Subject: [NEXTEL-1] Loral Skynet Looks To A Future Beyond Bankruptcy

From: [email-masked]
Date: Wed, 28 Jul 2004 15:27:05 -0400

Loral Skynet Looks To A Future Beyond Bankruptcy

Jul 19, 2004

Loral Skynet, a satellite-operating subsidiary of Loral Space and
Communications, is hoping for an upswing in fortunes over the next few
months. While its parent company has had to deal with a number of
balance sheet issues that pushed it into Chapter 11 bankruptcy court
protection, Loral Skynet has been focused on expanding its global reach
and boosting revenues.
One potential growth driver is SkyReach, a new IP enabled service, which
provides two-way broadband connectivity for secure private networks or
high-speed Internet access. This service is now commercially available
in the Americas. SkyReach is scheduled to roll out in Europe and Asia
later in 2004 or in early 2005.

The June 28 launch of the company's Telstar 18 satellite will play a key
role in the deployment of SkyReach outside the Americas. The satellite
has a total of 54 active transponders, sixteen high-power Ku-band
transponders and thirty-eight C-band transponders. The satellite will
join Telstar 10 in serving Asia, offering cable, broadcast and SkyReach
IP service connectivity (see story, p. 1).

In an exclusive interview with Satellite News, Loral Skynet President
Terry Hart talked to Mark Holmes, our international editor, about his
hopes for the company and how recent events have affected his
organization's culture and aspirations.
Satellite News: How has the Intelsat deal to acquire Loral's North
American satellites affected the growth opportunities for Loral Skynet,
particularly in the Americas marketplace?

Hart: There was obviously a big adjustment to our balance sheet and our
revenue and the way we structure our company to support our customers
around the world.  All that has changed. The thing that hasn't changed,
interestingly enough, is our strategy. Between 1997 and 2002, we were on
top of a very rapid peak of growth of about 50 percent per year in our
FSS (fixed satellite services) business. We were growing very
dramatically. It was clear to us, in order to continue that kind of
growth, we would need to begin to diversify more into value-added
services.

So we opened up two additional product lines, besides our space segment
FSS business, which were network services and professional services. Our
strategy was to begin to grow in those other dimensions globally with
platforms to serve network services customers and move more into
applications with professional services. So even with the dramatic
changes in the business represented by the sale of the North American
satellites to Intelsat, that continues to be our strategy.  And, the
satellites we kept, plus the ones we are launching cover the globe in a
way that allows us to continue that strategy.

Satellite News: Is it true as part of the Intelsat deal you cannot
re-enter the U.S market for two years? Can you still be a player in the
U.S. government market?

Hart: As conditions of the agreement, we cannot sell space segment where
both the uplink and downlink is in the United States. We can still do
FSS from Telstar 12, where we are going from the United States to Europe
or vice versa, and we can still do end-to-end network services such as
our new IP-based SkyReach service.

Satellite News: Has the Loral/Intelsat deal made it more difficult for
the company to win new contracts? Has there been an uncertainty among
customers?

Hart: Certainly, it is an extra item that the sales team addresses, and
we have been pretty effective in doing that. As Loral's CEO Bernard
Schwartz has said publicly many times, we have a very aggressive plan to
reorganize the company. It is a little bit of an unusual Chapter 11
situation, in that Skynet continues to generate a good deal of EBITDA
(earnings before interest, taxes, depreciation and amortization) and
cash flow from the assets that we do have on orbit. All of the secured
debt was paid off with the sale of the North American satellites. We
have not had to borrow any cash to operate the company, which is unusual
in the situation we are in.

We are confident we have a good plan to go forward. When we show that to
our prospective customers, they understand the situation and there have
been very few occasions where we have lost opportunities because of it.

Satellite News: What do you see as the major growth opportunities for
the company, both in terms of regions and applications? If we take the
Asia broadcasting market, what do you see as your competitive advantages
over other satellite providers in the region?

Hart: Right now, as most are aware, there is an oversupply of
transponder capacity and, as a result, we have been focusing more on
growth in network and professional services. We will continue to do that
to fill up a lot of the existing capacity we have around the world, with
an eye in three to five years time on Ka-band opportunities as well as
other FSS opportunities where we can begin to build satellites for that
growth.

We see traditional broadcast applications continuing to use satellites
as they always have but that is going to be a fairly limited growth
opportunity with compression technologies limiting utilization of the
existing capacity. We see a whole new way that people are going to use
satellites in the future, and what they want is not to be concerned with
teleports and all the infrastructure needed to use the satellite. What
they want is an inexpensive terminal that can connect with IP open
protocols to a local network. That is what we are building out with
SkyReach.  We see that as being a major growth opportunity in the
future.
In Asia, we have just launched a second satellite for the region. Our
interest in doing that was based on the success we had with Telstar 10,
our first satellite in Asia, where we were able to fill that satellite
up with very good market prices in about 18 months after we took
control. We had sold out the C-Band and most of the Ku-band on that
satellite and that continues to be a good business for us. For some
time, we had wanted to launch a second satellite in the region. With the
joint funding of the Telstar 18 satellite with APT, which we launched
[June 28], we are on our way to creating a second neighborhood in Asia.
The C-band would be used mainly for video distribution throughout the
hemisphere and Ku-band would be used for more data applications in Asia.

Satellite News: In recent months, we have seen the trend of
private-equity firms investing in the satellite sector, including the
purchases of PanAmSat [SPOT] and New Skies [NSK]. Is this a positive
trend? How do you think these developments will affect Loral Skynet's
ability to pick up new international contracts?

Hart: I think it is a positive trend. It demonstrates what all the
satellite operators have been saying for some time, and that is we are
undervalued. The private-equity people have more latitude, and they can
come in and put their stake in the ground, realizing that they are
undervalued assets.

Some years from now, when supply and demand is better balanced, the
businesses are going to be very healthy. I think it is a very positive
thing for the industry. It will help us go forward as the economic
climate improves.

Satellite News: Could you give us an update on the company's capital
expenditure plans during the next 12 months? Will the company look to
aggressively invest in new satellites?

Hart: The satellite construction part of an FSS business is obviously
very capital intensive, but we are not looking to make any satellite
investments in the near term. As we launch more and more network
services, such as SkyReach, we will not have much in the way of capital
expenses other than people. As we continue to focus on growth, there is
not going to be a large capital investment until we reach the point
where there is a better supply and demand balance. At that point, the
industry is going to be focused more towards Ka-band and spot-beam
satellites and their more effective use of spectrum for the types of
growth applications we are looking for, such as two-way broadband
access. In the two-to-three-year timeframe, I think we will be making
some decisions about our well-positioned Ka-band slots and spot beam
satellites.

Satellite News: Are you seeing a recovery, in terms of demand for
capacity?

Hart: In the last two or three months, we have seen a doubling in terms
of service inquiries, where customers are looking for price quotes on
space segment or for network services. I think other operators are also
reporting similar increases in activity. That hasn't quite materialized
to an increase in revenues yet, as the sales cycle in this business
tends to be long. We are on the edge of seeing that activity feeding
down to our sales channels. The ones we find more interesting going
forward are on the data side.

Satellite News: SkyReach recently became commercially available
throughout the Americas. What are your expectations for this service?
How do you view the opportunities for SkyReach in Asia and Europe?

Hart: We are benefiting from a merger we did within the company
combining the Loral CyberStar business into Skynet. That brought with it
the legacy data and VSAT types of services, which we are still
supporting. But, more importantly, it brought with it a large number of
talented people with a large amount of networking and IP experience. We
at Skynet had actually been working on a parallel product, which we now
have been able to bootstrap and accelerate its rollout, and that is what
we are calling SkyReach. We made a decision two years ago at Skynet to
pursue that product line with an open standard - DVB-RCS -- which we
believe to be an important attribute of the service globally. We entered
into a relationship with EMS to supply those hubs, and we have installed
the first two in our Mt.  Jackson, Va., facility using IA-7, the former
Telstar 7, and Telstar 12, which covers all the Americas and Europe.

In Europe, we want to take advantage of the east-to-east beam on Telstar
12 and also in Asia, Hong Kong and Hawaii with Telstar 18. The European
and Asian hubs, when deployed towards the end of this year or early next
year, will essentially complete what we think will be the first truly
global satellite IP network, whereas our competitors have all done
pockets of two-way IP over satellite -- like SatLynx in Europe. This
will be a truly global network, where all of our hubs will be connected
to a fiber backbone in a way that a customer, like a multinational
corporation or organization, would be able to connect all of its offices
around the world on a private or public Internet network. We think that
is a very powerful play right now and Skynet is working hard to be the
first one to make it a truly global market for two-way IP.

Satellite News: Will that give you a significant competitive advantage?

Hart: We think so. We are watching carefully to see how this market
evolves.  There have been a lot of disappointments in terms of broadband
efforts, and a lot of people have pulled back. It's a fairly modest
investment with just a few hubs, but it is taking advantage of our
global presence and the expertise we have gained with Cyberstar and its
legacy products. We think it is the right combination at the right time
to accomplish something we think is unique.

Satellite News: You mention a number of disappointments in the broadband
arena? Why do you think it will be different for you?

Hart: We are not going for the big play consumer-based product, which I
think is where most of the ventures have been trying to hit that home
run and sign up millions of subscribers for Internet access. Where you
have a high concentration of subscribers in metropolitan areas,
satellite has to compete against DSL and other terrestrial technologies;
that is rather difficult, at least until spot beam satellites are more
economical. What we are doing is looking to solve the last-mile problem
globally for enterprises that have a real need for a private and secure
global network service. For that niche, we are not looking to have
hundred of thousands of subscribers. Our sweet spot in this market is
deploying high-quality networks of between 15 and 500 sites.
Contact: John McCarthy, Loral Space and Communications, e-mail:
[email-masked].

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