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Edited Transcript of ISAT.L earnings conference call or presentation 1-Aug-19 7:30am GMT

Half Year 2019 Inmarsat PLC Earnings Call

Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Inmarsat PLC earnings conference call or presentation Thursday, August 1, 2019 at 7:30:00am 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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* 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

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

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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 Half Year 2019 Results Webcast. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, 1st of August 2019.

I would now like to hand the conference over to your first speaker today, Mr. Rupert Pearce, company's CEO. Please go ahead, sir.

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

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Thank you. Good morning. Thank you for joining us to discuss Inmarsat's first half results for 2019. I'll spend 10 minutes taking you through the operational highlights for the period, after which, Tony and I will take questions.

Before that, I'll touch on the recommended offer for Inmarsat announced in March. This offer is subject to a number of regulatory approvals, some of which have already been received, and we continue to expect the transaction to complete during the fourth quarter. Given our disclosure restrictions under the takeover code, I cannot comment further on the transaction today, and I won't be answering questions on it during Q&A. All I can do is refer you to the scheme document for further details on the transaction.

So let me now discuss our operational performance in the first half. The group produced underlying revenue growth of 5% and underlying EBITDA growth of 15%, supported by continued traction with Global Xpress, which grew revenues by 60% to $176 million in the half. These underlying numbers exclude Ligado, $51 million of revenue and EBITDA generated in the period from the settlement of the arbitration case with RigNet announced in June and bid-related costs. Free cash flow improved by $175 million in the half, driven by revenue and EBITDA growth, improved working capital and reduced levels of CapEx due to the timing of contractual payments for major infrastructure projects and lower levels of GX installations in IFC.

I'll now run through the performance of the various business units. In Maritime, the key trend continues to be our capture of leading market share in the fast-growing VSAT segment, driven by an increasing demand for higher bandwidth to fuel the digitalization of the global shipping industry. In this segment, Fleet Xpress remains the driving force for our Maritime business as we continue to drive successfully into Maritime VSAT. There was a high level of FX vessels installed in the period, taking our total FX vessels to over 6,800.

Our strategic partners continue to help drive volumes, too, with 37% of our installed FX vessels being installed by distribution partners in the period. Importantly, the proportion of FX installations from completely new customers remains strong, too, at around 30%, well ahead of the average for 2018 of 19%, demonstrating our ability to move beyond FB migration to VSAT and to increase our VSAT share also from the capture of new ships or churn from other VSAT networks.

We remain on track to complete the margin-accretive XpressLink migration program by the end of the year, with just 250 XpressLink vessels remaining to be transitioned. And we're already enjoying the benefit of lower costs at Ku-band leases influx. So overall, another good quarter for Fleet Xpress, with our VSAT revenues up nearly 17%.

In FleetBroadband, our revenues continue to fall as expected from a combination of vessel losses and softening ARPU. Both generated in the main from high ARPU FleetBroadband customers upgrading to VSAT, in particular, our own Fleet Xpress services. There was continued traction from actions implemented to support our market share in this segment, highlighted by a significant reduction in the rate of FB vessel losses to third-party networks in the half compared to 2018. These retained FB customers are now either staying put with FB or migrating to Fleet Xpress.

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

Turning to Government, which continues to outperform. Our U.S. business, again, performed very well, supported by several new business wins, increased spend under existing long-term customer contracts and further growth of underlying revenues related to the Boeing take-or-pay contract. Outside the U.S., we also saw continued momentum supported by increased GX hardware sales, higher customer spend and activities related to a number of strategic projects.

Moving on to Aviation, firstly, looking at in-flight connectivity, which continues to grow significantly. We have around 1,690 expected aircraft under contract or committed to GX hardware and another 300 aircraft under option with existing customers. This number includes a reduction of around 100 aircraft following material internal issues at 1 of our prospective customers, Garuda Indonesia. These issues were in no relation to Inmarsat's contract or service with this customer. It remains a relatively turbulent time in the Aviation industry.

Our GX and EAN installation programs in IFC gained further traction, with a total of 666 aircraft installations achieved by the end of the period, including 235 activated aircraft, generating airtime revenue.

Our core business in Aviation again delivered steady growth. There was overall revenue growth in our business and general Aviation business, while SwiftBroadband revenues declined modestly. This was mainly driven by continued managed customer migration to JetConneX, our GX-based product for this market, which grew strongly, and we now have around 530 JX aircraft installed at much higher usage rates. And there was higher customer usage for our Classic Aero product in Safety Services.

In Enterprise, revenues declined mainly as a result of ongoing market pressures on a number of our legacy products, in particular, fixed to mobile. Satellite phone revenues were also down due to the high level of hardware sales in the prior year, while our M2M and BGAN businesses remained relatively resilient.

Away from our operational performance, we announced 2 major developments of our GX network during the period, with 5 new satellites to be launched from 2022. Firstly, we announced a design-and-build program for our GX 7, 8 and 9 satellites in partnership with Airbus, which will transform GX' network capacity, capabilities and operational agility to ensure we continue to optimally support our customers' future demand requirements in a highly efficient and tailored way. These satellites are expected to be launched in 2023.

We also announced a program for our GX-10A and B satellite payloads in partnership with Space Norway, specifically and uniquely dedicated to the Artic region but also seamlessly extending the whole GX network to encompass Artic coverage, which we believe will be important for maritime, aviation and government customers. These satellites are expected to be launched in 2022. These groundbreaking programs ensure that Inmarsat and GX will remain at the forefront of global mobile broadband satellite communications for the long term.

So to sum up, we produced a robust performance in the first half as we made good progress against our key priorities for the year, giving us the confidence to reiterate our view of the outlook and our future guidance.

That's it for me. We'd now be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is coming from the line of Michael Bishop from Goldman Sachs.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Just a couple of questions from me. Firstly, picking up on the new 5 GX satellites. So I was just wondering whether you could give us a broad overview of the business case for the 5 GX satellites, which verticals they're going to support the most and whether we should be thinking that's a similar revenue contribution to the original GX guidance you have for the first 5 satellites.

And then secondly, just on the U.S. government commentary, it sounds like you're fairly upbeat during the quarter, but perhaps, we had a little bit more mixed views from the competitors. So I was just wondering if you could give us a little bit more color there.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [3]

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Thanks, Michael. Thanks for your questions. I think the -- yes, the order of GX satellites is about our confidence in the future growth in the GX business. So that's the first thing. They do have slightly different business opportunities.

GX 7, 8 and 9 is about moving to a new business model for delivering future capacity and scaling the GX business. So it's responding to our belief that future demand will mandate further capacity, and we're going to bring our capacity to bear in a much more agile way, so we can put it where it's needed, when it's needed.

Having built a GX network initially for -- principally for coverage, it is, of course, unique as a truly seamless global broadband network. We are now able to augment that network with complementary capacity to go deep with higher speeds, more capacity and more agility given that we are -- we now have strong evidence that GX is going to be successful and that there's huge demand in principally, maritime, aviation and government for this kind of capability.

So GX 7, 8 and 9 will play into that demand curve in those markets in future years with extremely high speeds, with extremely low cost per megabyte in place and delivered surgically where and when it's needed, operating sometimes in conjunction with other satellites. So it's the next phase of growth. And yes, that will drive incremental revenue growth for us above and beyond the targeted $500 million.

GX-10A and 10B, it's different. It's focused specifically on the Arctic region. We found ourselves with a strong business case to be part of a collaboration on these 2 HEO satellites. There are at least 3 payloads on those satellites, which are, by the way, not competitive payloads. And what we've done is we've entered into a collaboration with Space Norway and the U.S. government with our piece being effectively extending GX into the Artic. We believe the Arctic region is an attractive region, does offer an incremental business case, principally for government services but also for maritime and aviation as well because it covers the most northerly aviation routes. And you probably saw recently one of our more recent customers, Emirates, making a very positive statement about the extension of GX into the Artic for its passengers.

On the U.S., I would just say we've got a great business. It's one well in the last 2 or 3 years. We, of course, have completely differentiated capabilities in many areas like Ka-Band, Military Ka-Band and L-Band. And we've worked really hard over the last 5 or 6 years to create a business that is less volatile and more dependable, and we've had a good run. We feel confident with the future growth in working with our U.S. customer -- government customer base. I wouldn't say it's a benign market by any means yet, and we have to work very, very hard to continue this kind of progress. So I'd say I'd characterize our businesses as cautiously optimistic about the future.

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Operator [4]

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Your next question is coming from the line of Roshan Ranjit from Deutsche Bank.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [5]

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Three for me, please. Just on your margin, another good performance in Maritime. Is it possible to get a sense of the percentage of XpressLink migrations that has occurred now? So how much have you got remaining essentially on the leased capacity, please?

I have to ask this question. Anything going on with the fourth GX satellite, given that you have announced further new satellites? And is it possible to get an understanding on where that is currently positioned?

And lastly, not quite on the deal itself, but Rupert, you did mention and you have stated in the release good progress with approvals. Is it possible to get a sense of the number approvals achieved and which are the big remaining ones left?

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

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Okay. Do you want to deal with them?

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Antony J. Jeffrey Bates, Inmarsat Plc - CFO, Member of Executive Management Board & Executive Director [7]

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Roshan, just quickly. On the first one, the original XpressLink estate was about 2,000 vessels. And as Rupert indicated, we're down to about 250 now. So it was about 10% left. So the KU impact in the P&L is coming through quite nicely. And as we've indicated, basically, that cost will have, to a material extent, gone away by the end of this calendar year.

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

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Okay. On the fourth GX satellite, I mean it's currently sitting over Europe. It is generating good business with its steerable military Ka beams, which seems to be a hot property. So I'm very pleased with GX 5, and Inmarsat-6 will, in short order, dramatically enlarge our global mil Ka capability. We haven't yet made a final decision about where it will go. There are business opportunities that continue to emerge there in different parts of the globe. There's no tearing hurry for us to do that. As you've probably seen with the arrival of a lot more GX capacity in the next few years, we've got the luxury of more choice, and we continue to bake those off against each other.

I'm not sure how much I can actually say about deal approvals. You heard on the way in that I've got to keep schtum on this, Roshan. But you've seen that we've made some progress in the U.K. You've seen public announcements about voluntary undertakings being given by the buyers, prospective buyers. And you've also seen the CMA have issued a PIN to look at the security implications of Inmarsat.

So just suffice to say that we're working across the board. The long pole in the tent is usually the U.S. because of their long FCC, Team Telecom processes, so you can draw a sensible conclusion there. But as you've heard from me throughout the outset, we are confident that this deal gets done before the end of the year, in Q4. I don't think it's going to get done earlier than that. But we are -- that confidence is based on good progress to date.

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Operator [9]

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Your next question is coming from the line of Mathieu Robilliard from Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [10]

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I have 2 questions. First, in terms of your new GX Fleet, can you go a little bit more into the technical details of that fleet in terms of what kind of speed it can achieve or what is the capacity compared to the existing one? How does it work from an antenna point of view? Is it all backward compatible? And what kind of coverage are you targeting?

And second, on the Maritime segment, so you flag renewed competition and still, I guess, a tough market for the FleetBroadband product. Can you maybe elaborate a little bit on where competition is coming from?

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

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Okay. A couple of questions, Mathieu. I don't want to go too deep into the GX fleet characteristics, first of all, because it's extremely technical. And secondly, because some of it is commercially confidential. But what we're bringing forward here is a next-generation capability using proprietary technology that greatly increases the capacity and capability of the satellite, whilst at the same time relying in to be substantially smaller and cheaper. We're also adopting LEO-type technologies to allow us to deploy these via a production line approach so that we can roll into new technology over the years to come instead of having to pick a vintage year, call it, 2019 and saying, "That's it. We're good for 15 years with this technology."

So the satellites are becoming cheaper, smaller, but dramatically more powerful and capable and agile. And we're going to start rolling them out on this production line. And because we're dramatically shrinking the time it takes to build and launch them from 5 years to under 2 years, we're also able to tailor the additional capacity to demand as it arises so that, in fact, you'll be looking at us investing in CapEx that we tailored to contracted demand that will be much more predictable and therefore, lower risk investment by Inmarsat in higher-class technology that can be future-proofed as we roll forward.

That's the key. So it is a revolution in our business model and in our capabilities, and it's founded on the fact that we're already global and in the lead. No one else can do what we're doing now, and we think it's a significant competitive advantage.

I don't think I did say the maritime market was a tough market. I mean all our markets are tough all the time, and there are competitors in them because they're growing markets, and they're very attractive markets for people to fight for position in. And by the way, I think the mobility markets are one of very few satellite markets that are growing very fast.

I don't think the competitive environment at Maritime has got darker or harder. I think it is what it is. And I remain very confident in our ability to win leading market share in the Maritime VSAT market.

What is going on in the market when you look at the overall market and its growth dynamics is a pronounced generational shift to broadband. Broadband, true broadband is now needed to fire, to fuel the digitalization of the trillion-dollar global shipping industry. That will drive costs out of the industry. It will create new revenue opportunities. It will allow greener shipping, and it's much to be desired. And broadband is the fuel for that.

On mass, the shipping industry is moving either from unconnected to broadband or from narrowband to broadband. And so we have people moving from FleetBroadband into -- which is a narrowband service into broadband, and we have to manage that carefully. And we're seeing most of the growth in the industry coming from VSAT networks like Fleet Xpress. So I think we're in the right place at the right time with the leading broadband capability, and it's our job to make sure that we grab as big a market share as possible fueled by FleetBroadband users migrating up to broadband and fueled by Fleet Xpress winning market share separately in new ships and from VSAT installations that are more anemic. If we get that right, we will have a tremendously strong business for many years to come founded on the digitalization of shipping.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [12]

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That's very clear. I guess I was referring to the comments on the press release about the market and competitive pressure on the FleetBroadband, but that's very clear.

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Operator [13]

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Your next question is coming from the line of Terence Tsui from Morgan Stanley.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [14]

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I have 2 questions, please. Firstly, on Ligado. I just wondered if you can give us any latest updates around the situation there, particularly now that the merger between T-Mobile and Sprint seems to be coming to its conclusion. Just wondered whether you think the FCC could take a closer look on Ligado in the near term.

And then secondly, what did you make of the announcement between OneWeb and Airbus when they were talking about dramatically reducing the cost for future satellite production? Do you see this potentially as lowering the barriers of -- to entry into the industry in the future?

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [15]

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Well, thank you, Terence. Two good questions. I don't think I can add much on Ligado. The connoisseurs of the Ligado story will be looking at every blade of grass on the White House lawn as to -- and reading something into it. There does seem to be a lot going on behind the scenes. It's been a long time for Ligado to wait on the FCC to move whether positive or negative, and there are plenty of indications that Ligado is trying to create as much pressure on the 8th floor of the FCC to get something done.

I don't particularly believe that the T-Mo-Sprint deal will be a spin-off deal with Dish. It can be read as positive or negative vis-à-vis Ligado or that it will -- the next -- there's some kind of action-causing event for the FCC on Ligado. So I think the fundamentals of the Ligado situation remain as they ever were, and I'm too hesitant about the outcome to comment positively or negatively on whether something will happen or when it will happen.

On OneWeb and Airbus, I think it's -- I think we've seen OneWeb and Airbus collaborating very, very powerfully to create satellite production lines that can move at an incredible pace and spew out small sats for these LEO constellations. That's been a feature of a lot of the LEO constellations, of course. And as I said earlier, Terence, we've actually adopted some of those techniques with Airbus for our next-gen GX satellites and found that very beneficial.

And by the way, I'd also say that you've just seen us integrate -- happily integrate a HEO network and a GEO network together working to the same terminals. So we remain as agnostic about LEO as we ever were. When that technology at whatever cost can solve our customers' problems better than anything else, we will adopt it and integrate it in our network. But it is, of course, very beneficial to the satellite industry that the production costs are coming down, the cost of access to space is coming down, and that's going to encourage lots of innovation. And we will be the beneficiaries of that because we intend to continue to innovate and be at the forefront of our global mobile satellite business.

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Operator [16]

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We have no further questions from this time. Please continue.

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Rupert Edward Pearce, Inmarsat Plc - Chairman of Executive Management Board, CEO & Executive Director [17]

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Very good. Thank you very much for your questions, and thank you very much for attending the call.

Q2 and the first half of 2019 has been a robust performance by Inmarsat. The trends with which we entered the year have continued. And we have a very diversified business, operating in some exciting growth markets. And the future of GX looks increasingly assured. Thank you very much.

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Operator [18]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.