Intelsat's (I) CEO Stephen Spengler on Q4 2015 Results - Earnings Call Transcript

| About: Intelsat SA (I)

Intelsat SA (NYSE:I)

Q4 2015 Results Earnings Conference Call

February 22, 2016, 09:30 AM ET

Executives

Dianne VanBeber - Vice President, Investor Relations & Corporate Communications

Stephen Spengler - Executive Vice President and Chief Executive Officer

Jacques Kerrest - Executive Vice President and Chief Financial Officer

Analysts

Simon Flannery - Morgan Stanley

Jason Kim - Goldman Sachs

Batya Levi - UBS

Michael Pace - JPMorgan

Andrew Spinola - Wells Fargo

Philip Cusick - JPMorgan

Anthony Klarman - Deutsche Bank

David Phipps - Citigroup Global Markets

Roshan Ranjit - Nomura

Arun Seshadri - Credit Suisse

Nick Dempsey - Barclays

Umesh Bhandary - Jefferies

Peter Gingold - Angelo Gordon

Lance Vitanza - CRT Capital Group

Diana Tatarchuk - Talisman

Operator

Good day, ladies and gentlemen, and welcome to Intelsat's Preliminary Fourth Quarter and Full-Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] Please note, today's conference is being recorded.

I would now like to hand the conference over to Dianne VanBeber, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Dianne VanBeber

Welcome everyone, and thank you for joining Intelsat's fourth quarter 2015 preliminary earnings conference call. Our release issued this morning and available from our website indicates that our report is a preliminary one and thus my opening remarks this morning will include additional, specific details that are important to note. Thank you for your attention.

In accordance with US Generally Accepted Accounting Principles we conduct an annual intangible asset impairment test. We're still in the process of completing that work and expect to book a non-cash impairment to our goodwill and other intangible assets accounts when this process concludes.

We would note that as we complete this work, the impairment charge will have no effect on our reported total revenue, revenue by customer set, revenue by service type, direct costs of revenue, selling, general and administrative expenses or adjusted EBITDA. However, in today's call when we discuss these metrics we will reference each as a preliminary report prior to the effect of any impairments. We expect to file our final audited results in our Annual Report on SEC Form 20-F in the next couple of weeks once we announce this is fully complete.

Please reference the special note regarding expected financial results in the preliminary earnings release which we published this morning. The special note is located near the Safe Harbor statement. Because the impairment work is not complete we are limited in terms of what further detail we can provide at this time beyond what is disclosed in a preliminary earnings release. Our discussion this morning will focus on our operating results and performance drivers as usual.

Separately, our preliminary results also notes that we have recently retained Guggenheim Securities, LLC to assist the Company in connection with various financing and balance sheet initiatives, including, among other things, evaluating the level of secured debt and balance sheet management opportunities. There can be no assurance that our retention of Guggenheim Securities, LLC will result in our pursuing or completing any specific transactions.

We also posted to our website this morning our preliminary quarterly commentary. The quarterly commentary provides the investment community with the information and context that you need to analyze our results in advance of our earnings call. We use a quarterly commentary to make your time with us more efficient and to maximize the time on this call for Q&A with management.

During today's call, we will discuss adjusted EBITDA and other financial metrics not prepared in accordance with U.S. Generally Accepted Accounting Principles, including EBITDA, related margins, adjusted net income per diluted common share, and free cash flow from operations. We provide reconciliations of these metrics to the most directly comparable GAAP measures in the earnings release and on our website.

Additionally, our conversation today will include forward-looking statements that reflect our current expectations for future industry conditions as well as our business strategy, market trends and positioning, and expected future financial performance. These forward-looking statements are subject to risks and uncertainties, many of which are outside of our control. Please refer to the Safe Harbor Statement included in our Annual Report on Form 20-F for information about some other factors that could cause our actual results to differ materially from our expectations.

Finally, be aware that our conference call today is open to the investment community and media, with the media invited to participate in listen-only mode. Members of the media are not authorized to quote either directly or in substance, any participant in the call who is not a representative of Intelsat. Following brief opening remarks by Intelsat's CEO, Stephen Spengler; we will take your questions. Steve?

Stephen Spengler

Thanks, Dianne. We delivered on plan for 2015 and continue to advance the initiatives that will support our goal of long term growth. 2016 is a critical foundational year. We are deploying the satellites, services, ground innovations and partnerships that will expand our leadership in large and fast growing applications.

On the management front, we're pleased to welcome Jacques Kerrest as our new Executive Vice President and Chief Financial Officer. We look forward to introducing investors to Jacques over the course of the next several months.

Now let me turn to our operating results and performance drivers for 2015. Preliminary reported full-year revenue of $2.35 billion in adjusted EBITDA of $1.85 billion is in line with our full-year guidance. Fourth quarter revenues were $571 million, a decline of 8% from the year ago quarter. As expected point-to-point applications and network services such as channel and trunking contributed significantly to the decline. Adjusted EBITDA was $453 million or 79% of revenue reflecting reduced staff cost and improved bad debt expense in the period.

As we mentioned in previous quarters, incremental capacity from all four of our 2016 satellite launches is essential to offset the revenue pressures that we expect to continue. Given this context, our outlook for 2016 total revenue is $2.14 billion to $22.2 billion roughly an 8% decline from 2015.

There were several factors to consider when thinking about 2016 most of which we have discussed over the course of the past year. The first is the continued erosion of trunking revenues. At year-end 2015 this revenue stream had declined to about 5% of total year revenue. We continue to expect this service to exit our network at accelerated pace over the next few years.

The second factor is reduced volume related to a specific government contract and the annualization of last year's reduced commitments for media customers in North America due to compression and single format transmission.

The third and largest factor affecting 2016 revenue is the renewal of contracts in our network service business at market rates. This includes renewed business from 2015 reflected in beginning of year backlog as well as business we expect to renew in 2016. Currency related pressures in Russia and Brazil also continue.

While these headwinds affect our near-term financial outlook, Intelsat is focused on reaching important milestones in 2016 that position us for future growth. Positive momentum is underway for the Intelsat Epic program, the centerpiece of our growth plan. The Intelsat Epic platform is comprised of seven high throughput satellites launching through 2019. These satellites are fully integrated with our existing fleet providing higher performance, improved economics and simplified access. On January 27, we launched Intelsat 29e our first Intelsat Epic satellite. It is scheduled to enter service in the second quarter.

Since our last earnings call we've signed nine new Intelsat Epic agreements with customers spanning enterprise in fixed and wireless telecom infrastructure. The majority of these agreements are with current customers transitioning from existing satellites to Intelsat Epic satellite. Most of these customers maintain megahertz commitments with two booking increases. In short, the contract momentum on the Intelsat Epic satellites continues on plan and we're confident that we're on track to ultimately unlock expensive sources of demand for our global network.

Our highest priority is getting our satellites launched and into service. Today we affirm our launch schedule in all respects. Intelsat 31, the second of two satellites for DirecTV Latin America is scheduled to launch and enter into service in the second quarter of 2016. Our other two new 2016 satellites, Intelsat 36 and Intelsat 33e are scheduled to launch in the third quarter and enter service by year end 2016.

We are rapidly developing our service platforms which complement our new capacity. Our IntelsatOne Flex and IntelsatOne Prism service platforms are expanding to include new vertical applications such as enterprise and government over the course of 2016. This service strategy represents another important cornerstone of our return to growth.

Intelsat is working with other business partners to support innovation in ground technology that will provide simplified access to our satellites. In early January, I attended the North American International Auto Show and joined executives from Toyota and Kymeta as they unveiled the role of satellite in connected car applications. We are currently sponsoring a cross-country trek of Kymeta connected car that will be demonstrated at the Satellite 2016 Conference in Washington DC in early March.

I have been in my role as CEO for nearly a year now and my view on the abundant opportunities in our sector is unchanged. The size of the opportunity through which we are building our services is far greater than those provided by the satellite sector today. Intelsat intends to be a leader in this expanding space.

The Internet of Things, aeronautical and maritime mobility, ubiquitous wireless infrastructure and the high throughput enterprise applications, these are the applications we can create value for our customers using our global capabilities and technology. We are actively working these applications today and designing networks that are global in scale and leverage the higher throughput and performance of our Intelsat Epic satellites and services.

This furthers our confidence in our ability to work through this transitional time and enter 2017 in a stronger position. Launching and placing our satellites into service, deploying managed services with global scale and supporting innovation on the ground will provide the foundation for Intelsat's growth.

With that, we're ready to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Simon Flannery with Morgan Stanley. Your line is open.

Simon Flannery

So the revenue guidance, could you give us a little bit of color about how the shape of that guidance is through the year, your growth rate in Q4 on revenues that declined was similar to that 8% number you gave out for the full year, but should we think that second half should be better than first half given some of the satellite launches you referenced any other color about that and when do we start an improvement in the revenue trends as you walked through some of these factors?

And then you gave some updated CapEx guidance, perhaps you could dive into that a little bit more of what we were able to do to reduce the CapEx in 2017 and the 2018 CapEx as well down from 2017 levels? Is that a level that you can hold or are you deferring some launches, any color that would be great? Thank you.

Stephen Spengler

Sure.

Dianne VanBeber

Hey Simon, I'm going to take the first, I'll take the first question. So the way to think about the progression of 2016 has to do with win capacity comes into the system and that helps to offset some of these headwinds. So in the first quarter we don’t have any new capacity coming in. So you might expect that the headwinds weight a little bit heavier and even as we're going from Q4 to Q1, but after that, over the course of the year we have capacity coming in.

In the second quarter we'll have 31 and on the heels of that you'll have 29e coming into service and so as the rest of the year goes by, I would say it's pretty flattish sequentially because you are showing to have some of those new revenues balancing out the headwinds that we have.

Simon Flannery

Okay, thank you.

Stephen Spengler

And on the CapEx Simon, here is how we've looked at it. First of all we did look at 2017 and we availed ourselves of some opportunities of doing some projects a little bit differently. The project that we announced last quarter with JSAT for the Horizon 3e satellite is an example of how we can be more efficient in deploying capacity for growth in various regions.

When you look beyond that, what you're seeing is a natural lessening in CapEx that we see in our CapEx plan. Of course we're putting up a lot of capacity with our Intelsat Epic satellite, so the quantum of capacity that we're putting into our network is substantial and so we're getting some benefit from the volume of capacity we're putting them into Epic in 2018.

Simon Flannery

And so is 2018 more of a kind of a run rate for a few years and that sort of, as you grow into your capacity?

Stephen Spengler

Well we're are not projecting out past 2018 right now, so I really only was to comment about 2018, but so that's really related to a natural lessening in our CapEx run rate benefiting as I said from the Epic volume.

Simon Flannery

Okay and maybe Dianne one last clarification, have you taken CSSC out of the guidance assuming that you lose that?

Dianne VanBeber

Yes, right, today our guidance assumes that we're not successful with CSSC.

Simon Flannery

Okay, thank you.

Operator

Thank you. Our next question is from Jason Kim with Goldman Sachs. Your line is open.

Jason Kim

Hey good morning, thank you. With respect to your comments about the balance sheet you're probably considering a variety of options, but at a very high level how do you look at the trade-off between maximizing your run rate in terms of maturities versus capturing that the biggest offer discounts of your bond, what is more important to you?

Jacques Kerrest

Hi this is Jacques. As you can tell from the press release, we have hired Guggenheim to help us on this activity, so and at this time I don't think we are willing to talk about this because in fact we don't have a plan yet and when we already we will certainly get back to you on this.

Jason Kim

Okay, fair enough. And then just reading from your quarterly commentary you note that the launches and entry into service of the three new satellites this year is expected to position the company for return to growth and I hate to nitpick, but are you referring to 2017 in terms of returning to growth or are you unnecessarily putting a timetable around a potential inflexion point?

Stephen Spengler

Yes Jason, we're not speaking specifically to 2017 because we're not offering 2017 guidance right now. I think as we look at 2016 and Dianne touched upon a few of the points and it is correct we are adding new capacity in 2016 that is important as we've said for quite some time now that it will enable our return to growth, but we're still facing headwinds throughout the year as well. And so we see pricing pressure in certain sectors and certain regions we have the effect of our point-to-point business erosion that we've been subject to for a while now.

We noted already the CSSC contract is not in our guidance and right now we're assuming that we do not win that. We have some year-on-year effect of media volume and FX related pricing impacts. So there's a fair amount of headwinds that we're dealing with right now. So we decided that it would be prudent for us to be consistent with our practice around guidance and so that's why we've given 2016 guidance and we will be prepared to give other guidance as time moves on.

Jason Kim

Got it, thank you.

Operator

Our next question is from Batya Levi with UBS. Your line is open.

Batya Levi

Great, thank you. In terms of this year's revenue guidance can you provide a little bit more detail on how much revenue you expect from Intelsat 29e to contribute and maybe 31 and 36 later this year and if you could compare that versus the declines in the core portfolio?

And in terms of the pricing pressure that you suggested you're already incorporating going to market rates 2015 and 2016, how much of your network services contracts are up for renewal for 2017 and what kind of visibility do you have for pricing on the network services side?

Stephen Spengler

Okay Batya, the first question was related to progress on the Epic satellite and as we've done in the past we haven’t gotten specific about fuel rates or progression towards our goals, but as we stand today, we're very satisfied with the take up of backlog on those satellites and the size of the pipeline of those satellites as noted in our commentary. We've added nine new customers over the last quarter and we're seeing good momentum in that regard. So that is obviously, the Epic satellites are an obvious important part of our growth as is 31 and Intelsat 36. So it is all part of that bigger picture.

On your second point regarding pricing pressure, so pricing has been a factor mainly in our network services business. We've seen pressure in pricing across network services in Africa and in most other regions of the world and so that's been the major driver of pricing pressure. There are a number of factors there and so of it has been referenced already. We have repriced customer portfolios in 2015, very important customer portfolios that business we wanted to retain that we reset the market prices that carryforward into 2016. There is expected price repricing happening in 2016 as well with renewals and some new business. So I think you had a specific question on percentage.

Batya Levi

Right, percent of renewals expected for 2017 is 2017 going to be a big renewal year and if the prices are higher than the market rates right now?

Stephen Spengler

Yes, 2017 from a network services standpoint is a normal renewal year. There is nothing unusual about it. In the media sector it is actually a light renewal year, so we're not going to see as many renewals in on the media side in 2016 and government because of the contracts being one year terms it is pretty much the same as year-to-year in terms of percentage wise.

Batya Levi

Okay, okay thank you.

Operator

Our next question is from Michael Pace with JPMorgan. Your line is open.

Michael Pace

Hi, I was wondering if I could just follow up a little bit on the last question in terms of pricing pressure and specifically network services and the renewals. So I think we can all capsulate on average how much needs to be renewed every year and I'm curious though the renewals for 2016 and without giving specific pricing data I generally don’t like to do that, but what percentage of decline is current today versus that was generating in 2015? And then maybe I'll ask you another question on that after.

Stephen Spengler

We typically don't get specific Michael on that type of percentage. But the network services business is the one sector where we're under a lot of price pressure and there is price pressure coming from traditional satellite capacity operators and some price pressure coming from the next generation where there is some forward pricing going on for future networks.

It is a reset, the market price because of the volume of capacity that’s been put on. We think that this is a situation that’s going to continue through 2016, but as we got our Intelsat Epic capacity up and available we are going to be able to counter that with differentiated capacity and differentiated services to counter that.

And I think we've – you know that we’ve talked a lot about network services and the importance of Intelsat Epic for network services it is the place where we see the greatest growth opportunities and the greatest volume opportunities as well.

Dianne VanBeber

And Mike…

Michael Pace

If I may try and get at it a little different way maybe if I look at the guidance that you've given us for 2016 it looks like you are expecting network services revenue to be down, I'm still using midpoints here about $170 million and I'm sure you are going to have some 29e revenue, so the losses I guess with the headwinds are greater than that, how much of that $170 million midpoint decline can you attribute to pricing I guess?

Dianne VanBeber

I think part of it Mike is just not to lose track of the fact that you’ve got beginning of the year backlog that's also down on that business. So, just to back you and just specific to the network services business, pricing declines is the largest piece by far. The other moving parts as well know, the trunking, the channel, we’ve talked before about kind of the better revenue progression that’s going to happen on 29e, so and then of course you’ve also got other net new business in the mix, so we’re not going to provide details on every one of those line items that clearly pricing is the biggest piece of the fall off in terms of network services. But don’t lose track of the fact that you've a lower entry into the year and because that's - you often need to take in short that – business that renewed at lower rates last year as well.

Stephen Spengler

And Michael maybe one additional point that’s maybe helpful. We've talked about the impact of point-to-point type services and shared some numbers around that. In 2015 we saw $40 million to $45 million decline in point-to-point services, the rest of it due to pricing and so in 2016 we would expect similar kind of ratio to that.

Michael Pace

Yes and then, I’m sorry just one more, I guess the timing of what’s happening here with the pricing and network services at what point did you start pricing and renewals at the current market rate, was this happening and is this the first year that we're seeing that so then we have another couple of years of that to happen or did that happen earlier and maybe we have a little bit less than that?

Stephen Spengler

Well, I think you saw the impact of pricing in our 2015 numbers right from the very beginning. So, this is not the beginning of that process. As I mentioned and is also in the commentary we're fortunate to renew some significant business with some of our important customers in network services and so those are portfolios that are reset now to market pricing and are now positioned for growth with Intelsat Epic. So this is not new, it reflects the issues that we had last year and then into this year.

Michael Pace

Okay, great. Thank you.

Stephen Spengler

You’re welcome.

Operator

Your next question is from Andrew Spinola with Wells Fargo. Your line is open.

Andrew Spinola

Thank you. I wanted to ask a question about the implied EBITDA margin guidance for 2016, just roughly middle of the ranges about 76% down 300 basis points year-over-year and I’m sure there is a little bit of pressure from the lower revenue, but it’s a big change and I think in your commentary you discussed investments in your service infrastructure and I’m just trying to understand may be what that investment is, is it related to epic and then does it imply sort of a change to a certain degree in the business model where you will be more cost intensive in terms of investments in the ground or is this related to one time increase that may be you could eventually grow into? Thanks.

Stephen Spengler

Yes, so that is correct that we are investing in our next generation services. I think you may know that we’ve been – we’ve had a service element, a managed service element to our business for quite some time now, it’s roughly 20% or so of our business today. What we’re doing is taking those services to the next level with Intelsat Epic fleet coming on. And so we’re developing services in a number of verticals where we’re providing more end-to-end wholesale services for our distribution partners and their operations.

So what that means is that we will be investing in some terrestrial CapEx to build out platforms and so it is a little bit heavier in 2016 to get these services moving. And we are investing in some more expertise and capabilities from a human standpoint as we move into these sectors. So those are two factors as we start ramping this services business, but I think it’s heavier at the front end as opposed to later on.

Andrew Spinola

And the services business will be a bigger part of your competitive advantage going forward, is that the sense I get?

Stephen Spengler

Absolutely, we think it is a very important part of what we bring to our customers. We have seen a real desire amongst our distribution partners for us to take on more of their network operations and this is for a number of reasons. By doing that it reduces their capital investments on their side, it also gives them simpler access to the Intelsat Epic fleet and capabilities and more importantly, it allows them to focus their efforts on developing applications, services and other kind of support vehicles for their end customers. And so we have a unique opportunity with the Intelsat Epic fleet to develop specific services in mobility and enterprise type services, wireless infrastructure services as well as media as well to support those distribution channels and customers in that way.

Andrew Spinola

Thank you.

Operator

Our next question is from Phil Cusick with JPMorgan, your line is open.

Philip Cusick

Hey guys, thanks. Your press release talked about new customers on Epic, but it seems like they are mostly from legacy and it sounds like many are taking more capacity, how are you doing with signing up new customers to Epic and should we think about Epic as a drive for new revenue or more a transference or protection of legacy revenue, thanks.

Stephen Spengler

So in the fourth quarter the nine customers who referenced are largely existing customers in the telecom space in particular for wireless infrastructure and enterprise services. It was just the nature of the flow of the deals in that quarter because we have also added new customers prior to that as well.

So we see Epic targeted for both existing customers who we're going to be transitioning them from existing Intelsat satellites as well as new customers that are looking for growth. In the particular case of these customers, we saw them commit to virtually the same amount of megahertz bandwidth and a couple of cases a bit more.

We have not seen the cannibalization that has been raised as a question a few times. In these cases customers typically join the Intelsat Epic network as an opportunity to consolidate services from other places and take advantage of the performance and economics. So that is an important part. We do see as I get back to the main part though, we do see Epic as not just a transitionary platform, but also a growth platform.

And so it is the opportunity to really provide much higher volume, better economics, better performance to customers in a number of segments that will allow their businesses to grow and those segments to flourish.

Philip Cusick

Can I follow up, I’m just a little confused. So if a customer is taking the same amount of bandwidth for a little bit more it sounds like isn’t pricing on Epic substantially lower and so you are getting lower revenue or is that the wrong way to look at this?

Stephen Spengler

I think it’s a wrong way to look at it, I mean the Epic is more efficient, so if a customer had the same requirement they would need less bandwidth to satisfy that requirement. But what we're seeing is customers are getting - taking advantage of the efficiency of the Epic system, but they are not necessarily taking less overall bandwidth. So, they are adding more volume to the equation and we're able to keep our monthly recurring charges at competitive rate levels and consistent.

Philip Cusick

Got it, okay I get it, thank you. And then can you just update us on the launch timing for the next few satellites coming up is a busy schedule for the rest of the year. Thanks.

Stephen Spengler

Sure. Sure, Intelsat 31 is the next one to be launched that is scheduled for the second quarter. It is also scheduled to be in service in the second quarter as well and that is the satellite for DirecTV Latin America that is fully committed for the DTH services there. After that in the third quarter, we’re scheduled to launch Intelsat 36 and Intelsat 33e.

Both of those satellites should be in service by year end. Intelsat 36 is a satellite that is for direct-to-home television in Africa and that is largely committed. The entire Ku-band payload is committed in backlog and of course Intelsat 33e is our second Epic satellite that is for Europe, Middle East, Africa and Asia and we are ramping up the backlog in that satellite right now.

Philip Cusick

Okay. Last one if I can on the CSEC deal, when do you expect to hear one about the new award and then two about the appeal on the awards process?

Stephen Spengler

Okay, sure. So maybe we go to – go back to the beginning because this has been complicated, just to refresh everybody’s memory, in the third quarter of 2015 we were notified that we were not the winning bidder for the CSEC contract.

We protested that award at that time because we felt that we offered a compelling solution for the customer and offered actually the best value for that requirement. The protest was handled by the General Accountability Office of the U.S. government and in December that protest was sustained meaning that the GAO agreed with our protest points. The GAO at that point instructed the procurement agency to do some specific things and to issue a new proposal, a new RFP which they did.

We responded to that solicitation for the new proposal, but we also filed a new protest with the GAO regarding that new proposal process which we have concerns about. So if you look at the timing of the protest process that is typical of the GAO it is normally a 100 day process, so that would take us to June before they would have to make a decision in terms of the deadline.

Philip Cusick

And is the RFP coming faster than that or is that sort of the next data point?

Stephen Spengler

Well the RFP is as our understanding essentially suspended right now. We believe the – we have made our bid, others have made bids as well, but they will continue with their assessment of those bids, the procurement agency that is our expectation, but they are not going to be able to make an award until the protest process is complete.

Philip Cusick

Got it, so June, best case?

Stephen Spengler

We’re talking May, June timeframe.

Philip Cusick

Got it. Thank you.

Operator

Our next question is from Anthony Klarman with Deutsche Bank. Your line is open.

Anthony Klarman

Hi thanks, I have a few questions, first Dianne I wanted to maybe go back to the answer you gave to a prior question and try to think about the piece of 2016, I guess what we’re maybe trying to get a handle on is sort of the run rate that we are exiting the year at from a sort of revenue and EBITDA perspective and kind of - if we look at the commentary in here about backlog, it starts out at $1.08 billion for 2016 and then the guidance is called at the midpoint 2175 [ph]. So that implies difference of about $375 million which seems to be that is kind of the swing variable in how you get from backlog to guidance, how does that phase throughout the year and then the EBITDA kind of follow along that same track?

Dianne VanBeber

I mean EBITDA of course we will all continue to have puts and takes over the course of the year, so I’m not sure I can really help guide you on that. I mean there is not much more I can add to what I said before. You shouldn’t assume that our run rate as we exit Q4, there is really nothing in terms of new capacity in the system offset in Q1, so you should see some further pressure in Q1 but after that as you go through the rest of the year, you have got capacity and your business is starting to come online that offsets the headwinds over the course of the year. So you end with a rather flattish looking year.

Anthony Klarman

Okay. And then on the bond buyback that you did for the quarter, I assume that now with Guggenheim hired and sort of looking at a more formal process, you are not contemplating any additional debt repurchases until that review is completed is that fair?

Jacques Kerrest

Yes, it's fair.

Anthony Klarman

And then over what timeframe would you expect Guggenheim’s work to be completed, this is something that you sort of have plotted out and you expect to have a view on the next step for the capital structure before the next quarter?

Jacques Kerrest

As you know, this is Jacques again, as you know we just retained Guggenheim’s securities and it is just too early to make any commitment here and I can’t even tell you if it's going to be when we announce this the first quarter.

Anthony Klarman

Okay and then finally on liquidity and how you sort of plan to manage liquidity, obviously this is a high working capital usage quarter because of the timing of your interest payment so you get a bit of a breather from that in 1Q. But if we just look at the midpoints of guidance on EBITDA and capital and then sort of the run rate of where cash interest is you are in cash burn setting for 2016. Could you just talk a little bit about kind of how you managed the liquidity of the business and sort of the usage of the revolver over the course of the year to kind of manage that liquidity?

Jacques Kerrest

Yes, I think as you know at December 31, we were not in a revolver at all and we will use the revolver as we go along this year. We have plenty of liquidity available to us so, it's much too early to say what point in the year we will be using the revolver, but you are right, the second and the fourth quarter of the heaviest quarter in terms of interest payment so…

Anthony Klarman

My final question for me if Guggenheim sounds like they are really looking at balance sheet type things other reports that previously indicated that you would thought about potentially looking at some assets for sale, I don’t know if there is anything that you can kind of talk about on sort of the things that you would think about potentially trying to monetize or look at kind of help either streamline the business or sort of increase liquidity?

Jacques Kerrest

Well, in terms of the asset sale rumors that were out there and really I'm just going to answer that as we usually do if we don’t really comment on market rumors in that regard and we haven’t commented in the past on that and of course we are always looking at opportunities, strategic opportunities if we think that the right things to do for the company and for our customers and for our shareholders, but beyond that we don’t comment on those kinds of speculations.

Anthony Klarman

Okay, thanks very much.

Operator

And our next question is from David Phipps with Citi. Your line is open.

David Phipps

Hi, thank you very much. Can we talk a little bit about the SG&A line and how that implied through the year to a bit lower than it was in the past and is that some a new level that we should look at it?

Stephen Spengler

Yes, SG&A you said?

David Phipps

Yes, SG&A.

Stephen Spengler

Yes, it was a in the fourth quarter last year there was a little bit of a lower staff cost. I don’t think that was necessarily a normal situation it was just the difference from the previous year so, I don’t think we should necessarily look at it as something its going forward.

Jacques Kerrest

There was also a bad debt expense that was much less than the prior year and that’s why you will see a difference between Q4, 2015 and 2014.

Dianne VanBeber

Just remember that we also talked about effect that were making some investment in our service infrastructure, so you should not assume that, you’ve got a lower cost base moving into this year.

David Phipps

Fair enough. And then as we look through some of the satellite launches this year, but do we see any material pick up of any of the costs needed at the line items of cost of goods or the SG&A?

Stephen Spengler

No there should be no change in that standpoint.

David Phipps

Fair enough, those are my questions thank you.

Stephen Spengler

Yes, thank you.

Operator

Our next question is from Roshan Ranjit with Nomura. Your line is open.

Roshan Ranjit

Good morning. Just a quick question on the government side now on an underlying basis if we were to include CSfC contracts l the underline basis if we what to include the CSfC contracts you would be looking at may be flat government revenues now given the, I guess ongoing pricing pressure across the board could you just given idea where the additional volumes are coming from, is that additional volumes from US DoD based or are you seeing more diversification across your government business? Thank you.

Stephen Spengler

I think you interrupted the government correctly. It is flattish if you had CSEC included there we have seen stabilizing that business over recent quarters as you’ve seen there is still, there is a pretty steady tempo to the government business in terms of operationally most overwhelming majority of our government businesses with the U.S. DoD and other agencies and so not so much from international ministries of Defense although we do have some business in those areas. So the demand for government that we see is coming from mobility type applications.

There is still a fair amount of demand for Ku-band services to aerial vehicles, both manned and unmanned and this is something that we see Intelsat Epic playing an important role in those types of services and so our government customers are very interested in the capabilities of Intelsat Epic and are very anxious to get testing those capabilities later on in the second quarter.

Roshan Ranjit

So just to add on that in terms of Epic and I know you mentioned 9 new Epic customers like [indiscernible] rather you said mainly telcos, had there been some government bodies taking Epic capacity within these 9?

Stephen Spengler

Not, yet and the reason for that is that government procurement rules require that the services be available at the time they are procured. So they do not allow for advanced purchases, pre commitments of any type for capacity like that. So this is the importance of getting Intelsat Epic up and operating. As soon as it is an operational mode we'll be able to provide bids to government customers and as I said we have planned - government customers will line up to be testing the Epic capabilities in the very near future.

Roshan Ranjit

Okay. Thank you.

Stephen Spengler

You’re welcome.

Operator

Our next question is from Arun Seshadri with Credit Suisse. Your line is open.

Arun Seshadri

Hi, thanks for taking my questions. Just wanted to ask first, has there been post now that's been like, I guess a little less than a month since you've launched 29e, just wanted to get a sense, any improvement in engagement with government customers you are seeing at all?

Stephen Spengler

Well, with government customers we’ve had very consistent and good engagement on Intelsat Epic for a while now. And one of the reasons for that is that Intelsat Epic has a digital payload on the satellite that is very similar but more advance to the digital payloads that are used on some of the government satellites. So our government customers are very attuned to the capabilities that that digital payload has in terms of connectivity, in terms of security, in terms of its resistance to interference situations. So those conversations have been ongoing with the government customers.

I wouldn’t say that it has accelerated since the launch, but I think like a lot of our customers they are anticipating the availability of the capabilities of the Intelsat Epic satellites and so there is a great deal of interest watching the development of the tests and in service date which is scheduled for April.

Arun Seshadri

Got it, thank you, and then as far as sort of specific points as far as the headwinds for 2016 and then into 2017 I just wanted to clarify couple of numbers. First, as far as trunking goes, I think you said 5% of the full year in 2015. I think you said in the past 6% was the full year for 2014, just wanted to get a sense for how much trunking comprised Q4, maybe you can start there?

Dianne VanBeber

How much trunking was in Q4?

Arun Seshadri

The headwinds, sorry.

Stephen Spengler

The headwinds that declined?

Arun Seshadri

Yes.

Dianne VanBeber

I’ll have to take that one offline with you. I think for the full year we had something that was in the range of 40 to 45 for both the combination as channel plus trunking and it is pretty easy to back out what channel was out of that, so that will give you your answer there I think.

Arun Seshadri

Got it and then as far as and then Dianne as far as the backlog that you've given before, I think you’ve said in the last 20-F that you filed the channel was about $9 million for 2016?

Dianne VanBeber

Yes, very modest, so if anything I think you will find that it's maybe will be somewhat lower than that over the course of the year, so you shouldn’t think of channel being as much of that revenue stream at all in 2016?

Arun Seshadri

Got it, okay thank you.

Stephen Spengler

Thank you, welcome.

Operator

And our next question is from Nick Dempsey with Barclays. Your line is open.

Nick Dempsey

Hi, yes good morning guys. Three questions please, can you talk about Brazil FX impacts? I think when you ask questions about half year last year just off at the CSfC [ph] that reported you were kind of saying one staying the same indirect effect of FX that they from that big state of business, is this you starting to see them now or that is coming true or when you refer to those Brazil FX impacts is that something different?

And my second question is just on the CSfC contract and also I have been [indiscernible] really quite low margin. Was it low margin for you or are they going to be low margin for them because they have to buy more capacity, so I’m just trying to understand whether the difference CSfC being how it would have much impact on EBITDA?

Stephen Spengler

Okay, Nick and your first question, I think the if I remember the question from last year it was a reference to more of a global impact of FX that our competitor referenced. And the way we answer that question is we don’t see a global impact of FX, but we do see the effect in two particular places Russia and Brazil. And Brazil is a country where we have to do contracts in local currency, the Brazilian Real, so there is a direct effect to the exchange rate in our pricing of contract, the big pricing of contracts et cetera plus normal FX issues in Brazil.

So we’ve always had that effect and Russia is a little bit different. That is more related to the price of oil and then the exchange rate change resulting from that where we’ve had to reprice contracts to maintain those customers in those services.

On the second point, I don’t really want to get into the specifics on the CSfC bid and the aspects of given where it is right now and particular margins. But it is a mixture of services that are on the Intelsat network as well as services that are off Intelsat networks the typical of the services we offer to government customers where we integrate solutions using the Intelsat fleet as well as the fleet of other operators and in this particular case where we were operating the entire network. So we bring the entire solutions together, but it is a mixture of both on that and off that services.

Nick Dempsey

Okay, thanks guys.

Stephen Spengler

Yes.

Operator

Thank you. Our next question is from Umesh Bhandary with Jefferies. Your line is open.

Umesh Bhandary

Hi guys, thank you for taking my questions. Maybe the first one just in terms of the headwind, Dianne, you mentioned that headwind in the full year was 40 to 45 from channel and trunking and I think you indicated that about 5% of our revenue going into 2016 or 5% of 2015 revenue is sort of legacy services. What should we expect in terms of how many years that should sort of go down to zero, is that over next two years, three years how should we think about that rate of decline of that 105 or so million net revenues?

Dianne VanBeber

Yes, so we set all along that, we thought this is kind of a three-year kind of phenomena that we were going to see. So you should - that we have also pointed out last year that we expected the point-to-point piece to be much stronger in 2016. So you should expect some big chunk of that hitting this year and then you will probably see a tail off into 2017 and 2018.

Umesh Bhandary

Got it, got it. And then it seems like you seemed to allude that pricing pressure that you are seeing right now that is more of a – there is sort of a step function decline right now, but then maybe it should stabilize. Is that sort of the way to interpret that or is this sort of going to be an ongoing thing in both your network services and also on the media side of the business?

Stephen Spengler

Yes that is, what I was referring to is that we do know that we have had a period of time now since early last year maybe back into the 2014 where we have had to be repricing renewals and other types of services to market and the market price has been under a lot of pressure. There is intense competition in pricing for traditional capacity across the globe.

So how along that will sustain, it is hard to say. I mentioned that we've done renewals and reset pricing for a number of our major customers and consumers of our services. So that has some runway to it going forward. But then the question is, okay what happens when we move to the Intelsat Epic and high throughput era?

Our view is that those are services that are going to be much higher volume services on the whole and so you’re going to see better economics for the customers, lower pricing on the whole because of the volume take up of those services across many of the customers that are going to be using those services.

Umesh Bhandary

Okay, I mean to the same I guess point, I mean I know you guys don’t want to provide sort of any kind of indication of like how the pricings are, but I’m sure you have seen some of the industry estimates out there which has suggesting then a pricing declines are [indiscernible] close to 50% and are those the numbers that we should be referencing or those numbers way off from what you guys are saying?

Stephen Spengler

Well, you’re right we don’t like to get into the specific price decreases, but I think you can see the impact certainly on our revenues in 2015 and 2016 on pricing. So it is meaningful in particular on the traditional capacity where there is over supply in many regions.

Umesh Bhandary

Got it and then just with regards to the Epic satellite, I mean it has been a while since you guys have provided updated fill rate on the 29e obviously since it is launched, is there a reason that you guys are not providing what the update is fill rate [indiscernible] particular satellite is because there is still variability in terms of what those revenues could be, what is really the rationale for not providing the updates?

Stephen Spengler

The rationale is competitive sensitivity, that’s really our rationale.

Umesh Bhandary

Got your and then may be one final question for me obviously and traditionally the satellite business use to be fairly stable just from what EBITDA cash perspective, now just given with all the pricing pressure the challenges that you are seeing how do you, how should investors think about what is the right level of leverage for this business is? Should we still think like, seven or eight times leverage is fair or should that number be substantially lower going into the future.

Stephen Spengler

Well, I don’t think we’ve seen a fundamental change away from a business that has hit very high EBITDA margin and we’re still maintaining those, so I think that’s a fact that has to be recognized that’s not changing anytime soon in our view. There may be a bit of pressure on percentages, but in our strategy to develop more services we see more EBITDA dollars coming on to our network over time.

Second thing is that backlog is still a very high part of our business. It is unique in that respect and so we're able to bring backlog on to the network that gives great visibility into the future for our services and going into each and every year.

Umesh Bhandary

All right, may be one last final follow up if I may. So if that is the case then what were into thinking in terms of hiring, Guggenheim at this point in time from restructuring your balance sheet.

Stephen Spengler

Well, as you could tell from the answer that we gave earlier, I don’t think at this point we’re going to comment on whatever we are going to do and review for the next few weeks. We have recently hired Guggenheim Securities and at this point that’s the only comment that we want to make.

Umesh Bhandary

Fair enough, thank you.

Operator

Our next question is from Peter Gingold with Angelo Gordon. Your line is open.

Peter Gingold

Hey, guys thanks for taking my question, most of them have been answered. I just on the network services side I think you said a couple of times you started to see the repricing of the contracts starting at 2014 and 2015, is there a way to think about what percentage of that revenues is still sort of priced today at above market pricing meeting sort of how much of your base network services revenue is sort of still at risk to reprising without the assumption of any new capacity from the Epic satellites being at on top of that?

Dianne VanBeber

Yes, so the way to think about the backlog and the network services business as roughly call it to $2.5 billion and its roughly third of that roughly is running through the renewal phase in any one year and it might be little bit depending upon if you are doing a portfolio deal for a big customer that’s got numerous like 10s, 20s of service orders and they all can do on different dates, but generally speaking that’s the right way to think about it, so and its going to evolve based on what’s the market pricing terms are so, as you go through the period of time. As you know, this pricing pressure started showing up. Oh sorry, this is Pete Gingold, sorry about that. So the pressures started in 2015 and then we will see that throughout 2016 as well.

Peter Gingold

So I guess my question is what you started new in 2015 are the prices lower has the market gone lower from when you started renewing in 2015, so essentially when that rolls off it is coming. It continues to go further or is there sort of a new sort of I guess baseline price level?

Dianne VanBeber

Well that would be pushing forward into the future by three years or so. So we will have to wait and see what market prices look like at that time. But at any one point in time you are constantly updating your backlog to whatever market prices are whether they are higher or lower.

Peter Gingold

Okay, I appreciate it thanks.

Operator

And our next question is from Lance Vitanza with CRT Capital Group. Your line is open.

Lance Vitanza

Hi guys. I apologize if I missed this, but could you talk a little bit about the media segment, are you seeing any pricing pressure there or to what extent are you seeing pricing pressure there and how is the competitive landscape evolved and then I have a follow up on your liquidity as well?

Stephen Spengler

In media, we’ve seen little bit of pricing pressure in the Asia-Pacific region for the most part. We’re seeing stability in North America right now. So otherwise Media segment is relatively stable from a pricing standpoint and that is really related to strength of our media neighborhoods and DTH platforms that are operating.

Lance Vitanza

Any change in the competitive landscape?

Stephen Spengler

I wouldn’t say there is change in the competitive landscape, I think there are certainly changes in the media sector in certain markets and I think those of us that are here in the U.S. know that there is dramatic changes in the media sector in terms of over the top type services. But for our customer sets who deliver content in North America the cable head ends that's still the driving force of their business and revenue generation engine of their business.

And so over the top right now is an alternative delivery means and it is not displacing the services that we have with them.

Lance Vitanza

Okay great and I wanted to ask you about the liquidity, I know there was a question about this earlier, but I wanted to take a different approach. If we kind of stick around it at the 2016 EBITDA levels, how long can you guys run before we need to see a rebound, I understand you can’t pinpoint when that rebound will be, will it be 2017? Won't it be 2017, but how long can you run at these levels before you guys have a problem?

Stephen Spengler

I don’t think we should comment on this right now as we said we didn’t want to comment beyond the 2016. So I’m sorry to say Lance, but at this point, I don’t think we especially after the fact that we just engaged Guggenheim to help us look at this together. So it will take us a little while, but we have as I said before plenty of liquidity in place. We are not using the revolver. I think we are absolutely fine right now.

Lance Vitanza

Okay. Thanks guys.

Dianne VanBeber

All right and just a quick note on time, we’re a little bit after an hour or so, so this is going to be our last call or last question excuse me and then we will be happy to follow up with everybody else as we can’t get to your questions, we will follow up individually. One more question please.

Operator

Thank you. Our last question comes from Diana Tatarchuk with Talisman. Your line is open.

Diana Tatarchuk

Hi just a few questions from me. Firstly I think regarding the cost base the question has been asked in a few ways already, but I just wanted to confirm. You are running the business in line with your guidance around call it midpoint $520 million of OpEx for next year. I know you’re making some investments, some bad debt was a bit lower year-over-year et cetera, but can you just confirm to us is that a steady run rate for the OpEx of the business or is that something you think might creep up in the future or something that you could work to reduce?

Dianne VanBeber

I don’t think you should expect to see a huge change in the way our cost base works. Certainly we are making some modest investments here. There are some additional employees that we're going to be hiring that you can see from the margin guidance that we provided. A little bit of that obviously comes from the lower top line, we are not talking about a major change in the way the business model works. And of course we're doing the service business so that over time we can generate additional EBITDA dollars. So we're really more focused on those EBITDA dollars than we are on the margin percentage.

Diana Tatarchuk

Okay, and then I guess another question was just in some ways has been touched on as well, at the end of the day when growth of the business has been discussed in recent quarters in particular it is focused very much on Epic, but as other people have alluded to, Epic is coming on line at a time when there is usually significant capacity on line from other operators and at the same time pricing is being pressured. So is growth really very realistic or are we just resetting to kind of a lower revenue and EBITDA for the business on a more permanent basis?

Stephen Spengler

Well let me just comment on Intelsat Epic and I think the very, very important thing to consider here is that Intelsat Epic is not conventional capacity. It is highly differentiated capacity and it is going to enable our customers to have much higher performing services for their end users. It is going to avail them better economics in their overall network and it is going to provide easier access to the network that will allow for growth and expansion of their market segments. Intelsat Epic is designed to a growth engine for our customers.

It is going to allow to have the capacity and volume required to enable them to address dramatically growing applications in aeronautical maritime mobility, Internet of Things, wireless access type services and government. So you know it is a different model than looking at traditional capacity and traditional oversupply and pricing pressures that are going on today.

Intelsat Epic is one of the first high throughput satellites in the marketplace globally and so will be building out a global network that will avail our customers of this capability and enable the growth. And as we've been talking about that, key to that growth is developing complementary services to the satellites that really make it easier for our customers to grow and allow them to expand and build their businesses and develop new markets, it's not about addressing the current demand in the marketplace, it is about expanding the demand in the marketplace.

Diana Tatarchuk

And do you think to the extent you are able to comment that this incremental demand for Epic will be able to offset kind of the legacy pressures that the business or really the entire industry is seeing?

Stephen Spengler

That is what we have said from the beginning in terms of what Epic will do for our company that it will offset the headwinds and the challenges that we are seeing here in the near term and allow us to grow in the future.

Diana Tatarchuk

Okay, and then my last question is with regards to the revolver can you just remind us if there are any maintenance covenants or any other constraints that you need to be in compliance with as you are drawing that and that's also quite a short dated maturity and if – how you plan to kind of proceed with those discussions with the revolver?

Jacques Kerrest

I think we are not going to comment on what we're going to do with the next maturity. As you know that's why we hired Guggenheim and we are just starting this review. As far as the covenants and everything into the locks and also the locks [ph] and also the Jackson [ph] as you know, they are in current tests for each of them, they are different. I think we can take this offline and tell you exactly…

Diana Tatarchuk

No, I guess I just meant specific to the revolver if there is anything that we should be aware of?

Jacques Kerrest

No.

Diana Tatarchuk

No, okay.

Dianne VanBeber

Complete access to the revolver.

Diana Tatarchuk

Okay, thank you.

Operator

All right and I'm not showing any further questions. I'll now turn the call back over to Mr. Spengler for closing remarks.

Stephen Spengler

Well, I'd like to thank everybody for your questions today and as we said we will followup with those of you that were still in the queue at the end and for everybody else I want to thank everybody for joining our call.

Operator

Ladies and gentlemen, this does conclude the program and you may all disconnect. Everyone have a great day.

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