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spk12: All participants, please stand by. Your meeting is ready to begin. Good morning, ladies and gentlemen. Welcome to the conference call to report the second quarter 2023 financial results for TELESAT. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of TELESAT, and Andrew Brown, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. Michael Bolido, Director of Treasury and Risk Management. Please go ahead, Mr. Bolido.
spk24: Thank you and good morning. This morning we filed our quarterly report on Form 6-K with the SEC and on CDAR. Our remarks today may contain forward-looking statements. There are risks that tell us that 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 discussion of known risks, see Telesat's annual and quarterly reports filed with the SEC and CDAR. 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.
spk08: Okay, thanks, Michael. This morning, I'll share some thoughts on our financial 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. As we noted in our earnings release, we've had a busy first half of the year. We're tracking our guidance, received FCC validation on CBAN clearing, which allowed us to recognize approximately US $260 million in the quarter, and completed some meaningful additional debt repurchases that we think strengthen our balance sheet and create value for shareholders. But certainly, the big news was our announcement this morning that we've selected MDA as prime contractor for the Telesat Lightspeed satellites, and that, by leveraging the advanced technology they've been investing in, we're able to reduce our CapEx on the project by roughly US $2 billion, while fully maintaining the revolutionary capabilities of the network that we think are going to make it so disruptive and successful in the market. Lightspeed is now fully funded to global service delivery given the company's own equity contribution, certain vendor financing, and aggregate funding commitments from our Canadian federal and provincial government partners. The government financing commitments are subject to a number of conditions. including completion of confirmatory due diligence and the conclusion of definitive agreements, which were aiming to get done by the end of the year, recognizing it could take a little bit longer. I want to thank our government partners for their strong and consistent support of Lightspeed and their recognition of the manifold public interest benefits that flow from the project. I want to say a few words about why this approach with MDA is is so much more capital efficient and why we ultimately pivoted and made the move to MDA. The game-changing development here is the digital beamforming antenna that MDA has developed. We considered a digital beamformer some years ago when we first evaluated technology options for light speed, but our engineers felt that it wasn't ready for prime time, that the technology development risk at the time was too great. That's why when we selected MDA to build the antennas way back then, the antennas MDA prototyped and was going to build for our original plan formed beams using analog technology, which is to say it was an analog beam former. Over the past few years, MDA has continued to invest in the digital beam former. And late last year, as we were working hard to close our business case funding which in part entailed looking to optimize the overall light speed design, an exercise I know I've spoken about previously, we took another look at the digital beam former and came to the conclusion that it was now sufficiently mature and that not only could we leverage it, but that we had to given the massive efficiencies it delivers. The performance improvement relative to the analog one is dramatic. It's game changing. To give you a sense, it can create roughly triple the number of beams versus the analog one, which means we can serve our customers and cover the globe vastly more efficiently. So for example, while the old satellite design required each satellite to have two pairs of analog beamforming antennas to deliver the capacity in the way that we want, we only need a single pair of digital beamforming antennas. This allows each satellite to be somewhat smaller and still have the same effective capacity as the larger ones. And smaller satellites almost always mean less costly satellites, and that's certainly the case here. In the case of light speed, the MDA satellites are roughly 75% of the size of the earlier versions we were considering. The digital beamformer also creates a better link between the satellite and the user terminal, which further improves the performance and the efficiency of the overall network. The satellites will continue to have four optical intersatellite links, which we've always emphasized as important, to dynamically and rapidly route our users' traffic anywhere on Earth, and which also provides great resiliency throughout the network. In addition to the digital beamformer, MDA also has been investing heavily in a digital processor that's tightly integrated with the digital beamformer. MDA's been doing all this because they see a big opportunity to build LEO satellites as the industry transitions in that direction. And to their credit, they've already been quite successful, winning last year a highly competitive process to be the prime contractor for the global star LEO constellation that Apple is funding and using. NVA has world-class capabilities in high-volume satellite manufacturing and is heavily focused on winning more business as a prime, which is why they won the Apple Opportunity and why they're going to be building the Lightspeed satellites. The work with MDA and many of our other suppliers has already started. We expect the first launch to take place in mid-2026, and that will enter global service in late 2027. The total capex for Lightspeed is approximately US $3.5 billion, and if we meet our plan, we expect to grow our revenue and adjusted EBITDA by several multiples, and achieve an IRR on the project of roughly 30%. We'll organize an investor day and present at a number of conferences in the near term so that we can give investors greater insight into our plans. It would be hard to overstate how pleased we are with the arrangements we've put in place for Lightspeed and how keen we are to get out there with customers, investors, and others. It's been... A long road, much longer than we anticipated, certainly much longer than I anticipated, with COVID and the supply chain constraints and inflation that COVID brought representing real obstacles. But we've always said we see a huge opportunity in the global enterprise broadband market and that we were laser focused on finding the most compelling path forward. Given where we've landed, it's been well worth the wait. I want to thank my colleagues at Telesat, genuinely world-class professionals in every key discipline, technical, regulatory, commercial, finance, legal, for their resilience, dedication, and ingenuity in what I think is hitting an absolute home run here. Throughout our 54-year history, we've always leveraged our deep engineering expertise and leaned into innovation to adapt in a dynamic market and meet our customers' ever-evolving but always mission-critical requirements. Telesat Lightspeed is just the most recent example of that. It's been a real privilege for me to work alongside the world-class team here, and we're all now just 100% focused on executing the plan. So with that, I'll hand it over to Andrew and then look forward to addressing any questions you may have.
spk16: Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. However, as Dan has said, it's been a long road, and obviously with our announcement on Lightspeed, we are so excited to be in the position to move forward with our program. Now, focusing on our financial performance in the second quarter of 2023, Telesat reported revenues of $180 million, adjusted EBITDA of $139 million, and for the six months ended June 30, 2023, we generated cash from operations of $102 million, and we held $1.5 billion of cash on the balance sheet. In the second quarter of 2023, and compared to the same period in 2022, revenues decreased by $7 million to $180 million, operating expenses decreased by $7 million to $52 million, and adjusted EBITDA decreased by $8 million to $139 million. The adjusted EBITDA margin was 77.1%, compared to 78.4% in 2022. Between 2022 and 2023, changes in the U.S. dollar exchange rate had a positive impact of 5 million on revenues, a negative impact of 1 million operating expenses, and a positive impact of 4 million on adjusted EBITDA. When adjusted for changes in foreign exchange rates, revenues decreased by 12 million, operating expenses decreased by 8 million, and adjusted EBITDA decreased by 12 million. The revenue decrease was mainly due to a termination in service by a South American customer, combined with a reduction in revenues from one of our North American DTH customers, This is partially offset by increased revenue from the work we are performing for NASA relating to satellite-to-satellite communications and lower it already. The decrease in operating expenses is primarily due to lower non-cash share-based compensation, partially offset by higher costs associated with the procurement of third-party satellite capacity required to support certain customer networks. Interest expense increased by 19 million during the second quarter compared to the same period in 2022. The increase was due to an increase in interest rates in the U.S. term loan fee facility combined with the foreign exchange impact that U.S. dollar denominated interest expense. This was partially offset by the impact of the repurchase of notes in 2023 combined with the impact of the maturity of one of our interest rate swaps in September of last year. In the second quarter, we recorded a gain in foreign exchange of 67 million as compared to a loss of 99 million in the second quarter of 2022. The gain for the three months ended June the 30th was mainly the result of a weaker U.S. dollar, the Canadian dollar, and with the resulting favorable impact on the translation of a U.S. dollar denominated debt. Our net income for the second quarter of 2023 was 520 million compared to a loss of 4 million in the prior year. The variation of 524 was principally due to C-band clearing proceeds, recognizing the quarter of Canadian $345 million, combined with a positive variation in foreign exchange and the conversion of our debt into Canadian dollars, and the gain on repurchase of debt of Canadian $153 million. This was partially offset by higher interest expense and higher tax expense. For the six months into June the 30th, the cash inflows from operating activities were $102 million, and the cash flows used in investing activities were 67 million. In terms of capital expenditures incurred, they were primarily related to a low Earth orbit constellation, Lightspeed, and the newly acquired ANIC F4 satellite. Guidance, as you will have noted in our earnings release this morning, we are very pleased to maintain our previously provided revenue and adjusted EBITDA 2023 guidance. The guidance assumes a Canadian dollar to US dollar exchange rate of 1.35. Telesat continues to expect that full year 2020 revenues to be between 690 million and 710 million. In terms of adjusted EBITDA, Telesat continues to expect between 500 million to 515 million. In respect to expected capital expenditures, as a result now of our Lightspeed announcement, we now expect our 2023 cash flows used in investing activities to be in the range of 175 million to 225 million, and we will provide any further updates at the time of our Q3 call. Looking at cash, to meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.5 billion of cash in short-term investments at the end of March, as well as approximately $200 million of borrowings available under a revolving credit facility. Approximately $1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate an ongoing significant amount of cash from our activities. At the end of the first quarter, leverage as calculated under the terms of our amended senior secured credit facilities was 5.69 times the one. Telesat has complied with all the covenants in our credit agreement and indenture. As Dan has also indicated in the second quarter and including the subsequent period, we have repurchased debt with a principal aggregate amount of US$296 million by way of open market purchases at a cost of $156.9 million dollars. So combining the prior repurchases done in 2022, we have now repurchased a total amount of US$456 million at an aggregate cost of US$233.9 million. In addition, this also results in interest savings of approximately US$27 million annually. Further, just to add, since the end of 2020, when Telesat repaid approximately US$340 million of our term loan, our overall debt has been reduced by approximately 24%. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6K provides the unaudited interim condensed consolidating financial information in the NDA. The non-guarantor subsidiaries shown are essentially the unrestricted subs with minor differences. So with that, I would conclude our prepared remarks for the call. I'm very happy to answer any questions you may have. And with that, now we'll turn back to the operators.
spk12: Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please leave your answer before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Mike Pace from J.P. Morgan. Please go ahead.
spk26: Hi, good morning. Thanks for taking the questions. Dan, I appreciate all the color and commentary earlier on the MBA contract and what you're getting out of that different from before. But I guess just to be really clear here for some of us that aren't so smart on satellite technology, you will have the same or roughly the same amount of capacity in this network than the prior network. I just want to confirm that. And then what are you not getting, if anything, for spending $2 billion less? And then I have a few other follow-ups.
spk08: Yeah, no, thanks, Mike. No, I mean, it's as we said, this constellation, by leveraging this more advanced digital beamformer, it's got the same effect of capacity. We were not going to settle on that. We've got a really good understanding, at least we think we do, of what the market needs, what our customers are looking for, the need to concentrate capacity dynamically around the earth. And so we didn't trade off any of that, which is the beauty of this. So we still have four ISLs, which we've always said is important in terms of our ability to dynamically route traffic around the world and have greater resiliency throughout the network and gives us a lot more scope in terms of rolling out landing stations. And so, you know, I didn't even talk about it in my remarks, schedule, haven't compromised schedule at all. You know, the good thing about working with MDA as the prime satellite contractor is that we've always been working with MDA on this program. I mean, they already had a big part of the program with, the intent of that, that they were going to build. So yeah, no, I mean, you know, look, what can I tell you? I mean, we've, we've, we've been beavering away in the background. I mean, we've been, you know, doing all sorts of things to close the business case, you know, and, and some of that we talked about real explicitly, like, like engaging with, investors on incremental equity contributions and the like. We also said, maybe a little more elliptically, that we were, you know, looking at other ways to optimize the constellation, the network. And ultimately, you know, we really hit pay dirt there. So anyway, yeah, no, we're, it's equally capable. And as I said in my remarks, with the digital beam former and our CTO Dave Wendling is sitting with me here, too, and Dave can talk more about it. The link is better between the spacecraft and the user terminal when it's transmitted with this digital beamformer, and that is kind of above my pay grade in terms of how all that works. But anyway, the analog antenna has to kind of squint at the user terminal at lower elevations, and the digital one doesn't. and it just improves the link.
spk26: But just to be super clear here, is there anything that you're not getting? And the answer in simple no works as well, too. It's a simple no.
spk08: It's a simple no from a capability perspective, from a flexibility perspective. I mean, yeah, and if anything, I think we're gaining stuff. I mean, with 3x the beams on each satellite, We've just got so much more scope to route traffic around. And look, we looked at this technology years ago. But but but we I mean, you know, tell us that we're not the most risk embracing organization on the face of the earth. I think we're forward leaning, but we don't, you know, get get overly aggressive. So we took a pass on it. the thermals were too high. I mean, there's all kinds of stuff. But in any event, I mean, MDA kept investing. And they're leveraging some of the work that they did on the analog beam former, which is another reason why we're not taking any schedule hit. So, yeah, no, it's just a home run.
spk26: Got it. Thank you for that. And then, I don't know who wants to take this one, but I'm hoping some folks can maybe just bridge some funding gaps for me here. So $3.5 billion total, $1.6 billion Telesat equity. We all can do math on how much money has moved over there to date, but I'm wondering, can you give us that number, rough, rounded, encouraged? I'm assuming CBAN proceeds will help fund that, and then additional money moving over. I'm just wondering if you can fill that in a little bit.
spk08: Let me try to fill it in, and if there are still gaps, which is often the case after I respond to questions, then the finance folks can do it. But a couple of things, and we tried to be clear about this in the release. We're fully funded for, right now, 156 satellites. So the deal that we've announced with MDA is for 198 satellites. The U.S. $3.5 billion is for the 198 satellites. But right now... with the cash that we have, including the cash that we've already invested in this project. Oh, and I should note the CBAM proceeds that we're expecting to get real soon here. With the cash that we have and the CBAM proceeds that are coming, with the money that we've lined up with our Canadian federal and provincial partners, we've mentioned that we've got some vendor financing. which is not as significant as our own equity contribution or the government contributions. So with all of that money, we've got enough money. We're fully funded for 156 satellites, plus we built a non-trivial amount of contingency in there because that's kind of how we roll. So that gives us enough money for the 156 satellites, which gives us full global coverage in a really good, high-performing constellation. But we've committed to MDA for another 42 satellites that will fund the current plan is using the existing cash flows of light speed once light speed gets up and running in a few years' time. So that's the plan. And so then the mass should work. So the CAPEX, just to be real clear here, the CAPEX for the 156th satellite constellation is about U.S. $2.7 billion. The total program cost is about $3.5 billion U.S. for the 156 satellites. So that's CapEx plus everything else is about $3.5 billion plus some contingency that I mentioned. And then when you look at the funding, there's about, you know, $1.6 billion equity contribution from Telesat. And just to be clear, that's cash that we've already put into the project. Cash that is already available outside of the restricted group for LEO. The CBAM proceeds that are coming in, that covers all that $1.6. And then the government contributions are about $2 billion U.S., and then, as I mentioned, there's some vendor financing as well. So that's what gets us there.
spk26: Can you break up the government financing and the vendor or give us one of those pieces? Is the government from Canada and Quebec, is that the same from last time as what I'm asking? Has anything changed?
spk08: Well, I mean, if you do the math, you know, so we've said that it's approximately $2 billion U.S., which... at current exchange rates is about 2.7 billion Canadian. Previously, what we said is that the government of Canada had committed to about 1.44 billion of Canadian dollar contribution. Quebec, 400 million of Canadian contribution. So there's an incremental 900 million there that we've been in advanced discussions with our government partners about. So, so that's kind of, you know, the government piece and we're, we're not free right now to break down exactly, you know, how much is coming from the different sources, but, but, but we'll be able to talk, we'll be able to talk more about that in the future. And then the vendor financing, you know, we're, we're subject to confidentiality obligations. Um, with our suppliers. It's some hundreds of millions of dollars, but we can't be more specific than that at this time. I will say it's not MDA. MDA is holding their call, I think, shortly after ours, and I'm sure they'll get asked. So, you know, we chose MDA because, you know, they got this great technology and they're leaning in hard to uh, in building in, in wanting to be a Leo prime, but we didn't select them because of vendor financing commitments.
spk26: Thank you. And just, just quick and to clarity, I think I know the answer. This is still going to be funded, built, um, in unrestricted subsidiaries. And then in the future, you might consider bringing everything back together. Is that still the thought?
spk08: Yeah, nothing has changed there in terms of how and where we're funding this. We've, you know, uh, Yeah, I mean, what happens in the future in terms of restricted group versus unrestricted group, you know, we're not saying anything about that. You know, at some point in the future, it could all come back together or we could, you know, continue to finance those activities separately. But there's nothing about today's announcement that changes any of that. Thank you. Okay, thanks, Mike.
spk12: Thank you. The next question is from Walter Pisick from LightShed. Please go ahead.
spk21: Thanks. Dan, just to confirm, that incremental government piece of the puzzle is not the revenue commitments that exist, right?
spk09: No, no, no. No, you know, and I mean, no.
spk08: We've got a capacity commitment from the federal government of Canada to That's 600 million Canadian over a 10 year term. We've got a separate commitment from the government of Ontario. That's 109 million Canadian over a five year term. And again, we've talked about this before, the way those things are structured. We think that, you know, that the amounts are essentially going to get doubled when we take that pool of capacity that's subject to those funding arrangements and enter into agreements that here in Canada with ISPs and the like. But no, those amounts are separate.
spk21: So this 900 then, I understand, I respect that you can't really disclose it, but cost-wise, obviously, is it going to look as attractive as what we saw from the government of Canada?
spk08: So that's a great question. So this approximately $2 billion U.S. dollars of government funding, we've said it's subject to the completion of confirmatory due diligence and getting definitive agreements in place. We're going to need to work with the government to agree fresh terms for all of that. I, I believe it's going to continue to be, you know, attractive financing, but we'll update everyone on that.
spk06: Okay. So, so yeah. And that, Fine.
spk21: And then just the overall numbers, it was definitely helpful to recognize that your capex is even lower for the initial launch and to get the revenue pump going. But the overall number then, in terms of what you've outlined, sources relative to the uses, it seems like you don't even need the operating cash flow to get to the full, you said, 198 constellation.
spk08: So we don't need the operating cash flow? Walter, to get to fund the U.S. $3.5 billion plus contingency for the 156, but we're going to need roughly another $800 million U.S. to fully fund the incremental 42 satellites plus the launch vehicles.
spk21: Why is that? You said $2.7 billion. for the 156, right? So if I just take $1.6 billion plus $2 billion... No, hold on, hold on, hold on.
spk08: Wait, wait. $2.7 billion for the CapEx, about $3.5 billion for the total program cost. It's a little confusing because the total program cost for the 156 is roughly equivalent to the CapEx for the 198, the numbers are the same.
spk21: Okay. I'm going to ask the first, the JP Morgan dude's question in a different way. You know, you had these presentations that were very helpful in terms of sizing the market, you know, 365 billion TAM, and you kind of broke it down and talked about your percentages. Has anything changed in terms of how you look at that TAM relative to this new constellation? Does it increase the TAM? Does it decrease the TAM? I assume we're growing the size of that TAM as we hit, you know, a commercial date that might be a little bit later than what I first kind of was forecasting back in 21. Just thoughts on that.
spk08: Yeah. So our thoughts about the addressable market, the size of the market, the amount of share we can take in that market are unchanged. Again, I mean, we deliberately have designed a constellation that allows us to do everything that we had been planning to do under the prior plan. If you dissect what we've said about the adjustable market in the past, order of magnitude and You know, it's about $400 billion, we think, out in the, I think we said, 2025 timeframe. Roughly, we've said about half of that $400 billion is kind of direct to consumer, which is not the market that we're focused on. We've always been real clear we're focused on the enterprise and the government services market. So that's roughly the other half of that, Tam. We've said if we get, you know, 2% of that, uh, which we don't think is the most ambitious, uh, uh, you know, kind of perspective that we'll be hitting our business plan. Um, and so, so our, our thinking around that, I just had a question is on that.
spk21: Yeah, I have that. I'm glad to see the four 30 is reaffirmed as is, you know, timeline on that. Um, but I think maybe what's the follow on this is like, you know, you've had a delay, you have a new vendor, there's been a lot more conversation about, I guess what people are calling directed device markets and more of the consumer thing. There's, I mean, Ergen on his stats dish call was talking about S band, although they're not financed, you know, I think you've got some legato spectrum. I don't know what's going on at Biasat. Is there an opportunity perhaps to partner with one of these other players, get access to some additional spectrum and modify this constellation of to the extent that you can address that broader $430 billion market you identified for 2025?
spk08: So here's what I'd say about that. First off, the 430 doesn't include the direct-to-handset market, which is some of what I know DISH is focused on. But these satellites right now have really been optimized, frankly, just like our prior satellite design. They're optimized to do high throughput broadband connectivity for the enterprise market. And we have squeezed out every watt of power and directed it to that market. And we've sized these satellites. We've optimized them for that mission. In order to change the mission, it just wouldn't make any sense. Now, having said that, if we had access to S-band spectrum or L-band spectrum, could we leverage the bus, the processor, potentially the antennas, although the antennas might look different? Yeah, we could potentially do something like that. But right now, we just got to stay laser focused on this huge market that's in front of us that we know well that we've been serving for years that we've been out there engaging with you know customers you know about light speed for quite some time so so walter that's our focus now could the tam be a little bit bigger because and is there a drop is there a drop dead date when you'd have to work something out with an s-band or an l-band owner we're we're we're We're off to the races. We're already moving forward with MDA on this. We're not, you know. Look, if there's some great opportunity here with some third party bringing that spectrum and some capital, then it would just be almost kind of like an adjacent network that might leverage light speed in terms of routing traffic around and whatnot. But, you know, yeah. Yeah.
spk21: You know, we've talked about this before in terms of the REV commitments that, you know, when we were waiting for TELUS to get and the ECA, all that stuff, that it impacted your ability to get signatures. So, I assume that this is going to kind of open up that spigot. Are you, you know, how do you envision disclosure in terms of as you get incremental revenue commitments for the new constellation? individual press releases, updating on a quarterly basis? How do we get a sense of how that business develops?
spk08: All of that. We'll be transparent about the deals that we're signing so that folks will have visibility. We understand how important that is.
spk21: Awesome. Thank you.
spk08: Okay, thanks.
spk12: Thank you. The next question is from Aaron Sechadry from BNP Paribas. Please go ahead.
spk19: Hello, gentlemen. Thanks for taking my questions. And first of all, congrats on getting a Lightspeed program reconstituted and funded. Lots of skeptics, so definitely hats off. Just wanted to nail down a couple of details on the funding, the equity side. So just to make sure I got my math right, the existing cash balance that you have right now is probably somewhere in the range of about $1.1 billion U.S. You're getting another $260 million from the CBAN proceeds that gets you close to $1.4 billion U.S. So is it fair to say that you have another U.S. dollar, $200 million or so of additional equity that you need to contribute either from the from the operating cash flows in order to get to your $1.6 billion U.S. of equity funding?
spk16: This is Andrew. I'll take that. I think as Dan laid out very clearly that we're totally funded. The $1.6 billion is already there today, and that is comprised of, as you say, the cash we have currently. We've got our CBAN proceeds coming in, Canadian $345 million. But also during the course of the program, we have been investing in the development of over time. So that number includes that funding. And also, yeah, so I think all together, I think we're in good shape. I think the key point, we don't need any more cash to come in today for us to say we're fully funded. Any cash that comes in today is something for the future. But for today, we're fully funded.
spk19: Got it. Thank you, Andrew. And then in terms of the, I noticed that you haven't laid out any future debt buyback authorizations. Is it fair to say that given you're fully funded, is it fair to say that future operating cash flow you're generating is still sort of likely to be used for debt buybacks?
spk08: So what would I say? Look, we've been doing a fair amount of debt repurchases and we highlighted that in the earnings release. And we think that it's been a really smart thing to do with the cash that we have that we hadn't had a higher value use for at the time. And rather than it just build up in the restricted entity, it just made a ton of sense to us to be repurchasing that debt back because we thought it's trading at attractive values and it was a good way to strengthen our balance sheet and create equity value for the shareholders. And all I would say is going forward, we're just going to be pragmatic about it as we go forward. If that continues to be the highest value opportunity for that cash, then we would consider more debt repurchases, depending on where the debt's trading and the like. If we had other attractive uses for that cash, building a geo-satellite or some other use, then we would consider that. But anyway, it's a long answer, but suffice to say, we feel good about the debt repurchases that we've done in the past. And going forward, we'll just be, I don't know, just kind of pragmatic about it. Andrew?
spk16: Yeah, no, just to confirm what Dan had said, that's absolutely correct. And You know, face value, we purchased $456 million back, as we mentioned, and that gives the gain of $222 million. But we're very focused on overall debt. That's why I threw in that, you know, since coming back to the end of 2020, we've reduced our overall debt by 24%. So in addition to all of the activities and light speed, getting going is the future of the company, we're very, very focused and responsible about the debt we have today.
spk19: Got it. Thank you. And then the last question from me is, In terms of – so obviously you have a lot of work to do to finalize the agreements, et cetera. So two other topics. One is the structure of the remaining $900 million in financing. Do you anticipate that to be at the Lightspeed subsidiary? And then secondly, do you – I guess beyond all of this, what are the other, I guess, risks or dependencies remaining – beyond getting all the agreements sorted out? What keeps you up at night at this point?
spk08: Thanks. So we expect that all of the government funding will be, yes, over, you know, on the unrestricted side. Leo, that was always the plan, and it continues to be the plan. As far as what else keeps us up at night... Look, we've got to close the funding with our government partners. I'm highly confident that we'll achieve that, but it's got to get done and it's got to get timely done. And then we've got a ton of work to do. We're going to be hiring a whole bunch of people and ramping up our staff. We're moving out with MDA in a big way. We're going to be ramping up our sales and marketing team as we do more heavy engagement with the customers. I mean, it's all that. And we've got our day-to-day business that we're running too and never take our eye off the ball on that. So anyway, I mean, we're just so excited to be finally on our way and we can stop talking about when are we going to be fully funded? When can we get going? I mean, it's just so liberating after all this time to have the funding lined up, to have a great plan with MDA and the rest of our partners. So from this point forward, it's just all about really focused execution.
spk20: Congrats and all the best.
spk08: Okay, thank you.
spk12: Thank you. The next question is from Raghav Garg from DoubleLine. Please go ahead.
spk25: Thank you for taking the question. Can you talk about the life of these satellites, given they're slightly smaller? Does that impact your duration of the constellation?
spk08: It's a good question. No, same capability from a lifetime perspective, which is to say we've specced that the satellites meet their performance specifications for effectively 11 years do we expect them to maybe go longer yeah that that's you know been our experience in the past and I think the experience of others in the past but but from a spec perspective our contract with MDA it's it's absolutely comparable to the prior plan it's 11 years
spk25: Got it. Thank you. And any color on you've given an IRR estimate, you've given the capex. So can you just talk about, you know, on my math, presuming some duration, you know, can you throw out an EBITDA number? Because you've sort of given the input. So I get to two to three billion. Is that unreasonable?
spk08: It's not unreasonable. We've tried to provide some kind of high level you know, building blocks. But we're going to quickly move past that. So we mentioned that we will schedule an investor day before the end of the year. We definitely plan to be presenting at more conferences where we can, you know, meet with investors one-on-one and share a whole lot more information about what the business case looks like. Thank you.
spk12: Thank you. The next question is from Mr. Rosenberg from Credit Suisse. Please go ahead.
spk27: Hi. Thanks for taking my question, and congratulations on the announcement with MDA. Some of my questions have already been asked here, but I did have a couple more I was hoping to lob in here. On the math part, I mean, some of the information you gave has definitely been very helpful. One remaining question I do have, just trying to close the gap a little bit between, I guess, uses of proceeds. I mean, the MDA announced that it seems like it's a Canadian $2.1 billion contract, and just trying to reconcile that with the numbers that you've specified for at least the initial 156 satellites. I mean, it seems like there's a pretty big delta there. I mean, probably over and above just what a contingency would be. I mean, so is there another significant vendor in the mix? Is there another kind of part of the puzzle? I guess I'm trying to get it.
spk08: Yeah, yeah, yeah. No, I mean, there aren't too many moving parts. It's the satellites. It's the launch vehicles. It's the global ground infrastructure. It's some upgrades that we need to make at our facilities here in order to operate this global constellation. There's some IT systems that need to get put in place. We've got some money for further user terminal development, that's kind of it. And when you add it all up, and we've been rigorous in terms of building up the business case, that's kind of what it comes into. And then, yes, as we mentioned, we do have some non-trivial contingency in the plan because that just seems to be the prudent thing to do. We hope we don't spend it. I mean, that would be really nice, but we budgeted for it, and our funding covers it.
spk16: We think we've been very prudent in the build-out in terms of contingencies and looking at all of the elements that are just outlined with our proper funding and not just the NDA contract itself.
spk27: Got it. And then as far as the, I guess, revised structure of terms with the government of Canada and Quebec, I understand there's probably some moving parts there, but are you able to clarify just, I guess, the status of that relationship? I mean, I think previously you had a term sheet and an MLA in place respectively with the two that had some contingencies related to the ECA financing. So then I guess with the ECA financing gone, I guess I'm just wondering, I mean, will there be some forthcoming disclosures of those documents or key structures?
spk08: Yeah, no, absolutely. I mean, we will provide lots of, all the material information relating to the structure of that funding when it's available. I mean, we've got, you know, commitments from these government agencies partners who I got to say have always been strongly supportive of Lightspeed. But as we mentioned, now they've got to finish their confirmatory due diligence because they've already spent quite some time understanding the project, but they've got to do some confirmatory diligence around the MDA path. And then we've got to get definitive agreements in place and the like. And so, you know, we're all very focused to getting that done in short order. And I guess the other thing I'd say is the government has, and when I say the government, our government partners, federal and provincial, have always been really supportive of our program. And I gotta think that certainly now that MDA, which is also a Canadian company with a big footprint here in Canada, now that MDA is taking on a much greater role in the project. And it's roughly two and a half times a bigger contract for MDA, which means building out more facilities at their facility in Quebec, hiring a whole lot more people, a whole lot more IP development here in Canada. We're now like the anchor for MDA's new digital satellite platform, which they hope to export around the world. So driving more exports, just all of that. I guess the point is if our government partners are Canadian government partners like them, we're strongly supportive of the old path. We got to think that with this new path, there'll be even more supportive still. And I do want to emphasize, we didn't pick MDA because they're Canadian. We picked MDA because they're a genuinely world-class prime for high-volume LEO satellite constellations. It's why they won the Apple contract, you know, Apple Global Star contract. But it doesn't hurt either that they're Canadian. So anyway, so that's how we think about it. But we'll provide lots of clarity there. on that government funding once it's in place.
spk27: Appreciate that. And the last final question, I mean, one you've probably anticipated is with the timeline of an operational LEO project in 2027 relative to your debt maturities back in 26. I'm curious if you've given any thought to potential structural changes that you might put in place prior to that to kind of capitalize on growing backlog on the LEO side. as far as refinancing?
spk08: I mean, I, I, I guess I'd say, um, that, that the schedule that we announced today, it's, it's fully consistent with the schedule that, that, you know, we had under the prior plan. So there's nothing new about the timing of, of, you know, our plans with MDA that, that really alter any of that. Um, We're, you know, fully cognizant of kind of, you know, the maturities. It's still some years out there, obviously, in terms of when these maturities are coming up. And I think we've been making it easier still with all these debt repurchases that we've been doing. So anyway, I mean, our expectation is we've got some time. Our Lightspeed business certainly is going to develop. Our geo business will continue to evolve as well. the whole landscape is continuing to evolve. So in any event, I mean, we'll speak more about that going forward. But there's certainly nothing that we announced today that alters in any way our thinking about it. And certainly, I think we already had a really strong business case with Lightspeed. The updated business case that's so much more capital efficient, it's only got a strength in you know, the overall company. And that just, I think, puts us in a better place going forward, you know, no matter how you're, what lens you're thinking about the business.
spk27: Appreciate that. Thanks again. Okay, thanks.
spk12: Thank you. The next question is from Marcelo Chernovsky from A-Ray. Please go ahead.
spk18: Hey, guys. Congrats on the fully funded now. Had a question, Dan, maybe just to parse some of the language you gave on debt buybacks from a prior caller. You said that if it continues to be the highest value opportunity for cash, but there may be other attractive uses of that cash that you would consider, so what other alternative uses of the cash would you consider at the GEO business?
spk08: Well, I mean, it's just to say that, look, I mean, it's all about... Strengthening the business, like how we always think about the use of cash. It's all about strengthening the business, creating value for shareholders, and providing great service to our customers. And so we're always looking for ways to grow our business in a way that is, I hope, smart and prudent. It turns out to be the case that we haven't ordered a geo-satellite in quite some time. I think we've always been very disciplined in terms of how we think about CapEx and the use of cash and how we run our business with our high operating margins and whatnot. But we don't foreclose the opportunity that in the future there could be a good opportunity to make some investments in the restricted group. That could be a new geo satellite. I don't know. It could be something else that would strengthen the business and meet all those objectives that I just talked about. To date, nothing has come across our plate, which is why we've used the cash to repurchase debt. We just want to be clear that that's something we can do, but we don't want to mislead folks that that's all we're going to do with the cash. We're We're gonna be open-minded and opportunistic. And that's all we were trying to say.
spk18: That makes sense. And with respect to the 42 satellites that are not part of the 156, you said that comes out of operating cash. So at what point will you have the operating cash to finance those, is that in five years when you're fully run-rated or is it longer than that?
spk08: Yeah, Andrew, do you want to talk about the timing of our assumptions?
spk16: Yeah, indeed. You answered the question yourself, actually, that indeed when we're fully global coverage and we're actually light-speeded off with customers, we will be generating cash flows. And that's when our models show that being pretty conservative, that we will be able to fund that from our cash coming from light-speed itself. That's why we don't feel we need any external financing whatsoever right now.
spk18: Understood. And then the 100 option, I guess, what is the timing around that? And what would you look for before exercising that option?
spk08: Yeah, well, there, listen, I mean, we've built in a lot of capabilities to scale up our network over time. If It'll be totally demand-driven. And so we think it's a really smart thing to have the rights there in the MDA contract to order additional satellites if we've got the business case to do it. We don't have to. We've also built into our regulatory rights the ability to scale up our constellation. And so... This is all about future optionality to continue to grow the constellation, but that'll purely be a function of what the demand environment looks like at the time. With 156 satellites and then 198 satellites, we have a massively capable network that can deliver multiple terabits of capacity to users. Our focus right now is you know, getting that taken up and then, uh, then we'll think about ordering incremental satellites and expanding.
spk18: And lastly, I know you're, you're still negotiating the, I guess, the financing with the government, but in terms of the split between, I guess, debt and preferred, is that, is that still similar? And do you think that there might be more warrants that they might take in the rest of the business?
spk08: It's something that we really need to work through with our government partners. We think everyone here is around the table. We're all constructive. We know each other well. They've been strong supporters of the project. We, I think, always try to be good custodians of the capital that's entrusted with us. So we've got to work through all those details with the government, and then we'll share all that with the markets. Great. Thanks so much for taking the questions. Thank you. I think we've got time for maybe one more question.
spk12: Perfect. Thank you. The next question is from Bill Wise in Pesco. Please go ahead.
spk22: Thanks very much, and congratulations on the announcement today. Most of my questions have been answered, but is there any update or any more thoughts you have on the impact of the DISH Echostar merger on Telesat's business and DISH renewals going forward? Thank you.
spk08: I think it has no impact on the work that we do with DISH and with EchoStar. We've obviously followed that situation closely. I think we have a really good relationship with DISH, with EchoStar. But no, we don't think that that combination changes in any way the the work that we do with them. That's it. Thank you. Okay. Well, thank you. And listen, thank you all for your time today. We look forward to speaking with you again when we issue our Q3 numbers, and we really appreciate everyone's time and all the good wishes. So thank you very much. Thank you very much.
spk12: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. you Thank you. Thank you. Thank you.
spk30: Thank you. Thank you.
spk12: Good morning, ladies and gentlemen. Welcome to the conference call to report the second quarter 2023 financial results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat, and Andrew Brown, Chief Financial Officer of Telesat. I would now like to turn the meeting over to Mr. Michael Bolaido, Director of Treasury and Risk Management. Please go ahead, Mr. Bolaido.
spk24: Thank you and good morning. This morning we filed our quarterly report on Form 6-K with the SEC and on CDAR. 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 discussion of known risks, see Telesat's annual and quarterly reports filed with the SEC and CDAR. 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.
spk08: Okay, thanks, Michael. This morning, I'll share some thoughts on our financial 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. As we noted in our earnings release, we've had a busy first half of the year. We're tracking our guidance. received FCC validation on CBAN clearing, which allowed us to recognize approximately U.S. $260 million in the quarter, and completed some meaningful additional debt repurchases that we think strengthen our balance sheet and create value for shareholders. But certainly, the big news was our announcement this morning that we've selected MDA members as prime contractor for the Telesat Lightspeed satellites, and that, by leveraging the advanced technology they've been investing in, we're able to reduce our CapEx on the project by roughly U.S. $2 billion, while fully maintaining the revolutionary capabilities of the network that we think are going to make it so disruptive and successful in the market. Lightspeed is now fully funded to global service delivery given the company's own equity contribution, certain vendor financing, and aggregate funding commitments from our Canadian federal and provincial government partners. The government financing commitments are subject to a number of conditions, including completion of confirmatory due diligence and the conclusion of definitive agreements, which we're aiming to get done by the end of the year. recognizing it could take a little bit longer. I want to thank our government partners for their strong and consistent support of Lightspeed and their recognition of the manifold public interest benefits that flow from the project. I want to say a few words about why this approach with MDA is so much more capital efficient and why we ultimately pivoted and made the move to MDA. The game-changing development here is the digital beamforming antenna that MDA has developed. We considered a digital beamformer some years ago when we first evaluated technology options for light speed, but our engineers felt that it wasn't ready for prime time, that the technology development risk at the time was too great. That's why when we selected MDA to build the antennas way back then, The antennas MDA prototyped and was going to build for our original plan formed beams using analog technology, which is to say it was an analog beam former. Over the past few years, MDA has continued to invest in the digital beam former. And late last year, as we were working hard to close our business case funding, which in part entailed looking to optimize the overall light speed design, an exercise I know I've spoken about previously. We took another look at the digital beamformer and came to the conclusion that it was now sufficiently mature and that not only could we leverage it, but that we had to given the massive efficiencies it delivers. The performance improvement relative to the analog one is dramatic. It's game-changing. To give you a sense, it can create roughly triple the number of beams versus the analog one, which means we can serve our customers and cover the globe vastly more efficiently. So, for example, while the old satellite design required each satellite to have two pairs of analog beamforming antennas to deliver the capacity in the way that we want, we only need a single pair of digital beamforming antennas. This allows each satellite to be somewhat smaller and still have the same effective capacity as the larger ones. And smaller satellites almost always mean less costly satellites, and that's certainly the case here. In the case of Lightspeed, the MDA satellites are roughly 75% of the size of the earlier versions we were considering. The digital beamformer also creates a better link between the satellite and the user terminal which further improves the performance and the efficiency of the overall network. The satellites will continue to have four optical intersatellite links, which we've always emphasized as important to dynamically and rapidly route our users' traffic anywhere on Earth, and which also provides great resiliency throughout the network. In addition to the digital beamformer, MDA also has been investing heavily in a digital processor, that's tightly integrated with the digital beamformer. MDA's been doing all this because they see a big opportunity to build LEO satellites as the industry transitions in that direction. And to their credit, they've already been quite successful, winning last year a highly competitive process to be the prime contractor for the global star LEO constellation that Apple is funding and using. MDA has world-class capabilities in high-volume satellite manufacturing and is heavily focused on winning more business as a prime, which is why they won the Apple opportunity and why they're going to be building the Lightspeed satellites. The work with MDA and many of our other suppliers has already started. We expect the first launch to take place in mid-2026, and that will enter global service in late 2027. The total capex for Lightspeed is approximately US $3.5 billion. And if we meet our plan, we expect to grow our revenue and adjusted EBITDA by several multiples and achieve an IRR on the project of roughly 30%. We'll organize an investor day and present at a number of conferences in the near term so that we can give investors greater insight into our plans. It would be hard to overstate how pleased we are with the arrangements we've put in place for Lightspeed and how keen we are to get out there with customers, investors, and others. It's been a long road, much longer than we anticipated, certainly much longer than I anticipated, with COVID and the supply chain constraints and inflation that COVID brought representing real obstacles. But we've always said we see a huge opportunity in the global enterprise broadband market, and that we were laser-focused on finding the most compelling path forward. Given where we've landed, it's been well worth the wait. I want to thank my colleagues at Telesat, genuinely world-class professionals in every key discipline, technical, regulatory, commercial, finance, legal, for their resilience, dedication, and ingenuity in what I think hitting an absolute home run here. Throughout our 54 year history we've always leveraged our deep engineering expertise and leaned into innovation to adapt in a dynamic market and meet our customers ever-evolving but always mission-critical requirements. Telesat Lightspeed is just the most recent example of that. It's been a real privilege for me to work alongside the world-class team here and and we're all now just 100% focused on executing the plan. So with that, I'll hand it over to Andrew, and then look forward to addressing any questions you may have.
spk16: Thank you, Dan, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. However, as Dan has said, it's been a long road, and obviously with our announcement on Lightspeed, we are so excited to be in the position to move forward with our program. Now, focusing on our financial performance in the second quarter of 2023, Telesat reported revenues of $180 million, adjusted EBITDA of $139 million, and for the six months ended June 30, 2023, we generated cash from operations of $102 million, and we held $1.5 billion of cash on the balance sheet. In the second quarter of 2023, and compared to the same period in 2022, revenues decreased by $7 million to $180 million, operating expenses decreased by $7 million to $52 million, and adjusted EBITDA decreased by $8 million to $139 million. The adjusted EBITDA margin was 77.1% compared to 78.4% in 2022. Between 2022 and 2023, changes in the U.S. dollar exchange rate had a positive impact of $5 million on revenues, a negative impact of $1 million on operating expenses, and a positive impact of $4 million on adjusted EBITDA revenues. When adjusted for changes in foreign exchange rates, revenues decreased by $12 million, operating expenses decreased by $8 million, and adjusted EBITDA decreased by $12 million. The revenue decrease was mainly due to a termination in service by a South American customer, combined with a reduction in revenues from one of our North American DTH customers. This was partially offset by increased revenue from the work we are performing for NASA, relating to satellite-to-satellite communications and low-earth orbit. The decrease in operating expenses is primarily due to lower non-cash share-based compensation, partially offset by higher costs associated with the procurement of third-party satellite capacity required to support certain customer networks. Interest expense increased by $19 million during the second quarter compared to the same period in 2022. The increase was due to an increase in interest rates in the U.S. Term Loan B facility combined with the foreign exchange impact and US dollar denominated interest expense. This was partially offset by the impact of the repurchase of notes in 2023, combined with the impact of the maturity of one of our interest rate swaps in September of last year. In the second quarter, we recorded a gain in foreign exchange of 67 million as compared to a loss of 99 million in the second quarter of 2022. The gain for the three months ended June the 30th was mainly the result of a weaker U.S. dollar, the Canadian dollar, and with a resulting favorable impact on the translation of a U.S. dollar denominated debt. Our net income for the second quarter of 2023 was $520 million, compared to a loss of $4 million in the prior year. The variation of $524 was principally due to C-band clearing proceeds, recognizing the quarter of Canadian $345 million. combined with a positive variation in foreign exchange and the conversion of our debt into Canadian dollars, and the gain on repurchase of debt of Canadian $153 million. This was partially offset by higher interest expense and higher tax expense. For the six months into June the 30th, the cash inflows from operating activities were $102 million, and the cash flows used in investing activities were $67 million. In terms of capital expenditures incurred, they were primarily related to a low-earth orbit constellation, Lightspeed, and the newly acquired ANIC F4 satellite. Guidance, as you will have noted in our earnings release this morning, we are very pleased to maintain our previously provided revenue and adjusted EBITDA 2023 guidance. The guidance assumes a Canadian dollar to US dollar exchange rate of 1.35. Telesat continues to expect its full year 2020 revenues to be between 690 million and 710 million. In terms of adjusted EBITDA, Telesat continues to expect between 500 million to 515 million. In respect to expected capital expenditures, as a result now of our Lightspeed announcement, we now expect our 23 cash flows used in investing activities to be in the range of $175 million to $225 million, and we will provide any further updates at the time of our Q3 call. Looking at cash, to meet our expected cash requirements for the next 12 months, including interest payments and capital expenditures, we have approximately $1.5 billion of cash in short-term investments at the end of March, as well as approximately $200 million of borrowings available under a revolving credit facility. Approximately $1 billion in cash was held in our unrestricted subsidiaries. In addition, we continue to generate an ongoing significant amount of cash from our activities. At the end of the first quarter, leverage as calculated under the terms of our amended senior secured credit facilities was 5.69 times to 1. Telesat has complied with all the covenants in our credit agreement and indenture. As Dan has also indicated in the second quarter and including the subsequent period, we have repurchased debt with a principal aggregate amount of US$296 million by way of open market purchases at a cost of $156.9 million. So combining the prior repurchases done in 2022, we have now repurchased a total amount of US$456 million at an aggregate cost of US$233.9 million In addition, this also results in interest savings of approximately $27 million annually. Further, just to add, since the end of 2020, when Telesat repaid approximately $340 million of our term loan, our overall debt has been reduced by approximately 24%. A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6K provides the unaudited interim condensed consolidating financial information in the NDA. The non-guarantor subsidiaries shown are essentially the unrestricted subs with minor differences. So with that, I would conclude our prepared remarks for the call. I'm very happy to answer any questions you may have. And with that, now we'll turn back to the operators.
spk12: Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please leave your answer before making your selection. If you have a question, please press star 1 on your device's keypad. You may cancel your question at any time by pressing star 2. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Mike Pace from J.P. Morgan. Please go ahead.
spk26: Hi, good morning. Thanks for taking the questions. Dan, I appreciate all the color and commentary earlier on the MBA contract and what you're getting out of that different from before. But I guess just to be really clear here for some of us that aren't so smart on satellite technology, you will have the same or roughly the same amount of capacity in this network than the prior network. I just want to confirm that. And then what are you not getting, if anything, for spending $2 billion less? And then I have a few other follow-ups.
spk08: Yeah, no, thanks, Mike. No, I mean, it's as we said, this constellation, by leveraging this more advanced digital beam former, it's got the same effect of capacity. We were not going to settle on that. We've got a really good understanding, at least we think we do, of what the market needs, what our customers are looking for, the need to concentrate capacity dynamically around the earth. And so we didn't trade off any of that, which is the beauty of this. So we still have four ISLs, which we've always said is important in terms of our ability to dynamically route traffic around the world and have greater resiliency throughout the network and gives us a lot more scope in terms of rolling out landing stations. And so, you know, I didn't even talk about it in my remarks, schedule, haven't compromised schedule at all. You know, the good thing about working with MDA as the prime satellite contractor is that we've always been working with MDA on this program. I mean, they already had a big part of the program with, they intended that they were going to build. So, yeah, no, I mean, you know, look, what can I tell you? I mean, we've been beavering away in the background. I mean, we've been, you know, doing all sorts of things to close the business case, you know, and some of that we talked about real explicitly, like engaging with, investors on incremental equity contributions and the like. We also said, maybe a little more elliptically, that we were, you know, looking at other ways to optimize the constellation, the network. And ultimately, you know, we really hit pay dirt there. So anyway, yeah, no, it's equally capable. And as I said in my remarks, with the digital beamformer and our CTO Dave Wendling is sitting with me here, too, and Dave can talk more about it. The link is better between the spacecraft and the user terminal when it's transmitted with this digital beamformer, and that is kind of above my pay grade in terms of how all that works. But anyway, the analog antenna has to kind of squint at the user terminal at lower elevations, and the digital one doesn't. and it just improves the link.
spk26: But just to be super clear here, is there anything that you're not getting? And the answer in simple no works as well, too.
spk08: It's a simple no. It's a simple no from a capability perspective, from a flexibility perspective. I mean, yeah, and if anything, I think we're gaining stuff. I mean, with 3x the beams on each satellite, We've just got so much more scope to route traffic around. And look, we looked at this technology years ago. But but but we I mean, you know, tell us that we're not the most risk embracing organization on the face of the earth. I think we're forward leaning, but we don't, you know, get get overly aggressive. So we took a pass on it. the thermals were too high. I mean, there's all kinds of stuff. But in any event, I mean, MDA kept investing. And they're leveraging some of the work that they did on the analog beam former, which is another reason why we're not taking any schedule hit. So, yeah, no, it's just a home run.
spk26: Got it. Thank you for that. And then, I don't know who wants to take this one, but I'm hoping some folks can maybe just bridge some funding gaps for me here. So $3.5 billion total, $1.6 billion Telesat equity. We all can do math on how much money has moved over there to date, but I'm wondering, can you give us that number, rough, rounding encouraged? I'm assuming CBAN proceeds will help fund that, and then additional money moving over. I'm just wondering if you can fill that in a little bit.
spk08: Let me try to fill it in, and if there are still gaps, which is often the case after I respond to questions, then the finance folks can do it. But a couple of things, and we tried to be clear about this in the release. We're fully funded for, right now, 156 satellites. So the deal that we've announced with MDA is for 198 satellites. The U.S. $3.5 billion is for the 198 satellites. But right now... with the cash that we have, including the cash that we've already invested in this project. Oh, and I should note the CBAM proceeds that we're expecting to get real soon here. With the cash that we have and the CBAM proceeds that are coming, with the money that we've lined up with our Canadian federal and provincial partners, we've mentioned that we've got some vendor financing. which is not as significant as our own equity contribution or the government contributions. So with all of that money, we've got enough money. We're fully funded for 156 satellites, plus we built a non-trivial amount of contingency in there because that's kind of how we roll. So that gives us enough money for the 156 satellites, which gives us full global coverage in a really good, high-performing constellation. But we've committed to MDA for another 42 satellites that will fund the current plan is using the existing cash flows of light speed once light speed gets up and running in a few years' time. So that's the plan. And so then the mass should work. So the CAPEX, just to be real clear here, the CAPEX for the 156th satellite constellation is about U.S. $2.7 billion. The total program cost is about $3.5 billion U.S. for the 156 satellites. So that's CapEx plus everything else is about $3.5 billion plus some contingency that I mentioned. And then when you look at the funding, there's about, you know, 1.6 billion equity contribution from Telesat. And just to be clear, that's cash that we've already put into the project. Cash that is already available outside of the restricted group for LEO. The CBAM proceeds that are coming in, that covers all that 1.6. And then the government contributions are about $2 billion U.S., and then as I mentioned, there's some vendor financing as well. So that's what gets us there.
spk26: Can you break up the government financing and the vendor or give us one of those pieces? Is the government in Canada in Quebec, is that the same from last time is what I'm asking? Has anything changed?
spk08: Well, I mean, if you do the math, you know, so we've said that it's approximately $2 billion U.S., which is at current exchange rates, is about 2.7 billion Canadian. Previously, what we said is that the government of Canada had committed to about 1.44 billion of Canadian dollar contribution. Quebec, 400 million of Canadian contribution. So there's an incremental 900 million there that we've been in... advanced discussions with our government partners about. So, so that's kind of, you know, the government piece and we're, we're not free right now to break down exactly, you know, how much is coming from the different sources, but, but, but we'll be able to talk, we'll be able to talk more about that in the future. And then the vendor financing, you know, we're, we're subject to confidentiality obligations. Um, with our suppliers. It's some hundreds of millions of dollars, but we can't be more specific than that at this time. I will say it's not MDA. MDA is holding their call, I think, shortly after ours, and I'm sure they'll get asked. So, you know, we chose MDA because, you know, they got this great technology and they're leaning in hard to in building, in wanting to be a LEO prime, but we didn't select them because of vendor financing commitments.
spk26: Thank you. And just quick and to clarity, I think I know the answer. This is still going to be funded, built in unrestricted subsidiaries, and then in the future, you might consider bringing everything back together. Is that still the thought?
spk08: Yeah, nothing has changed there in terms of how and where we're funding this. We've, you know... Yeah, I mean, what happens in the future in terms of restricted group versus unrestricted group, you know, we're not saying anything about that. You know, at some point in the future, it could all come back together or we could, you know, continue to finance those activities separately. But there's nothing about today's announcement that changes any of that. Thank you. Okay, thanks, Mike.
spk12: Thank you. The next question is from Walter Pisick from LightShed. Please go ahead.
spk21: Thanks. Dan, just to confirm, that incremental government piece of the puzzle is not the revenue commitments that exist, right?
spk09: No, no, no. No, you know, and I mean, no.
spk08: We've got a capacity commitment from the federal government of Canada to That's 600 million Canadian over a 10 year term. We've got a separate commitment from the government of Ontario. That's 109 million Canadian over a five year term. And again, we've talked about this before, the way those things are structured. We think that, you know, that the amounts are essentially going to get doubled when we take that pool of capacity that's subject to those funding arrangements and enter into agreements that here in Canada with ISPs and the like. But no, those amounts are separate.
spk21: So this 900 then, I understand, I respect that you can't really disclose it, but cost-wise, obviously, is it going to look as attractive as what we saw from the government of Canada?
spk08: So that's a great question. So this approximately $2 billion U.S. dollars of government funding, we said it's subject to the completion of confirmatory due diligence and getting definitive agreements in place. We're going to need to work with the government to agree fresh terms for all of that. I, I believe it's going to continue to be, you know, attractive financing, but we'll update everyone on that.
spk06: Okay. So, so yeah. And that,
spk21: fine and then just just the overall numbers it was definitely helpful to recognize that your capex is even lower for the initial launch and to get read the revenue pump going but the overall number then in terms of what you've outlined sources relative to the uses it seems like you don't even need the operating cash flow to get to the to the full you said 198 consolation so we don't need the operating cash flow
spk08: Walter, to get to fund the U.S. $3.5 billion plus contingency for the 156. But we're going to need roughly another $800 million U.S. to fully fund the incremental 42 satellites plus the launch vehicles.
spk21: Why is that? You said $2.7 billion. for the 156, right? So if I just take $1.6 billion plus $2 billion... No, hold on, hold on, hold on.
spk08: Wait, wait. $2.7 billion for the CapEx, about $3.5 billion for the total program cost. It's a little confusing because the total program cost for the 156 is roughly equivalent to the CapEx for the 198. The numbers are the same.
spk21: Okay. I'm going to ask the first, the J.P. Morgan dude's question in a different way. You know, you had these presentations that were very helpful in terms of sizing the market, you know, 365 billion TAM, and you kind of broke it down and talked about your percentages. Has anything changed in terms of how you look at that TAM relative to this new constellation? Does it increase the TAM? Does it decrease the TAM? I assume we're growing the size of that TAM as we hit, you know, a commercial date that might be a little bit later than what I first kind of was forecasting back in 21. Just thoughts on that.
spk08: Yeah. So our thoughts about the addressable market, the size of the market, the amount of share we can take in that market are unchanged. Again, I mean, we deliberately have designed a constellation that allows us to do everything that we had been planning to do under the prior plan. If you dissect what we've said about the adjustable market in the past, order of magnitude and You know, it's about $400 billion, we think, out in the, I think we said, 2025 timeframe. Roughly, we've said about half of that $400 billion is kind of direct to consumer, which is not the market that we're focused on. We've always been real clear we're focused on the enterprise and the government services market. So that's roughly the other half of that, Tam. We've said if we get, you know, 2% of that, which we don't think is the most ambitious, you know, kind of perspective, that will be hitting our business plan. And so our thinking around that.
spk21: Say it again? Yeah, I have that. I'm glad to see the 430 is reaffirmed as is, you know, timeline on that. But I think maybe what's the follow on this is like, you know, you've had a delay, you have a new vendor, right? there's been a lot more conversation about, I guess what people are calling directed device markets and more of the consumer thing. There's, I mean, Ergen on his stats dish call was talking about S band, although they're not financed, you know, I think you've got some legato spectrum. I don't know what's going on at bias that is there an opportunity perhaps to partner with one of these other players, get access to some additional spectrum and modify this constellation of to the extent that you can address that broader $430 billion market you identified for 2025?
spk08: So here's what I'd say about that. First off, the 430 doesn't include the direct-to-handset market, which is some of what I know DISH is focused on. But these satellites right now have really been optimized, frankly, just like our prior satellite design. They're optimized to do high throughput broadband connectivity for the enterprise market. And we have squeezed out every watt of power and directed it to that market. And we've sized these satellites. We've optimized them for that mission. In order to change the mission, it just wouldn't make any sense. Now, having said that, if we had access to S-band spectrum or L-band spectrum, could we leverage, you know, the bus, the processor, potentially the antennas, although the antennas might look different. Yeah, we could potentially do something like that. But right now, we just got to stay laser focused on this huge market that's in front of us that we know well that we've been serving for years that we've been out there engaging with you know customers you know about light speed for quite some time so so walter that's our focus now could the tam be a little bit bigger because and is there a drop is there a drop dead date when you'd have to work something out with an s-band or an l-band owner we're we're we're We're off to the races. We're already moving forward with MDA on this. We're not, you know. Look, if there's some great opportunity here with some third party bringing that spectrum and some capital, then it would just be almost kind of like an adjacent network that might leverage light speed in terms of routing traffic around and whatnot. But, you know, yeah. Yeah.
spk21: You know, we've talked about this before in terms of the REV commitments that, you know, when we were waiting for TELUS to get and the ECA, all that stuff, that it impacted your ability to get signatures. So I assume that this is going to kind of open up that spigot. Are you, you know, how do you envision disclosure in terms of as you get incremental revenue commitments for the new constellation, you know, individual press releases, updating on a quarterly basis? How do we get a sense of how that business develops?
spk08: All of that. We'll be transparent about the deals that we're signing so that folks will have visibility. We understand how important that is.
spk21: Awesome. Thank you.
spk08: Okay, thanks.
spk12: Thank you. The next question is from Aaron Sechadry from BNP Paribas. Please go ahead.
spk19: Hello, gentlemen. Thanks for taking my questions. And first of all, congrats on getting a Lightspeed program reconstituted and funded. Lots of skeptics, so definitely hats off. Just wanted to nail down a couple of details on the funding, the equity side. So just to make sure I got my math right, the existing cash balance that you have right now is probably somewhere in the range of about $1.1 billion U.S. You're getting another $260 million from the CBAN proceeds that gets you close to $1.4 billion U.S. So is it fair to say that you have another U.S. dollar, $200 million or so of additional equity that you need to contribute either from the from the operating cash flows in order to get to your $1.6 billion U.S. of equity funding?
spk16: This is Andrew. I'll take that. I think as Dan laid out very clearly that we're totally funded. The $1.6 billion is already there today, and that is comprised of, as you say, the cash we have currently. We've got our CBAN proceeds coming in, Canadian $345 million. But also during the course of the program, we have been investing in the development of over time, so that number includes that funding. And also, yeah, so I think altogether, I think we're in good shape. I think the key point, we don't need any more cash to come in today for us to say we're fully funded. Any cash that comes in today is something for the future, but for today, we're fully funded.
spk19: Got it. Thank you, Andrew. And then in terms of the... I noticed that you haven't laid out any future debt buyback authorizations Is it fair to say that given you're fully funded, is it fair to say that future operating cash flow you're generating is still sort of likely to be used for debt buybacks?
spk08: So what would I say? Look, we've been doing a fair amount of debt repurchases and we highlighted that in the earnings release. And we think that it's been a really smart thing to do with the cash that we have that we hadn't had a higher value use for at the time. And rather than it just build up in the restricted entity, it just made a ton of sense to us to be repurchasing that debt back because we thought it's trading at attractive values and it was a good way to strengthen our balance sheet and create equity value for the shareholders. And all I would say is going forward, we're just going to be pragmatic about it as we go forward. If that continues to be the highest value opportunity for that cash, then we would consider more debt repurchases, depending on where the debt's trading and the like. If we had other attractive uses for that cash, building a geo-satellite or some other use, then we would consider that. But anyway, it's a long answer, but suffice to say, we feel good about the debt repurchases that we've done in the past. And going forward, we'll just be, I don't know, just kind of pragmatic about it. Andrew?
spk16: Yeah, no, just to confirm what Dan had said, that's absolutely correct. And You know, face value, we purchased $456 million back, as we mentioned, and that gives a gain of $222 million. But we're very focused on overall debt. That's why I threw in that, you know, since coming back to the end of 2020, we've reduced our overall debt by 24%. So in addition to all the activities and light speed, getting going is the future of the company, we're very, very focused and responsible about the debt we have today.
spk19: Got it. Thank you. And then the last question from me is, In terms of, so obviously you have a lot of work to do to finalize the agreements, etc. So two other topics. One is the structure of the remaining, you know, $900 million in financing. Do you anticipate that to be at the Lightspeed subsidiary? And then secondly, do you, you know, I guess beyond all of this, what are the other, I guess, risks or dependencies remaining beyond getting all the agreements sorted out? What keeps you up at night at this point?
spk08: Thanks. So we expect that all of the government funding will be, yes, over, you know, on the unrestricted side. Leo, that was always the plan, and it continues to be the plan. As far as what else keeps us up at night... Look, we've got to close the funding with our government partners. I'm highly confident that we'll achieve that, but it's got to get done and it's got to get timely done. And then we've got a ton of work to do. We're going to be hiring a whole bunch of people and ramping up our staff. We're moving out with MDA in a big way. We're going to be ramping up our sales and marketing team as we do more heavy engagement with the customers. I mean, it's all that. And we've got our day-to-day business that we're running too and never take our eye off the ball on that. So anyway, I mean, we're just so excited to be finally on our way and we can stop talking about when are we going to be fully funded? When can we get going? I mean, it's just so liberating after all this time to have the funding lined up, to have a great plan with MDA and the rest of our partners. So from this point forward, it's just all about really focused execution.
spk20: Congrats and all the best.
spk08: Okay, thank you.
spk12: Thank you. The next question is from Raghav Garg from DoubleLine. Please go ahead.
spk25: Thank you for taking the question. Can you talk about the life of these satellites, given they're slightly smaller? Does that impact your duration of the constellation?
spk08: It's a good question. No, same capability from a lifetime perspective, which is to say we've specced that the satellites meet their performance specifications for effectively 11 years do we expect them to maybe go longer yeah that that's you know been our experience in the past and I think the experience of others in the past but but from a spec perspective our contract with MDA it's it's absolutely comparable to the prior plan it's 11 years got it thank you and
spk25: Any color on, you've given an IRR estimate, you've given the capex. So can you just talk about, you know, on my math, presuming some duration, you know, can you throw out an EBITDA number? Because you've sort of given the input. So I get to two to three billion. Is that unreasonable?
spk08: It's not unreasonable. We've tried to provide some kind of high level information. you know, building blocks. But we're going to quickly move past that. So we mentioned that we will schedule an investor day before the end of the year. We definitely plan to be presenting at more conferences where we can, you know, meet with investors one-on-one and share a whole lot more information about what the business case looks like. Thank you.
spk12: Thank you. The next question is from Mr. Rosenberg from Credit Suisse. Please go ahead.
spk27: Hi, thanks for taking my question and congratulations on the announcement with MDA. Some of my questions have already been asked here, but I did have a couple more I was hoping to lob in here. On the math part, I mean, some of the information you gave has definitely been very helpful. One remaining question I do have, just trying to close the gap a little bit between, I guess, uses of proceeds. I mean, the MDA announced that it seems like it's a Canadian $2.1 billion contract, and just trying to reconcile that with the numbers that you've specified for at least the additional 156 satellites. I mean, it seems like there's a pretty big delta there. I mean, probably over and above just what a contingency would be. I mean, so is there another significant vendor in the mix, or another kind of part of the puzzle, I guess. I'm trying to get a better understanding.
spk08: Yeah, yeah, yeah. No, I mean, there aren't too many moving parts. It's the satellites. It's the launch vehicles. It's the global ground infrastructure. It's some upgrades that we need to make at our facilities here in order to operate this global constellation. There's some IT systems that need to get put in place. We've got some money for further user terminal development, that's kind of it. And when you add it all up, and we've been rigorous in terms of building up the business case, that's kind of what it comes into. And then, yes, as we mentioned, we do have some non-trivial contingency in the plan because that just seems to be the prudent thing to do. We hope we don't spend it. I mean, that would be really nice, but we budgeted for it, and our funding covers it.
spk16: We think we've been very prudent in the build-out in terms of contingencies and looking at all of the elements that are just outlined that we've got proper funding and not just the NDA contract itself.
spk27: Got it. And as far as the, I guess, revised structure of terms with the Government of Canada and Quebec, I understand there's probably some moving parts there, but are you able to clarify just, I guess, the status of that relationship? I mean, I think previously you had a term sheet and an MLA in place, respectively, with the two that had some contingencies related to the ECA financing. So I guess with the ECA financing gone, I guess I'm just wondering, I mean, will there be some forthcoming disclosures of those documents or key structures?
spk08: Yeah, no, absolutely. I mean, we will provide lots of all the material information relating to the structure of that funding when it's available. I mean, we've got, you know, commitments from these government agencies partners who I got to say have always been strongly supportive of Lightspeed. But as we mentioned, now they've got to finish their confirmatory due diligence because they've already spent quite some time understanding the project, but they've got to do some confirmatory diligence around the MDA path. And then we've got to get definitive agreements in place and the like. And so, you know, we're all very focused to getting that done in in short order and I guess the other thing I'd say is the government has And when I say the government our government partners federal and provincial have always been really supportive of our program And I got to think that certainly now that MDA which is also a Canadian company with a big footprint here in Canada is now that MDA is taking on a much greater role in the project. And it's roughly two and a half times a bigger contract for MDA, which means building out more facilities at their facility in Quebec, hiring a whole lot more people, a whole lot more IP development here in Canada. We're now like the anchor for MDA's new digital satellite platform, which they hope to export around the world. So driving more exports, just all of that. I guess the point is if our government partners are Canadian government partners like them, we're strongly supportive of the old path. We got to think that with this new path, there'll be even more supportive still. And I do want to emphasize, we didn't pick MDA because they're Canadian. We picked MDA because they're a genuinely world-class prime for high-volume LEO satellite constellations. That's why they won the Apple contract, you know, Apple Global Star contract. But it doesn't hurt either that they're Canadian. So anyway, so that's how we think about it. But we'll provide lots of clarity there. on that government funding once it's in place.
spk27: Appreciate that. And the last final question, I mean, one you've probably anticipated is with the timeline of an operational LEO project in 2027 relative to your debt maturities back in 26. I'm curious if you've given any thought to potential structural changes that you might put in place prior to that to kind of capitalize on growing backlog on the LEO side. as far as refinancing?
spk08: I mean, I, I, I guess I'd say, um, that, that the schedule that we announced today, it's, it's fully consistent with the schedule that, that, you know, we had under the prior plan. So there's nothing new about the timing of, of, you know, our plans with MDA that, that really alter any of that. Um, we're, you know, fully cognizant of kind of, you know, the maturities. It's still some years out there, obviously, in terms of when these maturities are coming up. And I think we've been making it easier still with all these debt repurchases that we've been doing. So anyway, I mean, our expectation is we've got some time. Our Lightspeed business certainly is going to develop. Our geo business will continue to evolve as well. the whole landscape is continuing to evolve. So in any event, I mean, we'll speak more about that going forward. But there's certainly nothing that we announced today that alters in any way our thinking about it. And certainly, I think we already had a really strong business case with Lightspeed. The updated business case that's so much more capital efficient, it's only got a strength in you know, the overall company. And that, that just, I think puts us in a better place, uh, going forward, you know, no matter how you're, what lens you're thinking about the business.
spk27: Appreciate that. Thanks again. Okay. Thanks.
spk12: Thank you. The next question is from Marcelo Chernovsky from A-Ray. Please go ahead.
spk18: Hey guys, congrats on the, on the fully funded now. Um, how did, question, Dan, maybe just to parse some of the language you gave on debt buybacks from a prior caller. You said that if it continues to be the highest value opportunity for cash, but there may be other attractive uses of that cash that you would consider. So what other alternative uses of the cash would you consider at GEO business?
spk08: Well, I mean, it's just to say that, look, I mean, it's all about strategy. Strengthening the business, like how we always think about the use of cash. It's all about strengthening the business, creating value for shareholders, and providing great service to our customers. And so we're always looking for ways to grow our business in a way that is, I hope, smart and prudent. It turns out to be the case that we haven't ordered a geo-satellite in quite some time. I think we've always been very disciplined in terms of how we think about CapEx and the use of cash and how we run our business with our high operating margins and whatnot. But we don't foreclose the opportunity that in the future there could be a good opportunity to make some investments in the restricted group. That could be a new geo satellite. I don't know. It could be something else that would strengthen the business and meet all those objectives that I just talked about. To date, nothing has come across our plate, which is why we've used the cash to repurchase debt. We just want to be clear that that's something we can do, but we don't want to mislead folks that that's all we're going to do with the cash. We're We're gonna be open-minded and opportunistic. And that's all we were trying to say.
spk18: That makes sense. And with respect to the 42 satellites that are not part of the 156, you said that comes out of operating cash. So at what point will you have the operating cash to finance those, is that in five years when you're fully run-rated or is it longer than that?
spk08: Yeah, Andrew, do you want to talk about the timing of our assumptions?
spk16: Yeah, indeed. You answered the question yourself, actually, that indeed when we're fully global coverage and we're actually light-speeded off with customers, we will be generating cash flows. And that's when our models show that being pretty conservative, that we will be able to fund that from our cash coming from light-speed itself. That's why we don't feel we need any external financing whatsoever right now.
spk18: Understood. And then the 100 option, I guess, what is the timing around that? And what would you look for before exercising that option?
spk08: Yeah, well, there, listen, I mean, we've built in a lot of capabilities to scale up our network over time. If it'll be totally demand driven. And so we thought, you know, we think it's a really smart thing to have the rights there in the MDA contract to order additional satellites. If, if, if we've got the business case to do it, we don't have to, we've also built, you know, into our regulatory rights, the ability to scale up our constellation. And so we, This is all about future optionality to continue to grow the constellation, but that'll purely be a function of what the demand environment looks like at the time. With 156 satellites and then 198 satellites, we have a massively capable network that can deliver multiple terabits of capacity to users. Our focus right now is you know, getting that taken up and then, uh, then we'll think about ordering incremental satellites and expanding.
spk18: And lastly, I know you're, you're still negotiating the, I guess, the financing with the government, but in terms of the split between, I guess, debt and preferred, is that, is that still similar? And do you think that there might be more warrants that they might take in the rest of the business?
spk08: It's something that we really need to work through with our government partners. We think everyone here is around the table. We're all constructive. We know each other well. They've been strong supporters of the project. We, I think, always try to be good custodians of the capital that's entrusted with us. So we've got to work through all those details with the government, and then we'll share all that with the markets. Great. Thanks so much for taking the questions. Thank you. I think we've got time for maybe one more question.
spk12: Perfect. Thank you. The next question is from Bill Wise in Pesco. Please go ahead.
spk22: Thanks very much, and congratulations on the announcement today. Most of my questions have been answered, but is there any update or any more thoughts you have on the impact of the DISH Echostar merger on Telesat's business and DISH renewals going forward? Okay.
spk08: I think it has no impact on the work that we do with DISH and with EchoStar. We've obviously followed that situation closely. I think we have a really good relationship with DISH, with EchoStar. But no, we don't think that that combination changes in any way the the work that we do with them. That's it. Thank you. Okay. Well, thank you. And listen, thank you all for your time today. We look forward to speaking with you again when we issue our Q3 numbers, and we really appreciate everyone's time and all the good wishes. So thank you very much. Thank you very much.
spk12: Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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