Telesat Corp Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen. Welcome to the conference call to report the Second Quarter 2023 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, see Telesat's annual and quarterly reports filed with the SEC and SEDAR. 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. This morning, I'll share some thoughts on our financial 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 for questions. As we noted in our earnings release, we've had a busy first half of the year. We're tracking our guidance, received FCC validation on C-band clearing which allowed us to recognize approximately $260 million in the quarter and completed some meaningful additional debt repurchases that we believe strengthen our balance sheet and create value for shareholders. But certainly, the big news was our announcement this morning that we've selected MDA as a prime contractor for the Telesat Lightspeed satellites; and that, by leveraging the advanced technology they've been investing in, we're able to reduce our CapEx on the project by roughly $2 billion, while fully maintaining the revolutionary capabilities of the network that we anticipate will make it so disruptive and successful in the market. Lightspeed is now fully funded for global service delivery, given the company's own equity contribution and certain vendor financing and aggregate funding commitments from our Canadian federal and provincial government partners. The government financing commitments are subject to a number of conditions, including completion of confirmatory due diligence and the conclusion of definitive agreements, which we aim to finalize by the end of the year, recognizing it could take a little longer. I want to thank our government partners for their strong and consistent support of Lightspeed and their recognition of the manifold public interest benefits that flow from the project. I want to say a few words about why this approach with MDA is so much more capital-efficient and why we ultimately pivoted to MDA. The game-changing development here is the digital beam forming antenna that MDA has developed. We considered a digital beamformer some years ago when we first evaluated technology options for Lightspeed, but our engineers felt that it wasn't ready for prime time. The technology development risk at the time was too great. That's why when we selected MDA to build the antennas way back then, the antennas MDA prototype was going to build for our original plan formed beams using analog technology. Over the past few years, MDA has continued to invest in the digital beamformer, and late last year as we were working hard to close our business case funding, we took another look at the digital beamformer and determined that it was now sufficiently mature and that we had to leverage it, given the massive efficiencies it delivers. The performance improvement relative to the analog one is dramatic. It can create roughly three times the number of beams versus the analog one, which means we can serve our customers and cover the globe vastly more efficiently. For example, while the old satellite design required each satellite to have two pairs of analog beamforming antennas to deliver the capacity in the way that we want, we only need a single pair of digital beam forming antennas. This allows each satellite to be smaller and still have the same effective capacity as the larger ones. Smaller satellites almost always mean less costly satellites, and that's certainly the case here. In the case of Lightspeed, the MDA satellites are roughly 75% of the size of the earlier versions we were considering. The digital beamformer also creates a better link between the satellite and the user terminal, which further improves the performance and efficiency of the overall network. The satellites will continue to have four optical inter-satellite links, which we've always emphasized is important to dynamically and rapidly route our users' traffic anywhere on earth and provides great resiliency throughout the network. In addition to the digital beamformer, MDA has been investing heavily in a digital processor that's tightly integrated with the digital beamformer. MDA has been doing all this because they see a big opportunity to build LEO satellites as the industry transitions in that direction. They have already been quite successful, winning a highly competitive process last year to be the prime contractor for the Globalstar LEO constellation that Apple is funding. MDA has world-class capabilities in high-volume satellite manufacturing and is heavily focused on winning more business as a prime, which is why they won the Apple opportunity and why they're going to be building the Lightspeed satellites. The work with MDA and many of our other suppliers has already started. We expect the first launch to take place in mid-2026, with global service commencing in late 2027. The total CapEx for Lightspeed is approximately $3.5 billion. If we meet our plan, we expect to grow our revenue and adjusted EBITDA by several multiples and achieve an IRR on the project of roughly 30%. We'll organize an Investor Day and present at a number of conferences in the near term to give investors greater insight into our plans. It's hard to overstate how pleased we are with the arrangements we've put in place for Lightspeed and how keen we are to engage with customers, investors, and others. It's been a long road, much longer than we anticipated, with COVID, supply chain constraints, and inflation posing real challenges. But we've always believed in the huge opportunity in the global enterprise broadband market and have been laser-focused on finding the most compelling path forward. Given where we've landed, it's been well worth the wait. I want to thank my colleagues at Telesat, who are genuinely world-class professionals in every key discipline—technical, regulatory, commercial, finance, legal—for their resilience, dedication, and ingenuity in what I believe is hitting an absolute home run here. Throughout our 54-year history, we've leveraged our deep engineering expertise and leaned into innovation to adapt in a dynamic market and meet our customers' ever-evolving yet mission-critical requirements. Telesat Lightspeed is just the most recent example of that. It's been a privilege to work alongside this world-class team, and we're now 100% focused on executing the plan. So with that, I'll hand it over to Andrew and look forward to addressing any questions you may have.

Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. As Dan has said, it’s been a long road, and obviously, with our announcement on Lightspeed, we are excited to move forward. Now focusing on our financial performance in the second quarter of 2023, Telesat reported revenues of $180 million and adjusted EBITDA of $139 million. For the six months ended June 30, 2023, we generated cash from operations of $102 million, and we have $1.5 billion of cash on the balance sheet. In the second quarter of 2023, when compared to the same period in 2022, revenues decreased by $7 million to $180 million. Operating expenses decreased by $7 million to $52 million, and adjusted EBITDA decreased by $8 million to $139 million. The adjusted EBITDA margin was 77.1% compared to 78.4% in 2022. Between 2022 and 2023, changes in the U.S. dollar exchange rate had a positive impact of $5 million on revenues, a negative impact of $1 million on operating expenses, and a positive impact of $4 million on adjusted EBITDA. When adjusted for changes in foreign exchange rates, revenues decreased by $12 million, operating expenses decreased by $8 million, and adjusted EBITDA decreased by $12 million. The revenue decrease was mainly due to a termination in service by a South American customer, combined with a reduction in revenues from one of our North American DTH customers. This was partially offset by increased revenue from the work we're performing with NASA related to satellite-to-satellite communications and lower overhead. The decrease in operating expenses is primarily due to lower non-cash share-based compensation, partially offset by higher costs associated with the procurement of third-party satellite capacity required to support certain customer networks. Interest expense increased by $19 million during the second quarter compared to the same period in 2022. The increase was due to an increase in interest rates in our U.S. term loan lease facility, combined with the foreign exchange impact on U.S. dollar-denominated interest expense. This was partially offset by the repurchase of notes in 2023 and the impact of the maturity of our interest rate swaps in September of last year. In the second quarter, we recorded a gain on foreign exchange of $67 million compared to a loss of $99 million in the second quarter of 2022. The gain for the three months ended June 30 was mainly the result of a weaker U.S. dollar against the Canadian dollar, which had a favorable impact on our U.S. dollar-denominated debt. Our net income for the second quarter of 2023 was $520 million compared to a loss of $4 million in the prior year. The variation of $524 million was principally due to C-band clearing proceeds recognized in the quarter of CAD345 million, combined with a positive variation in foreign exchange and the conversion of our debt into Canadian dollars, along with the gain on repurchase of debt of CAD153 million. This was partially offset by higher interest expenses and higher tax expenses. For the six months ended June 30, the cash inflows from operating activities were $102 million, while cash flows used in investing activities were $67 million. Capital expenditures were primarily related to the lower orbit constellation Lightspeed and the newly acquired Anik F4 satellite. Regarding guidance, as you will have noted in our earnings release this morning, we are very pleased to maintain our previously provided revenue and adjusted EBITDA guidance for 2023. This guidance assumes the Canadian dollar to U.S. dollar exchange rate of CAD1.35. Telesat continues to expect full-year 2023 revenues to be between $690 million and $710 million. In terms of adjusted EBITDA, Telesat continues to expect between $500 million and $515 million. As for expected capital expenditures, as a result of our Lightspeed announcement, we now expect our 2023 cash flows used in investing activities to be in the range of $175 million to $225 million, and we will provide any further updates at the time of our Q3 call. Regarding cash, to meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.5 billion in cash and short-term investments at the end of March, as well as approximately $200 million in borrowings available under revolving credit facilities. About $1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant amount of cash from our activities. At the end of the fourth quarter, leverage as calculated under the terms of our amended senior secured credit facilities was 5.69 times to 1. Telesat has complied with all the covenants in our credit agreement and indenture. As Dan indicated in the second quarter, and including the subsequent period, we have reported debt with a principal aggregate amount of $296 million through open market purchases at a cost of $156.9 million. Combining this with prior repurchases done in 2022, we have now repurchased a total amount of $456 million at an aggregate cost of $233.9 million. This also results in interest savings of approximately $27 million annually. Since the end of 2020, when Telesat repaid approximately $340 million of our term loan, our overall debt has been reduced by roughly 24%. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6-K provides the unaudited interim condensed consolidating financial information in the NDA. The Non-Guarantor subsidiaries shown are essentially the unrestricted result with minor differences. So with that, I will conclude our prepared remarks for the call. I'm very happy to answer any questions you may have. And with that, I'll turn back to the operator.

Thank you. We will now take questions from the telephone lines. The first question is from Mike Pace from JP Morgan. Please go ahead.

Hi, good morning. Thanks for taking the questions. Dan, I appreciate all the color and commentary earlier on the MDA contract and what you're getting out of that different from before. I guess, just to be really clear here for some of us that aren't so smart on satellite technology. You will have the same or roughly the same amount of capacity in this network as the prior network. I just want to confirm that. And then what are you not getting, if anything, for spending $2 billion less? And then I have a few other follow-ups.

Yes. No, thanks, Mike. Just to clarify, this constellation, leveraging this more advanced digital beamformer has the same effective capacity. We were not going to settle on that. We have a really good understanding of what the market needs, and our customers are looking for. They need to concentrate capacity dynamically around the world. So we didn't trade off any of that, which is the advantage here. We still have four ISOs, which we've always said is important in terms of our ability to dynamically route traffic around the globe and have greater resiliency throughout the network. I didn’t even talk about it in my remarks, but the schedule remained unaffected at all. The good thing about working with MDA as the prime satellite contractor is that we've always been working with MDA on this program. They already had a significant part of the program with the antenna they were going to build. So yes, it's equally capable. If anything, we're gaining efficiencies. The digital beamformer can create three times the number of beams on each satellite, giving us much more scope to route traffic. And while we looked at this technology years ago, we didn’t opt for it then because the risk was too high. But MDA has continued investing, and they’ve made it work, which is another reason why we are not seeing any schedule hit.

Got it. Just to be super clear here, is there anything that you're not getting? And the answer in simple no works as well, too.

It's a simple no from a capability perspective. We believe we are gaining. With three times the beams on each satellite, we have much broader traffic routing capabilities. To clarify, the CapEx for the 156 satellite constellation is about $2.7 billion. So with the current funding, we are fully funded for those satellites. The total program cost is approximately $3.5 billion for 198 satellites.

Can you break down the government financing and the vendor financing into pieces? Have there been any changes since last time?

We've said approximately $2 billion from the government of Canada, with their original commitment being about CAD1.44 billion, and Quebec contributing CAD400 million. So there has been some incremental funding, which we are negotiating with our government partners. The vendor financing is a few hundred million dollars, but we can't disclose specifics at this time.

And just quick clarity, this is still being funded and built in unrestricted subsidiaries. Is that correct?

Yes, nothing has changed in that regard. We're continuing to follow the same funding approach, and we haven’t made any declarations about bringing everything back together.

Thank you.

Thank you. The next question is from Walter Piecyk from LightShed. Please go ahead.

Thanks. Dan, just to confirm that the incremental government funding piece is not the revenue commitments that exist, right?

No, we have a capacity commitment from the federal government of Canada for CAD600 million over a 10-year term and a separate commitment from the government of Ontario for CAD109 million over a five-year term. The incremental $900 million is separate and will be clarified as negotiations progress.

Great. So this overall number in terms of what you've outlined for sources relative to the uses seems that you don't even need the operating cash flow for the full constellation?

Correct, we don't need the operating cash flow to fund the 156 satellites, but we will need additional funding for the 42 satellites down the line once Lightspeed starts generating cash.

Thank you.

Thank you. The next question is from Arun Seshadri from BNP Paribas. Please go ahead.

Hello, gentlemen. Thanks for taking my question. First of all, congrats on getting the Lightspeed program reconstituted and funded. Just wanted to nail down a couple of details on the funding side. So the cash balance you have right now is somewhere in the range of about $1.1 billion. You're getting another $260 million from the C-band proceeds, so is it fair to say you need another $200 million in additional equity?

We are fully funded. The $1.6 billion equity contribution is comprised of existing cash, the C-band proceeds coming in, and cash we have already invested in the project over time.

Got it. Thank you. And I noticed you haven't laid out any future debt buyback authorizations. Going forward, are you likely to continue using operating cash flow for debt buybacks?

We feel our debt repurchases have been a smart use of cash, and if that continues to be the highest value opportunity, then we would consider more debt repurchases depending on market conditions.

Got it. And lastly, any thoughts on the structuring for the remaining $900 million in financing?

We expect the government funding will be over on the unrestricted side, LEO. As for risks, we need to finalize funding with our government partners, but I'm confident that will happen. We're excited to get started and ramp up our workforce to execute this plan.

Congratulations and all the best.

Thank you. The next question is from Raghav Garg from DoubleLine. Please go ahead.

Can you talk about the life of these satellites given they're slightly smaller? Does that impact your sort of duration of the consideration?

No, the specifications indicate that the satellites are expected to meet their performance specifications for effectively 11 years, just like before.

Thank you. Can you throw out an EBITDA number based on your assumptions?

It's not unreasonable to think in terms of high-level building blocks; we're looking at an Investor Day scheduled before the end of the year for more detailed information.

The next question is from Mr. Rattenburg from Credit Suisse. Please go ahead.

Hi, thank you for taking my question and congratulations on the announcement with MDA. I have a question about the funding. The MDA announced seems like it's a CAD2.1 billion contract, but it’s unclear to me how it reconciles with the 156 satellites. Can you clarify this?

There are several components—the satellites, launch vehicles, global ground infrastructure, and factory upgrades. The total program cost reflects all those elements, including contingencies.

Understood. Any updates on your relationship with the Government of Canada?

The relationship is strong. We've been in advanced discussions, and we expect everything to be clarified and finalized soon, ensuring all terms are favorable.

Appreciate that. Lastly, are you considering structural changes before your debt maturities back in 2026?

The schedule remains consistent with prior plans. We're aware of the maturities, but we have time to address those issues as they arise.

Thank you.

The next question is from Marcello Chermisqui from Ares. Please go ahead.

Congrats on being fully funded now. Can you discuss your thoughts on debt buybacks?

All cash uses are focused on strengthening the business and shareholder value. We're open-minded about future uses, whether it’s debt repurchases or other opportunities.

And can you clarify the timing and structure of the 42 satellites not included in the first phase?

We've built in capacities to scale based on demand. The timing will align with Lightspeed's operational cash flows to fund those satellites once the network is operational.

Thank you for your insights.

The next question is from Bill Wise from Invesco. Please go ahead.

Thank you. Any updates on the impacts of the DISH-EchoStar merger on your business?

We don’t expect any impact on our work with DISH and EchoStar. We believe our relationship remains strong and unaffected.

Thank you.

Thank you all for your time today. We look forward to speaking with you again when we issue our Q3 numbers, and we appreciate everyone's support.

Thank you very much.

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