Maxar Technologies Inc (MAXR) 2018 Q2 法說會逐字稿

Welcome to Maxar Technologies Limited, the Company, second quarter 2018 results conference call. We would like to remind you that part of today's discussions including responses to various questions may contain forward-looking statements which represent the Company's estimates, future plans, objectives and expected performance as of today's date. These statements are based on current assumptions that the Company believes are reasonable but are subject to a wide range of uncertainties and risks that could cause actual results to differ materially from the forward-looking information.

You are referred to the advisory regarding forward-looking statements contained in the third quarter earnings news release and in the Company's most recent management's discussion and analysis and annual information form which are available online under the Company's SEDAR profile at www.SEDAR.com, under the Company's EDGAR profile at www.SEC.gov or on the Company's website at www.mdacorporation.com. I will now turn the call over to your host, Howard Lance. Please go ahead.

Good morning, and welcome to our call to review the second quarter results and key accomplishments across the company.

We continue to make good progress, strengthening our foundation for long-term profitable growth. I want to thank the entire Maxar team for their continued focus on creating sustainable performance as we move forward.

Please turn to Slide 2 of the slide deck. Maxar, as you know, has combined 4 leading space brands across the value chain into 1 company. We've created a global commercial leader serving the new space economy. Our capabilities in optical and radar imaging, geospatial services and AI, large- and small-satellite design and manufacturing and space infrastructure will be highly sought after as the new space economy continues to develop and evolve.

Maxar is uniquely positioned to grow by leveraging its end-to-end solutions and by accelerating innovation across all facets of our company.

Key drivers of our financial success will be continuing strong end-market demands, a proven operating model and the specific strategies we're putting in place to drive growth across each of our segments. These factors will result in sustainable earnings growth and cash generation, allowing for a significant deleveraging of our balance sheet and providing attractive returns for our shareholders.

During the quarter, we made progress on many of the key elements of our strategy. We saw a continued growth in the Imagery segment, as we introduced important new commercial products. We had a major program win in our Services segment that provides a catalyst for future growth. Our diversification effort in Space Systems continued. We got closer to turning the corner on revenue growth and we announced an initial design contract on a large LEO communication satellite constellation. We also continued to deliver both cost and revenue synergies from the merger. And lastly, we remained keenly focused on cash generation, showing nice quarter-on-quarter improvement in operating cash flows.

Now if you'd please turn to Slide 3. We announced that Biggs Porter will be joining Maxar as Chief Financial Officer on August 15. Biggs was most recently the CFO of Fluor Corporation. Before that, CFO of Tenet Healthcare and previously, Interim CFO at Raytheon and a Senior Financial Executive in Northrop Grumman. His breadth of industry and financial experience will be instrumental in shaping our future strategies and execution in both financial operations and our capital structure. I want to say a big thank you to Anil Wirasekara for serving as interim CFO and for the continued service he will provide to Maxar.

It was announced yesterday that Maxar has formed a consortium with Thales Alenia Space. Together, we're pursuing the Telesat LEO communication constellation, and we announced the consortium has been awarded a design contract for the expected 9-month risk mitigation phase of the program. This award follows a rigorous selection process involving all of the leading global satellite manufacturing companies. During this phase, the 3 companies will work closely together to refine the ultimate system design, including the satellites, gateways, user terminals, the operations center and the ground network.

Telesat is funding our consortium and possibly 1 additional company for the design phase. And then following this, we'll downselect to 1 partner for the fixed-price production phase sometime in 2019. Needless to say, this is an exciting development for Maxar in order to diversify and grow our Space Systems segment in the face of continuing design -- declines in the GEO communications satellite market.

This program was highlighted as one of our large growth opportunity pipeline programs at our March Investor Day meetings. These opportunities were identified as near-term catalysts for driving future growth at Maxar. Both SSL and MDA will contribute to the Telesat LEO design and potential production content.

We also announced a major prime contract award with NGA on the Janus Geography $920 million IDIQ contract vehicle in our Services segment. This was another program identified in our large growth opportunity pipeline. The combined scale and capabilities of the former Radiant Group and MDA Information Systems allowed this important win. Previously, we'd been subcontractors to BAE and Harris and limited in our ability to grow revenue. This is a clear example of revenue synergy resulting from the merger.

Maxar employees are actively engaged in creating our future, and this is resulting in industry recognition. Maxar was recently ranked #74 out of 500 mid-sized companies in Forbes Annual Workplace Survey, and was one of only 3 space or geospatial companies selected. DigitalGlobe was selected as one of the Denver Post's Top Work Places for the third time in 4 years. Radiant Solutions was included in the Tampa Bay Times Top Workplaces List for the second consecutive year, and MDA in Brampton, Ontario, was recently nominated for the 2018 Business Excellence Award by the Brampton Board of Trade.

Our workforce is one of our competitive advantages, effectively collaborating to deliver end-to-end space technology solutions for our customers and working to build a better world. These awards demonstrate that Maxar employees value the company's purpose and integrity, its commitment to mission first and its culture of innovation and collaboration.

At the end of the last quarter, we took a snapshot of our investor base. At that time, about 50% of our shareholders were non-U. S. companies and, as such, we're still entitled to continue to file as a foreign private issuer with the SEC. Our U.S. domestication plan remains on track for implementation no later than the end of 2019.

And finally, we announced this quarter that we reached a settlement with the former preferred shareholders of DigitalGlobe that had dissented to the acquisition. I'm pleased to have this issue resolved as we wrap up the remaining items associated with this transformative merger.

Now let's turn to an overview of the second quarter down on Slide 4. Total company revenues increased 4% sequentially from Q1 to Q2, but declined 4% year-over-year on a pro forma basis as expected due to the continued declines in our GEO communications satellite line of business and the close-to-finish Canadian RCM program.

Revenue from the remainder of Maxar increased 5% year-over-year in the quarter, demonstrating continued strong fundamentals across the rest of the company. Imagery had solid year-over-year growth in the quarter, as did our revenues in small satellites, U.S. government space programs and across MDA in Canada.

EBITDA margins declined as expected by roughly 140 basis points year-over-year, again on a pro forma basis, driven by lower [intaxment] -- investment tax credits that were recognized in the second quarter this year versus the second quarter last year. If not for the timing of the ITCs, margins would have expanded by roughly 60 basis points year-over-year. We achieved $6 million in EBITDA synergies during the quarter and have now reached $15 million year-to-date. For the full year, we project $25 million savings and remain confident we'll hit our run rate target of $60 million in EBITDA cost savings by the end of 2019.

Adjusted EPS in the quarter was $1.22 per share, down only $0.02 on a pro forma basis from the year-ago period. Our backlog stands at $3.05 billion, and our book-to-bill was 0.95 in the first half after removing the quarterly drawdown of the 10-year EnhancedView contract with the U.S. government that's in the Imagery segment.

As expected, we consumed $34 million in adjusted free cash flow this quarter due to timing of receipts and ramp in spending on the WorldView Legion constellation. We're affirming our revenue and cash flow guidance for the year with continued momentum coming off a solid first half. We now expect adjusted EPS to come in near the top-end of our previous guided range.

Turning now to Slide 5. We present a view on the first half of the year compared to 2017. Revenues are down 4.6%, but margins have expanded nicely, primarily on performance in Imagery. Adjusted EPS is up 12% year-to-date compared to the prior year.

Turning to Slide 6 now for some details on order activity and key accomplishments during Q2. In Imagery, the U.S. government line of business continues its stellar execution on the EnhancedView contract, marking the 72nd consecutive month delivering at or above the required performance metrics. I'm also very pleased to announce that we were notified of NGA's intent to exercise option year 8 of this contract, thus extending the program into its ninth year. We continue to be the predominant commercial mission partner for the National Geospatial Intelligence Agency, a role that we look forward to continue in the future as this contract likely shifts to the National Reconnaissance Office.

We continue to see solid demand signals across our International Defense and Intelligence line of business, which is in part being driven by recent new product launches like SecureWatch and Rapid Access as well as enhancements in AI tools, using machine learning to provide this customer set with greater insights into the geospatial data that rests at their fingertips. We expect growth in these products and the installed base of our Direct Access Program will be major contributors of continued growth in the Imagery business going forward.

In Commercial, we launched 2 new products in a partnership this quarter. EarthWatch is a cloud-based subscription for viewing, streaming and downloading the company's industry-leading geospatial data, enabling our commercial customers to accomplish their missions with ease through a single interface. Customers will be able to incorporate analytics and image analysis in their applications, empowering them to make business decisions with confidence. Industries across technology, energy, insurance, automotive and telecom markets as well as civil governments will use EarthWatch to solve their most pressing challenges in addressing geospatial data.

GBDX Notebooks is a subscription product that provides users with pre-built machine learning and remote-sensing algorithms, as well as offering them the ability to write their own to extract valuable insights from the company's 100-petabyte image library. Using 1 of 3 available e-commerce tiers, customers can develop and run their own proprietary algorithms at scale or use Maxar-developed algorithms or use open-source algorithms, including mapping navigable airspace for drones, assessing forest fire risk to buildings and change detection for maritime traffic. Like EarthWatch, we expect GBDX Notebooks to garner traction with the insurance, automotive, energy and technology industries.

Also in commercial, we announced a partnership with an organization that will leverage the GBDX big data platform to answer agricultural questions across the globe using machine learning at scale. These efforts will create more sophisticated baseline data sets in the agriculture vertical and will fuel research and development efforts to improve agricultural information products as well as to create new ones.

Common applications include assessments of land tenure, crop yield production estimates, water resource conservation and pest and disease monitoring. The goal of this collaboration is to create technical breakthroughs that will change the lives of farmers, their communities and our planet, helping us all deliver on Maxar's purpose to build a better world.

The big news in Services this quarter was the Janus Geography Prime Award mentioned earlier. During the quarter, we also had success with our classified customers, including growth both in existing contracts and the signing of new ones to provide software development, engineering services and advanced AI capabilities. We continue to see strong tailwinds from this customer set and are making targeted investments to further our capabilities to address this important market.

Our new product development efforts continue, particularly in machine learning and services, and we'll be releasing some new products in the back-half of the year targeted at the IDI and commercial markets that will leverage what we've learned in serving the U.S. government, our skills and our capabilities. Longer term, we expect these new products to be important drivers of growth for the Services segment.

In Space Systems, we announced the acquisition of Neptec design after the quarter-end. Neptec is a leading provider of sensors, including those using advanced LiDAR technology for space applications. We expect the capabilities to be accretive to earnings in 2019, to increase the company's capabilities and to open new markets related to rendezvous and docking, the tools for on-orbit inspection and servicing and space exploration, all markets that are expected to grow significantly for many years.

Also, this transaction deepens our presence in the United Kingdom. Shortly after the acquisition closed, we announced a commitment from the U.K. Space Agency for us to develop leading-edge space robotics capabilities in country. This agreement enhances Maxar's ability to lead a European consortium, bidding on the first phase of the European Space Agency space-servicing vehicle robotics program. And it demonstrates how the Neptec acquisition provides Maxar the opportunity to become the world leader in space sensors as well as space robotics.

As discussed earlier, we announced the Telesat LEO design and risk management phase Award. Space Systems continued development and construction on several groundbreaking spacecraft programs. JUPITER 3 for Hughes Networks and EchoStar will provide unprecedented broadband capacity and cost per gigabit from the GEO orbit. U.S. government space robotics projects, including RSGS, Restore-L and Dragonfly will enable future on-orbit servicing and assembly missions. And work on WorldView Legion for DigitalGlobe will significantly increase the company's revisit rate and image capture capabilities.

We've already discussed the Telesat LEO award, which could be the first step in a multibillion-dollar production program for Maxar. So where does that leave the GEO Communications market? As we've discussed at length in the past, industry orders fell significantly in 2015 and have remained at those low levels ever since. At this point, we do not expect a significant recovery for this market, with industry orders likely to be at the low end of the 8 to 12 awards range this year 2018.

From our perspective, industry growth clearly is moving in the direction of LEO and NEO consolations, with the demand for GEO primarily driven by the replacement needs of existing satellites. As such, we are examining a range of strategic alternatives for our GEO Comsat line of business. We continue to align our workforce size with the operations and engineering work to be done. We continue to exit leased buildings and consolidate our footprint on the Palo Alto campus.

We are establishing a separate organization structure and bringing in new talent to focus on execution of the U.S. government and commercial smallsats growth opportunities at a new facility in San Jose, with a healthy pipeline of smallsat and U.S. government opportunities that we believe will lead to sustained growth well into the 2020s. All of these actions are aimed at maximizing long-term value for our shareholders and bringing best-in-class solutions to our customers.

With that I'll turn the call over to Anil for a detailed discussion of the financials in the second quarter.

Thank you, Howard, and good morning, everyone. Before I get started, I want to remind everyone that effective Q1, we report segment revenues and EBITDA on a gross basis and eliminate intersegment activities on a separate line in the income statement. We have made this change to provide consistency with our peers, and also to provide more transparency as we expect intercompany activities to ramp significantly over the coming years as we continue with the construction of the Legion satellite constellation. We believe this data will provide greater insight into the operations and financial health of the company. I would also like to alert all of you that during my review I will be comparing our Q2 2018 actual results to Q2 2017 pro forma results as if the merger was completed in 2017. This should provide a much better and a more appropriate year-over-year comparison than a comparison to Q2 2017 actuals, which is provided more as a statutory requirement.

Please turn now to Slide 7 where we represent year-over-year comparison for the second quarter. Total company revenues declined in the quarter but were in line with our outlook. Imagery segment recorded strong revenue growth, but this was more than offset by a slight decline in our service business and a more significant decline in our Space Systems business, with the latter impacted by a step down in award values in the GEO concept market we have experienced since 2015, the effect of which continues to flow through our revenue line.

We also experienced, as expected, a lower level of planned activity on the RCM project for the Canadian government. Adjusted consolidated EBITDA margins declined 140 basis points, driven in large by timing of investment tax credits realized versus the second quarter of 2017. Excluding the impact from IDCs, margins actually increased 60 basis points year-over-year driven by revenue mix and cost synergies.

Please turn to Slide #8. Imagery segment revenues were up 5% year-over-year driven by International Defense and Intelligence demand for co-imaging and elevation products from our commercial customers. Adjusted EBITDA margins for the segment expanded roughly 40 basis points year-over-year to 64.2% driven by higher revenues and cost synergies. As Howard mentioned, we received word from the NGA that the plan to renew our EnhancedView SLA contract to provide a 9th year funding on this contract vehicle. Our pipeline in International Defense and Intelligence market remains robust, and we announced new products and partnerships that we expect will drive future growth in our Commercial business.

Please turn to Slide #9. Space Systems experienced a 3% year-over-year revenue decline in Q2 as growth in our U.S. Government and smallsat businesses were more than offset by the decline in the GEO Communication satellite business and our work on the Canadian RCM program that is nearing completion. The increase in U.S. government business demonstrates that our diversification strategy implemented in 2016 is working, and that once the RCM project winds down and the GEO concept market stabilizes, this segment should return to growth.

Adjusted EBITDA margins declined by 530 basis points year-over-year to 13%, driven primarily by timing issues related to the recognition of tax credits and lower revenues. It is important to note that the timing of recognizing ITCs is inconsistent quarter-over-quarter and that we booked $15 million in the second quarter of 2016 compared to less than $4 million this quarter. This explains a good portion of the quarter-on-quarter and year-over-year variance that you're seeing in our EBITDA margins.

Please turn to Slide #10. Our Services business posted a 3% decline versus Q1 2017 in pro forma revenues, driven largely by unfavorable timing of U.S. Government contract modifications. At this point, we expect half-on-half growth in this business as recent wins, of some of which we have highlighted on this call, begin to ramp up. Adjusted EBITDA margins declined 50 basis points year-over-year to 10.4%, driven largely by a mix of price and cost-plus contracts.

In addition to the Janus Geography win that Howard highlighted earlier, the Service segment also won some classified work to provide software development, engineering services and social and cultural analysis. Going forward, the segment continues to have a strong pipeline of process capability set, and we expect it to be consistent contributor to long-term growth, particularly as it begins to rolling out new products in the second half of the year.

Please turn to Slide 11. The company generated roughly $49 million in adjusted operating cash flow in Q2, up nicely over the first quarter. As in the past, we will continue to have fluctuations in quarterly cash flows and, as such, provide a view of at least 6 quarters of performance, which should give readers a more wholesome view of recent trends. As a management team, we tend to focus on a rolling 4 quarters of cash generation to help adjust for seasonality and discrete items that can affect a single quarter.

As a reminder, we define adjusted cash flows as operating cash flows less interest expense and orbital securitization payments. And it also excludes integration costs. A reconciliation of these items can be found in the appendix of the accompanying slides we're using during this call. During the quarter, we invested $82.8 million in CapEx and capitalized development costs. Going forward, we will be highly focused on working capital and other drivers of cash flow to allow us to achieve our guidance targets for the year.

Please turn to Slide 12. We finished the quarter with our consolidated net debt at $3.11 billion, up modestly from Q1. Our leverage ratio at the end of the quarter was 4.1, well within our covenant range. We have no material debt maturities until 2020. As a reminder, from our Investor Day in March, we expected limited delevering to offer in the near term as we work on the Legion constellation build. However, once done, we expect the company to generate free cash flow streams to allow for a significant reduction in debt and leverage. The management team remains fully committed to paying down debt levels as soon as possible.

That concludes my presentation. Howard?

Thanks, Anil. Let me wrap up, turning to Slide 13, with our updated guidance. Following solid first half performance, we have affirmed our outlook for the year for consolidated revenues and cash flows. Adjusted EPS is now expected to come in toward the top-end of our previously forecasted range of $4.65 to $4.85 per share. We made some modest adjustments to our EBITDA margin outlook at the midyear point, raising Imagery a bit higher and putting Space Systems segment a bit lower due to the continued GEO concept market weakness and program performance.

Adjusted segment margins are now expected at roughly 33% for the year, excluding corporate expenses. Corporate expenses are expected at the higher end of our guidance range, driven in part by increasing spending as we prepare for redomiciling in the U.S. in the coming quarters. Interest expense as well as depreciation and amortization expenses are now expected to be lower than previously forecasted.

Overall, we continue to have a high level of conviction that our efforts to drive growth, cost synergies and cash conversion will allow us to achieve our objectives during 2018.

With that, I'm going to ask now for the operator to open the line and we'll take your questions.

(Operator Instructions) And your first question is from Thanos from BMO Capital Markets.

Howard, could you just clarify a point on seasonality? You previously talked about the year being back-half weighted. Looking at the guidance and what you did in the first half, it seems like results will now be more evenly spread. Is that a correct assumption?

Yes. That's certainly, Thanos, what our guidance indicates. And that's primarily driven by the stronger-than-expected demand in the first half in the Imagery business, especially from our international customers. And because these are on annual contracts, we have to assume at this point that if they're running a little hotter than normal in the first half, that that will equalize itself in the second half. Of course, if they are available to get additional funding from the various governments, then we could have some upside in the second half. But that's predominantly what's caused first half to be a little stronger than we had originally anticipated.

Great. And then on Telesat, could you clarify what portion of the contract you're involved in, whether it's the antennas, payloads, ground infrastructure or bus? And if you and Thales ultimately are selected to build the constellation, could you clarify what proportion of the content in dollar terms might flow to Maxar? Or would it be preliminary to do so?

This consortium is so named because we are equal partners with TAS on this project. We will focus on our strengths, which certainly will include the bus and all the propulsion infrastructure as well as very advanced antenna technology and other satellite electronics at MDA. TAS has experience -- more experience, frankly, with systems engineering of large constellations. They've just completed the Iridium NEXT program as well as are further along in development and application of digital payloads. So we felt that the 2 companies coming together would increase our PWIN on the project, give us the best chance of having the most robust constellation and the lowest overall cost for Telesat.

So we expect it to be very much a 50-50 partnership. It will obviously have lower revenue than if we were doing it totally ourselves, but this is going to be a large fixed-price pursuit for the production phase, and we're also sharing the risk now. Finally, we have access through our relationships in Canada to funding for the constellation. They have access through their European relations. So overall, we feel it's a very, very strong team and will represent a win for both Thales Alenia as well as Maxar.

Great. And just a quick one for Anil. R&D capitalization went up versus last quarter. So how should we be thinking about that going forward? Should it remain at similar levels to Q2? Or might it go up or down?

No. I think you have to look at capital expenditure in its entirety. And we are still committed to bringing our capital expenditure at the lower-end of our guidance. That was what we committed on Investor Day, and we're committed to doing that. So don't look at these things individually, but look at it in its entirety.

Your next question is from Paul from Scotia Capital.

Howard, could you maybe just clarify a little bit, one, the commentary you made around the separate organization for the smallsat manufacturing? Can you just go back over that? I missed a little bit about which markets that was going to actually be focused on. And maybe you could give us a sense of what that business looks like today, either in terms of size and staff, that would be helpful.

Well, initially, Paul, we have added the engineering operations of the smaller satellite business in the same facility within kind of the same organization as the GEO business. We believe that what we want to really take advantage of what we think is going to be really strong growth in the smaller-form factor satellites. And broadly speaking, we're talking 100- to 500-or-so kilograms. These satellites will be commercial applications as well as U.S. government applications, spanning from commercial -- communications to various kinds of Earth observation and remote-sensing.

We feel that that having its own organization, we've brought in a new Head of Business Development, a new head of Strategy. We're organizing that in a facility in San Jose, which is much more appropriate for the overhead cost that -- and physical structure requirements that smaller satellites need. We want to be competitive and aggressively go after this market. We have a large and growing pipeline of startups and U.S. government programs that want those kinds of satellites rather than the very, very large GEO Communications satellites. This will allow us to pursue that with different overhead rates and different structure.

Okay. And on the GEO side, you talked about a strategic alternative process. How should we think about the timing for that, Howard?

It's actively in process now. It has been for a while. I won't predict, again -- and we haven't made any determination what the final outcome will be, but it's fair to say we're looking at a range of options. All of it trying to accomplish one thing: position Maxar for growth and value-creation going forward. We do not believe, at this point, we'll see much in the way of a market recovery for GEO. So at a minimum, we're downsizing, continuing to cut staff to align with the workload. Cutting our footprint, making available some of our owned facilities for sale and moving into as small a footprint as possible on a go-forward basis.

Okay. And then the last one on my end, I guess, is how should we be thinking guys about the ramp-up of Legion? We saw it start to tick up this quarter. Anil, can you just give us sort of what the cadence might look like over the next year here in terms of that going to full strength?

Yes. As I said, for the remainder of the year, we are committed to the targets that we announced on Investor Day, which is in the $300 million to $330 million rate. Going forward, for next year, I think we are still in the planning process. And I don't want to comment right now as to what that number would be, but it would be kind of similar to this range, not significantly higher or lower.

At this point, we're in the engineering design phase. As we go into the production phase and start bringing in materials, you might see certain quarters higher in capitalization because we're bringing in those materials for use. To remind you, this is a $600 million investment, which will occur largely over '18, '19 and '20 financial years.

Your next question is from Steve from RBC Capital Markets.

Just a couple of questions. First, just to clarify on the partnership with Telesat or targeting Telesat. You talked about the 50-50 arrangement. And just to clarify, does that continue -- or contemplated to continue through the build phase as well? Should you be awarded that? Will that continue joint efforts? Or could that go to one or the other party?

No. We're in this as a team. And we have agreed in our consortium arrangement to be approximately 50-50 workshare throughout the entire program, drawing upon the strengths of both companies to contribute.

Okay. Excellent. Secondly, just on the debt-to-EBITDA, it ticked a little bit higher to just over 4. I assume that's just normal short-term variability that we've seen in the cash flows. Is there anything else we should be reading into that?

Not at all, Steve. Those are just monthly fluctuations that you -- that you see these things change on a weekly basis depending on the milestones that you have accomplished and the payments that you make. So I mean, these still happen. We're still committed to our long-range targets for this year.

And on this slide, you mentioned that there are several levers you can pull. You've talked about these a little bit in the past on potential sale leaseback, receivables -- however, receivables. I guess, just what criteria would you look at in terms of where the balance sheet stands or where the business stands to actually pull some of those levers?

We are aggressively looking at all options in order to improve our cash flow. And if it makes sense to us that there is value in crystallizing some of the items we have on our balance sheet into cash, we will certainly go ahead and do that.

I think -- Steve, I think there are a kind of 3 parts to this. One is the operational part: What can we do business-by-business to make sure that we're generating the maximum operating cash flow in the business as possible? Second, what are we doing to try and drive down our capital expenditure rates, whether it's for plant and equipment or capitalization software or other R&D so that we can try and minimize cash use for that?

And then third, looking at assets on our balance sheet, such as the orbitals or other assets, and financing arrangements that can generate cash inflows. So we're looking at all of those. And it's important to us to continue to stay the course with regard to generating some modest amount of free cash flow in the company even in the face of this accelerated spending on WorldView Legion over the next 3 years. I think that's consistent with the story that we've been telling since the March Investor Days.

Very consistent. Just a final one. Just more generally in terms of some the cross-selling efforts you've been seeing across the business over the past 8 or 9 months. I guess now since the transaction closed, you talked a little bit earlier about Janus. But elsewhere in the Imaging business, in particular, are you seeing more come to fruition there, in particular, radar imaging into the broader base? Or any color just in terms of the sales efforts now that are succeeding that might not have before with either individual business?

Well, several things come to mind. Certainly, we are currently expecting our radar imagery revenue to be higher this year than last year, and a portion of that is as a result of utilizing the DigitalGlobe channel. The fact that our pipeline for U.S. government business is expanding has a lot to do with the merger and the role that DigitalGlobe plays as an important partner with the U.S. government as well as the role that Radiant plays. So we certainly are seeing an expanded pipeline as a result of that.

Internationally, we're still optimistic that we're going to be able to book international versions of Legion this year and in coming years. And that's as a result of the close relationships that DigitalGlobe has with their IDI customers. So we are seeing clearly those cross-selling benefits. And as I mentioned in my prepared remarks, we don't believe we would have won a prime contract on Janus without the combined scale and capabilities of the former MDA IS business and Radiant -- the former Radiant Group. So we're very pleased at this point with the progress being made, and we hope as the year progresses to have more concrete examples that we can talk about as we did this quarter with Janus.

Next question is from Robert from Credit Suisse.

This is actually Audrey Preston on for Rob Spingarn. And so my first question is for Howard. As recently as your Investor Day, you noticed or, I guess, you observed that your -- the GEO concept market was relatively close to troughing, whereas now we're not expecting a recovery anymore. So I was hoping you could maybe explain some of the puts and takes that changed your outlook for the recovery in the GEO sat market?

Yes. I don't think that our view has changed. I think the words we used and have used since March is that we expected a bottoming. And that's really referring to our revenue from this sector. So as we launch more satellites than we book, our revenues have been coming down quarter and quarter and quarter for some time. So the bottoming occurs when we essentially reach kind of a steady state from a revenue standpoint. And we believe that we're just about there.

The orders this year, that the industry is now -- that we're expecting for the industry is very much on par with last year. I think last year was about 7, we think it's going to be around 8 or so this year. And that results in a limited amount of bookings. And revenue continues to decline. So I don't think that our view of that has really changed since the March time frame. We continue to look at alternatives as we've discussed. And we will, in the near future, reach a conclusion with this business on how we go forward.

All right. Great. Thank you for the clarification. And then another couple of questions on guidance. So it looks like the interest expense and the adjusted D&A are expected to decline relative to your expectations from last quarter. Could you just explain a little bit more what altered in your expectations for interest and for the D&A expense for the full year?

On the interest side, I think it's as simple as what we're seeing in our LIBOR plus rates are lower than we had forecast. Certainly, interest rates, we expect will continue to be on the uptick, but they are lower and slower, let's say, than we had expected. We have locked in now over $1 billion of our debt with interest rate swaps, which will secure those interest rate costs over the next 3 to 4 years on a portion of our debt. On the D&A, it's a very complicated purchase-price adjustment and valuation process that we've gone through since the merger last October. And again, compared to our prior outlook, the valuations of some of those assets moved around. We now think that they are stable, and that the guidance we provided for depreciation and amortization should be within that pretty narrow predictable range for the rest of the year.

All right. Great. And then one last one on the Neptec acquisition. So can you quantify any sort of financial additions coming from that Neptec acquisition? And any sort of synergy targets that you're looking at? Or was this just more of a smaller scale, more of a strategy-driven approach with less of an actual financial impact on the bottom line?

We think it has both. We certainly think it has strategic value, and I talked about some of those elements. This is a profitable growing company. We paid around about 10x trailing EBITDA, and our 3-year projection is that will be more like 5 to 6x. So we think that it's going to be a nice contributor to our space business as well as their current footings in the U.K. gave us a little bit of a boost there. They're located right across the office park from our current operations. So there certainly are some synergies. But this is about taking advantage of the growth that we expect to see in sensors that are deployed for various spacecraft applications.

Your next question comes from Stephanie from CIBC.

Can you talk a bit more about GBDX and EarthWatch and some of the opportunities that you're seeing around that big data and analytics piece?

EarthWatch is very similar in its construct to SecureWatch, which is our International Defense and Intelligence customer product. And so it basically allows for a daily take, utilizing our cloud-based GBDX platform. So a daily take of certain information that is of interest to our various commercial or vertical market customers. And we just literally rolled that out at the recent Esri conference. Already have a very large number of beta customers and expect with the opportunity pipeline to be ramping it up.

All of these products are built utilizing our imagery capabilities and platform. And it's about increasing the kind of daily take rate, where you can look at a specified set of geospatial information on a more regular basis and utilize change detection and other kinds of algorithms to get a more real-time view using our imagery. And that's, I would say, the underlying consistent trend across U.S. government, international government and commercial, is we love this high-resolution imagery. We want more of it, we want to take advantage of cloud computing and AI to have it tell us more about what we're looking at on a more frequent basis.

Okay. And then in terms of the LEO opportunity, can you talk a bit more about the pipeline you're seeing outside of Telesat and how Maxar is positioning itself?

We are the major supplier of antennas and some other electronics on the OneWeb constellation. We are in discussions with other potential companies as it relates to being a merchant supplier of various components. But this is a constellation that we have, at this point, made a commitment to.

If we -- if our consortium is awarded the production contract, then this will be our sole focus as it relates to complete systems and satellites in LEO, in the Communications part of the business, having nothing to do with Earth observation and other remote-sensing. But for Communications, this will be the horse that we've hitched our wagon to.

Our next question comes from Dimitry from Veritas.

So I have 2 questions. First is what drives the increase in capitalized development costs in software year-over-year? And what part of those capitalized intangibles are related to SSL's GEO business? And then the second question is change in the depreciation and amortization estimate. Did you lower the value allocated to DigitalGlobe satellite, and that essentially drove the slight reduction in D&A? And that's it for me.

On the second question, the answer is yes. It's largely related to the valuation of the DigitalGlobe assets. On the first question, there is no year-over-year increase in investments in GEO. It's comparable. The biggest investment there is our ongoing work on the digital payload technology as well as some of the technologies on the JUPITER 3 high throughput -- Ultra High Throughput Satellite so the increases year-over-year are largely attributed to activities in the Imagery business related to development of a number of the products that we've mentioned that are already generating revenues and development of new products.

And just on the valuation side, these are valuations that have now been finalized by third parties, and it's just not the valuation of the satellite, but also the assessment of the useful life of the satellite. And those both have now been finalized by third party valuers that have been engaged by the company.

Yes. Yes, I appreciate it. And so how should we look at capitalized development costs going forward? That is the end of, obviously, the remainder of this year, and then over the next few years?

Well as it relates to this year, I don't think we're expecting the second half to be much different than the first half. Really can't comment on future years at this point as all of that will be driven by what are the specific programs and products we need to develop. At Investor Day, we kind of laid out a multiyear view of overall CapEx. And so I would point you to that rather than getting in any specifics about individual products or programs at this time.

Your next question is from Steven from Raymond James.

Howard, the EBITDA guidance being a little lower, it looks like half of that decline is coming from space. So, is Radiant having some negative surprises as well? And where is the other delta coming from?

We took down, I think by, like 50 basis points the margin expectations at Radiant, so that's a relatively small number. The decline is around Space Systems, which, I think, we took down a full 100 basis points for the year. And that's driven again by the volumes that we're not seeing any improvement as well as a little bit of mix at Radiant across that cost plus programs. But that's the minor point. It's really around Space Systems. And in aggregate, we gave you approximate midpoints; they were never meant to be precise. Always a range about them.

And so we're kind of making a mid-year adjustment. It's not a large change in the annual EBITDA. And as I said, I think we're trying to take an approach of meeting expectations. Right now, in the guidance we provided, Imagery, revenue in the second half is flat with the first half. And it's for the reasons I mentioned. In international, we think there is potential for upside, but that's not in our guidance currently.

All right. That's helpful. And then, Howard, on the Janus award, when does it start? And how much incremental revenues is it worth for you?

So Janus is an indefinite delivery, indefinite quantity contract that the U.S. government uses. So think of this as an umbrella or sometimes called a hunting license that we now, as a prime contractor, get to bid on all of these so-called task orders that come out under that contract. So there will be many, many task orders; we'll bid on this individually.

And we believe that there's an opportunity, let's say over the next year, to kind of double our revenue in this area, which has been running around, I'm going to say nominally, $10 million. So we think we have an opportunity to double that over the next year or so. At this point, there have been 8 task orders issued, and we're bidding on most of those, and we'll win our fair share. The real key is now as the prime we're more in control of our future growth than we were as a subcontractor.

Your next question is from Richard from National Bank.

On the Space Systems segment, if you were to exclude GEO Com and RCM, what would the margins be for that business?

Higher. Yes. I don't mean to be flip about that. But I think it's fair to say that most aerospace defense contractors have margins in the mid-teens. So that's kind of the benchmark that's out there. Sometimes lower, sometimes higher. But longer term, that's certainly kind of a benchmarking target that we would think about in the Space Systems segment more broadly.

We've enjoyed higher margins than that at times, largely because of stronger success in some of the legacy MDA programs. But I think that -- for long-term planning, that is probably not a bad position to take. Clearly, we're being held down today by the margins in the GEO business, which are not at that level.

And I guess related to margins, as you add more IP and like AI and EarthWatch, would you expect to potentially expand margins going forward because of that?

Well, you know, inventory margins are very high currently. And yes. As you bring in more revenue, you do leverage the fixed infrastructure that we have, which might cause you to say, "Well, margins should go up." At the same time we are extending higher operating expenses to develop a lot of the new products. So as we move from just selling pure imagery to, I'll say, productized imagery that provides these insights and intelligence, we do have more OpEx. So at this point, I wouldn't call for any huge increase in margins.

But the team that works for me here at Maxar knows that I have a mantra, which is margins should always go one direction regardless of how high they are. So we will certainly work to get more efficient and to leverage our scale, with margins across all the businesses. So we would hope there's little bit of an uptick in the future in Imagery, but I wouldn't call for any kind of a major hundreds and hundreds of basis points going higher. So hopefully, that gives you a little color around your question.

Yes. That's helpful. And then on the 27th, you announced an appointment of Michael Rack as President here. Where do you see the biggest opportunities in new space as you look forward here over the next few years?

So what our new group President at MDA Mike Greenley has done is determine to organize MDA around the government business, which would be focused on programs, certainly, first and foremost, with government of Canada, but then also government opportunities in other allied nations and then to bring in a separate commercial President, recognizing that the commercial business, which is more products-oriented, has lots of opportunities to support customers again in Canada, but a much broader international export opportunity.

And so as we see the overall space economy ramping up, we think we're in a wonderful position to do more within but also outside of Canada. Again, the Neptec acquisition helps give us a little bit of a jump start in the U.K. And we talked previously about some programs we've done over the years in Australia but we need to have a much broader export market. And Mr. Rack will be focusing on that. Lots of global experience previously in his background. So anxious to get him on board to lead the commercial effort. And really glad to have Chris Pogue on board leading the renewed focus on government programs growth.

There are no further questions at this time. You may proceed.

Okay. Well, we'll thank everyone for joining the call today, and look forward to talking to you next quarter. Take care.

Ladies and gentlemen, this concludes today's call. We thank you for participating, and we ask that you please disconnect your lines.