Telesat Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 10 speakers on the call.

Operator

Conference is being recorded. Good morning, ladies and gentlemen. Welcome to the conference call to report the Q2 2023 Financial Results for Telestat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat and Andrew Brown, Chief Financial Officer of Credesat. I would now like to turn the meeting over to Mr.

Operator

Michael Bolaido, Director of Treasury and Risk Management.

Speaker 1

Thank you and good morning. This morning, we filed our quarterly report on Form 6 ks with the SEC and on SEDAR. 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 a discussion of known risks, see Telesat's annual and quarterly reports filed with the SEC and SEDAR.

Speaker 1

Telesat assumes no responsibility to update or revise these forward looking statements. I will now turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer.

Speaker 2

Okay. Thanks, Michael. This morning, I'll share some thoughts on our financial results and give an update on the business. I'll then hand over to Andrew, who'll speak to the numbers in detail, And then we'll open the call up to questions. As we noted in our earnings release, we've had a busy first half of the year.

Speaker 2

We're tracking our guidance, Received FCC validation on C band clearing, which allowed us to recognize approximately US2 $60,000,000 in the quarter and completed some meaningful additional debt repurchases that we think strengthen our balance sheet And create value for shareholders. But certainly, the big news was our announcement this morning that we've selected MDA As prime contractor for the Telesat Lightspeed satellites and that by leveraging the advanced technology they've been investing in, we're able to reduce our CapEx on the project by roughly US2 $1,000,000,000 While fully maintaining the revolutionary capabilities of the network that we think are going to make it so disruptive and successful in the market. Lightspeed is now fully funded to global service delivery given the company's own equity contribution, certain vendor financing And aggregate funding commitments from our Canadian federal and provincial government partners. The government financing commitments subject to a number of conditions, including completion of confirmatory due diligence and the conclusion of definitive agreements, Which we're aiming to get done by the end of the year, recognizing it could take a little bit longer. I want to thank our government partners for their strong in support of Lightspeed and their recognition of the manifold public interest benefits that flow from the project.

Speaker 2

I want to say a few words about why this approach with MDA is so much more capital efficient and why we ultimately pivoted And made the move to MDA. The game changing development here is the digital beamforming antenna that MDA has developed. We considered a digital beamformer some years ago when we first evaluated technology options for Lightspeed, But our engineers felt that it wasn't ready for prime time, that the technology development risk at the time was too great. That's why when we selected MDA to build the antennas way back then, the antennas MDA prototyped and was going to build for our original planned formed beams using analog technology, which is to say it was an analog beam former. Over the past few years, MDA has continued to invest in the digital beam former and late last year As we were working hard to close our business case funding, which in part entailed looking to optimize the overall Lightspeed design, An exercise I know I've spoken about previously.

Speaker 2

We took another look at the digital beamformer And came to the conclusion that it was now sufficiently mature and that not only could we leverage it, But that we had to given the massive efficiencies it delivers. The performance improvement relative to the analog one It's dramatic. It's game changing. To give you a sense, it can create roughly triple the number of beams versus the analog one, Which means we can serve our customers and cover the globe vastly more efficiently. So for example, While the old satellite design required each satellite to have 2 pairs of analog beamforming antennas to deliver the capacity In the way that we want, we only need a single pair of digital beamforming antennas.

Speaker 2

This allows each satellite to be somewhat smaller and still have the same effective capacity as the larger ones. And smaller satellites almost always mean less Constantly satellites and that's certainly the case here. In the case of Lightspeed, the MDA satellites are roughly 75% of the size Of the earlier versions we were considering. The digital beamformer also creates a better link between the satellite and the user terminal, Which further improves the performance and the efficiency of the overall network. The satellites will continue to have 4 optical inter satellite links, Which we've always emphasized is important to dynamically and rapidly route our users' traffic anywhere on earth And which also provides great resiliency throughout the network.

Speaker 2

In addition to the digital beamformer, NDA also Has been investing heavily in a digital processor that's tightly integrated with the digital beamformer. MDA has been doing all this because they see a big opportunity to build LEO satellites as the industry transitions in that direction. And to their credit, They've already been quite successful, winning last year a highly competitive process to be the prime contractor for the Globalstar LEO constellation that Apple is funding and using. NDA has world class capabilities and high volume satellite manufacturing And is heavily focused on winning more business as a prime, which is why they won the Apple opportunity and why they're going to be building the Lightspeed satellites. The work with MDA and many of our other suppliers has already started.

Speaker 2

We expect the first launch to take place in mid-twenty 26 And that will enter global service in late 2027. The total CapEx for Lightspeed is approximately $3,500,000,000 and if we meet our plan, we expect to grow our revenue and adjusted EBITDA By several multiples and achieve an IRR on the project of roughly 30%. We'll organize an Investor Day and present at a number of conferences in the near term so that we can give investors greater insight into our plans. It would be hard to overstate how pleased we are with the arrangements we've put in place for Lightspeed and how keen we are to get out there with customers, investors and others, it's been a long road, much longer than we anticipated, certainly much longer than I anticipated With COVID and the supply chain constraints and inflation that COVID brought representing real obstacles, But we've always said we see a huge opportunity in the global enterprise broadband market and that we were laser focused on finding the most compelling path forward. Given where we've landed, it's been well worth the wait.

Speaker 2

I want to thank my colleagues at Telesat, Genuinely world class professionals in every key discipline, technical, regulatory, commercial, finance, legal For their resilience, dedication and ingenuity and what I think is hitting an absolute home run here. Throughout our 54 year history, we've always leveraged our deep engineering expertise and leaned into innovation To adapt in a dynamic market and meet our customers' ever evolving, but always mission critical requirements. Telesat Lightspeed is just the most recent example of that. It's been a real privilege for me to work alongside the world class team here And we're all now just a 100% focused on executing the plan. So with that, I'll hand it over to Andrew and then look forward

Speaker 3

release and filings. However, as Dan has said, it's been a long road. And obviously, with our announcement on Lightspeed, we are so excited to be in the position to move forward with our program. Now focusing on our financial performance in the Q2 of 2023, Telesat reported revenues of 180,000,000 Adjusted EBITDA of $139,000,000 And for the 6 months ended June 30, 2023, we generated cash from operations of 102,000,000 And we held $1,500,000,000 of cash on the balance sheet. In the Q2 of 2023, when compared to the same period in 2022, Revenues decreased by $7,000,000 to $180,000,000 Operating expenses decreased by $7,000,000 to $52,000,000 and adjusted EBITDA decreased by $8,000,000 to 1 €39,000,000 The adjusted EBITDA margin was 77.1% compared to 78.4% in 2022.

Speaker 3

Between 20222023, changes in the U. S. Dollar exchange rate had a positive impact of $5,000,000 on revenues, A negative impact of $1,000,000 operating expenses and a positive impact of $4,000,000 on adjusted EBITDA. When adjusted for changes in foreign exchange rates, Revenues decreased by $12,000,000 operating expenses decreased by $8,000,000 and adjusted EBITDA decreased by 12,000,000 The revenue decrease was mainly due to a termination in service by a South American customer, combined with a reduction in revenues from one of our North American DTH customers. This was partially offset by increased revenue from the work we are performing for NASA relating to satellite to satellite communications and low earth orbit.

Speaker 3

The decrease in operating expenses is primarily due to lower noncash share based compensation, partially offset by higher costs associated With the procurement of 3rd party satellite capacity required to support certain customer networks. Interest expense increased by $19,000,000 during the second quarter compared to the same period in 2022. The increase was due to an increase in interest rates in the U. S. Term loan B facility combined with the foreign exchange impact U.

Speaker 3

S. Dollar denominated interest expense. This was partially offset by the impact of the repurchase of notes in 2023 combined with the impact The maturity of one of our interest rate swaps in September of last year. In the second quarter, we recorded a gain on foreign exchange of $7,000,000 as compared to a loss of $99,000,000 in the Q2 of 2022. The gain for the 3 months ended June 30 was mainly the result of a weaker U.

Speaker 3

S. Dollar Canadian dollar and with the resulting favorable impact on the translation of our U. S. Dollar denominated debt. Our net income for the Q2 of 2023 was $520,000,000 compared to a loss of $4,000,000 in the prior year.

Speaker 3

The variation of 524 That's principally due to C band clearing proceeds recognized in the quarter of CAD 345,000,000 combined with positive variation in foreign exchange and the conversion of our debt into Canadian dollars and the gain on repurchase of debt of CAD 153,000,000 This was partially offset by higher interest expense and higher tax expense. For the 6 months, ended June 30, the cash inflows from operating activities were 102,000,000 And the cash flows used in investing activities were $67,000,000 In terms of capital expenditures incurred, they were primarily related to Our low earth orbit constellation, Lightspeed and the newly acquired Anik F4 satellite. Guidance. As you will have noted in our earnings release this morning, we are very pleased To maintain our previously provided revenue and adjusted EBITDA 2023 guidance, the guidance assumes a Canadian dollar to U. S.

Speaker 3

Dollar exchange rate of 1 point 35. Telesat continues to expect its full year 2020 revenues to be between $690,000,000 and $710,000,000 In terms of adjusted EBITDA, Telesat continues to expect between $500,000,000 to $515,000,000 In respect to expected capital expenditures, As a result now of our Lightspeed announcement, we now expect our 'twenty three cash flows used in investing activities to be in the range of $175,000,000 to $225,000,000 And we will provide any further updates at the time of our Q3 call. Looking at cash. To meet our expected cash requirements for the next 12 months, Including interest payments and capital expenditures, we have approximately $1,500,000,000 of cash and short term investments at the end of March As well as approximately US200 $1,000,000 of borrowings available on the revolving credit facility. Approximately US1 $1,000,000,000 in cash was held in our subsidiaries, in addition, we continue to generate an ongoing significant amount of cash from our activities.

Speaker 3

At the end of the Q1, leverage, as calculated under the terms Our amended senior secured credit facilities was 5.69x to 1. Telesat has complied with all the covenants in our credit agreement and indenture. As Dan has also indicated in the Q2 and including the subsequent period, we have repurchased debt with a principal aggregate amount US296 million dollars by way of open market purchases at a cost of $156,900,000 So combining the prior repurchases done in 2022, we have now repurchased a total amount of US456 1,000,000 U. S. Dollars at an aggregate cost of $233,900,000 In addition, this also results in interest savings 27,000,000 annually.

Speaker 3

Further, just to add, since the end of 2020, when Telesat repaid approximately USD340,000,000 Of our term loan, our overall debt has been reduced by approximately 24%. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6 ks provides the unaudited interim condensed consolidating financial information in the NDA. The non guarantor subsidiaries shown are essentially the unrestricted subs with minor differences. So with that, I would conclude our prepared remarks I'm very happy to answer any questions you may have.

Speaker 3

And with that, now we'll turn back to the operator.

Operator

The first question is from Mike Pace from JPMorgan. Please go ahead.

Speaker 4

Hi, good morning. Thanks for taking the questions. Dan, I appreciate all the color and commentary earlier on the MDA contract and what you're getting out of that different from before. But I guess just to be really clear here for some of us that aren't so smart on satellite technology, you will have the same or roughly the same amount of Capacity in this network than the prior network, I just want to confirm that. And then what are you not getting, if anything, for spending $2,000,000,000 less?

Speaker 4

And then I have a few other problems.

Speaker 2

Yes. No, thanks, Mike. No, I mean, it's as we said, This constellation by leveraging this more advanced digital beamformer, It's got the same effect of capacity. We were not going to settle on that. We've got a really good understanding, at least think we do of what the market needs, what our customers are looking for, the need to concentrate capacity dynamically Around the earth and so we didn't trade off any of that, which is the beauty of this.

Speaker 2

So we still have 4 ISLs, Which we've always said is important in terms of our ability to dynamically route traffic around the world and You have greater resiliency throughout the network and gives us a lot more scope in terms of rolling out landing stations. And I didn't even talk about it in my remarks schedule, haven't compromised schedule at all. The good thing about working with MDA as the prime satellite contractor is that We've always been working with MDA on this program. I mean, they already had a big part of the program with They intended that they were going to build. So yes, no, I mean, look, what can I tell you?

Speaker 2

I mean, We've been beavering away in the background. I mean, we've been doing all sorts of things to close the business case. And some of that we talked about real explicitly like engaging with investors on incremental equity contributions and the like. We also Said maybe a little more elliptically that we were looking at other ways to optimize The constellation, the network, and ultimately, we really hit pay dirt there. So anyway, yes, no, it's equally capable.

Speaker 2

And as I said in my remarks, With the digital beam former and our CTO, Dave Wendling is sitting with me here too and Dave can talk more about it. The link is better between the spacecraft and the user terminal when it's transmitted with this digital beam former and that It's kind of above my pay grade in terms of how all that works. But anyway, the analog antenna has to kind of Squint at the user terminal at lower elevations and the digital one doesn't. And it just improves the link.

Speaker 4

But just to be super clear here, is there anything that you're not getting? And the answer and simple no works as well too, but just

Speaker 2

It's a simple no. It's a simple

Speaker 5

no from a

Speaker 2

capability perspective, from a flexibility perspective. I mean, Yes. And if anything, I think we're gaining stuff. I mean, with 3x the beams on each satellite, We've just got so much more scope to route traffic around. And look, we looked at this technology years ago, But we I mean, you know Talasat, we're not the most risk embracing organization on the face of the earth.

Speaker 2

I think we're forward leaning, but we don't get overly aggressive. So we took a pass on it. The thermals were too high with I mean, there's all kinds of stuff. But in any event, I mean, MDA kept Investing. And they're leveraging some of the work that they did on the analog beamformer, Which is another reason why we're not taking any schedule hit.

Speaker 2

So yes, no, it's just a home run.

Speaker 4

Got it. Thank you for that. And then I don't know who wants to take this one, but I'm hoping, some folks can maybe just bridge some funding gaps for me here. So $3,500,000,000 total, dollars 1,600,000,000 Telesat equity. We all can do math on how much money has moved Over there to date, but I'm wondering, can you give us that number rough, round and encouraged?

Speaker 4

I'm assuming CDAN proceeds will help fund that And then additional money moving over. I'm just wondering if you can fill that in a little bit.

Speaker 2

Let me try to fill it in. And if there are still gaps, Which is often the case after I respond to questions then the finance folks can do it. But a couple of things, we tried to be clear about this in the release. We're fully funded for right now 156 satellites. So the deal that we've announced with MDA It's for 198 satellites.

Speaker 2

The US3.5 billion dollars is for the 198 satellites. But right now with the cash that we have, including the cash that we've already invested in this project, oh, and I should note the C band proceeds that we're expecting to get real soon here. With the cash that we have and the C band proceeds that are coming With the money that we've lined up with our Canadian federal and provincial partners, we've mentioned that we've got Some vendor financing, which is not as significant as our own equity contribution or the government contributions. So with all of that money, we've got enough money. We're fully funded for 156 satellites, Plus we built a non trivial amount of contingency in there because that's kind of how we roll.

Speaker 2

So that gives us enough money for the 156 satellites, which gives us full global coverage in a really good high performing Constellation, but we've committed to MDA for another 42 satellites that will fund the current plan Is using the existing cash flows of Lightspeed once Lightspeed gets up and running in a few years' time. So that's the plan. And so then the math So the CapEx, just to be real clear here, the CapEx for the 156 Satellite constellation is about US2.7 billion dollars The total program cost It's about US3.5 billion dollars for the 156 satellites. So that's CapEx plus everything else It's about $3,500,000,000 plus some contingency that I mentioned. And then when you look at the funding, there's about $1,600,000,000 equity contribution from Telesat.

Speaker 2

And just to be clear, that's cash that we've already put into the project, Cash that is already available outside of the restricted group for LEO. The C band proceeds that are coming in that covers All that $1,600,000,000 and then the government contributions are about $2,000,000,000 and then as I mentioned, there's some vendor financing as well. So that's what gets us there.

Speaker 4

Can you break up the government financing and the vendor or give us one of those pieces? Is the government in Canada and Quebec? Is that the same from last time is what I'm asking? Anything changed?

Speaker 2

Well, I mean, if you do the math, so we've said that it's approximately 2,000,000,000 which at current exchange rates is about CAD2.7 billion. Previously, what we said is that the government of Canada had committed to about 1 point $4,000,000,000 of Canadian dollar contribution. Quebec, $400,000,000 of Canadian contribution. So there's an incremental $900,000,000 there that we've been in Advanced discussions with our government partners about. So that's kind of the government piece and we're not Free right now to break down exactly how much is coming from the different sources, but We'll be able to talk more about that in the future.

Speaker 2

And then the vendor financing, we're subject to confidentiality obligations With our suppliers, it's some 100 of 1,000,000 of dollars, But we can't be more specific than that at this time. I will say it's not MDA. MDA is holding their call, I think shortly after hours and I'm sure they'll get asked. So we chose MDA because They got this great technology and they're leaning in hard in building in wanting to be a LEO prime, But we didn't select them because of vendor financing commitments.

Speaker 4

Thank you. And just a quick and a clarity, I think I know the answer. This is still going to be funded, built In unrestricted subsidiaries and then in the future, you might consider bringing everything back together. Is that still the thought?

Speaker 2

Yes. Nothing has Change there in terms of how and where we're funding this. We've Yes. I mean, what happens in the future in terms of restricted group versus unrestricted group? We're not saying anything about that.

Speaker 2

They at some point in the future, it could all come back together or we could continue to Finance those activities separately, but there's nothing about today's announcement that changes any of that.

Speaker 4

Thank you.

Speaker 2

Okay. Thanks, Mike.

Operator

Thank you. The next question is from Walter Piecyk From Ly Shed, please go ahead.

Speaker 6

Thanks. Dan, just to confirm that incremental government Piece of the puzzle is not the revenue commitments that exist, right? This is

Speaker 2

No, no, no. And I mean, no, We've got a capacity commitment from the Federal Government of Canada. That's CAD 600,000,000 over a 10 year term. We've got a separate commitment from the government of Ontario. That's CAD 109,000,000 over a 5 year term.

Speaker 2

And again, we've talked about this before the way those things are structured. We think that the amounts are essentially going to get doubled When we take that pool of capacity that's subject to those funding arrangements and enter into agreements Here in Canada with ISPs and the like. But no, those amounts are separate.

Speaker 6

Okay. So this $900,000,000 then, I understand, I Respect that you can't really disclose it, but cost wise, obviously, is it going to look as attractive as what we saw from the government of Canada?

Speaker 2

So that's a great question. So this approximately US2 $1,000,000,000 of government funding, we said it's subject to The completion of confirmatory due diligence and getting definitive agreements in place, we're going to need to Work with the government to agree fresh terms for all of that. I believe it's going Continue to be attractive financing, but we'll update everyone on that. Okay. So yes.

Speaker 6

Fine. And then just the overall numbers, it was definitely helpful to Recognize that your CapEx is even lower for the initial launch and to get the revenue pump going. But the overall number then in terms of What you've outlined sources relative to the uses, it seems like you don't even need the operating cash flow to get to the full, You said $198,000,000 consolation

Speaker 2

No. So we don't need the operating cash flow, Walter, to get to Fund the US3.5 billion dollars plus contingency for the 156, But we're going to need roughly another $800,000,000 to fully fund the incremental 42 satellites plus the launch vehicle.

Speaker 6

Why is that? You said $2,700,000,000 for the 156, Troy, so if I just take $1,600,000,000 plus $2,000,000,000

Speaker 2

No, hold on, hold on. Wait, dollars 2,700,000,000 for the CapEx, About $3,500,000,000 for the total program cost.

Speaker 7

Understood.

Speaker 3

And if it's contingency, yes.

Speaker 2

It's a little confusing because the total program cost for the $156,000,000 is roughly equivalent to the CapEx for the 198, the numbers are the same. Yes.

Speaker 3

Just go ahead.

Speaker 6

Okay. I'm going to ask the first, the JPMorgan Dudes question in a different way. You have these presentations that were very helpful in terms of sizing the market, $5,000,000,000 TAM and you kind of broke it down and talked about your percentages. Has anything changed in terms of You look at that TAM relative to this new constellation, is it increased the TAM, does it decrease the TAM? Does I assume we're growing the size of that TAM as we hit A commercial date that might be a little bit later than what I first kind of was forecasting back in 2021, just thoughts on that?

Speaker 2

Yes. So, our thoughts about the addressable market, the size of the market, the amount Of share we can take in that market are unchanged. Again, I mean, we deliberately have Designed a constellation that allows us to do everything that we had been planning to do under the prior plan. If you dissect what we've said about the adjustable market in the past order of magnitude, it's about $400,000,000,000 we think out in the I think we said 20, 25 timeframe. Roughly, we've said about half of that $400,000,000,000 is kind of direct to consumer, which is not the market that we're focused on.

Speaker 2

We've always been Real clear, we're focused on the enterprise and the government services market. So that's roughly the other half of that, Tam. We've said if we get 2% of that, which we don't think is the most ambitious kind of perspective That will be hitting our business plan. And so I don't remember that. So our thinking around that.

Speaker 2

Just one

Speaker 6

question is on that. Yes, I have that. I'm glad to see the 430 is reaffirmed as is timeline on that. But I think maybe what's the follow on this is like you've had a delay, you have a new vendor. There's been a lot more conversation about, I guess what people are calling direct to device markets more of the consumer thing.

Speaker 6

There's I mean, Ergen on his stats dish call I was talking about S band, although they're not financed. I think you've got the Ligado spectrum. I don't know what's going on at ViaSat. Is there an opportunity Perhaps to partner with one of these other players to get access to some additional spectrum and modify this constellation To the extent that you can address that broader $430,000,000,000 market you identified in for 2025?

Speaker 2

So here's what I'd say about that. First off, the 430 doesn't include the direct to handset market, which is Some of what, I know DISH is focused on. But these satellites right now have really been optimized, Frankly, just like our prior satellite design, they're optimized to do high throughput Broadband connectivity for the enterprise market. And we have squeezed out every watt of power And directed it to that market. And we've sized the satellites.

Speaker 2

We've optimized them For that mission, in order to change the mission, it just wouldn't make any sense. Now having said that, If we had access to S band spectrum or L band spectrum, could we leverage the bus, The processor, potentially the antennas, although the antennas might look different. Yes, we could potentially do something like that. Right now, we just got to stay laser focused on this huge market that's in front of us That we know well that we've been serving for years that we've been out there engaging with customers about Lightspeed for quite So Walter, that's our focus. Now could the TAM be a little bit heavier because

Speaker 6

And is there a drop dead date When you'd have to work something out with an S band or an L band owner

Speaker 2

in order to create. We're off to the races. We're already moving With MDA on this, we're not if look, if there's some great opportunity here with some third party bringing that spectrum and some capital, Then it would just be almost kind of like an adjacent network that might leverage Lightspeed in terms of routing traffic around and whatnot. But Yes. We think about it

Speaker 6

that way. We've talked about this before in terms of the rev commitments that When we were waiting for TELUS to get and the ECA, all that stuff that it impacted your ability to get signature. So I assume that this is going to kind of open up that Spigot, are you how do you envision disclosure in terms of as you get incremental revenue commitments for the new constellation, Individual press releases, updating on a quarterly basis, how do we get a

Speaker 5

sense of

Speaker 2

how that business develops? All of that. We'll be Transparent about the deals that we're signing, so that folks will have visibility. We understand how important that is.

Speaker 6

Awesome. Thank you. Okay. Thanks.

Operator

Thank you. The next question is from Arun Suchetri

Speaker 5

Thanks for taking my questions. And first of all, congrats on getting the Lightspeed program reconstituted and funded, lots of skeptics. So definitely hats off. Just wanted to nail down a couple of details on the funding, the equity side. So just to make sure I got my math right, the existing cash balance that you have right now is probably somewhere in the range of about $1,000,000,000 You're getting another $260,000,000 from the C band proceeds that gets you close to $1,400,000,000 So is that is it fair to say that you have another US200 $1,000,000 or so of additional equity that you need to Contribute either from the operating cash flows in order to get to your 1,600,000,000 U.

Speaker 5

S. Of equity funding?

Speaker 3

This is Andrew. I'll take that. I think as Dan laid out very clearly that we're totally funded. The $1,600,000,000 is already there And that is comprised of, as you say, the cash we have currently. We've got a C band proceeds coming in, CAD 345,000,000 But also during the course of the program, we have been investing in the development over time.

Speaker 3

So that number includes that funding. And also yes, so I think altogether, I think we're in good shape. I think the key point, we don't need any more Cash to come in today for us to say we're fully funded. Any cash that comes in today is something for the future. But for today, we're fully funded.

Speaker 6

Got it.

Speaker 5

Thank you, Andrew. And then in terms of the I noticed that you haven't laid out any Future debt buyback authorizations, is it fair to say that given you're fully funded, is it fair to say that future Operating cash flow you're generating is still sort of likely to be used for debt buybacks?

Speaker 2

So, what would I say? Look, we've been doing a fair amount of debt Repurchases and we highlighted that in the earnings release and we think that it's been a really Smart thing to do with the cash that we have that we don't had we haven't had a Higher value use for at the time and rather than it just build up in the restricted entity, it just made a ton of sense to us To be repurchasing that debt back as we thought, it's trading at attractive values and it was a good way to strengthen our balance sheet and create equity value For the shareholders and all I would say is going forward, we're just going to be pragmatic about it As we go forward, if we if that continues to be the highest value opportunity for that Cash, then we would consider more debt repurchases depending on where the debt is trading and the like. If we had Other attractive uses for that cash building, a geo satellite or Some other use then we would consider that. But it's a long answer, but suffice to say, we feel good about the debt We've done in the past and going forward we'll just be I don't know, just kind of pragmatic about it.

Speaker 2

Andrew?

Speaker 3

Yes. No, just to confirm what Dan had said, that's absolutely Correct. And face value, we purchased $456,000,000 back as we mentioned, and that The gain of €222,000,000 but we're very focused on overall debt. That's why I threw in that since coming back to the end of 2020, we've reduced our overall debt by 24%. So in addition to all these activities on Lightspeed, getting going is the future of the company.

Speaker 3

We're very, very focused and responsible about the debt we have today.

Speaker 5

Got it. Thank you. And then last question from me. In terms of so obviously you have a lot of work to do To finalize the agreements, etcetera, so two other topics. One is the structure of the remaining $900,000,000 in financing, do you anticipate that to be at the Lightspeed subsidiary?

Speaker 5

And then secondly, do you I guess beyond all of this, what are the other, I guess, risks or Dependencies remaining beyond getting all the agreements sorted out, what keeps you up at night at

Speaker 4

this point?

Speaker 2

Thanks. So we expect that all of the government funding will be yes over on the Leo, that was always the plan and it continues to be the plan. As far as what else Keeps us up at night. Look, we've got to close the funding With our government partners, I'm highly confident that we'll achieve that, but it's got to get done and it's got to get timely done. And then we've got a ton of work to do.

Speaker 2

We're going to be hiring a whole bunch of people and ramping up our staff. We're moving out with MDA in a big way. We're going to be ramping up our Sales and marketing team as we do more heavy engagement with the customers. I mean, it's all that. And we've got our day to day business that we're running to and Never take our eye off the ball on that.

Speaker 2

So anyway, I mean, we're just so excited to be finally On our way and we can stop talking about when are we going to be fully funded, when can we get going. I mean, it's just so liberating after all this time to have the funding lined up, to have a great plan With MDA and the rest of our partners, so from this point forward, it's just all about really focused execution.

Speaker 5

Congrats and all the best.

Speaker 6

Okay. Thank you.

Operator

Thank you. The next question is from raghav Garg From double line, please go ahead.

Speaker 8

Yes. Thank you for taking the question. Can you talk about The life of these satellites given they're slightly smaller, does that impact your sort of duration of the constellation?

Speaker 2

It's a good question. No, same capability from a lifetime perspective, which is to say, we Expect that the satellites meet their performance specifications for effectively 11 years. Do we expect them to maybe go longer? Yes, that's been our experience In the past and I think the experience of others in the past, but from a spec perspective, our contract with MDA, It's absolutely comparable to the prior plan. It's 11 years.

Speaker 8

Got it. Thank you. And any Carlo, on you've given an IRR estimate, you've given the CapEx. So can you just talk about On my math, presuming some duration, can you throw out an EBITDA number? Because you've sort of given the inputs, I get to $2,000,000,000 to $3,000,000,000 is that unreasonable?

Speaker 2

It's not unreasonable. We've tried to provide some kind of high level Building blocks, but we're going to quickly move past that. So we mentioned that we will schedule In Investor Day, before the end of the year, we definitely plan to be presenting at more conferences where We can meet with investors 1 on 1 and share a whole lot more information about what the business case looks

Speaker 6

like. Great. Thank you.

Operator

Thank you. The next question is from Mr. Rosenberg from Credit Suisse. Please go ahead.

Speaker 7

Hi, thanks for taking my question and Dan congratulations on the announcement with MDA. Some of my questions have already been asked here, I did have a couple more. I was hoping to log in here. On the math part, I mean, some of the information you gave has definitely been very helpful. One remaining question I do have, just trying to close the gap a little bit between, I guess, uses of proceeds.

Speaker 7

So I mean, the MDA announcement It seems like it's a Canadian $2,100,000,000 contract and to try to reconcile that with the numbers that you've specified for at least the initial one 156 satellites, I mean, seems like there's a pretty big delta there. I mean, probably over and above just what a contingency would be. I mean, so is there another Significant vendor in the mix or another kind of part of the puzzle, I guess, I'm trying to get a better understanding.

Speaker 2

Yes, yes, yes. No, I mean, I'll it's there aren't Too many moving parts. It's the satellites, it's the launch vehicles, it's the global ground infrastructure, It's some upgrades that we need to make at our facilities here in order to operate this global constellation. There's some IT systems That need to get put in place. We've got some money for further user terminal development.

Speaker 2

That's kind of it. And when you add it all up, and We've been rigorous in terms of building up the business case. That's kind of what it comes into. And then yes, As we mentioned, we do have some non trivial contingency in the plan because that just seems to be the prudent thing to do. We hope we don't spend it.

Speaker 2

I mean, that'd be really nice, but we budgeted for it and our funding covers it.

Speaker 3

We think we've been very prudent in the build out in terms of contingencies and looking at all of the elements that has just outlined that we've got proper funding and not just The NDA contract itself.

Speaker 7

Got it. And then as far as the, I guess, revised structure of terms with the government of Canada and Quebec, I understand there's probably some moving parts there, but are you able to clarify just, I guess, the status of that relationship? I mean, I think previously you had a term sheet and an MOA in place, respectively, with the 2 That had some contingencies related to the ECA financing. So I guess with the ECA financing gone, I guess I'm just wondering, I mean, will there be some forthcoming disclosures of those The documents or key structures?

Speaker 2

Yes. No, absolutely. I mean, we will provide Lots of all the material information relating to the structure of that Funding, when it's available. I mean, that's we've got commitments from These government partners who I got to say have always been strongly supportive of Lightspeed. But as we mentioned, now they've got to finish their confirmatory due diligence because they've already spent Quite some time understanding the project that they've got to do some confirmatory diligence around the MDA path.

Speaker 2

And then we've got to get definitive agreements in place and the like. And so we're all very focused to getting that done In short order, and I guess the other thing I'd say is, the government has, And when I say the government, our government partners, federal and provincial have always been really supportive of our program. And I got to think that certainly now that MDA, which is also a Canadian company with a big footprint here in Canada, Now that MDA is taking on a much greater role in the project and it's roughly 2.5 times a bigger contract for MDA, which means building out more facilities at their facility in Quebec, Hiring a whole lot more people, a whole lot more IP development here in Canada. We're now like the anchor For MDA's new digital satellite platform, which they hope to export around the world. So driving more exports, just All of that, I guess the point is if our government partners, our Canadian government partners like them, we're strongly supportive of the old path.

Speaker 2

We got to think that with this new path, they'll be even more supportive still. And I do want to emphasize, We didn't pick MDA because they're Canadian. We picked MDA because they're a genuinely world class prime For high volume LEO satellite constellations, it's why they won the Apple contract, Apple Globalstar contract, But doesn't hurt either that they're Canadian. So anyway, so that's how we think about it. But we'll provide Lots of clarity on that government funding once it's in place.

Speaker 7

Appreciate that. And the last final question, I mean, one you probably anticipated is that with the timeline of An operational LEO project in 2027 relative to your debt maturities back in 2026. I'm curious if you've given any thought To potential structural changes that you might put in place prior to that, to kind of capitalize on growing backlog on the LEO side As far as refinancing?

Speaker 2

Well, I mean, I guess I'd say that the schedule that we announced today, it's Fully consistent with the schedule that we had under the prior plan. So there's nothing new about the timing Our plans with MDA that really alter any of that. We're Fully cognizant of kind of the maturities. It's still some years out there, obviously, in terms of when these maturities are coming up and I think we've been making it easier still with all these debt repurchases that we've been doing. So Anyway, I mean, our expectation is we've got some time.

Speaker 2

Our Lightspeed business certainly is going to develop. Our geo business We'll continue to evolve as well. The whole landscape is continuing to evolve. So in that event, I mean, we'll speak more about that Going forward, but there's certainly nothing that we announced today that Alters in any way are thinking about it. And certainly, I think we already had a really strong business case with Lightspeed.

Speaker 2

The updated business case That's so much more capital efficient. It's only got to strengthen the overall company and that just I think puts us in a better place Going forward, no matter how you're what lens you're thinking about the business.

Speaker 7

Appreciate that. Thanks again.

Speaker 2

Okay. Thanks.

Operator

Thank you. The next question is from Marcelo Cherniavsky

Speaker 9

I had a question, Dan, maybe just to parse some of the language you gave on debt buybacks from a prior caller. You said that if it continues to be the highest value opportunity for cash, but there may be other attractive uses of that cash that you would consider. So what other Alternative uses of the cash, what do you consider at GEO Business?

Speaker 2

No, I mean, it's just to say that Look, I mean, it's all about strengthening the business like how we always think about the use It's all about strengthening the business, creating value for shareholders And providing great service to our customers. And so we're always looking for ways to grow Our business in a way that is, I hope, smart and prudent. It turns out to be the case that We haven't ordered a GEO satellite in quite some time. I think we've always been very disciplined in terms of How we think about CapEx and the use of cash and how we run our business with our high operating margins and whatnot. But we don't foreclose the opportunity that in the future there could be a good opportunity to make some investments on the In the restricted group, that could be a new geo satellite, I don't know, it could be something else that would Strengthen the business and meet all those objectives that I just talked about.

Speaker 2

Today, nothing As we come across our plate, which is why we've used the cash to repurchase debt, we just want to be clear that That's something we can do, but we don't want to mislead folks that that's all we're going to do with the cash. We're going to be open minded and opportunistic. And that's all we were trying to say.

Speaker 9

That makes sense. And with respect to the 42 satellites that are not part of the 156, You said that comes out of operating cash. So at what point will you have the operating cash to finance those? Is that in 5 years when you were fully run rated? Or

Speaker 2

Andrew, do you want to talk about the timing of our assumptions here?

Speaker 3

Yes, indeed. You answered the question yourself actually That indeed, when we're fully global coverage and we're actually light speed is off with customers, we will be generating cash flows. And that's on our model show that being pretty conservative that we will be able to fund that from our cash coming from Lightspeed itself. That's why we don't feel we need any external financing whatsoever right now.

Speaker 9

Understood. And then the 100 option, I guess, what is the timing around that? And what would you look for before exercising that option?

Speaker 2

Yes. Well, there, listen, I mean, we've built in a lot of capabilities to scale up our network over time. It will be totally demand driven. And so we think it's a really smart thing To have the rights there in the NDA contract to order additional satellites If we've got the business case to do it, we don't have to. We've also built into our Regulatory rights, the ability to scale up our constellation.

Speaker 2

And so, this is all about future optionality to Continue to grow the constellation, but that will purely be a function of what The demand environment looks like at the time with 156 satellites and then 198 satellites, We have a massively capable network that can deliver multiple terabits of capacity to users. Our focus right now is getting that taken up and then we'll think about ordering incremental satellites and expanding.

Speaker 9

And lastly, I know you're still negotiating the I guess the financing with the government. But in terms of the split between, I guess, debt and preferred, is that still similar? And do you think that there might be more warrants that they might take in the rest of the

Speaker 2

business? It's something that we really need to work through with our government partners. We think everyone here is around the table. We're all constructive. We know each other well.

Speaker 2

They've been strong supporters of the project. We I think always try to be good custodians of the capital that's entrusted with us. So we've got to work through all those with the government and then we'll share all that with the market.

Speaker 9

Great. Thanks so much for taking the questions.

Speaker 6

Thank you.

Speaker 2

I think we've got time for maybe one more question.

Operator

Perfect. Thank you. The next question is from Bill Wise, Enterscore. Please go ahead.

Speaker 2

Thanks very much and congratulations on the announcement today. Just most of my questions have been answered, but is there any update on or any more thoughts you have On the impact of the DISH EchoStar merger on Telesat's business and DISH renewals going forward? I think it has no impact on the work that we do With DISH and with EchoStar, we've obviously followed that situation closely. Think we have a really good relationship with DISH, with EchoStar. But no, we don't think that, that combination Changes in any way, the work that we do with them.

Speaker 6

That's it. Thank you.

Speaker 2

Okay. Well, thank you. And listen, thank you all for your time today. We look forward to speaking with you again when we issue our Q3 numbers and we really appreciate Everyone's time and all the good wishes. So thank you very much.

Speaker 3

Thank you very much.

Operator

Thank you.

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Earnings Conference Call
Telesat Q2 2023
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