Maxar Technologies Inc.
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Welcome to MDA's Q2 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, 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 second 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 website or SEDAR. I will now turn the conference over to Howard Lance. Please go ahead.

[Howard Lance:]

Thank you. Good morning, ladies and gentlemen. Thank you for joining us today for the MDA’s second quarter 2017 conference call. With me is Anil Wirasekara, Executive Vice President and CFO. I’ll begin the call by discussing some of the key business activities that have taken place since our last report. Anil will then review the financial results for the second quarter, and after that, we’ll open the line to your questions. Unless specified otherwise, all dollar values included in today’s discussions are in Canadian dollars. On February 24, 2017, we announced that we had entered into a definitive merger agreement to acquire DigitalGlobe, the leading provider of satellite Earth imaging solutions and services for global defense, intelligence and commercial customers. Shareholders of both companies overwhelmingly approved the merger in special meetings yesterday. Final regulatory approvals are proceeding as anticipated, and we now expect to close the transaction in the third quarter of 2017 or soon after. The combination of MDA and DigitalGlobe will be a powerful force for enhanced growth and value creation for shareowners. We’re very much looking forward to closing the transaction and the creation of a distinctive space technologies company with end-to-end solutions expertise across space systems, imaging and analytics. Turning to the financial results in the second quarter, we made significant progress in securing some critical new bookings at SSL across multiple end markets. These included a major Earth observation constellation, a large HTS communications satellite, and the first in-orbit servicing and refueling spacecraft. We believe our diversification strategy is working and will lead to significantly higher SSL backlog by year-end as compared to the prior year. This will drive increased utilization within the SSL satellite factory and fuel renewed growth in this business going forward. Consolidated MDA revenues were CAD 504 million in the second quarter, flat with the prior year quarter but up 2% sequentially. As we’ve seen in the past several quarters, revenues in the Communications segment declined year-over-year in Q2, down 8% as compared to the prior year. But this decline was offset by strong revenue growth in the Surveillance and Intelligence segment, which was 21% higher than the prior year. Consolidated operating EBITDA was CAD 94 million in Q2 as compared to CAD 96 million in the prior year quarter. Total funded backlog at the end of June was CAD 2 billion, consistent with the balance at the end of March. In the Communications segment, we continued to experience softness in the geocommunications satellite market with just three industry awards during the first half of 2017 and none to SSL as compared to seven awards in the first half of 2016 with two to SSL. Satellite operators continued to defer new CapEx commitments in order to consider future demand profiles, especially for data-centric satellite applications, including enterprise and consumer broadband, aviation, maritime and terrestrial backhaul. And they also need to understand the impact of new capacity coming online in the near future from additional large high-throughput satellites and LEO constellations. Our heritage as the leader in HTS satellites, coupled with our recent investments in advanced satellite technologies such as digital payloads, positions SSL to maintain its market leadership going forward. We were selected, in the second quarter, by an unnamed commercial customer, to design and build a greater than 500 gigabits per second HDS satellite. With an order value of more than CAD 500 million, we have finalized the design and expect to be under contract in the coming months to begin work on our largest satellite to date. We expect the industry to only award between 10 to 12 geocommunications satellites this year, as compared to 14 industry awards in 2016. Of course, the majority of these awards will now be in the second half of 2017. We’ve seen a noticeable pickup in our bid and proposal activity in recent months. Replacement satellites for a direct owned video applications, as well as satellites with expanded data capabilities are all under consideration. Given the geocom sat softness in the recent years, we’ve worked hard to diversify the SSL business to include new opportunities in U.S. government and Earth observation satellite markets. We’re making significant progress, and I’ll discuss this further in the Surveillance and Intelligence segment in just a moment. Two geocommunications satellites were successfully launched during the quarter, and our performing on orbit as planned. EchoStar 21 satellite was launched June 7. The satellite will be used by EchoStar for mobile voice and data communication services, in Europe. The BulgariaSat-1 satellite was launched on June 23. This satellite will be used for direct-to-home television and telecommunication services in the Balkans and other European regions. Company’s Montreal operations signed a letter of intent with the government of Quebec during the second quarter in support of its Satellite Centre of Excellence. A CAD 45 million dollar venture loan by Investment Quebec is in support of our advanced technology development investments in the province. An authorization to proceed was received from Sierra Nevada Corporation to begin work on a communication subsystem for their Dream Chaser cargo vehicle, the spacecraft currently being developed under the NASA Commercial Resupply Services Program to support the International Space Station. Several other contracts for communications antennas, customers in Asia and U.S., were also signed in the last month. Near quarter end, SSL president, John Celli, announced his retirement following a distinguished 36-year career with the company, the last 11 years serving as President. All of us thank John for his leadership and dedication to our company and to the entire satellite industry. We were very pleased to announce the appointment of Dario Zamarian as Group President of SSL to succeed John. Dario brings a wealth of experience in leading transformative growth in global high technology companies. We were also pleased to announce the promotion of Paul Estey to Chief Operating Officer of SSL, reporting to Dario. Paul had previously led engineering and operations and joined SSL in 1997. Moving on to the Surveillance and Intelligence segment, MDA Systems in Richmond signed a five-year contract with Defence Research and Development Canada. MDA will lead a team of five Canadian organizations with expertise in hyperspectral imaging and data analysis to develop and validate airborne and ground-based hyperspectral imaging capabilities. Hyperspectral imaging gathers much more richer and sophisticated information about the world’s oceans, lakes, land, and vegetation as it collects the full spectrum of light reflecting from the earth’s surface and separates it into dozens of spectral bands. Analyzing this spectral information for a feature on the ground can reveal its composition and evolution, providing critical information to environmental, security, and national resource decision makers. MDA also signed several contracts with DigitalGlobe during the quarter to continue the support and growth of their international direct access program customer base. Included in this list is a contract for the design and development of the next generation direct access facility system, which will include numerous new features to be released to all DigitalGlobe direct access program customers next year. The company continues to be on track with the test integration of the RADARSAT constellation mission spacecraft. Having recently completed antenna integration and deployment on the first unit, test and integration of the second and third spacecraft are underway currently. The launch of the three satellite constellation is on schedule for 2018. We continue to expand our land administration business activities with a recent contract award of over CAD 6 million from an undisclosed customer. Also the Land Title and Survey Authority of British Columbia received Esri’s Special Achievement in GIS award for their ParcelMap BC, a survey-aware electronic map of all active titled parcels and surveyed crown lands in British Columbia. As prime contractor for ParcelMap BC, MDA worked LTSA to define, design and implement this Esri GIS-based system to create and maintain a single, complete and trusted representation of British Columbia’s integrated parcel fabric. In other recognition, the Canadian Armed Forces received the U.S. Geospatial Intelligence Foundation’s military achievement award for their unclassified remote sensing situational awareness program. USGIF provides superior maritime domain awareness and as prime contractor MDA was recognized under this award as a key contributor of our transportable ground systems. MDA’s robotics business in Brampton signed a contract amendment with the Canadian Space Agency for continued support to the robotic operations on the ISS. The MDA built Canadarm2 and Dexter robotic systems continued to be heavily utilized during recent SpaceX Dragon and Orbital ATK Cygnus resupply missions. And also on science payload deployments and robotic maintenance tasks. These included the replacement of the entire ISS power control and bus switching units. MDA Robotics also secured over CAD 4 million in additional funding for its engineering services work in support of the Bruce Power nuclear plant. And also received an order for four robotic interfaces on behalf of Japan Aerospace Exploration Agency. We also signed a contract with the Canadian Space Agency to conduct a concept study. And this is to determine the feasibility of using a Synthetic Aperture Radar, subsurface ice sounder and imager as a potential payload on the future Mars Orbiter mission. This type of SAR payload uses radio waves to illuminate the surface and subsurface of Mars. The echo beach radio wave pulse can be processed to provide valuable information about surface properties, distribution of water and ice. These kinds of measurements will be crucial to finding potential future landing sites for humans on Mars. MDA’s geospatial services business in Canada signed a number of important contracts since the last report. We’re providing the National Oceanographic and Atmospheric Administration with near real time information from our radar set to satellite which will be used for large and small scale ice and snow products, ice forecasting and other monitoring services. We’re also providing Scanex with a radar set to ground station solution and radar set to data for an additional three years. At the recent GU8 symposium we announced the availability of RADARSAT-2 to archive imagery on the geospatial big data exchange platform from DigitalGlobe. GBDX is a cloud based, multi-source satellite image library allowing customers to quickly and cost effectively solve large scale, complex challenges. Developers can access the imagery archive to develop tools and algorithms that serve a multitude of vertical markets. The RADARSAT data allows users to observe features and changes in the environment that go undetected using other imaging techniques. The MDA geospatial business in the U.S. continued its strong performance with CAD 26 million in new contracts. This business also successfully signed a contract amendment with the national geospatial intelligence agency for its geospatial terminal operations requirement. MDA will provide an additional year of software and services to automate the production of the NGA aeronautical charting products. These are associated with critical flight operations at U.S. airports and the air space immediately around it. Let me take this opportunity to remind you that bookings, revenues and earnings for SSL satellites which are used in earth observation applications and for the U.S. government are included in the Surveillance and Intelligence segment. During the quarter, SSL signed a contract valued at several hundred million for the next high generation, high resolution earth imaging satellite constellation for DigitalGlobe. Called WorldView Legion, the low earth orbit satellites will more than double DigitalGlobe’s high resolution capacity in important regions. Notably, SSL has been down selected as a finalist to produce these satellites prior to the merger negotiations commencing. In addition, SSL was selected by Space Infrastructure Services, LLC to provide their first geo on-orbit servicing spacecraft with contract value of approximately CAD 300 million. SIS is a U.S. company that will commercialize the satellite servicing capabilities being developed in conjunction with the DARPA RSGS program and will include satellite refueling. The private sector investments is for the spacecraft - and refueling robotics. SIS will be establishing a sustainable, commercial servicing business which was one of DARPA’s objectives in order to limit the U.S. taxpayer investment while still ensuring critical national security needs are met. On-orbit satellite servicing will provide satellite operators with more flexibility in managing their CapEx and enabling future space missions on orbit. Spacecraft will provide life extension, inspection and repair, as well as the capability to perform assembly on orbit. First commercial customers benefit from satellite refueling will be SES, one of the world’s largest satellite operators with a fleet of more than 50 of GEO and 12 MEO satellites on orbit. And they signed the first contract. SIS will be majority owned by FTL, LLC, a global investment company headquartered in Silicon Valley, along with other U.S. investors. SSL MDA holdings will have minority ownership share in SIS. Financing for the new venture is expected to conclude in the next month or so and the contract will be added to SSL backlog at that time. Our U.S. access strategy continues to make solid progress. The opportunity pipeline is growing along with our bookings and revenue. In the first quarter report, we announced that SSL MDA Holdings, our U.S. headquartered operating company, signed a security control agreement with the U.S. Department of Defense. The facility security clearance for Palo Alto is awaiting approval, and a number of staff have now received their individual security clearances. Early in the second quarter, we announced some key appointments to the newly formed SSL government systems group. These included Rob Zitz, who took on the role of Chief Strategy Officer. Rob’s experience in senior leadership positions and multiple U.S. government agencies including NGA, NRO, Department of Homeland Security and the U.S. Secret Service is bringing tremendous insight to directions we are taking in our U.S. government pursuit. Our work with JPL and the Arizona State University on the NASA Discovery mission to explore the asteroid 16 Psyche has been progressing well. The launch date was recently moved up one year to the summer of 2022. The Psyche spacecraft bus is being built by SSL. NASA announced during the quarter that in order to support the new mission trajectory, SSL redesigned the solar array system to a more powerful five-panel X-shaped design. This is commonly used for missions requiring more capability and power. Much like a sports car, by combining a relatively small spacecraft body with a very high power solar array design, the Psyche spacecraft will speed to its destination at a faster pace than is typical for a larger spacecraft. The full value of Psyche program award is expected to be included in SSL backlog before year-end. So WorldView Legion, already in backlog, will give us real scale and heritage in the earth observation satellite markets. Along with Psyche, SIS, and the HTS geosatellite for the unnamed commercial customer, these satellites together represent over CAD 1.2 billion in new bookings at SSL across both segments demonstrate the power of our diversification efforts. While we have no assurance of booking these orders, we have a clear expectation as of today that this happen over the coming months. That concludes my report. I will now ask Anil to report further on our financial results.

[Anil Wirasekara:]

Thank you, Howard. Good morning, and welcome, everyone. As always, we appreciate you joining us today. I’m pleased to report another steady quarter of operating results. For the second quarter 2017, we achieved operating EBITDA of CAD 94 million on consolidated revenues of CAD 404 million. We also achieved operating earnings of CAD 47 million or CAD 1.29 per share. We ended the second quarter with order backlog of CAD 2 billion, which remained consistent with the balance at the end of March 2017. As Howard discussed earlier, we were selected in the second quarter by a commercial customer to construct a very large high-throughput satellite with an order value in excess of CAD 500 million. We expect to be under contract in the coming months to begin work on SSL’s largest value satellite to date. Also not included in order backlog is the value of the spacecraft contract for DARPA’s robotic satellite servicing program as third-party financing commitments have not yet been fully completed. Let us now review our second quarter results with comparison year-over-year. Consolidated revenues for the second quarter were CAD 404 million, comparable with that of the second quarter last year of slightly higher than Q1. Revenue growth in our Communications segment continues to be depressed as many satellite operators in the geostationary communications satellite industry have continued to delay awards to assess competing technologies as well as shifts in customer demand and regional capacity and pricing issues. This has resulted in fewer awards in this industry over the last two years. On a positive note, we continued to make great progress in our efforts to diversify the SSL factory in Palo Alto and have over the past 12 months received several key strategic awards for nongeostationary spacecrafts. Operating EBITDA this quarter was CAD 94 million, resulting in overall margins of 19%, comparable to the second quarter of last year. Operating EBITDA from the Communications segment this quarter was CAD 41 million, down from CAD 56 million in Q2 2016. Margins were 12.4% compared to 15% for the second quarter of last year. The Surveillance and Intelligence segment contributed operating earnings, operating EBITDA of CAD 53 million and margins of 31%, significantly higher than the second quarter of last year second quarter operating earnings of CAD 47 million or CAD 1.29 per share. It is important to note that operating earnings will continue to be materially impacted by a higher effective accounting tax rate as a result of the changing mix of jurisdictional distribution of our earnings. The effective accounting tax rate has increased from 13% to 19%. The company’s cash tax rate remains unchanged. I remind everyone that operating EBITDA, operating earnings are non-GAAP financial measures and reconciliations to net earnings is provided in our latest MD&A. Operating EBITDA and operating earnings may vary quarter-to-quarter due to a number of factors. They include the size and number of construction contracts in progress, change in revenue mix between service and construction and contract life cycle of large construction projects. Other items like investment tax credits, foreign exchange and flow through costs can influence a quarter-over-quarter comparison. Second quarter net earnings under IFRS was CAD 26 million, consistent with that of the same period last year. Net earnings this quarter were impacted by the inclusion of a large, non-operational nonrecurring expenses related to the DigitalGlobe transaction. Now let me review our year-to-date results in comparison to the prior year. For the first six months of 2017, consolidated revenues was CAD 998 million compared to CAD 1.1 billion for the same period last year. The Communications segment accounted for 67% of consolidated revenues or CAD 664 million, and the Surveillance and Intelligence segment accounted for 33% or CAD 334 million. Year-to-date operating EBITDA was CAD 184 million resulting in overall margins of 18.4%. The Communications segment accounted for 50% of operating EBITDA with CAD 92 million and margins of 14%. The Surveillance and Intelligence segment contributed CAD 92 million to operating EBITDA with margins of 27.5%. Year-to-date operating earnings was CAD 92 million or CAD 2.52 per share. The effective accounting tax rate on operating earnings was 19%. We expect the accounting rate for the full year to remain at this level. Year-to-date net earnings under IFRS was CAD 32 million compared to CAD 66 million for the same period last year. The decrease, as previously indicated, was largely due to the inclusion of a large, non-operational, nonrecurring expense related to the DigitalGlobe transaction and the recognition of restructuring costs in 2017. Looking at our cash flows for the second quarter, we generated cash inflows from operating activities of CAD 34 million this quarter. The timing and magnitude of working capital changes will vary significantly from period to period given our portfolio of large construction programs and will therefore have an impact on quarterly cash flows from operating activities. We will continue to deploy working capital as it’s critical to managing lead times in all our construction activities and continuing to invest in new technologies for growth. Cash from operations will also impact as we continue to invest in our efficiency enhancement program and in a variety of activities related to the DigitalGlobe transaction. In investment activities, the company used CAD 24 million in the second quarter of 2017 compared to CAD 29 million for the same period of last year. For the six month ended June 2017, the company used CAD 57 million for investment activities compared to CAD 53 million for the corresponding period last year. For year-to-date the major investment activities was in the purchase of property, plant and equipment at CAD 27 million and the investment in technologies and software of CAD 39 million. Purchase of plant and equipment included increased expenditures on test equipment and leasehold improvements related to relocating some of our operating facilities. In financing activities, we paid dividends of CAD 13 million at the end of June representing our quarterly dividend of CAD 0.37 per common share. We have also declared a quarterly dividend of CAD 0.37 payable at the end of September. Year-to-date dividend payments amounted to CAD 27 million. We used CAD 145 million to repay our 2017 term notes in full at maturity. And we also paid a portion of our 2024 term notes. Turning our attention to the financial conditions of the company, we efficiently fund our cash flow requirements from our syndicated credit facility. At the end of June, our total long term debt net of cash balances was CAD 890 million and a net debt to bank EBITDA ratio was 2.77, consistent with the prior quarter but slightly higher than our target of 2.5 because of some nonrecurring one-time expenses. Our current covenant requirement is 3.5 times. The unused capacity and upgrade facility with – together with cash flows from operations provide us with adequate room to operate effectively and pursue all our growth and investment initiatives. After the quarter, MDA successfully completed the syndication of USD 3.75 billion in debt in the form of a four-year revolver, three-year and four-year term loan with our syndicated bank group, and a – and a seven-year USD 2 billion institutional term B loan facility. The financing is fully committed and will be available on the closing of the DigitalGlobe transaction. MDA has also received all the required approvals for listing its shares on the New York Stock Exchange. To recap, we posted steady results in Q2 2002. Despite continuing challenges in the business environment, we achieved operating EBITDA of CAD 94 million and operating earnings of CAD 47 million or CAD 1.29 per share. We are very encouraged by our opportunities in the U.S. government market as we continue to make substantive progress in our U.S. access plan. We also continued to make strong headway in the commercial low earth orbit satellite market with key strategic bookings. We are also encouraged by our current bid activity in the geo satellite business. We look forward to receiving all the regulatory approvals in the third quarter for the DigitalGlobe transaction and integration work is proceeding well. That concludes my discussion. I will hand it back to Howard.

[Howard Lance:]

Thank you, Anil. We’re now ready for the operator to open the lines to your questions.

[Operator:]

[Operator Instructions] And your first question is from Steve from RBC Capital Markets. Steve, please go ahead.

[Steve Arthur:]

I guess first just on the DigitalGlobe combination. The shareholder vote’s now complete. I guess where do things stand with CFIUS and what other steps or approvals are required now to complete this transaction?

[Howard Lance:]

Steve, we put out a press release indicating that we had withdrawn and refiled our petition in order to give CFIUS more time to complete their due diligence. We are in the 30-day period that will end on August 14 and we look forward to them reaching their conclusions and recommending to the President approval of the transaction. At this point we don’t see any issues. It’s just a question of completing the remaining work.

[Steve Arthur:]

And the other steps or approvals beyond that are relatively small?

[Howard Lance:]

Yes, we think that once CFIUS is approved that closing will occur relatively swiftly.

[Steve Arthur:]

Second topic just on the HTS satellite that you’ve talked about as being awarded. Just wondering if there’s any other color you can offer there in terms of the nature of that satellite. Does it involve these digital payload capabilities? Are you working on it now? The time line for delivery, anything at all?

[Howard Lance:]

We’ve completed the design. The program when initiated is in the 48 month lengths. There are a number of new technologies that will be on the satellite. Beyond that I can’t really talk about any more details until the contract is signed.

[Steve Arthur:]

When you talk about an outlook of, kind of, 10 to 12 geos for the year I assume you’re involved with most or all of those. Any color on the nature of that pipeline and what you would expect your market share to be in that? Any difference from what we’ve historically seen? And I guess in that, as well, is there any thought on future HTS satellites in that pipeline?

[Howard Lance:]

Well first of all, I think we’re entering a little bit of a new phase where the number of awards might be less important than the total dollar value. When you start talking about one award in excess of CAD 500 million. In terms of what’s in the pipeline, it’s a mixture. We’re starting now to see, as we’ve been discussing, satellite operators that have a need for the replacement satellites for those that are already on orbit that are reaching end of life. And that’s a combination of HTS video and hybrid kinds of satellites. So it’s quite a mixture. It’s a variety of regional and global operators. We certainly are in the mix on, we believe that a high number of these procurements. And I expect our market share to be maintained or to grow. I think our position is a strong one with regard to our heritage as well as our relationship with the customers in the design mode. On this large HTS satellite, the design is now fully complete and that took a bit. It’s going to be the largest satellite we’ve ever built, and I think will demonstrate further the kind of capabilities we have. As we do projects like this as well as the earth observation constellation for DigitalGlobe, every time we do that, we’re establishing not only a stronger commercial position, but a very strong position with regard to our credibility for future U.S. government satellites.

[Steve Arthur:]

And just one final question just coming back to DigitalGlobe. They reported a strong quarter about a week ago, I guess. Any general comments on the performance of their business you’ve seen, and just one specific one with that, we did see a small, I think, CAD 14 million contract to Planet I think a week ago with U.S. NGA. Any implications of that on the DG business or future business?

[Howard Lance:]

Our view is the company is performing well, very much in line with our expectations. With regard to the Planet award, I think that was expected, and it’s not replacing or taking away any business that DigitalGlobe has that I’m aware of. It’s serving other missions where the low resolution imaging can meet the need. If it’s a requirement for high resolution imagery, DigitalGlobe is the only one that’s able to provide that.

[Operator:]

Thank you. Your next question comes from Thanos from BMO Capital Markets. Thanos, please go ahead.

[Thanos Moschopoulos:]

The S&I segment obviously had quite a pick up relative to last quarter, and in your prepared remarks you alluded to a number of the program wins. But just to clarify, should this be sort of the new run rate going forward, or were there some onetime items that helped the quarter? Will there be some peaks and valleys in the near term as we think about the near term outlook for S&I ?

[Howard Lance:]

I don’t think in the near term, no. The only major program that’s winding down is the RCM constellation which we’ve talked about before. That’ll conclude in 2018 and launch then. Not expecting any major step down in S&I, and to the extent that we continue to book as we indicated things like the SIS spacecraft, and the Psyche U.S. government mission, and others down the road, those will go into that segment.

[Anil Wirasekara:]

Thanos, as I had – as made in my remarks, our business has – we will have quarterly fluctuations that go up and down. And that will continue to happen, but overall on a long-term basis, there’s – we don’t see any material impact to our continuous run rate.

[Thanos Moschopoulos:]

On the SIS business, can you clarify at this juncture how much of the joint venture you’ll actually own and how much capital you’ll be investing, or is that still being finalized?

[Howard Lance:]

I’ll just say it’s under 20%, so we won’t be consolidating the results from the SIS business.

[Anil Wirasekara:]

Yes, it’ll be a non-influencing position, so we’ll be a minority shareholder.

[Thanos Moschopoulos:]

And then, Howard, you alluded to some of your traction on the legal front, and certainly we know about some of the projects that you’re involved in. Any updates there in terms of where – when some of those might move forward?

[Howard Lance:]

Nothing specific. I think, Thanos, as you well know, the whole industry is trying to figure out the demand and supply position going forward. There are multiple operators looking at additional LEO constellations or MEO constellations. In addition, we have customers looking at additional earth observation constellations, so there’s a lot of activity in the satellite market. It’s difficult to predict the exact timing of awards and whether those programs will go forward. But clearly as costs continue to come down for providing connectivity on a gigabits per second basis, it opens the door for satellites to play a major role in connecting business and consumers with each other. We are particularly interested in what 5G terrestrial connectivity will provide in terms of additional backhaul access for satellites. And certainly the LEO constellations with their lower latency, as discussed by a number of companies, offers a new potentially large opportunity for growth going forward. So I like our position. As you know, we’re supplying OneWeb all of the antenna systems for their constellation. We’ll be involved with others along the way as well.

[Thanos Moschopoulos:]

Great. And just one last one from me. What would be the expected timing of your NYSE listing?

[Howard Lance:]

We expect to do the listing concurrent with the closing of the merger.

[Operator:]

Your next question comes from Paul from Scotia Capital. Paul, please go ahead.

[Paul Steep:]

Howard, could you talk a little bit about surveillance in the near term? I – we’ve spent time on some of the bigger opportunities, but what’s been driving and supporting the strong numbers, the – printed in the current quarter? Maybe talk about the various segments of that, in particular as well geospatial, as to how that business is tracking.

[Howard Lance:]

Well principally, if you think about the elements, you have our government systems businesses in Canada in that segment. Those have been strong and stable for some time. You’ve got our Canadian and U.S. geospatial services businesses which especially on the U.S. front have been growing in recent quarters. And then you have the U.S. government segment, all the scientific spacecraft that we’ve booked to date are showing up in that segment. And then fourth, the Earth observation spacecraft which previously included smaller constellations for customers Terra Bella, now owned by Planet. But going forward will include the larger constellation from DigitalGlobe and other opportunities in the pipeline. So quite a vibrant list of activities are going on. And that diversification, we think, is a key view to the future with regard to what the company will look like. As we merge with DigitalGlobe, that diversification becomes even more broad. So I’m certainly not suggesting that the geo comp set market is not important. But going forward it becomes a smaller portion of the overall results of the company and as a result, I think, investors will view that diversification in a positive way.

[Paul Steep:]

One other follow-up on that. It may be related to your U.S. access plan and the buildup of your U.S. business development team. Could you give us an update as to how you see them progressing? I know we talked, maybe a couple quarters ago, that this is going to be a little bit longer path, but what sort of milestones we should be watching for in terms of their work and how they’re sort of addressing that new market?

[Howard Lance:]

Yes. For a while now we’ve talked about our, kind of, nominal target of getting that business to a CAD 500 million business within five years. And I think we’re on our way to that. As you think about backlog, growing and executing that backlog over a multiple year programs, we’ve got a good run right now. And we hope to build on that to the extent that we can talk about future RFIs or RFPs that come out, we’ll do that. One of our challenges is going to be that a lot of these programs are classified by the U.S. government and so we won’t be able to provide a lot of color around that, unfortunately. But we’ll do our best to try and talk about progress. I’m very pleased that we’ve built a solid team. This team has detailed and deep knowledge and understanding of the applications and credibility because many of our team came out of government, or industry serving government for many years. So we’re making progress. It’s showing up in the bookings, in the revenue growth that you’re seeing and surveillance and intelligence. And we’ll do our best to provide as much color around that as we can, going forward.

[Paul Steep:]

And then the last one from me. Could you talk a little bit about the WorldView Legion satellites in terms of the time line. I know it’s been broadly, sort of 2020, 2021. And maybe as well how should we think about that mix between GEO and LEO satellites, in terms of whatever you can help us out with there. Thank you.

[Howard Lance:]

Yes, I don’t believe, Paul, that DigitalGlobe has provided much color in that area. So I can’t say any more than they’ve said which is it’s a multiple satellite constellation. When on orbit it will more than double the high resolution capacity that they have currently on orbit. And I think that the other aspect of coming on is that together we’re going to take advantage of the scale economies, of producing satellites, the expertise that we have to drive down the capital cost per dollar of revenue. We talked about the combined capital cost of the companies over the next five years being in kind of the 10% to 11% of revenue range which would be much lower than the CapEx as a percent of revenue currently experienced by DigitalGlobe. So it’s one of the elements of the combination that we’re very excited about. I’m also very excited about the additional capacity, the user cases continue to build around the world for the application of these satellites. And they’re going to provide in 2020, 2021 a more on-orbit capacity to allow the business to grow.

[Operator:]

Thank you. Your next question is from Deepak from GMP Securities. Deepak please go ahead.

[Deepak Kaushal:]

I’ve got a three-part, maybe to dig deeper in some of the aspects of your organic business. First, on the space infrastructure services, satellite servicing initiative, Howard, maybe you can address what’s different this time? Maybe remind us, for satellite servicing, I think we had a false start several years ago. Now we have Intelsat saying yesterday that they want to do more mission extension. So what makes it different this time versus the false start we had a couple years ago?

[Howard Lance:]

I think there’s a couple of elements to it. One is the technology continues to mature. We’ve worked with NASA over the last several years and DARPA to complete a number of ground based demonstrations. That showed that the technology of being able to do these aspects in space is maturing. Second, the public/private partnership that is the foundation of RSGS has reduced the investment required by partnering with the U.S. government and making the returns more attractive to investors.

[Anil Wirasekara:]

And also the regulatory environment when you’re partnering – you’re having – being involved in a public/private partnership rather than doing it completely privately, and those are certainly two of the key obstacles that we had in the previous time that we decided to do that. One was the capital commitment, and secondly was all the regulatory environment.

[Deepak Kaushal:]

Okay. So from a customer perspective, no obstacle, the – nothing’s changed? They were ready to go before and they’re ready to go now?

[Howard Lance:]

Well I think they’re probably more ready to go now as there’s pressure on capital spending. The opportunity to defer capital by a year could be very significant for the customers. I think what’s also different here is with the combination of a partnership with DARPA. We’re much more likely to be able to be engaged with U.S. government in refueling missions and servicing missions going forward. So we’re very excited. The investors are very excited and I think I’ve been very encouraged by the number of high quality investors that have come to the table. And we’re very close to being in a position to close the financing, and book the order, and start working on the satellite.

[Deepak Kaushal:]

Second part on the imaging side. If I think back to – following on the Planet question. If I think back to Skybox Imaging when you guys built the original payloads, I believe there was some IP rights that were conferred to MDA. And then Skybox became Terra Bella, became Google, now it’s Planet. Do you guys still have some of that IP rights to put into your own earth observation satellites for other customers?

[Howard Lance:]

Well, Deepak, I could be mistaken, but I don’t think there is any real significant amount of IP transfer there. We’ve developed our own IP working not only on the Terra Bella but other earth observation satellites, and now we’ll work closely with DigitalGlobe. They’ve been designing earth observation satellites for 25 years, and the combination of our satellite experts and their earth observation and high resolution imaging experts I think is going to develop a lot of new IP together. But there wasn’t a significant amount transferred in the Terra Bella project.

[Deepak Kaushal:]

Okay. Great. And then – and then the final part, if I may, and thank you again for my – for the time, we had an update on the Canadian government’s space policy review in June. There was some mention of some long-term work as well, and they’re including the Navy. What do you see as some of the long-term opportunities with the Canadian government that have come out of that that perhaps U.S. investors might not be too familiar with?

[Howard Lance:]

Well I think there were – there were two or three. Certainly first of all is the Canadian surface combatant ship program. This is one of those programs that when we win our share of that work this is going to be a one to two decade kind of program for MDA. So I see that as certainly the most significant and we were very pleased, of course, to see that supported. I think space and situational awareness in general was highlighted in the report. We are very well positioned as the Legacy partner for the Canadian government, both the Canadian Space Agency and the Department of National Defense. So I think we’re very well positioned in the long run. We have to remember of course that these very large procurements take time and they go through long processes for consideration. But we’re very encouraged by the overall defense policy report. I think it was very positive as it relates to MDA’s future prospects. And I think give us a solid expectation for continued growth over the long run in our Canadian businesses which over the last five or six years, other than the RCM project, the funding has not been growing. So I’m cautiously optimistic based on what we saw in that policy report.

[Operator:]

Thank you. Your next question is from Tim from TD Securities. Tim, please go ahead.

[Tim James:]

Just looking at the Communications segment for a minute, the revenue in the second quarter was similar to Q1 levels and yet operating EBITDA margin at percentage declined fairly noticeably. Just wondering what the primary drivers were of the difference sequentially.

[Howard Lance:]

I’ll let Anil comment as well, but the bottom line, Tim, is that in any given quarter, there’s a lot going on with regard to these programs as it relates to percent completion accounting. If you have programs that are ending, for example, and being launched in a quarter you’re going to release the final amounts of any risk reserves that you have. In other quarters where you’re booking new programs, you may have it going the other direction. The mix of which satellites are in the factory, you know, I’d like to have the results be predictable like a service business. In this particular company, that’s just not the way it is. There are lots of factors going on. For example, you book new reserves, you release reserves for liquidated damages. You’ve got all of this going in both directions in any given quarter. So lots of things moving. You do your estimates at completion every quarter and then move around based on where you are in the program. So it’s going to be lumpy. I think it always has. We were discussing this yesterday and looking back over the last two or three years.

[Anil Wirasekara:]

And it’s always the case, Tim. We’ve always said that, you know, don’t compare this quarter-over-quarter. Look at it – if you look at it on a six-month basis, it’s so much more consistent six month over six month. If you look at it on an annual basis, it will be the same. Quarter-by-quarter, you’re going to have the fluctuations more so on the EBITDA side because of earned value reporting that is done unlike just revenue recognition. So I would caution you against just comparing it quarter-over-quarter and drawing any conclusions.

[Howard Lance:]

We've also set up the same thing as it relates to cash flow, that cash flow in many of these programs does not follow revenue. And so early in the program, typically you’re collecting more cash than you’re using because you’re in the engineering design phase. Toward the end of the programs, you’ve already collected all the cash but you’re still spending money for finalizing and launch. So it’s one of the challenges in a programs and capital driven business. This’ll be less of an issue – not totally zero – but much less of an issue at DigitalGlobe. They have much more predictable both EBITDA and cash flow, and so we’re – we believe that will help to mute this impact going forward on a consolidated basis.

[Tim James:]

So maybe just to confirm my thinking here on the margins related to this. The margins for two different satellites for SSL over the life of the revenue recognition would be – are all relatively comparable. The margin variation comes in sort of the timing of where SSL is in the build of those satellites, as you point out, towards the end of the build. Their provisions get released which helps margins versus the early part of the build. And so there isn’t a lot of variation between – or the margins from one satellite to the next?

[Howard Lance:]

No, I don’t think that’s true. Actually I’d say there’s a fairly robust range of margins from satellite to satellite. So it’s not – they’re not all the same. Over time I think what we’ve been quite proud of is our ability to maintain margins in a – in a – in a world of falling revenues. There aren’t too many industries that can accomplish that, so we’re pleased with our overall margin trends, even in the light of downward pressure on bookings and revenue. But there is certainly material differences in margins on given satellites based on the complexity, the size, the scale, the competitive nature at the procurement.

[Tim James:]

My second question, I’m just wondering if you could discuss the U.S. access plan strategy and kind of where we stand now? I’m just wondering, does the fact that recently announced wins that have ties to the U.S. government and which are unclassified mean that they shouldn’t be counted towards achieving that CAD 500 million opportunity, and that that opportunity remains incremental to the revenue that is in the company’s backlog today or will be by the end of the year?

[Howard Lance:]

No, I think that we – when I talk about CAD 500 million dollar opportunity going forward, I go back to kind of the beginning and would include all U.S. government programs, whether it’s a civil program with NASA, or a Department of Defense, or an intelligence community program. So I include all of that as opportunity. I wouldn’t have included kind of the base business we had in government services, but certainly in terms of SSL systems business, I would include all that.

[Tim James:]

So some of the wins that you’ve announced recently, then, could – we should think of as going towards achieving that CAD 500 million opportunity?

[Howard Lance:]

Yes, absolutely. We’re already all – we’re all on our way in terms of that with the bookings to date. I don’t know where our total bookings will be at the end of this year to date for SSL government systems, but it’s going to be pretty substantial when you include four or five major satellites.

[Anil Wirasekara:]

[Indiscernible], civilian agencies, they have classified components in there, and if you don’t have all your security clearances, leave alone not being able to build the spacecrafts, you can’t even participate in the bidding process.

[Operator:]

Thank you. Your next question is from Rob from Cormark Securities. Rob, please go ahead.

[Robert Peters:]

Just had a - maybe two questions and a clarification. Kind of my standard one here, I was hoping you could maybe just provide a breakdown of the backlog by Communications and S&I? But additionally, given that SSL is starting to work on more of these projects that are showing up in S&I for the U.S. government, I was wondering if you could maybe give us an understanding of how much of the total backlog work is being done at the SSL facilities?

[Howard Lance:]

Well in the latter question, virtually all the SSL backlog is being done in Palo Alto. In terms of the split, I’ll let Anil take that.

[Anil Wirasekara:]

It’s about 50-50 right now. But it can fluctuate violently depending on when these bookings get in the backlog. So the next quarter it could be 70-30.

[Howard Lance:]

And Rob, one of the things that we’re looking at with the pending merger is our future segmentation. We have realized that it’s perhaps a bit confusing that SSL volume is split up between the two segments and therefore it’s not always obvious that we’re winning orders that are filling the factory. They just aren’t GEO comp set orders. So going forward, we’re taking a look at how we’re going to report with the addition of DigitalGlobe and there’s more to come on that. But I tried this time to reemphasize that a good portion of the recent orders for SSL are going into the S&I backlog and show up in that revenue and earnings going forward.

[Robert Peters:]

Thanks, Howard. I think that’s certainly a good point. And maybe just to the clarification part. You mentioned that the Legion is now in the backlog. I was just wondering, given the timing of the press release, is that in Q3 release or was it actually present in Q2 backlog.

[Howard Lance:]

It’s in backlog as of June 30.

[Operator:]

Thank you. Your next question is from Richard from National Bank Financial. Richard, please go ahead.

[Richard Tse:]

Howard, obviously there’s a lot of innovation happening across the industry. Are there any changes with respect to how you approach R&D at MDA? It’s not clear from the financials the amount that you actually spend on the R&D. So would that, sort of, as a percentage of revenue be increasing, and what would it be sort of moving towards?

[Howard Lance:]

Yes. I’m not sure that I can answer the total percentage number. But it’s increasing. There’s no question across the company as we think about driving innovation, we’re going to need to spend a little more on R&D. The high through put GEO concepts, for example, are really breaking new ground in several areas in terms of the digitization of communications, as well as larger higher power capabilities which are driving [Audio Gap] but also we’re seeing opportunities to drive growth across our Canadian businesses and are making significant investments in innovation across Canada as evidenced by the LOI we’ve signed with Investment Quebec to support some of the investments we’re making in the Montreal facility. So I appreciate the question, and perhaps we’ll try and provide a little more color around the magnitude of R&D going forward. I think it’s a fair question for a technology company.

[Richard Tse:]

Okay. Thank you.

[Anil Wirasekara:]

I think in our year-end financials we give a pretty big description of what our – what our R&D is, because there is R&D that we meet all the accounting criteria of capitalizing which we have to, but in pretty much every single project that we do both in Canada and at SSL, there is a significant component of R&D that is written off as cost of sales. It just depends on what – how you define R&D.

[Howard Lance:]

Yes, I think the...

[Anil Wirasekara:]

Nonrecurring engineering going on in every program, right?

[Howard Lance:]

Yes, so I think of it in terms of R&D that’s program-related, and then kind of internal R&D which are investments to advance the technologies for future programs. And we’ll try and talk a little bit more about those going forward.

[Richard Tse:]

In your opening comments you talked about satellites coming to end of life, so I guess the expectation would be that there’s a building backlog. Is there a certain year here that the bulk of those operators have to make a move? I guess what I’m trying to get at here, is there a service swell of activity that could come in 2018, 2019. or 2020? Where would that sort of fall in terms of year-wise?

[Howard Lance:]

Yes, it’s not quite that precise. I mean, the satellites generally are designed for 15-year life. Some are replaced a little earlier, some go longer. But I think it’s fair to say that with the step down in the last couple of years in orders, that there is a growing stream of satellites that are going to need to be replaced. Typically that’s made up about half of the market looking back over the last 10 years. So I see that as the foundation that will allow the overall satellite orders to grow. At this point, we’ve started looking at 2018. We see it maybe a little bit stronger than 2017, but I wouldn’t want to call a big uptick at this point, but there’s a lot of pending demand for replacements that in this 2018, 2019, 2020 timeframe are absolutely going to be awarded and built. So the view and kind of clarity of the timing is always the difficult thing.

[Operator:]

Thank you. Your next question...

[Anil Wirasekara:]

Okay. We can do one more call, if there is time.

[Operator:]

Thank you. And the next question is from Stephanie from CIBC. Please go ahead.

[Stephanie Price:]

Thank you for squeezing me in. Howard, you mentioned earlier the investment by the government of Quebec. Can you talk about the investment, the Montreal facility, and the utilization there post-RCM?

[Howard Lance:]

Yes, the investment is what’s called I believe a venture loan. These are investments that Quebec government makes for technologies developed in the province which have potential growth but no guarantee. Depending on our success, we’ll either repay or not repay that loan through amortizing and royalties over time. I’d say that the Montreal facility is going through the same kinds of pressures that SSL does because it serves the geocom sat market. But increasingly they’re also now providing now antennas and subsystems for Earth observation and scientific spacecraft. But I’d say the utilization of those two factories probably follows one another relatively consistently. So it’s a little lower than it was a couple of years ago. But in both factories we flex our workforce especially as it relates to the manufacturing side.

[Stephanie Price:]

Great. Thank you. And then just following on Richard’s question, there’s obviously a lot of changes that are going on in the industry right now. Can you talk about what you see as the biggest near term opportunity for MDA, SSL and then longer term in terms of the satellite market?

[Howard Lance:]

Well, I don’t know that any one opportunity jumps out. Obviously the ability to close on the order that we’ve been selected for is very important. Just in terms of not only the scale but what it will allow us to do in driving some new technologies that we think will port well across lots of other proposals. We just remain focused on trying to be very, very close partners with our customers. And they’re going through a patch where they’re trying to figure out what’s the answer and I’m very pleased that they’ve engaged us more often than not to help them figure it out. But I don’t think of any one major catalyst there. I think that we will see the market gradually rebound. I don’t know that it will ever get back to 22 satellites a year. But as I said earlier, the question is less around numbers and from our standpoint, more around the dollars. So booking a CAD 500 million Canadian satellite is like booking about three of the average satellites. The quantity probably becomes less important. The capacity on an orbit is what’s going to be important. And I would say what happens with LEO is probably will make a difference from a standpoint if one or two other companies decided to invest in major LEO constellations and we’re involved in one of those as a prime. Obviously that would be a huge step up multi-year program. Because as you know, the life of the LEO satellites is much lower. So that’s kind of the way I look at it. Hopefully that’s added enough color to your question.

[Stephanie Price:]

That is helpful. Thank you, Howard.

[Howard Lance:]

Well, thank you very much for joining us this morning on the call. Have a good day.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. We thank you for participating and we ask that you please disconnect your lines.