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Edited Transcript of ISAT.L earnings conference call or presentation 1-May-19 7:00am GMT

Q1 2019 Inmarsat PLC Earnings Call

May 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Inmarsat PLC earnings conference call or presentation Wednesday, May 1, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antony J. Jeffrey Bates

Inmarsat Plc - CFO, Member of Executive Management Board & Executive Director

* Rupert Edward Pearce

Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director

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Conference Call Participants

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* Aleksander Peterc

Societe Generale Cross Asset Research - Equity Analyst

* John Karidis

Numis Securities Limited, Research Division - Analyst

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Roshan Vijay Ranjit

Deutsche Bank AG, Research Division - Research Analyst

* Sami Kassab

Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Inmarsat First Quarter 2019 Results Webcast and Conference Call. (Operator Instructions) I must also advise you that this conference is being recorded today, Wednesday, the 1st of May 2019. And I would now like to hand the conference over to your speaker today, Mr. Rupert Pearce. Please go ahead.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [2]

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Morning, everyone. Thank you for joining us to discuss Inmarsat's first quarter results for 2019. I'm going to take you through the operational highlights for the quarter before handing over to Tony to go through the numbers. We'll then take questions and finish the call in about one hour's time. We're referring to a slide deck, which you can find on our website.

So let's jump in with a brief review first of our operational performance in the first quarter. We turn to Slide 3, which outlines the highlights. We delivered further revenue growth of 11%, building on the positive momentum achieved in previous quarters. We continued to successfully build and aggressively defend market share in our target markets, supported by our diversified product portfolio, enabling the business to capitalize on significant growth opportunities in these markets. As a result, our view of the medium-term outlook and our future guidance remains unchanged.

At the end of the period, we announced a recommended offer for the group by a consortium of private equity firms and pension funds. This offer is subject to a shareholder vote next Friday as well as a number of regulatory approvals with the transaction expected to complete during the fourth quarter of this year.

Given our disclosure restrictions under the Takeover Code, I cannot give any further comment on the transaction today and I won't be answering questions on it during the Q&A session. All I can do is direct you to the scheme document for further details on the transaction.

I'd like now to run through the performance of the various business units during the quarter against our future road map for each. Slide 4, turning first to Maritime, with a particular focus on our 2 key products, Fleet Xpress and FleetBroadband.

The key trend in Maritime continues to be migration to fast-growing VSAT segment, driven by an increasing demand for higher bandwidth as digitalization gains traction in many segments of the maritime industry. Most of the growth in the mid-market will come from vessels migrating up from our FleetBroadband services and as well as from new build ships entering the market. And as context, Fleet Xpress expects remains the strategic and operational driving force for our Maritime business as we continue to rapidly gain market share in the Maritime VSAT segment. There was a particularly high level of Fleet Xpress vessels installed in the period, taking our total FX vessels installed to over 6,100. We also outperformed in the proportion of new customers installed with Fleet Xpress at 36% of overall FX installs compared to an average of around 19% last year, demonstrating FX growth will be fueled materially also by non-FB customers.

Our strategic partners continued to help drive volumes and market share with now 37% of our installed FX vessels being installed by our distribution partners in the period, up from 27% last year. We remain on track also to complete the margin-accretive XpressLink migration program by the end of the year with just 560 XpressLink vessels remaining to be transitioned.

And finally, Crew Xpress, our new FX-based crew-focused product, was launched in the quarter and has gained good early traction with customers with a number of successful sea trials taking place, and we're now moving into pipeline generation and moving into billing.

So overall, another good quarter for FX with our VSAT revenues up nearly 24%, which is particularly impressive against revenue growth of 19% in the previous year.

In FleetBroadband, our revenues continued to fall, largely as expected as the vast majority of the net vessel losses in the quarter continued to be generated by upgrade to VSAT, in particular, to Fleet Xpress.

ARPU softened, again, as expected for the remaining FB vessels as high ARPU customers moved to VSAT services.

We achieved initial traction from actions implemented to support our market share in the segment, highlighted by a significant reduction in the rate of FB vessel losses in the quarter compared to the 2018 quarterly average. Clearly, it's too early to call a trend here, but this is very encouraging evidence that our actions are having positive effects on our business in this segment to protect FleetBroadband and manage migrations to Fleet Xpress.

Looking ahead, we remain confident that, in Maritime, we will continue to grow our market share in the highly valuable VSAT market and protect our share of the mid-market over time.

Turning to the next slide of Government, which continues to outperform. Our U.S. business again performed very well, supported by several new business wins and increased spend under existing long-term customer contracts. The Boeing take-or-pay contract delivered a further increase in underlying revenues whilst there was continued decline in breakage to very modest levels. Outside the U.S. we saw continued momentum supported by increased GX hardware sales in the quarter.

Looking ahead, we'll continue to become more embedded in a number of significant customer platforms in the United States and we will seek to further diversify and internationalize our product portfolio and market presence outside the U.S.

Moving on to our Aviation in-flight connectivity business on the next slide. It was another excellent performance for this business in the quarter, supported especially by equipment sales to our customer on the European Aviation Network. We have around 1,790 expected aircraft under contract or committed to GX hardware, including a linefit deal for Virgin Atlantic's new A350-1000s announced last month. We're now including the hardware committed aircraft with our contracted aircraft going forward as we're now winning material customers through linefit GX hardware commitments on the purchase of new aircraft as opposed to retrofit commitments and connectivity contracts as our indirect business gains traction. We've also another 300 aircraft under option with existing customers.

Our GX and EAN installation programs in IFC gained further traction with a total of 600 aircraft installations achieved by the end of the quarter, up from 245 in the prior year. We expect the installation rate to continue to ramp up. There were 145 GX-installed aircraft at service at the end of the quarter, generating airtime revenue with additional customers expected to come into service in the next few quarters. This includes our customer on the EAN in the coming months following customer trials on a small number of aircraft, which are currently under way. Our L-band-based IFC service based on FleetBroadband also performed well in the quarter.

So to sum up on IFC. We continued to make progress against all key metrics, and we expect to continue our positive momentum as we support more customers into service during the course of the year and beyond.

Next slide. Our core Aviation business delivered continued growth in the quarter. In Business and General Aviation, revenues for our SwiftBroadband product continued to decline modestly, mainly as the result of customer migration to JetConneX, our GX-based product for this market, where we now have around 475 aircraft installed at much higher usage rates, generating now more than $7 million of revenue in the quarter.

In Safety Services, there were some higher usage from customers for our Classic Aero product as well as the billing catch-up for certain customers. Whilst our next-generation safety products with Broadband-Safety gained further traction in the market following its launch late last year.

So a decent performance from our core Aviation business, too, with our market leadership positions maintained in BGA and SOS, supported by a long-standing and highly valuable distribution relationships.

And finally, on Slide 8, Enterprise revenues, which declined, mainly as the result of ongoing market pressures on many of our legacy products, in particular, BGAN and fixed-to-mobile services. Satellite phone revenues were also down due to the high level of hardware sales in the prior year.

Our M2M business remained resilient. And we continued to make progress in developing a number of initiatives with major partners in IIOT, which is the key long-term growth opportunity for our Enterprise business.

So to sum up, on the next slide, Slide 9. We made good progress against our annual priorities in the first quarter, giving us further confidence that Inmarsat will continue to build on our positive momentum and deliver further growth in the future.

With that summary, I will hand you over to Tony to discuss the numbers in more detail.

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Antony J. Jeffrey Bates, Inmarsat Plc - CFO, Member of Executive Management Board & Executive Director [3]

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Thank you, Rupert, and good morning, everyone.

I'll start on Slide 11 with the income statement where you can see that reported revenues were little changed with the impact of Ligado revenues dropping out being more than offset by an increase of $33 million or 11% in the revenues from our core businesses, particularly Government and Aviation.

Direct costs increased by $13 million, reflecting a higher level of low-margin equipment sales, particularly in Aviation, partly offset by the release of some bad debt provisions, predominantly in Maritime. Indirect costs continued to be managed tightly with the impact of slightly lower costs being compounded by favorable currency movements to give a $6 million overall reduction.

Adjusted EBITDA, which excludes $17 million of exceptional costs associated with the recommended offer for the group, was consequently $5.5 million lower at $169 million. Excluding Ligado, adjusted EBITDA increased by $27 million.

Depreciation increased by 20 -- $12 million, mainly reflecting additional asset impairment charges.

Underlying net financing costs were down by $10 million, primarily due to an increase in capitalized interest, given the significant investment in the I-6 satellites in the prior year.

The tax charge increased by $3 million to $5.5 million, reflecting the impact of lower taxable profits, the downward revaluation of the Norwegian-related deferred tax assets and a number of other individually small issues.

The underlying effective tax rate increased to 22.8%, which is higher than the U.K. statutory rate of 19%, primarily due to the impact of the current nondeductible costs on the underlying tax charge. While underlying profit before tax has decreased, the underlying tax charge has remained relatively flat, driven by adjustments in respective prior periods.

Then we have -- then we finally have the change in the value of the conversion liability on the convertible bond. The significant charge this quarter has arisen as the market price of the bond has reacted to the offer of the group.

Please note that the value of the convertible bond carried in our Q1 balance sheet is not exactly aligned with the redemption value that will be proposed to the convertible bondholders due to the accounting treatment that we are obliged to adopt.

Putting all of this together meant that we reported a statutory loss after tax of $272 million, driven entirely by the change in the convertible liability.

Now let's take a look at the summary of the results for each of our business units on Slide 12. In Maritime, revenue was down, but direct costs also reduced, both in response, but also reflecting the unwinded provisions against future bad debts as well as lease capacity savings from the XpressLink migrations. Indirect costs declined by $2 million due to the absence of marketing spend on the Volvo Ocean Race, which finished last June.

In Government, there was very strong revenue growth with direct costs consequently rising by $9 million and indirect costs unchanged at $11 million.

In Aviation, IFC revenues more than doubled, principally driven by the equipment orders Rupert mentioned earlier as well as GX airtime revenue. IFC direct costs rose by $17 million, in line with the equipment sales. And the indirect costs were up by $3 million due mainly to higher legal costs on the EAN.

In our core Aviation business, revenue was up by $2 million whilst direct and indirect costs were little changed.

In Enterprise, revenues were down by $5 million with direct costs falling $3 million in response and indirect costs were a little lower.

Central Services revenues were down by $33 million due to the absence of Ligado revenue, as expected. Direct costs increased by $1 million due to higher inventory provisions. And indirect costs reduced by $6 million, mainly reflecting favorable currency movements.

Finally, at the bottom of this slide, you can see that GX revenues have continued to grow strongly, increasing by over 70% in Q1 to $86 million.

Now let's look in more detail at the performance of the individual business units, starting with Maritime on the next slide. Before I go into the detail, I wanted to highlight 2 small disclosure changes in our Maritime reporting. Firstly, we are now including equipment revenue with the other revenues from the same product family. Previously, these equipment revenues, which typically amount to around $20 million a year, were included in the other products category. Details of the quarterly restatement are set out on our website.

Secondly, from the 1st of January 2019, the operational management of around 880 FleetBroadband vessels was transferred to Maritime from Enterprise. Consequently, these vessels and their resultant contribution is now included in the Maritime results. In Q1, these vessels contributed around $1 million in revenue and were moderately dilutive to the Maritime FleetBroadband ARPU.

Now let's go to the results. Maritime revenues declined by $13.5 million, with further strong growth in Fleet Xpress being offset by lower FleetBroadband and legacy product revenues.

VSAT revenues grew strongly, with revenues rising by 24% as compared to the 19% increase reported for the whole of 2018.

We ended the quarter with 6,727 installed vessels, including over 6,100 FX vessels, an increase of 42% from the prior year. During the quarter, we installed 789 new vessels with 285 of these being with totally new customers, 240 coming from existing FleetBroadband customers and 164 migrating from XpressLink. The FX vessel base installed by our distribution partners was 37% of installed vessels, up from 27% of the prior year. This mix change has helped to drive growth in vessel volumes, but continues to have a dilutive impact on VSAT's ARPU, which was down 15% in the quarter.

Notwithstanding this mix impact, it is good to note that the average ARPU achieved in both retail and wholesale on new installations is now starting to establish a gentle uptrend, reflecting the end of initial FX promotional offers and the mix of plans being taken out by our customers.

In contrast, FleetBroadband revenues fell by 19% despite the addition of 880 vessels and $1 million of revenue from Enterprise. The underlying year-on-year reduction of 3,750 vessels reflects the migration of 1,600 vessels out to Fleet Xpress and the loss of 2,150 vessels mainly to third-party Ku VSAT operators.

The Maritime team has been working hard to reduce these losses with targeted pricing activity and product innovation. These actions are now starting to impact positively with the rate of vessel loss, excluding FX migrations and the transfer of Enterprise vessels, falling from an average of 570 vessels per quarter in 2018 to 350 vessels in Q1, a reduction of 38%.

FleetBroadband ARPU has also declined over the last 12 months, falling by 11% to $695 per month, reflecting the migration to VSAT being weighted towards higher usage customers, a decline in customer usage of peripheral and FleetBroadband services and absence of high ARPU revenue from the Volvo Ocean Race and the transfer of the low ARPU vessels from Enterprise.

Fleet One revenues were $1 million lower than last year with lower equipment sales offsetting the impact of 1,200 more vessels, including an additional 360 in the quarter.

Our other typically low-margin legacy product revenues continued to decline, falling by $6 million in the quarter.

Direct costs were $12 million lower, reflecting not only the lower revenues, but also the bad debt provision unwind and lower lease capacity costs that I mentioned earlier.

Indirect costs were also lower, reflecting the Volvo Ocean Race marketing costs last year.

And putting all of these together meant that despite lower revenues, Maritime EBITDA was unchanged year-on-year.

Now let's look at Slide 14, the Government results. Government revenue increased by $22 million to $101 million for the quarter. Revenues in our U.S. Government business increased by 28%, reflecting new business wins and increased government expenditure under long-term contracts. There was also a continued increase in underlying revenues from the Boeing take-or-pay contract.

Outside the U.S., revenues were up 30%, driven particularly by increased GX equipment revenue as we worked to establish future GX airtime revenue streams.

Then as you can see, direct costs increased by $9 million, reflecting the revenue increase and indirect costs that were flat at $11 million to give a $13 million increase in EBITDA for the quarter.

On the next slide, you can see that Aviation continued to grow very strongly, delivering a 53% increase in revenues driven mainly by our IFC business. IFC revenues grew by $28 million to $47 million. Installation revenues increased by $23 million to $31 million due to a significant order of equipment sales for a customer on the EAN.

GX airtime revenues were $4 million in the quarter, up from $0 in the prior year. And airtime revenues from our L-band-based IFC business were flat at $12 million.

We now have around 1,790 aircraft under aircraft and committed to GX hardware, as Rupert explained, as well as 300 under option. At the end of the quarter, there were 600 installed aircraft, including 145 GX aircraft in service.

The core business grew by $2 million with SwiftBroadband revenues down $4 million to $16 million, mainly reflecting customer migration to JetConneX, which grew airtime revenues to $7 million from $4 million in the prior year. Classic Aero revenues grew by $3 million to $13 million, reflecting continued growth in aircraft volumes and some delayed invoicing.

For Aviation overall, direct costs increased $17 million to $25 million, driven by the higher level of equipment revenue whilst indirect costs were up $2 million to $17 million, reflecting higher legal costs on the EAN.

This meant Aviation EBITDA was up by $11 million to $45 million. We continue to expect that Aviation -- EBITDA margins in Aviation that were 52% in Q1 compared to 51% in 2018 and 60% in Q1 2018 will return to at least their 2016 margin levels of over 60% by the end of 2021.

Aviation CapEx decreased by $12 million to $45 million, reflecting fewer installations of the onboard equipment in the quarter for certain customers.

Aviation cash flow improved marginally, with -- sorry, materially, with the impact of both higher revenues and lower CapEx driving an improvement of $23 million in the quarter with the IFC business moving closer to breakeven.

Now let's move to Enterprise where revenues declined by $4 million.

Long-standing market trends have continued to impact BGAN and fixed-to-mobile where revenues for each fell by $1 million.

Satellite phone revenues declined by $2 million, mainly due to levels of handset sales versus the prior year -- lower levels handset sales.

M2M revenues were also a little lower due to the unwind released in Q4 of last year. Aside from this revenue issue, the underlying M2M revenues have continued to grow steadily.

In addition, the FleetBroadband vessel transfer to Maritime I mentioned earlier reduced the Enterprise revenue by around $1 million.

Within these revenue changes, but lower direct and indirect costs, EBITDA fell at a lower rate than revenue, falling by $1.4 million (sic) [$1.5 million] to $20.1 million.

Let's now look at the next slide where you can see that free cash flow improved by $109 million, mainly due to a $60 million reduction in cash CapEx that I would discuss on the next slide and also to an improvement in working capital.

Working capital and noncash adjustments added $46 million in the quarter. Working capital improved by $40 million, driven by lower receivables, which reflected both improved collections and sales phasing, lower inventories and an increase in accrued payables, mainly relating to the costs of the recommended offer for the group, which arrived at quarter end.

We ended the quarter with net debt at $2.1 billion, a little less than last year and $93 million lower than at year-end. We continue to have over $1 billion in liquidity, and leverage remains well within our actual and policy covenant levels.

The next slide gives detail on CapEx, which was $59 million lower than last year, driven by the timing of contractual payments on major infrastructure projects, particularly the GX-5 and I-6 satellites.

Success-based CapEx was $44 million lower, reflecting the lower levels of GX installations in Aviation. And other CapEx increased by $4 million due to moderately higher investments in internal IT systems and infrastructure.

Finally, on Slide 19, let me reconfirm that all of the guidance that we gave at the 2018 results in March shown again on this slide is unchanged. I should also point out that the fact that we are ahead of consensus for Q1 2019 is simply an issue of timing of revenues and costs rather than suggesting any change in our outlook for 2019.

So that's it for me. Rupert and I would now be happy to take your questions. I'll pass it back.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will now take your first question. It comes from the line of Aleksander Peterc from Société Générale.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [2]

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I'd just like to understand a bit of what's going on in terms of quarterly dynamics for this first quarter, which does look particularly strong versus the rest of the year. So just in Maritime, you had a nearly 10 percentage point jump in your EBITDA margin from the previous quarter. So could you help us understand how much of this margin increase is due to the provision release for bad debt that you mentioned? And how much is sustainable and can be carried through into the remaining quarters of the year?

And similarly, on Government, you had a particularly strong revenue increase in the first quarter year-on-year. Is that partly due to the low year ago quarter when you reported actually a decline of about 9%? And should we look at this revenue in Government now as increasing or at least being stable at this level for the remainder of 2019 sequentially or not?

I would think so -- obviously I would think yes because you don't highlight any one-offs in this revenue in the quarter.

But if you think that we should be more moderate in our forecasts for the remainder of the year, could you tell us on what basis we should do that?

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Antony J. Jeffrey Bates, Inmarsat Plc - CFO, Member of Executive Management Board & Executive Director [3]

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Okay. So Maritime, the primary revenue issue in the margin is the bad debt issue that we flagged at the back end of last year where we had been increasing bad debt provisions, reflecting slower collections from customers in the marketplace, partly driven by the market, partly driven by our new billing system and noise that, that was creating. In Q1, the merits of the Maritime margin improvement, roughly half of it is down to the bad debt unwind in the first quarter and the balance is really just down to the mix of revenues in terms of hardware sales low in the quarter and just general trading dynamics.

In Government, the story in the first quarter of Government revenues, particularly outside the U.S., are strong around hardware sales as the large transactions gone through, which is almost, by definition, a one-off as a hardware sale but it will lead to medium-term growth in airtime revenues. And in the U.S., revenues were being just strong right across-the-board, largely airtime, but also some hardware sales on existing contracts rather than new contracts. And the Boeing take-or-pay contract, as we've indicated, is also running quite strongly, which is part of that volume issue in the first quarter.

As far as the full year is concerned on Government, the point I made at the end when I was talking about guidance generally is that although we've had a very strong quarter, our view of outlook for the full year is unchanged in aggregate. We're not going to give -- start giving guidance by individual business unit over the whole year. But the first quarter is much more of an issue about timing of revenues arising in the first quarter, frankly, and particularly, in Aviation than in rest of the business units. And you're continuing to see , as you see normally with our business, individual business units going up or down a little bit quarter-by-quarter as individual transactions run through.

So full year guidance unchanged off the back of Q1 and you will see the mix of that start to come and go across the business units across the year as is normal.

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Operator [4]

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And your next question comes from the line of Michael Bishop from Goldman Sachs.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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Just two for me. Firstly, on Government, you've clearly seen good trend. So I was wondering if you could disaggregate what you're seeing in terms of a broader market improvement in Government and what is more Inmarsat specific? Because if look at the peers that have reported, or at least the commentary over the last 6 to 12 months, it feels like there are few ups and downs between the different operators.

And then secondly, could you just comment a little bit more on how you see the ramp-up of the EAN and what the initial feedback has been like from the trial flights? I mean everything would be interesting, pricing -- or your thoughts on pricing demand, customer feedback, speeds, et cetera.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [6]

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Okay. Thanks, Michael. I think if I look at the overall Government, I mean it's very hard to make a general statement about the worldwide Government market because it's so different and there are so many different buckets. I think I would say that among the larger elements of that market, particularly the U.S., we've seen a slight improvement in in-market conditions, which merely takes them from terrible to not so bad. It continues to be a highly competitive, relatively attritional environment. And of course, it's the ultimate buyer's market. Elsewhere, it can be different, but the size of the relevant markets are much smaller and so much less likely to, for one market, to determine our outcome in a particular quarter.

Our strategy for a long time now, these 3 years, has been to diversify geographically and I think we've done that very successfully. So that unlike many of our competitors who compete with us only in a small number of markets, we have a very diversified Government business and that gives it solidity through that diversity. We've diversified also in the verticals, so we have spent a lot of time moving beyond, excuse me, defense and security and that's been a good thing. And you've seen some announcements of deals like the FirstNet deal, for example, that have begun that process.

And then, finally, we've also invested a great deal over the last few years in products and service innovation. Particularly in a raft of next-generation, highly militarized or governmentized L-band services like LACE and LAISR and WiSL and L-TAC and Assured Access, I could go on. And that -- those investments are starting to pay off with many revenue streams being material in those areas.

And finally, of course, GX has delivered a profoundly different, highly unique, WGS-compatible global mobile broadband proposition, both in commercial Ka and in military Ka in which a WGS terminal can just repoint at our network and work. These are unique features that have driven the strength of our repositioning of our Government business. So I think there's been a very modest market improvement over the last couple of years. But fundamentally, what we're seeing now is the strength of Inmarsat businesses on the back of 3 or 4 years of determined hard work and strategic repositioning.

In EAN, it's a little early to be able to come up with some compelling statistics about EAN. We've got a small number of aircraft from the BA Fleet flying with EAN. It wouldn't say it's advanced trials because we are selling subscriptions to customers actively and we're putting more aircraft on the network each week. Those aircraft will become part of the broader IAG fleet with Vueling and Iberia coming onstream really quickly behind BA.

So we're very, very encouraged by the early signs. The service is compelling. It's really unique, this combination of satellite and terrestrial technology working together. This satcom is extremely light, certified by Airbus as having no fuel cost. So if you're a small, single-aisle, short-haul aircraft operator, this is a very compelling offering. And of course, with the support of DT, we've got great coverage across the whole of Europe.

The early signs from customers are very positive. What we're picking up in the blogosphere is amazement at the speed of the service and the capability of the service, so we're very encouraged. But give us a couple more quarters and hopefully we'll be able to show more volume and a richer customer experience in terms of the numbers.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Could you help us with timing on -- just so people are paying for it on the flights, but just through various trials. So when do you think you might start to see, as an end-user, actual pricing kind of sort of a like a customer proposition?

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [8]

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It's commercially available right now, so BA is selling it to its -- on those aircraft on which it is installed, BA are selling the service. And so we are seeing customer sessions -- hundreds of customer sessions coming through. And our customer under this model though is IAG, is BA. So we provide a service to them on a particular commercial basis. They then turn around and they decide how to monetize this service or not to their customers. So that's entirely their decision.

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Operator [9]

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And your next question comes from the line of John Karidis from Numis.

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John Karidis, Numis Securities Limited, Research Division - Analyst [10]

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So the day you reported your full year results, Iridium held a Capital Markets Day. They spent a lot of their time talking about how they're proposing to take market share away specifically from Inmarsat, not just in Maritime, but also in the other sectors as well, Aviation and Government and Enterprise. I'm not trying to be cute about it at all, but I'd be very interested to hear what your views are about the arguments that they made during that 4-hour presentation, please, Rupert.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [11]

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Well, I didn't -- I wasn't on it. But I can give you some sweeping brushstrokes. We're obviously a very different business to Iridium. A substantial part of our future growth is predicated on mobile broadband offering data speeds of 50 megabits per second and above. Our focus is actually on delivering higher speeds and higher capacity to those communities. We don't see that as a market in which Iridium is a compelling competitor with our L-band offerings. So there's a big piece of our business where we look elsewhere to -- for competition. But clearly, in terms of our ongoing L-band services, Iridium is already an important competitor, and with Iridium Certus, will continue to be an important competitor even as we also upgrade and develop our L-band services with the Inmarsat 6 network as our data speeds also jump as our capacity jumps and as our cost comes down.

So it's a competitive marketplace. We relish that competition. That's what gets us out of bed every morning with a spring in our step. It'd be pretty boring if we didn't have competitors.

I think Iridium has done a fantastic job delivering their new network through -- it's been a troubled long program and I take my hat off to them for what they've achieved. And it'd be very interesting to see what they bring forward in terms of service offerings and we look forward to competing with them. Across all of these verticals in those subsegments of the market that were a lower bandwidth, higher-resilient product, is what customers want. As I said, it's a subset of what we do. I think they will be very competitive. They've been a tremendous innovator in certain subsegments of the market. I would particularly call out IoT and M2M services as areas where they've been particularly visionary.

Obviously, this isn't a call about Iridium, so I will summarize it by just saying, we feel very good about our ability to defend our market share, defend our markets and compete head-to-head with Iridium, including taking the battle to Iridium in those areas where they hold market leadership today. And we will continue to be highly competitive and highly innovative in our L-band networks. We're not switching all of our innovation to Ka-band. We will continue to be a leading innovator in L-band, and on the back of that, compete successfully in the market.

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John Karidis, Numis Securities Limited, Research Division - Analyst [12]

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Could you please remind me of the timing for ISAT-6's coming into commercial service?

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [13]

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Yes, of course. Inmarsat-6F1 is on track to be launched towards the end of next year, 2020, and will come into service over the end of Q1, early Q2 2021. And Inmarsat-6F2 will be about a year after that.

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Operator [14]

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And your next question comes from the line of Roshan Ranjit from Deutsche Bank.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [15]

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Three questions, please. Just on Maritime, the 38% reduction in FleetBroadband migration, is that purely related to some of the pricing incentives that you've rolled out across that product? Or have you seen an ease in of the -- a question, let's say, from some of your peers with their new product launches?

Secondly, in Aviation, you recently announced a new deal with Virgin Atlantic. Is that going to expand out across the Virgin fleet?

And lastly, just on the long topic of Ligado. There's been some recent news flow from the FCC. I think there's a vote to next week. Is it possible for you to comment on that and disclose your views there?

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [16]

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Okay. Thanks, Roshan. In terms of the reduction in our FB losses, is it us or them, I think it's us. I don't think there's been any lessening of the competitive environment for VSAT capture at all. In fact, you'll see a lot of news flow from our competitors in this space. But I think we've done a very good job starting in the fourth -- early in the fourth quarter of last year to address this leakage. We've done it through a number of -- by strengthening the FB proposition, but we've also done it by redoubling our efforts in Fleet Xpress and by developing probably the fastest turnaround in our history, a new crew-focused VSAT -- low-end VSAT product called Crew Xpress, which we've taken through sea trials and which has now entered commercial service and which we have already an emerging pipeline and backlog that's very encouraging.

I think those 3 things taken together have had a marked impact on FB losses more quickly than we'd expected actually. I didn't expect that we would see a material slowdown in those losses in Q1 and we have, so Tony and I are both very happy about that. We're not calling a trend yet because it may just be serendipity. But we intend to continue to strengthen our offerings across the entire maritime market and portfolio so that we lead everywhere. As I've said, strategically, it is very important to us that we maximize our market share in VSAT. It's going to be the largest segment by value and by ship numbers in the coming years, and we want to be the leader there. So this transition of our FleetBroadband customers is a very important signal of the future health of our business, so we take it very seriously.

We are very happy to win the Virgin Atlantic deal. It's an indirect deal for us, so that's terrific. It doesn't necessarily read across to other sub-fleets within the Virgin Atlantic empire. You win these fleets fleet by fleet or sub-fleet by sub-fleet and Virgin Atlantic already has a good and established relationship, for example, on other sub-fleets with our competitors. And once we or a competitor are installed on an aircraft, the likelihood of that aircraft churning across to somebody else is very low because of the cost and time it takes to do that, so you tend to be on for the life of the aircraft.

So we're focused much more on new retrofits and new linefit opportunities, but there will be further opportunities with the Virgin fleet going forward if we deliver a great service to them and show them the strength and the quality of GX, which is what we're focused on.

In Ligado, yes, there's been some news around the FCC. I think what you're referring to probably is the NOAA license proposition where the FCC is saying that they're minded to license some NOAA spectrum that Ligado has kept its eye on and some people have done a read across that, that wouldn't have happened if the FCC were thinking more positively about Ligado's application more generally. But that's maybe taking 2 and 2 and making about 10. We just don't know.

So I think from our perspective, the cautious view is no change in the Ligado situation. As you know, from the moment we cut the dividend at the beginning of last year to today, we've assumed very conservatively. I hope that, Ligado, there will be no Ligado revenues in 2019 and we're not planning for them to return to paying us any time in the near future. That's maybe prudent, but I think it's the right thing to do for us. We certainly don't control the outcome for Ligado's licensing. We're not even anything other than the provider of spectrum to them through a lease. Essentially, we're a passive bystander. So although we wish with them well, we are planning for the worst and hoping for something better.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [17]

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Great. Just one follow-up quickly. I appreciate your conservative nature around Ligado, as you said, as has been the case. Do you have any view on kind of the time frame of the ongoing discussions in U.S. with the FCC? From what I read, they could be using that 5 megahertz next year.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [18]

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Yes. That may be true. I don't have a particular view on timing here, but it's hard to see how Ligado would bid for that spectrum if it wasn't -- and pay a very large amount for that spectrum if it wasn't part of a comprehensive settlement of their regulatory position. So it will be, again, interesting to see whether these things create a snowball effect or not, but I think it's far too early to make any sensible statement about their prospects here.

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Operator [19]

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(Operator Instructions) Your next question comes from the line of Sami Kassab from Exane.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [20]

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At the last conference call, Gogo and yourself reported a slowdown in your pace of issuance of new RFPs in the in-flight connectivity market. Can you discuss where you see the situation today and whether there had been any pickup into your RFP activity in that market?

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [21]

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Okay. Thanks, Sami. Just to be clear, I don't know what Gogo reported, but what we talked about was not a slowdown in the pace of tenders, but a slowdown in the pace of outcomes, awarded deals. And the gestation of an IFC tender into a deal can be extremely long, sometimes more than 12 months. We've had tenders that have run for as long as 18 months, Virtual Lufthansa being a good example of that. So I think what we generally reported was, yes, a bit like London buses, sometimes you wait a long time for these things to pop out and then suddenly there comes a little rash of them. And both of us said it doesn't really mean anything. We talked about the way the market was evolving and maturing.

There continues to be a huge amount of interest in every corner of the aviation community about in-flight Connectivity. But airlines move at different paces. And as they get into a tender, the vagaries of that tender can mean that it can be short or long. So expecting a steady stream of wins in an orderly fashion doesn't seem to happen. And the other thing I'd say is, quite often, these tenders get announced -- sorry, these awards get announced at the same time as another major event for an airline. It could be the opening of an airport, it could be a big industry event like AIX in Hamburg. And indeed, you saw at AIX in Hamburg in Q1, you saw a rash of announcements about people going with GX, which is very encouraging. So I'm afraid our airline industry customers, they don't march to our quarter and they don't fall neatly into lines to ensure a nice, steady flow that's easily predictable.

I don't read too much into that, Sami. I think over the course of the year, we are seeing strong interest in our services, both EAN and GX, and we expect that to continue. The airline industry is encountering, I guess, you'd say turbulence for all sorts of reasons now. It's a difficult economic environment for them. But nonetheless, we see WiFi connectivity being seen as a hygiene factor for airlines moving forward. So people buying new aircraft want them connected and people increasingly realizing that they will struggle to be competitive without connectivity on their existing aircraft. And so gradually, the entire aviation industry is moving to become connected.

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Operator [22]

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And your last question comes from the line of Mathieu Robilliard from Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [23]

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Just one question for me. Can you share with us any progress you made with regards to GX Flex upcoming fleet? I mean, in terms of the settings, the capability, I don't know how much you can share at this stage, but any updates would be useful.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [24]

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Okay. Great question. Very timely. The decision on GX Flex is very imminent. We've been, as you know, conducting a lot of work in this area, which turned into a tender process around the turn of the year. We're right at the end of that process. And we expect to go under contract shortly and to make an announcement about that shortly, which means in the next few weeks. We're very encouraged by the engagement from our traditional and new partners in this area, the amount of innovation that has been contributed into the tender. And I think we remain -- we believe we remain on track to deliver what we said we would, which was a material step change in our capabilities and our agility and the speed at which we can move to deliver next-generation broadband services that will complement and augment our existing network and allow us to follow our customers in terms of their expectations of service quality and service coverage and keep us at the forefront of this industry whilst meaningfully moderating our infrastructure CapEx in the years to come, which would be an extraordinary achievement, if you think about it, as we move to a new model for global mobile broadband. I think we're on track to do that.

When we started talking about meaningfully moderating CapEx and remaining competitive, we had a twinkle in our eye, we had a gleam -- a glimmer of how we would do that and I think we've largely solidified that. So we expect to bring that back to the market in the next few weeks, short number of months. And it's going to be an exciting story about how we remain at the forefront of our industry in global broadband.

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Operator [25]

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Thank you. And we do not have any further questions. Please continue.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [26]

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Okay. Well, thank you very much for attending our Q1 results conference call. I think, overall, it's been a good start to the year. This is important in our industry because a good start generally connotes a solid finish. It's much harder to catch up from a slow start, so we're very gratified by that. Q1 has been very much a story of the continuation of a good finish to 2018, continued growth at the top line and the EBITDA line through diverse growth opportunities with I think good progress in Q1 made in the key area of solidifying our Maritime story, laying the foundations for Fleet Xpress to be a leader in the important VSAT sector, while making good steps to take tighter management of FleetBroadband to stay on its migration to that VSAT heartland. Thank you very much.

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Operator [27]

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That does conclude your conference for today. Thank you for participating. You may now disconnect.