Viasat Inc (VSAT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the ViaSat second quarter fiscal year 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference may be recorded. And now, I'll turn program over to Mark Dankberg. Sir, the floor is yours.

Thanks, good afternoon, everybody. This is Mark Dankberg. I'm Chairman and CEO. And I've got with me this afternoon, Rick Baldridge, our President and Chief Operating Officer, Ron Wangerin, our Vice President and CFO, and Keven Lippert, our General Counsel. Before we start, Kevin will provide our Safe Harbor disclosure.

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that certain factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC, or from our website. With that said, let me turn it back over to Mark.

Okay. Thanks, Kevin. We'll be referring to slides that are available over the web, and we've also put out a press release earlier this afternoon. So we'll start with some highlights, and the [top] of the financial summary for our second-quarter and year-to-date. for fiscal year 2012. And then after that Ron will discuss our financial results in more detail. And I'll provide an update on our business segments. And then finally, I'll update our outlook for the fiscal year and summarize things, and we'll take questions. So the highlight, since our last conference call, was definitely the successful launch of new satellite, ViaSat-1. The satellite was launched on October 19 by ILS, and that was a complete success. After launch, and separation from launch vehicle, we deployed the [solar arrays], and flew the satellite to geosynchronous orbit.

Once there, we've deployed all the antennas, and we've started in-orbit testing. So far, all the test results have been good. We anticipate about another 6 weeks of in-orbit testing, and then we'll begin commercial service. So I'm not going to rehash all the sequence of events that delayed the launch by about 8 months from the initial plan. We've discussed those already, and their predictable impacts are reflected in the results for our satellite service segment. But obviously, we're really excited to have the satellite in orbit, and close to service. And we expect to see the benefits of that beginning in the last quarter of this fiscal year.

We're pretty happy with the performance of the rest of our business areas in the past quarter, especially given a pretty tough overall macro environment. Commercial networks has performed pretty much as expected. We had strong revenue growth due to the new projects that we've won, the Boeing MEXSAT, Iridium and [Thelas] -- podium MEXSAT Ground Based Forming, the Iridium on the Thelas on their Ka-band payloads. And we're seeing the beginnings of increased terminal shipments for Ka-band with KA-SAT.

We're also seeing good growth in commercial and mobile broadband. The margins in our government segment are trending back towards their historical levels. Orders for the year have been strong, and we still believe we'll see revenue growth, and prospects for sustained revenue growth in government business next fiscal year too. That revenue growth is coming from our BlueForce Tracking 2 back (inaudible), and also from expansion of our government mobile broadband products and services.

The first level Department of Defense response to the budget pressures that they been under, has mostly been to slow things down and delay procurement, as opposed to reprioritizing programs or finding alternative solutions. We've certainly seen our share of delays, but we've also seen some of those delayed programs come to fruition, as with our MIDS in -- MIDS [JTRS] this -- past quarter. We expect continued delays, with the balance of this fiscal year in our information assurance and line network encryptor business. But we don't anticipate that's going to undermine our revenue or order growth for the year as a whole, but the mix will have some effect on our government margins for this fiscal year.

This next chart illustrates some of the key financial metrics for the second quarter and fiscal year-to-date, compared to the same periods last year. This data is also in our earnings release. Overall, our results were generally in line with what our plans were. We have strong new awards in the quarter, and year-to-date, and that helps with visibility in the second half of the year. At this point, our forecast shows that we could get close to $1 billion in new awards for this fiscal year as a whole, which would be a record for us.

Revenue was up year-over-year, reflecting the stronger rewards and growth in our mobile broadband and other service-related revenues. Adjusted EBITDA, however, was impacted primarily by the effect of the ViaSat-1 satellite launch delay which we've talked about in the past, and ROn will talk about in more detail, later in the call. So with that, Ron will go into more detail on our financials.

Thanks, Mark. We'll begin with a segment discussion, followed by further P&L discussion, the balance sheet, and then cash flows. As you can see beginning this quarter, we're presenting segment revenues, split between product and service. We believe this will provide better insight into our shifting business mix. In addition, the reconciliation for segment adjusted EBITDA was included in our earnings press release filed earlier on Form 8-K. As Mark mentioned, overall, our operating results were about as we expected, and consistent with our prior communications.

Government segment revenues were higher year-over-year, primarily from the timing of the MIDS Lot 12 order received earlier in the quarter, and converting a number of those terminals to sales. Of note though, is our evolving mix of service revenues from both extended maintenance contracts on fielded products, and expanding satellite service networks for mobile ISR and command-and-control applications. We expect this to continue in the future. Our operating earnings improved for the quarter and year-to-date, mostly from better program performance.

In the commercial segment, our sales growth is principally from the mobile broadband, enterprise VSAT consumer broadband, and antenna products and systems. The revenue growth in the first half of the year is consistent with our total year expectations. Our operating loss and adjusted EBITDA reflect the production start-up effects of the SurfBeam 2 product line, higher selling costs related a number of larger international opportunities we are pursuing, as well as continued addressments in advanced networking and antenna technologies.

In satellite services, revenues are down for the quarter and year-to-date year-over-year, principally from lower wholesale subscribers sales, and sales of our managed broadband service. The lower wholesale subscribers revenues are [the fact] of the satellite delay, and our distribution channels reducing their sales and marketing of the existing service, in advance of the new services provided by the ViaSat-1 satellite. These results were consistent with our communications on our last call.

In the first half of the year, we're incurring over $15 million of cost related to fiber backhaul, gateway site costs, and our data center that were tied to our original launch date. And we'll continue to incur these costs, without the associated revenue benefits through most of the third quarter. Also in the first half of the fiscal year, we began our rural utility service, broadband stimulus program, which also added extra selling costs in the quarter. Over the next few quarters, we will begin to see the financial benefits of this broadband stimulus program.

As we turn to the rest of the P&L, for the second quarter and year-to-date, the other pertinent items include, research and development expenses are down because we had more funded development programs over the same period last year. Other expense is principally interest expense on outstanding borrowings, net of capitalized interest. The year-over-year reduction reflect the higher capital in process amounts, in relation to the debt outstanding. We expect to continue to experience low interest expense until the satellite is placed in service, which we expect to occur in late in our third fiscal quarter in this year.

There's a significant difference in income taxes year-over-year. In the first half of last year, the federal R&D capital tax credit was not in effect. As a result, our tax rate was above 30%. This year, it is in effect for the first 3 quarters. And this benefit, combined with our expected lower pretax income, our current year effective income tax rate is now expected to be negative 55%. The income tax benefit recorded in the quarter, which was about $0.08 per share, reflects this lower rate on a year-to-date basis, as well as some discreet benefit items.

In turning to the balance sheet, overall, our balance sheet metrics are strong, with good liquidity. Day sales outstanding on receivables are near record lows, reflecting good customer quality and program performance. While our inventory level is higher than we'd like it to be, primarily due to government order predictability, we made some progress this last quarter reducing it a few million dollars. The inventory balance over the next couple of quarters may not decrease in total, as we expect certain of the reductions we will achieve in our government products, will be offset by increases in our SurfBeam 2 inventory to support the retail sales channel in the US, as we launch the new services of WildBlue.

The significant increase in prepaid and other assets is primarily related to (inaudible) fees from Telesat, for their portion of the satellite-related launch and insurance payments, and from prepaid supplier and maintenance contracts. The significant increase in fixed assets from the satellite-related costs for insurance and the launch, our continued gateway and continue network build-outs in the United States, and from customer premise equipment additions for our retail subscribers.

The only significant change in liabilities is the decrease in accrued liabilities, primarily associated with the payout of accrued performance compensation from last fiscal year. We did borrow up on our line of credit, in support of the large capital expenditures in the quarter. At quarter-end, we had over $146 million in availability on our line of credit.

And turning to cash flows, cash flows from operations for the quarter and year-to-date were below our expectations, largely due to the inventory increase consuming cash. We also saw cash used for prepaid supplier and maintenance contracts. And we expect to make gains in the second half of the year to generate cash from operations, as certain of these items will turn, and convert to cash. Cash used in investing activities for the quarter and year-to-date reflect the significant payments for -- made for the satellite, principally again, for insurance and the launch, and for the continued gateway build out.

In addition, other purchases of property and equipment for the quarter and year-to-date are for capital associated with the customer premise equipment for retail subscribers, the back office expansion at WildBlue to support the service launch, and for additional of hub equipment for our global mobility business as the network continues to expand. We did borrow $95 million net in the quarter, to support these capital initiatives. Now that our major ViaSat-1 related capital payments concluded in our fiscal second quarter, for the rest of the fiscal year, our cash flow will primarily be impacted by the timing of the service launch and ramp-up, and the retail subscriber mix for the WildBlue service. Our cash flow generation from operations and borrowing availability provides significant flexibility to support the various elements of our strategy. Now I'll turn it back over to Mark, who will talk about our business segments.

Okay. Thanks, Ron. So with that, we can go into a little bit more depth on each of the business areas. In terms of the WildBlue home broadband services, the focus is more on preparing for what's about to happen. Our total subscriber base has been under pressure the last 3 quarters, due to the delays in the ViaSat-1 launch, and growing anticipation with the availability of the new services. Clearly, there's been a lot of interest building, and that's made it harder to sustain sales of the existing service plans. But we feel well prepared to rollout the new services, as soon as we're done with in-orbit testing.

Ground infrastructure deployment is going well. We'll begin activating Gateway teleports and some of the beams as part of in-orbit test, and the remainder once testing done That should begin service next month which is December, and should be complete in our fiscal fourth quarter by March, when the entire ViaSat-1 footprint is expected to be in service with the new plans. Production schedules for customer premise equipment have been a little bit disrupted by the very unfortunate flooding in Thailand, but we believe we have enough equipment already in hand, or in the pipeline to support our service rollout. We're hopeful that conditions there will help productions resume, and sustained subscriber ramps throughout the whole next fiscal year.

We expect to refine our exact service plans and policies pretty much right up through service launch. We've been working with each of our distribution partners to explore a range of different types of service plans, but things are converging. We've updated our service plans with the National Rural Telecom Cooperative, and are still working with DirecTV and Dish. Dish continues to express interest in retailing WildBlue service, and it's certainly possible that could work out. As we've mentioned last time, we are currently planning to offer speeds that are much, much faster than we originally anticipated, and I'll talk about our approach, in more depth on the next slide.

Meanwhile, we're still seeing pretty exciting growth, though on a smaller base for our Yonder global mobile services. Currently, the preponderance of Yonder revenue is through leased Ku-band transponders. Maritime, working with our partner KVH, leads the way for us. As of now, we're in the neighborhood of around 2,000 total platforms, including maritime, business jets and government aircraft. Our strategy, in global mobile, is to begin migrating airtime usage to Ka-band on our own satellite and our partner satellites.

We believe high-capacity Ka-band satellites will be truly transformational in mobile broadband services, and we believe we're continuing to gain traction there. We have initial contracts with JetBlue and several ongoing efforts for products and services with the US government. Overtime, we believe high-capacity Ka-band will reduce airtime costs, yield compelling performance advantages, and create substantial competitive advantage. The successful launch of ViaSat-1 was a big step in this area too, and we plan to start showing the benefits of that in our fiscal year 2013.

So this slide shows our approach to how we're positioning ViaSat-1 services, in the context of alternatives available to un-served and under-served homes. WildBlue's original 2005 service plans were positioned for un-served only. At $50 a month, 512 kilobyte per second service is better than dial-up, but it's often -- it's not often a better value than other alternatives. And since WildBlue has consistently been the satellite service with the highest user satisfaction, according to a leading consumer magazine, we think that's been the case for the whole satellite sector. That means many subscribers would reasonably switch to an alternative, whenever one is available. And those alternatives include even low-speed DSL or low-speed cable or more often, 3G or 4G mobile wireless, even for fixed home use.

The growth of wireless, including satellites, help illustrate the value or the utility of broadband is really measured in 2 dimensions. And that's what we're trying to show in this chart. One dimension is speed, which is pretty obvious. And the other dimension is volume, or gigabytes allowances, with which people are becoming more familiar, via wireless plans. For most people, high speed and high volumes come with some variant of fiber-to-the-home or fiber-to-the-node, either cable or telco, like DOCSIS 3.0 service or FIOS or U-verse

But homes that are far from a fiber node are often limited to speeds of only a megabyte or so, even if they have copper coax connections. Those soft -- those types of services might offer more gigabytes, but for many people, really high volumes aren't as useful as really high speeds. Mobile wireless, especially 4G LTE has shown that really high speeds, and for them in the 12 megabyte per second range can be really useful, even if the volumes have limits due to bandwidth availability. And that's exactly the situation with ViaSat-1.

We feel we've gone to pretty heroic lengths to raise the bar on satellite bandwidth and economics, by over an order of magnitude. But still, there's only going to be a finite amount of satellite bandwidth available to address a market of many millions of un-served and under-served homes for the next 3 years. We made our service unlimited, or set the types of limits used by wireless terrestrial systems, it's possible that all that bandwidth could be consumed by relatively lower numbers of subscribers that are heavy video users. So we're aiming to position our service to provide great value and utility, across a broad range of online activities including video, but aiming for the fat part of the Bell curve and bandwidth usage.

So we'll be offering speeds in a very comparable 4G mobile wireless, with bandwidth allowances that are likely to be higher at each of the popular price points. Clearly, we don't expect these plans to satisfy everybody, and we'll make that clear in our promotional material. But we think they will be a really good choice for a lot of people that are typical broadband users, and want a really, really fast, reliable responsive internet experience. So the upshot is, instead of having service plans that are graded by speed, say, fast, faster, and fastest, which is what a lot of services do, at successfully higher price points, we're planning to model our service plans, like 4G mobile wireless.

Each plan will have the same high-speed, starting at about $50, but with successfully higher bandwidth allowances at each price point. We think that 12 megabytes for $50 is a great value, and we think many people will accept reasonable usage limits to get it. We believe this will be exciting, and attractive to users. It will fit our metrics for subscriber growth rates, and total potential users. It will help ensure service quality, and it will reduce churn, while maintaining the growing ARPU, and addressing a broader total market. Our distributor's and retailers seem enthusiastic, and we're excited, to finally be on the verge of launching the new service plans.

So switching to our commercial networks, as anticipated we're seeing very strong revenue growth in our commercial networks business. It's a result of some of the key programs we've earned over the last few quarters, including Boeing's MEXSAT, the Thelas Iridium's Ka-band payload modules, O3b. And of course, the Ka-band in-flight and Wi-Fi system for JetBlue and LiveTV. We also continue to see steady growth in our antenna systems business, and product shipments for ArcLight, mobile broadband.

And we're starting to ramp surfing-to-user terminals for KA-SAT. We believe the successful launch and deployment of ViaSat-1 is also going to give a boost to our commercial networks business. Of course, that enables user terminal sales to our wholesale distribution partners, but it also paves the way to expand the application base for Ka-band broadband. We've already gotten started with inflight Wi-Fi and government mobile broadband, but we have others in the works as well. The launch of ViaSat-1 also helps our international Ka-band networking opportunities.

With our launch and deployment risks retired, it's now it's clear that we'll have significant economies of scale and (inaudible) market advantages, compared to other Ka-band network providers. We're in the lead position to prove that our system manages the unique technical challenges presented by the next generation of high-capacity Ka satellites, and we'll have volume production and product performance data to back that up. As we've described though, fiscal year 2012 is still an investment year for us in commercial networks. That's driven by CPE production start-up costs, and the learning curve, the delayed start of customer premise equipment shipment growth ramps, and the technology investments we're making in new application areas.

The main story, we think in our government (inaudible) is that we're seeing most of the growth that we anticipated, in an environment where revenue growth is extraordinarily difficult to achieve. The government business mix is evolving, in a way that we believe presents sustained growth opportunities. This graphic is intended to show, that while some of our longer-term defense product areas are well along in their lifecycle, with emerging areas that show as high, or higher potential.

The graphic is intended to show qualitatively where some of these new markets are, in terms of life cycle and growth potential. Government broadband is especially exciting, because we believe it has a lot of upside, in both product sales and ongoing services, and we're gaining quite a bit of traction. Our customers there, appreciate that we've been able to steadily introduce performance improvements, have been able to support a broad range of host platforms, that we're turning the vision of high-capacity Ka-band into a reality, on both our partner satellites, as well as our own.

Mobile broadband services are growing pretty quickly, and we're expanding, in terms of geographic coverage, types of platforms, numbers of platforms, functional capabilities, equipment suites, types of missions that we serve, and now getting into the government and commercial Ka-band too. We're showing that we can provide greater capabilities with lower operating costs, obviously just what you DOD needs, given the budget environment. We believe there is also good potential emerging for further growth in Blue Force Tracking, for us to penetrate more into the airborne, joint tactical radio system market, and in new applications in cyber security. The Blue Force Tracking 2 program is making steady progress in tests, demonstrations and production startups. Costs remains favorable to our plans.

Years of cost and schedule growth seem to be coming to a head in the Joint Tactical Radio System environment. The GMR or Cluster 1, the ground mobile version, which is the largest of the JTRS programs, will essentially not going to production, and there are comparable decisions to be made for the other Clusters. We believe that given the success and maturity of our MIDS Joint Tactical Radio System, radio and the adjacent products, that we'll have some opportunities to serve some of the JTRS platforms in the months ahead.

Our information assurance and Inline Network Encryptor business is experiencing significant production contract award delays this fiscal year. We think though, the longer-term outlook for high assurance internet protocol and Inline Network Encryptors remains stable, but timing is an issue. The largest customer for these [AP] inline network encryptors is delaying orders, that will move a lot of our anticipated production business out into our next fiscal year. But on the other hand, we are seeing new opportunities for next-generation information assurance products, and we believe we're well-positioned for those.

Even though we're anticipating overall revenue growth in government this fiscal year, the shift in the mix presents management challenges and allocating resources appropriately, to manage costs in the areas that are delayed, while still being able to staff the areas that are growing. Usually, we're pretty good at this, but the uncertainties in order status and timing make it harder than normal. Still, we feel pretty fortunate, to be having to deal with reallocating resources, instead of just plain downsizing.

So this slide on our outlook is similar to what we showed last quarter, but the outlook has been adjusted to reflect the effects of the satellite launch delays, as well as our understanding and timing and mix on defense programs. Adjusted EBITDA for fiscal year 2012 as a whole, appears it will be relatively flat year-over-year, reflecting primarily, the currently revised outlook for the inline network encryptor product orders. That will also affect our GAAP and non-GAAP net income. Overall trends for new orders and revenues remain as before. The outlook for fiscal year 2013 remains consistent, but of course, with greater confidence, given the successful launch of ViaSat-1.

So that pretty much covers the areas we wanted to talk about. The main event, of course, has been the successful launch and deployment of ViaSat-1. We've been working towards that for quite a long while, and it's incredibly exciting for us to see it become a reality. We'll have about 5 or 6 weeks of in-orbit testing, and then we'll be in service. We talked about our [post] of service plans. We believe we're ready, and our channel partners are enthusiastic. As anticipated, the commercial networks business is seeing solid revenue and orders growth, due to a combination of new programs and increasing sales of terminal products.

The launches of an Eutelsat's KA-SAT and our Viasat-1 enables user terminals (inaudible). Mobile broadband has seen steady growth in maritime and aviation terminal sales. The launch of ViaSat-1 should have a favorable on our competitive position for new international Ka-band network sales. As we've described, fiscal year 2012 is an investment year for us in commercial networks. Our government business is operating on margins that are trending towards our historical levels. And we're seeing growth, that we think reflects the underlying strength of the markets that we've been working on, and progress we've made in those markets.

Obviously, the DOD budget makes for an extraordinarily different difficult macro environment, but we're optimistic that once DOD works through the delay phase [transient], and plans start to emerge to deal with the budget realities, that some of our initiatives will be some further embraced, to save costs and increased operational capabilities. So that cover the highlights. And at this point, we would be able to take questions.

Thanks, sir.

(Operator Instructions).

One moment for questions to queue. Our first questioner in queue is Ron Epstein with Banc of America. Your line is open, please go ahead.

Hi, it's Elizabeth in for Ron. I just had a couple, actually modeling questions. One, how should we think about how much interest will increase? And then, also depreciation once the satellite is placed into service?

Okay. So the satellite is about $350 million in including the capitalized interest fees. And it will have a service life of roughly 15 years. We'll set that once it goes into service, and all the check outs complete though. The remaining about $100 million of other capital for the gateways of -- and all the ground infrastructure, has a weighted average life of about 7 years. And from an interest standpoint, there is -- we have a $275 million bond and 8.875 coupon. And then we have amounts on our line of credit, which has a weighted average borrowing in the 4.5%, 5% range. And basically, it will just depend on the capital amount that we have. But fundamentally, for the most part, we've been capitalizing the lion's share of interest expense each quarter. And once the satellite and other ground equipment is placed in service, it will -- will no longer be doing that.

Okay. And then how many subs do you have on WildBlue as of the end of this quarter?

It was about 385,000.

Okay. And then one more if I could. What are you thinking about the launch of the next satellite and the timeline for that?

And so we've been working on a plan for that. We've said that, that's been a little bit -- will be influenced by the success of this launch. So that's taken care of. So I'd say, we're kind of -- realistic objective would be sort of mid 2015. Maybe we can do a little better than that, but that would be a -- kind of the target.

Okay. Great. Thanks so much.

Thank you.

Our next question in queue is Mike Crawford with B. Riley & Co. Your line is open. Please go ahead.

Thank you very much. Did you say that's a SurfBeam 2 modem production was impacted by the Thai flooding, maybe from [Fabranet] or another contractor? And what's the status of your inventory there?

Rick, did you want to talk about -- Yes. So we use Benchmark as our supplier. They have a facility in Thailand, and so that -- of the ongoing production has been disrupted. Rick, do you want to add any more on just inventory status or outlook?

No. I think what we had, was basically two factors going. We talked a little bit about it, was a higher level of inventory in our military side, which we think we'd be able to mine out in the second half. And then we have adequate number of inventory to serve, Barrett in Canada, Eutelsat in Europe, and our service launch here, with both inventory we have, and that has already been shipped, and we have are having workarounds. We're setting up new lines, in Thailand, in areas that aren't quite flooded. And we think we'll -- it's possible we have to deal with their shipping of 1or 2 shipments, but we think we'll be fine.

Okay. Thanks. And then switching gears a little bit for -- regarding national broadband, ubiquitous broadband in the US, has there been any change in the way the government is thinking about this? Has there been any more recognition of how economical satellite broadband could be here?

So the FCC passed an order on universal services reform in the last few weeks -- the -- it appears to us to be mostly status quo. There's still a lot of detail to be filled in. But a lot of it seems to be intended to support the operating expenses of existing rural phone companies for the next 5 years. One difference is they have talked about setting up an alternative technologies fund, which would include satellite, at about $100 million a year on an ongoing basis, as part of the plan. Details for that are still to be worked out, but I would say in a nutshell, that sort of characterizes it.

Okay. Thank you. Final question relates to some of the international opportunities you're pursuing, that's -- lifting up SG&A a little bit? Can you go into any of those, like Australia or other?

Yes -- there's a number of Ka-band satellites in the works, [NBN] in Australia is one of them. There are other programs in the Middle East, Latin America, and we're seeing more interest to get those started. So those are the kinds of things that we're going after. And a lot of them, I'd say several of them are, kind of the residential broadband model we're seeing in Europe and the US. And clearly, we think we're pretty well positioned for those, given -- especially given the launch of the ViaSat-1 So those are the kinds of things that we're spending on. But there's also applications of these Ka-band broadband satellites to mobile broadband as well, and given the traction we're getting, that's a really interesting area that we are also investing in.

Okay. Thank you.

Thanks, Mike.

Thank you, sir. Our next questioner in queue is Rich Valera with Needham & Co. Your line is open. Your question, please.

Thank you. First of all, congratulations on the launch of ViaSat-1.

Thanks.

Secondly, just want to think about -- get some color on how we should think about the transition to the launch year. It seems like churn, I guess, is sort of ramping here in front of the launch. And I would expect it remain elevated, for maybe at least another quarter. Certainly, before you actually get ViaSat-1 in commercial service. So I was wondering if you could talk through maybe the churn aspect of that transition over the next couple of quarters? And when do you think you get to sort of net-net positive ads, given some of the churn coming off of the -- I guess the WildBlue satellite in particular?

Yes. So we have turn -- I mean the -- we've got a couple of offsetting factors. One is as you mentioned, given the age of the existing plans and the anticipation of the new plans, we've seen more churn. And we've had sort of gradual declines in the existing subscriber base. One of the factors that helped offset that a little bit has been the new RUS stimulus plans, which we've actually been gaining traction in, sort of helping stabilize things. I think that we've got another month or 2 before -- 6 weeks, 8 weeks before we start offering the new plans. And we think we've got a good shot at pretty much right in the first quarter, being back to net subscriber growth, right at the beginning of the first quarter, given just the levels of interest and enthusiasm that we've seen around the new service plans.

Is that the first calendar quarter, Mark?

Yes, first calendar quarter.

Right. Right. Got you. Okay. So that's good.

Yes.

And then once you --

I'm sorry. Just the other point I wanted to make was, if you look at sort of what happened with the RUS plans -- and this is part of the reason that we are expressing enthusiasm is that -- a relatively modest improvement there, which is kind of $40-ish for a megabyte plan have sparked a lot of -- I'd say, disproportionately high increase in gross adds. And so that's one of the things that gets us -- gives us optimism that -- the kinds of speeds that we're talking about, at price points we're talking about, will have the effect that we've been expecting.

Okay. That's helpful. And then I know in the past, you guys have talked sort of broadly about the type of gross adds per month you might see. I think you've related it back to what WildBlue saw in its early sort of peak times, before it had any capacity issues on it --some of its beams. Can you maybe revisit those, just to talk about what kind of peak -- or I guess really more sustained gross monthly sub adds you might be thinking about, as things really get just spooled up, as you move into calendar 2012?

Sure. The - we think the (inaudible) past is relevant. And the history there was -- the most interesting time was when WildBlue launched the WildBlue 1 satellite, and went into service in spring of 2007. Now, the -- a couple of distinctions, is one is that, they sort of delay their service launch longer than we are, relative to the satellite launch. That meant, when they launched service in WildBlue 1, they did it nationally. We will be phasing it out, and of course, WildBlue 1 covered the whole country, whereas with ViaSat-1 we're covering the high demand areas, But I think that once you get to 3-ish months into service launch, we should be on a comparable basis, in terms of the high demand areas being covered.

But with the launch of WildBlue 1, they went from about kind of gross add rates, sort of in the neighborhood of where we are now to about 25,000 to 30,000 gross adds a month. And that took about I'd say, 3-ish, 3 to 4 months from launch. Now, they're only able to sustain that, at that time for 3 or 4 more months, before they ran into capacity limitations. So what we're kind of aiming for -- would be the -- really good to see gross adds in that range, maybe a little bit north of that, but be able to sustain it, for longer periods of time.

Right, clearly. Okay, that's certainly helpful color. And then, just wanted to maybe revisit the growth rates for the commercial and defense businesses. I think last time, you had talked about sort of 50%-ish type of growth for the commercial business, and maybe 10% in defense. It sounds like commercial is pretty much on track and defense may be on track with a mix shift or slight movement off that number. Just wondering if you could comment --

I think -- that's -- I mean, those seem like big numbers especially on the commercial side, but so far, we're pretty close to that. And it looks like our outlook forecast still seems to be on -- a lot of that is, combination of projects that we've won, and sort of the growth in the services uptake. So that's -- it's pretty much there, in the commercial side.

On the government side, we might be a couple of points below that, might not quite get to 10%, but I think it's going to be pretty close. And I think we'll certainly see good growth in orders. The only thing that I'd say different from where we were, what we were looking at a quarter ago, are these online network encryptor orders which are shifting out. Some of the other areas, especially the mobile broadband areas, doing better than we thought. So there's a little bit of give and take in there, but it's pretty close.

Great. And just one final one if I could, want to make sure I understood a tax rate. Ron, did you say you are expecting a negative 55% tax rate for the year?

Yes. Basically last quarter, we talked about a 0% overall rate. And this quarter, when we're looking at a lower pre-tax number, primarily from the lower government earnings, and satellite services. As a result, when you apply the eligible deductions, primarily the three-quarters of the federal R&D credit, we end up with a negative tax rate.

Now, is that comparable to the roughly 2% non-GAAP rate you showed this quarter? Are we measuring the same thing there? Or is that a GAAP number you're talking about?

The 55 is a GAAP number.

Right.

The non-GAAP number, obviously is impacted by the -- how we treat the various add backs for non-GAAP purposes.

Sure.

But I would say -- it would be pretty close, because we did have a year-to-date adjustment to get to the negative 55%, so it will probably be a few points higher than that.

Than what we saw on the second quarter?

Yes, than what we saw in -- so well, you had a 2% non-GAAP rate, so I'm looking at roughly a -- maybe a 7% to 10% non-GAAP rate, because it will be a little bit higher on a quarterly basis in Q3 and Q4.

Okay. That's helpful. And then, looking out to the next fiscal year, if -- I guess it depends on the R&D tax credit, which always seems to, but if we did get the R&D tax credit, would we assume -- sort of a similar rates in fiscal 2013? Or how should we think about that?

No, We expect better pre-tax income next year --

Yes.

So when you combine that, and assuming that we get a federal R&D credit, we're looking in the upper 20s, low 30s.

Okay.

Okay?

That's helpful. Okay. That's it for me. Thanks, gentlemen.

Alright. Thanks, Rich.

Thank you, sir. Our next questioner is queue is Yair Renier with Oppenheimer & Co. Your line is open. Please go ahead.

Yes, thank you. Just wondering if you could maybe talk a little bit more about how you came to decide to roll out on the same speed across the board, and then differentiate the programs based on bandwidth limits? It seems as though, yes, that's something -- that's the kind of approach that the wireless providers have taken. But it's the approach that DSL and cable providers left quite a number of years ago. So I was wondering if it was a matter of kind of studies you've done with subscribers, or was it based on the limitations, of the type of bandwidth that you have on the satellite?

So we're trying to figure out a way to provide good value to subscribers. And it's pretty clear that, that value is delivered in 2 dimensions. The -- when you think about the number of subscribers that we can have, the thing that becomes the gating factor for us, is the usage. It's the gigabytes. So when we think about that -- when we think about that -- we're sort of are logically left with a situation where we can offer subscribers volume -- and just to put things also in perspective, there are lots of ways to play the volume limitation issue.

What we are aiming to do is provide volume caps that will give us a very high quality service, in the sense that we can deliver the speeds that we advertise, almost all the time. So you can always play games, or you could say that your volume caps are high, but service performance is poor, and people don't get it for that reason. So right now, we're not -- we're not going there at all. And we have -- but we have other ways which we think we'll be able to improve on the volume caps subsequently. But the point is, that volume caps are the way that you manage the quality of the service, and they influence the total subscriber population that you can serve.

So then, we're thinking well why, if we need to have volume caps, which aren't as high as people can get in other domains, why not offer value and dimension that we can? And that is speed. And so that's what we aim to do, is to give people really good value in the speed dimension, even if the value and the volume dimension is more sort of along the median. And that's -- what we also look at, we've done lots of analysis on usage. And the way we described it is, we're sort of writing the fat part of the Bell curve on the volumes. So we think the volume is -- good enough to provide most people a really good service, that they won't run into. And then we use the speed, as a way to really create excitement around the service.

And that just seems -- it seems to be a natural. A lot of people that have seen the service, when you show it to them, and you show them the speeds, they just find it really compelling, and that's what we're looking for. So I mean the alternative is to provide sort of a comparable volume limits and low speeds, and we didn't really see any point in doing that, when we can provide our (inaudible).

But just as a follow-up, when you say you are aiming at the fat part of the Bell curve, are you talking about that -- where that is for wireless subscribers? Or for wired --

For home -- for home subscribers.

Got it. And then are -- the plans you're going to make available to your wholesale customers going to be similarly structured?

Yes. Well, so that's part of -- what I was talking about is part of what we've been going through with our distribution partners, because in some ways, the notion of volume graded plans as opposed to speed graded plans seems just different. And so we spent quite a bit of time with our distribution partners, sort of going through our rationale. And we're to the extent that they would own the retail plans that they choose, we're willing to support whichever ones they like. But so far, we seem to be converging on the plans the way I described, where our distribution partners seem to find them pretty compelling as well.

Great. Thank you.

Thanks.

Thank you, sir. Next questioner in queue is Jim McIlree with Dominick & Dominick. Your line is open. Your questions, please. Yes, thank you. On that issue, Mark, can you refresh us as to what the total subscriber capacity is for the satellite, given the pricing plan that -- or the service offerings that you've adopted?

Yes. What we've said is, remembering that given bandwidth usage grows over time, that the subscriber capacity is a function of time, and -- but what we are aiming for is to be able to get to at least 1 million subscribers. And the plans that we've described, certainly would achieve that. And they give us some pretty fair amount of maneuvering room, and opportunity to deal with growth, or changes in the competitive environment. And that's -- when I kind of went through -- it's hard in the presentation but I sort of recited the list that we're considering when we come up with our plans, one of them absolutely is, to preserve the potential total subscriber population. And we think that these plans are-- will be -- they'll deliver good performance, they'll be really compelling and attractive, and they'll meet our objectives for total subscriber.

Okay. Great. Thank you.

Thanks, Jim. Our next questioner in queue is Chris Quilty with Raymond James. Your questions, please.

Good evening, gentlemen.

Hi, Chris.

Mark, just a follow-up, you said you want to maintain at least 1 million subs. But I think in years past, you've talked about the satellite having a potential capacity of up to 1.5, 2 million or more subs. Were you just putting the very bottom end limit on the satellite? Or has the operating environment or competitive environment changed that much, that you're now sort of downsizing the potential capacity?

No. Giving sort of a lower limit, we're trying to be conservative. I think there are definitely potential for us to do better than that. And -- I would describe -- there's two factors going on. One is absolute growth in bandwidth usage, which is continuing sort of on the pace of that it's been for the last few years. So it's a little bit predictable, I'd say. The -- where that consumption is not surprising for us. It's a little disappointing that we're coming into market 8 month later, because there is a time value to bandwidth. But overall, I wouldn't say we're surprised.

And then the other factor is the ability of alternative technologies to deal with it. Because part of what we're trying to do, as I mentioned before is sort of positioned ourselves at a certain point in the under-served market. And we really haven't seen any surprises there, as well. So I would say is the ranges that you describe are all sort of intact. We certainly have upside relative to the million, but the million would be pretty darn good. And so we're aiming, we want to sure we keep that in play, with maneuvering room.

And I have a Verizon 4G card, and they lie, when they say 12 megabytes. So if you deliver anything near that, you'll do well. (Laughter).

Yes, so I don't want to pick on any of those. I -- I believe that for a couple of reasons, that using a satellite service that advertises 4 megabytes would probably be more reliable than a mobile service that's advertising the same speed. I think it'll be -- have less jitter, and a lot of that has to do with the modeling and dimensioning that we've been doing. But we're getting close enough to where, we don't have to speculate about it anymore. We'll find out a lot in a couple months.

Okay. And so can you talk about how the introduction of those types of plans are going to impact your existing subscribers on WildBlue, which is already experiencing churn? I mean, obviously, if I'm paying $50 a month for 512 kilobytes, and I find out, the same service provider is offering 12 meg, I'm going to want that deal like, today?

Yes. So -- right. That's always been a consideration, and we have incentives. We'll have upgrade plans that we'll offer. And the principle that we've talked about, kind of ever since we started, is very similar to the principle that people use with wireless plans. Which is, we'll have basically upgrades that people can do if they're in -- under contract, in plan, if there -- if they've out of -- if they've already met their minimum commitment, then we'll have a plan for that. But basically, we will treat our existing subscribers at least as well as new subscribers, in terms of offering them the opportunity to convert to the new plans. And we've sort of bake that into our outlook, at some number of a gross adds that we'll have on new service, will be conversions from the existing services.

That said, we think we'll also have some ideas and promotions that might make it more attractive for people, than it currently is, to stay on the current satellites. As an example, one of the things is, as people migrate from the older satellites to the new satellites, will free up bandwidth on the old satellites, and that will create some maneuvering room for us. As an example, which will let us give us some incentives to existing customers who don't necessarily want to go all the way from where they are now to the new plans.

So would you anticipate that there's going to be -- I mean, I'll ask the question one way, and then another way.

Okay.

How have you modeled out WildBlue, if everybody on the satellite wants 12 megabytes per second, how many subs can you squeeze on it? And I guess the alternative question is, do you think those people would be happy with 6 megabytes for maybe paying less per month, or having a bigger cap, and that's how you make it work?

Yes. Yes. Yes. So those -- it's basically -- you're on the right track. There is that. There will be some -- and we've talked about this in the past, that there are some plans that we'll offer on the existing satellites, that are sort of in between. And remember, we have about 50% of the geographic area of the US is not covered by ViaSat-1. So those people that are on the WildBlue 1 or Anik F2 satellites, that we just can't -- with this current satellite offer them the 12 megabyte per second plan. So that has clearly, a moderating impact on the rate which people -- on the total number of people that are going to be migrating.

On the other hand, we'll have -- like I said, we'll have improved plans to offer them, which use the new generation of networking equipment, which also gives us some bandwidth efficiency gains relative to where we are now. Then we'll be able to take advantage of extra bandwidth on the old satellites, even with the old equipment, and that will allow us to offer certain promotions. And then the other thing is, in -- we have looked at, is what happens in similar domains, when people offer -- for instance, speed upgrades, that require an equipment change, whether it's on wireless or wired services? And that gives us a sense of the rate at which people will migrate. We're trying to factor all those things into our plans.

And I doubt we'll do it -- we'll predict it perfectly. But we got levers to play with as things progress, in terms of let's say, the types of incentives we offer for conversion, or the alternatives we can offer to people, to do just like what you said, which is to offer something in between.

And I'm sure you probably heard earlier today, EchoStar Hughes reported their results. And I think for the first time ever, they failed to add any new consumer subscribers. And they pointed to very good gross adds, but a higher churn rate, and the churn rate being related to involuntary deactivations due to customer credit. Is, a, is that something you're seeing in your subscriber base? And b, does that impact the rate at which you think you can grow subscribers on the ViaSat-1 service?

For one is -- for one -- it's a little bit hard to compare churn rates and churn between the use approach, and the WildBlue one. I think we've had some differences in sort of how we frame our service, and how we manage it. But yes, I'd say when you look at deactivations for us, kind of the main ones -- we've talked about this before, sort of what one of the main ones for us, has been people who find that 3G wireless became available at their home, and it offered a better value than the 500 kilobyte plans at $50 that WildBlue had before. So clearly, we think we're going to solve that one.

Also, some people just don't perceive as a real -- given modern sort of bandwidth requirements, don't perceive that 500 kilobytes relative to -- at $50 -- relative to dial-up, at say, at half the price is a great trade. So again, we think we'll be dealing with that one. So the main thing that we're aiming for are to deal with the churn that's associated with the service quality, and we think we're going to do well there.

The churn related to involuntary deactivations, I'd say that's a factor. And I think given the economic times, I think a lot of different services are seeing some of that, as I'd say, we are, to some extent. But I think that the biggest factor for us, is that by repositioning the service to actually be better than terrestrial alternatives, we're going to widen the aperture for us. And I think that will help us get good quality customers, just to be -- just have a bigger customer base to choose from.

I say, Mark, one thing I'd add is, I don't know if there is a difference at all, because we don't know their data, but we -- over a year ago now, implemented some tighter credit review of the new customer we've added -- actually, I think we've improved a little bit in that area.

Final question, since I hear you, Ron. You said the 2013 outlook looks consistent. Is that consistent with, what you would have said 6 months ago, before you had the delays? Or is it -- you're just saying the consistent trajectory from being 6 months behind?

I would say it's more the latter, I mean from positioning, because you're going to have -- had we launched a 6 months earlier, we would've had a higher run rate of -- we would of had (inaudible) more beginning subscribers, a higher run rate of subscribers leading into the year. So I think it's really -- nothing has changed from a trajectory, it's just the timing of when that starts.

Got you. And mid 2015, ViaSat-2 is mid 2015 launch?

That's what we're aiming for. I mean, a lot is going to depend on the exact proposals around the satellite architecture that we have, and trade-offs there. But that's a -- I think that's a -- right now, that's a good working target.

Okay. Great. Thank you.

Thanks, Chris.

Thank you, sir. And just as a reminder --

And --

I'm sorry.

We'll take one more call.

Understood. Our next questioner queue is Brian Ruttenbur with Morgan Keegan. Please go ahead.

Thank you very much. A couple quick questions on the ramp with ViaSat-1. A number of users, you expect per month, starting in January? I assume that's when you're bringing on subscribers. Can you give me exact month or timing of that?

Boy. What I would say is -- this is going back to the historical stuff we talked about in the past, where when we covered the whole country, we are getting in the 25,000 to 30,000 gross adds a month range. We've been operating more in the 10,000-ish, 12,000-ish range. So I think reasonable approach would be to sort of -- envision some ramp from where we are, to where we'll be, over the next 3, 4, 5, months starting in January, something like that?

Great. So is it the goal to eventually get to 20,000 subscribers per month? Or is it starting off at that level? Or is it --

Well, no -- so I just want to repeat what I said before, is that when historically, one WildBlue 1 went into service, which was in the spring of 2007, they jumped very -- over a 2 or 3 month period from about -- around where we are now, and maybe a little less, up to 25,000 plus a month. And that was with -- when -- with full national coverage right from the launch. So we're going to phase-in our coverage, and our coverage will cover about half the US. But that half is disproportionately higher demand, and a half we're not covering. So I think -- we haven't said 25,000 to 30,000 is upper limit. We think we could handle more, we're just sort of citing what happened historically, because I think is a reasonable chance that 6 or 9 months from now, we could be doing better than that. But I think what you'll do, is you'll see some ramp from where we are now, that will grow as we add a little more coverage -- traction with the dealers. So, we'll be disappointed if 5, May, June, we're not at that rate of 25,000 to 35,000.

Okay. And just final question, you've mentioned government costs are higher -- and that's the reason for the flat EBITDA, is that correct?

Well, it's just that costs are higher, and more that, the margins -- that we have margin mix issues, and that one of our higher-margin -- relatively higher-margin programs has been the inline network encryptor production. And that production has -- our customers are telling us, is they're not going to be buying them at the time they thought they were before -- pushes it into our next fiscal year. And that is not -- that's not the only one, but that's probably the largest effect, that's shifting our EBITDA.

Okay. Is that a revenue impact then also?

Yes. Yes. And we talked about that a little bit, which is that, some of that revenue would shift out. But on the other hand, we've actually had better than, sort of expected growth in revenue from some of the newer areas, like the broadband mobile. So that, it will cover, maybe not all of that, and then we talked about like 10% growth in our government business. We might be a point or 2 below that this year. But the revenue that comes in, is on newer programs, more development, doesn't carry the margins at the production stuff does.

Good, I got it. Thank you very much.

Brian, Brian I think one of the -- back to your point, our cost is actually down, (inaudible) a little bit on the government side. So what he really was saying is the shift in orders on I&E products, which are book and ship and high margins are lower -- we're forecasting lower growth there, which will reduce our growth rate for the year a few points But we're getting really good new order flow in some of these other areas that are strong. So it's just -- it just can't offset it in the same period, because one is book and ship, and the other one will take a little longer -- a little longer gestation period.

Right. Thank you very much.

Thank you, sir. And with that, that concludes our time for questions and answers. I'd like to turn the program back over to Mr. Dankberg for any closing remarks.

Okay, thanks. We really appreciate everybody's interest and participation and all the questions. And look forward to next call, when we can talk about, what we've been doing with the satellite in service. So thanks a lot again. Talk to you next time.

Thank you, sir. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. Have a wonderful day. Attendees, you may disconnect at this time.