Viasat Inc (VSAT) 2014 Q4 法說會逐字稿

Welcome to ViaSat's FY14 fourth-quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Good afternoon everybody, and welcome to the ViaSat's earnings conference call for our fourth quarter, FY14. I am Mark Dankberg, Chairman and CEO. I have got with me Rick Baldridge, our President and Chief Operating Officer; Bruce Dirks, our Vice President and Chief Financial Officer; Shawn Duffy, our Chief Accounting Officer; and Keven Lippert, our General Counsel. And before we start, Keven will provide our Safe Harbor disclosure.

As you know, this discussion will contain forward-looking statements. This is simply a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC, or from our website.

Thanks, Keven. So as usual, we will be referring to slides that are available over the web. I will start with some highlights, and a top level business overview, and then Shawn will discuss our consolidated and segment-level financial results. And I will give a little more color on our consumer business, and some strategic thoughts on market opportunities. And summarize our outlook, and then we will take questions. Leave plenty of time for questions.

So overall, our fourth-quarter and full FY14 results were really strong. We had double-digit gains in revenues and adjusted EBITDA for both the quarter and the fiscal year as a whole. Adjusted EBITDA was up pretty impressive, 41% for the quarter and 35% for the year as a whole. As we mentioned in the press release, our legal expenses for FY14 in carrying through the first SS/L lawsuit through trial were about $25 million. We also increased our R&D spending by about $25 million compared to FY13. So in that light, we are really happy with the profitability of our business. I will discuss the thinking behind our spending in some more depth a little later in the call.

Awards for the fourth quarter were at [$454 million], and for the year, awards totaled $1.4 billion. Awards for the year as a whole are up somewhat over last year, and it's a positive book to bill, even with 20% revenue growth year-over-year. In general, we're seeing more large opportunities, and expect to see continued lumpiness in new awards. Our Exede service offerings are still leading our growth. We installed a total of about 75,000-plus terminals, adding about [21,000] net subscribers in the quarter, ending with about 641,000 in total. We are continuing to improve unit economics and profitability for Exede, in terms of subscriber acquisition costs, churn and revenue per subscriber. In the near term, that's all contributing to reducing our gross add rate, and we will talk later about growth strategy in that respect.

We're really happy with progress on the Exede in-flight Wi-Fi service. We are now up to 100 aircraft in service, between JetBlue and United. Feedback on the service has been very, very -- (technical difficulty). We're delivering speeds of 12 megabytes a second per passenger, well over 90% of the time. Passenger usage is much higher than for any other in-flight Wi-Fi service. There are a number of (technical difficulty), and well over 100 active devices on a single airplane. That's pretty remarkable, since there has been very little marketing or promotion around the service, since it's still on only a relatively small percentage of each of the carriers' fleets.

We're working with the airlines on strategies to leverage the high levels of passenger engagement that we're all seeing. We're also working on a number of opportunities for additional airlines, as a result of the performance we've demonstrated so far. We're very excited about our relationship with EL AL, also, in terms of reaching the European market, and the opportunities to introduce even more new and innovative service variance. We've got about 7% year-over-year revenue growth in our government business.

We are seeing some of the effects of the draw-downs in the Middle East on some of our products and services. But as we are aiming, we have been able to transition many of our government aeronautical broadband capabilities beyond applications in Iraq and Afghanistan into a broader global applicability, for more regular forces. That's opening up opportunities that are much larger than we've had to date. There will be lumpiness involved in the transition, but so far, we see it as quite positive. We're also seeing significant growth in both our tactical data links business and in information security.

Tactical data links, in particular, is going through a growth spurt in funded development that will translate into production growth in three or four years. Our information security efforts on mobility are gaining momentum for both government and enterprise applications, with our new relationship with Samsung creating some exciting opportunities. Critical infrastructure security is beginning a transition from developments to deployments, too. Our largest individual opportunities center around high-capacity satellite networks. We are making very good progress on deploying the NBN Infrastructure in Australia, and that's our single largest and most complex contract ever. We recently also announced a new agreement with Xplornet in Canada, valued at over $225 million, for integrated space and ground networking on ViaSat-2.

The underlying theme unifying all of our growth markets is constantly increasing demand for more and more bandwidth with lower unit cost. We believe that is where we can be the best in the world for satellite, and make continued relative progress compared to terrestrial wireless. We're making very good progress on ViaSat-2 with Boeing. ViaSat-2 will be state-of-the-art in capacity, coverage, unit economics and flexibility. We're seeing more international opportunities with partners that want to apply that capability. We believe ViaSat-1 has shown the value of the technology in multiple domains, so we're investing a lot into pushing the state-of-the-art, even beyond ViaSat-2. Our first Ka-band payloads are going into production on third-party commercial satellites, and we're also building and testing prototypes of our own next-generation Ka-band payloads.

Fundamentally, we feel like we're inventing the future of broadband satellite. That's why we've been so committed to defending our intellectual property, even through litigation, if we have to. Our suit with SS/L turned out very well. It was expensive, and we recognize the risks associated with jury trials on advanced technologies, but it was absolutely the right thing to do. The trial was held in federal district court in front of a judge with significant experience in patent and intellectual property litigation. The trial lasted almost three weeks, with an additional eight days of jury deliberation. The jury was very attentive and thorough, and worked its way through a detailed 13-page verdict form.

Our $283 million award was allocated among lost profits and reasonable royalties for all of the three patents found valid and infringed, as well as for breach of the build contract and our nondisclosure agreement with SS/L. While we recognize there is still risk, we believe the verdict is a very strong and clear indicator of the value of our intellectual property, and we will continue our vigorous defense through final resolution.

Keep in mind that suit was centered on the Jupiter-1 clone of ViaSat-1, and only had three of our earliest patents at issue. We have many, many more patents on these core broadband technologies, with six of those at issue in the second case we filed against SS/L. We think about IP protection as a necessary aspect of our objective of innovating and building our business through a technology-centric strategy. So that's it for the upfront overview, and now I will turn it over to Shawn for an overview on the financials.

Thanks, Mark. As Mark mentioned, our FY14 performance was very strong. Revenues increased 21% to $1.4 billion, with the each of our business segments contributing to this growth. Our fourth-quarter revenue of $344 million was also up, increasing 11% year-over-year, primarily within our Satellite Services and Commercial Networks segments. The year-over-year growth in adjusted EBITDA was equally impressive, reflecting the significant operating leverage we have achieved, as our satellite service offerings widen and scale across fixed and mobile markets. FY14 adjusted EBITDA was $221 million, which reflects a strong increase from last year of over 35%. For the fourth quarter, adjusted EBITDA was up 41% year-over-year, setting a new quarterly record at $57 million for the period.

Turning to the income statement, and looking at the sources of revenue, we saw both our product and service revenues grow. The chart on the page shows the year-over-year growth for the fourth quarter. But on an annual basis, the growth was more pronounced, with product and service revenues increasing 18% and 24%, respectively, from FY13. This year's product revenue growth was concentrated in our consumer and local broadband products, and antenna system products within our commercial segment, and information assurance and tactical data link markets within our government segment. The main driver of this service revenue increase was our residential broadband services, fueled particularly through our retail channel successes.

As we turn to the rest of the P&L, our cost of revenues as a percent of revenues was down for the year, representing a gross margin improvement of 2.4 percentage points. SG&A as a percent of revenues was down slightly, in spite of the significant legal costs we incurred defending our intellectual property. Q4 was an important period for us, with nearly $9 million in litigation expenses, as we entered the pivotal point of trial activities in late March. That drove our total FY14 spend in this area to nearly $25 million. So year-over-year, it is clear to see that this represents the majority of the SG&A increase. Our R&D spending also increased consistent with our previous guidance. So taking all of this into account, income from operations for the year improved $24 million, reflecting a much more significant underlying operations improvement.

Below the line, our net interest expense was down, with year-over-year lowered interest rates and higher amounts of capitalized interest associated with the ViaSat-2 build. Looking into taxes, our FY14 taxes reflected benefit reductions as our income generation trends gained momentum, significantly reducing pretax losses, along with the effects of reduced federal R&D tax credits, upon the expiration of that legislation in December 2013. So overall, we substantially improved our earnings performance, driving our FY14 pro forma net income to over $20 million, and non-GAAP earnings per share to $0.44, which reflects a four-fold increase from last year.

Turning to our balance sheet and FY14 cash activities, our cash flow from operations for the year was $205 million, reflecting year-over-year growth of over $100 million. Substantially higher adjusted EBITDA and vigilant working capital management were the main contributors to this increase. Capital expenditures grew in line with our expectations, as ViaSat-2 construction activities continued. During FY14, we made ViaSat-2-related payments of $119 million, which represents the bulk of the year-over-year capital expenditure escalation.

Our fourth quarter reflected another period of reduced capital spend for subscriber acquisition investments, comprised of CPE and installation costs. We expect to see these trends continue, as redeployment of our CPE equipment continues along, with benefits derived from improving cost profiles. So we ended the year with $58 million in cash, and $105 million drawn on our $500 million credit facility. Thus, we closed out FY14 with significant headroom and credit flexibility, as we look to other investment opportunities that enable future growth in our key strategic market areas.

Before I hand it back to Mark, I wanted to provide some insight into our segment performance. As we noted, overall revenues were up 11% and 21%, for the quarter and the fiscal year, respectively. Adjusted EBITDA for the quarter was up 41%, and for the year, we were up 35%, with our satellite service segment clearly dominating the performance trend. Our Satellite Services fourth-quarter revenues were up 35% year-over-year, and for their full fiscal year, increased 41%.

In addition, adjusted EBITDA margins have been improving dramatically, almost doubling in FY14 to 22%, compared to 12% in last year. In the fourth quarter, our segment adjusted EBITDA exceeded $25 million, representing a 24% margin and $100 million-plus annualized run rate. It's important to note that both the quarter and the year reflect significant upticks in the Loral litigation related to legal expenses, which we do capture in this segment. In FY14, we spent about $25 million on these efforts. So taking that into account, compounding strength of our satellite service performance is pretty clear.

We also had a very strong year in our Commercial Networks segment, with fourth-quarter revenues up 15%, and full-year revenues up over 25%, reaching a record of $396 million. Growth was spread across our product areas, including consumer broadband products and infrastructure, in-flight mobile broadband systems, ground [infrastructure] systems, and our satellite payload technology development programs. Our fourth-quarter Commercial Networks adjusted EBITDA was down slightly year-over-year. However, our FY14 results reflected a 75% increase from 2013, coming in at $24 million.

This increase was the result of the higher revenues and improved gross margins, offset by our R&D investments and next-generation high capacity Ka-band technologies, which were very instrumental in securing the next-generation Ka-system contract from Xplornet in Canada, for an initial award of $228 million. Overall, our NBN Co. satellite network project is at the peak of period -- program performance, and we're delivering strong execution, as the largest infrastructure project in Australia's history progresses forward. As I noted, in-flight broadband was another driving force to FY14. Today, we are about one-quarter of the way through JetBlue and United's terminal deployments, and we hope to approach 400 installed aircraft by the end of this calendar year.

Finally, looking to our Government Systems segment, performance has been strong these last few years. Revenues for the year were up 7%, with strong product sales growth, especially in our information assurance and tactical data link products, offsetting modest service revenue declines. Adjusted EBITDA was down slightly for the year, and up for the quarter, by approximately $2 million, primarily due to improved product margins from the prior period. Overall, our government segment performance is pretty attractive, particularly as we look outward to the performance of other top defense contractors in this increasingly challenged defense spending market. So with that, I'll turn it back over to Mark.

Okay. Thanks, Shawn. So at this point, I will go into a little more depth on our growth strategy for the Exede consumer services business. As I mentioned at the beginning of the call, we're really pleased with the financial performance to date on consumer broadband, which is more clear in light of our legal expenses. We have been placing more emphasis on our own retail channels, which are enabling steady improvements in ARPU and SAC. We believe we're doing well in the retail market. As we have discussed in the past, churn has been higher than we want. And we have been targeting that through a detailed analysis of all sources of both voluntary and involuntary churn. We have continued to make steady progress over the last couple of quarters, but still has more to go.

Given that we are well over half full in total on ViaSat-1, and much more so on the highest demand beams, we are being careful and selective in the way we are seeking new subscribers. So we're now comfortable with adding less than the 90,000 to 100,000 quarterly installs that we [will] ordered a year ago, because if subscribers we are obtaining are more profitable, and they have got a better experience with us. As long as we can continue to lever that connectivity into improving unit economics, we believe that's a good trade-off.

Seasonally, the first half of the calendar year is slower for us than the second half. And we're not trying to fight that seasonality by throwing money at unprofitable marketing tactics; we are aiming to invest in more enduring competitive advantages. Given our planned allocation of capacity to in-flight Wi-Fi and other applications, we're still aiming to roughly fill the satellite around the end of next year, which would be four years from service launch. Overall, we're seeing dishNET add skew very strongly to use, and that makes sense to us, in light of the ownership of that business. Longer term, we believe that the investments we are making in technology and customer experience creates a lot of opportunity for our own retail channels, as well as with both DISH and DirecTV. Our Exede 12 service has accomplished pretty much what we intended it to do.

Now we think we can make a substantial improvement in several dimensions of the service. We can offer higher speeds, give much more bandwidth per user, and get even faster responsiveness. Many of those attributes will come with ViaSat-2. However, we're beginning to test some of them well before then. Of course, we are very aware of the benefits of powerful brand names and bundled distribution, but we also know that broadband is a very, very important service for many homes, and that there is great demand for great broadband technology. So we're going to continue to strike a balance, where we can still rapidly grow our earnings on ViaSat-1, as we have been. But also focus our spending on achieving enduring competitive advantages, compared to alternative technologies such as wireless, and in learning all we can about go to market strategies while we are still filling ViaSat-1.

The big picture, there's been a lot happening in our world in the last few months, so this is a good opportunity to reflect on all of that. First of all, and we have hit this multiple times already, we think our core competency is technology, and that's the focus of our competitive strategy. We're focusing that technology in what we think a very sound fundamental economics: that is driving down the capital and operating costs of delivering large amounts of bandwidth through a number of challenging but potentially very rewarding markets. We believe we're on our way to being the best in the world at broadband satellite. We are very highly integrated vertically in the technologies needed to deliver the greatest amounts of bandwidth at the lowest cost, and we're making more strides in that area on ViaSat-2 and beyond.

One of the things that we're most excited about is the progress we are making in reducing our cost per bandwidth relative to terrestrial wireless. The payoff for that ought to be faster speeds, lower bandwidth per user, and ultimately, greater customer utility and satisfaction. We think we are seeing that very clearly in the in-flight Wi-Fi market, in some of our enterprise applications, and in market tests and consumer services. In short, we think we're beginning to demonstrate that satellite can be much more than a last resort technology that does not compete with terrestrial alternatives. The satellite technology we are creating will be even more competitive. A lot of these markets are big, and so they are attracting more and more competition, from startups, from much bigger telecom companies, and even from Internet companies.

Industry consolidation is also a competitive factor. We focus on the applications of all this activity, but we like our position. We're finding receptive partners in multiple markets that understand what we're trying to do, and we think they understand the power of these disruptive technologies. It takes times to disrupt the market. We have to build the technology, and we have to show what the impact is in the market, and then we can scale it. Then we feel like we're doing just that. Even with more potential competition, we're not seeing fundamentally new technology enter these markets that challenges the economic benefits of what we're doing in the markets that we're targeting. We're seeing more and bigger growth opportunities. So we're more excited than ever about our growth potential.

So this last slide puts our FY14 revenue and EBITDA growth into some historical context. We are really happy with our growth track record. That growth, over time, has been driven by different combinations of government and commercial technology, and service offerings. We've also been able to enter and compete successfully in successively larger markets and opportunities. The lumpiness associated with that growth makes it pretty hard to forecast timing and short-term rates of growth, but the long-term trend has been really good. We think that our growth outlook a stronger and broader now than ever. We have a very good foundation of technology customers and market opportunities to build a model.

Relatively new offerings in in-flight Wi-Fi, government airborne applications, mobile security and infrastructure security are maturing and growing. We still anticipate very good growth in Satellite Services. We're also focused on building value through our technology and intellectual property. ViaSat-1 has had a significant impact on the satellite industry, with a favorable verdict from the SS/L litigation is an important validation of our role in inventing the technology behind it, and the value it created.

We're really excited about the technology that's coming next. We intend to continue to invest in creating and defending technology, and increasing the role of satellite broadband in government and commercial markets, and we think that's what's creating value for our shareholders, too. So that's the end of our prepared remarks, and at this point, we would be happy to take questions.

(Operator Instructions)

Matt Robison, Wunderlich Securities

Thanks for taking my question. The first one on the bookings. Was Xplornet in the bookings? And if so, how -- what was the split between satellite and commercial?

Yes, it was in the bookings. We -- I think what we actually booked was about $230 million for the quarter, and we're not breaking the split out between (technical difficulty).

Okay. Thanks. What was CapEx in the quarter?

Shawn?

For Q4, or are you looking for year to date?

I can work with either one.

Okay. Q4 was about $74 million in total.

Okay. And of those installations, what were -- how much -- how many were migrations?

Semi-gross adds, we didn't break that out. We're -- it's becoming a small one. Becoming a much smaller number. So, we're --

I know you didn't break it out. That's why I'm asking. I'm curious, did it go down from the third quarter?

Yes, they're going down sequentially.

Okay. What was the Satellite Services revenue, other than residential?

We're not breaking that out, but it is still small.

It's been high single digits millions lately. Is it still about like that? And can you comment on the split of traffic by time of day? What percentage you are getting in those hours where your break caps are less meaningful? (multiple speakers)

No, I would say people do take advantage of the late night un-capped zone, and that's -- actually, probably, our single biggest hour, is after midnight. But other than that, I don't think we have a breakout of peak busy hours versus off-peak usage.

It's been pretty consistent with our modeling, though.

So was the magnitude of the nonresidential, was it small enough to imply that your ARPU went up sequentially?

Yes. We said that. ARPU has been growing. (multiple speakers) ARPU is still growing. The nonresidential stuff will start growing. It's going to trail the deployments of the in-flight Wi-Fi terminals, and we started the quarter with like a dozen, and we finished with closer to 100. I think we're at 100 now. It will start growing over the next few quarters.

And that Xplornet bookings, some of it did go into Commercial Networks, because some of it was for ground stations and customer premise equipment? Is that the right way to look at it?

Just ground segment. There's some service stuff in there. There's -- when I say service, there's maintenance and support, and there's bandwidth. There's really been no CPE yet.

Okay. Thanks a lot.

Rich Valera, Needham and Company

Thank you. Mark, wondering if you would be willing to give any other color on your thoughts on both gross adds and churn, as we move into the second half of the calendar year? You seem to suggest that there would be a natural seasonality for maybe higher gross adds in the back half of the year. Wonder if you can elaborate on that? And then, with the churn, it has been inching downwards. But where do you think the natural level of churn is, if you are willing to hazard to guess at that? And should we expect that to keep trending down, as we move through this year? Thanks.

Okay. Yes. In terms of the seasonality, a lot of that has to do with the school year, family moving patterns, household formation. And for us, there's -- the slowest parts are in the spring, straddling the end of the March quarter and into the June quarter. Into most of the June quarter. And then in the summer, things pick up, and definitely in the holiday season, things pick up for us. So from our perspective, when we look at cost effectiveness of marketing and promotion, we get way more bang for the buck in those time periods.

And so we will be spending more of our marketing and promotion dollars where we have the wind behind us, instead of fighting it. So that's what we expect.

The other thing is, the other thing that we commented on, in terms of gross adds, in the things that we're doing on churn. What we're really looking to do is to parse all of the forms of churn, due to all of the ways that we interact with our customers. And that requires us being able to do some controlled experiments.

And that is having some -- as I mentioned -- some depressing impact on the rate at which we are acquiring -- doing gross adds, because we're filtering inquiries, and we're filtering sales as a result. The upshot of that is that we are getting pretty steady improvements in both involuntary and voluntary churn. And what we're expecting to do is to incorporate the things that we're learning there, as we scale up our promotions. And we think we should get -- we should get a lift in both add rate and a reduction in churn.

The way I would put the churn thing is, first thing we're doing is, we think we would like to get more into the 2.5% a month churn rate, and we're not there yet. And then once we get there, then we are going to aim below that. But right now, that a good target for us, given where things stand.

Mark, maybe you would mention what we think the ultimate effects, what we think is driving churn, and the ultimate effects of -- and that's where we're spending some money on R&D, to try to make service better, actually, which we think will impact churn. Maybe you could --

Yes. There's some of it -- probably the single -- and we've talked about this before. Probably the single most impactful thing that we can do to improve customer satisfaction and reduce churn, and we have done trials on this and gotten measurements, is by substantially lifting or eliminating the volume usage caps, and being able to do that with good unit economics. So we're doing forward -- we've been investing in that.

We think that will be probably the most impactful thing on the product side. But the other thing that we're doing, which are also impactful, and maybe sound more mundane, or in terms of how we're doing our credit screening and how we're doing our demographic screening. The way we are on-boarding subscribers, the way that we're providing customer support to those subscribers, once they're on board. All of those things are having measurable impacts, and a lot of them have to be parsed out separately.

Great. That's helpful. Want to ask a question about the second case, which you alluded to in your prepared remarks. It sounds like you've got -- in addition to the three patents that were upheld in the first case, you've got several others. Wondering what your thoughts are about the ability to work around? And that seems to be what SSL suggested they would do, if need be. Anything you're willing to say about the ability to work around your patents, if you are building a high throughput spot-beam satellite?

There were three patents at issue. There were three patents at issue in the first case; there are six different patents at issue in the second case. We think those patents are stronger and broader. The SSL asserted in the first case that they had worked around us and couldn't work around them, and the jury found otherwise. And we think it is going to be difficult for them to work around them with satellites that use those design techniques, which is highly derived from ViaSat-1.

Great. Thank you. And final one from me, just on the government -- the orders, I know, are lumpy, but they were a bit light this quarter. Just wondering if you're willing to talk about government broadly for FY15? How to think about that business on a year-over-year basis, either in terms of orders or revenue? That would be helpful, thanks

So government business, there are some things that we mentioned that are trending down, but there are others that are trending up. Those trending down are things that were product-oriented, like Blue Force tracking, product-oriented towards Afghanistan and Iraq. There are a couple other things that are in that boat as well, some satellite terminal products. But we have other things that are trending up pretty markedly, especially the tactical data links, the informational assurance, and the transition of airborne mobile broadband products into the regular forces.

So I think in the short-term, they are going to balance out a little bit, but there is also some bigger things that we're doing that have big upside that we're really pretty optimistic about, but we don't know the timing. And it's hard to speculate on that, so you can think of it flat to up, depending on the timing for revenue. And margins, I think, are -- overall, the base margins are good, and you've seen us start to invest more, and Shawn talked about that in the last couple of quarters, especially on the government arrows, so that will have some impact on the margins. But the rest is aggregate, flat to up.

Okay. That's helpful.

Amy Yong, Macquarie Capital.

This is Andrew for Amy. I had a question on the AT&T. Post the deal announcement on Monday or Sunday about a transaction with DirecTV and AT&T. AT&T said that they're going to expand their project to the IP, which is an expansion into rural areas, their u-verse footprint. And I also wanted to ask you if you have any comments on the recent announcement to enter the in-flight business? You see any risks from both?

Okay. They are both important. AT&T is -- obviously has tons of capabilities. On the -- I will start with the in-flight one first. One is, we're not quite sure what AT&T is doing. I don't know if anybody is for sure. They have talked about using air to ground. I think there's still some more information that needs to be surfaced about how what spectrum they are going to use, how much spectrum, things like that.

I think from our perspective, if you look at what we're doing today with our in-flight Wi-Fi services, we feel like, from a bandwidth perspective, we've got an order of magnitude. And in some cases, substantially more than that advantage, compared to pretty much any other technology. And we think that's why we're seeing the uptick in the passenger engagement rates. We are able to deliver the speeds that we are.

I think it's being noticed. And I think that's going to be really hard to do with air to ground, from what we -- ground to air. We'll have to see how that plays out. Then obviously, the other really big advantage that satellite has is that it works over water, and on routes that are largely over land, partially over water, or largely over water.

And so we like our position, and we will just have to see more. But I would be pretty surprised to see somebody come up with higher speeds, more passenger usage, better streaming video, than the thing that we've been able to demonstrate on 100 aircraft already. And we'll have hundreds more in service this year. And then it's going to get only better when ViaSat-2 goes up the next year.

Okay. On the rural broadband expansion, again, AT&T didn't talk very much about what that means. From the language that they used, what we would expect is that it would be an AT&T equivalent of the Verizon home fusion, which is outdoor antenna, direct-to-home broadband that rides on top of their LTE network. And Verizon home fusion, it is a good service. I think people like it. It hasn't been marketed super-aggressively by Verizon, and we're aware of that. We would expect AT&T is certainly capable of doing the same. Conceivably, they could be more aggressive at it.

We're also trying to understand what the build-out region will be. AT&T has been interested in shrinking its DSL and plain old telephone network footprint. So we have to see what that yields, in terms of net increase in footprint. But one of the things that we've -- I've talked about here is that we believe that terrestrial wireless is a good and viable technology.

And that for us to have a place in the market, we need to be materially better than that, and we think we can be. And that's ultimately what will determine our market penetration and our success there, is doing things that are meaningfully better. And we think we can. Some of that depends on these new satellites.

Yes. And on your recent M2M announcement with Thuraya. I know Orbcomm and Iridium are dominating that market. I was wondering if you could maybe expand or comment on how you plan to penetrate it? Thanks.

The M2M market, yes, we do see Iridium and Orbcomm and Iridium in there. One of the main things that we're looking at doing, and this -- you can connect what we're doing with Thuraya to some extent to what we announced last quarter with LightSquared. Is we see that there is, in the M2m market, just like there is in the broadband market, there's advantages to higher speeds and lower cost of bandwidth. So I think that Orbcomm is at the opposite end of the market, and Iridium is pretty close to Orbcomm in terms of speeds and unit economics.

So what we're trying to do is explore the other end of that market. And the work that we did with LightSquared on their advanced ground-based beam-forming spot beam technology gives us really good insight into what's possible there. And because of all of the focus on the terrestrial use of their spectrum, there really hasn't been any deployments in the market that take advantage of the capabilities of that LightSquared satellite. So I think you will see us cooperating with Thuraya, partly in the North American market, partly in international markets, to develop the M2M market in a way that's like we've gone after the broadband market.

Great. Thank you.

Andrew Spinola, Wells Fargo

Thanks. Mark, you had made a comment in the prepared remarks that Ka-band payloads are going on to prototypes to third-party satellites, and I didn't understand the comment. And I was wondering if that was an indication that you have some movement on your joint venture with Boeing? Or if that -- this is something else?

No, it's something else. We -- so two things. One is, we started talking about this a couple years ago, is that one of the issues that we had, one of the big issues that we had with SSL and ViaSat-1 is, ViaSat-1 was designed out of all existing payload components. It reduced the risk, but it meant that SSL could basically -- once they had the recipe, they could apply that to other customers. With Boeing, we reached a much better and clearer -- and overall better understanding of what to do with ViaSat-2, which also builds on off-the-shelf components. But we said beyond the ViaSat-2 generation that, to get another order of magnitude improvement in capacity and bandwidth economics was going to take custom payload components.

So we've been doing two things. One is developing those Ka-band custom payload components, and we have prototypes in our labs that we're testing. So that's one path. The other path is that we felt that we were really strong in Ka-band, and that we could get -- we could use that in the commercial market in -- I think it's about a year and a half or two years ago we got a contract with Talus on the Iridium Next, the next generation of Iridium. That has Ka-band feeder links and Ka-band cross-links and satellite. So we're building those Ka-band components.

And what we're getting out of that -- it's a good contract for us, and we're really pleased to work with Talus and Iridium. But we're also going through all the certification process of our Ka-band components. And so that's what's -- that's the third-party add-on that I was referring to, and those are going into production now.

Understood. And then on gross add momentum, I'm -- two-part question. I guess the first, my memory with you is, in years past, when they were a publicly traded independent company, it was that Q4 and Q1 were -- of the calendar year were really the seasonal strong quarters. So, I'm a little confused by why it's different for you. And maybe you can explain why it's weaker in Q1, and not stronger?

And then when I'm thinking about getting to 900,000 subs, I'm assuming you mean by the end of FY16. I understand you can improve your churn, and that is certainly going to help. But in terms of gross add momentum, do you feel like you're going to need to do anything promotionally to drive growth in subs? Or you think you can really just get there by fine tuning your distribution?

Thanks.

Okay. Yes. So one is, our experience, just in the seasonality and the way we've gotten adds, is different than Hughes. I'm not quite sure why, historically -- so our experience is a little over two years of operating on Exede, and plus our WildBlue history. The -- it's interesting, because historically, WildBlue had a more wholesale bent, and less retail. Now Hughes, because of their ownership with EchoStar and DISH, has a very, very -- most of their -- by far, most of their adds are DISH now.

That's what's driving them. And that's a little bit different. As I mentioned, DISH has skewed their mix of wholesale adds pretty heavily towards Hughes, and we think that that essentially accounts for all the difference between us and Hughes in the market now.

The other thing is, we have made some changes to our processes in the last two quarters that have, I'd say, filtered our gross adds, in -- especially in the DirecTV channel, and working with DirecTV to accomplish goals for both them and us. We may change that as we get the data that we both wanted there.

But the bigger question is, are we going to use promotions? Yes. Of course we are going to use promotions. I think what we talked about is, what we've been trying to do is mac -- optimize the effectiveness of all of our spending. And what we found is that when we do promotions that tie with our view of seasonality, we get way better -- way more bang for the buck. And so, I think what you will see is that we're going to take advantage of that over -- especially more into the summer months, and then in the holiday months was our -- have been our strongest periods.

Great. And then just last one from me. Would you be willing to give an outlook for legal expenses for FY15 in any broad sense? Thanks a lot.

I think that there's a lot of different things that you have to keep in mind related to the timing of the legal expenses. We have promotions that we have -- we may file, we may do more of those or less of those. And we also have the timing on the appeal case. I think we expect that next year would be notably less than this year, but there are definitely different things on that timing that could pull things in. Overall, though, I'd say we think it should be notably less.

Great. Thank you.

Matt Robison, Wunderlich Securities

Thanks again. Am I correct in my understanding that most of your consumer contracts are about two years in length? And maybe -- correct me if that's not the case? And give a sense for what the pattern has been for customers that have come off their contracts, and the trend in continued service?

So yes, our contracts are two years in length. We're just now at the point where our earliest Exede customers would be coming off contract. We have -- the way we tend to look at it is -- there's a survivability trend. And so we plot the -- think of it like half -- what is the half-life of a subscriber? What is the decay? People exponential decay rates. And those things are piecewise linear. There is sort of an infant mortality rate, and then they tend to level off, and we don't see big discontinuities when you cross the life of a contract. It's pretty steady. Once you understand what the exponential decay rate is, it's a good measure of the life of a subscriber.

Okay. And so most all the churn you've seen so far has been from WildBlue, though. Is that in place?

No. Most of the churn that we -- when we talk about a higher churn, other than the WildBlue stuff, is infant mortality.

And then we've talked about that in the past. It really has to do with the things we've talked about, which is -- we've talked about this is the past. One example is, if you were a cable customer, and you were to switch to satellite TV, cable broadband price just went up pretty measurably, $50 a month for 12 MegaBits. Looks really attractive, and if the sales process doesn't include a really good understanding of what the limits are on satellite broadband in terms of this gigabyte usage especially you can end up with disappointed customers who don't stay long.

There are other factors, as well, that go into the on-boarding process. How people migrate their home network from one technology to another, whether it's from cable to DSL, or from satellite -- cable to satellite. But basically, it is making sure that the customers who buys the satellite service understand what they are getting, and if they are a good fit. And so that's one of the things that we've been doing, is not saying every customer is a -- every potential good customer is a good one, is trying to figure out what is the likelihood of them to stay? How can we filter that? And it's really been infant mortality that's been -- infant mortality meaning subscribers that stay for short periods of time.

And those things, as we have talked about in the past, can be tracked down to specific distribution channels, generally. Sometimes to the on-boarding or install process, sometimes to the sales process. And so we been winnowing those down. We have dropped distribution partners that consistently don't do a good job of that. We have worked with other distribution partners to improve it. The result has been, we're getting the results that we want, basically, a little bit more selective on the front end and better retention.

So just to be clear, infant mortality means subscribers that didn't stay around long enough to engage their two-year commitment

Yes. Right. They would leave relatively shortly.

(multiple speakers) 30 days or --

(multiple speakers) It depends. And the other thing is, everything is sort of interconnected. One of -- an interesting -- and it will follow on from one of the other point you made, is that people that have been with us for a little while and understand how the satellite stuff work tend to stay longer. And so some of those things have to do with the on-boarding process. But -- how we deal with them, when they hit their limits. Did they understand why their hit their limits? Can we help them -- so if they get all the utility they want and not hit the limits?

And we're finding that we can do quite a bit on that front, as well. So some of those things will -- and some of those techniques, when scaled, will enable us to open the aperture, as well. The only thing you have to remember when you think about this -- about the gross add rate in total, is that as we fill up the satellite, especially in the higher demand beams, your costs could rise in the lower demand beams.

Because you're trying to coax demand in places for the level of product that we have now, where it was naturally lighter. And I think that's just an artifact of the geographic distribution of demand and capacity. But we're also -- I think we're learning a lot about how to deal with that, as well. We're also making sure that we have enough capacity across all the satellite to have some of these ancillary services we're offering them.

Yes, we talked about that, right? Yes, that's where we've taken the 1 million capacity that we have talked about down to about 900,000 across the satellite.

Thanks a lot for the details.

Sure. You're welcome. Okay. Good. So, I think that's all the questions, and that's all our prepared remarks. And so we thank a lot, everybody, for participating in our call, and we will talk you next quarter.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.