Viasat Inc (VSAT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 ViaSat earnings conference call. My name is Alicia, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to introduce your host for today's call, Mr. Mark Dankberg, Chairman and Chief Executive Officer. Sir, you may proceed.

Okay, thanks. Good afternoon, and welcome to ViaSat's earnings conference call for our second fiscal quarter ending September 29th of 206. I'm Mark Dankberg, Chairman and CEO and I've got with me Rick Baldridge, our President and Chief Operating Office; Ron Wangerin, Vice President and Chief Financial Officer; and Greg Monahan, Vice President and General Counsel. Before we start, Greg will read our Safe Harbor disclosure.

Thanks, Mark. Portions of this presentation contain projections or other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. We wish to caution you that these statements are only predictions and may differ materially from actual events or results. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically the section titled "Factors That May Affect Future Performance," in the company's 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.

Okay; thanks, Greg. We'll be referring to slides that are available over the Web. And I'll start with our fiscal year '07 second quarter financial results, and then a business overview perspective. And then after that, Ron Wangerin will discuss our financial results in more detail. Finally, I'll update our outlook and financial guidance and give a quick summary. And then we'll take questions.

So starting with second quarter revenues, sales for the quarter were $131.5 million, which is a new record for us. And that's up 26% compared to the second quarter of last year. And for the fiscal year to date, we're at $260.2 million, which is up 27% over last year.

This next slide shows our second quarter non-GAAP earnings and EPS compared to last year. Non-GAAP earnings grew from $6.9 million to $8.5 million, which is up 24%; and from $0.24 a share to $0.28 a share, up 17%. Non-GAAP earnings exclude amortization of intangibles due to acquisitions and noncash share-based compensation -- and we'll provide explicit bridge data from non-GAAP to GAAP net earnings a little bit later.

Congress has still not passed the R&D tax credit legislation for 2006 so our tax rate continues to be substantially higher than we anticipated for the year to date. So we're pretty proud of having achieved our earnings plan so far.

This next chart shows Q2 GAAP net earnings and earnings per share. Q2 GAAP earnings grew from $6 million to $6.5 million, up 10%. And net EPS was flat at $0.21 a share.

For the second quarter year to date, non-GAAP earnings are up from $12.9 million to $16.1 million, which is an increase of 25%, and from $0.46 a share to $0.53 a share, an increase of 15%.

And then finally, this next slide shows second quarter year-to-date GAAP net earnings. Those are also up year over year. GAAP net earnings increased from $11.1 million to $11.9 million, which is up 7%, and at $0.39 per year to date, which is flat.

So we're all-- our first quarter results are good and in line with our plans despite the significantly higher-than-anticipated tax rate due to the lack of R&D tax credit legislation. Ron will go into more depth on earnings and financials in a few minutes, but first, I'll give a quick top-level overview of our business situation.

Revenues and orders for the quarter were both at record levels for us. Earnings were really good and right in line with our plans despite the R&D tax credit issue. So our financial performance has been really good, reflected in better-than-anticipated revenue and stronger operating earnings and margins.

Pretax pro forma op margins for the quarter were pretty much right at about 10%. And part of the reason for that is that we did return to overall profitability in our commercial segment in this quarter -- a little bit sooner than we were anticipating. And it does appear that we should be able to sustain and improve on those results in the commercial sector in the next few quarters.

Our balance sheet remains solid; we added a little more to our cash balance. And we're pretty happy with our performance in several different business areas, both commercial and government. We'll go into more detail on that later, but the basic idea is that we feel pretty well positioned for growth and not too overly dependent on any single area.

New orders for the quarter set another record and were pretty well distributed. The largest contributors were commercial broadband and our information assurance area, which included an increase in the value of a contract with Boeing and was called the FAB-T Security Module -- we'll talk about that a little bit later.

Our new-order pipeline also looks good pretty much across the board. We are anticipating a good mix of product orders and a few substantial contracts for projects or enhancements to existing contracts such as for the MIDS JTRS system.

The big-picture view of our markets still seems nicely positive. The MIDS-JTRS program, which is also called MIDS-J, is progressing well and it continues to show really good potential. It continues to be the most productive of the defense JTRS project efforts, which positions the program well in a tight budget margin. We're still working on the development of the basic MIDS-J radio product. And MIDs-J and the related JTRS applications represents one of our two biggest near-term growth opportunities in defense.

The information assurance area also appears to be a very promising market. While we anticipate good year-over-year growth in our in-line network encryptor product sales, we're also seeing many related opportunities for embedded security modules in related technology development and product opportunities. The Defense Department's transition from circuit-oriented connection to an Internet protocol based network-centric environment is still in its early stages. And we think the technology we've developed for our in-line network encryptors and security module embedments is very innovative and valuable in multiple areas.

There has also been continued progress in the defense satellite communications area as mobile broadband and defense applications of our commercial products.

And we continue to be extremely pleased with the rollout of Ka-band broadband services. We think there's compelling evidence that our DOCSIS-based SurfBeam system, combined with high-capacity spot-beam satellites, delivers a level of service that is much, much better than has ever been achieved before with conventional systems.

We're very optimistic about the future of the satellite broadband sector as a whole. We feel we've turned the corner in terms of achieving our manufacturing objectives as well as managing the remaining infrastructure development efforts.

The next major sector milestone is the launch of WildBlue's first dedicated Ka-band satellite, called WildBlue 1, which is scheduled for early December. A successful launch will more than triple their capacity and pave the way for a sustained growth for the next couple of years or so.

Over all, we feel like things have gone at least as well as we had planned here, and this is increasing our confidence to continue to invest in the area and to expand our [address] of the markets.

So now we'll turn to some of the main business highlights of the past quarter. And we'll start with our defense business, which over all continues to perform well, with good growth and strong earnings.

Our pipeline also appears good to us. Our data links area, which includes MIDS, continues to be strong. MIDs productions continues to be very competitive between ourselves and DataLink Solutions, but we're very happy with our competitive position on both domestic and international orders. The MIDS joint tactical radio system development program continues to be a bright spot in the overall JTRS market. And while things tend to change relatively gradually in the defense environment, we're also satisfied with our position there and we remain optimistic about growth prospects in that market.

We also see good opportunities to improve the existing MIDS Link-16 data links for new information applications and potentially to add some new platforms or missions.

We're also looking at growth opportunities in digital video data links for UAV, or unmanned aerial vehicle, applications.

The information assurance market continues to be very attractive for us and we're also seeing good growth there. A number of the projects that we've been working on, including the embedded security modules in Boeing-- and we've advanced beyond line-of-sight terminal projects, or FAB-T program; our MIDS-J program and the common data links program have resulted in very innovative and attractive technology, and we're seeing a lot of opportunities for that technology that transcend just the high-assurance Internet protocol encryption market.

We've also continued to work on product refinements and production cost efficiencies for our existing in-line network encryptor products, the KG-250 and KG-255, and that's also yielding results for us. So along with the data links area, this remains a very promising growth target for us.

Military satellite communications has always been important to us as well, and a nicely profitable business. We've recently had some good success on a number of fronts there, especially in Ku-band mobile broadband. It's a very competitive market, but so far we feel we have the only real operational networks for commercial aviation and small Ku-band maritime terminals. And our equipment is really the only stuff that's flying on DOD aircraft. And that's given us pretty good had start in both technology and operational experience in equipment configurations, which seems to be paying off.

We also have some good opportunities to expand into other DOD mobile satellite areas and to grow our defense broadband modem business. So over all, our defense sat-com activity is picking up noticeably.

On the commercial side, this was an important quarter for us in our commercial satellite businesses. As I mentioned before, we feel we've turned the corner in the consumer broadband market. Over all, that's due to a combination of factors, including our current production run rates, the maturity of our product designs, our manufacturing processes, our continuous supply chain improvements, as well as reaching key infrastructure engineering milestones.

So we're continuing to gain confidence in this business and anticipate sustained growth in sales and earnings here even as we also aim for price reductions to help our customers grow the market and as we continue to invest in system enhancements. WildBlue is planning to launch the WildBlue-1 satellite in early December, and that'll be a key milestone in terms of expanding satellite capacity and the consequent addressable market in the U.S.

We've also been spending a lot of time working on the underlying market environment for satellite broadband in general and its competitive position relative to alternative technologies, especially WiMAX and other broadband wireless solutions. Our contract on the ground-based [theme]-forming systems for Boeing and MSV on their L-band -- it's called MSS, or mobile satellite services satellite, has given us a lot of insight into terrestrial broadband alternatives. I'm sure many of you are aware that the DBS companies have been considering broadband wireless as part of their overall broadband [inaudible]-link strategy, even as they are now currently beginning to market WildBlue's service. After the DBS companies withdrew from the advanced wireless services auctions, there's been more focus on the MSS, ATC, or ancillary terrestrial component, spectrum.

The upshot it that we're very confident that there's an enduring and growing opportunity for Ka-band satellite broadband even in the presence of WiMAX competition, with or without ATC, as long as we can continue to refine and improve our systems value proposition, which is basically just higher connection speed at lower monthly prices delivered with lower capital investments in markets in the lower ranges of homes per square mile.

WildBlue has certainly proved that there's nothing fundamentally less attractive about satellite broadband as compared to other alternatives, and that user satisfaction is really driven by a speed-price-performance ratio. So we're working with WildBlue and others to capitalize on our lead in this segment and push the state of the art in both U.S. and international markets. We'll have more to report later, but for now, we see this as an outstanding growth opportunity for us in consumer broadbands, growing to the point where it may eclipse our more traditional DSAT business. We see the two as very complementary and synergistic and are working to capitalize on the respective competitive advantages we get from each area.

Obviously, one of those advantages is the sheer total volume of two-way satellite terminals we're building each month. We also have some very attractive digital chip and mimic technologies which we are beginning to introduce into our more conventional DSAT product lines.

So even though the DSAT industry remains intensely competitive, we're still aiming to build onto unique advantages we have and are aiming to grow profitably.

We still see opportunities in the Ku-band mobile broadband position, and our recent contract aware with Airinc for business jets is an indication of that. Fundamentally, the business and technology still make sense. We see underlying end-user demand and no really good alternative technologies. We still have the only real operating networks and we're growing those. We know the market is still demanding improvements in unicoms and in smaller terminals, and we're working on that. But we're aiming to go about it methodically and make sure we've got enough staying power to be there when this business really does take off.

We also are involved in using the more conventional mobile satellite services systems for new applications and see good potential there, as well.

Finally, we're very excited about our core technologies in broadband, mimics, digital chips, and other advanced technologies. We've won some interesting smaller contracts there and have also done some pretty impressive demonstrations for both government and commercial applications. We think these technologies are going to help us win some bigger programs in both defense and commercial markets.

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

Thanks, Mark. We'll start from the results from operation, reviewing segments first; then discuss the rest of the P&L; followed by a discussion on the balance sheet; and then, cash flows.

In the government segments, revenues for the second quarter were about $70 million, a new quarterly record and a 42% increase over the same period last year. Year-to-date revenues are also a record at $134.6 million and a 31% increase over prior year to date.

The increase for the quarter and year to date is primarily related to increases in development of next-generation MIDS and information assurance products and from sales of information assurance-related products.

In the commercial segment, revenues for the second quarter were $61.5 million, an increase of 8% over the same period last year. And for the first 6 months of fiscal 2007, sales were up $21.2 million, or 20%. For both the quarter and year to date, we saw increased sales of our satellite networks products, principally in consumer broadband production activity and some help from the acquisition of ECC we completed in our fiscal third quarter of last year, offset by reductions in our antenna business.

For segment operating earnings, the government segment posted second quarter operating earnings of $12.4 million, an increase of about 32% from the prior year. Year to date, operating margins are $24.2 million, or an increase of 23% over last year.

The second quarter and year-to-date percentage increases are not as high as the increase in sales due to higher research and development investments and noncash share-based compensation expense charges.

The commercial segment operating margins declined in the second quarter and year to date year over year due to lower margins in our antenna systems business and higher research and development investments in our next-generation VSAT products. These were partially offset by improved performance in our consumer broadband product area, which were important in achieving the overall slight commercial segment profit we earned this quarter.

Our second quarter and year-to-date operating earnings amount include noncash share-based compensation expense charges of approximately $500,000 and $2.1 million, respectively.

As we look at the rest of the P&L, as Mark mentioned, for the second quarter we experienced very good year-over-year revenue growth, to $131.5 million, which is a new record, and a 26% year-over-year increase. The cost to revenue increase reflects improved margin performance, particularly in our commercial segment.

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 has been robust in both segments.

Research and development expenses were up significantly in the second quarter year over year due to the development of new information assurance, military satellite communication products, and next-generation VSAT equipment. And this was consistent with our expectations.

Quarterly amortization of intangibles is higher for the second quarter year over year due to the acquisition of ECC in the third quarter of last fiscal year and Enerdyne in our first quarter of this fiscal year.

We continue to experience good operational efficiency as pretax income increased by 33% on sales increases of 26%. Our income tax provision for the second quarter reflects a quarterly tax rate of 34.6% versus 21.6% for the same period last year. The federal R&D credit expired and has not yet been approved for extension, and therefore no benefit is reflected in the results for the second quarter of this fiscal year.

We will address the different between GAAP and non-GAAP earnings per share in a few slides. For the fiscal year results, year to date, we're experiencing very good year-over-year growth in several key areas. First, our revenue for the first 6 months is $260 million, which is a 27% year-over-year increase.

Cost of sales increase from the higher revenue levels and fiscal year 2007 amounts include noncash share-based compensation expenses of $1.1 million.

Selling, general, and administrative expenses were higher year over year, mostly due to higher selling costs from higher sales volume in both segments, and increases in business infrastructure to support future growth. In addition, SG&A grew to noncash share-based compensation expense charges of approximately $800,000.

Research and development is up significantly for the first 6 months this year due to the development of the new information assurance, military satellite communication products, and next-generation VSAT equipment. This was in line with our previous communications to increase discretionary investment on a quarter-by-quarter basis based on affordability.

Quarterly amortization of intangibles is higher year over year due to the acquisition of ECC in the third quarter of last year and Enerdyne in our first quarter of this fiscal year.

And, again, we continue to see good operational efficiency as pretax earnings increased by 30% on sales increases of 27%. And this is especially good considering our fiscal 2007 year-to-date results reflect noncash amortization and share-based compensation expense increases of $3.7 million over last year.

Year to date, our income tax provision reflects a tax rate of about 34% versus 21% for the same period last year. The federal R&D credit expired and has not yet been approved for extension, and therefore no benefit is reflected in the results. If the extension of the federal tax credit is approved during our third quarter, there will be a year-to-date adjustment at that time.

For the difference between GAAP and non-GAAP earnings per share, we include this slide to show the difference. Non-GAAP results exclude the effects of acquisition-related intangibles and the effects of noncash share-based compensation expenses resulting from the adoption of FAS 123-R.

The year-to-date results also include a one-time charge we recorded in the first quarter of this fiscal year from the cumulative impact of accounting corrections related to employee option expense and the related tax impact. The total for this one-time adjustment is approximately $1.1 million, and is included in cost of sales, selling, general, and administrative expenses, and research and development expense line items in our P&L.

It should also be noted that, year over year, in the second quarter and year to date, the weighted average shares used for the earnings per share computation increased by about 1.9 million shares.

Our balance sheet continues to be strong. Cash and short-term investments increased by over $10 million from the beginning of the year, and we'll talk about the movement of cash later, when we review cash flows.

Accounts receivable increased at higher revenues as we met program milestones and increased our book and ship orders. Unbilled accounts receivable increased mostly in our mids and information assurance development programs, partially offset by continued program performance in our consumer broadband and antenna systems programs. We expect unbilled receivables to decline over the next few quarters as milestones are achieved.

Inventory declined by more than $4.5 million since the beginning of the year, which was consistent with our expectations. We've been focused on reducing our inventories and made some progress this quarter.

Other current assets increased due to an increase in income taxes receivable.

Goodwill and intangibles increased due to the Enerdyne acquisition and ECC purchase price adjustments we discussed last quarter, offset by regular quarterly amortization.

Net property and equipment is up almost $3 million due to capital additions, mostly for facility expansion and test equipment to support our business growth.

Our capital expenditures were in line with expectations and should be relatively flat in the third quarter before picking up in our fiscal fourth quarter.

The change in other long-term assets was primarily from a reduction in long-term deferred income taxes and from 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 growth of the business and is in line with our revenue levels. Advances were up from the beginning of the year, reflecting the timing of receipts and contract milestones. This amount can fluctuate from quarter to quarter, and the level of advances is a good sign of the quality of the contracts that we have.

The change in other current liabilities primarily relates to increases in warranty reserves from product shipments and to the payable associated with the ECC purchase price adjustment we discussed last quarter, which will be paid in May of 2007.

These were partially offset by a reduction in performance, bonus, and 401-K accruals paid in the first quarter and in accrued income taxes. The increase in other long-term liabilities is primarily related to warranty accruals from product shipments and from deferred rent.

At the end of the quarter, we continue to have no outstanding borrowings, leaving our full line of credit available plus standby letters of credit. As of quarter end, we had about $56 million available under our line of credit.

As we turn to cash flows, we had a good quarter for cash flows, generating over $5 million in cash from operation, bringing us to over $13 million year to date. We've seen some increases in working capital accounts, particularly in receivables, which is consuming some cash. But we expect this to turn around in the second half of the year and generate cash at a greater rate in the second half as compared to the first half.

Cash flows from investing activities for the quarter and year to date reflect capital expenditures, largely for facility expansion projects at our facilities in Carlsbad, California. Our capital increases are also from production test equipment to support our growth. We expect capital expenditures to be flat to lower next quarter, and then pick up in the fiscal fourth quarter of 2007.

Net for the quarter, cash increased a little over $1 million. For the year, though, cash has increased by over $10 million despite us growing the business substantially during this period.

I'd like to turn it back to Mark, who'll talk about our outlook.

Okay; thanks, Ron. I'll talk about our outlook for the rest of fiscal year '07. And after all that good news, it shouldn't be too surprising that we need to revise our outlook for the remainder of the year. Given our year-to-date sales, we believe that our revenues for the year will come in higher than $520 million, which is more than we anticipated at this time last quarter. We've had a very strong first half, and there's still some uncertainty about timing of some orders and deployments for our second half, so we're not sure the second half will be much bigger than the first half, but we don't think it'll be smaller, either.

At this point, it also looks like earnings will be quite a bit stronger in the second half than in the first half so we're raising the higher end of our outlook to be $1.30 per share on a non-GAAP basis compared to $1.25 a share at this point last quarter. We are leaving the lower end at $1.15 and still suggest the middle of the range as the most likely.

As we've mentioned a couple of times, the R&D tax credit still hasn't been renewed for 2006, but at this point, it appears we would reach at least the low end of our outlook even if the credit is not renewed at all. Of course, if the R&D tax credit is renewed for 2006, that will have a significant beneficial impact for us. But as we've mentioned in the past, even with the R&D credit, our tax rate for this year will be at least a couple of points higher than it has in the recent past.

GAAP net income would be in the range of about $0.19 to $0.24 lower than our non-GAAP income to account for amortization of intangibles due to acquisitions and share-based compensation expense.

As we've already discussed, it looks like we've got a promising and sufficient pipeline of new orders to achieve this kind of financial performance for the remainder of this fiscal year and to position us to grow another 15 to maybe 20% annually in succeeding years.

We do intend to make prudent investments this year to help identify and capture this kind of growth in the future. So along with the R&D tax credit legislation, those investments will certainly be a factor in determining whether or not our earnings would exceed the middle of our outlook range this year. And the combination of the outcome on the tax rates and the investments may result in our operating margins for the rest of the year actually being a little lower than they were this quarter, while we still would achieve our overall earnings objectives.

So that covers all the major points that we wanted to make. In summary, we believe we had an excellent second quarter with strong revenues and operating margins essentially, again, making up for the lack of R&D tax credits. We're happy with our position in a number of defense and commercial market areas, which gives us good opportunities to sustain our revenue and earnings growth.

We've been very focused on achieving profitability in our satellite networks business as a whole, and reached that a little sooner than we anticipated. We think this gives us more maneuvering room to make investments and profitably grow the market for Ka-band broadband. We see exciting opportunities there.

We're also proud of our balance sheet in that we continue to build cash while achieving very nice growth. We think it's a good reflection of the quality of our business and earnings.

And we believe we are well positioned to address markets that are going to continue to grow.

So thanks for listening, and at this point, we'd like to open it up for questions.

[Operator Instructions] Our first question comes from the line of Tom Watts with Cowen and Company. Please proceed.

Congratulations, Mark.

Thanks, Tom.

Lots of good news on lots of fronts. You were talking about, on particularly the SurfBeam and WildBlue side -- once WildBlue 1 goes up, do you expect them to take actions? Are they going to accelerate growth there? Are they going to-- since they'll have more capacity, will they step up promotions or subsidies? How do you think that will affect your shipping volume?

I think a lot of WildBlue's growth is really going to be driven by the retailers, and that's-- the three big ones they've announced are AT&T, Dish, and DirecTV. And AT&T is kind of leading the pack; Dish has just recently started promoting it; and we think DirecTV will probably follow behind. And I think what you'll see is increased retail activity on their part. And we would bet that as soon as WildBlue 1's in service, which will probably be -- figure a three months kind of time frame from launch -- that we will see-- we will see a lot. We'll see that reflected in monthly shipments.

Okay. And then, as I understand previously, at least, those three retailers hadn't made any volume commitments to you. But if they did, that would probably come with the result of lower margins. Is there any update on that? And how should we think about the margin impact of them stepping up their activities?

I think there's a couple of opposing forces there. One is we-- what we think is we're likely to see higher run rates in volumes and that we'll get benefits of-- stretching down the learning curve.

The flip side is, we do think it would probably make sense to structure an arrangement that traded higher volumes for lower prices.

So I don't think-- without getting into too much detail, I think what-- we are expecting to be able to grow the revenue and earnings in that area. And it's really a little bit hard to say what the impact on the margins will be in that area. I think-- and we mentioned, from an overall company perspective, that you'll see probably maybe a little decrease in op margins, but mostly because of the tax effects that we talked about before if the R&D tax credit's renewed. And I think you'll see, in general, more margin from our commercial segment in the second half than in the first half. I think that's about-- is that enough depth to go into now? Does that answer that?

Yes. And then, also, on the MIDS front. What's happing on the margin front there? I have some indications that perhaps the Turkey MIDS award might be at a little bit lower margins than we've seen in the past?

I'll tell you, it's at lower prices; I think you can see that.

Okay.

I think that if you look at kind of what's-- as we mentioned, it's been pretty competitive between DLS and us, and I think that the pricing reflects that. But I'd say, over all, we're pretty happy.

I think the overall price on the Turkey thing was pretty consistent with what we did [inaudible]. So it's a little bit-- the award that was announced was a little bit skewed by some other credits that we had with the Navy.

I see. So that's-- How do those credits work?

Well, they were just netted out of the contract that they awarded, so--

I see.

You can't just extract price and the number of units in that contract, straight.

Okay. Then a question for Ron and then I'll [inaudible] to ask. The amortization increased substantially. I didn't quite catch exactly what the causes were for that. And should we look-- for both stock-based comp and amortization, should we look at similar levels going forward?

Regarding the increase, particularly from last quarter, it's from the Enerdyne acquisition. If you recall, the Enerdyne acquisition closed at the very end of the first quarter, so we really had no amortization; I think there was, like, five days or something like that. So normalizing that beginning this quarter is reasonable.

Okay.

And with regards to share-based compensation, we expect that to increase. We had a grant early in the fiscal third quarter that'll begin to flow through, and we haven't modeled all that yet.

Okay, thanks very much.

Thank you.

The next question comes from the line of Steve Mather with Sanders Morris Harris. Please proceed.

Well, thanks. Mark, Rick, and Ron -- another good quarter.

Thanks, Steve.

A couple of things. First of all, Mark, best I can tell, you've hired a lot of engineers in the last year -- 25% or so. But the production hasn't-- production stamp hasn't ramped up as much. I'm wondering whether you could say whether that's-- the work that the engineers are doing is basically preproduction or if really you're shifting to more software encryption type of business?

I think the engineering staff really reflects the amount of ongoing developments that we have. And that's-- examples would be MIDS, JTRS, the FAB-T security module, and other information assurance defense programs. We have a couple of other-- we've announced a few other defense programs -- for instance, software-defined radio work with Harris and a couple of others. So basically, the development programs are what's driving the engineering count.

Our manufacturing tends to be very productive and so-- especially because we outsource a lot of the actual physical assembly. So you'll see-- I mean, this is not unusual for us, in our growth history, to see that type of effect.

Okay, that's great. How about the UAV application? You've mentioned that on a few quarters now. Can you just share a little bit of perspective on how big that could get as you branch out beyond video -- where we are in that whole cycle?

Well, for us, we feel like we have a number of technologies that are pretty applicable to data -- UAV data links. And that includes things like [head] beam encryption, high speed broadband on small platforms. That would be things like what we do on business jets, for instance, or other small platforms. We have antenna RF technology-- modem-- high-speed modem technology.

What we didn't have was really a way to provide that in a packaged system. And Enerdyne-- the Enerdyne acquisition that we did last quarter kind of gives us a way to channel that technology capability as well as Enerdyne had specific digital data link products for what are called kind of Tier 2 UAVs; kind of smaller UAVs.

And over all, we see opportunities to grow in kind of two dimensions. One is -- a lot of video links on these Tier 2 UAVs are done just with analog radios right now. We see kind of an inevitable transition to digital -- partly for security, partly for increased capability. So we feel Enerdyne's well positioned to capitalize on that with things that they've been doing already.

And then, we feel like we can apply some of those technologies that we have to their market and customer base as we kind of move up scale even from just the analog to digital transition.

And do you know how big that can be? I mean, I think right now it's a relatively small business. Do we see that that could be ballpark a $100-million-a-year-type business for us in a few years?

Yes; that would be a great target for us.

And one last one, Mark. If I wanted to look negative, I'd say the government segment orders were flat with this year -- $70 to $68 million. And then, commercial growth was due to the consumer business, which will grow, but might not drive dramatic growth rates.

But yet historically, your technologies have really opened new markets and how do you-- you're very confident in your growth rates over even three to five years. So is it really a matter of the technologies maturing in order to-- or, the markets maturing for your technology?

Well, I think both. Yes. I mean, some of it, I would say, is general market sense. A lot of it, especially over the near term, when we can look out four quarters, for instance, or six quarters, on a rolling basis, has to do with the particular pipeline that we have -- proposals and modifications for existing contracts.

So we can look at things-- there are a number of things that we've talked about -- for example, in the MIDS and MIDS-J are, where we still anticipate pretty substantial contracts. And those areas tend to be pretty lumpy. Examples of some of the things we've talked about would be for MIDS-J-- one area we've talked about in the past has been the airborne networking wave form, also called PTMP. There's probably upgrade work anticipated for that. There's also updates to the MIDS-LVT capabilities, especially around updating for security and other features.

So you take things like that, which tend to be pretty lumpy, and we look at kind of what our forecast is and take all that in together. So I'd say in the near term, like four to six quarters, our optimism, or confidence, on growth is more tied to specifics than the general market trends. I'd say, once you get out in the later years, then we're making more subjective judgements. Does that help [inaudible]?

Your funnel seems to expand as the years go on. So congratulations; thanks.

Thank you.

The next question comes from the line of John Bucher with BMO Capital Markets. Please proceed.

Thank you. It's Jim [Peck] for John Bucher. Mark, you turned profitable on the commercial satellite network side. Can you talk a little bit about where you see the most leverage in terms of your sustained profitability on that front?

Well, the-- probably the single most obvious engine there is just going to be the increased deployments of consumer broadband. And that'll come in the U.S. through WildBlue. And part of that, you'd look at just the increased capacity that they will get with the WildBlue 1 launch.

And one of the ways to consider that is if you've been following WildBlue, they've got-- they've had good growth so far. As a matter of fact, in a number of satellite beams, or market areas, they've actually sold out a couple of times and have had to wait for either infrastructure improvements or more capacity. So when they overlay WildBlue 1, what that'll do is allow them to sell substantially more into those areas where there's already proven demand and they've had to kind of slow out their deployments just based on capacity.

The other thing that's pretty significant is that up until the last few months, WildBlue's really-- their main retailing arm has been NRTC, which has been very effective in certain areas. But actually it doesn't have a very large physical footprint in covering the entire U.S. So if you'll get the additions that they've brought on with AT&T and now Dish Networks, what you're going to see is-- and we're really are just -- we or they are just now beginning to see the effects of that -- is market presence in the areas where they really haven't had that before.

So those two effects -- new capacity and new reach -- we think are going to likely drive higher run rates in WildBlue. And that'll contribute to the economics for them and us.

So for you guys, it's be more on a volume base?

Right. I mean, that's really the main impact for us is we'll just see higher run rates.

Okay. And can you provide any long-term operating margin targets or a time frame for that?

I think what we'd like to do is see WildBlue-- the K-band broadband achieve profitability that's consistent with the company as a whole. And I think that we probably won't have that next quarter, but I think over the next several quarters we have a good opportunity to do that.

The one area where I would temper that will depend on what we see from the retail channel -- potentially, our relationship with WildBlue and/or other retailers in kind of trading volume orders for price reductions over time. And those are areas that we have to look at. And we also have to look at what the market acceptance is. Right now, clearly there's good market acceptance at the current price points but we have to see how that varies over time. And also, we have to look at what the impacts will be of having additional capacity, whether in the U.S. or in other regions.

But over all-- and I would say I think we're going to drive to that steadily-- is we should see earnings from that business that are comparable to our earnings as a whole for the company.

Okay. And lastly, outside of your Airinc partnership, do you guys have any other initiatives to penetrate the airborne mobile broadband communications market for business jets?

I'd say for the business jets general aviation market, we're primarily focused on working with Airinc and SES.

Okay. Thank you very much.

Thank you.

The next question comes from the line of Jim McIlree with Unterberg Towbin. Please proceed.

Thank you. It seemed like the commercial DSAT business was down year over year somewhat substantially. And you said that it's-- you're taking measures to address it. I'm just trying to figure out what, specifically, that might be and how long you think it would take to get this market recovering.

I don't think-- we didn't say anything about the commercial DSAT business being down year over year. I think one thing is the antenna systems business for this quarter of this year is off compared to the same quarter last year. And that business can be a little bit lumpy. And also, we've had-- I'd say we've had some tough program execution issues that have impacted our earnings in that business in this quarter. But over all, we're-- that business has been pretty steady for quite a few years for us at rates that are pretty comparable to our overall profitability. So that's sort of what we expect for that in the future.

Well, maybe I was just backing into it. With the-- since the commercial broadband was up year over year, I was just assuming that-- In order to get to the overall commercial number, that commercial DSAT was down.

I think the one area that was probably down year over year is in the commercial mobile broadband connection business in there.

Oh; right.

Very little connection business in that this quarter. So that, and a little bit the antenna systems. But I think the DSAT's fairly flat.

Okay, great. And is there-- it seems that there might be a chance that mobile broadband comes back in the next couple of quarters? Is that-- if it does, would that just be at relatively small volumes?

I think-- we're working to grow that-- the mobile broadband -- let's clarify -- the Ku-band mobile broadband. We've seen kind of steady advances in the applications other than the commercial aviation, which was the Connection that's-- Obviously, with Boeing stopping that business, that's kind of-- that's a step backwards; a down step, there. But I would say there's definitely prospects that we can grow that business kind of steadily by going after other applications. For instance, maritime. Expanding our reach in business jets, which we're doing by adding other outlets and other platform manufacturers besides Gulfstream.

And I think-- kind of the most interesting area that people are going to ask about and look at is the commercial aviation. And that's still a little too early to tell. I think what should be evident is that the airlines that were running the Connection service liked it a lot and their passengers did. And so there's definitely kind of end-user demand. And so I think we're working with others to figure out if there's a way to get back-- to get those services back in service. And we just don't know yet. Does that answer your--?

Yeah, that does. And just one follow-on to your last statement. Would you consider making an investment in a service provider in order to help get that business going -- the commercial aviation?

That's a very-- that's a broad question and it's sort of speculative. What I'd tell you is-- and we've said this kind of before, is-- we think there is going to be a commercial aviation business. I think that what you sort of have to be able to do is figure out how to derive enough revenues from the-- the capital investment that you've got to make, which is basically putting the equipment on the airplane and the operating expenses.

And to do that, what that's probably going to mean is that-- I'm just going to compare this to Connection. Connection's main source and main lightning only -- we don't have complete visibility in that. But their main source of revenue was broadband access fees. So the subscriber would pay so much per hour or for the flight and get access fees. And there are a number of other ways that you can derive revenue, including making the service available to other devices. People [inaudible] for instance cell phones, you can do that with voice, you can do it with messaging services, you can do it with e-mail services on BlackBerrys. You could do entertainment components; there are a number of different dimensions.

And from our perspective, if we can find a situation where we believe that there's a services entity that can make all that happen in a way that makes financial sense, then we may participate in that. But all that-- there's a lot to be done to get to that point.

Okay; very good. Thank you.

[Operator Instructions]

Okay. If that's all the questions, then I think we'll call it quits and thank everybody for your attendance and we'll look forward to talking to you next quarter.

Ladies and gentlemen, thank you for joining today's conference. This concludes your presentation. You may now disconnect; good day.