Telesat Corporation (NASDAQ:TSAT) Q1 2024 Earnings Call Transcript

Telesat Corporation (NASDAQ:TSAT) Q1 2024 Earnings Call Transcript May 10, 2024

Telesat Corporation reports earnings inline with expectations. Reported EPS is $-0.8 EPS, expectations were $-0.8. Telesat Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the conference call to report the first quarter 2024 financial results for Telesat. Our speakers today will be Daniel Goldberg, President and Chief Executive Officer of Telesat, and Andrew Browne, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.

Michael Bolitho: Thank you and good morning. This morning, we filed our quarterly report for the period ending March 31, 2024, on Form 6-K to the SEC and on SEDAR+. Our remarks today may contain forward-looking statements. There are risks that Telesat’s actual results may differ materially from the results contemplated by the forward-looking statements, as a result of known and unknown risks and uncertainties. For a discussion of known risks, please see Telesat’s annual report and update filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I will now turn the call over to Dan Goldberg, Telesat’s President and Chief Executive Officer.

Daniel Goldberg: Hey, thanks, Michael. My opening remarks were quite short this morning. Given we hosted an earnings call just six weeks ago, when we released our Q4 and full year numbers. I really just wanted to note that we’re tracking to the 2024 guidance we gave earlier, and we’re moving out as quickly as we can on Telesat Lightspeed. Now that we have understandings in place for all the financing, we need for our first 156 satellites. Our CapEx guidance, this year is for between CAD1 billion and CAD1.4 billion or around USD750 million to USD1 billion, which is pretty much entirely for Lightspeed. And you’ll see that unfold as we report our results throughout the year. So with that, I’ll hand over to Andrew and then I’ll speak to the — who will speak to the Q1 numbers in more detail, and then we’ll open the call up to questions.

Andrew Browne: Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning’s press releases and filings. In the fourth quarter of 2024 Telesat reported consolidated revenues of $152 million, adjusted EBITDA of $111 million and generated cash from operations of $76 million and ended the quarter with $1.8 billion of cash. But fourth quarter of 2024 compared to the same period in 2023 revenues decreased by $31 million to $152 million. Operating expenses decreased by $6 million to $47 million and adjusted EBITDA decreased by $28 million to $111 million. The adjusted EBITDA margin was 72.8% as compared to 75.7% in 2023. The revenue decrease for the quarter was primarily due to reduction in services and a low rate on the renewal of a long-term agreement with a North American direct to home customer, as well as lower revenues from certain mobility and Latin American customers and lower equipment sales to Canadian government customers.

Looking at OpEx, the decrease in OpEx is primarily due to lower noncash share-based compensation and higher capitalized engineering expenses relative to the prior period. Interest expense decreased by $4 million during the fourth quarter when compared to the same period in 2023. The decrease in interest expense was primarily due to the repurchase of notes and term loan B. This was particularly offset by an increase in interest rates on the US dollar term Loan B facility itself. In the fourth quarter, we recorded a loss on foreign exchange of $68 million as compared to a gain of $10 million in Q4 2023. The loss for the three months ended March 31, ’24, was mainly the result of a stronger US dollar Canadian dollar spot rate March 31, ’24, as compared to the spot rate as of December 31, 2023, and the resulting unfavorable impact on the translation of US denominated debt.

Our net loss for the fourth quarter was $52 million compared to net income of $28 million for the same period of the prior year. The change was primarily due to the loss on foreign exchange business. For the quarter ended March 31, 2024, the cash inflows from operating activities were $76 million, and the cash flows used by investing activities were $20 million. In terms of capital expenditures incurred that were primarily related to a lower orbit constellation Telesat Lightspeed. Guidance as you will also have noted in our earnings release this morning, we reaffirmed our 2024 guidance. This guidance assumes the Canadian dollar to US dollar exchange rate of $1.35. For 2024 Telesat still expects its total full year revenues to be between $545 million and $565 million.

In terms of operating expenses, excluding share-based compensation, we are still looking to spend between $80 million to $90 million attributed to the Telesat Lightspeed. In terms of total adjusted EBITDA Telesat’s, it expects to be between $340 million and $360 million. As highlighted on our last call, we will begin the process of showing GEO and LEO separately, and we have accordingly set out this in all four of our financial statements. In respect to expected capital expenditures, as we disclosed last quarter, we continue to expect our 2024 cash flows used in investing activities to be in the range of $1 billion to $1.4 billion, as Dan has highlighted, which is nearly all related to expected Telesat Lightspeed Capital Expenditures. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures.

We have approximately $1.8 billion of cash and short-term investments at the end of March, as well as approximately USD200 million of borrowings available under our evolving credit facility, approximately $1.25 billion of cash was held in our unrestricted subsidiaries. In addition, we continued to generate a significant amount of cash from our ongoing operating activities. Leverage at the end of the fourth quarter, total leverage ratio as calculated under the terms of the amended senior secured credit facilities was 5.7 times. Telesat has complied with all the covenants in our credit agreement and indentures. In terms of our debt repurchases, we were active subsequent to quarter end and up to May 8, ’24, where we purchased that would assume the principal amounts of USD219.5 million in exchange for an aggregate cost of USD98.9 million, combined with the debt repurchases completed in ’22 and ’23.

Telesat has now reported the cumulative principal amount USD806.5 million at an aggregate cost of USD438.3 million. Just about including the repayment in 2020 of approximately $341 million of the outstanding term loan being combined with our repurchases, our overall debt has now been reduced by approximately 24% or USD1.1 billion. In addition to sell-through results and interest savings of approximately $55 million annually. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6-K provides the unaudited interim condensed consolidated financial information in the MD&A. The non-guarantor subsidiary shown are essentially the unrestricted subsidiaries of minor differences.

So with that, I think we will conclude our prepared remarks for the call and very happy to answer any questions that you may have. We will now turn back to the operator. Thank you.

See also 15 Fastest-Growing Cities in Canada and 15 Best Oil Stocks to Buy According to Analysts.

Q&A Session

Operator: [Operator Instructions]. The first question is from Edison Yu from Scotiabank.

Edison Yu: Hey, good morning and thank you for taking our questions, mainly just some housekeeping ones. On the cash flow is quite strong in the quarter despite the EBITDA declining. Were there any one-time benefits here? And how do you think this can trends for the rest of the year?

Andrew Browne: And now, I think our cash flows, I think underscore the high margins that we’ve got. If you look at our GEO business margins are approximately 80%. And I think some of the great things over existing business, notwithstanding the fact that indeed we’ve identified that we will see, you know, drops this year, but that’s the underlying cash flow.

Edison Yu: As I said, and then appreciate the — obviously the breakdown of GEO and LEO, and you’ve got some consulting revenue in the LEO side is the 1Q a good run rate to take for the rest of the year, the contribution from some LEO consulting?

Daniel Goldberg: I don’t think so and it’s not a big part of our business at this stage, obviously not until LEO sort of you know, up and in service, late 2027, are we going to see meaningful revenue up until then there might be some more kind of incidental stuff. We’re doing some work with the US government that’s sort of lumpy in nature. And I think this came from a contract that we have with NASA that we’ve talked about before, where we’re demonstrating some features on Leo’s ability to communicate with other in-orbit spacecraft. So it’s kind of a low to no margin stuff to. It’s a good thing for us to be doing to be demonstrating capabilities and tightening the relationship with the important US government user. But yeah, it’s not kind of going to be a big driver of our top line results or certainly our adjusted EBITDA for the year.

Operator: The next question is from Arun Seshadri from BNP Paribas.

Arun Seshadri: Yes, hi. Just a couple from me. First, just wanted to understand. So that government of Canada is planning to take senior equity, I guess, above lenders and shareholders. Is that right? Like so they’re equity in LEO is going to be structurally senior equity ahead of existing lenders and shareholders?

Daniel Goldberg: So maybe a couple of things. I mean there, what we announced six weeks ago it is that the government of Canada, we reached terms with the government of Canada on a roughly CAD2.1 billion loan and we disclosed. But the terms of that are 15 years. It picks during construction, it’s gotta carries a rate of core plus 475 basis points. So it’s fundamentally a loan and the government of Canada will be the funded, you know, alongside the government of Quebec and our vendor financing that we’re getting, it will be the sort of senior secured lender in connection with Lightspeed constellation and in the unrestricted group where we’re building Lightspeed. So that’s kind of number one. But yes, as part of the deal, there is kind of an equity feature.

The government of Canada is getting a 10 warrants are covering 10% of the equity in the Lightspeed project. And those warrants are struck at an equity value of $3 billion US up for the Lightspeed project. So can you I’m just trying to be responsive to your question about senior equity. It’s kind of a form of equity participation in the Lightspeed project itself as opposed to the common shares of Telesat Corpation. So effective, Thank you for that, Dan. That was kind of [indiscernible] what you say is that it is effectively equity that’s first preference on Lightspeed and then residual equity would be what flows through the equity of — Yeah, I wouldn’t think about it is first preference. I think about it that right now, you know, Telesat owns 100% of Lightspeed.

And in the future, if the government can exercise these warrants, they would be an equity participant alongside of Telesat.

Arun Seshadri: Okay. You’re saying that it’s non-structurally senior equity then?

Daniel Goldberg: No.

Arun Seshadri: Alongside whatever equity there is —

Daniel Goldberg: That’s right. Yes, that’s exactly right.

Arun Seshadri: Are there any I mean, I guess, like is there anything specific either direction. As you finish of the financing would you from the government of Canada’s perspective would it make sense for them to have the entire Telesat cash flow also be as credit support or that financing or is, you know, I guess on the flip side would be insist that Lightspeed be separated from Telesat in order to sort of finish of the financing and I guess if the latter in the case how would you manage solvency requirements to make sure that it happens?

Daniel Goldberg: So maybe I’ll start answering this and so first of all, and just so everyone understands how this work. The government of Canada is lending us money. It’s going to be in the unrestricted group and the cash that Telesat Lightspeed generates is going to be used to support the borrowings in that unrestricted group. And so again, we’ve mentioned that our funding sources beyond our own $1.6 billion equity contribution is going to be borrowings from the government of Canada, the government of Québec and some vendor financing and so those borrowings are going to be supported and secured in and were secured by our Lightspeed activities. And so yeah, so could we in the future — a could in the future, others potentially be behind the government of Canada in terms of being supported by Lightspeed cash flows or good with the government consent something differently than you have on for right now.

That’s that’s kind of how it’s set up. I think we’ve always been pretty clear about how Lightspeed’s getting financed and the fact that we’ve got a restricted group and an unrestricted group. And I mean, it’s fundamentally it’s been project finance and our financing sources are government of Canada, the government of Québec, some vendor financing and then again, our own meaningful equity contribution. So I hope that’s helpful. And then we should probably move on.

Arun Seshadri: Yes, I think that’s very helpful. Like can I ask one last thing and that is notice that the restricted payment hasn’t fully been made yet. Just would you, I guess the expectation is that restriction would be made and then once that’s done. Are there any other things that need to be done to put a blow on, I guess what else needs to be done from the timing standpoint to put a blow on the all of the financial requirements? Thanks.

Daniel Goldberg: So the restricted payment, I think it’s $125 million.

Michael Bolitho: And yet there’s a remaining restricted payment of $120 million to be made under the $150 million general basket

Daniel Goldberg: Yeah. And we expect that will get done in the coming days. Yes. Correct. And then beyond that, again, we’ll have at this point in time. We’ve got all of the financing lined up for the 156 satellites. We do need to conclude definitive funding agreements with those sources that I’ve described Government of Canada back then and the vendor financing. But we’ve already kind of started down that road and are highly confident that we’re going to get there. So that’s I’d say the final bow that needs to be tied on, but we are moving forward. As we said in our remarks, I mean, we’ve got meaningful cash on our balance sheet at this point in time, and we’re going to start spending that money so that we can move this program forward as quickly as we can because we are hugely bullish on the opportunities that are out there in the market and we want to come to market and get in service as quickly as we can.

Operator: The next question is from Chris Quilty from Quilty Space.

Chris Quilty: Thank you. So Dan, just to follow up and I’m not going to hold you to it, but on the government of Canada, Quebec and the vendor, is that something that, you know in the next three to six months, sort of —

Daniel Goldberg: Yeah, Chris. No, we believe that should get done before the end of the summer. And hopefully, yeah, we’ve got a lot of momentum with the government of Canada as you can imagine and the government of Quebec, which are the big contributors here. So yeah, we’re talking about the coming months.

Chris Quilty: So I was going to say the summer ends in October in four of them —

Daniel Goldberg: Well, I’m working on a auto with summer, which are a little bit earlier. There are some. Yeah, anyway, spring hasn’t really even shown up yet. So anyway, yeah.

Chris Quilty: So and also the CapEx in Q1, I mean, obviously, you just closed the financing deal, but CapEx in Q1 was a little bit lower than I was expecting. Is it fair to assume you’re probably more towards the $1 billion and the $1.4 billion? And Andrew, typically in these large-scale long-term programs, is it fair to assume, you know, year one, 30% year two, 40% year three, 30% type of how it falls out in timing or should we look at this is sort of a longer slower climb. It’s just general framework of how you expect to pay that?

Andrew Browne: Yeah, I think, Chris, that given the nature of the program, you know, it’s a supply chain and getting everything sort of moving forward. So I think in this year that we in our guidance $1 billion to $1.4 billion, we think that’s a solid number and so by implication, that means we’ll see kind of more payments upfront as we get all of the suppliers in place. So that’s probably the best way I would characterize it and then thereafter, as we go through the different milestones of the next two to three years, it would be more of a kind of a flow tied to the contract and the PLD operational milestones.

Chris Quilty: Great. And one other question for you, Andrew. The you had given the expected OpEx for the Lightspeed program, I’m assuming that is OpEx that’s running through the P&L and stripped out whatever is getting capitalized then can you give us a sense of what is getting capitalized in as part of the program? And is that again, if and as the construction goes and more gets capitalized, do we see that Telesat OpEx staying flat because everything gets rolled into capitalization? Or do you expect it to grow in the out years. I mean, it’s going to grow in the out years.

Andrew Browne: But yeah. So in terms of the sources and uses, we tried to make it a little bit clear in terms of the CapEx spend is third-party CapEx spend, so with vendors. So labor is in the operational uses, whether it’s capitalized or not, just so you can see the outflow of funds and what the purpose of the outflow of funds is. So in that regard and you know, the capitalized costs are there yet in terms of the overall level of effort, the amount of capitalized stuff we build up, we ramp up our staffing infrastructure quite rapidly and therefore you get to sort of a constant state relatively quick into Pro in terms of de-levering.

Chris Quilty: I understand. I had another question. You’ve predicted the data side of the business being down about $75 million as some of those contracts roll off. Have you programmed in being able to resell some of that capacity? And what sort of lock have you seen on the data side and reselling?

Daniel Goldberg: Yeah, for sure. We assume that there’s some capacity that has come back in inventory that will resell. And I suspect we’ve already resold some of that on and the guidance that we gave for this year will have kind of captured our assumptions at least about all of that. And was there another part to your question, Chris?

Chris Quilty: No, that was it was.

Daniel Goldberg: Okay.

Chris Quilty: But I will ask you a difficult question, which is the elephant in the room question, Intelsat SES panel, you probably have Lightspeed on order before the regulators get done with that, but what are your general thoughts on that transaction and how it impacts you?

Daniel Goldberg: Yeah. Well, first off, I mean, we all know that those were conversations that have been taking place between SES and Intelsat some time ago, and they both confirmed that there had been discussions and then they both have each announced that those discussions had come to an end. But yeah, I was never persuaded that you know that was the end of it. So it wasn’t a big surprise to us. I’d say that they made the announcement they did recently. And I think it’s that announcement, I think fits within them kind of the same framework that we’ve been talking about for a little while, which is to say the industry is changing quickly. There are these new entrants in the StarLink and the future hyper that are on impacting the industry and we all believe that industry consolidation would be a response to that.

And we’ve seen some already with ViaSat and Inmarsat and Eutelsat and OneWeb. And now this big transaction as companies kind of organize themselves, too. We remain competitive in this changing landscape. For us on I don’t think it’s going to have any real impact in terms of how we compete in the market, but the prospects of Lightspeed and the like are we’ve been competing against each of them, you know, for decades now. And they each, they’re hitting each meaningfully larger than Telesat coming together. Obviously, they’ll be larger still, but I don’t think there’s anything that should be too dramatically different in the combined competitive profile versus us competing against each of them individually. So yeah, all the say, we weren’t surprised if it fits with our expectation that consolidation would happen in the industry.