Telesat Corporation (NASDAQ:TSAT) Q3 2022 Earnings Conference Call November 8, 2022 10:30 AM ET
Company Participants
Michael Bolitho – Director of Treasury and Risk Management
Daniel Goldberg – President, CEO and Director
Conference Call Participants
Brandon Karsch – Kennedy Lewis
Andrew Browne – CFO
Operator
Good morning, ladies and gentlemen. Welcome to the conference call to report the third quarter 2022 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, Mr. Bolitho.
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, seek 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. Thanks, Michael. Good morning, everyone. This morning, I’ll share some thoughts on our 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’ll open the call up to questions. Q3 came in very much in line with our expectations, and we continue to expect to exceed the revenue and adjusted EBITDA guidance we gave at the outset of the year. The overall operating environment feels pretty stable from a demand and pricing perspective, and I was pleased to see our capacity utilization tick up slightly in the quarter.
We disclosed last quarter that we have an anomaly on our anik f2 satellite that reduces its station-kept lifetime from 2025 and to more like the end of this year. We noted that anik f2 represents approximately 8% of our total revenue and that absent finding ways to provide continuity of service for our customers using the satellite, we anticipated revenue could be reduced by roughly one third versus what we previously expected it to be for next year 2023.
We noted also that we are working closely with our customers to evaluate and implement measures to offer them continuity of service and mitigate the adverse revenue impact on the company. I’m pleased to say that our team, working hand in glove with our customers has developed a range of plans to continue to support the services now provided on anik f2.
These plans include making changes through antennas communicating with the satellite in order to extend service, relying on other Telesat and third-party satellites, and even purchasing an existing Inorbit C-band satellite from another satellite operator that’s expected to be repositioned and co-located with anik f2 in the coming months. Assuming all of these things occur as planned, we now anticipate that we’ll retain over 90% of the revenue we originally expected to recognize from anik f2 next year, although there are some additional operating expenditures associated with leasing third-party capacity for some of the customer requirements, as well as the capital expenditures associated with purchasing the third-party satellite and making other investments in ground infrastructure.
We’ll provide a further update when we release our Q4 numbers, and I do want to applaud the combined efforts thus far of the Telesat team, our customers, and other partners as everyone works hard to provide continuity of the important services supported on anik f2.
Turning to Telesat Lightspeed. On our last call, I mentioned that we were in discussions with certain additional financing sources to cover the increased cost of the program and that we expected to have a better sense of where we stood on the financing around the end of this year. We noted that the contemplated financing would be at the Lightspeed unrestricted subsidiary level and would be subordinate to the ECA lenders and the government of Canada and Quebec investments.
Since our last call, I’m pleased to say that we’ve made tangible progress in connection with securing this financing and in addition, have had regular and sustained engagement with the ECA lenders as we seek to finalize the financing. We remain extremely bullish about the opportunity Telesat Lightspeed gives us to grow our business. We have a highly disruptive and robust constellation design over $750 million in contractual backlog and over $4 billion in financing arrangements and the strong support of government partners at the federal and provincial levels here in Canada. Lightspeed represents a compelling investment opportunity. And although there is no assurance that the advanced discussions we’re having with our various financing sources will come to a successful conclusion. Our overwhelming focus is on completing the financing and commencing the full-scale construction of the program.
Lastly, I noted on our last earnings call that we repurchased in the first half of this year, USD 160 million face value of our 6.5% unsecured notes and further that our Board had authorized us to repurchase up to an additional USD 100 million face value in Telesat debt. As we’ve said previously, we think our debt is trading below fair value, which is why we’ve repurchased it in the past and why we continue to believe that doing so makes sense for the company.
And although we have the authority to repurchase up to an additional USD 100 million of debt, given everything else that’s going on at the company right now, including the discussions we’re having on securing additional Lightspeed financing, we decided to hold off on further repurchases last quarter. We’ll continue to closely monitor how the debt is trading and as required, provide updates on any repurchases we might make. With that, I’ll hand over to Andrew and then look forward to addressing any questions you 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 2022, Telesat reported revenues of $180 million, adjusted EBITDA of $137 million, and generated cash from operations of $92 million with $1.7 billion of cash on the balance sheet at quarter end. For the third quarter of 2022 compared to the same period in 2021, revenues decreased by $12 million to $180 million. Operating expenses decreased by $4 million to $56 million and adjusted EBITDA decreased by $19 million to $137 million. The adjusted EBITDA margin was 76% compared to 81.1% to 2021.
Between 2021 and 2022, changes in the U.S. dollar exchange rate had a positive impact of $4 million on revenues, a negative impact of $1 million in operating expenses, and a positive impact of $3 million on adjusted EBITDA. But adjusted for the changes in foreign exchange rates, revenues decreased by $16 million for 2022 compared to 2021. Operating expenses decreased by $5 million and adjusted EBITDA decreased by $22 million. The revenue decrease was primarily due to a reduction on renewal of a long-term agreement with a North American DTH customer and revenues from short-term services provided to another satellite operator at 2021, which did not recur in 2022.
This was partially offset by higher revenues from mobility customers and the asset communication services project program. The decrease in operating expenses was primarily due to lower non-cash share-based compensation, partially offset by higher ages. Interest expense increased by $6 million in the third quarter compared to the same period in 2021. The increase was due to an increase in interest rates on the U.S. Term Loan B facility, combined with the foreign exchange impact on the conversion of U.S. dollar-denominated debt. This was partially offset by the impact of the repurchase of senior unsecured notes in 2022.
Just to note, and as discussed in quarter 2, we repurchased notes with a principal amount of USD 160 million. These repurchases resulted in a gain in the first 6 months of CAD 107 million. These notes have been retired and also represent an annual interest savings of approximately $10.4 million. In 2022, we recorded a loss on foreign exchange of $249 million during the third quarter compared to a loss of $68 million in the third quarter of 2021, the loss for the 3 months ended September to Turkey was mainly the result of the stronger US dollar, the Canadian dollar compared to the spot rate as of June 22, with the resulting unfavorable impact on the translation of our U.S. dollar-denominated debt. Our net loss for the third quarter of 2022 was $229 million compared to a net loss of $52 million in the prior year. The variation of $176 million was principally due to a higher non-cash foreign exchange loss compared to the same period last year.
For the first 9 months of 2022, the cash inflows from operating activities were $161 million and the cash flow generated from investing activities were $18 million. Included was $65 million by way of receipt of the remaining Phase 1 USC band clearing proceeds in terms of overall C-band proceeds, we have received approximately USD 85 million and expect further proceeds of approximately $260 million in terms of the capital expenditures made to date, virtually all are related to a lower or constellation Telesat lately.
As you’ll also have noted in our earnings release this morning and as Dan has mentioned, we have reiterated our increased guidance, which we provided with the release of our second quarter results on August 5, 2022. Telesat expects full-year revenues to be between $740 million and $750 million. Also, as we stated before, included in our revenues is our expectation that we will recognize a significant hardware sale and the provision of related services to start later this year as part of the USD 18.3 million contract.
In terms of adjusted EBITDA, Hesedexpectes to be between $545 million to $560 million. Also, as a reminder, we don’t expect any adjusted EBITDA from the hardware sale as the expected expense associated with this contract is more or less equivalent and other guidance still reflects the Canadian dollar to U.S. dollar exchange rate of 1.3. In respect to expected capital expenditures, we now expect our 2020 cash flows used in investing activities to be in the range of $ 50 million, a $75 million, including capital expenditures to further advance our Lightspeed program.
Once we have got greater visibility around the construction and financing of our program, we will provide a further update on our anticipated capital expenditures for the year. To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.7 billion of cash and short-term investments at the end of September as well as approximately USD 200 million of borrowings available under our revolving credit facility.
Approximately $1.1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant attach from our ongoing operating activities. At the end of the third quarter, leverage as calculated under the terms of the amended senior secured credit facilities was 6.17x 1. Telesat has complied with all the covenants in our credit agreement and indenture.
A reconciliation between our financial statements and financial covenant calculations are supplied in the report we filed this morning. The 6-K provides the unaudited interim condensed consolidating financial information in the NDA. The non-Garanter subsidiaries shown are essentially unrestricted subsidiaries of minor differences. So that concludes our prepared remarks for this call, and I’ll be very happy to answer questions that you may have, and we will turn back to the operator. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] First question is from Walter Piecyk from LightShed.
Unidentified Analyst
This is [ Joe ] on for Walt. A couple of questions, please. Is there any more color you can provide about the process with the ECAs and the suppliers kind of like any details? Maybe are there specific parts or components that are available now that weren’t before that maybe give Telesat a little better visibility? And then second, the OpEx for LEO appears that it was effectively flat quarter-over-quarter.
And when should we expect that to ramp? And are any expenses for LEO being capitalized currently? And then finally, Amazon showing some progress. One Lib has been launching and then there’s some smaller start-up that seem to be having some progress. Do you feel like Telesat is getting behind a little bit, given the delays.
Daniel Goldberg
All right. It’s Dan, Joe. I’ll try to — so there’s sort of a 3-part question. Let’s see. So the first part was about — do we have any more insight on kind of where Telesat is from a supply perspective and whatnot? No, there nothing’s changed. We’ve said, I think, on our last couple of calls that we did a whole lot of work with Talos and they did a whole lot of work with their supply chain over the past year to sort of update the program, update schedule, update pricing. And all of the work that we did in connection with that with Talison that they did with their supply chain, it also holds. We’re not hearing anything different from Dallas about yes, there are expectations around supply chain schedule, anything else.
So that — and on the lenders, we said, I think, on our last call that we were engaged with them that we’re hoping to have a much better sense of where things stood by around the end of this year. And that remains to be the case as well. I’d say since the last earnings call we hosted. We’ve had a lot of engagement with the financing sources that we’ve been talking to with the lenders, I should say, including with the lenders, lots of intense sessions, trying to move the ball forward. So that’s all taking place right now, and that continues. And then on the last questions around light speed, I think it was OpEx and whether things are being capitalized. Oh, actually, you also had a question about kind of the competitive environment. So I’ll answer the competitive environment one.
And then maybe, Andrew, you can talk to the LEO expense one. No, we’re not seeing anything out there in terms of the competitive environment that makes us think differently about our ability to be successful with Lightspeed. Certainly, OneWeb is getting their program back on track and that they had to pause their launch campaign because of sort of Ukraine Russian activity.
So we’re seeing that, but there’s nothing that they’re doing or you had mentioned Amazon that we’re seeing Amazon doing that changes the way we think about our ability to be successful with Lightspeed. I mean it is — we continue to engage with the customer community very closely on Lightspeed. We continue to see a huge amount of enthusiasm from the customers about the value proposition that we’ll be bringing with Lightspeed. And yes, there’s nothing that we’re seeing that changes our thinking about that. So Andrew, do you want to talk about that?
Andrew Browne
Yes, on the question on the OpEx. And that obviously, as you see what a high margin of almost 78% that we control the OpEx very, very tightly. And so as we’re advancing our discussions with the ECA and other sort of investor support, we’re very focused on hiring and OpEx and expanding. So we manage that very, very closely. Obviously, when the program gets going, then of course, we would expect to see an increase coming from that. And just in terms of the capitalization, that is typically what you would do with a capital program that you would indeed capitalize those costs. So that’s where we are.
Unidentified Analyst
Okay. So we shouldn’t — like will some of the OpEx lead ahead of the actual finalized program before you actually implementing it will ramp up a little more. That’s what I’m trying to…
Andrew Browne
Yes, we would expect it to ramp up more. I mean we have going back until we got the delays at Thales, obviously, with our engineering and support teams in terms of design and dealing with Thales, et cetera, that we indeed are put in the appropriate people we need to get going. But once we have the supply chain delays, then obviously, with that ramp, we actually sort of held back on, as you would expect us to do. But once the day we get going, then we will obviously where are other areas that we need to provide support to the program.
Operator
The next question is from Dan De Bono [ph] from Invesco Credit Management.
Unidentified Analyst
I’m looking at the segment information, Item 5, which is on Page 10 of the supplement. And I would love to get some color on the enterprise side for the quarter. Looking at growth rates and thinking of where we’re running, if you could — it’s a pretty diverse segment. If you could talk a little bit about some of the wins and losses and how you feel about that for the next couple of quarters. That would be helpful.
Daniel Goldberg
Looking at my colleague, John Flaherty, I’ll make a start at this. I mentioned in my opening remarks that yes, the operating environment has been — yes, I’d say kind of on the one hand, consistent with our expectations for this year, too favorable. I’ve been pleased that we’ve been able to grow the utilization of the fleet over the year.
I think, in particular, so far this year, we’ve seen strong interest, particularly from the mobility segment that would be aeronautical and maritime. A lot of that was predictable. I mean, those were the sectors that were kind of held back during the — during COVID, and as the restrictions of eased and more and more people are traveling again, it was predictable that those sectors would come back.
But they came back probably even stronger than we expected. I think if we have a problem kind of taking advantage of the opportunities there, it’s mostly because of capacity limitations in the areas where the most demand exists. That would be sort of key maritime routes, places like the Med, the Caribbean for the cruise market, some of the key flight paths for the Aero segment. So yes, I don’t know.
And then just thinking regionally, where we’ve seen harder conditions like Africa, like Latin America, I’d say those markets continue to be challenging, but no more challenging than they were, frankly, over the past couple of years. And I think, particularly in Latin America, we’re doing a nice job getting renewals, winning business, maintaining utilization, and the like. So in any event, that’s off-the-top observations. And John, I don’t know if you’d add anything.
Michael Bolitho
No, I think you pretty much hit all of the major points, Dan.
Operator
The next question is from Brandon Karsch from Kennedy Lewis.
Brandon Karsch
I was wondering, just following up on the last question with the mobility gains. Are you seeing any significant new business wins there? Is it more just recovery or any kind of other organic expansions of existing customers not really to be cope?
Daniel Goldberg
I’d say certainly in the first half of the year, we had capacity come back into inventory when DISH just did the partial renewal with us. And we’re really pleased that almost overnight, we took that capacity and put it to work in the mobility market, there was that. And we had another big win earlier in the year with another customer that was more on the aero side. So — and then as I mentioned beyond that, it’s more like, I don’t know, singles and doubles just given the capacity constraints that we have. Yes, that’s what it feels like…
Brandon Karsch
Okay. That’s helpful. And with all the headlines around the potential Shaw and Rogers merger, do you anticipate any impact in your business from that on the broadcast side or elsewhere?
Daniel Goldberg
We don’t think so. No, we don’t think so.
Brandon Karsch
Okay. And then on the LEO side, is it possible to provide maybe any more detail in terms of what types of financing you’re looking for? Is this — are you fully focused on private financing? Are you talking to government agencies about further financing? And if you’re unable to secure it given market conditions over the next couple of months, is there a point where you think that maybe you’re too far behind and that this bill maybe becomes untenable after already scaling it back?
Daniel Goldberg
So on the financing side, there are sort of 2 paths that we’re active on right now. One is trying to complete the discussions and the financing with the export credit agencies. And I mentioned that there’s been a lot of activity with them over the past quarter, and we’re focused on driving all those negotiations to a successful conclusion. And then we mentioned on our last call that we’re looking at securing some additional financing, just given some of the increases in the program costs coming from the combination of inflation and just kind of a longer schedule and the incremental costs that come with that. And coupled with the fact that we had always said that we are going to need some incremental financing as part of the program.
At one point, there was, I don’t know, some consideration potentially to doing something now that we’re public, that was what was certainly a path that we could consider in the past issuing some equity if we needed to. But given where the markets are trading right now and we’re Telesat’s trading right now, which we believe is below fair market value, we’re sort of less interested in that.
So we mentioned on our last call that we’re looking at some other financing sources. We talked about that as being kind of at the LEO kind of subsidiary level and making sure that that was all subordinated to the ECA lenders who are very focused on being senior in the capital structure over on the LEO side and making it subordinate to the investments that we’re getting from the government of Canada and the government of Quebec and making sure that as we seek to secure it, that it’s accretive to the overall kind of company profile. And so that continues to be our focus. I mentioned that we’re making progress on that front mentioned that we’re in advanced discussions right now. But I don’t think we’ll add anything beyond that at this stage
Brandon Karsch
Okay. Then I guess the last part of my question that I had asked was if you’re unable to…
Daniel Goldberg
Yes,. Right now, that’s — we’re not asking ourselves those questions right now. We’re very focused on closing up the financing that we need in the time frame that we’ve telegraphed to everyone. So yes, that’s the focus right now. And fundamentally, we’ve said this consistently. We got a great program. We got a great constellation. We’ve got an enormous amount of support from our shareholders, our board, an enormous amount of support from our government partners here in Canada, got a significant amount of backlog already on the constellation and are having really good discussions with the customer communities. So that’s our focus is finishing the financing, getting the program going and getting out there in the market with Lightstream.
Operator
There are no further questions at this time. I would like to turn the meeting back over to Mr. Goldberg.
Daniel Goldberg
Okay. Operator, thank you very much, and thank you all for joining us this morning. We look forward to chatting when we issue our Q4 and full year numbers. So thank you very much.
Operator
The conference has now ended. Please disconnect your lines at this time and thank you for your participation.
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