Inmarsat Plc. (OTCPK:IMASF) Q2 2014 Earnings Conference Call August 5, 2014 3:00 AM ET
Simon Ailes – Senior Director, Corporate Finance and IR
Rupert Pearce – CEO
Tony Bates – CFO
Carl Murdock-Smith – JPMorgan
Paul Sidney – Credit Suisse
Giles Thorne – Jefferies
Robert Berg – Berenberg
Simon Weeden – Citigroup
Thank you. Good morning and welcome to our second quarter 2014 results call. The call today will be led by Rupert Pearce, our Chief Executive Officer, and Tony Bates, our Chief Financial Officer. Rupert and Tony will discuss the results announced today before inviting your questions.
Before we start, a reminder that today’s discussion is subject to our Safe Harbor statement that you can find included within our press release. Rupert will now begin today’s call.
Good morning, Simon. Good morning everyone and welcome to today’s call. The results announced today speak to a continuing healthy outlook for our L-band operations and improvements in other business lines. More importantly perhaps, is the fact that our strength Global Xpress or GX, formally began commercial operations on a regional basis on the 1st of July 2014. The combination of a very successful testing program and let’s not forget, over four years of development work. Very exciting to now be providing live commercial GX services, booking revenues and generating further customer interest. This is the most encouraging start for GX and bodes well for the start Global GX services in 2015.
We also found time in Q2 to announce a major strategic initiative to offer in-flight passenger connectivity services across the European Union, to refinance $1 billion of debt at historic low interest rates and finally of course to welcome Tony Bates as our new CFO. With these important events and milestones behind us, we enter the second half of the year with confidence. And we therefore, lifted our interim dividend by 5%. This is our ninth straight year of dividend increases, every year since we became a public company back in 2005.
So, let’s now turn to look at the results for the quarter in more detail. Starting with our maritime sector, revenues for the second quarter were up 1.4% at $113 million. The underlying growth is really much stronger because the second quarter last year was boosted by some one-time maritime revenues related to naval exercises in the period. Indeed, the sequential growth from the first quarter of almost 3% is a better indicator of the solid growth we’re seeing in our maritime business. The growth in our maritime business is driven by the continuing pace of subscriber additions for FleetBroadband, with over 1800 net ads in the second quarter. The growth rate consistent with or ahead of the past several quarters.
This continued take of the FleetBroadband, is being fueled by multiple drivers, by migration of existing customers are upgrading their Inmarsat service instead of choosing a competitive service but the expansion of our adjustable market was smaller hitherto unconnected vessels buying Inmarsat for the first time in the form of our innovative FB150 or our recently launched Fleet One service and finally by package migration where existing FleetBroadband, customers upgrade their service package to meet their growing data needs, driving ARPU and revenue quality for us as well as improved value per megabyte for them. These factors contributed to a record FleetBroadband ARPU in the second quarter, a strong indicator of our continued momentum in L-band maritime services.
In terms of maritime development, we launched our new Fleet One service in May, a variant of the FleetBroadband family designed to appeal to smaller vessels in the fishing and leisure markets with a seasonal or consumer needs. Fleet One is further evidence that we continue to innovate around our equipment and service offerings to expand our adjustable maritime market leveraging powerfully the capabilities with the established Inmarsat for satellite fleets. While not contributing to wholesale MSS revenues reported at Inmarsat Global, it was also very strong quarter for our XpressLink service.
During the second quarter, we added a 136 XpressLink subscribers in line with additions achieved in Q1. We ended the second quarter with an installed VSAT base of over 1800 ships, generating the revenue run rate in excess of 80 million a year, all of which will migrate to Global Xpress over time in a process which will begin once GX is globally available. Turning to the land mobile sector, headline revenues were down 4% but in fact, broadly flat when eliminating the impact of Afghanistan and event revenues. The incremental event contribution year-over-year was approximately 1 million. Within the land sector, we’re seeing growths from our handheld satellite phone IsatPhone, and from the progress we’re now making in the M2M market.
During the quarter, we added over 5000 IsatPhone subscribers and that compares to 2000 net adds in Q1. This improvement is in partly to the successful launch in March of our new IsatPhone 2 model which features significant design and functionality improvements. This is another example of our determination to innovate and enhance our L-band service offerings. The satellite phone markets remains an important opportunity for us to win market share and to leverage our established Inmarsat 4 global satellite fleet and an improved product will help us to achieve this. In our M2M business, we added over 5000 terminals in the quarter and we’re seeing strong revenue growth. We also signed a significant M2M lease contract at the end of Q1. The contribution from this contract started late in the quarter and the financial benefit from this contract will be more pronounced in the second half of the year.
In addition, due to the nature of this particular contract, we do not record the number of terminals for the 5000 terminals we added in the quarter with some other M2M growth only and the number would have been materially bigger, if we were yet to include terminals under this new contracts. BGAN terminals in the quarter reduced by about 5000 units driven mainly by terminals deactivated following their use for an election event in the Philippines in 2013. Those of you following us for sometime, you’ll be familiar with this type of change as BGAN terminals are often deployed in large numbers for one-off event such as elections, incentive taking. BGAN revenues in the quarter were not impacted by the reduction.
Finally, for our land mobile sector in June, we launched IsatHub, a device that will allow smartphones to stay connected when beyond the reach of terrestrial network. The simple to use, low cost device is essentially a portable Wi-Fi broadband hotspot, enabled by our Inmarsat-4 satellites. This device will not be anyway of interest to existing users but will appeal to potentially much wider market and we had a lot of interest in the lead up to the launch. In aviation, revenues were up against strongly with 15% growth. This performance continues to be driven by growth in SwiftBroadband, with continuing takeouts from business jets and to in-flight passenger connectivity services.
During the quarter we added over 300 SwiftBroadband terminals and achieved an ARPU well up on Q2 last year. During the second quarter and following the tragic loss of MH-370, we announced proposals to provide free of charge enhanced position reporting for the commercial air transport market, leveraging our base of more than 11,000 Classic Aero terminals already installed on wide body aircraft and comprising the goal standard for oceanic safety communications by satellite. In addition to this free global airline tracking service, we also announced proposals to offer on a commercial basis both in enhanced position reporting facility which will support reduced in-flight aircraft separation a potential great value to commercial airlines and the black box in the cloud service under which on the back of certain defined trigger events such as non-approved cost aviation, historic and real-time flight data recorder and cockpit voice recorder information can be streamed off in aircraft to defined aviation safety recipients, potentially vastly improving situational awareness and the ability to act upon such awareness in emergency situations.
These proposals are designed to support the efforts of the International Civil Aviation Organization or ICAO and other international safety bodies to continue their review and enhance globally available aviation safety services. All service innovation has received a warm reception around the world and forms part of an ongoing dialogue on the next steps for global air safety. Inmarsat remains very committed to serve the safety and connectivity needs of the global aviation industry. Now switch from the wholesale business to the Inmarsat Solutions business. Inmarsat MSS revenues at a retail level grew by 8% year-over-year that this largely reflects the base of Inmarsat customers coming across under our acquisition of Globe Wireless in January this year. Nonetheless, underlying trends were positive with growth in maritime and from the existing leasing business that moved to Inmarsat Solutions from another Inmarsat distributor. Our broadband and other MSS revenues were down 15%, which is mainly driven by continued lower margins and overall contraction in our US government business the commodity Ku-band managed solutions and equipment sales.
Although the revenues in this category were also impacted by the disposal of our retail energy business to RigNet and by the acquisition of Globe Wireless, these were largely offsetting in a quarter with a small net positive benefit to revenue. The other key positive offset was the growth in maritime VSAT revenues from XpressLink that I discussed earlier. So, turning now to GX, it was the quarter of highs and lows. On the one hand, the successful commercial service introduction of GX on the 1st of July was a great moment for all of our stakeholders. While on the other hand, the further launch delay for the F2 and F3 spacecraft as a result of another proton launch failure in May was at low given the level of readiness and confidence we have in GX.
The first commercial GX traffic was passed on July 1st with the US government at the end customer. While the rest of the Inmarsat team the first I knew of this event was a photograph sent to me by Peter Hadinger, who heads our US government business unit. The photo showed a computer screen with some rather innocuous lines across it and the message from Peter explained everything. It said, you’re looking at a feet of the first commercial GX traffic, congratulation. GX is here. After over four years of development, we are hugely indebted to the skill and dedication of so many members and staff as well as our many satellites and network partners in making GX a reality. The initial contributions from our early US government customers comprise multimillion dollar annual commitments and these initial and important successes speak to the potential for GX and the likely strong take up by US government customers.
Of course, the key question is, when will be we’ll be able to launch next Inmarsat 5s and make GX a global service. Today, we’re still waiting on the failure review board’s findings to learn more about the May Proton launch failure which drives decision-making around the timing of the Proton Rockets return to flight which will in turn dictate when our end launches can be scheduled. Based on what we know today, we expect to complete our two launches in a timeframe which we’re committed to launch GX services on a global basis by the end of the first half of next year. That means a delay of several months relative to our previous plan which will naturally mean an adverse impact on the likely level of GX revenues in 2015. But, it is important to stress that with the delay being just a few months, our medium terms expectations to take up a GX services and the overall revenue opportunity remain unchanged.
So, this delay is really just about shifting the revenue ramp a quarter or two to the right and we remain absolutely on course to achieve our target of 500 million of GX revenues within five years from the date of global service launch. The second question we need to address on the planned Proton launches is the impact of EU and US economic sanctions against Russia following geopolitical tension and fighting in the Ukraine. We’ve carefully examined the changing picture on sanctions and continue to see no reason why our launches cannot currently go ahead as planned. Of course, the picture has changed and may change again. So, we can only monitor the situation closely as it develops and plan accordingly. However, for the moment, I simply reiterate our view that we are not currently impacted.
In the meantime, we’ve contracted with SpaceX for up to three missions in the way that will provide flexibility and backup to our existing plans. The SpaceX deal provides us with a launch for Europasat, our new our new S-band payload on a shared satellite platform a launch vehicle for our fourth Inmarsat in mid-2006 in the event it is required, either as a replacement should F2 0r F3 suffer a launch failure, or as a fourth satellite with an incremental business case. And finally, the deal also provides us with an option for a further launch with which we could use for Inmarsat-5 F3 for example in the event that any further proton delays extend beyond the end of April 2015, or for a subsequent satellite launch. So our access to space has been enhanced. The other important development in the quarter was of course our announcement in early June of a new investment in an EU-wide hybrid satellite terrestrial communications network using our existing S-band license to provide in-flight passenger connectivity services as well as other complementary satellite communications services.
While aviation passenger connectivity remains a very substantial opportunity for GX on a global basis particularly serving oceanic air routes and areas where the density of air traffic routes does not justify the roll-out of air-to-ground networks, in the right market environment but densely trafficked air routes over land, e.g. currently the United States and Europe as the ground systems nonetheless transform the economics and service capabilities for aviation passengers in ways of satellite technology kind of compete with. In this regard, our S-band license is a unique asset in allowing us to operate combined terrestrial and satellite services across the 28 EU member states on a seamless basis to support highly innovative, unique aviation passenger connectivity services to millions of European consumers transiting Europe’s highly congested air space.
That is still, these new S-band hybrid network capabilities will be integrated partly with our global GX aviation passenger connectivity offerings enabling each technology, satellite and hybrid to complement the other across the entire aviation connectivity market opportunity and globalizing an ultra-high quality and customer experience in ways now demanded by many airlines and their passengers. Taken together, these technologies therefore, should put place Inmarsat at the forefront of this exciting growth opportunity. Indeed, we believe that in light of the fast pace of development in the US with AT&T now committed to roll out a network alongside the existing Gogo service, Europe is a very attractive market opportunity. Passengers in the US are already showing a clear preference to fly on a connected aircraft and it is now important that Europe is not left behind in offering a service that is rapidly becoming the norm and an enabler of business.
For the satellite element of the network announced and under construction with our partner, Thales Alenia Space, our aviation team are now focused on securing satellite and terrestrial licenses at the member state level as well as developing our channel to market in a form of distribution and solutions partners and engagement with and commitments from airlines that will allow us to roll out our hybrid satellite terrestrial program and begin services in earnest. This program is proceeding well with applications submitted in 25 member states and 10 satellite services license already secured. On the customer side, in addition to our Memorandum of Understanding with British Airways to be launch customer, talks with another major airline are reaching an advanced stage and we have an early stage dialog established with several others. The appetite of this service is clearly that. We’ve tried to host an Investor Day in late September, which will provide an opportunity to recap and update the whole S-band investment plan in more detail. This remains a very exciting opportunity for the company offering the chance to not only generates an attractive return on investment within itself but also to complement our established GX aviation business case, such that each investment is strengthened and enhanced by the other. As such, we see our S-band investment that’s being both strategic and synergistic.
So, to conclude, the overall trading environment for our services remains positive across all our business lines except for our US government business where it’s previously stated, trading remains difficult in light of customer budget pressures and other medium term factors. This is fully anticipated and it is well within the scope of our previous commentary but nonetheless, offsets the consistently strong growth we have in other areas of our business. Overall, we’re confident in our prospects particularly for continued growth in our L-band MSS revenues. The delay we now expect in relation to our Inmarsat-5 satellites will of course delay the deployment of GX services on a global basis. It looks at the moment like we’ll be delayed some six months in the initial ramp up of global GX services. Not a material delay in a broader scheme of things but in the short term that will actually reduce the amount of GX revenue we can expect in 2015 and analysts and investors will need to consider this in their forecasts.
Nonetheless, it’s important to just state that we continue to believe that over the three-year period 2014 to 16 which we’re only six months into at the moment, we will achieve growth in our wholesale MSS revenues within the 8% to 12% target range that we have previously provided guidance. I hope you’ll agree with me that to achieve such an outcome, despite GX launch delays that are beyond our control will demonstrate the strength and diversity of our business as well as the intrinsic quality of the Global Xpress offering.
That completes my remarks. So, I’ll now hand over to Tony, to take us through the financial review.
Thank you, Rupert and good morning everybody. I will focus my comments on the Inmarsat Group Limited results for the second quarter. Inmarsat PLC has also released interim results today and both reports can be found on the Investor Relations section of our website. Let me start with the revenue line. Total revenue for the Group was down 6% or $19 million reflecting the modest growth in Inmarsat Global segments and the decline in the Solutions business. Rupert has already discussed the key revenue drivers so, I will only add two further comments.
First, in our Inmarsat Global business, the performance needs to be seen in the context of a very strong Q2 of last year but Q2 was the highest revenue quarter for the year boosted by some non-recurring revenues. Secondly, following the decision by LightSquared to restart phase 2 of the cooperation agreement we were expecting a payments in relation to the second quarter of $9.1 million. This payment was not received and has not been recognized as revenue in the quarter. Discussion with LightSquared continue to emerge – sorry discussions with whole LightSquared to emerge from bankruptcy are ongoing but there is not further visibility on payments from LightSquared at this time. Group cost for Q2 were down 3.2% or $4.9 million year-over-year. This reduction was primarily the result of contraction of our US government business reflected in lower cost of sales but also couple with direct action taken during 2013 to reduce the cost base particularly in terms of headcount
Within the Inmarsat Global segment, you will see that we are reporting headline cost growth of 18% or $10.4 million. This is however not a course for concern. There was $3 million growth in employee costs as we have recruited to support GX, with head count raising from 2629 from 597 a year ago. The remaining $7 million of the increase is due to transfers between the segments and some one-off items. More specifically, as we’ve previously discussed, certain assets were transferred to the Inmarsat Solutions segment and this gave raise to most of the $4 million increase in network and satellite operations costs. This change eliminates on consolidation and had no impact on the cost of the Group as a whole.
The movement in other operating costs contained a $2 million FX translation item and higher equipment cost of approximately $1 million following the release of the new IsatPhone handset at the end of March. In the second half of the year, there will be some cost growth given the start of GX commercial services, in particular you will see more of the ground infrastructure costs being expensed rather than being capitalized. This has been discussed in the past, so I would expect the increase to already be within most analysts models. Moving down the income statement, depreciation and amortization appear to be well up on last year, but this was due to a large credit depreciation in the prior year. The charge for Q2 this year was expected to be in line with Q1. However, this charge will step up again in Q3 due to depreciation of the first Inmarsat-5 satellite.
Finance costs are up in Q2 reflecting $35 million of one-off costs in relation with the bond refinancing that we completed in May. The underlining finance expense was a combination of increased debt due to the capital programs and reduced capitalized interest related to our Alphasat satellite. The Inmarsat PLC interest charge for the full year including interest not reported at the Inmarsat Group Limited level, remains in line with previous guidance of between $70 million and $75 million ignoring the one-time refinancing charge recorded in Q2.
The adjusted effective tax rate for the quarter was down year-on-year largely tracking the reduction in the main UK Corporation tax rate. You will also see that in the release, we have included a reminder that there are number of ongoing inquiries with the tax authorities. We have previously provided against these matters but the cash has not yet been paid over. If all of these items were to be settled that’s provided for, we estimate that the Group would face cash outflows of approximately $125 million by 2016 with around $80 million of that being in 2016. I should stress that these matters remain under discussion, and we therefore hope to achieve a better result. The Group does of course have more than adequate funding to meet the outflow if required.
That brings me on to liquidity. Inmarsat PLC ended the quarter with available liquidity of just over $1 billion in cash and undrawn debt facilities. This includes some additional funding raised with the recent bond issue where although the Group did not require additional funds, we decided to take advantage of low yield on a strong bond market. This new issue not only provides like-for-like interest savings over $20 million per annum but it also significantly extends the average maturity of our debt. This was therefore a very successful transaction for the company. Free cash flow in the quarter was positive before one-time finance charges and dividends mainly reflect the facing of CapEx. Cash CapEx for the full year 2014 is now expected to fall between $500 million and $550 million reflecting the new commitments for Europasat and SpaceX.
This final total does of course remain highly dependent upon the eventual satellite launch dates. The corresponding early view for 2015 is the cash CapEx in the range of $400 million to $450 million. We remain fully funded as to all the Group requirements for the foreseeable future. Finally, I wanted to highlight the short paragraph on page five of today’s release which flags our intention to revise our segmental reporting analysis with effect for the Q3 results. This change reflects the fact that we are now increasingly managing the business as marker verticals based on business units and supported by central services organization. To ensure a smooth transition period, the existing segmental analysis of Inmarsat Global and Inmarsat Solutions will continue to be provided a supplemental information for as long as necessary.
We will also provide restated historic information for the new segments. The new segments will be maritime, government, enterprise, aviation and a central services unit that will capture infrastructure development and corporate costs. Each new segment will provide revenue and operating profit breakdown in commentary and we planned to discuss these changes more fully at our Investor Day in September. At the same time, Inmarsat PLC will begin providing full quarterly reporting in line with that provided by Inmarsat Group Limited today, thereby eliminating the risk of confusion between the two sets of results and allowing us to focus on the PLC results going forward. We strongly believe that these changes are important to both properly reflect how Inmarsat is managed today and to provide enhanced information for the benefit of all stakeholders.
That’s now completes our remarks. So, I will hand over to the operator to open up the call to questions.
Thank you, sir. [Operator Instructions] So, we come to our first question for today and it’s Carl Murdock-Smith from JPMorgan.
Carl Murdock-Smith – JPMorgan
Good morning. Thank you. Two questions please. Firstly, just on the land segment, that’s proven much stronger than consensus was expecting for this quarter. I was wondering to what extent – you talked about the M2M contract just beginning to contribute at the end of that quarter. So I was wondering to what extent the beta’s due to that beginning to contribute, to what extent is volatility in global events. So if you could provide a bit more commentary on the global events portion in particular, that would be helpful. And then secondly, Tony now that you’ve got your feet slightly more into the board – under the desk, the satellite sector is one with a very wide range of gearing at different companies. I was just wondering what your initial thoughts were on Inmarsat’s level of gearing and the potential to return funds to shareholders over the medium term. Thank you.
Thank you Carl, appreciate the questions. Answering the question on the land segment, I think it’s actually strong performance across the number of different product suites. GSPS had a good quarter, the number of subscribers accelerated over Q1 quite materially. We think that we’re well positioned now with IsatPhone Pro 2 and ARPU is ticking off gradually in that area. BGAN also had a solid quarter. If you reverse out the Philippine asset which is just historic, we had a good net adds and ARPU – had a good performance in terms of ARPU as well. So, that provided the solidity. You’re right, there’s a lot of sectoral growth in M2M. But, leaving aside that lease contact, that came in on during the quarter, we did had more than 5000 subscribers to our devices to our M2M stable and such showing the robustness across all of the product offerings.
We spent a lot of effort improving the service offering with IDP and BGAN M2M and Isat M2M. We’ve now got a broad range of products. We’re playing into the rapidly maturing solutions in this environment and we’ve also added some very, very important new channel partners as well as well as our existing channel partners that are continuing to perform well. So, I think it’s much more of a broad based progress than just at least the lease. Leases material, it impacts the numbers we’ll continue to add to those numbers going forward, but I think it’s a broader set of areas of performance.
On the question about the capital structure and the ability to return more funds to shareholders, I think you’re all very familiar with the historic profile of the Group. But, also on the plant basis, going forward, you know that we have material growth expectations coming out at some of the initiatives that Rupert has been talking to about today whether it be GX or the aviation opportunities. So, in the medium term, clearly the revenue and the cash is generated from that will continue to rise. CapEx on the other hand, we’re going through the build phase of that activity, it’s falling away with peaking in as we’ve indicated today in ‘14 falling away in ‘15. There is further expenditure on the aviation project going forward from there but clearly those curves will continue to diverge and that should therefore provide the opportunity over that medium term, but now, we’re down to a year but clearly once we go beyond, 15 or perhaps 16 with that spread is starting to grow which gives us the opportunity to think about what is the most appropriate use of those funds whether it be to return funds to the equity owners pay down debts or maybe there are other opportunities to invest in. So, it’s really question you should ask me again in two years’ time.
Carl Murdock-Smith – JPMorgan
I’ll put it in the calendar. Thank you very much.
Our next question comes from Paul Sidney from Credit Suisse.
Paul Sidney – Credit Suisse
Thank you very much. Just three questions please. Firstly, following the commercial launch of GX are there any interesting data points on speed and performance, for example, that you can share with us that have come from end users? That would be very interesting, thank you. And the second question, in maritime I was very interested to hear that FleetBroadband customers are actually moving up the tiers and using more data. I was just wondering what is actually driving that, what kind of services are driving the increase in data usage among your existing FBB customers? And just thirdly, on the European hybrid aviation network, following your discussions with airlines, just wondering if you had any further thoughts on what would work best in terms of the way to bill for these services, in terms of your thinking. Thank you.
Thank you Paul. Good questions. GX in terms of speed and performance I think it’s a little early to come to any conclusion in the real world of post-testing. We’ve only just gone into commercial service. We had some very good strong feedback from those customers that were assisting us with the beta testing and the trialing. We trialed a huge number of diverse Ka-band terminals and capabilities. And the overwhelming feedback during the trialing was how impress were with the resilience and the performance and the exceptional speeds in GX in all its different guises all the way from commercial Ka through to military Ka. So, we do feel very confident that we got an exceptional proposition and that the spacecraft built for us by Boeing have been built really, really well and delivering ahead of our – modestly ahead of our expectations. So, that all goes well. Hopefully, we’ll add some more color on customer experience the Q3s and again I’ll make the diary note to come back to you on that in Q3.
In terms of the FleetBroadband customers moving up the tiers, I think you’ve got a couple of things going on. One is the fact that as you move up the tiers you get cheaper megabytes and so the question is, so it becomes logical for people to move up the tiers that they think they’re going to use the megabytes. What’s driving the megabytes is clearly two things. First off the need to provide decent crew connectivity. Crew continues to ensure supply particularly highly trained crew in. In today’s world, it is virtually human rights for you to be connected. And so, it has become necessary for ship owners and ship managers to provide decent connectivity to their crew members, that’s the first driver. But equal importantly, basic commercial enterprise drivers we call the era of the smart ship. We talk about the ship now being a note on the network but there is no doubt that an investment relatively modest investment in connectivity can drive exponential advantages in terms of new revenue opportunities and then in particular much greater efficiency in terms of the cost of managing a ship.
And that’s everything from weather monitoring, smart routing, cargo tracking, regulatory clearances, tele-medicine, tele-training, a whole raft of solutions and applications that are now being delivered electronically over the air on to a ship and are resulting in better trained crew, faster turnarounds in harbor, less downtime for maintenance and faster more efficient sailing. Enormous raft of solutions, the solutions are now maturing to the extent it has become easier to integrate the solutions in your network, that’s driving early adoption, the adoption is driving next generation solutions and that were into a virtuous cycle around its concept of the smart ship, all of which only becomes possible if you have a decent broadband connectivity that you can rely on which of course is FleetBroadband.
In terms of the S-band, Paul, I think it is still early days to talk about a model what Paul is talking about is the question of whether which model would be adopted to build for aviation connectivity services where we build an intermediary, where we build an airline when turnaround will have the customer relationship, and relationship management and value proposition development for this customers and we reach all the way through to the customer sitting in the feedback wanting to have connectivity. In the US, the prevailing order at the moment with Gogo is one way the relationship between of the network operator is with the customer itself to use. So, a person going on a flight will buy a voucher from Gogo and deploy it when he sits in his seat. But, increasingly we’re seeing the desire of the airlines to grab back the relationship with the customer to develop a premium relationship with the customer and for the airlines have the relationship with the network operator and not let the network operator anywhere near the end customer.
I think there is quite a long way to go yet in terms of where that relationship goes. For us, obviously our heritage is B2B, B2G network operator. So, it would be perfectly normal for us to have a relationship with the distribution partner which could be an airline. We have no particular desire to reach all the way through, become a consumer oriented business, but we’ll see how this develops and obviously provide the services in whichever way our airline customers stayed at the right way.
Paul Sidney – Credit Suisse
That’s really helpful. Thanks Rupert.
Next on the line, we have Giles Thorne from Jefferies.
Giles Thorne – Jefferies
Morning and thank you for taking my questions. I’ve got three please. I wanted to start with the 10 member state MSS licenses you’ve got. And how many of those are from the big five European countries, and does it mean that you’ve now actually retired the regulatory risk in these 10 countries? And just then turning to the MoU with BA, it seems to me that your ability to do ATG in Europe and roam on to high throughput with GX outside of Europe is unique. I’ll be interesting to hear what is the scope of the agreement with BA, is it just short haul or is it short haul and long haul?
And also get a sense of the lead time for BA to retrofit its fleet. And then lastly, for GX into the US government, we’ve now seen it leaked that the US Air Force is considering keeping the final two satellites of the WGS system on the ground as spares. If this rumor was to become fact, then it’s obviously a fantastic lead indicator for your sales into the US government. It’d be interesting to get your perspective on the likelihood of those last two satellites actually being grounded and to hear what risks to your plans do you see should it emerge that those two satellites are indeed launched. Thank you very much.
Thank you Giles. Well, I can’t confirm that the initial 10 member state licenses contain a large number, if not all from memory of the larger economist in Europe. But, I would stress that does not retire all of the regulatory risk. What we’re talking about, there are the satellite licenses and that is relatively more straight forward than seeking the terrestrial, the complementary ground component or the terrestrial component that goes to make the hybrid network up the hybrid network. We have applications in for a number of those, the applications are going well but it’s a longer track to get these applications out the other side just because it’s more complex animal, that’s never been created before in European licensing.
So, I think we wouldn’t have gone ahead with this venture, we didn’t feel that the risks were containable and manageable. I don’t think there is anything we’ve seen to suggest that’s not – most longer the case, but it’s going to take us 12 to 18 months to roll out the regulatory framework, obviously, we’re starting with our priority countries and getting a right kind of momentum and tweaking up second and third tier countries as we go. But, we remain very optimistic about the regulatory outcomes but still early days Giles.
Secondly, the MoU, the MoU with British Airways, the scope of that is it relates only to their short haul aviation fleet specifically designed to partner with the next generation cabin for European short haul aviation. Obviously we’d love to impress BA with our capabilities and broadened the relationship obviously a major, major international airline and we would hope to be able to entice them into delivering passenger connectivity via Global Xpress. In fact, they’re already customers of ours for some routes with SwiftBroadband. You’ll properly aware that they supply end-to-end passenger connectivity for their transatlantic route from – their all business class flights out to city airport all the way to New York with SwiftBroadband.
So, hopefully we can continue to expand this side of relationship we have with British Airways. Again, it’s early days to talk in terms of the lead times for retrofitting their short haul aviation, we’re in the process of making decisions around deployment of the air-to-ground network and the on board equipment. Your final question around GX is it well puts. If it is true, that the US government is going to keep the final two WGS satellites as ground spares and save themselves a rumored near $0.5 billion in doing that then it does suggest they may be looking hard at Global Xpress to provide augmentation and gap filler capabilities and of course as you rightly know Giles, the military Ka capabilities we have are completely fungible with WGS programs. All you have to do is repoint a terminal at our satellite and it works. And those beams are steerable in the field of view of the satellite so that the US government can move and we believe and move that capacity where they needed in real time.
So, it’s a very efficient flexible good value of delivering military Ka capability, augmented of course by that global overlay of commercial Ka-band which is also unique. So, we’ve been saying for long time now that not only that we can augment and enhance our government customers’ needs with Global Xpress, but in the short term, in the phase of severe budget cutback and the need to find economies, we have this instant way for them to save money in a very efficient effective way without prejudicing a long term procurement strategies. So, fingers crossed that we can perform that role in the short term because I think it will provide a fillip to the launch of GX and it will also embed us in a very valuable way with a very important strategic customer that hopefully we can follow on including necessarily continue to invest in new capacities to serve that need.
Giles Thorne – Jefferies
Thank you very much.
From Berenberg, we got Robert Berg on the line.
Robert Berg – Berenberg
Hi there. Yes, thanks for taking my questions. Three please. The first, you mentioned obviously the Proton launch delays impacting the revenue ramp for Global Xpress. So is there any costs that can be delayed or do you think the impact in 2015 and 2016 will be higher on the EBITDA level than, as a percentage than on the revenue level? The second question is around the agreement you have with SpaceX and if, say, ILS come out tomorrow and you have a launch February and May after the April 2015 date that you gave, what would be the process there? Would you be able to have a launch April/May or would it be later than that? Just around the timeline that might be involved. And thirdly it’s kind of a yes and no question. On the reporting changes that you plan to give more details about in September will you still be reporting a kind of a global MSS revenue for your guidance? It was a bit unclear from the wording in your press release. Thank you.
Okay. Thanks Robert. Robert, I’m going to ask Tony to answer your first and your third question. But, let me just before I hand over to him, let me just come back to you on the SpaceX agreement. The SpaceX optionality for launch that would support, let’s say, Inmarsat-5 F3 would operate as early as the autumn this year but it’s dependent on us giving them sufficient notice. So I think it’s realistic for you to think of our optionality of being in the ballpark of this autumn, sorry not this autumn, autumn 2015 to the spring of 2016, that’s the kind of operational area where we would deploy, we might deploy F3 over a Falcon 9 or Falcon Heavy. Obviously we don’t expect that to happen, what we expect to happen given the news we have at the moment, is return to flight for Proton in the September timeframe, with us coming in the queue around that time of the year early 2015 with two quick launches of F2 and F3 one after the other. If that’s the case, we remain sanguine about that. We would go with Proton and we would expect to be fully global with a full service offering by the end of the first half of next year. It’s only we saw a material slippage from that or if for example if we saw further anomalies or real delays in return to flight which don’t look like being the case at the moment that we’d start to seriously consider this optionality with SpaceX.
So, Robert let me answer your third question first because it’s the easiest. The binary answer is, yes, we will continue to provide historic data. And so, we’ll run right the way through the guidance period so there is no question of us moving the goal post at the middle of the process. And, that’s why one of the reason why I was saying that we see the changes being additive to you all because you’ll see the business now from two perspectives rather than just from one. So, and just being practical about that of the next two or three months, we’ll obviously work with you as the wider community to make sure that it’s working for you in terms of what we propose for Q3. As far as the issue about delays and the impact of that on the numbers is concerned, the broad message is that we don’t see much change to the cost basis as a consequence of slipping at the timing of satellites.
Inevitably there will be some small changes, for example it maybe and then things start to be depreciated earlier, that’s one timing implication. We will clearly try and run our cost as tight we can. But in fact, the capability needs to be built and ready to go. So, I wouldn’t expect major changes to come from our future numbers if things move. It’s really more about that why you see it most is the timing of the CapEx just going through and when we start to depreciate. So, no impact on cash really.
I mean one of the silver lining to this cloud of Proton delay is that because we have one operational satellite already. We can complete all of the end-to-end testing of a network and the developments of services offerings in the terminals. So, where we delayed over the first launch of our first satellite, there’d have been a number of things that we couldn’t do in terms of maturing the GX service offering. That’s not the case, given we’ve got the first satellite up. So, it really does minimize the nature of the delay.
Robert Berg – Berenberg
Great. Thank you.
Our next question comes from Simon Weeden from Citigroup.
Simon Weeden – Citigroup
Yes, thank you very much. I think I’ve got a couple of questions here for you. One is whether you expect any material contribution from the European aviation plan by 2016 and therefore whether we should now consider that to be included in the 8% to 12% CAGR targets for wholesale MMS. And the second question just relating to LightSquared. I guess I’m curious as to whether they have any advantage in starting phase two if they knowingly at the time were unsure or thought they may be unable to make future payment. Does this lock down the spectrum for another couple of years or something like that, which may give them the opportunity to come back which they otherwise might lose, for example? Thank you.
Okay. I’ll ask Tony just to comment on the European aviation plan revenues. I mean my brief commentary here is would be that if they do come in, they come in very much towards the backend of the 2016 in a very modest amount. Tony, can give more color on that. Very quickly before I hand over to Tony. On LightSquared, LightSquared exercised their option to opt back into phase two in a phased way because, if they haven’t, that asset would have gone away forever, it made it absolute sense for them to do that. They’re putting place for DIP funding to fund the initial payments. And as you know we have the next quarter’s bill outstanding, they’re using us their grace period which comes on 1st of September. We probably saw a recent filing in the bankruptcy that suggest they’re putting DIP funding in place to make that payment.
So, if they don’t make that payment, they run into an Inmarsat right to terminate. So one’s expectation is that they will honor their contract, the contract that they have clearly assumed and activated, reactivated during the bankruptcy process. So, we’ll see how this plays out, but my expectation is that we will be paid by LightSquared as we’re providing essential services to them that are core component in the spectrum value that is such a big piece of why someone might want to take them out of bankruptcy. I think beyond that is impossible to comment because it’s such a fluid situation.
So, on the first question Rupert basically summarized it correctly, there is nothing material in the revenues up through to 2016 and therefore nothing within our material within our thinking as far as delivering that 8% to 12% target is concerned.
Simon Weeden – Citigroup
That’s great. Thank you very much.
As there are no further questions in the queue, I would like to turn the call back for any additional or closing remarks.
Okay. Thank you everyone for your questions. Much appreciate the time and attention on the call and the questions. I think to summarize, we feel it’s been a solid quarter. We’ve delivered pretty much to expectation despite a number of things going on our business which can be tough to manage like US government attritional markets and some slippage in the GX story. I think it shows the robustness and the diversification of our business. We got areas of very strong growth that continues to support the short term. And we’re very confident that with a modest delay, we will bring through Global Xpress in the next few quarters to deliver step change in our growth for the foreseeable future. That plus the air-to-ground investment makes Inmarsat a fun place to be with lots of new opportunities that complement each other. So we remain very confident for the medium term. Thanks very much indeed.
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