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Edited Transcript of I earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 Intelsat SA Earnings Call

LUXEMBOURG Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Intelsat SA earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David M. Tolley

Intelsat S.A. - Executive VP & CFO

* Dianne VanBeber

Intelsat S.A. - VP of IR & Corporate Communications

* Stephen Spengler

Intelsat S.A. - CEO & Director

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Conference Call Participants

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* Anthony Francis Klarman

Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research

* Arun A. Seshadri

Crédit Suisse AG, Research Division - Analyst

* Christopher David Quilty

Quilty Analytics, Inc., Research Division - Founder & Partner

* David Lawrence Phipps

Citigroup Inc, Research Division - Director and Senior Industry Analyst

* Giles Thorne

Jefferies LLC, Research Division - Equity Analyst

* James Maxwell Ratcliffe

Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst

* Jason K. Kim

Goldman Sachs Group Inc., Research Division - Senior Analyst

* Lance William Vitanza

Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst

* Michael Vincent Pace

JP Morgan Chase & Co, Research Division - MD and Senior Research Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Intelsat Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Dianne VanBeber, Vice President of Investor Relations. Ma'am, you may begin.

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Dianne VanBeber, Intelsat S.A. - VP of IR & Corporate Communications [2]

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Welcome, everyone, and thank you for joining Intelsat Second Quarter 2019 Earnings Conference Call. Earlier this morning, we issued our earnings release and published a quarterly commentary, both of which are available at our website. The quarterly commentary supplements are released in the 6-K filing, and provides information and context that you need to analyze our results in advance of our earnings call.

During today's call, we will discuss adjusted EBITDA and other financial metrics not prepared in accordance with U.S. generally accepted accounting proposals, including EBITDA, related margins and free cash flow from operations. We provide reconciliations of these metrics to the most directly comparable U.S. GAAP measures in the earnings release and on our website. Later today, we expect to file our quarterly report on Form 6-K with the SEC. You can find the link to the filing on our website.

Additionally, our conversation today will include forward-looking statements that reflect our current expectations for future industry conditions as well as our business strategy, market trends and positioning and expected future financial performance. These forward-looking statements are subject to risks and uncertainties, many of which are outside of our control. Please refer to the safe harbor statement included in our quarterly report on Form 6-K for the quarter ended June 30, 2019, once filed, and our other SEC filings for information about some of the factors that could cause our actual results to differ materially from our expectations.

Finally, please be aware that there our conference call today is open to the investment community and media, with the media invited to participate in listen-only mode. Members of the media are not authorized to quote either directly our in substance any participant in the call who is not a representative of Intelsat.

Our call today is hosted by our CEO, Stephen Spengler; and our Executive Vice President and CFO, David Tolley. Following remarks by Steve, we'll open the call for questions. Steve?

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Stephen Spengler, Intelsat S.A. - CEO & Director [3]

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Thanks, Dianne. Our second quarter activities reflect the focus on our operating priorities, and in particular on leveraging our new satellites. Since our last call, we have announced sizable contracts for wireless and other broadband infrastructure. The Asia-focused Horizons 3e satellite in our Intelsat 33e satellite combined to form an attractive and sizable service footprint for the region. Later this quarter, we're scheduled to launch the Intelsat 39 satellite. Its footprint spans Europe, Africa and Asia. Intelsat 39 benefits from a large prelaunch commitment from an infrastructure customer, the Myanmar Ministry of Technology and Communications (sic) [Ministry of Communications and Information Technology] across the business, we're executing on strategies to improve the stability of our core business.

To briefly highlight Intelsat's financial performance. In the second quarter, we generated revenue of $509 million, a decline of $28 million or 5% as compared to the prior year period. Adjusted EBITDA was $374 million or 73% of revenue. The quarter includes most but not all of the revenue and cost impacts of the Intelsat 29e satellite failure that occurred in April. We're still finalizing some of the commercial elements discussed in our April 30 conference call. We believe that the total impact of Intelsat 29e will be within the adjustments we made to our financial guidance last quarter. So we affirm our 2019 guidance in all respects today.

Before we move to Q&A, just a few words on the C-Band Alliance proposal to the Federal Communications Commission. Our FCC proposal outlines a market-based framework for clearing a portion of C-band spectrum within 18 to 36 months, following the receipt of a final order from the FCC. Since the April earnings call, our focus has been on making technical and operational enhancements to our proposal. Combined, our filings demonstrate our expertise in identifying and addressing the challenges of operating networks in the future environment where satellite and wireless applications will need to safely coexist. Our recent discussions with the FCC emphasized the following 3 elements of our proposal. The first is the value that our proposal will deliver to the U.S. government. We are confident that our proposal generates the greatest value in terms of public interest because we balance protection of essential incumbent services with efficient spectrum clearing. The sooner U.S. service providers have access to cleared spectrum, the sooner the wheel of economic development and innovation will begin to turn.

To address concerns voiced by Capitol Hill, we recently indicated that depending upon the structure of the final FCC order, we are willing to make a contribution to the U.S. Treasury as part of a transaction. We won't let something easily addressable stand in the way of adopting our proposal. We'll defer any questions from the investment community on this aspect of the proceeding until we understand that our proposal represents the path forward and the situation is further defined. The second element of our proposal is the amount of spectrum to be cleared. It is evident that the government seeks to adopt a holistic plan that clears as much spectrum as possible. We understand this objective. Our goal is to provide a path to efficiently clear the spectrum that will allow the U.S. to attain leadership in 5G. However, this should be done without significant disruption to the consumers in businesses that rely on C-band services today. The third element is the primary benefit of our proposal, time. As a transition facilitator, we are solely accountable for a fast and safe clearing schedule. Our committed schedule for clearing spectrum increases the certainty that the expected benefits of 5G deployments and the innovation that will spring from it will accrue to the U.S. economy. Based upon comments made by the FCC, it appears that a decision could be made this fall. The FCC controls the timing of the order. Whenever the order is issued, we will be ready to implement our proposal quickly and efficiently.

Let's move to Q&A so we can discuss this topic and address your questions on the business.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Philip Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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Two if I can. First, Dave or Steve, can you expand on the comments about donating some of the C-band proceeds to the treasury? I understand if you don't want to talk the right level, but are you confident at least that there is a procedure that is legal for that and who could sign off on it? And then maybe can you talk more about replacing the capacity for 29e? What you -- how do you think about the spending on that? What's the opportunity to look like for that capacity?

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Stephen Spengler, Intelsat S.A. - CEO & Director [3]

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Okay. Sure. As we said, we see the availability of this C-band spectrum as accruing a huge benefit to the U.S. economy and to the security posture of the United States. And so just to reiterate what I just said, depending on what the final order looks like, we're prepared to make a contribution to the treasury. We do believe the precedence exists for this for with that we have the ability to do this. But I think the mechanism and how we accomplish that will be subject to how the final order comes out. So I really can't comment any further at this time because it's really dependent on how things progress.

In terms of Intelsat 29e, as we mentioned in the last call, we immediately started developing plans for how we're going to address the loss of this satellite and the capacity from this high-throughput satellite. First thing that we've done is, we've commenced a drift of one of our Intelsat satellites from another region, a Ku-band satellite that's on its way to the North American region that will be coming along, and we're looking at other opportunities within our fleet to support backfilling some of the -- some of that region's capacity. We're looking at other options across the industry where we can potentially cooperate with other operators in bringing some near-term capacity into operations for our customers. In addition, however, we're also looking at whether we can execute a quick procurement of a high-throughput satellite. We believe this is possible in a reasonable amount of time that we can bring some differentiated high-throughput capacity into the network within a few years, and we can accomplish this within our current guidance that we have provided to the marketplace.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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Can you -- if I could follow up on a couple of those, where is that Ku satellite coming from?

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Stephen Spengler, Intelsat S.A. - CEO & Director [5]

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It's coming from, let's say, the African region and it's been made available by the fact that we brought a new satellite into that region and so it's no longer required there.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [6]

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Got it. And then the potential to bring that differentiated capacity on within a few years. So this would be a new satellite that's similar to 29e, or less expensive and less complicated?

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Stephen Spengler, Intelsat S.A. - CEO & Director [7]

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Well, technology has progressed since the Intelsat Epic satellites were built, and so we do think we can contract for a satellite that's going to have even improved economics from a cost per unit standpoint. So we will be able to take advantage of that. We are looking at a high-throughput design, high-throughput multispot design, but we're still working out the exact coverage area at this point in time. So it would, in general, address the North American in particular lost capacity from Intelsat 29e. Just as a reminder, we had another Intelsat Epic satellite Intelsat 37e already configured over Eastern U.S., Caribbean and Latin America that has allowed us to restore customers at the time of the failure.

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Operator [8]

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And our next question comes from James Ratcliffe with Evercore ISI.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [9]

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On (inaudible) of 29e and also Network Services, given that you had the onetime benefit in 1Q, I would -- and also the loss of 29e, I would have expected revenue to be down a bit more than this. Is -- was it just offset from other sources? And is that a positive indication for that business as a whole, or just something else going on?

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Stephen Spengler, Intelsat S.A. - CEO & Director [10]

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Well, I think -- in general, I think, the network business had been tracking to our expectations prior to the issue. We did take -- did have some impact for 29e in Q2, but as I noted, not all of the impact has been recorded. The one thing to keep in mind is that what you don't see is the growth expectations that we had in our plan and in our original guidance for the full year. And so you're going to see -- that's going to play out and that's been adjusted in our new guidance for the full year. So we still see some very positive activity in networks, especially around the Horizons 3e satellite, some new business on Intelsat 33e. We have the new Intelsat 39 satellite launching shortly that will support that business. So we are ramping up services from mobile network operators for broadband connectivity in the remote rural areas, and so we're getting some positive new business in that area as well as growth in our managed maritime mobility services called Flex Maritime. Having said that though that, that sector still is dealing with issues around pricing and some nonrenewals where we have point-to-point services moving to fiber and other technologies.

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James Maxwell Ratcliffe, Evercore ISI Institutional Equities, Research Division - MD & Senior Analyst [11]

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Just a follow-up on Phil's questions. Did I understand you correctly that you thought -- you think you may be able to get another high-throughput satellite but still be within the CapEx guidance envelope that you've put out for '19, '20, '21?

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Stephen Spengler, Intelsat S.A. - CEO & Director [12]

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Yes, that's correct. I mean it, obviously, requires adjustment of priorities and plans, but we do believe it can fit within an envelope.

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Operator [13]

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And our next question comes from Ric Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [14]

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I would follow up, obviously, on a couple of those. You mentioned that the full impact of I 29 did not affect 2Q. I think last quarter we talked about maybe some recurring impact and some nonrecurring impact. Can you update us maybe as far as what -- as we look from 2Q to 3Q, how much more impact should we see and can you just split out that kind of recurring versus nonrecurring?

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [15]

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I think we talked about on the last call, thank you for the question, was $45 million to $50 million of revenue impact for the calendar year. The failure was on April 7 if I remember correctly, so essentially right at the beginning of 2Q. So if you want the full year run rate impact on revenue, you could just run rate that $45 million to $50 million for the year. Before you do that though, you need to take out about $15 million of that impact that was due to onetime outage and repointing credits. Those get netted against revenue, they don't show up as cost. So if you take that $45 million to $50 million net off the $15 million and run rate it, I think, you end up with something like $40 million to $47 million of run rate revenue impact. And then, I don't know whether this was in your question or not, but if you want to step that down to EBITDA, you'd have to take the $15 million of restoration costs and run rate that as well.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [16]

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Okay that helps. And then you also mentioned the -- by the way, David, welcome.

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [17]

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Thank you.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [18]

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When you look at the comments on the amount of spectrum, clearly, that's been an issue with the C-band. I think you mentioned you understand the objective and that can be a path. Can you elaborate a little bit further on that? Because there's been a lot of discussion of exactly how much spectrum is needed when and it would help us kind of understand how you're making that through the consensus process.

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Stephen Spengler, Intelsat S.A. - CEO & Director [19]

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Well. I mean, key to navigating through the consensus process is to be in dialogue with the FCC, which we have been to really understand what their priorities are and what their objectives. And so would understand those priorities and objectives, and as we noted, they are looking to see how more spectrum can be cleared. And we're doing everything possible to balance that with how do we protect the services, our customer services, that are on that capacity and that spectrum today. We've commented in the past that a key to the path to clearing more potentially would be the use of compression and next-generation HEVC technology. So that would be central to that evaluation. Also, key would be engagement with our customers to make sure that they would be able to adopt this technology, how they would adopt, the time of adoption, et cetera. Because these are there networks delivering valuable television, radio and other content across the U.S. So we're committed to finding a way to clear more spectrum, which is the FCC's objective to maintaining quality of customer networks, and we will do what we can to balance those goals to the best of our ability.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [20]

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Okay. And obviously, there has been some legislation introduced. Do you expect any other legislation to be introduced? And it would seem like legislation probably isn't the final path but just what do you expect from the legislative side?

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Stephen Spengler, Intelsat S.A. - CEO & Director [21]

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Well, there has been activity on Capitol Hill. There've been several bills either introduced or previewed. I think the main message from what's happening on Capitol Hill is that there is bipartisan urgency on 5G. All of these initiatives are around how do we -- how does the country clear more 5G spectrum faster? Now different bills may have different areas of focus. Some may focus on spectrum, some may focus on the mechanism, some may focus on protecting incumbents or how a transition facilitator can play. I would just say that we're aligned with those goals in general, in terms of clearing the maximum amount of spectrum, protecting incumbent users and using our expertise as satellite operators and our knowledge of this -- these networks and the spectrum to facilitate a transition. I think in the end, however, it's not clear how congressional legislation will advance, but in our view, the FCC has the authority, has the authority to act and we expect that it will.

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Operator [22]

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And our next question comes from Giles Thorne with Jefferies.

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Giles Thorne, Jefferies LLC, Research Division - Equity Analyst [23]

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I had 3 questions, please. I wanted to start with OneWeb. It's been known for a while. The SoftBank was going to play some kind of master distributor role for OneWeb, and has now been used in the past week or so confirming that. It gives reason, therefore, to confirm whether your historic expressivity around aviation or maritime remains in place? And if so how exactly does SoftBank fit into that picture from your perspective? Secondly, coming back to the question of the impact of Intelsat 29e, and I suppose I'm coming at a previous question from a different angle. You've been clear that the short-term impact -- you've been clear on what the short-term impact will be and it must come as a relief 3 months down the track it's largely playing out as you anticipated. But given this is a very dynamic environment out there for selling into mobility. Does the loss of your vanguard HTS capacity from conversations with customers made you worried about your overall medium-term relevance in this all-important area? And lastly, coming back to the question of C-band, and I'm going to give this voluntary contribution question and rather short, enough time has passed and enough ex partes have been published showing that there have been enough all-hands meetings with the FCC to inform a view on what a voluntary contribution mechanism could look like. So what exactly have you socialized with them? Is this the approach one of fixed proceeds or percentage or a sliding scale? Any color would be really useful at this point.

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Stephen Spengler, Intelsat S.A. - CEO & Director [24]

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Okay. Thank you, Giles. So first, on OneWeb. The short answer is, yes, our agreement with OneWeb is still in effect and includes distribution rights from ability, government and oil and gas opportunities. So just want to clarify that. You asked about Intelsat 29e and mobility. I think you're right in the sense that Intelsat 29e was part of our integrated managed service network that is largely serving mobility and other applications. So there are some territorial gaps in that network now, but at the same time, we recently put Intelsat -- sorry, Horizons 3e into operation, which gives us the entire coverage of the Pacific all the way through Alaska and parts of the U.S. So we still have a very substantial network that's almost completely global at this point in time. We're still serving the main maritime groups around the world and as indicated earlier, we're seeing some good growth on those managed mobility services. We see opportunity as well in the aeronautical area where we're still covering major routes across the globe with that platform. The performance has been very good on these Intelsat Epic-backed managed services. Our customers are getting excellent performance and we'll continue to drive new business and add area. I think that there are probably some delays in some of the things we are working on. The FlexExec, perhaps, in the U.S., obviously, but we're continuing to move forward, building out our distribution partners and growing those parts of our business. And then the last question on C-band contribution. I'd really not -- I'd really rather not comment on the specifics of what's possible because that is all subject to how the final order and arrangements are determined. We do believe there are several paths to do it, but I don't want to speculate on what that could be at this time because it's just too early to say.

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Giles Thorne, Jefferies LLC, Research Division - Equity Analyst [25]

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Fair enough. And just to come back to the 29e question. Anecdotal evidence coming out of airlines and mobility distributors is that one of the key criteria when making a buying decision is visibility on road map to lower cost per bit. So being able to put in front of potential customers, your future investment plans and where that would take economics has been part of why people have won business. It feels that you're not in a position to be able to present a fulsome cost per bit road map. Is that something you're finding as an issue?

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Stephen Spengler, Intelsat S.A. - CEO & Director [26]

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I would disagree with that statement, Giles, because we talked about, last quarter, our plans and efforts that have been evolving over the last couple of years and developing the next generation of high-throughput services on software-defined satellites. We believe that this is something that is in development, that's becoming more real and is going to be significant for the future. These next-generation satellites are extremely flexible. They can come out of the factory at a faster clip than previous generations. They are extremely capable satellites from a performance standpoint. And most importantly, they have significant improvement in a cost per CapEx per bit standpoint that allows us to remain competitive over the longer term. And so these geo satellites are going to continue to be important for the future. It's part of our road map. We're sharing that with customers today, and as indicated in the last call, our objective is to get to an order for one of these satellites on or about the end of this year or a little bit after, but we're very much on the path to doing that.

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [27]

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Giles, I might add that if you look at the mobility business, year-to-date actual, despite the loss of 29e, mobility was up. And if you were to pro forma out the 29e failure, it would've been up in a way that's pretty healthy. So I think all of that supports what Steve said in terms of how customers are thinking about us in the mobility business despite the loss of 29e.

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Operator [28]

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And our next question comes from Lance Vitanza with Cowen.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [29]

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So on the Network Services side, the revenue -- if I am the reading the commentary correctly, the revenue appears to be up sequentially when we adjust for the onetime accounting benefit that you had in 1Q '19. I'm talking about sequentially, and then, obviously, the satellite failure. And so from -- again the commentary seems to suggest that it was mostly the new Asia-Pacific start. Could you discuss sort of whether there are other opportunities either in the region or perhaps in Latin America that could follow? And just sort of generally what the pipeline for new business looks like? I'm not talking about the backlog but the pipeline for new deals that may be in the works that you haven't yet announced.

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Stephen Spengler, Intelsat S.A. - CEO & Director [30]

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Sure. So as I indicated earlier, and you dissected the numbers well because if you take out a few things that have happened in the networks business, we're actually having a decent year in that area. And certainly the Horizons 3e and new start business for mobile network operators in Asia is an important part of that. At the same time, we have expanded our mobility services on that new satellite and globally, in general, as David was just referencing. And we've brought on a new customer which we talked about this quarter that's using Horizons 3e and Intelsat 33e for remote community broadband connectivity. And so we still see a lot of growth opportunities on those 2 satellites across Asia, across Africa as well. I should also mention corporate networking is growing decently in Africa for those assets as well. So there is still excellent growth opportunities in networks, not only for mobile network operators, for some of the enterprise services as well as, of course, the mobility services that we've been talking about. I think Latin America is probably going to be a little bit slower. We have -- we still have Intelsat 37e there, which was very critical for our restoration efforts around after the Intelsat 29e failure. So we do see opportunities for growth on that asset, but it's going to be a little bit slower as a region, in our view.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [31]

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And then just as a follow-up. In terms of prospective Epic business, I'm just trying to dig in a little bit on the avionics opportunity as distinct from mobility. And maybe I should be referring to it as aeronautics, and I think that's what you termed it in your commentary. But do you have any data points there to suggest that this is going to be a real opportunity? I mean I have heard, obviously, a lot of people talking about it. And I'm just trying to get a sense for the timing and to the extent to which that you as a supplier really think that this is viable?

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Stephen Spengler, Intelsat S.A. - CEO & Director [32]

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Sure. I -- we think that obviously mobility is a great area of longer-term growth opportunity for our business. And aeronautical mobility or aviation mobility is absolutely part of that, whether it's providing capacity for other operators or -- for service providers or developing some of our managed services. A data point we can give you is something from NSR that they forecasted $1.36 billion of growth from mobility applications between now and 2023. About 2/3 of that is from aviation broadband. So it's a pretty large proportion of the expected growth in that sector and it's an area of focus for us.

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Lance William Vitanza, Cowen and Company, LLC, Research Division - MD & Cross-Cap Structure Analyst [33]

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Well, it sounds like -- let me try to be a little bit more clear. It sounds like we're -- you're referring to the sort of the consumer-driven broadband into the cabin type application. I'm trying to get at the more what I call avionics, which is really the communications between the pieces of equipment that are on the jet itself back to the ground for maintenance, for repair, et cetera. Is that a viable, distinct category? Or am I making too much out of that?

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Stephen Spengler, Intelsat S.A. - CEO & Director [34]

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I think over time that will be an important category when you think of avionics and sort of Internet of Things in terms of monitoring operational equipment on planes. A lot that, of course, is being served by L-band services today, especially in the cockpit. But over time, as broadband connectivity is established on aircraft, I think we could see some more applications being served on that plane. But for the most part, when we talk about aeronautical or aviation applications, we're talking about broadband connectivity for the cabin.

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Operator [35]

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And our next question comes from Anthony Klarman with Deutsche Bank.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [36]

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A few questions. I guess while we're on Lat Am, in the SG&A, you called out some increase in bad debt expense largely related to customers in Latin America and Europe. I guess I was wondering if that was correlated to some of the nonrenewal that you mentioned on the revenue side in Network Services and how we should think about whether some of their drags into the back of the year?

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Stephen Spengler, Intelsat S.A. - CEO & Director [37]

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Anthony, I think the -- just thinking through the specific bad debt in Latin America, I think probably what we're seeing in Q2 relates to Venezuela, which was related to the Intelsat 29e failure, and that's probably the biggest impact in that particular region in Q2.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [38]

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Okay. Got it. And then there is a mention in both direct costs and SG&A regarding staff-related expenses as part of the rationale behind the higher expense increase, and I assume that some of that relates to sort of transitional expenses and staff-related expenses associated with 29e. But maybe to get to the heart of an earlier question, I'm wondering how much of that will nonrepeat or nonrecur as you think about the back half of the year? And I guess really what I'm getting at for you, Steve, or for David is, just how to think about the correct pacing as we look at where the first half finished up and what your guidance implies for the back half of the year?

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [39]

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Sure. I think the primary -- these numbers get pretty small, so forgive me, but the primary driver of those staff-related expenses would really be the investment in the P&L that we are making for our managed services businesses. I would expect that to continue into the second half, frankly. We think managed services is a very important part of our future. There are also some compensation accruals that are running through that line item that may or may not manifest themselves in terms of cash in the second half of the year. And then some ones and twos thereafter, but those are the primary drivers.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [40]

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Got it. Okay. And then maybe finally on C-band. Rather than delving into the voluntary contribution, Steve, I was wondering if you guys have further refined any of your views around potential taxes? And I think previously you had said that this was not considered an asset sale, at least in your original views, but if you had any views as to how proceeds that might come in would be taxed. And then maybe, David, as an add-on to that, with a fresh set of CFO eyes, if you had any sort of thoughts as to how the application of proceeds might work? Or where you might target some deleveraging in the structure going forward?

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [41]

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Sure. I'll take that. Look, in terms of tax, what I would say, I'd repeat what Steve said earlier. We don't currently have a deal. So what we are really focused on is deal execution and making something happen here that's favorable for all of us. Once we have a structure and it's finalized, we'll analyze it and try to understand more about what the tax implications are. We expect to pay whatever is appropriate in the U.S. and Luxembourg, we're subject to tax in both jurisdictions. But I think it's far too early to say what the potential tax exposure might be in a deal related to C-band. In terms of use of proceeds, I would say, again, it's not something I'm spending a tremendous amount of time thinking about. We're focused on making a deal happen. But I do think it's fair to say that a significant deleveraging would be a very important part of any use of proceeds if we're successful in making a deal.

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Operator [42]

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And our next question comes from Jason Kim with Goldman Sachs.

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Jason K. Kim, Goldman Sachs Group Inc., Research Division - Senior Analyst [43]

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I have a longer-term question for Steve and a follow-up for David. So for Steve, as I look at some of your satellite peers, a few of them are pursuing different strategies in terms of investment in different satellite networks and business opportunities. Intel has had levered balance sheet for a long time, so you've always had to look to be as efficient as possible. But to the extent that your leverage can come down, are there initiatives or M&A our other investment that you would think you want to make to help the top line trajectory of the business long term? Or do you see the current level of investments in the core business as efficient to write out the new-term pressure and see a revenue stabilization sometime in the future? Just your high-level thoughts here will be helpful. And for David. Obviously, you're joining at an important juncture for the company. Putting aside the C-band process, if you had a blank slate, what do you think is appropriate leverage for the business from your perspective given the changes in the sector in recent years?

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Stephen Spengler, Intelsat S.A. - CEO & Director [44]

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Okay. Thanks, Jason. I think the most important thing to keep in mind is that we are focused on, right now, stabilizing the business and returning to growth. I mean growth is still the key over the long term. And so that's where we are now. And when -- as it relates to C-band, as David just indicated, our first priority would be to address the balance sheet and our capital structure. But, of course, as we do that, it creates opportunities, and we always are looking across the landscape as to where to deploy capital or resources to grow. We have a number of those growth initiatives underway now from a organic standpoint, but as we always have, we will look at inorganic situations to enhance that strategy in the future. So we don't comment on specific things to do, but you've seen some of the smaller investments that we've made over the last few years. It's focused on how do we accelerate technology development to get access to new platforms, distribution. We would certainly look in those areas as well as others into the future.

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [45]

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In terms of leverage, I guess what I would say is, I believe the company has previously provided guidance that 5 to 6x debt/adjusted EBITDA is a reasonable target range. I don't see any compelling reason to update that guidance currently. Again, our focus is on deal execution currently as it relates to C-band. I would say that, obviously, whatever capital structure we settle in with needs to be sustainable and provide enough leveraged free cash flow for reinvestment in the business so that we can get the top line turned around. And I think deciding exactly what that means in terms of capital structure is still ahead of us.

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Operator [46]

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And our next question comes from Mike Pace with JPMorgan.

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Michael Vincent Pace, JP Morgan Chase & Co, Research Division - MD and Senior Research Analyst [47]

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Sorry to go back to Network Services, but a quick one. Just on the onetime revenue credits and repointing costs, I'm just wondering you've stated that there is more of this or little bit of this to come. And I am just wondering why that doesn't happen almost initially or clearly in the first couple of months post that? And I do have a couple of other questions that I'll do after.

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Stephen Spengler, Intelsat S.A. - CEO & Director [48]

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Mike, just to clarify that. I mean there -- when something like this happens, it's very complicated situation. So there are several customer situations that we're still working through for very, very large networks. And so we're working through those issues and so it's just -- we just don't have a clear answer as to how it's all going to sort out from a financial standpoint. But it's within -- everything we're working on is within our expectations at this point.

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Michael Vincent Pace, JP Morgan Chase & Co, Research Division - MD and Senior Research Analyst [49]

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Okay. Fair enough. And then I guess on the first quarter call, you highlighted probably some incremental weakness or headwinds in the government and media businesses. And I'm just wondering is this playing out maybe better than expected or as expected or is it really more of a timing into the second half? Because it seems like the run rate there is doing a little bit better than what you stated. And then, Steve, just a bigger-picture question for you in, clearly, much longer term. But with all of the hype in 5G, and clearly, you guys were involved here with the C-band spectrum, but I'm also just wondering how your satellite infrastructure plays a role in 5G much longer term in the U.S. and globally?

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Stephen Spengler, Intelsat S.A. - CEO & Director [50]

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Sure. Let me just touch upon media and government first. And I would say that what we talked about last quarter in terms of softness in media and government is playing out as expected. In the media space, we've seen more nonrenewals than we originally had anticipated entering the year. And we've talked about the reasons for that. It's customers that are actively trying to control costs and be more efficient and shifting some of the ways that they utilize our capacity by turning off SD channels or compressing a bit or doing some different things. And so that's playing out as we expected over -- we expected to play out over the course of the year as we indicated. In the government side, we talked specifically about a couple of nonrenewals in the first quarter that affected our view of the year. And so those nonrenewals have full year impact. We don't have any other events that would suggest that our guidance would be off from what we anticipated in that area.

Regarding 5G, this is a very important area for us as a company. We believe putting aside our efforts around 5G and C-band. We believe that 5G is an important catalyst for the cellular industry just as it is for the broader telecom industry. It is the opportunity for satellite services to be incorporated into an industry-wide, telecommunications industry-wide standard for the first time. And so we and other operators actually have been very engaged with the 5G standards bodies. These are the regional entities that are working on the 3GPP standard. And satellite services and satellite network aspects are being incorporated into that standard in the Release 17 that's coming up in the near future. So we view this as a very exciting opportunity. It's going to allow better interoperability between satellite networks and wireless networks and terrestrial networks. We believe it has the potential to stimulate sharing of R&D and technology and chipsets and really make some of the services that we provide more efficient and cost-effective for end customers going forward. And the importance of that is that it will allow us, for the first time, to reach some scale and cost structures that will hopefully unlock new applications and services of the future on a hybrid basis with other telecommunications technologies.

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Operator [51]

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And our next question comes from Arun Seshadri with Crédit Suisse.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [52]

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Just a couple things from me. One, just wanted to ask on the government renewal side. Sounds like you had pretty good renewal rates this quarter. If you could talk about any -- could characterize any changes in sort of pricing or anything you've observed? And then separately, how was -- I just wanted to update on FlexAir? How was that being competitively received in the marketplace?

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Stephen Spengler, Intelsat S.A. - CEO & Director [53]

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Sure. So you are correct. Government renewals in Q2 were very solid, above 90%. So that's playing well. We are seeing some price adjustments on those renewals. Again, a lot of these government services are 5 years old and so there is some adjustment for that, but volumes are holding up in that sector. So that's all good news. In terms of FlexAir, we're just getting moving on FlexAir. We've been very active in validating the terminals that can be used with this Flex platform. As you know, the government users have a wide range of terminals that they use on airborne systems. And so we're going through the process of verifying and certifying those terminals onto the Flex network. We have our distribution channels set up. But in terms of expectations, we saw this as a launch year for that service. We have good interest from our customer sets, but we don't see that having a significant impact on 2019. It's really something we're going to ramp this year and get moving forward into next year.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [54]

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Got it. That's helpful. And then today as far as overall 2020 outlook goes, I know you don't want to comment specifically, guidance comes out later, but just wanted a sense for your visibility today vis-à-vis 3 months to go. And what are you able to say on 2020?

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Stephen Spengler, Intelsat S.A. - CEO & Director [55]

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Well, first of all, as you know, we're not going to comment specifically about 2020. Our objective is to close out this year and achieve our goals and objectives that we've laid out. We're just starting into our business planning process and budgeting process for next year and so it's really premature to say anything.

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Arun A. Seshadri, Crédit Suisse AG, Research Division - Analyst [56]

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Fair enough. Last thing from me is, on the reduction in backlog, I assume a decent amount of it or a little bit more than half of that reduction in the backlog sequentially from $7.9 billion to $7.5 billion was from 29e. If you could just sort of -- is there any way you could quantify that in terms of how much was regular way versus how much specifically was -- of that $400 million reduction was 29e? That would be helpful.

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [57]

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That's not a number that we disclose, but I can tell you that the loss of 29e was a substantial driver of the drop in backlog from the $7.9 billion to the $7.5 billion sequentially that you mentioned.

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Operator [58]

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(Operator Instructions) Our next question comes from David Phipps with Citigroup.

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David Lawrence Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [59]

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Maybe you can level set the market on some of the milestones that you're thinking about for the C-band as we go through the rest of the year like when do you think it comes up on the FCC calendar? Any other back and forth that you might have and some -- and over timing as to when you could start some of the process?

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Stephen Spengler, Intelsat S.A. - CEO & Director [60]

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Well, the time line is 100% controlled by the FCC and in particular the Chairman's office. All we really have to go on is the Chairman's statement that he wants to bring us forward in the fall. And so you can take that literally, which means any time in September to December time frame. We do see a lot of engagement at the FCC on this topic, so we know they're working hard on this. It's a priority. And we're engaged with them at the Chairman's office, the other commissioners and the bureaus accordingly. So we're doing everything possible to help them move forward and conclude on this in that time frame. What we've also said though is that we've continued to do our work in preparation for how do we manage the transition, how do we proceed on things commercially. And so we have developed all of our plans in those areas technically as well. We have our designs ready to go with our satellites. So what we said is when the FCC comes out with an order, we're going to be in a position to move very quickly, and we believe faster than any other option out there.

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David Lawrence Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [61]

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Has anything come up in the discussions. The T-Mobile-Sprint merger has been contested and I'm sure you'd love to have an extra bit if T-Mobile is not allowed to pursue the Sprint acquisition. So has any of that factored into the timing or discussions that you've had so far?

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Stephen Spengler, Intelsat S.A. - CEO & Director [62]

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I don't know because I -- the FCC doesn't necessarily share that with us. And in terms of T-Mo and Sprint and what it means, we can't really speculate on who the participants may be in any market-based process down the road. What we do know is that our mid-band spectrum is unique. We think it's valuable and important for 5G deployment in the U.S. And therefore, we think it's going to have a lot of interest when we get there.

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Operator [63]

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And our next question comes from Chris Quilty with Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [64]

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I was wondering if you could give some specific numbers for either revenues or the growth rate for the mobility business, which I think you've done in the past?

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Stephen Spengler, Intelsat S.A. - CEO & Director [65]

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We have. We have -- we've talked about what mobility is in terms of our company revenues. It's running at about 13% of the company revenues. But from a quarterly standpoint, there has been impact on Intelsat 29e in the quarter. So while there -- we're seeing services growing in mobility around the world, the Intelsat 29e impact pretty much wiped that out for the quarter.

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David M. Tolley, Intelsat S.A. - Executive VP & CFO [66]

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So, Chris, I would add. As I said previously on this the call and I'm not prepared to give any specific numbers. But as Steve indicated, about 13% of the top line is mobility. I said earlier on the call that mobility was up on an actual basis first half over first half even with the impact of 29e.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [67]

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Got you. And can you characterize is the nature of the mobility revenue shifting at all from transponder services to managed services? And is there some sort of goal you would like to see over the longer term?

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Stephen Spengler, Intelsat S.A. - CEO & Director [68]

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Well, in terms of volume, the overwhelming volume for mobility services is by the way of transponder services. But having said that, we're investing in our managed services for mobility, for maritime, for aeronautical, for consumer broadband as well as business jet as well as government. And so we think that there is a great opportunity over the long term to enhance these managed services in those sectors. And as I indicated earlier, our maritime managed service Flex Maritime has done very well since it was introduced last year and continues to grow quarter by quarter as more ships are connected as, they upgrade from L-band to real broadband services and as we add additional distribution partners in different parts of the world. So I can't really comment right now about what the percentage or mix going to be, but we're going to see more and more of these managed services as it's an attractive way for service providers to grow very efficiently on a global basis.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [69]

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And one question on the government business. I was a little intrigued by your mention that you saw a decrease in LPTA contracting, which was always intended for pencils and staplers not advanced services. Is that something that you saw as a onetime issue? Or are you actually seeing directives coming from the Pentagon or the administration to kind of rightsize the use of that contracting vehicle?

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Stephen Spengler, Intelsat S.A. - CEO & Director [70]

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Yes. I think the pressure came largely from Capitol Hill. It was in some of the NDAA language, and we do know that there are a number of people on senators and congressmen that identified this as a very inefficient way of buying sophisticated services. And so this year, we've seen a complete reversal and we've seen a lot of -- a lot more, if not all, of the services on a -- total value basis and not just on lowest cost, technically acceptable. And so we're glad to see that. It allows us to differentiate what we bring to our customers. It allows us to talk about past performance and how we performed for these specific customers, and so we really do welcome that change. And we think it's a much more intelligent way to be buying sophisticated, mission-critical services for the DoD.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Founder & Partner [71]

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Got you. And final question on Latin America. Continued headwinds there. If you were to rank the primary issues you're dealing with there, is it primarily competition, end market or available capacity?

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Stephen Spengler, Intelsat S.A. - CEO & Director [72]

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I think it's a mix of a number of things. I think that there is maybe a slowdown in demand in certain areas, and there is plenty of supply, for the most part, in the region at the moment. But I don't think it's necessarily long term. It may be just a cycle we're going through until it comes back in the balance.

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Operator [73]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to Steve Spengler, Chief Executive Officer, for closing remarks.

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Stephen Spengler, Intelsat S.A. - CEO & Director [74]

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Okay. Thank you, everyone, for joining our call and thanks for the questions as well. We look forward to meeting with investors at upcoming investor and industry events in September. Thank you for joining us.

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Operator [75]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone, have a wonderful day.