Viasat Inc (VSAT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q3 2010 ViaSat earnings conference call. (Operator instructions) As a reminder, today's conference is being recorded. I would now like to turn the conference to our host, Mr. Mark Dankberg. Sir, please go ahead.

Thanks. Good afternoon, everybody, and welcome to ViaSat's earnings conference call for our third quarter of fiscal year 2010. This is Mark Dankberg, I'm Chairman and CEO. And I've got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Keven Lippert, our General Counsel. Before we start, Keven will provide our Safe Harbor disclosure.

Thanks, Mark.

Before we get started, I'd like to remind you that the discussions 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 form 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. We will be referring to slides that are available over the web and we'll start with a quick overview of the WildBlue acquisition to set some context. And then we'll cover a top-level financial survey for fiscal year 2010 third quarter and the year-to-date.

I'll discuss the major highlights as well as an overview of our business segments. After that, Ron will discuss financial results in a lot more detail. And finally, I'll update our outlook for the fiscal year and summarize things. And then we'll take questions.

So there's been a real whirlwind of activity around the WildBlue acquisition in the last few months. I'll start with the main point to that to provide some context for the financial results.

We were fortunate to receive quick regulatory approvals, allowing the transaction to close more than three months sooner than we'd planned. That meant we incurred less than half the transaction expenses we had anticipated. The final assessment on cash tax benefits also was more favorable than initially anticipated. So those two items meaningfully improve our cash position relative to our plans at the time the agreement was announced.

At close, we issued the minimum amount of new ViaSat shares that were contemplated. About 4.3 million at a market value of about $130 million, a small premium to the $125 million of equity value associated with the color that was established when the transaction was executed.

The total number of WildBlue subscribers at the close o0f the transaction was higher than we'd originally planned for, just over 420,000. Recall also that we issued $275 million in senior unsecured notes, approximately two months prior to transaction close and that resulted in about $1.8 million of incremental net interest expenses in our third quarter prior to the transaction close.

We've completed all the purchase accounting analysis and Ron will go into that in depth in the CFO discussion.

Results were consistent with our expectations when we announced the transaction. As we've previously discussed, one of the artifacts of the WildBlue transaction going forward is to eliminate revenue due to consumer broadband network infrastructure sales to WildBlue, as well as WildBlue retail customer premises equipment. So of course, that effect kicks in earlier due to the accelerated transaction close too.

The net effect of all these factors though is positive. We currently anticipate that the WildBlue business will be immediately accretive to earnings, as we have calculated when the transaction was announced. We'll provide more information on WildBlue later in the call.

So next up is our third quarter financial summary. The early conclusion of the WildBlue transaction in our third quarter makes this quarter's results more complex than they otherwise would have been. I'll give a really quick top-level summary, and then we'll reserve a much more detailed review for the CFO discussion portion of the call.

Revenues for the quarter at $157 million were a little lower than we'd anticipated, largely as a result of delays in new orders, especially from or through the US Department of Defense. New orders were lower than we'd anticipated at about $156 million. We'll give more detail later, but we believe that new awards for us were affected as with others in the defense sector by much lower year-over-year DoD procurement and R&D expenditures in the December quarter due to budget process issues.

Our product margins for the quarter were strong. Excluding WildBlue transaction expenses of about $7.5 million and including a weighted average increase in our share account, non-GAAP diluted earnings per share still came in at a solid $0.39. GAAP net income was $0.09 a share. We'll provide explicit bridge information between GAAP and non-GAAP results later in the call.

Cash flow from operations this quarter were excellent and the cash savings from the accelerated transaction close and tax benefits contributed to a strong cash position. Ron will provide more discussion on all these points and on factors such as the breakout of transaction costs, interest expenses, the allocation between capitalized and expense interest, and the other WildBlue related effects.

Year-to-date revenues are up about 3%, reflecting the delays in DoD order timing. Non-GAAP earnings are up about 1%, which reflects revenue delays correlated to orders timing, as well as the other factors related the WildBlue transaction that I've mentioned.

Margins on a year-to-date basis have been good, as has cash flow from operations. The non-GAAP year-to-date results exclude year-to-date WildBlue transaction expenses of about $10 million. We'll provide explicit bridge information from GAAP to non-GAAP results on year-to-date later in the call as well.

Our full fiscal year 2010, which ends at the end of the March quarter, will contain a greater proportion of WildBlue results than we had earlier anticipated. We'll provide more information on WildBlue results when we talk about business segment highlights and in the CFO discussion. We'll also provide some information on our full-year 2010 outlook, including the effects of acquiring the WildBlue later in the call.

So next we'll consider some of the main highlights for the quarter. We consider the accelerated close of the WildBlue acquisition to be a significant benefit. It helps our financial results, but also gives us significantly more time to make improvements to the business and the service prior to the launch of ViaSat-1. Stronger than anticipated subscriber growth in the intervening period between execution and close of the transaction also improves the situation and our outlook.

Post-close management integration has gone smoothly. ViaSat's cash position and projected cash flow is better than anticipated due to lower than planned transaction expenses, favorable cash tax benefits, strong operating cash flow, and a good cash flow outlook.

Operating margins in our product businesses have been good. While defense orders appear to be slower than anticipated, there have been a number of factors that suggest this is a sector issue and that our specific market segments remain attractive, and that our competitive positioning relative to competitors within those segments seems to be strengthening. We'll provide more detail on that in the DoD business segment highlights.

Our commercial satellite networks business has been winning and executing a higher proportion of Ka-band network infrastructure programs, which represents a good opportunity for accelerated growth due to end user equipment once there was a satellite -- associated satellite launches occur. And that'll begin in a little less than a year from now with additional launches occurring throughout the following year.

One of the more interesting and somewhat unexpected opportunities is a proposed allocation by the rural utility service of $100 million in broadband stimulus subsidies explicitly for satellite broadband subscriber equipment in rural markets. We'll discuss that more in the satellite services segment discussion.

Our near-term revenue outlook is tempered by the slow pace of DoD orders, and that also will affect near-term earnings to some extent. The R&D tax credit for calendar year 2010, which includes the last quarter of our fiscal year 2010, is still not in place. That means there's some risk that our tax rate for fiscal year 2010 will be higher than normal and significantly higher than fiscal year 2009, which included five quarters worth of R&D credits.

Nevertheless, we still see a good opportunity for significant growth in earnings and earnings per share in our fiscal year 2011, including the accretive effects of the WildBlue acquisition and we'll provide more on that later too.

So that brings us to a top-level discussion of the highlights of each of our 30 business segments. Start with government, and as I alluded to in the highlights chart, Jefferies & Company reported recently that DoD procurement spending actually declined 7% on a year-over-year basis in the December quarter. That's the first contraction in four years and it's the largest contraction since the 10 years that they've been measuring that.

So while our particular program and market areas continue to appear attractive and we believe there are real growth opportunities in our markets, we had some sector level headwinds in terms of the procurement budget and process issues in the DoD big picture in the last quarter. Still it's important to recognize that the situations in each of our defense market areas should be considered individually.

Satellite networks continues to show strong growth, especially broadband mobile satellite, powered by airborne ISR or intelligent surveillance and recognizance applications. Much of the airborne ISR needs are driven by urgent needs requirements in the Middle East and have not, in general, seen the funding delays relative to expectations that other areas have.

We believe that our ArcLight branded airborne broadband suites offer -- afford a strong competitive advantage at KU-band and that our ability to migrate platforms to both defense department's wideband global satellite as well as the upcoming commercial Ka-band satellites affords an opportunity for an enduring advantage in a market based with substantial growth potential for both equipment and services.

We have a growing airborne broadband satellite services component too and have also won a competition for a similar international program.

We've also been maintaining a steady base of business in fixed and transportable defense broadband satellite products, as well as narrowband mobile products.

Turning to our tactical data links areas, the MIDS tactical data links business is undergoing a long planned, gradual transition from the LVT or low volume terminal product base to the new joint tactical radio system, or JTRS configuration. While MIDS JTRS is proceeding more slowly than anticipated, it is happening.

The program passed a very key milestone in December when the Defense Acquisitions Board approved transition of MIDS JTRS into production. Then in January of this year, unexpectedly we were awarded 100% of the first low rate initial production order for 41 terminals, valued at $14.4 million. While we don't at this time expect the government to change its strategy of continuous competition for MIDS J as they used with the MIDS LVT, this does provide a unique competitive advantage for future MIDS JTRS development, integration, and production competitions.

The Defense Acquisition Board decision in LRIP award reinforces the significant schedule advantages that MIDS JTRS holds relative to other JTRS programs. Significantly, the Defense Acquisition Board decision also directs funds to be allocated for the joint new advanced airborne networking waveform that has long been anticipated, although that funding will likely occur in the next government fiscal year.

Besides ViaSat's also been notified of a significant backlog of international MIDS LVT orders, for which we've been selected that are all awaiting foreign military sales processing at the MIDS international program office.

Finally, continued defense fiscal pressures ultimately seem more likely than not to extend the missions and operating life of existing airplanes that use MIDS LVT and MIDS J equipment as compared to newer platforms that appear a little more likely to slip out in time.

Turning to cyber defense, the macro environment for information assurance and cyber defense products appears to be steadily improving. Our competitive position in in-line network encryptor products also appears to be strengthening. Our market share for tactical products and global information grid or [dig] infrastructure network encryptors is increasing according to data that we compile regularly. There's also a near-term prospect for the high assurance Internet protocol encryption or HAPE standard network encryption market to consolidate down to only two market leaders.

We've made good progress on new product evolutions, including more compact hardware implementations. We've also introduced an important new product called the IPS 250 that is especially aimed at two very significant new market applications. One is homeland security and first responders. And two are coalition operations and what are called the leave behind scenarios.

The NSA is targeting or encouraging this new class of devices that are interoperable with the type one HAPE devices for classified data, such as the KG-250, but will be used by organizations or an environment that cannot provide the level of physical control and protection that's required for the type one cryptographic devices.

In aggregate, all these factors are indicative of increasing momentum in our information assurance and cyber security business. But orders in this area lag our plans, primarily because of sluggish defense procurement and R&D spending last quarter, including delayed supplemental allocations for Middle East deployments.

Defense priorities, draft, fiscal 2011, the DoD budgets, and customer feedback are consistent with improved order flow in this area over the next few quarters. We've also seen growth in our nascent inline media encryptor product line and believe that segment will also benefit from increased focus on cyber security and emerging national security policies. Boards for security projects and new follow-ons have also been slower than planned, but have been proceeding ahead.

We're seeing good growth in our Ka-band broadband network infrastructure in our commercial business. At the end of the third quarter we received a long anticipated equipment and support services contract from Barrett Xplorenet for the Canadian beams on ViaSat-1 valued at about $21 million. That gives us a leadership position in Ka-band broadband in the US, Canada, Europe, and the Middle East.

The first of these new Ka-satellites planned for deployment is Eutelsat's KA-SAT. We believe that will launch near the end of 2010 or possibly early 2011. That's a delay of a few months relative to earlier plans and will likely impact our sales of KA-band user equipment in our fiscal year 2011.

The breadth and scale of our KA-band networking system wins does appear to be enhancing our competitive position with potential new customers. There's a number of new international KA-band broadband satellite programs in the concept and/or planning stages. We tend to focus on those new opportunities that are planning higher capacity satellites that are capable of offering board competitive broadband services. We believe there may be two or more new KA-band broadband programs initiated this calendar year. New S Ka-band sales will be lower for the next year due to the WildBlue acquisition.

Our antenna systems business is showing very good growth. That business includes the antenna and RF gateways for all of our Ka-band broadband customers as well as Ku-band aviation mobile antennas, satellite earth sensing and imagery stations, and integrated antenna systems. We anticipate continued success in new orders and revenue growth in the near-term for that product line.

Our global mobile broadband business is growing steadily with the fastest adoption rate for us in maritime through our partnership with KVH. The commercial business jet market has much higher unit dollar equipment values for us but that's declined in fiscal year 2010. It now seems to be showing some sign of growth.

Our aviation business in total though has been significantly strengthened by success in the government market. At this point, we think that user expectations for bandwidth have outstripped the ability of KU-band satellites to economically serve the commercial aviation market. We are focused on the opportunity for Ka-band in commercial aviation and we believe the economics there are much more attractive enduring for both the users and the service providers alike.

We could be wrong, so we think the window for commercial aviation services, based on KU-band FM fixed satellite services economics is closed. Such services won't really meet user expectations and ultimately will be short-lived.

Despite another year of disappointing financial results for our OEM WAAS mobile software, we remain committed and engaged with our partner Cisco. We think that the rebound in Cisco's core business, continued interest in data center and cloud computing services, closer integration with their WAAS appliance system solutions business all offer reasonable cause for optimism. Plus we're enthusiastic about the benefits that the WAAS software, or wide area application services software brings to KA-band broadband services and we're already testing it on the WildBlue network.

Finally our satellite services business segment now includes the WildBlue business. WildBlue outperformed our relatively conservative expectations and had just over 420,000 subscribers when the transaction closed in mid-December. That's grown somewhat to about 425,000 subscribers since then. That helps boost confidence in obtaining the financial performance we planned for the time interval up to the launch of ViaSat-1.

Our current plans call for only modest expansion in total subscribers in the next five quarters through the end of our fiscal year 2011 in order to meet our financial targets. Our strategic objectives include technology introductions and updates to our service plans that will refine and improve our competitive positioning in preparation for the launch of ViaSat-1.

We'll be working closely with our retail partners to introduce new service plans in the geographic areas where we have more bandwidth to work with on our existing satellites and in creating new plans that exploit the substantial competitive advantages that come with the ViaSat-1 bandwidth.

That said, there's upside potential to our outlook given the government's rural utility services proposal to allocate at least $100 million to subsidize the adoption of satellite broadband in unserved areas.

We've been working some joint industry-wide concepts along with Hughes and EcoStar that would subsidize equipment purchases and installation for qualified subscribers in exchange for reduced subscription fees. RUS has announced their intent to create a satellite-specific program but has not yet released the details. Details are anticipated in about the next month or so.

In the past, we haven't planned for any broadband stimulus funds at all to be made available for satellite service. So this creates an upside opportunity for us, which could possibly take affect in the second half of our next fiscal year.

Meanwhile, the ViaSat-1 project continues on schedule and under budget. Construction of the satellite itself is almost complete. The current schedule calls for launch right about one year from now in February of 2011. We continue to work a number of international opportunities as I mentioned. Those mostly consist of working with governments and/or service providers that are contemplating buying new high pass (inaudible) Ka-band satellites or payloads.

We believe we are well positioned to compete with the networking equipment as well as with potentially providing operation services support. There's a few cases where existing satellites might be used to initiate services on a small scale in some regions. We continue to be optimistic about expanding the use of our own satellite and our partners Ka-band broadband satellites for applications beyond consumer broadband. We're especially interested in defense mobile broadband and commercial global mobile broadband applications. We're working with our international Ka-band partners to develop and bring these services to market in a consistent manner that can add value to all of our satellite assets.

We believe our experience in operating these global mobile and defense mobile services already at KU-band as well as the growing fleet of mobile broadband platforms that we support provide a good foundation for leveraging the attractive economics of Ka-band bandwidth into those markets.

So that's it for the highlights. And at this point I'd like to introduce Ron Wangerin who will do the CFO discussion.

Thanks, Mark. Overall we had a lot going on in our P&L this quarter. First as you see, we're now reporting product sales and service revenues as well as cost of product sales and cost of service revenues separately. This presentation is an SEC requirement and reflects the growing significance of our service business.

Service revenues are recorded in all three of our segments and represent satellite and related services, maintenance and support agreements, and other service agreements.

Product sales in the third quarter of fiscal year 2010 were $137.1 million, which was 3% lower than the same period last year. The decrease was experienced almost entirely in our government segment, principally from lower MIDS JTRS development revenues.

Service revenues of $19.2 million were up about $10 million over last year. Approximately $9 million of the $10 million increase came from the results of WildBlue in the 17 days post acquisition period while the remaining amount came from higher mobile broadband service revenues.

Cost of product sales margin is fairly consistent with last year. Cost of service revenue margin movement is primarily related to WildBlue's additional sales and related margin.

Selling, general, and administrative expenses in the third quarter are up about $10.5 million or 44% year-over-year. About $9.5 million of the increase is related to the WildBlue acquisition, which included $4.6 million in transaction expenses, $2.7 million in severance costs, and about $2 million in SG&A costs post acquisition for WildBlue.

We expect to incur about another $1 million to $2 million of integration expenses in the fourth quarter related to the WildBlue acquisition. The remaining increase in selling, general, and administrative expenses is primarily related to higher non-cash stock compensation expenses.

Research and development expenses were up about $1 million from last year. Almost all the increase is related to our next generation consumer broadband system. We continue to also invest in next generation tactical data links, information assurance, antenna and mobile broadband technologies; all market growth areas for us.

Quarterly amortization of intangibles is lower for the third quarter year-over-year due to the completed amortization of certain intangibles, which is partially offset by the new amortization from the WildBlue acquisition. Income from operations for the third quarter fiscal year 2010 includes non-cash stock based compensation expenses of $3.3 million versus $2.5 million in -- for the third quarter of fiscal year 2009.

Other expense principally represents interest income and expense net. The higher income expense is related to approximately $2.1 million of interest in the quarter, offset by approximately $350,000 of interest income. As we said earlier, last quarter we issued $275 million in senior unsecured notes. In addition, we borrowed $140 million from our line of credit in order to complete the WildBlue acquisition. While this increased our total interest expense, about $3.8 million was capitalized in the quarter for capital assets.

Our income tax revision for the third quarter reflects several items. First we recorded a benefit of $2.6 million related to the statute of limitations expiring on previously filed tax returns. Second, due to our lower pre-tax income in the quarter and for the year due to the interest expenses and transaction expenses from the WildBlue acquisition, our effective rate was reduced in the quarter whereby we recorded a benefit.

And third, due to our cumulative tax position following the acquisition of WildBlue, we made adjustments related to other deductions -- other tax deductions, which may now be limited.

Our fiscal year 2010 effective tax rate is expected to be approximately 18%. And we'll address the difference between diluted GAAP and non-GAAP diluted EPS in a few slides. But in looking at our year-to-date results, also due to the significance of the WildBlue service business we'll be reporting product sales and service revenues as well as cost of product sales and cost of service revenues separately going forward.

Year-to-date product sales through the third quarter of fiscal year 2010 were $438 million, essentially flat from last year. Service revenues of $37.5 million were up about $12 million over last year. WildBlue service revenues were the primary driver for the increase, contributing $9 million in the 17-day post acquisition period, while the remaining amount came mostly from higher mobile broadband service revenues.

Cost of product sales margin improvement is primarily rated -- related to a greater mix of high-margin product sales. Cost of service revenue margin improvement is primarily related to WildBlue's additional sales and the related margin.

Selling, general, and administrative expenses through the third quarter are up approximately $17 million or 24% year-over-year. About $12 million of the increase is related to the WildBlue acquisition, which includes $7.1 million in transaction expenses, $2.7 million in severance costs, and about $2 million in SG&A costs post acquisition. The remaining increase in SG&A is primarily related to higher selling costs in our government segment, non-cash compensation expenses, and for intellectual property investments.

Research and development expenses are down 8% through the first three quarters, principally due to the shift to some of our development efforts going from internal development projects to customer funded development. However we will continue to invest in next generation technologies provided we see growth opportunities for us.

Amortization of intangibles is lower through the first three quarters year-over-year due to the completed amortization of certain intangibles, partially offset by the new amortization from the WildBlue acquisition.

Income from operations through the first three quarters of fiscal 2010 includes non-cash stock based compensation expenses of $8.4 million versus $7.6 million for the same period last year.

Other expense principally represents interest and income and expense. The higher interest expense is related to approximately $2.5 million of interest expense year to date, offset by about $550,000 of interest income. Year to date, we've capitalized approximately $5 million of interest related to our ViaSat-1 satellite and other fixed assets under construction.

Our income tax provision through he first three quarters, like for the third quarter, reflects several items. First, the $2.6 million in related -- is related to the statute of limitation expiring on previously filed tax returns. A second due to our lower year-to-date pretax income for the year due to interest and transaction expenses from the WildBlue acquisition, our effective rate was reduced in the quarter, whereby we recorded a benefit.

And third, due to our cumulative tax position following the acquisition of WildBlue, we made some adjustments related to other tax deductions, which may now be limited.

In addition, the fiscal year 2009 effective income tax rate included five quarters of federal R&D tax benefit while fiscal year 2010 only includes three quarters.

We'll address the difference between GAAP and non-GAAP diluted earnings per share in a couple of slides.

In looking at our segment results, in the government segment, revenues for the third quarter were $89.1 million, a 5% decrease over the same period last year. The decrease for the quarter is primarily related to lower development sales of next generation tactical data links and in video data link systems offset by higher sales of next generation military satellite communication systems.

In the commercial network segment, revenues for the third quarter were $55 million, a 1% increase over the same period last year. The year-over-year quarterly increase is mainly due to higher sales of enterprise ViaSat and antenna systems products, which were offset by reduced sales of mobile satellite communication systems and domestic consumer broadband products.

For satellite services for the third quarter and year-to-date, sales were higher versus the same period last year, primarily due to sales from our -- from WildBlue post acquisition and increases from mobile broadband services from our global expansion initiatives.

Year to date government systems segment revenues were $284.5 million, a 2% increase over the same period last year. The increase for the first nine months is primarily related to increased sales of next generation military satellite communication and simulation systems, partially offset by lower tactical data link and information assurance product revenues.

In the commercial network segment, revenues year to date fiscal year 2010 were $172.7 million, a 2% decrease over the same period last year. The year-over-year decrease is related to lower consumer and mobile broadband systems, partially offset by higher antenna systems and enterprise VSat product sales.

Regarding operating earnings, in the third quarter government systems operating segment earnings were $10.8 million, a 24% reduction from prior year. Lower operating earnings were principally due to the lower revenues and associated margins combined with higher new business selling and support costs. Year to date, the government segment achieved operating earnings of $37.2 million, which is a 6% reduction from the same period last year. The reduction is principally related to higher selling, and proposal, and support costs, partially offset by margin contributions from our higher sales.

Commercial network segment operating profit in the third quarter was lower primarily due to higher research and development costs related to our next generation consumer broadband system, partially offset by better margin contribution. Year to date, the improvement in operating earnings is primarily due to better margin contribution on lower sales, primarily in our antenna systems area, and lower selling and support costs.

For satellite services for the third quarter and year to date, revenue increases have produced increases in operating earnings. These improved operating earnings were offset by the acquisition related costs discussed previously related to the WildBlue acquisition.

As we look at the GAAP and non-GAAP EPS attributable to ViaSat and common shareholders, non-GAAP results are a little more involved this quarter, primarily due to the WildBlue acquisition. Non-GAAP results exclude the amortization of acquisition related intangibles, acquisition related expenses, and the effects of non-cash share based compensation, net of tax.

Last quarter we added transaction expenses to the pro forma calculation. This was a change as a result of the accounting standard FAS-1 41(R), which became effective for us this year and now requires the expensing of acquisition related transaction expenses. Previously these costs were capitalized and included in the acquisition price subject to purchase accounting.

In addition, the WildBlue transaction expenses generated a lower pro forma income tax, a fact associated with some of their WildBlue transaction expenses as they're not currently deductible for income tax purposes. As a result, the income tax effect is lower than you'd expect.

In addition to the transaction expenses, our share count is higher year-over-year due to higher average stock price and the related impact on the treasury stock method, combined with the shares that we issued in connection with the WildBlue acquisition, which increased the average shares outstanding by about 900,000 shares, which may not have been factored into most folks' expectations.

As a matter of point, the approximately 4 million shares issued in connection with the WildBlue acquisition are subject to a lock up agreement through February 15th, 2010 and then have certain trading restrictions thereafter.

Turning to the balance sheet, overall our balance sheet is significantly different than last fiscal year end and even last quarter as a result of the WildBlue acquisition and our $275 million senior notes offering. Cash and short-term investments increased by about $5.8 million and we'll talk about the movement of cash later when we review cash flows.

Billed accounts receivable is up about $16.5 million since the beginning of the year, and about $11.5 million of this increase is related to WildBlue, and the rest is mostly from our government segment.

Unbilled accounts receivable were up about $5 million from the beginning of the year due to the timing of certain contract milestones from earlier with our government systems and consumer mobile broadband systems contracts. We made a lot of progress in the quarter and expect continued improvement over the next two quarters, which should help add to cash from operations.

Inventory is up about $14.5 million from the beginning of the fiscal year, of which about $7.2 million is related to WildBlue acquisition and the rest is primarily related to higher inventory to support higher sales of military satellite communication systems.

Deferred taxes are up significantly due to the WildBlue acquisition. As part of our WildBlue acquisition announcement, we announced that we expected to receive significant cash tax benefits from WildBlue's net operating losses and their assets acquired. The difference between the expected future cash benefits and what our income tax rate that we use on our P&L is recorded in deferred taxes and we expect our cash tax rate to be less than 10% of pretax income over the next couple of years.

Prepaid and other current assets were higher, mostly due to the WildBlue acquisition. Goodwill and intangibles increased due to the WildBlue acquisition, partially offset by regular amortization of our intangibles. In connection with the WildBlue acquisition, we recorded an increase in amortized usable intangibles of $82 million and goodwill of approximately $8.6 million.

Property, plant, and equipment net has increased about $86 million since the beginning of the year, of which approximately $85 million was related to the WildBlue acquisition. Satellites net represents the WildBlue 1 satellite and the ANIK F2 prepaid lease that were acquired in the WildBlue acquisition.

We're about two years into the construction of our ViaSat-1 satellite and to date we've capitalized about $171.5 million through the third quarter of fiscal year 2010. Most of these costs relate to progress payments for the satellite and the launch vehicle. We've also completed the placement of the launch insurance and the premium costs were below our plans. We now expect ViaSat's share of the satellite launch and insurance to be approximately $300 million, excluding capitalized interest.

We also expect to spend approximately $110 million in associated gateway and network operations equipment. And finally, we expect to capitalize about $25 million related to various costs in equipment associated with the development of our next generation consumer broadband system.

Other long-term assets are up about $17 million since the beginning of the fiscal year, primarily due to capitalized debt issuance costs from our debt offering and revolver, capitalized software costs associated with our next generation consumer broadband system, and licenses and patents.

Accounts payable are up from the beginning of the year, mostly due to the WildBlue acquisition. Excluding the WildBlue amount, accounts payable is actually down for the year.

Advances in customer deposits were up about $22 million since the beginning of the year, reflecting the timing of cash receipts on contract milestones, primarily in our government systems and commercial networks areas, as well as approximately $7 million acquired from the WildBlue acquisition.

The increase in other current and long-term liabilities primarily relates to acquired liabilities from the WildBlue acquisition. We've borrowed $140 million from our line of credit in connection with the WildBlue acquisition. At the end of the quarter, including the effect of standby letters of credit, we currently have about $60 million available under this line.

As we look at cash flows, as we discussed last quarter, we expected to make substantial progress in cash from operations during the third quarter. For the quarter, our cash flows from operations were $57 million and put us back on track for the year, largely due to program milestone achievement and collection of receivables. We expect to make some additional progress in the fourth quarter as well.

Cash flows related to investing activities for the quarter reflect the purchase of WildBlue, net of cash acquired, capital expenditures for our satellite project, capital expenditures for licenses and patents also related to our satellite project, and lab and production test equipment.

Cash provided by financing activities is primarily from proceeds from drawing down our line of credit, net proceeds from our senior unsecured bond offering offset by debt issuance cost, and the net proceeds from the issuance of common stock, principally the exercise of stock options.

We did see a significant increase in stock option exercises in the quarter when our stock price climbed, plus we have a number of options expiring between now and September, so we expect to see additional activity over the next couple of quarters.

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

Okay, thanks, Ron. So now I'll talk about financial outlook for the balance of fiscal year 2010 and the initial outlook for fiscal 2011, which begins on April 3rd.

So our outlook for fiscal year 2010 and 2011 reflects the inclusion of WildBlue. The outlook integrates the known factors that have been affected by the WildBlue acquisition and the associated debt and equity financings we've executed. Fiscal year 2010 full-year results include a full quarter Q4 with WildBlue as well as the half on step period in the third quarter.

We expect revenues for this fiscal year to be around $600 million -- $690 million or so and non-GAAP EPS around $1.57 or so, plus or minus approximately, as shown by the ranges in the chart.

We've discussed the main near-term factors earlier in the call, including delays in certain anticipated defence contracts, elimination of WildBlue retail equipment revenues, and a somewhat higher than previously anticipated current WildBlue subscriber base.

For fiscal year 2011, we're anticipating revenues over $900 million. That includes a full year of the WildBlue business, as well as growth in both our government and commercial product businesses. Lumpy awards can affect the amount and timing of our revenues, but we think on balance, these are reasonable estimates based on what we know now.

Non-GAAP EPS would be in the middle of a range of about $1.90 to $2.00 per share, which reflects an increase to our thinking for fiscal year 2011 prior to the WildBlue acquisition. And we're targeting adjusted EBITDA for fiscal year 2011 to be almost $200 million.

It's too early for us to offer detailed revenue or earnings guidance for our fiscal year 2012, but we do expect there will be two significant factors that create headwinds to earnings growth that year. One would be interest costs that are capitalized during the construction of ViaSat-1. Those will start being expensed once the satellite's launched. And second, we'll begin depreciating the ViaSat-1 infrastructure assets immediately upon launch. Together, those two effects create an additional $65 million or so of pretax expenses to overcome in fiscal year 2012 compared to fiscal year 2011.

But when we announced the WildBlue acquisition, we said we believe that synergies and accelerated subscriber ramps would enable us to overcome those headwinds, and at least allow us to maintain our fiscal year 2011 earnings in fiscal year 2012. And we still think that's a reasonable target and do not at this point see earnings contraction in our fiscal year 2012. Plus we're targeting growing EBITDA in fiscal year 2012 by about $40 million to $50 million compared to fiscal year 2011.

So now in summary, we think the key highlights for the quarter are shown on the slide. About two months after close, we're very pleased with the outcome of our WildBlue acquisition. We're pretty much on or ahead of plan in the key dimensions. The short regulatory approval process let us close over three months early, resulting in significant cash savings due to reduced transaction benefits and additional cash tax benefits.

That coupled with strong operating cash flow puts us in a stronger cash position and roll forward outlook than we'd planned before. The subscriber base at the close of the acquisition was a little bigger than we'd booked into our plans, giving us a little bit of a head start in our financial performance. It also gives us some maneuvering room to work on technologies that can improve the service and in defining new service plans that help pave the way for introducing ViaSat-1 in just about a year from now. We'll be working closely with our retail partners on all those issues.

Meanwhile, margins in our products businesses have been good. We believe we've got very good competitive positions in key areas including defense satellite broadband, defense mobile broadband, MIDS joint tactical radio system, and the cyber security areas. While defense orders in our third quarter were below what we'd been anticipating, the combination of unexpected temporary defense department procurement spending contractions, the gain in what looks like gains in our I&E or in our network encrypted market share, MIDS LVT international order processing backlogs, and our MIDS JTRS (inaudible) win, also suggests to us that we're dealing with order delays issues as opposed to declines in either our specific markets or our competitive positions in those markets.

The planned creation of a satellite specific broadband stimulus fund for unserved markets is an exciting new opportunity for us and creates the potential for some additional upside.

We're pleased with our third quarter earnings and see exciting opportunities for growth as we go into our fiscal year 2011. So thanks a lot for listening and we'll be happy to take some questions now.

(Operator instructions) Our first question is from the line of Mike Crawford. Sir, please go ahead.

Thank you. A lot of stuff here. Just a couple of quick questions. Could you just go through when you expect to launch ViaSat-1? And then after that how long while the satellite is configured before you can start operations?

Well it should launch mid-February of 2011. That's the planned moved. First half of February 2011. And then you'd figure 60 to 90 days from there until it goes into service. That would be pretty typical.

Okay. And what about the opportunity on the defense side to use some of the capacity with ViaSat-1. Is it something that would be appropriate for say WGS or something else?

Yes, right now government is just getting Ka-band capacity on WGS available in areas that they need it. And so we're working with them on equipment to do that, but there's definitely a lot of interest in using the commercial Ka capacity that we have, that Eutelsat has in Europe, and that Yahsat has in the Middle East in a consistent way. And that really gives them the ability to sort of do -- think of product in terminal development, tactics testing here, staging and deployment in Europe, and then operations in the Middle East. So that's actually a big opportunity for us.

And then the last question related to that is could you just go into the cost per bit on ViaSat-1 compared with say maybe the next most competitive one, which I think is Ka-sat and then maybe versus legacy satellite, like say WildBlue.

So compared to WildBlue, the actual -- what WildBlue has now and pretty much anybody has now for the best K satellites, it'll be more than -- it'll be better than a 10 to 1 improvement, close to 12 or 14 to 1 improvement. And the Ka-sat will be a big step up as well, but ViaSat-1 will be probably close to half the cost of Ka-sat on a cost prepare. And there's really nothing else -- [and VisionNet] comes close to that really right now.

Okay, great. And then last question relates to BFT-2. So I know there's this down select process and I saw your competitor say that it has successfully completed their demonstration, but that it's system only worked at flight speeds approaching 150 knots. And I'm -- isn't there something that needs to work with war fighters that fly much faster than that?

It could. There's -- the BFT-2 procurement is supposed to go on helicopter platforms, which can go faster. But there's a lot of factors in the procurement. We think it's really going to be a shootout. We've think we've got a good shot, but it's going to be a shootout one way or another.

Okay, thank you very much.

Thank you, Mike.

Thank you, sir. Our next question in queue is from the line of Michael French of (inaudible).

Good afternoon, gentlemen.

Mr. French, your line is open.

Good afternoon, gentlemen.

Hi.

Hi. So it looks like WildBlue's doing about $50 million a quarter right now in revenue. I was wondering what growth rates you're assuming in your 2011 targets.

They're a little bit above the $50 million a quarter range now, but we're not even planning for 10% increase so -- in revenue run rate for now -- between now and the time of the ViaSat-1 launch.

Okay. And in terms of the churn at 2.1%, do you think it's going to stay around there? Or is there anything you can do to improve upon that?

I think actually that is one of the areas that we're looking at. And our main objectives, and we've been very consistent about this all along, is we think that we can substantially improve the service quality by providing more bandwidth. And there are things that I mentioned we're going to try to do in terms of new technology introductions, new service plans, that we'll be introducing between now and the launch of ViaSat-1 that we think ought to improve customer satisfaction. We think that'll be reflected in churn rates.

But in terms of the rate at which we can roll those things out, given the relatively non subscriber growth goals that we have, overall we wouldn't encourage people to monitor all the metrics that we're going to see between now and then. Subscriber growth will be relatively modest. RPU we're actually a little bit interested in having come down a little bit because we're trying to get more engagement with retail partners that'll be really important once the ViaSat-1 satellite launches.

And churn -- I think we will try to get some measurable improvements in churn and that'll start we think once we can really start deploying some of these technologies and service plan changes, which will probably be during our first quarter -- end of first quarter of fiscal 2011.

Okay, thank you. And a last question on the government systems. Given the state of the budget being late and they're operating under continuing resolutions and there was a little bit of shortfall there, do you expect that that business will pick up immediately in the current quarter? And given the strong margins you had, is the mix shift going to work against you in the products that would be coming on?

So right now we think this fourth quarter will be a good order quarter for us, but I'd say if you look at sort of our products businesses and our government businesses, we would -- we thought third and fourth quarters would both be good. We have more insight now. We think the fourth quarter will be about where we'd have thought the fourth quarter was going to be anyway. And that the catch up effect, if you can think about that for what happened in the third quarter will really be more distributed over the fiscal year 2011. And some of that is, I'd say, a little bit of conservatism in looking at how the DoD is operating. Just a lot of issues related to the budget process. That's our view now.

Okay. Thanks, Mark and good luck.

Thank you, Mike.

Thank you. Our next question is from the line of Rich Valera of Needham & Co.

Thank you. Just trying to get a handle on how you're characterizing the DoD shifts. And is sounds to me like you're really characterizing (inaudible) as delays rather than necessarily any meaningful near-term change in demand. And it sounds like -- in answer to just the previous question you were suggesting that 4Q coming in about where you expect. And was that on a bookings or a revenue basis?

That will be a bookings basis and you'd have to figure in some revenue impact because of a shortfall in the third quarter. But bookings wise, I think we'll be about where we thought we were before.

And then for fiscal 2011, what are you thinking for overall growth in either DoD bookings or revenue?

It's modest growth. I mean the -- you can -- if you use the WildBlue run rate, you can sort of figure out what our total growth would be. It's in the 7% to 8% -ish range I'd say reasonably split between commercial and defense. And that -- I think that's based on a little more realistic view on the defense business.

Defense is -- I just want to reiterate, it's a little bit hard to describe because if you get the policy statements in terms of where the focus areas are, look at how we're competing in those areas. In fact we've really -- you could say we've lost one program we were targeting to win, but that's about it. And nothing else is on our way. We think at some point there'll be some catch up, it's just a little bit hard to predict when given the budget environment.

Okay. That's helpful. And then with respect to tax rate for fiscal 2011, can you talk about what tax rate you're assuming for your pro forma EPS estimate?

Yes, we're -- I would say in the mid-20s range for an effective tax rate for FY11.

Great, that's helpful. And then just in terms of putting aside the -- well, I don't know if you can really put it aside, but looking at fiscal 2011 bookings, do you think that you're going to have -- given it sounds like you'll have maybe some catch up bookings, do you think you have a positive book to bill on the sort of product side of the business in fiscal 2011?

Yes, I'd say modest. We've actually built a pretty fair amount of backlog over the last couple of years. I mean our backlog (inaudible) growing and we think we'll add to it some next year as well.

Great. Okay that's helpful. Thank you.

Okay. Thank you, Rich.

Thank you, sir. Our next question is from the line of Myles Walton of Oppenheimer & Co.

Thanks. Good evening, guys. I was wondering if you could -- Mark, you mentioned EBITDA growth coming in 2012 of $40 million to $50 million I think, but I think you're also confronting (inaudible) and interest headwind of $65 million. So I'm just curious, why doesn't EBITDA grow actually in excess of that $65 million non-cash headwind?

Yes, there's a couple of things. I mean first of all it's -- there is some incremental piece for ViaSat-1, but that doesn't -- not all that comes into play on -- at the beginning of the fiscal year some of it trails in and part of it's the timing of the gateway equipment. Some of it actually starts before the fiscal year, so there is an effect there that you do have crossing fiscal years when hardware's placed in service, those types of things as well as the ramp rate for the service piece as well as the expected equipment. So there is a fair number of moving parts there.

Okay, so the $65 million is not a non-cash headwind that you're confronting in 2012, it's actually a mix of --

Well, interest will certainly be a cash piece.

But it's the same as -- the difference in capitalizing interest versus not (inaudible) it.

-- yes, versus not -- correct. Yes, I mean in fiscal 2012, due to the placement of the ViaSat-1 in service, we're -- our plan includes no longer capitalizing that interest. So (inaudible).

Yes, I'm sorry. But that would be excluded from the EBITDA calculation.

Correct.

Okay. All right and then the other question. So sales guidance ticks down by $70 million for the -- or effectively it looks like for this current fiscal year. Is that all out of the defense delays that you've been talking about? Or is there some also on commercial?

It's mostly from our government business, a little bit in the commercial side, but a good chunk of it from the government side.

Okay. And I guess the MIDS program, could you walk us through how MIDS J looks from here in terms of next production lot awards? The competitor thinks that they follow a dual procurement strategy as well. I'm just kind of wondering the timing for production launch from here.

Well there's a -- the next MIDS LVT production lot is lot 11 and that'll be -- it's supposed to be this quarter. This -- our fiscal fourth quarter. I think -- Rick I don't know if you -- I think we'll see maybe the next MIDS J production lot in about a year. Within about a one-year timeframe. So there's actually -- even that's pretty striking that we got the 100% of that last order, because there may not be new MIDS J production awards for quite a while.

But are you in a gully until that period of time? I mean does MIDS LVT lot 11 stay kind of at this current rate that you're at?

Yes, MIDS 11 will be comparable to lot 10 I'd say. The lot 11 will (inaudible).

Yes, maybe down a little bit, but there's also several international awards that we're expecting soon.

Yes, so that -- the international stuff's a little bit funny because it's not even US DoD procurement money, but it has to go through the US procurement system. And that's just sort of backlogged now. We mentioned that. So that -- some of those awards coming in are going to help -- I'd say are going to help us drive a growth in tactical data links orders over the next year compared to what we've seen.

There was a (inaudible) -- one last one on the MIDS LVT international goes above and beyond Taiwan, which we've seen in terms of a notification or is this more widespread?

Yes, I'd say there's about three countries and it's pretty fair -- three or four different countries and it's close to $20 million-ish of orders that are sort of in process.

Determined for ViaSat, not between the two competitors?

Right, yes. Just for us. Those are ones where it said here's what's coming and we're just really -- it's just taking a longer than expected time to go through the bureaucracy at the procurement office.

Okay. Great. I'll get out of the way. Thanks.

Okay, thanks Myles.

Thank you. Our next question is from the line of Jim McIlree of Merriman Curhan. Mr. McIlree, your line is open.

I'm sorry. Thank you. Good evening. Ron, can you clarify your tax rate comment? Mid 20%, is that for the pro forma or for the GAAP expectation?

The GAAP. So the pro forma would be a little bit higher.

Okay, and so essentially no change from kind of what we were thinking before.

Yes, and -- but that it -- remember that would assume that the federal R&D credit is enacted for -- on a catch up basis for fiscal 2010 -- or calendar 2010, which would impact our fiscal 2011.

Okay, great. Thank you. And the -- if I understand it correctly, you guys are going to try to shift at least on the margin more of the subscribers of WildBlue towards a wholesale distribution? Is that correct? And if it is correct, won't that result in better CPE sales in fiscal 2011?

Yes, the -- so yes, it is correct. We've said that one of the things we'd like to do is do more wholesale working with the retail partners. I think that'll help us in the aggregate grow the business more quickly. It'll tend to -- that'll pressure RPU down a little bit. The -- and if so, we will do better when you look at the split of equipment that's either for internal consumption or sale. But relative to where we were prior to the WildBlue acquisition, it's still going to be quite a bit less in equipment sales.

We also have, Jim, another phenomenon that's occurring because we're -- actually some of our logistics tools are causing us to delay revenue recognition for one of our distribution partners. And it'll hit us over the next few quarters as kind of a one-time hit. It'll catch up at some point, but it certainly will affect -- not very big, but it'll affect a little bit of FY11 revenue as well.

Okay, and when you say a little bit of degradation in RPU, are we talking a buck or two? Or are we talking $0.50 or so?

Oh, it'll be more than $0.50.

Yes, we're bottling it over time, not -- somewhat be in FY11, but beyond that more significantly. I mean right now ballpark we're at RPUs of $41 -ish. $41 to $42. $41? Yes, so but we wouldn't be -- we've been talking about RPUs in the $30 range on a blended basis once we really get going on ViaSat-1. So that gives you an idea of a sort of where we think we're heading.

There should be at the same time a lot less capital deployed or customer acquisition costs in that it will -- we'll walk through those metrics but they should change at the same time.

Yes, but that effect is really going to be associated with subscriber growth once the new satellite launches. And we tried to model, as Rick mentioned, the return on capital investment that comes along with that and freeing up capital for successor satellites.

Okay, great. And last one. Just ballpark incremental costs associated with bringing -- with operating ViaSat-1. So not the interest expense or depreciation, but just more back office, more SG&A. Things like that, ballpark-ish, what those incremental costs are going to be.

I think a good way to look at it is we're investing a bunch of capital and that's in gateways and network infrastructure equipment. But the variable costs associated with operating this -- the system really aren't going to increase hardly at all.

The single biggest driver is the back (inaudible).

Yes, and that's basically just a -- it's a capacity cost it's not so much a per subscriber cost. That's about it. I mean that's the main cost.

So it's less than what everybody and you had modeled before, Jim, substantially I'd say.

Okay, great. I think I see where you're going. Thank you very much.

Thanks.

Thank you. Our next question is from the line of Steve Ferranti of Stephens Inc.

Hi, thanks. Good afternoon. Just following up on the WildBlue discussion. We know certain spot beams there are close to capacity. Could you give us a sense though for overall capacity utilization on that satellite? And any potential efforts there might be to increase utilization of some of the lower utilized beams and what that might mean for the extent that you're successful in that endeavor, what that might mean for potential margins there?

Okay, so at the time we acquired WildBlue and given the service plans that they had, they're probably in the range of 60% to 65% full if you look at their capacity of cost on the entire system. As you mentioned, what -- and we've talked about numerous times tends to be pretty much at capacity in about 35% or 40% of the beams and well below capacity in some of the more rural state beams. So that's the situation we have now.

One of the things that we're looking at doing is -- and I'll say if you say we have 425,000 subscribers now, you can visualize that if we could match things out perfectly with the services that we have now, that would give us growth for 225,000 more subscribers.

As I mentioned we're planning less than 10% growth in subscriber account and that's what we think is a fairly reasoned conservative view of what'll happen prior to ViaSat-1 launch. So given that, we're actually looking at coming up with some service plans in these lower fill areas that are just higher speed and better service quality. And ways that people could choose to upgrade to those plans if they chose. So that's really sort of where more of our focus is now. I think that will help us and our retail partners sort of pave the way and understand what'll happen when we launch the new satellite, which is where all the real growth will come from.

The other point though, which is -- it's sort of interesting here, is that broadband stimulus might actually help us do better than what our plans were because a lot of the emphasis on the broadband stimulus will be in those beams where we a bunch of capacity. So we're waiting to see what the details are there.

Right now we're trying to -- want to sort of contain expectations and then the other is to focus on improving the service. Meanwhile though, the other thing I want to point out is that the incremental EBITDA margin that we get when we add new subscribers is high. It's better than 65% to 70%. So even though we have relatively modest growth potential, that can pay off for us.

Understand. And then just -- you may have touched on this before, but the -- if assuming the broadband stimulus funding actually comes in a expected allocated to satellite, would you attack that I guess through your retail partners? Or would that be direct?

Probably be both. EcoStar, for instance, has been one of the organizations along with us that's been urging the creation of this type of a fund, so I think they're definitely interested and they'd be one of our partners.

Okay, last one for me. Any updates you can give us in terms of your thoughts on ViaSat-1 in terms of a potential mix of revenue? I mean we know it's targeted to be largely consumer broadband focused, but any thoughts you can give us in terms of mix of potential revenue there by application, whether it be government or vertical -- particular vertical markets and maybe how that's changed over the last year?

Well, our projections have all been based on consumer and part of the reason that we've done it that way is because the marginal yield on consumer is the lowest. So if we were to penetrate any other segments that would only make things better.

Penetrating the other segments would come with some specific events. And the ones that we see as good opportunities are really the ones we've talked about all along, and that's government, broadband mobile, global mobile. And those -- I think there's a lot of pretty good prospects. I think it's a little bit hard to speculate on how that split could go. But I would say if we do 10% to 20% government and global mobile, that'll actually have a pretty significant impact on our results because the yields are so much better. And those would be reasonable targets for us.

Okay, terrific. And just to clarify, when you said that your original projections were based on consumer -- all consumer broadband, that was -- you're referring back there to the presentation that you guys gave when you initially announced the satellite, is that right?

Yes, that's right.

Okay, terrific. Thanks.

Thanks, Steve.

The only other comment I'd make there, Steve, before you run, is that -- I mean there is the potential that we could sell, make some type of bandwidth deal at some point that would have slightly lower margins. Those (inaudible) so. We could trade certainty and volume for margins.

That's possible.

Okay, thanks.

Thank you. Our next question in queue is from the line of Chris Donaghey of SunTrust Robinson.

Hi. Good evening, guys. Mark, it sounds like worldwide the interest in the ViaSat technology is -- momentum is continuing to build. And my question is, especially as we get closer to the ViaSat-1 launch, what do you think your -- the probability is that you're building a second satellite before you launch the first one?

That's something that we're definitely looking at that we would start -- I mean we would start construction of a second satellite before we launched the first one. That's definitely possible. I would say there's a bunch of factors that are going to go into that and we're not -- it's not something that we're ready to announce now, but a lot of things I think are going our way towards that in terms of our cash position, our cash outlook, and the prospects of getting the retailers excited about working with us in the -- in a more aggressive way.

But there's other factors and we're getting a little bit into what I consider to be competitive issues that I don't really think we should go into yet. And I don't think we're going to do anything that'll surprise anybody. We'll give some indications of what our thoughts are and what the timing would be when it's appropriate.

Okay, and with the WildBlue subscriber base going, I guess I was kind of expecting you to work it down rather than actually see it grow. Maybe you just can't control that. If people want the service, you don't really want to close the door in their face. But as you were looking at that FY12 expectation, how many subscribers are you assuming launch with ViaSat-1? In other words, what percentage of that 420,000 plus subscriber base do you expect to see convert either the day the satellite goes live or very shortly thereafter?

So, what we've done is we've come up with a model that is sort of a conversion model. And it's relatively I'd say conservative because there's just a lot of inertia getting people to change their subscriptions. We are looking at, a long with our retail partners, maybe some promotions that would involve converting people promptly. That is people who may sign up for service now in the intervening year because that gives them a priority in line to get ViaSat-1 service. So we're looking at those types of promotions, though we haven't started anything like that now.

The -- like you said, we're trying to really strike a balance between managing the service well, trying to improve the service qualities and our financial results, and we're very aware that good financial results are part of what helps us finance a follow-on satellite, which will give people who aren't in the ViaSat-1 coverage areas now prospects of getting that type of service in the future.

So it's a tricky balance. We'll probably know more later, I mean as we -- especially as we work with our retailers on specific promotions. And I think you'll see some of that stuff crystalize by the end of the spring, kind of May/June timeframe, because the -- especially the DBS companies have national campaigns and dealer meetings that they do in that timeframe. So that's probably the timeframe where we have more information about our plans there.

Okay, and just real quick on the guidance, Ron. Your FY11 non-GAAP EPS guidance, $1.94 to -- $1.90 to $2.00, that was using a mid-20s tax rate? Did I hear that right?

The 20s for GAAP. It would be higher for non-GAAP.

It would be higher for non-GAAP?

Yes.

Okay, but you were also saying that you're going to have -- you're bringing on an NOL as well that would actually make your cash tax payment less than 10%. So if I was backing out what the actual cash earnings power of that reduced tax rate was going to be, I'm kind of calculating that the earnings would be somewhere between $0.40 and $0.50 higher if I were to use the actually cash tax rate? Am I doing that math right?

Well, I think we're not -- so from a reporting standpoint, it's probably pretty close, but we're -- from a reporting standpoint, we can't really use a -- the cash tax effect if you will for that because we got the deferred tax assets that are going to be amortizing in. So when we do our pro forma effect, we're going to be using similar rates that we've used historically. They've only been a little bit different recently because of the -- how tax -- how certain acquisition related expenses are treated for tax purposes. But so I would say -- I understand where you're trying to go. I'd have to think about it and maybe get back to you.

That's one of the reasons why we gave you the EBITDA numbers. And you know what the interest is, so that's kind of the delta.

Okay. And then just a couple of quick housekeeping questions. What is the implied share count for next year's guidance?

It's a little over $39 million.

Okay, and then just the depreciation that -- or just depreciation of the WildBlue satellite.

Well, for both the WildBlue satellites, we're depreciating those over about 10 years. The 10 years remaining.

Okay, so on an annual basis just what is that? What's the amount?

40-ish for the satellites. There's some for the gateways and whatnot as well.

Great, thanks.

Yes, so -- I'm sorry it would be 30-ish because (inaudible). There's roughly $300 million of the satellites that are capitalized right now. So it'd be $30 million-ish per year.

Great, thanks.

Thank you. We have time for one more call from the line of Matt Robison.

Hi. Can you tell us what the eliminations -- the main two of the eliminations were for the CPE that goes to WildBlue?

So, for which period?

Well just -- I guess for the two weeks that you just had and general -- and how we should think about that relative to what you've been shipping in the past?

So, yes on a quarterly basis, we have historically anywhere between $10 million-ish a quarter to WildBlue in total.

And so of that, depending on how the mix goes between wholesale and (inaudible) --

-- wholesale and retail.

-- that could cut in half.

Yes, it's been running close to half recently.

Okay, and you mentioned another couple broadband Ka-band projects this year. Were you talking this year as in fiscal or calendar?

Calendar 2010.

Okay. And how much cash are you -- I mean how much interest are you capitalizing quarterly?

It's going to change as we -- as our -- the amount of the satellite that we're capitalizing and the payments. This past quarter, we were capitalizing about -- I think we said it was a little over $2 million. I think for Q4 we're expecting it to be about 3 point -- almost $4 million for Q4 and it'll go up a little bit each quarter after that as we capitalize more on the satellite.

So it kind of -- in that sense, from a cash flow standpoint it's kind of an offset with your cash tax rate.

Yes, so think about -- yes. That's fair. I mean total interest a little over $8 million and a little under 50% for capitalized. A little over 50% for expense right now and then that'll grow over time.

What do you think the churn is now and where do you think it's going to go?

Churn right now in a blended basis was about 2.1%.

That's monthly?

Monthly, yes. And we expect that we can get that down a little bit. That's what we'd like to do. Partly that comes from the wholesale -- if we have a higher wholesale mix, the wholesale subscribers tend to churn a little bit less generally because they're bundled with video. And then also if the things that we do to improve the service take hold, we think that'll improve the churn rate a little bit too. And it's never really been on a blended basis much above where it is now.

Okay, that's it for me. Thanks.

Okay, so I think that covers all of our questions. We really appreciate everybody's attention. We know there was a lot of material to cover. Should be -- hopefully we've paved the way for that and it'll be faster next quarter. But thanks a lot. Appreciate your attention and we'll talk again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great evening. Thank you.