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

Hello, and welcome to Eutelsat First Quarter 2023-'24 Revenue. My name is Alicia and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] I will now hand you over to Christophe Caudrelier, CFO to begin today's conference. Thank you.

Thank you. Good morning, to all. Welcome. And thank you for joining us today for Eutelsat first quarter 2024 revenue's presentation. I am Christophe Caudrelier, and I am the Group CFO. Let's start by taking a quick look at recent highlights. First quarter operating verticals revenue were down minus 2.4% like-for-like. On a sequential basis, however, they were up almost 3% excluding a one-off in Government Services in Q4 2023. This improved trend was driven by continued robust double-digit growth in Mobile Connectivity on the back of strong commercial momentum. The final beam of the EUTELSAT QUANTUM satellite was sold during this quarter, completing what has been a record ramp-up for a fully incremental satellite. Also, as we just announced this morning, the EUTELSAT KONNECT VHTS satellite, bringing 500 gigabits of incremental capacity successfully entered into service. Elsewhere, the Eutelsat/OneWeb combination project was approved on the 28th of September 2023, and is now live. OneWeb itself has seen strong commercial momentum reporting a backlog up 66% year-on-year. Finally, we confirm all Eutelsat Group’s objectives which I remind you replace Eutelsat's previous standalone objectives. I'm also pleased to report that the EUTELSAT QUANTUM satellite is now fully commercialized just 18 months after its entry into service in late 2021, representing a record ramp-up for a fully incremental satellites. As a reminder, the software-defined satellite with real-time adaptability is one of our first flexible satellites, serving customer needs in applications where demand is booming. The final beam was commercialized this summer for a luxury maritime Mobility customer. As a result, QUANTUM enjoys the balanced commercial profile with 4 beams serving Government Services and 4 in Mobility. I'm also pleased to announce the successful entry into service of EUTELSAT KONNECT VHTS. This most advanced very high-throughput satellite system will support the development of our connectivity businesses across Europe, delivering 230 beams with a Ka-band capacity of 500 gigabits. EUTELSAT KONNECT VHTS is the largest geostationary satellite to date in Europe. It embarks the most powerful on-board digital processor ever put in orbit, offering capacity allocation flexibility, optimal spectrum use, and progressive ground network deployments. KONNECT VHTS enters service with circa EUR 450 million of firm pre-commitments namely from Orange with its Nordnet affiliate for the French coverage, Telecom Italia Mobile over Italy, and Thales Alenia Space to serve, notably government connectivity services. These commitments underpin Eutelsat Group's revenue growth objectives in the coming years. The combination between Eutelsat on OneWeb was approved by shareholders on September 28, heralding the new era for satellite connectivity. The combination is now live with strong synergy potential that we have already started to operationalize across the company's various businesses. The left-hand chart shows the strong commercial momentum at OneWeb with a backlog of almost $1 billion, a 66% increase over a year. The constellation is already generating revenues across several verticals, such as Data in Alaska where OneWeb provides connectivity solution for remote business sites, as well as community Wi-Fi. It is on track to reach global coverage by the end of the year. Let's now take a look at Q1 performance by application. As a reminder, all commentary is on a like-for-like basis, that is to say, at constant currency and perimeter. Total revenues for Q1 stood at EUR 274 million, down 0.8% on a like-for-like basis. Other revenues, that is to say revenues other than those generated from the commercialization of satellite capacity were up EUR 5 million due to a positive EUR 5 million variation in hedging revenues versus Q1 last year. Excluding a negative currency effect of EUR 8 million based on a euro-to-dollar rate of 109 versus 102 last year, revenues of the 4 operating verticals were down by 2.4% on a like-for-like basis. Let's now look at the revenues in more detail. Video 66% -- sorry, 60% of Group total recorded revenues of EUR 164 million, down 9.5% compared to last year. Government Services, 12% of Group total, saw revenues of EUR 34 million, up 1.1%. Mobile Connectivity, 13% of total, saw revenues of EUR 35 million, up by 44.1%. And Fixed Connectivity, 15% of revenues stood at EUR 40 million, an organic decrease of 2.6%. Well, let's look first at Video. Q1 revenues were down 9.5% to EUR 164 million. This reflected, first, the full effect of the non-renewal of the Digiturk contracts. Note that this base effect will cease after Q2. Second, the effect of sanctions against certain Russian and Iranian channels. And third, Professional Video revenues, which accounts for around 10% of the Video vertical, also decreased, reflecting lower occasional use. Quarter-on-quarter revenues were slightly down due to an unfavorable basis of comparison last quarter in Europe where some smaller contracts were booked with retroactive effect. Over the full-year, revenues are expected broadly in line with wider market trend of a mid-single-digit decline, excluding the effect of Russian and Iranian sanctions, embarked for a full 12 months versus 6 months in fiscal year '22-'23. Moving to Government Services. Revenues stood at EUR 34 million, up 1.1% year-on-year. This rise reflected the contribution of EGNOS GEO-4 contract on HOTBIRD 13G. On a quarter-on-quarter basis, revenues were down by 25.2%. Excluding the one-off DLR contract in Q4 fiscal year '23 of EUR 14 million, first quarter revenues were up 9.5% on a quarter-on-quarter basis on the back of increasing traction with European customers. The latest renewal campaign with the U.S. Department of Defence of Fall 2023 resulted in a slightly improved renewal rate of above 80%. Over the full-year, Government Services revenues will benefit from the abovementioned EGNOS contract on HOTBIRD 13G, set to generate EUR 100 million in revenues over 15 years as well as the contribution from OneWeb LEO-enabled connectivity solutions. First quarter for Mobile Connectivity revenues stood at EUR 35 million, up 44.1% year-on-year. This reflected the commercialization of the final beam on EUTELSAT QUANTUM for a maritime mobility client. Revenues also benefited from the entry into service of the high-throughput satellite, EUTELSAT 10B, with significant pre-commitments and recent deals, especially in Maritime, notably, the multi-year multi-million contract with Marlink. For the full-year, Mobile Connectivity is expected to see double-digit growth driven by ongoing strong demand for both GEO and LEO-based connectivity solutions. First quarter Fixed Connectivity revenues stood at EUR 40 million, down by 2.6% year-on-year. They include the contribution from the wholesale agreement with Orange, TIM, Hispasat, and Swisscom, which is now fully embarked. On a quarter-on-quarter basis, revenues were up 6.5%, notably on the back of the resale of OneWeb capacity for data usages in Alaska. Over the full-year, Fixed Connectivity is set to deliver double-digit growth on the back of the entry into service of KONNECT VHTS as well as the contribution from LEO connectivity offers. Turning to backlog. The backlog stood at EUR 3.4 billion at the end of September, broadly stable versus end of June 2023. The consumption of the Video backlog in the absence of major renewals was offset by strong commercial momentum in Connectivity, reflecting the rebalancing of the business toward growth verticals. The backlog was equivalent to 3x times fiscal year '22-'23 revenues, with Video representing 57% of the total. Let's now turn to the outlook. Following the approval in late September '23 of the combination with OneWeb, the financial objectives of Eutelsat Group replace the previous financial objectives of Eutelsat standalone. That is to say, revenues of Eutelsat Group are expected to grow at a double-digit revenue CAGR over the medium to long term, already reaching EUR 1.32 billion-EUR 1.42 billion in fiscal year 2024. Adjusted EBITDA for Eutelsat Group is expected between EUR 725 million and EUR 825 million in fiscal year '24. After synergies, the cash CapEx of Eutelsat Group is estimated to be at EUR 725 million to EUR 875 million per annum on average. These objectives are based on a nominal deployment program. You will find on the slide here, a reminder of our future launches. With that, I thank you very much for your attention. I'm now ready to take your questions.

[Operator Instructions] We'll take now our first question from Roshan Ranjit from Deutsche Bank.

I got 2, please. Just on the KONNECT VHTS satellite, good to see that has started operations now. Can you remind us of the ramp-up of the capacity agreements that you have with the likes of Orange and TIM, please? Because if I remember correctly, there is some sort of phasing of the payments as you migrate the traffic from KONNECT to VHTS. So a reminder there will be good, please. And secondly, just on the FY '25 guidance. I think you previously said that you expected OneWeb to break even at the EBITDA level during FY '25. Now if I look at the guidance that you issued today for the group level, at the low end of the range, it kind of suggests that OneWeb could be generating EBITDA for -- of close to EUR 100 million in '25, again, making the assumption on the underlying Eutelsat business. So has anything changed there? Should we expect maybe less cash burn and faster ramp-up? Anything you could say about that OneWeb ramp-up would be very helpful.

So first, on the KONNECT VHTS question and the ramp-up of capacity, I mean what's going to happen is that it will be a progressive transfer from -- of the customer first from KONNECT to KONNECT VHTS and we'll start to generate some revenues in Q2, with the first 2 months of Q2, and then we'll ramp up more in Q3. So -- and the KONNECT VHTS will then fully, and all the current customer of KONNECT will be fully transferred to the KONNECT VHTS, and then KONNECT will be more dedicated to connectivity in the African continent. On the second question related to our forecast or our guidance on OneWeb and on the combined group, yes, I confirm that the fiscal year '25 to have a break-even -- EBITDA breakeven for OneWeb is still the goal. I'm not sure to get your question on the EUR 100 million for OneWeb for fiscal year '25. I mean, for me, it's no change to the previous guidance that we have given. So it's still on track, and this will be, I mean, again, related to OneWeb ramp-up and the revenue ramp-up. But maybe -- did I get your question well or is there something else that I should add?

Well, no. I mean I guess your range of EUR 900 million to EUR 1.1 billion, if I look at the kind of current run rate of the Eutelsat standalone business, around EUR 810 million or so, the delta is made up from OneWeb. So you had previously said break-even. Now I appreciate break-even has a range. But I was just wondering if anything has changed where we should expect maybe a faster EBITDA buildup off of the OneWeb business.

Okay. All right. No, it makes sense. But it makes sense. But just also to confirm or to precise that, in any case, I mean, in the future, I mean, we will communicate on the Eutelsat Group, and we won't be able to disclose on the OneWeb standalone basis. But yes, I mean, your calculation makes sense, and it's in line with what we said.

We'll take now our next question from Terence Tsui from Morgan Stanley.

Just a couple of questions for me. Firstly, just on your Video business. Can you just give us an idea of any things we should be aware of over the next 12 months or so in terms of big contract renewals? And I just want to better understand why you think this lower use in professional services -- Professional Video is occasional or whether it's a bit more sustained into the foreseeable future. And then my second question was just on OneWeb. And looking at the future CapEx requirements. I know you've talked about Gen 2 but are you any closer as to committing as to when you need to replace the existing satellites in place already? So there's some at over 600 ones there. When do you think about how they need to be renewed over time?

So first question, for the next 12 months, there's no big renewal in the coming 12 months. The next big renewal on the Video business will be for '25. Regarding your question on Professional Video and occasional use, we -- I mean, our estimate is that I mean it's in line with the -- our global estimate of mid-single-digit decline of the overall business for Video. So no particular, I would say, a prospect on anything particular on the occasional use. It's really -- in our opinion, it really follows the trend of the Video business. And moving to your question on the CapEx for OneWeb. I mean just -- and the replacement of the satellites, just to precise, I mean the first generation of satellite for OneWeb is expected to last until 2027. And it actually, we expect the lifetime, I would say, of the first generation to be a bit longer than was initially expected or thought. So really, we -- and we have also included in the -- in our plans and in OneWeb's plans, I mean some spares and some replacement of some satellites in order to replace, I mean, certain satellites that would need to be replaced. But I mean, nothing particular or specific in terms of Gen 1 in whether we should be replacing the current constellation. The Gen 2 constellation or the satellites for the Gen 2 are still expected to be launched and to be ready for the replacement constellation by '27.