PanAmSat, the Wilton, Conn.-based fixed satellite services provider, is placing greater emphasis on the market for U.S. government satellite services, as well as on integrated satellite and fiber offerings. These were two of the main points to come out of the operator’s first quarter results released April 11.

The onus will be on the operator’s new G2 Satellite Solutions Division, which incorporates Hughes Global Services, to drive revenues in the U.S. government services sector where PanAmSat had previously not been a key player.

Tom Watts, a satellite equity analyst at SG Cowen, believes this acquisition was a smart move. In a note to investors, he wrote: “This step was necessary because PanAmSat did not have the critical mass and experience needed to compete effectively for this business. With the ongoing turmoil in the Middle East, and an increase in homeland security use, government revenues are likely to be higher in 2003. Traditionally, the US government has accounted for about three per cent of total revenues [for PanAmSat. This] is likely to ramp up to over 10 per cent in the next few years.”

The government sector is proving to be a fast-growing area of the business. Jim Frownfelter, PanAmSat’s COO, told Interspace: “Historically, for PanAmSat, we did not pursue government business. We have strictly been a commercial operator. Prior to Sept 11, I think our total contribution in revenue from the [Department of Defense], and the various arms of the U.S. government to lease satellite capacity was relatively small. We have been trying to ramp up, and now look at it as our fastest growing market sector.

He continued: “Today, it is about three per cent of our total revenue, which is a pretty substantial growth pattern, when you think we have only been chasing this for a little over a year now. We have taken a huge leap forwards in terms of being in a position to support the global requirements of the U.S. government. Our expectation is by the end of the year, we will be somewhere around 5 to 6 per cent.”

Fiber Play

The other area where PanAmSat would like to make headway is in a combined fiber and satellite offering. The operator recently announced a new hybrid satellite/fiber service through the formation of an agreement with Level 3. PanAmSat will be able to transition to virtual teleports that will enable it to connect and consolidate its six existing U.S. teleports. PanAmSat’s customers will have access to these teleport hubs via Level 3’s distance-insensitive network with local points of presence (POPs) in over 70 cities in the United States and Europe. This new approach eliminates the need to use a satellite to gain access to this hybrid network. Frownfelter observed: “By having this network in place, I can easily move traffic and centralise locations for my people and resources, which will allow me to improve customer service and minimise my operating expenses.”

William Kidd, a satellite equity analyst at Lehman Brothers, was positive about this strategic direction. He said in a research note: “Fiber/satellite offers can be complementary on point-to-point services, since the marketing process can generate potential customers in need of one or the other technologies; moreover, fiber can be used to interconnect long-haul traffic in regions, instead of over satellite, since it is cheaper.”

For PanAmSat, which derives around 75 per cent of its revenues from the video distribution business, reliability and quality of service issues have been obstacles in putting together a quality hybrid satellite/fiber product. A new fiber technology called multipacket protocol label switching (MPLS) offers a solution for a combined fiber/satellite offering. MPLS as a technology is designed to improve the reliability and distribution of digital video signals. Frownfelter said: “Starting in 2001, we sat down and started to seriously investigate how we could use this technology and how we could integrate it into our hybrid satellite/fiber networks. We evaluated a number of potential partners in the fiber arena and settled on Level 3 for phase one of the deployment of this network. The Level 3 relationship is just the beginning of what we think will be a revolutionary partnership moving forward.”

In 2002, the operator conducted extensive tests as it stepped up its plans. “We did tests where we pushed all kinds of video content through the network and monitored performance. We were literally sending billions of bits of data. We ended up with zero packets that were corrupted during this entire test phase, and only three bits were corrupted that required correction at the end site. For us, we were ecstatic about the enhancement to reliability in distributing video signals using this MPLS technology,” Frownfelter said.

In term of its financial results, the operator had revenues in the first quarter of $199.8 million, a decrease of $7.3 million compared to the same stage last year. Earnings before interest, taxes, depreciation and amortisation in the first quarter was $148.5 million, or 74 per cent of total revenues, compared to $151 million, or 73 per cent of total revenues for the same period in 2002. PanAmSat guidance for the year calls for revenues of between $783 and $823 million in 2003, a $20 million increase compared to previous guidance. Watts said, “PanAmSat posted an impressive Q1 in light of a very challenging economic environment. Revenues were slightly higher than expected due to the ramp up in government services.”

While the results were impressive, the major subject of discussion during the conference call was what News Corp (through its acquisition of PanAmSat parent Hughes Electronics) would do with PanAmSat once the Hughes deal is finalised. While News Corp CEO Rupert Murdoch has said he plans to keep PanAmSat, Watts is not so sure. “Longer term, we do not believe that Rupert Murdoch will keep PanAmSat as part of its global empire. There doesn’t seem to be a strategic fit,” Watts said.

Despite continual speculation and potential changes in terms of its potential ownership structure, Frownfelter said that his company has responded well in challenging conditions for the satellite industry. “For the last two years, Hughes has been going through this very arduous process. I have seen so many times where companies that are involved in that not keeping their eye on the ball and morale in the company going down and having a difficult management time with keeping people focused on running and operating the business as you should. We never did that,” he added. –Mark Holmes

(Contact: Kathryn Lancioni, PanAmSat, e:mail: [email protected]; Tom Watts, SG Cowen, email [email protected])