Viasat Inc (VSAT) 2010 Q1 法說會逐字稿

Welcome to ViaSat's fiscal year 2010 first-quarter earnings conference. Today's call is being recorded. Your host for today's call is Mark Dankberg, Chairman and CEO. Please go ahead, sir.

Okay, thanks. Good afternoon, everybody, and welcome to our earnings conference call for first quarter of fiscal year 2010. And, as he said, I'm Mark Dankberg, Chairman and CEO. And we have with us here Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Keven Lippert, our General Counsel.

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

Thanks, Mark.

I would 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 risk factors that could cause actual results to differ are discussed in our SEC filings, including our most recent reports on Form 10-K and 10-Q. Copies are available from the SEC or from our website.

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

Okay, thanks, Kevin.

So, we will be referring to slides that are available over the web and we'll start with top level highlights and a fiscal year 2010 first-quarter financial summary and then a business overview discussion. And then after that, Ron will discuss our financial results in more detail. And finally, I'll update our outlook for the fiscal year and summarize things, and then we'll take questions.

Overall, our financial results for the first quarter were generally consistent with our plans. Revenues grew by about 4% over last year to $158 million, and income is up significantly over last year. Income from operations was up 23% over the prior year, resulting in good growth in GAAP and non-GAAP diluted earnings per share. New orders this quarter were light, reflecting timing of relatively lumpy programs. Overall, we believe there is a good opportunity for orders to catch up to or possibly surpass revenues on a year-to-date basis by the end of our second quarter. Our current outlook for new orders over the course of the year is pretty good, and we anticipate continuing to build backlog. Last year, we added about $100 million to our firm backlog and we may be able to get close to that again this year.

As I mentioned, Ron will go into more depth on the financial results a little later, but from a top level perspective, there is a couple of significant points in the P&L statement. Strong growth in operating income comes despite a substantial increase in our bid and proposal expenses, which was offset by a decrease in the R&D expenses. Historically, we tend to spend more on bid and proposal when we have good opportunities to pursue programs and projects that are in our competitive sweet spots. Also, historically, we tend to have a pretty good win rate when the targets are right. For us, significant B&P spending is more of a leading indicator for near-term new contract awards than other factors, such as R&D.

Reduction in R&D spending is due to two main points. Conversion of some internally funded discretionary programs into customer funded programs and allocation of more discretionary engineers towards bid and proposal activity instead of R&D. So, we consider growth in bid and proposal spending on good quality opportunities as a positive indicator, and we will discuss this a little more later, but the B&P activity covers a number of areas, including government, ArcLight, mobile broadband, information assurance projects, tactical data links and weapons data links, antenna systems, and commercial Ka-band broadband systems. And that results in a more optimistic outlook for orders for our year.

Overall, our weighted view of government program awards for the fiscal year seems especially strong. Our balance sheet for quarter end also reflects a partial drawdown of our revolving credit facility. We have a temporary bulge in working capital due to timing of contract milestones and cash receipts on a few programs in government, satellite, mobile satellite and broadband networks. While we're still in a net positive cash position, we just felt it made sense to exercise the line and put more cash on the balance sheet.

At this point, we still anticipate that cash flow from operations for the fiscal year as a whole will be a little stronger than it was last year, consistent with the growth in earnings. So, we would not anticipate drawing further on the credit line this fiscal year.

Overall, the combination of budget improvements and slightly better than planned last year, fiscal year '09 cash flow, meaning we are still in a favorable cash position relative to our financing plan at the start of the ViaSat-1 project. In aggregate, we anticipate financing the ViaSat-1 project as envisioned through a combination of cash on hand, cash flow from operations and the existing extended credit facility.

At $170 million, the credit facility appears sufficient for the project and a comfortable level of working capital flexibility. The ViaSat-1 project remains on schedule and under budget relative to the original plan. We're more than halfway through and believe that the landscape for partnerships and distribution relationships remains as or more favorable than we planned, and we'll certainly talk about all this more later as well. So now, we will touch on some of the highlights for each of our business areas.

The landscape for government business seems good. While the dust isn't completely settled from the administration change, the impact for us is coming more into focus. We have a better idea of what's being modified or delayed and what's unaffected. That includes the impact of the shift from Iraq to Afghanistan. We've seen some delays on some new program starts and on follow-ons, but we also have more visibility into the timing of delays and are factoring that into our forecast.

Overall, we feel pretty good about the situation in that other than the TSAT program, we really haven't seen any cancellations of significance. The delays seem to be manageable, and there are a number of opportunities being created. And even on the TSAT program, it looks like much of what would have been our content may get incorporated into the new enhanced versions of the advanced EHF satellite.

Our government satellite area has seen the most dramatic growth. We are still seeing good demand and opportunities for government satellite modems and small terminals building around our standard products called EBEM, or the enhanced bandwidth efficient modem, and the Joint IP Modem and our LinkWay VSAT products.

One of the most exciting areas has been the adoption of our ArcLight networks for defense ISR, which is intelligence, surveillance, and reconnaissance applications over Ku-band satellites. We're being integrated into four different network applications and there are good opportunities to grow those networks and win additional ones. The value proposition for ArcLight is that it enables those platforms to use much more plentiful Ku-band capacity instead of mobile L-band satellites. That allows much higher transmission speeds for airborne platforms to operate simultaneously in a given service area and much lower air time costs.

The fact that we've got so much experience and so many fielded networks and terminals for commercial applications is definitely creating valuable synergies in the defense market. We also see that while our Ku-band network is better than any existing alternative, it's still in the not good enough category relative to mission needs. So, we see strong underlying demand for Ka-band satellite services and associated network and terminal equipment.

We also continue to pursue application of ViaSat-1 and Eutelsat's KA-SAT for defense applications. Outside of the Middle East, the US and Europe are the next two largest markets for DoD leased commercial bandwidth, and it's clear that Ka-band offers both much better performance and much lower cost for many of those applications.

Overall, we anticipate very good growth in revenues and earnings in this government satellite area this year, but possibly more modest growth in orders over last year, which was a very strong year.

Product sales and information assurance for the first quarter were good and ahead of plan, but we anticipate potential delays in subsequent KG250 orders. We see good opportunities and early successes in crypto licensing and embedments and opportunities for both new and follow on projects.

The outlook for orders in the information assurance area for this year is very good, but revenue and earnings in this area may be flat to possibly modest growth. This is something of a transition year for our tactile data links business as domestic MIDS low volume terminal, or LVT, production tapers and low rate initial production of MIDS joint tactical radio system is planned to begin.

We have delivered several of the production transition terminal versions of MIDS-J and have had very good feedback results in platform integration and in flight testing. That's definitely re-enforced support for MIDS JTRS in the services as a more forward looking and future proof version of the radio compared to the existing LVT unit. It also supports our leadership position in the joint tactical radio system market in total. The international MIDS LVT market's really not affected by the joint tactical radio system migration, and we continue to have good success in international.

In addition to JTRS production start-up, we are also anticipating more opportunities in MIDS LVT product improvement programs, weapons data link programs, and lower cost Link-16 small tactical terminals. The up-shot of all that is that we see flat to modest declines in revenue in tactical data links and -- revenue and earnings in that area, but very good growth in new orders.

Video data links for unmanned and manned ISR platforms continue to do well and we anticipate good growth in revenues, earnings, and orders for this fiscal year. Overall, we are happy with our competitive posture in defense. You can see that we have different businesses in varying stages of product cycles and that's just what we want to achieve. We see good prospects for sustained growth and we're continuing to evolve our business to new products and systems.

Overall, our commercial business segment was profitable in the first quarter. We will go into the different portions to give some insight on how we see things progressing. Ka-band consumer broadband is the single largest portion and right now, the major factor there is still capacity constraints on WildBlue's existing satellites. That geographic concentration of subscriber demand is one of the most promising aspects of our new satellite, but right now it's constraining growth for WildBlue.

They are working on promotions in the lower demand areas, but that has had limited effect so far. They are also testing expanding onto some limited additional Ka capacity from Echo Star in the high demand areas, and that could kick in late this calendar year.

Capacity is also an issue in Canada. The Ka consumer business remains nicely profitable. We're seeing a steady stream of international opportunities that are in various stages of maturity, but which can yield good growth opportunities over the next few years. Our antenna systems business has been growing steadily and profitably. We're gaining some critical mass in the Ka-band teleport gateway business, improving on the substantial base of ViaSat-1 and Eutelsat's KA-SAT. We're seeing good growth opportunities there.

We also are establishing a good beachhead in the Ku-band mobile broadband antenna area, building on our commercial aviation and defense ISR business. That's getting really interesting, and we are developing some pretty compelling Ku- Ka-band aviation antenna concepts that will allow aircraft to benefit from the dramatic performance and cost benefits of the forthcoming Ka-band satellites. And we're also benefiting from vertical integration advantages with the mimics and microwave module capability we have in U.S. monolithics especially for our highly integrated consumer Ka-band terminals. Overall, we are seeing more growth opportunities in antenna systems than we ever have.

The mobile broadband area is also seeing good growth. Most of that is going to show up in our defense segment now because of the rapid growth in the DoD intel, surveillance, and reconnaissance applications I mentioned. We have a promising partnership with KVH in maritime applications. We are jointly getting close to full global coverage and have seen good growth in maritime user terminals.

Business jets have been significantly impacted by the global recession, but maritime has been growing throughout. KVH recently announced shipping their 500th Maritime TracPhone V7 terminal. We supply the ArcLight modems for those. And maritime subscriptions also contribute to our satellite services business area, which is growing well. KVH believes it has already captured 10% of the maritime VSAT market.

Our VSAT area recently disclosed that our previously announced large VSAT program is with RascomStar for a pan-African cellular backhaul and rural (inaudible) network. Work on that program has commenced in earnest and we are very pleased to be working with them. It's been challenging and time consuming, but RascomStar has created a very interesting platform for providing continent-wide satellite services in Africa.

The AcceleNet product continues to make slow and steady progress in revenue growth. It's the primary earnings drain on our commercial business and has been, and as we have grown other product areas and we've begun to whittle down the losses due to AcceleNet, we should show better financial results in the commercial segment. That better performance is an important component of our earnings growth for fiscal year '10.

Overall, we remain very positive about our partnership with [Cisco] and application delivery services. Obviously, IT spending as a whole has been heavily impacted due to the recession, yet we're still getting pretty steady growth with AcceleNet. We just think it would be poor judgment for us to bail out of this area, so we are choosing to manage through it.

Overall, it should be apparent that all these commercial product areas are poised to benefit substantially from the existence of high capacity Ka-band satellites, such as ViaSat-1 and KA-SAT. We feel we're making good progress in positioning them in the interim and in establishing value propositions, partnerships, key technologies, reference customer accounts and excellent distribution channels, and each of these areas can grow substantially late next year and early 2011 when the new satellites are launched.

From our perspective, the two key watch words on our Ka-band project are patience and persistence. We believe that things are going well. We are now more than halfway through the project. Satellite construction and integration are still on the original schedule, and the satellite program is still well under the original budget. We are steadily retiring technical, program and execution risks. As we get closer to launch, we have been expanding the scope of distribution and bandwidth purchase discussions.

We recently increased our revolving credit facility to $170 million, and that doesn't necessarily mean that we intend to do everything on our own, but it does establish that we are capable of it. That's the important aspect of us finding our way to the most valuable ultimate partnership relationships. We have been in meaningful discussions with several excellent prospective, strategic and financial partners.

It's possible that we can establish relationships with more than one, each providing world-class capabilities in different complementary market areas. If we can execute any of these, they will be very close, long-term and strategic partnerships, so we are being pretty deliberate, as are our prospective partners to make sure we really have compatible long-term views.

We don't want to put any time lines on these discussions. In some cases, it's conceivable that nothing would happen until the satellite actually launches. We will just have to see. So, we believe we have the staying power to see these things through, so it still seems that we can derive the financial return from the project that we were targeting when we started.

One very important aspect of the satellite project is the associated broadband ground segment. We've gotten very positive feedback on our ground segment development. We have by far the leading position in Ka-band ground terminals for bent pipe spot beam satellites. Our only real competitor here got kind of a false start, investing years in on-board process satellites and then has recently made a u-turn and gone down the same technology path that we had identified quite a while ago.

But there are a lot of technology differences between on board processed and bent pipe spot beam satellites. Superficially, bent pipe satellites look a lot like conventional Ku-band FSS satellites, but there are some pretty significant differences. If you look at what's happening in the rest of the world for Ka-band broadband satellites, they are all similar to either what WildBlue and Telesat are doing using our networks or evolving to the ViaSat-1 and KA-SAT high capacity concepts.

The competition is certainly strong, but we think that our vertically integrated capabilities, technology lead time, and economies of scale give us an edge in the long run, and this is one of our sources of excitement about the Ka-band ground segment market.

The broadband stimulus notice of funds availability from the rural utility service and NTIA have been out for awhile and first-round proposals are actually due next week. The government seems clearly oriented towards localized rural terrestrial projects, but there might be some opportunities for innovative and compelling satellite solutions. We are working applications with excellent potential partners. It's likely that we will develop a series of applications spanning the three planned tranches of awards.

We say opportunity, but recognize that it will be challenging for any national solution to fit within the localized stimulus framework, let alone a national satellite service. We have said in the past that we see any potential broadband stimulus participation as upside to our business and not as integral to it. We still see that as the case. We do believe that our working relationships with these prospective stimulus partners helps pave the way for business relationships with those same partners on ViaSat-1. In any event, we do not anticipate that the broadband stimulus program will diminish our addressable market for ViaSat-1 services in any kind of meaningful way.

Okay. So, at this point, I would like to introduce Ron Wangerin, our CFO, and he will discuss the financial data in more depth.

Thanks, Mark.

We had a good start to our fiscal year 2010. Revenues in the first quarter were $158.4 million, a 4% increase over the first quarter of last year. We will address the specific revenue changes later in our segment results. The cost to revenues percentage improvement year-over-year reflects a greater mix of higher-margin product sales primarily in our government segment.

Selling, general and administrative expenses in the first quarter are up $3.3 million or 14% year over year. About $2.6 million of this increase is due to higher proposal and some selling costs associated with the new order pipeline, principally in our government segment that Mark discussed earlier, and the other $0.7 million is consistent with our overall business growth. This high new business activity we were experiencing, while positive, does create pressure on expenses. This is a delicate tradeoff for us and we may continue to spend at this level in future quarters.

Research and development expenses were down 29% in the first 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 links, information assurance, antenna, and broadband technology, all market growth areas for us.

Quarterly amortization of intangibles is lower for the first quarter year over year due to the completed amortization of certain intangibles. Income from operations for the first quarter of fiscal year 2010 includes non-cash stock-based compensation expenses of $2.6 million versus $2.2 million for the first quarter of fiscal year 2009. Other income decreased due to lower interest income earned from lower invested cash balances and significantly lower interest rates on those balances year over year.

Our income tax provision for the first quarter reflects a quarterly tax rate of about 26% versus 35% in the first quarter last year and 15% for fiscal year 2009. If you recall, the federal research credit expired January 1st, 2008 and was reinstated in the second quarter of fiscal year 2009. So, for the first quarter of fiscal year 2009, there was no effect of the federal research tax credit in the provision and then, with the reinstatement, there were five quarters of the federal research credit included in the fiscal year 2009 rate.

Now, in fiscal year 2010, the federal research credit is set to expire December 31st, 2009, so we will only include three quarters of estimated federal tax credit in our estimated effective tax rate for fiscal year 2010, which we expect to be about 26%.

As you can see, there is no longer a minority interest line in our P&L. Effective this quarter, as a result of adopting Statement of Financial Accounting Standards No. 160, our P&L is modified to reflect the new presentation. Our income attributable to our noncontrolling interests was essentially flat year over year. We will address the difference between diluted GAAP and non-GAAP earnings per share in a few slides.

In looking at our segment results, in the Government segment, revenues for the first quarter were $92.6 million, a 4% increase over the same period last year. The increase for the quarter is primarily related to increased sales of next generation military satellite communication and simulation systems revenues, partially offset by lower sales of video data link product revenues.

In the Commercial Networks segment, revenues for the first quarter were $63.3 million, a 1% increase over the same period last year. The year over year quarterly increase is related to higher enterprise VSAT product sales and next generation surf beam development, offset by lower consumer broadband sales or as our largest customer in this market, WildBlue, experiences capacity constraints slowing new subscriber editions, as well as lower antenna systems product sales.

For Satellite Services for the first quarter, sales were higher versus the same period last year, primarily due to mobile broadband service sales from our global expansion initiatives and close relationship with KVH.

In the first quarter, the Government Systems segment achieved operating earnings of $12.1 million, which is basically flat from the prior year. Although we experienced higher operating earnings from increased revenues and associated margins, as well as lower R&D expenses, these were offset by higher proposal and selling costs.

The Commercial Networks segment operating profit declined slightly in the first quarter year over year. Although we experienced improved margin performance in our mobile satellite systems and had lower R&D expenses, these were offset by reduced earnings from our consumer broadband products.

For Satellite Services for the first quarter, the operating loss was lower by $1.4 million compared to the first quarter last year, reflecting improved profitability in our mobile broadband services and lower ViaSat-1 support costs year over year. For the first quarter of fiscal year 2010, operating amounts include non-cash share-based compensation expense charges of approximately $2.6 million, and they were $2.2 million in the first quarter of 2009.

As we look at the GAAP and non-GAAP diluted earnings per share attributable to ViaSat common shareholders, 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 and pro forma income and an increase in share count of approximately 1.1 million shares. The share count increase was from our higher stock price and the resulting impact from the treasury stock method, share increases from restricted stocking and investing, and the stock issued from our 401K match in the first quarter of this fiscal year.

Now turning to the balance sheet, overall, our balance sheet continues to be strong. Cash and short-term investments increased by about $40.8 million, and we will talk about the movement of cash later when we review cash flows.

Billed accounts receivable increased by about $2 million from the beginning of the year, primarily on higher commercial receivables. Unbilled accounts receivable were up significantly due to the timing of certain contract milestones, primarily with our mobile satellite, government satellite communications and broadband systems contracts, and we expect this amount to come down over the next two quarters and add to cash from operations.

Inventory is up by about $2.1 million from the beginning of the fiscal year due to the transition of certain products through a units of output basis of accounting. Prepaid and other current assets were basically flat. Goodwill intangibles decreased due to regular amortization of our intangibles.

We are about 18 months into the construction of our ViaSat-1 satellite and today, we've capitalized $128 million through the first quarter, primarily related to progress payments for the satellite and launch vehicle.

Net property and equipment, excluding the satellite, is down slightly as depreciation outpaces capital additions. We do not expect this to occur each quarter, though. Other long-term assets are up about $2 million since the beginning of the fiscal year, primarily due to capitalized debt issuance costs and licenses and patents.

Accounts payable are down significantly due to the payment of some significant milestones for our satellite and launch vehicle made during the quarter. Days payable, in turn, are down from historical averages. Advances were up $5.8 million since last quarter end, reflecting the timing of cash receipts on contract milestones, primarily in our Government Systems area. The decrease in other current liabilities primarily relates to the settlement of discretionary compensation accruals from last quarter end, offset by new discretionary compensation accruals and other employee-related accruals. Other long-term liabilities are basically flat since the beginning of the year.

As Mark mentioned, in the first quarter, we doubled our line of credit from $85 million to $170 million, and we're very pleased that we accomplished this. We also drew down $80 million at the end of the quarter. Similar to the P&L, as a result of adopting FAS-160, the treatment of minority interest also changes. It is now part of equity and is presented as the non-controlling interest. At the end of the quarter with the increased revolver, including the effect of standby letter of credits, we currently have about $84 million available under our line to support our business growth.

As we look at cash flows, for the quarter, our cash flows used in operation were generally consistent with our expectations. Our net income and non-cash add-backs were offset by a reduction in working capital, primarily from the payment of discretionary compensation in the quarter, as well as increases in receivables and inventory. Cash flows related to investing activities for the quarter reflect capital additions for our satellite project, business expansion activities and capital expenditures for licenses and patents, also related to our satellite project. Cash provided by financing activities is primarily from proceeds from drawing down our line of credit, offset by debt issuance costs and the net proceeds from the issuance of common stock, principally the exercise of stock options.

Next, I will turn it back to Mark who will provide an update on our outlook.

Okay. Thanks, Ron.

So, at this point, I will give a quick update on our outlook for the rest of the fiscal year. Start with strategic outlook and our business mix for this year, as I said, skews towards defense. Satellite modems and terminals will lead the way in revenue and earnings growth this year with mobile broadband for intelligence, [rayons], and reconnaissance at the forefront. There is still a lot of upside there with opportunities to win new networks and to significantly expand the ones that we've captured so far. That's an area we have been working hard on for years and it's very rewarding to see it begin to come to fruition.

Information assurance and tactical data links may be more flattish in terms of revenues and earnings this year, but we see very good opportunities for strong orders and sustained growth ahead. Overall, we see defense reprioritizations and a willingness to rethink some of the very large programs of the past as creating openings for us. Our initial success in airborne ISR is one example of that, and we see more potential in data links to tactical radio systems, information assurance and broadband satellite connectivity.

Commercial satellite, we perceived an increasingly evident macro-trend towards Ka-band for data services driven by the need for more competitive bandwidth pricing. While the Ku-band FSS market is not going away, we think the growth, not only in the US, but globally, in data will be at Ka-band. And we think it's also now even more clear that our high capacity satellite technology is leading the way. We believe this represents a significant change in the satellite industry and a significant change in ground technology and business models.

When technology is changing rapidly in the functional partitioning and interfaces among modules and subsystems have to be re-engineered, vertical integration can be a big competitive advantage, and we have by far more end to end Ka-band ground technology for broadband in one place than anyone else. We have been able to integrate new technology in digital chip designs, application acceleration software, microwave chips, new microwave MIMIC materials, microwave modules, and antennas around these new Ka-band markets for both fixed and mobile services.

The market's not quite arrived yet because of the lead times for the new generation satellites, but over about the next year or so, we think we will see the benefits of this with the launches of KA-SAT in Europe and ViaSat-1 in the US and with contracts to provide ground equipment to other international Ka-band service providers.

Overall, our financial outlook hasn't changed that much. New orders have seen some delays but, overall, our current estimate is that new orders for the year as a whole may be a little stronger than we had previously forecast. The delays in new orders combined with capacity constraints on consumer Ka-band networks will likely impact revenues for the year, and we estimate that could be down by about 3 to 4 percentage points from our prior estimates.

There is some pressures on earnings due to that, due to the growth in share count and the timing of the renewal of the R&D tax credit for calendar year 2010. But at this point, we do not estimate a change in our earnings target for the year, which still reflects about a 10% gain over last fiscal year. We anticipate earnings growth to be driven by a government satellite and improved profitability in our commercial and satellite services business segments.

We remain quite cost conscious and sensitive to the macro-economic environment, but as we have discussed throughout the call, we see an exceptional level of new opportunities as indicated by growth in our bid and proposal spending. So, we will be using our judgment to balance our investments in these significant new growth opportunities as things unfold over the course of a year.

Finally, in summary, first-quarter financial results are generally consistent with our plans. We had very strong year-over-year growth in operating income despite a higher than anticipated level of bid and proposal spending. We think that's indicative of strong near-term new business opportunities. New orders for the year as a whole appear a little stronger and we have a good shot to build additional significant backlog.

Near-term opportunities skew more towards defense, where reprioritizations and reconsideration of large programs are creating a favorable landscape for us. We are experiencing a short-term working capital bulge. We're still in a net positive cash position. We have exercised a portion of our expanded credit facility to put more cash on the balance sheet.

Our ViaSat-1 project remains on schedule and under budget. The combination of our financial performance over the course of the project, the cost savings we have achieved and our expanded credit facility provides a solid foundation for competing the project and launching the satellite as planned in the first quarter of calendar year 2011. While we think this is a sufficient funding strategy, it's not necessarily the ultimate strategy for us and we continue to explore and pursue more favorable and/or strategic structures. As we get closer to launch and retire risks, we have made good progress on strategic partnership discussions and distribution and bandwidth purchase relationships on a number of fronts and market segments. That lends confidence to achieving the financial returns on the project that we envisioned when we started. We believe that our leadership in high capacity Ka-band broadband is also favorably affecting our competitive position for international broadband network equipment contracts.

So, that covers our prepared remarks and at this time, we would be happy to open it up for questions.

Thank you. (Operator Instructions). And we will take our first question with Mike French from Morgan Joseph.

Hi, guys. This is Jim Moore in for Mike French.

Hi.

A question about Hughes announced their 100 gigabyte per second satellite launch in June. They announced that they'd be launching that around 2012, and just wondering if this puts any downward pressure on prices given that there might be more capacity out there now?

Eventually, it might. We -- it's not obvious that they will use the satellite in the same way that we will use it. And so far, we don't really see any difference in our approach to the market, actually, and I think that's not just because it's been a short time interval. It's because I don't think that the ways that we're looking to apply the satellite are effective yet.

Okay. And so, in terms of your new credit facility, are the terms different from the old one?

No. They are similar. In terms of we only have a few maintenance covenants or financial covenants in terms of EBITDA and interest coverage, but, no, they are substantially the same.

Okay. And then, could you guys give a little more color as to what some of the delays are that you are experiencing that are negatively affecting the revenues for this year? Give a little more color on that?

It's kind of a variety of things on the defense side. We had projected that awards would come a little bit earlier in the year, and those awards are things like LRIP for the MIDS JTRS program; they involve some of the timing of delivery order exercises on KG250s. We've got a little bit of delay by weeks on some government satellite program procurements, things like UHF terminal upgrades, just I'd say things like that. Kind of what we'd attribute most of them to are just change in administration delays. Things like that. Does that answer your question?

Yes. That about answers it.

There is not -- there is not a single program. Specifically, it's been a series of things. There's been some things that have been accelerated a bit, so across the board, there's some ongoing efforts. I think there is a little pause in the planning side.

That's on the government side. The other thing we mentioned on the commercial side is really it's the demand distribution -- geographic demand distribution for WildBlue. It's just a little hard for them to anticipate where all of the subscription orders they will get will come from. And that is kind of another -- that's the other main factor in the revenue delay.

Okay. And then just a housekeeping question. What was the depreciation amortization for the quarter?

Got it, Ron?

Got it. Just a second. About $6.5 million.

$6.5 million. Okay, great. Thank you. Good luck going forward.

Okay. Thank you.

We will take our next question from Jim McIlree with Collins Stewart.

Thank you. I want to make sure I understood the revenue commentary correctly. You're saying that revenue growth this year is probably 6% to 7% over last year; is that correct?

Yes. About in that range.

Okay. And so, obviously, if the earnings guidance is unchanged, you're assuming better margins and so where is that coming from?

Well, we've had a good -- I mean, one of the things, as Ron pointed out, is we've had a good mix of product revenue. Product revenue typically carries much better margins for us, and so that gives us flexibility.

And product revenue on the commercial side, government side or both?

Government side, especially. Some on the commercial side, as well.

Yes.

But government side, especially.

Okay. When I was -- when during the commentary, it seemed like the product revenue that you were looking for good growth would the government SATCOM. Is that -- did I hear that right?

Yes, that's --

And the other stuff seemed like there was potentially delays and maybe a little bit less than you had previously expected.

Yes. The government SATCOM has been a strong area. That's a good area for us.

Okay. Great. And then your comments on AcceleNet, can you expand on that a little bit? What were the losses that you incurred in that business last fiscal year and what would you -- what are you thinking this fiscal year?

Last year, it was about $6 million in that area alone. This year, we were targeting breakeven. We may not get to there, but it will improve substantially by millions of dollars.

Right. And that's a combination of lower spending and a little bit of volume growth? Or is it mostly one or the other?

It's both. It's really both.

Okay. And then lastly, the unbilled receivables were up, I don't know if I want to call it sharply, but let's just call it up versus the prior quarter. Is that attributable to any specific program, or is that a combination of things?

Basically, in three different areas. And as I tried to indicate, we expect relative to the contract milestones on those programs that they should come down quite a bit over the next couple of quarters.

So, exiting the year at --

Okay. So, I mean, the largest area is in -- on the commercial side and some mobile satellite systems. Some of the work we are doing on the ground base beam forming contracts and we're starting to deliver on those systems. We've made some deliveries in late Q1. The bulk of them occur in Q2, though. And then --

Some of them at the end of the quarter, though, Jim, so some of that cash will spill over.

And then some in the MIDS area and then some in some government SATCOM programs for some next generation products.

Okay. So, it sounds like this quarter, maybe the September quarter would be the peak in the unbilled and then you bring it down to normalized levels. Fair enough?

Yes, over the next couple of quarters, we expect it to come back down.

I think we've probably seen the peak.

Yes.

In the June quarter?

Yes.

Okay. Good. Great. Thank you.

Thanks.

Our next question comes from Rich Valera with Needham & Company.

Thanks. Good afternoon. Following up on the cash from operations question. Do you still expect around $60 million of cash from OPs this year once you get through this sort of working capital bulge?

Yes, or a little bit better.

Okay. Excellent. Then, with respect to your discussions with the government, it sounds like you have had some at least initial discussions and perhaps ways you could fill up some of the capacity that -- or fill the void that will be left by TSAT among other things with potentially ViaSat-1. Is there anything more you can shed on that in terms of your discussions of some potential DoD uses of ViaSat-1?

Well, so there's -- yes. There is a lot more to it than just thinking ViaSat-1 instead of TSAT. One thing you have to sort of understand is that TSAT in some ways was sort of symbolic within DoD. Whenever they had problems, hey, we need more bandwidth or we need the ability to support more mobile users, especially, the TSAT was really the only solution out there. So, in some ways it was symbolic besides a program. And so with TSAT going away, it's causing people to have to sort of confront the issue of how do we get that type of mobile broadband services.

And one of the ways to look at that is you look at what's happening now when we describe these ISR programs that we were doing in Afghanistan is an example where we are ramping up pretty quickly the number of Ku-band satellite mobile terminals we have. People are saying, well, there is no TSAT out there. Maybe we can use commercial capability to do that.

And then, when you look at when we talk about, well, how much better will it be when you have Ka-band and Ku-band, that really gets people's attention. And then, we look at, okay, now where are the markets where you use commercial satellite capacity? Where will those be? And you can see -- we can see a lot of opportunity to sell sort of -- I would describe it as an integrated suite of equipment and services that perform mission needs that in some sense were attributed to a TSAT-like capability. And that's a pretty interesting theme. I think that the notion of ViaSat-1 as a replacement for TSAT is sort of oversimplifying the concept, but the need for especially mobile and broadband communications in the Middle East, US, Europe and then other places that may turn out to be (inaudible) of action, those are all real needs. Does that help at all?

Yes. That's helpful. And then, just with respect to partner discussions for ViaSat-1, I think in your prepared remarks, you mentioned that there were some partnerships that might just have to wait until the satellite was actually launched. And just kind of wondering how far you would take that? Do you feel you need to have some distribution partnerships signed before you launch? Or do you have enough confidence that you'd be willing to launch the satellite prior to actually having a significant chunk of the capacity for the satellite actually signed up for?

Oh, there is no doubt we have the confidence to launch it, no matter what. That is not -- I don't see that as the issue. I think the real issue is going to be putting in place the systems and relationships that we need to exploit the capacity, and that will be a combination of us being able to sell it and these prospective partners being able to use it.

What we are seeing is because there clearly is demand for broadband services in these regions and there's really no other way to serve that market, that it's just sort of naturally occurring. And I don't want to it -- I don't want to appear either overconfident or like we're making too much of a big deal out of it. But kind of the way to put it is we're selling satellite terminals all the time to people who want to add subscribers in those areas. There's no bandwidth.

So now, sort of the discussion is shifting to, okay, well, how do we -- how do you bundle your bandwidth with those guys and how do we fit that within our distribution systems, and that's sort of the nature of the discussion. And what I would say is I would be surprised if we had -- I would be pretty surprised if we have no distribution agreements when we launch. But unless we see some change in that underlying dynamic, and then besides that, we'd have to see all these other applications that look pretty promising go away, as well. It would be crazy not to launch it.

Right. Okay. That's helpful. And finally, Ron, just can you -- minus what is the actual rate on the credit line, the new credit line in particularly for the $80 million you've drawn down, what should we think of as the interest rate on that?

L plus 4.

Okay.

There is a rate table, but it's about L plus 4.

Okay. Thank you. That's it for me.

But, Rich, just as a point, we are, given the construction of the satellite, we will be able to capitalize that interest related to that drawdown against the asset.

Right. Okay.

Our next question comes from Myles Walton with Oppenheimer and Company.

Thanks. Good evening, guys. I'm trying to reconcile, Mark, the comment about the delays in orders versus your other comment about the order look -- order outlook for the year being better, and usually, if you are seeing a delay in orders, you would be kind of more cautious on what the year will hold. I guess, what is giving you that increased confidence despite some near-term delays?

It's just a number of things that we're bidding on and sort of there is a reality factor to them. Without saying -- and we attribute some of this to the change in administration. When there was a change in administration, there was a lot of emphasis on, hey, we want to cut the defense spending. There's going to be cuts. It wasn't clear how they were allocated. There were organizations that were thinking, well, are there going to be across the board cuts? How does that influence our procurement plans? And then, as I sort of described, as the dust settles, it became clear, well, here is how we're going to spend our money. Here are the things that we need for Afghanistan. Here's the things that we are going to stop doing for Iraq. And sort of the mind set. And this is in the program space that we operate in.

The mindset sort of went from not quite sure what I can do or when things are going to happen to, oh, okay, here is what happened and here is when these things are now planned to happen. And so, that's given us more visibility. And I think there's been some short-term impact, which is sort of natural. But what we are trying to convey is that there is almost nothing that went away. It just sort of said, okay, here is what our schedule is for this and those range from follow-ons to programs to, as an example, what's the split of purchases on MIDS-J between additional production transition terminals and low rate initial production. That's an example of something where you can say, hey, looks like the total amounts were clear and more certain, but not going to meet this particular time schedule that they had laid out before. So, does that give you -- I'm trying to describe sort of the sense of --

Yes. I mean, and I guess also to the point, though, you said you expected 2Q you might be able to catch up book-to-bill of 1 before the end of the first half, which would imply a pretty healthy order rate, 200 million plus orders in the second quarter, and given you are already into it, I imagine you have visibility to say that.

That's exactly -- that's the way things look now.

Okay. And I guess the other thing I'm trying to interpret is if you're growing backlog $100 million -- potentially, $100 million year on year by year end, I mean, that would be the second consecutive year of 20% plus backlog growth, and you have 7% sales growth in 2010. I mean, is it fair to say -- not putting words in your mouth, but 2011 sales growth would be even better?

That's the way things look. I mean, if things -- yes, that's the way the math would play out. And we'd sort of like to see all those things happen before we put out those kinds of numbers, but that's the way things look now.

Okay. And I guess from a standpoint of the CapEx plan, about $100 million this year for the satellite. Is there any plan to slow that up? Are we exactly kind of where we were three months ago when we were talking?

No envisioned change, Myles.

Okay. And how, Mark, how important is a global bandwidth solution to the DoD in the context of proposing a ViaSat-1 offering?

Actually, global isn't really -- here is the way I would describe it. There is what's called a WGS system -- when TSAT goes away, there are these two satellite relations, WGS and ADHF, and WGS is intended to be sort of a global sort of core satellite capability. What really -- one of the things that TSAT could do and there is a need for is to be able to concentrate a lot of capacity in hot spots. And there, you have to sort of anticipate where they are and have a satellite network that can respond to that.

And if you look at what we did commercially with our satellite and what Eutelsat did with theirs, that's exactly what we did is just sort of weigh out what's going to happen and how you bring to bear great capability in the places you need it, and that, I think, is the underlying dynamic behind an augmentation to WGS or ADHF that we could help fill with our current satellite, with our partner satellites, and the way I'd put it is with a more purposeful way to use those types of assets for DoD in the future.

Okay, but I mean, presumably, ViaSat-1 is not going to be hovering over a hot spot hopefully anytime soon, so are you saying from a standpoint of using technology on a follow-on dedicated platform?

Yes, yes. And the way I'd put it is there's really two problems. I mean, one problem is having the satellite resources. Another way to look at it is by definition, a lot of our military is mobile. It moves around. So, one of the things to do is you want to have it outfit with a capability that can exploit the resources that are there. And so, one of the ways we look at when we have ViaSat-1 over the US and KA-SAT over Europe, and those two areas make up a lot of military satellite use, whether it's for homeland defense, training, test and development and deployments, in some cases, what we have is the ability to show them what's possible with these satellites.

We're not going to move these satellites to hot spots in Somalia or the Middle East or anywhere else. But what you can do is you can sort of develop a capability and prove it out. You can start outfitting forces and then you can have plans to put in place, customize assets, whether we own them or the government buys them and we help them develop them or they just do it on their own, then you have the ability to sort of start moving those forces that you equip into those areas and getting the benefits of that type of space segment.

Okay. No, that makes sense. And last one for me. Ron, on the P&L R&D coming down sounded like it was a pretty much equivalent offset to B&P, I think you started to come down on R&D in the second quarter last year. So, I'm not sure how much kind of anniversarying or lapping benefit you get from here. Is -- and I don't recall what B&P was for the last nine months of last year. Are we going to see essentially no additional headwinds on B&P and no additional benefits on R&D on a year-over-year basis?

I think on the R&D side, it did level off towards the latter part of last year into this year. So, we will see similar levels in the future. B&P, as we talked about, it could be -- continue to run at a robust rate as we look at these opportunities and weigh, is there a good chance to win them and, therefore, it's worth the pursuit, or should we pull back and that's the tradeoff we've been working at.

I think B&P was up more than R&D was down, though.

A little bit.

Okay. Thanks so much.

Thanks, Myles.

Our next question comes from Chris Quilty with Raymond James and Associates.

Hi, gentlemen. We are looking for clarification. Jim thoroughly confused me with his question about the top-line growth and I think you said 6% to 7% top-line growth and I don't know whether you were talking about one of the segments, but the slide says a target of 10%, so is 10% the target growth, but you really think it's going to be more 6% to 7%?

I think it said 10% earnings, not revenue. Mark was talking about revenue.

Okay. But if I remember -- okay, so $700 million is still an operable revenue number for the year?

What we had said last quarter was 10% earnings growth and 10% revenue growth. This quarter, we said that revenue could be down by 3 to 4 percentage points and that led to Jim McIlree's question, does that mean 6% to 7% revenue?

Which means $700 million wouldn't be the real number. It would be more like $675 million.

Yes, 7% minus 3 to 4 points. Yes.

Okay. And how would that be balanced out in terms of growth between the two segments? I think last quarter you said it should be about equal between the two.

That decrement comes equally.

Yes. And so, when we were talking -- there was a question for about where does the decrement come from and some of it are due to the order delays on the government side. And the other is basically a more conservative view of shipments to WildBlue, which really -- the way I discussed the WildBlue thing is they get orders in all the time. They get lots of orders and some of those they can't fill because they are in beams that are full. And what they are trying to do is generate more orders in the lower demand beams. But so far, that hasn't happened so much, so if you just look at sort of what it would play out, we have a little more conservative view of the shipments to them.

That could be offset by a couple of things. One is if they become more successful in their plans to stimulate demand in the low -- in these low fill areas, and then the other factor is they are doing these tests with an Echo Star satellite, which could create room for tens of thousands of customers in the high demand areas.

Okay. And just speaking of which, with regard to the broadband funding, are you working directly with WildBlue on some of their initiatives to get subscriber equipment funded through grants? Or are they carrying the load on that?

What I will describe is we are cooperating with them.

Got it.

Here is the way I'd describe it is there are certainly things that WildBlue is taking the lead on for their benefit, and we are cooperating with them on those. There are other things that we are describing where we are either taking the lead or we're working with other partners as well. That's the distinction I would make.

Got you. Okay. So, going back to the top-line growth assumptions for the government business, if we are looking for about 6% to 7% growth, I think you said that your two largest product areas, information assurance is flat to modestly up and tactical data links is flat to modestly down. Where specifically is the growth coming from?

The biggest area is government satellite. That's the one we mentioned in terms of revenue growth this year.

And by government satellite, are you talking government satellite antenna systems or --

It's so we describe the products being the things that are derived from the EBEM, enhanced bandwidth efficient modem from our government LinkWay applications which go into things like JNN (inaudible) from the Joint IP Modem program, but especially like one of the most biggest growth areas we talk about are these ISR applications, the Ku-band, ArcLight, which is -- it's really the stuff we do for Gulf Stream business jets or maritime applied to defense.

Is that stuff displacing a -- an Inmarsat system on those aircraft?

Yea. I mean, what they were going to use was L-band and basically, what they do is they look at it and say, well, okay, what speed can I get? It's ISR application, so --

Data intensity.

Big deal. Okay. So, if they can get three or four times the speed, they can operate more aircraft and actually the operating costs are lower and that's a pretty easy trade. And what we had done was shown successful flight demonstrations and so, that sort of led to this big flurry of activity there.

Okay. And on the EBEM JNN SWAN stuff, how is that being impacted by the WIN-T program, which is supposed to be eclipsing a lot of that legacy stuff.

Yes, I would say that's sort of old news. I mean, if you look at what happened over the last few years, JNN was sort of this separate program, which has been in some sense, merged into the WIN-T family. As a matter of fact, the JNN stuff was all data path to start with. And then, they had competitions and they've seen new entrance in there, including general dynamics, who is the WIN-T prime also has a lot of the JNN business now. And a lot of that was really driven by Iraq deployments, the JNN stuff was.

So, you're teaming with GD on this?

Well, basically, what happened -- and this happened a little over a year ago, is the government standardized on our modem network system as the satellite solution for JNN. So, we work with all of the JNN suppliers.

Because they were primarily iDirect, right?

No. That was never iDirect. That -- iDirect really had, I would say, some much sort of smaller specialized market segments. But in this JNN mesh deployment, our system has been kind of the standard for the last three or four years.

It was -- I would call it before the de facto standard and then they went through a selection process and then that is the fundamental core they are using to upgrade the Joint IP Modem.

Okay. And one other question, just on the government's side. The delay in the first (inaudible) launch, has that or might that have an impact on the rate at which they acquire terminals that are forward capable of using that system, because that's a big growth opportunity for you guys, I presume.

Yes. I think -- we are really interested in the U.S. ground segment. The (inaudible) ground segment has been tied to JTRS and right now, (inaudible) ground segment lags the satellite significantly. We actually see a pretty big opportunity there. I would say if the satellite were to continue to shift, the first (inaudible) satellite out, that would be disappointing. Right now, there is very little baked into our plan there. We see that (inaudible) ground segment as upside to our plan, not as part of our plan. But we'd sure like to see the satellite. I mean, we'd like to see the satellite stabilize and get launched, because I think that's going to create a lot of opportunity for us.

Okay. Great. And final question, Ron, can you give me a ballpark because with the interest expense, I'm trying to figure out how much of that is going to be capitalized because you got kind of like a temporary chunk of drawdown. Can you maybe just give us a ballpark or sort of what the quarterly interest expense might look like through this year?

The interest expense should be very low. I mean, in a few tens of thousands of dollars. Most of the interest expense will be capitalized since the amount of our drawdown is substantially less than what we are capitalizing. So, it will be able to capitalize the $80 million, plus some of the fees associated with that.

Okay. And so, that will remain the same out into FY2011 also, up until the time of launch.

That's correct.

Cool. You saved me from a modeling error, because I would have forgotten that.

No problem.

Thanks.

Our next question comes from Steve Ferranti with Stephens, Incorporated.

Hey, guys, this is Neal for Steve. Can you guys give us a quick update on the Blue Force Tracking 2 program?

So, Blue Force Tracking 2, basically -- well, we said in the past is that because of delays in the FBCB2 program, which Northrop is prime on, they have had to rethink how to deploy BFT2. So, that delayed our BFT2 program. What they then decided to do was try to configure a competitive procurement between us and Comtec for BFT2 and that's pretty much still where things lie. They are working on what exactly is the procurement plan for that and what the competition plan is. We expect to see that sort of out probably before the end of this calendar year. At least, what the procurement plan will be, if not (inaudible).

Okay. And then, on the RascomStar contract announcement, that seems like a nice new contract award. How do you guys see the timing of that project playing out? What's the potential for additional contract awards down the road? And how are you guys positioned for any future business opportunities with RascomStar?

I think it's about a 12 to 18 month program in total.

About two years.

A two year program. So you will see the revenues being earned over that period of time. There is a pretty substantial upside to the program, because one aspect of it is rural village (inaudible) in and if that proves to be successful, the program could grow substantially. In terms of future business with RascomStar, I think we are one of the -- the way I'd look at it is that RascomStar, really, as an entity is a very interesting entity, because it really represents sort of a unified pan-African approach to dealing with infrastructure issues there. And that has good prospects to expand into other forms of (inaudible) infrastructure or broadband or internet infrastructure. And so, we are really happy to have the relationship and we're trying to help them think through some of those things, but those are all off in the future at this point.

Okay, great. Thanks, guys.

Thank you.

Our next question comes from Chris Donaghey with SunTrust Robinson.

Hi. Good evening, guys, just a quick follow-up on the Rascom deal. How unique is this offering? How much development is going to go into this program and are there plans to market it elsewhere? Or is still the kind of the thoughts on this commercial business to migrate everything to KA?

Is it actually a fairly unique requirement, and that has to do with really the way they want to land and manage the network. One of the things and if you look at sort of Telecom infrastructure in Africa, there's a lot of, I'd say, relics from colonial days. That is, a lot of European countries that tend to provide infrastructure and to have the traffic carried on the infrastructure terminated outside of Africa. So, one of the things they were sensitive to was to have a network that would terminate things locally. And so, it has its very strong, what you call, mesh component, to it, which is almost like anywhere to anywhere thing. And it has to do with where they land and manage the traffic.

It turns out that we had a network product that we'd used for (inaudible) for quite awhile. That was really the closest thing to this anywhere. And so, what we we're doing under this program is we are getting funding to modernize it and reduce the costs and make it suitable for the scale that they want to do. And we consider -- I mean, there is development. That's part of it, and we look at that as a good opportunity. And we are developing good technology for it and so far things have gone well on that.

In terms of other applications, a little bit of a unique situation. Probably the nearest sort of similar applications would be actually in developed countries that have universal service offerings requirements where they want single hop mesh kind of activity. One example is a place where we actually already provide (inaudible) in Australia. The numbers wouldn't be as large, but that could be a good example application. Believe it or not, there are similar applications in other developed countries. So, it's a nice sort of sidelight for us, but we really look at it as a really good project, really good customer relationship, really good opportunity for expansion in the market, probably with different -- for different technologies and different applications as well.

Okay. Great. And all of the growth that you are seeing on the Intel, the ISR side, can you tell what the funding source is? Is this coming through the ISR surge or is this coming from other program line items?

Yes, we can tell. It's really ISR. ISR is a big deal, right, for dealing with targeting, figuring out -- dealing with IEDs, roadside bombs, all of those issues. And so, there is a real need for it. There are -- and I really don't want to cite program names, but we are right in the middle what the programs are. And these are really sort of -- a lot of them are under the quick reaction funding programs, which often means they are sort of special forces, special operations, special needs types of programs to deploy new things quickly. And somebody did some research, you could probably figure out what the likely candidates will be. Some of them are programs, though, that have been around for quite awhile with that mission.

But they are being expanded.

Yes, they're being -- and what we are really aiming for and we are seeing good opportunities there as they sort of a cross over from these quick reaction special needs into broader defense organizations.

Yes, I guess that was going to be the follow-up is I kind of assumed that a lot of the funding was coming through quick reaction capability-type programs and was going to ask about the potential to move into longer term -- maybe not necessarily programs of record, but to be incorporated in longer term budget items.

Yes. I think that -- I mean, really, the thing that sort of works for us and this is -- this approach has worked for us in the past a lot is when people see a capability, a mission capability that's dramatically better than what they can get from the programs of record. Officers start looking, say, hey, why can't I have that? It's available now, why can't I have it? And that's the effect we are trying to create.

Okay. Then -- sorry, go ahead.

And so, if you do something that is fairly dramatic like dramatically improve the amount of (inaudible) someone can transmit or the resolution they can get, those are the kinds of things that can have that impact. That's all.

Okay. And then, I was trying to read into what you are saying about the potential applications of ViaSat-1 technologies on a derivative basis, maybe into other military satellite programs. I mean, is the competition for WGS number 6 and 7 is that something that you are still looking at or have you kind of moved on to other places that ViaSat-1 related technologies might show up?

Well, let's see. What I would say is -- well, one is, if they are going to buy more WGSs, they're going to buy them from Boeing. I mean, certainly on the satellite side, there is nothing there for us. I mean, the way I'd describe it is in some ways, if you look at historically and let's just take ISR as an example. ISR a lot of times people say, hey, that's an airborne terminal problem. If I just had the right modem or I had the right antenna, I would get the capability I want. And what we are trying to demonstrate is that it's really a systems problem, and just because DoD doesn't have the right assets to make that system close doesn't mean that there aren't commercial assets that can make the, what looks like an antenna or terminal problem, be a way easier and much more near-term problem. So, that we can show with existing commercial assets. Then, you really come at it from two directions.

One is, well, okay, so how do I get the terminals to let me have that capability when I'm in places where I can exploit it? And then how can I expand the places where I can exploit it? That's sort of the ways -- one of the big questions is, how do you frame the problem? We were trying to show people that, wow, you can have this now. The systems are coming, they are already -- they are going to be launched. They're probably going to be launched before you actually have your platforms upgraded, so let's start looking at that.

Okay. And, I apologize, one last question. Just kind of a follow-up on the Hughes question. At least, from a qualitative perspective, can you help us understand how much of the secret sauce of what you are going to accomplish with the higher bandwidth is ground segment versus space segment?

It is distributed between the two. I mean, there is aspects to both. A lot of it is manifested in the space segment itself. Does that answer your question?

Yes. I was trying to figure out how much work does Hughes have to do in order to accomplish the same type of bandwidth, and do you have any feel for what their ground segment capability looks like?

We do have a feel. I mean, basically, I think that Hughes position is that they pretty much have the ground segment because they just need to take their Ku-band FSS stuff and apply it to Ka-band, and I think that that is a good start, but I don't think it's the whole thing. And they are smart enough to figure out what the whole thing eventually will be, themselves.

Okay. All right. Great. Thanks.

Thanks.

Our next question comes from Matt Robison with Wedbush Morgan.

Hi, gents. Can I get maybe a little bit more color on what's happened with the information -- the timing of demand for information assurance? And then, it sounds like the BFT2 activity that we were looking for in the summer has maybe slipped three or four months, and is that -- should we look at the LRIP for MIDS-J activity to be on a similar schedule?

Okay. Let's see, so I'll start with the information assurance. Separated out -- there's a couple of different things. There are some programs that I would say have had some delays. And some of those are like follow on phases to programs that we've already got. And we're working with the program office. We understand with the timing of those -- we have a better understanding what the timing will be. They have a better understanding of the timing. Some of those are sort of sole source, some are competitive. But there is that aspect, which is a program aspect. There is the product procurement aspect, which is really KG250 orders for us, that's the biggest thing, and there -- a lot of that depends on timing of delivery, order contracts, and how well we do on those delivery order contracts. And right now, as I mentioned, we are actually ahead of plan first quarter.

The TVs look like we may temporarily go behind what our plan was in subsequent quarters and that's the way that looks now. But our customers are telling us, okay, here's what we are going to buy and here is where the money is programmed and we can sort of see where the rebound is. So, overall, we think the trends there are still good. And if you were to look at our history over the last five years, it's very saw tooth anyway. I mean, in terms of up, down, up, down on a quarter-to-quarter basis, with a very strong overall trend climb up and we don't see that changing. The -- on IA business as a whole, one of the things that's very reassuring is -- and this is sort of what we were banking on and what we've been counting on in the competitive environment, is this standard.

The KG250 is based on a standard called HAIPE, high assurance internet protocol encryption standard and that is just -- there is just constant demand to upgrade that. And that -- we had a fairly major program that concluded not too long ago for what they called HAIPE 3.0 and they're just about to start HAIPE 4.0. So, that just re-enforces what we believe the long-term position that we have in the information assurance market. And we think is really going to create more and more separation between the leaders in that market and other people and we are seeing evidence in the embedment programs that were winning and the opportunities coming that even the second tier players in the HAIPE market are recognizing that and are coming to sort of the first tier players. So, that's part of why we are so optimistic about this business in the long run. That answer your questions about that, or does that raise more questions?

No, That's helpful on information assurance and the other two items were --

Yes, Blue Force Tracking, I think it's just that the government is sort of working to reformulate their plans based on what's going on in FBCB2 and they had an acquisition plan and they couldn't really implement it.

I think they are -- one of the milestones you were talking about is this kind of fly off or this field (inaudible). I don't think those things have slipped as far as what you said. So, it really is what Mark just pointed out, that they are having to rehuddle on the acquisition plan given the other things that have occurred that are not associated with the transceiver and the network.

So, the field activity still is -- sounds like it's next month or two then.

It's -- I can't give you an exact date right now. I should be able to, but it definitely hasn't slipped as far as the -- and again, they could accelerate that if they got their act together on the acquisition plan sooner than what we think. But, yes, I think the field trials have not slipped that much.

Okay. And the LRIP for the MIDS-Js, that's late this year now?

No. It really wasn't -- I mean, there was LRIP and there is a couple components of that. There is additional purchases of these preproduction prototype terminals and the LRIP and they've just moved a couple months, really. So it's -- we expect them both to get that combination of awards either in the current quarter that we are in or one of them could fall over in the subsequent quarter.

Okay. Thanks a lot.

Okay. Thanks, Matt.

Our next question comes from Jim McIlree with Collins Stewart.

I think we need to make this the last question.

Okay. Great. Option expense about $10 million for the year? So, is that a good number?

Yes. I mean, it might be a little bit higher than that.

Right. And then, Ron, on the tax rate, you are accruing at an equal rate for every quarter or you're expecting the Q4 rate to go higher than what you are accruing for now?

No, it would be an equal rate for the quarter.

That's it for me. Thank you.

All right. Thanks, Jim.

There are no further questions. Mr. Dankberg, I would like to turn the call over to you for closing remarks.

Okay. Well, thanks a lot. We really appreciate everybody's time on the call and we appreciate all of interest and the questions, for sure. So, thanks for that, and we look forward to talking to you next quarter.

This does conclude today's conference call, and we thank you for your participation.