Telesat Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the conference call to report the 2nd quarter 2024 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive of Telesat and Andrew Brown, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. James Ratcliffe, Vice President of Investor Relations. Please go ahead, Mr.

Operator

Ratcliffe.

Speaker 1

Thank you, Paul, and good morning, everyone. This morning, we filed our quarterly report for the period ending June 30, 2024 on Form 6 ks with the SEC and on SEDAR Plus. Our remarks today may contain forward looking statements. There are risks that Telestat'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 and updates 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, HealthEquity's President and Chief Executive Officer.

Speaker 2

Okay. Thanks, James, and good morning to everyone. Q2 and the 1st 6 months of this year have unfolded consistent with our expectations. As a result, we're reaffirming all of our guidance for the year and keeping focused to make sure we meet those objectives. When we hosted our Q1 call in early May, we indicated we were seeking to conclude our Lightspeed funding agreements with the governments of Canada and Quebec by the end of this summer.

Speaker 2

This is obviously a key priority for us. I'm happy to say that we've had good and sustained engagement with government representatives and we are optimistic that we remain on track to achieve this timing. We'll make a separate announcement once the definitive funding agreements are concluded. Beyond that, we're making strong progress executing on the Lightspeed program. As MDA, our prime satellite contractor noted on its earnings call last week, they've now selected and onboarded 90% of the suppliers for the Lightspeed program and they remain on track for their full year ramp up plan.

Speaker 2

We've increased our own headcount since the start of the year by nearly 20% as we staff up to execute on Lightspeed and the team is making excellent progress on the program. As we noted in today's earnings release, our focus this year remains twofold. For our GEO activities, the emphasis is on maximizing EBITDA and cash flow by doing what we can to mitigate anticipated revenue declines and rigorously managing our cost structure. And on LEO, it's all about execution, closing our funding agreements, staffing up, building out all the various elements of the light speed network, including the satellites, the ground infrastructure and the software that we need and commercializing it in the key verticals we're focused on. I'm very pleased with the progress we're making in all of those areas.

Speaker 2

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 our shareholders. With that, I'll hand over to Andrew and then look forward to taking any questions.

Speaker 3

Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In the Q2 of 2024, Telesat reported consolidated revenues of €152,000,000 dollars and adjusted EBITDA of $103,000,000 For the 1st 6 months of 2024, the company generated $66,000,000 in cash from operations, ending the Q2 with $1,400,000,000 of cash. For the Q2 of 2024 and compared to the same period in 2023, revenues decreased by $27,000,000 to $152,000,000 Operating expenses increased by $5,000,000 to $56,000,000 and adjusted EBITDA decreased by $35,000,000 to $103,000,000 The adjusted EBITDA margin was 67.8% as compared to 77.1% in the Q1 of 2023. The revenue decrease for the quarter was primarily due to reduction in services and a low rate on the renewal of a long term agreement with a North American direct to home customer as well as lower revenues from certain mobility and Latin American customers.

Speaker 3

The increase in operating expenses is primarily due to higher wages and benefits, bad debt expense and costs associated with consulting contracts, partially offset by lower non cash share based compensation and higher capitalized engineering expense associated with Telesat Lightspeed. Interest expense decreased by $7,000,000 during the Q2 when compared to the same period in 2023. The decrease in interest expense was primarily due to the repurchase of notes and Term Loan B. This was partially offset by an increase in the interest rate and the U. S.

Speaker 3

Term loan facility. In the Q2, we recorded a loss in foreign exchange of $34,000,000 as compared to a gain of $67,000,000 in the Q2 of 2023. The loss for the 3 months ended June 30, 34 was mainly the result of the strengthening U. S. Dollar, the Canadian dollar spot rate through the quarter as compared to the spot rate as of December 31, 2023, and the resulting unfavorable impact on the translation of our U.

Speaker 3

S. Dollar denominated debt. Our net income for the Q2 was $129,000,000 compared to net income of $519,000,000 for the same period in the prior year. The change was primarily due to the onetime recognition of C band clearing income in the Q2 of 2023 along with the impact of the foreign exchange loss as I had mentioned earlier. For the 6 months ended June 30, 2024, cash inflows from operating activities were CAD 66,000,000 and capital expenditures were CHF 334,000,000 in the same period, almost all of which were related to Telesat Lights B.

Speaker 3

Actual cash used in investment activities was $220,000,000 in the 1st 6 months of the year. Certain capital expenditures were incurred late in the 2nd quarter and subsequently accrued. This is reflected in the increase in trade and other payables at quarter end. Guidance. As you will also have noted in our earnings release this morning, we have reaffirmed our 2024 guidance.

Speaker 3

This guidance assumes a Canadian dollar to U. S. Dollar exchange rate of CAD 1.35. For 2024, Telesatil expects its full year revenues to be between CAD 5.45 and CAD 5.65. In terms of operating expenses, excluding share based compensation, we are still looking to spend between $80,000,000,000 to $90,000,000 attributed to Telesat LightSpeed.

Speaker 3

Adjusted EBITDA. Telesat still expects to be between $340,000,000 to $360,000,000 As promised, we are also showing our GEO and LEO results separately and is reflected in Note 4 of our financial statements filed on Form 6 ks. In respect to expected capital expenditures, we continue to expect our 2024 cash flows used in investing activities to be in the range of $1,000,000,000 to $1,400,000,000 which is nearly all related to expected Telesat LightSpeed CapEx. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1,400,000,000 of cash and short term investments at the end of June as well as approximately $200,000,000 of borrowing capacity available on the revolving credit facility. Approximately $1,200,000,000 in cash was held in our unrestricted subsidiaries at the end of the quarter.

Speaker 3

In addition, we continued to generate a significant amount of cash from our ongoing operating activities. At the end of the second quarter, total leverage ratio as calculated under the terms of the amended senior secured credit facilities 5.6 times. Telesat is in compliance with all the covenants in our credit agreements and indentures. In terms of our debt repurchases, we repurchased year to date an amount of US262 million dollars at a cost of US120 million dollars including accrued interest. This includes an amount of US43 $1,000,000 purchased after quarter end.

Speaker 3

Combined the debt repurchases completed in 2022 and 2023, we've now repurchased a total principal amount of $849,000,000 at a cost of USD 459,000,000 including accrued interest. This also results in interest savings of approximately USD 55,000,000 annually. Including the repayment in 2020 of approximately US356 $1,000,000 of Term Loan B, our overall debt has been reduced now by approximately 36% or $1,200,000,000 A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6 ks provides the Uniti's interim condensed consolidated financial information into MD and A. The non guarantor subsidiaries shown are essentially the unrestricted subsidiaries with minor differences.

Speaker 3

So that concludes our prepared remarks for the call, and now we'll be very happy to answer any questions you may have. So with that, I will turn back to the operator for the question and answer session. Thank you.

Operator

Thank you very much. We have the first question from Edison Yu from Deutsche Bank. Please go ahead. Your line is open.

Speaker 4

Good morning. Thank you for taking our questions. First, just want to clarify that the negotiations are on track. Are you basically saying that it will conclude in the next couple of weeks based on your end of the summer timeline?

Speaker 2

Yes, that's effectively right. Our expectation is that in the next couple of weeks, we will conclude the agreements and make a separate announcement about that.

Speaker 4

Understood. And I guess is there anything that still needs to be worked out? Or is this sort of more the right people got to make the right signatures? Or is there anything kind of outstanding?

Speaker 2

Yes. No, as I said in my prepared remarks, we've had really good engagement with the government representatives. These are representatives from the Government of Canada and the Government of Quebec. There are a good number of agreements that need to get concluded in order to document all the different features of the funding arrangements. At this point in time, there's I don't see any significant impediments or obstacles in getting this done in the coming weeks.

Speaker 2

And so, yes, we're just it's a big funding arrangement with multiple agreements and we're just working through all that, but there's nothing, yes, kind of extraordinary about what remains to get done.

Speaker 4

Got you. You're switching to the guidance on the CapEx, obviously implies pretty substantial step up, even at the low end of the range. I guess, how do we think about what determines if you end up in a close to $1,000,000,000 closer to $1,400,000,000 And what sort of the drive to delta?

Speaker 2

Andrew, do you want to take that?

Speaker 3

Yes, sure. If you look at our flow of CapEx in the second quarter, it's approximately about $309,000,000 or so. So if you kind of multiply that by $3,000,000,000 you actually get to $1,000,000,000 from a mathematical perspective. So that's why we feel pretty comfortable where we are with the range.

Speaker 2

Yes. And maybe I would just add that, it's a sign that the program is on track. I mentioned again in my prepared remarks that MDA, who's the prime and is going to be the beneficiary of so much of our capital spending this year. And next, they've done a great job of getting all of their suppliers online. They're placing orders and they're moving out exactly as we would like them to.

Speaker 2

And so, yes, we felt everything we're seeing tells us that we're going to be tracking the guidance. And as Andrew said, there was a big spend in Q2 and everything we're seeing is showing good progress and that our suppliers will achieve the milestones they need to achieve in order to unlock the payments that we've sort of budgeted for.

Speaker 4

Okay. Thank you. I'll jump back in the queue.

Speaker 2

Okay. Thanks.

Operator

Thank you. The next question is from David McFadgen from Cormark Securities. Please go ahead. Your line is open.

Speaker 5

Okay. Thank you. A couple of questions. Can you just give us an update on where you stand with respect to negotiating that 1 DTH customer? I think the contract has been renewed this fall.

Speaker 2

Yes. Thanks, David. So just for everyone's benefit, we've got a renewal with EchoStar on our NIMIC5 satellite that comes up in early October. And we've said that on our last two calls, I think that we've been engaged with EchoStar. So we're not done yet.

Speaker 2

I've mentioned before, we know EchoStar well. We have good relationship with them. We've done business with them for a very long time. So we certainly had a number of exchanges, but we're not done yet. So my expectation obviously with this renewal coming up in about 2 months' time, we'll be landing on a resolution pretty soon.

Speaker 2

Certainly, I think that by the time we do our Q3 call, we'll be able to provide a lot of detail around where we landed. But at this point in time, still having discussions with them.

Speaker 5

Okay. And then maybe a couple of questions on LightBee. So in terms of defending agreements, you'd say that you expect to have them signed by the end of summer. Is that with both the government of Canada and the government of Quebec? Because I think in the past you were primarily referring to the government of Canada.

Speaker 2

Yes. No, it's our expectation that it will be with both of them. And again, it's why it's taken a little while. Again, we're tracking the timeframe that we had envisioned a few months ago when we put out our Q1 numbers. But because it is the government of Canada, it is the government of Quebec.

Speaker 2

We also have this vendor financing and so there all of that needs to get done. It takes a little bit longer than if it were 1, just a purely commercial kind of funding syndicate. And 2, yes, with these government funding, there are yes, it's kind of special consideration. So yes, it will be with the government of Canada, with the government of Quebec and it all feels like it's moving in the right direction. I have to say just because I'm a former lawyer, it ain't over till it's over, but we're highly confident that we're going to get there in the coming weeks.

Speaker 5

Okay. And then can you update us on your total spend to date on Lightspeed?

Speaker 2

Andrew?

Speaker 3

Looking up for the half year, as we said, we've spent $334,000,000 in total, of which CAF was $220,000,000 and the balance has indeed been reflected in the accounts payable that we see on the balance sheet.

Speaker 2

And those are Canadian dollars, right, Andrew?

Speaker 3

Yes, correct. Canadian dollars, correct.

Speaker 5

So I think the budget for rights is 3,500,000,000

Speaker 4

dollars Well, that's the U.

Speaker 5

S. Number. And so that's so you spent C334 so far on the project all in?

Speaker 3

Yes.

Speaker 2

Okay. Wait, no, no, no. That's just what we've done so far this year. Yes. But we've been making investments in the program for the past few years, including payments with launch providers, a lot of the non recurring engineering investment that's gotten made, user terminal development just kind of across the board.

Speaker 2

So Andrew, I don't know if you want to say anything more about that.

Speaker 3

Yes. No, I can.

Speaker 2

If you go all the

Speaker 3

way back to the development, back to 2020, on a Canadian dollar basis, looking at CapEx, it's about $980,000,000 CapEx is what we have spent doing all of the work that we have done to get where we are today. And currency? And Canadian dollars.

Speaker 5

Okay. Okay. All right. That's great. Thank you.

Speaker 6

Thank you.

Operator

Thank you. The next question is from Chris Quilty from Space. Please go ahead. Your line is open.

Speaker 7

Hey, guys. So congratulations, you put up better results than I was expecting for Q2, but that begets the question, you maintained full year guidance. And so did you see anything that was pulled forward into Q2? Maybe just first question.

Speaker 2

No. No, the quarter unfolded, yes, like we expected.

Speaker 7

All right. So I therefore kind of didn't model the back half down as much as perhaps I should have to stay at kind of the midpoint of the guidance. But putting aside Mimic 5, which I had already accounted for, when you look at the base of the business, are there any other large contract roll offs or the other issues you've sort of identified, maritime and Latin America, are those getting better or worse?

Speaker 2

I think, look, we gave guidance at the outset of the main, the year has been unfolding like we expected. There were some renewals that we didn't think we were going to get that we did. There were some things that we thought would roll off in a certain timeframe. We still think they're going to roll off, but they're rolling off a little bit later. And then equally there are some things that played out in a way that's probably worse than what we thought.

Speaker 2

One of the things I'd note and we flag it in the 6 ks is our customer Explorer, which is a Canadian rural broadband provider that serves its customers with a mix of satellite, terrestrial wireless and fiber, Xplore is going through a restructuring process right now. And as a result, we bumped up our bad debt provision in the quarter and we're trimming our expectations for what we'll do with them for the rest of this year. So I'd say that was one that we didn't anticipate when we gave our guidance at the outset of the year, but that's something that will be a bit of a headwind in the second half of year and potentially next year as well.

Speaker 7

And remind me, Dan, because that was they bought all the ViaSat and Hughes Canadian payloads for ViaSat 1 and 2. But you guys were involved in the deal, if I can say, as sort of a middleman through that contract, if I remember correctly. So I wasn't expecting there was a huge revenue or margin contribution on that?

Speaker 2

Yes. No, not really so, but you're right. You're right in the sense that Xplore uses satellite capacity from Telesat, Viasat and Hughes. But no, we didn't act as a middleman for any of that. We own the payload, I'm sorry, the Canadian payload for ViaSat-1 and we did a long term deal with Xplore to use that payload, but they did their own direct deals with Hughes and ViaSat for their other capacity, so that that doesn't flow through our P and L.

Speaker 7

Okay. I got it part way right.

Speaker 2

Well, that's usually better than I do, so that's pretty good.

Speaker 7

All right. Second question for Andrew, I guess, spending $1,000,000,000 in the back half of the year is no small fee for the government, but for Telesat, that's a big chunk of money. And clearly, people are not building stuff at that rate. How much of that should we think of as prepayments to and how does that flow through MDA to the supplier base in terms of the revenue contribution on the other side? If you can give us

Speaker 2

a So maybe Chris, I'll take this one. And I won't speak to MDA's revenue recognition or I mean that yes, talk to them about that. But our suppliers need the money. They're ordering equipment right now. I mean, don't forget, we're launching satellites 2 years from now, which means that those satellites are going to be getting built in the coming months.

Speaker 2

And so they're ordering, you name it, solar arrays, I'm sitting here with my CTO, help me out Dave.

Speaker 6

All of the various components

Speaker 2

of the spacecraft, the mechanical, the propulsion system, solar arrays, attitude control 100%. People are building stuff. All the supply chain is building stuff. They're ramping up. They're spending money.

Speaker 2

And as much as I would like to think that everyone wants to do Telus at a great big favor, in my experience, all these companies want money before they start spending money. So that's the flow of funds. And here again, and I'm somebody that is always squeamish about spending money. But the reality is, we're hitting the schedule and they're moving out. And the worry would be if we weren't spending the money, then our schedule to me and to other people that know this industry, it wouldn't be credible.

Speaker 2

The reality is, yes, we're spending a lot of money over the next 24 months because people are buying stuff and building stuff and that's exactly what's going on.

Speaker 7

Great. And speaking of stuff, I have to ask, it's a company, but also an industry question around your selection of And obviously And obviously that technology is absolutely critical to the sort of performance economic returns you expect. So can you perhaps give us a little soliloquy on the process there?

Speaker 2

Yes. So our world class, long standing CTO, Dave Wendling is sitting in the room with me, but I'll take the first crack at this, Dave, and you can come around. So, yes, these optical inter satellite links are a key part of the constellation. And for everything on the constellation, whether that's the onboard processor, the antennas, the digital antennas or these optical links, we're always trying to make the right choice between cost, capability and kind of reliability, heritage and whatnot. So we had and there are a lot of folks right now that are coming forward with good optical technology in space.

Speaker 2

We worked with MDA in making the selection. So that's something else I'd note. This was kind of a joint effort, joint determination between Telesat and MDA. And the reality is we landed on TCEAT because they kind of most check the box on those different variables, performance, reliability, cost, schedule, all of that. So TSAT has good heritage here.

Speaker 2

They have a very good capable optical link. At the end of the day, it was a competitive process. And at the end of the day, we at MDA judged that Tset was the best vendor for it. It's not a black mark against any of the other companies out there that are making optical links. We have a we felt like we had a number of good alternatives.

Speaker 2

But at the end of the day, TSAT got over the line for us. And Dave, I don't know if there's anything else?

Speaker 6

No, I think you said it well, Danny. I just note that it was a very disciplined down selection process in the final analysis then. So as you said, TESAC came out on top in a very tough process.

Speaker 7

And final question, listening to the NDA call the other day, clearly your topic heap with them, but they apparently have a new undisclosed customer that sort of grown in size very quickly. Which would lead someone to believe it might be a government customer, which tends to exert priority. Again, all I'm speculating, but these are the things we've seen happen before. Do you have any concerns? I know they're ramping up to a capacity of like 2,000 satellites a year, but they're ramping up.

Speaker 7

Is there a growing book of business that's not serving any reporting?

Speaker 2

So the short answer is no. They're right down the street from us, about an hour and a half away from us. We know MDA well. Our teams are well integrated. We've got a lot of former MDA employees here.

Speaker 2

They probably have a couple of former Telesat employees on their side. We have, I'd say, a really good working relationship with MDA at all the different levels kind of throughout our organizations. We've worked with MDA for decades, not as a satellite prime, principally on the antenna side and whatnot, although they've been building satellites for years years. So no, we don't have any concern. We're in close contact with them as they ramp up their staff, as they ramp up the supply chain.

Speaker 2

We including myself, meet with them on a regular cadence. So which is not to say that we're relaxed and complacent. This is a huge program for us. It's a huge program for them. Both of us need this program to be successful.

Speaker 2

I like that dynamic where we both have a lot of skin in the game. But no, I mean, it's something that we're going to keep monitoring very, very closely. But no, I feel good right now about where they are on the ramp up and how our teams are engaging and the like. So and if we feel differently about that, we'll let you know. Great.

Speaker 2

Thanks. Thanks, Chris.

Operator

Thank you. The next question is from Walter Dziekak from Leitchell. Please go ahead. Your line is open.

Speaker 4

Thanks, Dan. Just a quick first a quick follow-up on one of questions with regard to the strength in the first half of the year relative to guidance. Are you basically assuming that EchoStar is a 0 in terms of revenue for the Q4 as they kind of work through their cash issues? Well, Is there some probability associated with that when you put together your guidance numbers?

Speaker 2

Well, when we put together our guidance and we said this before, it captured a range of outcomes with EchoStar. And we haven't changed any of those assumptions in terms of what those range of outcomes could be. So no, the back half of the year and our thinking about it hasn't deteriorated because we've learned something new. Our thinking has changed about EchoStar from where we stood at the outset of the year when we gave the guidance. And I guess the other thing I'd say is, yes, we all track what's going on in the sector, including what's going on with EchoStar.

Speaker 2

The reality is to date the direct to home satellite business is obviously still generating a significant amount of cash flow at EchoStar. To date, Mimic 5 is being fully used by EchoStar. My expectation is to the extent that they renew with us, then that will be a reflection that Nimiq 5 is still an important part of their distribution infrastructure and they'll find a way to pay for that because it's important that they continue to provide service to their DTH customers and continue to enjoy the benefit of that cash flow. And so my expectation is that they'll find a way to make sure that they're paying us. So I'm just pausing here.

Speaker 2

Are we still online? Okay. Sorry. Our screen was flickering here. I wasn't sure if we had lost the line.

Speaker 2

That was a

Speaker 4

good response. Maybe it was just flickering positive feedback. Yes, I mean, I agree. I mean, look, if they have to generate some level of free cash flow in one element of the business and they can't switch off and mimic 5, then you got to get why not just put a gun to their head then and just not let them off the hook for a lower renewal?

Speaker 2

Well, I mean, look, with all of our customers, you try to, yes, frame things in a kind of a win win way as best you can. You don't always get there, but we've been working with EchoStar for nearly 20 years now, and we have a good relationship with them. We've talked about this before. We all know it. The direct to home satellite business is facing real secular headwinds.

Speaker 2

We try to work with whether it's Bell or EchoStar or Shaw, try to work with them to sustain that business because there still are millions of households across North America that rely on those services. And so

Speaker 4

No, I just feel like on this renewal, however many years it's going to be, also the longevity of the stat itself. It's like this is the last one 5 years from now, if there are a couple of 1,000,000 subs lower, then they're not going to be maybe as nice to you as you sounding like you want to be nicer than in this scenario. In other words, like this could be the last negotiation of your 20 year relationship. So why not like just squeeze in for everything you can?

Speaker 2

Yes. I don't know. We've been doing this for a long, long time. It's not how we approach our customers in the market. And so anyway, so stay tuned.

Speaker 2

We're going to conclude one way or another our renewal discussions with them and then we'll be able to provide an update on that in a couple of months' time.

Speaker 4

Any KFLs on the LEO? Now that NDA is kind of talking about it more, obviously, there's seemingly more confidence in the market that the project is moving forward. Has this opened up any additional presales on the enterprise side? I realize obviously the launch is still a couple of years out, but wondering if you've got any kind of additional commitment. And to that end, in terms of the market size beyond enterprise, what Globalstar and Apple have done in its recent phone, again, getting back to the direct to device, I know this is not the target market that you want, but is there any rethinking in that in terms of direct to device?

Speaker 4

I mean, I think Skyglow had an announcement yesterday with the new Pixel phone. It seems to be a market developing. I've been using the Globalstar stuff. It's been great in the whole coverage that exists. Just curious if your thought process has changed in terms of trying to attack that market?

Speaker 2

It's a great question, but no, it hasn't. The reality is the spectrum that Lightspeed is operating on the Ka band spectrum is ideal for broadband connectivity, but it's not ideal for direct device providing a broadband connection, even an air bank connection to a handheld smartphone. So and we believe the market that the verticals that we're focused on are great opportunities for us. They're large, they're deep, they're fast growing and we've optimized the constellation to serve that market. The frequencies are really well suited to serve that market.

Speaker 2

And so no, that remains the focus. And then as far as presales activities, Lightspeed is moving forward. I mean, if anyone still has any questions about that, yes,

Speaker 4

I mean, I don't know

Speaker 2

what to say, but we're obviously spending money, MDAs ordering stuff and we're all ramping up our staff. And I mean, Lightspeed going forward. I think the customer community understands that. We've got sales people and business people running all around the world engaged with the customers that we know well in these different verticals. And so nothing to announce right now.

Speaker 2

But

Speaker 4

I know you only announced like material contracts, but could you at least comment whether there have been incremental bookings that maybe they're not significant enough to call out

Speaker 2

any other No, no, no. I mean Have

Speaker 4

there been any bookings since the last earnings call?

Speaker 2

No, no, but it wasn't our expectation that there would be any. We're having good engagement with really good prospective users in the key verticals that we're focused on, aero, maritime, government, enterprise. It wasn't my expectation that we'd be announcing anything since putting out our Q1 numbers. But the market knows what we're building. Users are excited about it.

Speaker 2

There's a clear validation that, the customer community is highly receptive to LEO. You see the traction that Starlink is getting. And we think that we're bringing something really compelling to the market. So anyway, stay tuned and we'll be very transparent about the orders we're getting right now. We've got about $750,000,000 of take or pay commitments on Lightspeed, which we do not include when we talk about the CAD 1 point 1,000,000,000 of backlog that we report in the earnings release.

Speaker 2

The Lightspeed backlog is separate and apart from that. And we'll as that moves, we'll report on it and we'll talk about the wins that we have and the like. Great.

Speaker 4

Thank you. Thanks.

Operator

Thank you. The next question is from Sean Mahoney from Bank of America. Please go ahead. Your line is now open.

Speaker 4

Yes. Hi. Thanks for taking the questions. First, I noticed a large working capital outflow for the restricted group and a large working capital benefit for the unrestricted group in the quarter. So just wondering, does that reflect any intercompany flows?

Speaker 4

Or is it just a coincidence that those numbers largely offset? Or did you use the remaining un sub investment capacity as you indicated you would on the last call? Yes.

Speaker 3

So that's the investment down from Telesat Canada into the unrestricted group. And from a timing perspective, just showing up top in operations. But next quarter, you'll see it down as an investment in.

Speaker 4

Okay, got it. Thank you. And then for geo OpEx, Q2 was up sequentially. It seems like at least part of that was due to the impact of expense associated with Explorer that you may spend as well as higher professional fees. How should we think about run rate geo OpEx?

Speaker 4

Should we look more to like Q1? Or do you expect to continue to incur higher bad debt expense with Explore or higher professional fees for some time?

Speaker 3

If you look at our Geo business overall, I would point out our actual EBITDA margin is 80%, which is pretty high, pretty significant. And we said on our last call, we were expecting GEO OpEx to be down 4% in our plans and that's contained within the guidance and that's still what we are actually sticking to now. On the bad debt, I'll just share the bad debt amount, delta, is about €2,000,000 to €3,000,000 So on a grand scale, it's not that sort of material. But as we said in our last call, in terms of OpEx and as Dan had alluded to in spending money, we are pretty judicious on what we do and how we spend money and which is good. So as I say, that's what we said on our call, that's a review of geo OpEx.

Speaker 4

Okay, got it. And then on the bad debt expense that you mentioned, yes, it looks like it went up like $3,300,000 in the quarter, so call it $1,100,000 a month. Are you still recognizing revenues from Explorer and just kind of offsetting that with bad debt expense?

Speaker 3

Yes. We are currently recognizing revenue with EXPLORER. They're making partial payments. So we continue to recognize revenue till we know more about what their

Speaker 4

plan is going forward. Okay. And can you quantify like what the remaining what their remaining obligations are, I guess, under the contract? Like how much of your backlog includes the Explore obligations?

Speaker 2

Yes, we'll help you out there. So John, remind me, it goes out until January 2020 7. Yes. So it would be $25,000,000 $26,000,000 It's probably order of magnitude about $40,000,000 of backlog that's in that CAD 1,100,000,000. Now you should also know that about a third of that was prepayment.

Speaker 2

And so when we recognize revenue from Explore each quarter, about a third of it is just non cash deferred revenue. So that's but that's what it is, Sean.

Speaker 4

Okay, got it. Thanks. And then the last one, I know a people have asked, so I'll just try one more time on the guidance. So the low end of the guidance implies second half revenues of about $240,000,000 to be $40,000,000 a month. And you did $305,000,000 or about just north of $50,000,000 per month in the first half.

Speaker 4

I know that there's the renewal with EchoStar that comes up, I can't remember, September, October. But in the past, you've said that those DTH birds are about $70,000,000 a year, could be more, could be less. But just wondering if you could help us understand like the drop off of at least or I guess even if you lost 100% of that EchoStar contract, it seems like you're still assuming some pretty steep declines in the rest of the business in the second half of the year? Thanks.

Speaker 2

I'm looking at Andrew. Maybe I'll take this. I guess, how we thought about the year, certainly, we even if DISH renews, we expect that it will be at a materially lower rate. So we've captured different outcomes with DISH that explain part of the decline. We've got this issue with Explore.

Speaker 2

We'll see where we land on that. So it's things like that. I'd note also, there's we take a look at kind of all of our business activities periodically. We're giving consideration to selling kind of a non core business that we own and that could potentially get done in the near term. So it would be impactful for this year.

Speaker 2

It contributes revenue. It doesn't contribute a whole lot of EBITDA to us, but that if we were to do that would weigh somewhat on the top line at least. So it's all those kinds of things. And then yes, we gave a range, right? I mean there's a low end of the range, there's a high end of the range.

Speaker 2

And yes, Andrew, do you want to add anything to that?

Speaker 3

Yes, indeed. If you look at the OpEx, as we know, as Dan said, we're hiring people. So our OpEx indeed was in LEO, our investment in LEO from the people perspective is going to increase. If you look at our segmentation, operating expenses for the 6 months was about €32,800,000 and our guidance we've given for OpEx in LEO is between $80,000,000 to $90,000,000 So that will also kind of play in overall as to what the increase potential increase in OpEx in the second half versus first half. So that plays in right down to the adjusted EBITDA as well.

Speaker 3

And I will say we are prudent as well in what we do.

Speaker 2

And maybe one other thing James has pointed out to me that and now that we've broken out our GEO and LEO numbers separately, it's easier for you guys all to see. But we recognized revenue in LEO for the first half of the year that and that's chunky nonlinear kind of revenue. It was the consulting contract that we had. I think this one was with NASA. NASA, correct.

Speaker 2

Which there's more revenue recognition in the front part of the year than there is in the back part. Here again, it's not contributing a whole lot of EBITDA, but it will

Speaker 4

impact the top line. So anyway, Sean, it's kind of all of

Speaker 2

those things, but there's certainly nothing that other than the Explore restructuring that's going on, we don't know where that's going to land. There's nothing about how the second half of the year is shaping up that's really anything different than the way we were thinking about the second half of the year at the outset of this year when we gave our guidance.

Speaker 3

And if you look at the segmentation breakout with Don, which I think is very useful and very transparent, the numbers we just sort of are the issues we just mentioned about the OpEx the revenues. And Leo, you can actually see that quite clearly and particularly pertaining to the 1st 3 months.

Speaker 4

Okay, got it. Thank you. And then just last one for me based on what you said. That non core asset that you mentioned, is that in the restricted group? And can you give us any sense for an order of magnitude of what you expect to sell that for?

Speaker 4

Is that like a $5,000,000 $10,000,000 or are we talking $100,000,000 or what's your number?

Speaker 2

Yes. So one, it is in the restricted group. It's not it's certainly not material from an EBITDA perspective because as I mentioned, it's pretty much EBITDA neutral for us. And then in terms of top line contribution, order of magnitude, it's kind of in the CAD 10 plus million contribution top line. So that's what it looks like.

Speaker 2

And then in terms of proceeds, we can't say yet, because we don't have anything to share yet, but it's not going to be really material. But any proceeds that we do get from that activity if we sell it will come into the restricted group.

Speaker 4

Okay, thanks. That's all for me.

Speaker 2

Okay, thank you.

Operator

Thank you. There are no further questions registered at this time. I will turn the call back to Dan Goldberg.

Speaker 2

Okay, operator. Thank you very much and thank you all for joining us this morning and we look forward to chatting with you again when we release our Q3 numbers. So thank you very much.

Speaker 3

Thank you very much. Kiriels?

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Key Takeaways

  • Telesat reaffirmed its 2024 guidance with full-year revenue of CAD 5.45–5.65 billion, adjusted EBITDA of CAD 340–360 million, and LightSpeed CapEx of CAD 1.0–1.4 billion (assuming C$1.35/USD).
  • In Q2, revenue was US$152 million (down US$27 million yoy) and adjusted EBITDA US$103 million (67.8% margin), reflecting lower DTH renewal rates and reduced mobility/Latin American volumes, with operating expenses up on wages, bad debt, and consulting.
  • The LightSpeed LEO program is on track, with funding agreements with the governments of Canada and Quebec expected by end-of-summer, MDA having onboarded 90% of suppliers, and Telesat headcount up 20% to support execution.
  • Balance sheet strength includes US$1.4 billion in cash, US$200 million revolver capacity and US$1.2 billion in unrestricted subsidiaries; debt repurchases of US$849 million principal (US$459 million cost) have reduced overall debt ~36% and cut interest expense ~US$55 million annually.
  • Key customer updates include ongoing EchoStar Nimiq 5 renewal negotiations for October, Xplore’s restructuring-driven US$3.3 million bad-debt provision on ~CAD 40 million backlog, and ~US$750 million of take-or-pay commitments for LightSpeed (outside the CAD 1.1 billion GEO backlog).
AI Generated. May Contain Errors.
Earnings Conference Call
Telesat Q2 2024
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