Viasat Inc (VSAT) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to ViaSat's FY2013 first-quarter earnings conference call. This conference is being recorded, and you're host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay. Thanks. Good afternoon, everybody, and welcome to our earnings conference call for our first quarter of FY2013. So, I'm Mark Dankberg, I am Chairman and CEO, and we have with got with us Rick Baldridge our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer; and Keven Lippert, our General Counsel. And, before we start, Keven will provide the safe harbor disclosure.

Thanks, Mark. As you know, this discussion contains forward-looking statements. This is a reminder that 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 to Mark.

Okay, thanks. So, we will be referring to slides that are available over the web. And, I will start with highlights and a top-level business overview, and then Ron will discuss the financial results. Then, I'll give a lot more depth on each of our business segments, and then we'll take some questions.

So, there is a lot going on at ViaSat right now. We're growing fast in a bunch of places. We really hate reporting operating loss, but there is a lot of exciting stuff going on, and we can see a number of campaigns that we have been working on for a long time all starting to come together. We think this quarter is the bottom in terms of operating results, and we will try to show you what gives us confidence that the earnings will follow the progress that we have been making in orders and in revenues.

We made a lot of good progress in the Exede Internet service area. Installs grew sequentially by around 40% to 66,000 for the quarter. That was due to operational improvements, which occurred more in the back end of the quarter. So, we expect to see good growth again this quarter, ARPU averaged across our entire sub-base was up about 3.5%, sequentially. Customer satisfaction remains good. New customers share from the underserved market actually increased, and churn is improving steadily.

We actually had quite a few more of our users upgrading from the WildBlue service to the Exede service than had first appeared to be. So churn has actually been lower than it seemed last quarter. We added 20,000 net subscribers this quarter, and we expect that to grow meaningfully for the next few quarters. Most importantly, we've got really good visibility into our per subscriber unit economics for both acquisition and service operations, and those are pretty much right where we like them to be. And they are trending to be better actually, and we'll give more detail on that in particular later.

Our Government business had a really strong quarter. Sales were up over 20% year over year. We had record orders that were pretty will distributed over a number of areas, and then, that yielded record backlog, and we have very good operational results. We think all that reflects very strong market positions in key areas that we have been working to achieve for quite a while.

We perceive good growth opportunity throughout this fiscal year, which is driven by the combination of the existing backlog that we have built and our market positions. The defense budget is something of a wild card, but we definitely believe that some of the growth opportunities that we're seeing are actually driven by the budget pressures, which are making more defense organizations more receptive to innovative solutions that are a lot less expensive and can replace troubled programs of record.

Sequestration could hurt us in some places, but from our perspective, some amount of the budget pressures are really a source of opportunities. Commercial Networks also had a very strong quarter for us. We are continuing to see very good revenue growth from a combination of product sales and projects, and we had year-over-year EBITDA improvement in that area. We believe we have very strong market positions in several new emerging or rapidly evolving markets that are driven by the bandwidth economics that we have shown with ViaSat-1.

And as we've had more market successes, it encourages us to keep making significant investments to consolidate those gains and to grow the markets. And the cost for that shows up mostly in this Commercial Network segment because that's where a lot of the engineering work is done. So, that gives you something of an overview, and at this point, I will introduce Ron, and he will give a financial overview.

Thanks, Mark. This chart illustrates some key financial metrics for the first quarter compared to last year. This data was also in our earnings release. New orders for the year are off to a great start at $333 million for the first quarter, which is a new record for us. We saw revenue growth in each of our segments year over year, lifting total revenues to almost $242 million, a 24% increase over last year, and also a new record for us.

Despite revenue growth, adjusted EBITDA contracted somewhat do to the start-up effects of our Exede Internet service, which we expected and will discuss in more detail throughout the call. So let's turn to our segments. The segment information and reconciliation of segment-adjusted EBITDA was included in our earnings press release filed earlier on Form 8-K.

For the first quarter in Satellite Services, despite average subscriber count being down 2% year over year, revenues are up $2.5 million, or 4% year over year, principally from a higher mix of retail subscribers for the Exede Internet service and the average revenue per subscriber increasing 3.5% to about $46.44.

This was the first full quarter for the Exede Internet service, and therefore we had a full quarter of depreciation and operating costs associated with the service. This will help comparability in future periods, but year over year, comparably depreciation increased by $7.6 million, and operating costs have increased by $7.1 million.

In addition, with the growth in subscribers over the quarter, our commissions also increased substantially. Commissions combined with marketing initiatives employed in the quarter, selling and marketing costs increased by $9.2 million year over year. As Mark will discuss a little later, given our subscriber growth plan, we expect sequential improvement during the fiscal year in these results.

In the Commercial segment, our sales growth is principally from consumer broadband product sales, as well as satellite systems development and satellite payload technology development programs.

Although we had a substantial increase in sales, we did incur an operating loss for the quarter reflecting lower margins on certain mobile development programs; higher selling costs associated with the number of international satellite ground infrastructure programs, one of which was the NBN Co program that was awarded early in our fiscal second quarter; and higher R&D investments in advanced satellite communication technologies that support our Products and Services business.

The Government segment rose over $20 million or 23% year over year, primarily from higher government-managed broadband services, mostly from ISR applications, UHF-Satcom upgrades and Blue Force Tracking 2 revenues, which were partially offset by lower information assurance product revenues. Our operating earnings improved for the quarter year over year from better program performance, a higher mix of higher margin sales and lower R&D costs.

As we look at the rest of the P&L, for the first quarter, the other notable items include the R&D expenses being higher over the same period last year, primarily in the advanced satellite communication technologies, and we believe that these investments are worthwhile and will provide opportunities for us and our partners where our networks are deployed around the globe.

The difference in other income is due to higher interest expense year over year from two items. First, in the fiscal fourth quarter of 2012, which was about five months ago, we issued about $275 million of new senior notes, and the other effect is from capitalized interest.

In the first quarter last year we had lower debt levels and most of the interest was capitalized on the assets under construction, most notably ViaSat-1. In FY2013, we expect interest expense to be significantly higher. The large difference in income taxes year over year is due to two reasons. First, lower pre-tax income year over year, and secondly, the effects of the federal R&D benefit.

FY2012 reflects two quarters of the federal R&D tax credit benefit, while FY2013 reflects no benefit. The federal R&D credit benefit expired on December 31, 2011, and has not been renewed. Given the federal R&D status and that we are forecasting a pre-tax loss for the year on a GAAP basis, our expected effective tax rate is about 40%.

Turning to the balance sheet, overall our balance sheet metrics are strong, with very good liquidity. Receivables increased with the higher sales in the quarter. The increase in inventory reflects a greater mix of ship-and-build sales and additional CPE in the distribution channel.

As we discussed on our last call, a significant focus in the first quarter was the expansion of our distribution and installation capacity, which resulted in more inventory in the channel. The increase in property and equipment is primarily for the capitalized customer premise equipment for the retail Exede subscribers we added and migrated in the quarter.

On the liability side, the reduction in current liabilities is principally from payments of discretionary performance compensation in the quarter. Therefore, on a net basis the reduction in cash during the quarter was primarily resulted from working capital used in the growth of the business and investments in new subscribers.

This past quarter we also amended and extended our revolving line of credit. At quarter-end we had about $310 million available under our line of credit. We believe our balanced capital structure, our cash on hand, and availability under our revolver, provides significant liquidity and operating flexibility for the company to meet it's strategic objectives. Now, I'll turn it back over to Mark, who will talk about our business segments in more detail.

Okay, thanks. So, I'm going to start with Consumer Broadband, and we will go into a lot more depth on what's happening there. So, we made, we felt, really good operational progress on a number of fronts. We increased the blended ARPU and we continued to tap significantly into the underserved market with good customer satisfaction.

We made really good progress late in the quarter on our installation process. The improvements really only took effect in June, so that means we expect this quarter to be better, as it will have the benefit of a full quarter with better operational effectiveness. Because our new service is so much better than the prior WildBlue legacy services, we have a lot of users that are upgrading to the Exede branded service.

Our commission structure paid a somewhat smaller amount for an upgraded subscribe compared to a new one, and unfortunately, that led to a pretty fair amount of disguising existing subscribers to look like new ones. So during the past quarter, we did a deep dive on installation data, and that showed that existing subscribers migrating to Exede were a lot bigger factor than it first appeared. That's actually a good thing, because it means that churn has actually been lower than it first seems, too. We had fewer people disconnecting.

So this page shows installation data over the past three quarters in the top left. And you can see that's been growing steadily, and you can see that a pretty significant portion of that, almost one-third in the last quarter, were these migrations from the WildBlue service to the new service. This data makes a lot more sense to us, and you can see in the top right that the churn's actually been lower than it first seemed. That's the result of doing this deep dive into the migrations. So we are upgrading and keeping a lot more subscribers.

That creates a little bit of a running in the sand effect on converting all the installs we are doing into net adds for these first few quarters, though. We had almost 20,000 migrations this quarter. We're still a little bit install constrained, albeit at a significantly higher level than we're at in the first quarter. And now, we're focused on the right metrics, and we expect steady improvements in improving our install process and our capacity throughout this quarter, too.

You can see that our blended ARPU is growing steadily, and that largely reflects the higher proportion of retail subscriber's that we have. Then in the bottom right you can see the net adds chart reflects the effects of the migration and the much more reasonable churn data. We expect net adds to improve both steadily and meaningfully as we go ahead.

So now, we've got about six months of operational experience, and we've got about 100,000 subscribers today on Viasat-1. So, we've got a pretty good handle on our operational business model. And we believe it's pretty powerful, and it's an attractive model and that we're well on the way to seeing it come to fruition. So we are going to try to illustrate where we are and where we're going on using the charts on this page and the next.

The chart on the left-hand side of this page shows where we are as of the end of the first quarter on our operational model. And, what we're going to do is compare it to where we were before we did the network expansion. So the first column all the way on the left shows where we were about two years ago, prior to undertaking the cost growth for network expansion, and we actually were at just maybe a couple thousand more subscribers as we had at the end of this first quarter of 2013.

Of course, back then, they were all WildBlue subscribers, and now we have a lot of Exede users. But, the total number of subscribers is pretty close in each case. Then the next column, that shows ViaSat-1/Exede Launch, shows the fixed and variable operations costs, SG&A costs and depreciation and amortization costs that we've incurred that are all due to the satellite launch and the expansion of our ground network in the operational infrastructure.

So then, what we did, as you can see, we blended those into the FY13 column, and that shows those incremental costs allocated to the appropriate categories. So, the higher ARPU means that we have a little bit more revenue than we did with slightly fewer subscribers. But, the graph also shows that since the revenue line is lower than our total cost, including depreciation and amortization, we are incurring an operating loss.

EBITDA is still positive because that's the flow of the depreciation and amortization, but it's lower than it was two years ago. In the next chart, we'll show you how we build on this data going forward. But before we do that, we also want to address our subscriber acquisition costs. You can see that compared to two years ago, our SG&A expenses, which include sales and marketing, are quite a bit higher this quarter than they were two years ago. In fact, that predominantly accounts for the operating loss for the whole Company.

So on the right, what we've done is we've normalized that by the number of new retail installations we did this quarter. We've been expecting an overall SAC cost, we are planning for an overall SAC cost, in a broad range between say, $600 to $800 for each retail subscriber that we have acquire. And in our first quarter, our actuals were just right over the midpoint of that, well within our operating model.

And you can see that includes both our marketing and advertising costs and our commissions, as well as capitalized customer premise equipment and installation. So the point is that even though the absolute costs of subscriber acquisition grew a lot, the unit costs, and those are the ones that drive the business model, are right in line with what we expect them to be.

And now we go to the next page. And in this chart, we're going to use the data from the previous one to show what happens when we do a roll forward. So, the left-hand side of this chart is exactly the same as what we showed in the previous chart, and that shows the starting point where we were at the end of the first quarter. But the first new column, which is labeled Variable Costs, shows an extrapolation of our actual variable costs when we add new users.

The contribution margin for each new user from here is significant. It's approaching 70% plus of revenue depending on our mix. So depending on the new scriber add rate, we expected to cover depreciation and amortization costs and have this business on a profitable run rate basis around a year after service launch, or around the last quarter of this fiscal year. And as we continue to scale, the business model becomes very profitable.

The point of this chart is not necessarily to project subscriber add rates, but just to illustrate the business model. Our fixed and subscriber acquisition costs in the first quarter led to the operating loss that we incurred, and we believe that performance improves from here, beginning with this second quarter that we're in now.

The last thing we want to talk about is our market. How we are addressing the market. And in this slide we want to return to the strategic issue where our subscribers are coming from. We think this is really important and actually one of the most exciting aspects of the results we've seen to date. In the first quarter, our survey data showed that just over 30% of our new subscribers came from some other existing terrestrial broadband service. That is, they didn't come from dial-up or they didn't come from another satellite service.

9% of the people in the survey in that quarter said they didn't know what they had used before. We thought that the 30% number was really good. And then, we've gotten data this quarter that said about 40% of our new subscribers came from some other existing terrestrial broadband service. And we're getting corroborating data that supports that from other perspectives, as well. So the growth, we think, is one of the artifacts we were anticipating as a result of reducing our upfront fee to $50.

Our subscriber basis is skewing to be more metro, both literally and geographically, as well in some important demographic terms. Importantly, we have more choices and options in determining who we would like our customers to be. We can exercise that choice and those options both by how we define and evolve our service plans and by how we bring them to market. And this is just what we're aiming for. But we had to have feedback from the market on how customers actually perceive the service before we can act on it. Now we're beginning to act on it.

It also means, of course, that we are addressing a much bigger market than just unserved households. It also means that we can continue to expand our potential market by improving our service. We've taken a number of steps to get closer to our customers in terms of controlling the marketing and selling process.

Unfortunately, that meant a change in our best sales-only dealer, which took effect in July. That set us back a little bit for a few weeks, but we've already overcome it, and our recent sales are above where they were in June. But we've got access to more data, and we're using that to improve efficiencies and costs in our acquisition process.

Finally, I'd say that our retail success in the market is definitely very interesting to both DISH and to DIRECTV. We have been working away on back office integration with them. We believe we will begin to see the results of that this quarter and that will also have a positive impact on the rate at which we add new subscribers. Overall, we find this data really encouraging and strongly suggest that we should be able to sustain and improve our growth rate in the quarters and years to come.

So, now, switch to our Government Systems business, and it seems like we've been building momentum there for over a year. But, we've seen it more in backlog buildup than in revenue and earnings growth. So this quarter was something of a breakthrough. It seems like that, anyway. We've got 20% growth in revenue, good operational performance and record orders.

It's a little ironic that we are finally seeing that kind of growth just when the downward budget pressures are really taking a toll on revenue for most defense companies. A lot of growth is coming through more unconventional acquisition approaches, things that are more commercial-like than the traditional procurement model. It's a consequence, we think, of both the capabilities we bring to market and the budget pressures making organizations much more receptive to cost-effective innovative solutions.

Mobile broadband for us is going very strongly. MIDS, MIDS-JTRS and JTRS in general is coming back to a growth mode for us and has good prospects to surpass even the prior historic highs that we had there. Satellite products and services are also going strong. One interesting factor is that its becoming evident that new commercial satellites, like ViaSat-1, are not only better than today's government satellites for broadband applications, but they're also better than what DOD will have even for the foreseeable future.

And demand for broadband conductivity is only going up, especially as more organizations see what's already available and in service. We are seeing more of that now in command control communications in addition to the ISR, or Intel Surveillance Reconnaissance, applications we've been doing already. We are really excited about that market and our competitive position there.

Blue Force Tracking is ramping up, and its exciting development for us was that we won a bandwidth services program not only for the Blue Force Tracking 2 program where we make the hardware, but also for Blue Force Tracking 1 as well. The defense environment continues to be unpredictable, but we're seeing evidence of how the budget pressures can help us. Sequestration could hurt us, but at this time, we anticipate that we will continue to see good year-over-year growth from our Government business.

We've had really strong year-over-year growth approaching, but not quite at 50%, in our Commercial Networks business. Plus, it seems pretty clear that we've got the leading market position for Ka broadband, and we think Ka broadband is a good growth market. We are very excited about the National Broadband Network Ground segment win in Australia. It's the single biggest contract award we've ever received. It's probably the largest commercial Ka broadband contract that's out there for quite a while.

And it's also really exciting to us because NBN shares our vision of what's possible with satellite. They want to deliver an even more fiber light solution. Their objectives align well with ours, and we think network will be a global showcase for what's possible. The level of government subsidy that NBN and brings to the service will accelerate what we think will be possible eventually in unsubsidized free enterprise markets, too. It's really exciting for us, and we think it will be a great thing for the satellite market.

We're making good progress in every one of our related target markets, too. We added $40 million in contract value with JetBlue's LiveTV subsidiary to serve a previously anticipated deal with a major US airline. It adds over 200 more aircraft and a base amount of service for us for 10 years. We also received an experimental license for our portable Ka band terminal in the United States, which is great for broadcast news gathering.

It's already being used by several major networks and broadcast stations, and I'll bet you've probably already seen quite a bit of live, high-definition, news footage that's come over ViaSat-1 and our fiber network, including the screen shot that we are showing here that ABC 7 in Chicago was kind enough to let us use here, showing live high-def video of the protests around the G-8 meeting in Chicago. The small side photo shows the portable ViaSat-1 terminal that was being used to capture it.

We have also captured and an exciting initial enterprise application. The market successes that we've had are encouraging us to continue to invest in new technologies and applications, and that only makes sense to continue doing it. So, this segment is where we're doing work towards our next satellites, as well. We have not yet placed an order for ViaSat-2. We just don't yet have a contract in front of us that we're ready to execute.

We've opened the aperture a little bit in terms of the range of options that we're considering. Things are a little bit fluid, but we are hoping we might be able to announce something this quarter. We still anticipate that ViaSat-2 will enable us to continue our trend towards constantly improving and more competitive service offerings.

This slide some summarizes things in and gives a framework for considering our outlook. We expect continued sequential quarterly improvements in subscriber count, revenue, EBITDA and earnings in our Satellite Services segment. The business model information we presented should help investors model how that rolls forward. We think we'll expand our distribution, and that will help maintain or improve momentum, too.

Government business doing very well. We saw a very good year-over-year growth in the first quarter, and we think we've got the backlog and the opportunities to sustain that during the course of this fiscal year. We're seeing opportunities for cost savings and commercial alternatives in a number of places. We see more of that than we see opportunities for traditional new start programs.

So in some sense, the budget pressures are helping, although sequestration might offset that, at least some. We think the market positions we've been creating in broadband satellite are valuable and difficult for others to duplicate because there are very few companies that are as strongly integrated into state-of-the-art commercial satellite communications and in defense to the extent that we are.

Our Commercial Networks business is seeing the growth that we've anticipated. The NBN contract win gives us a lot of new multi-year backlog and also helps propel our market advantage significantly. We think other countries will be very interested in what Australia shows is possible with satellite. Plus later this year, we'll be bringing other new Ka band operations to product, including in-flight Wi-Fi, the news gathering and more defense applications.

The Commercial area carries the burden of the lot of our R&D, though, because that's where the work gets done. So, this is definitely going to weigh on the bottom line there. But we think the market success and the benefits in the Services segments make those investments worthwhile. So that concludes our prepared presentation. With that, we would like to open it up for questions that you all may have.

Thank you.

(Operator Instructions)

Ron Epstein.

Hi. It's actually Elizabeth in for Ron. Just a couple questions. What were the gross adds by month in the quarter? How did it change as we progressed through the quarter?

It doesn't really make sense to break it out by month. We have variations month-to-month, but I can tell you, like we said, it was very back weighted towards the end of the quarter, because that's when we made the improvements that we were aiming for in our install process.

Okay. And then, how should we think by segment about the margin progression throughout the year? Do you think Government Systems can maintain this 14% through the rest of the year? How should we think about the other two segments as the year progresses?

This is Rick. I think on the Government side, I think that's a very strong performance. So, kind of flat to potentially slightly down. I don't think it's going to go up from there, but I don't expect it to change much for this year. On the Commercial segment, as we talked about, I think that's where we still expect a loss for the year in that segment due to the R&D investments that we're making.

So, I'd say that should hold kind of where it is. It will fluctuate quarter to quarter. It should be better at the end of the year. But, on average, I think Q1 should represent something close to what the year as a whole. And what we said, or what Mark said a minute ago, is that we're going to have quarter-over-quarter improvements in Satellite Services. So, you can't really look at what margins in each quarter are.

It's the incremental margins for the new subs we're adding, and Mark suggested that is kind of in a 70% plus range on incremental sub adds each quarter over quarter going forward from here. So we think we get the bottom. So, really its going to drive sub adds and the incremental margins for those subs.

Okay. Thank you.

Rich Valera, Needham & Company.

Thank you. Good afternoon, guys. You represented the wholesale/retail mix on your chart, but you didn't actually give a number. I was wondering how we should think about the migrations with respect to wholesale versus retail economics. Can you give us a sense of how many of those are your old subs that were your retail versus wholesale? And, just help us out with how we should about modeling those from an economic perspective.

I think -- this is Ron -- two things. One is, more than half of them were retail subs. And, how we're looking at that going forward, I think it's really a reflection of -- back to Mark's comment on DIRECTV and DISH and their engagement in their distribution programs.

As they ramp up and as they engage more, we should see more of their subs theoretically migrating. And that won't necessarily show up as additional subscriber acquisition costs for us because that's their costs. It could fluctuate, but to date it's been more than half of them have been in our retail channels.

And given that, what was your overall retail/wholesale mix on a gross basis?

On the gross adds?

Yes. You look at the gross adds, what would have been moving wholesale and retail?

It was relatively close, in the 70%/30% range.

So 70% retail?

70% retail, 30% wholesale.

Got you. Okay. That's helpful. And on NBN, a very nice order there. Can you give us a sense of how you expect that to be recognized and how you think the margins will look on that relative to the Government segment as a whole?

The first year for this fiscal year, most of the work that we will do is really engineering work. So, it won't have a big contribution for us, nor will it have big contribution margins. Most of the real work begins next year. And then, it will go on for about a1.5-, 2-year period from this time it starts. Because they ordered their satellites in February. They expect them near the end of '14, '15.

I'm sorry. When you say most of the work next year, you mean most of the revenue starts really next year?

Yes, it's revenue. When I say work, yes, turn that into revenue. That's really when we start building the gateway infrastructure, teleports, network infrastructure, that's where most of the revenue recognition will come.

So, we shouldn't think about it as a linear, it's like three-year type of recognition. It's going to be less this year and then ramping to something above a linear run rate in years two and three?

Yes.

Okay. That's quite helpful. And, I'm sorry, just back to your wholesale subs, can you give a sense of how many, you know, what percent of those were DISH versus other wholesale partners?

DISH is our biggest wholesale partner now. And it's really DISH dealers that have been doing most of the -- now, because we've been working with DISH itself on the back-office integration, they make up probably three-quarters-ish or a little over that of the wholesale.

Okay, that's helpful. And then, I'm guessing you don't want to get into specific growth rates, but in Government, you did have a very impressive year-over-year growth rate in the first quarter, off of really a pretty easy comp, though. So, even with relatively solid sequential growth, year over year, the growth would slow down quite a bit. So, trying to get a sense of how to calibrate the growth of that business on an annual basis. I think we've been looking at something like 10%, which sort of seems reasonable looking at it on the sequential basis. I don't know if you'd be willing to comment on how that revenue might trend, either sequentially or year over year, beyond the first quarter?

10% is not a bad estimate.

Okay. Great. And, I'm sorry, Mark, you made a comment in your prepared remarks about changing out your best sales dealer. I wasn't sure what that was. You said you'd recovered from that, but I was confused as to what that actually meant when you said you'd changed out your best dealer, or something like that.

That's fine. I'll clarify that. So we have, in our sales channel, our single biggest channel is what we call sales-only dealers. And these are call centers, basically. When we advertise, or you see -- do searches, generally you'll see an 800 number to call. That's a call center, and we refer calls to those.

We have some that are independent, we have some that we defer calls to. And those are different -- those call centers have different techniques, are good at different things. The one that was our single biggest is the one that we ended up changing out. The single biggest meaning the one that accounted for the greatest portion of our retail subscriber sales, that we changed out. It was really over the degree of visibility and control that we had on marketing data.

So that's what set us back a little. Because they were very good. But on the other hand, it also opened up the door for us to be able to get more access, to understand what was going on better. Because one of the points I was trying to make is that, given the market that we address now, we really have a lot choices in how we go to market than we used to when we only served mostly underserved -- unserved rural customers.

So, it turns out that we took a risk there in replacing them. But, it's already worked out very well. We're at the point where if I think we'll have more data, we'll be able to target more effectively and we'll, also, actually reduce our costs. But the point I wanted to make is that there are multiple effects. And although we have, like for instance, install capability go up, we had a little bit of a decline at the beginning of July in orders, which we've since recovered from.

Okay, that's helpful. Thanks for that clarification, Mark. Thanks, guys.

Thanks, Rich.

Yair Reiner, Oppenheimer & Co.

Thank you. First question, can you give us a sense of how you're looking at the rest of the year, and what year-end total targets are for both growth and net subscriber rates?

Just in terms of ad rates, one of things that we've talked steadily over quite a while, is talking about, can we get 30,000 to 40,000 new adds a month, or new installs a month, and that's still a good target for us. We see that, that's achievable. We didn't think we were going to get there in the June quarter. We won't hit it for the whole September quarter, but we might on a run rate basis.

We are getting close. We see that it's achievable. We've got more iterative things to do, refinement things to do as opposed to fundamental things to do. So, in terms of targets, our first target is to be able to hit that consistently on a run rate basis, do it for a whole quarter, and then, we'll see if we can do better than that.

And on a net basis?

Well, on a net basis, the thing we've got to go through is -- one is, we have this bubble of migrations, and think of it this way, which is we made a trade-off, consciously, which is we knew that if we made this service really, really good, we'd create this gap, which would create pressure for old subscribers to upgrade. Because for $50, they can get a 12-megabit service instead of a half-megabit service. Now, obviously, that creates a lot of motivation for a lot of existing subscribers to upgrade. But that, you can think of that as a bubble that we're working our way through. It will take a while to get through that, and that's going to consume a fair amount of our install and dealer capacity for a few quarters.

So, our first goal is to show that we can get to the 30,000 to 40,000 installs a quarter -- a month, I mean, a month. And then, as we work through that migration bubble, then we'll turn more and more of those into net adds. The benefit of defining the service in that way, even though it created this migration bubble, is we address a much bigger market, and we feel like we have a lot more control of our destiny and a more exciting market. I'd say the biggest issue is the migrations. As you can see, there are churn effects, too, that will cut into our net adds, but the churn rate is -- actually, it's pretty manageable and it's coming down. Once you understand the migrations better, I think the churn rate looks a lot more manageable.

Thank you. And then, if I could, just one for Ron. In terms of the D&A in the quarter for Satellite Services, it was a little bit lower than I expected. It seems like you should have had basically $9 million more than prior to ViaSat-1, I guess about $5 million depreciation on ViaSat-1 and about $4 million on the ground equipment and then more on the CPEs. But, the D&A was only up about $7 million from prior levels. So maybe you could talk about what the factors are there?

Sure. I would say it's primarily to the fact that, over the course of last year, the predominant adds that we had were retail, and therefore, I think for the year last year, we made $33 million in CPE investments -- or $35 million in CPE investments, that's depreciating through over a relatively short period compared to the satellite, and that's your primary, [netter] down.

Thank you.

Tim Quinlan, Stephens Inc.

Hi, good afternoon. On ViaSat-2, I'm kind of curious, Mark, what the deliberations are right now and what the considerations are before you commit to a contract. Is it more around who is going to build it, or is it what they're going to build, or is it the business case for building it?

The main things are primarily, I'd say, price and terms, and that's what we are negotiating around. I'd say the business case is good. But the price and terms are always a factor. And that's what we're working on. There are always things that are unique to each particular satellite manufacturer. So, we are working through those, comparing those, as well.

And, as you build the business case for ViaSat-2, how important is the enterprise market for that case?

What I would say is, we're developing these alternative uses, but we think that the fastest-growing and the most important one is the consumer case. So the kinds of things that we're focused on are -- making sure that we get the subscriber unit economics that we want; that we get the satellite when we expect, that's a factor; and then also, that we have the coverage in the right places in the right proportions. Those are all things that are mostly driven by consumer. Then, there are some things that we can do to improve some of these other applications, as well. Those are second-order effects.

Got it. And then, I wanted to make sure I understand the wholesale opportunity here, or what you've been doing in the wholesale channel in the quarter. Because if I read the chart right, it looks like the net additions through wholesale were only about 2,000 subs. But it was 40% of the gross adds, or something like that, which means that a lot of the churn, or all of the churn, is coming in the wholesale channel. Is that right?

I would say that on the gross app side, maybe 30% is coming from the wholesale channel, and if you look at the one chart on the wholesale side, there's been net declines beginning in Q3, then a little bit less in Q4, and now they've actually gone net positive for the quarter. So, they're just a sign that, that channel is ramping up and contributing positively to net app.

The churn has been higher in our wholesale channel than in the retail. So the churn is a little more disproportionately in wholesale, which contributes to the effect that you're noticing.

Right. And then, I just want to understand your expectations, now. I know you've made this change in the sales-only deal, or I think maybe you changed -- I know you've changed some issues in your fulfillment network. Would you expect, in the September quarter, for installations to continue to grow versus where they were in the June quarter? And, would you expect migrations and churn to stay relatively consistent with where they were in the second quarter?

So, we expect installs definitely to grow. It's just a question of by how much. What we're trying to do is balance the demand with the install capacity. We don't want to waste a whole bunch of resources by driving orders to a close point that we can't fulfill, but the pressure of the orders is what drives the install capacity.

So we're trying to balance that. We think it's going to go up. I'd say the migrations, I wouldn't be surprised to see migrations hold at around 30%-ish of installs for this quarter. And that's not based on science, other than we don't see it changing a lot from where it was in the June quarter.

Right. And then, the churn as well --

Churn seems to be coming down. And I think that, basically, churn is really driven by the legacy business. And so, what's happening is a lot of the legacy subscribers are migrating up, and the churn rate for the new business is really, really good. So, I think we'lll continue to see the churn rate come down.

Okay. Thank you very much.

Thanks, Tim.

Matt Robinson, Wunderlich.

Thanks. You made some remarks that suggested that, when you went back and looked at your migration and churn for the March quarter, things might have been a little bit different than the way you described it before. Is there an update to those numbers that you can provide us?

The numbers are what you see. The numbers as we believe them to be now are what's depicted in the slide, sorry, on page 9.

Oh, yes. Okay. So more just a graphic presentation? Because we have some specific numbers that you presented three months ago.

There were probably 2,000 or 3,000 people that were migrations last time that were probably reported as in the churn. About that, right, Ron?

Yes.

So, I think that was cleaned up this time. Reflected in prior period.

That's what I mean. Last quarter, if you recall people were over the phone [complaining] about 9% quarterly rate, 3% monthly rate, and as you can see, the quarterly rate for the fourth quarter is now, lower than that 3% that was discussed last quarter. So, it's about 2.6%.

What we expected was that the churn rate, which is really driven by legacy subscribers, would go down. That was it sort of -- the thing that was confounding was the direction. And we felt it should go down because subscribers who were dissatisfied would have the option of upgrading their service. And, what we found were, people at the same address were disconnecting and reconnecting with different initials or names or credit cards, and it was confusing our metrics. So, when we did a much more thorough review of that, that's what we found. We found thousands of those. And what it showed was, directionally, churn is going down, not up.

Okay. That's helpful clarification. Now, when you talk about the customers that are coming to you that have been served by cable or DSL, the terrestrial-type customers, why do you think they are doing that, and what's your thought on the sustainability for that, [end]?

So, the dominant sources for us are people who are using wireless at home. That would be 3G or 4G. They generally had a mobile wireless plan and they've used something like -- they might use a Mi-Fi to turn that into a Wi-Fi for their home, or they might just use a wireless download with a computer or laptop. So there are those and DSL.

Those categories account for the majority of people who we consider underserved that are migrating to our service. And the reason that we get back is ours is a lot faster, it's more reliable and it's more responsive. You can do things that you can't do with those others. And, just to be clear, we think this is really significant because, up until the point we introduced the new service, what we were seeing was a flow in the other direction, where one of our subscribers or any satellite subscriber would leave if they found 3G or 4G wireless to be available, or if even a low speed DSL service became available.

Okay. So really almost like data caps, where they could get past the low data cap they're going with you, if --

To be honest, I will tell you -- what we think, is that people do not like data caps. I want to make sure I put that out there. People don't like data caps. But data caps to people are abstract. A lot of people aren't quite sure what they use. I can tell you our data caps don't affect the majority of subscribers. But data caps are abstract, where as when you see the service, the speed and responsiveness, it's very tangible.

When you can look at it and say, wow, that's fast. Okay? And so, when people are presented with those two, they tend to like the speed and responsiveness that they get through our service. Then, what's really important for us is to measure and monitor customer satisfaction to find out that, even when they made that choice, that they're not disappointed later. And so far, that seems to be the case. It seems to be people are happy with their choice.

So, your network latency is low enough that it more than offsets the round-trip, it sounds like.

I think you've seen demonstrations of it. It's the combination of the acceleration and the speed and the lack of congestion that makes it really, really responsive. And that's what people notice. I mean, they notice it for web browsing and servicing, shopping, email, things like that, but also if you watch YouTube videos or videos that come up on websites like ESPN or Disney, it's just way faster. And I think that's what people respond to. What's the percentage that are -- what's the split between your data rates -- your data caps, then, if the consumer is not particularly sensitive to that? Right now, where we are, is we're selling a very high proportion of our $50 plan. So Exede 12, the 12-megabit service, is 90% of our sales, and most of that, I'm going to say in the 80%s, mid-80%s, high-80%s, is the $50 plan. For the first few months, we informed people that we weren't able to accurately measure consumption, and we weren't enforcing the volume caps. But, beginning in July, we have been able to measure it, and we started informing people of their usage. And we will have a buy-more option for people that meaningfully exceed what their caps are, and we'll sort of ease into that.

I would say probably for the last month or so, people are becoming more aware of what their usage is. I just want to clarify one other thing, which is even though we said we couldn't measure it accurately enough to enforce it, we've been able to measure this pretty well ever since it started, and we've been able to correlate actual usage with predicted usage. And, think of it as a histogram, [or create] a distribution of what the usage is, is very, very close to our models. It's very consistent with the data that we see from other sources that say a very small fraction of users use a very large fraction of the bandwidth.

So you expect a meaningful amount of customers that are going to be in a buy-more situation, or are people generally getting it right with what they [had]?

Our objective is not to make money on buy more. Our real objective is that people buy the plan that is best suited for them. And I think that's what we will get to. Also our objective is that the $50 plan is the dominant plan. We may see the percentage of the higher plans go up some from where it is now when people see what it is, but the $50 plan is intended to be the popular plan.

You will have people, as we roll this out, migrate -- this is Rick -- migrate to mid-tier, upper-tier plans just because they know you're not going to be impacted by the limits in the first part. It should be just a normal distribution.

Thanks. Thanks for giving me all the time on the call.

Sure, thanks, Matt.

Chris Sigala, B. Riley.

Just filling in for Mike Crawford here. Thanks for taking my questions. You mentioned the DIRECTV and DISH relationships seem to still be a work in progress. I was just kind of curious on the timeframe, or what you're expecting for the timeframe, for when those channels might be fully ramped?

First of all, as we mentioned, DISH is, right now, our biggest wholesaler. A lot of it is going through their dealer network. We've been working, really, IT integration with DISH, which should be in effect this quarter. I think you'll see them a lot more active. DISH remains very, very interested in us in broadband -- in bundling broadband with their video.

DIRECTV, also. DIRECTV, I think we've had really good meetings with them. I think they're excited about the results that we've seen in terms of subscriber satisfaction with the broadband. And I think you'll see them more maybe at the end of this quarter or next quarter really paced by IT integration issues.

Okay. Great. Has there been any change, maybe through those various meetings on how you're looking at the effect of [HughesNet] for service will have once it comes on line here in a few months?

You know, I think that there's two overarching strategic issues. One is, even in the unserved market, I think everybody thinks there's plenty of room for both satellites, and we don't see anything to change that from what we've seen in the first six months. But then, when you look at it from the underserved market perspective, the market is twice as big or more. So I think on a strategic level, that says that I think both of them should do fine. And I think that, probably, we expect over time that DISH will have greater affinity for the EchoStar use service. That's probably going to be the case.

I'm not quite sure that DISH is going to want to not use our satellite. That's not the indications that they've given us. And, so we'll see. But I think what we've been aiming for, as you can tell, and what we talk about here, is what we're aiming for is to have a service that we can compare to terrestrial alternatives.

And the way we're trying to do it is to make it so that people would prefer it to those terrestrial alternatives. That seems to be the case. So, in that perspective, we're sort of aiming higher. And I think that how we compare and compete with Hughes will really depend a lot on where Hughes aims, and if they aim like we do, well, maybe we're both going after this bigger market. I think that's more the strategic issue.

Great, I appreciate the color.

Okay, thank you.

Chris Quilty, Raymond James.

Thanks. First, just a clarification. I think it was on the NBN contract, when you say next year, is that calendar or fiscal year?

It's fiscal.

Okay, so when you say next year, you are always talking fiscal?

Yes. Not always, but we should have been more careful on that point.

It's one quarter, or three-month difference, but still. So, DIRECTV is not contributing now, and just for accounting purposes, because it's an agency relationship, will that look like when you account for a bias at retail customer or will you still treat it as a wholesale?

That will be a retail customer.

Okay. ViaSat-2. Any potential there for looking at new technologies like the electric propulsion?

I'd say, like I mentioned, we are expanding our aperture a little bit just to make sure we're getting exactly the right agreement.

Okay. And a clarification on the government broadband. I didn't see in the presentation if you gave a growth rate for the government mobile broadband area. I think you had done that in previous quarters. The take-away, I think, was that it is still growing nicely. The question is that I had seen the story, probably in Defense News, that they are looking to take a significant portion of that Liberty aircraft, and airfleet and move it into the reserves. And does that have an impact on the growth of that segment, or do you still see incremental growth on a go forward?

Okay. So, I'll try to answer both parts. One is, I think what we've shown in the past is we have shown a chart that shows the percentage of our government business that's made up of services as opposed to products. And we've shown that the services portion has been increasing steadily. And it did grow a little bit again this past period.

But the other point in there is that, that business segment, Government Mobile Broadband Business segment, is made of both product sales and service sales. And there's a little bit of a wave cycle effect because we get service sales after we've gotten product out into the market. And actually, we're going through a wave of product sales now, which I think augers well for continued growth in the services sales. And then also, the other thing we might mention is, I have mentioned in the past, we're getting upgrades from Ku-band to Ka-band. So, that, we are going through those two things.

That business is continuing to grow. It's the fastest growing part of our Government business. Then on the Liberty aircraft, one of the things that were seeing is assets that had been just focused on Afghanistan and in organization elements that were focused on Afghanistan are now being dispersed to other parts of the world. And you can imagine what those hot spots are.

What's happened is none of those assets are taken out of service. They are going to other places, and our customers are asking us to support them and support services in those other places. In some of those places, there is Ka-band. So, that's helping us to get those upgrades. I would say that the organizational element that those assets go into doesn't really impact our ability to service them.

If I may add there, Mark, is that there's growth domestically in terms of quite a bit of training growth that we expect this year and next year.

Okay. And also domestically, Ka-band, what's the timing on the first customers or rollouts or [intended] certification for the domestic commercial Ka-band service, aviation?

Right around the end of this calendar year.

Okay. And how many aircraft is it in total, now?

I think we're over 350.

The goal's 375, yes.

For Ka-band, for commercial airlines.

Great. And clarification just on the profitability of the Satellite Services business in the quarter. The adds were about as expected, and the SAC cost was about as expected, what was the big delta in terms of the lower profitability?

The results were pretty much as expected.

Okay. So, we were off on the consensus.

Or we haven't been doing a very good job of providing the visibility people need to anticipate. It's one of those.

Okay, so here's your opportunity. What would be a good range for EBITDA for this year?

I'll tell you, the thing we've done, we feel we've done a good job on directionally where things are going. It's hard for us, very hard for us, to predict timing. We've just had a hard time on that. And there's timing elements that are going to impact it. It's hard for us to say.

As we get more and more quarters, what we've told you guys is that we're going to disclose -- this is Rick -- we're going to disclose better metrics and guidance around those metrics as we mature. It will take another couple of quarters to get over the curve and you guys will get a little bit better at looking at it, and we will probably do a better job of describing it.

Fair enough. I had to try.

This one was our first full quarter. Okay?

Yes.

Brian Ruttenbur, CRT Capital.

Thank you very much. Two quick questions. The revenue from the DoD in the quarter, I don't know if I caught that. Can you just state that?

Are you talking government systems?

Yes, but I wanted specifically from the DoD.

We didn't disclose that.

Can you disclose it?

It will be in our Q.

Okay. And, what has it been historically from the DoD?

It can fluctuate because sometimes we have very large and significant contracts with some of the larger primes and some of them were prime ourselves. I wouldn't say there is a steady, consistent trend, just really the ebb and flow of where we are and sometimes we work through other people's contract vehicles because that's the quickest way to get us under contract, too.

Can you give us a range on that flow? Is it 30% to 50% of your government revenue? Is it 5%? Is it 70%? Can you give us some numbers?

DoD is probably closer to 80% I was going to say it probably fluctuates between 60% and 80%.

Perfect. And has there been concerns at your firm with sequestration and how you're going to handle that?

Well, we mentioned that. We try to go through and identify those customers and contracts that we think would be affected. It's hard for us to identify a big impact. And then, the flipside of that is that some of our business is coming because of these budget pressures. Business that we wouldn't have otherwise. It's a little bit different for us than for one of the larger prime contractors where there is just no upside in it at all.

Perfect. Thank you very much. I appreciate it.

Thanks, Brian. Last question, please.

Tim Quinlan, Stephens.

Thank you for taking my follow-up. I just had one detail question on making sure that the NBN contract is within the government systems and within your government business, and then how much of it goes into backlog? And, a more difficult question maybe on what DISH's minimum commitments are, and if that would still support growth in the wholesale channel even if they weren't particularly motivated.

Okay. First question, on NBN, that will be reported in our Commercial Network segment. So, what we've talked about earlier in the call, right away, the $240 million contract, that will go into our backlog. We'll work off a fraction of that, much less than one third this year. More like a 10%, 15%, during this fiscal year. Because that's really more lead development, engineering work and test work for them. And in two years, we will see bigger growth, and that will be more in the equipment build and deployment phases.

Just a reminder, we didn't book that this quarter.

That contract will fall into our second quarter. Second quarter is going to be another really good quarter, obviously, for us for orders. On the DISH arrangement, basically, what we've said in the past is that DISH made a commitment to acquire a certain number of terminals and to turn those into a service. And we have no doubt that they will happily and pretty quickly burn through those.

The issue is really whether or not they want to work with us on a sustained, longer-term basis. We really won't know the answer to that until next calendar year. I'll bet they'll probably work through their terminals this calendar year, or shortly afterwards. But, I think even before we get to that point, we'll have some indications that they want to work with us. They have the right to, as long as they do a reasonable amount of business with us on a continuing basis. So far, they've indicated that they'd like to, that they think there's a lot of demand out there and they'd like to have access to those satellites. That's really about as much as we know now.

That's great. Thank you.

Okay. Thanks a lot, Tim. So, I think that's all the questions. We really appreciate all the questions. That's all the questions for today. And, I think that concludes our call. We'll look forward to speaking again next quarter.

Thank you. Ladies and gentlemen, that does conclude the conference. You may all disconnect at this time. Everyone have a great day. Thank you.