Loral Space & Communications, Inc. (NASDAQ:LORL) Q2 2018 Earnings Conference Call August 2, 2018 10:30 AM ET
Michael Bolitho - Director, Treasury & Risk Management
Dan Goldberg - President & CEO
Michel Cayouette - CFO
Jason Kim - Goldman Sachs
Michael Pace - JPMorgan
Arun Seshadri - Credit Suisse
Brian Hill - Wells Fargo
Good morning, ladies and gentlemen. Welcome to the conference call to report the Second Quarter 2018 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat; and Michael Cayouette, 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.
Thank you and good morning. Earlier today, we issued a news release containing Telesat's consolidated financial results for the three month and six months ended June 30, 2018. This news release is available on Telesat's website at www.telesat.com under the tab investor relations. We also filed our quarterly report on Form 6-K with the SEC this morning. 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 additional information about known risks, we refer you to the risk factor section of our annual report on Form 20-F for the fiscal year ended December 31, 2017 filed with the SEC on March 1, 2018. The information that we are discussing today reflects our expectations as of today and is subject to change except as required by securities laws Telesat disclaims any obligation or undertaking to update or revise this information whether as a result of new information, future events or otherwise.
I will now turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer.
Thank you, Michael. Good morning everyone. This morning I'll discuss our second quarter financial results and then give an update on the business. I'll then hand over to Michelle Cayouette who'll speak to the numbers in more detail and then we'll open the call up to questions. Adjusting for foreign exchange rate changes and the adoption this year of IFRS 15 revenue and adjusted EBITDA in the second quarter were approximately 5% lower relative to the same period last year.
Comparing the first half of this year with the first half of last year and making the same adjustments for FX and IFRS, revenue and adjusted EBITDA were each down 3%. Our earnings release provides greater detail on the magnitude of the impacts on our results of both FX and the implementation of IFRS.
Turning to some key metrics backlog at the end of last quarter was $3.8 billion, utilization was 94% for our North American fleet and 68% for the international fleet. And looking at how our revenues broke down on an application basis for the quarter broadcast services represented approximately 54% of total revenue, enterprise was 44% and consulting and other 2%. And on a geographic basis for the quarter, North America accounted for 82% of revenue, Latin American 9%, EMEA 5%, and Asia 4%.
Turning to new satellites, we were very pleased with the successful SpaceX launch of our Telstar 19 VANTAGE satellite less than two weeks ago. SpaceX did a tremendous job and we anticipate the satellite will enter commercial service next month. Telstar 19 V built by SSL is a state-of-the-art high throughput satellite that will be co-located with our Telstar 14R satellite to expand our services over the Americas, the Caribbean and the North Atlantic.
The satellite has a mix of Ka and Ka-band capacity. The Ka-band capacity for South America is already under a 15-year contract with Hughes Network Systems and our long-standing customer Gov Canada has entered into a 15-year contract for substantially all the satellites ka-band capacity over Northern Canada which means that all the satellites Ka-band capacity serving that region is already under contract.
Telstar 19 VANTAGE our other new satellite built by SSL is now at Cape Canaveral and we anticipate it will be launched later this month by SpaceX. Telstar 18V has a broad C-band beam over Asia which is similar to the one on Telstar 18, the satellite it we'll replace. It also has a mix of regional beams and high throughput spot beams and Ku-band that represents a significant expansion of our Ku-band capacity for Asia.
Although Telstar 18V will be owned and operated by Telesat, our longstanding partner aPT is providing 57.5% of the capital for the satellite program in exchange for use of 57.5% of the satellite's capacity. In addition to these two large geo satellites, in April we brought into operation our first LEO satellite an important milestone in our plans to deploy a highly advanced, high capacity, extremely low latency, LEO satellite constellation.
We'll be using the satellite to validate some of the design parameters of our LEO constellation and to do testing and demonstrations in concert with other companies and satellite users who have a keen interest in next generation LEO satellite services. And earlier this week, we announced that we've entered into contracts with Airbus on the one hand and a consortium of Thales Alenia Space and Maxar on the other hand to further develop and validate the system design for Telesat's planned LEO constellation.
We anticipate this work will take approximately nine months to complete at which point we expect to receive a commercial proposal from each of these contractors to deliver the key elements, namely the satellites, certain ground segment and the overall system integration of the Telesat LEO constellation. These are world class companies and we've had the privilege to work with over the past decades and we look forward to working together in the coming months to complete the design of our state-of-the-art and truly disruptive plan Low Earth Orbit satellite broadband constellation.
With that I'll hand over to Michelle and then look forward to addressing any questions you may have.
Thank you, Dan and good morning everyone. During the second quarter of 2018 and compared to the same period in 2017 revenue decreased by $14 million to $212 million. Operating expenses decreased by $8 million to $36 million and adjusted EBITDA decreased by $5 million to $179 million.
Between the second quarter of 2017 and the second quarter of 2018, the average value of the US dollar in Canadian dollar terms decreased by 4.4%. That decrease had a negative impact of $6 million on our revenue, a positive impact of $1 million on our operating expenses and a negative impact of $5 million on our adjusted EBITDA.
On January 1, 2018, we adopted IFRS9 financial instruments and IFRS15 revenue from contracts with customers. The adoption of IFRS9 had no impact on revenue operating expenses or adjusted EBITDA. For the three-month period ended June 30, 2018, the adoption of our IFRS15 had positive impact of approximately $3 million on revenue $6 million on operating expenses in $9 million on adjusted EBITDA.
When adjusted for the changes in the foreign exchange rate and the impact of IFRS15, revenue decreased by $12 million during the second quarter when compared to the same period in 2017, operating expenses decreased by $1 million and adjusted EBITDA decreased by $9 million.
During the first half of 2018 and compared to the same period in 2017, revenue decreased by $16 million to $444 million. Operating expenses decreased by $25 million to $74 million and adjusted EBITDA decreased by $2 million to $373 million.
Between the first half of 2017 and the first half of 2018, the average value of the US dollar in Canadian dollar terms decreased by 4.8% that decrease had a negative impact of $12 million on revenue, a positive impact of $1 million on operating expenses and a negative impact of $11 million on adjusted EBITDA.
For the six months ended June 30, 2018, the adoption of IFRS15 had positive impact of approximately $7 million on revenue $11 million on operating expenses and $18 million on adjusted EBITDA. When adjusted for the changes in the foreign exchange rate and the impact of IFRS15, revenue decreased by $12 million during the first half of the year when compared to the same period in 2017. Operating expenses decreased by $12 million and adjusted EBITDA decreased by $10 million.
Excluding the impact of IFRS15 and the changes in the foreign exchange rate, the decrease in operating expenses during the first half of the year was mainly due to a special payment made in the first quarter of 2017 to stock option holders in connection with the cash distribution to our shareholders.
Depreciation and amortization decreased by $2 million during the second quarter and by $4 million during the first half of the year when compared to the same period in 2017. The decrease was mainly due to the end of the useful life of accounting purposes of our Telstar 18 satellite in 2017. Interest expense increased by $7 million during the second quarter and by $16 million during the first half of the year when compared to the same period in 2017.
The increase was mainly due to the interest expense recognized on certain customer contract with the significant financial component as a result of the implementation of IFRS15. Higher interest rates on our new senior secured credit facilities and senior notes as well as the amortization of the gain on refinancing resulting from the implementation of IFRS9.
The increase was partially offset by an increase in capitalized interest combined by positive impact related to the conversion of US dollar denominated interest expense into Canadian dollars equivalent. In 2018, we recorded a gain on financial instrument of $1 million during the second quarter and again on financial instrument of $15 million during the first half of the year. The gains on financial instruments reflect changes in the fair value of the interest floor on our senior secure credit facility, the prepayment option on our senior notes, and our interest rate swap.
In 2018, we also recorded a loss on foreign exchange of $59 million during the second quarter and a loss on foreign exchange of $137 million during the first half of the year. The losses on foreign exchange were mainly related to the change in the exchange rate used to translate our US dollar denominated debt into Canadian dollar equivalent at the beginning and the end of each period.
Tax expense decreased by $3 million during the second quarter and increased by $8 million during the first quarter when compared to the same period in 2017. The decrease during the second quarter was mainly due a decrease in operating income combined with higher interest expense. The increase during the first half of the year was mainly due to gain on certain financial instruments.
On April 26, 2018, we amended our senior secured credit facility to effectively reprice our term loan B facility. The amendment reduced the interest rate on our term loan B from LIBOR plus 300 basis points to LIBOR plus 250 basis points. The cash inflows from operating activities were $94 million during the second quarter and $221 million during the first half of the year. And the cash outflows used in investing activities were $30 million during the second quarter and $58 million during the first half of the year.
The majority of our investing activities in 2018 were related to capital expenditure for the construction and launch of Telstar 18 VANTAGE and Telstar 19 VANTAGE. To meet our expected cash requirements for the next 12 months including interest payments and capital expenditures, we had $563 million of cash and short-term investments at the end of June as well as approximately $200 million US dollars of borrowing availability under our revolving facility.
In addition, we continue to generate a significant amount of cash from our operating activities. At the end of the second quarter, we were in compliance with the covenant in our credit agreement and indenture. A reconciliation between our financial statements and the financial covenants calculation is provided in the quarterly report we filed this morning.
That concludes our prepared remarks for this call and now we will be happy to answer any question you may have. Operator?
[Operator Instructions] Our first question today will be from Jason Kim from Goldman Sachs. Please go ahead.
Thank you. Good morning. I want to start with the C-band question. So, with the NPRM meeting behind us, we've all seen the direction that FCC seems to be headed with the C-band initiative and I wanted to get your take on the topic now with three other peers being part of satellite group. Where does Telesat stand here and how much revenues are you generating from US C-band currently?
Good morning, Jason. So, as you know we've been following the FCC's proceeding on C-band closely. We'll participate in the proceeding. We're not at this point in time aligned with SES and Intelsat and Eutelsat on their position there. I said before I think on our last call, we're sympathetic to the direction that the FCC is heading. We understand their policy objectives about trying to find more C-band, more spectrum to make available for 5G activities.
We are all aligned with the other satellite operators to the extent that there's a recognition that those of us that have made big investments in C-band infrastructure capable of serving the US should be compensated if that spectrum that we've all relied upon is being reassigned to other services. We're not going to say at this point what our US C-band revenues are as part of the proceeding everyone needs to make certain information available.
So, in any event we are in much the same position impostor that we were when we spoke about this I think it was on our last call and yes, we're, we'll participate actively in the proceeding.
Sounds good. And then for Telstar 18V, could you remind us what the expansion capacity is versus Telstar 18 maybe in terms of how many Ku transponders it'll have and how much CapEx did you spend on the two new satellite 18V and 19V including launch costs?
And as a follow up to that what's the reasonable pace of ramp up and the fill rates of these satellites going forward?
Well, lot of questions there Michel do you want to take the CapEx one?
Yes, so we are going to give us a minute a two on the CapEx. As you know we have T 19V. It's the total satellite we own the 100% and we have paid for 100% of the satellite. For T 18V, we only have the CapEx and utilization for a portion of the satellite. So, if you give us a minute maybe Dan can take this.
I was just looking to try to talk about how much Ku band, how much expansion capacity. The C-band is like for like. The satellite really has two payloads, a C-band payload and a Ku-band payload. The C-band payload is again sort of like for like what we had on Telstar 18.
The Ku-band almost the entire payload is expansion there are number of regional beams, there are some high throughput spot beams over Indonesia and Malaysia. All of that is expansion capacity. But remember…
Is there a way to quantify that?
Yes, there is. And Michel, he went out to get some information and Michael Bolitho can talk to you offline if we can't get the information at our finger tips. And our website will have a pretty good description of what the satellite is including the Ku-band capacity.
Remember also, as I said aPT has the majority of the capacity on the satellite so they've got 57.5% of the total capacity on that satellite. So, for now I'm afraid that's about as much as I can give you. And then in terms of ramp, the C-band capacity, our C-band capacity on Telstar 18 is pretty full right now and our expectation is that will pretty much be the case when T 18V comes into service, we'll migrate our customers, C-band customers who are on T 18 over to T 18V.
The Ku-band, yes that will ramp up over time. I won't make a sort of specific projection around that in terms of what the slope of that ramp looks like. I will say that pre-launch we're out there talking to lots of folks about the Ku band capacity and there is a meaningful amount of interest I'd say particularly in some of the high through-put capacity over Indonesia and Malaysia.
John, do you have information about how Ku capacity?
Unidentified Company Representative
So, going from little bit less than twice as much Ku capacity.
But in terms of total number of transponders?
Unidentified Company Representative
For Telesat around seven.
Now, going to about 12.
Unidentified Company Representative
Seven now, going to 12 and then the high throughput is…
The high throughput is all new capacity?
Unidentified Company Representative
Unidentified Company Representative
And that's included in the 12 transponders or it will support the Ku.
And even going from seven to 12 in some ways kind of understates it because the seven Ku band transponders we have on Telstar 18 are pretty low power transponders that are I'd say qualitatively inferior to the near capacity that's coming.
Got it. Last question is in the Enterprise segment seems like you didn't have any short-term provisioning revenues this quarter, but I'm curious if there are other factors that may have impacted revenue performance this quarter versus one Q?
You're right there was no kind of meaningful revenues from leasing to other operator's surplus satellites. Other than that, for enterprise quarter-over-quarter I'd say nothing in particular to highlight or they're always puts and takes in any quarter there is some there's always some seasonality particularly on the maritime business, but probably flush through the quarter there were there was some norm renewals for certain enterprise capacity stuff that we'd anticipated.
But other than that, nothing too noteworthy. I should say, I think our equipment sales were lower in the quarter and we put those in the -- and most of that, I think all of that would have been enterprise services in the quarter. But other than that, nothing too noteworthy.
Alright. Thank you very much.
Hi Jason, we don't have the answer to your question on the CapEx here. But if we don't have it before the end of this call, you can contact Michael Bolitho and we'll give that.
Will do. Thank you.
Thank you. The next question is from Michael Pace from JPMorgan. Please go ahead.
Hi, good morning all. I'm wondering Dan can you just, can we step back and we talk about the LEO project and I apologize I jumped on a little late here, if you went over a lot of this. But can remind us what broad strokes what you filed with the SEC back in the day just size, number of satellites, key market segments et cetera has anything changed since then?
And then also can you just remind us, I believe in the past you said that you have some advantaged orbital slot for yourselves and can you remind us what that means as well?
So, for LEO Telesat has priority ITU rights in AA band to operate in LEO constellation. We submitted an application to the FCC in their NGSO processing round, it would have been to operate LEO constellation of 117 satellites operating in AA band, various orbits and various altitude and we received an authorization from the FCC for that some time ago.
So, and that constellation for us we're very focused on the global enterprise market. So broadband telephony kind of back haul market which we think is a very promising market for a very low latency, very high capacity, LEO constellation focused on serving the mobility market. So that's aero connectivity and maritime services and focused also on some -- the government services market.
So, the constellation that we've designed, we believe will give us significant competitive advantages serving all of those markets. Advantages from a cost perspective, performance perspective including the low latency from a coverage perspective, from a resiliency perspective. So, that's the constellation that we've designed, that's the constellation that we've been authorized for in both Canada and the US that's the constellation that we've been executing on.
It's my expectation that over time the constellation would grow in size from 117 satellites to additional satellites, but that's the business case that we've been focused on.
And I know to-date you haven't or if you have I'm not aware of it size the cost of this project, but I would assume that it's billions maybe of dollars not millions. So, I guess can you talk about maybe your willingness to take on partners?
Can you talk about maybe the willingness of your shareholders to invest equity to fund this?
So, I'd say our shareholders are like the management team here very bullish on the prospects of our LEO plans. You're right, it's a meaningful capital investment. We announced this week that we've entered into two sort of design contracts with two different manufacturing teams and teams so Airbus on the one end and Thales and Maxar on the other are going through over the next call it nine months sort of refining design phase with us.
And at the end of that, we expect that we'll be getting sort of bids from each of them at that point in time we'll have greater clarity around what exactly the magnitude of the investment will look like. And then in terms of funding it, yes it will be a variety of things. Some of our own cash flows obviously consistent with of the covenant constraints that we have looking for some export financing and potentially raising equity from other parties as well so that's, at this point how we are thinking about our financing plan.
Okay. And then just one more. I think in the past, you've for lack of a better word kind of teased us a little bit on how much you've presold on 19V in the past of course you mention Hughes, [indiscernible] who else have you signed up if you can't give specific names to see where are you with building that capacity and does all that start day one or does it kind of come in overtime? Thanks.
Yes, no. I mean, I don't think we were teasing anyone Mike. No, I think we've been pretty specific. I think we said that we saw order magnitude about 30% of the capacity most of that almost all of that is end of life it starts up pretty much right away on in service so that's Hughes in South America and its Hughes. The great big [ph] contract we did with them is Ka-band, but there are other services that we provide to Hughes using Ku-band in Latin America for Bell and their wholly-owned subsidiary Northwestel that provide services in the far north of Canada.
Here again, that stuff kind of just ramps right up. So yes, that's what the profile looks like. And then there are other sort of new business opportunities in the pipeline particularly in Latin America, in the Caribbean, across the North Atlantic.
So, in any event we're quite bullish on our 19V prospects and again happy with the launch. We have some additional work to do now in terms of deploying the antennas on the satellite and doing in-orbit testing. So, in any event it's been so far so good in terms on the mission on 19V and just really keen to get it into service and start recognizing the revenue from the contracts that's we entered into and closing more business.
Okay. You haven't pre-sold anything in addition to what you've already announced or have you?
We have. I mean, we tend to announce the very very large deals. And I put Hughes and Bell in that category. Other than that, if there are other big material contracts along the way, we'll announce those.
All right. Any other questions.
Thank you. Our next question will be from Arun Seshadri from Credit Suisse. Please go ahead.
Hello, gentleman. Thanks for taking my questions. Just one from me, one left for me. And that is just in terms of thinking about funding your LEO constellation. At this point, the timing of that funding is expected to be sort of late 19, early 20.
Just any color you can give in terms of when you think you have to raise the sort of the first slug of the financing for that?
Our own thinking about that I'd say really that's something that we'll be working on over the next 12 months.
Understood. All I had, thanks a lot.
Okay. Thank you. And I think Jason Michel had an answer on your CapEx question.
So, I think Jason the question was how much money did we spend on T 18V and T 19V so far and at the end of June this year we had invested approximately $300 million US in T 18V and T 19V.
Thank you. Our next question will be from Brian Hill from Wells Fargo.
Good morning. Thanks for taking the question. I was just wondering if you could outline any other regulatory or policy approvals that you might need for the global Ka-band constellation aside from what you've already obtained from the FCC and the global IT rights?
Yes, I'd say most fundamentally it's market access and some countries have kind of very clear frameworks around how to go about doing that. Lots of countries are members of the WTO and have made market opening commitments. Other countries it's more kind of laborious, so I take that from a regulatory standpoint will be the most fundamental work that needs to get done.
The IPU is having one of their World Radio Conferences next year. They're looking to update certain rules around NGSO satellite constellations and so we're actively participating in that. But for me those are sort of the key regulatory activities around our LEO constellation.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Dan Goldberg.
Okay. Well, operator thank you very much and thank you all for joining us this morning. And we look forward to chat in with you again when we release our third quarter results. So, thank you very much.
Thank you. The conference has now ended. Please disconnect your lines at this point, and we think you all for your participation.