Viasat Inc (VSAT) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first quarter ViaSat earnings conference call. My name is Bill and I will be your coordinator for today. At this time all participants are in a listen-only mode mode. We will be facilitating a question and answer session towards the end of the conference. If at any time during the call you require assistance please press star, followed by 0 and a coordinator will be happy to assist you. As a reminder this call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mark Dankberg, Chairman and CEO of ViaSat. Please proceed, sir.

Thank you.

Good afternoon everyone, and welcome to ViaSat's earning conference call. For our fiscal year 2005 first quarter ended July 2, 2004. This is Mark Dankberg I'm Chairman and CEO and I have with me Rick Baldridge 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 sections 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 [INAUDIBLE]In the conference call presentation again, and they can be viewed over the web. I will be referring to those as we go along. The topics we'll cover include our fiscal year '05 first quarter financial results. CEO overall perspective and then Rick Baldridge our President will review the operational highlights. Ron Wangerin the CFO will discuss the financial results in more detail and then I will give an update on our outlook and financial guidance, and talk a little bit about the strategic environment and a quick summary and then we will take questions. The first slide on revenues shows that it turns out that revenues this quarter were a little better than we expected at $84.2 million. That is a 42% increase over our first quarter for fiscal '04. It also turns out to be our 6th consecutive quarter of record revenue. As we will discuss a little later we also grew our backlog by almost another $20 million this quarter. So obviously we didn't need into backlog at all in accomplishing that. Revenues turned out to be stronger due to shipments of some of our standard products such as UHF satellite modems and our VSATs products.

This next slide on pro forma earnings shows that for the first quarter we were on plan at about $4.7 million or 17 cents a share on a pro forma basis. That is almost triple our year-ago results of $1.6 million or 6 cents a share. The pro forma results exclude only amortization of intangibles associated with acquisitions and will provide explicit bridging data that GAAP results a little bit later. Our pretax earnings were actually better than we planned but our anticipated tax rate for the year is currently higher than we expected due to the fact that federal R&D tax credits are currently no longer effective as of June 30th, and Ron will go into more detail into later. Our margins are still continuing to lag a little bit from what we like and we will talk about that in more detail in the operations portion of the call. In the aggregate we think it was a strong quarter in terms of earnings and EPS, given that if we'd had our expected tax rate we would have come in at just about 19 cents a share. Also works out about a 9% return on sales on a pretax pro forma basis which is just a little bit shy of our near-term goal of 10%. So Q1 GAAP net earnings grew about 7 fold on a year-over-year basis, and net our targets. And net earnings were $3.6 million for the first quarter of this year compared to just under half a million last year. And grew about six-fold to 13 cents a share for the current quarter this fiscal year versus 2 cents a year ago. So we are certainly pleased with the top level financial results and with that as some context I'll give a top level view of our business situation.

The key points we feel we are off to a good start for the year, both financially and in terms of the business environment. Our first quarter results are consistent with our full year objectives. The rebounds in new orders -- the rebound that we had in new orders -- is nice and pretty much what we were aiming for. We're still really happy with the balance and strength across our various business areas. Our segment data shows strong government sales in the quarter of $38 million, and that our commercial segment makes up about 55% of sales. But commercial segment also includes sale of products in the government markets which make things a little bit more balanced. And the defense segment was nicely profitable this quarter but driven some what by a favorable mix which may persist a little while and it is really good. The commercial segment was solidly profitable but we will have to continue -- we will probably continue to have some broadening development investments that restraining margins are a couple more quarters. We had some good highlights in the quarter. We earned our KG-250 certification and started shipping production units. That is a big step for us it and creates some good opportunities looking ahead.

In terms of our broadband business, we were really happy to see Telesats [INAUDIBLE] to be successful. That has a K A band payload for both Telesat in Canada and LogBlue in the U.S., so that's fantastic. We've got our first operational network with SurfBeam at KUBAND and those connection service also launched with Rotunda. If you do searching on the internet you will find some positive reviews of that service. We were very pleased with the value of our recent [INAUDIBLE] production contract and fact that we are delivering production units at record rates. Performance wise we think we're doing well. We met our targets in the first quarter despite the 2 cents a share hit due to the tax rate, so that indicates some strength. It is not really a slam dunk. We are aiming to continue to hit our targets even given the higher anticipated tax rate going forward.

We think the outlook for product shipments in the second half is still good and that will earn better margins due to having some of the older programs completed and behind us. Also the volume and program quality behind our funded R &D gives us a lot of maneuvering room to manage below the line costs while still doing fine and new orders and opportunities. We expect total funded R&D this year, probably $10 million to $20 million more than we had last year and that would put us in the range of close to $100 million. That helps a lot. On the other hand costs and schedule issues on some of our new products counterbalances that some what. So we've got a mix of some things better than planned financially and others that are behind planned. We still have a lot of good opportunities in front of us for both defense and commercial systems but some of the most visible big programs in DOD are delayed like global user objective system, the transformational communications system and some of the joint tactical radio system efforts. We don't think the underlying needs have gone away so things will happen there in due course. In the meantime, we've had other products that are filling in and some of those are just natural consequences in the new system. The delays haven't impacted our planned results.

So turning to new orders, last quarter we said we were aiming for about $400 million in new orders for this fiscal year and that is still the case. First quarter is consistent with that. And with our quarterly book and ship type targets as well. Our view of the order pipeline is still good. There is still some big awards that are out there and it is a combination of art and science to predict when and how much we'll get in new orders, obviously, but using the same type of process that we've applied over the last couple years still looks good. As I've mentioned, we've made some adjustments in our outlook reflecting delays in some of the bigger DOD programs, but there's other things that have built into the delays. We never know exactly what we're going to win or when until you actually execute the contracts, but I can give an indication of the main sources of new business in play during the rest of this fiscal year. And that includes joint tactical radio system projects, including a MIDS into that. Some information on assurance product sales. Some program additions in that area and some new program opportunities. Additional orders for standard defense satellite products.

Some international MIDS production orders. A study in demo programs around weapons data links. New consumer broadband opportunities, including new customers and expansions for existing customers. Some additional inpipe broadband orders. Some continued satellite ground system and antenna opportunities. Continued VSATs network orders, including expansion of shipments to existing customers. And also opportunities associated with these new defense programs, including the ones I mentioned before like local user system TCF, joint strike fighter and others. The next chart puts the revenue growth in the context of our backlog. This was our 7th straight sequential quarter of growth and the 6th consecutive quarterly record. Last quarter was the first quarter we had in quite awhile where there was any downtick at all in backlog. And you can see that we more than made up for that this quarter and set another new record for total backlog at just about $300 million. Our new orders are pretty lumpy so we aren't going to add to backlog every quarter. The prospects for growing backlog again next quarter are pretty reasonable and we are pretty confident its going to grow over the whole year as well. At this point I would like to turn it over to Rick Baldridge our President and COO who will go over some of the business and operational highlights.

Talk about the government sector first. Our government business recorded $38 million in sales. Had strong orders. Increasing backlog and very good earnings. We're maintaining a good mix of fund development programs. Helping to ensure future growth coupled with a solid base, product manufacturing. During the quarter we had strong sales products including UHF satellite modems and MIDS terminals that help account for the increase in revenue relative to plan. One of the big milestones in the quarter was that we received certification for the KG-250 and shipped additional production units so that means we'll now be able to start realizing the benefit of the product shipments we have been planning on, and that we've completed the R&D of the initial version which is a big deal. Although a couple quarters later than we had hoped for, but we are there. There will be a more complete press release on this in the next few weeks after it has been approved by our customer. We got our biggest MIDS production order and are shipping units at record rates in the area, so we have been liquidating the end-bill receivables associated with the original contract orders. It might also substantially improve our margins and aggregate on that product. As we transition to production contracts from the development program combined with the first three low rate initial production lots. We are behind plan on the new standard military satellite modem program, the EBEM program. This is causing some margin erosion but our technical performance is very good.

We have an updated plan for completion and we're hitting the original recurring cost estimates so the future for this program continues to look very good. The pipeline of new potential government business is good and includes information assurance, joint tactical radio system programs including the MIDS to JTRS upgrade, and several satellite networking opportunities -- including the ones Mark mentioned [INAUDIBLE] TCS and a number of near term smaller programs. So let's switch to commercial now. Our commercial segment is also growing and has remained profitable. Our VSATs networks business is the largest component and has continued to perform well both in new business acquisition and in profitability. During the quarter we completed DBRCS testing under our contract with Utilsef. We also shipped a record number of links to our remote terminals during the quarter, over 5800. Between the SurfBeam DOCSIS system and the DBRCS we believe we continue to be well positioned to address customers interested in open standard networks which appear to be a growing segment of the total VSATs market. Our satellite ground systems large antenna business has had steady financial performance while continuing to grow revenue and build backlog. Aggressive restructuring and process improvement efforts in this area are beginning to bear fruit and result in improved competitiveness and improved operating margins. We are really happy with what that team is doing.

Our broadband business area had some important events recently, including launching KUBAND SurfBeam networks with innelset, and it worked with innelset. And a recent KABAND contract worked for Telestat. The successful watch of [INAUDIBLE] is also a big plus. Our financial performance in this area is below plan and will likely remain there for a couple more quarters. But we have a revised plan which we factored into our outlook and we are working very closely with our customers to support their deployment plans. We also continue to see a steady stream of new DOCSIS system opportunities and believe we are making good progress in helping establish it as a global open standard for residential satellite broadband. Of course, we are very pleased and proud of the debut of Lufstansa's flight service, and that reinforces our optimism about the growth of in flight broadband services. This market is materializing a little slower than we thought it might but it is gaining momentum.

Finally, we continue to see steady growth at US Monolithics, both in supporting the microwave subsystems, prior growing VSAT and broad business areas. As well as in winning new funded development contracts to push the state of the art and mimic the module technologies for defense application.

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

Thanks, Mark.

As we highlighted in our last conference call, our financial priorities for fiscal year 2005 are to continue to grow revenues, orders, and earnings year-over-year. We're also very focused on metrics and measuring each business and market area to ensure we are on course. Our systems and management processes enable us to identify earlier than before when we need to make adjustments. As we progress through the year we expect to see margins improve in our business as we work through lower margin backlog and higher margin production programs begin to ramp up. We're a stronger company today that is looking to build on the gains that we made last year. As we turn to the statement of operations, when we look at our results we had a really good quarter as reflected in the P&L. Revenue increased by almost 25 million or 42%. For segment purposes government revenues were 38.1 million and commercial revenues were 46 million. Our government commercial split continued at 55/45 for the first quarter indicating our 42% growth was equally split between the two segments. On the government side year-over-year we saw revenue increases across all of our business areas particularly in tactical data links, information assurance, and a government broadband.

On the commercial side, increases in consumer broadband, enterprise VSATs networks, and Tenasystems led the way. At the gross margin line, gross margin dollars grew from revenue increases but gross margin percentage fell slightly compared to last year. The 25.4 % gross margin percentage as the 2 percentage point increase from last fiscal quarter, and reflects improved performance on a number of production programs. The gross margin is not as high as last year due to continued cost [INAUDIBLE] certain consumer broadband programs and the EBAM program, whereby suppressing overall gross margins. SG&A increased approximately 20% reflecting increased selling expenses from higher sales in our enterprise VSATs business and new business proposal costs in the government segment. But when compared to the increase in sales we are seeing very good leverage. Company-funded research and development expenses continued their decline this quarter and are substantially less than last year. This reflects the higher level of customer-funded R&D. Amortization of intangibles were comparable to last year.

Other income and expenses comprised of interest expense and minority interest. The reduction from prior year reflects lower interest expenses when compared to last year. In the first quarter of last year, average borrowing at our line was approximately $9 million and this year they were 0. Our operating income before intangibles improved from last year and from last quarter to almost 9%. We continue to see our goal of 10% later half of the year in sight. All totaled we generated 5.3 million in pretax income. Our effective tax rate applied in the first quarter was over 33% and higher than planned due to the expiration of the federal R&D credits on June 30th. As a result of the expiration of the credits our income taxes were over $400,000 higher and resulted in almost 2 cents per share reduction to earnings per share on a GAAP and non GAAP basis. If the R&D credits are reinstated depending upon the terms of the reinstatement and the timing, we'll adjust our effective tax rate accordingly. Our net income of 3.6 million puts on track to achieve our full year goals and objectives.

We performed ahead of plan but came in close to consensus of 17 cents per share pro forma, due to the higher effective tax rate. On the next slide we include the difference between GAAP and non-GAAP or pro forma earnings per share amounts. The company only includes the effects of acquisition-related intangibles net of tax impact. As we turn to the balance sheet, cash and short-term investments increased by approximately $900,000 during the quarter. When we look at accounts receivable both billed and unbilled, we did not make progress in the quarter. Our billed receivables were reduced by approximately $8 million while unbilled receivables increased by 10 million. The reduction in billed receivables contributed to cash generation but the increase in unbilled receivables reflects primarily the delay in achieving milestones on certain consumer broadband and antenna systems programs. And slower than expected uptake for mobile broadband products. As we achieve these milestones in shipments in the second and third quarter, this balance will begin to be reduced. But these programs will most likely result in the usage of cash in the second quarter. Inventory was basically flat quarter to quarter. Eventhough sales slightly increased. This improved inventory turns a little. We expect the inventory balance to remain relatively flat over the next quarter but it could be influenced by end of quarter timing of shipments.

Our prepaid and other balance increased mostly due to increases in pre-payments made to suppliers, partially offset by a reduction in our current income tax receivable. Goodwill and intangibles were reduced by the quarterly amortization of the intangibles. This amount was similar to last quarter but due to an intangible that expired in July we expect 2, 2 intangible amortization to be approximately 1.66 million, and be further reduced to 1.51 million in Q3 and in Q4 each. Net property and equipment continued to go down as depreciation of approximately 2.5 million, updates capital expenditures of approximately 2 million. We expect capital expenditures to increase over the next several quarters primarily for facility expansion and to support general business growth. The reduction in other assets reflects quarterly amortization of capitalized software offset by increases in other long term assets. As we look at the liabilities and equites side of the balance sheet, accounts payable increase for the quarter as we had several shipments for product come in at the tail end of the quarter. Advances were reduced significantly in the quarter and reflected progress on a number of contracts. The reductions were pretty evenly distributed across our enterprise VSAT networks antenna systems and tactical data links program.

We continue to have no outstanding borrowings on our line of credit. Other current liabilities decreased primarily due to the payment of 401(k) and performance bonuses in the quarter that we talked about on the last call, as well as payments for legal and other professional services. This is partially offset by increases in accrued employee related liabilities. Other long-term liabilities increased due to growth in the accrued warranty balance, which reflected the strong quarter for MIDS, UHF modem, SurfBeam, and LinkStar shipment. As we turn to cash flows we had another good quarter for cash and it basically ended up where we thought it would. As we talked about in the last call we thought cash from operations would be essentially zero due to the payment of over $6 million in accrued 401(k) and performance bonuses in the first quarter, and we basically came in at this level. In the first quarter we had strong net income plus non cash adbacks in excess of $6 million. The non cash addbacks were comprised of 5.4 million in depreciation and amortization, plus approximately 800,00 in tax benefits from the exercise of stock options. This was offset by cash usage and working capital, principally the reduction of advances of $5 million and the reduction of accrued employee-related liabilities. The net result was a slightly positive generation of cash from operations. We had capitol expenditures of approximately $2 million which was offset by proceeds of issuance of common stock related to stock option exercises in our employee stock purchase program.

The net result was an increase in cash of approximately 900,000. As we look ahead to the second quarter due to the delays in the achievements of certain milestones and shipments, we'll likely not generate cash from operations but will build positive momentum heading into the third quarter. Next I would like to turn it back to Mark to talk about our business outlook.

Thanks, Ron. At this point I would like to talk about our outlook for fiscal '05 and talk a little bit about the strategic environment. First on the outlook we are still comfortable with the consensus estimates for this fiscal year. Looks like there is a pretty good chance that revenues will probably be a little higher than the estimates, but we wouldn't raise earnings estimates for the year at this point yet. As we mentioned we are anticipating a higher tax rate pending the resolution of federal R&D federal tax legislation, and the combination of tax rate increase and development costs we mentioned previously are going to put pressure on second quarter earnings, but so far we anticipate that our business is strong enough to accommodate that in the context of the revenue improvements. It's a little early to talk about fiscal '06. If that's an issue indicator will be to track awards during this fiscal year. If we can approach 400 million like we are aiming to then that could indicate. Now, for that year that is actually a little bit higher than current estimates, and we will learn more about that by next quarter. I'd like to comment just briefly on the strategic environment.

We do expect DirecTV to best the use networks reset business and we have expressed interest in acquiring some or possibly all of that business either ourselves or with potential strategic partners. And there is several others interested in it, too, so we can't really predict what is going to happen there but we do believe our business prospects is good as they stand without acquiring HNS. We think that is reflected in our own outlook and that of the analysts that provide research on us. If we were to acquire some or all of HNS it would be because we think it would be at a price and with terms and relationships that would improve those prospects and within a pretty short period of time, too. The other point is that we have completed the update of our shelf filing and it is now effective. At this time we have no specific plans regarding the shelf filing for HNS or otherwise. We can't and we won't use a shelf at this point in advance of an HNS deal. There is still a lot of options regard any potential with HNS. We could do something ourselves or with partners. We might buy some or part or not even be involved at all. It is just too speculative now and it would be premature to talk about how we finance it or how much or whether we even need to finance anything at all.

Finally, given how well things are going in our business we do remain interested in potential small niche or strategic acquisitions and we're going to continue to consider some possibilities there. So that pretty much covers all the points that we wanted to make and so in summary, we are happy with the quarter and the continued outlook for this year and preliminary indications beyond that. We set a new quarterly revenue record for the sixth straight quarter in a row, while still growing our backlog to another new record level. We just about tripled our earnings on a pro forma basis compared to the first quarter of last year, and the increase was even greater on a GAAP basis. Plus we achieved some important milestones in terms of new business outlook by getting certification on the KG-250. Security product and shipping the first production units. We did well with new MIDS orders and we're shipping units at a record rate with improving margins. The annica2 is successful, paving the way for Wild Blue to launch its service in early calendar 2005, and we also got initial contracts from Telesat to support the Canadian broadband services on our satellite And Boeing's connection services operation and off to a great start.

We do have some challenges in some of our newer development programs but the good news is that if you look back a year, we have resolved all the same type of issues that we had then within the context of our plans and we anticipate that we will deal with the new challenges the same way. Our order pipeline looks attractive and consistent with our outlook. There've been some delays in some of the higher profile defense projects, but in aggregate there's other things that are filling in. So overall we're pretty happy with that. There's a number of interesting strategic possibilities out there that might let us capitalize on what we've accomplished so far, and we're going to continue to consider those in what we think is a prudent way. Well that's it for our prepared remarks and we'd be happy to take questions at this time.

Thank you very much, sir. Ladies and gentlemen, if you wish to ask a question, please key star, one on your touchtone telephone. If you're question has been answered or you with to withdraw your question at any time, please feel free to key star, two. Please key star, one now to begin and we will wait one moment to compile a list of questions. The first question comes from Tom Watts of SG Cowen. Please proceed.

Hi Mark. Nice job on the quarter. Could you just give us an update on your targets for the both the gross margins and pretax pro forma margins and when you expect to get there. And also did you say you thought they would be a little bit soft in Q2?

Just starting on the target --, the target that we said we wanted to get to was 10% on a pretax pro forma basis, and we figured that we'd get there on a more closer to 30% gross margins with kind of maybe 20% below the line. And our gross margins are basically softer but our pretax pro forma at 9% is pretty close to what we wanted. I don't think we're going get to 10% in the second quarter. I think we have a good shot at getting that in the second half -- that's kind of what our outlook is now. On a gross margin basis I think our gross margins will come up as well in the second half. You know, it would be nice to be able to spend a little more on discretionary R&D but right now we have added a lot of engineers. Our engineers are all really busy on funded programs, so that is a factor as well.

And does that suggest that we could see the same low level of discretionary R&D for the next couple of quarters?

I think that for the next quarter, for the second quarter, I wouldn't think of things being too much different than they are now, maybe a little bit higher R&D spending. That is not going be dramatically different. I think in the second half we think our gross margins will come up and we'll probably increase our R&D spending and still be in the 10% stage.

And then also on DSOs, we'd certainly hoped for a little more improvement there. Do you expect to see improvement there and also later in the year? Longer term is there any reason we could see those down? Get to something like 110 days longer term?

Hi Tom, this is Ron. On the DSOs from a billed standpoint they did come down given the reduction, but in total with billed and unbilled they were essentially flat quarter to quarter. I think when we look at it we're going to -- given what we talked about on the unbilled continuing to languish a little bit over the next quarter or so as we hit some of these milestones. I think maybe continue to inch up a little bit and then as we get shipments and milestones and convert it to cash, then it will continue to go down. Once we get into some of our production programs, the nature of our terms and given that kind of a sales --the sales that they'll generate and we would see it down in the 110 range.

Then just finally, you mentioned, Ron, you just said F2,2 amortization of intangibles was 1.66 and over the levels we're looking for in SQ3 and 4. 1.51 (from Ron). Thanks very much.

Thank you very much, sir. Ladies and gentlemen, your next question comes from John Butcher of Harris Nesbitt. Please proceed.

John Bucher of Harris Nesbitt. A question for Mark on the recent funding cuts in the MUOS program. I'm wondering if you think that's a harbinger for things to come in other programs that have fairly lengthy R&D cycles. It's hard to imagine a program that had more need than the boost in UHF access that that program potentially recommended.

Well, I mean, I think in the macro sense it is not a surprise that there is a lot of, you know, there is just tension between the needs, current needs for, you know, war in Iraq versus the R&D spending for future needs. So I think -- you know, personally, I think that you're going to see pressure on kind of the bigger ticket programs. You know, the multibillion dollar programs. I think that the needs there are absolutely there. So there will be some way to either if MUOS is delayed some way to stretch out the existing UHF satellite capacity in some way. And that is probably what is under consideration. At this point I don't think if you take MUOS or you extend this argument to other ones there aren't a whole lot of programs that we're seeing going away but I think what we are seeing is kind of stretching out the funding. And in the ones that were involved and with MUOS being an example, it turns out that because we have existing products it sort of addressed the same basic need. It turns out not be a big factor for us. At least not that we can see right now.

The programs that you have that are in LRIP or full scale production phase, you don't expect any impact on any of those that might hurt your recurring product revenues which are expected to boost your margins going forward?

No, no, we don't see that, no, at all.

Thank you very much.

Thank you.

Thank you very much, sir. Sorry about the mispronunciation of your name. Ladies and gentlemen, your next question comes from Steve Mather of Sander Morris Harris. Please proceed.

Mark, with firms that have your attributes, meaning core technology spread across a variety of product lines, often process improvement is a bit overlooked. Can you just share a little bit more about that effort that you have underway and how you do mitigate, you know, some of the cost overruns that are just naturally crop up when you have these kind of attributes?

It is a good point and we tend to be very focused on technology. One of the good things is that we made Rick Baldridge our Chief Operating Officer and that kind of comes squarely in his area and he has been doing some good stuff there. I would say some of the main things that we are doing is -- one is we've updated our software development process. The software is obviously a big contributing factors to types of systems that we do and probably about six months ago we got that we got that Level three certification from the software development institute, so that's starting to be phased into our programs. We've also and we -- we have kind of developed a framework process for development and transition into production which is always a tricky area when you're doing lots of new products like us, and that is another area that we are working on. And also we have spent a lot of time just tracking our shipments, performance and operations and developed teams to do that. So I think that I tend to -- maybe I tend to gloss over some of those areas and focus on our new development but these are all initiatives that I would say have been underway for about maybe the last year and a half. And, you know, we expect that they will bear fruit. I think also not to excuse kind of what we are doing, but almost everything that we do is stuff that has never been done before so there is always going to be some element of unpredictability. We appreciate the opportunity for bringing it up but we are focusing on doing better than the things that we do.

I mean good -- Steve. You know, a little while back we were talking about MIDS and it was in some of the shape and that MIDS production is going extremely well and the end build as Ron mention -- is coming down. We had some issues on KG-250, we're through that. I think in the end we get through these issues and the product works well and is very reliable.

And the easier one, you talked about legacy equipment like if MUOS is as that is naturally delayed like a lot of historical programs that fit that -- that look. You have the UHF work. On TCS is there an obvious natural consequence where you fill in? That is one of of your issues when you have a lot of product lines and occasionally some of them are speculative, take the ones that are most speculative and those seem to drop off and your sales funnel becomes more important.

On the MUOS and transformational communication systems, I think just to be clear, I think the big picture is that satellites become much more important in kind of modern warfare just because of the distances covered and the speed. MUOS really develops a kind of narrow band highly mobile segment of that. TCS is kind of the little heavier duty broadband IP based. The version of that for MUOS what we are seeing is probably going to be some type of compensating extension in the life of current UHF satellites and that is an area where we are really strong. So actually one way to look at it in MUOS we're on a team with Raytheon. We think we have a good chance to win. But there are two competitors, a fact goes the wrong way and we're not in it. To the extent that the current systems are perpetuated we have a strong role. I'm not saying that is the preferred outcome but that is what the situation is. On the TCS, we're on the Lockheed team we have a good role there. The corresponding way that they deal with that now is to use a lot of commercial satellite capacity and IP based conventional satellite networks. That is an area that is one of our fastest growing right now. A lot of it is being done right now in the sense of paving the way for the transformational architecture. But to the extent that that is delayed or put off it probably gives us more opportunities for existing products.

Thanks very much.

Thank you.

Thank you very much, sir. Again ladies and gentlemen, just as a quick reminder, If you wish to ask a question please key star, one. Your next question, gentlemen, comes from Rich Valera of Needham & Company. Please proceed.

Thank you. Good afternoon, gentlemen. Mark, you mentioned a number of programs that were delayed on both the government side and on the commercial side. I think you talked about some of the consumer broadband stuff and you said some other stuff was filling in for those. Could you talk a little bit about some of the programs actually filling in for some of the ones that have been delayed or pushed out?

And just to be clear I think, you know, we have always had delays. A couple of years ago it turns out that something was delayed it left a hole and we would be talking about what happened. The good thing now is we're in a mode where we can account more for the delays and so a lot of times when you talk about delays it really delays not necessarily with respect to when we expect them, but when the customer has announced them. So, for instance, if you looked at delays on MUOS, you know, the government was expecting to make an award on MUOS I think kind of around June. Now, what I would say is we built in conservatism there and that's almost the same thing is true of almost all of our programs where we are trying to build in some conservatism relative to the customer's announcement. So the first point is that when we talk about delays mostly we are talking about a sense of when the customers announce them because we think you know analysts will look at when those programs happen relative to the customers' schedule. The other thing is that we are having stronger sales on some of the other areas like our VSATs business is doing well, and [INAUDIBLE] is doing really well in new awards. The broadband area is doing very well in terms of new awards. Information assurance. It is hard to point to some individual big thing. It is really more the aggregate that is compensated for. And I would say that just looking ahead we have -- we have tried to factor this into our awards forecast on an basis as well. Does that make sense?

Yeah, that does, thank you. On the consumer broadband side I think you or Rick mentioned that that was a little slower than expected. If you could comment on sort of how you see the ramp of the SurfBeam product, and also if you have worked through the I think you had some development issues that you talked about last quarter on SurfBeam.

Okay. First of all, I think that right now the -- you know, I think we have a pretty realistic expectation for the rollout on the consumer broadband and we do have a network operational with innelset. I tell you, it is -- I would say it is doing okay. There is -- I mean it is -- it is -- I would say it is actually doing pretty well. It is -- but that doesn't mean that it is as good as what we would like it to be and so we are working on that. That is kind of how I would describe that but we are definitely going through network ramp up so we are surfacing any potential issues with how people operate it compared to how we thought they would operate it, what are the manifestations on our software or hardware. So it is just -- it is just -- I would say that part is kind of what is in our plans. I think one of the things Ron mentioned was slower uptake on mobile broadband and there I would characterize it as it is not -- I wouldn't call it slower uptake because we and our customers which would be Airink, Boeing, mostly what we are referring to is the general aviation market and mostly what we're doing with Airink and it's really not a question of marketing so much as it is basically initial units. These are pretty high ticket items and just the actual how we are deploying the initial units. We are not at the point yet where we are really measuring market uptake on the mobile broadband. I'm actually pretty optimistic on the mobile broadband market just based on the reception that we are seeing and the initial articles about connection. The consumer broadband, we can't really speak for our customers but a few of Wild Blues website they are saying watch for commercial service in early '05 and so we are aligning with that.

Great. A couple of guidance questions for Rick, I think, or Ron. First on the tax rate. What should we use as the tax rate going forward? Is that sort of 35%? And then you mentioned that there is a chance that the R&D tax credit could get reinstated. Could you just talk about maybe what the factors are that could affect the reinstatement of that R&D tax credit and when that might happen?

From a tax standpoint we are using a rate in the lower 30s and maybe not 33 -- right around 33 for the year. When we look at the factors that could affect it's our understanding that the R&D credits are in a bill that's trailing this new ETI which is a replacement for the FISK, and what could happen is when it gets reinstated, they could make it effective back to July 1st. They can block it out for a period of time in which case you would lose any credits in that period, so there is really two factors. One is when does it get signed and two is what are the terms in terms of making it retroactive back or as of a particular date. And whether or not you would lose credits in the intervening period, and that would then go into a new computation for what the overall tax rate is.

Great, thank you.

Thank you very much, sir. Ladies and gentlemen, there are no further questions in the queue. I would like to turn the call back over to Mr. Mark Dankberg for some closing remarks. Please proceed, sir.

Thank you. We appreciate everybody's time and attention for our conference call this quarter and we will be back with you in three months. Look forward to it then, thanks, bye.

Thank you very much, ladies and gentlemen, for your participation in today's conference call.