Inmarsat's (IMASF) CEO Rupert Pearce on Q2 2016 Results - Earnings Call Transcript

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Inmarsat PLC (OTCPK:IMASF) Q2 2016 Earnings Conference Call August 4, 2016 4:00 AM ET

Executives

Rupert Pearce - CEO

Tony Bates - CFO

Analysts

Paul Sidney - Credit Suisse

Wilton Fry - RBC Capital Markets

John Karidis - Haitong Securities

Rob Berg - Berenberg

Giles Thorne - Jefferies

Terence Tsui - Morgan Stanley

Mathieu Robilliard - Barclays Capital

Andrew DeGasperi - Macquarie

Unidentified Company Representative

It's a great start. Inmarsat's First Half Interim Results. We've got two speakers for you this morning. Rupert will begin with the strategic context, after which Tony Bates will take you through the full details of the financial results for the quarter two and the half. Before we get there, I'd just like to remind everyone to take a close look at the disclaimer with regards to the forward-looking statements. And so without further ado and before making any further errors, I'll pass you onto Rupert.

Rupert Pearce

Fantastic. Well, I'm Steve Spangler. What a great way to begin. We can't get any better from that. Right, so ladies and gentlemen, good morning. Welcome to our Q2 results presentation. I'm very pleased this morning to be introducing a solid set of results, demonstrating the resilience, diversity and plain old fashioned grit of our business in the face of a somewhat challenging market environment. Several of our core markets are in recession. Overcapacity looms in adjacent markets that may spill over into our own global mobility markets. And the challenge of bringing Global Xpress and the EAN to market amid that short-term environment is significant.

So I'm heartened that in Q2, we rose to those challenges, delivering growth in our government and aviation sectors, an excellent performance from our newer product offerings in maritime, and exciting strategic partnerships to assure the future success of Fleet Xpress, as well as continued progress against our medium-term ambition, very strong participation in the fast emerging global aviation passenger connectivity opportunity. It remains difficult to predict the medium-term with high levels of precision, but we know enough about our competitive strength, our diversified business opportunities and our focus and fully funded innovation roadmap to remain confident in our existing guidance, which predicts exciting growth for Inmarsat in the years ahead.

Before I hand over to Tony to take you through the numbers announced today, I want to spend a few minutes now setting out our Q2 and half year results in a strategic and broader market environment context. We will be returning, at the Capital Markets Day, to drill much deeper into many of the themes I'm going to touch on in the next few slides, but of course we remain happy to take questions on them later this morning as well.

So I'll start with this slide. We're fortunate to be a business focused 100% on high growth markets. Mobile broadband is growing globally. Whatever the short-term volatility of the broader maritime, government, energy and even aviation sectors, there is massive intrinsic growth in demand for global mobile broadband. We live in a world which demands uber connectivity on the move, not only between people, but between people and machines and between machines. We call it the Internet of Everywhere.

Commentators continue to predict a global data growth CAGR above 60%, driven off the back of huge growth in smart devices, growing from roughly 5 billion today globally to more than 20 billion by the end of the decade, as well as an explosion of applications, solutions and digital services, including the revolutionary power of big data applications and platform based demand side economics. We all know these trends well because we live them every day in our business lives and as consumers. For Inmarsat's business, they're driving two big trends. Firstly, our core customer base has begun to change their use of mobile satellite services radically. And secondly, we have become relevant for the first time to a totally new universe of customers.

The first trend is driving new growth for us in a low-risk, complementary way to our existing business. The second trend offers further transformational growth opportunities that can take us to a fundamentally different, highly exciting place for the business. So looking at the first trend, there's no doubt that our core customers are embracing the transformative power of connectivity in their businesses and that this will drive solid growth for Inmarsat for many years to come. In Maritime, data connectivity that used to be regarded as simply a cost to be tightly controlled is increasingly being regarded as a value-added enabler of the digital ship era, delivering exponential returns on investment across incredibly diverse areas of ship borne activity.

In a similar vein, the cockpits of commercial aircraft and the management of aviation systems and operating platforms are being transformed by the power of mobile broadband. Governments too have placed the online line of sight broadband communication at the heart of their ability to deliver situational awareness, intelligence, surveillance and reconnaissance and inter-operational command and control, meaning that mobile satcoms is a fundamental enabler to their activities across diverse areas of operation. And in the energy sector, a smart oilfield, meaning one connected and operated increasingly autonomously as part of a vast community of sister oilfields, is said to pump oil 30% cheaper than a traditional oilfield. So in an era of relatively low oil prices, remote broadband connectivity turns out to be the difference between being in business and not.

Indeed, we're finding in many of our core markets that attritional market conditions are, ironically, driving the adoption of mobile broadband enabled innovation in a countercyclical effect. Secondly, beyond our legacy customer constituencies, new customers, with pervasive connectivity needs, are starting to deploy our services for the first time because the unique capabilities of mobile satellite services meet their new business requirements, driven by their adoption of mobile broadband connectivity as a mission critical capability.

Once a business or a government department has decided to embrace the power of mobile broadband for its customers, suppliers and staff, then coverage and reliability come into the equation, at which point our unique global capabilities start to look highly desirable. Perhaps the single most obvious example of this is the emergent passenger connectivity opportunity. The demand for pervasive connectivity by their travelling customers, even in the air, has driven commercial airlines to embrace mobile satellite broadband services as absolutely critical to their future competitiveness. And we're really happy to bring our 37 years of experience in highly reliable, cutting edge global aviation connectivity to bear on the commercial airline industry's unique requirements.

But other sectors are also enjoying a kind of revolution, including smart cities, intelligent transport systems, which includes the connected car, train, truck and bus, and the world of smart everything, including agriculture, education, healthcare, energy grids and control systems among many other verticals. In this hyper connected world it's no longer shocking any more that satellite operators are being invited to the 5G party. SCS and Inmarsat are inside the tent of the European Commission's 5G action group, for the first time lining up alongside the terrestrial network operator and telco equipment manufacturer incumbents, because this time Europe wants to see innovative technology extend into suburban and rural areas, reach into the skies and onto the seas, be interoperable and highly cyber resilient, be broadcast to the many, support low power, wide area end-to-end networks and stay up when natural disasters or terrorism hit us. These trends place mobile satellite broadband much closer to the mainstream than ever before. In passing, I'd also note that several of these opportunities are not broadband opportunities. The narrowband opportunity is ideally suited for our L-band networks, with plenty of renewal to come for that legacy business in the years ahead.

However, it is undoubtedly true that these long-term growth opportunities need to be considered in the context of shorter-term supply/demand asymmetry in the global satellite services marketplace. We are moving into a period in which we expect to see space segment supply, especially HTS capacity grow very rapidly through the remaining years of this decade, creating a capacity glut, that industry commentators believe may be some three times prevailing aggregate demand in 2020. Although we believe that demand will come to outstrip supply within the following five years, in the early 2020s, normalizing supply and demand, there is little doubt that if all of this new planned space segment is funded and launched, which of course is far from free from doubt, it will create greatly intensified competition and strong downward pressure on wholesale and retail pricing in the marketplace. We know that many investors are rightly, deeply concerned by this possibility.

We do not discount this looming threat at all. However, we do believe that our focus on differentiated global mobility offerings to highly selected markets and customers insulates us to a greater extent from the adverse impacts that will undoubtedly be felt in some adjacent markets, such as enterprise VSAT services or consumer broadband. Indeed, when one digs a layer deeper into commentators' analysis of future HTS supply, one discovers that much of this new capacity is highly regionalized. For example, more than 60% of that capacity is targeting North America and Latin America and relatively little of the remainder of the new capacity can actually be repurposed to serve regional, let alone global mobility markets.

Other characteristics of these new HTS satellites that make them highly capable to deliver cutting-edge services to fixed enterprise or consumer subscribers render them far less agile and capable to deliver competitive services to wide area, highly mobile customers who demand global quality of service and, where accordingly, the network operator has to manage peak demand dynamically.

So our focus will remain tightly on global mobility services, where are capabilities are differentiated and highly relevant to the needs of our customer base. But don't think for a moment that we're being blase about the market environment. We do believe that we will have to respond to downward pricing pressures in the next few years to come and that competition in our markets will increase as others eye our sectoral growth opportunities greedily. We just don't believe that our markets will suffer the degree of downward pressure as will be experienced elsewhere. And we believe that our many competitive strengths in our core market, as well as our committed innovation programs, leave us well placed to achieve our medium-term growth targets. As I said a moment ago, this slide is just a taster for a much deeper dive into the subject to come at our Capital Markets Day in October, so I'll leave it there on this topic.

So what makes us different? What gives us a right to survive and thrive as the leading mobile satellite services operator in challenging markets and amid heightened competition? Well, one reason is because mobile services is what we do. It's all that we've done for 37 years. We're not talking a big game about moving into mobility from elsewhere. We're already there. And right now, incumbency, credibility, experience and specialization really matter. We're talking about a customer base for whom connectivity is no longer nice to have, it's mission critical. And when it's mission critical, 37 years of market experience, a strong reputation for delivering on our promises and a proven track record of performance to the maritime, aviation and government sectors is a vital differentiator.

It matters too that we're a highly profitable company of real scale and substance. If you're a customer entering into a long-term relationship with your supplier, you want them to be around for the foreseeable future. It's also important to stress that time is of the essence too and seizing new growth opportunities in our core market. It's a material factor that we are the only satellite operator with a seamless global HTS network in place and fully operational today, let alone one with a fully redundant backup L-band network interwoven with our broadband network to provide weather-resilient, high levels of reliability, safety services and end-to-end service solutions.

Ships, aircraft, government and energy users want next-generation connectivity now. They're not going to wait a few years for something that exists today only on a blueprint or in bits and pieces in a manufacturing facility or which can't be globalized for many years. And when those customers install GX on a ship, aircraft or platform, that capability is likely to stay on that asset for the remainder of its operational life. That could be 20 years or more. This is particularly the case for Inmarsat customers as they will have a high degree of confidence in our ability to serially upgrade and develop our GX capability in the years to come as we are a satellite operator on our fifth-generation network, not just a reseller of someone else's capacity decision.

Let me also just say there is only one satellite operator that has the opportunity to convert to broadband -- serve to broadband services an existing installed base of thousands of aircraft, 10s of thousands of ships and a legacy government customer strategically determined to move out of Ku band and into Ka band, Us. Incumbency has its value. We like our diversified capabilities too. Being global allows us to focus on any geography. Our highly diversified products and services base, operating from bytes to megabytes and from credit-card-sized end-to-end devices to highly complex aviation broadband, enables us to be successful and relevant across not only many industry verticals, but also to deliver bundled, integrated capabilities to serve highly diverse needs of any customer in any vertical. This provides us with a wide universe of growth opportunities in our market. No other satellite operator has that breadth.

Being in the mobility business is also qualitatively different from being in the FSS business. Unlike the FSS operators, we're used to relatively low average bill ratios on our satellites because we build for coverage. We deliver global mobile quality of service and availability and we manage our networks to peak demand, so the pesky habit of being in a different place every hour or so. That means we design our networks for agility. The ability to move power and bandwidth and even beams themselves around in real time to meet surging demand is key. Operating a seamless, fully integrated global network in space is a unique feature for us, but it's just the start. That coverage is converted into a global managed service, extremely high quality, operating dynamically for a user base that we know really well.

I can't emphasize enough how totally different these features are to HTS capacity targeting FSS opportunities. Indeed, we suspect that as broadband customers become ever more sophisticated and as their needs grow, what it takes to be a winner in mobility markets and what it takes to be a winner in fixed markets will become more and more divergent. Don't think it's all about our space assets and our networks either. One of our most valuable business assets is our long-established global distribution network, the specialist organizations that have worked with us for many years to turn our capabilities into highly integrated, highly capable solutions for their end customers.

Today we go to market in more than 200 countries and across many different niche verticals, through more than 600 such established relationships. A sizeable minority of our business is now undertaken directly to market through our business units, but the majority of our revenues are generated as a wholesaler and we celebrate the diversity and strength of our indirect channels to market. That asset, those relationships cannot be built overnight. Think about that in the context of the recent announcements of the strategic partnerships with Marlink, SpeedCast and Navarino.

And finally, it matters that we continue to innovate and that we have a demonstrable track record of successful innovation going back decades. Our customers can depend on us to continue to keep them at the cutting edge of service innovation, not only with significant service enhancements, both speed and capacity, but also through step change cost-per-bit reductions that keep our services price competitive too. They know that the first iteration of GX is a pathway to future enhancement, Inmarsat-5 F4, the EAN, Inmarsat Gateway and the revolution to come in L-band and Ka-band through the Inmarsat-6 program. We have the capacity and the capabilities to ensure that our customers' needs will be fully met into the far distant future. Take all of these items together and you can see why we're confident that we can continue to compete well in our chosen markets.

And finally, I think it's strategically important to stress that we have many diversified and independent pathways to grow. So much of the current debate about supply/demand asymmetry and the impact of technological innovation is actually focused very narrowly in terms of its impact on Inmarsat. Essentially, the debate is about the potential for GX to meet its $500 million target in 2010, but there is so much more to our medium-term growth prospects than GX. Now obviously I would stress at the outset that we remain confident in the $500 million target. And you'll recall that we've described on several occasions in the past how the aggregate size of the new markets we're addressing with GX services, principally in maritime, VSAT, energy, government VSAT and aviation passenger connectivity, are sufficiently large that our $500 million target does not require us to hit outrageous market share metrics across the board to succeed. It isn't winner takes all.

We've also shown how our ability to proactively transition our existing user base in some markets, most notably maritime, on an ARPU accretive basis from narrowband to broadband services, also makes the $500 million challenge relatively low risk for us. But we also have a series of independent growth opportunities to complement GX, many of them relatively unaffected by the glut of FSS capacity looming in our headlights or the increased competition for broadband communications in global VSAT markets.

First off, we remain confident that our current and future L-band infrastructure has ongoing growth potential. I've listed some obvious areas on this slide, on the left-hand side, and I've also talked about some of these areas earlier. The fact is there are plenty of opportunities for cheap, light, highly portable, highly resilient terminals delivering speeds of up to 5 megabits per second. Next generation aviation and maritime safety, air traffic management, small ships and aircraft, the whole area of the Internet of Things, M2M and LPWAN networks and smaller unmanned aerial systems are just some examples.

Let's not forget also the unique backup capability that L-band services also offer in some very harsh environments and in some specific use cases. Then, as you can see in this pretty picture, we have Milsatcoms. We are the unique purveyors today of global military Ka band capability, a superb glove fit for the augmentation and gap fill needs of U.S. DoD and a small elite group of coalition forces who deploy alongside the U.S. DoD. There is a real opportunity for us to become a trusted and embedded supplier to these governments of services that are uniquely fungible with existing deployed proprietary investments these governments have already made, such as WGS network or the Athena Fidus satellite, making us a highly efficient and effective strategic partner for these users. No traditional HTS or FSS capacity can go after this opportunity.

In a similar vein, next slide, we believe that the EAN will create an independent but also complementary growth capability. The nature of this technology, targeting the European shortfall aviation market is truly differentiated from satcom solutions, dramatically more performance in terms of capacity, speed and cost, capable of being tailored to aviation routes and upgraded dynamically and surgically, but also far cheaper to install and operate than satcom. We've seen those advantages play out for Gogo with their air to ground network before it got full up. And we're confident that the EAN can be a winning proposition in its target markets in the years to come. Once again, we don't see next generation HTS displacing the EAN. Of course, it's also worth repeating that the EAN doesn't just stand alone. It actually dramatically enhances our global GX network for aviation as it will be fully integrated with that network to allow aircraft passing over or into and out of Europe to avail themselves of the EAN, enabling our entire global aviation network to be higher performance and lower cost and therefore more competitive.

We also believe that our new solutions platform, the Inmarsat Gateway, will not only come to differentiate our networks for our customers, but also deliver incremental revenue streams to us, our channel partners and of course our solutions ecosystem partner. You've seen some green shoots this year in this area, with Fleet Media and Fleet Cyber announced and launching. We're a long way from proving out this concept and it is very early days, but we have high hopes that this area can develop into a meaningful complementary growth engine. No Inmarsat growth chart would be complete without reference to Ligado, of course. Our association with Ligado is not affected by HTS competition, and if they succeed in their endeavors then they will deliver us meaningful revenue streams, potentially for decades to come. In the next three years alone, a revenue contribution of some 340 million is not to be sniffed at either.

And finally, there are the usual wildcards. I'll mention three. Firstly, events. As ever, our business is well positioned to serve events, whether humanitarian disasters, major media events or simply a rise in government OPTEMPO, any of which can have a pronounced and immediate effect on our financial performance. Second, China and India. We believe we have a unique presence in those markets, founded on many years of relationship building and local investment. They offer a differentiated, independent, if somewhat intangible growth opportunity.

And finally, the connected car. We believe that L band services have an important route to play role to play in the future connected car by supporting OEMs in their desire to manage their transportation platforms in a highly efficient and intimate ways. No doubt this last item is a long-term business development proposition today, but it's another example of a growth opportunity unaffected by short-term FSS market overcapacity. Taking all of these items together, I hope you can now appreciate that Inmarsat has diverse pathways to our growth target. Right, having set the scene somewhat, I would like to hand over to Tony to jump into the Q2 numbers. Tony?

Tony Bates

Thanks, Rupert. So Rupert has launched the rocket and I will now bring us down to earth. Okay. Let's kick off with the numbers, the Group in aggregate. So a few things to pick up on this story here.

We start off with total revenue for the six months. As Rupert indicated, we've had a decent quarter, with growth in aviation, government and Ligado, a slightly weaker, sorry, half, in those areas. A slightly weaker period for maritime and enterprise. The good news is, as you'll see later when we get into the detail, the results for maritime and enterprise were both materially better in the second quarter. The results are also impacted by revenue mix, so we continue to see the trend of moving towards basically airtime, with a very high margin as compared to lower-margin sell through products, which has helped us in terms of our cost base. That's an ongoing story. And secondly, currency has started to have an impact, particularly in the second quarter because we have a substantial amount of our cost base is non-US dollar denominated, particularly obviously here in the UK with sterling. So that's given rise to an improvement year-on-year in operating costs, so lower operating cost despite the increase in revenue.

Walking further down the P&L, depreciation and amortization reflects bringing on the F2 and F3 of I-5 in terms of depreciation from the start of this year, after we declared CSI. Interest and tax pretty much unchanged in terms of the P&L, tax rates ticking down over the medium-term, but nothing dramatic going on. And then if you go further on you will see free cash flow very much stronger in this half of the year. It's particularly in the first quarter where CapEx was very low. We only had 40 million CapEx in the first quarter compared to about 100 million in the second quarter. We'll talk more about that later. Also you can see that we're continuing to increase the dividend, the dividend up by 5%, as we've increased it in the last two or three years, a reflection of our confidence in the performance of the business over the medium-term. We've also added a scrip alternative for our shareholders. This is a completely free option and it's in the interest of just giving a wider range of choices to our shareholder community.

Over on the right hand side, if you look at Q2, you can see the full impact starts to come through of Ligado, or you will be able to see that. That's a critical impact. Currency is much more pronounced, as I mentioned, and also higher CapEx. If we go onto the mix of revenues, now looking at this, you can see wholesale MSS revenues up by 6.7% in the first quarter, sorry, for the half year, 8.9% in the second quarter. Better performance in the second quarter driven particularly by the price increases in FleetBroadband, which we'll talk about when we talk about maritime. But really this is about the growth of our two core engines of SwiftBroadband and FleetBroadband driving that.

Our other terminal and revenue line here you can see going backwards. This is the mix change between these two lines that helps us. Typically this second line on the slide has a third party pay-away, so it has a lower margin than wholesale MSS revenues. There's two elements though going in different directions. One is a lot of the older legacy products. But going in the other direction is our XpressLink product, which obviously has an increasing third party pay away within this line.

Ligado, you're aware of the deal. We've given you all the guidance around that, running exactly to track. The difference is Ligado are actually paying us within the quarter rather than after the quarter end, which has an impact into working capital. But you can see here on this slide that Q2 is obviously where the change is as the new deal bites.

If we go further down the slide, the good news to see I think is that EBITDA excluding Ligado was up, both for the half and for the quarter. And as I say, that's a function of both currency and revenue mix. So actually there's a third dynamic within there. We are investing, as we've said a number of times, in aviation. So there's much more cost going through the aviation business unit. And again, we'll talk about that on the aviation slide. Put all that together and I think the overall set of numbers are moving ahead reasonably well in the current market environment, not just on the top line and margins, but also the margin percentages.

Now let's look at the individual business units. So maritime, the markets do continue to be tough. There are specifics, which I'll touch on as we go, revenue down 0.5% in Q2 but down 4.5% in Q1, so clearly a better second quarter, driven primarily by what's been going on in FleetBroadband. You can also see here sequential growth in maritime, which is another way of looking at the same thing, which is also good to see.

So what's been going on, on FleetBroadband? The fleet itself is little changed, but we put some price increases through in FleetBroadband. We actually rejigged all of the price bands and their individual pricing. We think of it as a ladder. People come in at the bottom, using not so much data, and then as they go up the stack, basically they pay more but their price per megabit drops. So although we talk about a price increase here, and that is driving an increase in ARPA from our customers from around back at the 700 or so average per month at the back end of last year to around 750 million as we come into -- coming for the whole of that half. For our customers, they're actually getting a lot more value for that money.

There's also a point to pick up here, is that there's a little bit of migration going onto VSAT, the top end of FleetBroadband. I think everybody's aware of this happening, but we never quantified it before. But just to give you an idea, it's around 1% of the fleet is migrating up. That's 1% a year, very round numbers. Those numbers, however, are not being reflected as a takeout of the FleetBroadband numbers of ships and then add to the VSAT numbers of ships. They are reflecting as an add to the VSAT numbers, but they're not coming out of FleetBroadband because we're still providing FleetBroadband to those ships, to those customers. And in fact, in terms of numbers of ships, it appears in both. There's more detail on that in the press release and we can follow through if anybody wants further clarification.

Just flipping back to the price increases, so the price increase was announced in February, took a couple of months to actually work its way through as people rebalance their price plans. And that really is what's driven the growth in Q2. VSAT has continued to grow very nicely, good growth in both Q2 and Q3. The fleet is obviously growing. We're up to about 2,800 ships here. Remember, these are ships that are going to migrate over to Fleet Xpress and we'll take out the third party Ku cost as a consequence. The order backlog that we have, more than six months' worth of installations, down a little bit, but still well more than six months.

We announced the launch of Fleet Xpress, full commercial launch at the start of April, end of March. But it doesn't really reflect in these numbers. We are starting to do some very early installations in Q2, but it's really going to be over the balance of the year as you start to see that coming through. And we will cut that out of the VSAT numbers for you to see it as it becomes material.

Also important to talk about, the deals that we announced. We announced one more this morning, just to add to the fun of course Marlink, SpeedCast and Navarino. These are all major distributors of our products out there. Between them, they're now making a commitment to north of 5,000 ships. So put that in context today, that's 5,000. We have 2,800 within our own business today. And the total market in this space is, depending on how you want to measure it, either 12,500 or 20,000 ships. So whichever way you cut it, it's a very material piece of the market that is committing to Fleet Xpress. That's much more a fundamental vote in the technology and the capability and the availability of that technology than anything else.

ARPU is, however, ticking down. It's ticked down across Q1, but particularly also in Q2. But there are a number of things in here which say that there is market price pressure coming in, but there are other things which are more about the mix of the product suite. So, for example, we have within our legacy-acquired business, the Ship Equip business, there was a product called SEVSAT, which had a TV-based product, which had pretty high ARPU. That is burning off as time comes through, and obviously that drives it down. The Norwegian krone in which some of these revenues are denominated, decided again in Q2 to take a walk and dropped against the dollar.

And then finally, we have flagged something that started to surface last year towards the backend of the year that's been rising. We are seeing, in the ARPU context, an increasing number of ships being laid up. Laid up is different from deactivations. Laid up means they're mothballing the ship. And because it's Ku today, what happens is their revenue drops. They basically go such that we remain whole, but they, in effect, suspend the revenue. So for example, if they we were charging them $100 today and our Ku pay-away was $30, their revenue from -- that we charge them drops to $50 as they lay up the ship. So we're still covered with our Ku, but our average ARPU drops as this ships goes into suspension. When the ship comes back out again, then it goes back up again.

The installations in the VSAT area, also good to see they were ticking up. We did $140 million -- sorry, $150 million net in Q1, $170 million net in Q2. And also, the rate of deactivations, which are ships really going away, actually fell away slightly in Q2, so lower in Q2 than Q3. So there's actually an awful lot going on around those two main products. And the legacy product decline is unabated, and we'll see that on the next slide. So here you have the macro story, as we talked about before. FleetBroadband, round numbers, $360 million of maritime revenue, still growing. Much higher growth rates last year because of a very big price increase at the start of Q 2015 -- Q1 2015, which has obviously dropped out. Price increase you can see here coming in Q2 2016.

VSAT, over on the right-hand side, again steady growth, growing nicely, for the reason we talked about. The FleetBroadband backup is that little dark bit that we've identified, very round numbers. It's about 10% of the VSAT revenue that you can think of as being charging for the FleetBroadband element that Rupert talked about earlier, which is a competitive differentiator.

Those two together, FleetBroadband and VSAT together, they -- you can see if you look at the pie charts, 81% of our total revenue, up from 74% the first half of last year. And that's obviously good because this is revenue mix, moving towards basically our product that is FleetBroadband, 100% Inmarsat airtime, and VSAT, which will be our 100% airtime Fleet Xpress product as we migrate over the next two or three years. Fleet continues to fall away over on the left-hand side. Fleet is now running at about $5 million a quarter. It's halving every year. And our other products, over on the right-hand side, which are the other drag on our revenues are now down to around 20 million to 25 million a quarter. So the mix in aggregate in this space is changing for us.

Now to government, nice to see the government business units together actually having growth. Growth for the first time since they were created and both growth in Q1 and Q2, but if you go underneath the surface, there's a number of different things going on.

In the U.S., the budgetary pressures continue. You may recall the U.S. government was declining something like 30% in 2014, 15% in ’15, and down 7% here in ’16, 16% in the first half of last year. And what's going on with the U.S. government is that we have that ongoing rate of decline, but now started to be mitigated by the initial impact of GX. You remember that F1 went up first. The primary customers on that U.S. government, that's gaining more traction as we go through ’16.

Outside the rest of the world, the markets generally are also difficult. So we still have budgetary constraints which pop up, but we've got a much, much more diversified portfolio. You'll recall that we're now in north of 30 countries, and it's good to see we break that down by half a dozen regions. Each of those regions, they've all grown in the six months that we're talking about here.

The headline number though is being driven by operational tempo in one particular part of the world, where there is operational activity going on which is driving a material increase in revenue from a very small number of SIMs. That is totally unpredictable, may stop tomorrow, may run for a longer period. It actually started last September. We're also, in the government area, working in the medium-term. And you've heard us confirm this morning that after the third round we actually have finally won this year's government contract with the U.S. Navy. It's good to see that. No impact in the 2016 numbers and will slowly bleed in through ’17 and then work with us for five years in total.

We're also working on I-5 F4 in terms of the business plan for that, the contracts that we may be able to secure around that, and I-6, I-6 particularly around the Ka capability. And obviously not just government, but government is an area where that's particularly relevant. Enterprise. Enterprise is a wide collection of different parts of activity, but if you look at the chart on the right hand side, just to get the headlines first, revenue down from $79 million to $72 million, but the EBITDA in that business unit up from $52.6 million to $54 million.

Revenue was down 4%, 4.6% in Q2 compared to 12.6% in Q1, and also sequential growth there, $38.5 million rather than $34 million for the quarter. So the results, the real pain was in Q1. And obviously the mix has improved, which gives us the better EBITDA. If you go into that, there is quite a lot of different things going on. BGAN, BGAN is one of the old core L-band products, continuing to decline. Normally single-digits, but we had a big boost from Nepal, the event last year through the media particularly, so the aid agencies. That came through in Q2 last year, so making a strong comparative to deal with. M2M up by 3%, rising terminal numbers, we now have more than 300,000 terminals out there.

And fixed to mobile, up very significantly, I wish we could do this every year. But the price increase impact, what's actually been happening is we've been bringing our fixed-to-mobile pricing much more in line with the market. And we've done it in several bites through the backend of last year and into this year and that's one of the things that's been driving that revenue stream. Round numbers, it's about $20 million of the total enterprise revenues. FleetBroadband is off. That's tied in very much to what's going on in oil and gas, both in terms of users and usage falling away.

And then GSPS, the sat phone, is the area that's been a little bit confusing. Airtime has been stable across the quarters at typically the levels that we've seen in past years, up a fraction here. You can see 4%. But we had low terminal sales in Q1, returned to normal terminal sales in Q2. And we expect that to continue through the rest of the year.

In aviation, continued growth in the core business, growth in Q1 and Q2, as Rupert talked about. This is still the L band business. SwiftBroadband, up by 14%, a very nice number. Number of SIMs out there rising from about 6,500 to around 8,000, so good volume growth. But actually we're finding, as I flagged at Q1, more customers are actually leaving their aircrafts sitting on the tarmac rather than flying and burning off data. So the round number, 25% growth in the number of SIMs is translated to a 14% growth in revenue. Classic Aero, the older product, number of SIMs continues to tick up. But this increase here is driven mainly by price increases at the start of the year.

Now the big one, the big one for the future starts to have an impact. So just to give you a number to get some teeth into, there are now a lot of deals on the boil, have been for a while, but we haven't quantified before. Just to give you an idea, there's deals covering 2,800 aircraft now at the RFI stage or beyond. There's an awful lot of potential revenue out there, and this is grinding through fairly slowly, but it is still grinding through. Meanwhile, as Rupert touched on, all the practicalities around the network and so on are proceeding well. And you'll see in the release that we've given you some guidance around the GX terminal certification, which is important as well, another key building block. Basically more than half of the commercial aircraft flying now have terminals certified for those particular airframes. And in the fourth quarter as we go out of this year, we'll also have some of the first DLH aircraft out there and trialing GX running live.

But for those of you forecasting the numbers here, there are some challenges in the numbers. The first is the operating costs of the business unit are rising. You can see over on the right hand side, EBITDA is falling away despite higher revenues. This is the cost of the team. We've said for some time that this cost will increase, so it basically doubles, as we expected, in the first half. In the first half it was running at $10 million a quarter versus $5 million a quarter in the previous year. And that's all about bringing onboard the people who are doing these deals and starting to put in place the capability to deliver.

Now, going forward, you're going to see a couple of things happen. The first is we are not yet up to the complement we expected in terms of people. You can imagine there's lots of deals out there, a lot of chasing going on. And we are going to go through a hump over the next two or three years as all of this activity continues and we need to be properly staffed up to do that. To put it in context for you, even with these numbers, we still have significantly less people chasing these deals than either do Gogo or Panasonic. So, going forward, we'll have that capability there, but also you're going to start to see an element of pass through coming. So we've talked about the aviation models running too tight, the bookends that Rupert talked about. One extreme is wholesale. The other extreme is a full service model. Where we have a full service model, we will be buying third party costs, for example, ISP costs, and passing them through to the airline in practice. That will hit the P&L more in our indirect costs or gross margin than sorry, in the direct piece rather than indirect, but it will be there.

So directionally, we're coming out of the year with the operating cost in aviation running at something like $50 million a year. Now flip onto the cash flow, all pretty straightforward here. As I mentioned, working capital improved off the back of Ligado. The other 30 million or so working cash working capital improvement is really us just getting tighter with our working capital management. And you see that now consistently coming through over a number of quarters. CapEx, I mentioned the numbers earlier, 140 million. And you can see 100 million of that was in Q2. Interest and tax, nothing particularly going on. Last year's tax number, you might recall in Q1 of last year we had a tax refund of $30 million, which was nice to have, but obviously not repeated this year. So we roll on down, and, at the end of the day, despite all this going on over the first half, debt basically unchanged or net debt basically unchanged at 1.9 billion.

A bit more detail on CapEx. You can see it here. We've used these buckets, so major infrastructure projects obviously in the first half. Primary issues going on here are F4, the S-band and a bit of the I-6 activity. They will continue as we roll through the whole of the year and will step up with the F4 launch at the backend of this year, the completion of the ,well, further progress on the S-band satellite and the F4 launch.

Success based CapEx, remember right now this is primarily in maritime, so this onboard equipment, or CPE if you want to call it that, primarily in maritime, primarily around XpressLink, where we are carrying some of the cost for the CapEx. By the way, we re-bill this to our customers and we re-bill it typically with a full cost of capital, so this is about cash flow rather than anything else. So we have a position in the marketplace where we are able to be differentiated, because a number of our competitors simply don't have the firepower to provide that support into the marketplace.

That number is going to tick up as we go through the back end of this year and going forward. Remember there are several elements to this. The first is you are going to see CapEx arising in this space with some of the airline deals, so onboard equipment. Lufthansa's a good example, we will start to see this number arising because we are incurring the cost of CapEx on the Lufthansa deal. Well recovered through the whole deal, but it was sharp on this line.

We've also got the migration in maritime of the current XpressLink product over to Fleet Xpress. We've said that over three years or so, there will be about $50 million, $60 million of CapEx and that will go through this line. And then last but not least are our VSAT, by XpressLink today becoming a Fleet Xpress product is growing, which means that this number will continue to grow off that basis. So that line is going to grow and you'll see it kick up particularly over the back half of the year. And then other, not really a lot going on there. That's our maintenance CapEx, this is a number which is probably going to be around the $100 million or so a year. In any given year it'll be plus or minus a bit.

Net debt, also relatively little going on here, plenty of liquidity within the business. Leverage running well within our guidance, whether you want to include it or exclude the debt, the converts actually is down a tad from December. Just to remind you, we have the convertible maturity in November 2017. It matures at $387 million. The conversion price is at $16.43, I think the chance of it converting to equity right now are not that high, but we shall see. And obviously for those of you in your models, you know that our debt's likely to be ticking up over the next year or two. So we are thinking, starting the process of thinking about what we need to do on the capital structure.

Okay, guidance. Rupert indicated and it's in the press release, guidance is unchanged. There's nothing on this slide that changes any of the guidance, just rearticulating it.

Two shades of emphasis for you. The first one is about the outlook. Stating the obvious, I think, but it's worth stating very positive for the long-term, with all the growth opportunity that Rupert talked about earlier. GX, aviation and just growth in demand. Everybody gets fizzed about capacity, but actually demand is growing significantly as well. But it is hard to forecast. If we had a crystal ball and knew with great certainty, then we would be fine, but we don't. You have new products in the form of GX, changing competition, price and capacity debates. We're pretty confident about where we'll end over the long-term, but there are going to be some -- there's a wider range of tolerance around any of the numbers right now in terms of trying to call it.

The other shade of emphasis is on CapEx. We've said 500 million to 600 million in each of those three years. I think you can all look at the math of the current year, 140 million in the first half. There is going to be quite a lot more coming in the second half. But the odds are we're certainly going to be at the bottom end of that range rather than the top end of the range. So not actually formally changing the guidance, but directionally that's where it's going. Okay. So those are the headlines numbers. And on that note, let me pass you over to Rupert and we'll deal with Q&A.

Question-and-Answer Session

A - Rupert Pearce

Okay. Let's go for it. There's a mic just coming round to you.

Paul Sidney

Yes. Thank you very much. Good morning. It's Paul Sidney, Credit Suisse. Just a couple of questions, please. On the U.S. Navy contracts, why do you think Inmarsat won this contract? And perhaps you could frame it in terms of what the U.S. military is really demanding in terms of the actual end user. And then just secondly, just a point of clarification, you mentioned 2,800 aircraft. Is that all of the aircraft that you are currently tendering for? Is that really what you're targeting? And is it just EAN, or does it include GX as well? Thank you.

Rupert Pearce

Okay. Thanks Paul. A very quick answer to the first question. That CSSC contract was managed by DISA, the defense procurement agency, and they ran a very, very competitive process. As you know it went through multiple rounds because it was protested multiple times, so you had to be the lowest price. And it was a focus on a five year Ku-band deal with Ka-band optionality. So we won it primarily on price. That was the nature of the beast and it was a painful and competitive process. So I don't think you can point to any other factor there because of the way the bidding process was. For us, quite apart from the fact that we only want to be a profitable business, so you can assume that deal was profitable for us even though we're buying third party capacity for Ku-band. It's also important to us strategically because the Ka-band option and the five-year relationship gives us the chance to manage U.S. Navy across to where it really wants to be long-term, we believe, which is in a next-generation global HTS capability in Ka-band, with military Ka-band capabilities.

Remember we already have in our stable under contract U.S. Coast Guard and Military Sealift Command, so this represents the recapture of three core U.S. Government maritime relationships that we used to have 10 years ago. They moved into higher frequencies, higher bandwidth because they needed to. And we built GX partly for this moment, which is to begin to serve those customers again with something more relevant to their needs. We think in the next five years we'll have ample opportunity to do that with the U.S. Navy.

Tony Bates

The aircraft numbers are -- it's everything that's in the pipeline at the moment and it's GX and EAN, so it's not split between the two.

Paul Sidney

Thank you.

Rupert Pearce

It's also a dynamic number, Paul. That's just a snapshot of where we are at the moment. Pretty much every major airline on the planet is developing or implementing a connectivity strategy. It's hard to believe that within five or six years, I suspect, it will be the norm to be on a connected aircraft.

So that's why we're gearing up so fast. Our ability to handle 10s of tenders at the same time has become vitality important. While we have a tremendously strong distribution channel into our core markets of cockpit communications and business aviation, they don't necessarily translate really well to cover the whole market for passenger connectivity on commercial aircraft. So we're supplementing that with a big investment, if you like, downstream ourselves to cover these tenders, to jump into them and to manage them very effectively.

It's also the case that airlines -- you know what I said earlier in the introduction, for something as mission critical to the competitiveness of airlines as passenger connectivity has become, means they want to talk to the source of supply, means that being an end-to-end satellite operator is actually a competitive advantage in these tenders. And obviously we need to mobilize ourselves to have those meaningful long-term conversations with airlines, not only to give them comfort about the quality of our service today, but also the enduring competitiveness of those services in the years to come. All of that requires us to gear up and be more downstream than we would normally be.

Wilton Fry

It's Wilton Fry from RBC. Just a quick question. I was wondering if you could give us some color around the flexibility for the bringing into use state the Europasat. Thanks.

Rupert Pearce

The--?

Wilton Fry

The bringing into use state the Europasat.

Rupert Pearce

Europasat, yes. Well there's been some somewhat -- well, highly inaccurate market rumors about the delivery of Europasat into service and its impact on our European licenses for EAN. The satellite program remains on track. Thales Alenia Space have done a terrific job. It is a condosat. That is the first genuine condosat we've done in our history, so we share -- the payload is split between our payload and Arabsat's Ku-band payload. But that's actually gone very well and Thales has managed that very effectively. So we see that being delivered to be ready to launch in the autumn of this year, consistent with a launch before the end of the year. However, such is the nature of the queue and the backlog around SpaceX and different [type of] platforms actually, that we don't believe that satellite will get launched until late Q1, early Q2 next year.

We are doing what we can to try to pull that in as far as possible, but I think it's unrealistic at this stage to expect that satellite to be launched in 2016. I don't think that in any way is material, either commercially or from a regulatory perspective. It is true that being late to launch will put us in breach of some and by far from many license regimes in -- for some regulators in Europe. We do not believe that that is a really material adverse event at all, for all sorts of reasons.

First of all, our regulators understand very well that the actual launch profile, the actual launch manifest is not in our control. They understand all of the steps we've taken to try to accelerate that process and they're very understanding of the situation. And they're very supportive of this highly innovative service that's coming to market in Europe within a few short weeks, really a few months away. Added to which, I would say the regulators are bound by law to act proportionately. And as soon as we saw this coming, we immediately were proactively engaged with regulators around this. We do not see this as any kind of a material adverse event, I'm afraid it's just part of the business of being in satcoms and the launch program is always fraught with difficulty and there's always launch risk.

We will remain very confident in the capabilities of Falcon. This satellite will go up on a Falcon Heavy, by the way, at the moment. Now if that development program continues to drift to the right, we do have other options. You'll have seen that we jettisoned that as an option for Inmarsat-5 F4 satellite, which we're going to launch towards the end of this year. We wanted to keep that on track and we move from Falcon Heavy to something called Falcon Full Thrust, which can launch heavier satellites. We also have a Proton option, should we want to be more dynamic about that. So we are managing this as well as we can.

John Karidis

Thank you. Good morning. It's John Karidis from Haitong. Is there any please you can tell us to advance our thinking about the business prospects for the fourth GX satellite that you just mentioned?

Rupert Pearce

Well, we are going to launch it. As I said, John, as we've said from time to time when we do report in on this, we continue to bake off different business cases against each other, but also to look at the overall placing of our aggregate capacity in a world that's very dynamic. If I was a betting man right now, I would say it would go up over the mid-Atlantic. We've seen some very exciting opportunities there in maritime and in aviation to serve growth markets. There are opportunities elsewhere, west of China and around China itself. But this is really about the balance of convenience, where the satellite is best located.

That's a good thing and we encourage our business units to compete for access to capacity and that's a dynamic environment. I am going to play that out over the time available, until we have to solidify a launch -- an orbital slot. We've got plenty of orbital slots available to have that degree of choice. That's good as well. But as I say, wet finger in the air today, mid-Atlantic, but it could be a number of other places as well. Rest assured that when we come forward, and my guess is it'll be around the time of the Q3s, rest assured we will come forward with an increase in the $500 million number for GX target in 2020 as we promised, because the business case will be incremental.

Rob Berg

It's Rob Berg from Berenberg. Three questions from me. The first is the other satellite operators have all had mixed messages on government, some saying it's getting better, some saying it's getting worse. Q1 to Q2 for you I think was slightly incrementally worse. But I'm wondering is that a trend or are we going to see an uptick, your views on U.S. Government from here.

Rupert Pearce

U.S. specifically?

Rob Berg

U.S. yes. The second point is how significant is the Navy contract, not looking for numbers, but in your $500 million guidance? And the third one is, on VSAT, you've got a significant number of ships using Ku-band capacity and your plan is to give that capacity back to the Ku-band operators. Are you worried at all this could create some overcapacity in Ku-band which would potentially compete with yourselves? Thanks.

Rupert Pearce

I think to say for the U.S. Government market right now is that, I don't think it's -- we don't feel materially more bullish about that. The fundamental dynamics of that market today, and we did say a quarter or a couple of quarters ago, it's still relatively low levels operational tempo and relative budget constraints. What we are seeing though is we're seeing the beginnings of the growth of the material GX business inside the numbers, and that is currently very lumpy. I wouldn't read much into volatility intra quarter in that respect, because you'll get someone making a pre commitment in one quarter, it won't be repeated in the second quarter for obvious reasons, but the customer's still there. So, I think you're going to see some lumpiness inside U.S. Government revenues for some time to come as we begin to create a scale business.

In the medium-term, I'm actually quite bullish about U.S. Government. As I said earlier in my introduction, I think our global Ka capabilities and our steerable global military Ka capabilities are strongly differentiated for U.S. Government. They are going to move all their new platforms for broadband are all going to be Ka and military Ka. They're going to migrate their older platforms over time, budgets permitting, and that's from Ku to Ka as well. So, I think a strong opportunity there.

That comes from innovation as opposed to market dynamics. I love to think that the operational tempo of that customer will gradually increase. There are some green shoots there in areas like intelligence and special forces activities that suggest they may be a leading indicator. But it's far too early to call a turnaround, it still remains very heavy lifting. Elsewhere, we've done a huge amount in our government business to diversify. As we said the other day, more than 30% of our aggregate revenues today come from customers and geographies and products that didn't exist in our stable even two years ago. And that's again very, very heavy lifting and it's just beginning to create more solidity in our business.

You see the global government business, the non-U.S. government grew double-digits year-over-year. Again, it's a very, very fragile recovery today and it's highly dependent on a very small number of customers, who have high operational tempo. But it's a much better situation than we were in, say three years ago. Maybe do you want to comment on that?

Tony Bates

Guidance, Rob, this is obviously a confidential U.S. contract so we are limited in terms of what we can say. We can't really give guidance in terms of quantum. I said a moment ago that really it'll have no impact on the numbers this year. I've said historically it's within the range of guidance. It's anticipated within the guidance. So we're not changing guidance as a consequence of having won that contract. I think you will have seen some pretty impressive historic headline numbers about the size of the contract, many hundreds of millions that had been bandied around some time back. I think probably bearing in mind this is spread over five years in terms of the contract, you need to be thinking obviously in terms of 10s of millions a year and low 10s of millions a year. But we can't really give any more guidance than that.

Rupert Pearce

Yes, Rob, you asked a question specifically about the 500 million target as well at the end of your question, just to comment on that. This is a Ku band contract for five years, with a Ka band optionality. It begins a conversation for us with U.S. Navy to guide them towards from off network onto on network. As I say, we've got those conversations going on in other fora as well. That 2020 number, the 500 million is only four years into the contract. So at this stage, the cautious view is don't expect this to be a material contributor this contract to be a material contributor to the 500 million at that date. The conversations haven't happened yet. The customer has to be extremely happy with the idea and it has to happen quite quickly for it to have any kind of meaningful impact in year four of this contract.

But if you look at this longer term, beyond that kind of time horizon, I think it gets super-interesting because I think we have the opportunity to renew a relationship with a customer that was absolutely core to our US Government business 10 years ago, and here we are again with the opportunity to get it back.

The third question was about VSAT. We obviously have a plan to manage our way out of our Ku-band leases over the next three, three and a half years, and we're confident that will play well. The strategic relationships we've put in place with Marlink and SpeedCast do play into that and they obviously have strong diverse Ku-band businesses and can help us manage our way through that as well. I'm not particularly worried. It's a good question. I'm not particularly worried about recreating Ku-band overcapacity. These are traditional Ku-band capabilities. I think as we move forward into this era it's going to be high throughput capabilities that will be more competitive. But as I said, ironically the high throughput competitors are much more narrow and focused in terms of their capabilities and their coverage than the big, sloppy old-style beams. So I think we're in a relatively benign environment. Giles?

Giles Thorne

Thank you. It's Giles Thorne here from Jefferies. I had two questions, please. Under the Marlink, SpeedCast, Navarino deals, what ability do they have to participate in market forces on the supply side? So I suppose what's the dynamic that drives the wholesale ARPU that you're going to be charging them? We understand it's a vessel commitment, but it seems like the wholesale ARPU you're charging will actually be quite dynamic. And second question was it would be interesting to hear your view on the relative competitiveness of your bandwidth economics for the ground segment of the EAN compared to ViaSat-3, assuming ViaSat-3 hits its headlines.

Rupert Pearce

Do you want to deal with the first question, Tony?

Tony Bates

Remind me what the first question was.

Rupert Pearce

Well you asked about market forces on the supply side, apropos of Marlink.

Giles Thorne

How is the wholesale ARPU with SpeedCast and Marlink been arrived at? And how fluid could it be, responsive could it be, to future supply-side dynamics?

Tony Bates

So Giles, the reality is that you're right, we clearly can't do long-term deals with people that are disconnected from the marketplace. So their pricing is linked to our market pricing. And in practice our market pricing is something that is dynamic.

Rupert Pearce

Wholesale market pricing.

Tony Bates

Wholesale market pricing. And we watch it very carefully, so it's hardwired, the two. And our pricing is a function of what's going on out there. So it will be a function of how much capacity is, remember this is a market that, you look at the research out there, is going to grow very significantly over the next four or five years, potentially doubling in size.

So we're just going to have to run with it. And if you look over the medium-term, what does that mean for pricing, wholesale price or retail price? That actually is quite hard to call at this point in time. The general drift is perhaps downwards, but the question really is whether it's downwards in low single-digit percentages or something more fundamental. And it's one of the variables that we're trying to, we need to stay close to, but we can't predict with any certainty because it's so much a function of what's happening in any particular area and also individual competitive behavior.

Remember Intelsat is sitting behind some of this, and Intelsat therefore are providing some of this capacity and it may be impacted by Intelsat's, shall we say, cash and pricing strategy. So you tell me how that's going to play out over the next five years.

Rupert Pearce

Well the relationship we have with those three companies who made strategic commitments to Fleet Xpress is hand in glove. We obviously drive wholesale pricing, that's in our absolute discretion. And as Tony said, we will react to the market dynamically to flex as we need to. And I think we're in a strong position to do that with our cost, whether it be economics, but also don't forget L-band is a component of this as well. Fleet Xpress is an integrated L/Ka capability, so really it's a very, very strong proposition into the maritime market particularly. So that's not lost on any of these protagonists.

Marlink and SpeedCast and Navarino will get discounts off our rack rates because they're making a strategic commitment and because they're taking their salesforces and driving them to heavily prioritize GX and Fleet Xpress in their businesses. That means churning Ku-band to Ka-band. It means managing proactively with us our and their FleetBroadband estate, at the top end of that estate, into Fleet Xpress on a strongly ARPU-accretive basis, at least doubling ARPU in today's marketplace. And the lovely thing about that is the latter piece is low risk. And for them, the former price is low risk as well because they are big Ku-band they have big Ku-band installed bases as well. So it's very powerful for us. It's very powerful for them.

Now there's a lot of stuff around the edges of this as well, for marketing, funding, working on how we deal with installs and maintenance and supply, which as you know, we've invested materially in to unblock that and make it a competitive discriminator as well. So it's a holistic approach to something that will play out over the next five years. When we get to the end of year five, we'll stop and we'll think again. I think for us it's really important, I talked about timing in the introduction, because we're here and now. Timing, getting after these ships, getting after the addressable market is very important. And this gets us out of the gate really, really quickly to ensure that we're in a very strong position in three or four years. You asked about the economics of EAN.

Giles Thorne

Well is the bandwidth, everyone's focused on cost per bit to deliver connectivity to an aircraft. So it would just be interesting to hear.

Rupert Pearce

Yes, of course. Look, very simply, I believe, I can't give you the hard numbers here. Apart from anything else, we haven't got hard numbers on ViaSat-3 yet, we've just got some hooks. It is no longer a mythical beast, I'll accept that, but it isn't funded. It isn't designed. It isn't built. It certainly isn't launched. So we're tilting at windmills a little bit here. But from what we know about ViaSat-3 today, I am very confident that EAN will have superior economics in the sense that we'll have -- in terms of cost-per-bit economics. So on that metric alone, we will be fully competitive in Europe like for like. But of course, as I laid out earlier this morning, there are loads of other far more important metrics, I think in this context which are relevant.

We can scale our networks to the demand and to the aviation routes. We can add more towers very easily. We can sectorize those towers very easily. I don't believe that our spectrum will calibrate, 30 megahertz in the context of the reusability in this network is very powerful. And above all, the economics of putting air-to-ground capabilities, hybrid air-to-ground capabilities on these aircraft is so superior. It's a tenth of the cost. It's much cheaper to maintain. You don't have to take the aircraft out of service to install. We are going to be delivering a dual L/Ka antenna through next-generation SwiftBroadband capabilities. We're talking about a satellite capability to be less than 2 kilograms, very small, very light, very performant and fully integrated with the rest of our network.

The air-to-ground piece is the size of this glass and less than a kilogram, so that in the context of smaller aircraft, single-aisle aircraft, it's just eminently superior. Because we integrate that with GX, even a long-haul aircraft that want to avail themselves of the EAN can do so very easily as well. So I really think it's a tremendously strong competitive proposition. Let alone the fact, of course, that EAN will be in full service by the middle of next year and will have several years' advantage in the market over a ViaSat-3 proposition.

Giles Thorne

If I could just have a quick follow-up on the first question. Is it too early to see the Marlink and Telemar merger as a roadmap to up-scaling that 2,000 commitment?

Rupert Pearce

Up-scaling Marlink's commitment?

Giles Thorne

Well they're all one shop now, so could the 2,000 go higher?

Rupert Pearce

No, I don't think we're going to see them move their number. It just makes it easier for them to deliver it, I guess. I'm actually a proponent of driving scale through some of our distribution. I think the long-expected merger of Marlink and Telemar is a good thing. It will work well for us. They're two very committed, loyal Inmarsat customers and we'll do everything we can to help that merger thrive.

Terence Tsui

It's Terence here from Morgan Stanley. I just wondered if you can give us an update on the license approval process for the EAN network. In the press release you mention that you've secured approval for 28 MSS licenses and 20 licenses for the complementary ground component. I'm just wondering if there's any holdup on the remaining ACGC licenses and what seems to be the talking point there.

Rupert Pearce

Okay. There isn't really a holdup, it just takes time. Several of the licenses we're yet to acquire are simply moving through public processes for comment. If you get very close to this, you can see them out there. Germany, for example, is a good example of that. So is the UK. No, we're generally very happy.

The 28 mobile satellite licenses, by the way, are important because they secure the spectrum for at least the next 30 years and it's also an important lead indicator that regulators have accepted that this S-band isn't something generally available for them for other purposes and that therefore it comes out of their spectrum locker, if you like. And the next shoe to fall will be to supply the complementary ground component license, so it's a good leading indicator. We've obviously modestly ticked up our ACGC licenses as well to 20. We've got some -- I think we've got a very strong proposition there across most of Europe and we're rapidly retiring remaining regulatory risk. There is a continuum of risk in this. I would say the continuum of risk is less about whether we'll get there on time. I'm increasingly confident we will. It's can we stitch these licenses together into a coherent package that allows aircraft just to fly easily across Europe.

It looks very positive where I stand now. We've had strong support from the European Commission who've jumped in behind this and at a recent meeting of all the regulators and the Commission. There was a ringing endorsement that this was a great thing to do for Europe and a call to arms actually by the European Commission to help us get on with it and move forward, which the regulators are very keen to hear.

So yes, I think confidence is growing that the regulatory environment will be there. Obviously, alongside that we've got a lot of technological issues to put to bed and they are also being rapidly solved as well. So I'm confident that by Q1 we will -- by the end of Q1, we will be demoing the service and doing early trials and adoption and that we will be ready in the second half of 2017.

The target is early in the second half of 2017. I'm naturally cautious about any technology program delivering exactly on time, so let's just say some time in the second half of next year we should be having a very exciting service. Well, if we haven't got any questions from the room at the moment, I'm going to go to the phones. So if there are any questions on the phone system, can we relay them over?

Operator

Thank you [Operator Instructions]. And we'll take our first question from Mathieu Robilliard, Barclays. Please go ahead.

Mathieu Robilliard

First, I had a question with regards to the $500 million target for GX. So obviously that was set up quite a few years ago and I guess it's fair to say that the competitive environment has changed a bit. Yet on Slide 5 of your presentation, you do indicate that you still expect a good balance in supply and demand on the mobility segment. So my question is today, when you look at this $500 million target, are you assuming the same kind of pricing levels than you were back then? Or are you assuming a higher capacity being used to offset lower prices? And if it's the latter, it's kind of a broader question, which is if the battle becomes more and more volume and capacity at the lower price, how well is Global X fleet suited compared to some of the new competitors? And the second question has to do with FX. So my understanding in the past is that you typically hedged your currency exposure, specifically the pound. Apparently, that is not the case this year and it played out very well. Should we think that you are continuing, you will continue to have unhedged position for the future, or at some point you will hedge costs and revenues in terms of the currency? Thank you.

Rupert Pearce

Well I'll deal with the first question very quickly, and I'll hand over to Tony on our FX policy. The short answer, Mathieu, is yes we remain confident we can deliver our $500 million of GX revenues run rate by the end of 2020. We reasserted guidance this morning. You're right. The pricing environment is highly dynamic, so is the volume equation, and so are the markets themselves. From where we were when we originally gave this guidance, we've talked in the past about the fact that we've disengaged from the idea of pushing GX out into the enterprise VSAT market for all sorts of reasons which are well documented. And that slot came out of the plan. Fortunately, going into the plan is this new emerging passenger connectivity market, which in many ways is a much better fit for our global mobility differential than regional fixed enterprise VSAT.

Net-net we're still confident in the $500 million. When we look forward to the environment as it will be in 2020 and we chart a path there, we're very conservative. We take into account this very dynamic pricing environment that we've discussed, the possibility of downward pricing pressure in certain markets. But also the dramatic dislocation between the demand curve and megabyte pricing, we take all of that into consideration. We then look at our network capacity and we ask ourselves, in that prevailing environment that we're crystal ball gazing at, do we have the capacity in the right places to serve the market to deliver this 500 million? There's no point saying we can get to 500 million but, oops, we don't have the capacity to serve it. And you're right, in our world for the foreseeable future, companies like us are going to have to build more capacity at lower prices and feather it in to keep supporting the demand side of the customer, whatever the pricing environment. And I'm confident that we have the capacity, either in space or soon coming into space, to support this $500 million number.

Looking ahead beyond 2020, obviously we believe it's needed to deliver more capacity. And the plan is to deliver that capacity surgically, in a way that complements GX. We don't have to rebuild GX all over again. In most parts of the world where we have global coverage, GX version 1 is absolutely fit for purpose for the foreseeable future. In other areas we're going to build deeper, we're going to deliver more capacity in a surgical, high power way that delivers real efficiency. It also changes the whole economics of the entire network. And that's true whether we deliver that capacity as GX version 2, if you like, that will be 5 F4, the Ka band payloads on Inmarsat 6 F1 and 6 F2 that arrive around the turn of the decade.

Also true when we deliver complementary technology. So, as I say, the EAN delivers for aviation capabilities in Europe that obviate the need for any further GX capacity, because air to ground is the superior technology that we integrate for the rest of our network. So five or six years from now, when you look at our network as it starts to feather in this new capacity, you'll see us remaining competitive on cost per bit, delivering much higher throughput and capacity, already planning speeds of 250 megabits per second and above in the early 2020s. But you'll also see a heterogeneous network, where we use different types of technology for different customers in different geographies, all welded together into this unique global network because our customers don't even start to buy until they're offered seamless global coverage. And that will be the secret source for Inmarsat to be competitive through the 2020s.

Tony Bates

And just quickly on hedging, yes, you're right, Mathieu we pulled the hedges off back of last year. That was a change of policy or approach. Hence we're applying that consistently at the moment. There's no current thinking about reestablishing that, but there will be situations where we will hedge. So, it's not a complete blanket, we'll never hedge again, it's a case by case situation that we keep under review.

Mathieu Robilliard

Thank you very much.

Operator

Thank you and now our next question comes from Andrew DeGasperi, Macquarie. Please go ahead.

Andrew DeGasperi

Yes. Good morning. I wanted to first ask concerning the anomalies happening with U.S. Navy's MUOS 5 satellite. I was wondering if you see potential future opportunities there. And secondly, can you maybe tell us what you're thinking in terms of the HTS of [indiscernible] satellites as far as internal efforts or potentially inorganic as well. Thanks.

Rupert Pearce

Okay. Yes, relatively recent news is that the MUOS-5 launch did experience difficulties. It is as yet unclear quite how material that is. MUOS-5 was a backup satellite as well, not a full service satellite. So in the short term I don't do a read across that says there's going to be a huge capacity issue for the US Government around the MUOS. Just for those who aren't experts in this, MUOS is to narrowband services what WDS is to broadband services globally.

MUOS tells me that the US Government is serious about narrowband services, that there is a long-term need for US Government to access narrowband services. I'm absolutely thrilled by that, by the way, because L-band is to MUOS what GX is to WDS. So it means that we have these two twin places where we can support the US Government with gap filling augmentation and truly fungible capabilities that sit alongside our proprietary capabilities.

So I continue to see the MUOS investments by the US Government as something that will pull through Inmarsat-4 and Inmarsat-6 L-band capabilities in a complementary way and that those capabilities are there to stay for government. And it goes back to what I said earlier; a lot of people focus on broadband and the changing competitive dynamics for broadband.

That's quite right; GX is a big part of our future, but it's not the only part. The L-band services and our renewal of them with Inmarsat-6 have some very exciting areas of growth too, which are much more unique to us and which are not affected by HTS proliferation or Ku-band proliferation or Ka-band proliferation. L-band does remain this unique part of our heritage and part of our future.

HTS, I think we've hopefully charted out pretty well where these HTS networks are arriving. I am pretty agnostic about where I build, where I buy and where I partner to deliver capabilities to my customers. We talked about our willingness to partner, for example, with Telenor around the [4-7] capability, because it's fungible and consistent with GX. Actually we quietly made sure together, we and Telenor, that that capacity would work with GX, so GX could globalize the 4-7 capability. And now here we are, working together in a way that is win-win for both of us.

We extend our coverage. We provide more resilience. We provide some enhancements to our existing coverage with Telenor. I'm very, very happy to carry on doing that around the world as capacity emerges where we can do that and where people want to engage in win-win collaborative behavior. Yes, you could speculate down the road there may be HTS capacity that comes up for sale, maybe as a result of a distressed business case or something like that. And I'm very happy to be opportunistic. All strategies come down to strategic opportunism as well. So if something shows up and it fits, we'll tuck it away and keep going. And we have the fire power to do that.

Andrew DeGasperi

Okay. Thank you.

Operator

[Operator Instructions]

Rupert Pearce

Okay. Well I think we've probably exhausted questioning creativity. Thank you again for turning up and asking such good questions. In summary, very solid quarter in Q2. I think we ended the half year pretty well, in good health. Markets are attritional, lots of threats abound. But through discipline and hard work and through playing to our differentiation strength, we feel in good shape. Notwithstanding that, we're very fortunate. We've got some fantastic tools to play with. GX coming on stream this quarter is set fair, EAN just ahead of time. The Inmarsat Gateway, bringing it, knitting it all together into an integrated whole gives us further differentiation to follow. Second half of the year is going to be tough. We're up for the challenge. And hopefully we can carry on driving at this kind of pace into the back of the year and finish it with a flourish as well. Thanks very much.

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