Maxar Technologies Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Welcome to MDA's Q1 2017 Conference Call. We would like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements which represent the company's estimates and future plans, objectives and expected performance as of today's date. These statements are based on current assumptions that the company believes are reasonable but are subject to a wide range of uncertainties and risks that could cause actual results to differ materially from the forward-looking information. You are referred to the advisory regarding forward-looking statements contained in the first quarter earnings news release and in the company's most recent Management's Discussion and Analysis and Annual Information Form, both of which are available on the company's web site or SEDAR. At this time, I would like to turn the call over to Mr. Lance. Please go ahead, sir.

[Howard Lance:]

Thank you. Good afternoon ladies and gentlemen. Thank you for joining us today for MDA's first quarter 2017 conference call. With me today is Anil Wirasekara, MDA Executive Vice President and CFO. I will begin the call by discussing some of the key business activities that have taken place since our 2016 yearend report. Anil will then review our financial results first quarter of this year, and after that, we will open the line to answer your questions. On February 24, 2017, we announced that we had entered into a definitive agreement to acquire DigitalGlobe, the leading provider of satellite imaging solutions and services for government, defense, intelligence and commercial customers. Regulatory approvals are proceeding as anticipated without issue. We continue to expect to close the transaction, sometime in the second half of 2017. Combination of MDA and DigitalGlobe will be a powerful horse for enhanced revenue growth and value creation for our shareowners. Turning to the financial results for the first quarter, consolidated revenues were 12% lower than the first quarter of 2016. Lower revenues in the communication segment were partially offset by slightly higher revenues in the Surveillance and Intelligence segment, driven by higher SSL U.S. government revenues. Operating EBITDA in the quarter, was 8% lower than the first quarter of 2016, again, led by declines in the Communications segment EBITDA. But, partially offset by higher Surveillance and Intelligence segment EBITDA. Active cost management during the quarter, while still investing for growth in the U.S. government markets, allowed operating EBITDA margins to increase in the quarter, from 17.3% in the prior year to 18% this quarter. We continue to experience softness in the commercial Communications satellite market, with just one industry award during the quarter. A combination of factors continues to weigh on satellite operator capital spending plans. These include, future broadband capacity, coming online from plans at LEO and the high throughput satellite constellations, as well as rising pressure in some regions. While bid and proposal activity remains strong and consistent with historical levels, the decision and award process has clearly been taking longer than in the past. We expect the industry to award between 12 and 16 GEO Communications satellites this year, about the same in 2016, with the majority of those awards occurring in the second half of the calendar year. SSL continues to be very well positioned to maintain its market leading position in the commercial Communications segment. But also, to diversify and expand its position in the U.S. government and commercial earth observation satellite markets. We believe the weak orders of SSL in the first quarter are not indicative of what lies ahead. I can tell you that SSL has in fact been selected for multiple satellite awards across all of these markets. And while there is no guarantee, we fully expect to conclude the contract negotiations and see these opportunities turn into significant bookings, sometime during 2017. Our U.S. access strategy continues to make solid progress. The opportunity pipeline is growing, along with bookings and revenue. SSL MDA Holdings, our U.S. headquartered operating company, signed the security control agreement with the U.S. Department of Defense during the quarter. This was a very important step in the process of positioning the company to more effectively pursue classified stage programs with the U.S. government. We also have a U.S. government agency sponsor and expect to receive the facility clearance for SSL in Palo Alto and selected staff during the coming months. We also recently announced the addition of several key executives, to bring a wealth of U.S. government space experience and a track record of success to our company. We believe we are making tangible progress. SSL was selected to provide a spacecraft to NASA Goddard flight center, for the Restore-L Servicing Mission. Restore-L will demonstrate the ability to extend the life of a satellite in low earth orbit. It is scheduled to launch in 2020. The Restore-L spacecraft will use robotics provided by our Pasadena, California operations, to grasp, refuel and relocate an existing U.S. government satellite, that's already in LEO orbits. And as a goal of demonstrating tools, technologies and techniques, that can be implemented on future government and commercial missions. The SSL spacecraft we are developing will provide structure, propulsion and power to support this critical mission. SSL was also selected to provide a spacecraft for a NASA discovery mission, to explore the metallic asteroid, Psyche. SSL will work with jet propulsion laboratory and the Arizona State University School of Earth and Space Exploration, in a mission to research the asteroid. Psyche is believed to be the only place in our solar system, where a metal planetary core can be studied. SSL will be providing the power propulsion chassis, a highly capable composite structure spacecraft, equipped with a high power solar electric propulsion system. Scheduled to launch in the 2020s, Psyche mission and one other were selected out of six discovery mission candidates. In addition, SSL signed an agreements for the Robotic Servicing of Geosynchronous Satellites program, or RSGS with the Defense Advanced Research Project Agency. The RSGS program will develop a capability to service and maintain spacecraft and other infrastructure throughout the geostationary army. The RSGS spacecraft from SSL will serve both commercial and government operators for the repair, upgrade, relocation, augmentation, and refueling of on-orbit assets. SSL will be providing a spacecraft to carry the robotic servicing payload and will manage the integration and operation of the spacecraft. DARPA will contribute robotics technology, systems expertise and the government provided launch. SSL MDA will add its own refueling capability to the program. Once launched, the RSGS spacecraft will have the capability to perform multiple servicing missions, for both planned and urgent customer needs, including high resolution inspection, refueling, correction of mechanical anomalies, assistance with relocation and other orbital maneuvers. As well as in the future, provide installation of attached payloads, [indiscernible] upgrades to the existing satellites throughout a longer life. Further terms of our agreement after the on-orbit demonstration of the RSGS vehicle's capability for DARPA. SSL will receive full title to the spacecraft, and will offer services to the commercial and government markets. We plan to establish a new company to manage this sector called Space Infrastructure Services and are not in active negotiations with potential equity partners. During the quarter in the Communications segment, one GEO satellite was successfully launched and is perform on-orbit as expected. The EchoStar 23 satellite for EchoStar Corporation was launched on March 2016. It's a highly flexible, KU band broadcast satellite, and can support multiple mission profiles. The high power satellite will be used initially for direct-to-home television services throughout Brazil. Company's Montreal operations signed a contract with Boeing during the quarter, for the provisioning of three communication systems that will interface with the existing International Space Station, space-to-ground antenna, previously provided by MDA. Contract was also signed with Airbus to provide four satellite antenna systems and control electronics. In the Surveillance and Intelligence segment, MDA Systems in Richmond has continued to sign ongoing system upgrade and deployment contracts with DigitalGlobe for their worldwide network of direct access facilities, and has also been supporting DigitalGlobe in upgrading its worldwide staff network to collect WorldView-4 imaging data. Our team continues to be active, delivering new Surveillance and Intelligence systems, including supporting the deployment of the Government of Canada's unclassified remote sensing situational awareness capability in Bahrain [ph]. The system is directly supporting the Canadian Armed Forces operation, by sharing near real time ship detection information, with the combined maritime forces and the United States Navy. Company continues to be on track with the test and integration of the radar set constellation mission spacecraft. Having recently completed thermal vacuum testing of the first unit. The launch of the three satellite RCM constellation remains on schedule for 2018. MDA's robotic business in Brampton supported a very busy period for robotic operations on the international space station during the quarter. The MDA-built Canadarm2 and Dextre robotic systems completed two challenging missions. The first involved the robotic replacement with external batteries, critical to supporting a space station powered system. Three follow-on servicing missions of a similar nature, will be performed over the next three years. During the second mission, our robotics system were used to unload a number of important experiments from the Space-X built driving capsule, and for the first time, to reinstall other equipment into the capsule for disposal. MDA's geospatial services business in Canada signed three contracts with Satellite Applications Catapult. This is a U.K. organization, created to generate innovation and foster growth in the U.K. economy in satellite related technology-as-an-applications. MDA will provide RADARSAT-2 satellite information for maritime surveillance and the detection of illegal unreported and unregulated fishing vessels in remote regions. The company also signed contracts to provide monitoring services for three different commercial mining companies. MDA will use RADARSAT-2 imagery to monitor activity and measure small ground circus movement changes in areas where there are ongoing mining operations. MDA's geospatial business in the U.S. booked over $39 million in geospatial information services contracts, with a number of undisclosed U.S. government customers since the last report. This business also successfully delivered a transportable ground terminal to the Department of Homeland Security, Air and Marine operations. This terminal has now been certified for operation, and enables improved maritime surveillance of U.S. borders in all weather conditions. In summary, our total funded backlog at the end of the quarter was $2 billion compared to $2.4 billion at the end of the fourth quarter and $2.5 billion in the prior year first quarter. That concludes my report, and I will now ask Anil to report on the financial results.

[Anil Wirasekara:]

Thank you, Howard. Good afternoon and welcome everyone. As always, we appreciate you joining us today. I am once again pleased to report our operating results for the first quarter of 2017. Consolidated revenues for the quarter were $494 million, on par sequentially with the previous three quarters, but lower compared to the same period last year of $562 million. Operating EBITDA was $89 million and operating EBITDA as a percentage of consolidated revenue was at a healthy 18%. This compared to operating EBITDA of $97 million and operating EBITDA margin percentage of 17% for the same period last year. The increase in margin percentage reflected the net impact of a mix of activities, between business segments, lines of business, and benefits of the enterprise improvement initiatives implemented in prior periods. We achieved operating earnings of $45 million or $1.23 per share compared to $56 million or $1.53 per share for the first quarter last year. The decrease reflected higher corporate expenses, as a result of our U.S. access strategy, additional non-cash interest expense from the orbital securitization liability, and higher effective accounting income tax rate on operating earnings. Net earnings on the IFRS for the first quarter was $6 million, down from $41 million for the same period last year. Net earnings were further impacted by the inclusion of large, non-operational items, including acquisition related expenses and restructuring costs, and share-based compensation expenses. Corporate expenses for the first quarter 2017 was $5 million compared to $4 million for the same period last year. The incremental expense related to pursue U.S. government market has been expensed as incurred, and I expect it to continue at the current levels in 2017, as the company's expansion into the U.S. government market continues to progress as planned. During this investment phase to diversify the business, the company expects that operating EBITDA and operating earnings will continue to be negatively impacted. We entered the first quarter with an order backlog of $2 billion. The amounts that we report as order backlog, includes only the value of the firm funded order. We do not include the value of unexercised contract options and unfunded purchase commitments under indefinite delivery in definite quality contracts. We also do not include in backlog, contracts that have been awarded to us, but not yet contractually finalized. Consolidated revenue for the first quarter of 2017 was $494 million. Revenues from the communication segment was $332 million, was sequentially more favorable but lower, compared to $403 million for the same period in 2016. Satellite operators in the geostationary communication satellite industry, have continued to delay awards to assess competing technologies, shifts in customer demand, and regional capacity and pricing issues. This has resulted in fewer awards in the industry over the last few years. We expect this lower level of revenue to continue, until such time as the geostationary communications satellite market stabilizes. Operating EBITDA margin, as a percentage of Communications segment of the first quarter of 2017 was 15.2%, higher than the 14.8% achieved in the same period last year. Surveillance and Intelligence segment contributed $162 million, compared to $159 million for the first quarter of 2016. Revenue from contracts in the emerging market sector, which include the U.S. government space and defense market, contributed to the increase. Operating EBITDA margin, from the Surveillance and Intelligence for the first quarter of 2017 was 23.8%, consistent with the same period of last year. Looking at our cash flows; in the first quarter of 2017, the company used $25 million in operating activities. However, on a rolling 12 month basis, we generated cash flows of $148 million from operating activities and on a rolling 24 month basis, we generated cash flows of $196 million from operating activities. Cash flow from operating activities can vary significantly from period to period, given the company's portfolio of large construction programs and the timing of milestone receipt of payments to customers and suppliers in the ordinary course of business. In the first quarter of 2017, the increase in working capital was primarily due to an increase in unbilled receivables of construction contracts, and the continued drawdown on a pool of advance payments received from customers in prior period. Working capital was also impacted by extended payment terms of certain satellite programs, and other non-operational payments. We expect working capital account balances to continue to vary from period to period. In investment activity, the company used $33 million in the first quarter of 2017 compared to $34 million for the same period last year. Major investing activities in the first quarter of 2017 were purchase of plant and equipment of $10 million and investment in technologies and software of $24 million. Investment in technology and software were higher this year. This quarter, as the company incurred increased levels of internal development costs for key technologies, including the digital payload program. In financing activity, the company used proceeds of $145 million on its revolving credit facility to repay its 2017 term loans, in full, upon maturity on February 22, 2017; and a portion of its 2024 term loans. Turning our attention to the financial conditions of the company; we efficiently fund our cash flow requirements with our syndicated credit facility. At the end of March, total long term debt net of cash balance was $894 million and our net debt-to-bank EBITDA ratio was 2.8, slightly higher than our target 2.5, due to the continued investment in our U.S. access initiatives and in new technologies and M&A related costs. Unused capacity in our credit facility, together with cash flows from operations, provide us with adequate room to operate efficiently and pursue all our goal and investment strategies. We declare a quarterly dividend of $0.37 per common share, payable on June 30, 3017 to shareholders of record at the close of business on June 15, 2017. And now to recap, despite continuing challenges in the business environment, our operating performance was solid this quarter. Our strong order backlog provides us with good long term revenue visibility. We are optimistic about our opportunities in the U.S. government market, as we continue to make substantive progress with our U.S. access plan. We are in good financial position, with ready access to capital markets and have the financial capability to continue to deploy a balanced growth strategy, to position this company for long term success. That concludes my discussion and I will hand it back to Howard.

[Howard Lance:]

Thank you, Anil. We are now ready to open the line and respond to your questions. Operator?

[Operator:]

Thank you, sir. Ladies and gentlemen, we will now take questions from analysts. [Operator Instructions]. And your first question will be from Paul at Scotia. Please go ahead.

[Paul Steep:]

Evening. Howard, could you talk, maybe a little bit about geospatial and the trending there? What you have seen in terms of the outlook and maybe even some of the synergies, possibly with DGI?

[Howard Lance:]

So, as you know Paul, we have two geospatial business units within the company; one radar focused in Canada and the other focused on, primarily processing and analytics services for the U.S. government. On the latter, we reported $39 million, I think the number was in orders over the period. That's a bit of an uptick. We started the year pretty well in that business unit, and I think that's as a result of the new management. We have done some reorganizing there, and the team is, I think very focused on that business. In Canada, we have been successful in signing some new contracts. I think that the future growth outlook in that part of the geospatial business, standalone is small or low level of growth. We don't expect that to be rapid growth. And bottom line is, across both of those, we expect to see numerous synergies, as we go forward with DigitalGlobe. Two areas that come to mind, most importantly, our focus historically has been radar, the opportunity to integrate an increased amount of radar and optical data imagery for purposes of analysis, we think is going to be a unique competitive advantage for us. Secondly, the combination of the DigitalGlobe acquisition at The Radiant Group and MDA's geospatial business in Washington DC. We think bringing those businesses together is going to provide scale and leverage, and allow us to pursue larger contracts than we would be able to do in the business.

[Paul Steep:]

Great. And then just one follow-up for me, could you talk a little bit, with RCM now heading into the final days of that project. Could you talk a little bit about how the opportunity looks in the U.S. in terms of building up a pipeline to sort of replace that project, I guess, within the early 2018 timeframe, or should we be thinking a little further out than that, in terms of ramping on the U.S. business around the surveillance side? Thanks.

[Howard Lance:]

Yeah. So I think, first of all, we are pursuing in Canada, additional follow-on business with our customers, and are hopeful that the follow-on remainder, the constellation will start to come into focus. The U.S. access strategy is really starting to take hold. We have announced several programs, where we are either under contract or have been selected. We are feeling quite good about the prospects going forward. I wouldn't want to speculate on any particular level of revenue or orders, but for the first time, you heard us today talking about the contribution in our Surveillance and Intelligence segment from the U.S. government, and that's a positive step to see year-over-year improvement, we certainly expect that to continue. I talked before about our goal of establishing around $500 million of incremental revenue, and I think we are on our way to doing that. When we will get to that level of annual billings, I still think is a few years out. But we are making good progress, and we believe, as we said on the February 24th call, that the combination with DigitalGlobe will accelerate our U.S. access plan, by giving us deeper relationships with many of the existing agencies that we want to serve.

[Paul Steep:]

Great. Thank you.

[Operator:]

Thank you. Next question will be from Thanos at BMO. Please go ahead.

[Thanos Moschopoulos:]

Hi, good afternoon. Howard, you mentioned that SSL has been selected for several satellites, what would be the typical timeframe between selection and ultimate contract signing? And what's the probability that these will ultimately translate into firm orders? Is it just a question of negotiating in terms of conditions or are some of these contingent on the customer's ability to get financing?

[Howard Lance:]

Thank you, Thanos. The selected items that I mentioned, none of them are contingent on financing. So it's really just a question of confirming the final requirements and agreeing to contract terms. I don't want to speculate about the timing. I do believe, in general, this year is going to be back end loaded, and I think that's going to be evidenced in terms of our bookings as well as revenue, rent and earnings, that flow out of that, and even potentially cash flow, because you know, that a lot of our bookings come with significant upfront cash payments. So we feel confident, we can't guarantee, but I feel very confident that you will see some significant bookings in 2017. I think weighted more towards the second half than the first half.

[Thanos Moschopoulos:]

And in terms of project size, is it kind of consistent with what you have seen in recent history or is there any sort of discernible trend, maybe some of these larger HTS satellites, are there more of those than what you are seeing in the pipeline?

[Howard Lance:]

Yeah. So I wouldn't want to comment on any specific order, but I would say that we saw an uptick in 2016, in terms of a higher average dollar award per GEO satellite, and that we expect that trend to continue going forward. So we are seeing that positive trend, and I think over time, the number of satellite awards is interesting, but the dollar awards are really what ultimately drives revenue and profitability. And so, we will be, in my view, even more important than whether the industry awards 18 or 20 or 16, show you what is the size and revenue for those awards, and we see that on the rising side.

[Thanos Moschopoulos:]

Great. And then finally, in terms of the U.S. access plan, you have clearly had some good success winning some civilian programs as far as the systems related work. Now that you have secured appearances, how is the pipeline starting to shape up, with respect to classified related systems work?

[Howard Lance:]

Yeah, I think it's shaping up very well. And our challenge with that is going to be, not just winning awards or being able to talk to you about them. We will be showing up in bookings, but at some point, we will be using the word undisclosed to the U.S. government customer a little more often than in the past. I am very optimistic, that we are going to make good progress in 2017, again, since we just signed BSEA [ph], we just brought on more [indiscernible] people. We are getting a facility cleared. Clearly, I believe it's going to be in the second half of the year. But I think we are making good progress, and I like the pipeline, and I like the fact, that we are now being included in the conversation, where previously we were not. So I think that's a part of the sign as well.

[Thanos Moschopoulos:]

And as you said previously, I think you have said that through -- you would probably begin by having some smaller study type projects as a prelude to larger contracts, that's going to be the idea?

[Howard Lance:]

Yeah, I think that's still the likely path, and also may be supplemented maybe with some small sat opportunities. So I don't see an imminent award of a very large classified complete spacecraft. The other part of this industry is the collaboration that occurs around a number of different suppliers. You may find, that's also getting a box [ph] of getting a payload, where we aren't doing the entire satellite, but we are doing part of it. So all of these things are very typical in kind of U.S. government ecosystem.

[Thanos Moschopoulos:]

Great. Thanks Howard. I will pass the line.

[Operator:]

Thank you. Next question is from Steve at RBC Capital Markets. Please go ahead.

[Steve Arthur:]

Great, thank you. Just wanted to follow-up on a couple of those points, first off in your comments on order flow, more likely weighted towards the second half. If we look at that with a softer order flow we have seen over the past couple of years, how should we be thinking about factory utilization that has to sell on the current backlog and any sense of the magnitude of impact we should be anticipating in the coming quarters on revenue and margins there?

[Howard Lance:]

Well clearly, we continue to see to finish and launch more satellites than we are booking. So instead to say that the workload in the factory is going down, that's being reflected in revenue, we had a workforce reduction during the first quarter, to try and better match the workforce with the work that we have to do. So we are going to -- I believe, kind of speak to say that, at that level or potentially even slightly lower, as we continue in the second quarter to finish some work and no guarantee of booking new business. So I think investors in our company, in this segment, need to understand that it's a lumpy business. It always has been. And the need is to look through individual quarterly numbers and look at the trend lines, and we believe by the second half of this year, the trend lines will be more positive than they are at this point. The other point of clarification I'd like to make is that, we report today in two segments, Communications and Surveillance & Intelligence, so everything that SSL is doing, is not showing up in the geo comms market. We are currently classified U.S. government spacecraft and the NASA kinds of programs are going into surveillance and intelligence. So Communications is not necessarily going forward, a very good match to what's actually going on in the factory in Palo Alto. Going forward, we are going to think about how we can provide perhaps better information, with regard to that. But that's a change that's occurring, as we move into these different spike markets.

[Steve Arthur:]

That's a good point. I guess just following on that, we spent a lot of time thinking and talking about SSL. I am just thinking more about the context of SSL, post the DigitalGlobe combination. It seems like SSL is still very important, but by our calculation, it's something like 15% or less of EBITDA. Is that the right way to think about it, a smaller contributor, so therefore these quarterly lumps should be a little less impactful?

[Howard Lance:]

Yes. I think your math is probably accurate. I wouldn't describe SSL as less important. Remember, the whole point of the DigitalGlobe transaction is diversification, yes, but it is also being able to offer end-to-end capabilities in the value chain, at the vertical integration that's going to come from SSL, working closely with DigitalGlobe to define, design, and ultimately manufacture and launch this spacecraft, is we think, going to bring us a competitive advantage in serving customers at the end of mission state, with this end-to-end capability, including, of course, all of our ground station capabilities, out of Canada. So that's a strong competitive advantage. And so SSL certainly continues to be important, but we do hope that the cyclical nature of the geo comm business will become less and less of a factor in driving wide swings in quarterly earnings. We certainly see that in the future.

[Steve Arthur:]

Okay. Good point. Just one other question, just on the potential impact of XM. For a couple of years, that was kind of a negative for the whole industry, into they getting back into business. Any sense of the impact that that might have on any customers that are in your pipeline now, or any changes in their views or anything advancing because of XM?

[Howard Lance:]

I certainly view it as a positive from the standpoint it presents another option. We have gotten great support from Export Development Canada, and we will continue to get that support. But to have the XM channel as well for financing, certainly is a good thing going forward and we support them getting back in business.

[Steve Arthur:]

Actually, I apologize. One final thing, just the DigitalGlobe acquisition and financing structure, have had many conversations today and every day. It seems about, with investors about the leverage and four times level that you are using when you complete the deal. Now a couple of months later of due diligence and looking more closely at businesses, how is your level of confidence, that that's still the right capital structure, or would you consider anything different data [ph], either higher or lower?

[Anil Wirasekara:]

No Steve. We still firmly believe that four times leverage is the most efficient capital structure that we can put together going forward, that provides us with the lowest overall cost of capital. We are very confident about the visibility of the cash to be able to service this, as well as providing the capital for all of the programs that we have. So yes, we are certainly committed and convinced that the four times leverage is something that is appropriate for this transaction.

[Howard Lance:]

See, we expect our cash flows to pick up as well on the second half of the year. Remember, there is a disconnect between our EBITDA and cash flows because of the nature of percent completion accounting on these programs. In many programs, we are getting cash upfront, before we are incurring the costs and recognizing the revenue. Literally then, the flipside of that toward the end of the program, we have already gotten most of the cash, and now we are still incurring some costs. So unlike many businesses, when revenue slows, you don't actually free-up working capital, you actually create more of a problem, unless you have more bookings coming in. So that's some of what you are seeing in the last few quarters, and this quarter as well. So we think that's going to improve in the second half, and Anil and I are very conservative. We are not going to over leverage the company, and we feel that the combination of our core business cash flows, plus the excellent cash flows from DigitalGlobe will support the initial out of the gate four times leverage, and we've made a commitment within the first two years, to drive that down to around three or less --

[Anil Wirasekara:]

A little less than three times.

[Steve Arthur:]

Okay, great. Thank you.

[Operator:]

Thank you. Next question will be from Stephanie at CIBC. Please go ahead.

[Stephanie Price:]

Good evening. Can you talk a bit more about the restructuring initiatives in the first quarter and how we should think about additional costs through the remainder of the year?

[Howard Lance:]

So we have taken restructuring expenses in the quarter. We expect to continue to right size a number of our operations around the company as the year goes on. So without talking about a specific number which is not finalized, you should expect some modicum of additional restructuring. But the largest expenses are going to be associated with the transition work, that now has begun pre-closing with DigitalGlobe and that will continue, post closing through the end of 2017 and perhaps into 2018. So we will have expenses associated with all of those activities that set us up in the right position to -- going forward, to grow. The good news with that is, as we then grow off of that lower base, I think you will see good leverage and improved margins, as well as cash flows.

[Stephanie Price:]

Okay. And then, in terms of the level of spend needed to deploy the U.S. access initiatives, is there a way that we can kind of separate that out from operating EBITDA to think about that separately from the core operating segments?

[Howard Lance:]

Yeah we can, we will certainly give some thought to your question. At this point, we don't break that out or disclose the exact amount for a lots of reasons, competitive purposes being one of those. But it is a fair request and let us go and think about, how we can provide you with a little bit of insight into that. I don't want to think of it though, Stephanie, as we have added costs that are then going to go away. This is becoming the fabric of our go-to-market strategy. So I don't expect it to drop. Having said that, some of the restructuring charges recognizes that we are making reductions elsewhere in our businesses, where revenue is not on that same growth track. So that's kind of our view. Does that answer your question?

[Stephanie Price:]

It does. Thanks. And then, just finally for me, on R&D, can you talk a bit about where you are investing the most R&D dollars, and where are you the most excited about going forward?

[Stephanie Price:]

Well, it's a large company with lots of programs. So I don't want to go with all of those. But I think that we have ticked up investments in the last year, certainly in SSL, because not only are we doing things that we have talked about, like the digital payload, to provide flexibility to our customers for the application of the geo comm satellites, but we are also making investments for our next generation technologies, that we are talking to customers about, that would include things like persistent platform capabilities, where we could launch a bus and then over time, as separate missions do launch in a simple on-orbit, different payload capabilities, we continue to invest in new technologies, that are going to be needed on larger, high powered satellites, such as Roll-Out Solar Arrays, when the traditional fold-out arrays are too large to be captured within the spacecraft launch comm. We are investing in a number of new technologies in the Canada businesses, I'd say across the board, with regard to developing new capabilities to innovate and serve our customers. And good question, we will think about our future calls, for us calling out some of those other investments, because innovation is absolutely something that we are committed to drive across the company.

[Stephanie Price:]

Great. Thank you.

[Operator:]

Thank you. Next question will be from Tim at TD Securities. Please go ahead.

[Tim James:]

Just want to return to the question regarding investments in terms of building out the U.S. access plan. So am I correct in interpreting then, the investments are expenses that won't go away, but will simply be absorbed over a greater base of revenue as that plan rolls out and grows?

[Howard Lance:]

Absolutely correct. So you have most of those expenses which are embedded in the segment results. The part that's at the corporate level, that's largely the fact that we have some duplicate costs, because we set up our U.S. structure headquarters at overhead and we still have some of those costs as well, and our traditional headquarters at Vancouver. So that's in the corporate line. The rest of it is all showing us now in the segments. And yes, those increases will plateau, and therefore should go up at a slower rate than revenue, as they are leveraged across a larger revenue base.

[Tim James:]

Okay, thank you. How should we think about revenue related to RCM in 2017? I mean, presumably, the manufacturing component of this has declined significantly. But I am just trying to get a sense for the nature of kind of the follow-on revenue opportunity at this point, I assume, given the timing of that constellation, there isn't a big opportunity in kind of 2018 and 2019. But I am just trying to understand, maybe the scale or get some sense for the scale of the headwinds for Surveillance and Intelligence revenue in 2017 and 2018 from the decline in manufacturing revenue there?

[Howard Lance:]

Well I am going to let Anil talk to the specifics, but we are not sitting on kind of on our hands. We have a number of other large pursuits with the Government of Canada and commercial customers, to help pick up the slack, as we wind down this program. So we are not planning on or expecting a major step down in revenue, in what today, we reported at the Surveillance and Intelligence segment. The Canadian programs that we are working, we have a good solid pipeline, expect to book orders this year, that we will be able to talk to you about. And then the U.S. surveillance intelligence activities also are getting reported in that segment. So we are not expecting a stepdown per se, but underneath, there certainly will be some stepdown of revenues, Anil, from RCM?

[Anil Wirasekara:]

Yeah. I mean, for this year, we are -- from 2017, we expect to do about $100 million of revenue from RCM. In the first quarter, we did approximately $30 million, so we have a little over $60 million left for the next quarters. And I think 2018, we expect another $50 million to $60 million of revenue that we will do, prior to the launch of the satellite towards the end of 2018. And then a little follow-on revenue in 2019.

[Howard Lance:]

So ultimately, what the revenue looks like in the segment, has to do with other business we can book, to just fill the void that will be created, as this program continues to move to completion and successful launch.

[Tim James:]

Okay, that's very helpful. So that number that you talk about for 2017, is that part of the original manufacturing contract that you are still just working off at this point?

[Anil Wirasekara:]

Oh yeah, yeah, yeah. Absolutely.

[Tim James:]

Okay. And then just one final question, I am trying to -- since announcing the DigitalGlobe acquisition, if you have had any more feedback or indications from your customers or potential customers that may compete either directly or indirectly with DigitalGlobe regarding this planned acquisition? And I am thinking of either concerns from customers or customers that may be giving you a bit of a vote of confidence here, in kind of raising the idea of additional opportunities for the combined company?

[Howard Lance:]

Yeah. So we continue to actively pursue small sat, Earth observation satellites with multiple potential customers. We haven't had anyone break off those negotiations or leave. They ask questions as would be appropriate, about how we would compartmentalize information about their programs versus DigitalGlobe. And we remind them that at any given time, we have 15 or 20 satellites, geo comm satellites at our factory, all with different customers, with lots of proprietary technologies and information that we are able to manage. So in my view, those answers have gone well, and have not impacted future potential of other customers. And at this time, I talk to all of them.

[Tim James:]

Okay. Thank you very much.

[Howard Lance:]

Thank you.

[Operator:]

Thank you. Next question is from Richard at National Bank Financial. Please go ahead.

[Richard Tse:]

Yes, thank you. In your opening statements, you talked about the operators taking some time to make decisions here. How much do you think that has to do with them, taking time here to evaluate some of the new technologies? And I guess related to that, if they are doing that, how do those new technologies change your -- or potentially change your revenue model for the business going forward?

[Howard Lance:]

Yeah. I think that there is a couple of dimensions to this. But largely, it has to do with operators trying to predict supply and demand in the market during the lives of the next satellite that they want to buy. So replacement satellites are going to be less of an issue. The issue is around new satellites with added capacity. And so, the business models are closely evaluating what's the impact of a LEO constellation. What's the impact of a very large or multiple large high throughput satellites that maybe launched and have much lower cost per gigabit, and how will my satellite configuration in my region compete with those. So I think it's -- that would be the way you should think about the work that's going on, and it's because these technologies are so new, the LEO large constellation in comms, very new, hard to put in precise terms, what will be the competitive advantage or not versus the traditional GEO approach. And then, the very large high throughput satellite alternative. So I just think they are being cautious with their CapEx, because they are making essentially an 18 year commitment, three years to build the satellite, 15 years to operate it, and they are trying to get a feel for the trends. And in my view, they are waiting kind of as long as they can. But at some point, replacement satellites will have to go on orbit, and we absolutely expect that to pick up. It's also causing though, some of the new operators who have entered the market, over the last five years, and are now thinking about their follow-on satellite orders to work through all of that. So it's a pretty complex business planning challenge that our customers have. We have not been able to predict this very well, nor has anyone else in the market. All of the consultants have also continued to kind of fall short. But we just entered around the last three months of detailed discussions with our customers and are feeling still very positive about the long term opportunity in the market, given that we expect to ream out from a pretty low level. Having said that, as we commented earlier on the call, we are diversifying this business, and ultimately, we want a business that, as a satellite manufacturer for a lots of different markets customers and types of satellite, so that we are left dependent just on the GEO comm piece.

[Richard Tse:]

Okay, that's really helpful. So I guess, related to Stephanie's question earlier in terms of R&D, I am guessing by the sounds, that you guys show that you are very well positioned from a technology perspective there. I am guessing, there are certain holes that you are really trying to fill. Obviously, with DGI, you are trying to rush by the business. But in the existing business, do you feel pretty confident in terms of the technology stack?

[Howard Lance:]

Yes. I think the only technology we are developing, where we have had a bit of a lag with competition is the digital payload, and we are now far and up along in our development cycle, that we are including digital payload and proposals for customers, and so that's a pickup compared to say where we were a year ago. I think in the other technologies, I think we continue to be viewed as the high power satellite provider. We have more high throughput experience than anyone else in the market, and I think that's going to serve us well. Coupled with the fact that, we have just an amazing track record of launching and operating with our customers' very successful satellites, I think we are well positioned. We can't control the market. We are frustrated certainly at the lumpiness of it. But I think we are very well positioned, as the market rebounces, taking our fair share.

[Richard Tse:]

Okay. And just one last quick one here, can you give us maybe a rough value of the awards that you have won, but that are not contracted?

[Howard Lance:]

No, I can't. I just don't want to step over that line, in terms of talking about an award that's not [indiscernible]. But I think they are measuring up, in a significant amount that I felt inclined in and in fact, all I needed to tell you, that there are things in the works. But, having said that, there are no guarantees. So we will look forward to announcing those awards hopefully soon, certainly in 2017. But I am sorry, I can't be more specific.

[Richard Tse:]

No, that's fair. Thank you very much.

[Operator:]

Thank you.

[Howard Lance:]

We will do one more question Glynn.

[Operator:]

One more question?

[Howard Lance:]

Yes.

[Operator:]

Certainly. The question, which will be the last, comes from Deepak at GMP Securities. Please go ahead.

[Deepak Kaushal:]

Hi, good evening guys. Thanks for squeezing in me for the last question, I won't ask about the tax rate. I did want to ask you, perhaps something about the future in the market of robotic servicing. You want some good early wins in that with NASA and DARPA. I think at a time when you guys had a partnership with Intelsat way back, there were some people that estimated the commercial market size for this at about $100 million a year. But a lot has changed since then. What do you see in terms of the market opportunity, both commercial and defense for robotic servicing in the future decades to come?

[Howard Lance:]

Yeah, thanks for the question, and I am not going to be very specific today, but we will take your question and think about that for the next call. I think we will be in a better position at that time, as we stand up with this new company. But we believe, the robotics servicing as a real future, both in commercial, as well as in government. We hope to be able in future quarters, to tell you about bookings for on-orbit servicing contracts, which are being negotiated also as we speak. We are very far along in discussions with equity investors. Our current plan is to set up the SIS business as a standalone entity, which we are one, but not the majority owner and to provide satellites and capabilities to that venture, but to do that along with other investors. So we have made good progress, and I think have a strong position, and we have a different business model than Orbital ATK. Our model is focused on refueling, in addition to being able to relocate. And so, there will be the opportunity in a given year, to do multiple refueling kinds of missions and I don't see any reason why our current view of the market would be any less than it has been previously. As you indicated, it may even be better than that. But let us come back with a little more specificity in a quarter or two, as we stand up this new company.

[Deepak Kaushal:]

Okay. And in terms of the equity partners, are you contemplating the majority being a peer in the industry or will that be public to shareholders? How should we think of that?

[Howard Lance:]

All I can say at this time is, we are talking to multiple potential partners. And at this time, we don't envision day one having a majority control of that venture, but rather being the -- in a supply and operating partner.

[Deepak Kaushal:]

Okay, great. Thank you. I appreciate taking the time to answer my questions. Thanks again.

[Howard Lance:]

No problem. Thank you for the question. End of Q&A

[Anil Wirasekara:]

Thank you.

[Howard Lance:]

Thank you for joining us today on the call and we will be back next quarter.

[Operator:]

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have yourselves a lovely evening.