Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call to report the first quarter 2020 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.

Thank you, and good morning. Earlier today, we issued a news release containing Telesat's consolidated financial results for the 3 months’ period and through March 31, 2020. This news release is available on Telesat's website at www.telesat.com under the tab Investor Relations. We also filed our quarterly report on Form 6-K with the SEC this morning. 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 additional information about known risks, we refer you to the Risk Factors section of our annual report on Form 20-F for the fiscal year ended December 31, 2019, filed with the SEC on February 27 and also to the updated risk factors contained in today's Form 6-K filing. The information that we are discussing today reflects our expectations as of today and are subject to change. Except as required by securities laws, Telesat disclaims any obligation or undertaking to update or revise this information, whether as a result of new information, future events or otherwise. I will now turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer.

Thanks, Michael. Good morning, everyone. This morning, I'll discuss our first quarter financial results and give an update on the business. I'll then hand over to Andrew who will speak to the numbers in more detail, and then we'll open the call up to questions. First quarter came in consistent with our expectations at the outset of the year. Looking at the quarter and adjusting for FX, revenue was down 5% relative to Q1 2019, OpEx was up 16%, adjusted EBITDA was down 10%, and our adjusted EBITDA margin was 79.6%, lower than the roughly 84% we had in the prior period. The revenue decline was driven by 2 contracts we've discussed on prior calls, including on our last earnings call: first, the nonrenewal by Shaw at the end of Q3 last year of one of its DTH contracts, which we've said has an adverse impact on annualized revenue of approximately 3%; and second, the end of the revenue amortization period of a large prepayment that we received years ago from WildBlue, now Viasat, on our Anik F2 satellite, which also has a roughly 3% top line, in this case, noncash annualized impact. Viasat continues to use Anik F2, and it's now on a cash-pay basis, although it's for a lower dollar amount relative to what we were amortizing previously. Revenue reductions from those contracts were offset in part by increased revenue in the quarter from equipment sales and from restoring certain services when the Intelsat 29e satellite failed last year. OpEx was up around $6.4 million in the quarter versus Q1 last year with most of that increase coming from a higher bad debt provision we took in the quarter, some increased in-orbit insurance expense and slightly higher compensation expense. The bad debt provision was the biggest contributor and which is for a customer that provides broadband service to planes and ships, a business, which, obviously, has been badly impacted by the collapse in commercial air travel owing to the pandemic. About 10% of our total revenue comes from customers providing broadband to planes and ships, and we expect this will be the area where we have the most impact from COVID-19. We are seeing some increased demand from certain customers as a result of the pandemic, namely, rural ISPs we serve in Canada and Alaska who need more capacity to support the increased use of their networks at this time. But we don't expect increased revenue from them will fully mitigate reduced revenue from the aero and maritime markets. Turning to some key metrics. Backlog at the end of Q1 was $3.2 billion, and fleet utilization was 82%. Looking at how our revenues broke down on an application basis for the quarter, broadcast and enterprise services each represented approximately 49% of total revenue; and consulting and other, 2%. And on a geographic basis for Q1, North America accounted for 81% of revenue; Latin America, 8%; Europe, Middle East, Africa, 6%; and Asia, 5%. Looking ahead, we remain strongly focused on commercializing our available in-orbit satellite capacity, maintaining our operating discipline, further developing our advanced LEO constellation and leveraging our valuable spectrum rights, all while we're doing everything we need to do to keep our employees safe and to support our customers through the pandemic. We still aim to be in a position to make some announcements about suppliers for our LEO constellation roughly mid this year and to enter into service with LEO by the end of 2022 with full global service available in 2023. And with regard to the spectrum rights, we were pleased with the final C-band order the FCC released last quarter, and we're taking steps to ensure we can timely transition our customers off the spectrum so that we can secure the USD 344 million in early clearing incentive payments the FCC allocated to Telesat. So with that, I'll hand over to Andrew, and then look forward to addressing any questions you may have.

Thank you, Dan, and good morning, everyone. I would like to go over some highlights on this morning's press release and filings. Overall, as Dan has noted, Telesat had a quarter which is very much in line with our expectations at the beginning of this year: revenues of $209 million, adjusted EBITDA of $166 million and over $1.2 billion of cash on the balance sheet at quarter end. Our adjusted EBITDA margin was driven by lower revenues and higher operating expenses. The revenue decline was driven by 2 contracts, as disclosed on our prior calls, including on the last earnings call: first, the nonrenewal by Shaw at the end of June 3 last year of one of its DTH contracts; and second, the end of the revenue amortization period of a large prepayment that we had received several years ago from WildBlue, now Viasat, on our Anik F2 satellite and indeed is noncash. Looking at operating expenses, we're up $6 million in the quarter versus the same quarter last year, but a higher bad debt provision, some increased in-orbit insurance and slightly higher compensation expense and professional fees. Our adjusted EBITDA margin was 79.6% as compared to 84.2% in the fourth quarter of 2019. Comparing the first quarter of 2020 with the same period in 2019, changes in the U.S. dollar exchange rate had a negative impact of $2 million on revenues, no impact on operating expenses and a negative impact of $2 million on adjusted EBITDA. Depreciation and amortization decreased by $8 million during the first quarter compared to the same period in 2019. The decrease was mainly due to the end of useful life for accounting purposes of Telesat's Anik F2 satellite in the fourth quarter of 2019. Interest expense decreased by $10 million in the first quarter of 2020. The decrease was mainly due to the refinancing of Telesat's debt at lower interest rates in the fourth quarter of 2019. In the first quarter of 2020, we recognized a loss of $44 million on financial instruments, reflecting lower interest rates during the quarter and consequent changes in the fair values of our interest rate swaps, the prepayment options on our senior and senior secured notes. In 2020, as the value of the U.S. dollar increased by about 8% from the end of 2019, we recorded a loss on foreign exchange of $291 million here in the first quarter, which arose from the translation of Telesat's U.S. dollar-denominated debt into Canadian dollars. Tax recovery for the quarter was $3.8 million. For the first quarter of 2020, cash inflows from operating activities were $109 million, and cash outflows used in investing activities were $2 million. Also, as noted on our March 1, 2020, call, we continue to expect our cash outflows used in investing activities in 2020 to be in the range of USD 60 million to USD 80 million, including capital expenditures we may make in connection with our LEO constellation partner making a full commitment with our respective suppliers. There may be meaningful additional CapEx this year in connection with LEO if we enter into a definitive contractual commitment to build the constellation, which, as Dan said, we may be doing sometime this year. If we make such commitments, we would expect to update our CapEx guidance accordingly. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.2 billion in cash and short-term investments at the end of quarter 1 as well as approximately USD 200 million of borrowings available under our revolving credit facility, approximately $536 million in cash withheld in our unrestricted subsidiaries. In addition, we continue to generate significant amounts of cash from our ongoing operating activities. Also, at the end of the quarter, Telesat has complied with all covenants in our credit agreements on indentures. A reconciliation between our financial statements and financial covenant calculation is provided in the report we filed this morning. So that concludes our prepared remarks for this call, and now we will be happy to answer any questions you may have. I will now turn it back to the operator. Thank you.

[Operator Instructions] We will turn to our first caller.

This is Mike Pace from JPMorgan. So a couple for me. I guess, thanks for the info on the aero and maritime exposure. Can you just maybe -- is this all through resellers? And I guess, regardless of that, how these contracts are written and kind of what are your expectations on getting this money over the course of the year? Are payments being put on pause in the current environment? Or in some cases, I suspect you might have to kind of wait until some other things get worked out. But if you could start there. I had a few more. I'll just do one at a time.

Yes. I mean -- so we've got a handful of customers and we said in the aggregate, for last year, about 10% of our total revenue for maritime and aero. And yes, they're broadband service providers to the commercial airline industry. And for some of them, for the maritime market, principally cruise, I would say it's where most of the activity is. And they're all in a little bit of a different situation. I mean, obviously, they're all exposed to planes not flying and cruise ships not being out there. But their own arrangements with the airlines or the cruise ship industries might be different. Some of them might have take-or-pay contracts. Some of them might have revenue shares. Our arrangements with our customers are all take-or-pay. And yes -- and they are in different situations. So I think we've pretty much heard from all of them who have come in looking for us to work with them to help them during this period, and those are conversations that are ongoing. We are reasonable, constructive people and we've worked with these folks for a long time. So we'll try to do something. What impact it has on this year, it's still too early to tell, candidly. We did take the debt provision -- the bad debt provision in Q1. That was the biggest contributor to the increase in OpEx. So anyway, it's still a little bit too early to say what impact it'll have net-net. And as I mentioned in my remarks, we have seen an uptick in some business for some customers, but we don't expect that will be enough to fully mitigate the adverse impact. But it's just still a little bit too early to say where we'll land net-net. But again, recognizing that it's 10% order of magnitude of our total revenue. Some planes are still flying. Some ships are still out there. So it's not like all of that's gone away. The airline industry around the world is going to get some government support, and they already are. And that will trickle down, I'm sure, to some extent, to at least some of our customers. So anyway, it's a big conversation with these folks and it'll play out, I'm guessing, in the coming weeks and months. So I hope that was helpful. I mean that's just about as accurate and candid as we can be. That's the situation.

Yes. No. I understand. And then can you also remind us what your exposure is to the energy sector? I believe that is a number that has come down meaningfully over the last few years. And I'm curious what...

Yes. It's trivial. I mean it's like order of approximately 2%. It's just not a big part of our business. You're right, it needs to be bigger. But the energy market has faced headwinds for years, obviously, and our revenue from that segment has declined over years.

Okay. Here's an easy one, I guess, just to be clear because I didn't see it in the Q or in the release. But there were no short-term satellite services revenue in the first quarter, correct? And also, how does that look for the cadence of 2020?

Yes. We -- usually, when we have really those in the quarter, we call it out. You're right, we did not have one in Q1. Yes, it's still too early to say. We've always said that revenue from that activity is lumpy. It's a little unpredictable. So nothing in -- I don't think we're going to see any of that in the first half of this year at this point. So -- and then stay tuned for second half.

Okay. And then just kind of a big-picture question, Dan. So I'm curious. So every year, right, you guys show up on January 1 with a certain percentage of your budgeted revenues like booked and under contract. And I guess, typically, what is that percentage on Jan 1? I recall 80-ish percent on either side or something like that. So I'd love a comment from there. And then what are typically the sources of that difference that you still need to earn over the course of a given year?

You're right. We show up Jan 1 every year, historically at least, with, on average, around 80%, kind of low 80% revenue secured, which is to say it's in backlog. And then the delta is, of course, contracts that come up for renewal in the year. It will be equipment sales, for instance, which are more kind of onetime events, but we almost always have some. We've got other -- some percentage of our revenues with customers that are more kind of recurring in nature. So for instance, we support some enterprise like point-of-sale networks and they're oftentimes what we call moves, adds and changes throughout the year that always generate some revenue. There are those short-term satellite services that we mentioned. Sometimes, we have 1 or 2 under -- up already under contract by Jan 1. More often than not, we secure those throughout the course of the year. And the new business stuff that's in the pipeline and it's kind of new business that we close throughout the year, that would account for almost -- I'm looking at one of my colleagues, but I think that's kind of the full waterfront of -- where that other order of magnitude 20% comes from in any given year. And that's been -- I mean I've been at Telesat for 13-plus years. It's been the case ever since I've been here, and if I had to guess, at least a few years prior to me showing up. So I hope that was helpful.

It is super helpful. And just last quick one. Just C-band, Canada, not U.S., any conversations with regulators up there? I realize everybody is probably thinking and worrying about other things these days, but any update on that would be great.

Yes. There are conversations. I mean Canada is in much the same kind of situation as the U.S. was in terms of the need for mid-band spectrum to support 5G rollout in Canada. The relevant regulators here is a department called ISED, Innovation -- oh, god. It used to be called Industry Canada, which is a whole lot easier.

Innovation, Science and Economic Development.

Thank you, Michael. Innovation, Science and Economic Development. We have a great relationship with ISED, and before them, Industry Canada. And so they're supposed to conduct an auction of 3,500-megahertz spectrum for 5G, supposed to be in December. There's some risk that, that could slide down a little bit because of the pandemic, but my own expectation -- my own expectation is it will probably slide but not by very much, but we haven't heard word on that yet. But yes, there's not enough spectrum in the 3,500-megahertz spectrum to satisfy all the spectrum requirements of the Canadian wireless carriers. ISED has already begun what in Canada is called a bit of a consultation; in the U.S., that would be like a notice of proposed rulemaking to identify expansion mid-band spectrum. So obviously, C-band is adjacent to that 3,500-megahertz swap. And so Canada follow very closely what happened in the U.S. And we are the largest C-band satellite user in Canada. So we've had some conversations with the department around that and some of the carriers around that. And still too early to tell how that all plays out, but yes, suffice to say that there's mid-band spectrum shortage in Canada. The Canadian regulators have already identified some portion of the C-band spectrum as a likely source of filling that spectrum deficit. And we've got good, constructive relationships with ISED, with the carriers here and so -- but it's still too early to tell how that all plays out.

We'll go to our next question.

Matt Lapides with ABRY. Quick question. Can you remind us how we should think about potential LEO costs as you think about that going forward? And if you're getting closer to contracting for that midyear, how should we think about the capital needs for that program, at least on sort of a high-level basis?

Well, a high-level basis -- this is Dan. I'll just repeat -- so first off, I'd say we've given CapEx guidance for the year, which Andrew then -- he probably did reiterate and I wasn't paying attention.

Yes, between USD 60 million to USD 80 million.

Yes, between USD 60 million to USD 80 million. So I think we've been clear that, that excludes any legal CapEx that would arise from us definitively committing to a manufacturer to move forward with the LEO constellation. There's some spending, including capital spending, in support of LEO as we are in what is the development stage, but nothing like the CapEx that we would incur if and when we commit to the project. So that's kind of what we've said so far for this year. And then I'll just repeat what I've said before about the total capital requirements for LEO, which we've said to be some multiple billions of U.S. dollars. We've said that once we enter into commitments with suppliers, satellite manufacturing suppliers, launch suppliers, [ up-ground ] segment providers, then we give much more precise CapEx guidance around what the overall cost. But for the time being, it's just the USD 60 million to USD 80 million for this year explicitly excluding any additional CapEx that would come from real LEO capital commitments, and then beyond that, just kind of multiple billions of dollars of CapEx guidance for what the project could entail.

Got it. Appreciate that. And then a follow-up from one of the earlier questions. Your short-term satellite services in first quarter, and it sounds like you're not expecting it in second quarter as well, can you remind us what that might have been in 1Q and 2Q of 2019?

Does anyone recall -- we're just looking at that right now. We should have that information, what short-term satellite services revenue we recognized first half last year, order of magnitude.

First half last year? Just a little $7 million.

Okay.

For the first half? Got it. Okay.

We'll go to our next question.

Jason Kim from Goldman. The first question for Dan, do you expect any impact from either COVID or one less restructuring to your LEO project, whether it's timing, potential financing kind of mix tweaks to business plan? Any impact you see?

I don't think so, Jason. What do I say, we're quite bullish on the prospects of our LEO constellation, our LEO business plan. I genuinely take my hat off to all the things that, one, we have achieved. We've said many times, these LEO constellations, it's heavy lifting. There's a lot of work, technical, regulatory, commercial, that's required to move one of these projects forward. And Telesat has been around for 50-plus years and has the depth of resources in all of those areas. And even for us, it's a challenge. I mean it's a lot of work. And so I think what, one, we have achieved as a startup, having successfully gotten our spectrum rights and placed satellites in orbit and having raised the financing they have, I think it's impressive. That said, we always believe that the constellation that we were bringing was just qualitatively better. They always talked about kind of a first-gen constellation and a second-gen constellation using that parlance. We kind of just went right to gen 2, which is a very advanced constellation with terabits of capacity and optical inter-satellite lengths and digitally processed payloads and phased array antennas that can dynamically lay down the capacity where we need it. So -- and I think that the customers, the financing sources, even the regulators are fairly sophisticated and they understood the relative strengths and weaknesses of these different constellations that are coming forward. I'd also say that we always focused on, always, the enterprise market, right? We're not focused on kind of direct-to-consumer broadband, which was one that's focused, at least initially. And so -- and we've been engaged with the customers, the regulators, the financing sources for quite some time. And I think they always had an appreciation for how our constellation is different and how our prospects were different. So it's a lot of words just to say, no, I don't think it's going to change how we think about it. I don't think it's going to change how the financing sources think about it. For sure, one thing that's impacted, we do believe that broadband at planes, including commercial airlines, and to ships, including the cruise ship industry, we think that, that's a market, that our LEO constellation will have significant competitive advantage in. And yes, that's a market that's obviously kind of on pause right now and the airlines and cruise ship companies are really suffering right now. But our constellation isn't going to be -- the global constellation won't be in service until 2023. I believe that the aeronautical market and the cruise ship industry will have recovered to some extent, whether it will be fully back to where it was pre-COVID, whether it will be -- have surpassed that or whether it will be a little bit less, candidly, I don't know. But I think planes will be fine and people will be traveling and ships will be out there, including cruise ships. So maybe some of the customer precommitments that I would have thought that we could have gotten, we'll probably have to rethink that. But overall, I'd say our LEO thesis remains intact notwithstanding what happened to one with -- and notwithstanding the impact that COVID is having right now, particularly on aero and maritime.

Okay. That's very helpful. And then on OpEx, are you able to quantify the bad debt provision you took in the quarter from the mobility customer? And obviously, things are still fluid, but how should we think about your OpEx, excluding bad debt-related issues for rest of the year?

Andrew, do you want to hit that?

Yes. I think as Dan has said, that, indeed, we're being very prudent, along with all of our customers, in terms of discussing what their needs are, what their challenges are. And of course, the reciprocal of that is to do with accounts receivable. So as Dan has outlined, it was a particular customer. We felt it was prudent just to take a provision. I would label it as a provision. It's not a write-off, so we're still discussing with that customer. We still have good expectations of getting paid. Nonetheless, I think, being a prudent company, that's what we have done. So as we see going forward for the rest of the year and given the levels of engagement we have with our customers, at this particular point, we don't anticipate any sort of significant sort of changes or extra provisions. Obviously, it's an ongoing sort of situation and crisis we're dealing with. But as I would see it today, I think we feel fairly comfortable. And I think for the rest of our OpEx, it's very predictable sort of going forward. So I think that's what I would say.

Yes. And maybe I would just contribute that I think you asked -- I thought you asked, Jason, sort of -- kind of what was the order of magnitude of that bad debt provision and...