Viasat Inc (VSAT) 2002 Q4 法說會逐字稿

Welcome to the ViaSat Q-4 earnings conference call, during.

You will be invited to participate in the question and answer session. At that time if you have a question, press the one followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, may 15, 2002. I would now like to turn the conference over to mark Dankberg, president and C.E.O., please go ahead.

Thank you. Good afternoon everyone, welcome to the earnings conference call for ViaSat's fiscal year 2002, fourth quarter, and year end as of March 31, 2002. This is mark Dankberg, chairman, president and C.E.O., and we also have with us, Rick Baldridge, our executive vice president, COO and CFO and Greg Monahan, vice president and general counsel. We would like to start off with Greg providing our safe harbor disclosure.

Thank you, mark. Many of the statements that we make during this conference call will be forward looking. Accordingly, ViaSat wishes to invoke the safe harbor forward looking statements provided by section 27A. of the securities act and section 21E. of the exchange act. Examples of these forward looking statement include but are not limited to statements concerning ViaSat's future operations, including projected gross margins, impacts of new business, and future cash flow. These forward looking statements are base on a number of assumptions. Actual results may be materially different than those expressed or implied by these statements. For a description of the factors, which may cause ViaSat's results to differ materially from those expressed or implied by these forward looking statements, please consult the securities and exchange commission filings for ViaSat. Specifically, the section entitled risk factors or factors that may affect future performance.

Okay. Thanks Greg. I'd like to start off with a overview for the financial results for the quarter and for the year, then we'll discuss our business areas and following that we'll return to the financial data in more detail and we'll be referring to the information in the press release that came out earlier today. Talk about financial results, fourth quart sales were $47.2 million, compared to 44.9 million, that's up 5 percent. Pro forma net loss excluding the effects of acquisition charges including amortization and goodwill and a charge for in process research and development was $1.9 million or 7 cents a share for the fourth quarter of fiscal year 2002, based on 26.4 million weighted average shares. That's a 142 percent decrease over pro forma income of 4.5 million or 20 cents per share for the fourth quarter of fiscal year 2001 based on 22.8 million weighted average shares. And income for the fourth quarter of 2002 includes a pretax $4.07 million noncash charge for accounts receivable relating to vul come, which ViaSat had assumed when we acquired the satellite businesses from scientific Atlanta. Without that charge, 2002 fourth quarter pro forma net why woman was 1.02 million or 4 cents per share. Actual net loss including the effects of acquisition charges for the fourth quarter, of F.Q.02 decreased 200 percent to $3.4 million or 13 cents per share, compared to actual net income of 3.2 million or 14 cents per share for the fourth quarter last year. Posted record sales for the year ended March 312002 of $195.6 million, and 19 percent increase over 164.4 million in sales, for fiscal 2001. Pro forma net income excluding effects of acquisition charges, including amortization and goodwill, and a charge for process R and D. for fiscal 2002 was $7.9 million or 33 cents a share based on 24 million weighted average shares. That's a 47 percent decrease over net income of 14.9 million, or 66 cents a share for fiscal 2001 based on 22.5 million weighted average shares. Net income for fiscal 2002 includes a pretax ed. noncash charges for accounts receivable relating to world come. Without that charge, fiscal 2002 pro forma was $10.7 million or 45 cents per share. Actual net income, which includes the effects of acquisition charges for fiscal 2002 decreased 78.6 percent to $2.2 million or 9 cents a share compared to actual net income of $10.3 million or 46 cents a share for fiscal 2001. At this point, I'll discuss some of the top level financial points now and Rick will go into more detail later in the call, including some additional points. That were covered in the press release. First of all, we had record revenue and a really really tough year for our industry. We had organic growth in our business and also added additional sales for labs, which also showed organic growth. The actual net income for the quarter is basically consistent with what we had anticipated. The pro forma results affect actual net income adjusted to new acquisition charges - acquisitional related charges, which are in process R and D and in prior periods, the tax rate related to the acquisition charges was the actual tax rate for the year. The actual tax rate for this quarter was negative. Which would have resulted in a less meaningful value for pro forma results. So what we did is we allocated our incremental statutory 30 percent effective tax rate to those acquisition charges, that's a much higher rate than the actual effective tax rate for fiscal year 2002. And that that results in a significantly lower pro forma results that we had calculated using the actual tax rate. So Rick will give more information on this later on but I wanted to touch on that now. Grows margins are - primarily because of the schedule delays we had with midst and connections and because of a reduction in broad band projects, discretionary R and D. increased dues to monolith things [inaudible] as well as other D.O.D. communications projects. Cash construction during the quarter was higher than we wanted, mostly driven by cash tied up in unbuild receivables and payables associated with Mids and Boeing. We'll go into more detail on why that was and how that's being shared later on. There's also cash consumed by the close of U.S.M. and Comsat acquisitions. And other debt reductions, and we also have got cash equivalents in the form of income tax equivalents. These are predictable and no surprises there. Rick will go into more depth in the financial, and our estimates for cash generation this quarter after the business outlook portion of the call. We said we wouldn't carry world come down in to this new fiscal year, so we've written that off. It's worth noting that we inherited those balances basically from the Atlanta balance sheet and they didn't involve revenue or earning for ViaSat [inaudible] light at 26 million, which is recessed of the current backlog in the range of $140 million. A fair amount and the reason for the low bookings in the fourth quarter is due to delay in commercial and government programs. The flip side of that is our new business pipeline has a lot of potential and we'll go into more detail on that when we discuss each of our business areas. Although we noted last quarter that we didn't think the first couple quarters of this new fiscal year 03 would be good for earnings wise, we do see good positive book to bill ratios over the quarter, which would translate into stronger financial results for the second half and confirm that the company's welt position for medium growth with improving margins, so we see interim awards over the next one to three months as an important indicator of future performance. It's also worth noting that we've absorbed some consolidation and cost reductions to improve our V. sat margins without any special charges. Now, switch to description of our business outlook and overview. The overall business outlook resolves around four major themes, the first is the potential for significant growth in defense. Second, is continued growth in VSAT [phonetic] revenues and the actions taken to improve the margins associated with those revenues. The third current situation of the big decrease in some of the broad band projects and the fourth is the potential return of the same or new broad band projects. So we'll go into those in some detail now. Starting with defense accomplishments and outlook. As of now, the pipeline growth opportunities in defense is more significant than it's ever been for us. That's due to a number of converging factors including the life cycle of the program that we're already involved in, as well as a number of anticipated new programs, and military satellite communication systems. I'm discuss each of them briefly. There's been a series of very important accomplishments for us recently, including completion of a contract and government qualification test, contractual acceptance of initial production deliveries and successful completion of a technical evaluation testing using both our L.P.T.1 airborne and L.P.T.2 ground versions of the terminals. Those are a number of positive implication the. One of the biggest is it clears away and frees up a lot of cash that's been tied up. Basically our plan [inaudible] use production accepted units in the government's technical evaluation exercises. In terms of tests wre aren't finished and the technical evaluation dates [inaudible] we basically went down the bath of building up extra units which we lent to the government for the technical evaluation, while simultaneously using other production units for the laboratory qualification testing. At the end of the quarter, we had over $15 million tied up in unbuild receivables on mids, so now having complete he had those tests with formal government acceptance now we have to start billing and collecting that amount over the current quarter and possibly some into the next quarter. The older units be being tested to the production units which is the agreement we have with the government. But it also opens the way for production and deliveries at a steady pace from here on out and that improves our competitive position on up coming orders. Plus there are additional opportunities on related programs, such as we recently announced with M-16 front end system award with north Bremen [phonetic] and hese new engineering development opportunities, including the radio systems program, M. 16 data links as well as other avionics opportunities. The government is planning additional low rate, initial production orders which are currently scheduled to be awarded as early as next month. Full rate production could start as early as next government fiscal year and would likely represent another increase in total manufacturing run rate. Another area where we see strong defense potential is in our information security area. This includes several different sub areas involving stand alone products, funded development programs, information security modules and subsystems for other projects. What is indicating in Boeing and [inaudible] involving ViaSat. The timing is uncertain and it is something we have to work with. Pending products include some we have already received initial contract awards and are awaiting additional funding or we're on winning teams and have yet to get the contractual starts, or building up proposals submitted that are still in evaluation. We anticipate good growth this year, since we do programs that are already underway and are pending additional funding, plus we have more upside potential on that with some outstanding bids. Then our. H.V. stat business is due to ramp up due to increased production rates on existing products. That's a good production rate and will serve to benefit us in the next couple quarters. There's potential to extend I don't understand that due to additional orders over the next couple of months. There's a number of new pending defense programs, we've submitted proposals some of which ought to be resolved in the next couple of months. A number of those projects have already gone beyond their initially planned award date and should finally be coming to fruition soon. There are subcontractor on a number of them and we don't have direct visibility to the customer. Some of those programs have already been disclosed, including the joint radio system, mobile user objective system, which is to fall into the existing units of satellites, the fab 2 or the family beyond line of sight terminals and also strike fighter. We also have bid some meaningful content in D.D.X., which is a newly reshipped program. A new Australian defense program involving U.H. F.K.U. band and satellite and antennas for the portions of wide band gap. Then there are also projects that we've already bid or expecting to bid imminently the prime contractor, which will have multiple awards, and a new K.A. band defense satellite terminal and other potential broad band military satellite communications projects. In summary, the outlook for defense has good potential due to a combination of successful completion of mids testing and tech any valve. Programs that have been delayed and expected to concern soon. Ramp ups of new products and new products being proposed. Our commercial business. Our convention F.S.S.VSAT [phonetic] business has continued to perform well, showing year over year growth this quarter. Mostly, that's driven by the ed. star system. This is the first time we've had an off the she will of, competitive product since ViaSat entered the commercial VSAT [phonetic] market. We're only competing in selective areas, but things are going well. We've deployed about 19 new V. star network hundreds in the second half, which is a lot. That's basically from a new start network product and we're encouraged by the success we've had there to date, including some very key customers such as Yugo [phonetic] stat and Dennis [Phonetic]. We've sat our target of growing our market share in the VSAT [phonetic] business. The VSAT [phonetic] market is extremely competitive and we've positioned to deal with that. During the fourth quarter, we implemented staff productions due to overlaps in the organizations in Atlanta and the Comsat labs, Lewis and Clark group, which we think will reduce our costs by several million dollars a year. We've basically absorbed the costs of those consolidations by our operating expenses. During the fourth quarter of this past fiscal year and the current first quarter of fiscal 2003. Those it is not easy to forecast the growth likely, but it is likely we will see sustained growth in the VSAT [phonetic]. We get that based on a combination of a few factors, including the early successes we've already had. The outlook for cost reductions improvements we've made in our sales approach and a perception of increasing activity in VSAT [phonetic] and some of the traditional international markets. We've also got a very broad product line, including a mash dump-up [phonetic] business we started, the mash multicarrier T.D.A. business and hub spoke businesses we got from Comsat labs. We have multiple products if a couple of those markets, so we're engaged in integrating those to reduce costs further. One example that I mentioned last time was integrating our new arc lied spread [Phonetic] into the star system. We've had some substantial technical progress on this in the past quarter and have an agreement scheduling deployment in our third quarter of this 3rd fiscal year. Now move on to satellite ground systems business, which has been relatively stable in a really, really difficult project for satellite infrastructure projects. There was a big chunk of backlog taken out of that. We have a promising amount of bid activity there. [inaudible] are under pressure due to substantial competition due to commercial awards and year over year, we expect this business to decline as well. We do a fair amount of repeat business with some customers and we don't expect that to change. We're also seeing additional defense opportunities in this business, as indicated by the ton tree system, last quarter with Lockheed and Honeywell. In summary, there is not a lot of variance expected in this area either up or down. Now I will switch to our broad band area. It's a business that is suffering most right now. But still shows the most explosive upside potential. The growth potential is based on either restructuring or reenergizing existing programs, or favorable outcomes on some pending programs that we think may likely to be awarded. I'll review waste going on now. First we'll start with our work on connection by Boeing. During the fourth quarter we completed F.A.A. pipe certification of our post production units for Boeing. Boeing's connection website, you'll see press releases there about that, as well as a picture showing the first commercial installation of the 747. In fact, in a recent [inaudible] last week, they said they were able to transmit the final F.A.A. certification document electronically by e-mail from 35,000 feet of a Boeing test kit and were able to send an 800 kilobyte document in less than 30 seconds, so clearly things are still progressing on connection. Boeing is still actively negotiating with many airlines regarding service. The F.A.A. certification is a big accomplishment. In the airline industry might be starting to recover in some segments. The success of the jets Boeing, including their satellite TV service also seems to lend that innovative services might influence passenger preferences, we are reasonably optimistic about connection. We think that most of the benefit of that for us would come in calendar 2003 versus this year. The other key point is that there were significant billing milestones associated with initial deliverseries and the F.A.A. certification which are flowing from unbuild receivables as of the fourth quarter close to invoices that will be could be converted to cash this quarter and next. On a related topic, a number of people have asked us about potential application of our connection technology into the market for two way broad band on private jet. That's definitely an area we're interest in and have been pursuing. We have in fact received contracts for demonstrations, trials, and/or system engineering by some Viacom customers. This is still relatively small but promising and we'll discuss that further in subsequent calls as warranted. Another interesting area is the application of the law blue doctors base consumer broad band system to existing F.S.F. satellites and that's a product area called [inaudible]. Basically we're adapting a system that was aimed at specific K. band spot beam salts to work on convention K. band satellite. Conceptually, that's similar to the star band or direct wave systems. We believe there are some very compelling advantages for service providers, including about double the band width efficiency or more, higher upstream speeds, better network management and the benefit of leveraging both from commercial standards versus purely proprietary VSAT [phonetic] products. We are working with a number of potential customers on this for initial deployment, but don't see those occurring earlier than the third quarter of this calendar year. We're not in a position to promise that yet. What we see now as the biggest issue is really whether or not those customers proceed with anything at all, not necessarily just whether they choose our equipment. A number of customers that have a potential to reach out to consumers that are exploring this, but they see new area based on what happened so far with star band and direct light. We believe that the surf beam system resolves a lot of issues that have surfaced in product in review of those services and we're working with potential customers to help them quantify the benefits. We have specific opportunities we're working in North America, Latin America, Asia pacific, and Europe and one or more of those opportunities would have a meaningful impact on our broad band business. There's also some pending potential K.A. band satellite projects, some of which include spot beam capacity. We believe it ought to be well potion positioned to compete for those. Some of those products involve incumbent fixed satellite service operators who are deploying partial spot beam capabilities on salts that also include traditional C.U. or K. band pay loads. Examples include Telesat [phonetic], Usat [phonetic} and morale. So satellites are likely to be launched and are much less likely to encounter the financing issues that have slowed or stopped the startups that didn't have existing F.S.F. services. Now I'll give a brief update on asteroids. We had two contracts, its larger was a prime contract directly with Astrolink [phonetic], the smaller was a smaller contract on det indicated gate ways. We received an as of close of the fourth quarter. Settlement of our larger contract with Astrolink L.L.C. itself is still pending. During the fourth quarter, there was some activities relative to that contract termination. We incurred about 300K. of termination settlement costs with our subcontractors. Which has been placed in inventory account. We also incurred a few hundred thousand dollars of R and D expenses for wrapup. The basic of that was to show hour ground terminals can communicate with the Astrolink [phonetic] pay load. That's always been considered a technical risk element by partners in the program and we believe mitigation of that risk may play a material role in facilitating restructuring the program. That leads to the obvious big issue which is what's going to happen with the program and/or asteroid. First of all, we don't know the answer to that and I don't mean to imply we do. I can talk about a few key points that we think are meaningful. Astrolink [phonetic] spent about $1.3 billion and a substantial amount of that was directed to investing partners to design and build two satellites and pay loads, which were very close to completion at the time Lockheed announced its withdrawal from a pending investment round last fall. The disposition of those assets has been the subject of a lot of negotiations among the investors, contractors. That will be resolved due to negotiated settlement or litigation. We don't know which way it will go, but it's not - it's not settled soon, it will be through the court. Disposition of those assets is obviously very important because they represent a lot of the value of the $1.3 billion investment in the project. In our previous 10-Q filing, we disclosed substantial termination of liability, 02 ViaSat by ViaSat L.L.C. which is clear and has not been disputed. That liability is substantially in excess of the amount we have on our balance sheet. At this point, we believe we have a strong likelihood, collecting the amount. We have on the balance sheet, but the time frame and the process for that will become more clear by the next conference call. That will be whether it leads to bankruptcy proceedings or negotiated settlement. There's a separate issue, whether or not there will be further investment to restart the project once the disposition of the satellite efforts is resolved. The reason we think the restart would be economically warranted is that the Astrolink [phonetic] assets could likely be acquired at a fraction of their original cost. Those assets are technically and fuctionally quite similar to the space link project that uses. It is a very substantial disparity in the current valuation of those two systems, so at some point, the market for satellite communications assets may likely correct some portion of that one way or another. From our perspective, launches those satellites, the probability of ViaSat being able to provide ground segment is quite good. The market for communication satellites is pretty small and near liquid and it's currently depressed along with ourple ton markets, so it may take a while to sort out. At this point it seems the events will move faster an therefore restart will be more likely via negotiated settlement but it's not immediate, and we will know a lot more within the next two or three months. We won't speculate anymore today. Wide boom is definitely still in business. Progress on their K. band satellite is currently suspended. There's a pretty fair amount of activity going on related to potential investments in long boom and/or restructuring of the company and/or some of the restructuring of asset. 40 our perspective we see them as best positioned and fastest route to providing scalable, high quality satellite broad band for consumers and small business at an affordable price. We think that represents value that will lead to the assets going into service. It also seems that the ground segment we're building is still the best and fastest way to use the satellites. We've got a good constructive relationship with world boom and think that the progress we've made on the ground segment is also helping to mitigate perceptions of either technical, economic, or business risks associated with their system. The amount of cash required to restart wild boom is relatively modest in the context of satellite systems. We've already talked about a number of applications of the surf beam K. U. broad band in the segment we're doing and we believe we're in a very low position for rapid growth in a couple of ways in the business but the timing is still unpredictable. Last thing, I'll give a quick summary of what's going on with U.S. ground Olympic [phonetic]. First thing is the biggest obvious direct growth that U.S.M. is tied to the K. band satellite launches, but there's also a number of other ways we're developing value. The first is related to VSAT [phonetic] for K.U. band F.S.F. satellites. This is grown for us. It has increasing importance to delay in the K.A. band systems and it's seeing substantial price competition. The R.F. trance receivers has already been a substantial factor in winning terminals. [inaudible] has done a significant amount of work for us at K.A.U. band which has improved our competitive position. Giving that the net result in substantial near term revenue. Still more being done there, which we do anticipate will lead to a meaningful U.S.M. revenue, which will be derived from products of F.S.F. satellites. Finally the potential benefit of U.S.M. satellite for surmuch beams is even greater, giving very very low price beam consumer to [inaudible]. U.S.M. is also D.U.D. opportunities that I mentioned, including K.A. band satellite and terrestrial bands. We structured U.S.M. as an independent subsidiary so we would not be being a captive supplier. That increases the viability of technical cost competitive position. So that's it for the overview. At this point I would like to turn it over to Rick Baldridge our C.F.O. and C.O.O. who will go into more detail on the financial results.

Thanks, mark. From the P and L first and then I'll go to the balance sheet. The pro forma net loss of 7 cents per share for the quarter includes as the market indicates, $4.7 million pretax charge for the accounts receivable that we inherited as part of the acquisition from the business for scientific Atlanta and there's some additional R and D. track credits in that quarter as well. We discussed both of these items and their magnitude in our previous conference call. Our pro forma E.P.S. including the other racom [phonetic] charge was 4 cents per share. I want to take a minute here to describe the change that we incorporated in our calculation of the pro forma amounts for F.Y.O.2. This has the effect of reducing the magnitude of the difference between the actual and the pro forma values in the year. We have a lower negative tax rate. Previously, we had used the effective tax rate for the respective quoting period to add back the acquisitionnal charges. We calculated pro forma earnings per share. This would have generated a much higher pro forma E.P.S. for this quarter if we would have continued to use that rate. As long as you have more normalized tax rate or at least a positive one, you can give a fairly good comparison between the actual and pro forma values. When the rate is negative, the difference can be almost twice as much. I think that is what most people have in their model. What was out there, is the result for the tax credit phenomena. The intent here is to reflect the business and manner as if these noncash charges were not there and therefore we are now using a full up statutory effective tax rate in this calculation. For us, that's approximately 40 percent. The impact of the change this quarter from the previous methodology is the single biggest difference in our biggest pro forma amounts. On a prospective basis, this will provide a clear-cut and - for profit. Our actual results and net income or relatively consistent with our previously forecasted outlook for this cawrt fer. The increase in tax credits as we discussed was the portion of the benefit allocated to our current period. If you remember, we had made some conservative estimates of the impact that these tax credits would have on the scientific related information was combined with our historical data and the actual values after receiving the required information from scientific Atlanta are more favorable. This has the effect of reducing our overall tax rate. You're come charge was to right off the assets that's been on the balance sheet since the acquisition of [inaudible]. We've maintained these receivables when we were in discussion with bankruptcy court and with new management at world come primarily because there was no change in our ability to estimate the probability or the magnitude of the outcome of those discussions. We are still in discussions and if they lead to any sales related to these assets in question, we'll identify those in a future call. Sales for the quarter were off about 2.9 million from last quarter, driven by the reduction in our broad band business and partially offset by an increase in our government business in the fourth quarter. SG and A was lower from last quarter, excluding the - when you included the expense of world come assets, reflecting our recent cost rereductions and accrual for compensation. Increase in R and D primarily reflect the in exclusion of results for U.S. moto [phonetic] Olympics for the first time. Investment requirements have started to improve and our joint venture with [inaudible]. We continue to forecast on a recurring basis late in the fiscal year 2003. Our operating income was productly where we thought it would be, considering the Astrolink [phonetic] termination and a slow down in our broad band related projects like wild blue and the production ramp on connection. In addition, we have completed the principal development efforts on two very tough jobs, one in connection an 1 mids. Both of these contracts required some additional expense in the quarter and resulted in lower risk margins. U.S. monoly things also contributed to the lower operating income. Gross margin should improve in the second quarter of this fiscal year. Overall increase in accounts receivable for the quarter of about 6.2 million. Receivables went down slightly, that was offset by increases in unbuild accounts receivable. This increase was primarily driven by mids in a number of miscellaneous programs. We have generally reviewed our accounts receivable and we record a small increase in our lines for [inaudible] accounts in the quarter. We should be in the generally cash receivables and corresponding decrease in accounts receivable balances this quarter with continued improvement throughout the 2nd and third quarter. Build receivables excluding Astrolink [phonetic] were approximately $33 million, with almost 85 percent H. left for 90 days. The Astrolink [phonetic] value, including the termination cost and already build amounts is approximately $8.1 million. As mark mentioned, we continue to be reasonably optimistic about this project. And believe the value we have recorded relative to our actual claim amount which exceeds $30 million, was reasonable. We don't know what the ultimate outcome will be and we have evaluated many possible scenarios and have to maintain this unreceivable. Unbilled accounts receivable was approximately 40 municipal dollars. Mids and Boeing continued the account for about half of that. Mids will be relieved in the next couple of quarters and Boeing should be billed and collected in this quarter. This is spread over multiple contract where we sues percentage of completion of government recognition to record revenue and require the achievement of various milestones to bill and collect from our customers. Our cash was impacted primarily by the payments made to wild blue tore the U.S. M. shares, shares that we acquired from them and the increase in unbuild accounts receivable and the $4.6 million reduction in our account payable. We created a tax asset, it's a tack receivable related to the credits in 2002, primarily related to the R and D items. We have should be able to collect that within the next few months, all we have to do is get the returns filed and we should be able to collect that money. We do expect to have a positive cash flow for the next two quarters and for the year. I have expect to have 15 to $20 million in cash by the end of our first quarter. We should have a zero debt balance with adequate cash reserves to fund a normal level of working capital by the second quarter. As far as guidance goes, our E.P.S. this quartster a little clouded with the world come charge, lower operating results due to the cost of carrying some additional resources for a while and anticipation of fairly significant news on new business within the next few months. And the push through on a couple of key development programs, mids and connections by Boeing. This couple with the delays in our broad band business is creating some near term pressure on our income. Our revenue outlook remains fairly unchanged from our last conference call. We're looking at fairly modest growth for the year, with the first quarter of F.O.3 being down slightly sequentially from our fourth quarter of F.Y.O.2. The potential is significantly better and the timing of some of those opportunities that we're working on in our broad band business and planning awards in our government businesses.

Okay. Thanks, Rick. Just to recap. First, growth, good growth potential which is by the completion of the midding qualification and the technical evaluation, which helps improve our competitive position, in the next awards which is decided in the next month or so. Possibly, continued og progress on information security. We have increased production run rates for existing U.S. hflt H. com products and we have several pending foo awards. The VSAT [phonetic] business has been growing nicely, including the 19 new link star hundreds in the second half of last year, combined with the cost reduction, potential for good growth. So, in fact, the VSAT [phonetic] business areas have a potential to compensate for an anticipated significant decline in funded broad band project revenue for this year. Now with overall prospects for revenue growth for the company as a whole, over all F.Y.O.3 with improved operating earnings. Even the broad band itself cuts in half relative to what it was in 02. I also lay down with the down sides and risk are. Basically, there's kind of a most obvious risk is in the timing of the awards for the D.O.D. and commercial broad bands. We could possibly get in a situation where we know we've won something, we're going to win certain programs, but the timing of the contract awards isn't on schedule and degrades our earnings due to the delay. It's possible we might not do as well as we might have in winning new programs and it's possible the mix of new programs we win doesn't quite have the blended margins that we expect. But there's good potential upsides as well. They're a couple of big broad band programs that might get started soon. There's also potential for a restart on the law boom 1 satellite this year, which would accelerate our ground segment work. It's possible that some new connection customers might turn up faster than expected. While we think restructuring and restart of Astrolink [phonetic] is a reasonable possibility, we don't an dissipate that to be a reasonable upside for this current fiscal year 2003. It probably would be quite late in this fiscal year. There's also potential that we can get a large customer for the surf beam based consumer broad band system and show a much better quality of service than the existing F.S.F. broad band systems have and we think that could trigger increased interest among regional service providers in general. The idea would be it might be an existence that consumer broad light broad band could be [inaudible] which hasn't been the case yet. Then there's also potential upside to do better than expected in the D.O.D. contract awards. I think there's some catalysts that people lie look for, including one is the resolution of the Astrolink [phonetic] asset disposition negotiations. Another is since a lot of these broad band projects are funded by capital markets, we think the U.S. capital market reception for some of the blue chip satellite operators like F.E.S., Yugo sat, this ought to be clear late this summer, we could have some positive ripple effect on pending broad band projects or the restructuring of existing ones and obviously, another thing to look for is the announcements on some of the pending D.O.D. programs. That's it for the prepared remarks we have. At this point we would like to open up for questions.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1 followed by the 4 on your telephone. You will hear a three ton prompt to acknowledge your question. If your question has been answered and you wish to with drawer your polling request, you may do so by pressing the 1 followed by a 3. One moment please for the first question. Our first question comes from rich Valero [Phonetic] with Neidman [Phonetic] and company. Please proceed.

Hi, good afternoon, guys. First, Rick, could you just clarify object the - what was the actual tax contribution you got this quarter to get that 4-cent pro forma number.

The tax credit in the quarter was about 1.7 million.

To get the pro forma 4-cent number?

Oh, you mean the tax - how much tax did we apply -

How did you get that 4 cent number? I calculated you needed about 700K. positive tax benefit. Is that -

To go with the amortization, is that what you're talking about?

Yeah, well, to get to the four sent, you had one number that was a 4-cent pro forma positive and what was the tax assumed for that?

I guess I'm not understanding the question, rich.

Okay. We can skip at that one. I'll get you off line. In terms of the guidance for next quarter, I think you said sequentially down slightly. Was that referring to top line, bottom line, or you know, what would be your top line and bottom line guidance there.

We just gave top line guidance. We said it would be sequentially slightly down.

Okay. And on the bot Tom line, do we expect profitability I would assume?

Yes.

And sort of low single digit profitability, is that -

Yeah. I think right now, rich, our first quarter doesn't look too dissimilar to us than our fourth quarter did. And I guess we don't have world come issue and we don't have this large of you know, tax credit, but I do expect our performance to be, you know, similar to or slightly better on the bottom line.

And what - what tax rate would we use, a 40 percent tax rate, is that how we will treat that?

I think our tax rate - you mean previous 40 percent or - for the amortization portion of that, when you add that back, okay, for the pro formas. That's for the amortization piece alone. Our tack rate for next year, I expect will be below 30.

Okay. On the - in terms of the commercial programs, mark, could you talk a little bit more about the surf program you mentioned a couple of times in the contention of wild blue, the surf beam, and who might be a pro speck tif customer or customers for that product?

Most satellite runs would be direct to home satellite TV operators, who are looking to add a broad band services complement, which is basically what echo star and Uso [phonetic] have done so far, so you can see companies like that doing that. Also, we've been in discussions with I.S.P.'s. We're also looking to add a satellite broad band component to their broad band services. Those are the two most likely.

Great. And, Rick, on the R and D, you mentioned it sounded like there's maybe a little bit of nonrecurring R and D, R and D that might go away this quarter. How do you see that trending sequentially?

I think we have the U.S.M., so that, you know, we talked about U.S.M. increasing our R and D, so that you should see stay, but there should be several hundred thousand dollars in there of R and D that you'd probably see again in this quarter, an then trend off.

Okay. Great. Thank you both, guys.

Our next question comes from William kid [Phonetic] with Lehman brothers. Please proceed.

I guess my first question is, I missed the full explanation as to why gross margins, declined sequentially. Can you provide clarity on what products or segments that disappeared or worsened to really create that change and at the same time can you give me the breakout for the commercial and military revenues and margins?

Okay. I'll give you the breakout for revenues for the commercial and military. The primary driver is in gross margin reduction was - it was due to mids and Boeing connection and the additional costs we incurred in the quarter. We finished the development in both those items.

I see. So the actual core kind of unit profitability on VSAT [phonetic]es and generally splitting those items you said is fairly consistent, you're talking bike a 32 percent margin level?

We didn't see much margin change or our core pieces of business other than we saw gross margin go away on broad band but we had revenue going away as well.

Okay. And is there - at the moment, you know, we've cleaned up the Astrolink [phonetic] exposure. I do have some optimism regarding wild blue, but can you let us know if there is balance sheet exposure at present to wild blue and if so, how much is it?

No. I don't think we have any current balance sheet exposure on wild blue.

With respect to the overall guidance, are you comfortable at all commenting on how you feel a little more specifically about whether on a quarter level or the full year level about the current E.P.S. guidance out there and secondly with respect to your full year E.P.S. guidance, I'm not sure how you feel comfortable maintaining your top line guidance with the sequential decline in the first quarter that is significant I think to where most analysts fall, so what's the rationale for a much stronger second half and - so if you could just give me, I'm asking for more E.P.S. clarity and why you're comfortable maintaining the top line in light of the first quarter.

Okay. I think the other question you had was of the 47.2 million in revenue, what was our defense stuff versus commercial, and our defense was 17.5 of that, going back to that point. The other point is, I don't think we're going to give E.P.S. guidance right now, William for the year.

Okay.

I think we're going to see how a couple of these projects sort out and I think we're committed to remaining profitable through that And you know, we'll learn a lot more during this next quarter, and so in the next conference call, I think we should have either heard on some of these projects or we'll know they're not, and we'll know what actions were taken to kind of return to, you know, similar profitability, that everyone's become used to with ViaSat.

But at the same time, can we also construe that you're not comfortable with the prior guidance?

There's a pretty broad range of guidance out there. Some folks are more comfortable with than others. There's a pretty big spread in the current year.

My last question relates to mids. Of what you're expecting to do for the coming fiscal year, how much revenue comes from mids do you think roughly, and of that, how much do you already have in backlog?

I think if you look at the tactical data links business in general, which includes mids and all the related programs, altogether, that's in the range f maybe 20 percent, 20 percent of where we would expect to be. And I would say, we might have of that, maybe a little more than - maybe half in backlog right now. Kind of in that ballpark

Okay. Thanks so much, mark.

Our next question comes from Victor Holley with Reeds Connor Bidwell [Phonetic] please proceed with your question.

A couple of things on the Orbcom [phonetic]. Do you have anything in your deal with scientific Atlanta to go back and renegotiate or recapture any of this, or was this known as bad debt when you did the deal in your mind, or do you have something to go back to them on?

That's a good question, and I don't think we want to comment on it right now.

All right. Number two then related to them, if you back out that - I take it that is true entire write off was A.R. related with them, correct.

Yes, it was.

So your receivables went up 11 million. How much of that sequentially, how much of that was due to willedup of these unbilled mids and connects versus just other business, you know, customers taking longer to pay.

A little over half of it was due to the mids and connection related stuff and the rest of it was on some other programs.

And was that - unbilled things on other programs or customers taking longer time to pay you.

Oh, it was unbilled. Our billed receivables are actually fairly flat if you exclude the billed portion of that - of that ORB com.

Okay. And then one last thing. I think earlier on when you were talking about guide arranges I thought I heard you say E.P.S. outlook first quarter was a little bit cloudy due to ORB com and you said later on since ORB com is hyped us, that's not an issue.

I was saying the E.P.S. for the fourth quarter was a little cloudy.

Thanks. All all I have.

Our next questions comes from Martin Ticunan [Phonetic] with C.E. Anterburg Tobin [phonetic].

A couple questions, just, you know, somewhat longer term, but maybe fiscal ol 3 as you exit, I'm curious about the information security business, how meaningful that might become the percentage of revenue or percentage of booking, just a little ballpark around that and the 40 million, I think you mentioned in unbilled A.R. for mids and Boeing, did you say for both of those that that would be largely collected in the next two quarters or was it just on the mids component to it, and then lastly, on again the E.P.S. kind of outlook for the current quarter, with revenue down modestly, I think you were saying, you know, although you don't want to go out past the first quarter on this, but kind of low single digit E.P.S., is that also implying that gross margin wouldn't necessarily rebound even though the mids and Boeing programs are completed, you wouldn't say anything above 30 percent.

Mark will answer the intro to that section in a second. I'll address the billed and unbilled. The unbilled what I said was about half of that on Boeing and mids, and we expect those - most of the Boeing stuff that we're billing right now, some of it has actually been collected since the quarter closed, and of the unbilled piece, since we're delivering that, it should flow through this quarter and maybe some into Nokes. Mids, we're going to pull out of that unbilled balance right now. As Mark mentioned earlier, we had our D.D.250, which is our official selloff of our mids unit this week and so we're beginning to bill liquidation payments against those deliveries as we roll those out. Those should roll out over the next two quarters.

An then before you go on to the next one, of the 50 percent unbilled A.R. that's not mids and Boeing, is there any major component to that or is that spread fairly broadly?

It's spread reasonably broadly.

Okay.

And the E.P.S. question you asked, which it sounded to me a little more related to gross margin, and the first quarter rebound on gross margins related to us kind of being done with Boeing and the Boeing connection and mid stuff. Until we get those phases of the contracts delivered out, you know, we're at lower margins collectively on those two, so that's were we expect our margins in the first quarter to be reasonably similar to what they were in our fourth quarter.

Okay.

And then the questions on the information security area, we would expect that to be in the ballpark of 5 percent of revenues for the F.Y.O.3, which is mostly development on some contracts that we have announced already, like band [inaudible], Teeter hub [Phonetic] to their defense work, plus some other programs that we haven't announced yet and potential upside on that based on some pending awards. In the awards - and the awards could be more - closer to maybe 10 percent of awards for this year, depending on Yakima's programs, the sales would be smaller because of the timing of the awards, and the new awards would also largely be development phases of those programs.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, press the 1-4. Our next question comes from Kevin deed [Phonetic] with Wells Fargo Van Kastner [Phonetic]. Please proceed with your question.

Wells Fargo securities now. Mark, would you mind talking a little bit about what you're seeing at Intelsat [phonetic], Eudosat [phonetic], and especially the consortium that S.E.C. Astro formed with Alcotel [phonetic] and Galant and what they're developing on the broad band terminals is.

I would say that the broad band front is not - in terms of the satellite - I'd say the satellite operators themselves, there is no clear direction among them. I think that they are sort of sorting among a few things. On the one hand, you've got kind of the star band and direct link stuff out there, which - just looking at the service providers that have kind of gone out with those things, it's a little bit hard to see that as great business models from a services perspective. On the other hand, you know, there's tens of thousands out there, so I'd say people are kind of weighing that. Then there's another camp, which is D.V.R.C.S. camp which S.S.E.S. has pushed and there's the S.E.C. Galant deal, which S.E.C. is still absolutely behind R.C.S., they had a hard time acquiring customers for that and that in acquiring the Galant Europe customer base, we really have a place to, you know, way to migrate customers to D.V.D.R.C.S. and drive down the cost there and that would be kind of consistent with Alcotel's involvement in that portion. The R.C.S., the D.V.D.R.C.S. contingent consortium is alive and kicking. The third thing that we're getting a lot of interest in is the stocks [inaudible] system for the consumer business, and there what I will tell you, kind of one of the main attractions is if you look at the other systems that are more VSAT [phonetic] centric, you start with how does the VSAT [phonetic] work and build a system backwards to the network from that, try to build all the operational support systems and the billing system and all that stuff, around that, whereas the dock cies approach that blue took was kind of let's start with a big networking system which was the cable modem system and let's tweak the VSAT [phonetic] portion of it to make it over satellite and for the people that see that kind of in person and look at what that means from a operational a support perspective, chips go into it and all that, it's pretty compelling, so I think that right now there's a lot of sort of measure - you know, kind of measuring what's going on and not a whole lot of commitment on anyone's part. That's how I would see it.

Do you think that's primarily just a function of the capital markets and that the whole Telecom as it is in general.

I think it's related to the capital markets. One of the things that you saw a year or two ago were service providers raised a lot of capital and they couldn't basically fulfill their business plans without committing to the capital equipment that went along with that. I mean, they basically needed to commit to things or the premise under which they raised their money became invalid, and right now you don't see the service providers with that type of commitment. I mean, you see people who are - who think there's opportunities to make money, but there's not the forcing functions that there were. I think that when you see - I think that if S.E.S. Yugo sat and [inaudible] sat are profitable in their U.S. offerings in the market, I think that's going to help put capital to work that will be more motivating to try things.

What do you see as the timing for the award on that, the first quest of the J.T.R.S. contract?

That looks like, - I mean, we get this indirectly through our prime contractors, kind of the current target is July 1.

July 1. Okay. Thanks a lot.

Thank you.

Our next question comes from Steve Freedis [Phonetic] with G.K.N. Please proceed.

Thank you. Calling in for Mike Christianiano [phonetic] today and I was wondering if you could give us a sense of the size that you anticipate of the upcoming mids awards and if you can give us also a sense as to what your win ratio, what percentage of that business'past you've received and what you expect this round.

Okay. It's a little unpredictable because of the price competition. I guess on the order of a couple hundred units and kind of in that range, which would probably be the biggest award to date, and that could be valued depending on how it was divided and other terms, you know, could be 50, 60, 70 million between the contractors. But you know, in those kinds of ranges, ballpark, and historically, we've gotten mids awards, maybe 20, 30 percent, in that range. We think we're - we think we're in stronger competitive positions than we've been historically.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, he press the 1-4. Our next question comes from Roger Gordon with Axio [Phonetic] capital.

Most of my questions have been answered already, but I calculate that receivables D.S.O.'s at the end of the year why 147 days and assuming that's true, can you tell me what the dollar amount of your allowance for doubtful accounts were at the end of the year and also what's the status of your sales backlog since the end of the year, has it grown or diminished at all, can you give us a sense of direction?

Can you repeat the second question?

On the backlog. I wanted to get a sense of since the end of the year into the first quarter where you stand with your sales backlog, has it grown, shrunk, what you see happening in the very near term.

I would say to date, six weeks, I'd say no meaningful direction. I don't think - what we're - what we would like to see, and part of this is someone asked about J.T.R.S., about July 1, whether it's June 30 or July 1 will determine, it's going to follow - even it's awarded July 1, it won't be awarded to us that day, so that's probably going to fall - we're looking for a book to bill that's, you know, meaningfully more than 1 or the first couple quarters and I wouldn't say that we're, you know, we've seen that in the first six weeks. I think that already some significant awards, you know, there's some kind of big dollar value awards that we have to be determined, more in the next six weeks and some in the next eight weeks or so. With that said, you know, on the smaller things that we're competing, especially in the commercial business, we've done aid I'd say quite well. The things that have been decided on the schedule have been going well, but the bigger things we know, it's hard to [inaudible]

Thank you. And on the calculation and on the allowance for doubtful accounts, what is that number if you have it.

I don't have the exact number, but it's less than a million dollars. And when you look at those receivables, we have about, like you said, half of those are unbilled, about half are billed, and if you take out Astrolink [phonetic] out of that, we have a fairly large allowance for debt on the Astrolink [phonetic] thing, but that one would exceed $20 million. If you want to characterize it that way. So if we have - $33 million in billed receivables between Astrolink [phonetic] and like I said, about 85 percent of those are less than 90 days old, so of the receivables, you know, we've done pretty well, and our history has been pretty good in terms of collection.

Thank you.

I'm showing there are no further questions at this time. Please continue with your presentation and closing remarks.

Okay. That concludes our presentation for this quarter. We appreciate everybody's time and attention to all this. We know it's very complicated and we're looking for similar or better results this time a quarter from now.

That does conclude your conference call.