Six months ago the financial community found SES Global’s then results tough to swallow. They grumbled about low operating margins especially on newly emerging value-added services. They moaned (“clumsy” said one banker) about the end-of-year presentation, and even hinted that key targets were being missed. At the same time there were considerable concerns over the state of its European division SES Astra’s ‘Project Dolphin’ strategy for German free-to-air listeners. ‘Dolphin’ has since generated acres of generally negative press for SES, of which more in a moment. None of this has done any favours for SES’ stock price, which has slipped down over the past half-year from €15 to barely €10, while arch-rival Eutelsat has – especially during August – recovered its stock price and share value of near-€12.50. SES Global’s latest set of results, delivered on Aug 7for the half-year to June 30, were agreeably different, although in my view SES’ basic metrics have not changed over the past half-year. Its most dramatic news announced was the prediction that with 19 high-def channels already on air over Europe on Astra, SES is now prepared to forecast that by 2010 it will carry more than 100 European high-def channels. Every one of them represents a major slice of fresh bandwidth, and commensurate income. Its previous best estimate for achieving a 100-channel target was four years later, at 2014.
In fact the company’s performance is rock-solid, with spectacular back-up contracts (€6.7bn), and this half-year’s set of headline numbers (revenues up 16.6%, EBITDA up 14.1%, net profit up 28.6%, and EPS up a remarkable 35.4%) that can only be described as impressive. Earlier this year SES Global bought New Skies Satellite, and even if the now consolidated New Skies numbers are stripped out, the core revenue performance remains – by any measure – strong, at 8.1% up on last year “and without any funny business in the numbers” stressed CFO Mark Rigolle.
The market seemed to agree. Deutsche Bank, in a note, said SES Global’s numbers were above expectations. UBS also took the view that results were better than expected, and mentioning Rigolle’s guidance that its full-year EBITDA results will improve from €900-920m to €1020-1045m, albeit helped by some earlier than expected sales of certain transponders to Star One later this year.
SES Global’s CEO Romain Bausch said SES saw satellite capacity demand as strong (74% overall transponder utilisation) and had exceeded expectations, except for the Far East, where fresh orders at its AsiaSat joint-venture remained sluggish. New Skies performance was ahead of plan, said Bausch, and organic growth continued across the group, from governmental contracts as well as core satellite business in North America and EMEA. SES’ overall 74% utilisation is lower than Eutelsat, but excluding New Skies its ‘in use’ transponder manifest grew by 33 (up 6%) to 582 filled transponders during the half-year. Moreover, confidence at SES is undoubtedly high. New capacity on order will add 240 new transponders between now and Q1/2009. Of course, strip out SES Americom from the data and Astra’s European transponder utilisation leaps to 84% (239 out of 286 transponders), with the overall average held back by Americom’s 69% utilisation, but again its North American demand is enjoying a healthy order book and growing governmental demand.
SES’ European HDTV dividend
Amidst a wholly positive set of numbers, it was SES Astra’s improved position on HDTV channels that impressed us. Six months ago Astra reckoned that it would take around 9 years to hit the 100 HD channels European target. That’s changed, and how. Bausch said that with 19 high-def channels already on air over Europe (rival Eutelsat has 8 commercial HD channels on air) and fresh HD contracts in place from many of Europe’s leading broadcasters, Astra is now relaxed enough to predict it will reach the 100 HD-channel milestone in barely 40 months. That’s seriously impressive, but helped by a ground-swell of consumer support for HDTV, with more than 5m ‘HD Ready’ sets already sold in Europe, and those numbers showing no sign of slowing. This “100 channel” HD target will help ameliorate the still heavy dependence on German analogue channels.
[close panel] There was more good news. Bausch told analysts that SES Global’s strategy was “unchained”, with its primary focus being on core satellite infrastructure. Earlier in August SES Global’s main Board had approved procurement of another pair of satellites (Astra 3B and New Skies’ NSS-9) on top of a heavy satellite-building programme averaging 3 new craft a year for the next 3 or 4 years. Bausch said SES was in the middle of a “most dynamic” phase. Astra 1L is due for launch in “early” Q1/2007, which will allow Astra 2C (currently on station at its mainland Europe 19.2 deg E position) to move to the capacity-starved ‘UK’ orbital slot at 28.2 deg E, and provide some much-needed bandwidth (between 10-16 extra transponders). SES Global’s consolidation phase seems over, with New Skies in place, at least for the moment. “We are not running after acquisitions,” Bausch said. “There is nothing concrete on our road map.”
The Astra 3B procurement programme will start now, with a mission to provide new capacity at 23.5-24.2 deg E, supplying DTH services, feeds to cable head-ends, extra capacity for two-way satellite broadband, and coverage for and into the Middle East.
Staying in Europe for a moment, Romain Bausch took time to explain the strategy in regard to New Skies Satellite, now renamed SES New Skies. The deal closed on March 30th, and already some $30m of cost savings has been identified with $20m set to be achieved next year. SES New Skies now becomes the company’s “third pillar”, with New Skies taking responsibility for just about all of Americom’s and Astra’s oceanic activity. For example, it takes over the AMC-12/Astra 4A (an AOR bird) along with its 72 transponders, as well as the 183 deg East (Pacific Ocean craft), AMC-23 and 38 transponders. New Skies will also look after the sales effort in regard to Astra 2B’s steerable beam looking over Africa, and its 8 transponders. NSS-8 is slated for launch in Q4 this year to 57 deg E, adding a massive 92 transponders to SES New Skies fleet (although replacing the smaller NSS-703 craft), and as already mentioned, SES is going ahead with procurement of NSS-9, which will open up a new trans-Atlantic orbital slot for SES at 20 deg West. Meantime, if all goes well with NSS-8 launch later this year then New Skies will relocate NSS-703 to the 20 deg West position And see what business it can bring in. [Box this]
SES New Skies orbital plans
NSS-8 Q4-2006 launch, replaces NSS-703
NSS-703 moves to 340 deg E (20 deg W)
NSS-9 Q1/2009? launch, to 183 deg E, replaces NSS-5
NSS-5 moves to 340 deg E in Q2-2009
NSS-703 retired late 2009
Data: SES Global
[close box] In terms of modelling guidance for the rest of this ear and 2007, CFO Mark Rigolle says infrastructure EBITDA margins will be around the 78% mark, with New Skies and the now 100% owned ND Satcom business included. Revenues will be “approaching” 10% growth this year, and high “single-digit” Compound Annual Growth Rate for 2007. Six months ago the market looked down its nose at SES’ ‘services’ business, but Rigolle reminded analysts that it had improved its margin in ‘services’ for the past 6 quarters, and that this will continue. German channels sign for Dolphin But as we hinted, there is one potential problem area over Europe, and it revolves around a highly controversial scheme to ‘convert’ Germany, Europe’s largest single market, first to digital TV and then to pay television.
Germany is a hugely challenging market, which has not taken to pay TV. In fact, the German viewing market is still largely watching analogue TV either on cable or satellite. As SES explained in an analysts briefing, Germany (and Austria) represent a terrific marketing opportunity. The UK, Ireland and Italy are now almost 100% digital satellite markets, each with a strong pay-TV operator and where public broadcasters have also embraced satellite TV. Germany, widely cabled as it is, does not have this same recipe for success. There is no single satellite pay-TV provider, and certainly no Rupert Murdoch (who dominates in the UK, Ireland and Italy).
[Bar Chart this]
Digital Satellite as % of Total Satellite*
Eur. Aver. 65%
Data: SES Astra
*at Year End 2005
[close bar chart]
Astra says there’s a substantial free-to-air market, mostly in analogue, which is good for SES’ revenues but hardly good for long-term growth. Cable doesn’t help, with 88.5% of viewers still watching in analogue (11.5% digital). Satellite (almost all from SES Astra) is only a little better (61% analogue, 39% digital), and no major Digital Terrestrial activity to replicate the UK’s spectacular ‘Freeview’ model. It is recognised that satellite is driving the digital message forward, helped by a wider choice of channels and services. Digital TV, said Astra in its presentation, will create huge benefits at all levels, consumer, broadcaster, rights-holders and of course the satellite broadcaster.
SES Astra says it has signed contracts with RTL Television (Germany’s most important commercial broadcaster) as well as MTV Networks for the use of its new digital infrastructure, dubbed ‘Dolphin’. The controversial ‘Dolphin’ service allows broadcasters to expand their digital line-ups and could also provide pay-per-view and near-video-on-demand channels. There will also be an enhanced electronic programme guide, room for personal video recorders, and a move towards more interactive TV. Subscribers will have to pay a monthly €3.50 ($3) to access the channels. It seems likely that many of the basic German channels on the Astra satellites at 19 deg East will encrypt their signals. MTV Networks includes MTV, Viva, Nickelodeon and from next year Comedy Central. RTL’s German channels include RTL, VOX, RTL II, Super RTL, n-tv, RTL Shop and Traumpartner TV.
SES Global’s Romain Bausch says his Astra staff is talking to other broadcasters, including public broadcasters in Germany, about the planned service. One option might be for pub-casters ARD and ZDF to continue digital transmissions ‘in the clear’ for the time being on the Dolphin platform (which can support ‘clear’ and encrypted channels) until such time as they have interactive services, or other services which would benefit from Dolphin’s specification.
But, the German Federal cartel office (Bundeskartellamt) is examining two Dolphin elements. The first is to establish whether a cartel has been formed, and this decision is expected soon and probably no later than September, says Bausch. However, the second element will look at the specification of SES Astra’s set-top box to determine whether it is really an open and neutral standard, which Astra insists it is. The Cartel office will likely rule on this aspect by year-end, says Bausch.
SES Provisional ‘Dolphin’ Plan for Germany
If approved, Bausch says there will be a “technical service fee” of about €3.50 per month (“and significantly less the sum charged by German cable for its similar supply of ‘free’ channels,” which Bausch says is about €12-€15 per month). There will be a ‘one off’ install fee of around €10-€15 including VAT. If the Cartel office rules against SES then Bausch says the invested costs for this year, up to the end of 2006, will be no more than €15m. If the scheme passes the Cartel office’s scrutiny then ‘Dolphin’, always a working name, will be rebranded and launched over Germany. In time Bausch hopes that a paradigm change will affect Germany, and certainly in the 2010-2012 time frame when the market is expected to switch off its analogue transmissions, Bausch says he would expect 80%-90% of German homes to be viewing encrypted signals.
To date, it seems SES has spent about €15m on Project Dolphin, and the bankers say they are a little more relaxed about the scheme despite anticipated “losses” of €90m-€100m over the 2007-2008 period. Indeed, Dresdner Kleinwort reckons that Dolphin could quickly turn into profitability and a speedy value of an additional €1.40 per share.
The SES revenue model for Dolphin is fairly straightforward: SES Astra expects the total number of digital satellite households to continue to rise towards the currently reported number of total satellite households by 2010 –2012, when the analogue signal is expected to be switched off (i.e. total digital satellite households post analogue switch off estimated at 16 to 17m after 2012). Dolphin penetration amongst the steadily increasing number of digital satellite households is expected to rise above 20% shortly after signal encryption, continuously increasing hereafter and settling between 80% and 90% of digital satellite households soon after analogue switch-off (when digital satellite households are estimated to equal total satellite households, i.e. 16-17m after 2012). SES rightly says that churn within this new economic model would be modest, and certainly in the low single digit range.
Bausch says Astra/Dolphin will not be providing set-top boxes. Broadcasters might provide incentives, but there will definitely be marketing contributions from broadcasters, helping fund point-of-sale activity. Astra’s variable costs, as yet unspecified, include funding the cost of smart cards as well as the cost of running CRM and call centres,“ all of which will be outsourced” says Astra.
So, the plan is in place. But there’s plenty of opposition. “When a tollbooth is placed even on digital terrestrial platforms, then we have to consider mandating a ‘must free offer’ regulation for certain mass market channels,” said Victor Henle, deputy chairman of the media authorities’ directors committee. He added that the changes proposed by SES Astra and leading broadcasters would “raise regulatory questions and require an open discussion between all parties involved.” Then there’s the regulator. “As monetary issues are involved on the broadcasters’ side, this suggests that we are, in fact, dealing with a cartel agreement,” Cartel Office President Ulf Böge said in a recent interview, adding that the authority suspects that Germany’s two leading commercial television groups RTL and Pro Sieben SAT.1 are closely working together in the planned introduction of satellite reception fees, despite the broadcasters claiming the contrary. “We assume that it is a joint project by the two large broadcasting groups and Astra which would not be admissible under cartel law,” said Böge.
In other words SES has a few major hurdles to overcome. As far as potential revenues are concerned, there’s zero income this year, and losses estimated at €90m-€110m for the first two years combined. By 2009 the Dolphin project is expected to move into positive territory, with EBITDA margins hitting 25%-30% once analogue is switched off. Payback is put at between 4-6 years.