Summary profit charts of satellite operators show that many companies levelled off, the optimistic growth in recent few years came to nothing, and the year 2016 began with an impressive valuation decline. Some analysts say about the fall of the “space” age, but is it really so?
CONDITION OF THE INDUSTRY
According to the news and financial information agency Bloomberg, in 2015, some of the large companies in the industry “started leaving orbit”. The analysis of the behavior of the world’s top three largest satellite operators, which define the overall industry trend, proved that they experienced serious troubles for intensive development. And in 2016 this trend has only intensified.
A representative event happened on May 12, 2016, when the financial market was shocked by the slump of 30% of shares of Eutelsat Communications SA. Investors preferred dumping the operator’s assets, against the backdrop of the published company’s own depressive forecasts for the coming two years. It is noteworthy that the news triggered not so tragic but also serious decrease in quotation of the Inmarsat Company’s shares, the nearest Eutelsat’s competitor. The Inmarsat’s shares fell by 7% that day, reinforcing the multi-month negative trend, i.e. since the beginning of the year the company’s shares were down 35%. The leading analytical agencies Goldman Sachs and Morgan Stanley also revised their recommendations downwards relative to that company’s shares, which resulted in Inmarsat’s facing the knock-out from the FTSE 100 list (Financial Times Stock Exchange Index). This is a London stock exchange index, which is based on the share price of one hundred largest companies with total capitalization of 80% of the stock exchange capitalization.
A similar opinion is shared by the international rating agency Moody’s, which states in forecasts that the whole satellite communications sector remains under strong pressure due to the slowdown in economic growth of a number of key regions and increased competition. The agency’s analysts remark that the largest satellite fleet operators like Eutelsat, Intelsat and SES are not direct competitors, and operate in their business segment, while the challenges they have to face are quite alike. It means that the problems of one company will get on all satellite communications investors’ nerves.
Satellite operators are vulnerable to terrestrial competition and suffer losses on broadband operators. These terrestrial companies make satellites out of areas with developed infrastructure. They can feel more or less calm only in vast territories lacking communications, i.e. areas of oceans and regions with low population density.
Many operators, in particular the Eutelsat, are placing stakes on business development in Latin America, as, according to their calculations, it could compensate for weakening of demand in Europe. At the same time, financial analysts remain skeptical about the idea. Low macroeconomic indicators of developing region keep out of getting adequate profit, since the residents of these countries have low purchasing power, and the actual growth does not satisfy investors. One of the business development options is merger and acquisition of local players, but this tactic also produces a short-term effect, without fulfilling strategic tasks of generating cash flow and profitability.
According to the WTA (World Teleport Association), in 2015 the top five satellite operators included two Luxembourg companies Intelsat and SES, French Eutelsat, US EchoStar and Canadian Telesat. The rating was based on the annual revenue of the company and the business growth, against the previous year. The World Teleport Association was founded in 1985, among the association members there are innovative companies involved in operating teleporters (satellites, transponders, transmitters, etc.).
INTELSAT – BAD DEBTS AND INVESTMENT
Intelsat is one of the two largest fixed satellite communications operators in the world. The anticipated revenue in 2016 is USD 2.2 billion. The company’s main services are as follows: transponders rental, mobile satellite communications, broadband access using terrestrial infrastructure, trunking communications, and facilities for telecom providers. The head office of Intelsat S.A. is in Luxembourg, and the executive office is in McLean, Virginia, USA.
The result in 2015 was USD 2,353 billion of proceeds. This is the lowest figure since 2011, and that decline started in 2012. The company insists that this is due to the regular space fleet replacement, which currently accounts for 50 satellites staying in the geostationary orbit and covering 99% of the populated territory of the Earth. The anniversary satellite was launched in 2015 and it replaced satellites IS-805 and Galaxy 11. The satellite will provide the population of Latin American with broadcasts of TV companies HBO and Fox, as well as broadband services for passengers of sea and air transport, who travel the North Atlantic Ocean.
The company’s greatest interest is focused on the Asia-Pacific Region as the most promising in terms of development. At the sixth annual forum Australasia Satellite 2015, the Intelsat’s representatives spoke about the most important growth points in the region. They pointed out as follows. The services of satellite operators are extremely popular among sea and air carriers. VSAT solutions are gaining popularity for sea transport, and these are small land satellite stations. There remain still poorly developed China and India, the two largest countries with the largest population in the world. In general, the whole air and sea markets of the Asia-Pacific Region were neglected by the leading satellite companies. Anticipating active efforts to introduce new services, the Intelsat’s representatives warned the community that the expectations of that region’s users were a bit different from the expectations of Europeans or Americans, so it was required to offer balanced business solutions.
In proof of its statements about the business development in the Asia-Pacific Region, the Intelsat signed an agreement with Japanese SKY Perfect JSAT Corporation to set up a joint venture for launching the satellite Horizons 3e with optimized C and Ku bands. This project will allow completing the creation of the next-generation platform Intelsat EpicNG. The launch is scheduled for the latter half of 2018.
At the same time, the company keeps on aware of its traditional market, i.e. the North America. It will start broadcasting in the Ultra HD format there in cooperation with the provider Harmonic. The satellite for transmitting signal is available to 98% of cable operators, and this creates an ideal environment for delivering Ultra HD content to consumers, as pointed out by the Intelsat.
Efforts are underway to create a special interface ScheduAll Connector. The work is about the fact that strategic sales partners can view the available capacities of the Intelsat and quickly adjust to the changing needs of media customers during demand fluctuations, effectively operating in “peak” and “dead” demand seasons. In addition, the Intelsat meets the needs of its customers and works on building up infrastructure, which allows distributing content in any format for “multiscreen” environment, when a user wants to access content from virtually any device with a screen. For this purpose, it is developed a land-line network IntelsatOne to complement the satellite one.
Some hope is offered by moving customers to the Intelsat Epic platform, which has more capabilities, including in providing fixed and wireless communications, as well as other services for corporate clients. However, the company has to service its debts and replace three satellites every year to maintain the resource capabilities of the space fleet on a regular basis.
Despite the positive data on some promising activity areas, the financial aspect of business does not trigger such emotions. A little room for optimism is offered by the need to execute contracts with advance payments of about USD 130.7 million made in 2015. Judging by the comments of analysts at the rating agency Moody’s, the company experiences problems with liquidity, so much so that the cash flow is not sufficient even for the financial viability of launched projects and, therefore, it is engaged in restructuring loans. The top management is making significant efforts to relieve the credit loop, but the negotiations have ground to a halt so far. The company declares its intentions to finance the capital expenditure needs using funds received from operating activities and cash payments, as well as new lines of credit.
The rating agency Moody’s states that to change the negative dynamics, the Intelsat should provide investors with a clear plan of capital structure and create liquidity cushion. Each satellite of the space fleet should be self-supporting during its service life, to enable its replacement with next-generation satellites. Otherwise, inadequate liquidity support policy and cash flow constraints would aggravate the company’s position in the financial world.
SES – CAUTIOUS OPTIMISM
The SES Company was founded in 1986 in Luxembourg, becoming one of the world’s leading satellite operators over 30 years. Currently it operates the space fleet of 53 satellites. The company’s main activities are as follows: satellite communications; transmission of content and voice communication to the world’s leading mass media, corporate and mass-market customers; cooperation with operators of mobile and fixed communications; as well as services for government and commercial organizations. Most of the revenue (70%) is generated by providing video services. The company wholly or partly owns regional telecom companies like Ciel (Canada), QuetzSat (Mexico), YahLive (Middle East).
The total revenue in 2015 amounted to EUR 2.0145 billion. The company shows a small but steady revenue growth over the recent few years. So in 2014, the SES received EUR 1.9191 billion, and in 2013 that figure was EUR 1.8625 billion.
The SES goes on piling into the space constellation of communications satellites of the O3b Networks Company. Its satellites stay in the medium earth orbit (MEO, altitude of 8 thousand km), which is much closer than usual geostationary satellites (GEO, altitude of 36 thousand km). This solution allows reducing delays in transmitting signal up to the wired Internet figures on Earth, as well as providing better voice and video communications.
O3b Networks was founded in 2007 to provide broadband communications in emerging markets of the Middle East, Africa, Asia Pacific Region and South America. The investors were Google and Liberty Global. The constellation of satellites will provide a high capacity of up to 1.6 Gbit/s. The first four satellites were launched in 2013, another eight ones were launched in 2014, and then it was started commercial operation of that constellation. It is scheduled to launch another eight satellites by 2019. The SES owns about half of the O3b Networks’ shares, and the company plans to get it under complete control.
The company carefully and predictably follows its financial policy, which is mentioned by experts at the rating agency Moody’s. In particular, the investment in O3b is combined with strategic development goals in the mobile communications, providing services to government agencies and businesses, as well as in emerging markets. The Moody’s analysts believe that the high demand for satellite broadband communications will allow the company to generate a high income, which will do exceed the calculated values. Although the medium-term risks are observed in launching, deploying and operating MEO space fleet, this initiative looks very attractive for a wide range of investors.
The SES’ main businesses area is to broadcast TV channels. According to the company, in late 2015, the SES’ satellite constellation broadcasted 7268 TV channels. The segment growth was 11.3%, against 2014, while the market growth was only 2%. That significant growth was due to running new HD channels for Europe and North America. It was HD broadcasting that became an important growth driver in all the SES markets. The number of such channels, broadcasted by the company, increased by 18% or up to 2230. In Europe, the growth was 25% and amounted to 700 TV channels, in North America the growth was3% or up to 1200 TV channels, respectively. The global market by this indicator grew by 13% and amounted to 6400 TV channels.
Like the Intelsat Company, top managers at the SES also pay great attention to the growing potential offered by air carriers. So, according to the Euroconsult International Consulting Company, the volume of air traffic will increase in 2016 up to 3.6 billion passengers, against 800 million in 2014. According to the Airbus Aircraft Building Corporation, the passenger traffic will total 6.7 billion people by 2032. And according to the results of the global opinion poll held by the Honeywell Company, it turned out that 81% of respondents would like access the Internet on every flight. Thus, an enormous market was shaped, and the company that first offers a real and viable solution will manage increasing its profits considerably.
The SES Company emphasises that customers should keep on staying in touch and within the reach in order to be able to get involved in important business processes. They need a broadband connection irrespective of their location. And these needs will prompt telecom market players to change. The communication should be everywhere and of high quality. Moreover, the business will “digitize” any, even the most remote office or production facilities. The role of the IoT (Internet of Things) will move onward and upward. Therefore, the companies declare their investment in the global information network, and connection of all market players to it, i.e. satellite, terrestrial, hybrid, as well as providing additional services.
EUTELSAT – SHOCKING FALL AND INNOVATION
The company traditionally ranks the world’s top providers of satellite communications. The geographic footprint is over 150 countries worldwide. The company’s satellite fleet accounts for 40 space vehicles, another five ones are under preparation to launch in the near future. So in July 2015, the first quantum satellite was ordered, and its launch is scheduled for 2019. Since October 2015 it is planned to implement a joint program with the Facebook Company to provide Africa with satellite Internet as a part of the internet.org program promoted by the social network’s founder Mark Zuckerberg. In the same month it was signed a contract with the Tales Alenia Space Company to design another new-generation satellite to be launched in 2019.
The Eutelsat’s satellites stay in the geostationary orbit within 116° W and 172° E, covering Europe, CIS, Middle East, Africa and most of Asia, as well as North and South America.
It is noteworthy that the Eutelsat Company has already used the launch vehicle Falcon 9 to set its satellites Eutelsat 117 West B and ABS-2A into orbit. Falcon 9 was designed by the SpaceX Company founded by Elon Musk.
In 2014-2015 (the Eutelsat keeps annual records from June to June), the company reported consolidated revenue of EUR 1.476 billion, or almost 10% of growth. The slump of Eutelsat’s shares was nearly 30% in May 2016 as a result of the Company management’s statements of revising profit forecasts, and it triggered down the whole telecom market. Previously, the company believed it would manage showing profit growth by 4% in 2016-2017, but new forecast contains anticipation of decline by 3%. From July to December 2015, the company made profit of EUR 774.4 million, which was 7.1% higher than in the same period of 2014.
As of December 31, 2015, the company’s main activity is video signal broadcasting, and it takes 63% of the company’s business. More than 6,000 channels are broadcasted via Eutelsat satellites, and nine out of ten households in Europe, Middle East and North Africa receive TV signal from the Eutelsat. The company has defined the premium market segment, and this is Central Europe, Middle East, Africa, Latin America and Turkey. Especially for these areas, the company use satellites of high capacity and power that allow enlarging audience due to increasing number of broadcasted channels and a wider set of services. The revenue of this business totaled EUR 468.9 million with the growth of 3.7%.
Another focus area of the Eutelsat is data transmission and broadband access, as well as additional services. This segment takes 23% of the company’s business. Moreover, the Internet access is provided both directly to end-users, and to telecom operators and Internet service providers. This service is also popular among corporate users like enterprises and government agencies. For these purposes, the company use satellites able to provide access at speeds comparable to the ADSL access ones. The revenue of this business totaled EUR 173.1 million with the growth of 8.6%.
The remaining company’s segment of 14% is the satellite communications services for government. The coverage allows being fast in responding to requests in Central Asia, Middle East, Africa and Asia-Pacific Region. The revenue of this business totaled EUR 106.2 million with the growth of 15.2%. From other activities not incorporated into the overall business structure, the company got EUR 26.1 million.
ECHOSTAR – THE US LEADER
EchoStar Satellite Services is a unit of the parent EchoStar Corporation (USA), being a global provider of satellite communications services and a developer of hybrid video content delivery technologies. The EchoStar Satellite Services operates the satellite fleet for the affiliated company Dish Network, a satellite broadcasting operator and Internet service provider in the United States. The EchoStar Corporation also designs and manufactures set-top boxes for broadcasting in the UK and Canada. Another unit of the Corporation is the Hughes Communications, representing a provider of satellite communications services.
For the time being, the EchoStar Satellite Services has a fleet of 22 space satellites of Ku, Ka and S band, as well as DBS satellites, some of which are owned, and some are leased. The company’s main activity is the video content and data transmission, transit services for mass media and other companies engaged in broadcasting. Among the company’s customers there are service providers, corporate clients, government agencies, and military customers.
In autumn and winter of 2016 the company EchoStar Satellite Services is about to launch another four satellites that will service for the European Region, North America, the Caribbean and Brazil.
The EchoStar Satellite Services’ revenue amounted to USD 490.591 million in 2015, against USD 484.455 million in 2014. In the first three months of 2016 the profit totalled USD 102.989 million, which is lower than in the same period of 2015 when the company earned USD 125.398 million.
The activities of the subsidiary EchoStar Satellite Services are tightly bound to the EchoStar Corporation, which is worth mentioning as an active drafter of a new strategic document like the American Space Renaissance Act, initiated by the Republican Congressman Jim Bridenstine (Oklahoma). The new legislative initiative provides for even more active US response to space exploration by commercial entities, in particular, the authorities must establish a responsible control over space exploration with due regard to national security requirements. There is actually an active discussion on the cooperation between military and intelligence agencies with commercial organizations to simplify their interrelationship and clarify issues related to space exploration. The strategic goal of this Act is to ensure military safety and space superiority, as one of the important components in future wars, as well as to reduce commercial risks.
TELESAT – SELL NOT KEEP
The top five world leaders list unexpectedly ends with the Canadian company Telesat. Its space fleet accounts for 15 satellites, two satellites are under construction, and, according to the company, they will be set into earth orbit to implement the Satellite Broadband Internet Access Program.
Telesat is a private company with two major shareholders: the Investment Board of the Canadian Pension Fund and the company Loral Space Communications Inc. In 2015, the consolidated revenue amounted to CAD 955 million with the increase of CAD 32 million, against 2014 year. However, in terms of revenue in USD, the company showed a decrease in consolidated revenue by 2% or USD 23 million. This was due to the rise in the US dollar against the Canadian dollar. Changes in foreign exchange rates of Canadian and US currencies lead to unusual results. Thus in the first quarter of 2016, the company reported a revenue growth of 3% or CAD 6 million up to CAD 235 million, against the same period of 2015. But, due to the rise in the US dollar of 12%, in terms of results in USD, the company reported decline in profit by 1% or USD 3 million, against the same period of 2015.
According to the results of 2015, the Telesat Company also managed reducing operating expenses by 2% or CAD 4 million up to CAD 184 million.
Despite the leading position in the backdrop of other dozens of satellite operators, the investors keep on efforts to sell the company. The information on this offer is periodically diluted with repetitive references to the company in financial summaries of the quarter or year’s results. So, the sale fell through in 2011 due to too low price offer. In late 2014, and negotiations were in progress between existing investors and the deal fell through again, since, according to rumors, one of the shareholders wanted to get USD 100 million more.
However, the company’s financial aspect is not as interesting as business development news. So in late 2015, the Telesat launched the 15th high-performance satellite Telstar 12 VANTAGE, which has already taken planed position in orbit. In 2015, the company signed preliminary agreements worth USD 4.8 billion, the terms of which will involve up to 93% of the North American and 80% of international space fleet of the Telesat. In the fourth quarter of 2015 the Telesat also signed a contract for constructing and launching the space vehicle Telstar 19. The satellite will provide a broadband Internet access to the South America, the Caribbean and the North Atlantic Ocean, and the lease agreement on satellite capacities was also signed. Another satellite Telstar 18 is scheduled to launch in the first half of 2018. It will be capable to cover the growing needs of the satellite services market in China, Mongolia and Southeast Asia, as well as adjacent areas of the Pacific Ocean.
The Telesat Company’s top management states that one of the operator’s priorities is to create a constellation of satellites in low earth orbit altitudes, which will allow expanding data throughput and reducing delays. Against the backdrop of growing demand for satellite communications services, this initiative looks more than reasonable.
SATELLITE OPERATORS MARKET DEVELOPMENT FORECAST
The general forecast of experts is that satellite operators will have to offer a wider set of services, but with lower profitability. It will be particularly topical in areas where they compete with terrestrial content delivery services, i.e. wired and mobile data operators. Their capabilities, quality and cost of services make it impossible to compete, as the satellite operators lose out in this field.
However, there are regions in the world where the majority of residents are offline, i.e. these are vast territories of India and Indonesia with 20% of the global population. Analysts predict that the focus of many satellite operators will be put on these regions.
According to analysts’ reports, the market has the growth potential, which could be up to 10% by 2020. The main growth drivers will be proceeds from selling data and new services in the field of defense and intelligence, as well as for agriculture, insurance and production.
The space fleet image will be significantly affected by micro-, nano- and other quantum satellites. Small satellites can arrange computing clusters in orbit, and the ease of reprogramming them will allow offering users more flexible models. These are not the ancient monsters of several tons, which operate for decades, quickly go out of date and cost tens of millions of dollars. The satellite industry is moving to open up an opportunity of having own space vehicles not only for large multinational corporations, but also for small companies. And a considerable amount of capabilities of these satellites will be leased for the needs of both enterprises and individuals. However, for this purpose, it is required to address the issues of standardization, country’s and military security, as well as a number of political problems.
Their contribution will be also made by HTS satellites, (High-Throughput Satellite or satellites with high capacity), which can transmit by a factor of 20 or more data per time unit for the same amount of allocated orbital spectrum. Some satellites show a hundredfold increase in data transmission. These solutions will be first demanded by telecom companies and sea carriers. The data transmission rate will go on increasing, reaching 1.34 Tbit/s by 2020. This will ensure the growth of the relay satellite communications market of up to USD 2.3 billion by 2021.
