Intelsat’s Restructuring will help Transform Satellite for a New Age of Connectivity A Q&A with CEO Stephen Spengler

The following interview with Intelsat CEO Stephen Spengler ran in Connectivity Business on May 21, 2020. The full text of is reprinted here with the permission of Connectivity Business.

To access the original article on the Connectivity Business website, please click here.

 

“Intelsat’s restructuring will help transform satellite for a new age of connectivity”

Reprinted with permission from Connectivity Business 

By: Jason Rainbow

May 21, 2020

Connectivity Business speaks with Intelsat CEO Steve Spengler about how the fleet operator’s financial restructuring will position it for growth as satellite and terrestrial ecosystems converge.

As well as substantially reducing its near-US$15bn debt mountain to invest in innovation and growth, the restructuring paves the way for an accelerated release of certain C-band frequencies for 5G.

Intelsat is carrying out business as usual throughout the process, albeit against the backdrop of an economy-hurting global pandemic. Today, the company launched a new managed service for cellular backhaul, where demand has been surging as COVID-19 accelerates the need for more connectivity in more places.

Jason Rainbow: The shift to participate in the accelerated C-band plan was something of a hard turn for Intelsat because the company had been really pushing for more compensation. What were the factors behind this pivot?

Stephen Spengler: We obviously advocated hard for many years for what we thought was a very unique, creative, win/win approach for everyone, but in the end the FCC made the decision the FCC made, and we respect that. Therefore, this is the opportunity that we have in front of us now.

We definitely wanted to be in a position to be able to elect for the accelerated clearing. To avail ourselves of the amount that we would receive for the acceleration payments. To do that, we needed to engage in the acceleration of our project to commence the clearing, and get moving on that work.

You have to separate our periods of time advocating for the best potential outcome — then there’s the FCC decision, and then we have to evaluate that FCC order and determine whether that’s the right thing for our company and our customers or not. Now we’re moving forward with that programme and executing on it as well as we can. That’s where we’re focused at the moment.

JR: What are your expectations for what Intelsat will look like after emerging from Chapter 11? What does a ‘substantial reduction’ of debt actually look like?

SS: This whole restructuring process is designed to position the company for the long-term. It’s addressing things in the company that need to be addressed to allow us to continue to invest in innovation and growth in the future.

You’re absolutely right, debt reduction is part of that plan. We think that there will be a substantial debt reduction in this process. We didn’t say what that would be because we don’t know. That’s what the process will determine. At the end of the process, the company will have a new capital structure that will be determined by both parties in the process.

We do expect that it’s going to be a much stronger balance sheet position for the company, that will complement the strong operating model that we have today. It will position the company for continued investment, continued development of new services, continued build-out of our network and, we hope over time, a return to growth of the business.

JR: Could the process include a sale process for certain assets?

SS: That is not anticipated as part of this process.

JR: C-band needs aside, Intelsat is well-known for transformative deal-making, even when it was burdened with a significant amount of debt. The tie-up with OneWeb which ultimately fell through comes to mind. Is it too early to talk about the kinds of deals Intelsat could make with more financial firepower, and how soon we could see something like that happen?

SS: It’s too soon to talk about such things, but your point is a good one. We’ve been carrying this debt load for a decade or more now. It hasn’t impeded the company from continuing to invest in our next-generation Epic system, for example, or to do partnerships with various companies, or to reach out to try to do a transformative deal like we would have had with OneWeb. That energy and philosophy and approach doesn’t change, even when we’re going through this process.

We want to continue to find opportunities to enhance the company and to enhance what we bring to our customers. As we go forward with this process and coming out the other end, we will always be looking at the right kinds of investments to make for the company. Some of those are organic investments that we make every day in our business, but some may be inorganic external activities. We can’t really comment on that. That’s something that will come down the road. They would all be designed to enhance the value of what we deliver to our customers. That would be the motivating factor.

JR: Other than financial flexibility, what other advantages does entering Chapter 11 at this point give Intelsat? Does it help shield your existing FCC licences from the potential of being revoked or modified if matters with the FCC turn sour, for instance?

SS: What you’ve referenced was not a factor in our decision. Another factor in our decision was liquidity. To execute on the C-band accelerated clearing process, we need to spend upwards of a billion dollars prior to any point that we get reimbursed from the FCC or the clearing house. That was definitely a factor and an objective in this process. We are also managing the effects of the COVID-19 pandemic and the economic impact around the world, which has affected some of our business sectors going forward. Liquidity is a second factor, and an objective in this process.

JR: Intelsat is operating with a ‘business as usual’ approach through the restructuring. Recently, the company launched a new managed service called CellBackhaul. This comes as cellular backhaul emerges as a bright spot as the pandemic takes its toll across all industries. How has COVID-19 changed your backhaul business and how will this new service address projected demand here?

SS: Well, I think it’s pretty clear that one thing that COVID-19 and the global pandemic has highlighted is how many people around the world are still unconnected to the internet, to broadband, to basic connectivity. I’m on the UN Broadband Commission, whose objective as part of the sustainable development goals of the UN is to enhance the development and growth of broadband connectivity around the world. Today, there’s still a little bit less than half the global population that doesn’t have broadband, proper internet connectivity.

It’s still a massive challenge. What COVID-19 has highlighted is the fact that, in many parts of the world, COVID-19 has allowed, for instance, students to jump onto an online classroom-type environment. Well that’s not available to many students around the world because the infrastructure just doesn’t exist. It really highlights the importance of broadband connectivity in developing markets, as well as developed markets.

Our engagement in the sector has been long and very successful. We have been a major provider to mobile operators all around the world. I think right now seven of the 10 largest mobile operators are our customers. We’ve been helping them extend their networks into remote rural areas for quite some time now. It has been a core part of our business.

In recent years, we’ve explored other approaches, helping them to a greater extent deploy these networks by offering more fully managed services. Taking on more responsibility for the end-to-end delivery of a service across geographic areas. A project that we announced probably 18 months to two years ago now was with a major mobile operator in Asia, as an example, where we’re actually doing the end-to-end network to extend their 4G network into very remote areas of their country — in a developed market, as a matter of fact.

We’ve partnered with Africa Mobile Networks in Africa. They are a company that are focused on specifically connecting the very remote communities that aren’t connected. They just passed their 1,000th site in April, which has brought the potential of connectivity to 3.5 million people that haven’t been connected before.

We’ve been engaged in all of these areas trying to enhance the market, and today we are announcing our CellBackhaul service, which is a fully managed service to help mobile operators implement service into remote rural communities that don’t have proper broadband connectivity. It will be a 4G service that will be enhanced to 5G in the future. We’re first launching it in the US, where there are still considerable rural populations that have needs for quality, reliable broadband. We think that this is a way to expand our partnership with mobile operators to help them deploy these kinds of services in a much more efficient manner.

By bringing more value to the table, by doing more of the work, it speeds the implementation. So US is first, and our intention is to take this platform and capability elsewhere. Probably to the African continent next.

JR: Are you anticipating COVID-19 to have long-lasting changes to education, workplace and other practices that will alter the landscape for connectivity?

SS: I think the short answer is yes. I think it’s very interesting what we’ve gone through. It’s been very challenging and difficult for people all around the world, but it also is likely to have changed behavior — consumer behavior and people’s behavior — on a permanent basis in certain ways. We don’t know what that is yet. We haven’t all come out of it yet. Certainly, the use of distance education through the internet is something that was required out of necessity, but I think people have learned the value of that in how it can be a part of an ongoing curriculum, perhaps.

We will see. It certainly shows that there shouldn’t be any reason that these kinds of extended educational tools can’t be brought to rural and remote populations in developing areas — with the exception of funding, how does it happen? If the technology exists, it’s a matter of making it happen. I think you can look at across all business, all governments, across the world, there are going to be some changes out of this pandemic situation that may be longer lasting than we think. Understanding what those are and being ready for those is something that I think business and leaders are looking at right now.

JR: It’s interesting how the pandemic has in many ways accelerated certain connectivity and media consumption trends. Stay at home orders have seen OTT flourish, while DTH has taken a hit because of a lack of sports and live TV. Your upcoming Galaxy 30 satellite is entering perhaps a very different world from when it was envisaged a few years ago, how do you see those trends playing out in broadcast?

SS: You’re right about broadcast, those trends have been going on for a number of years — this move to OTT and different kinds of delivery, and massive amounts of content choice that people have now. The reality is, in the US for instance since you mentioned Galaxy 30, paid television through cable is still a large, overwhelming majority of revenue generation for content owners. It’s still a very critical part of their business. It will be for the long-term.

This is why the content owners and the protection of these services was so important during the C-band proceedings with the FCC. These are critical services that they deliver across the country to thousands of cable headends and tens of millions of subscribers. It will still be part of the infrastructure going forward. Galaxy 30 will still be a very important satellite in the North American cable distribution infrastructure. Of course, an important satellite in the process that we’re undergoing right now in terms of clearing the spectrum, and that will be part of the service ordering needs that we’ll have for well into the future.

It will continue. At the same time, OTT delivery is growing dramatically. For us, we are seeing video delivery taking up a larger and larger portion of the things that we’re doing in the network side of our business, or the mobility side of the business. The connectivity that we’re providing in those areas is not just data, it’s not just voice, it’s pretty much video transmission, as well.

JR: Clearing spectrum in the US will also require C-band holders such as Intelsat to order a number of satellites ASAP to ensure services are protected. Are you able to talk about the progress you’ve made there in terms of orders and what that looks like?

SS: We’re not prepared to talk about that just yet, but it is an area of great focus. Getting those satellites ordered and in the factory with the proper delivery times is of utmost importance. We are well underway with our C-band clearing project. We’ll be sharing information about the required contracts that we are undertaking fairly soon.

JR: What about contracting for your software-defined next-gen Epic system later this year? How has COVID-19 affected that timeline and proposition?

SS: COVID-19 has had no bearing on that at all. This is an important development that we’ve had underway for a while. The next generation of our Intelsat Epic fleet is leveraging software-defined technologies in space as well as on the ground, because Intelsat Epic’s next generation is about these new spacecraft, but it’s also about the ground network that’s so important to go with it. That process has been moving forward. We’re engaged with manufacturers and there’s no slowing of our efforts there. Our intention is to get some of those satellites under order in the near term.

JR: Is there anything else that connectivity investors should know as Intelsat enters another period of transformation?

SS: I would maybe just expand on something I just referenced. I think it’s an exciting time. While there have been challenges in our sector for growth, there has been so much innovation going on and so much work happening to advance satellite and telecoms together.

One of the exciting opportunities as we bring software-defined capabilities to space is we’re also very active on the ground. We’ve been engaged in the development of satellite participation in the 5G standard. This year in release 17 there’s a lot of work going on in incorporating what the 3GPP call ‘non-terrestrial networks’ into the 3GPP 5G standards. We think this is an important step forward. It’s going to make interconnections and interoperability between terrestrial and satellite networks much smoother.

It’s going to allow the satellite sector to leverage the technology, the standard space technology that’s going to help bring down costs and make very efficient network deployments for the future.

I think it’s worth watching how satellite becomes a part of this future ecosystem, which I believe is going to be very important for all the services that are going to be developed in the future.