest financial period when SES officials acknowledged that Alcatel Space had not stepped up as expected to assume a partnership role in Satlynx. This leaves SES Global holding a 50 percent stake in the venture. Under accounting rules, 50 percent ownership is deemed sufficient to require inclusion in the parent company’s financial statements.

If a partner is added to reduce SES Global’s stake below 50 percent, then the company would be able to resume accounting for the startup operation’s weak results on an off- balance sheet basis, Kidd explained.

“Alcatel might be encouraged to join Satlynx, if the commitment translates into some additional satellite orders over the next 12 months,” according to Kidd. “SES is forecasting Satlynx to break even in 2005, meaning that additional investments are needed in 2004, though the company indicated these were small.” No additional investments in Satlynx by SES are foreseen in 2003, he added.

For full-year 2002, SES Global increased its revenues to 1.35 billion euros ($1.45 billion), or 38 percent compared to 2001. The company’s 2002 profit, however, dipped to 205 million euros ($220.5 million), down from 280 million euros ($301 million) in 2001. This decline resulted from goodwill amortization and financing charges related to SES Americom.

The parent company also used a strong net operating cash flow of 1.052 billion euros ($1.13 billion) to reduce its debt by 479 million euros ($515 million). That move helped the company to trim its net debt-to-equity ratio to 74 percent at year-end 2002, company officials said.

–Paul Dykewicz

(Mark Roberts, SES Global, 352 710 725 490; Bob Peck, Bear Stearns, 212/272-6665; William Kidd, Lehman Brothers, 212/526-4849)