Buy Intelsat: Management Seems to be on Orbit Despite Top Line Concerns


Intelsat’s Q2 2016 revenue came out at $241.98 million, a 9.37% decline compared to the same quarter last year

Despite a declining top line, Intelsat managed to post a $116 million net profit, which came out to be 93.33% higher compared to Q2 2015

Intelsat will launch 4 new satellites by Q4 2016 which would likely help boost their revenue as customer responses have been positive

Intelsat has a price target of $3.2 per share, which represents a 21.67% upside potential to secondary investors

Company Overview

Intelsat SA (NYSE:I) operates one of the world’s largest satellite services. Being one of the major players in the global communication business, they offer satellite based communications infrastructure such as fixed and wireless telecommunication links, data and network capacities and other mission critical services to global businesses and governments around the world.

Intelsat SA offers their services under four categories, including, transponder services, managed, services, channel services, and mobile and remote satellite services.

Besides serving the global business-to-business segments and multinational companies, Intelsat SA also has a strong presence in the defense industry as they are involved in providing satellite services to both US Government and other private sector military contractors.

As of August 3, 2016, Intelsat SA had a market capitalization of $269.52 million and employed around 1,069 people to run their global operation.

Review of Q2 2016 Financial Result


Figure 1: Intelsat SA Generated $541.98 Million Revenue in Q2 2016

On July 27, 2016, Intelsat SA released its Q2 2016 financial result, which showed that the company has generated a $541.98 million in revenues. Compared to the $598 million revenue in Q2 2015, this year’s Q2 revenue fell by almost 9.37%.

It is worth noting that the revenue of Intelsat SA has been gradually declining since the beginning of 2013 and their stock price has fallen accordingly, reflecting the steady decline of the company’s top line over the last four years.


Table 1: Intelsat SA’s Net Income Increased by 93.33% Compared to Same Quarter Last Year

However, Intelsat SA managed to post a $116 million net income in Q2 2016, which is 93.33% higher than the net income from the same quarter last year.


Figure 2: Intelsat SA’s Price Went up Over the Last Week

As a result, by August 1, 2016, Intelsat SA’s stock price went up to $2.75 per share and it is now trading at $2.63 per share, representing a 9.32% increase since the publication of Q2 2016 earnings.

What The CEO of Intelsat Had to Say During Earnings Call

Intelsat SA’s Network Services segment was the “problem child” of their growth-share matrix for the last few years. In Q2 2016, the trend continued as Network Services accounted for 75% of the year-over-year decline.

During the Q2 2016 earnings call, the Chief Executive Officer of Intelsat SA, Stephen Spengler, explained that “reductions in point-to-point applications, such as channel and trunking, as well as pricing pressure” reflected the competitive environment that caused the continued decline in revenue in this segment.

Furthermore, the CEO was not reluctant to admit that their media business also suffered due to volume reductions in the North American market.

However, he pointed out that Intelsat SA’s $441 million EBITDA was 76% of the revenue has a high contribution margin. But, Mr. Spengler sounded optimistic when he mentioned that the four new satellites going up in 2016 would gradually increase their capacity.

“In terms of our goals, our highest priority is getting our satellites launched and into service. To that end, on June 9, we successfully launched Intelsat 31, and that satellite entered service yesterday, generating fully incremental revenues for our media business,” he said.

He also mentioned that two other satellites, Intelsat 36; and Intelsat 33e, are expected to become fully operational and enter service by Q4 2016.

Mr. Spengler, also mentioned that their recent tests showed a future design that would increase the efficiency factor by 5 times compared to their current Intelsat Epic. “As compared to Intelsat Epic today, this would result in the customers’ cost per bit improving without lowering the price per megahertz,” He noted.


Jason Kim from Goldman Sachs asked a crucial question during the Q&A, mentioning the industry is accommodating a lot of new innovation and that’s not only creating qualitative competition, but also adding a lot of supply or capacity in the industry.

The key to Intelsat SA’s future success, therefore, depends not only on meeting customer demands, but it would largely be affected by how well they can cope with the qualitative competition. The Epic program may appear to be cutting edge now, but to stay competitive, the management needs to continue their focus on innovation as well. The good news is that Intelsat SA management seems to get this point and planning accordingly.

While existing customers of Intelsat SA are excited and having faith, Intelsat SA management needs to translate that confidence into solid bottom line improvements.

The satellite business is based on a long term focus and quarterly financials may not really reflect the reality of the business. Given the customer response about Intelsat SA’s Epic program, we are rather hopeful about the future of the company.

Intelsat SA currently has a high price target of $3.2 per share, which represents a 21.67% upside potential to secondary customers.