Intelsat has reported results for the three-month period and combined year ended December 31, 2008i.
Intelsat, Ltd. reported revenue of $608.8 million and a net loss of $524.2 million for the three months ended December 31, 2008. The net loss includes non-cash charges of $326.8 million for orbital location impairments and $186.6 million for a loss on undesignated interest rate swaps. The company also reported Intelsat, Ltd. EBITDAii, or earnings before interest, taxes and depreciation and amortization, of a loss of $71.1 million. New Bermuda Adjusted EBITDAii was $459.5 million, or 75 percent of revenue, for the three months ended December 31, 2008.
Intelsat, Ltd. reported revenue of $2,364.9 million and a net loss of $1,198.2 million for the combined year ended December 31, 2008. The net loss includes $315.0 million of restructuring and transaction costs associated with the New Sponsors Acquisition (as defined below) in February 2008 and non-cash charges of $390.4 million for asset impairments and $166.7 million for losses on undesignated interest rate swaps. Intelsat, Ltd. EBITDA was $916.8 million and New Bermuda Adjusted EBITDA was $1,855.1 million, or 78 percent of revenue, for the combined year ended December 31, 2008.
“Intelsat ended a strong year with the best revenue quarter in the company’s history. Revenue grew by six percent in the quarter and eight percent for the full year, and we ended the year with $8.8 billion in backlog. New Bermuda Adjusted EBITDA growth of 11 percent for the year demonstrates that we are combining a successful business strategy with a disciplined operating profile to drive performance and opportunity in traditional and emerging applications,” said Intelsat CEO Dave McGlade. “These new opportunities are evident in our Network Services and Government sectors, where we’re enabling the launch of innovative mobility and maritime applications, and in our media business, where we are complementing our position as the global network for the world’s leading programmers by providing high-power capacity for growing regional direct-to-home platforms.”
“A little over two years ago, we implemented a program to better manage our fleet investment. Our first task was to consolidate our satellite fleet, taking surplus capacity out of our inventory. We have completed this task while at the same time achieving record revenue growth,” McGlade said. “Our capacity management program will now focus on building additional value in our fleet, as our satellite replacement programs create inventory that is optimized for the regions and applications that represent sustained opportunity. We believe the company is focused on pursuing the right initiatives to stay strong and successful in a challenging economic environment.”
Business Highlights
• Intelsat General Corporation, an indirect, wholly-owned subsidiary of Intelsat, Ltd., was awarded a multi-million dollar contract to provide bandwidth to an affiliate of European Aeronautic Defence and Space Company (EADS), to support the unmanned aerial vehicle (UAV) surveillance operations of the French Air Force in Afghanistan. As part of the contract, Intelsat repositioned the steerable Ku-band spot beams on its IS-601 satellite in order to provide both a low-data-rate link to control the UAV in flight and a high-data-rate link to collect real-time video and photos from the aircraft for use by troops deployed in the field.
• Intelsat announced the New Dawn joint venture with a South African investor group led by Convergence Partners that will utilize project financing to build and launch a new satellite into the 33º east longitude orbital location. The satellite, which is expected to enter service in early 2011, will be operated and marketed as part of the global Intelsat fleet. The project is expected to be funded approximately 15% with equity and 85% with debt, with the debt being in the form of non-recourse project financing provided by African institutions. The equity is to be provided by Intelsat (74.9%) and the Convergence Partners-led group (25.1%), which also includes Altirah Telecoms. Intelsat’s cash contribution to the project is expected to be approximately $25 million.
• Intelsat’s system average fill rate on its approximately 2,125 station-kept transponders remained at 83 percent at December 31, 2008, the same rate as at September 30, 2008. In the fourth quarter, 19 net new transponders were put into service.
• Intelsat announced several new launch contracts and its intent to accelerate the build and launch of three satellites, increasing the current number of satellites in development to ten, including the New Dawn satellite announced in December 2008. Included in the 2009 launch program is the Intelsat 14 satellite that will feature a government-related hosted payload known as the Internet Router in Space, or IRIS. The Intelsat 15 satellite is also expected to launch in 2009.
• In December 2008, Intelsat Subsidiary Holding Company, Ltd. (“Intelsat Sub Holdco”) repaid the $175.1 million of outstanding borrowings under the revolver portion of its senior secured credit facilities and Intelsat Corporation repaid the $66.1 million of outstanding borrowings under the revolver portion of its senior secured credit facilities. Intelsat’s cash and cash equivalents at December 31, 2008 were $470.2 million.
Financial Results for the Three Months Ended December 31, 2008
Total revenue of $608.8 million increased by $33.3 million, or 6 percent, for the three months ended December 31, 2008 as compared to $575.5 million for the three months ended December 31, 2007. Growth trends including strong renewals, expansions of existing contracts, new business and improved contract terms contributed to the overall favorable trends. Customers based in the Europe and the Africa and Middle East regions provided the greatest contributions to the overall revenue increase.
Revenue trends by service type for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007 were as follows:
• Transponder services— an aggregate increase of $24.5 million, due primarily to a $27.2 million increase in revenues from network services customers, which resulted from new capacity services and strong renewals in the Africa and Middle East, the Europe and the Latin America and Caribbean regions, and a $10.1 million increase in revenues from Intelsat’s government business customers resulting from new services and strong renewals in North America, offset partially by a decline in revenues from media customers for services delivered primarily in Latin America and North America.
• Managed services— an aggregate increase of $6.6 million, due primarily to new business and service expansions in trunking and private line solutions from customers in the Africa and Middle East and the Europe regions and an increase in revenues for occasional use video solutions primarily from media customers in the Europe region.
• Mobile satellite services and other— an aggregate increase of $5.9 million, due primarily to a $5.0 million increase in usage-based mobile services for Intelsat’s government business customers.
• Channel— a decrease of $3.8 million related to continued declines due to the migration of point-to point satellite traffic to fiber optic cables across transoceanic routes and the optimization of customer networks, a trend which we expect will continue.
Total operating expenses for the three months ended December 31, 2008 increased by $537.1 million, or 152 percent, to $891.2 million as compared to $354.1 million for the same period in 2007, with the increase primarily due to a non-cash charge for orbital locations impairment of $326.8 million and an increased loss on undesignated interest rate swaps of $177.6 million as a result of changes in interest rates. Other changes in direct costs of revenue, selling, general and administrative expenses, depreciation and amortization and interest expense, net are described below.
• Direct costs of revenue increased by $21.9 million, or 25 percent, to $107.8 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. The increase was due primarily to:
* an increase in cost of sales due in part to unanticipated costs associated with launch vehicle resales; and
* an increase in fiber and third-party satellite capacity costs related to increased revenues.
• Selling, general and administrative expenses decreased by $10.0 million, or 16 percent, to $50.9 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. The decrease was due primarily to:
* a decrease in bad debt expense, primarily due to the collection of certain customer accounts that had been partially reserved; and
* a decrease in other employee compensation due to relocation expenses incurred in the fourth quarter of 2007.
• Depreciation and amortization expense increased by $21.0 million, or 11 percent, to $217.1 million for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007. This increase was primarily due to:
* increases in depreciation and amortization expense due to the write-up of depreciable and amortizable assets to fair value upon the closing of the February 2008 acquisition of Intelsat’s parent, Intelsat Holdings, Ltd., by Intelsat Global, Ltd., an entity controlled by funds advised by BC Partners Holdings Ltd., Silver Lake Partners and certain other equity investors (the“New Sponsors Acquisition”); and
* an increase in depreciation expense resulting from the placement of the Intelsat 11 and Galaxy 18 satellites into service in 2007 and 2008; partially offset by
* a decrease in depreciation expense due to several satellites that became fully depreciated in 2008.
Interest expense, net increased by $131.3 million, or 56 percent, to $365.2 million for the three months ended December 31, 2008 as compared to $233.9 million for the three months ended December 31, 2007. The increase in interest expense was principally due to the incurrence or assumption of approximately $3.7 billion of net additional indebtedness in connection with the New Sponsors Acquisition, along with the following:
* an increase related to the amortization of discounts resulting from the adjustments to fair value of the company’s debt as a result of purchase accounting in connection with the New Sponsors Acquisition and the impact of change of control offers and refinancings; partially offset by
* a decrease in interest expense due to lower interest rates on the company’s variable rate debt in 2008 as compared to 2007.
Non-cash interest expense was $104.4 million for the three months ended December 31, 2008 and included $69.8 million of paid-in-kind interest expense on the Senior PIK Election Notes due 2017 (the “2017 Bermuda PIK Notes”) of Intelsat (Bermuda), Ltd. (“Intelsat Bermuda”). Also included within non-cash interest expense was approximately $5.5 million of additional interest accrued to account for the escalation of the applicable interest rate margins under the effective interest rate method.
Financial Results for the Combined Year Ended December 31, 2008
Revenue for the combined year ended December 31, 2008 of $2,364.9 million increased by $181.8 million, or 8 percent, as compared to the year ended December 31, 2007. New business, strong renewals, expansion of existing contracts and improved contract terms contributed to the overall favorable trends. All regions reported revenue increases, with the Europe, the Africa and Middle East and the North America regions showing the strongest gains. Revenue trends by service type for the combined year ended December 31, 2008 as compared to the year ended December 31, 2007 were as follows:
• Transponder services— an aggregate increase of $140.9 million, due primarily to a $114.0 million increase in revenues from network services customers, which resulted from new capacity services and strong renewals in the Africa and Middle East and the Europe regions, and a $32.5 million increase in revenues from Intelsat’s government business customers resulting from new services and strong renewals in North America, offset partially by a decline in revenues from media customers, primarily in North America.
• Managed services— an aggregate increase of $38.5 million, due primarily to a $23.1 million increase in revenues from network services customers, resulting from new business and service expansion in trunking and private line solutions and GXS Broadband solutions in the Africa and Middle East, the North America and the Europe regions, an $11.7 million increase in revenues from managed video solutions for media customers primarily in the Europe and the Latin America and Caribbean regions and an increase of $3.7 million in revenues from managed services for Intelsat’s government business customers.
• Channel— a decrease of $18.8 million related to continued declines from the migration of point-to point satellite traffic to fiber optic cables across transoceanic routes and the optimization of customer networks, a trend which we expect will continue.
• Mobile satellite services and other— an aggregate increase of $21.2 million primarily due to a $3.5 million increase in satellite-related services sold mainly to customers in North America, a $10.5 million increase in usage-based mobile services for Intelsat’s government business customers and a $7.2 million increase in professional services, including provision of customer premises equipment for Intelsat’s government business customers.
Total operating expenses for the combined year ended December 31, 2008 increased by $929.5 million, or 68 percent, to $2,296.6 million as compared to $1,367.1 million for the same period in 2007, with the increase primarily due to a $305.8 million increase in restructuring and transaction costs in connection with the New Sponsors Acquisition, an asset impairment charge of $63.6 million related to an anomaly experienced by the Galaxy 26 satellite in June 2008, a non-cash charge of $326.8 million for orbital locations impairment in December 2008, and an increased loss on undesignated interest rate swaps of $155.0 million as a result of changes in interest rates. Other changes in direct costs of revenue, selling, general and administrative expenses, depreciation and amortization and interest expense, net are described below.
* Direct costs of revenue increased by $39.6 million, or 12 percent, to $363.1 million for the combined year ended December 31, 2008 as compared to the year ended December 31, 2007. The increase was primarily due to:
* an increase in cost of sales, fiber and third-party satellite capacity costs related to increased revenue; and
* an increase in cost of sales to support our satellite services program management.
• Selling, general and administrative expenses decreased by $37.0 million, or 16 percent, to $201.4 million for the combined year ended December 31, 2008 as compared to the year ended December 31, 2007. The decrease was primarily due to:
* a decrease in bad debt expense due to improvements in the timing and amount of account collections, as well as the collection of certain accounts that had been reserved for;
* a decrease in professional fees in the combined year ended December 31, 2008 due to heightened expenses incurred during the year ended December 31, 2007 to support the company’s integration activities and other merger and acquisition activities; and
* a decrease in staff expenses due to the departure of certain executive level staff and other staff reductions during the combined year ended December 31, 2008.
• Depreciation and amortization expense increased by $75.7 million, or 10%, to $859.8 million for the combined year ended December 31, 2008 as compared to the year ended December 31, 2007. This increase was primarily due to:
* an increase in depreciation and amortization expense primarily attributable to the write-up of the company’s depreciable satellites and amortizable assets to fair value upon the closing of the New Sponsors Acquisition; and
* an increase in depreciation expense resulting from the full year impact of satellites placed into service during 2007 and the impact of satellites placed into service in 2008, primarily our Galaxy 17, IS-11, Galaxy 18 and Galaxy 19 satellites; partially offset by
* a decrease in depreciation expense due to certain satellites becoming fully depreciated in 2008.
* Interest expense, net increased by $382.4 million, or 39%, to $1.4 billion for the combined year ended December 31, 2008 as compared to $992.8 million for the year ended December 31, 2007. The increase in interest expense was principally due to the incurrence or assumption of approximately $3.7 billion of net additional indebtedness in connection with the New Sponsors Acquisition, along with the following:
* an increase related to the amortization of discounts resulting from the adjustments to fair value of the company’s debt in purchase accounting for the New Sponsors Acquisition and the higher principal and interest resulting from the change of control refinancings; partially offset by
* a decrease due to lower interest rates on the company’s variable rate debt in 2008 as compared to 2007; and
* a decrease due to write-offs of debt issuance costs and premiums paid in 2007 in connection with certain debt refinancing transactions completed in 2007.
The non-cash portion of total interest expense, net was $412.7 million for the combined year ended December 31, 2008, and included $210.5 million of paid-in-kind interest expense and $75.0 million of additional interest accrued to account for the escalation of the applicable interest rate margins under the effective interest method. The remaining non-cash interest expense was primarily associated with the amortization of the deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums recorded to adjust Intelsat’s debt to fair value in connection with the New Sponsors Acquisition.
EBITDA, New Bermuda Adjusted EBITDA and Other Financial Metrics
Intelsat, Ltd. EBITDA, a loss of $71.1 million for the three months ended December 31, 2008, reflected a decrease of $490.1 million from $419.0 million, or 73 percent of revenue, for the same period in 2007. New Bermuda Adjusted EBITDA increased by $20.3 million to $459.5 million, or 75 percent of revenue, for the three months ended December 31, 2008 from $439.3 million, or 76 percent of revenue, for the same period in 2007.
Intelsat, Ltd. EBITDA of $916.8 million, or 39 percent of revenue, for the combined year ended December 31, 2008 reflected a decrease of $683.1 million from $1,599.9 million, or 73 percent of revenue, for the same period in 2007. New Bermuda Adjusted EBITDA increased by $176.9 million to $1,855.0 million, or 78 percent of revenue, for the combined year ended December 31, 2008 from $1,678.1 million, or 77 percent of revenue, for the same period in 2007.
At December 31, 2008, Intelsat’s backlog, representing expected future revenue under contracts with customers and Intelsat’s pro rata share of backlog in its joint venture investments, was $8.8 billion. At September 30, 2008, Intelsat’s backlog was $8.7 billion.
Intelsat management has reviewed the data pertaining to the use of the Intelsat system and is providing revenue information with respect to that use by customer set and service type in the following tables. Intelsat management believes this provides a useful perspective on the changes in revenue and customer trends over time.
