VideoFor many companies, experiencing the recession involves hanging on in survival mode — dumping costs, squeezing bucks out of working capital, and praying for an economic turnaround to rescue them in 2010. But since business is all about maximizing opportunities, even companies that continue to thrive are pushing hard to make sure they'll take full advantage of a bounce-back.
In many cases the effort consists of forging ahead with new products, services, and pricing in a time when controls on corporate costs will continue to be tight, regardless of improving fiscal health. Recent interviews with senior finance executives at three companies — Hughes Communications, McAfee Inc., and Sabrix Inc. — revealed a strong bent toward adapting their offerings to customers' shifting buying preferences.
A big opportunity for Hughes, a provider of high-speed satellite internet connections, for instance, lies in the 10 million to 15 million North American consumer "households" — including small businesses — in areas where there's no access to cable, DSL, or cellular broadband service. The company currently has about a half-million subscriptions within that market.
Making hay out of that opportunity requires a big capital investment. Hughes announced last month that it finalized a deal for the construction of a second satellite, at a cost of $400 million, to handle new subscribers. That amounts to almost 60% of the company's $676 million revenue for its North American broadband service — including both consumer and enterprise customers — for the 12 months ended March 31. Worldwide revenue was just under $1.1 billion.
But there wasn't much doubt that the cost would be justified, said Hughes CFO Grant Barber. Before April 2008, when the company launched its first dedicated satellite, all of its capacity was served through leased transponders on satellites owned by other operators. The cost of providing service that way is about $25 per customer per month. But for subscriptions handled by its owned satellite, that cost drops to $6 or $7. "The cash-flow generation from owning your own satellite is staggering," Barber told CFO.com. And there's lots more left to save: Hughes still leases about 112 transponders in North America at a cost of $160 million annually.
The key to another huge profit opportunity is that the new satellite, slated to be launched in 2012, is expected to have at least 100 gigabits of storage space — 10 times more than the existing one has. As that satellite gets filled, monthly per-customer costs could shrink to microscopic levels, relatively speaking. "For the same service offering, our cost could drop to a buck or two," Barber said. "At that point our margin will have gone from $43 [with leased transponders] to $66."
That difference in margin will really prop up the bottom line if the company continues at its current rate of revenue growth, which Barber said has been about 17% to 20% per year. The pace has barely slowed during the recession, something that surprised Hughes executives.
In fact, they delayed finalizing the satellite deal, which was announced last September just as the economy was melting down. They waited until they were confident that demand for the company's services would not be severely affected. "When the economic crisis hit, we wanted to be careful not to mis-time that event," said Barber.
The goal was to start work on the new satellite soon enough to be ready to launch a few months before the first one reached capacity. The executives also want to have enough time to position and test it before it's needed to start absorbing demand. Having it ready too early would force the company to needlessly pay the fixed operating costs on the second satellite; merely delaying the launch wouldn't really be an option, because a contract with a launch company must be nailed down nine months to a year in advance.
But completing the satellite late would be no better. That's because the company then would have to again lease costly transponder space to handle excess demand. "We couldn't take a risk of being months without capacity in the market," Barber said. So the company made an equity offering in May 2008 in which it raised $100 million to help fund the development when the time was deemed right. Fortunately, the company's stock price was around $50 at the time, compared to about $21 today.
Still, Hughes executives didn't know what effect the economic downturn would have on new subscriptions, making it risky to pull the trigger on the development deal too soon. Sensing a customer marketplace in which there would be reduced appetite for up-front costs, the company created an alternative pricing plan with an activation fee of only $100 instead of $300, counterbalanced by a $10 higher monthly subscription fee.
As a result, Hughes had record fourth-quarter subscription sales and even stronger performance in the first quarter of this year, when there were 53,000 new customers for a 14% year-over-year increase. More than half of the new subscriptions have been under the new plan. "It showed that catering to a more conservative market was the right thing to do in the current marketplace," Barber said. The growth sealed the company's decision to wrap up the satellite deal.
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