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Edited Transcript of SESG.PA earnings conference call or presentation 25-Oct-19 7:30am GMT

Q3 2019 SES SA Earnings Call

Luxembourg Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of SES SA earnings conference call or presentation Friday, October 25, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Martin Browne

SES S.A. - CFO

* Ferdinand Kayser

SES S.A. - CEO of SES Video

* John-Paul Hemingway

SES S.A. - CEO of SES Networks

* Richard Whiteing

SES S.A. - VP & Head of IR

* Steve Collar

SES S.A. - CEO & President

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Conference Call Participants

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* Aleksander Peterc

Societe Generale Cross Asset Research - Equity Analyst

* Giles Thorne

Jefferies LLC, Research Division - Equity Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nicholas Michael Edward Dempsey

Barclays Bank PLC, Research Division - Research Analyst

* Patrick Thomas Wellington

Morgan Stanley, Research Division - MD and Head of the European Media Equity Research

* Paul Sidney

Crédit Suisse 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

* Sarah Simon

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to SES 2019 Half Year (sic) [9 Months] Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, 25th of October 2019.

And I would now like to hand the conference over to your first speaker today, Mr. Richard Whiteing. Thank you. Please go ahead.

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Richard Whiteing, SES S.A. - VP & Head of IR [2]

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Thanks. Good morning, everyone. Thanks for joining this presentation of our 9 months results for the 9 months ended 30 September, 2019. The presentation and other results documents were uploaded on our website this morning, and I hope you had a chance to look at that already. As always, please note the disclaimer at the back.

The agenda for this morning is as usual and it's outlined on Page 2. In a moment, Steve Collar, CEO, will present the main business highlights. Then Ferdinand Kayser and JP Hemingway, the CEOs of SES Video and SES Networks, will take over and cover the main developments in their respective businesses. Afterwards, Andrew Browne, our CFO, will then cover the financial results. The presentation will conclude with some closing remarks from Steve, and then we will be open to questions.

So on that note, let me please hand over to Steve.

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Steve Collar, SES S.A. - CEO & President [3]

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Thanks, Richard, and good morning, everyone. I'm going to talk you through the business highlights and then hand over to Ferd and JP, who will dive into the segments.

So I'm starting on Page 4. I'm happy with the solid performance that we've achieved in Q3 and year-to-date. For the seventh consecutive quarter, our results are in line with our expectations and consistent with our external guidance that we provided. And that's pleasing and reflects our ongoing focus on execution in the core of our business and our commitment to openness and transparency as far as our results. We're seeing expansion of revenue and EBITDA in the second half of the year, and we talked about that on our last call. And it's important that we continue that momentum through into the remainder of the year and that we deliver a strong Q4, much as we did in 2018. Our outlook for the full year is unchanged.

JP and Ferd will speak about the business segments and the customer deals in detail, so I will not steal their thunder. What I will do is speak a little bit to something that I'm really excited by and that's the progress that we're making in creating the future for SES. We're developing a capability that I believe is genuinely differentiated and truly powerful, a seamless cloud scale, multi-orbit intelligent network that will support all customers and verticals with true scale and reach, and more about that in a second. And lastly, I'll be talking about C-bands. We're entering an important phase for the repurposing of C-band in favor of 5G in U.S. It's a truly complex endeavor but the CBA is working incredibly hard and with strong results to show for it. The Chairman of the FCC has again reiterated his belief that there'll be results to show for all of these efforts in the fall, and again, more of this to come in a second.

So looking at the numbers on Page 5. The key message is that once again we're in line with our expectations and consistent with the guidance that we provided. Our Networks business continues to grow nicely with revenues up 5% year-on-year. We've signed a number of important customer deals in the quarter, and we're also starting to see the value of some of the projects that we've recently brought into service coming through in the revenue line. This will drive us towards a strong Q4, very much our expectation within the Networks business.

Video is also tracking to forecast and a slowing rate of the decline in the business as we've expected. I'm also really pleased with the simplification that we're bringing to our Video business, with the combination of our infrastructure and services into a single team, upgrade and enhancement of our SES 360 content orchestration engine and our cloud playout partnership with Microsoft, all indicating good things in our Video business.

Strong control over our costs and discretionary spending supported us in achieving our EBITDA of EUR 904 million, which Andrew will speak more about in a second. We're on track to finish the year strongly, and we have a handful of important deals left to close to make sure that we finish the year where we want to. And at this point, we have good line of sight to the guidance that we provided.

So turning to Page 6 and coming back on the future network vision. Very good news is that the heavy lifting on O3b mPOWER is largely done, with CDR successfully completed, and we've secured 2 launch slots for 2021 for our first wave of satellites. We've made 3 very important announcements this quarter, which, when taken together, really show how we're thinking about the network of the future.

Firstly, everything we do now is referenced to the cloud. Our partnership with Microsoft allows us to extend Azure across our network, providing lightning fast access to the full capability of connected cloud, while also enabling the edge, supporting edge compute and leveraging the reach that we have as the largest global satellite network. And it's also significant that this partnership straddles our Video and Networks business, pointing to new ways that we can deliver video services in the future.

Secondly, we're building a network automation and orchestration layer in ONAP in partnership with Amdocs that will allow us to deploy network functions remotely. It will automate network management and really place the power and capability of our network fully in the hands of our customers, and it's super exciting. And yet that's only possible if you can manage the enormous flexibility that truly configurable digital system with 40,000 individually steerable and configurable beams offers, and we'll be able to do that, thanks to the development of our Adaptive Resource Control software, or ARC. And all of these innovations are not just for O3b mPOWER, but will extend across our entire network of GEO/MEO assets, including most immediately SES-17, to create the world's first truly seamless multi-orbit, multi-vertical, scalable, cloud-enabled satellite-based network, and I could not be more excited about it. It's really super progress that we're making in this area.

So turning to Page 7. It was no accident that on Wednesday we announced that we team with Thales to deliver a tremendously successful in-flight demonstration of MEO and GEO interoperability, seamlessly handing over between O3b and GEO using the same antenna on board. We've established a leading position in cruise over the last few years, in part because we've been able to combine the benefits of high throughput and high performance of the low latency system that we have in O3b with the scale and reach of our GEO fleet.

And we've now shown that we can bring that same compelling value proposition to the in-flight market, with seamless switching between GEO and MEO fleets in the sky and a common terminal on board. This is particularly relevant, as that is already our fastest-growing segment, up almost 30% Q3 this year versus Q3 last year. And this shows a compelling sort of future vision for not only O3b mPOWER, but SES-17 as we combine the reach and flexibility of those 2 fantastic assets in the commercial in-flight market.

And then lastly from me, I'll speak a little bit to C-band. It was no accident -- sorry, a few words about, sorry. So as I mentioned, the FCC Chairman has reiterated his belief that there'll be results to show in the fall from the ongoing proceedings to repurpose C-band and to support the rapid and broad-based rollout of 5G services in the U.S. The C-band alliance has made really strong progress in the outreach and engagement with all stakeholders, our customers, the potential acquirers of spectrum, the FCC and the Hill, and it really feels to me like we're getting towards a phase of action.

You'll see plenty of activity, I think, in the coming weeks to bring all of the various agreements involved to closure, reinforcing the fact that the CBA approach is not only the quickest part of the plentiful spectrum for 5G for all potential 5G network builders, but also the only way that does so while protecting incumbent users, provides benefit to the U.S. treasury and is fair and balanced for all stakeholders.

So with that, I'll hand over the Ferd to update you on developments in Video.

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Ferdinand Kayser, SES S.A. - CEO of SES Video [4]

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Thank you, Steve, and good morning, everyone. So starting with the highlights for Video on Slide 10. Video continues to be a highly profitable and cash generative business within SES Group, delivering value across our video library. In the first 9 months of 2019, SES Video generated revenue of EUR 907 million. This represented an underlying decline of 8.1%, which was in line with our expectations. The decline in revenue included the impact of lower revenue from the U.S. wholesale contracts, which we mentioned in our annual results presentation in February. However, we believe that this trend is not indicative of the expected long-term revenue trajectory. This is underpinned by the sequential growth in revenue from Q2 to Q3 2019 or, in other words, looking at the numbers, we can confirm that the decline in Video is decelerating.

Market conditions remain challenging, but nevertheless, we can highlight several positives in the first 9 months. First, the total number of channels increased by 3% year-on-year, with HD growing 3% and Ultra HD growing 13% year-on-year. Additionally, 68% of the total TV channels are now broadcasted in MPEG-4 and an additional 12% are in HEVC.

Second, our initiative to combine our video distribution and our video services activities is basically completed. Since end of September, the video services business is integrated into our infrastructure business, some fine tuning to be done, and we are currently phasing out the MX1 brand. All the video activities will be operated under the SES brand in the future.

Lastly, and as Steve mentioned, we have now secured nearly 95% of the expected revenue for 2019 in Video, and we are on track to deliver on the full year outlook, as was the case in 2018. We have a very precise understanding of the agreements and transactions which we have to execute before the end of the year, one or the other of which was supposed to be signed already before the end of Q3. I should also mention that we see an uptick in our services business, mainly driven by sports and events.

Year-to-date, and in particular, in Q3, we concluded some important contracts, and we were able to offer new product solutions to our customers. We have mentioned some of those on Slide 11. Indonesia, which is a market in which we want to strengthen our position by SES-9, our DTH customer, Nex Parabola, distributing already the Citra channels, is now also distributing premium sports with the UEFA Champions League and the Europa League matches live and in high definition. This will, for sure, help to further drive the technical reach in Indonesia.

In Asia, also, and more specifically in the Philippines, it is also SES-9, which is used by Mediahouse.PH for the distribution of CLUBTV, a new bouquet of international channels distributed also by Pay-TV operators starting with EASO.

In Eastern Africa, in Ethiopia, we launched the Ethiosat platform based on the collaboration with the Association of the Ethiopian Broadcasters and the public service operator, EBC. We started with a total of 34 channels, 12 of those channels already in HD quality. In the medium term, Eastern Africa is representing a market potential comparable to the one we have in Western Africa, where we started free TV channels on our fleet. We have Canal+ Afrique as the key customer and partner, who recently celebrated 4 million subscribers in Western Africa.

I mentioned already the increasing momentum we see in the area of the distribution of live sports events. A good illustration is the distribution of the FIFA Women's World Cup live games in Ultra HD via the SES UHD platform through the Fox Sports affiliates in the U.S. In the services area, and thanks to the collaboration with Microsoft, which was mentioned already by Steve, we are now in the position to provide end-to-end as a rate-based media delivery services on Azure, offering to broadcast other media companies, flexibility and scalability, which are essential to today's rapidly changing media environment. These services cover the entire video value chain from content interest playout to delivery.

So now moving to the individual video segments in more detail, starting with the distribution path on Slide 12. Underlying revenue was 8.2% lower than last year, where the key factor is the lower revenue from our U.S. wholesale business, various reductions based on changes in consumer habits and the ongoing SD switch off. In Europe, we experienced some slight volume reductions, especially with some long-term renewals secured at the end of 2018, and which I referred to in the Q1 results. In addition, we continue to experience the effects of the expiration of certain contracts signed on a short-term basis in the second half of 2018.

Trading conditions in the international market continues to be challenging, but I'm happy to see the effect of our recent contract signatures, albeit, not yet completely offsetting the challenges in specific markets. Regarding YahLive, commercial operations have now been fully integrated with the focus on building a pipeline and driving operational efficiencies in the next quarters.

Finally, on Slide 13, video services were 7.7% lower than last year, while the number of paying subscribers remained stable. HD+ revenues was lower on a year-over-year basis, driven by the reduced number in hardware sales and this -- as the business is shifting towards the software-based model in partnership with leading TV set manufacturers, such as Panasonic and Samsung, offering for the German market TV sets with integrated software-based conditional access system.

Regarding MX1, revenue was lower as we continue to shift our portfolio and exit certain low-margin legacy contracts. On the positive side, as mentioned before, we made progress in creating a single market-facing entity, delivering higher value proposition for customers by combining MX1 video services and video infrastructure teams by end of September. We believe that our customers will see greater benefit from this as we now combine capacity sales with various services offering, among other various streaming and nonlinear solutions.

And with that, I hand over to JP.

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John-Paul Hemingway, SES S.A. - CEO of SES Networks [5]

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Thank you, Ferd, and a warm welcome also from my side. So starting with the highlights for SES networks on Slide 15. As Steve said, we expect networks to drive sustainable growth. In the last 9 months of 2019, networks did exactly this and delivered 5.1% underlying revenue growth. We reported total revenue of EUR 544 million year-to-date, and we are well positioned to address growth in multiple segments, including government, mobility, in aero and cruise, in fixed data from demand for 4G and WiFi expansion, and energy digitization projects. I'm also confident our strong results will continue as we increasingly leverage the capabilities of our GEO high-throughput satellites. SES-15 continues to be a very successful asset and we are ramping well on SES-14, and we are now serving our first customers on SES-12 and building a robust pipeline for more.

We have a unique value proposition with customers increasingly selecting our hybrid GEO and MEO Network solutions, and we continue to invest to add network intelligence, analytics and automation to drive seamless adoption of satellite-enabled cloud services. Our customers are very excited about dramatically expanding on these capabilities with the launch of O3b mPOWER, and we are developing great opportunities across the board in fixed data, mobility and government for this platform in the future.

So looking at 2019 performance, we've secured over 92% of the revenue outlook, which implies another strong year of growth, and we are fully focused on delivering within the full year range.

So now I'd like to move on to Slide 16 and look at some of our recent customer successes. We are delighted to announce the new business aviation connectivity service, LuxStream, with our excellent partner, Collins Aerospace, and to do so with a leading fleet operator, VistaJet. The speeds available, for example, 25 megabits over North America, are going to enable unheard of passenger experiences, including high-definition video streaming. We are now able to expand with our partners across both business and commercial aviation markets.

Speaking of which, we further cemented our leadership position in the commercial aviation market by significantly expanding our business with Gogo in support of their demand across North America on our SES-15 under the satellite assets. As Steve mentioned, we have developed a strong collaboration with Microsoft. And announcing our capabilities as an Azure ExpressRoute partner and seamlessly integrating our satellite ground and Azure infrastructures, we can offer dedicated private network connectivity from any vessel, airplane, enterprise or government site around the world to Microsoft Azure cloud services.

Lastly, we have expanded our business in Pakistan with our partner Supernet and in support of Telenor Pakistan and other operators. We are deployed in multiple regions, with both MEO and GEO services, where the terrain means satellite is the only viable and reliable method. In particular, our high-performance MEO services are seen by our customer as key to enable seamless rollout of 4G coverage.

So now I'll briefly run through some of the individual vertical performances, starting with government on Slide 17. We are reporting 4.8% underlying revenue growth year-to-date compared to the prior year, with positive developments in both of our government segments. Revenue from the U.S. government continued to grow, supported by both GEO- and MEO-enabled network solutions. We have secured additional MEO expansion in Q3 and expect continued growth under a pre-existing blanket purchase agreement. Growth across the global government portfolio was driven by the expansion of our managed services for government-funded connectivity projects, humanitarian programs, and peacekeeping missions. Our institutional projects, such as those with EASO, continue with strong execution to milestones. As a small note, Q3 2019 underlying revenue was slightly lower by 0.7% than Q3 2018, primarily due to heavy equipment and installation programs this time last year.

So moving on to fixed data on Slide 18. In what remains a highly competitive market, year-to-date 2019 underlying revenue was 1.4% lower year-on-year. Latin America developed positively. Growth was mainly supported by new and incremental services for 4G expansion with major operators, rural WiFi projects and strong adoption of our managed platforms for enterprise customers, particularly on our new asset SES-14. Energy services also expanded with ongoing adoption of MEO-enabled connectivity to the leading service providers in that industry. Lower revenue from wholesale capacity in EMEA and Asia Pacific led to overall fixed data revenue being slightly lower than the prior period as this is yet to be offset by customer upgrades and new business flowing to revenues.

Finally, in mobility, on Slide 19, we continued our high-growth path, with underlying year-to-date revenue expansion of 14.6%. Aero, once again, delivered a very strong growth with our service provider customers, leveraging our SES-15 and SES-14 assets in North and Latin America. This growth was furthered with SES's new Ka-based network and also with the restoration on services on behalf of Intelsat, activated during Q2 2019.

Growth in maritime was driven by the expansion of agreements again with existing and new cruise operators. SES is strongly recognized as a key part of changing the passenger experience, and we support 4 of the top 5 global cruise operators, representing significant vessel expansion potential.

So in summary, the first 9 months of 2019 have developed as per our expectations, with commercial successes across the entire business. For Q4, our key focus is to deliver and execute on another uptick in our networks business, as we have previously demonstrated.

And with that, I will hand over to Andrew.

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Andrew Martin Browne, SES S.A. - CFO [6]

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Thanks very much, JP. Good morning, ladies and gentlemen.

Turning to the financial highlights on Page 21. As Steve has mentioned, we delivered a solid performance in line with expectations, and we remain on track to meet 2019 financial outlook as we did in 2018. Revenue for the 9 months was EUR 1,451.9 million with underlying revenue lower by 3.6% compared with 2018. On a reported basis, revenue was 1.2% lower, including the benefit of the stronger U.S. dollar. At constant FX, total revenue, including periodic and other, was 3.9% lower than the prior year. EBITDA of EUR 889.6 million represented an EBITDA margin of 61.3% or 62.3% when excluding the EUR 14.2 million restructuring charge.

Our operating costs were lower on a constant FX basis and a tight focus on cost and discretionary spend allowed us to deliver operational efficiencies, offsetting costs, so we continue to invest in expanding our networking business. Combined with the impact of the lower reported revenue, EBITDA was 4.1% lower as reported and 6.6% lower at constant FX.

Net profit was EUR 249.9 million compared to EUR 303.7 last year and essentially following the trend in EBITDA with additional depreciation related to satellite supported service. Net debt-to-EBITDA was lower at 3.47x compared with 3.5x at the half year. We expect to achieve at or below 3.3x at the end of the year and in line with our commitment to investment-grade status. Finally, there's no change in financial outlook, as Steve mentioned, and this includes our CapEx forecast.

So turning quickly now to remaining pages and starting with revenue on Page 22. The change in FX, as you can see, accounted for EUR 42 million of the total movement on a reported basis. At constant FX, the underlying business was EUR 53.8 million or 3.6% lower, reflecting the growth in Networks and Video developments, indeed, as we anticipated. Total revenue included EUR 18.4 million of periodic and other revenue compared with EUR 24 million in the same period in 2018 at constant FX.

EBITDA -- turning to EBITDA on Page 23, EBITDA was lower as reported and adjusting for the change in FX. As mentioned, this was driven by lower revenue, with operating expenses flat. In addition, we booked EUR 14.2 million of restructuring charge as part of our ongoing program to optimize our overall operating structure and operations across the group. Accordingly, the EBITDA margin was 61.3% and excluding the charge 62.3%.

Net profit on Page 24 was EUR 249.9 million for the first half. Depreciation was higher, including the impact of the entry into service of these new satellites as mentioned. Net financing costs were slightly higher than the prior period, which benefited from higher levels of capitalized interest. We recorded EUR 16.1 million as tax income and some gains in noncontrolling interest of EUR 15.7 million. These 2 line items were affected in 2018 by deferred tax asset related to the entry into service of the GovSat-1 satellite that we own in partnership with the Luxembourg government

CapEx on Page 25. As already mentioned, there is no change compared to what we had outlined in February.

Leverage, Page 26. The leverage development net debt-to-EBITDA was 3.47x compared to 3.5x at Q2 2019. And as already mentioned, we expect 2019 to follow along with 2018, and accordingly, we expect to be at or below 3.3x at the end of the year, in line with our fair and strong commitment to investment-grade status.

Financial outlook, lastly on Page 27. And as Steve commented, it's unchanged, and we are on track to deliver on 2019 as indeed we have done for the last 7 quarters.

With that, I'll hand back to Steve.

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Steve Collar, SES S.A. - CEO & President [7]

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Okay. So not much more for me. Just to repeat, results very much in line with our expectations. A lot of focus on Q4 to make sure that we deliver the year that we expect really strong progress around the development of our future architecture and also gaining momentum in C-band with a decision expected this year.

So with that, Richard, back to you and questions.

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Richard Whiteing, SES S.A. - VP & Head of IR [8]

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Thanks, Steve. Operator, I think we can go ahead and take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) You first question from the line of Nick Dempsey from Barclays.

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Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [2]

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I've got 3 questions. First of all, can you give us a sense of the overall revenue hit that you're likely to get from the combination of Viasat and Canal Digital and therefore, the shift away from SES-5? And can you give us a rough estimate of the time frame of that impact? I know it's going to take time for that to unfold.

Second question on C-band. In terms of pay-aways, we know that the CBA is agreeing to a voluntary payment to the U.S. treasury. I'm sure you won't comment on the level of that. Can you just talk to us about your latest thinking on the tax situation beyond any voluntary payment to the U.S. Treasury for any windfall you get from C-band?

And the third question, you've got a really tough comp in fixed data in Q4, both from periodic revenue and from good growth in the underlying from that particular situation you had in Q4 last year. Do you have other periodic revenues up your sleeve or something else up your sleeve for Q4 in fixed data? Or are we going to watch fixed data get quite a lot worse year-on-year in Q4?

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Ferdinand Kayser, SES S.A. - CEO of SES Video [3]

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So the first one, the announced or the intended merger between NENT and the Canal Digital in the Nordics, first of all, one comment, this is the only market where consolidation between Pay-TV operators has not yet taken place. So it was a matter of time and sooner or later, this was to happen. We -- for the time being, our understanding is that -- and we are still in discussions with the colleagues from NENT, there will be no impact on our revenues during the next 2 or 3 years. And then depending on how the migration will be executed, of course, there will be an impact -- the negative impact after this period.

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Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [4]

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Sorry to jump in. Are you able to give us any kind of quantity of that impact when it does happen?

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Ferdinand Kayser, SES S.A. - CEO of SES Video [5]

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Too early for the time being.

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Andrew Martin Browne, SES S.A. - CFO [6]

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And Nick, just coming to your question on the tax, I think we've been quite consistent. We said around 25% is what our expectation is in terms of tax we pay on the net proceeds.

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Steve Collar, SES S.A. - CEO & President [7]

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And look, on the fixed data, yes, I mean, we just said that there was a tough comp Q4 2018. We've got strong expectation that we're going to get to our '19 number. We're not necessarily going to break that out at this point into various different verticals, but we are seeing some good positive momentum in fixed data. As we mentioned, we sort of brought into service now networks in Indonesia. We're in the process of bringing networks into service in the Andean region as well. So I would say, both organically and potentially from some periodic revenues, we still have a good expectation for fixed data in the fourth quarter.

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Operator [8]

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And your next question comes from the line of Aleksander Peterc from Societe Generale.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [9]

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I actually have 2. So first one on restructuring. You had -- I think you planned EUR 25 million to EUR 30 million for this year, and we had EUR 14 million so far in the first 9 months. So does this mean that we're going to have a Q4 with a charge of somewhere between EUR 11 million and EUR 16 million or is your section budget being revised lower than that?

And then second question is really regarding your guidance, and I'd like to focus on Video. Your low end of the guidance there is EUR 1.225 billion, and that was in an FX rate of $1.15. Now we have an FX rate probably with Q4 coming in at $1.11, you're going to land at $1.125. So with the tailwind from FX, this low end should be actually EUR 10 million higher, so EUR 1.235 billion. And I can't see how you can reach EUR 330 million in the fourth quarter, that's up 9% quarter-on-quarter for Video. That's quite a lot of flat year-on-year. Just can't reconcile that with cyclical trends in the segment?

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Andrew Martin Browne, SES S.A. - CFO [10]

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And on the first question, on the restructuring, indeed, the guidance is EUR 25 million to EUR 30 million, and we've got about EUR 14 million spend so far. And indeed, in Q4, there'll be sort of a catch-up as we look to finalize rollout and some of the plans that we've been working on. But I would say within that range, we'll probably be at the lower end of that range, I would think.

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Steve Collar, SES S.A. - CEO & President [11]

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And look, I think the question on -- the second question was really around what it's going to take for us to get to our guidance on the Video side of the business. And so all I'd say to you is we've got some important contracts to close out, one of which we have and others are coming. And we need to do those in order to get to our guidance on the Video side. And we have good visibility of those. So I think that probably gives you the insight that you need with respect to what has to happen to get to our Video number.

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Operator [12]

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

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [13]

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Just a couple of questions for me. Firstly, just following up on the Video question. Is it possible to sort of give us a magnitude of the video contracts that have slipped in the third quarter into the fourth quarter relative to just contracts that you're always expecting in the fourth quarter and sort of bridge that gap that we were discussing?

And then secondly on C-band, I was just wondering if you have any commentary on the Eutelsat filing, which was talking about the CBA having -- or not having authority to go beyond the 50% treasury contribution?

And then my third slightly bigger picture question is, following the presentation on the testing of the mPOWER terminals, I was just wondering if you could give us a bit more color on the sort of size of the Antenna, i.e., the complexity of the terminals, specifically for the Mobility segment because, obviously, that is sort of one of the drawbacks historically of MEO that you were trying to correct as you move to mPOWER to open up more mobility verticals?

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Steve Collar, SES S.A. - CEO & President [14]

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So I think, Michael, not too much more to say on Video side. Again, you can see kind of where we sit today and where we need to go in terms of getting to the guidance in the fourth quarter. Again, good visibility of how we're going to get there, restating and reaffirming our guidance on Video side. So nothing much to comment on beyond that.

On C-band, again, nothing much to say about sort of Eutelsat's commentary. We're making strong progress, I would say, across the board, including with sort of Treasury and the Hill. So a lot, a lot of progress, I would say, going on. And as I sort of said in my overview, I think we'll see over the next kind of days, weeks, some strong progress on a number of different fronts, including that one.

On the mPOWER testing, JP anything to add to what we've already said?

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John-Paul Hemingway, SES S.A. - CEO of SES Networks [15]

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I think, just to reiterate, though, that the testing that we described or you described earlier, Steve, was actually on existing O3b capabilities. So readily tested on a live operating NGSO system, and it was available on standard aero antennas installed on the aircraft. So the performance we got with that, which is over 260 megabits to the aircraft, as we said in the press release, is simply outstanding. So therefore, we can assume we will get minimally that on that same antenna as we move forward into O3b mPOWER. Now of course, we will be working with the antenna vendors over the next couple of years to make sure we can get even more to leverage the most out of O3b mPOWER, and we're working with 2 or 3 vendors as we have publicly stated.

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Operator [16]

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And your next question comes from the line of Giles Thorne of Jefferies.

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Giles Thorne, Jefferies LLC, Research Division - Equity Analyst [17]

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I had 3 questions, and they're all for Ferd. The first one, just -- it'd be interesting, Ferd, to get some color on your expected output of the work that you are doing with Microsoft to develop a broadcast grade managed video service on Azure. Just paint a picture for me of what that will unlock for you from an application perspective, and therefore, I guess, maybe a revenue perspective too.

And then coming back to this question of the impact from the Canal Digital and Viasat consolidation. Clearly, there's 2 broad buckets of customers that you'll have at any video neighborhood, be the main Pay-TV bouquet and then any free-to-air guys that transact with you directly too. So it'd be interesting to get your perspective on -- in the history of TV, has the loss of the main Pay-TV operator ultimately resulted in the demise of the video neighborhood or can the free-to-air bouquet keep it going over the very long term? Any thoughts on that would be useful.

And then the last one is picking up on the news around the Russian streaming service Kartina, who's decided to launch channels at 19 degrees East rather flip the entire video debate on its head. I just wanted to get your perspective on what does that mean for the future of TV distribution, nothing minor?

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Ferdinand Kayser, SES S.A. - CEO of SES Video [18]

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Very good, thanks. First one on Microsoft, it would be clear that offering cloud-based services via Azure Pass is an additional option, but it's about offering video services to various customers. And the understanding should not be that the intent is to progressively shift everything to the cloud. So we are offering a couple of play-out solutions, for instance, which are on-prem with our -- in our facilities, and of course, now as a third category, the ones being offered by our cloud. And here, the services, in particular, important for customers looking for flexibility, having the intention, for instance, to launch pop-up channels, having the intentions to launch channels with very short notice period, and therefore, the flexibility and the scalability of this solution is very important.

On the merger between NENT and Canal Digital, yes, the Pay-TV operator is an important player on 5 East neighborhood. But what I should mention is that NENT being the successor of MTG, which has been historically our customer on this orbital position, MTG reorganized part of the activities already many years ago by selling the Ukrainian activities to Ukrainian operator, and this continue to be on 5 East, by selling the Baltic operations to a Baltic operator and this continue to be on 5 East. And of course, now with the consolidation, very probably to one last because the shareholder of Canal Digital is still operating its own satellites. We, of course, have to first develop the 5 East neighborhood. And of course, we are doing this with the remaining customers we have, and we will continue to have on this orbital position.

Regarding Kartina on 19 East, this is indeed an interesting development, because it's not the first time that an OTT operator is going the other direction. So up to now, normally, satellite DTH customers started offering OTT services in parallel. Here, an OTT operator is going the other way around, and that's because he has realized that in major markets like Germany, the broadband penetration is still not strong enough to give him -- to allow for universal coverage. And therefore, he came to the conclusion that going on satellite allows him to capture additional subscribers for his service.

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Giles Thorne, Jefferies LLC, Research Division - Equity Analyst [19]

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So just on that last point, do you think it's not an economic decision around the cost to serve for Kartina, it's literally a market access question?

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Ferdinand Kayser, SES S.A. - CEO of SES Video [20]

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It's a market access question, combined with the cost to serve because -- and in particular, in markets like Germany, and I have another example, yesterday, we were meeting with the customer, where the customer, who is a very established player in the German market, tells us that the OTT services are nice to have, but what is really disturbing them are the unpredictable high cost of the OTT distribution by our CBM. So it's not only the costs, but it's the fact that if the content is successful, the costs are higher than initially foreseen. So it's definitely a combination of the 2.

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Operator [21]

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And your next question comes from the line of Patrick Wellington of Morgan Stanley.

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Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [22]

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I'd like to ask a few questions about C-band. Are you going to preannounce the availability of 300 megahertz as you did when you stepped up from 100 megahertz to 200 megahertz? So is that in the plan? And when should we expect to see that? I noticed you said we'll see over the next few days and weeks, some developments. So is that one of those developments?

Secondly, Andrew, while you're still here, can you give us a few of your latest thoughts on the corporate taxpayer? Well, I know Nick asked a bit about this. But will you be passing on your secrets on minimization of that to your successor? And is there a possibility that the windfall tax could be partly paid in kind, i.e., in spectrum rather than cash?

And then thirdly, Steve, you talked about the potential acquirers of spectrum and how you've been talking to them. Can you expand a bit on that and tell us about their relative degree of enthusiasm to buy C-band spectrum in due course? And then finally, the FCC report and order, will it be in by the end of December? Or is there a possibility it slips into next year?

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Steve Collar, SES S.A. - CEO & President [23]

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Patrick, some good questions there. So yes, I mean, I do -- I think that we will see some strong progress over the next sort of days and weeks. And that's very consistent with the Chairman sort of suggesting strongly that he wants to see and expects to see progress on this file this fall. And so that means that all of these various different open threads need to be closed over the next sort of days and weeks.

On the aggregate amount in spectrum, so we are on record of saying we can clear 200 megahertz in 18 to 36 months. The FCC is on record of saying that they want more. And a number of the commissioners have talked about 300 megahertz being the target. We've been working very hard, I would say, over the last sort of 4 to 6 weeks intensively with our customers on a plan to get beyond 200 megahertz. Nothing to say on that right now. But as soon as we do have something to say, you will hear about it, and it's something that we are very, very focused on.

Andrew, do you want to touch on corporate taxes?

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Andrew Martin Browne, SES S.A. - CFO [24]

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Indeed. Patrick, thank you very much for your comments. And I assume your question is around -- just around C-band, and I think that to be fair, we said about 25% is probably good for now, I would say.

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Steve Collar, SES S.A. - CEO & President [25]

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Yes. And I wouldn't comment, Patrick, on will any of the contribution or corporate tax be paid in kind. I think that's unlikely, but wouldn't say anything more than that at this point in time. For the acquirers of spectrum, look, I would say strong interest, and particularly as the CBA plan becomes more and more prominent, I think what we've seen is stronger and stronger engagement from the acquirers of spectrum. And that is relatively broad-based at this point in time, which is good to see.

This is, I would say, mandatory for anybody looking to deploy a capable 5G network in the U.S. This mid-band spectrum is the best spectrum available for that. It is high-power and unencumbered. And so as you would expect, there's interest consistent with the fact that this is among the highest priced spectrum in the market.

And then with respect to timing, I mean, we've said all along, we don't control the timing. It's obviously very much the prerogative of the FCC and the Chairman. He has sort of said, "Look, we expect progress on the fall. Could it slip a month?" Absolutely, but my expectation is still that we'll see something this year.

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Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [26]

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That is excellent. Just going back to the acquirers. Some people fear that it's just going to be Verizon and AT&T. So you think it's going to be a broader group than that?

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Steve Collar, SES S.A. - CEO & President [27]

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We -- I mean -- again, we won't know until we get into the sales process in earnest. But I would say the engagement is broad-based at this point in time. So I think we're seeing interest across the board.

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Operator [28]

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And your next question comes from the line of Sarah Simon of Berenberg.

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Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [29]

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Sorry, I've got a question on your comments around the revenue you secured. So you talk about 95% being secured across the group. But you've talked about 95% in Video and 92% in Network. So am I missing something there? And then sort of ally to that, when you talk about the revenue that's being secured, does that include the periodic revenue because, obviously, that's pretty lumpy?

And the final question is, when you say it's secured, does that mean it's already operational? Or this is contracts that you have signed that you expect to go live, but where there's still work to do to actually put it into operations?

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Steve Collar, SES S.A. - CEO & President [30]

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So I think I'm looking at Richard here to keep me honest. But on the 95%, I think it's just shy of 95% aggregate across the business. It is 95%, in fact, a little north of 95% on the Video side and Networks, I think, we said it was 92%. So you can pick bones out of that Sarah, but it's basically kind of branding and that's what it looks like across the business.

And then on the question of periodic, so there's definitely periodic sort of expected in Q4. And that forms part of our overall revenue picture. Obviously we now bring that out very clearly for you to all see that. And then your last question was to do with -- what was your last question, Sarah?

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Sarah Simon, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [31]

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As to whether -- so let's say you've got a contract which you've signed for Networks that you need to do a bit of groundwork before you can actually go live. Would that revenue be included in your secured? Or is it just stuff that you'll -- that has been switched on already?

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Steve Collar, SES S.A. - CEO & President [32]

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Yes. I mean I would say depending. I mean generally speaking, once we sign a contract, it is secured. But obviously, we -- the contracts where we have work to do, we will sometimes not put that in our secured revenue numbers until we sort completed the implementation. So unfortunately, the answer is, it depends.

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Operator [33]

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Your next question comes from the line of Paul Sidney of Crédit Suisse.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [34]

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I had 3 questions, please. Firstly, just following on the C-band comments, just looking at bigger picture, I just wondered if you had any guidance you could give us on the priorities for the use of any proceeds that you receive. How should we be thinking about you using a cash windfall for the spectrum?

And then just secondly, on Video, obviously, the U.S. market, you have seen a lot of pressure there in recent years. I was just wondering what percentage of Video revenue is now coming from the U.S.? And are we through the worst in terms of the SD switch off in your opinion?

And then just thirdly, I was very interested in the in-flight connectivity slide that you gave. I was just wondering, is there an opportunity there for you to now go direct to airlines with a very attractive product, rather than just being a sort of wholesale provider in the IFC market?

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Steve Collar, SES S.A. - CEO & President [35]

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Paul, so priorities for use, I think we continue to be cautious about not spending money that we don't have. But I think we've also talked about a couple of priorities when it comes to any proceeds from C-band. I think our first priority will be some modest deleveraging. And so that would be our first use, I would say. And then secondly, we've got a lot of excitement, as you can see, around our Networks business, we've got a very, very scalable business. And I think as we get towards the launch of O3b mPOWER, we really start to see a lot of momentum building, and I think the in-flight demonstration that we've done is a good example of that. Some of the things that I talked about earlier on the call around our overall network vision. So we've got some exciting things on the Network side that we would be looking to invest in. So I think some deleveraging and then investment on our Networks business.

And then, JP, do you want to take the question on the in-flight?

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John-Paul Hemingway, SES S.A. - CEO of SES Networks [36]

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Yes, absolutely. So it's a good question, Paul. But no, we're rightly proud of the performance that we've done. But if you see the announcement, it was very firmly done with our partner Thales. And -- but what they bring to the table is indeed the development of the antenna solutions that we sort of worked together to bring to bear. So no, this does not signal a change in our go-to-market strategy for the aviation market. But we will continue to work with our partners to make sure that those solutions are tailored best to our current and future assets.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [37]

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Yes. And the Video question.

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Ferdinand Kayser, SES S.A. - CEO of SES Video [38]

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There was a question on the Video business in U.S. So our Video business in U.S. is representing less than 10% of our total Video business.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [39]

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Is that both services and distribution?

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Ferdinand Kayser, SES S.A. - CEO of SES Video [40]

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Yes. Yes.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [41]

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Okay, good. And just on the SD switchover, do you think we're through the worst of it? Just a follow up.

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Ferdinand Kayser, SES S.A. - CEO of SES Video [42]

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In U.S., yes.

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Operator [43]

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And your next question comes from the line of Sami Kassab of 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 [44]

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I have 2 questions, please. The first one, can you comment on capacity pricing trends in Networks, possibly discussing the various subsegments? Have you seen any improvement in the pricing environment? Or is the pressure similar to previous quarters?

And secondly, can you elaborate on your satellite replacement strategy at 19.2 East? I mean most of the satellites there have an estimated end of design life in the next 2 to 3 years. You have not announced anything yet. Eutelsat has younger assets but has already announced the replacement of HOTBIRD. So what does it mean? Does it mean you have more fuel and the asset life can be extended? Or are you waiting for technology to improve and value economics to improve? Any comment on 19.2 replacement strategy, please, Steve?

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John-Paul Hemingway, SES S.A. - CEO of SES Networks [45]

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Yes. So I'll take the first one there, Sami, on the pricing trends in Networks. So they are indeed different by segments. I previously commented on the sort of intense competition we see in the fixed data market in general. The good news that we're delivering on our performance that we showed is that we're delivering greater volumes that offset that. So there is this odd balance that we maintain there. But that's -- so that's the segment that probably suffers the greatest price compression that we see in the markets. Outside of that, we're not seeing price increases. So really, the sort of price trends are really as we've reported in previous quarters across the segments with differences across each.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [46]

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And no improvement in pricing versus previous quarters?

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John-Paul Hemingway, SES S.A. - CEO of SES Networks [47]

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No noticeable improvements in pricing, but no noticeable decrease either.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [48]

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And on 19.2?

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Steve Collar, SES S.A. - CEO & President [49]

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Yes. And just maybe to complement that Sami, I would say we're not necessarily focused on increased pricing. I think what we are interested in is increased ARPU. And in many cases sort of delivering a lot more funnel money is kind of key in a bunch of the segments that we're in, which is not at all inconsistent with the overall data market. So I'm not sure I want to place an expectation that I don't see pricing being driven by competition as much by being driven by what you need to do to close the business cases of our customers and that has been the dynamic for a good while now. The good news is, I think, with our -- with the assets that we have and the capabilities that we have, we're often meaningfully above the rest of the market when it comes to pricing because the customers value the performance that we can deliver.

And on satellite replacement, we've got great assets at 19.2. We have no need to replace those assets for a number of years. We probably don't need to make a decision around what we're going to do with 19.2 for at least another 2 or 3 years. So no imperative, I would say, to move out on 19.2 anytime soon.

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Operator [50]

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And there are no further questions at this time. Please continue.

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Richard Whiteing, SES S.A. - VP & Head of IR [51]

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Thanks, Tina, and thanks everyone. As usual, myself and the rest of the IR team are available, if you have any follow-ups. With that, I wish you all a very good day. Thank you, and goodbye.

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Operator [52]

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Thank you. And this does conclude our conference for today. Thank you all for participating. You may now disconnect.