Ten years at the top
The beginning of April 2015 marked ten years since Dave McGlade joined global satellite operator Intelsat as its CEO. He has presided over some significant changes at the company during that time, from a transformational acquisition…
Ten years at the top
The beginning of April 2015 marked ten years since Dave McGlade joined global satellite operator Intelsat as its CEO. He has presided over some significant changes at the company during that time, from a transformational acquisition to listing on the NYSE.
Now the company’s executive chairman, McGlade sat down with SatelliteFinance to discuss the challenges and triumphs of the past ten years and his excitement about Intelsat’s future.
Ed Ansell: You joined Intelsat as part of the 2005 LBO and during the past ten years you have overseen the company’s transformational acquisition of PanAmSat, the secondary buyout led by BC Partners, and most recently the IPO. Did you expect your tenure as CEO to be as deal heavy as this? Has it compromised or steered you in ways that you did not envision?
Dave McGlade: I’m an interesting executive in that I love strategy, I love operations and I also love deals. I think I have varying skills in each of those areas and for me deals are always welcome as long as they benefit the company. Clearly we had to find more scale for the company, we had to expand the number of services and balance the portfolio, which we did with PanAmSat. And then with the IPO, it was about having a public currency and finding liquidity over time for shareholders. All those things are needed but frankly I’m just as happy running a company and trying to make it as good as it can be, working with customers, working with employees, etc.
EA: You refer to a deal being welcome as long as it benefits the company, it could be argued that the secondary buyout in 2007 massively leveraged Intelsat and therefore had a huge impact on what strategy you could undertake thereafter. How restricting was that?
DM: Clearly it makes you manage things tighter than it normally would, which is a benefit. They are very good shareholders, they are very strategic, they are very supportive, but obviously it added more debt to our balance sheet and made it that bit more difficult in terms of less flexibility. But I think we have managed through it pretty well.
EA: The IPO had been a long time in the making, was there a relief when it was finally achieved and how have you found the shift to being a public company?
DM: So we were already a public company from a debt stand point. We already had quarterly earnings calls. We thought of ourselves as a public company and had the discipline of a public company. It wasn’t a massive shift really and it is interesting to see how with certain investors from both the debt side of the house and the equity side of house understand the opportunity of investing in our company. So I think there have been actual synergies there from an investment standpoint.
EA: Is it still the case that a number of your bondholders are also your shareholders?
DM: Several are but we have some pure equity holders and we have a large number of just bondholders.
EA: Intelsat’s share price has dropped significantly since the beginning of the year. Has it been difficult managing these fluctuations and how frustrating is it explaining the company’s situation to the market?
DM: I want to make sure that our employees, our customers, and our partners understand that we are a sound company. That we have a fully funded business plan and that we are still investing. In fact, we are investing more than we were before in future revenue growth. We’ve added some investments on the ground infrastructure on top of what we are doing on the satellite side, it is about that whole ecosystem and our strategy of end-to-end solutions for the customers.
The frustration, of course, is that we continue to have the headwinds on the government side as well as some in our network services business, and without fresh capacity becoming available yet. And right now it is all about new inventory. In a very competitive environment in many markets around the world you have to have that new inventory, and we won’t have new satellites launched until IS-34 later this year, and then beginning of next year IS-31 and our first Epic satellite (IS-29). We need that capacity.
What happened was, when you have very little free float, when there is not that much stock out there, it means that there is a lot of volatility, which is good and bad. But the post Q4 stock reaction was really about continued headwinds and the guidance we gave that said we would be down a bit in revenue, due to the pressures of network services and government, and that we wouldn’t de-lever further. That reflected in the share price.
EA: Is there a determination to increase the size of that free float at any point? And what would the time frame be?
DM: Well it is really about our major shareholders, BC Partners and Silver Lake, exiting. And for them they have to have the right opportunity to exit. I think that part is self-correcting over time.
EA: You have been very open and transparent in your guidance about the issues that the company currently faces and your long term strategy. Is it then frustrating that investors and analysts are taking a short term view without looking at the large amount of capacity coming onboard?
DM: That is the difference between having public equity and not having public equity. It is quarter by quarter by quarter. So there isn’t the same kind of long term view. Now some investors do see the long view, but generally there are always those investors that want to see something very quick. We prefer long term investors who see how we can create value over time, and we are fortunate to have shareholders—public and private—with that orientation.
Sometimes people confuse share price falls with the viability of a company. It just means that they aren’t happy with where we are and the market conditions that we are dealing with. Long term we are still very bullish about our government business, our Epic platform and what that means we can do for broadband in a number of verticals. We are bullish on our company, our strategy, the future of the industry, and the potential growth avenues that we can pursue.
EA: How important is Epic to the future revenue generation of Intelsat? Are you putting all your eggs into one basket or will it be all incremental revenue?
DM: It is not the entire story but it is a critical part of it. We started Epic for our data customers, our broadband customers, for network services in general and also our government customers. And then we discovered there would be needs addressed by using Epic for media services.
It has been an evolution. We are already iterating beyond the first generation of Epic. We are thinking of an interim step between now and Epic 2.0, where we get closer and closer to a world of software defined satellites, leveraging our digital payloads so we can do things that will help us differentiate in the market place. This is a progression that is going to continue and Epic will certainly be a big part of our future. When we look back 10 or 20 years from now we are going to see more and more Epic satellites in our portfolio.
There are all kind of exciting things happening, everything from beam forming where you can customise the coverage on demand, to reallocating power, to having frequency agility. One thing we have worked on Epic since the beginning is that it has to be backwards compatible and has to be able to work on all frequencies. We have to make sure we have the right kind of spectrum for the right kind of application in the right region. We leverage that based on the resources that we have and we have the most extensive orbital resources of any operator.
EA: Is the idea of having flexible satellites, with the ability to rapidly shift frequencies, key to the future of the industry?
DM: In the past we were much more focused on C and Ku-band but clearly we see value in Ka, and we also sell UHF and X-band capacity through our government unit. We are certainly looking at the higher frequency bands for future needs. The key for us in this world of contention, as everybody wants more and more spectrum, is how do we prove that we will utilise it very efficiently and for critical services that are valued by as many people as possible.
EA: As you have said, your government business faces continued headwinds. How do you convince the sector to invest more in commercial satellites in a time of constrained budgets?
DM: I have a background that is more media and telecommunications so I looked at both worlds when I joined Intelsat and felt comfortable. The area I did not know when I came into this job ten years ago was the government side and I have found that to be a fascinating world. One where there is a lot of innovation but where there is also a lot of work to be done to convince our customers to change the way they buy. I think we are making headway there. We have shown them creative business models to demonstrate how cost effective we are versus them doing things on their own.
Since the day I walked in the door, we have been advocating a hybrid approach, where you blend the capabilities of government-owned milsatcom with what we can do.
It has been a long push but we see signs of change, that’s why I am bullish that long term it will occur. Frankly there had to be a catalyst for this to happen and that catalyst was the budget crisis. Sequestration, while it has been painful for us, in the end may be our friend. Allowing our customers to break away from the way they have always done things.
I do believe there is vision at the top from many generals and senior civilians in the Pentagon and Capitol Hill, who continue to see the value of commercial satellite communications and how we can help.
EA: Network services is the other area of the business which has struggled recently but you are very bullish about its future, why?
DM: We have the ability to enter many new markets. It is not just the domain of Elon Musk and Google and Greg Wyler to say “I will connect the unconnected”. We’ve been doing it for a long time and we will continue to do that. But we also want to connect the unconnected devices, like the internet of things, like connected cars. We are looking at all the possible mobility applications and refining those sectors, so we that we can exploit opportunities in a more targeted way.
It is exciting to think about all the possibilities of a ubiquitous network, and there is nothing as ubiquitous as satellite. We can do things that others can’t do, we just have to get the right cost, the right size and the right performance.
EA: The M2M market, and to a certain extent the internet of things, are currently dominated by the terrestrial telecoms players. Do you think that satellite will always be a minority support to that?
DM: I think it will be a minority support just like we are in the telecommunications fabric of the world. But as a smaller industry that’s fine. The internet of things is predicted to grow by billions of dollars over the next several years so we just want our slice of it. The key is to look at the right verticals where you address hard to reach places – agriculture, healthcare, the connected car, etc.
EA: When do you think this will actually become a significant part of your revenue stream?
DM: We need the ecosystem to be there so we have to have the right cost structure on the terminals and antennas, and then pair that with the high throughput satellites. So we get the economics right, get the form factor right and deliver at a competitive price.
EA: A lot of that relies on economies of scale in terms of producing the hardware. Do you feel that satellite operators need to work together to develop a standardised product base on which to sell their services?
DM: We are a bit of a sub-scale business when you compare us to the fixed telephony and wireless world. Historically we have not done enough to work together, it felt like there were fiefdoms. I am more optimistic now than ever. We are expanding ESOA right now from just Europe to all of Europe, Middle East and Africa. We are working together with SDA, the Global VSAT forum and, on the spectrum side, the SSI Initiative. And while there are multiple organisations still out there, we’re cooperating in ways we have never done before. This has been helped by some of the new leadership in the established satellite operators such as Inmarsat, SES and Eutelsat.
EA: What is your view on the planned broadband mega LEO constellations? Do you think there is a future for all of them? How many will actually survive and are they ultimately a threat?
DM: I think one can survive, multiple ones I struggle with. What I am having trouble dealing with is how SpaceX will have thousands of satellites combined with many hundreds of satellites from OneWeb, and how they are going to work out the frequency issues in terms of interference, how will they manage their assets in space and deal with the risk of debris. More importantly, the market has to grow very fast to accommodate so much new capacity. So I don’t think it is going to be as easy as some think.
There will be mistakes made, as in any sector, and some will execute better than others and you can’t ensure that everybody will be successful. But that being said we welcome the competition, we welcome the innovation. We’re going to innovate as fast and as much as we can at the GEO level and we will continue to look at LEO and MEO and high altitude platforms. From our standpoint working at GEO is still the optimal place to be. Is there a way to complement that? Maybe and we’ll certainly investigate it. We need to think about everything and look at everything and we’ll continue to do that.
