Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, welcome to the conference call to report the first quarter 2021 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 period ended March 31, 2021. 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 or uncertainties. For additional information about known risks, we refer you to the Risk Factors section of our report on Form 20-F in the 2020 fiscal year and in our quarterly report on Form 6-K, both of which can be obtained on the SEC website. 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. Thank you, Michael. This morning, I'll discuss our first quarter results and give an update on the business. I'll then hand over to Andrew, who will speak to the numbers in more detail. Then we'll open the call up to questions. Comparing our Q1 results to the same period last year and adjusting for foreign exchange rate changes, revenue was down 6%. Operating expenses were 11% lower, adjusted EBITDA was 5% lower, and our adjusted EBITDA margin was 80%, slightly higher than the prior period. The largest contributor to the FX-adjusted revenue decrease was the impact of the COVID-19 pandemic, particularly on customers serving the aeronautical and maritime markets. While the improvement in OpEx was driven by the reversal of a bad debt provision last quarter as compared to a bad debt provision we took in Q1 2020 in response to COVID. Turning to some key metrics. Backlog at the end of the quarter was $2.5 billion, and fleet utilization was 79%. Looking at how our revenues broke down on an application basis, broadcast was 52% of total revenue, enterprise services 46% and consulting and other 2%. And on a geographic basis for the year, North America accounted for 83% of revenue; Latin America, 8%; EMEA, 5%; and Asia, 4%. Turning to our Teleset Lightspeed constellation. We made significant progress moving the program forward last quarter, including announcing that Thales Alenia Space is our prime contractor, that MDA will be building the advanced Phase III antennas for the Lightspeed satellites and that the government of Québec is making a CAD 400 million investment in the project. Last month, we raised USD 500 million for Lightspeed by issuing a secured bond, and we expect to finalize the rest of the Lightspeed financing in the coming months. In parallel with that, we continue to do a lot of important work with Thales, MDA and other key suppliers to progress the program. Lastly, we continue to make steady progress toward becoming a public company, something we expect will occur in the third quarter of this year and which can further support our growth plans. In sum, it was a busy quarter and what promises to be a busy year for us. And with that, I'll hand over to Andrew.

Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In the fourth quarter 2021, Telesat reported revenues of $190 million, adjusted EBITDA of $152 million and generated $75 million -- $79 million of free cash flow with almost $900 million of cash on the balance sheet at quarter end. For the fourth quarter 2021 and compared to the same period in 2020, revenues decreased by $18 million to $119 million. Operating expenses decreased by $6 million to $40 million. And adjusted EBITDA decreased by $14 million to $152 million. The adjusted EBITDA margin was 80% compared to 79.6% in 2020. Between 2020 and '21, changes in the U.S. dollar exchange rate had a negative impact of $5 million on revenues, a positive impact of $1 million in operating expenses and a negative impact of $5 million on adjusted EBITDA. When adjusted for the changes in foreign exchange rates, revenue decreased by $13 million for 2021 when compared to 2020. Operating expenses decreased by $5 million, and adjusted EBITDA decreased by $9 million. The largest single contributor to the decrease in revenues, excluding the impact of foreign exchange with the adverse impact of the COVID-19 pandemic on certain customers, serving the commercial airline and other industries. The decrease in operating expenses for 2021 was a result of the reversal of the bad debt provision in the current quarter compared to a bad debt provision recognized in the fourth quarter of 2020. This improvement was partially offset by additional hirings for the Telesat Lightspeed program. Depreciation and amortization decreased by $5 million when compared to the same period in 2020. The decrease is mainly due to the end of useful life for accounting purposes of our Anik F1R satellite in 2020. Interest expense decreased by $13 million in the fourth quarter when compared to the same period in 2020. The decrease was mainly due to lower interest rates and expanding debt, a lower debt balances in 2021. The gains and losses and financial instruments reflect changes in the fair values of our interest rate swaps and the prepayment options on our senior and senior secured loans. In the first quarter of 2021, we recognized a loss of $25 million related to financial instruments. In 2021, we also recorded a gain on foreign exchange of $35 million during the quarter compared to a loss of $291 million in the fourth quarter of 2020. Income before taxes was $63 million in the quarter compared to a loss of $282 million in the fourth quarter of 2020. Tax expense increased by $26 million during the quarter compared to the same period in 2020 and was largely attributable to gains on foreign exchange and certain financial instruments and lower interest expense in 2021. For the fourth quarter of 2021, the cash inflows from operating activities were $99 million, and the cash outflows used in investing activities are $20 million, virtually all of the capital expenditures related to a lower orbit constellation. As we previously advised to 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 before the advance our Lightspeed program, while we press our financing arrangements. Subject to the progression of our financing, there may be meaningful additional CapEx this year in connection with Lightspeed as we move into full production, we expect that to happen in the coming months, and we'll look to update our CapEx guidance at that time. To meet our effective cash requirements for the next 12 months, including interest payments and capital expenditures, with $883 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 $642 million in cash was held in our only expected subsidiary. In addition, we continue to generate a significant amount of cash and ongoing operating activity. At the end of the quarter, leverage was calculated on the terms of our amended senior secured credit facilities, was 4.42x to 1. Telesat has complied with all the covenants in our credit agreement and intention. A reconciliation between our financial statements and financial covenant calculations is provided in the report that we filed earlier this morning. After the end of the quarter on April 27, Telesat issued $500 million of 5.625% senior secured notes due in 2026. Telesat intends to use the net proceeds of this offering to fund additional investment as one or more unrestricted subsidiaries for the development of Telesat Lightspeed. So that concluded our prepared remarks for this call, and I will be very happy to enter any questions that you may have, and we will turn back to the operator.

[Operator Instructions] And the first question is from Mike Pace from JPMorgan.

Few questions, and I'll just do them one at a time because it's easier for me if that's okay? So for the enterprise business, I'm wondering if you guys can dig into a little bit on the COVID impact in the Aero and Maritime segment of yours? I guess, how much in your estimation didn't work its way in through the system in 2020? Or what was the lost revenue that you think there? And then on a sequential basis, I guess, enterprise in Q1 versus enterprise in Q4, I realize there's an FX impact there as well, too. But can you quantify if there was any incremental COVID headwind, I guess, sequentially as well?

Mike, it's Dan. I didn't get the first part of your 2-part question. Maybe I'll answer the second part, and I'm looking at my colleagues on the top line. I don't think there was any incremental COVID headwind experienced in Q1 relative to Q4, but can you repeat the first part, I didn't follow it?

Yes. I guess just to simplify it, how much did these -- the Aero and Maritime segment hurt the business in 2020 from COVID issues from aero time and maritime customers? Because I'm trying to figure out, as that comes back in 2021, right, how much of a tailwind could that be versus 2020?

So let's see, I mean, the -- I think the -- I'm just trying to do some math here. Give me some [Audio Gap] yes, I'd say that on the EBITDA line, COVID impact was probably a little bit less than 2%.

Of total? Okay.

Yes

Okay. Got it. And then on -- in the broadcast business, I think there was some disclosure, a slight reduction from a North American DTH customer. And it sounds vaguely familiar, so I don't know if that's new disclosure or not. But correct me if I'm wrong on that, but...

No, this is -- yes. No, this is the shaw impact that we had, yes, disclosed, got at this point, probably 24 months ago or something.

Okay. Got it. And then short-term satellite lease revenues that were -- that didn't happen in '20, does that come back in the future at all? Or is that just tough to know?

It's tough to know. I mean we've always said on those things that they're lumpy. They're a bit unpredictable. As you know, we had none in 2020. There could be something this year. I don't think it will be all that material. It won't be as meaningful as what we had seen in years prior to 2020. But there could be something this year. And if there is something, we'll flag it when it comes.

Got it. And then on the...

But I do think -- I'm sorry, just to finish the thought, I do think, though, that there's still a requirement for operators preserving their frequency rights. So -- but again, I think -- part of it, I think, is everybody's just trying to figure out what the future looks like. And so a lot of what we did was preserving cave and rights for satellite operators that wanted to launch mostly Big GEO-K band platforms. And I think that people are pausing a little bit right now.

And then just a question on GEO versus LEO as it relates to, I guess, the enterprise business. Dan, I think you've said in the past that you thought around 25% of revenues might be better suited for your LEO constellation. And I just wanted clarity, did you mean -- if you said that, which I think you did, 25% of total or 25% of enterprise?

25% of total. Yes, yes.

Okay. Historically, that's how you talk.

Yes, yes, yes. No, and I'll sort of reaffirm that. And again, it's not science. It's art in some ways. But yes, we've tried to be rigorous in terms of looking at the existing customer requirements we have and asking ourselves, which could be provided more effectively with a LEO architecture. And it's something like that, order of magnitude, around 25%, yes, of total revenue.

Got it. And then on the EchoStar or Hughes call, they mentioned that they bought some more capacity from you. I believe, for Puerto Rico. And I'm just wondering, is this meaningful rounding? And then I'll just throw in my last question for the finance guys on the call. The Term Loan B, I realize that you have no more amortization because of the payment in the fourth quarter of '20. I just wanted to understand, is there still a cash suite that exists? Or did the payments kind of push that out as well, too?

I'll start with the Hughes deal. It was a good deal for us, and we have a good long-term relationship with Hughes and the larger corporate family there. But I wouldn't say that, that was really material for us. It was a good deal. Glad we did it. It's good for their business, too, but nothing might that we think is material. And for sure, if we did, we'd be flagging it.

And Mike, it's Michael Bolitho, on the cash, we -- it pushes it out is the short answer to your question.

The next question is from [ Joe Gruber Rovich ].

I guess just following up on the last one here just now. Can you just talk about what your capital allocation priorities and how we should expect you to leverage cash flow, in particular at the RemainCo?

Hard hearing the back half of your question, Joe. The first one, I think, was kind of I think kind of capital allocation priorities, I think. And then you shoved off a little bit at the end. I couldn't hear the second bit.

Yes. So I'm just wondering how you think about allocating your capital in the core Telesat group?

In the core Telesat group, you mean at the restricted -- in the restricted entry?

Yes.

Yes. Okay. I don't know if I'll invite my finance friends to comment and I can chime in as well.

I would say, in terms of, as we said this morning, in terms of our overall sort of CapEx forecast for this year, we're looking at a range of USD 140 billion to USD 160 billion. And that does include some CapEx in respect of our Lightspeed program. And indeed, as we progress our financing, and we will look -- potentially look through in the -- later in the year to indeed roll out our Lightspeed program, where we would expect to see meaningful more CapEx. So that is our approach to what our CapEx allocation is as we see it this year.

Yes. Maybe I'll just add because Joe was wondering, okay, but what about the restricted entity. And there, I guess, Joe, I mean probably not terribly different from how we've approached the business for the last -- long, long time, which is to say we've got GEO satellites that will come up for replacement provided that we've got a good business case to replace those satellites, then we'll certainly allocate some of the cash that should be building up at Telesat Canada for those purposes. I'd say that would be kind of priority #1, if they're good, accretive investments to be made in our existing GEO business, replacing existing satellites, building new GEO satellites, again, sort of opportunistically then we'll definitely do that. But if those opportunities don't exist, then it will be, yes, more focused on building cash and delevering.

That's helpful. I just had one more, too, following up on the enterprise question from earlier. Is there any reason to think that this business shouldn't recover in line with global travel? And then as we kind of come out of COVID here?

It should. I mean, we definitely face -- prior to COVID, I think we've said that maritime, aeronautical combined represented about 10% of our business. I'm looking at my colleagues for affirmation, as I say that. But yes, that's right. And then with COVID, that declined. And so for sure, when our customers in the aero and maritime market, particularly the cruise market, are back in full swing, that's got to have tailwinds for us. So yes, that's the right way to think about it, I think.

Actually, I just thought of one more. What should we expect for cash taxes in 2021? And I guess, what drove the higher payment in the first quarter here?

In terms of our cash expectations, the higher cash tax payments, the higher tax expense on our P&L reflects indeed the gains on ForEx exchange, which was quite substantial in the quarter and indeed the lower interest that we receive. So we would say, overall, in terms of what do we think our actual cash taxes would be for the full year. I'd say it's probably consistent to what we have seen in Q1, I think on a -- kind of on a even basis going forward for the rest of the year.

The next question is from Jason Kim from Goldman Sachs.

Great. And first, a big picture question for Dan. So you got the legacy Telesat business that generates a lot of free cash flow, but it has been declining. Then you have an exciting growth opportunity in LEO, where you're leveraging a couple of things that you have that are unique. Then those are priority orbital rights and your satellite technology leadership. So over the long term, do you look at these silos as permanently separate? Or is it more of a temporary financing arrangements given the cost of the upfront investment in terms of higher financing LEO. But over time, you think you will recombine these 2 silos?

Yes. I mean it's for sure the case, Jason, that we're financing, LEO, like we're financing it, not because we see it as some totally foreign distinct business, addressing some new market with -- that wasn't the rationale at all. The rationale, as you can well appreciate, was that there are a whole series of restrictions that we face in the Telesat Canada silo in terms of raising the kind of capital that we need to fund the Lightspeed constellation, and that pushed us into financing in the separate credit silo, particularly given that these export credit agencies exist that will project finance. So that absolutely was the driver and the way we're -- the way we plan to manage the business is, again, not to have 2 separate finance teams, legal teams, even sales teams, regulatory teams. They're -- because -- yes. I mean it's, by and large, overlapping customer bases and the like, the plan is to manage the business with kind of one team by being careful to make sure that we're making the proper charges back and forth so that -- all of that's done in a proper way and and the like. Whether -- can I sit here today and say, yes, in 2027, we'll collapse everything? I don't know. I mean just honestly, I don't know. We'll have to see how the business evolves, we'll have to see where the financing markets are in the time and all of that. So I certainly wouldn't rule it out. That might be a massively logical thing to do. But equally, we don't sit here today and say, that's something that we're definitely going to do. But to take the step back, and to your point, the reason we finance this thing the way we have is a reflection of the fact that given the constraints that we had with our covenants and the like on the restricted side, it compelled us to finance this over in this unrestricted sub.

Okay. That's very helpful. And then I know you've been asked this before, but I think it's worthwhile to hear from you again. And that is what can Lightspeed do that other LEO constellations cannot do or will have difficult time doing? Are you competing directly against them? Or are you addressing a different end markets or customers?

So I mean, I'll answer this question, although in full candour, some of it is is a bit still shrouded in mystery. And I say that because we don't have full visibility into the capabilities of some of these other systems that are talked about. Starlink, for instance, we -- there's still not as much technical information out there that would allow a company like ours who's, I'd say, very sophisticated in terms of understanding the capabilities of different satellites and constellations. We still don't have all of the information that we would need to really assess exactly what the capabilities are. And I'd say that's true for Kuiper as well, less true for OneWeb, where there's, I'd say, a lot more information that we have access to. So with that caveat, I guess I'd say a couple of things. One, we've always been very clear. Our focus is on the enterprise segment. It's backhaul connectivity for mobile network operators and ISPs. It's connectivity for the aeronautical market, the maritime market, and for the government services market, markets that we understand very well. And we designed our constellation from day 1 to serve those markets. And we work very closely with certain customers in those segments to make sure that we were, yes, going to be able to meet their requirements. And so -- which is not the case with some of the other constellations. I think Starlink, Kuiper, in particular, have been very plain spoken about the fact that their principal focus is on the consumer market. And I can tell you, if we, from day 1, we're focused on the consumer market, our constellation architecture would look different. There are different markets if you want to, yes, build a constellation to efficiently address one, you're almost, by definition, trading off your ability to efficiently address the other. OneWeb, on the other hand, I think we all know, they started out talking about focus on the consumer broadband market. And then kind of pivoted their business focus, not so much the design of their constellation, but their business focus over to more of the enterprise market. And so anyway, a lot of words, but important to note, we are focused on different markets. There is limited information about some of these other constellations. But then back to our constellation and why we believe that we're going to have a significant competitive advantage, focusing on the markets that we're focused on, you got to work your sleeves and just get right into the weeds of these technologies. All of our satellites have very high throughput, high capacity, intersatellite links. We think that's essential to effectively address the aeronautical market, the maritime market and the government market. I don't know what Kuiper is going to look like with respect to that. And still -- Starlink is introducing some intersatellite links, but I think that their capability is -- they're less capacious, I think, than our intersatellite links, OneWeb doesn't have them. All of our satellites have processed payloads that gives us real advantages in terms of routing traffic, in terms of improving the efficiency kind of, off the link, which allows us to get. You squeeze out more bits, frankly, through a limited amount of spectrum. All of our satellites have very high-performing phased array antennas, which mean -- and incredible capabilities in terms of hopping beams, which gives us immense flexibility in terms of how we lay our coverage down in a very dynamic way over the visible earth for any given satellite. And then you overlay on top of all of that, what will be a very powerful kind of software program that will orchestrate all of those disparate parts and to making it a very fast, responsive system. You add all that stuff up, it's going to be, we believe, just an extraordinarily compelling value proposition for the customers. And yes, it's something that will give us, we believe, a competitive advantage in the market and our customers are competitive advantage in their markets. So anyway, Jason, a lot of words. And again, some of it is still a bit shrouded in mystery in terms of what others are doing, but that's how we think about it.

The next question is from Walter Piecyk from Lightspeed (sic) [ LightShed ].

It's LightShed. Dan, can you give us an update, Verizon and AT&T are pretty fired up to get the C-band stuff cleared. Are you already incurring any expenses that you're getting reimbursed for? And then if not, if it's really just about getting those incentive payments? Obviously, that near-term one for 2021 looks solid. The larger payments that can extend to 2023. Do you have better clarity now that maybe those are going to be some acceleration of those payments rather than I mean to wait until maybe '22 or '23, that you could see a lot of that kind of front loaded?

We believe that we'll be in a position to be entitled to all of the payments that were kind of earmarked for Telesat either by the end of the year -- either by the end of this year or sometime, if it should slip, in the first half of next year, we believe that we've taken all the actions that we need to take to clear all of the spectrum that we and our customers have been using. I think...

Hold on there, Dan. Are you talking about the $85 million relative to the 2021 clearing targets or the full amount? Meaning the $260 million, you think also could be accelerated into the first half of next year?

Yes. We were provided $344 million off the top of my head, and we believe that we'll have taken all the actions that we need to take to be fully entitled to all of that. And that if the -- if things happen like the FCC says they'll happen, yes, we should get -- be in receipt of all of that money within the next -- either before the end of this year or we think shortly thereafter.

Well, the FCC certainly has enough cash to make that payment. That's for sure. Is there a -- do you get taxed on that? Or is there a way you can receive that in a tax-efficient manner?

We do get taxed on that.

Okay.

And yes, so...

Got you. And then any -- so obviously, U.S. moving pretty quickly. Obviously, C-band, a lot more important than millimeter wave, there must be some pressure on the Canadian regulators to hash out what the plans are for up there. Like what's going on with that? What's the latest in terms of moving forward on C-band for Canada?

We don't have an update on it, to be honest with you. I think I said -- I think it was on the last call, we've gotten a question about this, and we had said that the regulator plans to auction the 3.5 gigahertz spectrum. I think that is supposed to take place by the end of June. Some parties I saw recently had asked for a delay in that. That already represented, I think, a 6-month delay. I think it originally was supposed to happen at the end of -- by the end of last year. But because of COVID, they pushed it out. And I believe that certain wireless operators in Canada had asked the regulator to delay it further still. But the minister, I believe, indicated that they won't do that. So I believe it's the case that the 3.5 auction is to take place, I think, before the end of June of this year. Now the C-band spectrum is adjacent to that. And as I've said before, I think it would make sense for the bidding parties, the wireless operators to know what the full mid-band picture looks like, ideally before they're having to participate in an auction for the other chunk of the mid-band spectrum, the 3.5 gigahertz. The C-band proceeding, as I said last time, should be ripe for decision. The record is set. We all made comments, reply comments and the like. But I don't have an update as to when a decision will be taken. But if I'm right, and the regulator also sees a logic in getting that decision out there before the 3.5 auction, then that suggests something should be coming relatively soon. But...

Right. So your point is they've made it clear that they're not delaying this. But I mean, it seems odd that every one of the operators, I think, has indicated that, look, we need to know what's going to happen with the C-band. So if they're not delaying it, then doesn't that kind of imply that we should hear something within the next 30 days?