Viasat Inc (VSAT) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ViaSat first quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. At that time, if you have a question, you will need to press the one, followed by the four, on your telephone.

As a reminder, this conference is being recorded Tuesday, August 13, 2002.

I would now like to turn the conference over to Mark Dankberg, Chairman, President and CEO.

Please go ahead, sir.

OK, thanks.

Good afternoon, everyone, and welcome to the earnings conference call for ViaSat's fiscal year 2003 first quarter ended June 30, 2002. This is Mark Dankberg, Chairman, President and CEO. And we also have with us Rick Baldridge, our Executive Vice President and COO; , Vice President and General Counsel; and , who just recently joined the company to become our CFO.

We'll start off with providing our safe harbor disclosure.

Thanks, Mark.

Many of the statements that we will make during the conference call will be forward looking. Accordingly, ViaSat wishes to invoke the safe harbor for forward-looking statements provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.

Examples of these forward-looking statements include, but are not limited to, statements concerning ViaSat's future operations, including projected gross margins, impact of new business and future cash flow. These forward-looking statements are based on a number of assumptions. Actual results may be materially different from 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 of ViaSat. Specifically, the sections titled "Risk Factors or Factors that May Effect Future Performance."

OK. Thanks, .

We've got a lot of good information to cover today. I'm going to start off with a top overview of our financial results for the quarter. Then I'll talk about our business situation and the significant events since last quarter, especially regarding new orders and business. And then after that Rick Baldridge will return to the financial data in a lot more detail, including the P&L statement, cash flow and balance sheet information. And we'll be referring to information in the press release that came out earlier today.

So starting off with the financial results summary, sales for the quarter were $42.9 million, compared to 48.8 million for the first quarter last year, and that's down 12 percent.

Pro forma net loss, which excludes only the effects of acquisition charges, which are amortization of goodwill and intangible assets was $315,000 for the quarter, or one cent per share. And that's based on 25.9 million weighted average shares. That's a 109 percent decrease over pro forma net income of 3.4 million, or 15 cents per share for the prior year, based on 23 million weighted average shares. The actual net loss which includes the effects of acquisition charges was $1.6 million, or six cents a share for the first quarter of this fiscal year, and that's down 159 percent versus net income of 2.7 million, or 12 cents a share last year.

New orders for the first quarter were exceptionally strong at just under $80 million, which grew our backlog by about $37 million to 176 million. About 75 percent of those orders were for defense communications products, which is a very positive sign for growth in that area. Which is going to be an increasing percentage of our total revenues. Our government orders for the, for just the first quarter were about equal to all of last year's government sales. Orders for the conventional, commercial VSAT and antenna ground systems business were better this quarter than in any quarter last year.

So the big improvements in the quarter versus the previous two weren't just in the two big contract wins, which I'm going to talk about, but we improved in the smaller orders as well. It also, I think shows our flexibility in being able to apply engineering and manufacturing resources to both defense and commercial business, in a way that's consistent with what the market demands and opportunities are in each of those. New orders help us a lot in rebuilding the backlog that was significantly reduced last year by terminations and delays in the satellite broadband projects. Plus we've still got a lot of new opportunities that are still in play, and I'm going to talk about those more a little bit later.

But first I want to give some more color on what's going on inside the company, and give some insight into our financial results for the first quarter, which ought to help people understand why we're optimistic about good and steady improvements through the rest of the year. And even though winning new awards is always a good thing, you'll get a better understanding of how much of a difference it makes to us right now.

One of the primary factors leading to that one cent loss before the acquisition cost amortization was an exceptionally high level of internally funded R&D, and in the proposal expenditures in the first quarter. R&D was just over 13 percent of sales for the first quarter at $5.7 million, and that compares to 9.4 million for all of FY '02, which was kind of, just about under five percent of sales. Bid and proposal expenditures, which is folded in as a component of our SG&A cost was also up significantly. That basically reflects expenses from a significant number of engineers that had previously been working on revenue generating, funded development contracts, mostly in the broadband satellite area.

And that's after we've already done a couple rounds of downsizing after the Astrolink termination, and as part of consolidating the Atlanta VSAT networks business with Comsat Labs. So that's, you know, so it's basically that extra staff, and that, the fact that high R&D and B&P expenditures led to that small loss for the quarter, it's not all bad. And basically we've been able to invest those expenditures towards things like new product developments, cost reductions on existing products, and in writing and supporting a high level of proposal activity.

The investments are pretty much across all our business areas, and include things like new antenna systems, mimics from USM, new infosec products for defense, mids and UHF SATCOM R&D, lower costs for VSAT products, some surf beam broadband R&D and other things. We think the R&D is going to help position us for growth, even in a down market, and we've already seen new VSAT winds because of the product that we've got with our VSAT line in - coming in the next few months. Our and our technologies as well. But that level of discussion in R&D and B&P spending is somewhat higher than we intend to sustain, and it's kind of related to one of the hard problem we've always had to work with since we started the company, which is managing the transition of engineers from one set of funded development programs to another. Generally this is a skill that as a company we've learned really well.

The problem with managing that engineering staff transition is intrinsic to aerospace and defense, and part of the way we've been so successful in the past is by having a very exceptionally broad and skilled engineering force that can adapt to the work . So we can allocate people to either commercial or defense, funded development programs, or to internal or external, refunded R&D or to new development programs or to product improvements. And over the last few years, you can see, for instance, how we've to manage the level of discretionary R&D, kind of inversely with the amount of customer funded developments that we have.

And besides that, usually when a funded development program ends, we've got a production following right behind it, where we can properly invest engineering time to decrease our manufacturing costs. But this whole system is just been operating on the edge over the last nine months. Normally we run a pretty lean operation, and that gives us some maneuvering room to manage through things like if there's delays in contract awards, or schedule slips, on ongoing projects or other unanticipated events. But the situation now is kind of precipitated by AstroLink and to a lesser extent combined with a number of new awards that we've been anticipating that would need a bunch of engineers, made things really difficult. And we immediately did staff reductions, cutting about 150 people out of the organization over the last nine months, or a little over 15% of our workforce. But we're still kind of in a low tide situation where every rock is exposed, and we had big projects that were stopped, others that we're completing, and new orders that are delayed.

The Boeing connection development didn't slow down, but it's now essentially completed, while the market's not really quite ready for deployment. completed in the spring, and while production is now getting going at a good pace, at somewhat later than what we anticipated, plus a number of DOD engineering programs have been delayed by quite a few months, and some of those that have been decided and showed result in contracts for us, like are still pending. So there are a number of programs that we thought would be resolved prior to the close of the June quarter, and would need the engineers we'd been holding on to. Plus anyone that knows our company knows that we have very high levels of productivity and commitment from our people, and we can't just instantly fire and hire engineers and sustain that type of culture and the competitive advantages we get from it.

So we erred on the side of holding on as long as we could, and we prod the people to improve our products and market position at a cost that we thought bearable. It's a little ironic, because the June quarter was just fantastic in terms of total orders. It was better than we expected, but that was mostly production programs, which are really good for margins, but not as good for supporting the engineering staff. So by the end of the June quarter, we'd a much better understanding of the amount and the timing of the potential new engineering orders, and we could plan our staffing around that. So at the start of this second quarter, we instituted a furlough program using a combination of accrued vacation ad unpaid leave to reduce staffing pretty significantly. That's a temporary solution, and it's going to be resolved by the level of new engineering contracts awards that we have over the next few weeks.

We've got a lot of internal communication about the situation and we've also instituted a number of other cost saving measures, so even though the second quarter awards outlook is pretty promising, and it's much more engineering oriented than the first quarter, it's not yet totally clear that we'll have enough new engineering development. We'll all the staff we have on furlough. If it doesn't, and people understand, we'll have to at least some additional staff cuts. And that will have been our best to avoid or minimize it. And, as a company, I think we'll be able to manage through that, preserve the substantial value that's ingrained in our engineering culture and be able to go ahead.

So it's basically a little bit longwinded explanation. It's why the June quarter was so uncertain but why we think it's basically the bottom for us. Schedule delays and cost growth on Boeing also were a factor, but R&D and are pretty telling in terms of variance to our more normal business model.

So this quarter we've already instituted a temporary fix and we'll resolve it more clearly within a few weeks. So we expect bottom line improvement even if sales are sequentially flat to slightly down. Plus as the new orders kick in, we see pretty significant sequential growth for the last two quarters, with a return to more normal profit levels for us.

Rick is going to go into more financial detail later. But at this point what I'd like to do is talk a little about our overall business outlook and our growth opportunities.

The biggest story for us is growth in defense. Of the $80 million in new contract awards that we got in the first quarter, about $60 million of that was defense. Plus there is still a lot of pending programs in the pipeline. And that's what we're going to discuss.

Our record for new orders in a single fiscal year is about $235 million. So the first quarter puts us in a really good position to break that this year. The $235 million was back in our fiscal 2001, and that was driven by a small number of very large orders from pre-revenue companies at the tail of the telecom level.

So for us to set a new record in orders this year in this environment with a much broader set of smaller contracts from the government and ongoing commercial companies would really be something. And I think we've got a good shot at doing that.

Our new award pipeline is still pretty promising. The first quarter was better than we expected. We had been looking at a book to bill that would be better than one. And, in fact, we almost reached . And that was driven by a good share of the MIDS production orders, as well as more UHF orders than we thought and a good collection of smaller ones.

This quarter we're also expecting a book to bill that's better than one, but we don't currently see it reaching the same level as the first quarter. It's a little difficult to predict.

A fair amount of the remaining second quarter orders are defense contracts, where we have agreements with the winning , such as for , the Boeing team, and Ka-band antenna systems on wide band contract. Or contracts where we've already been given preliminary funding.

Examples of other pending programs that we anticipate to be decided this quarter and are still up in the air include a UHF networking subcontract with Boeing on the program, which is the next generation defense UHF satellite system. There's additional government and commercial big antenna systems work. There's more work with Boeing on their proposal, which is a defense airborne satellite terminal.

There's an program pending for gigabit speeds encryption. There's work on the new . And there's probably some amount of commercial broadband and/or Ka-band stuff that we expect to some extent as well.

Then there is still a pretty fair amount of pending programs beyond our second quarter. As you get farther out, the amount of visibility decreases, but we can identify about another $100 million or more of defense contracts alone that we expect to be determined in the second half of the fiscal year, which includes additional MIDS orders for both domestic and international customers, some additional military SATCOM programs. Also domestic and international. There's some simulation and test equipment for the joint strike fighter, and there's additional infosec projects as well.

So you can see that there's definitely a new focus, or a renewed focus on defense, but that's not really that much of a change for us. If you consider that, you know, we had a big spurt in commercial there in the broadband area, but of those big broadband projects, two of the three customers there were , which is run by Boeing, which is also one of the big defense companies and a big aerospace company, and Astrolink, which was mostly driven by Lockheed and TRW, which are also fundamentally defense companies. So it's pretty easy for us to transition between that type of commercial and the number of defense opportunities that we have. Plus there's a lot of common technology between them, such as Internet protocol based information security, and Ka-band antennas, amplifiers and transceivers that are used in both.

So now I'll switch over to some of the accomplishments that we had during the quarter. First on defense, the big one was MIDS, where we finished qualification testing, we did really well in the flight testing exercises, got government acceptance on our initial production units, and we got a very good share of the production awards in the latest round, which is what's called LRIP three, or low rate initial production third phase. The program as a whole made good progress, which makes it easier to continue on to further rounds of production orders, and we expect that those will likely increase in terms of total volume purchases.

There's still potential for more awards for us on MIDS this fiscal year. And we also got our first international direct order with the Netherlands, and there's potential for more there this year as well. In the infosec area, that continues to do really well. We've got opportunities for standalone devices, including the KG 250 that we announced, and a new potential program for our gigabit speed encryption device. Plus we've got a bunch of devices that are embedded into other radios or terminals, or systems, and those would be things like the JTRS teaming agreement that we have with Boeing.

We announced win with a NATO Improved Link Eleven, COMSAT device. We have proposal in for the FAB T encryption device and we're also working on the Theater Isle, to do their missile defense program for embedded encryption device, and have a number of other opportunities that we're bidding as well. On UHF satellite, we got 4,000 more UHF DAMA modems for the PSC-5, and other Raytheon radios. And that's good, that's means higher production rates near-term, and it means that that production will go on longer than it would have otherwise. That's really good business for us.

Also we've been receiving a better than expected number of domestic and international orders for our UHF satellite radio systems, and that's partly due to the delays of other new radio programs that were going to be out there, but haven't happened yet. So that's one opportunity for us to sell our existing products. So overall in summary the outlook for defense is really good potential to a combination of programs that have been delayed, and we're expecting to occur soon. Some ramp up of existing products, and the number of new programs that we're proposing on.

In the VSAT area, we think our conventional fixed satellite services VSAT business seems to be gaining ground. There's a combination of look at kind of our VSAT business and our commercial antenna business, and the orders in our first quarter were higher than any quarter last year. And that's an extremely tough market with a lot of projects being delayed. The VSAT orders are mostly being driven by the new LinkStar system from our Comsat labs business, and we're finding that our value proposition, of breadth in our product line and what we think is the most advanced technology in the industry is - seems to be pretty appealing. We've added good customers.

There seem to be a lot of opportunities but it seems like the sales delivery cycle, I'd say, is a little more slow than it was maybe six or nine months ago, and we think that softness in the market as opposed to us loosing deals or just choosing poor targets. And actually, anecdotally it seems like we're competing pretty well, at least for customers that are looking for new systems. We've complete - competed directly with both and H&S on some and have won contracts and delivered systems in those situations. So that seems promising in terms of gaining market share. And we think we'll do well as our market returns. Our satellite ground system segment is doing quite well in a really tough market. We've got a positive book-to-bill ratio there, and we're building business spec up towards where it was before AstroLink went away, which had been a big project for them. The defense win with ITT is great, because that directly translates some of our commercial K band capability into the DOD market, and we're seeing some more defense opportunities there as well.

On the broadband side, due to the big broadband projects and Telecom issues that are engulfing almost all the big media, broadcasts and telecom companies, this has been a source of our restructuring and staffing issues, and it's where the bulk of the engineering staff surplus staff came from. We had some schedule slips and budget overruns on the connection program, which are already reflected in our first quarter results, but we've made really good progress and we're now shipping both airborne and ground hardware. Boeing announced a new antenna contract with Mitsubishi, which is significant because that included an order for 400 production units, which is a good indicator that we're going to see some production orders in that range in the not too distant future.

They also announced British Airways and Japan Airlines as customers, and got initial regulatory approvals in the US and Europe. And we've also had some successful business jet flight demonstrations, put out a press release today on that, and we think we're moving in the direction of some more significant orders in that market. The other - another interesting thing is that Liberty and Lockheed put out press releases a couple of months ago on their progress on reaching a settlement with AstroLink, and , the CEO of Liberty commented publicly on his interests in both AstroLink and . And there's been measurable progress in restructuring AstroLink, but there's not anything new that we can talk about right now. We do have a little bit of new broadband business spec'd into our plan for this fiscal year, and we have some potential for there.

But it's not something that we're really counting on in our plan. With US Monolithics, we're working on some pretty significant cost reductions in KU band electronics, and are applying the resources a lot more aggressively now to further improve our MIDs competitive position given this big production order. And also we're seeing some opportunities for in applications as well. So at this point, I'd like to turn it over to Rick Baldridge, who will go into a lot more detail on our financial results.

Okay, thanks Mark. Before I start, I'd like to formally introduce Ron Wangerin, our new CFO. Ron's a - Ron has a very strong technical background, public accounting perspective and excellent experience in manufacturing and telecom environment. Ron really helps to help strengthen our team here. So, you know, we'd like to say welcome and Ron kind of gets one a year and next time he'll be for us and addressing the financial issues.

The three primary areas I plan to cover in this section: our earnings for the quarter, our balance sheet, and then the near-term outlook.

From an earnings perspective, Mark's already covered the issues here fairly well. But let me add a couple of things regarding the broadband area: the impact of recent MIDS and taxes. I'll also review the normal elements of the P&L.

We have discussed our strategy with regard to broadband in the last couple of calls. We've continued to see some slips in awards of some of the projects that we were tracking in this area, and we're forced to take some cost-reduction actions; notably, furloughs and layoffs, to reduce the impact of these delays in our bottom line for Q2. We've moved some of these resources to our businesses and continue to support the funded projects in our broadband area.

For Q1, total R&D expenditures were up significantly from our fourth quarter, almost $2 million. That was in primarily three areas. One is broadband applications over conventional satellites, things like ; U.S. Monolothics, the growth in investment there; and some additional R&D in our government area. With engineers to internally funded projects, that doesn't result in in our customer-funded projects.

We also had some additional schedule slips in cost growth on the connection program and recognized a charge of about $1.8 million in the quarter. We do remain profitable in that program overall. The savings from the cost reduction action should have been up to about $1 to $1.5 million in our second quarter.

The MIDS award we received at the very end of the quarter benefited both gross margin and revenue in the quarter as a result of combining this award with our previous awards on this contract, which helped offset some of the loss of broadband. We treat this - we have one contract with the government on this for all and the elements, and we treat that on a combined contract basis.

SG&A expenses, which appear to be down significantly from the fourth quarter, were up when you exclude the write-off that we had in the fourth quarter. This was primarily due to the increase in and proposal expenses targeted at the opportunities that Mark discussed.

expenses recorded as part of the that we have there were about $100,000 lower for the quarter, which reflected continued progress in gaining new customers, thereby reducing their operating loss. We signed up 70 new sites during the first quarter.

From a tax standpoint, we're segregating the components of our tax provision due to the book loss we had in the quarter and the amount of the tax credit provision. The effect of this methodology is to allocate taxes and tax credits proportionally to each period, avoiding the significant swings on a quarter-by-quarter basis in the year.

We continue to earn fairly significant R&D tax credits due to the nature of the development work that we have. The tax credit that we recorded for the quarter $33,000.

Let's turn to our balance sheet.

Our overall accounts receivables were flat quarter over quarter, with slight reduction in build accounts receivable and an slight increase in . Build accounts receivable in terms of has improved in the quarter, when you exclude the $6.3 million for , which I'll address in a minute. The over 60 day receivable went down about ten percentage points as a percent of the total, from around about a quarter of our total, to around 16 percent. This is an indication of the improvement in quality in our, in our billed accounts receivables. In addition with the exception of writing-off the receivable we inherited from Scientific Atlanta, our history of collecting all of our receivables in each of our businesses is excellent.

ViaSat's Carlsbad operations has had immaterial amounts of receivables written off in the history of the company. Very, very small. And none within the last few years. We've collected each of the receivables in our Atlanta operations since we've acquired that business as well. We do not anticipate any significant reduction in our billed accounts receivable in our second quarter, but do anticipate a significant improvement in our unbilled receivables in this quarter.

As far as Astrolink goes, We do want to remind you that we're maintaining the 6.3 million billed receivable on our balance sheet, which is fairly old, dates back to December of last year. As Mark mentioned, we continue to see progress regarding negotiations between the various parties involved, and continue to believe our receivable's valid. Remember, this represents a fraction of our total claim of over $34 million, represented by the termination requirement due us as part of our contract.

Unbilled receivables increased for the quarter, primarily in the government business. We'd anticipated some reduction in this area during the last call, due to some milestones being reached on the program by Boeing, and on the MIDS program. Boeing made significant progress on each of these programs in the quarter, due to the issues we discussed earlier on Connection. Those milestones and billings are occurring in the second quarter. On MIDS we should have a reduction of about $4 million in the unbilled account within the quarter. We currently anticipate a reduction of over ten million in our unbilled accounts by the end of September.

Inventory, our inventory grew this quarter, the growth was price related to our commercial satellite networks products area. This area had lower than anticipated revenue for the quarter, and had ordered product from our suppliers based on a higher revenue, higher anticipated revenue level. We've taken the appropriate action with regard to new deliveries from our subs, and should see a reduction in inventory for the quarter. The good news is the inventory increase was in our Linkstar and Skylinks products, which continue to be well received in the marketplace, with over $2 million in that growth being received within the last couple of weeks of the quarter.

ViaSat and our auditors spent a great deal of time reviewing our inventory during our year end audit, and subsequent Q1 review, and continue to believe our reserves currently at seven and a half million dollars are adequate. This is also an area each of our business leaders are focusing on. We consumed about seven million in cash in the first quarter. We're forecasting to generate cash in the second quarter result of the achievements and the milestones and the programs I just mentioned, and very focused attention by the leaders of each of our businesses. We're currently forecasting to generate between five and 14 million of cash this quarter. A few payments landing one way or the other at the end of the quarter could have a significant swing on that value, that's why you see such a range in my estimate, our estimate.

But these are the, first quarter we were in violation of EBITDA covenant, and we've received a waiver for that. It's worth noting that the collateral for our line of credit's been limited to only accounts receivable and the inventory. We stay close in those - in close contact with our bank, who's been with ViaSat since going public with regard to forecast and cash . As far as a range and go, our revenue from the recent contract awards does not materially benefit our results until our third quarter, therefore we expect sales to be fairly flat on a quarter-by-quarter basis from Q1 to Q2, with about 20% growth sequentially for each of the third and fourth quarters. Impact of cost actions, as I mentioned earlier, our cost reduction action saved about 1 to 1-1/2 million in second quarter, and in addition to reductions in R&D and B&P, we've redeployed some of the resources of some of our government programs due a recent awards. to take some additional actions in the second quarter, depending on what happens with some of the pending new business opportunities over the next few weeks. Our third and fourth quarters should reflect significant improvements in operating earnings and cash flow. That's it Mark.

OK. Thanks Rick. So, I'm just going to summarize some of the main points again. The first quarter awards - new contract awards, were second best ever for us, at 80 million dollars, and the best ever for us in defense at 60 million. And that 60 million is just about equal to all of our last fiscal year's government sales. Plus there's still a number of additional government orders to be resolved this quarter, including somewhere we've - we're already on the winning team, we've gotten initial funding. Overall, it looks like our government business has the potential to grow in the 40% or more range this year over last, which will make a lot of the revenue decline in broadband. Plus the fact that we've got a good defense business creates government opportunities for our VSAT and antenna systems businesses, which we've already seen with the program with ITT. So there's several other opportunities like that as well, so overall, we think that business lines, our government business is going to account for maybe a little more than half of our total business this year, up from only about 1/3 last year.

We think that the conventional VSAT business is doing comparatively well given the market environment. Combined with cost reductions, this offers the potential for growth with margin improvement, but it depends, to some extent, on the overall telecom and corporate IT markets. Our satellite ground systems antenna business is off to a really good start this year and continues to be steadily profitable. So looking at it in terms of paramount with what we see as upsides to what we've sort of laid out, there are some - a couple of pretty big broadband programs that actually might still get started, and we might get those contracts, but we just don't know - and don't know the timing yet. There's which is a company, part of Satellite, is planning to buy next generation gateway network management system, probably this quarter, and we've got a proposal in for that.

TeleSat two satellite launches scheduled for calendar 03, and they have some KA band capacity and they were a significant investor in . And there's a pretty good chance they'll buy some ground segment for that KA band capacity, either later this year or maybe early next year. In terms of downsides and risks, the main downside would be if we do a lot more poorly on pending awards than we've done historically, or if those contract award dates slip out beyond what we're expecting. So we could end up with a small year over year decline in revenues, and that could be on the order of 5% to 10%, but we still ought to be able to be solidly profitable on even that type of run rate. catalyst - you know the near-term catalyst is going to be the disposition of about another $65 million in project-oriented proposals. That ought to be decided this quarter. That's what's still left to go.

There's still about $200 million in government and commercial project awards we're tracking now. That's in probably for the second half of our fiscal year. And that's in addition to the more basic book and ship product opportunities, so it will be fairly evident how we're going to do based on those award flows.

Obviously the earlier the contracts are awarded in the year the more impact they'll have on this year's results. But we're pretty confident that by the fourth quarter of this year we'll be at a run rate that represents a good improvement for us for sure.

So that concludes our prepared remarks. At this time, we'd like to open it 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 one, followed by the four, on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the one, followed by the three. If you're on a speakerphone, please pick up your handset before entering your request.

One moment please, for the first question.

Our first question comes from William Kidd with Lehman Brothers. Please proceed with your question.

Good afternoon.

Rick, I guess this question is for you. I was just wondering if you could elaborate a little bit more on the gross margin improvement sequentially and what products were really the higher margin products. And you know what type of gross margin level do you think is sustainable going into next quarter?

OK. Thanks, William.

The real gross margin improvement came on our government side of the business. And I think you'll end up seeing that in the segment reporting data you get in the Q. You know right now we're not expecting - you know we're expecting to have fairly normal margins that we've projected, you know that you guys have been looking at for the last several projections ongoing in the year.

So actually, as a whole, I think our gross margins on a quarter-by-quarter basis are fairly flat for the year. And from our Q1 to Q2 I think that it's fairly flat overall.

I see. And there is - Rick, I had some of the guidance that you gave, but can you provide a little more perspicuity around what your EPS expectations are for coming quarters?

I don't think - you know, at this time, we're not prepared to give updated EPS guidance. I think we've kind of given you guys a range of where we think, from a revenue standpoint, things should come in, some savings we anticipate on a quarter-by-quarter basis. I did indicate that we had $1.8 million worth of a charge associated with the commercial side of our business. We don't see that recurring in the second quarter off of the Boeing program.

Right.

But we continue to have - you know we continue to have the same amount of people we had, save about 25 or 30 folks that we lay off in the quarter. So we should see about $1.5 million in savings, and we shouldn't have a charge of $1.8 million for the program.

Now that's partially offset by the MIDS issue. So when you look at the overall gross margin side, you'd say, OK, gross margin rates going to be about the same. And the sales, we indicated - we feel it's going to be fairly flat. So you're really looking at the savings actions in terms of expenses. That will be the difference in a quarter-over-quarter basis.

And Mark, I have a conceptual question, you know, I guess in the past that your commercial focus was predicated, at least a while back on the Ka-Band developing and the logic being the Ka-Band was an efficient place to be from the satellite, from a satellite point of view. Now that a number of projects are on hold, and Spaceway's the only one with actual capital, or the only large project with capital that's moving forward, what will the implications be on your core VSAT business?

Should Spaceway be the only vertically integrated operator, or really the only VSAT manufacturer with Ka-Band space segment? I guess what I'm asking is, are you going to be at a disadvantage because the projects you're associated with potentially aren't moving forward as quickly?

Well if it, if it were to turn out that Ka-Band, that Spaceway's the only Ka-Band project out there, I would say that would be true. I think that there's some pretty interesting things if you, you know, listen to what Spaceway said. I mean, which I think they're going, in some ways will help clarify the market. I mean, basically what, and I think one of the things you pointed out is, you know, Spaceway really represents space segment, that H&S would use to pull people off conventional satellites and, you know, especially say from PanamSat and put them on to Spaceway.

But the thing is, you know, Spaceway is still a very expensive system. They're looking at, if I remember correctly, you know, 1.8, $1.9 billion for two satellites, so those are really expensive. They haven't really promoted Ka-Band as a way to save costs. It's just supposed to be better, and theirs. And if you look at I think one of the reasons that it makes sense to restructure Astrolink is if you could get two satellites that are essentially equivalent up there for half a billion, you'd basically, I think that, what that does is it puts out the real value proposition of Ka-Band, which has much, much lower a cost of airtime.

And even if Astrolink doesn't get restructured, you'll see telesats, and they can have two capacity out there, and I think the real value proposition for Ka-Band is going to be lower a cost airtime, and it think there's going to be some stuff that will get, you know, make that possible. Now certainly it may be delayed, and I think that, you know that I would say that if we thought that there was never going to be that value proposition, we'd maybe take a different attitude towards our VSAT business.

But a lot of our VSAT business now is oriented around lower cost airtime. We could introduce some of that through our technology or the surf beam. And people are responding to it. So I think it's too early to say that, I think that we're, I think that we're gaining ground, so I think we're just going to have see how things play out.

And I guess a last final kind of quick question is, you said the VSAT market was good this quarter. Is that because it was, you know, structurally good, or is that simply because you gained market share from ?

No, I think it's because, let's say, I wouldn't say it's structurally good, I think that the VSAT market is structurally difficult. I think that we're doing well based on, you know, I mean this we're going head to head with and in some cases used on contracts before where we never could and we've won some and those have turned in to orders. I mean, and deliveries for us. And we think that's a good sign.

Great, thank you.

And the numbers are good.

Our next question comes from with Needham and Company. Please proceed with your question.

Thank you. A little more specific Rick on the guidance for next quarter. It sounds to me like what you're saying is that revenue flat, gross margins roughly flat, and then that the major, the change in operating income would come from the $1.5 million cost savings, and $1.8 million non-charge, so roughly a sort of $3.3 million positive delta on the operating income line. Is that, am I thinking the right way here?

No . I think that what I'm saying is the 1.8 we were able to offset by actions in our government section, so - and we don't see that recurring in the second quarter. So that would have been up in the gross margin line. I think the real difference you're going to see is the cost savings come into effect in the quarter.

Okay, so basically a positive 1.5 million on the operating income line. And then how about the tax rate. I've had a hard time figuring out where your tax is going to come out on any given quarter. If you were at a positive operating income, or positive, you know, total income, what kind of tax rate should we expect for the second quarter?

Well, if we're at a positive income standpoint, fundamentally what you - the way this thing - the way we've segmented this is - you could kind of calculate a statutory rate close to 40% on the income level, and then that gets netted against our R&D tax , and I'd say for lack of more - you know, you do that R&D tax credit provision based upon what you kind of earned in that quarter. (Inaudible) we'd expect to earn about the same amount in the second quarter as we did in the first quarter.

OK. Alright, in separate topic, on your - of your backlog, I guess - and maybe if you could look at this in terms of including all of the options and maybe , do you have any rough feel for how much of that would within fiscal 03?

Well, you know, I think we've said previously - we've certainly had indicated before that we would I think, about - a little over 100 million dollars of our backlog at the end of last year within this year, and we certainly would some of the 80 million dollars that we've booked in this year, but to - probably less than half of it.

Of the total amount including the options and ?

Excluding the options and . Excluding the options and amounts.

Okay.

So - I think that might put us kind of ballpark in the range of 2/3 going ahead. Ballpark?

OK, thank you.

Our next question comes from Tom with . Please proceed with your question.

Congratulations Mark and Rick, on the great orders. In terms of orders going out, did I hear you say you had about 65 million in projections for the coming quarter? You were looking for a number about that range?

No, -- that 65 million was projects - lets see, what I'm going to do is kind of divide our new orders into two camps. There's kind of one which is sort of ongoing, more book and ship type orders for things like VSAT, networks or satellite terminals, defense stuff, things like that. That underlying rate is maybe 25 - 30 million, and then on top of that, we would win, of new programs. And so, I'll tell you, in the first quarter we won about - probably about - actually that underlying rate in the first quarter was more like 30-35 million with the big 45 million in some big projects, so this quarter I think we're kind of in a 25-30 million dollar range. We've got, you know, let's say 25-30 million kind of base business, and then you can add up stuff we've already won that's in the 10-15 million on top of that, and then there's 65 million left to be determined. Does that make - so I think we're sort of in a base - you know we're kind of already in the $35-$45 million range in what we've won or been selected for, and expect to get in terms of base business. Plus it's kind of $65 million left, which obviously we don't expect to win all of that.

Right.

And so I'd say we're definitely - you know we think we're going to do better than again, and it's conceivable we could do as well as we did first quarter, but we'd have to be a little bit lucky.

OK. And what sort of historic win rates have you had going back and looking at over the past couple of quarters?

Well actually the last couple of quarters it's hard to say, because there really just - you know one of the big issues for us in the third and fourth quarters is there's almost nothing in terms of these, you know, kind of more project-oriented contracts that were decided. But you know we tend to win kind of as a whole 40 percent, you know?

I mean the big - one of the issues is do things get awarded. Of the things that get awarded, we kind of win 40-50 percent of what we go after in good targets. And that's one of the reasons we're so optimistic now, is there's a lot of stuff that's in our strike zone.

OK. And then you had mentioned $200 million for the second half.

Yeah.

Is that $200 million - is that comparable to the $65 million...

Yeah.

... in terms of new major contracts that come up?

Right. Right. That's for the second half; that's comparable.

And what would be the comparable number to that as sort of ? Is it the $25 or $30 million?

There's kind of the $25 to $30 million sort of base business there. Now there's definite - in the second half, you know it becomes a little - you know I'd say right now some of that may not be awarded at all. It's just harder to see, but the main point I want to make is there's stuff that we're aiming at that we think is going to happen in that timeframe.

OK. And then just coming back to the $65 million, what are the two - sort of the two largest contracts in that that we should look for?

Some of the biggest things there are actually some commercial - like this is pretty - it's a reasonably big - there's nothing that's more than like in the $15 million range, you know? But there's , there's some other commercial satellite orders for conventional satellites. There's the gigabit Ethernet program and the program. So those are kind of the top three or four for us.

OK. And then, also, in the broadband area, I believe - are you bidding on as well?

Yes.

And what sort of timing do you see for that?

It should be - you know I think it should be fairly soon.

OK.

I think that, you know, it's always up to our customers to decide, but I think they're getting to the point where they're going to make decisions, you know, probably this quarter.

OK. And then on both the side and the side, are those technologies that really could be transferable to other types of broadband projects? Or are the specifications more unique that really apply to each of them?

In each case there's kind of a base that's very transferable. And there's also aspects that are unique to that system. But a lot of what we're going after in general in broadband commercial has this kind of unifying that allows to have a competitive advantage on each, you know, as we find new projects. That's kind of what we look at it in our strike zone, and they both definitely have elements to that.

OK. Well thanks very much.

Thank you.

.

Thanks.

Our next question comes from Wes Cummins with B. Riley & Company. Please proceed with your question.

Hi Mark, hi Rick.

First, Rick, I guess for you, on the receivables you said basically that the absolute value should decline by about ten million next quarter?

Yes.

Where are you at right now?

Well right now I think we're actually probably up a little bit on the billed side from where we, from where we ended the quarter. And we don't keep, you know, we don't keep a perpetual AR balance in the middle of the month, but we've billed a little bit more than we've collected so far, and we've found our cash position to be about equal, so it's kind of, so that would tell you that we've kind of collected about what we've spent, and we've billed more than we've collected. So we've already made some transfer from unbilled to billed.

OK. Can you give me some background on why this seems like it's been such a struggle to collect these receivables?

Yes. I think, you know, a couple things that I mentioned on the, on the billed side of those receivables, I think we are, we are making some progress, and we're making some progress and moving some things from the, you know, from kind of the aged side of things into the, into the more near-term so that's evident by the values. The unbilled side has been the real, kind of source of growth. I'd say over the last few quarters, and it's been primarily in two, in two areas and that's been Boeing and MIDS.

And both those programs, we've experienced, you know, delays in our delivery schedule and some cost growth on both programs, and we've recognized those cost growth in terms of earnings adjustments. But those delays have delayed achieving some key payment milestones. Which began, we don't have, haven't had any more delays on MIDS so actually we've made some pretty good progress in moving some things out of unbilled to billed on the MIDS side, and are making some as we speak on Boeing Connection. So it's really just the achievement of those key milestones on those two programs that has created most of the growth.

OK. You know, when can, I guess first what is your optimal level of receivables as far as DSOs go? When will you get there and how do we avoid getting back to this position in the future?

Well, you know, you know, going directly to the how do you avoid, you know, how do you avoid getting back there in the future, I think that staying on schedule is really critical. We're also paying very close attention to our contract terms, it's something that, you know, I'd say ViaSat's done a great job of in our history, and when you look at the turnover on our core pieces of our business, the turnover in receivables has been pretty good, you know, just in terms of collectability and turnover size. It's these fairly long contracts that embed both development and production that have, you know, kind of in the scheduled base have created this little bubble that we've got on the, on the receivables side.

Also, you know, we inherited some receivable balances and some customers from Scientific Atlanta that had some payment terms in there that were longer than what had traditionally been ViaSat's core payment terms. I think and the guys are doing a pretty good job of the new customer signups are fairly high quality customers. And so I think that takes a little bit of time, it's taken longer than we thought, but moving into a higher quality customer set on the VSAT side, and moving into more production oriented on some of these big contracts like MIDS and Connections should help the, should help drive down the receivable, the DSO side on the receivable.

And I would say, you know, when you said optimal, you know, what is an optimal DSO set? And certainly, I'd say it's below 80. I mean, we'd like to be below 80 at some point. And when you looked the old core business at ViaSat, we were there. Whether that, in the long run, is realistic in the market, I'm not positive, but getting close to that number, that is our goal.

OK. And a couple of other things. USM, how is business there progressing, how close do you think that business is getting to break-even, and I guess, what kind of drag was it on you guys's quarter?

Well, the USM -- the USM business for us, I mean, one aspect of it is in Ka-band, and that is obviously slow. And part of what we've focused them on a little more is supporting some of our ongoing businesses, especially in the defense stuff and in the business. And I would say that, you know, it's probably going to continue -- I'll tell you that, for this fiscal year, for the whole year, it's going to be -- it's going to bring down our results. Certainly that's going to be true if you count their -- just their results on their bottom line without mingling them with what we can gain on the defense side. But there's definitely -- depending on the rate at which we can incorporate some of that technology into things like , that's where we're going to get benefit even without Ka-band taken off. But it's -- you know, it's going to be -- this year is still going to be a factor.

OK, is there any possible business for them on Spaceway?

I'd say it's possible.

OK. Last question here. On your guidance going forward, I guess you said 20 percent up sequentially in each of the third and the fourth quarter. That kinds of gets you to around $60 to $62 million in the fourth quarter. I mean, do you guys see that as kind of a run rate going forward as I look out into fiscal year '04 ...

Yes. Yes.

OK. All right, thank you very much.

You're welcome.

The next question comes from with . Please go ahead.

Hi, just one more thing on the revenue. Did I hear you say near the end that the revenue for the full year could be off 10 percent or -- because usually the numbers are flat and then up 20 percent sequentially brings you back to where you were last year.

Right, right. I think that that's kind of the nominal case. And when I was talking about downsides, you know, the real issue is if we do because we still have things to be determined, awards to be determined, or if some of those awards are just way later than what we're expecting ...

The down 10 is the worst case, or a bad case -- not a ...

That's right.

OK, all right. I think all the others have been answered, or asked, thanks.

Thank you.

The next question comes from with . Please go ahead.

Yes, good afternoon. I hate to belabor the receivables point, but I was just, you know, wondering if maybe you could provide more clarity if you kind of differentiate between receivables that are, say, commercial versus, you know, DoD or government oriented. And then the respective DSOs in those areas if you had them, for the last quarter?

Yes, sure. You know, in general, let's not say in general -- let's say specifically. From a commercial recievable -- you know, our government receivables for the quarter were about -- you know, of the end bills and our government receivables represents over half of the end bills. That's - you know it's about $24 million. And of the build our government receivables represent about $11 million. And that balance obviously being commercial - and of the balance that's in commercial, you know when we say government and commercial it's not as clean as that because we have some government mix of business on our commercial side. You know specifically in our satellite segment business.

So you know there's a little bit of mix overlapping there. That's kind of the breakout.

OK. And then excluding the , the $6.3 million, was there any other receivables that are - you know would you say at risk from any of the broadband areas, or where payment is suspect? Or any sufficiently for those and...

I think that - you know I think we feel like we're sufficiently reserved. I mean we went over the receivables stuff. We've spent an inordinate amount of time in both our yearend and our first quarter both from our auditors perspective - internally we have some weekly receivable in cash review meetings with each one of these things. We spend a lot of time being very critical of these. And I think we believe we're adequately reserved across the board.

We do have - you know of course there's risk in any receivable that you have out there, but we're all comfortable that we've adequately reserved that and disclosed where we have concerns.

OK. And also relating to USM, you know can you cite any instance now or you know for any contracts you have up for bid where, you know, just the technology that you've acquired through them makes you more competitive in the bidding process? If you could just anecdotally speak to that.

I mean one program that we did didn't win, but that we did was program, which was just awarded last week. And that's really the first Ka-band for DOD. And we think there'll be others. But we felt like the USM technology was, you know, very helpful to our bid, even though we didn't win. And there's still some chance that may end up using some aspects of their technology.

So we're seeing - certainly seeing interest in DOD. The Air Force has done some trials very successfully of USM's Ka-band on DOD terminals. So that's one obvious example. There's a couple of others.

So the positive impact is imminent. That's only the point I was trying to stress.

Oh, yeah. I think so.

OK. That's all. Thank you.

Thank you.

The next question comes from with C.E. Unterberg Towbin. Please go ahead.

Thank you.

Did you say the $1.8 million charge for connection was in cost of goods sold?

Yes.

So if your revenues are flat next quarter and you don't have that charge next quarter, why wouldn't your gross margins be up?

As I said, you know we offset that - there was some offset from the government side a little bit higher than - higher margins in our government business in the first quarter than we expect in our second quarter.

So is the second quarter government margin - the second quarter government margin is going down because of a mix shift Q2 versus Q1?

This goes back to the issue of the MIDS contract being added to our previous awarded MIDS contracts. Adjustment in that quarter is about $1.9 million for that. And so it's really no other shift. I mean we do have some other mixed shifts going on, and then we have that every quarter on a quarter-by-quarter basis.

So this quarter, I'd say MIDS sales will be slightly less than last one, but we're going to have some increased sales in some of our UHF side. And there's some additional development sales that we'll have that we didn't have before. It will have a different margin in it. So there are some different in both mix and, you know, the relative program content.

OK, good. Great. Thank you.

Your next question comes from with Salomon Smith Barney. Please go ahead.

Hi. I apologize if I missed this, but did you give the revenue breakdown between government and commercial and the income breakdown?

No, I didn't. But our government revenue for the quarter was $20.3 million and our commercial revenue was $22.6. And from an operating earnings standpoint, of the - you know we had $2.1 million. If you just look at the operating earnings, we had a $2.1 million loss for the quarter. And the government was about 3.9 positive and the commercial about $6 million lost.

OK. Also, I'm not quite sure if you said that you'd have positive cash next quarter from $5 to $14 million.

Right.

Do you have any sort of guidance for the full year - fiscal year?

Not right now.

OK.

It will be - you know we're forecasting to be cash flow positive in the third and fourth quarters right now.

OK. Thank you very much.

The next question comes from William Kidd with Lehman Brothers. Please go ahead.

I guess, Mark, I have a question just about , and if you could tell me if the product - you know a year ago I guess it was significant, and I'm wondering if its priority or significance has been somewhat lessened by the acquisition. And where do we stand? Is the product going to get back on schedule, and how meaningful will it be in the back half of this calendar year?

OK. Prior to the acquisition, our was our - you know that was going to be our entry into the interactive market. And then with - when we acquired , we were able to bring up the LinkStar product right away. So that gave us an entrée in there, and that obviously elevated the importance of LinkStar to us right away, you know with some impact on .

Now the real attraction of to a lot of potential customers is in the spread spectrum technology and the technology. And what we wanted to do is bring it out in a way that is complementary to LinkStar as opposed to competitive. So what kind of slowed that down was we have - we basically wanted to fold technology into the LinkStar network management system so it would like one network. And that caused us to redirect.

And so we wouldn't have two separate systems, we'd just have one system, which you could do with either technology or technology. That's where we're headed. We already have our first binding order for it and we'll be delivering it in the last quarter of this calendar year. So in our third fiscal quarter.

And we're still seeing a lot of interest in it from people that are really interested in spread spectrum technology. We also are seeing - I mean kind of the counterbalancing thing is that there are a lot of people who are interested in standards and things like and LinkStar is obviously very amenable to that, and we will be announcing a -- you know, an RCS compatible version of LinkStar. So we're going to have both of those, but under a kind of common networking system.

Is it possible to get a timing and size update for upcoming MIDS awards, and maybe just like -- well, I realize it's not a perfect crystal ball, but is there any guidance you can give us around the next year? What are you looking at?

Well, I think on MIDS awards there's really a couple -- there's, let's say, two different areas, one is domestic, the other is international. Domestic, kind of the next thing you'll probably see is still one more what they call LRIP, or low rate initial production phase, probably, you know, first -- probably first half. I think it'll be earlier in the calendar year than this one was, but we can't say that for sure. You know, it'll probably be no earlier than the first quarter of calendar '03, might be in the second quarter of calendar '03. I think that the total amount of units ordered will be larger than this one, but it won't be double. It might be, you know, ballpark, 30, 40 percent bigger. Something like that.

On the international front, I think that -- you know, there's this Netherlands opportunity out there, and that one seems promising, because we won units from them the first round. There's a couple of other opportunities out there that -- there's a big one with Taiwan, but there's a lot of management and political issues around that. We don't know about the timing. But depending on the timing of the LRIP-4, we could get another one this fiscal year. It's possible.

Appreciate it, thank you, sir.

And thank you.

Ladies and gentlemen, as a reminder, to register a question, please press the one, followed by the four at this time. The next question comes from with DVM Asset Management. Please go ahead.

Yes, I was wondering about the for the Army. How you -- from what I gather, you've finished qualification testing there, and how does the order flow go for it?

The -- when we won the Army award, there was a pretty -- I'd say an outlook of pretty small number units for the base Army, which can be in the range of 100 or something like that. But -- you know, because it's being applied to things like missile defense, which is a pretty important area right now, the outlook for units seems to be increasing, I'd say, both domestically and internationally. But it's a little hard to quantify right now. I would say that we're -- we expect the market to be quite a bit larger than we thought it was going to be originally, but right now, I can't point to specific orders, although we've inquiries -- you know, we've had inquiries. It's just the way DoD works. Someone will say, I think we ought to do this, and then they'll come back and ask, Hey, how much will this cost, when will it be shipped?

We've had inquiries like that, but we're not seeing the program yet. But I would say, you know, we're still looking at something that's probably on the order of 10 percent of the airborne market. You know, less than 10 percent of the airborne market. So the airborne market's where a lot of the action is, but the ground segment could be pretty significant for us.

So what do you have as far as a -- in your plan for the year as coming from the Army portion.

Not very much. We just don't have it planned, but we're certainly working to make it happen, we just don't see the procurement. Right now -- I mean, in terms of plans, most of what we're doing when we track opportunities is we look at programs that are announced that there's going to be RFPs and contract awards, and that's what we're tracking. So since there isn't such a thing for the Army, it wouldn't be as part of our - when we talked about the awards potential before, that wouldn't be in there because there's not a specific program. But it could still happen and we're trying to make that happen.

answer, but basically there's not anything baked in. It would be a plus if it happened. And we think there's some chance that it would.

OK. Now on the Netherlands award you got that was, you know, obviously just for a handful of units, are they updating - they have like 130-something F-16s. They're going to do all of them? Would that be what you're after?

That would be what we'd be after, .

OK. So along with that, what's the opportunity in the international market?

Well that's the...

That's your biggest one?

... single biggest target right now. There are other targets that we know will happen, they're just not as imminent. For instance, Taiwan, Japan, and there are a couple of others.

There's another dynamic here which is that the - you know the program office in the Navy who bought this amount is really interested in consolidating all the international orders. So some of these international orders may be pulled through them. Right now that wouldn't be considered part of the ; it would increase the amounts. But we're fine to be prepared either way.

Was MIDS in on that? Did they bid on that?

MIDS will certainly bid on things like Netherlands, for instance, especially because they're European. So that's - you know, they're a factor. Right now we think that they are behind where we are in is. But at some point they may become more competitive.

OK. And when do you expect the input from USM to be an actual part of a MIDS terminal that you produce?

Well let's see. I would say that we won't - if you look at kind of USM hardware content, it probably won't show up until . But we're really looking at all of our MIDS orders as kind of a continuum. And it's just like steady product improvement. So we have two sources for, for instance, segment. We will have USM working with one or both of them, probably to make incremental improvements.

I mean what we're trying to do is get just steady improvement so we can improve our margins and remain competitive. And I would say that that - and that happens partly in hardware that we ship and partly in the way we compete for new orders. And so I'd say it's kind of already starting - certainly on the new orders part.

How about - I guess I'll go to Rick. What's your plan for paying down your line there?

Well I think it's - you know I think it's going to depend on our cash flow generation. this thing, you know, almost on a weekly basis, . And we'll see where we end up at the end of the quarter and then what our next few weeks' forecast looks like. But I certainly don't want out there, you know, that I don't need to have just from an expense side with our earnings.

You know any little help I can get on the earnings side helps. So I do want to make sure that we have the kind of liquidity to cover other things that we need. So we intend to pay it down as - you know we had that out in different types of increments, borrowing different of periods. And whether it's, you know, apparent, you know overnight type things, or whether it's in 30-day or 60-day type elements. So we'll draw those down as soon as we can.

Where does it stand now?

It's the same as it was at the end of the quarter, .

OK. And can you go over this inventory thing again? You said the whole is due to the commercial . Is that people backed out, or what's the deal? You bought more expecting larger orders, so they're unfinished goods?

Yeah, we placed these orders based upon a forecast, you know, for the items. We're really buying these in most areas other than - like some stuff in . You know a few minor components in things like , where we have some spare items and things like that.

But this entire increase was in , primarily LinkStar. And we have placed orders based upon the forecast. Our revenues for the quarter were a little lower than what our forecast was for the quarter. And, like I said, about a little over $2 million of that came in in the last - you know the last two weeks in the quarter.

So what we've done is we've gone back out to those same subs that we have and adjusted our forecasts. And actually below what our expected revenues are to bring those inventory levels down. And it was things like modems and, you know, antennas and, you know, component elements of - that we would then assemble together to establish the finished goods.

OK. So you've had six weeks. Have you had any progress on that?

Yeah we have.

Any quantifiable progress?

No.

OK. How about - you have gone back to Scientific-Atlanta, I imagine, to - on some of these receivable issues. What's going on there?

I'm sorry. I didn't understand the first part.

You must have gone back to Scientific-Atlanta on some of these receivable issues and perhaps an issue. Is there anything happening there?

That's nothing that we can talk about publicly.

OK. OK, that's it.

Thank.

The next question comes from with . Please go ahead.

Hey guys. A couple of questions here.

I want to go back to the SG&A line. Could you help me understand going forward what the percentage revenues will be? If we look at the next quarter and we assume revenues and then we take our SG&A we had, do we merely take out the $1.5 million in savings that you already talked about? That gets us back down to about a 17 percent SG&A as a percentage of revenue.

Yeah, I don't have my - I don't have it calculated the way you look at it.

I'm basically taking your SG&A and your revenues off of your financials and then $1.5 million from the SG&A and dividing by the ...

I think we have - our forecast is a little bit higher than that in the next quarter. But it will get down to about that level.

So for the year then we'd be looking at something like 18 percent as a percentage of revenues?

Hang on just a second. Yes, close to that.

So my assumption that the $1.5 million we got in savings does come out of SG&A, that's correct?

Right.

OK. On the -- going back to the tax line, you talked about tax credits. I think I missed the number, do you have an estimate of what the R&D tax credits will be for next quarter?

It says the number for the quarter is about 633,000 for the first quarter?

And we expect it to be about the same for next quarter?

And we expect right now that based on the content of the business that we have, the tax credits that we'll earn in the second quarter to be similar.

That's all my questions, thanks.

Thanks, .

Gentlemen, there are no further questions at this time. Please proceed with your questions or any closing remarks.

OK, well that basically concludes our call for this quarter. I thank everybody for your interest and attention and look forward to talking to you again in the next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.