Full Year 2024 Eutelsat Communications SA Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Akhil Dattani - JPMorgan - Analyst : Hi, good morning. Thanks very much for taking the questions. I've got two, please, if I can. Firstly, could you help us understand a little bit better the way we should think about the building blocks for your revenue target for this year? I guess if we go back, the expectation had been with OneWeb that we're ramping towards a double digit growth level. So clearly the revenue target here is quite a lot lower than people would have thought. Rightly or wrongly, Bloomberg consensus had double digit growth in for this year. So it's clearly quite a long way below that. So maybe you can help us understand what the moving parts are and specifically why you are not expecting growth this year. And then the second question is a bigger picture one, and I appreciate it's difficult given you're no longer guiding to the previous targets you had for OneWeb. But how should we try and think about the economics and growth path from your combination with OneWeb? I guess the challenge REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call for us on the outside world is that we now don't have complete visibility on how you're thinking around the CapEx envelope, how aggressively or not you're going to invest in OneWeb. So obviously it makes life very difficult in terms of trying to model and understand how we should think about this. So maybe you could help us understand your perspective in terms of what are your thoughts, aspirations. Is it about return on capital? Is it about something else? And how do we try and size the opportunity as you see it today in the context of what you're seeing around a bit more competition and maybe a little bit harder to really size quite what you're looking to do? Thanks very much. Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Okay. Very relevant question. So thank you for that. Let me try to give you some guidance here. We are still of course fully in the integration phase of our merger. So, embarking a full year of OneWeb into our next year is a key part of it. The other one is of course that we expect the ground infrastructure. So, the ground infrastructure of OneWeb will be completed during the spring of '25 with the last five, eight gateways, which are some of the tougher ones in some of the quite tough geographies and also of course market access during the spring next year have the full global coverage. So that operational ramp-up is on track. But it is certain that that delay, which we already announced back in January, is still the main delay for the full operational growth coming out of the LEO services. So within the different verticals, we do see connectivity boosted by the LEO growth mainly next year whereas you see less new capacity coming online from a Konnect VHTS and our E 10B during the next year. There's still some growth in the GEO market and connectivity market, but it's clear that next year, it's the slower rollout of the ground infrastructure and market access, which is a lot of regulatory, country by country openings, which is giving a slower ramp up of the LEO revenues. So it would be a pivotal year next year because it's going to be a full year where we will complete the global coverage from a LEO perspective with the LEO ground fully rolled out, but also progressing on bringing both LEO and GEO offering out in the market. And then turning to your next question, it's also going to be a year where we figure out what is the right way of moving forward with the CapEx. Next year, CapEx is guided to be within the envelope of 700 million to 800 million, which is in line with our also previous guidances on CapEx where we'll start embarking on the continuity, and what I call the first step in our next gen. That first step will of course foremost ensure compatibility for our customers and continuation of services, but it's also going to start embarking some new elements of a technology that fully mature and the journey also towards completing one or several partnerships in the market. IRIS2 could be one, but there are also other dialogues around partnerships in the market. And as you see more and more of our customers, just like with Intelsat, also ask us to be part of the roadmap going forward because they see our LEO connectivity capacity to be integrated in their offering. So some of those partnerships we're exploring quite extensively and we see ourselves as a very good platform for those kind of partnership, be it IRIS2 or alternatives where we actually built a joint technology roadmap for bringing mature technologies or more mature technologies to the market once they get there. So that's what we're exploring. As you know, we've had the RFP out for about a year now and have had a couple of teams working in a co-engineering approach to exactly draft what is the relevant timeline for bringing on-board new technologies and how do we ensure the continuity of services and compatibility of services from our constellation in a stepwise approach to the next. In terms of how we guide this, of course, we still have our return on capital criteria, which we've always had in Eutelsat Group, on showing a strong return on capital to our shareholders, and we remain within the same guidance that we've had historically for our GEO fleet, putting some of the same return on capital criteria also for the investments into the new constellations. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call So we remain confident that we'll find the right way forward, and we also are a strong platform for partnerships, especially for our LEO connectivity and constellation, but you see also increasingly in the GEO world, an opening for partnerships, as we showed with the partnership with Thaicom for GEO capacity over Asia. So that's part of our strategy going forward. Should we take the next question?

Question: Alexander Peterc - Bernstein - Analyst : Yes. Good morning and thank you for taking our question. I'd just like you to come back a little bit on flat revenue in fiscal '25. Is this really just the results of the slower rollout of ground networks and slow regulatory agreements across various geographies? And even if that's the case, I would have expected that you have incrementally a lot more capacity to sell on OneWeb in more geographies in '25 versus '24. So I'd just like to understand, is the legacy Eutelsat in a tailspin and that's maybe in step with the rest of the GEO market? Or is OneWeb simply not delivering? And it's a really material question for shareholders because they suffered a 50% dilution with the transaction of stake of OneWeb. So I'd just like you to put a little flesh on the bone here. And also, would you at some point be able to give us a more longer term forecast of when you expect to actually reach that double digit growth that you were initially modeling? And at what point do you expect free cash flow to break even? That will be the first question. The second one is, we saw SES moving its orbital slots from indefinite life to definite life because of the structural decline in GEO markets. Would you be taking a similar approach? I don't know how you classify these assets now and what kind of impact would that have on your accounts? And then finally... Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Alex, sorry, your line's not very clear. Can you just repeat the question on SES?

Question: Alexander Peterc - Bernstein - Analyst : That's great. Thank you very much. Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Okay. So coming back to your first question, which also was a bit reflected on the first one, I think, it's clear that the ground infrastructure rollout, let me just maybe walk you through, we've had now, for some time actually, full satellite coverage, global coverage. So the satellites are where they should be and actually covering the entire world. In order to actually start serving customers, there are then a couple of steps. There is the step of actually having ground infrastructure, so gateways, or sometimes we call them SNPs, but gateways where you actually bring the traffic back down and into the Internet, and that's a set of around 45 to cover the full global coverage. We're now at 37, so very close to having a strong coverage, but still with some holes in, as I showed on the map in it, for a few of the difficult ones. There's some of the Pacific area, there's some of the Indian Ocean that is only coming online during the next six to nine months. So that's to achieve coverage. But then actually to move into a country, you also need to have what we call landing rights and right to operate in a country, which is a country by country approach. We are going very well with that, but there are still a few countries. Recently, Japan is coming through. India has been bubbling back and forth, but also in a good route to open. And some of those markets are also the markets where we have what we call take a pace. So as soon as the market actually open up, we have the capacity sold, but we are still waiting for some of those market approvals. Some markets, we see the exact same picture with Starlink. The markets simply only open up when the local regulator opens up for it. Thailand is a market where it's still in discussion as well, where the regulator is still needing to set the final signatures. Then the next step, of course, is having distributors in the market or working with customers in the market and get them into actually trial capacity. Typically they start with five to 10 test terminals and make sure that they know how to install them, how to bring them out. Sometimes we even need just to get the import papers for this kind of technology out in the markets and then rolling up from there to actually start seeing revenue ramp. And I think it's that last market access terminals out in the market, import papers, distributors actually ramping, starting to ramp up significantly even though they've acquired the capacity. I think that's the slowness we've seen and therefore we expect to see the LEO service revenue only ramping up over this year to reflect the full global coverage from a ground infrastructure towards the spring next year. In addition, we have less additional new capacity in the GEO connectivity this year. We still have capacity left on E 10B and Konnect VHTS, but it was not a steeper ramp-up as we saw this year where we had a very strong backlog already on Konnect VHTS with customers like TIM and Orange starting very early on to migrate capacity onto these additional satellites. And then, as you can see also here, a very big demand for the Konnect satellite over Africa. As soon as we liberated the capacity over Europe, we managed to resell that relatively fast into Africa and Middle East. But there's less additional capacity there over the next year. So that's how you should be thinking about it. The GEO fleet is healthy, just to answer that part of your question, but we don't have additional GEO connectivity satellites coming up this year. The Flexsat that we have in the books is a bit delayed due to some manufacturer's issues. So that's only towards the end of '26-'27. That will see REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call more connectivity capacity coming up in that region, and meanwhile, we'll be more dependent on the ramp-up on the LEO services for the connectivity. And then finally, and you shouldn't forget that we see the video which is still more than half of our revenues. That has a mid-single digit decline also expected next year, and simply just to compensate for that, we already need the connectivity to grow at a higher pace. So the connectivity needs to grow at a high end single digit number just to compensate for that video that's simply mechanical. So that's what we expect to see next year.

Question: Alexander Peterc - Bernstein - Analyst : So one is on IRIS2. Yes, just on IRIS2, what's your view on what's going on? There's a big re-think apparently around this project and there's some disagreements among the protagonists. And the second one, any progress on your thoughts regarding the ground infra and leaseback? Thank you. Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Let me start with IRIS2 because it's a big question. As you know, we're part of the SpaceRISE Consortium, which officially communicates and align communication with the European Commission, but one of the key things is that Eutelsat Group is still part of the SpaceRISE Consortium, which I think is an update in and by itself. As you've seen over the summer, Airbus and TAS has informed that they do not wish to be part of the core consortium of SpaceRISE, which means that today the SpaceRISE Consortium consists of SES, Hispasat and Eutelsat Group. We're still very much convinced about the strategic importance behind the IRIS2 in terms of having European sovereign capacity and having a strong European sector for it, and we still hope to be able to collaborate with the entire sector, space sector, not only TAS and Airbus, but of course also a lot of the other suppliers, small and medium companies also across the European space sector to deliver this to the European Commission. Right now we're working towards what's an optimized buffer with the changes of the consortium, which has a deadline in early September and hopefully taking that into a further dialogue with the European Commission afterwards. But I think watch the space for kind of September announcement. That's where we try to see how we make sure that Europe still has sovereign capacity in close collaboration with the commission. It's one of the most important potential partnerships that we're also seeing for finding synergies with our next generation development of our LEO constellation synergies. It's something that has been a key element of our strategy around the next steps in the constellation. So that's also one of the timelines that we try to align with our deployment of the gradual approach to our next-gen constellation. And now I just totally forgot your second question. Can you just quickly repeat it?

Question: Alexander Peterc - Bernstein - Analyst : Thank you very much.

Question: Roshan Ranjit - Deutsche Bank - Analyst : Great. Good morning, everyone. Thank you for the questions. I've got two, please. First one, just a few points around the guidance, please, Eva, and you've already given us quite a bit of detail. Can I just check on the previously given synergy targets? I think this was given back in '22 and clearly we've had a few moving parts since then, but I think you, at the time, guided to 80 million of CapEx synergies in the first year. How are we tracking to that number? And I guess given the OneWeb delays, are there kind of revenue synergies. Should we expect any revenue synergies in the FY '25 guidance? And then just coupled with that, you highlighted at the EBITDA level the scope for efficiencies. I guess most of the OneWeb revenue contribution in '25 will still be terminals. Is that fair to say? So what level of efficiencies can we expect to keep the margin kind of slightly down? And second question is, at the time of the announcement deal, you've always highlighted that you expect three to four global LEO networks and yesterday we saw the launch of the first set of LEO satellites from China. Are you seeing any pressure in terms of kind of building your backlog? Are there discussions around pricing? Have they become a bit more detailed, seeing any pricing pressure there? And obviously just to follow up on the ground infrastructure, you said it's still a thought process, but are you seeing a kind of interest, incoming interest? We saw one of your peers yesterday highlight scope for divestments. So is there strong appetite for satellite infrastructure? Thank you. Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Okay. Let me start at the guidance on the synergies. I think we are seeing, and once you're actually fully integrated, it's a bit like re-separating the warm and the cold water, but we do actually track our synergies and both on CapEx and on OpEx as well as on revenues. And I said revenues is probably the hardest one to really track because you are up against some guesswork of what would have happened if we had not merged on revenues. But on all three targets, we actually see the revenues or the synergies coming in strongly. On OpEx synergies, I think we probably always over-delivered on OpEx synergies, taking in very rapidly integrating the two organizations within the targeted scope. And on CapEx synergies as well, now part of this is of course also to change the approach towards this more gradual stepwise approach to bringing on new technology, which might have happened anyway because it has more to do. It has as much to do with technology maturity and negotiations and how to get into the right technology roadmap with it. On revenue synergies, I think it's very clearly that this combination has seen the revenue synergies of a joint sales force and go to market approach. So there we are quite comfortable within the deal rational around synergies. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call The EBITDA levels in terms of ramp up, actually most of the ramp up is expected to be service revenues, much lower target on terminals, and so it's not the main ramp-up on terminals. The larger part of the ramp-up for next gen OneWeb is going to be service revenues, which is also what gives us comfort in that it's going to be a slight decrease on our EBITDA margin, but not necessarily something which is hugely impacted by a huge chunk of terminals, as we look at it now. On the 3 to 4 global LEO constellations, it's very clear that that's the perspective that has both a financial as well as a spectrum technology argument behind it. The reason we say we don't expect to see more than a handful of LEO networks globally are, of course, there is an overall ticket of getting started in this space, which is well north of the 6 billion to 8 billion to get anywhere towards having a global LEO network with any kind of capacity, and that necessitates a certain amount of deep pockets, which, of course, certain states can choose to have, but it's not every single nation who would do that. The second one, which is as much a technology explanation, has to do with the way spectrum works. Spectrum in a constellation work in the LEO constellation is very different from what you see in the GEO world. In the GEO world, you have a position on the arc, right? So you have 36 degrees or 114 west, 7-8 west, you have a position on the arc, and that's your spectrum position. That's how it works in the GEO world and it stays there. In the LEO world, it's on a priority basis, the way it works with ITU is that you send an application about what are you planning to build and then you get in line. And as long as you deliver on your milestones, you keep your priority. Right now, OneWeb has delivered on their milestones historically. So that means that our constellation, our LEO constellation has the first priority in the Ku-band, even ahead of Starlink in the Ku-band, which means that for constellations that come later, they will have to coordinate not only with us, but also with Starlink because Starlink is now into the second priority in the Ku-band. The same goes for the Ka-band. The Ka-band, there are no constellations live yet. The ones that we're expecting to see is, of course, Kuiper from Amazon, and the other one could potentially be Telesat. And then we have the Chinese who, in spite of having a lower priority, a lower priority, you can compensate by launching more satellites. It just gets more expensive. So you can get there, if you have deep enough pockets. You could overcome a lower priority in the spectrum band because what needs to happen is that you need to launch more satellites to compensate for having to coordinate with the other players in the same spectrum band. So that's why we're saying the combination of having some of the spots of the top priorities already filled, and maybe not that many people who will be massively overpaying an already relatively expensive LEO constellation, we give maybe four or five real chance for having a business case in there. However, we do think that the Chinese, you've seen that. I think it's a fact that the Chinese see this as a very important sovereign, almost infrastructure the same way as Belt and Road, is a physical infrastructure. This could be a digital infrastructure the same way, and we will see some countries who will be well aligned to go with the Chinese capacity or support in that areas. We certainly see a lot of other countries who want alternatives. And I think that's one of the key elements of our value proposition, is that we provide a different sovereign proposal to the American and potentially Chinese constellations. So I think that's a key selling point. It's a lot of discussions we have with, not just in the governmental segments, but also in a lot of the private sector of having alternatives and delivering on different constellations. And then finally, don't underestimate, especially in the governmental sector, people want resilience. Customers are buying resilience, especially for critical services, which means that you typically tap into different type of networks. That can mean both multi-orbit between GEO and LEO. That gives you an element of resilience, but could be also simply to be customers at multiple constellations. So that's especially true for it. And on the ground infrastructure, it's the same thing. We've seen a lot of the inbound interest from, especially infrastructure funds, which is also why it's still something we are contemplating. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call

Question: Sami Kassab - BNP Paribas - Analyst : Yes. Good morning, everyone. Thank you. I have two remaining questions. The first one, now that manufacturers are out of SpaceRISE, shall we think that IRIS2 could turn out to be more of a hosted payload type of system, a somewhat CapEx-light system that leads to capacity procurement on existing infrastructure rather than reinventing perhaps the wheel and investing into new infrastructure? And secondly, part of the '25 revenue outlook is driven by the lack of progress on lending rights in some important markets where you probably have take or pay, like India, perhaps Thailand? How should we think about the delays in the lending rights authorization? Shall we think of those as purely an administrative issue or shall we think of the delays as reflective of the competitive landscape of India and Thailand having their own space industries that they are trying to protect by preventing others to access their markets? Thank you. Eva Berneke - Eutelsat Communications SA - Chief Executive Officer, Executive Director, Member of the Executive Committee Good questions. So let me start with the last one here. This is essentially administrative delays we're seeing. This is a new type of capacity that a lot of markets have wanted or a lot of administrators in markets or regulatory authorities have wanted to get a better understanding of, whereas we've previously seen a -- when you launch a new GEO satellite, it's a well-known type of capacity and it's something that the administrative procedures are well known whereas bringing in a LEO capacity, and typically we've seen that maybe Starlink has been either at the same time or just ahead of us, and then they want to try to figure out how to do something, a regulatory approval or both at the same time to have competition in the market, which is what we see with India. In other terms, it's because it's a combination of both a gateway approval, import approval, and serving the market approval, as in Thailand, because in Thailand, we also have a gateway. So we need both a gateway approval, we need a import for terminal approval, and of course, serving the market approval. So that combines in Thailand. We actually work with a lot of the local distributors, both in India. We have very good help from our large investor from Bharti Telecom in order to explain to authorities a lot of the questions on the new technology, and as well as in Thailand where, as you know, we work closely with Thaicom as well, given our partnership in the GEO space. So a lot of times that's actually a good collaboration. Sometimes it's also combined with those local operators bringing online capacity for themselves. We've seen that in multiple cases that they're interested in complementing their GEO capacities with some LEO capacities. So sometimes it also becomes a commercial discussion with them. So I'd say it's lengthy with the same thing we've seen in Japan. It's taken probably three to four months longer simply to make sure in this case, it was telecom operators who were comfortable with it, but it's not only market action. It is also that we're getting down to some of the very hard gateways. The last five gateways are on some rather exotic places both from a weather perspective right now. It's 50 degrees plus in Saudi Arabia where we're building one. We've seen floods in north of India. I think it was north of India where we've seen big floods taking out some of our equipment. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 09, 2024 / 7:00AM, ETL.PA - Full Year 2024 Eutelsat Communications SA Earnings Call So it's simply us. Some of these gateways are getting to the tougher areas, but we're also succeeding within Kazakhstan, it's now live. We have an African and some of the Pacific Islands that need fiber. So there's a few islands that just need to have the fiber connection out there for us to get there. So the last five is the one that's taking the next six to nine months to really get the ground network completed. On IRIS2, yes, it's clear that I can't explain a lot of the actual architecture, but there's been speculation about whether a kind of hosted payload could be an alternative. Right now we are still working on the original tender offering and structure with the commission, but of course, there are lots of alternatives. And I think what's important is that we get to a point where we have really European sovereign capacity. To me, that's the most important objective of the IRIS2 discussions.