Eutelsat Communications S.A. (ETL) Earnings Call Transcript & Summary

Good day, and welcome to the Eutelsat Third Quarter and 9 Month 2021/'22 Revenue Presentation. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sandrine Téran, Chief Financial Officer. Madam, please go ahead.

Thank you, and good evening, and thank you for joining us on this call where we will present our third quarter 2021/2022 revenue. I am Sandrine Téran, CFO, and I am here with Michel Azibert, Deputy CEO and Acting Chief Commercial Officer. Let's start by taking a quick look at recent highlights. First, total third quarter operating vertical revenues amounted to EUR 285 million and were broadly stable compared to the second quarter. Second, Broadcast revenue trends started to improve both sequentially and on a year-on-year basis. Third, Fixed Broadband and Mobile Connectivity, which are going to be the main growth drivers for Eutelsat in the coming year, both recorded robust double-digit growth in the third quarter, highlighting the significant potential in connectivity. Both on the commercial front, we made good progress in the commercialization of EUTELSAT QUANTUM. On the strategic front, we inked a global distribution partnership with OneWeb to address key connectivity verticals. And finally, the performance of the first 9 months was in line with expectations, enabling us to confirm our financial objective. Total revenues for the third quarter stood at EUR 287 million, down 4.8% on a reported basis. This included a negative perimeter effect of minus EUR 8 million, reflecting the disposal of EBI in April last fiscal year, the positive currency effect of plus EUR 8 million related to the euro-dollar rate and largely offset by a hedging impact included in other revenues, which saw a negative swing of minus EUR 7 million. As a result, revenues of the 5 operating verticals were down by 3.5% on a like-for-like basis. Turning to the revenues of each of the 5 verticals on a like-for-like basis. Broadcast, 61% of group total, recorded revenues of EUR 173 million, down 6.8% year-on-year and 0.8% quarter-on-quarter. Data and Professional Video, 14% of group total, saw revenues of EUR 40 million, down 2.7% year-on-year and stable quarter-on-quarter. Government Services, 12% of group total, saw revenues of EUR 35 million, down 11% year-on-year and 8% quarter-on-quarter. Fixed Broadband, 6% of revenues, stood at EUR 17 million, a progression of 30% year-on-year and almost 8% quarter-on-quarter. And Mobility, 7% of revenues, saw revenues of EUR 21 million, recorded a 24% growth year-on-year and a 5% progression quarter-on-quarter. Finally, other revenues stood at EUR 2 million that included a negative EUR 3 million effect from hedging operations compared to a positive impact of plus EUR 4 million last year and a negative impact of minus EUR 2 million last quarter. EUTELSAT QUANTUM, which began operational service mid-November, is the seventh of our growth satellite to enter into service. It brings distinctive features, in particular, in terms of flexibility, adaptability and security, which provides unparalleled value for customers. As a result, the commercialization progressed quickly, with 6 beams out of 8 already secured after a semester of operations. 1 beam was sold to a customer operating in the Middle East called Maritime Mobility, with potential for further business in the future. The other 5 beam were sold to service providers in Government Services, 3 of them for new business and 2 to favor the renewal of existing business. And we continue to see a promising pipeline of business to address both U.S. government and non-U.S. environment customers for Government Services or Mobility. We are confident in our ability to have the satellite fully sold out in the coming months. Turning to OneWeb. On the operational front, 13 launches representing 2/3 of the constellation has been completed and first distribution partners have been onboarded. Unfortunately, in the context of the Ukrainian crisis, OneWeb had to suspend the remaining 6 launches, which were supposed to happen at the Soyuz rocket. Nevertheless, OneWeb has been able to quickly sign agreements with SpaceX and New Space India, enabling launch resumption by the end of current calendar year at latest. On the commercial front, we signed a multiyear global distribution agreement with OneWeb, deepening cooperation and showcasing operational synergies between both companies. This agreement, which covers all verticals and geography, will benefit to both companies. For OneWeb, leveraging a new commercial firepower and global sales team will enable to maximize commercial opportunity. And as far as we are concerned, we will have the ability to spend LEO capacity on top of GEO and will be the only FSS operator able to do so on a global basis, which is definitely a differentiator enhancing our overall commercial proposition. And finally, this agreement is the first step towards the development of future combined LEO-GEO offers. Now let's take a look at the Q3 performance by application. As a reminder, all commentary and figures relate to a like-for-like basis, i.e., at constant currency and perimeter. Third quarter Broadcast revenues amounted to EUR 173 million, down 6.8% year-on-year. This reflected mostly the partial renewal of capacity with Nilesat at 7/8 degree West, which is not offset by the resale of capacity. Excluding this impact, revenues were down at a low single-digit pace, reflecting the slight erosion of the underlying business in Europe. On a more positive note, revenue trends started to improve related to the second quarter, which was down minus 8.6% year-on-year. On a quarter-on-quarter basis, revenues were broadly stable with a slight minus 0.8% erosion, fully reflecting the carryforward effect of the above-mentioned 7/8 degree West headwind, which started to impact revenues from mid-October. On the fourth quarter revenue are expected to remain broadly stable relative to Q3, assuming that there is no material deterioration of Russian revenue. Third quarter Data and Professional Video revenues stood at EUR 40 million, down by 2.7% year-on-year. In Fixed Data, which represented 2/3 of the participation, improved volume trends are now offsetting most of the negative impact of competitive pressure. Professional Video revenue trends saw slight uptick, reflecting the phasing of a specific contract which is beneficial to the second half but neutral over the full year as well as growth of cash revenue. Quarter-on-quarter, therefore, revenues were stable, reflecting the above-mentioned Professional Video savings as well as the broad stabilization of Fixed Data. On the commercial front, a multi-year agreement was signed with Tuvalu Telecommunications Corporation for connectivity on the EUTELSAT 172B satellite to support the extension of corporate networks for government offices and businesses of the Tuvalu Islands. We expect this application to decline at a mid-single-digit pace for the full fiscal year, consistent with previous indications. Third quarter Government Services revenues stood at EUR 35 million, down 11% year-on-year. They reflected the negative carryforward effect of USG renewal, driven in particular by the withdrawal of troops from Afghanistan with a renewal rate of only 75% in fall 2021. At the end of life and the end of life in stable orbit of EUTELSAT 174A, which means the capacity is now sold at a lower price. Quarter-on-quarter, revenues were down by 8%, with the full effect of full 2021 renewal now in the quarterly revenue base and screen renewals already partially reflected in the base as well. On the commercial front, as anticipated in February, the latest renewal campaign of the U.S. government during 2022 resulted in a below-average outcome with a new renewal rate above 70%. That reflected, in particular, the ongoing effects of the geopolitical context in the Middle East. Conversely, the commercialization of EUTELSAT QUANTUM continued to progress with site being now commercialized for government services, of which 3 are new business. In the fourth quarter, the negative effect of this renewal should be largely affected by the ramp-up of new business for EUTELSAT QUANTUM. Third quarter Fixed Broadband revenues stood at EUR 17 million, up 30.2% year-on-year on a like-for-like basis. This reflected growth in all regions with, in particular, in Europe, the contribution from the wholesale agreement with TIM and Hispasat. The ongoing strong dynamic of our African operation and the ramp-up of the multi-beam agreement signed on the EUTELSAT 65 West A satellite with several Mexican service providers. Conversely, third quarter revenues also reflected the erosion of the legacy business of Bigblu Broadband on KA-SAT, accentuated this quarter by the context of the cyber incident, which affected the service. Quarter-on-quarter, revenues were also up by 7.7%. The favorable momentum of this application is expected to continue into the fourth quarter. Third quarter Mobile Connectivity revenues stood at EUR 21 million, up 24.5% year-on-year and 4.5% quarter-on-quarter. The reflected the carryforward effect of the contracts signed with Anuvu last fiscal year. The agreement signed earlier this fiscal year on EUTELSAT QUANTUM with a customer in the Middle East and more generally, the ongoing strong growth of Maritime, which is driven by the ramp-up of contracts with service providers signed in previous years. On the commercial front, we continue to see a robust pipeline of business for Maritime Mobility, highlighting both the strong demand of this vertical as well as the quality of our in-orbit resources and services. In the fourth quarter, growth is expected to decelerate as the comparison basis will include the above-mentioned agreement with Anuvu. Turning to backlog and fill rate. The backlog stood at EUR 4 billion as of 31 March 2022 versus EUR 4.5 billion a year ago and EUR 4.2 billion at end December 2021, reflecting its natural erosion in the absence of major renewals this quarter. The backlog was equivalent to 3.3x 2021 revenue, with Broadcast representing 63%. The number of operational transponders as of 31 March 2022 stood at 1,358, down by 20 units quarter-on-quarter, reflects increased depleted end of life in stable orbit of the EUTELSAT 174A satellite. The number of utilized transponders stood at 961, down 13 units quarter-on-quarter, reflecting principally the same effect as well as the fall 2021 renewal campaign in the U.S. administration. As a result, the fill rate was broadly unchanged at 70.7%. Let's now turn to the outlook. Nine months operating verticals are fully in line with expectations. At EUR 1.20 rate, this stood at EUR 840 million and were down 4%, consistently with the valuation implied by the midpoint of our range of objectives for the full year. In this context, we reiterate our objective to generate operating verticals revenue of between EUR 1.11 billion to EUR 1.13 billion for current fiscal year based on a euro-dollar rate of EUR 1.20. All our other objectives for the current and following financial year, including cash CapEx, adjusted discretionary free cash flow, leverage target and dividend policy are also concerned. As a reminder, this outlook is as usual based on our nominal deployment plan, which is unchanged. This also assumes no material deterioration of revenue generated from Russian customers. I thank you for your attention, and Michel and I are now ready to take your questions.

[Operator Instructions] And we'll take our first question from Aleksander Peterc with Societe Generale.

I just have a few. First of all on Russia, you now mentioned there's a possibility of a deterioration there. So could you give us a little bit of color on the context? Notably, is there a risk that you don't find it difficult to get paid, given the extended sanctions on the Russian financial system, how is that going to work out in the medium term? If you just kind of point out the puts and takes and what kind of risks you envision? Is the whole 6% of your revenue in Russia potentially at risk? Or is it less than that? And any other implications that you'd like to point out? Then secondly, on the Nilesat resale, how have you progressed with respect to the capacity you've taken back in? Have you managed -- how much of that have you managed to resell thus far? And is there any more momentum from this coming through in the coming quarters?

Thank you, Aleksander. I will take the question on Russia and Michel will answer on the Nilesat resale plan activity. So you are right that Russian customers represent 6.3% of our revenues on the basis of fiscal year '21. I would say we are facing 3 types of risks on the customer side. The first one is the risk to see sanctions imposed on our customers, which is not the case today. But this is the first risk that we have to monitor very, very carefully. For the time being, we have had a very limited impact of those with the 7 channels that we had to remove from our fleet but with a negligible impact on our revenue for the first 3. The second one is the one you mentioned, which is the risk that we may not be able to be paid anymore. It's not the case today. We have a bank channel allowing us to receive the payment from our customers. And actually, we have received payments the beginning of the crisis. So for the time being, this risk is also managed even though we are monitoring it very carefully. And the third risk, I think we should mention, is the risk of potential ruble devaluation. You've seen that the ruble has come back to a pre-crisis level. So currently, we have a new issue on this. But in our contract, we have some mechanism of a partial adjustment of the price if the ruble were to deteriorate, I would say, over several months. And what I can say on this is that if we were to apply those clauses that we have in our contracts with the customers, in the case of -- we would have to apply disclosures on a full year basis. The impact would be a kind of mid-single-digit million euros for the full year. So those are the main risks that we are monitoring. For the time being, we are in a position to keep on delivering the service to our Russian customers who are not subject to sanctions. And as I was mentioning, we have received a payment and we are receiving payment from them. That's probably the first summary of where we spend on this exposure with Russia on the revenue side.

On Nilesat, Aleksander. So you remember, in February, we mentioned what was the expected impact on the partial renewal with Nilesat on a quarterly basis. We said it will be in the range of EUR 7 million. In the previous quarter, we said EUR 5 million. So there was clearly a less -- bit less momentum and this is still the situation. The reason for that is that we were, at some point, expecting 2 big new business with 2 different customers from the Middle East. This has not materialized so far, and I don't think it will materialize in the next quarter. Still, of course, we are gaining momentum with smaller customers which takes us to a situation right now where approximately if we consider the starting point of having 35 transponders with Nilesat, we are probably somewhere like 55% volume we feel. And given that we charge a higher price with no distributor between us and the customers, we are probably somewhere around, let's say, 65% value and we feel of the capacity. We have -- it was a Ramadan period, which was a little bit quiet, as you would imagine. Now we are starting the bigger campaign of our sales in the region with the big show in Dubai next week. So we'll see after that. But so far, this is the situation.

And can I just have a very quick follow-up? On Mobility, do you see actually a pickup now in the aerospace in in-flight communications as we see a significant pickup in travel, airlines are saying they're full, getting very full. So do you see any positive momentum there that will continue to feed some growth for the next, not just quarter but quarters?

Yes. Aleksander. So we remain cautious for the very short term on aero Mobility because we are still monitoring the situation of service providers who are still in difficulty following the COVID crisis, but you are very right that we expect the aero segment to gradually recover and you see a strong potential for this vertical. And more specifically, I would say that our next significant incremental capacity to address the segment will arrive in service in fiscal year '24 with -- it can be in the coming days, years, and we have a significant precommitment on those assets, also in aero Mobility. So we expect the growth to be visible in this segment, specifically in '24 in the contest -- in the context of this new incremental capacity.

And we'll take our next question from Sami Kassab with BNP Paribas.

I have 3 questions, please. The first one is on OneWeb. Following the agreement to resell OneWeb's capacity, can you discuss how you plan on accounting for that? Will you include all the gross revenues in your own revenue line? Or will you just account for a commission that you may perceive on the transactions that you have materialized? Secondly, do you have any update on the European Union Broadband constellation plan? Perhaps a few words on where you stand and if there's been any movement since the last time we spoke. And lastly, SCS recently acquired a service integrator in government, Leonardo DRS. Can you tell us what revenue exposure you had to that service provider please?

I will take the first 2 and Michel will answer on the DRS one. So OneWeb and the accounting treatment of the distribution agreement that we have signed with them. So we are transferring capacity from OneWeb and reselling the capacity to our own customers. So we will book the purchase and the revenue in the P&L and in the bottom line, we correspond to the resale margin that we will generate on this distribution activity from the OneWeb constellation. Second question on the EU constellation. We don't have much to report since our last quarter call where Eva has a chance to answer questions on this topic. You know that we are supportive of the initiative. We are proactively participating in the current discussions, but there are a lot of options on the table. You know that we think that the best way, in our view, to achieve the objective of the EU in a timely manner and in an efficient way would be most probably to leverage on the existing assets. And we see also an opportunity here for potentially a multi-orbit solution, but we have not been specifically to report based on the progress that has been made on the side over the last 2 or 3 months. Michel, on the DRS.

Yes. So DRS GES is an opportunity that we looked at and we passed on it. It's a company which is one of our customers, as you know, for the U.S. DoD that we sell, in particular, to special operations where they focus very much and also the army. It's -- we generate revenue with them, which is approximately 2% of the revenue of [indiscernible] -- it's our #3 or 4 customer for the U.S. DoD, depending how you counts. We're confident that's the majority of the business that we generate to give them will continue to supply that, given one, that we have unique impact capabilities to provide service for certain areas of the world, in particular, for the MENA coverage, but also, we have QUANTUM for which there is a huge interest coming from DRS. We met them recently at the Washington conference, and they reassured us that in the coming quarters, we should not see any significant change in the way they interact with us. Again, it's a very good relationship, and we see little risk to lose the business with them.

We'll now move to our next caller, that will be from Roshan Ranjit with Deutsche Bank.

Great. I've got 2, please. On government, when you are talking about the QUANTUM commercialization, I think you said 2 of the beams were a renewal. Can you give us a sense of the pricing uplift that you have been able to get here and whether this plays a part in helping to moderate the latest government campaign renewal at 70%? And kind of tied to that, to get a sense of the portion of your contracts, which are indexed based and whether the -- Michel, I think you mentioned the kind of reselling of the Nilesat capacity, if you were able to embed some indexation into those contracts? And secondly, just a quick one on the launch costs. Can you confirm that for the upcoming launches there isn't any impact of the higher costs associated with the launches? So i.e., you've locked in your prices and they are not going to change given the current environment we're in?

So Michel, if you may take the question on government, then I will answer the 2 others.

Yes. So on QUANTUM, as you know, we have 8 beams on the satellite or 8 flexible beams. As it was mentioned by Sandrine, we have currently sold 5 of them and secured 6 of them. One of them will start in a couple of weeks. We still have 2. We have very high demand for the remaining 2. What we do basically is, of course, we took the demand as it came when all the customers have had a chance to test the service, in particular, let's say, the software part of the service, which started basically in January with one exception for Mobility, which came earlier. So it's concentrated on U.S. DoD customers or, in general, government customers. We generally price the capacity on QUANTUM with a premium to the regular capacity, premium in the order valuation of the premium is in the range of 20% to 25%. When the customer, of course, wants QUANTUM and was already a regular customer, then we transfer the customer. We get a lot of premium and, at the same time, of course, we free up some capacity on regular services on regular satellites that we would plan to resell. So of course, net-net is positive but a little bit less positive than purely new business. So we have a combination of both. And in terms of the anticipation that we have for the revenue of the satellite when it will be fully loaded, it's quite coherent price and volume with what we said before, which means that basically, the generation of the satellite would be equivalent to an average satellite in the range of EUR 30 million to EUR 35 million.

Thank you, Michel. On the question on the portion of our contracts which includes some kind of indexation, I would say, the answer is simple. We have no -- most of the time, our contracts do not have such indexation mechanism. It's not the practice in the industry. And it's specifically the case story for the Broadcast vertical. So when we sign a new contract, even as we speak currently in the context of the Nilesat plan, we don't have some escalation embedded in the contract. So this is not something which plays a significant role in the way the industry is working. On the launch costs, yes, I can confirm that we are not exposed to increase if any, in the launch cost in the next year. We negotiate our launches well in advance to the launch date. We have in place a framework agreement with one launching agency specifically for the long term with the launches which have been negotiated already several years ago. So we are not exposed to an increase in the launch for our ongoing 5 program, and we are not exposed either for the following months because we have launches already prenegotiated for future satellite program.

That's great, super helpful. Just to follow-up, Michel. So you mentioned the government contract when you're migrating kind of existing customers and you've got the, I guess, capacity which they move it off to resell. How is that reselling process going? Has that started on the government side? Anything you can say there, please?

I'm not sure I got your question right, Roshan. Can you repeat?

Sure. The reselling of the government capacities as these customers have moved across to the QUANTUM beams, the capacity that they are migrating from, you said that you were looking to resell. How is that going? How are those conversations going?

Yes. It's going well because the demand is after, of course, we got the big losses related to Afghanistan, which impacted both campaigns of the last fall and this spring, then the momentum is progressively revealed. So the capacity, which has been freed either because of the Afghanistan or because of the shifts that transfers from QUANTUM, especially on 70B and 36B is sort of getting refill progressively, not, of course, at the same speed at QUANTUM, but we were with a sort of good regular momentum.

We'll now take our next question from Ben Lyons with Crédit Suisse.

I just have 2 quick ones, actually. The first one, could you run us through your interest rate exposure and how much of your interest rate risk is hedged? And secondly, also on the cost side, does the strength in the dollar impact your CapEx guidance? I'm just wondering how much of your CapEx is in U.S. dollars.

So on the interest rate exposure, we have a very small portion of our debt which is variable rate denominated. We are talking about less than 15% of the gross debt, I would say. And to be even more specific for the debt, the relevant rate is still negative today. And of course, we will take appropriate action to swap this debt into fixed rates as soon as the moment comes so that we have no exposure to increasing interest rate. On the CapEx side, the exposure to U.S. dollar is very limited. It can vary from 1 year to another. For instance, if we have a launch with the U.S. agency, so I would say it goes between a few percent for a year and the maximum will be maybe around 10% for the big years with, for instance, the U.S. contracts. So very limited exposure to USD in our CapEx line.

[Operator Instructions] We'll now take a question from Nick Dempsey with Barclays.

I have 3 questions left. So just going back to QUANTUM and the 2 beams that form part of existing renewals. So are we saying that this was all part of the spring renewal period where you achieved a 70% revenue renewal level with the DoD? So in other words, to just achieve the 70% level, you had to wrap into the contracts 1/4 of the QUANTUM capacity to achieve that? Or is it more complex than that? And if so, can you explain perhaps the detail? The second question, you talked about a slight erosion in the underlying broadcast of Europe in the quarter. Can you give us an indication, first of all, whether that's coming from volume or price? And then whether that is part of large customer deals in Europe or some of the smaller piecemeal things that you do that is causing that slight erosion. And the final question recently announced downsizing and delays to the Lightspeed constellation. Does that present an opportunity for OneWeb in the next few years? Are there some applications where you were previously expecting when you did do due diligence on OneWeb expecting Lightspeed to be the key impact?

QUANTUM, Nick, your first interpretation is the right one, so it's part of the spring renewal campaign that's -- you understood it well. Then on the...

Yes. On the question on the slight decline in Europe on the Broadcast. Well, I would say it's mostly volume. And I would say, the natural erosion of notably free-to-air channels, which are going down and which may not be fully replaced by new ones. So it's mostly volume duration for the slight decline in the Broadcast in Europe, which is almost a mature market. On OneWeb and the question of the delay reported by competitors, like Telesat, yes, of course, this is something which is a positive for OneWeb. But OneWeb is also currently managing the issue of the constellation of the last 6 launches that were expected to be done with Soyuz. So OneWeb will still have some delay in its constellation but the fact that Telesat is struggling to have -- to put in practice its project is, of course, on the positive side for OneWeb.

We'll now take our next question from Carl Murdock-Smith with Berenberg.

You've answered most of mine so just one left on semantics around the Q4 commentary from me. Both on Broadcast and on Government Services, you've effectively said that you expect Q4 to be broadly stable relative to Q3. Similar to Ben's question on the kind of currency moving around, can you just confirm that, that's in constant currency rather than necessarily in euro terms?

Yes, yes, I can confirm that we did this indication at constant currency.

And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you very much to all. We wish you a very good evening and talk to you in 3 months. Thank you. Bye-bye.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.