Satellite Operators Knocked Out of Orbit

Profit warning is evidence of structural problems in sector
At Closing, February 22nd
444.00 GBp

Unlike the Lou Reed song, this certainly wasn't a case of Satellite of Love. Eutelsat's shock profit warning appeared to come out of the heavens for shareholders, pushing the shares down more than 30 percent on Friday morning.

Unfortunately, this isn't a one-off for the sector. It follows a similar, though less dramatic, warning from rival Inmarsat last week. Investors should expect more pain. This is an industry under pressure from technology changes and overcapacity, which means its famously fat margins might be slimmer forever.


Eutelsat's valuation has lagged rivals but they're starting to suffer too

Source: Bloomberg data

Like Inmarsat and another listed rival SES, Eutelsat spends heavily to deploy satellites in orbit and needs at least five years to recoup costs. The French company owns about 40 satellites and gets almost two-thirds of revenue from selling capacity to TV broadcasters, and 22 percent to broadband providers.

Both of those business areas are getting crunched by more competition. And this isn't just new space-based rivals shooting rival satellites into space. Back on Earth, the fast fixed-broadband networks are also catching up as a viable way to carry TV signals.

Satellite Services

SES and Eutelsat generate most of their revenue from video services

Source: Moody's and company reports

Avanti figures reflect FYE 2015 recurring revenue, excluding the sale of spectrum.

These are long-running trends that were known before the spate of warnings. But the reckoning has arrived sooner than many hoped. Eutelsat’s new CEO Rodolphe Belmer has kitchen-sinked mid-term earnings guidance, which was clung to by his predecessor despite the space game's structural changes.  

Belmer expects sales to decline as much as 3 percent in the 2016/2017 fiscal year, instead of rising at least 4 percent, while the Ebitda margin will be 75 percent versus expectations of more than 76.5 percent. That may still look pretty stellar, but UBS estimates it will chop 11 percent from Ebitda.

Eutelsat’s wager that emerging market growth would offset weakening demand in Europe hasn't panned out. In Latin America, a recently-launched satellite, delivering broadband capacity, is filling up much slower than hoped.

The View from Space

Eutelsat's revenue by region in 2015

Source: Goldman Sachs

South America's macroeconomic weakness isn't helping, and neither are currency exchange effects. But Eutelsat appears also to have made a wrong bet: it’s harder to make money from satellites in emerging markets because consumers have less purchasing power.  

Couple that with competition from new "high-throughput" satellites launched by local competitors in many developing markets and the outlook isn't happy. 

The new boss has promised a strategic review by July to focus on “cash flow generation and margin support”. Yet it's hard to see what he can do to avoid a structurally less profitable future.

One option would be buying developing-market competitors, similar to its 1.14 billion euros ($1.3 billion) purchase of Mexico's Satmex in 2013. Belmer could cut the 500 million euro yearly capex budget, but that might limit growth.

He may instead want to revisit the company's promise to pay out 65-75 percent of net income in dividends. Eutelsat and its investors (as well as the rest of the sector) are looking at a future where satellite supply becomes more of a commodity, with the lower multiples that implies. They're going to need to adjust to life in a lower orbit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Leila Abboud in Paris at

    To contact the editor responsible for this story:
    James Boxell at

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