By Paul Dykewicz

Intelsat Ltd.’s latest reduction in force (RIF) by close to 50 people along with its restructuring of certain teams earlier this month are not surprising moves in light of the company’s recent struggles.

The transition Intelsat is undergoing is painful but necessary for the company to compete effectively with its industry rivals. Many of the layoffs this month affected sales and marketing, while the ground operating staff also lost jobs, industry sources told us. Other segments of the workforce could be affected in any subsequent job reductions.

It seemed inevitable that the one-time intergovernmental satellite organization, which previously had undertaken several rounds of job cuts, needed to trim even more. Part of the problem is that demand for satellite services in general is weak, and transponder pricing is hurting. In addition, Intelsat traditionally has been wedded to telecommunications, a sector that has seen its profit margins fall, due in part to the widespread deployment of fiber-optic cable in the developed world.

Intelsat was created in the 1960s, and it has a 35-year legacy and mindset of serving the market as an intergovernmental organization. Efforts began in the late 1990s to start the transition to becoming a private company but such change is difficult to achieve. Intelsat is three years from its intergovernmental past but its strides to become more of a commercial entity have been insufficient to catch up to its industry peers.

In contrast, other satellite operators are more focused on growing demand for video services. Luxembourg-based SES Global [SES] and Wilton, Conn.-based PanAmSat [SPOT] are two examples. However, SES Global and PanAmSat have endured their own scaling-back of expenses.

It’s no secret Intelsat is shopping itself around. In May, it withdrew its planned initial public offering, and it engaged Morgan Stanley and Merrill Lynch to explore the potential of another party’s investment in or acquisition of the company. That list of possible buyers has been winnowed, and it now includes between two and four financial operations. A sale could take place before summer’s end. Intelsat rivals PanAmSat and News Skies Satellites N.V. [NSK] were sold to financial buyers earlier this year.

The current management at Intelsat has attempted to transform the organization into a more commercial, broadly focused communications company than its historic past. Teleports have been added along with fiber-optic cable capabilities. However, Intelsat still has not completed a full shift from its intergovernmental past to match the commercial focus of its competitors.

One reality is that Intelsat still has far more employees than it probably can afford, compared with other FSS operators, and this is why continued RIFs are in Intelsat’s future. PanAmSat has roughly 700 employees, while Intelsat has close to 900, based on figures released regarding this most recent round of cuts.

Telltale signs of Intelsat’s need for change surfaced in the company’s first-quarter 2004 report released May 11. Net income plunged 74 percent to hit $16.8 million, compared with $64.1 million for the same period last year. EBITDA for 1Q04 slipped to $164.6 million, or 70 percent of revenue, compared with $191.3 million, or 80 percent of revenue, for the same period of 2003. The decrease in the company’s bottom-line performance during 1Q04 principally was due to lower revenue, higher operating expenses and interest expenses, and lower income from other sources, compared to first quarter 2003.

Intelsat’s management certainly has looked for ways to boost its performance by trying to find new streams of revenues and profits. To that end, the company has expanded its presence in satellite-based backhaul solutions for wireless providers in developing markets. It grew its managed services business in revenue, backlog and capacity used. Intelsat’s wholesale broadband services added one major service provider in Europe, BT Broadcast Services, and three smaller service providers in Africa.

With the company on the selling block and a new owner possibly gaining control fairly soon, further changes are inevitable.

Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at [email protected].