Telesat Corp Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen. Welcome to the conference call to report the third quarter 2022 financial results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat; and Andrew Browne, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.

Thank you, and good morning. This morning, we filed our quarterly report on Form 6-K with the SEC and on SEDAR. Our remarks today may contain forward-looking statements. There are risks that Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For a discussion of known risks, please refer to Telesat's annual and quarterly reports filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I will now turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer.

Okay. Thanks, Michael. Good morning, everyone. This morning, I'll share some thoughts on our results and give an update on the business. I'll then hand over to Andrew, who will speak to the numbers in detail, and then we'll open the call up to questions. Q3 came in very much in line with our expectations, and we continue to expect to exceed the revenue and adjusted EBITDA guidance we provided at the outset of the year. The overall operating environment feels pretty stable from a demand and pricing perspective, and I was pleased to see our capacity utilization tick up slightly in the quarter. We disclosed last quarter that we have an anomaly on our Anik F2 satellite that reduces its station-kept lifetime from 2025 to more like the end of this year. We noted that Anik F2 represents approximately 8% of our total revenue and that, absent finding ways to provide continuity of service for our customers using the satellite, we anticipated revenue could be reduced by roughly one-third versus what we previously expected for next year, 2023. We noted also that we are working closely with our customers to evaluate and implement measures to offer them continuity of service and mitigate the adverse revenue impact on the company. I'm pleased to say that our team, working closely with our customers, has developed a range of plans to continue to support the services now provided on Anik F2. These plans include making changes to antennas communicating with the satellite in order to extend service, relying on other Telesat and third-party satellites, and even purchasing an existing in-orbit C-band satellite from another satellite operator that's expected to be repositioned and co-located with Anik F2 in the coming months. Assuming all of these things occur as planned, we now anticipate that we'll retain over 90% of the revenue we originally expected to recognize from Anik F2 next year, although there are some additional operating expenditures associated with leasing third-party capacity for some of the customer requirements, as well as the capital expenditures associated with purchasing the third-party satellite and making other investments in ground infrastructure. We'll provide a further update when we release our Q4 numbers, and I do want to applaud the combined efforts thus far of the Telesat team, our customers, and other partners as everyone works hard to provide continuity of the important services supported on Anik F2. Turning to Telesat Lightspeed. On our last call, I mentioned that we were in discussions with certain additional financing sources to cover the increased cost of the program and that we expected to have a better sense of where we stood on financing around the end of this year. We noted that the contemplated financing would be at the Lightspeed unrestricted subsidiary level and would be subordinate to the ECA lenders and the government of Canada and Quebec investments. Since our last call, I'm pleased to say that we've made tangible progress in connection with securing this financing and in addition, have had regular and sustained engagement with the ECA lenders as we seek to finalize the financing. We remain extremely bullish about the opportunity Telesat Lightspeed gives us to grow our business. We have a highly disruptive and robust constellation design, over $750 million in contractual backlog, and over $4 billion in financing arrangements as well as strong support from government partners at the federal and provincial levels here in Canada. Lightspeed represents a compelling investment opportunity. And although there is no assurance that the advanced discussions we're having with our various financing sources will come to a successful conclusion, our overwhelming focus is on completing the financing and commencing full-scale construction of the program. Lastly, I noted on our last earnings call that we repurchased in the first half of this year, $160 million face value of our 6.5% unsecured notes and further that our Board had authorized us to repurchase up to an additional $100 million face value in Telesat debt. As we've said previously, we think our debt is trading below fair value, which is why we've repurchased it in the past and why we continue to believe that doing so makes sense for the company. And although we have the authority to repurchase up to an additional $100 million of debt, given everything else that's going on at the company right now, including the discussions we're having on securing additional Lightspeed financing, we decided to hold off on further repurchases last quarter. We'll continue to closely monitor how the debt is trading and, as required, provide updates on any repurchases we might make. With that, I'll hand over to Andrew and then look forward to addressing any questions you have.

Thank you, Dan. Good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In the third quarter of 2022, Telesat reported revenues of $180 million, adjusted EBITDA of $137 million, and generated cash from operations of $92 million with $1.7 billion of cash on the balance sheet at quarter end. For the third quarter of 2022 compared to the same period in 2021, revenues decreased by $12 million to $180 million. Operating expenses decreased by $4 million to $56 million and adjusted EBITDA decreased by $19 million to $137 million. The adjusted EBITDA margin was 76% compared to 81.1% in 2021. Between 2021 and 2022, changes in the U.S. dollar exchange rate had a positive impact of $4 million on revenues, a negative impact of $1 million in operating expenses, and a positive impact of $3 million on adjusted EBITDA. However, adjusted for the changes in foreign exchange rates, revenues decreased by $16 million for 2022 compared to 2021. Operating expenses decreased by $5 million and adjusted EBITDA decreased by $22 million. The revenue decrease was primarily due to a reduction in the renewal of a long-term agreement with a North American DTH customer and revenues from short-term services provided to another satellite operator in 2021, which did not recur in 2022. This was partially offset by higher revenues from mobility customers and the asset communication services project program. The decrease in operating expenses was primarily due to lower non-cash share-based compensation, partially offset by higher wages. Interest expense increased by $6 million in the third quarter compared to the same period in 2021. The increase was due to an increase in interest rates on the U.S. Term Loan B facility, combined with the foreign exchange impact on the conversion of U.S. dollar-denominated debt. This was partially offset by the impact of the repurchase of senior unsecured notes in 2022. Just to note, and as discussed in quarter 2, we repurchased notes with a principal amount of $160 million. These repurchases resulted in a gain in the first six months of CAD 107 million. These notes have been retired and also represent an annual interest saving of approximately $10.4 million. In 2022, we recorded a loss on foreign exchange of $249 million during the third quarter compared to a loss of $68 million in the third quarter of 2021. The loss for the three months ended September was mainly the result of the stronger U.S. dollar compared to the Canadian dollar against the spot rate as of June 22, with the resulting unfavorable impact on the translation of our U.S. dollar-denominated debt. Our net loss for the third quarter of 2022 was $229 million compared to a net loss of $52 million in the prior year. The variation of $176 million was principally due to a higher non-cash foreign exchange loss compared to the same period last year. For the first nine months of 2022, cash inflows from operating activities were $161 million, and cash flow generated from investing activities was $18 million. Included was $65 million by way of receipt of the remaining Phase 1 C-band clearing proceeds. In terms of overall C-band proceeds, we have received approximately $85 million and expect further proceeds of approximately $260 million. In terms of the capital expenditures made to date, virtually all are related to our lower constellation, Telesat Lightspeed. As you'll also have noted in our earnings release this morning and as Dan has mentioned, we have reiterated our increased guidance, which we provided with the release of our second quarter results on August 5, 2022. Telesat expects full-year revenues to be between $740 million and $750 million. Also, as we stated before, included in our revenues is our expectation that we will recognize a significant hardware sale and the provision of related services to start later this year as part of the $18.3 million contract. In terms of adjusted EBITDA, we expect it to be between $545 million to $560 million. Also, as a reminder, we don't expect any adjusted EBITDA from the hardware sale as the expected expense associated with this contract is more or less equivalent, and other guidance still reflects the Canadian dollar to U.S. dollar exchange rate of 1.3. In respect to expected capital expenditures, we now expect our cash flows used in investing activities to be in the range of $50 million to $75 million, including capital expenditures to further advance our Lightspeed program. Once we have greater visibility around the construction and financing of our program, we will provide a further update on our anticipated capital expenditures for the year. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.7 billion of cash and short-term investments at the end of September, as well as approximately $200 million of borrowings available under our revolving credit facility. Approximately $1.1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate significant cash flow from our ongoing operating activities. At the end of the third quarter, leverage as calculated under the terms of the amended senior secured credit facilities was 6.17x. Telesat has complied with all the covenants in our credit agreement and indenture. A reconciliation between our financial statements and financial covenant calculations is supplied in the report we filed this morning. The 6-K provides the unaudited interim condensed consolidating financial information in the NDA. The non-guarantor subsidiaries shown are essentially unrestricted subsidiaries of minor differences. So that concludes our prepared remarks for this call, and I'll be very happy to answer any questions that you may have, and we will turn back to the operator. Thank you.

The first question is from Walter Piecyk from LightShed.

This is Joe on for Walt. A couple of questions, please. Is there any more color you can provide about the process with the ECAs and the suppliers? Any details? Maybe are there specific parts or components that are available now that weren't before that maybe give Telesat a little better visibility? And then second, the OpEx for LEO appears that it was effectively flat quarter-over-quarter. And when should we expect that to ramp? And are any expenses for LEO being capitalized currently? And then finally, Amazon is showing some progress. OneWeb has been launching, and there are some smaller start-ups that seem to be having some progress. Do you feel like Telesat is getting behind a little bit, given the delays?

It's Dan, Joe. I'll try to address your three-part question. The first part was about gaining more insight into where Telesat stands from a supply perspective. Nothing has changed in that regard. We've previously mentioned that we collaborated extensively with Thales over the past year to enhance the program, along with the schedule and pricing. The efforts we made with Thales and their supply chain are still holding. We're not hearing anything different from Thales regarding their expectations about supply chain schedules. Regarding the lenders, we noted in our last call that we were engaged with them and anticipated having a clearer understanding of the situation by the end of this year, and that is still true. Since our last earnings call, we’ve had significant interactions with various financing sources, including lenders, and we've been actively working to advance discussions. As for the Lightspeed question regarding OpEx and capitalization, I also noticed a question about the competitive landscape. I’ll address the competitive environment first, and then perhaps Andrew can discuss the LEO expenses. We aren't seeing anything in the competitive landscape that makes us reconsider our chances of success with Lightspeed. OneWeb is getting their program back on track after pausing their launch due to the Ukraine-Russia situation, but there’s nothing happening with them or with Amazon that affects our confidence in our ability to succeed with Lightspeed. We're continuing to engage closely with our customer community regarding Lightspeed, and there's a great deal of enthusiasm from customers about the value we plan to offer. So, we don't see anything that changes our outlook on that. Andrew, would you like to discuss that further?

Yes, on the question on the OpEx. As you see, with a high margin of almost 78%, we manage the OpEx very, very tightly. As we're advancing our discussions with the ECA and other types of investor support, we're very focused on hiring and OpEx and expanding. So we manage that very, very closely. Obviously, when the program gets going, then of course, we would expect to see an increase coming from that. Just in terms of capitalization, that is typically what you would do with a capital program, you would indeed capitalize those costs. So that's where we are.

Okay. So will some of the operating expenses occur before the actual finalized program is implemented? Will it increase a bit more? That's what I'm trying to understand.

Yes, we would expect it to ramp up more. I mean we have, going back until we got the delays at Thales, obviously, with our engineering and support teams in terms of design and dealing with Thales, etc., we indeed are putting in the appropriate people we need to get going. But once we have the supply chain delays, then obviously, with that ramp, we actually sort of held back on, as you would expect us to do. But once the day we get going, we will obviously assess other areas that we need to provide support to the program.

The next question is from Dan De Bono from Invesco Credit Management.

I'm looking at the segment information, Item 5, on Page 10 of the supplement. I would appreciate any insights on the enterprise side for the quarter. Considering growth rates and our current trajectory, could you discuss some of the wins and losses in this diverse segment and your outlook for the next couple of quarters? That would be helpful.

Looking at my colleague John Flaherty, I'll begin. I mentioned earlier that the operating environment has been generally consistent with our expectations for this year, albeit a bit favorable. I've been pleased that we've been able to increase the utilization of our fleet over the year. In particular, this year, we've seen strong interest from the mobility segment, which includes aeronautical and maritime. This was somewhat anticipated, as these sectors were held back during COVID, and as restrictions eased and more people began traveling again, it was expected that these industries would rebound. However, they came back even stronger than we had anticipated. The main challenge in seizing these opportunities mostly stems from capacity limitations in regions experiencing high demand, such as key maritime routes like the Mediterranean and the Caribbean for the cruise market, as well as some of the essential flight paths for the Aero segment. Additionally, when considering regional challenges, areas like Africa and Latin America remain tough, but not more difficult than in the past couple of years. In Latin America specifically, we're doing well in securing renewals, winning business, and maintaining utilization, among other successes. Those are my initial thoughts. John, do you have anything to add?

No, I think you pretty much hit all of the major points, Dan.

The next question is from Brandon Karsch from Kennedy Lewis.

I was wondering, just following up on the last question with the mobility gains. Are you seeing any significant new business wins there? Is it more just recovery or any kind of other organic expansions of existing customers?

In the first half of the year, we saw capacity return to inventory after DISH made a partial renewal with us. We're pleased that we quickly utilized that capacity in the mobility market. Additionally, we secured another significant win earlier in the year with a customer in the aerospace sector. Beyond that, it feels like we're primarily experiencing smaller gains due to our capacity constraints.

Okay. That's helpful. And with all the headlines around the potential Shaw and Rogers merger, do you anticipate any impact on your business from that on the broadcast side or elsewhere?

We don't think so. No, we don't think so.

Okay. And then on the LEO side, is it possible to provide maybe any more detail in terms of what types of financing you're looking for? Are you fully focused on private financing? Are you talking to government agencies about further financing? And if you're unable to secure it given market conditions over the next couple of months, is there a point where you think that maybe you're too far behind and that this bill maybe becomes untenable after already scaling it back?

So on the financing side, there are sort of two paths that we're active on right now. One is trying to complete the discussions and the financing with the export credit agencies. I mentioned that there's been a lot of activity with them over the past quarter, and we're focused on driving all those negotiations to a successful conclusion. Then we mentioned on our last call that we're looking at securing some additional financing, just given some of the increases in the program costs coming from the combination of inflation and just kind of a longer schedule and the incremental costs that come with that. Coupled with the fact that we had always said that we were going to need some incremental financing as part of the program. At one point, there was some consideration potentially to doing something now that we're public, that was what was certainly a path that we could consider in the past, issuing some equity if we needed to. But given where the markets are trading right now and where Telesat's trading right now, which we believe is below fair market value, we're sort of less interested in that. We mentioned on our last call that we're looking at some other financing sources. We talked about that as being kind of at the LEO subsidiary level and making sure that it was all subordinated to the ECA lenders who are very focused on being senior in the capital structure over on the LEO side and making it subordinate to the investments that we're getting from the government of Canada and the government of Quebec and making sure that, as we seek to secure it, it's accretive to the overall company profile. So that continues to be our focus. I mentioned that we're making progress on that front and that we're in advanced discussions right now. But I don't think we’ll add anything beyond that at this stage.

Okay. Then I guess the last part of my question that I had asked was if you're unable to...

Yes, at the moment, we are not contemplating those questions. Our primary focus is on finalizing the financing we need within the stated timeframe. We have consistently communicated that we have a strong program and a robust constellation. We are receiving tremendous support from our shareholders, board, and our government partners in Canada. There is already a significant backlog associated with the constellation, and we are engaged in fruitful discussions with our customer base. Therefore, our priority is to complete the financing, initiate the program, and introduce Lightspeed to the market.

There are no further questions at this time. I would like to turn the meeting back over to Mr. Goldberg.

Okay. Operator, thank you very much, and thank you all for joining us this morning. We look forward to chatting when we issue our Q4 and full-year numbers. So thank you very much.

The conference has now ended. Please disconnect your lines at this time and thank you for your participation.