Bernard L. Schwartz Discusses the Satellite Industry and Loral's Broadband Strategy At Today's Carmel Group Conference
LOS ANGELES--(BUSINESS WIRE)--Jan. 31, 2001--In a speech presented at The Carmel Group's DBS 2001 Conference here today, Bernard L. Schwartz, chairman and chief executive officer of Loral Space & Communications (NYSE: LOR), discussed Loral's role in the evolving satellite industry and the company's refocused broadband strategy. A transcript of the speech is contained in this release and will be posted on Loral's web site at www.loral.com.
Mr. Schwartz will also speak tomorrow at the Merrill Lynch Satellite Communications CEO Conference 2001 in New York at approximately 12:30 pm EST. Merrill Lynch has arranged for a live web cast of tomorrow's speech on the Internet at events.mlresearchmedia.com at approximately 12:30 pm EST. There is no replay available.
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In 1996, Loral, one of the world's largest and most successful defense electronics companies, decided to sell our defense businesses while keeping the commercial space segment, thereby creating exceptional value for our shareholders.
It was perfect timing. Defense industry values have never again reached the prices then in place at the time of the Loral transaction and commercial satellites were not yet recognized as an attractive growth opportunity.
At that time, our one-third ownership of Space Systems/ Loral was our most significant asset. SS/L was one of the three largest commercial satellite manufacturers, its global importance far larger than its $300 million annual revenue would indicate. Present at the birth of the space age, it had accumulated some of the industry's most valued resources and skills, and further, had earned a reputation as the most technologically innovative performer in the industry. Within two years Loral consolidated its control of SS/L, acquiring 100 percent ownership.
The satellite business was then, and is now, exciting, with huge potential driven by the proliferation of emerging applications in communications and information services. Satellites are vital enabling tools for the rapid expansion of the global communication infrastructure and will continue to be an essential ingredient in the quest to establish a global communications network.
One particular characteristic of space is the iron-clad limitation of orbital slot availability. Like beach-front property, orbital slots are scarce compared to the ever-increasing demand. It was obvious to us that adding services to our existing hardware manufacturing capability would create value for our shareholders. So we built more powerful and larger satellites. And, through the acquisition of Skynet and Orion and the creation of CyberStar as well as through investment in Loral Global Alliance affiliates Satmex and Europe*Star, we developed related service capabilities offering our customers a broad range of products and global services beyond just manufacturing satellites. Today we provide system design and integration, ground and space operations, network management, enhanced channel utilization, newsgathering services and transponder leasing - all value added services.
Loral is a pure-play commercial space company. Ours is a straightforward strategy with two related satellite-based core businesses. One is developing and manufacturing satellite technologies and hardware. The other is offering services that provide a platform for the delivery of information - transponder leasing, data transport, satellite network management, and so forth. In both these businesses, Loral's contribution is an extremely high-value, critical component of our customer's business.
In establishing this strategy Loral was among the first satellite manufacturing companies to depart from a singular focus on producing hardware to give prime emphasis to the high-margin, customer-focused services side of the satellite business. We recognized the synergistic relationship between the manufacturing and service segments and the potential for this strategy to foster growth on both sides of the equation.
At Space Systems/Loral -- where sales more than tripled to about $1 billion in 2000 -- we design and build satellites for customers who want to enable communications over a huge swath of geography- in the form of cable, network or direct-to-home programming; distance learning; weather imaging; air traffic control systems; wireless telephony; satellite-band radio; corporate data networks; and Internet access services. Working closely with these customers, SS/L's engineers have an unencumbered view into "tomorrow's" communications applications. This benefits both our manufacturing and services businesses. SS/L continues to be an industry leader in the development of new technologies that support applications developed by service providers, including the use of spot beams, Ka-band payloads and innovative on-board modulation techniques. These advances, along with the development of larger, more powerful satellites like Loral's 20.20, address the critical needs of our customers, as they improve the capabilities of and expand their fleets.
On the services side of our business we offer transponder leasing and value-added products to television broadcasters, cable and direct-to-home operators, data resellers and distance learning companies, among others. These services are provided by our growing 10-satellite Loral Global Alliance constellation comprising the assets of Loral Skynet, Satmex and Europe*Star. The Global Alliance, an outstanding example of a successful partnership, combines the offerings and local strengths of regional operators to provide a seamless network of service worldwide to customers requiring a global reach. It also allows Loral to leverage its strengths, its orbital positions and extensive space assets. Through the Global Alliance, Loral Skynet gains additional access to worldwide on-orbit capacity through its international partnerships.
In addition to leasing transponders, Loral's fixed satellite services group offers network management services and applications engineering, on-orbit back-up services and a world-class network of ground facilities. Sales in our FSS segment approximated $450 million in 2000 and are growing rapidly. Loral's first priority for its FSS segment is to aggressively expand Skynet's very profitable business by building more capacity, developing more of our orbital slots, seeking additional Global Alliance partnerships, and expanding our value-added service offerings.
Loral CyberStar is our other satellite-based service - with approximately $130 million in annual revenue -- delivering broadband data, Internet and multimedia services to enterprise customers and ISPs. CyberStar is experienced at marrying ground and space assets in every major region of the world to serve its multinational customers. CyberStar distributes high-speed data over private corporate global networks - VSATs -- to nearly 200 customers, with 621 installed sites and service to over 11,000 desktops. In addition, CyberStar provides Internet Service Providers (ISPs) with access to the Internet backbone, allowing them to acquire a greater quantity and quality of content, and resulting in the availability of greater bandwidth to serve their expanding customer bases. The 173 ISPs currently served by CyberStar reach over seven million customers.
These are very valuable businesses -- and Loral has a strong and formidable foothold in them. The barriers to entry are high - it takes a tremendous amount of time and money to build or amass the physical plant, the orbital slots, the on-orbit transponders and, most important, the human skill and creativity. Loral's workforce is richly talented - across the board. We are rightfully proud of the innovations they've introduced and the applications to which they've given life.
As we established - and continue to invest in - these core capabilities of Loral, the "broadband boom" appeared on the communications horizon. Unlike the more conventional forms of communication - like, telephone calls, television and dial-up Internet access - in terms of consumer acceptance, broadband is still in its infancy. The opportunities for broadband services suppliers appear to be limitless. We all know the demand is there - for more content, higher speed transmissions, richer graphics, and uninterrupted, "always on," ubiquitous service. The size, shape and price of the product, however, are still in the process of being defined. The challenge is to deliver directly to the consumer's personal computer, television, or hand-held gizmo, "all content, all the time."
Thus far, that end-user demand is being filled mostly by terrestrial means: fiber optic networks, DSL, cable modems, etc. But satellites play a key role in the overall scheme. Satellites characteristically "do the heavy lifting." They carry Internet content from the US to Europe. They bypass terrestrial networks to deposit data at the "edge of the net" where it's more accessible to ISPs' customers, eliminating the increasing problem of Internet congestion. They cover the "last mile" where fiber leaves off. They broadcast video or data from a single point to a whole continent's worth of receivers rather than just to another single point. And, they perform this essential broadcast function most cost-effectively. They extend communications services to areas of the world that will never be wired. Satellites also work well in conjunction with fiber, connecting easily into the existing ground-based data delivery systems. As the ground network expands, satellites can play a variety of roles - their capacity can be applied to broadcast needs, Internet access, etc. - adjusting to new technologies and applications as they evolve, covering what fiber cannot handle in terms of capacity or geographic reach.
We envision many new opportunities as new applications drive demand, and as technology developments change the relationship between space and terrestrial capabilities. One such opportunity is presented by the demand for broadband communications. We devised a detailed plan for two-way broadband delivery via satellite and fiber, directly to the end-user, involving the construction and launch of two high-powered KA-band satellites and the development and installation of a system of ground stations. This project would be undertaken with strategic partners who could bring valuable technology, marketing and/or funding capacity to the table. And, we examined a number of scenarios. Despite the feasibility of Loral's plan, however, we have concluded that we do not have the in-house skills to develop the marketing resources to competitively deploy such a system.
Data delivery directly to the consumer - which entails packaging content, engaging in e-commerce, providing consumer premise equipment and acquiring and caring for subscribers -- is better left to others, many of whom are our customers. Furthermore, given the crowded field of players, we didn't see a way to sufficiently differentiate Loral from the others entering the direct-to-the-consumer field. We have concluded that Loral is best positioned to play this broadband opportunity by sticking to its core strengths.
Consequently, we have decided to refocus our broadband-to-the-consumer plan in favor of a strategy that represents what we see as the most appealing way for Loral to participate in the broadband revolution. That is, we will stick to what we do best and where we already hold a strong leadership position - the development of satellite technologies and hardware and the provision of high-quality, value-added transport services.
Loral will play to its strengths - we'll be a merchant supplier to customers who need the assets Loral owns and operates in order to meet their business objectives. Our satellites and services will support current and future customers, who are operating or planning to operate within one of the many niches in the broadband environment, by providing data delivery platforms for them - by designing and building a satellite for them, managing their satellites, leasing transponders to them, or tailoring our satellite services to their business specifications.
Loral is uniquely qualified to do this today -- the assets, resources, networks and talents are already in place. Many companies have announced their intention to enter the broadband delivery market, among them EchoStar, Boeing, Gilat, Akamai, Edgix, HNS, NetSat Express, Wild Blue, Cisco and DirecTV. Loral knows how to provide them each the facilities and services that make their solutions possible, and to adapt with them as the market and technology grow and change. In fact, these companies are already our customers or partners.
In addition to our specialized skills, Loral brings particular resources to support our broadband offering. We have in orbit two Ku-band satellites - at 89 degress and 93 degrees west latitude - well placed for service to the attractive North American market. We are now designing two Ka-band satellites with spot beam capacity, for those same slots. The Ku capacity is available now for limited broadband transmission, allowing our customers immediate entry into the broadband market. Loral's Telstar-8 satellite, to be launched within two years, will include Ka broadband, two-way capacity as a Skynet fixed satellite service.
Examples of how we are already participating in the rich broadband market are our recently announced leasing programs to supply Ku-band capacity to Boeing and Gilat for their new business applications. In Gilat's case, we created a new satellite neighborhood at our 129 degrees West longitude orbital slot, with 14 transponders under long-term lease for its Starband product. For Boeing's "Connexion" service we leased multiple transponders for up and downlink capacity to deliver real-time, in-flight services to commercial aircraft.
We believe that, given Loral's skills, this modified strategy is a more effective and profitable way to play the broadband opportunity, and leaves to others the multi-billion dollar investments necessary for consumer service deployment.
As you know, we similarly modified our strategy regarding Globalstar recently. It is clear to us that Globalstar's technological superiority and quality of service will ultimately lead to broad acceptance of the product in the targeted markets. Other than as a franchise participant, however, Loral will not provide further funding for Globalstar. In addition, we intend to write down substantially all of our Globalstar investment in the year 2000 to get the financial impact behind us.
Our appetite for new opportunities has not abated. Loral's core manufacturing and service businesses are both situated for growth. Loral's EBITDA from fixed satellite services is expected to grow over 25 percent annually, fueled by our record backlog, increasing utilization, and greater capacity from planned satellite launches which will bring our on-orbit constellation to 14 satellites by 2004. And, utilization and leasing rates are improving in all areas of the globe.
Revenue growth in our manufacturing sector is normally slower but still a healthy 10 to 15 percent annually, limited only by the resources available to us. Margins were somewhat lower than expected in 2000, as we transition to more complex and higher-power satellites, but will resume the more typical nine to ten percent levels in 2001.
Our data services growth rate, harder to predict now with any certainty, should nevertheless be robust as we continue to pursue and expand CyberStar's existing activities.
This is an opportunity-rich environment. Through Space Systems/Loral we "see" new opportunities and applications before others. In fact, Loral is often involved early in the customer's process of development and design. And we are experienced in the necessary integration of the space, terrestrial and ground functions.
Despite some recent skepticism, satellites continue to demonstrate indisputably their crucial value as a communications link - not only for traditional services like television broadcasting but for new applications like digital audio radio service, the delivery of "real-time" data and entertainment directly to aircraft, the alleviation of Internet congestion, and as a hybrid provider for the extension of geographically constrained technologies. Loral and the satellite industry are well positioned to benefit from the proliferation of as yet unidentified communications services. Our unique resources and our adherence to our core capabilities strategy give us confidence that Loral's core capabilities will maintain a top-line growth rate in the 20 percent range in the future.
Thus, we will build shareholder value as a hardware producer, designer, systems integrator and service operator as varying new opportunities surface where a satellite's attributes will provide the best solution. We will use the competitive advantages we have to differentiate Loral and command a premium position in the marketplace. We will focus on the things we do well, and continue to do those things better.
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Thank you.
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Loral Space & Communications is a high technology company that concentrates primarily on satellite manufacturing and satellite-based services, including broadcast transponder leasing and value-added services, domestic and international corporate data networks, global wireless telephony, broadband data transmission and content services, Internet services, and international direct-to-home satellite services. For more information, visit www.loral.com.
This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, Loral Space & Communications Ltd. or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the company with the Securities and Exchange Commission, press releases or oral statements made with the approval of an authorized executive officer of the company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions. These factors and conditions have been described in the section of the company's annual report on Form 10-K for the fiscal year ended December 31, 1999, entitled "Certain Factors That May Affect Future Results." In addition, these factors and conditions have been described with particular regard to the company's interest in Globalstar, L.P. ("Globalstar") and Globalstar Telecommunications Limited ("GTL"), in the section of the annual report on Form 10-K of Globalstar and GTL for the fiscal year ended December 31, 1999, entitled "Certain Factors That May Affect Future Results." With regard to forward-looking statements concerning Loral CyberStar, Inc. and its business, financial condition, results of operations and prospects, the factors and conditions which could materially affect these statements are described in the section of Loral CyberStar's annual report on Form 10-K for the fiscal year ended December 31, 1999, entitled "Certain Factors That May Affect Future Results." The reader is specifically referred to these documents regarding the factors and conditions that may affect future results.
Contact: Loral Space & Communications
Jeanette Clonan, 212-338-5658
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