Telesat Corporation (NASDAQ:TSAT) Q3 2023 Earnings Call Transcript

Telesat Corporation (NASDAQ:TSAT) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the conference call to report the Third Quarter 2023 Financial Results for Telesat. Our speakers today will be Dan 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, Sir.

Michael Bolitho: Thank you, and good morning. This morning, we filed our quarterly report on Form 6-K with 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, see Telesat’s annual and quarterly reports 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: Okay. Thank you, Michael. This morning, I will share some thoughts on our financial results and give an update on the business. I’ll then hand over to Andrew, who will speak to the numbers in detail, and then we will open the call up for questions. We have been executing well so far this year, are on-track with the key financial, strategic, and operational objectives we have been focused on. We are tracking our guidance, received the final roughly $260 million of U.S. C-band clearing proceeds, and completed some meaningful additional debt repurchased in the quarter that we think will strengthen our financial position and create value for shareholders. Obviously, a huge focus for us is executing on Telesat Lightspeed our advanced broadband LEO network, and I will give some updates on that.

Since sharing on our Q2 call that we selected MDA as our prime contractor, and are fully-funded for the program, we have done a significant amount of work with MDA to advance the program, including further engagement with the supply chain. Both Telesat and MDA are ramping-up their teams to execute Lightspeed. And I have been really pleased, but not surprised, by the extraordinarily capable people we are bringing on board and the really strong interest we are seeing from professionals throughout the industry, to join us to work on this flagship program. We also announced in the quarter another key Lightspeed contract This one with SpaceX for fourteen Falcon 9 rockets to launch the advanced satellites making up the Lightspeed network. I believe it is SpaceX’s largest commercial launch contract.

Falcon 9 is the most reliable rocket out there. And SpaceX has a demonstrated high launch cadence that will go a long way toward ensuring that, we bring Lightspeed to market, consistent with our schedule. They have been a great partner for Telesat on a number of our prior programs, and we are very pleased to be working with them on Lightspeed. Our other key focus is concluding our funding arrangements with our Canadian federal and provincial partners. We are fully-engaged with them at this time and remain optimistic that we will be able to reach financial close, consistent with the timeframe we shared previously, which is to say, later this year or early next year. The Telesat Lightspeed program advances a wide range of important public policy goals, including bridging the digital divide, spurring advanced manufacturing, IP development, exports, and high-quality jobs, as well as important climate and national security objectives.

Our federal and provincial partners in Canada have been strong and consistent supporters of the Lightspeed program, and we are grateful for that. We remain hugely bullish about Telesat Lightspeed and are looking forward to sharing more detailed information with investors about our business plan and expectations. To that end, Andrew and I plan to get on the road, to meet with investors in both the U.S. and Canada over the next couple of weeks. We are looking forward to it. With that, I’ll hand over to Andrew and then look forward to addressing any questions you may have.

Andrew Browne: Thank you, Dan. Good morning, everyone. I would now like to focus on highlights from this morning’s press release and filings. In the third quarter of 2023, Telesat reported revenues of $175 million, adjusted EBITDA of $133 million and for the nine months ended September 30th, 2023, we generated cash from operations of $156 million and we held $1.8 billion of cash on the balance sheet. In the third quarter of 2023, compared to the same period in 2022, revenues decreased by $5 million to $175 million. Operating expenses decreased by $6 million to $50 million and adjusted EBITDA decreased by $4 million to $133 million. The adjusted EBITDA margin was 75.9%, compared to 76% in 2022. Between 2022 and 2023, changes in the U.S. dollar exchange rate had a positive impact of $3 million on revenues, a negative impact of $1 million on operating expenses, and a positive impact of $2 million on adjusted EBITDA.

When adjusted for changes in foreign exchange rates, revenues decreased by $8 million, operating expenses decreased by $7 million and adjusted EBITDA decreased by $7 million. The revenue decrease for the quarter was mainly due to lower revenue from certain South American customers. OpEx to decrease the operating expenses was primarily due to lower non-cash share-based comp, partially offset by higher costs associated with the procurement of third-party satellite capacity required to support certain customers networks that could no longer be supported on ANAC S2 constant, once it commenced client operations. Interest expense increased by $11 million during the third quarter when compared to the same period in 2022. The change was due to an increase in interest rates on the U.S. Term Loan B facility, combined with the foreign exchange impact in U.S. dollar denominated in interest expense.

This was partially offset by the impact of the repurchase of notes in 2023, combined with the impact of the maturity of one of the interest rate swaps in September of 2022. In the third quarter, we have recorded a loss from foreign exchange of $77 million, as compared to a loss of $99 million, the second quarter of 2022. The loss of the three months ended September 30th, 2023 was mainly the result of a stronger U.S. dollar to Canadian dollar, which the resulting unfavorable impact on the cancellation of our U.S. dollar denominated debt. Our net loss for the third quarter of 2023 was $3.3 million compared to net loss of $228.7 million in the prior year, the variation was principally due to the positive impact on the conversion of a U.S. dollar debt into Canadian dollars and the gain on the repurchase of our debt.

Also, to mention for the nine months ended September 30th, 2023, our net income was $545 million, the significant net income was primarily due to the U.S. C-band clearing proceeds recognized in the second quarter of 2023, combined with the year-to-date gain on the repurchase of our debt. For the nine months ended September 30th, 2023, the cash inflow from operating activities of $156 million, and the cash flows generated from investing activities were $264 million. The cash flows generated from our investing activities was due to the proceeds received from Phase 2 — as mentioned and partially offset by capital expenditures. In terms of capital expenditures incurred, they were primarily related to a lower orbit constellation, Telesat Lightspeed, and the newly acquired an NH4F satellite.

Turning to guidance, as you will also have noted in our earnings release this morning, we’ve maintained a previously provided revenue and adjusted EBITDA 2023 guidance. The guidance assumes a Canadian dollar to U.S. dollar exchange rate of Canadian 1.25. Telesat continues to expect its full year 2022 revenues be between $690 million and $710 million. In terms of adjusted EBITDA, Telesat continues to expect between $500 million to $515 million. In respect to capital expenditures, we continue to expect our 2023 cash flows used in investing activities to be in a range of $175 million to $225 million. 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 $200 million borrowings available under our revolving credit facility, approximately $1.3 billion in cash was held in our unrestricted subsidiaries.

In addition, we continue to generate a significant amount of cash from our ongoing operating activities. At the end of the third quarter, leverage as calculated under the terms of amended senior secured credit facilities was 5.46 times to one. Telesat has complied with all the covenants in our credit agreement and indenture. As Dan has indicated, in the third quarter and including the subsequent period, we have repurchased debt with a principal aggregate amount of $195.3 million, at a cost of $137.4 million combining these repurchases with repurchases done in 2022, we have repurchased a total amount of $587 million dollars at an aggregate cost of $332.7 million. In addition, this also results in interest savings of approximately $40 million annually.

Since the end of 2020, when Telesat were paid approximately $340 million of its term loan B. Our overall debt has been reduced by approximately 28%. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning, our 6-K provides an audited interim condensed consolidated financial information in the MD&A. The non-guarantor subsidiary shown or essentially the unrestricted subsidiaries with minor differences. So that concludes our prepared remarks for the call, and now we’ll be very happy to answer any questions you may have. And with that, we’ll now turn back to the operator.

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Walter Piecyk from LightShed. Please go ahead.

Walter Piecyk: Thanks. Just wanted to focus on the reaffirmation of guidance, I think as it relates to CapEx that would require obviously a pretty big step up in the fourth quarter. And then I also connect that question to OpEx. If I look at your SG&A and things like that, it didn’t really move much sequentially. So, I guess the question is, is fourth quarter the quarter when we’re going to start seeing some of these LEO project costs kick in? I think on a prior call I asked if anything, like if things, OpEx costs are capitalized until the satellites are launched. I think the answer was no. But if you can just kind of refresh us on when those expenses are going to start to ramp up. And if they aren’t, why would CapEx guidance be maintained at, I think that your guidance is $175 million to $225 million, which would imply a pretty big step up in the fourth quarter?

Andrew Browne : Well, Walter, this is Andrew. I think you — in that is, is the timing when we will commence our program. And so, we’ve made assumptions that we will commence in quarter four and hence we will see the additional CapEx being spent in the quarter. And in terms of SG&A and OpEx, as you know, given our high margins, we really control that very, very closely. But also, we are preparing, as you will imagine in terms of head count and other resources getting ready for the commencement of the program. That’s why historically, if you look at our SG&A is pretty well sort of flat and very well contained. And in terms of sort of the capitalization of the OpEx in our previous calls, we said that that’s not the case. There is some to do with sort of engineering people involved, but once we get going we’re very excited to get going and hopefully that will be Q4. I think a lot of this will be more apparent.

Walter Piecyk: So, and can you give us any sense on, at least on the OpEx side of things, because obviously CapEx you’ve already guided to. How long it takes, how many quarters it takes to really get that engine going in terms of expenses. How much of a vertical ramp are we going to see in SG&A in the upcoming quarters?

Andrew Browne : What I would say to Walter that when we give our full year numbers, I think we will give pretty comprehensive guidance, I think around LEO and about the steps in LEO and what our ramp will be in OpEx in addition to geo. So, I think we’ll make it very clear. So, it’ll be very clear. So, it would be very obvious looking at a boat of our companies.

Daniel Goldberg: And maybe I’ll just — Hey, Walter, it’s Dan. Maybe, I’ll just add a couple things. One we’re ramping up now. I mean, we’re — I think I mentioned in my remarks we’re out there staffing up as is MDA, so we’re out there right now hiring a lot of people. Not everyone’s on board at this point in time, but we’ve certainly had a lot of our offers accepted. So, the team’s ramping up really nicely, and as Andrew said, we’ll give detailed guidance for 2024. A lot of the spending that we’re doing though, a lot of that’s going to be capitalized. So, a lot of the engineers that we’re hiring and Andrew will go over all that I know, when we give our guidance, but that’s our expectation.

Walter Piecyk: What is the — since the last earnings call, has there been any alteration in kind of how you’re planning out the constellation itself? And then similarly, have you seen any initial traction in getting additional capacity commitments ahead of the launch or when — and if not, when what quarter do or how much before the actual first, TSATs go up in the air, would you start to see additional revenue or excuse me, capacity commitments?

Andrew Browne: So, on the first one, since we announced the deal with MDA two months ago, everything’s I mean, we’ve kicked off we’re working hand in glove with MDA, as we move the program forward. I mentioned that, we’re spending an MDA is spending a lot of time in the supply chain right now, and that all seems to be going well. So there hasn’t been, I think you had asked has there been any alterations or something in the plan? And the answer there is no. What — and look, we’ve been working on this for a long time, so things are, I’d say pretty well set in terms of what the program looks like. And so that’s all kicked off, and going well, and then as far as sort of a backlog, I mean, I think, we’ve said we’ve already got order of magnitude around $ 500 million US and kind of committed backlog to the program.

Our first launch is mid-2026, and we do expect to be ramping backlog between now and then. I think that, look we’re engaged with the customer community right now. There’s a huge amount of interest in Lightspeed and it’s been gratifying to see that now that we’ve announced the program, I think that there will be things that is customer commitments that we’ll be able to announce over the course of next year. We’re not sort of giving any guidance about exactly what that looks like, but based on the discussions that we’re having with folks, my expectation is that we’ll be signing additional customer backlog commitments throughout the course of next year. And we’ll update on that as go through.

Walter Piecyk: Right. Which you’ve said before. So, when you think about those conversations, are the verticals — the business verticals, the applications different at all from what you were thinking about when you size this market initially and you looked at kind of the low hanging fruit, what do you think in terms of enterprise applications or otherwise that people are going to gravitate to your constellation? In terms of some of these commitments that we may see next year?

Andrew Browne: No, I’d say, look, I mean, these are markets that were active in, like, every day, right? It is back-haul connectivity with mobile network operators and ISPs. It is providing capacity for maritime and aeronautical services. It is engaging with governments. Those are exactly the verticals that we have always expected Lightspeed to have a real competitive edge in. And so, nothing is changed there. That continues to be our expectation. And so, when we are announcing things, between now and being in service. And again, my expectation is we will have some commitments over the course of next year. We will talk about, where those are coming from. But those are the verticals that we expect to get really good traction in.

Walter Piecyk: And the…

Daniel Goldberg: Walter, I am not going to monopolize you on our call.

Walter Piecyk: Alright. I will let you go to the next one then. I will circle back in. I appreciate the answers.

Operator: Thank you. Our following question is from Caleb Henry from Quilty Space. Please go ahead.