Viasat Inc (VSAT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to ViaSat's fiscal year 2013 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, and welcome everybody to our earnings conference call for our fourth-quarter of our fiscal year 2013. I am Mark Dankberg, I'm Chairman and CEO, and I've got with me here today Rick Baldridge, who is our President and Chief Operating Officer, Shawn Duffy, who is our Chief Accounting Officer, and Keven Lippert, our General Counsel. And also, we are happy to welcome Bruce Dirks, our new CFO.

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 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.

That said, back to you, Mark.

Okay, thanks, Keven.

So, we will be referring to slides that are available over the web, and I will start with some highlights and talk a little about the business overview. After that, Shawn Duffy will discuss our financial results, and then I will give a little more depth (technical issues), We've got a lot of really interesting stuff to cover, including information on our contract with Boeing for our ViaSat-2 satellite. And finally, I'll summarize our outlook, and then we will take questions.

So our fourth quarter was very good across all our business segments, and we're really happy with the fundamentals in each of them. Overall, we achieved record orders for the year of $1.4 billion, a 36% increase over fiscal year 2012, and 61% higher than fiscal 2011. We achieved almost 100,000 consumer installations in the fourth quarter, with over 90% of that being new Exede subscribers. This resulted in net adds of 46,000, and that's a 21% sequential increase from our third fiscal quarter. We ended the fiscal year with 512,000 subscribers, that's up 33% from that same time last year.

We achieved record revenues of over $1.1 billion for the year, a 30% increase from fiscal year 2012. Q4 of our fiscal 2013 was also our fifth consecutive quarter of record revenues. Adjusted EBITDA Company-wide was up 10% year-over-year, for both the quarter and the entire year, even though earnings were somewhat attenuated due to sales and marketing expenses associated with our strong subscriber growth.

Overall, it was a strong quarter and a good year, and our progress on a number of fronts, as well as our financial results, continue to build confidence in our view of the long-term market opportunity to compete in a broad range of broadband market segments, where we can lead in delivering value driven by our space systems technology. We feel we're seeing market validation of the strategy and principles demonstrated by ViaSat-1, and it's worth investing in our winners. So now, Shawn will give an overview on the financials, and then I'll come back with some highlights on each business segment, and more on ViaSat-2 and our plans going forward.

Thanks, Mark. Well, as Mark mentioned, our fiscal 2013 has been a very strong year for us, and the charts on this page speak for themselves. Our Q4 revenues further demonstrate our progress, coming in at $309 million, which was an increase of $68 million, year over year.

As we will discuss more later, our service offerings have been the largest driving factor to our growth. We are closing out the year with revenues surpassing the $1 billion mark, coming at $1.1 billion for fiscal 2013, which reflects a $256 million increase over the prior year. Q4 adjusted EBITDA has also grown by 10% from Q4 fiscal year 2012 to $41 million, despite the current-period impact of even higher subscriber acquisition costs than last quarter, as our gross adds approached 90,000. So we are closing fiscal 2013 with $163 million in adjusted EBITDA, $512,000 consumer subscribers on our satellite networks, and good growth momentum.

So, let's turn to the P&L as a whole, and look at the results a bit deeper. Starting with our fourth quarter, our mix of revenues reflected $125 million, directly derived from our service offerings, which is now over 40% of the total revenue base. We also grew our product revenues by 22% to $184 million, fueled by growth in both our government and commercial segments.

Our fourth-quarter operational performance in the core business was very good. However, investments in Q4 subscriber acquisition costs, reflected in the growth in SG&A, resulted in a quarterly loss of $7 million. Conversely, the reenactment of the Federal R&D credit legislation we discussed last quarter provided an additional $8 million benefit in Q4. On whole, non-GAAP net income rose $9.3 million to $8.8 million or $0.19 per share.

For fiscal 2013, product revenues grew to $664 million from $542 million, and service revenues grew to $455 million from $322 million last year, representing year-over-year growth of 23% and 42% respectively. With respect to our fiscal 2013 earnings, clearly the ViaSat-1 start-up effect felt in early quarters of this year, coupled with our fourth consecutive quarter of gross add growth dictated this year's earnings.

One way to bring this up, at a quick glance, is to first look at the growth in SG&A, which is up $59 million this year from fiscal year 2012. However, more than 60% of this increase was driven by our investments in subscriber acquisition costs. So, it's pretty clear to see that when you adjust for just those up-front stock investments, our current ending sub base is already generating returns on the ViaSat-1 network. Couple that with our strong government results, and overall, we drive pretty strong metrics in our core business performance.

Amidst this growth trend, it is critical that we keep the long-term in sight, so we continue to make investments in research and development activities, focused in a few, key strategic areas such as next-generation satellite, mobility solutions, as well as pushing boundaries on integrated government SATCOM platforms. Fiscal 2013 results also included additional interest expense, due to the capitalized interest effects of completing ViaSat-1 in Q4 of 2012. And in Q3, we recorded a debt extinguishment charge of $27 million, after we completed the refi of $275 million in debt obligations.

So, overall, we're closing out fiscal 2013 at a GAAP loss of $41 million, or a $0.94 per share loss, with corresponding non-GAAP net income of $0.9 million, and solid adjusted EBITDA of $163 million, with the quarterly trends all going in the right direction.

That backdrop starts to shape our fiscal year 2013 cash flows and closing balance sheet. So, let's take a look at the details. Overall, our cash flows from operations have continued to build through the second half of fiscal year 2013. Despite the $20 million in cash payments we made in Q3 to call our prior 8.875% senior notes, and the growth in new subscriber sat costs, in the fourth quarter, we generated approximately $43 million from operations, which nearly mirrored amounts generated during our nine months, so we closed out fiscal 2013 generating $92 million in cash from operations.

In fiscal 2012, our cash flow from operations were $141 million, so we have not yet returned to the historical levels, as we push to drive our net adds upwards. However, the growing sub base is starting to provide funding for the next sub adds.

Moving to investing activities, fiscal year 2013 was dominated by cash usage to fund CPEs for our consumer satellite service customers, accounting for over 50% of CapEx spend. As our success in the retail market continues, our investments in CPE will persist until we derive a sustainable pool of equipment to support our sub base, at which time, quarter-over-quarter spend in this area will slow a bit. Correspondingly we continue to build our mobility networks and service support environments to drive our adjacent market opportunities.

Our liquidity remains at nearly $400 million, which enables us to fuel our future growth, including ViaSat-2 and other strategic investments. Mark is going to talk about how each of the segments in much more depth, however, let's take a summary look at the segment results for the year.

Our fiscal Q4 segment results reflected another quarter of across-the-board revenue increases, throughout the segments, year over year. Again, these charts speak for themselves, with the trends in each area consistent with our expectations. Our satellite service segment revenues increased both in the quarter and year-over-year results, reflecting our ViaSat-1 and related Exede service launch success. As we have previously discussed, growing the subscriber base can have a near-term impact to earnings. However, as our total subscriber base has grown, these impacts are declining on a relative basis.

Our commercial network segment also grew in Q4. Adjusted EBITDA for the period was down due to R&D activities for our next-generation Ka-band network ramp. However our success in global Ka-band solutions and follow-on consumer terminal orders helped offset those effects in the full fiscal year. Within our government segment, we experienced growth of 40% year-over-year, driving revenues for the quarter to $146 million, up from the prior-year amount of $105 million. Our fiscal year reflects the same success, with total government revenues coming in at $528 million, up 36%.

While we don't expect this type of growth to continue, our service offerings have been a big part of this success, doubling year-over-year to a record $164 million, pushing government segment adjusted EBITDA up to $160 million from $78 million. We are ending our fiscal 2013 with $335 million in government segment backlog, which is up 25% from the end of fiscal 2012, so that provides a nice start going into fiscal 2014.

So I will turn it back over to Mark provided a more in depth look into our segments, and some related market updates.

Okay, thanks, Shawn.

It also imported to say how much we really appreciated Shawn's work over the last three quarters, in both filling the Chief Accounting Officer and Chief Financial Officer role, and in helping transition in our new CFO, Bruce Dirks. So Shawn has done a great job, and she is going to continue to participate in our conference calls and investor communications going forward.

So, now I will talk about each of our segments, starting with government systems. As Shawn just described, we finished a really strong year with another real strong quarter. Annual revenues grew 30% year-over-year, and annual EBITDA grew 48% year-over-year, and backlog also grew 25% year-over-year, all of that in a very tough budget environment. We wouldn't have predicted that kind of growth at the beginning of the year, even though we've been working hard to achieve the market positions that made it possible. We believe it's good evidence that we really have positioned ourselves as being able to help our customers do more for less money, compared to alternative technology solutions.

While mobile broadband services led the way, we also achieved growth in orders and/or revenues of all of our major government business areas, including our MIDS, joint tactical radio system, information security, and satellite products. Also, a pretty extraordinary accomplishment in this macro environment. The government mobile satellite broadband area has sustained exceptional growth in market share.

We continue to add more user organizations, platform types, geographic coverage areas, and bandwidth usage every quarter. We're also gradually introducing the benefits of Ka-band to our existing customer base, which we anticipate will -- they will really appreciate the benefits of our ViaSat-2, compared to other mobility systems, and we talked about that.

We don't have a short-term crystal ball that can predict the effects of sequestration in particular, or an increasingly stressed budget environment in general on a quarterly basis. Our order backlog, our growing installed base of mobile broadband networking terminals, and our funnel of new proposals give us some comfort in assessing our outlook on an annual basis. We anticipate sustained revenue growth in fiscal year 2014 and beyond on an annual basis, even with estimated adjustment factors we've made for sequestration affects. We're making investments in broadband mobility technology and services, in response to existing and anticipated government users.

We believe those investments are strong offensive moves that will consolidate and expand our market success. But, depending on the timing and success rate associated with new business, relative to those planned investments, we're planning earnings in this segment might actually contract a little bit in the short to midterm for fiscal year 2014. We're going to manage the business in a way that increases the chances that we can enjoy outsized growth again, in the near term future.

The ViaSat-2 contract that we're going to discuss in a few minutes is going to give some context to the activities in our commercial segment. Think of our commercial network segment as including a blend of closely integrated functions. On the one hand, we saw products and technologies that are increasingly tied to our Ka-band broadband service capabilities. That includes network infrastructure and user terminals for Ka-band networks, with Utilisat, Xplornet, KACST in Saudi Arabia, and NBN Co in Australia, all major customers that together account for the vast majority of third-party Ka-band capacity in the world.

We also have a growing business opportunity in providing mobile broadband for commercial customers such as JetBlue and United in in-flight connectivity. Long-term trends in this segment are favorable, with revenue up 25% on an annual basis compared to fiscal 2012. Contract values are relatively high, and the market has so far been relatively limited, but it seems to be growing, and we've got a fairly high market share among those early adopters. We believe that our first-mover advantage with ViaSat-1 has been a pretty decisive competitive advantage, and that ViaSat-2 has the potential to confer similar advantages again.

This business segment also bears the R&D costs associated with our new payload technology, our new ground networking technology, and new applications development. Consequently, earnings in the segment are somewhat suppressed by those R&D investments, which are executed and managed within this segment, but which benefit the Company as a whole.

That effect is going to intensify in fiscal year 2014, as we ramp up investments in the third generation of Ka-band ground network associated with ViaSat-2, our next-generation payload technologies beyond ViaSat-2, and in prosecuting or litigation to defend the intellectual property and other proprietary information, that we developed with ViaSat-1. We think these are really good offensive as opposed to defensive investments, and that we will be able to still achieve good earnings growth Company-wide while we're making them.

In Satellite Services, we're continuing to learn and improve our execution in pretty much each aspect of our Broadband Services business. We had another quarter of sequential improvement in installations, gross adds and net adds, despite the March quarter being traditionally somewhat challenging on a historical basis. The June quarter, remember, is actually historically even more challenging.

Even though our unit economics remain pretty steady, sequentially our adjusted EBITDA dipped slightly, due to the high level of subscriber growth. We had over 40% more gross adds this quarter than we did last quarter. During periods of high growth, the current period portion of our sac expenses inhibits earnings. Of course, we gain the benefits of the larger subscriber base going forward.

Gross adds benefited not only from a full quarter of DirecTV as a distribution partner, but also from growth in our other channels, as well. Wholesale gross adds for the quarter remained pretty steady, compared to the third quarter. ARPU is maintaining its upward trend, primarily due to our increasing proportion of retail subscribers. And we continue to test targeting different consumer profile types, additional sales channels, and refining our product positioning.

So this chart gives some additional top-level blended data on subscriber metrics. As previously mentioned, we did nearly 100,000 installations in the fourth quarter, with close to 90% being new subscribers, as migrations continue to taper off. Net adds increased significantly. Blended churn appears significantly higher this quarter than it did last quarter, but it would have been essentially flat with the past three or four quarters, except for a significant number of wholesale disconnects that were held in suspense at the close of the prior quarter, and were then classified as disconnects in the fourth quarter.

So, that is, we think that the average of the third and fourth quarter is really a better representation of churn in each of those quarters. Blended churn continues to be disproportionately driven by legacy WildBlue disconnects. We're investing a lot of time and effort into segmenting and analyzing our existing and potential subscriber base across a number of dimensions, including geographically, demographically, by distribution channel, by marketing approach, by availability of alternative services, and a number of other dimensions. And we're constantly testing and analyzing different combinations.

So the next slide gives a little more insight into our thought process. In the past, we have talked about the importance we place on understanding the unit economics of the Consumer Service business. We think of those unit economics in a multidimensional space, with significant interdependencies among the variables. That is, we're not aiming for a single point solution of sac, gross add rate, churn, net subscribers, et cetera. All those factors are correlated.

So, the basic idea we've been testing is that by making the service better, we can address a bigger market, attract more effective distribution channels, grow at a faster rate, achieve a higher cumulative subscriber base, and ultimately, earn higher returns on investments. When we increase our addressable market, we're intentionally capturing more subscribers, who have more terrestrial choices, who will likely churn at a higher rate than those subscribers who are otherwise unserved. Our testing and analysis is giving us valuable insights into how all the different variables I mentioned interrelate, especially among that very large and attractive base of subscribers with other alternatives.

So, as a trivial example, we'd expect the churn rate for customers that are otherwise unserved to be lower than the churn rate for customers that are in the underserved category, which should be lower than customers who are classified as fully served. The churn rate for legacy WildBlue subscribers, even in the unserved market, should be worse than the churn rate for Exede 5, and that should be worse than the churn rate for Exede 12. And in practice, that's exactly what we are seeing.

The upshot is that we think we're building a portfolio of distribution approaches, each with good unit economics, that those economics consist of distinct combinations of the attributes in the diagram, tailored to a specific target market-channel-product combination. When we cast a wider net, we often find initial churn rates that are pretty high in that approach, but that we've been able to successfully manage down that churn rate by more disciplined targeting techniques each period. For competitive reasons, we're not going to go in more depth than that now, but we wouldn't really get useful insights into our economics by just thinking of churn as a single point variable.

So now this slide gives you a little bit of a sense of the places we're investing to create those better services, that enable us to address bigger markets and compete effectively against other technologies, or to improve the unit economics in the core unserved markets. It's really critical to understand that while the context so far has been the consumer service, that essentially this same way of thinking applies virtually across all of our broadband markets we're working on, including in-flight Wi-Fi, news gathering, live events, enterprise and government.

We think the most impactful by far element of the value proposition is the bandwidth economics in space, and that's the satellite. ViaSat-1 has shown us pretty convincingly that you have to combine that with other elements, such as the distribution channels, the definition of the product offering, the underlying network technology, and analyzing all the data to really optimize the intrinsic value of that bandwidth.

Remember for ViaSat-1, we made important breakthroughs in ground networking, we completely changed the way satellite broadband services were defined for our subscribers, we reengineered our performance systems, and we developed new analytics and distribution methods. We're still working on all those elements, and in particular, are doing so anticipating the next step change in bandwidth economics that we're going to get with ViaSat-2.

Another way to think about it, is that we're not getting the striking sequential improvement we've achieved over the last year, simply by doing the exact same thing each quarter, just more effectively. Instead, we're adding, clarifying new elements to our approach each quarter, that are then layered on to create these cumulative effects. We still have a number of new dimensions to introduce, and refinements to make. Our own view is that further gains in the rate of growth or in unit economics will be more likely due to those innovations than to merely doing exact same thing. In the long run, we believe the single most impactful competitive advantage is going to come from our series of satellites.

We feel like we've made a lot of progress, and we're really proud of what we accomplished. In February, the FCC's Measuring Broadband America Report rated Exede number one in terms of delivering its advertised speeds, even in the busiest hours, for all of the broadband services they measured. We earned a Guinness World Record for highest capacity satellite, and we received a Bronze Edison Award for Innovation In Information Technology. The root source of this success is the technology that made ViaSat-1 possible.

Obviously, we're still disappointed that technology was wrongfully used, disclosed and marketed in a way that damaged us, and we're pursuing legal remedies for that. But back in 2008, we said that we wouldn't have undertaken ViaSat-1 if it was just a one-time event, and we had a longer-term strategy to constantly improve our space systems technologies, and we believe we earned a lot of credibility in being able to turn our technology vision into economic value.

So, today, we are really excited to be able to talk about that next step in ViaSat-2. So we're really happy to announce we have got a contract for ViaSat-2 with Boeing. ViaSat-2 is not just more of ViaSat-1 technology, it's a fundamentally more powerful satellite architecture, that builds on the networking foundation of ViaSat-1. We and Boeing believe it to be unlike anything else in the satellite industry. It advances the broadband state-of-the-art.

We're leveraging the very powerful Boeing 702 HP platform in a number of unique Boeing payload technologies, but the payload architecture, design and systems approach are ViaSat's. The performance and operational benefits are compelling. We'll about double the bandwidth economics of ViaSat-1, while simultaneously increasing the coverage footprint by over 7-fold. Those performance grains will substantially improve our competitive positions in all the broadband markets we're developing, including residential, in-flight connectivity, maritime, land mobile, enterprise, and especially government.

Plus we gained very valuable operational flexibility, performance and capital investment benefits. The satellite schedule calls for a mid-2016 launch. We think the total systems package, the unprecedented bandwidth capacity and geographic coverage, and the considerable operational flexibility will be really attractive for international markets. Especially where demand distributions are unknown, regulatory environments are uncertain, and business cases depend on a blend of different applications, geographic coverage, and application market segments. So, we've executed a strategic agreement with Boeing to jointly market satellites using this technology.

We already have a good history with Boeing, we have worked together to market space and ground systems for commercial mobile satellite systems. We're also already working with Boeing on integrated space and ground systems on several current and planned defense systems, including applicability of commercial broadband satellite technology for protected satellite networks.

The figure on this page shows the ViaSat-2 coverage area, it covers virtually all of North America, Central America, a little part of northern South America, all of the Gulf of Mexico and the Caribbean, as well as the primary aero and maritime routes between North America and Europe. We're not going to go into detail on the technical approach. Other than that we'll say this is not a steerable antenna spot beam, that can only illuminate a relatively small portion of the footprint at any given point in time.

We think of the steerable beams as operating an anywhere value proposition. We would describe our capability as an everywhere offering. That distinction is very important to many customers, including virtually all of commercial mobility and most government mobility users. We'll have the ability to deliver gigabits anywhere on a very dynamic basis. We believe the improvement relative to any of the satellite mobility system is an order of magnitude, and the footprint is large enough to make a significant dent in the market.

Also, we'll have the flexibility to deal with economic or regulatory uncertainties, in the international markets we cover. We won't have stranded capacity anywhere, and we can opportunistically serve highly disparate bandwidth demands simultaneously across the coverage area in a manner that is proportional to that demand. So, this gives us the confidence to cover those international fixed markets and the ocean service areas that have high potential, but may develop slowly than our current core markets.

In our core US residential markets, we'll have the capability to improve our offered speeds by multiples of the current Exede 12 service, as warranted by markets. We believe this will have a very significant and very beneficial impact on our ability to address increasingly larger markets, offer greater value to powerful distribution partners, and help us manage churn in a more competitive terrestrial marketplace, compared with not only DSL, but fiber-to-the-node and more advanced wireless offerings.

We also gained some very important operational efficiencies, infrastructure deployment and efficacy. We are very excited to have ViaSat-2 finally under contract, pleased with our partnership agreement with Boeing, and enthusiastic about continuing to build on the competitive dynamics and financial results we realized with ViaSat-1.

So now I'll integrate our outlook for the Company as a whole, building on what we have discussed for each segment. Satellite Services are doing well. Unit economics have been in line, and we believe trends are favorable, especially in the growth segments. We overachieved somewhat this quarter in gross adds and that caused EBITDA to be essentially flat for the quarter, but that's an artifact of a step gain in new adds. While churn for the quarter looked high, we believe that's a consequence of it looking low in the third quarter.

Total blended churn has been running around 2.5% a month, disproportionately driven by Legacy WildBlue subscribers, as more favorable for Exede 12 customers, especially as we feedback analytical data into our distribution channels. We believe longer-term trends on churn are favorable, especially in the context of a growing addressable market.

We see potentials for further gains in subscriber growth rate, but those gains will likely be linked to specific marketing and/or product activities and/or seasonal macro market effects. Even the current rate of subscriber growth yielded attractive cumulative economics as the subscriber base continues to build, and we pass cumulative net subscriber inflection milestones.

We're planning for more modest revenue growth in the government business, reflecting our wariness about the effects of sequestration and DoD budget planning cycles on new order timing. Given our investments in winning technologies, especially mobile broadband, we're planning earnings in the government segment might actually contract a little bit in the short to mid-term in fiscal year 2014. Success in some specific opportunities could improve that, and we'll gain insight based on the timing of results of those specific opportunities.

Our commercial segment has a fair amount of lumpiness associated with large Ka-band programs and applications. Our existing business space provides a comforting level of backlog, and a number of important expansion opportunities. The realization of our ViaSat-2 plans through our contract with Boeing is a big step in creating and capturing more opportunities, with a substantial amount of competitive differentiation, because of the compelling functional and performance benefits of the new generation of satellites. Our strategic agreement with Boeing gives us more comfort that we'll capture more of the economic benefits of the advance in space technology.

In the ViaSat-1 generation, new orders and revenue of the technology side were realized, even before the satellite was in service. We see the same opportunities with ViaSat-2. But, we also anticipate a higher level of investment in the commercial segment than we have had in the recent past. That includes R&D for the next generation of ground networks, next-generation payload R&D beyond ViaSat-2, and litigation expenses associated with our ViaSat-1 complaint versus Space Systems Loral. We believe that, Company-wide, we've got good potential to achieve attractive and sustained annual gains in revenue, EBITDA and earnings per share in fiscal year 2014 and beyond.

So, that concludes our prepared remarks, and at this point, we'd be happy to take questions.

(Operator Instructions)

Mike Crawford, B Riley.

Given the expected doubling of bandwidth economics with ViaSat-2, does that imply that this is going to be somewhere around a 300 gigabit per second capacity? And what is the total cost that you expect to incur to build, launch, and insure the satellite?

So describing the capacity is a little bit complicated, because the way this satellite works is not the same way that ViaSat-1 works. When we gave the capacity numbers, think of them as benchmarks. They are like gas mileage numbers, and they're only meaningful in a specific context. The trick that ViaSat-2 can do sort of make those comparisons a little different, in just getting a number like that, but I'll give you another way to look at it. When we did ViaSat-1, one of the things that we said was we thought we can get about 1 million subscribers with a given level of service, and that level of service is our Exede 12. So that means, in order to get doubling of the bandwidth benefits, we ought to be -- if the satellite costs were the same, we ought to be able to do 2 million at exactly the same level, and if the satellite cost or the system cost was higher, we could do even more than 2 million for that to be true, and that's -- right now, that's a good way to look at it.

And so you don't want to say with the system cost is?

System cost -- okay on the system cost side, we'll do a disclosure subsequent to the call, that will give the number on the satellite. But think of it, the satellite itself is probably about 30%-ish plus higher than the ViaSat-1 satellite. The total system cost doesn't grow nearly as fast when you consider ground system, launch, and insurance. So when we started the ViaSat-1 project our budget for all those things together with about $500 million, the budget for this is about 25% higher. So when you think about that, in order for us to get double the bandwidth productivity, that means that we need about 2.5 times the equivalent subscribers, and it definitely does that.

Okay, thank you. Are there satellites in operation today that Ka-band that provide Ka-band connectivity without spot beams or steerable spot beams, or was this going to be a completely new way to provide Ka-band service?

It's a new architecture.

Okay. Thank you, and one last question for me. Regarding the litigation with Space Systems Loral, which I believe is headed for a jury trial next February, where you're seeking, among other things, an injunction, what would happen if there is another satellite scheduled to be launched that might have some of that technology, appropriated technology on it? How would you address a situation like that?

Mike, this is Keven. I think at this point, litigation is complex. We've obviously sought different types of damages, and injunctions is clearly one of those, but we'll have to see how that plays out.

Okay, thank you, Keven.

Tim Quillin, Stephens.

Congratulations on a great year and ViaSat-2 sounds pretty interesting and exciting. Mark, when you talked about 2.5 million subscribers, is that assuming that they're at fiber-to-the-node speeds?

To do an apples-to-apples comparison, one way to do it would be to say how many subscribers could we do at the same service level? I think it's more likely that what we're going to do is improve the service level, and have the number of subscribers be more like what it was on ViaSat-1. So think about that as sort of the same number of subscribers at 2.5 times the bandwidth. That would be the flip side of that. At 2.5 times the bandwidth though, if we do it that way, can be manifested in multiple ways. It can be higher speed, it could be more usage, a lot of ways we can implement that, and that we will decide based on what the market is, closer to the time that we go into service with it.

Great, thank you. And so 98,000, first of all, in terms of installations, is that a sustainable number? And what are you seeing from DISH in terms of wholesale contribution, and how sustainable is that?

Okay. So one is, boy, I wish I could predict the future. What I can tell you is, we did in the March quarter, is typically a seasonally more difficult quarter, so that gives us some upside going forward. But, like I said, I think when you think about improvements that we're going to make, I wouldn't think of us is doing the same thing over and over, and better. We have things that we intend to do which includes adding different product variants, and introducing new channels.

There's some headwinds that we have as well, which is DirecTV has said that they intend to add Hughes to their services as well. So far what we've seen have been pretty consistent, and pretty much what we said in the beginning, which is demand the seems to exceed the supply and DISH continues to work with us, and DirecTV will probably work with Hughes, because both of them would like to get as many of the limited number of subscribers as they each can, and that makes complete sense. I can't tell you what's going to happen exactly, but I don't think that we've reached the ceiling of what's possible. It will just depend on how those different trends play out.

And then --

Just to remind you, Mark did say -- this is Rick -- Mark did say earlier that the June quarter tends to be the most seasonably depressed quarter. I don't think we should look any different than somebody else.

Right. Right, and what are you seeing from DISH right now?

We said that our wholesale adds for our fourth quarter were pretty much steady with our third quarter.

Okay, and then lastly, just what percent of subscribers are on Exede?

We're over 50% Exede now on total basis, pretty well over that, in the mid- to high 50%s I think, ballpark.

58%.

58%, thank you.

Rich Valera, Needham and Company.

First question on the ViaSat-2 architecture, which certainly sounds pretty intriguing. Correct me if I'm wrong, but it sounds like the bandwidth on the satellite is actually dynamically configurable across geographies and spot beams. Is that correct?

Yes, dynamically configurable across geographies.

I'm just curious, is a satellite like this, essentially a spot beam satellite with dynamically configurable capacity been built before, or is this the first of its kind?

It's the first of its kind anywhere near this combination of geographic coverage and total capacity. It's just never been done before.

Right. Right, very interesting. I look forward to seeing that in action. With the success, I guess, in the consumer program recently, you haven't talked too much about the in-flight which we think should have an imminent launch here, coming up with JetBlue. Can you one, talk about what your best guess is as to the timing of the JetBlue launch, and then can you give us any color on how your business model works for the in-flight broadband market? Are you kind of getting paid on a per megabyte basis per subscriber? Any sense of what your business model, you expect to look like, in that in-flight category would be helpful.

Okay, in-flight, we expect should be operational this summer. I think we talked a little bit last time about LiveTV, which is doing the installs for JetBlue, had kind of a random issue to deal with, with the FAA. I think they have a resolution for that, and so things are proceeding from there for the summer. The business model, like I said before, we think we can change the business model in the in-flight space. Right now, the business model is high prices, low penetration, laptop-centric, because of the high prices.

JetBlue and us are looking to create an environment where basically penetration can be very high. Think of everybody with a mobile device would use it, and that we can take advantage of our bandwidth effectiveness to drive the cost down to the point where it can be free to the subscribers. And, so, JetBlue has said that's what they want to try. That's a different model, I think it could be -- we think it's exciting, and could be extraordinarily successful, and so that's what we'll be trying. We would essentially be paid on some form of bandwidth consumption basis by the airline, by JetBlue, who would give it away free.

The idea is if the cost is low enough, we'll have -- their description, the catch phrase they always used was coke and a bag of peanuts. If it costs the same to give people in-flight connectivity as it costs to give them a coke and a bag of peanuts, that a great way to drive customer satisfaction, and we think that if you get high penetration, that's a really good model for us. So that's what we'll be trying with them.

Okay that's very helpful, thank you. And then just on the service, the satellite service revenue line is a little higher than I would have modeled. Is there any kind of nonrecurring lump in that service number, is that the baseline number we should use going forward as you add subs?

Yes, I wouldn't say that there's anything unusual in there, that needed to be considered. I think it reflects our continuing growing ARPU.

Great, that's very helpful. And then, just one more if I could on the sac, obviously sac was higher because you have a lot more subs than you expected, but was your per subscriber sac sort of in line with your expectations?

Yes, I think we have different channels that have different costs and when you blend them altogether, it's pretty much right where we'd expect it to be.

Great. That's it for me. Congrats on the nice quarter.

Yair Reiner, Oppenheimer.

This is [Wayne Wade] for Yair. Can you maybe give us a sense for how the data caps are working out for your subs? Are you seeing a lot of them hitting the caps, and if so, are they trading up or changing their behavior?

The data caps are -- One of the reasons we'd like to be able to apply more bandwidth at the same price. We have a number ways to work on I would say our objective is, not to try to extract money from our subscribers. We set the data caps because we thought that there were a lot of subscribers who would not hit their caps, that's what we're seeing. What we're also seeing though is that subscribers will modify their behavior in an effort to fit with in the caps, and actually -- what we would like to do is make it so they don't have to modify their behaviors, to fit within the caps and those are the kinds of things that we intend to do going forward as we improve our service. The short answer is, we're not modeling trying to drive more revenue out of subscribers, and we're trying to help them be even happier within whatever the caps are that we offer.

Right, right, I guess in terms of ViaSat-2 that you just announced, how do you expect the capacity to be used, say on home broadband, Wi-Fi, defense, in-flight Wi-Fi? And any other commercial applications? How you segment the different buckets?

Okay that's a little harder to predict at this point. One of the things that we've said, and I think it will help you get some insight into that is, what we've said is, around the time that we launch ViaSat-2, we'd be pretty happy if we were generating in the range of 10% of our Satellite Services revenue from all of these adjacent businesses, and that includes the news gathering, live events, government, and satellite Wi-Fi connectivity. So that would, let's say, if we're at that point at around 2016 when we launch, I think the capabilities of ViaSat-2, especially the transatlantic, maritime, Caribbean coverage, will put us in a position to grow that percentage from there. At a faster rate than what it grew before, but right now, that's probably all we'd say.

Great, great and one more, if I may. In terms of depreciation, it looked like it was roughly somewhat flattish quarter-to-quarter. Any reason for that as opposed to maybe ramping up quarter-to-quarter?

Depreciation has a lot of different dynamics to it. We had some of our original legacy network that was coming off from a depreciation perspective, towards the end of its life, but there's kind of some different elements with various assets coming off and on, but nothing that was dynamically unusual.

Right.

So in other words, in normal course, we expect it to grow as we add more subscribers.

How should we think about depreciation into next year? Should it, as you say, grow, or should it be roughly running at fourth quarter's run rate?

No, definitely, it's going to grow. We're going to see effects of both CPE subscriber asset-based growth, as well as just general growth as we grow up the mobility and other support metrics. So, you definitely should see it growing quarter over quarter.

Thanks. That's for me.

Amy Yong, Macquarie Capital.

This is Andrew or Amy. I just had first a question on the LonoCloud acquisition. What was the rationale behind that?

Okay, so LonoCloud, what they have, think of it as a cloud operating system, where most cloud services are sort of service provider-specific so you think of buying a certain cloud thing you probably have to tailored your cloud integration or cloud usage, say to Amazon, or to somebody else. What LonoCloud does is, think of it as a layer of abstraction, or an operating system that lets you say, hey I want to buy transcoding services in the cloud, or I want to buy video streaming support in the cloud, and then, just like you would talk to a printer or disc drive the same way, you would say, get me those services and get them for me with these sorts of policy statements like here is my security approach, here's my pricing approach, and LonoCloud lets you manage that dynamically, helps you do load balancing, better pricing, all those things. When we add all these services, we have a lot of cloud activities going on, and we basically acquired it because we wanted to use the software, we were already using the software, and we had an opportunity to acquire it.

Great, thanks and also on -- I just want to -- for clarification, did you say that pretty much you were hoping for 10% of revenue on the satellites should be outside of the Satellite Services? In other words, about 90% of capacity should be the consumer business? And then secondly, what are your funding plans ahead of the launch of ViaSat-2?

Okay, so to answer the first question, if you look at the revenue that we would report in our Satellite Services business segment, let's say in 2016, that what we're aiming for is about 90% of that being consumer and 10% being other, and other includes in-flight Wi-Fi, land mobile, government, things like that. Does that answer the question?

Yes, thanks.

And then on the funding, basically the funding for ViaSat-2 comes out of cash flow from operations and basically the usage of our existing credit lines.

Great, thank you.

Thanks. Let's take one more question.

Ron Epstein, Bank of America.

This is Elizabeth in for Ron today. I just had two questions. One, the 88,000 monthly adds you had, where does that lie versus where you expected the adds to be at this point, when you launched the satellite? I think you talked about getting to 100,000 and presumably that would have happened before now, I think? Given how you talked about it before. How are you expecting that to continue to grow?

Okay. So, what we talked about the 88,000 was for the quarter, not monthly.

I'm sorry.

And we had this discussion of few quarters ago we thought 90,000 to 100,000 installs a quarter would be a good target, and this quarter we did 98,000. We don't think we necessarily hit the ceiling, taking into account all the puts and takes. I've already said before, which is headwinds due to DirecTV dividing up its distributions, seasonal adjustments, growth due to other factors. We don't think we've hit that.

In the past, we've had discussions about are we getting specific numbers or not. What we said is, you have to look at multiple factors, one of them being that our ARPU is substantially higher than what we projected by 25%. What we said was, ultimately we thought we'd get to the target that we thought, and that's a combination of that, plus the higher ARPU is going to get us the returns we wanted. So we've actually expressed this before, we're pretty happy with where we are, we think we earned the return that we aimed for when we started the project, but the combination of parameters is going to be a little bit different than the exact ones that we thought, and that's what happened across all of our businesses. We aim for the end result and we don't always get there exactly the way we thought.

Okay and just one other question for you. The FCC report that you mentioned in your release also talked about how the latency issues on ViaSat-1 are about 20 times the terrestrial average, and just curious what you're doing to address that, and if that will also be the case on ViaSat-2?

Yes, so one of the things that report is a metric called ping time, and that's a measure of latency. Satellite, because of the round-trip delay to the satellite that is pretty much -- that's the bugaboo of satellite, is the ping time. Our ping times, I think are in those 600-ish millisecond time range, and where you see is more of the 20, 30 millisecond time from terrestrial. One thing that people use to think that would be manifested in is slower responsiveness for instance, for webpages, but what the FCC measured is another target in there that showed that the average page load time in Exede 12, even in the busiest hours was something like about a 1.5 seconds to 2 seconds off of the best fiber systems, and actually significantly faster than those DSL systems.

So the ping-time issue, primarily the main manifestation of that is in what you would call fast twitch multiplayer games, shoot-them-up games. One of the things that we do when we try to attract new subscribers is to let those subscribers know, if that's important to them, this isn't a good choice for them. And as we get better at that, as we prefilter our subscribers, it's one of the ways that we manage churn when introduce new channels. But that fast twitch games is probably the only real manifestation of that ping time.

Thank you.

Does that answer that question?

Yes, thank you.

We're told there's one more we're told on the phone, so let's go ahead and take one more call.

Chris Quilty, Raymond James.

I had a question, can you help walk me through, looking at the Satellite Services business, you had a good quarter in terms of net adds, revenues up 9% sequentially, but your EBITDA reversed path from its historic trend, and was actually down 8% sequentially. And I'm assuming that reflects a higher sac cost? Can you help explain that?

Yes, absolutely. One of the things that we talked a little bit last quarter was that quarter over quarter, as our gross adds grow, on an incremental percentage higher rate, the impacts to the current quarter's EBITDA is going to grow as well. So while the sub base and the higher revenues definitely are driving higher contributions, the high percent of gross adds will actually have near-term impacts, and then they start to have the recovery in the following period.

Okay. Now does the actual sac per customer, you have talked about being between a 600 to 800 sort of range. If I'm running the numbers right, you've moved up significantly towards the higher end of the range in the quarter?

We've been up there, and we talked about that a little back little over 700, and then we brought DirecTV, Mark talked about different channels. We've got a lower channel we brought on -- we're expanding in our new direct channel, and that's lowering. So it's a blend, and it's going to depend on who in the quarter. But we're still in that range, I think you have got to look at all the adds in the period. And we have a huge increase quarter-over-quarter in gross subs versus the prior quarter, which drove that. You're just not going to overcome that when we are in this kind of a ramp.

It sounds like the net adds are going to go down seasonally in Q2, and it would probably be fair to assume we'll see the SG&A tick back, also?

Yes. The component of that due to the gross add rate, that contribution will go down if the gross adds go down.

The best way to generate really good earnings growth right now is to slow our subscriber growth near-term.

But that's not what we want to do.

Exactly. Shawn, can you give us the actual number of subs on ViaSat-1 at the end of the quarter?

Yes, sure. It was about 295,000 297,000 right around there.

Okay. And a question on the ViaSat-2. Is the technology on ViaSat-2 and 1, it sounds like there's some clear differentiation, is it fair to assume everything is backward, and forward compatible between the two systems? Or are they going to be discrete modems that don't interact?

It will be like what we did with -- when we did ViaSat-1, we moved from WildBlue-1 and [kept] 2 is that, if you want to take advantage is of the features of the new satellite, you'll need new networking equipment. The networking equipment will be backwards compatible, but the old equipment won't deliver the new features on the new satellite. Now, because we've been planning for this, we'll have the ability to introduce new equipment, even before we have the new satellite. So the new CPE will work on the old network.

Okay, so it brings up a question on aeronautical portion. First of all have you gotten that antenna and the radome certified with the FAA yet?

The terminal, I think we're done. I think the real issue is the radome with the FAA, which LiveTV is doing. I think that they have a resolution for that. You'd have to ask them, but I think that's resolved, that's why I think we will go into service this summer.

Okay so the question is, right now you've got an aviation solution, where on the East and West Coast, you've got a lot of capacity on ViaSat-1, but in the center of the country, you're dependent upon WildBlue, which obviously doesn't have the throughput or capacity. It sounds like ViaSat-2 isn't going to provide you an ability to seamlessly backfill the center of the country, because it's going to be a different modem technology. Is that correct?

Yes, but I wouldn't look at it that way. The thing that the new satellite really will do for us is the ocean coverage, so as an example, if you use -- the thing we talked about -- I think we talked about in the press release -- is let's take JetBlue. JetBlue has a bunch of flights that either go up and down the East Coast, say from New York or Boston or Florida. They actually fly out over the ocean as part of that, or they may go to the Caribbean. So, there's an area where we just don't have coverage on any satellites. So that, that provides a pretty compelling reason to do an upgrade to those terminals. And that upgrade, I think in the context of functional capability, is going to be pretty attractive.

Okay. Clearly, a much better opportunity than the geographical coverage you have today, but the big question is, aircraft being mobile, not everybody is going to stay on an Atlantic route, and do you want to invest in equipment if it's going to be limited to those areas. Does it make sense to, and is there something on the planning map to come up with a dual band KA-KU type of solution? Is that doable?

Yes. Number one is that's doable, I think as a matter of fact, I think you'll see that from us. Whether or not that will make a lot of sense for a lot of our government customers, whether or not that makes sense for commercial customers we'll see. I think that more significantly, what we're trying to show is, there have been assertions in the past that you can't have really high capacity and really big coverage, and what we're trying to show is hey, if you have the right technology, you can. We're not going to cover the whole world instantly, but what we are going to do is cover increasing parts of it, plus we can blend together the service areas of our partners, like Utilisat, as an example, or Arabsat. So I think what you'll see is more and more of the globe, especially the interesting parts of the globe, being covered by sort of the seamless coverage. That's how we think it will play out.

Okay. And, did I understand you correctly that you are going to market, basically with Boeing, to sell the 702 satellite, proprietary design you have to other customers, or were you just talking about infrastructure and modems to third parties?

What we said is, we have an agreement with Boeing. Think of it as, unlike in the past, Boeing is not going to go off and say hey, we got the satellite, do you want to go buy it. It's going to be a cooperative agreement between us and Boeing. What we think is that the combinations of coverage, capacity and flexibility will be pretty attractive to anybody looking for a Ka-band broadband satellite, and that we'll do that together. So what that exactly means in terms of how people ultimately contract for pieces of the system, we'll deal with on a case-by-case basis. But, the basic idea that it will be a system sale.

And expected mass of the satellite are you going to be kind of locked into Ariane 5, or Proton as your options?

No actually the launch mass of the satellite and the launch candidates for the satellite are going to be very, very similar to ViaSat-1.

Okay. And final question here, the subscribers, got that one, sorry about that. You mentioned on the government business, that you're likely to see a little bit of a profit decline this year. Can you just give us sort of order of magnitude? Is that modestly down, 10% or 20% down?

I'd say it's more modest than that.

Okay. Modest it is. All right, thank you, gentlemen.

Okay.

Thank you. This concludes our question-and-answer session. I will turn it back to management for closing remarks.

That pretty much concludes all the stuff that we had to say. We really thank everybody for their time and attention, and look forward to talking to you again next quarter.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.