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

Good day and welcome to the Eutelsat Communications Full Year 2022-'23 Results Presentation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Eva Berneke. Please go ahead, madam.

Thank you. Welcome. Good morning and thank you for joining us today for Eutelsat's Full Year '22-'23 Results Presentation. I'm Eva Berneke, CEO; and I'm joined in today's call by our CFO, Christophe Caudrelier. Let's start by taking a look at the highlights of the year. This year's Operating Verticals revenues were at the upper end of our expected range. This performance was mainly based on sustained momentum in Mobile Connectivity, we posted a double-digit growth over the full year. We delivered a very solid financial performance, including an industry leading adjusted EBITDA margin of 73%. Adjusted discretionary free cash flow of EUR 518 million, comfortably within our expected range of an annual average over 2 years of EUR 420 million at the exchange rate euro/dollar of 1.00. $382 million proceeds related to Phase II of the C-Band transitioned recognized in very late June '23 after the completed certification. On the operational front, this financial year was also marked by a successful entry into service of 3 satellites. We launched 4, but 3 of those 4 have already gone into service. The 2 HOTBIRDs, 13F and 13G, is ensuring service continuity at our flagship 13 East video position, but the HOTBIRD 13G is also hosting an incremental EGNOS payload, which is also part of the strong performance on cash this year. EUTELSAT E10B, which we just announced had gone into service, carries incremental 33 gigabytes of capacity addressing especially demand in Mobile Connectivity, but also sees and enjoys firm precommitments from both Intelsat and Panasonic. And today, I'm happy to announce that we just signed a 4-year multimillion deal with Marlink for specifically capacity on the E10B illustrating the very strong commercial traction addressing the booming mobility connectivity needs. On the back of this, we confirm all our objectives with sustained cash generation and return to growth next year on a Eutelsat stand-alone basis. This leaves Eutelsat with strong foundations to ensure the successful merger with OneWeb where the EGM is expected to approve the transaction in late September. Looking at a few of our key figures. Christophe will come back to the details, but let me just take you through the highlights. Revenues for our 5 Operating Verticals stood at EUR 1.136 billion on a reported basis and EUR 1.157 billion at the exchange rate of EUR 1 to $1 on which our original objectives were based. This represents a 4.8% decline on a like-for-like basis, but is comfortably within the midpoint of our expected range between EUR 1.135 billion and EUR 1.165 billion. Also we delivered an industry leading profitability with an adjusted EBITDA of 73%. The decrease year-on-year is illustrative of the changing revenue mix between video broadcasting and mobility connectivity. Cash CapEx stood around EUR 271 million, which is broadly stable year-over-year despite the launch of 4 new satellites. Discretionary free cash flow stood at EUR 462 million on a reported basis. On an adjusted basis as per our financial objectives, which is at the EUR 1 to U.S. dollar rate, it stood at EUR 518 million, well above the objective of the annual average of 2 years of EUR 420 million. The net debt to EBITDA ratio stood at 3.35x in June, broadly stable versus last year. We remain comfortable compared to our medium-term objective of 3x as we shortly will receive the USD 382 million pretax in respect to the second phase of the C-band proceeds. Now let's have a look at full year revenues. Total revenues for the year stood at EUR 1.131 billion, down 1.8% on a reported basis. Other revenues, as a reminder revenues other than those generated in the commercialization of satellite capacity, were down EUR 8 million including a EUR 3 million negative variation in hedging revenues. Excluding a positive currency effect of EUR 33 million based on a euro to dollar rate of $1.04 versus $1.14 last year, revenues of the 5 Operating Verticals were down by the before mentioned 4.8% on a like-for-like basis. As you'll have noted and we wanted to do a little bit of explaining on this, we have slightly adapted the way we report our Operating Verticals. The definition of Operating Verticals remain the same, but our new framework is altered from 5 segments to 4 within the Operating Verticals. Video will be regrouping Broadcasting and Professional video, that used to be 2 different segments. Fixed Connectivity will encompass data and fixed broadband. Mobile Connectivity and Government Services will remain as they were before. Proforma quarterly data '21-'22 and '22-'23 is provided in the appendices of the press release. Let's look at the different segments in the revenue in more detail. Video is 62% of the group total recorded revenues of EUR 705 million, down 8.3% versus last year. Government Services around 12% of group revenues were down 7.2% with revenues of EUR 143 million. Mobile Connectivity at 10% of total saw revenues of EUR 110 million, up by almost 27%, 26.8% to be precise. Fixed Connectivity 16% of revenue stood at EUR 178 million, an organic decrease of 2.3%. Going to the operational performance. Video, the full year revenues we just mentioned were down 8.3% to EUR 207 million. This reflected the full year effect of the nonrenewal of Digiturk, which we previously mentioned; lower revenues in Europe; the effect of the sanctions against certain Russian and Iranian channels, which mainly impacted the second half; and Professional Video revenues, which account for about 10% of this vertical, also decreased reflecting structural headwinds as well as some seasonality on key events. On the commercial front and more positively, Eutelsat was selected by Orby Elevate for the distribution of the first mainstream English language direct-to-home services for the U.S., leveraging the coverage of EUTELSAT WEST 117 over the U.S. Eutelsat also extended its partnerships with du, the Emirates Integrated Telecommunications Company, to upgrade its direct-to-home services across the Middle East and North Africa. Government Services revenues stood at EUR 143 million, down 7.2% year-on-year. Fourth quarter revenues stood at EUR 45 million, up by almost 26% and 45% quarter-on-quarter. This increase was mainly due to a oneoff contract of EUR 14 million with German Space Agency DLR whereby HOTBIRD 13F provided a service from April on the 0.5 East orbital position. Excluding this impact, fourth quarter revenue decline with 14% and therefore consistent with the trend we also saw in the third quarter albeit representing a slightly improved trend versus first half thanks to superior renewal rate in the spring of U.S. DoD campaign, which is above 70%. We saw only 65% in the fall of '22 campaign. Mobile Connectivity revenue stood at EUR 110 million, up 26.8% year-on-year reflecting a very positive momentum especially in Maritime. Fourth quarter revenue stood at EUR 27 million, up 20.7% year-on-year and 2.9% quarter-on-quarter reflecting the positive impact of the commercialization in the first half of the third beam on the EUTELSAT QUANTUM for a maritime mobility customer. Fixed Connectivity stood at EUR 178 million, down 2.3% year-on-year. In broadband, 40% of this application revenues were broadly stable on a comparison basis including the contribution from the wholesale agreements with Orange, TIM, and more recently Hispasat and Swisscom as well, but to a lesser extent the growth of African operations. In Fixed Data, which is 60% of this application, we saw improved volume trends partly offset by negative impact on the ongoing competitive pressure on prices. Fourth quarter revenue stood at EUR 41 million. On a like-for-like basis, they were down by 16.0% year-on-year and by 6.9% quarter-on-quarter reflecting tougher comparison basis including a positive oneoff of EUR 2.5 million in the fourth quarter of last year. Excluding this oneoff, they were broadly stable on a sequential basis. Turning to backlog and fill rate. The backlog stood at EUR 3.4 billion at end June versus EUR 4 billion a year earlier reflecting the natural erosion and the absence of major broadcast renewal in this quarter and is partly compensated by additional mobility contracts. The backlog was equivalent to 3x '21-'22 revenues and Video represented 59% of the total versus 64% a year-ago. The backlog profile is progressively reflecting the rebalancing of our operations towards connectivity with also shorter contracts. Moreover, the backlog does not yet include managed service with the new definition to be provided next fiscal year. The number of operational transponders as in June '23 stood at 1,351 broadly stable year-on-year compared to last year while the entry into service of new regular capacity compensating for the stable orbit life of a few satellites over the last 12 months. The number of utilized transponders stood at 953, down by 43 units year-on-year, but up 37 units compared to March. The latter reflecting seasonality of certain maritime contracts especially in Europe. Keep in mind that this picture does not include yet the HTS capacity of some of our satellites such as Eutelsat Konnect. As a result, the fill rate stood at 70.8% compared to 73.2% a year earlier and 67.8% in December. Let's now turn to the more detailed financial results and I'll hand over to Christophe.

Thanks, Eva. Good morning, everybody. Happy to be here with you. I will start with the adjusted EBITDA, which stood at EUR 825 million at the end of June 2023 compared to EUR 862 million last year, down by 4%. The adjusted EBITDA margin stood at 72.9% at constant currency that is to say 73% on a reported basis versus 74.8% in fiscal year '22. This is on the back of lower revenues mainly in the Video business. Operating costs were EUR 16 million higher than last year reflecting first, increased staff and technical costs due to a changing revenue mix and to a lower extent inflation; second, the cost incurred by transactions with Russia; and third, exchange rate negative impact. This adjusted EBITDA margin is reflective of the progressive rebalancing of our business towards connectivity applications. Turning to the P&L. Group share of net income stood at EUR 315 million versus EUR 231 million a year earlier, up by 36% and representing a margin of 28%. This reflected on the positive side lower depreciation of minus EUR 455 million versus minus EUR 482 million in year '22, which was due to lower in-orbit and on-ground depreciation. 2 satellites, HOTBIRD 13F and HOTBIRD 13G, entered into service respectively on April 4 and May 30, 2023. Other operating income of EUR 203 million compared to an income of EUR 45 million last year and includes $382 million related to Phase 2 of C-band proceeds. As a reminder, last year's other operating income including $125 million of Phase 1 of C-band proceeds. On the negative side, net financial results of minus EUR 91 million versus minus EUR 65 million a year earlier, reflecting an unfavorable evolution of foreign exchange gains and losses as well as higher interest rates. Higher tax at minus EUR 67 million versus minus EUR 49 million a year earlier reflecting notably the 30% tax rate applied to the above-mentioned C-band proceeds. Negative income from associates of minus EUR 87 million reflecting the full year contribution of the stake in OneWeb, which last year was only from September 2021 onwards. Moving to cash. Net cash flow from operating activities amounted to EUR 735 million, EUR 66 million lower than a year earlier due to lower adjusted EBITDA and the first installment of $100 million of the take-or-pay agreement signed with OneWeb, partially compensated by lower working capital requirement needs namely thanks to a prepayment in respect of the EGNOS contract of EUR 85 million and strong cash collection. Cash CapEx amounted to EUR 271 million, a level broadly stable versus EUR 280 million last year. Interest and other fees paid net of interest received amounted to EUR 95 million versus EUR 78 million last year. It notably reflected interest from the credit facility drawn down for the financing of satellite programs. Discretionary free cash flow amounted to EUR 462 million on a reported basis, up EUR 19 million, excludes the first installment of $100 million of the take-or-pay agreement signed with OneWeb. Adjusted discretionary free cash flow as per the financial outlook definition and at a euro-dollar rate of 1 stood at EUR 518 million, down EUR 3 million or 1%, but well above our objective of an average of EUR 420 million per year at a euro-dollar rate of 1 for fiscal year '23 and fiscal year '24. Turning to the next slide. At the end of June 2023, net debt ended at EUR 2,766 million, down EUR 49 million versus end of June 2022. It reflected higher discretionary free cash flow of EUR 462 million generated in fiscal year '23, the reduced dividend payment of EUR 81 million following the payment of part of the dividend in shares under the scrip option, the outflow related to an inorganic investment of EUR 143 million mainly for OneWeb and other items, which contributed towards the increase in net debt for a net impact of EUR 190 million. This reflects mostly the use of a debt related finance lease for the financing of satellite programs, which amounted to EUR 200 million. As a result, the net debt-to-EBITDA ratio stood at 3.35x compared to 3.27x at the end of June 2022. We remain comfortable compared to our medium-term objective of around 3x as we expect to receive the cash of Phase 2 of C-band proceeds of $382 million pretax. The average cost of debt after hedging stood at 2.96% versus 2.55% in fiscal year '22 in a higher interest rate environment. The weighted average debt maturity stood at 3.6 years compared to 4.3 years at the end of June 2022. And last, but not least, liquidity remains strong with undrawn credit lines and cash of around EUR 1.5 billion. This is it for the financial results. I now hand it over to Eva for the outlook.

Thank you, Christophe. Let's turn to the outlook. First, our assumptions for each Operating Vertical for financial year '24. Video revenues are expected broadly in line with market trends of a mid single-digit decline excluding the effects of sanctions, which will be embarked for full 12 months next year versus 6 months in financial year '22-'23. Government Services will continue to reflect the outcome of past and upcoming U.S. DoD renewals and a tougher comparison basis with this financial year due to the mentioned oneoff DLR contract. Revenues will, however, benefit from the EGNOS contract of HOTBIRD 13Gs, which is set to generate EUR 100 million over 15 years. Both Mobility Connectivity and Fixed Connectivity verticals are expected to experience double-digit growth in the next financial year on the back of entry into service of EUTELSAT 10B and KONNECT VHTS, both with firm precommitments and positive commercial traction. On the back of this, we confirm our financial outlook on a stand-alone basis. Revenues are expected to return to growth from this next financial year and onwards. And elsewhere, cash CapEx will not exceed the EUR 400 million per annum for each of the next 2 fiscal years. We also confirm discretionary free cash flows at an average of EUR 420 million per year over the next 2 fiscal years. So we confirm our leverage targets. These objectives are of course all on a stand-alone basis and based on nominal deployment programs. You'll find a slide just a reminder of future launches with the EUTELSAT 36D and Flexsat Americas, which are currently in procurement. And turning to a bit of update on OneWeb. OneWeb continues to enjoy strong commercial momentum with a 50% increase in contracts signed since last October for a total backlog a bit over EUR 900 million. Recently OneWeb signed a multimillion take-or-pay contract with Telstra for cellular backhaul in Australia. This deal illustrates how OneWeb with top-notch B2B approach can provide capacity to telcos especially in remote areas through its service level agreements, which are necessary for resilience and better real-time experience. In June OneWeb also achieved its revenue target with revenues just over EUR 50 million. Announced today, the later than expected availability of terminals should lead to a slight delay in revenue recognition at OneWeb this coming year. All-in-all this marginal adjustment of 2% of the midpoint of revenue range of the combined entity has no impact on cash flow generation and long-term market prospects of the group. A quick word on where we are in the transaction process. We are waiting for the final authorizations namely from France and the U.S. before we call for an extraordinary general assembly. We expect this extraordinary general assembly to take place in the second half of September '23. Once it's approved by the EGM, the combination will immediately be live as the teams are fully focused on making the combination a success. This timeline is fully compatible with the operational and financial objectives communicated at the announcement of this combination project. So in summary, looking ahead, the achievements over the past year put us in a very strong position with everything in place for a successful combination with OneWeb. We reorganized Eutelsat along 2 business unit, Video and Connectivity, to capture the market opportunities. 3 of the 4 satellites that we launched in late '22 are now part of our fleet providing services at key orbital positions underpinning the return to revenue growth. And the next change will be the entry into service of KONNECT VHTS, which brings 500 gigabits of capacity to address the booming needs in broadband over Europe and Africa. Eutelsat's capacity to generate sustained cash flow is more than confirmed with over EUR 2.4 billion of cash generated over the past 5 years. Elsewhere, Eutelsat is also at the center of the plans to build a European multiorbit constellation [ IRIS squared ] where we are part of the Space RISE Consortium. And finally, the combination with OneWeb is on track to close by the end of Q3 in this year and we are ready to go live day 1. Thank you for the attention. We are now ready to take on any of your questions. I think we have a few already in, but otherwise feel free to write in on your questions.

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

I hope you can hear me well. I just have a couple. So first on OneWeb, if you could comment on the backlog momentum. I'm under the impression that the EUR 900 million figure is stable versus what you reported with 9-month results. So is there any underlying progress that is not immediately visible here for us? And then the second is still on OneWeb regarding the delay in terminal availability. Could you tell us if this has to do with component supply issues or are there any technical difficulties of the terminal manufacturers? And have you now secured fully the supply for fiscal '24 or are there further risks in slippage that may lead to further revenue outlook reductions at OneWeb? And I have a very quick follow-up after that.

Let me try to -- I think there's still positive momentum in the backlog. It's true that it hasn't -- from when you made the rounding figures from [indiscernible] to this, it's still EUR 900 million, but it is now above EUR 900 million and we have added both the mentioned Telstra deal in it. There are also some quite interesting other tests ongoing, which is not yet in the backlog. One is just out here with the [ PVO ] program from the U.S. military side and you'll probably also see some of the press on the U.K. testing remote islands with OneWeb. This is not confirmed in terms of numbers. The deals are confirmed, but not in terms of numbers in the backlog. So we are evolving and we hope within the next couple of months to pass the EUR 1 billion mark, but we're not quite there where it rounds up to EUR 1 billion rather than down to the EUR 900 million. Also I'd say focus has shifted a little bit into revenue recognition rather than just building backlog. I think that's also at the pace we are at with OneWeb that we have switched more into getting customers go live. And that is starting to respond also to your second question around terminals. As you know, we work with multiple terminals with a B2B focus, which typically means testing of the different terminals first naturally by ourselves to make sure it works in the network, but then also on a couple of test sites with customers. And having the right terminals available and going through a couple of months of test is a typical sales process with a B2B customer. And the right terminal availability and also evaluation of the terminals after given that we have multiple terminals to choose from is probably what is taking a little bit more time. Then there's also a few segments where terminal supply has been delayed in terms of flat panels. They are now there, but again we need to get them out and get them tested with the customers. So that's why we take some more prudence on the revenue ramp-up and also is directing a little bit more sales attention to actually ramping up revenues and getting customers installed over the next month.

Very clear. And just a quick follow-up on [ IRIS squared ]. Can you put any flesh on the bone there on what kind of role you could? What is the opportunity there? Do you have anything new on that front?

I think [ IRIS squared ] in the Space RISE Consortium, which is what we call the consortium with actually quite a lot of large players; ourselves Eutelsat, SES, ESPASat, Airbus and Telus as part of the Space RISE; but also we closed collaboration with Orange, Deutsche Telekom, OHB, Telespazio. So a very large consortium working together. We are on the last almost days of finalizing the offer. The offer needs to go in on August 7 so that is next weekend. We need to be done with it. So it's what -- we're in the process of defining the architecture and the overall elements of such a multiorbit highly secure constellation and that's going in in a week's time to Brussels and then we expect to start the dialog with Brussels around it. The calendar is still a focus on getting to a last and final offer in November, December and then a choice from Brussels in February next year. Of course that continues to be a quite ambitious timeline in terms of such a large public sector buying it especially when you see technology this complex and this innovative. So it's not a given that that there will be no modifications of this. But right now we are on track to be able to hand in a first round proposal end of next week in the consortium.

And we take our next question from Roshan Ranjit with Deutsche Bank.