Viasat Inc (VSAT) 2012 Q4 法說會逐字稿

Welcome to the ViaSat's fiscal-year 2012 fourth-quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed Mr. Dankberg.

Thanks, good afternoon, everybody. Welcome to our earnings conference call for our fourth quarter of fiscal year 2012 and I'm Mark Dankberg, Chairman and CEO. I've got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Keven Lippert, our General Counsel. Before we start, Keven will provide our Safe Harbor disclosure.

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is simply a reminder that certain factors could cause actual 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. That's it, back to you, Mark.

Thanks, Keven. So, we will be referring to slides that are available over the web and we'll start with highlights and a top-level financial summary for our quarter and for fiscal year 2012 as a whole. After that, Ron and I will discuss financial results in more detail. Then I will provide an update on our business segments. Finally, I'll update our outlook for the next fiscal year and we will summarize things, and then we will take questions.

So, the main event for us in our fourth quarter was the launch of the Exede 12, 12-megabit per second consumer broadband service over ViaSat-1 and the Exede 5, 5-megabit version over our legacy satellites. Our objective is to not only grow our consumer broadband subscriber base and earn an excellent return on the ViaSat-1 satellite. To also show that with the right combination of space and ground technology, we can compete effectively in the broader market for high-speed internet services. We believe that sets foundation for a long-term growth franchise. While it is still early in the game, so far the data seems to support our strategic you. We feel we are making steady progress towards our targets in growing this subscriber base, too.

Our Commercial Networks business achieved strong revenue growth of about 50% year-over-year in the fourth quarter, and about 37% for the fiscal year as a whole. That resulted from a good combination of significant new projects, and growth in product sales, especially as a result of network deployments at Ka-band and in mobile broadband. We earned an important new international Ka-band broadband project in Saudi Arabia in the fourth quarter as well. Adjusted EBITDA in the segment increased for the fourth quarter and the fiscal year as a whole although operating earnings there were negative in this segment on investments in product development and SG&A cost including significant new business proposal costs.

The government segment showed incremental year-over-year revenue growth for the fourth quarter and the fiscal year as a whole, despite a very challenging macro environment. That's leading to revenue contraction in most of the principle competitors in our defense communications markets. This segment was very solidly profitable for both the fourth quarter and the fiscal year as a whole, we still perceive good growth opportunities going forward, even if order timing remains difficult to anticipate.

This next chart shows some key financial metrics for the fourth quarter and the fiscal year compared to last year. This data was also in our earnings release. New orders for the year were really strong, at just over $1 billion, a little over 16% higher than revenue was for the year. Companywide revenue for the year grew by about 7.7% even though sales in the Satellite Services segment contracted by about 5% due to the ViaSat-1 launch delay. For the fourth quarter, year-over-year revenue grew by just over 11% among even though Satellite Services revenue shrunk by about 8%. Adjusted EBITDA Companywide contracted largely due to launch delay impacts that we've discussed in prior calls.

In a few minutes, Ron will give more detail on revenue, earnings, and adjusted EBITDA by segment for the quarter and the year. On the whole we feel that absent the launch delay effects the business is doing pretty well. In particular we think even incremental revenue growth in our defense business is a good sign given the macro environment. I'll talk more about the landscapes for each of our areas after Ron goes into more detail on the financials.

Thanks Mark. We'll start with segments then go into further discussions on the P&L, the balance sheet, and then cash flows. The reconciliation for segment adjusted EBITDA was included in our earnings press release filed earlier on Form 8-K. In Satellite Services revenues were down for the quarter and year, year-over-year principally from lower wholesale subscriber revenues, partially offset by higher sales for mobile broadband service. The lower wholesale subscriber revenue is due to the ViaSat-1 launch delay and our distribution channels reducing their sales and marketing of the existing service in anticipation of our Exede internet service launch. These results were consistent with our communications at our last several calls.

Also consistent with our prior communications year-over-year we've incurred significant costs related to fiber backhaul, gateway site cost in our data center that were tied to the original launch date. This contributed to lower earnings and adjusted EBITDA. Since we began the Exede service this past quarter, depreciation from the satellite and gateways and the incremental selling costs outpaced the incremental revenue from new subscribers. Given our subscriber growth plan we expect this to turn later this calendar year.

In the Commercial segment, our sales growth is principally from antenna systems and consumer broadband sales, as well as satellite systems development and satellite payload technology development programs. Our operating loss and adjusted EBITDA of the quarter and year-to-date reflect the production startup cost effects of the consumer terminals, lower margin development programs, higher selling costs related to a number of larger international opportunities we're pursuing, as well as continued investments in advanced satellite communications and antenna technologies which not only benefit the Commercial segment, but the Government and Satellite Services segment.

Government segment revenues were up slightly, year-over-year, primarily from higher government broadband, mostly from the ISR applications and our Blue Force Tracking 2 revenues which were partly offset by lower Tactical Data Link and Information Assurance product revenues. Given the US government budget timing and amounts, our product revenues have been pretty lumpy, increasing and decreasing with the amount and timing of certain awards. As we look ahead we expect our service revenues to continue to grow. Our operating earnings improved for the quarter and year-over-year from better program performance, a greater mix of higher-margin sales, and lower R&D costs.

As we look at the rest of the P&L, for the fourth quarter and fiscal year the other notable items include (technical difficulty) -- including in selling and general and administrative expenses for the fourth quarter and fiscal year 2012, are litigation expenses. Year-over-year litigation expenses increased by about $1.8 million, of which the Loral case represented about $1 million. Regarding the Loral litigation given the nature of the case, the amount and timing of cost we expect to incur will vary based on interim rulings and the pace and amount of discovery. So this could cause these costs to be lumpy from quarter--to-quarter.

Research and development expenses are down, reflecting a shift in our engineering resources to more funded development projects over the same period last year. The difference in other income is due to the capitalized interest effects year-over-year and the issuance of our new senior notes in the fiscal fourth quarter of 2012. As discussed in the last call, ViaSat-1 and associated ground equipment were placed in service this past quarter and we therefore stopped capitalizing interest related to these assets. In addition, our total interest expense increased with the issuance of the senior notes which yields a higher interest rate than our revolving line of credit. The combination of these two items drives the year-over-year increase. In fiscal 2013, we expect interest expense to be significantly higher.

The significant difference in income taxes, year-over-year, is due to two reasons. Lower pretax income, year-over-year, and secondly the effects of the federal R&D tax benefit. Fiscal year 2011 reflects five quarters of federal R&D tax benefit, while fiscal year 2012 reflects only three quarters of benefit. The federal R&D tax credit benefit expired on December 31, 2011 and has not renewed.

Turning to the balance sheet, overall our balance sheet metrics are strong with very good liquidity, and following the new senior notes issuance in the fourth quarter, a better balance of matching long-term revenue-generating assets with long-term debt. We continued to make good progress in receivables and day sales outstanding continue to be near-record lows. Inventory increases in the year are primarily related to seating consumer terminals in Europe and North American in support of the KA-Sat and ViaSat-1 service rollouts this past year. The increase in property and equipment and other long-term is principally related to the ground equipment and other cost associated with our Exede internet service.

On the liability side the growth in current liabilities is principally from customer advances, reflecting better payment terms. In the fourth quarter, we issued $275 million of senior notes due 2020, net of debt issuance costs at rate of 6.875%. We used some of the proceeds to repay amounts outstanding on our line of credit. At quarter end we had approximately $313 million in availability under our line of credit. We believe our cash on hand and availability under our revolver provide a significant operating flexibility.

Turning to cash flows, cash flows from operations for the fourth quarter were very strong, mostly from working capital improvements and helped us get back in line with our expectations for the fiscal year. For cash used in investing activities we continue to invest in customer premise equipment for our retail satellite service and are completing various back-office initiatives in support of the Exede internet service. Also, to support our growing global mobility broadband business, we are investing in additional network infrastructure and equipment. Since the ViaSat-1 satellite and related costs are largely behind us, cash flows for the next couple of quarters will be primarily influenced by the ramp of our Exede service launch, the retail wholesale subscriber mix, and the timing of when we start construction of our next satellite.

Cash flows from financing activities primarily reflects the issuance of our new $275 million senior notes, and the repayment of the outstanding balance on our line of credit. We believe the issuance of these notes combined with the announcement earlier this week of the amendment to our line of credit, which improved our credit terms, provide significant liquidity and flexibility options for the Company to meet its strategic objectives. I'll turn it over to Mark now to talk about our business segments in more detail.

Okay, thanks, Ron. So, we are finally under way on the Exede consumer service and this is a good time to review our strategic objectives, since that's the context for all of our tactics, priorities, and the data we will present. Probably, the single most important strategic objective is to market proof that a good satellite broadband service can be preferable for consumers and less expensive to deliver than some terrestrial alternatives.

Our Exede service is probably overkill for the unserved-only market but by attracting underserved customers, our addressable market in the US becomes much larger than it was. Importantly, that market looks bigger as we continue to improve the product and the value we can deliver. Plus our international market opportunity could be multiples of the domestic market. Just as important we believe that almost all our go-to-market tools and tactics really depends on who our target market is.

So the biggest change we've made compared to the legacy WildBlue business has been the definition of the services. WildBlue had a wholesale and retail ecosystem that was built around three tiers of service, that were differentiated by speeds. We decided to offer Exede 12 under ViaSat-1 coverage areas and Exede 5 under the legacy satellites each with much higher speeds than the fastest legacy WildBlue plan, and then offer varying amounts of gigabytes modeled on our 4G wireless plan.

So that's had important implications on our distribution arrangements, our fulfillment systems, retail sales channels, and brand management. It's too soon to be certain but we will show you data we've compiled so far and it supports the market expansion view. We believe that's because users do value the speed and responsiveness of the network, the effects of the strategy and the WildBlue ecosystem made a number of things harder. Therefore, direct comparisons with WildBlue's last satellite launch on WildBlue-1 were a little less meaningful. But we also think that their broader market makes for a much better business opportunity and that we are on a good path to capitalize on that.

So this chart shows that we installed a total of about 49,000 new user terminals across the satellite fleet in the March quarter. That's just about double the number of installs we did in the prior quarter, before the launch of the Exede service. Exede service wasn't available everywhere in the country until the last month of the quarter. So, the mix of the service sales over that fourth quarter, over the fourth quarter is not really meaningful. But on of run rate basis, over 75% of our new installs are for the Exede-12 on ViaSat-1. And somewhere in the range of around 7% are Exede-5 on the legacy satellites.

We're running around 15%-plus on our legacy services which are largely under the RUS stimulus program. New orders were actually significantly higher than the number that we installed, but for this partial quarter of service introduction, installations were the bottleneck on growth. Some of those new installations that we did were migrations of legacy users who could be either wholesale or retail on to the Exede branded services, and therefore those didn't yield net new subscribers. Disconnects, which are almost entirely from the legacy services, also affected net subscriber additions. The rate of legacy disconnects in the fourth quarter was pretty similar to that in the third quarter.

This page shows some key metrics around those new installations. In the fourth quarter, about 7,100 of the new installs, or about 15%, were for subscribers migrating from a legacy service to the new Exede version. Since Exede was only available for a portion of the fourth quarter, we'd expect both the absolute number and the percentage proportion of migrations to go up in our first quarter of fiscal year '13. Overall we expect that the number of migrations may probably subside in subsequent quarters. About 63% of the installs in the fourth quarter were for retail subscribers. We think this is likely to continue and as long as we can achieve our overall user install rate goals, that retail wholesale split is fine for us.

The blended ARPU for the installs in the fourth quarter increased markedly in the range of about 15% compared to the legacy WildBlue history. That reflects several factors, including a greater retail proportion, higher pricing for the wholesale plans reflecting the much higher bandwidth recurring content per subscriber, and materially higher prices for the premium versions of the wholesale and retail plans, which also reflects the much greater value of those offers to subscribers. Obviously, the higher ARPU relative to past history and financial models is a really important benefit and allows us to achieve comparable revenue targets with the lower absolute new subscribers.

Even so, the absolute ARPU is still in the competitive range of terrestrial services. We feel we are often delivering higher consumer value than land-based alternatives. That's supported by survey results from a sampling of our new retail Exede customers. While about 58% of those customers would be described as coming from the unserved market, and that is, they either didn't have home internet at all, or they only had dial-up, or they only had a competing satellite service. About over 30% of the new Exede retail customers said that they previously used a terrestrial broadband service at that same address.

Most of those were from 3G or 4G wireless or DSL but actually a meaningful number also came from cable modem or other systems. About 9% of the survey respondents didn't know what they had used previously. Overall, we believe this data paints an encouraging initial strategic picture for the Exede service and makes it worthwhile to pursue the strategic path we are on. So one really important component of the strategic view is customer satisfaction. We felt that customer satisfaction data for the WildBlue legacy services indicated that if we could boost the speed and reliability of the service and therefore the relative value -- especially in megabit per second per dollar of subscription cost terms. We could really boost our customer satisfaction rankings into territory that's occupied by high speed terrestrial alternatives.

This chart shows data that was collected from new Exede retail subscribers by CFI Group, using the American customer satisfaction index methodology and samplings over the last three months. This initial data is consistent with what we would have expected and targeted from a strategic perspective. We think the results place us kind of in the middle of the pack or better for all broadband services, including terrestrial and we have plans that we think can further improve our customer satisfaction from here. Since it's still pretty early we are going to monitor this closely.

But the initial data supports that the network is working pretty well and we've been measuring network loading with respect to our traffic and network quality models. We're aiming to sustain the service quality levels that we've started with as we add subscribers through a notional 1 million basic unit subscriber level in our out years of service. Initial results are consistent with our expectations which is also important and a very positive metric.

In summary then, we believe the data we've collected to date supports that we can address a substantially larger market for satellite broadband than has been previously shown; that our plans are attractive to consumers including at least some of our terrestrial alternatives; that their initial customer satisfaction is within the range of those terrestrial alternatives; that we've got the satellite capacity to sustain our performance as we scale the subscriber count; and that we've got an opportunity to earn a higher blended ARPU by introducing new features and services. But we've still got a still bunch of work to do.

We're focused on growing our installs and the subscriber count. We doubled the install rate in the first quarter of operation and are aiming to double it again over probably the next two to three quarters. If we could do that, that would get us to the range of 100,000 new installs a quarter, or better than 30,000 a month. Obviously, we will have challenges to do that including the launch of [view] satellite later this summer. But based on what we know now we think that's an achievable target.

So far, we have used very limited promotions. We've wanted to use promotions that are consistent with our target market and we believe we've got data now that will help us do that. The WildBlue brand is quite well known and is trusted in the context of rural unserved markets. But well known is not really exactly the same as well-regarded in terms of the more metro, underserved markets. That's where we want to position Exede, but that brand is completely new in the more traditional satellite market that initially accounts for most of the growth. So it's a tricky balancing act and we are working to improve there. We believe we've got data that suggests we're making progress but it's a long-term project to establish a new brand and weed out the old. Again, we believe strategically it makes sense to do that.

Also as a result of redefining the service in economics, we're assembling a more retail-centric installation and fulfillment network, it's more aligned with our strategic view and will give us more control of fulfillment and logistics. But we hit install bottlenecks fairly quickly in the fourth quarter and that demand surged faster than install capacity. It's good that the demand was there, but it is disappointing that we couldn't capitalize on it to the greatest extent. So we are instituting some changes in our fulfillment metrics and compensation we believe will better match capacity with demand.

We reached a new Exede distribution agreement with DIRECTV that adds to our existing DISH Network and NRTC agreements and is an important milestone for us. We believe DIRECTV is a natural partner and that the performance and customer satisfaction associated with Exede complements DIRECTV's premium video offerings. We have recast the distribution relationship into an agency format so those DIRECTV subscribers will be retail for us. We're working with DIRECTV on a referral basis pretty much immediately and will integrate the bundled offering later this calendar year.

Finally, all the data we have obtained to date are very encouraging in the context of our ViaSat-2 plans. Our primary objective with ViaSat-2 is to improve service economics and then to fill in and expand coverage areas. We believe we have a plan to that, we've been targeting the middle of this calendar year to get the satellite starter, and are making progress towards that goal. Our mission with ViaSat-1 was to open a path to an enduring business model, a sustainable competitive advantage. We think ViaSat-2 will bring that picture into even sharper focus.

So now turning to our Commercial segment. The number of Commercial satellites using Ka-band is steadily increasing and we believe we're the leader in Ka-band network technology. We're investing significantly in new technology to make the benefits of high-speed, low-cost Ka-band with accessible to a broad range of markets. While some of these applications overlap to some extent with terrestrial alternatives, a number of them compete only with more conventional Satellite Solutions. With ViaSat-1 in service and Exede showing what is possible, we're getting more and more interest in Ka-band for a range of applications.

This past quarter we won a significant contract with the Saudi Arabian National Science Center, for the network infrastructure for the Ka-band portion of Arabsat-5C. One of the key factors in laying the program was the breadth and depth of capabilities we have including for home, enterprise, defense, and mobility applications. The program is an excellent opportunity to showcase the enhanced capability that high-capacity Ka-band offers compared to more conventional fixed-satellite services satellites and to jointly develop new technologies, too.

Revenues in this segment grew significantly as we increased user terminal shipments; and continued to make progress on key projects, including the MEXSAT ground-based beam-forming program with Boeing; and the Iridium Ka-band payload modules for Thales. We continue to invest significantly in new Ka-band technology for consumer, in-flight Wi-Fi, maritime, land mobile applications such as newsgathering, and defense. Most of the R&D expense is recognized in this segment. A fair amount of the benefits of that technology are realized through our satellite services and government segments though.

We are aiming for the first test flights on Ka-band Wi-Fi this fall with JetBlue, with Commercial service probably commencing early next year. We're already doing initial trials of Ka-band newsgathering capabilities. Then, the segment is also leading our investments in subsequent generations of high-capacity satellites involving both space and ground technologies. We're enthusiastic about the potential to increase both the capabilities and the economics of satellite broadband. The early subscriber data for Exede is encouraging in terms of market opportunities and we're aiming for the next step of ViaSat-2 procurement contracts.

So obviously the defense contract environment is challenging. We were actually able to squeak out a little growth for the year and believe that definitely puts us in the minority. We also returned to more historical margins in this segment, which was an important objective when we entered the year. We had a couple of awards like our MIDS JTRS production orders slip out of our fiscal year or the results would've been even better. Our government mobile broadband services area continues to grow fast on a quarter-over-quarter basis as you can see from the chart. We believe we continue to gain momentum in Airborne Satellite; Intel, Surveillance, Reconnaissance; and Command and Control applications. We're continuing to add new Airborne platforms, new missions, new user organizations, greater geographic coverage, and we now have Ka-band services under contract, too.

In the fourth quarter we [flight] demonstrated what we believe is the first ultra-small aperture Ka-band ISR and Command and Control to a number of user organizations with functional capabilities significantly greater than that available at Ku-band. There's already significant demand for that. We made the initial Blue Force Tracking 2 deployments this quarter, and started deployments into a second military operations theater. Our small tactical terminal achieved recognition by the JTRS community, and has been selected for platform testing as a possible alternative to the small-form factor AMF, or Airborne and Maritime Form-factor version of JTRS.

Finally our MIDS JTRS received go ahead for full-rate production and just subsequent to the end of the quarter we were awarded the first production contract initially aimed at the F/A-18 platform. We're happy to see the investments we've made in JTRS network radio begin to turn into real production programs. So we've got a slight update to our overall outlook slide. In general the trends we've been discussing remain consistent, we've added fiscal year '14 to the slide and have reflected the benefits created by the high-incremental margins at Exede scales, beginning in the back end of fiscal '13 and then in fiscal '14. Our solid core government and networking products business helped reduce downside risk.

Given that we only have about one quarter of experience with ViaSat-1, it's still hard to accurately forecast all the factors associated with growing our consumer retail business such as the specific nature and timing of subscriber acquisitions and fulfillment costs, and the net ramp rate of subscribers due to the mix of migrations and new customers. At this point, none of those factors is really outside the range of expectations, but it's still early. We're aiming to get more of a steady-state understanding by the second or third quarter of this fiscal year.

So in summary, the main event is our satellite broadband segments subscriber growth. It's been over four years in the making, and we believe many of the elements of our strategic view are being validated by market data. We've achieved a lot, we've put up 20 teleport gateways, launched a new brand, created a disruptive service, achieved substantial improvements in initial customer satisfaction, widened our market reach meaningfully into underserved territory, and engaged a more retail-centric fulfillment network, but we still have a lot more to do. The addition of DIRECTV to our existing distribution system will help us achieve the growth rates we are targeting. This quarter we've reported what we believe to be key metrics that can help create models for the financial performance of the satellite services segment, and we'll update those throughout the year.

We've got some pretty exciting stuff lined up for the rest of this year, including the launch of our in-flight Wi-Fi service with JetBlue and then United Airlines; Ka-band Airborne Defense applications; Ka-band newsgathering; new host platforms for our joint tactical radio system projects; international Ka-band opportunities; and terminal shipments will ramp as our partners grow their subscriber base. Our Commercial networks business has seen the growth we've anticipated. We feel like we have a good opportunity to achieve double-digit growth in our Government segment this year, but of course timing is difficult and the environment is challenging. So, that's it for the prepared remarks and we'd open it up to any questions you all could have.

(Operator Instructions) Ronald Epstein, Bank of America Merrill Lynch.

This is actually Kristine Liwag calling in for Ron. My first question is regarding ViaSat-1. I think you touched base on this a little bit earlier, how many gross and net subscriptions did you add in the quarter?

We did 50,000 installs, about 49,000 installs, we said about 7,100 of those were migrations. So, you can call it gross adds, 49,000 less that, and that led to around 8,000 net when you subtract out the migrations and [just turn], the disconnects.

I see. And how many do you expect to add for fiscal year '13?

Right now, like we said, our bottleneck was fulfillment and logistics. So that's what we're working to increase capacity on and we're making some tweaks to that. It's going to grow, the rate of installs is going to grow. We think like we said, we'd like to double that rate of installs over the next couple quarters. We'll just have to see what the migrations are, and disconnects are going to come down we think, ultimately because the services on the old satellites are actually getting a little bit better. That basis is shrinking and there's not much turn on the new base at all.

Great, well thank you.

Mike Crawford, B Riley and Company.

I am hoping you can walk through the model a little bit, if you hit this target of 100,000 adds in the quarter with a 65% or so retail mix. It sounds like to me like that could be $45 million subscriber acquisition costs in the quarter assuming around $700 a subscriber, is that a good way to think about it?

It's fair, yes.

So, at what point, if you are running at that point at that rate. Then at what point is the approximate timing you'd expect it to flip in the cash generation versus building up this long-tailed recurring revenue stream at a higher ARPU?

A lot of it has to do with also the ramp early on in gaining that base throughout the year because the one's that we're adding in Q1 will help offset some of that later in the fiscal year. But from a cash flow basis it could conceivably run negative throughout the fiscal year. Probably turn beginning early next fiscal year. (Technical difficulty) Because of the incremental.

Yes, the incremental.

The incremental was $48. Then just jumping gears a little bit on ViaSat-2. So, it sounds like you haven't awarded the procurement contract yet but you're close. Is that a satellite that you're still targeting for the North American market or was that something you might consider putting internationally where you said you see the opportunity being multiple times larger?

That next one is primarily North American.

Okay, thank you.

Tim Quillin, Stephens.

Can you help me reconcile the 8,000 net subscriber additions and why the Satellite Services revenue went down quarter-over-quarter?

It's primarily related to the timing, we had greater reductions earlier in the quarter as the service was being rolled out. When we went public with the rollout in the middle of January -- there was before we had the entire coverage which occurred in late February, early March you had that bulk of the quarter where people knew about the new service, but may or may not have been able to get it. So there was this interim period where the disconnects were greater than the adds. Therefore, even though we had a greater number of retail subscriber adds which has a higher ARPU and therefore revenue than the wholesale side. It just really had to do with the timing of when the disconnects occurred relative to when the adds occurred.

What was the order intake in the quarter?

It was quite a bit higher, it's a little bit hard to -- it was meaningfully higher than that, and it was good. What we'd say is the demand was high.

Yes. Can you give us a sense of what April looked like either in terms of orders or installs?

I think we're going to wait until next quarter and we'll talk about the quarters as a whole.

Right, right. Then on the Satellite Services business cash cost, looked like they were up about $8 million quarter-over-quarter, is that about normal or were there any unusual startup costs in the quarter?

It was almost all related to the [SAK] if you'd go back, I don't recall specifically what the number was in Q3, but it went up like $10 million or $11 million just the SAK loan in Q4.

Okay, that's helpful. Then just a couple modeling questions Ron, if you can help us out with expected tax rate for fiscal '13, expected interest cost for fiscal '13, and expected depreciation and amortization cost, that'd be helpful. Thanks.

Sure, so I guess we'll start first with taxes. Taxes are going to be interesting because in the fourth quarter we had a pretax loss. If you look at the segment breakdown for the year on a quarterly basis, our Government segment, we expect to be profitable. On the Commercial side, we don't expect the segment to be profitable on a quarterly basis until the fourth quarter. And then in Satellite Services we expect losses in the first half the year with profitability in the back half. What it all means, at a Company level, is that we expect pretax losses in the first half of the year and profitability in the second half, with profitability overall for the year.

Without the federal R&D credit, we think the tax rate will be in the 35% range. And with the federal R&D credit in place, likely in the upper 20%s. So that it on taxes. On depreciation, we've provided some guidance last quarter on the ground equipment. It was roughly $120 million over 7.5 years for the incremental and the satellite disclosed in the slide here that we have here a 17 year life and the value that we're depreciating is $363 million. So, you can do the math on what each of those equal.

Then the third component is interest, so we would expect the balance to be quite a bit higher next year. Just looking at the combined interest on the two bonds, it's quite significant. Dependent upon of the timing of our next satellite procurement and what those terms are. It's going to influence how much capitalized interest we have, and without knowing what those variables are I don't want to provide a specific dollar amount. But just given what our interest expense was this quarter it should be significantly higher in Q1, just from lack of new capital assets and the run rate for the two bonds that are outstanding.

Okay, thank you.

Matt Robinson, Wunderlich.

Can you just give us what the starting subscribers were?

This is about 377,000 -- somewhere in that range.

New subscribers were about 385,000.

Yes, so you had about 33,900 disconnects if I did the rate right.

That range is [with] migrations. (Multiple speakers)

Without the migrations.

I guess the other meaningful metric on that is when you look at the retail wholesale split. Now, retail we've got a little over 207,000 subscribers and on the wholesale side it's a little over 178,000.

Okay. So I know it's probably an unfair number to mark you on because of the timing issue. But it does look like you had about 4.5% monthly churn based on the numbers you gave.

It's about 9%.

About 9% for the quarter.

It's about 3%.

3% per month.

Okay, thanks for the correction. I had it wrong. I had two instead of three in the denominator, sorry about that.

That's about what it's been running for the last few quarters.

Okay, so you figure with better timing this quarter, you might see that go down a bit?

It's going to trend down because the churn on the new subscribers is really, really low. The churn really is coming from the legacy subscribers, and some of those are migrating over, and some will continue to leave. The service should get better on the legacy systems, and you should see it improve there too.

Because you'll have more people on the 5?

We'll have more people moved over to the other satellite.

And dialing up the service on --

To leave more bandwidth, less contention.

On the old services? Your slide data you had $14.8 million for retail CPE, is that the amount that you capitalized?

Yes.

Okay. How much do you expect that to go up this quarter?

It'll really be dependent on the gross adds, and we didn't really talk about what the gross adds were, and then the retail wholesale mix has been fairly steady with what it was in the last quarter.

Okay, I'll let somebody else ask a question, crunch some numbers and come back, thanks.

Just a reminder, we encourage you guys to think about this ramp as a ramp, not as a convex curve. So, just want to make sure when you're laying that out, you're thinking about it that way.

Ken Herbert, Wedbush.

Just first question. In the slide the unserved versus underserved mix, with Exede how do you see that evolving? And the preferences obviously for the Fiber 12 within the various markets whether it be underserved or unserved.

Okay, so the 5-megabit and 12-megabit versions are really based on geography and satellite coverage. So under ViaSat-1, which is really where most of the people and most of the demand is, that will all be the 12-megabit version. Then 5-megabit version is mostly in the mountain state areas. What we're aiming to do is to go out with a consistent message and service throughout the country.

What we think is if it's -- one of the ways we put it is we feel like a lot of the people who get satellite service in the past, we felt like it's the last resort and they're paying very high prices for a low performance. So we wanted to put out a service that people would feel was good and fair. That one of the ways to show that is that people who do have a choice, buy it also. That's the underserved marked. The attraction into the underserved market, what we think would pull people to the Exede service is, is it's just really fast. It's very responsive and most of the time people say that's better than what I have at home, especially if it's DSL or wireless.

So we're aiming to promote those aspects of it and the mix of subscribers will be what it will be. What we wanted to be sure is that people who are underserved would perceive value proposition that once they got it, that they'd be happy. We feel that's what we're achieving so far. So we don't really know what that mix is honestly, I'd say getting close to one-third of our customers from underserved is probably a little more than we would have thought we'd get. We thought we would have made the point with less than that. We think that's a good thing, it just means we have a bigger market. Does that answer your question at all?

No, that's helpful. I guess if I just take a step back when you look at the launch so far, just obviously a few months into it. Would it be fair to say that you've been relatively happy with the subscriber ramp and how that's -- and the marketing side but the execution and the fulfillment is clearly where you've got significant room for improvement, would that be a fair statement?

They're interrelated, and yes. What I would say, and all this stuff is going to vary depending on the market conditions and competitive environment. What I would say is the demand that we saw upon service introduction was really good. It ramped fairly fast and the fulfillment approach was based on a projected ramp rate and the demand was higher and we couldn't keep up. That had some feedback effect on demand, and so we're trying to get that back into balance.

Are there any specifics you can identify from a fulfillment standpoint that you're doing to obviously address this?

Yes, mostly it just has to do with the capacity, the ability to schedule install appointments upon orders. We created some different metrics that our fulfillment channels will be using to get compensated and turn incentives. We couldn't do that instantly and it took a little while to figure out a good formula that we felt would work and work for them, and we think we're there. It'll take a little while for that to take effect but I think it'll do what it's intended.

Great, okay, thank you very much.

Yair Reiner, Oppenheimer.

So first, can you give us a sense of how the wholesale channel is reacting to the new service. Both DISH and the rural telecoms? Also what was behind DIRECTV's decision to be an agent rather than buy wholesale from you?

I would say I think that wholesale channel is -- people seem to be enthusiastic about the service. I think that DISH has been the largest volume wholesaler for us. Our perception, and our perception from DISH viewers is that they're pretty excited about it. I think DISH also has this pending new service, and so it's a little bit tricky to know exactly what they're thinking but I'd say they're selling and they seem to be pretty happy with the service quality. I think it's a good fit for them, I think they're promoting it reasonably well.

NRTC is also pretty engaged, we've met with them. I'd say on the electric utility side there's no conflict and they're really interested in it. The phone company guys are pretty impressed with the service and they're wrestling with what do they do with their physical plant. Those are the views. For DIRECTV, virtually every broadband product they sold except for WildBlue was on an agency relationship, and what they told us was they just felt that, that was more appropriate way to go. So, we said fine, that works for us too.

Maybe you can give us a little color on the decision to depreciate ViaSat-1 over a 17-year period rather, than I think what's more traditional, than 10 to 15 years. Also just to clarify, are you now looking at your total capacity with the three satellites at 1 million? I think previously it was a number a little bit north of that.

I'll do the second one first. We've talked about is in the out years we'd like to have 1 million-ish, and that's not 15 years out, it's like 3 or 4, 5 years out we'd like to have 1 million-ish subscribers on ViaSat-1 at a good service quality. That's what I was referring to there, it's just for ViaSat-1. The other satellites will have less but they'll have incremental capacity beyond that. Ron you want to talk about that?

I think the question though Mark, was that times we've said 1 million to 1.5 million subscribers on ViaSat-1. You're not changing that. The issue is we've been for some time now guiding people towards 1 million subscribers in their models.

Yes, that's the plan that we were using, one of the things that we've said is. If things were to go the way they are now, to stay that way would be quite a bit more than 1 million. We're forecasting, we're trying estimate what the demand will be and what it will take to provide a good service quality as that demand grows. Those are predictions in the future. Right now, as we've said in the past things seem to indicate we've been reasonably conservative.

Thanks for the clarification. Just one for you Ron if I may, I just want to make sure I'm understanding slide 17 correctly in terms of the non-GAAP net income for 2013 as a whole. You said you expect EPS to be either down or negative in the first half. I guess for it to be positive for the whole, it implies a fairly large ramp in terms of earnings in the second half.

Correct. So the answer I would say is yes on that because of just the timing of the non-GAAP net income piece does not adjust for the depreciation, some of the interest, and those types of things that are pretty significant without the associated revenue benefit. As we ramp up the number of subscribers, we turn the corner in the back half of the year. And as you know, more of that falls to the bottom and therefore you're able to overcome it a lot quicker because you have that many more subscribers.

Regarding the 17-year life on the satellite, it has to do with a variety of factors including the fuel lights, as well as the electronics, the design, the expected cash flows. We did a lot of research and analysis, and we are not an outlier there either. We also did a very comprehensive public company search and there's some out as much as 22 years. So it's not necessarily an outlier. I think dependent upon what the design is what the tradeoffs were relative to capacity and the hardware, i.e., weight versus how much you're reserving for fuel is going to dictate that balance. That could change with future satellites but with ViaSat, when it's in its orbital slide, the calculated life was north of 17, and we feel comfortable with that.

Thank you very much.

Chris Quilty, Raymond James.

A specific question on the Commercial Network segment where you had some monster revenue growth there, is that sustainable or did the quarter benefit from some discrete project activity?

No, there was nothing really discrete on project, it was a lot to do with the terminal rollout. But now that we've got in addition to Europe with KA-SAT, we've got a fair amount going on in Canada to bear it there, excuse me, explore net there. Then just our wholesale channel in the US.

So it probably reflects a little bit of channel fill then?

No, I don't think that's so because there's not a lot of lead time ahead of these things Chris. Also there's been good growth and we're doing this Ka-band payload stuff. We've got really good opportunities for additional growth in that business area, we're doing a next-generation GBBF [net] set with a [guy set up] the temp set labs, we've got good Antenna system, new order flow, and good backlog in there, so it's fairly well distributed.

There wasn't much that came in from the new Saudi program either, so that's really starts to ramp up in the first quarter.

Okay. A couple Ron questions. Looks like you're providing a little bit more detail segment breakout with both product and service by the three segments. Is that something you're going to continue to do on a go-forward basis?

Yes, we started it in Q2 and we plan on continuing it going forward.

Okay. Orders and backlog? By segment, I didn't see it in the --

So what we did differently in the press release this time is a breakout of orders by segment to give that all up front, and would we do backlog by segment? Probably not. If it's a meaningful metric we'll consider it, but heretofore we've always thought that people have been able to do a roll on that relative to our other elements. As you know, our backlog is more important to our Government and our Commercial Networks business, less important in the Satellite Services because it's really just a roll on the sales each quarter.

But it's all zero, Satellite Services.

I see the table now, I just missed it. Share count was down about 1.4 million sequentially, was there a buyback in there?

No, it had to do with the anti-dilutive effect because we had a net loss in the quarter, you don't include the incremental options from the treasury stock method because it would be anti-dilutive.

That's right, you only give fully dilutive, not the basic share.

Right.

Final question on SG&A was up about 10% sequentially, which I'm assuming reflects the one quarter of Exede rollout. Fair to assume that SG&A will go up again sequentially in Q1?

Yes, that's fair. As the rollout continues.

Same order magnitude?

Not necessarily, no.

Okay, great, thank you very much.

And with that, that did close our time for questions. I'd like to turn the call back over to Mr. Dankberg for any additional or closing remarks.

Okay, well that pretty much concludes what we had to say for this quarter. We look forward to talking to you all next quarter too, thanks.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect.