Viasat Inc (VSAT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter four 2007 ViaSat earnings conference call. My name is Paul, and I'll 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 the conference. (OPERATOR INSTRUCTIONS) I'd now like to turn the call over to Mr. Mark Dankberg, Chief Executive Officer. Please proceed, sir.

Good afternoon, and welcome to ViaSat's earnings conference call for our fourth quarter and fiscal year ending March 30, 2007. I'm Mark Dankberg, ViaSat Chairman and CEO, and I have with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Kevin [Leopard], 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 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. We'll be referring to slides that are available over the web and we'll start with our fiscal year '07 fourth quarter and year-end financial results and a business overview, and after that, Ron Wangerin will discuss our financial results in more detail. Finally, I'll update our outlook for our new Fiscal Year 2008 and give a quick summary and then we'll take questions.

We'll start with fourth quarter revenue. Sales for the quarter were $132 million which is up 12% versus last year. For fiscal year '07, we totaled $516 million, which is 19% over fiscal '06 and that's a record level for us. This next slide then shows our fourth quarter non-GAAP earnings, which grew from $8.2 million to $10.8 million, and that's up 32%, and from $0.28 a share to $0.34 a share, up 21%.

Non-GAAP earnings exclude amortization of intangibles due to acquisitions and non-cash, share-based compensation and we'll provide explicit bridge data from non-GAAP to GAAP net earnings a little bit later.

The next chart shows fourth quarter GAAP net income grew from $5.8 million to $8.6 million, or 49%, and net earnings per share grew 35% from $0.20 to $0.27 a share. For fiscal year '07 as a whole, non-GAAP earnings are up from $28.8 million to $39.1 million, that's an increase of 36% , and from $1.00 to $1.27 a share, an increase of 27%, and those are both records for us as well. And finally this next slide shows our fiscal year '07 GAAP net earnings are also up year-over-year at a record levels. GAAP net income increased from $23.5 million to $30.2 million, which is up 28% and from $0.82 to $0.98 for the year as a whole and that's a 21% increase.

Overall, we're really proud of our financial results for the fourth quarter and that caps off an excellent year for us. We exceeded the earnings objectives we had set at the start of the year and also grew revenue a little more than we had originally anticipated. So with that as context, I'd like to move on to a top level business assessment.

If you had a chance to look at our year-end results press release a little earlier today, you could see we had an excellent overall financial year. Earnings, as already discussed, were very strong. We also had outstanding cash flow for the quarter and the year as a whole, ending with over $100 million in cash. Also, we've been gradually improving our operating margins for the Company as a whole, right about at our interim target of about 10% of sales.

We've also been steadily improving the margins in our commercial business, which was pretty nicely profitable in this fourth quarter. Overall, the improved margins reflect a recent trend of increasing the proportion of business due to product sales as opposed to engineering development phase projects. That's helped us increase our gross margins and support higher discretionary investments in R&D and new business proposals while still expanding our operating margins.

Quality of earnings has been very strong reflected in an excellent balance sheet which gives us quite a bit of maneuvering room. Overall, we're very pleased with our financial situation and as we go along I'll give management's view of how this dovetails with our view of how we are positioning the Company for continued growth.

So in terms of new business, our fourth quarter orders were okay at $126 million. We ate into backlog a little bit, but there were some significant orders in there. We were selected by Taiwan for their MIDS terminals. Taiwan has one of the largest fleets of F-16 fighters and it's one of the single largest international markets, so, overall, our share of the international MIDS market has been good, pretty close to right around half.

We also recently announced a $9.6 million contract to develop a prototype system for what's called Blue Force Tracking. Blue Force Tracking is a satellite network that continuously updates the location of U.S. Forces to help prevent friendly fire casualties. This Blue Force Tracking program is intended to replace an existing system and we won that in an open competition.

Our approach uses what's called our ArcLight technology which has been very successful in military communications on the move and projects and also on the commercial business jets. The purpose of the competition was to support more users with better precision than they get from the existing system or any modifications that they could get from that. The DoD is limited by the satellite bandwidth they've got available in the frequency bands that they need in specific geographic regions. So, exceptional bandwidth efficiency was the primary selection criteria.

Our contract is for a rapid prototype that proves that level of bandwidth efficiency that we proposed. We believe once we do that, we'll be very well positioned for future orders for Blue Force Tracking terminals, a market anticipated to be more than 100,000 or so. DoD could still use the existing Blue Force Tracking network and then put all the new terminals on to our new network, and then could eventually retrofit those existing platforms. We're very excited about this win, which if successful, represents one of our larger opportunities in the defense market. And we'll know a lot more about how this will go in about a year from now.

We also had nice, solid broadband orders especially for WildBlue Communications. We'll go into more depth on that later including our very exciting announcement regarding their next half million subscriber terminals. We're also looking at the potential of a wave of new program awards. We'll talk more about those later.

We're nearing the decision dates for some big competitive contracts, as well as execution of some significant follow-on programs. Meanwhile, a lot of the orders that we have had have been for short lead, book-and-ship type of products, and that reflects the trend that we've cited in several of these conference calls. It helps carry us to the 19% year-over-year revenue growth that we had in fiscal '07, and they have been a component of the margin gains that we've seen, but they haven't built backlog.

We want to emphasize that for these types of products we can still achieve good sales and earnings growth without building much backlog, but if things go our way with these new order events, then we should show a stronger book-to-bill in our fiscal '08 and add to backlog. Ultimately, we think there are very solid demand fundamentals in our key markets and that's really the source of our growth outlook, and I'll go into that point more on the next chart.

This chart is really intended to address that big picture view of our markets which we feel is very attractive. MIDS/LVT production remains robust. The MIDS Joint Tactical Radio System, or MIDS J development system is proceeding very well, and has good prospects for growth to more waveforms and applications. One of the pieces that we're doing is the MIDS JTRS security module, and we believe that's probably the best positioned security module of the JTRS programs to support internet protocol or IP adaptive networking. And that's what we think will be the key factor in the selection and deployment of JTRS radios or any kind of next generation defense radios .

The market for IP capable information assurance products continues to appear to be very attractive, especially as DOD emphasizes migration to commercial IP v6, that's the internet protocol v6 features.

We still think we're in the early stages of demand for the HAIPE standard, which is what we implement on these inline network encryption products, such as our KG-250. And then another key point is we recently received certification for the KG-250 for foreign interoperability, or FI, and that makes the KG-250 the only HAIPE device of its kind applicable for international coalition use. Until now, the Defense Department could really only use older internet protocol cryptos that aren't HAIPE compliant when they are involved in international coalition networks. So, this new FI interoperability capability may significantly increase our near-term market opportunities.

KG-250 sales were actually very strong in the fourth quarter and we're seeing a noticeable increase in our opportunities in that area, and as well, in the defense satellite field in general. This reflects both increasing awareness and demand for satellite connectivity of all types, as well as a favorable competitive position. To give some examples of some important new military satellite communications, or MILSATCOM, activities and opportunities and these include important roles on the space and ground segments for the TSAT program which is currently scheduled for down select later this year.

We have a key subcontractor role on the Harris Navy multi-band terminal team, or NMT, which is scheduled to be decided in June. And we've got new proposal opportunities for a number of MILSATCOM terminal systems, new potential opportunities to participate in defense MUOS, or mobile user objective system mobile terminals which is the follow-on to UHF, Blue Force Tracking, which we've already discussed, and new updates to defense applications of our LinkWay satellite networks which have been an important component of the joint network note or JNN program, and also we started participation in what's called the IRIS program concept, which is to fly an onboard process payload on commercial satellites for defense applications.

On the Commercial side we're seeing very strong demand for consumer broadband in general. The uptake rate on the just opened WildBlue 1 satellite is exceeding expectations. WildBlue's success in combining our [ sirpee] networking system with Ka-band spot beam satellites to deliver a much higher quality satellite broadband service has been attracting a lot of interest in international markets.

We announced an agreement with Eutelsat to use their existing Ka-band capacity in Europe for market trials, and to explore launching additional new Ka-band broadband satellites. We believe we're learning a lot about the consumer broadband market and are exploring opportunities to substantially improve the speed and quality of satellite broadband services at the same or lower subscription costs as are offered now.

There's steadily increasing interest in broadband for commercial airlines. We're currently involved in responses to three different major airlines, and there's been a fair amount of press regarding their interest in broadband. Meanwhile, our business jet service continues to expand and provides excellent operational experience. And then we're also getting the opportunity to bid on a variety of significant domestic and international commercial satellite system projects.

So now I'll turn to some of the main business highlights of the past quarter and start with defense. Our defense business continues to perform well. MIDS and MIDS J remain our single largest area. Production of MIDS low volume terminals remains strong and profitable, and MIDS J recently completed some important development milestones. We anticipate significant additional development work during this fiscal year. Support for MIDS J advanced interoperable Data Links among its user population seems stronger than ever.

We've also seen better than expected growth in our new Enerdyne video data links business, and we're getting opportunities to bid on advanced tactical and weapon data link programs. Information assurance continues to see an opportunity rich environment. While there have been fluctuations in the past in KG-250 demand due to a number of factors, fourth quarter orders and revenue were both very strong. Also, our recently obtained FI, foreign interoperability certification opens a very interesting new market for us. The KG-250 is, at least for awhile, the only HAIPE compliant network encrypter certified for foreign interoperability.

We anticipate this will sustain or boost sales in the next few quarters, but we'll have to see how that plays out exactly. We're seeing robust proposal activity including in a number of potentially large new markets. We're also seeing good growth in our Government satellite business as I mentioned. We've already mentioned the Blue Force Tracking program win, and we're working on a broad variety of other military SATCOM programs and markets.

We had a solid quarter in our Commercial segment with higher earnings and better margins. An important factor there has been the growth of the consumer satellite broadband business, especially with WildBlue Communications. WildBlue recently brought their new dedicated Ka-band spot beam satellite called WildBlue 1 into service and the subscriber uptake rate on that has exceeded expectations. That's likely due to two main factors, one being pent-up demand in geographic areas that had been sold out on their first satellite, called Anik F2 ,and the other factor being the launch of broader retail distribution.

So as mentioned in our earnings press release, we're very pleased to announce a major expansion of our supply agreement with WildBlue. ViaSat will now supply WildBlue with all of the next half million subscriber terminals for both WildBlue 1 and Anik F2 satellites, along with some improvements in the network infrastructure, and a long-term support services agreement.

There are other provisions which could extend the supply contract significantly beyond that, and/or expand it to include use of other existing Ka-band capacity. The exact pricing and delivery are dependent on their demand from subscribers and distributors, so it's not really meaningful at this time to assign a specific dollar value or period of performance for the contract. Based on recent demand, the increase in their distribution footprint due to the DBS companies, the satellite TV companies, and the fact that not all of their distribution channels are even yet fully engaged, we anticipate the value of the contract could exceed $200 million over a time period that could be somewhere in the range of maybe around three to five years.

Now, it's important to note that given the nature of the contract, we're not going to include this full amount in our contract backlog, but this does make for a pretty vivid example of why we believe we have a good opportunity for continued revenue and earnings growth even though our backlog is not growing at that same rate. And as previously mentioned, the success of WildBlue is definitely attracting interest in a number of other markets especially Europe. This new supply agreement certainly strengthens our ability to compete well internationally on those opportunities.

The rest of our VSAT business has been pretty steady. We've had very good success in applying commercial VSAT networks into the defense market and in fact have moved some portion of that business into our Government segment. We also continue to compete well on international projects using LinkStar. And we're also finding increased interest in applications for the SurfBeam broadband system that we use with WildBlue on Ka-band on Ku-band networks, and we see opportunities to leverage the scale we have due to Ka-band.

As I mentioned before we're seeing renewed interest in the commercial aviation market for mobile broadband, including domestic U.S, regional international carriers and most of the long haul international carriers that use our equipment on Boeing's connection (INAUDIBLE). A little early to predict the outcomes, but we're actually pretty encouraged so far.

We've also been doing trials and some early market entries for maritime and passenger trains. But in the meantime our business jet and defense communications On-the-Move applications of our mobile broadband technology provides a nice base of business and a platform for steady improvement in our network and product features as well as capabilities and price points.

And we've also had some interesting opportunities to leverage our success in satellite networking in the ground based beam forming mobile satellite systems contract into other significant and attractive satellite system program opportunities. So, a little too early to tell how those will turn out but we'll know more the next few quarters on some of them.

We continue to add to our technology portfolio for commercial satellite. That includes gateway antenna systems including Ka-band, mobile antennas, microwave integrated circuits to expand the capabilities and reduce the cost through further integration, some new digital modem chips, especially for the new DVB F2 standard with adaptive coding. And then another recent addition for us is a small company called ICT.

Their main technology is a wide area network acceleration and compression software product called AcceleNet. AcceleNet provides pretty dramatic improvements in a number of IP network applications over any transmission medium that is either bandwidth constrained or has high latency. The most obvious applications are in satellite, as well as mobile wireless networks. We're exploring a number of uses, integrated with our commercial and defense products and we're also helping ICT improve its access to broader domestic and international distribution channels. We're enthusiastic about the potential, but it's a little too early to predict specific financial impacts right now.

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 fourth quarter were $68.8 million, a 26% increase over the same period last year. For fiscal year 2007, revenues were $270.7 million, and a 29 % increase over prior year. The increase for the fourth quarter and year-to-date is primarily related to increases in funded development of next generation MIDS and information assurance products, and from the increased sales of information assurance products.

In the Commercial segment, revenues for the fourth quarter were $63.2 million, a 2% decrease over the same period last year. The year-over-year fourth quarter reduction is primarily related to decreases in our antenna systems area offset by increases in our satellite networks area. For the fiscal year 2007, sales were up $16 million, or 7% to $245.8 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 which we completed in our fiscal third quarter last year, offset by reductions in our antenna business.

Operating earnings amounts include non-cash share-based compensation expense charges of approximately $1.4 million in the fourth quarter of fiscal year 2007 and $1.5 million in the fourth quarter of 2006. For the fiscal year, operating earnings amount include non-cash share-based compensation expense charges of approximately $5 million for fiscal year 2007 and $1.5 million in fiscal year 2006.

In the fourth quarter, the Government segment posted operating earnings of $8.9 million, a decrease of about 13% from prior year. The year-over-year operating decrease is due to lower margins of legacy UHF SATCOM products, higher R&D expenses, and higher selling and support costs due to revenue growth. For the fiscal year, operating margins are $41.7 million, basically flat year-over-year.

The year-to-date percentage increases are not as high as the increase in sales primarily due to higher R&D investments, higher selling and support costs due to revenue growth, and non-cash share-based compensation expense charges. Commercial segment operating margins increased substantially in the fourth quarter and year-to-date year-over-year, due to the improved performance in our satellite networks area which was consistent with our plans. These were offset by lower margins in our antenna systems business, higher R&D investments in our next generation VSAT products and non-cash compensation expense charges.

As we look at the rest of the P&L, as Mark mentioned, for the fourth quarter we experienced year-over-year revenue growth of $132 million, which is a 12% year-over-year increase. The cost of revenue increase reflects 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, increased proposal activity, which was robust in both segments, and from higher support costs due to our growth.

R&D was up significantly in the fourth 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 in key technologies on a quarter-by-quarter basis based on affordability.

Quarterly amortization of intangibles is higher for the fourth quarter year-over-year due to the acquisitions of Enerdyne in our fiscal first quarter, and Intelligent Compression Technologies in the fourth quarter of this fiscal year. Our income tax provision for the fourth quarter reflects a quarterly tax rate of about 16% for the quarter versus 12% for the same period last year. We'll address the difference between GAAP and non-GAAP earnings per share in a few slides.

For the fiscal year results, we experienced very good year-over-year revenue growth in several key areas. First, our revenue increased to $516.6 million, which is a 19 % increase year-over-year. Cost of sales increased from the higher revenue levels, however margins improved in our Commercial segment. In fiscal year 2007, cost of sales includes non-cash share-based compensation expenses of $1.8 million. This compares to $700,000 for fiscal 2006.

SG&A 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, Selling, General and Administrative expenses grew due to the year-to-date non-cash share-based compensation expense charges of approximately $2.9 million. This compares to $700,000 for fiscal 2006.

R&D is up 37% compared to last fiscal year due to the development of new information assurance, military satellite communication products and next generation VSAT equipment. This was consistent with our plans. Amortization of intangibles is higher year-over-year due to the higher intangible asset balances from the acquisitions of ICT and Enerdyne this fiscal year.

Other income is higher due to the higher interest income from our higher invested cash balances. We continue to experience good operational efficiency with pre-tax earnings increasing by 29% on sales increases of 19%. This is especially good considering our fiscal year 2007 results reflect a $6 million increase in R&D and a $3.5 million increase in non-cash share-based compensation expenses.

Year-to-date, our income tax provision reflects an effective tax rate of about 18.2% versus 17.8% for the same period last year. The current year reflects a benefit of approximately $1.3 million related to the federal R&D tax credit from our fiscal year 2006 fourth quarter recorded in the current fiscal year. For the difference between GAAP and non-GAAP earnings per share, we show this slide to show a bridge between the two amounts.

Non-GAAP results exclude the effects of acquisition related intangibles, the amortization, and the effects of non-cash share-based compensation expenses. The year-to-date 2007 amounts also include a one-time charge we recorded in the first quarter this fiscal year from the cumulative impact of the accounting corrections related to employee option expense and the related tax impact. The total for this one-time adjustment is approximately $1.2 million. It is included in cost of sales, Selling, General and Administrative and Research & Development expense line items in our P&L.

It should also be noted that year-over-year in the fourth quarter and year-to-date the weighted average shares used for the earnings per share computation increased by over 2 million shares. The share increase is due to stock issued for acquisitions, stock option issuances, and the impact of the Treasury stock method due to our higher stock price.

Our balance sheet continues to be strong. Cash and short-term investments increased by almost $67 million from the beginning of the year, and we'll talk about the movement of the cash later when we review the cash flows.

Accounts receivable increased due to higher revenues as we met program milestone and increased our book and ship orders. Unbilled accounts receivable decreased significantly, primarily in our consumer broadband and VSAT network areas from program milestones. We're pleased with our continued progress in the receivables area reflecting better program execution and cash payments.

Inventory is down about $4 million since last fiscal year end on higher revenues. We've been focused on improving inventory turns and believe we're making progress here. Other current assets increased due to an increase in prepaid supplier payments and deferred income taxes. Goodwill and intangibles increased due to the ICT and Enerdyne acquisitions, the ECC purchase price adjustments from their earn out we discussed in the first quarter, and the Enerdyne earn out achieved in the fourth quarter, all of which was offset by regular quarterly amortization.

Net property and equipment is up over $5 million due to the capital additions, mostly for facilities expansion and test equipment to support our business growth. Our capital expenditures were in line with our expectations. In the fourth quarter, we opened additional building in our Carlsbad Campus and expanded our footprint in Chandler, Arizona. The change in other long-term assets is primarily due to the issuance of a secured borrowing arrangement we entered into in the quarter.

As we look at the liabilities and equity side of the balance sheet, accounts payable decreased reflecting improved days payable balances with our vendors, especially in light of our higher revenues. 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 change in other current liabilities primarily relates to higher accrued employee costs like vacation, or performance bonuses, and 401(k) match, and from the payables associated with the ECC purchase price increase we announced in the first quarter, and the increased purchase price from Enerdyne in our fiscal fourth quarter due to the achievement of their earn out. Both of these earn outs will be paid this month. The increase in other long-term liabilities is primarily related to the secured borrowing arrangement, warranty accruals from product shipments and 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. Some of you may have noticed we recently took the opportunity to update our longstanding shelf, increasing the size to $400 million, reflecting our current size and creating more flexibility.

As we turn to cash flows, we had another strong quarter for cash flows generating almost $24 million in cash from operations, bringing us to almost $67 million generated from operations for the fiscal year, which is a record. In addition to the strong earnings and non-cash add backs we made substantial progress in the working capital accounts primarily through program performance and media milestones and deliveries.

Cash flows from investing activities for the quarter and year-to-date reflect the acquisition of ICT, capital expenditures largely for business expansion as our Company continues to grow, including the aforementioned facility projects, and for production of test equipment to support our growth. Cash provided by financing activities is primarily from the net proceeds from common stock issuance, primarily driven by the increase in stock price and people exercising their options, and the cash received from the asset servicing arrangement. Net for the quarter, cash increased by a little over $26.7 million, and for the year cash has increased by almost $67 million. We achieved this increase while substantially growing the business. I'd like to turn it back to Mark who will talk about our outlook.

Okay, thanks, Ron. At this point, I'm going to talk about our outlook for our new fiscal year 2008. And this next slide shows our current outlook and it's essentially the same as we introduced last quarter. I'd like to give you a little insight in correlating this with the qualitative discussions around our business areas.

Based on our existing backlog, recent results in our products business and near-term expectations for new awards, we're reasonably comfortable with the ranges presented. At this point, we anticipate that where we end up in the range will be influenced by the success and timing of a number of near-term awards. We think revenue and earnings will be more heavily weighted towards the second half of the year, which is actually been fairly typical for us in the last few years. We believe we may have better visibility somewhere in the second quarter about the impact of these new awards. A lot of the new awards are going to primarily impact years beyond fiscal year '08, but there may be some impact in the current year.

This year is a little different than most of our recent prior years in the relatively high proportion of product sales on revenue and margins. So while in prior years we would normally point out that it would be very unlikely for us to exceed the high end of the range, at this point, that might actually be possible this year, but it depends on a combination of key new awards and demand for some of our products.

A couple of other points on this slide are, one, the R&D tax credit legislation passed at the end of 2006 only extended the credit through calendar 2007, and our fiscal year '08 extends into the first quarter of calendar '08, so if the R&D credit is not extended again or if the extension of the credit happens late in the year it's going to impact our effective tax rate, and that might push us more towards the lower end of our range.

And second point is we've updated the GAAP to non-GAAP reconciliation estimate to include amortization of the ICT acquisition, as Ron mentioned before in his section.

So, overall, that covers all the points that we wanted to make, and then just to summarize, we feel we've had a stronger than planned fiscal year '07 with excellent revenue and earnings growth and outstanding cash flow. We're anticipating continued good growth in revenues, earnings, new orders and cash flow although skewed toward the back half of this fiscal year. Our balance sheet is very strong and gives us some strategic flexibility.

We remain very pleased with the opportunities for growth in our target commercial and defense markets, and we also feel we're pretty well positioned to compete in those markets. We like the balance and synergies across our commercial and defense markets. We think our growth outlook for fiscal year '08 is pretty much the same as it looked to us last quarter, and we can see the opportunities for subsequent years shaping up well too. So, thanks for listening. That completes our prepared remarks and at this point we would like to open it up for questions.

(OPERATOR INSTRUCTIONS) And your first question is from the line of Steve Mather with Sanders Morris Harris Capital. Please proceed, sir.

Hello, good afternoon, Mark.

Hi, Steve.

Just a couple things on your, some of these new awards. The information assurance you mentioned that a few times today. I know you're embedded in some devices and you have the inline network encrypters, but to what extent is your information assurance sort of architecture work with, let's say, the networks and data mining and filtering that all needs to be more robust once you have JITRS and MIDS and other tactical radios out there in a big way?

Well, insurance products are pretty much oriented towards internet protocol communication and I'd say, in general, less specific to the applications. Now, that said, there's actually some really interesting new areas that we are looking to extend to that I guess I didn't talk about it in particular, that are sort of related to what you talked about, and one of them being, if you look at the notion of what's called media encryption as sort of an extension of communications, so communications would be what they call data moving from place to place, and media encryptions also what they call data at rest, so one of the artifacts of all of this is you're pushing a lot of information out to the field.

You have it kind of stored on hard drives or on computers, and what you'd like is to have some kind of convenient way to access that, but yet protect it while it's at rest, and that's actually a very, very similar application to what we're doing with our IA area, and that is related to the area that you talked to. Does that make sense?

Yes, absolutely.

Okay. Actually, it's kind of new for us, new for everybody, but we're pretty excited about it.

For Blue Force Tracking, I think you mentioned 100,000 terminals, possibly as the scope. Can you give us the other two components which is how much per terminal and then how much of that is ViaSat contribution?

Okay, yes, the 100,000 I think kind of comes from numbers that we've seen. It's less our estimate than our assessment of the estimates that have been published. The value of the terminals is generally in the thousands, as opposed to the tens of thousands of dollars, or the hundreds of dollars, kind of in that range, and things go well, you will be the prime contractor for all of those.

Okay. And then one last thing. If you happen to win the NMT project, what technology do you contribute, let alone how big could that be for you?

Our role on the NMT and this is a Harris prime contract. It's basically a competition between Harris and Raytheon, and our role is pretty much providing the microwave RS, and that's let out of our USM subsidiary, which is basically you can see what we're doing is taking all the technology and the volumes that we've got in Ka-band and we're basically applying it to the military Ka-band and military EHF band, and that is actually not too surprisingly in the military world that's a pretty high value contribution, if you look at the total value of military EHF and forthcoming Ka-band terminals, so it's a pretty big opportunity for us.

Okay, thanks a lot, Mark. Great.

Thank you, Steve.

Your next question is from the line of Tom Watts with Cowen. Please proceed, sir.

Congratulations, Mark, on the quarter.

Thanks, Tom.

On the Commercial side, you've mentioned with WildBlue the 500,000 Ka-band set terminals for at least $200 million. Does that suggest about $400 a terminal and with the new contract are there going to be any differences in margins basically between what you've seen before and the WildBlue deal?

Yes, I wouldn't jump to the $400 a terminal number because, as I mentioned, there's a few other factors in there including some infrastructure improvements. There's support services, and there's also, depending on how things play out, a reasonably good chance it will be extended beyond the 500,000, so we've sort of and especially because of the other uncertainty factors, and I want to emphasize it's like a requirements contract.

But what we've done is sort of mush all of that stuff together to come up with the $200 million and which we think is very kind of reasonable middle estimate and it could be less, it could be quite a bit more, but it's really going to be driven by all of those different factors.

And does the exclusivity extend to all of the EchoStar, DirecTV and AT&T terminals as well?

Yes. Basically, the exclusivity is really tied to the satellites that they have, independent of the distribution.

Okay. And then --

I'm sorry.

Go ahead.

I was going to say, we're really excited about it. I think it gives us a great jump on kind of filling up those satellites, helping them fill up those satellites, and it will let us, both us and WildBlue, start thinking about encores beyond the current system.

Okay. And several of you mentioned the positive margin trends in the quarter for the Commercial sector. Where are we likely to see those going forward?

Well, basically, whenever we do this stuff, the margins kind of change over time, and this is basically one of the things we've said in the past, so kind of one of the main points we've said in the past that we basically want this to be a big mass market and part of what we're trying to do is work with WildBlue and their distributors in the way to develop that.

And what we've done here is this is a move towards that, so we think we're going to basically making some price adjustments that will help them do that, and to make this be a good business for all of, for what we consider to be the whole ecosystem, so that's going to have some near-term margin impacts for us, but I would say all that's kind of baked into our outlook already.

And that would includes, that includes, this being over time. It's a multi-year agreement so what we've done is we're trying to, as we've done in the past, we're trying to make it be a good business now and preserve our position in the market, in the future and we think it's a good overall trade- off. Does that help?

Yes.

Okay.

Finally, you made some comments on your recent shelf. In terms of looking at acquisitions, in the past you made a lot of smaller acquisitions which you have integrated very well with minimal dilution. You haven't done a major deal since Comsat, Scientific-Atlanta. If you were to do a large deal, what sort of criteria would you put on that?

Well, a large deal would have to be pretty special. It would have to be a good opportunity, and right now, we kind of, as you can see from what we've been doing, we kind of like the approach that we've been taking because we feel that the markets that we're addressing are good already, and we don't really feel the need to do anything major. But every once in awhile something will come up that you'd want to be in a position to deal with and that's what we're trying to do that.

We're trying to make sure that we've got the ability to deal with opportunistic things and so it's a little hard for me to describe what a bigger acquisition would look like because we're not looking. I mean, we're not out looking for one. Does that answer your question there?

Yes, yes, it does.

Okay.

Well, thanks very much.

Sure, thank you, Tom.

Your next question is from the line of James Mcllree with Unterberg, Towbin. Please proceed.

Yes, thank you, good afternoon. Mark, you spoke of the second half having, I think you said there was a skew to the revenues in fiscal '08 towards the second half. Can you put some numbers around that, 55% or 60% of the revenue in the second half, something like that?

I don't think I would want to do that yet. Rick, I don't know, would you like to add anything to it?

No. I don't think so. I think, though, that it's going to look similar, our first quarter I'd say is going to look more similar to our first quarter last year and it's probably sequentially down, and so if you were to slope the year and assume we get the kind of growth we've put in there, I think you could do the math, Jim.

Yes, I think if you look at our pattern over the last two or three years, it's not going to be, I think, and we do the same thing, we look at our patterns and you can look at them and I think you'll see that it's going to be similar to what we've had in the past in that sense.

Okay, and can you comment on what tax rate you're assuming for fiscal '08?

Yes, this is Ron. We're looking in the kind of the 28% range, upper 20s.

Okay. And also the OpEx goals, or target, that you have for the year, either in dollars or percent changes or percent of sales?

Well, I would say they are similar to what we've been striving for in the 10% range. I think some of the targets that Mark had talked about, there may be a mix of more funded, some of these would be funded development contracts, made less than some of our discretionary, so we're going to be I think in a situation again where there are going to be trade offs between funded development programs and Company funded development programs, so I would say that we're still striving in that range, 10%, maybe a little bit better than that, but it's going to depend, again, on the mix of the programs.

Okay, and lastly, in years past, there's been issues with unbilled receivables versus billed receivables. Is there any expectation for a major shift in that in fiscal '08?

I'm not sure about any issues with unbilled receivables. They've been just a function of how we account for programs and the performance, so I'm not sure what that means.

Well, issues meaning that the time the unbilled receivables have gone up because of what you said, because of the way the programs are built out and the delivery, so I'm just wondering if there's a program or two in there that would make unbilled receivables go up significantly in fiscal '08?

I think there always can be, and I think it depends on the cycle of some of the programs that we have, like we've always talked about traditionally like our MIDS program depending upon where it is in the cycle, it could be growing or substantially liquidating from one quarter to a next, and I think we'll see that from quarter to quarter.

I think, again, some of the mix of funded developments and the related milestones and how that gets billed out could impact it. Certainly, being down where we are year-over-year is positive. It reflects where we are in some of those cycles. We think it's going to grow for the next quarter or two, but again, it depends on some of the mix.

I think we're not, given the size of the Company, we're not as subject to one dominant program moving the balances significantly each time as we used to be, but again, it's purely mix and timing.

Okay. Great. Thank you.

Thank you.

And your next question is from the line of Larry Harris with Oppenheimer. Please proceed.

Yes, thank you, and congratulations on the results for the quarter. I was wondering if you could provide maybe a little more detail in terms of the MIDS J program? I assume you passed the critical design review? Could we go into production? If so, when? And right now, how do you see it fitting in with the AMF program?

Okay, yes. We actually passed the CDR quite a few months ago, and that went well. We've passed a couple of other important milestones, as well, relating to a demonstrations and kind of putting us on the path to production readiness. There are things happening that are actually bringing the program into production. It's not quite kind of the first phase, the first production phase that you'd expect would be called probably what's called a LRIP program, or low rate initial production, and I would say we're kind of Epsilon below that. Very, very close to that in terms of where the program is.

The relationship to AMF is a little bit fluid, I would say. If you look at kind of the MIDS J charter, and I would emphasize that a lot of this is really kind of constantly up for review by the government, but if you look at the MIDS J charter it's really to make this JTRS reprogrammable radio, to add the IP network encryption capabilities that are in the security module, and that sort of gets it back, it sort of gets it to where the MIDS-LVT is, but with a different architecture and some other capabilities.

And then the next big step, and this is still one of the things that we're anticipating additional funding on but as it has started and it's under way is what's called the advanced airborne networking waveform, and that's something called TTNT and MIDS J is really the vehicle, the program that brings TTNT to market. And the combination of the value of the [current links],16 data links with the anticipated value of TTNT is something packaged in a form factor for the platforms that we have and with the performance and reliability and pricing that MIDS has. That's what's really driving the demand and the, kind of what's helping fuel the anticipation and optimism around MIDS J.

Now, AMF has a bunch of other waveforms in its scope and a bunch of other platforms, but AMF if you look at one of the ways to look at AMF is even though it has a bunch of radio capabilities as part of its development, I would say that it's not unreasonable to look at it as primarily a systems integration program, and that's where one of the things that's been kind of bouncing around is do other capabilities get put into other radios which then get integrated in AMF, and that's the area that I think we'll learn a lot about over the next couple quarters or so. Does that help cover kind of --

Yes. It does, it does. And would you anticipate that with MIDS J, your principal competitor here once again would be Data Link Solutions or Rockwell Collins?

Yes. It's a really interesting situation because, yes. If you look at, we have this kind of [collapetition] arrangement with DLS where we jointly develop it, so we both have interests in developing it, and then we compete for production, and we kind of split the production on the LVTs.

Now, the interesting thing is both Rockwell and BAE are on AMF teams, but they are on opposite teams, so there's a very funny dynamic in terms of how they will each look at the program and how they each look at it and how DLS will look at it once AMF is resolved. But it's a really interesting dynamic.

Understood. All right, thank you.

Thank you, Larry.

And your next question is from the line of Michael Coady with B. Riley. Please proceed.

Thanks. Hi, Mark.

Hi.

Looking at the operating margin just in kind of high level, you talk about striving for 10%, but at the beginning of the call you mentioned that you're at your, I guess, interim target is the way you phrased it. What would be a little bit longer term target?

Well that's a good question. And I'm not really going to add too much information now, but what we've said kind of over the last two or three years is we felt we could get to 10% and once we had gotten there, we'd sort of look at how we should set our sights again. I would say right now, we're kind of looking to very incrementally increase it, but as one of the points that Ron made and then I tried to make as well is we're not quite sure what the mix will be for these programs looking out over the next couple quarters because we have some pretty big events, and I think what we would like to do is wait another couple, two or three quarters, and then maybe talk a little bit more about margins because it will be a more meaningful answer.

So at this point, I wouldn't say that we see them going down. We think the 10% seems pretty stable. The real issue is do we have an opportunity to raise them and it will depend on the mix.

Okay, fair enough. Thanks. And then just lastly, any comeback in the antenna business on the horizon?

Yes. And that's been, the antenna business has been, I would say, a little bit of a drag, and I'd emphasize the little bit part, but a lot of that has been working through programs that had either a particular margin issues or development issues, and that's actually a relatively predictable pattern, and we're pretty much through it.

The potential for improving things noticeably and this is, I'd say, the last few quarters have been kind of uncharacteristically tough for that business because it's been a pretty consistent performer for us for six or seven years, but what we're seeing are good trends in terms of orders which led us sort of do two things.

One is replace the revenue that we've got now with revenue that will have a little better margins, and then the second part is it gives us the opportunity maybe to grow it a little bit, and we're optimistic about that and I'd say in general, it won't have a huge impact on our results as a whole, but it will be a nice trend for that business. Then the other part that's going along with this is I'd say we're expanding the notion of what that business does for us into a little broader, kind of a broader interpretation of the antenna technology than we've had in the past with an emphasis on the technology aspects, and I think over time we're optimistic about that as well.

Okay. Thanks again, good luck.

Thank you.

Your next question is from the line of Rich Valera with Needham & Company.

Thanks. Mark, in your prepared remarks you made some comment about looking at ways to increase bandwidth available in the consumer broadband market. Is there anything you can elaborate on that topic?

Okay, yes. Basically, we look at the success of WildBlue and I think everybody kind of attributes a lot of that to this combination, as I mentioned, of good space segment and good ground segment, and as well as a well operated service. But we really emphasize that this good space segment is an important ingredient, and so that's where a lot of our focus is, is to kind of look out in the future for how to do that both in the U.S. market and other markets, and that is, we don't, I don't have a definitive answer for you. We're trying to keep our options open.

I can tell you that it's something that's high on our priority list. One of the things I'd tell you that I think is a factor in how we're going about it is in the past, a lot of times what people have done is we've sort of developed satellites which have certain characteristics and then look at developing ground equipment that, let's say, best fits that ground segment.

One of the things we've been looking at is we look at as a whole system and from the experience that we've got, we can see that if you do certain things in the space segment in the satellites, we think it can make dramatic improvements in the capacity, speeds that you can offer customers, reducing congestion, all things that I think will make the service more popular, increase the capacity, increase the markets you can penetrate, just add more scale.

So what we're looking at doing is figuring out a way from both a technical and business perspective to do that in a what I'd say a prudent and sane way. That's I think, actually, we don't really know yet what it's going to be other than we've got those objectives in mind.

Do you have any sense in terms of time frame of when you might get a little more clarity? Is this something over the next fiscal year you're looking to flesh out?

Oh, yes. I'd say that I think that it's becoming a very important problem because of just the success that WildBlue is having right now, so the need for a new satellites, or satellite or satellites or series of satellites or some sequence around that, and expansion of capacity is becoming clear, so we'll know a lot more this calendar year, I'd say.

Got it. And Ron, with respect to tax rate, you mentioned you're looking for a 28% tax rate next year roughly, but what does that assume with respect to renewal of the R&D tax credit in that calendar first quarter of '08?

It could go a little higher depending upon that calendar first quarter, and also the mix of some of the development programs that we talked about, so there is, there are a few things that will impact it.

One is, Mark talked about some good program opportunities that could provide more credit, so depending upon the timing of some of those that could impact how much R&D credit we have, and then when you look at the fourth quarter would definitely drive it up, but some of those other things could drive it down. So that's why we're kind of using a 28% range right now as kind of a best estimate using a combination of factors, and as we go through the year and we learn different things we'll be updating that.

Great. That's helpful. Thank you. Yes.

Why don't we take one more.

Okay. Your final question will come from the line James Mcllree with Unterberg, Towbin. Please proceed.

Yes. Thanks, again. There was a rather large increase in both goodwill and intangibles this quarter versus last. What accounted for that?

Sure. I'll take it. We had, one of the biggest one was from the ICT acquisition that added about $20 million to the balance, and then I mentioned in my section, as well, that Enerdyne had achieved their earn out and that added almost $6 million to the balance as well. So those are the two big ones that hit in the quarter. And then that was offset by some quarterly amortization.

Okay. Thank you.

Yes.

Okay. Good. I think that wraps up our prepared remarks and Q&A session. So, thanks a lot, everybody, for joining the call and we look forward to speaking to you again next quarter.

Thank you for attending today's conference. This concludes the presentation, and you may now disconnect. Have a great night.