Maxar Technologies Inc.
Q2 2010 Earnings Call Transcript

Published: 1 Aug 2010

[Operator:]

Good afternoon. My name is Christine, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the MacDonald, Dettwiler and Associates Limited Q2 2010 Earnings Conference Call. 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) Thank you. This conference call and webcast, which includes a business update, second quarter 2010 results, and question-and-answer session contains certain forward-looking statements and information, which reflect the current view of MacDonald, Dettwiler and Associates Limited, MDA, with respect to future events and financial performance. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, anticipate, plan, foresee, believe, or continue, or the negatives of such terms or variations of them or similar terminology. Any such forward-looking statements are based on MDA’s current expectations, estimates, projections, and assumptions made in light of its experience and perception of historical trends. Any such forward-looking statements are subject to risks and uncertainties, and MDA’s actual results of operations could differ materially from historical results or current expectations. You are referred to the risk factors described in MDA’s most recent annual management’s discussion and analysis, annual information form, and other documents on file with the Canadian Securities Regulatory authorities available online at www.sedar.com or www.mdacorporation.com. The forward-looking statements and information contained in this earnings release and the associated conference call and webcast represent MDA’s views only as of today’s date. MDA disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, other than as required by law, rule, or regulation. You should not place undue reliance on forward-looking statements. Mr. Friedmann, you may begin your conference.

[Daniel Friedmann:]

Thank you. Good afternoon, ladies and gentlemen. And thank you for joining us today for MDA’s second quarter 2010 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I will be discussing some of the key business events that have taken place in the past months, Anil will review our financial results for the second quarter and during both of these discussions, we’ll be referring to additional material that is available for viewing on MDA’s website in the Investor tab. We will be referring to the slide numbers on the lower left when we talk about them. After that, we will open the line to answer your questions. In the surveillance and intelligence sector, MDA continued to make progress on the design phase of the RADARSAT Constellation Mission. Slide number three in the Investor tab on our website shows an image of the RADARSAT Constellation. On the left-hand side you see a model of the satellite and we’ve put a person there so you can get an idea of scale, there’s three of them and on the right-hand side, you see the ground segment. In addition to being the prime contractor for the overall mission, MDA is adding value by building the main payload of the mission with actually images to ground and the ground segment. The recent passing of the government’s omnibus budget bill has solidified the funding for the mission. However, the government is still currently authorizing the work one step at a time and has so far authorized us to proceed until the end of November and those are the numbers that are included in our backlog. MDA signed a multimillion dollar contract with a leading provider of satellite services in Europe to provide RADARSAT-2 ground information solution together with data rights for the European Union. The solution will be used to support a variety of maritime and land surveillance application. The company also received its first sizeable order of $3.8 million for RADARSAT-2 information and its new overall purchase agreement with the United States Government. MDA’s unmanned aerial vehicle services business continues to perform well with increasing surveillance hours logged in this past quarter. Our Canadian customer has exercised its first option to extend operation through June 2010, and our Australian customer has also exercised its first one-year extension option to extend operations through the end of 2011. That was June 2011 for Canada also. Slide number four in the material shows a few shots of a UAV service currently operating. On the left-hand side you see the typical ground control station where you pilot the UAV and you also receive the information and on the top right you see the actual UAV with all the sensors, and on the bottom right a sample image. You have to understand that the sample image is taken from very high altitude and nobody knows that it’s being taken. MDA continues to build and enhance its U.S. operation so that we can perform larger volumes and variety of confidential work. The company was awarded several contracts from confidential customers for technology solutions in support of the U.S. national security programs. MDA was also awarded a service contract worth over $8 million to provide geographic information to the Kingdom of Saudi Arabia. The information will support the activity of land ownership maps for the overall country as well as advanced city planning activities for utilities and municipal services. Moving on to the advanced technology sector, in the communications area, MDA received its initial payment due under the $254 million U.S. contract for the provision of the communication satellite system to the National Space Agency of the Ukraine. The contract is to deliver an operational geostationary communication satellite to provide direct broadcasts, television and high-speed Internet access to the Ukraine and surrounding areas. Work has commenced and the contract value is now in backlog. However, this happened after the quarter closed and therefore, was not included in the quarterly numbers. Slide number five in the information tab contains a picture of what the satellite will look like and a little stick man beside it so you can get an idea of the scale, how enormous this satellite is when unfolded, of course, in orbit. When we launch it, it’s all folded up. Once again, we’re the prime contractor. There’s a major value added and we build the smart -- the whole communication payload, all those antennas you see hanging from it, all the electronics inside that big box in the middle and that’s our main value added. MDA has signed contracts to provide EADS Astrium and Orbital Sciences with advanced technology solutions for communication satellites. These satellites will primarily serve Europe, Africa and the Middle East markets, delivering additional capacity as well as next generation broadcast and internet services. In the advance technology sector for space exploration, the company achieved several milestones. The company’s enhanced platform for the Dextre robot on the space station, together with critical communication system components were delivered to space station. Space station operation, using the various MDA robots and components is expected to continue through 2020. MDA’s work on the next generation technologies and prototypes for international space exploration and for on-orbit servicing continue to progress well. The company received a $4 million contract amendment to its $46 million contract with the Canadian Space Agency. In addition, MDA is on all three teams that want strategic contracts to develop the advance technology concepts for NASA’s New Frontiers Program. The program objective is to launch a new series of planetary science investigations. The NASA contract is to conduct initial studies for deep space exploration mission in the 2014 to ‘16 time frame. Following the 12-month studies, one of the three teams and we’re on all three, is expected to be selected by NASA to proceed. In the area of on-orbit satellite servicing, MDA continues to engage in discussions with potential commercial clients. If the company is able to obtain advance purchase commitments, the development of the service will proceed. If the company is unable to obtain acceptable commitments, the service business plan will be suspended and the company will switch its focus to system opportunities, something which we should be able to determine in the next couple of months. Moving on to the financial services sector in North America. Our sizable property insurance information business continued to perform well. MDA entered into a strategic partnership agreement with Vertafore, a leading provider of information to insurance distribution channels. Under this agreement, MDA will provide insurance agents who use Vertafore system with the ability to automatically pre-fill the necessary data elements in preparing the request for home insurance quotations from multiple insurance carriers using property data elements from MDA’s vast proprietary information warehouse. This agreement adds value to Vertafore’s client by enabling them to conduct a much more seamless interview process with the homeowner. MDA also introduced contents estimating to commercial property underwriters, so they can better understand their exposure to contents damages. The new contents estimating solution works to ensure a more accurate evaluation of the contents and therefore, the premiums that more closely reflect the risk to be underwritten. In the mortgage lending information business in North America, the overall mortgage market continues to be soft, however, based on its strong delivery performance, MDA’s businesses with key customers remains steady. In addition, MDA signed an agreement to deliver its automated decision solution to a major provider of finance and lending solutions to the Canadian and U.S. banks. In British Columbia, BC OnLine business related to land titles and tax certificates grew. The latter as more and more municipalities are opting for the convenience of BC OnLine’s electronic delivery of tax certificates. Recently the company began piloting one of its new property-related products. This product allows the electronic exchange of strata-related information between property managers, real estate agents, lawyers and lawyers. Timely delivery of strata information is critical to the conveyance process. Looking now at the financial services sector in the United Kingdom and Ireland. In England and Wales, the number of residential housing construction continues at a relatively low level despite improved lending availability. The mandatory requirement for HIPs was suspended on May 21st, pending legislation for a permanent solution. This means that obtaining a HIP is no longer mandatory when a homeowner puts the home on the market. The company had anticipated this announcement for many months and its installation plan has now been executed. The termination of HIP has the following impacts. HIPs transactions have stopped. Some of the HIP specific assets have been written down. All personal searches sold to HIP manufacturers, including ourselves have stopped. For the next several months, some of the searches in the HIPs produced prior to the suspension are expected to be used for closing purposes, temporarily depressing the sale of new closing searches. Endless channel searches, which are predominantly driven by closing activity increased slightly to 3,200 per week, compared to 3,100 per week as of last report. Personal search volumes declined dramatically to 250 per week, from 2,400 per week as a result of the HIP situation. Once the search is embedded and the pre-suspension HIPs have worked their way through the system, one can expect search activity to pick up again for both endless and personal searches. Furthermore, as the comparison again becomes the main buyer of searches, we can expect an increased demand for quality and accuracy which are MDA hallmarks. Looking at our growth initiatives in the U.K., MDA progressed in a number of areas. In the area of services to the commercial property information market, MDA launched a service, provided a partnership with a U.K. Land Registry. Based on multiple data sources, MDA offers commercial property developers and other stakeholders ongoing electronic access to a complete suite of property-related information and tools covering all the individual properties in a commercial development area. The company has now signed up a major commercial law firm and its commercial client in England for the specific large development project with a duration of 15 years. Commercial searches have become one of our main products in the last year and a half. MDA enhanced its fraud-related services, enabling U.K. lawyers to interrogate global databases from one internet location to help reduce the risk from fraud. MDA also launched a service to allow lenders to mitigate risk by creating a panel of pre-qualified professional service suppliers, solicitors, surveyors and so on, and manage them over the internet. Lenders will be able to track all work undertaking and bring improved third-party oversight to the property transaction process, as well as, obtain better management information, all on the MDA website. Finishing with Scotland and Ireland, the market remains soft to down, however, operations continue to be profitable. That concludes MDA’s operational highlights since the last report. I will now ask Anil to report on our financial results. Anil?

[Anil Wirasekara:]

Thank you, Dan, and good afternoon, ladies and gentlemen. I hope you have been able to download the slides that Dan referred to from our website. I will be referring to the financial section of the slides starting from page seven, while I discuss our financial results for the quarter. If you have not downloaded these slides, please do so now from the Investor tab on our website, www.mdacorporation.com. During the second quarter of this year, 2010, our overall operations continued to perform at a very high level, with solid operating results from all our businesses. Very strong results from our Information Systems business and consistently solid performances from our geospatial and property insurance businesses have contributed to a record quarter in operating earnings. Our backlog and our bookings pipeline today is at an all-time high and our cash flow, liquidity and balance sheet extremely healthy. I would now like to discuss some of the key financial data for the second quarter 2010 commencing on page seven of the slides, the second quarter financial update. I would firstly like to clarify and explain the headline columns starting from left to right on page seven. The first column is our reported Q2 2010 actual financial step -- financial data. The second column is the normalized Q2 2009 financial data and that is so that you could make a correct and accurate comparison of quarter-over-quarter data between second quarter 2009 and second quarter 2010. Moving from, once again, from left to right, the first row of the shaded or first column of the shaded area gives the first adjustment that we have made and this is for end currency translation. This is translating all our foreign operations into Canadian dollars. These are translation gains and losses that we have adjusted for, so that you could have a correct and accurate comparison. The second column in the shaded area is the gross versus net adjustment that has been made to some of our products in BC OnLine and the exit to business, so that the revenues would be compatible quarter-over-quarter. And the third column, if you remember, was the one-time tax credit that we got on the settlement of the tax dispute with revenue Canada on the investment tax credit for our SBDM program, which we booked in the second quarter of last year. And finally, on the extreme right, is the reported result for the second quarter 2009. So we start with the reported results in the extreme right, you make those adjustments, then you get the normalized Q2 2009 and that is compared to the reported Q2 2010. Starting with the Information Systems business, the Information Systems revenue for the second quarter was $141 million, compared to $100.5 million in the normalized Q2 for 2009. The $100.5 includes a $0.9 million adjustment for translation of foreign operations. Information Products for the quarter was $117.4 million, compared to $113.3 for the second quarter of 2009. And here we have two adjustments, $17 million for foreign currency translation, and once again, these are translation adjustments, not cash flow adjustments, and $14 million to adjust for the revenues on between gross and net for exit to, as well as for BC OnLine, so $117 million -- $117.4 for information products for 2010 second quarter and $113.3 for 2009 second quarter for information products. Total consolidated revenue for the year, $258.4 million second quarter 2010 versus $213.8 normalized second quarter 2009. Our operating EBITDA, systems, $32.7 million for the quarter, compared to $21.1 million for the second quarter of 2009. Information products, $28.1 million for the quarter, compared to $22.1 for the second quarter of 2009. And as you can see, the second quarter of 2009 we had $2.4 million foreign currency translation, adjustments, so that, once again, you can make a proper comparison quarter-over-quarter. For a total operating EBITDA for the company for the second quarter of $60.8 million for Q2 2010, compared to $46.2 for Q2 2009. Operating earnings is $34.1 million for Q2 2010, compared to $22.4 million for Q2 2009 and once again you had the foreign currency translation of $1.5 million and the SR&ED tax adjustment of $4.9 million to bring it down from the $28.8 to $22.4, which is the normalized number so that you could make that comparison. The next line we have items affecting compatibility, $6.6 million this quarter. The majority of that $6.6 million is the mark-to-market adjustments on most -- on some of our foreign currency hedges. Two in particular, these are the hedges, the foreign currency hedges that we have in place for the two large Russian contracts and the foreign currency hedges that we have for the Ukraine. Both these -- both the cash flows are fully hedged. We don’t get hedge accounting for these two contracts, so we’ve got to mark-to-market all the forward contracts. When you mark-to-market these forward contracts, you take a -- we took a loss for a mark-to-market loss and that loss will reverse itself out in the next two to three years as we complete the program. These are not cash losses. These are just accounting losses. You take the loss now and then it gets readjusted over the term of the contract. The other adjustment of any materiality is, as Dan mentioned, we, once HIP was canceled, we wrote-off $2.1 million of equipment that we had related to HIP and another $600,000 that was related to restructuring and stock severance payments that we have made to get out of that HIPs business. Those are the two main items that we had to adjust for in order to make a comparison quarter-over-quarter and get to our net earnings number. Net operating earnings number of $27.5 million was $18.9 million normalized Q2 for 2009, giving us an operating earnings per share of $0.83 for this quarter, compared to a normalized Q2 2009 of $0.55 and once you adjust for the foreign exchange and the SR&ED program of $0.04 and $0.12, you get to our reported number for 2002 of $0.71. The next number is our GAAP number. Our GAAP number for this quarter was $0.67. And the normalized GAAP number for the second quarter of 2009 was $0.46. Once you make all these other adjustments, the reported number for Q2 2009 was $0.62. Going to the next page, which is page eight of our slides, is our segmented revenue and operating EBITDA. And this is in home currency where we report the four segments in the home currency so that foreign currency and foreign exchange transactions don’t distort the numbers. Starting off with property information for Europe, this is reported in Great Britain pounds, revenue, the adjusted revenue, this is adjusting after adjusting for gross versus net, Q2 2010 was 27.1 million, Q2 2009 was 30.3 million. The difference of 3.2 million was purely due to the downside in shutting down HIP in the early part of June this year. On operating EBITDA, we had 2.1 million this year compared to 1.6 million in the second quarter of 2009. Our margins moved from 5% of revenues in 2009 to 8% of revenues in 2008, representing a 31% growth in our operating EBITDA quarter-over-quarter. I have also provided Q2 where it says Q1 to show the sequential trend revenue. There has been an upside from 24.1 to 27.1 and a nominal increase of EBITDA from 2 million in the first quarter of 2001 to 2.1 million in the second quarter of 2001. The next section, property information North America, this is reported in U.S. dollars. Revenues, once again, these are adjusted revenues because we have to adjust for gross versus net on BC OnLine and I think this would be the last quarter we would do that. From the next quarter, I think, we would be comparing apples-to-apples with respect to revenues. For the revenues for the second quarter 2010 was $54.7, compared to $48.7 in the second quarter 2009. And operating EBITDA was $17.3 million for this quarter, compared to $13.8 for the second quarter of 2009, representing a 25% growth in the operating EBITDA for the property information business. Margins moved from 28% in 2009 second quarter to 32% in the second quarter of 2010. Looking at this business sequentially quarter-over-quarter, first quarter versus second quarter, we went from $51.6 to $54.7 and on the operating EBITDA margin -- operating EBITDA went from $15.7 to $17.3. Our Geospatial services, these are reported in Canadian dollars. Revenues from $18.8 million in second quarter 2009 to $19.6 million in the second quarter of 2010. Operating EBITDA from $5.5 million in the second quarter of 2009 to $7 million in the second quarter of 2010, representing a 27% growth in this business and margins improving from 29% in the second quarter of 2009 to 36% in the second quarter of 2010. Looking at it sequentially, it went from $19.4 to $19.6 quarter-over-quarter and $6.4 million in the first quarter of this year to $7 million in the second quarter of this year. Finally, our Information Systems business also reporting in Canadian dollars, revenues went from $101.4 million in the second quarter of 2009 to $141 million in the second quarter of 2010. Operating EBITDA from $21.1 to $32.7 million, demonstrating a 56% growth in this business quarter-over-quarter and margins pretty consistent, 24% in 2009, 23% in 2010. Sequentially, we went from $32.9 million in the first quarter to $141 million this quarter and from $32.5 to $32.7, margins pretty consistent 24% in the first quarter, 23% in the second quarter. Looking now at our cash flow highlights, page number nine. Our net cash flow from operations was $97.5 million this quarter, compared to $26.1 million in the second quarter of 2009, significant in-flow of cash during this quarter. A lot of this was a result of getting some advanced payments from our customers in some of our larger programs and generally having -- generating a significant amount of cash as well from operations, as you can see $52.8 cash flow from operations. The interest paid, down quarter-over-quarter by about $ million from $43 -- from $4.3 million to $3.1 million. Capital expenditure, pretty consistent quarter-over-quarter $5.8 to $5.1 and our amortization, $2.6 million for amortization of intangibles that are really acquisition related that don’t need to be replaced $2.4 million this year, $5.1 million this year for software and others, same as last, and $3 million this year for -- this quarter for capital assets compared to $3.4 million. While the main highlight of this page is the amount of cash that was generated this quarter, $97.5 million. Looking at page 10, some other key financial highlights, mostly balance sheet items. Our long-term debt now is $202.4 million. So we paid down a significant amount of our long-term debt. What is remaining in our debt is the two tranches of long-term that we have, one with Prudential that matures in 2020 and the other one that matures at the end of 20 -- at the end of 2013, towards the latter part of 2013. Our entire revolver now has been since paid off. Trade accounts receivable consistent quarter-over-quarter, most of our accounts receivable are current, did -- don’t see any issues with that. Accounts payable and accrued liabilities once again, nothing unusual. The increase in our accounts payable is pretty much due to accrued charges relating to a lot of mark-to-market activity that has to go into our balance sheet and then gets reversed out. Our backlog as of the end of June was $928 million but the backlog today, after we have taken into account the Ukraine and the two UAV contracts and several other smaller contracts that we have booked and when we offset the burn during the month is at an all-time record of $1.2 billion. Our tax rate for this quarter was slightly higher than normal at 27%. Having said that, we expect the tax rate to remain in the 25.5% to 25.75% range at year-end, so we don’t think that this is not a permanent increase to 27%, this is a temporary increase. We think it will get back to 25% for the third quarter and fourth quarter and overall for the year would be in the high 25% range. Our common shares outstanding, was $40.9 million and fully diluted was $41 million. With that, I will hand you back to Dan. Dan?

[Daniel Friedmann:]

Thanks, Anil. And, Christine, we’re now ready to open the line for questions, please.

[Operator:]

(Operator Instructions) Your first question comes from the line of Steve Arthur, RBC Capital Markets. Your line is open.

[Steve Arthur:]

Yeah. Thanks very much. Just a couple of follow-up questions. I guess first Anil, on-orbit satellite servicing, I expect there’s limited amounts that you can say at this stage with your negotiations ongoing. But is there any color at all you can offer just in terms of, I don’t know, how many perspective customers you’re talking to? Are they technical issues that you’re negotiating with them now or is it only price, any sense of how wide the spread is on price or anything else you can add there?

[Anil Wirasekara:]

Sure. There are only a few major suppliers in the market. We’re talking with three, which represent well over half the market. We have passed pretty well all the technical hurdles with most of them. We’re also talking to government customers. It’s really boiling down now to figuring out what is exactly the modus operandi of when re-fuelings are going to happen in the lifetime of a satellite, what are the issues related to if something goes wrong and what is the price. And these are complex issues but we’re at that level and we should be able to get, one way or another. It’s not easy. It’s never been done before. People have to think of new business models. There’s been escalation in terms of launch costs and so on in the marketplace and we’re just kind of working our way through those issues at this point. But compared to last time when we were still just at the end of sorting out all the technical issues, we’re now on all commercial issues. So I’m hopeful that over the next couple of months we can conclude this thing one way or another and move one.

[Steve Arthur:]

Okay. And if there is a decision to proceed, any sense of what the investment requirement would be through the year or through the first launch and how much of that would be covered by those initial contracts?

[Anil Wirasekara:]

We have our targets but it’s premature to discuss that. That’s what we’re trying to achieve in our negotiations and if we get to our targets, we’ll have an investor call, explain the whole thing to you. And if we don’t, we’re going to go back to the systems business in this area which is a long-term area for us.

[Steve Arthur:]

Okay. Fair enough. Secondly, just on cash generation, obviously very strong in the quarter. Cash itself stood at I guess just over $80 million at the quarter end. So, I guess, I can assume or question, I guess, just to see if that has been used so far in July to repay debt. And I guess more broadly, any change to the thinking on how to put that cash flow to work in the future?

[Anil Wirasekara:]

Yeah. All the -- all the cash has been used to repay debt. As I said, our revolver now stands at zero.

[Steve Arthur:]

Okay.

[Anil Wirasekara:]

What we have is the two long-term pieces which we don’t intend to repay. We intend to let those be at least for the foreseeable future. With respect to what to do with the money, I’ll have to go to Dan.

[Daniel Friedmann:]

That story has not changed from last time. I think I mentioned that our first priority was to get to a conclusion on our on-orbit servicing and we’re not -- we’re not there yet. Our second priority was to do acquisition in strategic areas and that’s progressed quite a bit. Our funnel is looking with a number of more possibilities than it was last time. And after we sorted all that out, we were going to make a decision on our kind of a long-term to the shareholders and but we need to get through the first two steps first. So we were hoping we would be there by now, but we need a couple more months to figure that out and to sort out our dividend policy.

[Steve Arthur:]

Okay. Understand. And just final question. Just on the Ukrainian satellite, I do understand that it’s out of the backlog now. Can you just remind us of the delivery time frames for that and periods for recognizing revenue?

[Daniel Friedmann:]

It’s about a three-year program.

[Steve Arthur:]

Okay. And it will just come in milestones through that period, presumably?

[Daniel Friedmann:]

Yeah. All of these the revenue starts out slow, then it burns pretty quickly and then it slows down again. In this particular case, of course, we spent the last several months doing a lot of design, so it’s going to burn from now on at pretty fast clip because we’re ready to go to production. So you have to realize that we close the financing once the design was done. So we’re ahead on this project in that sense.

[Steve Arthur:]

Right.

[Daniel Friedmann:]

So we’re several months into it in terms of our normal project. So it’ll burn pretty fast from now for the next year and a half, and then a little bit slower after that.

[Steve Arthur:]

Okay. Great. Thanks very much. I’ll pass the line for now.

[Operator:]

Your next question comes from the line of Scott Penner, TD Newcrest. Your line is open.

[Scott Penner:]

Thanks. Actually, just to follow on Steve’s last question there. Given what you’re seeing over the next couple of quarters, should the revenue from the systems business remain kind of where it has been for the past couple quarters?

[Anil Wirasekara:]

I think so, yeah. At this stage we are 100% booked to our forecast. Never in our history we’ve been at this stage booked for the year. Hopefully we’ll exceed our forecast. But at the moment we’re 100% booked for our 2010 forecast in terms of backlog. So we have pretty good visibility. I don’t have the quarterly breakdown of revenue.

[Daniel Friedmann:]

Yeah. The third quarter should be, Scott, fourth quarter is a little bit slow because we shut the plants down in a lot of these places towards the middle of December. So it might be a little less, 10%, 15% less in the fourth quarter but the third quarter should be pretty strong.

[Scott Penner:]

Okay. And then is there -- what, to the extent you can comment on it, is the any additional impact on your EBITDA in the U.K. as, I guess as the search volumes adjust this quarter?

[Anil Wirasekara:]

So the situation is that we believe we’re at a low in search volume right now because the HIPs are still going through the marketplace. As those HIPs get used up over the next two to three months, we expect search volumes to go up and at that point you have to make assumptions as to what kind of search volumes from who but we think we’re well positioned because the solicitor’s in charge. And we expect to see a good return of the stuff that has gone down and then some. In the current quarter, if it were to stay low for the whole quarter is a couple of cents but by the end of the quarter, it should be bouncing back up again.

[Scott Penner:]

Okay. And then, Anil, I think in the past you’ve commented that the insurance business is around 80% to 85% of the North American products, EBITDA’s, I mean, given what seems to be a better momentum on BC OnLine. Is that still about the proportion?

[Anil Wirasekara:]

You know, all the property businesses are picking up nicely, BC OnLine’s up. Our US property business is up nicely. So the proportion is getting, I don’t have the number in front of me but the insurance piece is getting smaller as a percentage as the other pieces grow.

[Scott Penner:]

Okay. And then just lastly, the $6.8 million that is the add-back from the, I guess the hedges that are, hedges accounting, where does that show up on the cash flow statement? Is it in the working capital?

[Anil Wirasekara:]

Yeah. It will be. It will be in the working capital.

[Scott Penner:]

Okay. I just wanted to clarify that. Thanks very much.

[Operator:]

Your next question comes from the line of Steven Li of Raymond James. Your line is open.

[Steven Li:]

Yeah. Hi. Thank you. Again, can you talk a little bit more about your UAV business? So Australia just came onboard. So how big is that business now approximately and how fast is it growing?

[Daniel Friedmann:]

Australia came onboard awhile back, but they’ve extended, I mean, most of these contracts are scheduled on an annual basis to be renewed annually. So Australia renewed, but they renewed with more hours. Canada’s also been flying more hours. So we have been increasing the amount of business and service we provide to our customers. That business is on the order of about $100 million a year right now and we have outstanding live bids under consideration right now. We are looking at perhaps offering a service on a more kind of by the hour basis instead of by the year basis, because they are smaller players that would like to buy that way and we’re looking at commercial market opportunities. By and large, we continue to get more optimistic about that business as we go forward and our business plans continue to develop and our customers continue to buy more

[Steven Li:]

Okay. And so Canada extended their contract to June 2011. What happens after June 2011?

[Daniel Friedmann:]

They have an option to extend further. I think it’s well known that Canada has advertised that it plans to leave Afghanistan, unlike Australia, who has a multi, multi-year commitment to it and so do other customers that are talking to us, Canada has advertised that they plan to withdraw, at least in a fighting capacity. However, Canada is now evaluating options for continued operations of their UAV service and other allies are looking at Canada’s UAV service if Canada doesn’t do it. I mean, it’s a requirement for the NATO forces to continue to operate. So we’re more optimistic that in some form, shape or another, that piece will be salvageable. We’re working on it. But, as I said, we’re also talking to customers, some that are larger than Canada in terms of what they would consume.

[Steven Li:]

Okay. Great. And just a question for Anil. The advance payments from customers that help your free cash flow, when do you expect that to reverse. Is it in the next couple of quarters or is it at the end of the contract?

[Anil Wirasekara:]

It’ll be during the course of the contract and we’ll get advance payments right though. This quarter, in July, as soon as we saw -- but the Ukraine, we got a $40 million well in advance payment. Next quarter we expect to get several other advance payments. So these will come in and then they’ll then reverse out as we payoff our subcontractors and consume those.

[Steven Li:]

Okay. Good. Thanks, guys.

[Operator:]

Your next question comes from the line of Paul Steep of Scotia Capital. Your line is open.

[Paul Steep:]

Great. Okay. I guess, actually, Dan, you sort of answered indirectly on the UAV side, just trying to sort of guess the segmented, roughly what the segmented revenues sort of look like going forward. So we can work back on that, I guess the question is there, and it sort of relates to the other one for Anil on CapEx is, how much are you looking to grow or add to that service because year-to-date the CapEx has been pretty thin.

[Anil Wirasekara:]

You know, we -- we don’t need CapEx for that service. We just expense it.

[Paul Steep:]

Okay.

[Anil:]

There’s no CapEx. It’s just operating expenses. We just take the upfront CapEx required and we write it off as a period expense.

[Paul Steep:]

Perfect. Okay. And on the overall, Anil, CapEx sort of looks like it’s significant down this year, is it going to ramp back at the end of the year or is there something, I’m just making sure I’m not missing something on this, because the level is low.

[Anil Wirasekara:]

No. I mean, yeah, I mean, CapEx this quarter was $5.1 compared to $5.8. A lot of our CapEx is internally developed software, I mean, that’s the big amount for CapEx. And we don’t expect any material change from last year maybe plus or minus 10%, but nothing material.

[Paul Steep:]

Okay. Fair enough. That was that. And the only other one for me was just one quick clarification. Dan, on HIPs, I thought, I heard you say with PSAs that it was down to 240 a week, is that…

[Daniel Friedmann:]

Yeah. 250, yeah.

[Paul Steep:]

Okay. So do we actually think when it comes back on the search side you’re obviously hedged both ways in the market but is the assumption that the PSAs will return or not so much and you pick it up on the electronic side?

[Daniel Friedmann:]

Our market study is the -- this -- our market study is showing that the solicitors prefer, majority of solicitors prefer the official search, which is either electronic search or the over-the-counter search to the personal search. So we believe that when it returns there’ll be a bigger -- there’ll be more of it returning into official searches than personal searches. What portion of that we can get in electronic versus over-the-counter, which is still the biggest competitor to our business, is remains to be seen. We have many initiatives under way to capture, every time there’s a change in the search market we go like crazy trying to capture our piece of it. So, we don’t expect the personal search volumes to return anywhere near to where they were on HIPs, because they were driven by state agents. We expect that more will return as official searches. The question is how much will the counter get and how much will we get. And we’re battling it out on the ground.

[Paul Steep:]

Okay. That helps. Thanks, guys.

[Operator:]

Your next question comes from the line of Paul Lechem of CIBC. Your line is open.

[Paul Lechem:]

Thanks. Good afternoon. Just go back on the HIP for a second. When the HIPs got canceled, how much in terms of a revenue impact do you expect that to be quarter-over-quarter, when you include only all the derivative impacts of the searches being reduced?

[Daniel Friedmann:]

Well, we took revenue, when we saw the search, we took revenue on searches. And when we saw the HIP, we only took revenue on the part of the HIP that was not searches. What was our HIP burn rate before it stopped?

[Anil Wirasekara:]

$10 million quarter.

[Daniel Friedmann Daniel Friedmann:]

Right.

[Anil Wirasekara:]

$10 million a quarter.

[Daniel Friedmann:]

Including searches. $10 million Canadian.

[Anil Wirasekara:]

$10 million Canadian.

[Daniel Friedmann:]

Yeah. About $10 million Canadian of revenue an insignificant bottom line was lost from HIPs and almost an equivalent amount from searches. But that we expect to return with in the next few months.

[Paul Lechem:]

Okay. So the $10 million was directly related to the HIP portion of the revenues?

[Daniel Friedmann:]

Yeah.

[Paul Lechem:]

And then there’s another $10 million from the reduction in searches?

[Daniel Friedmann:]

Right.

[Paul Lechem:]

Okay. Per quarter?

[Daniel Friedmann:]

Per quarter.

[Paul Lechem:]

Okay.

[Daniel Friedmann:]

Canadian.

[Paul Lechem:]

Canadian, yeah. You’ve talked in the past about new initiatives with the land registry. You talked about one today. But you’ve also in the past talked about e-registration. Can you talk about any developments on that side?

[Daniel Friedmann:]

Our approach and we hope the government will stick to their staying out of the business philosophy, approaches to more forward on several initiatives related to e-registration, but not in one bang. We don’t think that the market’s going to convert overnight. So we are moving on a number of areas. Right now the hot topic is fraud. I spoke on my speech that we’re introducing fraud products, many products to prevent fraud. So obviously that’s tying more of our solicitor client base with our mortgage and surveyor client base, which, of course, allows us to build work space for them to work together, which moves towards them being able to trade documents and orders and money, which all goes towards building our infrastructure for e-registration. We’re introducing the land registry product, more land registry products into our business. That’s how we’re going about it. We have about four initiatives aimed at solicitors and surveyors, and mortgage banks, that tie them altogether, have them work more together, but they’re focused on what the issues are today. In the commercial property market, it’s a certain type of information. In the retail side, residential side, it’s fraud. But our plans are all towards (inaudible) but we’re moving where people have hot buttons and are willing to pay attention and play today.

[Paul Lechem:]

Can you give me a sense, when you have these four initiatives that you talked about up and running, are these material revenues that could come out of those?

[Daniel Friedmann:]

You know, if they were all to succeed, the four would add up to the kind of HIP revenue we used to have. But they’re not legislated like HIPs was and not all are going to succeed. But then we have some more coming later. So we are back to our original plan in the U.K. which was we’ll enter the market by getting on analysts and building up a very strong solicitor base, which we have. We have more solicitors connected than anybody else electronically. And we will then introduce more and more product to make their life easier and safer and move towards convincing. We have to put those plans on hold because the government came up with this HIP legislation that required a very significant situation, as you can imagine, between the search business that we stood up and the HIP business that we stood up, we got up to about $80 million a year in 12 months, so all our attention went to that. Now we’ll return back to our original plan and incrementally add more customers and do more and more of the -- have them do more and more of their work on our website and that’s our growth plan. And it’s independent of a number of transactions. We are trying to grow the amount of money that is spent and the amount of value-added we have per transaction. To the extent that the market floats back up from a very low point now. We’re running a little lower than last year. That’s added bonus. But our growth plan is about doing more per transaction and those are what the initiatives are all about.

[Paul Lechem:]

Great. Thanks. Last question. Just under the satellite side, you mentioned that you were at 100% of your target or targeted backlog for the year. I don’t know how you put it exactly. But it sounded to me like the constraint here is your capacity rather than the amount of work. Is that -- if that’s the case, maybe, I misheard you or misunderstood you. Are you planning to rectify that? Do you need to add capacity and how much more could you grow this business if you did so?

[Daniel Friedmann:]

No. We’re not capacity constraint. We have been forecasting the Russian jobs and the Ukraine and RCM for a while. We knew they were coming. We were working at a low level on them before they came in. We’ve increased our staffing significantly, bought new equipment. We may be adding more physical capacity or we may be leasing some as we go forward. But by and large we’re not capacity constraint. All I tried to say is that at this point, given the plan that we had eight months ago, we can make all that revenue with the bookings today. We expect to book more. Although, by and large, by the time September, end of September comes along, any revenue you book then it’s basically for the year after in systems because it takes three months to design things. So not capacity constraint, our growth is constrained by our ability to book more business and that’s not always been the case. But with today’s economy, we have no trouble hiring and we’ve been able to staff up.

[Paul Lechem:]

Okay. So when these contracts, when these satellite contracts get fully up and running, you did about 140 million in systems revenues this quarter, how much more could we expect that division to produce?

[Daniel Friedmann:]

I think as we’ve explained, the systems business has one level of growth, which is kind of single digit, and then it takes steps. When we make a new major entry like we have in communications with the Ukraine and the Russian satellites, we take a big step up. We’re right in the middle of that step. So nobody should be trying to forecast 40% growth per quarter like we achieved this quarter. That was a step. We stepped up to a new level…

[Anil Wirasekara:]

Baseline.

[Daniel Friedmann:]

… a new baseline and then the growth goes along at that level until we take another step up. So we think we’ve kind of achieved a certain level at this point and we’re at that level for a while until something else significant happens, like another major UAV customer or on-orbit servicing or something like that, that we’re all working on.

[Paul Lechem:]

Okay. Great. Thank you very much.

[Operator:]

Your next question comes from the line of Thanos Moschopoulos of BMO Capital Markets. Your line is open.

[Thanos Moschopoulos:]

Hi. Good afternoon. Dan, could you elaborate on what your Plan B would effectively be if the on-orbit servicing initiative doesn’t end up working out? I guess it would be to sort of take that expertise in robotics and try to redeploy it towards other initiatives?

[Daniel Friedmann:]

We have a baseline plan. We’re currently under contract for on-orbit servicing for some work with NASA. We’re under contract with the Canadian Space Agency in exploration. And we have our sights on other things. Many of those things take a few years to develop. We’re also under contract with confidential customers in the U.S. for all kinds of studies on on-orbit servicing. Our whole issue was, we have all our systems business, we’re trying to make it go forward and it’s our traditional business. The question is, can we stand up a service like we did in the UAV side that will apply to commercial customers that are not prepared to buy capital equipment, they just want to be refueled or repaired or inspected. And we put that business plan together and it’ll -- it’s being tested now. It’s in its final exam to see if it will go. If it doesn’t go, we continue on. It’s not like we are -- we start something new. We continue on with the initiatives we have. Obviously, we have spent a lot of effort on the commercial business plan. So some of our best resources have been tied up on that and we would redeploy those resources back to our baseline business, which would make the baseline business move faster for sure. So none of those fits and work has stopped, they’ve just had a second priority to the commercial business plan. And the question is what’s going to be the first priority. If the commercial business plan works out, it will continue to be first priority. If it doesn’t work out, it will be put on the shelf until something changes, prices, costs, business plans and we will put all our effort into the more normal systems sale business plan, our confidential customers in the U.S. and things like that.

[Thanos Moschopoulos:]

Okay. That’s helpful. On the UAV front, given the success you’ve had in that market, are you starting to see any competition for your full service model or for the bids you have outstanding? Is the case where the only real alternative for the customer is to buy something themselves?

[Daniel Friedmann:]

It’s -- we’re still a small player, although we have invented a new way to go to market where we are a big player on that way to go to market. So like everything else that we do, our competition is a status quo, which is either buying your own UAV’s and running it as a capital expenditure, which we are bidding on also, because we’re a systems company and a prime contractor and people are not buying UAV’s, they’re buying surveillance platforms, so any ground segments and so on. So we are bidding on those. And the other competition, of course, is pilots, unmanned aircraft and we compete with that. So that’s the major competition for us. We’re winning our fair share. We’ve seen some very good developments. The last few we saw was totally specified as a service and you could either bid with a manned aircraft or an unmanned aircraft. In the past, typically those decisions have been made before the race starts. So it’s very nice to see that people are starting to think of surveillance. That’s our business. We’re not in the UAV business. We’re not in the airplane business. We’re not in the satellite business. We’re in the surveillance business. We are the surveillance company. We’re an information company. Everybody else is flogging hardware and wings and motors and stuff. We flog information. So the market is moving in that direction and we can provide that information, as you know, manned aircraft, unmanned aircraft and so on. So we’re seeing some good trends. But it’s early days. We need to win a couple of more to make this into a steady growing concern. But it’s certainly up to the right start and we’re putting lots of attention to it and we may put some -- a little bit of capital into it so we can sell by the hour instead of by the year.

[Thanos Moschopoulos:]

Okay. Thank you. I’ll pass the line.

[Operator:]

Your next question comes from the line of Sera Kim, GMP Securities. Your line is open.

[Sera Kim:]

Hi. Good evening. For the U.S. business, I’m just wondering if you can comment on the strength of the property information business. Is that demand, does that attribute to demand ahead of the tax credit expiration or how much was that -- how much is it related to that versus traction with the new products and customers?

[Anil Wirasekara:]

We had a bump from Obama’s tax cut and it stopped the moment the cut stopped and it went back down. But taking those bumps off the graph, we have traction on our new product. I think, I mentioned our (inaudible) technology is going in there. And we’ve had traction in terms of the delivery, electronic delivery platform we put in for the home valuation code of conduct which is performing well for our customers. And a lot of our customers check on a very regular basis the performance of the contractors and they always have two to four people that they buy from and they move volume around. So we’ve benefited from some of that. But by and large, the market is not showing any faster post rate than before, other than government stimulus to live and die with the stimulus.

[Sera Kim:]

Okay. And in terms of the operating margin for the U.S. business, I know that the property insurance businesses tend to be relatively stable. So would you say the uptick is all due to the improvement in the U.S. property business or have you seen improvements on the insurance margins as well?

[Anil Wirasekara:]

Yeah. The insurance business, as you say, is pretty steady. The other business, you can double your margins by booking two more million because you had a million in profit before and now you have $2 million in profit. So it’s small numbers and you see larger jumps in percentages as we basically scale to break even. So as soon as you see any pickup at all it shows up on the bottom line, same with the U.K.

[Sera Kim:]

Okay. And just going back to the question about the four new initiatives in the U.K. business, I guess what can we expect in terms of timing and when you expect to start seeing cash and could we see cash later in this year or is it more of a 2011 story?

[Anil Wirasekara:]

No. It’s not a 2010 story. We are working through the business plans. We are going to be doing some development during this year and the first half of next year. And you’ll start seeing revenue in middle of next year type of level. It’s not a legislative thing. So we introduce the product and we get a pilot customer and then we get two pilot customers and we roll it out. It’s not a HIP, June 21st bang, it goes.

[Sera Kim:]

Okay. And…

[Anil Wirasekara:]

At least from last.

[Sera Kim:]

Okay. And just last question. Earlier you’d mentioned that your M&A pipeline is pretty healthy. I’m just wondering, are you focusing acquisitions on the product side or on the system side or is it relatively equal?

[Anil Wirasekara:]

We’re focusing, as I think I’ve mentioned before, on the kind of green areas, which is the systems, the geospatial side and the insurance side. We’re still shy on the transaction based business because it’s too hard to predict the future at this point. And quite frankly, we’ve emerged -- in the U.K. we’ve emerged very strong, and there’s not much to buy. In the U.S. there is but in the U.K. there isn’t in the property side.

[Sera Kim:]

Okay. Great. Thanks a lot.

[Operator:]

Your next question comes from the line of Naser Iqbal, Salman Partners. Your line is open.

[Naser Iqbal:]

Hi, guys. Thanks for taking my call. Just, I guess, three quick questions. Anil, I guess you threw out a lot of numbers, just wanted to just clarify. On the cash balance, the $82.8 in the quarter, like how much of that would have been like paid off in the current quarter?

[Anil Wirasekara:]

Pretty much all of it got paid off.

[Naser Iqbal:]

Are we like back to like the normal 30-ish?

[Anil Wirasekara:]

Yeah. So normal you would be back to the normal $20, $25 million.

[Naser Iqbal:]

Okay, okay. And then just also in the quarter, the changes in working capital were about a positive $53 million. Should we expect some of that to reverse in the coming quarters?

[Daniel Friedmann:]

Yeah.

[Naser Iqbal:]

Okay. Like maybe like half of it, all of it?

[Daniel Friedmann:]

About a third of it at least.

[Naser Iqbal:]

Okay. And I guess just my final quick question, Dan, I mean, your margins, I guess, for the overall business, particularly on the information side are pretty healthy. And given that you’ve got these contracts going to be ramping up in the next couple of quarters, do you think you’ve factored in all the potential pitfalls so that the margins are going to be where they are or should we expect some kind of a decline given that you may have a bunch of issues coming into play?

[Daniel Friedmann:]

Well, two separate questions. When we take revenue, we take revenue based on our estimate to completion and we’re very careful to make a proper estimate to completion, anticipate risks, anticipate risks that we don’t know about yet. So, everything going like normal in the past, we don’t have any significant retro-adjustments in our history because we are very studious about getting the risks in. So we understand the risks in these programs and we provide for them and we’re trying not to get ahead of ourselves at any given time. So that’s one side. The other side is that these projects, our margins related to our valued added by and large, and the percentage value added in the front-end of these projects is much higher than in the middle because in the middle, we’re procuring launches and buses and solar panels and all kinds of things. So as you see the pass-through revenue coming through our books, the margin as a percentage of revenue is going to drop quite substantially. And, but if you look at it on an average, our systems margins should be like they’ve always been. But don’t get confused by one quarter growth or one quarter margins. There’s big things passing through our books, next -- this time we did some design work for the Ukraine, next time we’re procuring a launch and that goes through the books.

[Naser Iqbal:]

Okay. I think those kind of comments, I guess, help me out in general a little bit better about these aspects. So appreciate that. That’s it for me and congratulations on the quarter.

[Daniel Friedmann:]

Thank you.

[Anil Wirasekara:]

Thank you.

[Operator:]

(Operator Instructions) Your next question comes from the line of Blair Abernethy, Stifel, Nicolaus. Your line is open.

[Blair Abernethy:]

Thanks very much. Dan, just wanted to talk a little bit about the [Martial Swiss Bank] insurance business. You had in the last couple quarters were looking at sort of expanding that into the U.K. Can you give us an update on how that’s progressing?

[Daniel Friedmann:]

We have made some progress in that area in terms of trying to define the best product. We’ve done some piloting on a cost to cure product. We’re expanding that piloting. But I think it’s fair to say that 99% of our focus is North America based. It’s a dynamic market. We’re experiencing good growth. We got some new initiatives on the table at this point and it’s -- they’re best suited for the North American market where people are ready to go to analytics in the next step and things. So we continue to work the U.K. but our primary focus is in the U.S. and Canada.

[Blair Abernethy:]

Okay. Great. And in terms of the -- in terms of M&A, is the scenario you’re looking at for the insurance business as well?

[Daniel Friedmann:]

Yeah.

[Blair Abernethy:]

Okay. Great. Thank you.

[Operator:]

There are no further questions. I turn the call back over to you, Mr. Friedmann.

[Daniel Friedmann:]

Okay. Thank you very much for listening and we look forward to updating you next quarter. Thank you and good evening.

[Operator:]

This concludes today’s conference call. You may now disconnect.