Maxar Technologies Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good afternoon. My name is Leonie and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald, Dettwiler and Associates Limited 2016 Third Quarter Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 third 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 would now like to turn the call over to Mr. Howard Lance. Please go ahead.

[Howard Lance:]

Thank you very much. Good afternoon, ladies and gentlemen, and thank you for joining us today for MDA’s third quarter 2016 conference call. Joining me today is Anil Wirasekara, Executive Vice President and Chief Financial Officer. I’ll begin the call today by discussing some of the key business activities that have taken place since our second quarter report. And then Anil will review our financial results for the third quarter, of course, after that, we’ll open the line to answer your questions. In summary, Q3 was a solid quarter for MDA. Total backlog at the end of the quarter was $2.6 billion, slightly above both Q2 and the prior year quarter, in spite of a record number of satellite launches so for in 2016. In the Communications segment, first at SSL, three geo satellites were successfully launched and are performing on orbit as planned. In addition, one geo satellite launch days is being prepared. The launch is included Intelsat 36 satellite built for Intelsat operator, the world’s first globalized network. The satellite will be used to provide media and content distribution services for Africa and South Asia. JCSAT-16 satellite designed and built for Sky Perfect JSAT Corporation, a leading satellite operator based in Japan. Satellite will provide video distribution and data transfer communication services. Sky Master 2 is the second of two advanced satellites built for Australia’s National Broadband Network and nbn. This high throughput satellite will be used in conjunction with Sky Master 1 to provide high-speed broadband service across the Australian constant. And finally, JCSAT-15 from Sky Perfect JSAT Corporation was shipped in as arrived at the launch base in French Guiana. JCSAT-15 is planned for launch in December and will provide broadcasting and communication services in the Asia Pacific region. As a result, those satellites continued to provide outstanding on orbit performance. In 2015, we achieved a 99.998% availability rate across our fleet of more than 80 satellites. Bid and proposal activity remains at record levels across both GEO and LEO constellations. These include satellites for traditional high power white beam applications for direct-to-home video, video distribution, and private networks. But increasingly, satellite operators are also requesting proposals for high throughput satellites that utilize multiple two way spot beams for broadband and mobile services. Certainly, these satellites also utilize digital payloads for added operator flexibility, as the satellite has solutions across all of these application types. SSL launched its first high throughput satellites in 2005 and 2006 with IP Star and WildBlue 1, and as the leading market share of SDF satellites in orbit. Today’s advanced designs can reach from 250 to 500 to 750 gigabits per second, or even to 1 terabyte per second. We’re also focused on speed to market and lowering our cost to serve our customers more effectively. Our key initiatives for achieving these objects include standardization, optimized testing and automated design processes. We recently completed satellites for BRIsat in 23 months and Intelsat in 24 months. Order activity for the industry in total is at 12 GEO satellites year-to-date with four words to SSL. We now believe 2016 will likely be on par with 2015 at around 16 satellite orders for the industry. The overall market remains below historic averages for the second year. The satellite operators to lay awards to consider competing technologies and to assess regional excess capacity and their profitability issues. But we remain bullish on the long-term health of the satellite industry, where new orders will include. replacement satellites, as well as those to serve increasing customer demands. We continue to invest in next generation technology and capabilities to serve these markets. IP traffic across all applications is expected to grow at above a 20% compound annual rate well into the next decade. Applications using satellite services will also continue to grow. And we believe the industry will remain relevant for both commercial operators and governments. We anticipate 2017 or 2018 will see a market recovery as a result. Turning to the Surveillance and Intelligence segment, MDA systems at Richmond was awarded multiple contracts, including several that I would like to highlight. The Royal Canadian Navy awarded MDA a contract to continue development and expansion of their naval operations software solutions through 2021. MDA was originally awarded this contract in 1997, and has been upgrading, enhancing the capability for the Navy since that time. Navy personnel utilized this system on a 24/7 basis for command and control and military message distribution. The system allows Navy to manage dynamic location and status information of its vessels and personnel, as well as other vessels of interest to Canada’s Department of National Defense. The DND also exercised an option on Polar Epsilon 2, the broad area maritime surveillance system awarded to MDA in June of this year. Under this option, the company will provide advanced space-based Synthetic Aperture Radar capabilities using information from the new RADARSAT Constellation Mission. And MDA received another DND contract to establish repair, maintenance, and upgrade service facilities for the ViaSat Link 16 military communication terminals. These are currently deployed across Canada for the Department of National Defense applications. MDA has now completed production on all three of the RADARSAT Constellation Mission payloads, first spacecraft that has brought an integration of the first spacecraft is underway. The launch of the three satellite RCM Constellation is on schedule for 2018. MDA Robotics in Brampton was awarded a contract amendment with the Canadian Space Agency valued at $35 million. The amendment provides funding for continued support to the ongoing robotic operations of the mobile servicing system on the international space station. At SSL four SkySat Earth observation satellites were successfully launched for Terra Bella, a Google company, and are performing on orbit as planned. We continue to engage with multiple customers regarding new opportunities for next-generation Earth observation constellations. SSL currently has 16 LEO satellites in production. The MDA geospatial services business in Canada signed a contract with Orbital Insight, a geospatial Big Data company that provides advanced information solutions obtained by analyzing millions of satellite images at a time. RADARSAT 2 Synthetic Aperture Radar information will be integrated into Orbital Insight’s business intelligence services and products to enhance further their analytics capabilities. We also recently signed two contract amendments with two long-term RADARSAT 2 customers, who will use the RADARSAT information to do things like analyzing oil spills, illegal fishing, agriculture, forestry, disaster management, and the maritime safety applications. And finally, MDA Information Systems LLC looked over $28 million in geospatial information services contracts in the quarter with undisclosed U.S. government customers. During the quarter, we announced a number of key appointments and other actions related to the continued implementation of our U.S. access plan strategy. This included the establishment of the U.S. operating company and the appointment of two new U.S. directors. But it’s important for me to remind you that the leadership of our Canadian businesses remains in Canada in the hands of Canadian nationals. The new U.S. structure is required to allow access to SSL into U.S. government classified space programs, and this is the largest space market in the world. U.S. government proposal activity is at a record level. And future contributions from this business will support research and development, capital spending, and employment across all of MDA. We believe that a strong and growing MDA is good for our investors, our employees, and our commercial and government customers. And the U.S. space market offers significant growth opportunities for us. It’s also important to note the progress we’re making to further grow our Canada businesses. We restructured our Canadian and international sales organization over the past year and are now seeing increased effectiveness in winning new Canada government and international programs as a result. We remain encouraged by the active dialogue and activities surrounding the new Canadian government innovation agenda. We continue to encourage government to invest in the Canada space industry and its capabilities as a leading innovation engine for the country to drive new technologies, economic benefits, and future employment for highly skilled technology employees. That concludes my report. I’ll now ask Anil to report on our financial results.

[Anil Wirasekara:]

Thank you, Howard. Good afternoon, and welcome, everyone. As always, we appreciate you joining us today. I apologize for the change in the release date. In future, we will certainly avoid releasing our results on a late Friday afternoon. I’m once again pleased to report our operating results of the third quarter 2016. Consolidated revenues for the quarter were $496 million consistent with the previous quarter and down slightly compared to $515 million for the same period last year. We achieved operating earnings of $46 million, or $1.26 per share and operating EBITDA of $84 million. Operating earnings and operating EBITDA this quarter included a contract loss provision of $10 million on a program in the Surveillance and Intelligence segment. The program, which involves significant technology development work on a space robotic vehicle was undertaken on a firm fixed price basis. We consider this kind of an adjustment to be an isolated incident. Excluding the loss provision, operating EBITDA this quarter would have been $94 million resulting in overall margins of 19% compared to 18% in the third quarter last year. Operating earnings would have been $54 million and $1.48 per share on par with the same period of 2015. Third quarter net earnings and IFRS was $42 million compared to $55 million for the third quarter of 2015. We ended the third quarter with an order backlog of $2.6 billion, which increased slightly from the balance at the end of June. The amount that we had bought as order backlog includes only the value of firm funded orders. We do not include the value of unexercised contract options and unfunded purchase commitment under indefinite delivery, indefinite quantity contracts. The company remains on track to receive its required security clearances in the fourth quarter of 2016, as previously indicated. We have also started building out a government business development and management team with relevant experience and clearances to oversee the development of the strategic plan to access the U.S. market. The incremental expenses relating to pursing the U.S. market have been expensed, as incurred, and the costs are expected to continue to ramp up over the next few quarters, as we execute our plan. During this investment phase and until new awards are secured in this market, we expect operating EBITDA, corporate expenses, and operating earnings to continue to be negatively impacted. Let me review our third quarter results by segment. In the Communications segment, revenues this quarter were $355 million compared to $384 million for the same period in 2015. Revenues were negatively impacted by the lower number of satellite contracts awarded over the last 18 months and consequently by the lower number of active satellite programs in the higher revenue generating stage of the program cycle, as compared to a year ago. We expect this trend to continue for the next few quarters until satellite order intake levels return to near historical averages. Fourth quarter revenues will also be impacted by the recent failure of the SpaceX Falcon 9 rocket. A certain launches of our our satellites planned for the final months of 2016, we now be delayed into 2017. Operating EBITDA from the Communications segment was $58 million with margins raising to 16%. This is compared to operating EBITDA of $57 million with margins of 15% for the third quarter of 2015. In the Surveillance and Intelligence segment, we saw third quarter revenues rise to $141 million compared to $132 million for the same period in 2015. The increase was primarily due to the timing of certain subcontract activity on larger programs. Excluding the impact of the loss provision, operating EBITDA this quarter would have been $36 million with margins of 26%. This would have been comparable to operating EBITDA of $36 million and margins of 28% for the third quarter of 2015. I remind everyone that operating EBITDA and operating earnings on non-GAAP financial measures and the reconciliation to net earnings is provided in our latest MD&A. Now, let’s review our year-to-date results with comparisons to prior year. For the first mine months of 2016, consolidated revenues of $1.6 billion consistent with the same period of last year. Excluding the impact of the loss provision, operating EBITDA would have been $288 million compared to $282 million for the same period of 2015. Operating EBITDA margin was 18.4% consistent with the same period of last year. Year-to-date operating earnings of the loss provision was $159 million, or $4.36 per share compared to $166 million, or $4.58 per share for the same period last year. Year-to-date net earnings were $108 million compared to $137 million for the corresponding period of 2015, and that is under IFRS. Looking at our year-to-date results by segment, staring in the Communications segment, revenues were $1.1 billion consistent with the first nine months of 2015. Operating EBITDA was $174 million compared to $165 million for the same period last year. The year-to-date margin percent was 16%, which improved the margin percentages of 14% for the prior year period. The margin percent increase reflected the higher number of GEO satellite that was completed and launched in 2015, enabling the company to eliminate risks associated with construction and launch and recognized higher margins on completion. Also, the efficiency enhancement initiatives at Palo Alto manufacturing facility contributed to the margin increase. In the Surveillance and Intelligence segment, year-to-date revenues were $442 million compared to $418 million for the same period last year. Excluding the loss provision, operating EBITDA would have been $114 million with margins of 26%. This is compared to operating EBITDA of $117 million on margins of 28% for the first nine months of last year. Adjusted operating EBITDA margins was down slightly compared to last year, but well within the range of management’s expectation. The margin percentage can also vary from period-to-period with the change in mix of activities. Looking at our cash flows, we use $33 million in operating activities this quarter. However, on a year-to-date basis, we generate cash inflows of $57 million from operating activities. The timing and magnitude of working capital changes will always have an impact on the cash flows provided by operating activities, given our large portfolio of construction programs. Investment in working capital is critical to building up business and managing lead times in construction activities. We used $35 million in investment activity this quarter compared to only $14 million for the same period in 2015. For the year-to-date, we used $88 million compared to $44 million for the same period last year. The major investing activities this year included the purchase of property, plant and equipment of $32 million and the investment in new technologies and software of $57 million. In financing activities, we paid dividends of $13 million at the end of September, representing our quarterly dividend of $0.37 per common share. We have also declared a quarterly dividend of $0.37 payable at the end of December. During the quarter, we signed a US$400 million revolving securitization facility agreement with an international financial institution.Under terms of this agreement, we may offer to sell eligible orbital receivables discount at the phase value using prevailing market rates. On September 30, 2016, we made an initial drawdown under this facility for net proceeds of CAD$19 million. 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 September, total long-term debt net of cash balances was $905 million and our net bank to – our net debt to bank EBITDA ratio was 2.8. The unused capacity in our credit facility together with cash flows from operations provided us with adequate room to operate effectively and to pursue all our growth and investment strategies. 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 in our U.S. access plan. We are in a good financial position with ready access to capital markets and has the financial capability to continuing to deploy a balanced growth strategy to position the company for long-term success. That concludes my discussion. And I will hand it back to Howard.

[Howard Lance:]

Thank you, Anil. We’re now ready to respond your questions. Operator, please open the line.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from Thanos from BMO Capital Markets. Thanos, please go ahead.

[Thanos Moschopoulos:]

Hi, good afternoon. Given your…

[Howard Lance:]

Hi.

[Thanos Moschopoulos:]

Hi. Given your commentary regarding the lower level of commercial GEO order activity. Should we expect a decline in revenue and EBITDA in the Comm segment over the coming quarters, or is there enough in the backlog and in the pipeline and maybe in other areas, such as LEO that you should be able to keep the Comm segment revenue and EBITDA somewhat stable?

[Howard Lance:]

I think directionally it will be a flat, maybe slightly lower. It depends a lot on what happens, let’s say, over the period between now and April 1. There are a number of procurements that have now slipped late into this year. I think, you’ll recall than was last year, we booked a number of orders in Q4. So we could see some of that happening again this year, but more likely we’ll see them into Q1 next year. Certainly, the record number of launches compared with the new satellite orders are putting downward pressure on revenue in terms of our traditional Geo communications market.

[Thanos Moschopoulos:]

Okay. And then you mentioned revenue might be impacted in Q4 due to SpaceX, any way to quantify that at this point?

[Howard Lance:]

I don’t think it with a specific number. But it is impacting our revenue more than profitability, but there is some impact there as well. But in a case, where we may be I think for the launch, for example, going to have a big impact on revenue, but it’s a pass through. So, we’re certainly focused on revenue. But I think our real focus is maintaining adequate levels of EBITDA through this cycle. We’re seeing now the second-year in a row, where the market is below where it normally is. We think it’s going to spring back, I wish, I could call that recovery for you more precisely at this point, we’re saying 2017 or 2018, but we know that there is demand that’s starting to back up and we believe at some point that’s going to be released. So I think if we can maintain solid profitability through the bottom of the cycle, I think, we’ll see nice leverage on the way up, as we start growing again.

[Thanos Moschopoulos:]

Okay, I appreciate the color. Any update on the LEO side in terms of the activity you’re seeing there?

[Howard Lance:]

I think it continues to be from lots of sources existing satellite operators who are looking at entering the LEO constellations space and then a number of start ups, both in the Communications as well as the Earth observation area. So the good news is, I feel like, we’re getting the call from all of them to participate. And having said that it’s difficult to pack the timing especially on some of the larger constellation deployments, because it’s such a large capital expenditure on the part of the operators.

[Thanos Moschopoulos:]

Okay. I appreciate the color of that one.

[Operator:]

Thank you. Your next question comes from Steve from RBC Capital Market. Steve, please go ahead.

[Steve Arthur:]

Great, thank you. First I just want to follow up on Thanos’ question on 2017 a look. But just from a slightly different angle, I mean, you had a very good discussion on the U.S. access opportunities does seem an important driver for the longer-term growth. But looking at 2017, I realize you never really give specific guidance. But is there any way of quantifying the level of spend that you’re going to need to do to deploy these U.S. access initiatives, the management team and Board and so on? And then from a high-level, how should investors look at operating EBITDA next year from the core operating segments, and then separately from this new investment initiative?

[Howard Lance:]

I think, Steve, we’re going to have a lot more visibility on this once we finish this year. So I don’t think we’re going to make any specific comments regarding 2017 until the Q4 call, because a lot can happen between now and the end of February when we talk to you, that is material as it relates to next year. So it really not like the boxes in at this point. I’m optimistic on a lot of things that are going on. But the timing turning those proposals in the revenue and then some margin is more difficult to predict. We are starting to ramp up a team. So we have a sense of what we’re doing, but that’s really not finalized. So we just brought on Board and announced, I think it’s maybe two weeks ago, our business development head for the government business, Richard White. So until he gets on board and really assesses what he’s going to need, I just don’t want to be definitive today. And I understand you’d like a little more visibility on that, but at this point, we really don’t have any.

[Steve Arthur:]

Okay. No, that’s fair enough. I guess secondly there’s been lots of talk in the industry in recent conferences about the technology disruption and you touched on some of these items earlier, things like flexible payloads and ultra-high frequency satellites. It does seem like SSL is well-positioned for this longer-term, but maybe it’s causing some delays in the near-term. I guess is that the correct way to be thinking about it? And how do you see this playing out your market share and your market positioning both in the next couple of quarters and over the next couple of years?

[Anil Wirasekara:]

I think our market share has been very solid and I don’t see any reason that it won’t continue to be solid in the market-leading position. I think that we have solutions as you say and I commented in my remarks really across the whole landscape whether it’s HTS satellites or the more traditional high power wide BGS satellites. So I like our position. We continue to develop our own digital payload technology and are including that now in proposals. I think that – what we’re trying to do is to come at this from multiple ways, serve our traditional applications better through speed to market and improving testing procedures and so on. And then offering very innovative designs related to finding ways to provide higher throughput capability at a lower cost possible per gigabit. And the real question is what’s going to be the sweet spot based on the combination of customer demand and the price points they want to hit. So we’ve got a lot of work going on and I’m very pleased. I feel like we’re engaging across the industry even with many customers that we have not sold satellites to recently. So I find that a very encouraging. But in the end, the higher the throughput, the higher the price tag. And so I think that’s what’s causing a lot of the pause is the CapEx requirement for a very high throughput satellite at a time where in certain regions there’s excess capacity and pressure on prices and operator profitability. They’re trying to figure this out. Buying a satellite today they’re going to launch in three or four years and that have about for 15 years they need also good crystal ball. And so I don’t think it’s unusual that you kind of see some pause. But the bottom line is I don’t see SSL being disadvantaged, I think we’re in a very strong position and expect us to remain there.

[Steve Arthur:]

Good color. Thank you. And one final question, just on the loss provision. I don’t recall seeing it like this in many years of watching MDA. Any further color on the nature of the problem or any risk that it shows up in other programs? And I guess looking ahead any chance of further charges related to this specific program or on the other hand possibly reversal?

[Anil Wirasekara:]

We hope that we can resolve this and have a reversal. We get -- always driven maybe know what to do that. Yes – and Tim as you said we have never had this before, this is an isolated incident, very complicated program that we had that’s taken off on a fixed price basis. We recently did a complete scrub of the program, had a new team look at it, new engineering estimate and we felt it was prudent for us to take the $10 million provision on this program. Having said that, of course, we have several occasional plans that we are all working on and we’ll continue to work on. And hopefully we can have this thing resolved. We don’t believe the day the systemic programmatic problems within the organization at all. This was just an isolated incident on a very, very difficult and very complicated program.

[Howard Lance:]

Anil tells me that in 20 years we would not have this kind of charge and my hope is we jumped to the next 20 years, obviously, there are no guarantees. We as a company are really very, very good at managing fixed-price production programs. It’s really what we do across the communications, and surveillance, and intelligence. This one got out of hand. And it got out of hand looking backward with 2020 hindsight because we didn’t fully understand the requirements. We didn’t hold the scope of the program in place and we didn’t identify there was an issue early enough in the program to deal with it. So lots of lessons learned here. Obviously, we’ve done a considerable review across the MDA programs as a result of this, nothing comes to this level of being an anomaly as I call it at this point.

[Steve Arthur:]

Okay. Thank you.

[Operator:]

Thank you. Your next question comes from Paul from Scotia capital. Paul please go ahead.

[Paul Steep:]

Great, thanks. Howard, could you maybe talk a little bit based on your experience on how we should think about the pipeline build in the business development outlook for the U.S. security market and satellite industry? And also as you talk about it, can you talk about what the size of pursuit team would be that you would need relative to the business MDAs historically been running?

[Howard Lance:]

Sure, I’ll get that a shot. First of all, you develop an opportunity funnel where the key to in the long run to winning U.S. government programs is starting early. That’s not really any different than what we do with the Canada government programs. They’re just a little larger and a little longer in their term. So we’re going to be getting into think of it as the stream of program and Rich and his team are going to be initially looking at developing a funnel. Again, remember we haven’t had any clear personnel outside of the proxy company up until now. So until we lift this veil and look inside we really don’t know exactly what’s in there relative to how many pursuits are there that we can immediately jump on. What we do know is we’ve got good progress with our work in the unclassified space with NASA and DARPA, The Defense Advanced Research Programs Agency. And so we have some large proposals that have been submitted and we’re hopeful that that will win some of those in the meantime. But as we go forward we’ll try and be, I would say, reasonably transparent where it’s possible and talking about how this pipeline is getting built up, because ultimately I think you need to get a sense of what’s in the pipeline, how is it moving through the pipeline well before you’re going to see it in an announced award. So we’re getting started in that and that’s what makes it difficult for us to have too much specificity around the revenue contribution from this in 2017. Most of that, we think, is going to be dependent upon proposals we’ve already submitted in the unclassified world. That doesn’t mean that we might not win some studies and technology White papers, but in terms of large production programs, I wouldn’t look for that in 2017 in the classified market.

[Paul Steep:]

Okay. Sorry, just to close off and so another way to maybe try to get a handle on the level of investment you’re going to be making. Should we think of these pursuit teams as materially larger than the teams at MDA would’ve been running historically and a much larger breadth of team that you need to bring in terms of scaling up for cost for next year?

[Howard Lance:]

Yes, so, Paul, the cost is not as much around business development customer facing people. It’s around the bid and proposal people at SSL that have to back this up. And, yes, generally speaking, because the programs are larger, more complex, the cost per dollar of pursuit is probably a little larger than it would be for many of the Canadian government programs. And again over time as we have a little more visibility we’ll try and help quantify that. Some of these costs you’ll see going up into the operating EBITDA line because they are directly related to operations. Some of the structural things we’ve had to deal with the organizational structure and security provisions with regard to meeting the requirements of the security control agreement will show up in the corporate overhead expense line. So you’ll see the cost in places and you started to see that even this year if you look through three quarters. I think we’re up about $4 million year-over-year in that corporate expense line. So that’s going to potentially cause a little deviation between our results on an operating EBITDA basis and on an operating EPS basis. So something that Anil will be talking more about going forward. I think, we have really good disclosure because we do call out that corporate overhead expense line

[Paul Steep:]

Great. And the last one for me, clearly, you’ve got your hands formed you’re extremely busy. But if we think forward when you first came on Board, you talked a little bit about judicious use of M&A as a potential means of accelerating this strategy. How should we think about that in the context of what you’ve got going on right now? Is that a top of mind idea, where you’re looking to build out new capabilities and service lines, or is this something that’s strategically further down the path into 2017 or 2018?

[Howard Lance:]

I would describe it right now as opportunistic, not something that we’re seeking out.

[Paul Steep:]

Okay.

[Howard Lance:]

I think we have plenty of things going on organically. But from time to time, opportunities pass by the window that seem like a good fit and we’re going to take a look, but it’s not something we’re out actively seeking, I think, that will come more in 2017, as we start to do more work around strategy, we’re going to be, as I talked about previously, really looking across the portfolio in the company and assessing strategy and strategic position in each of our lines of business. Our new Head of Corporate Strategy, where Stephenson is going to be leading that. He comes out of not only Bain & Company, a consulting group. For the last 16 years, he spent his first 10 years as a U.S. Air Force officer dealing with space, and for the ongoing time in the Air Force Reserves at the Pentagon and working with the head around space policy. So he’s an ideal person with both his strategic background and his U.S. government background help give us a chance with working with existing. There’s a team here to really take a good look strategically across the company. And I think over the next six months, as we do that, that’s going to inform us as to where we might want to go and look, and rather do that first rather than go out and just be totally tactical about what might be available, what might look cheap or whatever. Does that make sense?

[Paul Steep:]

That makes perfect sense. Thanks very much for the color.

[Howard Lance:]

Okay.

[Operator:]

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

[Richard Tse:]

Yes, thank you. Howard, I understand that you can’t give us a sense for the revenue contribution from addressing these sensitive deals. But could you give us maybe a rough idea on the size of that addressable market that you’re trying to pursue just so we can have some context?

[Howard Lance:]

Well, that’s a little bit of a tough number because it’s how you define it, but it’s – we certainly talk in terms of numbers that we think are addressable well in excess of US$5 billion. So it’s a big – it’s a very big number. And depending on where – what it includes, how many services, how much of that is hardware and how much of that is technology investment, that’s what we need to learn more about. A lot of this is called out in the U.S. Federal Budget. A lot of it is black and isn’t called out. So when I first joined, I think I talked about an aspirational number that might be worth achieving of something like $500 million in our Canadian dollars of revenue. I still think after six months, if that is a reasonable goal to put out there. We’re not bound by it, but it’s a big enough number that makes sort of interest and it would certainly be a major contributor to the company based on our current revenue.

[Richard Tse:]

Okay. And I guess sort of related to Paul’s question, can you give us a sense of what your headcount is today and what that target headcount would be to get to that point?

[Howard Lance:]

I can certainly tell you, you’re talking specifically, Richard, around U.S. government pursuit, right?

[Richard Tse:]

Yes, or you can sort of give me the numbers for the entire company as well they are?

[Howard Lance:]

Yes, I wouldn’t really want to talk specifically about headcount until Boeing Lockheed exactly what we’re doing. What I can tell you is, this is not hundreds of employees. This is a beachhead of business development people in Washington D.C. in a few other locations backed up by the existing advanced technology and bided proposal people in SSL. So it’s really less about adding a lot of people and it’s more about redeploying some of the talent we already have who have currently been working on commercial pursuits. There will be a net headcount increase, but I wouldn’t want to comment on a specific number at this point. Once we do that and they’re out there something we could perhaps address on a future call.

[Richard Tse:]

Okay. And just one last one for me, you said in your comment that some prospective customers are valuing new technologies. I was wondering you can give us a sense of some of the more notable technologies that may be sort of causing those delays here?

[Howard Lance:]

Well, I think certainly one of the major ones is the whole, let’s say concept of high throughput satellites. And what is the sweet spot in terms of capacity compared to upfront cost. We’re doing lots of analysis for lots of customers across that whole spectrum that I talked about from 200 gigabytes per second up to 750, or even a terabyte. And so I think all of them are trying to figure out what is the profile that they’re going to need in their various markets in order to strike the right balance between the upright CapEx and the ongoing pricing points that they need to need to provide those services profitably. And I think to a lesser extent, some subset of these satellites want to utilize a digital payload, which allows more operator flexibility over time, if they’re not sure exactly what they want to use it for. But that’s in the minority of cases, certainly not all of them. So I think that’s kind of how we view it in terms of the discussions that are going on, as technology continues to evolve and as the market evolves.

[Richard Tse:]

Okay, that’s great. Thank you.

[Operator:]

Thank you. Your next question comes from Robert from Credit Suisse. Robert, please go ahead.

[Robert Peters:]

Thanks very much. Just wanted to kind of touch on Communication margins. I know part of that is kind of the winding down or delivery of some of these recent satellites. But I think you’ve demonstrated strong ability to take out costs. I’m wondering how we should think about the sensitivity of the margins going forward, as we see the top line pressure? It seems to me, Howard, given your comments, it’s – you think there’s ability to control costs going forward?

[Howard Lance:]

Well, I – certainly, that’s our number one objective. We’re working very hard – as hard as we’re working on winning new business. We’re working to make sure we have good profitable new business. And I just want to compliment the whole team, this is a team that has built these satellites and leading market position with the kind of availability that we’re talking about and they’ve continued to do that. We’re finding ways to take out process – processes and value engineer, the products. And I think it’s a very impressive undertaking. And I think that, our goal is not only to be a market leading on the top line, but also to be market leading on the bottom line. That that agility and capability is what’s going to give us, I believe, a leg up, as we move into the U.S. government market, where costs are more important than ever as their budgets have gotten compressed. So I think what is an advantage today for us in the commercial world becomes an advantage tomorrow in the government world.

[Robert Peters:]

Thank you. And maybe just, we’ve seen two years now, where we’ve kind of had softer awards. And just maybe wondering if you can kind of contrast, I know, you were here at a time, but maybe contrast kind of where MDA is as a company now versus next year? I mean, I think we’ve got the bigger pictures about the U.S. government opportunity. But I was wondering if there’s anything else on the S&I side and maybe on the LEO side that we should kind of be thinking about to maybe contrasts 2016 with 2015?

[Howard Lance:]

Well, I think overall you’re going to see us taking a conservative view based on what we know today, which is we do expect to see the commercial market rebound. The question is when? And we still have another good year of the RCM contributing, but it’s not contributing at quite the same levels. So I talked about how we’ve worked hard to build the business in behind that smaller programs, but there are multiple ones and that’s working pretty well. But at the same time, we’re working with the Canadian government to advocate follow-on programs. So I think those – the combination of all of that, I think, gives us upside, as we look at 2017 a lot more upside, as we look at 2018, but I think causes us to still remain relatively conservative in the next few quarters, because we certainly have more headwinds and tailwinds from the markets, and we’re working hard to counter that on the cost side. But volume and revenue does matter when it comes to trying to maintain all of your margins, especially when you’re investing at exactly the same time to try and ramp up in the U.S. government market. So we do have a little bit of a confluence of the headwinds in the market in the near-term. But I remain very optimistic about the upside in the longer-term and think we’re extremely well-positioned, as we go through this cycle.

[Robert Peters:]

Great. Thank you very much. And just a quick accounting question for Anil, can you give us the breakdown of the backlog between S&I communications?

[Anil Wirasekara:]

That’s about75, 25 like the same as we have been pretty much in the past quarters. We move between 72 and 77 on the comp side depending on of these bookings. So I mean, there’s no material change.

[Robert Peters:]

Great, thank you. I’ll pass the line.

[Anil Wirasekara:]

Thank you.

[Howard Lance:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from Deepak from GMP Securities. Deepak, please go ahead.

[Deepak Kaushal:]

Hi, good evening, guys. Thanks for taking my questions. I had a question about cash flow understanding that the commercial satellite business is working capital intensive, we’ve seen a substantial amount of working capital investment over the past four years. But with deliveries exceeding orders in recent quarters and expected over the next several quarters, what should we expect in terms of cash from operations coming out of that business over the next 12 to 18 months?

[Anil Wirasekara:]

Yes, I mean for the most part, we would expect – we are expecting cash flow from operations to be positive. For the first time, I think, in the last eight quarters or 12 quarters, our current assets exceeded current liabilities, and we have part of that problem was that when we acquired SSL way back in 2013, they had a $250 million to $300 million deferred revenue position, and we had to work through that and flush that through the system. We’re through with most of those with a final delivery of the nbn pro Sky Muster satellite. And this quarter, we were $25 million to $30 million positive and we hope to build on that momentum certainly going forward. This quarter, we had a significant amount tied up in receivables, that was a timing, it’s a more or less of timing issue. We have since collected almost 75% of all those receivables in the last 30 days. So yes, we’re very conscious about the amount that we’re investing in working capital and hopefully we can dump this thing around.

[Deepak Kaushal:]

So do you guys have a target conversion rate of operating EBITDA to cash from ops that you could share with us?

[Howard Lance:]

Yes, I don’t think specifically, but I would tell you that I read your investment notes and we too are not satisfied with our conversion rate, and we are placing a lot more emphasis on this going forward than we have been. So I think some of the structural headwinds are behind us, and you should look forward to improve. If it doesn’t, there’s going to be specific reasons why not, but we are expecting it to improve going forward.

[Deepak Kaushal:]

Okay, thanks. And just a quick follow-up last question, if I may. I know, Howard, you mention there’s a lot that happened between now and giving an outlook more Falcon outlook for 2017. But broadly speaking, if we’re looking at a slowdown in the geo satellite market over the next 12 to 18 months, and you have a pipeline of bid outstanding in the non-cost side government market. Is it conceivable that that could exceed or fill in that hole in the geo satellite market side and we could see healthy growth in 2017, or is it something we should expect in investors?

[Howard Lance:]

I wouldn’t expect that in the near-term. I would expect that certainly as we did in 2018 and beyond, I think 2017 top line is going to be challenged. That doesn’t mean that it won’t be flat, or it will be down, but it’s going to be challenged by all the headwinds that I talked about. The question is going to be what can we do on the bottom line, excuse me, to serve as a dampening force in some of the decline, but we’re certainly under top line pressure.

[Deepak Kaushal:]

Okay. Thanks. I appreciate the extra color on that offline.

[Howard Lance:]

The other thing to keep in mind is, I’m fairly bullish on our ability to go win some new orders. And so we might see backlog growing, but the U.S. government programs are typically, at least, as long – sometimes longer than our commercial programs. So the ability to convert all of this orders into revenue – from programs revenue does take time, so that’s the other factor to keep in mind.

[Operator:]

Thank you. There are no further questions at this time. Please proceed.

[Howard Lance:]

Okay, operator, thank you very much. I want to thank everyone for listening and we look forward to talking to you next quarter, and good day.

[Operator:]

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