Viasat Inc (VSAT) 2005 Q2 法說會逐字稿

Good day Ladies and gentleman and welcome to the ViaSat second quarter earnings conference call. My name is Mia and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. If at anytime during the call you require assistance please press star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would like to now turn the presentation over to your host for today’s call Mr. Mark Dankberg chairman and CEO. Please proceed.

OK thanks good morning everyone and welcome to the ViaSat’s earnings conference call for our fiscal year 2005 second quarter ended October 1st 2004. I’m Mark Dankberg chairman and CEO and I’ve got with me Rick Baldridge our president and chief operating officer, Ron Wangerin our vice president and chief financial officer, and Kevin Lifford our associate general council. Before we start Ted will read Safe Harbour 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 forms 10-K and 10-Q. 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 Kevin. We decided to get into the conference call presentation then you can see those over the web and I’ll be referring to them as we go along. Topics will cover include our fiscal year ‘05 second quarter and year to date financial results in a business over view perspective. After that Ron Wangerin will discuss financial results in more detail. Finally I’ll up date our outlook and financial guidance, talk about our strategic environment and give a quick summary then we will take questions.

We will start with second quarter revenues sales for the quarter were $82.6m which is up 29% compared to second quarter of last year. For the six month year to date we are at $166.8m which is record for us and that is up 35% over last year. And the next slide shows that second quarter and year to date pro forma earnings growth have been even stronger than revenue growth second quarter pro forma came in at $4.7m which is up a little over 50% compared to last year and pro forma earnings were 17cents per share which is also up a little more than 50% compared to last year. Ron will give explicit bridging data between pro forma add GAAP results a little later. This next slide shows year over year growth in GAAP net earnings. GAAP net earnings for the second quarter were $3.7m which is just over double last years second quarter net of $1.8m. Fully diluted net earnings per share for the second quarter was 13cents a share which is almost double last years 7cents a share and also note that the share basis has grown this year relative to last year primarily due to the impact of the treasuring method of accounting per shares. On a six month year to date basis pro forma earnings are also up a little more than double to $9.5m this year compared to 4.6m a year ago and non-EPS basis pro forma year to date is 34cents a share is right at double of last years 17cents. And finally this next slide shows that six months year to date GAAP net earnings more than tripled from $2.3m to $7.3m this fiscal year and GAAP net EPS 26cents a share to date is a little better than three times last years earnings of 8cents a share. We are certainly really pleased at the top level financial results and with that of some context I’ll give a top level view of our business situation.

Overall the first capita (inaudible) is consistent with our plans. A mix among the different components usually isn’t completely predictable but the overall results have been fine. We had a very strong quarter in our core areas that make up most of our sales and that includes MIDS, our information insurance business, the Panceta (ph) communications and the main commercial areas including enterprise, VSAT networks and antenna systems. It’s also really important to note that we earned 87m of new orders even without any really large individual orders. I’ll add some more color later but that basically fills out a triple page for us of year to date records for sales earnings and back logs.

Last quarter we noted that costs and schedule level overruns primarily on our new DOCSIS based consumer broadband satellite network resulted in that area performing under prior quarter. In that we expected that situation to persist for a little while and now that has turned out to be the case. In other various payment betterment plans plus we’ve pretty good progress in broadband and I am going to talk about that in our look there a little bit later.

In terms of new orders last quarter we said we were aiming at about $400m in new orders for this year and that’s still the case this quarter is interesting because we totaled $87m in new orders without any large single allures. Over the last couple years we have won several significant individual projects and there are still a few of those out there that look pretty promising we have mentioned some of those before especially a tactical data link programs including a joint tactical radio system variant of MIDS and additional US and international production orders as well as on to other different contracts. We have also been anticipating as we have completed some of our development programs we should start winning a growing demand of production contracts I think this quarter is a confidence booster there. That would especially be true for things like MIDS, KG250, VSAT and our consumer broad band systems and those are all areas that contributed in this past quarter.

I also want to comment on our $400m target. We use a weightings system that’s meant to factor the likelihood of if and when a customer will make a decision at all the probability of us getting the awards in the dollar value of the award, so it’s hard to predict very large individual contacts. So at this point our $400m is a good average estimate the actual outcome is probably more likely bimodal. That would mean that there is some chance we will end up with second half orders being comparable to the first half which would put us in the range of say $360-375m except there is also a pretty good chance that we will end up at $450m or more. The difference in those two focus areas would be due to 1 or maybe 2 large individual contracts that could end up being awarded this year or that might slip into next year or might be awarded in a period of small pieces or possibly it might not happen at all. So for now $400m is a rational weighted average out.

This next part is on back log and revenue trends of last few quarters to show growth in back log in the context of our quarterly run rate. We have been expecting the first half to be good year over year but pretty flat on a sequential basis and the results have actually been a bit stronger then we were predicting. We’ve been anticipating a new sequential growth in our new second half and we are still planning on that. Meanwhile we have continued to add to back log which gives us a nice foundation for revenues over the next few quarters.

Ok so now I will turn to some of the main business highlights of this past quarter. Our government business was very strong for the quarter and we are really pleased with that. Ron will give you more details but we set records there for sales and earnings and margins were also excellent. We think that reflects a good mix of production and development programs. Product sales were pretty good, pretty much across the board in the (unaudible) area and we were especially pleased to have a nice talk to productions shipments of KG250’S we are planning very nice growth there in the next couple quarters and we should have more to say about that on our next conference call.

MIDS production is going at least as well as planned including reaching record unit production rates, achieving the gains in margins that we have been aiming at. The near churn pipeline of additional product orders seems good. A lot of the KG250 units that we have been shipping this past quarter are due to early adopters or there evaluation units so we will continue to learn more about the size of the near term adjustable market it took prior results have been quite encouraging and we think the substantial R&D investments that we have made in the past will turn out to be very worthwhile. So far success and certifying the KG-250 opened other awaited opportunities that we’re pursuing as we are going to continue to size up those over the next couple quarters.

In general we still see the information assurance market as very substantial for us and we are going after that pretty aggressively. And we’re involved in investing in some additional products and technology and we will report on that as we learn more. We still would like get involved in the NEOS (ph) program in some way as well as increase our participation in various joint (inaudible) radio systems programs and we have got some avenues to pursue on both those things.

Our commercial segment is still growing nicely. Our enterprise VSAT network sales and earnings are at record levels for us and we are very happy with that. Margins have also been good there and consistent with our plans. Our antenna systems business has also been doing well, though we’ve been investing more than anticipated in our consumer broadband systems and that threw our commercial segment as a whole and into the red for the quarter. We’ve been making a big push to deploy a more highly integrated, higher performance lower cost version of our box of network and gateways plus some system software to increase efficiency of (inaudible) antennas. We put a lot of priority on solving a couple of system bugs that had slowed the access speed in some circumstances or reduced network at times. We believe we’ve made very good progress on those fronts. All these issues and aggregates are mainly reflected in our results by growth in our billed and our unbilled receivables and some lower aggregate margins. Although there is always an uncertainty whenever you are introducing complex new systems, we think the problems are pretty well understood and bounded at this point. We probably won’t see that work its way through the balance sheet for a couple more quarters.

Overall, we are very excited about our positions on our broadband. (Inaudible) up to (inaudible) pay loads available for system integration and testing now and one funny thing is that our customers and those who (indiscernible) end to end connections of our KA band consumer terminals through the satellite and into a network gateway. So there is obviously still a lot more to do but that’s really tangible progress. Plus we continue to have new customers and orders for the SurfBeam system as well as more business with existing customers. The mobile broadband market still hasn’t really taken off yet but they are still in progress. Connexion has outfitted more international carriers and more airplanes and ordered more units from us. ARINC and Gulfstream are also making head way including good flight demonstrations at the recent aviation show in Las Vegas. Finally US Monolithics has been making steady progress in terms of semi part of product sales as well as the new funded technology programs. So at this point I would like to introduce Ron Wangerin, our CFO who will discuss the financial data in more detail.

Thanks Mark. We’ll go through the results a little differently this quarter. We’ll start off with the results from operation with the segment perspective first, then discuss the remaining elements of the P&L followed by the discussion on the balance sheet and then cash flows. As Mark talked about earlier, we had another solid quarter. In the government segment, revenues for the second quarter were $41m. This is a 48% increase over last year. The primary growth drivers were increased MIDS production, an initial shipment for the KG-250 product. Year to date revenues were just over $79m, which is a 43% increase over prior year and the primary growth drivers for the increase are higher MIDS production and initial shipment for the KG-250 and growth in our other information insurance programs.

In the commercial segment, revenues for the quarter were almost 43 million which is an increase of 16% from the prior year. The growth was distributed among our enterprise VSAT, consumer broadband, antenna systems and MMICs production and development businesses. Year to date revenues were just over $90m. This is a 30% increase over prior year. The main drivers for the increase are consumer mobile broadband, enterprise VSAT and antenna systems.

The segment operating earnings, the government posted operated earnings of 8.3 million which represents a 20% return on sales in an increase of 120% from prior year. An increase reflects lower R&D due to completed development of the KG-250 product as well as for the higher funded R&D in the segment. A reduction of $900,000 in selling general administrative expenses related to the funding of previously expense didn’t propose a cost and the higher sales yield mean greater operating earnings. Year to date segment operating earnings are almost $14m which represents 112% increase from prior year. The increase year to date, are the same as those for the quarter.

In the commercial segment, despite the increase in revenue year over year, segment operating earnings came in at a loss of 155,000 while we saw nice increases in operating earnings in our enterprise VSAT, antenna systems and USM business from the higher revenues. These games were offset by development cost increases and our consumer broadband business had a production closeout charge in our mobile broadband business, both of which resulted in contract accounting adjustments driving gross margins lower by 3.3 million for this business area in the quarter.

Year to date increases and operating earnings were primarily derived from the results in the first quarter. As we look at the rest of the P&L, for the second quarter and year to date, pursuing seeing very good year over year revenue growth. Gross profit was impacted by the previously described contract accounting charges in the consumer and mobile broadband areas. Second quarter selling general administrative expenses benefited from the funding of certain bid and proposal, costs previously expensed. As you can see we’re requiring less company funded R&D due to the higher level of customer funded R&D, the completion of the KG-250 development, and certain operating adjustments made to ensure operating metrics for MIDS. We expect research and development expenses to increase in the latter half of the year.

Quarterly amortization of intangibles is lower for the second quarter and year over year giving a completed amortization of certain intangibles in the quarter. We expect the quarterly amount will drop another 150,000 per quarter for the next several quarters. Other income and expense reduction reflects lower interest expense from lower debt levels year over year off set by higher minority interests due to improved profitability of (inaudible).

Our income tax division for the second quarter end year to date utilizing annual effective tax rate approximately 33%. Prior year quarterly and year to date tax benefits reflects a lower pre tax income amount offset by quarterly benefits for R&D tax credit. All totals, our net income for the quarter and year to date are strong and would have been even significantly better if not for the cost increases in our broadband programs and the higher tax divisions. In this next slide we include our GAAP to pro forma bridge and it clearly shows the difference between pro forma earnings and GAAP per share amounts.

Pro forma results only exclude the effects of acquisition related and tangible net of tax impact. As you look at the balance sheet, cash and short term investments decreased by approximately $8 ½ m during the quarter and we’ll cover the change when we discuss the cash flow statement. As we look at accounts receivable, though the accounts receivable increased quarter over quarter primarily on increased shipments in both our government and commercial segments and the achievement of program milestones. Big sales for billed receivables in the mid 50’s which is significantly below historical level.

The main area of management attention is on unbilled receivables. The growth for quarter over quarter since prior year end reflects the high level of MIDS production in the progress payment process. In the delay in achieving milestones primarily on consumer broadband and enterprise VSAT programs and further than expected uptake from mobile broadband products. As we achieve the milestones in shipments in the second half of the year the balance will be reduced. It will take a couple of quarters to work its way up.

Inventory was basically flat quarter over quarter. We expect the inventory balance to remain relatively flat over the next quarter or so but could be influenced by end of quarter timing of shipments. Our prepaid and other balance increased mostly due to increases in prepayments made to suppliers primarily in our government segment. Goodwill and intangibles were reduced by the quarterly amortization of intangibles. Net property and equipment increased in the quarter by 2.3 million which is net of depreciation of 2.6 million. The increase is attributable to a new enterprise VSAT service customer and the declining of equipment because of the sale of the contractual requirement and equipment expansion in our enterprise VSAT network operations centers as this business expands. We expect capital expenditures to increase over the next several quarters primarily for facility expansions and to support general business growth. The reduction in other assets reflects quarterly amortization and capitalized software offset by increases to other assets.

As you look at the liability and equity side of the balance sheet, accounts payable increase for the quarter is due to several shipments for products coming toward the end of the quarter and increases in payment base to suppliers. Advances were up slightly quarter over quarter but reduced significantly at the beginning of the year and reflect progress on a number of contracts. At the end of the quarter we continue to have no outstanding borrowings leaving our full line of credit available (inaudible). Our current liabilities were flat in the quarter and decreased from prior year end. The change for the quarter end prior year are primarily due to the payment of performance bonuses that were talked about on the last call as well as payments for legal and other professional services, and this is partially offset by increases in a creed and play related liability and higher warranty accruals which resulted from continued shipments of MIDS and LinkStar VSAT terminals and the commencement of the KG-250 shipments.

As we turn to cash flows, consistent with our discussion last quarter we could perceive usage of cash from operations in the second quarter due to certain delays in achieving program milestones. For the quarter, we used approximately 3 ½ million in cash from operations. Despite the strong net income and non cash ADVAX, the increase in receivables were greater, yielding the cash usage. In our fiscal third quarter, we expect cash from operations to be neutral but there are several other items that could swing as positive or negative depending upon the timing around quarter end and program performance.

Regarding cash from investing activities, for the past several quarters our capital expenditures have been in the $2 ½ m range. This quarter they were higher by over $2m primarily due to the new enterprise VSAT service customer we talked about earlier in the network operation expansion as our enterprise VSAT service business expands. Year to date the conditions are similar to the second quarter. Strong net income and non cash ADVAX offset by receivables growth in the payment of 401K match and performance bonuses resulting in usage of cash from operations. Capital expenditures are increasing as we previously described. The recorder cash was reduced by almost 8.2 million and year to date it has gone almost 7.3 million. Next I’d like to turn it back to Mark, he’ll talk about our business outlook.

Thanks Ron, I’ll talk a little bit about our outlook for the rest of the fiscal year and talk a little bit about the strategic environment. To the strategic environment, I think it’s worth a minute to consider a few things. One important theme is that our results seem consistent with (inaudible) growth product sales over the next couple of years. We’re seeing that clearly now with MIDS and links or VSAT and it seems for the KG-250, and the SurfBeam broadband system were off to good starts. So incremental product sales should grow at importance and you could see that effect this quarter because $87m in orders without any individual major announcements probably caught few people by surprise. High product volumes ought to drive better margins too and although (inaudible) are the broadband investments in our commercial segments now. It’s pretty evident in the government segment where we see the benefits of finishing the KG-250 without and then combined with the earnings from shipping units and that’s the effect that we’re aiming for in the commercial segment in a couple more quarters.

The government segment, interoperable high assurance internet protocol encryption standard is finally here. We have been anticipating that for a long time and we think it’s going to change the playing field and we’re off to a strong start. I hope these standards can also strengthen our position in international links too. In the commercial world KABN (ph) spot beams have been a long time coming but they are just about in service too. We think that’s a game changer and not only the considered broadband market but in enterprise VSAT as well. We won’t really see the impact to the middle of calendar 05’so we think it’s coming and we think that’s really good.

So overall we still feel we’ve got strong prospects and that’s reflected in our pipeline of new business. Our STV group hasn’t announced a decision yet regarding their used network system subsidiary so we can’t say it’s out of play yet. We’re still interested at the right price but it’s not very likely we’ll end up acquiring it. We’ve got a lot of confidence in our businesses and we’ll still consider ways that we can build more value, possibly through some niche acquisitions or strategic alliances. So it’s next start on the outlook is pretty simple and we think that the consensus estimates that are out there seem rational and we don’t really have anything new to add there.

So that pretty much covers all the points that we wanted to make. In summary we’re very happy with our overall first half performance. Year to date earnings set a new record and has about doubled on a pro forma basis and tripled on a GAAP net basis. Year to date sales are also at record levels and are up 35% over last year and backlog is also at a new record. Our core areas are doing very well. We have invested a lot in our new broadband system both in terms of earnings and in working capital and that’s going to continue for a little while so we’ve made good progress on all the issues. We see continued strong demand and we’ve got a plan to contain the investments over the next couple of quarters.

We are really excited about the launch of HAIPIS (ph) standard in our KG-250 and can see not only strong product sales but several related market opportunities as well. And in our commercial segment we think the launch of KN-Spot Beam Services next year has a similarly positive influence. And finally we think we’ve got a set of new opportunities in front of us that’s consistent with our growth outlook. So that’s it thanks for listening and at this point we’ll open it up for questions.

Ladies and gentlemen, if you wish to ask a question please press star followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw your question please press star followed by two. Please hold while we coordinate the questions. Thank you for your patience, please continue to hold. Your first question comes from Tom Watts of SG Cowen. Please proceed.

Hi Mark congratulations on the quarter and setting all the records. The commercial sector is unprofitable because the increased on the surfing products you’ve mentioned. I assume that, that’s from getting it to work with the annex satellite, could you just comment on that. How many more quarters are we likely to see that or have all those issues been solved and in (indiscernible) either the initial orders particularly from wild globe would also tell us that a certain number of terminals in those, when might those be deployed and could be reached a reorder point?

On the surfing area, we’ve been working on two different areas, one is just making sure that we’ve got all the K-band features done and that was a little more work than what we expected but as I mentioned we thought it made good progress there. And the other part was we now got Innerpass (ph) recording a few thousand subscribers and are working an in service system and that basically surfaced some of the bugs that I talked about either in terms of slower access or browsing speeds under some circumstances or network uptime issues although the uptime has been, actually it’s been really pretty good for a brand new service but it’s not quite at the level that we think it aught to be. So those are areas that are really foundations of what we are doing at K-Band as well. So we put a lot of effort into solving those and we’ve made good progress there as well. Those I’d say are the two areas that we’re spending money on. That’s a pretty big project for us, there’s a lot of people on it and so any delays tend just to accumulate costs and that’s what’s happened. We think that we should be pretty much caught up I’d say conceivable at the end of this quarter but more likely early in next quarter. So we think that we’ve got a plan to contain that, we think that’s as I mentioned before, we think that’s overall kind of baked into our overall outlook but the effect will persist probably I’d say through the fourth quarter this year to some extent and then what we should see there is improving margins from there on out.

Okay and then terminal reorder points for --

I think we’re really seeing two factors there, one is we’re taking on some additional customers and that’s one factor and the other would be more terminal orders from our existing customers. I would say that will depend on when Wild Blues actually goes into service. It’s kind of up to them, their website says early ’05 so I think if that’s the case then we could see some new accounts. With (indiscernible) I think that might be an interesting point but we could see some other interesting facts before that from other customers as well.

Just on another surfing question, Echo Star satellite is up now, is there any progress on their decision making in terms of their broadband direction?

I don’t know, I think we can’t really say what they’ll decide, I think if you look at what Direct TV did with their K-band said they are going to use them for video. I’d say it’s possible that Echo Star might decide to do that as well. So I’d say it’s pretty much up in the air and we couldn’t really say what they’ll do and when, but I’d say they’re still interested and engaged, I think it’s just a question of when they decide how to deploy their resources.

Okay thanks very much.

Thank you.

Your next question comes from Rich Bollera(ph) of Needham and Company. Please proceed.

Thank you. Ron just on the unbilled receivables, could you give us the amount for the June and September quarters respectively?

Sure. In terms of --

The dollar amount.

On the slide on the balance sheet, I think we have that there. The unbilled at the end of June was $67.6m and there was $73.7m. The growth is up $6.1m.

Could you just say how much of that is Wild Blue related?

We don’t disclose individual --

Okay, fair enough. Onto the connection, Mark I was just wondering if you could give an overall sort of status on the program. On a recent call a competitor of yours suggested that British Airways may have actually dropped dialup connection and there were some rumors of a (indiscernible) maybe backing away a little bit, could you just give a sense of how things are going with those players then just in general on connection.

It is a little bit hard for us to say because we’re not on the front line in terms of marketing and supporting it but what we have seen is continued orders from Boeing and we’re seeing more and more airplanes going into service on a steady basis and system performance has been good. I think -- the sense that we get is that the carriers that are adopting it are pretty happy with it. Certainly the sense we get from just anecdotal that you could get as well from talking to people and how they think they would respond to the system in the price pointer has been very positive. We talked to the people that have actually used the system, journalist or media people or other people that Boeing has done demonstrations for. They have been making supportive … I think the biggest issue with connection is just going to be when it reaches critical mass so that people expect it then I think you’ll see kind of a sticking point and a lot more saturation. The other thing is we don’t see any other real alternatives to how you’re going to accomplish that functionality on airline so I think that’s a plus for us.

Sure. And just one final one Mark, I think you alluded to the potential for some business related MIOS even though you weren’t on the winning team there, can you elaborate on that at all, what form that potential business might take on the MIOS?

Yes I think one is the way I describe it is we’re just exploring some avenues there but the main things are that we have a base of, it you look at who the users are from MIOS in DOD we have 20,000 plus users of our UHF terminals now and those are the target customers for MIOS and the MIOS program itself, one thing good pointed out was, it doesn’t really address that user population directly, it’s really more of an infrastructure program. So we think that there are ways, things that we could do possibly either with hawkeyed or with the government that would help bring those users along in terms of getting them on to a (indiscernible) satellite eventually. And that’s one of the avenues that we’re pursuing.

So probably on the – something on the terminal side, the terminal moving side.

Yes.

Great that’s very helpful thanks Mark.

Thank you.

Your next question comes from Jim Mcilree of Hunterberg Kelvin, please proceed.

Thank you the 20% margins that you posted in the government business this quarter I don’t suspect it’s sustainable for the next few quarters? But if it is could you tell me your finale and then if it isn’t you know how much lower do you think it goes? Or how much do you think it drops in the next couple of quarters?

The way I would put it is I wouldn’t say it’s unsustainable in the sense that it was driven by one-time things. I would say that it’s better than what we would normally predict for sure. But it’s not better than what we would like to do or what we’re capable of doing. But a lot will depend on the mix of products and program performance. But I think in modeling you might want to you know I think a more typical estimate might be four points -- you know or so lower than that.

So I think one of the issues Jim is if you know we’re having some issues on the commercial side like we’re having with system development stage and certainly that can tend to push on the defense side and try to hold back on some R&D in some areas and so we can squeeze a little bit more of that out of that side of the business to off set those issues. We’ll do that you know when we need to it. And hopefully when the other things come along we’ll be able to re-invest that a little more.

And the margin profile for the KG250 is that better than average in government or below average?

A little better than average.

Okay so if we assume that’s the increasing portion of the mix going forward then you will have the ability to anchor some of the cost over runs on the commercial segment you’re saying right is that one way to look at it?

Yes.

Okay and then secondly the cost over runs that you were talking about as well as the – I think you probably close out payments. Can you size those in dollars so we could get a feel for what margins would have been with out those charges?

The combined 2 was about $3.3m lower than it other wise would have been. (indiscernible) close out piece of that was about half a million dollars on it.

It was about 600 billion.

Okay so excluding that out of your margin and commercial would have gone up sequentially if I’m looking at that right?

Correct.

Okay and then you said that that at least a portion of those expenses continued for the next couple of quarters. Is that at the same level or at a reduced level or a higher level?

I think what we’ve done is we’ve lowered the margin expected on some of the terms of development contracts on the commercial side, so that we’ll have some continued address margins in that business over the next quarter of two. And so we’re trying to factor that in already Jim.

Okay and that’s it thank you.

Thank you.

Your next question comes from Larry Harris of Openheimer and company, please proceed.

Yes thank you and congratulations on the results for the quarter. What type of tax rates should we be using say going forward on GAAP and on a proforma basis?

Okay the – we’ve been getting a few questions on that of late. Regarding our taxes you know we’re using an annual affected tax rate of 33% through the first half of the year. With the signing into law this quarter of the tax law that basically extends the exploration date of the R&D tax credits from expiring on June 30th of ’04 it’s now going to be expiring on January 1st of 2006. So our new estimate is an annual affected tax rate at 27%. And that will yield a benefit to our fiscal third quarter of about $650,000 up to tax point.

Great so an annual rate of 27% is it then on a proforma basis or GAAP?

When we do our porforma adjustment we use a 40% rate for the amortization and the intangibles.

Okay great and if you could just I guess sketch out what’s the competitive outlook is right now in terms of the mid terminals? You know what share you may be getting say versus Rockwell Collins and DAA and Euro-MIDS (ph) going to be a factor going forward?

You know we’ve been – I think we’ve been running close to half – 50% all things considered in market share for the last year or so. And I think that’s good I think we’d like to try to do that. I think the competition is it’s a tough competition for sure, but over all I think we’ve been pretty competitive. And I think over all if we could maintain that we’ll be pretty happy. I think Euro-MIDS really hasn’t been a factor yet. And depending on how this joint tax for radial system vary in plan shapes out that may sort of re-align things to the point where it’s primarily by ViaSat and DOS. And that the Europeans have participating in through you know in some other way through those --. But Euro-MIDS I think hasn’t quite in fact – there will always be some programs that go into the European providers because they are European programs. I think the overall role Euro-MIDS may be a little bit different from what it is was originally envisioned.

Right.

Does that answer your question sir?

Yes it does thank you very much.

Okay thank you.

Your next question comes from Steve Mather of Sanders Morris and Harris, please proceed.

Oh thank you, can you provide just a slightly bit more perspective on the minimal new order announcements. I mean you gave a good explanation but I’m just wondering would you kind of say that some government work doesn’t get the announcements? Or is it the production work you know it along KG250 if that happens is that not – just give us a little bit more on it?

What we’ve tried to do in the past is have a policy that we consider to be rational meaningful in terms of announcements. And so we try not to put out press releases on just little you know every little incremental order. We tend to use kind of a dollar thresh-hold which is for us now probably in the $5m plus range. I mean if we –to take awards in that range we probably would gain to announce those. Sometimes there are awards which can be either commercial or government where our customer wants to weigh in on when we announce it. And sometimes that delays things and there are probably a couple of things that occurred in this last quarter that are in the category that we would have announced and may still be able to announced explicable that we’re trying to satisfy our mix with our customer appeals at least have an opportunity to review it.

And so you know we’re –we under stand that it was a little bit of a surprise and we’re trying, we didn’t do it on purpose, we were trying to assess kind of our policy so people have a little bit of a better view into what’s going on there. That’s kind of what happened. We also you know probably the biggest piece of our core base falls in the 401 (ph) category on a regular basis. So you know a higher percentage of our orders has fallen into that category.

Yes and just 2 other real brief ones, how competitive do things become if someone else acquires part of HNS? And then secondly how large is the build up of lets say Wild Blue and Telesat (ph) equipment prior to you know let say a Q1 ’05 service launch?

In terms of the HNS they are already very competitive and a very formidable competitor. I don’t really see who their – you know – having a new parent changes that either way. I think they are the biggest in the industry and have the longest heritage and they are going to be very formidable competition (indiscernible). I think in terms of Wild Blue there’s not a lot I mean there is no channel-stopping going on. I would say that we really won’t see much in the way of shipments until probably the first quarter you know we’ll start getting units out there. But I mean the customers don’t start getting units out there but I think it will be -- it will be the summer. A lot depends on – you just have to understand what their plans are for roll out. And their plans for roll out encompass a lot more than just getting our – so you know I think it will be better to ask them what the pace would be. But right – I wouldn’t anticipate us shipping a lot of stuff prior to their roll out other than the infrastructure part that’s needed to write a proper (inaudible).

Okay that’s great thanks.

Good thank you. Can we just take one more question?

You have a follow up question from Tom Watts of SG Cowen, please proceed.

This is a question for Ron on the tax rate they added a annual 27% or this going to be – does that imply that your – we have a lower rate than that in Q3 and Q4 so we ended with a weighted average at 27% for the year thinking in the terms of 33 for the first 2 quarters?

What we’ll end up with is a lower for Q3 and the 27% for Q4 and an annual 27%.

Okay

And that third quarter benefit with the tax line is about a $650,000 (indiscernible). So if you take expect pre-tax time 27% less $650,000. That’s the climate we’re modeling it.

What is the – so it’s pre-tax times 27% less $650,000.

That’s right.

Okay and then you’ve also in your commentary you commented on an extent line items as certainly with the amortization (indiscernible) intangible going down $150,000 per quarter I think and then you mentioned that R&D would be up for remaining quarters. Can you just comment on some of the line items and not the margins? Repeat those statements.

Sure first of all with the amortization and intangibles we announced for Q3 and Q4 it’s going to be a little over $1.5m towards a million five or something like that. And then so that amount continues to go down again in Q3 and Q4 over what it was in Q2. And then regarding the research and development it’s been a little bit lower in Q1 and Q2 as we’ve made some adjustments that we’re articulated earlier so that we could meet some of our operating metrics. And so those amounts we expect to increase in the later half of the year.

Okay and on gross margins? We’ll receive more from recovery on that.

We expect to see our operating margin percentage improve not so much a lot in Q -- a little bit in Q3 and more further in Q4.

Okay.

Tom I did want to point out that we – the last time we said if we end up with a higher tax rate we were going to – we though we could sort of –we were going to work to off set that from a earning stand point and the whole earnings number that we had out there and it think that same thing holds true. So we were going to do some things were natural from a containment standpoint to hold it. At this point in time I think that we don’t expect to – with the tax rate kind of (indiscernible) to lift or ETFs.

You did not – sorry could you say that again about the ETF?

I think we said we weren’t going to change guidance and that was -- I believe we said the same thing last time that there was (indiscernible) a tax rate change.

Okay great, thanks very much.

Okay I think that covers it for today thanks everybody for listening and we’ll talk to you again next quarter.

Thank you for your participation in today’s conference, this concludes the presentation you may now disconnect. Have a good day.