11/8/2020

speaker
Molly
Event Coordinator

Hello and welcome to the SES year-to-date 2020 results call. My name is Molly and I'll be your coordinator for today's event. Please note that this call is being recorded and for the duration of the calls, your lines will be on listen only. However, you will have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. I would now like to hand the call over to your host, Mr. Richard Whiting, Head of Investor Relations, to begin today's conference. Thank you.

speaker
Richard Whiting
Head of Investor Relations

Good morning, everyone, and thanks for joining. Our results call for the nine months ended 30 September 2020. This morning's presentation was uploaded to the investors section at ses.com this morning, along with the press release if you don't already have it. As always, please note the disclaimer at the back. In a moment, Steve Collar, CEO, will present the main business highlights, followed by Sandeep Jalan, CFO, to cover the financials in more detail. After some closing remarks from Steve, we will be happy to take your questions, where we're also joined on the line by JP Hemingway, CEO of SCS Networks. And so with that, let me hand over to Steve.

speaker
Steve Collar
Chief Executive Officer

Thanks, Richard. Good morning, everyone, and thanks for joining us for our Q3 call. Let me take you through the main business highlights, starting on page three. We're pleased with our solid year-to-date performance, reflecting strong focus and execution. and the resilience of our business despite the continuing challenges introduced by the COVID-19 pandemic. As has been the case for the last three years, networks growth remained strong while video was flat quarter on quarter. Our proactive and quick response to the COVID is contributing well to lower operating expenses and good performance at the EBITDA line. As a result, we're on track to achieve our full year outlook with more than 97% of expected revenue already secured and full focus on closing out the year as strongly as possible. As we've discussed previously, and I will share more details in a couple of slides, we have four key strategic initiatives underway at SES that will create significant value, and we've made strong progress in all four areas over the last few months. In particular, the visibility of substantial CBAN proceeds continues to increase, with our transition plan fully on track, the FCC auction due to start next month, and a success milestone for realizing the first relocation payment now only 13 months away. We have a well-differentiated value proposition in our networks business, and we continue to build, and this has been sort of substantially expanded with our partnership with Microsoft Azure. Strong video neighborhoods emphasized recently by the meaningful extension of our business with Canal Plus across three satellites, and underpinned by strong cash flows and a disciplined financial policy. So turning now to the key numbers on page four, overall revenue for the first nine months stands at 1 billion, 410 million. For a third successive year, our network's business has posted strong growth, delivered revenue up 7.5%, and this despite the COVID-19 environment that's depressing demand in some of our most important growth segments. Our video business, the largest in the industry, delivered to our expectations, and we saw revenues this quarter stable with Q2. I'm pleased with the resilience that we've been able to show at the adjusted EBITDA line, including a 4% reduction in operating expense year-on-year and reflecting the strong cross-company actions that we implemented at the start of the year to protect the bottom line in the face of COVID headwinds. We've also reduced leverage year-on-year with metrics consistent with investment grade, strong liquidity, and a healthy balance sheet. So looking at the segments in more detail and starting with video on page 5, Our video business delivered results in Q3 in line with our expectations. As I mentioned, the long-term importance and resilience of our prime neighborhoods was underscored by our recent agreement with Canal Plus. I'm really pleased with the outcome of this deal with an important long-term partner covering three different orbital locations and serving more than 10 million Canal Plus subscribers. Not only have Canal Plus committed to over 230 million of incremental backlogs, but they're also consolidating a substantial part of their M7 business onto the SES network at 23.5 East, securing its long-term future and extending our relationship with Canal Plus until the end of the decade. A couple of words now about our business in Germany, a market from which we generate almost 400 million in revenue, serve 18 million households from a total of 36 million, and where we operate a brand-leading B2C consumer platform, HD+. HD Plus is an incredibly important value driver in our most important market, a market in which there's a vibrant collection of public broadcasters, commercial broadcasters, paid TV, and a significant free-to-air audience. Since the start of the year, HD Plus has seen an uptick in paying subscribers to the platform, which stands now at over 2 million. Importantly, over the course of the year, we've developed and implemented a dedicated HD Plus operator app that's now embedded directly into TV sets by manufacturers such as Panasonic and Samsung. This avoids the need for consumers to purchase modules or set-top boxes in order to receive HD+, increasing convenience and providing greater insight into consumer behavior. In fact, every third TV set sold in Germany today is already carrying the HD Plus operator app. And HD Plus is reflected of a global trend with consumers everywhere seeking the best viewing experiences and more high-definition and ultra-high-definition content where satellite is the most reliable and cost-effective means for customers to distribute their most valuable content. SES is the global leader in premium content, with further growth in HD and UHD channels to almost 3,000 in total, carried over the SES network. This is 65% more than our closest rival, demonstrating the strengths of our premium neighborhoods, which serve an industry-leading 367 million households. It's this combination of unparalleled reach and premium content that customers such as Canal Plus continue to value highly when committing to long-term contracts, as evidenced by the substantial video backlog of 3.5 billion. So, now turning to networks on page six, a network continues to be the growth engine for SES, with more than 25% growth over the last three years. Despite the challenges from COVID in 2020, growth of 7.5% year-on-year reflects the work done signing new business over the preceding 12 months, and really strong execution across our network's business unit. Our government business delivered a step up in revenue this quarter, and we achieved some breakthroughs with new applications for our MEO constellation with the U.S. government. The first is a flexible network deployed for remote austere locations, and the second is a solution to support U.S. servicemen in COVID-restricted areas, and we're optimistic that this will lead to repeat business. Another feature of networks in 2020 and one that differentiates us from our peers is the growth that we're posting in FixATA, up 6.6% year-on-year. Our partnership with INRED in Colombia is a great example of the kind of rural inclusion projects that have sustained this growth over the last several months. In mobility, we've still recorded double-digit year-on-year growth, thanks to the new services signed at the back end of last year. The team has done a fantastic job in working with our long-term partners in what is a challenging time for their businesses, while managing so far to keep the quarterly run rate stable in 2020. And turning to page seven, and I'm going to say a few words on what we're calling our network of the future, an integral part of how we intend to drive sustaining growth across our network's verticals throughout the next decade. Our vision is a seamless, multi-orbit, intelligent network that allows our customers to consume service flexibly and manage their application needs. It's a network that benefits from cloud scale and leverages network functions natively running in and seamlessly interconnected to the cloud. Our gateways and platforms will be virtualized and integrated with cloud data centers, and this vision took a major step forward through the announcement of SES becoming a founding partner for Azure Orbital. Just recently, we added ST Engineering iDirect and Gillette as key technology partners for O3B Empower, both of whom share our vision and together represent a significant percentage of the terminals deployed across our markets today. They will deliver their platforms to be fully compatible with the O3B Empower Space Brain Arc and the network automation functionality being built within ONAP. Just as importantly, the same hardware deployed at our gateways and customer locations will be able to transition seamlessly between O3B Empower and, for example, SES17. We're now less than a year away from the launch of SES17 and the first launch of O3BM Power, and we have 500 million of secured backlog for these systems, and we will report regularly on our commercial progress going forward. And finally, from me, before I hand over to Sandeep, an update on our four key initiatives on page eight. These four initiatives, when taken together, will transform SES. Our capabilities, our ability to serve our existing customers and attract new ones, and together will create substantial value for our shareholders. These initiatives reflect our core priorities at FES, and we have real momentum in all four. Since our last results call, we've made really strong progress in our C-band transition plan, as I mentioned earlier on in this call. We've completed all major procurements, a number of which are already ahead of schedule, and we've begun the process of transitioning customers. The FCC-led process is progressing at pace, And the strong demand for high-quality mid-band spectrum was evidenced recently by the extensive list of 74 potential bidders for the auction that will kick off already next month. So we're really well on track with relocation payments expected to begin in a few months, and with the first clearing milestone only 13 months away, unlocking the first billion dollars of proceeds that will be used to strengthen our balance sheet. Looking ahead to the second acceleration payment, it's still a little early to be definitive on the use of proceeds given that we're around three years away, but the order of priorities remains clear. Shareholder return, any further balance sheet strengthening if required, and disciplined investment should we see an opportunity to create shareholder value. Moving on to our second initiative, Simplify and Amplify, we've now implemented the actions needed to deliver on our targeted EBITDA optimization, that will deliver 40 million in EBITDA savings in 2021 and 50 million on an annualized basis from 2022 onwards. We're continuing to drive simplification, efficiency, and operational focus internally, and this is reflected in our decision not to pursue the separation of our networks business within SES at this time. We've done a lot of work on this, both internally and externally, and now have a blueprint to execute if needed. We've concluded that we can achieve the objectives of sharpened operational focus and strategic flexibility without incurring the additional cost, resource, and time to execute that separation would imply. We do intend to simplify our legal and financial structures, reducing the number of legal entities by more than a third, increasing visibility of business unit performance internally and later also externally, and continuing to drive strong operational focus in video and networks, while the work that we've done preserves strategic flexibility for the future. I've already spoken at some length about our third initiative, our network of the future, and the vision associated with that, and the important part that SES17 and O3BM power play in this architecture. This seamless interconnected multi-orbit vision is something we've been working on for some time, and I couldn't be more excited about the progress we're making. An important point to make is that if we can work seamlessly across SES, GEO, and MEO assets, we can also ultimately work seamlessly across other space-based networks as well. We're building a platform that can form a backdrop for network sharing, driving both improved customer experience and capital efficiency in the industry. And finally, cloud. And cloud is also part of this interconnected network of the future because it drives scale and the ability to virtualize large parts of our network. But as you can see from the industry forecast, the adoption of cloud services is also accelerating across many industries, including those that we serve today, and represents a substantial value opportunity for us. I think we're meaningfully ahead of the industry in the way that we're approaching cloud and looking to leverage the cloud across our business. And this is underscored by our substantially expanded partnership with Microsoft. Operationally, we've moved our own key enterprise and operational systems to Azure. And we've created a corporate cloud initiative to define, develop, and launch seamless cloud content and connectivity solutions to our customers. Last month, really excitingly, we became an Azure Orbital partner and key connectivity partner of Azure Orbital, building and managing gateways for Microsoft that will be co-located with their Azure data centers, and we'll also place our O3B and Power gateways there. We're also Microsoft's MEO satellite partner to connect Azure modular data centers and benefit customers who will be able to take Azure to the network edge extracting value by applying a range of data processing, AI, and other tools. So with that, I'll hand over to Sandeep and then come back to conclude at the end. Sandeep.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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