New Skies Satellites [NYSE: NSK], the Dutch satellite operator, continues to perform solidly. In its latest results, the company reported revenues of $54.1 million for the third quarter, which was in line with most analysts’ expectations.

Robert Peck, a satellite equity analyst at Bear Stearns, said in a research note: “We think the company has done a great job of managing its bottom line in a tough global market. In addition, once again the company has hit our estimates and maintained 2003 guidance. We think the company has been taking the right steps in focusing on key elements of the business, increasing utilization rates, lowering cost structure, lowering capital expenditure.”

Tom Watts, a satellite equity analyst at SG Cowen is also optimistic. He said in a research note: “New Skies is developing a number of opportunities that should lead to revenue expansion in 2004. We project 10 percent revenue growth, up from 7.4 percent in 2003.”

Yet, while the prospects look good for the company, the satellite marketplace remains tough, with falling transponder prices and intense competition. In an exclusive interview with SATELLITE NEWS’ International Editor Mark Holmes, New Skies CEO Dan Goldberg talks about the operator’s main opportunities for growth in 2004 and its main achievements in 2003.

SN: What percentage of revenues is New Skies deriving from the government services sector now? How do you see this market developing in 2004? With numerous satellite operators placing a great emphasis on government satellite services, what competitive advantages do you have in this sector?

Goldberg: Approximately 20 percent of our revenues come from government services. It has obviously been a strong market for all of the operators, including New Skies, and it is our expectation, and I think pretty much everyone else’s as well, that this is going to remain so for the foreseeable future.

I think we have done a very good job in this market over the past couple of years. Our satellites and our network are highly regarded by government users and so I expect this will continue to be an important business sector for us going forward. I would say our competitive advantages are mostly related to the strength of our satellites. Government users seem to like our geographic coverage, in terms of both the power levels and the excellent inter- and intra-regional connectivities our satellites offer, as well as the global beams many of them have. Additionally, often government users have polarization preferences, one way or another, which seems to match up reasonably well with our satellites.

Further, our satellites are highly reliable and our network is extremely secure. New Skies’ entire technical infrastructure supporting the satellites is absolutely state-of- the-art, and I think that gives confidence to a lot of the government users whose communication requirements and networks are of vital importance. They absolutely cannot tolerate any outages or disruptions. I think we have a strong reputation in that regard. We also tend to be very fleet of foot and constructive in working with them on the technical and operational level, and I think they really appreciate it.

SN: How do you view the opportunities for the company in the Latin America region? Latin America represents around 19 percent of your overall revenues. Do you expect this figure to increase in 2004? In terms of the five regions mentioned in your results (North America, Indian subcontinent, Latin America, Europe, Asia Pacific), in which region do you expect to make a major leap in 2004?

Goldberg: I believe Latin America is showing signs of improvement and New Skies has been a beneficiary of that in 2003, particularly in Brazil. Brazil seems to be much stronger and more stable than it was say a year ago. That has manifested itself in some of the business we have announced during the course of the year, including this last quarter. From my perspective, Argentina may be behind Brazil in terms of a resurgence of demand, but I think it will get there. Those economies are a lot healthier than they were even a year ago, but it is particularly starting to show itself in Brazil, in terms of the opportunities that are there.

The IMEA [India, Middle East & Africa] region has been strong for us for a while now, and it is my expectation that this will continue to be the case, particularly with Africa and the Middle East. In India, the international long-distance telephony market has driven a lot of the demand for satellite capacity as you saw with our deals with Data Access and Reliance Infocomm, but it is questionable whether the rapid growth we have seen over the past few years can be sustained year-over-year. It continues to be a very strong market, but it is difficult to tell whether it is sustainable. A lot will depend on what happens with DTH [direct-to-home] and some of the other domestic initiatives, which are taking place. Elsewhere in the subcontinent, Pakistan issued two DTH licenses recently. There are a lot of opportunities throughout that region, which I think are very promising.

North America accounts for a significant amount of the government services that we deliver. I think there will continue to be growth in that market segment and that should be a positive dynamic for that region.

Asia still has somewhat of a question mark over it. There is great promise in places like SE Asia and NE Asia, but if I had to pick a region that suffers from the greatest amount of overcapacity, I would probably identify Asia, particularly in Ku-band. There are difficult market conditions there, and while I believe it will improve, it is difficult to predict at what pace demand will pick up in order to address the excess capacity in the region.

SN: There continues to be pressure on transponder pricing overall in the industry. The average price per transponder (36 MHz) in the third quarter was $1.3 million, compared to $1.5 million in the second quarter. Do you expect this price compression to continue at the same rate over the next two to three quarters?

Goldberg: First off, implicit in that question is that price compression has been ongoing. We did see a drop from $1.5 million to $1.3 million per transponder for new business in the last quarter, but throughout the seven or eight quarters leading up to the third quarter, our pricing held steady at around $1.5 million. So, I am not sure it is right to characterize it as this inexorable downward pressure that the industry is experiencing.

Having said that, I do think 2004 is going to be another challenging year for the satellite industry. There is still overcapacity in a lot of markets. While demand is improving in certain markets, there is still a fairly meaningful amount of capacity that the industry needs to work through. But I think it is going to do it.

I think the industry has responded very responsibly to the overcapacity situation that we find ourselves in today. Almost all of the operators have ‘X’d out from their plans the expansion satellites that they had in mind at one point. Some operators have even cancelled what appeared to be committed capital expenditure. All of that is going to have a very positive impact on supply over the long-term from the operator’s perspective. But in the near-term, 2004 will be a challenging year as there is still the potential for more price compression. In any given quarter, it can be distorted for an operator of our size by one large multi-transponder deal, for example.

But while 2003 has been a tough year for the industry, I am pleased to say that our performance throughout the year has been strong. In the last quarter, our revenues were up 11 percent and EBITDA was up 11 percent, year-on-year. For the year, we are up around 7 percent on revenues and 9 percent on EBITDA. I feel pretty good about that.

SN: The company continues to have a strong balance sheet. If the company were to consider a second share buyback, is there a timeframe in place as to when this might happen? Equally, if the company were to make a dividend payment to shareholders, when would this likely take place?

Goldberg: We completed the first share buyback in the quarter and, since then, we have been in the process of cancelling the shares in order to be in a position to do more buybacks. The share cancellation finished up on Nov. 10, and they are now effectively cancelled. We have authority from our shareholders to do up to two more 10-percent share repurchases. That authority was granted to us at our annual shareholders meeting in May and extends for an 18-month period. If we were to do another share buyback under that grant of authority, it would have to be done within that time frame. As far as the dividend, if we decide to declare one, as a formal matter, it will be decided upon at our annual shareholders meeting, which will take place in May 2004.

SN: In terms of consolidation, when we spoke before, I asked if the company had the financial firepower to acquire PanAmSat [NYSE: SPOT]. In terms of potential acquisitions, would you consider smaller acquisitions such as Telenor’s satellite assets, rather than a major acquisition such as PanAmSat?

Goldberg: My view is that the number of acquisition candidates in our industry is, obviously, fairly limited. There are not that many operators. You have to be opportunistic in terms of how you engage in it. You don’t really have the luxury of sitting in a conference room somewhere and defining your ideal acquisition candidate, and then going out and finding it. There aren’t enough operators out there. Really, we have to take these things as we find them. When processes begin for a particular asset, that is an opportunity to go in and take a look. Beyond that, when you know of ownership uncertainty surrounding a certain set of assets, that could be an opportunity to initiate something as well. So, that is how we are going to go about it. We will have to be opportunistic and very nimble in identifying and responding to strategic opportunities as they arise.

SN: Do you think that 2003 has been a relatively quiet year in terms of consolidation in the satellite industry?

Goldberg: I think there have been more deals than are apparent at first glance. Certainly, the Loral/Intelsat deal is an obvious one. But prior to that, Loral and Alcatel [NYSE: ALA] came to an agreement among themselves in terms of the ownership of Europe*Star. And there was some activity at Eutelsat as well. While it wasn’t a strategic acquisition at the end of the day, let’s not kid ourselves, a meaningful amount of the shares in Eutelsat have exchanged hands as Telecom Italia [NYSE: TI], France Telecom [NYSE: FT] and Deutsche Telekom [NYSE: DT] all sold their stakes. There was also the joint venture between SES Global and Lockheed Martin [NYSE: LMT] in Asia, where SES has essentially taken ownership of the rest of that. And there has been the significant deal with Inmarsat, which was announced recently. Finally, there are also opportunities out there now, and so if you look at all of those things, it is actually pretty meaningful.

SN: Finally, what are the major challenges ahead for the company over the next 12 months?

Goldberg: The major challenges are the same set of challenges that we have confronted over the past 12 months, which is how do we continue to create value by selling the residual available capacity in a market that remains challenging with vigorous competition. That is the fundamental challenge that faces us. But we have faced this challenge for the past 24 months and we continue to meet it head on and our performance this year is a testament to our success. I’m confident that by remaining agile and extremely focused on market dynamics and customer needs, we will be more able to exploit the opportunities that do present themselves.

(Jeff Bothwell, New Skies Satellites, e-mail: [email protected] )