3 May 2011 11:12
INMARSAT PLC
ANNUAL GENERAL MEETING: 3 May 2011
ANDREW SUKAWATY, CHAIRMAN & CHIEF EXECUTIVE OFFICER -Speech given to Shareholders at the Company's Annual General Meeting held on 3 May 2011.
Good morning Ladies and Gentlemen. It is now 10.00am and it's time to start the proceedings. May I welcome you all to Inmarsat's annual general meeting.
For more than 30 years, Inmarsat has been delivering voice and data connectivity to end-users, through the most versatile and reliable network in the world. Through our 11 satellites, which have more than 160 years of in-orbit life, we support mission critical applications to customers operating in extreme environments. We give them the confidence to know they can rely on our services to support their businesses and operations, when and where they need them.
As we will be announcing our Q1 results on 9th May I cannot provide any updates on specific trading activity or financial information today, so will focus on highlighting key aspects of our 2010 performance with additional comments as appropriate.
2010 was another strong year of revenue and profit growth for Inmarsat. 2010 also marked a significant milestone for Inmarsat as a publically listed company - the end of our fifth year as a listed stock. This is important because in 2005, when we listed our shares on the London Stock Exchange, we set a target for ourselves. That target was to take a company which had historically grown revenue at a 2% to 3% rate and accelerate that growth. Initially we targeted a 5% to 6% compound annual growth rate (CAGR) and 18 months later increased that target to 6% to 8% CAGR.
5 years on, we have exceeded our goals significantly. We not only achieved 9% compound annual growth in revenues during this period, but we also achieved annual growth rates of 13% for EBITDA and 28% for pre-tax profit. We also increased our dividend by over 7% CAGR during this period.
Of course, we need to continue to look ahead. In mid 2010 we announced a 5 year revenue growth target for our Inmarsat Global MSS business of 5% to 7% CAGR through 2014 with 2009 as the base year. With this growth, on our largely fixed-cost base, we would expect a higher rate of profit growth. In addition, to underline our confidence in our future, and to highlight the strength of our balance sheet and cash flows, we are recommending a full year dividend of 22.69 cents (US$). This is one of the resolutions being put before shareholders to approve today. This will bring the total dividend payable for 2010 to 36.69 cents (US$) per share, an increase of 10% on the total dividend paid in 2009. We have also announced that we expect to sustain at least 10% dividend growth for the subsequent two financial years 2011 and 2012.
We have continued our focus of ensuring a healthy financial position for the Group and during 2010 we actively pursued strategically beneficial financial transactions, including a new loan relationship with the European Investment Bank supporting our Alphasat development programme, and are working to finalise loan arrangements with the US Ex-Im Bank in connection with our Inmarsat-5 Global Xpress programme. These agreements have, and will continue to help our balance sheet and will provide highly competitive debt arrangements for us.
Our healthy financial position has been supported again by good results in 2010. Group EBITDA last year increased by 17% over 2009. Our EBITDA margin has increased to 59% for 2010 compared with 57% for 2009, helped by the inclusion of revenue from our Cooperation Agreement with LightSquared, which started to be received in August 2010.
Total Group revenues for 2010 increased by 12.9% compared with 2009. For our two operating segments, Inmarsat Global reported a 10% increase in revenues to US$764.1m - with Stratos up by 11.3% to US$717m. After eliminating intercompany sales of US$309m, total Group revenues were US$1,172m. We maintained tight control of our costs during the year, with total Group net operating costs for 2010 increasing by only 7.3%, with the increase principally related to Segovia which wasn't part of the Group in 2009.
I would now like to provide some more detail about our business operations. I'm going to focus on our strategy first, then talk about Inmarsat Global, which is our wholesale business and then to discuss Stratos.
Strategy
Our strategy has evolved over the years as we have seen the number of data applications used by our customers increase, the size and cost of our terminals dramatically reduce and also benefitted from the increased spectrum efficiency and throughput of our satellites.
Over the last year, we have continued to lay the groundwork to drive additional growth opportunities in the future, maintaining our leadership position over the next decade.
In 2010, we announced a new investment programme for our next generation Inmarsat-5 ('I-5') satellites and services which we call Global Xpress. Global Xpress is targeting a US$1.4 billion existing VSAT market opportunity, adjacent to our own markets. This US$1.2 billion capital programme will launch new mobile broadband satellite services significantly faster than our current available services. We will be the first to offer true global mobile VSAT-type services. This will open up new and often complementary broadband opportunities, particularly in the maritime, energy and government sectors. But with this investment, we are also targeting our existing customers and distribution channel with services many are already using or demanding for the future as their bandwidth needs grow.
Boeing is building three Ka-band satellites for us and we expect the Global Xpress programme to start commercial operations on a regional basis in 2013. In 2014, we expect to have a global service operating over the three satellites. We have already signed agreements with leading companies for the ground infrastructure and core technology module and for maritime satellite terminals. We are targeting US$500m of annual Global Xpress revenues, five years after we begin offering a global service.
Global Xpress complements our L-band franchise and can also provide an upgrade path for existing customers, who may develop higher bandwidth needs. It affords them the opportunity to migrate, over time, from existing L-band services to the new Ka-band GX services, just as many of our customers are currently migrating from our third generation existing and evolved services to our fourth generation BGAN-based services. Some customers may also choose to use both services simultaneously in the future through hybrid or co-located terminal packages we plan to offer.
Of course, we remain well positioned to continue growing our core L-band franchise as well. With three generations of satellite constellations in operation, another one satellite currently being built - Alphasat - which will operate in the L-band spectrum, we continue to invest for the future. We intend to maintain our L-band network, and will purchase new satellites for this network on a rolling procurement basis. This means that they will be replaced over time rather than in a concentrated investment period. It will allow a smoother investment and cashflow profile which benefits our capital requirements.
We have previously said that we would look at acquisitions which complement our existing business and we are delighted that we have completed, last Thursday, the acquisition of Ship Equip International. Based in Norway, Ship Equip is a leading provider of VSAT maritime communications services to the shipping, offshore oil & gas and fishing markets.Ship Equip, through its global operations, is ideally positioned to support the evolution of certain segments of the maritime market to higher speed services - and is especially well suited to the opportunities offered by our new Global Xpress programme. Ship Equip has a large installed base of maritime VSAT customers and a management team with extensive knowledge of VSAT operations. Acquiring this company demonstrates our commitment to prepare the way for a fast and successful take up of Ka-band services via Inmarsat Global Xpress.I'd like now to highlight two new services, which are supported on our L-band satellites: our hand portable satellite phone, the IsatPhone Pro and our satellite low data rate ('SLDR') services.
We have seen our land voice revenues decline over the years and the introduction of IsatPhone Pro is an opportunity to reverse this and grow voice revenues in new markets, with new users, over the coming years. The IsatPhone Pro is a small handset, with a ruggedised design and clear voice quality, designed for the special remote environment market we serve globally. It has the longest battery life in the industry and the lowest retail price for the handset. We have also recently added a data capability to the handset. Initial sales have been positive and we expect to take a 10% share in the established market within the next two years. Although this market segment is already very competitive with offerings from regional and global providers, we believe the voice quality, reliability and affordable product we can offer is unmatchable by our current competitors - we believe, for many years to come.
Low data rate services provide us with the opportunities to drive more traffic onto our network without our having to incur any significant investment - either capital or operational. This vision has begun to provide a revenue benefit as the number of applications using telemetry units has increased. Our investment in SkyWave Mobile Communications ('SkyWave') in 2009 came at a good time in its development and for our expectations of market growth in that sector. SkyWave has announced the launch later this year of a new service, IsatData Pro. We also have made progress with a BGAN-based telemetry service, which will be offered through all of our Distribution Partners.
Another important development in 2010 was in the area of satellite/terrestrial hybrid networks. In December 2007 we signed an agreement to work with another satellite operator, LightSquared, to enable the re-banding and efficient reuse of L-band radio spectrum covering North America. It was intended this would provide flexibility and operational terms to support the development and deployment of 4G ancillary terrestrial component ('ATC') services by LightSquared. In August 2010, LightSquared triggered their rights under this agreement and payments are now being made to us on a quarterly basis.
There has been significant planning for this event. We are now ready to make the required changes over the next few years, to manage the effects of the terrestrial implementation by LightSquared. As you would expect, we will incur costs, particularly in the first few years of this development and these are more than adequately covered by the payments made under from the agreement from LightSquared. Assuming LightSquared maintains its intention to complete its ATC implementation, on this basis, we expect there to be a steady income stream from LightSquared for the future. In addition, we are exploring similar hybrid activities both through our S-band satellite programme in Europe and other activities in our existing L-band system. Inmarsat will continue to explore opportunities of this type in related areas to our business that can deliver additional value to shareholders.
Moving now on to Business Operations, first for our largest business, Inmarsat Global.
As a wholesaler of satellite airtime, Inmarsat Global sells its services through distributors who engage directly with the customer or through their own channel of service providers.
In 2010, our Maritime data revenues in this business, grew by 4%, with voice revenues as expected falling. Underlining this is a migration away from our older maritime services, especially Inmarsat-B which is due for closure at the end of 2014, to our FleetBroadband services. Our FleetBroadband services have cheaper tariffs and higher transmission speeds and this accounts for some of the reduction in revenues, particularly for voice revenues. During 2011, we will be launching FleetPhone which is a low cost, primarily voice service, for maritime users and we expect to re-capture some of this maritime voice market.
Our FleetBroadband services, introduced four years ago, are now accepted and endorsed across the maritime market adding more than 10,000 terminals in 2010. FleetBroadband 150, our lower cost version, has made a strong start, having only been launched in mid-2009 and is successfully targeting the leisure and fishing markets which are new market segments for us. FB150 has been selected to provide back up to the FB500 in the 2011-12 Volvo Ocean Race - an endorsement of its reliability and performance.
Our land business is diverse, with revenues coming from many different segments. Government, media, oil and gas exploration and aid agencies are all key sectors for us. Our user groups are susceptible to events such as natural disasters and military activities and these can cause spiking of use of our services and so we see some volatility in traffic usage.
Our BGAN service celebrated its 5th birthday during 2010. Since launch it has seen good subscriber growth and with this rapid take-up, we have seen, as expected a corresponding decline in our older data service, called GAN. We have announced the closure of this venerable 64kbps service by the end of 2014.
Of course, we continued to support critical humanitarian and emergency activities during the year. In the earthquake disaster in Haiti, our terminals were deployed through various organisations including those we support charitably, including Télécoms Sans Frontières and the ITU's Framework for Cooperation in Emergencies programme, together with numerous aid and other NGO bodies. In the floods in Pakistan and Australia and in countless other situations, we were there with our distribution partners providing vital support and monitoring system performance and capacity 24x7. Currently we are also being used extensively in Japan, where we have made special shipments of terminals to assist the aid efforts.
In our aeronautical business both our Classic Aero services and Swift64 service, which is a data service, experienced a healthy increase in the number of channels being used. Our SwiftBroadband service has seen strong revenue growth during 2010 and its widespread industry acceptance has been reflected in a corresponding growth in active channels. SwiftBroadband is used in a variety of ways - it enables cockpit, cabin and operational applications through one installation using a single antenna in the aircraft. We are also undertaking work to take our aero safety services to the next generation platforms, namely SwiftBroadband
We have also been successful during the year in securing lease renewals, although roll-over of leasing agreements is dependent on the business needs of the customer, and therefore we do not assume that all contracts will be renewed or extended. In 2010, we benefited from an increase of additional government contracts and had a net revenue benefit from aeronautical leases, with some contract extensions offset by non-renewals and the reduction of some aeronautical and maritime leases.
Our government customers use Inmarsat services across all our sectors and we continue to support both military and civilian operations on a worldwide basis. We have seen our revenues fluctuate as government activities change around the world and have seen reduced traffic levels in 2010 from such users in the Middle East, reflecting this volatility. It is difficult to predict usage patterns in government however. As government budgets are squeezed and they consider their spending plans for building their own satellite systems we can provide highly economical commercial capacity for them, so we remain positive on the government sector overall, despite the variable year on year demands. In addition, we are well placed now and with Inmarsat GX in the future to meet and exceed their service requirements, with an economical global Broadband platform unparalleled in other government systems.
Turning now to the Stratos business.
In January 2010, we acquired the business assets of Segovia and added it to our Stratos group for reporting purposes. Segovia is a leading provider of secure Internet protocol managed solutions and services principally to the United States Army, to other U.S. military services and to government agencies. We acquired Segovia to strengthen our relationships with these key government customers across land, maritime and aeronautical environments as well as bringing enhanced services to the government sector generally. We have been delighted with how this business, and particularly its management, have settled into the Inmarsat Group and worked across the businesses to achieve mutual success. While they operate independently they have been a real enhancement to our overall activities.
Stratos itself, is one of two major distributors to Inmarsat and provides services both directly to the customer, and through a network of service providers. The majority of mobile satellite revenues derived from Stratos are Inmarsat airtime sales.
The price and volume of the various services sold by Stratos has been influenced by several factors, including price competition both from other Inmarsat distribution partners and competing MSS and VSAT services, as well as the migration to new lower-margin broadband services. In addition, the promotion of some of their former service providers to becoming new Inmarsat distribution partners, as well as changes in the mix of services they sell or lease, have all adversely impacted Stratos's revenues and margins. Stratos's achievement in retaining its market share of Inmarsat services and the profitability of its MSS business cannot be underestimated. We are pleased with the performance of Stratos. Furthermore Stratos has been a major contributor to the early sales of our IsatPhone Pro service and has introduced a new interim Ku-band service, FleetBroadband Plus, to meet the growing need for higher bandwidth services in the maritime sector in advance of our forthcoming Global Xpress offering.
In 2010, the growth for Stratos in the Inmarsat airtime services came primarily from increases in the use of the aeronautical Swift 64 service, strong FleetBroadband activity and with good growth also in leasing. This growth was partially offset by a decrease in the land mobile sector.
The Stratos Broadband business, which includes Segovia for reporting purposes, provides VSAT services, mainly to the oil and gas sector, microwave services to oil platforms in the Gulf of Mexico, equipment supply and engineering services. The increase in 2010 revenue is due to the inclusion of Segovia revenues from the date of its acquisition on 12 January 2010 and increased microwave revenues.
In summary, as a Group we are focused on continuing to profitability grow our business in a sector which remains healthy despite the global economic downturn.
We are working to ensure we target opportunities to develop our IsatPhone handheld business opportunity.
We are making good progress in our Global Xpress programme which will deliver future revenue opportunities. Although we will have some incremental operating costs for this programme, we don't expect to see any trend changes in our underlying costs, cash flow and profitability.
Although we expect land mobile and aeronautical revenues to have some volatility, we believe our BGAN and SwiftBroadband services will continue to attract new users and traffic which will drive growth. Balanced with these developments, we expect the ongoing strong growth of FleetBroadband to continue to constrain revenue growth in our maritime sector given the lower price of its data services, but as usage levels build so will the revenue base and growth will come.
We are working to address the challenges ahead which impacted performance in the latter half of 2010. We expect to see growth in Inmarsat Global MSS revenues during 2011 although believe it will be weighted to the second half of the year. We will also have significant financial benefits from the payments received from LightSquared under the Cooperation Agreement.
We are excited about the opportunities we can develop through the acquisition of Ship Equip and the ongoing contributions from our other subsidiary companies - Stratos and Segovia.
We have delivered good results, we have increased dividends to our shareholders and provided reliable, proven services for our customers. Our strategy will ensure we continue to do so. Our intention is to drive further shareholder value, through selective investments in our core area of focus which is delivering two way communication services, primarily where terrestrial networks do not go, over land, sea and air.
Thank you for your investment in Inmarsat.