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

Good day, and welcome to the Eutelsat Third Quarter and 9 Months 2022-'23 Revenues Conference Call and Webcast, followed by a business update on OneWeb. Today's conference is being recorded. At this time, I would like to turn the conference over to Eva Berneke, Chief Executive Officer. Madam, please go ahead.

Thank you, and welcome to you all for joining us today for Eutelsat's Third Quarter '23 Revenue Presentation. I'm Eva Berneke, the CEO, and I'm joined today by our CFO, Christophe Caudrelier. We'll start out with Christophe presenting third quarter revenues, and then I will get back and give you a business update on OneWeb and our combination project, Eutelsat OneWeb. Over to you, Christophe.

Thank you, Eva. Good morning to everyone. Let's start by taking a quick look at the recent trading highlights. Q3 operating verticals revenues landed at EUR 272 million and 9 months operating vertical revenues were at the midpoint of our expectation for the full year. The third quarter saw an improving trend in government services on the back of an Airbus take-or-pay deal and ahead of entry into service of incremental capacity in fiscal year '23-'24. Connectivity applications continue to see sustained positive momentum ahead of the entry into service of KONNECT VHTS and EUTELSAT 10B next fiscal year. With all this, we confirm all stand-alone full year '22-'23 and long-term financial objectives. As we announced beginning of May, Eutelsat has joined forces with fellow European companies to form a consortium to bid on the European Commission's tender for the IRIS² satellite constellations. The partnership will aim to create a state-of-the-art satellite constellation based on a multi-orbit architecture and interoperable with a terrestrial ecosystem. To address the growing connectivity needs of European governments, businesses and citizens. Elsewhere, OneWeb's Gen-1 constellation is on track to reach global coverage by the end of this year, supporting a robust commercial ramp-up across key verticals. The Extraordinary General Meeting to approve the combination is expected to take place in the third quarter of calendar 2023. Let's have a look at Q3 revenues. Total revenues for the third quarter stood at EUR 272 million, down 5.2% on a reported basis. Other revenues, as a reminder, revenues other than those generated from the commercialization of satellite capacity were down EUR 2 million, including a plus EUR 1 million positive variation in hedging revenues. Excluding the positive currency effect of EUR 7 million based on a euro-to-dollar rate of 1.07 versus 1.13 last year. Revenues of the 5 operating verticals were down by 7% on a like-for-like basis. Looking at revenues in more detail. Broadcast, 58% of group total, recorded revenues of EUR 157 million, down 10.6% versus last year. Data & Professional Video, 14% of group total, to revenues of EUR 38 million, down 7.3%. The Government Services, 11% of group total, to revenues of EUR 31 million, down 13.4%. Fixed Broadband, 7% of revenues, stood at EUR 19 million, and organic progression of 7.3%. On Mobility, 10% of total, to revenues of $27 million, up by 23%. Other revenues stood at EUR 0.4 million, which included a $2 million negative impacts from hedging operations versus a negative effect of EUR 3 million a year earlier. Now let's take a look at the Q3 performance by application. First, Broadcast. Q3 revenues were down 10.6% to EUR 157 million. This reflected the full impact of non-renewal of the Digitürk contract, lower revenues in Europe, the effect of the sanctions against certain Russian and Iranian channels, which mainly impact the second half of fiscal year '22-'23. On the commercial front, Eutelsat was selected by certain Latin American customers for broadcast services in Mexico and Brazil, leveraging the unparalleled coverage of the EUTELSAT 65A, 117WA and 117WB satellites over the region. Revenues in the fourth quarter are expected to slightly decrease compared to the third quarter on the back of lower volumes in Europe. Now Data & Professional Video revenues stood at EUR 38 million, down by 7.3% year-on-year. In fixed data, 2/3 of this application improved volume trends partially offset the negative impact of ongoing competitive pressure. Professional Video, 1/3 of revenues saw a slight deterioration, reflecting the phasing of a specific contract as well as seasonality occasional use. On the commercial front, the partnership was signed with POULSAT to help provide schools in North Africa with high-speed Internet connectivity, thanks to Eutelsat Advanced Solutions. We expect this application to decline at a mid-single-digit pace over the fourth fiscal year, consistent with previous indications. Government Services revenues stood at EUR 31 million, down 13.4% year-on-year. They reflect the full negative carryforward effect of recent U.S. Department of Defense renewals with, in particular, a renewal rate of 65% in fall 2022. This decrease was partially offset by a take-or-pay contract with Airbus, which also expands Eutelsat's European customers portfolio, thereby diversifying its geographic exposure. Quarter-on-quarter revenues were up by 3.1%, reflecting the above-mentioned contract, which was booked with retroactive effect at July 1, '22. The latest renewal campaign with the U.S. Department of Defense, spring 2023 resulted in a slightly improved renewal rate of above 70%. In the fourth quarter, the trend should improve on the back of these tailwinds. Third quarter fixed broadband revenues stood at EUR 19 million, up 7.3% year-on-year on a like-for-like basis. This reflected the contribution from the 4 European wholesale agreements with Orange, TIM, and more recently, Hispasat and Swisscom, as well as, to a lesser extent, the growth of the African operations. Quarter-on-quarter revenues were up by 3.5%. Over the full year, fixed broadband should be broadly stable as the comparison basis now better reflects the above-mentioned contracts, mainly in Europe and Africa. Keep in mind that Q4 '22 was also included a positive EUR 2.5 million on which will clearly impact the comparison basis of the upcoming Q4. Growth is expected to reaccelerate in fiscal year '23-'24 on the back of the entry into service of KONNECT VHTS. Q3 Mobile Connectivity revenues stood at EUR 27 million, up 23% year-on-year, reflecting the ongoing positive momentum, notably the strong growth in Maritime. Quarter-on-quarter revenues were down by 4.1%, a mechanical impact, which reflected the timing of the commercialization of the third beam on EUTELSAT QUANTUM booked in Q2 with retroactive effect from August 2022. The overall positive dynamic is expected to translate into double-digit growth for the full year, albeit at a slower place compared to the first 9 months rate of 29.2% as the comparison basis will gradually reflect some of the above mentioned as well as other incremental contracts. Turning to backlog & fill rate. The backlog stood at EUR 3.5 billion at the end of March '23 versus EUR 4 billion a year earlier and EUR 3.7 billion at the end of December 2022, reflecting its natural erosion in the absence of major Broadcast renewals this quarter. The backlog was equivalent to 3.1x '21/'22 revenues, and broadcast represented 58% of the total versus 63% a year ago. The backlog profile is progressively reflecting the rebalancing of our operations towards connectivity with shorter contracts. Moreover, the backlog does not include management services. We are currently working on the methodology to better reflect this service, this contribution. The number of operational transponders at 31st March '23 stood at 1,352 broadly stable year-on-year and compared to end of December 2022 with no entry into service of any new regular capacity or end of stable orbit life of any satellite over the last 12 months. The number of utilized transponders stood at 916, down by 45 units year-on-year and by 39 units compared to end of December. The latter reflecting notably lower volumes in Broadcast on the absence of major Broadcast renewals this quarter. Keep in mind that this figure does not include yet the HTS capacity of some of our satellites such as KONNECT and QUANTUM. As a result, the fill rates stood at 67.8% compared to 70.7% a year earlier and 70.2% at the end of December. Let's now turn to the outlook. On the back of all these, we confirm our financial outlook. We expect to generate operating revenues of between EUR 1.135 billion to EUR 1.165 billion for the current fiscal year based on a euro-dollar rate of 1. The revenues are expected to return to growth from fiscal year '24 on the back of incremental capacity. Elsewhere, cash CapEx will not exceed EUR 400 million per annum for each of the 2 next -- next 2 fiscal years. We also confirm our discretionary free cash flow objective with an average of EUR 420 million per year for the next 2 fiscal years. Finally, we confirm our leverage target. As a reminder, these objectives are on a stand-alone basis and are based on a nominal deployment program. And before handing over to Eva, a reminder of our virtual launches for which you will find more details on the slide here. Now over to Eva for the business update on OneWeb.

Thank you, Christophe. And a bit of update since February, where OneWeb has made some very solid progress. As the satellites required to complete the Gen-1 constellation and finalize the global coverage has been launched. It means that Gen-1 is now fully derisked. That will be supporting growing revenues above the 50 degrees north and will be rolled out below 50 degrees by the end of the year. In terms of ground network, 22 network portals have been completed at the end of March, and we're well on track to the full global rollout during '23. By the end of this month, the OneWeb network will be available north of 35 degrees, which is pretty much all of Europe and all the lower states of the U.S. This will unlock potential for revenue ramp up in these 2 key regions. And as planned, global coverage will then follow by January '24. OneWeb's network currently represents around 450 gigabytes per second of capacity, which is expected to increase to 1.3 terabytes by the end of '23 when it reaches full global coverage. Today, network utilization rate stands around 5%, a level which is set to dramatically increase as the rollout progresses. The rise of Alaska fill rate, which has tripled in less than a year is illustrative of one west capacity increase usage in geographies where demand for connectivity is strong. At the end March, terminal availability is also progressing well. Government terminals are available, maritime flat panels are expected for the second half of this year and aviation flat terminals by early '24. These flat panel represent a significant upgrade from the customer point of view from the dual parabolic currently in use. In terms of ground equipment, as I said earlier, we have 22 network portals completed in March, and regulation authorities obtained for 170 countries. All of these are key enablers supporting a robust commercial ramp up as more and more customers buy into the LEO offering. When we first communicated one with backlog last October, it sat between $600 million and $700 million. It's now progressed to $900 million, a $300 million increase, well illustrating the appeal of the LEO offer to a wide variety of connectivity applications. On the back of this, we also expect OneWeb to reach the $50 million revenue objective by end June this year. OneWeb has built a strong distribution network across 3 key verticals: Fixed Connectivity, OneWeb has started to take a pay with various customers. They provide cellular backhaul services to Airtel in Africa, and it works for Galaxy in Canada, which is already underway, with communities being served with WiFi. Thanks to OneWeb network. And recently, a multimillion, multiyear deal to provide LEO technology connect remote part of Southeast Asia has been signed with mu Space. In Mobile Connectivity, Eutelsat won a multimillion, multiyear deal with Intelsat back in February. This deal as well as the successful trials for the combined aviation antennas that showcase the possibility that opened up by the GEO and LEO combination is a very strong proof point. Finally, the one we have the most attracting interest from government applications, both hard and soft government applications is evidenced by the trials for remote connectivity broadband in the U.K. under the U.K. government connectivity program. In total, OneWeb today has 53 distribution partners with 75 expected by the end of this year when global coverage have been reached. Just a quick word in terms of timing of the transaction process. We're waiting for the few final authorizations namely from France and the U.S. before we actually can call for an extraordinary general assembly. We expect this to take place in the course of third quarter of this year. Once it's approved by the EGM, the combination will immediately be live as the teams are fully focused on making this combination a true success. The time line is fully compatible with the operational and financial objectives communicated at the announcement of the combination. On the back of this, the derisking of Gen-1 as well as the robust ramp-up of technical and commercial operations in OneWeb leads to confirm the value creative synergies. Regarding revenues, we'll leverage Eutelsat sales force, geographic reach and existing customer base to accelerate commercial ramp-up on OneWeb. That's already started up within our take-or-pay agreement. OpEx optimization will come mostly from avoidance of future costs, ramp-up and cost implication between the 2 entities. And last but not least, leveraging a hybrid LEO/GEO satellite infrastructure will unlock Gen-2 rationalization and considerably optimize both fleets and enable significant CapEx savings. These synergies represent a relatively low risk and generate significant value in the order of magnitude EUR 1.5 billion. Previously, we've had a few questions around Gen-2. So the second generation of OneWeb satellite is still expected to unlock significant value at an optimized cost. With the work ongoing under the sign of Gen-2, a few words on the main characteristics of the Gen-2 satellites, which we believe present a compelling economic, technology and commercial advantage, and it will enable us to address a significant portion of the booming connectivity market. The design process is based on a throughout market analysis to ensure rightsizing while the network is being conceived as to enable fleet expansion at minimum marginal cost. Gen-2 has 3x to 5x the capacity of the Gen-1 but at a lower cost per megabit and further enhancing the network's competitiveness. It will leverage both existing and future dual infrastructure to focus capacity on high demand areas and reduce overall cost. Inter-satellite links will represent new functionalities, which are key to some of our customers, and we'll reuse a lot of the Gen-1 ground infrastructure, leading to significant CapEx savings. And finally, innovation on smaller terminals to unlock more new use cases. All-in-all, we believe that this represents $1.5 billion to $1.8 billion of savings from a cost of building a constellation from scratch. And the confirmed envelope for Gen-2 around USD 4 billion is confirmed. Positive discussions with government ECA on support for this big investment is also well underway. That brings to end my short update on OneWeb and Christophe on Eutelsat's Q3 performance. So both Christophe and I are now ready to take any of your questions.

[Operator Instructions] Our first question today comes from Sami Kassab of BNP Paribas.

May I start the question session with Video Broadcast. At 11%, we had a tough quarter. We've seen trends deteriorate. How do you see the revenue trend evolving in the medium term? Do you think you can reduce the rate of decline? Or is it bound to continue to accelerate? And perhaps while commenting on that, can you share with us the large customer renewals you have in front of you for the next 12 to 18 months, please? The second question is on OneWeb. Thank you for providing the useful update. May I can ask whether you could give us a rough estimate of how the backlog is split between the 3 verticals that you have mentioned? And lastly, could you provide an update on IRIS²? What are the next key steps and the time line envisaged on this project?

Yes. Let me maybe hand over first to Christophe on the Broadcast and then I'll take the 2 latter on OneWeb and IRIS².

Okay. Thanks, Eva. So your question on the Broadcast. First of all, we confirm that we see a general trend for the business of a decrease in the range of mid-single digits for the coming years. I mean, don't forget that we have been hit, particularly this year with some unusual events. For the second part of the question related to the biggest renewal, actually, we don't have major renewing in the short term in the 12 months horizon. The next biggest renewals are for fiscal year '25 and they are mainly focused on Europe.

So, just Sami, in terms of the broadcasting, the 10%, 11% is fairly split 50-50 or about 1/2 of it comes from the sanction impact. And the other is the underlying trends that we see, as Christophe was saying a mid-single-digit decline. And that's also what we expect in the midterm. On OneWeb, the split today, most of the revenues is from fixed broadband. That's all of the revenue today. Essentially, we see mobility starting up now with the flat panels and the maritime segment kicking in very strongly. So we expect to see that coming live over the H2 this year with much more mobility revenue. And we think aviation is going to come in more in '24. There's been some very successful test, and you've seen the big take-or-pay from Intelsat, which is very focused on the aviation segment. So -- but we think that will be most of the -- mostly in '24 that, that will start kicking in. Government is not yet representing a lot, but there are lots of tests with government, both in terms of subgovernment as we highlighted in the U.K., but we also have a lot of military interest in starting to experiment with this. So today, most of it is from fixed broadband. And we expect to see fixed broadband continue to be a very large chunk of it, especially on the back of the very successful cases on mobile backhaul in the telco space. On IRIS², let me give you a few comments on the time line as we see it right now. And if you then want more details, please reiterate a question. The time line is right now that we are waiting for the feedback from the EU Commission by the end of May. And at that time, they declare which of the different bidding consortiums will be eligible to be able to receive the detailed RFP. As you know, the first round was a high-level RFP, which didn't have all the details in terms of security requirements and so forth. So we'll only receive that by the end of May. And then there is a very significant amount of work for the consortium over the summer on actually responding to the RFP. And there will be a first hand back in September and they pass likely in November and expected time line is right now that by February, the commission will have appointed the winning consortium. As you can almost hear, this is a very tight time line. So there's quite a lot of work that needs to go on there, which is why we are right now spending a lot of time in ramping up the joint team in the consortium to be sure that we are ready to hit the ground running once we get the detailed RFP.

One last follow-up on the IRIS² project. Given that the 3 largest satellite operators in Europe and the largest manufacturers have come together in one consortium. Can you help me understand what are the other potential consortium likely to be? Who are in these competitive consortium, please?

We haven't gotten a lot of details back from the commission on who they are. We know there are other bidders that's pretty much what we know today. And there are lots of rumors falling around in the market, but we do believe that there are the bidders that are also responded to this. I think part of it is that -- part of the reason we come together that it's such a strategic and important project, which is quite significant amount of work for all of the operators that we actually believe we are much better on joining forces to really respond to this highly strategic projects from the commission.

Our next question today comes from Aleksander Peterc of Societe Generale. Please go ahead.

Yes. First of all, on IRIS², would you help me understand what kind of assets you may contribute to this project? Is it involving, I mean, in the expansion of multi-orbit project, so will this involve potentially OneWeb after the consolidation with OneWeb and LEO/GEO assets as well? How you think about this? And then secondly, do you foresee any complications from the fact that the U.K. government will now, most part of the EU is going to be a major shareholder of yours. Would that limit your potential participation? And how we should think also about any CapEx requirements that this project may entail? And then I have a follow-up.