Viasat Inc (VSAT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2008 ViaSat earnings conference call. My name is Sherell, and I will be your facilitator for today. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn your presentation over to your host for today, Mr. Mark Dankberg, Chairman and Chief Executive Officer. You may proceed, sir.

Thanks. Good afternoon, everyone, and welcome to ViaSat's earnings conference call for our first quarter ending June 29th of 2007. This is Mark Dankberg, I'm Chairman and CEO, and I've got with me Rick Baldridge, our President and COO, Ron Wangerin, our Vice President and CFO, and Keven Lippert, our General Counsel.

Before we start, Keven 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 for forward-looking statements. The Company undertakes no obligation to update publicly or revise any forward-looking statements.

Okay. Thanks, Keven.

We'll be referring to slides that are available over the web. We'll start with our fiscal year '08 first quarter financial results and business overview perspective. And, after that, Ron Wangerin will discuss our [financials] in more detail. And, finally, I'll update our outlook for the remainder of fiscal year '08 and give a quick summary, and then we'll take questions. We've adjusted the frontend financial section to be a little more of a summary. Later in the call Ron will provide more detail on this during his section.

Revenues for the first quarter were $128.6 million, which is basically flat YOY. Our awards for the quarter were $136 million, which is also pretty much flat. GAAP diluted EPS was $0.13 per share this year versus $0.18 per share last year, a 28% reduction from the same quarter YOY, and non-GAAP diluted EPS was $0.21 a share versus $0.26 last year or a 19% reduction.

So we are pretty disappointed with the sales and earnings for the quarter, but we'll tell you what the cause was and why we think we're going to catch-up in the second quarter. Our outlook for the year as a whole is the same as it was last quarter. We've been spending noticeably more on discretionary R&D and proposal preparation, and it looks like that's paying off in some pretty exciting new orders which should become clearer this current quarter.

So, with that, I'll move on to the top level overview. And I'll start by going over the Q1 results again. There are two main points here, the first is that we shipped several hundred fewer KG-250s in the first quarter than we had planned. That equates to several million dollars in value. While there are always some areas that do better than plan and others that do worse, this is essentially the difference in results versus our plan.

Our orders for KG-250s for the quarter were actually our best ever and were consistent with our shipment plan, but we made some conscious decisions that reduced costs, were consistent with our customer delivery dates, but eventually did increase the chance that some shipments would fall out of the quarter, and that's what turned out to happen. We now plan that in this quarter we'll essentially cover all those units, that's what we were going to do anyway.

And that kind of leads to the second issue which has to do with consensus estimates. We usually only discuss annual outlook estimates and not quarterly numbers. In the last conference call we indicated that our earnings for the year would be back loaded, and that is still the case. So we'll address this point in more detail near the end of the call when we revisit our outlook and give more information on how we view the distribution of earnings for the rest of the year.

Our discretionary proposal preparation and R&D spending in the last couple of quarters has been a little higher than planned. We do manage that but we also have to balance it with the opportunity timing. There's a lot going on now. We think we're getting our monies' worth and that ought to be evident this quarter. I'll talk more about that in the next slide.

Our VSAT Network's business was a little weak and we are adjusting some resources there. We're doing very well in the broadband and government VSAT markets and we're going to capitalize that and take some actions that we think will help us compete more effectively also in a couple of other market segments, too.

Antenna systems, which was off last year, did well, and is pretty much back on track. Tactical data links and consumer broadband both did better than planned. We had another very strong quarter for cash flow, adding a net of $10 million in cash to our balance sheet.

Switching to new business, we know that new orders are a focal point. Estimating the timing and specific value of new orders is hard because they come at customers' convenience and sometimes even big ones get metered out incrementally.

But it's looking more and more like this could be a really good year for us in new orders. First quarter orders were $136 million, pretty flat versus last year. It's a little bit arbitrary, though, because the $46 million MIDS LVT HAIPE 8 order fell into the second quarter this year instead of the first quarter last year. We had record KG-250 orders. While Blue orders were even stronger than we expected, when we got the first preproduction orders for MIDS JTRS, which is very significant. The MIDS Lot 8 Q2 is going to be very good, and could approach even $200 million depending on some outcomes.

Here are some of the specific new things that we're targeting. Not all of them are going to happen this quarter or necessarily at all, and they won't all be instantly big but some combination of these things is what's going to drive the order year that is taking shape

We've had a fair amount of initial funding in MIDS JTRS that is moving towards growing the program substantially. One is the Airborne Networking Waveform, also known as TTNT. Another area that is progressing with some exploratory funding is to add new form factors to MIDS J and new operating modes, which would extend it to new Airborne platforms. Together these could more than double the size of MIDS J compared to our MIDS LVT Program.

We also won a contract with Harris on the Boeing team for the weapons data link for small diameter bomb. Our role is to add the advanced networking nodes, like Link-16 and TTNT. Boeing is still competing to be down selected, but this is a big step for us and our team with Harris and the whole field of network weapons.

We were selected in the new information assurance area called media encryption, which secures the data that rests on hard drives, on laptops, or PCs. That's a very promising new area, and what we're doing is working the Type I DOD version of that. It fits well with our tactical internet protocol, Kryptos, that are used to get the mobile data to the users in the first place.

We also are contending more on the larger Krypto modernization market, where our HAIPE internet protocol security expertise is valuable. We've won new programs to update DOD's existing UHF satellite ground segment, plus the impending launch of what's called the mobile user objective system of UHF satellites is creating more pull for updating our 20,000 plus existing UHF terminals and modems to (inaudible) capability, as well as for us to provide completely new terminals.

The impending launch of the wideband global satellite system that includes a DOD Ka-Band is also creating opportunities for us. And the down select for the multi billion dollar TSAT Program is coming up this fall. We have a very significant role on the Lockheed Team.

On the commercial side, if you follow Space News, there was an article in there last week saying that Eutelsat's Board had approved construction and launch of a new Ka-Band satellite for consumer broadband in Europe, and that Eutelsat is working with us to create a high-speed consumer broadband service in Europe. We're very excited about that opportunity. Together we're planning to improve the cost effectiveness of satellite broadband by about an order of magnitude compared to what's -- we've done with WildBlue here in the U.S.

We have already been working with Eutelsat to use their existing Ka-Band capacity with some telcos in Europe and have gotten a very good reception. So the start of a substantial Ka-Band broadband market outside the U.S. is finally in sight, and we believe our partnership with Eutelsat will help us both internationally and here in the U.S., as well. And we've been doing a bunch in the satellite mobility area, and that seems like things are happening there, too.

Just going over the markets, we're very -- that we're in -- we're very positive about the market segments that we're participating in. We see good sector growth, and we like our competitive positioning. For government we deal with complex tactical data links, information assurance, and satellite aspects of network centric communications. Most of what we do, upgrades existing forces and weapons platforms, and is generally less acceptable to budget cuts than the new big ticket programs. A fair amount of our target Defense market is actually driven by replacing items that are becoming obsolete, so some of that spending is hard to defer.

I'll do a quick tour through the DOD landscape. Our MIDS LVT is basically in the middle of a long cycle. We've seen a lot of the U.S. production but there's still a lot of international to come, plus a long tail of maintenance and support as units come out of their multiyear warranties.

Our competitive performance has exceeded expectations, sharing the market pretty evenly with [DOS], our competitor, and contributing substantially to earnings. We've been very focused on renewing and expanding the market through the MIDS JTRS program, and that is going well, primarily because we've done very well at executing the program. It's not quite there yet, but it's becoming more clear how that market could be double the size of MIDS LVT and begin to ramp-up in the next year or two.

Our Boeing small diameter bomb contract with Harris gives us a foothold to expand into the weapons data link market.

Our Interdyne UAV business is relatively small but growing very nicely. Our high assurance internet protocol encryption entry with the KG-250 has been going very well, especially recently. That has given us a good foothold in the broader information assurance market, building on the core technology that makes KG-250 so competitive. That's one of the areas we've been investing in.

Media encryption, which I mentioned, is a very interesting adjunct. We tend to compete primarily there in the information assurance markets in general with General Dynamics, and L-3, and have found few other potential new entrants, and think we're more than holding our own in that business.

In the military satellite communications segment, just a few years ago we could really only play a role in the UHF satellites, where we did very well but where the market potential was capped. Now, we are very much involved in several systems that are likely to see good growth, KySat being one, wideband global system, mobile user objective system, Blue Force tracking systems, [MRSAT] and their [EGAN] service, as well as the use of commercial Ku-Band for programs like joint network news and (inaudible).

Our MIL SATCOM business is growing a lot, and there's some pretty big potential orders to be awarded in the next several quarters. Overall, we think our positioning in network centric Defense electronics is exceptional.

On the commercial side, the biggest story is WildBlue's fantastic growth in fixed broadband since the launch of [WildBlue One] and adding dish network retail distribution. They've passed 200,000 subscribers and are adding as many as 30,000 a month, and that should only get better when Direct TV also launches retail distribution which should be soon this quarter.

We think our success here is due to the convergence of three factors. One, is obviously our ground networking system and consumer terminals. Number two is WildBlue's strong network and service operations, distribution, and business approach. And third is the bandwidth advantage they have from their spot beam bent pipe Ka-Band satellites.

We're working very hard to capitalize on this success in two ways. One is to reproduce those conditions in good markets outside the U.S., and our partnership with Eutelsat seems a very promising start and helps validate our view of the sources of value. The second is to expand in the U.S. A key in both cases is to further improve the capacity and cost effectiveness of the satellite bandwidth. We think we can improve that by an order of magnitude which would make an already obviously very popular service much, much better. We think it's in a stage where technology leadership is very important and we have a big lead. We think we're the runaway leader in Ka-Band products so far.

We're also believers in Ku-Band mobile networks. We'll have some good stuff -- we're hoping we'll have some good stuff to talk about next quarter or so. And, finally, we're still working into some very interesting mobile satellite services sector applications that extend beyond our existing ground based [theme forming] entry with Boeing and [MSB].

Okay, so after that, I'll turn to some of the main business highlights from this past quarter. Starting with Defense. Overall, our Defense business continue to perform very well. While results for this quarter were a little lower than expected as a result of the delivery delays of some KG-250 shipments that we discussed earlier, we believe we'll catch-up with this -- with that in the second quarter.

MIDS and MIDS JTRS remains our single largest area. Production of MIDS low volume terminals remains strong and profitable, and subsequent to the quarter end we announced our most recent production Lot 8 Award. We expect there will be more follow-on domestic and international orders as there have been in prior years. MIDS JTRS continues to hit critical development milestones and the order for preproduction terminals this quarter is a sign of the program maturity. We anticipate significant additional development work during this fiscal year on MIDS J, which also ultimately will significantly expand the production market, too.

We continue to see near-term growth opportunities in our Interdyne UAV video data links business, with their next generation products, and we've gotten good exposure and interest on a new product which makes it very easy and convenient to upgrade analog video links to the benefits of digital.

Information assurance remains an opportunity rich environment. While in the past there had been fluctuations in KG-250 demand due to a number of factors, the fourth quarter of last year and the first quarter orders were both very strong, and this quarter looks promising, too.

We indicated last quarter that at least for awhile our KG-250 was the only [AB] compliant network encryptor that certified for what's called foreign interoperability, and that may be a factor in those recent good order trends.

We're seeing very robust information assurance proposal activity, including in a number of potentially large new markets. We're also seeing good growth in our government satellite business. MIL SATCOM opportunities are expanding steadily, and the addition of the $90 million indefinite delivery, indefinite quantity contract under the GSA provides a convenient contract vehicle to sell a wide variety of government satellite products and services. The (inaudible) market that applies our commercial Ku-Band mobile products to DODs still looks good but has been a little slower to start than we thought, and we think it's still pending.

The biggest story in our commercial business is Ka-Band broadband. Last quarter we announced a new exclusive requirements type contract with WildBlue, and that is valued around $200 million. The requirements contract does not fit our definition of backlog, so we record the firm orders as we get them on a quarterly basis. At the rate things are going we'll realize the revenue for that contract faster than we originally thought. We're putting a lot of effort into exploring how to increase the capacity of existing Ka-Band satellites and how to work with WildBlue on future satellites. We'll know more about this next quarter.

We're also working closely with Eutelsat on a very high capacity Ka-Band satellite system for Europe and how to leverage those efforts for both the U.S. and European markets.

Our VSAT networks business has generally been pretty steady, but the first quarter was slow. We've had very good success in applying commercial VSAT networks into the DOD market, and we're leveraging that in light of some new opportunities. We're shifting resources and are adjusting our structure somewhat to accommodate this shift. Given the success we've had with WildBlue, we're seeing increased interest in applications for our [surf beam] consumer broadband products on Ku-Band, and we're organizing to better leverage that in our VSAT networks channels. We're much better positioned to exploit that now than we were last year.

Longer term we see more and more convergence between surf beam broadband and what is otherwise considered the more conventional VSAT market. As an example, Eutelsat has been one of our biggest VSAT customers through its [Sky Logics] subsidiary that offers Ku-Band VSAT services in Europe, so clearly a very high capacity Ka-Band satellite would be a big benefit to our VSAT networks position there, too.

We see other opportunities to reproduce this type of synergy in other global markets. As we've previously discussed, we're experiencing renewed interest in mobile broadband in the aviation market. Long haul international, as well as domestic U.S. carriers, have recently increased their activity in this area in general. There have been recent announcements regarding trials and planned near-term selection of technologies targeted at particular classes of planes or routes. We continue to believe this market will emerge, and we are well positioned to provide a proven true broadband service to the aviation market and other mobile markets, including maritime and trains. But there's still a lot of confusion in the market.

Ultimately, we don't actually think that either cellular, air-to-ground, or L or S band, MSS solutions are really viable or scaleable, but it might take awhile to sort that out. Meanwhile, we're doing well with our business jet equipment and service business and are gradually expanding that in both geographic coverage and platform coverage. I don't think it's a market that we can force, so we're making sure we've got staying power, and think things are going okay so far.

Last year our antenna systems business was working through some low margined programs which hurt performance there. This year it's off to a good start financially. Orders are up and backlog is growing. We're also working to expand our addressable market there, especially in mobile technology. This is a good fit with our [com on the move] business, among others.

Our recent acquisition of JAST, a very creative mobile antenna technology company in Switzerland, fits with that. We've had some interesting opportunities to leverage our success in satellite networking in the ground base [theme] forming contract, into other significant and attractive satellite system program opportunities in the NSS band. It's still a little too early to tell how those will turn out, but we'll know more in the next couple of quarters on some of them.

In general, we are working to synthesize technologies from some of our recent acquisitions, such as ECC, ICT, and JAST to leverage our position in the fixed and mobile satellite areas. This is part of where our increased discretionary spending is going. Overall, we're excited and optimistic about it. We still plan to continue and increase those investments, while getting the earnings growth we're aiming for this fiscal year.

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

Thanks, Mark.

I'll start with the P&L and segment results, then cover the balance sheet and cash flows. As Mark mentioned, for the first quarter our operating results were below our plans. Revenues were $128.6 million, essentially flat when compared to last year. The cost of revenue reduction reflects improved margin performance, particularly in our commercial segment.

SG&A expenses were higher YOY, mostly due to higher selling and support costs from increased new business activity, principally in the government segment, and from our ICT acquisition in the fourth quarter of last fiscal year.

Research and development expenses were up significantly in the first quarter YOY due to the development of next generation information assurance technology and UAV equipment. This was in line with our previous communications to increase discretionary investments in key technologies based on expected market demand and affordability, which we thought we had.

Quarterly amortization of intangibles is higher for the first quarter YOY due to our acquisitions in last fiscal year. Enerdyne Technologies in the first quarter and Intelligent Compression Technologies in the fourth quarter, offset partially by the completed amortization of certain intangibles.

Income from operations for the first quarter of fiscal year 2008 includes noncash stock based compensation expenses of $1.8 million and $1.5 million for the fiscal year 2007 first quarter. The increase in other income represents primarily interest income earned from higher invested cash balances YOY.

Our income tax provision for the first quarter reflects a quarterly tax rate of about 27% for the quarter versus 33% for the same period last year. If you recall, last year at this time the Federal R&D credit had not been expended and we received no Federal benefit. The rate for this year assumes three quarters of benefit as the credit is set to expire in December of this year, and we estimate in the 28% range for the full fiscal year.

So all up our net income was lower by about 22%. The lower net income combined with share count increase resulted in lower GAAP diluted EPS from $0.18 per share to $0.13 per share, and non-GAAP diluted EPS from $0.26 a share to $0.21 per share. The share count increase is about half from stock issued for acquisitions and about half related to our employee stock purchase and stock option programs. We will address the difference between GAAP and non-GAAP diluted EPS in a few slides.

For segment results, in the government segments revenues from the first quarter were about $70.6 million, a 9% increase over the same period last year. The increase for the quarter is primarily related to increases in funded development of next generation satellite communications and data link products and information assurance projects, offset by reduced sales of information assurance products, Mark mentioned earlier.

In the commercial segment revenues from the first quarter were $58 million, a 9.5% reduction over the same period last year. The YOY first quarter reduction is primarily related to decreases in enterprise VSAT products, some of which is now marketed and sold to government customers, offset by increases in our consumer broadband sales.

In the first quarter the government segment posted operating earnings of $6.2 million, a decrease of about 48% from the prior year. The YOY operating earnings decrease is due to increased R&D investments of next generation information assurance and UAV products of about $2.6 million and higher new business proposal costs of about $2.3 million.

The commercial segment operating margins increased substantially in the first quarter YOY due to the improved performance in our consumer broadband and antenna systems areas. These increases were partially offset by reduced earnings in our enterprise VSAT products and from investments in our recent ICT acquisition.

Operating earnings amount includes noncash share based compensation expense charges of approximately $1.5 million for the first quarter of fiscal year 2008 and $1.5 million in the first quarter of fiscal year 2007.

As we look at the GAAP and non-GAAP (inaudible) difference, non-GAAP results exclude the affects of acquisition related intangibles and the affects of noncash share based compensation expenses. The first quarter 2007 amounts also include a $1.1 million onetime charge we recorded for the cumulative impact of accounting corrections related to employee stock options, and it is included in the stock based compensation line.

It should also be noted YOY in the first quarter the weighted average shares used for the EPS computation increased by over 2.5 million shares. The share increase is due to stock issued for the -- for acquisitions, stock options, and employee stock purchase plan issuances, and the impact of the Treasury stock [method.]

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

Accounts receivable decreased due to the collections as we met program milestone and increased our book and ship orders. Unbilled accounts receivable increased primarily in our government segment due to the timing of contract milestones. We're pleased with our continued progress in the receivables areas reflecting better program execution and cash payments.

Inventory is down about $2.5 million since the beginning of the fiscal year. We've been focused on improving inventory turns and believe we're making progress here.

Deferred income taxes increased primarily as a result of the adoption of a new tax related accounting center called FIN 48 and the related accounting.

Goodwill and intangibles decreased due to regular quarterly amortization. Debt, property and equipment is almost $3 million due to capital additions, mostly for facility expansion and test equipment to support our business growth, offset by quarterly depreciation. Our capital expenditures were in line with our expectations. The change in other long-term assets is primarily due to the deferred income taxes, also from the adoption of FIN 48.

As we look at liabilities and equity, accounts payable increased slightly, but days payable balances with our vendors are still well below historical averages. Advances were up $2.8 million, mostly in our commercial segment, reflecting improved terms of certain awards and the timing of receipts and contract milestones, and this amount can fluctuate from quarter to quarter.

The change in other current liabilities, primarily relates to plan payments made in the first quarter for 401(k) match and performance bonuses of almost $9 million and about $8.7 million associated with the ECC acquisition terms, and from the issuance of stock of approximately $5 million from the Interdyne acquisition.

The increase in other long-term liabilities is primarily related to an increase in long-term income taxes associated with the adoption of FIN 48.

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

As we turn to cash flows, we had another strong quarter for cash flows, generating $15.8 million in cash from operations. This despite the payment of almost $9 million for 401(k) match and performance bonuses.

In addition to the strong earnings and noncash add backs we made substantial progress in working capital accounts, primarily through program performance and deliveries. Cash flows from investing activity for the quarter reflects the cash payout according to the acquisition provisions for ECC and Interdyne and capital expenditures for business expansion as our Company continues to grow. We expect capital expenditures to be flat to down next quarter.

Cash provided by financing activities is primarily from the net proceeds of common stock issuance. Net for the quarter cash increased by almost $10 million.

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

Okay. Thanks, Ron. So I'll go into the outlook for our -- for the rest of our fiscal year '08. And this next slide shows our current outlook for fiscal year '08, which is essentially the same as we presented last quarter, even though Q1 was below both our plan and the consensus estimates.

I mentioned earlier that in the time period after our conference call last quarter we didn't really see consensus estimates adjust sufficiently to reflect our plans for quarterly earnings this fiscal year, those being more heavily [SKU'd] to the second half than normal even though the consensus for the year as a whole is in the middle of our range.

We still expect earnings this year to be more back loaded than the current consensus reflects. At this point, we think that our second quarter is going to be in the range of the current estimates. That would leave the balance divided between the third and fourth quarter, with the fourth quarter being higher than the third quarter. Combined the outlook for Q3 and Q4 would now be several cents higher than the consensus indicates, essentially by about the shortfall of the first quarter. We'll have better visibility into the Q3 and Q4 split by the end of the second quarter.

As of now our awards outlook for Q2 looks to be over around $160 million and depending on timing and outcomes could even approach $200 million. So, obviously, that would give us more clarity and should help people understand how we anticipate our second half growth consistent with our outlook. If things go well for the year not only should we see the revenue and earnings we've been aiming at but also better YOY order growth.

Another point we want to revisit is at the Federal R&D tax credit legislation that was passed at the end of calendar 2006 only extended the credit through calendar 2007. Our fiscal '08 extends into the first calendar quarter of the year 2008 so if the R&D credit is not extended again it will impact our effective tax rate and might push us more towards the lower end of our fiscal year range versus the middle.

So that covers all the points that we wanted to make, and going back in summary, our results were lower than we planned for the first quarter but our outlook for fiscal year '08 is unchanged. Although it's not unusual for our year to be somewhat SKU'd towards the back half, the extent to which it's SKU'd this year is greater than usual. Our visibility into the next few quarters is improving and is primarily driven by products or programs for which we're already involved.

Our balance sheet is really strong and gives us some strategic flexibility. We remain very pleased with the opportunities for growth and our competitive position in our target commercial and Defense markets. We like the balance and synergies across our commercial and Defense markets.

We've presented a little more detail on emerging opportunities in Ka-Band broadband, information assurance, the evolution of MIDS JTRS and activities in MIL SATCOM. I know we've covered a lot of stuff, and we're happy to take any questions you might have now.

(OPERATOR INSTRUCTIONS.)

And our first question comes from the line of Steve Mather of SMH Capital. You may proceed.

Well, thanks. Good afternoon, Mark.

Hi, Steve.

Mark, commercial EBITDA margins for your competitors are 10% to 12%, and you guys are barely positive. And I know you talked about it a little bit just now, but I mean what's really going to affect change to get it from barely positive to a, you know, a pretty impressive number where some other folks are?

The -- well, I tell you, you know, there's different factors in different segments. The thing that's helped the most has been the growth that we've had in the Ka-Band, and we, you know, one of the things we wanted to remind people about is that when we announced our big order last quarter with WildBlue we made a conscious decision to pass on price cuts to them in order to make the market bigger. I think that is working, but that sort of reset us a little bit in terms of where we were in terms of margins. So we expect to work that back to be better.

And we are doing things on the VSAT business. I can tell you also that what we're aiming to do as we go through different growth cycles in government and commercial is, you know, we have different perspectives or timelines of where we expect earnings to be in each, and right now we still see the commercial market as having kind of bigger up side. It's going to be harder to match the margins we have in Defense but we expect them to continue to improve, and we feel like they have been improving over the last few quarters.

Okay. And then can you leverage your core, let's say, Defense technology to become a prime on some of these upcoming contracts in the next year or so, that will kind of put you on path to double or even triple your government revenue? I mean some other folks are doing that in the kind of tactical handheld radio business, and their revs are up pretty big, twice in fact, you know, 45% versus 23% for you guys. And I'm just wondering, can you really -- do you see the opportunity to double or even triple your government revenue?

Okay. So two different things. One is do we see the opportunity to double or triple our government revenue? The answer to that is yes; okay? No, one thing I do want to say is we've said several times in the past that where we think is good, you know, if we can get consistent 15% to 20% growth YOY, year after year for long periods of time we think that we're doing well, and I think in that context, yes, we can double or triple our government revenue in the paths that we're on.

So as far as prime contracting goes, though we already do more than half of our Defense business as prime contractors, our business, the part -- the way I describe our role is we're really a prime for what I would consider to be products. We're not a prime for systems, and there's kind of two tiers, at least two tiers above us. I mean one tier kind of above us would be, let's say a company the size of Harris. And Harris is in a position to prime systems that work that we are not, and that's part of the reason that we like teaming with companies that size or bigger.

I don't think you're going to see a big change for us in the type of programs that we get involved in. I do think that kind of to your point that what we are looking to do or become are be prime contractors in markets that are bigger than they have been in the past and MIDS LVT, as an example, compared to other programs we've primed as an example of that, MIDS JTRS would be the natural progression of that, and that's an example of how that aspect of our business could double over the next, say, four or five years.

Okay. Thanks, Mark.

Thank you.

And our next question comes from the line of Tom Watts of Cowen & Company. You may proceed.

Hi, Mark. Just a little more on the WildBlue front, can you give us some sense of what weekly install rates are running there? And are those corresponding roughly to your shipment rates?

Yes, I think that the numbers, basically, the numbers that we're quoting are numbers that they've come out and said publicly in terms of where they stand, and so --

Okay. What were those numbers?

They're even talking about install, install rates that have been 1,000 to 1,500 a day, that's kind of a -- so that's good, that's it. It's the sell through that's really pulling that, and that's consistent with that 30,000 kind of peak number that we're talking about.

Okay.

So those are very impressive, those numbers, by the way.

Okay. And -- no -- I think -- I know before you'd said you'd hope for 25,000 and it's clearly exceeded that. At what point might we see them commit to an additional satellite? Is that something more than a year away? And could you also update us on any actions related to your satellite license?

Okay. The -- we think that WildBlue is going to take action for another satellite a lot sooner rather than later, and that's because if you look at the rates that we're describing the -- basically, that puts them at a pretty good likelihood of selling out of capacity before a new satellite began in orbit. So I think, you know, that gets our -- their attention as well as ours, and that's what would lead someone to believe that they'll do something soon.

We, you know, for us we had two filings for orbital slots. Those filings have been granted, and so now that's kind of where things stand there. I think one of the points made in the past and we want to make again is that WildBlue actually just due to the combination of delays that they had and kind of things stretching out, basically lost their orbital spot. So anybody that, you know, somebody wants to work with them, bringing orbital slots to the table is a plus from that perspective.

And does that -- I assume you're in discussions with them about potentially partnering on that slot, is that something that seems like a likely solution for the next satellite?

I'd say WildBlue is, as they should, evaluating a range of opportunities. We think that we're very interested in working with them. We think we're going to bring them a really, really good offer, and we'll find out probably about over the next quarter, I think it'll be a lot more clear how that will play out.

And is there a chance that you would make a significant investment in such a venture?

Actually, the structure of it's not so clear, and I don't really want to speculate yet. You know, what I would say is it is -- we don't want to rule anything out, so I don't want to rule out the possibility that we would make an investment.

Okay. And then just one final area, on MIDS J there's certainly been a lot of movement around the MIDS -- around the JTRS program overall, and in the past you've said that's likely to benefit you even if other areas are cut-back. Are we likely to see more awards or more platforms added to MIDS J in the near term, or could we see additional awards there?

I would say it's moving in that direction and it's, you know, sometimes it's hard to tell exactly when it -- when you can say it happened, but as I mentioned in the course of the call we've gotten some initial -- I'd call it kind of exploratory funding to start doing that; okay?

And I think what that reflects is the government and the program office keeping its options open, it's exploring its options, and what you would probably conclude from that is the probability that MIDS J would go in that direction is a lot higher than it was a few months ago, and hasn't quite completely flipped over yet but that's the direction that it's heading.

And then I know awhile ago you had talked about the ultimate revenue potential on the MIDS J program. I think it originally had started out in the $2 billion range and then it had gotten enlarged because of some of the development spending. Could you give us a sense of how big you think that opportunity is with the programs you have today and where that could go?

Okay. So the way -- I think a good way to describe it is ultimately the size of the program really depends on the platforms that it goes on, and the value of the terminals. And if you look at MIDS LVT, you know, in the past we've pretty much characterized that as in the range of a $2 billion lifetime production opportunity.

And so when we talk about the possibility that MIDS JTRS could double, that would double that, that would basically be by adding additional platforms that MIDS JTRS would go on that MIDS LVT doesn't, and that's, so that would tell you, you know, once you kind of get things going in the direction where those platforms adopt this hardware, that's where you'd say, "Oh, well, now we could sort of count up noses and say that's like a $4 billion lifetime opportunity."

And that's, I'll tell you we're not there yet but that's sort of things are moving towards that. And that could come -- the things that are sort of going to drive that would be, for instance, adding waveforms that would be used by platforms that MIDS LVT is not on. And one of those examples is this advanced networking waveform or TTNT.

The other big step would be coming up with form factors of the radio, and that'd be like a chassis configuration, a power supply configuration that fits those other airplanes, as an example. And those kinds of things are the things, you know, some of them where funding has already started and are more mature, others are a little more exploratory, but the government is starting to spend money in that direction.

Okay.

Does that answer it?

Yes, it does.

Okay.

Okay, Mark. Thanks very much.

Thanks, Tom.

And our next question comes from the line of Larry Harris of Oppenheimer. You may proceed.

Yes, thank you. I want to talk, I guess, or ask about the Airborne opportunity. There was some discussion of Lufthansa and their plans. You know, do we -- do you think that we could see several carriers moving forward in the next 18 months to try to offer service similar to what Boeing had with Connection?

Yes, I think the simple answer is yes. I think that the carriers that have the connection service really liked it. The passengers liked it, and I mean it's just obvious that people's expectations I mean sort of matched doing that. But I think the big question is how that's going to happen, and kind of the thing that's going well for us is that if you look at what's flying and what really delivers broadband, and we're basically the only one that has anything now, and we did the hardware for Connection.

And that's basically our entry in there. I think there's still, as I mentioned, there's still a lot of confusion. I mean if you looked around there was a service by a company called [Tensing], you know, around the same time as Boeing Connection, and they said that was broadband and that offered everything that you'd want on the internet. But it turned out if you look at what the pricing for that was, if you sent a PowerPoint file, a 10 megabyte attachment, it would cost you $100 or something.

I mean so the point is it's not so clear for some of these carriers what broadband means, but I think there's going to be more broadband on both long haul international and regional carriers, and we think that that's what's good for us.

Do you think that you might play, if some of these carriers move forward, a larger role, or maybe more of a systems integrator role than you played on Boeing Connection, and do you see opportunities to maybe bring the operating costs of the service down?

Yes. Right now, the answer to both of those questions is yes. On the Boeing Connection program the only thing we provided were modems. One of the things that we're targeting now, and this was clearly a concern for the air carriers, was the equipment was heavy and it was expensive. And we have existing products now and evolutions of them which make the terminals much less expensive and a lot lighter to install. And also because we've been actually operating this business jet service we have a good handle on what it would cost on a recurring basis to operate this service, and we feel we can do that more cost effectively. So those -- we are working those three areas.

There are a few others area that, I think they're going to involve partnerships in a couple of respects, and so those are some of the things that we're, you know, we're still exploring. And one example, you mentioned Lufthansa, and T-Mobile has been cited as one of the leading candidates for Lufthansa. And you see what T-Mobile brings is the ability to sort of integrate the onboard in-flight WiFi service with the on-the-ground service, and that's one angle that carriers are looking at. And that'd be an example where, you know, it'd probably be smart to partner with someone like that for carriers that see it that way.

I understand. All right. Well, thank you very much.

Thank you, Larry.

(OPERATOR INSTRUCTIONS.)

And our next question comes from the line of Jim McIlree of Unterburg. You may proceed.

Thank you. Good evening. Ron, earlier you talked about a $2.6 million increase in R&D and $2.3 million in bid and proposal. You were talking about relative to the prior year; right? Not relative to your plan?

Correct.

Okay.

I was talking about the differences YOY.

Okay. Great. And maybe my math is just wrong but it looks like your proforma tax rate was around 31%. Is -- when you're talking about taxes for the year are you talking about proforma tax rate or a GAAP tax rate?

GAAP tax rate.

Okay.

Really our effective rate that we're using in our provision for income taxes.

Okay. Great. And relative to the second half outlook, it's not -- you're not looking for just a resumption of the information assurance, which if I understand it correctly you're expecting in Q2. You're looking for a lot of these things that you've talked about during the call to accelerate in the second half; is that correct?

Yes.

Okay. Great. And then can you just give a brief update on the Blue Force tracking project, where you are in that R&D phase, and when you think you might get a rip or full-blown production?

Okay. The Blue Force tracking program that we're doing is part of, you know, it's called [FECB2], and that -- that's one aspect of all of the mobile kind of movement tracking, Blue Force tracking, different programs that there are going on. That's a big one. I mean that's the one that is round numbers of a few 100,000 terminals for that particular version.

What's happened is we won a prototype contract that we started kind of earlier in the spring. It's about a one-year program. We've gone through our initial designer views. Things have gone very well. I think that -- I'd say very, very well. I think that really kind of the purpose of the prototype, as we've said in the past, is to demonstrate that we can get the density of users and the update rate, that the combination of those two, lots of users in close geographic area with high update rates. If we can do that, that's what the key is to getting into production.

I think that the government could go one of two ways. One is they could wait for a completion of the prototype contract, get the [tests], and (inaudible) then they'll rip at that point, or start a production.

The other thing is that if things continue to go well and they get the confidence that we hope they would get through the designer view process that we could see some of that stuff happen earlier. And earlier would be relative to the completion of the prototype program which is kind of a little less than a year from now.

Okay.

Does that answer your question?

No, that's terrific. That's great. I think that's it. Thank you very much.

Okay. Thank you, Jim.

Can we take one more call?

Of course. And our next question will come from the line of Rich Valera of Needham & Company. You may proceed.

Thanks. Good evening, guys. Mark, just wanted to clarify, I think you mentioned in your prepared remarks [$160 million] of potential orders. I think that was in the second quarter with as much as $200 million. I just wanted to confirm that was a potential second quarter bookings number?

Yes, this current quarter bookings.

Great. And are there any specific large awards you could point to that we could look for to get a sense of how you're progressing towards either of those numbers?

I hate to say it, it's a little bit hard. The single biggest piece of that is the one that we already got which is the MIDS LVT Lot 8 Award, and that was about $46 million. It's conceivable but I wouldn't -- we're not counting on anything, any individual ones that are bigger than that.

After that, kind of the next bigger pieces will be things that are sort of add-ons to existing programs, with MIDS J being kind of the leading candidate. There are a couple of other kind of midsized competitive contracts that could be awarded this quarter and that would certainly help. And those, I think they'll show up on Defense (inaudible), in press releases.

Right. Okay.

I mean if you see things that are kind of in the $15 million to $20 million range that you go, "Wow, what was that," well, that'll help.

Sure.

There was one; okay?

Yes. That's helpful. And, Ron, I think in past releases you've given a line-by-line stock comp expense breakout, and I don't believe it's in this release, can you give that information? Like [cogs], SG&A, R&D, stock comp?

Yes, we took that out, more or less intentionally, and I don't have that information in front of me. I guess we didn't see that it was that important by line item, but I guess we could always add it back in if we think that's important to disclose.

Okay. No, it's just helpful for model consistency, but not a big deal.

Okay.

Okay. Thanks very much.

Okay, thanks a lot, Rich.

Well, that concludes our prepared remarks and the questions and answers. We appreciate everybody for dialing in, and we look forward to talking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.