2 May 2013 10:54
INMARSAT PLC - ANNUAL GENERAL MEETING: 2 MAY 2013
ANDREW SUKAWATY: CHAIRMAN
It's 10 o'clock. Good morning, ladies and gentlemen, and welcome to Inmarsat plc's 2013 Annual General Meeting.
As we announced our first quarter results for 2013 this morning, I will have the opportunity to cover key highlights from our performance in 2012 and the first part of 2013. I will give updates on the wholesale and retail parts of the business and a summary of our Global Xpress Ka-band satellite programme. Where I refer to GX in my comments, this is our abbreviation for the Global Xpress programme.
On our analyst call this morning, Rupert Pearce, our CEO reported that we have seen a continuation of last year's positive trends in our core wholesale business and this has resulted in a good performance for Inmarsat Global at the wholesale level, which delivers the vast majority of our cash flow and profit generation.
Across our three wholesale sectors, maritime, land and aviation, we saw continued strong subscriber growth for new services in the first quarter, with our installed base of MSS terminals increasing year over year and quarter over quarter. Despite the continuing drag on revenues from maritime customer migration from our older to newer services and the drawdown of government activities in Afghanistan, we still saw growth of 3.7% in revenues from our wholesale MSS services quarter over quarter. We also delivered a good performance on wholesale costs, resulting in strong EBITDA growth in the Inmarsat Global wholesale business for the quarter.
However, disappointingly, our Inmarsat Solutions business fell short of our expectations in the first quarter because of an underperformance in one of the four business units. Our Inmarsat Solutions business reports the financial results for the retail element of our four internal business units, Commercial Maritime, US Government, Global Government, and Enterprise. The retail elements of three of these business units have performed in line with expectations for the first quarter, but in the latter part of Q1, the retail element of our US Government unit experienced a sudden and sharp contraction of both demand and profitability, linked to the knock-on effects of the US budget sequestration and the impact of resultant cuts to US Government spending.
The Inmarsat board and management team believe that the fundamental drivers of value in this business remain fully intact and that the strong outlook for GX, which will be the main engine of our future growth, is unchanged. Without diminishing in any way our determination to return our US Government retail segment to strong growth and profitability, it is worth noting that our retail operations are principally a strategic tool to drive wholesale demand and their stand-alone value and performance is less important to us when compared to their strategic mission to secure the long-term success of wholesale services - whether L-band or GX. So, while we are not content that we should have any element of underperformance, I would strongly encourage the view that the overwhelming majority of the business - measured by value - is little changed.
Let me now provide some commentary on each of our core sectors.
Starting with maritime services, revenues were up 9% for the first quarter, which follows the positive growth performance in 2012, with continued decline in voice offset by strong growth in data services.
Our FleetBroadband maritime service continues to perform well and in the first quarter there was a positive uptake of net additional terminals reflecting that we are having new vessels accessing our services for the first time rather than them migrating from our older services.
Our XpressLink service, which combines our FleetBroadband and a Ku-band service in a single package, had a year which exceeded our expectations in 2012 and is increasing in popularity. We have seen this continue in the first quarter of 2013 as well. Most vessels migrating to XpressLink give us the opportunity to move them to our new GX service when it is launched. We were very pleased to announce in March that we had won a major contract for XpressLink with Nordic Tankers, all the more so because this was a win from a competing VSAT service and demonstrates how attractive the XpressLink service is to the leading maritime customers.
Turning to the land sector, we have continued to see the trend experienced in 2012 extend into the first quarter of 2013, with data revenues reflecting the on-going impact of drawdown in Afghanistan. However, the decline from Afghanistan in the quarter was partly offset by a contribution from events in sub-Saharan Africa. Our broadband service for land users, called BGAN, experienced some softness aside from in government usage, although we saw an increase in 1,700 underlying net additions in numbers of terminals, excluding a large terminal usage for an elections event in Brazil where we do not expect these terminals to be used again in the near future.
In voice revenues, we had good growth in IsatPhone Pro in 2012 and in the first quarter, we added over 5,000 subscribers to take our installed base to over 90,000 units. We started this hand-held phone service in 2010 and are very pleased with how it is performing.
We gave significant more focus in 2012 to our machine to machine, known as M2M, services and we see growing interest from companies wanting to use our IsatData Pro and BGAN M2M services as we move through 2013. This is a fast growing MSS market where we have limited presence today thus far, but is one very capably served by our L-band satellites.
In the aviation division, we had modest revenue growth in 2012 although for the first quarter of 2013, we have seen 15% revenue growth reflecting similar trends to what we saw in the fourth quarter. SwiftBroadband is our fastest growing aviation service. Our Q1 revenues show stable Swift 64 revenues and growth in SwiftBroadband usage, coming largely from markets other than government - namely from the air transport and business jet markets - thereby reducing our dependence on government business and helping smooth the swings in quarterly performance by spreading revenues across customers with more steady usage profiles.
We see the aviation sector benefitting from our new GX services and in April, and together with Honeywell, we gave the aviation industry a preview of GX avionics at the Hamburg aviation trade show. From being a 'maybe' market opportunity when GX was first conceived, today the in-flight passenger connectivity market continues to show signs of being a considerable opportunity for GX and with our long L-band heritage, we are convinced that we are very well positioned to be the key infrastructure player for passenger connectivity services globally.
What I've just described to you forms our wholesale MSS business. Now I'll spend a few minutes on providing an update on our Inmarsat Solutions retail segment.
Our retail businesses use several providers of satellite capacity. Their use of Inmarsat's wholesale capacity is the majority of this and the retail results track the trends and drivers we experience in the wholesale side of the business to a large extent. In the retail business the results are slightly magnified by our disproportionately higher share of exposure to Afghanistan and our leasing business which reduced during the course of 2012. This resulted in a fall in retail revenues despite growth at the wholesale level. As Afghanistan runs off to non-material levels we would expect to see our Inmarsat MSS retail revenues track more closely to our wholesale revenue trends.
In terms of margin at Inmarsat Solutions, the picture is more challenging. Firstly, the loss of MSS retail revenue from Afghanistan and leases means losing high margin business and we have been seeing this during 2012 and again in the first quarter in 2013. Secondly, we have been adding capacity to our VSAT network in order to more effectively support the high number of XpressLink customers we are signing up. This also impacts margin, but it is both temporary and a price well worth paying to secure a substantial pre-order book for maritime GX and to strengthen our position in the VSAT market. Finally, there is substantial margin compression in our US Government managed services business arising from demand changes and intense competition for such services to the US Government. This follows the implementation of Federal budget sequestration that has led to immediate defence spending cuts leading to many programmes being cut, de-scoped or postponed and those that remain are being awarded or renewed at very low margins. This is the principal new area of challenge for us and is the main driver in a likely short fall in margin relative to our expectations for 2013.
First of all, much of the current slowdown in the US Government market should not be taken as representative of future spending levels by the US government. We believe that the slowdown represents more of a reorganisation phase, during which the various defence procurement agencies reset plans and prioritise services they need to maintain. This "reset" process will be completed well before our GX services are launched. Second, both with respect to our legacy L-band services and with GX to come, our core competency is to serve mission-critical needs on a global basis, such as those of the special operations and intelligence communities, which have historically been prioritised as "protected budgets".
Third, the possibility that spending cuts impact in-house US Government procurement programmes, actually in the medium term could create opportunities for GX to meet our customers' continuing communications needs in an exceptionally agile and appropriate way. Given that the commercial launch of GX is now within touching distance, this opportunity is about to become a reality.
I've mentioned our GX programme several times and its importance across the various sectors we work in - particularly our maritime and government businesses. We remain on track and on budget and we continue to make strong progress across a range of diverse programme activities. We are now rapidly implementing our go-to-market preparations. We have contracted for three launches with Proton, who had experienced two launch failures recently after a long period of uninterrupted success. We are obviously very pleased to have now seen two successful missions for Proton since our end-of-year results. Proton's successful return to flight means we can prepare for the first satellite launch with improving confidence on timing. There remain five commercial Proton launches ahead of us, so there's plenty more opportunity to verify the credentials of Proton and we remain confident in our launch strategy. As a result we expect a first Inmarsat-5 launch in Q4 later this year and to complete the two following launches in 2014 as planned to create the global GX network.
While mentioning satellites, I should also mention that we remain on track for the launch of the Alphasat satellite in mid-2013, which will be launched on an Ariane 5 launch vehicle. We also deorbited Inmarsat-2 F1 after 22 years' service. This was our first launched Inmarsat satellite ever and is a testament to the quality of the engineering teams from Inmarsat and Astrium to maintain the spacecraft for such a long period of time when the design life was for 10 years.
As we have announced our first quarter's results today, my concluding statements reflect our views for the full year's performance. The Inmarsat plc board and senior management believe our Q1 performance puts us well on track to meet management expectations for wholesale revenue for the full year and is fully consistent with our outlook statement which called for MSS revenue growth of up to 2% CAGR for the two financial years 2012 and 2013. We expect the current adverse market conditions for our US Government retail activities to continue for the time being and we are not forecasting an improvement in performance this year. We therefore expect our Inmarsat Solutions retail business to have a challenging year. We are undertaking steps to review how we can offset this underperformance with cost measurements which can be implemented in a way so as not to affect our growth aspirations and delivery of our key programmes. We have always had a strong management of our operational expenditure and the current environment maintains our focus on this.
Before we move to the formal business, I welcome any questions you may have for me, or indeed, for any of the directors present here today.
Thank you for your investment in Inmarsat.