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Maxar Technologies Ltd. (MAXR)
Q1 2019 Earnings Call
May. 09, 2019, 5:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good afternoon. My name is Marianna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Maxar Technologies Q1 2019 earnings conference call. It is now my pleasure to turn the call over to Jason Gursky, vice president of investor relations at Maxar.

Please go ahead, Mr. Gursky.

Jason Gursky -- Vice President of Investor Relations

Great. Thanks, Marianna, and good afternoon, everyone. I'm joined today by the company's chief executive officer, Dan Jablonsky; and our chief financial officer, Biggs Porter. Both are going to make some opening remarks, after which, we are going to open the line for questions.

We're shooting to wrap up the call in roughly 45 minutes. [Operator instructions] Before we get started, I'd like to refer listeners to the company slides for today's call, which can be found on the company's website, maxar.com, under Investors, Events & Presentations and Q1 2019 Event Details. Finally, I'd like to remind you that part of today's discussions, including responses to various questions, may contain forward-looking statements, which represent the company's estimates, future plans, objectives and expected performance at today's date. These statements are based on current assumptions that the company believes are reasonable but are subject to a wide range of uncertainties and risks that could lead actual results to differ materially from the forward-looking information.

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You may refer to the advisory regarding forward-looking statements contained in our quarterly earnings release, earnings call slide deck and the company's most recent management discussion and analysis found in our Form 10-Q, which are available online under the company's SEDAR profile at sedar.com, under the company's EDGAR profile at sec.gov or on the company's website at maxar.com. With that, I'd like to turn the discussion over to Dan Jablonsky. Dan, go ahead.

Dan Jablonsky -- Chief Executive Officer

Thanks, Jason. Good afternoon, everyone, and thanks for joining us. Before I get started, I want to thank Maxar's nearly 6,000 team members for their tireless effort over the past several months. We've been moving quickly to affect change that will better position us to generate improved shareholder returns, focusing on customers' needs and delivering high-value solutions that support critical missions.

Thank you to all those who are helping us to make this happen. If you'd please turn to Slide 3. I want to put our company in a wider context today so that investors understand where we're headed. Maxar is a leader in space technology, infrastructure and robotics and provides geospatial data and analytics to commercial and government customers worldwide.

In 2018, we generated over $2 billion of revenue across three different segments. Please turn to Slide 4. We address large and growing markets. The U.S.

government is spending more in the areas we serve, mainly space capabilities and/or intelligence. We expect that trend to continue given the increasingly complex geopolitical environment and pace of innovation. Our international government customers now, as around the world, are experiencing a similar phenomenon. We're a premier source and a mission partner for these governments.

And we expect to expand with current customers and in underserved areas. In the commercial markets, we see strong demand for Imagery, data and analytics driven by new use cases enabled by cloud computing advances, artificial intelligence and machine learning. We're also seeing a growing pipeline for space-based remote-sensing applications and continuing demand for communications missions. Please turn to Slide 5.

Our customers are the who's who of the most complex and discerning government agencies and global corporations. We've earned their trust over the past 60 years by delivering best-in-class technology solutions on required timelines at an efficient price point. We're unwavering in our commitment to our customers and their missions both today and into the future. Every great business is built with the help and collaboration of great customers.

And we feel privileged to be serving those shown on this page as well as hundreds of others. If you'd please turn to Slide 6. Our strategy is focused on providing space-based and earth-intelligent solutions, in many cases with large franchise programs and products we've built over several decades. We serve our customer value chain with our space-based solutions such as satellite hardware, space robotics, satellite integration and ground systems and with our earth intelligence capabilities and geospatial data and products, data and analytical platforms and defense services.

And we often accomplish all of this with the sustaining franchises we have designed and built over time that are listed on the bottom of this page. Going forward, we are going to place increasing emphasis on the higher value aspects of this continuum as customers increasingly want to extract insight from the vast amount of geospatial data available to them. This means we'll be looking to build repeatable, scalable products that reveal earth intelligence at scale using the decades of IP built at Radiant, DigitalGlobe and MDA. Our EarthWatch and SecureWatch subscription platforms are good examples of what we've done to date.

We'll also continue to further drive industry-leading geospatial machine learnings, capabilities across Maxar, particularly in our U.S. government services offerings. Finally, we're going to focus on and invest in our 1300 and Legion-class satellite products and in our space robotics and defense integration capabilities to better serve our government and commercial customers. Please turn to Slide 7.

As discussed on our fourth quarter call in February, we reorganized to better serve our customers and improve our financial outlook. Prior to this change, the company operated with four business units utilizing four different brands and functional leadership at each of the business units. We then had a corporate brand and overhead structure that sat on top of that. We found that the former structure inhibited collaboration across our businesses, and it's too expensive to maintain.

Instead, we're moving to a One Maxar model, bringing together our space-based solutions and earth intelligence capabilities under one roof with one brand and with more integrated functional leadership across the organization. We expect this new organizational design to save money, improve our time to market with new products and services and improve collaboration across the organization, which should in turn unlock growth synergies and improve team member engagement. The one exception to all of this is MDA, which will continue to operate under its own brand as a vertically integrated company with a leadership team in Canada. It will still benefit from corporate cooperation, knowledge and oversight.

But we thought it was important to do this given the rich heritage and brand equity of the company in the Canadian market. There's a large and growing pipeline of government work in Canada on the horizon. And we want this organization to be as best positioned as possible to win its fair share of that work. Please turn to Slide 8.

I'd like to now provide an update on the five near-term priorities that I outlined on the fourth quarter call and that the management team and our team members have been working to accomplish as we look to improve the financial health of the company and to set it on trajectory for long-term, sustainable growth. The first I will mention is that we are focused on reducing debt and leverage levels. We remain laser focused on leverage reduction and are tracking all alternatives available to us. We will leave no rock unturned.

Second, we are reengineering the satellite business based out of Palo Alto. EBITDA at the legacy SSL business, which we are rebranding Maxar Space Solutions, improved in the quarter. While we still have a long way to go and there is always risks associated with fixed-price projects, particularly those with development activity, I feel good about the actions we're taking to improve costs and execution. Most importantly, we have a team which is focused on long-term success.

On our last call, we described some of the financial investments we were making in employee retention. While this will continue to be an important area of focus, I'm pleased to note that our efforts are taking hold, we've stabilized and at least for now, voluntary turnover is more in line with Bay Area averages. We're focused on the 1300 and Legion classes of satellites where we have line of sight to both classified and unclassified government programs as well as commercial communications and earth observation missions. I don't have any new orders to report for you today.

But the team is working diligently to win awards, and we have a good pipeline of opportunities over the next few years and beyond. Third, we are positioning MDA for long-term growth. We finished our work on the RCM program and are getting ready for launch. This constellation of three radar satellites manufactured for the Canadian government has been an important element of the company's revenue stream over the past several years.

We look forward to working together with the Canadian government on its longer-term radar continuity program at the appropriate time as the company continues to maintain best-in-class satellite design, assembly and test capabilities at its Montréal facility. As far as growth prospects are concerned, I'd like to highlight a couple of items that are very positive for the outlook at MDA. To begin, MDA signed the initial design phase contract with Lockheed Martin this quarter for the Canadian Surface Combatant program where we will be providing the Electronic Warfare suite. While we expect revenues to ramp slowly as full-fledged production is still a few years out, we believe this could turn into a long-term franchise for MDA as other navies look to upgrade their fleets.

Also this quarter, the Canadian government pledged its support of NASA's Lunar Gateway program via proposed funding for Canadarm3, which will be the primary robot arm on NASA's mission. MDA is the incumbent on Canadarms 1 and 2 and has provided mission support on over 200 robotic space maneuvers over the past several decades. Hands down, the greatest number by any company on the planet. As such, we could not feel better about the potential for a follow-on program.

Fourth, we are positioning both the Imagery and Services segments for long-term growth by increasing our analytics and product offerings and growing capacity when our WorldView Legion constellation goes into service. The insurance claim for the loss of WorldView-4 has been settled. We have already received payments of $153.5 million, and we expect the remainder of the $183 million by the end of the second quarter. We've also taken advantage of technology advances in the WorldView Legion constellation that will increase capacity above our original plans.

This better sets us up for additional capacity in the highest-demand regions of the world, which will fuel growth once the constellation is launched. Despite the year-over-year declines in revenues and EBITDA this quarter given the loss of WorldView-4, we remain on track to finish the year flat on both metrics as we work to offset lost revenue and we benefit from the full effects of the cost savings initiatives, which brings me to the final point. We are reducing our cost structure, which should improve profitability over time and help us with our debt and leverage situations. This quarter, we engaged in significant cost reductions that unfortunately affected several hundred of our colleagues.

This is never easy, but it was a necessary step as we try to right the ship. We continue to be on track for achieving both original merger synergies from the DigitalGlobe-MDA combination as well as the incremental savings that will come from this most recent effort. If you'd please turn to Slide 9 for some other key highlights of the -- in the Imagery segment this quarter and a few words about the medium- to longer-term outlook. As you know, we are capacity constrained in certain high-demand regions right now given the WorldView-4 loss, which means that subscription and product sales are going to be the primary drivers of our ability to grow until the Worldview Legion constellation is on orbit.

We also put out a press release recently highlighting the continued traction we are seeing in our platform products. On that front, I am pleased to report that we announced the contract with Vulcan this quarter for our use of EarthWatch subscription products demonstrating continued adoption with nongovernmental organizations. One aspect of this program works to help reduce illegal fishing and coincides directly with our purpose of building a better world. SecureWatch now has over 40 customers ranging from ministries of defense to intelligence agencies to national mapping agencies who utilize the web-based platform for applications such as mission planning, border and facility monitoring and disaster response.

And EarthWatch now counts over 70 customers across a multitude of industry verticals, including technology, automotive, insurance and oil and gas who are utilizing the constantly updating Imagery library and analytical tools that come with this product to better manage their businesses and to create new innovative products and services. I'd now like to frame for you all how we're thinking about the growth outlook for our Imagery business over the next several years. As we've talked about, from an accounting standpoint, our noncash deferred revenue associated with our original EnhancedView contract will burn off over the next six quarters. When we look underneath, there's a cash-generating revenue.

We see positive trends going forward. Although growth this year is constrained by the loss of WorldView-4, growth over the next two years can be driven by the subscriptions and products I just mentioned. In our new structure, we're continuing to invest in technology and product advances that we believe will fuel faster, more capital-efficient growth. Our recent agreement with Toyota Research Institute-Advanced Development and NTT Data Corporation to develop a proof of concept to build automated, high-definition HD maps for autonomous vehicles using high-resolution satellite imagery is a good example of this.

Over the longer term, we will have additional capacity available to us once the WorldView Legion constellation is launched and operational in the 2021 timeframe. It is important to note that in 2019 and 2020, we are benefiting from U.S. government funding to further integrate our Imagery production, distribution and operations with U.S. government systems through a cloud-based infrastructure.

This additional federal funding for further integration will allow for closer interoperability with the U.S. government in our current and future ground and space architectures and is key to our long-term opportunities. Some of this funding has required us to increase our capital spend on infrastructure, but it is a part of what we're being paid for. Please turn to Slide 10.

The Services business experienced a nice bounce back quarter-on-quarter in margins driving -- driven by execution and mix. And the team there is focused on aligning itself with a new operating model, which we expect will lead to mix shifting toward higher-margin products over time as we better leverage our product and go-to-market themes. Importantly, this quarter, we signed a $70-plus million multiyear contract for development and integration of automated intelligence and machine learning capabilities into operations for the United States Air Force. We'll be working closely with the Air Force to demonstrate the operational value of advanced analytics in day-to-day operations.

We also booked a number of other contracts during the quarter that allowed for a book-to-bill ratio well above one. So our business is off to a good start, which has us maintaining the 29 outlook for low- to mid-single-digit top line growth and roughly 11% EBITDA margins. In the medium term, we expect growth prospects to be driven by the recent growth in bookings as well as demand from the U.S. government.

And over the longer term, growth prospects will be driven by demand pull from the U.S. government and further penetration of international markets, which for us remain relatively untapped at this point. If you'd please turn to Slide 11. I've already spoken about some of the key highlights for our Space Systems business so I won't reiterate them here.

While I can't say we have eliminated volatility, we recognized progress in the quarter with the improved profitability at the legacy SSL business and the Canadian Surface Combatant pursuit that converted to a win this quarter. It's also worth noting that our Restore-L program for NASA completed its critical design review recently. As a reminder, this spacecraft is designed to refuel satellites in low earth orbit and will include two robotic arms provided by the company. We are also nearing completion of EUTELSAT 7, which will be our first satellite to feature an all-electric propulsion system that reduces overall spacecraft mass, allowing our satellites to carry larger payloads or to fly on smaller launch vehicles.

I'd now like to frame for you all how we're thinking about the growth outlook for our Space Systems business over the next several years. Over the medium and longer term, the outlook for MDA is positive based on the expected trajectory of Canadian space and defense programs; commercial satellite programs, especially those in LEO; and eventually on the company's ability to penetrate export markets, including the defense electronics associated with the Canadian Surface Combatant. As for the legacy SSL business, the outlook is going to be driven by execution of the current backlog and the ability to win new orders for the 1300 and Legion-class satellites from both government and commercial customers. There's a healthy pipeline on a combined basis, and we're focused on converting it to wins following the temporary disruption created by the GEO Comsat sales process in the second half of last year.

Please turn to Slide 12. I want to provide a few words on our longer-term objectives. At this point, we're driving toward top and bottom line growth by focusing on large, growing markets through our unique franchises, customers and capabilities; and by expanding margins by reducing our cost structure; and placing more emphasis on the higher end of the value chain I spoke to earlier. We look forward to the capex holiday we have talked about once the Legion constellation is launched in 2021.

We're moving to a lower capital-intensive model to the lower cost of new satellite capacity and a higher mix of data-driven products, the combination of which we expect to drive higher returns on invested capital over time. And lastly, we are committed to delevering and reducing overall levels of debt. As we've said before, we're tracking all alternatives. Please turn to Slide 13.

Finally, I just want to outline what I think is the opportunity here at Maxar. We're the leader in large and growing markets. And we've built significant technology and industrial leads in many of the areas in which we operate. We are a trusted partner with some of the most sophisticated government and commercial customers on the planet.

We have a solid and growing set of long-term product and program franchises. And finally, we're on a path to address our challenges. Simply put, we know what we have to do, and we're doing it. And with that, I'd like to hand the call over to Biggs to take us through the financials for the quarter and our 2019 outlook.


Biggs Porter -- Chief Financial Officer

Thanks, Dan, and good afternoon, everyone. Please turn to Slide 14 where we present year-over-year comparisons for the first quarter. Total company revenues declined 9.5% year over year in the quarter as expected, as the Imagery segment was negatively impacted by the loss of WorldView-4, Space Systems saw lower volumes in Geo and the RCM program and Services had a tough comp versus the first quarter of 2018. Adjusted consolidated EBITDA margins declined 390 basis points year over year driven by the lower revenues in the Imagery segment as well as lower revenues and profits in the Space Systems segment.

This was, in part, offset by margin expansion in Services. Please note that this quarter also absorbed $6 million of ForEx losses resulting from the discontinuance of hedging treatment for accounting purposes. Without this, adjusted EBITDA would have been $123 million in the quarter versus the reported $117 million. GAAP EPS was a loss of $0.99 versus a gain of $0.26 a year ago driven by a lower tax benefit, our restructuring cost and lower EBITDA from the Imagery segment.

Please turn to Slide 15. Imagery segment revenues declined 5% year over year driven by the loss of WorldView-4, which affected the international defense and intelligence market. Our U.S. government business experienced growth driven in part by the contract Dan mentioned earlier to upgrade our infrastructure, while the commercial market was driven in part by growth in our subscription-based products and services.

Adjusted EBITDA margins for this segment declined year over year given the reduction in revenue but were up quarter-over-quarter from the fourth quarter 2018, which was negatively impacted by a legal settlement. Please note that efforts to recover lost WorldView-4 revenue and the cost actions we took to mitigate the profit hit from this failure were technically late in the quarter. This suggests that for Imaging, we should see sequential improvement into the second quarter. Please turn to Slide 16.

Space Systems experienced a 6% year-over-year revenue decline in Q1 primarily driven by the expected wind down of work on a multiyear RCM project as well as lower revenues in our Palo Alto factory. These decreases were in part offset by increased activity on WorldView Legion. Adjusted EBITDA margins declined 600 basis points from a year ago driven by an increase in estimated costs to complete certain satellite programs, lower volume in our Palo Alto factory and a decrease in RCM revenue and a change in product mix. These increases were partially offset by a decrease in SG&A expense due to a headcount reduction as a result of prior year restructuring initiatives.

SSL, which as Dan mentioned, we are rebranding Maxar Space Solutions, posted $210 million in revenue and a modest EBITDA loss in the quarter, which is a significant profit improvement quarter-over-quarter. Please turn to Slide 17. Our Services business posted a 3% decline in revenue versus the first quarter of '19 on a tough comp given the small divestiture and the strong first quarter from contract modifications in 2018. EBITDA margins expanded 460 basis points year over year driven largely by the loss on a divestiture recognized in Q1 of '18.

This business experienced near-solid bookings quarter with total book-to-bill for the segment exceeding one. As Dan mentioned, the strong growth in bookings over the past year or so provided a good level of visibility in Services.Please turn to Slide 18. The company consumed $58 million in operating cash flow in Q1 following a seasonally strong Q4. Keep in mind that we make the majority of Q4 and Q1 interest payments in the first quarter each year and make minimal payments in the fourth.

During the quarter, we invested roughly $73 million in capex and developed intangibles versus $60 million in the year-ago period. Both the Legion program and the government's investment in our Imagery segment were the primary drivers of the increased spend. Of note, SSL consumed $45 million of free cash flow in the quarter. As a reminder, we expect the timing of milestone payments associated with several of the projects in backlog to be a headwind this year for this business.

We are carefully watching the performance of this business including the stability of personnel, project estimates and developmental elements of existing programs. One of the key watch items for cash flow for SSL for the year will be if we can win new programs that bring cash. Going forward, across the board, we will continue to have a keen focus on working capital and other drivers of cash generation. And as Dan mentioned, in the second quarter, we expect to receive all $183 million in proceeds from our insurance claim associated with the loss of WorldView-4.

If you're trying to annualize the quarter to estimate the full year, please consider the following: In Q1 of 2019, the doubling up of interest added $42 million of cash outflow in the quarter relative to the norm. We will only have two quarters' worth of interest payments for the rest of the year. We also had $17 million in outflows in the quarter related to previously settled legal matters. We expect to have $183 million of insurance proceeds in Q2.

And we have seasonally high cash outflows in Q1 for the payment of year-end liability buildups, and the fourth quarter is typically seasonally positive. Please turn to Slide 19. To finish the quarter, we've consolidated net debt of roughly $3.2 billion, up modestly from the end of last year. Our bank-defined leverage ratio ended the quarter at approximately 4.5 times, up roughly a third of a turn from the end of last year given lower levels of trailing 12-month EBITDA as well as a higher level of debt.

That said, we are well within our covenants. We had roughly $535 million liquidity at the end of the quarter via a combination of cash on hand and our revolver. As we said earlier, since the end of the quarter, we received insurance proceeds, which we are using to fund our 2019 capital investments, thereby significantly reducing what would otherwise be the draw on our revolver. We have no maturities until October 2020.

Going forward, we remain focused on delevering and reducing our debt levels. As Dan mentioned in his remarks, we are tracking all alternatives to do so, and we will be sure to provide updates to our investors when appropriate. We expect to increase cash generation in future years from expansion and EBITDA using all the levers Dan referred to earlier. Also, keep in mind that our investment in the WorldView Legion constellation will continue for two more years, at which this year is the peak, after which, we'll be in a position to have much greater free cash flows to delever.

We understand what our alternatives are to refinance our near-term maturities. However, our current actions are focused on delevering first. We do, however, recognize that we need to move along the path, removing uncertainty in this regard. Please turn to Slide 20.

Turning to guidance. Dan, in the earlier slides, already provided an update on our high-level thoughts for the top line and margin rates for most of the business. We had a good start to the year. But given that it is just the first quarter and there is still so much left to accomplish, at SSL in particular, we're not going to raise adjusted EBITDA guidance for the year.

We will, however, give some additional insight. At this point, we continue to expect adjusted EBITDA for our Imagery, Services and MDA businesses to exceed $550 million, net of corporate expenses, this year driven by a flat outlook for revenue and EBITDA in Imagery, modest growth and flattish margins in Services and a modest revenue decline and several hundred basis points of margin compression driven by mix at MDA. This EBITDA guidance does not include the gain we'll record on the WorldView-4 insurance claim. At SSL, we expect profitability to improve off of the roughly $80 million EBITDA loss we posted in 2018.

However, as I said earlier, cash flows, which were roughly negative $95 million in 2018, are likely to be a headwind in 2019 given the timing of milestone payments, retention and cash restructuring charges. We're going to continue to refrain from providing a specific guidance for SSL given all the moving pieces related to the timing and cash profiles of new business, remaining activity on existing business and our restructuring and repositioning efforts for that business. As Dan referred to earlier, we have improvement in retention of personnel already as a result of our efforts. We're spending a little over $20 million on retention programs this year at SSL tied to milestone performance.

This and clarity as to our strategy for the business are keys to success. On operating cash flow, excluding SSL, we expect to generate cash in the range of $350 million to $450 million this year. This includes significant restructuring cash outflows due to reductions enforced and final integration costs from the 2017 merger. These costs aggregate approximately $40 million, excluding SSL, and are exceeded by the in-year savings we expect.

Now those costs, if normalized, the operating cash flow would be higher. We expect capex to be up year over year as we reach peak spending on the Legion program. This program remains on track for launch in early 2021. And capex levels on this project should decline as we move closer to that date.

We expect capex, including SSL, for the year to be less than $375 million, excluding capitalized interest. This may be higher than many expected, but it includes approximately $25 million in timing variance on the expenditure of cash rolling over from 2018 and expenditures related to new programs that have been funded by contracts and related receipts flowing through the revenue line. We expect depreciation and amortization of roughly $410 million this year. Interest expense is expected to be approximately $205 million.

Interest expenditures are expected to come in at roughly $185 million this year with approximately $20 million of that capitalized. We are forecasting a roughly 0% effective tax rate due to the benefits of our NOL carryforwards and ITCs. The diluted share count should come in at roughly 61 million. And as I discussed in the past, our credit agreements allow us to convert our GAAP financial state -- GAAP financials back to IFRS for the purposes of compliance with our covenants, which will generally lead to a higher level of EBITDA.

Most notably, these are R&D expense and investment tax credits. We also have the ability to add back several other items to the leverage calculations, including stock compensation, which we now deduct from EBITDA and the expected benefits of restructuring efforts and cost savings. It is, as already noted, complicated and will vary based on expenses embedded in our U.S. GAAP numbers.

So when we roll all the factors embedded in our guidance with these items, we expect our leverage ratio for the purposes of our debt covenants to end the year well below six times. So to summarize my comments. A solid start to the year relative to our expectation. We are staying conservative on guidance until visibility on SSL's forecast improves, and we are focused on deleveraging.

And with that, I'd like to ask our operator to remind listeners how to queue up for a question and to open the line.

Questions & Answers:


Certainly. [Operator instructions] Your first question comes from Steven Li. Your line is open.

Steven Li -- Oppenheimer and Company Inc. -- Analyst

Hi. Thank you. Biggs, the $45 million cash flow consumed by legacy SSL, if I annualize it, is that enough to capture a lot of the milestone payment headwinds this year?

Biggs Porter -- Chief Financial Officer

Well, we're -- as I said, we're not going to guide on SSL. We did say it would be a headwind referencing back to the $95 million last year. If you're looking at the quarter itself, I would note that each of the businesses were seasonally negatively affected. So there's some of that to be taken into consideration.

But going forward to the rest of the year, it's just very hard to say exactly what SSL will do, how it will play out. Just too much depends upon variability, among other things associated with when new business comes in and whether -- what its cash profile is, whether that brings new cash into the quarter. So I just -- rather than implicitly give guidance where we are, why not I just refer you to those particular circumstances that -- we do expect it to be negative. The first quarter would have some seasonal negative effects.

But then a lot of this for the rest of the year is going to depend upon performance, other variables and the timing of new business.

Steven Li -- Oppenheimer and Company Inc. -- Analyst

OK. And then maybe a question for Dan. The SecureWatch, can you give us a sense of that momentum, whether its size or growth, Dan?

Dan Jablonsky -- Chief Executive Officer

Certainly. I mean as we've discussed, we are -- even with the loss of WorldView-4, forecasting flat revenue and EBITDA for the Imagery business this year. A large part of that is predicated on the update we've had in our subscription products, EarthWatch and SecureWatch, and some derivatives coming off that included. And so we're seeing very positive momentum in the marketplace.

As we announced, we've got 40 and 70 new customers -- or total customers, respectively, on SecureWatch and EarthWatch announced. And these are large and growing customers with accounts. So we're very bullish on those types of products, those two in particular but derivatives of them as well, going forward as we continue to create a better experience and product for our customers there.

Steven Li -- Oppenheimer and Company Inc. -- Analyst

What is your typical size of duration then for these subscription services?

Dan Jablonsky -- Chief Executive Officer

We are not disclosing particularly what the size of the average customers is, but they can range from anywhere from $100,000 to well north of $1 million annuals contracts.

Steven Li -- Oppenheimer and Company Inc. -- Analyst

Thank you.


Your next question comes from Robert Spingarn with Credit Suisse. Your line is open.

Audrey Preston -- Credit Suisse -- Analyst

Hi. This is Audrey Preston on for Rob Spingarn, and I just had a couple of questions this evening. So first, given the fact that we're about halfway through the year now and we haven't logged any significant orders in SSL, my question was how are -- how do you gain confidence that you'll be able to maintain that one or two-order cadence that you ballparked last quarter for the year? And then how can you rebuild trust with your customers in terms of maintaining business in this segment?

Dan Jablonsky -- Chief Executive Officer

Yes, certainly. I mean I would say that with the customers we have and the customers we've had in the past, we're seeing very strong encouraging signs and having great conversations with them. And several of them have programs in the factory, and they've been out to do program reviews with us. And I can just tell you those have been very positive.

We're there. We're doing what we said we would do, and we're delivering on their missions. In terms of future business, we have a very strong pipeline of commercial and government business, both classified and unclassified on the government side and both LEO and Geo programs on the commercial side. And we're very confident we'll be turning wins in.

But unfortunately, I don't have anything to announce today, but we expect to in the near future.

Audrey Preston -- Credit Suisse -- Analyst

Great. Makes a lot of sense. And following up on that, just assuming kind of a worst-case scenario, stress testing here. If you don't record any orders for the rest of this year, do you still maintain confidence in your ability to hit breakeven in Space Systems with the $500 million top line?

Dan Jablonsky -- Chief Executive Officer

I am very confident in the strategy we've chosen. I do believe we'll get awards this year. And that is premature to speculate given it's our latest in the year that -- on where we end up. But not only are we forecasting that we're going to have wins in this business, but we've also been discussing that we can do that on a smaller footprint.

So we'll be more nimble. The mix of business we need is not as great as it was to sustain the commercial GEO business that we had in the past. And with the mix of different types of programs we can put in the factory there and also through the engineering phases, we've got a lot of good stuff built into how we're going to run that business going forward. And we've made very positive strides in the first 90 days or so in terms of the reengineering work that's been going on out there, stabilize the workforce and really bolstering our credibility back in space.

Audrey Preston -- Credit Suisse -- Analyst

Right. Thank you.


Your next question comes from Richard Tse with National Bank Financial. Your line is open.

Richard Tse -- National Bank Financial -- Analyst

Yes. Thank you. I've got a couple of questions here. First, with respect to that legal proceeding in Ukraine, I was wondering if you may be able to give us a bit more color in terms of what the timing of that could look like.

Biggs Porter -- Chief Financial Officer

I think we made pretty good disclosure in our 10-Q on that. We don't expect it to have material impacts throughout the year. But again, this is a -- in an arbitration-type setting. And it's doing what the arbitration-type settings do, which is usually sliding to the right and trying -- people trying to figure out exactly what that looks like.

But again, this is something that's fairly old that we're working our way through. For those who aren't familiar with that, we delivered a satellite to Ukraine that we were paid to build. We delivered it to the appropriate place. And then Russia invaded Crimea, and Ukraine hasn't had access to that satellite.

So we did what we said we would do. And now we're in arbitration about the aftereffects of that.

Richard Tse -- National Bank Financial -- Analyst

OK. And second one for me is we noticed there are some new items on your balance sheets. And I guess we're guessing it's probably related to the adoption of some new lease standards in terms of reporting. Can you confirm that's the case? And can also confirm that these items do not count toward your debt levels for covenant purposes?

Biggs Porter -- Chief Financial Officer

It's yes to everything. The -- we did record lease liabilities and assets for operating leases associated with the new lease standard. And no, they don't affect our debt covenants because they're not capital leases.

Richard Tse -- National Bank Financial -- Analyst

OK. Great. Thank you.


Your next question comes from Thanos Moschopoulos with BMO Capital Markets.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi. Good afternoon. I realize you're not providing SSL cash flow guidance, but how should we think about maybe the first half of the year versus the back half? In the absence of any new GEO awards this year, can you comment on whether there'd be any reason to think that the cash burn would be any different in the second half versus the first half?

Biggs Porter -- Chief Financial Officer

You're right. We're not giving guidance. And so I really don't want to be finite or leading. If we say we're not going to give guidance, then we're not going to give guidance.

I think that there's a lot of variables, as I've said repeatedly. The key thing for us to watch in terms of seeing real improvement is getting new orders in that have a positive cash profile associated with them, but it's been the wins that are awarded what the cash profile is. And we're just not guiding at this point in time. As we get further through the year, see things more predictable, we'll revisit.

But at this point in time, we're just not going to guide.

Dan Jablonsky -- Chief Executive Officer

And Thanos, maybe just to add a little bit on top of that. We've also got the restructuring charges we're taking this year as we get on the right cost profile for the business, so lots going on there. But we're very actively in the reengineering phase and very pleased with what we've seen in the first 90 days there.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

And related to that, of the $45 million SSL burned this quarter, can you comment how much of that was cash restructuring?

Biggs Porter -- Chief Financial Officer

The -- I don't have the exact number. It was a contributor to the cash outflow. There's relatively small capital expenditure in there. There was a bigger amount, I think, associated with restructuring activities, but we haven't separately disclosed it.

But there are other restructuring activities, retention payments that will go on through the course of the year. So I don't -- I wouldn't look at that as something that is going to particularly create variability. I do think there's variability. And as I said in answer to the first question, that certainly there was some pay-down in liabilities in the first quarter within SSL just as there was in other parts of the business.

And if you looked at our balance sheet, you'd see a reduction of liabilities from 12/31 to 3/31, which represents both the interest payment we talked about but also seasonality.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

OK. Fair enough. Just one last one. For those of us trying to do the covenant math, can you provide color on how much R&D expense you'd expect to be added back from a covenant perspective for full-year 2019?

Biggs Porter -- Chief Financial Officer

I don't think I want to specifically guide on that. There's decision making as we go through the year in terms of what we spend R&D on. We have said that if you look at all the facts, they can be very substantial. We talked about that last quarter call, but I don't want to get in and shed light on them and guide on them at this point.

It will be less than what we had in prior years because we're not spending R&D within Space Systems like we did in the past.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

That makes sense. Thanks for that.

Dan Jablonsky -- Chief Executive Officer

OK. Operator, we're at the 45-minute mark, which is our intended length for today. So I think we're going to wrap up the call and thank everyone for dialing in today. We look forward to connecting with all of you on the next earnings call.

Thank you.


[Operator signoff]

Duration: 45 minutes

Call participants:

Jason Gursky -- Vice President of Investor Relations

Dan Jablonsky -- Chief Executive Officer

Biggs Porter -- Chief Financial Officer

Steven Li -- Oppenheimer and Company Inc. -- Analyst

Audrey Preston -- Credit Suisse -- Analyst

Richard Tse -- National Bank Financial -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

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