Space tout - The Financial Director interview

He won’t admit it, but the past few years have been nail-biting for Dr Ramin Khadem, chief financial officer of Inmarsat Ventures. Three major competitors entered the satellite communications market in the 1990s, and by 1997 were beginning to launch their satellites. At the time, most clients used Inmarsat satellites to transmit voice communication and, because it was predicted that voice was where the growth in telecoms would be, this was the area Inmarsat’s new competitors targeted.

These companies, which included Globalstar and Iridium, planned to make satellite communications much more user-friendly by producing handsets that were only slightly larger than the cellular telephones of the early 1990s, instead of the briefcase-sized satphones that were the standard ten years ago.

But Khadem, who is a Canadian citizen of Iranian birth, and the rest of the Inmarsat board took the view that, while there certainly was a need for personal mobile communications, it would probably be taken care of more cheaply and effectively by the cellular phones that were beginning to arrive on the market. He decided that the target customer base for the new hand-held satphones was too narrow, while their low data transmission speeds would restrict users to voice communication.

CHOOSING TECHNOLOGY
Indeed, Inmarsat had already consciously decided against entering the hand-held satellite phone market. ICO, a company it had co-founded to produce hand-held satphones and the necessary infrastructure had been hived off as a separate venture in 1999, having cost around $150m in initial investment.

Predicting the future is Inmarsat’s central challenge – meeting the cost of it is Dr Khadem’s share of the problem. The design and development of future generations of satellites is not only hugely expensive but can typically take 10 years from conception to operational readiness in orbit.

“It is a very fine judgement call second-guessing what the end user will want in 10 or 15 years,” says Khadem. “Our competitors spent several billion dollars developing the infrastructures necessary to provide a particular service, where we scaled our business to grow with demand. In the end they got it wrong. Around 60% of our current demand comes from data, not voice. The hand-held telephone is just not equipped to handle the vast amounts of traffic our enterprise customers demand.”

Inmarsat’s two largest competitors paid a heavy penalty for choosing the wrong option ten years ago. Both were forced to seek Chapter 11 protection from bankruptcy and, while one has now emerged out the other side, the future of the other is still uncertain.

Just what a difficult decision it was to follow the data route becomes clear when Khadem talks about the details. Today, it may seem obvious that the need for data transmission would be greater than the need for voice, but in the early 1990s the internet and ISDN services that transfer data files on the ground were in their infancy. So too was the computer software that would receive them – and the computer industry was far from convinced of the need to invest time and money in a medium that had only specialist applications.

Going digital was also a gamble. Although the new digital technology was known to make more efficient use of the radio spectrum, the supporting industries were reluctant to jump before being sure that there would be an adequate return on their investment.

“The investment necessary to prepare for the digital revolution that we believed was coming involved not only the building of satellites capable of handling digital transmissions but persuading our service providers to build the equipment to receive the signal on earth,” says Khadem. Yet the move to more efficient digital technology has since helped Inmarsat to keep to its policy of reducing charges to customers year on year.

THE SPACE RACE
It is not only Inmarsat’s portfolio which has been substantially altered recently – its status has been changed, too. Originally, the company was an intergovernmental organisation (IGO), which was almost entirely funded by the 85 or so biggest telecoms companies of the world, including BT, Telenor, COMSAT, France Telecom and KDD. Under this co-operative model, the shareholding companies were expected to provide the necessary capital for building and launching satellites in accordance with their usage of the system. Behind them stood their governments whose representatives influenced strategy, especially since Inmarsat was originally set up to provide an infrastructure for maritime distress calls.

In the 1980s many of the national telecoms companies moved towards privatisation and needed more flexibility from Inmarsat. Later, its privileged IGO status was criticised by its new competitors. But Khadem says the main reason for the change was a desire to make Inmarsat a commercial company with a broad investor base and the ability to raise money in the markets. Eventually, after a considerable period of planning, analysis and review the Inmarsat council, the shareholders and the governments decided to sanction a change and Inmarsat became a limited company in April 1999 with the aim of becoming publicly quoted within two years. At the same time a new fiduciary board was created.

“There were a number of obvious advantages in being an IGO set up by treaty, including our tax-free status,” says Khadem, “but none were of such importance that we could not do without them. In the end we were of the view that the advantages of flexibility and financial independence that came with the change to a limited company outweighed those benefits that we would lose.”

Today, Inmarsat is a plc, but it remains in the hands of the original shareholding telcos. “It is a matter regret that we have been unable to do an IPO,” says Khadem. “The reason is the current state of the equity markets. However, we remain ready to make the move as soon as the situation improves sufficiently.”

In the meantime the company’s revenue streams continue to depend on the number of calls users make. “Our primary customers are the telecommunications companies that own and operate the land earth stations,” says Khadem.

“There are 37 of them around the world, including one at Goonhilly in Cornwall, which is owned by Stratos. Whenever a customer initiates a call through a satphone, our system records the time spent on air and sends the bill to the appropriate LES for payment.”

The good news for Khadem, as CFO, it that this system transfers much of the risk of bad debt to the service providers which have to ensuring payment from each of the 220,000 registered terminal users. “It means,” he says, “that we have hardly any bad debt.” Revenue streams for 2000 showed, at $416.9m, a modest increase over the 1999 figure of $406.2m. After tax profits for the year were $62.7m.

THE FUTURE
However, the long lead times in satellite communications mean that keeping Inmarsat profitable is as tough as ever. The latest generation of Inmarsat-3 satellites were launched five years ago. Their Inmarsat-4 replacements are expected to be launched in 2004. They represent an investment of $1.7bn and are predicated on a continuing upward demand for multi-media communications.

The thinking is that voice and data will be supplemented by a host of applications, such as telemedicine, that will require ever higher speed connectivity.

A second issue concerns the risks involved in the launch and in-orbit life of highly sophisticated communications satellites weighing in the order of five or six tonnes. Insurance premiums are high, currently at between 15% to 18% of the value insured. Inmarsat actually prefers to build and hold a spare satellite on reserve each time it launches a new series. “There is little point in only recouping the cost of a failed launch when the real loss is the three years it would take to build and launch a replacement satellite,” says Khadem. “We do, nevertheless insure a part of the operation. The spare satellite is, if you like, an added form of self-insurance.”

Economic, military and naturally occurring incidents also have an effect on the amount of usage made of Inmarsat satellites and directly affect the company’s short term revenues while its main focus must remain long term. “It’s is important from a financial point of view that we are aware of these kinds of events and factor them into our calculations for future spending,” says Khadem. This may seem a tough balancing act to carry off, but any business that uses rockets to send valuable hardware into space was never going to be entirely free of nail biting moments.

THE SKY’S THE LIMIT
A brief history of Inmarsat and satellite communications.

Much of the world will never be covered by cellular phone networks. Even within Europe, North America and Japan, where networks are most advanced, there are large areas where it is impossible to use a mobile. Nor is this position likely to change in the foreseeable future.

Inmarsat Ventures, a British headquartered company with a global presence, aims to fill in the blanks. “Inmarsat provides the infrastructure for mobile satellite communications. That means we procure satellites, put them into orbit, maintain and replace them as needed, and sell air-time to the world’s major telecoms companies,” says Khadem.

Inmarsat was set up 22 years ago to provide maritime safety communications. The International Maritime Organisation requires every ship over a certain tonnage to carry satellite communications as part of its safety equipment.

In practice this means they carry Inmarsat enabled transceivers which automatically send and receive emergency messages under a system known as GMDSS (global maritime distress and safety system).

Today, Inmarsat satellites are also used by customers on land, such as media, construction, transport, and mining companies, not to mention the occasional Afghan warlord. In addition, three quarters of the world’s wide-bodied jets use the signal for a variety of purposes including passenger and crew communications. The signals from their phones are beamed up to a satellite, around the world and then down to a land receiver, which routes them into the country’s phone/data lines.

The nine Inmarsat satellites in high earth geostationary orbit are capable of handling signals from phones with transmission speeds of up to 64 kilobits per second – more than six times faster than the mobile telephone in your pocket.

The current generation of Inmarsat-3 satellites were launched five years ago. They incorporate high-capacity spot beams that can be directed onto areas of high demand while still maintaining the ability to deal with fast transmissions from elsewhere on the earth’s surface.

The new Series 4 satellites planned for 2004 will contain a number of improvements, not the least of which will be an ability to handle broadband traffic up to 432kbps. The existing 64kbps bandwidth already makes possible the transmission of real-time video pictures. Inmarsat hopes that the very much higher speeds of the future will transform, for example, the level of care given to patients in telemedicine link-ups and considerably reduce the cost of sending large data files.

CURRICULUM VITAE

Name: Ramin Khadem

Age: 56

Qualifications: BSc, MA, PhD

Career:

1993-: CFO, Inmarsat Ventures

1981-1993: Variety of planning and finance functions, Inmarsat

1975-1981: Economic and market research culminating in marketing director, Teleglobe Canada

1972-1975: Various analytical and econometric work, Bell Canada Enterprises, Montreal

Biggest challenge: Preparing Inmarsat for the transition from IGO to plc status.

Biggest hassle: Consistently meeting shareholders’ demands.