Viasat Inc (VSAT) 2008 Q4 法說會逐字稿

Good day everyone, and welcome to the ViaSat FY 2008 fourth quarter earnings conference call. Today's conference is being recorded. Your host for today's call is Mark Dankberg, Chairman and CEO.

Good afternoon everyone and welcome to ViaSat's earnings conference call for our fourth quarter and fiscal year ending March 28 of 2008. I am Mark Dankberg, Chairman and CEO, and I have got with me Rick Baldridge, our President and Chief Operating Officer, Ron Wangerin, our Vice President and Chief Financial Officer, and Keven Lippert, General Counsel.

Before we start Keven will provide our Safe Harbor disclosure.

As you know during the course of the discussion today we will make forward-looking statements, including those relating to the anticipated benefits of strategic relationships, expected future business, projections of financial performance, growth in trends in our business or key markets, the anticipated performance of products or services, and plans, objectives and strategies for future operations.

We would like to caution you that the actual results could differ materially from those contemplated by our forward-looking statements. We refer you to the risk factors contained in our SEC filings available at the SEC's website, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q.

We would like to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date which they are made. And we undertake no obligation to update any forward-looking statements.

As usual, we will be referring to slides that are available over the Web. Before we start, I would like to make a quick strategic point regarding our business. Right now we're undertaking a two-pronged task. First, is to continue to grow our core business and earnings at an attractive and sustainable rate. And second is to construct a satellite asset that we can believe can accelerate our growth in multiple dimensions when it is launched in 2008.

We think it is an exciting challenge, and that we're off to good start. So today we will focus on the financials and the growth prospects for our core business first. We will also give a brief update on the status of the satellite asset. We will start with our fiscal year '08 fourth quarter and fiscal year 2008 financial results for year end, and business overview perspective and some highlights. After that, Ron Wangerin will discuss our financial results in more detail. Then we will update our outlook for fiscal year '09, and give a quick summary and take questions.

So turning to slide on Q4 financial summary. As you can see, our fourth quarter results were very good, especially when compared to last year. We earned $0.41 a share on a non-GAAP diluted basis, up 21% compared to $0.34 last year. GAAP net income was $0.33 a share, about 24% higher than last year's $0.27. Income before tax was up 37% over the same period last year, which we think is very, very good.

Revenues at $147 million were up 12% over last year, meaning we improved margins significantly. New orders for the quarter were a bit of a challenge at about $98 million. We had several contract awards spillover into the current quarter. Total new order activity for this first quarter to date has been excellent. And counting MIDS Lot 9, which we expect soon, already puts us well ahead of the total for the fourth quarter.

So while order timing is always a little unpredictable, this suggests that the combined value for the fourth and first quarters is anticipated to be pretty consistent with our growth outlook, even if the distribution isn't quite what we planned.

That is actually one of the good things about carrying some backlog, it helps mitigate the lumpiness of orders, especially in the government business. When we get to the business highlight section I will give a little more detail on orders and some of factors in the lumpiness.

This next chart shows the fiscal year financial summary for fiscal year '08 year-end results. We had record GAAP diluted earnings per share of $1.04 per share this year, and that is up 7% compared to $0.98 that last year. And we had record non-GAAP diluted earnings per share of $1.36, which is also 7% higher than $1.27 for fiscal year '07. We will provide explicit bridge data from GAAP to non-GAAP later in the call.

Earnings per share comparisons on a year-over-year basis are a little complicated because of the timing of federal R&D tax credit legislation. Our fiscal year '07 tax rate was much lower than fiscal year '08, because it contained five quarters' worth of R&D tax credits. Our fiscal year '08 tax rate only includes three quarters of R&D tax credits, because the credit has not yet been extended into calendar year '08. It turns out to be about an $0.08 swing. And Ron will give more detail on this in his portion of the call.

But to help illustrate this point, we had very, very good growth in pretax income, which was up 29% on a year-over-year basis. We also set a record for revenues at about $575 million, which is up 11% over last year. And that again reflects good gains in margins for the fiscal year as a whole.

Net new contract awards for the year were $560 million, which is lower than we planned, but that is due to the same factor we just discussed for the fourth quarter.

So let's take a quick overview and put those top level fourth quarter financial results in some context. In summarizing those key financial points for the fourth quarter, the first is a timing of significant follow-ons to existing programs that were straddling quarter boundary, contributed to lower than planned new orders in the fourth quarter.

The timing of those programs had essentially no impact on revenues or earnings in the quarter, but they did significantly affect our overall book to build and our backlog. And besides those, there were some smaller product awards that would've had a smaller impact on backlog, but those did affect your sales and earnings in this most recent quarter. Still we were able to manage our discretionary expenses to yield good overall earnings.

Overall our core business was very strong, with good growth in tactical Data Links, government satellite communications, antenna systems and others. Our operating margin improved to approximately 12%. And with the exception of a fairly large receivable with one customer, which has been paid subsequent to the end of the quarter, our cash flow was on or ahead of our target.

Our overall results for fiscal year '08 were new records in awards, revenues and earnings. As I pointed out on a previous slide, pretax earnings were up 29% year-over-year, which is very strong in light of the growth in Company-funded R&D, which was up 50% for the year.

Our tax rate for the year was up 10 percentage points over last year, due to the timing of the R&D tax credit legislation. Ron will go into this in more detail in his section and provide some guidance as to what we expect going forward.

So now we will turn to some business highlight, starting with government. In tactical Data Links, this area is still our largest. We continue to compete well and grew sales in our fiscal year '08. We're targeting continued growth in fiscal '09 through the combination of LVT production, MIDS JTRS development program, and smaller new initiatives including weapons Data Links and new Link-16 applications, including our first orders for shipboard MIDS units.

Just after the fourth quarter closed, we received substantial additional contractual commitments on MIDS JTRS, which help set the stage for additional funding for another new addition called the Airborne Network (inaudible), and that has been in the works for quite a while, as well as the possibly other [wins for us]. Just to help illustrate how lumpy awards timing can be, at this point we're targeting a total of around $100 million in orders in the Data Links area alone in this first quarter, which obviously is a big factor in our excellent start to the year.

Execution has been good, with record LVT shipments in our first quarter. Our tactical UAV Data Links business has also been growing fast through a combination of existing legacy products and new products introductions, funded mostly through discretionary R&D.

We have always had high expectations for the Information Assurance area, and that continues to show good growth prospects. There has been a sustained long-term good growth trend in the KG-250 Inline Network Encryptor products, but that area is also quite lumpy, and it was down sequentially in the fourth quarter.

The government procurement agency that we through instituted a major change in its ordering system, which required us to adapt our sales channels and it stretched out the ordering pipeline. That was one of factors constraining our fourth quarter orders. So far we see sequential improvement this quarter, but it may not return to normal levels until the second or third quarter.

Meanwhile we see a rich set of Information Assurance project opportunities with robust proposal activity. The government is also planning its first delivery orders for media encryption this year, which we consider an exciting new productline in our Information Assurance area. This area received a significant amount of our R&D investment in fiscal year '08. And based on past successes, we anticipate seeing returns on that beginning this current fiscal year '09.

Government satellite networks had a very good year in fiscal '08, driven by the completion of some key product development and increased production orders. We have a growing set of product franchises there, including our UHF satellite band products, the enhanced bandwidth efficient modem, or EBEM, which is doing very well, our upgraded LinkWay system used on the Joint Network Node, or JNN terminals, and the emerging joint IP modem and BlueForce tracking products which are still in development.

We just recently deployed our mobile broadband ArcLight product on a DoD aircraft for operational missions. It has been very successful and could be an ice breaker in other DoD applications.

Turning to commercial, the situation in consumer broadband has not changed significantly. We are expecting lower revenues in fiscal year '09 due to capacity constraints in the U.S. market. WildBlue has started advertising in their lower SurfBeams to help stimulate demand there. Plus new software upgrades are creating enough capacity for them to reopen all their beams to some extent. But there is just not the capacity to reach the same levels as we did in fiscal '08.

Eutelsat's Tooway network has begun operations in Europe, and we're working to open a few other international markets. On the other hand, we are expecting growth and higher earnings in all of our other commercial business areas this year. Antenna Systems had a very strong fiscal '08, good backlog entering fiscal '09, and is positioned to bid on some key government and commercial antenna programs.

Our Enterprise VSAT business had been declining last year, as we worked through some organizational changes, new product releases and strategy evolutions. The fourth quarter shows market improvement compared to the third quarter, especially in new orders. And that trend has continued so far in our first quarter of '09.

We have integrated all our international satellite products into a single organization, including our LinkStar and SurfBeam networks, LinkWay mesh networks, the enhanced bandwidth efficient modem, which is one of our [SEPC] modems, our ArcLight mobile systems, and also AcceleNet wide area network acceleration products.

The organizational changes should deal cost efficiencies. Plus we have new generations of the LinkStar and LinkWay products, and have had very good success with mobile broadband networks, and our expanding geographic coverage significantly. Geographic coverage seems to be a key discriminator in the mobile market for aviation and maritime, since those users often cover a lot of territory. And based on a growing base of business jet and maritime users, we have been able to attract a growing set of regionally strong satellite operator partners. We have also come up with some very capital efficient methods to increase our ongoing service revenues in the mobile broadband area.

The AcceleNet WAN acceleration software also is an important factor in our commercial satellite network strategy. It offers compelling bandwidth and performance efficiencies. And the OEM agreement with Cisco adds another valuable dimension to it. We have already integrated AcceleNet into some of our key Enterprise VSAT accounts. We have been investing fairly significantly in this area and anticipate it may turn profitable in the second half of our fiscal '09.

Our Comsat Labs division continues to lead our work in the mobile satellite services sector, and recently earned some additional scope in our contract with Boeing in mobile satellite ventures. We anticipate growth there this year due to progress on the ground-based beamforming contract, as well as other areas.

Now I will switch to the next generation Ka-band projects. Our ViaSat-1 satellite program has been progressing consistently with our plans. We're about four months into a three-year project. We're working on several different aspects. First there is the detailed engineering design of the satellite, with space systems (inaudible). We believe that is progressing well.

We have also been working on the [fiber ground] network access and are making good progress there too. During the last quarter Tom Moore, who is co-Founder and CEO of WildBlue, joined us as a Corporate Vice President and President of our ViaSat-1 satellite initiative. Tom has been a tremendous addition for us in virtually all aspects of developing this business.

Besides the technical programmatic aspects, he has also been engaging in strategic discussions with some specific potential partners, who may be customers, distribution partners, investors, or in some cases, combinations of all those.

Our discussions have been on the much higher user speeds we can offer, and the much greater and steadily increasing volumes of bandwidth we can deliver. There is no question that broadband data usage is growing, and that an increasing percentage of the traffic is video and media content. But just like satellite TV, it is not at all sensitive to latency. Our confidence that ViaSat-1 will be successful within the unserved and underserved markets in the U.S. is only increasing.

We have also worked with independent market analysts retained by potential investors who have also supported that conclusion. We have had good interest in pretty much every satellite application market, where the cost of satellite bandwidth is an issue, such as Enterprise VSAT, 3G or 4G cellular backhaul, local video or video uplinks, local video distribution, maritime and aviation broadband and government and defense applications. While demand for consumer broadband is strong and demonstrated, we also see at least as much demand in these other adjacent markets.

In terms of timing of either distribution or investment commitments, we have interested parties that feel high-capacity satellite is a very unique asset, and that recognize the leadtimes in obtaining such an asset, and are interested in detailed discussions now.

While we obviously cannot give any assurances, we very pleased with the progress we have made to date. We're working to have our first investor onboard within a quarter or two, and possibly a second later this year. We may be able to signup our first distribution partner within a year as well.

We continue to work closely with Eutelsat on their KA-SAT project. It is probably worth progressing for a moment on who Eutelsat is. They are the leading satellite TV provider in Europe. Their Hot Bird video neighborhood is received by more than 40 million direct to home users, and over 120 million homes in total through multiunit dwellings or cable. That is far more than both DIRECTV and EchoStar combined in the U.S.

KA-SAT is about a 70 gigabit per second satellite. Is the second-highest capacity satellite ever, along with our ViaSat-1, and is designed to run on next generation SurfBeam ground segments. KA-SAT is scheduled for launch in the second half of 2010, about six months earlier than ViaSat-1. It will be co-located with Eutelsat's video satellites, and some of the capacity is intended to be used for enhanced local high-definition video on-demand, ethnic or other video programming.

One of the benefits of our close collaboration with Eutelsat is we can develop an integrated consumer terminal that integrates broadband services with video and video on demand into a single package. While we have been very successful to date with stand-alone Ka-band broadband, we believe this added dimension of home video integration will further differentiate us in both the U.S. and the international markets.

For example, at the Satellite Expo in Rome, we and Eutelsat demonstrated a single, integrated, direct to home satellite dish antenna that for the first time delivered both Ka-band broadband and high-definition video through a single antenna via Eutelsat Hot Bird satellite. Both we and Eutelsat continue to be very enthusiastic about the strategic potential of our partnership.

So at this point I would like to induce Ron Wangerin, our CFO, who will discusses the financial data in more detail.

We will start with the P&L and segment results and then cover the balance sheet and cash flows, and provide an update on ViaSat-1 cash needs. As Mark mentioned, for the fourth quarter operating results were good relative to the sales level. Revenues were $147.4 million, a 12% increase when compared to last year. The cost of revenue percentage reflects a mix of products where margins were slightly lower quarter over quarter, particularly in the government segment.

SG&A expenses for the quarter, while lower year-over-year, included higher selling and support costs from increased business activity when compared to last fiscal year, which was offset by cumulative adjustments to lower discretionary cash compensation in fiscal year when compared to cash compensation accruals from last year.

R&D was similar to the other quarters of this fiscal year, but up significantly in the fourth quarter year-over-year due to the development of next generation Information Assurance, unmanned aerial vehicles, global antenna and broadband technologies. This was in line with our expectations.

Quarterly amortization of intangibles is basically flat year-over-year. Income from operations for the fourth quarter of fiscal year 2008 includes non-cash stock-based compensation expenses of $1.6 million. And it was $1.4 million for fiscal year 2007 fourth 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 fourth quarter reflects an effective tax rate of about 28% versus 18% for last fiscal year. The higher year-over-year effective tax rate is due to the timing of federal R&D credits. In fiscal year 2007 the effective rate included five quarters of federal R&D benefit due to the timing of the credits renewal. And in fiscal year 2008 the effective rate only includes three quarters of benefits, reflecting an expiration of federal R&D credit at the end of December 2007. So all up we are pleased with our improved margin, as pretax income was up by about 37% on revenue increases of 12%.

We will address the difference between GAAP and non-GAAP earnings per share in a few slides. For fiscal year results we established a number of new records for the Company. Revenue rose to $574.7 million, an 11% increase when compared to last year. The cost of revenue percentage reduction reflects improved margin performance, particularly in our consumer broadband and antenna systems areas.

Selling, general and administrative expenses were higher year-over-year, mostly due to higher selling and business support costs from increased business activity when compared to last fiscal year, offset by lower discretionary cash compensation in fiscal year 2008 when compared to cash compensation expenses from last year.

The Company increased R&D investments by almost 50% year-over-year in next generation technologies for the development of information assurance, unmanned aerial vehicles, mobile antenna, and VSAT technologies. This was consistent with our plans. We expect fiscal year 2009 R&D expenses to be flat to slightly lower.

Amortization of intangibles is flat and reflects the completed amortization of certain intangibles, partially offset by amortization of new intangibles from our JAST and ICT acquisitions.

Income from operations for fiscal year 2008 includes non-cash stock-based compensation expenses of $7.1 million, and $5 million for fiscal year 2007. The increase in other income is primarily interest income earned from higher invested cash balances year-over-year.

Qualitatively for fiscal year 2008, our income before taxes reflects higher revenues, increased margins and a reinvestment of some of this margin in new contract proposal expenses and next generation products to support future growth.

Year-to-date our income tax provision reflects an effective rate -- effective income tax rate of about 28% versus about 18% for the same period last year. The rate last year was lower due to -- was lower relative to historical levels due to the inclusion of an extra quarter of federal R&D benefit from fiscal year 2006 being recorded in fiscal year 2007, due to the timing of federal R&D tax legislation. The effective income tax rate for this year assumes only three quarters of federal R&D benefit, as the rate expired in December. This amounts to an approximately $0.08 swing per share of net earnings year-over-year.

We have seen these swings for the past several fiscal years due to the timing of the federal R&D credit renewals. We expect the federal R&D credit to be retroactively reinstated this fiscal year. For fiscal year 2009 we are planning for an effective rate of approximately 28%. If the federal R&D credit is not reinstated, our effective rate would be about 36%.

Minority interest increased due to improved operating results of our majority-owned TrellisWare subsidiary. I would like to address a particular matter here regarding our dispute with WildBlue and their resellers related to field failure rates on transceivers, which are part of our outdoor portion of the customer premise equipment. This is a contractual dispute around damages that occurred in the past. We believe there is not an ongoing product issue based on data provided by our customer. We believe we have a fair contractual and financial position that is properly reflected in our results at this time.

Looking at our segments, as you saw in our earnings press release today, in the fourth quarter we made management and organizational structure changes to better align the organization with our recent strategic changes. Our Satellite Services segment is primarily comprised of our ViaSat-1 satellite and our mobile broadband and Enterprise VSAT service businesses. Our commercial network segment comprises our former satellite networks and Antenna Systems segments, except for the Satellite Services component. And we have recapped the data for the prior fiscal years periods presented to conform to the current period presentation.

In the government systems segment revenue for the fourth quarter was $84.1 million, an 18% increase over the same period last year. The increase for the quarter is primarily related to sales of tactical Data Links and next generation military SATCOM systems, partially offset by lower information assurance product sales. In the Commercial Networks segment revenues for the fourth quarter were $61.6 million, a 3% increase over the same period last year. The year-over-year quarterly increase is primarily related to higher consumer broadband, mobile satellite, and Antenna Systems sales, offset by decreases in Enterprise VSAT sales. For Satellite Services the fourth quarter and fiscal year sales are essentially flat year-over-year.

In the fourth quarter the government systems segment posted operating earnings of $12.1 million, an increase of 33% from the prior year. The year-over-year operating earnings increase is due to higher revenues, improved margins in our government SATCOM and Data Links product, offset partially by higher R&D investments of next generation Information Assurance and unmanned aerial vehicles products and higher new business investment cost.

Commercial Networks segment's operating profit was down slightly in the fourth quarter year-over-year. Although we experienced improved performance in our mobile satellite and Antenna Systems areas, these were offset by reduced earnings from our Enterprise VSAT product and from investments in our ICT products.

For the fourth quarter operating earnings announced include non-cash share-based compensation expense charges of approximately $1.6 million for fiscal year 2008, and $1.4 million in the fourth quarter of fiscal year 2007.

For the fiscal year in the government segment revenues were $319.5 million, a 15% increase over last year. This increase is primarily related to sales of next generation military SATCOM systems and tactical Data Links product.

Fiscal year 2008 Commercial Networks segment revenues were $248.3 million, a 7% increase over last year. We experienced increases year-over-year in consumer broadband, mobile satellite and Antenna Systems sales, all of which were offset by decreases in Enterprise VSAT product sales.

For the fiscal year the government systems segment posted operating earnings of $45.8 million, a 7% increase when compared to last year. We saw higher earnings from higher sales that was partially offset by increased R&D investments and higher new business investment cost.

Fiscal year 2008 Commercial Networks segment's operating profit increase was due to improved performance in our consumer broadband, mobile satellite and Antenna Systems areas, partially offset by reduced earnings in Enterprise VSAT products and investments in ICT. Included in our fiscal year 2008 Commercial Networks segment operating profits are investments of over $4 million in our ICT products, and $3 million in our ViaSat-1 project.

For Satellite Services the fiscal year loss increased year-over-year primarily due to a customer bankruptcy in our managed broadband service area. Year-to-date operating earnings amount include non-cash share-based compensation expenses of approximately $7.1 million for fiscal year 2008 and $5 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 onetime approximately $1.2 million charge we recorded from the cumulative impact of accounting corrections related to employee option expense and the related tax impact.

As we turn to the balance sheet, our balance sheet continues to be strong. Cash and short-term investments increased by almost $22 million from the beginning of the year. And we will talk about the movement of cash later when we review cash flows.

Accounts Receivable had been trending down in the first half of year, but increased this quarter primarily due to a customer holding over $10 million at fiscal year end. And these payments have since been received. Had we received those payments, Accounts Receivable would have actually decreased to around $82 million, and cash would have eclipsed $135 million.

Unbilled Accounts Receivable increased due to the timing of certain contractual milestones. Inventory is up $14 million since the beginning of the fiscal year, reflecting the transition of some products to a units of delivery basis accounting, and inventory buildup for delayed awards we referenced earlier, and deferred consumer broadband shipments to customers.

Deferred income tax increased primarily as a result of the adoption of FIN 48 and the related accounting. Prepaid and other current assets increased primarily due to prepayments of suppliers and a shift the long-term receivables to short-term other current assets.

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

[JAST] property and equipment is up about $13 million due to capital additions, of which $8.1 million is related to our new satellite project, and the remainder was for facility expansion and test equipment to support our business growth, offset by quarterly depreciation. Our capital expenditures for the satellite project were a lower than planned in the fiscal fourth quarter.

The change in other long-term assets is primarily due to deferred income taxes, also from the adoption of FIN 48, offset by amortization of capitalized software and the reclassification of a long-term receivable to a short-term other current asset.

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 well below historical averages. Advances were up mostly in our commercial segment, reflecting the timing of receipts and contract milestones. And this amount can fluctuate quarter to quarter.

The change in other current liabilities primarily relates to payments made in the first quarter of 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, and lower year-over-year discretionary cash compensation accruals, partially offset by changes in warranty accruals.

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

At the end of the quarter we continue to have no outstanding borrowings, leaving our full line of credit available with standby letters of credit. As a quarter end we had about $52 million available under our line of credit.

Looking at the cash-flow statements, the quality of cash flows from operations has been very good. Strong net income and non-cash add backs have contributed to most of the cash flows. The cash flows from operations for fiscal year 2008 was excellent at $48 million, and could have been better without the delayed $10 million receivable receipt I spoke of earlier.

Cash flows from investing activities for the quarter reflect capital expenditures for our satellite project and business expansion activities as our Company continues to grow. Capital expenditures for licenses and patents related to our satellite project and the maturity and short-term investments. Last quarter, due to the decline in interest rate, we began to purchase short-term investments in order to enhance our return on cash. We will do this from time to time. This quarter those investments matured.

Year-to-date cash flows from investing activities reflect the cash payout of the acquisition provisions for ECC and Enerdyne, as well as our JAST acquisition, and capital expenditures for our satellite project and business expansion previously discussed.

Cash provided by financing activities is primarily from the net proceeds from common stock issuance. For the fiscal year cash from financing activities also includes the purchase of common stock related to net shared settlements from restricted stock units divested in the third quarter.

We expect to generate cash from operations in the future. However, with the ViaSat-1 satellite project, we expect to increase our capital expenditure level significantly during satellite construction.

Speaking of ViaSat-1 satellite, we are frequently asked about the capital expenditures and sources of cash related to the ViaSat-1 satellite project. We expect the cost through launch to be in the $100 million range, and it will depend on the timing of the Gateway rollout. We have a current strategy that we're executing do that would limit ViaSat's total required investments. Under this path our equity participation is similar to our cash on hand plus investments to date.

Alternatively we believe we have adequate sources of funding for the project, which includes our cash on hand, available borrowing capacity, and the cash we expect to generate over the next few years. We believe this provides us great flexibility to execute this project in an appropriate manner, and obtain outside equity in a range indicated under terms that we consider reasonable and favorable.

So with that, I would like to turn in over to Mark to talk about our outlook.

At this point I will review our current outlook and then give a quick summary. Turning to our fiscal year '09 outlook, we expect pretty good revenue growth, and are aiming for earnings to grow a little faster on a relative basis, the key drivers of revenue growth coming from Information Assurance, government and satellite communications and mobile broadband. Earnings growth is anticipated to be primarily attributable to our government business, and decreased investments in the AcceleNet and enterprise VSAT, which we believe will significantly improve the profitability of our non-Ka-band commercial business overall. Our outlook does include a significant reduction in U.S. Ka-band consumers and earnings due to satellite capacity constraints.

Our fiscal year '09 plan aims at non-GAAP earnings per share of between $1.55 and $1.65, and GAAP earnings per share of between $1.19 to $1.29. These ranges assume the R&D tax credit will be extended and retroactive to the beginning of this calendar year. Also, we do expect earnings for fiscal year '09 to be shaped similarly to this current fiscal year -- or past fiscal year '08, with the second half being stronger than the first half, though not to quite the same extent as this current year.

So in summary, our overall earnings performance for fiscal year '08 was pretty consistent with the low end of our range when adjusted for the higher tax rate due to only three quarters worth of R&D tax credits, and the additional R&D and startup expenses associated with the ViaSat-1 satellite initiative. The second half of the year was quite strong, with earnings of about $0.81 a share on a non-GAAP basis.

So returning to our two-pronged task, we believe our current outlook for fiscal year '09 in the $1.55 to $1.65 range on a non-GAAP seems quite achievable, even given our ViaSat-1 investment plans and the extension of the R&D tax credit into 2008 and 2009 calendar years. And that would put us in the range of about 15% or so year-over-year growth in non-GAAP earnings per share.

We anticipate that earnings growth would be driven primarily by our government business, and especially by product sales. On the commercial side, despite the expected decrease in Ka-band consumer networks earnings due to satellite capacity constraints, we anticipate that growth in most of our other commercial areas will offset that. We see potential for good margins due to a higher proportion of sales and products, but also note that product sales for us tend to carry less backlog. So timing of contract awards can certainly affect quarterly results. But going into the first quarter of fiscal year '09, we have got a little bit of a head start because of product orders that slipped out of the last quarter of fiscal '08.

And we also believe they're making good progress on the [second ton] construction of satellite assets. That includes satellite and ground segment design and construction, working with potential partners on financing, applications and distribution.

Overall we remain optimistic about our long-term growth outlook. We like the market that we address, and believe we've got sustainable competitive positions in our target segments. In the longer term we see excellent opportunities in leveraging high-capacity Ka-band satellites, both domestically and internationally.

That concludes our prepared statements. And at this point we would be happy to open it up for questions.

(OPERATOR INSTRUCTIONS). Chris Quilty, Raymond James.

A question for you on the fourth quarter SG&A it was down below levels I would have expected. Was there anything in particular that you would attribute that to? And what should we look for in terms of a go forward basis, either the SG&A on a gross basis or on an absolute percentage of sales?

I think what we do is we make trades with those discretionary accounts to the extent that we can within a period. We will make investments in those areas and throttle back where we think we need the performance. What we don't like to do is isolate any one element of that. I think we expect just normal growth in SG&A year-over-year.

Ron, do you have a percentage next year that we are targeting? We've got that model. I think you guys see it too. I don't think that has changed what I have seen out there.

Fair enough. Just for next year your overall revenue guidance is down by about $20 million. Is it fair to assume that is all in the consumer broadband business?

I think if you look at our commercial business, basically consumer broadband revenue will certainly be down, but we think on an earnings basis, due to the effect that we described, because of the earnings growth and decreased investments in Enterprise VSAT and ICT that will achieve pretty much the targeted earnings over revenue.

On your discussion on ViaSat-1 program, when you say $400 million through launch that is including the launch, I assume?

Yes.

Yes.

You obviously haven't studied to target any of those launch providers at this point in time?

I would say we are engaged in launch provider discussions.

Fair enough. In terms of the order for the Lot 9 on the MIDS, what time is it realistic to assume that? Is that a first half year event or back half, and what should be driving the timing decision there?

We would say it is imminent -- would be a good way to describe it.

We expect it in the next couple of weeks, I would say.

In terms of development on both MIDS J and BlueForce tracking can you give us an update?

On MIDS J, as I mentioned, there was an increase in the funding commitment that we received right at the very beginning of this fiscal year. And that covers the program as described. There are other potential increases to MIDS JTRS. The one that we have identified in the past, and that we think is sort of enabled -- you look at the sequence of events and the extension of the funding commitment that they just gave us is intended to support this airborne networking waveform. It is kind of 10s, low 10s, mid 10s of millions of dollars kind of range for that.

Then there are a couple of other things that are sort of also in the works, but are not yet as mature as the airborne networking waveform for MIDS J.

On BlueForce tracking, the next steps would be a limited what they call a low-rate initial production, kind of a small number of initial terminals, and probably enhancements to the prototypes that we have done already. That is what is in the works now. We'll be able to talk about that I would say a bunch more next quarter.

I think last year, or at the time the contract was originally announced, you were talking about possible [LREP] within a year. And it sounds like that is slipping a little bit, but certainly it is something you would expect before the end of the year?

Yes, based on the discussions that we're having now, and the timing that the government customer says they want, that is what seems likely.

Final question, your maritime product that you're doing with the -- if you could give us an update on the maritime product for the ArcLight modem?

We have been going after maritime business. We've got a partnership that we have been developing with KVH. That -- I think KVH reports on that as well. We're pretty pleased with how that has gone. And we're looking to expand it. They have had good demand for the product, and a pretty -- I would say a pretty robust use by those that have bought it. That is when I referred to expanding the geographic coverage area through maritime airborne. That is important part of our plans for that area. Does that answer your question then?

It does, but you're really dependent on the rate at which FDS buildout those ground earth stations, correct?

I wouldn't say that. I would say part of the thing -- that is one of the things that we talked about, when I talked about a relationship with a set of regional satellite operator partners. I think what was going on is that the products -- and what I would say is kind of our view is one of the things about our network is the ability to support multiple products. Multiple products meaning, for instance, business jet aviation, or commercial aviation, maritime, other ground mobile, even defense applications on a single platform.

So the fact that we've had good growth in the uptake of the platforms, in that some of those platforms just will either fly or just sail from one place to another, makes it pretty attractive to other regional partners to just say, hey, oh yes, I would like some revenue if those platforms come into my area. And so that is what we are working on with our extension plans. It goes beyond any single individual satellite operator.

(OPERATOR INSTRUCTIONS). Rich Valera, Needham.

Mark, in your prepared remarks you talked about a potential North American reseller partner a year away. I am just wondering what limit it to not being closer? Is this just conservatism on your part or could that happen sooner, but you just don't want to promise that?

I definitely what don't want to promise. I am trying not to overpromise. That is one factor. I would say there are two considerations that go into this when we tell people about our satellite. Number one, is we're happy with the response and interest that we've gotten, for sure. It is pretty much everyone we talk to.

But one camp will say, it is okay, three years this pretty far away. I'm really, really interested but when we get closer maybe we can discuss things in more detail. That is an understandable response. We're also getting others who say, oh, wow, I know it is far away, but if I'm really interested in having satellite capacity like that, it will never be closer than three years from anyone. And if I really want to use it, or use a lot of it, then I should engage in discussions now.

And so we have actually had both flavors of responses. And we don't know which -- we don't know if the second ones will really -- how those will play out. It is still a little early in the process. And that is kind of a snapshot of what is going on there. Does that make sense to you?

Yes, that is helpful. I just wanted to see if you have any sort of commentary on the progress with Cisco with the AcceleNet products. It seems like those are pretty key to improving the profitability and offsetting some of the lower WildBlue sales. Is there any commentary you can give us on how that is going, or visibility to the ramp there?

Yes, we would say it is early in the process. They did a global rollout, just a week or two -- let's say they actually didn't at the end of January is when they announced it. We think overall Cisco response to their [router] product seems to have been good. We are seeing a lot of increased pipeline activity is the way I would describe it, with some early results. It is a little too soon to call it either way, but I would say that we are -- we're pretty happy so far. But what we really need to do see that turn into the results, most likely in the second, third quarter.

I am just trying to gauge how risky this ramp is, since it that seems like from a profitability perspective that is pretty important in making it up (inaudible). I am just trying to get any sense of how conservative or aggressive I guess you have been in terms of that ramp expectation?

We would say that we have been reasonable. There is two components to the improvement. One is less spending. So we have a lot of control over that one. And the other one is improved sales. Where we are now is you just go through a sales cycle on this. One of the things that the sales cycle includes is trials.

I think it is a product that is well-suited for trials, where what you do is you bring a customer into a trial program, give them a server and have them put clients in the field.

One of the things that we are seeing is a lot more activity at the front end of the pipeline. And that is kind of all you could want at the very beginning of the process. So far we feel like we still have a reasonable position, but in the middle.

Just one final one. Say you hit the midway of your revenue guidance, can you give us a sense of the relative growth rates expected in the government and commercial businesses?

I think when you look at the growth and profitability, I think what we said the growth -- a lot of the growth is going to come on the government side, some on the commercial side. Within the commercial side we expect it within our antenna systems area, some of our mobile satellite services and mobile broadband. And there will be some production we expect in the consumer broadband side.

From a profitability standpoint, some of our activities that we've done in our Enterprise VSAT that as well as in our ICT side we can -- with a little bit of activity we can see a much higher earnings turnaround in those areas. So profitability-wise we would be -- the offset of those items against the consumer broadband, the lower sales we expect from the consumer broadband.

What we are saying is most -- if you look at it on a dollar basis, most of the growth in absolute dollar earnings will be in government.

In government, correct.

I think that -- is that the point your question?

I am like getting used to the revenue -- sort of absolute revenue growth in the respective categories.

That would be a higher rate of growth on the government systems side versus the commercial side.

Do you still expect growth in the commercial side?

It is fairly moderate this year because of the decline in consumer broadband. We've gotten really good growth in both government SATCOM and information security. So in both those we're expecting above 20% growth rates. And so given an overall growth rate, I think, we have given you around 15%, the consumer -- the commercial side of the business we're expecting very nominal growth.

Tom Watts, Cowen and Company.

You mentioned the order of more than $100 million you had gotten in tactical Data Links alone early this quarter. Can you comment overall how orders are coming so far in the quarter? And could we see a quarter over $160 million or $170 million orders?

Yes, just to be clear I said we're targeting over $100 million. That is kind of what we think is achievable. So that particular area. And, yes, definitely we could see doing better than $160 million, $170 million. And what we would like to see, like I said before, is the combination of the two quarters when you look at Q4 plus Q1 -- someone would look at that and say, yes, that is consistent with the kind of growth that we're looking at, which should get us in the 640ish range in revenue next year.

In the consumer broadband terminals did I understand that the inventory increases was primarily related to those, and how much of that is in consumer broadband? And are you holding inventory that is to be shipped under contract to some of those customers?

On the inventory side there is really two components for some of the growth. The first is in some of our government products areas where we were building to a product forecast. And with some of the new contract awards being delayed, it is a timing issue, and we believe that will be worked out over the next quarter or two.

That mainly KG-250.

The other primary cause is from the government -- I'm sorry -- from the consumer broadband equipment. And we're working with both -- on the manufacturing side and with our customer side to get that back down to more normalized levels.

On the consumer broadband you mentioned some software fixes that could increase capacity in some of the sold out beams. Is this a 5 or 10%? And also what has WildBlue said recently about -- what are install rates running? Are they below 10,000 at this point per month?

The software -- it is not really fixes, they are just planned product evolutions that we and WildBlue both were planning to deploy. So those are being rolled out. And I think we said once before the actual amount of capacity increase we will get will depend a little bit on how they manage the service. But you could expect something in the 25, 30, 35ish% range. And those are our estimates. I really don't think it would be less than 25%, but it is really up to them how they manage their network. It could be in the 30, 35 plus percent range in terms of capacity increases. So that will open up meaningful amounts of capacity in all of their sold out beams.

And WildBlue has made public statements that said that they expect -- not that test that they expect -- that they have reopened all of their beams, and that they expect to be able to add new subscribers to all of their beams throughout this year. That will also sort of calibrate that.

I think that their add rates are actually -- have been a little more robust than what they thought. I would think in some of the statements they had made in conferences that is over 10,000 month so far.

Just a final question on that KA-SAT, could you update us where -- at what point do you anticipate orders starting to accelerate there, and what are they doing on the distribution side to make that happen?

KA-SAT in one way (inaudible) of that is a continuation of Tooway service that they have launched now on their Hot Bird satellites. And they have had lots of demand there. The main issue is they just don't have sufficient capacity, and with pricing that is consistent with the offer they want to make. So that is what is going to throttle terminal orders in the next two years.

Now what we would expect to see with KA-SAT is probably sometime this year an infrastructure order. That would go with that. It would just be a [replay]. But we have installed (inaudible) you would see an infrastructure order ahead of the satellite launch. And some nominal amounts of terminals that would be ordered as well, and then ramped once the satellite is launched.

So the near-term target in Ka-band for Europe would be -- we have kind of talked about these numbers before, I don't know, low 10s of thousands of total terminals that could be deployed on Hot Bird. I would say kind of low tens of millions of dollars on the infrastructure orders that would go along with the satellite at some point.

Could that be the current year?

Yes. It could be.

Jim McIlree, Collins Stewart.

On the tax rate you stated 28% for the year. So how are you going to accrue for that? Are you assuming a higher tax rate in the June quarter and then going down to 28% or taking a catch-up when it gets -- should it be reinstated?

To the extent that is not reinstated at the end of the fiscal first quarter, we would have to exclude it from our overall effective rate calculation. So we would be using a higher rate earlier in the year. Then should it be reinstated, depending upon what the terms of the reinstatement are, we would adjust our rate accordingly.

Right. So if it is retroactive then you'll take a -- you'll catch up in whatever quarter that is implemented?

Correct.

On the R&D spending, Ron, I think you were suggesting flat year-over-year. But you also mentioned that ICT and Enterprise VSAT consumed $7 million of spending. I'm assuming that spending goes down, but it doesn't go down to zero, is that correct?

The spending in those two areas was not just -- I think what I said was related to the ViaSat-1 was $3 million, and we invested $4 million in ICT, not all of which is R&D for the ICT piece. A significant portion for ViaSat-1 was R&D. So when we look at the overall -- again, we view R&D as another discretionary component. And for fiscal year '09 we see it flat to slightly lower year-over-year. So depending -- it will be a mix of -- between the areas, the other parts of the business.

What would get the attention for R&D spending in fiscal '09?

We have some continued investments in our information -- next generation Information Assurance products, as well as in the first part of the year continuing for our unmanned aerial vehicle products. We do have then throughout the year some planned estimates for ViaSat-1 on the next generation SurfBeam system. Those would be the three primary areas. And then there will be normal levels of spending in other product areas, some for Data Links and some for the SATCOM area.

I am assuming then that the ViaSat-1 investment goes up substantially versus the $3 million that you spent in fiscal '08?

Yes.

Is that $3 million a good runrate -- it can't be a good runrate for the year, can it?

I think what we said when we talked about the launch of the project back in early January, that those are primarily over the second half of the year. So it depends on the timing and nature of some of the potential manufacturing/development and manufacturing contracts that we get as well. But it is a relatively constant rate throughout the year, but obviously higher year-over-year since most of the spending for the ViaSat-1 next generation system occurs in the latter half of the year.

It is probably -- on a quarter by quarter basis, the piece that we will put in R&D is probably a little less than that, but it is not a lot. We gave you an idea of what we thought would be expensed in the current year in our Q3 conference call.

In the MIDS order that you're hoping for imminently would there be deliveries on that this quarter -- the June quarter?

No. It is a normal annual lot buy.

Booking for it isn't a good way to characterize it, I would say we have sort of been notified.

Right. I'm just trying to differentiate between the hasn't actually been awarded yet.

Okay, that's fine.

Then usually the June quarter is kind of flattish, down sequentially from the March quarter. But the March quarter was kind of weak, so is it reasonable to think of that same seasonal pattern, or a little bit different this year?

I think we do expect that. I think Mark has made the statement, it may not be as severe as last year. Remember last year's Q1 was way off. But I think (inaudible) all you guys have models out there. We don't generally comment on analyst things. But in general I think people understand the legality of it and have a pretty good idea of what it is going to be.

I think that is it. Thank you.

I think that is it for all the questions, and that is all for our conference call for today. Thank you all very much for listening, and we look forward to speaking with you again next quarter.

That does conclude our conference call for today. We do thank everyone for their participation.