Eutelsat’s shark attack

Blood in the water after world’s 3rd biggest satellite fleet operator washes ashore with big bite marks


Eutelsat delivered a dramatic revenue and profit warning May 12 that’s causing the entire satellite sector – bandwidth providers, customers, rocket and satellite builders, credit-rating agencies, the whole lot — to ask themselves the Jaws question.

You recall the scene: a swimmer’s body washes up on the beach in pieces. To prevent a panic and preserve the tiny tourist town’s vital summer trade, the coroner ascribes the death to a “boat accident.”

Then an outside expert reviews the evidence. His voice dripping with ridicule, he turns to the coroner and says: “This is not a boat accident! … It was a shark.”

When the world’s third-largest commercial satellite fleet operator by revenue, and one whose financial state looked solid, turns up for its quarterly earnings call with bite marks and missing limbs, the optimists will conclude that it was a Eutelsat-specific shark attack.

They’ll say Eutelsat was overly dependent on dubious revenue from assets it inherited from Satmex of Mexico, or from its past harvest of U.S. Defense Department business in the Middle East, or its still complicated business of providing consumer satellite broadband in Europe.

All these factors were included as new Eutelsat Chief Executive Rodolphe Belmer ticked off why the company’s planned 5-percent revenue growth for the year ending June 30, 2017, now looks like a 2 percent decline.

That’s a dramatic swing by any measure and Eutelsat’s stock looked about as chewed up as that summer swimmer after trading the next day, and the day after that. Inmarsat, SES and Intelsat shares suffered as well.

Belmer repeatedly pointed to ‘industry-wide” trends in explaining the forecasted revenue decline. The data business in general, he said, which is about one-third of Eutelsat’s total revenue, is no longer a good place to be with the exception of consumer and small-business broadband delivery.

The arrival of high-throughput satellites and their how-low-can-you-go-per-megahertz prices is ripping up conventional satellite businesses and will continue to do so, he said, with no corresponding new HTSgenerated business in sight.

To find out how you look, it’s useful to reflect on what your counterparties are saying.

Here’s aeronautical connectivity provider Gogo Chief Executive Michael Small, when asked why Gogo shouldn’t become a satellite owner given how much bandwidth it is buying over all the major air routes.

“Ownership economics are terrible!” Small said. “You’ve got to make a huge investment … and then pray it lasts 15-20 years.”

Despite the pressure Gogo and its competitors are under to secure seamless global satellite coverage, Small said Gogo would hesitate before adding too much more because the collapse in satellite bandwidth prices is not over.

“We just bought a lot more capacity at a much lower price,” Small said. “We don’t want to buy too much today so that we can capture the ongoing decline in costs that we would expect. Satellite capacity ultimately is a commodity.”

One investment bank titled its post-announcement Eutelsat analysis “Skyfall.”

A couple of days later, Moody’s Investors Services, in a report analyzing Intelsat’s moves to repurchase bonds at substantially below par value — a report that made no reference to Eutelsat’s troubles — said in passing that the fixed satellite business was suffering from “recent supply additions and challenging macroeconomic conditions.” Moody’s suggested Intelsat might want to consider selling off some of its fleet.

eutelsat-shark-cageEutelsat said it would do everything within its power — reducing capital spending is first on the agenda — to maintain its investment-grade rating. How it will do this is unclear.

With two of the three largest fleet operators going through a rough period, it was left to the third — SES of Luxembourg — to make the case that, first, not all fleet operators are alike; and second, that the core video business remains robust.

“Contrary to the mainstream thinking in our industry, which has advocated the pursuit of the mega high throughput satellite concept (whether in a mono, duo, trio, or quattro system) based on a defined technology at a certain point in time, SES has adopted an incremental approach over the years,” SES Chief Executive Karim Michel Sabbagh said in a May 18 commentary following an investor road show.

“With the advantage of commissioning around two replacement satellites per year, SES is introducing to its steady-state missions customized payloads tailored to growing applications. We define this approach as hybrid infrastructure. These incremental missions are leveraging the latest technologies at marginal costs, therefore enabling more favorable business models.”

SES’s answer to the Jaws question appears to be: It is indeed a shark, but shark cages are available.