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Intelsat’s Results Show Elusiveness Of FSS Recovery

By | August 4, 2003

      Hamilton, Bermuda-based satellite operator Intelsat’s 44 percent drop in net income for the second quarter, compared with the same quarter a year ago, highlights the plight of fixed satellite service (FSS) operators in a marketplace saddled with overcapacity.

      Intelsat’s net income fell $32.9 million to $42.6 million during the second quarter, compared to the same period of 2002, due principally to higher operating expenses, slightly lower revenues, a $9.8 million hike in interest expenses, and a $4.7 million rise in other expenses. The sagging results from one of the FSS industry’s strongest operators reflect the difficult market conditions faced by the sector and make the cost-cutting induced rise in net income at rival PanAmSat [Nasdaq: SPOT] during the second- quarter even more impressive (SN, July 21).

      Telecommunications revenues for Intelsat dipped 1 percent, or $2.2 million, to $244.5 million for the second quarter, compared to the same period last year, primarily due to a decline in the level of services provided to a key customer that sought bankruptcy protection last year. Second quarter revenue actually rose 2.3 percent from the first quarter in what could be viewed as a positive indicator that the company’s core business is stabilizing and is poised for recovery, said Intelsat CEO Conny Kullman.

      Tom Watts, the satellite analyst at SG Cowen, interpreted Intelsat’s upturn in revenues as a positive sign, especially considering similar news coming from PanAmSat. The slight revenue gain for both companies in consecutive quarters suggests that the FSS sector “has bottomed,” he added.

      In another encouraging sign, Watts attributed much of the sharp reduction in Intelsat’s net income to depreciation in the value of new satellites. As a result, the net income figure for the second quarter does not reflect the overall health of the company nor the industry, he added.

      Intelsat also reported “good” margins for second quarter EBITDA (earnings before interest, taxes, depreciation and amortization), Watts said. EBITDA during Intelsat’s second quarter only slipped 4 percent to $179 million, down slightly from $186.6 million during the second quarter of 2002.

      Reduced capital expenditures in the face of industry-wide overcapacity helped Intelsat lift its free cash flow from operations for the second quarter to $166.7 million, up dramatically from $20.1 million for the same period in 2002. The big increase in free cash flow largely was due to reduced spending for new satellites, other property and equipment, company officials said.

      Intelsat CFO Joesph Corbett said the company’s proposed acquisition of Loral Space and Communications’ North American assets would include implementation of an integration plan aimed at minimizing transition time and maximizing financial performance (SN, July 28). The purchase of the six satellites and corresponding orbital slots awaits an auction process that will be conducted as part of Loral’s bankruptcy court proceedings.

      The acquisition of Loral’s prized North American satellite assets to fill an existing gap in Intelsat’s global coverage is a “fantastic” deal for the buyer, Watts said.

      –Paul Dykewicz

      (Susan Gordon, Intelsat, 202/944-6890; Tom Watts, SG Cowen, 212/278-4260)

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