Viasat Inc (VSAT) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the ViaSat's fiscal year 2014 second quarter earnings conference call.

Your host for today's call is Mr. Mark Dankberg, CEO. You may now begin, Mr. Dankberg.

Okay. Thanks. Good afternoon, everybody, and welcome to our earnings call.

I am Mark Dankberg, I'm Chairman and CEO, and I've got with me 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. This discussion contains forward-looking statements and is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

Back to you, Mark.

Okay. Thanks, Keven.

So, as usual, we will be referring to slides that are available over the web. And I will start with some highlights and a top-level business overview and, after that, Shawn will discuss our financial results. And then, finally, I will summarize our outlook and we will take questions.

So, once again, we are pretty happy with our quarterly results which we did across all of our reporting segments. We set a record for revenues again at $354 million and that's up 25% year-over-year for the second quarter, and we're up 29% year-over-year on a year-to-date basis.

Adjusted EBITDA also set a new record for us at $54 million and that is up 22% from the same time last year and up 44% year-to-date. New orders for the quarter were also very good at $391 million.

Our Exede consumer broadband service achieved 92,000 gross ads, and that's up 68% compared to last year. Net ads were a little over 41,000 and we ended the quarter with about 591,000 subscribers with about 430,000 of those on ViaSat-1. ARPU increased about 6% year-over-year primarily as a result of our higher retail mix, but we're also beginning to see some positive contribution from the VoIP service we introduced last quarter.

Our commercial and government segments also did well with good results over a broad range of products and projects. In commercial networks, we grew in consumer terminals, inside broadband terminals, and Ka-bands had a payload project. That segment also had strong new orders.

Our government system segment revenue is still growing which is pretty remarkable in this incredibly stressful budget environment. New orders growth in government systems was also very strong, more than doubling from last quarter, and illustrating again how lumpy things are in that segment. As we noted last quarter, we are increasing investments in new technology, network expansions, and in litigation expenses to protect and extend our technology competitive positions.

So, with that overview, Shawn will give description of the financials and then I will come back with more detailed highlights in each of the business segments.

Thanks, Mark. Our fiscal 2014 second quarter results were very strong at the top line down through our core operating performance.

Revenues grew by 25% year-over-year and 10% sequentially with both our satellite services and commercial network segments achieving new revenue record. Q2 adjusted EBITDA grew 22% year-over-year to $54 million as our consumer subscriber base continues to expand and we drive growth across multiple markets within our other segments.

If we look at to the quarter-over-quarter results, we can also see the strains of our operating leverage pushing through, generating sequential adjusted EBITDA growth despite heavier upfront stock expenses associated with this quarter's strong retail growth adds. And increased discretionary investments and litigation expense focused on protecting and extending our technology advantages.

Turning to our year-to-date results, financial backdrop is pretty consistent with our Q2 performance. Revenues were up 29% and adjusted EBITDA growth accelerated to $107 million, up 44% for the six-month period. Margins improved on a year-to-date basis despite increased discretionary investments driven by the broad top line growth we are seeing across our business segments.

Moving to our P&L as a whole and looking into our revenue mix, both product and service revenues grew about 25%. Our product revenue growth occurred within both our government and commercial segments while the service revenue growth was delivered from our scaling sub base within satellite services. We expect this mix of growth to continue throughout FY 2014 as we progress in our large scale infrastructure projects such as NBN and Australia and recent integrated ground station wins in our antenna systems group.

As we see in our Q2 results, our expanding service revenues drove improved contribution margins as cost of revenues decreased by 2.6 percentage points year-over-year. This improvement was offset by increases in SG&A and R&D. As we have seen before, SG&A growth occurs in successful high sub ad quarters due to the impact of subscriber acquisition costs. We have also mentioned on prior calls that our R&D investments would be growing as we expand high-capacity satellite capabilities and we see that again this quarter.

Our Q2 net interest expense is down $1.6 million from the prior period due to reduced borrowing rates obtained in the late FY 2013 note refinancing as well as increased interest capitalization related to our ViaSat new investments. We will continue to see decreases in interest expense as more interest is capitalized commensurate with the ViaSat-2 construction activity.

Turning to taxes, our second quarter income tax benefit reflects the effective rate method along with 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. Additionally, we recorded a one-time $3.7 million reduction in certain state deferred asset valuation allowances.

So, overall we are generating pro forma net income in the second quarter of 2014 of $9.3 million which is up $11.2 million from last year. A great milestone achieved through the execution of our satellite service strategies coupled with solid earnings performance and our other product lines.

Our year-to-date cash flow from operations was $102.8 million which increased dramatically year-over-year generating an additional $61 million in cash compared to this time last year. Strong adjusted EBITDA growth is certainly the driving force, but we are also seeing the benefits of strong working capital management.

Moving to investing activities, our capital expenditures during the first six months grew by nearly $98 million from the same period last year. As you can see, our ViaSat-2 payments are beginning to dominate our cash usage as we ramp up construction of our newest high-capacity satellite, outpacing our Q2 CPE investments in support of our retail subscriber base growth. So, as we close out our second quarter of fiscal 2014, our liquidity remains strong with $67 million in cash on hand and only $35 million drawn on our existing $325 million revolving credit facility.

Mark is going to share some more details around each of the segments in a few minutes, but first I wanted to provide a summary of our Q2 segment level results. As I mentioned earlier, revenues were up significantly in each segment compared to the same period last year. The takeaway here is that our traditional product businesses continue to thrive alongside the successes we are having with our high-capacity satellite service offerings on ViaSat-1.

We had very impressive adjusted EBITDA in our satellite services and commercial network segments. We did see a slight dip in government segment adjusted EBITDA reflecting near-term increases in R&D activities and mobile network expansion spending. However, on a sequential port quarter basis our government systems segment grew adjusted EBITDA by 12% which reflects the strength of its core operations.

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

Okay. Thanks, Shawn. So, we will start with the satellite services segment.

Overall, we're pretty happy with the performance of this segment. Revenue growth is still good. It's up 49% from the same period last year and we are seeing some of the benefits of scale as adjusted EBITDA more than doubled over the same time frame.

Gross adds were good at 92,000 with just over 100,000 installations, and migrations seem to be tapering. As we've discussed in the past, growth in our retail gross ads results in a one-time stock expense which cuts into adjusted EBITDA growth in those periods. Those current period stock expenses, along with higher legal expenses, is what has caused that flattening you see in the sequential quarter-over-quarter EBITDA for this particular quarter in the chart on the lower left-hand corner.

ARPU is continuing to increase on a year-over-year and a sequential basis. We are aiming to achieve that through higher value service plans and adjacent offerings, such as VoIP, as opposed to retail price increases. Unit economics are still pretty much in line with expectations. With the growing subscriber base and increasing ARPU, we crossed the $100 million dollar our can satellite services for the quarter.

Churn for this quarter was higher than where we would like it to be in the long term, and I will give some insight into the causes and approaches to that on our next slide. Overall, we can expect to see variations in subscriber acquisition and retention dynamics as we test and measure different approaches to the market.

We introduced our VoIP service last quarter on a limited basis as a bundled offering through our direct sales channel. We're not yet marketing it roughly and are still working on the scaling fulfillment. But the initial attachment rates and subscriber response are encouraging and we're aiming to scale it in a methodical way. Over time, we expect it to have a meaningful impact on our financial metrics.

We also recently introduced a new service package called Exede Evolution. And that's aimed at removing the usage caps for services other than media consumption and it is just a first step towards offering our subscribers options beyond fixed usage caps. It's available only in very limited markets so far and provides a framework for testing and measuring some interesting value propositions. Initial results seem promising and we will move on to a second set of markets soon.

We think of the evolutions plans as an initial step towards creating, measuring, and analyzing new higher bandwidth service plans that will really benefit from new technologies that we still have under development. We think these new plans and developments coupled with the big gain in bandwidth economics targeted for ViaSat-2 can create competitive advantage and increase our addressable market significantly, and that is a good lead into the next slide.

So, here one of our objectives with ViaSat-1 was to expand our market beyond merely unserved customers into the underserved market. Underserved refers to customers with access to DSL, some type of wireless or low speed cable.

Before ViaSat-1, we found that people preferred almost any technology compared to satellite. With the Exede plans though, we took a big jump from 512 kilobits for $50 a month up to 12 megabits at the same price. So, our Exede subscribers get high speeds very reliably and they are able to consume more bandwidth, too. 12 megabits is faster than the average broadband speed in the US and $50 is an attractive price.

Our analysis of the competitive options available to our existing Exede subscriber base shows we've penetrated the underserved market. And we continue to analyze the correlation between the strength of our service offering and our ability to successfully appeal to and serve broader market segments. As we do this, we're gaining confidence that we can use of speed and bandwidth to effectively compete in a much larger market.

For now, although our service is the best choice for our targeted segments in the market, we recognize our offer has been attracting customers that are not good fits because they have fiber-based alternatives. So, what this slide is intended to show is that churn on Exede is not monolithic across the market segments. It is sensitive to the interplay between our plans and customers' alternatives.

Churn for the unserved and our good fit subscribers in the underserved remains in a healthy range. But in those customer acquisition channels where we are attracting subscribers that are not a good fit because their usage expectations are greater than what our plans deliver, we need to manage subscriber acquisition more closely by improving our market segmentation skills and working with our distribution channel to better implement qualification measures.

So, we are taking steps that help us more accurately predict which subs would be good matches, better informing those subscribers about the trade offs involved and that eventually will let us tailor plans to be a good choice for even more people. Simply, we are testing the edges of the envelope.

Ironically, we could probably reduce our churn if we raised our prices and/or lowered speeds and made our offer unattractive to those in the under and more fully served markets. That might be okay in the short term, but we think it would inhibit our growth in the long run. We are developing skills that we think will be increasingly valuable as we improve our technology and grow our addressable market.

Still, overall our financial results are good, our unit economics are in line, and even those subscribers in fully served markets are still profitable for us. We believe over time we can reduce turn by calling our distribution channels that are intrinsically poor and by working closely with those whose long-term interests are aligned with ours. In the near-term churn averaged over the entire base might persist at these levels for a little while, but we believe the steps we and our distribution partners are taking will reduce it over the next few quarters.

Our commercial networks segment posted revenues of $110 million for this quarter and that is a 27% increase year-over-year and another record for this segment. Consumer broadband terminals, Insight broadband, international Ka-band infrastructure projects and Ka-band satellite payload contract contributed to the gains. Higher overall sales along with improved product and service margins enabled operating income and adjusted EBITDA to also increase year-over-year. As we mentioned last quarter though, we're increasing R&D investments in next generation technology and that tempered the gains a little bit.

One of the main thrusts in this segment is getting our commercial Ka-band, in-flight Wi-Fi and commercial service with JetBlue as the launch partner. We've achieved both FCC and FAA approvals and have been doing pretty extensive test flights with JetBlue. The actual in-service date is up to JetBlue, but we believe it's getting pretty close. We think the service quality and economics will be very impactful and ultimately significantly influence the in-flight Wi-Fi market and create pretty exciting opportunities for us.

We are also seeing significant potential interest from international partners attracted to the bandwidth economics, geographic coverage, and operational flexibility of ViaSat-2. Obviously, those are large comp let's opportunities and are subject to a number of factors and variables, but the benefits of ViaSat-2 technology compared to other broadband satellites seem pretty compelling. We will provide updates on these opportunities as the business prospects warrant.

Our government systems segment continues to grow which is very unique and pretty remarkable in this incredibly stressful defense budget macro environment. Revenues were up 11% year-over-year driven mostly by a fairly broad-based gain in product revenues this quarter. Blue Force Tracking, Information Assurance, and Tactical Satellite Radio products contributed to the revenue gain.

As we discussed last quarter, adjusted EBITDA declined somewhat compared to the prior period primarily due to higher R&D investments and mobile broadband network expansion expenses. But sequentially adjusted EBITDA was up by $3 million, about 12% quarter-over=quarter.

Orders in the second quarter were very strong, again highlighting the lumpiness in the segment. The awards were pretty broadly based and include mobile broadband, Link 16 Tactical Data links, and Information Assurance. They also include development of new products and/or capabilities that create further production growth opportunities in the future.

As we have gone longer and deeper into the stressed budget environment, we are becoming more confident that we are seeing more opportunities because of the tight funding than we had before. Business as usual seems harder to do for the government and innovative, lower-cost solutions are getting greater consideration which overall is good for us. The flip side though is that there are a lot of systemic stresses being induced by the combination of reduction in urgent needs procurement activities, declining procurement budgets, sequestration, another year of continuing resolutions, it's just a very uncertain and unpredictable macro environment. So, while we're gaining confidence that we can continue to grow within the next several years, forecasting on a quarterly basis is challenging.

So, that brings us to a summary on our business outlook. Overall, we do not think things have really changed very much from our last conference call. Our satellite service business is growing pretty steadily in an overall market landscape that we think is pretty favorable for our sector. There can certainly be quarterly competitive fluctuations in the market, but we do not really anticipate near-term market force changes. We believe our investments in new technology can help expand the market and improve our competitive position in the longer run and that those investments are worthwhile.

Our commercial networks business is executing on backlog, is delivering generation products, and is investing in new technologies. We see attractive though pretty lumpy opportunities there to grow.

Our government business is seeing the proverbial double-edged sword. All the factors I just mention on the last slide that make for a tight budget environment increase the attractiveness of our technologies and innovative approaches. But they also make for a very uncertain and unpredictable macro environment.

Things are changing from multiple directions because of the changing procurement priorities, the real-time evolving global events, the government shutdowns, budget re-plans, continuing budget -- continuing resolution impacts, and you name it. We believe the overall trend for us is still up, but you need some tolerance for uncertainty on a quarterly basis. We do think the investments we're making are still warranted and worthwhile.

So, overall we think our business has performed at a good high level through the first half of this fiscal year with good top-line growth across the segments and improving margins despite the investments we're making in our future. We believe the strategic investments that we've made over the last several years are having the effects we intended. We have a sense our market opportunities are expanding, our competitive position is stronger, and if we can continue to perform that our most exciting opportunities are still ahead of us.

So, that's it for our prepared remarks and at this point we would be happy to take questions.

(Operator instructions) Our first question on the funds will come from Rich Valera with Needham & Company. Please go ahead, your line is open.

Thank you. Good afternoon, gentlemen. First, just wanted to see if you could give us a migrations number. I think you mentioned it was trending down, but if you could give us a feel for what that number was?

I think this quarter it was around 9,000 ballpark.

Okay. And then just sort of related, the churn number, wondered how -- when you started to see that the higher churn and if you have already started tuning your plans as we speak and should we -- it sounds like you said it may stay higher, but should we assume that the subs that you're adding today are presumably having a more sticky profile than the ones that maybe you added a couple of quarters ago that resulted in the higher churn so you're already in essence addressing that higher churn as we speak?

Yes. So the churn is, as I said in the presentation, it varies a lot depending on basically where we pull our subscribers from and what alternatives that they have. People that use a lot of bandwidth -- were using a lot of bandwidth already, especially if they came from like a good cable network or even a fiber network, those are the ones that are most likely to churn. So, what we've been doing is, one, analyzing that. There are a couple of other factors that we can use as well to predict it. So, we've analyzed it, sort of have a sense of confirming it. Now, going back and implementing it across our acquisition channels is a little bit complicated and involves multiple factors and not all of those fixes take hold the very first time that we try them. So, that's kind of -- where we are now is we're implementing them, some of our partners are implementing. We think it could take another quarter before we really see the changes that we're making now take effect in the segments that we are most trying to address.

Okay. That's helpful. And then your gross ads actually jumped quite nicely sequentially which was frankly a bit since surprising given that this was the first quarter you were essentially sharing the DirectTV channel with [Hughes], so just wondering if you could talk about your overall sort of growth -- your installations and how we should think about that number going forward and if there is any color you can provide on DirectTV which again doesn't seem like there was much of a blip there.

We do not want to -- I think for competitive reasons we're not going to go into too much detail. There is -- there are a number of different factors involved which one of them being that there is a fairly predictable amount of capacity available on our satellite and the use satellite which is very, very similar to ours. And so with the fact that there is finite amount of capacity and there seems to be good demand has some impacts on how it is playing out and I do not think things are going to change a whole lot. I think the biggest factors will just be sort of the rate at which different beams fill up and how we all manage through that. But I think that overall dynamics are not going to change that much and I think both DirectTV and Dish are realizing that satellite broadband is a good companion to satellite TV and they're both routine interested in having that work well across both suppliers.

Great. And then one final one on ARPU if I could. ARPU, as you noted, was a pleasant surprise and seeing some lift you mentioned from VoIP. I know you don't want to give specific guidance, but if you had to think about ARPU a few quarters from now or a year from now, would you assume that it likely keeps going up as you perhaps get better attach rates on VoIP or the mix improves towards some sort of higher end product? How do you think about ARPU looking out a few quarters or a year?

Yes. I think we have opportunities to steadily improve ARPU, not super dramatically. It will depend on the introduction of these new services and that's really our main objective is to sort of introduce more value than price in some sense going forward. And we're trying to do that through the VoIP, through the evolution plans that we talked about, and we think that we have a couple of other ways to go, and I think that for the -- relative to the speeds that we're offering, I think we have a pretty attractive price and there are opportunities to increase our ARPU and still deliver a good value which is -- that's the effect we're trying to achieve.

Okay. That is it for me. Thank you.

Thanks Rich.

Yair Reiner with Oppenheimer.

Sorry. If you could help me with the math on the satellite services, you have about 41,000 subs more on average in the quarter. It seems that that should provide a quarter-on-quarter growth of about $6 million or $7 million, but you obviously reported growth significantly higher than that. What is the delta there that gets us to that $15 million quarter-on-quarter growth?

So, you are talking from the top line revenue growth?

Yes, in satellite services.

Yes. So, I think it is pretty key on just on the mix of the subs and continuing to see the retail subs drive upward which is driving ARPU so that was the weighted average growth, that's the biggest drivers.

Yes. This is Rick. I'd say that it more depended on where we ended the last quarter than where we ended the current quarter. It has some ad in there, but --

Timing impact.

Yes. So, it is a combination of both of those so you can't really just look at the current quarter ads and get there.

Got it. So I guess that applies that the June quarter was probably back half loaded? Is that fair?

I do not think so. No.

You just have to integrate. You have to integrate --

A full quarter of the prior quarter subs.

A full quarter of the prior quarter subs plus if you said it was even, roughly 50% of the current -- an average of 50% of the current quarter subs and blended between retail and wholesale, so you can't just take the net adds in the current quarter to get to the revenue growth.

Understood. And then can you give us a sense of the wholesale retail mix in the quarter and how that is trending?

No. We're not going to break it out explicitly. We're still mostly retail. And it varies from quarter to quarter depending on a bunch of factors, a lot of which are under the control of the satellite TV companies themselves.

Okay. And then just one last one for me from now, legal costs, you've called those out of the last couple of quarters. I know that maybe for -- you going to litigation you probably do not want to give us an exact number, but can you give us a sense maybe for the year of what you're looking at towards legal expense just so we can have a baseline going into 2015?

Yes. I think what we have talked about and what we kind of mentioned last quarter is that the impacts for this year are going to be more significant clearly than they were last year. Q2 was kind of a ramp up in the activities as we started working through the discovery part of the case and closing that out in the quarter. So, I think what we're going to -- we're going to continue to see a lift in those impacts in each of the quarters and definitely higher for the year. This quarter was a little -- definitely a higher quarter than the sequential quarters and it's really going to be based on the timing of the actual case whether it happens at the end of this year or into the beginning of next year.

Okay. Thank you.

Thank you, Tim Quillin, Stevens.

Hi. Good afternoon. Nice quarter. With regards to churn, excuse me, is there -- are we seeing any difference between the churn rates in the wholesale channel versus the retail channel? As I recall in a couple quarters in fiscal 2013 you had some issues around the timing of the reported relations from your wholesale partners. Is there any difference right now between churn in the channels?

No. I would attribute the different -- I would attribute churn more towards the market segments themselves. It's really the factor that I described which is sort of our plans relative to the alternatives that the subscribers have. And it's because the headline number, which is 12 megabits a second for $50 is attractive and so we're trying to make sure the subscribers understand what the volume limitations are. That is primarily the biggest issue.

Now, between the two satellite TV companies, Dish tends to skew more rural than DirectTV and so that would have implications invocations about what their choices are, but I would say that the issues really have to do with subscriber alternatives as opposed to the TV channel itself.

Right. But it sounds like some of your either your retail partners or your call centers are not communicating the caps well to potential consumers. Is there differences in how you do that internally versus how you think external partners might be communicating those caps?

Yes. When you go -- one thing is we have been going into the call centers and I can tell you that some of the distribution partners that we've had account for a weight disproportionate amount of churn and we have terminated several of them because we did not feel that they were taking steps to really deal with the issue.

The ones that we have now we believe that they are -- some of them, they can be implementation issues, some can have to do with the way information is presented to the call agents themselves, so it is actually I would say a fairly detailed process and we are going through it in great depth and I think that actually one of the things we have come to admire and respect is the depth to which the desk -- the best ones do that work and so we are adopting those things, but not everything can be changed overnight. And I think we and the distribution partners that we have that are engaged, we're doing a good job and we will get there but it is probably not going to be turnaround in a quarter.

Okay.

And also, we are trying different things because we do not want -- we want to present what we have in a favorable light but just make sure that people understand what the trade-offs are.

Right. And there is the fine print.

Even some of the worst channels go -- they are profitable and they can be positive and so this is not a horrible product. And we're learning how people take our service. So, it's not -- it's something we're working on improving, but it's not bad.

Yes.

There's one other point I want to make which is the flip side to this thing is one of the things that we're learning is do you put out a good headline offer and lots of people are interested as opposed to the notion how are you ever going to sell satellite to people who have a choice? What we are finding is sort of the flip side which is you present a good economic offer and it is really more an issue of making sure that people understand the trade-offs and where it is a good fit, so we're not anxious to sort of solve the problem in a crude way that diminishes that affect.

What we're trying to do is understand sort of what the edges are so that when we make improvements in our service we know how to go back and get the corresponding interest from potential subscribers and how to deal with that. And that's a little bit why we are dealing with it the way we are and I think to Rick's point, it's worse than what we are targeting but the results are still good overall. So, it's not like a -- we don't regard it as a crisis. We are just trying to improve it.

Right. And just one last question on migrations. Migrations were good I guess year-over-year but up a little bit quarter over quarter. You're down to about 160,000 subs or a little over that on the old WildBlue satellite. How many of those subs are in areas where they would not be able to be served by ViaSat-1, so in other words where is the floor in that business?

Yes. We're getting -- that is a good point. We are getting fairly close to it, to the floor. Actually, I think that the number of subscribers that we end up with from the legacy satellite is actually going to be influenced a fair amount by some of these alternative uses that we are coming up with like in-flight Wi-Fi or some of the live events or media-type things that we are doing, but we're getting pretty close to the floor and the migrations we think is going to continue to taper away.

Thank you very much.

Thanks Tim.

Mike Crawford, B Riley and Company.

Thank you. On commercial network side you talked about development, progress on Ka-band satellite payload. Is that NBN and where do you stand with NBN, both in terms of kind of percent complete on what has already been booked plus any status of any discussions to extend what you might be able to do for them?

Okay. The Ka-band payload project is not NBN. It's a contract we have with [Tavis] on the Iridium NEXT program where we're doing the Ka-band feeder links and cross links which is a very good project for us. On NBN, do you want to --?

Yes. We're in the 30% to 40% complete range. We're through most of the development effort. We're beginning to deploy antennas. The first gateway will go in the -- beginning installed on January 6. It's being shipped literally today I think or yesterday. Right now it's being shipped over. The second one is right behind that.

So, gateway deployment going on. We've moved a whole network test facility installed over in Australia. We have a duplicate one here, so we are going through all the (inaudible) sell-off tests, so we're right in the middle of integration, a bunch of testing and beginning hardware deployment.

And then in terms of the macro picture with NBN, they had a change in government in the last couple months, the new government has expressed a desire to use more of their existing telco infrastructure, do more fiber-to-the-node and a little less fiber to the home on their existing market base on existing homes in Australia. Overall, I think that makes for a little bit more unpredictable deployment environment for terrestrial and the sense is that for satellite it can create more opportunity. What -- that is predicated on people having a good understanding of the quality of the satellite service which, as we have seen here, is a little hard to appreciate until you can see it for yourself, but I think overall it creates more favorable environment for us long term. Okay. Thank you. And then you've also in the past talked about some other big NBN sized or actually bigger than NBN opportunities. Can you elaborate on either what any of these might be or what any potential timing could be related to these opportunities?

No. We are not going to go -- I do not think it would be a good idea for us to go into them by name. The basic idea is that the ones that we put out, sort of the overall objectives we're setting out to achieve with ViaSat-2, there are people who have been looking at other satellite broadband satellites and go, wow, if you can really do that, that is pretty impressive. So, that is kind of the basis of the discussions that we have had and we've been really happy in working with Boeing. I think one of the things that people -- we've had people going to visit Boeing and saying will it really do this, can that really be done? And so we think that that is a sort of necessary step to get people to be comfortable with what the capabilities are.

It is an expensive satellite, but the functional capability is, we think, the best available and for a few big opportunities where people are looking at that scale, those are the kinds of things that we're engaged in now. We just don't know what the timing would be and whether or not they will come to fruition, but we're happy that we are having these types of engagements for the right reasons. I think that's what's encouraging at this point. And Boeing is doing a good job from a team standpoint of representing ViaSat's and Boeing as a team in pursuing these.

And kind of I guess adjacent to that, you've talked about a desire to perhaps obtain capacity on new Ka-band systems, preferably using the ViaSat-2 architecture sold by you and Boeing. Is that something that still remains quite a ways off before we could see any news on that front or is that kind of coming up closer on the horizon?

The opportunities that we're looking at, they would start before ViaSat-2 is launched, sometime maybe some of them could start within a year. It's just a little bit hard to tell. It depends on what -- it depends on catalysts and budgets with each of the opportunities we're looking at, but there are two or three of them in play and so that is a good number at this point.

Okay. Thank you. Final question regarding in-flight broadband. Have you had any talks with carriers that already have a mobile broadband offering but who might want to offer a materially improved service?

Yes. Yes. I mean usually the context for that is in fleet expansion or adding to their fleet or swapping out their fleet. And I think that when that happens, they are definitely interested in what is available at the time and so I think that gives us entrées into pretty much all the carriers. I think a lot of it is going to be influenced by the first deployments that we will see with JetBlue and then United. I think those will have a pretty big influence when people can fly around and actually see how it works. So, we are getting close there but we are not -- it's hard to expect things to move too fast before that happens.

One thing that is kind of cool is because there is an airplane flying around that is equipped, people from other airlines have flown on that airplane just to see how it works and that has been encouraging. So, I think that people are getting a sense of what is possible.

Okay. Thank you.

Thanks.

Matt Robison with Wunderlich.

Thanks for taking the question. Maybe -- first of all congratulations on the government bookings. That was pretty stunning and are we -- do we just kind of not really know how the pipeline develops from here and just sort of take it as it comes or do you think that we can have further sort of catch-up on the bookings in the current quarter?

So far as the bookings go, things are not -- they're not just appearing. We are not expecting. The thing that is happening is that we are working on opportunities with specific customers or to extend opportunities with existing customers and there is just a lot of uncertainty in when they will have budget available, what the authorities are for using that budget given the continuing resolution, sort of the wind down in some of these urgent needs spending authorities. So, things are moving around and it just makes it hard for them to be able to predict when things are going to actually close and that's a big part of what accounts for the lumpiness.

The part that is good that we are trying to convey is that we have had opportunities for things, I will give one example would be like things that were joint tactical radio system applications where it becomes more evident that either the program of record isn't going to be able to deliver or won't be able to deliver in the timeframe or that the target price points don't fit the budget for the application and people are coming back and saying, well, I understand you have got this. How can that be made to work?

And so we're seeing more of those kinds of opportunities and that's what gives us some sense of confidence that things will grow, but it's really hard to predict what the trajectory of the funding will be for them. There's quite a few things in the works and we're not kind to convey a change in our view of what it is. We're just trying to convey this uncertainty of the timing.

Well, yes. And it sounds like that is kind of core to your value proposition, things like that. So, on the account and commercial networks, since you're so far along with NBN and with some pretty major milestones it sounds like coming in the next few weeks or next couple of quarters, should we kind of assume that you're going to have another couple more strong quarters like this in the near-term?

Did you understood?

Yes. I think I got your question. I think what you're going to see is what we talked about before is NBN was going to kind of scale kind of as we are building throughout FY14 and then we may see kind of some curtailing of that as we enter into 2015. So, I think that we are going to see some continued strong trends. We also have had some good successes in some of our terminal revenues as well stemming out of our as some of our younger products. So, those can be lumpy as well and kind of push one quarter one way or another.

I think it is pretty hard to predict.

What we should be thinking about for taxes?

Sure.

(multiple speakers) benefits.

Yes. I can walk through that a little bit. So, overall what we have discussed is that the current quarter had a one-time effect of this discrete item on a valuation allowance for state taxes, but overall if you look kind of out to the rest of the year it's kind of in line to what we have disclosed before taking into consideration the R&D credits, the effective rate is probably going to be around 80%. It can move based on different dynamics as R&D credit to the income, but on the effects of the discrete items if you look out to the year, it's around there.

You said 80%?

Yes. As your closing out. And that is just from the effective rate perspective but, again, it is very -- it is conditioned with the effects of the discrete items.

80%? So, 80% of 35% or 40%? Is that what you mean?

Yes. So, to go back to kind of the elements that we talked about before, you have to look at the statutory rates and then because of the R&D tax credit is effective through the end of December and we're using an effective rate method, those benefits are formulated with in the rest of the year results.

Okay. Rich, maybe this one is for you. How do you see the face of [life] TV with United versus JetBlue and how do you expect the split to go between GoGo and Exede for United?

United is not using GoGo except for on a few PES aircraft. They chose Panasonic and a KU option for the United, the old United aircraft side of the fleet. And they have live TV ViaSat Ka-band on the Continental -- the old Continental side of the fleet. And then there are some aircraft in the middle that are up for grabs that is dark aircraft that hasn't been selected yet and we hope once they start flying the United airplanes that we will get those.

So, you don't see GoGo getting any incremental traction with our GTO offering at United?

No. I don't -- I am not forecasting GoGo. I am obviously horrible at forecasting GoGo, but --

So, when United is advertising their satellite service they are offering now, they are talking at the current moment Panasonic it sounds like.

Panasonic, KU band satellite.

Yes. Sure. And then last question for me is what quarter is our current thinking for the ViaSat-2 launch?

Well, so the satellite construction schedule should be first half of 2016, sort of an early middle first half. It shows 2016 according to the current schedule. The launch would probably be hopefully right around the middle of the year.

Okay. Thank you.

Thanks Matt.

Chris Quilty with Raymond James.

I just thought on that last question, have you announced a launch provider yet?

No, we have not.

Okay. And you have quite a bit of time before you have to make that decision contingent on getting the right launch slot?

Yes.

So, a question on churn. If I ran the numbers right here, it looks like WildBlue was down about 30,000 subs which means net of migrations, you were down about 20,000 churn on the ViaSat-1 satellite and I guess my question is twofold. Number one, are those numbers right? But since the satellite has been in service for less than two years and generally people are signing a two-year lease contract, how does that work in terms of recapturing equipment? Are you able to do that? And how does that impact the accounting of those particular customers?

And the second part of the question is with your reseller partners, was there something -- some kind of provision written into the contract whereby there was a hook on the back end? So they might get a commission if they sign up somebody but if the guy doesn't stay for his two years you get a call back?

Okay. So, there are a bunch of things there. So, one is when we look at churn, if you think about this issue that we described which is sort of for whatever reason a mismatch in expectations from people who are coming from say a cable or fiber-based solution satellite, that manifests itself pretty soon and people that find themselves in that situation are pretty much terminating well ahead of the two-year schedule. So, there is a termination fee associated with that and we have the right to recover the equipment. We do not recover 100% of it. We look at our actuals on the recovery and we do true up our costs and our -- we true up our recovery costs and expense the stuff that we can't recover as it happens and I think we have done a pretty good job on that. Things move around a little bit, but I think we account for that the way we should.

The biggest issue on that churn -- on that front on churn, and this is the issue we talked about, is really that upfront sort of qualification process of trying to match our service to subscribers. That would be a good match. When we sell wholesale, the retailers really bear that risk. When we sell retail through agents or other distribution partners, we bear that risk.

In general, what we find is that the best of the distribution channels do not like the churn anymore than we do and they work with us to bring it down. We do have provisions -- retention provisions in our agency agreements that are intended to cover this and we may change those or introduce different incentives from time to time to help deal with the issue, but we think that the number one issue is really the whole step by step process by which we attract qualified and enroll subscribers so we're looking at it holistically.

Okay.

Does that answer your question there?

It does. I am just thinking back to the early days. I was really impressed at the time you were pulling in 40% or so of your subs when you pulled them were coming from terrestrial subscribers and clearly some of those guys were not good catches, but I guess if you're able to tool the marketing and the sign-up process, do you still think the business model and the plans that you've devised would support bringing in a significant number? I don't know if it's 40% of your subscribers as terrestrial flips rather than saying wait a second, maybe we need to re-tool this entire thought process and maybe go after more the really underserved or super unserved customers.

In general, one of the things that we have found is that over time that the fraction of subscribers we are getting that do have terrestrial alternatives have gone up from that 40%. It's significantly higher. And when we look at that increase and where those subscribers are coming from, we're able to pretty much deduce what the issues are and where we are pulling them from and that's sort of the root of the approach we're taking to manage that problem, the problem being that people who are high bandwidth users who come from good choices tend to churn more quickly.

So, as I mentioned, we are going through the qualification process to deal with that. What we think is, as opposed to retreating away, we find this encouraging and what we're trying to do is use some new technologies in the increase of bandwidth that we are expecting to get with ViaSat-2 to actually cast a wider net, not a narrower one. I think that's our long-term plan. We're trying to do it methodically and in some sense what we're doing is we're facing this market segmentation issue head on. How do we find subscribers that are good fits for us that are substantially beyond just the unserved segment?

I would say if ViaSat-1 was a project, we probably would not do it this way. And since it's the first in the series, this approach is really important.

So a learning process?

Yes.

And just to clarify, are these mainly in terms of retargeting who you're going after, these are mainly soft costs or are there some kind of implications for a higher [stack] in order to get the targeted customers?

No. It won't -- (multiple speakers).

Okay. I know you do not provide guidance but just to clarify, sorry not Q4, the December quarter is traditionally up sequentially in terms of net adds?

Yes. Last year was a really good quarter for us.

Okay. And Shawn, could you give us perhaps a targeted CapEx spending for the full fiscal year?

Yes. I think what we have talked about is the milestones on ViaSat-2 are going to be a big driver. I think what you're seeing in the Q2 results is that the CPE spend was a little bit down to Q1 even with the gross adds and we talked about those dynamics a little bit before with redeployment of some of our CPE as we get new subscribers. So, I think if you kind of look at where we were at Q2 and consider those dynamics continuing to happen at a slightly progressive rate a little bit and then probably for ViaSat-2 looking at what we did for Q2, we're going to see those things happen for Q3 and Q4 as well but, again, it's going to be eight based on milestones and there is significance we can have some fall into next year.

So not a range?

I think specifically I think it can move a lot so probably, better sense to look at our Q2 trends and kind of look at that out to Q3 or Q4.

Okay. And final question on the government systems, it looks like the service related business was down about 20% sequentially, 15% year-over-year. You had a pretty huge step up in the service revenues over the proceeding year, year and a half, and I know you had talked about some revenue risk as we withdraw out of Afghanistan. Is this probably the floor on where you would expect those service revenues to trend or is there more downside as we continue to withdraw.

So, we have different business areas that contribute to our overall services. One of the things that we talked about last year was we provided bandwidth on an interim basis Blue Force Tracking 2 and that pretty much ended I think as a result of that. They had a procurement competition to do that on a sort of on their program of record basis instead of going through us. We might get that again in the future. There will be opportunities for us to compute for it but I think that is one of them if not the major reason that you are seeing the decline year-over-year.

So the actual command and control business remains relatively steady?

If you look at the ISR business that we have had in the command and control portions of the mobile broadband, the trends have been pretty good in terms of getting more platforms and more users. One of the issues that definitely will come into play is going to be the draw down from Afghanistan. On the other hand, one of the things that is encouraging is that the users have found the capability to be really valuable and there is not a shortage of places in the world that need this kind of capability, and so part of what's happening is those assets and the corresponding service are looking like they are going to be redeployed in other places.

Got you. All right. Thank you everybody.

Thanks Chris.

Amy Yong with Macquarie.

I have two follow-up questions. Number one, what was your end subscriber number on your legacy satellite from the September quarter and, secondly, on in-flight, what maintenance check would you install the equipment on the JetBlue and United aircraft? Is it the B or the C check? Thanks.

Okay. On the first one what we said is we had about 591,000 subscribers at quarter end and about 430,000 of them were on ViaSat-1, so that would be about 160,000-ish thousand between WildBlue 1 and [Anik F] 2.

On the second point, Rich, you can correct mean if I am wrong but basically in order to achieve the install tempo that they want that is to get the Wi-Fi deployed in the fleets, they are going to do special installations and that they will not be under -- not all the aircraft will get them under the normal maintenance cycle.

I see. So, these would be in addition to the regular maintenance cycles cut checks that they have?

Yes. They may reschedule. They may integrate some of the maintenance. They may do some early for instance because they have got the aircraft online, but that is up to the airline. So, we are following their lead on scheduling those but Mark is right, that tempo, the rate that they want to install these things, it does not line up with normal maintenance cycles perfectly.

Okay. Thank you very much.

Thank you.

(Operator instructions)

I think we will go ahead and shut it off this point.

Okay, Sir. Well, at this time we'd I don't show any additional questions in the queue.

Okay.

I will turn the program back over to you for any additional or closing remarks.

That covers what we had to say for this quarter. Thanks a lot, everybody, for joining our conference and look forward to speaking again next quarter.

Thank you, presenters, and thank you, ladies and gentlemen. Again this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may now all disconnect.