Viasat Inc (VSAT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ViaSat fiscal-year 2004 fourth-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 Wednesday, May 12, 2004. I would now like to turn the conference over to Chairman and CEO, Mark Dankberg. Please go ahead, sir.

Good afternoon, everyone. And welcome to ViaSat's earnings conference call for our fiscal year 2004 fourth quarter, ended April 2, 2004. This is Mark Dankberg; I'm Chairman and CEO. And I have with me Rick Baldridge, who is our President and COO; Ron Wangerin, our Vice President and CFO; and Greg Monahan, our Vice President and General Counsel. Before we start, Greg will read our Safe Harbor disclosure.

Thanks, Mark. Portions of this presentation contain projections or other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, regarding future events or the future financial performance of the Company. We wish to caution you that these statements are only predictions, and may differ materially from actual events or results. 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 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 others 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'll use 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 will cover include our fourth-quarter and fiscal year-end financial results, and then a CEO overall prospective. Then Rick Baldridge, our President and COO, will review operational highlights, and after that, Ron Wangerin will discuss financial results in more detail. Finally, I will update our outlook and financial guidance, and talk about our strategic environment and give a quick summary, and then we'll take questions.

So revenue-wise, Q4 was our sixth straight quarter of sequential revenue growth, and we set a quarterly record again for the fifth quarter in a row, at 83.2 million. Sales were up 55 percent year over year, and were stronger than planned. For the year, we did 278.6 million, which was up 51 percent and handily set a new record. We ate into backlog a little bit this quarter, for the first time in a year and a half, but we think that is an artifact of the war timing, and so far it looks like we will go back to stronger book-to-bills in the first half.

We shipped more product that we planned for the quarter, but we think the first couple quarters of fiscal year '05 will still have the revenue we thought they would. It's just that this Q4 had a bulge in it, so we probably won't meet or beat this $83 million level in either of the first two quarters of our fiscal '05.

The next slide shows pro forma earnings, and earnings for the fourth quarter were a little better than we planned, at $5 million or 18 cents per share on a pro forma basis. Our pro forma results exclude only amortization of intangibles associated with acquisitions. We will provide explicit bridging data to GAAP results a little bit later.

We were kind of disappointed in the margins, given the high revenue, but that was driven by cost growth in a couple of specific areas, and we think we have got better potential going forward. We will talk more about that later.

Q4 GAAP net earnings were also very good, at $3.8 million or 13 cents a share for this quarter. Fiscal-year 2004 earnings, as a whole, were 17.9 million and 65 cents a share on a pro forma basis. Those are also a little better than we had planned, even if we exclude the effects of the SA settlement we announced last quarter. The year-to-date pro forma charts again break out the effects of the settlement in blue.

And then, fiscal year 2004 GAAP net earnings and EPS are both records, at $13.2 million and 48 cents a share, including the settlement amount of 3.8 million, which is again shown in blue, and we are very happy with those results, too.

So with that financial data as a context, I would like to give a top-level perspective and sense of our business as a whole. I'll start with the key points here. Overall, our financial results, we feel, are pretty much excellent. Even if the fourth quarter was a little less perfect than the first three, in terms of margins or cash flow or orders, we would still give ourselves an A for setting new records in annual sales, earnings, cash flow, EPS and in new orders. We raised our profitability objectives each quarter, and achieved them each time, with an additional benefit from the SA settlement.

Then, combine that with the progress we made on the balance sheet, and in generating operating cash flow, which let us finance better than 50 percent year over year growth, while improving our cash position by better than $25 million, and it's pretty obvious why we are happy with the Company's performance.

Finally, financially, we think we were pretty well positioned for a very nice fiscal year '05, and we will go into more detail on the financial results in our outlook a little later.

On this slide, I wanted to make a few points of how we view the results, as well as the imperfections. We kind of overachieved in the fourth quarter, in terms of material input and product output, in areas like MIDS, our data controllers, VSATs and UHF modems. It certainly gives us confidence that we can produce sharp manufacturing output increases, which will come in handy in the second half of fiscal '05, when we are ready to tap into the production backlog we have built up in areas like MIDS and SurfBeam.

Some of our development projects, including SurfBeam and KG-250 acceptance testing, exceeded budgets this quarter, which depressed margins. But the bright side is that operationally, we were postured more neutrally and robustly than we were a year or so ago, so we can still have a shot at achieving our goals, even when things don't all go our way.

The awards were a little bit weak in the context of our string of strong book-to-bill results, but that was primarily due to contract timing, as opposed to (indiscernible) programs, and that was especially the case in defense contracts. And if awards continue to play out as they have so far, we will be building backlog again pretty promptly, although, on a quarterly basis, we are always still subject to customer timing. It's also important to note that, while we don't always expect things to work out this way, right now we are still seeing continued strength across all our business lines at the same time, which is really nice. Overall, we think it's going to make for an interesting and exciting FY '05, as you will see when we go into more depth.

This next chart shows new orders on an annual basis, to put things into perspective, and you can see we handily set a new record this year, at about 346 million. And, while our new orders stretch out over more than just one year, in the past they have not been a bad indicator of our next year's sales. At this point, we are not projecting that sales will reach 345 million for fiscal '05, but it is worth noting the prior-year patterns.

Now, this next chart looks at revenue growth in the context of our backlog. This, as I mentioned, was our sixth straight sequential growth quarter and our fifth consecutive quarterly record. The bulge in Q4 revenue, combine with a slight downtick in backlog made things a little less spectacular than this chart looked at the same time last quarter. But, if we're anticipating things correctly, we will probably see a little bit of backsliding in quarterly revenue, combined with a nice uptick in backlog in the first half of fiscal '05, which will improve the ratio of total backlog to run rate. Plus, as some of our new products go into volume production during fiscal '05, we think our bill and ship prospects are going to continue to improve, as well. So this further reinforces our confidence for nicely growing sales each quarter on a year-over-year basis, and the prospects for strong sequential revenue growth again, starting in the second half of this new fiscal year.

Now, I am about to introduce Rick Baldridge, to discuss operational highlights, but I wanted to make a couple of points first. It's pretty evident that we have improved operationally and financially over the last year and a half, despite very fast growth that's got us on the Business 2.0 Top 100 Growth Companies -- Top 10, in fact. And obviously, adding Ron Wangerin as CFO helped, and that is really visible through his quarterly financial discussions. But Ron also freed Rick to focus completely on the President and COO role, which has really strengthened us organizationally. Our execution is better, we can plan more effectively and we are deeper and broader managerially. Over the last year, we have promoted six new people into Vice President and General Manager rolls, all from internal managers. We have created two new business areas, addressing markets that we expect to grow nicely. Rick and Ron have put in place processes that push management savvy deeper into our organization.

Qualitatively, a couple of years ago I felt like we were still digesting the acquisitions we had made. Now it seems much more likely to harvest the benefits of putting together the team that we have. There are a couple of key things I want to point out here. One is it's a factor in our confidence of meeting our fiscal year '05 growth targets, but I think it also means we're now capable of adding a couple of more strategic pieces if the opportunity was to arise.

So with that introduction, here is Rick.

Thanks, Mark. First, I would like to just reiterate Mark's comments regarding the evolution of the organization. Our business and functional leaders and their groups continue to be focused on ensuring that we have the best technology, which is key to ViaSat's success.

But in addition, they have matured a lot, from a business-savvy perspective. Although each of these business areas is self-directed, there's a stronger sense of unity and coordination between each of the businesses and the various functions, now, than I have seen in a few years.

With that said, let's move onto the highlights in the different business segments. Our results in the government (ph) business segment were excellent, both for the quarter and for the year. Revenue for the fourth quarter was up about 78 percent on a year-over-year basis, and 56 percent for the year. This business continues to generate good profits, and should improve as we move some of the current development projects into production. We had strong a strong mix of production jobs and funded R&D projects that should position us well in the network-centric market space. Product sales in the data controller and UHF modem areas were strong, and we introduced some new features in the data controller products this quarter. We continue to get new orders for our KG-250 product, which is undergoing testing this week and is currently in the certification process. We still have a shot at getting production units into customer hands in the first quarter. We'll see how that goes.

MIDS completed some key testing with the segment of the FCC this quarter, removing the last key development-related milestone in that program. Our supply chain is more developed, and our production volumes have picked up, resulting in record deliveries in the quarter, and March set a new monthly benchmark, as well. Our development efforts on a new DoD standard satellite modem program called Enhanced Bandwidth Efficient Modem, or EBEM, are making good progress and, although not completed, we received orders for an additional 201 units in the quarter, which makes the backlog about 700 so far.

We have had some increases in development costs on this program, but we are fairly far along, and it looks like we will be very close to the recurring costs we estimated at the beginning of this program, which was a challenge. We received the RFP for Lot 5 on MIDS, and it's scheduled for award early this summer. That should be the next major award opportunity we have for MIDS. There's still some international opportunities that look like they will move ahead, but we can't predict their timing.

We're continuing to see good opportunity flow in almost all of our government areas, and have been awarded some initial subcontracts for the risk reduction phase on TCS, DoD's next-generation satellite system. We're on the Northrop-Grumman-Lockheed team for that project.

Now, we will talk about the commercial segment. The segment has grown very nicely, with record revenues in the fourth quarter, up 39 percent when compared to the same period last year, and up 47 percent for the year as a whole. Our team has achieved some critical milestones in the quarter, but our system for Intelsat (ph) being accepted, and a couple of thousand CPE units shipped on that project. We also announced a contract with Telesat Canada for a Ka-Band version of SurfBeam. We now have over 115,000 units of SurfBeam in backlog, and it's really nice to see this system up and working. We have experienced some challenges, from a cost/performance perspective in this area, which contributed to lower operating margins than we would have liked, but our technical progress and system performance is very good so far. We also passed the required interoperability testing with our DVB-RCS system, and can therefore remove that potential obstacle to future sales of our LinkStar product.

Mobile broadband realized additional orders on our standard Connexion modems, and we received an additional award for general aviation terminals for that project, as well. We have also started on a demo for a maritime system.

Our VSAT networks group finished the year strong, setting a new record for deliveries and continued profitability. We now have about 70 LinkStar hubs and over 20,000 terminals out there; that's almost 5,000 terminals shipped in the fourth quarter. We are making reasonable progress in North American, and we're seeing more and more opportunity flow with high-quality customers.

U.S. Monolithics, I'm happy to say, had its first profitable quarter, and is making good inroads in the government space, in addition to the strong quarter in support of our VSAT and broadband business. We kicked off a lean business initiative in our antenna and gateway business this quarter. We expect this will help to continue to drive down our costs, reduce inventory and reduce cycle times. We are really happy with the progress in SGS this year. Our growth in revenue and backlog provides great opportunities to expand our business.

Thanks, Rick. At this point, I'd like to introduce Ron Wangerin, our CFO, who will discuss the financial data in more detail.

Thanks, Mark. I would first like to start off by discussing our joint venture revisions, and then launch into our fiscal-year 2004, fourth-quarter and year-end results. Regarding the joint venture revisions we mentioned in our press release today, the matter arose as part of a normal SEC review of our fiscal year 2003 Form 10-K. We had dialogue with the SEC, our outside auditors and our audit committee regarding the accounting for our investments in Immeon Networks joint venture with Loral. This is a fairly complex technical accounting matter and, as a result of this process, we're revising our previous presentation of costs incurred for the Immeon networks joint venture. We will restate amounts in fiscal years 2003, 2002 and 2001, previously recorded as equity and loss of joint venture, into cost of revenue in the statement of operations, and have disclosed the effects in our press release today. By making this adjustment, the business activity with Immeon will now be reflected as an operating activity, instead of an investing activity. As a result of these changes, the statement in cash flows was also impacted, and we will make necessary adjustments. These changes will not affect ViaSat's previously reported revenues, net income, earnings per share, assets, liabilities and stockholders' equity for those years. We plan to file an amended Form 10-K for the fiscal year ended March 31, 2003 in the next month.

In January 2004, Immeon is now a wholly-owned subsidiary of ViaSat, and subsequent to the resolution of this process in our future filings, it will enable us to extend our universal shelf registration statement, as we indicated in our press release, and Mark will discuss later in this call.

I will next talk about our financial priorities. Throughout our fiscal year 2004, we have had four consistent financial priorities. They were growing earnings faster than revenues, generating positive operating cash flows from operations while growing, continuing to strengthen the balance sheet and sustained revenue and orders growth.

The relative priorities have varied a little on a quarterly basis, but together they set our overall financial agenda, and they were appropriate, particularly coming off our fiscal year 2003. As we have discussed each quarter, we have accomplished those goals during the year. As we look ahead to fiscal year 2005, we're looking to sustain our revenue and orders growth and earnings growth, as well. We may not grow sequentially quarter over quarter every quarter, but we look to grow year over year.

In addition, we continue to focus on our key operating metrics that we have been tracking over the past fiscal year, such like cash flow, inventory turns and days sales outstanding. We're also very focused on improving our margins to our target of 10 percent operating margin.

Lastly, the Company situation is different than it was one year ago or two years ago. We're a stronger Company with a diversified backlog, both in the split of commercial and government work, as well as customer-funded development and production. We also have a very strong balance sheet that enables us to do things we weren't able to do. Accordingly, we want to leverage our current position in order to be opportunistic in the marketplace, and Mark will address this a little later.

As we turn to the balance sheet, we have divided it up so you can view it a little easier. Further, we're showing the balances as of our fiscal year end 2004, the end of our third quarter and the end of last fiscal year for presentation purposes. We'll adjust the changes in cash balance in the cash flow page. When we look at the old accounts receivable, these balances grew by over 10 million from last quarter and $12 million from last year end. The increase in billed accounts receivable was principally related to the significant increase in revenues Mark discussed earlier, primarily in the government segment. While the balance grew by over $10 million over the last quarter, our aging improved substantially. In fact, accounts over 60 days dropped by almost $3 million, and over 85 percent of the accounts are within 60 days. When we look at unbilled receivables, these balances grew by over $11 million from last quarter and 27 million from last year end. The increase relates to the $11 million revenue increase from last quarter, and over $30 million increase from the fourth quarter of last year. The increase also reflects the status of a few customer-funded development programs that billable milestones were not achieved. And Rick and Mark discussed some of these development challenges we experienced on SurfBeam and KG-250.

While days sales outstanding went from 113 days last quarter to 121 days this quarter, DSOs remained below historical levels. Regarding inventory, the increase primarily reflects the receipt of certain tactical data links (ph) inventory as we prepare for Lot 4 production and the timing of our DOCSIS satellite Internet product shipment that did not occur by fiscal year end, but did occur subsequent to year end.

The reduction in goodwill and intangibles was due to the normal quarterly amortization of our intangibles. In the fourth quarter, the Company prepared its FAS142 analysis related to impairment of intangibles, and concluded that intangibles were not impaired.

Net property and equipment went down quarter over quarter, as depreciation exceeded capital expenditures. The change in other assets reflects a 900,000 reduction in capitalized software from normal amortization, offset by an increase in long-term deferred income taxes. As we look at liabilities and equities, accounts payable increased as a result of the significant business base increase. We continue to grow our business faster than our accounts payable are increasing, and this contributes to cash usage for this line item. Advances continue to be strong, and reflects the strength of our customer base. It's nice to see our outstanding line of credit with a balance of zero.

The increase in current liabilities over last quarter and year end reflects the increase in warranty reserves resulting from the strong shipment in the quarter of our LinkStar VSAT products, second-generation satellite modems, shipments of connections by Boeing units, MIDS and DOCSIS-based broadband terminals. Further, the increase was also caused by accruals for 401(k) matching performance bonuses. The 401(k) matching performance bonuses totaled 6.7 million, and these amounts will be paid out in the first quarter. Last year, this number was zero. The increase in other long-term liabilities is also the result of warranty reserve increases from shipments of LinkStar VSAT products, second-generation satellite modems, shipments of connection units, MIDS and SurfBeam terminals.

In presenting the cash flow statement this quarter, we condensed it to make it easier to view. As we look at the cash flow statement, there are a number of positive items. First, the Company started with strong earnings for the quarter and fiscal year. The earnings included certain non-cash adjustments, principally depreciation and amortization. Depreciation and amortization were 5.1 million for the fourth quarter, and 20.7 million for the fiscal year 2004. The sum of earnings and non-cash adjustments is a good base to start from.

Next, when we look at the net change in working capital accounts, the cash used by growth in these accounts was principally caused by the 21.6 million increase in accounts receivable, partially offset by increases in accounts payable and accrued liabilities. This left us with net cash generated for the year of $28.6 million.

Regarding cash flows from investing activities, the cash used was caused by retirements of fixed assets and purchases of property and equipment. For cash flows from financing activities, we did pay down our line earlier in the year, and the remaining activity was from the net proceeds from the issuance of common stock. All totaled, we generated free cash flow for the year of over $20 million, and this led to a net increase in cash of $14 million from last year end.

On balance, we're very pleased with our performance in fiscal year 2004. As we look ahead to fiscal year 2005, while we expect to be slightly positive in the first quarter, we do not expect to generate much cash, principally due to the payout of our 401(k) matching performance bonuses. But in the second quarter and for the year, we continue to expect to generate cash from operations while we grow. When we look at the key balance sheet measures, they continue to be in line with management's goals and objectives, and we continue to focus on achieving progress in each of these areas on a quarter-by-quarter basis.

On the next chart, and looking at the P&L, we have included both the fourth-quarter comparative and fiscal-year comparative amounts. Regarding the fourth quarter, revenues increased by almost $30 million, or 55 percent from last year. The revenue increases were driven by higher sales in both of our segments. For segment reporting purposes, government segment revenues were $39.6 million, which is an increase from the fourth quarter of last fiscal year of 77 percent, and commercial revenues were 43.6 million, an increase of 39 percent over the last fiscal year.

These revenue levels were records for both segments. Strong government orders totaled over 170 million over the last 12 months, led to record quarterly revenues in our tactical data link, information assurance and government broadband business areas. The record quarterly commercial revenue was also the result of strong orders flow, which also totaled over 170 million over the last 12 months. We saw record levels of orders and revenues in both our VSAT products and large antenna systems businesses. Further, the maturity of our mobile broadband and consumer broadband products and systems is also helping with higher orders and revenue.

Our gross margin dollars are much higher than last year, due to the increased revenue levels, but the gross margin percentages still below where we would like them to be. 24 percent is 1 percentage point below last year. The higher percentage of funded development programs, combined with the development (ph) cost overruns in our SurfBeam area and higher amortization of capitalized software are suppressing margins. As we work through the lower-margin backlog and obtain new contracts, we expect margins to improve.

Selling, general and administrative expenses for the quarter was interesting. Our business base is over 50 percent greater than last year, and our awards volume is up over 20 percent from last year. And we're basically doing this with the same SG&A cost base.

Research and development expenses dropped by over 50 percent from last year. The positive side to the high customer-funded R&D is a reduced requirement for discretionary research and development expenses. Amortization of intangibles reflects the normal quarterly amortization. In fiscal year 2005, the quarterly amount will be approximately $300,000 less.

The quarterly government segment operating profit was 4.6 million, and the commercial segment operating profit was 1.7 million. The quarterly government segment operating profit is a $2.8 million increase from last year, and an 18 percent improvement.

Last year, the commercial segment in the fourth quarter had an operating loss, so it's quite a turnaround.

The change in taxes year over year reflects the impact of the profitability levels. The Company applies roughly a 40 percent tax rate, which is reduced for the benefits received from research and development tax credits. The methods applied were consistent in both years presented.

In looking at the year-over-year results, revenue increased by over $93 million or 51 percent. Again, the revenue increases were driven by higher sales in both of our segments. For segment reporting purposes, annual government segment revenues were 128.1 million, which is an increase of almost $46 million or 56 percent from last fiscal year. And commercial revenues were 150.5 million, which is an increase of almost 48 million or 47 percent from last fiscal year.

For the other line items, the changes year over year were essentially similar to the changes previously discussed for quarter-over-quarter changes. One notable exception to this is the impact of the Scientific Atlanta settlement in our third quarter of this year, which benefited cost of sales by 3.2 million, and selling, general and administrative expenses by 3.1 million. Excluding the effect on SG&A expenses from the SA settlement, SG&A expenses only rose by 15 percent, while the business base grew by over 50 percent. The Company continues to be focused on cost control, leveraging investments in its infrastructure to achieve better results.

In the next slide, we want to clearly show the difference between GAAP and non-GAAP or pro forma earnings per share amounts. The Company only includes the effect of acquisition-related intangibles, net of tax impact.

Next, I would like to turn it back to Mark, who will talk about our business outlook.

Thanks, Ron. At this point, I would like to talk about our outlook for fiscal '05, and share some of our strategic thoughts and plans. In terms of outlook, last quarter we provided initial guidance for fiscal '05, which began for us on April 3, 2004. We said 15 to 20 percent revenue growth, and that was based on a fourth quarter of 2004 sales outlook which was in the mid-70's at that point. So, at the end of the third quarter, that implied fiscal '05 sales in the range of about 310 to 325 million. So, obviously, given that we were able to surge to 83 million in fourth-quarter sales, I think it shows we are pretty capable of doing 325 million in fiscal '05, even if we do backslide a little bit into the mid-70's in revenue for the first couple quarters of this year. At this point, I'd say it's pretty reasonable to assume the high end of that 310 to 325 million revenue range.

We mentioned before that we're aiming for about 10 percent pretax pro forma operating results early during fiscal '05. The cost overruns in Q4 meant we backtracked some in the last quarter of fiscal '04, compared to the third quarter, but we are still focused on achieving that objective during fiscal '05, and are maintaining our outlook of approaching that level for the year as a whole. So, if we were very close to that for the year as a whole, and we were to do 325 million in revenue for fiscal '05, then we would be at about 80 cents in pro forma EPS for the year, and that would be maybe a penny or so better than we indicated in our third-quarter conference call. We still see earnings for the first couple quarters of fiscal '05 the same as we did last time, so the incremental improvements would occur in the second half of the year.

We're also still aiming to ratchet up our gross margins for the Company as a whole to the 30 percent-ish range by the end of fiscal '05. The dynamics involved there are the same as they have been, with the main ingredients being to continue to work off some of our lower-margin backlog during the course of the year. And it, of course, would also be important to avoid a continuation of cost overruns such as those incurred during this fourth quarter.

This next slide -- I want to give some insight into why we're confident of our current fiscal '05 outlook. The fourth-quarter production surge shows we are capable of rapid growth that we are anticipating in the second half of fiscal '05. Some of that growth was driven by production schedules for products like MIDS and KG-250's, and will be cannibalized (ph) by finishing programs such as Ka-Band SurfBeam. Although we were disappointed in the cost growth we had this quarter, we think we're at a stage where we have more visibility into the hard technical problems. New R&D and testing always has some unpredictability, but that can improve some when we get closer to the end. We have emphasized before that we can manage towards a 10 percent pretax pro forma operating goal, even if the gross margins are still in the high 20's, if we have to. In fiscal '04, we did over $80 million in funded development projects for defense and commercial customers. That's a lot of R&D, and gives us a way to manage our discretionary R&D costs, while still sustaining and even improving our technology advantages. While some funded R&D is very specific, a lot is portable within our markets. And we see even more funded R&D in fiscal '05.

Finally, we still see a good new orders pipeline, especially in the first half. That should allow us to build more backlog. New opportunities include MIDS Lot 5 production, international MIDS orders, new joint tactical radio system contracts, more funding for current information assurance projects, some new information assurance contracts, some new mobile broadband and orders for VSATs, antenna systems, surfing systems, as well as add-ons to those, and KG-250 and others.

I did want to just talk a little bit about our strategic environment, and want to just acknowledge that we are aware of some important pending changes to our satellite networking competitive environment. News Corporation, which controls the DirecTV group, which was formally known as Hughes Electronics, is in the process of divesting noncore assets, and they recently announced the sale of their controlling interest in PanAmSat to KKR, and the sale of the Hughes Network Systems set-top box business to Thomson. And we're expecting the sale of the rest of Hughes Network Systems, which is the largest provider of VSAT equipment and services. Depending on how this plays out, it could influence the landscape of the VSAT market. We believe that our success to date, and the growth we are seeing in our VSAT market, coupled with the valuable strategic relationships we have developed in the industry and our advanced open standards products makes us a uniquely valuable partner to potential strategic or financial acquirers of HNS or of just certain portions of HNS. Also, some of the growth areas we have engaged in have surfaced (ph) some niche technology or distribution companies that, under the right conditions, could accelerate our growth opportunities.

And finally, the success that we have had over the last couple of years in integrating our existing technology sales and distribution assets and acquisitions has made us more confident in considering new ideas. So, while we don't have any specific capital plans today, we are planning to amend and extend our universal shelf filing. That filing really gives us flexibility to rapidly strengthen our cash position, which could be to make some selected niche acquisitions, or possibly to participate in some way in a portion of a larger transaction. We believe that, even if we don't actually ever use the extended shelf filing to raise equity, just the flexibility that it affords us will provide some meaningful benefits to the Company.

So that covers all the points we wanted to make. Just to summarize, you can tell we're pretty happy with the quarter, and very happy with our fiscal year '04 year-end results. We set earnings, revenues and orders records. Our confidence in achieving the FY '05 outlook we described last quarter has improved, and allowed us to guide to the high end of the previous revenue range, and to slightly inch up the earnings outlook.

Our new orders pipeline still looks fit. We're still seeing strength across our entire business portfolio. We have got excellent customer-funded R&D projects, and there is just some nice business opportunities out there that, once resolved, might favorably impact us over the next few quarters. We believe we have earned a greater sense of confidence in our organization, and management team, and we're planning to extend our universal shelf filing to position us to lever that if the right strategic opportunities emerge.

Well, that's it for our prepared remarks. At this point, operator, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Rich Valera, Needham & Co.

Could you give us a little more color on the KG-250 and SurfBeam? I guess cost overruns and when you would expect those programs to sort of either be finished up for to sort of get beyond the current issues that are facing those two programs.

Well, SurfBeam, basically -- we got our first system into -- or got acceptance from our first customer, which is Intelsat, and from their customer, so that was a big step for us. And we accomplished that recently, a little later than we aimed to, but that was still good.

So I think from a Ka-Band perspective, we're in pretty good shape there. We have some of the other opportunities we're pursuing are also Ku-Band, so those will be pretty straightforward. Ka-Band -- there's some more features to do, but they are not scheduled to be rolled out until later in the year. And so we're not overly stressed about that.

For KG-250, the big milestone we had to get through was to go through all of our own contractor acceptance testing, and we have done that, and it's now into the certification process. So we have made progress there.

So we think we have had -- I guess the way I would put it is we had some growth, but we don't -- cost growth. We don't necessarily see that persisting for long periods of time.

It sounds like you would expect to wrap up the bulk of those issues within the June quarter. Is that fair?

I just want to be really careful. On the KG-250, that's basically into government certification, so that will occur on their schedule. We get products through government certification on a regular basis, so we believe we will get through that. But it's their schedule, not ours. But we have done our part, based on the testing that we have done so far. And I'm just trying to be really careful with my words on that. But hopefully, that will go in a reasonable period of time. Like Rick mentioned, we feel like we have a reasonable shot at getting units in customer hands this quarter.

SurfBeam, the Ku-Band stuff, is in service, and so now, the real issue is the customer rollout. The Ka-Band stuff was not planned to be deployed this quarter; we are looking more like the next quarter. That's kind of consistent with the launch schedules for Ka-Band, as well.

And along those lines, how should we look and think about the sequential gross margin trends? Should we expect some improvement there, on a sequential basis?

Yes. This quarter stuck out for us. Next quarter, we are -- if you look at kind of where we were guiding, last time, in terms of earnings, we would still kind of squeeze out a little bit of sequential earnings improvement. And if our sales don't go down, that means we are kind of looking at getting better margins to get us there.

And any word on JTRS MIDS? I think that was something you mentioned last quarter might be something you could see some form of initial orders for in the relatively near term. Any status on that?

Yes. It's a program we are definitely really excited about. I'd mentioned before that we'd gotten started on it, but there's really a much more substantial development program that we are expecting to be awarded. And I think it's first-half. That's what it looks like. It's always up to the customer, but I think it's the first-half of our fiscal year that we will see that.

And just looking at the broadband landscape, I know these are tough things for you to comment on, but you may have alluded to this slightly in some of your strategic comments, but anything you can say about the broadband plans of either DirecTV or EchoStar, and how you may or may not be engaged with them, as far as being a potential partner to either of them for their broadband initiatives?

Well, the main thing I would say is I like our competitive position on the broadband stuff. We have got our SurfBeam stuff going out, so that's good. But what we are really looking at are two big players in direct-owned (ph) TV, who are unpredictable. I think that there's a lot of stuff -- I think that there's steps that they have to do. I think we have a competitive offering. We would like to see a distribution arrangement like for instance what's been happening with WildBlue. WildBlue should be in a good position, but what will their distribution agreements be (indiscernible)? It's a little hard to tell. Personally, I think you just have to see a sequence of steps that have to happen that first DirecTV will do and EchoStar will do, and we will be ready when they are. And in the meantime, I think we will still be able to perform the way we're planning to.

John Bucher, Harris Nesbitt Gerard.

A question on the Connexion work with Boeing. It looks like they have made a lot of traction with some of the long-haul, Pacific Rim-based carriers -- Singapore, JAL, Korean Air. I was wondering if you could either give us an idea of what your dollar content in that program is per aircraft, or if not that, what you think the total addressable market opportunity is to ViaSat for the long-haul carrier market via Boeing. And then also where you think the margins -- whether the margins supplying equipment to Boeing on that are above or below the corporate average there. And if you could do the same also for Airink (ph) or bundle them together, however you see fit?

We're very happy with the progress Boeing has been making in getting airlines to sign up for Connexion. I think with Lufthansa going into service, I think that's really going to open some eyes. So we are really excited about it. We haven't really broken out our dollar value on a per-airplane basis for Connexion. It's sort of the comparison that we have used before; it's pretty similar to, say, some of our defense modems that go aboard airplanes, not like a MIDS, but more like our UHF satellite terminals or modems. So that will be in the range of tens of thousands of dollars, not hundreds of thousands of dollars per platform.

But in the aggregate, if things go well, that represents an opportunity for us kind of steady-state in the low tens of millions of dollars a year. And it's probably comparable in each market, both the civil aviation and the commercial aviation market. Now, if we get it that would be really good. I think that the -- kind of the big swinger in the Connexion market is going to be penetrating a U.S. carrier. I think like Boeing would really like to do that, and we'd like to see them -- I bet it will happen. Does that answer your question?

It does. And for Airink?

On the Airink -- yes, my main point there was I think that on the Airink project, which is the civil aviation -- that's really what they're aimed at. Our content per platform is higher than in Connexion, but the number of platforms is lower. So I think, in aggregate, it represents an opportunity for us that is comparable to what Connexion would be, kind of tens of millions of dollars.

I think that also, just from a margin perspective, I think that probably the production -- the margins for the program overall are probably pretty comparable to our total Company's margins, although they were lower when we were in the development and test phase, so they should be a little higher when we are in the production phase, but average out to something that is in the ballpark of what we normally do, margin-wise.

And final question, sort of a follow-up to Rich's on the KG-250 testing -- you have got a backlog there. I understand that it's in the government certification process now. Are you seen increasing interest on the part of some of the other potential end users within the government for that, or is your outlook about the same as it was previously?

I think our outlook is pretty bullish on that. I would say we are very pleased with the order backlog that we have. It's much bigger than we thought it would be, prior to certification. And we are basically kind of -- we are in the mode where people are buying -- some customers are buying small numbers of units for test and evaluation, and we are seeing good commitment on the government side to what is called this HAPI (ph) standard, which is the open standard that our product meets. So that should create a good environment. We will know a lot more, once we are through certification. And after that, we can give a lot more color, say, after our second quarter, ballpark.

Thank you very much. Great job.

James McIlree, C.E. Unterberg Towbin.

Can you quantify the cost overruns on SurfBeam and KG-250, how much of a dollar hit it was during the quarter?

If you want to look at the aggregate overruns, you can sort of look at, well, we did maybe another $7 or $8 million in revenue than we thought we would, ballpark, $7, $8, $9 million revenue. But we ended up with kind of the same gross profit dollars that we thought we would, and that will give you some -- you could sort of work backward from there and get an idea of sort of a range of kind of where the magnitude of the overruns were.

So a couple million dollars in aggregate?

The overruns also did not all occur in the quarter. That reflects what we think the cost growth is to get through the development phase, and what percent complete we are there. So we basically have accounted for where we think we will end up.

And I am sure you have other programs that would face the same type of challenges next year. Have you changed the way that you are accounting for those development programs, to reflect the experience that you have had on these two?

I think that, when you look at the complexity of these programs and how many we have, we have had things that have gone positive. You know, offset the ones that have gone negative. So I think that, in aggregate, we have done pretty well on fairly large programs like this. So I don't think that magnitude of earnings adjustments is an outlier.

Also, we have to look at kind of what the requirements are for the programs and whether they are cost reimbursement contracts or not. It turns out that these two are programs that we both -- that we believe, and we talk about SurfBeam and KG-250 in particular. It turns out both of those have large amounts of discretionary R&D components to them. We feel that they are very large markets, with very desirable customers. So we're investing in them, and we are accounting for that. That's part of what you're seeing right now.

And we are not also changing any of our (indiscernible) accounting on our other programs. We're accounting for them as we believe that they are appropriate.

The surge in revenues that you saw in Q4 above what you had originally expected -- you said that that, to a certain extent, robbed from Q1 and Q2. Can you identify which programs or product area that might be?

Added, secondly, what would be the products or program areas that you would think account for the second-half the resumption of sequential growth?

I hope I didn't give that impression. I think what we were trying to say was it really didn't rob from Q1 and Q2; that, if you look at what we talked about at the end of Q3, we were really talking about relatively low sequential revenue growth going in Q4-Q1-Q2 timeframe, which would put us kind of ballpark mid-70's, with a little bit of sequential growth in there. What happened is Q4 was low 80's. If you look at where we think Q1 will be now to where we thought it was in the third quarter, it's pretty much the same. So in that sense, we would say it did not rob things. And probably what that tells you is we think we are pretty confident in the order flow and the ability to draw down our backlog to keep our revenue going anyway.

So we just sort of added about 7 to 8 million into that nine-month timeframe; that would be one way to look at it. And that addition occurred in the quarter we just finished. Does that make sense?

Yes, it does. But the initial part of that question was what product area or program accounted for the surge in the Q4 revenues.

The main areas we talked about were kind of material inputs on MIDS, and then production output on -- we did pretty well on VSATs, data controllers, antenna systems.

The large antenna systems, as well.

They were kind of mixed among in those, with MIDS being a good part of that.

And I just want to make sure that I'm clear. You would expect mid-70's type revenue in both Q1 and Q2?

Yes, in that range.

And possibly Q2 greater than Q1, or kind of equal to?

Probably a little bit bigger.

Steve Mather, Sanders Morris Harris.

Mark, one of the most interesting areas for me is both MUOS and TCS. In that respect, when do you expect a MUOS contract to be awarded? And then secondly, just so I understand it right, you are with Raytheon on MUOS, but with Lockheed and Northrop on TCS. And I am just wondering how comfortable you are saying that you will likely participate, no matter who is in the lead, or no matter who is the lead contractor, I guess. I am trying to get a sense of how much do or die it is that your team wins either of those two, considering your technical abilities.

I would say, on -- you know (ph), we have a clear role now on the Raytheon team. Originally, we were on the Boeing team, and we had no role on the Raytheon team, but they found a place where we could add value, so we're happy with that. If Lockheed wins, there's a chance we won't get anything on MUOS, and that would be disappointing, but not devastating. I think, if on the TCS team -- and TCS, it's Lockheed and Northrop competing with Boeing. And we are really on the Lockheed-Northrop team. Is it possible we could find a home on the Boeing team? It's certainly possible, but right now that's not our plan. Right now, I would say the way to look at it is that we are on the team we are on, and if that team loses, then we won't participate in those aspects of the program.

But I want to be real clear on a couple of things. One is MUOS and TCS, the way they are structured right now, are primarily space programs and infrastructure programs. And so, no matter who wins, there will be opportunities for terminal makers on those four -- those space systems. And that, although the players that are on the space system prime (ph) will probably have a leg up, people who make JTRS or FAB-T or all those other types of terminals, which we are involved in as well, will also have opportunities. So there are a lot of good opportunities that are not totally do or die, the way we see them right now.

Thank you for clearing that up. Secondly, although I am interested in your perspective on consumer broadband, I want to kind of narrow this question. How do you see the ramp in your particular business in the next two months, not market adoption but simply the revenues and expenses, shipments, things like that? Just so -- and like I say, separate that from the market adoption story.

Well, we have not broken out consumer broadband separately within our segment reporting, so I don't want to go into much detail there. I can give you -- tell you qualitatively what's happening is -- and this should continue over, let's say, over the next year and should be repeated. That is what we're hoping, and that's what the plan is. But for instance, we have our first employment with Intelsat, in the Middle East, Ku-Band, and what we expect to see in terms of revenue growth over the next few months is just shipping more units. And so far, they and their end customer are pretty bullish about being able to do that. So that's one way we will get growth, and the other way is we're still working on these Ka-Band projects that we have announced for WildBlue and Telesat Canada. And so we're deriving some amount of revenue associated with those, but we would not really see -- and then we'll also see some revenue associated with infrastructure shipments first, though not likely this quarter, not in a significant way this quarter.

So we will start -- the way we will see ramps will be kind of some development followed by some infrastructure and then followed by terminals. And what we're aiming to do is bring on a couple of other system customers over time, and just repeat that cycle. We don't really want to put numbers around it right now. Does that help?

Absolutely. Just one final, if I could, and it's a quick one. Assuming no future relationship with HNS, or whatever that becomes, how would you kind of position your sustainability or competitive pitch, relative to SpaceWay from, let's say, a cost benefit basis to a customer?

I think that SpaceWay is --

Let's say, if it does what it is supposed to do a year from today.

I think that it's an interesting satellite. It will appeal to some enterprise users, because of the single-hop mesh. It fits to apply (ph) for videoconferencing, could be better than a conventional VSAT. I think that, as for other VSAT services, how attractive SpaceWay is -- say one, if it exists and it works -- how attractive it is will depend a lot on what somebody paid for it, and how they choose to amortize their capital cross in airtime expenses. So if they pay too much, it might not be that competitive. If they get a good deal, it could be competitive.

But if you were to compare that to, say, a business customer that used say -- Anik F2 or a WildBlue satellite, I don't think you would see any benefit, just from a services perspective. So that's one of the things that we will be exploring with some of our partners.

But then, the other big issue with SpaceWay, I think anyone is going to have to deal with, is it will be the only satellite of its kind in the world. And so I don't know how much -- no matter what it costs, I'm not sure how much mission-critical business it will get if the prospect of some type of satellite failure means there is just no recourse. I don't think that's a fatal problem; I think it's just going to be a gating problem in developing SpaceWay, no matter who owns it.

David Kestenbaum, IRG.

Rick, as far as the receivables and the inventory obviously spiked up during the quarter, can you talk about what you expect next quarter? Are they going to spike down, and then you should be able to raise additional cash? Can you talk about your expectations?

Ron, why don't you handle that one?

We do see the receivables level coming down a little bit this quarter, mostly from unbilled moving into billed and unbilled going into cash. We do see ourselves generating cash from that perspective, as well as lowering inventory levels.

With regards to generating cash flow from operations, we did highlight the fact that in the first quarter, we do have a 401(k) match and performance bonuses that will be paid out during the quarter, and that will lower the other cash that we would have otherwise generated. But we still see ourselves generating cash for the quarter.

On receivables, do you think you can get to the DSO level you were at in the prior quarter?

I think we will come pretty close, yes.

Mark, can you talk about strategically why you would want to do a deal with a strategic partner for HNS versus going it alone?

Yes. First of all, one thing I will say about HNS is we don't have any financial data, and so it's very difficult to say anything based on facts. I think, though, that if you look at the complements of what HNS has now, there's a lot of services businesses, and there's some equipment business, as well. And what we are anticipating is that there may be other investors, either strategic or financial, that have basically investment themes that are more suited to a cash flow type business, that might be a little more asset heavy than us and more valued on cash flow.

And so, if that happens, and those entities are willing to offer a higher price, they will probably be in a better position. But I think that in that case, we could still be a valuable partner to help them with their equipment needs. And probably, those customers would be likely to want to -- those buyers would be likely to want to migrate to a more open platform. So those are the kinds of rumblings that we're hearing.

Now, if the sale proceeds, and there is financial data on it, and that could look attractive to us, then we will consider that, too. But that is all we know right now.

George Appleyard (ph), Appleyard Investments.

A quick question about the margins. Is it my understanding that what you are seeing for quarter one/quarter two, there's even a chance that the margins will even go lower before heading back up towards the end of the year? Or are you pretty sure that the margins will not get any lower than they were in the last quarter?

We're expecting the margins to improve compared to this first quarter. And if you look, what we were trying to do is draw a line where we had kind of sequentially growing margins, which we did for the first three quarters. And we were just going to continue that out sort of asymptotically, trying to approach 10 percent by, let's say, the first or second quarter of '05. So I would say that right now, what we think is the fourth quarter was kind of an aberration. It did volume and made up for it, but in the first quarter, we were trying to get back closer to that line that we're trying to get at before.

Now, these pressures -- where they just out of competition, or this was just an unusual event, in your opinion, for this currently completed quarter?

Well, the main point was we ended up and determined that we were going to invest more in primarily KG-250 and SurfBeam -- those two product areas. They are getting closer -- we achieved some milestone that give us some visibility. We never know for sure. We think that those particular problems won't persist into this quarter.

Two more quick questions. Number one, this offering, up to 200 million -- do you see it in any way being used in such a way that it may dilute the share numbers that you currently have outstanding? Or this is completely going to be unrelated? So is there any dilution possibilities for that?

Well, I would say it's a possibility. We could not necessarily say that anything we do won't be dilutive. But on the other hand, as I said, we do not have specific strategic plans at this point, as to how we would use it. So it's a little hard to comment on the impact, or whether we'd use it at all. But we do believe that having the filing extended, both in terms of timing and value, will give us a lot more flexibility. That's the purpose right now.

I understand. And my last question to ask you quite briefly is just noticing that there have been quite a bit of insider selling through your Company and pretty ramped up lately. What I mean lately is not just the last month but throughout. Is this sort of something that your Company is going to continue to do, or is this something that was done for personal reasons for different people, and you see it sort of slowing down?

It's hard for me to comment on individuals. I can comment on my own. One of the things that we said, we disclosed last year was that we were going to put in place a 10b5 selling program, so that we would have a way for people who actually had not sold hardly any shares, people who are either founders of the Company or people who have been employed here for a long time, didn't have an orderly way to sell any of their holdings.

So I think that's part of what you've seen. I can tell you, on my part, it's been a relatively predictable and small part of my total holdings. My personal wealth has been largely tied up in ViaSat stock. I think that's true for others. That's about all I can say. A lot of that will depend on the individuals as a whole.

Of course; I understand. And just to reaffirm, so your guidance for year 2005 is now basically being just a little bit stretched toward a 325 possibility, with 310 remaining the bottom, as you predicted it before and during the last call?

The last time we gave a range of 310 to 325, and this time, now we think it's more likely 25.

Kevin Feldman (ph), CVM Asset Management (ph).

There's been a lot of articles lately about the amount of awards coming out of the DoD shortly, being in the range of like 25 billion. Can you give me a range of what your piece of -- they mentioned MUOS and the various JTRS flavors and transformational satellite. What is your range that would filter down to ViaSat?

It's really hard to say. There is a question of timing and value and probability of win. But here's what I would say, is we could -- what I would like to do -- we talked in terms of items (ph); we talked about revenue. What I would also like to see is good growth in orders year over year. That's probably part of what we have shown. And if we can get orders growth that is kind of along the lines of the orders growth that we had from last year to this year, let's say on 400, low 400's, that would be pretty good. And that kind of roughly split between defense and commercial, that would be pretty reasonable at this point.

That sort of bars any really unusually good things happening in either one. That would give you a feel for what we think would be reasonable in this kind of timeframe. But we do think that that sort of takes into account the fact that some stuff might slip into next your. Overall, we see pretty robust opportunity flow for us. Does that help you at all?

Yes. That was one of my other questions, is you have, in the past, given us some idea of where total awards might be. And so that's somewhere in the low 400's?

Yes. I think we would like to see that.

Has the Intelsat customer -- is that an official rollout yet, or still testing, or where is that at?

Probably we have to be careful of what -- it is not our customer, it's Intelsat's customer. What Intelsat's told us is they have acceptance from their customer, which involved a testing phase.

Are they advertising the service to their customers?

I believe so. We're a little bit detached from that, but what we're anticipating is some pretty steady rollouts in the number of subscribers they have, which are right now small. I mean, it's hundreds, is how many they have now. And I assume (ph) they will probably then go through thousands before they get to tens of thousands. But that's the mode that they are in now, is ramping up. Kind of in the hundreds of thousands range, probably.

And along the same lines, have you finalized any terminal contracts with the service providers that will be using Sonic F2 (ph) in Canada?

The contract that we announced with Telesat was primarily for infrastructure. They are trying to work out agreements with retail service providers, which we are supporting them on. And I think that was what the plan was, but I can't really comment. We haven't announced anything yet.

And can you give us the approximate size of the terminal side of that?

I think it will be good. I think it will be comparable to what we have announced each time we brought on another major customer before.

So let's see. We have two major customer's now, right?

Yes. What would that be, 50,000 to 60,000 apiece, kind of in that range? It could be better, you know. But that's kind of reasonable at this point.

You mentioned about all the awards and possible awards coming along in InfoSec, the information assurance stuff and all that. And in previous calls, you thought that InfoSec would become your largest business, perhaps, here in fiscal '05. Is it still happening that way?

I don't think it will happen in '05, partly because MIDS is doing really well. At one point, we were sort of saying that we were hoping MIDS would be as big as the rest of our -- if you go back two years ago, we would like to see MIDS be as big as the rest of our defense business. And it's been better than that, in terms of the orders. And the MIDS JTRS is kind of an added bonus there. But the InfoSec stuff is still doing really well, and we will probably add a lot more when we see KG-250 kind of steady-state production orders. That's the big thing we will be looking at during the course of this year.

Did you and DLS get a JTRS MIDS award?

They are still working on the structure, but it's likely that all of us will.

So I think that concludes our question-and-answer session, and we really appreciate everybody's time and interest and patience during the call, and we look forward to speaking with 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.