Monday, May 08, 2017

MDA Restructures For DARPA & Competition, Cuts US Workforce but Anticipates New Orders in Weak Q1 2017 Report

          By Brian Orlotti

Richmond, BC based MacDonald Dettwiler (MDA) has reported lackluster financial results, highlighting both declining revenues in its traditional line of business, but expects at least some upside from the upcoming acquisition of Colorado based DigitalGlobe and future US government contracts related to the Defense Advanced Research Project Agency (DARPA) Robotic Servicing of Geosynchronous Satellites (RSGS) program.

MDA CEO Lance and his Q1 2017 report. MDA’s condensed consolidated financial statements and management’s discussion and analysis (MD&A) for the three months ended March 31, 2017 are available online under the title, "MacDonald, Dettwiler and Associates Ltd. First Quarter Report 2017 for the Three Months Ended March 31, 2017." For a complete transcript of the Q1 conference call, check out the May 2nd, 2017 Seeking Alpha post, "MacDonald, Dettwiler & Associates' (MDDWF) CEO Howard Lance on Q1 2017 Results - Earnings Call Transcript."  Photo & graphic c/o MDA.

But MDA CEO Howard Lance, speaking during the May 2nd, 2017 quarterly conference call, also reiterated his intention to form a new, US based company, to manage contracts related to the DARPA RSGS program.

These contracts are currently managed by Palo Alto California based Space Systems Loral (SSL), an MDA subsidiary.

The new firm will be US based and MDA will not be the majority owner. The new firm will also hold title to the technology used in the US contracts and will distribute RADARSAT-2 data relating to "maritime surveillance and the detection of illegal unreported and unregulated fishing vessels in remote regions."

As outlined in the December 16th, 2016 post, "MDA says No Sale of Canadarm Technology to the US Government in NASA RESTORE-L, DARPA RSGS or "Any Other" Project," MDA spokespeople have gone on record as insisting that no Canadian technology has been used in US contracts.

MDA ten day performance quote covering the period from April 25th - May 2nd, 2017. As outlined in the May 8th, 2017 Globe and Mail Globe Investor website, "MacDonald Dettwiler and Associates Ltd is up today by $0.43 or 0.66% to $66.06. Shares have lost 0.91% over the last five days, but are unchanged over the last year to date. This security has under-performed the S&P TSX by 39.92% during the last year." Graphic c/o Globe and Mail Investor.

As outlined in the May 2nd, 2017 MDA press release, "MDA reports first quarter 2017 results," MDA’s communications satellite division has reported the following results for the first quarter of 2017:
  • Consolidated revenues of $494.3Mln CDN, down from $562.4Mln CDN for the same period last year, with the communications segment contributing revenues of $332.0Mln CDN, down from $403.2Mln CDN for the same period of last year. According to the press release, the drop reflected "lower geostationary communications satellite bookings over the past two years."
  • Operating earnings were $44.9Mln CDN, or $1.23 per share, down from $55.9Mln CDN, or $1.53 per share, for the first quarter of 2016. As outlined in the press release, the decrease "reflected lower operating EBITDA, as well as higher corporate expense, additional non-cash interest expense following the securitization of orbital receivables and a higher effective income tax rate on operating earnings."
  • Net earnings under International Financial Reporting Standards (IFRS) for the first quarter of 2017 were $5.9Mln CDN, down from $40.7Mln CDN for the same period of last year. As outlined in the press release, "net earnings were impacted by the inclusion and variability of certain large, non-operational items, particularly restructuring costs and incremental legal and other professional fees related to the acquisition of DigitalGlobe, Inc."
  • The company had total funded order backlog of $2.0Bln CDN as of March 31st, 2017, as compared to $2.5Bln CDN for the same period last year. 
  • The communications segment contributed operating EBITDA of $50.5Mln CDN compared to $59.5Mln CDN for the same period last year. 
  • The surveillance and intelligence segment contributed operating EBITDA of $38.6Mln CDN, a slight rise from last years $37.7Mln CDN, and perhaps the only bright spot in the report. The division also reported a 2% increase in revenue, to $162.4Mln CDN.
  • The company was still able to declare a quarterly dividend of $0.37 CDN per common share, which will be payable on June 30th, 2017 to "shareholders of record at the close of business on June 15, 2017."

Also on the upside, CEO Lance  anticipates orders for 12-16 geostationary-orbit telecommunications satellites in 2017 (13 were sold in 2016). However, with only one order booked thus far, MDA subsidiary SSL faces an uphill battle for US government telecom contract work against entrenched competitors including Thales Alenia Space, Airbus Defence and Space and Mitsubishi Electric.

Lance indicated that the company is reducing staff at Palo Alto, California-based SSL in the face of this market downturn although no similar layoffs have so far been announced in Canada. Canadian government work relating to the RADARSAT Constellation Mission (RCM) is slowly winding down but Lance did promise several potential, if undefined, Canadian initiatives over the coming months.

MDA has asserted that its $3.1Bln CDN purchase of US-based satellite imagery provider DigitalGlobe (currently in progress), which has a growing surveillance and intelligence business, should aid its bottom line next quarter. Lance noted that, once the DigitalGlobe acquisition is complete, telecommunications satellites will account for no more than about 15% of MDA’s total EBITDA. The sale is expected to close sometime in the second half of 2017.

Lance also tried to convince investors that the telecom satellite downturn is a result of satellite fleet operators’ “confusion” about the future direction of the industry. The market’s attention has been split between stand-alone high-throughput telecom satellites (SSL’s speciality) and large constellations of small telecom satellites (like that being built by newcomer SpaceX).

For example, on May 3rd, Hawthorne, CA based SpaceX, during a hearing of the US Senate’s Commerce Committee, detailed its plan to launch a constellation of 4,425 custom-built broadband satellites using Falcon 9 rockets beginning in 2019, deploying in phases until reaching full capacity in 2024.

As outlined in the May 8th, 2017 post, "SpaceX details plans to launch thousands of internet satellites," the satellites will operate at altitudes ranging from 1,110km to 1,325km. SpaceX has also proposed an additional 7,500 satellites operating even closer to the ground, claiming this will boost capacity and reduce latency in heavily populated areas. However, no specific timelines have been given for this part of the project.

SpaceX's satellites will essentially operate as a mesh network and will beam directly to gateway stations and terminals at customers' homes, a strategy intended to greatly reduce the amount of ground-based infrastructure needed, particularly in rural and remote areas. Gigabit per second speeds are being promised, with different bandwidth packages being offered at various prices. Promised latencies of between 25 and 35ms would put the SpaceX network on par with terrestrial broadband connections as well as outdo traditional satellite  internet providers (600ms or greater).

Despite its effective exit from Canada, success in the US continues to elude MDA. The shifting terrain of the satellite industry will require adaptability from incumbents and newcomers alike.
Brian Orlotti.

Brian Orlotti is a regular contributor to the Commercial Space blog.

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