Viasat Inc (VSAT) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ViaSat fiscal year 2004 second-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, October 6, 2003.

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

Thank you. Good afternoon, everyone, and welcome to ViaSat's earnings conference call for our fiscal year 2004 second quarter ended October 3rd of 2003. This is Mark Dankberg; I'm Chairman and CEO. And I have with me Rick Baldridge, our Executive Vice President and Chief Operating Officer; Ron Wangerin, our Vice President and CFO; and Greg Monahan, Vice President and General Counsel. Before we start, Greg will read our Safe Harbor disclosure.

Thanks, Mark. Information contained within this presentation may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. I wish to caution you that these statements are only predictions, and that actual events or results may differ materially. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the section titled "Factors That May Affect Future Performance," in the Company's 10-K. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Stockholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements.

Thanks, Greg. We're going to use the slides again this quarter during the conference call presentation. And they can be viewed over the Web. I will be referring to those as we go along. The topics we'll cover include our second-quarter financial results and a summary of the key points there. We had a great quarter for sales, earnings, cash flow and new orders, and we'll spend some time discussing all that, followed by a summary of the highlights (technical difficulty). Then, Ron Wangerin will discuss the financial results in more detail. After that, I'll give an update to our outlook and financial guidance, and a quick summary.

So, looking at the revenues, we reported record revenue again for the third quarter in the row, at $64.3 million. Last year's second-quarter sales were a little low, but a 63 percent increase is really nice, and a little better than we'd planned. The sustained revenue growth is basically a consequence of the backlog we have been building over the past year and a half. Plus we also had another nice quarter in faster-turn (ph) book-and-ship orders in VSAT networks and some of our defense products. The run rate on those products has been higher over the last couple quarters and, while by definition there's not a lot of backlog there, we're getting more comfortable that we may be establishing a bigger base in those areas. So, given the continued good order and opportunity flow, as well as growing backlog, we're still planning for sequential growth in sales through the year. We're at 123.6 million for the first six months, which is up 50 percent over last year, and we'll go into more detail on the makeup of this quarter's revenues, a little later in the call.

So, looking at pro forma earnings for the quarter, they actually came in a little higher than we were planning, at $3 million and 11 cents a share. The pro forma results exclude only amortization of intangibles associated with acquisitions, and we'll provide explicit bridging data to GAAP results a little bit later. The extra penny per share we earned is due to pulling into this quarter a little higher sales volume than we were expecting. Gross margins were a little lower than we expected, but there were compensating favorable variances, and we'll go into that in more detail later, too. We're happy with these results, and we believe they help confirm that, overall, we are on the trajectory we want to re-establish, the operating earnings and margins we have historically achieved.

This next chart gives Q2 net earnings, and it shows we had GAAP net earnings of $1.8 million and 7 cents per share, fully diluted. And also note, as the press release pointed out, that the share basis has grown this year relative to last year, primarily due to the impact our higher stock price has on the treasury method of accounting for shares.

Now, switching to the year to date, pro forma earnings are $4.6 million and 17 cents per share. So you can see that in the second quarter, we did achieve the sequential growth that we were aiming for.

Then, moving to a year-to-date net earnings basis, year to date, we have earned $2.3 million and 8 cents per share. Again, the only difference, relative to pro forma, being the amortization of intangibles associated with acquisitions.

Okay. So next, we'll summarizes some of the key points about the operating results, as well as the strong new orders that we earned in the quarter. So, looking at the chart on key points, one of them is that the last couple of quarters help illuminate some trends we think have been developing for the last 18 months. This quarter extends the steady progress we have been making, beginning with the surge of orders back in the June quarter of our fiscal year '03. The first thing we had to do is get the revenue engine revving. Then we had to reach critical mass in each of the business area, so we could absorb the staff we held onto in the slower quarters, and also have a base to grow with the orders. And we are also starting to see the benefits of the big increase in funded development contracts that we had, that are reducing our discretionary R&D costs. So this quarter, we are able to again grow the operating margins and the earnings faster than sales, and we believe we will continue that trend for a little while. Plus we again generated strong operating cash flow, over $9 million this quarter alone. That strong cash flow is really helping our balance sheet. One noteworthy point on that is that our cash and equivalents now handily exceeds our revolver credit line debt. So in essence, we could have been completely out of the line for the first time in about two years.

We also continued to improve a number of other balance-sheet measures, especially DSOs and inventory turns, and Ron will go into detail on that in his portion of the call.

And the new business momentum is still very good, with positive book-to-bill of about 1.4 this quarter. Orders were strong, at $88 million for the quarter, and we are already at $190 million for six months year to date. Backlog is now at a record level, even exceeding the peak of the telecom boom for us, and it's nicely diversified. There still a bunch of good opportunities in our pipeline, too. We're not really expecting the second half to be as high as the first half, but the pipeline does look promising. We anticipate very nice year-over-year growth in new orders, as well as in revenues, which is building confidence for our fiscal year '05 for us. We think the current order flow and pipeline suggest that we probably spent some of those higher-than-expected discretionary expenses of a few quarters ago pretty wisely.

And we can see some of that, looking at the next couple of charts. This first one shows a revenue trend, and it shows basically that we've grown sales for the last four quarters. Then, this overlay chart coming up shows that we've also had a positive book-to-bill and added to backlog for every one of those quarters, and that's really good for us, since our orders can be so lumpy. It's a really nice consistency. Obviously, we could have big swingers like our recent MIDS order, and they can be decisive on whether or not we can achieve this positive book-to-bill every quarter. But, given five straight such quarters, that suggests that we have got a lot of different things going on, and it makes us a little less dependent on specific contract timing. The accumulated backlog really helps make things more manageable. So we can't predict that we're going to do this every quarter, but based on what we have in our pipeline, we have got a decent shot at it for a little while.

Okay. So then, the next topic we'll move onto is going to be the highlights in the different business areas. And this first chart will start on the government business highlights. On the government side, one main theme is we had been and still are ramping up a lot of funded development contracts. We're doing more of this than ever. That's great, in terms of technology development, and it's also good in terms of loading our future pipeline of manufacturing products, and it's also reducing our discretionary expenses. A significant portion of the development work is being done under cost reimbursement contracts, too. So overall, right now, that's a little bit of a drag on our government gross margins.

Our $43.8 million MIDS order was a really big deal for us. We did very well there, and we think that's due to a combination of factors, including the performance of our units in government qualification testing, the demonstrated ability to steadily increase our production rate and competitive pricing. This award helps indicate that we have arrived in the MIDS data link world. The other point is that there's still some additional significant near-term international orders that have not yet been awarded, and we could see some of that decided in our third and fourth fiscal quarters. So we're still growing defense backlog and, because of things that haven't yet been decided, there still a bunch of stuff in the pipeline to be determined in the next couple quarters.

We said we're aiming to improve government gross margins, and that's still the plan. Things are already starting to happen there. For instance, the newer production of MIDS terminals will carry significantly higher gross margins than those that are being built now. The higher-than-expected volume will certainly help there.

We have also established a new government broadband area that has very nice growth potential. That area continues to make progress, with the combat camera program we announced previously, creating a nice opening for our LINKWAY IP-based VSAT systems, as what we'd like to be an early prototype of the Defense Department's transformational satellite communications initiative. And we think there's more to follow there. Plus, we earned our first add-on to the new DoD standard EBOM (ph) satellite modem and remain bullish on the long-term potential there.

Another kind of interesting point is that we are back into the MUOS next-generation UHF satellite program. Raytheon invited us to participate on their team, and we are really pleased and excited about that opportunity. We had been on another team that didn't make that first down selection, so this is an unexpected opportunity for us. We are still working on KG's 250 certification, and that's a little behind where we thought it would be at this point. We continue to receive orders for the product in advance of certification, though, and we don't see that negatively impacting our near-term results, overall. There's a lot of activity in our information security area, of course, and this area is already accounting for a lot of the growth in our government segment.

So, now, we'll move over to the commercial side. And there, the most obvious point is that we had a profitable quarter in that segment, too. So that's great progress. One of the key drivers is that our VSAT networks business had another very nice quarter, so we're continuing to build positive momentum there. We're especially pleased with progress of the LinkStar hub spoke VSAT system. We've deployed almost 50 network hubs in the last two years, and there are now over 12,000 cumulative remote units. So the VSAT industry is still very, very competitive, but we think we are creating a much bigger gap between us and the companies that are behind us, and we think it's clear that the gap between us and HNS and Gilat ahead of us is narrowing. We're seeing more bidding activity than ever, which probably goes along with a perceived increase in the level of capital spending on information technology among businesses and in some of the faster-growing economies. So the level of production and deployment of LinkStar units is actually getting pretty close to the run rates that we'll see when we first start SurfBeam production, and the steady ramp has helped us refine our manufacturing support processes over the last year. The positive momentum on LinkStar in some of the big North American contracts we have completed is also generating more activity around Imeon (ph). So, while that's pretty close to a breakeven situation for us now, we see some opportunities to improve that pretty meaningfully, too, over the next few quarters. And, while LinkStar is our fastest-growing VSAT product family, we have also won and executed some very nice, profitable programs in our other product lines, too. So we feel like we're making good progress over the last year, in combining the various assets we had from the legacy ViaSat, Scientific Atlanta and Comsat Labs into a much more seamless team, and I think we have got a lot more confidence, going forward, as things stand, and can see things improving even further as we roll out EBBRCS (ph) compliant products and eventually bring SurfBeam into our VSAT sales and support organization.

Then, without going into too much detail, we're also making very steady progress in our large antenna business. We've built a backlog of orders there that's the biggest it's been since we acquired that group from Scientific Atlanta. The backlog is very nicely diversified, and it includes over four different major defense contracts. We have been investing to expand the product line and drive down costs, so there's also a good sense of moments of there, as well, from both the internal and external viewpoints.

Now, a few weeks ago, Intelsat and Orbit Data Systems announced that they were using our SurfBeam system at Ku-Band in the Middle East to offer broadband to direct-to-home TV subscribers. And that's a contract we had announced in June with an unnamed customer. But clearly, this appears consistent with Intelsat's objectives in investing in WildBlue Communications, and shows their interest in bringing that technology to international markets. It also indicates that they've chosen SurfBeam as their new consumer broadband platform, which lends a lot of credibility and prestige to pretty much all of our international VSAT marketing efforts. So obviously, we put a lot of focus and effort into that rollout, and we're going to have more to talk about here on that, on the next call. We still haven't yet announced the resumption of our Ka-Band contract with WildBlue, but we are putting a lot of effort into it, and there's been steady progress, and I expect we'll also be able to address that next quarter in more depth. The other important aspect on our commercial segment is our U.S. Monolithics subsidiary. The bottom-line results there are not quite yet where we want, but we do see a lot of the pieces falling into place to get us there by about the end of the fiscal year. Two of the main drivers will be getting SurfBeam into production in both Ku-Band and Ka-Band versions. That ought to be well underway by the first quarter of fiscal '05. In the meantime, another important aspect is that one of the defense mimic projects we targeted has gone well. And USM is beginning to grow a significant base of funded developments that's really going to help their bottom line and create excellent diversified growth opportunities.

So, at this point, I'd like to introduce Ron Wangerin, our CFO, who is going to discuss the financial detail -- the data in more detail.

Thanks, Mark. Our financial priorities over the last several quarters continue to involve. We are very focused on growing earnings faster than sales, which we've done. Our cash flow is very strong for the quarter, and I'll talk about that shortly, along with our balance sheet improvements. For more details on the financial results, I'll start out by discussing where we end up with the balance sheet, the cash flows for the quarter and conclude with the operating results.

As we look at the balance sheet, it continues to get stronger and stronger, and we've made excellent progress over the past year. In comparing the significant balance sheet elements, we'll discuss the increase in cash on the next slide when we look at the cash flow statement for the quarter.

Total receivables increased by approximately $1 million on an increase in revenues in revenues of over 5 million, whereby improving DSOs. At quarter end, unbilled receivables were greater than billed, but this is a function of the relative timing of contract milestones in relation to quarter end. We had two contracts with milestones achieved within the first few days of the quarter, both of which were for over $2 million, and this created an $8 million swing between billed and unbilled. And this will happen to us from time to time.

As we talked about on the last call, inventory decreased, as expected, due to the timing of several shipments early in the quarter, and large antenna and material moving into cost of sales. Prepaid assets increased largely due to long-leave material deposits. Goodwill and intangible asset reductions represents a normal amortization of intangibles. Property and equipment was virtually flat, with capital expenditures offsetting quarterly depreciation. The change in other assets reflects a reduction in long-term deferred income taxes of approximately $900,000 and amortization of capitalized software of approximately $500,000. We began amortizing the ArcLight software in the quarter, and we expect capitalized software amortization in future quarters will increase to approximately 900,000, but we had no new capitalized software in the quarter.

We reduced our accounts payable by almost $5 million since last quarter, despite the increased business volume. Collections in advance of revenues increased quarter over quarter to almost 19 million, reflecting improved customer turns and the quality of the customers. We see this amount leveling off, though. We paid down our line of credit (technical difficulty) million dollars, to below 6 million. The increase in other current liabilities reflects an increase in warranty reserves for shipments during the quarter, and accruals for 401(k) match and performance bonuses.

Next, we'll talk about the cash flows for the quarter. During the quarter, we generated 9.3 million in cash from operations. The strong cash flow resulted from improving net income, the over $5 million in non-cash add-back's for depreciation and amortization and working capital management. I do want to highlight that the cash generated included the pay-down of accounts payable by over 5 million in the quarter.

As we talked about last quarter, we see depreciation increasing somewhat in the future, with rising capital expenditures, and amortization increasing due to increased software capitalization -- excuse me, increase (technical difficulty) 6 million per quarter. Cash from operations was used to fund capital expenditures of 2.6 million and pay down our line of credit by over $2 million. (technical difficulty) approximately 1 million relative to the first quarter, and we expect to continue at the current level, or slightly higher, as we have a number of products going into production, creating demands for production test equipment, and a number of new development programs requiring lab and test equipment. All totaled, we had a net increase in cash of over 4.7 million since Q1.

On the next chart, I'd like to discuss some of the key balance sheet measures we are tracking. The 9.3 million in cash flow from operations continues our trend of generating cash through our growth phase. Over the past twelve months, we have generated over $25 million in cash from operations. We continue to use some of the cash from operations to pay down our revolving line, and ended the quarter with a net positive cash to net balance, for the first time in two years. We continue to see cash being generated from operations over the next few quarters, as well.

DSOs continue to improve. We said over the past several quarters that our historical average was in the low 130's, and we were targeting to be in the low 120's. As you can see, we are in that range now, and we'll still drive to -- try to drive that number down further.

Inventory turns continue to improve. We do get some questions about our calculation. We use sales instead of cost of sales to compute turns. In cost of sales, the turns would be higher. Our turns improved by almost 10 percent quarter over quarter, and we have made considerable progress over the past year. But our target still remains at better than 10 turns.

Next, as we turn to the P&L, for the second quarter, revenues increased by 63 percent over the same period last year. Revenues for our government segment were 27.7 million for the quarter, and commercial revenues were 36.6 million. We're seeing revenue increases in essentially all of our business areas. Gross-margin dollars continued to grow as the volume has grown. But gross margin percentage is still lower than we would like. Gross margins for the second quarter are lower, due to higher input on some lower-margin programs relative to prior quarters. As Mark indicated, as some of the new higher-margin programs begin their ramp-up over the next several quarters, we expect the gross margin rate to improve.

Selling, general and administrative expenses continued to be relatively flat quarter over quarter, but are declining as a percentage of sales. The significant increase from the second quarter of last year reflects higher selling expenses from increased sales, and accruals for 401(k) match and performance bonuses.

Mark discussed earlier the higher level of customer-funded development. This has resulted in lower discretionary R&D expenditures over the past several quarters. The substantial reduction in year-over-year other expense is primarily related to our investment in Imeon, which was only 49,000 for the second quarter of this year, and almost $600,000 lower than last year. In addition, our interest expense was significantly lower, reflecting a lower debt level.

For segment purposes, government operating margin was 3.8 million for the second quarter, and commercial operating margin was 530,000. Our income tax benefit for the quarter reflects a normal statutory rate of approximately 40 percent, offset by R&D credits.

Year-to-date revenues increased by 50 percent over the same period last year. Year-to-date revenues for our government segment are 55.2 million, and commercial revenues are 68.4 million. The significant change in year-over-year margin percentage is related to the MIDS order received in the first quarter of last year, and the related accounting. This produced a much higher gross margin rate, relative to sales. As I said earlier, we expect to see improvement in our gross margin, and Mark will discuss this shortly.

Year-to-date SG&A expenses are higher in the current year, due to accruals for 401(k) match and performance bonuses, which were 0 last year. R&D is much lower year over year, due to the higher level of customer-funded development, which has resulted in lower discretionary R&D expenditures. The year-to-date substantial reduction in other expense is related to our investment in Imeon, which accounted for 1.1 million of the balance last year, and is less than 100,000 this year. For segment purposes, year-to-date government operating margin is 6.6 million, and commercial operating margin is positive, at 17,000. Our income tax benefit reflects the normal statutory rate of approximately 40 percent, offset by R&D credits.

On the next slide, we have included -- clearly show the difference between non-GAAP and GAAP per-share amounts. As you can see, the only item the company includes are the effects of acquisition-related intangibles, net of tax.

Next, I'd like to turn it back to Mark, who will talk about our current outlook.

Thanks, Ron. At this point, I'll talk about that -- our outlook for the rest of this fiscal year.

In terms of guidance, we do not think there is any basis for changing our outlook for the year as a whole. As we mentioned earlier, our sales for the quarter were a little higher than we thought, due to timing of material receipts. And we probably accelerated about a penny of earnings into this quarter from the second half. I think the second-quarter results probably show we are on the right track, in terms of continuing to grow earnings faster than revenues for the next few quarters, and we think each of the third and fourth quarters will show sequential improvement relative to the second. We still think setting a target of 10 percent pretax earnings on a pro forma basis is the right thing for us, in the near- to mid-term. We'd like to hit that type of run rate in the first quarter of fiscal '05, in a way that's sustainable throughout that fiscal year. Once we do hit those types of margins, we're going to aim to improve them, but we don't really think it's prudent to plan on that until we get to where we can focus on it in more detail. And right now, we are focused on that 10 percent target.

So, this next slide, particularly, shows kind of the difference, in terms of a composite pro forma business model, where we are going to basically show revenues, cost of sales, gross margin leading a PBT, and that PBT is on a pro forma basis.

And this chart helps to illustrate what we're aiming at, to improve our margins. Well, our operating margins are pretty much right where we planned for the second quarter, to be consistent with our trajectory towards a target operating margin. So gross margins are not yet where we want. Right now, there's a number of interrelated factors. We've got a large amount of customer-funded R&D, which tends to be at a lower gross margin than our production contracts. The funded developments reduce our below-the-line expenses, though, and that helps operating margins. We also have a strong near-term opportunity pipeline, due to higher discretionary investments that we made in previous periods, and that helps reduce the current below-the-line expenses also, to some extent. Plus, we know that we've got a number of low-margin programs that plan to be replaced by higher-margin follow-ons, with MIDS being a good example.

So, we would like to see fiscal '05 in the aggregate, and then averaged over the year, look more like the model on the right-hand side. And there are couple of important points about that, though. The first is, while we're aiming for the 30 plus percent gross margins, we don't think that we have to have that to make 10 percent operating margins. We've got some knobs and levers to manage, and sufficient maneuvering room, so that we could get there in the first quarter, even if the gross margins are a little bit under 30 percent. The other point is that a wild card here might be some unexpected growth in the SurfBeam business. We expect that SurfBeam production for consumer applications is going to carry gross margins that are well under 30 percent. Given our current expectation for the Ku- and Ka-Band SurfBeam content in fiscal '05, we still plan on 30 percent plus gross margins on a blended basis. But if something unexpectedly big happens, and SurfBeam revenues grow substantially, we believe we could still maintain 10 percent pro forma profit before tax, even at that price (ph), with gross margins down somewhat.

And finally, this isn't a static picture. We adjust our model and operating plan in response to opportunities and challenges. We think the diversity of markets for our core technologies is a strength. That means that this aggregate model is really a blend of several different models, depending on specific market dynamics and product lifecycles. And just as an illustration, remember, a few years ago, we had gross margins over 40 percent, and net earnings that were over 12 percent, but also fewer good targets to invest in. So for now, we think the blended model shown for fiscal '05 represents a good balance of operating earnings and investing in sustained growth, and we will communicate if and when we think that changes.

Last quarter, we had identified some important factors that could influence our trajectory toward the target margins we are aiming at. And so, I would like to review those here briefly. The first one is the U.S. domestic MIDS ought-four (ph) came in later than we originally planned. But it's here now, and it's bigger than we thought. So that's positive. There's still some important international MIDS opportunities that are still pending, and they are later than we planned. But as of now, we don't forecast an impact due to that. We still haven't yet announced the resumption of WildBlue, or a decision by Telesat for Ka-Band SurfBeam. And those are still being resolved, and they are a little later than planned. So that's a little bit of a drag on current performance, but we don't anticipate an impact due to that, based on our current assessment. Some of the DoD broadband projects, like the transformational comms, are also a little later than planned, but current forecasts don't really impact near-term results. And finally, some of that KG-250 revenues and margins we would like to see are being deferred to some extent, due to schedule delays.

The net result of all this is that our order and sales momentum lets us offset those things, so that none of these factors has really changed our outlook for the balance of this fiscal year. And that in itself is probably a good indicator that we are regaining some of the balance we've typically had in the past. That doesn't mean our outlook for guidance is bulletproof. We are still expecting that, in the aggregate, we're going to have favorable results on opportunities like those that I mentioned above, but in terms of the outcome and timing, our results are more robust than they were before, which is a good thing.

So, then, just moving on to the summary, we are really happy with our results for the quarter. We achieved all our objectives. We are growing earnings at the pace we wanted. Revenue is growing nicely. Bookings and backlog indicate that we should be able to sustain that for a while. The new business pipeline is still good. The operating results have yielded excellent cash flow. Cash flow has resulted in a much stronger balance sheet. Cash and equivalents on hand exceed the balance of our revolving credit line. We are still improving some key balance sheet ratios, and we see evidence of sustained gains in our competitive positions across pretty much all our businesses.

So, that concludes our prepared remarks for today, and at this point, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Thomas Watts, SG Cowen.

Congratulations on a great quarter. Just a couple of -- since the end of the quarter, how have orders been going, so far, as far as this quarter? And in particular, have we seen Netherlands MIDS come in, into the European new contracts?

Well, we haven't made any announcements. We believe things are okay. But no; there's really nothing to say, I'd say, yet, about this quarter.

Wasn't the contract going to the Netherlands Parliament or something, for the necessary approval? What happened for that build that was related to that?

The timing for that is just -- it's still going to the timing that had been discussed, so we weren't actually expecting a final decision before today.

Did you hear anything?

No, we're not announcing anything yet.

Also we saw Liberty finally pulled out of Astrolink. It looks like Astrolink is done for. Are there any residual liabilities there? In terms of the technology you developed for that, are there any other markets?

We're a little disappointed; I thought there was some chance it would come back. It looks, from a Liberty perspective, and Astrolink as a project is done. There's no impact to us whatsoever. There are no liabilities in our plans. There are some prospects, because there do exist payloads at Northrop-Grumman that there still pretty complete, that we could see those turn up in different projects, at some point. And we are not counting on that, nor do we have it in our plans. But I know there are some opportunities where that could occur.

And you mentioned -- you positioned yourself as number three in the VSAT market. What would it take to move into the number two position ahead of Gilat? And I notice you recently recruited some people from there (ph).

I think that, basically, there were mostly -- just deferring to market data that Comsys publishes -- and Comsys is generally regarded as an authority for VSAT market share, and they have had us in the number-three position with -- maybe with not a whole lot of change for calendar 2002. To be honest, I'm not quite sure that they are surveying -- we have a pretty broad range of VSAT stuff, and it depends on how you define it. I think that we are -- I don't really want to get into a market share analysis war, but I think that if you add up all the stuff we're doing in satellite networking hardware, which would include like VSATs that go on airplanes and SurfBeam and that, I think we're going to be pretty close to Gilat, pretty soon, if not already.

Okay. And then on Intelsat, there's some reports that there are other potential deals out there similar to the ODSL deal that you have with them. What could timing of those be, and would those be similar scale to (inaudible) transactions?

We believe that they are pursuing some good ones, and we are working with them on that. I think that the scale is probably in the ballpark, but it wouldn't really -- I really couldn't add anything to the timing. I think that would best coming from Intelsat.

And just finally, Echostar now plans to push forward with a full commercial launch of their satellite broadband. What are your chances in positioning there? And also, how can you guard against -- doing business with Echostar often puts pressure on the margins of their suppliers. How are you looking at that opportunity?

Well, Echostar seems to be interested in moving ahead with some Ka-Band broadband. We think we be a good supplier for that. I think that there are a lot of (inaudible) that will go into Echostar's decision, probably not the same ones as ours. So I'll have to see what they do. I think that the thing about Echostar is that they can drive a lot of volume. They do expect their suppliers to be extremely cost competitive, and so if there's a match there between what we think we can do and what they want, hopefully that will work out. But it's still pretty early to tell, and we'll have to see.

Thanks very much. Great quarter, Mark.

John Bucher, Harris Nesbitt Gerard.

Mark, I just wanted to make sure I understand -- the first full quarter that you're targeting for the 10 percent operating margin -- that's the first fiscal of '05?

Yes, I would say that's kind of where we are aiming for that, yes.

And then, with respect to AirLink and the Skylinx program, for that system, for the addressable market size there, should we be thinking mid-sized corporate jets and above? And have you seen any recent changes in the competitive landscape for that market, and can you just provide an update on what your outlook is there?

We don't perceive any change in the competitive landscape there. I think that there are a number of manufacturers of those types of corporate jets, like Gulfstream, Cessna, Citation -- and there would be others like Bombardier. And there are a few others. That's the target market. And right now, basically, one of the ways that distinguishes -- and I'm not an expert on business jets, but we have a tail-mount antenna where there is a sufficient surface in the tail and area to mount it under a radome using a steerable antenna, which is how a lot of those Jets get, for instance, TB (ph). Or that would be where an INMARSAT-type voice antenna would be. So that kind of describes the market, as opposed to something that would be a fuselage mount. I think that right now, we have announced around $20 million in orders. I think that AirLink intends to work through those orders over the next six months to nine months or something like that, and they are really in a marketing mode. They've been a little more active, based on the flight testing we have done. And I think we'll learn a lot more, as I said, over the next six to nine months.

And a final question. Could you say what current headcount is?

It's dynamic, but I'm guessing we are right about, say, in the 950 employee range, all told. That would include temporaries and full-time temporaries and things like that.

Do you expect a moderate increase between now and the end of the fiscal year?

Yes; I think we will probably be, ballpark, 1,000. That's probably a good estimate for year end.

Wesley Cummins, B. Riley & Co.

A couple of quick ones here. One, when do you expect the production of the new MIDS order to start the production for those units, and the margin improvement that we will see from that?

There's a couple of different views, but I think overall, it will take us on the order of a year from when we get the orders when we're cranking out units, and then it's around another year to fulfill the production.

And then, you mentioned in the call that one of the things that could put pressure on your gross margin is if you have some -- basically some big growth in the broadband satellite side. What programs are out there that you guys are bidding on? Maybe the Echostar is one of them. But does that explosive growth include, say, like WildBlue and Telesat? Or is some of that figured into your gross margin assumption?

Right now, we have been negotiating. And actually, with WildBlue, we're expecting to resume a contract that has already been -- that was in place, and we're just kind of renegotiating that. So we have a pretty good view of what the rollout will be. So when we aim at 30 percent gross margins, say, for next fiscal year, the does take into account what our current expectations are for WildBlue and Telesat, as well, I'd say. But it excludes -- for instance, if Echostar were to do something on a big scale, or if we were to start piling on a number of the other opportunities that occur in that time, then it could start having an impact.

And Mark, maybe you could just comment on what you see as the size of that market, consumer and maybe small-business commercial broadband use for two-way satellite, and how you see that growing, if you would?

First of all, there are a lot of factors that have to come together to make this market play out. It's not all under our control. But I think that one way it's been put -- if you look at -- I think a good metric is to look at it in the context of satellite TV. Satellite TV can achieve maybe in the range of 30 percent penetration, or maybe like right now, they are in the 20 percent range. So you might look at that as a baseline. And maybe they can get 30 percent of that. So you could see in the range of 5 or 10 million, eventually, in the U.S. But that takes -- there's a lot of assumptions that go there, and the international market is big, too. So it's a good, big market, but there so much that has to happen that it's kind of premature to bake that into any estimates.

And just the last thing. I don't know if you say this on your call or not, but what are you guys pricing, or kind of ballpark pricing for a terminal for a Ka-Band SurfBeam product?

We haven't really been very explicit. I think that we are kind of market pricing where (ph) consumer broadband is now. It's probably in the $700 range, and we'll be better than that, to start with. And if it's going to get to anywhere near the market size of millions, it's going to have to be well under that, probably under $300, before you get to a million units.

Thanks. Nice quarter.

Steve Mather, Sanders Morris Harris.

Just one. In the last two quarters, Mark, new orders obviously came in at over 1.5 times revenue. I just wondered if, in the next two quarters, can orders keep pace with revenue? And then, secondly, the business areas which you will rely on to get there. You've already mentioned a lot of them -- KG-250, international MIDS and Ka, of course. Could you just add a little color on this? Can you even keep pace with revenue? And if you could, that is even, in itself, pretty positive.

Yes. We actually -- predicting orders is always tricky. We kind of maintain the weighted average of all the programs we've got in front of us. And we do expect to more than keep pace. That is what our crystal ball says now, is we expect to more than keep pace with revenue, in aggregate, between the next two quarters. And some of the big things there -- we've talked about international MIDS. There are things that should be happening on the JTRS (ph) front. There are opportunities related to the transformational communications satellite system, and also things related to this penetration of our commercial VSATs into the DoD market. On the DoD side, there are a number of pretty specific programs that we have in that. The other things are that our pipeline, our activity rate for new orders for VSAT is pretty strong. So one of the things I was sort of alluding to is we think that our book-and-ship base line is maybe creeping up a little bit. And that alone, you know, could account for, say, 40 percent or so of the orders we'd like to get in the next two quarters. And then there's a few other wildcards there that we don't weight that highly. But does that help give --?

Absolutely. And your -- in aggregate book-and-ship, how much of that is generic in VSAT, or I should say, commercial VSAT?

I would say, right now, we're running pretty close to, let say, 60 percent or so of kind of our book-and-ship run rate, and maybe a little bit -- could get a little more than that is in VSAT. And then the next two areas -- kind of, we get some of that in the antenna business and in our defense products. And those would be things like our Data Controller products, some of the UHF satcom products. And we are still -- as I mentioned, we're getting orders on KG-250's had a pretty nice rate.

Just one follow-up to KG-250s. Can you just give another sentence or two on the source of -- I don't know how you want to qualify it -- postponements or delays? It seems like there's a nice market there waiting for a nice product.

Yes, and it's a little frustrating. It's a complex product; it's in a compact form factor (ph), and we just ride out the end, in terms of making everything work, integrating all the hardware/software manufacturing processes. And that's just coming together; it's a little more challenging then we planned. But we don't really see -- there's no real issues, other than it's just taking a little longer.

(OPERATOR INSTRUCTIONS). Kevin Spellman (ph), UBM Asset Management (ph).

If you kind of read between the lines on your hiring pattern, it appears like you are going to have a pretty good role in this transformational satellite program. Can you kind of comment on how and when, the size of that, and when it kind of gets going?

Basically, we could have a good role in that. Lockheed has announced that we are a part of their team. We think that's a good team. One of the things we pointed out in the past -- Lockheed and Northrop-Grumman, our team. That is the old TRW space park division. And we had worked quite closely with those groups on Astrolink. And so, a lot of the things that we are doing are pretty similar to what we had been doing on the Astrolink program, but in the DoD framework. And then you can layer on top of that the IP, information security aspects of it, which we are real strong at. So that will give you a pretty good flavor of it. The size of it, and the timing are hard for us to -- the timing certainly is hard for us to predict; it's a very big program. It's really dominated by the space segment, not so much by the ground segment. But that pulls along a lot of ground segment. And then, also, the sequence in which work gets done is influenced by the overall government and prime contractors' perception of where the main risks in the program are. So we are really in the mode of kind of responding to and supporting our customers, but it's going to start coming, probably in the next -- I'd say in the next couple of quarters, we're going to start to see more of that, according to current schedules. And then, there will be kind of a burst, and at some point, there is going to be some down selection between the Lockheed and Boeing team. And so that will have a big influence on how big it grows.

Are your part of the Boeing team at all?

No, we haven't said anything about that.

The real focus of your hiring appears to be in the encryption market, and you said before that you expect that to be the largest part of your business, surpassing MIDS at some point. Is that still happening?

We said we think that can happen, and we still think that can happen.

When does that happen?

That's not -- we haven't said -- I just went to be clear. We haven't said this was going to happen on a certain date. Obviously, there's things that can happen in the MIDS area, as well. But if you look at the current trajectories, that business could be pretty -- could be as big as MIDS or bigger, maybe -- you know, our fiscal '06, in that timeframe. It won't be this year or next year.

Okay. I just love those hiring pages, so here's another question about that. You appear to have hired an IP attorney. How good do you think you are going to be at protecting DOCSIS from the inevitable cheap imitator?

There's a number of factors that go into that, and it's kind of premature. A lot of is going to depend on what our customers want to do, as well as what we want to do. One of the things that we've said is -- all along is that we think we're going to play a very big role in bringing the system to market, and we're focused on being able to play a sustainable, large role in volume production. I think the jury is still out on that. We are optimistic, but there's a lot of factors that are going to influence that.

And is there any part of your contract with WildBlue where they would say you can't provide SurfBeam to someone like Echostar or DirecTV, for instance?

I don't want to comment on specific contract terms. The only thing I would say is that we are positioning ourselves to be able to address a broad market.

(OPERATOR INSTRUCTIONS). Richard Valera, Needham.

Mark, just following up on an earlier KG-250 question, when you get that certified, do you think the revenue trajectory meaningfully changes, since it sounds like you are getting orders now? What kind of acceleration might you see there?

It's a little hard to tell. We think the product is in a nice market spot, and there's a lot of good indicators. I've got to say we're pleasantly surprised by the ordering rate, even prior to certification, so that's a good sign. And maybe the only other -- it could be tens of millions of dollars a year. That's certainly possible. It's difficult for us to assess. I think that a lot of it will be determined by when we actually start shipping these early units. A lot of them will go into the hands of kind of early adopters, test labs. And then I'd say that their satisfaction with it, and the applications they see is really what's going to influence how big it gets to be. It's hard to tell right now; it could be pretty big.

And understanding it's tough to predict these dates with any precision, when do you think you can get that certification done? Is this sort of one quarter, two quarters, three quarters?

We kind of thought we'd being right in the middle of that now, and I would say we're maybe a quarter. We don't see it being more than that. We are in a stage of the project where it's just difficult to predict exactly; you are kind of peeling the onion on the integration and bugs (ph). But we don't think -- we haven't slipped that substantially. We think it's pretty close, very close.

Now, finally, just on the bookings, you had 180 million of bookings in the first half. And I think you said, in your comments --

190.

Richard Valera; Oh, I'm sorry, 190. Sorry, I didn't want to shortchange you there. And I think you said you thought you would be down in the second half. But if you could just talk about what are some things that could maybe be swing factors -- the biggest things that could be swing factors to maybe make you up or down relative to that number, if there's any things that are sort of really on the bubble that you can identify, in terms of large opportunities?

Well, I think I kind of ran through that quickly before. It's international MIDS, some of the prototype early-entry things for transformational comms, transformational comms, GTRS (ph). A lot of them are kind of defense projects, which are lumpy, big awards. And of course, there could be a SurfBeam type thing in there, but we don't really have that calculated in.

Mark, why don't we make that the last question?

Okay. Yes, I think we'd like to wrap up, so at this point, that's all we had prepared. I'd like to thank everybody for joining us, and we look forward to next quarter, three months from now. Thanks again.

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