Viasat Inc (VSAT) 2008 Q2 法說會逐字稿

Good day, and welcome to the ViaSat Incorporated second quarter fiscal year 2008 earnings results conference. As a reminder today's call is being recorded. At this time, I would like to turn the conference over to the Chairman and Chief Executive Officer, Mr. Mark Dankberg. Please go ahead, sir.

Okay, thanks. Good afternoon, everyone, and welcome to our earnings conference call for our second quarter ending September 28th of 2007. I'm Mark Dankberg, Chairman and CEO. And I've got with me, Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; 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 discussion of the important risk factors that could cause actual events or results to differ materially than those contained in our projections or forward-looking statements. The Company undertakes no obligation to update publicly or advise any forward-looking statements.

Okay, thanks Keven. So, we will be referring to slides that are available over the web and we'll start with our fiscal 2008 second quarter financial results and then a business overview perspective. And after that, Ron Wangerin will discuss our financial results in more detail. Finally, I'll talk about a couple of strategic points and update our outlook for the remainder of fiscal year '08 and then give a quick summary. And then we'll take some questions.

So, looking at the second quarter financial summary, our financial results were pretty strong. New orders were at a record high, at about $190 million, nearer the higher end of our estimates from last period. That's up 34% over last year's second quarter.

Revenues were $146.6 million, also a record, and 12% higher than last year.

And margins were pretty good, too. Our GAAP diluted earnings per share was $0.27 per share this year versus $0.21 last year, a 29% increase. Non-GAAP diluted EPS was $0.35 this year, compared to $0.28 a share last year, a 25% gain.

Then, looking at our second quarter year-to-date financial summary for the first half of our fiscal '08, orders to date are $325.5 million, an increase of 18% year-over-year. Revenues for the first half were $275 million, which is up about 6%, compared to a very strong first half from last year. We've added about $50 million to backlog so far in the first half.

Good second quarter earnings helped offset some of the weakness in our first quarter. GAAP diluted earnings per share of $0.40 a share this year is up about 3%, compared to last year's first half. And non-GAAP diluted EPS of $0.56 is about 5% higher than fiscal year '07. We'll provide explicit bridge data from GAAP to non-GAAP later in the call.

So, overall, our financial results for the second quarter are pretty much in line with our plans and remain consistent with our outlook for the year as a whole. Last quarter we noted that we had been spending noticeably more on discretionary research and development and proposal preparation, and we're expecting to see some of the benefits of that in the second quarter, which turned out to be the case, given our record new orders.

So, with that, I'll move on to the top level overview. And the main financial points are, first we bounced back quite nicely from the KG-250 Crypto product shipment shortfall that hurt our first quarter earnings. Orders, sales and earnings all hit record highs. We have been able to continue to increase our discretionary investments in R&D and do proposals, while still hitting our earnings targets. We believe we've been aiming at good growth target markets and $190 million in second quarter orders are a good indication of that. We had very good all around performance in information assurance, tactical data links, the UAV data links and consumer broadband. We see very good long-term growth opportunities in each of those areas, as well as the mobile satellite and defense satellite networks.

Cash flow for the quarter was very strong again, also, and we ended the period with over $128 million in cash.

And, as I mentioned, we had our best quarter ever for new orders at $190 million. Some of the major factors included our MIDS LVT Lot 8 production award, a very strong quarter in UAV data links, very solid orders for KG-250s and some other new information assurance programs.

Market demand for WildBlue's Ka band service has been very, very good, probably a little stronger than expected. Remember that we only record orders as they become firm according to our half million unit ordering agreement, so, by definition, new orders there will be pretty close to revenues. We'll talk a little bit more about some of the new program wins in the business highlight section.

One important point is that there is still a lot of new business opportunities pending. These include extensions of existing programs, such as MIDS JTRS, the Blue Force tracking program, upgrades to the Joint Network Node Program, security system work on a large building Airborne Terminal Program called FAB-T, and a number of others.

We have a substantial amount of upside on the TSAT defense satellite system program, which is supposed to be awarded in the next several months.

Also the market demand for standard products that ship under ordering agreement, such as Surfbeam, Ka-band terminals for WildBlue and others, and KG-250s seem strong. And our outlook on being able to estimate those seems good.

I want to repeat that the timing of new orders is often unpredictable and sometimes programs get awarded in increments that are different than we anticipate. But overall, we think our prospects for second half orders are as good as or possibly even better than the first half. That would yield very solid year-over-year growth in new orders and should build confidence in sustaining our growth.

Finally, one other point to consider here is that we only report the value of firm contract awards. A number of the areas we've been focused on in both government and some commercial opportunities are really multi-year, multi-phased projects. Those programs can give us increased visibility into pending future awards, although, of course, there are still some uncertainties about the timing to follow-on orders and the potential for program plans to change.

Okay, so now we'll turn to some of the main business highlights of this past quarter, starting with defense.

Overall, our defense business is doing very well and, for the moment, is outpacing our commercial business in revenue growth. We are also becoming increasingly successful at migrating commercial technologies into defense markets, a theme I'll return to later in the call. Basically, we've been successful in a good fraction of our new initiatives and that's giving us confidence in continuing to target exciting new areas.

I mentioned the Data Links business is doing well, including the MIDS Lot-8 production contract awarded in second quarter. We are anticipating continued new orders for international MIDS as well.

One recent important accomplishment for MIDS JTRS was the first test flight of a MIDS J terminal on an F-18 at China Lake Naval Air Station. The flight used a complete hardware terminal configuration and was operated in tack hand mode, which is a navigational aide. The test was a success and further flight-testing, including additional modes, are planned and/or underway. It's a good step to bringing MIDS JTRS into production.

Our Enerdyne subsidiary had a great quarter for new orders, paving the way for continued growth in UAV data links. This included production of existing products and some important strategic orders for new products that we think can significantly expand our market.

The information assurance area bounced back nicely from the first quarter KG-250 shipment shortfall. We shipped a record number of units and had a very strong quarter for new orders, as well. Although quarter-to-quarter orders and shipments can be a little erratic, there's a very clear positive trend in sustained growth of KG-250s overall.

But perhaps an even bigger story is the steadily growing breadth and depth of our information assurance business in total. This quarter we won two new key orders, one for media encryptors, which protect what's called data that's at rest on users' PCs.

And the second, to replace an older legacy cryptographic system. Media encryption is a natural extension of our target market for tactical edge network encryption. We are one of only two companies under contract for those media encryption products. The market is new and products will not ship for a couple of more quarters, but we're excited about the potential. While unit selling prices will probably be lower than for the IP network encryptors, the volume of units will likely be much higher. That's because one network encryptor can serve a complete local area network of computers, but the media devices are essentially one per PC.

The other contract is our first win in the overall area of crypto modernization. That's a big market and there's probably close to about a billion dollars in aggregate that we could attack. Our first big win, the GOE contract which is mentioned in the press release, is anticipated to result in revenue of several tens of million dollars, if all production options were to be exercised, which is what we would expect. The initial contracted award is primarily for development and test and is about $9 million.

We are also actively engaged in other areas that are natural extensions of either products or customer relationships we already have in information assurance. But, for now, we consider the wins we've just described to be significant.

Our defense satellite business is also seeing good growth. We've successfully completed design reviews on the BlueForce Tracking Program and are beginning to work with our customer to plan the next phases.

ViaSat, working as a subcontractor and teammate with Globecom, was recently awarded a contract to develop a joint internet protocol modem, or JIPM, which is a next generation defense standard satellite modem that's sort of a networking equivalent of our SEPC standard, EBEM modem. A joint IP modem is a natural outgrowth of our LINKWAY and links to RV SAT products, which are already used by DOD terminals, such as the Joint Network Nodes. But the joint IP modem, like EBEM, will include DOD-specific security features. It also opens up a number of other terminal opportunities that were targeted for more secure organic DOD products versus purely commercial variance. So, we're really excited about this new program.

Plus, we're seeing a new round of upgrades to the existing UHF satellite systems, as well as potential opportunities on the new MUOS constellation.

So, now switching to commercial, the biggest story there continues to be Ka-band broadband. Terminal production in the second quarter continued to be strong. Overall, we can say that we have pretty much achieved the market and financial results in this area that we were aiming at when we began several years ago. We believe we have a good understanding of the market, a good understanding of how to be profitable and have proven financial results for this portion of our commercial business.

WildBlue has been the driver here, but they are probably going to plateau for a while, based on beam closures, due to their reaching capacity in several geographic areas. For now, their overall plan to increase Ka-band capacity is still unclear. WildBlue will get some capacity gains when they field some system software upgrades over the next few quarters.

We believe there will also be some exciting new developments in satellite capacity announced in the next quarter, but completely new satellite capacity is going to be about three years away. We do expect to have some additional growth opportunities in the interim involving new geographic markets, such as Europe, working with Eutelsat, as well as some new infrastructure opportunities.

Of course, the capacity limitations of existing Ka-band satellites have been a factor that we were keenly aware of and been anticipating. So, while it will somewhat constrain our growth in this particular area, we have factored that into our overall company-wide growth plans already.

But a very key takeaway is that market demand for Ka-band satellite service has been extremely strong and we believe we have a very good understanding of the market, which we expect to leverage into the future. And, for instance, if you look back at the June quarter, the number of new subscriber ads for WildBlue was about double that of Clearwire, which has had a very high profile on terrestrial broadband wireless. So, we see the key to sustained growth is more and better Ka-band capacity and we believe that will happen and create a substantial wave of growth in a timeframe that will be much, much faster than it took to launch WildBlue in the first place.

Our commercial VSAT technology has done very well in government markets, but has declined somewhat in enterprise markets. We're addressing this in a couple of ways and believe we are making progress.

On the broadband mobile front, a few airlines have announced trials with competing technologies or a competing satellite system in the aviation market. As I mentioned last quarter, we still perceive a lot of confusion in this area. Meanwhile, we're still working with some other airlines and are hopeful of launching some initial services and we say stay tuned there.

Meanwhile, we're steadily increasing the reach and size of our ArcLight aviation, maritime and terrestrial mobile networks. We do think we have a good handle on the key technology aspects and are continuing to invest consistent with the budget -- with our own budgets and the competitive environment.

Our antenna systems area has rebounded very nicely and shown strong orders and good earnings this fiscal year. In general, we're working to synthesize technology from some of our recent acquisitions, such as ECC, ICT and JAST, to leverage our position in the fixed and mobile satellite areas for both defense and commercial applications. This is part of where our increased discretionary spending is going and is effectively reducing the earnings in our commercial segment. Overall, we're optimistic about it. We still plan to continue and possibly increase these investments, while getting the earnings growth we've been targeting.

So, 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 the P&L and segment results and then cover the balance sheet and cash flows.

As Mark mentioned, for the second quarter, operating results were in line with our expectations. Revenues were $146.6 million, a new record, and an 11.5% increase when compared to last year. The cost of revenue percentage reduction reflects improved margin performance, particularly in our consumer broadband and government products areas.

Selling, general and administrative expenses were higher year-over-year, mostly due to higher selling and support costs from increased new business activity and from our ICT acquisition in the fourth quarter of last fiscal year.

Research and development expenses were up significantly in the second quarter year-over-year due to the development of next-generation information assurance, unmanned aerial vehicle, mobile antenna and VSAT technologies. This was in line with our expectations in previous communications to increase discretionary investments in key technologies based on expected market demand and activity.

Quarterly amortization of intangibles is lower for the second quarter year-over-year, due to the completed amortization of certain intangibles, partially offset by the amortization of new intangibles from our JAST and ITT acquisitions.

Income from operations for the second quarter of fiscal year 2008 includes non-cash stock-based compensation expenses of $1.9 million and $500,000 for fiscal year 2007 second quarter. The increase in other income represents primarily interest income earned from higher invested cash balances year-over-year.

Our income tax provision for the second quarter reflects a quarterly tax rate of about 28% versus 34% the same period last year. If you recall, last year at this time, the federal R&D credit had not been extended and we received no benefit. The rate for this year assumes three quarters of benefit, as the rate is set to expire in December of this year.

So, all up, our net income was higher by about 31% on revenue increases of 12%. We will address the difference between GAAP and non-GAAP earnings per share in a few slides.

Year-to-date, revenues were $275.2 million and a 6% increase when compared to last year. The cost of revenue percentage reduction reflects improved margin performance, particularly in our consumer broadband products.

So more to our second quarter explanation. Selling, general and administrative expenses were higher year-over-year, mostly due to higher selling and support costs from increased new business activity and from our ICT acquisition in the fourth quarter of last fiscal year.

R&D is also up significantly year-to-date, year-over-year, due to the development of next-generation information assurance, unmanned aerial vehicle, mobile antenna and VSAT technologies. Quarterly amortization of intangibles is basically flat and reflects the completed amortization of certain intangibles, partially offset by the amortization of new intangibles from our JAST and ICT acquisitions.

Year-to-date income from operations through the second quarter of fiscal year 2008 includes non-cash stock-based compensation expenses of $3.7 million and $2.1 million for the same period of fiscal year 2007. The increase in other income represents primarily interest income earned from higher invested cash balances year-over-year.

Qualitatively, for the first six months of fiscal year 2008, our income before income taxes reflects higher revenues, better margins and higher investments in new contract awards and next-generation products to support future growth.

Year-to-date, our income tax provision reflects an annual estimated effective income tax rate of about 38%, excuse me, 28% versus 34% for the same period last year. The rate last year was high relative to historical levels, due to last year at this time the federal R&D credit had not been extended and we received no benefit. The rate for this year assumes three quarters of benefit, as the rate is set to expire in December of this year.

In looking at our segments, in the government segment, revenues for the second quarter were almost $80 million, a 14% increase over the same period last year. The increase for the quarter is primarily related to sales of next-generation military SATCOM systems.

In the commercial segment, revenues for the second quarter were $66.8 million, an 8.7% increase over the same period last year. The year-over-year second-quarter increase is primarily related to increased consumer mobile broadband and antenna system sales, offset by decreases in enterprise VSAT product sales, some of which are now sold and reported in the government segment.

In the second quarter, the government segment posted operating earnings of $11.9 million, a decrease of about 4.5% from the prior year. The year-over-year operating decrease is due to increased R&D investments of next-generation information assurance and unmanned aerial vehicle products of about $2 million and higher new business investment costs.

Commercial segment operating profit increased in the second quarter year-over-year, due to the improved performance of our consumer broadband and antenna systems areas, partially offset by reduced earnings in our enterprise VSAT products, investments in next-generation mobile antennas and from our recent ICT acquisition and new business pursuits at U.S. Monolithics.

For the second quarter, operating earning amounts include non-cash share-based compensation expense charges of approximately $1.9 million for fiscal year 2008, and $500,000 in the second quarter fiscal 2007.

Year-to-date, in the government segment, revenues were almost $150.4 million, a 12% increase over the same period last year. The increase is primarily related to sales of next-generation military SATCOM systems.

Year-to-date in the commercial segment, revenues were $124.8 million, basically flat over the same period last year. Although flat, we did experience increases year-over-year in consumer broadband and antenna systems sales, offset by decreases in enterprise VSAT product sales, some of which are now reported and sold in our government segment.

Year-to-date, the government segment posted operating earnings of $18 million, a decrease of about 26% from the prior year, and is due to increased R&D investments of next generation information assurance and UAV products and higher new business investment costs.

The year-over-year year-to-date commercial segment operating profit increase is due to improved performance in our consumer and mobile broadband and antenna systems areas, partially offset by reduced earnings in other satellite network product areas. Year-to-date, operating earning amounts include non-cash, share-based compensation expense charges of approximately $3.7 million for fiscal year 2008 and $2.1 million for the same period of fiscal year 2007.

As we look at the GAAP and non-GAAP EPS differences, non-GAAP results exclude the effects of acquisition-related intangibles and the effects of non-cash share-based compensation expenses. The fiscal year-to-date 2007 stock-based compensation amounts also include a one-time approximately $1.2 million charge we recorded from the cumulative impact of accounting corrections related to employee option expense and the related tax impact.

We also note that year-over-year the weighted average shares used for the earnings per share computation have increased by about 2 million shares. The increase is due to stock issued for acquisitions, stock option and employee stock purchase plan issuances and the impact of the treasury stock methods.

As we look at the balance sheet, our balance sheet continues to strengthen. Cash and short-term investments increased by almost $25 million from the beginning of the year and we will talk about the movement of cash later when we review cash flows.

Despite the substantial quarterly increase in revenues, accounts receivable increased -- I'm sorry, accounts receivable decreased due to collections as we met program milestones and increased our book and ship orders. Unbilled accounts receivable increased slightly due to the timing of contract milestones. We are pleased with our continued progress in the receivables areas, reflecting better program execution and cash payments.

Inventory is essentially flat since the beginning of the fiscal year. We have been focused on improving inventory turns and believe we are making progress here, particularly given the revenue increase.

Deferred income taxes increased primarily as a result of the adoption of FIN 48 in the first quarter and the related accounting.

Goodwill and intangibles decreased due to the regular quarterly amortization, offset by new goodwill and intangibles from our JAST acquisition in the second quarter of this fiscal year.

Net property and equipment is up $3.4 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 deferred income taxes, also from the adoption of FIN 48 in the first quarter, offset by the amortization of capitalized software.

As we look at liabilities and equity, accounts payable increased consistent with our growth in revenues and days payable balances with our vendors is still below historical averages.

Advances were down slightly, mostly in our commercial segment, reflecting 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 planned payments made in the first quarter for 401(k) match and performance bonuses of almost $10 million and about $8.7 million associated with the ECC acquisition provisions and from the issuance of stock of approximately $5.6 million from the Enerdyne acquisition provisions. This is partially offset by increases for current year 401(k) match and performance bonus accruals and warranty accruals from product shipments.

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

At the end of the quarter, we continue to have no outstanding borrowing, leaving our full line of credit available, less standby letters of credit. As of quarter end, we had about $51 million available under our line of credit.

As we turn to cash flows, we had another strong quarter for cash flows, generating almost $22 million in cash from operations. In addition to the strong earnings in non-cash add backs, we continue to make progress in the working capital accounts, primarily through program performance and deliveries, where working capital is growing at a lower rate than the growth in revenues.

Year-to-date cash flow generated from operations of $37.7 million is also very good, especially considering the payment of $8.7 million related to the ECC acquisition and the payment of almost $10 million for 401(k) match and performance bonuses in the first quarter.

Cash flows from investing activities for the quarter reflects the cash portion paid for our JAST acquisition and capital expenditures for business expansion as our company continues to grow.

Year-to-date cash flow from investing activities reflects the cash payout in the first quarter related to the acquisition provisions for ECC and Enerdyne, as well as our JAST acquisition, and capital expenditures for business expansion. These are consistent with our expectations and we expect capital expenditures to be increasing over the next two quarters and will depend on the timing of certain projects.

Cash provided by financing activities is primarily from the net proceeds from common stock issuance. Net for the quarter cash increased by almost $15 million and almost $25 million year-to-date.

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

Okay, thanks, Ron.

At this point, I'd like to talk about a couple of strategic points and then update our outlook for fiscal year '08.

But first I would like to comment on an observation on our financial results, which is the disparity in earnings between our commercial and government segments. While we have made good progress on commercial profitability, the earnings for this segment as a whole do not obviously reflect the market and financial success we've had with Ka-band broadband. So, the first point is, we're certainly aware of that. We have spent several years investing in consumer broadband to get to this point. So, it's worth reflecting a little bit on the situation in our commercial segment as a whole.

We've got two basic purposes for our commercial segment. One is to create an opportunity to take advantage of commercial technology in government markets. And second is to establish alternative outlets for our core technologies, which are satellite communications, networking and information assurance. And to create these outlets that are less correlated with defense business cycles and have the potential for more rapid and profitable growth in their own right.

So, I'll start with the first point of leveraging commercial technology into government. Defense technology in the last 20 years has shown a pretty clear pattern where DOD has pioneered new technologies because essentially it's been the first or only customer for those technologies. But ultimately, those technologies can become valuable in the commercial market and then the DOD versions become overwhelmed and surpassed.

And one prominent example is the evolution of the ARPANET into the internet. But there is lots of other down to earth examples, too. For instance, DOD had its own high-speed DLSI digital program called [VSIC], which was absorbed into and surpassed by commercial technology. There was no standard 1750 for processor architectures, no standard 1553 for computer buses. There were JOVIAL and ATA programming languages standards and a unique standard for data communication, for unique physical networks, for secure voice and data. And all those things were eventually overwhelmed by commercial alternatives.

The same things are in process in other areas now, areas that we are involved in, especially satellite broadband, mobile satellite and information assurance. And, as an example, if you look at three of the major satellite programs we have won fairly recently, that would be EBEM, BlueForce tracking and now the joint IP modem, virtually all of the competition for those programs came from companies that are primarily commercial using commercial technology. The traditional DOD satellite ground segment companies like Raytheon or General Dynamics, Rockwell or Harris, in most cases didn't even bid on those programs.

Essentially, all of those programs also had at one time or another some purely organic DOD equivalent that turned out for one reason or another to be less desirable than the commercial adaptations that are now being embraced by DOD. BlueForce tracking is especially relevant, because it has the potential to be our second largest defense program, after MIDS.

Defense SATCOM is one of our most profitable business lines and is experiencing very good growth now, due in large part to these programs that have been transitioned from commercial. We also have pure production programs for defense applications of commercial products, such as LINKWAY and the Joint Network Node System. Our broadband, Comm on the Move, is another big defense satellite opportunity that will likely be won by commercial technology, if not by us, by someone else.

One of our recent acquisitions, JAST, which is contained in our commercial segment, is developing the antenna technology for BlueForce tracking. There is also very appealing defense opportunities for the wide area network acceleration technology that we have acquired with ICT, which is also in our commercial segment.

So, obviously, we believe we are doing extremely well with the first purpose of our commercial segment. The second purpose is to develop related markets that are less correlated with defense business cycles and have the potential for more rapid profitable growth. The primary area that we have invested in in this regard is the consumer Ka-band broadband. We invested a lot over about six years and we are very, very happy with the results there. Ka-band broadband has been our fastest growing business in the last year. If WildBlue did not have the bandwidth constraint issues that they do, this business would quite likely be our single largest business within a year or so, and possibly one of the most profitable.

Clearly, the market demand is substantial and we believe we have achieved a very strong competitive position. We are also exploring, though, with lower levels of investment other commercial markets where we feel we might achieve similar results.

So, fundamentally, we believe we are fulfilling that purpose as well, to the extent possible, given the satellite capacity constraints of our primary customer.

And so, I just want to make two main points in leaving this. One is that the segments are more intertwined in positive ways that might be evident on the surface and, two, I would say we are very carefully considering all of the areas that we are investing in, the ways in which our segment results have been derived and the ways that we can relieve any bottlenecks that might constrain our commercial revenue and earnings growth in the future.

So, that's it. This next slide shows our current outlook for the remainder of fiscal year '08 and it's essentially the same as we presented last year. Things in the second quarter were probably a little bit better all around than we anticipated last quarter, so we don't really need to comment much on the fiscal year as a whole. We do think that analyst estimates fairly reasonably reflect the range and timing of earnings for the balance of the year.

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

So, that covers all of the points that we wanted to make. And, just as a quick summary, our results for the second quarter were consistent with our plans and our overall outlook for the fiscal year as a whole. Our outlook for fiscal year '08 is unchanged. Our visibility into the next few quarters continues to improve, especially with the strong second-quarter orders. And it is primarily driven by products and/or programs for which we're already involved.

Our balance sheet is very strong and that gives us some strategic flexibility. We remain very pleased with the opportunities for growth in our competitive position and our target commercial and defense markets. We like the bound synergies across our commercial and defense markets. And, again, I know we have covered a lot of stuff and we would be happy to take any questions anyone might have.

Thank you, Mr. Dankberg. (OPERATOR INSTRUCTIONS) And we will pause for just a moment to assemble the roster. We will take our first question today from Tom Watts, Cowen and Company.

I have a couple of questions. Mark, congratulations on the quarter.

Thank you.

And thanks for your comments on the margins of the commercial business. On the- - you actually have increased those sequentially and it's certainly good to see profits on those. Are there prospects for further increasing commercial margins going forward?

Yes. The answer to that is, yes. And we have been working on that steadily. Feel like we've made progress. And probably for next couple of quarters or so that's probably what we're going to be more focused on growing earnings there, probably faster than we grow revenues there.

Okay. And then, second, there was mention that orders in the fiscal second half could have a substantial uptick from the first half. Which business areas will you expect that to be in?

That's probably more likely on some of the government sides, but there actually are some prospects on the commercial side, as well. So there's, there's good, I'd say good and good sized prospects on both sides. But I maybe would bet a little more on the defense one.

Okay. And then, just finally, you mentioned that the bandwidth constraints on WildBlue were holding back growth a little bit. Have we reached a steady install rate now on WildBlue? And, if so, are we going to see revenues from that level off a little bit? And where do you see -- could other commercial broadband projects, such as Eutelsat, make up for that? What would the timing of the Eutelsat acceleration be?

Yes, overall, while we are seeing -- we are certainly seeing some plateauing because of the beam closures that WildBlue has announced. I would still say that in the second half we'll see more installs in the second half than we had in the first half, probably in aggregate that's sort of what we anticipate. Okay. So it will be a little while before it's totally -- before that area completely flattens out. We are seeing opportunities for additional growth, and with Eutelsat being a good example on that, which could make a -- also contribute to some growth in that area. And then there is also some infrastructure that can go along with that as well. Those would be the main areas.

And then finally, we do expect that sometime in the next couple of quarters WildBlue will introduce some software system upgrades that will increase their capacity sort of incrementally. So, all of those things are going to come into play.

Okay. Mark, thanks very much.

Okay. Thank you, Tom.

(OPERATOR INSTRUCTIONS) And again we'll pause for just a moment. (OPERATOR INSTRUCTIONS) And again, we'll pause. We'll take a follow-up question from Tom Watts, Cowen and Company.

Yes, could you -- I'll just add one more additional question. Could you give us any additional color on the development of plans around your satellite slot? Is that something you are likely to partner with WildBlue or Liberty? Or are there other prospective partners for that?

Okay. We are -- we don't have anything -- I can tell you, we don't have anything to announce as a result of capacity constraints that WildBlue is seeing in the market demand. We see strong motivating forces to get it resolved sooner rather than later. But, at this point, don't have any announcements. Obviously, we are very sensitive and mindful to the fact that shareholders, most people would like us to have partners for a follow-on satellite and that's one of the aspects that we are working on in terms of, I would say, putting together an overall solution for it. And, with one of the main points being, as I mentioned before, it's going to be about a three-year lead-time. So, that is what's motivating sooner rather than later. But we are just not quite ready yet.

And under what circumstances would you consider developing that satellite on your own?

I think that us doing it on our own is not a likely outcome, I'd say. Okay. Now if -- that's -- I'd say that. I mean, we've kind of said that in the past. I think that we would do it in cooperation with what we would consider to be a good set of partners.

Okay. Thanks.

Okay, thank you, Tom.

We'll take our next question from Jim McIlree, Collins Stewart.

Thanks. Good Afternoon. Just wondering what opportunities or risks you face from the launches of the WGS and AEHF satellites?

Okay. We actually don't see either of those as risks. I think the WGS satellite is a good opportunity for us, because we have a lot of kind of our newer satellite equipment and networks that are going to operate on that. And we think that will free up capacity or will create organic DOD capacity. That will probably, I'd say, probably stimulate demand more, certainly more than suppress it. So, we look at the WGS as a good thing.

We also, besides having the satellite modem products and networking products and also applications of things like KT-250s or other network encryptors, besides all that we've also done the teleport antenna systems there. So, we're pretty excited about that.

The AEHF system, actually we have not a whole lot of direct involvement with, so that's sort of a no opt for us. The only factor is we're an important part of the Lockheed Martin TSAT team. To the extent that TSAT is viewed as an extension of AEHF, things that are good for AEHF could be good for us as well. But that would probably be more of an indirect relationship.

Okay. And secondly, I think there is a pretty big RFP coming out of NAVC for some UAV, for a substantial UAV deployment. Is Enerdyne directly involved in that? Or are they teamed up with a couple of primes sitting under --?

I'm not going to be totally knowledgeable on everything that goes on in that business. But, Enerdyne mostly has been involved in kind of smaller tier two UAVs and I don't -- I'm not aware of any of Enerdyne's customers being directly with that particular acquisition. But, that one we might have to look into and provide data outside this call.

Okay. Great. And, finally, the enterprise VSAT. Are you done with whatever restructuring actions you had contemplated or products, product actions you had taken? Or are you still kind of working your way through that process?

Yes, I would say -- I'd say we're still working our way through it. And it's -- I'm not sure I'd call it as dramatic as restructuring, as more of just kind of reconsidering and maybe repositioning somewhat. And that includes just a variety of factors from specific product roadmap plans to specific marketing development plans, and particular partnership relationships. But, we mostly -- and I kind of put it in the positioning aspects of the product.

Very good. Thank you.

Okay. Thank you.

Next we'll hear from Larry Harris, Oppenheimer.

Yes. Thank you and congratulations on the results of the quarter.

Thank you, Larry.

I apologize. I came on the call late. I apologize if this was addressed. But, any updates relative to Lufthansa and a connection type replacement program?

No. We just mentioned kind of aviation broadband briefly and really did not point out that a couple of airlines have committed to trials, either of non-satellite technologies or, in one or two cases, satellite technologies from other companies. But, we've been talking with other airlines and we didn't mention any by name and can't at this point. But are still seeing, I think, pretty good prospects and kind of said stay tuned. We're hoping to have some announcements. I think, as other airlines have committed to, either to trials or to rolling something out, I think it's increasing the sense of urgency for some of the airlines that we've been working more closely with. So, we're hoping that's something, something will break on that in the next quarter or so.

And you're still seeing a strong demand or good demand in terms of the corporate aircraft market?

Yes. I'd say that is continued. I'd say it's just building kind of steadily and building in the sense of kind of steady deployments. I'd say all of the aircraft that we've put in service are all in service and active users. And our initial launch partner was Gulfstream and we're working to add a couple of other manufacturers as well.

Understood. All right. Well, thank you very much.

Okay. Thank you, Larry.

Mr. Dankberg, I show no further questions at this time. I would like to turn the conference back over to you for any additional or closing comments.

Okay. Good. I'm glad we could address everybody's questions and, again, we thank you all for your time and attention on the call this quarter. And we'll look forward to speaking with you again next quarter.

That does conclude today's conference. We thank you all for joining us.