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Edited Transcript of Telesat Canada earnings conference call or presentation 30-Jul-20 2:30pm GMT

Q2 2020 Telesat Canada Earnings Call

Aug 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Telesat Canada earnings conference call or presentation Thursday, July 30, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Martin Browne

Telesat Canada - CFO

* Daniel S. Goldberg

Telesat Canada - President & CEO

* Michael Bolitho

Telesat Canada - Director of Treasury & Risk Management

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Conference Call Participants

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* Michael Vincent Pace

JPMorgan Chase & Co, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the conference call to report the second quarter 2020 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 like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.

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Michael Bolitho, Telesat Canada - Director of Treasury & Risk Management [2]

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Thank you, and good morning.

Earlier today, we issued a news release containing Telesat's consolidated financial results for the 3- and 6-month periods ended June 30, 2020. 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 Factors section of our annual report on Form 20-F for the fiscal year ended December 31, 2019, filed with the SEC on February 27, 2020, to the Risk Factors section of our quarterly report on Form 6-K for the quarter ended March 31, 2020, filed with the SEC on April 30, 2020, and also to the updated risk factors contained in today's Form 6-K filing. 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.

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Daniel S. Goldberg, Telesat Canada - President & CEO [3]

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Okay, thanks, Michael. Good morning, everyone.

This morning, I'll discuss our second quarter and first half financial results and give an update on the business. I'll then hand over to Andrew, who will speak to the numbers in more detail. And then we'll open the call up to questions.

For the second quarter and adjusting for FX, revenue was down 11% relative to Q2 2019. Adjusted EBITDA was down 17%. And our adjusted EBITDA margin was 79%, lower than the roughly 85% we had in the prior period. The revenue decline was driven by 2 contracts we've discussed on prior calls: first, the nonrenewal by Shaw at the end of Q3 last year of one of its DTH contracts; and second, the end of the revenue amortization period of a large prepayment we received years ago from WildBlue on our Anik F2 satellite, each of which has a roughly 3% top line impact, with the WildBlue one being noncash. In addition, in Q2 last year, we recognized revenue from a short-term satellite services agreement with another satellite operator, something that didn't recur in Q2 this year. At this point, it doesn't look like we'll be recognizing any revenue this year from providing short-term satellite services, something that over the past years has contributed around 2% to 3% of annual revenue.

OpEx was up by $7 million in the quarter versus Q2 last year, roughly half of which was from a bad debt provision for customers in the mobility sector who've been adversely impacted by COVID. The balance came from increased compensation, driven largely by LEO, as well as higher fees for professional services and in-orbit insurance, all of which was mitigated to some extent by lower expenses in other areas.

As I said last quarter, about 10% of our total revenue comes from customers providing broadband to planes and ships, and we expect this will be the area where we have the most impact from COVID-19. 2 of those customers have declared bankruptcy since COVID hit, hence the bad debt provisions we took in Q1 and last quarter. We've been doing business with customers in the mobility vertical for years now and, over the past few years, have worked with them to help them get through this really challenging period in their industry. That will provide some headwinds for us this year and to a lesser extent in the next year as well. On the other hand, it appears that COVID is driving an uptick in demand for rural broadband connectivity but not enough to mitigate, at least for this year, the adverse revenue effects from COVID.

Turning to our first half results and adjusting them for FX. Revenue decreased 8% versus the prior period. OpEx was up 18%. Adjusted EBITDA was down 14%; and the adjusted EBITDA margin was 79%, down from nearly 85% last year. The revenue and expense variances were in the main driven by the same factors accounting for the changes Q2-over-Q2.

Turning to some key metrics. Backlog at the end of last year was $2.9 billion and fleet utilization was 81%. Looking at how our revenues broke down on an application basis for the quarter: broadcast was 51% of total revenue, enterprise services 47% and consulting and other 2%. And on a geographic basis for Q2, North America accounted for 81% of revenue, Latin America 8%, EMEA 6% and Asia 5%.

Looking ahead, we remain strongly focused on commercializing our available in-orbit satellite capacity, maintaining our operating discipline, further developing our advanced LEO constellation and leveraging our valuable spectrum rights, all while we're doing everything we need to do to keep our employees safe and support our customers through the pandemic.

With that, I'll hand over to Andrew and then look forward to addressing any questions.

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Andrew Martin Browne, Telesat Canada - CFO [4]

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Thank you, Dan. And good morning, everyone.

I would like to focus on highlights from this morning's press release and filings.

Overall, as Dan has noted, in quarter 2, we achieved revenues of $208 million, adjusted EBITDA of $164 million and $1.2 billion of cash on the balance sheet at quarter end. Our adjusted EBITDA margin was driven by lower revenues and higher operating expenses. The revenue decline was partially driven by 2 contracts we anticipated and disclosed in our prior calls: firstly, the nonrenewal by Shaw at the end of Q3 last year of one of its DTH contracts; and secondly, the end of the revenue amortization period of a large prepayment that we had received several years ago from WildBlue on our Anik F2 satellite and is noncash. In addition, in the second quarter of 2019, we provided short-term services to other satellite operators; and that revenue, we did not see in the first half of 2020. As Dan has also noted, we did not anticipate the COVID-19 pandemic and the absence of opportunities to provide short-term services to other satellite operators, both of which impacted Telesat's revenue and operating expenses during the quarter.

Operating expenses were up $8 million in the quarter versus the same quarter last year. Approximately 50% of the increase in operating expenses was a result of a higher provision for bad debt primarily related to customers in the mobility sector. This business is under pressure from COVID-19. Other increased expenses include compensation associated with the Low Earth Orbit program, professional fees and in-orbit insurance; and offset somewhat by lower expenses in some other areas.

Our adjusted EBITDA margin was 79.1%, as compared with 85.2% in the second quarter of 2019. Comparing the second quarter of 2020 with the same period in 2019, changes in the U.S. dollar exchange rate had a negative impact of $2 million in revenues, a positive $1 million impact on operating expenses and thus a negative impact of $1 million on adjusted EBITDA.

Depreciation and amortization decreased by $9 million during the second quarter compared to the same period in 2019. The decrease was mainly due to the end of the useful life for accounting purposes of Telesat's Anik F2 satellite in the fourth quarter of 2019. Interest expense decreased by $14 million in the second quarter of 2020. This decrease was mainly due to the refinancing of Telesat's debt at lower interest rates in the fourth quarter of 2019. In the second quarter of 2020, we recognized a loss of $1 million on financial instruments, reflecting lower interest rates during the quarter and consequent changes in the fair value of our interest rate swaps and prepayment options on our senior and senior secured notes. In 2020, as the value of the U.S. dollar decreased by 3.7% from the end of the fourth quarter of 2020, we also recorded a gain on foreign exchange of $125 million during the second quarter, which arose from the translation of Telesat's U.S.-denominated debt into Canadian dollars. Tax expense for the quarter was $15.2 million.

For the 6 months ended June 30, 2020, cash inflows from operating activities were $147 million and cash outflows used in investing activities were $10 million. As noted on our March 1, 2020, call, we continue to expect our cash outflows used in investing activities in 2020 to be in the range of USD 60 million to USD 80 million, including capital expenditures we may make in connection with our LEO constellation prior to making a full commitment with our prospective suppliers. There may be meaningful additional CapEx this year in connection with LEO if we enter into definitive contractual commitments to build a constellation. If we make such commitments, we would expect to update our CapEx guidance accordingly.

To meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we had approximately $1.2 billion of cash and short-term investments at the end of the second quarter as well as approximately USD 200 million of borrowings available under our revolving credit facility. Approximately $486 million in cash was held in our unrestricted subsidiaries. In addition, we continued to generate a significant level of cash from our ongoing operating activities. At the end of the quarter, Telesat has complied with all covenants in our credit agreements and indentures. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning.

So that concludes our prepared remarks for this call, and now we're happy to answer any questions you may have. I will turn back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Mike Pace from JPMorgan.

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Michael Vincent Pace, JPMorgan Chase & Co, Research Division - MD and Senior Research Analyst [2]

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A few questions. I'll just do them one at a time, if that works, but maybe, Andrew, can you just talk about the working capital in the quarter? I apologize. I wasn't able to dig into all the different line items, but was that timing-related? Does that reverse? Or is there something else underpinning that? And is there any relation to kind of your -- the bad debt customers that you noted earlier?

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Andrew Martin Browne, Telesat Canada - CFO [3]

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And I would say thank you for the question. If you look overall at our net cash from operating activities, it was $147.2 million. That compared with $196.1 million in the same period of last year. Net cash used in investing activities was $10 million. That compares with $31 million sort of in the same period last year. When you look at the movement in working capital, specifically if you look at the bad debt, I think, as we had said that given the COVID sort of impact, we have been very prudent with some of our customers, and hence we have gone and made sort of what we think is very prudent provisions around sort of bad debt. In Q2, we had sort of indicated the increase in overall OpEx of $8 million. We said about 50% of that is related to sort of bad debts. And then in year-to-date, we've said, about 40% of that increase in OpEx or $14.5 million, indeed those also reflect the impact of bad debt. Going forward, we think we've improved. We can't rule out any additional provisions, but we feel, based upon our customer base now, that we should be I think conservatively positioned going forward.

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Michael Vincent Pace, JPMorgan Chase & Co, Research Division - MD and Senior Research Analyst [4]

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And then as it relates to the short-term satellite services that you don't expect in the second half, is that largely due to what's going on here globally? Is it temporary? Should we expect those to pick back up in calendar year 2021? Or is there something else there that I'm just not aware of?

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Daniel S. Goldberg, Telesat Canada - President & CEO [5]

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Yes. Hey, Mike, it's Dan. Yes, what we've said about those in the past is that they're lumpy. They're a little bit unpredictable. And we -- on the one hand, we're out there seeking to secure them, but yes, you got to be pretty opportunistic on those opportunities. So it is our expectation that we'll see revenue from that activity again and probably including next year. We've certainly been in discussions with various folks, but for various reasons, nothing really landed so that we'd be recognizing revenue this year. But it's my expectation that, yes, we'll see revenue from that in 2021 and beyond, so long as we still have the capability with the satellite to do it.

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Michael Vincent Pace, JPMorgan Chase & Co, Research Division - MD and Senior Research Analyst [6]

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Got it. And then just moving to the broadcast segment, the sequential improvements, maybe $3 million to $4 million versus the first quarter, that uptick, is that FX-related? Or was -- or is there additional business in there that we weren't thinking about?

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Daniel S. Goldberg, Telesat Canada - President & CEO [7]

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I mean, to be honest, from my perspective, broadcast, with the exception of the Shaw nonrenewal, has been pretty flat. So if there's movement there...

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Michael Bolitho, Telesat Canada - Director of Treasury & Risk Management [8]

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It's about 3/4 of it is foreign exchange rates.

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Daniel S. Goldberg, Telesat Canada - President & CEO [9]

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Yes. The FX and maybe some equipment sales on the margins or something like that, but it's you back out Shaw and you back out FX, Mike. It's pretty flat.

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Michael Vincent Pace, JPMorgan Chase & Co, Research Division - MD and Senior Research Analyst [10]

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Got it. And then, Dan, a big picture LEO question for you. Can you just maybe give us a little more color or update on, I guess, expected next steps for you guys; maybe the expected timing of announcements of partners, vendors, funding? And then maybe in the context of all of this, can you just remind us the advantages that you think you have versus other pending LEO constellations from an architecture or a spectrum right perspective?

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Daniel S. Goldberg, Telesat Canada - President & CEO [11]

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Yes. So let's see. As far as timing of announcements, all I would say is it's coming. We're fully engaged with the vendor community, the financing community, vendor community, including satellites, rockets, ground terminals and the like. And so I would say in the coming months, you should be hearing from us on that in a position to make some definitive announcements and with respect to procurement and financing. So that's where we sit there. As far as how we compare with the other LEO constellations, I mean, there are sort of 2 that are probably most concrete. One is SpaceX. The other is OneWeb. There's Kuiper, the Amazon initiative that's out there, but I'd say it's still a little bit less defined, or at least less is probably publicly known at this time about it.

And I'd say a couple of things about our LEO constellation and approach relative to those. First off, and you touched upon it, spectrum. So our constellation will operate exclusively in Ka-band. We have the priority ITU rights to that Ka-band spectrum. It's like 4 gigahertz of spectrum. We think that's the best spectrum to operate a constellation like this. OneWeb and SpaceX are -- both have the same frequency plans. They're using Ku-band for the users and Ka-band for the gateways. There's just less spectrum at Ku, particularly on the return link, and so they'll be a little bit more spectrum-constrained. And they're both going forward without spectrum, and so they're going to need to sort out how they share that spectrum. There, I'd say OneWeb on the Ku-band at least is a little bit more like us. They've got priority rights to that spectrum. SpaceX is secondary to them, and here again they're both secondary relative to us on the Ka-band. So that's one differentiator. I think we've just got better spectrum and better rights to it. And then there's the design of the constellation itself and the focus.

So SpaceX, I think, is it's kind of first and foremost focused on the consumer broadband market. We are not. I think we've always been very clear that we're focused on the enterprise market. That would be backhaul connectivity for mobile network operators and telcos, broadband connectivity to plane and ships and providing services to governments. So that was always our focus. And then we've built a constellation that we think is really optimized for those requirements. And we're leveraging processed payloads, phased array antennas, inter-satellite links. None of the other constellations have inter-satellite links. We've got a hybrid orbital architecture, a mix of polar and inclined, which we think is the most efficient way to get capacity where our customers want it. We think, as a result, we'll have the lowest cost per bit in terms of what we've invested relative to what we've put in orbit, which then should give us a cost advantage when we're marketing our capacity to those key verticals that we're focused on.

So -- and then I guess the other thing I'd say is we've been doing this for 50 years. Those verticals that we're focused on are verticals that we've been serving for decades. We know the customers. We know the technology. We know what they're looking for. We can bridge them and from GEO to LEO. We can use GEO and LEO to complement each other. So in any event -- I mean I've been going on now for a bit, so I'll stop there, but I'd say for us, the way we think about it, those are some of the key differentiators.

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Operator [12]

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(Operator Instructions) There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Goldberg.

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Daniel S. Goldberg, Telesat Canada - President & CEO [13]

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Perfect. Okay, operator. Well, thank you very much. And thank you all for joining us this morning, and we look forward to speaking again when we release our third quarter numbers. So thank you.

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Michael Bolitho, Telesat Canada - Director of Treasury & Risk Management [14]

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Cheerio.

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Operator [15]

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Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.