Loral Space & Communications Inc.
Q3 2018 Earnings Call Transcript

Published: 4 Nov 2018

[Operator:]

Good morning, ladies and gentlemen. Welcome to the conference call to report the Third Quarter 2018 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat and Michael Cayouette, Chief Financial Officer of Telesat. I would like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, sir.

[Michael Bolitho:]

Thank you and good morning. Earlier today, we issued a news release containing Telesat’s consolidated financial results for the 3 month and 9 month periods ended September 30, 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 that Telesat’s actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties For additional information about known risks, we refer you to the risk factors section of our annual report on Form 20-F for the fiscal year ended December 31, 2017 filed with the SEC on March 1, 2018. The information that we are discussing today reflects our expectations as of today and is subject to change except as required by securities laws 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:]

Thank you, Michael. Good morning. This morning, I will discuss our third quarter financial results and give an update on the business. I will then hand over to Michelle who will speak to the numbers in more detail and then we will open the call up to questions. Last quarter was a busy one and I am pleased with our financial performance as well as the successful launches we completed. Adjusting for foreign exchange rate changes and the adoption this year of IFRS 15, revenue was 2.7% higher relative to the same period last year and adjusted EBITDA was 1.4% higher. Our adjusted EBITDA margin was 82.8% last quarter versus 81.3% in Q3 2017. Our earnings release provides greater detail on the magnitude of the impact on our results of both FX and the implementation of IFRS. So turning to some key metrics, backlog at the end of last quarter was $3.7 billion and fleet utilization was 82%. I would like to highlight for you that we have changed our utilization metric this quarter and the way we calculate it. For roughly the past 11 years which is when we completed the combination of Telesat Canada and Loral Skynet, we have been reporting North America and international fleet utilization separately, but with Telstar 19 VANTAGE coming online last year, we think the change in our past approach is warranted. First, the satellite is both North America and international capacity rather than allocate the capacity between the two we felt this was an appropriate time to start reporting the single fleet utilization number. Second Telstar 19 VANTAGE has meaningful HTS capacity. The issue with HTS capacity is given the frequency reuse you get by using multiple smaller beams, the share volume of megahertz that HTS brings skews the traditional utilization calculation, which we have derived by more or less dividing the total number of megahertz or transponders across the fleet are capable of transmitting over into the total number of megahertz that are actually under customer contract. Rather than exclude like some of the other satellite operators do, the HTS capacity from the calculation so that it doesn’t distort the utilization number, we are not calculating our utilization, not on megahertz, but on active amplifiers which are also known as tubes on the satellites. We believe this approach provides the best metric of capacity utilization as it includes all of our capacity, which is to see both HTS and non-HTS capacity. Moreover at the end of the day, it’s the amplifier that’s effectively the revenue generating unit on the satellite So now to calculate fleet utilization, we essentially count all the amplifiers we have across the fleet and divide that number into the number of amplifiers that are under customer contract. Our fleet utilization at the end of Q3 using this metric is as I mentioned 82%. For comparison purposes, utilization at the end of Q2 using this new methodology would have been 85%. Excluding from Q3, the impact of our new Telstar 19 V satellite, which has the significant number of new amplifiers utilization would have been flat quarter-over-quarter at 85%. Looking at how our revenues broke down on an application basis for the quarter

[Michael Cayouette:]

Thank you, Dan and good morning everyone. During the third quarter of 2018 and compared to the same period in 2017, revenue increased by $30 million to $227 million, operating expenses decreased by $2 million to $40 million and adjusted EBITDA increased by $14 million to $188 million. Between the third quarter of 2017 and the third quarter of 2018 the changes in foreign exchange rates had a positive impact of $2 million on our revenue, a negligible impact on our operating expenses and the positive impact of $1 million on our adjusted EBITDA. On January 1, 2018, we adopted IFRS9 financial instruments and IFRS15 revenue from contracts with customers. The adoption of IFRS9 had no impact on revenue, operating expenses or adjusted EBITDA. For the three months period ended September 30, 2018, the adoption of IFRS15 had positive impacts of approximately $5 million on revenue, $5 million on operating expenses and $10 million on adjusted EBITDA. When adjusted for the changes in foreign exchange rates and the impact of IFRS15, revenue increased by $6 million during the first quarter when compared to the same period in 2017. Operating expenses increased by $3 million and adjusted EBITDA increased by $2 million. Excluding the impact of IFRS15 and the changes in the foreign exchange rates, the increase in operating expenses during the third quarter was mainly due to higher cost of sales and higher professional fees. The increase was partially offset by lower expenses following the disposition of the subsidiary in the third quarter of 2017, higher engineering costs capitalized to our satellites programs as well as lower consulting expenses. During the first 9 months of 2018 and compared to the same period in 2017 revenue decreased by $4 million to $671 million. Operating expenses decreased by $26 million to $115 million and adjusted EBITDA increased by $12 million to $562 million. Between the first 9 months of 2017 and the first 9 months of 2018, the changes in foreign exchange rates had a negative impact of $10 million on revenue, a positive impact of $1 million on operating expenses and the negative impact of $9 million on adjusted EBITDA. For the 9 months period ended September 30, 2018, the adoption IFRS15 had positive impacts of approximately $13 million on revenue, $16 million on operating expenses and $28 million on adjusted EBITDA. When adjusted for the changes in the foreign exchange rates and the impact of IFRS15 revenue decreased by $6 million during the first 9 months of the year when compared to the same period in 2017. Operating expenses decreased by $9 million and adjusted EBITDA decreased by $8 million. Excluding the impact of IFRS15 and the changes in the foreign exchange rate, the decrease in operating expenses during the first 9 months of the year was mainly due to a special payment made in the first quarter of 2017 to stock option holders, lower expenses following the disposition of a subsidiary in the third quarter of 2017 as well as lower consulting expenses. The decrease was partially offset by higher cost of sales and higher professional fees. Depreciation and amortization increased by $1 million during the third quarter and decreased by $4 million during the first 9 months of the year when compared to the same period in 2017. The increase during the third quarter was due to the depreciation on our Telstar 19 VANTAGE satellite which began commercial service in August 2018. The decrease during the first 9 months of the year was mainly due to the end of useful life for accounting purposes of Telstar 18 satellite in 2017 combined with the reduction of the amortization related to revenue backlog. The decrease was partially offset by the increase in depreciation related to our Telstar 19 VANTAGE satellite. Interest expense increased by $10 million during the third quarter and by $26 million during the first 9 months of the year when compared to the same periods in 2017. The increase was mainly due to the interest expense recognized on certain customer contracts with the significant financing component as a result of the implementation of IFRS15, higher interest rates on our senior secured credit facilities and senior note as well as the amortization of the gain on refinancing resulting from the implementation of IFRS9. The increase was partially offset by an increase in capitalized interest. In 2018, we recorded a gain on financial instruments of $4 million during the third quarter and the gain on financial instrument of $18 million during the first 9 months of the year. The gains on financial instruments reflect changes in the fair value of the interest rates floor on our senior secured credit facilities, the prepayment options on our senior notes and the interest rate swaps. In 2018, we also recorded a gain on foreign exchange of $53 million during the third quarter and a loss on foreign exchange of $84 million during the first 9 months of the year. The gain and loss on foreign exchange were mainly related to the change in the exchange rate used to translate our U.S. dollar denominated debt into Canadian dollars equivalent at the beginning and the end of each period. Tax expense decreased by $13 million during the third quarter and decreased by $5 million during the first 9 months of the year when compared to the same periods in 2017. The decrease during the third quarter and first 9 months of the year was mainly due to the recognition of the tax credit in 2018 as well as the impact of the gain and loss on foreign exchange. During the third quarter of 2018, the cash inflows from our operating activities were $123 million and the cash outflows used in investing activities were $27 million. During the first 9 months of 2018, the cash inflows from our operating activities were $344 million and the cash outflows used in the investing activities were $85 million. The majority of our investing activities in 2018 were related to capital expenditure for the construction and allowance of Telstar 18 VANTAGE and Telstar 19 VANTAGE. To meet our expected cash requirements for the next 12 months including interest payments and capital expenditures we have $637 million of cash and short-term investments at the end of September as well as approximately $200 million of borrowing availability under our revolving facility. In addition, we have continued to generate the significant amount of cash from our operating activities. At the end of the third quarter we were in compliance with the covenants in our credit agreement and indenture. The reconciliation between our financial statements and the financial covenant calculation is provided in the quarterly report we filed this morning. That concludes our prepared remarks for this call and now we will be happy to answer any question you may have. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] Our first question is from Jason Kim from Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Hi, this is Anna calling on behalf of Jason Kim. So a couple of questions, you just saw in the C-Band Alliance Consortium and I just want to hear your thoughts on what changed from your perspective to join the group. And then in terms of potential proceeds can you talk about what your priorities would be, the leverage profile you would maintain and if the monetization would be a taxable event? Thanks.

[Dan Goldberg:]

Okay, thanks. Let’s see. So and we had always said regarding Intelsat’s proposals around the C-Band spectrum. We had always said that we were sympathetic to how Intelsat was thinking about it which is to say that those of us that have made significant investments in satellites and ground infrastructure serving the U.S. market that if spectrum is going to get reallocated, one, ithad to – has to get done in a way that doesn’t disrupt the important services that our customers are providing, and two, it needs to get done in a way that makes sure that those of us that had made investments are compensated for not being able to fully leverage those investments. And our concern about what Intelsat had done was just to – it was more a concern around making sure that if there are any proceeds from the spectrum that it got distributed equitably and we had some concerns about whether or not that would be the case. Suffice to say that in conversations that we’ve had with Intelsat and SES and Eutelsat, they were the other members of the CBA, we became persuaded that there were mechanisms to make sure that proceeds were equitably distributed. And as a result, given that Telesat, Eutelsat, Intelsat and SES are the ones that have made the investments in the satellite infrastructure serving the market and that our customers are the ones that have vital interest in it. Just made sense to us to join the CBA and think that that’s the best forum to make sure that ours and our customers’ interest are appropriately looked after. As far as I think you’d asked about the magnitude of the proceeds, I won’t speculate at this time on what those might be. There’s still a lot of work that needs to take place in the proceeding and with all of the relevant stakeholders. And then I think you’d asked about what – how we think about our leverage profile and whatnot in connection with the proceeds. Here again, it seems very premature to speculate about that this early in the process including whether or not proceeds might be taxed, but I think we’re just too early to be making guesses about that right now.

[Unidentified Analyst:]

Got it. And also I know it’s a very different market, but do you have any preliminary thoughts on the Canadian market in terms of something similar with C-band in the future?

[Dan Goldberg:]

No. I guess all I would say is, the government – the Canadian regulator has started a consultation like the FCC did a little while ago to engage the community about the same spectrum. And I mean, the Canadians have the same interest that the U.S. does in making sure that Canada is maintaining pace with respect to 5G and the availability of next-gen networks. We’ll certainly participate actively in any Canadian proceedings just like we’ve done in the U.S., but here again Canada is a little bit behind the U.S. in terms of their regulatory proceedings. So here again it just feels really early to speculate as to how that might play out and how they all ultimately think about it.

[Unidentified Analyst:]

And my last question, last quarter you noted some pressures on network services segment. Do you have any updated color on that area? We’ve heard from a peer view is that the media customers are looking for more efficiency in their transponder spending, and I know your media segment is somewhat unique, but are you seeing anything similar in your conversation?

[Dan Goldberg:]

[indiscernible] I don’t remember honestly what we said in last quarter about network services. I’d say overall, well I take media, I mean, our broadcast we put our video revenues into the broadcast segment. It’s so much of that business for us sort of these very long-term DTH contracts. And so we did note that some of the – we saw some pressure and we in the first nine months of the year from the loss of a North America video customer, that was something that happened very early in the year and we flagged it. But I wouldn’t say that we’re seeing any meaningful changes in our broadcast segment other than what we’d talked about before. For the enterprise segment, which is where I guess we would put what you referred to as kind of network services. There I’d say we’re not seeing things that are that much different. We’ve noted that, that market is a very competitive market. We’ve noted that it’s particularly competitive in markets like Asia, Africa, Latin America, and there I’d say we continue to think about that market as a very competitive one.

[Operator:]

Thank you. The following question is from Michael Pace from JPMorgan. Please go ahead.

[Michael Pace:]

Hi, thank you, and good morning. Maybe on LEO, I guess, you’re clearly making some progress whether system designs, terminals and I think you’re actually testing it as well. Dan, I’m wondering, can you talk about whether or not where you are on kind of your big picture and strategy on this going at it alone versus working with the partner and maybe just the pros and cons of each? And then I have a follow-up for Michel on the financials?

[Dan Goldberg:]

Sure. So yes we’re making good progress on our LEO and I offered a few words in my opening remarks about the customer trial that we did with Global Eagle. We’ve got some more that are coming up. And if you remember at the – when we put out our Q2 numbers right around then we had announced that we are going through this sort of design validation period with Airbus on the one hand and this consortium of Thales and Maxar on the other hand. And we expect that effort to go roughly through kind of Q1 of next year. And at the end of that period, which is when the work that we are – we task these guys to do, we think at that point in time we’re going to be in a better position to figure out kind of next steps in terms of which vendor we work with and alike. As far as working with partners and whatnot, that we haven’t taken any decisions on, I’d say there is a significant amount of interest in the market certainly from the customer community in terms of working with us and taking advantage of some of the significant benefits that we think LEO constellation will deliver. Beyond that I’d say it might be the case. Each of these verticals that we intend to serve has their own different complexion. So, I’d say it sticks and on that, we’re certainly seeing a lot of interest in the market around it. And I forget, Mike, if you have another question about, I think that was it.

[Michael Pace:]

On LEO, yes. I just wanted to maybe ask about in the third quarter there were some short-term satellite services revenue and well aware that happens throughout the course of the year. We were actually thinking it was going to happen in the fourth quarter, so that may have been our mistake. But I guess, one, you typically give us just maybe some goalpost on how much that was during the quarter maybe on a percentage or revenue basis, and so I’m wondering, if you could do that, and then will that – these revenues also occur in the fourth quarter or was it moved up to the third quarter?

[Dan Goldberg:]

Yes. I doubt that we gave particular guidance about when that step would show up in any given quarter. But so – so the magnitude of it for Q3, I’d say excluding that revenue, we’d have been more or less flat from a top-line perspective once you adjust for FX and IFRS. So that should give you a pretty good sense of the magnitude and then no we’re not expecting anything in Q4.

[Michael Pace:]

Thank you.

[Dan Goldberg:]

Okay. Thanks.

[Operator:]

Thank you. The next question is from Arun Seshadri from Credit Suisse. Please go ahead.

[Arun Seshadri:]

Yes. Hi, thanks for taking my questions. Just a couple from me. One, just wanted to get a sense on the C-band sort of – if you’re seeing any, I don’t think you point to any specific comments in the comment period so far that sort of that concern you or on the flipside, do you feel like generally speaking the commentary you’re hearing is constructive?

[Dan Goldberg:]

I’d say, I don’t know how may FCC proceedings you’ve participated in, in your life, I’ve had a lot. There are lots and lots of folks that are filing and that have an interest in the proceeding. I think the only thing I’d say is, the CBA coming together I think was a very constructive development for the industry and the proceeding more broadly, the CBA recently announced that a significant amount of additional spectrum can be made available, which I think was a hugely constructive step and it’s something that should have been very well received by everyone, who’s participating in this proceeding and certainly from the – our regulators’ perspective as well. So anyway, we’re still in the midst of the proceeding. Reply, comments are going to we do, but in any event, I think that the CBA is playing a very constructive role in the proceeding. So, I don’t know. I’m a believer that when things make sense and there is a demonstrable public policy benefit that can be achieved through a particular approach, I don’t know. We – with that backdrop I’m always cautiously optimistic that you get to the right outcome, but it’s still early days.

[Arun Seshadri:]

Got it. Understood. Thank you for that, Dan. And then as far as 19V, any update in terms of pre-sales?

[Dan Goldberg:]

No, I – we said before that pre-launch we’d already placed under long-term contract all of the Ka-band capacity for South America, all of the Ka-band capacity over Canada. The – what would I say, I mean at this point in time, the satellites been in service for a few months. It’s I’d say well over half utilized at this point in time and there are other good opportunities in the pipeline. So anyway, I think we’ve made excellent progress on the satellite so far. I think the fact that we could add Telstar 19V that have – it’s pretty much all expensing capacity and still have a fleet-wide utilization rate of 82%. This kind of testimony into the fact that we did a good job in terms of pre-launch commitment. So, yes, that’s what I’d say about it.

[Arun Seshadri:]

Okay, great. And then lastly in terms of LEO, as you go through the design phase of your project, can you – has anything changed in terms of the types of customers that are showing the most interest? And has anything changed in terms of I guess, the end-markets that are I guess the best suited? Also, if you could also comment a little bit in terms of how the LEO market has evolved especially with some of the sort of the financing or lack thereof? Yes, just any comments there would be helpful? Thanks.

[Dan Goldberg:]

Yes. No, I would say, when we talked about the design phase, I mean, what we’re doing right now is in many ways kind of a validation stage. We have a design and now we’re working with our vendors, prospective vendors I should say or potential vendors just to – yes, it’s a lot of validation. At this point in time, validation, and I would say optimization as we go through the process with them. And I’d say all of our commercial assumptions about who and what verticals LEO offering would appeal to, I’d just say, we’re just seeing greater confirmation of everything we believed. We believe that for the mobility market, for aero and maritime. Our LEO constellation is going to address that market extremely effectively and certainly the demonstration that we did with Global Eagle in many ways validated for us both technically and commercially the assumptions that we’ve made around that. And we’ll be doing more testing with – in the Maritime segment in the near term and in the Backhaul segment in the relative near-term, which are other verticals that we’re very positive about. I’d say the government services market we continue to engage with government users. And here again, I think everything we’ve seen there validates for us that the type of LEO constellation that we’re bringing to market is very much going to address requirements and evolving requirements in that market. I’d also say maybe just as a reminder, our focus is very much the enterprise market, including the government market. We’re not at this point in time focused on the direct-to-consumer market, where we believe that some additional progress needs to be made on the user terminal before a constellation like ours could really effectively serve that market. So, no, we’re up there, very busy on the technical front, on the commercial front, and no, everything that we’re seeing I’d say continues to support our original thesis as to why this is a very good use of our time and energy.

[Arun Seshadri:]

Great. Thanks.

[Operator:]

Thank you. The next question is from Craig Chobor from Solus. Please go ahead.

[Craig Chobor:]

Good morning, guys. Just a couple of follow-ups. One on the LEO testing that you did with Global Eagle. It would be helpful for me just to – if you could share some of the testing benchmarks maybe that came from those tests? Just to sort of illustrate the performance of LEO versus some of the existing technologies that they’d be using instead whether it’s Rupert speeds or latency, which is the obvious benefits of LEO?

[Dan Goldberg:]

Yes.

[Craig Chobor:]

Can you share that?

[Dan Goldberg:]

Yes. I guess I’d say a couple of things about that. For whatever reason we didn’t put a press release out on it. I know that we participated in the press releases of two of our kind of partners in this. I’d suggest take a look at the press release that Global Eagle put out, take a look at the press release that Gilat put out. Gilat was the partner that provided the kind of the ground equipment and the modems and whatnot, take a look at what they said. But suffice to say, the latency was extraordinarily low. I want to say like sub 20 milliseconds of latency is what I saw. They were just making sure that the applications that airplane passengers want worked really, really well. So that’s why there is video streaming, video chatting, some other applications like that. And then we even did a hand-off between the – our LEO satellite, which operates in Ka-band with one of our GEO satellites that also operates in Ka-band and that all went very smoothly. So, for me nothing speaks to success like a happy customer and I know that Global Eagle was overwhelmingly happy with the results of the testing. So anyway, yes, we – and as far as speeds, this was very broadband, I mean, it’s something like 500 megabits per second about something like half a gigabit I think are the types of speeds that they were running at.

[Craig Chobor:]

That’s great. Really good. And then Dan just on LEO, I don’t know have you guys ever given us a quantum from a cost perspective on what the system would cost and how you’d funded, I’m assuming partners are external financing, but has – have you guys talked through that yet?

[Dan Goldberg:]

No. No, we haven’t. I mean, part of what we’re waiting for is just to get through the work with Thales and Airbus. I mean, we’re doing validation and design work, but we’re also validating our costing assumptions through that exercise, and until we’re done with that work, we’re not saying anything about total magnitude of investment. I think we said before that we will be needing some additional financing in connection with our LEO plans, but beyond that we haven’t said anything specifically about the magnitude of the overall investment.

[Craig Chobor:]

Okay, great. And then the last one for me. Just on – following up on the Canadian C-band process. Do you expect that the C-band alliance would be commenting during the evaluation period or would you be commenting separately from Intelsat and others?

[Dan Goldberg:]

My guess is probably both. Certainly, all the current members of the CBA have an interest in what’s going on in the U.S., but also what’s happening in Canada. My guess is, each of them I know that we have submitted some comments in the initial Canadian consultation around C-band, I believe there will be another one. And I believe that Intelsat, SES and maybe Eutelsat as well commented. That was before the formation of the CBA. Now that the CBA is formed, if there is a further proceeding in Canada and I expect there will be, I would expect that, I don’t know, but it wouldn’t surprise me if the CBA were to make comments, but Telesat given how much we do in Canada with C-band, which is a lot, we would certainly make our own filing as well.

[Craig Chobor:]

Got it. Okay. But to be clear, the current sharing mechanism that you – that was agreed to in the U.S. Does that apply in – would that apply in Canada or is it kind of separate – could that be a separate negotiation?

[Dan Goldberg:]

I think we in connection with what we did in the U.S., we’ve agreed I believe in principle that there’d be a similar approach in terms of how proceeds would be distributed in the event that the government of Canada – it’s – in lots of events. One that if they actually reallocated C-band way too early to say if they would do that, and two, if we were to come along and make a proposal that is similar to the type of proposal that the CBA is endorsing South of the border, if we were to do that North of the border, yes, there is an understanding amongst CBA members that some of the same principles that we’re proposing in the U.S. would be followed in Canada as well.

[Craig Chobor:]

Alright. Terrific. Thanks, guys.

[Operator:]

Thank you. This concludes the question-and-answer period. I’ll turn the meeting over to Mr. Dan Goldberg. Please go ahead, sir.

[Dan Goldberg:]

Okay. Well I would just say thank you all for joining us this morning and we look forward to speaking with you again when we issue our fourth quarter and full-year results. So, thank you very much.

[Operator:]

Thank you. The conference call has now ended. Please disconnect your line at this time, and we thank you for your participation.