[Satellite TODAY 06-04-13] Intelsat continues to struggle with only “modest near-term growth prospects” and “elevated government demand risk.” These are some of the main findings of a new a report issued by Chris Quilty, senior vice president, Raymond James, who has initiated coverage of Intelsat. This is Quilty’s first in-depth report on the company.

 

     Quilty notes that the satellite industry is similar to the real estate market in that both sectors carry above average capital costs, limited availability, and economies-of-scale advantages.

 

     Over the past decade, Intelsat’s capex spending as a percent of revenue has averaged a mere 27 percent, as compared to 37 to 41 percent for its two closest competitors. “We believe this capital efficiency advantage is sustainable over time due to Intelsat’s more disciplined capital spending approach, scale-purchasing advantages, willingness to embrace new technologies and vendors, ingrained low-cost culture, and ability/willingness to reshuffle its satellite fleet to meet emerging demands,” Quilty says.

 

     Additional optimism resonates from healthy revenue projections. “We expect revenue growth to improve dramatically by 2016, aided by the arrival of new DTH platforms [DIRECTV Latin America] and the first of at least five planned Epic satellites,” he says.

     Intelsat’s Epic satellite program is being viewed in some quarters as a major competitive differentiator with significant potential for future revenue growth. The announcement of the Epic program was a major strategic move by the company, as it looks to play in a number of key industry verticals going forward.

 

     “Potential to expand Intelsat’s addressable market opportunity drives performance improvements in Intelsat’s existing services, and generate significantly higher capital returns,” Quilty adds.

 

     Quilty estimates for revenue generation with the Epic satellite range from 30 to 40 percent as compared to only 10 to 15 percent for a traditional FSS satellite. But along with the optimism, obstacles still remain. Quilty cites overcapacity, debt, technological obsolescence and terrestrial encroachment, as some of the potential issues facing Intelsat.

 

     “While satellite technology is unrivalled in its ability to deliver point-to-multipoint content distribution, terrestrial networks generally enjoy a substantially lower carriage cost for point-to-point communications,” Quilty says. He highlights the examples of Intelsat’s African trunking business, “which has experienced steady erosion since the introduction of undersea fiber optic cables to the African coast beginning in the late 2000s.”

 

    In response to overcapacity issues, Intelsat announced in March 2012 its intentions to deploy a Ku-band global mobility network, spanning 10 beams on seven different satellites. And as far as debt, as of March 31, 2013, Intelsat held approximately $15.9 billion of third-party debt, representing a net debt/EBITDA ratio of 7.7 times.

 

     “This high level of indebtedness along with restrictive covenants could impair Intelsat’s ability to execute certain elements of its business strategy, including: one, raising additional capital; two, investing in new satellites; three, pursuing acquisition opportunities; and four, investing in personnel, IT systems, and product development,” the report said.

 

     The report says Intelsat’s dependence upon U.S. military contracts could be viewed as another major challenge. Currently Intelsat derives approximately 18 percent of its revenues from the U.S. military, primarily through a series of one-year contracts. “This lack of contract visibility, coupled with a competitive environment and the threat of declining defense spending could expose Intelsat to both declining revenues and a more challenging pricing environment,” Quilty adds.

 

     But, despite the challenges, Quilty is optimistic that the company is in a strong position overall.

 

     “Intelsat has built out the industry’s largest and most comprehensive managed service capability giving Intelsat the unmatched ability to provide complex, highly secure, end-to-end communications solutions on a global basis. While not a significant margin contributor, Intelsat’s managed services capability represents a competitive discriminator, especially for higher-growth, emerging market customers that do not have the resources/capabilities to fully develop their own service offering,” he adds.