Telesat - Earnings Call - Q2 2021

Transcript

Speaker 0

Good morning, ladies and gentlemen. Welcome to the Conference Call to Report the Second Quarter twenty twenty one 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 like to turn the meeting over to Mr. Michael Beliso, Director of Treasury and Risk Management.

Please go ahead, Mr. Beliso.

Speaker 1

Thank you, and good morning. Earlier today, we issued a news release containing Telesat's consolidated financial results for the three and six month periods ended 06/30/2021. This news release is available on Telesat's website at www.telesat.com under the tab Investors. We also filed our quarterly report on Form six ks 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, you can refer you to the Risk Factors section of our annual report on Form 20 F for the 2020 fiscal year and in our quarterly reports on Form six ks, all of which can be obtained on the SEC website. The information today that we are discussing reflects our expectations as of today and is subject to change. Except as required by security laws Telesat disclaims any obligation or undertaking to update or revise this information whether as a result of new information, future events or otherwise. I will now turn the call over to Dan Goldberg, Telesat's President and CEO.

Speaker 2

Okay. Thanks, Michael. This morning, I'll discuss our second quarter and first half 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. Comparing our Q2 results to the same period last year and adjusting for foreign exchange rate changes, revenue and adjusted EBITDA were both down 3%, and our adjusted EBITDA margin was 79.2%, essentially flat compared to the prior period.

Comparing first half results and adjusting for FX, revenue was down 5%, adjusted EBITDA was down 4% and our adjusted EBITDA margin was 79.6%, slightly higher than the 79.3% in the prior period. The reduction in revenue and adjusted EBITDA for both the quarter and the first half of the year is principally the result of a slight reduction of service for one of Telesat's North American DTH customers, nonrenewals from certain enterprise customers, including maritime and aero customers for the first half year comparisons and lower consulting revenue. Turning to some key metrics. Backlog at the end of the quarter, which I should note excludes backlog associated with our Telesat Lightspeed constellation, was $2,400,000,000 and fleet utilization was 80%. The $2,400,000,000 is a Canadian dollar number, and the other dollar references I'll make in my remarks this morning will also be to Canadian dollars.

Looking at how our revenues broke down on an application basis for the quarter, Broadcast was 51% of total revenue, Enterprise Services 47% and consulting and other 2%. And on a geographic basis for the quarter, North America accounted for 81% of revenue, Latin America and Asia were each 7% and EMEA was 5%. Turning to our Telesat Lightspeed constellation. We've made a couple of big announcements in the last few days about the program. Yesterday, we announced that the Government of Canada plans to make a $1,440,000,000 investment in Lightspeed.

And last week, we announced that the Government of Ontario is committing 109,000,000 to use Telesat Lightspeed to provide high capacity broadband connectivity to remote communities throughout the province. The Ontario commitment will bring our contractual backlog on Lightspeed so far to over 3 quarters of a billion dollars. And with the investment by the Government of Canada announced yesterday and our other sources of financing, Telesat now has arrangements in place for approximately $4,000,000,000 of funding for the program. We expect the balance of the funding required to come primarily from the export credit agencies we're presently in advanced discussions with. We hope to be in a position to make announcements on this remaining funding in the near term.

Lastly, I'm pleased to say that we're on track for Telesat to become a public company later this quarter or early in the fourth quarter. Last week, we obtained the FCC approval we needed, and L'Oreal disclosed last Friday that it's already received sufficient proxy votes from its shareholders in support of the transaction, recognizing that those votes are still revocable. L'Oreal shareholder meeting, where the final vote will occur, is scheduled to take place later this month on August 23. In sum, it's been a busy first half of the year. We've made a significant amount of progress on our key strategic initiatives.

And having done so, we're in a very good position with respect to both financing of our revolutionary Lightspeed Constellation and becoming a public company. And with that, I'll hand over to Andrew and look forward to addressing any questions you have. Thank you, Dan. Good morning, everyone.

Speaker 3

I would now like to focus on highlights from this morning's press release and filings. In the 2021, Telesat reported revenues of $188,000,000 adjusted EBITDA of 149,000,000 and generated $54,000,000 of free cash flow with almost $1,500,000,000 of cash on the balance sheet at quarter end. For the 2021 and compared to the same period of 2020, revenues decreased by $20,000,000 to 188,000,000 operating expenses increased by 11,000,000 to €57,000,000 and adjusted EBITDA decreased by €16,000,000 to €149,000,000 The adjusted EBITDA margin was 79.2% compared to 79.1% in 2020. Between 2020 and 2021, changes in the U. S.

Dollar exchange rate had a negative impact of $13,000,000 on revenues, a positive impact of $2,000,000 in operating expenses and a negative impact of $11,000,000 on adjusted EBITDA. When adjusted for the changes in foreign exchange rates, revenue decreased by €7,000,000 for 2021 compared to 2020. Operating expenses increased by €14,000,000 and adjusted EBITDA decreased by 5,000,000 Contributing to the decrease in revenues excluding the impact of foreign exchange was a slight reduction of service for one of Telesoft's North American PPH customers, nonrenewals from certain enterprise customers and lower consulting revenues. The increase in operating expenses was principally the result of £16,000,000 increase in non cash share based compensation combined with higher wages due to the hiring of additional employees primarily to support our Telesat LifeSeat program. These increases were partially offset by higher capitalized engineering and lower bad debt expense in the three months ended 06/30/2021.

Depreciation and amortization decreased by £4,000,000 compared to the same period in 2020. The decrease was mainly due to the end of useful life for accounting purposes of adding F1O satellites in 2020. Interest expense decreased by £5,000,000 in the second quarter when compared to the same period in 2020. The decrease was mainly due to lower interest rates on our outstanding debt in 2021. The gains and losses on financial instruments reflect changes in deferred values of our interest rate swaps and the prepayment option on our senior and senior secured notes.

In the 2021, we recognized a gain of $4,000,000 related to financial instruments. In 2021, we also recorded a gain on foreign exchange of $41,000,000 during the second quarter compared to a gain of $125,000,000 in the 2020. Net income was $61,000,000 in the quarter compared to net income of $162,000,000 in the 2020. Tax expense decreased by $2,000,000 during the quarter compared to the same period in 2020 and was largely due to lower income before taxes in 2021. For the 2021, the cash inflows from operating activities were £154,000,000 and the cash outflows used in investing activities was £91,000,000 virtually all of the total capital expenditures related to a lower Orbit constellation.

As we have previously advised for 2021, we expect our cash flows used in investing activities to be in the range of US140 million to US160 million dollars including capital expenditures to further advance our LifeSeq program while we progress our financing arrangements. Subject to the progression of our financing, there may be meaningful additional CapEx this year in connection with Lightspeed as we move into full production. We expect to happen in the coming months and we will update our CapEx guidance at that time. To meet our expected cash requirements for the next twelve months, including interest payments and capital expenditures, we've almost $1,500,000,000 of cash and short term investments at the June as well as approximately $200,000,000 of borrowings available under our revolving credit facility. Approximately US567 million dollars in cash was held in our unrestricted subsidiaries.

In addition, we continue to generate a significant amount of cash from ongoing operating activities. At the end of the quarter, leverage as calculated under the terms of the amended senior secured credit facility was 5.46x:one. Telesat has complied with all the covenants in our credit agreement and indentured. A reconciliation between our financial statements and financial covenant calculations is provided also in the report we filed this morning. On April 27, Telesat issued USD 500,000,000 or 5.625% senior secured loans due in 2026.

We also announced yesterday that Telesat received $1,440,000,000 investment from the Government of Canada to support our Lightspeed project. This is a significant step we believe that will in the near term allow Telesat to secure the remaining financial commitments required to mature Telesat Lightspeed is fully financed. To date, Telesat Canada has invested USD613 million in cash in these unrestricted subsidiaries to fund the development of the LightSea project. And as indicated at the time of our note issue in April, we will invest the $500,000,000 wave in these unrestricted subsidiaries. So that concludes our prepared remarks for this call, and I will be very happy to answer any questions you may have.

And so we will turn back to the operator. Thank you very much.

Speaker 0

Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift your handset before making your selection. And the first question is from Arun Seshadri from Credit Suisse.

Speaker 4

Congratulations on this investment from the Department of Canada. Just had a couple of questions on the business plan for LightSpeed. I think, Dan, you mentioned that you had approximately $750,000,000 in commitment so far all in for LightSpeed. Is that a roughly a ten year or a little bit longer sort of contract length? And would it

Speaker 1

be fair to say that you

Speaker 4

have that represents something like $75,000,000 annually or something like that in terms of annual commitments? And then can you talk a little bit more about the overall plan in terms of by the time of launch, what's your expectations in terms of total commitments and annual contract?

Speaker 2

Okay. Thanks for the question. So on the backlog, yes, that was the right number. In my remarks, I've said over million total backlog. As far as kind of the tenor of that, and one, I guess, I'd say, I think it almost understates what we think those contracts that make up that $750,000,000 are ultimately going to lead to.

So $600,000,000 of that number is the deal with the Government of Canada that we announced, I don't know, a year or so, two years ago. And if you'll recall and that's over ten years. But the way that works is the Government of Canada is committed to $600,000,000 We agree to create a pool of capacity. I think it's 140 gigabits of capacity over Canada. And then we agree to make that capacity available to Canadian ISPs at a really low rate.

And so we expect that, that capacity pool is going to get taken up. And if and when it does, it should lead to roughly another $600,000,000 of contractual commitments. So kind of the way we think about that $600,000,000 commitment, things go well, things go as we expect, it should be like 2x that number. And that's kind of how the Ontario deal that we announced last Friday works. That one is for $109,000,000 but it's over a five year period.

And it's that same concept. We agree to create a pool of capacity, make it available at a low rate. We expect that will get taken up. So there again, we think that, that 109,000,000 should actually lead to about 2x in contract value over that five year period. And then we've got another contract with another customer on the access that we announced some time ago.

That is the other kind of contract we already have in place. Beyond that, we don't have any targets that we're going to announce in terms of what we want the total what we expect the total contractual backlog to be. But suffice to say, our objective as we move through the construction process and start to launch the satellites is that we will be signing and announcing other customer commitments. And I mean it's kind of you've seen Telesat in action for the last bunch of years. We'd like to pre sell capacity and derisk these programs, and that's going to continue to be a big focus of ours.

Speaker 3

Great. Thank you

Speaker 4

for that color, Dan. That was very helpful.

Speaker 3

And then just wanted to

Speaker 4

spend some time, the other topic we've been hearing some questions about has been what happens with some of your key contracts that

Speaker 3

are coming due in 'twenty two and 'twenty

Speaker 4

four with your large North American customer on the VCH side. Can you sort of is it possible to give us some more granular breakdown of the revenue that could potentially be rolling off in 'twenty two and 'twenty four? And sort of what your state of play with that customer are in terms of discussions? And anything you can add to sort of help us with the modeling impact of that?

Speaker 2

Well, I mean, we've always been low really for competitive reasons to give too much granular information around when those contracts come up and what they're producing. I mean, just given we're in a competitive environment. But look, we've always said a good way for analysts to get a handle of kind of what's coming up when is to go back and look at when we launched these DTH satellites or payloads on a satellite that's dedicated to a DTH customer, they tend to be fifteen years from the in service date of that satellite. That should give everyone a pretty good feel of when those contracts are coming up. So the first one that comes up is our Anika three contract, that's with DISH, that comes up sort of Q2 next year.

And we'll see. I really don't have a good feel right now about kind of the likelihood of renewal on that. I think we're going to be pressing to get a better sense of how DISH is thinking about that. We've already certainly started giving consideration to what we would do with that Ku band payload, just didn't renew all or some of it. And I think that we certainly got opportunities with other customers in Canada and The U.

S. For that capacity if we get some or all of it back. And then the next one that comes up is roughly about two years from now would be Unit four contract with Bell. And we've started some discussions with Bell, but still don't have clarity at this point on where that's going to end up. So anyway, I mean that's kind of where things sit.

And as we learn more from the customers about what their intentions are, we'll share that when the time is right.

Speaker 4

Got it. Thank you, Dan. Just one question on relatively from a timeline standpoint in terms of options with extending those contracts, obviously some of those satellites are approaching your end of life. Is

Speaker 5

there

Speaker 4

an option to potentially launch an MSV or other ways of extending the satellite life in the event of a contract extension? Or would you or do

Speaker 3

you think those will have to

Speaker 4

be new satellites that will have to be launched to extend the potential contract extension?

Speaker 2

So probably at this point in time, if we got going, Anacap three, for instance, I mentioned that the contract with Dish kind of comes up in Q2 of next year. But the satellite itself has an expected life of roughly about another four years. So we certainly got time to replace it or extend its life. So and that's kind of the satellite with the earliest expected end of life. So we have even more time on other ones.

So yes, certainly, if it makes sense for us and it's what the customer wants, we've got time to do that.

Speaker 0

Thank you. The next question is from Mike Page from JPMorgan. Please go ahead.

Speaker 6

Hi, good morning and thanks for taking the questions. Dan, you talked about having 4,000,000,000 funding to date for the LEO constellation. I'm assuming that's Canadian dollars, so correct me if I got that wrong. But the question is, does just to be clear what that includes, obviously, yesterday's announcement, but does that include the expected restricted payments from The U. S.

Dollars Five Hundred Million secured bond deal that I believe is yet to happen and the government of Quebec, so everything that you kind of announced to date? And then just to clarify, I think you said that you expect the export credit facilities to make up the remainder of that. So I can do the math, obviously, with the total funding or total needs versus what you have. But can you kind of size the export credit facilities because there's other things like operating losses and interest expense and things like that? I'll stop there and have some follow ups.

Speaker 2

Yes. No, so a couple of things, and thanks for the questions, Mike. So yes, the $4,000,000,000 was a Canadian dollar number. So what at current exchange rate is about $3,200,000,000 something like that. Yes, the bond proceeds are part of that number, Same with the Government of Quebec investment.

Same also, I should say, with The U. S. C band proceeds that we expect to get. So all of that. And then what else would I say?

Oh, you asked about kind of order of magnitude on expectations for ECA financing. So we're still in discussions with the ECAs. So we're not done there. But I don't know, order of magnitude, dollars 2,500,000,000.0, something in that ZIP code.

Speaker 6

Got it. And then in the term sheet that you guys filed last night, I recall seeing some language that additional cash equity contributions needs to come in for the Government of Canada to finalize all of this. And I guess and the number was blank in the term sheet. So would everything that you've announced to date satisfy that, meaning the RP that we just discussed? Or would it require additional equity in air quotes here?

Speaker 2

Yes, my General Counsel. Yes, we did redact that number when we made the filing. And what would I say? So one, mostly covered in what we described in the press release that kind of lays out that sort of builds up to that C4 billion dollars number we talked about. And then look, we redacted the number.

But what I would say is in the scheme of the total funding required for Lightspeed, the number that equity incremental equity contribution that the term sheet references is not material in terms of the overall funding for Lightspeed.

Speaker 6

Got it. And then I know you've talked about this in the past on calls, but I think it would be good to do it again because of new credit investors taking a look at the company over the last few months. Can you just remind us, in your opinion, just the competitive advantages of your LEO constellation versus other folks, and whether it's satellites, size, cost, useful lives, bandwidth capacity, the network, priority spectrum rights and on the latter on the priority spectrum rights, like who will you have priority rights over?

Speaker 2

Okay. Boy, I'm almost tempted to get out the transcript from the last quarter call and just read it. And I would say to folks, like we talked about this on the last call, and folks should take a look at it. And you highlighted, Mike, a lot of the key features. But I'll take a little time here and reiterate it.

And I'll start with Spectrum. So yes, we've got priority IT rights to over four gigahertz of Ka band spectrum, and we enjoy that priority over everyone. Over all the other NGSO the LEO commercial operators, I would say, that includes SpaceX and OneWeb and Kuiper, for instance. So yes, priority rights we think are important or valuable and that's who we have priority over. And we enjoy those rights up through Canada, has this priority following at the ITU.

Then you get into beyond spectrum, you get into the weeds of our constellation design and the markets that we're focused on. You touched on some of that. I think I'd start there, which is we strongly believe that we're going to have and our customers are going to have a competitive advantage in the market verticals that we're focused on. And those market verticals are they're all enterprise markets. We're purposely, consciously designed this constellation to serve those enterprise markets, which is to say not the consumer market.

And as I think I said on the last call, that's fundamental, right? When you start designing a constellation, you have to make a whole bunch of trade offs when you optimize your constellation to serve, in our case, the enterprise market versus what I'd say for Starlink, SpaceX, for Amazon, Kuiper, their focus has been, certainly what they've been saying publicly, the consumer broadband market. So recognizing that our focus has been different, we designed our constellation to give us a competitive advantage in the enterprise market. And that means we designed our Orbits to allow us to very efficiently both get full global 24x7 coverage of the earth, but at the same time, not waste capacity over the polar regions, we think it's impossible we think it's important to have coverage over the poles because your aero users, your maritime users, your government users want coverage of the poles. They only need so much capacity up there.

So we've got this hybrid orbital architecture that has densified capacity over those parts of the world where the people are. So there's orbital architecture, which we think we've got a very clever and innovative design. And then the satellites themselves, they're in a somewhat higher orbit than what Starlink and Amazon are talking about. And what that allows us to do is it allows us to cover with each satellite more of the earth, but not require as many satellites, which means that we're more kind of capital efficient. We've got a little bit higher, which means our latency is going to be a little bit higher, but we think it's trivial, the incremental latency.

We're not way up where NEO is or way, way, way, way up GEO is. So we require fewer satellites, which means kind of less capital intensity and more coverage. And then the satellites themselves, these are, as I've said before, pretty big, very advanced, highly capable satellites. They're going to last at least ten years. So we've got a much longer opportunity to amortize and recover the investment that we're making in the satellites.

And we're not going to be on this total treadmill that some of the other folks are going to be whose satellites have, I don't know, less shielding, less redundancy, less capability and need to be replaced more often than ours. And then the satellites themselves have phased array antennas, which allow us to dynamically cover and reposition our capacity dynamically, which is very important. We've got the ability to hop those capable beams in microseconds, which allows us to cover everywhere but also to look after lots of customers and kind of reuse that capacity literally in microseconds. We've got all of our satellites connected with high capacity optical links, which means that we've got the ability to serve that means all of our satellites are always on network. So they can be over the Pacific, over the Atlantic.

They can be anywhere, but they're always connected, which means we can always leverage their capabilities, which means the system is incredibly reliable and redundant and which gives our customers which also means we can route traffic in space so super fast and with a huge amount of flexibility. And then there's more. All of our satellites are process payloads. They're flying computer processors, which means we have huge amounts of ability to flexibly route traffic. It means that we can make the signal more efficient.

And now our engineers do that. But we can basically receive the signal, clean out any noise in the signal and put it back down to where our customers want it. It's just much, much, much more efficient. And then you take all of those capabilities, and I should say, a fully integrated, highly capable ground infrastructure that's seamlessly integrated with the satellites. And you take all of that together, and you have an extraordinarily capable, powerful, agile system that we think is going to give us and our customers real competitive advantage in those markets that we're focused on and that we've been active in for decades.

So anyway, I like to talk about this obviously for a really long time. Our commercial and technical people can talk about it even longer than I can. But it matters. We're providing the technical service. And at the end of the day, that's what you got to get in the weeds on this stuff.

That's what is going to make the difference between kind of who brings the best value proposition to the market for those verticals that we're focused on. And it's just going to get better over time. We're starting with two ninety eight satellites. We can scale this constellation. The user terminals are coming along well and getting more and more capable, and they're going to get cheaper and cheaper.

As we use the constellation, we'll get much more knowledgeable and efficient about how to bring more and more capacity out of it. So yes, I mean that's a long, long, long, long, long answer. But like that's kind of what you got to do, to explain to people why we think we're going to be so successful with Lightspeed and why our shareholders are so excited about it and why me and my colleagues are so excited about it.

Speaker 6

Well, appreciate the passion. I'll jump back in queue and let others ask some questions. Thanks.

Speaker 7

Thanks, Frank.

Speaker 0

Thank you. The next question is from Walter Piecyk from LightShed. Please go ahead.

Speaker 5

Dan, that was a pretty passionate description of the LEO, so that was nice. I love it. One of the areas you talked about was the optical links. You talked about that after talking about where you were relative to StarLink in terms of the height. Doesn't that, if you're using optical links, and I think I've heard some companies recently talk about using geos for backhaul in order to have that kind of that connectivity everywhere.

But if someone's using geos as opposed to your optical, the way you're engineering the system for the optical links, doesn't that make it in effect much better than the plans that we've heard from others? And then to that end, can you talk a little bit about that technology, like who are you using and kind of where is that? Is that because I think Starlink hasn't they've talked about having some type of links and it's uncertain kind of where they are with that. I'm just if you can just give us an update on that specific element of your type of technology that's going be on your LEO constellation.

Speaker 2

Okay. Thanks for the question, Walter. So let's see. I mean, for us, the idea of using GEO to allow our LEOs to kind of talk to each other completely defeats the purpose of launching a LEO constellation because you've just now introduced all that latency into the network. And a big, big, big point of launching the LEO constellation is to provide low latency services because we think that's where the market is going.

So we wouldn't do that. We don't think that's a great plan. With respect to StarLink, my understanding of what they've done, the first country satellites they launched, I believe, did not have inter satellite links. But I believe they said that they started to launch satellites with inter satellite links, and I think their plan is to continue to do that. But I don't know that much about the performance of those inter satellite links.

Ours are going to be capacious, high capacious, lots of capacity. We're going have at least the ability for each so we'll have four optical links on each of our satellites. Each one has a throughput capability of about I'm looking at our technical guy, 10 gigabits. That's what we've spec. And they can talk to the satellites behind them, in front of them, from side to side.

They can even reach over to a satellite one satellite over, which again gives us a lot of resiliency and redundancy and the like. Talos, Alenda Space, our prime for Talosatellite Speed, is the company that's going to be building the optical links that go on our side.

Speaker 5

Do you know if they're subcontracting that? Or is that their own internal development? And is that kind of fully baked, meaning is there still development work between now and when you're launching to really get that kind of ready?

Speaker 2

Well, we're fortunate to have Erwin Hudson, our lead light speed engineer, here in the room with us. So Irwin, guest appearance? You. Paul, this is Irwin Hudson. On the optical links, Talos is the provider.

They do procure some of the components from suppliers, but they are the primary designer and primary integrator of the optical links. We've been working on this optical link design for a couple of years. We have full prototypes built and tested. And we feel like that we are quite far along in the design. And we feel like that most of the risk has been reduced.

They do operate at 10 gigabits in both directions. So it's a full bidirectional capability. Each satellite has 40 gigabits of inbound and 40 gigabits of outbound ISL capability, which I think is well beyond what any other LEO satellite constellation has proposed. Thank you, Erwin.

Speaker 5

Sorry to move away from the

Speaker 2

very Yes. Maybe one more question.

Speaker 5

Just one quick one. On the DISH satellite, Anika F3, If DIRECTV and DISH merged, would that change, would that improve or make it harder, do you think, to get a renewal out of that contract?

Speaker 2

Well, I mean, if DISH and DIRECTV were to merge, I got to think getting regulatory approvals at a minimum would take a little while. And this contract is coming up, as I mentioned, in Q2 of next year. So I would suspect that they wouldn't have an approved transaction prior to the renewal date here, number one. Number two, if DISH and DIRECTV were to combine, it would be a big effort. It would take them quite some time to move the subscribers from one of the operators over to the satellites of the other.

I mean, they've each got millions and millions of households throughout The United States and repointing all those dishes and swapping out all the CPE not only would be very, very expensive, but it would be very, very time consuming. So anyway, I don't think DIRECTV a DISH combination will really have any impact on the probability of renewal for this Anika III contract. Thank you.

Speaker 0

Thank you. The next question is from Michael Delginio from Blackstone. Please go ahead.

Speaker 8

Hi, good morning. Thank you for taking the question. I just wanted to ask for an update on your capital allocation thoughts following the announcement of this big commitment from the Canadian government. You'd said in the past that when you completed the public listing, that could be an opportunity to raise some equity in the public markets. And I'm curious, just based on the comments earlier, about how you think substantially the rest of the Lightspeed funding is going to be coming from the export credit, if that's something that you would still consider pursuing?

And then on a related note, given that you seem to be very close, I was just curious if you have any updated thoughts on your use of free cash flow at the restricted group. I know you had said in the past that kind of debt reduction was somewhat down the list of priorities, but now that the funding for Lightspeed is becoming clearer, if you have any updated thoughts on that? Yes.

Speaker 2

Michael, it's Dan. Thanks for the question. So we've just got to be because of all the rules around securities offerings and whatnot, we my General Counsel is glaring at me from across the table. We have to be very careful about what we say about intentions of issuing public equity. So I think at this point, particularly given that we said that we expect all of that to be public later this quarter, early fourth quarter, I will demure and not address that one.

As far as priorities for in the restricted group in terms of how we use our capital. Maybe I'll take the first crack at that and then Andrew, if you want to chime in. We talked about this on the last call. And Michael, I don't think you got it exactly right when you said that we've got debt reduction way down on the priority list. We don't think about it that way.

I think what we've always tried to be careful to say is Our first desire is to use the cash that the business generates to reinvest in the business. And so our first and of course, in a smart, accretive way And so our first priority would be if we have attractive investment opportunities within the restricted sub, that could be replacement satellites, it could be expansion satellites. That's the first thing that we would look to do. But if those opportunities didn't exist, we're not going to make capital investments for the sake of making capital investments. At that point in time, I think we'd do some combination of let cash build up in the group.

Now there are cash sweeps, we would have to respect those. Or pay down debt, which is always a good way, I think, to create equity value when you don't have other good uses for the cash. So that's how we think about it. Andrew, I don't know if you want to add anything.

Speaker 3

No, I think that's consistent down to what we've always said. So we're right on track.

Speaker 2

Great. And then if I

Speaker 8

could just squeeze one more in quickly. Does the agreement with the Canadian government change your thinking on the long term futures of the restricted and unrestricted groups? You said on the last call, something that you would consider combining them in the future, but not really strong plans at this time. Is that kind of how you're still thinking about it? It's something you could consider down the line, nothing set in stone.

Speaker 2

Yes. I don't think that the announcement that we made yesterday about the Government of Canada funding changes at all how we think about the long term capitalization of Telesat. So yes, I don't think it has an impact. So the way we when we discussed it on the last call and the way we think about it, unchanged.

Speaker 8

Great. Thank you so much. Really appreciate all the commentary.

Speaker 2

Yes. Thank you.

Speaker 0

Thank you. The next question is from Tim McGregor from RBC. Please go ahead.

Speaker 1

Hey, guys. Thanks for taking the questions. A lot of them have already been asked, but can you maybe talk about the pricing environment on both the broadcast and the enterprise side?

Speaker 2

Yes. So I would tell on broadcast, we just haven't had a lot come up for one, our utilization, particularly on our broadcast satellites, I mean, we're full. And so we're not really in the market pricing broadcast deals at the moment. For the enterprise segment, it remains a very competitive environment. I would say that on average, looking at our asset guru, management guru, as I said, I'd say we have not seen the kind of steep price declines that we were seeing a couple of years ago on any particular deal.

Each one kind of has its own dynamic. Sometimes we're renewing flat. Sometimes we're having to sharpen our pencil and make reductions, sometimes meaningful. Other times, we can even get away with a little price increase sometimes just depending on the deal. But on balance, I'd say still a very competitive market.

On balance, probably still more downward pressure than anything else. But it's moderated from what it was a couple of years ago.

Speaker 1

And maybe one more. As the business becomes more complicated in terms of unrestricted versus restricted group, you thought about posting financials for the separate credit silos as you continue to build out the investment? And it would be helpful for the fixed income investors to see that.

Speaker 2

I'll let our finance team take that one.

Speaker 3

I mean that's something that we could consider as we go forward. So that's something that we can take under, advise them to see if that could be helpful.

Speaker 2

I will say we get the fact that we've got these two silos and we're very disciplined internally to kind of track expense and the like and attribute it to these different silos. Understand the importance of being rigorous about that. We're

Speaker 1

very disciplined.

Speaker 0

Great. Thanks. Thank you. The next question is from Uresh Bandhari from Legal and General. Please go ahead.

Speaker 7

Hi, guys. Thank you for taking my questions. I'm going to get back into the boring topic of DCB business since you have creditors that we sort of care about. I think in the past, you have talked about that you would not undertake huge investments from spec, especially on that side of the business. I guess what I'm curious is, if let's say there is not sort of like another fifteen year commitment from your one of your one or all of your VTE customers, what is sort of like plan B looks like there?

I mean, is there still a business proposition there? Is the business still sort of viable? Can you sort of continue to provide services to your customers in the interim? I mean, given lot of your satellites are coming to your end of life, especially on the MIMIC side, right? So or maybe my understanding is incorrect there.

Speaker 2

I couldn't follow the question perfectly, but I think the question I'll try to rephrase it, and you can tell me if I have it right, that in the absence of a fifteen year follow on commitment from a customer, how do you keep that business going? Is that kind

Speaker 7

of Yes. The On the DCB side, yes.

Speaker 2

Yes. Okay. So what would I say? One, look, there's still millions of people that are getting their multichannel video service through DTH. Some of that is just kind of by virtue of where they live.

It's their only alternative. Others because they like the service. And certainly, that part of the video market has been facing headwinds. There's no denying that. So I think as these contracts come up for renewal, we've just got to go contract by customer with contract by contract with the different customers.

It's Dish, it's Bell, it's Shaw. Some of these contracts, on average, I think the average length of the contracts at this point, I don't know, a little bit less than four years with the Aannock F31 coming up, as I said, Q2 next year. But some of them are still quite long dated. So what I would say is as these contracts come up, it was kind of like we talked about earlier in the call. If the customer wants to renew for fifteen years, yes, we'll go build a new satellite.

If they don't have that kind of visibility and want to do something shorter, that might then be a good opportunity, so long as the satellite is otherwise healthy, to extend its life. And there are a couple of different options out there, some kind of more ready for prime time than others, to extend the life of a satellite. And certainly, a number of our satellites are good candidates for that. And then some of our satellites have useful lives that go years and years beyond the initial fifteen year contract term with that existing customer. So here again, if you look at our SEC filings, we make estimates on the life of the satellites.

But certainly, Nimiq six satellite comes to mind, our Nimiq five satellite, our NXG1 satellite, these are satellites that right now, it looks like we'll be still in service, in some cases, decades from now. So anyway, that's how we think about it.

Speaker 7

So I guess it's sort of safe to assume that we have enough satellite capacity that even if we don't launch new satellites within the next four, five years, It seems like there is still a viable DCS business at least for the next ten, twelve years. Is that kind of the right way to think about it?

Speaker 2

Yes. But with the big proviso that at the end of the day, it's up to our customers, and they're going to have to make their own business decisions about serving their customers and the like. But for sure, if they are wanting to continue to serve those customers, those customers continue to be a source of nontrivial cash flow for all of our three customers, then yes, we see a path that we would be able to carry on the provision of all of our services so long as yes, we got enough notice from them and that we work together to provide them with a continuity of service.

Speaker 7

Got it. I mean, I think it's sort of easier for all of us to sort of see that there will be some level of, you know, satellite TV customers just in the foreseeable future. But at the same time, we find it probably difficult to imagine that, you know, this or Shaw or any of those guys who want to commit to another fifty year contract on a new satellite. So it seems like we'll

Speaker 2

have to see. I mean, again, just got to talk to each of these customers. And we've got between these mission extension vehicles that can extend the life of satellites between the fact that some of our satellites continue to have years of life beyond the termination date, we should have some options that we can talk to the customers about. Got it.

Speaker 7

And just one final question for me. Probably I'm sure you talked about it in the past. What happened with Mimics six and Shaw? Because I think that was led to the new satellite that was launched for them.

Speaker 4

What is the reason that I

Speaker 7

think that got canceled? Or is that not being used somewhere else? What is how is six being utilized?

Speaker 2

Yes. I think you've got the wrong satellite. Mimic-six is a satellite that's used by our customer, Bell. The satellite that Shaw didn't renew was on our ANECA F1R satellite. And what happened there is Shaw had a fairly antiquated ground infrastructure.

They were still on MPEG-two, and the vendor that they bought their encryption gear from is no longer even supporting that equipment anymore. So Shaw was compelled to move to a newer technology. And they moved to an MPEG-four technology, which was more bandwidth efficient. So it allowed them to reduce the amount of satellite transponders they needed to transmit the number of channels that they needed to transmit. So that's what happened there.

They were compelled to upgrade their ground equipment. They captured some efficiencies, and they skinnied down the number of transponders they needed. But equally, they did extend to the end of life on our Anacapt-two satellite. So that's how we managed it, but that's how they managed it.

Speaker 0

The next question is from Jonathan Koutman Please go ahead.

Speaker 2

Hey, Dan. Can we talk a

Speaker 5

little bit about spectrum? So I don't think it's lost on anyone that was following the 3.5 gigahertz auction, but we saw some pretty hefty prints there at roughly like $2.28 per megahertz pop. So when we think now about the Canadian C band, I think it's our understanding that we're clearing 300 megahertz of the 500 megahertz for ISED. We have, I think, 100 megahertz for our legacy GEO projects. So, what type of opportunities are there in the future for Canadian C band and helping work with policymakers to get that out to people and used in an efficient manner?

Speaker 2

Yes. It's a great question. And it wasn't lost on you what that spectrum just cleared for. And I can assure you, it wasn't lost on us either. So just maybe one correction.

We're left with 200 megahertz C band in Canada, not 100 megahertz. I don't know. I don't know what the answer is. I mean, honestly, we were disappointed that ICED didn't adopt our proposal. It is the case that Canada has taken historically a different approach to spectrum management than, for instance, what the FCC has done.

But we thought we had a great proposal for the Government of Canada, and we were disappointed that ISAID didn't adopt it. But they did what they did. Having said that, we were pleased that, okay, they didn't do what we wanted them to do on C band, but we were pleased with the deal that we announced yesterday. And I will say, I know you asked a question about C band, but I will just pause to say, we're the financing arrangements that we made with the Government of Canada, they're attracted to Telesat. The Government of Canada certainly looked after its interest in terms of having upside with warrants and whatnot.

But the terms that we negotiated with the government, they're attractive to Telesat, and we think that's something that's accretive to all of our stakeholders. On the residual 200 megahertz that we're keeping, we need that 200 megahertz to continue to support our customers in Canada in rural areas. But we're going to continue to think about and I think it would behoove policymakers and wireless providers here in Canada to think about maybe sometime in the future, whether there are other flexible ways that, that spectrum could be used to, yes, support rural and remote satellite dependent communities. But like ICED has done in some other areas, and I'm thinking S band, for instance, there, where they have sort of a hybrid terrestrial satellite use. I think that if the regulator is innovative and they are at times, that maybe there are things that we can do in Canada.

And who knows, maybe even in The U. S. With the residual spectrum that the satellite operators have there, maybe there are things to do in the future with that spectrum beyond just providing C band satellite services.

Speaker 5

Yes. It just strikes us and just and if you care to comment, please do so. But it just strikes us with 200 megahertz here and the potential that we could isolate, I guess, our legacy businesses into 100 megahertz of that 200 megahertz when you've got spectrum trading wealth north of $2 per megahertz pop. There could be the appropriate incentives for us to confine our legacy businesses to 100 megahertz and free up that spectrum for the great people of Canada?

Speaker 2

Yes. Look, what I would say is there's always going to be a need for more and more and more mid band spectrum for advanced terrestrial wireless services. And the government here auctions what spectrum they have in 3,500 megahertz. They'll auction the 300 megahertz C band spectrum still sometime out well, it won't be available until sometime out in the future. But I've got no illusions that just given the way people use wireless services, that residual 200 megahertz is attractive, it's valuable.

We need it for the satellite dependent communities. But if the satellite community were carrying gloves with the regulator and the wireless operators, yes, it seems like everybody potentially could be well served by finding innovative ways to fully productively use that spectrum. And my guess is that's certainly something that other regulators beyond Canada will look at in the future too. I think we've got time maybe for one more question. So operator?

Speaker 0

Thank you. The next question is from Matthew Piedes from Avery Partners. Please go ahead.

Speaker 9

Hey, guys. Thanks for squeezing me in. One question about an earlier comment you made, Dan, about potential demand for capacity if DISH were not to renew. Can you just talk about what sort of demand that is, how robust it is? Is it long term in nature, how you might think about the pricing for that demand if it were to come, if the capacity went down?

Speaker 2

Yes. I mean we've done a whole lot of thinking about what that capacity could be used for. It's good capacity. And it's Ku band. It's kind of full North American coverage for the most part.

So the projects that we're thinking about are rural broadband connectivity. And there's, as you can imagine, significant demand for more and more of that. And for mobility services, probably in particular, aero connectivity, it's good Ku band capacity that covers key markets and bypass. And I should say, we're just not to renew it. It might be the case that they're currently using that capacity for to distribute third party video.

That's to say that will distribute third party video using that AntiCap three capacity. And if DISH didn't renew with us, I know potentially some of those services could contract with Telus directly. Those are kind of the different opportunities that we've been thinking about for that capacity. Pricing, I don't know. Look, I'm not suggesting that addition renew overnight, we would refill all that capacity at the exact same rates.

I think it's inevitable if they don't renew that there will be a dip in our revenue for some period of time. But those are the types of projects that we're already kind of thinking about and having in the pipeline in the event that DISH didn't renew all or some of that capacity.

Speaker 9

That's helpful. Can you just is there any can you order of magnitude give us a sense for how we should think about what the pricing environment might be for that replacement capacity? Is it dollars for nickels, dimes, quarters?

Speaker 2

Is it just sort of just quarter of magnitude? Know it's difficult. I don't know. Think I it's nickels and dimes. No, it's a bit hard to say.

But yes, anyway, and it's still a little premature, but we'll share more on that when we've got better visibility about what DISH wants to do and when you have a better feel for what those other kind of the robustness of those other opportunities.

Speaker 9

Fair enough. Appreciate it. One last one for me just the question asked earlier about financial statements from restricted and unrestricted group, that would certainly be helpful for credit investors to look

Speaker 1

at the two. I'll just throw that in there.

Speaker 2

Okay. All right. We appreciate that. All right. Well, listen, everyone, thank you very much for joining our call this morning, and we look forward to chatting with you when we release our Q3 numbers.

So thank you very much. Thank you, operator. Thank you.

Speaker 0

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.