Viasat Inc (VSAT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to ViaSat's Fiscal Year 2011 Second Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thank you. Good afternoon, everybody, and welcome to ViaSat's earnings conference call for our second quarter of our fiscal year 2011. I'm Mark Dankberg, 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, Vice President and General Counsel.

And before we start, Keven will provide a 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 the 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.

Let me turn it back over to Mark.

Okay, thanks, Keven. So, again, we'll be referring to slides that are available over the web. And we'll start with a top level financial summary for our second quarter of fiscal '11 and the year as a whole, and then I'll discuss the major highlights and an overview of our business segments. And then after that, Ron will go into the financial results in more depth. And then finally I'll summarize things and we'll take questions.

So, starting with the financial summary, the second quarter results are in this chart. We have good year-over-year growth in revenues, orders and income from operations, including the benefits of the WildBlue acquisition. Earnings per share are down on a year-over-year basis due to a significantly higher tax rate due to timing of the federal R&D tax credit extension, as well as increased share count. Revenue and earnings are still not quite up to our plans for this quarter because new orders have been pretty lumpy and they were lower than planned in the first quarter.

Last quarter we were cautiously optimistic that new contract awards would be stronger in the second quarter, and that did turn out to be the case, especially for a number of government programs. Our book-to-bill ratio was about 1.25 to 1, while revenue this quarter is up about $37 million on a year-over-year basis. Ron will discuss the current quarter in more detail on the financial portion of the call, but we also had very good cash flow from operations and EBITDA.

We feel we've done well at managing our costs given the uncertainty in award timing for government orders, while still preserving our ability to resume growing the development and products businesses as the orders materialize. We're still cautiously optimistic that second half orders in aggregate can be meaningfully stronger than the first half, and that could allow us to achieve our plan for the year as a whole.

So this next chart shows the year-to-date results and it reflects pretty much the same themes as in the previous chart. Stronger second quarter orders pushed book-to-bill for the year up over 1. On revenue that's a little lower than we were aiming for. Earnings year-to-date also reflect the Florida loss on a government program that we recognized back in the first quarter.

And the tax rate year-to-date is also significantly higher than planned due to the R&D tax credit timing. Otherwise we feel that by careful cost control, income is pretty close to planned, despite the lighter revenues year-to-date. Earnings per share year-to-date reflects the Florida loss and the tax rate, as well as higher interest expenses and share count associated with financing the ViaSat-1 satellite and the WildBlue acquisition. Of course, most of the benefits of these capital structure changes are tied to the launch of ViaSat-1, which is still planned for the spring of next year.

So at this point we'll go into our highlights for the second quarter. And overall strong contract awards was really the key point for the second quarter. Orders were very good in our defense satellite and information assurance businesses. Government satellite orders were exceptionally strong, including the Blue Force Tracking 2 contract and mobile satellite broadband for airborne intelligence surveillance and reconnaissance.

We discussed the BFT-2 Blue Force Tracking 2 order somewhat on the last conference call, and I'll go over that in a little more depth when we get to the government segments highlight. But from a growth perspective, it's pretty key to note that we received a $477 million delivery order contract, Blue Force Tracking, and the initial order that we received in the second quarter was less than 10% of that value.

There's still a number of additional government and commercial programs with pending follow-ons or new order decisions that make us cautiously optimistic about the prospects for meaningfully stronger second half quarters in aggregate. Of course, one very key opportunity there would be a definitive contract with Jet Blue for Ka-band aviation broadband following the memorandum of understanding we jointly announced in September. And we'll talk more about that in the business area highlights.

Finally, we also believe that we made significant progress on key programs last quarter that will begin to pay off in the next few quarters. That includes continued progress on the construction of ViaSat-1, the Surfbeam 2 ground segment that we're going to use on ViaSat-1 by WildBlue and also Barrett Xplornet in Canada and it'll also be used on Eutelsat's KA-SAT and the YahSat 1B satellites.

We've made good progress executing on the BFT-2 contract, a new information assurance products that are scheduled to go into production in our fourth quarter, and also on initial production orders for new tactical data link products. And more recently there's been advances in our airborne ISR capabilities that should stimulate further growth there as well.

So at this point, given that context, I'll discuss some of the highlights for each of our segments in more detail. And we'll start with government systems. Government revenues and earnings in the second quarter reflect the lumpy orders that we've seen in the last few quarters, and especially the effects of the lower orders that we had in the first quarter of this fiscal year.

The single biggest factor in the defense industry right now has to be the intense budget pressure that the department's facing, as well as the delay that pressure is causing. Defense appropriations are still under continuing resolution. New priorities are still being debated and established. And obviously there are big changes in Congress now that are going to ripple through all that also.

But, as we've already noted, orders in our second quarter rebounded pretty well. We still believe that our defense business areas represent good growth prospects and the recent orders helped build confidence in that. Our top level perception is that we're still winning our share of proposals. We do see cost pressures. We see some cancellations and we see lots of delays.

But in general, most of the opportunities that we have built around mostly bite-sized ways to improve capabilities for existing defense platforms and resources had substantially lower costs than are currently being incurred or budgeted.

Satellite networking business has shown quite steady growth despite this environment. This is being driven by airborne intelligence surveillance and reconnaissance missions, our ongoing businesses in mobile UHF satellite networks, and broadband modems. Plus, of course, the recent award of the Blue Force Tracking 2 contract.

The BFT-2 program is pretty fast paced and we believe we're off to a good start. Production program builds on the low rate initial production contract we had previously performed on, so we've got a good baseline to build upon. As I mentioned before, the initial order represents less than 10% of the $477 million delivery order contract value, so there's good opportunity for significant growth in the future. We have already begun to receive additional delivery orders for more product units.

There are a number of opportunities that we're seeing for related businesses as a result of the Blue Force Tracking program. And one of the larger opportunities that should be determined over the next year or so is the MTS, or the movement tracking system.

The airborne ISR business continues to perform exceptionally well. Our head start in commercial aviation created a good lead in these defense applications. We're already on well over 100 aircraft and believe that momentum is continuing to build. There's very high demand for long range, high resolution video transmission in both manned and unmanned aircraft.

Our first customers were special forces units with urgent needs. But many other organization with similar missions have been impressed with the capabilities of the networks, and that's leading to growing economies of scale for a broader range of users in that community.

We recently demonstrated a new version of the system that boosts the peak transmit speeds from an aircraft up to around 4 megabits a second through an 11.5 inch antenna. The system's capable of even higher speeds if you use Ka manned satellites, including the government's own WGS, or wideband global satellites. And we've also demonstrated a Ka band version of our small airborne antenna to show that that's possible.

Finally, we mentioned a couple of quarters ago that we'd gotten a contract to apply this airborne system for long range command and control applications that go beyond just the airborne intel surveillance and reconnaissance mission, and that's progressing, too. So, if things go well, we could see some of the same effects in the command and control area that we did in the ISR, with other organizations jumping on the same capability that the special forces early adopters with urgent needs pioneered.

We also had a good quarter for orders in our information assurance products, which reflect some seasonality based on annual orders from our user organizations. We still anticipate good demand for our new information assurance products, which include a next generation of the KG-250, a variant of the KG-250 that can be shared, or what's called left behind, with either coalition partners or Homeland Security forces, as well as new media encryption products based on our Stonewood acquisition.

Tactical data links business has had the greatest impact from program delays. We're still making progress and we continue to see growing interest in expanded roles for the joint tactical radio system version of our MIDS product, but things are happening slowly. We still anticipate funding for new waveforms and applications.

We also received initial production orders for our lower cost [small tactical terminal rest ET], which we believe will expand the market for Link 16 networks as a whole. We don't really see these things accelerating very much in the short term, but aim for significant growth in the mid to longer term.

Our commercial networks business is operating at a loss right now, really pending the start of services on the new generation of Ka-band satellites. The first of that new generation of satellites is currently planning to launch in this current quarter, and that's Eutelsat's KA-SAT. And that would be followed by ViaSat-1 in the spring, and then YahSat 1B currently planned for the fall of next year.

Ku-band VSAT business in general doesn't seem to be growing sector-wide, other than the mobile broadband segment, where we believe we have a leading position. The business jet market may begin to pick up, and that was certainly depressed over the last year. The maritime market, though, has been growing steadily and nearing 1,000 ships using our [ArcLight] network. Our maritime partner, KVH, recently won a large delivery order contract with the US Coast Guard there.

We also have a few special projects at Ku-band, such as with RASCOM, and those still have growth opportunities. But overall we believe the VSAT data business is evolving towards Ka-band, which is clearly a strong suit for us. We're still performing on the early stages of the infrastructure projects for those satellites, but user terminal shipments are tied to the satellite launches themselves.

Our antenna systems business, which is more tied to infrastructure, has been growing well and remains steadily profitable with good margins. The antenna business is also seeing steady business with airborne broadband antennas and is benefiting from the growth there, too. The potential to evolve customers to Ka-band for airborne mobile is another good growth opportunity for antennas. And we continue to do well in satellite imagery ground stations and see some growth opportunities there.

We recently completed a major project with Boeing for the ground based beam forming system for their SkyTerra MSS mobile satellites. And that project was very successful, and there are opportunities for other satellite projects coming up that are planned to be decided in the next couple of quarters or so, where we believe we'll be a leading competitor or part of a competitive team.

As we mentioned before, we see growing momentum for Ka-band satellite systems in various parts of the world. In general, we think that a market -- that's a market where we should be able to compete well. Finally, as we'll discuss in the next slide, the mobile Ka-band market is becoming more evident. And that also represents a good growth opportunity for us, especially given our partnerships with the first movers of the Ka-band satellites.

From the satellite services segment, that was nicely profitable again this quarter, as the WildBlue business is performing according to plan or better. Subscriber counts are steady to slightly up. ARPU and churn are pretty steady. Cash flow is very good. We were awarded $19.5 million of the American Reinvestment Recovery Act broadband stimulus funds by the Rural Utilities Service for the Western US, and Dish Network, who is our distribution partner, was awarded $14 million for the Eastern US

We're still working with Rural Utilities Service on the details of deploying that, including their rules for determining subscriber eligibility. We anticipate we'll begin new service plans for subscribers that are eligible under that program early next calendar year. We're also working with our distribution partners on the new service plans for the ViaSat-1 satellite.

Satellite construction is proceeding towards launch in the spring. At this point, the satellite construction activities are all integration and environmental testing. Functional and performance testing has been consistent with our design and the estimated throughput capacity. We're also beginning to ramp up our own ground infrastructure deployments in anticipation of the launch schedule.

We're also well into WildBlue's back office infrastructure upgrades that'll support greater numbers of subscribers, higher installation rates, much higher service feeds and greater volumes of traffic and a broader range of more flexible service plans.

The ground networking equipment for ViaSat-1 will be the second generation of our Surfbeam Ka-band network. And I'm happy to say we're already reporting -- or operating Surfbeam 2 over the air on existing satellites. And production is on schedule to support Eutelsat's KA-SAT launch, which is several months ahead of ViaSat-1.

In aggregate, we believe the pieces are coming together to allow us to enter service on ViaSat-1 next summer, as we've been planning. Meanwhile, services on the ArcLight mobile broadband business continue to grow. We've got, as I mentioned, close to around 1,000 planes and ships on the public and some private networks, and we're seeing steady progress. We've always felt that the next generation of Ka-band satellites would offer compelling advantages for mobile broadband, and we're seeing progress on that front, too.

In September we jointly announced our memorandum of understanding with Jet Blue to put high speed Ka-band broadband WiFi on their fleet. We think Jet Blue is an excellent partner for us for a couple of reasons. One is that they really emphasize and enjoyable passenger experience in their go-to-market approach, and their live TV service with DIRECTV is a very important component of that.

Their passengers are very interested in in-flight broadband, but Jet Blue wanted confidence that they could provide an experience that fit their expectations. And they came to the conclusion that the broadband bandwidth economics of these next generation Ka-band satellites was really the only way to achieve that. We think their approach will lead to the highest levels of user penetration and engagement that's yet been seen for in-flight broadband. And that's a key part of increasing the demand in the aviation market.

Also, their in-house live TV unit is the market leader in installing satellite terminals on commercial airlines. And we'll be working with them to market broadband across the industry in places with high capacity Ka-band coverage, which initially means aircraft that mostly operate in the US, in Europe and in the Middle East.

Jet Blue and live TV have existing relationships with a number of airlines, including United Continental, Lufthansa, Frontier and others. We think broadband mobility is an exciting market and that this helps build confidence in our vision for that.

Finally, as we've mentioned in the past, we're making plans for the next satellite, which would be our ViaSat-2. Our objectives remain the same as we've described in the past, to continue to improve bandwidth economics, to add capacity to areas not covered by ViaSat-1, to reinforce those areas with the highest demand, and to explore some new geographic areas. We'll provide further updates as they're warranted, including, of course, anything regarding financial or contractual commitments.

That gives you an update on the business as a whole, and now Ron will go into more detail on the financial data.

Thanks, Mark. We'll begin with the segment discussion followed by further P&L discussions, our non-GAAP measures, the balance sheet, and then cash flows. As Mark mentioned earlier, our total revenues for the quarter were almost $198 million, a 23% increase over last year. And they were almost $390 million year-to-date, which was a 22% increase over the same period last year.

This growth has been mostly fueled by the acquisition of WildBlue, but we've also seen nice year-over-year gains in our government SATCOM systems products, antenna systems and Surfbeam 2 development sales. These gains, however, were not able to offset declines in tactical data link, unmanned aerial vehicle and encryption product sales, which have been impacted by delayed or reduced awards due to the timing of government funding for a number of our customers, as well as declines in our Surfbeam 1 and mobile broadband product sales.

For the second quarter, overall operating earnings, excluding acquisition related intangibles, in the aggregate are up about $4.8 million, or 35%. The increases in the satellite services segment with the operating results from WildBlue and expanding mobile broadband subscribers exceeds the decline in government systems and commercial networks. The government segment operating profit percentage is consistent with last year, but the operating profit dollars are down on lower sales and higher new business investments.

The declines in operating profits in the commercial network segment are due to lower sales and increased R&D investments, mostly for our Surfbeam 2 system and advanced antenna technologies. Year-to-date, overall operating earnings, excluding acquisition related intangibles, in the aggregate are up about $4 million, or 15%.

These gains occurred despite an $8.5 million charge we recorded in the first quarter of fiscal year 2011 related to a government SATCOM program. The overall gain reflects a significant year-over-year improvement in satellite services from the WildBlue acquisition.

Including the program charge in our first quarter, the government systems segment also saw operating profit declines due to higher R&D investments of next generation data link products and higher new business investments. The reduction in commercial networks operating profits were mainly due to lower sales and increased R&D investment, mostly for our Surfbeam 2 system and advanced antenna technologies.

As we look at the rest of the P&L, for the second quarter, amortization of intangibles is higher due to the acquisition of WildBlue in our fiscal third quarter last year and the Stonewood Group early in our fiscal second quarter this year. Income from operations also includes non-cash stock-based compensation expenses of $4.3 million for the second quarter of fiscal year 2011, which is a $1.8 million increase over the same period of last fiscal year.

Other expenses for this fiscal year is essentially the net interest expense from our senior notes and line of credit that was not capitalized. We expect the amount to be reduced sequentially each quarter until service launch, as the capital on our satellite and other long term assets under construction increases. But it will also depend on our total debt outstanding.

Our income tax provision for the second quarter reflects an annual tax rate of approximately 36%, which is significantly higher than the 24% tax rate in the second quarter of last fiscal year. The higher tax rate reflects the December 31, 2009 expiration of the federal research and development tax credit. The estimated effective tax rate is different from the expected statutory rate due primarily to state research and development tax credits.

For our year-to-date results, amortization of intangibles is higher due to the WildBlue acquisition in our third quarter last fiscal year and the Stonewood Group early in our fiscal quarter of -- second quarter of this year. Income from operations also includes non-cash stock-based compensation expenses of $8.3 million, which is $3.3 million higher than the same period last year.

Other expenses for this fiscal year is essentially the net interest expense from our senior notes and line of credit that was not capitalized and our income tax provision year-to-date reflects an annual tax rate of approximately 36%, which is significantly higher than the 25% tax rate for the same period last year, again due to the expiration of the federal R&D credit in December of last year.

Looking at non-GAAP metrics, non-GAAP reconciliations includes both earnings per share and adjusted EBITDA. Non-GAAP earnings per share excludes stock-based compensation expenses, acquisition related operations also includes non-cash stock-based compensation expenses of $8.3 million, which is $3.3 million higher than the same period last year.

Other expenses for this fiscal year is essentially the net interest expense from our senior notes and line of credit that was not capitalized. And our income tax provision year-to-date reflects an annual tax rate of approximately 36%, which is significantly higher than the 25% tax rate for the same period last year, again due to the expiration of the federal R&D credit in December of last year.

Looking at non-GAAP metrics, non-GAAP reconciliations includes both earnings per share and adjusted EBITDA. Non-GAAP earnings per share excludes stock-based compensation expenses, acquisition related expenses, and the amortization of acquisition related intangibles, all net of income tax effects.

Our diluted share count increased substantially for the second quarter and year-to-date year-over-year principally due to the 4.3 million shares issued in connection with the WildBlue acquisition in December last year, the 3.2 million shares we issued in an equity offering in March of this year, about 1.7 million shares from the exercise of stock operations, investing of restricted stock units over the past 12 months, and about 800,000 shares from the effect of the treasury stock method due to our higher stock price.

Adjusted EBITDA of $43.1 million for the second quarter brings our year-to-date adjusted EBITDA to about $81 million. The year-to-date amount was also reduced by the $8.5 million program charge we took in the first quarter. For the quarter and year-to-date, the over 80% growth in adjusted EBITDA is largely due to our acquisition of WildBlue and our other expanding service businesses.

In looking at the balance sheet, our balance sheet metrics continue to improve overall with our operating growth. Working capital management and operating cash flow continues to provide a stable source of funding for our ViaSat-1 satellite and related infrastructure and other capital outlays.

Beginning this quarter we broke out the ViaSat-1 related gateway and network infrastructure that's under construction. Year-to-date we've increased our progress for the satellite and gateways by over $60 million, and our total capital outlays through the ViaSat-1 in service date are consistent with our previous forecasts.

This quarter also reflects the change in goodwill and intangibles related to the Stonewood acquisition, which was completed early in our fiscal second quarter. And the only significant change in liabilities was the reduction in our line of credit, and we currently have over $216 million in availability under our line of credit.

Turning to cash flows, we had another good quarter for cash flows, generating over $57 million from operations, and this brings us to $96 million year-to-date. We used the cash to fund capital expenditures primarily for the ViaSat-1 satellite and related ground and network infrastructure equipment, our acquisition of the Stonewood Group, and for other expansion to support the back office systems at WildBlue in advance of the ViaSat-1 launch.

While we borrowed $15 million in our fiscal second quarter, we're still net lower for the year on our line of credit by about $15 million. We also have seen a benefit from stock option exercises, mostly due to our higher g=stock price and because a significant number of options that were issued 10 years ago were expiring. This has contributed nicely to our cash balance.

Our previous forecasts for total ViaSat-1 capital expenditures and cash flow generation from operations remain intact.

I'll turn it back over to Mark and he'll provide us some summary comments.

Okay, thanks, Ron. So, in summary, the last couple of quarters have been pretty challenging, driven by lumpy orders from a budget stressed and balky defense procurement environment, coupled with a trough in the satellite networking equipment for commercial markets due to the transition to the Ka-band satellites and the timing of the satellite launches.

The defense issues are sector-wide, but they're a little bit tricky for us because while we want to control costs in line with orders and revenue, we still think we've got good growth opportunities, even given the macroenvironment. And we want to remain positioned to capitalize on that.

The near term growth opportunities for us are in defense satellite, especially the airborne ISR and Blue Force Tracking businesses, and in information assurance and cyber security. Mid to longer term, we see those continuing to grow and we're still optimistic about the MIDS joint tactical radio system and its variants. But delays will probably slow the tactical data links business in the near term.

Meanwhile, we're getting closer to the major milestones we've been waiting for in our commercial networks business. The first of the next generation Ka-band broadband satellites, Eutelsat's KA-SAT, is planned to be launched this quarter and to go into service late spring. Then launches of ViaSat-1 and YahSat 1B are scheduled for the spring and fall of 2011 respectively.

That'll drive completion of the infrastructure programs and pave the way for growth in user terminal orders and sales. We're also seeing increasing momentum for Ka-band broadband in general, which creates a favorable competitive environment for us. And that's extending to broadband mobility as well and the intersection of Ka-band and mobility is another market that should be good for us.

We're also continuing to make progress towards the launch of the new WildBlue services. That should begin early next year with the broadband stimulus funding driving attractive new plans on the existing satellites. And then in the summer, with the main event on the ViaSat-1 satellite.

We do feel we've controlled costs to sustain earnings in the face of the order delays and that the strong orders in our second quarter should help build confidence in our second half. Book-to-bill in the second quarter was a little over 1.5 to 1, and that creates some positive momentum. We're cautiously optimistic that second half orders can be meaningfully stronger than the first half. And we should have an opportunity to grow revenues and earnings accordingly, while maintaining a positive book-to-bill for the year.

The impact from the changes we made in our capital structure last year, which are the bond and the additional equity offering, the delay in extending the R&D tax credit, need to be factored into models for our earnings per share. There's some impetus towards making the R&D tax credit permanent, which would certainly help in forecasting our tax rate and earnings per share. Cash flow and EBITDA have been good and also appear consistent with our plans for the second half.

That pretty much concludes the prepared remarks that we have. And at this point we'd be happy to take questions.

(Operator Instructions). Our first question comes from Jim McIlree from Merriman. And your line is open.

Great. Thank you. Ron, you talked about R&D in the services business increasing. And were you talking about an increase year-over-year or quarter-over-quarter?

So in commercial networks, R&D increased both for year-over-year and quarter-over-quarter.

Okay, so I misheard. It was in commercial networks. Great. Thank you. And then with Eutelsat launching this quarter, when would be a reasonable time to think about an inventory fill of modems for them? Would that be concurrent with the launch or in front of it?

It'll probably be after the launch. This is really their first Ka-band broadband satellite, and so I think they're going to go through a little more [inaudible] test program post launch than we'll need to because we're more in the business. So I think you'll see more of an inventory ramp-up probably near the end of the first quarter of next calendar year, at the end of our fourth quarter. That's where it would start.

Great. And the -- can you talk a little bit about --

Jim, that's a little later than we -- first of all, they're launching a couple of months later than -- when we started this -- when we looked at this a year ago, and then kind of to our expectations they'll start, like Mark said, a little while after launch. So that does push out our ramp-up and deliveries for them.

Yes. Right, okay. And then on the stimulus side, how does that money get spent? Does that come directly to your or does it go to wholesalers or can you talk about the chain of how the stimulus dollars get allocated?

It depends on who does the selling. And what I would say is it's a little bit premature for us to talk about it because we're trying to finalize all that with our US right now. And they feel that all this stuff will be gated by their, what they call an eligibility tool, which they'll have that will confirm the eligibility of the individual recipients. And that won't really be available till next year.

So, for right now, I'd say it's more of a next calendar year thing. And by then I think we'll be able to do a better job of answering your question more clearly.

Okay. So can you even talk about whether or not it would be -- the money would go towards equipment or of subsidies for service or both or you --

Oh, that part I --

-- even say that?

-- yes. So, there are two different plans. One is the one that we have. That's the -- we mentioned $19.5 million for the Western US. That one basically there are subsidies that are due upon subscriber acquisition. When a subscriber signs up, there's a cash amount that goes with that.

There's a separate plan that Dish created for their part for the Eastern US. And from our perspective, we won't really see that. That will just go towards probably driving higher subscription addition rates, from our perspective. Those subscribers will go on our networks.

On the -- for the Western US, the subsidies would come to us as the retailer, if we're the retailer, or they would -- what we're working towards with our US is that they would be able to be passed on to the retailer if that's one of our distribution partners. That's the basic -- that's the general thing. And it's essentially an upfront.

Okay, great. I will yield the floor and queue back up. Thank you.

Thanks.

Thank you. Our next question comes from Rich Valera from Needham & Co. Your line is open.

Thank you. I was wondering if you could give us some color back half expectations. I think previously we'd been expecting a pretty solid ramp in the second half. You did mention one factor that might mitigate that somewhat, the delays of perhaps some CPE shipments maybe into next year. But is it still safe to assume that we're expecting a pretty solid ramp in both revenue and EBITDA in the second half?

Yes, I think -- what I'd say is that our second half is still fairly consistent with what we thought it would be at the beginning of the year. So without giving specific guidance from where we are, as you know we moved away from that, I'd say it really hasn't changed since we started the year, significantly, other than this Eutelsat issue.

And we have some offsets to that. And of the -- for instance, Blue Force Tracking wasn't firm when we started the year, so there's always ups and downs. And so I'd say it's pretty consistent with what we thought at the beginning.

Great. And I know you can't predict necessarily what's going to happen with the R&D tax credit, but if you were modeling your tax rate for the back half, what do you think the safest assumption is here? Should we assume kind of a full tax rate again in the third, and then if you get the tax credit it would kind of -- it would all hit in the fourth essentially?

Yes, the -- obviously it really depends on the provisions of what gets extended. If it's a four-quarter extension or if they go a full two years or if it's permanent, it'll mean different things. If it's a four-quarter extension, meaning from January 1 of -- for all of calendar year 2010, we would expect it to bring our effective rate down from 36%, where it is now, to the 27% range or so. But it really depends on the provision.

If it gets extended two years then that'll allow us to bring in another quarter into our valuation and would bring it down a couple more points. So right now kind of the word is that they expect to pass it in this lame duck session. So there's no guarantee, but that's what -- that's what we're anticipating.

Okay. That's helpful. The -- wanted to follow up on your MIDS JTRS STT. It sounds like you're maybe a little less optimistic on the timing of that, if not the magnitude of that program. Can you just give us some color? I know you'd submitted some initial units, STT units for testing. Can you give us a sense of where they are and what the timeframe might be towards production?

So, the small tactical terminal, or STT, is really not part of the program of record. It's --

Right.

-- small variant that we created. And what it does do is it addresses some of the need for what they call the JTRS AMF program, which is really more of an aviation and maritime one. And we had had some units under evaluation and that -- the good thing that happened in this past quarter is we got production orders, so it's like our first initial production order contract. And it's for a small amount, but it is production units.

And I would say it's just things are going slowly but steadily and we don't really see the demand for the capability going away or other products that would fill that market at the same price point and availability. And that's what gives us some confidence. But we're gun-shy about the timing.

Okay, that's helpful. And I'm sorry, just one final one, if I could. You mentioned you're sort of moving forward to some degree with ViaSat-2. Just wondering if you can give any more color on maybe where you stand on that.

When we did ViaSat-1 we came up with design architectures for the satellite that we thought ultimately would meet our objectives. And we went through an RFP process with the satellite vendors and at the end ended up with a satellite that was as good as or better than we were aiming for in around that ballpark price.

So where I'd say we are now is we've come up with a design architecture for a second satellite that would meet those objectives that I laid out. And we're sort of in the process of going through getting design proposals from some satellite manufacturers. That's where we are. And the purpose of that would be to confirm our expectations of what's possible --

Okay. All right, thank you.

Thanks, Rich.

Thank you. Our next question comes from Ben Swinburne of Morgan Stanley. Your line is open.

Good afternoon, guys. It's actually [Dave Gober]. Thanks for taking the questions.

Hey, Dave.

So just a couple on the satellite services segment. And I think this is a clarification and I apologize if I missed something. Just looking at the satellite services operating margins kind of compared to the first quarter, seems like there was a slight decline in the overall margin there. I thought I heard some commentary about R&D investment in that segment as well as commercial networks, but I may have misheard there. Any color in terms of the quarter-over-quarter EBIT margin progression?

Yes. I'm not sure on the interpretation of the R&D. We really don't have R&D in the satellite services segment. But there was a slight decline in the op margin from Q1 to Q2, mostly due to, as we talked about in the first quarter, we had net subscriber reductions in the first quarter that basically improved the operating results.

As we indicated we expected a rebound and began adding net subscribers, which occurred in the quarter. And as a result, we incurred some greater subscriber acquisition costs, many of which do get expensed in the quarter in which we had the subscriber. So that brought down the operating margins a little bit more.

On top of that, we expect those operating margins in that segment to continue to go down sequentially next quarter and the subsequent quarter, as we begin to add some additional subscribers a little bit this year, and also bring some of the costs on that -- in anticipation of ViaSat-1. So we start lighting some of our -- some of our [fiber] actually this next quarter.

Okay. And then just kind of back to ViaSat-2 for a second, Mark, I was just curious if you could kind of talk about -- obviously there's a process in terms of figuring out what's technically feasible, but it's also the process of -- the business process of whether or not you want to launch the satellite. And I was curious what the timeline looks like there and how linked that is to the success of subscriber additions and the operational success of ViaSat-1 and kind of how you think about the timeline there and also how you think about financing a new satellite and all those issues.

Okay. So, what we're aiming for, and this really will just depend on how the process goes, which really has to do with what our expectations are, what the economics turn out to be, and the feasibility of our technical approaches, but what we think is that we'd be able to reach completion of that -- of all that stuff probably before -- shortly before we go into service with ViaSat-1.

Probably be -- it probably won't conclude -- probably wouldn't conclude before we actually launch the satellite, but it'll probably be somewhere in the interval between when we launch and when we go into service. So that -- and what that would mean is we'd really be starting or executing contract probably before we get visibility into the uptake on ViaSat-1.

Of course, if things go way, way differently than we expect, then we'd react accordingly. But the thing that we're -- thing that we really got our eye on is just the lead time for the satellites, all indications that we're getting about what the uptake rates would be, what the demand would be in the different geographic area that we have coverage, and trying to avoid the situation that WildBlue has been in where for -- it'll be a year and a half where there's really a lot more demand than they have capacity. And so that's probably what's driving our thinking the most.

Great. That's very helpful. Thanks.

Thank you, Dave.

Thank you. Our next question is from Michael French of Morgan Joseph. Your line is now open.

Good afternoon, gentlemen.

Hey, Michael.

Hi, Michael.

Just following up on ViaSat-1, how much of the capacity do you think would be set aside for large commercial applications like Jet Blue or other big users like maybe US government versus individual subscribers?

Okay. So, the way I would describe it is we would like to have -- we would like to establish those markets and understand those markets, using ViaSat-1 and not preclude that because we consume all the capacity for [consuming], as an example. But all that has to be modulated by sort of what the rate of expansion is on -- rate of -- rate of customer acquisition is on ViaSat-1 and what we see as the prospects in these other markets.

So right now the way I'd put it is, certainly with Jet Blue, that gives us good confirmation of the potential for the aviation market. But I think given the timing of when we would go into service with that, which is more like 2012, that we won't see more than 10% of overall capacity use for that type of market. And Jet Blue -- that includes expansion beyond what we have with Jet Blue. But that'd be sort of a ballpark.

And what I would say is the next one that's also really attractive is the government market and that could also drive -- I think timing-wise, it could be in that ballpark, keeping in mind that total government usage in the USA today of Ku-band is like 3% in ViaSat-1 capacity. So that would represent solid growth of the total amount of demand and that's capturing a reasonable amount of that.

In enterprise, enterprise I think is going to end up turning to be a little more like the consumer business. We have some opportunities there. But also would be maybe I'd say smaller than the aviation and the government segments. The other thing that we're looking at is to get economic yields from these other businesses that are on a par or better with the consumer business. So overall we don't see it affecting the returns that we'd get from the satellite as a whole.

Does that answer your question?

Yes, it does indeed. Thanks a lot, Mark. And the second question has to do with the continuing resolution and impact of certain product areas you have that maybe felt some delays. Now, the issue with MIDS and [Jitters], that's tied probably to a separate matter than funding. But is there any chance that the continuing resolution in funding matter could affect the rate of deliveries for Blue Force Tracking 2 or some of the other product categories you have?

No. The continuing resolution it just adds more confusion to a stressed market, is the way I'd put it. But it doesn't mean nothing's happening. It means that budgets sort of go along at the levels that they were at. And Blue Force Tracking, just as an example, that was the one that had pretty significant spending in the prior year. So that one wouldn't be affected.

The -- I think the -- it probably would have more of an effect on things like the MIDS Jitters. That's in STT and things that are a little more new. But overall, I think that we're trying to account for that when we build our expectations for what orders will be over the next couple of quarters.

Okay, thank you and good luck.

Thanks, Michael.

Thank you. Our next question comes from Chris Quilty from Raymond James. Your line is open.

Thank you. Mark (inaudible) I've seen some articles recently trashing the performance of the Jitters AMF program. And I was wondering if that hasn't possibly created some greater opportunities for you with the MIDS J.

I would say that mostly we're -- what we're banking on is sort of the value proposition of these radios that they're smaller, less expensive, maybe available sooner. And I don't think we would count on the MIDS AMF prime contractors or any of the contractors not performing. I think that wouldn't be a good bet. I think we'd rather bet on sort of the value proposition. And I think that still impacts.

Okay. And with regard to the LVT program, last year, I believe it was last year, you got some nice initial international orders. What's the status of that? Are you seeing any pickup or are some of the international budgetary problems we're seeing in the news restricting your ability to sell into that market?

I would say in general the US market, when you look at sort of what the market for MIDS LVT was going to be and you could sort of carve out, well, there's an international market that's approximately the size of -- the international market in aggregate, in total, was approximately the size of the US market. Penetration in the US market is -- has gone faster. So that means a higher proportion of the US terminals have been acquired.

So that means that internationally we still see -- we still see some running room there. And while things are maybe a little bit stressed, I think ultimately you're going to see -- and ultimately meaning we don't see things pushing out for years. But the need for Link 16, F16s especially and F18s that operate in coalition airspace, is pretty high. And so we see that stuff still happening. That's just part of the foundation for that business.

Okay. And, Ron, you mentioned that the net adds were up in the quarter. Can you give us that net add number and the subscriber base?

They were up a couple thousand, up to, like, 416 or so, 416,000.

Okay. And you said the both churn and ARPUs are remaining steady?

Yes. And really the driver here, just to kind of reiterate, is we've been trying to dial up the service quality in some of these areas and we were out of capacity already in the best areas. So now we continue to churn more people off the dense areas and add a few people in the other ones and really just trying to stabilize that. So that's been our strategy for a couple of quarters here.

Okay. And you talked about the margins actually declining on a go-forward basis because of some investment. But once the stimulus money starts to flow, shouldn't that largely offset some of that investment dollars?

It should. I think, Chris, we're just being, like Mark said a minute ago, we're a little unsure about the timing, and then actually how that's going to get applied, where that's going to be recognized. So we're just, I'd say, slightly cautious on adding that into our outlook.

Okay.

But you're right.

Okay. And the Surfbeam 2 modem, is that ready to go to production or when are you estimating that it'll be fully into production?

Were already -- there's some of them that are on the ship right now headed this way.

Oh, great. And just a final question, clarification. I think, Mark, you mentioned that you've got over 100 aircraft flying an ArcLight modem. But I thought your press release from last week mentioned 200 aircraft. Are there --

I'm sorry, when I said --

Two separate --

Yes, Sorry, Chris. When I said over 100,l when I mentioned that in the course of the call, I was talking about the government ones. And then you add in the commercial ones and that's how -- we are over 200 all together.

Okay, so, with the business jets combined with the government piece.

Yes. Yes, we're pretty well over 200.

Got it. And I can't remember. Have we on the conference call given you a chance to give your thoughts on what Immarsat is doing with their Ka-band Global Xpress program?

We talked about that a little bit. And just to recap, I think it's -- I think it's an interesting program. It certainly validates the use of Ka-band for mobility, which is one of our themes. So I think they'll clearly be working to do that as well. Their satellites provide capacity sort of spread uniformly around the world. And then they have the ability to augment that in a few places.

So it's -- that -- I think that presents a capability that's sort of complementary to what we're trying to do with Ka-band, which is work in these regional environments. So when you think, like, for instance, think of a Jet Blue, what we would do in supporting jet Blue is really a domestic US airline. So most of the benefit of that would come under a ViaSat-1, which is 140 gigabit satellite. So the economics that would come from that are pretty compelling.

If you try to spread that capacity all over the world, you get a little bit different economics, but you do have Ka-band everywhere in the world. So that -- so that is sort of the angle that we're interested in. We could be a user of it. We could end up being a supplier for parts of their terminals or infrastructure. That's still to be determined by them.

I can tell you right now, for instance, on Blue Force Tracking, we're a big user or will be a big user of Immarsat capacity. And with their new Ka-band in places that aren't covered by these regional satellites, we'd probably be a user of Ka-band as well.

Okay, great. Thank you.

Thanks, Chris. Are there any more calls? I think we have time for one more.

Okay, our final question will come from Tim Quillin of Stephens Inc. Your line is open.

Thank you for taking my call. With regards to the ViaSat-1, when will you be able to have a launch window and what are kind of the steps between here and there?

Okay. We have a launch window. It's in the spring and it's consistent with what we've talked about. And so now what we're really working now are just the integration steps between finishing the satellite construction and integrating it with the launch vehicle. But that's determined.

There's a -- I'm going to be a little bit shy because there's always a potential for some gamesmanship on these launch manifests. So I'm not quite sure how much -- personally, I'm not quite sure how much of that's public. But the launch window that we have, it's right consistent with what we've talked about before in the spring.

Okay. And is there anything with the KA-SAT launch has been delayed just a couple months. Is there anything that happened there that you think could happen to delay the ViaSat-1 launch or anything else that might cause a delay?

So, the KA-SAT program had, I would describe it as a more aggressive satellite construction schedule than we did when we announced ours. And I think that when it's all said and done, their launch schedule is going to be very, very similar to ours. So we would attribute it maybe to -- I don't -- you can talk to Eutelsat better than we could about what their schedule would be.

But at the end, I think their launch schedule will end up being pretty comparable to ours from when they started, maybe -- actually maybe even a month or so faster when you look at sort of the beginning to end. I don't think that that's indicative of anything that's going -- that's likely to change between now and launch for us.

Okay. And then in terms of the -- your subscriber mix, where is it between wholesale and retail in the September quarter and how did that compare to the prior quarter?

It's pretty comparable to the prior quarter. I mean generally it's about 46% retail, 54% wholesale right now. and that's generally consistent with where it was last quarter. I mean it might have changed by a mix of a thousand or so, but on over 400,000, it's a fraction of a percentage.

Okay. And then I think when we had talked maybe a quarter or so ago you thought that the commercial networks business could grow in fiscal '11, which would imply a strong back half. And now there's some delay in the CPE shipments. Do you still think that that business can -- the revenue can grow year-over-year in fiscal '11?

That's not -- that's not very likely. I mean there are some extraordinary things -- not extraordinary. I mean we could be pretty fortunate and win some big programs, but I think even the timing there wouldn't be enough to offset some kind of issues that we've seen so far in the schedule delays.

Fair enough. And then just one last question, if I may. Regarding the -- so you've had 38 million initial orders for BFT-2 and I think you talked about some additional orders that you received. Can you talk about the ramp-up of revenue under that program and what the profitability is going to look like? Will it be lower on the front end of the program and then improve over time or how do you expect that to play out? Thank you.

I think the original $38 million will be spread over about a year timeframe from when we got it, fairly evenly. I'd say not purely evenly each quarter, but fairly evenly. And the overall margins are, I'd say, very typical to government development margins on our government program. And then these production awards are very typical to our production margins on our government programs. So I think you shouldn't see a big swing either way as that kind of folds into our revenue mix.

Great. Thank you.

Okay, so that should conclude all the questions and answers. And I think that concludes our presentation for this quarter. Thanks very much. We appreciate you joining us and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may now disconnect.