Intelsat challenges ahead
February 26, 2014
By Chris Forrester
On February 21st satellite giant Intelsat revealed its end-of-year numbers for 2013, and while we reported that the operator’s all-important contracted backlog had fallen back a worrying $200 million to $10.1 billion (and it was $10.7 billion back in Dec 2012), some observers think there might be other elements of concern.
A comment from Armand Musey, a senior satellite analyst at Summit Ridge Group, has presented some additional worries for Intelsat. He points out that investors have more or less shunned Intelsat since its IPO last April (Intelsat up just 7 per cent, NASDAQ up 34.6 per cent and S&P500 up 17 per cent).
Musey gives some reasons, top of which revolves around the shrinking backlog. He says: “According to its IPO prospectus, Intelsat typically has 82 per cent of its revenue in backlog at the start of the year, so it only needs to sell 18 per cent to make its year. To have a nearly 6 per cent decline in revenue when 82 per cent of revenue is in backlog suggests a much larger projected decline in sales activity during 2014 – perhaps as much as 30 per cent. Obviously, if sales productivity falls 30 per cent, revenue will eventually fall 30 per cent as the company works through its backlog.”
He also examines the plans for Intelsat’s new – and highly expensive – satellites, and the consequences on its cashflow. “We note that it has 43 satellites. Assuming a 15-year average life, they need to launch approximately three satellites a year to replace each of these revenue-generating assets. This costs far more than $550 million, most likely around $900 million, putting Intelsat dangerously close to cash flow break-even.”
Intelsat is very much focusing on the launch of its new trio of high-throughput ‘EPIC’ satellites, the first of which is due for launch in 2015. Intelsat’s CEO Dave McGlade admitted the impact of cut backs in US military spending. “The pipeline of new business is rather limited,” McGlade said. “They’ve learned to live with less and to be more efficient….We do not see that [business] coming back anytime soon — or at all.”
February 25th saw a couple of investment advisors alter their advice on Intelsat. Typical was Zacks which downgraded Intelsat from ‘Neutral’ to ‘Underperform’. However, only a few days ago bankers Wells Fargo raised their outlook from ‘Market Perform’ to ‘Outperform’, saying they believe Intelsat’s stock is “cheap”.