Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call to report the fourth 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 1-year periods ended December 31, 2020. This news release is available on Telesat's website at www.telesat.com under the tab Investors. We also filed our annual report on Form 20-F 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 2020 fiscal year filed with the SEC today. The information that we are discussing today reflects our expectations as of today and is 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.

Okay. Michael, thank you, and apologies to everybody for the late start. Our conference provider is having some technical difficulties. So thanks for sticking with us. This morning, I'll discuss our fourth quarter and full year results and give an update on the business. I'll then hand over to Andrew Browne, who will speak to the numbers in more detail, and then we'll open the call up to questions. So looking first at the full year numbers and adjusting for foreign exchange rate changes, revenue was down 10% relative to the prior year. Operating expenses were 9% higher, adjusted EBITDA was 14% lower and our adjusted EBITDA margin was 79.6% compared to 83.7% in the prior period. The revenue decrease was due to lower short-term services provided to other satellite operators; the nonrenewal by Shaw at the end of Q3 2019 of one of its DTH contracts; the end of the noncash revenue amortization period of a large prepayment we received years ago from WildBlue on our Anik F2 satellite; and the impact of COVID-19, particularly on customers serving the aeronautical and maritime markets. Roughly 60% of the revenue decline last year was from the Shaw nonrenewal and the end of the WildBlue prepayment amortization, the impact of which had been cycled through our results at this point. The increase in operating expenses last year was due to higher professional fees related to higher bad debt expense related to customers hurt by the pandemic; our rolled plan -- I'm sorry, our planned roll-up transaction; higher in-orbit insurance expense; and higher wages due principally to increased headcount to support development of our Lightspeed LEO satellite constellation. Turning to the fourth quarter and adjusting for FX, revenue was down 7% relative to Q4 2019 as a result of lower short-term satellite services provided to other operators. Operating expenses and adjusted EBITDA were about 7% lower. And our adjusted EBITDA margin was 79.5%, which was pretty much flat with Q4 2019. Turning to some key metrics. Backlog at the end of 2020 is $2.7 billion, and fleet utilization was 81%. And looking at how our revenues broke down on an application basis in 2020: broadcast was 50% of total revenue; enterprise services, 48%; and consulting and other, 2%. And on a geographic basis for the year, North America accounted for 82% of revenue; Latin America, 8%; EMEA, 5%; and Asia, 5%. I'm particularly pleased with all the good work we did last year to position Telesat for future growth, including announcing the roll-up transaction and taking steps to realize value from our desirable C-band spectrum rights, both of which can help us fund our growth plans, including the Lightspeed constellation. Last month, we announced that we've selected Thales Alenia Space to build Lightspeed and also that the government of Quebec is making a significant investment in the project. There's some background noise, operator. I don't know if you can do something about that. Lightspeed is the most advanced LEO broadband constellation under development and will give Telesat and our customers a decisive competitive advantage in serving the global enterprise broadband connectivity market, helping to bridge the digital divide around the world and fueling our growth for years to come. We expect to complete financing for the project in the coming months, launch the first Lightspeed satellites in roughly 2 years' time, with customer beta testing beginning shortly thereafter and start commercial services in the second half of 2023. Looking ahead to the balance of this year, we remain strongly focused on a number of key priorities, including commercializing our available in-orbit satellite capacity, maintaining our operating discipline, executing on the Lightspeed constellation, leveraging our valuable C-band rights and completing the roll-up transaction, promises to be a very busy year. With that, I'll hand over to Andrew, and then look forward to addressing any questions that you might have.

Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In 2020, Telesat's reported revenues were $820 million, adjusted EBITDA of $653 million and generated $279 million of free cash flow and with over $800 million of cash on the balance sheet at year-end. During 2020, Telesat repaid USD 355.7 million of debt, including $341.4 million during the fourth quarter. For the full year 2020 and compared to the same period in 2019, revenues decreased by $90 million to $820 million, operating expenses increased by $15 million to $181 million and adjusted EBITDA decreased by $109 million to $653 million. Accordingly, our adjusted EBITDA margin was 79.6% as compared with 83.7% in 2019. Between 2019 and 2020, changes in the U.S. dollar exchange rate had a positive impact of $3 million on revenues, a positive impact of $1 million on operating expenses and a positive impact of $4 million on adjusted EBITDA. When adjusted for the changes in ForEx rates, revenue decreased by $87 million for 2020 when compared to 2019, operating expenses increased by $15 million and adjusted EBITDA decreased by $106 million. The revenue decline was partially driven by two contracts we anticipated and discussed on our prior calls. Firstly, the nonrenewal by Shaw at the end of Q3 2019 of one of its DTH contracts; and secondly, the end of noncash revenue amortization period for the very large payment that we'd received several years results from WildBlue, now Viasat, on our Anik F2 satellite. In addition, we also had lower short-term services provided to other satellite operators and the impact of the COVID-19 pandemic. The increase in operating expenses for 2020 was due to higher professional fees relating to proposed rollout transaction; higher bad debt expenses related to customer impacts by COVID-19; higher in-orbit insurance expense; and higher compensation expenses, due principally to increased headcount to support the development of our Telesat Lightspeed Low Earth Orbit satellite constellations. Comparing the fourth quarter of 2020 with the same period in 2019, revenue decreased by $18 million to $202 million, operating expenses decreased by $3 million and adjusted EBITDA decreased by $15 million to $160 million. Depreciation and amortization decreased by $6 million during the fourth quarter and decreased by $32 million for the full year. The decreases were mainly due to the end of useful life for accounting purposes of our Anik F2 satellite in late 2019 and our Anik F1R satellite. Interest expense decreased by $16 million in the fourth quarter and by $55 million for the full year 2020 when compared to the same periods in 2019. The decrease was mainly due to lower interest rates and debt following Telesat's refinancing in 2019. The gains and losses on financial instruments reflect changes in the fair values of our interest rate swaps and the prepayment options on our senior and senior secured notes. In 2020, we also recorded the gain on foreign exchange of $147 million during the fourth quarter and a gain on foreign exchange of $48 million for the full year. Tax expense increased by $19 million during the year ended 31st of December compared to the same period in 2019. For 2020, the cash inflows from operating activities were $372 million, and the cash outflows used in investing activities were $93 million, an excess of 80% of the total capital expenditures related to a lower orbit constellation. For 2021, we expect our cash flows used in investing activities to be in the range of USD 140 million to USD 160 million, including capital expenditures to further advance our Lightspeed program while we finalize our financing arrangements. Subject to the progress of our financings, there may be meaningful additional CapEx this year in connection with Lightspeed as it'll move into full production we expect to happen in the coming months, and we look to update our CapEx guidance accordingly at that time. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have $818 million of cash and short-term investments at the end of December as well as approximately USD 200 million of borrowings available under revolving credit facility. Approximately $676 million in cash was held in our unrestricted subsidiaries. In addition, we'll continue to generate a significant amount of cash from our ongoing operating activities. We note that Telesat has paid down debt by USD 355.7 million during the year, mainly during the fourth quarter. Also in December, with the development and financing of our constellation, Telesat transferred assets to certain unrestricted subsidiaries related to the Telesat Lightspeed network, including NGSO spectrum, U.S. market access rights, certain IP and certain fixed assets as well as certain C-band assets together with the right to receive proceeds on repurposing. Concurrently with these transfers, Telesat contributed USD 193 million in cash to Telesat LEO Holdings, Inc., which is an unrestricted subsidiary of Telesat. With the prepayment of the debt as mentioned, pro forma leverage on the amended senior secured credit facilities was less than 4.5x to 1. As of December 31, the applicable amount on the amended senior secured facilities was CAD 182 million, reflecting the use of certain baskets to facilitate the asset transfers and the result of fourth quarter activity. At the end of 2020, Telesat has complied with all the covenants in our credit agreements and debentures. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. So that concludes our prepared remarks on this call. And now we're very happy to answer any questions you may have, and we will turn it back to the operator. Thank you.

Thank you. [Operator Instructions] The first question is from Mike Pace of JPMorgan.

I'm not sure where to start, but I'll start with Dan, just some big picture. So I think, what, you announced a satellite manufacturer news. And then I think you were quoted in some articles about the LEO project cost, and I thought I saw upwards of $5 billion. So anything you can confirm, add or correct on that?

Yes. Mike, we announced the Thales Alenia Space contract probably about a month ago now. And at the time we made that announcement, we said that, that contract had a value of approximately USD 3 billion, and that the total CapEx associated with the Lightspeed program, so satellites, launch vehicles, landing stations, things like that, were -- it was approximately USD 5 billion. So yes, we can confirm that.

Got you. And then maybe Canadian C-band. Is there anything to update on us here? Maybe just your best guess on what happens next in timing?

Yes, that's a good question. In truth, we don't have great insight into the timing about when the government is going to take a decision. It's certainly ripe for a decision, comments, reply comments. The record is kind of ripe for action. The Government of Canada has said that they plan to auction 3,500 megahertz spectrum by the end of June of this year. I think it would be handy for all the operators who are thinking about participating in that auction to know about the availability of other mid-band spectrum that might be coming. So I don't know. So if I had to guess, I would think that the government would come out and take a decision and provide some guidance about the mid-band spectrum prior to that time, but I'm not sure. So we're still waiting on that right now.

Okay. And I do have a few questions on the restricted group and unrestricted groups. I don't know for Andrew or Mike or even you, Dan, if you want to give this a shot here, but so I see the term loan pay down in the fourth quarter, you moved cash over and other assets, including the C-band spectrum. So my question is -- and I don't know what the best way is for you guys to answer this, but maybe starting with September 30, what your RP builder basket was at that point in time and then what it was at year-end 2020?

Okay, Mike, it's Michael Bolitho. So the answer to that was the RP builder basket, I'll use U.S. equivalent numbers, was the equivalent in Canadian dollar terms of about USD 1.6 billion as of the 30th of September. We transferred the assets on the 31st of December. The builder basket as of December 31 was approximately USD 140 million.

Okay. Kind of a quick math Canadian here, then plus fourth quarter build, okay. So USD 1.4 billion, USD 1.5 billion, so close to CAD 2 billion. I guess, I understand the cash and the C-band value there, but is there something else that you can tell us about the other assets? And in particular, how you're valuing the Canadian C-band within that mix?

Maybe I'll -- this is Dan. I'll take this one. So we've identified all the different assets that got transferred over to help us get our arms around the values of the different assets that we moved over. We worked with an external firm to make sure that -- yes, that we had confidence about the values that we were signing. So that's more or less, Mike, the process that we went through. So yes, we're quite rigorous about it.

Got it. And then back to Mike or Andrew, do you still have access to your general baskets for RP and permitted investments that hasn't been used?

That is correct. The general basket of USD 150 million is open, Mike, as is the 500 million unrestricted subsidiary basket.

Okay. And then just 1 more because this is tough for us on the outside looking in, but if you're moving all these assets over to the LEO group or the unrestricted group, spectrum and other IP and other assets, does the GEO group or your core business still utilize these assets? And will the GEO group need to pay the LEO group for the use of these assets on a go-forward basis?

The answer to the question is yes to both.

The next question is from Walter Piecyk of Lightshed.

Thanks to the commentary in the press release about the C-band, just a little follow-up on that. In your proposal, you had mentioned the value to the bidders of knowing the availability of the spectrum prior to -- and auction your spectrum prior to the 3.5 that's getting auctioned by the end of June. I'm just curious, how quickly -- I think you referred to in your proposal, maybe in agreement with Auctionomics the plan to use them toward structure, a private sale of your own. If the government basically or the regulator said that, that was okay, how soon would you have to know in order for Auctionomics or whoever is designing, how you would sell that asset? How much time would they need to conduct a process that you think the government should be okay with? Again, assuming that you won't try and get this and that the bidders would want to have this stuff auctioned prior to the 3.5 auction?

Yes. It's Dan, Walter. It's a good question. I've been a little bit less close to the mechanics of exactly how that will all work were we to get authority to do it. But my guess is it would take a couple of months from the time a decision is taken, from the time that we'd be ready to conduct an auction like that, something like that.

So at this point, given that the government hasn't really said anything ASAP, it's probably difficult, I guess, to get that stuff auctioned prior to the 3.5. Now we're just on a time line of like, doesn't it make sense for them to make this auction happen, at least on a similar time line, maybe third quarter, fourth quarter ideally, so the operators can figure out how they want to allocate their spectrum for 5G.

Yes. No, that's probably right, if the government holds to its schedule for 3.5, which I think they will, but I'm not sure. They've delayed it once already. I'm not -- I haven't heard about any further delays, but you can never rule it out.

Right. That's a fair point. They could theoretically come out, approve the C-band and at the same time say, "Okay, we're just going to slide this back a quarter to try and have them simultaneous or a different time line," I guess. But there's been no indication that won't -- yes, I know we're just speculating, right?

Yes, yes, exactly.

Okay. On the LEO, let's assume, for whatever reason, it's -- there's obviously high demand for 5G spectrum as we've seen in the U.S. And the numbers are very large, and you've got significant capital and you raised significant cheap capital. Is there any way to accelerate the LEO time line from what you've already outlined?

Probably not. The reality is we're planning to start launching satellites in about 2 years' time. So -- and the satellites that we're building, they're advanced satellites. They've got process payloads and Phase 3 antennas and beam hopping and inter-satellite links. So no, I think that the time line that we've articulated is a realistic time line, but I think trying to accelerate it would be hard.

Got it. And then just lastly, in terms of just your core GEO business, it looks like enterprise was up sequentially for the first time in quite some time. Maybe that was a drop out of some contracts that you kind of lapped a little bit. When you think about 2021, is there ability to kind of sustain this run rate of CAD 200 million of revenue? Or do you think you're still going to face some kind of struggles in terms of like DISH or whoever else that will not want to renew some their satellites in the broadcast side?

Sure. I'm sure after what we were -- when you were talking about outlook for the business, were you focused on enterprise or the business more broadly?

Well, no, I was just pointing out that, that was a kind of a bright spot. I guess you would call it, right, that you generated potential growth. Obviously, that did not extend to broadcast, which you outlined the issues that impacted that in the quarter. So I kind of mixed my stuff together. I said, enterprise is looking pretty good. So like how does that translate to the overall -- okay.

Yes. So first off, I'd just observe, we haven't given guidance in the past beyond CapEx guidance, and we're not going to start right at this very moment. But I would say that there were definitely some headwinds that we confronted throughout 2020. And yes, for sure, the nonrenewal on Shaw and that amortizing that prepayment from WildBlue, that accounted for, I said around in my opening remarks, about 60% of the total year-over-year revenue decline. So that's now cycled through. Barring something unforeseen, we're not expecting to have the kind of headwinds, the kind of top line pressure that we had in 2020. So yes, I mean, it's a fair question. It's a fair observation. And given that we have cycled through those two big factors, yes, that puts us in a different position as we go into 2021. Sadly, COVID is still present. So it is going to continue to restrain our ability to get back on track with our aeronautical customers with our maritime customers. There's still very much suffering from COVID, but it's not our expectation that this year we're going to be facing the kind of headwinds that we had to face in 2020.

Understood. And if you don't mind, I just want to sneak one last one in. On the $5 billion...

Last one, go ahead.

Well, just last one. On the $5 billion number for the LEO build, I mean, there's a lot of investment dollars going to LEO generically, right? I get that your optical link, obviously, add costs that others might not be putting in, blah, blah, blah, but launch costs are coming down. What are the dynamics that, that could take that $5 billion number either 20% higher or 20% lower? Is that -- are you going to -- is the way this business works is that it's going to basically be pretty tightly within that range of $5 billion?

It should be. I mean the reality is the contracts that we're entering into are pretty much fixed-price contracts. And the big CapEx is obviously on the satellites and the launch vehicles. So we feel good about that $5 billion number. Over the course of a program, could things happen that pressure it slightly, could it get delayed or something like that? Potentially. But in the mean, these are fixed-price contracts. So we feel a high level of conviction around that's what it should be looking like.