Intelsat SA (I) Stephen Spengler on Q1 2016 Results - Earnings Call Transcript

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Intelsat SA (NYSE:I)

Q1 2016 Earnings Call

April 28, 2016 11:00 am ET

Executives

Dianne J. VanBeber - Vice President-Investor Relations & Communications

Stephen Spengler - Chief Executive Officer & Director

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Analysts

Simon Flannery - Morgan Stanley & Co. LLC

Jason K. Kim - Goldman Sachs & Co.

Philip A. Cusick - JPMorgan Securities LLC

Michael Vincent Pace - JPMorgan Securities LLC

Batya Levi - UBS Securities LLC

Anthony Klarman - Deutsche Bank Securities, Inc.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Arun A. Seshadri - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Lance Vitanza - CRT Capital Group LLC

Keith Hanauer - Seix Advisors

Umesh Bhandary - Jefferies LLC

Operator

Good day, ladies and gentlemen, and welcome to Intelsat's First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. Please note today's conference is being recorded.

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

Dianne J. VanBeber - Vice President-Investor Relations & Communications

Welcome, everyone, and thank you for joining Intelsat's first quarter 2016 earnings conference call. Earlier this morning, we issued our earnings release and published a quarterly commentary, both of which are available at intelsat.com. 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 the quarterly commentary to make your time with us more efficient and to maximize the time on this call for Q&A with management.

Beginning in the second quarter of 2016, we expect to change the timing of our call, so in the second quarter we plan to hold our call prior to the market open. Watch for the details when we announce our next call in July.

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.

Later today we will be filing the quarterly report on Form 6-K of Intelsat SA with the SEC. You can find a link to the filing 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, positioning and expected future financial performance. These forward-looking statements are subject to risks and uncertainties, many of which are outside out of our control. Please refer to the Safe Harbor statement included in the annual report on Form 20-F for information about some of the 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 participants in the call who is not a representative of Intelsat.

Following brief opening remarks by Intelsat CEO Stephen Spengler; Intelsat CFO Jacques Kerrest will join Steve for the Q&A session. Steve?

Stephen Spengler - Chief Executive Officer & Director

Thanks, Dianne. Our first quarter financial results and operational progress support our objectives for 2016. The highlight of the quarter is the entry into service of our first Intelsat Epic satellite, Intelsat 29e. We're deploying the satellite services, ground innovations, and partnerships to expand our leadership in large and fast growing applications.

First quarter revenues were $553 million, a decline of 8% from the year-ago quarter. As expected, Network Services contributed significantly to the decline, especially point-to-point applications such as channel and trunking, as well as pricing pressure reflecting the competitive environment.

Reduced revenue in our Media business also contributed to the decline, reflecting the North America volume reductions first reported in the third quarter of 2015. The Media results also reflects some currency pressure related to our business in Brazil and Russia, several contract expirations outside of North America and a number of contracts that were renewed at current market prices.

Adjusted EBITDA was $418 million or 76% of revenue. The reduced top line is the primary contributor to the decline in both dollar value and margin percentage. As we have mentioned in previous earnings reports, incremental capacity from all four of our 2016 satellite launches is essential to offset the revenue pressures that we expect to shadow our 2016 financial results. Our highest priority is getting our satellites launched and into service.

Today, we affirm our schedule for these launches with one exception. We've been notified by our launcher that Intelsat 31, the second of two satellites for DIRECTV Latin America will be delayed by a matter of weeks to a late May launch date. This will result in an in-service date that slides to early third quarter 2016. Our other two 2016 satellites, Intelsat 36 and Intelsat 33e, remain on schedule and are expected to launch in the third quarter and enter service by year-end 2016.

Intelsat 29e entered service at the end of the first quarter, and new and existing customer traffic will begin to be loaded onto the satellite over the next several months. Because Intelsat 29e is our first next-generation satellite, we're conducting significant testing to demonstrate that in-service performance matched our design objectives. I'm happy to report that test results have exceeded our expectations.

The Intelsat Epic satellites are designed to optimize throughput to the end-user terminal. To our broadband customers, the more efficient our capacity, the more inventory they have to sell and the more aggressively they can grow their businesses. Therefore, bits per hertz efficiency is a far more important consideration than aggregate throughput per satellite.

The test results underscore our confidence that we have a premium, differentiated platform, and one that delivers immediate value to our customers. Combined with our increased focus on managed-service platforms IntelsatOne Flex and IntelsatOne Prism, we're putting into place a global high-performance infrastructure that can scale in terms of volume, geography and the number of sites supported. This supports our confidence and our focus on addressing the higher volume and faster growing applications that comprise an incremental $3.1 billion opportunity for our fleet through the year of 2021.

Since our last earnings call, we've signed nine new Intelsat Epic agreements with customers spanning enterprise, fixed and wireless telecom infrastructure and mobility. A standout of course is the contract we announced with aeronautical broadband service provider, Gogo, which made a significant commitment for Intelsat Epic capacity on three satellites, as well as mobility capacity on other satellites across our globalized fleet.

In short, the contract momentum on the Intelsat Epic satellites continues on path unplanned, and we're confident that we're on track to ultimately unlock extensive sources of demand for our global network. Although it is early in the year, our business is progressing to our expectations. In this context, our financial guidance for 2016 is unchanged from our last call.

In addition, to our satellite launches and implementing our managed-service strategy, we continue to advance the other three operational priorities that are important in this foundational year. One of these priorities is supporting sector innovation. We announced that we'll be the first customer for an in-orbit mission extension service being provided by Orbital ATK. The value of such a service allows us to extend revenues and increase both our operational and capital expenditure flexibility.

Another important focus for the company is the liability management process, which is still ongoing. Our $1.25 billion secured debt offering in March was an important first step, and as always we appreciate the support of our investors. Given that this work is still unfolding, we may not be able to fully answer all your questions during the call today. 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.

We are confident in our ability to work through this transitional time and to enter 2017 in a stronger position. We're interested in assuring that you fully understand our business results.

So with that, let's go to questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from the line of Simon Flannery with Morgan Stanley. Your line is open.

Simon Flannery - Morgan Stanley & Co. LLC

Great, and thanks for that, Steve. I know your commentary about the restructuring, but I don't know if you or Jacques can say anything about it, what the expected timeline here might be for seeing some next steps on this? And then, just a question on the cash OpEx that was up quite a bit both sequentially and year-over-year, despite the revenue declines. I wonder if there is some advisory costs in there, but any color around, what was driving that and how we should think about that for the rest of the year? Thanks.

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Hi, Simon. Regarding the liability management exercise, obviously we are working on it, and it's a big project, as you know. It's very difficult to tell to give you timeframe of when it's going to end. But you can be assured that we're working on it diligently, and we will work on this as fast as we can. In terms of the expenses, and I guess you were talking about maybe the sequential increase in terms of OpEx, is that right?

Simon Flannery - Morgan Stanley & Co. LLC

Yes.

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Yeah. I think as you know Q1 is a little bit different from Q4 so, we have some compensations and bonus numbers in Q1 that we didn't have in Q4 and also – but I mean, basically that's it. If you look at the SG&A there is a big swing between Q4 and Q1 in the bad debt expense. And Q1 is more in line with what we saw last year, but compared to Q4, it's a big swing. So, I don't think there is anything abnormal in Q1. We pretty much were on budget and what we expected, so.

Simon Flannery - Morgan Stanley & Co. LLC

Okay. And the comp and bonus stuff, just to be clear, is that a one-time payment or is that sort of the lab accrual level for the year?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Yes. It's accrual level and it's also as you know in the first quarter it is more other compensations involved and so, that's what it is in Q1.

Simon Flannery - Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

And our next question comes from the line of Jason Kim with Goldman Sachs. Your line is open.

Jason K. Kim - Goldman Sachs & Co.

Hey, thanks. I got a business question and then a question about the balance sheet. First, with the testing of your Intelsat 29e going smoothly, have you seen any pick-up in your activity levels in terms of engaging your customers who are contemplating the service from you guys?

And then, in terms of the incremental adjustable market opportunity that you've cited for, I think for $3 billion, all of that opportunity, is there a way to put up segment a little deeper? And by that I mean, of that market opportunity, how much do you think you're better positioned to capture market share, given your focus on Ku-band architecture and the technology platform that you're using versus the Ka-band HTS and that most other operators are focusing on at the moment?

Stephen Spengler - Chief Executive Officer & Director

Okay. Thanks, Jason. The testing has gone well so far, as I indicated. We're seeing results that are equal to or better than our expectations in many cases. And so we're very pleased with that. We're obviously sharing that with customers and prospects, so that they can understand the benefits that they will derive from the system. And so since this just happened in recent weeks, it's not realistic to think the pipeline is going to turn around in a matter of a couple of days and be responsive to that. But as I've said in the past, we feel good about where we stand with our Epic satellites and the backlog build in those satellites, and the pipeline is within our expectations and building accordingly.

Let me comment on your second question, which relates to the future opportunity. When we talk about $3.1 billion through 2021, we see these opportunities in segments that are very well suited for the Intelsat Epic architecture and capabilities, as well as what we are doing in terms of building out services and technologies to support these applications. So, specifically, the opportunity that we're talking about comes from enterprise networks, globally, it comes from IoT, Internet of Things, and machine-to-machine. It includes cellular backhaul and cellular network extension opportunities. It includes aeronautical mobility, maritime mobility and government services incorporated in that $3.1 billion through 2021.

These are all sectors that are viable today, although I would say Internet of Things is still in its very early stages. But other than that, these sectors are all utilizing Ku-band capacity today. And I think that's the biggest distinction, and one of the biggest distinctions that needs to be made regarding our strategy and where we are. Intelsat Epic is available today with Intelsat 29e operating, and then, we will have additional capacity expanding globally with additional launches later this year and next year to enable Intelsat Epic services around the world.

We see Ku-band as the band of choice for commercial applications around the globe. It's being used extensively today for the applications we just mentioned. And it is robust across the globe from Intelsat and other suppliers. There's a technological ecosystem around Ku-band today with a lot of innovation happening in antennas and ground technology. It allows customers the choice, the resilience, and the performance that they need.

By bringing Intelsat Epic onto the equation in Ku-band, we bring higher performance, we bring better economics, we bring better accessibility, and as I said, it allows the global architecture to be leveraged, as well as the open and adaptable architecture. So, all this innovation that's happening on the ground can be benefited in the Epic services. So that is what I think distinguishes our strategy in Ku-band in particular versus other offerings which are more targeted to specific applications that are in the future and also future deployments of those satellites.

Jason K. Kim - Goldman Sachs & Co.

Okay. That's helpful. And on the balance sheet, maybe for Jacques, can you just confirm for us what your secured debt capacity is now once you give the guarantees to the 2022s, and based on the new sets of numbers for first quarter including any carve-outs you may or may not have used from your last secured bond issuance a month ago?

And then secondly, a related question, when you say the guarantees will spring during 2Q, is that a function of any covenant related issues you want to address as a result of your expected EBITDA declines as you report future quarters, or should we be thinking that this will be done, in terms of providing the guarantee, this would be done basically to refocus the market's attention to actual liability management scenarios and transaction as opposed to this intense focus on the guarantees under specific sets of bonds?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Okay. Hi, I will answer your first question first, because I guess it's part of the answer to the second question. As you know, we said on the call before the bond offering that we thought we had about $2 billion of secured debt capacity at the time. We lost a little bit because of the EBITDA number, which is the biggest contributor to that secured debt capacity in the first quarter, but we still have quite a bit available.

And obviously, the guarantee is tied to the next move that we will make in the liability management, which we can't talk about today, but as I said in the answer to Simon's question that we're obviously working on this with Guggenheim, and we will be effecting some transactions in the next few weeks or few months. So, I think it's all related and we wanted to give a sense to the market that obviously depending on what transactions we do and at what time, we will be issuing the guarantee.

Jason K. Kim - Goldman Sachs & Co.

Got it. Thank you.

Operator

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

Philip A. Cusick - JPMorgan Securities LLC

Hi guys, thanks. I guess two things, one, if you could address, Media was a little weaker than expected. I understand it will ramp back up as the DTV satellite comes on later in the year. But what's happening in the underlying business? And then the government sector seems to be tracking better than guidance at this point, even when we include the CSSC cancellation in May. Do you think full year results could come in better at this point than your current guide? Thanks.

Stephen Spengler - Chief Executive Officer & Director

Okay. Thanks, Phil. On Media, Media is tracking to our full year expectations in terms of guidance. I think what you saw in the first quarter were a couple of things, you're seeing the year-on-year effect of the compression or move to a single standard of distribution in North America, that a couple of our customers implemented last year. We're seeing a bit of effect of currency issues in Brazil and in Russia for our media customers. What you don't see is that we are experiencing some strong activity in our neighborhoods. There is not a lot of capacity there to sell, because they're very full, but we did do some renewals in our neighborhoods and they held up very well.

Outside of our media neighborhoods, there were some non-renewals, there was a termination of a non-paying customer, there were a few price adjustments across the board. And these are the – outside the neighborhoods, these are the more competitive places for our Media business. And so, it's not abnormal, There was probably a little bit more than normal in the first quarter, but nothing underlying across the media sector trend-wise that gives us concern, and you're right to point out that later this year, we'll have Intelsat 31 and Intelsat 36 coming into operation, which will positively impact the Media business.

In terms of government, we tracked a little bit better in the first quarter, because of a particular CPE project for one of our customers. So, first quarter was a little bit higher on, because of some one-time events. We do see that tracking within our guidance for the full year at this stage. Obviously, the CSSC outcome is still in question. We submitted our proposal in April, and we have not heard back on that, yet. So we will see how that plays out. We are getting a small amount of incremental extension business, we anticipate coming forward, but it's not real clear how much of that will be and how long will it be.

Philip A. Cusick - JPMorgan Securities LLC

Okay. Thank you.

<: You're welcome.

Operator

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

Michael Vincent Pace - JPMorgan Securities LLC

Hi. Good morning. A bunch of follow-ups actually. I'm wondering if we can go back to the Media business, and I guess you noted for the first time, the renewals of certain contracts to current market rates. And I'm wondering if you could give us a little more color on, were these contracts that had multiple years of life left or were they close to renewal and you just accelerated that? And I guess how did that work in terms of pricing reductions with the timetable of renewals there.

Stephen Spengler - Chief Executive Officer & Director

Okay. First of all, they were at the normal renewal point. They weren't out of the cycle from that standpoint. And in actuality, in some cases when these are renewals within our neighborhood, the market rate was actually an increase in price. When it was outside of our neighborhood, it was a decrease in price. So it's really dependent on where they were, but these were normal renewal cycles, it was not out of cycle or it was not a renegotiation at all in these circumstances.

Michael Vincent Pace - JPMorgan Securities LLC

Okay, that's good. And then can you just review for us, I guess the renewal timeline for major media contracts, I believe 2018 there are some, and then a lot more in 2020. Can you just confirm that in a little more detail?

Stephen Spengler - Chief Executive Officer & Director

Well, that's correct. 2016 is pretty much a low renewal year for Media. We have some in 2018 and 2020, but when you look at the neighborhoods, most of those contracts, in North America in particular, go to the end-of-life of our North American satellites. And so, we're years away from renewal discussions on those. But when you talked about the 2018 and 2020 those are specific to North America. Other renewals across the network were at varying times.

Michael Vincent Pace - JPMorgan Securities LLC

Okay. Couple one on the business. Can you just – the nine additional Epic agreements that you signed since February 22, I'm wondering if there's a way that you can help size that for us. And is there a way for maybe you to put it in the context of size relative to the three anchor tenants on Intelsat 29e payout, similar size, smaller size?

Stephen Spengler - Chief Executive Officer & Director

Well, first of all, those contracts, the nine contracts that we've mentioned are substantially if not in a very large majority weighed into new business. So we're very glad to see new business come along for the Epic satellite. It's across enterprises, it's across cellular backhauls, it's across mobility. The one contract that was sizable was the Gogo contract.

And so, I don't want to necessarily put it in relation to the first three initial anchor contracts, but it is substantial in the sense that they are taking services on three of the Intelsat Epic satellite as well as a number of our broad beam satellites as well. So it is a substantial contract for Intelsat and for that part of the fleet, the Epic part of the fleet and the broader fleet, and it's a long-term contract. So that all combines to make it fairly sizable commitment on the product Gogo, and we're very much pleased to be working with them and continue to be working with them as they expand their network.

So that's how it looks. I would say that, again, that we're pleased with how it's progressing. And by the way, I should mention one of the thing on Gogo, an element of the Gogo contract also included a commitment on OneWeb. And we think this is very important. It's a incremental commitment above the capacity on the Intelsat network. We think it's a endorsement by a leading service provider in the mobility sector of our strategy, which is the strategy to have services that's band both GEO and LEO through an interoperable capability into a single terminal, and it will allow customers like Gogo to deliver services across the polls, allow our services with more performance density in certain parts of the world depending on how their network rolls out. And we're very pleased to be able to work with them on this future strategy that we're implementing today with OneWeb.

Michael Vincent Pace - JPMorgan Securities LLC

Great. And then, just a capital structure question for Jacques, I guess. Can you just explain why you don't have revolver availability given you can issue first-lien debt and guessing necessity with credit facility baskets, but – so that would help? And then, when you think about, you mentioned $2 billion of first-lien or secured debt capacity back when you did the deal. You used a $1.25 billion of that. EBITDA has reduced the difference a little bit and I just want to understand is that difference – is that a conservative view of permitted liens tests or is there – are there other baskets that could provide some other wiggle room, or is it really just black and white?

Stephen Spengler - Chief Executive Officer & Director

I think, it's pretty black and white. And we've lost a little bit as you indicated and that's all it is and we knew that. We will obviously manage within that capacity. Regarding the revolving credit, it's obviously tied to the borrowing and eventually we have said before we did the bond offering, that we will use the proceeds to manage our liquidity going forward. And this is a maturity that came up in 2017 anyway and so that's what we did and we're managing on that basis.

Michael Vincent Pace - JPMorgan Securities LLC

Great. Thank you.

Operator

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

Batya Levi - UBS Securities LLC

Great. Thank you. A question on Network Services and pricing pressure that you mentioned that you're still seeing. Has there been any change in the last couple of months in terms of the competitive activity or the demand that's coming in from the customers that could put just maybe more stability on the pricing side? Thank you.

Stephen Spengler - Chief Executive Officer & Director

Yeah. I would say at this point that pricing is playing out as we expected in 2016 for Network Services. And so I don't see much of a change from what we anticipated, and of course what we anticipated is incorporated into our guidance.

I will say though that as Intelsat Epic comes on online, and as we enable newer, higher volume services, we have the ability to deliver services with higher capacity commitments, at better economics, better pricing for our customers and acceptable pricing for us. So, we will see bigger and longer-term deals hopefully with Intelsat Epic that will have price points that are maybe lower than historical, but also reflecting our strategy of driving higher volumes.

Batya Levi - UBS Securities LLC

All right. Thank you. And just one follow-up on Gogo. Is the bulk of the contracts starting sometime next year or can we see a bit of that in this year as well?

Stephen Spengler - Chief Executive Officer & Director

There are aspects of that contract that have started already on some of our wide beam capacity.

Batya Levi - UBS Securities LLC

Got it. Thank you.

Stephen Spengler - Chief Executive Officer & Director

You're welcome.

Operator

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

Anthony Klarman - Deutsche Bank Securities, Inc.

Thanks. Couple of operating questions. First on the navy contract, you mentioned the resubmission of the revised proposal on April 1. Could you just flush out what the rough timeline is and when you would expect to hear on that revised proposal? And then, can you remind us what your guidance for the year assumes with respect to the Navy contract?

Stephen Spengler - Chief Executive Officer & Director

Sure. We really have no way of estimating when the contracting office will make a decision on the CSSC proposals. And so, it's been in for a few weeks now and we're just going to have to wait to see when they make a decision and when they would be – when they would want to commence the new services for whoever wins that contract.

A reminder on the guidance, the guidance assumed that we would not renew that contract. So, the end of that contract life is the end of this month, end of April, and so that's what we've assumed in the guidance. As I mentioned earlier, because we are the incumbent supplier for that contract, we are getting some extension contracts for those services, and so, they're sort of coming out incrementally. And so, we do expect to continue some revenues, but it's unclear for how long and how extensive that will be.

Anthony Klarman - Deutsche Bank Securities, Inc.

And I guess as we think about 2Q comparisons, this obviously would be the first quarter where you would comping against the period where you had that in. And so, I assume we should be expecting a more steep decline in government on a year-over-year basis in 2Q? And then moderating subject to what you wind up hearing back on the resubmission proposal?

Stephen Spengler - Chief Executive Officer & Director

Well, I think especially because we have the CPE contracts in the first quarter. So that makes the first quarter little bit higher than let's say normal, because of the one-time equipment contract. And so, I think your basic assumption is correct.

Anthony Klarman - Deutsche Bank Securities, Inc.

And then on 2019, I just wanted to try to get back to sort of the economics of it again. You mentioned in the quarterly summary, the quarterly commentary about the satellites being 2.5 times above the current capacity platforms. As we're thinking about load factors on the satellites, should we be thinking about that type of multiplier effect as to what the revenue and the cash flow capabilities are going to be of these Epic satellites as they load going forward?

Stephen Spengler - Chief Executive Officer & Director

Well, I think it's important to put that statistic in context. For certain applications, with certain antenna sizes and certain assumptions, we can get up to 2.5 times is our estimate of improvement over wide beam services to Epic with enhanced ground equipment and optimized ground equipment. That doesn't mean that every single network is going to be able to avail itself of that kind of increased performances; many of them will, some maybe a little bit less. We think that all of them will benefit in one way or another, but to get to that maximum performance multiple, it depends on the specific application, the specific network.

But as I mentioned earlier, we do expect that this additional performance is going to enable us and our customers to deliver much higher performance to end users and unlock demand for high-volume applications across multiple segments, such as mobility and other areas. And our business plan and business case for the Epic satellite is structured and constructed to support this, because Epic satellites as we said for some time, each copy of the Epic satellites are more expensive, but the incremental individual units of capacity are less costly to us. So, we can deliver units at lower prices as well.

Anthony Klarman - Deutsche Bank Securities, Inc.

Got it, thank you. And then on the balance sheet and capital structure, for Jacques, I guess there was at one point a bank amendment that you had been pursuing, and as a part of that, you were looking to perhaps cancel the revolver. I just wanted to confirm that, one, the bank amendment was potentially still part of the process. I don't think it was ever sort of terminated and that your expectation given that you mentioned you did not have revolver capacity draw currently was that you would be canceling the revolver and would be funding that with cash on balance sheet?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Yeah, so the amendment is in another options that we have that we obviously are assessing and as long as we analyze this and see what we want to do in the market, we saw the options that we have available. We may or we may not revisit the amendment. And it's too early to say if we're going to revive this or not. The cash, you're right, we've said all along that we will be using liquidity and part of the bond offering proceeds when to do that and that's what we will be doing going forward.

Anthony Klarman - Deutsche Bank Securities, Inc.

And based upon where the business is, and what you see as the forward for the liquidity and the cash burn of the business. Do you imagine holding minimum cash balances that are roughly similar to the revolver capacity of $450 million or so, or do you think at this point that the business could run with a narrow cash balance?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

$450 million is a number that we have mentioned before, and we will go up and down from that number, but that's the numbers that we're going to manage to.

Anthony Klarman - Deutsche Bank Securities, Inc.

Okay. And then just a question on open market purchases, I guess, I just wanted to confirm that there were no, sort of purchases or otherwise exchanges of debt during the quarter or subsequent to the quarter end?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

That's correct.

Anthony Klarman - Deutsche Bank Securities, Inc.

Okay. Great. Thank you very much.

Stephen Spengler - Chief Executive Officer & Director

You're welcome.

Operator

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

David Phipps - Citigroup Global Markets, Inc. (Broker)

Hi, thank you for taking my questions. I've got a question on the SG&A. You had higher SG&A in the first quarter after running at lower levels. In the second quarter last year, you also had higher SG&A. Were there any one-time things that we should think about there? Or should we think about the SG&A for the second quarter to be in a similar range this year?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Hi, David. Yeah, I'm not sure about Q1 2015 compared to the prior year. But if you look at Q1 this year compared to last year, as I said before, there is a very small increase in terms of some of the bonus calculation and some of the other comp, for year-to-year, not sequentially. And the big – as I said before, the numbers in terms of the bad debt is really the swing between the Q4 to the Q1. But in terms of bad debt for Q1 of this year, we are very close to just about $1 million more than last year. So it's pretty normal, and it's almost at the same level that it was in Q2 last year. So there is really nothing that we worry about here, it's just a few numbers that moved this quarter, but we are pretty much close to our budget that we had expected.

David Phipps - Citigroup Global Markets, Inc. (Broker)

I was asking more on the second quarter from this year versus the second quarter last year, because the expenses were elevated there as well?

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

Yes, that's correct. I mean, the big swing in this is obviously bad debt, and it's hard to – we have a forecast for that. But sometimes you get lucky and we got really lucky in Q4 last year, for instance.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Fair enough.

Jacques D. Kerrest - Chief Financial Officer & Executive Vice President

So I don't think there is anything abnormal, and you will not see any major increases in Q2 and Q3.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Okay. And when we look at the media guidance that you gave for the full year it was down slightly to down 2% and you started out down 5% or almost 6% for the quarter. So you're already down about 1.25% for that. Is that still good guidance that we'll be down somewhere between flat and zero for the year, because I don't think any of the Epic satellites add to the revenue in that business, do they?

Stephen Spengler - Chief Executive Officer & Director

No, the Epic does not necessarily play into the Media guidance. We're comfortable with where we are at this point of the year.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Okay.

Stephen Spengler - Chief Executive Officer & Director

And again, we have two satellites coming in – two Media satellites; Intelsat 31 and Intelsat 36. So when those come on, we're going to be seeing some additional revenues from that new capacity.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Got it. So there's two other questions. One, I get a lot of questions asked about, you have an Epic backlog and you've given that there is a certain percentage, and then you've said that you've gotten new customers. But I think investors are having a hard time figuring out how they should think about how much revenue that could be, and how much (38:27) or what is the new capacity that you're up to from the base of the 20% plus all the different customers including the nine you've added since the last conference call. So do you have any update that you can give us on what capacity you're up to on the Epic 29e? Or – and maybe help us try to think about how the revenue will start in the current quarter and beyond? So is it very late, has it started now, should we expect it at the middle of June?

Stephen Spengler - Chief Executive Officer & Director

Okay. So, our objective for the Epic satellites, I think we laid out at the beginning that we were talking about fill factors of 40% to 60% fill in a three-year timeframe for those satellites. And we're on track for that target at the current time. So, unfortunately, we don't give specific fill rates for specific satellites or subsections of our network. So that's probably the best we can do from a numerical guidance standpoint for the Epic satellites. But in terms of fill, I think I noted that we expect that we will have the Intelsat 29e filling up sort of mid this quarter to its backlog rate. So it's going to be a period of time where we have some transitions early in its life, at the very first month or so. But then starting to ramp up mid second quarter and going from there. Of course, the Intelsat 33 satellite isn't launched till the third quarter. So there's a late 2016 impact for that one.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Fair enough. And then, final question – just a clarification. When we talked about the guarantees springing on the unguaranteed Jackson bonds, that suggested that you needed to go through a liability management, complete I'm thinking (40:28) liability management in order for those to spring, it wasn't a timing issue. So if there's no more liability management done in the second quarter, we would assume that the springing guarantees would not be sprung?

Stephen Spengler - Chief Executive Officer & Director

I don't want to be so straightforward about this. But I think we anticipate to have some liability management during the second quarter.

David Phipps - Citigroup Global Markets, Inc. (Broker)

Thank you. That answers my questions.

Operator

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

Arun A. Seshadri - Credit Suisse Securities (USA) LLC (Broker)

Yeah, hi. Thanks for taking my questions. First, I just wanted to ask, in the government business, what the amount of the non-recurring hardware sale? And then specifically, I think you've mentioned something about the – I'm just trying to understand the impact of this new format for buying behavior from the DoD, about this lowest price technically acceptable format? And sort of, is that a big departure from their prior buying behavior, and maybe you can start there?

Stephen Spengler - Chief Executive Officer & Director

Okay. So we don't divulge the specific value of specific contracts, and so that would fit into the – the CPE contract would fit in that category. There was a little bit of it in Q4 2015 and then the bulk of it was in Q1 2016. And you can see maybe a quarter-on-quarter change there that would probably give you an indication of the size.

In terms of buyer behavior, the government contracts are tendered with different types of criteria for their decision. The CBSP or CSSC contract was originally a best value contract and in the first go around and that best value contract will take into consideration not just price and technical performance, but also performance of the vendor, reputation of the vendor and other factors into the equation as they judge a contract.

In this current RFP that they issued, which was the third RFP in the CSSC contract, they changed the purchasing criteria to lowest price technically acceptable. So some of the other factors are removed from the equation and they look at technical acceptability and performance and pricing as the main criteria. This is not a new contracting method. It's something that's used on certain government contracts on a regular basis, other government contracts are more best value based. So it just depends on the particular situation.

Arun A. Seshadri - Credit Suisse Securities (USA) LLC (Broker)

Got it. That's helpful. Thank you. And then, is there any reason, what is the recent evidence around DoD demand and indications that DoD is getting more constrained regarding their own satellite capacity?

Stephen Spengler - Chief Executive Officer & Director

Well, right now, we feel like we're in sort of a normal cadence for the government business, their use of government capacity. Their use of commercial capacity is in a fairly steady state. They are using both. They are leveraging their own assets. They are leveraging commercial assets. And so we do see the opportunity to continue to serve the government and will be important part of their solution going forward. But there isn't a strong pipeline now for new business. It's in this operational cadence that's pretty steady and regular.

But one thing I will say about government contracts is that often when requirements come up, they can come up quickly. So it's very hard to have visibility for this, but often a requirement will come along if we have the right kind of servicing capacity to meet those requirements. The bid is managed on a rapid basis and services can turn up quickly and that's just the nature of this sector.

Relating to that, however, is that we do see opportunities in the future, where government procurement entities are looking at different models for procuring capacity on a longer-term basis and then higher bulk capacity. So we'll see how that comes into play. This ties directly to a greater emphasis in the DoD to integrate their capacity and satellite services strategy between government and commercial, where it was not done so in the past. It is becoming more integrated going forward, which I think is good for industry. It's good for the government customers.

Arun A. Seshadri - Credit Suisse Securities (USA) LLC (Broker)

Thank you for that. One last thing from me. And – in terms of the Media revenue, I think in the past, you'd talked a little bit about in neighborhood versus outside the neighborhood. I don't know is there any way you could quantify how much of your Media business revenue today or backlog would you consider in neighborhood versus outside? Thanks.

Stephen Spengler - Chief Executive Officer & Director

Well, it would be hard for me to quantify the revenue off the top of my head here, so I won't do that. But a large portion of the backlog is within the neighborhoods, that is where most of the media backlog resides. It's with DTH providers and those neighborhoods in various parts of the world. It's in the distribution neighborhoods to cable head-ends across Latin America, across Asia, across North America. It is really the valuable part of this business, because it is providing mission critical services that are highly valued by these customers across the network. So that is the more stable part of the business. And then, outside those neighborhoods, we tend to have a more competitive and dynamic environment for everybody in the space.

Arun A. Seshadri - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

Stephen Spengler - Chief Executive Officer & Director

You're welcome.

Operator

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

Lance Vitanza - CRT Capital Group LLC

Hi, thanks. I had two sort of things. The first is on the $3.1 billion incremental revenue opportunity through 2021. I want to make sure I'm thinking about this correctly. Do you mean that by 2021 the opportunity will be $3.1 billion per year, or is this a cumulative revenue figure, in other words $600 million per year? And then, in any case, just how much of that do you think you can capture or how long do you suppose it would take for you to capture your fair share of that business opportunity?

Stephen Spengler - Chief Executive Officer & Director

So the $3.1 billion represents what the incremental business will be in 2021. So it will build to that increment of additional business across those verticals that I mentioned before.

Lance Vitanza - CRT Capital Group LLC

Got it.

Stephen Spengler - Chief Executive Officer & Director

So, it's a sizable increase across these sectors. We feel good about how Intelsat is positioned, because today, we are the leading provider of enterprise networking services across our sector. We are the leading provider of cellular backhaul and cellular network services across our sector. We're the leading provider of aeronautical and maritime services and government services. So we have a strong position in all these main verticals.

And so, we expect that with the things we're doing strategically and bringing in new services on the Intelsat Epic fleet, developing new services that complement that such as IntelsatOne Flex or IntelsatOne Prism that will be able to get our share of the business, and the intention of course is to get more than our share of the business, if we execute appropriately and develop these services in time. And some of this will be ramping in the near-term. We mentioned that the Gogo network earlier as an example. Even though that's Epic-based contractor, our service is commencing early, they're commencing now. So this isn't something that we're waiting for few years, where it's going to ramp over that period of time, the demand.

Lance Vitanza - CRT Capital Group LLC

Great. And then, speaking of Gogo, with that contract that you announced recently, can you tell me who supplies the bulk of their capacity right now?

Stephen Spengler - Chief Executive Officer & Director

Right now, I would say, we are probably the leading provider of their capacity on broad beam capacity. Gogo has an air-to-ground network in North America and they have a satellite network augmenting North America as well as internationally. And so, I would see us as the leading supplier at the moment.

Lance Vitanza - CRT Capital Group LLC

And I think a lot of this use Gogo when we fly. It's great to have that option. But I think many of us would like it a lot more if it were a lot faster, had more capacity. Is that basically the pitch here that you went to them with and will this ultimately enable much greater speeds for end users?

Stephen Spengler - Chief Executive Officer & Director

So Gogo, as I mentioned, has two networks. They have the air-to-ground network, which is a North America network, and they're building out and enhancing their satellite network that will augment the North American services and internationally. They see the world in a very similar way we do. They've done some very smart investments we believe in their antenna technology for the aircraft, they call it 2Ku. And that is important that the technology and the antennas are optimized for these kinds of services. And they recognize that with that antenna technology and high throughput technology such as this available on Intelsat Epic, they can enhance the services that they deliver to their customers.

And I want to emphasize again that these services are being built-out in Ku-band, which again we see is the commercial band of choice for these kinds of services, because it's available today, it's robust today, and is going to get better over time as high throughput capability, such as Intelsat Epic comes along.

Lance Vitanza - CRT Capital Group LLC

Thanks for your time.

Stephen Spengler - Chief Executive Officer & Director

Okay. Thank you.

Operator

And our next question is from Keith Hanauer with Seix Advisors. Your line is open.

Keith Hanauer - Seix Advisors

Hey, thanks. Good morning. Steve, I think there is a little confusion out there on the Media business, about what exactly you mean when you're talking about in neighborhood versus out of neighborhood. So maybe just more clarification about what exactly that distinction is? And you mentioned it applying to both DTH as well as cable distribution. So maybe you can provide some color on the pricing issues that you saw there. Is that a headwind that's limited to just the distribution side and not DTH, or was that kind of spread throughout in the out of neighborhood footprint?

Stephen Spengler - Chief Executive Officer & Director

Okay. Sure. Glad to clarify that. So over the years, we've built out our Media business globally with the specific intention to support content providers and DTH operators. And so let me touch upon DTH first. So we've enabled companies like DIRECTV Latin America to build out their services across Latin America on Intelsat's satellite. And in recent years, we've launched Intelsat 30 to help enhance that neighborhood for DIRECTV across Latin America. Intelsat 31, which will be launched later this year, is an enhancement to that neighborhood to strengthen that customer services and our position there, of course.

Intelsat 36 is another example, where we have a DTH distribution platform at a particular orbital slot serving Africa. That satellite will enhance that neighborhood for MultiChoice, our customer there to allow them to expand their services in HD and 4K in future and those sorts of things. So we make investments in capacity and satellites to enhance those positions with various DTH operators. I gave you two examples, but there are others around the world.

In terms of what we do for content providers is that we enable content providers to deliver their content to cable head-ends across various regions of the world. So we help people distribute their content across three different neighborhoods and we're building a fourth in Latin America. We have a distribution neighborhood for Africa, for Asia, parts of Asia, across North America.

And so, these are places in orbital slots and satellite communities that see thousands of cable head-ends and reach thousands of cable head-ends. So, this is a place where programmers want to be, it's how they reach end subscribers through cable head-ends and other terrestrial distribution vehicles. And so, there is real inherent value to be part of these neighborhoods in these communities around the world. Others will leverage these same communities such as BBC or NHK to reach these neighborhoods as well. So, that is the basis of where we have neighborhoods for various communities.

Outside of those long established neighborhoods are places where we provide services to other media companies. And this is also a more competitive part of the marketplace because there may be some more competitive alternatives. There hasn't been an established neighborhood setup. And so, those are places where we may have bit more competition and may be places where we have media companies that are more entrepreneurial in nature, where we may help facilitate startups in the media space and many of those will make it, some don't, and is places where there may be more price competition and such. So, that is what we saw in the first quarter, some pressure in those non-neighborhood areas. And so, we did not see pressure within our distribution neighborhoods and DTH neighborhoods themselves.

Keith Hanauer - Seix Advisors

Okay. And that sort of makes it sound like that DTH side itself almost inherently is all kind of in neighborhood or am I understanding that...?

Stephen Spengler - Chief Executive Officer & Director

Yes. Yeah, for the most part. For the most part. There are some smaller DTH operators that we're trying to build up and establish new neighborhoods around that are in early stages, but yeah, for the most part, you're correct.

Keith Hanauer - Seix Advisors

Okay. Thanks. And if you could give a little bit of color on the backlog, I think that would be helpful? And maybe just what from – specifically from 29e and from the Gogo contracts, what has hit the backlog at this point? And on Gogo, is it backlog for the entire contract or does some of that phase in as the Epic satellites are launched and you increase the scope of the contract?

Stephen Spengler - Chief Executive Officer & Director

No, as long as it's a firm fixed contract, which this is, we will book the backlog for the entire value of the contract. So the Gogo contract is in the backlog.

But to look at what has happened this year, when we've talked about our headwinds in terms of pricing headwinds or point-to-point service headwinds, that affects our backlog as well. And so in the first quarter, we did have an impact of those headwinds to our backlog. We didn't have any new capacity coming in in the first quarter of this year. So there wasn't new capacity to build backlog onto. But at the same time, we did a number of deals and we built new backlog that didn't offset those headwinds, but we did make progress with Gogo and other service providers on the fleet in general, but more specifically on Intelsat Epic satellites across the fleet. So we're seeing the backlog build in Network Services and those areas. We're pleased with where it's progressing so far, and we expect it to continue as these new satellites come along.

Keith Hanauer - Seix Advisors

All right. Thanks a lot.

Stephen Spengler - Chief Executive Officer & Director

You're welcome.

Operator

And our last question for the day is Umesh Bhandary with Jefferies. Your line is open.

Umesh Bhandary - Jefferies LLC

Hi, thank you for taking my question. Maybe the first one is a little bit of a bigger picture question, obviously with the supply demand imbalance within the data services side, I mean all of us have been wondering sort of when do we sort of get to that potential balance. And can you sort of maybe talk about that in the context of I think some of your providers, some of your competitors are talking about potentially putting up capacity as high as a terabyte per satellite. I'm not sure if those are actually real, is that feasible? If that is the case then how should we sort of think about long-term supply demand dynamics within the Network Services segment of the business?

Stephen Spengler - Chief Executive Officer & Director

Sure. I think, when you look at supply and demand today, I think it's very important to focus on the demand side in particular. We are in a point in time where there are huge demand opportunities and opportunities to unlock demand in revenue across multiple segments of the ecosystem around the world. We have $3.5 billion to $4 billion people unconnected today, to the Internet or broadband.

And the way satellites are evolving and services are evolving there is an opportunity to capitalize on that. We have people that demand to be connected virtually every minute of the day, whether they're in an airplane or on a ship or anywhere and there's opportunity to capture that part of the market. Same thing is true for businesses, enterprises, governments, military customers, they're looking for more and more broadband capability anywhere in the world at any given point in time. And so – and then there is future applications such as the Internet of Things, connected cars and other types of vehicles that may be connected. So, there is a unique situation now that that is in front of us in terms of potential demand.

What's unique about this situation and this supply and demand situation is that there is new technology coming onboard into the satellite networks around the world, into the ground networks that support satellite networks and in the broader telecom space that will enable very high performing services and high performing services at lower costs to the end users that will hopefully unlock this demand opportunity.

So, that's why we feel bullish about our investments that we've made in Intelsat Epic, the investments we've made in the services that support Intelsat Epic, the investments that we've made in technology and partnerships to enable some of these end-to-end services and capabilities to unlock this demand.

So, I think it's very important to keep in mind the demand situation. There always will be supplies and ebbs and flows in supply and demand. But I think the interest in future satellites is based upon this belief that there's a lot of opportunity out there and a specific opportunity for the satellite sector, which hasn't been quite as visible in the past.

Umesh Bhandary - Jefferies LLC

So, does that mean that really from – when you look at your business to achieve stability, is that sort of like several years out or is that kind of in sight?

Stephen Spengler - Chief Executive Officer & Director

Well, we've said – for us, we've said that our new satellites are absolutely essential for us to overcome some of the headwinds we are facing, and to return to growth. And so, we have four launches in 2016, one of them has already completed. We've three more to go. Those are very important to position us for 2017 and beyond. We have three additional Intelsat Epic satellites next year. So these are all essential elements for us to capture the growth that I talked about, but also to address our business situation as you just referenced.

Umesh Bhandary - Jefferies LLC

Got it. And then one specific question regarding the Media business. Just given the precipitous decline that we saw in this quarter, given some of the renewals that you had, maybe you can educate us on when the 2018s renewal come? Why should we not – why should we expect similar kind of headwinds or we should not, because those renewals are something different?

Stephen Spengler - Chief Executive Officer & Director

Well, first of all, Media is performing to our expectations as I said earlier. We have two new satellites coming later in the year, which will support the Media business through 2016 and into 2017. We do think that the renewals that come up in 2018 and beyond, customers may very well avail themselves of new technologies at that time, which may allow them to be efficient, more efficient, just as they did last year. So that could happen.

However, at the same time, there are opportunities emerging in 4K, for distribution in 4K, or HDR transmission across North America and other regions, and other opportunities for growth in media globally, because there's still a large amount of HD still to build out across the global network. So we have visibility into these renewals coming up in the future and we also anticipate seeing some opportunities for growth as well.

Umesh Bhandary - Jefferies LLC

Got it. And one final question from me. Just in terms of the balance sheet you noted that in your prepared commentary that you've repaid the intercompany note between Jackson and (01:03:25). Just maybe your thought around that, why that was done at this particular point in time, and where does that play, sort of play into the liability management that you're talking about?

Stephen Spengler - Chief Executive Officer & Director

Hi, we're advised by council that we have to do this after raising the cash from the bond offering. And obviously it's part of the overall projects that we've started with Guggenheim. That's we wanted to market to know that we had done this.

Umesh Bhandary - Jefferies LLC

And maybe you can highlight though what is the reason that the council gave you that you needed to pay that intercompany note, so that we're clear on that?

Stephen Spengler - Chief Executive Officer & Director

I don't think we can tell you exactly, because we have several options available to us and that's the answer, sorry.

Umesh Bhandary - Jefferies LLC

All right. Thank you very much.

Stephen Spengler - Chief Executive Officer & Director

Thank you.

Operator

Thank you. And I'm not showing any further questions. I'll now turn the call back over to Mr. Spengler.

Stephen Spengler - Chief Executive Officer & Director

Okay. Thank you, Bridget. Thank you everybody for joining the call today and thank you specifically to 11 of you that joined us for some Q&A. So, thank you very much.

Operator

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

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