Argonautica

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‘Inmarsat: Another No-Growth Quarter’

Last Thursday Inmarsat announced results for Q3. Whilst the share price reaction on the day suggested a positive reading of the results by the market, we believe a large part of this was relief that the company did not issue a profit warning. In fact, when looking at the results in more detail, Q3 proved to be yet another quarter of zero growth for the company.

In our previous blog ‘Inmarsat: Rough Seas and Cloudy Skies’1 we highlighted our concerns around Inmarsat’s guidance for 2018 – an increase of €340m in revenues from their 2015 base, implying an average annual growth rate of 9%. To put this ambition into context, the company has only posted quarterly revenue growth of more than 1% once in the last 3 years. Q3 revenue growth of 0.4% proved disappointing in our view, and for the total 9-months this year revenues have, in fact, contracted2. We are still yet to see any signs of an inflection point in revenues, despite the new GX product offering being available for its first full quarter. Further quarters similar to Q3 would push the required CAGR figure higher, and put the 2018 guidance at increasing risk.

Maritime, their largest division at c.50% of group revenues, proved to be the main detractor over the quarter at -4.9% growth year-on-year. We previously highlighted our concerns surrounding Inmarsat’s maritime operations, both from the perspective of their product offering, and also the broader maritime market facing a recession. We believe that Inmarsat’s references to ‘overcapacity in the global merchant fleet’, increasing ‘vessels being laid up or scrapped’, and an ‘increase in the rate of deactivations’ justify our concerns about our outlook for the company’s maritime operations. Furthermore, a decrease in ARPU of 13% for their newer VSAT products (GX and FleetXpress) is worrying, especially given the recent launch of GX and their reliance on upselling for gowth, and is perhaps evidence of a reluctance of ship-owners to pay more for better products. The company’s justification that these results are against a strong comparable Q3 last year also appears to be weak when one considers Q3 2015 revenues for maritime came in at $150m vs. a 3 year quarterly average of c.$147m.

In aviation, the other main area upon which Inmarsat is reliant for growth, the announcement of the IAG deal in principle, in addition to the Air NZ and another European airline provided some reassurance on the future outlook. However, with contracts still to be signed, and a reluctance to provide any clarity on the business model, we still find it difficult to assign Inmarsat too much credit in this area currently. Importantly though, with 50% of the company’s revenues currently derived from the maritime market in comparison to aviation at c.12%, aviation revenue growth needs to outpace the contraction in maritime by over 4x, just to keep group revenues stable. This is even before considering the additional growth that would be required to meet the 2018 guidance. Whilst Q3 was also certainly helped by a boost to Government activity from the disclosed contract with Boeing, there was little detail provided to give comfort that these gains would be sustainable, specifically if Boeing would be willing to renew this contract at current levels (or at all) in an HTS market facing numerous headwinds.

In contrast to the absence of growth seen at Inmarsat, industry disruptor Viasat (whom we highlighted as a primary threat to Inmarsat’s business model in our previous blog) reported a strong set of results for the quarter on Tuesday3. Viasat grew revenues 13% year-on-year, and also announced they had been awarded contracts for 650 new commercial aircraft over the quarter. While the majority of these were in North America, it certainly highlights Viasat’s ability to utilise its technological advantage, offer better economics to aviation customers, and subsequently take market share. We expect them to have similar success, at Inmarsat’s expense, as their focus on Europe grows.

In our view, Inmarsat’s numbers raised more questions than answers, and a number of our concerns appear justified so far. Further quarters in the vein of Q3 would force Inmarsat into an increasingly uncomfortable position, and without a stabilisation in maritime activity we believe it will be difficult for the company to avoid a profit warning.

Oisin O'Leary
Investment Analyst, Argonaut Capital
November 2016