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

Hello, and welcome to the Eutelsat's third quarter and 9 months 2023-'24 revenues. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd now like to turn the call over to your host today, Mr. Christophe Caudrelier, CFO, to begin today's conference. Please go ahead, sir.

Good afternoon to everyone. Welcome, and thank you for joining us today for Eutelsat Third Quarter 2024 Revenues Presentation. I am Christophe Caudrelier. I'm the Group Chief Financial Officer, and I'm joined by Joanna Darlington, Head of Communication and Investor Relations. On today's agenda, we will cover first the highlights of the third quarter, then Q3 performance, and finally, we will have a look at the outlook and financial objectives. Let's start with the highlights of the past quarter. Third quarter and 9 months revenues were in line with expectations. Video was in line with overall market trend of mid-single-digit decline. Now the base effect of the nonrenewal of the digital contract and Russian sanctions was washed through as of the third quarter. Connectivity applications continue to see double-digit growth, up 22% in Government Services, plus 48% in Mobile Connectivity and plus 24% in Fixed Connectivity, driven by incremental GEO capacity and LEO. With all this, we confirm all our full year 2023-2024 financial objectives. On the operational front, we saw the successful launch of the EUTELSAT 36D satellite, assuring service continuity for customers on EUTELSAT 36B. And in LEO, the rollout of the OneWeb ground network remains on track. On the commercial front, we secured a major $500 million deal with Intelsat for capacity on the OneWeb LEO constellation. And finally, on the financial front, we completed the successful refinancing of November 2025 bonds. On GEO operational front. We successfully launched EUTELSAT 36D satellite on March 30, with an entry into service expected during the second half of 2024 calendar. Embarking 70 physical Ku-band transponders, this satellite will assure service continuity with optimized performance for customers in Video over its footprint. The satellite also includes additional flexibility and coverage options, enabling to balance the loading between its different missions. EUTELSAT 36D will replace EUTELSAT 36B at the 36° East orbital position, where it will operate alongside EUTELSAT 36C. There is no further GEO launches planned until calendar 2026. Turning to the OneWeb ground deployments. With 34 gateways now open currently, we are now halfway and on track to our target of 38 gateways by mid-2024. On the regulatory front, we are also on track in terms of landing rights and/or operating permits with the exception of India. In March, Eutelsat Group signed a major new multiyear, multimillion-dollar agreement partnering with Intelsat on the OneWeb low-Earth orbit constellation, commencing in mid-2024, that is valued up to $500 million over 7 years. We have a firm commitment of $250 million, including the $45 million deal signed in March 2023, with options of a further $250 million by the end of the period. This expanded partnership significantly derisks investment in OneWeb, as well as highlighting the necessity in today's world for major satellite operators to be able to offer multi-orbit solutions to their customers. On the financing front, Eutelsat completed the refinancing of November 2025 bond at the end of March, with a successful offering of EUR 600 million of senior notes due 2029 by Eutelsat S.A. The new notes bear interest at an annual rate of 9.75% and are issued at a price of 100% of their par value. The gross profit, together with cash on hand, funded the repurchase of EUR 623 million worth of the EUR 800 million, 2% bond issued due to 2025. The operation was accompanied by new revolving credit facility agreement of EUR 450 million. The graph on the left shows the updated debt maturity profile. There are no significant repayments now due until 2027 and 2028. Let's turn now to the Q3 performance by application. Let's have a look at the Q3 revenues. As a reminder, all commentary is on a like-for-like basis, i.e., at constant currency and perimeter. Reported indicators include OneWeb since October 1, 2023, and that compares to Eutelsat Q3 2022-2023 performance on a stand-alone basis. Total revenues for the third quarter stood at EUR 300.8 million, up by 8.3% on a like-for-like basis. Other revenues were up EUR 0.2 million due to a positive EUR 0.7 million variation in hedging revenues versus Q3 last year. Excluding a negative currency impact of EUR 3 million based on a euro-to-dollar rate of 1.09 versus 1.07 last year, revenues of the 4 operating vertical, meaning excluding other revenues, were up 8.5% on a like-for-like basis. Let's look at revenues in more detail. Video revenues, representing 53% of revenues, stood at EUR 160.2 million in the third quarter, down 4.9%. The other 3 verticals include a contribution from OneWeb, consolidated since first of October. Government Services, 15% of revenues, stood at EUR 43.6 million, up 22.1%. Mobile Connectivity, 13% of revenues, stood at EUR 39.2 million, up 48%. And Fixed Connectivity, now 19% of revenues, stood at EUR 57.4 million, up 24.2%. Other revenues amounted to EUR 0.5 million versus EUR 0.4 million a year earlier. It included a negative minus EUR 1.1 million impact from hedging operations compared to a negative impact of minus EUR 1.8 million last year. Let's look by vertical. First, Video. Q3 revenues were down by 4.9% to EUR 160 million, in line with the broader market trend following wash-through of the base effect of last year's nonrenewal of the Digitürk contract and Russian sanctions. On a quarter-on-quarter basis, revenues were down 3.9%, reflecting the nonrecurrence of a one-off contract in Q2 for EUR 3 million. On the commercial front, Eutelsat secured several new contracts in emerging broadcast regions, highlighting the ongoing relevance of satellite in these markets, where sustained demand is partially mitigating the decline in Europe. They included, notably, new business on EUTELSAT 117 West A, with Mexico's StarTV for the deployment of StarFlix, its new streaming service; Instituto Nacional de Radio y Televisión del Perú, which signed a multiyear capacity agreement for large-scale content distribution to homes and IP devices across the country. We also inked a new business at 7/8° West orbital position with Télédiffusion d’Algérie, which increased capacity to consolidate its TV and radio channels on the country's leading video neighborhood. iKO Media Group also took capacity at 7/8° West as well as 16° East and 13° East to bring its new eSports TV package, eCLUTCH, to screens across Europe, the Middle East and Africa. Moving to Government Services. Third quarter revenues stood at EUR 43.6 million, up by 22.1% year-on-year, boosted by the contribution of the EGNOS GEO-4 contract on HOTBIRD 13G since June 2023. They also integrate the carryforward effect of recent U.S. Department of Defense renewals, with a renewal rate of more than 80% in Fall 2023. Quarter-on-quarter, revenues were up by 7.2%. The Spring 2024 renewal campaign with the U.S. Department of Defense confirmed the improved trend observed in Fall 2023, with a renewal rate once again above 80%. Third quarter Mobile Connectivity revenues stood at EUR 39.2 million, up 48% year-on-year. They reflected the entry into service of the high-throughput satellite EUTELSAT 10B and OneWeb growth. Quarter-on-quarter, revenues were up by plus 11.9%, underpinned by ramp-up on OneWeb. On the commercial front, Eutelsat extended its partnership with Universal Satcom, the Dubai-based satellite communication system integrator with a new multiyear capacity deal, enabling Universal Satcom to leverage Eutelsat's geostationary ADVANCE maritime packaged solutions in Ku-band to extend its coverage in MENA and globally. Elsewhere, Australia Sat One is now using the OneWeb LEO constellation for the first time activation of land-based service across Australia's remote northern and southern regions, maritime services in Australian waters and commercial service in New Zealand. Moving to Fixed Connectivity. Third quarter revenues stood at EUR 57.4 million, up 24.2% year-on-year, mainly reflecting the entry into service of KONNECT VHTS as well as a contribution from OneWeb. Quarter-on-quarter, revenues were up by 6.7%. On the commercial front, OneWeb is gaining traction with the activation of contracts where the service is now fully operational, notably in South Africa, where Q-KON, a leading satellite engineering enterprise, is leveraging the constellation to deliver digital banking services in the region; and NEC XON , a leading African integrator of ICT solutions and part of Japan's NEC Group, has signed a multiyear, multimillion dollar deal for connectivity for enterprise customers in remote areas, especially in agriculture, mining and oil and gas. Let's look at the backlog now. It stood at EUR 3.9 billion on 31st of March 2024 versus EUR 3.5 billion a year earlier and is stable versus end of December 2023, representing 3.4 years of revenues. It reflected natural erosion in the Video segment in the absence of major renewals this quarter, offset by the contribution of OneWeb. Video accounted for 44% versus 61% a year ago, with connectivity, therefore, representing over half of the backlog. Let's now turn to the outlook. On the back of our 9 months performance, we confirm our objectives for the full year 2023-'24 of operating vertical revenues of between EUR 1.25 billion to EUR 1.3 billion and adjusted EBITDA in a range of EUR 650 million to EUR 680 million. Cash CapEx for fiscal year 2024 remains expected in a range between EUR 600 million and EUR 650 million after synergies. For the period fiscal year '25 to fiscal year 2030, cash CapEx is expected between EUR 600 million to EUR 700 million on average per annum. We also continue to target leverage of circa around 3x in the medium term. With that, thank you very much for your attention. And Joanna and I are now ready to take all your questions.

[Operator Instructions] Our first question today will be coming from Aleksander Peterc calling for Bernstein.

I just have a couple. So the first one is, can you tell us if you're looking at any potential asset sales or similar transactions that will allow you to deleverage a bit more quickly in the context of significantly higher financing costs that you now experience? And obviously, the reason for the question is there were reports in the press regarding the potential sale of ground assets that you may be envisaging. So just like what you can say on that. Secondly, if you could comment on the impact of SES' plans to take over of Intelsat, both from the general market perspective, what you think this will do to the products and pricing in the market and so on? Is it good? Is it bad? And also, if there are any indications for you a significant contract with Intelsat for OneWeb capacity? Do you think that, that may change in the context of this takeover? And then a third point, very briefly, if you have anything new to share on the subject of IRIS², we haven't heard about that much lately.

Thank you, Aleksander. So let me try with Joanna to answer to your 3 questions. First of all, on the global, I would say, any asset sales, I would say that the group is always analyzing all the potential and the evolution of the market. So I mean, we are -- it's something that we are currently looking at or we're always looking at. To answer more specifically to your question related to the ground infrastructure. I would say that some -- we have been contacted by infrastructure funds, who have come to us with the idea to make something similar to what was done to the -- in the telecom area with the antennas and with the network. And I would say that we believe that they came to see us as we are really well positioned as a starting point for a venture like this. Having the combination of GEO and LEO is obviously a plus. I would say that, at this stage, however, we have no further comments on this point. I would say that, again, we are always analyzing all the potential options to partner with external investors. At this point, the analysis is very preliminary. And anyway, we will come back to the market if there was something to materialize. But at this point, it's very early stage. Moving to your second question related to the announced merge between SES -- or takeover of Intelsat by SES and the impact on the market. I would say, first of all, it's probably a deal that is going to take quite long, considering the 2 actors, and it's going to take probably many months before it comes, I mean, reality. That's the first thing. Second thing, what we can do -- what we can say, and I have no specific comments to make, but what I can see or what we can see is that SES will spend probably around $3 billion of cash in this transaction. And clearly, our analysis is that it reduces SES' optionality to invest in other projects. And I would say that in the meantime, we, Eutelsat, continues our integration with OneWeb, and we are pursuing, I mean, our -- being a first-mover approach in the multi-orbit segment, thanks to this combination. So we don't really see any significant impact. I would say also that SES-Intelsat is becoming more and more a U.S.-centric activity. And we are, as you said, that not very much exposed to the U.S., we are, but not that much. I would say, to end on this question, to add to this question and more related to your question on the impacts on the -- and I think you are referring to the contracts and the deals that we have signed with Intelsat, I mean, nothing changed. Again, the combination of SES and Intelsat does not offer the option of low orbit, which is a technical solution, which is necessary in the mobility segment and, more specifically, in the aero and maritime, where Intelsat has strong market shares. And the deal with Intelsat has been confirmed because Intelsat -- and I believe the combination really do need this capacity. So again, we have a $250 million deal, which is confirmed, and an extension -- possible or potential extension of another $250 million by the end of the coming year. So I would say it doesn't change a lot, except to what I commented for us. On IRIS², the project is still ongoing. I have not much to comment on this specific project. I mean, obviously, we are still very supportive of the IRIS² project as it is in line with the LEO development. So we are still very much supportive, and we are working on this IRIS² project, but taking into consideration also the timing for the European community and the very near election. Obviously, it takes a bit of time. So again, the process is still ongoing, but nothing much to add on this point. Joanna, do you want to add something?

No, I think that's very clear. We haven't got an update at the moment. So as soon as we do, you'll be fast to hear it.

We'll now move to Roshan Ranjit of Deutsche Bank.

Great. I've got 2, please, and 2 quick follow-ups on the previous ones. Firstly, on the OneWeb backlog, where we've seen some reports in one of your big customers is adjusting their demand for some of their projects in the Middle East, I guess, it's the NEOM project. Given their capacity agreement they have with you, does that alter the -- any payment terms or the size of the deal they have with you? Is that a take-or-pay deal? Anything you could say there would be very helpful, please. Secondly, what is the latest on the RFPs for Gen 2? I think they have been issued or in the process of being issued at the beginning of the year. So have you got anything back? And what is the kind of timing on that? I know, previously, you were thinking about [ 118 ] parallel with the IRIS² project, but given that delay, I guess, you're going to be pressing ahead. And just a quick follow-up on the Intelsat capacity agreement. In terms of the logistics of how easy it is to move capacity between LEO and MEO, I guess it's just dependent upon the terminals and multi-band orbit. Are there any other considerations if one wanted to switch between LEO and MEO capacity? And the other follow-up is on the infra discussion, and you came out with your release last week. And Christophe mentioned that you were approached by investors. What -- and you made the read across to what we've seen in the tower side. What is the potential to, I guess, have multitenants within the ground infrastructure? So could a potential buyer use the ground infrastructure for another provider? Is that easy to do? And what kind of multiples do the ground infrastructure go for? Because, I guess, we haven't really seen a deal or potential deal like this before.

Okay. Thank you, Roshan, for your 3 questions. Maybe I will start by the second question, and I will -- Joanna and I will come back on the first one on the backlog. Really, your question related to the RFP on the Next Gen, I mean, the process is still ongoing. We are still in line with a timing, which is beginning of the summer, I would say, to finalize the process. And we will come back to the market, obviously, as soon as we have defined more in detail, obviously, the providers, the industry and also the technical aspects of this -- of the Next Gen. So still have to wait a bit more. Probably, again, we will come back on this around the full year results. Related to the -- or coming to your question related to Intelsat and the logistics to move the capacity from MEO to LEO. Yes, obviously, one of the biggest impacts are they are not at all the same structure or the infrastructure, meaning, obviously, the modems and the antennas are really -- or at least the antennas are very different. But what we can probably add to this in terms of other considerations is, obviously, they are not the same. I mean the coverage is not the same. Today, MEO doesn't have a full coverage, and obviously, for aviation and for maritime. It's very different compared to what LEO can offer at this time. So definitely, this is a big difference. And then, I would say, they have the kind of same kind of difference between LEO and GEO and LEO and MEO in terms of capacity and in terms of latency. But again, the 2 biggest consideration to be taken are: one, the equipment; and then the coverage and the application and mainly related to Mobile Connectivity. On the question related to the infrastructure and the multi-tenant, I would just quickly answer that it is already the case. And I would say it's more and more the case. We are having other customers in some of our teleports. This is, I would say, mainly true currently for the GEO equipment, and so the GEO facilities. It's not the case currently for LEO. They are really specific to the constellation. Having said that, I mean, you have 2 parts in the -- you have the infrastructure, you have the location of the infrastructure. And clearly, I mean, this could be shared with other customers or other users than Eutelsat Group. And then you have already in the GEO environment, I mean, multi-customers using the equipment. And back to your question to the backlog on OneWeb, and Joanna, do you want to answer this?

Yes, sure. Just before I do, just on the infrastructure, I mean, I think, Roshan, I'm not sure if I quite understood your question, but we're talking about financial investors who are infrastructure funds. So we're not talking about selling a portion of the teleport to other operators. I mean the fact is that we already provide third-party services for other operators, I mean, typically smaller operators. But I don't think that we would be looking at changing the governance of the ground infrastructure. So I just wanted to clear that up. And then for the contracts, I think you're referring to NEOM, and the press articles that have said that they're scaling back their ambitions or their time frame. It doesn't -- the answer is it doesn't affect our agreements. As you know, typically, the contracts that we signed on the LEO constellation are take-or-pay. So what goes into the backlog is a minimum amount that they have committed to. That's a firm commitment. And I'm sure when they signed this, it gave them plenty of leeway to adjust the capacity based on changes to potentially to time line and scope. So the answer is no, it doesn't affect the backlog.

We'll now move to Stéphane Beyazian of ODDO BHF.

I've got 2, 1 follow-up, actually, regarding OneWeb. Is it possible to have a little bit more color on, let's say, the ramp-up of the revenues over the next couple of quarters and whether you have still some big contracts potentially on in the pipeline. And this 1 question is regarding Starlink. Are you increasingly seeing Starlink or its partners bidding in OneWeb's segment in the different vendors?

Thanks, Stéphane. So on the first question, the answer is, as you know, we're not going to report OneWeb separately. Well, I think, if you look at today's numbers, it's -- at this stage, it's still fairly easy to back out the OneWeb contribution. But you have our objectives for the current year. You also have longer-term CAGR for the next 3 to 4 years, but we won't comment specifically on OneWeb. But obviously, as you know, the geostationary side is reasonably mature. So obviously, we expect the growth, the revenue growth to come from the LEO side. And in terms of contracts in the pipeline, well, we publish on those fairly frequently. I mean either when we win a new contract, which goes into the backlog, or alternatively, as we've announced in the past couple of months, when we have a market which is open, it means that we can activate contracts, which are already in the backlog. But obviously, no comments at this stage on future contracts that we might find. And then your second question was, sorry?

That was regarding Starlink. That seems to be increasingly interested in the B2B segment. So I was just wondering whether you are seeing them more frequently in the bidding?

Well, we know that Starlink is addressing the B2B segment. It's not a surprise. I think we've said in the past, number one, we have a certain, I would say, an advantage in the B2B segment, which is that we have a long history of asset sale services, we have a strong ethic of -- or a strong track record and a high level of customer loyalty with regards to our aftersales service. Starlink is starting to make ventures into the B2B space. But obviously, their product is still very much geared towards a consumer market. I have no doubt that, that will change over the course of time. But I wouldn't say that, at the moment, it will -- it's a major issue for us. And the other thing, I think, looking at the big picture, we know, obviously, Starlink is a very big constellation. It will go into other areas, for sure. But we've always said that we're -- we can live quite happily with a chunk of the LEO market knowing that, that market is restricted to the number of entrants. So we're not -- it's not our ambition to go head-to-head with Starlink, but we can live quite happily with maybe a 15% to 20% market share of the total LEO market.