Why we like speedcast
SpeedCast International (ASX: SDA) is a company that doesn’t grab many headlines, but we think it’s worth watching. The company is a leading global network and satellite communications service provider, and is strongly positioned to benefit from growing data demand. Reflecting its potential, the share price has doubled over the last two years.
It purchases satellite capacity from satellite operators (a high fixed cost business) and resells satellite usage and telecommunication services to over 100 different customers. Last year it did a transformative acquisition of Harris Caprock, which significantly increased its scale and geographical footprint. It now has dominant market share in both the maritime and energy verticals. Furthermore, it purchases around four times more bandwidth than any other commercial buyer.
Increasing automation, big data, the Internet of things and our general need to be connected all drive increased data demands. We have increasing expectations of being constantly connected, but fixed infrastructure solutions are not always practical. Satellites are a fantastic way of providing data to remote or isolated places where other forms of communication are either not commercially viable or not possible. For example:
- It’s not economically feasible to run an underwater cable to every island on the planet
- It may take too long to construct permanent copper wires for an emergency tsumani disaster relief project
- I’d love to hear a viable pitch for an underwater cable solution for a cruise ship or offshore oil rig operation in the Pacific
SpeedCast is now strongly positioned to benefit from growing data demand in these segments. We note, like the general populous, remote residents are consuming more data, oil rigs are moving to lower staff costs with centralised data management (meaning more data is being sent from the rig to base), and cruise passengers want ever-more Netflix time.
The company is particularly well positioned in this market due to having strong economies of scale. We wrote previously that economies of scale can be a strong competitive advantage as it lets businesses spread fixed costs. SpeedCast has indeed successfully used scale to its advantage by consolidating bandwidth usage – this has seen it improve margins annually, from 10.9% in FY11 to 17.5% in FY15 (all of this pre the Harris Caprock acquisition).
As the largest net bandwidth purchaser, SpeedCast is able to negotiate flexible contract terms. For a given MgHz purchase, SpeedCast may be offered bandwidth across a network of satellites operating in different band frequencies and geographies. This means it has a greater probability of on-selling bandwidth to meet customer demands and can achieve a higher rate of bandwidth utilisation than competitors. This In turn results in a lower marginal cost of doing business than its competitors – giving them a scale advantage.
Being the largest bandwidth purchaser in a fragmented market of satellite operators adds legs to SpeedCast’s investor day presentation calling out scope for “bandwidth cost saving benefits from volume oversupply” and “expansion in margin % from operating leverage & scale”.
The Montgomery funds own shares in SpeedCast International.
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Jon Gatland
:
It seems Musks plans for satallite domination have completely spooked the Speedcast market.
Speedcast really needs to lock in more contracts to position itself as a take over target or to ensure steady growth without the fear of attrition due to a possibly better product coming to market.
david klumpp
:
Hello Lisa: I was wondering if you were planning an update on SpeedCast? Since your excellent review, we have the significant acquisition of UtiliSat, thus the launch of a new “vertical”, and the latest interim results out this week. Would appreciate your opinion on these latest developments.
Lisa Fedorenko
:
Hi David, yes there has been lots of news. Enough to warrant a formal update as a new blog post.
warren
:
Hi Lisa,
I recently returned from o/s and noted that internet use is now available on aircraft. (I’m probably a little behind the times in this observation.) Is this part of SDA’s operational area? I imagine that would be similar to cruise ships. I also noted that the costs for accessing the web was relatively high. Also could you provide a little more detail as to what you mean by ‘the vertical’?
I’ve found you’re pieces for MIM to always be interesting, educational and informative, LIsa and I wish to a long and prosperous career.
Lisa Fedorenko
:
Hi Warren,
Thank you for your kind words and informed questions.
Internet is indeed beginning to be offered on aircraft. SDA is aware of this, and indeed highlights aviation as one of the verticals (side note – I am using the term vertical as a synonym for segment) in its Enterprise and Emerging Markets division. However Speedcast’s expertise and, importantly, customer relationships are concentrated on other segments (particularly maritime and energy).
Currently, SDA has a small presence in the aviation space, focusing on business offerings rather than commercial aircraft. It is indeed a growing segment and we wouldn’t rule out Speedcast getting more actively involved in the future. However this would require either a significant investment in staff or an acquisition in the space. For the moment management are (rightly in our view) concentrating on integrating the existing businesses and de-levering the balance sheet.
Scott Paten
:
Any concerns about the SpaceX Global Wifi ambitions? “The project would bring high-speed internet to all corners of the globe, vastly undercutting existing services in coverage and cost” – Daily Mail
http://www.dailymail.co.uk/sciencetech/article-4472920/Elon-Musk-s-SpaceX-bring-satellite-internet-2019.html
Lisa Fedorenko
:
Hi Scott,
There are some interesting new developments coming into the satellite space, of which SpaceX global is one (another exciting development are HTS satellites which provide c20x more throughput than current satellites). The project you are referring to involves launching and operating clusters of satellites. This is a high capex business (estimated to cost >$10bn) and not part of the vertical in which Speedcast positions itself (Speedcast rather buys and resells bandwidth/ time from satellite operators to satellite end users).
Speedcast derives most of its earnings from the maritime and energy segments. The SpaceX program is admirably focused on delivering high speed internet to parts of the population presently without it. This segment is not a key business focus at present for Speedcast.