MacDonald, Dettwiler & Associates' (MDDWF) CEO Dan Friedmann on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: MacDonald, Dettwiler (MDDWF)

MacDonald, Dettwiler & Associates Ltd. (OTCPK:MDDWF) Q2 2014 Earnings Conference Call July 30, 2014 5:00 PM ET

Executives

Dan Friedmann - President and Chief Executive Officer

Anil Wirasekara - Chief Financial Officer

Analysts

Thanos Moschopoulos - BMO Capital Markets

Steve Arthur - RBC

John Barker - Neuberger Berman

Naser Iqbal - Salman Partners

Deepak Kaushal - GMP Securities

Steven Li - Raymond James

Doug Young - TD Securities

Paul Steep - Scotia Capital

Varun Choyah - CIBC

Operator

Good evening. My name is Elizabeth and I will be your conference operator today. At this time, I would like to welcome everyone to MacDonald, Dettwiler and Associates Limited 2014 Second Quarter Results Conference Call and Webcast. (Operator Instructions)

We'd like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements which represent the company's estimates, future plans, objectives and expected performance as of today's date. These statements are based on current assumptions that the company believes are reasonable, but are subject to a wide range of uncertainties and risks that could cause the actual results to differ materially from the forward-looking information. You are referred to the advisory regarding forward-looking statements contained in the second quarter earnings news release and in the company's most recent management discussion and analysis and annual information form, both of which are available on the company's website or SEDAR.

I would now like to turn the call over to Mr. Dan Friedmann. Please go ahead.

Dan Friedmann

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us today for MDA's second quarter 2014 conference call. With me is Anil Wirasekara, our Chief Financial Officer. I'll be discussing the key events that have taken place in the past few months. Anil will review our financial results for the second quarter. And then we'll open the line for your questions.

In the Communications sector, the company signed a contract for one communication satellite, bringing the year-to-date bookings to five satellites. Hispasat 1F, our replacement satellite for Spanish satellite operator Hispasat, this satellite will provide service for television, broadband, corporate networks and other telecommunications applications in Europe and the Americas.

Bidding activity in the commercial satellite sector continues to be competitive and had very heightened level of activity. The AsiaSat 8 communication satellite built for AsiaSat, a leading satellite operator in Asia, was completed and shipped to the launch site. This satellite will be used for television broadcast, private network services and broadband services across Asia Pacific. This is the third satellite that SSL has provided to AsiaSat, and two more satellites for this long-term customer are currently in the factory.

The US Air Force Space and Missile Systems Center awarded the company two indefinite delivery, indefinite quantity contracts to work with US government agencies to host government payloads on commercial satellites. These satellites include both geostationary and low-Earth orbit missions. Under these contracts, the company has been selected to perform the first competitive study to host a NASA instrument for monitoring pollution over North America. In Canada, our Montreal operations signed a contract with an undisclosed customer to provide two communication satellite subsystems.

In the Surveillance and Intelligence sector, the Commonwealth of Australia awarded the company a contract extension till the end of 2014 for the unmanned aerial vehicle surveillance service currently being provided to the Australian Defence Force in Afghanistan. In Canada, the Department of National Defense has exercised the option to extend the contract for the provision of operation support to the East and West Coast Radarsat-2 ground systems, which are Canada's wide area maritime surveillance infrastructure.

The company also signed a contract valued at $14 million with the Land Title and Survey Authority of British Columbia to design and implement a geographic information system to create and maintain a single complete and trusted representation of British Columbia's land parcel fabric. This system will allow the Land Title and Survey Authority to deliver consistent vital information about land parcels to private industry, government and the general public.

In the robotics area, the company was awarded three strategic contracts. The first is from the Canadian Space Agency to design and build Canada's contribution to NASA's first mission to return samples from an asteroid to Earth. And they will deliver a laser-based instrument to be used during a six-month test to create a three-dimensional map of the asteroid to help the mission team select the site from which to collect the sample.

The second contract won by our US operation, which now has a robotic capability, is a contract from NASA to study system concepts and key technologies for the Asteroid Redirect Mission. This mission aims to bring a rather small near-Earth asteroid into lunar orbit where it can be further analyzed. Two concept studies will be conducted under this contract, one that examines the use of MDA's robotic technology for the capture of the asteroid and the other that explores how to adapt the SSL commercial spacecraft to serve us the actual asteroid redirect vehicle.

The third contract is from the US Department of Advanced Research Projects Agency, DARPA, which aims to advance new solutions that has the potential to provide more affordable access to space. Under this contract, SSL will support completing the design and integration of its flight model for a new capability that can carry small science and technology missions to space onboard SSL's built geostationary satellites. The self-contained hosted mission would then be launched from the geostationary satellite once in orbit. This will offer better value to our commercial customers as well as to the government.

Moving on to the services business in the Surveillance and Intelligence sector, the company received key contracts, including a contract with a national geospatial agency in the United States with a provision of software systems and services to automate the production of the agency's aeronautical charting products used for flight operations at and around airports. The company will leverage many years of experience in developing aeronautical information solutions for the US Air Force and the FAA. The contract will support the agency, which is the largest aggregator of aeronautical information in the world in achieving its objective to automate the drafting and maintenance of aeronautical charters.

Finally in the services area, the company has signed a definitive agreement to acquire a business that includes radar and other information sensors used for national security purposes. The business will significantly strengthen MDA's ability to pursue future surveillance and intelligence programs in United States. The acquired business has approximately 170 employees of which 90% have security clearances and generate annual revenues of approximately $40 million. The business will become part of MDA Information Systems LLC and is our first acquisition under a secure proxy arrangement.

In closing, ever since we acquired the distinctive space program execution capabilities with SSL 18 months ago, the company has been active in pursuing opportunity to expand its capabilities in the United States. In the area of robotics, we now have established a meaningful capability. And as I mentioned earlier, we're winning key contracts in the area of low-Earth orbit surveillance satellites. We're expanding our capability at SSL by working on the Skybox constellation announced earlier this year. And we're pursuing many other key opportunities. And with this latest acquisition, we're expanding our presence in the US radar surveillance market and in particular access to radar information and systems business.

That concludes MDA's operational highlights/report. I will now ask Anil to report on our financial results. Anil?

Anil Wirasekara

Thank you, Dan. Good afternoon and welcome, everyone. As always, we appreciate your time and interest in MDA. I'm very pleased to report that we continued to perform well this quarter. We achieved solid increases in a number of key performance measures. Year-over-year second quarter consolidated revenues increased 23% to $553 million. Operating EBITDA increased by 11% to $91 million. And operating earnings increased 19% to $52 million or $1.43 per share. These second quarter results are record highs quarterly results for our company and they highlight the benefit of our diversified earnings base.

We ended the second quarter with fully funded order backlog of $3 billion, up from $2.8 billion as of the end of March 2014. We continue to be very busy in terms of bid activity, particularly in the commercial communication satellite market where we booked contracts to build five communication satellites in the first half of the year. Let me first review our second quarter results in more detail with quarter-over-quarter comparison.

Consolidated revenues of the second quarter 2014 increased to $553 million compared to $450 million for the same period last year. The main driver for the increase was great volumes across both operating segments, particularly higher activity in the RCM program and several communication satellite construction programs currently in the factory. Operating EBITDA increased to $91 million compared to $81 million for the second quarter last year on higher activity levels. As expected, operating EBITDA as a percentage of gross revenue was down somewhat this quarter primarily due to the higher proportion of satellite construction contracts that included a significant flow-through component in the sales mix.

Operating earnings this quarter increased to $52 million or $1.43 per share compared to $43 million or $1.20 per share for the same period of last year. I remind everyone that operating EBITDA and operating earnings are non-GAAP financial measures. And in our latest MD&A, you will find a reconciliation to net earnings.

Net earnings under IFRS this quarter increased to $36 million or $1.01 per share compared to $31 million or $0.86 per share for the second quarter of last year. It's worth noting that debt-to-earnings include among other items non-cash amortization of acquisition-related intangible assets that are not expected to be replaced and the impact of fair value adjustments on share-based compensation.

Now I will review our results for the year-to-date on a consolidated basis as well as the contribution from our two operating segments. For the six months ended June 30, 2014, consolidated revenues increased to $1.05 billion compared to $879 million for the same period of last year. The increase reflected growth across both segments and were aided in part by the impact of foreign currency translation as well.

Revenue from Communications for the year-to-date increased to $735 million compared to $664 million for six months of last year. Revenue from the Surveillance and Intelligence business for the year increased to $310 million from $215 million for the same period last year. Operating EBITDA for the year-to-date increased to $176 million compared to $163 million for the first six months of 2013.

The Communications segment achieved operating EBITDA of $88 million and a solid 12% operating margin. However, increased competition has put pricing pressures on new satellite construction procurements. In the Surveillance and Intelligence segment, growth in our operating EBITDA kept pace with revenues, resulting in operating EBITDA of $88 million and a healthy 28% margin.

For the first six months ended June 30, 2014, operating earnings increased to $101 million or $2.80 per share compared to $85 million or $2.50 per share for the same period last year. The effective income tax rate on operating earnings for the year increased to 21% from 19% for the full year in 2013, mainly due to the change in mix of incomes from the jurisdictions in which we operate. We expect the effective income tax rate for the full year 2014 to be in the low to mid-20%s, slightly higher than what we previously expected.

We have performed well year-to-date despite the challenging business environment. Based on the strength of our results of the second quarter and the first half of the year, we believe that we are on pace for meeting our annual organic growth targets.

Now let us turn our attention to cash flows. We continue to deploy capital in a systematic and disciplined approach across the broad spectrum, investing in business through capital expenditure, working capital, acquisitions, research and development, and other organic growth initiatives. We have been deploying capital in the construction of a second thermal vacuum test chamber and a variety of electrical upgrades to the manufacturing facilities at SSL, which are now near completion.

As a result, total capital expenditure this quarter and year-to-date was slightly higher than the same period of 2013. As a priority thus far this year, we have invested cash generated from operations back into working capital. We had built up a healthy balance of advanced payments at the end of last fiscal year related to certain long-term construction programs and we are now drawing upon those advanced payments this year to fund work on those programs.

Investment in working capital is integral to our business with the volumes and variety of long-term construction contracts that we have. We efficiently fund our working capital requirements with the revolving loan facility which we recently amended with reduced interest rates and relaxing of certain financial covenants. And we also extended the maturity date by one year to November 2017.

Now to summarize our performance, we achieved a record second quarter. We generated consolidated revenues of $553 million, operating EBITDA of $91 million and operating earnings of $1.43 per share. Operating EBITDA margins remained solid on a diversified earnings base. Our order backlog as of June 30th was $3 billion, providing us with very good long-term revenue and cash flow visibility. We have a strong pipeline of opportunities across both operating segments to support continued growth.

We are focused on executing our long-term strategies, enabling our customers to face an increasingly more complex industry and challenging market environment. We have declared a semiannual dividend of $0.65 per share payable in September. As always, we remain ready and willing to access capital markets if required to fund future growth initiatives and drive shareholder value.

That concludes my discussion. And I will hand it back to Dan.

Dan Friedmann

Thanks, Anil. Anil and I are now ready to respond to your questions. Elizabeth, can you please open the line?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Thanos with BMO Capital Markets.

Thanos Moschopoulos - BMO Capital Markets

Maybe starting off with margins, you mentioned the fact that there were some higher level of pass-through costs this quarter leading to the margins that we saw. So how should we think about margins going forward, given that some of the cost efficiencies are coming on line and thermal vacuum chamber? Can we see some improvement or would you be maintaining your long-term margin target of 18% at the corporate level?

Anil Wirasekara

Our goal for the end of the year is to maintain the current level of margins. We certainly don't expect the margins even on a consolidated basis to increase over the remaining half of the year.

Thanos Moschopoulos - BMO Capital Markets

And then can you talk about what you're seeing in the geospatial business over the past quarter? I think it was flat year-over-year in Q1. Has there been an uptick on a year-over-year basis in Q2?

Anil Wirasekara

We had an outstanding year last year. So it's tough to try and grow from a big increase one year over the other. And we are pretty encouraged that we are at least maintaining where we are for the first half of this year.

Thanos Moschopoulos - BMO Capital Markets

Has there been some improvement in the US government's contracting environment? I mean there were a couple of announcements obviously you made recently on the government front. And so would you say that overall the US government market is better than it was maybe six months ago?

Dan Friedmann

Yeah, things are becoming unstuck and starting to move and it's still not back to the pre-sequestration timeframe, but it's definitely moving, yes.

Anil Wirasekara

But it takes a while. It takes a couple of quarters for these to move from releasing of budgetary funds to actual procurement and generation of revenue.

Thanos Moschopoulos - BMO Capital Markets

Is there any color you can add on the proposed acquisition as far as when that might close? And will you be disclosing at a future date the purchase price, or should we expect that that will be not material?

Anil Wirasekara

We expect to close around the fourth quarter. In the fourth quarter, we go through CFIUS and some of the other regulatory issues. We don't anticipate any problem, but we got to go through the process and hopefully close somewhere middle of the fourth quarter. And once the transaction is complete, we will have to disclose the amount, but it's not material.

Thanos Moschopoulos - BMO Capital Markets

Any color in terms of what it brings to the business or is that something you can't comment on given the nature of the asset?

Dan Friedmann

I think I spoke about it. It's a very key asset that does very significant work in the surveillance area and radar specifically. So all the strengths that we have in Canada and worldwide and we have been unable to access in the US, this is the key property for that in the United States. And we are expecting to build up synergies over time, as we have with the robotic capability we acquired many years ago and to really try and open up this market for us. In the rest of the world, we are leading. But in the US, we don't participate. And we are lucky that the property came up in the market. I remember working with them 20 years ago. And the seller does not want its name disclosed at this point. They'll come in due course.

Operator

Your next question comes from Steve with RBC.

Steve Arthur - RBC

Just a couple of follow-up questions, I guess first on margins. Kind of holding the line there and sounds like pressing pressure hasn't really abated it at all or probably got inverse. I guess just another angle on that. I expect margins are also being impacted by the ongoing cost related to the ViaSat 2. Any way that you can quantify what some of those costs might be or how that's impacting you? And any update on the status of that whole situation?

Anil Wirasekara

As far as costs are concerned, I mean this is the direct legal cost, not a lot of the indirect costs that are involved. But the direct legal costs were about $2.5 million on a year-to-date basis, most of which was in this quarter.

Steve Arthur - RBC

And that shows up under corporate expense in your statements?

Anil Wirasekara

That showed up under corporate expense in our last statement, yes.

Steve Arthur - RBC

And I understand there's another hearing in August. Any other color on the whole process there?

Dan Friedmann

The jury delivered their verdict, which has been well reported. And the Judge has to enter the final decision at that level in that court. And before the Judge does that, both sides got an opportunity to submit their views on the whole thing, which are called post-trial motions, which we both have. And that's what will be heard, I believe, on August 7th. And at some point after that, which could be weeks or months, the Judge will enter the final judgment in the case. And at that point, there may or may not be appeals by either side to the higher court.

Steve Arthur - RBC

I guess one other related question on margins. We talked last quarter and before about some SSL number, the efficiency improvements, manufacturing process improvements initiatives. Can you talk a little bit more about just what your efforts are there and what the expected impact of that might be shorter term and longer term?

Dan Friedmann

Yes, we have in our fairly extensive process and the way, which looks at our whole overhead structure with respect to what today's needs are. And we expect to make some overhead reductions in costs, things like buildings and space and so on where we can be more efficient. We have a significant program going on where our suppliers have the money that we get to spend outside of SSL and how to improve those processes and achieve better value for ourselves and our customers. And we have a variety of projects on the direct side, both related to capital expenditures in testing and so on to improve efficiency, but also reviewing some of our processes that have accumulated over time and how to make them more efficient. And that project is probably about a year-and-a-half long project to reengineer a number of areas to be more efficient and more aligned with what today's market is buying, which are smaller satellites versus larger satellites, for example.

And as that process continues, there will be savings. We had savings in this quarter. I'm sure there'll be savings by the end of the year and more next year. Much of that has been passed on to our customers. So how much margins will improve or not is a whole other question. But in our normal process, we are trying to adjust our business to the market realities to try and maintain our value to our shareholders.

Steve Arthur - RBC

I guess with those process improvements, is there any kind of an objective or a target level of savings, x dollars or x% or something like that over one year or three years? Is there anything you could share?

Dan Friedmann

You know MDA. We have one, yes, but we can't share it now.

Steve Arthur - RBC

I know you mentioned on pace for meeting your annual organic growth targets, you're off to a very strong first half of the year. I think revenue and earnings are up 18% or so. Well, there'd be some volatility quarterly with the timing of contracts and such. But can you just, I guess, refresh us on your annual organic growth targets and what that might look like for the balance of the year and over the next couple of years?

Anil Wirasekara

Dan has talked about this previously where he had said that our organic growth rates are in the low-teens, and that's kind of where we expect to be, in the high single-digit, low-teens. Whether it's going to be 10% or 11% or 12% or 8%, it varies year-over-year, but that's kind of what we have engineered this business to do. I think we've been pretty clear about that. And that's where we hope to come.

Operator

Your next question comes from John with Neuberger Berman.

John Barker - Neuberger Berman

A couple of questions. One, on the ViaSat lawsuit, does the injunction of use of technology hinder any of your planned satellite construction? I wonder if you can just comment on the Ukraine-Russia situation and what impact it may have on your plans.

Dan Friedmann

I think you're referring to the fact that ViaSat has asked the court to consider an injunction on the over seventh hearing, which of course we have argued against. The irony of the whole thing is that since we've known about this for over a year, we're probably the company that has done the most work on trying to deal with this situation. Those patents do apply to more than just SSL. And we have the same solutions that allow us to complete our existing satellites and to bid the satellites in our pipeline. And those so far are cost and schedule neutral.

Having said that, our customers get nervous about the possibility of an injunction. So although we have a solution for the situation that's happening right now with the case right now and in reality does not affect the production of the satellites, the reaction from the marketplace if an injunction were to be granted is a little unpredictable. Needless to say, we're putting a lot of effort into trying to avoid that, as we believe that the situation can be compensated through monetary means and this drastic measure is not required. So that's the situation with that.

Ukraine, I don't know if you're referring to a specific contract that we have.

John Barker - Neuberger Berman

I am aware of that contract, but I'm also aware that there may be things I don't know about in terms of future plans or future deals. Just wonder if you can comment on whether this is common in both cases.

Dan Friedmann

In terms of the current contract, as we stated, we have declared a force majeure on the ground segment. And fortunately, that has not been cured. And that has had an impact on the overall program. The company has continued to construct the satellite and we plan to be complete with that in the next couple of months. At this point, without the force majeure and its impact being resolved, that work is likely to stop at that point until somebody can figure out how to unlock the force majeure. So that's where that contract is at.

John Barker - Neuberger Berman

In that instance, what is the financial hit to MDA?

Dan Friedmann

Only that we cannot continue to work on the last $50 million-odd of the contract at this point.

Anil Wirasekara

The contract value of about $50 million has not been recognized and the costs associated with that. So until such time as there's a go-forward plan to cure the force majeure and continue with the program, we will not be recognizing that revenue. From a cash flow standpoint, we are pretty much neutral. We have been paid in advance for all the work that we are doing and have done.

Dan Friedmann

In terms of future work, the key impact for us is that we've had a very successful program in Russia. AM5 satellite is doing very well. The AM6 satellite is ready for launch. It's been a huge success. The Russians need more satellites. And we've already established a business there. But under the current political situation, we don't see a way to sell more equipment to Russia in the foreseeable future, especially from a Canadian perspective. So that business is impacted.

John Barker - Neuberger Berman

What was the expected size of the Russia business that you did previously?

Dan Friedmann

We've been selling about an average of payload a year. There's currently a procurement for about three payloads going on. So it's $50-million a year of very good business.

Operator

Your next question comes from Naser with Salman Partners.

Naser Iqbal - Salman Partners

It seems this year in terms of the satellite awards is a little bit slower compared to last year. And just given the competitive commercial market, are you where you need to be in the capacity utilization, or do you think you need some more contracts and maybe some more rationalization to get to where you need to be?

Dan Friedmann

I'm not sure what you mean by capacity utilization is slower. I mean we've booked and announced five satellites in the first half of the year. That's pretty good. And often satellites are worked on for a while before they get announced, like Hispasat we worked on for two months before we could announce it. So that was actually being worked on. Those five satellites have been worked on since kind of the end of Q1. We have a very good backlog. So I think we're in good shape.

Naser Iqbal - Salman Partners

So in terms of the competitive pressures, you think at least from a cost structure basis you're where you need to be?

Dan Friedmann

I've mentioned I think to an earlier question that we're working very, very hard on our cost structure over the next year-and-a-half.

Naser Iqbal - Salman Partners

Anil, it looks like the changes in working capital, at least for the first half, is negative $160 million for the first half of the year. How much of that do you think could that reverse, or do you expect that the negative working capital changes could continue a little bit further?

Anil Wirasekara

No, I think a lot of it is going to reverse in the second half of the year, as it did last year. And already today, it has reversed. Having said that, we consistently in today's business environment have to invest in working capital. And as Dan just said, there are times where we have worked for two, three, four months on programs before they are finally confirmed, because there's a variety of regulatory issues that need to be resolved prior to signing of a contract. So we got to work a lot of these to inventory. We got to find a lot of parts before we get any advance payments. We got to put significant deposits on launches in order to reserve the slots. So there is a continuous plan or program to reinvest in working capital. Now we take all this into account when we run our business. So it's not that we are unaware of it. But it's part of the business that you have to have a fair amount of liquidity if you want to be in this business. And at times, you're called upon to invest in a variety of manufacturing and operational requirements.

Naser Iqbal - Salman Partners

And I guess my final question will be just on a major acquisition. In terms of the targets out there, is it that for something in the size of an SSL, are there any targets like that, or is it that you're not finding the targets at a reasonable price?

Dan Friedmann

There are very few targets. And quite frankly, we're way more focused on our organic growth and on the tuck-in acquisitions. We've got to plan to put in the SSL together and to go after a very, very significant new market for us in the United States for which we're building up a very impressive pipeline. And that's our first priority. That's where we build the most value. Before we go shopping again for something else big, we got to plan to go into Brazil where multi-billion dollars of expenditures are planned. Again, we need to grow organically and buy smaller acquisitions there. So our major focus is to work on the plan that we've established. If we find a very good large acquisition, we'll act on it. The last one we acted on when we started pre-SSL. So we're just going to continue with that, because they don't come together very soon, very often. But there is a lack of good targets for sure if that's the only thing you're doing.

Naser Iqbal - Salman Partners

Would you say that in terms of your pipeline today versus where it was at the beginning of the year that the pipeline is more robust and much higher where you were at the start of the year, or do you think it's about the same?

Dan Friedmann

I think you have to break it down. We have our traditional Canadian-based surveillance business. That pipeline is pretty steady. We've had some good gains, but we've had some losses like the situation with Russia. And we have some gains like the ship programs in Canada that we're in better position today than we were then. The commercial satellite pipeline is very strong, continues to be over $2 billion, higher level of activity. Right now, probably half a dozen satellites in play in the next weeks or months. And then our new pipeline of basically having the capability that we have in Canada at SSL like the robotics capability I spoke, the LEO satellite capability, the newer acquisition now. And the pipeline is developing from that. That is growing every quarter and that has significantly improved from the beginning of this year.

Operator

Your next question comes from Deepak with GMP Securities.

Deepak Kaushal - GMP Securities

A couple of follow-up questions and a couple of new questions, if I may. I saw Boeing got an order from Intelsat and they had a marketing agreement with ViaSat. Are you finding that that's impacting new competitive wins, or is that not related?

Dan Friedmann

No, we're finding an impact from that. That agreement is old. It's back from the original contract they signed with ViaSat. There aren't any significant large high-throughput satellites in the pipeline today.

Deepak Kaushal - GMP Securities

And then going back to the new pipeline that you're talking about with the LEO and the robotic and the radar capability in the US now with SSL, did you say that you now have a full proxy board for SSL or are you still under an SSA? Last year, you identified a $10 billion pipeline in Surveillance and Intelligence in the US addressable. How does it change your immediately addressable market for the US government?

Dan Friedmann

Let's clarify some things. We have a proxy company in the United States, which is Geospatial Services business independent from SSL under which we did this acquisition. And that's run that way. We have at SSL a complete program to go after government business and other commercial business. A big part of our pipeline is Silicon Valley startups and some of them not so much startups that are getting into space like Skybox and there's many others now, which is a brand new thing for us we hadn't anticipated. And a lot of it is government like NASA and DARPA which doesn't require anything. It's non-classified work. And we have a separate, much smaller pipeline at SSL, which is classified work, which is done under SSA at SSL. But the vast majority of the pipeline is under our original proxy board company and not under any security arrangement, just civilian government business like NASA and so on.

Deepak Kaushal - GMP Securities

So in terms of implement a proxy board for SSL Federal, is there a timeline for that? And then how would that open up the market for you guys?

Dan Friedmann

No, we're not planning to implement a proxy for SSL Federal. We don't see a need to do that. And in terms of expanding in that area, it would only happen if there was a significant classified procurement. At the moment, we don't have any of those in our pipeline. They're all more civilian procurements. And we've never had a $10 billion pipeline. I wish. Might be an addressable market.

Deepak Kaushal - GMP Securities

No, you said it was addressable market.

Dan Friedmann

Our pipeline started at zero and has built to many hundreds of millions at this stage.

Deepak Kaushal - GMP Securities

Just a general question hosted payloads. You won a couple of studies for US government hosted payloads. How long does this study stage kind of go and when do you see the US government start to procure actual hosted payloads on commercial satellites?

Dan Friedmann

There're several things going on. In order to procure hosted payloads, you had to quality and win one of this indefinite delivery, indefinite quantity contacts, which we did win, and we won both the geo side and the low-Earth orbit side. We're winning on both sides. That establishes the contract vehicle and the pre-qualification of the company. And at that point, government departments can basically order. So we are open for business and we're working on a number of opportunities that go directly to our hosted payload. So far, there was only one a few weeks ago. So far under that vehicle, we're working on a study for NASA. But we also have what we call the PODs contract, which is where we take a satellite in our spare battery compartment and launch it from our own satellite. And that we have received the go ahead to get all the way to the flight model, as we discussed.

Now when the big money gets spent, there are several items in our 2015 potential booking pipeline in the area of PODs or hosted payloads. More importantly, they offer an advantage to our commercial customers, because they would share the right.

Deepak Kaushal - GMP Securities

And can you quantify that opportunity either in 2015 or beyond specifically for the hosted payloads?

Dan Friedmann

No, it's too early. The indefinite quantity, indefinite delivery contract was two weeks old. It's just too early.

Operator

Your next question comes from Steven with Raymond James.

Steven Li - Raymond James

Just a few questions. Looks like Radarsat is ramping nicely. How much was it in the quarter? I think last quarter you said it was about $30 million.

Anil Wirasekara

Well, a little bit more, because it's now reached its peak. So I think this quarter, we are not a $40 million, and that was the big $100 million jump in Surveillance and Intelligence revenues quarter-over-quarter. But a lot of that stuff is flow-through as well. So we had big flow-throughs as well on RCM and it's coming to the peak.

Steven Li - Raymond James

And also on FX, how much impact was FX on the revenue, can you quantify?

Anil Wirasekara

It's hard to give an exact number, but it's in the $25 million to $30 million range.

Steven Li - Raymond James

The Australian extension, is it at the same run rate till the end of the year, so $15 million a quarter?

Dan Friedmann

Yes, it's at the same run rate. And as you know, Australia has made a much longer commitment than the extension they gave us. So we're hopeful that will continue.

Steven Li - Raymond James

And then my last question on Optus, you mentioned there was an issue. Did you have to take any charge in the quarter, or is it maybe in future quarters?

Dan Friedmann

Contracts of all kinds of ups and downs and yeah there is an overrun on the Optus contract. It's just visible because the overrun happened at the launch site instead of the factory. But it's a non-recursive business and we carry the appropriate reserves for that.

Operator

Your next question comes from Doug with TD Securities.

Doug Young - TD Securities

Just a couple of housekeeping questions from me. First, on the acquisition, you expect to close later this year. Are the margins in that business consistent with the Surveillance and Intelligence business you have today?

Dan Friedmann

This is our business today that generates all kinds of technology for the government and operates at US government rates, which are kind of 10% type margins. We hope to convert it closer to our geospatial business over a period of years and not only grow it, but improve the margins.

Doug Young - TD Securities

Speaking of the geospatial business, I wonder, Anil, if you'd be able to provide what that was in terms of revenue in the quarter.

Anil Wirasekara

I think on the revenue side, it was about $35 million to $40 million of revenue when you take both the US side and the Canadian side. So we're ticking up $130 million, $140 million year on that business.

Doug Young - TD Securities

And then last one from me. Sorry if I missed it. But did you provide the backlog by segment this quarter?

Anil Wirasekara

No, and I don't think we've ever done that to provide backlog by segment. You can't even look at backlog by segment as such.

Operator

Your next question comes from Paul with Scotia Capital.

Paul Steep - Scotia Capital

Just on the commercial satellite market, the win rate has been fantastic so far this year. Should we think about maybe a bit of a slowing here at least just in terms of stretching out a bit the pace of awards just as you go through that cycle?

Dan Friedmann

I think our win rate is about right so far this year. I counted a little around a little over 30%, our win rate. It's impossible to predict what the win rate in the next few months will be. These things are all won or lost by small amounts. And so I don't know how to answer that. We're trying our best.

Paul Steep - Scotia Capital

On the vacuum chamber, how close to commissioning are you or have you actually commissioned the second chamber at this point?

Dan Friedmann

It's not commissioned, but it's ready. We're just inside it and likely you can close the door very quickly, so nobody is locked in there. But it's just going through final testing. It'll b ready in Q3.

Paul Steep - Scotia Capital

So should see some modest benefit in that in the back half of the year, just operationally for the team down there presumably?

Dan Friedmann

I think one satellite is going to go through it this year.

Anil Wirasekara

It would help ease the backlog, the bottleneck.

Operator

Your next question comes from Varun with CIBC.

Varun Choyah - CIBC

Can you talk a bit more about the emerging markets, like the opportunities in Brazil and do you plan to compete in India?

Dan Friedmann

Yes, both of those geographies have been good news since last report, although Brazil has an election later on this year and timing is dependent on that. They have very strong and large programs, surveillance like programs of the ocean, the waterways, the land, which are made for us. And we have made good progress in establishing our local partnering and situation, nothing to announce at this stage, but it's advanced very nicely over the last little while. And we've worked hard at preliminary responses and estimates and so on for those programs. So that's moving along well. And it's a good pipeline. It's going to be slow, but it looks good.

In the case of India, certainly the new government has been very helpful. Not only are things moving faster, but it's more friendly to the outside. We have good partner discussions there. And the government has announced they will procure satellite from foreign suppliers, at least one satellite from foreign suppliers, first time in 20-odd years. We are of course lining up to bid that. But we are intent on an Indian strategy where we're there in country for the future, as there is pent-up demand.

So those two geographies are looking very good for us and we're working very hard on them. And then some other emerging opportunities for us in Australia and the UK and Turkey.

Operator

Mr. Friedmann, there are no further questions at this time. Please proceed.

Dan Friedmann

Okay. Thank you, everyone, for listening, and we look forward to updating you on our next quarter. Have a good summer.

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