Telesat - Q2 2024
August 14, 2024
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to the conference call to report the second quarter 2024 financial results for Telesat. Our speakers today will be Daniel 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. James Ratcliffe, Vice President of Investor Relations. Please go ahead, Mr. Ratcliffe.
James Ratcliffe (VP and IR)
Thank you, Paul, and good morning, everyone. This morning, we filed our quarterly report for the period ending June thirtieth, 2024, on Form 6-K with the SEC and on SEDAR+. 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 a discussion of known risks, please see Telesat's annual report and updates filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I will now turn the call over to Daniel Goldberg, Telesat's President and Chief Executive Officer.
Daniel Goldberg (President and CEO)
Okay. Thanks, James, and good morning to everyone. Q2 and the first six months of this year have unfolded consistent with our expectations. As a result, we're reaffirming all of our guidance for the year and keeping focused to make sure we meet those objectives. When we hosted our first quarter call in early May, we indicated we were seeking to conclude our Lightspeed funding agreements with the governments of Canada and Quebec by the end of this summer. This is obviously a key priority for us. I'm happy to say that we've had good and sustained engagement with government representatives, and we are optimistic that we remain on track to achieve this timing. We'll make a separate announcement once the definitive funding agreements are concluded. Beyond that, we're making strong progress executing on the Lightspeed program.
As MDA, our prime satellite contractor, noted on its earnings call last week, they've now selected and onboarded 90% of the suppliers for the Lightspeed program, and they remain on track for their full-year ramp-up plan. We've increased our own headcount since the start of the year by nearly 20% as we staff up to execute on Lightspeed, and the team is making excellent progress on the program. As we noted in today's earnings release, our focus this year remains twofold. For our GEO activities, the emphasis is on maximizing EBITDA and cash flow by doing what we can to mitigate anticipated revenue declines and rigorously managing our cost structure.
On LEO, it's all about execution, closing our funding agreements, staffing up, building out all the various elements of the Lightspeed network, including the satellites, the ground infrastructure, and the software that we need, and commercializing it in the key verticals we're focused on. I'm very pleased with the progress we're making in all of those areas. We're hugely bullish on our prospects in the market, as well as our ability to deliver an extraordinary value proposition for our customers and significant value creation for our shareholders. With that, I'll hand over to Andrew and then look forward to taking any questions.
Andrew Browne (CFO)
Thank you, Daniel, and good morning, everyone. I would now like to focus on highlights from this morning's press release and filings. In the second quarter of 2024, Telesat reported consolidated revenues of CAD 152 million and adjusted EBITDA of CAD 103 million. The first six months of 2024, the company generated CAD 66 million in cash from operations, ending the second quarter with CAD 1.4 billion of cash. For the second quarter of 2024 and compared to the same period in 2023, revenues decreased by CAD 27 million to CAD 152 million, operating expenses increased by CAD 5 million to CAD 56 million, and adjusted EBITDA decreased by CAD 35 million to CAD 103 million. The adjusted EBITDA margin was 67.8%, as compared to 77.1% in the first quarter of 2023.
The revenue decrease for the quarter was primarily due to a reduction in services and a low rate under renewal of a long-term agreement with a North American direct-to-home customer, as well as lower revenues from certain mobility and Latin American customers. The increase in operating expenses is primarily due to higher wages and benefits, bad debt expense, and costs associated with consulting contracts, partially offset by lower non-cash share-based compensation and higher capitalized engineering expense associated with Telesat Lightspeed. Interest expense decreased by CAD 7 million during the second quarter when compared to the same period in 2023. The decrease in interest expense was primarily due to the repurchase of notes and Term Loan B. This was partially offset by an increase in the interest rate and the U.S. term loan facility.
In the second quarter, we recorded a loss in foreign exchange of CAD 34 million, as compared to a gain of CAD 67 million in the second quarter of 2023. The loss for the three months ended June 30, 2024, was mainly the result of the strengthening US dollar, the Canadian dollar spot rate through the quarter, as compared to the spot rate as of December 31, 2023, and the resulting unfavorable impact on the translation of our US dollar-denominated debt. Our net income for the second quarter was CAD 129 million, compared to net income of CAD 51.9 million for the same period in the prior year. The change was primarily due to the one-time recognition of C-Band clearing income in the second quarter of 2023, along with the impact of the foreign exchange loss, as I had mentioned earlier.
For the six months ended June the thirtieth, 2024, cash inflows from operating activities were CAD 66 million, and capital expenditures were CAD 334 million in the same period, almost all of which were related to Telesat Lightspeed. Actual cash used in investment activities was CAD 220 million in the first six months of the year. Certain capital expenditures were incurred late in the second quarter and subsequently accrued. This is reflected in the increase in trade and other payables at quarter end. Guidance. As you will also have noted in our earnings release this morning, we have reaffirmed our 2024 guidance. This guidance assumes a Canadian dollar to US dollar exchange rate of CAD 1.35. For 2024, Telesat still expects its full year revenues to be between CAD 545 million and CAD 565 million.
In terms of operating expenses, excluding share-based compensation, we are still looking to spend between CAD 80 billion-CAD 90 billion attributed to Telesat Lightspeed. Adjusted EBITDA, Telesat still expects to be between CAD 340 billion-CAD 360 billion. As promised, we are also showing our GEO and LEO results separately and is reflected in note 4 of our financial statements filed on Form 6-K. In respect to expected capital expenditures, we continue to expect our 2024 cash flows used in investing activities to be in the range of CAD 1 billion-CAD 1.4 billion, which is nearly all related to expected Telesat Lightspeed CapEx.
To meet our expected cash requirements for the next twelve months, including interest payments and capital expenditures, we have approximately CAD 1.4 billion of cash and short-term investments at the end of June, as well as approximately $200 million of borrowing capacity available under a revolving credit facility. Approximately CAD 1.2 billion in cash was held in our unrestricted subsidiaries at the end of the quarter. In addition, we continued to generate a significant amount of cash from our ongoing operating activities. At the end of the second quarter, total leverage ratio, as calculated under the terms of the amended senior secured credit facilities, was 5.61 times. Telesat is in compliance with all the covenants in our credit agreements and indentures.
In terms of our debt repurchases, we've repurchased year to date an amount of $262 million at a cost of $120 million, including accrued interest. This includes an amount of $43 million purchased after quarter end. Combined with the debt repurchases completed in 2022 and 2023, we've now repurchased a total principal amount of $849 million at a cost of $459 million, including accrued interest. This also results in interest savings of approximately $55 million annually. Including the repayment in 2020 of approximately $356 million of Term Loan B, our overall debt has been reduced now by approximately 36%, or $1.2 billion.
A reconciliation between our financial statements and financial covenant calculations is provided in the report we filed this morning. Our 6-K provides the unaudited interim condensed consolidated financial information into MD&A. The non-guarantor subsidiaries shown are essentially the unrestricted subsidiaries with minor differences. That concludes our prepared remarks for the call, and now we'll be very happy to answer any questions you may have. So with that, I will turn back to the operator for the question and answer session. Thank you.
Operator (participant)
Thank you very much. Yes, we will now take questions from the telephone lines. If you have a question, please press star one on the device's keypad. You also can cancel your question at any time by pressing star two. So again, please press star one at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. We have a first question from Edison Yu from Deutsche Bank. Please go ahead. Your line is open.
Edison Yu (Analyst)
Good morning. Thank you for taking our questions. First, just want to clarify that the negotiations are on track. Are you basically saying that it will conclude in the next couple of weeks, based on your kind of end of the summer timeline?
Daniel Goldberg (President and CEO)
Yeah, that's effectively right. Our expectation is that in the next couple of weeks, we will conclude the agreements and then make a separate announcement about that.
Edison Yu (Analyst)
Understood. I guess, is there anything that still needs to be worked out, or is this sort of more, you know, the right people got to make the right signatures, or is there anything kind of outstanding?
Daniel Goldberg (President and CEO)
Yeah, no, as I said in my prepared remarks, we've had really good engagement with the government representatives. These are representatives from the Government of Canada and the Government of Quebec. There are a good number of agreements that need to get concluded in order to document all the different features of the funding arrangements. At this point in time, there's, I don't see any, you know, significant impediments or obstacles in getting this done in the coming weeks. And so, yeah, we're just, you know, it's a, it's a big funding arrangement with multiple agreements, and we're just working through all that. But there's nothing, yeah, kind of extraordinary about what remains to get done.
Edison Yu (Analyst)
Gotcha. Just switching to the guidance on the CapEx obviously implies a pretty substantial step up, even at the low end of the range. I guess, how do we think about what determines if you end up, you know, closer to CAD 1 billion, closer to CAD 1.4 billion, and what sort of drives the delta?
Daniel Goldberg (President and CEO)
Andrew, do you want to take that?
Andrew Browne (CFO)
Yeah, sure. That, if you look at our flow of CapEx in the second quarter, it's approximately about CAD 309 million or so. So if you kind of multiply that by three, you actually get to CAD 1 billion from a mathematical perspective. So that's why we feel pretty comfortable where we are with the range.
Daniel Goldberg (President and CEO)
Yeah, and maybe I would just add that, you know, it's a sign that the program is on track. I mentioned again in my prepared remarks that MDA, who's the prime and is going to be the beneficiary of so much of our capital spending this year and next, they've done a great job of getting all their suppliers online. They're placing orders, and they're moving out exactly as we would like them to. And so, yeah, we felt, you know, everything we're seeing tells us that we're gonna be tracking the guidance.
And as Andrew said, you know, there was a big spend in Q2, and everything we're seeing is showing good progress and, and that our suppliers will achieve the milestones they need to achieve in order to unlock the payments that we've sort of budgeted for.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
That's it. Thank you. I'll jump back in the queue.
Daniel Goldberg (President and CEO)
Okay, thanks.
Operator (participant)
Thank you. The next question is from David McFadden from Cormark Securities. Please go ahead. Your line is open.
David McFadden (Director, Analyst Communications and Media)
Oh, great, thank you. Yeah, a couple of questions. Can you just give us an update on where you stand with respect to negotiating that one DTH customer? I think the contract's up for renewal this fall.
Daniel Goldberg (President and CEO)
Yeah, thanks, David. So just for everyone's benefit, we've got a renewal with EchoStar on our Nimiq 5 satellite that comes up in early October, and we've said that, you know, on our last two calls, I think that we've been engaged with EchoStar. So we're not done yet. I've mentioned before, we know EchoStar well. We have a good relationship with them. We've done business with them for a very long time. So we've certainly had a number of exchanges, but we're not done yet. So my expectation, obviously, with this renewal coming up, you know, in about two months' time, we'll be landing on a resolution pretty soon.
Certainly, I think that by the time we do our Q3 call, we'll be able to provide, you know, a lot of detail around where we landed. But at this point in time, still having discussions with them.
David McFadden (Director, Analyst Communications and Media)
Okay, and maybe a couple of questions on Lightspeed. So in terms of definitive agreements, you know, you'd signaled that you expect to have them signed by the end of summer. Is that with both the Government of Canada and the Government of Quebec? Because I think in the past, you were primarily referring to the Government of Canada.
Daniel Goldberg (President and CEO)
Yeah, no, it's our expectation that it'll be with both of them.
David McFadden (Director, Analyst Communications and Media)
Okay.
Daniel Goldberg (President and CEO)
Again, it's why, you know, it's taken a little while. Again, we're tracking the timeframe that we had envisioned a few months ago when we put out our Q1 numbers. But because it is the Government of Canada, it is the Government of Quebec, we also have this vendor financing, and so there, you know, all of that needs to get done. It takes a little bit longer than if it were one, just a purely commercial, you know, kind of funding syndicate. And two, yeah, with these government funding, there are, yeah, kind of special considerations. So yeah, it'll be with the Government of Canada, with the Government of Quebec, and it all feels like it's moving in the right direction.
I have to say, just 'cause I'm a former lawyer, it ain't over till it's over, but we're highly confident that we're gonna get there in the coming weeks.
David McFadden (Director, Analyst Communications and Media)
Okay. And then can you update us on your total spend to date on Lightspeed?
Daniel Goldberg (President and CEO)
Andrew?
Andrew Browne (CFO)
For the half year, as we said, we've spent CAD 334 million in total, of which cash was CAD 220 million, and the balance has indeed been reflected in the accounts payable that we see on the balance sheet.
Daniel Goldberg (President and CEO)
Those are Canadian dollars, right, Andrew? Just-
Andrew Browne (CFO)
Yes, correct. Canadian dollars, correct.
David McFadden (Director, Analyst Communications and Media)
You know, I think the budget for Lightspeed is $3.5 billion, well, that's the US number. And so that's so you've spent CAD 334 million so far on the project. All in?
Andrew Browne (CFO)
Yes.
David McFadden (Director, Analyst Communications and Media)
Okay. Okay-
Daniel Goldberg (President and CEO)
Oh, wait, wait, wait, wait. No, no, no. That's just what we've done so far this year.
David McFadden (Director, Analyst Communications and Media)
Mm-hmm. Just this year.
Daniel Goldberg (President and CEO)
Yeah, but we've been making investments in the program for the past few years, including payments with launch providers, you know, a lot of the non-recurring engineering investment that's gotten made, user terminal development, just kind of across the board. So Andrew, I don't know if you want to say anything more about that?
Andrew Browne (CFO)
Yeah, no, I can. If you go all the way back to the development, back to 2020-
Daniel Goldberg (President and CEO)
Mm-hmm.
Andrew Browne (CFO)
On a Canadian dollar basis, looking at CapEx, it's about CAD 980 million CapEx is what we have spent doing all of the work that we have done to get where we are today.
Daniel Goldberg (President and CEO)
In currency?
Andrew Browne (CFO)
In Canadian dollars.
David McFadden (Director, Analyst Communications and Media)
Okay. Okay. All right. That's great. Thank you.
Daniel Goldberg (President and CEO)
Thank you.
Operator (participant)
Mm-hmm. Thank you. The next question is from Chris Quilty from Quilty Space. Please go ahead. Your line is open.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Hey, guys. So congratulations. You put up better results than I was expecting for Q2, but that begets the question, you know, you maintain full year guidance. And so, did you see anything that was pulled forward into Q2? Maybe just first question.
Daniel Goldberg (President and CEO)
... No. No, the quarter unfolded, yeah, like we expected.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
All right. So I therefore kind of didn't model the back half down as much as perhaps I should have to stay at the kind of the midpoint of the guidance. But putting aside Nimiq 5, which, you know, I'd already accounted for, when you look at the base of the business, are there any other large contract roll-offs or, you know, the other issues you've sort of identified, maritime and Latin America, are those getting better or worse?
Daniel Goldberg (President and CEO)
I think, you know, look, you know, we gave guidance at the outset of the year. Like in any year, there are always puts and takes. In the main, the year has been unfolding like we expected. There were some renewals that we didn't think we were gonna get that we did. There were some things that we thought would roll off in a certain time frame. We still think they're gonna roll off, but, but they're rolling off a little bit later. And then, you know, equally, there are some things that played out in a way that's probably worse than what we thought.
One of the things I'd note, and we, and we flag it in the 6-K, is our customer, Xplore, which is a Canadian, rural broadband provider that, serves its customers with a mix of satellite, terrestrial, wireless, and fiber. Xplore is going through a restructuring process right now, and as a result, we bumped up our bad debt provision in the quarter, and we're, you know, trimming our expectations, for what, you know, we'll do with them for the rest of this year. So I'd say that was one that we didn't anticipate when we gave our guidance at, at the outset of the year, but that's something that will be a bit of a headwind in the second half of the year, and potentially next year as well.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
And remind me, Daniel, because that was, they bought all the, the Viasat and Hughes Canadian payloads for Viasat's ViaSat-1 and ViaSat-2. You guys were involved in the deal, if I can say, as sort of a middleman through that contract, if I remember correctly. So I, I wasn't expecting there was a huge revenue or, or margin contribution on that.
Daniel Goldberg (President and CEO)
Yeah, no, not really so. But you're, you're right. You're right in the sense that Xplore uses satellite capacity from Telesat, Viasat, and Hughes. But no, we didn't act as a middleman for any of that. We own the payload, I'm sorry, the Canadian payload for ViaSat-1, and we did a long-term deal with Xplore to, to use that payload, but they did their own direct deals with Hughes and Viasat for their other capacity, so that, that doesn't flow through our P&L.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Okay, I got it partly right.
Daniel Goldberg (President and CEO)
Well, you know, that's-
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Okay.
Daniel Goldberg (President and CEO)
usually better than I do, so that's pretty good.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
All right, second question for Andrew, I guess. You know, spending CAD 1 billion in the back half of the year is no small feat for the government, but, you know, for Telesat, that's a big chunk of money, and clearly, people are not building stuff at that rate. How much of that should we think of as, you know, prepayments to, you know—and how does that flow through MDA to the supplier base, in terms of the revenue contribution, you know, on the other side? If you can-
Daniel Goldberg (President and CEO)
Sure. So maybe, Chris, I'll take this one. And I won't speak to MDA's revenue recognition or, I mean, that, yeah, talk to them about that. But our suppliers need the money. They're ordering equipment right now. I mean, don't forget, we're launching satellites two years from now, which means that those satellites are gonna be, you know, getting built in the coming months. And so they're ordering, you name it, solar arrays. I'm sitting here with my CTO. Help me out, Dave. I mean-
David Wendling (CTO)
All of the various components on the spacecraft,
Daniel Goldberg (President and CEO)
People are-
David Wendling (CTO)
- mechanical, the propulsion system, solar arrays, attitude controls.
Daniel Goldberg (President and CEO)
100%.
David Wendling (CTO)
All that.
Daniel Goldberg (President and CEO)
People are building stuff. All the supply chain is building stuff. They're ramping up, they're spending money. And, you know, as much as I would like to think that, you know, everyone, you know, wants to do Telesat a great big favor, in my experience, all these companies want money before they start spending money. So that's the flow of funds. And here again, and I'm somebody that is always squeamish about spending money, but the reality is, we're hitting the schedule, and they're moving out. And the worry would be if we weren't spending the money, then our schedule, to me and to other people that, you know, know this industry, it wouldn't be credible.
The reality is, yeah, we're spending a lot of money over the next 24 months because people are buying stuff and building stuff, and, and that's exactly what's going on.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Great. Speaking of stuff, I have to ask, you know, it's a company but also an industry question around your selection of Tesat, you know, for your optical terminal. I think you were involved with Mynaric on a couple phases of DARPA's Space-BACN.
Daniel Goldberg (President and CEO)
Mm-hmm.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Obviously, that technology is absolutely critical... you know, to the, the sort of performance and economic returns you expect. Can you perhaps give us a little soliloquy on the process there?
Daniel Goldberg (President and CEO)
Yeah. So I'll and our world-class, long-standing CTO, Dave Wendling, is sitting in the room with me, but I'll take the first crack at this, Dave, and you can-
David Wendling (CTO)
I can, yeah.
Daniel Goldberg (President and CEO)
Yeah, these optical intersatellite links are a key part of the constellation. And for everything on the constellation, whether that's the onboard processor, the antennas, the digital antennas, or these optical links, we're always, you know, trying to make the right choice between cost, capability, and kind of reliability, heritage, and whatnot. There are a lot of folks right now that are coming forward with good optical technology, you know, in space. We worked with MDA in making this selection, so that's something else I'd note. This was kind of a joint effort, a joint determination between Telesat and MDA.
And the reality is, we landed on Tesat because they kind of most checked the box on, on those different variables: performance, reliability, cost, schedule, all of that. So, Tesat has good heritage here. They have a very good, capable optical link. At the end of the day, it was a competitive process, and at the end of the day, we and MDA judged that, that Tesat was the best vendor for it. It's not a black mark against any of the other companies out there that are making optical links. We felt like we had a number of good alternatives, but at the end of the day, Tesat, you know, got over the line for us. And Dave, I don't know if there's anything else.
David Wendling (CTO)
No, I think you said it well, Daniel. I'd just note that it was a very disciplined down selection and selection process in the final analysis then. So, and as you said, Telesat came out on top in a very tough process.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Final question. You know, listening to the MDA call the other day, clearly, you're top of the heap with them, but, they apparently have a new undisclosed customer that's sort of grown in size very quickly, which would lead someone to believe it might be a government customer, which tends to exert priority. Again, I'm speculating, but, you know, these are the things we've seen happen before. Do you have any concerns? I know they're ramping up, you know, to a capacity of, like, 2,000 satellites a year, but they're ramping up. You know, is their growing book of business, a concern in any way for you?
Daniel Goldberg (President and CEO)
So, the short answer is no. You know, they're right down the street from us, about an hour and a half away from us. We know MDA well. Our teams are well integrated. We've got a lot of former MDA employees here. They probably have a couple of former Telesat employees on their side. We have, I'd say, a really good working relationship with MDA at all the different levels, kind of throughout our organizations. We've worked with MDA for decades, not as a satellite prime principally, you know, on the antenna side and whatnot, although they've been building satellites for years and years. So no, we don't have any concern. We're in close contact with them as they ramp up their staff, as they ramp up the supply chain.
We, you know, including myself, meet with them on a regular cadence. So, which is not to say that we're relaxed and complacent. This is a huge program for us. It's a huge program for them. Both of us need this program to be successful. I like that dynamic, where we both have a lot of skin in the game. But no, I mean, it's something that we're gonna keep monitoring very, very closely. But no, I feel good right now about where they are on the ramp up, and how our teams are engaging and the like, so... And if we feel differently about that, we'll let you know.
Chris Quilty (Leading Wall Street Satellite and Space Analyst)
Great. Thanks.
Daniel Goldberg (President and CEO)
Thanks, Chris.
Operator (participant)
Thank you. The next question is from Walt Piecyk from LightShed. Please go ahead. Your line is open.
Walt Piecyk (General Partner)
Thanks, Daniel. Just a quick follow-up on one of Chris's questions, with regard to, you know, you had this strength in the first half of the year relative to guidance. Are you basically assuming that EchoStar is a zero in terms of revenue for the fourth quarter, as they kind of work through their cash issues?
Daniel Goldberg (President and CEO)
Well, um-
Walt Piecyk (General Partner)
Is there some probability associated with that when you put together your guidance numbers?
Daniel Goldberg (President and CEO)
Well, when we put together our guidance, and we said this before, it you know captured a range of outcomes with EchoStar. And we haven't changed any of those assumptions in terms of what those range of outcomes could be... So no, the back half of the year and our thinking about it hasn't deteriorated because we've learned something new or our thinking has changed about EchoStar from where we stood at the outset of the year when we gave the guidance. So, and I guess the other thing I'd say is, yeah, we all track you know what's going on in the sector, including what's going on with EchoStar. The reality is, to date, never mind to date.
The direct-to-home satellite business is obviously still generating a significant amount of cash flow at EchoStar. To date, Nimiq 5 is being fully used by EchoStar. My expectation is to the extent that they renew with us, then that will be a reflection that Nimiq 5 is still an important part of their distribution infrastructure, and they'll find a way to pay for that, because it's important that they continue to provide service to their DTH customers and continue to enjoy the benefit of that cash flow. And so my expectation is that they'll find a way to make sure that they're paying us. So I'm just pausing here. Are we still online? Okay, sorry, there. Our screen was flickering here. I wasn't sure if we had lost the line, so-
Walt Piecyk (General Partner)
No, well, that was a good, that was a good response. Maybe it was just flickering positive feedback. Yeah, I mean, I agree. I mean, like, look, if they have to generate some level of free cash flow in one element of the business and, and they can't switch off the Nimiq 5, then you gotta get. Why not just put a gun to their head then and just not let them off the hook for a lower renewal?
Daniel Goldberg (President and CEO)
Well, I mean, look, you know, with all of our customers, you try to frame things in a kind of a win-win way as best you can. You don't always get there, but we've been working with EchoStar for nearly 20 years now, and we have a good relationship with them. We've talked about this before. We all know it. The direct-to-home satellite business is facing real secular headwinds. We try to work with, whether it's, you know, Bell or EchoStar or Shaw, you know, try to work with them to sustain that business, 'cause there still are millions of households across North America that rely on those services. And so, yeah-
Walt Piecyk (General Partner)
No, I just feel like on this, on this renewal, however many years it's gonna be, you know, also the longevity of the sat itself, it's like this is the last one. Five years from now, if they're a couple million subs lower, then they're not gonna be maybe as nice to you, 'cause you're sounding like you want to be nice to them in this negotiation. In other words, like, this could be the last negotiation of a 20-year relationship, so why not, like, just squeeze them for everything you can?
Daniel Goldberg (President and CEO)
Yeah, I don't know. We've been doing this for a long, long time. It's not how we approach our customers in the market. And so anyway, stay tuned. We're, you know, gonna conclude one way or another our renewal discussions with them, and then we'll be able to provide an update on that in a couple months' time.
Walt Piecyk (General Partner)
I guess also on the LEO, you know, now that MDA is kind of talking about it more, obviously, there's seemingly more confidence in the market that the project's moving forward. Has this opened up any additional, you know, presales on the enterprise side? I realize, obviously, the launch is still a couple of years out, but wondering if you got any kind of additional commitment. And to that end, in terms of the market size beyond enterprise, you know, what Globalstar and Apple have done in this recent phone, again, getting back to the direct-to-device, I know this is not the target market that you want, but is there any rethinking in that in terms of direct-to-device? I mean, I think Skylo had an announcement yesterday with the new Pixel phone.
It seems to be a market developing. I've been using the Globalstar stuff. It's been great, you know, in the holes of coverage that exist. Just curious if your thought process has changed in terms of trying to attack that market.
Daniel Goldberg (President and CEO)
It's a great question, but, no, it hasn't. The reality is, you know, the spectrum that Lightspeed's operating on, the Ka-band spectrum, is ideal for broadband connectivity, but it's not ideal for, you know, a direct device, you know, you know, providing a broadband connection, even a narrowband connection to a handheld smartphone. So... and we believe the market that the verticals that we're focused on are great opportunities for us. They're large, they're deep, they're fast-growing, and we've optimized the constellation to serve that market. The frequencies are really well suited to serve that market. And so, no, that remains the focus. And then as far as presales activities, Lightspeed's moving forward.
I mean, if anyone still has any questions about that, yeah, I mean, I don't know what to say, but we're obviously spending money. MDA's ordering stuff, and we're all ramping up our staff. I mean, Lightspeed's going forward. I think the customer community understands that. We've got salespeople and business development people running all around the world, engaged with the customers that we know well in these different verticals. So nothing to announce right now, but-
Andrew Browne (CFO)
And I know you, you only announce, like, material contracts, but could you at least comment whether there have been incremental bookings, that maybe they're not significant enough to call out in-
Daniel Goldberg (President and CEO)
No. No, no, no. I mean, the,
Andrew Browne (CFO)
Other than any booking since the last earnings call?
Daniel Goldberg (President and CEO)
No. No, but it wasn't our expectation-
Andrew Browne (CFO)
Okay
Daniel Goldberg (President and CEO)
... that there would be any. We're having good engagement with really, you know, good prospective users in the key verticals that we're focused on: aero, maritime, government, enterprise. It wasn't my expectation that we'd be announcing anything, you know, since putting out our Q1 numbers. But the market knows what we're building. Users are excited about it. There's a clear validation that the customer community is highly receptive to LEO. You see the traction that Starlink is getting, and we think that we're bringing something really compelling to the market. So anyway, stay tuned, and we'll be very transparent about the, you know, orders we're getting right now.
We've got about, I think, CAD 750 million of take or pay commitments on Lightspeed, which we do not include when we talk about the CAD 1.1 billion Canadian backlog that we report in the earnings release. The Lightspeed backlog is separate and apart from that. And we'll, you know, as that moves, we'll report on it, and we'll talk about the wins that we have and the like.
Andrew Browne (CFO)
Great. Thank you.
Daniel Goldberg (President and CEO)
Thanks.
Operator (participant)
Thank you. The next question is from Sean Mahoney, from Bank of America. Please go ahead. Your line is now open.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Yeah. Hi, thanks for taking the questions. First, I noticed a large working capital outflow for the restricted group and a large working capital benefit for the unrestricted group in the quarter. So just wondering, does that reflect any intercompany flows, or is it just a coincidence that those numbers largely offset, or did you use the remaining unsub investment capacity as you indicated you would on the last call?
John Flaherty (VP, Business Planning and Marketing)
Yeah, so that, that's the investment down from Telesat Canada into the unrestricted group. And from a timing perspective, it's just showing up top in operation, but next quarter, you'll see it down as an investment in.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay, got it. Thank you. For GEO OpEx, Q2 was up sequentially. Seems like at least part of that was due to the bad debt expense associated with Xplore, the Max Ant, as well as higher professional fees. How should we think about run rate GEO OpEx? Should we look more to, like, Q1, or do you expect to continue to incur higher bad debt expense with Xplore or higher professional fees for some time?
Andrew Browne (CFO)
If you look at our GEO business overall, we'll point out our actual EBITDA margin is 80%, which is pretty high, pretty significant. And we said on our last call, we were expecting GEO OpEx to be down 4% in our plans, and that's contained within the guidance, and that's still what we are actually sticking to now. On the bad debt, I'll just share the bad debt amount delta is about CAD 2 million-CAD 3 million, so on a grand scale, it's not that sort of material. But as we said on the last call, in terms of OpEx, and as Daniel had alluded to in spending money, we are pretty judicious on what we do and how we spend money, and which is good.
As I say, that's what we said on our call, but that's a review of GEO OpEx.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay, got it. And then on the bad debt expense that you mentioned, yeah, let's say it went up, like, CAD 3.3 million in a quarter, so call it CAD 1.1 million a month. Are you still recognizing revenues from Xplore and just kind of offsetting that with bad debt expense?
John Flaherty (VP, Business Planning and Marketing)
Yeah, we are currently recognizing revenue with Xplore. They're making partial payments, so we continue to recognize revenue till we know more about what their plan is going forward.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay. And can you quantify, like, what the remaining, what their remaining obligations are, I guess, under the contract? Like, how much of your backlog includes the Xplore obligations?
Daniel Goldberg (President and CEO)
Yeah, we'll help you out there. So, John, remind me, it goes out until...
John Flaherty (VP, Business Planning and Marketing)
January 2027.
Daniel Goldberg (President and CEO)
Yeah. So it would be, you know, 2025 and 2026. It's probably order of magnitude, about CAD 40 million of backlog, that's in that CAD 1.1 billion. Now, you should also know that about a third of that was prepayment. And so when we recognize revenue from Xplore each quarter, about a third of it is just non-cash-
John Flaherty (VP, Business Planning and Marketing)
Non-cash
Daniel Goldberg (President and CEO)
...deferred revenue. So that's, but that's what it is, Sean.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay, got it. Thanks. And then the last one, I know a few people have asked, so I'll just try it one more time on the guidance. So the low end of the guidance implies second half revenues of about $240 million, which would be $40 million a month, and you did 305 or about, you know, just more than $50 million per month in the first half. I know that there's the renewal with EchoStar that comes up, I can't remember if it's September or October, but in the past, you've said that those DTH birds are about $70 million a year.
Could be more, could be less, but just wondering if you could help us understand, like, the drop-off of at least, or, you know, I guess even if you've lost 100% of that EchoStar contract, it seems like you're still assuming some pretty steep declines in the rest of the business in the second half of the year. Thanks.
Daniel Goldberg (President and CEO)
I'm looking at Andrew. Maybe I'll take this. Yeah, I guess, you know, how we thought about the year, certainly, even if DISH renews, we expect that, you know, it'll be at a materially lower rate. So, you know, we've captured different, you know, outcomes with DISH that explain part of the decline. We've got this issue with Xplore. We'll see where we land on that. So it's things like that. I'd note also, we take a look at kind of all of our business activities periodically. We're giving consideration to selling kind of a non-core business that we own, and that could potentially get done in the near term, so it would be impactful.
For this year, it contributes revenue, but it doesn't contribute a whole lot of EBITDA to us. But that, if we were to do that, would weigh somewhat on the top line, at least. So it's all those kinds of things. And then, yeah, we gave a range, right? I mean, there's a low end of the range, there's a high end of the range, and, yeah. Andrew, do you want to add anything?
Andrew Browne (CFO)
Yeah, indeed. If you look at the OpEx, you know, as we know, where Daniel said, we're hiring people, so our OpEx, indeed, will in LEO, our investment in LEO, from the people perspective, is gonna increase. If you look at, on our segmentation, operating expenses for the six months was about CAD 32.8 million, and our guidance we've given for OpEx in LEO is between 80-90. So that will also kind of play in overall as to what the increase, the potential increase in OpEx in the second half versus first half. So that plays in right down to the adjusted EBITDA as well. And I will say, we are prudent as well in what we do.
Daniel Goldberg (President and CEO)
And maybe one other thing, James, is pointing out to me that now that we've broken out our GEO and LEO numbers separately, it's easier for you guys all to see. But we recognized revenue in LEO for the first half of the year that... And that's chunky, you know, nonlinear kind of revenue. It was the consulting contract that we had. I think this one was with NASA.
Andrew Browne (CFO)
NASA, correct.
Daniel Goldberg (President and CEO)
Which there's more revenue recognition in the front part of the year than there is in the back part. Here, again, it's not contributing a whole lot of EBITDA, but it'll impact the top line. So anyway, Sean, it's kind of all of those things, but there's certainly nothing, you know, other than the Xplore restructuring that's going on, we don't know where that's gonna land. There's nothing about how the second half of the year is shaping up that's really anything different than the way we were thinking about the second half of the year at the outset of this year when we gave our guidance.
Andrew Browne (CFO)
If you look at the segmentation breakout we've done, which I think is very useful and very transparent, the numbers we just sort of are the issues we just mentioned about the OpEx and the revenues in LEO, you can actually see that quite clearly, and particularly pertaining to the first three months.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay. Got it. Thank you. And then just last one from me. Based on what you've said, that non-core asset that you mentioned, is that in the restricted group? And can you, can you give us any sense for, like, order of magnitude of what you expect to sell that for? You know, is that like a CAD 5 million, CAD 10 million, or are we talking CAD 100 million, or more?
Daniel Goldberg (President and CEO)
Yeah. It is in the restricted group. It's not, it's certainly not material from an EBITDA perspective, because as I mentioned, it's pretty much EBITDA neutral for us. And then, you know, in terms of top-line contribution, order of magnitude, it's kind of in the CAD 10+ million contribution top line. So that, that's what it looks like. Oh, and then in terms of proceeds, we can't say yet, because, you know, we don't have anything to share yet, but it's not gonna be really material. But any proceeds that we do get from that activity, if we sell it, will come into the restricted group.
Sean Mahoney (Desk Analyst, Global Credit and Special Situations)
Okay, thanks. That's all for me.
Daniel Goldberg (President and CEO)
Okay, thank you.
Operator (participant)
Thank you. There are no further questions registered at this time. I will turn the call back to Daniel Goldberg.
Daniel Goldberg (President and CEO)
Okay, operator, thank you very much, and thank you all for joining us this morning, and we look forward to chatting with you again when we release our Q3 numbers. So thank you very much.
Andrew Browne (CFO)
Thank you very much. Cheerio.