Viasat Inc (VSAT) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2006 ViaSat earnings conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to the host of today's call, Mr. Mark Dankberg, Chairman. Please proceed, sir.

Thanks. Good afternoon, everyone and welcome to ViaSat's earnings conference call for our fiscal year 2006 second quarter, ended September 30, 2005. This is Mark Dankberg. I'm Chairman and CEO. I've got 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 that may differ materially from actual events or results.

We refer you to the document the Company files from time to time with the Securities and Exchange Commission, specifically the section titled Factors That May Effect 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. Forward-looking statements of this presentation do not include any impact related to the expensing of stock options under the Financial Accounting Standards Board Statement 123R.

Okay. Thanks, Greg. I will be referring to slides that are available over the web. We'll start with our fiscal year '06 second quarter financial results and then a business overview perspective. After that, Ron Wangerin will discuss our financial results in more depth. Finally, I'll update our outlook and financial guidance and give a quick summary and then we'll take questions.

So we'll start with the second quarter revenues. Sales for the quarter were $104 million, which is a new record for us, and that's up 26% compared to the second quarter of last year. For the fiscal year to date, $204 million, up 22% over last year.

This next slide shows second quarter and pro forma earnings compared to last year. Pro forma earnings grew from 4.7 million to 6.9 million, which is up 45%, and from $0.17 a share to $0.24 a share, up 41%. Pro forma earnings exclude only amortization of intangibles due to acquisitions, and we will provide explicit bridge data from pro forma to GAAP net earnings a little bit later.

And the next chart shows Q2 net earnings and net earnings per share. Q2 net earnings grew from 3.7 million, up to 6 million, or 59%, and net earnings per share grew from $0.13 to $0.21 a share, up 62%. For Q2 year to date pro forma earnings are up from $9.5 million to $12.9 million. That's an increase of 37%, and from $0.34 to $0.46 a share, an increase of 35%.

And finally, this next slide shows Q2 year to date GAAP net earnings. Those are also up year-over-year. GAAP net increased from $7.3 million, up to $11.1 million, which is up 52%, and from $0.26 to $0.39 a share, an increase of 50%.

So overall, first quarter results were a little better than our plans and Ron will go into more depth on earnings and financials in a few minutes. But I can tell you we're very pleased with the financial results for the quarter. Revenues set a record again, and were a little stronger than planned. Cash flows from operations were excellent at $12.3 million. That's a little better than planned too. Earnings also came in a little better.

The balance sheet is solid and it indicates we're executing a little more crisply. Another important point is that we're also improving margins somewhat, which lets us invest a little more in discretionary R&D, while still hitting our earnings targets. We're still doing a lot of good funded R&D programs and tactical data links, information assurance and satellite networking, and our engineering staff is growing pretty fast, but we also have a number of discretionary R&D investments that will help sustain our expected growth in fiscal '07 and beyond. So we'll be increasing our discretionary R&D expenses going forward to the extent we're comfortable.

Business wise, I think the most noteworthy big picture issue for us is that we're becoming more and more confident in the market acceptance of our major new products and systems. Our products are pretty complex. We've had our share of bugs and issues to deal with, and we probably will have more in the future. But overall, we've been addressing the issues and our customers are pretty happy. Ultimately that's what's being reflected in our financial results, our cash flow and balance sheet.

And looking forward, I think our customers see not only the immediate value, but also the growth opportunities and potential of our systems. Plus, in many cases, we're just now really working with early adopters, so there's a lot of people watching to see how things progress. At a high level, this goes for a number of areas, including the consumer broadband, the mobile satellite systems, information assurance, and the MIDS and MIDS JTRS.

For instance, I think it's becoming clear because of WildBlue and Telesat Canada that customers really can be actually happy with the satellite broadband internet connection if the price is right and you can consistently deliver on speed and bandwidth and that's making an impression on a lot of people in a number of markets. And we think it bodes well for future growth.

The same is becoming clear on airborne broadband. More and more people are recognizing the value of a real high speed broadband connection, and we're seeing good satisfaction from users on commercial flights and business jets. There are similar dynamics in network encryption products, and we're seeing a lot of interest in the MIDS JTRS program. So fundamentally this creates a lot of opportunity for us and we'll address more specifics in the highlights and outlooks portion of the call today.

New orders for the quarter were pretty good and remain good year to date. Our backlog is essentially flat over this quarter. We still anticipate a strong year, but there are a few pretty large lumpy orders and the timing on those is hard to predict.

Last quarter, we said we were aiming this year for about $500 million in total new orders. That's still in play, but it's also possible that coming out will fall into our next fiscal year. So overall, we could see orders for this year in the mid to high 400s, but possibly well in excess of $500 million. There are a few potential big swingers, which are a couple of large international MIDS LBT orders, development projects for MIDS LBT enhancements, could be additions to the MIDS JTRS program, some international MIDS JTRS funding, new information assurance programs, there's some commercial satellite development projects, and consumer broadband systems add-ons.

Each of those things potentially involve tens of millions of dollars. On the other hand, we're also starting to expect to book and ship more of our products with shorter lead times, which might tend to reduce our backlog as a proportion of annual revenues. So we have a couple of different forces at work there, and we'll report further on that in the next couple of quarters.

We view this next chart for the last few quarters to show backlog in the context of our quarterly run rates. So you can see, we've had pretty steadily -- pretty steady revenue and backlog growth for a pretty good period of time. We're confident we'll grow our backlog for this year as a whole, and in the second half as a whole, but it was flat this quarter and there's a pretty good chance it could actually decline by as much as 20 or 30 million in the third quarter. It just depends on award timing, but you shouldn't be too surprised if that happens. Right now we think that would be compensated for in the fourth quarter.

Okay. So at this point, I will turn to some of the main business highlights of the past quarter. Government business was very good this quarter. Margins and earnings were excellent. The awards were really good. The strongest areas for us are Tactical Data Links and Information Assurance. We had a good quarter for product deliveries. We're adding staff on funded development programs. More of our development programs are being done on a cost reimbursement basis.

MIDS JTRS continues to build momentum as a factor in the overall JTRS program environment. There's also a number of important MIDS LBT enhancements in the works. KG-250 sales were very strong and compensated for lags in the prior couple of quarters. We're close to getting our KG 255 gigabit network encryption product to market and we've got some positive indications on interest for that.

In September, the U.S. government put out an announcement for F-16 enhancements, which included MIDS for Turkey. ViaSat was the only provider of MIDS included in the announcement, which is an indication that we could expect to receive significant orders for MIDS terminals for the Turkish air force. Turkey has a very large F-16 fleet and that would have significant value to us. We've not received any orders under this foreign military sales or FMS contract yet, and the timing is still uncertain. But we do have orders for Turkey factored into our outlook. We also believe we are well positioned to continue to do well in the international market.

Overall we feel like we're making very good progress in our commercial business. This quarter our commercial segment as a whole was profitable before amortization of intangibles. We had strong earnings in antenna systems and really good progress in satellite networks.

Our LinkStar and LINKWAY product lines continue to be solid performers. We've been shipping record numbers of LINKWAY mesh IP VSATs each quarter to government and commercial customers, and we're in the range of about 70,000 LinkStars shipped to date and we set a record for shipments in the second quarter there. We've had very good results internationally and have been identified by third parties as having leading equipment sales market share in both India and China.

Immediately following Hurricane Katrina, QUALCOMM asked us to help them reconstitute emergency mobile cellular and land mobile radio communications in some of the worst areas there. Within about a day or two, we were able to use our LINKWAY IP network and quick deploy satellite terminals to connect QUALCOMM emergency satellites in Louisiana, back into the phone networks here in San Diego and Carlsbad.

There was a lot of network integration work that had to be done under pretty intense pressure. It was an incredible accomplishment and might be the first application of its kind with that level of adaptive network integration. We're really proud of our role there. It's a good demonstration of the role satellite can play to back up terrestrial networks in case of disasters. Both FEMA and U.S. Northern Command were involved in the deployments.

Switching to mobile broadband, now that Arinc's has FCC approval for their business jet service in the U.S., we've been working with them and Gulfstream and are really just getting cranked up in production there. That's looking pretty promising, too. The production ramp-up in consumer broadband helps a lot. It has a very positive impact on results for US Monolithics.

Product performance has been very good. We've made big steps in infrastructure system capabilities and reliability. We're making good progress in achieving our manufacturing cost targets. Overall, things are looking pretty promising.

A lot still depends on WildBlue and Telesat Canada in their service rollouts, but so far we've been impressed by what they have accomplished. We're very, very happy with our working relationships and we're optimistic we can work together and grow our markets.

So right now we think things are on a good track and that's a factor in our plans for continued revenue and earnings growth in our second half. I do want to point out, though, that there are a number of opportunities that could arise in this area and we may want to invest in those to the extent we can and still achieve our financial targets. I'll talk about this more later when we get to our financial outlook.

But now I'd like to introduce Ron Wangerin, our CFO, who will discuss the financial data in more depth.

Thanks, Mark.

We'll start with results from operation with a segment perspective first, then discuss the rest of the P&L, followed by a discussion on the balance sheet and then cash flows. In the government segment, revenues for the second quarter were $49.5 million, a 20% increase over last year. In year to date, government segment revenues are $103 million, which is a 30% increase over last year.

The increase in government revenues for the quarter and year to date are attributable to increases in Tactical DataLink sales, principally MIDS production sales and the MIDS JTRS development program, and information assurance products, mainly KG-250 sales offset by reductions in mobile Satcom product sales year-over-year.

In the commercial segment, revenues for the second quarter were $56.9 million, a 33% increase over prior year, and year to date commercial segment revenues are $104.4 million, a 16% increase over last year for the same period. For the second quarter and year to date we saw increased sales of our satellite network products, principally due to the increases in consumer broadband production activity, and in antenna system sales. As you can see, year to date sales are basically 50/50 in the government and commercial segments.

For segment operating earnings, the government segment posted second quarter operating earnings of $9.4 million, which represents an increase of about 14% from the prior year. Year to date, government segment operating results are $19.7 million, which is a 41% increase from last year to date. But the quarter end year to date increases are primarily related to year-over-year higher sales of MIDS production units and improved margins in this area and higher KG-250 sales.

Year to date margin increases are partially offset by higher company-funded research and development expenses of $2.1 million, and increased selling expenses of $1.9 million, reflecting higher proposal and sales activities. The year to date increases in operating margins also include a benefit of $2.7 million recorded in the first quarter related to a subcontractor legal settlement we discussed on the last call.

Commercial segment operating margins improved in the second quarter to $1.2 million from a loss of $155,000 last year, due to improvements in antenna systems from both improved program performance and in satellite networks from higher sales and their related margins.

Year to date, the commercial segment operating earnings are down from last year, mostly due to higher year-over-year research and development expenses of 1.3 million, and investments of 1.2 million related to a new commercial radio frequency, micro positioning technology, and continuing development and start-up costs of our DOCSIS-based consumer satellite broadband system.

These investments exceeded the earnings from the other portions of our commercial segments and resulted in negative operating margins year to date. But again, results were positive for the quarter. As we look at the rest of the P&L, for the second quarter, we experienced very good year-over-year revenue growth to $104 million, which, as Mark said, is a new record.

Selling, general, and administrative expenses were higher year-over-year, mostly due to higher selling costs from the higher sales volume and due to increased proposal activity, which is very robust in both segments. In addition, SG&A grew due to infrastructure costs to support our growth. Research and development expenses are up significantly in the second quarter year-over-year, due to the development of new military satellite communication products and next generation VSAT equipment.

We indicated in our last call that we've identified a number of opportunities we believe will provide good returns to our shareholders in the future, and to the extent that we can afford it, we will be increasing discretionary spending to target these opportunities. The increased spending for these opportunities manifest themselves in higher selling, general and administrative and research and development expenses.

Quarterly amortization of intangibles is lower for the second quarter year-over-year due to the completion of amortization of certain intangibles. The quarterly amount is expected to remain constant for the rest of the year. Our income tax provision for the second quarter reflects a quarterly tax rate of about 22%. The effective tax rate is lower year-over-year because in the end of the second quarter of last fiscal year, the R&D credit had expired and so the benefit was no longer available.

Our net income for the quarter and year to date remains strong. Our earnings continue to grow faster than revenues, reflecting strength in our core business areas. Year to date for the first two quarters, we've experienced very good year-over-year revenue growth. Costs of revenues included a $2.7 million benefit related to the legal settlement with the subcontractor we discussed on the last call.

SG&A expenses were slightly higher year-over-year, mostly due to higher selling costs due to the increased proposal and sales activities and we spent over $0.5 million in the first quarter to complete our fiscal year 2005 Sarbanes-Oxley assessment. Both of these contributed to SG&A growth.

R&D is up significantly year-over-year due to the development of the new military satellite communication products and next-generation VSAT equipment. We expect R&D spending to increase in fiscal year 2006 over fiscal year 2005, but will be dependent on the mix of programs we're working on and our overall performance.

Amortization of intangibles is lower year-over-year due to certain intangibles having been fully amortized. Other income and expenses reflects higher expenses related to the unused portion of our credit facility, which has doubled from 30 million to 60 million from last year. And interest expense accrued related to prior year amended tax returns.

Our income tax provision reflects a projected annual effective tax rate of about 21% for the year. The estimate was derived from a normal statutory rate of approximately 40%, plus amounts for estimated R&D tax benefits, extra territorial income deductions and the new manufacturing deduction. The effective tax rate is lower, year-over-year because at the end of the first quarter last fiscal year, the R&D credit had expired, but was subsequently reinstated in our fiscal third quarter. We're facing the same situation this year as the R&D credit is set to expire at the end of this quarter, the fiscal third quarter, so our effective tax rate only includes three quarters of benefits.

Year to date, our earnings per share is strong and slightly ahead of plan. Performance in the first half boosts our confidence that we'll be able to achieve our fiscal year 2006 targets. Next slide we include to clearly show the difference between GAAP and non-GAAP or pro forma earnings and per share amounts. Pro forma results only excludes the effect of acquisition-related intangibles, net of tax impact. As our quarterly amortization goes down, the difference between GAAP and non-GAAP earnings per share is reduced.

Turning to the balance sheet, cash and short-term investments increased by approximately $9 million during the quarter, and we'll cover this when we discuss the cash flow statement. As we look at accounts receivable, billed accounts receivable decreased slightly quarter over quarter, despite the increase in revenue. Unbilled receivables increased by $3.6 million, mostly due to increases in the government segment from progress billable contracts. As we look ahead a few quarters, we have a number of significant milestones for programs in the government and commercial segments and expect unbilled receivables to decrease.

Inventory was basically flat quarter over quarter. We expect inventory to go down slightly next quarter, but could be influenced by the mix of orders we have and end of quarter timing of shipments. We believe that there are a number of opportunities to reduce program working capital across the company over the next few quarters, though.

Goodwill and intangibles were reduced by the quarterly amortization of intangibles, but property and equipment was up over $2 million due to capital additions, mostly for facilities expansion and test equipment to support our business growth. We expect capital expenditures to continue to increase over the next several quarters. The increase in other assets primarily reflects the increase in long-term deferred income taxes, offset by quarterly amortization of capitalized software.

As we look at the liabilities and equity side of the balance sheet, accounts payable increased in line with the increase in revenues. Advances were basically flat quarter over quarter, reflecting continued strength of contractual terms on a number of our contracts. At the end of the quarter, we continue to have no outstanding borrowings, leaving our full line of credit available less standby on LCs. As of quarter end, we had about $55 million available under our line of credit.

Other current liabilities were up quarter over quarter by about 2.5 million due to increases in warranty accruals from higher product shipments and increases in the 401(k) and performance bonus accruals. The increase in other long-term liabilities is related to long-term deferred rent related to a facility we began leasing in the quarter.

As we turn to cash flows, we had a very good quarter for cash flows, generating over 12 million in cash from operations. Our strong net income and non-cash add-backs were the primary contributors. Capital expenditures are higher than prior quarters at $4.15 million, but consistent with our expectations, and we expect capital to be at this level or higher for the next few quarters as we complete capital projects to support our expansion.

We received $800,000 from the issuance of common stock during the quarter, mostly exercises of stock options. Net for the quarter, though, cash increased by $9 million. Year to date, we're off to a great start generating over 19 million in cash from operations, again, from strong net income and non-cash add-backs.

Capital expenditures are outpacing historical levels, but consistent with our expectations. And net year to date cash is almost doubled, increasing by 13.5 million to over 28 million at September 30th. As we look ahead, we look -- we expect to generate cash in the aggregate over the next several quarters, but maybe not every quarter individually, but we expect it to be positive position overall.

At this point, I'll turn it back to Mark.

Okay. Thanks, Ron. At this point, I would like to talk about our outlook for the rest of fiscal '06. And our outlook for fiscal '06 has been trending more towards the middle of the higher end of our ranges. We've been expecting the second half to be stronger than the first and that's still the case.

Based on revenues in the first half, it's pretty likely we'll hit the high end of our revenue range. We're slightly ahead so far in earnings, so the middle of the range seems pretty likely and depending on tax effects and what happens in the consumer broadband area, we could end up a little above the middle of the range. We've been increasing our discretionary R&D investments and that's factored into our outlook.

We still may reinvest earnings above the middle of the range back into the business to help sustain our expected momentum in the out years. We still anticipate good growth in orders for this year over last, but the lumpiness makes it a little hard to tell just where that will turn out right now.

And just to build on that, this next slide gives some very preliminary views on our fiscal year '07. This is probably earlier than we would like to comment on that, but there's already a number of analyst estimates out and we wanted to give some Company perspective. We do think we'll continue to have good growth into our fiscal year '07. We've seen analyst estimates for revenues in the range of about $450 to $500 million in sales, and that seems like a reasonable spread to us right now. We think our orders for fiscal year '06 will certainly be consistent with that kind of revenue range, even given the potential for more of a shift to book and ship product sales.

In terms of earnings, we think a range of about $1.15 to $1.25 per share for the year pro forma seems prudent at this point. We think the middle of that range ought to be a reasonable target, but we'll discuss that more next quarter. There are a couple of factors to consider. One is that as we've mentioned, we would like to continue to increase our discretionary R&D investments, as a percentage of sales. Plus, we're doing more of our development programs on a cost reimbursement basis, which will likely decrease our R&D tax credits, so we need to plan for a little higher tax rate.

That covers all the points we wanted to make. In summary, we're happy with our second quarter and our fiscal year '06 results to date. We've had good growth, met our earnings plan, generated a lot of cash, improved the balance sheet, and reached some important program milestones. We're pretty happy with how our new products are doing in their markets. The key things to watch still include expansion of MIDS LBT and MIDS JTRS programs, the information assurance area, progress in mobile broadband, and of course the rollout of KA-band consumer broadband service.

We're very happy with our opportunity pipeline and we're optimistic about achieving sustainable growth for several years ahead. So thanks for listening. At this point, we'll open it up for questions.

OPERATOR INSTRUCTIONS]. Your first question comes from Steve Mather from Sanders Morris Harris.

Hi, Mark.

Hi, Steve.

My perspective is, you've just said it, margins are good, prospects are good, you're a trusted partner, you're executing. Seems like the next step is to maybe apply this formula and grow a bit faster even than you will.

So I kind of have a two-part question. One is if you want to grow organically, to what extent do you think there's prospects to really get big quick like a prime, meaning if you would have wanted a new contract, you would have gotten bigger quicker.

So in terms of organic, are there any big home runs or triples in the works. And then secondly, if you're just going grow organically the way you've been growing, is there acquisition opportunities that you might undertake to bring in more revenue and then apply your formula to that business and then grow in a sense through acquisition with that formula?

The first thing I will tell you, we're actually pretty happy with our growth rate, and we've been sustaining it for a while, and we like to grow as fast as we can, but not faster than we can, and I think part of our formula is sort of recognizing the -- what we can do there.

I think there are definitely areas where, if you look at the things we're doing now, it's possible that we could grow faster, but we just don't know enough yet to be able to predict that. I think we'll learn more in those areas and that will depend on how some of these programs shake out. All of them, consumer broadband, MIDS JTRS, the mobile broadband, and the information assurance area, all-- I believe have good growth prospects.

I think what you're seeing now is kind of a prudent view on our part of where that will go in the near term. It's a little harder to tell when you look two years out. In terms of the acquisitions, I would say we are generally kind of always considering acquisitions that sort of-- we've talked before about kind of modest acquisitions that would add technologies or maybe help push us in a new direction.

We have been considering those for a while. We still are and-- but there's nothing to report now. Some of those, depending on how certain markets play out, could help us. But right now, I mean I think the bottom line is we don't want to get too carried away beyond what we're projecting.

That's great, Mark. Well, you certainly have found and applied that formula. So good job. Congrats.

Thanks, Steve.

Your next question comes from Jim McIlree from Unterberg, Towbin Please proceed.

Thank you. Can you talk about the ultimate margin goal that you have for both the satellite networks and antenna systems, and over what time period do you think you could reach those?

Generally, the-- from the perspective of return on sales, generally what we're aiming for is in the range of 10%, 10% operating margins, kind of pro forma, pro tax. That would be pre-amortization, pre-tax. I think those are still good targets for us. I mean-- and it's-- I would say for the more conventional business-- let's say for the antenna systems business, the VSAT networks business, even the mobile broadband business, we're pretty close to those now.

The broad, consumer broadband one is a little more unpredictable and it's a little hard to say because there's some trade-offs in terms of what our market growth opportunities are and how we might want to price to address those and those are things that we're trying to work out with WildBlue and Telesat and also with their distribution opportunities.

I think just to add something, Mark, it's Rick, one of the offsets there is going to be how much we have to invest in consumer broadband market in R&D that will effect operating earnings over the next year or two, but from a returns sales standpoint, we ought to be able to do that well.

It sounded like you also would take a lower margin in order to get bigger volumes. Did I hear that correctly, or did I misheard that?

Yeah, I think the lower growth margin kind of changed, you know, even with the lower margins so overall, in kind of a stable environment, we ought to be able to do that well, but I think it depends on what, where the market is at the time.

Okay, and you said that you were going to have more cost reimbursable projects going forward, so does that imply that the margins in the government business should be coming down from the 19% level? And, again, over what time period? If true, over what time period?

I think the trade-off is we had some, you know, reduced some of the risk because we had some modest overruns in those markets that tended to depress margins. When we look at those, we think that is kind of the risk sharing in that, the net result of that should be about the same type of margin overall. Maybe just also add the trade-off is also in the R&D line in some regards. If we have a lot of customer-funded development and cost type, it may necessitate less company-funded R&D. That could also balance it out.

Okay, but there's no-- it doesn't sound like there's any sort of intention to let the margins drift a little bit?

No.

Okay. Thank you very much.

Thank you.

Your next question comes from Tom Watts from SG Cowen. Please proceed, sir.

Thanks. Congratulations on a solid quarter.

Thank you, Tom.

Couple questions. First, just the share count increased a little bit more rapidly than we were expecting. Is that a function of more options coming in the money, or were there additional grants and what should we look for that in the future?

It is a function of the stock price and the effect on the treasury method.

Okay.

And, you know it, really depends on how the stock price does in the future as to how that will get impacted.

Okay. And in terms of WildBlue, I know that you were looking, you know, you were contemplating putting DOCSIS into the enterprise market at one point. Do you have, do you have adequate production capacity to do everything that WildBlue would want and go into the enterprise market, and how do you think about trade-offs of that of cannibalizing LinkStar and the enterprise market versus putting a DOCSIS product there?

Okay. Well there, are a few things rolled up into that.

Number one, our number one priority has been to help make sure that we're doing the best we can to help WildBlue and Telesat establish the consumer market, because that really creates the foundation for anything we can do beyond that, and I would say that we're doing just in terms of the run rates, we're doing a lot. I think we're doing a lot better there.

And I think also,-- then the second point is, yes, we still are interested in bringing DOCSIS and KA capacity into the enterprise market, and I think our partners are interested in having that happen as well, and I would say it's, it's not going to happen tomorrow, but I think we're definitely looking at how we're going to work our way in there, and what-- also we're looking at what that means in terms of specific product configurations and the definition of the products and service offerings.

But I think that what it will do is it will really create a little bit different category than the traditional VSAT business and I think that will help differentiate it from our current services. And I also believe that ultimately because customers also value a lot of the broadcast aspects of enterprise VSAT that what you'll end up seeing is really a combination of both the DOCSIS and LinkStar product capabilities when that really comes to market.

Does that answer your questions on those fronts?

Yes. When you say a different category, is that a lower end product? Because it would be less expensive, or it emphasizes more broadcast than LinkStar might?

I think what it will do is it will really emphasize more bandwidth than what's available in the KU band. And bandwidth isn't-- I say if you look at conventional VSAT customers, and number of VSAT, enterprise VSAT sites in the U.S., which is still in the 400 or 500,000 range, lots of bandwidth isn't really the primary value proposition there, and I do think bandwidth would be valuable and there's overlap, but I think that the more bandwidth proposition does, I think it can grow the market and represents a little bit different value proposition and we may trade off other aspects of the value proposition to increase the market.

Okay. Just a final question, on the mobile broadband area, on the commercial side certainly the airline industry is continuing to suffer and energy prices will put more pressure on that. Is that going to slow down the connections by Boeing, and then in parallel are, we seeing the acceleration that you expected in the business jet market, particularly with some of the new products getting approved?

Yeah, I think-- okay. Yeah, first on the connection by Boeing front, Boeing has been pretty clear about saying they are really targeting the long haul international segment right now. I think the dynamics there are a little bit different than in the domestic U.S. market and so they have been having steady growth there, and that's really-- I mean we, so far as connection by Boeing goes, what we do is, certainly follow their lead and we don't intend to convey anything inconsistent with that from their perspective.

The business jet market is actually, I think it's going pretty well. I mean one of the issues is get the early systems out there from a production perspective, especially with Gulfstream, see how they respond to it, I think they have been and customers have been pretty enthusiastic. The next step is to get installation capability ramped up and that is, that's happening. I mean we're increasing that to the point where I think within a quarter or two, we'll be at, at a run rate that's pretty good for that distribution channel.

We're looking to working with ARINC and other customers to try to expand that and that could happen kind of middle of next year. We might be able to do some things there. I think the other area in the mobile broadband is to maybe look at combinations of mobile broadband and passenger entertainment.

That could maybe create an opening back into the U.S. market and that is still TBD how that would happen, but I think that the fact that we're seeing good results in the first two may create the opportunity for the third.

You would actually provide some of the products to support video services similar to what Jet Blue does with DirecTV?

Well, I don't think you'll see us do that. I think what -- I think what you would see is, and this is kind of how you could see it, and it could happen in a number of ways, but basically I would say that video entertainment is valuable.

I think you could-- there are a number of different companies that specialize more in in-flight entertainment and that they could-- they would probably take the lead in that and it could include Connection by Boeing, but the point is if you have some form of satellite video entertainment, the incremental cost to add satellite broadband at that point is very low, and that, that creates an opportunity.

Then I think the second sort of category of opportunity has to do with the fact that more and more people are looking at wireless distribution on board the airplanes and that can have a big reduction in kind of the weight and cost burden for distribution in airplanes and that could be consistent with both broadband and entertainment.

So I think kind of what's making us optimistic is just more of a recognition that, hey, this stuff really works and people like it. And also when you look at a business jet package and you look at the weight and size of that and compare that to what goes on the bigger twin aisle planes, you can see, wow, this doesn't have to be a really, really big expensive heavy system to deliver those types of capabilities. That's kind of what the dynamics are. Does that make sense?

Yes. Does that mean you could take your business jet products and conceivably go into the commercial market separate from Connection?

What I would say it is it indicates the technical possibility. I think what we need to do is kind of work with partners to see who is interested and who wants to do it and so far we've seen some interest there. There's just no way that we're going to go into the service ourselves. What we're trying to do is look at partners that can help us reach those markets.

Okay. Thanks very much.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from John Bucher from Harris Nesbitt. Please go ahead, sir.

Thank you. Mark, I was wondering if you could elaborate just a little bit on the migration from backlog to book and ship and where backlog might be less of an indicator. If you could just comment specifically on maybe some revenue categories there. And then second question, you mentioned that ARINC is in fact ramping up and talked a bit about the biz jet market.

I'm just curious, as they type-certify aircraft, do you have to bear any of the R&D costs for type certification in the arrangement that you have with ARINC? and if you could give us an update on whether they have any other aircraft types certified besides Gulfstream? And then the final third question, I think you mentioned something about communications, radio frequency, micro positioning technology. If you could just mention the context in which you mentioned that in your commentary. Thank you.

Okay. I'll see if I can get to all of this. First, on the backlog, basically the main thing is what we're seeing are, in the VSAT area, consumer broadband area and mobile broadband area, what we've got some infrastructure deployed and now we can ramp up shipments and those shipments can happen reasonably quickly, so I would say that those will mean in the KG-250 area, and the 255s coming out, I think that means that we can deliver products on shorter lead times. And so what I would -- that's a factor that could mean -- just here's one way to look at it, look at our backlog.

Now it's going into the quarter is about a year of sales. Now it's maybe a little less than a year of trailing sales. Right around a year of trailing sales, and it could, as a year of trailing sales, that could go down as we do more product-based shipment. The flip side of that is, and that's why I think it's going to jump around a little bit. If you look at some of the -- when I made that list of kind of big potential swingers, like MIDS, JTRS, international MIDS orders, those kind of things, those would come in big lumps and they would have long lead times.

So all I was trying to do is layout the way that our backlog could vary and it will depend on the timing and size of those orders, but I'm just trying to prepare, you know, prepare people for the fact that things are changing --could change a little bit. Does that answer that question?

Very clear. Okay.

Okay. On the type certification, for the airborne broadband, I can tell you we don't have any obligations that require us to do anything. Obviously, it's-- we feel its to both of our advantages to address a broader range of aircraft, and so we'll figure out some economical way to do that and that could involve us, ARINC, the air plane manufacturers, all doing reasonable things to get there. I think all three of us have motivations to get there.

But we don't have any commitments that obligates us to do things that wouldn't make sense. The last one, the micro positioning thing that we're investing in, basically that's kind of an exploratory -- I would say it's an exploratory thing we're doing with a customer. It's pretty interesting technology. If we get it to work, and we get it to -- we can make all the performance and pricings, it could kind of interesting.

I would say from an overall corporate performance perspective at this point, it's not really material, so far as our outlook goes. But it is really interesting technology. It fits what we do pretty well.

Is it a commercial or a government application?

Primarily commercial, but there's also some really interesting government applications and that's part of why we're interested in it.

Cellular-related?

No, no, it's on a smaller scale than that.

Okay, and then does ARINC have any non-Gulfstream type certified solutions?

They have gone through type certification steps on two other airplanes and I just don't know if those customers want us to announce those at this point in time -- formal type certification right now and so I just don't know where they are in terms of those announcements.

Thank you very much.

Okay. Thank you.

Ladies and gentlemen, this concludes your question and answer portion for today's call. I would now like to turn the presentation back to Mark Dankberg for closing remarks.

Okay. Well, that concludes all of our prepared and Q&A portions and thanks a lot, everybody, for your time and attention. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today's call. This does conclude your presentation. You may now disconnect. Good day.