Telesat Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 28, 2024

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the conference call to report the Q4 2023 Financial Results for Telesat. Our speakers today will be Mr. Dan Goldberg, President and Chief Executive Officer of Telesat and Andrew Brown, Chief Financial Officer of Telestat. I would now like to turn the call over to Mr.

Operator

Michael Bolaito, Senior Director of Treasury and Risk Management. Please go ahead, Mr. Bolaito.

Speaker 1

Thank you, and good morning. This morning, we filed our annual report for the year ending December 31, 2023 on Form 20 F with the SEC and on SEDAR Plus. Our remarks today may contain forward looking statements. There are risks to 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, please see Telesat's Annual Report filed with the SEC.

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. I'll say a few words this morning about our performance last year, share some thoughts about our expectations for this year and then give an update as to progress to date on the Lightspeed program. I'll then hand over to Andrew to speak to the numbers in more detail and then we'll open the call up to questions. I'm very pleased with our performance and the things we achieved in 2023.

Speaker 2

We did a really effective job in staying focused and beating our adjusted EBITDA guidance, maintaining our operating discipline and industry leading operating margins, securing the C band clearing proceeds and executing what I believe were some value enhancing debt repurchases. But far and away, the most important thing we did last year was find an innovative and highly accretive path forward for Telesat Lightspeed, including landmark agreements with MDA and SpaceX, as well as important financing arrangements with our government partners in Canada. The satellite user community fully consistent with our long standing expectations is transitioning to LEO Networks and this transition will accelerate over time. For that reason, moving forward with our transformational Telesat Lightspeed program is our highest priority. 2024 marks the 1st full year where Telesat starts to make that transition to LEO in earnest.

Speaker 2

And to help all of you track what we're doing, starting this year, we're breaking down our financials between Jio and LEO and showing consolidated numbers as well. As you can see in our top line guidance that we released this morning, we're expecting some significant revenue declines around CAD150 1,000,000 in geo this year, split pretty evenly between our video and non video businesses. We're not giving guidance beyond 2024 today, though I would note we're not expecting to see this magnitude of annual top line decline in the coming years. On video, the expected decline comes primarily from the full run rate impact of the lower rate on Mimic 4 from the renewal we secured last October with Bell, as well as a renewal we have with EchoStar on Nimiq 5 coming up in early Q4 this year. Over the past few years, we've talked about the headwinds we're facing in our DTH business, really driven by cord cutting and the rise in over the top video platforms and the reductions we're expecting this year are very much a continuation of that trend.

Speaker 2

The other half of our expected revenue decline is coming from the enterprise side of our business, with the biggest contributor being erosion of maritime services revenues. Other meaningful expected reductions are from an aero customer, number of customers in Latin America, a universal service program we support in Indonesia and here in Canada, some point of sale retail networks in a number of government services. The biggest driver on the lost revenue in the enterprise segment is the migration of customer requirements from Jio to LEO, namely to StarLink as they're the 1st in the market with a disruptive LEO network. The reality is that enterprise customers want affordable, low latency broadband connectivity, which we've been talking about for quite some time. If anything, the transition to LEO is happening a little faster than even we expected.

Speaker 2

And although we don't love seeing StarLink cannibalize some of our GEO customer requirements, it's a strong validation of the market embrace of LEO and the compelling path that we're on with the TitleSat Lightspeed. We fully anticipated the transition to LEO and it's precisely why we're building Lightspeed and why we're so bullish on it. Turning to OpEx, we expect to see an increase of roughly CAD40 1,000,000 year over year, which is all driven by the investments we're making in Lightspeed. Perhaps the increase comes from headcount expansion. I'm happy to say, though not surprised, we're getting world class professionals joining and wanting to join Telesat.

Speaker 2

Individuals who see where the industry is going and want to be part of building out and bringing to market a really advanced and revolutionary low earth orbit global satellite broadband network. The project is a huge magnet for absolutely top notch talent throughout our industry. To give you a sense, we had a little less than 500 people across the company at the end of last year and around 35% of them were working on Lightspeed. By the end of this year, we expect to have roughly 7.40 employees, a roughly 50% increase with nearly 2 thirds of the team working on Lightspeed. Dedicated geo heads are actually coming down over 10% as we shift folks to Lightspeed and more broadly take steps to rightsize GEO OpEx for a declining GEO business.

Speaker 2

The rest of the OpEx increase is coming from higher Lightspeed revenue related costs as well as costs associated with professional services, IT, travel, marketing and regulatory activities, all tied to the development, implementation and commercialization of Lightspeed. It's full on and we're making great progress working with NDA and our other suppliers. We've completed the major system requirements review milestone with MDA and are progressing toward preliminary design review in the Q3 of this year. They're ramping up staff just as we are. We're also making great progress with our software partners, developing the tools we need to dynamically manage the traffic on the network and the APIs and other interfaces our customers will use to purchase and manage light speed services for their users' requirements.

Speaker 2

We're also making really good strides with various antenna suppliers for LEO user terminals for each of the verticals we're focused on as well as with suppliers for our landing stations. In short, we're moving up fast on all the key work streams necessary to bring Lightspeed into service. The customer community is enthusiastic with the approach we're taking and the services we'll be offering and there's great interest also with potential strategic partners and governments around the world to leverage Lightspeed for their needs. Telcos, mobile network operators, satellite operators, service providers and users in every vertical around the world. For enterprise, for aero, maritime and government services, they all recognize the transition to LEO that's underway in our industry and everyone is actively looking for the best path or paths to ensure that they don't get left behind.

Speaker 2

Our CapEx guidance for this year has us investing roughly CAD1 1,000,000,000 into Lightspeed this year. We remain focused on launching our first satellites in June 2026, slightly more than 2 years from now, offering beta services shortly thereafter and providing full global coverage and service by the end of 2027. Let me now give a quick update on Lightspeed funding. Over the past months, we've had extensive engagement with the government of Canada over funding for Lightspeed. We believe we've reached an understanding on detailed funding terms and expect to release a summary of those terms shortly, likely after markets closed today.

Speaker 2

Suffice to say that we're very pleased we've reached this point. As we've noted in our earnings release, we estimate that our total cost of borrowings is roughly US750 $1,000,000 lower than our prior funding plan and that's on top of the US2 $1,000,000,000 in CapEx savings. We're very grateful for the strong support we've had from the Government of Canada on the Lightspeed program. And I'd note also that the Government of Canada isn't just some inanimate object. There are a ton of people throughout the Government of Canada who have worked really hard with Telestat and engaged closely with us over the past few years.

Speaker 2

And I just want to note that my colleagues and I appreciate all their hard work and commitment to the program. And I'd note also not a huge surprise given all the benefits that Telesat Lightspeed delivers to Canada, I'd say the world, whether that's bridging the digital divide, whether it's job creation, technology development, job creation, all of that, There are huge benefits that come from the Lightspeed program and the government of Canada and the people that work there recognize that. We really appreciate that. So in sum, we accomplished a great deal last year and have a very full 2024 as we accelerate our efforts and investment in bringing light speed to market. Our industry is undergoing a significant transition as LEO Networks gain ascendancy and market share.

Speaker 2

To that end, our highest priority is on focused execution of the Lightspeed program, both technically and commercially. We're hugely bullish on our prospects in the market as well as our ability to deliver an extraordinary value proposition for our customers and significant value creation for shareholders. With that, I'll hand over to Andrew and then look forward to addressing any questions you may have.

Speaker 3

Thank you, Dan. Good morning, everyone. I would now like to focus on the highlights from this morning's press release and filings. Telichat ended the year 2023 with reported revenues of $704,000,000 adjusted EBITDA of $534,000,000 and generated cash from operations of $169,000,000 with $1,700,000,000 of cash on the balance sheet at year end. As Dan has mentioned, we outperformed our 2023 adjusted EBITDA guidance.

Speaker 3

In the Q4 of 2023, Telesat reported revenues of $166,000,000 adjusted EBITDA of 123,000,000 and generated cash from operations of $13,000,000 For the Q4 of 2023 and compared to the same period in 2022, revenues decreased by $41,000,000 to $166,000,000 Operating expenses decreased by $30,000,000 to $49,900,000 and adjusted EBITDA decreased by $15,700,000 to $123,300,000 The adjusted EBITDA margin was 74.3% as compared to 67 0.2% in 2022. When adjusted for changes in foreign exchange rates, revenues decreased by $41,200,000 operating expenses decreased by $30,200,000 and adjusted EBITDA decreased by $15,900,000 The revenue decrease for the quarter was primarily due to the completion of an equipment sale in 2022 to DARPA, which was not repeated in 2023 and a rate reduction on the renewal of a long term agreement with a North American customer. The decrease in operating expenses is primarily due to lower noncash share based compensation and higher equipment sales in 2022 related to the DARPA program as I just mentioned. Interest expense decreased by $2,000,000 during the Q4 when compared to the same period in 2022. The decrease was due to repurchase of notes and Term Loan B in 2023.

Speaker 3

This was partially offset by an increase in interest rates in the U. S. Term Loan B facility. In the 4th quarter, we recorded a gain in foreign exchange of $78,000,000 as compared to a gain of $72,000,000 in the Q4 of 2022. The gain for the 3 months ended December 31, 23, was mainly the result of weaker U.

Speaker 3

S. Dollar to Canadian dollar spot rate as of December 31 compared to the spot rate as of September 30, 23, and the resulting favorable impact on the translation of our U. S. Denominated debt. Our net income for the quarter was €39,000,000 compared to net income of €91,000,000 for the same period in the prior year.

Speaker 3

Our net income for the year ended December 31 was $583,000,000 compared to a loss of $82,000,000 for the prior year. The positive variation of $665,000,000 was principally due to C band clearing proceeds recognized in the Q2 of 2023 combined with the gain on the repurchase of our debt and the foreign exchange gain on the conversion of a U. S. Dollar debt. This was partially offset by the booking of an impairment of $79,800,000 in quarter 4.

Speaker 3

For the year ended 31st December, the cash inflows from operating activities were $169,000,000 and the cash flows generated from investing activities were 212,000,000 dollars The cash flows generated from the investing activities was due to the proceeds received from the Phase 2 C band clearing, as mentioned by then, partially offset by capital expenditures. In terms of CapEx incurred, it was primarily related to our low earth constellation Telesat LightSpeed and the newly acquired HANEC F4 satellite. Turning to guidance. As you will also have noted in our earnings release this morning, we have provided preliminary 2024 guidance. This guidance assumes the Canadian dollar to U.

Speaker 3

S. Dollar exchange rate of 1.35. As Thanh also mentioned, we will look forward to reporting on a segmented basis, where we will break out our Lightspeed and Geo business as we go forward. And this is really to provide transparency and understanding that everybody will be able to appreciate as both our businesses develop. Turning to 24, specifically, Telesat expects its full year revenues to be between $545,000,000 and $565,000,000 And in terms of operating expenses, excluding share based comp, we would like to point out that we have a range of €80,000,000 to €90,000,000 attributed to Telesat Lightspeed.

Speaker 3

And also, as mentioned, this highlights represents an increase of €40,000,000 year on year. In terms of adjusted EBITDA, Telesat expects to be between $340,000,000 to $360,000,000 Turning to CapEx in respect to capital expenditures for 2024. Using investing activities, we anticipate this to be in a range of $1,000,000,000 to $1,400,000,000 which is practically all related to Telesat light speed. Dan has also highlighted the drivers to our 2024 financial outlook in terms of revenue declines we're expecting at the GEO business and the increase in operating expenses that are fundamentally related to Lightspeed, as I had mentioned. The drivers of that OpEx is indeed its headcount, as we discussed, marketing, IT systems, professional fees and consulting.

Speaker 3

Turning to cash. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1,700,000,000 of cash and short term investments at the end of December as well as approximately US200 $1,000,000 of borrowings available under our revolving credit facility. Approximately $1,250,000,000 in cash was held in our unrestricted subsidiaries. In addition, we continue to generate significant amount of cash from our ongoing operating activities. At the end of the Q4, the total leverage ratio as calculated under the terms of the amended senior secured credit facilities was 5.32x.

Speaker 3

Telicell has complied with all covenants in our credit agreements and indentures. Further, including the repayment we made in 2020 of approximately $341,000,000 of the outstanding Term Loan B, combined with our ongoing repurchase program, our overall debt has been reduced by approximately 28%. Just to recap, we repurchased to date a total amount of US587 $1,000,000 at an aggregate cost of US332.7 million dollars In addition, this also results in interest savings per year of around $40,000,000 A reconciliation between financial statements and financial covenant calculations is provided in the report we filed this morning. Our 20 F provides the unaudited interim condensed consolidated financial information in the MD and A. The non guarantor subsidiaries shown are essentially the unrestricted subsidiaries with minor differences.

Speaker 3

So I think that concludes our prepared remarks for the call. I'm very happy now to turn back to the operator and address any questions you may have. Thank you very much.

Operator

Thank you. So now we'll take questions from the telephone line. And the first question is from Chris Quilty from Credit Suisse. Please go ahead.

Speaker 4

Dan and crew, congratulations on getting that financing stub done. It's been a long trip over the years. And somebody I can't decipher, I mean, can you remind us what was the last publicly stated position you had on terms of debt rates? I think it was around $2,000,000,000 correct?

Speaker 2

Yes. Hi, Chris. Yes, that's about right. That'd be a U. S.

Speaker 2

Number. I think what we've said is well, Andrew, go ahead.

Speaker 3

Yes, I'll go ahead. In fact, on our website, we have investor presentations. We did a kind of a small road show in November and Toronto in New York, but reading out on Page 19 just for anyone that's referenced. Overall, in terms of our sources and uses, we had Telesat Equity of $1,600,000,000 government funding $2,100,000,000 which is your question, Chris, tender financing of $300,000,000 And on just to round off in terms of our spending, Overall, we had $2,700,000,000 for our satellites, operational expenditures of about $800,000,000 And we also had contingency included of roughly 40% of €400,000,000 all contained within the overall program itself. I'll just give you a quick refresher on that.

Speaker 4

That's great. Thanks for the detail. So I kind of jumped over it, but congratulations on the I think the vision you put forward here with a focus on the enterprise market. And that brings up a question, StarLink has obviously been hurting the maritime market and other adjacent markets, but haven't really have you seen them at all target the traditional enterprise market? And can you help us understand the differentiation of what you're trying to do versus Starlink system?

Speaker 2

Yes. Well, Chris, thanks. So let's see. Yes, they're definitely having an impact in maritime. They're working hard to make inroads in aero, but it looks so far like they've had greater traction in maritime than aero at this point.

Speaker 2

But in truth, we're kind of we're seeing them everywhere. We see them when you say enterprise, maybe less kind of corporate enterprise, but we are seeing them for backhaul requirements on certain networks. So that's where we're seeing them. And we said in our remarks, customers want affordable, high throughput, low latency, resilient connectivity and SpaceX by now has launched a lot of satellites and it's a good product. But our product is differentiated for the verticals that we're focused on, which are those enterprise verticals.

Speaker 2

So we talked about telcos, mobile network operators, corporates, governments, aero, maritime. And I'd say, it's a few things. One of the key things that we do unlike a service that's kind of principally a consumer grade focused service, we've got the ability with our customers to do a bunch of things, give them SLAs, make commitments around CIR, give our customers the ability to have their own dedicated bandwidth pools, which then they can manage. They can oversubscribe it. They can offer different service tiers.

Speaker 2

They can move their bits around across their network, which for some of them could be the entire earth. So it gives them massive flexibility, mass of control over their bits, over their network. So I'd say that's a big part of the differentiation from the customer standpoint. I think from, I don't know, the investor standpoint, what we're doing, I think, is also very capital efficient. We're able to cover the world with terabits and terabits of this very high performing capacity with hundreds of satellites, not thousands of satellites and satellites that last north of 10 years.

Speaker 2

So gives us a long opportunity to earn the kind of returns that we need to on our invested capital. So in any event and look, again, I think SpaceX is moving fast and being disruptive. We don't get everything right around here, to say the least. But we definitely saw the transition from Jio to LEO coming and what a powerful value proposition that is for our enterprise customers. So we've been all over that.

Speaker 2

But I'd tell you as good as SpaceX is and as fast as they're moving, like no one's going to own this entire market. The market's huge. It's growing fast. That's it, particularly for enterprise customers, they never want to put all of their eggs in any one basket. And so in any event, we're excited to get moving and get out there as fast as we can.

Speaker 2

And as you probably picked up in my remarks this morning, we're just super focused on making big investments to get there as fast as we can.

Speaker 4

Great. So, MBA clearly has a pretty tall task ahead of them here over the next couple of years. But after listening to the EUTELSAT 1 web call, I find myself asking you the more important question, which is where are you in terms of your gateway filing?

Speaker 2

In terms of so are you kind of U. S. Focused?

Speaker 4

Well, no, I mean for the global deployment, I mean, OneOne has had their constellation up and it's still not fully operational because they couldn't get their gateways installed due to regular challenges.

Speaker 2

Yes, yes, yes. I've tracked all that too. So here's what I'd say, few things about gateways. 1, for better or worse, we've been working on this for a long time. So we've identified we're starting off with at a minimum 25 landing stations around the world, they'll all be connected up and the like.

Speaker 2

And then we'll scale our landing station infrastructure from there. And then for any given customer in any given country, we can kind of have sort of more bespoke landing stations as well with some of the flexibility that an advanced system like ours has. The other thing I'd note about Lightspeed maybe unlike OneWeb is we've got the optical and our satellite links on our constellation. And so what that means is you probably need never mind probably you need fewer gateways in order to still have full global coverage and connectivity and the opportunity to manage traffic around and to make sure that all of your satellites 20 fourseven are kind of on network enabled to contribute. So yes, we've identified the main stations where we need to go.

Speaker 2

I think we'll be in good shape there.

Speaker 4

Would you be interested in buying a STARLINK optical crosslink?

Speaker 2

You know what, it's an interesting question. And I'll share with you that we haven't had any conversations with StarLink about that. There are probably pros and cons of doing something like that. Pros being SpaceX is building lots of them and it would allow us to theoretically interconnect with their constellation, although they're flying lower than we are. So were we to interconnect with those guys, probably do that in RF rather than optical.

Speaker 2

I'm not sure that the STARLINK optical link is SDA compliant. That would have to be something that we would take into consideration. There are a number of good OISL, Optical Inter Satellite Link providers out there with heritage and the like. So anyway, stay tuned on that. We've announced a good many of our suppliers, including MDA and SpaceX.

Speaker 2

We announced Elyria working with us on some of the software that's going to orchestrate the constellation. And as we work with MDA and pick that kind of next level supply chain, folks will learn more about the maybe different component parts of the network.

Speaker 4

Great. Final question, Mimic 5, was that a 1 year or a multi year contract?

Speaker 2

Mimic 5, well, it was a

Speaker 5

The one that's coming up for renewal?

Speaker 2

Yes, yes, yes, it's coming up for renewal. So it hasn't been renewed yet. We've started having conversations with EchoStar about it, but it was a 15 year agreement that comes up in October of this year. So stay tuned on that.

Speaker 4

Got you. Thanks, Chris. Thank you.

Operator

Thank you. And the next question is from Mr. Arun Seshadri from BNP Paribas. Your line is now open.

Speaker 6

Yes. Hi. Thanks for taking my questions. First from me, I noticed this word like in your funding conditionality that the program is fully funded to global service delivery subject to certain conditions. If you can outline what those conditions are would be helpful.

Speaker 6

And then separately on the funding plan itself, clearly strong support from the government of Canada around the $750,000,000 reduction and being cheaper today. Can you sort of tell us how you calculate that $750,000,000 so we just understand the

Speaker 5

puts and takes there? Yes.

Speaker 2

Andrew, do you want to start with that and then I'll maybe talk about what some of the conditionality? Yes, absolutely.

Speaker 3

As you know that we were initially dealing with sort of Palace and dealing with the export credit agencies. And I have to say, the export credit agencies are not necessarily cheap, right? And they have a lot of fees, a lot of upfront fees and premiums. And so when you calculate the arrangements that we have come with the Canadian government and you do the math, basically, that's it just falls out of the equation. It's 7 50 GBP cheaper.

Speaker 2

And over to me on conditionality. I mean, so I've got to be definitely careful here. My General Counsel is sitting across the table from me. So, what would I say on the conditionality that doesn't make my GCI rate. I guess I'd say the conditionality, it's kind of typical stuff with any funding agreement, right?

Speaker 2

So we have to enter into definitive agreements. We've got multiple funding sources. Each funding source needs to make sure that the other one is there and it's got and that in the aggregate, we have sufficient cash to quote fully fund the program. So it's that kind of stuff. As you can see, I'm a big believer in action speaking louder than words.

Speaker 2

We're confident we've got the financing in place that we need to move our project forward, which is why we're hiring all these people and spending all this money and entering into all these contracts. But that's when we referenced it, we're kept on a tight lease here by our legal department. And so it was mostly just to be just careful to say, yes, we still need to get those definitive agreements in place and the like. And I would think

Speaker 3

I would just add further that we've got contingency, as we mentioned, the $400,000,000 also our program.

Speaker 6

Got it. That's helpful. On the original the 750,000,000 dollars plan, the reduction. So obviously, I understand, Andrew, that the export agencies are not necessarily that cheap. But just in terms of the assumptions in that $750,000,000

Speaker 3

is that just kind of over the total the

Speaker 6

debt costs over a certain period of time that it's lower by? Like can you just share those assumptions in advance of the disclosure that's going to come out tonight?

Speaker 2

Yes. I'll take that one, Andrew. Yes, I mean fundamentally, yes, like we've stared at what were our total cost of borrowings under the original plan with another vendor and what it is now. And we took everything into account. We took into account what the total CapEx and other costs of the original program were versus the new one.

Speaker 2

We took into account what our expected cost of borrowings would be over the life of the funding commitments, right? So the interest rate, any other and this is relevant for the export credit agencies, premia and stuff like that that you have to pay. And then we compare that to what our expectations are will be our cost of borrowings for what I'll call the new and improved approach. And yes, that's the math we did, the 7 $50,000,000 savings over the course of the program. And it's my expectation that in the near term, we'll provide some additional details around our funding terms and it will allow folks to kind of make their own calculations about what our cost of borrowings are.

Speaker 3

A rigorous process that we've gone through.

Speaker 6

Got it. Understood. Thank you. And then separately, can you talk about broadcast revenue? It seems like even adjusting for the run rate, Bell, and maybe a little bit from for the EchoStar, Broadcast revenue is still a little bit lower than we would have expected, if you could give any additional color there.

Speaker 6

And then also how much in geo OpEx reductions are embedded in your EBITDA guidance? Thank you.

Speaker 2

I'll let Andrew take the second one. I'll start with the first one. So yes, I mean, and I said it in my opening remarks, the expected decline in Video, overwhelmingly driven by one thing that's already happened, which was the renewal that we secured with Bell for Nimiq 4. Yes, sorry, just keeping my Nimiq straight. With Nimiq 4 last October, so we had nearly 3 months impact of that lower rate last year, but we got the full run rate impact of it for this year.

Speaker 2

And we said at the time, it was a significantly lower rate that we agreed with Bell to close that Nimbus 4 renewal. So that's the biggest contributor to the expected decline in broadcast this year. And then there's Echo. So we've just started conversations with Echo. Our guidance accommodates a range of different outcomes with where we end up with them from they don't renew anything to they renew just part of it or they renew all of it.

Speaker 2

But no matter what, our expectation is given what's going on in the market, given the other recent renewals we got, we are expecting under any scenario, it's going to be materially less revenue from DISH on Mimic five than what we've been recognizing over the past 15 years. So anyway and then there are other broadcast customers we have that we sort of take into account when we put our projections together. But fundamentally, it's the 2 that I've highlighted.

Speaker 6

Got it. Helpful. Last thing for me is, how much do you plan on spending, I guess, on Lightspeed before getting definitive docs from, I guess, the Canadian government on the funding? And do you and when you think about the OpEx side, you kind of mentioned on EBITDA for 2025, the step down

Speaker 3

will be less than 2024.

Speaker 6

Any way you could quantify the OpEx within 25 that you can expect today? Thanks. That's all for me.

Speaker 3

I'll address some components of your questions indeed. I think your first question was relating to the step down in our geo OpEx. And as you probably appreciate, our fixed costs are approximately 62%, 65%. And nonetheless, we've gone through in quite a bit detail looking at our plans or scale of plans as Dan has gone through the investments in Lightspeed in the future. But then so we brought our geo cost down now approximately, I'd say 4% or so, notwithstanding the fact that our costs are pretty well fixed.

Speaker 3

And then when you look at Lightspeed, that indeed about 65% to 70% of that increase is indeed fixed and primarily it's coming from compensation as we scale up on the higher people coming in. And then just coming back to our sort of guidance and adjusted EBITDA $340,000,000 to $360,000,000 But just to compare, if you take a look at what we said $90,000,000 $80,000,000 $90,000,000 for Lightspeed, if you actually added that back to what the adjusted EBITDA guidance is, we come to a margin of like 79% to 80%. So our costs are very, very focused. As for 2025, you probably maybe, as Dan had said, I think our expectations in terms of top line will not see the reductions that we're seeing now. And in OpEx, we probably wouldn't give any guidance right now specifically for 2025.

Speaker 3

So I hope that's kind of addressed your variation of your questions.

Speaker 6

Yes. Thank you.

Operator

Thank you. And the next question is from Mr. Walter Piek from Light Shed. Please go ahead.

Speaker 5

Yes. Hi, everybody. This is Joe for Walt. You provided a CapEx range. I just want to kind of get a sense of what's the difference between hitting the high end versus coming into that $1,000,000,000 low end of the range?

Speaker 5

Is there something like what's the limiting factor right now?

Speaker 2

Well, I mean, our suppliers need to hit milestones in order to get money from us. So we've got a nominal schedule that they need to achieve, but if they don't hit their milestone, we ain't going to pay them. So we've built the range principally around that.

Speaker 3

Okay.

Speaker 5

And then getting back to I think it was Chris' question about enterprise. If you could drill down a little further into that, just so I understand, were these customer contracts that were up for renewal and they required having LEO as part of the solution going forward, So there's going to be a non renewal. So how does that work with the kind of guide comes down that much?

Speaker 2

Yes, yes, that's exactly it, Joe. I mean, we had contracts coming up for renewal. I said in my opening remarks that a big chunk of it, the biggest contributor was around maritime, it was cruise. We've got customers that have been serving the cruise market and they lost business to StarLink. And so they didn't renew their contracts with us.

Speaker 2

That's how it works. That's what it was. That's exactly what it was. And that accounted for again, that was the biggest contributor.

Speaker 5

Okay. And then are those how long are those contracts generally? Like is there a chance for, let's say, the next renewal whenever that is, when in 2027 or 2026 or whatever, when you have something that's potentially on the horizon to be commercial with Lightspeed that you could win that business back?

Speaker 2

Yes. Look, it's pretty fluid. I mean, the big enterprise customers are sophisticated about what's happening out there in the market. They have quite a bit of flexibility to add networks, drop networks. We'll make some, I'd say, maybe kind of medium term commitments, maybe 2 or 3 years or something like that.

Speaker 2

And I don't have full visibility exactly what they've committed to with StarLink. I know that StarLink has had a practice of oftentimes not signing long term agreements with customers. It's almost kind of month to month in some ways, whether they did something differently with the cruise customers, I don't know. But suffice to say that the cruise lines and the service providers that serve them are well aware of what we're working on with Lightspeed. They like what we can offer and the flexibility that we offer and our ability to concentrate capacity at ports and on key shipping lines.

Speaker 2

They like to have a diversity of suppliers, as I mentioned. So yes, I mean, we're I hate losing any renewal, But yes, we're sure not kind of blocked out of the market on a go forward basis.

Speaker 5

And then my last question. On the funding, you mentioned the Canadian government. Is the provincial government, the Quebec provincial government still involved in the funding process?

Speaker 2

Yes. Our expectation is that Quebec will be a meaningful funding participant in our program. Quebec gets great things from this Lightspeed initiative. I'd say now more than ever that we're working with MDA. When I think about the amount of investment that was going to be made in Quebec under the original plan when Quebec had agreed to certain funding commitments.

Speaker 2

Now that MVA is our prime contractor, yes, the amount of investment in Quebec has gone up, I'd say, dramatically. So yes, our expectation is Quebec will be part one of our funding sources.

Speaker 5

Okay. Thanks.

Speaker 7

Okay. Thanks, John.

Operator

Thank you. And the next question is from Mr. Mike Pace from JPMorgan. Please go ahead.

Speaker 7

Hi, good morning guys and thank you for the added color on the guidance between the two segments. I guess just to dig down a little bit, Dan, you said that you don't expect the same type of declines in 'twenty five. And I guess I understand that from a total basis because of the broadcast renewals. But from an enterprise, would you continue to expect enterprise to decline at that same kind of rate? And maybe another way to get at it is, and I think we've discussed this in the past, how much of your enterprise business do you think is at risk for real alternatives including your own eventually?

Speaker 2

That's a great question. I'm smiling because we were we had anticipated this question, so I'm not sure we have a great answer for it. So what would I say? Look, we've got a long term plan. We gave our guidance obviously this morning for 2024.

Speaker 2

We have a decent amount of visibility. It's one of the nice things about our sector, a decent amount of visibility in terms of what our longer term performance will probably be. You don't always get it exactly right, but we've got a decent track record, I think. So we've done a pretty, I'd say for most companies a super rigorous analysis. We've done a real kind of rounds up analysis looking out beyond 2024.

Speaker 2

And having done that, it's why we were able to say this morning that it isn't our expectation, which is to say, it is not our expectation that we're going to have the magnitude of top line decline in future years that we've had this year. We need to do a little bit more work, I think, to give a I don't know, substantive, for lack of a better word, answer to your question about where are you more vulnerable to, for instance, STARLINK or even cannibalizing our own revenue? We used to give some guidance about the percentage of our enterprise revenue or maybe even our total revenue that we anticipated would migrate over to Lightspeed over time. And like many things, I've forgotten what we said. But John, do you remember what we had said?

Speaker 2

I want to say we had estimated it was around 50% of our enterprise revenues that we thought would be migratable to Lightspeed over time. I think that's what we said. I believe

Speaker 6

it was in that zone. There are some things that just aren't suitable for Yes,

Speaker 5

yes, yes.

Speaker 6

That are better served.

Speaker 2

So that was kind of the estimate that we gave before. And so I would say no, again, we said that a little while ago and already we've seen some move off, not for Lightspeed, but to Sterling. But in many ways, it'd probably be a similar book of business that could move to Lightspeed that would be more vulnerable to LEO competition writ large. I again think that Lightspeed is a better value prop for enterprise users than the other LEO constellations. But I don't know, it's a long winded answer, Mike.

Speaker 2

And as I said, we need to do a little bit more work on it. But kind of order of magnitude, that's probably the book of business that's at risk. And I'm sure looking at my colleagues who do the work of updating the long term plan, I'm sure that's kind of how we thought about. And to be clear, we assume in our forward projections that there is that there are additional requirements that move to LEO, including before light speed is available, which is to say we lose it. So yes, I think we've captured that.

Speaker 7

Okay. A few more and they can be quicker on my end. The I just

Speaker 2

want to make

Speaker 7

sure I understand. So if I take your consolidated EBITDA guidance for 2024 and I add back the Lightspeed OpEx, is that basically the GL business or the restricted group in terms of EBITDA?

Speaker 6

Yes.

Speaker 1

Yes, it is. Correct.

Speaker 3

Absolutely. Yes, Mike.

Speaker 7

Okay. And then can you share what the Lightspeed OpEx was in 2023, please?

Speaker 3

In 2023, it was approximately just under $50,000,000 $48,000,000 to be precise. Canadian. Yes, Canadian.

Speaker 7

Yes, yes. Thank you. And then I think I got the math here. You did not repurchase any debt in the Q4. Can you confirm that?

Speaker 7

And anything subsequent to the end of the quarter?

Speaker 3

That's correct, Jeff.

Speaker 7

Okay. And then I believe you still have a $150,000,000 basket, I don't recall if it's RP or committed investments that you can move from restricted group to unrestricted group. Has that happened? If not, when should we expect that to happen? Basically, we should.

Speaker 1

It is it has not happened. We would expect to do that fairly soon.

Speaker 7

Okay, great. Thanks guys.

Speaker 2

Thanks, Mike.

Operator

Thank you. And the next question is from Marcelo

Speaker 8

I wanted to ask a couple of questions on the guidance. My understanding is maritime and aerospace represent about 20% of enterprise sales, so about $70,000,000 of the 2023 enterprise sales. So it seems like between like the cruise business and aerospace customer, it could be down 50% in 2024. So in line with what you were saying, the StarLink competition lift, is that the right way to think about that?

Speaker 2

John's just going to confirm. So let's see. So the sheet that I'm looking at has aero and maritime being a little bit less than 20% of our total revenue. I forget what you would kind of characterize as a percentage of our enterprise revenues. I haven't done the backward math on that, but roughly half and half.

Speaker 2

So Yes,

Speaker 5

there you go.

Speaker 2

So I'm sorry, so the question again. Yes.

Speaker 8

So it seems like Aerospace Maritime is down 50% in your guidance. Is that the right way to think about it?

Speaker 2

We're staring at something. Hold on.

Speaker 6

Yes, it will be roughly. Yes.

Speaker 2

Yes, yes. You've done good math there, it sounds like.

Speaker 8

Appreciate it. So it seems like given your earlier comment about 50%, like potential loss to start, like do you think that there's not much more risk there? Or do you think that, that segment might have incrementally more in the 50%?

Speaker 2

That segment would probably have incrementally more, maybe less aero and more maritime, yes, of all the verticals, right now probably having the biggest impact in maritime for what we felt so far.

Speaker 8

Okay. That's helpful. And then on the broadcast revenue side, it seems like you're guiding to 50% of the total revenue decline, so about $75,000,000 If I look at the decline from Q4 versus the Q3 of 2023, it seems like a $10,000,000 decline likely mostly due to Mimic for the Bell contract renewal. So that would imply about $30,000,000 of decline baked into 2024 numbers. So the remaining, say, dollars 45,000,000 of broadcast revenue decline outside of Mimics 4, Is that all Mimic 5?

Speaker 8

Because I think that one is only 2 months remaining, even if you assume 0, it seems like there might be other stuff that's going on.

Speaker 2

So, I think your math around the impact of NIMIC 4 is kind of directionally right. There might have been some other stuff in there as well. Then as I mentioned, the other big, I would say, anticipated contributor would be DISH. And by DISH, I mean, EchoStar. And there, yes, I mean that it comes up in early October and we just it's just too early to say whether that gets renewed at all or it's just some partial renewal.

Speaker 2

So it's that. And then beyond that, yes, just kind of making provision for any other erosion that we could potentially have. And yes, so those are the component parts of that.

Speaker 8

Okay. No, that's helpful. And then I noticed in the disclosures, you mentioned something about NIMIC 4 that happened earlier this year. So what are your contingency plans with Bell in case something more permanent happens to Mimic 4? And is it correct that the insurance only lasts until November 2024?

Speaker 2

So we'll take the insurance

Speaker 3

when it

Speaker 1

grows. Nimiq 4 is at the end of its life or near its end of its orbital maneuver life. So it has very little book value. So it has very little insurance. What insurance is there expires in November of 2024.

Speaker 2

And then as far as kind of contingency for Bell. So right now they use Nimiq 4 and they use Nimiq 5. I think the first thing I'd say is I'm sorry, NIMIC6. Thank you, Dave. We highlighted the issue that we had with NIMIC4.

Speaker 2

It's the right thing to do to highlight it for everyone. My own expectation is that Nimiq 4 makes it to its anticipated end of life. You never know. If it didn't, Bell has got NIMIC 6 and they're using that. And beyond that, we'll see where we land with EchoStar on the Nimiq 5 renewal.

Speaker 2

Maybe there's some ability to use NIMIC5 to look after Bell if they needed it. So certainly, I'd say those are kind of the things that we think about. And Bell is a sophisticated customer. I mean, they understand how the networks work.

Speaker 8

Really appreciate it. And sorry, on Mimics 5, like are you on the scale of assumptions, are you assuming no revenue for that in the 2024 guide?

Speaker 2

No, I'd just say we like we gave a range of guidance that can accommodate a range of different outcomes. So yes, it accommodates all kinds of different outcomes with EchoStar. My own guess is we get a partial renewal with them, but it's just too early to say. They've got work to do on their side in terms of how they go about distributing all the channels that they need to distribute. And so they've got work to do with them.

Speaker 2

We've known those guys for a long, long time. We have a good relationship with them. But it's still some months away and we developed a guidance range that accommodates just a whole range of different outcomes with them.

Speaker 8

And that satellite, does that represent a significant like much more revenue versus other NIMIC satellites or other satellites you have? Or is it pretty consistent with in terms of size, scale of other ones?

Speaker 2

I'd say of the NIMICs, kind of same order of magnitude with NIMIC4, NIMIC5, NIMIC6 recognizing, I should say, if you go back to the original rates on because NIMIC4 and NIMIC5 have been renewed at lower rates, much lower rates than their 1st 15 years of life. But if you went back and looked at the rates on the original rates on NIMIC 4, NIMIC 5 and NIMIC 6, yes, they're kind of all in the same ballpark.

Speaker 8

Very helpful. Thanks so much for answering the questions.

Speaker 2

You're welcome. Okay.

Speaker 1

We have one more we have time for one more brief question.

Operator

Thank you. And the last question is from Mr. Joe Geprowicz from Sixth Street. Please go ahead.

Speaker 6

Hi. Thanks for squeezing me in here. Most of my questions have been answered. I guess, just one on the 4th quarter performance, EBITDA coming in better than expected. Was there any one time items in there?

Speaker 6

Or what was driving that?

Speaker 3

Overall, I think it's just sort of timing, the timing of our expenditures, particularly as we invest in sort of light speed going forward. As you can probably tell, we control the OpEx pretty, pretty tightly. And so with the program, as soon as we get going in 2024, that's why we've stepped up our guidance. So I'd say that's kind of one of the main contributing elements in addition to the frugality of how we manage the business.

Speaker 6

Got it. And then just one more. So just to be clear, the $700,000,000 of government funding that you were in advanced discussions or as of last quarter, are you saying now that the whole $2,100,000,000 of U. S. Government funding is now secured and you expect to release details after the close?

Speaker 2

I don't know what the 700,000,000 dollars reference is to we had noted in the earnings release and I reiterated it in my remarks that we expect to have about US750 $1,000,000 of savings relative to what our original funding plan was. And by savings, I mean, savings in terms of our cost of borrowings in addition to the US2 $1,000,000,000 CapEx savings. And then as far as that 2.1, so there I'd say, stay tuned. The government of Canada, we would expect would be a meaningful amount of our government partner funding sources. We expect that Quebec, as I mentioned earlier, will also be part of that.

Speaker 2

And so I would just say, stay tuned. We expect to make some information available in the near term around the Government of Canada financing. And then it's not going to be too long till we do our Q1 call. So we'll probably be able to provide a bit of an update there as well.

Speaker 6

Okay. Thank you very much for the time.

Speaker 2

Yes. Thank you, Joe. All right. Well, listen, everyone, thank you very much for joining us this morning. As I mentioned, our Q1 call is kind of around the corner.

Speaker 2

So we look forward speaking with everyone again then. Thank you very much. Thank

Speaker 3

you very much. Cheerio.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time.

Powered by Quartr
Earnings Conference Call
Telesat Q4 2023
00:00 / 00:00