US spending cuts shadow Eutelsat and Intelsat

The US government is cutting back on spending, and this is beginning to hurt Eutelsat’s revenues. While the satellite operator is stressing ‘business as normal’ and is firmly maintaining its official revenue guidance although admitting growth could be at the “lower end” of forecasts. It seems that shareholders took the warnings of lower revenues from the US military as a sign that the next year will be much tougher for the Paris-based broadcaster.

Indeed, on April 8th Eutelsat’s share price tumbled a massive 8.6 per cent (€2.31) and at one stage the price fell off the cliff crashing from €27 a share in after-hours trading on the 7th to €25.50 in a matter of seconds, and ending on April 8th at €24.74.

Paul Sidney, an analyst at Credit Suisse said, “Eutelsat generates around 10 per cent of Group revenues from government and military [clients] with the majority of this from the United States. With US DoD budget cuts 6 per cent in 2013, we reduce our estimates for Eutelsat multi-usage revenues by 4 per cent for FYJune13 to reflect lower volume requirements and future pricing pressure in negotiations with the US government and military.”

Sarah Simon, an analyst at Berenberg Bank, went much further describing Eutelsat’s fall from grace as “Groundhog Day” and comparing the disappointing results announcement as a “perfect replay” of Eutelsat’s Q3/2012 results when the worries were mostly focussed on Ka-Sat’s business prospects. She analyses the results with surgical precision:  “Last year, the problem was perceived to be temporary in nature and related to the DoD requiring capacity with a different geographic footprint to that which it had previously contracted, and which Eutelsat was not able to provide immediately. However, this time round, management expects the impact, coupled with a slower ramp-up in data services, to lower the medium-term revenue growth prospects by around 1 per centage point.”

Unfortunately there’s more. Berenberg points out the on-going dispute with arch-rival SES over the 28.2/28.5 degrees East position now running through an arbitration tribunal in Paris. If Eutelsat loses this argument then the bank says it would mean trimming about 5 per cent from Eutelsat’s numbers.

Eutelsat defended its presentation, and told us that some analysts misunderstood what was said at the results announcement. “We said that our current analysis leads us to believe there could be a one per centage point impact but this was an estimate and we would update in July. Some analysts took this as a confirmation of revised guidance which in fact it isn’t.”

Meanwhile, fellow satellite operator Intelsat says it is starting a new chapter in its history and beginning a “positive cycle of deleveraging” that it says will enhance its equity value. However, one of its key clients – the US military – is cutting back, and this is already affecting revenues.

Intelsat, since April, is now a quoted company and reported its first set of quarterly numbers (to March 31st) on May 9th. Intelsat said it enjoyed revenues of $655.1 million and a net loss of $7.8 million.  Contracted backlog stands at $10.4 billion.

“Total revenue grew 2 per cent in the first quarter of 2013, as compared to the year earlier quarter. On-network revenue grew 4% in the period, reflecting solid demand for transponder services and the benefit of refreshed video neighbourhood capacity and mobility capacity provided by our 2012 launch campaign,” McGlade continued. “In addition, managed services revenue increased, reflecting demand for our global hybrid infrastructure of terrestrial and satellite capacity, particularly for mobility applications for network services customers. New customer and renewal activity remains steady, and our backlog, at $10.4 billion, offers visibility into future revenue trends.”

Intelsat’s media business, which generates about 34 per cent of revenues, grew 6 per cent y-o-y. However, its important government/military business segment, which now accounts for 19 per cent of its revenues, fell back by 2 per cent y-o-y.  McGlade said the USA’s “sequestration” programme, whereby military and defense spending is being trimmed has affected Intelsat and new contracts and orders which normally signal business activity “has slowed, and visibility remains extremely limited”.

Intelsat says its average fill rate on our approximately 2,175 station-kept transponders was 78 per cent at March 31st 2013, reflecting a slight increase in net new transponders resulting from the entry into service of recently launched satellites and an increase in active transponders due to new contract activity.

You must be logged in to post a comment Login