Loral Space & Communications Inc.
Q1 2018 Earnings Call Transcript
Published:
- Operator:
- Good morning ladies and gentlemen. Welcome to the conference call to report the First Quarter 2018 Financial Results for Telesat. Our speakers today will be Dan Goldberg, the President and Chief Executive Officer of Telesat; and Michael Cayouette, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead.
- Michael Bolitho:
- Thank you and good morning. Earlier today, we issued a news release containing Telesat’s consolidated financial results for the three month period ended March 31, 2018. This news release is available on Telesat’s website at www.telesat.com under the tab Investor Relations. We also filed our quarterly report on Form 6-K with the SEC this morning. 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 additional information about known risks, we refer you to the Risk Factors section of Annual Report on Form 20-F for the fiscal year ended December 31, 2017 filed with the SEC on March 01, 2018. The information that we are discussing today reflects our expectations as of today and is subject to change except as required by securities law, Telesat disclaims any obligation or undertaking to update or revise this information whether as a result of new information, future events or otherwise. I will now turn the call over to Dan Goldberg, Telesat’s President and Chief Executive Officer.
- Dan Goldberg:
- Okay, thanks, Michael. Good morning everyone. This morning I’ll discuss our first quarter financial results and given an update on the business. I will then hand over to Michael, who will speak to the numbers in more detail and then we will open the call up to questions. Adjusting for foreign exchange rate changes, the adoption of IFRS 15 and the special compensation payment made to stock option holders in Q1 of last year, all adjustments we’re making in order to facilitate an apples to apples comparison with the results in the prior period, revenue, operating expenses and adjusted EBITDA in the first quarter were all essentially flat relative to the same period last year. Our earnings release provides greater granularity on the magnitude of each of these adjustments. Turning to some key metrics, backlog at the end of last quarter was $4 billion. Utilization was 93% for the North American fleet and 70% for the International fleet. Looking at how our revenues broke down on an application basis for the quarter, enterprise services represented approximately 49% of total revenue, broadcast was also 49% of revenue and consulting and other 2%. And on a geographic basis for the quarter, North America accounted for 79% of revenue, Europe, Middle East and Africa 10%, Latin America 8% and Asia 3%. Turning to new satellites, our Telstar 18 vanTagE and Telstar 19 vanTagE satellites are both being built by SSL and are scheduled to be launched by SpaceX mid this year. Telstar 19V is a state-of-the-art high throughput satellite that will be collocated with our Telstar 14r satellite to expand our services over the Americas, the Caribbean and the North Atlantic. The satellite has a mix of Ka and Ku-band capacity. The Ka-band capacity for South America is already under a 15-year contract with Hughes Network Systems and our long standing customer Bell Canada has entered into a 15-year contract for substantially all of the satellites Ka-band capacity over Northern Canada, which means that all of the satellites Ka-band capacity serving that region is already under contract. Telstar 18V, our other satellite being built by SSL, has a broad C-band beam over Asia, which is similar to the one on Telstar 18 the satellite that will replace. It also has a mix of regional beams and high throughput spot beams in Ku-band that represent a significant expansion of our Ku-band capacity for Asia. Although Telstar 18V will be owned and operated by Telesat, our longstanding partner apT is providing 57.5% of the capital for the satellite program in exchange for use of 57.5% of the satellites’ capacity. In addition of these two large GEO satellites at the beginning of the quarter, we successfully launched our first LEo satellite into orbit, an important milestone in our plans to deploy a highly advanced high capacity extremely low latency LEo satellite constellation. The satellite is now in its intended orbit has completed performance testing and is operational. We’ll be using the satellite to validate some of the key design parameters of our constellation and to do testing and demonstrations in concert with other companies and satellite users, who have a keen interest in next generation LEo satellite services. Looking ahead, we remain strongly focused on commercializing our available in-orbit satellite capacity, maintaining our operating discipline, launching bringing into service and commercializing our two new satellites and further progressing our advanced LEo satellite consolation initiative. With that I'll hand over the Michael and then look forward to addressing any questions you may have.
- Michael Cayouette:
- Thank you, Dan, and good morning everyone. During the first quarter and compared to the same period in 2017, revenue decreased by $2 million to $232 million, operating expenses decreased by $17 million to $38 million and adjusted EBITDA increased by $3 million to $195 million. Between the first quarter of 2017 and the first quarter of 2018, the average value of the U.S. dollar in Canadian dollar terms decreased by 5.2%. That decrease had a negative impact of $6 million on our revenue, a positive impact of $1 million on our operating expenses and a negative impact of $6 million on our adjusted EBITDA. On January 1, 2018, we adopted IFRS9 financial instrument and IFRS15 revenue from contracts with costumers. The adoption of IFRS9 had no impact on revenues, operating expenses and adjusted EBITDA. For the three months period ended March 31, 2018, the adoption of IFRS15 had a positive impact of approximately $4 million on revenues, $5 million on operating expenses and $9 million on adjusted EBITDA. When adjusted for the changes in the foreign exchange rate and the impact of IFRS15, revenue remain constant during the first quarter compared to the same period in 2017. Operating expenses decreased by $11 million and adjusted EBITDA decreased by $1 million. The decrease in operating expenses was mainly due to a special payment of $12 million made in the first quarter of 2017 to stock option holders in connection with the cash distribution to our shareholders as well as the reduction in cost of sales resulting from the implementation of IFRS15. Depreciation and amortization decreased by $2 millions during the first quarter when compared to the same period in 2017. The decrease was mainly due to the end of useful life for accounting purposes of our Telstar 18 satellite in 2017, interest expense increased by $9 million during the first quarter when compared to the same period in 2017. The increase was mainly due to the interest expense recognized on certain customer contracts with a significant financial component as a result of the implementation of IFRS15. Higher interest rates on our new senior secured credit facilities and senior notes as well as the amortization of the gain on refinancing resulting from the implementation of IFRS9. The increase was partially offsets by an increase in capitalized interests combined with the favorable impact related to the conversion of U.S. dollar denominated interest expenses into Canadian dollar equivalent. During the first quarter, we recorded a gain on financial instruments of $13 million and a loss on foreign exchange of $77 million. The gain on financial instruments reflects changes in the fair value of the interest rate floor on our senior secured credit facility, the prepayment option on our senior note and the interest rate swaps. The loss on foreign exchange was mainly related to the change in the exchange rate used to translate our U.S. dollar denominated debt into Canadian dollar equivalents at the beginning and the end of the period. The tax expense increased by $10 million during the first quarter compared to the same period in 2017. The increase was mainly due to an increase in operating income as well as gain on certain financial instruments partially offsets by an increase in interest expense. On April 26, 2018, we amended our senior secured credit facilities to effectively reprice our terminal in the facility. The amendment reduces the interest rate on the term loan B from LIBOR plus 300 basis points LIBOR plus 250 basis points. During the first quarter of 2018, the cash inflows from our operating activities were $126 million and the cash outflows used in investing activities were $28 million. The majority of our investing activities during the first quarter were related to capital expenditure for the construction of Telstar 18 VANTAGE and Telstar 19 VANTAGE. To meet our expected cash requirements for the next twelve months including interest payments and capital expenditures, we have $517 million of cash and short-term investments at the end of March as well as approximately US$200 million of borrowing availability under our revolving credit facility. We also continue to generate the significant amount of cash from our operating activities. At the end of the first quarter, we were in compliance with the covenants in our credit agreement and indenture. A reconciliation between our financial statement and the financial covenants calculation is provided in the quarterly report we filed today. That concludes our prepared remarks for this call and now we will be happy to answer any questions you may have. Operator?
- Operator:
- Thank you. [Operator Instructions] The first question is from Jason Kim of Goldman Sachs. Please go ahead.
- Jason Kim:
- Thanks very much. A couple of questions from me. First, the short-term provisioning revenues in the quarter, how much were they in 1Q 2018 and how do they compared to last quarter?
- Dan Goldberg:
- It was pretty much a wash, Jason, with the Q1 in 2017.
- Jason Kim:
- Okay.
- Dan Goldberg:
- So we had a – we recognized some revenue for that this last quarter and it is pretty much a wash with the same amount that we recognized in the prior quarter. And magnitude, I mean, as a percent of the overall revenue, it's not – it's not that material.
- Jason Kim:
- Got it. And then secondly on our long-term basis, what do you think the total size of the investments in the LEo project could be for Telesat? I saw the Canadian government also committed funds for Leo, but I was curious if you had a ballpark figure in mind for Telesat's investments over the next call it two to three years and your cash balance is pretty sizable right now and will likely get bigger as it generate more cash. So from where we stand today, can you talk about your priorities to deploy that excess cash or LEo initiatives where you want to focus on or as capital return to shareholder something you consider again as you have done in the past?
- Dan Goldberg:
- Let me talk about LEo a little bit. So we haven't said – at this point, we haven't shared our thoughts with folks around what the total investment could look like. It's obviously a meaningful project. We're still working with our perspective vendors right now. And until we've gotten further along with them if those premature to me that to be speculating right now about what the total magnitude would be, but suffice to say it's a meaningful undertaking. We were pleased to see both the federal government and the Ontario provincial government making provisions in their recent budgets to support LEo at both levels at the federal and provincial level. I think really appreciate the promise that these LEo consolations have in terms of addressing real broadband challenges and they're obviously supportive. So we're really pleased to see that. Maybe I'll say a couple of words about how I think about using the cash and then Michael can share his thoughts. Certainly, this signature growth initiative that we have in mind right now and by that I mean sort of medium to long term is LEo. The near term growth initiative is for us Telstar 19V and some of the expansion capacity on 18V. And it's certainly the case when we think about making future investments. LEo will likely be featured very meaningfully in terms of the types of capital investments we make and how we use our cash. Beyond that I think certainly over time to the extent that we've got excess cash beyond what our investment requirements are then we did thinking about delivering and strengthening the balance sheet. I'd say right now there isn't any plan or intention to make returns of capital to shareholders. I'd never definitively take something like that off the table, but I can say that that's not the plan right now. And Michael, I don't know if you want to add anything.
- Michael Cayouette:
- No, that’s correct Dan. So our focus is on using cash to support our growth initiative. Eventually if we don't have a project that if we have still excess cash in addition to our growth initiatives, we will certainly think about reducing our leverage. And as you know for – we don't have any plans to return any cash to our shareholders. But as you know we also have some communication that we cannot even if we wanted to think about it. We cannot reduce the pay any amount to our shareholders. If we don’t, we will – we do 4.5 times leverage.
- Jason Kim:
- If I can follow up on the LEo project a little bit more and I appreciate the color you have given me. Is your current plan regionally focused in Canada, like real parts of Canada or are you more thinking about broader geographical exposure? And then do you believe that Telesat has organic capabilities to sort of fund or capabilities to fund these investments organically or do you think a partnership would be necessary or desired?
- Michael Cayouette:
- So on geographic focus, LEo is a global play. These satellites are orbiting the earth and redesigned a constellation kind of relying on two different types of orbits. We think is a very efficient way to cover the global, number one. And two to put capacity kind of densify your capacity where we believe the demand is going to be. So it’s absolutely a global play. As far as our ability to finance it ourselves or the need to work with others, we do generate a meaningful amount of cash, but for this project, it’s likely that that we would need to bring on additional investors or partners as well. So that’s our thinking about it.
- Jason Kim:
- Well, thank you for that. And just a couple of very quick housekeeping items. In terms of the accounting change impact, is the benefit to revenue and EBITDA are good run rate to use for the balance of the year. And where would the offsetting figure appear on your income statement or cash flow statement relative to prior accounting standards assuming these are all vantage. And that this accounting change impacts your backlog balance this quarter.
- Dan Goldberg:
- I will take the last question first. Yes, it has some impact on our backlog. So in term of the backlog what we have reported is that net of – the impact of IFRS15 on our backlog is – safe for $239 million and impact of FX was $41 million. So if you looked at the net change excluding IFRS15 and excluding FX, backlog declined by $149 million, which is about $3.9 million – 3.9%. Regarding the accounting during the year, we expect that it should be for the year probably the change the impact will be similar during Q4 2000 and every quarter for 2018. It will change over time every year for 2019, 2020 and the following years, but for right now for 2018 we expect that Q2, Q3 and Q4 to have a similar impact [indiscernible] impacts.
- Jason Kim:
- Thank you. And what’s the offset to the EBIT to EBITDA benefit?
- Dan Goldberg:
- Well, so, there is no – on the EBITDA benefits you have as I mentioned, we have an impact of positive of $4 million on our revenue reduction on expenses of $5 million and an EBITDA of $9 million, so…
- Jason Kim:
- Right, I mean, I am talking about on a cash flow basis assuming these are non-cash…
- Dan Goldberg:
- Sorry, on a cash flow basis that’s – it’s non-cash.
- Jason Kim:
- Okay, thank you.
- Operator:
- Thank you. The following question is from Mike Pace of JPMorgan. Please go ahead.
- Mike Pace:
- Hi, thanks. I come on a little late, so apologize if this was discussed already. Can you remind us on 2019 the – I guess is there a launch date set when you would expect to actually be generating revenues from the satellite? Can you remind us what percentage of the capacity was pre-sold? And I guess how much deferred revenue on an annual basis we should expect to see on that? And then I have one other.
- Dan Goldberg:
- Let's see. We said that we expect the satellite to launch sort of mid this year. My expectation is if all goes well in terms of the launch manifest and the satellites readiness to be launched, we would probably be entering service kind of right around the beginning of – let me think – I'm thinking sort of in the September-ish timeframe. It’s my expectation, Mike. As far as amount of capacity that we pre-sold, we've given an indication before that it's roughly – it's a little bit hard to say because some of the capacities kind of this high throughput Ku-band capacities some of its more traditional Ku, but I think overall when we think about it, it's roughly about a third of the satellites capacity that that we've sold, pre-launch. So at this point in time and that's kind of end of life kind of agreements. And then we certainly haven't said anything before about a deferred revenue impact. We have said before that the deal that we did with Hughes, where they acquire the Ku-band capacity over South America that they are prepaying for that sort of – from the time we signed the satellite contract kind of up until launch, but we haven't given any information about sort of the magnitude of deferred revenue amounts.
- Mike Pace:
- Okay, that’s fair. And just I understand when you say that you sold roughly a third of the capacity of the bird. Does that – is that equate to you have in a third of the – the third of the revenue potential locked down I guess on that satellite till end of life? Is capacity and revenue kind of roughly equal?
- Dan Goldberg:
- Kind of roughly equal. I mean not – it's not a perfect proxy, but yeah that – order of magnitude – it’s sort of in that ballpark I'd say.
- Mike Pace:
- Okay. And then Dan on the C-band situation, I'm just wondering – I'm sure it's something that you guys are monitoring. What type of skin in the game do you have here? What do you think this – how much of an opportunity is this for Telesat? And then on the flipside, what parts of your business do you need to make sure is protected as the C-band proposal goes through the process here?
- Dan Goldberg:
- So it’s sort of taking a step back. I’d say we've been following this closely for a long time. I'd say regulators certainly in the U.S. but elsewhere are working hard to try to find other candidates spectrum bands to free up to – for terrestrial wireless for 5G and the like. And so, we've been monitoring closely what the FCC has been doing. And we're – we've made really meaningful investments in our C-band capacity in North America and elsewhere, but we are grown up somewhere sympathetic to what the FCC and other regulators are trying to achieve. I’d say that we agree with Intelsat and SES, who have sort linked arms on this proposal. We agree with them on let’s say some basic fundamental points one that the industry has made really significant investments in C-band facilities and that the services that we provide frankly around the world with C-band including in North America are really important kind of mission critical services that touch a lot of people's lives and we agree with Intelsat and SES that to the extent that regulators including the FCC ultimately look to reassign that spectrum to other users that that those of us that have made those significant investments need to get compensated for them. I’d say on what Intelsat and SES have said and they’ve said some things on the record at this point. There's still a lot more that will be said over time our expectation is that FCC will start some sort of a proceeding on this and NPRM on this probably at some point this summer. What Intelsat and SES have said and they've linked up with Intel as well is that there would be this consortium of a C-band operators and that proceeds would get paid into that consortium and then would get allocated equitably to folks that have made the investments. Our observation though is that under their proposal ultimately Intelsat and SES would control this consortium. And so, they would be making judgments presumably about what’s equitable from our perspective that that doesn't work. That's not going to cut it. So at this point in time at least as what Telesat thinks about it that that proposal as it stands unless we can be persuaded that these proceeds are in fact going to be distributed in an equitable way. We're going to oppose this. And we’ll oppose it vigorously. So, anyway, it's something that that folks have been looking at and the industry has been looking at on a global basis for a long time. It's certainly heating up in the U.S. today more than it is almost anywhere else, but that's what Telesat think about it at this point.
- Mike Pace:
- Sure and would you might share in I guess what percentage of your total revenue is North American C-band?
- Dan Goldberg:
- We haven't broken that out. I won’t say right now, but take a look we've got three satellites, three of our anik satellites that have 50 states coverage that we've invested 100s of millions of dollars in. So, we’ve got a lot of skin in the game here. So in an event, it's early, early days obviously in this proceeding. I'm sure you've seen that certainly a number of terrestrial wireless players have already come out opposing this Intelsat, SES, Intel proposal. It's playing that. If there's anything attractive about it, it's that this kind of to the extent that there's going to be a reallocation to spectrum then it can be done in a way where the stakeholders kind of reach a consensus. I mean we've seen this in the broadcast sector when they went from analog to digital. We've seen in other areas if these things are to work. You need kind of industry reaching a consensus if this stuff is going to get done on an accelerated kind of thoughtful basis. And so, we’ll have to see when this NPRM comes out, but certainly the case to rely upon two parties to represent the entire industry that's made the investment and to rely upon them to make judgments about how proceeds can be shared equitably. I think that would be pretty unprecedented and certainly not something that we're going to get our heads around.
- Mike Pace:
- Great, thanks. I appreciate the views, Dan.
- Dan Goldberg:
- Okay, thanks.
- Operator:
- Thank you. The following question is from [indiscernible]. Please go ahead.
- Unidentified Analyst:
- Hi. I was just wondering if there is any update you could give on the timing for selecting vendors for the LEo projects. It seems like [indiscernible] reports could be in next few months.
- Dan Goldberg:
- I'm sorry I didn't catch the – the color and their organization. Could you…
- Unidentified Analyst:
- [Indiscernible]
- Dan Goldberg:
- So are – we’ve been sort of active with vendors conducting an RFP making sure that the vendor community can basically deliver the capabilities that we think are essential in order to have a disruptive LEo offering. My expectation is that within the coming months, we'll probably down select to one or two vendors to work with them further to develop the solution for what we're looking for. So that's kind of our plan right now. I don't think it would be until sometime next year that we would be looking at entering into sort of any significant capital commitments around it.
- Unidentified Analyst:
- Okay, great. And would you anticipate arranging financing partners around the time of the down collecting or that would also…
- Dan Goldberg:
- Yeah I think that will be something that we’ll be exploring really in the coming months.
- Unidentified Analyst:
- And are the financing partners mostly within the industry or outside investors?
- Dan Goldberg:
- I think there’d be a whole range of entities that would be interested in participating in an initiative like this, some of those could be strategic; some of those could be purely financial. Obviously, we wouldn't be doing this if we didn't think that this represented a really compelling investment opportunity for us and our shareholders. So I think it could be a range of entities that would be interested in participating in something like this.
- Unidentified Analyst:
- Okay. That's it for me. Thanks for taking the questions.
- Dan Goldberg:
- Okay, thank you.
- Operator:
- Thank you. [Operator Instructions] The following question is from [indiscernible]. Please go ahead.
- Unidentified Analyst:
- Thank you. My question has been answered.
- Dan Goldberg:
- Well, that was easy.
- Operator:
- Thank you. [Operator Instructions] There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Goldberg.
- Dan Goldberg:
- 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 second quarter results. So, thank you very much.
- Operator:
- Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
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