Viasat Inc (VSAT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 ViaSat earnings conference call. My name is Danielle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Mark Dankberg, CEO. Please proceed, sir.

Thank you. Good afternoon, everyone, and welcome to ViaSat's earnings conference call for our third quarter ending December 29th of 2006. I'm Mark Dankberg, Chairman and CEO. And I have got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, Vice President and Chief Financial Officer; and Kevin [Lepperd], our Associate General Counsel. Before we start, Kevin will read our Safe Harbor disclosure.

Thanks, Mark. This presentation contains projections or other forward-looking statements regarding future events or the future financial performance of ViaSat. These statements are only predictions and may differ materially from actual events or results. Please see ViaSat's filings with the SEC, including our most recent filings on Forms 10-K and 10-Q, for a discussion of the most important risk factors that could cause actual events or results to differ materially from those contained in our projections or other forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements.

Okay. Thanks, Kevin. I will be referring to slides that are available over the Web. And we'll start with our fiscal year '07 third quarter financial results and business overview perspective. And after, that Ron will discuss our financial results in more detail. And then 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 $124.3 million, and that's up 11% compared to the third quarter of last year. For the fiscal year-to-date $384.5 million, which is up 22%. This next slide shows third quarter non-GAAP earnings compared to last year. Non-GAAP earnings grew from $7.6 million up to $12.2 million, a 60% increase, and from $0.26 a share to a record $0.40 a share, up 54%. Non-GAAP earnings exclude amortization of intangibles due to acquisition and noncash share-based composition, and we'll provide explicit bridge data from non-GAAP to GAAP net earnings a little bit later. Congress reinstated the long anticipated R&D tax credit in December retroactive for all of calendar 2006. So now we can adjust our expected tax rate for fiscal year '07 back to where we planned at the start of the year. And that added about $0.10 per share to our non-GAAP earnings in this quarter.

This next chart shows our Q3 GAAP net earnings and EPS. Q3 GAAP earnings grew from $6.6 million to $9.7 million, up 46%, and net earnings per share grew by 35% from $0.23 to $0.31 a share, also reflecting the benefit from adjusting our tax rate. In Q3, our year-to-date non-GAAP earnings are from up $20.6 million to $28.3 million, an increase of 38%, and from $0.72 to $0.93 a share, an increase of 29%. The tax rate adjustment added about $3.2 million to that. So based on our tax rate being back as planned, we are now ahead of where we thought we'd be at that point in the year.

Finally, this next slide shows our Q3 year-to-date GAAP net earnings. Those are also up year-over-year. GAAP net earnings increased from $17.8 million to $21.6 million, up 22%. And from $0.62 to $0.71 for the year, which is a 15% increase, and also a little ahead of our plan. Remember, this is the first year we have included FAS 123R compensation expense in our GAAP net income. So overall, our third quarter earnings are extremely strong. With the reinstatement of the R&D tax credit, you can see that we had been overachieving for the last several quarters by meeting our EPS targets, even with a much higher than planned tax rate. So now we are ahead of our plan year-to-date on revenues and earnings. Ron will go into more depth on earnings and financials in a few minutes.

Next I'll give a quick top level overview of our business situation. So our third quarter was really strong in several ways. Earnings were excellent, and set a new record for us. Cash flow was outstanding. We generated almost $29 million in cash flow from operations and ended the quarter at about $77 million in cash on the balance sheet, $29 million more than we had in September. Margins were very good, slightly exceeding our 10% target that we had been working towards. The commercial segment as a whole improved again and generated more earnings than the prior quarter. We remain pretty happy with our growth and competitive position in both defense and commercial markets. At least for calendar 2007, which includes the balance of our fiscal year '07 and the first three quarters of our fiscal year '08, our tax rate will be more predictable with the passage of the R&D tax credit.

Revenues and new orders were okay. We'll go into more depth on this later in the call. But basically that reflects a business mix with a greater proportion of short lead time product sales where we can get the orders and ship the products in the same quarter. Generally the margins on those are good, but the order and revenue flow on a quarter to quarter basis isn't quite as predictable as [back on] driven businesses, even with a good understanding of the underlying long term market demand drivers.

As I mentioned, orders for the the third quarter were okay at $124 million, which is about the same as our sales. It continues to appear to us that we'll likely see our orders and revenues a little more closely matched than we have in the past. We have talked about this several times already, but it is worth emphasizing again.

Several of our products, including consumer broadband, VSAT systems, and the inline network encryptors, which in aggregate account for in the range of close to 40% of our annual sales, all carry relatively small amounts of backlog. That contrasts with our MIDS LVT products, for instance, which is also our product sale, but carries longer lead times, and therefore, a greater backlog. So we don't really anticipate that our backlog is going to grow all that much, even as we continue to plan for 15% to 20% or so annual year-over-year revenue growth. We continue to see good demand from the [inaudible] and a good pipeline of new orders. Overall our new business awards and growth drivers continue along the lines of Data Links, government information assurance, and fixed and mobile satellite broadband for both commercial and government customers.

The big picture view of our market still seems appealing. MIDS and Link-16 are still very important for both U.S. Forces and our international allies. If anything, the need for such advanced data links and networks is becoming more evident. We feel we are still well positioned there. The JTRS environment is still evolving, but we believe it will be a large and important domestic and international defense market, and that our competitive posture there is pretty good, especially considering the size of that market and the competition. The MIDS JTRS program still appears to have a significant schedule advantage compared to other JTRS programs, especially in the area of information security for Internet protocol and network centric communications.

While there is still a lot of JTRS focus on what are called legacy waveforms, ultimately we believe the more significant value proposition for JTRS is in the newer, forward looking networking modes, where information assurance has a very prominent role. MIDS J has a lead position for existing Link-16 networks and it is also anticipated to be the lead platform for the new airborne networking waveforms. The information assurance module in MIDS J, which we are designing and building, may be the single most portable resource in the JTRS environment. And we continue to see opportunities to leverage this capability, including participation in radio systems for other manufacturers, too.

The government Type-1 security market for Internet protocol networks is still in the early stages. And we believe we are still well positioned and growing the range of markets, systems and products we can address. And the overall market for secure, broadband and mobile IP networks in defense still seems to be emerging and growing. We believe our ability to cross over commercial satellite products and technology into the defense market has been valuable and that we have good growth opportunities here, as well. We have been pursuing some very interesting U.S. defense satellite opportunities, which may be awarded in the first half of this calendar year.

On the commercial side, we are still very happy with the development of the Ka-band consumer broadband market. Now that the WildBlue1 satellite has been launched, they have about tripled their capacity over the U.S. So there is a lot of room for growth. The new satellite will allow WildBlue to resume marketing in areas that have a lot of demand, but have been closed to new subscribers because they had saturated their capacity on the [inaudible] satellite. There are also infrastructure and network improvements that can add to the available capacity, as well. We have a lot of confidence in our terminal manufacturing process and have shown that we can do that profitably. There may be some short term uncertainty in WildBlue shipments as they adjust to the new capacity and their distribution pipeline accordingly. Also, the success that we have had with WildBlue has created opportunities for us in other markets, as well. We are working to leverage some of our Ka-band capabilities in the more conventional VSAT market, and see opportunities for growth there.

So at this point we'll turn to some of the main business highlights for our past quarter. Our defense business continues to perform well. MIDS and the new JTRS version, or MIDS J, remains our single largest area. Production of MIDS low volume terminals, or LVTs, remains strong and profitable. We mostly compete with Data Link Solutions, a joint venture between BAE and Rockwell Collins. MIDS LVT pricing has been declining, but we are satisfied with our competitive position and performance. And each year, our revenues are a blend of current and prior year orders and pricing. We've captured several large international orders, and believe we lead the F-16 market. We anticipate that for international customers, MIDS LVT will remain the primary product for quite a few more years. MIDS units have been deployed several years now, and we anticipate maintenance and service revenues will grow to reflect that. We are positioning to better serve that demand, and are targeting meaningful growth there.

In the U.S. we anticipate MIDS J will start to replace LVT production within the next couple years or so, which also is a growth opportunity. Finally, we are working towards integrating new modes into MIDS J that will increase the range of platforms we can serve. We think the MIDS J development schedule, lead, and its current advantages in IP network-centric capabilities make it attractive for some of these new applications. But there is still a lot of maneuvering among the various JTRS products and user platforms before we will know how that will play out.

Our information assurance business continues to see an opportunity-rich environment. Most of that still revolves around high speed Internet protocol-based security products. As I mentioned before, we believe the U.S. and its defense allies are still in the early stages of adopting IP networks to replace dedicated circuits, and there is a fairly steep customer learning curve there. It is a relatively dynamic market environment that we think is good for us, actually. We are working approval for some exciting new information assurance products and hope to market those soon. We are seeing robust proposal activity, including with new customers.

We are also seeing growth in our government satellite business. Our new DOD high speed E-Band modem is entering production, and we're seeing more opportunities to migrate commercial technologies to defense markets. That includes our Arclight Ku-band com-on-the-move systems, and new generations of our LinkWay mesh VSAT products that have been an important part of the DOD JNN program, or Joint Network Node. We are also pursuing very small mobile terminals using commercial satellite capacity.

Last quarter our commercial segment returned to profitability. And this quarter we improved further. Overall, we are optimistic about the prospects to continue to profitably grow our commercial business. I've already mentioned that one key event last quarter, with the successful launch of the WildBlue1 satellite. That triples WildBlue's capacity, increasing the number of subscribers they can serve to around three-quarters of a million. Now that's not an enormous number in the overall scheme of things, but combined with their DBS and telco distribution deals, it does clear the way for WildBlue to ramp up subscribers for the next couple years or so. As many of you know, we have been pretty bullish that low cost Ka-band satellite capacity, combined with our advanced ground networking system, would fundamentally change the satellite broadband business, compared to prior attempts to attack this market with conventional Ku-band satellites.

We think the market results are consistent with our view. So overall, our confidence in the business is growing. And we also have more evidence that we can profitably build and sell consumer terminals with the performance and price points needed for broader market acceptance. We believe the market for satellite broadband in the U.S. is far, far greater than the capacity that WildBlue now has in space. Without going into great depth here, we believe that will be true, even in the presence of more terrestrial broadband wireless buildout, such as for WiMAX. But some significant technology improvements are needed, both on the ground and in space to realize that potential. So while in the near-term there are a number of factors that have lined up well to create growth opportunities for us, we're still very much oriented towards long term success in this market. We believe the longer term offers very significant potential beyond just consumer broadband access, to include areas such as enterprise and government applications.

So the upshot is, we are constantly trying to balance our short and long term interests. This is one of the areas we have been considering when we talk about increasing discretionary investments in our fourth quarter of this year and on into fiscal year '08. We are also considering product pricing and market development strategies that are consistent with that balance. We don't really have anything more definitive to say on this point right now, but we just want investors to appreciate some of the dynamics involved in the business, and what our overall strategic objectives are.

Our conventional VSAT business had a good third quarter that contributed significantly to our overall commercial segment earnings. We are working on using our commercial broadband volumes to better advantage in the VSAT business, and believe that offers potential to continue to improve results there. Also we are exploring some specific market segments where we can achieve truly differentiated competitive positions that will also improve earnings. We believe we are making very good progress in defense and government applications, and have a couple of other potential areas we are exploring, too.

The commercial mobile satellite services, or MSS sector, continues to be very interesting to us. Our main business there is still the ground based beam forming program with Boeing and MSV, though we have interesting opportunities in related networking sectors. It is still too early to tell how those will develop. The Ku-band mobile business is still progressing. We anticipate some expansion into other ground and maritime markets, as well as expansion in the general aviation market. And we're still working with others to try to restart the commercial aviation sector. But it is too soon to tell there, as well.

Our antenna systems business had a solid quarter for new orders, but is still operating at roughly breakeven. We think that's going to show improvement in subsequent quarters. We remain pleased with the performance of our US Monolithics and ECC subsidiaries in terms of new MMIC and module capabilities, and opportunities for high speed modems and modem chips. So that gives you an overview.

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

Thanks, Mark. We'll start with results from operations 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 segment, revenues for the third quarter were about $67.3 million, a 27% increase over the same period last year. Year-to-date revenues are $201.9 million, a 29% 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 existing information and assurance products. In the commercial segment, revenues for the third quarter were $57 million, a 5% decrease over the same period last year. The year-over-year third quarter reduction is primarily related to reductions in our antenna systems area. For the first nine months of fiscal 2007, sales were up $18 million or 11%, to $182.6 million. The increase year-over-year is from 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 last year, offset by reductions in our antenna business.

For segment operating earnings, I want to point out first that our third quarter operating earnings amount included noncash share-based compensation expense charges of approximately $1.6 million, and for the nine month period ended, they were $3.6 million. Comparing that to 2006 results, there were no share-based compensation charges. In the third quarter, the government segment posted operating earnings of $8.6 million, a decrease of about 29% from the prior year. The year-over-year operating earning decrease is due to lower revenues of legacy UHF SATCOM products, which carry higher margins, higher R&D expenses, higher selling and support costs due to revenue growth, and from noncash stock-based compensation charges. Year-to-date, operating margins are $32.8 million, or a 4% increase over last year. The year-to-date percentage increase are not as high as the increase in sales, primarily due to higher R&D investments, higher selling and support costs due to the revenue growth, and noncash share-based compensation expense charges.

For the commercial segment, operating margins increased substantially in the third quarter and year-to-date year-over-year, due to the improved performance in our satellite networks area, which is consistent with our previous communications. These are partially offset by lower margins in our antenna systems business, higher R&D investments in our next generation VSAT products, and noncash compensation expense charges. As we look at the rest of the P&L, as Mark mentioned, for the third quarter we experienced year-over-year revenue growth to $124.3 million which is an 11% increase year-over-year. The costs of revenue increases reflect improved margin performance, particularly in our commercial segment. SG&A expenses were higher year-over-year, mostly due to higher selling and support costs from the higher sales volume, and due to increased proposal activity, which is robust in both segments.

R&D was up significantly in the third quarter year-over-year, due to the development of next generation information assurance technology and VSAT equipment. This was in line with our previous communications to increase discretionary investments on a quarter by quarter basis, based on affordability. Quarterly amortization of intangibles is higher for the third quarter year-over-year, due to the acquisition of Efficient Channel Coding late in the third quarter of fiscal year 2006, and Interdyne in our first quarter of this fiscal year. Income from operations for fiscal year 2007 third quarter includes noncash share-based compensation expense of $1.6 million and no expense for fiscal year 2006 third quarter. Our income tax provision for the third quarter reflects a benefit related to the passage of the R&D Tax Credit legislation and the retroactive impact to the quarter. In the fiscal third quarter of this year, we recognized the cumulative catch-up benefit of $1.3 million related to fiscal year 2006's fourth quarter, and a $2 million benefit related to the first two quarters this fiscal year. And we'll address the difference between GAAP and non-GAAP EPS 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 nine months is $385 million, which is a 22% year-over-year increase. Cost of sales increased from the higher revenue levels, and fiscal year 2007 amounts include noncash share-based compensation expenses of $1.6 million, and there was no shared-based compensation expense in fiscal year 2006 amounts. Selling, general and administrative expenses were higher year-over-year, mostly due to higher selling costs from the higher sales volume in both segments, and increases in business infrastructure to support future growth. In addition, SG&A expenses grew due to year-to-date noncash share-based compensation expense charges of approximately $1.9 million. There were no share-based compensation expenses in fiscal year 2006 amounts.

R&D is up 46% for the first nine months this year, due to the development of new information assurance, military satellite communication products, and next generation VSAT equipment. And this was consistent with our plans. Quarterly amortization of intangibles is higher year-over-year due to the acquisition of ECC late in the third quarter of fiscal year '06, and Interdyne Technologies in our first quarter of this fiscal year. Other income is higher due to higher interest income earned from our higher invested cash balance. We continue to experience good operational efficiency, with pre-tax earnings increasing by 21% on sales increases of 22%. This is especially good considering our fiscal 2007 year-to-date results reflect a $5 million increase in R&D and noncash amortization and share-based compensation expense increases of about $6 million over the last year.

Year-to-date, our income tax provision reflects an effective tax rate of about 19% versus about 19.7% for the same period last year. The current year rate reflects a benefit of approximately $1.3 million related to the federal R&D credit from our fiscal year 2006 fourth quarter recorded in the current period due to the retroactive extension of the credit. For fiscal 2007, we expect an annual effective rate of approximately 26%.

For the difference between GAAP and non-GAAP earnings per share, we include this slide to show the difference more clearly. Non-GAAP results exclude the effect of acquisition-related intangibles and the effects of noncash share-based compensation expenses resulting from the adoption of FAS 123R. The year-to-date amounts also include a onetime charge we recorded in the first quarter of this fiscal year from the cumulative impact of accounting corrections related to an employee stock option expense and related tax impact. The total for this onetime adjustment is approximately $1.1 million, and is included in cost of sales, selling, general and administrative, and research and development expense line items in our P&L. It should be noted that year-over-year in the third quarter and year-to-date, the weighted average share used for computing earnings per share increased by over 1.6 million shares.

Our balance sheet continues to be strong. Cash and short term investments increased by $40 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 due to higher revenues as we met program milestones and increased our book and ship orders. Unbilled accounts receivable increased mostly in our Tactical Data Links and information assurance development programs, partially offset by continued program performance in our consumer broadband, VSAT networks, and antenna systems programs. We expect unbilled receivables to decline over the next few quarters as milestones are achieved. Inventory is up about $1 million since the beginning of the year. This is higher than we would like it, but is primarily related to the timing of shipments in our consumer broadband products area. This had a corresponding impact on revenues, as well. Other current assets increased due to an increase in income tax receivable of $3 million and prepaid supplier payments.

Goodwill and intangibles increased due to the Interdyne acquisition and the ECC purchase price adjustment from their earnout we discussed in the first quarter, offset by regular quarterly amortization. Net property and equipment is up over $2 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 picking up in our fiscal fourth quarter. The change in other long term assets was basically flat, reflecting an increase in long term deferred income taxes and offset by a reduction from the quarterly amortization of capitalized software.

As we look at the liabilities and equity side of the balance sheet, accounts payable decreased reflecting improved days payable balances with our vendors. Advances were up substantially from the beginning of the year reflecting improved terms of certain new awards and the timing of receipts and contract milestones. This amount can fluctuate from quarter to quarter. The level of advances is a good sign of the quality of contracts that we have. The change in other current liabilities primarily relates to the payable associated with the ECC purchase price adjustment we announced in the first quarter, which will be paid in May of this year, and from one week's payroll accrual due to the timing of payroll in relation to quarter end. These were partially offset by a reduction in accrued income taxes. The increase in other long term liabilities primarily related to warranty accruals from products 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, less standby letters of credit. As of quarter end, we had about $56 million available under our line. As we look at cash flows, we had a record quarter for cash flows, generating almost $29 million in cash from operations, bringing us to over $42 million year-to-date. In addition to the strong earnings and noncash addbacks, we made substantial progress this past quarter in working capital accounts, primarily through program performance and [inaudible] milestone deliveries. Cash flows from investing activities for the quarter and year-to-date reflects capital expenditures largely for business expansion, as our Company continues to grow, including facility projects in Carlsbad, California, and for production test equipment to support our growth. We expect capital expenditures to pick up in the fiscal fourth quarter of 2007.

Cash provided by financing activities is primarily from the net proceeds of common stock issuance, primarily driven by our increasing stock price and people exercising options. Net for the quarter, cash increased by a little over $29 million, and for the year, cash has increased by almost $40 million, despite us growing the business substantially during this period. I would like to turn it back to Mark, who will talk about our outlook.

Okay. Thanks, Ron. At this point, I'd like to talk about our outlook for the rest of our fiscal '07, and our preliminary view of fiscal year '08. This slide on our updated fiscal year '07 outlook is a good place to tie together a number of the points that we've made in the call. For the previous few quarters, we have been working really hard to achieve our earnings objectives and overcome an estimated tax rate that was at least 10 points higher than planned, because the R&D tax credit for 2006 hadn't been enacted. So that meant we applied more resources to customer funded activities and somewhat less to discretionary R&D and related spending. Now with our tax rate back where we anticipated, the upshot is that we are likely to overachieve relative to our plan by a few percentage points on revenue and earnings. Our updated revenue outlook for the year as a whole is about $520 million, say plus or minus a few million, as compared to our beginning outlook of $475 million to $500 million. As I mentioned before, one of the factors that can swing a few million either way is the startup and distribution pipeline for the new WildBlue1 satellite.

Our non-GAAP EPS target for the year is in the range of about $1.25 to $1.28 as compared to our original plan of about $1.15 to $1.25. Remember that our original plan did have the R&D credit in it. So that means that if you just look at the mid points of the original versus the current outlook, that we will have added about $0.06 or $0.07 a share to our non-GAAP earnings for the year. The way the R&D tax credit legislation played out really skewed the quarterly distribution of those earnings, but the overall result for us is higher earnings than originally planned for the year.

Our GAAP net earnings will be lower than non-GAAP by about $0.29 taking into account the amortization of intangibles associated with acquisitions and the impact of FAS 123R equity compensation expenses. Overall for the year, we expect record new orders that will be somewhat, but not usually, greater than revenues. Our total fiscal year '07 outlook now gives us a little more flexibility to invest further in discretionary R&D that we believe will help sustain our growth in fiscal year '08 and beyond.

So this next slide shows our preliminary outlook for fiscal '08 and shouldn't really contain any big surprises relative to what we have been saying in the past. We are aiming to grow at around 15% to 20% a year if we can, and our fiscal year '08 targets are consistent with that. We are planning on growing a little more than 15% in revenues and non-GAAP EPS relative to our current fiscal year '07 year end outlook. It would be more like 20% year-over-year growth relative to our going in fiscal year '07 plan. We are targeting revenue in the neighborhood of $600 million, plus or minus, and non-GAAP EPS in the range of about $1.45 to $1.55 a share. We don't expect to grow backlog substantially during the year, but are aiming at new orders in line with our sales. We think that most of the growth drivers are the markets that we have been talking about already, MIDS, JTRS, information assurance, and commercial and government satellite broadband and mobility. And this outlook reflects organic growth and doesn't really factor in any strategic events or new acquisitions.

So that covers all the main points that we wanted to make. In summary, we have had a stronger than planned fiscal year '07, which is leading us to anticipate revenues and earnings that are higher than we originally expected for the year. We had exceptionally strong cash flow, reporting over $76 million in cash at the quarter end. We still anticipate continued positive cash flow, though not quite at the same rate as we had this quarter. We are very pleased with the strength of our balance street. We're still pleased with the markets we are addressing, and our competitive positions in those markets. We think we are positioned for continued growth in our fiscal '08 and beyond, building on those strengths in the MIDS and MIDS J Tactical Data Links area, information assurance, as well as both satellite broadband and satellite mobility. So thanks for listening. And at this point, we'll open it up for questions.

[OPERATOR INSTRUCTIONS] John Bucher, BMO Capital Markets.

Question for you on the MIDS family of programs. You've mentioned that that's still the biggest area for your Company. And it just appears like the scope of that collection of programs continues to expand. I was just wondering, can you say whether that appears to be expanding at a rate faster than your overall prospects? And can you give us some idea with some of the additions and changes, and also some of the needs that you sort of alluded to here in the call about other data linking capabilities that are needed in other platforms? What sort of horizon do you see in any way, if you care to describe it, in terms of scope, in terms of procurement potential dollars or platforms or just any way at all you can sort of provide an update for that as to how -- what sort of horizon you might see this being a driver growth for the Company?

Okay. Thanks. I think overall, we are definitely bullish about MIDS and MIDS J and the Data Links business in general. Things kind of move slowly and steadily in the DOD environment. And I think the way it is mostly going to play out is kind of in two stages. One is additional funded development, or program wins that will give us more development funding and growth in the engineering part. And I would say we are still expecting that over the next two, three years and beyond. And probably the main -- the two main venues for that, we have talked about before, are one is additional scope to MIDS J. And we've talked about things like airborne networking waveform. There is also a couple other things that are in the works, and we talked about maybe applications to what's called [inaudible] to the next generation [inaudible] satellite, or some ground waveforms. Those are all -- those are the kinds of things that we could see being added to the scope of the program. And there is also anticipated to be an update to the LVT or a modernization program. And those are kind of discrete events and we think they'll add to our development.

I think in terms of wider market and production, I think we'll see that phased in following these other things. And that's probably going to put them more in our fiscal year 2010 kind of time frame, or beyond. We're also looking at the Data Links market for UAV. That was kind of the basis of our Interdyne acquisition, and we are also looking at tactical weapons Data Links. And those are all areas that can grow. It's just -- and I'll say -- our sense is that those things are all moving in the right direction. We don't feel like we have had any set backs. It is just a question of how it plays out over this time frame. Does that help?

Yes, that helps. It sounds like the procurement with additional funded R&D development taking place over the next three years or so, you see the procurement pipeline lasting out for quite some time?

Yes. Yes. Definitely. And also, I think when you -- I don't want to go into too much detail. But if you look at the way the whole JTRS program was restructured, basically a lot of production funding is, I'd say, less structured than it was prior to the development function -- the development portion being restructured. And I would say that adds, let's say, some -- I'd say, uncertainty to how the money will be allocated. But it does that in a way which I think favors our approach to the market. I think it makes it more competitive and makes it a little more dynamic. And I actually think we're going to do well there. And that's one of the reasons that we are optimistic.

And just one more question. You mentioned that LVT pricing has come down, but your performance has stayed strong still. Do you see the financial model -- your financial model in production MIDS that you think that existing margins today can be maintained going forward?

I don't want to go into too much detail on that. But I would say we have factored -- I think we've done a pretty good job of anticipating the trends there. And we have sort of factored that into our thinking. But I'd say you just have to -- you can look through the awards, you can sort of see the decline in pricing. And I think that's just one of the things that we are anticipating and dealing with.

Thank you.

Steve Mather, Sanders Morris Harris.

Mark, just two things. First, you have done a lot of work in calendar year '06 on facilities expansion. Could you mention where you are as we enter '07.

This is Ron. I'll answer it. We've been -- in calendar '06, we had a lot of facility projects throughout everywhere where we are located. And we had expansion in Massachusetts in the Boston area, in Maryland, our Germantown facility, our Atlanta facility, and a new building here in Carlsbad. In calendar '07, we have another new building in Carlsbad, as well as a facility expansion in the Phoenix area, out at USM. And those are the principal ones that we have going on. We completed a lot of them last year, but we still have a couple more ongoing.

Okay. That's great. And one other thing, Mark, there is a lot of spending in the bridge budget from last October, in terms of SATCOM, or com in general, wireless, et cetera. And then soon to be the supplemental budget here in February. With those, I would have expected, with that near-term demand, a little bit more of a spike in revenue for you. Could you just give a little more perspective on that?

Okay. I would say that there are some companies that have definitely been affected just by the number of forces that are deployed in Iraq and Afghanistan. And forces get deployed and people either have expendables or consumables, and they get more orders as a result of that. And I would say that's actually been a pretty small factor for us over the last two or three years. More of our stuff is kind of based on, I'd say, more enduring or longer term plans for platform upgrades or for organizational expansion, or assigned resources. Yes, operational, tactical, organizational strategies. So I don't really see us being influenced significantly in any way by the supplemental. We can get some stuff around the margins, but it is not really like it has been with a couple -- some of the other defense companies, for us. And I think that's good and bad. I think the good thing is, that as you sort of see some of that stuff winding down, I don't think it is going to impact us, the way it might others that have been more dependent on that in the past.

Good point. Thanks.

James McIlree, Unterberg, Towbin.

I think you said that the VSAT business was a little bit better this quarter. What was the source of that?

I think the VSAT business was a little bit sensitive to mix, kind of the particulars of procurements that we see in the market. And I don't know if you would say, we were either had been a little bit unlucky in the few previous quarters, or we were a little more fortunate in the current quarter. But the mix was a lot more favorable for us, and that improved our margins. And I would say on the other hand, we are also a lot more focused on improving that area. And we have taken some actions that I think are reducing our costs, streamlining our operations, and I'd say also, we are a little more focused on those markets where we have some specific advantages. Especially for instance DOD markets and we're working on a couple others that I think we can get similar situations on. That's kind of it. Did that help?

Yes, that's helpful. Will there be any secondary or tertiary impacts to your business from the Sea Launch failure?

I think it is not a good thing from us -- from our perspective in the overall scheme of things, because we believe that there needs to be innovation in space, and that's going to require launching new satellites. And I think everybody -- it is just going to put a little crimp in that. It will be a little while before that platform is available for use again. And that's going to put a little more stress on other resources.

There weren't any direct -- we weren't relying on that satellite for direct business. [multiple speakers] collateral, in fact.

I would just say that's kind of in the space in general.

Great, and last one. I'm trying to understand the MIDS time line. It seems like you are running out on the U.S. production, but maybe the international picks up. Is there some sort of gap that we are looking at until maybe MIDS J re-ups or international picks up?

No, I wouldn't say that. I think it is less that we are running out of the U.S. production. What I would say is, one is that U.S. has led international, in terms of, let's say, build out of the F-16, F-18 related fleets. So that leaves more running room in international. And the international tends to stretch out a little more. I think that what you are going to see in the U.S. market is that, when MIDS J is available, the people who would have been buying MIDS LVTs, will start to look at buying MIDS Js. And I think that you'll see two effects. One is sort of the balance of the U.S. deployment skewing more, but not completely, towards MIDS Js. And then you'll also see, at some point, kind of a recapitalization that goes to the MIDS J version, even on platforms that currently that have LVTs. I think we won't see that on the international side, partly because international customers have tended to place orders that are longer term, and so we'll still be taking deliveries on orders that were placed in the past. And also the JTRS version won't be available for international use for a while after it gets deployed initially.

You're also going to see an increase over the next few years in revenue associated with just the depo and support work for those systems that have been filled in, that you really haven't seen much of today.

And how much can that be as a percent of, let's say the initial sale?

In most programs, the post delivery support depo repair field support represents a larger overall dollar amount than the initial procurement dollars.

Great. Thank you very much.

Tom Watts, Cowen and Company.

You mentioned that the consumer revenues were down year-over-year due to consumer -- delays in consumer broadband shipments. I may have missed it, but could you just give us a little bit more detail on that?

I think overall, we think WildBlue is deploying and growing pretty steadily. I'd say one of the issues is just --

If I can? Actually Tom, what we said was, for the quarter, the year-over-year revenue decline was principally related to the antenna systems business.

Okay.

It was about $4 million year-over-year. So, a $4 million decline, I think $3 million of which was related to antenna.

The consumer stuff it's not like it is going down to uncertainty, I was talking about. This really has to do with how much do they have in their pipeline now. How much did they put in there anticipating a certain launch for WildBlue1 and launch through their distribution partners, and are there any transients associated with that? We actually don't have that much visibility into that. And so we are just trying to be a little cautious. That's the only issue there. We think their run rate is pretty steadily improving.

And also, in your press release, you certainly highlighted MUOS and WWSS programs. What -- you mentioned WWSS was a $5 billion program. What sort of role you could you have that in long term, and what's the revenue opportunity associated with that?

That's a very broad, expansive program to -- basically it is kind of a purchasing contract vehicle for commercial satellite services and equipment. What I'd say is our main opportunity in the near-term is, we think, is that it -- that commercial is becoming more and more important in overall military satellite communications, operations, that expectations and demands on the systems are higher. And so what we are seeing in the near-term is an opportunity to refresh a lot of the equipment we have deployed already. Just because people are -- would like more of it. They'd like it to do more than it does. And that's generally higher speeds, higher capacity. And that's kind of what our newer versions of our VSATs do. So I'd say that's kind of the biggest. And one of the things you can kind of look back at is what we have announced in the past, in things like -- a good example would be LinkWay sales that have gone into the JNN program. And we see opportunities to refresh that.

Okay. And then you also had a Taiwan MIDS win recently? I think it was only $12 million, if I recall. What sort of long term potential is there?

The -- Taiwan's got one of the largest F-16 fleets in the world. That's a theme for us. We were successful in the Netherlands and Turkey. And I'd say we are probably on the range of a quarter or less of the way into their fleet with this initial award.

Okay. And that's going to deliver over how many years, do you think?

This initial delivery?

No, for the longer term.

It will go over five years, I'm sure for them to fill that out. They also have some airplanes that are like a smaller version of the F-16 that we are aiming at, as well. So they have some related-type airplanes.

We think that's an example of a pretty key win for us.

Congratulations on the great free cash flow. In the past you indicated a goal of 10% growth in free cash flow going forward. Is that still a goal? Are you looking for higher? Could you just comment on what we should look for for free cash flow?

Must be a different company.

Yes, I think we have had a goal of 10% operating margins. That one, we grew -- we got that this quarter. We'd like to -- I think we have had a sequence to show that we can get there, stay there and then improve it. And I think that's what we are doing. And that's certainly going to -- I think that the trends we see, the growth in earnings, I think we'll generally see cash flow going with it. But we don't have specific goals. And this quarter was a fantastic quarter for cash flow. We are not going to do exactly this amount in another quarter or the next quarter or two.

I think it was more than a year ago that -- you think free cash flow can continue to expand going forward, generally?

Generally, yes. It has a lot to do with the types of products that we are selling and where we are in some of our larger backlog programs. And then even in our MIDS production contracts and what not, and how the cash flow works there. So yes, we see that as we grow, we can continue to grow cash and free cash flow. It does depend, though, on what some of our investments are going to be in the future.

That comment is true relative to a static set of business.

Yes.

Okay. Thanks very much.

Larry Harris, Oppenheimer.

Thank you, and congratulations on the results. I just want to get a better understanding of MIDS J and where it sort of fits into the scheme of things. The application is essentially similar to what you are doing now, tactical aircraft, like the F-16, F-18, F-15-type aircraft. And would MIDS J be just an addition on to the current JTRS program? Or would it perhaps reduce MIDS -- the JTRS AMF? Where would it fit into the scheme of things?

That's a good question. So there's two answers to that. The first answer is that the MIDS J program was originally conceived as a kind of a plug and play replacement, form fit function replacement, for the MIDS LVTs that we are making now. In that sense, you could imagine it just as a box to replace LVTs and added these new networking capabilities. I think there is opportunities in the broader JTRS market for radio like MIDS J to, as an example, be a component of the MIDS -- of the JTRS AMF program. A big part of AMF involves integration of JTRS radios on airborne and maritime platforms. And I think that given the lead that the MIDS J product has, and some of its newer capabilities, including for instance the airborne networking waveform, I think it could become a candidate to be a box, let's say a product of AMF, when you think of AMF in the integration sense. And that could significantly expand the role of, let's say, the homes that we can place a MIDS J unit in, compared to the original market for MIDS LVTs. And there's actually -- could be because of some of the waveforms that we've been talking about, especially some of the ground waveforms, that that same thing could extend to the ground program, as well.

I understand. All right. Well, thank you.

[OPERATOR INSTRUCTIONS] David Kestenbaum, Morgan Joseph.

Mark, you talked about the opportunity in maintenance and service on the MIDS. I'm just wondering, where are you now, as a percentage of revenue on maintenance and service? I assume it is pretty small. But overall, if you look out a few years, what is the opportunity to provide maintenance and service on a variety of contracts?

I think -- well, I think Rick's answer was good. One, is, like I say, right now it is small. I'd say 10ish percent or less of our total -- because basically, the units go out with a multi-year warranty on them. So we won't see this incremental service and maintenance and depo revenue until units go out of warranty. And that's kind of just now starting to happen. And I think it is a little bit hard to predict. But I think Rick's observation about what you see in similar programs is definitely pertinent, in terms of the size of that market in aggregate. So what you can think of is, and I'm not quite sure what the exact progression is to get there, but you can imagine five, six years from now that our maintenance and services revenues start to approximate where our product shipments were, say this year.

Okay. What are the large government awards that you alluded to in the first half of 2007? Can you just list them?

We didn't identify particular ones. In some cases, we are sort of hamstrung. The MIDS Taiwan announcement is a good example of where there are times when our customers can make announcements, but we can't. Because we haven't had the PR approved. What we did say is we have a couple of satellite things that we hope to be able to announce pretty soon, first half of this year, that I think they're going to be pretty attractive and open up good markets for us.

Okay. Thanks a lot. And I agree with Tom. Good strong free cash flow.

Thank you, Dave. Why don't we take one more.

[Kevin Spellman, DDM Asset Management.]

I've got a couple follow-ups to, like, first on Tom -- Tom asked you about the Taiwan MIDS awards. Does that mean that's all yours?

Yes, basically a lot of the international programs are a little different than the U.S., in that each country generally does kind of a winner take all approach to their MIDS supply. And that's definitely our understanding of Taiwan now. And that's really -- and it is a little bit unclear how that extends to multiple platforms. Generally the provider on the lead platform has a good shot, though.

You mean if you were to go from like the F-16s to like the F-4s or whatever else -- ?

Right, that would be a good example. Obviously, it is a very competitive market. We have a lot of respect for our competition. But in general, the way I described it is the way that they will tend to go.

Then to follow-up to Steve's question. So, I didn't quite get -- if we read about the Army asking for so many hundred million for Joint Network Node for this year, you are saying that won't have any affect on you to get it?

No, I think JNN is one example of a system that goes out with our products in it. And if there are more JNNs built, that is one example of one -- it is a very good example of one of our systems that would be -- that would get a bump in sales. Partly, one of the ways with the JNN though for us is kind of as, if you are familiar with the [WinKey] program concept. And a lot of what's doing on with JNN is sort of, in some cases, displacing WinKey sales, as opposed to merely being incremental for war needs. So it depends on how you look at it. But JNN is one where we're likely to see increase at that expands.

So what kind of swing factor is there in that? As far as if there was no appropriation in this supplemental sort of JNN, versus if they get what they want. What's that mean to you?

Well, I would say, there's really two -- I'm going to dodge that a little bit, because I'm going to say we're going to look at JNN in two ways. One way is building out additional incremental units. And that has some impact to us, and it's pretty good because it is an important program to us. But there is also another aspect to it, which is upgrading the JNN nodes for additional capabilities. And I would say in the overall scheme of things, that's even a bigger target for us than just incremental unit sales. And I think that -- that's likely to be more rewarding for us, even in the near future.

Thanks. And then when we talk about MIDS J and it expanding its role, whether it be in AMF or on the ground, or wherever. When does that -- if you are successful in getting that, those additional applications and platforms, when does that show up as an addition to revenue? Is that something years away? This year?

I think there will be two aspects to that. One aspect is some of those new platforms would require additional capabilities. And that could be other waveforms or modes. For instance, the advanced networking -- the advanced airborne networking waveform. That's -- one is that is a capability that would be added to MIDS J, but also sort of makes it more attractive for other platforms. And so one thing is we'll see new capabilities come in in advance. Same thing could be said for MUOS or other waveforms. So some of those -- we would expect or hope to see this year, this calendar '07, certainly calendar '08. And what I'd say is, those are indicative that will expand the market, but not necessarily decisive. And what I would expect, based on just the way the budget maneuvering played out on JTRS, no one will really know exactly what they have for JTRS production until you start seeing more of the contract awards. And I think that's going to be government fiscal year '10, '11, maybe a little bit in '09. But I think those are the times where you'll really see the production stuff, when you'll know how that's going to get sorted out. I think from our view, to the extent that we increase the scope of what we address, those are indicative that we are making progress, but not necessarily decisive.

So that would add to expectations in the '07, '08 calendar?

Yes, and I think -- actually what we'd say is, one of the things that maybe comes across here, is some of those things were supposed to have been done by now. They are just behind -- I don't know if I'd say they are behind in their expectations. It's a little later than we thought. Overall though, our orders and sales have been pretty good, even though those things are a little bit behind. But I would say that they are as likely, or more likely than ever to occur.

Okay.

Does that answer your question?

Yes, and one last, if I might. Got time?

Yes.

On -- you sunk just a boat load of money into SurfBeam and that DOCSIS platform. And the way it sounds, you want to sink more money into it. And the return hasn't -- I mean, we got a little glimmer of hope here this quarter, but it just hasn't been there. When do you cash in? When does this pay off?

Okay. Well, that's a fair question. What I'd say is, there is two ways to look at what we have done there in that SurfBeam area. Number one, is we could say, well we are not going to do anything more until we get back all the money we put in and then some more. Another one is we could say, what we really want to do is understand what the market is, and see if the market is not as good as we thought, as good as we thought, or better than we thought. And once we get that, we'd like to figure out, could we play it out? And how would that play out? Or could we readjust our objectives in a way that could be better? And what I intended to imply was those are the things that we are considering. We haven't made decisions, we haven't said what we are going to do. Some of the things that we do may depend on what other people do, as well. So we're looking at it. I just think it is important -- I guess the main thing I'd like to convey is really to respond to the point that you just said, which is there could be some expectations that, well, we invested all this money, and now we're just going to milk it and get back all of our money. And that may or may not be a good thing to do. That's really the point I wanted to make is that we really need to assess that question. And if we come to a definitive answer, we'll communicate more exactly what that means.

Okay. That makes sense.

Good, I'm actually glad you asked that question. Because we wanted to make that point.

Okay. Thank you.

That's it. I think that covers all the ground that we wanted to do. And we appreciate all of your questions. And thanks for listening. We'll speak again next quarter.

Ladies and gentlemen, this concludes your presentation. You may now disconnect, and have a great day.