Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call to report the third 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, Mr. Bolitho.

Thank you, and good morning. Earlier today, we issued a news release containing Telesat's consolidated financial results for the 3-month and 9-month periods ended September 30, 2020. This news release is available on Telesat's website at www.telesat.com, under the tab Investors. 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 2019 fiscal year filed with the SEC on February 27, 2020, and our quarterly reports filed with the SEC on April 30, 2020, July 30, 2020, and earlier today. The information that we are discussing today reflects our expectations as of today and is subject to change. Except as required by security 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, and good morning, everyone. This morning, I'll discuss our third quarter and year-to-date financial results and give an update on the business. I'll then hand over to Andrew, who'll speak to the numbers in more detail, and we'll open the call up to questions. For the third quarter and adjusting for FX, revenue was down 14% relative to Q3 last year. Adjusted EBITDA was down 19.5%. And our adjusted EBITDA margin was 80%, which is lower than the roughly 86% we had in the prior period. The revenue decline was driven by 2 contracts we've discussed on prior calls. First, the nonrenewal by Shaw at the end of Q3 last year of one of its DTH contracts; and second, the end of the revenue amortization period of a large prepayment we received years ago from WildBlue on our Anik F2 satellite, each of which has a roughly 3% top line impact, with the WildBlue one being noncash. In addition, in Q3 last year, we recognized revenue from a short-term satellite services agreement with another satellite operator, something that didn't recur in Q3 this year. Lastly, and of less consequence than these other factors, we had some revenue headwinds owing to COVID. OpEx was up by approximately $4 million in the quarter versus Q3 last year, principally from increased compensation driven by our LEO program as well as higher fees for professional services. And turning to our results for the first 9 months of the year and, again, adjusting for FX, revenue decreased 10% versus the prior period. OpEx was up 16%. Adjusted EBITDA was down 16%. And the adjusted EBITDA margin was nearly 80%, which was down from nearly 85% last year. The revenue and expense variances were in the main, driven by the same factors accounting for the changes Q3 over Q3, but with the addition of some COVID-related bad debt expense we recognized in the first half of this year. Turning to some key metrics. Backlog at the end of last quarter is $2.8 billion, and fleet utilization was 81%. And looking at how our revenues broke down on an application basis for the quarter, broadcast was 51% of total revenue; enterprise services, 46%; and consulting and other, 3%. On a geographic basis for Q3, North America accounted for 82% of revenue; Latin America, 8%; EMEA, 5%; 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 support our customers through the pandemic. So with that, I'll hand over to Andrew.

Thank you, Dan. Good morning, everyone. I would now like to focus on highlights on this morning's press release and filings. Overall, as Dan has noted, in quarter 3, we achieved revenues of $202 million, adjusted EBITDA of $162 million with over $1.2 billion of cash on the balance sheet at quarter end. This is an increase of approximately $215 million since December 2019. Our adjusted EBITDA was driven by lower revenues and higher operating expenses. The revenue decline was partially driven by 2 contracts we anticipated and discussed on our prior calls. Firstly, the nonrenewal by Shaw at the end of Q3 last year of one of its DTH contracts. And secondly, 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 is noncash. We note the 2 factors when anticipated at the beginning of the year have an impact on our revenues, lack of opportunities to provide short-term services to other satellite operators and the impact of COVID-19 pandemic. In the third quarter of 2019, we provided short-term service to our satellite operators and that revenue we did not see in 2020. Operating expenses were up $4 million in the quarter versus the same quarter last year. The increase is mainly attributable to higher compensation and professional fees incurred in support of our Low Earth Orbit program. We made no further bad debt provisions during the quarter. Our adjusted EBITDA margin was 80.4% as compared to 85.7% in the fourth quarter of 2019. Compared to third quarter of 2020, with the same period in 2019, changes in the U.S. dollar exchange rate had a negative impact of $1 million on revenues, no impact on operating expenses and a negative impact of $1 million on adjusted EBITDA. Depreciation and amortization decreased by $9 million during quarter 3 compared to the same period in 2019. The decrease was mainly due to the useful life for accounting purposes of Telesat and [indiscernible] satellite in the fourth quarter of 2019. Interest expense decreased by $14 million in the third quarter of 2020. This decrease was mainly due to the refinancing of Telesat's debt at lower interest rates in the fourth quarter of 2019. In the third quarter, we recognized the gain of $6 million significant on financial instruments reflecting changes in interest rates during the quarter and consequent changes in the fair value of our interest rate swaps and the prepayment options on our senior and senior secured notes. In 2020, as the value of the U.S. dollar decreased by about 1.9% from the end of the second quarter of 2020, we also recorded a gain on foreign exchange of $66 million during the fourth quarter, which arose on the translation of Telesat's U.S. dollar-denominated debt in Canadian dollars. Tax expense for the quarter was $16 million. For the 9 months ended September 30, 2020, cash inflows from operating activities were $300 million and cash outflows used in investing activities were $78 million. As noted on our March 31, 2020 call, we continue to expect our cash outflows used in investing activities to be in the range of USD 60 million to USD 80 million during 2020, including capital expenditures relayed in connection with our LEO constellation prior to making a full commitment with our prospective suppliers. There may be meaningful additional CapEx this year in connection with LEO if we enter into definitive contractual commitment to build constellation. If we make such commitments, we would expect it will take our CapEx guidance accordingly as we go forward. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we had approximately $1.2 billion of cash and short-term investments at the end of the second quarter as well as approximately USD 200 million of borrowings available on their revolving credit facility. Approximately, $444 million in cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant amount of cash from our ongoing operating activities. At the end of the quarter, Telesat has complied with our covenants in our credit agreement and indenture. A reconciliation between our financial statement and financial covenant calculations is provided in the report we filed this morning. So with this, that concludes our prepared remarks for this call. I'm now happy to answer any questions you may have. I will now turn back to the operator.

[Operator Instructions] The first question is from Mike Pace with JPMorgan.

I guess, Dan, in the past, I think -- this is going back a few years ago, I guess. You talked about the percentage of your business that you thought was susceptible to HTS capacity. And I'm wondering if you guys have thought about that same question for LEO capacity. Obviously, some of it would be from you. And how you think about how those existing customers might, could, would transition to a LEO constellation? Does that make sense economically for them with switching costs, et cetera? So if you could start there, I have a few follow-ups as well.

Yes. Thanks, Mike. We've done a lot of work on that, actually, evaluating kind of our existing customers and looking at how their networks are configured and making judgments about which of those would sort of be logical candidates to transition to LEO over time. And so obviously, it's not our DTH business. I've got to say there's a bunch of background noise. I don't know if there's somebody that can -- if the operator can help out. So the DTH is a little bit less than half of our total revenues. That wouldn't go. And then there are -- in our non-DTH business, there are -- yes, some set of requirements that look like they'd be a really good fit for LEO. Networks that are, yes, just very much focused on big broadband links, which is what LEO is really well optimized for. And I would say, probably true for a significant part of maritime activities, particularly cruise, and we think aero as well. We think those are our customer segments that would be natural. So beyond that, I wouldn't want to make any, I don't know, projections just at the moment on kind of what portion of our current enterprise business would move over to LEO. But at a high level, that's what it looks like. And I would say, transitioning customers doesn't happen overnight. It's a lot of work to go into the field. Certainly, even for the customers that would -- maybe excluding the mobility customers, aero and maritime, whose antennas already contract. But it wouldn't happen without a meaningful amount of work even with those customers that track at a minimum, they're going to need a new modem that's compatible with our new LEO system. So -- but over time, look, we think that LEO is going to be just a phenomenally compelling value proposition. It's going to be super high throughput, super low latency, extraordinarily reliable, extraordinarily secure, and we can achieve a price point that is lower than what can be achieved with GEO. So anyway, Mike, those are some high-level thoughts.

Well I guess then to follow up on that, another question I had was, I think it was at the last call, but you said that you're not really going after the consumer broadband marketplace. And I do realize your business model is more of a wholesaler. But I guess is that Telesat personally that isn't going to go after a consumer broadband vertical? Or could resellers might come in, buy your capacity and take on that segment? Or does the business case not make sense for consumer broadband for your LEO constellation?

Well I mean it's -- you're right. I mean we're focused on more of a B2B orientation when it comes to -- right, I mean there are 4 verticals we're focused on; backhaul connectivity for mobile network operators and telcos and ISPs, aero, maritime and government services. For that first category, it's absolutely the case that telcos, ISPs, others are going to be taking our capacity and then providing a service to their customers, many of whom are our consumers. That's how it works today with the vertical that we serve and it's absolutely going to be the case with LEO. That will be 5G. It will be LTE. It will be YMax, Wi-Fi, it will be all that. I guess what you're driving at, though, is will those enterprise customers do kind of a direct-to-home business? Will they take a Telesat LEO terminal and install it on somebody's house? That's not really our focus, and I don't think -- those aren't the conversations that we're having today with our telco ISP customers. And yes -- and the reason is we're still skeptical that the antenna that would go on a consumer's home is going to be low cost enough and high-performing enough for that to make sense. I do believe in the fullness of time, whatever the hell that means, that, that antenna will be available and that our constellation can support going to the consumer markets when that antenna is cheap enough and capable enough. But that's not on our kind of near term, even medium-term road map. But what do I know, if that antenna comes a little bit sooner than we would expect and it should come, right? It's going to be -- the great thing about being in Ka-band is it leverages the whole millimeter wave 5G ecosystem, all the antennas and chipsets that are going to be built for that. But in any event, it's not on our kind of near-term, medium-term road map. And if it comes sooner, that will be great, that will be upside for our business case. But it's not how we think about it right now.

Okay. Fair enough. And then as it relates to Canadian C-band. And again, I know this has been brought up before. But just is there -- can you give us a quick refresh, if there is, on any regulatory deadlines or milestones or any updates that you've had with regulators since the last time we spoke?

Yes. No, it's timely. I mean I think -- let's see. The government of Canada issued what is called a consultation. It's like a rule-making proceeding in the U.S., issued a consultation document in August, proposing to reallocate some C-band spectrum to -- -- for mobile terrestrial use, principally 5G, not unlike is what is the plan south of the border to free up C-band spectrum and make it available for mobile network operators for 5G. They appended to their consultation Telesat's own proposal that we made to the government of Canada. That, as far as I know, was unprecedented that the government would append a private party's proposal to a consultation like that. Comments were actually due on Monday, so earlier this week. We believe there's going to be strong support for the proposal that we've made. And at a high level, our proposal is that we would meaningfully accelerate the clearing of C-band spectrum so that it can be made available to Canadian mobile network operators at the same time that other mid-band spectrum is planned to be made available. The government of Canada right now plans to auction 3,500 megahertz spectrum in June of next year. And under the Telesat plan, we would double the amount of spectrum -- mid-band spectrum that's available for mobile network operators in that time frame. So in any event, comments went in on Monday. And again, we don't have access to all of those comments at this point. They haven't been published yet. But we think there's going to be some strong support for our proposal. We believe it is really the only path where lots of mid-band spectrum can be made available in the near-term for 5G and being able to make that spectrum available without prejudicing the important services that are currently being provided with that spectrum. And it's much like -- in some ways, it's like in the U.S., it's broadcast. But here in Canada, in addition to broadcast, it's world broadband services, it's public safety services, it's national security services. So you've got to find a way to seamlessly transition those users if that spectrum is going to be made available for 5G and Telesat to come forward really with the only plan to do that. So anyway, comments came in on Monday. Reply comments will be due in a couple of weeks. The record should be right for consideration by the end of this year. And so we'll see. But I'd say that's the update. I'm cautiously optimistic that our plan will be the one that is adopted just because we think it more than anything else advances kind of all the key policy objectives, getting 5G out there, not prejudicing the existing important services and giving Telesat some proceeds that we've committed to invest in our LEO project, which the government has been a strong supporter of because it is a great way to bridge the digital divide here in Canada and create a lot of jobs in an export-driven sector, which is to say, kind of the new space economy. So anyway, that's what it looks like to us right now, Mike.

The next question is from Robert Strougo with RIS Investments.

The LEO [indiscernible] pretty expense [indiscernible].

Robert, I'm afraid you're breaking up and we can't hear you very well.

LEO is going to be expensive to build-out. Am I right about that? Do you hear me?

Just barely, Robert. If there's anything you can do to have a better connection, that would be helpful.

I put you on speaker. Can you hear me better now?

Not really. But anyway, go ahead, ask your question. If we can make it out.

All right. LEO probably is going to be quite expensive to build-out. There's talk that you're going to be going public. Could you tell us what is the status of that? And what you'll be getting on the C-band because you have very valuable C-band also? Could you tell us about the financial situation because you're indicating you have $1 billion in cash? Loral and the pension company, Canadian pension fund, owns all your stock. So could you tell us what's going on there? I guess Loral stock is going down and the talk is that you're trying to go public.

Yes. I was able to hear that. It sounded like there were kind of a couple of questions there. So on what we refer to as the roll-up, which Loral has made some disclosure about before, I think the last disclosure that Loral and Telesat made on the roll-up was back when we released Q2 numbers. And at the time, both Telesat and Loral said that Telesat shareholders were in advanced discussions around the roll-up. We don't have an update to that right now, but that kind of remains the status. So when something -- when there's been a material development there, we'll update the disclosure. On LEO, what we've said before is that, that project we expect would be sort of multiple billions of dollars of CapEx. We haven't said anything further than that. At this time, we've said that we expect it would be financed kind of roughly 1/3 equity, 2/3 debt. We've said, in terms of the debt that we would be looking to project finance it and to work with export credit agencies in North America and Europe, where most of the content for the LEO project would be produced that we would be looking to the export credit agencies to provide the debt financing for that. On the equity, yes, we pointed to the cash that we have on the balance sheet. We pointed to C-band proceeds that we expect to receive from the U.S. C-band clearing process there. Telesat was allocated, I think it was $344 million to clear our C-band spectrum down there. We're making good progress in terms of our ability to clear that spectrum by the FCC's deadlines with Canada. I just gave the status on where the C-band process is in Canada. We don't know what the Government of Canada will do. I said, we think we've put a great proposal forward. We've committed to take any proceeds that we receive from that process and invest them in Telesat LEO. But it's a bit early to speculate as to where that process will land and what the magnitude of those proceeds will be. And certainly, if Telesat were to go public and if Telesat were to issue equity as part of that process, certainly, the proceeds of an offering could be used to invest in LEO. So anyway, that's where all of that stands right now.

Let me ask you a question about Loral. Loral owns quite a bit of your stock in the pension -- Canadian pension company owns quite a bit of your stock. You have a lot of cash. I know you want to use it for LEO. But what about buying back some of that stack or taking the company public? As far as I know, you're in the process of going public. I don't know if that's revealed to the world, but I believe you have to go public in order to do LEO. And you just indicated you're doing 1/3 stock and 2/3 debt on the LEO, and I hate to think about a company like Intelsat that got itself with so much debt that they filed for bankruptcy, even though they got most of the C-band. So the question I have is where are we at this process. I mean -- I think you've got the greatest thing going, must loved it, too, the LEO and the uses are boundless for companies that would want to utilize it. I don't know about an Apple or something like that or whether -- if they talk about consumer. But certainly, Apple would like to have its own way of doing things through the Internet versus going through everybody else and every other company that I could think of. So -- but you're not getting financing from them. It seems like you're going to do your own financing. Could you just tell us -- give us an idea of what your plans are for the future?

Yes. Well Robert, I mean I agree with you. We're super bullish about the opportunity and the prospects for Telesat LEO. We're -- we've been in this industry for over 50 years, I think we're extraordinarily good at what we do. I'm totally persuaded that we've designed the most capable, advanced, compelling Low Earth Orbit satellite constellation that will be extraordinarily well received in the market and should be a great investment for us. So that's -- we've been working on this project for some years now. And yes, we're very bullish about its prospects. So I described our plans in terms of how we're going to go about financing the project. But yes, no, I think -- I'm in violent agreement with you. It's a great opportunity. The returns on that investment should be very compelling. And we think it's a great use of our capital in terms of growing the business and creating a lot of equity value going forward. So with that, Robert, I think I got to cut you off here. But we appreciate your questions, and look forward to catching up later, maybe.

The next question is from [ Joe Grgurich ] with Pretium Partners.