MDA Space Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 9 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to the MDA's Conference Call and Webcast. This call is being recorded on November 8, 2023 at 8:30 am Eastern Time. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

Operator

I I would now like to turn the conference over to Shereen Sahabi, Senior Director of Investor Relations at MDA.

Speaker 1

Thank you, operator. Good morning, and welcome to MDA's Q3 2023 earnings call. Mike Greeley, our CEO Envito Calmoni, our CFO, will lead today's call and share some prepared remarks before taking your questions. Before we begin, I'd like to remind you that today's call will estimates and other forward looking information, which may differ from actual results. Please review the cautionary language in today's press release and public filings regarding various In addition, during this call, we will refer to certain non IFRS financial measures.

Speaker 1

Although we believe these measures provide useful supplemental information about our financial performance, these measures do not have any standardized meaning under IFRS, and our approach in calculating these measures may differ from that of other issuers and therefore may not be directly comparable. Please see the company's quarterly report and other public filings for more information about these measures, including reconciliations to the nearest IFRS measures. And with that, it's my pleasure to turn the call over to Mike.

Speaker 2

Thank you, Sherry. Good morning folks and thank you to those joining us today to discuss our Q3 2023 financial results. We delivered another solid quarter in Q3 with double digit revenue And adjusted EBITDA growth, solid profitability and record backlog. Results would showcase the team's continued strong execution and the momentum we are seeing In our business and our end markets. Q3 was a busy quarter for MDA.

Speaker 2

In August, we announced we've been awarded a $2,100,000,000 contract from Telesat to act as the prime satellite contractor on the Telesat Lightspeed LEO constellation. Our second prime satellite contract in 18 months and a testament to MDA's innovative technology and advanced manufacturer capabilities in this market. Shortly after, we announced the acquisition of the digital payload division of SADXfly Communications as we continue to invest in our digital satellite technology and talent. That acquisition was completed last week and I look forward to spending time with that team coming up soon. We also unveiled our new software defined digital satellite product at the World Satellite Business Week Conference in September as the market continues to transform from analog to digital satellites With Telesat being an anchor customer for this new product line.

Speaker 2

And subsequent to quarter end, we announced a selection of SpaceX As our launch partner from Chorus, our next generation earth observation constellation and confirmed our launch window for Q4, 2025. Of course, none of this would have been possible without the hard work and dedication of the entire MDA team, who I'd like to thank and acknowledge. As a result of the strong execution year to date, we are updating our guidance for the full year. We now expect 2023 revenues to be in the $790,000,000 to $810,000,000 range, an increase of approximately 25% year over year at the midpoint of guidance. We are also increasing our adjusted EBITDA guidance to $165,000,000 to $175,000,000 representing approximately 20% to 21% adjusted EBITDA margin.

Speaker 2

For the full year, we expect capital expenditures to be in the $200,000,000 to $210,000,000 range, primarily reflecting growth investments across our business areas. In line with our long term strategic plan, we continue to invest in the business to meet current and future growth across our business areas. In satellite systems, we are continuing to make investments in new technologies and capabilities to accelerate our transition from analog to digital payloads And build up our high volume satellite manufacturing capacity as more low earth orbit or LEO constellation opportunities come to market. Telusat Lightspeed Award is a great example of how we are strengthening and securing MDA's position at the heart of the rapidly growing LEO constellation and satellite systems market. MDA's contract includes the design, manufacture, assembly and test of 198 satellites with options for Telesat to purchase up to 100 additional satellites.

Speaker 2

The recently completed acquisition of SADEX VY Space Systems U. K. Helps advanced MDA's new digital satellite product offering, adding complementary digital payload expertise and capacity to meet growing customer demand. In Robotics and Space Operations, we are leveraging our Global leadership in space robotics innovation and long history of success with Canadarm to win follow on space agency work, Most notably securing the award to develop the Canadarm III robotic arm, which is destined for NASA's Gateway, a lunar orbiting international space station. We are also engaging with a full slate of new and exciting commercial opportunities as they emerge in the market to provide both proven technology solutions and on orbit operational services.

Speaker 2

And in our Geo Intelligence business, we continue to see robust demand for our earth observation data and analytics and are advancing work on the KORUS Earth Observation constellation, which will provide even greater imaging capabilities and actionable insights for our customers. I'll now quickly step through the financial highlights for the quarter, spend a few minutes giving you a view on the industry, provide an update on MDA's 3 business areas and then pass it over to Vito for a deep dive into the financials. For the Q3, MDA delivered revenues of $205,000,000 up 19% year over year. Adjusted EBITDA was $43,000,000 up 10% year over year and adjusted EBITDA margin was 20.9%. Our backlog at quarter end stood at $3,100,000,000 a record level for the company, driven by the sizable Telesat Lightspeed award.

Speaker 2

We ended the quarter with a healthy balance sheet, which gives us the financial flexibility to run the business and invest in our strategic initiatives. Next, I'd like to update you on developments within the broader space market, which is continuing to expand, mature and gain momentum. A few items worth highlighting. Starting closer to home, the Government of Canada announced in October a $1,000,000,000 of funding over 15 years for the Radarsat Plus portfolio, an initiative aimed at ensuring continuous, efficient and sustainable access critical and high quality Earth observation data for Canada. The latest funding announcement builds on the momentum we saw earlier in the year when Canada announced $2,300,000,000 of investments for 2 space initiatives, continuing Canada's participation in the International Space Station and developing and contributing a lunar utility vehicle to assist astronauts on the moon.

Speaker 2

These commitments signal not only the speed of the market opportunity before us, but the growing importance of the space economy on a national level. In September, the world watched as a historical 7 year mission of OSIRIS REx successfully returned to Earth, touching down in the Utah desert with physical samples of the asteroid Bennu, thanks in part to an MDA built laser altimeter. Over the course of 6 months, the OSIRIS REx laser altimeter mapped and measured the surface of the asteroid producing a highly accurate 3 d map. That three d map provided scientists critical insight into Bennu's surface, enabling them to pinpoint an ideal spot on the asteroid's rocky terrain From which to collect a sample. The successful completion of this mission is a serious point of pride for all of us at MDA.

Speaker 2

And on August 23, India became the 1st country to land a spacecraft near the Moon's South Pole, an unchartered territory that scientists With this landing, India also becomes the 4th country to ever achieve a soft landing on the moon after the United States, Russia and China. 1 of the major goals of India's mission is to hunt for water based ice, which could support human habitation on the moon in the future. India is just one of a number of countries with lunar and space exploration ambitions. According to a recent report from space market analytics firm Euroconsult, the number of space exploration missions are projected to exceed 750 in the next decade, more than tripling from the 2 36 missions we saw in the previous 10 years. Global government spending for space exploration is expected to grow from $26,000,000,000 in 2023 to approximately $33,000,000,000 by just 2,032 as governments around the world support ambitious space exploration plans.

Speaker 2

South of the border, both NASA And the U. S. Department of Defense Space Development Agency or SDA continue to advance civil and defense space programs including Artemis, NASA's lunar exploration program to send humans back to the moon. And SDA's multiple LEO constellations, which will create a new ecosystem of satellites designed to enhance space infrastructure and help protect national interests and which is resulting in repeat orders for core technology suppliers like MDA. Globally, we continue to see increased interest in space exploration with Germany being the latest country to sign on to NASA's Artemis Accords, signaling its commitment to safe long term and ethical space exploration.

Speaker 2

The latest entry brings the group size to 29 nations with interest from many non traditional spacefaring nations, which are now building their own national space programs. In terms of space infrastructure, spacecraft launch activity continued to unfold at a record pace. In the first half of twenty twenty three, A total of 1666 spacecraft launched globally, an increase of approximately 40% versus the same period last year with 93% of those spacecraft operated by commercial players and the majority comprised of communications satellite launches. The higher activity levels are driven primarily by growth in commercial LEO constellations. All of this activity bodes well for MDA And our future pipeline opportunity set, which we estimate today at approximately $17,000,000,000 in cumulative pipeline over the next 5 years, a level that we would characterize as very robust for the company.

Speaker 2

Now I'll turn to our 3 business areas. In satellite systems, we are seeing good momentum in this market with our teams working to advance multiple requests for communication satellite solutions And a growing number of LEO constellation projects. We are seeing good activity levels from customers and our opportunity funnel remains strong. As I noted earlier, in August, we announced an expanded role in the Telesatellite Speed program, where MDA is acting as the prime satellite contractor for the 198 satellite constellation, responsible for the design, manufacture, assembly and test of the satellites. Over the last few months, our teams have been busy engaging with our supplier base And progressing early design work, system requirements analysis and subcontractor tendering, planning and preparation.

Speaker 2

Additionally with this contract, Telesat becomes the anchor customer for MDA's new and industry leading digital satellite product line. The fully integrated portfolio includes a complete range of modular digital products and components for space based communication solutions Coupled with advanced high volume manufacturing capability capable of delivering 2 satellites a day, helping dramatically To reduce production cost and schedule for customers. As an example, Telesat has indicated that MDA's new software defined satellite product was a significant factor in their ability to bring down the cost of Lightspeed Constellation by approximately $2,000,000,000 when compared to the original constellation design. We also recently completed the acquisition of the digital payload division of SADX-five Communications And I'd like to extend a warm welcome to our new team members. The team, which is based in the U.

Speaker 2

K, has been integrated into MDA U. K. And brings with it Strong capabilities and expertise in digital payload technology. The team will be collaborating closely with our satellite systems business in Montreal and will help us expand our footprint in the U. K.

Speaker 2

Market and add strategic in country capability to produce satellite payloads. Moving to other notable programs. We continue to make good progress on the Globalstar program. The team recently completed the satellite critical design review and is currently progressing towards a spacecraft integration readiness review in Q1 of 2024. For the Globalstar program, MDA was selected That's the satellite prime contractor to enhance Globalstar's LEO constellation through the addition of 17 satellites, We support SOS features and direct to device communication for Globalstar's customer Apple.

Speaker 2

Moving to our Geo Intelligence business. Customer demand for our earth observation offerings remain robust and we are seeing increased recognition of the role that commercial earth observation satellites can play to provide near real time data and analytics to governments and private enterprise. We continue to advance work on our Chorus constellation, which will include a 4th generation MDA built C band synthetic aperture radar satellite in addition to the X band satellite, which we're purchasing. The team continues to advance unit and subsystem level work for the platform, payload and bus avionics as well as building the ground segment subsystems And detailing Constellation operations plans and processes. Subsequent to quarter end, we announced at our Earth Insights customer event in October, The selection of SpaceX as our large partner for Chorus with a launch window set for Q4, 2025.

Speaker 2

The event, which brings together our global customer community for our Earth observation business, was a great opportunity to feature the enhanced capabilities of Corus and help existing and new customers gain a better appreciation of the technology that's coming. We are pleased with the response from customers Continue to engage in active discussions with both new and existing customers on how Chorus can help address their earth observation data and analytics needs. In terms of other notable programs, work on the Canadian Surface Combatant or CSC program, one of our long term government programs is progressing in line with our expectations. The team continues to meet our technical milestones and complete capability testing as required. Recall that MDA is Responsible for the design and integration of the electronic warfare system for the ships, which comprises a suite of sensors including laser warning Electronic system technologies used to detect threats to help protect the men and women of the Royal Canadian Navy.

Speaker 2

Moving to our Robotics and Space Operations business. We continue to see good traction and activity levels on both government and commercial fronts. On the government side, we continue to progress the design work on Phase B of the Canadarm III contract, which MDA was awarded in early 2022. And now we'll see us completing the preliminary design of Canadarm's 3's robotic system to be used aboard the NASA led Lunar Gateway. The team is making good progress towards the preliminary design review milestones.

Speaker 2

And during the quarter, we submitted an updated bid for the next phases of work on Canadarm 3, including advanced detailed design, detailed design and manufacturer integration and test. In Q3, we also received follow on contracts For the Canadarm III external robotics interfaces, including the final construction and delivery of the interfaces. This latest award builds on the design work completed by MDA during the earlier phases of the program. With these new contract awards, the external robotic interfaces become the first Canadarm 3 hardware components to go into production, a major milestone for the Canadarm 3 program and Canada's space program. The team is also working with the Canadian Space Agency on bids for follow on services contracts to provide engineering support to the International Space Station Robotics, including Canadarm2 as part of Canada's commitment to support the ISS until its retirement in 2,030.

Speaker 2

On the commercial side, we're exploring a number of opportunities to incorporate our robotic technology on applications to support space exploration and mobility and are encouraged by the level of customer activity in this market area. Shifting to operations. We continue our hiring efforts to support the anticipated revenue ramp up. Over the last year, we have added more than 840 new hires. With more than 2,900 highly skilled MDAs done, we have the people and the talent to help propel our growth And give us the scale to execute on the market opportunities we see emerging.

Speaker 2

The team is busy planning and preparing For the move to our new global headquarters and space robotics center of excellence in Brampton, Ontario, expected to begin in the Q1 of 2024. This purpose built facility will feature state of the art labs, manufacturing, R and D and assembly integration and test facilities. The Center of Excellence will also house multiple space robotics mission control centers, enabling MDA to provide critical on orbit operations capabilities to commercial and government customers worldwide. We also remain vigilant when it comes to our supply chain, keeping a close eye for potential business disruptions And so far these have all been manageable. We continue to deploy a number of proactive measures that have served us well.

Speaker 2

These include designing around known shortages, Finding alternatives that are more readily available, ordering materials as early as possible and building up inventory for some components. For new programs, we are ensuring that our supply chain organization has full visibility early in the process to ensure our orders are placed promptly and monitored constantly to mitigate any delay risks. To recap, we are pleased with our performance this quarter. With momentum building across our operations, our team is energized and we remain laser focused on our priorities. A strong focus on execution, converting opportunities in our funnel and expanding our leadership in core markets, while maintaining strong profitability and a healthy balance sheet to help us fund our growth initiatives.

Speaker 2

With that, I'll hand it over to Vito to walk us through the detailed financials.

Speaker 3

Thank you, Mike, and good morning, everyone. For my update today, I'll walk you through our Q3 2023 financial results and also provide additional color on our outlook update. As Mike has noted, overall Q3 was a strong quarter for MDA and we're pleased with how the team is executing. In the quarter, we saw strong revenue growth with revenues up 19% year over year, slightly ahead of our guidance for the quarter. In terms of adjusted EBITDA, Adjusted EBITDA margin of 20.9 percent exceeded our 19% to 20% guidance range and backlog at the end of the quarter stood at a record 3 point $1,000,000,000 Total revenues for the quarter were $204,700,000 and this represents a $32,700,000 or 19 And the year over year increases were driven by higher revenues across our businesses with strong contributions from our satellite systems And our Robotics and Space Operations businesses in particular.

Speaker 3

By business area, revenues in our Geo Intelligence business of $48,400,000 represents an increase $2,900,000 or 6.4 percent compared to Q3 2022 and this was driven by slightly higher volumes of work. In Robotics and Space Operations, we saw healthy year over year growth with revenues of $61,900,000 in the latest quarter And that represented a $7,300,000 increase or 13.4% versus Q3 of last year. And the growth is largely attributable to higher volume of work performed on the Canadarm3 program. Revenues in SaaS Systems of $94,400,000 in the 3rd quarter were $22,500,000 or 31.3 percent higher Compared to the same quarter in 2022, trunk showing was driven by higher work volume as new programs ramp up, including the Global Start program, which was awarded to us in Q1 of 2022. Moving to gross profit and as a reminder, gross profit represents our revenues less Cost of revenues, which includes materials, labors, allocated overhead, shred credits and depreciation.

Speaker 3

For Q3, gross profit was $57,700,000 representing a $1,300,000 or 2.3% increase over the same period last year. Gross margins in Q3 2023 was 28.2% and this compares to 32.8% for the same period in 2022 as a result of MDA's evolving program mix and in line with our expectations. As discussed in previous quarters, we do anticipate the mix of programs in 2023 to cause a slight drop in gross margins as we make our way throughout the year and we're seeing that here. Q3 operating expenses of $42,000,000 were $3,400,000 or 8.8 percent higher than last year's $38,600,000 and this reflects an expansion of our SG and A functions as our work volume grows And a steady pace of R and D investment as we advance our development work on KORUS, our next generation earth observation constellation and other proprietary technology initiatives. Adjusted EBITDA.

Speaker 3

Adjusted EBITDA in the latest quarter was $42,800,000 compared to $38,800,000 in Q3 of 2022 driven by higher gross profit as we continue to execute on our backlog. Adjusted EBITDA margin was 20.9% in Q3 2023, excuse me, compares to 22.6% in the same period last year. The year over year change in adjusted EBITDA margin was largely in line with the variance in gross margin over the same period. As noted, we ended the quarter with $3,100,000,000 in backlog This represents an increase of 123% on a year to date basis and 118% versus the same period last year. The increase in backlog was driven by new order bookings, including the recently announced Telesat Lightspeed Constellation contract award, partially offset by continued conversion of our backlog into revenue.

Speaker 3

In terms of CapEx, we remain focused on making the right investments in the This is to support our strategic growth initiatives. And in Q3 2023, we spent $49,400,000 on gross capital expenditures. This was up slightly from $40,900,000 last year. Growth CapEx was $44,000,000 in the latest quarter compared to $35,000,000 in Q3 of 2022. And consistent with our plan, we expect to see year over year growth in CapEx spend As we advance Corus and invest in initiatives to support our growing business, including expanding and modernizing our physical infrastructure.

Speaker 3

Cash from operations during the quarter was a usage of $30,000,000 compared to a cash generation of $7,000,000 in Q3 of 2022. The year over year decrease was driven by higher working capital requirements in Q3 2023 as a result of the timing of certain milestone Payments versus the same period last year. On a trailing 12 months basis, it's important to note that our operating cash flow totaled $95,000,000 helping Fund our growth investments. Free cash flow in the quarter was a use of $79,400,000 in the latest quarter. Cash from financing activities was an inflow of $53,500,000 which primarily reflects the borrowings made on our revolving credit facility during the quarter compared to $23,500,000 in Q3 of 2022.

Speaker 3

In terms of balance sheet, we ended the quarter with a healthy financial As Mike has noted, net debt at the end of the quarter stood at $290,400,000 available liquidity was $275,000,000 remains Elevated at $275,000,000 and net debt to trailing 12 months adjusted EBITDA ratio was 1.7x. In summary, this was another strong quarter of execution from the team and in line with our guidance. We're seeing positive inflection in our revenue and profitability as we convert our backlog. Turning briefly to outlook. For fiscal 2023, we're raising our financial outlook to reflect strong execution to date.

Speaker 3

We're narrowing our full year revenue guidance to $790,000,000 to $810,000,000 and this was from $785,000,000 to $810,000,000 previously. And this represents robust year over year growth of approximately 25% at the midpoint of guidance. We are raising our 2023 adjusted EBITDA guidance to $165,000,000 to $170,000,000 from $155,000,000 to $165,000,000 previously, And this represents approximately 20% to 21% adjusted EBITDA margin. We're also narrowing our 2023 capital expenditures Range to $200,000,000 to $210,000,000 from $200,000,000 to $220,000,000 previously, comprising primarily of growth investments to support Chorus And the previously outlined growth initiatives across our three business areas. With strong execution year to date, we look forward Wrapping up another successful year here for MDA.

Speaker 3

Our backlog sets us up well for 2024 as our teams ramp up and advance Our work on a number of technologically exciting and strategic programs across our entire business. Mike, with that, I'll turn it over to you.

Speaker 2

All right. Thank you, Vito. I think with that, we'll open it up to questions. Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from Doug Taylor from Canaccord Genuity. Please go ahead. Your line is open.

Speaker 4

Yes. Thank you and good morning everyone. Congratulations on another strong quarter of execution.

Speaker 3

Thanks Doug. Thanks Doug.

Speaker 4

Telesat earlier this week spoke to the strong progress in moving the Lightspeed program forward with ramping and working with Supply chain and such you've echoed that today. So my question is, I wonder if with the benefit of a couple more months of planning now Behind us, are you willing to share anything incremental about the model implications we can anticipate for 2024 or any other timeline that you could potentially help us with?

Speaker 2

Yes. I think Probably not a lot right now. It's very similar to how we talked about it before. Like, I agree with our remarks, of course, and I agree with Talitha's remarks like we're very much in sync. We're executing on the plan.

Speaker 2

The teams are working really well together. So it's a very positive story. But there's a lot of work to do to ramp up. So it is a long gradual ramp up. We've tried to characterize that through 2024 that It's a steady ramp up through 2024 as we solve everything and start to incrementally activate the supply chain With the follow on years being a bit bigger of a burst as we then get into really receipt of a lot of materials and get into production towards those 1st 2026 launches.

Speaker 2

So the 2024 is a ramping year for the year and then very heavy busy 2526.

Speaker 4

Okay. And maybe sticking with the satellite systems business, like the Globalstar program continues to move along nicely. Could you remind us as to when we should expect to reach Peak revenue throughput related to that program

Speaker 2

in the years ahead? I'll let Vito talk if he's got anything there. But I remember when we first talked about this program and it hasn't changed. It's very much a steady program. It's sort of A 3 year burst with like steady years throughout the 3 years on that one.

Speaker 2

And so there's not really a peak. It's just like 3 solid steady years and that are Similar in nature.

Speaker 3

I just echo those comments, Mike. Doug, Globalstar is progressing extremely, extremely well. We expect steady Revenue through 2024 in relation to 2023, if you will. There's always some revenue recognition timing related matters From a subcontractor perspective, but pretty well in line, I'd say. And just to echo back to your the question around Telesat and what Mike articulated, Clearly, we'll be looking forward to with our year end results and providing more robust 2024 guidance, if you will, formal guidance.

Speaker 3

That Project and the initiatives there that Mike described are going exceedingly well and the developments over the next couple of months Yes. As the teams continue to dialogue, we'll provide a little bit more insight into maybe 2024 revenue specifics. But Nothing no events have no activity has transpired over the last couple of months that take us away from some of the Commentary that we provided when we announced the program. It's all progressing in line with our expectations to more slightly positive.

Speaker 4

We'll look forward to more detail next quarter. Last question for me. Given you now booked a ride for Chorus On SpaceX, can we infer increased confidence in the remaining technical and production milestones Acquired there as you look to derisk the build of that constellation?

Speaker 2

Yes, absolutely. That is the case. That's why we would make those announcements at this time is that we're past all of our critical design reviews. We're in unit production. Next year, we'll transition From unit production into satellite production and that's we can see all that.

Speaker 2

And based on our Schedules, we've made all these calls with SpaceX in our launch window. So, that's what we're confident in for sure.

Speaker 4

Hope that's the line. Thank you.

Speaker 2

Okay. Thanks, Doug.

Operator

Thank you. Our next question comes from Ken Herbert from RBC Capital. Sir, please go ahead. Your line is open.

Speaker 2

Yes. Hi, good morning, Mike, Vito and Shireen. Nice quarter again. Maybe just to start Mike, if we look at the potential of the Telesat exercises more of the options On the Lightspeed program, can you just talk about where you stand with capacity on the digital satellite side? And would you need to incrementally add capacity?

Speaker 2

Or how Yes, it's a big topic. Everyone wants to talk about this topic. It's a good topic, Because we do have a very active pipeline and people need to have the right frame of mind in talking with us about our capacity. You've heard us talk about the transition that we're making. And we're making a transition to the new digital satellite product, which has strong overlap across multiple And that we're then we're modifying our both of our engineering processes Around more of a product based framework, as a result and we're modifying our operations and production facilities around the product And so that's the transition that we're making in the business is to this product and to this product production.

Speaker 2

That's one significant transition, but we're doing it. And it's going well. The result of that is that we can then produce 2 satellites a day. We keep saying that number that this will allow us to produce 2 satellites a day. I of course going on telling people helping people with the math whereby 2 satellites a day is 400 satellites a year.

Speaker 2

And on a 5 year block that would be 2,000 satellites in a 5 year block if you do the math. And Telesat has ordered 200 of those 2,000 over the next 5 years. And so if we got a top up for another 100 from them then that will Fine. That fits in the capacity that we're establishing in the business. If somebody else came along and ordered another chunk, then that's fine too.

Speaker 2

It fits in with that capacity. And so we're making this one transition to give ourselves this capacity and then I get to stare down the sales team to say, okay, Sold 200, 2000. We got to go get 1800 more and everybody smiles back. But that's what we're working on. So definitely we have the capacity To be able to receive those types of top up or follow on orders.

Speaker 2

That's very helpful. And just as you think about that transition To the clearly more of a product based approach, and I can appreciate probably the most recent acquisition fits into this. But what are the risks inherent in that transition? Or how should we think about maybe where there could be These are positive or negative surprises as part of this transition over the next few quarters? Yes.

Speaker 2

I think that in any transition, Well, in all of our growth, we've always say when everyone says what are your big worry Bs, we always talk about talent. We've hired a lot in the last few years. We continue to hire and hire well. Strong engineers are coming into the company.

Speaker 3

Strong manufacturing techs are

Speaker 2

coming into the company. Factoring techs are coming into the company. People are attracted by space and so we are able to hire well, but we massively continue to focus on that Because human talent is what gets us here and keeps us here. And so that's a big area of focus. As you mentioned, the acquisition in the U.

Speaker 2

K. Brings in some talent, also brings in a new team and location. We can tuck a more people in and around them as we go forward into the future as well. So it gives us a couple of different areas where we can add talent to the business. So we'll pay attention to that.

Speaker 2

The other big things that we focus on, the transition to the more Advanced Manufacturing is an incremental step really. We've been doing this for Several years now as we've gone through our role in constellations over the last number of years through 03B and Iridium NEXT And then the OneWeb constellations, certainly not OneWeb that transitioned to OneWeb, which was very much a robotics based manufacturing and test Transition, so as we produced over 2,000 satellites for the 1st generation of the OneWeb constellation. Did I say satellites? I meant antennas, 2010, for the 1st generation. So that's got us Got our chops all tuned up to be able to do this stuff and now we're transitioning all those skills with support of outside experts into the full satellite advanced manufacturing So that's more of an incremental step.

Speaker 2

One of the key things at the moment that we need to pay attention to and I mentioned in my remarks is our continued focus on our supply chain. So we're now out in the market buying very high volumes. And so us making the right choices there and us making sure that our supply chain can scale with us It's also a very important laser focused item for us. Great, Mike. Appreciate all the color.

Speaker 2

I'll pass it back there. Okay. Thank you.

Operator

Thank you. Our next question comes from Kona Gupta from Scotiabank. Please go ahead. Your line is open.

Speaker 5

Thanks, operator, and congrats on a good quarter. Just Wanted to ask about margins first. You're still trending above 20% margin so far this year. And I know you've been talking about 18% to 20% margins long term. Was there anything specific in the quarter that All the margins in terms of mix and your Q4 implied guidance kind of suggests 18% margin.

Speaker 5

So Is that mix shifting into Q4 more than you anticipated? Or what's really happening in these two quarters?

Speaker 3

Hi, Konark. It's Vito. No, we just continue to see great execution. I mean, obviously, mix contributes as satellite In particular, business is a bigger component, but they're executed very well. And the absorption of the overhead as we scale up And the application to the programs continues to be ahead of our expectations.

Speaker 3

So it's overall just continued good execution. You're right in regards to what we're implying there for Q4. And Q4 typically you do have some seasonal effects there That in addition, we don't expect any significant quarter over quarter mix related issues Q3 and Q4. That's more maybe just reflecting Some seasonality that we typically see in Q4, although if you cast your eye to prior year, you also see healthy margins there as well. So We'll continue to refine our guidance and continue to execute towards it.

Speaker 3

But the credit goes to the entire operations team. And also as our revenue grows, clearly, an objective is to continue to make the proper And appropriate long term investments in our SG and A and our R and D, but the expectation, of course, is that we'll get some operational efficiencies As a percentage of revenue through that and that also helps margins as we go forward. So you haven't heard us talk about 2018 for a long time, But maybe 2019 to 2021 as we move forward here. We'll give refined guidance as we move February, but very pleased with our margin performance. Thank you for asking the question.

Speaker 5

Yes. That's great, Vito. Thanks so much. And then, with respect to growth outlook, I know you guys will be providing Full year guidance in the next 3 months or so. But just kind of like conceptually thinking about what do you have in your backlog.

Speaker 5

So for 2023, I think you have about 98% of revenue, planned revenue and backlog. Is there any comparable number like without getting into too much detail, like what's the high level sort of secured revenue in 2024 that's in the back right

Speaker 3

Yes. Maybe we'll just I think that gets us into 2024 February perspective a little bit. But Clearly, as you see us moving and evolving from a backlog perspective, as we provide guidance, there's a More significant component of firm in our backlog as we move forward. TBD on Lightspeed based on what we described earlier around The pace of the ramp and whatnot, but from a perspective of predictability and whatnot as we move forward and Develop a larger revenue base, we're meaningfully derisking the short term sort of view of on the revenue side of things. So We'll give you a little bit more color, Konark, as we move forward with our guidance.

Speaker 3

And I think it's a fair question in February to sort of say how much of Our 2024 guidance is actually in backlog, but we'll take it one step at a time and just hold off there until we do that.

Speaker 5

No, I appreciate that. And then just a quick follow-up on Chorus, maybe perhaps more for Mike. The earthen side event, Mike, it's first For me, for sure. But what is the discussion like there with customers? I mean, you're talking to existing customers as well as new customers.

Speaker 5

And What exactly are they doing at that event? Are they looking at the technology and like you start discussing the contract opportunities with them? Or it's just like more like Showing or showcasing what you have as a product for now and then maybe you get eventually the contracts or the orders in the next couple of years?

Speaker 2

Yes. It's really a it's all of those things in addition to, the customers talking about what they're doing In their communities with, Radarsat-two data and our maritime insight platform Software applications, in addition to what they would like to be able to do with Chorus. And so it's a bit of us talking about where we are and where we're going. It's a bit of us introducing new capabilities that we might have added or tweaked on Radarsat-two and or are about to introduce on Quaras. And then there's like fireside chats and panel discussions with customers community for them to be able to talk about What they're doing and where they're going and what they're seeing in the market.

Speaker 2

So it's a very collaborative kind of community team building thing That occurs. During the time there is 1 on 1 conversations that do occur off to the side With key customers, everybody can request 1 on 1 conversations to get a little bit more sort of personal about where they want to go, What they're buying, what they'd like to buy that kind of stuff. And so you do end up with some of the side sales conversations as well During that session.

Speaker 5

That's great color. Thank you so much for your time as always.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from David McFadgen from Kumar. Please go ahead. Your line is open.

Speaker 6

All right. Thank you. So a couple of questions. When at what quarter do you expect the Chorus CapEx to end?

Speaker 3

CapEx for Chorus essentially will be through the back of it as we conclude 2024, With maybe one exception, one of the items related to launch costs, you're seeing us start to make some prepayments On launch to SpaceX. And that's going to actually sit in our prepaid accounts until we actually launch and then it flips into Yes. So it will essentially be largely funded, I'll say, through 2024. Technically, we'll have a little bit of, Call it, those launch costs flipping from prepaid into capital in 2025, But we essentially break the back of it through the 2024 from a cash flow perspective.

Speaker 6

Okay. And then when you report your 4th For results, do you expect to issue 24 guidance then, I guess?

Speaker 3

That's correct. Across all the metrics, obviously, revenue margin, capital, all those systems, how we're doing it today, yes.

Speaker 6

Okay. And then maybe you could give us a couple of updates. So on the Canada Lunar Utility Vehicle Program, dollars 1,200,000,000 I thought that the Canadian government might announce the award of this contract this year or maybe 24. Can you give us an update on that?

Speaker 2

Yes. I don't think we've got an exact schedule from them on that. They're definitely working that through. What they've done from the Canadian Space Agency Perspective is they've just announced an Industry Day, in the December 6th time frame, I think is what stuck in my head that 1st week of December To be able to provide an industry update on their thinking around all their programs, which would include Anticipated schedules. So we'll be looking for an update in that 1st week of December.

Speaker 6

Okay. And then would they also be giving an update On the Radarsat Constellation Mission replacement $1,000,000,000 contract there?

Speaker 2

I expect they'll For sure, they're going to talk about it. They've just made that announcement in the last couple of weeks. And so they were pretty clear that The $1,000,000,000 that they announced had a couple of components there. One was to put another satellite into the radar Constellation mission to give it some more resiliency, while starting the early phases of the radarSat Constellation mission replacement program. So we know that, but then for sure that would be an opportunity for them post the big announcement To give more information at that Industry Day in December.

Speaker 6

Okay. And do you have an idea regarding the $1,000,000,000 of breakdown between Dialog costs versus just annual maintenance and operation?

Speaker 2

Not at this time. No, it's pretty early days here. We just got a big announcement. We'll see how this all plays out. Understand the requirements, understand what they're thinking.

Speaker 6

Okay. And then I was wondering if you can give us an update on the potential $4,000,000,000 contract coming out of NASA. I know you partner with Lockheed Martin And GM on that one, I think they were supposed to announce some awards in November. I was wondering if you can give us an update on that.

Speaker 2

Yes. They were supposed to announce in November. You're right. But they as that approached, they indicated that they're going to switch that to March. And so they need some more time to think that through.

Speaker 2

So they moved their November To March.

Speaker 6

Okay. And then I believe you held or you're going to hold sort of Chorus unveiling for future clients talk about the capabilities. I don't know if you did that or not, but I was wondering if you can give us an update on that.

Speaker 2

Yeah. Yes. So that was that Earth Insights conference that we were just talking about a few minutes ago in October there. So we had, I forget the number 60, 70 Folks come in for that from around the world, all over the world that are RADAR STAT 2 customers and or potential Chorus customers. And everyone got together around that and really good discussions on that.

Speaker 2

So when we would explain Chorus to that crowd, they're all synthetic aperture radar users. I stood up and did my executive hand waving and talked about launch dates. And then as soon as I sit down, It goes real technical, real fast in that crowd because they all live in that world. So yes, they got right into it And get through all the detailed capabilities of that constellation, the capabilities of the satellites, the impact of the Orbital Pass, the ground station concepts and what all that means in terms of operational performance for people. Really good sessions, a lot of excitement and enthusiasm around those conversations.

Speaker 6

Okay. And then lastly, you've been awarded the prime contractor role for 2 Satellite constellations, I don't know if you can disclose this, but I'm just kind of wondering in your sales funnel, how many other Contracts are you chasing where you'd be prime contractor on a satellite constellation build?

Speaker 2

Yes. More than 1, that's for sure. I think these days that In the satellite systems business, you have 2 large buckets of opportunity. 1 is in our merchant supplier business, Where we continue to have like a robust relationship with the market to provide antennas, electronics Payloads and then the other is in the full systems prime role. Those opportunities themselves the full systems prime role split into 2 sub buckets.

Speaker 2

One is a group of opportunities where we could be the satellite prime and then another is the opportunities where we could be the payload prime where someone else is going to The full satellite integration, but we would be the payload prime for the digital payload. And so that's kind of how The pipeline breaks down. We've got a bunch of merchant supplier work and then a bunch of prime work. Then the prime work is either satellite prime of which there are several And then there are payload primes of which there are several.

Speaker 6

Okay. All right. Thank you.

Speaker 2

Okay. Thank you.

Operator

Thank you. Our next question comes from Stephen Mackelson from BMO Capital Markets. Please go ahead. Your line is open.

Speaker 7

Hey, guys. So you noted that the satellite systems pipeline remains strong. Just to clarify, is the pipeline continuing to strengthen New opportunities in the recent months? Or would you just say that it's more at a sustained strong level?

Speaker 2

No. There'd be more opportunities in the recent months. Yes. So like we've had a strong pipeline for several years. We've moved things out of pipeline into backlog such as like $2,000,000,000 worth in the Lightspeed example.

Speaker 2

And then that's been replaced and expanded by other opportunities. So it's an active healthy pipeline.

Speaker 7

Okay. Now with the Canadian Surface Combatant Program, can you remind us when that is when you expect that to hit a full revenue run rate?

Speaker 2

Let me think. Probably as we go through 2025 for sure, because there's a 26 I think is a Current year of like steel cutting on those ships and so they're going to need stuff in a couple of years after that. So there'll be some ramping in 2024 and then 2025 for Sure you get into more of a full production picture.

Speaker 7

Okay. Thanks for the color on that. Final question. There have been more awards with The like the Layer 2 programs in the States and I understand you guys have roles with providing antennas on that. Any updates on discussions with some of the prime contractors for this new phase and future phase?

Speaker 2

It's a really robust thing for us. We the really cool thing in general for LEO constellations is the opportunity for Repeat and follow on business. And the whole SDA community and the different tranches is definitely turning out to be such an opportunity. And So we continue to have repeat opportunities to bid that leads to repeat orders for sure. So we're in Continue with discussions across all the primes and all the various tranches that are out there for bid In terms of opportunities for ourselves.

Speaker 2

So with their success, we hope for our success and we would expect to see Announcements in the future of more continued follow on orders for our antennas into that market.

Speaker 7

Okay. So just to be clear for the latest tranche that was awarded, those are still out for bid or have they been awarded?

Speaker 2

There was just an announcement there on tranche 2 I think that Lockheed Martin and Northrop Grumman between the 2 of them Just received about US1.5 billion dollars of orders for TRON-two satellites. Announcements have not been made yet about any In their supply chain, for various things. And so that would be an opportunity potentially for us in the future to be able to announce some success there. So we'll see how that goes over the next few weeks.

Speaker 7

Got you. Appreciate the color. I'll pass the line now.

Speaker 2

Okay.

Operator

Thank you. Our next Question comes from Christine Liwag from Morgan Stanley. Please go ahead. Your line is open.

Speaker 8

Hey, good morning guys.

Speaker 3

Hey, Christine.

Speaker 8

Free cash flow burn came in a little higher than expectation. Vito, you mentioned that this was related to timing of milestone payments. To what degree do they reverse in 4Q? And where do you expect free cash flow to net out for the full year?

Speaker 3

Dean, hi. Yes, you're right. We had a larger than when you look at the quarters, The historical quarters here, the last several quarters swing than you would have otherwise seen, but very much in line with expectations for us. So there's no surprises With how our cash flow is moving. One of the important things to think about At the end of Q is to examine our working capital or look at our working capital at the end of Q3, notwithstanding The $50,000,000 plus swing, if you will, in the quarter.

Speaker 3

At the end of Q3, we're essentially at a net working capital position of, call it, Just under 30,000,000 usage. And so that's quite normative for us to be in that sort of Plus or minus 30 range. So I think what you're seeing there was just a bit of A swing into more of a normative position for us through the end of the quarter and we're very much in our normal sort of range as we move forward. One When you look at that Q3 balance that I just described is maybe just to call out some of the One timers that are in our cumulative working capital. We have been making some prepayments to SaptiX-five in respect to the chips and whatnot.

Speaker 3

And as at the end of the quarter, there's roughly CAD30 1,000,000 ish that sits there with respect to that. So that's obviously Reflected in the cash flows through cumulatively through Q3. And also you're starting to see us make some payments to Prepayments to SpaceX on launch. In relation to Q4, your question on Q4, I would expect free cash flow to be from an operating cash flow perspective to be Roughly flattish plus or minus maybe 10 ish. And we'll have some additional SpaceX related payments going through in Q4 as well.

Speaker 8

Thank you, Vito. It's very helpful. And maybe taking a step back on Cash, right? Look, it's clear that the growth ahead of the company is visible and that's a testament to the strong wins Your team is able to get any significant orders. But if 4Q free cash flow maybe still under pressure, I mean, Full year 2023 would now be potentially the 3rd year of a negative free cash flow for the company.

Speaker 8

And I know you could provide more guidance next quarter for next year. But just taking a step back and taking a higher view, how do you think about funding for growth? Because it seems like CapEx to support these programs are going to come online and the prepayments that you mentioned, I'm not sure to what degree they start reversing in 2024. But how are you going to fund this growth? And I mean, you're still well below your debt covenant, so there's room there.

Speaker 8

But how high of a leverage are you comfortable with?

Speaker 3

Yes. No, that's a terrific question. I mean, I just need to emphasize that Everything that's transpiring is in line with our expectations and what we've given guidance to the market on. So leverage at the end of the quarter, 1.7. We will cross the 2 leverage likely in Q4, again, very much in line with expectations.

Speaker 3

Your comments around negative free cash flow, absolutely accurate as it relates to 2023 as we predicted and that It's largely in line with obviously the growth CapEx that we are funding. 2024 will be a same Similar year in that regard, if you will, with respect to growth CapEx. And again, we'll refine guidance, but that's consistent with what we've described all the way through. In terms of comfort from a leverage perspective, I would say that 3 is sort of the mark for us. We sort of see that.

Speaker 3

Obviously, our covenants are well in excess of that and the liquidity and availability is well in excess of that. So we understand the nature of the business. We have strong operating cash flow as we move forward into these years. And as we make our way through 2024, I Largely that growth CapEx is meaningfully, I'll say behind us a little bit. We'll still have some in 2025, but Corus, as I've Articulated will be largely behind us.

Speaker 3

So we feel uber confident and comfortable with how it's progressing. And it all starts with obviously a strong revenue and EBITDA margin profile. And once you've got that operating cash flow as a backbone, It gives you a little bit of obviously play there when it comes to the balance sheet. But don't make any mistake about it. We Obviously, we'll be very prudent and run a conservative balance sheet as we move forward.

Speaker 8

Great. Thank you very much for all the color.

Speaker 3

You're very welcome. Thanks.

Operator

Thank you. This is the end of the question and answer session. I will return the conference back to the speakers for closing comments.

Speaker 2

All right. Thanks very much. Thanks everyone for your time this morning. As we've discussed multiple times through We look forward to updating you on our progress at our next earnings call at the end of February, where we can also I'll talk a little bit about what we're seeing for 2024. Thanks for the time and we'll talk to you all then.

Operator

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.

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Earnings Conference Call
MDA Space Q3 2023
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