Viasat Inc (VSAT) 2009 Q1 法說會逐字稿

Welcome to ViaSat's fiscal year 2009 first-quarter earnings conference call. Today's conference is being recorded. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thank you. Good morning, everyone, and welcome to ViaSat's earnings conference call for our first quarter of fiscal year 2009. I am Mark Dankberg, Chairman and CEO, and I have got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, Vice President and Chief Financial Officer, and Keven Lippert, our General Counsel.

Before we start, Keven will provide our Safe Harbor disclosure.

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

We would like to caution you that actual results could differ materially from those contemplated by our forward-looking statements. We refer you to those risk factors contained in our SEC filings available to 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 on which they are made, and we undertake no obligation to update any forward-looking statements.

Okay. Thanks, Keven. We will be referring to slides that are available over the Web, and we will start with our fiscal year '09 first-quarter financial results and a business overview perspective and some business highlights and discussion. And then after that, Ron Wangerin will discuss financial results in more detail, we will update our outlook for the fiscal year, and then we will take questions.

So, as you can see, our first-quarter results were very good, showing strong growth over last year, which was itself overall a record year for us. We had record new orders of about $206 million, and we will discuss some of the more significant ones shortly.

Our revenues reached a new record at $153 million, up 19% year-over-year. We earned $0.29 per share on a non-GAAP diluted basis, up 38% compared to $0.21 last year. And GAAP net earnings per share was $0.20, which is 54% higher than last year's $0.13.

Income before tax was up 66% over the same period last year, which was very good and reflects that we improved margins significantly.

You can also see that our effective tax rate this year is at about 35% compared to about 27% last year. And this reflects the fact that there has not yet been legislation renewing the federal R&D tax credit for calendar year 2008. The higher tax rate reduced our earnings by several cents a share this quarter.

So let's take a quick overview of those top-level first-quarter financial results in context. In summarizing the key financial points for Q1, we had a very good quarter for new contract orders. Some of the highlights there include a very good share of the MIDS low-volume terminal LVT Lot 9 production order and additional funding on the joint tactical radio system or JTRS version of MIDS.

Orders for our in-line network encryptor products like KG-250 were up sequentially, reflecting some pent-up demand that was freed up by implementation of a revised delivery order agreement, which had constrained sales in our last quarter.

We also won an important addition to our previously announced joint IT modem contract that expands the target applications for that new standard defense satellite modem system. Commercial orders in Ka-band and broadband were in line with our plans, and we also received an order from mobile broadband network infrastructure from KVH that could be pretty strategic in terms of global, Maritime and aviation coverage. We think we've got a pretty good shot at having another very good quarter for orders, and we will talk about that as we discuss the business scenario highlights and outlook.

Margins and earnings in our core businesses were really quite strong with pretax earnings up 66% compared to the same quarter last year. We are optimistic about the growth opportunities in a number of our business areas, so we continue to make discretionary investments to the extent that we can, consistent with our annual earnings objectives.

In the first quarter, we invested significantly in R&D, as well as other discretionary support expenses around new Link 16 and UAV tactical terminals, Next Generation Information Assurance products, Next Generation Ka-band broadband ground segment, planning costs to support potential Ka-band partnerships and expenses to support the initial rollout of our AcceleNet WAAS or wide area application services mobile product through our OEM contracts. It is always a balancing act to manage immediate and longer-term results, but we think the investments we are making today are consistent with the kinds of investments we have made in the past that have contributed to our steady growth. We will talk a little more about the potential for some of these areas when we get to the business areas. Congress has not yet passed the federal R&D tax credit legislation for calendar year 2008. So, as I mentioned already, our tax rate is 8 percentage points higher than it would otherwise be. Assuming that credit is extended, then we would get the benefit of that later this fiscal year.

So we will look at some of business highlights and start with the government area. Tactical Data Links is still our largest government area. We had very good orders in the first quarter, including both the low-volume terminal production order and extended funding on MIDS JTRS. Overall we believe the MIDS joint tactical radar system program, as well as our competitive position, has strengthened over the last few months.

After the quarter closed, we were selected in a competitive procurement for the next lot of MIDS JTRS production transition terminals. Our overall MIDS revenues for this year are anticipated to be pretty flat compared with last year. At this point we anticipate that new orders in that area could increase by 10% to 20% compared to last year.

We also had a good quarter for orders in complex communications environment simulators, and we have also been investing a fair amount in R&D for Next Generation tactical UAV Video Data Links. We have been earning design wins on some new platforms and anticipate those to turn into orders later this fiscal year. Sales of existing products in the tactical UAV area have been in line with our plans to date.

Results in the Information Assurance area were improved sequentially. As mentioned previously, sales of the in-line network encryptor products have been delayed, pending implementation of a new delivery order agreement contract. Now it is put in place, and so far we are seeing orders and shipments that are pretty much in line with expectations.

We have continued to see incremental funding on Information Assurance projects and are forecasting some meaningful orders in that area in this quarter.

We also anticipate the government to select its initial contractor for media encryptors this quarter. That would not likely result in a large initial contract value, but we expect to see good potential growth in the opportunity for type 1 secure encryption of data at rest. Results in our government satellite area were very good. Orders, revenues and earnings were strong from a mix of products, including the EBEM modems that are used on the wideband global satellite system, UHF satellite modems and software and network upgrades, commercial LinkWay VSATs used in defense networks and additional development work on the new standard joint IP modem networking [modem].

The orders outlook in this current quarter is also quite positive for satellite products. Initial testing of our Blue Force Tracking prototypes has been positive, and we're engaged in negotiations for the next phase, which would be the next step towards a volume production and deployment program.

We are also working hard on getting a jump on the market for the Next Generation Mobile User Objective System UHF satellite constellation ground segment which is what we would be participating in, and we're in negotiations around an opportunity there.

We announced the first deployment of our ArcLight Comms-on-the-move products by US Special Forces for aviation applications and think that that is an important application in gaining more widespread Ku-band Comms-on-the-move opportunities in DOD, and we're seeing some follow-on orders.

During the quarter the DOD approved proceeding with the TSAT program, which is about a $15 billion multiyear defense satellite network. We have a very significant role on the Lockheed Martin team, and that would have quite a positive incremental impact on our outlook if they are selected. We're also investing in another significant defense satellite ground segment proposal opportunity.

On the commercial side, one important point is that the outlook for consumer Ka-band broadband has improved relative to a quarter ago. WildBlue announced completion of network infrastructure capacity enhancements that opened up all their geographic coverage areas. Also, DirecTV began significant distribution of their Ka-band broadband service, which is powered by WildBlue.

So consumer Ka has been a little better than expected, and as pipeline inventory has been consumed, the forecast for terminal shipments was growing. We also have continued to deploy both Ka-band and Ku-band TOOWAY product with Eutelsat in Europe, and we have seen the very beginnings of infrastructure orders associated with their Next Generation KA-SAT satellite, which is planned for launch in 2010 just about two years from now.

Antenna systems results were very good, and we continue to see good opportunity flow. In recent quarters we have been more focused on our conventional VSAT business and are seeing improvements there. There are some good opportunities that enable significant growth, and we may have more to report there next quarter.

We announced an important agreement with KVH that will increase our ArcLight mobile broadband system to near global coverage by the end of 2009. KVH has had very good initial success in Maritime applications, and we have agreed to make them our exclusive partner there going forward. They ordered network infrastructure to light up important areas, including Asia-Pacific.

We also have a services agreement that allows us to participate in ongoing revenue and creates roaming agreements between us. So the global ArcLight networks will support Maritime and aviation services both. We believe this will both stimulate demand for additional user terminals and increase the usage on existing terminals that roam outside their initial coverage areas.

Usage data for the few hundred existing Maritime and general aviation terminals is pretty exciting. Customers seem happy with broadband service speeds and airtime pricing compared to the alternatives they have had using global satellite services bands.

Pieces are also falling into place here, and we're aiming to increase our distribution agreement and services channels over the next couple of quarters. The recurring services component of the business will be reported in our satellite services segment. Obviously the commercial aviation market is challenged right now, and we're pleased to have these additional outlets for the mobile broadband products and services.

One particular commercial aviation opportunity, which is a little bit of a special case, continues to progress, though, despite being delayed relative to the original plans.

Another very interesting area for us right now is the wide area network optimization market and especially our OEM agreement with Cisco for their wide area application services or WAAS mobile product. Cisco has had a good ramp on their WAAS appliance business. WAAS mobile opportunity is anticipated to be an important component of that total market. We are in the earliest parts of the rampup with actual customer sales data for just a couple of months or so, and even that period was influenced by a plan product upgrade release which occurred during that time.

It has taken a little longer to get started than we anticipated, but the month to month growth rates are exciting, even though the numbers are still very small. It will probably take another quarter or two to have a better estimate of the growth trajectory. Support for the OEM agreement might impact us as much as $0.02 to $0.03 this quarter depending on the ramp rate. We think it's definitely worth sustaining that right now. I would encourage investors to both look into the WAAS market opportunity, as well as industry reception to our AcceleNet product. Both of those are quite encouraging.

So let's talk a little bit about ViaSat I and our Ka-band. At this point progress on ViaSat I and Next Generation Ka-band is pretty much consistent with our plans. We're seven months into a plan, 36 months on a construction schedule. Capital costs and schedule estimates are still overall consistent with our estimates at the start of the project. We have accomplished quite a lot in terms of details on the satellite design, the gateway infrastructure design and the ground segment and service planning. All of that is still pretty much consistent with our plans when we began. There has been a lot of technical work done in those areas.

We have been engaged in a lot of discussions on other Ka-band broadband projects around the world. It is still too soon to tell how those will play out. We do expect at least a few satellites that will have Ka-band partial payloads along the lines of a WildBlue I or ANIK F2 type of satellite in some new coverage areas such as the Middle East.

We also are working with potential satellite operators that are interested in very high-capacity Ka payloads, along the lines of ViaSat I or KA-SAT but in additional regions. We continue to believe we will be well-positioned to compete in those as those projects mature.

We have been participating in market analyses for multiple geographic regions, and the market factors in those regions are essentially the same as and consistent with the underlying market factors that make ViaSat I and KA-SAT so compelling in North American and Europe.

Providing ground segment for additional Ka-band satellites would have a positive impact on our outlook, leading up to the launch of ViaSat I.

We have also engaged in discussions for additional applications besides the direct to own consumer broadband market in both the US and Europe. In general those discussions support our initial assessment that there be meaningful demand for other applications such as local and regional video distribution, video contribution uplinks, mobile broadband and 3G or 4G wireless backhaul that would all be much more economically served by these Next Generation Ka-band satellites.

At this point we cannot provide very much additional detail on partnership or investment discussions, so I will try to add a little color to help convey our thought process. First, we are engaged in a constant flow of what we consider to be worthwhile discussions. There is a lot of interest. That includes both financial and strategic investment and/or partnerships. At this point we're spending more time on the strategic partnership discussions as we believe they will convey greater value. Pretty much by definition the strategic discussions are more unique to the specifics of each party. So one should think of them as a series of rifle shots as opposed to a parallel or more shotgun approach involving a more uniform relationship with multiple potential candidates. In each case the discussions also involve each party learning more about the risks and opportunities associated with each particular strategic area. We believe that both we and our potential partners find these discussions valuable. While we have no announcements to make, we have not learned anything that we believe is inconsistent with the underlying principles of our project.

On the contrary we believe that we and our potential partners have a more thorough and nuanced perspective on the details of the various broadband markets, and we are if anything more encouraged about the long-term success of the project.

Because of the quantity and diversity of potential strategic relationships, we have to carefully manage our time and resources in considering them. We're spending more time with those where we anticipate a greater likelihood of resolution in the near-term. That contrasted with other potential partnerships that we are also optimistic about but will probably not mature until significantly closer to the satellite launch.

We think there will be some resolution on one or conceivably two potential strategic relationships this year, though, of course, we cannot dictate those timetables. We think the sequence of events is important and that other potential partnerships would be influenced by the right sequence. And we believe we're prepared for a patient and prudent approach.

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

Thanks, Mark. We will start with the P&L and segment results and then cover the balance sheet and cash flows. As Mark mentioned, operating results for the first quarter were very good. Revenues were $153 million, a new record and a 19% increase over the first quarter of last year. The cost of revenue percentage reductions reflect improved margin performance, particularly in our government products areas.

Selling, general and administrative expenses were higher year-over-year, mostly due to higher selling and support costs from increased business activity, as well as legal and other costs associated with our Ka-band satellite initiatives. R&D was up significantly in the first quarter year-over-year due to the development of Next Generation tactical datalink Information Assurance, unmanned aerial vehicle and broadband technologies. This reflects the market demand the Company sees in these future products and the desire to increase the pace of investments in these key technologies.

Quarterly amortization of intangibles is slightly lower for the first quarter year-over-year due to the completed amortization of certain intangibles, partially offset by the amortization of new intangibles from our JAST acquisition in the second quarter last year. Income from operations for the first quarter of fiscal year 2009 includes non-cash stock-based compensation expenses of $2.2 million, and it was $1.8 million for fiscal year 2008 first quarter. Despite similar year-over-year average invested cash balances, other income decreased due to lower interest income earned from lower interest rates year-over-year.

Our income tax provision for the first quarter reflects a quarterly tax free of about 35% versus 27% in the first quarter of last year. The fiscal year 2009 effective tax rate does not include any benefit related to the federal R&D tax credit, whereas the fiscal year 2008 rate did. Without the federal R&D tax credit, we expect for the full-year rate to be about 34% this year.

Minority interest decreased slightly due to lower operating results in the quarter for our majority owned subsidiary, TrellisWare, versus the same quarter last year. So all up, our pretax income was up by about 66% on revenue increases of 19% despite increasing our R&D investments by $2.5 million, and net income and earnings per share were impacted by the delay and the extension of the R&D credit. We will address the difference between GAAP and non-GAAP earnings per share in a few slides.

In looking at our segments, if you recall last quarter, we made management and organizational changes to better align the organization with our recent strategic changes.

Our satellite services segment is primarily comprised of our Maritime and airborne mobile broadband and enterprise VSAT services, as well as our ViaSat I satellite. Our Commercial Networks segment comprises our former satellite networks and antenna systems segment except for the satellite services segment. We have recapped the data for the prior fiscal year periods presented to conform with the current period presentation.

In the Government Systems segment, revenue for the first quarter was $88.6 million, a 26% increase over the same period last year. The increase for the quarter is primarily related to sales of Information Assurance product and Next Generation military SATCOM systems, partially offset by lower development revenues of Next Generation tactical datalink products and a change in accounting on MIDS production from the percent complete basis of accounting based on costs to units of delivery method for production Lot 8.

In the Commercial Networks segment, revenues for the quarter were $62.9 million, a 12% increase over the same period last year. The year-over-year quarter increase is primarily related to mobile satellite, enterprise VSAT and antenna systems sales, offset by a decrease in consumer broadband sales.

For satellite services for the first quarter, sales were slightly lower year-over-year. In the first quarter, Government Systems segment posted operating earnings of $12.1 million, an increase of 96% from the prior year. The year-over-year operating earnings increase is due to higher revenues, improved margin in our SATCOM and Information Assurance products, offset partially by higher R&D investments of Next Generation Tactical Data Links, Information Assurance and UAV products, higher new business investment costs and the change on MIDS mentioned earlier.

Commercial Network segment operating profits were basically flat for the first quarter year-over-year. Although we experienced improved performance in our mobile satellite and antenna systems areas, these are offset by reduced earnings from our consumer broadband products and from investments in our AcceleNet and Next Generation consumer broadband products.

For satellite services for the first quarter, the operating loss was higher year-over-year primarily due to legal and other costs associated with the ViaSat I satellite. For the first quarter for fiscal year 2009, operating earnings amount include non-cash share-based compensation expense charges of approximately $2.2 million, and they were $1.8 million in the first-quarter 2008.

As we look at the GAAP and non-GAAP earnings per share differences, non-GAAP results exclude the effects of acquisition-related intangibles and the effects of non-cash share-based compensation expenses net of tax. The changes year-over-year are primarily related to higher net income.

In looking at the balance sheet, our balance sheet continues to be strong. Cash and short-term investments decreased by about $14 million from the beginning of the year, and we will talk about the movement of cash later when we review cash flows. Accounts receivable decreased on improved collection activities, unbilled accounts receivable increased primarily due to MIDS progress payment production lot timing, and the timing of other contract milestones.

Inventory was down from the beginning of the fiscal year due to shipment of certain consumer broadband inventory to customers offset by the transition of some products to a unit to delivery base of accounting. Prepaid and other current assets are lower primarily due to lower prepaid supplier payments. Goodwill and intangibles decreased due to regular quarterly amortization. Net property and equipment is up about $16 million in one quarter due to capital additions, of which about $16 million is related to our new satellite project and about $3 million for quarterly facility expansion and test equipment to support our business growth, offset by quarterly depreciation. The change in other long-term assets is primarily due to deferred income taxes and amortization of capitalized software.

As we look at liabilities and equity, accounts payable decreased despite revenue increasing. Days payable balances with our suppliers improved and is below historical averages. The biggest change in our balance sheet for the quarter was in advances, which were down mostly in our commercial segment reflecting the timing of receipts and contract milestones on certain mobile satellite and antenna systems programs.

This balance is now back in line with historical levels, but as we saw it can fluctuate significantly from quarter to quarter. The change in other current liabilities primarily relates to the payment of the secured borrowing in the first quarter of about $5.1 million associated with an enterprise VSAT program and the payment of discretionary compensation accruals of $4.7 million, partially offset by changes in warranty and employee-related accruals. The increase in other long-term liabilities is primarily related to an increase in long-term deferred revenues.

Regarding the minority interest change, in the first quarter, our majority owned subsidiary sold stock to existing stockholders. We also invested in the transaction to maintain our equity percentage. The result was an increase in minority interest of $1.5 million.

At the end of the quarter, we continue to have no outstanding borrowing, leaving our full line of credit available plus standby letters of credit. As of quarter-end, we had about $53 million available under our line of credit. We are in the process of expanding and increasing our credit facility through a new syndication.

As we look at cash flows, we had good net income in non-cash outback, which was offset by changes in working capital. The net change in working capital is almost all related to advances which we discussed earlier and the result of the modest increase in cash from operations. Cash flows related to investing activities for the quarters reflect capital expenditures for our satellite project and business expansion activities as our Company continues to grow and capital expenditures for licenses and patents related to our satellite project as well.

Cash used in financing activities was primarily from the payments on the secured borrowing, offset by stock issuance from our majority owned subsidiaries and the net proceeds from common stock issuance. Our forecast for generating cash from operations is consistent with our previous estimates and our outlook at the time we announced our ViaSat I project.

I would like to turn it back to Mark now to discuss our outlook.

Okay. Thanks, Ron. At this point I will give a quick update on our outlook for the rest of the fiscal year.

Our outlook for the year as a whole remains pretty consistent with our estimates last quarter. At this point based on awards timing, we might want to narrow the revenue range a little bit, consistent with where we see a reasonable midpoint of revenue in the mid $600 millions.

We are still aiming at the same range of GAAP and non-GAAP earnings per share. Our estimates for both of those are based on a tax rate that is consistent with the federal R&D tax credit being extended and retroactive to the beginning of calendar year 2008. Our estimate for timing has a little higher percentage of the total fiscal year earnings in the second half of the year that is indicated by the current consensus of analysts' estimates. Much of the difference is due to the timing of the R&D tax credit. We expect earnings in the second quarter to be sequentially higher than the first quarter and have stronger earnings growth in the second half. The growth rate on the AcceleNet WAAS mobile is a little bit of a wild-card.

To date we have had good ramp rate but on very small numbers. Based on that and the very favorable industry reviews and feedback we are getting, it makes complete sense for us to continue to support that at the level we have been, even though at this point it is likely to impact earnings in the second quarter by a couple of cents a share or so. We expect to know a lot more about the growth trends next quarter.

There are several factors that affect the higher second-half outlook, including the shift that Ron mentioned earlier regarding delivery-based accounting on MIDS LVT production; the benefits in the second half and the strong awards in the first half; renewed in-line networking encryptor order flows associated with the updated delivery order agreement; good order flow for book and shipped government satellite products; forecasted higher shipment rates for consumer broadband in the third and fourth quarters; improvement in Satellite Services results, including the effects of mobile broadband recurring revenue; resolution of pending orders in the VSAT products area; and anticipated continued growth in the OEM sales of AcceleNet.

Overall we believe that the pace and mix of new contract awards is consistent with our view of the overall fiscal year targets. And we recognize the uncertainties around the timing of the R&D tax credit, but overall believe that the benefits of the tax credit for us are quite worthwhile.

So now I will just summarize, and in that regard our overall earnings performance for the first quarter of fiscal year '09 was pretty consistent with our pretax objectives and reflected solid year-over-year growth. The higher tax rate due to not yet having the R&D tax credit reinstated had about a few cents per share impact on earnings per share. Record new orders of about $206 million are excellent. We are optimistic about another very good quarter for new orders for this current period.

We have got a number of opportunities, both commercial and government, which have timing consistent with that. A fair amount of our optimism derives from programs or projects that are already underway or involve already made initial funding commitments or where we have been selected for awards.

On the government side, revenues in are largest area, Tactical Data Links, are anticipated to be relatively flat year-over-year, but we anticipate good growth in Information Assurance and satellite communications, simulation and tactical UAVs. Year-over-year new orders are expected to increase, though, in Tactical Data Links, as well as in all the other government areas.

On the commercial side, there is positive indications that demand for consumer Ka-band terminals will be stronger than it appeared last quarter. That is due to completion of network upgrades that added capacity in areas that had been closed to new subscribers and working through pipeline inventory, resulting in increases in contractual order forecasts relative to prior levels.

We also have good opportunities in our conventional VSAT business and Ka-band mobile broadband. We have had some small additional commitments on Next Generation Ka-band broadband and anticipate growth there. The impacts of the AcceleNet WAAS mobile OEM agreement with Cisco is a little bit of a wild-card, but overall we are still happy with the markets we're addressing and our competitive positioning within those markets. We think we have got some exciting growth opportunities ahead.

And that concludes our prepared remarks, and at this point we would be happy to take questions.

(OPERATOR INSTRUCTIONS). Rich Valera, Needham & Co.

Rick, I was wondering if you could remind us what your cash flow from operations targets for fiscal '09 is?

We're looking in the north of $50 million range.

Great. Just to triangulate on your expectations for expenditures for ViaSat I, you had talked about $135 million of costs associated with that in fiscal '09. Can you say how much of that you have actually done year-to-date? Is it safe to say at this point that given the uncertainty of the timing of your strategic discussions that you are going to put debt capacity in place to be able to support that $135 million by yourself at this point?

I guess a couple of responses on that. Regarding the debt capacity, yes, we are expanding our line to a level that we think is appropriate given our expected expenditures.

Regarding the expected level for this year, we're basically spending at a level that we anticipated, maybe a week or two slower, but I think that is fairly consistent with our plans. Some of it depends on the timing of some of the milestones that we hit relative to whether it is a launch contract or the satellite contracts that could slide a quarter or slide out of the quarter that could influence the total for a year. But we don't see anything that is inconsistent with our original spend plans at this time.

Okay. Mark, in your prepared remarks, you make reference to a project that you were partnered with Lockheed Martin on that you said could be quite significant if they won. Could you just go over that project again with maybe a little more color?

Yes. It is what is called TSAT, and TSAT has been in the works for quite awhile. It's about a $15 billion multi-satellite, multiyear development aimed for deployment in the 2016-ish timeframe. And we have a pretty big role on the Lockheed team. Big meaning you know more than $100 million of involvement, somewhere in that range. And the program it has been sort of unclear whether or not it would proceed, but just in this past quarter, the DOD pretty much firmly decided to make a downselect and an award to either -- it's between Lockheed and Boeing to pretty much make a downselect this year.

Great. That is helpful. In terms of the second quarter, should we be thinking about pretty much a full tax rate again for the second quarter since it does not look like we will get the R&D tax credit in time for that quarter?

I mean you can judge yourself as well as we can based on what is going on in Congress. I would say it is probably safer to assume that it probably won't be implemented before the end of the quarter, but it might.

Great. That is helpful. Thanks very much, guys.

Tom Watts, Cowen & Co.

Congratulations on the solid quarter. Just to clarify, when you say you're focusing on strategic relationships rather than financial, that is going to be primarily distribution, someone to provide distribution? Should we think if they are going to do that, would that suggest that they are less likely to provide an investment?

Well, it's a first strategic going to -- I guess what I would say is we would use strategic as meaning someone that has an interest in the industry, and in the industry would be, say, a satellite partner or someone who is a broadband partner. And that broadband such partners could either end up helping with distribution or facilitating distribution. That is kind of the way we define strategic. I would not say that because of that, that would mean that they were less likely to make an investment. I would say that depending on the strategic partner, that still could make sense. That (technical difficulty)--

And then, yes. And then also could you give us a little bit more color on TOOWAY and how we should think about the takeoff of the European market? I know that they have been -- they are still putting distributors in place. Are we really waiting for the Ka-band satellite launch in 2010 for the takeoff? In terms of shipment rates for them, is it still for the hundreds per month at this point?

Basically with TOOWAY the idea is to understand the European market and to, I would say, test it. The idea is in theory is to kind of make strategic relationships that would be -- that would, let's say, blossom with the KA-SAT satellite. And the total market for TOOWAY prior to the launch of KA-SAT is in the tens of thousands, and that is what we've talked about before. That means like 40, 50,000-ish. They may augment that a little bit with Ka-band, but it would be in that tens of thousands range. So you could sort of figure between now and then that would mean thousands per month. That would be kind of between now and two years from now, the 24 months, tens of thousands of terminals. That would give you some idea of what that would mean. That would be pretty -- I mean I think that would be a really nice start and would help pave the way so you could get a running start when KA-SAT is launched.

And then just finally, you talked about how commercial VSAT was developing very nicely, and you were expecting to close some additional orders. Is there something specific happening in that market, and is that primarily U.S.-based? And are you feeling share, or is the market having a little bit of pickup in growth?

I guess the main thing I would say is we were just so absorbed in the Ka-band stuff that I would say we probably neglected conventional VSAT business a little more, a little bit through a time period. So over the last two quarters, we have made it more of a focus area. And I would say that whereas things have been sort of declining for us, even when the market itself was growing a little bit, we have reversed that I would say.

So I think we're more holding our own, and I think we have a good shot at getting back at least to where we were. And we're doing that through a combination of things. I would say we have announced several product improvements. We have reallocated resources. We cut costs. I mean we're doing a variety of things that are improving that business, but they are more I would say execution-oriented than market-oriented. Does that help?

Yes.

Steve Ferranti, Stephens Inc.

A quick follow-up on the KA-SAT opportunity with TOOWAY. Over the next two years, can you sort of characterize for us how you expect the ramp for the infrastructure piece of it to roll out, and then when over that two-year period you might expect those unit volumes to ramp up to what you describe in the previous question?

Yes. So it is a little bit hard, but I would say a good way to look at it is to sort of compare it to WildBlue in the United States. WildBlue between their two satellites was about a 10 gigabits capacity KA-SAT and Europe is about 70 gigabits. So it is like seven times bigger.

With WildBlue prior to launch, we did tens of millions of dollars in infrastructure that would be 20-ish million kind of infrastructure. So for KA-SAT because it is a lot bigger you could expect the infrastructure to be bigger. It is not going to be bigger by the ratios because of the scale we have improved the economics. So the capital infrastructure costs per subscriber will be quite a bit better than it was, but still you're looking at a satellite that is seven times bigger. So that is a factor.

And then the infrastructure stuff you would expect would be deployed between now and satellite launch in about two years. If you look at what we did with WildBlue in the first -- WildBlue and TeleStat combined in the first two or three years, you're looking at, you know, a couple of hundred-ish million in terminal sales. So we think that is not -- the uptake rate is going to depend on the distribution, but the capacity is certainly there to have similar types of results.

Does that give you an answer to something you're looking for?

Yes, absolutely. That was very helpful. And then in terms of the ground infrastructure that Eutelsat is looking at putting in place versus what WildBlue put in place prior to their ramp, is it similar infrastructure-wise in terms of number of gateways?

Yes, it is similar. I mean the main thing like I said so you can sort of look at the ratios of capacity and then what you want to do is say, well, you would expect and we want to deliver efficiencies in capital cost per subscriber. So those two things will balance a little bit, but we think the infrastructure opportunity is definitely bigger on KA-SAT because the capacity is so much higher and the number of gateways is comparable.

Okay, great.

We're really talking -- just to be clear, what we are talking about is the amount of infrastructure, network hub infrastructure equipment that goes in each gateway.

Right. Understand, okay. And are there any technology milestones that you have either hit or expect to hit in the near future on either I guess ViaSat I or KA-SAT that would give you an increased confidence level in terms of your ability to hit the capacity targets that you are looking at?

Yes, I mean that is a good question. I mean basically a lot of it in terms of the capacity of the satellite, a lot of that is based on engineering analysis, and then that gets turned into specifications for the satellite payload. And when we talk about technical progress on the satellite construction contract, we go through a series of design reviews for the satellite payload, and that puts a lot more specificity in the actual hardware implementation of the design.

And so we have been making pretty good progress on that. We have been through a preliminary design review. Kind of the next milestone around the end of this year would be a critical design review on the satellite payload itself, and that really is the design the satellite has to be implemented. So that will be the next big milestone. That would be this year.

On the ground segment side, one of the big milestones has to do with things like placement of infrastructure, the exact -- when I say placement of infrastructure, kind of the exact placements of infrastructure, and then going through the calculations of how that influences the economics and capacity. And that is the other big area that we have been making good progress on.

Okay. Great. Very helpful. The last one for me, I guess in terms of the discussions that you have been happening to date with strategic partners, can you characterize -- are they a bit more skewed toward the consumer broadband distribution end of the spectrum or maybe perhaps toward the more traditional video distribution model? Any color you can give us there?

I would say consumer broadband is one area, and just to reiterate we really like that area because it is so well understood and proven in the US and we believe underway in Europe as well.

But some of the other ones do involve some of these additional uses. And I would say more traditional video is not -- I think that's a good application. That is not one of the areas that we have been working on these strategic partnerships. It is really more things like wireless backhaul, 3G, 4G wireless backhauls is obviously a really good one. There's a lot more sensitivity to coverage areas of 3G now than there were just months ago. That is still a hard problem. Some of the more media-centric aspects of the Internet also have shown good promise for us, and those are kind of more the initial areas.

Okay. And I would assume obviously your guys part of the challenge there would be sort of optimizing the highest and best use of the asset at this point?

Yes and I would say what we're doing is we are sort of trading off one of the things you look at is the yield in Satellite Services from each of these applications. They have different characteristics. So I will just give an example like consumer broadband. It has a pretty good yield, a pretty high-yield. Most of the distribution agreements would likely be sort of along the lines of what exists now, which are sort of best efforts of distribution. So you don't have -- you may not have very high commitments, but you have good yield and good underlying market dynamics.

Some of the other applications might have a lower yield, but we might get more substantial commitments faster. And so then we sort of make some trade-offs in that area, and what we're looking for is to have choices.

Absolutely. Well, very helpful. Thanks, guys.

Jim McIlree, Collins Stewart.

Mark, I think you talked about some Enerdyne design wins. Can you elaborate on that at all?

Yes, I don't want to be too specific, but in this tactical UAV world I will also call them tactical unmanned aerial systems, there has been a lot of activity in some new platforms and some new competitions. And basically -- and these can involve, for instance, payload upgrades to existing vehicles, or they could involve new vehicles, and we've basically been working with the vehicle manufactures to provide primarily video data links and some associated other features, which would be including things like metadata or fusing both data and video links together. And basically we have been pretty encouraged because what we're finding is the Enerdyne products, the interlinks products, fills kind of a void in the market. And I think some of those -- before I name names, I think we would like to coordinate with the platform operators and just get their approval on them. But they are kind of -- if you just look at who the manufacturers of that class of UAV would be, it would be all the ones that you would find in that class. That is what we're finding so for.

Okay. So you're not necessarily depending upon the UAV manufacturer to win some RFP or displace an incumbent in order for Enerdyne's products to get --

No, it is not really proposals. These are more vehicles that are already in the works, and they have some upgrades on. I mean there certainly can be uncertainties in the volume of production for each of these manufacturers and how big their market is. But I think by getting the design wins that we're getting, we're going to get growth over time.

Okay. And the Satellite Services operating income or operating loss of about $2 million, is that a relatively steady-state given the investments that you're making in ViaSat I, or is that set to become an even bigger loss in the upcoming quarters?

I think that overall there could be quarters where we have negative fluctuation. But as we build critical mass in there, that is an area were you have got to have X. You have some fixed cost, and you have to have X, and we're growing revenue opportunities that are primarily in the mobile area in the near-term.

But there are not necessarily a lot of operating losses associated with the new satellite on a quarter to quarter basis, not in the near. (multiple speakers). This particular period I would say we had a higher than normal expense rate for legal and support costs.

Yes, that is fair. Yes.

Maybe that is a better way of what I was trying to ask. Is that the expense rate that you have for the ViaSat I project is fully reflected in the quarter, and you're probably not going to build it up going forward? Is that fair enough?

That is fair. I mean we will have some continued support costs for it, but we do think this quarter was particularly high.

Okay, good. And lastly, on the Blue Force Tracking, Mark, I think you said that it went through testing, and then it was ready for the next stage. Could you outline what the next stage and the stage after that would be?

I mean the purpose of -- remember what we had from about a year and a half ago was a prototype contract, and the purpose of the prototype was to demonstrate some technical advances that the customer thought was really important, and that is the part that has gone well. We feel prototype testing that we have done has gone pretty well, and that includes lab testing, and then now there is some -- right about now there is some kind of field demonstrations.

So given that, that is kind of what the government was looking for. What we're trying to do is figure out how to get from here to a production program, and that will probably involve next contract, which would be a relatively small amount of building more of the prototype level product and then a productization phase.

And all told, the government is looking to have to be able to declare the thing in production in some form kind of next year-ish, kind of end of 2009. So that gives you some idea of the timescale.

I think for the next year or so we probably would not expect to see orders that are much different than we saw in the prototype phase, but then beyond that things would grow, assuming that things continue to go well.

Yes, that is perfect. Great. Thank you very much.

Why don't we take one more question.

Chris Quilty, Raymond James & Associates.

Just to clarify, Mark, you were seeming to on the guidance side mention something about a narrowing of the revenue guidance, and then you never followed through with actual numbers. Were you making any kind of a change or narrowing to the prior guidance you had given?

I think that -- we gave a range of 630 to 670. I think the 670 was a little lower than the top of the range before, but the middle of that range is kind of right in the middle of where we would be aiming for.

Okay. So was that in the slides?

That 630 to 670, yes (multiple speakers) it is in the slides.

Okay. I was having some problems there, so I did not see it. Also, on WildBlue I think last quarter you gave us some volumes there that I think you said were moving up more towards 30,000 a quarter. Is it fair to assume with what you have said that the volume should head north of there through the back half of the year?

Yes.

Okay. And with the change in the segment revenues here, I am having a little problem figuring it out. What did you have as the organic growth rate in the quarter ex the acquisitions?

Well, the acquisitions did not contribute anything meaningful to the results.

Yes, I mean these are all organic growth. It is all organic growth.

Okay. I guess a question for you, Ron, on the service revenues and the new way it is broken out, just to be clear I mean you had an existing aero service in there of about 100 aircraft I think. You just picked up the KVH Maritime, and eventually down the road, you're going to pick up ViaSat I. Is there anything else that is in that bucket?

That is why --

Maybe a little context around that, though. With regards to -- we have had some existing Maritime already and with what Mark talked about with the expanding KVH agreement for additional infrastructure and lighting up additional regions around the world, that provides certainly an opportunity to grow that piece of it. And with that, there are some revenue sharing arrangements and roaming arrangements that go with it.

We also see some additional aviation opportunities that would flow through there under similar types of revenue-sharing arrangements, and then our existing VSAT Satellite Services business is also in there.

In the US.

In the US.

Okay. And when you look at the year-over-year increase, I mean we're still talking real small numbers here. But is it fair to assume that a good portion of that was related to the KVH Maritime, or did the revenue-sharing not kick in until post the announcement?

That will not kick in for a couple more quarters.

Okay.

And it is really a combination of both Maritime and the general aviation.

Right. And, of course, when KVH actually purchases the gateway hardware, that does not go into the service piece; it gets dropped into the Commercial Networks?

That is correct.

And Delta had an announcement today that they are I guess the first major airline rolling forward with Aircell. Using a ground to air type of arrangement, obviously only good for domestic travel. But your thoughts on that?

There are a number of different technologies that people are talking about for aviation. I think the ground-based air to ground stuff is -- the attraction of that is it is got a pretty low initial cost. The real -- the main issue with it is just going to be, what happens when you have a bunch of airplanes converging in, let's say, a hub area like Dallas, Dallas Fort Worth or Atlanta. It is going to really, really stress the performance in those types regions.

I think satellite has got some definite benefits in terms of speed and capacity, and so we're just going to have to see it play out in the market. I think it is going to take awhile for people to really understand the benefits of each, and so we're fracturing that into our longer-term outlook.

Okay. And I guess final question here, just to follow-up on the Blue Force Tracking timing, is the guidance that you gave of production volumes end of '09, is that not a big pushback from what you've said previously of hoping to be in production by the end of this calendar year?

No, no. As a matter-of-fact, it is exactly what we have been saying all along is that this kind of -- you know, what we've said is first contract was a prototype one that was a $10 million contract. The next phase we said would be kind of a very low rate initial production and production readiness, kind of in the same ballpark in aggregate, and then after that would be production, and that basically what we're seeing now is consistent with what we have said all along.

Okay. And the Army seems to be moving the ball in terms of the technology and bandwidth that they are looking for everyday, of course, always wanting more. And there were some recent articles in defense news and what not about how they are trying to look at that future combat system variance. Anything in those discussions that leaves you perhaps wanting in your technology solution, or do you think you have a good migration path towards whatever that would think they want for FCS?

Yes, I think that there have been articles on kind of, let's say, look at the migration path for what they call FBCB2, which is the battle force management program that Blue Force Tracking is integrated into and FCS, which is Future Combat Systems. Basically the articles only reinforce that what they want is more bandwidth to do more things. And if you look at what it is that our Blue Force Tracking update provides relative to the Blue Force Tracking I system that is out there, it is higher bandwidth and more capacity.

So we think all it does is just reinforces why they are doing it in the first place and why we would think it is reasonably likely that they will follow through with us on what they said they were going to do. Because that is the dimension that we are aiming to improve.

If you look at FCS -- think of FCS, there is really not hardware in the timeframe nor satellite capacity in the timeframe that goes along with FCS that is going to do anything better than what our Blue Force Tracking II version will do.

So I think that concludes our Q&A session and our call for this quarter, so thanks a lot, everybody, for your participation, and we look forward to talking to you again next quarter.

And again, ladies and gentlemen, this does conclude ViaSat's first fiscal year 2009 first-quarter earnings conference call. We do appreciate your participation, and you may disconnect at this time.