Ses Global's (SGBAF) CEO Karim Michel Sabbagh on Q1 2016 Results - Earnings Call Transcript

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Ses Global SA (OTCPK:SGBAF) Q1 2016 Earnings Conference Call April 29, 2016 3:30 AM ET


Mark Roberts – Head-Investor Relations

Karim Michel Sabbagh – Chief Executive Officer

Padraig McCarthy – Chief Financial Officer


Giles Thorne – Jefferies

Eric Beaudet – Natixis

Simon Cooke – Insight Investment

Ben Heelan – Bank of America

Robert Berg – Berenberg

Igor Ostrowski – Goldman Sachs

Eliska Mallickova – Morgan Stanley


Good day, and welcome to the investor and analysts’ conference for SES first-quarter 2016 financial results. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Roberts. Please go ahead.

Mark Roberts

Thank you, Emma. Welcome, everybody to the first-quarter 2016 results call. Karim Michel Sabbagh, our CEO; and Padraig McCarthy, our CFO, are going to discuss the quarter, and our announcement to move to a controlling stake in O3b, which refers to the documents which we published this morning, and which are available on the website, if you haven’t already received them directly from us. Following that, we’ll be pleased to take your questions.

Karim, the floor is yours.

Karim Michel Sabbagh

Thank you Mark. Welcome everyone, to this briefing regarding the 2016 first-quarter results. Over the January-March period, we’ve made considerable progress on the execution of our strategy. This includes all the organic avenues we have prosecuted, and on which I will expand further on this call. We have also pursued two accelerated capabilities development programs. First, and as announced on 26 of February, SES is acquiring RR Media with the objective to merge it with SES Platform Services. The tie-up will create the world’s foremost digital media platform services.

Second, we are also announcing today the acquisition of a controlling stake in O3b, which creates, under the SES Group, the most formidable data-centric satellite-enabled communication capabilities. I will expand further on O3b at the end of the Q1 results, as per the dedicated briefing you had access to this morning.

Now back to the Q1 highlights, and as on Page 1, we had a productive quarter with a relentless execution of our strategy among the four market verticals with revenue on the aggregate growing by 0.8% on a reported basis, and EBITDA in line with previous years. Now, this picture would be incomplete without mentioning the strength of our fully secured backlog, reaching €7.6 billion by the end of Q1. This underpins our ability to, first, secure the strategic renewals; two, achieve new business wins; three, build traction for the programs to be launched in 2016 and 2017; and finally, and most importantly, is to sustain the value differentiation of our capabilities, i.e., our ability to monetize them in a way that is accretive to our business.

Moving on to Page 2, video continued to show strong growth on a reported and constant FX basis, underscoring the differentiated capabilities throughout the value chain. Mobility continued to go from strength to strength in the aeronautical and maritime sub-segments, delivering growth rates of nearly 61% and 51% on a reported and constant FX basis. Our enterprise segment is starting to benefit from the strategic repositioning as we are increasingly placed as an enabler for our clients’ networks and businesses. Government is showing strong momentum with the expanding our commercial wedge outside the U.S.; and, equally important, with the re-win of our signature programs in the U.S., with [indiscernible] as a case in point.

Our video business, as outlined on Page 3, continues to benefit from strong differentiation, as evidenced by the continued growth of our channel count, and particularly for high definition, where year-on-year growth was 17.6%. We’re also now broadcasting, on a continuous basis, 15 ultra HD commercial channels.

Page 4 is a good recap of SES’s unique positioning along the video value chain. The merger of SES Platform Services and RR Media will result in serving 1,500 customers, 1,000 plus TV channels, and more than 120 video-on-demand platforms. Additionally, at the midyear point, SES-9 is expected to arrive at 108.2 East to be co-located with SES-7, and strengthen what is already an outstanding video neighborhood in Asia Pacific. Our engagement in the video market also as an experienced provider through HD+ is making marked progress. We now have nearly 1.8 million paying subs on the platform, a number that effectively is up 11% versus previous years. The platform, we expect, will see further strengthening with the addition of ultra HD channels in 2016.

On the enterprise segment, as outlined on Page 5, it is benefiting from a differentiated positioning among the three types of applications that are effectively best-enabling our client businesses. And we are seeing a strong pull for our Enterprise+ solutions, thanks to the unique combination of our GEO wide beams; GEO HTS; and MEO HTS capabilities. Now, as noted on Page 6, this is enabling us to reposition our business beyond infrastructure to provide network platforms, as well as full service provisioning. The most recent win with Facebook underscores the potential of SES to constantly customize its dynamic offering. I would like to refer you back to what I’ve mentioned on previous occasions regarding the need to have a more adaptive approach or enterprise segment, and this is exactly what we are doing. This means, effectively, that we’ll double down on serving clients where our solutions are differentiated. We’ve done this at the start of 2015 with the region-wide win with Airbus services, and most recently with Facebook; and we’ve gradually de-emphasized some of the legacy avenues.

Mobility, which we cover on pages 7 and 8, has met unprecedented success since the announcement of the three SES programs that are optimized to serve the aeronautical and maritime markets. The revenues from this market vertical helped [ph] progress by nearly 61% on a reported basis over the course of the first quarter of 2016. Now, we’re presently serving, as a market leader, our clients on the GEO wide beam feed, and this is already augmented by the O3b MEO HTS feed.

Now these capabilities will be scaled up, with the SES HTS assets that will be launched in 2017. As we speak, we are already the largest provider of connectivity capabilities to the top three IFC IFE service providers in the world: Global Eagle, Google, and Amazon. We are also expanding our suite of services to serve clients across network platforms and services, mainly in the maritime sub-segments.

Finally, on our government business, as outlined on pages 9 and 10, this is now benefiting from four types of program covering, on the one hand, defense and security; plus, civilian applications, on the other hand, for the U.S. Government, along with 50 plus clients globally. And I highlighted that point during our briefing at the end of – for the year-end 2015 results. Along with continuum of providing infrastructure network platforms and services, SES has achieved significant wins, as well as results in this vertical, as illustrated for our new programs in Canada, the U.S., and the UK.

Now at this point, I will hand over to Padraig in order to cover the financial results for Q1.

Padraig McCarthy

Thank you, Karim and good morning, everybody. So starting with the key financial highlights on Slide 12, reported revenue grew approximately 1%, with reported EBITDA in line with that of quarter one of the previous year. If we look at the results at constant exchange rates, revenue and EBITDA declined 1.9% and 2.9%, respectively. The revenue reduction was due to the continuation of certain legacy items, which were well flagged in to 2016. Firstly, the impact of the AMC-16 renewal in quarter 1 2016; secondly, the migration of capacity contracted by ARSAT on to its own satellite; and finally, the impact of the accelerated revenue of the WAAS U.S. Government-funded hosted payload in quarter 1 2015, during the initial construction phase. Stripping out these items, revenue remained flat.

EBITDA tracked revenues, declining 2.9% at constant FX, with the margin remaining strong at 74%. Operating profit also tracked profit also tracked EBITDA, remaining close to flat at reported rates, and declining 2.9% at constant FX. Profit after tax reduced 11.7%, and profit of the Group by a similar amount, due mainly to the non-recurrence of the first-quarter 2015 FX gain.

Net debt-to-EBITDA continued to decline and was 2.43 times at the end of quarter 1. This compares to 2.54 times at the end of 2015, and 2.76 times at the end of quarter 1 2015.

The signature of important contracts, principally for airline connectivity, were an important driver of the contract backlog, which increased from €7.4 billion to €7.6 billion. It’s now representing around 3.9 years of revenue, and an average customer contract length of over eight years.

If we move to Slide 13, we outline revenue in more detail. So we’re consistent with our strategy, we are now reporting our revenues by business vertical. Our video vertical grew 5% as reported, and 3.2% at constant FX, and represents 71% of total revenues. The underlying growth drivers here were continued increase in channel count, and particularly in the international markets; further growth in HD channel penetration, and growth in market share; and the benefit from the first commercial ultra HD channels with 15 channels now broadcast. Services also continued to grow with increasing contributions from HD+ and SES platform services.

Just a few words on the North American video business, which remains stable. As a reminder, this is comprised of two elements; first of all, direct-to-home wholesale business contracted on a long-term basis with EchoStar; and secondly, direct cable activities, which are also based on long-term contracts, and which represents approximately 3% of the total Group revenue.

Moving to enterprise, where revenues represented 12% of our total revenue and declined 22.2% at constant If we exclude the two legacy items already mentioned, AMC-16 and ARSAT, the constant FX decline was 19.5%; the principal factor here reflecting the impact of the stronger dollar, which started to impact only in the second half of 2015.

Mobility vertical continues to grow at an accelerated pace with reported growth of 60.6%, constant FX growth at 50.8%; and it now actually represents 5% of total revenues, with contracts for airlines connectivity and maritime being the key driver. And finally, the government vertical revenues declined by 5.9% as reported, or 10% at constant FX. If we backed out the impact of the accelerated revenue recognition on the WAAS payload, the reduction was 4.4%; and part of this reduction was due purely to timing related to our Techcom Services company.

Slide 14, we see EBITDA remained in line with last year, due to the impact of the stronger dollar. It declined at 2.9% at constant FX, following the lower revenues. Operating costs were well controlled, increasing slightly, or just over 1%. And all this resulted in a blended EBITDA margin of 74%. And speaking about margins, on Slide 15 we see the infrastructure and services margin breakout, with the infrastructure margin at 84.2% and the services at 15%. It’s important to see both services and infrastructure margins not only on their own, but also on a combined view, as services of SES are different in this offering [ph] and generates revenue for the infrastructure business.

And if you look at the elimination column you will see that the transponder pull-through revenue generated by the services business increased 5.7% as reported, or 2.5% at constant FX.

On Slide 16, we have the elements below EBITDA. Depreciation and amortization, after adjusting for FX, reduced slightly with a reduction in depreciation of 4%, due to changes in the depreciable fleet; and also, the continued execution of our targeted 20% reduction in normalized CapEx by 2018, which is well on target.

The net financing costs increase reflects the non-recurring net foreign exchange gain of €35.8 million recorded in quarter 1, which I already mentioned, quarter 1 2015. And excluding this, financing costs actually declined 12%. The effective tax rate was 16.1%, slightly lower than the 19.6% of last year. And finally on this page, the share of associates losses relates to the Group’s interest in O3b was €28 million, a reduction of 10% versus the same period of last year, reflecting the ongoing positive development of the O3b business.

Slide 17 outlines the fully protected backlog, which, at €7.6 billion, is at its highest level, and reflects the important new business wins and the continued building of the order book on new programs.

Now, the fact that it has been consistently strong means that not only is the business being recorded in the profit and loss replaced, but that we continue to sign long-term contracts with an average contract duration in the backlog of over eight years.

And on Slide 18, in respect of the outlook, we confirm that first-quarter financial metrics were in line with the management expectations; and, therefore, there were no new developments in respect of the guidance that was presented in February 2016. And with that, I would hand back to Karim.

Karim Michel Sabbagh

Thank you, Padraig. Ladies and gentlemen, I now invite you to move to the O3b briefing. Now we covered in previous conversation the unprecedented opportunities of an SES and O3b tie-up. We were also very clear on the condition precedents that were necessary to enable this tie-up. These have now been met, and the SES Board has, therefore, approved the approach for taking control of O3b.

Page 2 outlines our approach. First, we are taking a controlling share in O3b by paying consideration of $20 million to increase our ownership from 49.1% to 50.5%. Naturally, this is subject to the regulatory approval, which we expect to obtain during the second half of 2016. Importantly, our approach to taking control will ensure that SES maintains its investment-grade rating. And Padraig will further expand on this point, and expand on our vigorous approach throughout.

Second, and on Page 2, we are explaining the clear future path we’re setting for the shareholding of O3b by building on the existing shareholder agreement and evolving it. We, therefore, have three clear alternative avenues. First, the O3b Board is to evaluate the IPO process for the remaining 49.5%. Second, and in a scenario where the IPO is not executed, SES has a call option from now to acquire all remaining shares in O3b.

Third, and in a scenario where neither the IPO nor the call option are executed, then the other O3b shareholders have a put option for SES to acquire all remaining shares, effective October 1, 2017. Net, we are faithfully executing on the two-step approach for taking control of O3b and clarifying these optionalities going forward, as established since our first investment in this gaining venture 6.5 years ago.

With the clarity of this approach, we are firmly strengthening SES’s differentiated global network and capabilities. And, as outlined on Page 3, we’re doing three things. First, we are effectively expanding the global reach of our satellite-enabled solutions. It is all about scaling up globally, as I have mentioned this time and again. And we are doing that with game-changing capabilities.

Second, we are augmenting SES’s differentiated capabilities in our three targeted data-centric market verticals, namely, enterprise, mobility, and government, where O3b is markedly operating and perfectly fits the SES targeted portfolio. Thirdly, and equally important, we’re enhancing SES’s foundation for sustainable growth through the sound momentum that O3b is building. And again, I would like to insist we’re doing that within our financial framework, which Padraig will clearly explain.

O3b is indeed a game-changing global solution, as visualized on Page 4; and allow me to spend a few seconds on this so that we all appreciate the value of this game-changing capability. The O3b network serves lines across the globe, mainly within the plus and minus 45 latitude; and, to some extent, within plus or minus 62 latitude. Future satellites would also be deployed on non-equatorial planes to serve poorer areas. Unlike all other HES systems, O3b delivers up to 1.6 gigabit per second of throughput per beam, with no latency of less than 150 milliseconds. Equally important, this is the only proven scalable constellation serving data-centric market verticals.

Now, to appreciate the differentiation of O3b, I invite you to refer to Page 5 where the value proposition clearly expands to the provisioning of network platforms. This is the repositioning that SES is undertaking, as per my earlier briefing. And O3b is already winning in this space, effectively enabling the business of their clients, with Royal Caribbean as a case in point; which effectively means that as the client business grows we grow with it.

It is important to note, as per Page 6, that the O3b value proposition is already resonating in the three data-centric market verticals targeted by SES. In a number of cases, we are co-serving the same client through the combination of wide-beam dual capabilities, plus O3b’s fiber-in-the-sky network proposition. I would like to underscore, in fact, the four 40-plus clients that O3b is already serving in more than 30 countries, along with the positive dynamics, whereby 50% of customers have already upgraded their service commitments. All this is yielding a fully protected backlog of $350 million.

Although we are at the start of this journey, Page 7 presents the already tangible complementarities between SES wide beam, SES high throughput satellites, and O3b fiber-in-the-sky. These complementarities are resonating already in the three data-centric market verticals. And, as noted on Page 8, each vertical exhibits conservative growth potential. O3b, along with SES, are best positioned to seize this growth potential, particularly in light of its global spread. And when all is said and done, O3b will be in unrivalled positioning in more than 20% of this market, where low latency is absolutely critical.

As we execute on our strategy in comparing SES and O3b, we are putting in place, as highlighted on Page 9, a growth engine that will deliver unprecedented momentum over the course of 2016 to 2021. Starting with the addition of SES capabilities, which are aligned to our four market verticals, namely, SES-9, SES-10, SES-12, SES-14, SES-15, and SES-16, we envisage steady-state incremental yearly revenues of €250 million to €300 million by 2021. Along the same time horizon, O3b will serve the three data-centric market verticals we are targeting, and could realize, on a steady-state, €400 million to €450 million annualized revenues by 2021. Now, to put these growth engines in perspective, they represent an increment up to €750 million annualized revenues, equivalent to over 35% increase to fiscal year 2015 revenue base.

At this point, I would hand over to Padraig in order to cover the financial aspects of the SES approach for taking control of O3b.

Padraig McCarthy

Thank you, Karim. And so, colleagues, I invite everybody to go to slide 11, where we have a little bit more granular detail of the financials of the acquisition. First of all, it’s an acquisition of 1.4%, which allows SES to consolidate O3b; and the price for this 1.4% is $20 million. This brings SES’s total cash investment for 50.5% of the equity to $323 million, or €257 million at the historic FX rate.

The controlling stake acquisition, which will increase SES’s top-line growth, is subject to regulatory clearance, and is expected to close in the second half of 2016, after which the O3b debt, currently at $1.2 billion, will also be consolidated. The closing of the transaction is expected to generate an IFRS non-taxable accounting gain of approximately $500 million, which relates to the re-measurement of fair value of the current non-controlling interest in O3b, with the final amount of the gain depending on the timing of the transaction.

As Karim mentioned, the investment is fully compliant with SES’s financial framework. It’s generating a double-digit IRR in excess of SES’s hurdle rate, with the business expected to be free cash flow accretive before financing costs and net income accretive to SES by 2018, 2019. The investment is also consistent with SES’s investment grade, which was reaffirmed by Moodys, and whereby we expect S&P to also reaffirm in due course. And finally, SES also remains committed to a progressive dividend policy.

A clear framework is also set for the future, whereby, as also seen in the shareholders agreement, the O3b board has voted to evaluate an IPO process to their remaining 49.5%. In addition, SES has a call option for the remainder of the shares at a baseline price of $710 million; plus, an interest charge to reflect the timing of the exercise of the call. And finally, a put option also exists, whereby the other shareholders can put to SES, from October 1, 2017, as a consideration not exceeding $710 million; again, plus an interest charge to reflect the timing of the potential exercise of the put. And for those of you who have been following O3b for quite some time, you will see that all this reflects the shareholder agreement.

As outlined on slide 12, the transaction is highly synergistic with important commercial operational and technical and financial synergies. The commercial synergies will focus on providing the customer with increased flexibility to move between GEO and MEO to best suit the customer needs, and to provide combined interface. The operation and technical synergies include extending the global teleport and IP access networks, and aligning and incorporating key features, and also innovations, across the technologies. The key financial synergies related to refinancing of O3b, which today has an average financing rate of 9.5%.

The consolidation of O3b, at 50.5%, will already allow some initial refinancing synergies as it is planned to, immediately on closing, refinance up to 25% of O3b’s current debt with an immediate important positive effect on the average interest rate of the company. Financial synergies will be significantly further accelerated should SES decide to move to 100%. SES will also now assess, over the coming months, opportunities to optimize the Group’s enlarging funding structure.

If we look at slide 13, this outlines the expansion of the O3b fleet as the constellation grows from 12 to 20 satellites, up from 9 to 17 operational satellites. The bar charts show the expected number of operational satellites per year as the capacity ramps up, along with a related indicative range of revenue per satellite, which may apply. The fleet can be developed in a modular fashion, increasing constellation efficiency as new satellites are added.

Slide 14 outlines the expected O3b capital expenditure program over the next five years to develop the 20-satellite constellation. The principal part of this CapEx is expected in 2016 and 2017. The average cost per satellite for total program costs for satellites 9 to 20 is estimated at $80 million, giving a normalized CapEx of $130 million when considering a 12-year design life. It’s worth pointing out that from 2017 on this CapEx profile, along with that of SES, will continue to give an overall Group CapEx profile as a percent of sales in the region of 25% to 30%, which remains lower than SES’s historic percentage in previous years.

On slide 15, we provide more information on the modeling element for O3b revenues. First of all, revenues for 2016 are expected to almost double and be in around, or a little bit above $100 million. I would also like to mention that the first four satellites have an accelerated depreciation profile which will have a favorable effect on depreciation in 2017 with a reduction in the depreciation for these four satellites versus 2016 expected of approximately $50 million to $60 million. The effective tax rate will be low initially, and is foreseen at 15% once in steady state.

Slide 16 outlines the medium-term sustainable revenue growth, accelerations for which the foundations have now been set. Karim went through this already. Just to clarify, the light blue lines represent the SES capacity; and that’s the €250 million to €300 million, which we also presented in February. And then, the dark blue lines reflect the O3b satellites currently being ramped up, or to be launched, with an annual life revenue range of €400 million to €450 million expected by 2021, which would add up to 20% step up to the SES full-year revenues.

And if you take the two together, this should – O3b’s capacity will more than double the SES growth rate acceleration from SES’s current satellites; and overall, the sum of the two together would step up by over one-third the 2015 Group revenue level. And finally, on slide 17, this outlines the complementary nature of O3b to the SES strategy by it’s providing a unique global MEO constellation; it’s expanding SES’s international revenue base; it’s accelerating SES’s top line; it’s providing a GEO MEO offering for enterprise mobility in government; and finally, it’s unlocking new applications and growth opportunities.

Now, with that, I will hand back to Mark to take questions.

Mark Roberts

Thank you, Padraig. Thank you, Karim. Before opening for your questions, I’d like to remind you that SES is going to host the 2016 Investor Day at our headquarters here in Betzdorf on Tuesday, June of 21, to which you are all cordially invited. If you don’t already have an invitation, please contact us and we’ll provide you with further details.

Now, Ella, could you please remind us of the process for opening questions?

Question-and-Answer Session


Thank you. [Operator Instructions] We will now take our first question from Jefferies.

Giles Thorne

Hi there, good morning guys. It’s Giles Thorne from Jefferies. Jeffries. I have three questions, please: a couple on O3b, and then another on operations. It’s quite a high-level first question. As you begin to exercise, or think about exercising your operational control, what changes can we expect to see at O3b? In particular, I am remembering Steve Collar’s teasing of a major upscaling in the O3b constellation; is this still on the cards under SES’s stewardship?

Second question on O3b, there’s been some evident fears or concerns around an equity placing of late, following the larger-than-normal request to issue shares at the AGM. I appreciate today you’re not actually signaling that you’re going to move to 100%, but in a scenario that you do, how are you viewing funding for the next 50% purchase of $710 million?

Lastly, picking up on some of the teasing from Martin Halliwell at the June event last year around space tugs, you’ve now been associated with Orbital ATK’s MEV-1 vehicle – well, you’d probably be only the two or three. But regardless, could you give us a sense of your objectives for this program? The CapEx implications look to be meaningful. Can we expect Martin to extend the CapEx reduction program beyond 2018 at the CMD in June this year? That was it. Thank you.

Karim Michel Sabbagh

Good. Giles, why don’t I take questions one and three, and I will hand over to Padraig for the second one. The changes, it’s not changes that are expected; it’s more, in our view, an evolution. I think the first evolution in terms of acceleration is how we jointly accelerate the commercial or the go-to-market synergies. For all the right reasons, we’ve been teaming with O3b, but we’ve been careful all the way to make sure that we’re doing this one considering that we’re only one of many shareholders without management control.

That now can be much further accelerated, which means that we can approach clients with a holistic integrated solution. We can do this with much better coordination. I think we can share a lot of the insights and the foresight now that we have that. In a previous setting was a bit more challenging to do. And so for me, number one priority is go-to-market, how you accelerate this.

Number two, to your point, is now that the O3b technology and the SES technology are under one group what are the opportunities to further synergize? And as we think to our SES program, because SES already has a very significant budget of operation in terms of building future assets with hybrid capability, hybrid taking in to account a lot of the HTS differentiation they are going to bring in.

Now we have the ability to do this jointly thinking with O3b. In some cases we may come to a conclusion that deploying a GEO capability may be more appropriate for the type of application we want to serve versus in other cases where a MEO capability would be much more relevant. And these conversations now can happen in perfect coordination, both at the level of our technology team, and also with our industrial partner. For all the right reasons, previously, we were not able to bring these three pieces together in one room all the time, and now I think we can further accelerate this.

And last, but not least, from an operational standpoint there is a lot of things that we could do now under the single roof. Financial synergy, as noted by Padraig, is one of them, but I can think about how do you go about our human capital development? How do we go about deploying our capabilities across all the important markets we want to serve? And so that, for me, is going to be an acceleration that we always had in mind. We were sort of executing on some of those elements, but certainly not at a holistic level, and now it’s a completely different ball game for this tie- up between SES and O3b.

On the third question, when it comes to space tugs, for us, the approach – and as you rightly noted, Martin has been very engaged with a number of industrial partners. You’ve mentioned one; we are in discussion with others. It’s – the content of this space tug is twofold for us. One is, effectively, how do we extend the life of some of the important satellite programs we have where a decision to renew these programs or amend these programs can be further delayed so that from a capital allocation standpoint we can re-prioritize other initiatives we want to prosecute? So, that is one of them.

As equally important, the concept of this space tug, and I remember vividly Martin saying this, is not just about extending the life of a satellites; is about the ability to create a persistent platform in space, i.e. in the future I will not exclude that the satellite platform is persistent in space, and through the space tug mechanism or network we’ll be able to take out some elements of an aging satellite and replace it with a new element. Because in many or some of these cases, that is really what is relevant to us.

And through this, we will not just be extending the life of a satellite with a technology that was designed 15 years ago, we’ll be able to plug in to the satellite and upgrade the technology; which, again, fits perfectly well with our approach to building hybrid satellites.

On this note, I will hand over to Padraig.

Padraig McCarthy

Yes. Thank you. Giles, on your second question, first of all, indeed, as you said, the investment decision always comes first before the financing decision. And on the investment decision, this would always be treated like any other investment decision: it needs to be subject to satisfying SES’s investment hurdle rates. As we’ve explained, O3b Board has decided to evaluate an IPO, and then there’s a call on the put option; and all this, I think, is well in line with the agreements.

Now, should such an exercise of a call option become relevant, again, assuming it all meets the hurdle rates, and then also depending on the timing, all potential financing sources, including capital markets, would be evaluated to determine the most appropriate financing option. All this will be done in keeping with SES’s commitment to our investment-grade rating, which is a fundamental part of our financial framework.

Giles Thorne

Very clear. Thanks, guys.


We will now take our next question from Eric Beaudet from Natixis. Go ahead.

Eric Beaudet

Yes. Hello. Two questions, if I may. The first one is on your operational. You mentioned you actually lost 22 utilized transponders in the quarter; I was wondering what region, or what exactly are these 22 transponders utilized decline this quarter?

And my second question is on O3b. You’ve given an O3b CapEx guidance, but you haven’t updated your long-term SES guidance. Does that mean that implicitly, on your uncommitted CapEx that you always put in your CapEx guidance, does these include O3b? Or will we see an increase in your CapEx guidance once you include O3b during your Capital Day presentation? Thank you.

Padraig McCarthy

Thank you, Eric. On the second question, actually, we do re-include our long-term CapEx guidance; it’s on Page 22 of the first-quarter results page. And this CapEx guidance, the scope is always SES only and does not include O3b, and you see the O3b committed CapEx on their slide.

With respect to your second question on the utilization of capacity, what we see quarter-to-quarter is utilization reduced by 20 net transponders; it represents about 1% of the available inventory. There was no reduction from video in the period. It’s simply the normal ebb and flow of data-centric traffic, mainly enterprise and government. We saw a similar trend, by the way, the same time last year, which went from 72.7% to 71.4%, and then it started to climb back in the second quarter.

Eric Beaudet

Thank you.


We will now take our next question from Simon Cooke, Insight Investment. Please go ahead.

Simon Cooke

Hi. Thanks for taking the question. Just a quick one on the financing. I know you flagged that you could refinance 25% of the O3b debt relatively quickly. Could you just talk us through what you’re weighing up in terms of refinancing the whole of the $1.2 billion post-closing, just so we can get an idea, for those of us on the debt side? Thanks.

Padraig McCarthy

Sure. Obviously, with SES as a 50.5% shareholder, we would limit any activity on the financing to reflect our 50.5% shareholding; and, of course, that would be a different position should we own 100%. And then, at 50.5% shareholding, and also linked to the portfolio of the O3b debt and looking at what’s possible, there is a possibility to refinance one of the facilities, which represents about 25% of the overall debt, and where the average interest rate is a little bit – well, the interest rate at that facility is a little bit higher than the average interest rate of O3b. But again, at 50.5%, we would only be working like a shareholder at 50.5%, and we would – and that’s why you’re talking only about 25%.

Simon Cooke

Okay. Thank you.


We will now take our next question from Ben Heelan from BOQ. Please go ahead.

Ben Heelan

Hi. Thank you. It’s Ben from Bank of America. Just a quick question on the impact of O3b on potentially cannibalizing the existing revenues in the enterprise business; and with the high throughput network, 12, 14, and 15, and the O3b network, any risk on – or any comment on the impact on pricing, et cetera. Thank you.

Karim Michel Sabbagh

The short answer will be no. O3b has been in the market since September 2014, and the commercial traction that has been achieved has been achieved with all the other commercial parameters, including pricing and the same way when it comes to SES. In fact, in the cases where we brought the two capabilities together for some of our clients, the consideration for taking on board this combined capability was mostly around the value-add that you bring. And, in our view, it has de-emphasized any price pressure that we could have been subjected to. And that is the idea.

The more you can depreciate on the product and the solution the less likely you’re going to be subjected to the pricing pressure that would commoditize your service offering; and that has been consistent with our approach to the data-centric market verticals since 2014.

Ben Heelan

Thank you.


We will now take our next question from Robert Berg from Berenberg. Please go ahead.

Robert Berg

Hi, there, yes, thanks. A couple of my questions were already answered, but a follow up on the last one. I remember you used to say there’s about $50 million of SES existing in Group revenue that was potentially cannibalized by O3b. Obviously, the upside seems to be much larger if O3b’s going to do $100 million of revenues this year. Could you give us maybe an update on the $50 million of, I think it’s, mainly point-to-point applications, like trunking and mobile backhaul, especially given the impact on the enterprise business last year? And the second question, I’m just interested to know what the Board would be taking in to consideration of O3b when deciding on whether to have an IPO or not, and your - on how the Board structure is. Are you over 50% of the Board? Thanks.

Karim Michel Sabbagh

Yes. So, let me try to address these. I think the thesis that was presented many, many years ago around the $50 million was presented, I think, at a time where we had our assumptions on how some of the data-centric markets would evolve. That $50 million cannibalization hasn’t materialized in the case of SES. I mean, Just to give you a picture of this, this was made at a time when, for example, we were not present in the aeronautical market, which is a very significant data-centric. I think markets have evolved in such a manner, and we have evolved our positioning in these markets, so that, that cannibalization exposure, in our view, has become [indiscernible].

And so, what O2b does is bring a number of incremental and accretive elements to the data-centric propositions that we have. Now, what this will do, it will certainly compete with the other HTS programs in the broader market. But when we were designing SES-12, 14, and 14 we were designing this with a view that at some point in time we would take control of O2b; and I personally have been very explicit about that, and certainly Romain, before me, has done this. So, we’ve made sure that as we fought for our fleet development and our go-to-market approach we didn’t want to run in to that hypothesis of the $50 million, although we put it out there to make sure that we appreciated the risk at the outset. I think we’re in a much better place today.

On the second question, when it comes the evolution of the corporate governance of O2b post-taking control, once we have closing we, indeed, have majority of the Board. And so without getting in to the detail, effectively, we will be able, along with the other shareholders, to have a more influential say in the oversight of the company, whether it’s from a strategic standpoint; whether it’s from an investment standpoint, particularly on capital allocation; and last, but not least, in terms of how do we oversee the performance of the company in perfect synergy and accretive integration with SES. Things that, for all the right reasons, we could not bring together to the extent that we could realize the full potential in a set-up where we are only playing our role on the Board among the other shareholders. And that is very well understood with the other shareholders. And certainly from our side and the side of the other shareholders, and certainly from the side of the management team on board the O2b and the SES side, that’s a great outlook for us to pursue.

Robert Berg

Okay, great. Thank you.


We will now take our next question from Chris Haveman from Goldman Sachs. Please go ahead.

Igor Ostrowski

Hello this is actually Igor Ostrowski from Goldman Sachs Assets Management. I had a quick follow-up question on the free options. Based on the existing business plans for SES and for O3b, which of these options do you think is most likely? Which is the preferred option? What, in your mind, is the best case scenario, the worst case scenario there?

Karim Michel Sabbagh

At this stage, we need to have the optionalities. And what we wanted to do at the outset is to make sure that these optionalities are clear; not just in terms of conceptually what they are, but also what are the associated economics with each one of them. I think that was the major evolution that we’ve made to our thought process. Because the two-step approach has been part of our narrative for the past 6.5 years.

Starting with an IPO, having a put towards the end, and having the ability to negotiate also an acquisition between these two milestones was always part of the dynamics that we have between SES and the shareholders and the non-SES shareholders of O3b. At this stage, our priority is to make sure that we have these optionalities. What was very clear in our mind was that at some point in time we would take control.

We always said fast taking control, whether we fully require or the rest of the balance will be – would go public in IPO. We remain in that mindset. But at least we want to give – we want to anchor these optionalities in a manner where the day we decide to execute one of these optionalities we are able to do so with full transparency; and, equally important, in full compliance with our financial framework. We have to balance the consideration of fully acquiring O3b in our view with all the other strategic priorities that we, as at SES, are pursuing.

And we have now the ability to think through this question, while being in control of O3b, so we have a tie-up. So these priorities are not any more binary, but we can think about these priorities together. So no final decision and no framework of decision was made. And, therefore, the first step for us is for the Board of O3b to agree with the IPO process for the remaining 49.5% of the shares.


We will now take our next question from Eliska Mallickova of Morgan Stanley. Please go ahead.

Q - Eliska Mallickova

Hi thank you this Eliska Mallickova from Morgan. Just a few questions on your overall trends in the business. Particularly looking at video, for example, you did 3.2% growth in Q1. What was this mainly driven by? Was it strong pricing in Europe? And then, maybe, how is it going to be for the rest of the year? For example, with SES-9 do you have any good pre-sales, and how much of a bumper is it going to be towards the end of the year? And then, on government, you – if we exclude the accelerated revenue you did minus 4.4%. So do you think that the declines are going to continue throughout the year? Or maybe do you see some sort of improvement by the year? And then, with O3b, now that you’ve consolidated it, do you think there’s some opportunity for O3b to take on some business with the U.S. Government? And then finally, with enterprise, what trends do you see for the rest of the year there, as well? Thank you.

Karim Michel Sabbagh

Let’s take each one of these one by one. When it comes to video, it was a function of two things; one is our sustained traction in expanding the neighborhoods and taking on new clients, particularly international markets. And equally important was also the migration from SD to HD, because the faster we accelerate this migration the more accretive it is to our revenue line.

And so we expect that momentum to be sustained for the rest of the year. And certainly, SES-9 is going to bring a very strong foundation. Our thought process on SES-9 is that it will have a fill rate comparable to SES-8, one to 1.5 years in to operation. We would expect it 12 months or up to 24 months to reach a two third fill rate level. In fact SES-9 has already signed I mean SES has already signed with a number of clients in Asia Pacific particularly for the beam that are customized for some of the large market there.

For regulatory reasons, these cannot be announced, because the satellite has to arrive at the final position before any public statement is made. This is why I’m refraining from referring to specifics on this front. But for us, the video momentum is going to be sustained.

On government, as noted by Padraig, there were I think, two factors in our performance in Q1; one is there were non-recurring revenues and if you extract these out, and we also account for some of the timing considerations on the side of Techcom, we have a much better visibility this year than we had last year in terms of where we see the government, going forward.

The single most important priority for us was to make sure that we win again of our signature program [indiscernible], which was achieved; and there was a public announcement to that effect. Going forward and you rightly noted this, our ability now to bring closer O3b in to the SES service offering, and because of the unprecedented, unsurpassed capability that SES government services have in the U.S, we can now bring directly the O3B capabilities in to the fold of the U.S. government requirements. Whether it’s on the civilian side, at [indiscernible] is a case in point, which is a contract that we already won; but also, to bring it on the defense and security side, where we were able to do a demonstrations that all [indiscernible]. And there are as we see discussion in relation to acquiring some of these capabilities in the domain of defense and security.

When it comes to commercial data-centric, I would split this in to two. Areonautical, in our view, will sustain the very strong positive dynamics that we have, even more so that now we can start thinking about bringing some of the O3b capability to broader maritime clients; and equally important, possibly in the future in to aeronautical applications. And certainly, we will continue to grow our commercial wedge in that space. When it comes to the enterprise, we will put more emphasis on the other parts of the value chain.

We are presently infrastructure, and more and more we believe that if you want to be a central enabler, i.e., the way to enter this is if your client business is growing then our business is growing with it. That will be the measurement of success. And with models that we have had with O3b, in the case of Royal Caribbean, and with our ability to provide today a complete network solution, Airbus services was a case in point a year or so ago, Facebook as announced a few days ago, is another case in point, I think we’re going to be successful. There may be headwinds in the short term, because there is a transition between a monoplay in infrastructure to the other one. But that is perfectly fine, because the positioning that we’re pursuing, and the wins that we are receiving, are much more sustainable from a differentiation standpoint.

So, I hope provides an answer to your question.

Eliska Mallickova

Yes, great. Thank you very much


We will now take our next question from Giles Thorne from Jefferies. Please go ahead.

Giles Thorne

My question was, picking up on the project you announced the other day with Rutgers University, it looks like it could be another pushing forward of satellite’s role in an increasingly non-linear TV world. Could you get a sense – could you give us a sense, please, of your ambitions for the output from that particular research project you’re doing?

Karim Michel Sabbagh

Our ambition and it’s beyond just, the announcement that we made recently, which, I think, was very exciting, is that in the 5G world, in a system – in an environment where 5G is the system of systems, we want to make sure, as SES, that satellite is an integral part of the design of the 5G system. And so the recent announcement with this university was only one manifestation of this.

We’ve been very proactive in other cases, and in other regions, Europe as a case in point, where we’ve had a number of meetings with Commissioner Rettinger. We started these conversations early on, and now the broader industry is involved. And around the same table we have the telco operators; we have the telco manufacturers; we have the satellite manufacturers; and we have the satellite operators. We are at our, I think, fourth round of consultation, again, to make sure that we, as a specific, will be an integral part of the design of the standard and the 5G architecture and I cans share with you that the last meeting we had was last meeting we had was on the – I think was on the 22 March.

This is one of the unfortunate events in Brussels took place. And we stayed on for five hours, and we – and I think it was a very constructive discussion. And there are follow on discussions. So net-net-net, we are going all out to make sure that we are part of that particular system. So Gile you are absolutely right that is certainly our intent.

Giles Thorne

Okay. Thank you.

Mark Roberts

Thank you very much I think we have run our to time now but thank you everybody for your participation. We remain at your disposal on our usual coordinates, and look forward to seeing some of you on the road in the coming days. Thank you very much.


That concludes today’s conference calls. Thank you for your participation ladies and gentlemen you may now disconnect.

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