Viasat Inc (VSAT) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the ViaSat Third Quarter 2006 Earnings Conference Call. My name is Ann Marie and I’ll be your coordinator for today. [OPERATOR INSTRUCTIONS] I will now like to turn the call over to Mr. Mark Dankberg, Chairman and CEO. You may proceed please.

Okay thanks. Good morning everyone and welcome to ViaSat’s conference call for our fiscal year 2006 third quarter ended December 30th, 2005. I’m Mark Dankberg, I’m Chairman and CEO and I’ve got with me Rick Baldridge our President and COO, Ron Wangerin our VP and CFO and Greg Monahan our VP and General Council. 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 document the Company files from time to time with the Securities and Exchange Commission; specifically the section titled “Factors That May Affect Future Performance” in the Company's 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 or 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’s Statement 123R.

Okay. Thanks Greg. So we’ll be referring to slides that are available over the web during the conference and we’ll start with our fiscal year ’06 third quarter financial results and a business overview perspective. Then after that Ron Wangerin will discuss our financial results in more detail. And 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 third quarter revenues. Sales for the quarter were about $112 million, which is a new record for us. And that’s up 27% compared to the third quarter of last year. For the fiscal year to date, sales are about $316 million, which is up 24% over last year and that’s another record.

This next slide shows third quarter pro forma earnings and earnings per share compared to last year. Pro forma earnings grew from 6.1 million to 7.6 million and that’s up 24% and from $0.22 a share to $0.26 a share, which is up 18%. Pro forma earnings for us exclude only amortization of intangibles due to acquisitions and will provide explicit bridge data from pro forma to GAAP net earnings a little bit later.

This next slide shows third quarter net earnings and net earnings per share. Q3 net earnings grew from 5.2 million to 6.6 million or 27% and net EPS grew from $0.19 to $0.23 a share, which is up 21%. For our third quarter year to date pro forma earnings are up from 15.6 million to 20.6 million and that’s an increase of 32% and from $0.56 a share to $0.72 a share an increase of 29% and both are third quarter year to date records for us.

And finally this next slide shows our Q3 year to date GAAP net earnings on EPS. Those are also up year over year. GAAP net earnings increased from 12.5 million to 17.8 million. It goes up 42% in EPS from $0.45 to $0.62 an increase of 38% also year to date records.

So overall third quarter results are very good and in line with our plans and we remain pretty well on track for our year to date results as well. Ron will go into more depth on our earnings and financial in a few minutes but next I’ll give a quick top-level overview of our business situation.

The Company wide financial results were very good and consistent with our targets. Cash flow continues to be very strong reaching $30 million year to date. It’s an area that we’ve been focused on and the results support that and are indicative of solid operational executions. The balance sheet remains strong with essentially no debt. We’ve been able to increase our investments and discretionary R&D significantly on a year over year basis. That basically indicates that our margins are little stronger and also that we have promising growth areas that warrant the investments. We’re aiming to continue to increase our discretionary R&D investments to the extent we incidentally can consistent with our margins and earnings objectives. At the same time we’re also continuing to perform all our customer funded R&D development programs. We also completed the ECC acquisition in the quarter and Ron will go over the balance sheet effects associated with that a little later as well.

We’re really happy with the products, technology and customer relationships that ECC brings to ViaSat.

So I’ll go over those key market points. Historically ViaSat’s competed well in markets that fit in our strike zone. We see a lot of opportunities now that fit that strike zone well. We still believe we can grow a lot in the next few years without having to enter fundamentally new business areas. And for now, I’ll quickly discuss some of the near-term opportunities over the next couple of quarters or so.

First, LBT production lot number 7 will be the annual major U.S. procurement. We also expect that to include international orders where we’ve been selected but have not yet received firm contracts, such as with Turkey.

MIDS JTRS, which also refer to as MIDSJ sometimes, is anticipated to add substantial new scope. For instance, in December the government announced its intent to add what they call the “advanced networking way form” in a way form called the Have Quick 2.

There are other increments to MIDSJ that are under consideration as well. Each new increment will include funded development and increase the addressable production market. In several information assurance programs that we’re currently getting we’ve already received study and/or demonstration funding related to several of those.

While the programs are still going to be very competitive, we’re receiving opportunities to work in areas that we never have before and we’re optimistic about growing our technology and capabilities further in this area.

On the commercial side, WildBlue and Telesat Canada continued to see strong customer satisfaction. WildBlue announced that they have raised an additional $200 million early this year and they’ve announced plans to launch WildBlue1, their next satellite, this calendar year, which would approximately triple their capacity.

There’s been well over about a billion dollars in financings from mobile satellite systems that can use what are called ATC or ancillary-terrestrial component frequencies. That creates a market for new ground systems and we’re actively addressing that opportunity. Plus, customer satisfaction has been good for KA-band for commercial and government mobile systems. We’ve also begun working with Inmarsat on ABU to the side one DOD network encryption standard, compliant version of their new broadband global area network, or BNs, broadband terminals for the defense market.

[While we] still believe we’ve got a strong market share for the type one AB network encryptors for DOD, the unit sales for us has been up and down, which are influenced by the DOD budget cycles and also a software upgrade to a newer version of the AP standard. Ultimately we believe AP demand is going to correspond to growth in DOD global information grid infrastructure, which is just now beginning deployment.

While there’s pressure in the environment to reduce DOD procurement budgets, in general our products and programs are generally upgrade or enhancements to existing platforms or systems. Usually programs like that do well in declining budgets because they fill needs created if you stop or slow down a larger, more visible, more costly major platform program. Finally, our combination with ECC creates some strategic opportunities, especially in satellite broadband areas, such as IPStar and the new DBBS2 standard.

Switching to new orders, our net new orders for the quarter were about $78 million, which is at the lower end of the range we were anticipating last quarter. So given revenues that were a little bit higher than planned, backlog declined a little over $30 million. In general, it’s fair to say that defense orders were affected to some extent by the budget delays. But the good thing is the backlog acts like a buffer, so those delays don’t necessarily impact near-term revenues or earnings, and our backlog is still about 11% higher than it was at this time last year.

Our near-term pipeline right now is exceptionally strong, mostly in the areas that I discussed, just a slide-to-go in the market overview. Timing of new orders are really at the convenience of our customers so we can’t always predict them accurately, but we anticipate the next 6 months will be very strong and we’re aiming to set a new record for backlog over that time.

I use this next chart for the last few quarters should show backlog in the context of our quarterly run rates and we’ve been pretty fortunate to have gone about a couple of years since the last time backlog declined. But based on the pipeline, we’ve got a good opportunity to start growing our backlog again promptly.

So now, we’ll switch to some of the main business highlights of the past quarter. Our government business was really good this quarter. Revenues were good. Margins earnings were excellent. MIDS product deliveries were very good and typical progress on the MIDS JTRS program has been good.

As I mentioned already, the government’s announced its intent to add an airborne networking way forms in MIDSJ, so we’ve been working with the government and DLS to define how to add that to the existing program structure. That would be a significant addition to the MIDSJ program and work would be divided among the two contractors, that’s ViaSat and DLS. We also are expecting the lot 7 MIDS LBT production request for proposal soon and that will likely include international orders, such as for Turkey.

KG-250 shipments in the quarter were down and lower than we expected. This quarter we’ll be shipping a new software release, supporting a newer version of the AP standard. It’s pretty tricky to predict KG-250 sales each quarter. We anticipate that shipment this quarter will be significantly higher than last quarter but we’re not currently expecting them to reach our previous highs yet. Our KG-250 production forecast is factored into our current financial outlook and we remain very optimistic longer term.

We’ll also begin shipping our gigabit speed KG device, and while this opens a different marketing segment for us, we don’t expect the market for gigabit devices to be as large as that for the tactical 100 megabit devices, such as the KG-250.

The other important point in information assurance area is that we’re doing a lot of proposal work for some new areas for us. It’s important that we’re getting exposed to these new programs and customers as a result of the security success we’ve had doing very high speeds with the flexibility in our technology and products and with what we’ve doing on JTRS.

Then another area with a lot of activity is government mobile satellite communications. We’ve got funding to test, demonstrate and develop new products around our Ku-band spread spectrum system. We’ve also been getting some funding for an integrated AP secure BGAN terminal that use Inmarsat’s new I-4 spot beam satellites. And then we also just got a toe in the water on NUOS, which is the government mobile user [apethic] system with funding for a satellite link effect simulator.

Okay, so now switching to our commercial segment, our VSAT network sales have been a little lumpy over the last few quarters, but we’re introducing new products, including an upgrade to our LinkStar product family. We’re going to add what’s called [ADBS-2] around the end of this quarter and we’re also planning a version that includes ECCs adaptive coding and modulation or ACM mode subsequent to that.

S-2 and ACM mode are more bandwidth efficient than the existing standards and may reduce operating costs for satellite users. It should help sustain our growth and also should be an attractive upgrade for the more than hundred networks centered around 70,000 remote terminals that we already have deployed. We also believe we’re making progress in our enterprise service business in the U.S.

Our antenna systems business has been pretty steady. Consumer broadband has had very good year in terms of year-over-year growth. Product shipments have been growing. We recently shipped our 100,000th unit. We’ve also made good progress in software releases for network infrastructure. Service reliability has been very good. WildBlue and Telesat success has had a positive impact on people’s perceptions of satellite broadband services. WildBlue announced they had raised $200 million in funding, which I mentioned, which will allowed them to launch their new satellite, WildBlue1, this year and that about triples the number of subscribers that they can serve. Overall, continued success with the consumer broadband business would be very good for our VSAT business as a whole.

The commercial mobile satellite business also has had progress. In-fight broadband is certainly popular among passengers that have used it and we have a very strong position in that space, but we’ll still have to see how that business grows as a business and to what extent other factors, such as onboard wireless distribution on airplanes, addition of live video, air to ground networks will all influence kind of the timing and shape in that business.

During the third quarter, though -- our third quarter, SES Americom successfully launched their AMC-23 satellite, which for the first time ever brings Ku-band satellite capacity over the entire Pacific Ocean region and that will spur more service deployments for Connections Asia Pacific Airline customers, as well as their initial Americom customers. Connections also announced increased Atlantic Ocean coverage as well. Obviously, satellites are the only way to go for transoceanic coverage.

We’ve already mentioned that we’re aiming to work on some of the new mobile satellite systems and have invested a fair amount of proposal funding towards opportunities there. We’re also shipping a lot of Ka-band consumer broadband transceivers from US Monolithics and we’re very pleased with the product performance and the manufacturing results there. USM continues to see good opportunities in defense also.

And, finally, we’re really pleased with the ECC acquisition, which we closed in our third quarter. ECC has a number of customer relationships and products that fit very well with ViaSat’s existing business. The two most obvious strategic benefits are with iPSTAR and in the DVB-RCS VSAT open standard system.

We feel like we’ve already got a very strong competitive position and the most advanced satellite broadband technologies when you consider the combination of DVB-RCS, iPSTAR, and DOCSIS. The iPSTAR spot-beam satellite in the Asian Pacific region has the potent ional to create services businesses to better comparable to the WildBlue and Telesat in the US and Canada. We don’t have as much content in iPSTAR as we do in the DOCSIS based systems, and iPSTAR distribution models are a lot more complex in the North American companies because iPSTAR covers so many different countries, but we still believe it creates a valuable growth opportunity.

So, at this point I would like to introduce Ron Wangerin our CFO, who will discuss the financial data in more detail.

We’ll start with the results from operation with a segment perspective first, then discuss the rest of the P&L followed by discussion on the balance sheet and then cash flows.

In the government segment, revenues for the third quarter were $53.2 million, a 10% increase over last year and year-to-date government segment revenues were $156.2 million, which is a 22% increase over last year. The increase in government revenues for the third quarter is related to increases in MIDS JTRS, simulation and information assurance, product development offset by reductions in UHF mobile Satcom product sales. Year-to-date increases are attributable to increases in Tactical Data Link sales principally MIDS production sales and MIDS JTRS development, and simulation and information assurance sales offset by reductions in mobile, UHF Satcom product sales year-over-year.

In the commercial segment, revenues for the third quarter were $60.2 million, a 47% increase over prior year and year-to-date commercial segment revenues are $164.7 million a 25% increase over last year for the same period. For the third quarter and year-to-date, we saw increased sales of our satellite networks products principally due to increases in consumer broadband product activity and in antenna systems sales. As you can see, our year-to-date sales are almost 50/50 in government and commercial segments.

For segment operating earnings, the government segment posted third quarter operating earnings of $12 million, which represents an increase of about 72% from prior year. Year-to-date government segment operating earnings are $31.7 million, which is a 52% increase from last year to date. So the quarter and year-to-date increases are primarily related to higher year-over-year sales of mixed production units and improved margins in this area and higher MIDS JTRS and information assurance sales.

Year-to-date margin increases are partially offset by higher company funded research and development of $2.8 million and increased selling expenses of $5 million reflecting higher proposal and sales activities. The increase in operating margin also includes a benefit of $2.7 million related to our first quarter MIDS subcontractor legal settlement, which we discussed on prior calls.

Commercial segment operating margins declined in the third quarter year-over-year by $1.5 million principally due to a charge recorded in the quarter of $1.4 million for a settlement to exit a contract related to a radio frequency micro positioning technology. New costs incurred during the quarter of over $1 million to relocate our Georgia operations to their new facilities, higher R&D costs of about $1 million and lower margins in our antenna systems business. These profit reductions were offset by improved performance in our consumer and mobile broadband product areas.

Year-to-date the commercial segment operating earnings are down from last year mostly due to year-to-date investments in the radio frequency micro positioning technology of $2.5 million. The move cost in Atlanta previously described and higher R&D investments of $2.2 million offset by improved performance in our consumer mobile broadband product areas.

As we look at the rest of the P&L, for the third quarter we experienced very good year-over-year revenue growth to $111.6 million, which is a new record. SG&A expenses were higher year-over-year mostly due to higher selling costs from higher sales volume and due to increased proposal activity, which is very robust in both segments.

In addition, SG&A grew due to infrastructure classes to support our growth and for move costs incurred during the quarter of over $1 million to relocate our Georgia operations to their new facility. R&D was up significantly in the third quarter year-over-year due to 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 for our shareholders in the future and to the extent that we can afford it we will be increasing discretionary spending to target those opportunities. The increase spending for these opportunities manifest themselves in higher selling and R&D expenses.

Quarterly amortization of intangibles is higher for the third quarter year-over-year due to the acquisition of Efficient Channel Coding in the quarter and one month of amortization. Our income tax provision for the third quarter reflects a quarterly tax rate of about 22% reduced for certain discrete benefits in the quarter bringing the rate to about 18% for the quarter. The tax benefit recorded last year, was due to the reinstatement of the R&D tax credit benefit in that quarter and accumulative patch up benefit flowing through during the quarter that’s causing the change year-over-year.

The shipping note is that the R&D tax credit benefit expired on December 31, 2005. As a result, our annual tax rate reflects no benefit from the credit in the fourth quarter.

For the year-to-date results, we experienced very good year-over-year revenue growth. These results include a $2.7 million benefit related to the legal settlement with the MIDS subcontractor we discussed earlier in the year, which shows up as a reduction of cost of sales.

SG&A expenses were higher year-over-year mostly due to higher selling costs due to increased proposal activity and sales levels. New costs incurred during the third quarter of over $1 million to relocate our Georgia operations and over a $0.5 million in the first quarter to complete our fiscal year end 2005 Sarbanes-Oxley assessment.

But our increase in sales is out pacing the increase in SG&A expenses creating bottom-line benefits. R&D is up significantly year-over-year as anticipated due to the development of new military satellite communication products and next-generation VSAT equipment.

Quarterly amortization of intangibles is lower year-over-year due to certain intangibles having been fully amortized. However, due to the acquisition of ECC, which was completed later in third quarter we expect amortization to increase to approximately $2 million per quarter over the next several quarters.

Other income and expense reflect higher expenses related to the unused portion of our credit facilities, which has doubled from 30 million to 60 million from last year and interest expense, accrued related to prior year amended tax returns offset by higher interest income from invested cash balances.

Our income tax provision year-to-date grew to reflect a projected annual affected tax rate of approximately 22% for the year, reduced for certain discrete items recorded in the third quarter. The estimate was derived from the normal statutory rate of approximately 40% less amounts for estimated R&D tax benefit, extra territorial income deductions, and the new manufacturing deductions. Year-to-date our earnings and EPS are strong and slightly ahead of plan. We are growing earnings faster than revenues which has been a goal. Performance year-to-date boosts our confidence that we’ll be able to achieve our fiscal year 2006 targets.

On this next slide, we included so you can clearly show the difference between GAAP and non-GAAP or pro forma EPS amounts. Pro forma results only exclude the affects of acquisition related intangibles net of tax. It should be noted that year-over-year in the third quarter the weighted average share is used for EPS computation increased by over 1 million shares largely due to our stock performance and the effect on the treasury stock market.

As you look at the balance sheet, our balance sheet continues to strengthen. Although cash and short-term investments decreased by approximately $6 million during the quarter. This was after using $16 million for the acquisition of ECC and we’ll cover the change when we discuss the cash flow statement.

As we look at accounts receivable, billed account receivable increased quarter-over-quarter due to reductions of unbilled receivable and higher quarterly revenues. Unbilled receivables decreased by about $7 million, mostly due to MIDS and consumer broadband program shipments. As we look ahead two quarters, we have several milestones for programs in the government and commercial segments and expect unbilled receivable to continue to decrease.

Inventory rose in the quarter by 11% and this has management’s attention. The increase is mostly due to lower KG-250 shipments primarily due to government order delays. As more of our new orders come from ship and bill type orders, we’ll see some investment new from unbilled receivable to inventory to fulfill these orders. We believe there are a number of opportunities to reduce program working capital across the company over the next two quarters and further our cash flow generation.

Good will and intangibles were increased significantly in the quarter due to the acquisition of ECC. Total good will and intangibles that were recorded were approximately $18 million of which approximately $10 million are amortizable intangibles. The increase from the ECC acquisition was partially offset by quarterly amortization of intangibles.

Net property and equipment was up over $2.6 million due to the capital addition mostly for facility expansion and test equipment to support our business growth. We expect capital expenditures to continue at this level or to increase over the next couple of quarters. The decrease in other assets primarily reflects the 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 contracts. At the end of the quarter, we continue to have no outstanding borrowings leaving our full line of credit available less standby letters of credit. As of quarter end, we had about $54 million available under our line.

Other current liabilities were up quarter over quarter by about 2.4 million due to accrued payroll at the end of the quarter and accruals for 401K and performance bonus. The increase in other long-term liabilities is related to deferred rent from leases commenced in the quarter and certain liabilities recorded in connection with the ECC acquisition for vendor financing and the legal settlement agreements.

As we turn to cash flows, we had a very good quarter for cash flows generating almost $11 million in cash from operations. Year-to-date we’re at $30 million generated from operations. For both the quarter and year-to-date, capital generated from operations is coming from the operations as working capital has contracted. This reflects strong operating performance and more efficient execution in the balance sheet.

Cash flows for investing activities reflect the acquisition of ECC for $16 million and higher capital expenditures for facility expansion projects and purchases of test and production equipment.

We expect capital expenditures to be at this level for the next quarter or so as we complete capital projects to support our expansion. We received $4 million from the issuance of common stock during the quarter mostly exercised as stock options in the quarter. So, net for the quarter, cash decreased by $6 million. As we look at year-to-date though, we have used $16 million to purchase ECC. We have invested 12.6 million for business expansion, and we still increased our cash on hand at the end of the quarter by $7.5 million when you compare it to the beginning of the year.

We are very pleased at the strength in cash flow and, as we look ahead, we expect to generate cash in the aggregate over the next two quarters.

Before I turn it back over to Mark, I want to spend a minute on where we are with FAS 123R, the accounting for stock options requiring the expensing of stock options. We will be adopting this accounting pronouncement in our fiscal first quarter of 2007, which begins in April, a few months from now.

We are currently evaluating our alternatives including changes in plan design as well as alternative expense models. Both of these could impact the calculation of the expense; therefore, we are unable to comment on the expected impact at this time.

It should be noted, our expense is impacted by the plan’s design and the factors in the model as well as our stock’s performance. That said, over time, we expect our expense to be comparable to companies with similar characteristics. In our next call, we will be able to provide better insights on the FAS 123R impact.

With that, I would like to turn it back to Mark for some comments on our outlook, which excludes any impact as a result of adopting FAS 123R. Mark?

Thanks Ron. So at this point I am going to talk about our outlook for the rest of the fiscal year ’06 and for fiscal year ’07.

So our view of fiscal ’06 as a whole is about the same as it was at the end of last quarter. The high end of the revenue range now seems more likely than the lower end, so it will be closer to the $425 million number and we would guide right in the middle of the pro forma EPS range which would be $1.00 a share. That is consistent with our targets for the year. It is possible we could come in with it higher, but one of the important factors there, as Ron discussed, is the status of the R&D tax credit, and we do not really know how that is going to stand at the end of our fourth quarter.

The next slide on our fiscal year ’07 outlook is the same as we showed last quarter. We believe that we’ll continue to have good growth into our fiscal year ’07. We know that the range is pretty broad right now, but we think we will be able to estimate a lot better next quarter when we get a better handle on our new business pipeline. We can estimate that the shape of revenue and earnings for next year is going to be fairly similar to this year, which would likely mean weighted a little more to the second half.

So that covers all of the points that we wanted to make. In summary, we had very good third quarter financial results with strong earnings and cash flow. The success of our MIDS, broadband, and information assurance product has helped create very strong new awards pipeline, and we are optimistic that we are going to be growing our backlog again and we are aiming for record levels of backlog over the next 6 months. The major growth opportunities are still in the same main areas, MIDS and MIDSJ, the information assurance area, satellite broadband, and satellite mobility.

We believe our playing field within these markets is widening due to the growing importance of MIDS JTRS and the overall JTRS environment, our successes that we have had to date in information assurance, and the fact that there is better access to capital for satellite broadband and mobility service providers. So, overall, we see good long-term market expansion opportunities. Thanks for listening and, at this point, we will open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question will come from Tom Watts with S.G. Cowen. You may proceed please.

Congratulations on a very solid quarter, Mark.

Thanks, Tom.

A couple of questions. One, cash flow growth was very good. It looks like you still have some more room on your inventory. As we look longer term over the next couple years, I know on your revenues, earnings, you said you could grow earnings -- you could probably do something like 20 percent growth. Is there a cash flow growth target that you are looking for? Are we going to be able to continue to generate that type of cash flow?

It is a little -- I wouldn’t predict substantial change in the cash flow. I think – What we think is valid that we have now is sustainable, basically. Make that as we grow. We ought to be able to grow it, but it is hard to go into more detail than that right now just because of the interactions in contract terms. There are issues that Ron mentioned in terms of what happens when we go to book and ship between inventory and unbilled receivables. But, in general, we have actually done pretty close to our operating earnings in cash flow and some of that has to do with the amount of amortizations that we have. So there are a number of interlocking factors. But the general trend sustaining and growing is one that we – that’s what we intend to do.

Okay.

Does that help – did that answer your questions? I’m not quite sure --

When you say “these levels” that implies an absolute dollar level, or it sounds like you should be able to keep growing [inaudible] different changes, but you should be able to keep expanding that.

Yes. Relative to – I would say if you look at it in some of the correspondence to our earnings growth that would be a way to look at it.

Okay. And then also in the RF micro positioning chart, is that a product area that we are going to see more of and is there potential for more charges in that area?

No. Well, okay, [I will] characterize it. We talked about it in the last few quarters. It was kind of a -- technology is a little different for us in applications area that we do not – that we have not been doing. We thought it was a really interesting and good technology and, basically, what Ron mentioned is that we exited the agreements that we had, and so unless we start new agreements, that is the end of the line for that. I am not saying that we will not ever go back because we did get some good technology out of it. But, for now, we exited.

Okay. A final question. In the consumer broadband area, on the positive side, we have seen WildBlue do a lot of talk about going into the enterprise market. [Could] I get upside to your projections. On the negative side, DIRECTV is making noises about not doing satellite broadband and going terrestrial WiMAX possibly even with an ATC solution. If DIRECTV and EchoStar do not do satellite broadband, does that reduce your expectations for WildBlue?

Okay. That is a really good question and all I can do is I can give you our perspective on it and I think that actually the whole notion of doing a satellite terrestrial combination WiMAX which I think is a really interesting solution. Personally I think that, that is going to be that the way people perceive that will be different then fixed broadband but that won’t be the same type of service as DSL or cable modem as an example. And obviously other people have different opinions on this and I’m just giving you my opinion, what I think is that. And you see these types of WiMAX type solutions especially ones in a kind of mobile frequency bands and I’ll bet you that that type of service will look more like a Verizon or Sprint EDDO service or Cingular Edge type of service. And so I think that’s an interesting service but personally I don’t think that people that will necessarily – mobile WiMAX– give up their fixed broadband service. And the way I see is that a WildBlue type of service is really -- more corresponds to a fixed broadband service. So actually what we think is that their going to turn out to be complimentary services and that’s probably a different spin then what you would get from EchoStar or DIRECTV and they could be right and I could be wrong. But that’s sort of how we see it.

And then Gerry and it sounds like you’re positioned to pan the ATC side as well then.

We think, I mean actually we think there’s a really interesting market there and we to the extent that we could would like to participate in that. And also it could be that our views – in that we don’t know everything that’s going on in the area from a service and demographics perspective but I think that from the technology perspective we certainly have things to offer and we’ll learn more about it. But right now I think they’re sort of complimentary things.

Thank you sir and your next question will come from Rich Valera with the Needham and Company. You may proceed please.

Thanks. Good morning Mark and Rick. Mark could you talk a little more about the, you mentioned you’re working I think already on the A&F and I think maybe Have Quick Way Forms. Have you actually gotten the formal R&D award on that one? And two, can you talk a little bit more about the potential there of those two markets, the A&F and Have Quick and markets in that, what that could mean to ViaSat?

Okay, well first of all we haven’t announced anything in terms of enhancement to our next JTR contract regarding that and when we can we will. On what they mean for the market – basically the Airborne Networking Waveform is really aimed at adding I’d say more advanced capabilities then what you get with Link 16, which is right now kind of censor displays and situational awareness. The advanced – the Airborne Networking Waveform we add a lot more real time data capabilities. And so what that will mean is it’ll probably go on platforms that are different then what MIDS goes on. So that’s interesting, it expands the – a little market space for us and also there’s a lot of new and complex technology and this will be a fairly significant development program. I think part of it is that what people in DOD are seeing is that MIDSJ is a very cost efficient and fast way to bring that capability to the Air Force so I think that speaks well for the opportunity for MIDSJ.

And the other one is that something like [half there twos] is kind of a anti-jammish voice data waveform, that’s a much more – there’s a lot more unit to do half quick then there are that do Link16, so that’s also an example of adding a capability to our radio, kind of a radio portfolio that let’s us play in a larger market.

And so I think you kind of get some flavor of the fact well it’s going to be a little bit bigger market, a lot of technology development and the other flavor that I’d add is that there will probably other increments as well that I’ll keep pushing us in those directions. So overall I think it’s a really good thing for us.

And this might be a tough one but do you have any sense of when you might have a MIDS JTRS terminal available with say the AMF waveform for shipment versus when the formal [cluster] or the JTRS cluster formal program may actually have since it’s been sort of put on stop order and could be multiple years out. Do you have any sense of when you’re product might be ready relative to that?

Yes I’m going to beg off on giving specific dates. Partly because there’s a lot of moving parts, I think the overall DOD strategy for JTRS is still in flux. I mean they’re trying to take into account what’s happened so far on the programs and what they think are realistic assessments of cost and schedule going forward. But I mean the main thing I’d say and I think that this is becoming more true not less true overtime but a big part of the value proposition admits to JTRS and why the program has been funded to the extent it has and why would that more or function features is that it’s perceived to be a faster track to the other programs and so it will probably deliver capabilities I’d say on the order of years before the others. And that could be one, two, three years depending on the configuration of the platform. Part of what the attraction of MIDSJ is it’s a little bit simpler so that it won’t have all of the loads that other radios will have and it may not have as many channels, simultaneous channels of operation, but what it almost certainly will have is the capabilities that it does offer will be there sooner. And I think that’s a good thing in terms of market penetration and market opportunity for us. Does that help?

That does help. Thank you. And could you just comment on what Lockheed’s win on TSAT that means to you guys? You know they – you guys are on there team in some capacity but could you talk about that?

Yes okay. I think there’s a lot of discussion recently about a segment of TSAT and it’s called TMOS, T-M-O-S, and what that is is kind of think of it as management and control portion of the ground segment, less -- think of maybe three main partitions to TSAT as a whole one would be the space part, number two would be kind of this management and control part and number three which is probably – well it’s not going to be the biggest then this one because the space parts are big but it’s bigger then the ground – then the – management control part would be the user terminals, which would be Air Force, Navy, Army, all the different user terminals. So the managements – and one of the issues that the government has that’s in -- they’re trying to do these things in parallel and some of the things that are done on the management segment will influence what happens in the other segments. So the government has set up what they call organizational conflict of interest contract clauses on these contracts, which mean that it’s a single contract, say Lockheed or Northern Grumman or Boeing or ViaCom or any of the contracts that work on these – are fortunate enough to have these organizational conflicts of interest or OCI clauses mean they have to have separate provisions or somehow they have to have firewalls among the people working in those areas. So for us we actually have a lot of different groups working on the space segment so we have fewer groups that are available to work on this T [MAS] segment so we’re not – I think that will have some involvement in it but it’s not going to be enormous at this point.

Any sense when the state portion might be awarded?

I think they’ve announced the schedule slip and I think that brings it to ‘07ish, ‘08, I think, kind of time frame. I can’t remember, I think there’s like been a one year slip and personally I’m not sure I remember it right. It’s not going to be this year which I think it was going to be at one point and I think it’s ’07. Rick do you know better then I?

Right now I think it’s kind of mid ’07.

Thank you sir. And your next question will come from John Bucher with Harris Nesbitt. You may proceed please.

Thank you, John Bucher here, Harris Nesbitt. Mark any – you want to take an estimate at what the ground station business might be of the total addressable market with ATC if you take a look at all the potential ATC plays out there?

Boy that -- it can really be a lot – okay one is the overall market can be really big. Now the addressable market for satellite – for a satellite company could be a lot smaller and a lot of that depends on what the service company is an end up it’s putting a spectrum due with it and so there have been some, I’m just going to give an example. One example is that they could end up with phones that have I mean that have a satellite chip in them and so that we’re probably not going to be a phone maker as an example. The infrastructure sides overall would be in the hundreds of millions of dollars, the subscriber terminal sides depending on what form the subscriber terminals take and what the applications are could either be ten times that or one tenth of that, I mean from a satellite perspective. We don’t know yet. A lot will be dependent on what they end up deciding what to do with it. That help?

I was thinking on the ground station portion primarily.

The infrastructure?

Yes, and just wondering you know it sounds like you said hundreds of millions of dollars -- just wondering if there were to be a number of the initiatives that are sort of on the drawing boards now that went with some sort of ancillary industrial component. Does this represent -- how big of a boost could this represent to your total adjustable ground station business?

It will you know, it really depends on -- right now it’s pretty much a U.S. phenomena. I think that it’s conceivable that it could spread to other parts of the world. I would say right now, hundreds of millions is probably the right ballpark for infrastructure. And, a lot even there, a lot depends on the network models that they choose and the partners that they choose for bringing the services to market.

And then final question, the range that you all provided on the fiscal ’07 earnings, I’m just wondering if there are certain particular product categories that perhaps have more potential to give you sort of break out the higher operating product margins. If you could identify which those are and what sort of events would happen for or have to happen for you to perhaps be at the higher end of that range?

Yes, well the -- let’s see for us to be at the higher end of range -- some of it would depend on for instance what happens in consumer satellite broadband. There are certainly upsides there. But you know, maybe not in marginal earnings but in absolute dollars of earnings we could translate into EPS for us and that would depend on for instance, let’s look at what happens with WildBlue and what happens with the DBS companies. Are their distributional relationships or not that are formed there. What’s the timing of launching WildBlue1 of the successors, WildBlue1 launch? Those are factors it may also may depend on what happens with other satellite broadband systems and operators internationally. And, then certainly the information assurance products have a good upside potential. There are some upside potential in the Tactical Data Links area as well and in the mobility area. You know I think and the way I would look at is probably -- we’re not expecting a break out change in our marginal earnings. So I think there -- I think that I’d probably put it at the higher end of the range we have a mix that favors more higher margin products as well as the lower end of the range it might mean that programs were delayed probably more than anything is what I would say at this point. Does that help at all?

Yes. Thank you very much I appreciate it.

Your next question will come from James McIlree with Unterberg, Towbin. Please proceed.

Ron can you go over again the charges that you articulated in the commercial segment. And then secondly, what is it going to take to get commercial margins to a respectable level?

Basically, what we said was in the quarter we had a charge the [exit] micro radio frequency micro position technology of about $1.4 million. And, that we also incurred about a million a little over $1 million in new costs related to the relocation of our facilities in and around the Atlanta area. And, then we had higher year-over-year R&D costs that we’ve been talking about our prior R&D costs throughout the year, so that it wouldn’t be non-recurring from that standpoint, but the other ones are certainly discrete for the quarter. And, so I think you know that’s $2.5 million of charges in the period. So I think if you pull that out our earnings improvement on the commercial segment, which is really driven by our beginning to deliver at the higher rates on consumer broadband because we’ve been recording profits as you’ve seen in the past in our VSAT business, on our antenna business system and mobile broadband. So we’ve had earnings improvements on the consumer broadband side and their offset this quarter by some of unique guidance. So I think that we are see improvements there.

The issue is when we continue to invest in some R&D we’re still rolling out some both software improvements and some next generation hardware side, on the infrastructure side for consumer broadband business. And as that system matures sometime this summer and that kind of rate is spending there slows down that’s when we ought to see margin improvements there. The thing that would preclude that from happening is future developments of next gen systems which would you know if we did something like that we’d talk about that at the time.

Okay and the WildBlue order that you highlighted in the press release. Is that -- does that have a higher margin than the first order that you got from those guys?

What we’ve been working on for the last couple of years has been a combination of some initial development work and the initial production orders. And, so we were investing in that phase. Now the incremental orders we get have margin in them. And so what you’re seeing in the quarter now, and it happens every quarter, is a combination of just recurring updates of new terminal orders as well as infrastructure expansion. And, yes, we’re – there’s those type of margin in them. They don’t have the same kind of margin in them, as you know some of our more mature production programs yet.

Okay and what’s the target margin for the commercial business over the next twenty-four months. Is it possible to get that to double-digit?

I think from what we said is we’re targeting operating earnings, margin in those businesses of around 10% and I think collectively our thoughts of our commercial business we think we can get there for that time frame.

Okay, great, thanks a lot.

Your next question will come from Steve Mather with Sanders Morris Harris. Please proceed.

First on floor space, I assume you haven’t entered this decision too lightly to expand pretty dramatically in your California office. Mark can you just parse out a little bit about what’s going to happen with all this new space production versus office R&D, etc?

I mean one of the things is we’re doing -- we are now working on and we’re anticipating continuing getting more funded development programs especially in new areas and that’s is probably driving a lot our expansion in terms of the amount of space that we need. We’re doing more operations stuff and that’s a factor as well. I think kind of the driver is engineering space. And, we think that is a good thing because generally the engineering programs that we do the development programs turn into some form of production, which is really, what kind of drives a lot of our growth and our earnings.

Okay, actually that’s pretty good from my intro to my second question about information assurance applications. Mark, I’m kind of trying to make this chart that has these difference applications on it and some of the components are KG-250, Tactical solutions and of course JTRS and you have NUOS and ultimately TSAT but these applications are pretty dramatically different even know it’s all information assurance. So how would you kind of put a framework to your competitive positioning to really take advantage of these growing demands in each of these areas?

Okay, the whole defense security information assurance business is pretty arcane business but, kind of to boil it down. The way we really got into it -- our strength was in just networking especially taking Type 1 – what’s called Type 1 security into the IP networking domain and that has to do with how you deal with the kind of routing information, the packet headers in a secure world. It’s how you combine that with satellite which has all these latency issues that other terrestrial IP networks don’t have, so we’re really strong in there but in order to get into there we had to develop some really good technology and encryption engines and form factors and programmability and those factors turns out to be very, very competitive in the overall information assurance world, so that opens up markets that are adjacent to the way we got in, which is in the network security and other applications. And those other applications, some of them, are much lower quantities of the program, but the values -- the dollar values have been -- can be much higher and they’re all good businesses and they represent in aggregate a market kind of as big as the market for the -- in line what’s called the INE market, inline network encryption market, which was [8250 in 265] address. Does that help?

Yes, absolutely. Thank you very much.

Hey Mark, we just take a -- we only have time for one more question, so –

Okay.

And gentlemen, your final question will come from Larry Harris with Oppenheimer. You may proceed, please.

Yes, thank you and congratulations on the results of the quarter. With respect to the guidance for the next fiscal year, it’s indicated that R&D will be up and the tax rate will be up, any sort of additional commentary you could provide? Could we see R&D up 15, 25%, you know, some sort of guide and also with respect to the tax rate. What sort of range might we be looking at?

Well, this is Ron, on the R&D side, first of all I think it would depend on some of the mix of some of the development programs that we have coming up with regards to the level of discretionary funding, that (a) we have available, you know, engineers to work on and (b) what that level might be. What we typically try to manage is look at our mix of customer funded development resources, as well as some of our earnings goals and use our R&D as a discretionary R&D as a buffer in that regard. So, the -- some of the contracts that we’re looking at, whether they be MIDS JTRS related, some of the additional work, those are going to be more customer funded and we have some other development ones in the pipeline as well.

So, it really will depend on the mix of customer funded development and then whether or not we can allocate engineers to some of the discretionary funding. That’s the first thing. Because, our really -- our goal is for operating earnings and so we’re going to typically manage in between customer and company funded to achieve our operatings earnings goals.

Now with regards to the tax rate, right now we’re looking in roughly the 30% range is what we typically model, 30 to 33, and depending upon a variety of factors could influence that. If the R&D credit does not get reinstated, that will cause our rate to rise substantially because we do get good benefits from it. So, we’re eager in looking at what’s going to go on in Congress this quarter and perhaps maybe even early into next quarter to be an indicator for our tax rate. It also has to do with some of the other deductions and benefits that we get related to where we manufacture, how we manufacture, how much of that content is ours, etcetera, with some of the other benefits that we get. But right now, we’re modeling in the kind of 30 to 33% range.

Okay, great. Thank you.

Okay. So, that covers our conference call for this quarter and we thank everybody for their attention and we look forward to talking to you next quarter.

Once again, ladies and gentlemen, thank you so much for your participation in today’s conference. This does conclude the presentation and you may now disconnect. Have a great day.