Intelsat Ltd. is targeting opportunities in selected niche business segments after reporting weakened financial results for the first quarter.
Intelsat’s net income fell 24 percent to $64.1 million during the quarter, compared to net income of $84.8 million for the same quarter last year. Revenues slipped slightly to $238 million for the quarter compared to $258.5 million a year ago.
The revenue decline was primarily due to a pair of key customers filing for Chapter 11-bankruptcy protection, company officials said. In addition, $14.1 million in revenue was lost in the quarter because of non-renewal of lease agreements.
Reduced demand for satellite services generally cut the utilization rate on Intelsat’s 26 in-orbit satellites to 63 percent. Intelsat typically has maintained a utilization rate of 70 percent or higher.
The company is trying to overcome the generally weak market conditions by pursuing growth through niche markets, Intelsat Chairman and CEO Conny Kullman said during an April 30 conference call. Examples include a restructuring announced March 14 that carved out new business units to focus on government services, video customers, and data, Internet and carrier services.
The three business units offer “key opportunities” for growth in fixed satellite services and each segment is one where Intelsat has a solid market presence, said Ramu Potarazu, Intelsat’s chief operating officer.
Creation these units will help sharpen the company’s marketing and customer service focus, Potarazu said.
Despite a drop in net income in the first quarter from a year ago, the latest results actually were flat when compared with the fourth quarter, Kullman said. That leveling off suggests that industry conditions are beginning to stabilize, he added.
Nuclear Winter Ahead?
Steve Symonds, an independent satellite consultant who heads Wilton, Conn.-based Symonds Associates, said Intelsat’s announcement that net income and revenue declined is just the latest sign that a “nuclear winter” has hit the satellite industry.
“Intelsat’s statement that it had 29 straight years of profitability did make me do a bit of a double-take,” Symonds said. “For 28 of those years, it was a cartel, like OPEC. The only question year after year was how large ‘profits’ would be — never a peep about losses. It is quite amazing to watch Intelsat — born and bred in a closed market akin to a game preserve — come to grips with the ebb and flow of the open marketplace.”
Matthew Karnes, a satellite analyst with SG Cowen, disagreed, saying that Intelsat’s performance was good in light of a “tough operating environment.”
Intelsat’s overall financial condition remains strong and the company’s delayed initial public offering (IPO) of stock is not needed to fund its near-term operations, said Joseph Corbett, Intelsat’s chief financial officer.
“Our business remains highly profitable and our balance sheet is strong,” Corbett said. “As such, we believe our current operating plan is fully funded through funds provided from operations, and, if necessary, commercial paper borrowings. Nevertheless, even though there is no current need for additional capital, we remain committed to the strategic goal of conducting an IPO as soon as practicable.”
The company’s cash flow position improved during the first quarter as Intelsat reduced its payments for satellites and other property and equipment. Intelsat ended the quarter with cash and cash equivalents of $60.6 million, up from $13.9 million for the same period a year ago.
Free cash flow should rise significantly throughout the year as the company reduces its capital spending due to completion of a three-year fleet renewal program. Benefits from lower than expected expenses to implement its terrestrial network infrastructure and a previous workforce reduction also should boost free cash flow, Corbett said.
Another Deadline Extension?
Company officials expect to have a strong case to present to the Federal Communications Commission (FCC) and U.S. lawmakers to extend its year-end deadline to complete an IPO. If market conditions do not improve sufficiently, the FCC can push back the required date for the IPO six months, until June 30, 2004. Any further postponement would require the support of Congress, which set the year-end 2003 deadline.
“We are not going to go to the Hill prematurely,” Kullman said. “It is right to do it to get the public equity and provide liquidity to our existing shareholders. We will get it out as soon as we possibly can.”
Despite encouraging signs shown by the market in the past few weeks, Intelsat is looking for “longer-term improvements” and stronger trends before trying an IPO, Kullman explained.
As Intelsat extends its services further in corporate broadband and wireless access, the company is putting into place “building blocks” that will give it a better story to tell potential investors, Kullman said.
Intelsat has achieved progress in fulfilling congressional intent in diluting the company’s ownership structure, without holding an IPO, Kullman said. For example, the company’s largest shareholder, Lockheed Martin [NYSE: LMT], has moved out of the satellite-operating business, he said.
Intelsat’s changing ownership structure is reflected by Lockheed’s previous purchase of shares once owned by Comsat, a company created by the U.S. government in the 1960s to be a signatory to Intelsat when it was an intergovernmental organization.
Since Lockheed Martin, a 24 percent shareholder in Intelsat, has left the telecommunications business, issues about potential anti-competitive problems no longer exist, company officials said.
Another example of Intelsat’s restructuring is India’s VSNL, a 5 percent shareholder. VSNL is no longer government-controlled, but is owned by Tata Industries, a publicly traded company, said Dianne VanBeber, Intelsat’s vice president of investor relations.
Another Intelsat shareholder is France Telecom [NYSI: FTE], also a 5 percent stakeholder. France Telecom now is a publicly traded company. However, it still is 55 percent owned by the French government.
Kullman said Intelsat remains interested in pursuing consolidation as a business strategy. He declined to discuss any specific combinations but he said consolidation would allow a company to enlarge its scale and save on capital and operating expenditures. Fewer satellites would be needed to provide service in each region and $250 million could be saved for each satellite a company would not need to build and launch, he explained.
Intelsat’s diversification efforts led it to complete a $58 million investment in WildBlue Communications during April. That investment gives Intelsat a 30 percent stake in the start-up Ku-band satellite system that plans to provide broadband services to consumer and small-office and home-office (SOHO) users next year. Intelsat also gained two WildBlue board seats to help steer that venture’s direction.
WildBlue will differentiate itself by offering lower price points for user terminals than the enterprise-market focused SpaceWay system, under development by Hughes Network Systems to provide Ka-band services to broadband users of HNS’ DirecWay service, Potarazu said.
“We see the [WildBlue] product taking off and attracting a lot of demand in the future,” he said.
Intelsat also plans to extend its hybrid satellite/terrestrial services, Kullman said. Specifically, Intelsat’s GlobalConnex portfolio of hybrid satellite/terrestrial services gained new data and IP services contracts from the Middle East and Asia Pacific regions in the first quarter. One such deal involved Fast Telecommunications, a Kuwait-based company that provide data and voice communications services.
“We have the initial phase of terrestrial rollout in place,” Potarazu said. “We are using terrestrial infrastructure to complement our satellite fleet.”
Intelsat officials also pointed to rising demand for the company’s occasional-use video services during the quarter that coincided with the war in Iraq. Several major broadcasters and content providers used the company’s satellite system for the first time during the quarter.
–Paul Dykewicz
(Conny Kullman, Ramu Potarazu, Joe Corbett, Dianne VanBeber, Intelsat, 202/944-7406; Steve Symonds, Symonds Associates, 203-834-2766; Matthew Karnes, SG Cowen, 212/278- 4491)
