Speedcast International Updates Expectations for 1H2019 and FY2019

Sydney, Australia, July 2, 2019 — Speedcast International Limited (ASX:SDA) (FRA:7SC) (OTCMKTS:SPPDF), a provider of remote communication and IT solutions, said it expects Underlying EBITDA for 1H 2019 of approximately US$60 to US$64 million and revised its expectation for Underlying EBITDA for full year 2019 to approximately US$140 million to US$150 million.

1H 2019

Speedcast said it expects Underlying EBITDA for 1H 2019 of approximately US$60 to US$64 million, including US$8 to US$10 million from the Globecomm acquisition which completed in December 2018.

Speedcast's expectations for 1H 2019 and full year 2019 have changed since the company's recent 2019 outlook at our AGM in May due to evolving market conditions and more recent commercial developments. The key factors expected to impact 1H 2019 include:

  • Weaker market conditions in EEM as well as slower implementation of existing backlog
  • Delays to some expected revenue under Phase 2 of the NBN project as well as lower profitability through additional resources being added during Q2 2019 to ensure the successful delivery of the project
  • Increased churn from a major Commercial Maritime contract that was highlighted during full year results, slower than expected implementation of the backlog of VSAT vessels
  • Continued technical difficulties causing further delays in the ramp up of the Carnival contract
  • Globecomm's expected contribution to EBITDA of US$8 million to US$10 million in 1H 2019 is lower than previously expected of c.US$12 million mainly due to delays in Government systems integration projects, lower revenue in Maritime as a result of higher churn, and delayed new business wins. This includes the contribution of cost synergies, expected to be approximately US$4 million, in line with original expectations
  • Slightly lower revenue than expected in Energy due to the timing of systems integration revenue being delayed to 2H 2019, and possibly further into 2020 with some social unrest in Mozambique

The company said these factors, mostly non-structural, have contributed to lower Underlying EBITDA in 1H 2019 than previously expected and to an anticipated decline in Speedcast (excluding Globecomm) Underlying EBITDA for 1H 2019 compared to the prior corresponding period.

Proforma net leverage at June 30, 2019 is expected to be stable at c.3.5 - 3.6x, compared to 31 December 2018 of 3.5x, and within Speedcast's Senior Secured Facility covenant of 4.0x.1

Full year 2019

Based on the performance year to date and revised expectations for 1H 2019, Speedcast currently expects Underlying EBITDA for full year 2019 of approximately US$140 million to US$150 million. Speedcast's previously communicated expectation for Underlying EBITDA for full year 2019 was US$160 million to US$171 million.

Globecomm Underlying EBITDA is expected to be approximately US$21 million in full year 2019, US$5 million lower than previously expected. With respect to cost synergies from the Globecomm acquisition, Speedcast said it is on track to achieve approximately US$11 million in 2019 in line with previous guidance.

Speedcast remains excited about the growth potential in the Globecomm business post integration as market fundamentals continue to be strong in Government and Maritime, and the company is pursuing attractive revenue synergy opportunities in various markets, including but not limited to IOT, media, cellular services, and Government.

Speedcast said the revised expectation for the full year 2019 (excluding Globecomm impact) is based on the following:

  • Maritime is expected to deliver modest growth (below 5%) due to Commercial Maritime underperformance. The major contract churn described above is a key factor to explain this year's abnormal performance.
  • EEM (excluding NBN) is forecasted to experience lower than expected revenue growth, as a result of a weaker 1H 2019 performance
  • Energy revenue is expected to grow around 5% in line with previous guidance, as the market has stabilised
  • Government revenue is expected to grow mid-single digit percent with a moderate change in the service/equipment revenue mix towards equipment revenue
  • The company launched a re-organisation initiative in June to further leverage its scale, deliver operational leverage and increase sales productivity. This is expected to deliver US$5 to US$10 million benefits in 2H 2019 and US$20 million in full year 2020. This program includes consolidation activities and procurement and other cost rationalisation initiatives across the organisation.
  • Speedcast is highly confident that it can achieve this revised full year guidance for 2019. This implies a larger increase to Underlying EBITDA from 1H to 2H than seen in previous years, which will be driven by the ramp up of expected cost synergies from the Globecomm acquisition and the Speedcast re-organisation benefits, combined with usual seasonality.

As a result of the change in full year expectations, proforma net leverage is expected to be higher than the previously communicated target of 3.0x to 3.2x at the end of 2019, but within the covenant level of the company's Senior Secured Facility.

Over the medium term, Speedcast continues to expect healthy growth in Maritime -- both in commercial shipping once this year's churn event is digested and in Cruise where bandwidth needs continue to grow, and also in Government -- with continued increase in defense spending and revenue synergies from the Globecomm integration expected in 2020 and beyond. Energy's return to growth will provide an uplift in Underlying EBITDA margin and whilst EEM remains in a challenging environment, Speedcast expects to return to growth due to market share gains as scale matters more and more.