Loral Space & Communications Inc.
Q4 2018 Earnings Call Transcript

Published: 1 Mar 2019

[Operator:]

Good morning, ladies and gentlemen. Welcome to the conference call to report the Fourth Quarter 2018 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat and Michel 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, Mr. Bolitho.

[Michael Bolitho:]

Thank you and good morning. Earlier today, we issued a news release containing Telesat’s consolidated financial results for the three month and 1 year periods ended December 31, 2018. This news release is available on Telesat's website at www.telesat.com under the tab Investor Relations. We also filed our annual report on Form 20-F 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, 2018 filed with the SEC on March 1, 2019. 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:]

Thanks Michael. This morning, I'll discuss our fourth quarter and full year financial results and give an update on the business. I will then hand over to Michel who will speak to the numbers in more detail and then we will open the call up to questions. Last year was a busy one and we are pleased with our results and the progress we made on a number of operational fronts. Looking first at the fourth quarter and adjusting for foreign exchange rate changes as well as the adoption of IFRS 15, revenue and adjustment EBITDA were approximately 11% and 14% lower respectively relative to the same period last year. There were number of puts and takes it’s the significant revenue we recognized in Q4, 2017 from short-term satellite services provided to other satellite operators something we flagged at the time that accounts for the overwhelming share of the negative variances and revenue and adjusted EBITDA year-over-year. We didn’t have any revenue from those types of services in Q4 of 2018. Turning to our full year results and again adjusting for foreign exchange rate changes and the adoption of IFRS 15 revenue was down approximately 4% and adjusted EBITDA was down approximately 5% relative to 2017. Here again where there were lots of puts and takes over the course of the year including lower revenue from certain broadcast customers offset in part by new revenue from our Telstar 19V satellite which started service in August last year. The largest single contributor to the lower revenue and adjusted EBITDA last year versus 2017 was the significant revenue recognized from short-term satellite services provided to other operators in Q4 2017. Revenue from those services makes for a bit of tough comparison year-over-year and quarter-over-quarter. Turning to some key metrics, backlog at the end of the year was $3.7 billion and fleet utilization was 82%. Looking at how our revenues broken down on an application basis for the full year, broadcast represented approximately 50% of total revenue, enterprise services 48% and consulting and other 2%. And on a geographic basis for the year, North America accounted for 82% of revenue, Latin America 8%, EMEA 7% and Asia 3%. We also took concrete steps last year to grow our in-orbit capacity and move forward with our planned revolutionary lower orbit satellite constellation. Telstar 19 VANTAGE and Telstar 18 VANTAGE were both successfully launched in Q3. Telstar 19V which is an expansion satellite for us entered commercial service in August. The Ku-band capacity over South America and Northern Canada on Telstar 19V was presold for 15 years and over the past few months we’ve been making progress on further increasing the satellite utilization something we remain focused on. Telstar 18V which replaced the C-band capacity on Telstar 18 and significantly expanded upon its Ku-band capacity and to commercial service in October although Telstar 18V is owned and operated by Telesat our longstanding partner aPT provided 57.5% of the capital for the satellite program in exchange for use of 57.5% of the satellite’s capacity. In addition with these two large geo satellites in January of last year we successfully launched our first LEO satellite into orbit an important milestone and our plans to deploy a highly advanced high capacity extremely low latency LEO satellite constellation. Since that time we’ve used the satellite to evaluate some of the key design parameters of constellation and have done some testing with a number of industry participants. All of which has been very positive. Mid last year we announced that we selected Air Bus on the one hand and a consortium of Thales and Maxar on the other hand to work with us to advance the design of our LEO constellation as well as validate certain of the key technologies underpinning our advanced constellation. We made good progress with both teams since that time and are expecting to receive later this year proposals from each of them to build the constellation. And earlier this year we announced two additional key contracts for deployment of our LEO constellation. One with [Blue Origin] relating to launch services and the other with Google subsidiary Lean for the development of unique software platform to manage real network. We’re pleased with the progress we’ve been making on our LEO plans, as well as the enormous interest we’re seeing in the customer community for the truly disrupted value proposition it offers. Finally I'd note that we joined with Intelsat, SES and Eutelsat last year in forming the C-band alliance to participate in the FCC proceeding examining the future use of C-band spectrum in the U.S. We think the approach laid out by the CBA and supported by others represents the best and most balanced rate forward to on the one hand protect the essential services delivered to U.S. consumers by the satellite industry and our customers. And on the other hand to make available on a timely basis mid band spectrum to terrestrial wireless players to ensure the U.S. can take a leadership role in the delivery of next-general 5G services. In sum, last year was a busy one and we’re pleased with the progress we made. Looking ahead we remain strongly focused on commercializing our available in-orbit satellite capacity, maintain our operating discipline and further developing our advance LEO constellation. With that I’ll hand over to Michel and then look forward to addressing any questions you may have.

[Michel Cayouette:]

Thank you, Dan and good morning everyone. During the fourth quarter of 2018 and compared to the same period in 2017, revenue decreased by 21 million to 232 million, operating expenses increased by $24 million to $71 million and adjusted EBITDA decreased by $17 million to $190 million. Between the fourth quarter of 2017 and the fourth quarter of 2018 the changes in foreign exchange rates had a positive impact of $1 million on our revenue, a negligible impact on our operating expenses and a positive impact of $1 million on our adjusted EBITDA. On January 1, 2018, we adopted IFRS 9 financial instruments and IFRS 15 revenue from contracts with customers. The adoption of IFRS 9 had no impact on our revenue operating expenses or adjusted EBITDA. For the three-month period ended December 31, 2018, the adoption of IFRS 15 had positive impact of $7 million on our revenue, a positive impact of $5 million on our operating expenses and a positive impact of $12 million on our adjusted EBITDA. When adjusted for the changes in foreign exchange rates and the impact of IFRS 15, revenue decreased by $29 million during the fourth quarter when compared to the same period in 2017. Operating expenses increased by $29 million and adjusted EBITDA decreased by $29 million. Excluding the impact of IFRS 15 and the changes in the foreign exchange rates, the increase in operating expenses during the fourth quarter was mainly due to the non-cash compensation expenses recognized for the 2018 year associated with restricted share units and stock options granted during the fourth quarter. For the full year 2018 and compared to the same period in 2017 revenue decreased by $24 million to $903 million. Operating expenses decreased by $2 million to $186 million and adjusted EBITDA decreased by $5 million to $752 million. Between 2017 and 2018, the changes in foreign exchange rates had a negative impact of $9 million on our revenue, a positive impact of $1 million on operating expenses and a negative impact of $8 million on our adjusted EBITDA. For the 12 months period ended December 31, 2018, the adoption IFRS 15 had a positive impact of $19 million on our revenue, a positive impact of $21 million on our operating expenses and a positive impact of $40 million on our adjusted EBITDA. When adjusted for the changes in the foreign exchange rates and the impact of IFRS 15 revenue decreased by $35 million for the full year 2018 when compared to the same period in 2017. Operating expenses increased by $20 million and adjusted EBITDA decreased by $37 million. Excluding the impact of IFRS 15 and the changes in the foreign exchange rate, the increase in operating expenses for the full year 2018 was mainly due to higher share based compensation and professional fee as well as higher equipment and installation costs. The increase was partially offset by a special payment made in the first quarter of 2017 to stock option holders, combined with lower expenses following the disposition of a subsidiary in the third quarter of 2017 as well as lower consulting expenses. Depreciation and amortization increased by $6 million during the fourth quarter and increased by $2 million for the full year 2018 when compared to the same period in 2017. The increases were mainly due to depreciation on our Telstar 19 VANTAGE and Telstar 18 VANTAGE satellite which began commercial service in August 2018 and October 2018 respectively. The increases were partially offset by a decrease in depreciation due to the end of useful life for accounting purposes of our Telstar 18 satellite in 2017 and certain customer relationship in the third quarter of 2018. Interest expense increased by $12 million during the fourth quarter and by $38 million for the full year 2018 when compared to the same periods in 2017. The increases were mainly due to the interest expense recognized on certain customer contracts with the significant financing component as a result of the implementation of IFRS 15, higher interest rates on our senior secured credit facilities as well as the amortization of the gain on the refinancing resulting from the implementation of IFRS 9. The increase was partially offset by an increase in capitalized interest. In 2018, we recorded a loss on financial instruments of $36 million during the fourth quarter and a loss on financial instruments of $18 million for the full year 2018. The losses on financial instruments reflect changes in the fair values of our interest rate swaps, interest rate floor on our senior secured credit facility, and the prepayment option on our senior notes. In 2018, we also recorded a loss on foreign exchange of $175 million during the fourth quarter and a loss on foreign exchange of $259 million for the full year 2018. The losses on foreign exchange were mainly related to the change rates 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 $14 million during the fourth quarter and decreased by $19 million for the full year 2018 when compared to the same period in 2017. The decreases during the fourth quarter and full year 2018 were mainly due to lower operating income and higher interest expense in 2018 compared to the same period in 2017. During the fourth quarter of 2018, the cash inflows from operating activities were $123 million and the cash outflows used in investing activities were $18 million. For the full year 2018, the cash inflows from operating activities were $466 million and the cash outflows used in investing activities were $103 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. For 2019 we expect our cash outflows used in investing activities to be in the range of US$40 million to US$60 million excluding any capital expenditures related to future commitment we’ll be making connection with our plan LEO constellation. To meet our expected cash requirements for the next 12 months including interest payments and capital expenditures we have $768 million of cash and short-term investments at the end of December as well as approximately US$200 million of borrowing availability under our revolving facility. In addition, we continued to generate the significant amount of cash from our operating activities. At the end of 2018, we were in compliance with the covenants in our credit agreement and indenture. A reconciliation between our financial statements and the financial covenant calculation is provided in the annual 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:]

[Operator Instructions] The first question is from Mike Pace with JPMorgan. Please go ahead.

[Mike Pace:]

Dan, maybe a couple to start with you; you launched a LEO bird and early last year you did some testing on that. Michel, gave some CapEx guidance that I guess excluded LEO investments. So, first operationally I guess what can you tell us about how the testing went and what verticals maybe were tested or services? And is there something you can share with us maybe bracket the amount of spending that could happen in calendar 2019 on your LEO project?

[Dan Goldberg:]

So, first on LEO, so the satellite - I think it was sort of April, that we brought it into operation. Yeah, and the testing we've done, we've been mostly testing different types of user terminals. We've done that in the aeronautical sector, we did it in the maritime sector, not sure what else we've done. We made a couple of announcements about it. But as I said in my opening remarks, yeah, it's sort of overwhelmingly positive. Customers just very excited about two things; one, just the amount of the throughput, but most excited about just the latency, which is to say the lack of latency, the very low latency and just the things you can do with the space based platform that's only operating 1,000 kilometers above the earth. It is cuppy and zippy and looks kind of just like you would expect if you were operating on a fiber network. So, that has all been very positive, not surprising but very positive. And then as far as what we would say in terms of where we are with LEO in spending and what not, really I'd just say they are with us. We've been growing in a way with Airbus on the one hand and Thales and Maxar on the other really doing a lot of good work just kind of flushing out the design. As I also said in my remarks, we expect later this year to get from them proposals on what the cost would be to build up the constellation. And so until that time, we just don't want to make estimates until we've really heard from the prospective vendors on it. The guidance that Michel gave should capture everything that we got in mind short of additional commitment. So, anyway, all I would say is bear with us. I mean, everyone knows it's a meaningful project and so - but we want to be robust when we give an estimate to the market about what we think this will be, and we're just not quite there yet.

[Mike Pace:]

Okay, fair enough. As far as the broadcast business, I believe and correct if I am wrong, you have small DTH contract up either this year or I believe early next year. Can you just maybe update us on discussions that you're having with that partner on that contract? And then I have a follow-up for Michel.

[Dan Goldberg:]

Yeah. No, you're right, Mike. So, the contracts that are in the DTH business that are kind of first step for renewal are our arrangements with Shaw. So, Shaw is used in three of our satellites to serve their subscribers throughout Canada and Anik G1, Anik F2 and Anik F1R. And so we have really just now completed our negotiations with them and where we've landed, they extended their services on – and some of the traffic is kind of moving around between our satellites. But net-net they are extending their use of our Anik F2 satellite. Anik G1 is a fairly new satellite and so that contract is not up for renewal until years to come. Anik F1R, we'll discontinue using towards the end of this year, I think October, kind of rolls off at the end of September. And so what Shaw has been able to do or they are in the process of organizing themselves to do is to return capacity. They've been still have a significant amount of their services on MPEG-2 and they are kind of busily rolling out MPEG-4 right now. And their expectation is by, yeah, the end September to be able to kind of go all MPEG-4 and return the capacity on F1R.

[Mike Pace:]

And then just to follow-up on that because you mentioned the word net-net there, I'm wondering, can you frame for us is that a - or how much of a headwind it sounds like is that for that business when you kind of put it all together with that customer?

[Dan Goldberg:]

So, when you put it altogether for Shaw, I kind of think about when I put it altogether for kind of our overall business, so for – so we'll be down October, November, and December on the Shaw contract. And then it's kind of full impact 2020. Again, we're getting that capacity back. Our focus is going to be reselling it. But for Shaw, it would be - I don't know, kind of three percentage kind of overall revenue impact on an annualized basis.

[Mike Pace:]

And then, Michel, I noticed in the 20-F in the liquidity section, it looks like you moved some cash over to an unrestricted subsidiary, it was $187 million. So I'm wondering, sounds like that happened during 2018. So I'm wondering why that was done and then how much more money can you move over under restrictive covenants?

[Michel Cayouette:]

So, in total the amount of - the reason why we did that is because we don't know exactly how we're going to structure the financing of the LEO constellation. And an option is to have the constellation or a portion of the constellation done through a unrestricted subsidiary. So, during the year we became - there was a point where we were lower than the 4.5x. So we moved money from that we thought we will need during the 2018 year, so we moved about $150 million U.S. in that unrestricted subsidiary. So, assuming that excluding the amount that we – because under the – if we eventually go back or when we're going to go back below 4.5x, we have a significant amount of availability under our credit agreement. But most restrictive clauses we have is under the indenture. In the indenture we have a basket of - investment basket of $120 million that we can move from Telesat Canada to that subsidiary. And in addition, we have a general basket of $150 million.

[Operator:]

The next question is from Jason Kim with Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Hi, this is Anna for Jason with two questions today. First, how should we think about the short-term service revenues for 2019? Will they be different from 2019, and what are your plans for the cash balance? And then secondly, do you have any other notable media contracts up for renewal in the next couple of years?

[Dan Goldberg:]

So, for the BIU revenue, there I noted in my remarks that for 2018 it was quite significant relative to 2017. Our expectation for 2019 is its going to look more like 2017. And I'd say overall for the business it's certainly the case that the – let me put that the other way. It was for 2017 that we had a very significant revenue from the short-term satellite services, lesser the case in 2018. 2019 is going to look more like 2018 and I'd say if there was any one big thing that was contributing to variances 2018 versus 2017, it was the significant revenue we have from their short term services in 2017 given that we think it's going to be more equivalent in 2019 as it was relative to this past year to 2018, I think that's our feeling for the overall business outlook which is to say our expectation is this year probably looking more stable with 2018 than kind of the 2018, 2017 comparison. And then you have another question about cash balances, I will hand it over to Michel. Sorry can you repeat the question.

[Unidentified Analyst:]

Yes, I was just wondering what are your plans for your cash launch for the next year?

[Dan Goldberg:]

So for now, we don't have specific sense other than to once we have the proposal for the LEO constellation and we have a better idea of how much that constellation will cost and how we're going to structure it. We will decide at that point what we are going to do with the cash but for now we have quite decided to leave the cash in bank. Okay, does that answer your question?

[Unidentified Analyst:]

Yes. And then the last one was any other notable media contract renewals?

[Dan Goldberg:]

No, I said that on that show, we extended - those were the two that were kind of coming up the quickest. For the rest of our direct-to-home customer contracts, those were more along David or kind of the average remaining life of that part of our business round about 6.5 years. So some coming up a little bit earlier, others later. But on average 6.5 years, so no having just worked through those renewals with [indiscernible]. There’s nothing else coming up too quickly.

[Operator:]

[Operator Instructions] The next question is from [Matthew Tye] with Neuberger Berman. Please go ahead.

[Unidentified Analyst:]

I got a couple two questions actually. The first is one of the key areas of growth that we hear is from in-flight and maritime for satellite. What percentage of your revenue today comes from that revenue streams?

[Dan Goldberg:]

It's around 10% of our total revenue.

[Unidentified Analyst:]

10% and do you expect that to be a growing area in proportion to your total business or you think that will relatively remain steady at 10%?

[Dan Goldberg:]

No. Our expectation is it'll grow. It's been growing. It's sort of chunky but know for sure that that's one of the growth drivers in our sector. And we think that will be a beneficiary of that. We should say continue to be a beneficiary of it.

[Unidentified Analyst:]

Do you happen to know the growth offhand this year for this area?

[Dan Goldberg:]

For this year, I think it was not really. My guess is that we were - it’s probably flattish, there were puts and takes and looking at colleague of mine hope you know but I would say for this year there were puts and takes we grew in some areas we’re down and others net-net kind of flat.

[Unidentified Analyst:]

And then the second question is around the C-band proposal. So assuming everything happens, what percentage of the C-band is Telesat attributable for?

[Dan Goldberg:]

So in the U.S., we're active in the U.S. but not nearly as active as we are in the Canadian market. I'd say if you think about total C-band activities in the U.S. we’re sub 5% of that.

[Unidentified Analyst:]

And in Canada as you said it's less than that?

[Dan Goldberg:]

No, no Canada much more meaningful in terms of the overall proportion of total C-band revenues that come from the Canadian market and a share of our overall revenue. We do a lot more in C-band in Canada than we do in the U.S.

[Unidentified Analyst:]

And do you have other percentage in Canada too?

[Dan Goldberg:]

No, it would be really up around 75%-ish if I had to guess of the total Canadian market somewhere in that 75% I guess.

[Operator:]

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Goldberg.

[Dan Goldberg:]

Okay, thank you operator. And thank you all for joining us this morning. We look forward to speaking with you in a few months time when we release our Q1 numbers. So thank you very much.

[Operator:]

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