SES S.A. (SESGL) Earnings Call Transcript & Summary

Hello, and welcome to the SES Q1 financial results for the 3 months ended March 31, 2023 call. My name is Laura, 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 your host, Richard Whiteing, Head of Investor Relations, to begin today's conference. Thank you.

Thanks, Laura. Good morning, everyone. Thanks for joining this analyst investor call for the Q1 2023 results. This morning's presentation was uploaded along with the press release to the Investors section at ses.com, if you don't already have it. As always, please note the disclaimer at the back of the document. In a moment, Steve Collar, our CEO, will present the main business highlights, followed by Sandeep Jalan, our CFO, to cover the financials in a bit more detail. After some closing remarks from Steve, we will take your questions. So with that, I hand over to Steve.

Thanks, Richard. Good morning, everyone. Thanks for joining us. And we've started the year well with a solid set of results for Q1, strong traction in the market with good sales momentum and excellent progress on both O3b mPOWER and our C-band project. Revenue and adjusted EBITDA were fully in line with our expectations and consistent with the full year outlook, which is unchanged and on track. Close to double-digit revenue growth as reported reflects the contribution from our acquisition of DRS GES, while solid EBITDA performance underscores our continued focus on execution across the business. We're performing strongly in Mobility, up almost 15% year-on-year and driving growth overall in networks. While in Video, we continue to flatten the revenue trajectory with more than EUR 110 million of renewal business signed in the quarter on good commercial terms for SES. Some of you may have caught the O3b mPOWER launch last week, bringing us to four satellites in orbit. And with the last two of the initial constellation launching in early June, we remain on track to start commercial service at the end of Q3 with customers ramping onto the system during Q4. In more good news, the first two satellites have completed orbit raising and has begun in-orbit checkout. We formed our first beams over the satellites and the performance looks great. Commercially, we continue to gain traction and significantly this quarter, Luxembourg's Ministry of Defense announced the MEO Global Services program, through which the ministry intends to acquire our services on O3b mPOWER to support Luxembourg and its NATO partners, establishing O3b mPOWER at the heart of defense and security across Europe. And we've added another strategic program to our list with the IRIS2 project and the recent announcement that we've partnered with Europe's leading space and telecom operators and manufacturers to develop what we believe will be a compelling secure multi-orbit architecture to serve Europe and its citizens for decades to come. We're bringing our multi-orbit credentials to the consortium. And given the ambitious time lines for the commission, the solution will likely leverage the best of existing and new infrastructure. And finally, on CPAM, with the successful launch of the two remaining satellites, our project to clear 5G spectrum across the U.S. is entering its final phase. We're very much on track to complete clearing and earn an additional USD 3 billion in accelerated clearing payments before year-end, while we continue to make progress with the clearing house for the pending $600 million in cost reimbursements. So I'll now move to Page 4 and more detail on our networks segment that together drove 3% increase year-on-year. The cruise market continues its robust trajectory and drove a significant pickup for SES as we equipped a number of new cruise vessels ahead of delivering connectivity services. All of our cruise customers are signed to O3b mPOWER, and we expect to have a number of vessels already transitioned to O3b mPOWER this year. Government and fixed data were largely flat year-on-year, with government showing a positive trend and fixed data benefiting from periodic revenue relating to a transponder sale. We have significant traction in the market across all our networks verticals, with EUR 340 million of business signed since the start of the year. Notable successes include incremental capacity and services signed on GovSats and some good pickup more generally in our global government business; several renewals with U.S. Space Force and DISA, including the renewal of the Army WIN-T network; the renewal and extension of services for CNT in Galapagos, including transition to O3b mPOWER; new mobile backhaul and rural connectivity project wins with CFE in Mexico, ultimately growing to more than 1,000 sites; a substantial commitment on SES-17 for aviation services that will expand the number of aircraft supported on the satellite; and recent wins in both business Aviation and Cruise, the latter representing a number of new cruise vessels signed to O3b mPOWER. And looking ahead to O3b mPOWER, I continue to be excited by the potential that we have to offer secure sovereign services from MEO, underscored by Luxembourg's intention to establish the NGS program, as I described. The program will authorize the acquisition of O3b mPOWER services valued at close to EUR 200 million over 10 years in the areas of defense, security and disaster recovery. Importantly, NGS is also the anchor for the framework agreement signed between Luxembourg and the U.S. late last year, the so-called global commercially contracted satellite communication support partnership established under the NATO Support and Procurement Agency. This establishes O3b mPOWER as not only the workhorse for NATO in the protection of Europe and its borders, but also as the strategic medium and orbit layer in the U.S. DoD space infrastructure. So with that, I'll turn to Page 5, and our Video business, where, again, we have a good quarter, securing renewals on good commercial terms. Business performance is fully in line with our expectations with revenues lower by 5% year-on-year, excluding the one-off termination payment from Nordic Entertainment last year. We have the best neighborhoods in the industry as demonstrated by our network reach, serving 369 million TV homes. And since the start of 2022, we secured well over 0.5 billion in new backlogs, including EUR 110 million of incremental business signed in Q1. Most notable deals include EUR 75 million worth of contracts with key public and private broadcasters, including QVC, ZDF, Seven.One, NBS and HIGH VIEW in Germany where we serve more than 17 million satellite homes. Pricing on renewal continues to reflect the pricing power gained by virtue of the large neighborhoods that we operate and the value creation generated from the audiences across our platforms. Also of note, more than 20% of our video contracts and revenues benefit from indexation clauses, adding to the solid long-term cash generation fundamentals of the business, evidenced by our Video backlog, which stands at EUR 2.5 billion. And finally, from me on Page 6, in addition to business execution, our main focus for 2023 is to deliver C-band clearing and to commercially launch O3b mPOWER. As I mentioned, we now have four of the 6 satellites needed for the initial O3b mPOWER constellation successfully launched in in-orbit. The final two have completed their major testing. We'll ship from Boeing this month, and we'll launch in early June. We're on track to declare O3b mPOWER operational and in service at the end of Q3, with customers ramping onto the system through Q4. Satellites 7 and 8 are following along pretty closely behind. While on the ground, everything is ready, with gateways deployed and a large suite of customer terminals available, tested and being shipped to customers. Yesterday, we announced our latest regional partner, Profen, who are investing in a local gateway to deliver services in Turkey in the region. It's an excellent model for O3b mPOWER and mirrors what we're doing already with Marlink and French Guyana and of course, Reliance Jio in India. And moving across the C-band. In March, we also saw the launch of our C-band satellites, allowing us to complete the small number of remaining customer transitions on the satellites. With only a few incumbent air stations left to have filters installed, we really are well advanced and fully on track to earn the remaining accelerated relocation payments in 2023. And so with that, I will hand over to Sandeep.

Thanks, Steve. Good morning, everybody. Turning now to the financial highlights on Page 8. We are very pleased with an overall solid first quarter financial performance, which is fully in line with our expectations. Reported revenue was 10% up year-over-year to EUR 490 million. These included the positive effects of stronger U.S. dollar, which was about 3%, and the contribution from the DRS GES acquisition, which was about 10%. Adjusted EBITDA was at EUR 265 million. This was 3% lower on a reported basis, representing a solid margin of 54%. This included the positive effects of U.S. strong dollar, which was about 2%, and also the contribution from DRS GES acquisition, which was also about 2%. The financial outlook for 2023 is all fully [indiscernible] revenue, adjusted EBITDA and CapEx, each being on track versus the guidance we gave with the February results announcement. Leverage of 3.6x was essentially unchanged compared with the year-end 2022. With the latest successful launch of C-band satellites in March, as Steve reported, and with more than 90% of transition plan having been completed, we have fully derisked the C-band clearing and have a clear line of sight to $3 billion or $2.45 billion after tax towards the end of this year. Further, we expect reimbursement of remaining C-band-related costs, which are approximately $600 million as of March 31, 2023. And once reimbursed, these will add to the cash balance and reduce net leverage. In fact, after we received these substantial cash inflows of over $3 billion net from the C-band net proceeds plus the reimbursement, our leverage, on a pro forma basis at the year-end, comes down significantly to about 1x compared to our leverage threshold of 3x. And meanwhile, we have also paid out the dividends of EUR 220 million for 2022, just 2 weeks back. Moving now to Slide 9, on the net income bridge. Adjusted EBITDA for quarter 1 was lower by EUR 9 million compared to quarter 1 of last year, and it was driven by the following component. The first was the positive effect, which came from the stronger U.S. dollar versus euro, and this contributed about EUR 13 million to revenues and about EUR 6 million to EBITDA. Second positive effect was the contribution from DRS GES, which was acquired at the end of August 2022. This contributed a revenue of EUR 45 million in quarter 1 and EBITDA of EUR 6 million in quarter 1 last year. After adjusting effect of both GES, like-for-like and constant currency, adjusted EBITDA was 7% lower compared to quarter 1 of last year. Third component was the growth in network, which included double-digit percentage growth in Mobility and $7 million of periodic revenue in Enterprise and Cloud during the quarter. These positives were offset by a decline in video of about EUR 22 million, or EUR 12 million when excluding the periodic revenue in quarter 1 2022 from net, as Steve said earlier. And another impact came from higher recurring OpEx as expected. Below adjusted EBITDA, the main effects leading to an adjusted net profit of EUR 64 million, were almost entirely noncash, particularly higher depreciation and amortization linked to SES-17 being in service and noncash ForEx loss of EUR 6 million booked this quarter. Meanwhile, lower interest expense and taxes contributed about EUR 8 million in the quarter. The difference of EUR 9 million between adjusted net profit and reported net profit is explained by net C-band expense of EUR 4 million and other significant special items of EUR 9 million in the quarter. That gain on these special items amounted to EUR 4 million. So in summary, a very good start to the year. Excitement is building with the mPOWER on service date getting nearer and in the backlog, nicely building, including some recent important commercial events. We are firmly on track with the full year revenue and adjusted EBITDA outlook and our growth trajectory. With that, I will hand over back to Steve.

Very good. Thanks, Sandeep. And then I will conclude with Page 11 and a real solid Q1 performance, strong execution in the business, with Mobility driving growth in networks, strong renewals in Video and good momentum in the market, with ongoing healthy deal flow supporting our year-end outlook. 2023 is a transformational year for SES that will see us bring O3b mPOWER to the market, a state-of-the-art constellation that's truly differentiated given the ability to deliver dedicated carrier-grade, scaled and targeted bandwidth and services that will provide the bedrock of our future growth, while we see -- that we will also see the culmination of a massive full year undertaking to repurpose C-band spectrum in the U.S. and in so doing, transform our balance sheet. And so with that, I think we're ready to take your questions.

[Operator Instructions] We'll now take our first question from Nick at Barclays.

Just got a couple of questions. So the first one, in terms of once mPOWER launched and functional, just in terms of thinking about the [indiscernible], you talked about customer that take up the route [indiscernible] Can you talk to us about the risks [indiscernilbe] about there being some more [indiscernible] a little bit of portion of customers [indiscernible] up quite as fast as what [indiscernible]? We end with the benefits through our O3b mPOWER [indiscernible] In a quarter or a couple of quarters later than we currently hope? The second question, IRIS2. So also, you'll be able to contribute some [indiscernible] projects. Can you talk to us about the likelihood of contributing notable investment given absence spend of C-band to that process?

Thanks, Nick. You were a little bit choppy there. So I'm not sure I got entirely the question, but I'll give it a go, and you can let me know if I answer appropriately. So on mPOWER, the good news is we kind of bring the satellites up in pairs. And so we catch a good amount of the capability significantly ahead of sort of commercial launch. We're already doing that with F1 and F2. They're already on station. We've already 4 beams. We're running through the sort of standard in-orbit testing, but we will now have a good number of months to run configurations, deploy ARC. So ARC is fully developed. This is our space brain that we've been developing internally, that's fully ready to go, and we'll get sort of deployed. And we'll be -- run that through and sort of deploy dummy services even with two satellites pretty much now. And so by the time we get to the end of Q3 with all satellites up in the constellation and ready to go, we're going to be fully checked out. And so that's why we're optimistic that, through Q4, we're going to be moving customers onto the spacecraft, new customers generating revenues. Obviously, there will be a ramp, right? And so that will happen through Q4 and indeed into Q1. But we don't anticipate any delay in getting customers up and operational on mPOWER, given the fact that we'll have the ability to fully check out performance and services and even start delivering, I would say, beta services on the first couple or the first four. Essentially what that looks like for customers is a gap for a period of time. But certainly, in terms of the capability of the mPOWER constellation, we can start delivering that even in advance of the final two satellites getting into the constellation. So I feel very good about service introduction on mPOWER. I feel very good about the level -- the amount of testing we've been able to do on the ground stations, on the customer terminals. All of that is fully validated with the existing constellation. So I really feel very good about where we sit with mPOWER. Notwithstanding the fact it's obviously taken us longer than we would have liked, and we've had to a bit be more patient to get to this point, but we do feel very confident in the program and the results we're seeing and the program we'll generate. Look, on IRIS2, I think the first thing I'd say is we feel like we've got a very strong consortium. We are part of a very strong consortium with the main team comprising Europe's major operators and manufacturers and then a broader group, including sort of telecom operators. And so I think we really feel like we've got all bases covered. We've got a strong security inside a component, which is also essential. This isn't just a space architecture, it's a sort of secure communications architecture. And so I think we feel that the team members that we have around the table are really strong, and everyone contributes. I think, as I mentioned, I think that the solution, which is still under definition to be clear, will comprise sort of headstart services on existing infrastructure and then launching new infrastructure. As you know, the European Commission has sort of set aside EUR 2.4 billion, plus additional sort of technology development with ESA. So there's a very significant amount of public funding available for this project. And it's way too early to sort of think about what investment might look like. As I say, we're still working hard on the architecture. It will be multi-orbit. We think we have a strong role to play given our investments, but way too early to sort of think about any incremental investments that we or indeed any other member of the consortium might make at this stage. Does that cover the questions, Nick?

Yes. Just one quick follow-up. In terms of IRIS2, if you are kind of holding aside some mPOWER capacity for that project, and it goes on longer than expected, which has happened before with the European projects, is there any chance that, that slows the ramp of mPOWER? Or do you just have so much capacity that we don't have to worry?

No, I wouldn't say that we are holding mPOWER capacity. We're driving mPOWER obviously hard into the market, as you can see from the deals that we're signing and the backlog that we have. So I don't think we see any need to hold any capacity back. And given that we're launching, bear in mind, we've got two more satellites that we'll add this year. We've got three more coming beyond that. So it's really not a consideration at this point.

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

I have a couple, please. The first one is just around your leverage. And what do you see as like the optimal leverage in the longer term? I know you've got the target leverage of below 3x from 2024. But when you have the significant C-band proceeds coming through, your leverage is going to be way below that. So perhaps do you see like any floor for how low you want leverage to be? And then my second question is just around the C-band. There's been some news flow in the past couple of days from the aviation industry around the first deadline for airlines to retrofit some of their equipment. If that deadline is delayed, does that impact the timing of any payments you may receive? And then lastly, if I can just squeeze in a final follow-up on IRIS2. I think it's going to be operating as a kind of a concession agreement. Have you got any, like, further color around how the economics could work? How the concessions could be awarded? And if not, maybe just give us an indication about the timing of when you expect the next steps.

So thanks for the question. I'll take the first one and pass on to Steve for the next two. So on the leverage, our quarter 1 leverage is at 3.6x. As you have seen with our December results, we have announced to reduce our leverage threshold to below 3x. As I said earlier, my speech that -- at the end of this year, when we take a look at this C-band significant proceeds coming in pro forma basis, the net debt leverage would stand at 1x. Clearly, our aim continues to remain a strong investment-grade balance sheet. We continue to carry investment-grade rating with both the agencies, which is Moody's as well as Fitch. And this will continue to remain the target. But clearly, the C-band money is not in the bank, it's coming beginning of next year. And as we come closer to that time line, clearly, we'll take a look at our financial policy and make further announcement as we do fit, including on leverage.

Very good. Thanks, Terence. I'll take the C-band question. So short answer no. Absolutely no impact. We have a job to do, which is clear the 300 megahertz and protect our broadcast customers, and that's what we will do. And that will earn us our EUR 3 billion in accelerated relocation payments. So no impact from this question from aviation. That really is a topic for the FAA, FCC, the mobile operators and the airlines. It doesn't impact us in any way, shape, form or fashion. On IRIS2, yes, there will be a sort of a concessionaire model. In terms of timing, we expect that this deal will kind of get negotiated in the second half of the year and probably, there will be a contract award to the successful bidder, which in the case of -- if it's us, in the consortium, it will be towards the consortium at the end of the year. And so yes, that's the sort of the schedule that we expect on IRIS2. Obviously, a lot of work to be done between now and then, right? We've got to come up with a compelling architecture. We sort of have to understand exactly how that fits with the commission's plans. And so a lot of work between now and whenever there's an award, and that we expect sort of towards the end of the year or maybe early into 2024.

We'll move on to our next question is from Sami at BNP Paribas.

I have two questions, please. The first one, the organic revenue growth of the Mobility segment has been quite volatile in recent quarters, from the low 20s down to the low single digits, back up to the [maximum]. Can you help me understand what drives the volatility in contract starts or usage of the capacity or anything else? And that would be number one. Number two. You've confirmed being in discussions with Intelsat. If not premature, can you let me understand the strategic rationale of your interest? I think from where I understand the financial side of the appeal, but strategically, other than [indiscernible] power, can you perhaps talk a little bit about that, if not premature?

Very good. Thanks, Sami. Listen, I mean, the first thing I'd say is, all of those growth numbers are good, right? high single-digit 20%. All of that stuff is super positive, and I think reflects really good momentum that we have on the mobility side. And it's both maritimes and principally cruise and aviation. There is a little bit -- one of the things that sort of explains a little bit of lumpiness is when we implement services on board cruise ships. We obviously -- as part of that, we sell equipment essentially, and that can result in some short-term lumpiness. But I would say, overall, the trend is very positive, growing both sort of capacity services and where necessary equipment sales. And equipping cruise ships, obviously, means a precursor to then generating significant service revenues. And we've just signed some more, right? So just in the last handful of days, we've signed another cruise line with another bunch of ships. And we've signed a significant deal in aviation on SES-17, and that will all kind of sort of -- that will range for us in terms of revenue growth out into the future. So it really feels like positive momentum in Mobility more generally. And look, [indiscernible], we put out a statement. We said we sort of -- we confirm we're in conversations, but really nothing more to add at this point in time. It would certainly be premature to get into discussions on that topic. So everything we've said on that topic is what we're going to say is -- what I would say, Sami.