Earnings Call Transcript - TSAT Q3 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the conference call to report the Third Quarter 2024 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. James Ratcliffe, Vice President of Investor Relations. Please go ahead, Mr. Ratcliffe.

James Ratcliffe, Vice President of Investor Relations

Thank you, Latanya, and good morning, everyone. This morning, we filed our quarterly report for the period ending September 30th, 2024, 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 see Telesat's annual report and update 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.

Dan Goldberg, President and Chief Executive Officer

Okay, thanks, James, and thank you all for joining us this morning. Q3 and the first nine months of this year have unfolded largely consistent with our expectations. As we noted in our earnings release, we've updated our guidance for revenues to be at the upper end of the range and for adjusted EBITDA to be at or above the top end of the range. Q3 was eventful, with our biggest news being that we closed the funding for Lightspeed towards the end of the quarter. We indicated on our Q2 call that closing was on track, and we're pleased to get the announcement done shortly thereafter. I'm happy to say that we're making excellent progress so far executing the program and are pleased with the good collaboration we're having with our key suppliers. I'm also happy to see all the very talented new people we're bringing into Telesat as we staff up for this important program. In addition to the good progress we're making on the technical front, I've been very pleased to see the level of engagement we're having with the customer community now that the program is fully funded. It's increasingly clear that satellite users, in each of the verticals we're focused on, see the significant benefits of LEO and appreciate that Lightspeed, with its highly advanced and capable design, can meet their growing connectivity requirements. Securing customer commitments for Lightspeed is obviously a very high priority for us, and we'll keep the market informed of our progress as we move forward. Switching gears to our GEO activities, I'm pleased to say that we entered into a renewal agreement with EchoStar last month for Nimiq-5, a renewal that we've discussed on prior calls. It's a five-year renewal that will see DISH ramping down its capacity over roughly the course of the first year to half the capacity they're using today. On a cash basis, we'll be receiving a little less than a third of what we used to. We plan to use the Nimiq-5 capacity we have coming back to us to support certain customer requirements in Canada, but we don't expect it to completely replace the lost revenue from DISH. We mentioned on our Q2 call that we were contemplating selling a wholly-owned subsidiary that was generating roughly CAD10 million a year top line, but with minimal EBITDA contribution. We entered into an agreement last quarter to sell that business called Infosat for proceeds in the low single-digit millions of dollars, so nothing very material there. The last thing I'll mention about developments in the quarter on the GEO business is that we restructured our contract with Canadian ISP Explorer, something we discussed on our last call. Explorer has undergone a financial restructuring, and as part of that, we took an incremental bad debt provision last quarter to reflect that situation. On our Q2 call, we noted that Explorer accounted for about CAD40 million of backlog and that roughly one-third of that was a prepayment that we recognized as deferred revenue each quarter. In light of Explorer's financial challenges, we restructured the contract, which will now expire at the end of Q3 next year, a little more than a year earlier than originally anticipated. Following the restructuring, we expect revenue from Explorer to be down around CAD4 million next year relative to this year, but effectively flat at the EBITDA line. In sum, it was a busy quarter, and we're performing well relative to our guidance as we get closer to year-end. We're very pleased to have Lightspeed fully funded for global service and are making strong progress on program execution to date. We remain very bullish on Lightspeed's prospects in the market, as well as our ability to deliver an extraordinary value proposition to our customers and significant value creation for stakeholders. So, with that, I'll hand over to Andrew and look forward to addressing any questions.

Andrew Browne, Chief Financial Officer

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 2024, Telesat reported consolidated revenues of CAD138 million, with adjusted EBITDA of CAD96 million. For the first nine months of 2024, the company generated CAD64 million in cash from operations, ending the third quarter with CAD1.1 billion of cash. For the third quarter of 2024 compared to the same period in 2023, revenues decreased by CAD37 million to CAD138 million, operating expenses decreased by CAD4 million to CAD46 million, and adjusted EBITDA decreased by CAD37 million to CAD96 million. The adjusted EBITDA margin was 69.5% as compared to 75.9% in the third quarter of 2023. The revenue decrease for the quarter was primarily due to a reduction in services and a lower rate on the renewal of a long-term agreement with a North American direct-to-home customer, as well as lower revenues from certain mobility and Latin American customers. The decline in operating expenses was primarily due to lower non-cash share-based compensation and higher capitalized engineering related to Telesat Lightspeed, partially offset by higher bad debt expense, professional fees, and increased headcount in our LEO segment. Interest expense decreased by CAD6 million during the third quarter compared to the same period in 2023, primarily due to the repurchase of notes and Term Loan B, partially offset by an increase in the interest rate on the U.S. term loan facility. In the third quarter, we recorded a gain on foreign exchange of CAD36 million compared to a loss of CAD77 million in the third quarter of 2023. This gain was mainly the result of the weakening U.S. dollar against the Canadian dollar throughout the quarter compared to the spot rate as of June 30, 2024, and the resulting favorable impact on the translation of our U.S. dollar-denominated debt. Our net income for the third quarter was CAD68 million compared to a net loss of CAD4 million for the same period in the prior year. The change was primarily due to the foreign exchange benefit I mentioned earlier, partially offset by the decline in revenues. For the nine months ended September 30th, cash inflows from operating activities were CAD64 million. Capital expenditures were CAD661 million, almost all related to Telesat Lightspeed. Of this amount, CAD550 million consists of cash payments while the remaining CAD111 million was accrued. This amount is reflected in trade and other payables on the balance sheet at quarter end. Guidance, as you will also have noted in our earnings release this morning and as Dan mentioned, we've updated our 2024 guidance. This guidance assumes a Canadian dollar to U.S. dollar exchange rate of CAD1.35. For 2024, Telesat now expects full-year revenues to be at the upper end of the guidance range of between CAD545 million and CAD565 million. In terms of operating expenses, excluding share-based compensation, we now expect to spend approximately CAD65 million to CAD70 million on Telesat Lightspeed this year versus our prior expectation of CAD80 million to CAD90 million. This mainly reflects the overall timing of new hires. In terms of total adjusted EBITDA, we now expect to come in at or above the guidance range of CAD340 million to CAD360 million, reflecting both better revenue and lower operating expenses. As promised, we are showing our GEO and LEO results separately as reflected in Note 4 of our financial statements filed in our 6-K. In respect to capital expenditures, we expect 2024 capital expenditures to be in the range of CAD1 billion to CAD1.4 billion, nearly all related to Telesat Lightspeed. This also reflects our estimate of timing of invoices received and corresponding accruals at year-end. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately CAD1.1 billion of cash and short-term investments at the end of September as well as CAD2.54 billion available under our funding agreements with the government of Canada and Quebec. Approximately CAD850 million in cash was held in our unrestricted subsidiaries at the end of the quarter. Additionally, we continue to generate a significant amount of cash from our ongoing operating activities. At the end of the third quarter, the total leverage ratio as calculated on the terms of the amended senior secured credit facilities was 5.84 times. Telesat is in compliance with all the covenants in our credit agreement and indentures. In terms of our debt repurchases, we repurchased year-to-date an amount of CAD262 million at a cost of CAD190 million, including accrued interest. Combined with the debt repurchases completed in 2022 and 2023, we have now repurchased a cumulative principal amount of CAD849 million at a cost of CAD459 million, including accrued interest. This results in interest savings of approximately CAD54 million annually. Including the repayment in 2020 of approximately CAD356 million of our Term Loan B, our overall debt has now been reduced by approximately 36%. 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 consolidated financial information in the NDA. The non-guarantor subsidiaries shown are essentially the unrestricted subsidiaries with minor differences. So, that concludes our prepared remarks for the call. We're now ready to answer any questions you may have. So, we will turn back to the operator.

Operator, Operator

Thank you. We will now take questions from the telephone lines. The first question is from David McFadden from Cormark Securities. Please go ahead.

David McFadden, Analyst

Yes, hi. Just a couple of questions. So, first of all, just on the EchoStar renewal. You indicated that the revenue will be down about a third or 30%, but you expect to offset some of that. What do you think the net impact would be?

Dan Goldberg, President and Chief Executive Officer

I don't know, David, it's Dan. Thanks for the question. I'm not sure yet. We have a couple of satellites that are nearing the end of their lives, and we plan to utilize the capacity from Nimiq-5 to support some of the customers who were using those satellites. Essentially, it's just a realignment of revenue. So, at this point, it's best to consider that we are not providing guidance for 2025 just yet. Stay tuned for that. When we do, we'll aim to give more insight. However, don't view it as new revenue; it will more likely be revenue shifting from customers currently utilizing satellites like Anik F3 and others that are close to retiring.

David McFadden, Analyst

Okay. So, then just a couple of questions on Lightspeed. You're sticking with your CapEx guidance of CAD1 billion to CAD1.4 billion. When I look at the cash flow statement, would that number show up on the cash payment of satellite programs? Because so far, it's about CAD500 million year-to-date.

Andrew Browne, Chief Financial Officer

Yes, I'll answer that. In fact, David, as I said in my notes that if you look at the CapEx itself, if you go to Page 8 of our cash flows used in generating for investing activities, you'll see two amounts—cash payments related to the satellite programs, CAD502 million; cash payments related to property and other equipment, which is also related to aspects of our Lightspeed program. So, that gives you CAD550 million. As we said, given the timing of invoices, cash hasn't been paid, but nonetheless, they were accrued. I could draw your attention to Page 7—trade and other payables. There is an amount of CAD157 million there. Included within that is an amount that I mentioned of CAD111 million. So, if you take the CAD111 million accrued and add the cash paid of CAD550 million, that gives you the CAD661 million that we've called out for capital expenditures.

David McFadden, Analyst

Okay. So, if you're going to actually record the CAD1 billion to CAD1.4 billion, those line items in the cash flow statement are going to be impacted, right?

Andrew Browne, Chief Financial Officer

Yes, correct, 100%.

David McFadden, Analyst

Okay. So, then just on the development of Lightspeed, there's been some talk in the trade press, a number of agreements that I guess you're working on. Can you give us any update on Taiwan, your discussions with providing Lightspeed to the government of Taiwan or something like that?

Dan Goldberg, President and Chief Executive Officer

We saw that there were some news reports about that, but no, our policy is not to comment on any potential discussions we're having with folks. This is not to say that we're not, but I would say— and we've talked about this before—Lightspeed is extraordinarily impactful and useful for governments, particularly as communications requirements evolve. We've seen how the conflict in Ukraine has played out. You might have seen that Australia recently canceled a multibillion-dollar geostationary program with Lockheed Martin due to budget constraints. However, the Australian Minister of Defense came out and said that the cancellation was due to the fact that technology has evolved and we need to meet these requirements. So, in any event, we can't comment on any particular discussions that we're having, but I would note that VIA SAT said on its earnings call last week that they are in discussions with us about a Lightspeed capacity purchase, and we will affirm that.

David McFadden, Analyst

So, just following on that, Lightspeed is expected to be better than Starlink, but no one expects Starlink to stand still, right? I was wondering if you have any comments on that and how would Lightspeed compare with what Starlink is proposing to do?

Dan Goldberg, President and Chief Executive Officer

Yes. I agree with you. Starlink is a great service, which is why they're gaining traction in the market. If people don't recognize that, then I think they're deluding themselves. Therefore, it is incumbent upon all of us to ensure we're bringing to market services that can compete not just with Starlink that exists today, but also with Starlink that will continue to improve over time. We will compete on all the elements we've always needed to, including quality of service, price, and responsiveness. We believe that features like service level agreements or giving our customers more autonomy in managing their bandwidth will be important. Ultimately, we recognize that our customers desire multiple providers to select from, and that is why we're building Lightspeed.

David McFadden, Analyst

Okay. All right. Thanks.

Operator, Operator

Thank you. The next question is from Edison Yu from Deutsche Bank. Please go ahead.

Edison Yu, Analyst

Hey good morning everyone and thank you for taking our questions. I wanted to go back on the 4Q guidance. If you take the range pointed towards and the first three quarters, it's a bit of a step down. Can you talk about the drivers of that? Is that basically all on Nimiq-5?

Dan Goldberg, President and Chief Executive Officer

No, that would be the biggest driver. That contract got re-rated, and it's just a third of the cash on a go-forward basis that we're going to be receiving versus what we did before. In terms of the EBITDA side, we continue to ramp up our cost structure, adding headcount mostly for our LEO activities.

Edison Yu, Analyst

Understood. I noticed there was an update on Shaw in the filing. Can you give us an update on the situation?

Dan Goldberg, President and Chief Executive Officer

Not much has changed. Shaw took the position earlier in the year that for whatever reason, they felt like they had the right to stop paying us. We don't share that view, so we filed a lawsuit against them for CAD45 million in damages. About CAD35 million of that is for revenue payments they owe us under the contract, and the balance would be punitive damages. So, not much to update beyond that; we're pursuing it.

Edison Yu, Analyst

Understood. And last one for me. I know you affirmed the discussions with ViaSat. Can you remind us about the discussions you're having? Does it cater more towards ISV, government, maritime, etc.?

Dan Goldberg, President and Chief Executive Officer

We are engaging with customers across various verticals around the world. The level of engagement has increased significantly since we announced that we're fully funded. There's a sense of urgency, particularly in sectors like aviation, where they need to transition to Lightspeed. Our interactions are across the board—aero, maritime, government services, and traditional backhaul rural broadband.

Caleb Henry, Analyst

Thanks guys. A couple of questions around Lightspeed and LEO constellations. Telesat recently announced a contract for 127 antennas from Intellian. How far does that get you with meeting your gateway needs?

Dan Goldberg, President and Chief Executive Officer

The order with Intellian covers about 27 gateways. We are pleased with the good work that Intellian has been doing—they are leaders in our sector. Some of the sites in Canada will be greenfield, while others around the world will be a mix of existing Teleport facilities and new sites. We feel good about our progress in mapping locations in North America, Asia, Europe, Australia, and Latin America.

Caleb Henry, Analyst

Okay. And I remember in 2020, Telesat was working on interoperability with the Space Development Agency. Does it look like Lightspeed will be able to communicate with the military constellation in the U.S.?

Dan Goldberg, President and Chief Executive Officer

We have been focused on ensuring interoperability as it is important for the U.S. government in their proliferated LEO initiative. This was a key consideration when Telesat and MDA chose TSAT. We are aiming to make Lightspeed interoperable—not just for ISLs but for traffic management systems as well.

Caleb Henry, Analyst

Is there any chance for discussions around interoperability with the IRIS² network?

Dan Goldberg, President and Chief Executive Officer

Telesat has not been involved in the IRIS² initiative as it is a European focused activity. However, it is quite likely that the Europeans will want IRIS² to be interoperable with allied constellations. We operate on Ka-Band, which I believe aligns with IRIS²'s specifications, possibly facilitating interoperability.

Walt Piecyk, Analyst

I thought in the prepared comments when you described the DISH transaction, you noted a 50% reduction over time in capacity and a 70% reduction in payment. But the first questioner said 30% and you didn't correct them. Can you clarify?

Dan Goldberg, President and Chief Executive Officer

Yes, I think I said we expect to receive around a third of what we previously took in cash. It will be about 70% less than the cash we're currently receiving. So, the cash reflects them taking less capacity and the capacity they are taking will be at a lower rate per unit.

Walt Piecyk, Analyst

Got it. Will there come a time when the capacity requirement effectively goes to zero?

Dan Goldberg, President and Chief Executive Officer

It's uncertain; it depends on whether we find other uses for capacity. They still have a significant number of subscribers. Therefore, we will see how it evolves.

Walt Piecyk, Analyst

About the discussions with ViaSat, can you confirm if they have already contracted?

Dan Goldberg, President and Chief Executive Officer

No, we only affirm discussions with ViaSat. They mentioned on their last call that they are engaged in discussions around a Lightspeed commitment.

Chris Quilty, Analyst

Congrats on closing the debt deal. With that in the rearview mirror, where has your focus shifted?

Dan Goldberg, President and Chief Executive Officer

The funding closure has allowed us to focus on various areas, including working closely with MDA, Intellian, and Aalyria. We’re also hiring extensively right now and spending more time engaging with the customer community. The reception has been great, and users are seeking competitive alternatives.

Andrew Browne, Chief Financial Officer

As for our headcount, we began the year with 500 people and expect to close at 700 people—an increase of 40%. Thus, you will see corresponding costs rising as we grow.

Chris Quilty, Analyst

Is there anything else needed on the ground side?

Dan Goldberg, President and Chief Executive Officer

We don't anticipate delays; we've been working on our gateway needs and have mapped out locations. We will have multiple landing stations up and running within two years.

Operator, Operator

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Goldberg.

Dan Goldberg, President and Chief Executive Officer

Thank you all for joining us this morning. We look forward to conversing with you when we release our fourth quarter and full year numbers. Thank you.

Andrew Browne, Chief Financial Officer

Thank you.

Operator, Operator

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