Eutelsat Communications SA (EUTLF) CEO Rodolphe Belmer on Q4 2018 Results - Earnings Call Transcript

Eutelsat Communications SA (OTCPK:EUTLF) Q4 2018 Earnings Conference Call August 1, 2018 3:00 AM ET

Executives

Rodolphe Belmer - CEO & Director

Michel Azibert - Deputy CEO and Chief Commercial & Development Officer

Sandrine Téran - CFO & IT Officer

Yohann Leroy - Deputy CEO & CTO

Analysts

Nicholas Dempsey - Barclays Bank

Giles Thorne - Jefferies

Paul Sidney - Crédit Suisse

Patrick Wellington - Morgan Stanley

Laurence Davison - Deutsche Bank

David Stroke - Credit Agrical

Sami Kassab - Exane BNP Paribas

Operator

Good day and welcome to the Eutelsat Communications full year's results. [Operator Instructions]. At this time I would like to turn the call over to Mr. Rodolphe Belmer, please go ahead, sir.

Rodolphe Belmer

Welcome and thank you for joining us today for our full year results presentation. I am Rodolphe Belmer, CEO, and I am joined on today's call by Michel Azibert, Deputy CEO and Chief Commercial Officer; Yohann Leroy, Deputy CEO and Chief Technical Officer; and Sandrine Teran, CFO.

Let's start by taking a quick look at the highlights of the year. First, I'm pleased to report that we fully delivered and in some cases over delivered on all of our financial objectives. This is the second year running. In particular, I will highlight the progressive improvement in revenue trends through the year, for the five operating verticals taken collectively, as predicted. Moreover in terms of financial discipline, we are ahead of track on our LEAP cost saving program. The successful application of our design-to-cost policy is having a tangible effect on CapEx and we will be able to reduce our CapEx envelop for the coming years. And the disposal of our stake in Hispasat added to our organic de-leveraging efforts means that we have achieved our target of 3x net debt to EBITDA ratio.

In consequence, we are able to recommend a further meaningful rise in dividend this year covered 1.4x by discretionary free cash flow. Elsewhere we had a solid commercial performance, I will come back to this shortly, which sets in good stead for objectives of returning to slight growth next year. And finally, we took a significant step in terms of giving shape to our connectivity strategy with the procurement of our KONNECT VHTS satellite.

Returning to our financial objectives, revenues ended the year down 1.9% on a like-for-like basis. You will recall that at the Q3 stage we were unsure of reaching our target due to timing of Other revenues. I'm pleased to say that all the Other revenues in the pipeline materialized in Q4 and hence total revenues landed within the target range set at the beginning of the year. And as anticipated no change in the positive trajectory of revenues from the five operating verticals, which were down by 1.3% this year, I will return to this.

Our EBITDA margin of 76.9% at constant currency was well above our 76% target. Our CapEx came in at €358 million, well below our €420 million average objective. And discretionary free cash flow saw a substantial rise of 12% at constant currency in spite of very tough comparison basis last year, which was already up by 65%.

The disposal of our Hispasat stake added to organic de-leveraging enables us to land at a net debt to EBITDA ratio of 3.0x. And as I said earlier, we are recommending a dividend of €1.27 per share, up by 5%. This dividend is 1.4x covered by discretionary free cash flow.

Returning to the top line now, the full-year outcome of €1,408,000,000 represented a decline of 4.7% on a reported basis and of -- minus 1.9% at constant perimeter and currency. The reported number reflects a negative currency effect of 3.2 points and a positive perimeter effect of 0.4 points. This is the impact of the acquisition of Noorsat partly offset by the disposal of Wins/DHI and of DSAT Cinema.

If we exclude the Other revenues i.e., the revenues not directly related to the sale of satellite capacity, the collective revenues of our five operating verticals declined by 1.3%. Moreover as predicted, there was a progressive improvement in the trend through the year from minus 2.2% in Q2 to minus 1.1% in Q3 and to a decline of just 0.7% year-on-year in Q4. Quarter-on-quarter the revenues of the five operating verticals were up by 0.3% at constant currency and perimeter in Q4.

As mentioned earlier, we delivered a robust commercial performance in Video for the second year running. Channel count rose by 4.5%. HD penetration continued to make strong inroads increasing by 3.8 points to 21% penetration. This resulted in an increase in the consumption of megabits taking into account of the above elements as well as a marginal increase in MPEG-4 penetration to 67%. Renewals at HOTBIRD notably with TVN and POLSAT were all with positive outcomes. And we secured new business in Europe notably with SFR, MEDIASET, and more recently XTRA TV in the Ukraine, as well as several emerging markets.

In Government Services, we achieved highly favorable outcomes in both the DoD renewal campaigns, which occurred during the fiscal year. We opened a new position at 174 degrees east, where we have been able to sign up incremental business. And EUTELSAT Quantum is seeing favorable traction with much of its capacity now reserved.

Finally in Aero Mobility we signed a landmark MOU earlier in the year with China Unicom, swiftly followed up with the sale of the remaining HTS capacity on EUTELSAT 172B to its subsidiary UnicomAirNet. And just recently Taqnia has taken incremental capacity on EUTELSAT 3B and EUTELSAT 70B.

Turning to the HOTBIRD constellation, we just announced the procurements of in-orbit resources to replace the 3 satellites at the 13 degrees east position. This is an important event in itself because HOTBIRD is our richest video hotspots. The new constellation will enable us to continue to operate the same level of capacity with a higher level of restorability.

It is also important because this procurement really showcases the benefits of our design-to-cost approach by replacing 3 satellites with 2 large ones. Improving the coverage match with customers' requirements. Using electrical propulsion, enabling a larger satellite for a given mass, and increasing the satellite in-orbit life. As a result, we will make a significant saving we'd achieved to the original cost of the constellation. Moreover, this savings will be delivered while enhancing the level of service to customers. This is part of our strategy to extract greater value from our core Video assets, as it is one of the key factors contributing to the reduction in our CapEx spend without compromising our growth plans.

A quick one now on KONNECT VHTS. This satellite due to be launched in 2021 will be the springboard for the acceleration of our European Fixed Broadband and in-flight connectivity businesses. As a reminder, the potential for connectivity of ViaSat is significant, the core market for fixed broadband ViaSat is estimated at some 5 million households in Europe in 2030. And demand for in-flight connectivity capacity is expected to more than triple to over €1 million globally by 2025. KONNECT VHTS will be a game changer in advancing in these markets thanks to production cost in line with our CapEx per gigabit target of €1 million enabling the provision of fiber-like service at fiber-like price and thus paving the way for the transition for niche to mass markets.

In the meantime, by redirecting some of the KONNECT capacity due to enter into service in 2020 to Europe, we will seize early mover advantage to prepare for the arrival of this KONNECT VHTS. As a reminder, we have contracted significant distribution agreements with firm pre-commitments from Orange and Thales.

Finally, this is an investment which will be managed within our revised CapEx envelope and it is consistent with our infrastructure business model, aimed at protecting our high EBITDA margin.

Now over to Michel Azibert, for a look at the operational performance.

Michel Azibert

Thank you, Rodolphe. So a quick recap on the revenue performance of the five operating verticals. As usual all my comment on the following section will be on a like-for-like basis i.e., at constant currency and perimeter. So among the core businesses, revenues in Video and in Government Services ended the year at broad stability. Fixed Data continued to decline as expected, albeit at a slightly lower rate than last year.

Among the Connectivity verticals, Fixed Broadband was down 7.8%, but the Mobile Connectivity vertical saw further robust top line growth of 18%. Other revenues amounted to €48 million [Technical Difficulty] revenues from broadcast were slightly up excluding the impact of the end of the TV d'Orange contract at the HOTBIRD position. This reflected in particular a solid performance in key emerging markets, notably MENA at the 7/8 west degrees and orbital position in Russia at the 36 degrees east and 56 degrees east orbital positions.

Professional Video continued to decline, reflecting ongoing pressure on point-to-point services. Fourth quarter revenues stood at €223 million, broadly flat year-on-year. At the end of June 2018, the total number of channels broadcast by Eutelsat satellites stood at 6,929 up 299 year-on-year.

High definition penetration continued to rise, representing now 21% of channels compared to 17.2% a year earlier for a total of 1,455 channels versus 1,142 channel a year earlier, an increase of 313.

Let's take a closer look at the trends at HOTBIRD. Channel count was stable at just over 1,000 channels. The number of channels broadcasting high definition rose by 20% to 329 channels, double the rate of channels transitioning to MPEG-4, which is up by 10% to 574. Yet MPEG-4 remains considerably more advanced than HD with a penetration rate of 57% versus 33% for HD channels. So these trends remain highly positive going into fiscal year '19.

Government Services revenues were broadly stable like-for-like at €159 million, reflecting predominantly the solid level of the previous 2 renewal campaigns with the U.S. Department of Defense. Fourth quarter revenues amounted to €40 million, up 2.3% year-on-year. The negative base effect of a positive one off in the fourth quarter of the previous year was more than offset by the first effects of the ramp up of incremental business secured at the 174 degrees east orbital position.

Commercial activity was also favorable throughout the year with not only the robust DoD renewals in the fall of '17, circa 95% in the spring of '18 above 95%, but also with the commercialization of the vast majority of the 23 operational transponders at the new 174 degrees east position paving the way for an improvement in trend in fiscal year '18-'19.

Turning now to Fixed Data. Nothing really new to say on this vertical, revenues were down 10% like-for-like to €143 million. They continued to reflect ongoing pricing pressures in all geographies and the absence of significant incremental volumes.

Fourth quarter revenues stood at €34 million, down by 10.6% on the year-on-year basis. Our cautious view is unchanged and revenues are expected to continue to decline in fiscal year '18-'19.

Turning to the connectivity verticals, starting with Fixed Broadband where revenues stood at €87 million down 7.8% year-on-year. Fourth quarter revenues stood €21 million down by 7.5% on the year-on-year basis. This performance reflected lower revenues for Europe in broadband in a context of scarcity of available capacity in Western Europe, as well as slower than hoped for progress by the retail joint venture with ViaSat.

The launch of the commercial service in Africa on the earlier free satellite in August and actions in Europe including yield management, differentiated offers, and a strengthened focus on under penetrated verticals are expected to lead to a return to growth in fiscal year '18-'19.

Finally Mobile Connectivity revenues stood at €74 million up 18% year-on-year, reflecting the effect of the earlier Taqnia contract signed last year. The contribution of EUTELSAT 172B with capacity pre-sold to Panasonic, which entered service at end November 2017, as well as continued growth on the wide beam capacity notably over the Americas with customers including Google and Hunter.

Fourth quarter revenues stood at €19.5 million up 14.6% year-on-year. Revenues in fiscal year '18-'19 will benefit from the start of the UnicomAirNet contract on EUTELSAT 172B in January 2019. From the new contract just signed with Taqnia as well as the ongoing ramp up of capacity contracts on KU-SAT for the benefit of several European airlines.

Turning now to backlog and fill rate. At the end of June '18, the backlog stood at €4.6 billion, down 12% compared to the end of June 2017, reflecting mainly the negative impact of the integration of our distributor Noorsat, impact of circa €400 million of backlog.

Contrast added to the backlog during the year included notably renewals with Cyfrowy Polsat and TVN in Poland at HOTBIRD. The new contract with UnicomAirNet at 172 degrees east, as well as the new contract with Taqnia up several orbital slots. The backlog was equivalent to 3.2x revenues of 2017-'18 with 83% represented by Video.

On the fill rate, the number of operational 36 megahertz equivalent transponders stood at 1,427 at the end of June '18, up 55 over 12 months, mainly reflecting the entry into service of EUTELSAT 172B in the end of November '17 and the subsequent relocation of Eutelsat 172A to 174 degrees east.

The fill rate increased and stood at 68.1% compared to 67.9% a year ago. An incremental 40 transponders have been leased since the beginning of the year with the main areas of growth including the Americas and the new 174 degrees east orbital position.

Now over to Sandrine for the financial performance.

Sandrine Téran

Thank you, Michel, and good morning everyone. Starting with profitability. EBITDA stood at €1,077,000,000 down 5%. The LEAP cost savings plan is ahead of plan generating €24 million of saving versus an objective of €15 million in fiscal year '17-'18.

As a result, and despite lower Other revenues with lower associated costs and the slightly dilutive impact of the integration of Noorsat, the EBITDA margin stood at 76.9% at constant rates, 76.6% on a reported basis compared to 76.7% last year.

Group share of net income stood at €290 million, that is €352 million in 2016-'17, down 17.5%. The net margin stood at 21%. It reflected on one hand the following negative elements, lower EBITDA, Other operating income of minus €19 million, reflecting notably a one-off accounting impact of the integration of Noorsat compared with plus €14 million a year ago, which included the capital gain on the Wins/DHI.

The tax rate of 32% compared to 25% last year, which reflected a positive non-cash one-off related to deferred tax liabilities to take into account future changes in the French corporate tax rate. And on the Other, several positives. A reduction of some €27 million in depreciation and amortization reflecting on one hand, lower depreciation of satellites having ended their operational life or already fully depreciated and on the other hand, the impact of satellites which entered services in the past 18 months; EUTELSAT 172B and EUTELSAT 117 WEST B.

The financial result of minus €105 million compared with minus €131 million last year, thanks mainly to the refinancing of the €850 million bond that was repaid in March 2017. Net cash flow from operating activities stood at €881 million compared to €983 million in 2016-'17, down €102 million. This reflected mostly the decrease in EBITDA with notably the currency impact, slightly higher tax paid, relating to the timing of tax payment and an unfavorable evolution in working capital compared to a demanding comparison base last year, reflecting, notably the significant amount of Other revenues recognized in Q4 which has since been cashed in, in July.

Cash CapEx amounted to €358 million, compared to €414 million a year earlier, well below the average annual target of €420 million, reflecting the phasing of various satellite programs as well as highly effective CapEx containment. It included already initial payments in respect of the KONNECT VHTS satellite and the new HOTBIRD constellation. Interest and other fees paid net of interest received stood at €108 million down €53 million year-on-year mostly reflecting, as I mentioned earlier, the repayment of the €850 million bond.

As a result, discretionary free cash flow stood at €415 million at constant currency, it represents a rise of 12%. At 30th June, 2018 net debt stood at €3,242,000,000 down by almost €400 million. Discretionary free cash flow more than covered the dividend payment of €295 million, which included dividends paid to minority interests. Equity divestment and investments, mostly disposal of Hispasat and the acquisition of Noorsat generated a net cash inflow of €206 million, while the foreign exchange portion of the cross-currency swap included in the net debt decreased by €16 million and repayments of export credit financing and financial leases contributed to the reduction in debt for €57 million.

As a result, the net debt to EBITDA ratio stood at 3x, a 0.2 point improvement on June 2017. The average cost of debt was 2.9% after hedging, down from 3.1% in fiscal year '16-'17. The weighted average maturity of the group's debt stood at 2.two years, compared with three years a year earlier. It is worth reminding that we have significant pre-hedges on the next two bond maturities, with respectively 10 and 7 years. And liquidity remains strong, with un-drawn credit lines of €650 million and in cash of €734 million.

Before handing back to Rodolphe, a word on IFRS-15 and IFRS-16 which will be adopted in the coming financial year. The main impact of IFRS-15 relate to the timing of revenues and cost recognition. All reclassification between revenues and cost for items such as marketing and technical contribution, subscriber acquisition cost and sale of terminals in the Fixed Broadband application.

The adoption of IFRS-16 will lead to the capitalization of short-term operating leases, which were previously accounted for as OpEx. We apply IFRS-15 retrospectively by restating the comparative period. IFRS-16 will be applied under the simplified retrospective method with no restatement of the comparative period.

Overall the broad impact of IFRS-15 is estimated between minus €15 million and minus €20 million on 2017-'18 revenues, of which minus €15 million to minus €20 million on the five operating verticals. IFRS-16 has no impact on revenues.

The combined impact of IFRS-15 and IFRS-16 is estimated at circa plus 1 point on the EBITDA margin and circa plus €30 million on net debt. It is estimated at between plus €5 million and plus €10 million on cash CapEx. There is no impact on discretionary free cash flow.

Now back to Rodolphe to speak on the outlook.

Rodolphe Belmer

A quick reminder of our strategic roadmap in 2 steps. Step 1, at 2019, clear focus on optimizing our existing assets in order to maximize the free cash flow generation of our core businesses and guarantee a healthy return to shareholders. While preparing for Step 2 from 2019 onwards, return to top line growth by extracting maximum value from our core Video business and paving the way to capture the connectivity opportunity. So what did we achieve in the past year, in terms of our commitment to grow cash flow, the LEAP program is ahead of plan with €24 million saved. We remain highly successful at CapEx containment to the point where our CapEx objective is reduced from €420 million to €400 million on average per annum and this is after the impact of IFRS-16.

Interest costs were reduced by over €53 million and the disposal of our stake in Hispasat enabled us to further accelerate de-leveraging. And in terms of returning to top line growth, in Government Services, the successful new position at 174 East and much of the EUTELSAT Quantum capacity now reserved. In Mobility with our landmark MoU with China Unicom and for connectivity in general, the procurement of KONNECT VHTS clearly shifting our strategy in this growth vertical and coming with major distribution agreements with Thales and Orange.

Looking now to our priorities for the current year. We will pursue all financial discipline aimed at maximizing free cash flow generation ensuring we deliver full benefits of LEAP with our €30 million target, securing further interest cost savings with the refinancing of the January 2019 bond and continuing to strive for CapEx efficiencies via our design-to-cost policy.

In operational terms, we will further focus on extracting maximum value from our core Video vertical, continue our efforts to stimulate the transition to HD and Ultra HD. Pursued the implementation of our differentiated pricing policy and nice growth opportunities like enhancing end viewer experience. We will also prepare for growth in broadband by continuing to strengthen our European operations ahead of the change in scale that will be brought by the availability first of Konnect and subsequently of the KONNECT VHTS satellite.

And into a very [indiscernible] of course, focus on successfully deploying the African broadband initiative. A word on this African broadband initiative or Konnect Africa. After multiple delays linked to the non or late availability of capacity lease from third-parties, all the elements are now in place for the launch of the service which will take place this month, an experienced management team is in place, the start of commercial service on Al-Yah-3 will make around 10 gigabits immediately available, enabling the service to be rolled out in 19 countries. This will be followed up with an additional 75 gigabit of capacity on Konnect expected to start operations in 2020 and enabling us to expand our footprint as it is created on the map.

The potential market we are addressing is significant. In Africa, only 1% of households have a fixed broadband subscription and only 26% have a mobile broadband subscription. Taking account of coverage and affordability criteria, the addressable market for satellite broadband is estimated at around 4 million to 5 million premises in 2030.

To address the market, we will use multiple distribution channels starting with traditional ISPs and telecom service providers, where we have several local partners already signed up. We will also seek partnerships with DTH operators. And we are trialing distribution agreement with capilary local partners such as banks, gas stations, and drugstores. And we will be testing Smartwifi hotspots in appropriate locations.

Turning now to the outlook, all elements are confirmed or upgraded. Revenues for the five operating verticals at constant currency perimeter and IFRS-15 accounting standard are expected to return to a slight growth from fiscal year '19. The revenue profile in fiscal year '19 will be back-end loaded reflecting the ramp up of Konnect Africa.

Due to the less predictable nature of the revenues i.e. revenues which are non-recurring and not related to the commercialization of capacity as evidenced in the last 2 quarters of the past year we'll henceforth exclude them from the revenue objectives. The EBITDA margin at constant currency is expected above 78% from fiscal year '19, taking into account the impact of IFRS-15 and IFRS-16.

Our estimated cash CapEx spend is reduced to an average of €400 million per annum for the period July 2017 to June 2020, reflecting mainly the above expectation impact of the design-to-cost policy. I remind you that we already reduced our CapEx envelop from €500 million to €420 million in June '16. This 20% total reduction has been achieved without compromising on at all the deployment plan.

Discretionary free cash flow is still expected at mid single-digit CAGR at constant currency for the same period. I remind you that our capital allocation strategy is divided between de-leveraging, investment in the business with strict return requirement hurdles, and a generous distribution to shareholders. We are also committed to maintaining a sound financial structure to support our investment grade credits rating with a net debt to EIBTDA ratio objective below 3.0x. And of course we reiterate our commitment to serving a stable to progressive dividend.

Thank you for your attention, and we are now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Thank you. We will now take our first question from Mr. Nick Dempsey from Barclays.

Nicholas Dempsey

I've got three questions please, so the first one just turning to African broadband. I guess the -- you've only just got everything in place, there is a lot to do there -- just that the €15 million that you were previously talking about may now be an optimistic target. And if that is the case, what exactly do you plans to do to Europe to return total Fixed Broadband to positive growth in FY '19, that's kind of 2 questions. And then, on C-bands, Rodolphe, you've historically been much more cautious than peers on size of the opportunity and the timing as well. Have you changed your mind on that based on everything you've seen from the FCC and your conversations with mobile operators for example? And just one last housekeeping one, on the refi of the January 2019 bonds, will you get much benefit from that in the FY '19 net interest costs or should be thinking of that as helping mainly FY '20?

Rodolphe Belmer

Well, thank you Nick for those questions. First one on African broadband. The service is going to open this month and we are ready with a full team up and running to deploy the service in 19 African countries. In terms of objectives as you know very well, we are not giving specific guidance on sub portion of our business like that. We mentioned a €15 million level for the level of revenues for this initiative two years ago when we had launched a failure -- when there was a launch failure on the AMOS satellite and we had to disclose what kind of impact we expected on our revenue at that time. What we can say is that the order of magnitude for this African broadband initiative is on the same ballpark as it was previously. Even though, with -- we have now a much better understanding of the African market, we have been able to work deeper with distributors, meaning that we estimate that the revenues we will get even though in the same ballpark would be slightly below what we anticipated two or three years ago.

But while everything -- well, this is totally included and part of our -- of the guidance I've mentioned on the return to an overall slight growth. Concerning Europe, well this year was actually in decline in our Fixed Broadband business in Europe. And we expect our revenues to have a sort of better trajectory in fiscal year '19. Why? Because actually this year, unfortunately, was concentrated not on business objectives but more on organizational objectives with our difficulties, I would say, with our partners in Europe. First part of the year was sort of concentrated on trying to have our combined operations with ViaSat running correctly, it was very difficult as you know. And finally, we decided not to continue. And the second part of the year was concentrated on sort of untying the links, the operational links and with that -- meaning that you sort of defocused our teams.

And also we had to realize that direct-to-consumer strategy -- the retail strategy was a bit disappointing and that's where -- that's what we decided to change our strategy to take the VHTS satellites from Thales, to have our own teams and operations to distribute broadband in Europe. And finally to continue to resort to our historical wholesale strategy and we will re-launch that wholesale strategy in Europe in fiscal year '19 with our historical distributors but also with our new distributors that we try to bring with us in this initiative. On C-band, what's our opinion, we have just joined the consortium made of SES and Intelsat to make sure that we can participate in this market-based approach around C-band in the U.S. and to make sure that we can protect our interests, take our first share of the possible proceeds of this C-band reallocation. And lastly to understand how this consortium works and can serve as a reference. In terms of our revenue on the value of the spectrum it's very difficult to answer with precession even though we remain a bit more prudent than most of the estimates that are made at the moment. In terms of timing, we understand that the timing must be, it is sort of two to three years' time horizon. FCC decision is expected at the beginning or in the middle of fiscal -- of civil year, sorry, 2019. And the implementation of this market based approach is expected to take place 18 months after that decision, 18 months, 24 months and that's the kind of horizon of time we have in our mind. Even though I must say that's the impact on ourselves of this C-band in the U.S. market based approach or a sell to mobile telecom will be very limited since we command around 5% of the spectrum in this -- in continental U.S., which is relatively small. And that's what I can say on this subject. Concerning the refinancing of the January 19 bond, I will turn to Sandrine Teran, the CFO.

Sandrine Téran

So as you know we have €800 million bond that carries a coupon of 5% that we will repay in January 2019. The full-year impact on our interest expense we'll be seeing in the P&L in the fiscal year '20. We will have the first savings on H2 of fiscal year '19 because we repay in January '19. But we will also have on the -- I would say at the end of the first half of fiscal year '19 additional interest expenses only few months because we will have double coupon to pay once we have issued the new bond at full. So full-year impact in fiscal year '20 and first savings in H2 fiscal year '19.

Operator

[Operator Instructions]. We'll now take our next question from Giles Thorne of Jefferies.

Giles Thorne

I had three questions please. Starting with Italy, we've seen Sky tie in its wholesale fiber asset sale with open fiber a few months back. The wording of the release at the time is pretty ambiguous but kind of core scene is using the service to drive fiber uptake and also uptake of streaming services. So there's inevitably going to be dishless element to Sky's proposition there. Sky has been doing dishless in Italy for a few years now. So I suppose my question is, do you see this new approach being consistent with what they were doing with Telecom Italia a few years back or is Sky getting more ambitious around IPTV distribution on the back of the active fiber deal? And secondly, coming back to broadband, if you listen to ViaSat, the ViaSat 3 constellation is going to enable them to take share from DSL operators and even some fiber customers. And on that basis as ViaSat looks to Europe it sees the addressable market as being much, much larger than the 5 million homes that you quote. Is that a view on the opportunity that you even recognize? Do you think you could do a similar thing with KONNECT VHTS namely take share off DSL and fiber? And then lastly, it'd be interesting to hear any ambitions you have for using the build-to-cost program in support of replacing HOTBIRD video satellites?

Rodolphe Belmer

On your question on Sky strategy, this is difficult for us to comment on their -- intention on their strategy. What we -- what they have made public is that they will resort to IPTV distribution of the service to address segments of the market that are very difficult to address with satellite-based distribution. And this is the very dense areas in the cities with big buildings where it is difficult to install antennas -- the satellite antennas. And when you -- and they had this strategy in the U.K. and they had -- they have this strategy now in Italy. When you look at the impact on our relationship with Sky it's continues to be very good. Second, the number well, the penetration of satellite in those two countries, the penetration of satellite, distribution of channels in those two countries is progressing, it is progressing more and more homes receive television by satellite in those two countries. In the U.K. we have only one force of the market, but in Italy we are much, much more a presence.

We have a very, very significant portion of the market, virtually all the Italians watching television by satellite they use our infrastructure, our 13 degrees east position and it's growing. Meaning that, we are -- what we see is that the IPTV strategy is totally complementary of a satellite distribution strategy. This is true in general and this is -- all the more true in Italy where the fiber infrastructure is still, in comparison to the other Western European countries relatively underdeveloped and covers only a fraction, a small fraction of the Italian population meaning the satellite is for sure an absolutely critical infrastructure to distribute television in Italy. It's true today, it's true tomorrow because of the deployment of [indiscernible] but also because of the difficultly of the terrain in Italy, with lots of mountains as you know. ViaSat-3, we have an different strategy, we think that -- well our view is that the market we should focus on, doesn't mean that there is no market elsewhere, but the market we should focus on is the geographic areas where -- which cannot be served by terrestrial telcos because it doesn't make sense for them, because the density of population is too low.

And there is no way they can amortize the any one -- the ground infrastructure. Meaning that we know for sure that in those areas they will never find a value proposition to invest in infrastructure, fiber or radio frequencies like DTS for 4G or 5G. And this represents a very important market that we estimate to 5 million homes in Europe by 2030. Why do we concentrate on that market? First, because those 5 million people is much more than we can serve with our VHTS satellites. And second, we think that this market is the much more profitable to us. This segment of the low-density population area is much more profitable to us, why? Because the churn rate will be far more favorable to us. The acquisition costs are the same in the low density areas or in the high-density areas that's designed but the churn rate, when you don't have any competition or a limited competition is obviously very different from the churn rates you obtain in a situation where you are competition head to head with telcos and with DSL. And when you look at precision, the churn rate in countries where, satellite -- internet by satellite in competition with telcos. With DSLs, for instance, in those geographic areas the churn rate is 3x higher than the churn rate in areas with low density population, where there is only satellite technology that is available to the household. And this has a very important impact on the profitability of that business for us and for those 2 reasons, we concentrate on that portion of the segment. Doesn't mean that we couldn't make it in the GSL, let's say segment, the segment of population covered today by telcos with GSL but that's not our focus because that's not where we believe profitability is. You had a question on design-to-cost and since we have Yohann Leroy with us today, I will turn to him to answer this question.

Yohann Leroy

Thank you, Rodolphe. Good morning, everybody. Good morning, Giles. And so maybe a few words about what the design-to-cost policy is about. First starting by saying that design-to-cost is not simply about reducing the cost, it's about increasing the value of cost ratio of our assets. What we strive to do with our design-to-cost policy is actually to improve the relationship we have with our suppliers compared to what it used to be in the past, where -- essentially in a pure customer to supplier relationship and so we're playing competition amongst suppliers to try to get the best cost possible from a set of requirements that we were issuing to our suppliers. We have decided to move from this pure competition approach to a much more partnering one, because the benefit of this is that it allows us to include the cost as an input in our procurement. And so not to play only with the margins of our suppliers i.e. 10% or less of the total price that we pay but to play with the entire cost base of our assets i.e., the 90% as well.

And so what is specific to Eutelsat in this approach? Actually, we have developed a specific approach identified a grid of 12 different levels that we try systematically to implement for our new procurements. And out of those 12 layers we estimate that 1/3 of them can be better and or more systematically activated by Eutelsat than by any other satellite operator. This is an approach that we have already taken for our last procurement the EUTELSAT 5 West B, and that has delivered impressive results because we -- as we communicated, this has allowed us to save more than 30% compared to the previous procurement. And so we have applied this same approach for the replacement of the ordered constellation. So now, last word about the HOTBIRD procurement, so I would say that I feel most of the 12 levels that we have identified have been implemented. And maybe the two main ones on which I can say a few words that deliver most of the savings that we achieve are electric propulsion and platform. For electric propulsion, as you know, this is a way to decrease the mass that is mobilized by the propellant and so it allows us to put more equipment on board and fit a new improved telecom mission, it is thanks to electric propulsion that we can replace the three existing satellite that we have at this orbital location by only two.

And as a result save typically 1 launch service but also on the cost of the satellites, even if each satellite is larger in terms of telecom equipment. Regarding the platform we will use the new Eurostar new platform from Airbus and this gives two benefits to us, the first one is that, this platform is much more cost effective than the Eurostar 3000 platform from Airbus. And the second benefit is that since we're going to be the first customer of this platform, it comes with an additional pricing sensitivity, if I may say, from Airbus. The drawback of course by being the first customer of this new platform is that it carries some schedule risks. But first we believe that we can manage them very well, thanks to our engineering team working with Airbus. And second, this is something we can -- this is a risk we can afford to take because we have slightly anticipated a replacement of the constellation compared to what our annual plan was. And by the way this is something we have already done in the past with Airbus because we're the first customer of the Eurostar 3000 platform, with Eutelsat 7/8 satellite.

Operator

We will now take our next question from Paul Sidney of Credit Suisse.

Paul Sidney

I had a couple of questions please. Firstly on your EUTELSAT Quantum satellite you state that most of the capacity has been reserved with your government customers. I was just wondering if you could give us a bit more detail on who those customers are, which governments are taking capacity and perhaps even more interestingly what applications and uses they are looking for the capacity, going forward. And then secondly, just a much bigger picture question, we've seen your European and U.S. peers reporting generally stable to even slightly positive results for the quarter. I was just wondering sort of big picture in your opinion, do you think we are now over the worst, do you think we can look ahead to perhaps some better trends than we have seen over the past couple of years both in revenue growth terms and also CapEx per throughput delivered?

Rodolphe Belmer

Thank you Paul, I will try to enter your -- to answer -- sorry -- your second question. I will turn Michel Azibert to give you a bit more color on the Quantum, even though it's sometimes difficult to comment in details about the usage made by our government customers of our capacity. Question two regarding the trajectory of revenues in the Government service vertical, its true that we see an improvement that we see as -- we consider that we're at sort of tipping point, we have been in a sort of continuous decline over the past five years, starting in 2012 on the back to simplify of the withdrawal of American troops in the Middle East, which sort of fuelled a very substantial decline year-after-year in the revenue line of that segment. This year is broadly stable to us with minus 0.1% which is very low, and we think that next one -- meaning that we're stabilizing and we estimate that next year we would be slightly growing in that segment on the back of increased demand -- mostly from the U.S. Department of Defense and notably in new geographical areas like the Pacific region, where we have now 2 big assets, 172B, which is our new satellite that we launched at beginning of this year. But we have opened a new position at 174 degrees with 24 additional transponders. And most of them being leased already -- leased to serve the needs of the U.S. government. And this creates a reasonable confidence that this segment will return to slight growth as of fiscal year '19. Growth that should accelerate after that, when Quantum satellite -- that's the satellite that's being specifically designed for the needs of the governments, will be launched. And as you said very well there is significant correction from U.S. customers for this satellite and I am now turning to Michel Azibert.

Michel Azibert

As you know the Quantum satellite is going to be launched in H2 of 2019 and brought into service at the beginning of the following year. So it's a little bit less than two years for us to -- let's say generate firm contracts on this satellite. We have used this mechanism of reservation to build the momentum and interest. Interest comes from both, let's say, resellers or service providers to the U.S. DoD, and some other governments. But I would say, probably the U.S. DoD service providers will be the key customers for that. We are at a stage where we believe we have reasonable, let's say hope, to get a contract signed for Quantum in the next quarter, so, not for the full capacity but for a significant part of the capacity. And so it'd be difficult to disclose the name of the service providers, because there is competition between them. And prefer to keep it, a little bit quite on the names.

Paul Sidney

Maybe you went off -- if I could just follow up, so my sort of big picture question. And thanks very much for the detail on government. But it was really about just sort of overall group revenues and just the outlook for the industry. I know it was quite a big question. But just interested to hear whether you think we're generally over the worst?

Rodolphe Belmer

Sorry, I thought your question was focused on the Government vertical. Well, as we said, our objective is to return to slight growth for this fiscal year. And this is based on two elements, I would say. First element, Video, which is the largest part of our business, is doing very well for us, very well, and is expected to experience slight growth next fiscal year. Why? And why is it different from some of our competitors? Because we don't have exactly the same geographical exposure, we are in Western Europe, in Western Europe, we're in Italy, Poland, Greece, which are our biggest markets, and the U.K., that's markets where satellite is dominating and is growing, first. Second, our positions in Europe, our HOTBIRD position is very strong. We think that we are able to maintain price in Europe.

And we think that what we expect is sort of growth, stability, of our revenues in Europe while the rest of the world for us and that the emerging markets will continue to grow on the back of the growth of the number of channels on the back of the adoption of HD, in those countries, and in the back of good or better prices per transponder. And even though the price per transponder is cheaper in the emerging countries than it is in Europe, there is 2 significant growth in those areas. And Video, as you know, is the vast majority of our revenues with 75% of our revenues of today. Second element, we have verticals which are in significant growth. Specifically Mobility, Mobility and -- well Connectivity, I mean Connectivity which is made of Mobility and Fixed Broadband segment. This Connectivity segments will be growing next year. The Mobile Connectivity segment will be growing, as it was this year because of the entry in service of the contracts that we signed with China Unicom, and with Taqnia, which will bring more revenues in this -- in that business line. And Fixed Broadband segment will be fed by the development of the African Broadband initiative.

And lastly, the Government segment, as I said, will be slightly growing. Do we see that as sort of industry wide evolution? Not sure of that, because we are -- the average of the industry is far more exposed than we are in two of our -- in two parts of the markets, which are shrinking. video in the U.S., we are no video in the U.S.; good for us. And second, Fixed Data. Fixed Data is shrinking. Continues to shrink for us also, minus 10% expectedly around that, that's the ballpark year-on-year and it will continue likewise. We are not developing the sort of network application as our competitors call it. This segment is in decline, there is a very severe price competition, there is over capacity in that specific segment. For us, it's a small part of our revenues, 10% in that the impact it has on our -- the way it brings to our top line evolution is smaller and smaller and more and more negligible. And that's why the evolution of our company seems to be a bit different, a bit more positive than for the rest of the industry.

Operator

We will now take our next question from Mr. Patrick Wellington of Morgan Stanley.

Patrick Wellington

Couple of things, firstly, I think Rodolphe, you said that the revenue growth would be back-end loaded in FY '19. So, can you give us the strength of that? You seem to be implying the African Broadband comes in towards the end of the year. So do we have sort of negative early part of the year, say, negative first half and then growth in the second half? Is that how we should look at it? Secondly, on CapEx phasing, you did €358 million, this year, which was obviously below your usual run rate. The guidance has been reduced to €400 million from €420 million, but that also seems to knock out, I forget the number now, €10 million, €15 million from IFRS change incorporated in that. So on a like-for-like basis, your CapEx guidance is really sort of €380 million, €385 million, is that right? And again, how should we look at phasing also CapEx is likely to be in the current year? And then the third one actually also goes back to that phasing point, the new Taqnia contract, when do revenues kick in from that and can you give us some idea of the scale?

Rodolphe Belmer

I said that the revenues will be back-end loaded in fiscal year '19, and the main reason for that is actually the fact that our African broadband initiative will progressively accelerate in services this month. And the deployment is of you see policy. We start with Congo and we are willing to open each of the 19 countries that I've mentioned, progressively. And that's the reason why the revenue trajectory is back-end loaded. And we have also the effect of the contract of China Unicom on 172B, which takes place in January '19. And that's the 2 main drivers for that back-end loaded trajectory. Does it mean that we're going to be negative at the beginning of the year and positive at the other end of the year? No, in fact it will be better during all the course of the year. In terms of CapEx, we had €358 million CapEx this year, whereas we had a sort of implicit guidance of €420 million that we did far better than expected. We have reduced our guidance and it's now €400 million on average. and it does incorporate €5 million to €10 million, the actual figure is €5 million to €10 million. €5 million to €10 million of IFRS-16 impact, and it's true that means implicitly that all things equal our implicit guidance, if we had been -- if we had stayed in IFRS -- in previous IFRS standards, we'd have been around €380 million. Taqnia, Taqnia is taking -- is entering into effect in July of this year. This is a contract that's quite sizeable. I don't know what kind of dimension we can give to that.

Michel Azibert

Let's say there the contract is twofold, one part is on these premium Ka-band, it's mostly like a replacement contract [indiscernible]. But the incremental revenue comes from the Ku-band at 70 degrees East, where we are -- the magnitude of the capacity is a little bit below 150 megahertz and it's priced as let's say mobility, mobility price meaning a little bit higher than data price.

Patrick Wellington

And just going back to the shape of revenue growth. Are you saying therefore that you'll be on an operating verticals basis, positive in all 4 quarters? You've got your easiest comp in the first quarter, I think. And secondly, just on Other, if you -- I don't know whether you can tell us about Other, it's obviously very variable. I mean what would be a good guess for Other revenue in FY '19, up, down, or sideways?

Rodolphe Belmer

So sorry, I couldn't hear the rest of your question because somebody was talking through it at the same time.

Patrick Wellington

I mentioned Other and the alarm bells went off. And Other revenue and it's obviously very difficult to forecast. So if you had to guess would it be up down or sideways relative to the FY '18 number?

Rodolphe Belmer

On your last question on Other revenues, we don't want to give guidance on Other revenues now on because we think it brings some variability and predictability to our top line, whereas this Other revenues first are not core business even, they are very small 2% to 3% of our revenues, and they don't reflect anyhow the health and profitability of our company going forward or the good recognition of its strategy. Second, do we want to tweak -- I read that this morning -- any our guidance with that? Not at all, I mean that if we had kept the Other revenues within the scope of our guidance we would have had the same slight growth guidance. I want to make this clear to everybody there is no tweak of a result that's not our style at all as you know very well. In terms of the evolution of the -- your more precision on the evolution of the revenue profile across this fiscal year. I would say that -- I said that the revenue profile will be increasing. We don't give guidance quarter-by-quarter, obviously. But as I said, it's a slight growth overall for the average of the year, meaning that it would start at a very -- at a sort of broadly stable level and would be improving during the course of the year. In that the first quarter will not be as positive as the other one so as you can imagine.

Operator

We would now take our next question from Laurie Davison of Deutsche Bank.

Laurence Davison

It's three questions from me, please. First question is just on the slight growth for 2019. I think you were asked on the last conference call about whether you are able to quantify that. I am just wondering whether you could help us out in terms of a rough level we should be expecting now that you have a great bit of visibility. Second question is just over your expectations for the government renewals for the full September, October renewal period. And thirdly, so just to go back to the Other revenues and why you are excluding that from your guidance. If you are saying that you would have had slight growth even with these Other revenues included why are you excluding them?

Rodolphe Belmer

I wouldn't give more precision that slight growth, I think it's in our view and I'm sorry if it's not -- it's explicit enough, we are back in positive territories, it's clearly a tipping point, and the first stage of our return to growth strategy. But we cannot give more precision at this point in time. Government Services, we had very good renewal rate during the 2 last renewal campaigns that we had with the U.S. Department of Defense last autumn and last spring renewal campaigns, which were in the order of 95% renewals, sometimes more than that. We don't give guidance on the expectation of renewal of the -- for the full campaign. What I can say -- and that I said before already, is that we expect the Government vertical to return to growth for this fiscal year, for fiscal year '19 after a good stability in fiscal year '18. Which means that we have quite positive view on the development of our business with the U.S. Department of Defense, which present more than 70% of the revenues of that vertical.

For the Other revenues, what I can say is that first we want to concentrate on the five operating verticals even though it wouldn't really change the overall picture of our group performance if we included the Other revenues. The five operating verticals this year, fiscal year '18, they performed slightly better than the group average at minus 1.3%. Second, why do we in this case exclude the Other revenues even though we were able to meet our guidance and to meet all targets and to achieve the signatures of all the contracts that we had in the pipeline and which were uncertain in April, last time we talked about it. We have decided to exclude those Other revenues because we think it's not core business and it gives some element of variability to our communication to our financial communication and to the visibility we want to give to our shareholders. We want to make sure that we can give as much visibility as not -- as much predictability as possible. And this Other revenues; even though they are very small, they are around 2% to 3% of our revenues, of our group revenues over the past 5 years, on average; they give some important element of unpredictability. And since we give guidance, which are very precise actually, which are -- the variation of the Other revenue line can have an impact on the predictability and -- of our guidance. Obviously if we gave guidance which would be very vague it would be different. But we have decided to give many KPIs 5 or 6 of them 2 to three years and disclose sort of precisely. And want to make sure that we deliver on that precision.

Laurence Davison

Okay, just one follow up. Just on an earlier as well. When do you expect Sky Italia renewal to be done?

Rodolphe Belmer

There is no data yet but probably in the next 18 months.

Operator

[Operator Instructions]. Our next question comes from David Stroke of Credit Agrical.

David Stroke

Just one, could you please update on your general approach vis-a-vis M&A opportunities, please?

Rodolphe Belmer

First I'd like to say that we have a very solid standalone strategy that we think delivers very well on the cash flow generation and the return to growth meaning that we are -- meaning that this strategy, very solid, very strong [Technical Difficulty]. Second, it's true that we always say that we think that this market, this source, satellite telecommunication market will probably will follow sort of consolidation phase because of the over capacities in certain segments of the market and because of the difficulties of some of the players in this segment. And what we said in the past and which are very true is that we are one of the biggest player in this segment. We are quite efficient, quite effective at managing a satellite operator, meaning that we need to be very attentive to what's happening on the market and to look at all the opportunities. We are very focused on shareholder value. We are very focused on the kind of return we expect from any investment. We are very disciplined, as you have realized meaning that we look at everything. But we do that with a very financial eye and with a view on what kind of synergy could be [indiscernible] out of a combination.

Operator

[Operator Instructions]. We'll take our next question from Sami Kassab from Exane.

Sami Kassab

Two questions, first, can you quantify the savings of the HOTBIRD renewal that you are going to make or at least if you can't quantify the savings, can you give us the CapEx that you spent 12 or 15 years ago on the 3 satellites. And secondly, on the LEAP cost savings plan you are running a €24 million well ahead of the €15 million initially anticipated, do you think you can exceed to €30 million guidance you've given and if so perhaps by how much?

Rodolphe Belmer

It's two difficult questions. On the CapEx savings we have been able to achieve on the HOTBIRD renewal procurement. Obviously, we cannot quantify it and make it public. What I can tell you is that the order of magnitude of the CapEx cost of the constellation, when we bought it 10 years ago was around €600 million for the [indiscernible] program three satellites and the launches' insurance and so forth. And even lower as given to you sort of order of magnitude that -- of the savings that we've achieved on other programs. And that could make sense for this HOTBIRD renewal even though it could be slightly higher than the figure that was mentioned by you. But I cannot be more precise for, I think, evident reasons. On the LEAP program we are actually ahead of the objectives, significantly. We said would be delivering €15 million saving this year and we did €24 million. Our guidance is €30 million for fiscal year '19. Could we be better than that? As you know we try to always do better than our guidance and sometimes we do make it. And we are focused and we are also incentivized to do better than our guidance, meaning that all the company, the entire organization is focused on growing cash flow, and is focused on all the building block of that including the LEAP program. Okay, thank you to all. Thank you for attending this conference around Eutelsat annual results.