Intelsat’s Q2 2013 results reflect tough economic times with the U.S. Government’s budget sequestration. Image credit: WikiCommons

[Satellite TODAY 08-01-13] On Thursday, Intelsat reveled its Q2 results for 2013 reporting revenues of $653.8 million and a net loss of $408.3 million, or $4.19 per share. Company officials noted that the U.S. Government budget sequestration remains a top concern.

      During a conference call on Thursday, David McGlade, Intelsat’s chairman and CEO said the sequestration has created a fog as far as forecasting the company’s fiscal future in the government sector. “Visibility remains limited. For example, [satellite service] renewals typically awarded for one year periods are now funded for shorter periods in some instances,” he said noting that “sequestration, and its potential effect on government spending, remains a top concern as we look out over the balance of 2013 and into 2014.”

On July 31, U.S. Deputy Defense Secretary Ash Carter released a memo providing more specifics for a further 20-percent reduction in U.S. Department of Defense spending over the next five fiscal years, which will take place regardless of budget levels approved by Congress, according to DoD officials.

     Intelsat is clearly not alone with feeling the ripple effects of sequestration. “I think that’s fairly consistent with the market,” said Sima Fishman, director of strategy consulting with Futron Corporation in an interview with SatelliteTODAY.com after the Intelsat conference call.

“As predicted, sequestration’s impacts … have been very unfortunate and far-reaching,” said U.S. Deputy Defense Secretary Ash Carter while testifying before Congress on Thursday.

And ironically, according to McGlade, DoD’s budget cuts will end up costing taxpayers more money. “From my discussion with a number of senators and congressmen and women, they know if they procure for longer periods of time they can get better pricing,” he said.

McGlade also said that based on Intelsat’s current level of government sales activity, “our government business will be an offset to our growth in 2013,” he said. But, despite concerns, he remains optimistic. “While it is uncertain that this mix trend will continue, we do believe that careful management of operating expenses will help mitigate the effects of sequestration at the Adjusted EBITDA level,” he said. “Our second quarter results reflect business trends consistent with those of recent quarters.”

On another positive note, Mike McDonnell, Intelsat’s CFO, said that managed services increased by $8 million dollars, or 12 percent, to $75 million, led by increased demand from network services customers for broadband mobility applications, especially in Europe and North America. “The bottom line, we have achieved a substantial portion of the first phase of our investment thesis,” McDonnell said.

      Among the other positives unveiled during Thursday’s call, McGlade reported growth on the company’s network services and media businesses. “The performance is a reflection of our fleet investment activities in 2011 and ‘12, which created our broadband mobility infrastructure and refreshed the capacity at our video neighborhoods,” he said.

     Still, the company reported EBITDA, (earnings before net interest, taxes and depreciation and amortization) of $439.2 million, and Adjusted EBITDA of $509.4 million, or 78 percent of revenue, for the three months ending June 30, 2013.

   Despite fiscal challenges, there are other mitigating factors. “With the completion of our April IPO and successful debt refinancing initiatives in the first half of 2013, we’re driving a positive cycle of delivering our balance sheet. Lower interest costs and reduced capital expenditures will enable increased cash flow, which in turn should allow us to further reduce debt,” McGlade said in a written statement issued before Thursday’s call.

      However, Intelsat’s net loss included $366.8 million for pre-tax charges, which is related to early extinguishment of debt resulting from debt paydowns resulting from the company’s April 2013 initial public offering and debt refinancing activity in the second quarter.

    One of the negatives in Intelsat’s Q2 earnings was their MSS business as customers move from L- to Ku-band, Fishman said, noting that this is common place industry-wide. “We see the MSS business falling off everywhere,” Fishman said. But McGlade said Intelsat has also engaged significant refinancing activity helping to mitigate any negative impacts of MSS and sequestration. “On a going forward basis, the combined benefits of the debt repayments and lower interest provide $245 million in annual interest savings. Our reduced interest obligations, as well as lower expected capex in 2013 and 2014, sets into motion the positive cycle that will allow us to continue to de-lever our balance sheet,” he said.

He also noted that the second part of Intelsat’s plan is to generate revenue and earnings growth, which will be catalyzed by new satellites. “This includes Intelsat 30, benefiting the media business as it comes into service in 2015, and Intelsat 29e, benefiting network services starting in 2016,” he added.

     Overall Intelsat’s Q2 results were not surprising, Fishman said after the conference call. “I didn’t see any surprises here. What we are seeing here is consistent with industry trends,” she said.

 Satmex Acquisition

      Intelsat officials said that although their eyes were on Satmex, the recent purchase by Eutelsat will not have a significant impact on Intelsat’s bottom line.

      “While it [Satmex] is an interesting company that we’ve looked at for many years, we feel we [Intelsat] are well positioned across those regions. We feel very comfortable that we have the assets and market potion to continue to be successful without Satmex,” McGlade said during the conference call.

      Fishman agreed with McGlade, noting that Intelsat’s “appetite for acquisitions is moderate because after the IPO they have already achieved the final position they wanted and can be selective. “They [Intelsat] aren’t going to buy anything they can’t integrate easily with and they already have good capacity for Latin America,” Fishman said.