Canadian-American space concern Maxar Technologies (MAXR) reported its third-quarter 2019 earnings Monday night, and while not all the news was good, there was apparently enough good news to satisfy investors -- who have bid up Maxar stock by 13% over the past three days.
Expected to report $1.06 per share in profits on $560.3 million in sales for Q3, Maxar whiffed on both targets, recording revenue of only $479 million -- and a $0.44 per share loss. The revenue number represented a 6% year over year decline in sales, but the earnings loss was actually an improvement over the $4.88 per share loss Maxar recorded in the year-prior quarter.
Also noteworthy was the fact that -- contrary to my expectations -- Maxar generated $19 million in positive free cash flow in the quarter. Free cash flow was also positive for the past 12 months -- $25 million, a nice change from the negative free cash flow experienced last year.
So in short, while Maxar's news wasn't great, neither was it all bad.
Commenting on the quarter, CEO Dan Jablonsky noted that Maxar continues to work to "position Maxar for sustained top- and bottom-line growth, including efforts to reduce debt and leverage levels." In that regard, although the top line actually shrank, and the bottom line remains negative -- at least as calculated according to generally accepted accounting principles (GAAP). Long-term debt did decline both quarter-over-quarter and year-over-year to $3.1 billion.
In an effort to further match debt levels to the cash production needed to support them, Maxar announced that it has signed a sale-leaseback agreement on a facility in Palo Alto, which should provide some extra near-term cash with which to whittle away at debt. And Maxar also rolled over a significant portion of old debt, replacing it with new "senior secured notes due 2023."
One challenge that needs to be highlighted is the fact that the "total order backlog" declined from $2.4 billion at the end of last year to $2.2 billion at the end of the third quarter, "primarily due to declines in backlog in our Imagery segment," and in particular "the loss of our WorldView-4 satellite." As backlogs foreshadow revenue to be earned in the future, it's going to be hard for Maxar to "position" itself for "sustained top-line growth" so long as its backlogs keep shrinking.
What it means to investors
Perhaps the most interesting dynamic going on at Maxar right now also concerns revenue -- specifically, where it's growing and where it's shrinking. Contrary to what I suspect many investors expected after the loss of the WorldView-4 sat, revenue at Maxar's all-important imagery division actually increased rather than decreased in Q3, and profit margins ("adjusted EBITDA" margins, which are now 63.6%) grew in tandem.
Maxar's second most profitable segment, services, likewise saw revenue growth, albeit on weaker margins (12.3%). Conversely, the company's space systems business saw revenue decline by 16%. That's not an immediate concern, though: Inasmuch as space systems contributes the weakest profit margins (5%) of any of Maxar's three divisions, weaker revenue there won't do much to pinch overall profits.
On the other hand, Maxar will be depending on new space systems contracts, many tied to its role building components for NASA's Project Artemis effort to return to the moon, to plug the hole in the company's revenue created by the loss of WorldView-4. Unless those Artemis-related contracts bring profit margins significantly better than what Maxar has historically earned from its space systems work, however, this company is going to have a really tough time growing its earnings as fast as its revenue -- no matter how much moon work NASA tosses its way.
Considering that analysts polled by S&P Global Market Intelligence who follow Maxar predict the company will remain deeply unprofitable (at least in GAAP terms) over the next two years at least, I still cannot recommend Maxar stock as an investment today.