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Edited Transcript of I earnings conference call or presentation 27-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Intelsat SA Earnings Call

LUXEMBOURG May 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Intelsat SA earnings conference call or presentation Thursday, April 27, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dianne VanBeber

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

* Jacques D. Kerrest

Intelsat S.A. - EVP and CFO

* Stephen Spengler

Intelsat S.A. - Director and CEO

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Conference Call Participants

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* Andrew Spinola

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Anthony Klarman

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

* Arun Seshadri

Credit Suisse AG, Research Division - Analyst

* David Phipps

Citigroup Inc, Research Division - Director and Senior Industry Analyst

* Lance Vitanza

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

* Michael Pace

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

* Nick Dempsey

Barclays PLC, Research Division - Research Analyst

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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 First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please note, today's conference is being recorded.

I would now like to hand the conference over to Dianne VanBeber, Vice President, Investor Relations and Corporate Communications. Please go ahead.

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

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Welcome, everyone, and thank you for joining Intelsat's First Quarter 2017 Earnings Conference Call. Earlier this morning, we issued our earnings release and published a quarterly commentary, both of which are available at intelsat.com. The quarterly commentary provides the investment community with the information and context that you need to analyze our results in advance of our earnings call. We use the quarterly commentary to make your time with us more efficient and to maximize the time on this call for Q&A with management.

During today's call, we will discuss adjusted EBITDA and other financial metrics not prepared in accordance with U.S. generally accepted accounting principles, including EBITDA and related margins and free cash flow from operations. We provide reconciliations of these metrics to the most directly comparable U.S. GAAP measures in earnings release and on our website.

Later today, we'll be filing our quarterly report on Form 6-K with the SEC. You can find a link to the filing on our website.

Additionally, today our conversation 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 annual report on Form 20-F and 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 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 or in substance, any participant in the call who is not a representative of Intelsat.

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

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

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Thanks, Diane. We continue to make solid progress on our operating initiatives, creating a foundation to drive future growth. This foundation includes continued progress on our Intelsat EpicNG program, expansion of customers for our maritime and enterprise-managed services and the successful marketing of Intelsat EpicNG for government applications.

Turning to our financial performance, first quarter revenue of $538 million, a decline of 3% as compared to the first quarter of 2016, reflects our continuing business transition, including previously noted headwinds from point-to-point services and lower pricing on wide-beam satellites. First quarter revenue also reflects payment challenges in Venezuela and certain non-renewals of VSAT and cellular backhaul services, some of which are related to the challenging economic environment in Russia.

Adjusted EBITDA for the first quarter was $410 million or 76% of revenue. This demonstrates our discipline with respect to operating expenses, especially while revenue was still transitioning to growth. Over the course of 2017, as our new satellites and services are deployed, we will be positioned to capture new revenue opportunities to transform our business. Nearer-term our second quarter will include the wind down of the CBSP contract, adding to the headwinds to be worked through until the volume on the new Intelsat Epic satellites and services begin to ramp up.

Our operating priorities for 2017 are the building blocks to a successful year. They're putting into place the right capabilities to return to growth. The first priority is to deliver on our launch schedule. With Intelsat 33e and Intelsat 32e in service, we can turn our attention to the launch schedules for Intelsat 35e and Intelsat 37e. We are carefully watching the manifest for SpaceX and Arianespace, where we have committed dates in late June and late third quarter, respectively.

The second priority is to execute on the commercialization plan for Intelsat Epic. Overall, the Intelsat EpicNG fleet has over 140 customers. The average contract term for our total Intelsat Epic backlog remains in excess of 5 years. Incremental commitments span government and all of our network services applications, including enterprise and wireless, but with most activity on the mobility front. Since Intelsat 29e entered into service a little over a year ago, we found that our mobility customers are the fastest adapters of the Intelsat EpicNG technology. They understand the value that Intelsat EpicNG delivers and are power users of the fleet. We've made steady progress with both our enterprise and wireless service providers, but in our experience there is a longer conversion cycle than with our mobility customers. We've prioritized initiatives that accelerate the adoption of Intelsat EpicNG services. These include, partnering with capable distributors, deploying our IntelsatOne managed -- IntelsatOne Flex managed services and supporting the development of innovative hardware. This quarter, we signed contracts with several IntelsatOne Flex enterprise customers. The commercialization of IntelsatOne Flex is expected to contribute to new growth in the second half of the year. Additionally, Liquid Telecom, a leading broadband service provider in Africa, will be an infrastructure partner as we rollout IntelsatOne Flex on the continent.

Future revenue growth depends on working with innovators across the ecosystem to unlock new applications for our services. Our development partnership with Kymeta for its 70-centimeter and 20-centimeter flat panel antennas was converted into an equity investment in the first quarter. In March, we joined with Kymeta to launch its new KALO service, which employs a simplified usage-based model for next-generation mobility services.

Our third operating priority is to expand our government business through sales of Intelsat EpicNG services. In the first quarter, we activated services for approximately 180 megahertz of Intelsat EpicNG capacity for use in government mobility in "Comms on the Pause" applications.

Our fourth priority for 2017 is to emphasize financial discipline with respect to our fleet investments and development of our orbital rights. We are on track with our capital expenditure program for 2017. Today, we reaffirm our revenue and adjusted EBITDA guidance for 2017. This reflects our expectations for launch timing, the commercialization of Intelsat EpicNG and our managed service offerings and continued stability in the markets we serve.

Before we move to your questions, a few words on the status of the conditional merger with OneWeb. Last week, we issued a news release extending the exchange offer end date to May 10, 2017. We continue to work to complete this merger, which if consummated will significantly strengthen Intelsat's capital structure, while creating an industry leader unique in its ability to provide affordable broadband anywhere in the world. Because the exchange offers are currently outstanding, we will not be able to address questions on those offers during today's call. As we move forward, we continue to focus on creating the company with great growth opportunities and a strong financial foundation.

With that, we're ready to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Michael Pace from JPMorgan.

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Michael Pace, JP Morgan Chase & Co, Research Division - MD and Senior Research Analyst [2]

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I'm wondering you noted some non-renewals in Russia, and I'm wondering, historically, you've typically just reduced prices to keep those customers. So I'm wondering, what's changed over there and do you think we've seen the trough or maybe more to come? And then can you also update us if you see anything in Latin America on, I guess, some similar business or price pressures to the economy there?

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

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Sure. Yes, good morning, Mike. First of all, the situation in Russia-- I wouldn't consider it a trend or something that's ongoing. It was a particular situation where a customer -- customer's business had some cost pressure on it, and they opted to serve their network with less reliable, less optimal terrestrial services. So they backed off some of the satellite services for the time being. So I think, it's a one-off situation, and not reflecting an overall decrease in demand for say cellular backhaul services in that region. Latin America, we see is pretty stable, performing to our expectations and from a pricing standpoint, like other parts of the world, it's showing stability over recent quarters.

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Michael Pace, JP Morgan Chase & Co, Research Division - MD and Senior Research Analyst [4]

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Okay. Moving to the media business. Again, you also talked about some non-renewals from retiring assets. I'm wondering, if you could add a little color there. And then as it relates to some of your media deals, it looks like you signed the Starz deal, and I'm wondering, as you renew remaining media deals over the next couple of years, getting into the 2019 time frame. I'm wondering if you can quantify the amount of renewals that are on MPEG-3 that are likely to transition to MPEG-4 and what impact that could have as well?

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

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Okay, I can give you some color around that second question, in a second. Regarding, yes, the non-renewals in the media sector. Essentially, the media business is really driven by volume at the moment. We're getting good growth across the new assets we put in place, Intelsat 31, Intelsat 36. But there were some volume declines, a little bit related to CONUS C-band which is a headwind which we've talked about in the past. But the other declines were 2 particular projects in customers that we did not provide continuity for on our new satellites. It was a business decision on both sides. So these were situations that were outside of our media neighborhoods and not in the core part of the media business, and were not unexpected. In terms of CONUS and where it stands with the move to MPEG-4 and greater levels of compression. At this point, we estimate that more than half of the customers that would be eligible for compression enhancements or movement to MPEG-4 DVB-S2 have already made that transition. We have indicated that we have some customers in the 2018, 2019 time frame that are still up for that conversion. And so, we're looking at those. We do not expect it to be the same magnitude that we saw in 2015. We're having conversations with those customers now about their plans in that regard. I think one of the challenges that the North American media companies have in this regard is to determine whether to move to MPEG-4 or to proceed to HEVC and HEVC is a technology that is especially well-suited for 4K. So these are the things, the trade-offs that they're assessing. We do expect that as some of these compression situations occur, there will be some pickup in 4K transmission going forward as well.

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Operator [6]

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The next question is from Andrew Spinola of Wells Fargo.

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Andrew Spinola, Wells Fargo Securities, LLC, Research Division - Senior Analyst [7]

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Steve, I wanted to ask specifically about a comment in the commentary, where it referenced that the 33e satellite has now seen all of the Intelsat 904 customers moved over. And I'm wondering, sort of my purpose is that I think about how much additional revenue can be generated by 33e? I'm wondering if you can kind of share some color on how full that satellite is, now that it's taken on all of the 9 series customers?

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Stephen Spengler, Intelsat S.A. - Director and CEO [8]

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Yes, there's still a lot of growth potential on 33e. It's a satellite that's expected to be 2 to 1 new business to transitioning business over time. So we still have a large amount of capacity available on that satellite. And just as a reference point, the 904 had about 60 gigabits of capacity. The 33e has about 40 gigabits of capacity. So it has a lot more opportunity for growth. I did make a reference to the sales cycle and how long it takes to bring on some of the network services-type customers in enterprise and cellular backhaul. We are experiencing a bit longer sale cycles as compared to mobility. Mobility as a market is really driven by great end-user demand by passengers on aircraft and then by the airlines anxious to get connectivity in the aircraft. So the service providers in that segment have large backlogs of planes to connect, and therefore, drive a lot of demand. In the other part of network services, the enterprise and the cellular backhaul, these are situations that do have good demand and they do have need to expand their network. And we do see that our offering with higher performance and better economics is resonating with these customers. But it takes a bit longer, because there's a business case, there's an investment case that these operators need to make, and it's often developing markets. And so, it takes a little longer to work through that more complex sales engagement.

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Andrew Spinola, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

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I guess, would you be willing to maybe help me think through how much additional revenue could come from 33e. So I would have assumed that with the higher capacity levels that customers who have transitioned to, maybe they would only be 30 million of incremental revenue that could be generated from 33e with additional capacity sales. Do you think you can do better than that?

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

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There is still a large volume of available capacity to sell on 33e. And we expect it's going to ramp up over the 36 months that we've talked about in terms of the ramp period for an Intelsat Epic satellite. So it is an area of great focus for our sales and marketing teams at the moment.

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Andrew Spinola, Wells Fargo Securities, LLC, Research Division - Senior Analyst [11]

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Fair enough. Specific to the Starz renewal, given it sounds like they chose HEVC based on their announcement with Arriss. I was wondering, can you give us any sort of quantification in terms of maybe what the step down in capacity if there was any that occurs with a contract renewal like that when they do move to the newer compression types?

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

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I think every customers' network is a bit different in how they operate. But in the case of Starz, there was a relatively minor step down in capacity with this renewal. So it was not a major reduction, but there was a reduction in terms of volume.

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Andrew Spinola, Wells Fargo Securities, LLC, Research Division - Senior Analyst [13]

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Fair enough. And last question for me. I guess, just if I'm looking at your government guidance, you renewed all your guidance and if I take the first quarter run rate and take out the $25 million sort of my estimate for the CBSP contracted, it has you down more like 11% year-on-year, and your commentary on the guidance -- the government market in the commentary wasn't particularly bullish. So I'm just wondering how you see that market ramping such that you could stay within your guidance for the year?

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Stephen Spengler, Intelsat S.A. - Director and CEO [14]

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Well, we only give our customer set guidance once a year. And so that was our view at the very beginning of the year. And so what we have reaffirmed today as our overall guidance for the company's revenues, we do have -- you are correct in terms of the impact of the CBSP contract. And so that is a headwind that will hit that business starting this quarter, Q2. But I did mention in my opening comments some success we're having with Intelsat EpicNG in the government sector. We have brought customers on to Intelsat 29e and 33e for our government customers. We're actively marketing those services to that sector today. So we do see those types of highly demand -- demanding customers valuing this higher performing capacity. And we have active sales activities going on in that sector. And so, we still feel that we're going to be tracking to our expectations on our government business.

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Operator [15]

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The next question is from Anthony Klarman of Deutsche Bank.

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Anthony Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [16]

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Couple of follow-on questions. So, I guess, getting back to the concept of guidance a little bit. Your reported numbers obviously have you pacing below the expectation range for adjusted EBITDA, and Steve you mentioned about how you see the ability in the back half of the year kind of captured some of the new business wins to offset, obviously, the headwind in 2Q, and obviously, getting the guidance range. Could you talk a little bit about what that pacing looks like and how we should expect kind of the year to pace out as it relates to the guidance range for adjusted EBITDA?

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Stephen Spengler, Intelsat S.A. - Director and CEO [17]

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Yes. I think you just referenced one fact for Q2, is that we will have the effect of the government contract, year-on-year kicking in, in addition to the other headwinds that we have. But as we look through the course of the year, we have 4 new HTS satellites in operation over -- by the end of the year. Obviously, the launches of Intelsat 35e in the end of June, current schedule, and the launch of Intelsat 37e at the end of the third quarter are important for us to hit that guidance. The ramp-up of our mobility services and our Epic services is another key driver over the course of the year. And our new managed services that we are bringing to market are also expected to ramp over the course of the year. So for those reasons, we are comfortable with our guidance. On the other side, there are risks and we made some assumptions. We made some assumptions around the specific launch timing. And so there is timing risk. There is obviously the risk of anomalies that we always have. There's also timing in ramp of services and Epic commercialization that we have to factor in, and there is market stability that we always have to contend with. So we felt on balance that we're still tracking towards our guidance range with the initiatives that we have in taking into consideration some of those risks.

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Anthony Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [18]

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You mentioned 35e and 37e, I think the in-service dates that you published are 4Q '17. I guess, does that imply that kind of 4Q is sort of the heavy quarter as you think about the distribution of adjusted EBITDA to kind of get to the guidance range?

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

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Well, we'll have a lot more capacity available in the fourth quarter, obviously, to your point. And with that capacity comes a ramp-up of services, whether it's capacity services or managed services as well.

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Anthony Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [20]

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Great. And then in the quarterly commentary, there was a quick little comment at the end of the 2017 operational priorities about optimizing your capital expenditure plan. And I guess, I was wondering, I know you haven't provided forward CapEx guidance in light of the OneWeb merger, but I was wondering if you can comment on sort of things you're thinking about in terms of optimizing CapEx, and given that it was under the 2017 operational priorities, whether things that you thought you were able to do this year on the CapEx side to help optimize cash flow of the business?

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

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Well, I think the point was that we're on track for what our plans are, even though we haven't given you specific guidance on what on-track means. We're always working to optimize our capital expenditures. As you know, we have invested in a mission extension vehicle to help extend the life of one of our satellites, which we think is an important step, not only to optimize CapEx, but to extend revenues for our customers. We are maintaining financial discipline around our operating expenses as noted. So there are a number of things we can do. We watch -- we made budget for something, but we also watch every expenditure and approve every expenditure as we go forward to make sure that we are wise in our capital and operational spending.

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Anthony Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [22]

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And last question. I'll take a stab at OneWeb question. On the conditional combination, I think there's a date in the merger document at the end of May, around which the debt exchanges are supposed to be consummated. Obviously, that's only a month away. I mean, why don't want to ask about exchanges. I guess, my question is, have you thought with SoftBank through the ability to potentially extend that date to provide a little more runway to kind of conclude some of the things that you guys are discussing with respect to, trying to complete the debt exchange?

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Stephen Spengler, Intelsat S.A. - Director and CEO [23]

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Yes, you are correct in that the conditional merger agreement, called for a 90-day period from the announcement for execution of the debt exchanges. And that brings us to right to the end of May. I think it's around the 29th of May. So that is the date. And I shouldn't -- there's still a month to go in that process, and I don't think we want to speculate at this point what will happen in the next month.

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Operator [24]

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The next question is from Lance Vitanza of Cowen.

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Lance Vitanza, Cowen and Company, LLC, Research Division - MD and Cross-Cap Structure Analyst [25]

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Most of my questions have actually been answered. But I did want to ask you, I think you got a comment, and maybe this was in the quarterly commentary, but that mobility customers -- I know, Steve, you mentioned in your remarks, mobility customers are driving the Epic growth. I imagine that Gogo is a big driver of that. I know they're a big customer. But Gogo recently announced a big capacity deal with one of your competitors. And so my question is, did you bid for that business? If not, why not? And if so, why didn't you win?

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

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Sure. Yes, Gogo is an important customer as well as other service providers in that sector. And you may remember that last quarter we announced expansion deals with Gogo and with Panasonic that were fairly recent. So we have periodic expansions of those networks and we announce them as we go along. I would just say in the particular case of the most recent announcement from Gogo, it was a situation where we didn't have the right capacity for what their needs were at this point in time. So we were not at really in competition on that particular one.

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Operator [27]

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The next question is from Nick Dempsey of Barclays.

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Nick Dempsey, Barclays PLC, Research Division - Research Analyst [28]

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Two questions, please. The first one, I mean, we've seen challenges for both Panasonic and Global Eagle management teams of both departing this year. In the event there are not 3 resellers in the inflight connectivity market or 4 if you add (inaudible). If you have one less within a year or 2, do you think the remaining players will take all of the same capacity that's currently contracted with some main FSS players? And second question, just within your networks services, if you look at the business excluding Epic, may not be value (inaudible). Would you say that values tracking of the same kind of rate or that it is deteriorated in terms of growth rate?

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Stephen Spengler, Intelsat S.A. - Director and CEO [29]

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You're saying non-Epic capacity, the second question?

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Nick Dempsey, Barclays PLC, Research Division - Research Analyst [30]

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Non-Epic inside networks services, yes.

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Stephen Spengler, Intelsat S.A. - Director and CEO [31]

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Yes, sure. Okay. So first of all on the mobility sector and specifically the aeronautical mobility sector. I don't want to really comment on the sort of the state of affairs of the various distribution companies. But I think, it's important to remember that there is a strong demand underpinning all of those service providers. There is considerable growth. There's backlog of planes to be installed with broadband. And so there is strong demand and need for capacity. And so we expect that Ku-band will continue to play a major role well into the future indefinitely, in that sector. And that we have the right kind of services capacity and satellite capabilities that will enable whoever the service providers are in that segment. So I think it's still early days in building out that overall connectivity to aircraft. And for us, if you look at what NSR says, it gives us the highest share of services in that sector. So we are going to continue to focus on building out our capabilities and services for those service providers. In the non-Epic area, I think you'll note in our documentation that our fill factors have maintained for non-Epic capacity, so we are still working positively from a volume standpoint. The challenges in network services are still pricing. And so we still have pricing pressure as we renew network services and we'll expect to see that over the course of 2017. If we look at our portfolio of customers, it's about 80% mark-to-market priced at this point in time. And so we feel like we're a long way into it. But there is more headwinds and point-to-point headwinds this year as well.

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Operator [32]

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And the next question is from Arun Seshadri of Credit Suisse.

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Arun Seshadri, Credit Suisse AG, Research Division - Analyst [33]

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First, I just wanted to ask, in terms of backlog, declining a couple of hundred million sequentially, anything to take away from that?

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

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Yes, in terms of backlog, I mean, what you're seeing really is the roll-off or burn-off of our media backlog. We had a number of large commitments in recent years, Intelsat 30 and Intelsat 31, Intelsat 34 and Intelsat 36, all large commitments for media customers. And, of course, we continue to have long-term contracts across our distribution neighborhoods. So that backlog is being consumed. And so I think that's why you're seeing overall reduction. But on the network services side, this is something we have been contending with for a few years. The contract terms have been shorter than in the past. They're slightly over 3 years right now and they tended to be a little bit longer in the past. And I would just highlight one other aspect of it, well, Intelsat EpicNG sometimes generates large contracts and large commitments. It also has a component of contracts that may have a base commitment from which the customers and service providers will grow from. And so we're going to see, perhaps not quite as large contracts at the start, but expansion of that business and growth in that business as the customer networks grow over time. That's not a major part and a major factor yet, but I just wanted to highlight it's something that, that would be developing over time.

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Arun Seshadri, Credit Suisse AG, Research Division - Analyst [35]

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Got it. Then as far as the investment in Kymeta, was that the $16 million that you -- from the cash book statements in the quarter?

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Jacques D. Kerrest, Intelsat S.A. - EVP and CFO [36]

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Yes, that's correct. Yes.

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Arun Seshadri, Credit Suisse AG, Research Division - Analyst [37]

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Okay, great. And I just want to understand a little better, I think you talked about the KALO service, just wanted to understand sort of more simplified way, how that sort of changes the paradigm of buying satellite service? And then just wanted to also, if you could comment in terms of, whether Kymeta is fully funded at this point and whether you can share sort of how big your equity stake is in terms of percentage?

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Stephen Spengler, Intelsat S.A. - Director and CEO [38]

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So in terms of the KALO service, let me just sort of describe how this works. The service is a service that is branded and provided by Kymeta. We are a partner of theirs in providing that service, in that the service will run over the IntelsatOne Flex managed services network. And so we are the network service provider and key partner to Kymeta to help roll out these services. It is specifically targeting some of the newer mobility segments that are unserved today. Mobility for vehicles of various types, whether it's a car, bus, train, truck, and industrial equipment whatever it might be as well as Internet of Things applications. And so, it's designed to optimize services for that sector. They're going to market with a simplified service package and pricing package based around sale of services by the megabyte. And so, that's how they package it up and how they're bringing it to that customer base. Beyond that, I think it's best to refer to Kymeta in terms of how they go-to-market. In terms of our equity investment and their funding, they just completed a series 'E' round of funding. So that was just this year. And so they are proceeding with their plans with that funding round. I shouldn't comment anymore about what -- how far that takes them and what their financial plan is. That's really a question for them. And so our stake is a minority stake of approximately 10%.

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Arun Seshadri, Credit Suisse AG, Research Division - Analyst [39]

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Got it. Last thing for me. Can you talk a little bit about sort of how Kymeta's future plans sort of potentially coincide with some of your plans with OneWeb? And have there been any specific customer conversations or sort of discussions around that?

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Stephen Spengler, Intelsat S.A. - Director and CEO [40]

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So, with the -- network that we're rolling out for the Kymeta KALO service is based on Intelsat's current network, both wide beam and Intelsat Epic satellites in using our IntelsatOne(r) infrastructure around the world. As part of that though, we envision that we will incorporate OneWeb capabilities and services into that network provision when it becomes available. So it is very much part of our long-term vision. And as we've talked about in the past, OneWeb is a very important part of our long-term strategy in terms of providing mobility services, services to government, cellular backhaul and other segments. And so we would increasingly see that part of our integrated infrastructure of the future.

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Operator [41]

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And the next question is from David Phipps of Citigroup.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [42]

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Can you talk a little bit qualitatively about the backlog? And when you look at the new Epic business, and we're assuming that, that business backlog comes on as a much shorter contract. And so that will have a dampening effect on the backlog. And then two, just confirm that the Epic backlog is built into the overall backlog.

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Stephen Spengler, Intelsat S.A. - Director and CEO [43]

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First of all, the Epic backlog is built into the overall backlog. The term that we are getting for the Epic services is in excess of 5 years. And so it's better than the average network services backlog. And so we will have, we believe, continue to get major commitments on Intelsat EpicNG going forward. But as I noted before, some of the commitments may be variable, in the sense that there may be a base commitment and then growth from that base commitment as the customers network grows and expands. And so it is a good contributor to backlog and we're getting good terms from that capacity and it represents what we believe to be the strength and unique characteristics of Intelsat EpicNG.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [44]

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You provided the traditional station-kept transponders and you separate out the new transponders. Can you talk about some of the capacity utilization on the new transponders?

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Stephen Spengler, Intelsat S.A. - Director and CEO [45]

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We're not -- because the Epic network is still at its very early stages, we're not breaking out a fill factor number for the Epic satellite at this time. We are keeping everybody appraised of the number of units that we're bringing into service on Intelsat EpicNG and we're trying to give you some visibility about customers that we bring on and growth we have in that regard. But at this point, we're not breaking out fill factors for Epic satellites in general or individual Epic satellites.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [46]

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Do you have an idea of how much if we -- if the launches go as schedule, how many of the Epic transponders you'll have at the year-end?

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Stephen Spengler, Intelsat S.A. - Director and CEO [47]

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We do. Give us 1 second, we can tell you that.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [48]

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And while you are looking for that. Last year, you had Latin American revenue in the second quarter that and the network services business that you then elected to start taking out of the network services business last in the third and fourth quarter. That was about $8 million. Is that about what we should expect out of that? Does that still makes sense for what happened in LatAm last year?

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Stephen Spengler, Intelsat S.A. - Director and CEO [49]

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I am not sure I understand the question exactly.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [50]

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Last year in the second quarter, you had Latin American revenue network expenses and then you wrote it off. So it was a bad debt expense.

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Stephen Spengler, Intelsat S.A. - Director and CEO [51]

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No.

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David Phipps, Citigroup Inc, Research Division - Director and Senior Industry Analyst [52]

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And then in the third quarter, you excluded it. So is that about the right order of magnitude? So Latin American network expenses -- network revenue should be about start of $8 million lower is what I guess I'm getting at for the second quarter of 2017?

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Jacques D. Kerrest, Intelsat S.A. - EVP and CFO [53]

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That's correct, Yes.

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Dianne VanBeber, Intelsat S.A. - VP of IR and Corporate Communications [54]

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So David, and this is Dianne. To answer your question, remember that 35e is a different configuration. It's more of C-band spot being. So that particular satellite has got about 70 incremental units on it. And so that will come into service before year-end assuming we had our late June launch date SpaceX. And then realistically, 37, it's -- given its launch date, it might make it into service by year-end, and that's a very sizable satellite. So in terms of incremental units, you've got almost 300 incremental units on that satellite.

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Operator [55]

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(Operator Instructions) And at this time, I'd like to turn the call back over to Mr. Spengler for closing remarks.

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Stephen Spengler, Intelsat S.A. - Director and CEO [56]

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Well, thank you, everyone, for joining the call. As soon as the exchange process ends, we will be meeting with investors at upcoming conferences. So we look forward to seeing you then. Thank you very much.

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Operator [57]

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Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.