Eutelsat Communications has announced that it has reviewed its strategic priorities and financial objectives in light of the slowdown in the Fixed Satellite Services sector and will take two major steps to counter this. In a statement released by Eutelsat, Rodolphe Belmer, Chief Executive Officer commented: It has become clear in recent months that the traditional […]
Eutelsat Communications has announced that it has reviewed its strategic priorities and financial objectives in light of the slowdown in the Fixed Satellite Services sector and will take two major steps to counter this.
In a statement released by Eutelsat, Rodolphe Belmer, Chief Executive Officer commented: It has become clear in recent months that the traditional businesses within the Fixed Satellite Services sector are facing a context of slowing industry-wide momentum. To face this lower growth environment, we are implementing an adaptation of our strategic priorities and financial objectives. Our immediate priority will be to maximise the free-cash-flow generation of our core businesses. We are confident in our ability to generate a level of discretionary free cash flow in the next three years, which will enable us to serve a stable to progressive dividend and reduce leverage, in line with our commitment to our investment grade rating. We will continue to invest selectively to prepare for a return to growth by building on our core Video business and capturing the longer term opportunities in Connectivity. Our objective is to return to broad top line stability as early as FY 2017-18.
Growth at Eutelsats fixed satellite services sector is slowing owing to stable demand in developed markets such as Europe, and economic headwinds in economies such as Russia and Latin America, which are only partly offset by more robust demand in Sub-Saharan Africa, the Middle-East and North Africa and Asia. As competition continues to intensify in the Data Services segment, Eutelsat anticipates ongoing downward pricing pressure. In light of these concerns, Eutelsat has adopted a two-step strategy.
Step 1 will see the company immediately deploy measures to maximise free-cash-flow generation of its core businesses including video, data and government services. As part of step 2, it will prepare for a return to growth by building on its core Video business and capturing the longer-term potential in Connectivity.
Eutelsat will place ground capex under strict control stating that this will not impact the current deployment plan and attendant future revenues. Savings will be driven by the implementation of a design to cost approach, a focus on hosted payload and partnership or condosats opportunities when appropriate, as well as capitalisation on industry-wide efficiency improvements.
The company will continue to consider opportunities to streamline its portfolio of assets, following on from the divestment of AlternaTV in April 2016. At the same time it will seek partnerships for some of its broadband projects, such as ViaSat in Europe and Inframed in Africa.
The organisation is also being realigned along five business lines namely Video, Data and Government services, which make up its core business, as well as Fixed Broadband and Mobile Connectivity. Measures will be implemented to further strengthen the quality of the salesforce, while the metrics on which key personnel are measured will be aligned to its cash flow generation targets.
Within this framework, Eutelsat is adapting the strategies within its three core businesses in order to optimise revenues based on its assumptions for their current and future operating contexts.
The company estimates demand in the video segment to rise modestly over the next five years especially in emerging markets such as the MENA and Sub-Saharan Africa where Eutelsat has a strong footprint, notably driven by increasing channel count. The trend in Europe is expected to be broadly stable with HD and Ultra HD ramp-up broadly offsetting improving encoding and compression techniques.
Against this backdrop, Eutelsats strategy in developed markets will be to optimise value, notably by increasing direct access to customers by integrating or reorganising indirect distribution, stimulating HD and Ultra HD take-up and implementing more segmented pricing strategies.
At the same time Eutelsat will continue to capture growth in emerging markets, benefiting from recent investments at the 7/8°West and 36°East positions, and investing selectively notably at 7°East.
Global demand in volume for Data Services will continue to grow, driven by increasing connectivity needs. However, this segment will remain structurally challenged, with the arrival of new technologies, particularly large HTS systems compounding an already oversupplied market and leading to increasing pricing pressure. Certain verticals, notably point-to-multipoint applications, which currently represent more than half of Eutelsats Data Services revenues, should be more resilient in the short- to medium-term.
Eutelsat will partly offset the impact of lower pricing with a series of measures including prioritising the ramp-up of existing capacity by adapting its pricing strategies where appropriate, focusing on less competitive geographies, complex networks and less price-sensitive customers, pursuing opportunities in verticals where satellite has untapped potential and leveraging on a differentiated offer.
Eutelsat hopes to return to growth with two horizons: in the medium term (from FY 2018-19 onwards) by building on its core Video business to accelerate growth, and in the longer term by preparing to capture the opportunity in Fixed Broadband and Mobile Connectivity (from FY 2020-21 onwards). Video by satellite will continue to grow and its expectation is that in the longer term, video distribution will be globally mostly split between satellite and IPTV.
Additional sources of demand will be created as broadcasters increase the level of outsourced services. In this context, deeper integration within the IP ecosystem and harnessing existing IP-based technologies will enable satellites to enhance the end-viewer experience, further increasing customer adhesion and generating opportunities to sell additional services for broadcasters, pay-TV operators and advertisers.
The potential of Fixed Broadband by satellite is significant, underpinned by poor infrastructure in emerging markets and in certain developed markets, and the cost-competitiveness of satellite versus terrestrial technologies in low-density areas. The challenge for the satellite industry will be to deliver a fiber-like service both in terms of quality and price. This will be achieved with the advent of VHTS (Very High Throughput) satellites at the beginning of the next decade.
In the meantime, Eutelsat will pave the way for mass-market adoption, by rolling-out different commercial models on its existing and committed capacity (KA-SAT and the Russian and African broadband projects), and working with industrial partners to reduce cost of terminals, in order to determine an appropriate level of investment from 2018 onwards.
In the next 10 years, Mobility has the potential to evolve from a niche to a mass-market, driven by an increasing number of connected devices, the take-up of more bandwidth-hungry usages leading to exponential rise in data consumption per user and the extension in the longer term of mobility from aero and maritime to land and connected cars.
Eutelsat will adopt a step-by-step approach, leveraging its existing strong positions at 172° East and 10° East, and developing aero mobility on KA-SAT. It will focus on securing the prerequisites for mass-market distribution, notably via selective investments to ensure we have the appropriate capacity and seeking partnership deals with all stakeholders.
Owing to the deteriorated economic context in several emerging markets, in particular Latin America, where much of the recently launched capacity has been targeted and intensifying competitive pressure for Data Applications in all geographies, Eutelsat confirms that its 2015-16 Revenues will be flat, with an EBITDA margin around 76%. 2016-17 will remain impacted by these headwinds, and will also reflect the impact of lower renewals in Government Services as well as a 25-30 million decline in revenues at the HOT BIRD position, notably due to the proactive rationalisation by Eutelsat of contractual arrangements with several distributors. In consequence, revenues are expected in the region of -3% to -1%, with an EBITDA margin above 75%.
In 2017-18, while data revenues will be under pressure, this should be offset by modest growth in Video and growth in Broadband and Mobility on the back of the capacity on EUTELSAT 36C, Amos 6 (Broadband for Africa) and EUTELSAT 172B. Eutelsat hopes to return to broadly stable revenues, with an EBITDA margin above 75%. In 2018-19, it expects to deliver modest growth, also with an EBITDA margin above 75%.
Capital expenditure will be reduced from an average of 500 million per annum for the period July 2015 to June 2018 to an average of 420 million per annum for the period July 2016 to June 2019.
Discretionary Free Cash Flow is expected to see CAGR in excess of 10% over the same three year period. On this basis, it claims to remain committed to reducing its net debt to below 3.3X EBITDA and to its investment grade rating.
At the same time, it hopes to adopt a stable to progressive dividend policy (versus a payout ratio in the range of 65-75% of net income).