Inmarsat reported Q1 ’18 earnings this morning in London and investors like what they see. Shares spiked as much as 11% before settling in for a ~8% boost by the end of the trading day. Most analysts attribute the price jump to solid revenue numbers from the Aviation connectivity segment.
Year over year comparisons are hindered by some earnings numbers being restated from the 2017 version, but the overall revenue in the aviation segment is up nicely ($56.0mm v $40.3mm for Q1 YoY). Cash CapEx is down thanks to the successful launch of the S-band satellite last summer and cash flow improved as well. But EBITDA margin % shrank, even as gross margin increased.
The company reported 245 commercial aircraft flying with Global Xpress (GX) at the end of the quarter and another 223 carrying the JetConneX business aviation option. A year ago there were barley 70 aircraft with the hardware installed across the two segments.
Looking at the revenue growth, however, the split tells an interesting tale.
In general aviation and safety services (“Core Aviation” according to the company) revenue improved 16.5% to $36.7mm for the quarter. Of that, $3.7mm came from JetConneX “airtime revenue.” The BizAv SwiftBroadband connectivity grew subscribers by 5% and average revenue per aircraft (ARPA) by 4%, combining for a 10% increase in total revenue for that segment.Safety services grew 11%, owing to higher usage and ARPA. Those numbers are all solid and reflect what others in the industry also show: BizAv is generally profitable for the inflight connectivity space.
Read More: Inmarsat GX officially live on Qatar Airways
Inmarsat’s commercial inflight connectivity (“IFC” according to the company) segment shows a slightly different story.
The L-band-based IFC services delivered revenue growth of 50.0% to $11.7mm (Q1 2017: $7.8mm). That growth came from increased usage by a number of key customers. And that’s key to the profitability of the segment. Inmarsat needs to maximize airtime/usage revenue to increase profits; once the satellite is in orbit the operating expenses are relatively low compared to launch and aircraft equippage costs. Currently some 900 commercial aircraft carry the L-band/SwiftBroadband connectivity solution.
The other half of the revenue boost for the IFC segment comes from a spike in the GX revenue. The GX segment increased from $1mm to $7.7mm year over year. That’s a HUGE number, but it also comes with HUGE costs. The “vast majority” of that revenue is tied to hardware installation on aircraft. Inmarsat is realizing revenue from the sale of the on-board kit to the airlines but immediately passing the vast majority of that cash through to pay for the hardware. It is great revenue but delivers nil for profit.
In the period, there was $7.7m of GX-related IFC revenue generated, (Q1 2017: $1.0m), the vast majority of which was relatively low margin installation revenue. Installation revenue is expected to ramp-up during the remainder of the year, driven by installation schedules of our customers.
Most providers suggest that it takes a year or so for any given airline to scale up to a sufficient install base to drive passenger awareness and adoption of the service. As global adoption of connectivity increases that number should trend lower but for now it seems to be holding, even as some carriers (e.g. Austrian short-haul) are fully fitted with the GX kit since last summer. Inmarsat can hold on to the install revenue for a few years yet, with just over 1,000 aircraft in the backlog. But eventually the airtime revenues need to show material growth for the sector to be commercially successful. And to justify the rebounding share price, given its tie to the aviation segment of the report.
Separately, 3,259 maritime vessels now carry the Fleet Xpress (GX for ships) product on board. Average revenue per ship dropped due to competition and reduced wholesale pricing, but the rapid deployment and growth in that segment is promising for the overall value of the GX constellation.