Viasat Inc (VSAT) 2010 Q4 法說會逐字稿

Welcome to the ViaSat FY 2010 fourth quarter earnings conference call. As a reminder, today's call is being recorded. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thank you. Good morning everybody, and welcome to ViaSat's earnings conference call for our fourth quarter of fiscal year 2010. I am Mark Dankberg, Chairman and CEO. I have got with me Rick Baldridge, our President and Chief Operating Officer, Ron Wangerin, our Vice President and Chief Financial Officer, and Keven Lippert, our General Counsel. Before we start, Keven will provide our Safe Harbor disclosure.

Thanks, Mark. I'd like to remind you that the discussion today will contain forward-looking statements. We would like to caution you that actual results may differ materially from those projected in these statements. The 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 a lot, Keven. We will be referring to slides that are available over the web, and we will start with the top level financial summary for our fiscal 2010 Q4, and then for the year as a whole. And I will talk about the major highlights as well as an overview of our business segments. After that Ron will discuss the financial results in more detail, and then we will update our outlook for this fiscal year 2011, and summarize things, and then we'll take questions.

So starting with our fourth quarter financial summary, overall the quarter results were pretty consistent with our expectations. Revenues were $213 million, which is up significantly, primarily as a result of having WildBlue included for this entire quarter. We had a very strong quarter for new orders at about $263 million. New orders rebounded well from last quarter, and were consistent with the outlook that we discussed last call.

Our product margins for the quarter were strong again, and excluding the WildBlue-related transaction expenses of about $1.6 million in this quarter, and accounting for the tax effects and impacts, and a weighted average increase in share count, our non-GAAP diluted earnings per share came in at about $0.43 a share. GAAP diluted earnings per share was $0.27 a share. And then we will provide explicit bridge information between the GAAP and the non-GAAP results later in the call. Cash flow from operations for the quarter were excellent, and our adjusted EBITDA was very good at $48 million. Ron will provide more discussion on all of these points, and on factors such as the breakout of the transaction costs, the interest expenses, allocation between capitalized and expense interest, and other related WildBlue effects later on. For the year as a whole, revenues are up about 10%, which reflects a combination of factors. Since the change in administration we have seen something of a slow-down in timing of a number of programs and orders from the DoD.

And then we have also seen a year-over-year reduction in our consumer broadband equipment, due to two main effects. One is the limited availability of bandwidth in the best markets, and then our acquisition of WildBlue, which means we no longer recognize equipment revenue for new WildBlue retail subscribers. But we completed the WildBlue transaction earlier than planned, and that added significant revenue to the year, though non-GAAP diluted earnings per share is down about 2% for the year, which reflects these government revenue delays correlated to orders timing, as well as some factors related to the WildBlue transaction. Margins on a year-to-date basis have been good, and cash flows from operations has also been very good. The non-GAAP annual results exclude year-to-date WildBlue transaction expenses of about $11 million. We will provide explicit bridge information from GAAP to non-GAAP results later in the call. Year-over-year adjusted EBITDA growth of 38% is indicative of the substantial services component of our business now.

So here I will quickly hit some of the highlights for the fourth quarter. Orders this past quarter were very good as I mentioned, and reflected significant wins in important areas. I will give again, more color on these when we cover the highlights for each business segment. Cash flow for the quarter was very good, and positioned us very well for our fiscal year 2011, which should complete the bulk of all the capital investments associated with the ViaSat-1 project. This past quarter was the first full period where we included WildBlue. We believe the integration is going well, and consistent with our plans. I will give a little more color on that in the discussion on our services segment. Government mobile broadband, which addresses a very important need for intelligence, surveillance and reconnaissance capabilities in the Middle East region, continues to be one of the stronger growth opportunities for us.

Government sales rebounded relative to our third quarter, but we don't see a material change in the award timing on certain fees that have been a factor for us over the last year. We believe this affects a pretty broad cross-section of defense electronics companies, and is not really unique to us. Finally, we completed a significant equity offering in March. That offering included placing all of the shares that had been received by the WildBlue selling shareholders, including Liberty Media, and that also means that we will not create a Board seat for the WildBlue selling shareholders, as had been previously contemplated. We also placed about $100 million of primary ViaSat shares, which significantly strengthened our balance sheet, and allowed us to reduce the balance on our revolving credit line. Ron will describe the effects of this offering in his section too. But we believe that proceeds of the offering, coupled with our cash flow performance, creates increased flexibility for us to make prudent investments, while maintaining a quite conservative financial posture.

So with that as context, I will go into the highlights for each of our segments. We will start with our government systems segment. Overall we are still trying to better calibrate the pace of contract awards and order timing, but we still like our relative competitive positioning in our three main market areas. In government satellites, the strongest growth has been coming from applying our ArcLight airborne broadband system to the Defense Intel, Surveillance and Reconnaissance applications that I mentioned, or ISR. ISR has been a very important focus for the Defense Department in the Middle East region, and we have very good success there. Our success has made it more evident how applying advanced commercial satellite technology can really outperform existing government organic capabilities, and that is an important theme for us, especially as these new commercial Ka-band satellites are being launched over the next year or so in Europe, the US, and then the Middle East.

Our ground-based government broadband and narrow-band UHF satellite programs also continue to do well. The Blue Force Tracking 2 competition should be decided in about the next quarter or so. Our tactical data links business is continuing along the lines that we previously described. During the quarter we received add-ons to our MIDS Lot 11 award, and the initial low rate initial production award on the MIDS Joint Tactical Radio System program. This MIDS J award is significant, because it reflects that the Defense Acquisition Board has acknowledged the program's technical maturity, and also it received NSA certification, which is the first multi-channel Joint Tactical Radio System cryptographic certification, and it is a pretty significant milestone in and of itself.

This year we also have opportunities to add revenues in a couple of new areas -- or significant revenues in a couple of new areas in our tactical data links area, including using a small Link 16 Small Tactical Terminal that we have been investing in, and which is being tested by some government customers. This STT, or Small Tactical Terminal, is a candidate to be an interim replacement radio for a number of applications of the JTRS AMF small form factor radio, and that program, as everybody knows, has been experiencing delays. The government is starting to draw some analogies between this Small Tactical Terminal that we have been developing and testing, and the Harris Falcon radio, which they used as an interim for ground segment use, and if that continues that could turn out to be really good for us. Finally we anticipate that the government will down-select a winner on the Small Diameter Bomb program in the next quarter or so.

We have been working with Harris on the Weapons Data Link for that weapon on the Boeing team. We are also seeing other opportunities for Weapons Data Links that include Link 16 starting to emerge as well. Our Information Assurance business has seen a lower government procurement rate for Tactical MI network encryptor products like our KG-250 overall, but we believe that the share of the market that we are winning is as good or better than it has ever been, and that orders will eventually rebound, probably after the government completes some procurement organizational changes.

The government has reduced the number of competitors that they are funding in the High Assurance Internet Protocol Encryption standard market to just two of us. That was on this HAIPE V4 contract, and the two includes us, and that is down from three competitors previously. So long term that should be good for us. We will also be introducing some new variants of the KG-250 this summer, which also should be a positive. Finally we believe that this ever-increasing emphasis on cyber security in general is going to help to continue to drive growth in our emerging position in in-line media encryption. So our hard-drive encryption for secret or top-secret equipment.

Now I will switch to our Commercial Networks business, and that has been relatively steady revenue-wise, but it has been very strong over the year in terms of new orders. A good portion of those orders have been for Ka-band infrastructure, and the revenue for those orders is recognized over a period of a couple of years or more, as we build out gateways and infrastructure, and we wait for the corresponding satellites to be launched. The real benefit of all of this work will become more evident near the end of this fiscal year and next fiscal year, when the European, northern American and Middle Eastern Ka-band satellites that go with these systems are launched. We continue to see an exciting series of additional international Ka-band broadband opportunities, and that is good because we have competed very, very successfully so far in those opportunities.

The government has also released an RFP for the satellite component of the broadband Stimulus program, and they plan to make an award there by around the middle of this fiscal year. That has not really been factored into our plans yet, and it could be a positive for us. Our Antenna Systems business has been very good. They have got a substantial backlog of Ka-band gateway programs, as well as good success in other more standard RJ antennae, teleport and imagery ground segment equipment. We have also continued to add customers to our commercial global, mobile, ArcLight and broadband network. By numbers, they are mostly maritime units, working with KVH, our partner in that business, but we are starting to see some life in business jets again, which is good, because we have a lot more equipment content in aviation than in the maritime units. The AcceleNet wide area network acceleration business is still very small, but it is now pretty much at a breakeven pace. But we have made really good progress in applying this technology to our WildBlue consumer broadband service, and we will talk about that a little more in the next slide, but we believe that technology will have a very positive impact, when we integrate it into our next generation SurfBeam 2 network.

So now to Satellite Services, the rapid growth in the Satellite Services segment is primarily due to the acquisition of WildBlue, which we completed about a quarter earlier than we thought we would when we first announced it. The WildBlue business is performing consistently with our plans. As we have said before, our plan for this year is for relatively modest subscriber growth, as we work mostly on positioning the business for the introduction of ViaSat-1 about a year from now. We believe that the new satellite, coupled with this new technology that we will be introducing, will dramatically improve service quality and create the opportunity to grow that business significantly. But for now we are focusing on developing better metrics for delivering and monitoring service quality, including webpage loading speed, streaming and downloading speeds, and other interactive services. We feel like we are making good progress on that.

We are also working very closely with our major distributors to show them where we are headed, and to integrate our new service plans with their IT systems and with their own promotion and marketing plans. We are aiming to introduce some improved service plans in the more rural western states this fiscal year, where we have bandwidth available. Growth there would mostly offset reductions in subscriber counts in the eastern half of the US, as we aim to reduce network loading that we inherited from the prior management in those beams. The ViaSat-1 project is making good progress. We are pretty much done with construction on the satellite, and we are into the testing phase. We anticipate launching the satellite around the end of the first quarter in calendar year 2011, and to be in service in our second quarter. We are also working as I mentioned on a proposal to the rural utilities service for the national broadband Stimulus program, and that could have some beneficial effect for us later this fiscal year. That will cover the business overview. At this point I will turn it over to Ron who will talk about the financial highlights.

Thanks, Mark. We are going to change things up a little bit by beginning with segment discussion first, followed by further P&L discussions, our non-GAAP measures, the balance sheet, and then cash flows. The Government Systems revenues were down about 8% in the quarter -- in the fourth quarter year-over-year, and 1% for the fiscal year. The reductions are primarily related to lower Information assurance product sales, which have been impacted by delayed awards, due to the timing of government funding for a number of our customers. We continue to see good demand for Government Satcom systems, and the awards received for tactical data links in our fourth quarter for both MIDS JTRS and MIDS Lot 11 add to our confidence as we look ahead. Sequential and year-over-year government segment growth will be a function of the timing of expected product and development awards.

Operating earnings for the quarter were up about $1.2 million, or 7%, primarily due to lower R&D expenses year-over-year, and slightly better product margins. Our reported government segment operating earnings were lowered by approximately $3 million in the fourth quarter of fiscal year 2010, and $7 million for fiscal year 2010, due to losses recorded on a government satellite communications development program. Our Commercial Networks segment revenues were essentially flat when comparing quarters, and slightly down year-over-year. We experienced lower sales of consumer broadband product sales, which were the result of lower sales to WildBlue and its customers, due to capacity constraints on the network, and then the intercompany effects following the acquisition. And these were offset by higher enterprise VSAT networks and Antenna Systems product sales.

Our operating margins are improved primarily due to better product margins in Antenna Systems, Enterprise VSAT and reduced selling, general and administrative costs, which were the result of cost reduction activities that we took earlier in the year. Our backlog in Commercial Networks does contain several lower margin development programs from our SurfBeam 2 system. As we obtain follow-on programs, we expect our operating margins will improve further.

For Satellite Services, the revenue increased for the quarter and year were attributable to the addition of WildBlue beginning in late Q3 of our fiscal year 2010, and mobile broadband Satellite Services. Operating earning results are impacted by the acquisition-related charges or expenses for both the quarter and the year. The fiscal year 2010 fourth quarter expense of $1.6 million was related to an asset impairment charge we took to ViaSat assets as a result of acquiring WildBlue. This was consistent with the guidance that we provided last quarter, and we do not expect to incur material additional acquisition-related charges or expenses.

Excluding the acquisition-related expenses or charges, the operating earnings would have been substantially better when compared to last year for both the quarter and the year. This is due to the profitability from WildBlue, and reaching a scale in the mobile broadband business, where there are sufficient units on the network to generate earnings. We expect to add to earnings in both fixed and mobile satellite operating earnings this upcoming fiscal year.

As we turn to the full P&L, our revenue growth for the quarter is up primarily due to Satellite Services. Also the margins tend to be better in Satellite Services contributing to earnings. Selling, general and administrative expenses are up year-over-year due to the inclusion of WildBlue for a full quarter, and the inclusion of certain acquisition-related charges discussed previously. R&D expenses are lower, but we continue to invest in Information Assurance products, Small Tactical Terminals, and advanced antenna designs, which are all important to our future growth. Amortization of intangibles is higher due to the acquisition of WildBlue in our fiscal third quarter.

Income from operations includes non-cash compensation expenses of $3.8 million, which is $1.5 million higher than the same period last year. Other expenses is essentially net interest expense from our senior notes and line of credit that is not capitalizable. We expect the amount to be reduced sequentially each quarter, as the capital on our satellite increases and whether we pay down on our revolving debt. Our income tax provision for the fourth quarter reflects a quarterly rate of approximately 15%, and lower than previously expected, due to the benefit of about $550,000 related to the statute of limitations expiring on previously-filed tax returns. Our share count for the quarter was much higher year-over-year, due to the issuance of about 4 million shares from the WildBlue acquisition in our fiscal third quarter, stock option exercises, and the impact of our higher stock price on the Treasury stock method for diluted share calculations.

In looking at the results for the fiscal year, product revenue decreases were offset by higher service revenues, both related to the WildBlue acquisition and mobile Satellite Services. Our selling, general and administrative and operating earnings were substantially impacted by the $11.4 million of WildBlue acquisition-related charges and expenses. We have a higher level of customer-funded development, primarily in our Commercial Networks, which lowered our company-funded R&D content for the year. Amortization in the future will be substantially higher due to the approximately $82 million in intangibles related to our WildBlue acquisition in our fiscal third quarter. Other expense or income is primarily interest expense on our debt. In total we expect the amount to be higher next fiscal year, but depends on the timing of amounts capitalized on our ViaSat-1 satellite project, and the timing of those related payments.

Our income tax rate for fiscal year 2010 and 2009 was approximately 15%. Both years benefited from statute of limitation expirations on previously-filed tax returns, but fiscal year 2009 included five quarters of federal R&D tax benefit, while fiscal year 2010 included only three quarters. Currently the federal R&D tax credit benefit is not in effect. Any benefit for fiscal year 2011 arising from a reinstatement will depend on the timing of the law going into effect, whether it was retroactive to January 1, and what the final terms are. Excluding the effect of the federal R&D benefit, we expect our income tax rate to be approximately 35%. If the R&D tax credit is reinstated retroactive to January 1 with similar existing provisions, then we would expect our income tax rate to be approximately 25%.

Looking at our non-GAAP earnings per share, non-GAAP earnings excludes stock-based compensation expenses, acquisition-related expenses, and the amortization of acquisition-related intangibles, all of which are net of income tax effects. Our diluted share count increased substantially due to the 4 million shares issued in connection with the WildBlue acquisition, plus the impact of the higher stock price on the Treasury stock method. The 3.2 million shares issued near our fiscal year end did not impact our diluted share count significantly for the quarter or the year, but will beginning in the first quarter of fiscal year 2011. And we will discuss the effects further in our outlook.

For our non-GAAP financial measures, we have added adjusted EBITDA this quarter. We believe this is an important measure now that we are a public debt holder, and for industry comparison. Our adjusted EBITDA of $48 million was very good for the fourth quarter, and it was $113.8 million for the fiscal year. We expect adjusted EBITDA to grow to around $200 million next fiscal year. In looking at the balance sheet, we have a really strong liquidity, with approximately $90 million in cash, and over $200 million available under our line of credit. I was pleased with the progress we made on receivables over the back half of the fiscal year. This helped us generate over $40 million in cash from operations over that period in just receivables alone.

Our inventory is higher from the inventory acquired from the WildBlue acquisition, and higher government satcom inventory to support the higher sales of their products. The change in deferred taxes is primarily related to our tax accounting around the WildBlue acquisition, and the shift between current and long term deferred taxes. Prepaid expenses increased primarily from amounts due from Loral, related to their 15% portion of their launch and insurance, and due to income taxes receivable. For our fiscal year 2010, we were able to file for refunds for previously-paid taxes following the acquisition of WildBlue, whereby substantially reducing our cash taxes in fiscal year 2010. Most of the increase in goodwill, intangibles, and PP&E are due to the WildBlue acquisition. We continue to make good progress on the ViaSat-1 satellite from a construction standpoint as Mark indicated. The big increase in other assets is mostly due to licenses, patents and other capitalized costs related to our ViaSat-1 satellite and SurfBeam 2 system.

On the liability side we did use $80 million of the proceeds from our equity offering to pay down our resolving line of credit, to offset some of the dilutive effects of the additional shares issued. The big increase in stockholders' equity is related to about $132 million from the shares issued for the WildBlue acquisition, $100 million related to the equity offering in the fourth quarter, and about $30 million to other stock issuances, primarily related to employee compensation areas. And the remainder is for retained earnings.

In looking at cash flows, we had two really good quarters for cash flows from operations in both Q3 and Q4. If you recall, we had about $57 million that we generated in Q3, and we followed with that over $54 million in Q4. For both the quarter and the year, we saw good performance from operations through earnings and non-cash add-back and depreciation and amortization, but also nice progress in working capital. For cash used in investing activities, we continue to invest in our satellite and related ground infrastructure in preparation of the ViaSat-1 launch next year. This quarter we also broke out cash paid for customer premise equipment for WildBlue's retail leasing program.

For cash flows provided by financing activities, you can see the impact of the equity offering late in the quarter, plus the repayment of our line of credit. Also since our stock price has risen we have seen increased exercises of outstanding stock options, which is further adding to cash. Fiscal year 2011 is our peak year for ViaSat-1-related capital expenditures, including the satellite launch, insurance, and related ground infrastructure. We expect to spend approximately $160 million, which is somewhat back half loaded for the fiscal year, and will also depend on the ultimate timing of the satellite launch. As we continue to generate cash from operations, we will evaluate the usage of our revolver and any other additional debt pay-downs. Now I will turn it back over to Mark, who will talk about our outlook.

Okay. Thanks a lot, Ron. Now we will talk about our outlook for fiscal year 2011 and 2012. The outlook is still basically consistent with what we discussed in the last quarter. Starting with this year, we are aiming to be a little more consistent with other companies, and discuss business factors more, and move away from providing specific quantitative figures as we have previously periodically provided in the past. The key drivers for revenue in our fiscal year 2011 are the timing of orders within our government business that we discussed earlier, and the probability and timing of some of these large international satellite projects we are pursuing, and as well as our ability to add subscribers in the lower demand rural beams on WildBlue. Timing of awards is, as usual, a main factor.

Our fiscal year 2010 fourth quarter results should provide a pretty reasonable baseline from which to forecast our fiscal year 2011. As in previous years, we expect our first quarter to be down sequentially a little from our fourth quarter, with sequential growth beginning again in our second quarter. As I mentioned, there are a number of new programs that are to be decided during this fiscal year, and that is one of the areas where we talk about timing being an important factor. We had really strong EBITDA in our fourth quarter, and we expect fiscal year 2011 to be in line with previous discussions, with some growth during the year. Updates to our models projecting earnings per share should be sure to take into account the effects of the recent offering of 3.2 million shares, which yielded about $100 million in additional liquidity.

We are projecting to spend about $160 million in capital on the ViaSat-1 project this fiscal year, which includes remaining payments to Loral, the satellite manufacturer, our launch, insurance, and the deployment of the ground infrastructure. As a result, we expect to use somewhere in the range of about $20 million in net cash for the year. Our cash taxes for the year are expected to be very low, as a result of the net operating losses that we acquired in the WildBlue acquisition. We mentioned in our last call that there were a couple of key factors in our fiscal year 2012 outlook to take into consideration, including mainly the cessation of capitalizing interest as a result of launching the ViaSat-1 satellite, and then beginning to depreciate the satellite and ground infrastructure that goes with that when we initiate service.

The combined impact of those two items is projected to add in the range of about $65 million in expenses, which we anticipate would be offset to a large extent by subscriber growth, and synergies associated with the acquisition. Since a lot of those FY 2012 expenses are depreciation, amortization and interest expenses, we do see strong EBITDA growth in our fiscal year 2012 versus fiscal year 2011.

So in summary, that covers all of the main points for the quarter and for our year-end. Those being good, strong awards, the WildBlue integration is obviously a very, very important point for us, and we believe that is going pretty much according to plan. The government contracting environment is still slower than we have seen in the past, and we are trying to calibrate that, but we still feel that our competitive position has been good in each of our areas. The government mobile broadband area has been an exception to that slowness in the government contracting environment, and we think that is really attributed to the urgent need status associated with it in the Middle East region. Had very good cash flow. I think that is important. That combined with our equity offering we believe creates a very conservative financial posture for the Company going forward.

So that completes our prepared remarks. At this point we would be happy to take questions.

(Operator Instructions). Our first question is from Mike Crawford with B. Riley & Company.

Thank you. One program you have been working on is Blue Force Tracking 2, so is there any update on that, any probability you can give on that, even though it is probably more of a long shot?

Okay. We turned in the Blue Force Tracking proposal during the quarter, and it is in evaluation. What steps you go through, there are questions, the government asks you questions, we respond to the questions. That has just gone on now. And you would think that the program would be awarded probably not this quarter, but maybe next quarter, and it is hard to say. We think we have turned in a good proposal, but it will be a shootout. That is about all we can say.

Okay. Thank you. And then regarding future plans, so now that you have probably enough capital to go ahead and start a ViaSat-2, if you want to call it, satellite project, if so desired, have you indeed done so? If you did, is there any way you could put some timeline on when something like could potentially launch?

Okay, that is a good question. The timing of the follow-on satellite is really going to be driven by a couple of factors. One is we -- one of the big things we did with ViaSat-1, is we made a pretty dramatic improvement in the economic yield of the satellite. That is the capacity per unit capital dollar. And we would aim to improve that. That will be through a combination of technology, where we can get improvements in the satellite throughput, and then also we are looking at having partners on the satellite that would help us by consuming some of it, and improving the economic source as well. What we have said is, we think those factors, there is a pretty good chance that they could come together this calendar year. If they do, and that makes it a good investment to proceed more quickly with the second satellite, that is what we would do. But we will be pretty clear when that point occurs, and it hasn't quite yet.

So final question, Mark, just to pin you down a little bit, I mean let's just say, for example, if all of those factors came together in December of this year, and then you kind of were able to proceed full speed ahead, how long would it take? Because it is a long lead time to get something launched. I mean is that something that can be done in two years, 2.5 years, does it take three years from that point?

I think three years would be a good proxy. It is conceivable that we could go a little bit faster, but I am going to say three years. So that would mean if we were to get something started later this calendar year, that it would be up in calendar 2013. That would be a good target.

Thank you very much.

Thanks, Mike.

Our next question comes from Jim McIlree with Merriman.

Thank you. Good morning. Do you have a firm launch date yet for ViaSat-1?

We have a launch window. That is really the way you work it with the launchers. There are always some uncertainties. But we have a launch window. We have been aiming for kind of mid-February of 2011, that is based on the original satellite construction contract, and that window would go, kind of all -- it could be anywhere in the first quarter. I would say right now our outlook is late in the first quarter, is kind of what we expect, but we won't have a specific date until we are a lot closer to the launch.

Okay. And so that window is about the same now as it was three, four, five, six months ago? I mean, maybe a little bit to the right, but not appreciably different?

Yes, I would say not appreciably different. When we started, we had a contingency that was built in, so that sort of management reserve. We have been consuming that management reserve. Right now today we sort of still have some, but I would say at the rate things are going, it might move on the order of a few weeks. But we still think kind of in that first quarter window.

Okay, great. And did you release backlog by segment?

No. No, we didn't.

Are you going to? Can you do that now? Or is that in the K?

That will be in the K.

Okay. Well, just to preempt that a little bit, the commercial backlog has been increasing nicely over the past year or so. Can you give some indication over what time period you would expect that backlog to be delivered?

So I would say over the next 18 to 24 months, but if you look at -- so that is what is reported in backlog. We do have items that, like for instance, on the international Ka-band programs with Eutelsat or Yahsat, for example, what we have in backlog now is really just for the ground infrastructure for the gateways and hub infrastructure. It does not include any expected future awards for the customer premise equipment. We believe that in fiscal 2011 and 2012 those will be forthcoming, and continue to add to the backlog.

Right, okay. And on those programs, has there been any appreciable change in the timing of your deliveries of the ground equipment?

Relative to when we started the Eutelsat satellite slipped a few months, and the main issue they had was, remember, there was an earthquake in Italy. When was that? A little over a year ago. And since their satellite is being manufactured in Italy, in Europe, there were some components that came from that. So that has probably pushed their launch schedule off by around a quarter or so, and so that is the main effect so far.

Okay. Great. Thank you.

Thank you.

Our next question comes from Steve Ferranti from Stephens Inc.

Mark, you had mentioned in your prepared remarks what sounded like a number of different additional Ka-band satellite opportunities that were in planning stages internationally. Any additional color you could give us, in terms of some of those opportunities, a timeline when you might expect an award, or maybe relative order of magnitude, a size of these things as compared to, like a Eutelsat or a Yahsat?

The one that has gotten -- that has been sort of the most public and has gotten the most attention has been the Australian National Broadband network. That is one. That is a program the Australian government has to basically build out fiber to most of the country, but they expect to have a wireless and a satellite component, and that would consist of two satellites, two Ka-band broadband satellites and the infrastructure. And they have been pretty -- their plans are to try to award that program this year.

But besides that, what I would say is if you look around the world, almost every region, I would say pretty much every region of the world has expressed interest in coming up with Ka-band broadband in a way that is sort of consistent with what we have seen in the US, Canada, Europe, and the Middle East. So some of the remaining regions are Latin America, Africa, parts of Asia, Russia. Those are the areas. The programs in those areas are sort of different in each one. Some of them are private companies. Some of them are more government initiatives. And so I think really more for competition reasons it probably wouldn't be appropriate to go into too much more detail than that. But I would say that in almost every part of the world there is definitely interest in obtaining some capability, and that the size of the programs would range from, say bigger than Ka sat to Yahsat size.

Okay. That is helpful. And maybe you could just help crystallize for us, you are obviously involved in many of these discussions. Why is it a potential operator approaches you guys, what drives them to approach you guys, and want to work with you guys, in these Ka-band opportunities? What is it about your technology, or what you bring to the table, that gets you to -- gets you to these level of discussions?

Well, I would say there are a couple of things. One is I think that the scale that we are obtaining is pretty attractive to a lot of people. I mean, basically everybody is pretty concerned -- if you are going to be in the business of providing this, just like WildBlue was before, and Eutelsat and everybody else, everyone is going to look at sort of what kind of scale do you have, so that they can anticipate what the decline in customer premises equipment will be. Everybody's eyes I know is always very focused on that factor. So we have got really, really good scale. If you look at the total amount of bandwidth that we have captured in terms of infrastructure, it is hundreds of gigabits per second. I mean, that is a pretty amazing number compared to all the bandwidth that is available now. It is a lot more than sort of the next biggest competitor. So that is a big factor. I think the other one, is one of the things we have described is that the improvement in broadband capability is a process and not an event, that we made a big step with ViaSat-1, we don't think that is the last step. And I think that people seem to like our sense of sort of vision in technology leadership. I think that is what is drawing people to us. I think those are really good factors. I think they will endure for a while.

That makes sense and very helpful. Last one, just a clarification for me, you mentioned Blue Force Tracking 2 earlier, and I understand these things are difficult to put a probability on, but do you expect this to be a winner takes all, or a dual-sourced event when it happens?

What the government said is that they expect it to be a winner-take-all. We don't have a reason to believe it would be anything other than that.

Steve, this is Rick. What I have been telling people consistently, and what we have kind of tried to communicate, is that Blue Force Tracking is not in our outlook. And if we were placing a bet, you would generally place your bet on the incumbent at this point in time, but like Mark said, we think we turned in a good proposal, and are still in that process, but I think that is consistent with what we have communicated.

I understand. That is certainly consistent with our understanding as well. So thanks for the color.

Thanks, Steve.

We will now move on to Michael French with Morgan Joseph.

Good morning, gentlemen.

Good morning.

First question, on the book to bill in the Commercial Networks segment was obviously strong; it was almost 2. Were there items from last quarter that got shifted right, or maybe some decisions that were made earlier than otherwise should have been the case, or do you think this is kind of a sustainable performance in terms of new bookings?

No, I think what is going on is we have got big, lumpy awards, because of these Ka-band broadband systems. In the last quarter, there was O3b, it was a big award -- that was over $45 million. And then also there was a portion of the Canadian infrastructure for Ka-band. What we will see I think in this phase -- and when I say this phase, meaning as people to start to plan these new Ka-band projects, and they get decided, we will see these big lumps. I think once we get into the actual operation of the satellites, if things go like they have in the past, we will actually see higher awards, because it will be the recurring subscriber equipment, and it will be probably smoother than it will be. But that effect really won't happen for about a year, until the first of the satellites start launching. In the intervening year, we could have a few more lumps, big lumps, as well. That would be a positive thing. That would be for some of these other new international satellite projects.

It is going to be kind of hard to tell, every quarter, because of this lumpiness whether that is a trend or not. We will try and give you guys color on that, but I don't think a really high quarter is going to indicate the next quarter is going to be that way, or a low quarter. But overall we think we will have a positive book to bill this year again.

Very good. On the government stimulus plan for broadband, is the proposal from the satellite industry essentially still the same, that they are talking about subsidizing the customer premises equipment and --?

Yes. Basically the broad outlines of the program are the government has identified about $100 million of the broadband stimulus funds to be provided for satellites. That would be allocated to subsidizing equipment, so that subscribers would essentially get equipment at no inception charge, no initiation fee. And the government is also looking to get a reduction in the service -- monthly service charge relative to what they have been in the past. Those are the two main objectives of the program. They have divided the country up into several regions, and in the RFP, basically they said they could award one or two, or more, winners in each of these regions.

Okay. And on the Government Systems side, you mentioned that some areas were slow. Obviously not mobile broadband. Was there a common theme to what was going on? I mean, there has been some talk about congestion and the procurement offices. There have also been a lot of protests. Maybe it was a combination of factors, but is there anything you see driving that that might turn around pretty quickly?

There is some -- it is sort of unique in each area, but the theme of congestion, I could describe it, is sort of a dominant overall simplistic theme. But for instance, let's take one area, an area where we have seen slowness has been in our recurring crypto production orders, and like we say, what we think is that it doesn't reflect reduced market size for those products. One of the things that has been a consumer of those products has been the deployments in the Middle East. And one of the factors that is probably entering into what is going on now has been sort of a draw-down in Iraq, buildup in Afghanistan, people sorting out, well, how much equipment did they have for Iraq, how much do they need for Afghanistan. And then that has been coupled with some changes in the procurement organization for the largest consumer of these network devices. So that one -- you can't just say congestion. You could point to the specific things.

What we do think is that probably, I think, in the next quarter or two, the government said that that rework will be complete, and that will probably open up the purchasing channels in that particular case. But you can sort of contrast that with what we have seen in our mobile ISR, where there has really not been any capability there before. It is what you would call an urgent need. And so we are definitely seeing pretty expedited contracting in that area. The programs, things like the sort of more conventional, Link 11 programs, technical data links programs, JTRS programs in general, all of those I would say are very deliberate, as the kind of pace, is the way I would describe them. That kind of answers on a little bit on each of the areas, but it is a little different in each area.

Right, right, I understand. And then finally, last one for Ron, for D&A for the quarter, were any items accelerated or is this -- with WildBlue in there, is this what we should expect to see going forward on a quarterly basis?

I would say so we did have some transaction-related expenses, the $1.6 million that would not recur. Then a few other items in there that wouldn't recur, but kind of in this range, $40 million-ish I think is a reasonable range going forward.

There was about $3 million or $3.5 million worth of unique things in there, wasn't there, Ron?

Yes. About $3 million of unique things, so in the $40 million-ish range is fine.

Okay, great. Thank you. Good luck.

Thanks, Mike.

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

Thank you. Good morning. I was wondering when and if you plan to start doing test marketing for ViaSat-1, where you sort of offer plans that would give an equivalent sort of price performance makeup as ViaSat-1, by obviously offering more bandwidth for the same price with the WildBlue satellite, just to get a sense of what kind of take-up you might get when you actually launch ViaSat-1?

Okay. That is a good question. And I sort of alluded to this during the discussion. We think we are going to improve the services pretty dramatically, and it is through a combination of effects. Obviously with ViaSat-1, the main ingredient is a lot more bandwidth. And that is just hard to replicate without having that much bandwidth. So what we are going to focus on is trying, as you alluded to, in these sort of improved test cases, is providing more speed and better interactive services in these lower population, more rural states. But we want to do it in an enduring way because we won't have the high bandwidth capacity that ViaSat-1 does, until we have a ViaSat-2 satellite. As we mentioned, that could be kind of second half of 2013 or 2014. So we don't want to spend bandwidth in an unsustainable way in those areas. So the upshot of all that is we will probably provide new plans that are sort of in between where we are now and where we will be with ViaSat-1. But we think that those plans will perform pretty substantially better.

Right now what we have been doing is trying to coordinate that with our distribution partners, because we don't want to leave them behind. They can't just switch on a dime, in terms of offering these new services. So we have been showing them what it will be. I can tell you we have had really, really good feedback from our distributors about it. They would like to adopt these plans. One of the ingredients of it is this WAN acceleration capability, the AcceleNet product, and I think we will have that kind of in the end of our second quarter of this year, this calendar year. The September quarter we will be able to start rolling these out. That would be the timing. I think that will give us a sense of what is possible, but you have got to calibrate it by the amount of bandwidth, and the relative -- when I say amount of bandwidth, which is the total amount of bandwidth that is available to offer these plans, and that these speeds will be sort of in between where we are now and where we are going.

We do think as a result of that, Rich, we will get some really good feedback out of the market place, in terms of what things are important to those customers.

Yes, I think we will get some good feedback. If the main value proposition is bandwidth, it is hard to totally replicate it without having all of the bandwidth.

Sure.

That is what the big thing will be.

Sound like in the calendar third quarter maybe you will have some -- be getting some pretty good feedback on these enhanced services with the AcceleNet capabilities?

I think so. Yes.

That is great. Moving on to the military side, you made some intriguing comments about the potential for MIDS J to essentially supplant, or substitute for the AMF small form factor radio. Can you give us any sense of what kind of milestones or steps would have to happen for that to occur, or the timing of when that might occur?

Okay. Well, I will tell you the main ingredients. One is we have such a radio. We have had customers that have asked for and been given test units. So they are evaluating it. Then the other factor really has to do with the JTRS program office itself. And there is sort of a sequence of phases that you go through, and I think that the Falcon radio in the ground environment is sort of representative of that, where before things started going it was not so clear whether a Falcon radio was friend or foe, the problem or a benefit for the program office. But as things played out in the -- what used to be called Cluster 1, in the ground radio segment, having a sort of commercially-equivalent FDA-compliant JTRS radio turned out to be a big benefit, because customers could move forward, without having to wait for this Custer 1 radio. And I think that we are sort of getting some interest from the program office, and some of the users, that they could look at this type of a radio in that same light. And I would say that is a really good sign. And if that continues over I would say the next few quarters, that could be indicative of the thing that we have been aiming at, which is to be at least an interim product for the earlier deliveries for these small tactical airborne platforms. And that would be a really good opportunity. I think this year, this next fiscal year will be a good indicator of how that will play out. Does that help?

Yes, that is helpful. Thank you. And then just looking at the overall bookings picture, you had another solidly positive book to bill in fiscal 2010 with the 1.1. What do you think of the prospects of having another solidly positive book to bill in fiscal year 2011 are?

I think they are good. I think when you look at all of the opportunities that we have, and our position in them, we think they are good. I mean it is hard -- the main issue for us really hasn't been so much that we have been losing things or seeing markets go away; it has been more timing. When the things do happen, they tend to have happened in clusters. I would say this last fiscal year was more lumpy than others. But overall we are pretty happy with the awards win rate. I think this year will be pretty good, too.

Great. Just one final one for me. You made reference to a government program in the prepared remarks that you lost a significant amount of money on both last year I guess and last quarter. Can you give us any clarity on what that is?

It is one of the development projects we have, Rich. We haven't called those out in the past. We have a number of these. Once in a while we will overrun a perfect (inaudible) development program. In aggregate, we have been able to offset those things with better performance than we expected on other programs. But we wanted to make sure that you guys knew that we recorded a forward loss, which should cover what we think we will lose on that program in aggregate. So we haven't disclosed the details of those. One reason, I think it just feeds into our competitors' hands, is one of the reasons, but -- because there are guys in there certainly wanting to say negative things. Our program is in pretty good shape. We think we have righted the ship, and we think we have the remaining effort under hand.

Great. I am sorry, just one more. From a modeling perspective for a tax rate, it sounds like for the first quarter we should probably use a 35% tax rate, and then if you get the R&D tax credit reinstated that would have a catch-up effect?

I think that is pretty reasonable. I mean given the status of what is kind of in the queue within Congress and the Senate, that that is a reasonable assumption.

And we are pretty confident it will get approved. Really the issue is when. And where we are in the quarter, it is probably a good idea.

Okay. That is it for me. Thank you.

Okay. Thanks, Rich.

We will now move on to Chris Quilty with Raymond James.

A question for you, I wasn't quite sure of the language you were giving on guidance. Does this mean on a go forward basis you are going to give guidance in terms of EBITDA, EPS, both or neither?

We are trying to be more consistent with other companies. As opposed to saying here is a dollar range for earnings, or here is a dollar range for revenue, or here is a dollar range for EBITDA, what we would really do is provide the business factors, and work off what the current results are, which I think is more typical, and more representative of what companies do. That was the main difference. We will still provide as we are trying to do information --

Okay. No, that is good. And I am glad you guys are kind of moving toward an EBITDA model. On that point, I think you answered this question, but I will ask it again, Ron. Was the Q4 amortization, is that sort of a good run rate, or is it something more or less because of one-time items?

Good run rate.

Good run rate. And R&D was down pretty significantly. You said you had some customer-funded R&D. Should that move back up to more like the $7 million a quarter level?

I think that it really depends on our mix of business, and how we deploy our engineers. I think that is an area, where as we certain development ones we have redeployed engineers, and if not, then we are looking at the product mix, up, the overall operating objectives. So it is really hard to say that it is any number, or peg a number.

Okay.

But I think for modeling purposes, I think that what you mentioned is a reasonable range.

Okay. And are you capitalizing now the SurfBeam 2 R&D?

Some of it is. Some of it is against program, and some of it is against R&D, depending upon how we have evaluated the different networks.

Okay. And I think you may have answered this question, but the net adds on WildBlue 1 at about 1,000 subscribers were a lot less than you had been doing in the past. And it sound like that is due to, primarily your decision to elect some of the overfill people just churn off, and not aggressively add new people on?

Yes, I would say that is the dominant factor. The demand is still really high, but what we are trying to change the perception of satellite broadband. One of the factors of that is just the loading on the networks. And we have a different view of how that should be compared to how it was with WildBlue when we acquired it. So that is a factor. There are some technology things that we will be introducing that will help us sort of counter that over some period of time, but we haven't introduced those yet. So the main factor for us really, I would say is more strategic, which is prove the positioning of the product in anticipation of the new satellite, and the interim results over the course of the year is the way we have described it in the past. Those are sort of the two deciding factors for us.

I think I was bottling like 20,000 or 25,000 net adds this year, it may be safer to assume you are relatively flat, or maybe a little bit down prospectively from --?

Oh, no, I would say that for the year that is still in the range.

Okay. And you had mentioned in one of the earlier calls, that you thought you would get two OEM customer deals. Obviously you got the Yahsat deal. Is there one still hanging out there, or where you thinking of the Avanti deal, and that went to Hughes?

No. Okay. So basically with Eutelsat, we are pretty committed to Eutelsat. And just to put things in perspective, just to give you the way that we look at things, the Eutelsat satellite is 70 gigabit capacity. I think the two Avanti satellites combined is like 9 or 10, but they are describing maybe a million-ish customers, and Eutelsat is describing about a million-ish customers 70 gigabits. That is more the type of service that we are aiming at. We didn't even really bid Avanti. It is not consistent with what we are aiming for.

What is the Ka-band capacity of the two combined satellites for Yahsat?

Yahsat is in the 15 gigabit to 20 gigabit range ballpark. It depends on a number of factors, but it is more in that range. Yahsat itself would be on the order of the Avanti 2 satellites. Probably much more modest subscribers.

Okay. So there is probably one other announcement that is still pending?

I would say there are others that are in the works, and they are not as, I mean the ones we are aware of aren't quite as mature yet, but I would say over the course of this year you could see one or two more.

Okay. It was this week or last week, Eutelsat announced a deal with Qatar, the country of Qatar, and the name of the company was unpronounceable, but it didn't give a lot of specifics, and the satellite contract hasn't been awarded, something like that, where it is clear Eutelsat was probably a good guess for something?

I think what you will see just going forward is probably distribution agreements. Remember, Eutelsat and Yahsat as well are wholesalers, so they want to provide wholesale capabilities, sort of like WildBlue does in the US, but they will be signing up distributors in each of the areas that they cover. There are, in the Yahsat territories, there are some areas that Yahsat covers, that US companies can't serve. So you might see a small deal in one of those areas that we would participate in.

Okay.

But I think the main thing, and the existing thing, will be retail distribution deals.

Okay. And a quick reminder, SBD2, is it the Lockheed Boeing team or the Raytheon?

Small diameter bombs, is that what you are talking about?

Yes.

Yes, we are on the Boeing team.

Final question, the MIDS J AMF opportunity, the MIDS J, or let me say, the AMF program they were talking hundreds of units, and these things cost, in excess of six figures for the box itself. Sounds like you are talking about for a tactical, a much smaller box that is using the JTRS wave form, and used for UAV data link between platforms. Is that to understand it correct?

So the AMF program is a maritime and airborne form factor program. There is a pretty broad range of platforms that are covered. Some of those things are like command and control platforms for ships, and obviously those ones are in the smaller quantities, probably the most expensive radios are just form factor. But it also includes platforms like helicopters, as an example, or other small aviation platforms, where you would see things more in the thousand range. Radios are still budgeted to be pretty expensive, but less, but if we were to provide a small form factor version, those radios would have a selling price of probably less than a MIDS unit.

Okay.

But the main advantage would be to get something into service more quickly than the AMF program might with its [objective] radios.

All right. That is not a hard standard to meet.

Okay.

All right. Thanks, guys.

Thanks, Chris. We will just take one more question.

We have a follow-up question from Jim McIlree with Merriman.

Go ahead, Jim.

Yes. I am sorry. Thanks again. When do you expect the SurfBeam 2 modem to be available?

We are finishing up SurfBeam 2 in anticipation of the launch of the Eutelsat satellite at the end of this year. So we expect to be shipping stuff by the time, yes, end of this summer, kind of the end of our September quarter. We should be shipping stuff for that.

Okay. Great. And lastly, do you have any brief comments on the FCC plans for the regulation, or classification of broadband services as a telecom service, instead of an information service?

So I would say in general regulating with a lighter touch would be better. I think that is an example of a level of innovation in providing service to the market that normally wouldn't be anticipated otherwise. We feel like the FCC has been pretty receptive to the performance improvements that we are providing. I think we talked a little bit about this in the past, but I think the national broadband plan itself, actually defines a pretty good opportunity for us, where the government specifically called out satellite, and our satellite as bringing pretty dramatic improvements. I think all of that is good. I think that the things that they are talking about and regulating, would be much bigger factors for the telco and cable industry than they would for us. The things that they are talking about are essentially network neutrality, those are things we can work with as well as any other broadband service provider. I don't think that we are going to lead the battle in that. I think we will be a follower there, but I think we can live with that. We hope they use a lighter touch more than a hard touch, and that is what they have said.

Okay. Great. Thank you.

Thanks, Jim. Okay. I think that covers all of the Q&A. We really appreciate everybody's interest, and look forward to our next call next quarter. Thanks a lot again.

And we would like to thank everyone for their participation. That does conclude today's conference.