Inmarsat Plc (OTCPK:IMASF) Q4 2013 Earnings Conference Call March 6, 2014 4:00 AM ET
Simon Ailes – Acting CFO
Andrew Sukawaty – Executive Chairman
Rupert Pearce – CEO
Nick Lyall – UBS
Giles Thorne – Jefferies
Terence Tsui – Morgan Stanley
Carl Murdock-Smith – JP Morgan Cazenove
Nick Brown – Goldman Sachs
Paul Sidney – Credit Suisse
On slide, for a second here, we've got a Safe Harbor statement which is included in our press release and included in the presentation today so I would simply refer you to that very briefly and then I will open the meeting by asking Andy Sukawaty to start. Thank you.
Thanks Simon and welcome. What I'd like to kick off with this morning is just highlighting what we're putting our money into and the reason I say that is 2013 has been a year of investment for us, in fact it's the highest level of investment in our 34-year history, and to some extent that continues in 2014 but we rapidly come out of that as you'll see in the numbers.
But people say, so what are you investing in? It's all about Global Xpress. And I guess it first and foremost is it Global Xpress or the I-5 new constellation, Ka-band constellation, which is a game-changer. It's the world's first truly global VSAT system and it's set up for mobility, which is a unique system, 50 megabit data speed to a 60 centimeter antenna on the move.
Second, there was our fourth L-band satellite which was called Alphasat, partially funded by the European Space Agency and CNES and UK Space. This provides additional redundancy in our I-4 fleet where the bulk of our revenues are coming from. It gives us more capacity because that business is growing and in capacity terms it's really growing and it extends the life of our constellation. So that was put in place also last year.
Third, a narrower set of things that we're investing in operationally that don't have the same kind of numbers but are still unusual for us and are things we're putting money into. The third one is Aviation. Aviation is the fastest growing sector for us. Now the growth is coming from Government and from business today but we feel, and I think the market feels, that we're at an inflection point because what we're seeing happen is customer cabin connectivity is starting to happen, we're seeing multiple bids coming out of airlines we're responding to and with Global Xpress coming we're in a prime position to take a healthy share of that market going forward.
Fourth, hardly mentioned, is new satellite earth station operation that just opened in December in Beijing which opens the Chinese market to us in a whole different way than we have historically done and geographically that’s been one of our fastest growing markets that started out very small and now with this new land earth station we're very optimistic as to what that can drive, both in L-band and in the future in Ka.
Fifth, is global governments, this means non-U.S. We've put significant new resource into our Government business outside the U.S. and this is already showing benefit, we're in new countries we weren't operating and selling on the ground in before, and we're already seeing the growth and net positives coming out of those in relation to our investment.
Next comes new products. I'm not going to lay them all out for you but we had 6 to 10, depending on how you define product and service, new products come out. We've just announced a new handheld product coming out, there's a new device that will work with smartphones coming out, there is cheaper, smaller maritime terminals that we've announced and the list goes on. So we are investing quite heavily in newer, smaller, cheaper terminals that will enhance our ability to fill these satellites.
And then last, but certainly not least, there's a new app platform, we have a partnership with Cisco who was engaged in originally to coincide with the Global Xpress program but it actually applies across all of our platforms. You'll see a new application set with our applications partners coming out first in maritime and some of these are quite game-changing application sets that allows us to more fully address the market in not just as a pipe but as an applications, not provider ourselves, but tightly tied application providers to us to help sell our services and have people use more of it.
So this is where our money is going, it's not just GX, it's been a heavy investment year, it continues to be but, of course, we did target ourselves to continue growing while these investment programs were underway and we did just that and let me go over the highlights with you now.
First in 2012 we returned, this is in 2012 now I'm highlighting, we returned our core wholesale mobile satellite business to growth and this is after the headwinds of migration in the maritime market from the old service to the newer more economical services and the impact of the withdrawal from Afghanistan. So that happened in 2012.
In 2013, we have seen that growth continue driven by new services and a diminishing impact from that maritime migration in Afghanistan and as a result of that we've had two solid years of revenue growth reaching 3.35% growth in our core MSS revenues in 2013. This outperformed the top end of our target range we set over two years ago, which if you remember was 0% to 2% CAGR over this period, in fact if you run the numbers it's 2.9% we achieved during that two year window in CAGR for our core MSS growth.
It was disappointing, however to get these positive developments in full swing, only to have our U.S. Government retail business experience an unexpected downturn due primarily to U.S. Government budget issues. But importantly this was in our lower margin retail business and did not spill over into our wholesale business which as I said continued to grow.
Of course it's our core wholesale business that drives the vast majority of our cash flows, this drives our financial strength and supports dividend growth and future investment. It was also an extremely busy year operationally; two successful satellite launches, Alphasat, as I said, strengthening our L-band service offering and the first of our Ka-band Global Xpress I-5 fleet went up as well as you probably know. So this puts our GX program on track, two done, I guess one GX, one L-band, two more satellites to go then it's global.
We are, as a result of all that reiterating our three-year 8% to 12% compound annual growth rate target for our wholesale MSS business today which again we also stated two and a half year ago. Our confidence is building in that. I'll also update you in a second on the Board of Directors and the changes in a moment.
So overall 2013 was a very solid year, exceeding our top line core growth targets while hitting our EBITDA consensus views for profit despite the shortfall in our retail business.
2014 is now set up nicely to be a transformational year for us as we target ourselves to head into a period of accelerating growth on the back of the Global Xpress launch and other investments I've just described.
Moving on to the dividend. I'm delighted to announce a further 5% increase in the final dividend for 2013 making for an increase of 5% for the full year. This is the eighth straight year of dividend increases, every year in fact since the IPO. Nor has the dividend been the only form of return to our shareholders over those years, all of which speaks to our intent to return cash when appropriate.
With the end of the current CapEx cycle in sight the Board will look again carefully at our dividend distribution policy over the coming period. However to be clear, we remain focused on driving sustainable dividend increases and to run an efficient balance sheet. We have demonstrated an ability to do that through two capital investment cycles now which illustrates the solid financial profile of this business we've built.
The dividend proposal today will come before the May AGM for approval and assuming that approval occurs will happen in the end of May.
Moving on quickly to our Board of Directors and management as well. I think we can say we've both grown and strengthened our Board of Directors during 2013 and had one executive director change. The first addition was Simon Bax who joined the Board in June, a great background for us. He was the Former CEO Encompass Digital Media and the CFO prior to that for Pixar, which was working for Steve Jobs by-the-way and Fox Studios.
At the same time we announced the appointment of Dr. Abe Peled to the Board. He's probably well-known to many of you in the room because he was the CEO for many years of NDS Group which sold, I guess about 18 months ago now to Cisco. He stayed on as a senior exec for Cisco for a year and he just brings a great background in general management in the tech industry and a deep understanding of technologies broadly, as you may know he was running a significant piece of IBM Labs prior to going into the commercial world if you will.
These appointments mean we are well positioned for yesterday's announcement that Jim Ellis has retired from the Board. He just recently accepted the Chairman role of Level 3 Communications in the U.S. He joined us as you may remember in 2005 at the IPO and we have benefited from this counsel during this period of time.
And finally, and more recently, we saw Rick Medlock leave the company and take up a similar role at the private equity backed Misys. We wish Rick well, but in his place we're delighted that Tony Bates will join us in June as CFO and Executive Director, again some of you in the room may know Tony. Tony has a significant experience both in the sector and in public markets generally, most recently with Hibu and Colt Communications, as you know, and prior to that EMI. Tony also has a track record on the operational side which goes deep which I think will be valuable to us as our business evolves.
These business changes happen and I think we've managed them in a way that maintains the quality of our management, our governance and our thinking most importantly as a business.
During the transition Simon Ailes, who you all know has stepped in to make sure we didn't miss a beat and he's done a great job and I'll now hand over to Simon to go through the results with you. Simon.
Thanks Andy. We put a photograph of our rocket launch on the cover of our results presentation today and believe me I'm going to have to go like a rocket to be able to get through my slides in the allotted time, so stay with me.
So I'm going to start with revenues. The result for the year is 5.7% down year-over-year and that might at first flush look like poor performance. But really there's a lot more to it and it's really a question of where the value arises. The result for Inmarsat Global for the year was 3.3% growth year-over-year and that as Andy said resulted in an outcome that was above the top end of our guidance range. And that’s all the more impressive when you think that Inmarsat Global generates 90% of the EBITDA of the Group and well over 90% of the normalized free cash flow and it's those metrics that pay and drive our dividend. So growth in this line is far more valuable than growth anywhere else in the Group.
If I drop down to other income, this is where we see a special situation which is the effect of LightSquared. In 2012, we still had substantive revenues from LightSquared, $60 million of revenue, $52 million of EBITDA. We did recognize some very limited revenues from LightSquared during 2013 and this was effectively recognized in deferred income on the balance sheet but compensates us for the termination of some leases that we did to clear Spectrum for LightSquared. But these are de minimis amounts and there were no payments in the year, no new payments in the year because they've been suspended.
Then we have Inmarsat Solutions. As we've talked about throughout the year the results here have been affected by U.S. Government spending cuts and a related increase in competition that really made life very difficult for us there. I would say that we've got some compensating growth within Inmarsat Solutions that helps but clearly the result for the year is down.
If I take you back down to the bottom total revenues for a second, if we add back the LightSquared effect revenue would be down just about 2% year-over-year, so really not quite as bad as the headline performance. And this did not prevent us from generating a very strong EBITDA performance for the year which we'll see on the income statement.
So here it is. We generated $649 million of EBITDA, that compares to consensus going into today of around $651 million, so very much in line and that also compares to a consensus this time last year of about $654 million. So through all the things that have gone on through the year we've really come in in line. And the reason we were able to do that on a down revenue performance was clearly a strong performance in costs. Costs, as you can see, across the Group were down nearly 5% and I'm going to go down into that in some detail in the next slide.
So let me just drop down the income statement a little bit. Depreciation and amortization counter intuitively was down year-over-year and that reflects the fact that there was an adjustment during the year in Q2. And it reflects the fact that having decided to sell our energy assets to RigNet we stopped recognizing depreciation for them and that also contributed to a lower charge year-over-year.
Although we started to see some depreciation for Alphasat, the satellite we launched in July, that only become commercially operational in November. So we really only had about a month's worth of depreciation related to that but that will obviously grow in 2014, not just with Alphasat but with the first Inmarsat-5 satellite which should start depreciating around the middle of the year.
Then I'm just going to spend a couple of minutes on the impairment charge. There is a substantive impairment charge here, we added to it in the fourth quarter but most of this has been previously disclosed and it falls really into three buckets. The first is the impact that the U.S. Government's spending cuts has had on our retail U.S. Government business and I think that is not just an issue that effects Inmarsat, it's a satellite industry-wide issue.
The second thing is that we really own that business for its strategic mission to position Global Xpress services directly with U.S. DoD clients. And having a smaller book of Ku managed service network business doesn't really impair the ability of that business to achieve that objective for us. So we feel that really the reason why we own that business really hasn't changed or fundamentally been affected by this impairment.
The second part of the impairment charge was about $27 million related to the energy assets we're selling to RigNet. When we agreed a price with RigNet we had to write those assets down to that price but what we got in return for that was a terrific upside of a committed partner in the energy market to take GX into the energy market and open what was previously a Ku-band closed shop. And they did that with a significant pre-purchase commitment on GX services, so that is a fantastic trade for the business.
The rest of the charge, which is broadly in line with last year's charge, reflects organizational changes within our operations whereby as we prepare for Global Xpress we’re changing our distributor relationship, promoting distributors from being service providers who have a retail relationship, to wholesale distributors who just have a wholesale relationship. And that takes away a revenue stream from our retail business without affecting revenues for the Group as a whole.
Perversely, the accounting for that does not allow us to transfer the related goodwill, so we get hit for the goodwill at the retail business but we can't write it up at the wholesale business. But we strongly believe that the vast majority of this impairment charge has no equivalent impact on the value of the Group as a whole and because it's non-cash it doesn't affect our ability to pay dividends either.
Okay, so I'll just drop down to net interest payable. Again, down year-over-year that's slightly strange given that net debt is rising with all this investment we're making but that's due to the capitalization of interest. Last year we capitalized around $43 million of interest, this year we capitalized $79 million of interest and by the time we get to 2015 when all the satellites are launched there'll really be no capitalization of interest so this impact will go away. And you'll see the true underlying interest charge when we look at cash interest in a moment.
And then income tax expense, $86.5 million. Some of things I've talked about have affected the tax charge in many ways but if you strip all of that out there's a very normal underlying tax charge of around 23% in line with UK corporation tax.
So that was the income statement, so now I'll just drill down a little bit into the costs, because those costs really helped us to deliver a very strong EBITDA performance for the year. And what I've done on this chart is I've put the costs for the wholesale business Inmarsat Global alongside the costs for the Inmarsat Solutions business so we can look at them on a like-for-like basis and see what's going on.
So firstly employee benefit costs which is really our staff costs, they went up in the wholesale business because we're hiring significantly at a rapid rate because we need to prepare for GX. So that's an understandable increase there.
Conversely the employee staff costs at the retail business went down and that's because we reduced the scope and scale of our retail U.S. operations following the spending cuts to deal with the fact that that business was shrinking.
Satellite and network operations costs at the wholesale level, they went down, that was really due to lower in-orbit insurance costs, but this is an area which will grow rapidly as the GX assets start to come on-stream during 2014. Those costs also went down at the Inmarsat Solutions level and here we show the costs including the intercompany purchases of airtime which is about $310 million. So if you strip that out of both sides those costs were still down and that reflect smaller or lower purchases of Ku-band capacity to again support the U.S. retail business for the Government.
Other operating cost at the wholesale level were down 13%, that's a little bit of foreign exchange and it's also the impact of the fact that in 2012 we had bad debt provision. I'm thankful to say we had no equivalent bad debt provision in 2013 so things have improved there and that explains the movement. On the retail side they were down again but that's to do with shrinking the retail U.S. Government business.
And were [ph] capitalized is where we've got our GX costs and of course, they're increasing as we get nearer to the launch. So cost control was a major factor in the results for the year and it certainly contributed to a great performance on EBITDA.
So let's take a look at how that translated into free cash flow. So $649 million of EBITDA and actually quite substantive working capital outflow and quite a big difference year-over-year. Now that's actually not what we would have expected and it's really due to a couple of unusual items. In 2012, we had some government pre-payments, they unwound into revenue in 2013, and we also had in 2013 that non-cash LightSquared income I just spoke about. And we also had a couple of late payments right at the end of the year which were then paid in the first week of January so they just affected the movement and I wouldn't think of that as being normal in any way.
CapEx, $580 million, obviously a huge figure, the biggest in our history but actually quite a bit lower than the guidance we gave which was up $625 million. Now the difference is partly phasing forward of CapEx into 2014 and it's partly from savings we made on the maintenance CapEx as we simply didn't spend as much as we anticipated. Cash interest was very much in line with expectations reflecting a cost of debt of around 5%.
And cash taxes very low compared to the P&L charge and that reflects the available cash depreciation we have against all the investments we're making and that will continue, so cash taxes will remain low but it will normalize back to P&L taxes over say the next two to three years as those benefits unwind.
And all of that resulted in a free cash outflow for the year of $84 million. Add to that a dividend of just over $200 million and you're looking at a cash draw for the year of around $300 million which we funded from ample liquidity which we'll take a look at right now.
So here is that liquidity, on the right hand side you've got a breakdown of about $1 billion of available liquidity at December 31, that's $144 million in cash, $156 million available under our Exim Bank facility which is attractively priced debt we got in relation to the Boeing contract. And then an undrawn bank line of $750 million which is available should we need it.
On the left hand side you can see the progression of debt and the associated increase in leverage, exactly in line with our expectations. What's probably changed a little bit is where we see peak leverage at the end of 2014, that's now picked up a little bit to between 3.3 times and 3.5 times net debt to EBITDA and there's really three reasons for this. The first reason is we decided to buy the fourth Inmarsat-5 satellite and that adds about $150 million of additional cash needs by the time we get to the end of this year. The second reason is that we did an acquisition of Globe Wireless which closed in January and that was a cash payment of $45 million. And the third reason is what? Is to do with the fact that we guided EBITDA down slightly year-over-year, sorry, that's probably the most important. But yes, we obviously had some guidance in Q3 to say that as a result of the fact that the GX launch had been pushed back a couple of months that would affect EBITDA for the year so it's slightly lower than where we thought it would be and, of course that contributes for the multiple here.
Okay, so let's go on to our much loved CapEx profile slide which has been all nicely updated for you. So what does it tell us? You can see the three last years for big CapEx through 2011 to 2013, the light blue showing the significant investment in GX. And then in 2014 you can see our expected guidance of between $500 million and $525 million of CapEx for the year. Alphasat, the red, now behind us and so CapEx is dropping a little bit just on that, but still remains very high.
In 2015, you can really see the CapEx dropping away, we're expecting CapEx to drop by about $300 million and that's why we can be confident that we can de-lever very quickly off that peak leverage let’s say that I just discussed on the previous slide. Towards the backend of the chart you've got the dark blue which is the investment in Inmarsat-6. Inmarsat-6 will be the next generation of satellites, those satellites will replace the Inmarsat-4s, so it's an L-band replacement CapEx. But interestingly the bars don't shoot up like they do at the front end of the chart where we're investing in I-5 and that's because instead of buying three satellites at the same time we're buying one satellite after the other on a rolling procurement basis over around 15 years. So the profile of CapEx for the next generation is much more shallow and that will allow us to preserve much more cash free flow in the business.
Okay, so now I'm just going to, I've got a couple more slides which really take us away from the year and start to look just at the quarter which we've just reported, just to break that out for a minute. So the fourth quarter was very strong, revenue growth in the wholesale MSS business was 5.4% compared to the 3.3% result for the year so this was a particularly strong quarter and I would say it was boosted by a couple of things that make it a little bit stronger than it might otherwise have been.
The maritime growth still powered on with FleetBroadband, we added around 1,400 terminals during the quarter. But also saw a little bit of a slowdown in the rate of decline of the (indiscernible) older services which are migrating, so that kind of boosted the quarter a bit.
A little bit of similar story on land where BGAN was boosted by the Philippines typhoon and the relief effort and the media coverage that came with that, that was probably worth about $1 million to $2 million in the quarter. And at the same time IsatPhone Pro had a fantastic quarter, growing 30% year-over-year and sequentially improving as well.
Aviation benefited from continued strong growth in SwiftBroadband but we also have this lumpy Swift 64 business which is our third generation serviced and that can have a strong quarter and a weaker quarter and it just so happened that the fourth quarter was one of those stronger quarter so, again, kind of lifted the result for the quarter.
But all of our key drivers were intact, IsatPhone Pro, FleetBroadband, SwiftBroadband, also performed strongly.
Now just to finish on Inmarsat Solutions. I don't think there's anything new here, we're down 7.5% year-over-year for all the reasons we've been talking about since the first quarter and there's not much change. However, the third quarter we were down 8.5% year-over-year and sequentially revenues in this business grew by about $4 million, so actually this is probably not as bad as we'd seen in the previous quarter.
We're often asked to explain how it is that our Inmarsat MSS business at the retail level falls by 5% when our wholesale business goes up by 5%, what is the driver behind that? And the reason is that our retail part of Inmarsat sales has a disproportionate exposure to Afghanistan, so as that shrinks it has a disproportionate effect on the revenues in comparison. And there are some other areas in the business such as leasing where we have a similar effect. Those factors will unwind during the course of 2014 as we expect the troop withdraw from Afghanistan to be completed, so I think this will start to, we have the opportunity for the results in the solutions MSS business to start to mirror more closely those in the Global business.
And then finally on Solutions, down 10% on the Broadband and other MSS, this reflects the contraction of the U.S. Government business, offset by some growth in XpressLink and other areas but not enough to turn the results around. So that's all my remarks on the finance side of things and I'm going to hand over now to Rupert to take us through the operations review and outlook.
Thank you Simon. So in the time that's left to me. I will do a very quick canter through the operation side of the business. We'll start with strategy, shock news, our strategy is unchanged. It's about three areas of strong revenue growth working together in a complementary way. Firstly L-band services over the Inmarsat-4, Alphasat and from the end of this decade the Inmarsat-6 platform.
Secondly, the Inmarsat-5 platform and GX which provides of course growth and development potential for our core customer base, our mobile customer for the foreseeable future, as well as a major diversification of Inmarsat into the currently $2 billion plus wholesale new markets of Maritime VSAT, Government Comsatcoms and Milsatcoms, Energy, Enterprise and Aviation.
If that weren't enough, thirdly fuelling ARPU, network differentiation and new revenue streams across both these platforms through the service enablement platform that Andy talked about, our Cisco strategic partnership which creates and empowers a really unique high value solutions ecosystem serving all the markets and customer communities at the sharp end of our network.
And at the more prosaic level you can see our fourth strategic goal is to organize our assets and business to support those ambitions as powerfully as possible. So, for example, the creation of the business units in 2012 revolutionized both our market focus and our ability to optimize our direct and indirect channels to market.
Okay, let's look in first at GX CSI. The takeaway is we're on track for CSI in early Q3. You can see here we launched the satellite, pictorially, December 8, that's on the front of your book and since then things have gone really, really, really well which the engineers tell me is phenomenally. 52 days to orbital deployment, that's entirely normal and we completed in-orbit testing, payload testing at the end of last month, which is fantastic news, major risk retirement and we move into the end-to-end service and network testing which is what we're going through at the moment at about six weeks.
Following that we'll start to involve customers in moving services across the network in what we call alpha testing. Largely that's an internal exercise; we after all have a very large customer of the platform inside Inmarsat these days in the form of the Maritime, Stratos, Segovia, Ship Equip and so on. That process will run for four to six weeks.
And then we'll move into beta testing which is very much live testing with end customers through a further period, leading to CSI around about the middle of this year. Very, very good news.
Behind that of course we have Inmarsat F2 and F3 on track to launch during the course of this year, we believe we will complete those launches by the end of 2014 to have global coverage in 2014 and global commercial service launch because both those satellites have to be tested in early 2015. All on schedule, on budget.
Behind the scenes we obviously have now the fourth satellite under construction, that provides us with a double option. If we do have, perish the thought a launch failure for F2 or F3 we can bring F4 in very, very quickly to ensure something just over 18 months delay before we're fully global which maintains our thought leadership in the industry. If we get three launches up, which is statistically the most likely outcome, then the fourth satellite remains as a spare for further growth opportunities.
Our six ground stations are on schedule, four are now functioning, two remain to be completed. And our service platform is on schedule as well, that is about the delivery of the billing, the provisioning, the integration capabilities and the core functions and solutions delivery.
And I'm also happy to say and I'm asked this quite often, that the orbital slot coordination process for coordinating a satellite for acquiring this nine times the available spectrum of Ku-band that gives us such a competitive edge over Ku band is in place and our market access progress is very strong and progressing to plan, designed to rollout this global licensing open market to support the satellites as they deploy.
We've got multiple equipment manufacturers appointed and the test equipment is available to support the beta testing campaign and we're very, very happy with the relationship we've got with our core terminal suppliers.
So the whole technology ecosystem needs to stand up and support the three satellites are on track, on budget. Obviously while the technology program is in great shape, what about market interest? Well you know we're not letting the grass grow under our feet here, we've engineered deliberate pathways for a fast start from the launch of GX through both the creation of a superb channel development program and by bringing defined strategic relationships and transition programs to bear across the board.
In Government, we have the Boeing partnership progressing very well indeed and we have very exciting U.S. Government tests across our network as early as Q2. So from April onwards we'll have one of our anchor tenants, one of our largest market opportunities actually proactively working with us in early stage testing and deployment to understand what GX can do for U.S. Government.
In Maritime we have a transition program, we have the extraordinary transition capabilities of XpressLink to drive us into an early fast start in that market. That’s going very well, I'll report a little bit more detail on that in a second and we've acquired Globe Wireless and I'll explain, again, why that helped supercharge our transition to Global Xpress.
In Energy we secured, as Andy said, we secured the RigNet partnership at the end of January and we feel that's a very, very strong initial driving force into the energy market for GX and in Aviation, we have Honeywell who has committed a very large amount of money to us both to break the business, get opportunities for GX but also of course is doing our avionics as well. It's not just about them, we've made great progress over recent months appointing VARs, value-added resellers, in all target markets. We now have more than 18 VAR agreements signed and expect to see continued news flow on that front in the months to come.
And, of course, principle among all of those we were delighted at the end of last year to announce that we've signed Astrium or Airbus Defence and Space as they are now known, as an anchor tenant for GX as everybody expected and we're delighted to have historically our largest most successful independent VAR sign up for GX and the future growth.
In terms of training more than 750 people have been through our training academy for GX and over 140 distributors I think that gives you a sense of the looming interest in Global Xpress. And, of course, that backs our continued statement that we now have more than 30% of our first five-year target revenues either under contract in the shape of people like Boeing and RigNet and Honeywell who have made financial commitment to GX or controls for example in the way that we have a backlog in XpressLink that's contractually committed to migrate to GX and that's a very exciting feeling that we can see the future success of GX.
But we're also innovating in L-band as well. I want to spend just a few minutes talking about that. There is a lot of L-band service development going on to ensure that that franchise continues to grow. We're not going to invest in Inmarsat-6 likely; we want to know we've got a solid franchise to back.
Lots of new product development, BGAN High Data Rate, Converge, BGAN M2M, BGAN Link, IsatPhone 2, Fleet 1 [ph] SB200 L-Tac, lots and lots of product emanating last year and coming up this year. And lots of new services too, we're offering prioritization services, geofencing services, new packages that have been very successfully adopted and of course, L-band inside where we actually integrate our capabilities into multivertical platforms, networks and services and others to be revealed during the course of the year. So we're very confident in our innovation platform for L-band.
Separately we're expanding geographically as well as Andy said, we're looking to crack open new markets, often uniquely for us by selective investment. The China stat is a wonderful example of how we can have pretty much exclusive market access to China through selective investment in China.
In Global Government, as Andy said, we have a very deliberate process of internationalizing our non-U.S. Government business and last year we went into Oman, Saudi Arabia, Colombia, Poland, Russia, China, Brazil, Turkey, Kazakhstan and Israel to build dedicated channel, dedicated relationships in those new countries that already are beginning to make a significant contribution to our revenue base, diversifying our Government business is very exciting.
Alphasat successfully launched on July 25 and that's now carrying substantial commercial traffic and expanding our capacity in our most heavily trafficked region, Europe, Middle East and Africa. And it means the Inmarsat-4 fleet is now, of course, operating with in-orbit redundancy so if we do lose a single satellite we can now do something about it by reshuffling the pack. That protects our core L-band cash flows which is very important and enhances our coverage options as well.
And finally in terms of L-band innovation in infrastructure, as Simon said, we're planning the first Inmarsat-6 to be feathered in on a rolling procurement basis around the end of this decade. So lots and lots of options I think for L-band revenue growth, let's not forget that in the stampede to get excited about GX.
Okay, I'm going to look at each of the business areas now, largely through the prism of the business units that we've created. I think the story for maritime is that we continue to demonstrate thought leadership in those core maritime markets and to build upon a long established incumbency in sustained and exciting ways.
FleetBroadband particularly continues to go from strength to strength. We added over 41,000 terminals. In the year net adds of, we're now through 41,000 terminals net adds of 7,200 in 2013. That's up 21%, so sustained momentum. 50% market share, we now think in our core merchant market for FleetBroadband alone as a product showing its adoption as the gold standard in maritime communications. ARPU growth still up, up 3% year-over-year.
One interesting point to draw out from those numbers is the tremendous success of FleetBroadband 150, our smaller product for smaller vessels. That's something that's broadening our market into unconnected, hitherto unconnected customers. What's exciting about that is we added 1,500 net adds. It continues to be roughly 25% of our net adds.
ARPU growth here very strong, up 20%. It shows that if you get people in through the door to try connectivity, they rapidly realize how exciting it is and they start to spend more to get more value. That augurs very well of course for the FleetOne launch, an even smaller, lighter, cheaper variant focused on fishing, leisure and coastal merchant market which will go out the door and be launched in a few weeks.
And the story at the same time around existing services is that we're continue to dynamically manage the conversion of our older services to our next generation services. We've whittled Inmarsat-B down in recent years to less than 3,500 terminals. And we're now focused on the 18,000 Fleet terminals and then migration to FleetBroadband or GX. To do that we're increasing pricing for legacy services as well as offering exceptional value on a per megabyte basis for legacy customers to come across to our new service platform. And there's every sign that they are doing that and becoming more valuable customer for us as they do so.
Finally, XpressLink continues to prove to be a very successful tactical step to bring customers early to GX. You can see 128 Q4 net adds, 792 installations. We've now got a very substantial total VSAT base committed to move to GX. I was particularly happy last year to see a step change in the pace of our installation. We did a lot of work around Ship Equip (indiscernible) that raised the pace of installation capability that obviously is a good predictor for GX. Globe Wireless comes in to spruce it up further. So I think we're well positioned to support our book of business and our customers' business and our channels business to migrate to GX.
In fact, a little bit of an update on Globe Wireless here, a quick digression to give you some more color about Globe Wireless. We completed the deal on January 2. This is what it does for us. It steps up our VSAT engineering and installation capability at a crucial time. It's to get those XpressLink wins and convert them quickly over the next couple of years into GX revenues moving them off network on to our own network for a dramatic EBITDA expansion and that will be able to support all of our channel partners very powerfully on a global basis to win new business in GX.
It also brings to our channel partners, an established network-level of value added solutions capability and a platform to deliver those solutions across the Inmarsat channel which drives cost requirements out of the channel, allows them to focus on doing what they do best and shows our ability to leverage capabilities at a network level serving now more than 3 million mariners.
It will be EBITDA and cash flow positive in 2014. There are both cost and revenue synergies. And so we see it as a very nice tuck-in acquisition. Enterprise, the story here is about product innovation, diversification and growth. Looking ahead, we've spun out aviation into a new business unit which we will start reporting from 2014. But looking back it's about these three factors; M2M leadership, the IsatPhone Pro and BGAN.
In M2M we've done a lot of product development. We've developed some very, very interesting strategic collaborations and channel development and there's early signs now that we're beginning to, that that will cascade into a step change in terminal sales and revenue growth.
The IsatPhone 2, a very strong revenue progression in 2013. The active user base is now 86,000 and we sold 28,000 units last year. The market is limited. Obviously it's quite a mature market, but we are taking market share in it very successfully. And the news coming up soon in just a matter of days is we're launching a new complementary handset and as you can see it is literally a pocket device and I think it will be a very welcome addition to the global handheld market.
In BGAN, it's about product diversification. We're working on different speeds, a new high speed variant went out at the end of last year which has been eagerly adopted by the media and will be eagerly adopted by the government customers and we're looking at different form factors all the way down to an extremely small cut down variant for the machine to machine market but also something that will work with your smartphone to satellite enable your smartphone and will do data rates that no other competitor can offer. There are very exciting new growth opportunities here as well.
Now turning to government, before I comment on our government business, I think it's a worth a moment or two to reflect on the market environment that proved so challenging in 2013. Where we stand today, there's no doubt that it remains challenging. The declines in our retail business we experienced in 2013 will annualize out into 2014 and although we expect things to bottom out during the year ahead, the market remains thin and we can't rule out further probably modest declines, even though we have had a slightly better start to the year than we'd planned for.
The optempo signs also point downwards with continued expected declines in revenues from Afghanistan and indeed we believe those revenues will be negligible by the end of the year ahead. And although we do have a U.S. federal budget this year which is a distinct improvement on 2013 that budget has not yet been flowed down into resources decisions. So we cannot yet say for sure what the marketplace looks like for new opportunities.
In the short term we expect commercial satcoms to be under pressure because of the end of the war budget and because the inflexibility in so much of the rest of the DoD's budget forces deeper cuts elsewhere including in commercial satcoms. But it's important to note that we do continue to believe that we're positioned well for the short to medium term with this important strategic customer base.
Why? Well, because the customers' connectivity needs continue to run way ahead of its own supply and its own supply is going to move in the opposite direction in the years to come and because those needs are utterly embedded and founded on core operating principles such as net-centric warfare and pervasive intelligence, surveillance and reconnaissance. There's no going back from that. And in that environment, our unique mobile global assets will deliver highly differentiated capabilities as well as enable us to have a highly efficient, agile and value-added commercial relationship with this customer just as those factors become of huge competitive significance.
GX of course delivers all those attributes in spades. You need coverage, capacity and capability tailored elegantly for government users in military Ka-band and offering extraordinary value for money. However, we are not just standing still waiting for things to improve. Rest assured we're grabbing the thing by the scruff of the neck and marching it forward.
We have a recovery strategy focused on defending and rebuilding our legacy programs, on diversifying our U.S. government customer base and on developing a slew of new products which are very exciting. The outlook remains excellent for GX, lots of customer interest. I talked about the trial earlier and in global government we can do more as well with the internationalization program, the tuck-in acquisition in Australia of TC Comms. This was a very, very strong, broad engagement with the ADF, the Australian Defense Forces. In fact we managed to grow global government revenues 9.3% last year in a truly attritional market showing what can be done with a bit of head start [ph].
Finally, aviation, this segment has been an extraordinary success in recent years with consistent double-digit growth across the government aviation business, commercial air transport and safety services. Truly a nose to tail success story and 2013 was no exception. You can see the metrics there. I won't dwell on them, you can read them afterwards. But SwiftBroadband goes from strength to strength and continues to perform across all aspects of commercial aviation. And GX is very, very well positioned I think for the future of airline in-flight connectivity particularly to passengers at the back of the plane and you'll see recently we had significant momentum, lots of news flow. I think the announcement of the Air China, that Air China had selected GX Aviation is a tremendous endorsement for Global Xpress. And that coverage, the capacity, the high quality service it delivers will challenge the regional service model and will position us at the forefront of a very exciting industry.
So in summary, having finished with something of a flourish in the fourth quarter of 2013, we've entered 2014 with confidence and momentum which feels good. We expect continued growth in our wholesale MSS revenue business which historically has driven 90% of our EBITDA. Yes, we face ongoing challenges in our U.S. government retail business, but we're mounting a concerted effort on that front and we believe we're well placed for recovery in the medium term with L-band innovation and of course the launch of GX. We believe that our recent M&A, ironically both on the sell and the buy side will deliver improved growth through the synchronicity of the Globe deal and the creation of a strategic relationship with RigNet in an important new vertical, energy.
Most of all, we're very excited that the commercial launch of GX is just weeks away now. We'll be recognizing revenues from Q3 this year and we're in excellent shape to complete GX global coverage by the end of the year. It's a truly extraordinary achievement from so many colleagues and partners that we stand on the threshold of that important moment.
On the back of all that, as Andy, said we're comfortable in reiterating our medium-term target guidance of 8% to 12% wholesale revenue growth over the 2014 to 2016 period. As we said late last year of course because 2014 is a transitional year, that growth trajectory is back-end loaded. But it nonetheless represents a tremendous transformation of the prospects for Inmarsat as a highly successful global business.
In short we have a clear strategy, a strong core business providing the fuel for reinvention and a very exciting future ahead with Global Xpress. Thank you. And I think we're going, straight to Q&A.
Nick Lyall – UBS
It's Nick from UBS. Could I ask two maybe on the, firstly, on the U.S. government orders. You mentioned the tests in the second quarter of this year. In terms of timing, when roughly would you expect to hear whether the test was successful and whether they're going to be making orders? What sort of timing should we expect for any bigger announcements on the big Department of Defense orders coming through if any? And is that also affected by current budget cuts because the timing unfortunately seems to coincide with a quite difficult period obviously? So would that extend in order in period?
And the second one, just a chance on LightSquared, as usual. But we have another date for the diary on March 17 with Judge Chapman potentially going to approve the latest plan. I mean is there any possibility in your thinking of resuming the payments any time soon or is this just again looking from the sidelines and fingers crossed?
Okay. Well, answering the first one, we have a deliberate strategy with the U.S. government to get them to understand the capabilities of Global Xpress which has been tailored very much for them including a designated military Ka-band capacity that can only be used by coalition forces and turn that into buying demand. And that is an incremental approach. They have to try to buy.
Once they try it and they've tried it and we've got extensive trials all set up, ready to go all the way through from commercial GX to military GX to a product that we do through Segovia called (indiscernible) which is a highly, highly secure capability that will take a couple of months. That will start April/May. That's the sort of time period of that.
On the back of that, yes, we're looking to cascade that thought leadership into the DoD, into some early adopters. But then the next phase will be to drive buying capabilities. The DoD can't just get out their checkbook willy-nilly and start writing checks. They have to have an environment, a procurement capability, a line item, a budget line item to be able to buy. And that next stage will be to work with the government to develop that.
So I don't think you'll see evidence of what I think is a very eager customer until very much the latter part of this year. But obviously we'll keep the market abreast of significant developments.
On LightSquared, I don't think, I mean in essence our strategy on LightSquared has not changed. There is a cooperation agreement out there which can be adopted by anybody who decides to buy LightSquared out of bankruptcy. So that's always the bid if you like. Bidders may ask for something different. That will depend on their business case. That will depend on their strategy about liberating value from the spectrum.
It's very, very hard to see that someone will want to spend the thick end of $3 billion on another go at monetizing this L-Band ATC opportunity without working with us and through us because we have the key pieces of the spectrum that aligns with LightSquared is to create contiguous blocks that are more valuable. And of course we sit alongside them with a large MSS business with very important customers in North America that needs to be worked with and people can't deploy that spectrum terrestrially without except on a non-interference basis with the rest of our business.
So we're very happy to continue to work with LightSquared under the current arrangement. You'll have noted that the current plan on the table the judge is considering which looks very unlikely to be the last word by the way I suspect has in it, in the dip [ph] funding the payment of $5 million to crystallize an option to keep our cooperation agreement alive. And it also contains a condition that the new buyers will have to come to an arrangement with us that's satisfactory to the lenders, which suggests that at the right time there will be a vigorous debate with us about the nature of our continued collaboration with LightSquared.
I think that's all good and we'll be entirely logical in the way we will engage. But we want to make sure we're engaging with the right people because you don't want to do this multiple times. You want to engage with the winner and move forward with that.
We certainly don't sit on the sidelines with our fingers crossed. We remain fully engaged. But we are in no way dependent on anything that comes from that.
Giles Thorne – Jefferies
Yes, it's Giles from Jefferies. I had three questions please. I wanted to start on the U.S. government and now we've seen in the news that the head of the U.S. Air Force Space Command is looking at a series of studies fundamentally recast how and where the U.S. DoD procures capacity. Clearly there are some positive implications for the sector especially if you factor in General Shelton's public comments that he doesn't see a reason why the U.S. government needs its own capacity and should just turn it over to commercial operators certainly in the wide band piece of what they're trying to do.
Could I just invite you to comment on these most recent statements and perhaps remind us of the complementarity between GX and WGS? And perhaps also stick your neck on the line and say whether you think those four WGS satellites that are due to be launched or procured and launched will now get shelved.
And the second question was turning to maritime, we've seen Thuraya be a lot of more vocal earlier in this year on how they're going to pick up competition in maritime with their first dedicated maritime product, the Orion IP. They're highlighting price competition or price competitiveness and again it's FleetBroadband. It'd be interesting to hear if you've seen any of that competition coming through and what the outlook is for this year.
And lastly I was just prompted again looking at the CapEx slide to wonder given that the industry is fairly excited about the positive implications of increased launch competition from SpaceX and the potential of electrical propulsion to in combination bring down the cost of launches, it seems to me that the Inmarsat-6s will be a perfect candidate for an electric propulsion because they are replacement capacity. I mean what's factored into your thinking and can we perhaps expect maybe those numbers could come down?
Okay, Andy, do you want to have a crack at that, the U.S. government?
On the U.S. government, we bought these satellites from Boeing. Boeing has made a significant take or break method to it. They look an awful lot like WGS satellites. In fact, the big difference is that they're global coverage and one would argue, fill in the gaps.
While it's clear their spending has grown in many areas, they continue to modernize and they've said they're standardizing around KA technology going forward. So without getting too specific, I would say we feel very well positioned to benefit from the change in policy relative to commercial operators versus their own build and I think our timing is quite good. We remain very close to that customer so that we can benefit from that.
And one would say if you were dreaming up a plan even though the budget cuts have hit us and hit everybody else, to be launching a new constellation that looks like ours does is kind of a perfect fit. So I think we should remain quite confident on where we can take this. But on the short term in terms of L-Band business and other business everybody will continue to suffer.
The only thing I'd just note is this is unique. When they talk about their procurement policy on satellites usually it's at fixed points and when they have these bids that go out around procurement they're buying transponders that are fixed point. Ours isn't that. Ours is a global coverage in channels and there isn't a similar process underway for that. So I think we've carved out a somewhat unique position and we'll see how that plays out.
I think very quickly, on the second two questions, Giles, maritime I would say no, we have not seen any kind of major competitive changes from the Thuraya launch. But we'll watch that with great interest. A statement of the obvious, the premium maritime customers want a global service, not a regional one. That plays to our strengths obviously. They want high levels of throughput that are very dependable. FleetBroadband is the best in class at that and they want a pathway to GX at the very top end and so I think we're well positioned.
They also need safety services as well, most of the maritime industry and obviously we're the only game in town for safety services. So that's not to say there isn't a market for low end regional maritime services and we take that market seriously as you can tell with people who want 50 and FleetOne that will launch on a global basis as well. So I think we're well positioned at the top end and the bottom end for competitive incursion.
CapEx, I thought that was going to be one for you Simon, but I think actually what you're asking is a technology question. And the short answer is you're absolutely right. We do want to foster more competition for launches because it's going to bring prices down across the board. I think what SpaceX are doing is extremely encouraging both in terms of more competition and the rigor and professionalism with which they're going into that business. We're very, very impressed by that.
Others were there before us, other who can afford to be thought leaders like SPF because they've got the diversity of satellites. No way we'd have ever done that. We've gone with Falcon Heavy for example, for Inmarsat-5 because we don't have 50 satellites to replace or something like that. You make a good point about Inmarsat-6. That is something where we could be little bit more daring and where electric propulsion would be a very good idea because we can be more sanguine about the exact dates on which the Inmarsat-6 satellites deploy.
And I think you will see us using those technologies, diversifying our launch providers to encourage more innovation and cost competition and using electric propulsion either to increase the payload size on the satellite or to reduce the cost of the satellite as well. So those are very welcome innovations.
No. Absolutely no, it was a three satellite deal and that was it.
Terence Tsui – Morgan Stanley
It's Terence from Morgan Stanley. I've got one operational question and two quick financial ones. Just on the operational side, in your opening remarks you mentioned that passenger connectivity on aviation is picking up and being quite material. Maybe you can just remind us on the revenues to date from this and how this is growing? And secondly, on the financials following on a little bit from Giles' question on CapEx. Under what conditions do you think that you can bring forward the initial investment in the I-6s? Are you flexible for instance in beginning your investment in 2015 as opposed to 2016 which you have in your CapEx profile chart?
And then finally, just again on the financials. Maybe Simon you can remind us on how the P&L depreciation and the cash and P&L interest charges move as the F2 and the F3 go up in 2014? Thank you.
Okay, just in terms of the outlook for capital expenditure for I-6, at the moment obviously we don't have a contract to purchase those satellites. And there's a significant design phase that would occur before an order could be placed as well. So for the moment I think that we're getting to the point where it will be actually quite difficult to bring forward much beyond, much ahead of 2020 the launches.
I'm sorry why would we want to do that? We wouldn't want to bring it forward, would we? We'd want to push it out.
Terence Tsui – Morgan Stanley
(Technical Difficulty). Well, if these opportunities were, even exceeded some of your expectations. I'm just looking at whether there's a risk that CapEx in 2015 won't come down by the $300 million figure you've mentioned.
From the perspective of Inmarsat-6 I'm very happy where Inmarsat-6 is located. If anything, we have the opportunity to think about pushing it off a little bit. But the combination of Inmarsat-5 and Inmarsat-4 remember actually favors Inmarsat-4. It gives back capacity and spectrum for L-Band growth because a lot of the very heavy end of our business will migrate to GX or will grow in GX from the beginning.
So one of the things we've said about Inmarsat-5 is it extends the commercial life of the Inmarsat-4s and that's why we can be sanguine about pushing out Inmarsat-6 to the end of the decade which is significantly later than it would have been four years ago without GX. So I think Terence we do feel sanguine about that.
And with a full redundancy there as well the chances of us needing more capacity in the existing I-4 network is very low. And we have coverage options of potentially using all the four satellites as well. So at the moment it's obviously a four for three configuration. It could be a fourth one for people looking for various…
And remember Alphasat brings more spectrum reuse with more beams and it's a very cutting edge digital process. And it brings more spectrum in the form of the extended L-Band which is 14 megahertz, seven by seven of new virgin spectrum that nobody else can use apart from us for capacity building in EMEA. So it's a good addition.
So then just on the depreciation charges. For the charge for this year of about $230 million there was an adjustment in the year worth about $13 million, $14 million. So I would normalize that charge by adding that back. That gives you around a normalized charge going into 2014 of $240 million to $250 million.
Now in 2014 we will have a full year of contribution from Alphasat. So that satellite is being depreciated over 15 years, so that adds about $25 million in 2014 and a half a year for the first EX [ph] satellite which begins operational life around the middle of the year, so we get a half year depreciation from that which we'd say would be another $12.5 million. And then I would add a little bit of capitalized interest because we start to depreciate the accrued capitalized interest on those satellites as well and from other bits and pieces. And I would say that adds up to a 2014 figure of between $290 million and $300 million for depreciation. Obviously picking up again in 2015 with the depreciation of the follow-on satellites.
On the interest charge we showed you a charge earlier in the day of $49 million. Capitalized interest on that was $79 million. So the underlying interests for the rates for 2013 was $128 million.
Now it's a bit complicated in 2014 because on the one hand you continue to capitalize interest on the satellites you're still building but you stop the capitalization on the satellites that you've launched. So it's a mix issue. I could walk you through that in more detail but I think that the shortcut answer here is I would expect P&L interest to be between $70 million and $75 million for 2014. And that would compare to cash [ph] interest charge of around $100 million pretty much in line, just to pick up from where we were in 2013.
Carl Murdock-Smith – JP Morgan Cazenove
Hi, Carl Murdock-Smith from JP Morgan Cazenove. Firstly, just on the inter-company reporting changes. I was wondering if you could just provide us with a bit more color on that inter-company sale from Global to Solutions in December. What exactly were those assets and what was the logic for that sale? And then secondly, I was just wondering if you could help us with any numbers with regards to the potential revenue impact in Q1 from those January fleet increases. Thank you.
So just on the first one, so a little bit of a technical issue. When we acquired Stratos Global Corporation they ran a ground station for us in the Netherlands and we then built the ground station for Inmarsat-4s on the same site and leased the contract to them to operate that ground facility. But it was essentially sitting in two legal entities.
We wanted to reduce the number of legal entities, reduce our costs in the Netherlands for reporting and employee costs and what have you, so we did a consolidation. We had to decide whether we were going to put the network assets in Solutions or we were going to put them in Global. And we ended up putting them in Solutions because that's where the contracts had originally been. So it's an efficiency matter only. But it does create a movement, an inter-company movement in the result.
And on a proforma basis had we done that at the beginning of January 2013, the results you would have seen today would have had $15 million of EBITDA move out of Global and into Solutions. But the overall number wouldn't have changed at all and because this is a steady state operation I think it will be basically the same number in 2015. So I think consensus for Global should come by $15 million and consensus for Solutions rise by $15 million and otherwise there should be no change. So that's really the extent of it.
Okay, in terms of Fleet pricing [ph] it's too early to be able to assess what the revenue impact is there. It's really a tactical move to as part of our general, one of the measures, levers we can pull on to start migrating people from Fleet either into FleetBroadband or increasingly now straight to GX. So as we have our phase out customers can either sit there, decide to pay the extra and wait or they can move to the new packages and essentially optimize their way out of price rises in which case there's a natural impact you will see that will just continue. We've done the same with Inmarsat-3 in recent years so you've seen the way that works.
Nick Brown – Goldman Sachs
Nick Brown at Goldman Sachs. Two questions please. Firstly, with the growth of free cash flow I think next year would you look at any further acquisition opportunities or should we expect all the additional cash proceeds to pay down debt? And secondly, roughly how much of your GX revenue would be now from the U.S. government in your five year plan?
Okay, I'm sure that's not a leading question at all. The answer is that we have said that historically that we're happy with leverage ratios in the 2.5 to 3 times level, net debt to EBITDA. But we have to look ahead at a business that's significantly bigger, going to be significantly bigger and significantly more diversified than has previously been the case. So we're going to look at that objectively as we move forward. So I don't want to signal that we're going to aim at any particular place on sustainable leverage ratios going forward.
We obviously continue to look at M&A all the time. But it has to be, we're not interested in being bigger, we're interested in being better. And I think you'll see from our M&A in the past that we've generally bought things that have a strategic impact on the business. Of course we'd rule nothing out and we have the firepower to do that. But it's not high in our plans right now.
And what you haven't said is also there are other ways to keep growing more innovation. We might be blessed by the need for more capacity for the DX plan that’s knocking the ball out of the park and shareholders expect us to follow our money and make the most of thought leadership. So those are things that we watch and wait. In the absence of that or alongside that, we have the ability of course to improve returns, cash returns to shareholders through increasing the dividend and through share buyback which as Andy said we've done in the past as well when we moved into a CapEx less intensive period.
So all of those things are in our toolbox to work with. And we'll have a rich dialogue with shareholders and investors moving forward once we've got through the launch period of GX and once we've actually start to hit our straps in terms of revenues.
In terms of breaking down those GX revenues, we're not going to do that, at least not at this stage. I think it will be highly misleading, very likely to be wrong and would make it more difficult for us to be opportunistic in the way that we grow GX. Just like we said we're not going to give the breakdown between the move out of L into and KA and the intrinsic growth in KA as well. We're here to manage the so-called cannibalization and we're here to make sure that GX makes the most of its opportunities.
But I will say that we think that the U.S. government market will be a very significant contributor to the GX growth over the next ten years. You've seen the metrics of the existing VSAT markets for $2 billion plus that will grow to $3 billion by the way by 2019. And you can see where government fits in that. But what I will say of course is some markets we'll scratch the surface off. In other markets we'll come to be a very, very significant player.
Paul Sidney – Credit Suisse
It's Paul Sidney, Credit Suisse. Just a couple of questions please. On XpressLink, are you seeing XpressLink still taking the majority of net adds in IT, Broadband in maritime. Maybe you can give us an estimate of what you think XpressLink too in terms of net adds in 2013 please.
And just the second question, on GX is there anything from your competitors that you currently see over the next 5 tom 10 years that can realistically compete with GX? Thank you.
I'll let Andy answer the second question because it's a good broad strategic one. On XpressLink I think we, you know it's a rough rule of thumb when you're in the market looking around and seeing what your key win is and so on. I would say that we're still winning 40% to 50% of market share in the maritime VSAT new opportunities which is pretty much the metric we came out with a year ago. If anything it's probably picked up because I think XpressLink has proven itself as a good workhorse for the industry and so it's gone from unproven to proven. And I think that's a very, very welcome position.
And it is still almost entirely new business. In other words it's not conversion from FleetBroadband into XpressLink en route to GX. And that's not a surprise now because I think in the tail end of 2013 if you're thinking of moving up market and you're an Inmarsat customer, you'd probably wait for GX. So this is broadening our market with every sale.
Just give you the figures on that, so we added 460 XpressLinks during the year and our total installed VSAT base went up by 300 units. So effectively what that tells you is there was churn of around 160 units from existing VSAT to XpressLink and I think that's terrifically positive that people are committing to a 5 or 6 year deal where they're getting three years of GX locked in. So there's real appetite for people who are not just on our network with VSAT today but for them to move, upgrade ahead of the GX being available.
Which is what we promised investors we'd do when we bought Ship Equip of course. We'd actually begin the process of migrating those installations to GX and XpressLink is one of the ways of doing that.
Sure, yes. On your second question what's the sort of competitive response to GX.
Paul Sidney – Credit Suisse
Yes is there anything really that you see out there in the industry that can realistically compete with what you have with GX?
Well, I mean if I put it in very simple terms no one has ordered a global fleet of Ka-band or Ku-band satellites. Now does that mean there's no competitive response? Absolutely not. As far as the low end from the MSS players like the Global Sat, they really have no answer to higher speed. They're locked in the voice and low speed data. There's nothing they can do technology wise or spectrum wise for example. So now you're talking about being traditional FSS players.
And I guess you'd argue they kind of fall into two camps. One is co-op arrangements and that like Viasat trying to either work with people to buy capacity to create a global footprint or cooperating with other satellite owners and operators to try to create a global footprint. And there's patches of that that give broader coverage, but it's still a patchwork. You could argue that in Europe, North Atlantic and North America it's looking better. But it's pretty thin in terms of the amount of capacity that's actually there to support it. So the Viasat co-op model's got a long way to go before it's competitive.
The other one is Intelsat trying to do it through this Epic. I was just looking last night at their sort of an investor conference they held or one of those conferences and what they were saying about this. I mean Epic has got a couple of years to go before it's in place. They've basically taken a piece of the capacity and are repurposing it. It's still a patchwork. It doesn't have full geographic coverage and if that's the answer then there's not much there. Their response to us is well, we don't have enough capacity. I hope that's true, and to support everybody.
And I think the response we're getting out of the market says it all and that is there's more and more demand for ubiquitous coverage with a VSAT like system and we're going to be the first ones there with it. Now whether that advantage lasts three years, five years, seven or eight years I don't know. I don't think it will last a decade. It will take a while for these fill-ins to occur. But I think if we have a five year run, we're in pretty good shape to take a very healthy share of what is a growing market.
Yes, what people forget is that with Global Xpress we built a secondary payloads, (indiscernible) beam which can channelize up to 1.6 gigahertz of capacity per beam in a very focused way. And although it's absolutely true that we play to our strengths by creating a global network where we've taken the power of a high throughput satellite and put it over a third of the globe and arguably to say that building for coverage but you're shallow.
There's enough depth there to make heavy inroads into some of these new regional fixed markets and if we're successful while we wait to bring more capacity in, if that's what's needed and we justify it by a business case, we'll put a spot beam over the area and we can go every bit as deep, if not deeper than anything out there and certainly deeper than FX [ph]. And that's really exciting because it allows us to bridge ourselves into markets where we wouldn't otherwise have a right to exist. So it's quite a sophisticated approach.
Thank you very much indeed for coming today. That will conclude the meeting. Thank you very much.
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