Ses Global SA (OTCPK:SGBAF) H1 2016 Earnings Conference Call July 29, 2016 6:00 AM ET
Richard Whiteing – General Mananger-Investor Relation
Karim Michel Sabbagh – Chief Executive Officer
Padraig McCarthy – Chief Financial Officer
Laurie Davison – Deutsche Bank
Sarah Simon – Berenberg
Nick Dempsey – Barclays
Eric Beaudet – Natixis
Sami Kassab – Exane
Eliska Mallickova – Morgan Stanley
Paul Sydney – Credit Suisse
Andrew Spinola – Wells Fargo
Good day and welcome to the investor and analyst conference call for SES H1 2016 financial results conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Richard Whiteing. Please go ahead, sir.
Thank you. Hello everyone and thank you for joining the SES half-year results conference call. I am Richard Whiteing, General Manager of Investor Relations. I am joined today by Karim Michel Sabbagh, President and CEO and Padraig McCarthy, CFO. In a moment, Karim and Padraig will discuss the first half’s developments using the presentation circulated this morning. This document is also available on the investment section of SES.com. I would ask that you take note of the disclaimer at the back of the presentation. After the presentation, we will take your questions.
With that, I would now like to hand over to Karim.
Karim Michel Sabbagh
Thank you, Richard. Welcome everyone to this briefing. For the January to June period, we’ve made considerable progress on the execution of our strategy. This includes the organic growth avenues we have pursued as well as the business accelerations we have completed and on which I will expand further on this call. Now the key highlight on page 1 is that we’ve continued to firm up the positive visibility on our business in terms of first expanding globally and continuing to build a strong foundation, excluding the non-comparable elements from the first half of last year. Two, doubling down on our vertical focus as we invest in the related growth dynamics with significant progress during the first half of the year and more to come during the second half. Three, building our capabilities with a single-minded focus on future-proofness, including accelerations through the acquisition of RR Media and O3b. And four, prosecuting the unique synergistic opportunities before us, particularly in terms of market development and financing, on which Padraig will expand further.
On page 2, video, which continues to represent 70% of our business, has performed positively, notwithstanding the asymmetrical comparable with last year. Enterprise, which contributes 12% of our top line, has been the focus of a repositioning effort by SES to enhance the appreciation. And was reinforced by our strong market traction with O3b. Mobility, now contributing 5% to our top line and starting literally from a zero base two years ago, continues to show very strong traction, with a 30% growth versus last year. Finally, government which contributes 12% to our revenue is withstanding relatively well the effects of budget sequester in the U.S. As we continue to gain market share in this particular environment. Equally important is our growing wedge with international governments. Now let me expand on each vertical, starting with video on page 3.
First, SES continues to develop its market through its unique combination of infrastructure and services, enabling the creation of differentiated experiences. This is evidenced by the acceleration of the transition from standard definition to high definition, with the latter now reaching a penetration level of nearly 33% by the end of June 2016. With 2442 HD channels, SES largely outperforms the rest of the market. This is further evidenced by the 60 commercial ultra-HD channels we presently carry. And with major announcements coming recently from leading pay-TV operators regarding upcoming new ultra-HD channels. It is worth noting also this week’s announcement regarding the traction we are building around ultra-HD with U.S. cable operators. The entry of operation of SES-9 in June 2016 and the creation of MX1 as the world-leading media services and end-to-end solution provider, we get further into this RR video business. I also invite you, to conclude, to note the positive impact that SAT-IP is having on the video experience where this technology is increasingly deployed. Now enterprise, as outlined on page 4, has been the focus of the repositioning effort with the objective to strengthen our business with tier 1 customers and around point to multipoint applications.
Supplemented by auxiliary services. We’re making good progress in this arena, as evidenced by the turnkey solutions we have deployed this year. Case in point with Facebook and with the innovative enterprise plus hybrid broadband platform we recently deployed in Asia. We can also measure now the impact of our long-standing development in O3b which while it has been patiently seeded by SES over the years, has not been reflected in our numbers to date. And going forward, it will. As you consider this impact, which has doubled since 2015 on top of our repositioning, we believe that SES is well set to grow its enterprise business. Mobility, as per page 5, has achieved the fastest pace of growth with 30% for SES and 55% taking into account O3b versus last year. SES has secured, since the start of the year, the largest ever contacts with the leading in-flight entertainment, in-flight connnectivity providers, namely Global Eagle Entertainment, Gogo and Panasonic. In fact, outside the industry legacy lower-band services in which we do not operate, SES has a leading position in aeronautical connectivity globally. Additionally, our Maritime+ solution introduced recently has gained considerable traction with the securing of a large multi-year agreement.
The mobility review would be incomplete without covering the unique positioning of O3b in this segment, particularly in the cruise ship market. We now serve 11 Royal Caribbean ships. And the rate of revenues are up 78% since last year. Government, as outlined on page 6, continues to recover in the U.S. from the impact of the budget sequester. And we’re nearing the end of this cycle. In fact, our business, while continuing to weather these trading headwinds, has benefited from three favorable dynamics as we offer services across the value chain, including personalized end-to-end networks.
First, we have won, in the first half of 2016, the re-compete of the TROJAN program along with other SES- enabled programs. Second, we have commenced operation of the O3b service for NOAA, marking the first entry of our innovative platform with the U.S. Government. Third, we’re actively expanding our capabilities internationally with early results in Canada, Europe and Africa. We’re also progressing well in building commercial traction for our SES-16 close to close are defense and dedicated program which will be launched in 2017. Now while we continue to drive forward our video business, I trust it is clear that we’re putting increasing focus on building differentiated capabilities in the prioritized data-centric verticals. Page 7, which echoes the value differentiation we presented at the investor day in June this year, underscores two points. One, we are investing the market segments where we can create the highest value and where end-to-end solution delivers sustainable advantage.
And two as most data-centric segments are demanding increasing bandwidth across regions, we are leveraging to the utmost the globalness of our network, the flexibility of our platforms, present and future, and the adaptiveness of our service-delivery model as clients demand more and more end-to-end managed networks. When done right, and this is illustrated on page 8, our data-centric offerings can enable the market and achieve considerable growth. Digicel is a great example of how O3b and SES are supporting the optimization of this terrestrial network. O3b plays, in this case, a central role. And the bandwidth provided has gone up by sevenfold since the start of operation in 2016. Along a comparable line, our strategic teaming with Global Eagle has uniquely enabled this service offering to the airlines. And the total capacity on this contract has gone up by fivefold since 2015.
Another notable example is the mobility segment. Where O3b is progressing very well with Royal Caribbean. And it has moved from enabling two to 12 ships in just one year. And it’s worth noting that these are, today, the most connected cruise ships in the world. Another demonstration of the evolution and resilience of our data-centric solution is the TROJAN program we re-won this year. And where SES is offering end-to-end network across multiple bands for critical defense and security-related applications. In everything we do, we are measuring visibility, progress and performance against our capability-building agenda.
And two notable actions in our plan, as per page 9, are the O3b and the MX1 acceleration, which will enter the SES whole, effective July 6, 2016 and August 1, 2016 respectively. We have covered in length during previous conversations the strategic contribution of O3b. And in addition to realizing its full potential, we are pursuing the transformational and combinational synergies set at EUR106 million by 2021. And again, Padraig will expand further on this point. On the side of MX1, which is the outcome of the merger between SES Platform Services and RR Media, our goal is to be the number 1 media experience provider. And we firmly believe that this is our rightful place with the differentiated capabilities we are deploying. Already from the starting gate, I would invite you to know that MX1 is serving over 900 global customers, over 1000 TV channels and over 120 video- on-demand platforms. Now these accelerations will reinforce the differentiation of the programs under development, as presented on page 10. Each is customized to serve in an optimum manner one or more of the four market groups we’re focused on. And as a result, the SES Group outlook is strong with an upside of up to 37% by 2021, versus the 2015 revenue base. Excluding the O3b and MX1 acceleration which will come on top.
And on this note, I hand over to Padraig to cover the first half financials.
Yes, thank you, Karim, and good morning everybody. So starting with the key financial highlights on slide 12. Revenues as reported for the first six months reduced by 4.2% compared to prior. With reported EBITDA down 5.4%. At constant exchange rates and at same scope revenue and EBITDA declined 4.8% and 5.8% respectively. The reduction is principally due to the comparable relating to certain legacy items, which I believe are well known at this stage. But just to recap briefly, three of these had already started to impact in Q1 2016. Being firstly the impact of the MC-60 renewal in quarter 1 2016.
Secondly, the migration of capacity contracted by ARSAT onto its own satellite. And thirdly, the impact of the accelerated revenue of the U.S Government hosted payloads. Now in addition, in the fourth item, which applies to the second quarter, relates to the last four transponders sold in Q2 2016 to Eutelsat. Which impacts the comparables for this quarter. Stripping out these items, underlying revenues declined 1.4%. EBITDA tracked revenues, declining 5.8% at constant FX and same scope. And the last refers to the exclusion of transaction costs related to the O3b and RR Media transactions. I will deal with the other key metric later. But just would like to say one more on profit of the Group. Which declined 17.5%, due mainly to the non-recurrence of the first quarter 2016 FX gain.
So if we move to slide 13, we outline revenue in more detail. After adjusting for the impact of the stronger dollar, 73% of EUR75.3 million of the decline at constant FX revenues relates to legacy items, which I’ve just gone through in detail. Video, which represented 70% of our total business, grew 0.3% without any new capacity coming into use. The comparable was impacted by a step up in periodic revenue in Q2 2015, arising from a short- term contract. If we exclude this, underlying growth was 4.1%. All the fundamentals remain strong in video. And the growth is driven by a continued increase in channel growth, in particular in international markets, HD channel growth and increasing benefit from the first of the HD channels.
Services in particular at SES Platform Services and HD+ continue to grow. On enterprise revenues, which represented 12% of our total revenues and declined 15.3% after excluding the legacy items. This reflects the changing market dynamics, where there is increased price pressure. The largest reduction was for point to point applications and wholesale capacity. This segment now represents approximately 3% of our overall group revenues and remains challenging. We continue to focus on tier 1 customers, managed services and point to multipoint applications. And here the decline was much less, reflecting the additional stickiness generated from providing value-added and scalable end-to- end solutions. The mobility vertical now represents 5% of our total revenues and continues to grow at an accelerated pace with constant FX growing by 50%. SES has developed a very strong position in this market with long-term contracts for airline connectivity and also, as Karim mentioned, ongoing maritime growth being the key drivers.
Government represents 12% of group revenues, and excluding the there was the payload impact, declined 8.9. %. Now, over half of this decline was due to the timing of equipment sales and SES Techcom revenues. The balance was from SES Government Solutions, where we would expect to see an improvement in the second half from the benefit of new contract wins, such as the recent TROJAN award and also upcoming renewals.
On slide 14, we see that the revenue decline was partly offset by the ongoing focus on operating costs. Which in fact declined about 2% period to period. And this resulted in an EBITDA constant effect and same scope decrease of 5.8%. Or a decrease of 6.2% after accounting for the first-half transaction costs relating to the O3b and RR Media transactions. If we look at slide 15, we see the EBITDA margin development in more detail. The infrastructure margin remains strong, at 83.7%. The services margin at 16.2%. We look at these margins more and more on a combined view, as services becomes more and more a differentiator for our overall offering and a key revenue driver of transponder pull-through. And you will see that this increased 4.1% in the period.
On slide 16, we see below the EBITDA line where depreciation and amortization declined 3.3% at constant FX. This is due to changes in the depreciabilty. But it’s also reflecting our ongoing efforts of reducing normalized CapEx, which we reported extensively on in our investor day. While the interest expense declined in total 30.6%, due to lower net interest and higher capitalized interest, you will see the overall financing costs increased. And this is due to the non-recurrence of the first-half 2016 FX gain of EUR36 million. The effective tax rate was 17.4% and was within our guidance range. And the share of associates loss relating to O3b declined. And this, of course, is reflecting the continued growth of O3b revenues and the fact that the business is in positive EBITDA territory from May 2016.
Now looking quickly at cash flow and leverage on slide 17. The net operating cash flow of EUR566.8 million was EUR218 million lower due to upfront payments received in 2015. This represented approximately 50% of the change. And the balance being working capital timing. Which were partially reversed in the second half. The net debt to EBITDA was 2.43 times. We’re treating 50% of the hybrid bond as equity as per the rating agencies’ methodology. The reduction is due to the raising of EUR1.65 billion of cash in the first half, with EUR900 million coming from the equity increase to fund O3b and EUR750 million from the hybrid bond. And these proceeds will now be used both for the consideration of RR Media, the consideration of O3b and the refinancing of the O3b debt. With respect to this refinancing, this will allow SES to deliver important synergies wherein total synergies for O3b will increase to EUR106 million by 2021. And SES’s current investment-grade credit ratings have been reaffirmed by both Moody’s and S&P.
On slide 18, here we show the pro-forma leverage as if the O3b and RR Media transactions were executed at the end of June 2016. What you see here is the transactions are fully compliant with our financial framework and outline the pro-forma debt EBITDA ratio of 3.3 times. In addition to closing the transactions, the funding is now in place to refinance the O3b debt. And we start this already in the second half of the year, with the first part happening in August. Delivering important financial synergies which will grow to EUR60 million in 2019.
On slide 19, we outline the expected future CapEx, including O3b. And here, the numbers are all in line with what we presented in the recent investor day. The committed CapEx profile will bring 137 additional wide beam transponders. And of course, the 36 gigahertz of customized HTS capacity. Where we have a very healthy pre-fill. And will allow the O3b constellation to grow from 12 to 20 satellites. And the CapEx profile benefits from our continued efforts to reduce normalized CapEx.O3b
On slide 20, we outlined the fully-protected backlog of EUR7.3 billion. Which underpins future revenue. It represents 3.6 times 2015 revenue. And reflects over eight years of average customer contract length. The consolidation of O3b and RR Media will add approximately EUR0.5 billion to this backlog.
Now finally, on slide 21. Turning to our future outlook. The first-half performance was in line with our expectations. All the financial guidance that was presented on February 25, 2016 is unchanged. The legacy items affecting the first-half comparison will not significantly impact H2 2016. As EUR25 million of the total EUR40 million have already been accounted for in the first half. The second half will benefit from the full six months’ contribution from SES-9. The contribution from SES-10, which is due to launch in October. We expect to see continued growth in video and mobility, while government is trending towards stabilization with some growth expected in the second half. This will be partly offset by enterprise where our go-to-market dynamics continue to be challenging. We expect them to be less challenging in the second half of the year. And in the event of second-half 2016 decline, it should be a single-digit one. Consequently, we would now expect to be in the lower part of both the revenue and EBITDA margin range.
The consolidation of O3b and RR Media in the second half of the year will be important growth drivers. From its consolidation date of July 6, RR Media will contribute around EUR70 million. O3b will contribute around EUR45 million from August 1, the expected date of consolidation. These numbers are before the elimination of EUR7 million to EUR10 million of inter-company revenue. This is a cosmetic adjustment which of course does not have any impact at the EBITDA level. The transaction and integration costs will amount to between EUR6 million to EUR8 million for these transactions for the year. And finally, as Karim outlined, our combined GEO/MEO investment programs will be an important contributor and are expected to add up to EUR750 million of annualized revenue at steady state by 2021. And this will represent growth of over 35% compared with the full-year 2015. And finally, SES remains committed to growing the annual dividend per share. And with that, I will hand back to Richard.
Thank you, Padraig. Operator, we will now hand over for questions.
And we will now take our first question from Laurie Davison from Deutsche Bank. Please go ahead. Your line is open.
Hi guys. The first question is just on the pro-forma leverage. Where would you expect that pro-forma leverage to be at the end of the year for this year? Second question is, you gave us some comments before on O3b of the percentage of customers which are incremental, who are buying incremental capacity. Could you just update us on that incrementalism of O3b? And third question, again on O3b, looking at the business plan out till 2020, has there been any change in your thinking about where the point at which O3b breaks even in light of recent trends that you’ve seen? Thank you.
Thank you, Laurie. So Padraig here, I will deal with the first one. So we expect the pro-forma leverage at the end of the year to be below 3.3. But to be slightly below 3.3. Just to remind you that our overall CapEx guidance which is outlined on page 19, for the full year is EUR120 million. And so there will still be quite an important guidance in the second half of the year. So we expect the leverage to be slightly below 3.3.
Karim Michel Sabbagh
Yes, and Laurie, to the point – so we’re stating that over 50% of customers have upgraded capacity. Two is that comparable conversations are underway with other customers. However, we should leave it until we have put, let’s say, in one or two quarters between the last announcement, which was a few weeks ago, and our conversation today. So that we can give you a more accurate upgrade. But what is quite positive is that we’ve had a benefit of visiting the O3b NOC quite recently. It was very visible how this update is happening at the level of each and every client. Padraig, do you want to take over the medium-term breakeven?
Yes, so in the medium term, so first of all - Laurie Davison..
Guys, I’m really sorry, we’re struggling to hear Karim slightly on the line. Karim, do you mind just repeating what you said?
Karim Michel Sabbagh
Karim Michel Sabbagh
Is got hear now?
That is, yes.
Karim Michel Sabbagh
Okay, so what I clarified to you is that indeed all 50% of customers have upgraded capacity. Two is that comparable conversations are underway with other O3b customers. And it will be more relevant to wait a quarter or two quarters since we’ve made this we’ve provided that data point only in recent weeks, so we can update you on this fraction. And I’ve shared with you our recent visit, so the observation from our recent visit to the O3b NOC in the U.S. where we could actually sort of observe on the screen these updates across different applications. Which is quite interesting. Because the update is not happening in one segment, let’s say in enterprise, it’s happening across the three segments. Which again indicates that it’s quite a captive applications. And if you actually provide it – and it’s sort of changing the end-user experience, there’s going to be increased inclination for this update to happen. Padraig, why don’t you take over the medium-range breakeven.
Yes, thank you. So, Laurie, we see full validation of a path whereby, from an overall group point of view, we would see O3b being EPS accretive in 2018. We had a positive EBITDA in May. That’s continued to grow over the positive EBITDA in June. I think also what is quite positive is we continue our dialogue on the financing synergies. And as I said, we would expect to have some of the initial synergies already coming in in August. But now our target will be to have the financing completed in bulk by the end of the year. Potentially, at the latest, the beginning of next year. So I think this is going very positive compared to also what we had said in our investor day.
Karim Michel Sabbagh
Okay, and maybe I can add on this, to go back to the upgrade – because I know that Steve was rightly quite excited about this. There are - to quantify this, six upgrades under discussion as we speak, with existing customers. Which is quite significant. Because we’re starting from a base of around 43, 44 clients. So this is quite significant. And the other point that I want to underscore is there is another phenomenon that we’re observing with O3b, and Steve has alluded to this during his briefing at the investor day. As you introduce the O3b solution to particular market segments, what you’re actually doing is you’re creating a productized – you’re actually productizing the service in a particular market group or customer group. And the moment you actually do that, you start creating tremendous traction with comparable organizations or companies that are within that same group. So the dynamic of productizing the product and make it relevant to a particular set of applications, five point you introduced at the one point. The moments it’s in the market, immediately creates traction with comparable users. And that, for us, is going to be the other positive dynamic in how we build traction. Both in the commercial but even more so in the government sector.
That’s great, thank you very much.
And we will now take our next question from Sarah Simon from Berenberg. Go ahead, your line is open.
Yes, hi, I’ve got a few questions. The first one was at the capital markets day, you had mentioned that there was a contact you thought looked quite good for O3b with Central Command. Wondered if you could give us an update on that? Second question was in Q2, on an underlying basis, enterprise is a lot less negative. And obviously you’re saying that it will be even less negative in the second half. So can you – is that more because the comps are easy? Or is this acceleration of growth in the managed services business? Or is it less contraction or just the worst is out of the way on the point to point stuff? And the third question was just on the ultra-HD testing going on with the U.S cable guys. Do you have capacity at the U.S cable head end neighborhoods to accommodate additional ultra-HD channels? Thanks.
Karim Michel Sabbagh
Okay, Sarah, let me try to take this question. So on the question of O3b, what I can state is vis-a-vis the opportunity that was mentioned by both Pete and Steve in their presentation a few weeks ago, this is progressing in the right direction. So we’re quite excited on how we’ve advanced on this. So we do expect that in the coming weeks, there will be an announcement to that effect.
Can you give us any idea of the magnitude of that contract?
Karim Michel Sabbagh
No, I can’t do that. That’s client-privileged information at this stage.
Karim Michel Sabbagh
Having said that, you do appreciate that given the SES – sorry, the O3b solution, the nature of the O3b solution and the nature of the client to whom this is intended, that’s going to be quite significant capacity that we’ll provide from the starting gate.
Karim Michel Sabbagh
The second point, when it comes to enterprise. So our thought process on the momentum for the second half of the year is on the one hand, we’ve dealt with the more significant part of the market weaknesses or the market headwinds that surfaced during the first half of 2015 and which were rightly noted by Padraig, I remember vividly at the same time last year. Secondly is, because now we are much clearer on where we want to position our service offering, we’re much more focused on – and I will qualify this as, what are the right price and where we want to win. So our success rate was actually reflected during the first half. And it’s actually reflected this much more dedicated and focused approach. And I do have to clarify that since last year, we’ve dedicated more resources on the SES side.
So not just talking about satellite resources, I’m talking resources on the ground with the right capabilities to be able to do so. And last but not least, I wouldn’t in any way want to undermine the impact of being able now to compare notes and work seamlessly with the O3b colleagues. Because they’ve been in this business much more invested, albeit for a shorter period of time. Because this has been the core of their business. Our ability now to sit around the same table, exchange insights and prosecute these jointly, completely changes the dynamics. Because rightly, they have had much more insight and experiences in this market segment than what we have had.
And that sort of duo is quite a powerful combination today. And when it comes to ultra-HD capacity – sorry, capacity in North America to serve the cable operator, the answer is yes. Since this was part of our full process when we came up with the end-to- end solution. So when this came to the Executive Committee initially, as a package service, that was the first question we’ve asked. Is, as this service picks up, will we be able to serve it? The answer was yes. So that – we’re in the middle of these conversations and some of these trials, as per the recent announcement. In fact, it went out this week, correct Richard? Yes. Sarah, I hope this answered your questions.
That’s great. Can I just add one follow-on one? Which is, you haven’t talked about synergies on RR Media. Is there anything you can say in terms of benefits within the Group of adding that? Besides the additional capabilities?
Karim Michel Sabbagh
Well I can say that it is – Avi yesterday was briefing the SES Board and these are not public yet. But he mentioned three key ones global media clients which whom they have served, and he said, had it been for SES, we are a medium that has signed them. And he actually named these three clients. But they’re not yet in the public domain. And so that, by itself – this speaks for itself when you have the kind of capabilities that they had, that we have, and the kind of market access that we have through our almost three-decade long experience with these clients, he said, look, in a month, I was able to secure and lock in these agreements. And it was validating spot on what we’ve been saying all along. And again, for us it’s just the start of this journey.
And we can now take our next question from Nick Dempsey from Barclays. Please go ahead, your line is open.
Yes, hi guys. I’ve got two questions left, please. The first one, just looking at the inter-company revenues of EUR7 million to EUR10 million relating to O3b, that you mentioned in your slide. I’ll need to understand that a bit better. Should we be looking, if we’ve been modelling O3b and SES separately, should we be looking at knocking out two times EUR7 million to EUR10 million for the year from our revenues? Or is that a short-term thing? Was it a percentage that we should be thinking of? So that was a surprisingly high number. And then the other question, I just wonder if you can help us understand a bit better, beyond the benefits you’re going to get from SES-9 in the second half, what else – and the fact that you won’t have the negatives in the base, the negatives from the tough comp in the base – what else is going to get better in the second half specifically that’s going to help you pull yourself up to minus 1?
Okay, thank you Nick. So on the inter-company revenues, that’s a fairly simple one. You know, for many years SES was providing all of the technical services for O3b. And so we’re doing the – we’re providing the services on the SOC on the NOC. And so this is purely – and these items have been in SES’s revenues and they’ve been a cost on O3b’s books. And now looking at it going forward, we’ve actually lost revenues but they also come out of the O3b cost. So that’s just a wash. And that’s more than half of it. And the other amount is just covering one or two defined contracts and shouldn’t be taken at this stage as a steady state. So that’s a technical adjustment. Then on the second question, Nick, I would break it down into a number of different drivers. The first one I would say is that, as I said already, we had EUR35 million of legacy impact in the first half. And in the second half, this should be about EUR5 million. So that’s already a very important change.
The second one then is obviously the available capacity on the existing fleet sorry, Nick, is it possible to go on mute because we have a lot of background noise here. Okay, the second point relates to the coming into service of SES-8. Sorry, the ramp up of SES-8. Probably you could say SES-8 now is already two- thirds ramped up, when we see it ramping up and continuing to ramp up. We see the SD to HD transition continuing. And we see the full benefit of the ultra-HD channels. Which, as you’ve seen, we’ve already – we’ve also signed some of these in the first half.
Mobility will continue to grow and to be a very strong growth driver. And here, we believe we have a big book of business. And also that we are growing the fastest in this sector. And then of course you have SES-9 coming in. Where with SES-9, we’re fully on track with what we said before. Which is within 18 months of launch, we expect two-thirds of it contracted. In fact, with SES-8, we exceeded that. As I said, we’re over 70% now in SES-8. SES-10 will also come into service. And with it there’ll be some revenues. Now turning to the businesses themselves, you must remember if you’re comparing the first half to the second half that traditionally, services are always on average over the last number of years, around EUR20 million better in the second half than the first half. And of course, we continue to have the growth with HD+.
And lastly, what’s also very important and plays a factor every year, is as you know, we have in total over 50 satellites, we’ve 32 in main use and therefore we have a diversified portfolio of satellites and services that we use and that quite often we get additional revenue on. And that’s been a constant pattern. And finally, government’s stabilizing. And as I said with enterprise, we still see enterprise as challenging. But the part that particularly gave us problems last year is now 3% of our overall revenue. Whereas in 2014 it was 6%. And we expect that should there be a decrease in the second half of the year, that would be more in single-digit territory rather than the large decrease we’ve had in the first half of the year. So I hope that is helpful.
Yes, I struggled to hear a couple of things there. Just on SES-9, how much did you say you think would be full after six months? I just didn’t catch that.
Yes, so on SES-9, we are expecting – we’re just about 20% utilization now. We’re expecting after 18 months to have a utilization of over two- thirds. And we’re on track to go there. So that would be an important element of the growth over the next six months.
Next question operator?
And we will now take our next question from Eric Beaudet from Natixis. Please go ahead, your line is open.
Yes, hello guys. Two questions for me. The first one is, I think – or I’m not sure if you mentioned at the end of your prepared remarks that you would reach the bottom end of your full-year guidance? And if I understood correctly, what has changed over the past few months for you to reach the bottom end of that guidance? And the second question is purely maintenance. RR Media, will it be integrated 100% in your video division? Or will it be spread out throughout different divisions? Thank you.
Yes, so Eric on the first one, I can take that one. It’s essentially the market dynamics in enterprise. And as Karim also outlined, we’ve remained relatively sticky in the tier 1 managed services type business. Where we’ve seen some decline but not to the same extent that we’ve seen in the point to point reseller business. Where you’ve seen that that overall percentage of business has gone from 4% of our overall revenues down to 6% of our revenues.
Karim Michel Sabbagh
And so to the second question, RR Media now is fully merged with SES Platform Services. So it’s one entity with the name of MX1. Which stands for media experience number 1. It’s a single management team, so Avi is the CEO of MX1. And he’s overseeing our operations with their core in Munich and in Tel Aviv plus all the other points of presence in London, in Romania and in the U.S. And all this now sits under the media solution groups that is overseen by Wilfred. Wilfred who has been driving SES Platform Services today along with our HD+ business. And he’s also leading our market solutions center. So RR Media as such, so the legacy entity will not exist anymore. It’s one single market-facing group that is up and running since July 6 when we completed the – and further announcement will be provided to that effect at the upcoming IBC conference.
And we will now take our next question from Sami Kassab from Exane. Please go ahead, your line is open.
Good morning, gentlemen. I have three questions please. Can you elaborate on the decline in video revenues in Q2? You were up 3% in Q1, so what happened in Q2 there? Secondly, can you confirm that your guidance assumes flat government revenue growth in H2? I think you might have said that but I’m not sure. And lastly, what impact does your guidance imply from consolidation among service providers in particular in the aero and maritime market? I think globally, for instance, and EMC. Thank you.
Yes, so Sami on the first one, on the revenue, as I said, the second quarter of last year had an important periodic revenue, which was essentially a large number of transponders for a short period of time. And so when we back that out, we’re seeing a year-to-year growth of 4%. All the fundamentals are very strong. We see the HD, the SD growth. We’ve got a good level of impact4. Our impact4 over 60%. And I think you had one question for us previously, is how many of those impact4 channels were also simulcast in impact2. That’s actually quite low at 5%. So all the fundamentals are in good shape in video.
On your second question with regard to how we see government in the second half of the year. So for the second half of the year, we see government trending towards stabilization. And we expect some growth in the second half. Your third question, can you just remind me of what your third question was again, Sami?
Yes. We have had some consolidation amongst some of your customer base. Like Global Eagle buying EMC and arguing that cost synergies would accrue thanks to rationalizing satellite capacity. So I was wondering whether there was any impact implied in your guidance or in your outlook from that consolidation.
Yes, so Sami our working hypothesis, and based on my experience also in previous industries, is once you have a consolidation in one part of the value chain or one part of the value chain in an industry, you’re going to have naturally – and this is one of the incentives in consolidation, how they manage their relationship with their industrial partners. And we are one of them. And if it’s the largest industrial partners that are the best positioned to serve that type of dynamics. So many of these conversations are already underway. And I would like to note that SES has a privileged position with Global Eagle Entertainment, since we’ve been from day 1 teaming to sort of prosecute all the commercial opportunities in the aeronautical market. But then again, part of this question, really the privilege of answering it should be for now the combined entity of Global Entity and EMC. But in general, I would invite you to go back to what we’ve observed in other segments. And we are likely to benefit from this consolidation. Because already we have consolidated with Global Eagle Entertainment, all their aeronautical connectivity requirements. And so we’re pretty much in a first-row seat to benefit from this.
Thanks, operator next question.
And we will now take our next question from Eliska Mallickova from Morgan Stanley. Please go ahead, your line is open.
Hi, thank you, it’s Eliska from Morgan Stanley. I just had a clarification question on the 3% that you mention is the business that is seeing the worst trends in terms of data. Is this – it’s 3% of Group and if enterprise is about 12% of your total revenues, does that mean that the rest of enterprise should be okay? So the remaining about 9% of revenues? And then another question on Latin America and the trends that you see there. Because obviously you [indiscernible] 47:30 that this is the market which has the worst pricing pressure, with the entrance of Epic and Intelsat into the market. Do you think that SES-10 should be well positioned once you launch, even despite these trends? And just a few quick questions. Why was the margin weaker, almost 100 basis points year on year in H1? And on the backlog, even though you had mobility boosting your backlog towards the start of the year, should we see the backlog stabilizing or could it still potentially keep declining? Thank you.
Karim Michel Sabbagh
Sure, so let me take the first and the second question. So indeed, the 3% – the 25% of the enterprise revenue would represent 3% of the total Group. And this is the part of the business we had noted at the same time last year would be – there is very strong noise. Operator, can you do something about the background noise? Okay, let’s try to get over this. So net it’s 3% of the group revenues. And therefore the balance, 9% is much more resilient. And we’ve had significant success in these areas. I would like also to note that it is particularly in this segment that O3b serves today enterprise customers. And so we’re very well positioned in this 9% plus all the increment O3b will be bringing. You made a comment regarding Latin America, and so I would like to go back to our earlier conversations where I’ve noted that all the new assets that we have deployed, including our current assets, have had very good traction. Because each one of them has very customized payload that is tailored to specific applications.
And so notwithstanding the fact that there are number of assets that are being brought into the region by alternative satellite operators, in our case and I take as an example SES-14 and SES-15, we’ve had unprecedented traction of these, particularly in aeronautical. Simply because of the fact that the payloads that we have designed and we have deployed on these assets are perfectly customized. And therefore, from the get-go, they’ve been locked in by the major IFC, IFD operators. So I can’t comment on the reference to pressure that you have mentioned that may have been attributed to other satellite operators. In our case, in the applications we serve, that is not the case. Padraig, maybe you want to pick up the comment on margin and backlog. Yes, so on the margin, Eliska, this is mainly because of the drop-off of the EUR35 million of legacy items, predominantly being in the infrastructure area. I think it’s interesting to note it’s interesting to note that despite that, we see the margin still very strong. And that’s also reflecting the fact that OpEx is down year to year.
And on the backlog, I really would not look – put anything into a EUR100 million movement of a backlog from one quarter to the other, from one half to the other half. We are confident that our backlog will remain robust. And also that we have a very good pipeline of deals that we’re working on. And I think the way to look at it is that now for many years, we’ve consistently delivered a high backlog. And that our average contract lengths are not declining. And they are consistently, on average, over eight years.
Next question, operator?
And we will now take our next question from Paul Sydney from Credit Suisse. Please go ahead, your line is open.
Yes, thank you very much. Good afternoon, guys. Just a few questions, two or three questions around ultra-HD. You’ve now got 16 commercial channels on the network. Just wondering if you can give us a bit more detail on who the broadcasters are, which geographies and what content is currently being transmitted? And just a follow on from that, are you actually seeing increased demand for capacity from those broadcasters that are now broadcasting in ultra-HD or do you expect to in the future? And I think just following on from that, I think there was a previous question around the U.S. cable testing of ultra-HD. And the question was, do you have the additional capacity to support that? Does that imply that, again, the U.S. cable operators would be needing more capacity to deliver a UHD product? Thanks.
Karim Michel Sabbagh
As a general observation, the ultra-HD requirements will trigger additional demand for capacity. So this is not a substitution of capacity that is operating in SD or HD that is moving to ultra-HD. And that is applicable both in Europe as well as in North America. And so the 50 channels that we have served today, that we are serving today on ultra-HD, all the capacity that is dedicated to them has come on top of what we’re already serving in SD or HD. So that, I guess, takes care of some of the questions that you have raised. When it comes to the coverage of these channels, some of them are Europe-centric, so case in point is Pearl TV over Europe, which was one of our first commercial channels. And I would think – so if I move, fast forward to one of our most recent channels which was, if my memory serves me well, is the sport channel that was announced in Nordic and if my memory serves me well, that was Viasat.
So we have seen now a diversity of channels, whether they are – all of them, by the way – so the rule in general, they are channels that are providing content where the experience is significantly enhanced with the quality of the image that you’re providing. And so that refers to sport, that refers to fashion or general entertainment as well as dramas and movies. And that was our hypothesis from the starting gate. And we – our target now, as we do this with the DTH, as we’ve done this successfully since 2015 with the DTH operators, is also to start building comparable interactions with the cable operators. It does require – and I need to recognize this – it does require a customized approach. Because you’re providing this to the cable head end but it does require a back-end set of capabilities that are not deployed today. And so it took us the right runway or the right horizon to come out with an end-to-end service delivery. And the combination of SES Platform Services and RR Media allowed us now to go to these cable operators with a turnkey solution. Which is why we’re confident that the traction that we’re building now will further develop in positives. And if you’re more interested in the exact channels that we’re broadcasting, I suggest Richard provides you with a list offline. Okay, Richard?
Next question please.
And we will now take our next question from Andrew Spinola from Wells Fargo. Please go ahead, your line is open.
Yes, thank you. I wanted to ask a clarifying question on the enterprise comment that Padraig made. I believe you said that you expect enterprise to decline in single digits next year. And I was wondering if that is inclusive of a full year of O3b? And if you can just give us maybe some color on what you expect from the legacy enterprise business? Second question, when we think about your uncommitted CapEx in 2019 and 2020, you have a separate line for O3b and for the rest of the Company. But I’m wondering, once you’re a combined company, is it possible that the EUR415 million and the EUR440 million in 2019 and 2020 could potentially be future procurements for O3b capacity? And then last question, beyond your three HTS payloads, when you think about your future HTS payloads, where do you stand on thoughts about potentially launching future Ka-HTS capacity? Possibly to integrate GEO and MEO with O3b? Or will you be more – continue to be committed to exclusively Ku in the GOR? Thanks.
Yes, thank you Andrew. I’ll take the first one. So thank you for asking it, because I want to be really clear on this one. So my comments purely relate to the second half of 2016 versus the second half of 2015. And of course, not yet taking O3b into account. Of course, when we consolidate O3b, we’ll see a completely different dynamic on our data-centric businesses. So my comments are relating to the enterprise vertical which in the first six months of the year declined by 20%. But what I’m saying is for the second half of the year, compared to second half of 2015, we will continue to see this vertical to have certain challenges. However, in the event of us having a decline, we would expect it to be a single-digit decline rather than double-digit decline we’ve seen in the first half of this year. So what’s for our existing source. Now of course, when you go and you consolidate O3b and in the pro- forma numbers that Karim has shown, even for the first half year, on pages 4, 5 and 6, you see that the dynamic begins to change very quickly on all of the data-centric verticals to become a much more positive one. So my comments were purely on the scope, excluding O3b.
Karim Michel Sabbagh
So Andrew, and the Padraig, let me pick up the CapEx question. So two clarifications. First, the numbers on page 19 are inclusive of the O3b CapEx. So that’s the first point. The second one, and indeed I think you’re touching to that, is in the uncommitted numbers, so what is shown in dark red, in these uncommitted numbers which today are assigned under our GEO development programs, there is going to be a very relevant discussion about what is going to be the most efficient way to deploy HTS payloads. And we have, today, uniquely the optionality to deploy this either in GEO or in MEO. And because, as Martin, our CTO, had announced at the investor day, we’re working on the concept of a universal payload, so the technology would be common across the GEO or the MEO arc. And because we’re working also on unifying the terrestrial segment, starting with the antennas, plus the other elements, we’ll be in a position to decide what is the optimum way to deploy these payloads. And this certainly applies, to go back to one of the points that you’ve raised – this certainly applies to Ka- band.
So there are going to be, increasingly, opportunities where we have to deploy Ka-band and our sort of natural thinking would have led us to do this in GEO. Increasingly, we’d be inclined to consider that MEO may be a more efficient way of doing it. One, because we can, with MEO and the technology that we’re envisioning, the performance could be more relevant to the end user. Both in terms of bandwidth, in terms of latency, and also the economics. Because as we deploy the payloads on a MEO arc, the economics are more favorable. And to go back to one of the principles, I’ve stated in fact at the start of the investor day, ultra-HD gives us the ability to have a much more scalable and flexible fleet in areas where there is very fast growth, where we need to grow very quickly. We need to do that in a very limited way and the most cost-efficiency manner. So I hope that in this broad brush, I’ve answered the points or the questions that you have raised?
And we will take our next question from Laurie Davison from Deutsche Bank. Please go ahead. Your line is open.
My questions have been asked. Thanks.
That concludes today’s Q&A. I will now turn the call back to our hosts for any closing or additional remarks.
Thank you very much everyone. Have a good summer.
Thank you. That concludes today’s conference call. Thank you for your participation ladies and gentlemen you may now disconnect.
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