Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the conference call to report the third 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- and 9-month period ended September 30, 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 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 and in our quarterly report on Form 6-K, 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.

Thank you, Michael. This morning, I'll discuss our third quarter and first 9 months 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. Comparing our Q3 results to the same period last year and adjusting for foreign exchange rate changes, revenue was down 2%; adjusted EBITDA was down 1%; and our adjusted EBITDA margin was 81.5%, up slightly from 80.4% in the prior period. Comparing the 9-month results and adjusting for FX, revenue was down 4%; adjusted EBITDA was down 3%; and our adjusted EBITDA margin was 80.2%, slightly higher than the 79.7% in the prior period. The FX-adjusted reduction in revenue and adjusted EBITDA for both the quarter and the first 9 months of the year was primarily driven by a slight reduction of service for one of Telesat's North American DTH customers; the reduction or nonrenewal of certain services in the enterprise segment, including as a result of the COVID-19 pandemic and lower consulting revenue, partially offset by an increase in revenue associated with short-term services provided to another satellite operator. Turning to some key metrics. Backlog at the end of the quarter, which I should note, excludes backlog associated with our Telesat Lightspeed constellation, was $2.3 billion; and our fleet utilization was 80%. Looking at how our revenues broke down on an application basis for the quarter, broadcast was 51% of total revenue; enterprise services, 47%; and consulting and other, 2%. And on a geographic basis for the quarter, North America accounted for 81% of revenue, EMEA was 8%, Latin America was 7% and Asia was 4%. As discussed on our last call, in the third quarter, we announced that the government of Canada is making a $1.44 billion investment in the Telesat Lightspeed LEO constellation and announced also that the government of Ontario is committing $109 million to use Lightspeed to provide high-capacity broadband connectivity to remote communities throughout the province. As we noted in our 6-K for the quarter, Thales Alenia Space, who we've been working with on Lightspeed, recently informed us that the global supply chain issues out there will delay the construction of the Lightspeed satellites, which in turn will delay our getting into commercial service. We're working with Thales now to get a better sense of the magnitude of the delay, whether there are steps we can take to mitigate the delays and whether there are any further optimization we should consider for the Lightspeed design, if we have a little more time. This delay with Thales is also delaying our ability to complete our financing arrangements with the export credit agencies. I expect we'll have more clarity on the Lightspeed schedule and export credit agency discussions in the near term. Lastly, on the roll-up transaction with Loral, I'm pleased to say that we're on track for that transaction to close and for Telesat to become a public company before the end of the year. And with that, I'll hand over to Andrew.

Thank you, Dan, and good morning, everyone. I would now like to focus on highlights on this morning's press release and filings. In the third quarter of 2021, Telesat reported revenues of $192 million, adjusted EBITDA of $157 million and generated $63 million of free cash flow, with almost $1.6 billion of cash on the balance sheet at quarter end. For the third quarter of 2021, and compared to the same period in 2020, revenues decreased by $10 million to $192 million, operating expenses increased by $8 million to $50 million and adjusted EBITDA decreased by $6 million to $157 million. The adjusted EBITDA margin was 81.5% compared to 80.4% in 2020. Between 2020 and '21, changes in the U.S. dollar exchange rate had a negative impact of $6 million on revenues, a positive impact of $1 million on operating expenses and a negative impact of $5 million on adjusted EBITDA. When adjusted for the changes in foreign exchange rates, revenues decreased by $4 million for 2021 when compared to 2020, operating expenses increased by $9 million and adjusted EBITDA decreased by $1 million. Excluding the impact of foreign exchange, the increase in revenues was primarily driven by a slight reduction of service for one of Telesat's North American DTH customers. The reduction or nonrenewal of certain services in the enterprise segment and lower consulting revenue, partially offset by an increase in revenue associated with short-term services provided to other satellite operator. The increase in operating expenses was principally the result of a $12 million increase in noncash share-based compensation, partially offset by higher capitalized engineering costs. Depreciation and amortization decreased by $5 million compared to the same period of 2020. The decrease was primarily due to the end of useful life for accounting purposes of our Anik F1R satellite in 2020. The gains and losses on financial instruments reflect changes in the fair value of our interest rate swaps and the prepayment options on our senior and senior secured notes. In the third quarter of 2021, we recognized a gain of $1 million related to financial instrument. In 2021, we recorded a loss on foreign exchange of $68 million during the third quarter compared to a gain of $66 million in the fourth quarter of 2020. Tax expense decreased by $3 million during the quarter when compared to the same period in 2020 and was largely due to lower operating income before taxes in 2021. Net loss was $42 million in the quarter compared to net income of $107 million in the third quarter of 2020. For the first 9 months of 2021, the cash inflows from operating activities were $250 million and the cash outflows used in investing activities was $124 million, virtually all of the capital expenditures related to our Low Earth Orbit constellation, Telesat Lightspeed. As we have previously advised 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 progress our financing arrangements. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, with almost $1.6 billion of cash and short-term investments at the end of September as well as approximately USD 200 million [ authority ] available on the revolving credit facility. Approximately $500 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, leverage was calculated and the terms of the amended senior secured credit facilities was 5.6x to 1. Telesat has complied with all the covenants in our credit agreement and indentures. A reconciliation between our financial statements and financial covenant calculations is provided in the report that we had filed this morning. As we have stated previously, Telesat Canada has structured its investment in Lightspeed through unrestricted subsidiaries. To date, Telesat Canada has invested $613 million in cash and the restricted subsidiaries to fund the development of Lightspeed. So with this concludes our prepared remarks for the call. And now we're very happy to answer any questions you may have. And so we will turn back to the operator. Thank you.

[Operator Instructions] The first question is from Jason Kim with Goldman Sachs.

I'll start with the questions about the quarter. First of all, what was the size of the short-term service revenue in the quarter?

Jason, as you know, we have those revenue opportunities from time to time. And I'd say, we've talked in the past sort of given order of magnitude for what those things are. This one was more or less consistent with the kind of revenue recognition for those services that we've had in the past. Order of magnitude, it's kind of low to mid-single-digit contribution for revenue for Q3.

Understood. And then the supply chain issues regarding LEO, there's still a lot of moving parts. But at this point, is this a timing issue or potentially costs as well? And can you remind us if you still believe you need -- if you're fully funded for LEO based on the financing sources that you have outlined in the past?

Can you repeat the last part again, Jason? Can you turn the volume up, Michael?

Sure. So in terms of the financing sources, if you believe that you're fully funded for Lightspeed, based on all the items that you've identified as a source of capital in the past, whether it's C-band.

Okay, thanks. So to the first part, I think this is more of a timing issue and maybe an issue that isn't even all that terribly surprising. I mean these global supply chain issues are having impacts across almost every segment of the economy right now. And so it's certainly the case that the Telesat Lightspeed program is requiring all sorts of components that are getting caught up in those global issues. So I think this is fundamentally an issue of timing. And as I said, we're engaged with Thales right now just to fully understand what the impact of that's going to be. In terms of funding, I think what we said last quarter when we put out our Q2 numbers, we had also just announced that significant investment from the government of Canada. And we took the opportunity to sort of just remind everyone of the financing that we had lined up to date. And in Canadian dollars, that was, at the time, order of magnitude, USD 4 billion, somewhat more than $3 billion. And said that we expected that with those amounts lined up, plus the amounts that we've been under discussions with the export credit agencies that, yes, those things would allow us to be fully funded for the program. And that's still our expectation, which is to say that the cash -- or I should say, the funding that we've lined up to date, plus the amounts that we are in discussions with the export credit agencies about, those things fundamentally should see the program fully financed.

Understood. And any updates on the DTH contract that's coming up for renewal next year?

No updates. We said before that we've got a renewal with DISH on our Anik F3 satellite coming up in Q2. But no, we don't have any updates in terms of what that looks like at this time.

Sounds good. And then my last question is regarding industry consolidation for partnerships, from your perspective, what does the industry need? How does consolidation or partnerships help achieve that? And what does Telesat bring to the table?

Well, I mean, it's a question that folks talk about from time to time in the industry. Certainly, our industry has gone through periods where there's been consolidation. In periods of time where you get new entrants into the sector, I feel like, I don't know, kind of unbalanced. We're probably, over the next few years, heading into another period where, yes, it's likely that there could be some consolidation and potentially some ownership change. Ownership change doesn't always lead to consolidation, but it sometimes does. And then I think that we're the industry to consolidate, for sure, like a lot of industries. If you do that, it can help rationalize the supply side of the equation. And where Telesat fits into that, I don't know. I mean I would say that our heavy focus has been on developing our Lightspeed constellation. We are big believers that the most promising segment of the market to address is the very strong and growing demand that we're seeing around the world for kind of enterprise-grade broadband connectivity. And we think that the best way to address that market is by having a very advanced Low Earth Orbit satellite constellation that, again, has been designed to address that particular enterprise market. So I'd say that is our overwhelming focus. If there's consolidation in the industry that's taking place, yes, we may or may not be a participant in that. I think that -- obviously, we think that the Lightspeed constellation is going to give us significant competitive advantages in the market. Maybe that initiative would be attractive to others in the industry. So -- but that's not really our focus right now. I mean, our focus, I'd say, has always been looking after our customers, being disciplined about what sorts of investments that we make with an eye towards making sure that we feel good about the returns on invested capital that come from the investments we make. And I think we've got a very good track record in that regard. And so anyway, those are some high-level thoughts on how we think about consolidation.

The next question is from Walter Piecyk with LightShed.

I just want to continue on with that. I mean, I guess, when I listened to all your comments, first, I think in the prepared comments, you said you were on track for an IPO or being public, I guess, is the way you phrased it. By the end of the year, it's November 5, so I'm just curious on kind of how and when that process is going to take place, and when we're going to see some sort of a ticker actually. But more importantly, in your answer to the last question, when you were talking about the financing and the discussions you were having with the export credit agencies, it didn't sound like having some type of like IPO proceeds was an important part of that process. So when you think about those discussions with the export credit agencies, like what is the process to get that to the finalization, so that we see it kind of official and everyone kind of knows this thing is fully funded and ready to go?

Yes. Thanks, Walter. Well, first off, on the timing of the Go Public transaction, it's coming. I mean you're right. I said before the end of the year, and we're -- what are we? November 5 today. So yes, I mean, it -- there's one other approval that we're waiting for right now. And I certainly -- as I look at my general counsel across the table, I don't see anything out there that causes us any concern about obtaining that in the near term. So stay tuned there. I think we're in good shape, and I think there'll be a Telesat ticker symbol out there, yes, quite in the near term. And then with the export...

[indiscernible] approval -- Dan, what about the last approval? Yes.

We're waiting for an approval from the Ontario Securities Commission.

Okay .

And then with the export credit agencies, look, we've had really good discussions with them. And as I said in my prepared remarks, the scheduled delay that kind of emerged from Thales recently is, yes, going to delay our ability to finalize those discussions with the export credit agencies. I mean as you can imagine, fundamentally, we just need the updated schedule so that we can update our plan in the business model and refresh that with the export credit agencies. But we've been in discussions with them for quite some time now. And yes, I characterize those discussions as productive. So I think, yes, we'll need to update the plan, but I'm...

Your point is that those discussions don't require some type of IPO-type funding or anything like that. It's just these are discussions that are just going to kind of move on their way and happen at some point, hopefully in the near future.

Well, look, I think our going public is an important part of the overall process in that one of the virtues of being public and one of the things that we talked about before is having access to the public equity markets as a source of financing is important to us. And so, yes, I'd say that, yes, it's a consideration, and it plays into the overall financing of our growth plans. Is it a material part financing, what we have described as a $5 billion U.S. program? No, not really, but it's still -- we think about it as a part potentially. So yes, so that's kind of how that all fits together.

Okay. And I guess secondly, on the supply chain issues. I mean your constellation is, whatever, a couple of years off. So wouldn't these constellation -- or excuse me, wouldn't these supply chain issues be having some impact on the other LEOs? Like Starlink is setting up satellites now. I know Kuiper is hopeful, I guess, to get something up in the air at the end of next year, some prototype. So like are these common components that are -- that you think will impact some of the LEO plans that are ongoing right now?

I believe that we are seeing the supply chain issues affecting not just our Lightspeed program, but some of the other players as well. We have less visibility. You knew exactly what's happening at SpaceX. They're a private company, and Kuiper is part of Amazon. So they don't have to report in any kind of granular way on Kuiper. But SpaceX did reveal, I think it was earlier this week, that they are delayed because of supply chain issues in getting user terminals out into the market. And so yes, that -- I think the supply chain issues, they're going to slow everyone down a little bit. So...

I mean both of those companies are also -- have also materially increased their number of satellites that they're using in the constellation. Just this morning, there was a filing from Kuiper where they're doubling their request to the FCC for satellites. I think it's like 70-something-100, 7,700 from whatever it was before, 3,500, 3,600. Is you -- like when you kind of -- as your progress moves along, is it likely that you'll face the same issue where you're likely to increase the number of satellite? I know it's a different application, but another increase potentially in the number of satellites you plan to launch?

Yes. So the filing that you're referring to, so the FCC has just sort of completed -- there was a deadline for filing applications in the second processing round for V band non-geostationary NGSO satellites in the C-band. And yes, we also made an application to the FCC that would allow us to expand Lightspeed. So there are 2 frequency bands that we've been filing for, both at the ITU and with the FCC and here with the government of Canada. One has been Ka-band and Lightspeed. We've got priority rights in Ka-band and have received an authorization from the FCC in their first processing round. And we have filed an application in the second Ka-band processing round at the FCC to expand beyond the 298 Lightspeed satellites that we've been talking about. Off the top of my head, I think we've sought authority to launch up to 1,671 Ka-band LEO satellites. And our own V band application that was submitted in this recent FCC V band process, kind of a mirror application. I think we had already filed a first round. We had V band constellation, and we've now updated that along with others in the industry. And I think, again, off the top of my head, it sort of mirrors what we're doing in Ka-band, it's 1,671.

Would that be future capacity for basically success-based capital? Or does that potentially impact the price of the initial project?

It doesn't impact the price of the initial project. It's what satellite operators need to do, which is to say, reserve spectrum that allows you -- gives you the kind of orbital and spectrum real estate. So that as you expand your constellation, you have some response to demand in the market that you've got the spectrum that you need to do just that. So that's what we've done, and that's what these other operators have done in filing these applications.

The next question is from Mike Pace with JPMorgan.

Actually a follow-up on, I guess, the 298 to 1,671 satellites. And I guess -- and I'm sorry if I just didn't catch a couple of nuances here, but is that -- this is all would be demand-driven growth? If it's there, then you just have the ability to add more satellites? Or is this -- do you think you need to get there to really have global full coverage for everything that you want to do, because it just -- it's 5x. It's just it's a lot larger.

Yes. No. We feel that the 298 that we're starting with is the right constellation size, will give us multiple terabits of capacity and a very powerful value proposition in the market. But Mike, I mean, it'd be foolhardy of us to not make sure that we've got the ability to scale our constellation in response to a market that's growing, in response to demand. So yes, that's what we've done here. That's what we did in the earlier Ka-band processing round. That's what we're doing in this V band round. That's what our competitors are doing as well. it's what we need to do to make sure that we've got the authority to scale our constellation as required.

Understood. Okay. And then a question on, I guess, C-band. When are you expecting -- or where are the satellite companies in terms of Phase 1 payments coming in? I'd love what you think there. But also, I guess, with some news yesterday or the day before that some of the wireless guys are delaying 5G rollouts because of potential interference issues, right, from the FAA. So I'm curious -- which I thought that issue was resolved back in the day. So I'm curious what you think or what you're hearing about that as well.

So the -- as you noted, the kind of the clearing process in the U.S. is taking place in 2 phases. We believe that we've now done everything we need to do to clear the spectrum that we've been using. We expect to receive the first payment from the FCC, which I believe is 25% of the total $344 million that we expect to receive. We expect to receive the first payment early next year. And then the second payment, my recollection is the industry is required to clear that spectrum by December 2023, I think it is. Again, I think we've already done everything we need to do to meet that deadline. But the other operators haven't yet and still need some time to do that. So my expectation is the second payment is something that we would receive. I'm staring at a colleague. It's further out, Mike. But certainly, none of the proceeds that the satellite operators are entitled to are going to be adversely impacted by these discussions that the wireless operators are having with the FAA. It's very clear what we all need to do in order to be entitled to those payments, and that is clear that spectrum and clear it on time. So yes, it's not my expectation that -- and to be clear, the carriers are -- have paid for their spectrum. So that money is available for the satellite operators once that clearing is done.

Understood. And just one more, because a lot of other questions have already been asked and answered. But just conversations with the export credit facility folks. Are you still talking about similar-sized type facility to what you've mentioned before on calls? Just any color there would be helpful.