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Intelsat Reports Second Quarter 2011 Results

by david.nunes

Intelsat Reports Second Quarter 2011 Results

Luxembourg, 4 August 2011

Intelsat S.A., the world’s leading provider of satellite services, today reported results for the three months ended June 30, 2011.

Intelsat S.A. reported revenue of $642.4 million and a net loss of $213.4 million for the three months ended June 30, 2011. Included in the quarterly results was a $158.0 million non-recurring charge for loss on early extinguishment of debt resulting from refinancing activity. The company also reported Intelsat S.A. EBITDAi, or earnings before net interest, loss on early extinguishment of debt, taxes and depreciation and amortization, of $464.4 million, and Intelsat S.A. Adjusted EBITDAi of $500.8 million, or 78 percent of revenue, for the three months ended June 30, 2011.

“Business activity is strong, driven by favorable demand trends for broadband infrastructure and media distribution for direct-to-home (DTH) and cable applications. Overall growth was muted in the second quarter, as a result of reduced mobile satellite services revenues in our government business and decreased network services revenues. Still, we experienced strong revenue growth of 9 percent in our government business and modest growth in our media business, resulting in steady overall revenue and maintenance of our 78 percent Adjusted EBITDA margin in the period,” said Intelsat CEO David McGlade.

“We are experiencing good renewals and continued progress in building the value of our video neighborhoods and our revenue backlog on recent and upcoming satellite launches, such as Intelsat 17 and Intelsat 18. We ended the quarter with $9.8 billion in contracted services backlog, underscoring the stability and visibility inherent in our business.” McGlade continued, “We plan to launch seven satellites through the first half of 2013. As we add new transponders, enhanced beams, and refreshed capacity, we will be able to support our customers’ expansion plans and emerging services with attractive growth profiles, such as broadband connectivity for maritime and other mobile communications.”

Business Highlights
 Intelsat continued to strengthen its business providing transponder services for DTH platforms for regional service providers:

o In Eastern Europe, DigiTVs’ owner, S.C. RCS and RDS S.A., renewed its contract for capacity at Intelsat’s 1 West video neighborhood. DigiTV serves millions of subscribers in Eastern Europe.

o In Asia-Pacific, Canal + Overseas S.A.S., the largest French-speaking pay-TV operator in the French Overseas Territories, signed a multi-transponder, long-term agreement on the Intelsat 18 satellite. The satellite provides high power Ku-band capacity to enable DTH programming, in this case for New Caledonia, and is Intelsat’s growing neighborhood of largely French language programming for the Pacific Ocean region.

 Latin America, a region served by 18 Intelsat satellites in prime orbital locations, continues to experience growth with respect to demand for commercial satellite capacity for infrastructure applications. América Móvil’s Colombian unit, COMCEL S.A., renewed and expanded its commitments for capacity on multiple Intelsat satellites in support of cellular backhaul applications.

 Private broadband networks for global organizations continue to drive demand for our capacity. In the second quarter of 2011, Bell Canada, Canada’s largest communications company, renewed and expanded an agreement providing a global IntelsatONESM network broadband solution for a widely-dispersed civilian government network. Separately, the United Nations renewed and expanded its contract for capacity used in a global network supporting peacekeeping missions. These complex networks incorporate capacity on multiple Intelsat satellites into architectures that deliver ease of management and superior reliability as compared to terrestrial alternatives.

 Mobility applications, such as broadband for maritime and oil and gas services, are a growing source of satellite demand for which Intelsat is well-positioned, given our ability to deliver connectivity on a global basis. RigNet, a leader in oilfield communications, recently renewed and expanded existing capacity agreements on multiple satellites for services in the Gulf of Mexico and contracted for new capacity to support Middle East energy sector services. Intelsat’s current satellite launch program includes seven Ku-band beams on four different satellites that will establish a global broadband infrastructure covering major shipping lanes and offshore energy industry operations.

 North American broadcasters are expanding regional sports programming and are using Intelsat’s Galaxy satellites to achieve efficient distribution to thousands of U.S. cable headends. Fox Entertainment Group will add regional sports to its existing programming at Intelsat’s 133ºW video neighborhood under a long-term agreement. Separately, NBC Universal will distribute its new lineup of regional sports programming under a long-term agreement for capacity on Galaxy 17.

 Intelsat’s satellite investment programs covering seven satellites continue to progress. Intelsat 18 is the company’s next launch, currently scheduled to take place in the fourth quarter of 2011.

 The Intelsat New Dawn satellite was launched on April 22, 2011. The Ku-band antenna reflector deployed and that portion of the satellite is operating as planned, entering service in June 2011. The west antenna reflector, which controls communications in the C-band frequency, has yet to deploy. Intelsat and Orbital Sciences Corporation, the satellite manufacturer, completed an investigation and concluded that the deployment anomaly of the C-band reflector was most likely due to a malfunction of the reflector sunshield. As a result, the sunshield interfered with the ejection release mechanism and thus prevented the deployment of the C-band antenna.
The New Dawn joint venture, of which Intelsat is the majority owner, has indicated to insurers that, assuming continued failure of the west antenna reflector to deploy, the venture is reasonably likely to file a partial loss claim. All or most of the proceeds of any insurance claim will be used to pay down the New Dawn joint venture’s debt in accordance with existing debt agreements. New Dawn continues to work with its customers on this satellite to identify other capacity to fulfill customer needs. To the extent the anomaly continues and the New Dawn venture is unable to provide suitable alternative capacity for some or all of the C-band customers, those customers may terminate their service contracts. Therefore, it is likely that we would lose a substantial portion of the related revenue backlog of $310.2 million.

 Intelsat’s average fill rate on its approximately 2,125 station-kept transponders was 77 percent at June 30, 2011.

 In April 2011, Intelsat Jackson Holdings S.A. (“Intelsat Jackson”) completed an offering of $2.65 billion aggregate principal amount of senior notes, consisting of $1.5 billion aggregate principal amount of 7¼% Senior Notes due 2019 and $1.15 billion aggregate principal amount of 7½% Senior Notes due 2021. The net proceeds of this offering were primarily used to repurchase and redeem all of the remaining outstanding Intelsat Subsidiary Holding company S.A. (“Intelsat Sub Holdco”) and Intelsat Intermediate Holding Company S.A. (“Intermediate Holdco”) notes, together with all of the outstanding Intelsat Jackson 9¼% Senior Notes due 2016 and 11½% Senior Notes due 2016. These transactions were completed on May 5, 2011 and as a result, no third party debt remained outstanding at Intermediate Holdco or Intelsat Sub Holdco from such date. These transactions generated a loss on early extinguishment of debt of $158.0 million in the quarter, and are expected to result in $38 million in annualized interest cost savings.

Financial Results for the Three Months Ended June 30, 2011
On-Network revenues generally include revenues from any services delivered via our satellite or ground network. Off-Network and Other revenues generally include revenues from transponder services, MSS, and other satellite-based transmission services utilizing capacity procured from other operators, often in frequencies not available on our network. Off-Network and Other Revenues also include revenues from consulting and other services.
Revenue for the three months ended June 30, 2011 increased by $7.2 million, or 1 percent, to $642.5 million as compared to $635.3 million for the three months ended June 30, 2010. By service type, revenue increased or decreased due to the following:
On-Network Revenues:

• Transponder services — an aggregate increase of $17.6 million, due primarily to a $9.7 million increase resulting from growth in capacity sold by our Intelsat General business and an $8.4 million increase in revenue from media customers primarily in the Europe and North American regions.

• Managed services — an aggregate decrease of $14.9 million, primarily due to a $6.3 million decrease in revenue from network services customers related to non-renewal of contracts for Internet trunking and private line solutions largely in the Africa and Middle East and the Asia-Pacific regions; a $5.6 million decrease in managed video services sold to media customers primarily in the Latin America and Caribbean and the Africa and Middle East regions in comparison to strong revenues during the comparable period in 2010 related to a global sporting event; and a $3.6 million decrease in solution-related hardware sold by our Intelsat General business to North American customers.

• Channel — an aggregate decrease of $3.8 million related to a continued decline from the migration of point-to-point satellite traffic to fiber optic cables, a trend which we expect will continue.
Off-Network and Other Revenues:

• Transponder, MSS and other Off-Network services — an aggregate increase of $2.9 million, primarily due to a $7.1 million increase in transponder services largely related to customers of our Intelsat General business, partially offset by a $5.0 million decline in usage-based MSS revenue.

• Satellite-related services— an aggregate increase of $5.4 million, due primarily to an increase in professional fees earned for providing flight operations for third-party satellites and government professional services.
Changes in direct costs of revenue, selling, general and administrative expenses, depreciation and amortization, and interest expense, net are described below.
Direct costs of revenue increased by $0.5 million, or 1 percent, to $101.1 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase was primarily due to $10.9 million of higher costs attributable to purchases of off-network fixed satellite capacity services and other third party services, partially offset by a $7.0 million decline in the cost of equipment and MSS capacity purchased, primarily related to solutions sold by our Intelsat General business. In addition, there was a $3.8 million decrease in other expenses due to a reduction in satellite insurance costs in 2011 resulting from the expiration of in-orbit insurance coverage that was being amortized.

 Selling, general and administrative expenses increased by $1.7 million, or 3 percent, to $55.1 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase primarily was due to $2.7 million in higher non-cash compensation costs associated with the Intelsat Global, Ltd. 2008 Share Incentive Plan, partially offset by a $1.0 million decrease in other miscellaneous expenses.

 Depreciation and amortization expense decreased by $6.8 million, or 3 percent, to $194.4 million for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This decrease was primarily due to the net effect of certain assets becoming fully depreciated and the 2010 impairment of the Galaxy 15 satellite due to an anomaly, offset by increases due to satellites placed into service in 2010 and 2011.

 Our income from operations increased by $136.1 million to $271.4 million for the three months ended June 30, 2011 as compared to $135.2 million for the three months ended June 30, 2010. In addition to the impacts described above, our financial results were affected by certain material pre-tax charges incurred during the three months ended June 30, 2010 and June 30, 2011, as discussed below:

• a $104.1 million non-cash impairment charge recorded in the second quarter of 2010 to write down our Galaxy 15 satellite, after an anomaly which occurred in April 2010 but from which the satellite subsequently fully recovered, as compared to no such charge in the second quarter of 2011; and

• a $20.5 million loss recognized on our derivative financial instruments for the three months ended June 30, 2011 due to cash settlements for interest, representing the difference between the amount of floating rate interest we receive and the amount of fixed rate interest we pay, together with the impact of marking the instruments to fair value, as compared to a loss on derivative financial instruments of $40.8 million for the three months ended June 30, 2010.

 Interest expense, net consists of the gross interest expense we incur less the amount of interest we capitalize related to capital assets under construction and less interest income earned. Interest expense, net decreased by $23.8 million, or 7 percent, to $325.9 million for the three months ended June 30, 2011 as compared to $349.7 million for the three months ended June 30, 2010. The decrease in interest expense was principally due to the following:

• a decrease of $16.1 million in interest expense as a result of our refinancing activities, including a series of refinancing transactions, redemptions and offerings in 2010 and 2011; and

• a decrease of $9.4 million resulting from higher capitalized interest due to an increase in capitalized satellite related costs.
Non-cash items in interest expense were $15.0 million for the three months ended June 30, 2011, primarily associated with the amortization of deferred financing fees incurred as a result of new or refinanced debt and the amortization and accretion of discounts and premiums.

 Loss on early extinguishment of debt was $158.0 million for the three months ended June 30, 2011 with no similar charge during the three months ended June 30, 2010. The 2011 loss was recognized in connection with the second quarter refinancing activity. The loss

was primarily driven by the difference between the carrying value of the debt repurchased or redeemed and the total cash amount paid for the purchase or redemption, including related fees and a write-off of unamortized debt discounts and debt issuance costs.

 Other expense, net was $1.3 million for the three months ended June 30, 2011 as compared to income of $1.6 million for the three months ended June 30, 2010. The decrease of $2.9 million was primarily due to a $4.7 million increase in equity method losses related to our equity method investments, offset by a $2.2 million increase in exchange rate gains, primarily related to our business conducted in Brazilian reais and Euros.
EBITDA, Intelsat S.A. Adjusted EBITDA and Other Financial Metrics
Intelsat S.A. EBITDA of $464.4 million for the three months ended June 30, 2011 reflected an increase of $126.4 million from $338.0 million for the same period in 2010. Intelsat S.A. Adjusted EBITDA increased by $4.1 million, or 1 percent, to $500.8 million, or 78 percent of revenue, for the three months ended June 30, 2011 from $496.7 million, or 78 percent of revenue, for the same period in 2010.
At June 30, 2011, Intelsat’s backlog, representing expected future revenue under contracts with customers, was $9.8 billion, as compared to $9.9 billion at March 31, 2011.
Intelsat management has reviewed the data pertaining to the use of the Intelsat network and is providing revenue information with respect to that use by customer set and service type in the following tables. Intelsat management believes this provides a useful perspective on the changes in revenue and customer trends over time.

Revenue Comparison by Customer Set and Service Type
By Customer SetNetwork Services315,627$ 50%306,335$ 48%Media198,984 31%201,844 31%Government115,054 18%125,791 20%Other5,621 1%8,476 1%635,286$ 100%642,446$ 100%By Service TypeOn-Network RevenuesTransponder services 457,152$ 72%474,722$ 74%Managed services 85,746 13%70,895 11%Channel30,552 5% 26,723 4%Total on-network revenues573,450 90%572,340 89%Off-Network and Other RevenuesTransponder, MSS and other off-network services53,278 9%56,134 9%Satellite-related services8,558 1%13,972 2%Total off-network and other revenues61,836 10%70,106 11%Total 635,286$ 100%642,446$ 100%Three Months Ended June 30, 2010Three Months Ended June 30, 2011Three Months Ended June 30,Three Months Ended June 30,20102011

Free Cash Flow from Operations and Capital Expenditures

Free cash flow from operations i was zero during the three months ended June 30, 2011. Free cash flow from operations is defined as net cash provided by operating activities, less payments for satellites and other property and equipment (including capitalized interest). Payments for satellites and other property and equipment during the three months ended June 30, 2011 totaled $236.9 million.
Intelsat is in the process of procuring and building seven satellites that are expected to be launched from 2011 to 2013. In addition to these announced programs, the company expects to procure one additional replacement satellite during the guidance period ending in 2013. By the conclusion of 2013, our total station-kept transponder count is expected to increase modestly from current levels. Our capital expenditure guidance includes capitalized interest but excludes capital expenditures associated with the Intelsat New Dawn satellite that launched in April of 2011. Intelsat expects 2011 total capital expenditures to range from $725 million to $800 million. Expected annual capital expenditure ranges for fiscal years 2012 and 2013 are $575 million to $650 million, and $175 million to $250 million, respectively.

End Notes

In this release, financial measures are presented both in accordance with GAAP and also on a non-GAAP basis. EBITDA, Intelsat S.A. Adjusted EBITDA, free cash flow from operations and related margins included in this release are non-GAAP financial measures. Please see the consolidated financial information below for information reconciling non-GAAP financial measures to comparable GAAP financial measures
Conference Call Information

Intelsat management will host a conference call with investors and analysts at 11:00 a.m. EDT on Thursday, August 4, 2011 to discuss the company’s financial results for the three months ended June 30, 2011. Access to the live conference call will also be available via the Internet at the Intelsat Web site: www.intelsat.com/investors/events. To participate on the live call, United States-based participants should call (866) 314-4483. Non-U.S. participants should call +1 (617) 213-8049. The participant pass code is 89330746. Participants will have access to a replay of the conference call through August 11, 2011. The replay number for U.S.-based participants is (888) 286-8010 and for non-U.S. participants is +1 (617) 801-6888. The participant pass code for the replay is 28284441.

About Intelsat

Intelsat is the leading provider of satellite services worldwide. For over 45 years, Intelsat has been delivering information and entertainment for many of the world’s leading media and network companies, multinational corporations, Internet Service Providers and governmental agencies. Intelsat’s satellite, teleport and fiber infrastructure is unmatched in the industry, setting the standard for transmissions of video, data and voice services. From the globalization of content and the proliferation of HD, to the expansion of cellular networks and broadband access, with Intelsat, advanced communications anywhere in the world are closer, by far.

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