Clarus reportQ4/16 Results as Expected, Awaiting UrtheDaily and OptiSAR News
March 29, 2017
KEY POINTS:
• Q4/16 revenues of $11.9MM and Adj. EBITDA of $1.9MM basically in line with our forecast. Russian contract for ISS sensors terminated, which caused one-time recognition of deferred revenue and depreciation in Q4 and cleans up the income statement going forward.
• Continuing to expect near-term announcements on contracts for OptiSAR and UrtheDaily constellations that could (in the case of OptiSAR) begin driving revenue as early as 2018.
• Lowered our 2017 & 2018 estimates for existing business as Deimos sales were soft in Q4/16 and management limited its 2017 guidance for now to “growth over 2016.” We still expect substantial Y/o/Y growth in revenue and Adj. EBITDA for the existing business in both 2017 and 2018.
• Reduced our sum-of-the-parts target price to $6.50 per share from $7.00 due to lower 2018 estimates.
Q4/16 RESULTS (EX-RUSSIA) BASICALLY IN LINE WITH RECENT PRE-ANNOUNCEMENT
Yesterday UrtheCast released its Q4/16 results. The Company reduced its 2016 guidance for content and engineering services revenue back in February, so the Q4 results for those units were largely as expected. However, the termination of the Space Station service barter agreement with RSC Energia at the end of Q4 caused UrtheCast to recognize the remaining $40.6MM of deferred non-cash revenue. This amount was offset by an equal depreciation charge. Total revenue and other operating income of $57.7MM in Q4 included $3.6MM of content sales, $8.0MM of engineering services and $45.8MM of non-cash Russian barter revenue.
An emphasis on reducing operating costs has borne significant fruit over the past several quarters. Consequently, even with a sizable revenue miss versus the original 2016 guidance, the Company still almost reached the top of its full-year 2016 Adj. EBITDA guidance. Q4/16 Adj. EBITDA of $1.9MM was close to our $2.1MM estimate.The Company paid down €4MM (~C$5.6MM) of its 5-year European debt facility in Q4 (as required) and ended 2016 with $8.1MM in unrestricted cash. So far in Q1 UrtheCast has bolstered its cash position through a bought deal for $18.2MM of net proceeds and a ~C$3.6MM deposit for a previously-announced US$3.9MM engineering services contract. On March 24 the Company also added a $10MM revolving credit facility to finance receivables (particularly the US$65MM engineering contract). We expect a milestone payment for this large contract (we believe with Saudi Arabia) in the next 1-2 quarters, along with the initial reimbursement of $3.2MM under the recently-announced R&D funding agreement obtained from the Canadian government. We expect UrtheCast to end Q1/17 (March) with close to $20MM in cash and approximately $31MM of debt.
UrtheCast continues to pursue the sale or other monetization of the sensors on the International Space Station, most likely to a Russian buyer. Management seems optimistic that it can complete a transaction for the ISS sensors, even though the Company (via its reseller Elecnor (Madrid: ENO, NR)) recently signed a multi-year Deimos-2 data agreement with the State Space Agency of Ukraine.
EXPECTING MORE OPTISAR/URTHEDAILY ANNOUNCEMENTS OVER THE NEXT FEW MONTHS
We expect UrtheCast to continue progressing towards key milestones on the pending OptiSAR (SAR plus ultra-high-res optical satellite pairs) and UrtheDaily (5-meter resolution with daily global revisit) constellations. The Company has already signed one firm contract to sell an OptiSAR pair to an unnamed foreign government (US$180MM plus up to $30MM in options) and retaining the right to resell the data collected from the satellite pair outside the customer’s nation and surrounding area to other government and commercial entities. There are also 2 outstanding MOUs (Kazakhstan and Saudi Arabia,we believe) for OptiSAR satellite pairs. The total value of the 3 contracts/MOUs is US$490MM (~C$640MM) and we expect that the great majority of the contracts’ value will be captured during a 3-4 year build phase between 2018 and 2021. CEO Wade Larson said on the earnings call that he is hoping to close on these two MOUs “shortly”. The Kazakh space agency stated at the beginning of March that it had completed negotiations with UrtheCast and just needed final approval from two agency supervisory boards. There has been no public statement from the Saudis, but they are funding US$65MM of OptiSAR development and have co-authored related SAR patents with UrtheCast so we expect the Saudis to follow through and convert their MOU to a firm contract in due course (within the next 6-9 months in order to hit the target launch of 2021). We think it might take 3-6 months for financing (export credit support for the customers) to be put in place once all 3 firm contracts are signed, which then would allow the build phase revenue to begin.
On the UrtheDaily front, UrtheCast management seemed very upbeat about the progress being made with business development. We expect the first four UrtheDaily satellites to cost about US$150MM (build, launch and insurance), which we believe would require ~US$30MM/year of long-term take-or-pay contracts in place to source bank and export credit financing. New CFO Sai Chu has extensive experience with large capital equipment financing programs and we expect him to lead the effort to finalize the financing facility for UrtheDaily. We believe the Company can source the needed contracts to arrange the financing within the next couple of quarters.
We have no revenue from UrtheDaily or OptiSAR in our forecast due to the uncertain timing of contracts, but we believe these constellations represent the largest growth opportunities for the Company over the next decade.
NO FORMAL 2017 GUIDANCE YET, BUT CAUTIOUS TONE LEADS US TO LOWER OUR ESTIMATES FOR THE EXISTING BUSINESS
UrtheCast declined to provide formal 2017 revenue guidance as new CFO Sai Chu starts imminently and wants to undertake a deep dive into the budgeting and forecasting process. The Company expects to give full-year guidance when it reports Q1/17 results in mid-May. However, management did note that Deimos content sales should grow and engineering services should be relatively flat Y/o/Y in 2017.
We had been expecting very substantial sales growth from Deimos in 2017, given that the unit has a very large pipeline of bids outstanding (previously noted as well over €200MM). However, while Deimos-2 seems to be gaining traction and UrtheCast is expanding its global direct sales force, the relatively soft Q4/16 content revenue and management’s outlook for Y/o/Y “growth” rather than something more dynamic has led us to take a more conservative view on the sales ramp of the existing business.
We note that the termination of the Russian non-cash barter agreement at the end of 2016 cleans up the income statement going forward. Our prior forecast had already assumed zero non-cash barter revenue or costs in 2017 and beyond.
We are now projecting Q1 revenues of $12.0MM, down from our prior estimate of $13.8MM, and Adj. EBITDA of $1.0MM (was $2.7MM). For all of 2017 we expect $61.4MM of revenues (was $71.1MM) and Adj. EBITDA of $17.0MM (was $25.5MM). On a positive note, the lower expense trajectory in recent quarters has allowed us to reduce our outlook for expense growth, which helps our Adj. EBITDA outlook for 2018. We now expect 2018 revenues of $69.7MM (was $77.5MM) and Adj. EBITDA of $24.0MM (was $27.7MM).Our forecast does not yet incorporate any build-phase revenue related to the OptiSAR constellation, which could be meaningful in H2/2018 if the two announced MOUs can be converted to firm contracts within the next several months.
TARGET PRICE ADJUSTED TO $6.50 PER SHARE, MAINTAIN BUY RATING
Our 12-month target price has been adjusted to $6.50 per share (was $7.00), and remains based on a sum-of-the-parts valuation analysis:
12-Month Target Value Component 1: $2.00 per Share for Existing Business (was $2.50). Our first target valuation component utilizes a 12-month target valuation of 10x 2018e EV/Adjusted EBITDA, in line with the current consensus 10.5x 2018e EV/Adjusted EBITDA for our tracking group of telecom and Earth observation satellite operators according to FactSet data. Closest comp DigitalGlobe (NYSE: DGI, NR) is in the midst of being acquired by MDA (TSX: MDA, NR) and is currently valued at 7.7x 2018e EV/Adj. EBITDA but has been struggling to expand sales outside of its core U.S. government business. This target multiple generates a 12-month target value for UrtheCast’s existing business of approximately $2.00 per share, down from $2.50 previously due to our reduced 2018 estimates.
12-Month Target Value Component 2: ~$1.75 per Share for Present Value of EBITDA from First Year (2020) UrtheDaily Data Sales (No Change). We generate a present value of the EBITDA generated by the UrtheDaily constellation in its first full year of operation (2020e). We assume 2020 data revenues of $50MM and contributory EBITDA of ~$28MM (55% margin). We apply a valuation of 10x 2020 contributory EBITDA and discount it back 2 years at 15% to arrive at a present value of about $1.75 per share (unchanged).
12-Month Target Value Component 3: ~$2.75 per Share for Present Value of EBITDA from 2019 Build Phase Revenue of 3 OptiSAR Satellite Pairs (No Change). Finally we attribute a present value of the EBITDA from engineering services revenue for the construction of the first 3 satellite pairs (the announced deal plus the two announced MOUs) in the first full year of build activity (2019). We assume the 3 OptiSAR pairs (worth a total of US$490MM/C$640MM) are under firm contract by mid-2018. Further, we anticipate about 80% of the total contract value will be recognized as engineering services revenue ratably over a 3.5-year build phase at a 25% EBITDA contributory margin. Our projection is that UrtheCast will generate about C$146MM of build-phase revenue in 2019 and realize about C$37MM of contributory EBITDA. We value this engineering services EBITDA at a 10x multiple, and discount that amount back one year at 15% to arrive at a present value of about $2.75 per share (unchanged).
Potential near-term catalysts include the conversion of outstanding OptiSAR satellite pair MOUs with Kazakhstan and Saudi Arabia, and UrtheDaily constellation announcements for data contracts or the sourcing of associated construction financing (which we believe would require ~US$30MM/year of firm, long-term, take-or-pay data contracts to be in place). We reiterate our Buy rating.
Target Price Calculator: Our twelve-month target price of $6.50 per share reflects a sum-of-the-parts valuation, including $2.00 per share of value from the existing UrtheCast operations (10x EV/2018e Adjusted EBITDA), $1.75 per share of present value from 2020e EBITDA of the pending UrtheDaily satellite constellation, and $2.75 per share of present value from 2019e EBITDA from build-phase activity for the first 3 satellite pairs of the pending OptiSAR satellite constellation as of December 31, 2017.