Telesat Corporation (TSAT) Earnings Call Transcript & Summary

Yes. Look, I mean the pros and cons of providing communication services with geostationary satellites, or Low Earth Orbit satellites; or MEO, Middle Earth Orbit, it's not lost on us. And there are trade-offs. GEO has some real benefits in terms of being able to permanently concentrate your capacity where you want it, that's good, and we've been doing that for 50 years. But there are some drawbacks. And probably the biggest drawback is a second of latency, which we think is a problem when you're trying to address the enterprise broadband market. And I could talk about that for a whole long time. So we were very, very focused on: one, making sure we're bringing to the market what the customers want, which we believe is low latency, affordable, highly reliable, very high throughput connectivity and making sure that when we deploy the LEO constellation, designing it in a way that allows us to maximally deploy our capacity where users want it, right? So it goes to your point, are you going to have a bunch of stranded capacity up there. So we did a bunch of things to make sure that as much as possible the spacecraft that we have in orbit can be serving customers and generating revenue. So the first thing we did was come up with what I think is a very intelligent orbital architecture. I talked about this hybrid mix of polar orbits and equatorial orbits. Polar is very efficient for providing global coverage. But after your satellite spend their time over the poles, and there's some demand up there. And I actually think you need polar coverage to effectively serve government users, maritime traffic and aero, but you don't want too much satellites up there. So the equatorial ones kind of counterbalance that. But in addition to that, all of our satellites have a phased array electronically steerable antennas so that as they're orbiting the earth, we can dynamically reshape their coverage to make sure that they're serving areas where our customers want that capacity laid down. And even when they're over oceans, that's aero, that's maritime, that's government, and those are important verticals for us. The other thing that we've done is all of our satellites are connected to each other with optical lasers in space. So even if you've got a satellite that's over the Pacific somewhere or over the poles, it's never off-network. It's always able to pass traffic optically with all the other satellites in the constellation. And we think that, that's absolutely game-changing. And so it's true. Right now, we've got an 84% utilization that I mentioned on our geostationary fleet. I don't think we'll ever be able to achieve that with a Low Earth Orbit satellite constellation because, as you said, Phil, just the very nature of it, you're going to have some of your satellites over -- covering parts of the world at any point in time where there's maybe less demand, but we don't think it matters. We think that -- and we're rigorous about this. We think that the benefits that you get from providing low latency services, being able to cover the poles, which you can't with geostationary satellites, the way we built this network with the optical links and the phased array antennas and the hybrid orbital architecture, we think that we'll be able to have still a robust enough utilization that the returns that we're going to be able to achieve with our network are going to be very attractive. But it's a great question because I've been in this game for a long time. Running a satellite fleet isn't very different than running a shopping mall or an airplane or a hotel, which is to say it's all about utilization. And your average rate per unit, whether that's a seat on an airplane or a hotel room or a transponder on a satellite, you have to be rigorous about that.

So I think on the call, you talked about something like 100,000 different GEO locations and thinking about the business cases on each of those.

Yes, yes, yes. No. So we've built up our business case in this kind of very rigorous way. On our last earnings call, I was talking a little bit about how we went about doing that. And what we did is -- and we did it differently for each of these different verticals that we're serving. But for the biggest vertical that we're serving, which is providing kind of backhaul connectivity in the terrestrial market. So this is providing links from, for instance, a cell tower or a remote community and connecting that back to some data center, back to some point of presence to provide Internet connectivity. We've divided the world up into, I don't know, I think it's like 150,000 polygons. And within each of those polygons, we've mapped out all the towers in those polygons. We've mapped out the kind of user density in those polygons. We've looked at fiber availability, microwave availability, ARPU because all these polygons have very different characteristics in terms of who's living and operating there. So yes, that's what we've done. And then for the aero market, we've looked at, gosh, was it a wide-body plane, a narrow-body plane, is it a business jet, is it a big, medium, small plane. We've looked at all the traffic routes for the aero market, same for maritime, cruise ships, high-end yachts, smaller pleasure craft, maritime transport ships, offshore drilling, all the different kind of different government users, whether it's UAVs or fighter jets or different kinds of ships. I mean, just all of that. And we've built this business case up in a, I think, a very rigorous, sober way to come up with this TAM that we think is out there for Telesat to address with its LEO constellation, and we've made all sorts of judgments about our share of that TAM, all sorts of judgments around where we think pricing is going to go and have come up with what I think is a pretty sound business case to support this investment that we're going to make.

A big part of -- I mean satellite in my experience has always been supply and demand, right? So you -- it sounds like you have a unique asset, but how much of that can be addressed by other LEO constellations that are going up and supporting not just yours but 3, 4 or 5, we'll see how many others? What sort of feeds into that? What do you assume?

Well, I mean, we've assumed that these other systems are going to get built. Years and years and years ago, Telesat had a monopoly over satellite services in Canada. Unfortunately for me, I wasn't working at the company at the time. But I think that went away about, I don't know, 25 years ago or something like that. We operate in a competitive market, a highly competitive market, and we've been competing against every other satellite operator in the world, every fiber provider in the world, every microwave provider in the world for a whole long time now. And that isn't going to change. And so we assume Starlink is going to be there. We assume that Amazon Kuiper is going to be there, OneWeb, all the guys that we're competing with today. And we feel good. I mean, we think that, that total addressable market is, I don't know, I think we've said $430 billion, I think, is the number that we've put out there. Now about half of that is for kind of direct-to-consumer broadband, which is mostly the market that Starlink and Kuiper have kind of designed their constellations to serve, but we'll compete against them in some of these enterprise verticals as well. But if we can get a percent -- if we can get 1% of that kind of a market, we'll crush our business plan. So we believe that this market will be competitive, but we know this market. We've designed our constellation in a way that we think is going to give us certain competitive advantages in the markets and the verticals that we're targeting. I think -- our plan to capture, I think we said about 1% of that market, I hope is conservative, should be conservative. But yes, no, we -- and you're right. I mean, our industry, like every other industry out there, it's all about supply and demand and getting that right and making sure that you're bringing a value proposition to the market that is going to be attractive to the customers that I think we know pretty well. Yes, yes. I mean that's how we think about it.

Do you think there's room for consolidation among -- I mean there's not many constellations up, but among the announced and planned, does it make sense to see some M&A before these things are built?

Well, we're seeing some M&A in the industry right now. I mean there's a pending deal right now. Viasat is working to acquire Inmarsat. I think there'll be more horizontal consolidation in our space. There's been lots of vertical consolidation. So I think we'll see more of that. And we've seen -- throughout my time in the industry, we've seen sort of periods of consolidation, periods that have been pretty quiet and whatnot throughout. I think we're entering into a period where consolidation is going to pick back up. For the LEO constellations, maybe over time there could be some. There's room, I believe, in the market for multiple Low Earth Orbit satellite constellations. And I think if I had to guess 10, 20 years from now, I think there will be a number of Low Earth Orbit satellite constellations that are serving the market, and they're all doing pretty well, and they'll probably have different strengths and weaknesses in different verticals. I think that's just kind of the nature of our business. I think -- so my own guess is in the next, I don't know, 24, 36 months, we'll probably see some consolidation of some of the existing providers that have been out there. Over time, yes, maybe there'll be some consolidation of some of these LEO constellations as well.

Okay. Have you -- you're not as far along as we had talked about a few years ago. Have you missed anything yet? Or is everybody just behind, and this is how it sort of typically goes?

Yes. It's taken longer than I would have anticipated. COVID has been part of that for sure. And now I'd say our most recent delay, it was also COVID-induced in that. Look, to the extent that you think that some of the supply chain issues that we're seeing and some of the inflation that we're seeing is COVID-induced, and I'm no economist, but I don't think it's all COVID-induced. But we've had some additional delays because of what we're seeing more recently in kind of the supply chain in the broader inflation realm. But not surprisingly, we're not the only one that's been impacted by this. I think everyone is having their in-service dates moving to the right. We were never going to be first. We had some competitors that were kind of out in front of us a little bit. I was never particularly troubled by that. I always believed it was the better thing to do when you're talking about investing this much capital to bring the right constellation timely to market, getting out there with a constellation and spending a lot of money bringing something to market that I think would have been a less compelling value proposition that just never made sense to us. So for us, it was all about being timely to market. And if we can execute kind of in a good way from here on out, we will be timely to market. Yes. And that's kind of how I think about it. Would I like to be out in the market now with our constellation? 100%. I mean, there's massive demand right now for the kind of constellation that Telesat is bringing. But if we execute well from here, I think we'll be good. This is what it feels like to us right now.

When do you expect to start launching?

2025.

Okay. And when would you have the full constellation up?

2026. On the current plan, that's what it looks like right now.

And getting that funded at this point, you're relying on the export credit...

That's the big missing piece right now, and we've been as explicit about this as possible. We have lined up a little bit more than USD 3 billion -- no, I mean US dollars, about USD 3 billion of financing between the cash that Telesat has on its balance sheet, the contributions that we've made to date. We've now announced a -- now I'll move to Canadian dollars, sorry, about a CAD 1.4 billion financing commitment from the federal government of Canada, another CAD 400 million from the government of Quebec. We've got the C-band proceeds that we were talking about that we're going to contribute to our LEO constellation. So the missing piece -- we've said that the total CapEx of our constellation is around USD 5 billion. So the missing piece has been completing our financing discussions with the export credit agencies that we're hoping will support the program. And so we're -- we have to pause our discussions with them when we had the supply chain hiccups with the vendor. We're now reengaged with the export credit agencies, but that's the focus right now is bringing those discussions to a successful close.

Is there a technology that you're still working on to make all this work? Or is that all sort of baked in?

Not really. Yes. No, it's all -- this is a kind of forward leaning constellation from a technology perspective. But all of the key technological building blocks, the optical inter-satellite links are each of our satellites is a basically flying computer processor. So the computer processor, these electric steerable antennas, all of that, we've been building prototypes. We've been derisking that stuff. Yes. No, it's not technology, which is not to say that we don't need to be careful in terms of those different component parts being built and integrated. But the final piece here right now, it's really closing the financing.

Okay. So last question. So let's say we're here a year from now, which I hope we all are, the -- at that point we'll be in 2023, what else needs to happen to keep you on plan? I assume getting the funding.

Yes, getting the funding, making sure that our vendors can timely source the components that they need to build these satellites, the ground infrastructure and whatnot. That's what it is right now. I mean it's closing the financing, and then it's just doing good, rigorous execution with all of our different suppliers. Telesat's been doing a good job of that, I'd say, for years and years. So from where I sit, once we get the financing, we've got a phenomenal team in terms of overseeing the execution of a big complex program like that. We're all very keen to get on with it. So that really that's what it is.

We just saw Gogo announce a deal with OneWeb. Are deals like that sort of something that you're not worried about because by the time you're up and running, they will have rolled over?

Yes, I'm not worried about it at all. I mean we know the folks at Gogo well. We know the folks at the other business jet providers. I think they were right to do that deal. And what that deal tells you is that companies like Gogo need access to a global low latency satellite constellation, but the capabilities that we'll be able to deliver relative to what OneWeb is doing and what others are doing will be transformative. And I think Gogo understands that well. And I think the other sophisticated users, and I consider Gogo a sophisticated user, honestly, doesn't trouble me at all.

Okay. That's a good place to leave it. Thanks, Dan.

Good.

Thanks, everybody.

Thank you.