Viasat Inc (VSAT) 2011 Q3 法說會逐字稿

Welcome to ViaSat's fiscal year 2011 third-quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks. Good afternoon, everybody. Welcome to our earnings conference call for this third quarter of fiscal year 2011. I'm Mark Dankberg, Chairman and CEO. I have with us here Rick Baldridge, our President and Chief Operating Officer, Ron Wangerin, on Vice President and Chief Financial Officer, and Keven Lippert, our General Counsel. Before we start, Keven will provide a Safe Harbor disclosure

Thanks Mark. I would like to remind you that the discussion today will contain forward looking statements. We 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's said let me turn it back over to Mark.

Thanks, Keven. We will be referring to slides that are available over the Web. We will start with the top level financial summary for our fiscal year '11 third quarter then the year as a whole. Then I will talk about the major highlights and an overview of our business segments. After that Ron will discuss financial results in more depth and finally, I will update our outlook for the fiscal year end and for next fiscal year and summarize things and then we will take questions.

So third-quarter results are summarized in this chart. We have good year-over-year growth in revenues, orders and income from operations including WildBlueEarnings per share are higher on a year-over-year basis due to higher pre-tax income and the effects of a lower tax rate due to the passage of the federal army tax credit extension offset by the effects of increased share count.

EBIDTA is also up year over including WildBlue. EBIDTA results will help with interpreting the effects of interest and depreciation due to satellite services and ViaSat-1 on our business as a whole, especially the government commercial network segments. A lot of the catch up effects of the R&D tax credit benefits helped GAAP and non-GAAP earnings per share.

Revenues and income from operations in the quarter reflect the effect that some of the lumpiness we've seen in new orders for the past few periods. Government contract rewards in total have been affected by the lack of the defense budget and the ongoing continuing resolution situation. We anticipated a strong second-half for new contract awards, but it turns out those will be a little more heavily skewed towards this fourth quarter, and I will talk about that in a little bit.

The next chart shows year-to-date results. Year-to-date earnings per share results reflect the catch-up effects of the R&D tax credit. Year-over-year earnings per share comparisons also reflect the first quarter program charge that we had. The increased share count associated with WildBlue, and increased effective share count due to a higher stock price. Year-over-year to date income from operations comparisons also reflects the first quarter program charge. EBIDTA is up substantially on a year-over-year basis including WildBlue. Year-to-date revenue is up, although somewhat reflecting government and commercial segment order delays and lumpiness in orders in prior periods.

One of the biggest challenges surrounding our business over the last few quarters has involved re-calibrating our forecasting process due to a sluggish government procurement environment and delays in commercial projects in tough economic times. In general, orders have experienced delays to a significantly greater extent versus program losses or cancellations. As I mentioned, we've been anticipating strong orders in the second half of this fiscal year, but things hadn't really changed that much at the close of the third quarter. Now, finally, Q4 already appears to be exceptionally strong, and that should lend some greater visibility to our outlook that we've had in the recent past.

A dominant theme seems to be that mobility, a very strong area for us in both government and commercial satellite communications, while MIDS and other -- MIDS JTRS and tactical data links orders are being delayed longer than we anticipated and information assurance has run pretty close to forecast. Government mobile satellite orders were a positive factor in the third quarter, including a $14 million add-on to BlueForce tracking, additions to broadband, ISR or Intel Surveillance and Reconnaissance networks for defense, as well as UHF satellite mobile orders too.

Early in the 4th quarter, two programs alone contributed about $110 million in mobile satellite network orders. We received a delivery order valued at over $70 million for additional BlueForce tracking units from the Army and we started work on a ground based beam forming network for Boeing for their Mech Lab program. We'll talk more about orders outlook in the discussions about each of our business segments.

The successful launch of Eutelsat's KA-SAT in December was certainly a third-quarter high Now that the satellite is on orbit, there's a much greater sense of engagement, for each of the KA band application areas in Europe including consumer broadband, government missions, and broadband mobile. The availability of new KA capacity, the culmination of a substantial multi-year investment in our new SurfBeam 2 broadband ground segment, in start of new mobile satellite projects, are all indicative of renewed growth in the commercial networks and fiscal year '12 which starts in April and we believe in corresponding improvements in operating areas.The rescheduled on-state of ViaSat-1 does have a meaningful impact on our fiscal year '12 outlook, and we'll provide some color on that when we talk about the satellite services segment and our fiscal year '12 outlook.

We will also continue to make -- we also have continued to make very important progress on a number of funded development programs including BlueForce tracking, MIDS joint tactical radio system, and our KG250 information assurance products and we will cover those in the segment discussions. Finally, the R&D tax credit extension in the December quarter allowed us to recognize cumulative catch up in our third quarter, and landed increased visibility to our outlook for fiscal year '12.

With that as context, we will discuss some of the highlights for each of our segments. So starting with government, at a high level, government satellite networking orders and opportunities appear to be stronger than we anticipated. Information assurance products and programs in aggregate are pretty much within expectations and MIDS, in the MIDS joint tactical radio system evolution, are experiencing delays that are significantly longer than we'd expected. The two strongest government growth areas for us are BlueForce tracking and Airborne broadband. Despite the overall defense budget environment, we anticipate those two areas will offset declines due to order timing and MIDS and yields on government segment revenue growth for fiscal year '11 as a whole and more robust growth in fiscal year '12.

We have good year-over-year revenue growth in our government business in the third quarter. BlueForce tracking two orders this fiscal year, to date, including the fourth quarter so far are about $120 million, more than triple the value of the original delivery order. And it's grown to tens of thousands of units. Those orders will be fulfilled largely in our fiscal year '12 and extending into the first half of the fiscal year '13. We believe this reflects good program progress to date and strong underlying demand for the capabilities the network delivers.

We've also been very encouraged by the government's desire to extend BlueForce tracking to networking equipment into the movement tracking system or MTS networks through consolidation of program management elements.Momentum on BlueForce tracking appears strong and there is additional opportunities for growth. Our government Airborne broadband business is also exceeding our expectations. We believe we have been earning a good reputation for innovation and execution in this area. We have seen growth and adoption by more end user organizations, more total aircraft, lower geographic coverage areas, and increasing mission activity and bandwidth demand in existing operational areas. Users benefit from network inter-operability and the ability to roam into each other's coverage areas, improving both operational flexibility and robustness. We've introduced new products offering higher user speeds and greater mission flexibility. We'll be introducing the first KA band terminals as well, which we anticipate will be a significant growth opportunity and deliver substantial end user benefits.

Finally, we've also captured some more global missions in addition to the regional Intel Surveillance and Reconnaissance operations we've been supporting. Operational demand for high-speed aviation broadband in DoD appears very robust, and this remains a strong focus area for us in terms of proposal activity and discretionary investments. We also see strong synergies with commercial global mobile broadband networks.

Switching to Information Assurance, we continue to view this as an attractive growth area. We're introducing a smaller lighter variant of our KG250 this quarter and that has seen strong customer interest. Defense information assurance policies are likely to evolve fairly meaningfully in the next few years as a result of budget pressures, shifting priorities and cyber security policies, and heightened awareness of the threat environment. We see opportunities to leverage our competitive position and apply our unique skills to new government organizations and to solve related information security needs. We've been successful in winning small but potentially significant contracts in some of these areas.

Notably, we also were one of two recipients of the Inaugural Defense Industrial Security Counterintelligence Awards, which we believe is indicative of our security capabilities in a secure enterprise environment. MIDS and MIDS JTRS revenues and orders continue to lag expeditions. There are several anticipated new starts that we've been expecting, including security enhancements to the existing MIDS low-volume terminals and advanced airborne data link capabilities for the MIDS JTRS that have significantly divided relative to expectations.

The joint program office for MIDS recently awarded a second low rate initial production contract which does indicate MIDS J is continuing to progress towards full rate production. While we still anticipate that our tactical data links in this area will grow beyond it's prior levels, our expectations for the near future and for fiscal year '12 have been tempered fairly significantly. The upshot is that we could believe we can attain significant growth in our government segment in fiscal '12 with margins that are closer to historical levels than they have been in fiscal '11 which was impacted by a pretty unusual program charge.

Now switching to commercial networks, revenue there has declined in fiscal year '11 compared to fiscal year '10 and is it's operating at a significant loss. We have previously identified and discussed the dominant effects there, which are elimination of retail terminal sales to WildBlue as a result of the acquisition, relatively static KA band subscriber levels due to the satellite capacity limitations, re-orienting a significant portion of our product portfolio towards emerging KA band satellites that aren't yet in service, considerable discretionary investments in our surfing to ground network product development, impact of the economic recession on the business tip market, and completion of a significant program we have with Boeing for the LightSquared ground based beam forming system.

So those effects have overshadowed strong performance in our antenna systems business which was driven by growth in KA-band network infrastructure projects, continued success in the earth imaging market and mobile broadband antennas.Fortunately, we now can see the elements for turning around many of these factors in our fiscal year '12. Near the end of our third quarter, Boeing won a contract with the Mexican government for a program called MEXSAT, which includes two L band mobile satellites, and we were selected by Boeing to provide that ground-based beam forming system. Our ground based beam forming system for Boeing's LightSquared satellite was recently deployed and tested, and Boeing and LightSquared have been very, very pleased with its performance. The ground based beam forming system for MEXSAT is very similar, we start this quarter with much of the work being performed our fiscal year '12 and on into '13.

The launch of KA-SAT was a major event in the third quarter. In orbit testing, including integration of ViaSat's applied gate waves and Surfbeam 2 ground networking starts this quarter and is scheduled for completion early in fiscal year '12. So we anticipate production terminal shipments to begin accordingly. SurfBeam 2 discretionary investments were paced to meet that KA-SAT schedule and an initial ViaSat-1 in-service date of early summer. So we will see reductions in our discretionary spending during fiscal year '12.

We also believe we are gaining traction in global mobile networks. We continue to work closely with Jetblue and LiveTV to definitize the memorandum of agreement we now announced last quarter and we expect work to begin shortly on a contract. New installs on business jets have resumed at rates that are as high or higher than then pre-recession. Our maritime partner, KVH, continues to see good steady growth in their mini VSAT network. They continue to add subscribers at a good rate, add new geographic coverage areas, and add additional bandwidth to areas with high demand.

We provide KVH with modems for their maritime terminals, gateway infrastructure, we help manage their network services, and we provide roaming services for maritime and aviation subscribers across their respective networks. Look for additional new announcements with KVH in the near future.

We also believe that bandwidth economics of high capacity KA-band satellites, like ViaSat-1 or KA-Sat are becoming more widely appreciated within the mobile broadband community. Given that Inflight Band with demand increasingly resemble terrestrial usage, we believe operators and carriers will follow JetBlue's lead and begin to distinguish between high-capacity KA-band versus lower conventional KU-band or lower capacity KA-bandwidth economics. We see good opportunities for KA mobile broadband in the very near future.

Finally, we continue to see good prospects for continued growth in our antenna systems business. Opportunities include continued deployments of KA-band teleports, advance mobile broadband antennas, and opportunities in earth sensing. In aggregate, we anticipate revenue growth in fiscal year '12 due to KA-SAT and ViaSat-1, the MEXSAT, ground based beam forming program and growth in antenna systems and global mobile equipment. Segment losses should be much reduced on an annual basis and we anticipate a profitable run rate by the end of fiscal year '12.

Now turning to our satellite services segment, WildBlue has contributed significantly to revenues and earnings in fiscal year '11. We have maintained an essentially flat subscriber population this year to manage network stress due to growing subscriber bandwidth expectations amid limited resources. Meanwhile, we have been spending significantly in discretionary R & D in capital investments to prepare for the launch for ViaSat-1.

As we previously disclosed, a manufacturing incident occurred while the satellite was being moved for an environmental test. (Inaudible) worked virtually nonstop to thoroughly inspect the spacecraft for damage, repair or replace any affected components and resume functional and environmental testing. The schedules progressed beyond where it was when the incident occurred, that resulted in about seven additional weeks of delay. We now plan a July launch and commencement of service early in the third quarter of our fiscal year '12.

GAAP and non-GAAP results for our satellite services segment will be affected in fiscal '12 by additional fixed costs due to network capacity expansion including things such as lease costs for new gateway teleports and additional terrestrial fiber back haul costs. We will have depreciation expenses for IT infrastructure and data centers, gateway teleports and the ViaSat-1 satellite itself and we'll incur interest expenses which have been capitalized during network construction.

Some of those additional expenses are timed to the actual satellite launch, and commencement of service, while others have been based on contractual commitments that were timed to the original program schedule. We'll discuss the effects of these factors on fiscal year '12 results in the outlook section.

We do plan to introduce new service plans on the existing WildBlue1 and AnikF2 satellites during the first quarter of our fiscal year '12. These new plans will take advantage of our Surfbeam2 ground network and will also be available in specific rural areas with subsidies under the rural utilities service broadband stimulus program. We believe this represents some opportunity for growth in WildBlue services prior to commencement of service on ViaSat-1. We're constantly evaluating the outlook for our new ViaSat-1 services in the context of the total US broadband environment, including trends in terrestrial networks, 3G and 4G wireless, and converged video broadband media.

We continue to target service feeds and provisioning that are about three to four times better than WildBlue now offers at comparable retail price points. Feedback from retailers and distributors appears quite encouraging. Revenues and earnings from our Yonder Global mobile broadband services also included in this segment. Dedicated private defense networks results are reported our government segment. While consumer service is a dominant factor in satellite services in fiscal year '11, Yonder results shows strong percentage growth on relatively small numbers and are anticipated to contribute to revenue and earnings growth in our fiscal '12.

General aviation subscribers have begun to climb steadily after contracting in calendar '08 and '09. Maritime usage on the KVH [TV set] network has grown considerably and that exhibits some seasonality. So that will give you an overview of the business segments and now Ron will discuss our financial results in more detail.

Thanks, Mark. We'll begin with a 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 third quarter were almost $196 million, a 25% increase over last year, and there are about $586 million year-to-date, which was a 23% increase over the same period last year.

The growth has been mostly fueled by WildBlue's results, but we've also seen nice year-over-year gains in our government satcom systems products, antenna systems, and next-generation consumer broadband development sales. These gains, however, were offset by declines in tactical data link and encryption product sales, which have been impacted by delayed or reduced awards due to the timing of the government budget process for a number of our customers. In the commercial segment, we've seen significant declines in consumer broadband product sales from our existing generation products from the limited satellite capacity available at WildBlue, lowered VSAT network product sales, and satellite networking technology system sales.

For the third quarter, overall operating earnings excluding acquisition related intangibles are higher than last year primarily due to the impact of significant acquisition related expenses incurred in the third quarter of last year for the WildBlue acquisition, which lowered prior year results. In addition, our fiscal 2011 earnings have increased significantly in satellite services, operating earnings, mostly from the operating results from WildBlue and our expanding mobile broadband businesses. These earnings improvements exceeded the declines in government systems and commercial networks.

The government segment operating profit percentage is lower primarily due to higher selling and support costs and lower margins on development programs. The higher operating loss in our commercial network segment is due to the significantly lower sales, lower margins on next generation consumer broadband development programs, partially offset by lower selling general and administrative costs. Year-to-date, overall operating earnings excluding acquisition related intangibles in the aggregate are up about $12 million or 40%. These improved results include both the $8.5 million charge we recorded in the first quarter of fiscal year 2011 related to a government satcom program and a net year-over-year $8.4 million year-to date difference in acquisition related expenses. The overall gain reflects a significant year-over-year improvement in satellite services from WildBlue.

In addition to the program charge in first quarter fiscal 2011, the government systems segment also saw operating profit declines due to lower sales and related margins as well as higher business support costs. The reduction in commercial networks operating profits are mainly due to lower sales and increased R&D investments mostly for next-generation consumer broadband and advanced antenna technologies.

As we turn to the rest of the P&L, for the third 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 $4.4 million for the third quarter of fiscal year 2011, which is $1 million higher than 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 continue to be low each quarter until service launch as the capital on our satellite and other long term assets under construction increases, but it will also depend our total debt outstanding. Our income tax benefit for the third quarter this fiscal year reflects the cumulative effect of the federal R&D tax credit reinstatement and a discrete benefit for the statute of limitations expiring on previously adopted tax positions. Including the effect of the federal R&D credit reinstatement, we estimate the effective tax rate for this fiscal year to be approximately 8%.

For our year-to-date results, amortization of intangibles is higher due to the acquisition of WildBlue in our fiscal third quarter last year, and the Stonewood group earlier in our fiscal second quarter this year. Income from operations also includes non-cash stock-based compensation, expenses of $12.7 million for our year-to-date for fiscal year 2011, which is $4.3 million higher than the same period of last fiscal year. Other expenses this fiscal year is essentially the net interest expense from our senior notes and line of credit that was not capitalized. Including the effects of the federal R&D tax credit in our fiscal third quarter, our income tax provision year-to-date reflects a tax rate of about 2%, which compares to 12% for the same period last fiscal year.

In looking at non-GAAP metric, non-GAAP reconciliations includes both earnings per share and adjusted EBITDA. Non-GAAP earnings per share excludes stock-based competition 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 third quarter and year-to-date, principally due to the 4.3 million shares issued in connection with the WildBlue acquisition in December of 2009, the 3.2 million shares we issued in an equity offering in March of last year, and about 1.8 million shares from the exercise of stock options investing of restricted stock units over the past 12 months. Adjusted EBITDA of $37.3 million for the third quarter brings our year-to-date adjusted EBITDA to about $118 million. The year-to-date amount was reduced by $8.5 million in program charges we took in the first quarter of fiscal year 2011. For the quarter and year-to-date, the substantial growth in adjusted EBITDA is largely due to our acquisition of WildBlue, their operating results and other expanding service businesses.

In looking at the balance sheet, our balance sheet metrics continue to be strong with good liquidity and low leverage. 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. Our inventory is higher than we want it to be right now and we look to work it down over the next several quarters. Year-to-date we've increased capital for the satellite and gateways by over $85 million and we've invested significantly in a data center and back-office systems for WildBlue, also this year.

The only significant change in liabilities is the increase in advances in customer deposits, which also includes WildBlue's deferred revenues. We have a number of contracts with down payments which has allowed us to work ahead from a cash standpoint. At quarter end we had over $210 million in availability on our line of credit. As we announced a couple of weeks ago, we amended our line of credit, which extended the term to five years, increased the size by $50 million to $325 million, lowered the overall costs, and improved the leveraged tiers and other baskets. We believe this added flexibility improves our access to capital and liquidity to achieve our operating objectives.

Now turning to cash flows, cash flows from operations continues to be slightly ahead of our forecast this year. For the quarter, we generated over $27 million in cash from operation, bringing us to $123 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 in the second quarter, and for other expansion to support back office systems in the data center at WildBlue and in advance of ViaSat-1. While we borrowed $5 million net in the third quarter, we're still lower our line of credit by $10 million net year-to-date. We have also seen a benefit from stock option exercises mostly due to a significant number of options that were issued 10 years ago that were expiring.

Our previous communications for the total capital cost of ViaSat-1 have not changed significantly. However, with the delay in the launch of the ViaSat-1 satellite, the timing has shifted to the right. Therefore, we expect payments of about $30 million to shift from this fiscal year to next fiscal year. Now I'll turn it back over to Mark who will talk about our outlook and provide some summary comments.

Okay, thanks Ron. So at this point we will tie together the various effects we've discussed in the business segments to give you a view of our fiscal year '12 outlook relative to fiscal year '11. The two largest factors in our outlook are the extent and timing of new orders and the launch schedule for ViaSat-1.

As anticipated, second half fiscal year '11 orders appear very strong in total, but have been a little more skewed to the fourth quarter. Q3 awards were about $172 million, but Q4 new orders could approach $300 million. That would be a record for us by a meaningful margin. Early Q4 results for just two programs alone, BlueForce tracking add-on in the Boeing MEXSAT ground-based beam forming system are over $100 million.

To be sure, individual orders remain difficult to predict and we still may not have calibrated the current environment correctly. But increased backlog visibility, the launch of KA-SAT and the planned launch of ViaSat-1, lend some confidence to the revenue outlook in fiscal year '12. We believe Q4 operating margins will be closer to historical levels as will tax rates given the R&D tax credit extension and the cumulative catch up that we saw in Q3.

Satellite Services earnings in the fourth quarter will begin to reflect some of the expensed items that will drive fiscal '12 based on ground network build outs, timed to the original ViaSat-1 launch schedule. Fiscal year '12 will see downward GAAP and non-GAAP income pressures totaling in the mid $30 million range from substantial increases in depreciation to the ViaSat-1 satellite, the ground infrastructure and data center investments, plus higher interest expenses due to completion of the satellite network as well as higher [FAS 123 R] expenses.

Given that service launch on ViaSat-1 will occur relatively late in fiscal '12, most of the benefits in revenue GAAP and non-GAAP earnings and EBITDA in fiscal year '12 are going to come from the government and commercial network segment. Government revenues could grow in the 10% range driven by BlueForce tracking backlog and mobile broadband off setting some contraction in MIDS.

Operating margins are planned to increased closer to historical levels, given the absence of the program charge that we incurred in the first quarter of this fiscal year. We believe commercial segment revenues are poised to rebound over 50% from relatively depressed fiscal year '11 levels. About half of that growth is anticipated to come from consumer broadband terminal and network sales in Europe into the US wholesale distribution team. The other half was associated with the new ground based beam forming program, higher antenna systems sales and global mobile aviation and maritime product sales. The revenue growth in the commercial network segment would reduce annual operating losses substantially for the fiscal year.

In aggregate, we believe EBITDA in fiscal year '12 could increase due to the government and commercial segments at a rate that is pretty close to the same percentage growth we'll see in total revenues. But the growth in depreciation, interest expanse and FAS 123R expense coupled with increase share count will exert some downward pressure on GAAP and non-GAAP earnings per share for the year compared to fiscal year '11. Fiscal year '13 offers attractive revenue EBITDA and EPS growth opportunities as WildBlue services on the ViaSat-1 are in full swing for the first time for an entire fiscal year. Commercial networks products shipments can grow accordingly in initial KA-band commercial in flight broadband service is also planned to commence. We believe will also achieve continued growth in our government segment driven by satellite mobility including the BlueForce tracking, ISR, and global command and control aviation networks, as well as resumed growth from a lower base in JTRS

So in summary, we see the most significant factors in our current business environment to be the very strong second-half to date new orders, the launch of KA-SAT, and planned launch of ViaSat-1 which is less than six months from now. Q4 orders are off to a very strong start driven by over $100 million in just two programs -- BlueForce tracking and the Boeing MEXSAT. In aggregate, we anticipate Q4 orders could approach $300 million. The orders reflect strong demand and good program performance and mobile satellite applications, including BlueForce tracking, ground based beam forming and high-performance aviation and maritime broadband networks for both commercial and government markets. Global mobile broadband in particular is seeing good growth in maritime, aviation and government subscribers. Growth in bandwidth usage in high demand regions and increasing geographic coverage. Very high interest in extensions of KA-band build confidence in our users' appreciation of the value proposition of KA-band bandwidth economics.

Near term and longer term global mobile demands seems strong enough to overcome both the sluggish defense procurement process and commercial economic stresses. The launch of KA-SAT and the scheduled launch of ViaSat-1 coupled with the scheduled completion of the next generation SurfBeam 2 ground network along with global mobile product sales create an environment for a strong rebound in Commercial Networks segment sales off the press fiscal year '11 revenues.

Fiscal year '12 was a transition year. While we will incur increased depreciation, interest and other expenses, we also have the opportunity for significant EBITDA growth. We believe that it would be indicative of a strength of our core business areas and set the stage for fully realizing the benefits of ViaSat-1 for fiscal year '13 and beyond. So that covers our prepared remarks. At this point we will be happy to take questions.

Thank you, Sir. (Operator Instructions)Our first question comes from Mike Crawford of B. Riley & company.

Thank you. Regarding movement tracking systems, is that something that simply now expected to be subsumed by BlueForce tracking or is that something where there's still going to be some kind of formal RFP process to your understanding?

Well, we don't know for sure. They are rolling in the MTS program office and the BlueForce tracking in the office. So there is still some uncertainty as to whether they will actually have a competition. What we've been told and what we think is possible is that they just move forward with an evolution of BlueForce tracking in the MTS program. So I think it either way our assessment -- or our probability of participating in that has improved.

Okay, thank you. And then -- one thing you didn't comment much on was a competition or an evaluation for ViaSat-2 design where I think you are looking towards around the summertime to choose who your manufacturing partner would be for ViaSat-2. So I'm wondering if that's still the case and whether Space Systems/Loral has slipped further down the ladder of prospective winners there.

Well, we have continued to look at the ViaSat-2 satellite design. We've also been working a fair amount on a big proposal for Australia for their national broadband network. And some of the technical features that we've been working on for that satellite would be also carried into our ViaSat-2 design. So we've really been focused our satellite efforts probably for the last month or two on that. And the end, now that that proposal is been submitted, that will let us direct more our attention toward our own one, which we're still sort -of aiming for in that same time period, kind of mid-summer this year.

Okay, thanks for that. And a final question might be more for Keven, but I do know you had this Markman hearing January 20 in Oakland, and that satellite bandwidth IP case with I guess that's now basically whit Raytheon and Comtech so I'm wondering if that went to your expectations or otherwise?

Yes, I think generally we make it policy not to comment publicly on litigation but we appreciate the question.

Okay, thank you.

Thanks, Mike.

Thank you. Our next question comes from Jim McIlree of Merriman.

Yes, thanks. Good evening. Ron, can you talk about what tax rate you're expecting in fiscal '12 both on a GAAP and pro forma basis?

So currently the R&D tax credit extension is for -- it would expire again December 31 of this calendar year. So we're looking for three quarters of benefit that would put the rate from a GAAP standpoint in the low 30% range -- sorry, upper 20%s and then on a non-GAAP basis in the low 30%s.

And if you got that extra quarter that would --

That would bring it down a couple of percentages.

Okay. All right. And relative to ViaSat-2, is it reasonable to assume that as you complete ViaSat-1, you still have a robust capital spending plan as you start up on ViaSat-2 so that construction in progress account continues to be kind of a steady number for the next few years?

It would, yes. If you recall, as we go out and we plan ViaSat-2, you have a large chunk of the satellite and the launch and the insurance that are paid in the third year relative to the first and second. So there is some skewing or waiting. Is it 30%, 30%, 40%, and that kind of range? It might be a little more skewed in the third year. So I would look for a similar profile that we incurred with ViaSat-1.

Which would give us --

Which would give us -- from an operating cash flow standpoint, between our service business and the equipment business, plenty of flexibility from a cash flow from operations, and we have our line of credit should we need to, from a liquidity standpoint.

Right. Okay. Great. And Mark, I'm going to -- I apologize. Could you repeat something -- I think you were talking about operating income in fiscal '12 and you are comparing it to the growth in revenue or something along those lines. And I just lost you. Could you do that for me again, please?

But we were talking about in the outlook section?

Yes.

We were talking about really two factors. One is growth in revenue and Company earnings in our government and commercial networks business. And then the other is the increases in depreciation, interest expenses, FAS-123. That would offset that. Which are basically due to the timing of the ViaSat-1 -- but that's not the FAS-123 but the depreciation and interest expense. And with that, we expect in aggregate, the depreciation and other expenses to slightly outpace the revenue growth and EBITDA gains.

From EPS.

From a EPS -- yes, from a GAAP, non- GAAP EPS perspective.

Okay, great. That makes sense. And so -- we're going to assume the best and ViaSat-1 launches in July. And then there's a month or two shake out period. And so you get -- do you come out of the operational period trying to market aggressively on ViaSat-1 or do you do, you know, a slowish ramp to --

What we're looking at is -- our plan-- the satellite takes a week or so to get into geosynchronous orbit. There will be about a two month test period for it, where we do final acceptance testing on the satellite, gain control of the satellite, and then we will go into service. And we expect to launch in -- we're working out the exact details, but we expect to launch in a bunch of beams at once and to grow fairly aggressively once we do that. And will cut more detail on the rates that we expect, but they're not far different from what we've been projecting that we would have if we had started service a few months earlier. Kind of the same growth -- subscriber growth

Okay. Just a different start point on the time.

And the big thing is just the time phasing of that in the fiscal year and the fact that the part that moved out of fiscal year is -- gets the cumulative benefits of that few months of delay that we have had.

Right. Okay. So the consumer broadband modems sales are you going to make to -- to the KA-SAT subscribers is going to be primarily success based and there might be some inventory building depending on how the distribution works out?

Yes. There will probably be some pipeline filling that will occur sort-of early on and then it will be really be success based. And their -- because it's really a new business venture for them, their first year growth have been more modest then what WildBlue would be have. But they haven't changed.

Okay. Great. Thank you very much.

Thanks.

Thank you. Our next question comes from Michael French of Morgan Joseph.

Good afternoon, gentlemen.

Hi, Michael.

The first question I had is on technology on the ground based beam forming technology you have. Could you provide a little more color on the applications for this, what advantages you might have, and the market opportunities here?

Okay. So there's been a flurry of satellites launched over the last couple years of ground based beam forming. We've been working with Boeing and we believe that the capabilities of our ground-based beam forming system are pretty much the best of any have been deployed. But the idea -- what beam forming refers to is just making spot beams out of the satellite. I'd say existing older generation mobile satellites, which would include things like Inmarsat or Aria or Aces all had beamed form networks, but they were in general fairly static. Where you would place the means and how you would allocate your resources among the beams was pretty well-defined when the satellites were designed and built. Not that you didn't have any flexibility, but it was largely defined by the satellite construction itself. The idea, you can have adapted beam forming, the problem is if you put the stuff on the satellite, it takes a lot of power and weight and mass.

So basically, the system designers came up with the idea of putting the beam forming adaptation down on the ground, which was a technically pretty ambitious thing, but it gives you the best of both worlds. YOu lets you have all the power andresources on the satellite devoted to the actual communications and putting all the beam forming processing on the ground.So what that lets you do, for instance with LightSquared, is they can take their capacity, which might be in the order of the 100-ish megabits range in total which is a fair amount for a no band satellite, low hundreds of megabits, but they can then move that around depending on what the demand is. The system that we built has some extra capabilities which are pretty important for a hybrid satellite and ground network in that if you had sort of interference sources on the ground like terrestrial base stations that were hotter than they're supposed to be or not in the right places, you actually have the ability to know those out. In the MEXSAT system, which is really aimed at things like law enforcement, some of those capabilities for interference rejection are really, really valuable as well as being able to locate the capacity based on operational mission needs that the government would have.

Okay. And I guess what I'm really getting at is this is something that's starting to take off. And are we likely to see more spacecraft built by Boeing, Loral and others that are utilizing this capability in a way that plays to the strength that you have?

Yes, I would say, I think that what you'll see is in the mobile satellite services segment, there are a number of players in that in L band and S band. I think that this technology will be pretty likely the way to go in the future and as you see those replacement satellites, I think Boeing has done a really good job. We have a good partnership with them and I think we have a chance of being successful there. On some basis.

I think their good programs for us, they're reasonably good sized. But beyond that, the expertise that we're getting in beam forming I think is really helpful in other domains as well. Especially in defense, where we were gotten involved in programs that involve beam forming, sensing applications, radar applications, and in applications on other aircraft antennas, things like that. Those, I think, are going to be really, really valuable skills.

Okay. And next area, question about policy. You probably noticed that FCC today issued an NPRM on universal service and where they want to focus that more on broadband capabilities and I was just wondering if you have any comments on what role you think satellites will play in the new rules that they develop.

Okay. It's what they described as sort of a multi- phased program. The first one is try to get spending on the current universal services program sort of under control and to drive the motivation away from [copy] service and towards broadband. Then the theory is to, really to implement the national broadband plan, there is a concept there called the Connect America Fund which was essentially redirected Universal Services Fund. So our understanding is that's where their steering.

There were some really good aspects of the Connect America Fund, including technology neutrality, and much, you know, especially much reduced spending rate, on rural telecommunications applications. So we see that as a good opportunity for satellite. The government and national broadband plan since then has been specifically talked about satellite as being a part of that. So we will follow that. I think it will play out over the next two or three years. We've had the opportunity to make presentations on that and we think our voice is being heard. We're looking forward to it playing out.

Very well. Thank you for taking my questions.

Thanks, Michael.

Thank you. Our next question comes from Chris Quilty of Raymond James.

Am I on?

Yes.

You gave some great detailed information in terms of depreciation and segment profits and everything. I'm sure when I go through the transcript I will be able to decipher it, but can you dumb it down for us and give us a range around where the EBITDA will fall out this year and moving towards 2012? I think the original forecast at the start of the year was around $200 million for this year. I think with the delay, obviously, we're not in that same ballpark. But can you help bracket for us in EBITDA number?

I think what we've tried to do, Chris, is we've moved away, as you know, at the beginning of this year from any kind of guidance both near-term or specific long-term. So what we've tried to give you is some kind of year-over-year correctional changes so that you can interpret that for yourself. And enough data around -- in the future it will be in more data on subscribers and subscriber growth and SAC and things like that. So that you will have the tools to do that. So we've moved away from specific guidance. But I think -- certainly including the transcript, if you can't sort it out of there, we'd be happy to kind of repeat it later individually the elements you don't get, but I think there is enough data here for you to get there.

And I think it was all there. I was just looking for the easy option. So second question, you talked about at least on ANIK F2 and WildBlue increasing some of the plans. Is that only in the unsaturated western regions or is that across the consumer base?

Well, the places where that will have impact prior to the launch of ViaSat-1 will be in the non-saturated regions, that you described which are mostly in the west. Once ViaSat-1 is up, we'll have so much bandwidth in aggregate that, though, that will give us a lot more flexibility. We could go back and make improvements to the way we use bandwidth on an F2 and WildBlue one in those regions. And we probably will because it will have some cost benefits to us. But the thing I described, which is prior to the launch of ViaSat-1 is primarily in the West.

Okay. You talked about increasing the data rates, but do you take them up, right now, compared to what people see when ViaSat-1 is launched are you take it somewhere between here and there?

Yes. What we've talked about is some place in between which would be better than what we've done in the past, using the existing ground networking system, but not as good as we can do with the ViaSat-1 satellite. And most of the -- a lot of the improvements that we've made from where we are now we come from the improved performance of the next-generation ground networking system.

And in either cases, in the Western Region or the saturated East, you obviously have to deal with the issue of customer migration, once you start ordering -- giving people a base rate of whatever it is, two or four megabits for a basic plan and there's somebody out there paying the same amount of money for 700 kilobits, have you managed that transition?

We've been anticipating that all on. So we have models for what we think the rates at which that will occur. Those models are based on similar situations in the wildest domain, where a service provider comes up with improvements to plans or speeds at comparable price points and you can look at sort of customer migration rates. So we've been looking at that.

What we plan to offer to our customers is essentially the same deal that we offer to our new customers. So if you're an existing subscriber and you have a one megabit plan for $60 and you'd like to upgrade that to the new plan, at $60, basically we'd offer whatever the upfront fee is that a new subscriber would, extend your suspicion by the new period. And then all the rest of your current term would be at the new service rate. That's how we plan to do that. And so that will involve some capital spending on our part. We also have, I think, some pretty clever ways to try to manage that with minimum capital spending on our part in our distributors parts. But that's all baked into our plan, that effect.

And we plan to continue to improve the services, people do turn off existing capacity.

Best way to do it. Did you mentioned that you've already begun shipping SurfBeam 2s to Eutelsat in the current quarter or the December quarter?

Very small quantities.

Okay. So it really starts ramping up in the March quarter?

It really starts ramping up in our Q1.

Okay. And how about Yahsat? Are they taking delivery yet?

No. The satellite is behind -- their satellite is later in the year.

It will go into service for over a year -

-- next year.

Okay. And did you say that your subs were basically flat with the last quarter?

Yes.

And ARPUs trends the same?

Yes.

And Ron, you had mentioned government EBITDA margins moving back to normal levels, sort of mid teens?

Yes. That was in Mark's outlook section. So low to mid teens.

Okay. Great. That's my short list of questions. Thank you.

All right, Chris.

Thank you. Our next question comes from Tim Quillin was Stephens Inc.

Good afternoon. I think I too will be reading the transcript like it's the da Vinci code to decipher that. But I appreciate the trail of breadcrumbs. With regards to BlueForce tracking programs, how much of the $120 million that you booked is going to ship in fiscal '11 versus fiscal '12.

A lot is really going to be in fiscal '12. The bulk of the initial order, the initial award that we got happens over a 12 month period and since we got it in August or late July, early August, you can see that kind of run rate. But we don't start shipping meaningful terminals until next fiscal year.

Okay. And do you -- how much visibility do you have on additional orders or does the backlog you have right now kind of carry you through the next year or so?

Yes. What you just said, the latter, it carries us through fiscal '12 into fiscal '13.

So you wouldn't expect to get additional orders until you're well through these shipments?

No, not necessarily.

I don't think that's true. The real issue is when they have money and what their install rate looks like. And so they have given us a forecast kind of what they expect, we've jointly worked that. I think there will be more between now and then. They're ahead of where we thought they'd be at this point.

Right so there's a chance that they might be able to accelerate the Fielding plant enough for you to get incremental deliveries in and therefore need additional orders?

I'd say this, they're clearly not going slower than we thought.

That's great.

I was going to say there's also a TBD on what Rick said on the moving tracking satellites.

Right and that sounds like nice upside as well. And in terms of the margins on the government side, what was in the mix or what was the reason for the margins to be relatively depressed in the third quarter? I understand what happened in the first quarter, but what happened in the third quarter and how do you get back to that low to mid teens level?

I would just say we had some lower margin development programs that accounted for a higher percentage of our sales, bringing the overall down. Plus we have some higher support costs. I think people are spending more and working harder for the fewer awards that are out there in the competitive environment given the defense budget process.

You know, the one loss development program that we had that we had recorded a substantial loss in earlier in the year, pretty much completed development in the period.

Okay. And then speaking of that, you may have said this during the prepared comments, but what was funded R&D in the quarter?

We didn't provide that. I don't have it off hand. It's something we disclose in our Q that will be out there tomorrow.

Okay. And you alluded to the fact that you have certain contractual commitments that are tied to the original launch date of the ViaSat-1 and that wasn't -- and you may have clarified that, but I'm not sure what costs exactly start sooner then the launch date?

Well, we have, for instance, gateway leases where we had gateways to be installed timed to the original launch date. And those would require you starting your lease, being able to prepare the sites, running your electrical, that sort of thing. You also have -- and the biggest component is probably some of the back haul, the internet connectivity, agreements that we entered into are a big factor. And then just some of the other support costs that we were timed to come up with a spring launch rather than a summer launch.

Are you able to quantify those costs for us all at all?

Yes.

You mean for next year?

The ones that start -- maybe the quarterly run rate of costs that start before the launch.

I would say the things that we had prepared that are going to be, you know, as a result of our model shifting out -- a quarter, those uncovered costs, there in the, you know, $12 million to $15 million range.

Okay. And as far as the tax rate goes, I just wanted clarification on two points. One is what tax rate to you expect in fourth quarter of fiscal '11? I know you expect 8% for the year.

About 20%. So if you're at 2% year-to-date and then 8% overall, it ends up being about 20% for the Q4.

Okay. And then if the R&D tax credit is renewed then you would expect a GAAP tax rate of around 25%, is that right?

I would say mid- 20%s.

Mid-20%s. And then pro forma tax rate of what level again?

It would make a few percentage points higher. 28%, 29%.

Okay. I appreciate it. Thank you

Yes question comes from Tom Champion, of Credit Suisse.

Thanks for taking my question. I just wanted to see if I heard this correctly. Like my counterparts who have questions before me, I was curious about guidance. And I was curious if you stated a reasonable expectation was about 10% year-over-year growth in revenue and adjusted EBITDA?

No, I don't think -- I'm not sure Mark said that. I think we've talked about from the 10% growth year-over-year was in the context of big government revenues.

Okay. And I guess operating income commentary, was that segment by segment as well?

Yes.

Okay.

But I guess I would say at the macro level what we were trying to articulate is -- we see growth on the commercial and government side, but that growth does not out pace some of the depreciation, some of the fixed costs in the model shifting, your initial ramp costs, those types of things that you don't get because the launch happens later in the year, and the amount of revenue you generate in that remaining time period is insufficient to offset those costs.

Got it.

Whereas if it had happened earlier in the fiscal year, you'd have a longer lead time and ability to ramp up your subscribers at a greater rate. You don't have that, and it's just not artifact of timing and where our fiscal year falls.

You would ramp them at the same rate the integrated -- at the end of the year.

Right.

Okay. And then is it correct to state that your set balance is essentially flat in the third quarter here? I'm curious if you could just touch on the operating margin profile, the WildBlue business versus your other wireless broadband services within the broadband segment.

Well, I think with both of them, it's about scale. You have a certain amount of fixed costs to run the network, run the operations and then getting to that scale more and more -- once you reach that point, more and more of your incremental subscribers or users of the network, becomes more profitable. So they aren't really comparable from the standpoint of you know, one is -- what is the consumer broadband piece is just so much bigger than the global mobile piece, but at the same time, we've reached a scale part on the global mobile side that as we add more and more users on the network whether it's ones that we have a direct customer relationship or ones that we are helping through the network operations aspect through some of the other agreements we have, -- particular on the maritime side, incrementally becomes more profitable. But I don't think they're necessarily -- you could drive generalization to say their directly comparable.

But one thing I'd add is if you look at our segment results for the first three quarters of this year, the WildBlue services business has been very profitable. And that will continue. The only change to it is that starting in the fourth quarter, we're going to start to incur some of these network expansion costs which will sort of change the equilibrium since things have been pretty stable on there, same number of subscribers. The results of them pretty predictable for the past three quarters. Now are going to incur some of those network expansion costs, which will start -- transitioning that. We'll be in a transition mode probably until right around the beginning of fiscal '13 when will have one year of just network growth with a fairly stable infrastructure environment.

Okay.

If you think about both of them from an incremental EBITDA margin, they should be relatively consistent. I think that's probably what you're asking. It's well above 50%.

Okay. Final question is it sounds like we should expect very robust growth in the commercial networks segment at least top line in fiscal '12. I'm just curious how you would characterize the growth we should expect in the fourth quarter.

The growth, just from a timing standpoint, where you see most of the growth Mark talked about satellite, on shipments of our next-generation consumer broadband equipment from primarily the terminals, those won't really start until Q1 of next fiscal year. So not really much delta for the fourth quarter. The MEXSAT program again, it's just starting to ramp. It's going to be more of a fiscal year 2012 and '13 profile and then those are the two primary drivers. So I would say from a Q4 perspective, not significantly higher, but a little bit higher.

Okay. Thanks very much.

Thank you. Our next question comes from Ken Herbert of Wedbush.

Hi, good afternoon, everybody.

Hi, Ken.

All right. Just want to ask this in a slightly different way. Can you talk directionally about the satellite services segment then from a revenue and operating margin standpoint into 2012, excluding -- excluding ViaSat-1?

You really can't. And the reason you can't is because the WildBlue business -- if you weren't going to launch the ViaSat-1, we could talk about it. But since we will launch services on ViaSat-1 within that year, it affects the rest of the business. See what I mean?

Yes, okay.

So you really can't talk about it that way. I think what you can say and what we try to say, is that from an EBITDA standpoint, we should continue to realize positive EBITDA over the year. From an EPS standpoint additional -- Mark, threw a number out there of $30 million, an additional $30 million in depreciation and interest and some uncovered expenses in that thing, we won't be able to cover all that with the earnings growth. So you'll have some EPS depression as a result of that, but we will be able to cover more than half of it.

Okay. So effectively, what you say is it sort of a net $15 million hit if I just sort of took the numbers they said, that's not offset by the growth that you're going to see?

No, I said more than half. So the numbers are close. I think it's in single digits, but high single digits. So that's from an EPS standpoint. From an EBITDA standpoint, we said we expected to have growth.

Pretty good growth.

Okay. All right. If you shift gears to the government side and under sort of continuation of -- the continuing resolution that we've been operating, can you talk about the timing of -- I know you talked about obviously lower ramp and perhaps more risk around JTRS and MIDS, but can you talk specifically about that segment and what you're seeing now in terms of timing and some of the interest from a customer standpoint to ideally move forward versus additional risk that might be getting creeping in here on some of these programs?

On MIDS -- you mean for MIDS and MIDS JTRS in particular?

Yes, exactly.

What we are seeing is, I'd say, if anything, more customer interest. And that's especially F18 that's the first real target platform. So we're seeing more customer interest there. And I'd say more interest from other platforms beyond F18s. And those are all good things. So we don't see really any functional capabilities that would replace it and we're certainly not seeing any desire whatsoever for people to forgo those functional capabilities, situation awareness that MIDS delivers. But the issues without a defense budget, it's hard to do new starts. It's hard to do anything other than continue the things you're doing now. That's what the continuing resolution does. So things like new upgrade to the LVT's that would deal with security issues or other modernization, those things have been delayed and continue to be delayed. On the MIDS JTRS, where people want to add new functional capabilities, like especially the advanced airborne data link, TTNT that has also been deferred, is also really tied to the defense budgeting issue. So what we said is until all this stuff gets resolved, we're going to push that farther out in our forecast. And it really reflects the fact that's the one area that we've just had a tough time forecasting all along because we can see all the elements, we just can't see the appropriations happening. And the funding flow starting.

We potentially -- within the next week or two we are going to get obviously the fiscal '12 budget -- budget requests. As that starts to work its way through, do we at some point get a positive catch-up effect and the appropriations and the money can actually start to get spent?

Yes we do. We think the things that we're talking about will all get funded. Our customers are still planning on them. They're actually spending money on each of those things at the levels that they can. A fair amount of that is internal spending. Some of it is what I describe as trickle funding to us and DLS. And in some places, their funding because of advanced data links through other programs or R&D things intending to migrate it to MIDS JTRS. So we think there will be a catch-up effect and that is why we are saying at some point we think this MIDS business is going to surpass the highs that we've had in the past. But were probably thinking that's more like fiscal '13.

Okay. And just one final question. On a commercial side you talked about obviously, you mentioned the JetBlue contract in the wing. Can you just talk about more specifics, and you mentioned as well that other potential customers are now looking at KA-band capability a little more acutely now or with a little more interest. Can you just talk any more specifics about what you're seeing in terms of not so much specific customers or airlines or anything of that nature, just timing or potential magnitudes of the opportunity as it looks like it starts to unfold?

Sure. The way I'd describe it is these things sort of unfolding in phases. Like the very first phase is did anybody want [M5] broadband at all? Does any -- are people interested, and is it something they want? I think it's pretty clear the answer to that is yes. There's been pretty good uptake on the existing services in the US.

And the next question that it raises was okay, now that you can have it, how well does it work? And the how well does it work is really sort of put more of a spotlight on how much bandwidth you have. What is it that causes service to be slower at some times and faster others? How will that play out as you get more and more airplanes? What happens if more and more people on airplanes use it? People are asking those questions.

And it sort of puts a spotlight on how much bandwidth you can bring to bear. And some people say well, okay, how much bandwidth do you have and what does it costs? That's where this KA-band stuff really, really shines. We can deliver many, many, many gigabits of capacity to that -- to that application over the US There's just no other way to do that with existing ground technologies or any existing satellites or even other forms of satellite. So that's kind of the effect I was describing. And I think as people just become more aware of the value proposition, it certainly makes sense that they're paying more attention to bandwidth.

Does that answer your question?

Yes. No, I appreciate the color. That's helpful. Thank you very much.

Why don't we take just one more call?

And our next question comes from Matt Robison of Wunderlich Securities.

That will make it easy. Because my question has been answered.

Okay.

Okay. Thanks. That concludes all the things that we have prepared. And we thank you all very much for your time and attention and look forward to talking to you again next quarter.

Thank you. Thank you ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.