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Loral Space & Communications Inc (LORL) Q2 2019 Earnings Call Transcript

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Loral Space & Communications Inc  (NASDAQ: LORL)
Q2 2019 Earnings Call
Aug. 01, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to the conference call to report the Second Quarter 2019 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat; and Micheal Cayouette -- sorry, Michel 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, Mr. Bolitho.

Michael Bolitho -- Director of Treasury and Risk Management

Thank you, and good morning. Earlier today, we issued a news release containing Telesat's consolidated financial results for the three- and six-month period ended June 30, 2019. 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, 2018 filed with the SEC on March 1, 2019. 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 CEO.

Daniel S. Goldberg -- President and Chief Executive Officer

Thank you, Michael. This morning, I'll discuss our second quarter financial results and give an update on the business. I'll then hand over to Michel, who will speak to the numbers in more detail and then we'll open the call up to questions. Adjusting for foreign exchange rate changes, revenue in the second quarter was 8% higher than the same period last year, adjusted EBITDA was 9% higher and our adjusted EBITDA margin was 85.2%.

The revenue increase was principally due to revenue contributions from our Telstar 19 VANTAGE and Telstar 18 VANTAGE satellites, which entered commercial service, respectively, in August and October last year, combined with an increase from short-term services provided to other satellite operators. Looking up the first half of this year relative to the same period last year, revenue and adjusted EBITDA were both slightly higher and the adjusted EBITDA margin was 84.7%, up from 84.1% last year.

The revenue increase was primarily due to revenue related to the Telstar 19 VANTAGE and Telstar 18 VANTAGE satellites, offset by lower short-term services provided to other satellite operators, lower equipment sales and lower revenue from certain customers in the resource sector.

Turning to some key metrics, backlog at the end of the second quarter was CAD3.5 billion and fleet utilization was 85%. Broadcast represented approximately 49% of total revenue in the quarter, enterprise services 48% and consulting another 3%. And on a geographic basis for the quarter, North America accounted for 80% of revenue, Latin America 8%, EMEA 8% and Asia 4%.

As highlighted in the earnings release, last week we made an important announcement with the Government of Canada regarding our planned Low Earth Orbit satellite constellation. Specifically, we announced that we signed a Memorandum of Understanding with the Canadian government to ensure access to affordable high-speed broadband connectivity across rural and remote areas of Canada using the Telesat LEO Constellation, an arrangement we expect will generate CAD1.2 billion in revenue over a 10-year period, CAD600 million of which being a contribution from the Canadian government.

Additionally, the government will contribute CAD85 million for Telesat through its Strategic Innovation Fund to support the development phase of the Telesat LEO Constellation. These announcements underscore the strong interest and support we're seeing for our planned LEO Constellation and further underpin our business plan.

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

Michel Cayouette -- Chief Financial Officer

Thank you, Dan, and good morning, everyone. During the second quarter of 2019 and compared to the same period in 2018, revenue increased by CAD19 million to CAD231 million, operating expenses increased by CAD2 million to CAD38 million and adjusted EBITDA increased by CAD19 million to CAD197 million. Between the second quarter of 2018 and the second quarter of 2019, the changes in the US dollar exchange rate had a positive impact of CAD3 million on our revenue, a negative impact of CAD1 million on our operating expenses and a positive impact of CAD3 million on our adjusted EBITDA.

When adjusted for the changes in the US dollar exchange rate, revenue increased by CAD16 million during the second quarter when compared to the same period in 2018, operating expenses increased by CAD1 million and adjusted EBITDA increased by CAD16 million. The increase in operating expenses during the second quarter was mainly due to higher non-cash share-based compensation, higher fees associated with professional services and higher consulting expenses. The increase was partially offset by lower rent expense.

During the first half of 2019 and compared to the same period in 2018, revenue increased by CAD9 million to CAD454 million, operating expenses increased by CAD3 million to CAD77 million and adjusted EBITDA increased by CAD11 million to CAD384 million. Between the first half of 2018 and the first half of 2019, the changes in the US dollar exchange rate had a positive impact of CAD8 million on our revenue, a negative impact of CAD2 million on our operating expenses, and a positive impact of CAD6 million on our adjusted EBITDA.

When compared -- when adjusted for the changes in the US dollar exchange rate, revenue increased by CAD2 million during the first half of 2019 when compared to the same period in 2018, operating expenses increased by CAD1 million and adjusted EBITDA increased by CAD5 million. The increase in operating expenses during the first half of 2019 was mainly due to higher non-cash share-based compensation, higher fees associated with professional services and higher consulting expenses. The increase was partially offset by lower rent expense.

Depreciation and amortization increased by CAD8 million during the second quarter and increased by CAD16 million during the first half of 2019 when compared to the same period in 2018. The increase was mainly due to depreciation on our Telstar 18 VANTAGE and Telstar 19 VANTAGE satellites, which began a commercial service in October 2018 and August 2018, respectively.

Interest expense increased by CAD8 million during the second quarter and by CAD14 million during the first half of 2019 when compared to same period in 2018. The increase was mainly due to higher interest rates on our senior secured credit facility and a decrease in capitalized interest, combined with the unfavorable impact related to the translation of US dollar-denominated interest expenses into Canadian dollar equivalent. The increase was partially offset by higher net interest received on our interest rate swap.

In 2019, we recorded a gain on financial instrument of CAD23 million during the second quarter and a gain on financial instrument of CAD80 million during the first half of 2019. The gains on financial instruments reflect changes in the fair value of our interest rate swaps, interest rate floor on our senior secured credit facility and the prepayment option on our senior notes. In 2019, we also recorded a gain on foreign exchange of CAD58 million during the second quarter and a gain on foreign exchange of CAD129 million during the first half of 2019. The gains 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 CAD5 million during the second quarter and decreased by CAD20 million during the first half of 2019 when compared to the same period in 2018. The decreases during the second quarter were mainly due to losses on the interest rate swap, partially offset by higher operating income and gains on foreign exchange. The decreases during the first half of 2019 were mainly due to lower operating income and losses on interest rate swap, partially offset by gains on foreign exchange.

During the second quarter of 2019, the cash inflows from operating activities were CAD78 million and the cash outflows used in investing activities were CAD14 million. For the first half of 2019, the cash inflow for operating activities were CAD196 million and the cash outflows used in investing activities were CAD31 million. The majority of our investing activities in 2019 were related to capital expenditure for the development of our planned LEO Constellation. To meet our expected cash requirements for the next 12 months, including interest payments in capital expenditures, we had CAD886 million of cash and short-term investments at the end of June, as well as approximately $200 million of borrowing availability under our revolving facility.

In addition, we continue to generate a significant amount of cash from 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 covenant 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 questions you may have. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question is from Mike Pace from JPMorgan. Please go ahead.

Mike Pace -- JPMorgan -- Analyst

Hi, good morning. Thanks for taking the questions. If you don't mind, maybe I'll just jump right into the LEOs here and start with the MOU that you have with the Canadian government. Dan, maybe can you just explain the CAD1.2 billion that we see in your release and saw in the press last week, is that -- what kind of number? Is that what you expect you think your LEO Constellation can generate in Canada only for maybe rural broadband? And then put that with the, up to the CAD600 million, which is included the CAD1.2 million that you would receive from the Government of Canada. How does all of this work? And it sounds like to me this is not an anchor tenant type of a structure, but maybe more of an anchor partner, if that's a better way to think about it.

Daniel S. Goldberg -- President and Chief Executive Officer

Yes, thanks Mike. The first thing I'd say is, so we announced this MOU with the government last week, we'll need to enter into a full sort of definitive agreement with them and some of the details will get flushed out in that. But fundamentally what we're doing with the government is we, Telesat, are agreeing to create a bandwidth pool using our LEO Constellation, so it's a pool of bandwidth, it will be probably measured in multiple gigabits of capacity. It won't be all the capacity that our constellation will have to serve Canada, but will take a pool of capacity. We will make that pool of capacity available to telcos and ISPs, specifically to serve the rural broadband market in Canada.

The Government of Canada will make that CAD600 million contribution to Telesat. They'll pay that to us over a 10-year period and in exchange for that, we will agree to make that pool of bandwidth available in the market at a sort of below market rate. And so when we get to the CAD1.2 billion, CAD600 million will come from the Government of Canada and the other half of that, the other CAD600 million to get to the CAD1.2 million will come from the telcos, the ISPs, who will be buying this below-market capacity to serve the rural broadband market here.

Mike Pace -- JPMorgan -- Analyst

But, I guess that ratio will -- it sounds like a 50/50 split. So if I'm misreading that let me know, but this is not, you don't have to hit CAD1.2 million and then you get CAD600 million, this is on an ongoing basis.

Daniel S. Goldberg -- President and Chief Executive Officer

Yes. No, that's right. They are agreeing to pay us CAD600 million over this 10-year period. We'll price that full capacity at a very attractive rate. We fully expect that telcos, ISPs, maybe even some municipal governments and others will take that capacity up we think pretty quickly. My own expectation is that will probably [Indecipherable] taken up pre-launch and when you take the CAD600 million. And you take the revenue that we expect to get from that pool of attractively priced capacity, it will equal up to the CAD1.2 billion, that's a Canadian dollar number, CAD1.2 billion to Telesat. And then we'll still have lots of incremental capacity to serve the Canadian market. So that CAD1.2 billion in our minds is in no way a cap of the kind of revenue that we expect to receive from the Canadian market, broadband, government services, energy market, all the other verticals that we serve, but we expect the CAD1.2 billion will get generated in connection with that deal that we announced with the government.

Mike Pace -- JPMorgan -- Analyst

Okay. And then moving to the CAD85 million contribution from the government, I recall reading somewhere that there may be a requirement for you to invest CAD200 million plus in R&D, your other items. So when I think about that on a stand-alone basis, it doesn't feel like a very good trade for you, unless you were planning on doing some or all of that anyway. So, would you think of that or is it -- or do I have to look at this holistically with the CAD600 million as well?

Daniel S. Goldberg -- President and Chief Executive Officer

No. I think the CAD85 million -- we are moving forward with our LEO Constellation. There's a very significant sort of R&D -- we should have call development phase as part of that. Part of the development phase is just launching the first, call it a dozen satellites or so. These will be the same satellites that will occupy the whole constellation. But those first ones, we'll launch and sort of rigorously test and put through all the pieces before we launch the hundreds of others. So that's sort of all considered by us and the government to be part of the development phase. So yes, that's -- the government's making a contribution to that phase of our LEO Constellation. We will be making significant investments just in terms of rolling out and developing the constellation, and the government's contribution will offset some of those expenditures that we'll have.

Mike Pace -- JPMorgan -- Analyst

And then given what you just said that you are moving forward and I've noticed a change in language in your quarterly reports as well with LEO. And I'm wondering if maybe at this point you're willing to frame a little bit and expressing rounding is very encouraged here, right? The size of this project, the timing of the spend, funding, potential partners or go-to loans [Phonetic], so can you maybe give us some more color today that maybe you haven't given us in the past?

Daniel S. Goldberg -- President and Chief Executive Officer

Yes, I mean what I can say is that our expectation is by the end of the year, we'll be announcing sort of supplier contracts. We will be building the constellation and the like. In terms of financing, I think we said before that it's going to be through a combination of equity and debt. I think we've said that on the debt side our focus is mostly what we're thinking about this as sort of project financing, we're focused on the export credit agencies to be lenders in connection with the debt side of this. So I think we said all that.

In terms of the magnitude of the investment, we've to-date said multiple billions will still stay there for the time being, until we get further down the road in terms of bids that we'll be getting from suppliers and we have more details from them about exactly what the overall capital investment profile would be. As far as partners and the like, we've said that our focus on the LEO Constellation, even though will be a very disruptive offering in the market, we're still be providing broadband connectivity services. So our focus is to continue to be a wholesaler, focusing on the backhaul market, the aeronautical markets, the maritime market and the government services market.

Our expectation is that we're going to be working with and serving a lot of the same customers that we serve today in each of those verticals. We are open to having partners along the way, but we've been doing this for 50 years now. We're pretty confident of our ability to commercialize this constellation in the market. I think Mike that addresses the different questions that you posed.

Mike Pace -- JPMorgan -- Analyst

Sure. Maybe just another quick one, maybe another quick answer, but the strategic advantages that you think you have in LEO versus others, and whether that be orbital slots or spectrum that you have that others might not. And then just for Michel, has any other additional cash moved over from the restricted group to the unrestricted group since the first quarter of last year. Thank you.

Daniel S. Goldberg -- President and Chief Executive Officer

I'll take the first one. So for strategic advantages, you mentioned spectrum and that's certainly one of them. So Telesat has priority rights to 4 gigahertz of Ka-band spectrum and that is important when you're providing satellite services or frankly any wireless service, that's important. I'd say in addition to that, we're serving all these markets today with our geo-constellation. We know the markets, we know the customers, they -- I believe have a higher regard for Telesat and confidence in our ability to not only look after their existing requirements, but to bring something forward that's revolutionary that helps each of them remain competitive in the different markets that they serve.

I think we've got the best engineering satellite -- engineering team in the world. So I think that the constellation that we've designed is extraordinarily advanced and compelling. It's going to represent a -- I think extraordinary value proposition in the market and it's going to allow us to provide a quality of service that is just unmatched in the market today and even what anyone else sort of has on the drawing board, and it's going to allow us to do that at the price points that will be extraordinarily competitive and still allow us to achieve the kinds of investment returns that we need to achieve to make a project like this make sense financially.

So anyway, I'd highlight all of those things as compelling reasons why we think this is not only going to be a great value proposition for the customer community and frankly for governments around the world that are very focused on solving the conundrum of a rural broadband connectivity, but it will be a great proposition for our shareholders and the lenders as well.

Michel Cayouette -- Chief Financial Officer

On your second question, the answer is no. We have not moved additional funds from Telesat Canada to the unrestricted subsidiary after our first investment.

Mike Pace -- JPMorgan -- Analyst

Great. Thanks for the answers guys.

Daniel S. Goldberg -- President and Chief Executive Officer

Okay. Thanks, Mike.

Operator

Thank you, Mr. Pace. [Operator Instructions] The next question is from Jason Kim from Goldman Sachs. Please go ahead.

Anna Chen -- Goldman Sachs -- Analyst

Hi, this is Anna Chen for Jason Kim. So focusing on the MOU again, the Canadian government contributed CAD85 million in Canadian dollars, but which entity are you receiving that investment? And are they being made in the unrestricted subsidiaries? And then any other updates on your existing capital structure as we think the 8.875% [Phonetic] notes are becoming callable later this year? Thanks.

Daniel S. Goldberg -- President and Chief Executive Officer

Okay. So the CAD85 million is based on the amount of expenses in capex and opex related to the deal project. Most of it will be in the unrestricted subsidiary. So the CAD85 million will probably be received by a combination of Telesat Canada and Telesat -- the unrestricted subsidiary, but we expect most if it will be from the unrestricted subsidiary.

With regards to the notes and capital structure, we know that we have the first call date of our notes is on November this year, but we still -- this is a note that mature in 2024. So we continue to monitor to look at the market, evaluate the market and we'll be opportunistic, if there is an opportunity, we'll look at it. But as you know, there is a significant premium to be paid, but we -- this is one of the option we have, but if we are optimistic -- if we sense opportunity, we'll do it, but we don't have any plan yet.

Anna Chen -- Goldman Sachs -- Analyst

Got it. Thanks. And then a final question on C-Band. So the CBA recently made comments that it's prepared to make a voluntary contribution. As a member of the CBA, just curious to get you're thought on the aspect of the proposal. And also is it fair to assume that any contribution that CBA may make will be separate for any tax implications that Telesat may have on the C-Band proceeds?

Daniel S. Goldberg -- President and Chief Executive Officer

Yes, so Telesat's a member of the CBA. We're fully aligned with what the CBA is doing. No, I don't have anything sort of more to add about what the CBA has said about the willingness to make a contribution. I think the CBA has made clear that there is a willingness to do that, but until we have a better sense for exactly how the entire proceeding is going to play out, it's a little bit premature right now to speak about exact quantums and the like. In terms of Telesat and taxes, yes, that would be separate and apart, I believe, from what the CBA is referring to in terms of making a contribution to the treasury.

Anna Chen -- Goldman Sachs -- Analyst

Okay. That's all I have today. Thanks.

Daniel S. Goldberg -- President and Chief Executive Officer

Okay. Thank you.

Operator

Thank you. There are no further questions registered at this time. I'd now like to turn the meeting back over to Mr. Goldberg.

Daniel S. Goldberg -- President and Chief Executive Officer

Okay, operator, thank you, 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 very much.

Operator

[Operator Closing Remarks].

Duration: 28 minutes

Call participants:

Michael Bolitho -- Director of Treasury and Risk Management

Daniel S. Goldberg -- President and Chief Executive Officer

Michel Cayouette -- Chief Financial Officer

Mike Pace -- JPMorgan -- Analyst

Anna Chen -- Goldman Sachs -- Analyst

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