Viasat Inc (VSAT) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to ViaSat’s fiscal year 2003 third quarter earnings results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time, if you have a question, please press the one, followed by the four on your telephone. As a reminder, this conference is being recorded, Tuesday, February 11, 2003.

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

Okay, thanks and good afternoon everybody and welcome to ViaSat’s third quarter earnings conference call for the period ending December 31, 2002. I’m Mark Dankberg and we also have with us Rick Baldridge, our Executive Vice President and Chief Operating Officer; Ron Wangerin, our CFO; and Greg Monahan, our General Counsel. And, before we start, Greg will provide our safe harbor disclosure.

Thanks, Mark. Many of the statements that we will make during this conference call will be forward-looking. Accordingly, ViaSat wishes to invoke the Safe Harbor for forward-looking statements provided by Section 27(a) of the Securities Act and Section 21(e) 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, the impact of new business, and future cash flow. These forward-looking statements are based on a number of assumptions and 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’s filings by ViaSat. Specifically, the section entitled Risk Factors or Factors that May Affect Future Performance.

Okay. Thanks, Greg. Well, with the overview of our third quarter performance and I’m happy to report that [unintelligible] offer a big improvement and the company’s made good progress on a number of fronts. I’m not going to recite all the details that were contained in the press release that went out about an hour ago. But, the main thing that we focused on we’re starting to convert the record pace of orders from prior periods into revenue, and improving our bottom line, continuing to make balance sheet progress and gaining our momentum in new contract orders.

Sales were really strong at $49 million for the quarter, which was better than what we expected. We were aiming for 1 to 4 cents a share pro forma earnings and we hit the bottom end of that range, excluding the Astrolink settlement that we recorded. We recorded a 5 cent per share pro forma loss with the Astrolink settlement and that accounted for a 6 cent per share write on. So, excluding Astrolink, we were a positive 1 cent. I’ll go into more detail on Astrolink in a few minutes.

Hitting the earnings range for the quarter was an important step as we tried to head back towards more historical profitability levels over the next few quarters. The balance sheet improves again for a total of $4 million in cash derived from operations, and improvements in our DSO’s, reduced debt and also resolution of the Astrolink assets. The new awards also continued on a record pace with a little over a [$656] [phonetic work] million in orders in that quarter. The fourth quarter outlook for awards is pretty bright and we believe we’ll exceed our old record of $235 million in a single fiscal year by a good margin.

Plus, we had a number of positive events on the commercial and broadband side, which we think positions us for good growth there, as well as in our defense business. A little bit later on in the call, Ron Wangerin, our CFO will go into more depth on third quarter performance. But, first I’d like to go into a little more depth on Astrolink and then cover the highlights across all our business areas.

We think that the Astrolink settlement is overall a good thing. It was actually executed in early January, but considered a subsequent event for Q3 recording purposes. The actual timing depended on Liberty Media reaching agreements among all the principal parties. So, we weren’t in control for -- and actually didn’t even have that much inside into when it would actually close. But, the settlement discussions have been going on for a quite a while. And, that’s part of the reasons that we hadn’t made any accounting changes related to the balance sheet items previously. The settlement, in our accounting treatment, don’t really indicate any kind of decrease in our confidence regarding the restart of the project, on the contrary, we think things have improved and this was a big step, especially given Liberty Media’s leadership role in restructuring WildBlue.

I’ll talk about the [unintelligible] business areas now starting with our defense business. First starting with MIDS we made good progress in the quarter in ramping up production. The airport and terminals in the operational evaluation now and [unintelligible] version of the terminal completed initial operational testing. So, we’re pretty steadily knocking off contract milestones where’s it’s about invoice and convert unbilled receivables. Production capacity’s improved so we can grow sales now at a pretty good clip given new unit orders.

For mix major opportunities for orders are a key European order expected near the end of this quarter or possibly moving over to the beginning of the next one. And then the next U.S. production rock will probably, we expect to be in the June quarter, but it’s looking overall to be in the September quarter. We expect margins to improve on the next orders as we account for them as stand-alone production contracts versus our current accounting as a combination with the development and testing.

We’ve also won some new type [unintelligible] involving customization for the growth potential and are encouraging from a competitive evaluation stance. Our government [unintelligible] business is still doing well. In the third quarter this accounted for a lot our ability to transition engineers who had been on the discretionary programs to run the development programs.

So, even so, things are still improving there and we’re not totally peaked yet. But, that key program which we had announced previously with Boeing had been delayed because of the protest. But, that protest has now resolved and that’s gaining steam.

There’s contract called UIA or Unified Information Assurance architecture, which we had thought we had started about three months ago, it actually still isn’t from the contract. And, that’s been kind of a double whammy for us and now we hadn’t been able to realize sales like we thought we would. And, we’ve also been expensing discretionary R&D costs that we thought could have been covered under the contract. We current believe that contract will start soon. We’re not the prime contractor so we have a little bit of -- a limited visibility into the actual start.

We’ve also been getting other new InfoTech opportunities that are a result of the previous wins and we expect to be able to announce some of these later this quarter. InfoTech is still our faster growing defense area and things still look good there.

We’ve also had a strong rebound in UHF band satellite sales and earnings, compared to where we were in fiscal year ’02 and that’s helping a lot. There’s some good new program opportunities there as well.

Overall, we’re anticipating somewhere in the range of about 30 to 40 percent year-over-year growth in defense for this fiscal year as a whole compared to the prior year and the current indications are that it appears to be a similar situation for next fiscal year, our FY04.

On a commercial business side, you know, the positive in the first [unintelligible] of this year were really in our defense side, not commercial. But, recently we’ve had some pretty good positive events that make things look a lot more promising on the commercial side. So, starting with our [Compow] [phonetic work] ads, [unintelligible] networks product business, that was the main source of the bottom line problems that we had in the previous quarter. And it was actually our main concern as we were looking toward this quarter and the next quarter.

But, there have been some pretty important developments, which appear to have improved things a lot. First, we identified a number of problems in the way we price some products and services and the way we fulfilled some of our orders. So, we’ve infiltrated cost reductions, which we’ve been expensing. Even though our results are already a lot better, we really won’t see all the benefits for the cost reductions until the June quarter.

We also won some big VSAT orders in December, and that allowed us to grow our sales for the December quarter and into this quarter with a better than normal backlog. And, then, actually if you look at kind of how we compete, probably our single biggest issue in competing for new projects has been that we didn’t have any single big projects that we could point to as an install base. And, so the big projects that we won in December with Shoppers Drug Mart and InterDirec e-Mexico and [unintelligible] have really helped in providing reference accounts for large jobs.

Then another good thing is we also have our first ArcLight data network up and running. We completed the capitalized R&D in that area of the third quarter and we now are expensing any more work on that. So, it’s a little early to declare victory on VSAT but things have improved a lot.

And things are starting to look up on the broadband part of commercial as well. The big news there in December was our Liberty Media, the National Rural Telecommunications Cooperative and [unintelligible], about $156 million in investment round in WildBlue. The National Rural Telecom Coop was the original distributor of Direct TV in rural areas and they see an opportunity to do a similar [unintelligible] and two-way satellite broadband, and, of course, they also have the large global satellite operating.

So, the current plan is to use WildBlue Ka-band blocking capacity on telepath and the [F2] [phonetic work] satellite, which is scheduled for launch in the fourth quarter of this year. That satellite’s also a replacement for an existing telepath capacity, so the likelihood of being launched is very, very high.

The new investment technically constitutes a change in control to WildBlue, so they need FCC approval for our license transfer. And that could take as long as three or four months from now and instigating items were up to generate revenue. But, there’s some other potential benefits as well besides just the WildBlue project in particular. [Telapack] [phonetic work] Canada also has Canadian Ka-band capacity on that same satellite and they may be motivated to use the same [unintelligible] grounds system that WildBlue’s using and that’d big for us.

Also, [unintelligible] have said that they’d like to use the technology and lessons learned from WildBlue and other global opportunities. Also, we’ve seen some new early preliminary reaction from other major north American satellite operators who see the WildBlue restart and [unintelligible] investment and have stated that they plan on ratcheting up their own ka-band plans, which we think will create opportunities in the market for us.

In Europe we’ve been working on several programs with Eutelsat, which we announced just recently, including adding a DVD RCF open standard mode to our links to our networks, plus providing ground segments for the ka-band [SKYpac] [phonetic work] systems which is on the [unintelligible] satellite. And then Eutelsat also is the first operator to buy a pilot [unintelligible] system which is we’re seeing [unintelligible] we’re using on WildBlue success on the ku-band factor.

Another point is Boeing started commercial trials from their Connexion by Boeing in-flight broadband service, which we’re positive and that’s drawing a lot of attention. And then British Airways will start the service next week. Boeing said they now expect to add some new [f-flyers] [phonetic work] this year. And, it looks like the outlook for improving additional production seems to be improving.

And, another point was we received about $10 million in orders from ARINC for their styling system for two-way broadband and business checks. ARINC had previously announced orders with Gulf Stream. And here ArcLight system with technology families.

And, then of course Liberty Media’s purchase of the Astrolink assets has greatly improved the prospects for that to return also. So, actually broadband’s looking a lot better now than it did just a little while ago. You’ll learn a lot more about the timing and likelihood of this over the next few months.

Well, hooks to our satellite ground systems business, which is also still doing well, it’s the main driver there has been government applications, such as the wide band [unintelligible] or Ka-band antennas and then the telemetry program [unintelligible], including space of range systems in the ballistic missile range systems. So, we expect to continue adding follow on orders on these other programs. But, don’t really feel a same type of dramatic growth prospect as we have in defense or potentially in broadband.

Our U.S. small [Olympics] [phonetic work] business has been an ongoing investment for us since we acquired it about a year ago. Obviously, the single biggest potential payoff for us there is in commercial ka-band and that could cause a real rapid turnaround with the event. When things look a lot more promising there than they have for a while. But, we’re also been working hard on other opportunities and made progress in the defense business for both internal and external customers. At this point, [USN] [phonetic work] is involved in almost half of our businesses. And then we’ve also made some progress in commercial Ku-band product orders out of USN.

So, there’s good bottom line progress in the December quarter and the outlook for the current quarter, hopefully [unintelligible] improvement there. That’s kind of the overview. At this point I’d like to introduce Ron Wangerin, our CFO, who will give more detail on the financial results.

Thanks, Mark. I’ll first start off by reviewing the results of operations, then discussing key elements of the balance sheet in a cash flow context and then talk about our forward-looking guidance. Regarding our operating performance reflected in the P&L, our Q3 sales increased by $9.5 million or 24 percent over Q2 levels. This is a significant rebound for us, given our sales levels over the past two quarters.

Contract awards in the fist quarter provided considerable increases in our government systems business as our MIDS and UHF SatCom production levels increased. Also, a number of our InfoTech programs awarded in late Q2 began to ramp up. In addition, we saw a rebound in commercial VSAT product sales, increased sales on the connection by Boeing program and we began development on the ARINC SKYLink program.

In addition, when I compare the mix of sales for the third quarter to a year ago, we’ve gone from 71 percent commercial sales and 29 percent sales to government customers, to almost a 50/50 mix on comparable sales levels. This is quite a transformation in a 12-month period. There are not that many companies out there who have the technology, the product and service mix, nor the people to achieve this. We’re really proud of our company’s ability to make these transformations.

Gross profit was affected by the 2.7 million charge in the quarter related to the Astrolink termination claim settlement in January. Excluding the Astrolink charge, gross profit improved significantly from last quarter to 24 percent. Although we are pleased that the margin trend is improving, this margin level is below our historical level and reflects sales from several contracts that are below our target margin level. At several of our new [technical difficulties] continue their ramp up and we complete revenue recognition on certain lower margin programs, our margin levels will increase towards historical levels. We expect to see continuing margin improvement in each of the next few quarters.

I’d now like to talk a moment about the Astrolink settlement. As you know, since Astrolink terminated our contracts with them in late 2001, we’ve been carrying approximately 9.2 million in Astrolink related assets on our balance sheet. These included 6.3 million in accounts receivable, approximately 400,000 in inventory and 2.5 million in pre-paid airtime. Since we had a termination claim for over $34 million related to the contract, we believe it was appropriate to maintain the carrying value of these assets until more complete information on a likely outcome was available. It was not until the settlement negotiations that occurred in earnest in Q3 that we had more complete information regarding the realizing of these assets.

As we indicated in our press release, the settlement was finalized in mid-January and resulted in the receipt of 6.5 million in cash at that time. This settlement had followed several months of negotiations with multiple parties and was dependent upon other parties reaching agreement for the final settlement, with whom we did not have any contact with. Therefore, it was a fluid process and some of the terms did change over time. Due to the numerous activities that need to take place for Astrolink to proceed forward, including SEC approval, the preparation of the new Astrolink business plan, market conditions, the ability to raise the required funding to execute the business plan, all of which are outside of our control, we determined it was appropriate to write off the remaining unpaid assets related to Astrolink and recognize the upside as we earn it in the future.

As a result of this determination, under the accounting rules, we’ve determined we must recognize the P&L implications as of the third quarter. The remaining balance sheet impact, which is mainly the collection of the 6.3 million in accounts receivable will be recognized in the fourth quarter. The company believes this treatment is appropriate and conservative.

Transitioning back to the other elements of the P&L, from Q2 to Q3 the R&D dropped by almost 30 percent to 2.5 million. This reflects the impact of several awards received at the end of Q2, which enabled our engineers to be shifted to customer-funded efforts. However, R&D was also impacted by higher than planned expenses for [unintelligible] development due to continued delay in the [UI8] [phonetic work] program.

SG&A increased by only 2 percent on a sales increase of 24 percent. And our investment in our [Immiant] [phonetic work] joint venture was down 167,000 or 26 percent over the last quarter. Overall, though, excluding the effects of the Astrolink charge taken, we achieved pro forma EPS within the range we provided on last quarter’s call.

Now, let’s look at the balance sheet. During the quarter we collected over $47 million in cash. This cash received balances both the increase in sales and receivables, with the improved customer terms, which we are seeing by increasing in our customer advances. As we look at the balance sheet, total receivables increased by approximately 6.5 million on a sales increase of 9.5 million. Given this increase our days sales outstanding improved by over 20 days. In addition, the quality of our aging improved during the quarter.

When we look at the increase in receivables most of it came in the government systems division and was driven by the MIDS program. This was offset by reductions in our connection by Boeing program as we resolved a number of our technical issues and began delivering units. We’re happy to report that we have completed nearly 65 units since the last conference call and have only five units remaining to deliver. We expect to complete those in the next week or so.

Inventory increased during the quarter, primarily in our VSAT products area. This inventory increase reflects purchases at the end of the quarter to fulfill several of the new VSAT contracts announced in the second half of the quarter. As we ship these products we expect a reduction in inventory in Q4.

As stated earlier, favorable customer terms enabled us to increase customer advances by 5.8 million in the quarter. Accounts payable increased during the quarter by 7.6 million, primarily due to increases in business volume and inventory. Cash reviews in the quarter per capital expenditures and in software development we are currently capitalizing.

As Mark indicated, beginning in Q4 we are no longer capitalizing our investment in ArcLight. Capital expenditures over the past several quarters were attributable to Texas equipment related to production contracts and for the ERP system we are installing company-wide.

Deferred income taxes increased substantially during the quarter and most of the increase reflects the company’s estimate of its realization related to its net operating loss carry-forwards. This is a non-cash item.

During the quarter totally warranty reserves increased by over 30 percent. This increase is primarily related to the significant deliveries in the quarter for UHF SatCom products, MIDS and connection programs.

For an update on our bank agreements, yesterday we completed our latest credit facility agreement, which expends the date of our credit facility to September 30, 2003, amends the Q3 covenance and provides greater flexibility in the future. We believe our cash on hand, the cash we’re generating from operations, and availability under our credit facility is sufficient to fund operating activities and our growth.

Let’s now turn to forward-looking. Regarding our forward-looking guidance, we took a great step forward this quarter with a substantial increase in sales and improved earnings over Q2. We expect this top line momentum to continue in Q4. Given our firm backlog and likely program awards this quarter, we continue to expect sales to reach the 56 to $57 million level and be the best revenue quarter in the company’s history.

Hitting this target would represent an increase in quarterly sales from Q2 to Q4 of almost $17 million. On the bottom line we expect the sales momentum to continue migrating us toward, as Mark indicated, profitability more consistent with ViaSat’s historical levels. We believe our continued operational improvement and management actions will enable us to make this happen. However, as we’ve moved forward through Q3 the status with some of the milestones that shaped the upper end of our guidance range became clear. These would include, first, the timing of the UIA program award. As Mark mentioned, the delay of this program creates a double impact of increased R&D and lower sales in the third and fourth quarter. Second, the timing of the WildBlue restart. We indicated that the upper end of our range of 10 to 14 cents, would likely depend on a restart in Q4. While the new investment round of WildBlue is a big positive for the commercial broadband space and ultimately for us, we now know the likelihood of a WildBlue restart during this quarter as well.

I would like to add, though, we’ve become engaged in additional broadband opportunities, using our [Doxus] [phonetic work] system as a consequence of the WildBlue restructuring. This is good news for us and creates a near-term opportunity, but is stressing our discretionary budget right now.

Thirdly, we are still seeing a lot of very good defense opportunities, many of which are a consequence of the programs we’ve already won. This is good, too, but again, it’s stressing our discretionary budget. We’re also expensing more on legal fees than we had previously anticipated. This is in regard to the potential recovery of costs we have previously expensed and where we may be entitled to contractual relief.

Somewhat offsetting these developments, there’s a performance of Comsat labs. Their business bounced back nicely in Q3 and we expect their performance to improve in Q4. Also, we expect to start some new defense satellite and INFOSEC contracts this quarter that we had previously estimated was lower win probabilities.

Taken together, we’re still aiming at the lower end of the pro forma EPS range provided last quarter, or 10 cents per share. But, it’s a little more of a challenge to achieve this than it appeared last quarter. We are committed to achieving the profitability we expect from the growth in sales, but do not want to do anything that reduces are ability to capitalize on our success to date. This outlook may also be impacted by the results of our annual FAS 142 goodwill impairment test we will conduct in Q4. Any impact, though, would be in the form of a non-cash charge. Regarding cash flows, with the resolution of the Astrolink termination claim we expect cash flows from operating activities to now exceed $11 million over the Q3 and Q4 period. When we provided guidance last quarter we did have an estimated amount for an Astrolink settlement in our figures and we realized a higher near-term cash settlement.

Now, I’d like to turn it back to Mark to discuss our outlook for fiscal year 2004.

Thanks, Ron. Okay, at this point I’d like to provide a little bit of preview into how we see things for next fiscal year and a wrap up. Overall, the trends are definitely looking positive. At this point we believe we should set a new record for orders in a fiscal year, [unintelligible] fiscal year. We’ve had great order growth in defense with commercials really not more life than it did just a few months ago.

Q4 appears like it ought to be our single biggest quarter ever for us in terms of sales. But, we don’t really have detail specific targets for the fiscal year ’04 starting in April. You know, although current indications are positive. We can give you some kind of bounding type of perspective. It’s look like a record year for us in revenue based on the Q4 run rate. You could kind of project that we should be up at least 20 percent year-over-year, but there’s potential to be up as much as 50 percent year-over-year. We expect to be solidly profitable in to generate cash flow from operations.

And right now it’s a little hard to narrow that range on FY04. There’s a number of significant swingers that are going to clarify things. And we’ll learn about them in the next few months. So, rather than try to put out a number, what we thought we’d do is talk about what some of those issues are so that people can observe the announcements that we make and then draw conclusions.

So, the big drivers that’ll be resolved that’ll influence where FY04 lands is one FCC license transfer approval process for WildBlue which effect the time table for restart and the climbing sales and earnings for us. Then there’s the resolution of what [Calpak] [phonetic work] Canada selects for the Canadian portion of that [ANIC-F] [phonetic work] ka-band satellite. There’s also the selection and timing of some new European MIDS orders, especially from the Netherlands. There’s the value and timing of the next U.S. government MIDS production, [unintelligible]. There’s the potential for some either launch customer contracts for our new [KB250] [phonetic work] INFOSEC products, and the selection of those will have an important influence.

There’s a couple other potential [unintelligible] system orders on Ku-band satellites and even potentially some new starts for ka-band that can have a big influence. There’s a pretty substantial potential upside we see if Astrolink restructuring proceed on the timetable that Liberty Media has laid out, which is targeted for kind of October of 2003 timeframe. And that would include some pickup of the continued value of the settlement. Then there’s also the potential for ArcLight sales growth, including additional orders from ARINC for other business [unintelligible] customers. And also if things proceed as Boeing nears envisioning on connection then we ought to see some impacts of that on our fiscal ’04 results.

And, we’re trying to be careful about balance our spending on all these opportunities we’re seeing on profitability targets. And we’re being very careful regarding our cash exposure on these projects. Both of those things will have some bearing on the growth rate [unintelligible].

So, to put some numbers to get kind of one thing as a starting point you could consider a run rate similar to the fourth quarter outlook of this fiscal year and that’ll be easier to around 225 to 230 million in sales, or about a 20 percent plus year-over-year growth rate. And if we were do that earnings with that level might be in the 45 to 50 cent pro forma range. And right now, based on what we know, that’s being pretty conservative.

At the higher end we could do in the range of, say, $280 million to $290 million if things go our way. And that could yield earnings that would be more like in the 80 to 90 cents for the year pro forma. Most likely things are going to be in the middle and rather than, you know, try to pick a number it seems like the timing of the specific awards will be the determining factor. We’ll know a lot more in the next few months and then we’ll be able to narrow our guidance range as we learn that.

That concludes our prepared remarks. And, now we’ll open it up for questions.

Thank you, ladies and gentlemen, if you’d like to register a question, please 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’d like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift up your handset before entering your request. One moment please for the first question.

Our first question comes from the line of Rick Valera with Needham. Please go ahead with your question.

Thanks. Good afternoon. On your credit facility, can you talk about what the limit is on your new credit facility?

Yes. The limit is still at 20 million, but we have, as we indicated in the quarter pay down on that amount and we continue to look at the relative availability of that and make pay downs as we see fit.

Is there any possibility of increasing that limit or maybe coming up with any other additional sources of liquidity?

I think as we continue to improve our performance, we’ll be able to – and demonstrate our growth and performance with that, we’ll be able to increase our availability within the existing framework and with the existing banks.

Great. And the 6-1/2 million cash from Astrolink, I believe you said that didn’t hit the balance sheet yet, right? Is that correct?

It was recorded in January, so it will be Q4.

Okay. Mark, you mentioned that you – I think in your previous presentation, that you expect to get maybe 40 to 50 million of [infosec] awards this year. Could you talk about, roughly, how many you think you’ve booked to date or whatever amount you’ve booked to date in [infosec]?

Probably, to date, in the 30’ish range.

I’m not sure if you mentioned this in passing, but the Wideband Gapfiller award that Titan got that you’re disputing, can you give us the status on that award?

Yes, that was a program called [Ka-Facts] and we filed the protest that was awarded to Titan [in April and we filed] to protest that and was resolved actually in Titans favor, in November. So, they got the contract and we’re no longer disputing it. We’re not [indiscernible] anymore and we’re looking at other opportunities for terminals on [indiscernible]

Great. And, finally, just a couple of model questions. The quench of the – into the fourth quarter, any sense of, sort of the sequential trends in both SG&A and R&D, if you could give any help on that, that would be great.

We don’t have any significant changes that we’re looking at for SG&A. IR&D will depend on the timing of the UIA and how much we continue to spend for the [KG-250] development.

Okay. Thank you.

Our next question comes from the line of James McIlree with C.E. Unterberg, Towbin. Please proceed with your question.

Thanks. Can you give us a more precise split on the revenues this quarter from commercial and government, as well as in indication on the operating profitability of both those?

Yes. Do you have another question and I can come back to you?

Sure. In order to get to the $.01 pro forma, what’s the tax that you’re assuming in that? And the last one I had was, you talked about increased legal expenses due to contract disputes. Can you fill us in on what that’s about?

I’ll answer that one. We had, basically, relating to our acquisition, find a [jet line] [indiscernible] business and we believe that we’re entitled to reimbursement for some of the expenses that we’ve incurred and it’s regarding that.

Okay. This was [technical difficulty]. Those expenses will be ongoing until that dispute is settled?

Yes, and the [indiscernible] are estimates.

Okay, on the split of revenue between commercial and government, the commercial revenues were 25.8 million and operating loss was 4.3 million. And revenues on the government side were 23.2 million and operating profits were 1.9 million.

Regarding the income taxes, as you know, we’ve been, this year, given the [locks]. We’ve been recording – we adopted the discreet method so we don’t really have an effective tax rate that we’re following. And, you know, that is also impacted by the R&D credits that we record on a quarterly basis.

I think the R&D credits are about 500K for the quarter and so the statutory tax rate is what we’re using – using about 40% on the pre-tax [indiscernible]. We can get to that [indiscernible].

For the ranges of earnings that you were – that have been suggested for next fiscal year, are you assuming that 40% statutory tax rate?

Yes, the 40% rate plus some benefit of the R&D credit.

Okay. And the last one, I promise, on the 4.3 million loss on the communications, is that with or without the Astrolink write-off?

That’s with the Astrolink write-off.

Okay, so the normalized loss is more like a million six?

Correct.

Great. Thank you.

Our next question comes from the line of Tom Watts with SG Cowen. Please proceed with your question.

On accounts receivable, you showed some improvement in terms of days sales, but it still saw an absolute increase. You mentioned that most of that was from MIDS. Could you give us any more insight into that? And, is that all unbilled receivables? Are there any testing issues on MIDS that [indiscernible] billing? What can you tell us on that?

Sure. The increase in both billed and unbilled we saw related to MIDS had a significant increase in revenue during the quarter to the tune of – in over $5 million of increase. And, so that drove increase in both sales – I’m sorry, in billed and unbilled.

With regards to the [hittingbillevents], it’s a progress billable contract, and that does have some limits. As we achieve certain milestones, it allows us to go even higher percentages. And, as Mark indicated, we continue to achieve certain of those milestones. And, as we do, we can capture a greater percentage of it.

Have there been any delay in receiving those milestones, or any product that wasn’t accepted on the acceptance testing process?

No, there hasn’t been any of that.

Things are going well. I mean part of it is the timing of the revenue recognition in the quarterly cycle and where we are in terms of progress going – I would say that earlier in the year, we were pretty upfront about unbilled receivables growing on MIDS probably because of initial meeting milestones were met. That’s much less an issue at this point.

On a second topic, in terms of the [efference] for next year, what are the implications on that for free cash flow? Do you – overall, do you expect to see free cash flow positive next year? Or would you need to increase borrowings in any way to support some of those estimates?

We would expect to be free cash flow positive next year. With the current production programs that we have, for MIDS, the balance beginning next year, does decline and begins – we turn the corner on that, in essence and getting – being [seelocudate] down 100%

That’s great news. In terms of – so, overall would you expect – is there a target we should look for Day Sales Outstanding on the receivable side?

Historically, our Days Sales Outstanding have averaged like a quarter and a half and we’re a little bit above that. We are doing everything we can to drive that number lower than a quarter and a half and -- on the increasing sales. A number of the – we’ve been a lot more conscious of it as we’ve indicated in the last couple of calls about customer terms and improving those to be more sensitive to the cash investments on certain programs. And we’ll continue to focus on those. Some of the other contracts we have, we’ve been working to modify the contract terms to improve the cash flow as well.

Okay, but you said at least part of the improvement will just be the natural evolution of the MIDS project as you get further through it?

That’s correct.

And just a final question. You mentioned legal expenses were higher, is that just the Scientific Atlanta case or are there other cases out there?

That’s the main one. Tom, also, from a receivable side, the results for this quarter don’t have the $6-1/2 million out of it, which will drive those DSO’s back down into the traditional [forums].

I’ll elaborate on that a little bit. Just to view it historically, we did it on a quarter to half between the sum of billed and unbilled. And where we were, kind of at the – at the end of the second quarter we had right around in the 80 million range. We had it as high as 85, but we’re right around the 80 million range. We only did just under 40 million in sales that quarter. So that’s kind of a low point. We ended up – in the September quarter, we were about 80 81 million, kind of in that range, on 39 million in sales. And if you figure we’ll be able to work out the Astrolink, which accounted for about little over 6 million, 6-1/2 million of that that would put us at about 75 million on 39. So, [infinity] [indiscernible] we’ll be over where converging on where we want to be. We feel like we’re making good progress there. And, we’re, hopefully, conveying that. We think the whole tone of managing our receivables has improved a lot.

It sounds like just quite naturally kept you a [long ways there].

Yes, that was a big lump that’s just been sitting there for a year. So we’re happy to have that work through the system.

Thanks very much.

Our next question comes from the line of John Bucher with GKM. Please proceed with your question.

It’s John Bucher with Gerard Klauer Mattison. On the GAO decision, they decided, I guess, less than positive project management issues with MIDS and Connexion, I’m just wondering are both those things resolved? Is that history at this point?

I would say so. We probably [indiscernible] that point. I think that there are different interpretations of it. I think that the way the government’s perspective on [Ka-Pat] was that the programs were – the development schedules were behind and they rated us down for that. And that’s still the case. So nothing will ever change the fact that those development programs were behind at the time that we finished them. But we believe that our performance, overall, has been good and there’s not much else to say.

So, just in terms of some of the specific project manager thing decided, do you think that those things have been corrected?

We didn’t necessarily, John, agree with everything they said. And, you know, they sited a few things and we don’t think that they looked at our responses appropriately, which is one of the reasons we filed a protest. You know, we don’t take that stuff very lightly. So, like Mark said, we were behind on the development schedules and we acknowledged that, but there was some specific points identified that we didn’t necessarily agree with.

Okay, switching topics to MIDS. If the op/eval goes successfully from a time that there’s a successful report back from the operational test scores there, what sort of ramp would you expect from successful op/eval? What sort of unit ramp would you expect in mids units in production mids terminals from that point forward, either in dollar amount or units or whatever’s convenient for you all?

Well if you look at what happened last year, in June we received an award that [started] about $30 million, which represented about 40%, so you’d look at maybe $75 million in production at that point. I don’t think we’re going to see huge jumps from that point. It’s hard to predict [used jump] in the U.S. market alone. We expect that one of the things that’s going to cause growth in total mids production is by adding in other international, which altogether accounts for about half the market. And we think we’re sited to see some of that to a greater extent this year.

Thank you very much.

Our next question comes from the line of Rob [Hamowitz] with [Bull Cass] Capital. Please proceed with your question.

Thank you. I had three quick questions. First, on liquidity, it seems like you improved your liquidity this quarter. Can you just review with us liquidity and include the $6.9 million from Astrolink?

Sure. First of all, it was 6.5 million from Astrolink. We – obviously, we’ve undergone significant growth in Q3 and expect continued growth in Q4. With that would come an increase in receivables over that time frame and increase in payables as our business volumes increase. As I indicated earlier, we had an increase in customer advances, which reflects improved customer terms, so there is some offsets going on in the balance sheet, and also with improved profitability comes the generation of cash flow as well, from operations.

If you go back and look at Q3 of last year, we had several consecutive quarters of cash from operations that were cash used in operations and that turned around significantly. In Q2 we generated cash from operations of about 3.5 million. We generated cash from operations of over 4 million in Q3 and we expect to generate cash flow from operations, as well, in Q4, a lot of which includes the receipt of the actual receivable but also improvements in the overall quality of the balance sheet.

So, generating the cash from operations has freed up monies to pay down our line and improve our overall liquidity position by freeing up availability under our credit facility. As we perform, in Q4 and in the future, we expect to be able to increase our credit facility amounts, whereby increasing additional borrowing availability, should we need it.

Okay, terrific. In terms of backlog for this past quarter, you put out about 57 million. Was there any [confit] orders that you were hoping for the quarter but might have been shifted to the right a little bit that you can tell us about?

Of today that the range of what we thought we could win in Q3 was higher. One of the most obvious ones was the UAIA contract. [this being] some contracts that we’ve won previously like, for instance, the [bad tee] contract [indiscernible] contract with Boeing. There was – the other that are protested that, which slowed things down a little bit so we’re now in the process of [definitizing] the full value of those contracts, which reflected – there are a fair amount that shifted from Q3 to, we believe, Q4. So that’s why it appears that the Q4 was going to be closer to the range of what we had in Q1 than the other two quarters.

Well, Q3 was pretty strong, so now you’re saying that the shift in Q4 should be ostensibly even stronger?

Yes, I think so. Right now – basically we’re at, right about $200 million in orders [Q3] the first three quarters and Q4 is looking to be better than the average quarter we’ve had so far. So that will put it pretty handily past our record of 235.

So the book-to-bill would be very strong then?

Yes, in fact the book-to-bill for the year will be close to 50%, you know 15 [indiscernible] so that’s – that gives us good confidence going into next year.

Well it sounds like you’re heading into the perfect storm of all good things.

We’ll see.

Pretty much you’ll have somebody try to buy you now, ahead of it.

[Indiscernible]

Our next question comes from the line of Kevin [Spellman] with [BVM] Asset Management. Please proceed with your question.

Hello guys. The 30 to 40% year-over-year growth you’re talking about in defense, does that include any amount of this European MIDS business that’s out there?

For this year, we expect to have no revenue, for this year in the 30 to 40% year we did gross. For next fiscal year, we [technical difficulty]. It’s difficult to attribute things to any particular project. What we try to do in putting the plans together is to weigh – to put some weighting on the different projects. And the weighting on the metal [indiscernible] some factor in there, but it’s not near what the total value would be.

Also just going back [technical difficulty] Netherlands MIDS, one thing I want to clarify is that the award value would be high, but the program is spread over multiple years. So the actual contribution for the Netherlands MIDS in next fiscal year plan in revenue is not really – it’s not a [indiscernible] it wouldn’t be decisive on whether or not we could or could not make that target.

But if you take Netherlands, Belgium and Spain and Portugal, those folks that are looking for MIDS terminals, that’s 120 million worth, are you counting on much of that at all? I mean is that upside if you get any of that?

We’ve been working from rfp guidelines in the response that we provided. And I’ll say that from planning targets for contact value are not in that 120 million range. It’s quite a bit less than that. Now, one thing you’re pointing out is that if the Netherlands establishes that contract, they may attract purchases from other countries that are not necessarily in the rfp for planning purposes. We’ll just have to see how that plays out.

There are a lot of decisions that take place next year, whether they go to SMS or direct commercial or piggyback on some of those awards, but there’s a lot of European business to be won.

But the question is, if you take, let’s say, a 30 to 40% year-over-year growth, FY ’04 to FY ’03, that’s not a could be, that’s – no, it’s not. It could be quite better. There are other factors as well. I mean with the European MIDS being one contributing factor. But there are other contributing factors that could make it better than that by, you know, 10 points more, 15 points more, something like that.

Which leads me to the – you know, we don’t hear much about the Army portion. What – is that a complete unknown, what kind of size that might be in the next year?

It’s a little bit hard to predict. As we get into these kinds of production programs, the funding could be more aligned with shifting priorities. And there are some applications that could grow, like, for instance, anti-missile defense is one application and there can be domestic and international applications like that. A lot of it depends on shifting government priorities and it’s tedious. There’s potential there. It’s just hard for us in making plans at this point.

Are you done with Immeon or not? There was a 12 31 02 kind of decision point. What did you decide?

We certainly are not going to discontinue service to any large customers. I mean Immeon will absolutely continue. There’s a decision point in our specific joint venture agreement with Loral that will be [indiscernible] this quarter. And that should have some impact on the structure of the venture and the way we account for it and what we do in the future.

But there’s no chance of discontinuing service to any of our customers. And I would say that we’ll record – we’ll [indiscernible] on what we decide next quarter. I don’t think that in the overall scheme of things that this decision is going to be a big factor in our results.

And how about – have you made any progress on getting involved in the joint strike fighter in any way?

I would say that’s definitely possible and people should keep an eye out for announcements.

Can you give us in what sense?

Well, before we’re involved in that, we’d have to announce a contract. That would be the next step would be the announcement of the contract. I mean, there are a couple of fronts – a couple of different areas we’ve been perusing opportunities in satellite communications, factual data link, simulation in [indiscernible] as well as in a couple of other areas.

That narrows it right down.

We’re working on a couple – we can’t tell you anything until we approval to announce anything and that’s been [indiscernible]. So it’s coming.

All right. That’s it.

Our next question comes from the line of Wes Cummins with B. Riley. Please proceed with your question.

Thanks. Just a couple of quick ones here. Can you say how much U.S. Monolithics cost you guys this quarter, and when you expect them to be break-even?

We don’t really -- we don’t break-out, I don’t want to get – break out individual operations to say that it cost a lot less this quarter than it did last quarter. Break-even – I’d say we can give you a lot better answer next quarter because we’ll know a lot more about the Ka-band. The Ka-band stuff comes into play, things are going to turn around real well, real fast. And it will be not that meaningful to speculate this quarter when we’ll know so much more next quarter.

Okay. And [driven] this claim you guys have against Scientific Atlanta, the amount is fairly substantial and can you give us an idea of how far along in the process here and if you guys see any resolution in the future?

I think the process, Wes, is really just starting and the resolution is just not clear yet. If it were actually end up to go to trial it could take two years. So, that’s sort of [indiscernible].

Wes Cummins. And, lastly, just if you could, give any kind of insight in the [Ico] program if you have any given the recent ruin by the FCC to favorable ruling for them?

Where things stand there is that Ico was granted their right to use the terrestrial frequencies and that’s probably a positive event for Ico. And what was, from our perspective, what’s pending is [Ico] making a down selection to a new ground segment contractor, we’re a candidate. I would say that. [Ico] knows better than anybody else. I mean we don’t know what the timing will be and what our status is. I can tell you right now that that’s just not in any of the projections really.

Just one last quick one. On the accounts receivable in inventory, with the pay down from Astrolink, do you expect accounts receivable to be flat or down, quarter-over-quarter into Q4, or to ride it a little bit, sequentially?

We expect it to be, more or less, flat.

Okay. Thanks.

I am showing no further questions at this time. Please continue with your presentation or any closing remarks.

Okay, so that completes our discussion for this quarter’s results. We’ll look forward to speaking with you all next quarter. Thank you very much for attending.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect, and thank you for participating.