Telesat Corporation (NASDAQ:TSAT) Q4 2023 Earnings Call Transcript

Telesat Corporation (NASDAQ:TSAT) Q4 2023 Earnings Call Transcript March 28, 2024

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. Welcome to the Conference Call to report the Fourth Quarter 2023 Financial Results for Telesat. Our speakers today will be Mr. Dan S. 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, Senior Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.

Michael Bolitho: Thank you and good morning. This morning we filed our annual report for the year ending December 31, 2023, on Form-20F with the SEC and on SEDAR Plus. 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 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. Thanks, Michael. I’ll say a few words this morning about our performance last year, share some thoughts about our expectations for this year, and then give an update as to progress to date on the Lightspeed program. I’ll then hand over to Andrew to speak to the numbers in more detail, and then we’ll open the call up to questions. I’m very pleased with our performance and the things we achieved in 2023. We did a really effective job in staying focused, in beating our adjusted EBITDA guidance, maintaining our operating discipline and industry-leading operating margins, securing the C-band clearing proceeds, and executing what I believe were some value-enhancing debt repurchases. But far away, the most important thing we did last year was find an innovative and highly accretive path forward for Telesat Lightspeed, including landmark agreements with MDA and SpaceX as well as important financing arrangements with our government partners in Canada.

The satellite user community fully consistent with our long-standing expectations is transitioning to LEO network and this transition will accelerate over time. For that reason, moving forward with our transformational Telesat Lightspeed program is our highest priority. 2024 marks the first full year where Telesat starts to make that transition to LEO in earnest and to help all of you track what we’re doing. Starting this year, we’re breaking down our financials between GEO and LEO and showing consolidated numbers as well. As you can see in our top-line guidance that we released this morning, we’re expecting some significant revenue declines around CAD150 million in GEO this year, split pretty evenly between our video and non-video businesses.

We’re not giving guidance beyond 2024 today, where I would note we’re not expecting to see this magnitude of annual top-line decline in the coming years. On video, the expected decline comes primarily from the full run rate impact of the lower rate on Nimiq 4 from the renewal we secured last October with Bell, as well as a renewal we have with EchoStar on Nimiq 5 coming up in early Q4 this year. Over the past few years, we’ve talked about the headwinds we’re facing in our DTH business, really driven by cord-cutting in the Ryzen over-the-top video platforms, and the reductions we’re expecting this year are very much a continuation of that trend. The other half of our expected revenue decline is coming from the enterprise side of our business with the biggest contributor being erosion of maritime services revenues.

Other meaningful expected reductions are from an aero customer, number of customers in Latin America, a universal service program we support in Indonesia, and here in Canada, some point-of-sale retail networks in a number of government services. The biggest driver on the lost revenue in the enterprise segment is the migration of customer requirements from GEO to LEO, namely the Starlink, as they’re the first in the market with a disruptive LEO network. The reality is that enterprise customers want affordable, low-latency broadband connectivity, which we’ve been talking about for quite some time. If anything, the transition to LEO is happening a little faster than even we expected. And although we don’t love seeing Starlink cannibalize some of our GEO customer requirements, it’s a strong validation of the market embrace of LEO and the compelling path that we’re on with the Telesat Lightspeed.

We fully anticipated the transition to LEO and it’s precisely why we’re building Lightspeed and why we’re so bullish on it. Turning to OpEx, we expect to see an increase of roughly CAD40 million year-over-year, which is all driven by the investments we’re making in Lightspeed. For half the increase comes from headcount expansion. I’m happy to say, though not surprised, we’re getting world-class professionals joining and wanting to join Telesat, individuals who see where the industry is going and want to be part of building out and bringing to market a really advanced and revolutionary low earth orbit global satellite broadband network. The project is a huge magnet for absolutely top-notch talent throughout our industry. To give you a sense, we had a little less than 500 people across the company at the end of last year and around 35% of them were working on Lightspeed.

By the end of this year, we expect to have roughly 740 employees, a roughly 50% increase with nearly two-thirds of the team working on Lightspeed. Dedicated GEO heads are actually coming down over 10% as we shift folks to Lightspeed and more broadly take steps to rightsize GEO OpEx for a declining GEO business. The rest of the OpEx increase is coming from higher Lightspeed revenue-related costs, as well as costs associated with professional services, IT, travel, marketing and regulatory activities, all tied to the development, implementation, and commercialization of Lightspeed. It’s full on and we’re making great progress working with MDA and our other suppliers. We’ve completed the major system requirements review milestone with MDA and are progressing toward preliminary design review in the third quarter of this year.

They’re ramping up staff just as we are. We’re also making great progress with our software partners developing the tools we need to dynamically manage the traffic on the network and the APIs and other interfaces our customers will use to purchase and manage Lightspeed services for their users’ requirements. We’re also making really good strides with various antenna suppliers for LEO user terminals for each of the verticals we’re focused on as well as with suppliers for our landing stations. In short, we’re moving out fast on all the key work streams necessary to bring Lightspeed into service. The customer community is enthusiastic with the approach we’re taking and the services we’ll be offering. And there’s great interest also with potential strategic partners and governments around the world to leverage Lightspeed for their needs.

Telcos, mobile network operators, satellite operators, service providers and users in every vertical around the world for enterprise, for aero, maritime and government services, they all recognized the transition to LEO that’s underway in our industry, and everyone is actively looking for the best path or paths to ensure that they don’t get left behind. Our CapEx guidance for this year has us investing roughly CAD1 billion into Lightspeed this year. We remain focused on launching our first satellites in June 2026, slightly more than two years from now, offering beta services shortly thereafter, and providing full global coverage and service by the end of 2027. Let me now give a quick update on Lightspeed funding. Over the past months, we’ve had extensive engagement with the Government of Canada over funding for Lightspeed.

We believe we’ve reached an understanding on detailed funding terms and expect to release a summary of those terms shortly, likely after markets closed today. Suffice to say that we’re very pleased we’ve reached this point. As we’ve noted in our earnings release, we estimate that our total cost of borrowings is roughly $750 million lower than our prior funding plan, and that’s on top of the $2 billion in CapEx savings. We’re very grateful for the strong support we’ve had from the Government of Canada on the Lightspeed program. And I note also that the Government of Canada isn’t just some inanimate object. There are a ton of people throughout the Government of Canada, who have worked really hard with Telesat and engaged closely with us over the past few years.

And I just want to note that my colleagues and I appreciate all their hard work and commitment to the program. And I’d note also not a huge surprise given all the benefits that Telesat Lightspeed delivers to Canada, I’d say the world, whether that’s bridging the digital divide, whether it’s job creation, technology development, job creation, all of that, there are huge benefits that come from the Lightspeed program, and the government of Canada and the people that work there recognize that, and we really appreciate that. So, in sum, we accomplished a great deal last year and have a very full 2024 as we accelerate our efforts and investment in bringing Lightspeed to market. Our industry is undergoing a significant transition as LEO networks gain ascendancy and market share.

To that end, our highest priority is on the focused execution of the Lightspeed program, both technically and commercially. We’re hugely bullish on our prospects in the market as well as our ability to deliver an extraordinary value proposition for our customers and significant value creation for shareholders. 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. Telesat ended the year 2023 with reported revenues of CAD704 million, adjusted EBITDA of CAD534 million, and generated cash from operations of CAD169 million with CAD1.7 billion of cash on the balance sheet at the year-end. As Dan has mentioned, we outperformed our 2023 adjusted EBITDA guidance. In the fourth quarter of 2023, Telesat reported revenues of CAD166 million, adjusted EBITDA of CAD123 million, and generated cash from operations of CAD13 million. For the fourth quarter of 2023 and compared to the same period of 2022, revenues decreased by CAD41 million to CAD166 million, operating expenses decreased by CAD30 million to CAD49.9 million and adjusted EBITDA decreased by CAD15.7 billion to CAD123.3 million.

The adjusted EBITDA margin was 74.3% as compared to 67.2% in 2022. When adjusted for changes in foreign exchange rates, revenues decreased by CAD41.2 million, operating expenses decreased by CAD30.2 million and adjusted EBITDA decreased by CAD15.9 million. The revenue decrease for the quarter was primarily due to the completion of an equipment sale in 2022 to DARPA, which is not repeated in 2023, and a rate reduction on the renewal of a long-term agreement with a North American customer. The decrease in operating expenses is primarily due to lower non-cash share-based compensation and higher equipment sales in 2022 related to the DARPA program, as I just mentioned. Interest expense decreased by CAD2 million during the fourth quarter when compared to the same period in 2022.

The decrease was due to the repurchase of notes from Term Loan B in 2023. This was partially offset by an increase in interest rates in the U.S. Term Loan B facility. In the fourth quarter, we recorded a gain in foreign exchange of CAD78 million as compared to a gain of CAD72 million in the fourth quarter of 2022. The gain for the three months ended December 31, 2023, was mainly the result of a weaker U.S. dollar to Canadian dollar spot rate as of December 31st compared to the spot rate as of September 30, ’23, and the resulting favorable impact on the translation of our U.S. denominator debt. Our net income for the quarter was $39 million compared to net income of $91 million for the same period in the prior year. Our net income for the year ended December 31 was $583 million compared to a loss of $82 million for the prior year.

The positive variation of $665 million was principally due. The C-band clearing proceeds recognized in the second quarter of 2023, combined with the gain on the repurchase of our debt and the foreign exchange gain on the conversion of U.S. dollar debt. This was partially offset by the booking of an impairment of $79.8 million in quarter four. For the year ended December 31, the cash inflows from operating activities were $169 million and the cash flows generated from investing activities were $212 million. The cash flows generated from the investing activities is due to the proceeds received from the Phase II C-band clearing as mentioned by then partially offset by capital expenditures. In terms of CapEx and costs, it was primarily related to our low-earth constellation Telesat Lightspeed and the newly acquired Anik F4 satellite.

Turning to guidance as you will also have noted in our earnings release this morning, we provided preliminary 2024 guidance. This guidance assumes the Canadian dollar to U.S. dollar exchange rate of 1.35. As Dan also mentioned, we will look forward to reporting on a segmented basis where we will break out our Lightspeed and GEO business as we go forward. And this is really to provide transparency and understanding that everybody will be able to appreciate as both our businesses develop. Turning to 24, specifically, Telesat expects its full-year revenues to be between $545 million and $565 million. And in terms of operating expenses, excluding share-based comp, we would like to, you know, point out that we have a range of $80 million to $90 million attributed to Telesat Lightspeed.

And also as mentioned, this highlights, you know, represents an increase of $40 million year-on-year. In terms of adjusted EBITDA, Telesat expects to be between $340 million to $360 million. Turning to CapEx and respect to capital expenditures for 2024 used in investing activities, we anticipate this to be in the range of $1 billion to $1.4 billion, which is practically all related to Telesat Lightspeed. Dan has also highlighted the drivers to our 2024 financial outlook in terms of revenue declines we’re expecting at the GEO business and the increase in operating expenses that are fundamentally related to Lightspeed as I had mentioned. The drivers of that OpEx is indeed as headcount as we discussed marketing IT systems, professional fees and consulting.

Turning to cash to meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures. We’ve approximately $1.7 billion of cash and short-term investments at the end of December, as well as approximately $200 million of borrowings available under a revolving credit facility. Approximately $1.25 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate significant amount of cash from our ongoing operating activities. At the end of the fourth quarter, the total leverage ratio as calculated under the terms of the amended senior secured credit facilities was 5.32 times. Telesat has complied with all covenants in our credit agreements and indentures. Further including the repayment we made in 2020 of approximately $341 million of the outstanding term Loan B combined with our ongoing repurchase program, our overall debt has been reduced by approximately 28%.

Just to recap, we’ve repurchased today the total amount of $587 million at an aggregate cost of $332.7 million. In addition, this also results in interest savings per year of around $40 million. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 20F provides the unaudited interim condensed consolidated financial information in the MD&A. The non-guarantor subsidiaries shown are essentially the unrestricted subsidiaries with minor differences. So I think that concludes our prepared remarks for the call. I’m very happy now to turn back to the operator. And, I guess, address any questions you may have. Thank you very much.

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Q&A Session

Operator: [Operator Instructions] And the first question is from Chris Quilty from Quilty Space. Please go ahead.

Chris Quilty: Dan and crew, congratulations on getting that financing stub done. It’s been a long trip over the years and somebody I can’t decipher, I mean, can you remind us, what was the last publicly stated position you had in terms of debt rates? I think it was around $2 billion, correct?

Daniel Goldberg: Yes. Hi, Chris. Yep, that’s about right. That’d be a U.S. number. I think what we’ve said is, well, Andrew, go ahead.

Andrew Browne: Yes, I’ll go ahead. In fact, you know, on our website we have investor presentations. We did a kind of a small roadshow in November in Toronto, in New York, and – but reading out from page 19, just for anyone that [indiscernible]. Overall, in terms of our sources and uses, we had Telesat equity of $1.6 billion, Government funding $2.1 billion, which is your question, Chris, vendor financing of $300 million. And on, you know, just to round off in terms of our spending, overall we had $2.7 billion for our satellites, operational expenditures of about $800 million. And we also had contingency included of roughly 14% of $400 million, all contained within the overall program just to give you a quick refresher on that.

Chris Quilty: That’s great. Thanks for the detail. So I kind of jumped over it. But, you know, congratulations on the, I think the vision you put forward here. You know with the focus on the enterprise market, and that brings up a question. You know, Starlink has obviously been hurting the maritime market and other adjacent markets, but haven’t really – have you seen them at all target the traditional enterprise market? And can you help us understand the differentiation of what you’re trying to do versus Starlink system?

Daniel Goldberg: Yes. Well, Chris, thanks. So let’s see. Yes, they’re definitely having an impact in maritime. They’re working hard to make inroads in aero but it looks so far like they’ve had greater traction in Maritime than aero at this point. But in truth, we’re kind of, you know, we’re seeing them everywhere. We see them – when you say enterprise, maybe less kind of the corporate enterprise, but we are seeing them for backhaul requirements on certain networks. So that’s where we’re seeing them. And, you know, we said in our remarks, customers want affordable, high throughput, low latency, resilient connectivity. And, you know, SpaceX now has launched a lot of satellites. And it’s a good product, but our product is differentiated for the verticals that we’re focused on, which are those enterprise verticals.

So, you know, we talked about telcos, mobile network operators, corporates, governments, aero, maritime. And I’d say, you know, it’s a few things. You know, one of the key things that we do, unlike a service that’s kind of principally a consumer-grade focused service, we’ve got the ability with our customers to do a bunch of things, give them SLAs, make commitments around CIR, give our customers the ability to have their own dedicated bandwidth pools, which then they can manage. They can oversubscribe it. They can offer different service tiers. They can move their bits around across their network, which for some of them could be the entire earth. So, it gives them massive flexibility, massive control over their bits, over their network. So, I’d say that’s a big part of the differentiation from the customer standpoint, you know, I think from – I don’t know, the investor standpoint.

What we’re doing, I think is also very capital efficient. We’re able to cover the world with terabytes and terabytes of this very high performing capacity with hundreds of satellites, not thousands of satellites and satellites that last, you know, north of 10 years. So gives us a long opportunity to earn the kind of returns that we need to – on our invested capital. So in any event, and look again, I think, you know, SpaceX is moving fast and being disruptive. We don’t get everything right around here, to say the least, but we definitely saw the transition from GEO to LEO coming and what a powerful value proposition that is for our enterprise customers. So we’ve been all over that. But I’d say as good as SpaceX is and as fast as they’re moving like no one’s going to own this entire market.

The market’s huge. It’s growing fast. I’d say, particularly for enterprise customers, they never want to put all of their hedges in any one basket. And so, in any event, we’re excited to get moving and get out there as fast as we can. As you probably picked up in my remarks this morning, we’re just super focused on making big investments to get there as fast as we can.

Chris Quilty: Great. So NDA clearly has a pretty tall task ahead of them here over the next couple of years. But after listening to the Eutelsat OneWeb call, I find myself asking you the more important question, which is, where are you in terms of your gateway filing?

Andrew Browne: Ah, in terms of, so are you kind of U.S. focused?

Chris Quilty: Well, no, I mean for the global deployment. I mean, you know, OneWeb’s had their constellation up and it’s still not fully operational because they couldn’t get their gateways installed due to regular.

Daniel Goldberg: Yes. Nope, I’ve tracked all that too. So here’s what I’d say, a few things about gateways, one, for better or worse, we’ve been working on this for a long time. So we’ve identified. You know, we’re starting off with at a minimum, 25 landing stations around the world. They’ll all be, you know, connected up and the like. And then we’ll scale our landing station infrastructure from there. And then for any given customer in any given country, we can kind of have sort of more bespoke landing stations as well with some of the flexibility that an advanced system like ours has. The other thing I’d note about Lightspeed, maybe unlike OneWeb, is we’ve got the Optical Inter-Satellite Links on our constellation. And so what that means is you probably need, never mind, probably – you need fewer gateways in order to still have full global coverage and connectivity and the opportunity to manage traffic around and to make sure that all of your satellites, 24/7 are kind of on the network and able to contribute.