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Loral Space & Communications Inc (LORL)
Q4 2019 Earnings Call
Feb 27, 2020, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, welcome to the conference call to report the Fourth Quarter 2019 Financial Results for Telesat. Our speakers today will be Dan Goldberg, President and Chief Executive Officer of Telesat; and Andrew Browne, Chief Financial Officer of Telesat.
I would now like to turn the meeting over to Mr. Michael Bolitho, Director of Treasury and Risk Management. Please go ahead, Mr. Bolitho.
Michael Bolitho -- Director of Treasury and Risk Management
Thank you and good morning. Earlier today we issued a news release containing Telesat's consolidated financial results for the three-month and one-year periods ended December 31st, 2019. This news release is available on Telesat's website at www.telesat.com under the tab, Investor Relations. We also filed our Annual Report on Form 20-F with the SEC this morning. Our remarks today may contain forward-looking statements. There are risks that Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For additional information about known risks, we refer you to the risk factors section of our Annual Report on Form 20-F for the fiscal year ended December 31, 2019 filed with the SEC today. The information that we are discussing today reflects our expectations as of today and is subject to change. Except as by securities laws, Telesat disclaims any obligation or undertaking to update or revise this information whether as a result of new information, future events or otherwise.
I will now turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer.
Daniel S. Goldberg -- President and Chief Executive Officer
Thanks, Michael. This morning, I'll discuss our fourth quarter and full year financial results and give an update on the business. I'll then hand over to Andrew who will speak to the numbers in more detail and then we'll open the call up to questions and I welcome Andrew to the call. It's his first year at Telesat. Welcome, Andrew.
Last year was a busy one and we're pleased with our results and the progress we made on a number of operational fronts. Looking first at the full year numbers and adjusting for foreign exchange rate changes, revenue was stable relative to the prior year. Operating expenses were down 12%. Adjusted EBITDA was a 0.5% higher. And our adjusted EBITDA margin improved slightly to 83.7%. In addition to a good year on the financial metrics, we also made significant progress on our LEO Constellation including refining the design of the constellation with our prospective suppliers and working closely with the customer community using our in-orbit LEO satellite to conduct demonstrations and trials to show the significant performance advantages of LEO.
We announced a very important arrangement with the Government of Canada to leverage the LEO Constellation to deliver a rural broadband connectivity throughout Canada, an arrangement we expect will generate over CAD1 billion in revenue over 10 years. We refinanced all of our outstanding debt, allowing us to extend our borrowing maturities and slightly improve our borrowing cost, and we made progress in the US on the FCC's proceeding to repurpose a portion of our C-band spectrum for 5G. In some, it was a really good, really productive year and one that sets us up well going forward.
Turning to our fourth quarter results, revenue was down 5% relative to Q4 2018. Adjusted EBITDA was down 8% and our adjusted EBITDA margin was 79.6% lower than the roughly 82% we had in the prior period. The declines in revenue and adjusted EBITDA were driven by two contracts we've discussed on prior calls. First, the non-renewal by Shaw at the end of Q3 last year of one of its DTH contracts, which we've said, has an adverse impact on annualized revenue of approximately 3%. And second, the end of the revenue amortization period of a large prepayment that we received years ago from ViaBlue [Phonetic], which is now ViaSat on our Anik F2 satellite, which also has roughly 3% top line in this case non-cash annualized impact.
ViaSat continues to use Anik F2 and it's now on a cash pay basis but it's for a lower dollar amount relative to what we were amortizing previously. We also had significantly lower equipment sale revenue last quarter versus 2018 when we completed a large, rural broadband build out in Northern Canada. But overall, Q4 revenue declines were mitigated to some extent by higher revenue last quarter from short-term satellite services provided to another satellite operator, as well as revenue from some of the new services.
Turning to some key metrics. Backlog at the end of last year was CAD3.3 billion and fleet utilization was 81%, and looking at how our revenues shape down [Phonetic] on an application basis for the year, broadcast and enterprise services each represented approximately 49% of total revenue and consulting another 2%. And on a geographic basis for the year, North America accounted for 80% of revenue, Latin America 8%, EMEA 6% and Asia 6% as well. Looking ahead to this year, we remain strongly focused on commercializing our available in-orbit satellite capacity maintaining our operating discipline further developing our advanced LEO Constellation and leveraging our valuable spectrum rights.
Other than the impact of the Shaw and ViaBlue contracts that I mentioned earlier, we expect 2020 to be pretty stable from a top line perspective relative to last year. We're very focused on our LEO Constellation and would expect to be in a position to make some announcements about suppliers for that roughly mid this year. We remain focused on entering service by the end of 2022 and we have in our full constellation in service by the end of 2023. And with regard to spectrum rights, we were on balance, pleased with the draft order, the FCC released earlier this month regarding C-band, and we look forward to seeing the final order from the FCC when it's released, which we expect will happen tomorrow morning.
With that I'll hand over to Andrew and then look forward to addressing any questions you may have.
Andrew Browne -- Chief Financial Officer
Thank you, Dan. Good morning, everyone. I've now been at Telesat for little over two months now and I'm very pleased to be working once again with them and enjoying my life in Ottawa. I would like to now focus on highlights from this morning's press release and filings. Overall as Dan has noted Telesat has had a good year in 2019 with revenues of CAD911 million, adjusted EBITDA of CAD763 million and we generated CAD336 million of free cash flow with over CAD1 billion of cash on the balance sheet at year end.
During the fourth quarter 2019 Telesat has also refinanced its debt to reduce interest expense and extend maturity date by approximately three years. For the full year 2019 and compared to the same period of 2018, revenues increased by CAD8 million to CAD911 million, operating expenses decreased by CAD20 million to CAD165 million, and adjusted EBITDA increased by CAD11 million to CAD763 million. And therefore, our adjusted EBITDA margin was 83.7% as compared to 83.3% in 2018.
So between 2018 and 2019, changes in the US dollar exchange rate had a positive impact of CAD9 million on revenues, a negative impact of CAD2 million on operating expenses and a positive impact of CAD7 million on adjusted EBITDA. And adjusted for the changes in forex rates, revenues decreased by CAD1 million for 2019 when compared to 2018. Operating expenses decreased by CAD22 million and adjusted EBITDA increased by CAD3 million. The decrease in operating expenses for 2019 was mainly due to lower cost of sales, share-based compensation, lower rents and related expenses.
During the fourth quarter of 2019 and compared to 2018, revenues decreased by CAD11 million to CAD220 million, operating expenses decreased by CAD21 million to CAD51 million and adjusted EBITDA decreased by CAD15 million to CAD175 million. Decrease in operating expenses during the fourth quarter of 2019 was mainly due to lower non-cash compensation compared to 2018. Depreciation and amortization decreased by CAD6 million during the fourth quarter and increased by CAD17 million for the full year 2019 when compared to the same periods in 2018. The increases are mainly due to a full year depreciation on our 18 and 19 Telstar VANTAGE satellites, offset by a decrease in depreciation due to the end of useful life of our Anik F2 satellite in late 2019.
Interest expense increased by CAD1 million in the fourth quarter and by CAD20 million for the full year of 2019, when compared to the same periods in 2018. The increases are mainly due to the higher US dollar exchange rates and the discounted interest paid upon the redemption of 8.875% notes. In 2019, we recognized the loss and financing of CAD152 million related to the redemption of the senior notes due 2024 and the refinancing of our senior secured credit facilities in the fourth quarter. The loss includes $44 million in redemption premiums on the notes.
The gains and losses on financial instruments reflect changes in the fair values of our interest rate swaps and the prepayment option on the senior -- and senior secured notes. In 2019, we also recorded a gain on foreign exchange of CAD65 million during the fourth quarter and a gain on foreign exchange of CAD164 [Phonetic] million for the full year. Tax expense decreased by CAD46 million during the year ended 31st of December, when compared to the same periods in 2018.
For 2019, the cash flows from operating activities were CAD376 million and cash outflows used in investing activities were CAD40 million. For 2020, we expect the cash outflows used in investing activities to be in the range of $60 million to $80 million including capital expenditures in connection with our LEO Constellation prior to making a full commitment with our prospective suppliers. There may be meaningful additional -- additional capex this year in connection with LEO, if we enter into definitive contractual commitments to build the constellation, which as Dan had said. We may be doing sometime this year, if we make such commitments, we would expect to update our guidance accordingly.
To meet our expected cash requirements for the 12 months, including interest payments and capital expenditures, we had CAD102.7 million of cash and short-term investments at the end of December, as well as approximately $200 million of borrowings available under revolving credit facility. Approximately CAD495 million of cash was held in our unrestricted subsidiaries. In addition, we continue to generate a significant amount of cash from our ongoing operating activities.
And at the end of 2019, Telesat was complied with all covenants and our credit agreement and indenture. A reconciliation between our financial statements and financial covenant calculation is provided in the report we filed this morning.
So that concludes our prepared remarks for this call. And now we'll be happy to answer any questions you may have, and we'll turn back to the operator.
Daniel S. Goldberg -- President and Chief Executive Officer
Operator, you with us?
Operator
I'm here. Are you ready for questions?
Daniel S. Goldberg -- President and Chief Executive Officer
We are.
Questions and Answers:
Operator
Perfect. We will now take questions from the telephone lines. [Operator Instructions] And the first question is from Mike Pace from J.P. Morgan. Please go ahead.
Mike Pace -- J.P. Morgan -- Analyst
Hi, good morning. Thanks for taking the questions. Dan, I know I asked you this one pretty much every quarter, the short term satellite services I guess we weren't expecting any in the fourth quarter. I think it was mentioned in your press release that there was some. So can you help us quantify that, just to help us kind of get to the -- maybe in the more core underlying business trends in the quarter.
Daniel S. Goldberg -- President and Chief Executive Officer
Yeah, I guess. And Mike, we're never tired of the question. We've said before that, on average, and those short-term satellite services, they're always a bit lumpy, they vary a bit from year to year. But on average, they are roughly representing order of magnitude about 2% of our revenue. And so, and I don't think last year 2019 was really that much different from that. So anyway, I mean so looking backwards, you should be able to kind of piece together what the Q4 contribution would look like.
Mike Pace -- J.P. Morgan -- Analyst
Okay. I'll give that a try. On LEO, I know you -- you did mention, I think both of you, some dates and I apologize, it was tough to write all that down and get the dates right. So can you go over that one more time? I heard a mid-'20, year-end '22, year-end '23, and if possible...
Daniel S. Goldberg -- President and Chief Executive Officer
Yeah, yeah.
Mike Pace -- J.P. Morgan -- Analyst
Yeah, and maybe just if possible, can you layer in that, maybe that the pace of spending, maybe just on a very rounding percentage basis, just the timing of how that rolls through those milestones that you mentioned?
Daniel S. Goldberg -- President and Chief Executive Officer
Yeah, OK. So let me cover the dates again that Andrew and I mentioned. So our expectation would be sort of roughly mid this year, we'd be in a position to make announcements about suppliers for LEO. So that's our expectation right now or planning suggests that we'll be in service by the end of 2022 with our partial constellation, but able to provide service to certain markets and then the expectation that the full constellation which is roughly about 300 satellites would be in service by the end of 2023. So those were the dates that we mentioned.
And I should say, we haven't received -- we haven't sought nor received approval from our Board to proceed at this point. But that's kind of what our current planning suggest to us when we would be in a position to make announcements to the market about suppliers and when we would be in service. Andrew had given some guidance, capex guidance for the year, US dollar number, $60 million to $80 million. And that covers off some expenditures that we think we'll be making for LEO even in advance of making sort of this full definitive commitments to suppliers. This is some spending that we will be doing to preserve our schedule and get a head start on the -- on the work that we'll, that we ultimately think that we'll be doing.
And then as far as you know, what the overall pace of spending would look like once we do announce definitive suppliers and whatnot. There, I would say, it's a little bit TBD at this point, all of that stuff needs to be hashed out with suppliers. But our -- I don't know, broad expectation if you're wanting to model something, to date, we haven't given kind of precise estimates about what we think our total spending would be, I think that's more appropriate once we finish off with the suppliers. We have said it's a multiple billions of dollars and in terms of the pace of the spending, we think that the overall program as I mentioned, if we were announcing suppliers mid this year, kind of launching, late '21, early '22 is when we commence launching and then expect to complete launching sometime probably like mid-2023 that kind of a schedule, that the capex should be sort of like our other more traditional geo programs, kind of somewhat linear over that period of time.
So from a modeling perspective, and I know, we haven't given you what the capex number would be. But that's --that probably won't be bad just from a modeling exercise. So I hope that's helpful, Mike.
Mike Pace -- J.P. Morgan -- Analyst
It is a little bit, and maybe to ask it another way, when do you think decisions would need to be made for incremental financing for the project?
Daniel S. Goldberg -- President and Chief Executive Officer
Well, I mean, we've said before about kind of how we're thinking about that. We've said before that our expectation is that the project will be project-financed relying upon the export credit agency market. We've said that roughly speaking, we think it would be financed kind of order of magnitude, one-third equity, two-thirds debt, again with the debt principally coming from the export credit agency market. And so we've -- we started work on putting that financing in place and, you know that we've been generating a significant amount of cash and we moved some cash out to a restricted entity or in anticipation of funding LEO. So, Michael, it looks like you want to say something.
Michael Bolitho -- Director of Treasury and Risk Management
Unrestricted entity, you said restricted.
Daniel S. Goldberg -- President and Chief Executive Officer
I'm sorry, an unrestricted entity. Thank you, Michael. So, yeah, Mike, I mean, so we said all that before. So I hope that's responsive.
Mike Pace -- J.P. Morgan -- Analyst
Yeah, it is. And then just one more on C-band and I don't want you to rehash kind of your views on the current situation, because we can read them in the SEC filings. But how is, this has been going on for a while now. And I guess, how is what's happening here and what may ultimately happen or may not kind of driving your expectation on how Canadian regulators will look at the situation for you in Canada as it relates to C-band? I guess, have you been talking with them? Has they've been back and forth or are they really just wait and see?
Daniel S. Goldberg -- President and Chief Executive Officer
Yeah, it's a good question. Certainly, the Canadian regulators like the US regulators are focused on making more mid-band spectrum available for 5G and they've indicated this before in different proceedings and the like. And I'd say that the Canadian regulators are paying attention to how it's all unfolding south of the border and we've tried to do a good job at Telesat of keeping them informed around all of that. And so, yeah, my expectation is like in the US, the carriers here in Canada need access to additional mid-band spectrum to rollout kind of a meaningful 5G experience and the Canadian regulators have already, again somewhat for shadowed that they'd be looking at potentially repurposing some of the satellite C-band spectrum like they have or like they're poised to do in the US for 5G, it's certainly the case, that we've conveyed to the Canadian regulators that, if that were to be done, it would certainly create something of a -- of a hardship for Telesat in that, we use all of that spectrum today to provide services. And that if in the fullness of time, they were to repurpose the spectrum, we would be looking to receive, yeah, some compensation for the opportunity cost of being deployed at that spectrum. And certainly in recognition of all the very meaningful investments that we've made over the years to use that spectrum.
So anyway, it's an ongoing conversation. We've got good relations with them, with the regulator here. And so I guess it's a long way of saying, stay tuned. But it is a conversation that what ultimately we had in Canada as well. But certainly, the US is poised to move first, probably tomorrow with their actions.
Mike Pace -- J.P. Morgan -- Analyst
All right, great. Thank you.
Daniel S. Goldberg -- President and Chief Executive Officer
Okay, thanks.
Operator
Thank you. [Operator Instructions] The next question is from Jason Kim from Goldman Sachs. Please go ahead.
Jason Kim -- Goldman Sachs -- Analyst
Thank you and good morning and welcome, Andrew as well. On C-band, a lot has changed and then happened in the process and I certainly appreciate the fact that we're not at the finish line yet. But I wanted to ask about some of the logistics, as it relates to Telesat specifically. So what does tell us, I need to in certain clearance itself, like what are the actual activities that are required from the Company and any updated thoughts on what the tax implication maybe for you from these payments?
Daniel S. Goldberg -- President and Chief Executive Officer
Yeah. Thanks, Jason. So I mean, like the other operators that are using C-band for services in the US, were going to need to work with our customers to install filters on what now that at all of their sites to make sure that the spectrum is cleared consistent with the timelines that the FCC is laid out. We've been working closely with the CBA, which has done, I mean, a huge amount of good work on that. We will be ready to clear the spectrum, consistent with the timelines. My expectation is we will work with all or some portion of the other affected satellite operators to make that clearing efficient.
So in any event, we've done a huge amount of planning and are ready to do that. We're just really waiting now for the FCC's final order. And then on the tax implications, I don't know, Andrew, Paul, if there is anything that you guys could say about that. Maybe other than you guys can clarify if I get any of this wrong. We're evaluating it. We're evaluating the US tax implications, the Canadian tax implications. So it's -- we're analyzing all that right now, Jason, we really need, for the order to be final, because depending on exactly how they effectuate reallocating the spectrum has implications in terms of -- of what our tax liabilities will be.
Andrew Browne -- Chief Financial Officer
Yeah, I think that's a good way to talk about the overview. Very good, Jason.
Jason Kim -- Goldman Sachs -- Analyst
Yeah, I had that [Phonetic]. Thanks for that. And then regarding the amortization of the ViaBlue, ViaSat contracts, is the 3% annual revenue impact a gross number? Or is that net of the cash revenue you're getting from the customer now?
Daniel S. Goldberg -- President and Chief Executive Officer
That was, it's almost, It's not that different. I mean, the cash revenue is welcome. But it's not so meaningful to have a material impact on that 3%. So it's probably, looking at Michael, as I've shared with you. Maybe, some little bit less than 3% when we net it for the new cash revenue, but here again, it's in the noise at that level.
Jason Kim -- Goldman Sachs -- Analyst
Understood.
Daniel S. Goldberg -- President and Chief Executive Officer
Well done, again. Net-net, we're in a slightly better cash position. Following the end of the amortization period, but it's just not material.
Jason Kim -- Goldman Sachs -- Analyst
Sure. And with respect to the LEO investments, whether it'd be opex spending as part of the investments as well? And as you're spending level of growth for this, will you be disclosing sort of two separate sets of financials over time?
Daniel S. Goldberg -- President and Chief Executive Officer
Sure, there will be impacts to opex and they already have been. I mean, we've been hiring people and doing other spending for a couple of years now in anticipation of LEO, that will ramp once the project is truly under way. And then with respect to your second question whether or not, there'll be different sets of financials, I'm not sure that we're...
Andrew Browne -- Chief Financial Officer
Yeah, I'd say it's premature at this stage, but that -- for sure we will be -- we will make it very clear, and disclose very obviously what the impact of the year will be, but we haven't sort of made that call yet, but we'll be showing quite rapidly [Phonetic].
Daniel S. Goldberg -- President and Chief Executive Officer
Stay tuned.
Jason Kim -- Goldman Sachs -- Analyst
And my last question is, was just going back to your core business, sort of a longer-term question. And that is one of the differentiating aspects of your strategy has been to make sure you lock in as much commitment as you can prior to launches and an even before you start committing to building a new satellite, actually. So at this juncture, like what growth opportunities do you see in your traditional FSS business right now?
Daniel S. Goldberg -- President and Chief Executive Officer
There, and we've talked about this one before. I'd say the largest one, the most chunky one is a very large opportunity that we've been in pursuit of for a very long time now with the Government of Canada, the Department of Defense here has a program of record, now referred to as enhanced satellite communications, polar program, they call it a scape, used to be called polar sat, then it was called PCW polar communications and weather constellation, but they've issued two RFIs on this program in the past. It's fully funded under the government's fiscal framework. We responded to the last RFI probably roughly right around a year ago. Maybe it's a little bit more than that now, they lose track of time, we've got -- it requires two satellites. It's designed to provide both narrowband and broadband communications capability to the Far North where geostationary satellites can't see.
So that's a very large growth opportunity for Telesat that we've been working on and positioning ourselves on for quite some time now. And then beyond that, I'd say it will be more opportunistic -- opportunities, some of that relating to mobility, traffic, aeronautical, maritime, some of it relating to other types of broadband applications like the ones that underpinned what we did for Bell in the Far North of Canada and Hughes in Latin America with our Telstar 19V satellite like we did for a big Indonesian customer for a government funded digital divide program in Indonesia, which is supported by our Telstar 18V program. So it will be things like that. Jason. It will be those kinds of opportunities.
Jason Kim -- Goldman Sachs -- Analyst
I can't help, but ask how big can this project be for you with the Canadian government?
Daniel S. Goldberg -- President and Chief Executive Officer
Well it's two large dedicated satellites each requiring its own launch vehicle. So it's, it's very, very meaningful. I won't throw out numbers, but you know, two geostationary size satellites that would operate in a highly elliptical orbit. The Telesat has actually obtained a patent on from the US patent office, we developed a very novel orbit that's really optimized to provide the kind of service that the Government of Canada is looking for.
And I say the Government of Canada that allied countries and in particular the US are working with the Canadian government on this project. So it's a huge opportunity for us.
Jason Kim -- Goldman Sachs -- Analyst
Thank you very much.
Daniel S. Goldberg -- President and Chief Executive Officer
Okay, thank you.
Operator
Thank you. There are no further questions registered at this time, I'd now like to turn the meeting back over to Mr. Goldberg.
Daniel S. Goldberg -- President and Chief Executive Officer
Okay. Operator, thank you very much and thank you all for joining us this morning and we look forward to chatting again in a few months' time, when we release our first quarter numbers. So thank you very much.
Andrew Browne -- Chief Financial Officer
Thank you. Bye, bye.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Michael Bolitho -- Director of Treasury and Risk Management
Daniel S. Goldberg -- President and Chief Executive Officer
Andrew Browne -- Chief Financial Officer
Mike Pace -- J.P. Morgan -- Analyst
Jason Kim -- Goldman Sachs -- Analyst
