Inmarsat portrays its in-flight-connectivity business as the single most promising in its portfolio. But it has a long string as regards free cash flow. The company said infrastructure capex will moderate as the GX-5 and Inmarsat I-6 programs wind down. Spending on airline terminal hardware, such as the $100 million to $150 million over three years in the Lufthansa contract, will decline as well as future airline deals are concluded. Credit: Inmarsat

PARIS — Mobile satellite services provider Inmarsat is laying off 10% of its staff and sharply reducing its dividend to continue investing in in-flight connectivity, which it views its main growth driver in the coming years.

Acknowledging that it had spent more than it would like to win initial airline IFC contracts, the company said such investment will drop now that it has established a position worldwide with its Global Xpress Ka-band broadband network.

The company believes the geostationary-orbit network of four satellites gives it early traction in markets where future competitors such as OneWeb and ViaSat have yet to enter.

To counter these companies’ expected greater in-orbit capacity, Inmarsat Chief Executive Rupert Pearce said Inmarsat is counting on its ability to add satellites to a given high-demand region within 18 months of an order.

He declined to elaborate on how it might do this. The usual time between ordering a satellite and having it in orbit is at least two years, and often longer closer to three.

High cost of IFC presence was needed to scale early

In a March 9 investor call, Pearce made clear that he had no regrets about spending heavily to win a Global Xpress order with Lufthansa and a couple of smaller airlines that were among the first to adopt the service.

“We needed to achieve a level of scale to win business globally and support service activations,” Pearce said.”Once you hit that scale, you need to process your pipeline into billing.That’s pretty much were we are today.”

Also important, he said, was the need to incentivize Inmarsat’s Global Xpress partners  Honeywell, Thales, SITA OnAir and Rockwell Collins among them.

Inmarsat said its Global Xpress service had signed up 1,300 aircraft as of Dec. 31, 2017, compared to 950 a year earlier.

IFC-related direct costs increased to $25.1 million in 2017. Indirect costs  more than doubled, to $55.7 million, compared to the year before.

The IFC business model remains in flux as a half-dozen service providers compete for airline business. Inmarsat said it concluded deals early on to establish its GX satellites’ global scale and persuade Inmarsat’s channel partners of the opportunity. Credit: Inmarsat

For the Lufthansa contract alone, Inmarsat is spending  between $100 million and $150 million over three years, with most of it to wind down in 2018.

“We do have some other airlines that do have capex in them, but it’s relatively small numbers,” Inmarsat Chief Financial Officer Tony Bates said during the call. “So in 2019 and 2020, spending on on-board equipment will be… $10 million to $20 million.”

Global Xpress has 30% share of non-North American IFC market

The Global Xpress service generated $142 million in 2017 revenue. Inmarsat reiterated its forecast of $500 million in annualized revenue by late 2020.

Inmarsat’s Aviation division, which includes the company’s lower-speed legacy L-band service in addition to Global Xpress, grew its revenue by 46.7% in 2017, to $195 million.

Inmarsat said Global Xpress is in second place worldwide in IFC revenue when North America is excluded, with a 30% market share, presumably second only to Panasonic Avionics.

Inmarsat has stationed its fourth Global Xpress satellite, Inmarsat 5 F4, at 117 degrees east over Asia. It is not yet operational and Pearce said it would soon move to “bring into use” an unspecified orbital slot to reserve the position for a future satellite. Inmarsat 5 F4 could return to the 117-degree location depending on how Asian, especially Chinese, IFC demand develops.

Under International Telecommunication Union (ITU) rules, an orbital slot is certified as “brought into use” if a satellite occupies it for at least 90 days. In this way, a single satellite may be used to validate more than one orbital position.

India and China are prized objectives for all IFC providers. Pearce said he had “anecdotal” evidence that many Chinese airlines are line-fitting their planes for the Inmarsat service.

“The issue of course is the right partners in China, and to solve the regulatory conundrum of market access,” Pearce said. “But we are confident that we will be one of the players in the very exciting market there.”

Indian regulators have recently proposed relatively open-market rules for foreign access to India’s IFC market, meaning providers like Inmarsat will, in principle, have the right to operate the service in Indian airspace.

Frightened of ViaSat-3? They’re years away from service

ViaSat has designs on those markets as well and has announced that it would launch three terabit-per-second ViaSat-3 satellites over the Americas, Europe and Asia. Only two are under construction, however. Pearce said ViaSat 3 will arrive so late to the IFC market as to be “uncompetitive in our core markets before it is built — if it is built.”

“Being in the market today for in-flight connectivity is key,” Pearce said. “If you’re selling vaporware, if you’re selling ViaSat-3, which may or may not emerge in the 2020s, you’re not selling something you can actually install on an aircraft today.

“Looking ahead, if ViaSat-3 and OneWeb arrive, Inmarsat has to be in a position where we can complete. We can react, very quickly  — in less than 18 months’ time — to deliver more capacity where it’s needed.

“I’m not frightened by ViaSat-3’s cost per bit over the horizon,” Pearce said. “I’m not frightened by their coverage over the horizon. You’re talking about an incumbent [Inmarsat] in a very strong competitive position technologically and operationally. It’s ViaSat who should be worried about coming in as a neophyte and trying to break into the market.”

Even without India and China, the IFC market has huge potential and Inmarsat believes it shows more promise than any of its other businesses and justifies its current cost.

“Although we currently remain in the market-capture and infrastructure-investment phase regarding the global IFC opportunity, we remain confident that over the medium term our IFC business will become highly profitable, and cash generative on a long-term, sustained basis,” Pearce said.

10% staff cut, and dividend reduction, to fund IFC

It’s on behalf of that confidence that Inmarsat incurred $19.9 million in severance charges in the last three months of 2017 as it cut staff. Bates said the layoffs, to total 10% of the company’s 2,000-strong work force, were mainly done in 2018.

For the same reason, Inmarsat’s dividend is being sharply reduced and will not rise until the company’s liquidity justifies it.

The severance charges are the main reason Inmarsat’s adjusted EBITDA was down 5.5% in 2017, to $751.4 million, or 53% of revenue.

Boeing Global Xpress take-or-pay results

Boeing Satellite Systems International included in its bid for the Global Xpress satellite manufacturing contract a take-or-pay deal under it would sell Global Xpress to the U.S. government for five years and pay Inmarsat a fixed amount during the period.

The idea was that Boeing would be paying Inmarsat more than the revenue it generated from Global Xpress in the contract’s early years, after which the trend would reverse.

The Inmarsat 5 F4 satellite, now at 117 degrees east, will be moved to pollinate another slot for Inmarsat and then may return to Asia, depending on how the China IFC market develops. Credit: Boeing

Apparently that has not happened.

As the take-or-pay term nears expiration, Pearce said Inmarsat will see a dip in Global Xpress revenue because Boeing pays Inmarsat more than Boeing receives from U.S. government use of Global Xpress.

“The things that hold us back in short term would be the dropping away of the Boeing take or pay to normalized levels, i.e., to the level of actual revenues,” Pearce said.

We’ve overtaken Intelsat as #1 government sat-service provider

Government was, after aviation, a star performer for Inmarsat in 2017. total government revenue grew 11%, to $366.7 million, pushing Inmarsat past rival Intelsat, for the first time, as the number-one commercial satellite supplier to governments worldwide. Inmarsat had ousted incumbent Intelsat to win a U.S. Navy award, which took effect in early 2017.

The contract, called CSSC, features satellite capacity from multiple suppliers, meaning the prime contractor — then Intelsat, now Inmarsat — does not generate the usual profit levels.

Inmarsat said it would take a few years before it could switch the CSSC work from third-party suppliers to the Global Xpress network.

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Peter B. de Selding
Peter B. de Selding
Peter de Selding is a Co-Founder and editor for SpaceIntelReport.com. He started SpaceIntelReport in 2017 after 26 years as the Paris Bureau Chief for SpaceNews where he covered the commercial satellite, launch and the international space businesses. He is widely considered the preeminent reporter in the space industry and is a must read for space executives. Follow Peter @pbdes