Viasat Inc (VSAT) 2014 Q1 法說會逐字稿

Welcome to ViaSat's FY 2014 first-quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thanks. Good afternoon, everybody, and welcome to our earnings conference call for our first quarter of fiscal-year 2014.

I'm Mark Dankberg, Chairman and CEO, and I've got with me today Rick Baldridge, our President and Chief Operating Officer; Bruce Dirks, our Chief Financial Officer; Shawn Duffy, our Chief Accounting Officer; and Keven Lippert, our General counsel. Before we start Keven will provide our Safe Harbor disclosure.

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is simply a reminder that 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 SEC or from our website. With that said, back to you Mark.

Thanks, Keven. So we'll be deferred to slides are available over the web and I'll start with some highlights in then talk a little bit in this overview and then after that Shawn Duffy will discuss our financial results. And then I'll provide more depth on each of our business segments and finally I'll summarize our outlook and we'll take questions.

We're very happy with our first-quarter results. It was our sixth consecutive quarter of record revenues. Sales Companywide were up 33% year-over-year and EBITDA was up 78% year-over-year. Financial results were strong for all our reporting segments.

The June quarter it is seasonally slow for consumer broadband, but we achieved about 76,000 gross adds, churn was steady and we added just about 38,000 net to end the quarter at over 550,000 subscribers. It was our fifth consecutive quarter of increasing ARPU, too, and that grew about 10% year-over-year. At the end of the quarter we began introducing the first satellite residential VoIP telephone service, which can enhance ARPU growth while still offering an excellent value in the un- and underserved markets that we're aiming at compared to land line telephone plans.

Our Government business is still in a pretty unique position, with continued strong year=over-year revenue growth and very good earnings growth. The Commercial Networks business also showed growth in revenue and earnings building on broadband networks and aviation.

A very important strategic backdrop to our overall growth story is the ViaSat-2 construction program under way at Belling. We believe our results, the program wins and the array of ongoing opportunities we have reflect our unique approach to the satellite broadband market. There's a lot of synergy among our business areas that are all catalyzed by the bandwidth economics that we've already achieved and that we're working to extend.

We're aiming at strong revenue and earnings growth this year while increasing our R&D investments in the range of $20 million to $30 million compared to last year. And also increasing our spending on protecting our intellectual property position.

So with that background, Shawn will give an overview of the financials and then I'll come back with some highlights on each of the business segments.

Thanks, Mark. Our first quarter of 2014 represented another quarter of strong financial results. Revenues were up 33% year-over-year and 4% sequentially, with both our Satellite Services and Commercial Networks segments achieving record revenues.

Q1 adjusted EBITDA also grew an impressive78 % year over year due to our growing consumer subscriber base as well as strong performance in our Commercial and Government segments. Hitting these strides represents some meaningful validation of our core strategies. Our Q1 growth stemmed from the success of our Exede service, which platforms multiple in-home service offerings on transformational KA band. These same solutions are the driving force behind our Commercial segment Q1 revenue as development activities ramp on NBNCo's caved-in network.

And our mobility solutions continues to deliver growing results as we leverage cross-market applications within our Government and Commercial segments. So let's take a look at our detailed P&L for the first quarter.

Looking closer at our revenue mix you can see that our service revenues grew by 48% year-over-year to $139 million and product revenues were $182 million, representing growth of 23% year-over-year. We expect this mix of growth to continue throughout FY 2014 as we grow our residential subscriber base, continue to widen government mobility platforms and drive broadband into other emerging markets such as commercial air.

As a percentage of sales our cost of revenues decreased year-over-year as our SG&A. We mentioned on prior calls that our R&D would be growing and we see that in this quarter, both in absolute terms as well as in the percentage of revenue. But even with these additional investments, the scale of our Satellite Service business is pushing through, generating positive income from operations of $3.4 million compared to a loss of $13.8 million in the prior period.

Looking into our Q1 interest expense, we are seeing nearly a $1.5 million reduction from the prior period due to the refinancing of our 8.875% notes at lower interest rates last October, as well as a slight increase in interest capitalization as we start construction of ViaSat-2. In future quarters we're going to see interest capitalization grow quarter-over-quarter, corresponding with our ViaSat-2 construction progress and related network investments.

Finally our income tax benefit this quarter reflects the inclusion of federal R&D tax credits, which were not booked in the corresponding period last year due to the expired legislation in effect at that time. So let's take a look at some of our capital activities and our balance sheet at the end of the quarter.

Overall our cash flow from operations increased dramatically year-over-year, with more than $50 million in improvement from the prior period. Clearly, the largest contributor is our growth in EBITDA, which continues to fuel cash generation at an accelerated rate. That growth, coupled with strong quarter-over-quarter working capital maintenance, has provided us with $54 million in Q1 operating cash generation, which is a pretty strong start as we look into FY 2014.

Moving to investing activities, our capital expenditures grew by $44 million from last year, as expected, reflecting the start of our ViaSat-2 project activities, as well as higher retail subscriber additions relative to the prior period. However, our liquidity remained strong, with $80 million in cash on hand plus the availability under our line of credit, which we have been able to delay drawing on as we close out our first quarter.

Mark is going to talk about the segments in more detail later, but overall this segment financial results were very good across the board. Revenues were up significantly in each segment compared to the same period last year. And adjusted EBITDA growth was even more impressive as we start to see some of the operating leverage from our service businesses drive earnings. Additionally, we had a good flow of mature product shipments this quarter, which provided strong product margin improvements year over year, as well as sequentially.

So with that I'll turn it back over to Mark, who will provide more color on each of our primary segments.

OKay. Thanks, Shawn, we'll start with the Satellite Services. Overall we were very happy with the performance of this segment.

Revenue growth was strong, increasing 45% from the same period last year while adjusted EBITDA grew nearly fourfold over the same timeframe. The June quarter is historically seasonally slow and our marketing and promotional approach for the quarter reflected that. Still we added about 76,000 gross.

Churn was comparable to the prior quarters and that yield about 38,000 net adds. Migrations are steadily tapering off. Unit economics remain in line and the results are seeing the benefit of the steadily increasing ARPU. We introduced our Exede VoIP service at the end of the quarter, which we believe can further help our approach in growing ARPU while still providing a very good value in these un- and underserved markets.

Our fundamental strategy for consumer broadband is still pretty much the same and we believe continues to be validated by the market and the results. The bandwidth economics of ViaSat-1 class satellites have had a very positive impact on satellite's place in the overall residential broadband market. But the broadband market is certainly static and our overall strategy is to use our space systems technology to improve our products and services relative to lower and competing terrestrial offerings for our targeted market segments, even while those terrestrial offerings continue to improve and customer expectations continue to grow.

The biggest component of our improvement is in space and we're excited to ViaSat-2 underway. We believe it will be an important source of advantage compared to competing terrestrial and satellite solutions. But there are other ground technologies and go-to-market strategies and tactics that we're working on that we believe should sustain our momentum in the intervening time. So we'll remain focused on these macro market forces even if that might involve some quarterly voluntary.

You have to remember that the competitive dynamic is interesting here. The performance of the Satellite Service is an important component of overall success and since there's a limited amount of satellite bandwidth available until the next round of launches that means there's only so many subscribers that can be served without undermining performance. Demand likely exceeds the supply so that creates a maneuvering move for us to focus longer term where we think growing the market with the right unit economics is the big prize.

Our Commercial Network segment posted revenues of $97 million for the quarter; that's a 28% increase year-over-year and also record for the segment. The revenue increase was driven by strength in consumer broadband products, aeronautical broadband communication systems and third-party satellite payload (inaudible) programs. Product margins improved somewhat from the prior period, which helped offset the new R&D spending associated with the ground and payload technologies for ViaSat-2 and beyond. So that enabled operating income to increase substantially year-over-year this quarter, with a corresponding threefold increase with adjusted EBITDA. Sequentially adjusted EBITDA in excess of $8 million from the previous quarter.

Our Antenna Systems business is seeing especially good growth in awards and opportunities. An important component of long-term growth in this segment overall will be creating and finding market opportunities with customers who place a high value on bandwidth economics. NBNCo in Australia is a good example and that program's making good progress. We believe NBNCo's satellite service will help set expectations for what's possible with satellite. That program builds around ViaSat-1 class satellites.

With the start of the ViaSat-2 program we're beginning to see opportunities for integrated space and ground programs that leverage that technology. With ViaSat-2 we also add broad geographic coverage and operational flexible to the bandwidth economic value proposition. We're really encouraged by the early feedback on ViaSat-2. The opportunity is big but awards in this area or going to be very lumpy.

This is also a good opportunity to give an update on our Exede in air in-flight Wi-Fi program. We achieved a significant milestone with a blanket license from the FCC allowing us to provide airborne KA band service across the US. The license permits us to use the low-profile antenna that's shown on the picture at the left on our KA band that feed all of our satellites.

We also continue to get closer to service introduction with our airline partners. Test flights for the FAA on JetBlue's A320 class aircraft went as planned and now we're awaiting final approval that'll allow us to begin the process of entering commercial service. FAA test flights on the 737 aircraft will occur shortly.

In mid June we announced that we'd begun working with Boeing towards offering our ViaSat KA band airborne satellite terminals as a factory line fit option for Boeing aircraft. That enables Boeing customers to take delivery of aircraft with the KA band equipment already installed and avoid costly downtime associated with post production retrofits.

And, of course, the entire commercial aeronautic opportunity for us has been greatly enhanced with the start of ViaSat-2, which has seven times the coverage area of ViaSat-1. This expands service coverage into important new markets, including Canada, Mexico, Central America and the Caribbean, and also provides a critical link to existing KA band capacity in Europe and the Middle East. We believe the coverage will also be valuable in all the airborne markets; commercial, general aviation and government.

And ViaSat-2's very important in that it shatters the myth that you can't have very high bandwidth along with very large geographic coverage areas and with operational flexibility. No other satellite systems have been able to create that combination yet and it's especially more valuable in these global mobile markets.

In Government Systems we achieved another quarter of exceptional performance and continue to do well in today's challenging defense market environment. In terms of financial performance, our revenues grew 30% year-over-year and adjusted EBITDA grew 14% over the same period. As we said last quarter, we're significantly increasing our investments in the Government segment to consolidate and extend our market gains and best growth opportunities, especially in mobile broadband services. One of the most exciting parts of that is growing adoption of high-capacity Ka band networks as a integral compliment of these global ISR and command-and-control networks.

We've also recently completed an exciting funded demonstration showing how we can apply high-capacity commercial satellites to improve resilience to jamming and interference. Some of the key business drivers in this past quarter included continued growth of our mobile broadband business, strong production volume on the Blue Force Tracking 2 product, excellent performance in our tactical data links and secure networks businesses, as well as continued solid products in satellite modems and terminals.

So far the main artifact for us in the DoD budget sequestration and furlough issues have been in program delays and unpredictable timing. Pressure on US defense budgets is expected to continue and seems to be encouraging government customers to more carefully consider alternative solutions that we believe favor our innovative value propositions. During the last quarter we saw some evidence of this trend with continued new awards, including key R&D development awards in both our secure Network Systems and our tactical data links businesses. Prospects in those core markets are actually improving for us. So while quarterly uncertainties remain the overall picture for our government growth remains positive.

One of the themes we've repeated throughout this presentation is our aiming to significantly grow our revenues and earnings this fiscal year while also significantly increasing our R&D investments. I mentioned earlier that we're planning to grow R&D investments Companywide by $20 million to $30 million compared to last year. So R&D is planning to grow quite a bit faster than revenue and that growth in our R&D expense will effectively mask a pretty significant amount of the growth in operating margins we believe we'll achieve. The point of this slide is to present some context for why we think that's a good investment and where it's going.

We believe that a large part of our growth is due to our unique position in being able to drive satellite bandwidth economics with a very high level of vertical technology integration and a good horizontal market presence. We're seeing growing market adoption of the bandwidth value proposition in traditional satellite markets and we're making meaningful inroads in some cases versus alternative terrestrial solutions. We have yet to ever really encounter an actual customer who's ever told us we're giving them too much bandwidth. But to the satellite industry -- or at least much of it -- which is mostly organized around selling bandwidth and creating channels to sell bandwidth still seems to be responding by saying that customers don't want and don't need as much bandwidth as we're offering. And we often have bandwidth advantages of over an order of magnitude.

So it seems to us that the market response we're getting warrants making the investments we can afford in order to create even more competitive advantage in this satellite space. We feel that's valuable because in a lot of these markets we're only competing with other satellite solutions. It's a long-term strategy, but we're in it for the long haul and we believe that the earnings we're getting from prior investments support our approach.

The biggest single growth item in R&D is in the networking system for ViaSat-2. While the ViaSat-2 payload design creates big advantages in bandwidth, coverage and operational flexibility it will take commensurate advances in the ground network to realize that. The ViaSat-2 network advantages apply to all the markets we're addressing.

Then we have associated market-specific investments in terminals and in broadband media. Each of those reinforces value propositions that we believe have shown favorable market response based on ViaSat-1. The benefit to the Company should be derived primarily in growing services revenues and earnings in the Consumer, Government and enterprise applications. While much of the path is associated with ViaSat-2, some of the capabilities should come to market sooner. Also as I mentioned before, we'll also be spending more this fiscal year on protecting and defending our intellectual property position on KA band satellite solutions.

Okay, so to summarize our overall outlook, we continue to see favorable market forces at work for ViaSat-1 in the consumer broadband opportunity. It still looks like demand is greater than supply and that we can anticipate continued good subscriber demand. We're happy with our unit economics, we're learning a lot and we think we'll be in a strong position to leverage the benefits of the investments we're making in ViaSat-2 in continuing to improve bandwidth economics and in growing the adjacent markets. That doesn't mean that every quarter will be free of competitive artifacts, but overall our view of growth in revenue and EBITDA for the business remains unchanged.

We had a very good quarter in our Commercial Networks business. We have a lot of backlog and performance on existing programs will drive our near-term results. In general, we're seeing the results of our leading position in ViaSat-1 class satellite networks.

With the start of ViaSat-2 we're now seeing opportunities to grow by capturing that next generation of broadband systems. This segment will incur the majority of the R&D investment growth we were talking about.

We're very pleased with our growth in the Government segment. We think it's pretty unique in the industry. Global satellite broadband's leading the way, but it appears that greater focus on cost is creating a more favorable competitive environment for some of our innovative approaches in several markets that we're already participating in.

We see a good opportunity for year-over-year growth continuing this fiscal year and beyond. We are about doubling our R&D spending in this area and investing in network infrastructure and that means we might contract somewhat in earnings year-over-year, as we talked about last quarter. So far the main sequestration artifact that we're seeing is the unpredictable timing on programs and awards.

That pretty much covers our prepared remarks so at this point we'll be happy to take questions.

(Operator Instructions)

Rich Valera, Needham & Company.

Wonder if you could give the actual churn in migration numbers for the quarter just for bookkeeping purposes?

Sure, and I think if you -- you asked about churn, I think that that is running around real close to where we were averaged over Q3, Q4 so probably around 25%. But you know --

2.5%.

Yes, 2.5%. Sorry, I'm giving you an annual number versus a monthly number. So we're coming right back in line to where we were. I'm sorry, what was the other number you --?

Migration.

Sure. The migration's are coming down pretty small. I think there were 5,000, 6,000 migrations at that amount. They're coming down quite a bit.

Great.

And in terms of the seasonality which we saw here, how should we think of gross sub adds moving forward? Should we expect an up trend in the next quarter and do we still think the 90,000 to100,000 per quarter is a reasonable level, or are there some dynamics, unit economic-type dynamics that might cause you to focus on a lower level than that?

I think -- I'd say we don't have specific target, we though Q2 was seasonably low. In the next quarter I think from a seasonality perspective that will be better. One of the things that we talked about last time was that DirecTV would be adding use and distributing used as well as us. We think it'll be a -- there'll be a number of puts and takes in it and I don't really -- I don't think I would say that we have a specific target, I think we're going to roll with what the market does.

Okay, fair enough.

And then you mentioned rolling out your voice service, any thoughts of penetration levels of that over time and what kind of impact that might have on ARPU?

The ARPU impact will depend on what the adoption rate is and the numbers that we had at the end of the quarter were pretty small so it's hard to say. But I think if you look at what other service providers get when they attach a VoIP product it can be in the 20% to 30% range. I think that satellite you wouldn't expect to take rates quite that high but it might approach -- it could approach that range and that'd be good for ARPU.

Sure, that makes sense.

And then with respect to the R&D levels, you did a good job of explaining where those investments are going this year, how should we think about subsequent years? Obviously the ViaSat-2 development program I would expect is multi year, but should we expect this kind of level of R&D into subsequent years, or might there be a little pullback following this year?

I don't think you'll see -- you won't see the step increase that we're showing this year but I think you'll see proportionate increases.

Okay.

That's a fair description, I'd say.

Got you. Any clues on -- you mentioned you're going to be bumping up -- it sounds like your legal expenses a bit, any clues there in terms of the magnitude you may expect on that front?

Yes. Obviously we cannot go into specifics, but it's really just a combination of obviously patenting around all of our R&D investments, as well as preparing to go to trial this year -- or early next year, I should say, this fiscal year on the SSL case.

Right, fair enough.

Finally, with respect to bookings, obviously some very nice backlog as we start the year here. Just wondering how you would characterize your bookings pipelines in the Commercial and Government segments, and if you looked at those segments on a annual basis if you thought they'd have a shot at having book-to-bills at one or better for a annual basis?

This is Rick.

I think this year we definitely have a shot of being over one, but I'd say it's hard because of the (inaudible) award last year and how large that single award was, but everything falls right we could exceed it. But I'd say it's going to be a fantastic year to repeat that just getting -- or burning some of that backlog off. So I'd say probably our 50/50 estimate is it wouldn't quite be there, but with some really good opportunities to have a greater than one-to-one, [don't you Mark]?.

Yes, and that was part of what I was trying to talk about in the Commercial segment, where it'll be more elephant hunting. You look at NBN as an exceptionally large program, what we're seeing are opportunities for even larger programs or others in that range. But the timing on those it's hard to tell where they'll fall and where those fall will have a big impact in even an annual book-to-bill ratio.

Got it.

You know we do not book any of those -- any of the forward service revenues for anything we record, we just book that as we record sales.

Got it, makes sense.

Yair Reiner, Oppenheimer.

Hi, this is William Wade for Yair. First off my question is, you mentioned that terrestrial competition is not standing still, to what extent is a factor in this quarter and how does that alter your expectations for subscriber trends going forward?

I don't think that I would consider that a factor for the current quarter. I think that if you look at the satellite industry as a whole, I think that our -- that the satellite market's share of net new ad in the US broadband market is way disproportionately high and I think that reflects the step increase that we got with ViaSat-1. Now if you think about that increase being associated with the deployment of a new satellite system there's going to be three-to-four year gap in between them an so it'll really take the next generation of satellites to extend that. What we think is it will actually extend that. You may think of it, let's say compared to LTE, in particular, in the underserved markets, LTE might advance incrementally due to next generation-like LTE advanced technology, but that -- I think that's a -- I was really referring to a multi-year trend there, not as a this quarter factor.

Great, thank you.

And just one other thing. Given the lower gross add numbers during the quarter, operating expenses seem a bit high in the Satellite Services segment. Can you give us a sense of what's driving that? Is that higher subscriber costs, or is there some other operating expense and how do you expect that going forward?

It's primarily driven by legal.

Yes, absolutely. I think one of the things that Keven talked about was we're going have ebbs and flows through the timing of the case and activities there and I think we had a just a little bit of a uptick in the quarter, which you'll probably seeing a little bit effects of.

If you exclude legal, we've at least achieved or exceeded our incremental margin on new sub adds that we've been talking about so it was actually very high in the quarter.

Tim Quillin, Stephens.

Yes I think I had the complete opposite slant on the margins in the Satellite Services business. So I look at your quarter-to-quarter incrementals and it looks like there was 100% contribution margin quarter over quarter, so I'm just wondering why margins were so good?

It was not 100%, Tim, but it was high and it was really -- Mark said in his comments earlier that it was seasonally down quarter and so our spend in things like marketing and those kind of spends was tailored to that quarter. So what you saw is that's what happens when you slow down a little bit and so saw the effect of that in that period.

What was the mix of wholesale and retail gross adds?

We're not --

It didn't change a whole lot. We're not go into all the depth on that each time, but it did not change much and you can tell by the ARPU growth.

Right.

Do you have the number of subscribers that are on ViaSat-1 satellite handy?

It is about 362,000, right around there.

Okay, perfect. Thank you.

And then on the Commercial Networks business, I think record EBITDA, record margins, given the fact that you are going to be investing in R&D in that business, what should be our rational expectations for margins over the next few quarters?

From a operating margin perspective? I think if you look at -- we had a very good quarter this quarter, we talked about a different elements of that for the call on some of the things that we had in our product shipments. I think that we're pretty happy about that and we're making good strides in that area. I don't know that I would expect that to occur on a quarter-over-quarter basis because we're going to have some lumpiness there with orders, but -- so I'd probably not expect Q1 to continue at that same level.

Yes, the vast majority of our EBITDA for the year will come from the Government and Satellite Services segments.

Another factor in there, that revenue growth that we're ramping into that quarter is on some big development programs, [like the income] and they don't carry a lot of margin associated with them.

Okay, thank you.

Lastly, Mark, talking about the competitive outlook, and I think you're right in the sense that it's not now that you have to worry about competition but thinking three-to-six years out and LTE advance or just build out of fiber or copper technologies. I'm intrigued by your investments in the network development. Would that be additive to the download speeds that you may hope to achieve on ViaSat-2, or could that be incremental improvements that you could get before the launch of ViaSat-2? What exactly -- in as much detail as you can, can you tell us what you're doing with that development effort?

Okay. So there's two parts. One part is the technical capabilities and the other part is go-to-market packaging of the capabilities, which is important, as well. What I would say is, if you look at what distinguishes a broadband offering in a competitive market the big things are speed and value and that's one of the things we are trying to show with ViaSat-1. So we increased the speed a lot. It was a good speed for the price but we see -- you'll see LTE speeds going up probably. I don't know if you'll see DSL speeds going up much, maybe a little more penetration (inaudible) type stuff, and you'll see cable speeds going up.

So one is yes, we absolutely will be able to increase our speeds pretty meaningfully and we'll figure out how to package that., but we'll be able to increase our speeds a lot. What we think is, just the fact that ViaSat-2 is coming means that that'll give us maneuvering room to increase our speeds even before it arrives if the market warrants. The other thing is the bandwidth consumption. Right now we have these gigabyte limits. We think this gigabyte are competitive in the markets that we're in, but clearly we could improve our competitive position by either substantially raising those gigabyte limits or finding a way to get rid of them completely. And those are really the main dimensions. I think that you'll see our offer improve over the next timeframe and I think that with that we'll compete well.

Mike Crawford, B Riley and Company.

On the mobility side, how much of the yond -- the yonder is all KU, now how much mobility, if any, do you have on Ka band now to government customers?

The government Ka is just starting. We've got -- some of our earlier customers started with the KU and they really liked it and they were saying, hey, look at what we can do with Ka. To do that we had to develop the Ka band terminals for them. Those are in place now for our first customers and they definitely see the advantage, especially in the ISR's, just faster speeds and better air time prices. So there are some places where they're operating where they can take advantage of that. And then we have a couple of approaches that'll let them operate pretty much anywhere they want in the Ka band. So barely the front end of the revenue curve, Mike, but we've got some costs we've been incurring out there to establish that.

Okay.

I think you're also developing a common broadband modem that can work across networks. What's the status of that development?

So that's -- if you look at what our overall strategy is for the government business is to be able to enable customers to -- we describe it as kind of like the mobile market where you've got a handset that's capable of LTE and 3G and 2G and you use whatever is available in the region that you're operating in to it's best advantage and that's the concept that we want to provide to our government customers, as well, is to provide them terminals that do that and that means being able to do Ka band, Ke band and multiple networking wave forms, as well. And so that's -- we think that's a good investment, it's one of the areas we're investing in.

Okay. Thank you, Mark.

And then, when you're talking about your network investment you're talking about including, say, it's fiber on the ground?

Yes, it's really -- network investments that we're doing or network expansion investments involve points of presence, connectivity to those points of presence, security and also bandwidth capacity as well, to accommodate growing numbers of users. Those are the main dimensions.

Okay, thank you.

And then on your alliance with Boeing's market satellite systems based on the ViaSat-2 architecture, is that something where you -- when do you think is the soonest you could expect it to come close to an agreement with someone to take a partial payload or a full payload on that satellite that looks like a ViaSat-2?

Hard to say, Mike, they're big complicated opportunities. What we can say is that when people have seen what's possible the interest level is high and so we're engaging on the opportunities, but it's hard to predict if any of them will close and if so, when.

One of the issues here, Mike, is you can see how expensive this thing is and so -- and people have to really value the capability set and that's an education process.

Well, at least for -- and it really goes back to what I talked about and sort of our investment strategy, which is to the extent that we can engage in users of bandwidth and those -- [a really good] example would be government customers are all users, the bandwidth value proposition is totally obvious. To the extent that what you're engaged with our people who are normally more channels or gateways to those users that's where you have to go through the analysis and the learning process.

Okay, thank you.

And then last regarding the FCC clearance, so -- I'm sorry, the JetBlue Airbus 320 planes are now cleared to start offering the service, is that what you said, and you expect the same to be the case for the 737s fleet as well?

So there's two steps. One is an FCC license and that license is really aircraft independent, it's an attribute of our system and technology. Then there's FAA certification for each individual air -- class of aircraft installations. So we went through a FAA flight worthiness certification process with Airbus -- with JetBlue on their A320 series. That was conducted in July and there's an evalua -- a consideration and evaluation process that the FAA goes through before they grant an air worthiness certificate. I think that that may be a month or so out in that timeframe. Then we expect to start -- just what we said was, the flights went well, we achieved the objectives we intended when we did the flight worthiness test but we're still awaiting the FAA certification for JetBlue then we will start the same process with the 737s this month.

Yes, we went through all of that, Mike, with the (inaudible) guys.

Brian Ruttenbur, CRT Capital.

A couple of questions, first of all on government -- on your government revenue. It looks like sequentially government revenue is trending down a little bit, is there something seasonal going on there, or is this just feeling a little bit of the effects from sequestration?

I would say it's not -- we don't think it's sequestration. If you look at our government results historically over time, our June quarter's generally been a slower quarter for us. So year over year it's up substantially, we think year over year we'll do well government wise.

We also, Mike, pointed out that the last year's Q3 and Q4 was just exceptionally high quarters and we didn't expect them to repeat.

So you don't expect have as high a government revenue this year as you did last year, or is that putting words in your mouth?

No, I think we said we expect pretty good growth year over year for government.

Okay, and then just a couple of other housekeeping. Tax benefit going forward and interest expense going forward, if you could give me the actual number going forward on a quarterly basis for both, if you have that?

Sure. Well, I think one of the things from the tax benefit that I think we talked about last quarter was that, with the R&D credit coming in people ought to think about having an R&D credit benefit of around $8 million. So if you look at what the statutory rates are and then put that on top you ought to be able to get within the ballpark of where taxes will be overall. From the interest expense perspective, what we're going to start to see -- our cash interests we're definitely driving the savings from the refi that we did and you're going to start to see the capitalization occur for interest as we start to ramp up on ViaSat-2. I think if you look year over year you may expect additional capitalization of like $3 million. So we've been able to delay borrowings as we progress on the ViaSat-2 so those things are going to impact interest clearly, but I think if you look at some of those benefits you ought to be able to get pretty close to where we are for next year.

Okay. So as a dollar amount and tax benefit for the year, it should be a tax benefit of roughly $8 million, is that what I hear from this? And then interest expense, should be roughly $40 million?

So what I said was that the R&D tax credit is going to drive about $8 million of additional benefit and then you've got to take in the statutory rate on top based on the outlook of earnings.

And you're statutory earning is what?

Excuse me?

I'm sorry, what was your statutory rate?

Our statutory rate usually blends right around 38%, right around there.

Thank you. Sorry, go on, I apologize.

Sure, no problem.

So from an interest expense perspective what I said is, you've got to factor in the reduced interest that we expected to see from the refi -- I think we said last year that that may be around $3 million to $4 million -- and then you also have the timing of the interest capitalization, which should probably uptick a little bit for the year about $3 million. If you look at that year over year you can wrap it up.

I think that's it. Mark?

Okay, good. So that pretty much completes everything we had to say this quarter. Thanks a lot for attending and look for to speaking with you all again next quarter.

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