Viasat Inc (VSAT) 2009 Q2 法說會逐字稿

Good morning, or good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the ViaSat second quarter 2009 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference call is being recorded today, Thursday, November 6, 2008.

I would now like to turn the conference over to Mr. Mark Dankberg, Chairman and CEO. Please go ahead, sir.

Okay, thank you. Hello, everyone, and welcome to ViaSat's earnings conference call for our second quarter fiscal year 2009, and I'm Mark Dankberg, Chairman and CEO. And I've got with me today Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer, and Paul Caster, our Associate General Counsel. Before we start, Paul will provide our Safe Harbor Disclosure.

I'd like to remind you that the discussion today will contain forward-looking statements. We would like to caution you that actual results may differ materially from those projected in these statements. The factors that could cause actual results to differ are discussed in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. We undertake no obligation to update any forward-looking statements.

With that said, let me turn it over to Mark.

Okay, thanks, Paul, and we'll be referring to slides that are available over the web, and we'll start with our fiscal year '09 second quarter year-to-date financial results and do a business overview, perspective and some business outlines and discussion . And then Ron will discuss our financial results in more detail. Finally, update our outlook for the fiscal year and I'll summarize things, and then we'll take questions.

So as you can see, our second quarter results were really good, showing strong growth over last year, which was a [tough] overall record year for us. We had record awards of about $256 million, which was on top of the previous record in our first quarter, and we'll discuss some of the more significant ones shortly.

Our revenues reached a new record at $159 million, which is up 9% year-over-year, and we earned $0.39 a share on a non-GAAP diluted basis, which is up 11% compared to $0.35 last year. GAAP net diluted earnings per share was $0.29, 7% higher than last year's $0.27. You can also see that our effective tax rate this quarter was low, at about 5%, compared to about 28.5% last year, and that reflects the fact that the R&D tax credit was retroactively extended from January 1, 2008 up through December 31, 2009.

Our year-to-date results are also very good with record awards of about $461 million. Our revenues are also up nicely at $312 million year-to-date, which is up 13% year-over-year. We earned $0.68 a share on a non-GAAP diluted basis, up 21% compared to $0.56 last year, and GAAP net diluted earnings per share was $0.49, 23% higher than last year's $0.40. Income before tax was up 8% over the same period last year. With the federal R&D credit passing, our year-to-date tax rate is about 20%, compared to about 28% last year.

So now let's take a quick overview, and we'll put those top-level second quarter financial results in some context. Overall, we're very proud of our performance over the past quarter in several dimensions. Earnings for the quarter and year-to-date are in line with our plans for the year. We realize that the R&D tax credit effects sort of wreak havoc with quarterly analyst estimates, but obviously the cash and earnings benefit to the Company are significant, and though the timing is unpredictable, the credit's been implemented every year that we've been public on an annual basis, so it's clearly worth the effort.

New orders are probably the most exciting aspect of this quarter's results. Obviously they significantly improve visibility and confidence to our growth outlook. We also believe the recent surge in orders add a measure of validation to our view of our competitive position in key markets and the value of our discretionary investments that we've been making. We'll give more detail on those in a minute.

Meanwhile, we've also been able to continue investing in key new technologies that we believe will sustain our growth in the longer term, especially in tactical data links and radios, information assurance, defense satellite networks, consumer broadband and wide area application services.

So now, we'll go over the business highlights for each of our areas, starting with government, and this was a fantastic quarter for our government business. In our view, we saw two big and very exciting themes play out. First, most of the dollar value of new awards came from orders of existing products, which tend to carry good margins. A little of those product orders shipped during the quarter. We also added substantially to backlog that will ship over the next few quarters. Remember, orders for us are often pretty lumpy, and the September quarter is usually a good one for us, but this one was really good.

The second theme is also very exciting because mixed in with the big dollar values of the existing products were some smaller things that we think indicate some of the big growth opportunities that we've been pursuing are being to materialize.

So I'll review each theme by area. In the MIDS area, we received additional add-on production for MIDS low-volume terminals, especially from international customers. International is expected to comprise a growing percentage of low-volume, MIDS low-volume terminal production going ahead. What we also won [on] competition, as well as saw on orders, was a MIDS joint tactical radio system, or MIDS-J production transition terminals. It's an important step for the MIDS-J program, and it reaffirms its significant schedule lead in the overall joint tactical radio systems world, as well as our ability to compete as effectively in the MIDS-J environment as we have in the LBG environment.

Orders in the unmanned aerial vehicle area also consisted of mostly production plus some small dollar-value funding for next generation products on new platforms. New orders in information assurance were very strong. Besides the normal flow of KG-250 inline network encryptor orders, we won our first big order from a major customer who's been upgrading older non-standard, non-HAIPE internet protocol [cryptos] on an annual basis.

We also won a down select to produce the first inline media encryptors, or IMEs, and those are the KG-200 and 201 family. Those are the only Type 1 products available for securing classified data, up to top secret, stored on personal computers. The initial award is a $1.5 million delivery order contract, but we're seeing strong interest by key customers. We think this award is at least as significant as when we won our first KG-250 orders.

Defense satellite also had a great quarter. We won $25 million in new orders for our LinkWay S2 commercial VSAT products for Army and Marine Corps satellite networks, which even more permanently establishes it as a de facto standard for U.S. and Department of Defense mesh satellite applications. Orders for the DoD standard point-to-point EBEM modem were good, and we've already shipped over 2,000 of those units to date. We received additional R&D funding to upgrade existing UHF satellite networking systems, and we see good opportunities for equipment deployments and to leverage our position in the next generation UHF satellites, which will be launched in 2010.

Over the last several months, we've been demonstrating prototype versions of the Blue Force Tracking 2, or BFT2, system. That's been very, very well received and has generated favorable reports in defense news. The prototype success certainly helps keep the program on track. If things continue well, Blue Force Tracking could be our largest defense satellite program ever.

We also earned our first DoD orders for our ArcLight airborne broadband com on-the-move systems. That follows some very successful battlefield deployments by U.S. Special Forces. We think this offers a unique and critical defense capability that's literally years ahead of other planned methods to deliver real-time broadband data and video to and from mobile platforms. It's really the only system of its kind that has been battletested, and it's already deployed globally on hundreds of commercial air, sea and land platforms, and it's been adapted to secure DoD applications. Those are all good indicators that we could be poised for really good growth in that area too.

Given the much-anticipated change in administration, it's probably worth a minute to take a top-level view of our defense business. We can classify our defense business opportunities into three broad categories. One area would be major new starts, and those are usually associated with some fundamentally new platform or capability. One example would be a big program called TSAT, which is a $15 billion-plus multiyear program for a constellation of survivable broadband satellites. TSAT is still in the competitive phase between Lockheed and Boeing, and we have a significant subcontract role on the Lockheed team.

Other similar big-ticket programs might include things like new Navy ships, airframes, such as a new set of U.S. Air Force tankers, or space-based surveillance systems. There have been more of these types of programs under the Bush administration than there were under the prior one, and if defense procurement budgets were to be reduced, these big-ticket projects are the likely targets.

We don't actually do that much business in these types of programs. A second major area has been the funding through supplemental requests for material for Iraq and then Afghanistan. While some of our tactical com products are certainly acquired this way, we don't believe this has been a significant driver in our growth over the last four to five years, as it has been with some other defense contractors.

We would characterize most of our business in a third category, which is used in defense infrastructure such as satellite teleports or jet fighters, or that depends on the organizational structure of our armed forces. For instance, the number of MIDS terminals that will be acquired really depends on the number of F-16s or F-18s.

When procurement budgets are constrained, we've found that there's increased interest in extending the capability of existing infrastructure assets so that expensive new platform programs can be stretched out or deferred or even cancelled. Overall, in the areas we compete, we generally offer a much lower cost, more off-the -shelf product that doesn't necessarily do everything that a new full-scale program of record might do. When budgets are tight, that creates a target-rich environment for us. Opportunities for business there don't materialize instantly, but they do appear as budgets are reduced or incumbent programs incur overruns on cost or schedule. So we adjust from looking for subcontractor roles on major programs to looking for opportunities to cut costs and schedules on upgrades to existing platforms that are threatened by a tight budget environment.

In the period from 1992 to 2000, our Government business grew from about $5 million a year to about $60 million a year this way, and today we've got a much broader field where we can participate.

Now I will switch to our Commercial highlights, and for the most part, Commercial results are pretty consistent with our plans. The Ka-band consumer broadband market has been working through channel inventory. That resulted from the surge in demand when WildBlue-1 was launched and then followed by beam closures when the high-demand geographic markets exceeded capacity. In general, things are settling out pretty much as we expected. WildBlue has been increasing subscriber capacity by deploying network upgrades. Through increased advertising and lower demand beams, WildBlue retail incentives and growth in their wholesale business, the rate gross adds on the network has grown and seems to be stabilizing around where we thought it would.

We've got a more representative production outlook, and we would anticipate that calendar '09 will have higher unit shipments than '08. Plus we're continuing to work with Eutelsat on two-way for Europe, with Telesat and [Darrett] in Canada, and we're doing preliminary tests and demonstrations with a new partner to open a new pilot Ka-band market, hopefully next fiscal year.

The biggest news last quarter was executing a $50 million infrastructure contract with Eutelsat for their KA-SAT. In the past, the value of customer [premise] equipment orders has been about an order of magnitude greater than the infrastructure orders over about a four- to five-year period following launch, so that's really exciting, and it's an opportunity to extend our Ka-band broadband product leadership for a sustained period of time. Together with North America, we should have good economies of scale. KA-SAT's planned for launch in the summer of 2010, so that's now just a little over six quarters away.

There were a couple of important developments also in our mobile broadband business. We announced a series of steps to very cost effectively expand to essentially global coverage for our ArcLight mobile broadband business by the end of calendar year 2009. That includes roaming agreements with KBH's ArcLight maritime service as well as cooperative agreements directly with some satellite operators. Our customers and channel partners are clearly telling us that seamless global coverage is a key value proposition for mobile broadband service, and we believe this is the most comprehensive coverage available at Ku-band. The attractions of Ku-band compared to other existing mobile bands are higher service speeds, much more total capacity and much lower airtime pricing than any other global mobile broadband service.

Also, earlier this month we announced an agreement with Lufthansa Technik to integrate ArcLight broadband into their cabin management and in-flight entertainment systems for business jets, and that significantly enhances our reach in the general aviation market, including Bombardier business jets, where Lufthansa Technik's offerings are standard equipment on Challenger 300 aircraft.

Antennae systems' performance remains good and benefits from opportunities associated with our satellite networks and mobile broadband businesses. The AcceleNet wide area acceleration services' software business is developing slowly, and that continues to impact earnings in our Commercial product segment. We continue to work very closely with Cisco, which markets AcceleNet as the [best] wide area application services mobile software complement to their hardware appliance business. The numbers are still small, but based on Cisco's focus and progress in this market, the reported results from pure-plays in this area, such as Riverbed, and our business to date, we remain quite optimistic about this area over the next year or so. It remains a work in progress, but it's pretty exciting, and I'll devote one more slide just to this area.

So this slide is extracted from ZDNet, a Ziff-Davis Net article on the Gartner symposium a few weeks ago in Orlando, Florida. Czech Republic selected the top 10 most important IT products from over 100 exhibiting vendors at that symposium. Most of the things that were selected were household names and include the Qualcomm Gobi global mobile broadband modem, the new Google phone, the BlackBerry Bold, some new Motorola Voice over Wireless LAN phones, new Toughbooks from Panasonic and new laptops from Dell. But among that type of company, our AcceleNet WAN acceleration product was listed as number eight. There's a brief write up about the benefits of software-based application acceleration and some comparisons with other WAAS-type products.

We think that kind of product recognition, coupled with our strategic OEM relationship with Cisco, makes it worthwhile to continue to invest in the area. The upside could definitely be more than worthwhile, and we'd encourage investors to do some further digging in this area.

Okay, this next slide provides an over view of our Ka-band initiative. We've already mentioned one significant development, which is our mutually exclusive contract for infrastructure in ground segment for Eutelsat's KA-SAT satellite. It's an important development in two regards. One is obviously just the value of the infrastructure program itself along with the anticipated end-user equipment that goes along with it. But it also creates substantial economies of scale between the U.S. and North America and we believe establishes us as a clear favorite to be the volume leader in consumer broadband equipment. That's a very important factor in winning agreements with satellite broadband retailers since customer premises' equipment cost is such a big factor in acquiring (inaudible) and volume is such a big factor in reducing those costs.

We are very, very pleased with our close working relationship with Eutelsat, and we're totally committed to helping them develop multiple related markets for KA-SAT bandwidth and in creating services and distribution opportunities that span both the North American and European markets.

We're also continuing to work a number of international opportunities for Ka services. While some of those may be delayed to some extent, others likely won't be.

There haven't been really any major changes in our ViaSat-1 program since the last quarter. Of course, we understand and appreciate the changes in the macroeconomic environment, and we're factoring those into our plans, but we believe we have a lot of maneuvering room. We're about 30% through a three-year project, and we're still on budget and schedule. Our core business performance, which is a key funding source, is just as we've anticipated. We believe we've got about a year, possibly longer, time to market advantage in the space segment plus comparable schedule leads on ground segment, and those things also create flexibility and leverage for us.

ViaSat currently has zero debt, and while in the past we've not typically carried debt, it would make sense to use debt as a component in financing an asset such as a broadband satellite that has substantial intrinsic value. It's noteworthy that all the major satellite industry market researchers are now identifying substantial growth in satellite broadband, and that they also identify broadband satellites as a distinct emerging segment of the fixed satellite services industry.

While credit markets aren't what they were a few months ago, we just expanded our revolving credit facilities and believe we're well advanced in creating additional long-term debt facility opportunities. The macroeconomic environment may delay some partnership opportunities, but others are still in quite active negotiations. We believe the underlying marketing forces that make ViaSat-1 an excellent investment are still in place, and as time passes, those are being further validated. But a key watchword for us is prudence, and we intend to be as prudent here as we have been in the rest of our businesses. We still have an array of strategic financing and partnership options, and we're going to make our choices in a very careful and thoughtful sequence.

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

Thanks, Mark. We'll start with the P&L and segment results, then cover the balance sheet and cash flows.

As Mark mentioned, operating results for the second quarter were very good. Revenues were $159.3 million, a new record and a 9% increase over the second quarter of last year. We'll address specific revenue changes later in our segment results.

The cost of revenue percentage increases reflect two things. First, if you recall, in the second quarter of last year we had several million dollars of KB-250 shipments that slipped from Q1 to Q2, which created a larger mix of higher margin product revenues. And secondly, in the second quarter this year, we had a higher proportion of funded development, which tends to carry lower margins.

Selling, general, and administrative expenses were higher year-over-year, mostly due to higher costs from our record quarterly and year-to-date awards, support costs from increased business activity, as well as legal and other costs associated with our Ka-band satellite initiatives.

Research and development expenses were down 21% in the second quarter year-over-year, principally due to the shift of some of our development efforts going from internal development projects to customer-funded development. However, we continue to invest in next generation tactical data link, information assurance, unmanned aerial vehicle and mobile broadband technologies.

Quarterly amortization of intangibles is slightly lower for the second quarter year-over-year due to completed amortization of certain intangibles partially offset by the amortization of new intangibles from our JAST acquisition in the second quarter of last year.

Income from operations for the second quarter fiscal year 2009 includes noncash stock-based compensation expenses of $2.9 million, versus $1.9 million for the second quarter of fiscal year 2008.

Other income decreased due to lower interest income earned from lower invested cash balances and lower interest rates year-over-year.

Our income tax provision for the second quarter reflects a quarterly tax rate of about 5%, versus 28.5% in the second quarter of last year. The quarterly rate is lower than the estimated annual effective income tax rate due to the signing of the Emergency Economic Stabilization Act of 2008, which was signed into law in the quarter, and this law extended the federal R&D credit from January 1,2008 to December 31, 2009. The quarterly rate reflects a fiscal year 2008 catch-up adjustment of about $872,000 and a year-to-date catch-up adjustment from the first quarter of about $945,000, and we now expect our annual effective rate to be approximately 23%.

Minority interest decreased due to lowering operating results in the quarter of our majority-owned TrellisWare subsidiary versus the same quarter last year, and we'll adjust the difference between GAAP and non-GAAP EPS in a few slides.

In looking at our year-to-date results, our revenues are very strong at $312.2 million, a 13% increase over the same six months of last year. The cost of revenue percentage reduction reflects improved margin performance, particularly in our government products areas, offset by lower margins on some funded broadband development programs.

Selling, general, and administrative expenses were higher year-over-year, mostly due to higher selling costs from our record year-to-date awards, support costs from increased business activity, as well as legal and other costs associated with our Ka-band satellite initiatives.

R&D is up slightly year-to-date year-over-year and reflects a high level of R&D from our first quarter offset by a reduction in the second quarter due to a shift in some of our development going from internal development project to customer-funded development.

Year-to-date amortization of intangibles is slightly lower due to the completed amortization of certain intangibles partly offset by the amortization of new intangibles from our JAST acquisition in the second quarter of last year.

Income from operations for the first half of 2009 includes noncash stock-based compensation expenses of $5 million, and it was $3.7 million for the same period of last fiscal year.

Other income decreased due to lower interest income earned from lower invested cash balances and lower interest rates year-over-year.

Following the extension of the federal R&D credit, our income tax provision for the first six months of this fiscal year reflects an annual effective rate of about 23%, which has been reduced by catch-up adjustment of $872,000 related to our fiscal year 2008 fourth quarter. This compares to an effective rate of approximately 28% in fiscal year 2008.

Minority interest decreased due to lower operating results of our majority-owned TrellisWare subsidiary versus the six months last year, and we'll adjust the difference between GAAP and non-GAAP EPS in a few slides.

In looking at our segments, in the Government Systems segment, revenues for the second quarter were $97.3 million, a 22% increase over the same period last year and a new record. Year-to-date for the first six months, revenues were $185.9 million, a 24% increase over last year. The increase for the quarter and year-to-date is primarily related to increased sales of information assurance products and higher information assurance development and next generation military Satcom systems revenue, partially offset by lower development revenues of next generation tactical data link products.

In the Commercial Network segment, revenues for the second quarter were $59.2 million, a 9% decrease over the same period last year. The year-over-year quarterly decrease is primarily related to lower consumer enterprise VSAT sales, partially offset by increases in mobile satellite and antennae system sales.

Year-to-date for the Commercial Network segment, revenues were $122.9 million, a slight increase over the same period last year. The change primarily reflects higher antennae and mobile satellite systems revenues offset by lower consumer broadband and enterprise VSAT sales.

For satellite services for the second quarter and year-to-date, sales were slightly higher for the same period as last year. In the second quarter, the government systems segment posted operating earnings of $13.3 million, an increase of 12% from the prior year. Year-to-date, government segment operating earnings are $25.4 million, a 41% increase over the same period last year.

The year-over-year operating earnings increase is principally due to higher revenues and their associated margins, offset partially by R&D investments of next generation tactical data link, [higher] information assurance and UAV products and higher new business investment costs.

Commercial Network segment operating profit declined substantially in the second quarter and year-to-date year-over-year. Although we experienced improved performance in our mobile satellite and antennae systems area, these were offset by reduced earnings from our consumer broadband and enterprise VSAT products, as well as investments in our AcceleNet product.

For satellite services for the second quarter, the operating loss is essentially flat, while year-to-date the operating loss was higher year-over-year, primarily due to legal and other costs associated with the ViaSat-1 satellite project. For the second quarter for fiscal year 2009, operating earning amounts include noncash share-based compensation expense charges of approximately $2.9 million and were $1.9 million in the second quarter of fiscal year 2008.

Year-to-date through the second quarter of fiscal year 2009, the operating earning amounts include noncash share-based compensation expense charges of approximately $5 million versus about $3.7 million in the first half of fiscal year 2008.

As we look at the difference between GAAP and non-GAAP EPS, non-GAAP results exclude the effects of acquisition-related intangibles and the effects of noncash share-based compensation expenses net of tax. The changes year-over-year are primarily related to higher net and pro forma income.

Then turning to the balance sheet, overall, we continue to have a strong balance sheet. Cash and short-term investments have decreased by about $34.4 million from the beginning of the year. Then, we'll talk about the movement of cash later when we review cash flows. Accounts receivable decreased on improved collection activities. Unbilled accounts receivable increased due to the timing of certain contract milestones, primarily with our mobile and consumer satellite systems contracts.

Inventory was down slightly from the beginning of the fiscal year due to shipments of certain consumer broadband and information assurance products to customers, and this was offset by the transition of some of our products to a units-of-delivery basis of accounting.

Prepaid and other current assets are higher primarily due to an income tax receivable.

Goodwill and intangibles decreased due to regular quarterly amortization. This quarter, we segregated the satellite construction from other fixed assets. Net property and equipment is up about $4.4 million since the beginning of the year and reflects normal capital projects to support our business growth, primarily lab and product test equipment, as well as facility expansion. Year-to-date, we've increased our investment in our satellite by almost $43 million. The change in other long-term assets is primarily due to increases in deferred income taxes offset by amortization of capitalized software.

As we look at liabilities in equity, accounts payable increased primarily due to higher product sales and associated inventory purchases from our suppliers, but days payable balances remains below our historical averages.

The biggest change in liabilities was in advances, which were down mostly in our commercial segment, reflecting the timing of receipts and contract milestones primarily on mobile satellite and antennae systems programs. This balance is now back in line with historical levels, but as we've seen, can fluctuate significantly from quarter-to-quarter.

The change in other current liabilities primarily relates to the payment of a secured borrowing in the first quarter of about $5 million associated with an enterprise VSAT program, 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 borrowings, leaving our full line of credit available less standby letters of credit. As we mentioned earlier in the week, we expanded our line of credit to $85 million. This provides us with more financial flexibility to support our business growth. Including the effect of standby letters of credit, we currently have about $80 million available under this new line.

As we look at cash flow, for the quarter and year-to-date, we had good net income and noncash add backs, which was offset partially by changes in working capital. The result was an increase in cash from operations of approximately $18 million. Cash flows related to investing activities for the quarter and year-to-date reflect capital expenditures for our satellite project, business expansion activities and capital expenditures for licenses and patents also related to our satellite project, and a payment related to our JAST acquisition.

Cash used in financing activities was primarily from the payment from the secured borrowing, offset by the stock issuance from our majority-owned subsidiary and net proceeds from common stock issuance. Our forecast for generating cash from operations is consistent with our previous estimate and our outlook at the time we announced our ViaSat-1 project.

At this point, I'd like to turn it back over to Mark.

Okay, thanks, Ron.

At this point, I'll give a quick update on our outlook for the rest of the fiscal year. Our outlook for the year as a whole remains consistent with our estimates last quarter. We're still aiming at the same range of GAAP and non-GAAP earnings per share. The R&D tax credit's been passed and eliminate that variable from our outlook. We've been expecting our second half earnings to be stronger than the first half. Our very strong orders for the first half certainly lends more visibility and confidence to that. Orders for us can be quiet lumpy, and we don't expect our second half orders to be as high as in the first half, but we do anticipate that book-to-bill for the year would be quite comfortable. Historically, a very, very high percentage of [firm] orders for us turn into revenue.

It's probably still a little early for us to give much detail on our fiscal year 2010 that begins April 4,2009. At this point, our outlook points to pretty good year-over-year earnings growth, and we'd estimate in the 10-ish percent range now, and we'll have more visibility there next quarter.

Now, just to summarize, we're quite proud of our results for the second quarter and the first half. We've sustained good growth in revenues and earnings, continued to generate cash from operations, and although new orders for us can often be lumpy, we feel that at $460 million-plus year to date, that's been just fantastic.

Plus with the R&D tax credit being reinstated, that helps eliminate a fair amount of uncertainty and confusion around our results. We enter the second half of our year with a very nice backlog that improves visibility and lends confidence to our outlook for the year as a whole.

So far, things have played out pretty much as we expected, with strong defense earnings and an order mix that favors good margin product sales. We're also pleased with the progress on several new market fronts, including new information assurance customers, the inline media encryptor award, Blue Force Tracking progress and communications on-the-move.

On the Commercial side, we're seeing a little more clarity on North American consumer broadband outlook, opportunities on the mobile broadband front and exciting potential on the wide area application services mobile front.

So overall, we're pretty satisfied with our growth prospects with specific areas we can identify for the near, mid and longer term horizons.

That covers our prepared remarks. At this point, we'd be happy to take questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Hello. Can you hear me?

Yes. Hi, Rich.

Hi. Good afternoon. A couple questions here. First, you've mentioned -- made some comments about looking at some debt financing options, Mark. I was wondering if you could add any color there, what types of feedback you've gotten from banks in terms of -- you've mentioned before sort of a 2.5 times leverage ratio might be reasonable. Have you explored that with banks that might be potential candidates to provide some kind of facility?

Yes, we have, and I would say the discussions are pretty -- they're pretty far along. I think that -- the idea that it's just impossible to get [debt] I think doesn't really apply. I think it's just on a case-by-case basis, and the main thing I'd say is we've been engaged in discussions with banks for months. We were able to extend our current credit facilities, and based on that, it gives us confidence that the discussions that we're having are real and reasonable, and that might lead somewhere.

And I presume you're pursuing the parallel path of talking to potential strategic investors that presumably could preclude you actually having to raise debt? Or is that -- do you figure there'll still be some debt in the equation regardless of who you might take on as a strategic investor.

As I tried to say before, we're looking at a whole array of things, and one is -- I think it's a complicated environment. There's a lot going on. We think that we have a bunch of options, and I wouldn't -- I don't want to communicate that we have a specific plan that we're going to do anything in any particular sequence. What we're trying to do is make sure that we have a set of options in front of us, and then pretty much what we'll do is we'll choose those options as we need to, as they make sense. And I think the sequence of events is going to matter. So one thing we're trying to be really careful about is that we do that sequence as best we can, but I'd say we have multiple options, and I don't really want to communicate that we're going to do any one particular thing yet, that we're not committed to any one particular thing at this point.

Okay. And with respect to your budget for this fiscal year, I think you'd said before you were looking to probably spend $135 million this year. Can you say how far along you are on that and if that's still the number you're looking for, for the first year's expenditures on the program?

This is Ron. Yes, we're expecting about $70 million more in the last half of the fiscal year, and I would say -- so it might be slightly lower than we were originally projecting, but it's still consistent given the duration and all the factors that go into it.

Great. Then a different topic, but on the topic of encryption, it sounds like you've really had some positive business development activity there recently. I think in the past, Mark, you've given some rough ballpark sense of how big that business was and how big you thought it could be. I think at one point you'd actually said you thought it could be your biggest business, even bigger than MIDS. Any -- would you care to update your thoughts on encryption in light of some of the new developments there?

Yes, and the way you described it is we said that we thought it could be our biggest business. And actually, MIDS has done pretty well over the past few years, but I think we're getting to the point where they can cross over, and a lot of it is related to some of these breakthroughs in the product area, and I would say it's a pretty broad area. We're really happy with the media encryption results, and the good thing there -- think about the inline network encryptors, like the KG-250, those go one per local area network, but the media encryptors go one per computer. So that represents a much bigger market. The average selling prices are going to be lower for network encryptors, [see that], but the market's so much bigger that it's pretty exciting.

Great. And on the tax rate, what's the tax rate you're expecting for the second half of the year. I know you're expecting a full rate of 23%. You expect similar tax rates for each of the third quarter and fourth quarter?

Yes.

Okay. And finally, with respect to fiscal 2010, Mark, you mentioned, I think, 10% EPS growth looks reasonable. Would you presume similar revenue growth to achieve that EPS growth? Or maybe less revenue growth with some leverage? How were you thinking about that?

Pretty close. I'd say pretty close. Maybe a shade less on the revenue side.

Great. Okay, that's it for me. Thank you.

Thanks, Rich.

Thanks, Rich.

Thank you. Our next question comes from the line of Chris Quilty with Raymond James & Associates. Please go ahead.

Hey, gentlemen.

Good morning.

A follow-up question on the SG&A, a fairly large pickup both in the quarter and year-to-date. Can you give us a sense of how much of that might be related to the ViaSat-1 program?

It's not a significant -- it's not the primary component. The largest component is primarily related to the selling and bidding proposals cost to support our award activity that's been really good in the first half.

And assuming that you hit your normal win rate on the bid proposal, that's a good indication of future business.

Yes.

By the way, what has been your win rate?

It's really hard to quantify, Chris. I think, actually, for the last -- we kind of go through streaks where we win almost everything we're going after, and so we had a little bit of that, but that's not always going to be the case. A lot of it just depends on the sequence of programs that are decided. But in general, overall, we win more often than we lose, I'd say, when we target things.

Okay. Speaking of -- you talked about long-term government spending programs. I'd be willing to bet some good dollars that TSAT never happens. You did mention you have some good potential business on there, but what happens in the world if TSAT never comes into existence? How does that impact your business model and where spending gets shifted to?

So the underlying needs out of TSAT sales was certainly there, and if you look at what's happened on the TSAT program, what they've talked about is scaling it back to this RS core, eliminating some of the optical intersatellite stuff and what most pundits would say is it would be replaced by some combination of advanced DHF¸ which is already in existence and an expanded view of the wideband global satellite services. And WGS has been a big, big for us. Most of these products that we talk about, things like [JIPIM] and EPEM and the LinkWave stuff, all of that stuff, we have a very, very strong position in that. If you think of WGS as really meaning non-processed types of satellite services, that's a big, big opportunity for us. TSAT is also -- we're just going to have to see how it goes. But that's an example of where if you look at what the alternative spaces are, it's pretty likely that we could do very well.

Okay. AcceleNet -- I know you've done this in the past, but can you just help me sort of put my hands around what's the order of magnitude size opportunity here, the number of units of things and cost per unit that the overall size of the market would represent?

It's a little bit hard. I think it's a work in progress. Part of the issue is that it's -- we're really -- our biggest channel in the market is our partnership with Cisco, and this is an emerging part of Cisco. It's an important part, and I think Cisco, when they talk about what their strategic elements are, they talk about Wide Area Application Services as really being part of application delivery, which is related to data center, load balancing, application delivery over the network. Those are all important components.

What I think people believe is that the software component, which is our WAAS mobile, will be some fraction of what that is, and one of the ways to look at that would be there's some pure-plays in the market -- like Riverbed is an example of a pure-play -- and you can look at their results, and they also have a software component, and the percentage of total product sales that are made up by this software component have been growing pretty significantly, but they're in the single-digit percentage, but they're up a lot from what they were a year ago. And so that -- I think if that were to continue and the field were to grow the way that people project, and if you look at the year-over-year growth the companies like Riverbed have had, you can get to tens of millions of dollars a year in software sales, which is obviously -- that is a great target. How long that takes, whether that materializes, all those things are too be seen, and they're really, I think, artifacts of the market as a whole, so they're wanting to see how that plays out. We're not going to directly influence that. We're going to address it more through our partnership.

Okay. And on the Blue Force Tracking, I thought I heard you say you could see it be your program. Did you mean your biggest Satcom program or even larger than the IA opportunity?

No, it could be -- what I think I said was our biggest single satellite, defense satellite program, and that's basically -- the government has identified a market for Blue Force Tracking terminals of 200,000 to 300,000 units at a few thousand dollars apiece. So that gives you an idea of what that could be over about a ten-year period. But that -- as a single program, that's big for us.

And the Defense News article you mentioned talked about $2,500 a terminal and units of 120,000 begin shipping in 2010. Is that consistent with what you thought?

Yes, that is for the FBCB2 program, and there are other applications beyond that, but that's for FBCB2.

Got you. Thank you very much.

Thanks, Chris.

And your next question comes from the line of Steve Ferranti with Stephens Inc. Please go ahead.

Hey , guys. I was just going to follow up on that question of Blue Force Tracking. I guess you already talked about the production schedule, but could you talk about the status of the incumbent producer there and how their development efforts are coming along at all?

Okay. So there is an incumbent contact, and they have a system that they've put together, and it is -- under the FBCB2 program, it's referred to as Blue Force Tracking 1 or BFT-1. And they also have other applications outside of FBCB2 for their what they call motion-tracking system, I think.

So within FBCB2, which is our -- that's the program we're working on, and that's the prime -- that's Northrop Grumman. We're a sub to Northrop Grumman under that program. Basically, there is no competitor. There was a competition, oh, a year-and-a-half, two years ago for a second-generation version, and we won that with our prototype. So I think that the incumbent basically looks at it as a big opportunity that has advantages of incumbency, and they were going to continue to do something to somehow get back into the program. And they're very capable. Of course that's possible. But if you look at the functionality features, integration with the rest of the program -- all that stuff's being funded under the contract that we won.

So while you never say never, as things progress, and based on the way things got described in the Defense News article, AUSA, the demonstrations, it's becoming more and more clear that the contract that they've awarded to us is the way that they're going to go. That's -- and of course, things can always be disrupted, but that's what the plan is, and I'd say as long as we do well, that's the likely outcome. Does that --?

Yes, that's perfect. Thank you very much.

Any other questions?

Thank you. (Operator Instructions). And our next question comes from the line of Myles Walton with Oppenheimer & Company. Please go ahead.

Hi, thanks. Good afternoon.

Hi Myles.

And I apologize if you've gone over this, but the overall profitability of the Commercial business in the quarter, can you characterize that?

As we indicated, we are still investing in certain areas within the commercial segment that do affect the profitability and what you see in the numbers and the results. We've made -- we talked about our AccelNet investments. We've also been continuing to invest in some of our mobile broadband technologies as well as we're seeing some impact from the VSAT business. So when you look at all those factors into play on a normalized basis, excluding some of these investments that were probably in the 6% year-to-date operating earnings range -- so some of those investments are quite significant.

Okay. And would that 6% exclude the run rate losses on enterprise VSAT, or is that inclusive of just the business conditions that exist in that market right now?

That would -- no, it wouldn't include the run rate, per se. It includes some impact, but not what I'll call a run rate. It does include some of our investments we're making on the satellite, though.

Okay. Any timeline or horizon at which point you think the enterprise VSAT market is maturing or getting out of the current funk?

Yes, the enterprise VSAT market for us -- we look at it a little differently than the other VSAT players. Basically, you can see our strategy in the VSAT market, in the enterprise VSAT market in general, really driven by driving the cost, again, down through these Ka-band projects, and some of those are -- one is our own. But others are working with partners, the most obvious one being the KA-SAT is really the next VSAT market after the U.S.

As the Ka-band stuff matures and becomes closer in time, we see big opportunities to transform that. That's really our strategy there. In the meantime, I'd say we tend to be more project-oriented and maybe a little less market-oriented than the other players in that segment. So we look at it a little differently.

Okay. So it sounds like it's pretty tightly coupled to the success of ViaSat-1 in the market, and I guess you'd say that a little in advance of that, you might find a modest turnaround in your enterprise VSAT business.

Yes, I think what we're really trying to do in some ways is redefine what that business is. A lot of it we see right now are people trying -- there's just not enough bandwidth, and so it sort of is pushing the VSAT market in -- I think just a more and more marginal role in enterprise networks, and we think that substantially changing the amount of bandwidth that's available will influence that, and that's really what our strategic play is.

And so, what we're doing in the meantime is positioning ourselves for that. And then also, on the enterprise side, this concept of application delivery over mixed networks, the thing that we're doing with Cisco, a wide area application service -- look at the way Cisco describes it as application delivery. We think that's a very significant strategic aspect of the VSAT business, especially in an environment where there's more [dial-up]. And so, what we're trying to do is manage through the transition period, and actually, I'd say we have some pretty good opportunities. Hopefully those will materialize. But that's what's really going to transform that business over the next year or two.

Okay. And then a clarification on the tax rate. You said 23% on a GAAP basis. What is the tax rate on a non-GAAP basis?

We typically -- we don't compute it that way. It would be marginally higher, though, due to the effect of the -- [I'd probably look at] the amortization or the intangibles as well as some treatment of some of the noncash stock-based compensation.

You could apply -- what you applied is an annualized tax rate. You'd use that same tax rate for the rest of the year.

Right.

And the last one -- you'd talked about having all the options on the table in respect to the ViaSat-1 financing, but if you can play out a scenario for us -- if there are no financial partners found, what's the amounts of long-term debt that you'd feel comfortable taking on, and also, what is the timeline for that type of decision?

So we've talked in the past about debt that would be in the 2, 2.5 times EBITDA range, and that seems to be more than adequate.

(multiple speakers)

That would be more than adequate, and if we were to do that, that would be the range, and I would say that that would come in place in over the next -- over 2009, somewhere in that timeframe.

Okay, thanks a lot.

No problem.

Thank you.

We have one more question.

And our next question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Sorry, just a quick one. What's your expected amount of stock compensation going forward? Was it a little unusually high this quarter?

Well, we did have a -- I would say the level for this quarter is more normalized with the future quarters because we did have an issuance earlier in the year, and therefore, Q1 had a partial quarter, whereas Q2 had a full quarter, so you'd expect it to be similar over the next several quarters.

We've been on a cycle where we've done equity option grants about every year-and-a-half, I think, over the last few years, and so this fits in that cycle.

So we're talking in the [2.8 to 2.9] per quarter range?

Yes.

Okay, thank you.

Okay, good. I think that covers all the questions, and that covers our call for this quarter. We thank everybody for your attention, and we look forward to talking to you again next quarter.

Thank you. Ladies and gentlemen, that will include today's teleconference. We do thank you again for your participation, and at this time you may disconnect. Have a nice day.