Viasat Inc (VSAT) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ViaSat's Fiscal-Year 2003 Fourth 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 "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Thursday, May 22nd 2003. I would now like to turn the conference over to Mark Dankberg, President, Chairman and CEO of ViaSat. Please go ahead, sir.

Thanks. And good afternoon everyone, and welcome to ViaSat's earnings conference call for our fourth quarter, ended March 31st 2003, and our fiscal yearend 2003 results. I'm Mark Dankberg, Chairman and CEO; and I also have, with me, Rick Baldridge, our Executive VP and COO; Greg Monahan, our VP and General Counsel; and Ron Wangerin, our VP and CFO. 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 revenues, net income, cash flows, the impact of new business, segment or area growth, and cost reductions. 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 filings by ViaSat; specifically, the section entitled "Risk Factors" or "Factors that May Affect Future Performance." Please note that any material or non-profit information discussed during this conference call scaled with any enumeration related to non-GAAP financial measures that are required under Regulation G will be located in the "Investor Relations" section of the company's website, located at "www.viasat.com."

Thanks, Greg. Our financial results for the quarter are described in the press release that we'll now just have to walk you through those and are in line with the press release and conference call of April 28th. We're up in the VSAT IP data, but the main points were sales of about $53.7 million. Earnings pro forma breakeven per share was 5 cents per share on a GAAP net income basis, which includes amortization and intangibles associated with acquisitions. Relative progress on a number of fronts overall in our fiscal '03, but earnings were disappointing. Ron Wangerin will go through the financial data in a lot more detail later on in the call.

As we discussed previously, there were three main factors that led to the earnings share fall relative to expectations for the fourth quarter.

One was better than anticipated type of 2Q programs, which was deferred in increased discretionary expenses. One was the InfoTech contract that ended up starting over a year later than it was originally planned. We even anticipated that we'd recover almost $3 million in costs that we expensed in R&D during the year. The other area I would like to talk is broadband. And that is also now more predictable going forward; however, the current quarter would likely be a little sooner than we thought that we would have been about six months ago.

Second was better than expected new business opportunities are consuming more and more active engineering time, which also reduced our revenues and increased our discretionary expenses. Mainly, in the IP system, it gives us some better tools to measure expenses on a weekly basis. So we now think we've improved already this quarter. And this is always as a consequence of our fourth quarter, as you know, is that we're looking at very strong near-term contract awards. And Rich will discuss it in a little while.

And then, our third area was some cost cuts and inventory repair charges, especially in the VSAT area, which degraded margins relative to expectations. Overall, it is the hardest area for one to predict because the VSAT business has the highest portion of booking ship revenues of all businesses and a variable mix along our product lines. But there are some improvements here to see bigger time several NDNAs that we developed in projects especially for discretionary R&D. Also, we've built more VSAT backlog during the last couple of quarters, which helped in escalating revenues and margins.

I would say we're cautiously optimistic on corporate. So in short, those are the risks in that; we've identified some specific issues with improvements, although we are to remain precipitous to some extent for income to turn in the first quarter. Later in the call, we'll be giving more data on our [indiscernible] looks going forward and why we think it's in the range we discussed last quarter even in light of these factors?

Certainly, we have in effect of this company business highlights with some instantly continuing to be even paid for new orders, especially in specific potential commercial markets that we've been targeting. We recorded 60 million in Q4 orders and achieved a record of certainly 260 million in new orders in a year. But I think that's pretty well mark-to-mark considering that in fiscal '02 about 70% of our business was commercial telecom and broadband various. As on the April 28th call, we discussed another 60 million in pending orders. So that fits into our authorized but has not yet reached a definitive contract. So far, to date, we've continued to make progress on executing those contracts signed and pursue just on our approvals to then selling them and creating a reason to keep up more advanced value on financial loading. And this really adjusts however with the strong capital groups. More announcements should follow through. But the deepened shot will be last year's total of $80 million in orders for the first quarter. Of course, I knew all the pipelines remained strong. In fiscal '03, we've got 140% book to bill ratio, which we think is excellent. The 60 million variables is to predict throughout the fiscal '04 debt condolence will be, roughly anticipating total orders will exceed fiscal '03. And it's got a good shot at 120% sales possibly time to a 140% range again, even with the quick growth in our revenue base.

With that, I'd like to quickly run through our business areas starting with the defense first. Digital, domestic and international network is, sort of, expected to be a little over [indiscernible] levels, because we significantly funded the R&D for making the variance as well. There has been a practical data, and it could be a single-digit nature to this to meet DOD orders. We would continue to ramp up mid shipment at the record levels for us. Preliminary feedback on the quality and reliability of our units that have been through operational testing has been good. Quite clearly, there is a lot of interest in persistent guiding weapons; and we think we're well positioned to enter this smart weapon datalink networks until the product materializes. We closed to what's about $35 million of the HIPPA, our [indiscernible] information security orders as well in fiscal '03, which was fantastic. It's actually a little lower than we thought it would be, because some of the things we've won are going to count as far as fiscal '04. So let me give a break out in that.

This year has also been pretty interesting with KV-250 sales being something of a wild product source in our second half. We've already received number of orders for that product. You know, certification is still a few months away. And with that comment, we're excluding our replay and links IP product that's been pretty promising upside and that represents a new area for us. In the last couple of months, we've had some test funding to demonstrate three substantial technology advances in secure IP-based [indiscernible] and this is one of the areas where we invested more than we planned in Q4. And so this continues to go well. This could be a very nice growth in our inflows and be a big boost for our VSAT business in general. It's coupled with brand new enhanced [indiscernible] contract as well as our new C2dot [ph] DOD transmission on satellite program to keep us a little sickle than creating a high quality product in the business area. There appears to be good demand, where I believe that we are being offered. Our view at the SatCom business is about double from fiscal '02 to fiscal '03. And we think it will likely stay at about that same dollar run rate this year really going forward.

Now, I'll cover some commercial stuff, our defense business did quite well in fiscal '03, so it's very important that we improve our commercial business this year to achieve the results we want. Our basic objective is that commercial contribute positive operating income. The main components for achieving that are to get sales from existing, anticipated orders for the Boeing Connexion system. Sales from existing and anticipated additional orders for the smaller two businesses, which are airborne broadband systems. Some significant orders for VSAT [ph] is based on different broadband with the Ka-band, SurfBeam and conventional Ku-band products. So, stay tuned for some announcements on them. The important part of that would include orders for U.S. Monolithics Ka-band transceivers. At the Skyform [ph] conferences [indiscernible] and they expect DAMA [ph] to satellite [indiscernible] about 8 month, which would turn into calendar year '04. So it looks like that may have slipped some more to see about the timing, because depending on their plans, we could take some swing up, fourth quarter sales based on the satellite launch. We took the continued good orders for our Satellite Ground Systems and antenna business, including both commercial and defense applications. And it's also a good potential for continued strong orders for our VSAT network products.

One thing that's really interesting is that some time in this fiscal year, we got a good shot of continuing to be the number two producer of VSAT equipment. We can take into account with our current run rate and the current number two. That run rate we've added between services and equipment sales from our VSAT and broadband equipment orders combined. We're keeping that range so that could put a pretty interesting few known things on our ability to market our products. Two years ago market shares especially probably didn't need any show up. Obviously, the VSAT market is still difficult, but those are positive to us [indiscernible]. So at this time I like to turn over to Ron Wangerin, our CFO will go into more depth on the financials results.

Thanks, Mark. I'll start off by first reviewing the results of operations for Q4 and then the look up some key trends for the fiscal year. Next I'll discuss the major elements of the balance sheet and also reference some trend along the way. Regarding our overall performance reflected in the P&L, our Q4 sales increased by $4.7 million, about 10% over Q3 level to 53.7 million, our new quarterly record. Growth in all of our commercial businesses over Q3 was offset by a slight reduction in revenue in our government business. With slight decline in our government revenues we'll see the subcontract material delay on this program and in our UHF satcom business. While the sales with that in the quarter, they're not lost; that will shift into fiscal 2004. Overall, this continued sales growth is the results of the orders received in prior quarters, extending from the significant investments made in business approvals in the first half of the year and the other to research and development investments.

Gross profit improved another point to 25% of sale that was impacted by a $560,000 charge related to a contract of overrun and no more overall margins in our VSAT business. Although it is positive that the margin trend is improving but it's still below our historical levels. As several of our new programs continue to ramp up, and we complete revenue recognition on certain lower margin programs, our margin levels are expected to improve toward historical levels. We're aiming to add another plant or two this quarter. R&D increased by 1.8 million or 73% from the third to $4.3 million. R&D expenses were higher than planned due to the delays in programs awards, delayed in the quick fourth quarter. This resulted in continued development under customer funding -- excuse me -- under company funding. In addition, we incurred higher R&D expenses to complete development of the new power amplifier in our UHF SatCom business and for VSAT product development. SG&A increased by $2 million or 22% over the third quarter. This increase is driven by higher selling expenses in our VSAT business, which posted record sales for the quarter, higher bidding proposal cost in our government business related to new business opportunities including the EBEM and Teleport [ph] contracts announced shortly after quarter end, and increased legal expenses primarily related to our claim against Scientific Atlanta.

Interest expense was lowered for the quarter largely due to the lower debt balance and debt service costs, and our investment in the Immeon joint venture continued quarter-over-quarter reductions. The fourth quarter investment of $78,000 reflects a $385,000 reduction over the third quarter. Overall, though due to the increase investments and research involvement and cost of security business, higher legal cost and lower sales and due to less gross margins; the company did not meet previous guidance.

I wanted to spend a minute here emphasizing some trends or significant items for the fiscal year. Sales for the government segment are 82.3 million for fiscal 2003, an increase of 31% over the last year and a record [indiscernible] of $15 million. Sales in the commercial segment for fiscal 2003 were $103 million. Included in the commercial segment sale of the larger antenna systems sales to government end user of approximately $10 million. This brings the company to basically a 50-50 commercial and government sales force [ph], which has no balance from the 70% 30% ratio for last year. A substantial number of the awards we received during the year were on programs that have long-term cycles. Meaning, we received initial funding for the development and low rate production of new programs. We expect that these programs overtime will yield good returns for our shareholders.

During the year, the company completed several fixed size development programs that contributed to earnings charges and lower margins in these products and their high production rates we expect to see margin improvement. In addition, we also resolved the Astrolink contract termination, which also impacted earnings. During the year the company invested over $60 million in research and development, a sum of 9% of sales. This investment in new technology and our people has directly contributed to new orders in our government InfoTech and UHF Satcom businesses and in our broadband business. The $60 million investment is a 70% increase over last year.

Also, during the year the company invested over $7 million in different proposals, which is the byproduct to two events; largest number of available contract opportunities the company has ever seen and a focused effort to rebuild backlog following the broadband termination and suspensions experienced in the later half of fiscal 2002. The $7 million is also a 70% increase over fiscal 2002. The combined investments of almost $10 million in R&D and different proposals over fiscal 2002 levels represents over 22 cents per share EPS. These investments were done when sales were declining and we believe will be necessary to position the company for the future and to provide long term shareholder value.

Also during the year we filed a claim against Scientific Atlanta related to our acquisition. We incurred discretionary funds and legal cost in fiscal 2003 and expect to continue to incur such cost until resolution. While we cannot comment on litigation, management believe the return to shareholders has lead the near term investment. During the quarter, we generated 7.5 million in cash flows from operations, which included the 6.5 million from Astrolink settlement referenced in last quarters call.

As you look at the balance sheet, total receivables are basically flat quarter over quarter. The Astrolink receivable is essentially replaced by new receivables from sales generated during the quarter and the movement of unbilled receivables to book. We've seen a steady decrease in our unbilled receivables as a percentage of sales over the past three quarters and expect the trend to continue. The quality of our aging has also improved over the past four quarters and our DSOs continue to improve to 137 days.

Inventory decreased during this quarter to below $30 million. We saw inventory reductions resulting from new orders sold in the government products, commercial VSAT and other broadband businesses. As the company continues to outsource additional manufacturing and from growth in revenues, we expect inventory to reduce further over the next two quarters. During the quarter, cash was used to pay down our credit facility by the addition of $4.4 million. This brought the balance to below $10 million in comparable to the fiscal 2002 yearend balance. In fact increased further availability under the line should the company needed.

Cash was also used in the quarter for capital expenditures were attributable to test equipment related to production contracts and for the ERP system we finished installing company-wide. I would like to point that the investment in company-wide ERP system during the quarter will provide better financial visibility across the company in the future. The shift in deferred income tax from current to long term represents the GAAP classification of our net operating loss and other tax credit carried forward. Some update on our bank agreements, yesterday we signed an amendment to our bank facility to address compliance issues that arose from the fourth quarter. Company believes our cash on hand; the cash we're generating from operations and the availability under our credit facility is sufficient to turn the operating activities and our growth.

I'd like to turn it over to Mark who'll give guidance for fiscal '04.

Okay, thanks Ron. I'll go with that fiscal year '04 -- obviously, we've been disappointed with our ability to predict earnings in the last several quarters. And looking forward there are three main factors, one is the volume of new rewards, two the timing of those rewards and third, the [indiscernible] on the rewards. We can address our prior fiscal year [indiscernible] in that context. Last quarter, we talked about our ranges, fiscal '04 revenues from about 225 million to about 290 million and pro forma earnings in the range of about 45 cents to about 90 cents. We continue to believe that this is the appropriate range for fiscal '04, and I want to provide additional clarity and have a look at it. Based on the current run rate today -- based on the current run rate, [indiscernible] I feel confident in the lower end of this range today.

Continuing to move high in the range depends on specific events. An example of those events will be definitive contract wins including bigger share in dollar values, timing, and there are programs can do things like Wild Blue [ph], Eutelsat [ph], international [indiscernible] orders, domestic [indiscernible] orders, 50:50 orders, PLD VSAT orders, [indiscernible]. Forgive me if I missed any factors I want to discuss that just the presence of an award may not itself drive us to the high end of the revenue wins.

We're optimistic about the opportunities. Since it's very early in the year there's plenty of time for them to occur, but right now today their impact on fiscal '04 is difficult to gauge. The whole [indiscernible] will just be clear when we are confident that particulars events that have occurred have pushed us towards this higher end of the range. We still are expecting that early fiscal year should [indiscernible] with revenue as after some management consideration resulted in forming [indiscernible] flexibility to build it faster on the current holder in revenue growth. So in that it had some earnings impact we've already seen for third quarter fiscal year '03. Also frankly we need some [indiscernible] so that we're not internally pressured to prematurely close on pending deals to meet their current quarter numbers. Finally, we have to put that petition in [indiscernible]. The proof is only going to be in the results. So if all goes for this current quarter basic result we intend to grow revenues by about a million or two sequentially. And that'll spread between both government and commercial.

We aim to reduce our discretionary spending also by about a million or two sequentially by having transferred people from internal R&D or marketing support to public contracts was already started. We are also obtaining some improved gross margins sequentially by about a point or so, partly through volume increases so we'll [indiscernible] new engineers looking on funded programs. Those goals were somewhat modest and continually will be better, but this will make us nicely profitable on a pro forma basis and should also be profitable on a GAAP net basis. It will also be consistent with our plans for achieving our full year earnings objectives. Well, these are some of new [indiscernible] through the execution. So based on some success in the first quarter we'll be in a better position in our next conference call to build on that in terms of visibility going forward with additional incremental sequential improvements. Also importantly this system has continued good positive operating cash flows and also reduced debts to improve our credit facility. So that's it for the prepared remarks.

At this point, I would like to open it up questions. Operator.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the "1" followed by the "4"on your telephone. You will hear a three-tone prompt to acknowledge your request. If your questions has been answered and you would like to withdraw your registration, please press the "1" followed by the "3." If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for our first question. Our first question comes from the line of Tom Watts with SG Cowen. Please proceed with your questions.

Hi Mark.

Hi Tom.

The contracts that you have been particularly focused on were the UIA and the Netherlands MIDS; we know [indiscernible] have those now come in?

Tom, if we -- I can answer that, I had made an announcement -- I can tell you that the Netherlands MIDS, I want to [indiscernible] that for sure is still pending.

Okay.

And the real issue Netherlands MIDS, you know, we're still waiting for the outcome. On the UIA, there we are pretty confident that outcome issue is started.

Okay. And then secondly, looking at your book to bill this year, if applied that to the midpoint of your revenue range that was just bookings next year or in the current fiscal year in the 360 range, is that so you think doable, if we kept the same book to bill or what sort of bookings should we think about for next year?

Firstly, the book to bill depends on the revenues and the revenues [indiscernible] depend on the timing of the awards. I think it still [indiscernible] I don't think it would good to say I expect to see orders in a particular range is what I will tell you whatever is that. When we started fiscal year '03, we saw a range in the 250 to 300 million. That's what we could see and it turned out that was, kind of, rough -- our weighted analysis and it turned to be in that range. About 260 right now at this equivalent time it looks more like 300 to 350 range absolutely [ph] feels like those are our probable [indiscernible].

Okay and then you mentioned that unbilled are likely to increase. I assume it is associated with the unbilled receivables associated with niche contracts. What is that -- what sort of cash flow are you looking for next year and is that -- do you have -- are there cash needs next year or should it be a positive cash flow every quarter?

Regarding unbilled receivables, we actually expected to go down as a percentage of sales over the next several quarters. With regards to the cash flow for FY04, we expect to generate cash flow from operations over the year of over $20 million and expect to be free cash flow positive for the year.

Okay. And I didn't catch everything you said about negotiations with your bankers recently. Could you just repeat that?

Sure. We -- yesterday, we signed an amendment with our banks just to address some covenant issues that we had extending from our Q4 results. And we have a very good relationship with our bank, and we anticipate to continue to work forward with them and analyze what our cash needs are adjust our credit facility accordingly.

Is there any reduction in the availability under your credit facility with the amendment?

No. There is none.

Okay and just finally on the Infosat that's an area we've look at as high potential. In the past you've mentioned revenues, you can say, as high as 50 million in the coming year. How -- and you mentioned the [indiscernible] 250 of one of the key variables there but could we end up with the 50 million range still?

Infosat video [ph]. The only way we would get that high would depend on orders for that product. And as I mentioned we've been receiving orders, but real -- we expect really to take hold once it's a complete clarification. And that's probably into the first half in that content. So we'll know a lot more in second half.

Okay thanks very much.

Thank you Tom.

Our next question comes from the line of Rob Camlet with Bateaux Capital Management [ph]. Please proceed with your question.

Thanks a lot. I just want you to expand on your comp questions regarding your credit facility. You talked -- you mentioned about negotiating [indiscernible] to improve that facility. Can you talk about what your goals are to some degree?

I think we got to go running [indiscernible] extend the term, increase the ceiling amount. And it's possible that we might like to convert some of this from being a revolver to being a term loan.

Exceptionally, those are the things that we do.

Can you give us, I think, the work out [ph] in numbers? An estimate, are we looking at 50 million or...

No. We don't actually -- we don't even actually want a facility that large just because...

How many combined, long-term and revolver?

It's in the ballpark.

Okay. So there could be a lot more possibility in your liquidity?

Yes.

Okay. I understand just from the past couple of days -- well, I just found out in the past couple of days but WorldCom [ph] has been repurchased by a private equity for Rohm and Hass [ph], actually some healthy contracts, new customers that sound like they're blue chip customers for attracted, do you expect to revive some of your old inventory or some of that project from the past, I mean, you wrote-down lot of - a lot of project because of outcome?

Because of outcome?

Yes.

It's possible. Right now, it's not in our plans. You know, obviously, looking our plans right now, it's not in there. But it's possible.

Okay. I'll have a surprise for you, if they were revived and I think that could be just a little bit of a rare possibility going forward.

And just to be clear also it helps in operating for a while already, you know, the possibility of that cash to make new purchases.

Right. And I think the new order; they're pretty good behind them. So it's a good thing. There is no downside there yet.

And can you just tell us how the SurfBeam probably going with Eutelsat, give me some insights there?

I would say, so far SurfBeam trials in general without having [indiscernible] some customers out their mind. I would say, in terms of meeting expectations and I think, they remain in the good figure, but I would say it's been the main indicator of areas in where our SurfBeam boxes fit, while Eutelsat is...

I could probably make some key factor in the new investment outlining to WildBlue [indiscernible] effected the satellite kind of changes for evidence of what it will do and what it will look like in the equipment that we have. And I think that investors were able to -- related to that on what they say in. So I don't think that - they think that we're been doing with anybody else, you know, we're involved in other thing to really materially change that when people can see what the potential is already. There is still lot to be done before it's deployed.

Okay. Thanks a lot and rest of year [indiscernible].

Thanks a lot.

Okay.

Our next question comes from the line of Rick Valera with Needham. Please proceed with your question.

Thank you. Mark, I was wondering, you mentioned the opportunity in [indiscernible] can you give us a little more color on that and maybe the timing of when you think opportunities there might arrive?

That's equal. A good example of that was a trial, a test that was done in last fall at China Lake [ph] and we participated with Northrop Grumman and Raytheon while variant and one of our mix channels have used on a - to the extent on within and close to at a moving pace some 35 - some 30 miles with control of the weapon handed off from a couple of different platforms on the way. That sets an example of what people will see possible for any kind of prevision demission [indiscernible]. I think, the interest in Link-16 is because there's already Link-16 terminals on all of these platforms, and we've got a controlled infrastructure to do it. So, that's the concept. We're certainly obviously interested on [indiscernible] DOD but right now there is a lot of plucks in DOD budgeting. You know, we will see there are some programs going on that we are somewhat involved but we will -- I think what will do is we will announce when we get some [indiscernible].

Fair enough. And you mentioned it sounds like ANIC F2, the launch has been pushed out into next year. You didn't sort of specifically talked about how that would affect? You had -- does I understood something in the order 30 million to 35 million should have spending when WildBlue was shut down, and I guess there was a thought that may be that would come back this year, do you think that -- or how of that do you think is affected by the launch as opposed to infrastructure, and may be funded R&D, that they would have to do pre-launched that you still might get in the relatively near term?

I think we are into the right questions, and I want to be careful not to speak for our customers. But at the [indiscernible] they expect a launch in about 8 months kind of in that range, and we also talked about being in service, sort of in the middle of '04. Okay. So, with that if we have a launch time that would have been later being in service present, being in service could be consistent with the timeline that we have sort of anticipating. So there -- it's unclear, okay, what the impact is and that's part of what we would like to do with the way we decide guidance. Because right now, I'd say we are pretty comfortable with where we stand in our revenue projections even if -- because even if it turns out that a lot of that goes forward because of the long schedule. So what we'd like to do is you know as we get more clarity then we'll start working on a layout from the bottom. Right now, we -- if you just -- and then tomorrow we have look at it -- there are 54 million now. If we get some sequential gains on the order of 11 million to dollars and there is no -- there is essentially zero revenue associated with [indiscernible] in the fourth quarters. So you know we are not really counting on that basis.

Great. And you mentioned the billed versus unbilled trends a couple of times could you give the specifics of last quarter the percentage billed versus unbilled and this quarter percentage billed versus unbilled receivables?

For the percentage of those -- seems it was very flat quarter over quarter it didn't. Last quarter we were at 52% billed and 48% unbilled; this quarter we're 51% billed and 49% unbilled.

And how would you -- you said you expected them to come down, I think, as a percent of revenue but I guess revenue is growing. Do you expect that percentage of billed versus unbilled to actually shift over the next few quarters or do you just expect it to come down by virtue of the growing revenue?

Well, obviously a little bit of both. [indiscernible] that creates further separation between billed and unbilled. And a large part of our unbilled is related to our [indiscernible] program and as we generate deliveries still over the close to the year that'll get worked out. So depending upon the sales mix and the type of contracts that we have during the year, some of that may be replaced by additional [indiscernible] and drive that ratio.

Great and one final one if I could. Just in terms of mid, excluding any international MIDS and understanding it sounds like you have something really in the hopper there, could you give us an estimated range just for the domestic MIDS for fiscal '04?

For the revenues?

Yes. Revenues please.

We really don't like to comment on specific revenues. We tend to give them programs should also help to deal with the timing of the next lot [indiscernible] which would be in -- I think we're expecting in the further later half of our fiscal second quarter.

Firstly, we tend [ph] to divide our [indiscernible] business into the inflation security area and the new business and the UHF and then we have this kind of a merging more broadband segment. [indiscernible] is still the single largest. It's not a big account for it [indiscernible], for instance.

Okay. Thank you.

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

[indiscernible] commercial split in fiscal '04 I thought that's the lower end of your range, it's the high end. Can you give us a feel for what that split might be?

Sorry Jim. The first part of your question got cut off. I assume what you asked was to comment on the split between government and commercial [indiscernible] high ends of the range [indiscernible] customers.

That's it precisely.

Okay. So I'll tell you, of course, the lower end of the range. If you add up by defense cost that government applications of commercial that means that if you take defense and [indiscernible]. Governments will be more than 50% probably at the low end.

Okay.

At the high end with the [indiscernible] advice you to further wait for events to see what happens.

Okay.

At the high end it could be 50-50 or it's possible that the commercial can [indiscernible] big part. But it's unlikely that the government would be over more than 50% near the high end.

Got you.

That makes sense?

Yes, it does.

Okay.

And on the bid and proposal run when you're talking about bid and proposal in fiscal 03...

Yes.

Did you give specific numbers on what that was in '03 versus '02 or did you lump it in with R&D?

I did give specifics on what bids and proposal were. It was $7 million for the current year.

Okay. And is that something that is -- I want to say easily but let's say a predictable in a fashion that's satisfactory to you for fiscal 04? I mean do you have complete control of that or is that kind of -- it's an opportunistic thing so it might be a big range.

The way I'd answer that is -- okay -- when we have a lot of under development contracts and we have quick innings from new engineers, then we have flexibility in moving people from discretionary expenses to contract. And that's the situation that we have now. So in that sense we actually do have control of it. But in the other sense there is still [indiscernible] we want to have the discretion not to do something down that I'm not too -- you know take people off where we think it would be strategic opportunities in order to [indiscernible].

Yes.

That makes sense, though. I mean [indiscernible] do we have the knob and rubbers to push [indiscernible] now.

Right. So I'll just not be acute about it, is that number, do you think it's up or down in fiscal '04 versus '03?

It'll be slightly down.

Okay.

That's what we expect.

Right. Okay. Great. Thank you.

Our next question comes from the line of Steve Mather with Sanders, Morris, Harris. Please proceed with your questions.

Good afternoon. Mark, do you see risk in the EPS numbers in the near term only because you have some of the same characteristics. You need to hire people; you have proposal works. There is a possibility that some -- the French work, way the commercial you know just slips a few months, and so does that give you the same characteristics that you had last quarter? And then is all that taken care of by the end of FY04?

I think basically, we just not performed to our expectations for the quarters in a row and that -- so I would say that the main thing we are trying to get [indiscernible] here what we think will happen and the way we did it, we feel like, we have a good understanding of what the variables are in the current quarter and the thing that you sited we believe that we have taken into account. And but I - really I am going to do this quarter for now [indiscernible] and tell you, how we did it.

Just a few details, the joint venture number looks a bit low, how do I think about that next year relative to --you know, the last couple of quarters were much higher?

Steve, we see it at a similar level going forward.

Similar to 78 or similar to the average of the year?

Similar to the fourth quarter.

Okay. And then SG&A and R&D, you don't have to -- you know we got to do our work too.

Yes.

So I am just wondering, you have a lot of factors going on; you can move people off R&D and on to those contracts but SG&A seems like a buffer. Margin looks very good but these other ones are a bit of a buffer, is that what's going on?

Well, in R&D, we are aiming for R&D to be lower. You know may be -- you know may be - instead of 9% in sales, it is more like 5% of sales. And that's just because given all the new funded contracts that we have we think we're going to have good profit mix going forward at that level. On the SG&A, it's a little bit more motion there. But I think -- we think we are going to improve it a little bit.

Okay. And one last philosophical question, a lot of the defense contracts that you have been working on, if you just look at SAT [indiscernible] and some other ones have gone -- come down through belling, and I am just wondering, if you could kind of add any color relative to the other top three big clients?

Well, of course, we have different relationships with other clients; and that would include the reality of being no third parties in a way. And we have efforts to reach at them. And even they want it hard and tough -- at the end of day, we're a team; sometimes, we compete. And there is some of that if you could -- I'll give you examples on the Jitters program there will be with, I think, all other cost carriers on the PowerPoint Jitter. We'll probably end up where they end up teaming with different pilots or different clusters. So I think our relationships with all three are actually pretty good, I'd say.

Okay. That's...

Let's be hopeful on this.

Thank you.

Thank you, James.

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

Hi. Several questions. First of is -- as it stands right now with USM profitable and where do you see it for '04 and that how is your business?

Well, USM is not profitable now. We're not breaking out USM separately; and, really, what we said is we've had some of our solutions businesses on aggregates. In future, there are operating margins for the year; and that includes the results of USM. USM -- I can tell you, USM's results were yet better due to two main factors. One would be broadband sales then we would offset that to some extent and we would highlight; and they're into that. There are now certainly good products and timings and standing for the timing. And the other area is with more potential to certainly become more involved in the fringe programs. So it is pretty promising idea that we're keeping and certainly that we're looking at.

Fine. On the European MIDS, what in the mid did seems to stacking out? You know, you got Netherlands switch called Sopaine [ph]; Belgium's announced they've 50 million out to be awarded. Now there's three of those clients going to Poland. From [indiscernible] they will need mid boxes. What is the size of that opportunity and what's your chances?

Well, pretty clearly, the thing is that we've said what kind of roll along in breaking up the niche markets is really our estimates were about 50% US and 50% rest of the world. And while the opportunity is exciting -- although it's not 50% rest of the world, half of that is European and the other half would be -- European primarily and participating allied nations and then rest of the world. And we think that the Netherlands where there -- will be indicative, at least, of how we'll do in that European segment. Not necessarily in the rest of world segment.

Haven't your chances improved since your original estimates assumed that the year over year consortium would be competing and they're not?

Probably. I don't see how [indiscernible]. I was confident when the programs were awarded. I mean, you know, it's right now quite a bit later than when they intend to order. So until all of that's resolved there's a lot of uncertainty but you can work [ph] still right up until the end and then we might not win those segments. Assuming right now things are looking better on our prospects, but until you actually win, you just can't tell.

That's the Netherlands you're talking specifically?

Yes.

And you haven't heard anymore from the foreign military sales deal for Belgium?

There's really been nothing that's changed on those.

Okay. A few conference calls ago you said to look for announcements regarding a joint strike fighter in a few weeks and also something about, you know, look for announcements with such and such operators and [indiscernible] system and the erosion of satellite time or what? Is it something we should still wait for?

Yes. I mean somewhere between during the category described, programs we described things where we have -- they're not going to start or they were selected but don't have definitive contract values for the entire anticipated amounts, and we don't have approval from customers to make announcements. And so some of those things could be in that category.

Thanks. You said something about funding for the transformation of satellite programs. Could you give us some more info on that?

With the -- just on defense -- probably defense has plans to take [indiscernible], the [indiscernible] down satellite systems, which include things, like X-band, Ka-band and EHF. And also their needs [indiscernible] cost difference in military and government departments. We are -- they've talked about trying to combine those in some ways under new product, what we call, transformational [indiscernible].

Have you got fundings for that? Is that what you were saying?

We have received funding under that program.

Okay. Is that significant?

Not yet. But I would say there has not been significant fundings. With all of them if you take the individual [indiscernible] like EHF. Certainly, you know, it will turn out to be hard and transmitters fall out until we have a company [indiscernible] under that. We've got a company under [indiscernible] which is far too significant, but if you take this piece out -- really, the whole transformational side piece out on its own, the funding in that particular category it really hasn't started yet.

But you're part of it already?

We are part of the small parts of that -- of some of the small parts of that space. The parts that we're aiming at anyway.

On this low range you gave out for fiscal '04, you listed a million things that would cause you to raise that. Well, what do you think about the low end? Do you have to do anything to set [ph] that? I mean is that just what -- does backlog do that for you?

That's what we're trying to convey, yes. And that -- just to be clear. I mean, we have fair amounts, let's say, we have with the running may be in the $25 million a quarter range of lot of top ended booking ship products and that includes things like [indiscernible], VSAT products, the standard antenna products, things like that. So that really means that we can just, you know, not get awards. So let me put together rewards that are inconsistent with our historical levels. But what we're trying to avoid is pinning our revenue range to some new specific program that is yet to happen. Okay. So that's what we're trying to avoid. And so all that means is, kind of, the combination of backlog in different ships. And, you know, just...

Does it have to remain at that 25 million a quarter of booking ships for you to get to 225?

That sounds simple. I mean if it's -- what we're trying to do is -- historically, we've been in a mode where nothing ever happens exactly according to plan. Some things are better; some things are worse. And it just allows for some things to be worse. And that could be one of the things that's worse if other things are a little better. So that's how we're trying to describe it. You know that -- the combination of that plus our pretty big rewards outlook in general means that we're trying to avoid reliance on a particular contact starting in a particular time.

Okay. Is your book to bill in the commercial VSAT world above one?

Yes.

And the antenna business too?

Yes.

Okay. That's all I had.

Okay. Thank you.

Our next question comes from the line of Jeffrey Bronchick with Reed Conner & Birdwell. Please proceed with your question.

Yes. Hi, guys. Mark, you made a reference to, you know, returning to historical margin once, you know, whatever variety of one time issues and kind of you get yourselves straightened, so to say. And without referring to exactly when, what sort of historical margins do you think you were referring to as far as either in a - outside the gross margin line and EBITDA line?

Well, we certainly now look at something above 30%.

On the gross line and for example, you have the EBITDA margins; you know, in the high teens, is that not unreasonable?

I mean, [indiscernible], so that's a - but what I would consider a little more steady stage, it should be the [indiscernible] big searching program and then...

Right.

...first of all in [indiscernible].

89.

Okay. So if we go back there, most probably to do gross margins in the mid 30s and profit before tax and this - one of the things, kind of before we got halogenations [ph] of intangible associated with acquisitions. We're getting profit before tax in the 10% fix range, no 10% plus. So that - what I would say is that, that where we're aiming to really drive this mix back towards [indiscernible], okay. And to get there we'll probably end up with the defense doing a little better than that, commercial doing a little worse, but in the aggregate right in that range.

And within what timeframe would you be unhappy about not obtaining those goals?

Ronald here. I think a lot of it will depend on our growth rate and the statistics mix for profit, so we can do. You know, I don't want to - well it could be there - nothing about the fourth quarter this year, but depending on what happened with mix might be next year.

All right. So that's okay. So within 18 months you feel we're doing something wrong or organized at something wrong here, if you're hitting those kinds of numbers?

Right.

Okay. Thanks a lot.

[indiscernible] there are number of metrics also to guide that. You know, we look at kind of what's the mix of our development business for sure, our standard production business and other things - you know, who are the customers on those production businesses and it also depends on what happens in the continuing business as well [indiscernible] what's that can happen this year that even the consumer business of gross margins might be below historical and it shouldn't drive us out of that on a profit before tax basis prior to goodwill and amortization of intangibles.

And the second part of my question is, you know, I understand the concept upfront expenses on both preparing a bid -- actually getting a bid and then going through the lifecycle of the project where obviously the margins get higher. So when you're looking at a range of, let's say, deceiving earnings as the metric of this 45 to 90 cents; if your bookings and revenues are blown out, which you seem to think they are, you would be -- numbers will come in toward the lower end, because you're basically scrambling resources to meet demand. And if things are -- the reason I'm looking that contrary ugly in uptick, you don't hit everything, you think -- earnings should be higher, because there is less expenditure.

Well, we didn't actually, if you look at it historically. The horrible fact is anything we've gone through some pretty big cycles; but there were times, historically, when we had the highest margins was when we had the least particular things to go after. Certainly, we didn't have the opportunity. So we -- our earnings were high. In the last quarter, what we really liked about was its balance around sales -- definitely sales and earnings and orders. In that month, our orders were still at a risk; and we had to call for [indiscernible] that we had pretty high earnings really just to mess up to go out. And we went through the cycle, where we had a whole bunch of the stuff in and then the [indiscernible], the backlog [indiscernible] we were playing catch up down. Only the last nine moths to a year, and it's to give you a subjective answer, is our organization has been professed on building that ongoing. And so you'll see at opportunities that we've done a good job. We've captured them, but that has resulted in resources. And I'd say that history is gone, we're dealing to you to think of it's an easy way we think that there is balance is on material. So we're dealing value and attack on earnings as well, as well as we've got to pause for our audience to show for it and good tasks make front roads. But we'd like to challenge that.

That was the setup for my statement and question.

Yes.

You know, the question is -- the three things that you do: need your R&D to come up with neat ides, product solutions, you then bid for these projects, and then you execute them when you get them. And my question is and I think everything you just said and in light of the last five years, raises the question of -- is a company the size of ViaSat has currently configured capable of successfully realizing its potential? In other words, it seems like you have difficulty doing all three things well at once, which bakes the question of -- would you be much more successful as a part of the larger organization.

That's really a tough conclusion. I'd tell, what we have -- we do have evidences right around the time we went public and the [indiscernible] after we grew 30% 20%, 30% or 10% consistently with tax profit. We've been using directions in markets -- you know are relatively not even bigger than [indiscernible] telecom market. I do think that this year starting now will be a much better test [indiscernible].

So you would suggest that this year, you know whatever it is you will probably get some idea of it. They're going to let you update the data points but -- you know I am just arguing that this is a very different company both size and complexity and number of things you are involved in versus when you first started and -- you don't think adjusting to this year is the test of -- you know a true or false to my question.

I think that's a fair point.

All right. Great. Thanks guys. Thank you.

Okay. We will take one more question, operator.

Our last question comes from the line of Kevin Spellman with BVM Asset Management. Please proceed with your follow-up.

Hi, I just had one more thing. In the commercial broadband part of the business, if everything -- all the schedules out there stay the same, what kind of revenues -- I am going to assume, you know, connection, WildBlue and if you get WildBlue you have Teleset and single large FSS operator. And if everyone's scheduled day is same, what do you look at for revenues that would fall into fiscal '04 from that part of the business?

I don't want to guess your question but the sense I get out of it is that, if things go well we will pick the high end of our revenues and that would include some combination of what you just described or we can also have some good prospect from our government business as well. And what worked for us in the past is not having to rely on some specific program or contracts and having a number of things that can go upwards [ph], and I think that's a position that we are in. We can hit that topline of revenue range, if things go well. And in this environment to get 30% plus revenue growth or 30% revenue growth, I mean, we should think that sounds good.

Long-term earning.

Yes.

Okay. Thanks.

Thanks Kevin. Okay. I think that covers not only our prepared remarks, probably had, I think a lot the Q&A as well. And we will be back in about three months for our next call. Thank you very much for attending.

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

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