Northern Sky Research

CAPEX Impact on FSS Operators

Apr 16th, 2012

In its recently released Satellite Operator Financial Analysis (SOFA) study, NSR assessed two different metrics regarding typical CAPEX outlays for fixed satellite services (FSS) operators:

  1. The first metric was the Total CAPEX to Cash Flow from Operating Activities ratio that gives an indication of how much of a FSS satellite operator’s capital expenditures can be financed by the annual cash flow coming out of its operations. The lower the ratio, the less cash is being absorbed by capital spending and more cash remains for other activities, be they payment of dividends, deleveraging, or possible merger and acquisition activities.
  2. The Total CAPEX to Annual Revenues ratio was the second CAPEX related metric assessed in this study. It performs a similar function to the prior metric and shows what fraction of an FSS operator’s annual revenues are used for CAPEX functions.

NSR’s statistical analysis of the Total CAPEX to Cash Flow from Operating Activities ratio from the SOFA study illustrates a clear distinction between large FSS operators and small- to mid-sized FSS operators. While the industry average for this ratio stands at 0.79, indicating that on average nearly 80% of cash flow coming from operating activities is funneled into CAPEX, the standard deviation shows that this can easily vary as widely as under 10% on the low end and over 150% (sometimes well over) on the top end.

This trend occurs because small- to mid-sized FSS operators will normally exhibit periods of very high capital spending when they need to plan for a replacement satellite in their fleet or look to expand their overall fleet size, but the small- to mid-sized FSS operators will then have very low CAPEX requirements in between these satellite programs. The larger FSS operators typically have more consistent year-to-year capital expenditure requirements as they normally launch several satellite replacements or expansion programs per year; however, they too will see cycles in their capital spending profile with periods of lower or higher spending (just not quite as dramatic as the small- to mid-size operators).

The Total CAPEX to Annual Revenues ratio essentially illustrates the same trends as described above for the Total CAPEX to Cash Flow from Operating Activities ratio. Larger FSS operators tend to score more consistently, though with some variability, in the 0.3 to 0.5 range, while small- to mid-sized operators can spend anywhere from less than 5% of annual revenues on capital projects to more than 150% of annual revenues depending exactly where they are in their fleet replacements/expansion cycle. SKY Perfect JSAT appeared to be in the “trough” portion of its capital spending cycle in 2010, and this allowed it to score the lowest Total CAPEX to Annual Revenues ratio of all FSS operators for the year for which NSR had data. Assuming SKY Perfect JSAT does increase capital spending in the next several years, it will likely see a more typical score for an FSS operator of its size in this metric.

Telesat, AsiaSat, Intelsat, Eutelsat, SES and Satmex all came next in terms of the Total CAPEX to Annual Revenues ratio in 2010 indicating that from this perspective they were spending fairly typical levels of on CAPEX for an FSS satellite operator. All of these companies are in slightly different places in their capital spending cycle, so there will be considerable movement in these rankings in coming years. For example, SES was heading into a peak of CAPEX spending in 2010 and therefore scored the highest of the large operators. Conversely, APT Satellite actually spent more on capital investments in 2010 than it had in total revenues. This was because APT Satellite was at the crest of its capital spending cycle for its Apstar-7 and -7B satellites and actually took on debt in this year in order to fund its CAPEX program. APT Satellite’s capital spending will likely decline significantly in the coming year or two, and it should then score a more typical Total CAPEX to Annual Revenues ratio.

Bottom Line

It is a well known fact that the FSS business is very capital intensive and the high costs of building, launching and insuring satellites are both a major barrier to entry into the sector as well as the core issue at the heart of every business plan in the industry. Over a longer period of time (about 5 years), NSR’s analysis shows that the average FSS operator will spend about 35% to 45% of their annual revenues, or 50% to 70% of their operating cash, on CAPEX. With statistically determined typical values for these ratios as well as understanding the different trends between large and small- to mid-size operators, it becomes a straight forward task to assess individual operator statements regarding their CAPEX spending projections and determine both how they stack up to their peers as well as if they are staying within industry norms.