Eutelsat Communications SA

PAR:ETL

Earnings Call Transcript 2019-Q3

[Operator]

Good day, and welcome to the Eutelsat Communications Third Quarter 2018-2019 Revenues Presentation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rodolphe Belmer, CEO of Eutelsat Communications.

[Rodolphe Belmer, CEO & Director]

Good evening, ladies and gentlemen, and thank you for joining us on this call where we'll present our third quarter 2018 and '19 revenues. I'm Rodolphe Belmer, CEO. I'm joined by Michel Azibert; and Yohann Leroy, Deputy CEOs; and Sandrine Téran, CFO.Before looking at the operations in detail, let's take a look at the main takeaways of the quarter. First, outcome of our negotiations with the finance administration on the territoriality treatment of our corporate tax will lead to a reduction of the order of EUR 70 million in our annual tax burden, contributing to the acceleration of our free cash flow-generating capacity.Second, core Broadcast is showing strong resilience with a return to quarter-on-quarter growth, meaning that the overall video vertical was favorable Q-on-Q.On the commercial front, we signed 2 multiyear multi-transponder contracts in Maritime Mobility, including an agreement with Speedcast on EUTELSAT 133 West A and a multi-satellite deal with Marlink.On the other hand, while indications of demand for the Konnect Africa broadband offer are highly positive, the ramp-up has been hindered by some preoperational issues. This delay, together with the digitalization in Professional Video and Fixed Data trends, coupled with the slower-than-expected materialization of the Video pipeline, lead us to adjust our revenue expectations for the operating verticals for the full year to minus 3%. All the other financial objectives are confirmed for the current and following year. I will come back to this later.Now over to Michel Azibert to take a closer look at the Q3 performance by application.

[Michel Azibert]

Thank you, Rodolphe. So third quarter revenues amounted to EUR 337 million versus EUR 334 million in H1 2017-'18, representing a 0.7% increase. They included a negative perimeter effect of EUR 4 million with the disposal of EUTELSAT 25B partly offset by the integration of Noorsat last year, a positive currency effect of EUR 8 million and a positive swing in other revenues of plus EUR 12 million, reflecting a significant one-off engineering fee in Q3 and a EUR 6 million negative hedging impact. As a result, the revenues of the 5 operating verticals were down by 4% like-for-like. Let's have a look at H1, starting with the core businesses. Video, [ 67% ] of total revenues, recorded Q3 revenues of EUR 215 million, down 2.5% versus last year, but as Rodolphe mentioned, stable quarter-on-quarter. Government Services saw revenues of EUR 40 million, down 1% year-on-year and also stable quarter-on-quarter. Fixed Data, now down to 9% of group total, saw revenues of EUR 30 million, down 18% year-on-year and by 7% quarter-on-quarter. On Connectivity, Fixed Broadband revenues stood at EUR 19 million, a decline of 10% year-on-year and 5% quarter-on-quarter. And Mobility generated revenues of EUR 20 million, up 5% year-on-year and by 1% quarter-on-quarter. Let's look at each vertical in more detail, starting with Video. Third quarter revenues were down by 2 -- 2.5% to EUR 215 million on a year-on-year basis. This decline reflected mostly an accelerated double-digit decline in Professional Video in the context of intensifying competitive pressure. Professional Video now accounts for less than 8% of Video revenues. Pure Broadcast revenues were stable year-on-year and recorded a slight growth quarter-on-quarter. It means the Video vertical as a whole was stable quarter-on-quarter. On the commercial front, we secured a multi-transponder contract for a new DTH platform on EUTELSAT 65 West A. However, as Rodolphe said earlier, some projects in the pipeline, which we hoped would materialize in the second half, have been delayed for nonstructural reasons. This partly contributes to the adjustment to our revenues expectations for the current year. We expect these opportunities to materialize in the future.A quick look at channel counts. The total number of channels broadcast by Eutelsat satellites stood at 7,021, up 2% year-on-year and by 3%, stripping out the effect of the disposal of EUTELSAT 25B. HD channels rose by 16% at constant perimeter to 1,509 channels, implying a penetration of 22% of channels compared to 19% a year earlier. MPEG-4 channels went up 7%, a slower pace compared to HD ramp-up, and the penetration rate stands at 69%. Overall, this led to an increase in megabit per second consumption of 2% on a year-on-year basis.As usual, a quick look at HOTBIRD. Channel count was down 39 units versus the end of March last year. This reflects the end of the simulcast or double illumination. In this, the number of unique channels was broadly stable. Over the quarter, the number of MPEG-4 channels rose by 4% to 592. It remains significantly outpaced by the ramp in HD channels, up 14% to 357. MPEG-4 is still considerably more advanced than HD with a penetration rate of 61% versus 37% for HD channels. As a result, the consumption of megabit at HOTBIRD rose by 2% year-on-year.Turning to Government Services. Third quarter revenues stood at EUR 40 million, down 1% year-on-year. This reflected, on one hand, the incremental business secured last year at the 174° East orbital position covering Asia Pacific; and on the other end, the low outturn of the fall 2018 renewal campaign with the U.S. government at 70% rate. On a quarter-on-quarter basis, revenues were stable. The outturn of the spring '19 renewals with the U.S. government showed an improvement versus fall at 85% in value. In Fixed Data, third quarter revenues stood at EUR 30 million, down 17.8% year-on-year, representing a deterioration versus the recent trend. It reflects as ever ongoing pricing pressure in a highly competitive environment and in Q3, softer volumes with telecom operators in Latin America.Fixed Broadband revenues stood at EUR 19 million, down 9.7% year-on-year. The underlying performance was minus 7.7% if we exclude the expiry of a contract with a Middle East customer for a spotbeam on EUTELSAT 3B, which was recontracted to Taqnia in the Mobile Connectivity vertical. This effect will wash out the next fiscal year. The performance was reflective of a further decline in European broadband due to capacity limitations in some countries and the transition to a new distribution model.At the same time, the revenue ramp-up for Konnect Africa has been hindered by temporary operational issues. I will come back to the last 2 points.First, Europe. Our existing wholesale distribution model is showing its limits with a fragmented distributor base, many of whom lack the critical size to fund subscriber acquisition costs. For some of them, satellite is not core as they rely on multiple connectivity technology to cover white zones, and yet, we are reliant on their commercial approach with little influence over their marketing and distribution strategies. This situation has led to an erosion in both subscriber base and revenues.At the end of 2018, we launched a preferred partner program, PPP, focused on a small number of selected partners who put satellite at the heart of the strategy. The advantages are they are incentivized to maximize market share. We have a greater visibility over distribution, pricing, subscriber base and customer retention. And crucially, they use exclusively capacity on KA-SAT. This allows us to fully capture market value. The first results of this new approach are very encouraging with a strong and sustained acceleration of gross adds for PPP distributors, as you can see on the graph.In the short term, revenues are suffering during this transition, but we expect the new approach to offset this decline from next fiscal year. And most importantly, it paves the way for an accelerated ramp-up when new capacity enters into service with the Konnect satellites in 2020. Turning to Konnect Africa. The early months of operations have been hindered by some temporary operational issues, political unrest with, for example, the Internet shutdown during election in DRC and tumultuous elections in Nigeria; regulatory with delays in obtaining licenses in Ivory Coast, pushing out the commercial launch; and logistics with some issues in hardware production and delivery. In consequence, no material revenues are expected in the current financial year.These delays, which are mostly rollout issues, do not alter our view of the strong potential of this market. We have seen a rapid acceleration in kit orders once operations are up and running and confirmed appetite in all regions. This validates the pertinence of our go-direct approach via a network of local partners operating in various fields and giving access to hundreds of points of sale. This model will be extended to several new countries in the coming months, starting with Ivory Coast.We expect revenues to ramp from next fiscal year with the full potential to be progressively realized from fiscal year 2021 following entry into service of the Konnect satellite.Finally, Mobile Connectivity. Third quarter revenues stood at EUR 20 million, up 4.7% year-on-year that reflected the start of the UnicomAirNet contract on EUTELSAT 172B, the carryforward impact of the contract with Taqnia at 3° East and 70° East and the ongoing ramp-up of aero mobility capacity contracts on KA-SAT. Quarter-on-quarter, revenues were up 1.3%, with a contribution from UnicomAirNet partially offset by the termination of the temporary wide-beam contract on EUTELSAT 172B. On the commercial front, we recently secured 2 multiyear, multi-transponder agreements in maritime, first, with Speedcast on EUTELSAT 133 West A; and a major multi-satellite deal with Marlink, which we announced in February. A quick look at the fill rate and backlog. The number of operational transponders stood at 1,418 at end March, broadly stable versus end December and slightly down year-on-year, reflecting the disposal of EUTELSAT 25B in August 2018. The number of utilized transponders stood at 960, down 10 units versus end December, principally reflecting the lower Fixed Data volumes in Latin America that I mentioned earlier. Year-on-year, the number of utilized transponders was up by 9 units or 17 units excluding the disposal of EUTELSAT 25B, reflecting new contracts in Video and the ramp-up at 174° East.The backlog stood at EUR 4.4 billion at the end of March '19 versus EUR 4.6 billion at the end of December '18, reflecting natural backlog consumption in the absence of material Video renewals. It was equivalent to 3.1x full year revenues. Video applications represented 76% of the backlog.Now back to Rodolphe for a word on the outlook.

[Rodolphe Belmer, CEO & Director]

Thank you, Michel. So at the 9-month page, the revenues of the operating verticals were down by 3.0%, tracking behind our full year objective of broadly stable. The reasons for this shortfall are temporary operational issues in Fixed Broadband, in particular delaying the ramp-up of Konnect Africa, the deterioration of volume trends in our noncore Fixed Data and Professional Video activities and the late materialization of some contracts in the Video pipeline. In consequence, the outturn for fiscal year '18-'19 is now expected to be in the same range of minus 3%. We maintain our objective of return to slight top line growth in fiscal year '19-'20. All our other financial objectives are also confirmed, including EBITDA margin and free cash flow.In particular, fiscal year '19-'20 revenues will be underpinned by several elements. In Video, new capacity on EUTELSAT 7C addressing sub-Saharan Africa; the materialization of opportunities in the Video pipeline, which have been delayed in fiscal year '19 that should materialize in fiscal year '20, including initial revenues from CIRRUS. In Government Services, the initial contribution of the EGNOS payload on EUTELSAT 5 West B with a contract value of EUR 100 million over 15 years and the entry into service of EUTELSAT QUANTUM. In Fixed Broadband, the ramp-up of Konnect Africa and the benefit of the new distribution model in Europe. In Mobile Connectivity, the full year effect of the contract with China Unicom and the ramp-up of recently signed maritime contracts. So a few words to conclude. We are facing a varying demand in our different businesses with challenging competitive environments for certain verticals. Crucially, Broadcast continues to be strongly resilient. The adjustments in current year top line is mostly attributable to delays in Fixed Broadband and Video as well as to tougher conditions in nonpriority businesses, i.e., Fixed Data and Professional Video. All our financial objectives are confirmed. The outcome of our negotiations on tax territoriality will secure significant savings, further reinforcing our strong focus on discretionary free cash flow generation and shareholder remuneration.I thank you for your attention, and we are now ready to take your questions.

[Operator]

[Operator Instructions] We'll now take our first question from Aleksander Peterc from Societe Generale.

[Aleksander Peterc, Equity Analyst]

First of all, can you tell us on Fixed Data, we were kind of used to low-teens declines there. We're now in the high teens in terms of the year-on-year declines. Is this the new now? Is this what we should model going forward for this particular business? Secondly, Mobile Connectivity. I'd just like to understand if the Unicom contract is ramping up progressively because my understanding was it was full on from the 1st of January, but it looks like you're talking about a ramp-up of that contract. So do you have a full quarter of that? And once that's very significantly offset by the headwinds that you're mentioning, would a termination of a contract there -- I think it was on 172B? And then third question would be on the tax rate. So I appreciate the hard figure of EUR 70 million, which is welcome news, but can you also give us an idea of a tax rate you're expecting to pay going forward?

[Rodolphe Belmer, CEO & Director]

Thank you, Aleksander. Actually, the Fixed Data revenue trend over this last quarter has been disappointing with almost 18% decline year-on-year, which is more negative than the trend we used to have in that segment, which showed actually trends in the order of minus 10% in the past. The reason for that is that we are now confronted to double, I would say, negative effect, continuous decline in price in the same order as before of minus 10% year-on-year. Related to this time was an erosion in volume, mostly in Latin America when some volume has been discontinued or not renewed by an important telecom operator in Latin America. Does it mean that this very negative trend will continue likewise in the future? What we can say is that we estimate that Fixed Data will continue to be in the negative trend going forward. We have always had or for the past 4 years, at least, a very negative view on that segment. Still we think that was the main driver of erosion should be -- to price erosion in the order of -- probably in the order of 10%. And that will -- the volume erosion that we have had in this quarter shouldn't probably be replicated in order in the next few quarters.Mobile Connectivity, there is no ramp-up in the China Unicom contract. It's a fixed contract, which started actually to enter into effect in January of this civil year. And actually, what we said and maybe we should explain that better is that the positive impact of that contract over the course of the last quarter was partially offset by the decline in revenues coming from another contract, which was a temporary 1-year contract we had with a service distributor. The 1-year contract, which that service distributor used, will leave room part of their capacity. And this contract can -- now offsetting part of the growth we expected from the China Unicom contract. The China Unicom contract will continue to produce positive revenues in the next few years, whereas the termination of the contract I just spoke to will be behind us as of now. Tax rate, the EUR 70 million of relief in our tax burden comes actually from reduction in our tax scope, tax perimeter, the profit, which is taxable in France, the duration of this basis. And we applied to this basis the nominal tax rate in France, which is today 34%. In the future, of course, our tax rate will be reduced because our tax perimeter attracting French tax rates will have reduced. And this prediction will document the same kind of prediction as today. But of course, the French nominal tax rate is expected to decline as of civil year '21, and meaning that we will also have the same kind of effect for us.

[Aleksander Peterc, Equity Analyst]

Okay. Can I just have a small follow-up? The Maritime contract with SpeedCast and Marlink, is that entirely new? Or is that contracts we already heard about in the previous quarter where you mentioned significant Maritime wins? Or are these 2 different things?

[Rodolphe Belmer, CEO & Director]

Well, I will turn to Michel Azibert to answer in depth those questions. What I can say to -- an introduction is that Marlink is a substantial new customer to us, very important customer, which access making us strong -- I would say, a substantial foothold in the Maritime segment. And it's -- we see that and we consider that as a big win for us.

[Michel Azibert]

On the run rate basis, the Marlink contract is several times bigger than the Speedcast. The Speedcast contract has been announced this quarter but came into effect already in the quarter, so it already impacted the results of Q3, whereas the Marlink contract is the one we referred to during the previous quarter call. It's a ramp-up, and it has a very modest impact on this fiscal year. But it will progressively ramp up, and it's a much bigger contract, encompassing several satellites in different regions of the world, by the way.

[Operator]

We'll now take our next question from Robert Berg of Berenberg.

[Robert Berg, Analyst]

A few questions from me. The first, in terms of the guidance, the guidance downgrade. And you mentioned the timing of revenue recognition of certain contracts in Video and Konnect Africa. Could you maybe give us a sense of the contracts signed but not started in Video? What you were hoping for in H2 and what you now are expecting in H2? And the same maybe for Konnect Africa or at least a guidance range for what you were thinking you might get in H2 from Konnect Africa versus the material revenues you're now forecasting.And the second, a few questions on the tax, a follow-up from the first question. Can I confirm the EUR 70 million savings would have represented about half your cash tax bill or at least half of your French tax for fiscal year '18? I just want to make sure my numbers are right there. And a 3 quick questions. What are the final steps for sign-offs? Is this now included in your free cash flow guidance? Or are you still waiting for the final sign-off?And then the third question. How do you think about growth projects going forward now that your tax rate is materially lower? Do we expect you to be more active in projects now the hurdles are lower? Maybe too early to think about that, but some thoughts would be useful.

[Rodolphe Belmer, CEO & Director]

Well, thank you, Robert, for all of those questions. Regarding the guidance downgrade, which is related actually to -- mostly to delays in the materialization of some contracts in the Video segment and also in delays in the rollouts of our African broadband initiative, I'm not sure I can give you much more details on that. What I can say -- well, first, to give you a broad picture, the guidance downgrade was mostly due to those delays, but it's also partially to the softer conditions in the Fixed Data and Professional Video segments that I referred to before.When it comes to the delays, delays that we think we will be able to catch up during the course of the next fiscal year, starting in July. In the Video segment, the contract that we thought we would be able to sign and which took longer to materialize refer mostly to contracts with large DTH platforms, on the one hand; and also some price increase with very big customers that are under negotiation on the other hand. That's the 2 big drivers of the growth in Video that we expected. And I think I'm afraid I cannot give more color or more details.In Africa, in the African broadband initiative, unfortunately, the revenue we will get this fiscal year are very, very low. They are almost, I would say, negligible. And when it comes to catch up and to catch up on the expected growth of our revenues in Africa as of next fiscal year when all the executional issues linked to our first tests into this continent are behind us, and most of those are now behind us already.When it comes to our tax situation, well, first, maybe I would say that our French tax represent around 90% -- well, Sandrine tell me -- correct me if I'm wrong, 90% of all the tax we pay. And actually, the 70% saving represents roughly 40% of our total tax burden, meaning that it's substantial. Is it included in our free cash flow guidance at the moment? The answer is no. Well, is it a good time for us to think about that? Well, it's not the right moment. We are today just commenting on our quarterly revenue. It's a revenue call only, and it's not the right time for us to talk more on the discretionary free cash flow profile for the next few years and for any related revision to our strategy.

[Operator]

We will now take our next question from Paul Sidney from Credit Suisse.

[Paul Sidney, Research Analyst]

I have 3, please. Firstly, could you give us a sense for what the new guidance implies for an absolute revenue number for the operating verticals, obviously with FX and pro forma numbers? Maybe if you could just actually just give us a sense for what the absolute number is. I tried to do a quick calculation. I thought it was at EUR 1.31 billion, year-to-year...

[Rodolphe Belmer, CEO & Director]

Bingo.

[Paul Sidney, Research Analyst]

Oh, okay. That's very easy. Okay. And then a couple -- and then just a follow-up on Konnect Africa. I mean you [ see it in ways ] in 2 regions now. You're mentioning logistical regulatory problems. You're launching very expensive satellites in that area. Again, really a follow-on from the last question, what would give you the confidence you can get to high utilization rates given all the problems there? And just the last question, we're seeing another cut to revenue guidance but now being driven by trends in at least 3 verticals that you weren't pulling out 3 months ago. I was just wondering, why the visibility in your business, why has it been so low recently? It's been a pretty turbulent 12 months. Just wondered is there any sign the visibility in the business can improve over the coming years.

[Rodolphe Belmer, CEO & Director]

Thank you, Paul, on your 4 questions. On the first question, on the absolute numbers in terms of revenues' impact by our guidance, well, you have the right figures. And I think, well, we can provide a bracket, which is between 13 10 and 13 14 -- sorry, EUR 15 million.Konnect Africa, what we -- our strategy was to resort to a third-party capacity of little size, of little cost to us to -- as a basis to ramp up our commercial operations. And that's the very reason why we have decided before the entry into service of our large Konnect satellites to lease some capacity initially to AMOS and now to Yahsat, our colleagues at Yahsat to sustain, to fuel our commercial operations. And it's limited capacity, meaning that it's a limited risk and which enables us to make our first tests into that new application in that continent. Of course, we didn't expect that much difficulty, that much executional difficulties impairing our rollout of our Konnect Africa initiative. Still, the very purpose of that ramp-up period was exactly to make sure that when our big satellites is operational, when it's online, we are ready with our commercial networks and running and with all the executional difficulties behind us. But we think that we are done -- we have gone through that the hard way. We have gone through many executional difficulties, but our thinking I think was, well, absolutely sound and proves to be very wise after the fact since we have now -- we haven't encountered many difficulties that we had solved out -- that we are sorting out. And when our satellite is coming online, I'll remind you that it will be launched only in December of this year and will become operational in summer -- next summer -- not this summer, but the following one. At this moment, our commercial operations will be up and running, and all the operational obstacles that we have encountered will be beaten, behind us. And which means that we are at full speed at this time to maximize the fill rate of our satellites.I must also say that even though we are making -- difficulties, we must say that the initial reaction we got on the marketplace from our distributors and from our customers is absolutely enthusiastic, meaning that our view on the potential for this business in Africa is untouched, even though our [ path ] is [ difficult ] and a bit frustrating for all of us, I must say.Revenue guidance. Why is it difficult to predict our revenue? First, I would say that our Broadcast revenue are very solid, very resilient. And I think we are very solid in our way to predict our Broadcast revenue, which have proven to be stable to slightly growing, exactly what we said before. And I insist on that because it's different from what's happening to most of our colleagues and respected peers. Our revenue on Broadcast are predictable, lots of visibility, lots of resilience and are stable to slightly growing.Now it's certain that we have encountered some unexpected difficulties, delays that I've mentioned but also softer market conditions in some areas and certain that our industry is going through a sort of turbulence -- an economic cycle in the market with turbulence in some applications like in Fixed Data or in Professional Video. It's noncore business for us, but still they do impact our revenue profile and with uncertainties, which are very difficult to forecast, which are very small in absolute terms but with an impact on our revenue driver.But I must say that through this difficult time, we have adopted a strategy to focus on free cash flow generation. And even though we have struggled with our top line over the past 3 years, we have delivered quite effectively, I would say, on our free cash flow, EBITDA, deleveraging KPIs and independently of our top line evolution. We are very focused on that, very focused on financial discipline, financial performance. And we must say that we deliver the same kind of revenue profile as our competitors. We are exactly in line, maybe slightly above, I would say, our peers. But we deliver a financial performance, which is, in my view, clearly leading the pack.

[Paul Sidney, Research Analyst]

That's great. Can I just have one quick follow-up? Would you relying entirely on third parties to sell capacity on Konnect into Africa?

[Rodolphe Belmer, CEO & Director]

Not exactly. We have -- we are embracing sort of a mixed distribution approach in Africa, relying on third party to resell our capacity, like specialized ISPs. That's what we do in Nigeria, for instance, with a company called Coollink. But also we are experimenting a sort of go-direct approach, relying on the retail partners but rolling out our own marketing mix in some countries, and that's what we are experimenting in DRC and Ivory Coast.

[Operator]

We will now take the next question from Laurie Davison from Deutsche Bank.

[Laurence Davison, Research Analyst]

First one, can you quantify the drivers to get you to spike growth next year in your operating verticals? Second question, is your guidance for 2020 still based on growth in spend from Sky Italia and Multichoice even after their spinoff from Naspers? And what is in your guidance out to 2024 for Fixed Data? Is it still a minus 10% CAGR? Third question is you're underperforming SES in data, mobility and government with their MEO advantage. We're seeing a raft of operators set to launch LEO operations as well. Then you need to start investing in LEO, MEO or more Ka to avoid being stuck without dated geo capacity relevant to data mobility and government.

[Rodolphe Belmer, CEO & Director]

Thank you, Laurie. What are the underpinning factors for our revenue profile for next fiscal year? First, we have new capacity coming online as of next fiscal year. That's the satellite called E 7C with almost 20 incremental transponders addressing the Video segment in the video market in Africa, and that's also QUANTUM satellite. We have also the first year of materialization of the EGNOS contract, the payload that we are embarking on our 5 West B satellite due to be launched also imminently. Second, all the delays are referred to in the Video segment, we -- and in the rollout of Konnect Africa, as I said, we expect to catch up on those delays, which means that the implicit revenues will materialize during the course of next fiscal year. Finally, we have the full effect of the China Unicom contract in Mobility of the Marlink contract, of the Speedcast contract in the Maritime segment. And also, we have less headwind coming from FRANSAT, for instance.And all that all together should sustain and should foster the revenue trend I referred to for next fiscal year and more than offset the expected headwinds which are the continuous erosion in price in the Fixed Data and Professional Video segments.In fiscal year '20, what's our expectation in the revenue profile in the Video segment? We don't give guidance, as you know very well, Laurie, segment by segment, application by application. But I must say that we don't anticipate any negative impact from -- on our relationship with Multichoice or with Sky in fiscal year '20.Fixed Data, same answer. I would say, we don't give specific guidance. Are we negative in that segment? Yes. Do we believe that the price erosion will continue? Yes. In the same kind of order of magnitude as before, around 10%? That's what we think. Maybe it's more than 10%. At least what we have in our own bucket, specifics with that, but we have also our own bucket we have at least more than 10% price erosion in those segments. SES, do they have a MEO advantage? I'm not going to comment on my competitors, on my peers. It's not our policy to criticize our competitors' strategy. What I must say is that our view is that the reason that gets employed -- and the rates of return of our investment is most probably -- clearly, leading the pack in our industry in terms of revenue profile with [ post ] revenue profiles, which are in the first year of our industry, and the cash flow generation is clearly by far dominating the industry standard and also the EBITDA margin. Does it mean that our strategy is good? Well, the future will prove it. Does it mean that it is financially extremely solid? It is definitely.In terms of our Ka strategy, we have committed very substantial investments to bring large Ka capacity to be able to address the very vast and fast needs for connectivity in the digital divide in continents like Africa or even in Europe with our Konnect satellites and the upcoming KONNECT VVHTS satellites. And those satellites will also enable us to improve, to increase our market share in the connectivity segments, be in the addition segment and in the Mobile Connectivity. And I think that we have shown some evidence that we are gaining market share in the Maritime segment with a very big contracts we have been able to win with Marlink, for instance. For the LEO constellation and the MEO constellation, all those objects, we look at those very, very clearly. We are very pragmatic. We have no specific inclination for geo. What we think is that pragmatism shows or evidences that today it's very difficult to generate a decent rate of return with those kinds of technological concepts.The moment it's becoming relevant, the moment we make sure our shareholder can generate substantial returns out of that kind of technologies, of course, we will look very, very clearly. What I can tell you is that our technical teams, they are fully focused on that, and they are studying all those technologies very, very closely. Maybe an element of proof is -- would be that as we said before and I like to insist on that because I like to [ migrate ] to complements on elements that have been evidenced in some articles and some analysis, we are launching our own low-orbit constellation with the name ELO, which is dedicated to the Internet of Things, IoT. We are launching our first demonstration satellite this year. And the first batch -- first small batch of commercial satellites will follow shortly after. It shows that we are very pragmatic. And when we think there's a business case, we are considering some investments.But what I'd like to say that this low-orbit constellation, for us, comes with a very reasonable, very considered CapEx investment since the order of magnitude of investment per object, per satellite launched is in the order of EUR 1 million per unit, which means that even if we think of dozens of satellites or a few dozen of satellites, the investments will be much more than absorbed in our current CapEx envelope. I think it's important to insist on that given what has been told recently wrongly in some reports.

[Laurence Davison, Research Analyst]

What happens if other operators who are entering the LEO space are willing to accept lower rates of return and this being the case on your fleet, would you accept that you have to defensively launch in this space or invest in this new capacity, and whether it's LEO, MEO or whatever's next? Or whether you just simply say those returns aren't sufficient to match our historic profile, and therefore, we will just stick with geo, even if that means a declining business.

[Rodolphe Belmer, CEO & Director]

First, I would say that maximizing shareholder value and shareholder returns is clearly a lot of focus and we are very serious on that, and I hope we have proven that over the past few years. Second, our strategy is designed to be immune from those kinds of maybe not very -- from this kind of competition brought by LEO constellation. Why? We are focusing on 2 segments, and we have made that very clear from the beginning. And it's exactly the meaning and the intention of our technological strategy. We are focusing on 2 segments, the video segments, which will be untouched by LEO constellation. And the Fixed Broadband segment, meaning, broadband to homes to consumers. This is the connectivity segment. Of course, we are addressing the Mobile Connectivity segments, but for us, it's the icing on the cake. It's not the core of our strategy. The core of our strategy is Fixed Broadband, and why do we focus on Fixed Broadband? Because we think there is very, very important Latin demand of course because we think it's not really price sensitive, second, and because we think that competition is not by LEO constellation or MEO constellation, or non-geostationary objects will not impact negatively in those segments because for those segments, you need fixed terminals, fixed antennas, at a low cost to accommodate with the needs and behaviors of consumers and hosts.

[Operator]

We will now take our next question from Nick Dempsey from Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

Just to kick off -- maybe just to try to keep things simple on tax. When we're thinking about FY '19 tax, should we just take our pretax profit, apply a tax rate of maybe 32% to 34% to that, which I think is what you were happy at the beginning of FY '19 before all of this came up. And then take a EUR 70 million amount off that absolute tax number? That was my first question. Second question, distributors of course, visibility problems at HOTBIRD back in 2016, government at Q1, now we're talking about distributor cutting spends in Mobility as a headwind. Distributors clearly factor in the African broadband situation. So is your exposure to distributors hitting your ability to predict the progress of the group more than in the past? And do you need to start thinking about having a larger services operation of your own like some of your peers? And then the third question, when we're talking about core broadcast being stable and Professional Video declining double-digit and you're saying Professional Video is 8%, I'm guessing in the base it was maybe 10%, 11%, something like that. That would imply Professional Video has to be done 25% roughly if core broadcast is 0%. So is Professional Video is down 25% or is core broadcast actually declining a bit?

[Rodolphe Belmer, CEO & Director]

Thank you, Nick. For the first question, maybe I will hand over to Sandrine Teran, our CFO.

[Sandrine Téran, CFO & IT Officer]

Nick, as you know, we don't guide on effective tax rate because you can have several impacts on the effective tax rate, but your proposal to make it simple is okay, I think, which means that you should take what you expect as a result here, multiplied by your knowledge of the effective tax rate of 34% and you deduct EUR 70 million. It could be more or less [ whatever you'd ] expect as a tax expense for fiscal year '19.

[Rodolphe Belmer, CEO & Director]

Thank you, Sandrine. On your question, Nick, on our distribution strategy and the fact that we tend to rely mostly on third-party distributors to distribute on our [ existing ] our capacity and the relevance of this strategy. We think that we believe that this strategy remains very relevant. When you look at the revenue trend that we are performing in our Video segment, for instance, which relies mostly on third-party distributors, as you said, well, I see no proof in our distribution strategy that we are performing less well than our competitors. True, that sometimes it can hamper some level of visibility. I'm not contesting that turbulence. The only element I'd like to bring forward is it's a very effective way to distribute our capacity and it's a very cost-effective way also to distribute our capacity. If you look at our revenue profile and if you compare it with our EBITDA margin and if you do the comparison with some of our competitors, you would realize that we deliver the same or better revenue trend overall and segment by segment. And our EBITDA margin stands significantly higher and with a better orientation also than most of our competitors. And for me, it doesn't call for a substantial structural modification in our distribution strategy. Doesn't mean that it's a philosophical approach in principle. Sometimes, we have relied that we would be better off if we distributed ourselves our capacity because it would be a way for us to better exercise our pricing forward. And when we have found that, and specifically it was the case in the Middle East region, we have decided to buy out our distributor in that region and to distribute ourselves the capacity to implement our own marketing and commercial strategy, and this approach, I think, is very beneficial. In some other sites where there is a fragmented distribution, like, for instance, in Video in Europe or like in the mobility sector, what we have found out when we have analyzed solely the different experience of moves in terms of integral -- vertical integration -- sorry, of our competitors, what we found out is that most often, this kind of vertical integration comes to the detriment of our competitors in terms of revenue and in terms of EBITDA margin. It has been a double loss. And that's why we see that when there is a fragmented distribution, we should mostly rely on distributors and use -- leverage the competition between them to maximize their distribution power while reducing the cost of distribution for us and it has been very -- this approach, for the most part, has been very, very beneficial for us. Professional Video was -- the decline is minus 25%. But I must say that it's the same kind of order -- we don't guide -- we don't communicate on the evolution precisely in Professional Video, it's not part of our guidance. Today, it's encompassed into the broader Video segment. But what I must say that the Professional Video segment lately has behaved as the Fixed Data segment being that it's more in the minus 20-ish order of magnitude percent year-on-year than minus 10%.

[Operator]

We will now take our next question from David Cerdan from Kepler.

[David Cerdan, Equity Research Analyst]

Two questions. Just to be sure for the tax savings, when do you expect to take advantage of the certainty [ enroll ]? Is it for this fiscal year? Or is it for next year? The second question is as you have a deal with the French tax administration, is it a secured deal you have? And is there a risk to see a change in the deal you have with the fiscal authority? And the third one is as you have now French [ enroll ] additional cash in your pockets per year, what do you think to do with incremental cash, which was not part of your guidance and maybe your CapEx? So do you think that you will use this cash for debt reduction or to dividend or for further CapEx?

[Sandrine Téran, CFO & IT Officer]

David, thank you for your questions. I take the question on when the advantage applies. So in terms of P&L, we will have the full impact in fiscal year '19 because the new law applies to our fiscal year '19. So full P&L impact this year. In terms of cash, we have...

[David Cerdan, Equity Research Analyst]

Sorry because as you exercise it at the end of June, when you say the full impact is in 2019, does it mean that it's in H2 2018 -- 2019?

[Sandrine Téran, CFO & IT Officer]

No, fiscal year '19, the full fiscal year '19. It applies to the fiscal year, but it's closed in 2019, so it is from July 1, 2018, to June 30, 2019. The full fiscal year.

[David Cerdan, Equity Research Analyst]

Okay. So you will benefit from -- you will take cash of EUR 70 million this year? This fiscal year?

[Sandrine Téran, CFO & IT Officer]

Yes. Full P&L effect, absolutely. In terms of cash, we will have some of it but not all of it because we have already paid a significant amount of taxes over the year. So the full cash impact will start in fiscal year '20.

[Operator]

We will now take our next question...

[Rodolphe Belmer, CEO & Director]

Sorry, we are going to answer the 2 questions we have not answered. Are we confident? What we gave today is in order of magnitude that we are converging elements of quantification of what should be the order of magnitude of the tax rate if we are expecting. Of course, it's the outcome of a discussion, very intense discussion and very rich discussion that we had with the French tax administration, but it's still subject to the formal ruling from the French tax administration that we are expecting from -- that we're expecting in -- correct, in June. Of course, the reason why we are putting forward this ticket today is that it's our best estimate as of today of the kind of faring the order of magnitude that we are expecting, and it's our best estimate, this best considered, I would say, estimate in terms of quantification. What do we do with this cash? As I said previously, this is quarterly. We are communicating on revenues only, that's not the moment to make any strategy update. What I must say is that we have been very consistent with our strategy over the past 4 years and on our focus on shareholder remuneration. And that's the only element I can bring forward at the moment.

[David Cerdan, Equity Research Analyst]

Okay. And just to be clear, how secured is the deal?

[Rodolphe Belmer, CEO & Director]

Well, it's not a deal, actually. There is no contract between ourselves and the French tax administration. The French Parliament has voted an amendment to the French tax code specifying what should be the rules pertaining to satellite operators when it comes to the notion of French common tax law, which is called the totality of revenues. The quantification of this element has to be made by the French tax administration. We have undertaken a discussion with the French tax administration to feed them with data to enable themselves to make their quantification of how they should translate the parliamentary amendment into the quantification that we could report in our annual results. The figure they came with, which is an order of magnitude, but since they have revealed to us this order of magnitude, the French stock exchange rule imposes us to communicate that figure to you. And this order of magnitude is 70 -- well, is worth EUR 70 million, that's the order of magnitude, [ CET tax ]. It's subject -- I repeat that, to ruling, which is expected to be sent to us by the French tax administration in 2, 3 weeks -- well, in some weeks' time from now. Would we put forward that figure if we couldn't deliver? It's our best considered interest, even your own guess.

[Operator]

We will now take your next question from Sami Kassab from BNP.

[Sami Kassab, Media Research Director, Co]

I have 3 questions, please. First, in your comments, you referred to delays in Video from customers refusing to pay the price increases you were asking. So what is the risk for you of these customers moving to another satellite? And what is the risk for them of you switching off their signals if they don't pay? Secondly, over the next 12 to 15 months, what is the share of Video revenues, the share of Mobility revenues and the share of Fixed Data revenues that are due to be renewed? And lastly, you talked about positive indications of demand for Konnect Africa. Can you give us numbers or examples of these signs of positive demand? How has your distribution network in Africa changed since our last earnings call, for instance?

[Rodolphe Belmer, CEO & Director]

Thank you, Sami. Well, I'm not sure I can answer all of your questions, which are very detailed and I'm going to try to hold these on the back of my mind. But on the delays in the Video, it's true that I said that one of the delays is due to the fact that we are in negotiation on the price increase with a specific customer. And this discussion is taking more time than anticipated. We thought it would have an impact before in Q3 and now we are certain it will come a bit later. Is there a risk that this customer is switching to another orbital position? I'm absolutely firm on that, that the answer is absolutely no for reasons I cannot comment, but the answer is absolutely no. Is there a risk that we switch off the signal? I would say the probability is extremely low. I'm pretty convinced that we'll find out an agreement with this customer and reach a compromise, which will satisfactory, at least for us. We are talking of an orbital position which is extremely demanded and for which price are oriented already positively, meaning that there is a very vibrant demand in that region. Michel, do you want to add on that?

[Michel Azibert]

On the Video or on the duration of...

[Rodolphe Belmer, CEO & Director]

Anything.

[Michel Azibert]

Maybe on the other question which is the renewals, I would say on Video, where contracts are generally, let's say, 5 years or more for this year's platforms and sometimes, let's say -- less duration for our distributors or free to our customers. I think what we can say is there is no major end of the big contracts coming for renewal at the -- in the next fiscal year. The bulk of the renegotiation with the DTH operators come after. Regarding data, of course, the duration of the data contracts are much shorter in the range of 1 to 1.5 years, so yes that would be a significant volume of renewals for data next year, or less, 50% maybe of the backlog will be up for renewal. For Mobility, much less because the main contracts that you know about which have been made public like the Panasonic HTS under 72, the -- UnicomAirNet, and Taqnia are longer-term contracts, all of them. So there is, more or less, the rest of the capacity, which is why we need to use more competitive pressure, but it's -- in volume, it's less than what is up for renewal in data.

[Sami Kassab, Media Research Director, Co]

So maybe if I take the 20% of the contract of the revenues are due for renewal every year or next year? Can I use 20%? Or what you're suggesting is it's less than that?

[Rodolphe Belmer, CEO & Director]

Well -- it's an order of magnitude for the overall capacity sales leading the start of the [ seed ], obviously, the broadband revenue which are of different nature renewal. But yes, overall, for the whole thing, is in the 20% to 25% of the total backlog, which is up for renewal of a little bit less than the 20%.

[Sami Kassab, Media Research Director, Co]

And in Africa?

[Rodolphe Belmer, CEO & Director]

In Africa, on your questions, on what are the signals or the sites that signal us that there is vibrant Latin demand in Africa for our studies? First, there is the reaction of the press, the reaction of the distributors. And also, more concretely, I'm not going to reveal any figure there, but there is the first sales of pits of terminals to some of our distributors even in countries where we have not been able to effectively sell distributors -- the service to the end consumers. The distributors are already pre-committed to significant orders of terminals, and sometimes, they're actually ordered and paid some terminals. And that's what we are -- that is one very factual element, which sustain the site that we think that there is an effective significant demand in that region.

[Sami Kassab, Media Research Director, Co]

And has the distribution network changed since our last call?

[Rodolphe Belmer, CEO & Director]

Well, the distribution network didn't really change. Actually, we have rolled out a good direct approach in DRC. We are doing the same in Ivory Coast, and we are going through a specialized ISP in Nigeria. We might open up new countries in French-speaking Africa under the go-direct approach but it's not done yet -- well, meaning that, in essence, our view to approach that markets with a diversified distribution strategy, with a diversified commercial strategy to better address the specificities of each individual African market, well that remains the same as when we communicated last time in -- I think it was in March.

[Sami Kassab, Media Research Director, Co]

Can you remind me what is the go-direct approach?

[Rodolphe Belmer, CEO & Director]

Go-direct approach, actually, we work with retail partners. We don't do the retail ourselves. Typically, retailers, gas stations or retailers of that kind -- banks, retail banks would -- that distribute the service on our behalf. They operate with our own marketing mix. Meaning that we define the product, the data plan. We define the price. We define the brand. We do own the ISP license and we do own the subscribers ultimately. That's what we call the go direct. Meaning that we do the marketing and we control the subscriber base and special retailer, that -- the physical distribution on our behalf and gets a commission for that.

[Operator]

We will now take our next question from Bruno [indiscernible] from [indiscernible] Capital.

[Unknown Analyst]

Given that your cash flow is growing, you now have this EUR 70 million of additional tax savings, you're going to reach your leverage target by the end of the fiscal year and your dividend is already high and covered. What are you going to do with this excess cash flow? I know that your shareholder returns -- are they [ for ] shareholder returns? But what does this mean exactly? Does this include potential stock buybacks?

[Rodolphe Belmer, CEO & Director]

Well, thank you, Bruno. As I said, we are not ready to communicate on those perfectly legitimate questions at this stage. It's only quarterly review and it's a call where we communicate on our quarterly revenue only. All of those questions that we are -- that you are asking, we are asking them to ourselves and we will be able to communicate on those later on when we communicate on our next year and following year's guidance.

[Operator]

We will now take our next question from Patrick Wellington from Morgan Stanley.

[Patrick Thomas Wellington]

Disappointingly for everybody, I've got 5 questions, but hopefully, they're quite simple. The first one Rodolphe, is I now make this 5 downgrades out of the last 7 quarters and yet you're still going for slight revenue growth for next year. Do you think it might have been better to go for broadly flat for next year? Because there seems to be a number of unexpected things coming in quite regularly. So maybe you can comment on what allowance you make for things going unexpectedly wrong? Secondly, just on the revenue, you gave us a revenue range, which was EUR 1.31 billion to EUR 1.315 billion. Does that include other? Of course, you had a big quarter for other in the fourth quarter last year, so what expectation do you have for other in that number? Thirdly on African broadband, we originally had in mind the number of EUR 15 million for full year. Then this year, it was going to be EUR 7 million to EUR 8 million. You talked about getting back to full potential -- towards full potential next year. So what is full potential these days for African broadband on an annual basis? The fourth one is just on tax, where you change your free cash flow guidance at the full year stage. That would seem a fairly obvious thing to do because you'll have the tax decision in mind. So will you update the full year -- the free cash flow guidance? And then finally, let it not be said that we'll go through a satellite call without asking something about C-band. So what are your latest thoughts on C-band and the potential value and project there?

[Rodolphe Belmer, CEO & Director]

Well, that's quite a lot of questions. Thank you, Nigel. On the revenue...

[Sandrine Téran, CFO & IT Officer]

Patrick.

[Rodolphe Belmer, CEO & Director]

Patrick, sorry. I didn't quite recognize you. I'm very sorry, Patrick. Well, I got it wrong for the first answer. Well, Patrick, sorry. On your question on our revenue forecast, what we provide is our best estimate as of today, and we think we have very strong arguments and strong elements which evidence that we should return to high growth next year. It's true that our track record of forecasting our revenue has not been extremely strong over the past few years and we are frustrated around broadly stable slightly negative. We think that this time there is cumulative elements like the arrival of new capacity, of incremental capacity that we haven't had for the past few years, which should foster our top line trajectory for the next fiscal year. The fact is that, I must say that even though our revenues have remained sort of flattish and that we have missed sometimes our guidance revenue-wise over the past few years, I must insist and reiterate that we have never missed our cash flow, EBITDA, deleveraging KPIs and objectives and that whatever I would say revenue fluctuations that we have had, we have been very focused on growing quite substantially our cash flow and delivering very, very substantial yield to our shareholders. That doesn't mean that I'm not confident in my revenue next fiscal year. What I say is that even though I missed in the past -- well, I make all the -- not revenue, KPIs. On the estimate of our revenues in absolute terms for our landing of this fiscal year, we communicated a sort of bracket in between 13, 10 and EUR 1.3 million, EUR 1.5 million. But it does not include other revenues, that the figures for the operating verticals, which are -- I would express our revenue guidance now in that no other revenues, only the 5 operating vertical. African broadband, as you know, we don't give guidance for specific verticals or specific applications. We communicated that figure of EUR 15 million, I think it was 3 years ago, when we had the incident on the launch pad with the AMOS satellites, which was destroyed and we had to communicate at this stage what was the impact of this incident, and we say it was EUR 15 million. And when we say that we want to return -- and when we say that we think that the full potential of the African growth initiative is in touch, doesn't mean that we want to reach EUR 15 million in Africa. The answer is no, we want to reach much more than that. And we are launching a full-sized satellite delivering 70 gigabits of capacity per second to serve the African broadband market. And obviously, we estimate that we are willing to generate much more than EUR 15 million. The EUR 15 million you are referring to was our year 2 or 3 of revenues, Year 2 revenues. It was not the full potential. The full year guidance, we see that in a few weeks' time from now. It's not the right time, as I said, for us to give more visibility on that. On C-band, well, I don't know what's your specific question on that. As you can guess, it's a very important matter that we do follow very closely and that we monitor as well as we can, and we have dedicated resources to that situation. What I must say is that we still -- that the situation is becoming a bit more complex lately, has become a bit more complex lately. Why? Because there was an important element taking place 2 weeks ago or maybe 10 days ago, which was the public notice released unexpectedly, I would say, by the FCC, which came out as a surprise. Since we didn't believe that at this time of the process when everybody was expecting the executive order to be released by the end of June, the FCC would come out with a public notice, which means it was a new inquiry and asking new questions. What's our read across of this FCC, well, it is that the FCC is asking questions around the fact or the interest of listening to a broader base of stakeholders than just the CBA and notably, the so-called SSOs, small satellite operators and also, the station operators. And for us, the reading of that is that the process is likely to be slightly delayed. And to be also a bit more complicated than it was when the FCC was in a sort of bilateral negotiation with this -- the CBA. What we have also noted -- well, I'm a bit lengthy, I'm sorry. I'm trying to answer your question in broad terms. What we have also noticed that while this public notice is also opening the door to new questions over the repartition of the proceeds, asking of this repartition between the CBA but also between the SSO and the station, and they're also asking questions, which also came out as -- I was kind of surprised, on the auction method. Meaning that, should they keep the market-based approach? Or should they ask for another, more traditional incentive action? Of course, in that context, we do support the CBA to appropriately respond to all those questions and challenges coming from the FCC. But we do also support the CBA in listening to what FCC is saying and in being more open to the questions -- to be open -- sorry, not more, but to be open to what FCC is asking, notably, when it comes to taking into consideration other stakeholders like SSOs or earth stations.

[Operator]

We'll take our last question from Michael Bishop from Goldman Sachs.

[Michael Bishop, Equity Analyst]

Just 2 quick questions to round it out. Firstly, on the video consumption, so essentially your new volume metric, where you highlighted 2% growth on HOTBIRD. Could you just give us the corresponding revenue growth so ultimately then we can get evidence around the volume and price equation? And then secondly, just again to round out the tax questions. If I just look at your cash tax last year, it was EUR 160 million, which is higher than the P&L tax. And also, if you look at the 1H number, it was about EUR 90 million. So given the profit before tax, probably isn't going to be wildly different in FY '19 or FY '20 based on your guidance, can we just simply assume that cash tax would have been in the region of EUR 160 million to EUR 180 million and therefore we should take off EUR 70 million to get to the FY '20 sort of full run rate cash tax number i.e., that would be EUR 90 million to EUR 100 million?

[Rodolphe Belmer, CEO & Director]

Well, thank you, Michael. This time, not Patrick. It's you now. On the -- we are trying and we have been trying over the past few quarters to communicate actually on the new metric, which is the consumption of megabits on our fleet for the video application because we think it's a good way to sort of neutralize many diverging elements, which are the number of channels, the HD penetration, the MPEG-4 penetration, the dual elimination from -- of the different channels to different compression standards. We think that the net outcome of that, of course, is the actual consumption of megabits for the video application across our fleet, and we have said that this consumption has grown 2% year-on-year over the past quarter and it has been the same kind of trend over the past few quarters, 400 specifically. The growth has just been below 2% quarter-on-quarter. And in terms of revenue, normally, we don't guide on HOTBIRD revenue, but what I can tell you is that HOTBIRD revenue are broadly stable. On your question on that, I must say that I'm not really able to answer to this very detailed question. I will hand over to Sandrine. I don't know, Sandrine, if you have the figures on the back of your mind?

[Sandrine Téran, CFO & IT Officer]

We tried to make something simple. As you know, in the cash tax that is reported you always have saving effect from one year to another because we pay taxes in advance and we may be refunded the year after. But to make it simple, if you want to have a clean basis for fiscal year '18, the total cash tax we paid in [ '12 ] just for the results generated in fiscal year '18, was [ another ] EUR 170 million, more or less. So that base would be a clean basis for the cash tax that we paid in France for fiscal year '18. And as you said, it can vary from one year to another depending on the results, but this would be the basis to show you the refund.

[Michael Bishop, Equity Analyst]

I see. So you also have 170 minus the 100 and then bear in mind the French tax is 90%, like you said earlier?

[Sandrine Téran, CFO & IT Officer]

Yes. EUR 170 million knowing that it's 90%, meaning all of the cash tax that we pay for a year, and then you deduct the impact of the EUR 70 million when you have the full year impact of the cash savings.

[Operator]

As there are no further questions I would like to say thank you for your participation. You may now disconnect.