Viasat Inc (VSAT) 2004 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the ViaSat fiscal year 2004 third quarter results. 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, Tuesday, January 27. Our speaker for today is Mark Dankberg, Chairman and CEO of ViaSat. Please go ahead, sir.

Good morning everyone and welcome to ViaSat's earnings conference call for our fiscal year 2004 third quarter, which ends January 2nd, 2004. This is Mark Dankberg. I am Chairman and CEO and I have with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, Vice President and CFO; and Greg Monahan, Vice President and General Counsel. Before we start, Greg will read our Safe Harbor disclosure.

Thanks Mark. The information contained within this presentation may make projections or other forward-looking statements regarding future events and the future financial performance of the Company. We wish to caution you that these statements only predictions and that actual events or results could differ materially. We refer you to the document 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 Form 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 update publicly or revise any forward-looking statements.

Thanks Greg. We're going to use slides again this quarter during this conference call presentation, and they can be viewed over the Web. I will be referring to those as we go along. The topics that we will cover include our third-quarter financial results and the summary of the key points.

We had another really good quarter for sales, earnings, cash flows and new orders and we will spend some time discussing that followed by a summary of the highlights for our business areas. Then, Ron Wangerin will discuss the financial results in more detail. Then, I will provide an update to our outlook and some financial guidance and a brief summary.

Our third-quarter revenues hit a record again for the fourth quarter in a row at $71.8 million. The sales were up 47 percent from last year and were a little stronger than we anticipated. Our sustained revenue growth is still being driven by the backlog we have been building over the past six quarters or so. Given that we're still seeing continued good order and opportunity flow as well as growing our backlog, we're still planning for sequential growth in sales for a few more quarters at least.

We are over $195 million for the first three quarters of this year, which is up 49 percent over last year, and just about equal with our prior full year revenue record. We will go into more detail in the makeup of our third-quarter revenues later in the call.

Earnings for the third-quarter were much better than planned at $8.3 million or 30 cents per share on a pro forma basis. Much of the increase was due to the settlement we reached with Scientific-Atlanta regarding our claim to recover certain costs associate with our purchase of the assets of their satellite businesses back in the spring of 2000. But, even without that, our third-quarter earnings were better than planned.

Our pro forma results exclude only amortization of intangibles associated with acquisitions, and we will provide explicit bridging data to GAAP results a little bit later.

For this quarter, we separated out the effects of the Scientific-Atlanta settlement in the chart. The settlement accounted for $3.8 million or about 13.5 cents per share on a pro forma basis and you can see that in blue on the chart.

Third quarter GAAP net earnings were also very good at $7.1 million or 26 cents per share for the quarter. In fact, we set new quarterly records for both earnings and earnings per share. The charts again shows the effect of the SA settlement broken out in blue.

The next chart shows year-to-date earnings. Those are also looking very nice at $12.9 million and 47 cents per share on a pro forma basis. Those are also a little bit better than we had planned even if we exclude the effects of the settlement. The year-to-date pro forma chart again breakout the effects of the settlement in blue.

Our next chart shows year-to-date GAAP net earnings at $9.4 million and 34 cents per share including the settlement amount of $3.8 million, which is again shown in blue. We were really happy with these results too, and obviously they make a nice contrast compared to last year.

Next, we will summarize some of the key points we want to make about the operating results as well as the new orders that we earned in the quarter. The key points overall financial results are pretty much excellent. They were sort of turbocharged by the settlement but just fine even without that. We have been working on improving our operating margins and using that to drive the balance sheet. And I think when you look at this quarter's results in particular, you can see that it really paid off. Plus, we have grown earnings faster than sales again and still have that near the top of our list for the next couple of quarters.

We have been steadily (indiscernible) the balance sheet for cash and than combined with three nicely profitable quarters plus the settlement, puts us at $20 million in cash with essentially zero debt. So, we are completely out of our revolving credit line.

Obviously, we have got a lot more maneuvering room now as far as working capital. And we will go into more detail later, that DSOs and inventory levels improved again. It's been a really good total team effort to achieve these results and I am really happy with how well we have been working throughout the Company to make this happen. Plus, we have still been able to sustain our record pace of new orders which has been a key factor driving the results.

Last year, we had set a new record of about $260 million in orders, and this year, we are already over 275 million in just three quarters, which is just fantastic and it's ahead of our expectations.

New orders are generally very lumpy for us, but we have had a nice sustained stretch of very good orders on a quarterly basis. It is always hard to predict that this is going to continue, certainly on this quarter by quarter positive book-to-bill basis because sometimes the decisive order slips across a quarter boundary or orders in general can be delayed as we have had happen several times over the last few years.

But in aggregate, the outlook for our next three quarters is about as good or better than past three has been. That doesn't mean that new orders in the next three quarters are going exceed $275 million in total or that we will continue our run positive book-to-bill in every quarter. But, if I look at a weighted set of probabilities for new business over that time period, it actually looks a little stronger than the past three periods do. Which is really good. Of course things can change. It's a little hard to tell right now how much there is beyond that time frame because there is a number of things that are still unfolding and I will comment on that later too.

Also, we achieved several milestones in our fundamental business processes including achieving ISO 9001, version 2000 certification in every one of our operational sites. We also got the software engineering Institute Level three software maturity management model certification, and we also made continued improvement in our business systems. And that is especially shown by being able to do this conference call within 25 days of our quarter end.

This next chart on the backlog in revenue comparison shows that we have been growing revenue very steadily on a sequential basis for the last five quarters in a row.

Then, in the following chart (indiscernible) is overlaid the revenue for the last six quarters with our accumulated backlog. What we do is rescale the chart so the backlog would fit on the same scale. You can see the backlog has been accumulating even faster than the revenue has been growing, which obviously is a very good thing and it gives us good confidence in our revenue outlook for the next year or so. In fact, you can see that as of the end of the third quarter, our backlog was more than four times our quarterly revenue run rate.

So to combine this with the fact we've also got a growing base of standard products which we kind of book and ship each quarter, and that amounts to roughly in the range of about 35 percent of our revenue. We have got a pretty solid base for which to grow for more than just four quarters.

So, now I will talk a little bit about the highlights in each of the different business areas. Starting with government. Overall, things are pretty good in our government business segment. Revenue for the third quarter was up about 48 percent on a year-over-year basis. This business in aggregate is still very nicely profitable. Although we still could have quarterly fluctuations due to the specific business mix in each of the areas.

We think our competitive position in the overall defense trend towards what they call network centric warfare is very good. We were a disproportionately important player in three main areas and those are IP based information assurance, especially for tactical end-users; satellite networking and tactical data link.

During the third quarter, we announced a $30 million MIDS order from the Royal Netherlands Air Force. So combined with our prior quarter, the U.S. defense quarter, we got a very nice backlog of MIDS production and e have shown that we can compete technically for both domestic and international business.

We have got several funded R&D programs under way that are going pretty well. We hope will strengthen our overall position. These include things like encryption devices that are embedded into our customers' radio products. Some stand-alone information assurance products and some defense and satellite projects including the new defense standard enhanced and with efficient modem which is called eBOM.

A lot of our information assurance products are being built to the new standard called Hapie (ph) which supports an end-to-end Internet protocol or IP interoperability among multi devices for multiple manufacturers. We still see this as a very important growth area for us. Our position in defense joint tactical radio system or JTRS market has improved significantly, especially because DOD's plans to include JTRS version of MIDS on a fast-track. We have already received some initial funding in that area and we should have more to talk about at JTRS area sometime into our new fiscal year starting in April.

Also we have been able to leverage our very strong commercial satellite networking portfolio into some new defense opportunities. That's going to develop slowly and steadily but we see it as a long-term important growth market too.

Right now it looks like the completion of certification for KG 250 (ph) IP crypto device is in sight. There is a good shot at having certified units in customer hand during the first quarter of our fiscal year '05.

We are behind a little bit where we wanted to be, but that doesn't seem like anybody else has beaten us to market yet that we are aware of and that is good. Plus, we think our product is pretty uniquely and effectively oriented towards tactical edge network users, which is a market that we know pretty well and we like. The number of orders we have gotten prior to certification for the device has also been encouraging, so hopefully by this time next quarter we will have some more insight into how things may develop on that product.

Now, I will turn to commercial highlights, and our commercial segment is still doing nicely too. Quarterly Commercial Segment revenue is up over 40 percent year-over-year, and about 50 percent on a year-to-date basis. The Commercial Segment as a whole was profitable again this quarter with very nice sequential margin improvements compared to last quarter.

We feel like the trends in this segment are positive in all of the areas which is very important for achieving our profitability targets for the Company has a whole.

What Broadband (indiscernible) unfolding a little more slowly than we hoped but is developing steadily and we been able to accommodate the pace without any impact on our financial targets.

As we announced, we're again under way with WildBlue and are beginning our InoSat (ph) KU band in deployment now. There is several other surfing networks in various stages of negotiation as well. We believe there's positive momentum behind that emerging standard. We already have well over 100,000 remote terminals under current contract, and we expect that number ought to grow fairly steadily.

We're also participating in the DVD RCS in Broadband VSAT a standard process and have made good progress in testing and in interoperability certification there as well.

Boeing's Connexion program has been making a very steady progress in signing up new airline partners, including both China Airline and Singapore Airlines fairly recently. And then they also announced an arrangement with SCF (ph) Americom for full Pacific Ocean coverage a couple weeks ago, and a new initiative to address the maritime market using the same networking standard as for airlines.

Our VSAT network business has been growing and has been nicely profitable for several quarters now. We continue to make inroads into the North American market as well. Our antenna business is also doing very well and has a robust blend to commercial and defense customers.

Now that SurfBeam is entering production, we have improved confidence in steadily improving financial results at our U.S. Monolithics subsidiary. As we plan to ramp up production at the KU and Ka-band power F transceiver products over the next few quarters.

Based on programs that are just now getting underway, U.S. Monolithics also will have a growing amount of defense R&D projects including participation in our MIDS JTRS program.

At this point, I would like to introduce Ron Wangerin, our CFO, who will go through the management data.

Thanks, Mark. With the results of this quarter, the benefits from the SA settlement and the progress we've made on the balance sheet, we're realizing many of our financial goals we set out to accomplish six quarters ago. That said, however, we continue to be very focused on growing earnings faster than sales for a couple of more quarters and generating cash through growth base. Mark talked about the strong orders flow in the pipeline we see ahead. This will be the fuel for continued revenue growth.

For more details on the financial results, I will start out by discussing where we ended up with the balance sheet and cash flows for the quarter, and conclude with operating results.

As we look at the balance sheet, I am particularly proud of its strength. Over 20 million in cash; we paid off our revolving credit line; over 150 million in current assets against only 58 million in total liabilities. DSOs below historical levels and inventory turns over 10. Wow. Let's talk about the details.

In comparing the significant balance sheet elements, we will discuss the increase in cash on the next line when we look at the cash-flow statement for the quarter.

Total receivables increased by approximately 2.5 million on an increase in revenues of over $6 million. Whereby improving DSOs another 10 days. I was pleased to see unbilled receivables remained flat in the quarter despite the significant increase in sales. This to me reflects significant strength in the overall process. Our programs are performing in that we're hitting our building milestones. We have efficient billing processes and our customers are pleased with our performance such as they're paying us on a more timely basis.

We continued to make progress again this quarter in inventory. The balance was reduced by 900,000 from core operations on revenue increases of 7 million and by $1 million from inventory written down related to the accounting of the SA settlement.

Goodwill and intangible asset reductions represents the normal amortization of intangibles. As we talked about on the last call, we see capitals expenditures increasing as a number of our development programs; have test equipment requirements; and we have a number programs going into production which require manufacturing test equipment.

As a result, property and equipment was up slightly net of depreciation. The change in other assets reflects a reduction in long-term deferred income taxes of approximately 1.6 million and amortization of capitalized software of approximately 950,000. This was the first full quarter of Arc light (ph) amortization and therefore, the amortization expense was $400,000 higher than last quarter. And we had no new Cap light (ph) software.

Accounts payable increased by over 6 million and is attributable to the higher business volume, particularly for production of SurfBeam, MIDS, Connexion by Boeing and our large antenna programs. Collections in advance of revenue decreased significantly quarter-over-quarter by over $5 million reflecting the completion of milestones on certain programs and the liquidation of those advances. Again we paid down our line of credit to zero balance.

The increase in other current liabilities reflects normal accruals for 401(k) match and performance bonuses in accordance with our performance. Other long-term liabilities increased due to warranty reserve increasing which stems from product deliveries during the quarter.

As we look at the cash-flow statement, during the quarter we generated 17.6 million in cash from operations. Cash flows were aided by a $9 settlement from VSA litigation. So without it, we still generated 8.6 million dollars.

The strong cash flow resulted from improved net income; the 5.5 million in non-cash Adbacks (ph) for depreciation and amortization and working capital management. As we talked about last quarter, we see total non-cash Adbacks increasing over the next several quarters to roughly $6 million per quarter, which will underscore the quality of our reported earnings.

We generated over $30 million in cash from operations over the past four quarters, excluding the SA settlement. We see ourselves continuing to generate cash from operations in the future but not at the same pace, probably more like half that.

Cash from operations was used to fund capital expenditures of 2.9 million and pay off our line of credit. Capital expenditures increased again during the quarter and we expect this at the current level or slightly higher.

In the next chart, I would next like to discuss some of the key balance sheet measures we have been tracking. The $17.6 million in cash flows continues our trend of generating cash through our growth base. Over the past twelve months, we generated over $40 million in cash from operations.

As we highlighted earlier, we paid off our line of credit and this is the first time we are debt free in over two years. We continue to see cash being generated from operations.

DSOs continue to improve. We said that over the past several quarters our historical average was in the low 130s and we were targeting the low 120s. As you see we're below our target level now and we're seeing how low we can go, but we're very pleased with the current levels.

Inventory turns continue to improve. We said our target was 10 turns or better and we're just now achieving this level and we will work to improve it.

Next, as we turn to the P&L. There is a lot going on in the income statement during the quarter. So we will provide a fair amount of detail here. Sales for the quarter were $71.8 million. This represents a 47 percent increase over the same period last year. For segment purposes, government sales were 33.3 million for the quarter, a $10.1 million increase over the prior fiscal year.

Commercial Segment revenues were 38.5 million. That's a 12.7 million increase over the prior fiscal year. The increase in sales was the result of higher orders activity over the past six quarters and those orders converting to sales.

Sales were aided by higher production deliveries on Connexion by Boeing, SurfBeam development and deliveries; increased sales on MIDS as we ramp production to support deliveries on Lot 3 and Lot 4; and increased sales of large antenna systems.

Gross profit in the quarter was aided by a $3.2 million credit related to the SA settlement.

Let's focus on the SA settlement for a moment. The settlement was for $9 million and was reduced by $2.7 million for assets claimed and for Q3 legal expenses leaving a $6.3 million pre-tax gain. This gain was divided among cost of sales and general administrative expenses in proportion to expenses previously recorded in the income statement. The resulting impact was the benefit to the cost of sales of 3.2 million and a $3.1 million benefit to selling general and administrative expenses.

With the benefit to cost of sales, gross profit was 28 percent. Without the settlement, gross profit was a little over 23 percent. The margin percentage is below expectations, mostly due to lower margin development programs working their way through backlog and some nonrecurring design costs for MIDS and continued certification costs for KB250.

While we expected to take a little bit longer to work our way to higher gross margins in fiscal year '05, highlighted in our last conference call than previously expected, we still remain positive of the past at 10 percent pre-tax amortization margins.

Selling, general and administrative expenses were lower quarter-over-quarter due to the $3.1 million SA settlement benefit and the recovery of bad debt in the quarter. These are partially offset by an increase in performance bonuses of 350,000 due to the benefit of the SA settlement. Other than special items, year-over-year for the quarter, the change primarily related to normal selling performance bonus and 401 (k) accruals. If you will recall, last year's performance did not warrant such performance benefits.

R&D was lowered due to discretionary spending required of Company-funded R&D, because of the high-level of customer-funded development. To reiterate, customers under development under contract is suppressing our gross margins.

Amortization of intangibles was consistent year-over-year. Other expenses were lower due to lower interest expense from substantially lower debt level and lower investments in Imian (ph). The Imian (ph) Investment in the quarter was $78,000. For segment purposes, operating profit for the government business was 3.9 million for the third quarter and 7.8 million for the Commercial Segment with the SA settlement, and 1.5 million excluding the settlement. Taxes in the quarter were reflective of a normal 40 percent tax rate, offset by approximately $1.3 million in R&D tax credit and other benefits.

When we look at year-to-date figures, year-to-date revenues were $195.4 million, a 49 percent increase over last year. The sales on that was only $200,000 shy of the Company's previous fiscal year record. For segment purposes, year-to-date sales in the Government Segment were $88.5 million. This sales level was higher than the previous record annual sales by $2 million, and we still have a quarter to go. Year-to-date sales for the Commercial Segment were $106.9 million. Again, sales are higher due to growth across all of our businesses from the strong orders flow.

Gross margins, excluding the effects of the SA settlement, improved by 2 percentage points year-over-year. This is a reflection of the operation improvements we've made over this time, specifically increased outsourcing of our manufacturing and computer (ph) development contract overruns. Selling, general and administrative expenses excluding the effects of the SA settlement are higher due to increased selling expenses from the higher sales levels and accruals for 401(k) match and performance bonuses.

R&D is lower year-to-date for the nine-month period due to the lower discretionary spending required of company funded R&D because of the high level of customer funded development. Amortization of intangibles was consistent year-over-year. Other expenses lowered due to lower interest expense from substantially lower debt level and lower investments in Imian (ph). Our year-to-date investment in Imian is only $160,000 contrasted with 1.6 million in the year-to-date fiscal year '03 numbers. Year-to-date taxes were reflective of a normal 40 percent tax rate, offset by approximately 2.7 million of R&D tax credits and other benefits.

As we look forward, we're seeing sequential sales growth, gross margin and operating margin improvements, a balanced mix of customer and company funded research and development, low interest due to debt levels. Imian (ph) will be consolidated into operations beginning in the fourth quarter and improve net earnings.

On the next slide we include the bridge between GAAP and non-GAAP or pro forma earnings and per-share amounts. The Company includes only the effects of acquisition-related intangibles net of tax impact. Next I would like to turn it back to Mark who will talk about our current business outlook.

Thanks, Ron. At this point, I'd like to talk about our outlook for the fourth quarter and then a little bit talk about next fiscal year. Given that we are three-quarters through our fiscal year, things look pretty good for meeting our targets for the year. Revenue has been a little stronger than we expected, and we anticipate sequential growth again for our fourth quarter, which would probably put us kind of into the mid $70 million range.

Even absent the SA settlement, we earned an extra penny or so a share this quarter, and I would say we expect to earn kind of in the 16 to 17 cents on a pro forma basis for the fourth quarter. If we can do that, we will be -- right there we will be within striking distance of our 10 percent operating earnings target that we have been aiming at, hitting it about the first quarter of next fiscal year. So that sort of describes the stage for our new fiscal year '05, which begins for us on April 3rd of 2004.

We think things have progressed a lot this fiscal year, and we will use our year-end status to make some beginning projections for next year. Since we expect to hit the mid 70'ish million range in this year's fourth quarter, and we have got better than a four-quarter backlog, plus a study and growing book and ship business, we can pretty reasonably expect fairly steady sequential revenue growth again next year. Based on current backlog and book and ship run rates, we can see about 15 percent to 20 percent year-over-year revenue growth for fiscal year '05 now.

So if we were to end this year at about 270 million, that would put us in the range of 310 to 325 million in revenue next year. I'm sure people will ask if there is upside to that number, and the answer is yes, there is. But the best thing for us to do in terms of describing our outlook would be to -- and for people who are looking to anticipate -- would be to follow our new contract awards over the next two to three quarters before baking anything else into that outlook.

The pipeline does look good, but we have seen in the past that orders can be delayed significantly. We do not to make projections now that depend on the timing of the specific contracts yet to be awarded. That doesn't mean that 15 to 20 percent growth is assured without any new awards. Obviously, we're expecting new awards, but given the backlog and our reasonably conservative new order profile, that seems reasonable.

As we have mentioned before, we're aiming to achieve an operating earnings margin of about 10 percent of sales on a pro forma pretax basis. We don't quite expect to hit that in the fourth quarter, but we should be pretty close, and should be closer still in the first quarter of FY '05. We don't yet anticipate exceeding that rate during the year. That is kind of our target. So a reasonably prudent estimate of earnings for next year would probably be under but pretty close to that 10 percent pretax pro forma target.

So if we were to do just as a for instance a just under 320 million in sales for FY '05, we would probably be approaching 80 cents per share for the year on a pro forma basis, but we would likely be lower than that by a couple pennies or so. We think this is consistent with where we have been saying we have been heading for the last couple of quarters, but at this point we've got quite a good foundation in terms of backlog. We have been able to demonstrate revenue growth and margin improvements, so we think we are earning a pretty high-level of confidence for those results.

The other point we'd like to make here is that even though we're getting pretty close to that 10 percent operating target, we still don't really have all of the ratios tuned the way we thought we would. That is something we're going to be putting more focus on during our fiscal '05. In particular, we would still like to grow the gross margin line into a low 30 percent range or so. There are some key factors there. Most of these we have discussed previously.

One is, working through the older MIDS orders where gross margins are still way down by the percent complete development and testing components. And then transitioning to the better margins consistent with what the current actual manufacturing costs are. That is going to happen over the next couple quarters and has been dependent on the timing of the U.S. defense and international orders that are now in hand.

Also, the restart of our WildBlue contract has a positive impact although that is just now happening this quarter. Also we have been winning some additional (indiscernible) development contracts which as Ron mentioned depress our gross margin somewhat. But, those also displace discretionary below the line R&D costs, so that has allowed us to steadily improve operating margin in aggregate, even without his gross margin gains.

So, in summary, we are still paying attention to the business model ratios and the gross margins. We think that we're going to get there maybe a little bit get to the gross margins a little bit more slowly than we anticipated. At this point, that is not really expected to drive our target operating earnings for the next quarter.

Another important point is that is some potential upside in our SurfBeam business for fiscal '05 but the gross margins there are significantly less than our 30 percent target, so growth in SurfBeam could slow gross margin improvement, but it would still have a positive impact overall on earnings for us.

Then, finally at this point I don't really think we should start discussing our fiscal year '06 quite yet. Just from a very top-level given our backlog and our order pipeline, we do think we will continue to grow in fiscal '06. I think we'll know more about the mix of business and our prospects and the accuracy of our forecasts in a couple more quarters and we will talk about that then.

Okay. Now just to go to the summary. In summary, we can say we're pretty happy with the quarter. We set earnings, revenues, orders and backlog records. We're on track to hit our targets for the year. It appears we should be well-positioned to hit our targets for next year.

Earnings and operating efficiencies have made big improvements in our balance sheet. We've got zero debt and 20 million in cash and still anticipate generating cash flow while achieving pretty healthy growth. Our new orders pipeline still looks good. We're still seeing strength across our entire business portfolio. We've got good customer funded R&D projects and they are still some nice business opportunities out there that once resolved could favorably impact us in the next few quarters.

So that is it for the prepared remarks. At this point, we'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) John Bucher with Harris Nesbitt.

Good morning John. A question regarding U.S. Monolithics. It looks like with the comments you made on SurfBeam you are expecting improved utilization there. How important is that the U.S. Monolithics to your achieving that 10 percent operating margin? Are you going to need some of the additional defense funded R&D that you talked about that U.S. Monolithics is experiencing to achieve the 10 percent operating margin goal?

The answer is it's a factor. It is important, it is not on its own you would think it is not incredibly decisive but it certainly is a factor. Everything we have a plan each of the thing to bake into that. The increased defense business is part of that improvement, and that seems to be going well. I don't know. Does that answer your question?

One more question. It looks like you have two plays for the commercial Broadband market for aircraft, both AIRINC as well as Connexion. I'm wondering how much of that is a part of your backlog, and are you expecting -- is that a significant factor in your assumptions for the growth going forward?

Right now, it is not a huge part of our backlog. Single digit percent of the backlog. I think that one of the things I mentioned is that I will just tell you the way we look at it. We have been doing really well on backlog. We've been able to drive growth on backlog and we expect to add to backlog over the next few quarters. I also think that sometime, maybe a year from now, we expect more clarity on how some of these standard products are just doing on a book and ship type of basis with maybe a little us lead time. And that is when we think we will learn a lot more about both of those airborne type products, about the potential for maritime following on those, plus some of the other products we have coming. We will learn a little more about those. So, it is sort of maybe -- the short answer is, I think for the next few quarters it's not that critical and in going out beyond that, it will be a little more important but a lot more visibility on that in a few quarters.

Thank you very much.

James Mcilree of Unterberg Towbin.

Great. Thank you. Can you tell us what the orders were for both the government and Commercial Segments during the quarter?

Just a second. It was a little heavier on the government side. It was roughly 49 million, and a little over 50 million on the government side, and with the balance a little over 30 million on the commercial side. The biggest factor being the mix (inaudible)

On the gross margins, you are looking for improvement in Q4. Is that correct? Is so, how is that coming about? There is less development projects or do you know what is happening to make the gross margins improve?

The two single factors, the two biggest factors that we're talking about her progression in MIDS, which will -- we could just working through units that are accounted for different transitioning units that are (inaudible) development costs. And then the other is increased activity on the SurfBeam stuff which is enabled by the WildBlue order. So those two will add some.

The other area is there is some back and forth associated with what happens in customer-funded R&D relative to discretionary R&D. That is a swing factor of several points in aggregate. That is why it doesn't really bother us that much. I'm not sure if it is clear why it doesn't bother us if you want me to elaborate on that.

No, I'm jiggy with that. If you have gross margin improvement then from that swing in the customer-funded R&D in Q4, does that mean that the SG&A -- I'm sorry does that mean the independent R&D will go up next quarter.

I didn't mean to imply that we're going to see a big change in gross margin because there is a big swing in the (inaudible) R&D. I was just explaining more why even if -- I think we think it's going to improve by a couple points or so. But a customer-funded R&D component is an important part and so we're a little bit -- and we're actually getting additions to customer-funded R&D as we go along. Especially since it is a customized version of the satellite networks or customized versions of other products and as part of an order, we get some R&D along with that. What that enables us to do is basically not spend as much on discretionary R&D, and so that is why we are sort of -- my views we're sort of playing out this transition. And we're trying to estimate it but it is taking a little longer than we thought.

Okay. Very good. That will do it.

Tom Watts of SG Cowen.

Congratulations on a great quarter. As you move more towards mass-market products, particularly SurfBeam and you are focusing more on terminal production. You mentioned that could have an impact on your gross margin target. When do you actually, I assume WildBlue is more of a gateway production earlier and then the terminal is later. How quickly will you burn through the initial terminal order for WildBlue? If you get more contracts in that area, what are the implications both from margins and also for cash needs? Do you need to have more working capital or do more test equipment to support that business?

Back on both our big surfing orders so far and also what we're seeing when we negotiate with other customers is basically our customers are experimenting to see what the demand will be. They are trying different marketing promotions are mostly what we worked out on multiyear contracts, which give the customer some flexibility. And if they want to -- multiyear ordering agreements, when I talk about that 100,000 plus terminal on order, those are over several years. We have given them and several could be 3, 4, 5 in that range.

What we do, they got the right to either add to the near-term or maybe try to accelerate those, but we will know when those things happen. So right now, we are not -- when we talk about our gross margin trying to migrate upward, that would have baked into it kind of our current understanding of the SurfBeam production levels. What would be different would be if those production levels go up levels that are higher than what we are expecting than what we are contractually committed right now and we would talk about that and give people some notice.

The other thing in terms of the production ramp up, we think we can manage that and we think that we can do it in a reasonably capital efficient way so far, based on what our supply chain approach is. We don't see big swings due to that.

So you could continue to growth with cash flow generation even in ramping that up?

That's what we believe.

Two final points on KG250, will we start seeing revenue recognition on that in the fiscal fourth-quarter or will that have to wait until the June quarter? Also can you give us an update on timing for some of the foreign MIDS, Denmark, Portugal, Taiwan? When might we see announcements with those contracts?

KG250 we're looking at recognizing revenue probably in our first quarter of FY '05. So that would be starting in the June quarter. Then, the international MIDS, one of the biggest issues is just working through all of the contractual process. It is a little bit unpredictable. It could be soon, or it could take eight quarters. Not that we can accommodate either way. We're going to go -- we are obviously trying to go as fast as we can but we cannot move the bureaucracy that much.

And then finally for domestic MIDS, does (indiscernible) have an award in the fiscal first-quarter or could that flip again as previously?

I think last year was a little bit of an anomaly (inaudible) we came so late and the year before that the order came right at the end of the June quarter. So, we are sort of expecting it to be in that June quarter, but it's hard to predict. It is -- that is what we're sort of expecting.

Great. Thanks very much.

One thing on the cash. We do anticipate to generate cash over the next year even with the growth, but we could have a quarter where we don't. I mean there could be payments that slipped from the end of the quarter to another quarter. So, we are not saying we're going to generic cash every quarter.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Richard Valera with Needham & Company.

Mark, could you talk about the new WildBlue contract, how much of that is actually terminals versus gateways and other sort of infrastructure?

In any of those I wouldn't say in every one, but in general, the total contract values are going to be driven by the remote terminals. That is pretty much the case there. If you look at the dollar values that would cost about a little over 60 million and having well over 100,000 terminals on order, you can see that terminals make up a big, big part of those two contracts in aggregate. I think that you may see, you may feel a little differences with different customers depending on what their satellite plans are and stuff. But in general, a lot of the contract values are going to be driven by the terminal compound.

Along the same lines that with the SurfBeam, you have talked before I think about having roughly a $700,000 terminal cost and having sort of maybe a pathway or expecting that to maybe go to 300 at some point in much higher volumes. Can you just maybe outline that halfway again and talk about maybe how important that is in getting SurfBeam adopted with one of the major DBS satellite providers that are looking at Broadband solutions like the Echo Star and DirecTV?

One thing is, I would say it just depends our contract announcements. We're already pretty well below $700 point. I think that there has been a sense of just kind of a ballpark number around $300. Once you are below $300, at current subscription prices for Broadband, that seems to be a little bit of a inflection point for the service providers in terms of achieving a reasonable return on capital, given a reasonable (indiscernible) cost including potential for some utilization.

So we feel if nothing else that's an important psychological barrier. I would say we are certainly on our way to getting there. I think it will be -- a lot is going to depend on since we're going to be deploying networks this year, I think a lot will depend on our customer acceptance and how well the operators are happy with us. But I think if things go well, we will start seeing that price point kind of following next year, I mean next calendar '05ish time frame. At least if not in deliveries, probably in orders. Does that help?

That is helpful. Is there anything you can say about what are some of the key things that the major DBS satellite operators are looking at in Broadband solutions and sort of how you might play their competitively vis-à-vis other solutions they may be looking at?

You mean in other Broadband?

Other Broadband solutions, yes.

My sense is this is just on the discussions that we're having with operators is that the main drivers will be the direct-to-home players. There are a number of those. There are obviously a couple major ones in the U.S. but there a number around the world. There seems to be an overwhelming preference for open standards. That kind of leads you toward either the DOCSIS stuff or DVRCS and we think the DOCSIS stuff is more mature. We honestly don't see proprietary solutions from anybody as a real competitor in that.

I think that the biggest issues are going to be getting equipment and service that works at all. It is really market development, and then I think one of those open standards will be what happens, assuming that there is market acceptance and the right price points and technical performance. So that is why we want to be sure that we can compete well with either of those standards.

Sorry, just one final one. Do you feel like there are any other sort of competitive DOCSIS products out there? Where do you feel your position is in sort of the DOCSIS side of the terminal market?

No, in DOCSIS our position is very strong. I think that the real issue is the prevailing standard. I think if it continues to do well, that at some point there will be second terminal suppliers in there. We will see how that works out for us. Obviously, we are trying to drive costs so that we can compete well in that market. That is what we're anticipating. So right now, for me I think that the biggest issue is going to be can we, in terms of equipment making and product performance and our service provider partners who really (indiscernible) customers' expectations and promote -- can we create demand. That is what I'm looking at as a big issue.

Just one final income statement question. How should we think about tax rate for fiscal '05, Ron?

There is a couple of things. We typically look at the standard 40 percent rate, and as you know, currently the R&D credits are expected to expire, I think it is June 30th. They weren't put up for renewal in this last session, and we expect that it will be with the right level of congressional backing, get instated or get extended. And if that were the case, then we would be -- as I said, we're looking at around 600 to 700 K in R&D credits as an addback to that per quarter.

Okay. Thank you.

Wes Cummins, B. Riley & Co.

Mark, just a follow-up on the commercial Broadband side. Could you maybe just comment on what you're seeing from the large carriers domestically or internationally? When you might think maybe we might see one of those carriers pick up on an ex-generation satellite Broadband platform and actually start to deploy that? Any insight into that?

By carriers, do you mean Direct to-own TV providers or --?

Like the short DirecTV.

I think we will just have to wait to see what happens at DirecTV. DirecTV has been pretty much wed to Direct TC and talks about basically -- personally I think that there is opportunities for changing direction there but we will have to see what happens under the new management. I think Echostar has part of their Americom to home partnership is really the arrangement working with SES Americom to augment their HDTV and their local vocal has Ka-band capacity.

I think that you could probably expect that Echostar will do something with that Ka-band capacity and they are likely to choose one of the standards, open standards that are competing. I think when they do that; I actually think that a lot of it depends on what the overall satellite TV environment is. Right now, I think there is a lot of focus from a satellite TV perspective on high-definition and PDRs and I think that makes sense. So I think that you just have to look at Broadband in some rational context for satellite TV provider.

I think it has an important place. I don't think it is absolutely is top of the list for how they intend to compete with cable and with each other. But, I think they both going to do something on some reasonable schedule. It is hard for us to have enough insight into their priorities to say more than that.

Could we also get an update on Telesat? What is going on there and what you guys are expecting?

I think the main issue with Telesat is their satellite should be launched sometime around the middle of the year. They ought to be in service about the last quarter you would think. So, they are getting close to where they actually ought to have something I think. Where they ought to have some equipment. I think that given that time frame and they obviously have been associated with WildBlue. They have a good understanding of our equipment. We should be well-positioned, but at the end it will be their decision. You never know until they decide.

Okay. On the defense side, looking at the MIDS products, do you see any possibility that the MIDS terminals get used our replaced proprietary avionics solutions for the F-22 or the joint strike fighter platforms?

No. I think the F-22 and joint strike fighter they are very committed to their integrated avionic functions. There are some capabilities that MIDS has that are not necessarily designed into those integrated avionics suites which create some opportunities to (indiscernible). It is what I think of as augment as opposed to displace and I think that is a possibility. Does that make sense?

That makes sense. Last question. Can you guys comment or do you see any commercial applications for your guys as encryption technology?

Possibly not eminently is what I would say. I think that there is a sequence in which we are trying to roll it out and the first one would be -- let's get this standard as high -- what we call Hapies (ph) . Let's get that out into the tactical defense market. There is clear demand pushing prices down. I think that there could be a natural evolution path which could go towards non-military homeland security type quasi-commercial stuff, infrastructure stuff and then maybe into the commercial market. We will just go in that sequence.

Okay. Great. Thanks.

Steve Mather of Sanders, Morris, Harris.

Just three -- you have covered so much ground so far. Just three sales questions first Mark on NUOS (ph) . If your team happens to be down selected can you still participate in the encryption or terminal production? Number two, regarding TSAT, (ph) what might you contribute into the next twelve months?

And thirdly, you talked about consumer Broadband a bit, what expectations do you have regarding consumer sales in the first six months. How rapid do you expect it? And then that way I can kind of gauge what the chances are of things being delayed?

On and NUOS right now we have joined the Raytheon team. Most of our things we would contribute to that team are in the area of networking, network management. It is a little less oriented towards user terminals. But, the user terminal segment for MUOS, a big part of that is sort of separate from the program. It's a lot of it is related to JTRS terminals or (indiscernible) upgrade. We may be able to negotiate some participation. Right now we're sort of expecting to participate more on the networking segment for that particular program if we are, if our team wins.

On the TSAT side, we bring expertise that our team values in several areas. One is in the information insurance network security area, especially habies stuff. One of them has to do -- basically uses onboard process technology. We have a team that is similar, very similar to the team that worked on Astralink, that is Lockheed Martin and the old TRW Space part of Northrop Grumman. So we should be expected to have terminal and ground segment portions that are similar from a system -- because this next year is really risk reduction systems engineering, so we would participate in those aspects of the program to the extent that those risks are important relative to other risks that are primed during the program office identified.

In the consumer Broadband area, that actually just to put things in perspective, we could end up shipping close to as many consumer terminals as we do LinkStar Enterprise type terminals over the next year. That would be more at the high -- we're doing over 1000 well over a 1000 on the LinkStar side. We could get this on a sustained basis. We might get the consumer stuff up into that range or maybe a even a little even higher depending on the rate in which we roll out customers.

I think for right now what I would think is gradual in terms of how it impacts our total business mix. Unless we make some more specific announcement. Does that help?

Yes, just one of the detail, the R&D tax credit for the lower than 80ish cents? Do you include 650ish or so K per quarter?

Yes, 625.

Sounds good. And then Mark, just on the Broadband it sounds like you do have moderate expectations not overly hyped regarding the Quickstart consumer acceptance?

Well, to start outputs, the first half of this year we have the project that were doing with InoSat (ph). I think that one is a specific customer order data systems. We really don't have a good sense of their deployment rates. I can tell you that things so far are pretty good. I think that the rate at which this will grow, I think personally is going to be more driven by bringing on more networks to start with than it is by having spikes in the ramp rate for existing networks. That is my current view. That could change in a quarter or two, but that is my current view.

That's great. Thanks.

Kevin Debee (ph) of Meerma and Company (ph).

Nice job on the quarter guys. Mark, would you mind just giving us a little more detail on KG250? What do you see as the opportunity there? How much all told and how much of your 50 million in orders came from that general direction?

We are still -- I am still personally very excited about this information insurance area. Just to clarify what KG250 is it's a network crypto, if you are defense user you have to hard and encrypt your stuff. You need a box to do it. You have to be aided by a box or card. The idea is to do it in open IP environment. The new standard, Hapie is the way that it is to be in or operable. You don't have to buy all of your boxes from one vendor. The three main vendors being L3GD (ph) . So right now there is only two of these boxes that are close to going out, we understand. One from us, one from L3. Certainly we look at L3 as a very capable formidable competitor.

The thing that we have for ours is that ours is tactical and recognized. It is the only one that we're aware of there. So the big market would be in the deployable type users and then there has been made a pretty big market there. If you want to go to a little research, there is a device called a KIV 7 (ph) which has kind of been standard circuit oriented crypto device and there are a lot of those out there. And that could represent a pretty good market for us.

I could see how the user acceptance goes and what the adoption rates are, but there is push behind at in the Pentagon, and there is pull it seems like from the users. Our order rate has been pretty good so far. It is not huge. Good being million-ish per quarter, kind of that range. Could that go up by double, triple four x, something like that? Reasonably quickly once it is out there that is certainly possible. And them we have expectations that are higher than that in the long run for sure.

But that is kind of the scenario.

Can you give us a little more detail on how you see JTRS being baked into MIDS going forward and what the timing is there? And whether or not the installed base would have to be retrofitted and if that would be just a hardware or rather just a software or both hardware and software?

The DOD policy issues, I think there is clearly a strong push in the current administration behind JTRS as a radio and networking solution. MIDS, (indiscernible) was very high-profile, it was one of the things you hear success story. So, getting MIDS and the other thing about MIDS, MIDS radio fills a very specific spot. On specific aircraft. It would be very difficult to put a different type of radio in there plus you look at the importance of deployment. It's hard to imagine putting a different radio in there.

So, what is happening now is to go to the MIDS manufacturers and say can you make a JTRS compliant version of a MIDS radio, and I think that seems to be important. It is proceeding on a fast-track relative to other JTRS areas. I think that probably the initial outlook would be to transition MIDS production from the current version to be into the JTRS version, and that would happened whenever that is available. So that obviously would be impacted by when they really get started full speed.

Once you get to see that, then you might look back and say well are there retrofitting opportunities and it's a little too early to tell there. I think the main thing I say there is work proceeding and the big question is when do they really turn on the full-scale development.

Okay. Thanks for the highlights.

I think that concludes all of the questions that we've got. I want to thank everybody for your attention through the call, and we look forward to talking to you again next quarter.

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