Viasat Inc (VSAT) 2015 Q1 法說會逐字稿

Welcome to the ViaSat's 2015 first-quarter earnings conference call.

Your host for today's conference is Mr. Mark Dankberg, Chairman and CEO. You may proceed. Mr. Dankberg?

Thanks. Okay. Good afternoon, everybody, and welcome to ViaSat's earnings call for our first quarter of FY15.

I am Mark Dankberg. I'm Chairman and CEO. I have with me today Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; and Keven Lippert, our General Counsel.

Before we start, Kevin will provide our Safe Harbor disclosure.

Thanks, Mark.

This discussion will contain forward-looking statements. This is a reminder that certain factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent form 10-K and form 10-Q. Copies are available from the SEC or from our website. With that said, back to you, Mark.

Okay, thanks.

So as usual, we will be referring to slides that you can get over the web. And I'll start with some highlights and a topical discussion. And after that, Shawn Duffy will go into our financial results. And then I'll provide more depth on each of the business areas. And then we will summarize our outlook, and take questions.

In terms of highlights, adjusted EBITDA has grown pretty steadily, with a 14% year-over-year increase to about $60 million this quarter. EBITDA benefited from continued improvements in our Satellite Services, and that more than overcame decrease in Government earnings due to the wind-down of our Blue Force tracking product and services.

Satellite Service margins have been really good. And, as we have discussed in the past, the unit economics on the consumer business have been really strong, and they are still improving. The high proportion of retail-to-wholesale subscribers is not what we originally thought we were aiming at, but we are taking advantage of it in several ways. And I will go into that in more detail in just a minute.

The most recent version of the FCC's Measuring Broadband America was released, and we came out the best again for delivering advertised speeds. Now we have well over 0.5 million subscribers on ViaSat-1, and the FCC study is an important validation that we've got the tools to define and deliver broadband services that do what we intend.

Another good indicator of that is our aeronautical broadband business. We've been working on commercial in-flight Wi-Fi for quite a while, and now we are starting to see the benefits of that. At the end of the first quarter, there were 140 aircraft in service between JetBlue and United Airlines, and over 120 more ship sets that we delivered and are ready for installation.

We are really happy with passenger usage and engagement. The number of users per flight is multiples of any other in-flight Wi-Fi service. Even though the penetration into the JetBlue and United Airlines fleets is still relatively low, and because of that, they still are not really promoting the service that much. We're pretty excited by the way the aeronautical broadband is going, and we are already working on a number of ways to separate ourselves even further from all of the other in-flight connectivity solutions.

We have taken two big steps on that front since the last quarter. First, we executed an agreement with Eutelsat so that we each can serve in both geographic markets, about doubling the footprint where we can deliver Exede in the air. Then just recently we introduced and demonstrated the first integrated Ku band and Ka band airborne satellite terminal that lets aircraft get connected anywhere in the world using whichever satellite network provides the best service in each particular region.

I will talk more about this later, but we think it is a real game-changer in the way that both commercial and government fleets will think about connecting their aircraft. It opens a lot of opportunities for both network infrastructure, onboard terminal equipment, as well as connectivity services.

Finally, while our first-quarter revenues were flat year over year, new orders were up 22% on a year-over-year basis, and our government book-to-bill was especially good, which will help us catch up on revenue for the rest of the fiscal year.

So today, before I hand it over to Shawn, one of the things I wanted to talk about is our subscriber business. How we think about the way that we think about subscriber growth on our satellite services. When we count subscribers, we think we're really doing that as a proxy to understand two key factors. One is, how are we doing today on earning return on our satellite investments. And then second, it is an indication of market demand. And that can predict how we will do in the future.

They're both important, but they're also really different. And we want to consider each of them thoughtfully. Our objective is to earn profits, not just add customers. That's why we keep focusing on the unit economics. Our original target was 1 million subscribers, and we were aiming to do that originally via wholesale business, competing on the basis of our ViaSat-1 technology. But after Space Systems Loral breached our contract and sold our ViaSat-1 technology to use, we acquired WildBlue, and that lead us to the retailer ourselves, which is been an important factor, given the impact that the used ViaSat-1 clone was going to have on the wholesale market.

So when we think about it fundamentally, our core service product is really bandwidth. And when we think of Exede 12 as kind of a bundle, it's a way to package that bandwidth, and then we can use retail as a way to bring that package to market. We defined the Exede 12 package to achieve some specific purposes, and especially we want it to increase the addressable market for satellite broadband. We thought that would fundamentally change the business, and we think it has. We have drawn about a third of our new customers away from terrestrial. Before Exede 12, the flow of customers was only the other way around, away from satellite and to terrestrial.

So when we started Exede 12, we came up with estimates that were based on unit data through legacy satellite broadband, and we wanted to learn how with this new product each aspect of those unit economics would be affected by the new and larger addressable market. And for the last couple of years, we have been reporting data on subscriber growth, ARPU, churn, subscriber acquisition costs, revenue, and EBITDA in the context of this Exede 12 package. So the purpose of the chart on this page is to try to better show the net impact of a combination of all of these metrics that we have been reporting on our Satellite Service Segment financials.

Just to recap, ARPU has been growing, of course and we have reported that, really steadily. Our subscriber acquisition costs and operating expenses have been decreasing. And churn has been higher than we have been aiming for.

But there are also two different types of churn that we have talked about: voluntary and involuntary. Each of those forms provides different feedback from the market about our packages and how we should evolve our marketing approach. We also started new service plans that package bandwidth in different ways, or add in different ways, such as our late-night free zone with uncapped usage, we have voice over IP telephone plans, we have come up with evolution-branded packages that remove the volume caps for web and e-mail even in the busy hours, we have enterprise service, and recently we have been talking about in-flight Wi-Fi.

All of those plans have allowed us to offer our core bandwidth product in packages that we're finding customers find more valuable. We have also learned a lot about how to reduce both of the forms of churn that we have been experiencing. We have a finite amount of bandwidth to sell. Think of it is our inventory, but all those different forms of packaging use different amounts of that inventory and they have different unit economics and different contributions to profitability.

So it is pretty clear that just counting the absolute subscribers has become progressively less meaningful as an indicator of current profitability. But we still want to know how we are doing relative to our original plans and which of those packages are the most profitable.

So one simple and concise way to express this is to express Satellite Service contribution margins in terms of SAC-adjusted basic wholesale residential units. That's what we are showing in the top graph there. Think of one unit as the contribution margin that we would earn from a single Exede12 wholesale subscriber. That was the original package that we were intending, and we intend to support about 1 million customers on all of the US beams on ViaSat-1. So if you thought about progress meter, you'd consider that when you get to 1 million units you'd would be 100% there.

Now with wholesale, the retailer pays for subscriber acquisition, the retailer bears the risk of churn, pays us a monthly wholesale fee, and get to keep the difference between the monthly wholesale fee and retail value. Now when we grew retail, we have SAC costs and we have churn risks, but we get to keep all of the revenue.

So when we convert service contribution margin into basic wholesale residential units, what we do is take our actual ARPU, our actual SAC costs, the expenses and we integrate in the actual subscriber lifetimes that we are experiencing. And the bar chart shows that when you integrate all of that together, that as of the end of our first quarter, our progress meter was over 90%. That is including the legacy subscribers.

So the pie chart below that shows a breakout, a snapshot, of where those equivalent subscribers come from in five major categories. From quarter to quarter sequentially, net subscribers were flat from Q4 of last year. But the mix generated as much incremental margin as of we had added 30,000 more wholesale subscribers.

At the end of the quarter we had about 529,000-ish Exede subscribers and about 112,000 legacy subscribers. We are not selling the legacy services in any volume anymore, so the legacy subscribers are shrinking steadily due to migration to the newer services, or they churn off. And in our total count, absolute count, they're being replaced by Exede subscribers. The big light blue pie slice shows the effective increase in value we get from the ViaSat-1 Exede retail subs, and we get that because our ARPU is higher, our SAC costs are lower, and our operating expenses are lower, and we compare that to those basic wholesale subscribers.

We have been slowly but steadily growing our VoIP subscriptions for about a year, so far with a real limited set of distribution channels. And the first quarter that we just finished was the first really meaningful period for aeronautical revenue. And we expect aeronautical revenue to grow quite meaningfully as more and more of the aircraft that we have already got under contract enter service over the next several quarters.

We do expect the legacy base to continue to shrink, and just to be sure we also expect the number of Exede residential subscribers to grow at a faster rate than the legacy base shrinks. So that will add substantially to our net absolute subscriber count.

The first quarter, as we have said before, is seasonally slow for us. We began seeing net subscriber growth in June, and that has continued into this current quarter, second quarter. Overall, we believe that the net subscriber count will grow in the second quarter, along the lines of what was in our FY14 fourth quarter.

In total, we have a pretty good shot at passing the 1 million wholesale residential equivalent units by about the first quarter of next year, which would be right about three years, little over three years from the time the satellite went into service. That would be excluding the remaining legacy subscribers. And when you also look at it from the point of view of net present value, we think the net present value, that revenue base, will be higher than it would be if we just had 1 million wholesale customers.

So overall, we think that this kind of approach is the right way to maximize the value of our ViaSat-1 investment. We have been thinking this way all along, and we think it is also the way that we are going to maximize the value of ViaSat-2 and subsequent satellites, whether they are in the United States or internationally.

The whole point of investing in better bandwidth economics on ViaSat-2, and in subsequent generations, is to be able to manufactured bandwidth inventory at ever-lower cost, which enables us to package that bandwidth in ways that are kind of ever more appealing and therefore, should increase our addressable market. That's what we want, and that's the way that we'll be confident that there is demand for ViaSat-2.

We think sustained growth is really the second part of why we pay attention to subscriber growth and these unit economics. And when we get to the Satellite Services segment, I'm going to talk about our plans a little bit later in the call on that subject, about how we expect to grow that.

So with that overview of looking at the consumer base, I will turn it over to Shawn, and she will quickly review our first-quarter financials in a little more depth.

Thanks, Mark.

Our first quarter 2015 represented another record quarter with strong financial performance. As Mark mentioned, our Q1 FY15 revenues were $319 million, with our Satellite Service segment dominating performance, posting revenue growth of the nearly 28% year over year, off-site by revenue reductions in our Commercial and Government segments. We also saw another quarter of good adjusted EBITDA performance, setting a new record of $60.2 million, up 14% from prior year and up 5% on a sequential quarter basis.

It is important to note that our first-quarter EBITDA record was achieved, despite the significant investments we continue to make in next-generation sixth and mobile Ka solutions, and litigation costs which contributed about $12 million to expense in the period combined.

So let's turn to our Q1 income statement and look at a few details. Looking at our top-line revenue mix, we can see that our service revenues continue to grow nicely; growing by 9% to $151 million in the first quarter. Our product revenues were down year over year due to lower Blue Force Tracking production volume and reductions in our Commercial segment as we continue to wind down our engineering activities on our large Australian Ka-band infrastructure program.

However, we had a good year-over-year growth in advanced tactical data link products, information assurance products, and our Government Systems segment, and from our antenna systems product in the Commercial Networks segment.

Our cost of revenues as a percent of sales increased slightly year over year, as we shift efforts to additional funded development programs in both our Commercial and Government segments, which tend to drive lower initial contribution margins. However long term, we expect to see these activities to create follow-on production contracts, which generally result in higher margins.

As I mentioned before, our litigation support activities continued to significantly impact our quarterly results. Our first quarter did reflect a substantial decrease from Q4. However, the level of post-trial support activities continued to substantially impact our earnings by approximately $0.03 per share net of tax. If we look at our Q1 SG&A without these activities as a percent of revenues, it is just slightly higher than the prior year, driven by support of certain large award pursuit activities in our Government segment expected to be awarded in Q2 or Q3 of this year.

Our interest expense decreased as interest capitalization increases commensurate with our construction activities on ViaSat-2, partially offset by higher outstanding debt balances. Overall, this generated a decrease of $1.5 million compared to prior period amounts.

Finally, our first-quarter income tax [effects] reflected a $3.5 million benefit, which is a decrease of about $2 million compared to the benefit recorded last year. Many dynamics in taxes impact our results, such as shifts in regulations, both at the federal and state levels; timing of earnings throughout the year; and overall estimated annual taxable income and related deductions.

The federal R&D credit expired in December 2013. So on a year-over-year basis, our Q1 results were significantly impacted by about $0.05 per share. Until the legislation is re-enacted, our earnings in total and on a per-share basis will be lower when compared to historical periods when the tax benefit was in effect.

Correspondingly, based on things and how they go in Congress, we may have a current quarter catch-up, like we experienced in our fourth quarter of FY13, which at the time generated an incremental $0.19 per share. In our press release we have provided a reconciliation between EBITDA and non-GAAP income to our GAAP earnings to assist in understanding the relationship between our core operating performance and the affects these tax attributes can have on these additional income metrics.

If you turn to our balance sheet, and cash flows, our Q1 cash flow from operations was approximately $47 million. Our growth and adjusted EBITDA was a significant contributor. However, investments and working capital drove year-over-year contributions down slightly. This working capital growth was driven by a decrease in accounts payable, timely of contractual milestones on one of our larger developing programs, and Q1 payments of (technical difficulties) 2014 annual employee benefit accrual.

Our capital expenditures year over year grew by $67 million, primarily due to the acquisition of our newest subsidiary, NetNearU, which Mark will talk more about later. Payments on ViaSat-2 are starting to ramp, as you can see on the above graph. However our CPE investments were down substantially, almost 50% year over year, significantly improving our per-unit economics. So all in, our net capital outlay outside of acquisition activities was about $98 million, up just slightly to the same period last year.

At the end of the quarter we had of $58 million of cash and $205 million outstanding on our revolver. Considering we've paid nearly $190 million towards our ViaSat-2 project to date, and made a very exciting investment in NetNearU of $60 million this quarter, it is pretty clear to see the accelerating cash-generating strength of our core business.

Mark is going to talk about the segments more later, and I have hit on many of the high points already. Our satellite service revenue grew 28% year over year. And that, combined with expanding EBITDA margins, resulted in almost a 90% increase in adjusted EBITDA. Government System revenues were down about 15% year over year. However, strong gross margins mitigated the somewhat fixed nature of SG&A, creating essentially flat EBITDA margins.

Our Commercial Network segment Q1 revenues saw about a 5% decline. And gross margins were down somewhat, creating an overall decrease in the segment's adjusted EBITDA margin. We have noticed before that we were entering into the later stages of the NBN Co program. The next couple of quarters will reflect some transition impacts to the quarters a we shift our efforts to the Xplornet communication infrastructure program.

With that, I will turn it back over to Mark.

Okay, thanks.

So I will start with the Satellite Services segment. As I mentioned before, net subscribers were essentially flat in the first quarter. But because of the retail/wholesale mix, the introduction of new higher value plans, service upgrades by existing customers, steady cost improvements, and the in-flight Wi-Fi, we added kind of the margin equivalent of over 30,000 base wholesale subscribers in the period. And that contributed to year-over-year revenue and EBITDA growth of 28% and 89% respectively on about a 16% year-over-year increase in the absolute subscriber count. Adjusted EBITDA for the segment was almost $33 million in the period, even including the $5 million in litigation expenses that we incurred with our SSL suit.

I've mentioned before that we came out best again in the FCC's Measuring Broadband America in terms of delivering advertised speeds. And we see this as a important component in our retail business where we want to introduce new service plans and innovation into the market, and this is a validation of our ability to deliver on those plans at scale. Of course, we also want to grow our absolute subscriber count. And we are going to do that in several ways. Before I discuss that, I wanted to touch a little bit on what led to the Q1 net flat outcome.

As we said last quarter, Q1 includes seasonally slow months. We also have been working with our distributors to understand and reduce churn. So collectively, we filtered our Q1 orders and marketing to test specific mechanisms for both voluntary and involuntary churn. That filtering meant we took on fewer gross adds, while still seeing disconnects that were really based on the policies that we had before the first quarter.

Some of the new filters were effective, especially on involuntary churn. And we believe we are already seeing the benefits of that in lower churn in this current quarter. That will, of course, yield some ongoing contribution to net subscribers. Other filters were not as economical as we thought they might be, and we expect to somewhat improve both the net adds this quarter by simply removing or evolving those filters.

We also plan to take advantage of improved seasonality by increasing promotional spending as well. But there are two more pretty exciting factors that we believe are also going to contribute to growth. First, we're introducing new service plans in select geographic markets that we believe will mitigate the single largest barrier to adoption and customer satisfaction. And second, as a result of both what we have been able to do to date and these new plans, we will be making some pretty significant gains in our distribution system.

So this next slide shows a sneak peak flavor of the new service plans that we will be offering in these select geographic markets. Just as a quick review, one of the ways that we got the bandwidth capacity that we did on ViaSat-1 is by constraining the service coverage area to the higher population parts of the United States and putting gateways in the lower population parts. But even with that step, you look at our coverage area, there are still substantial variations in populations and demand among the ViaSat-1 beams.

So we think about ViaSat-2, not only does it offer better total bandwidth economics, it also more closely and flexibly matches the bandwidth resource allocation to the anticipated demand.

But in the meantime, with ViaSat-1, while many of our beams now have strong demand relative to their capacity, others, like as examples Alaska or Hawaii or Maine, have more bandwidth than we would likely sell with the current product offerings in the near term. So in beams like that, we will be offering one of two different families of bandwidth promotions. The most exciting is the new $69.99 Freedom Plan promotion.

For the first six months that plan will be virtually unlimited without volume caps for normal consumer use. In other beams, we will test promotions offering double or triple the existing caps for each Exede12 version. And we will double the media consumption under the Evolution plan that always offers unlimited web and e-mail.

So there are a few reasons why we think this makes good sense for us now. Most significantly, with ViaSat-2 coming, that will improve our bandwidth economics enough to make this possible on an enduring basis. We think removing or mitigating the volume caps while still preserving our high advertised speeds is the best way to use the technology advantage of those bandwidth economics in the market.

Our distributors believe this to, and they're excited about the opportunity. We think this plays well against both terrestrial and satellite competition.

We have also been developing and testing network technology improvements that contribute to removing bandwidth caps as a factor while preserving strong bandwidth yield. We plan on phasing in that technology even before the launch of ViaSat-2. And then we can use the promotional aspects of the new offers to help us dovetail the new subscriber growth with our technology improvements so we can balance subscriber growth, continuing strong returns on investment, sustained delivery speeds, and the duration and length of these promotional offers.

So in long run, what we really want is to have the tools to match our best service plans to the highest demand markets. And ViaSat-2 will do that multiples better than ViaSat-1 would. So we believe that ViaSat-2 will present at least the same kind of opportunities we have had with the first satellite to use innovation to grow our market and earn an attractive return on investment. In the meantime, these new promotional plans, even when offered in lower demand markets, we believe will help us grow our distribution and increase our subscriber counts.

The other thing I wanted to talk about in the context of our Satellite Services revenue is our demonstrated global roaming capability. As I mentioned before, we anticipate good growth in our in-flight Wi-Fi contributions to the Satellite Services segment, as we bring the balance of our existing orders with JetBlue and United Airlines into service.

But we are also excited about the opportunities to grow our fleet of connected aircraft for both commercial and government markets. And we think we took a big step forward there with the first flights of our integrated Ku and Ka band aeronautical terminal on a commercial Boeing 757. During those flights, we showed that we can dynamically switch among about six different satellites and three different forms of networks across both Ku band and Ka-band.

This a really big deal for aircraft that spend most of their time in the US and/or in Europe, but also global roots or global missions. This integrated Ku and Ka band terminal allows our aircraft to roam virtually anywhere in the world, and yet have a compelling advantage under our own and our growing list of partner satellites. The Ku/Ka band antenna system can fit under the same radome, or one that is really similar to that required for either Ku band or Ka band alone. We have had really good response from both government and commercial fleets, and we think this is another good reason to be optimistic about our prospects in the aeronautical broadband market.

This next slide talks about our Commercial Networks, and our revenues there, as Shawn mentioned, are down about 5% year over year, mostly due to lower consumer terminal sales to ViaSat-1 wholesale and third-party satellite networks. And lower revenues, as we begin to complete testing and installation of the NBN Co satellite network in Australia.

Those reductions were offset somewhat by higher revenues for our antenna system sales and our Ka band payload modules that we are delivering to Thales for the Iridium Next constellation. The mix also yielded slightly lower margins, and the combination resulted in lower adjusted EBITDA by about $5.5 million. This segment of our business is somewhat sensitive to large lumpy program awards, and those opportunities are kind of difficult to forecast.

But we do have a number of good growth opportunities. We are working several third-party satellite network opportunities where we would provide network infrastructure. The demand for in-flight connectivity is growing worldwide. And for some regional satellite operators, this is a big plus for them to have their network be linked to the global roaming capabilities that we can offer in the US, Eutelsat in Europe, and our Middle Eastern partners, and soon to be augmented by ViaSat-2 for all of North America and the Gulf of Mexico, the Caribbean, and the Atlantic crossing routes. Our integrated Ku/ Ka terminal great multiple opportunities to tie together Ka band networks in different high-traffic areas of the world.

We have accumulated a lot of data on our in-flight connectivity service. In the first seven months, we've accumulated over 115,000 flight hours, and we have connected over 770,000 mobile devices. We're doing web browsing, e-mail, VPN traffic, video downloads, video streaming, and audio streaming. Lots of people watch Netflix and other video media, and in fact the single most popular website in the air for us is Pandora.

Now with our NetNearU acquisition, we also monitor well over 100,000 unique Wi-Fi hotspots. So managing multiple different tiers of service and different networks in the air is well within our demonstrated capabilities.

Finally, since last quarter, we completed our Iridium engineering model Ka band payload as part of Thales' delivery of the first Iridium Next engineering model satellite. The first NBN Co satellite launch is scheduled for 2015, and that will mark the transition of our program from development to terminal production and support. We are also continuing to work on opportunities to work with partners for ViaSat-2 class satellites in other regions of the world and/or for our next generation beyond that.

Next slide is on our Government Systems business, and the US defense market as a whole is still pretty challenging. Overall defense spending is weak, and we continue to see both requests for proposals and awards shifting to the right. Our government revenues actually down at about 15% in the first quarter year over year, and that is primarily due to completion of contract obligations under Blue Force Tracking product and service commitments.

But, over the last couple of years, our government business has pretty much defied industry trends, and, while our first quarter was slow, we still see good opportunities to continue to outperform again this year. Our first quarter orders for government business exceeded revenues by about 17%. So book-to-bill was 1 to 1.17. Even so, a number of targeted new orders are still somewhat delayed, and we also anticipate strong new order flow around the government fiscal year boundary, which is the end of our current second quarter.

So overall, we believe we've got an opportunity for front-loaded new orders in our FY15 that will help drive higher revenues in our second half. We are seeing good growth opportunities in link 16 tactical data links, in information assurance and cyber security, and aeronautical broadband networks and services that we believe will last [out] the decline that we are seeing in Blue Force Tracking. Longer term we still see very good growth opportunities in aeronautical broadband and other government applications of satellite broadband, as well as in certain tactical radio and information security segments.

Okay. That brings us to our outlook and the summary. We think this chart does a good job of summarizing the growth in revenues and adjusted EBITDA that we have achieved over the last 10 years. We have maintained a good blend of government and commercial technologies, and have had especially rapid growth in Satellite Services EBITDA over the last couple of years. Our 10-year adjusted EBITDA compounded annual growth rate is about 20%. Last year we achieved over 30%.

Overall, we believe we have the elements in place to achieve EBITDA growth this year approaching FY14's rate again. We think that would primarily be driven by Satellite Services. Our first quarter is a pretty strong indicator of that, with revenues up 28% year over year and EBITDA up 89% year over year, as I mentioned, on about a 16% year-over-year increase in absolute subscriber count. That was enabled by strong retail performance where the combination of retail, wholesale mix, new retail plans, VoIP subscribers, in-flight Wi-Fi, and expense reductions overcame higher than target churn to deliver economic value well beyond the absolute net subscriber count.

Our first-quarter sequential performance gave us about the equivalent of about 30,000-ish basic wholesale subscriber units. And we think we can continue to increase our absolute net subscriber count meaningfully this fiscal year through gains in retail distribution, geographically targeted service promotions, improved churn, more targeted filtering on gross adds, and better seasonality. And we are already seeing the positive effects of some of these factors in our net subscriber count so far this quarter.

Finally, as I mentioned, we also anticipate rebounding government sales in the second half of this fiscal year, driven by a strong book-to-bill ratio in each of the first two quarters. We believe we can achieve double-digit adjusted EBITDA gains in our Government business on relatively flat year-over-year sales, and that would be led by mobile broadband, link 16, and information assurance and cyber security.

So that covers our prepared remarks. And at this point, we would be happy to take questions.

(Operator Instructions)

Mike Crawford, B. Riley & Co.

Thank you very much. In talking about your retail subs, you had net benefit slice of the pie. Can you just comment on how you are calculating that? And then give us any data you can on what percent of the mix is retail? And then finally, how much lower is your incremental retail SAC today versus a year or two ago?

Okay. So just a couple of bounds. We are not really breaking out wholesale, retail, split anymore. We have been predominately incrementally retail for quite a while now. I don't think we're going to give a lot.

I think we have talked before in the 70%-plus range of being sort of retail to wholesale adds, somewhere along that range. But we are not going to continue to disclose that. What we have talked about is, and I think Shawn can add to this, is we have talked about steadily growing ARPU and steadily declining SAC.

We're -- I think even the last time we talked about SAC was below our $700 target. So that has declined. I think, Shawn, would you like to maybe give a little -- detail that we're describing in our Qs and add on to that?

Yes. I think that, as Mark mentioned, the SAC has continued to decrease. And if we look to quarter over quarter, this quarter represented another decrease. So we're quite a bit below the $700 range of that target that we gave when we started out.

Almost a, I'd say -- this is Rick -- almost 100% of that blue area that Mark talked about as the expense is from retail.

Correct.

Okay, thank you. Just one more, switching gears. So you have got this new Ku/Ka terminal you have demonstrated for, say, government users.

You have your new NSA-certified terminal that also enables some roaming, and then you have also been developing a modem or terminal with broader roaming commercial capability. When are these initiatives going to be available to be put into networks?

Okay. So the main thing when we would talk about this Ku/Ka terminal is think of it as for both government and commercial. One, just to clarify, I'm going to describe two different extreme value propositions. One value proposition would be if think of some companies that advertise themselves as, we are global.

We have -- we may not have the absolute best coverage in every region, but we have coverage everywhere. That would be one extreme, and that has been the value proposition is, coverage everywhere. And then another one, and this is the one, for instance at a regional airline like JetBlue finds particularly attractive as well, we have very, very attractive (inaudible) a very attractive coverage in the US market, which is much, much better than you would get on a purely global solution.

And separately from that, we also tell people that we today support several hundred aircraft on a Ku band network the goes all around the world. And that is primarily business jets and government aircraft, but not commercial aircraft.

So this combination Ku/Ka basically allows us to stitch together both value propositions, that we can provide the best in a particular region coverage area and we can provide global. And for a lot of government aircraft, but also for a lot of long-haul aircraft, commercial aircraft, that is a really valuable proposition.

So we will be able to ship production versions of that terminal next year. We have done test flights, as I mentioned, on a Boeing 757. And we have shown test data to a bunch of different government customers especially, but we are also making that available to commercial customers.

And what we showed is that we can switch dynamically where we use different networks on Ka band or Ku band or in different types of Ka/Ku band satellites, and we actually can integrate even other people's network standards as well. So that is the point of this. And we think it's going to have pretty good payoff in both markets, government and commercial.

Okay, thank you. And a final question is, can you comment on status or thoughts of getting someone else interested in taking you up on a ViaSat-2 architected-type system?

Yes, we are still working, I would say, several different opportunities on that. And the big thing is they invest in commitments on the part of partners. And so we're working through with them on what that means on their business plans. I think for people that are looking at the broadband market the way we do, which is, okay I need to turn bandwidth into a value proposition in the market, and what does it mean to be able to offer unlimited, as an example, or what does it mean to be able to offer 20 or 30 [megabits] compared to what they can do with other satellites. That is the process that they're going through in the markets that they are in and that we are interested in getting. And it's hard. It's hard to handicap it.

I would say, we still have some that look pretty interesting. But it could be a quarter, two quarters, four quarters. It's very difficult to forecast.

Okay. Thank you very much.

Thanks, Mike.

Rich Valera, Needham & Company

Thank you. Wondered when you were thinking you were going to have ViaSat-2 service within 2016? Is that kind of late 2016?

It would be second half of 2016. And it depends a little bit on the integration of how we do the spacecraft and the launch. It could be near the end of 2016, or could be more three-quarters of the way. Scheduled launch would be mid-August of 2016.

That is calendar?

Yes, calendar 2016.

So just trying to understand how to think about from here to that point with ViaSat-1. You basically said you thought you could add net subscribers, I think for the balance of this year, of this fiscal year, I think you were saying. I'm just wondering how we should think of beyond this fiscal year, because there's going to be quite a significant gap between the end of this fiscal year and, say, when ViaSat-2 service starts.

So how do we think about that in terms of net subscribers? When do we think ViaSat-1 kind of fills up? And then can you continue to add the kind of equivalent units like you did this quarter, even beyond when the total net subscriber number stops going up?

Do think you will be able to continue to add sort of equivalent subscribers beyond that period as we wait for the ViaSat-2 launch? Thanks.

Yes. So those are really good questions. And that is one of the points we were trying to bring out, which is, you think about it, one of the things that we talked about when we launched the satellite is the notion that bandwidth demand increases each year, that people expect sort of more bandwidth for the same amount of money, or they consume more bandwidth. And if we did not offer them more bandwidth, then more and more of our subscribers would hit the volume caps and they'd be dissatisfied. So the notion of that is, think of it as we grow revenue as we fill up the satellite, and then we would probably have revenues tail off once we passed some sort of peak point in year four or five, something like that.

But if you look at what we are doing with these different service plans, one of the things that is coming out of that is that we are able to generate revenues that are more bandwidth efficient. So we get more revenue per megabit. That's what we are trying to do. And we are trying to get more value per subscriber.

So what we are going to show, we think, and that's part of the point of trying to show this in this equivalence unit, is that we think we can grow total value beyond the $1 million so we can make the peak higher. And if we are successful in how we manage those subscribers and the services that we offer, especially in those beams that have higher demand, we can probably sustain a peak revenue rate longer. And that's what we would like to do.

Now in some areas -- and think of that as that as sort of hey, we are generating a surplus, in some sense. That we're using bandwidth more effectively than we thought. In other markets that have lower demand, we're not using as much bandwidth. And so we could afford to try to test new service plans like these ones that I described like the Freedom Plan in a way that will sort of give us a preview of what is going to work when we get the new satellite, but we can test it in specific markets on the current satellite.

And so overall, there is a lot -- I would say there's a lot of stuff for us to learn on this. But I think that's what we're doing now. And right now we're pretty optimistic that we will be able to do better economically in total than we thought if we can continue to sort of get the gains that we have had in the last several quarters.

So maybe honing on a little bit, you talk about exceeding the original 1 million equivalent target, if you will. Can you give us a sense of where you are today on that equivalent basis?

Yes. I'm just going to give you an example. And we have not disclosed all this stuff, and I'm just give you a really, like a gross example. So let's suppose that we had 1 million wholesale subscribers and that our wholesale price was somewhere in the $25 or $30 range.

What you'd think is at that rate you would generate $300 million to $360 million, ballpark, frame it that way, if the satellite were full of wholesale subscribers. I think we are running at a run rate right now of over $100 million a quarter, and 80% of that is due to ViaSat-1. So we are already at a $320 million revenue run rate, and we still got a lot of maneuvering room left.

So as an example, from a pure revenue perspective, we will be able to drive, we think, well beyond what we would do with 1 million wholesale subscribers, if we can get -- and that's where we talk about, what if our ARPU was $40, what if our ARPU was $50, what if our ARPU is over 50? And then we are integrating these other services like in-flight Wi-Fi that don't really have an ARPU equivalent.

We measure it in different ways, like revenue per airplane or revenue per flight that are different metrics. And we're trying to do that by getting very high penetration, probably lower dollars per using subscriber, but many more using subscribers per airplane.

So the upshot is, we still feel like we have a long way to go. And what we did, just to recap, what we did in this metric is when we sell retail, we have additional capital investments. So what we have done, even though we are already sort of thinking of it as 100% of revenue run rate, pretty close, if it were all wholesale.

What we have said is, when we adjust that for the additional SAC costs, we are in the ballpark of 90%-ish, with about 20% of that being legacy subs. So think of it as that we are in the low 70%s, in terms of where we are on just ViaSat-1.

So we thought there was quite a bit of running room left. Does that answer your question about how we think about these different metrics?

Yes, that's helpful. Thanks, Mark. And just one more from me. Do you plan on giving gross installs or the install number going forward, or not? Or will you give it for this quarter?

We probably -- for this quarter what we did, we did talk about where our net subscribers are, which is the same as where they were last year, about 641,000 at the end of the quarter. We will probably talk about actual subscribers each quarter.

But I think we will also give you this blended number as well, because we think it is more indicative of what we are trying to do, which is we are trying to grow the real value that we get on the satellite. And we think it's a more meaningful measure than just counting noses, which is basically what the net subscriber count does because it leads out other things. So we will probably do both for the foreseeable future.

Okay. That's it for me. Thank you.

Thanks.

Matt Robison, Wunderlich Securities

How do you decide what places to have the unlimited caps, and what will you do with the subscribers after the six months? Then so I'm curious why R&D was down, what the nonresidential revenue was, and what gross adds were?

Okay. So I'll tell you the first things are. Basically, the geographic markets where we will have virtually unlimited plans are those markets where we have the most bandwidth, because what we are aiming to do is we are aiming to keep up our reputation of delivering the speeds that we advertise. And we have a pretty good idea of what to expect, but there is some uncertainty in it. So this gives us maneuvering room to be able to manage.

If we have very high demand in that area, which would be a good thing, we will be able to still achieve the integrity of our service. In the areas that are sort of in the middle, we will probably do the double and triple caps. And where those areas are is, as I sort of was alluding to, it is a little bit of a complicated relationship of the design of the satellite and the exact geographies of the market. Let's see.

I asked you about gross adds, nonresidential revenue, R&D, and then what are you going to with the subscribers on a two-year contracts, what are you going to do after the first six months?

(Multiple speakers) So basically what we're offering is a promotion for the first six months. That's what we're clearly offering.

But we would like to do is, as we confirm the operating characteristics of these particular plans and our terrestrial technology is, what would like to do is be able to extend those benefits, because it will keep the subscribers happier, and it is where we are going as well. That is sort of what we would like to do, what we intend to do, but we are leaving ourselves some wiggle room in case a good thing happens and we're sort of overwhelmed with demand, we will figure out how to deal with that.

How do you write the language of a two-year contract when you have that (multiple speakers)?

It is promotional. It says it very clearly if you look at what we described is. It's kind of like getting HBO for six months.

We're not inventing anything here. It's a common practice.

So basically it'll say, after six months it goes to one of the other plans.

Actually what we have baked in is we have a path for subscribers. So subscribers can either, one, assuming that we don't extend the promotion. If we don't extend the promotion, the subscriber can either drop back to the normal parameters of that particular plan. Or he can elect a higher value plan, which preserves exactly the service that he's getting.

Okay.

So our subscribers will be able to do either one.

Okay. I assume you (multiple speakers) those other questions?

I think Shawn's going to address the R&D thing. I think for right now we're not giving a lot more detail on the actual numbers of subscribers details within the quarter.

How about -- in the past, the nonresidential has been kind of mid to high single-digit millions. Is that the way it was this quarter?

Yes.

We are at the very front end of commercial air part. So it is beginning to be more meaningful, but not yet. So it is -- you're probably not far off. The R&D thing, Shawn?

Yes, from the R&D, Matt, you kind of decide, you know, is it going to stay at this level that we had in Q1? And we kind of talked throughout the call, we had a lot of different reallocation of engineering activities, moving to funded development programs. But we do have some things in the Commercial mobility that I think as we look out, we are going to continue to invest in.

So I would expect it to be a little bit higher than where we are right now. But if we get some other opportunities, we may shift resources.

So higher, but not like it was last year?

Pretty close, yes.

Okay. So we go back -- we go from $9.7 million back to $16 million or so, then?

Maybe a little bit less than that, but between those two.

Thanks.

Andrew De Gasperi, Macquarie Capital.

Yes. Thank you for taking my question. First, I guess I wanted to ask you, the global rolling capability, will there be any additional costs as you lighting up transponders in Europe, or is this a barter arrangement?

It is not a barter arrangement. It is basically an agreement that we have with Eutelsat. It's kind of a bilateral agreement where -- let's take an example. If we were to have a United Airlines jet that originated in the US that was our customer and it flew to Europe, that we would have an agreement with Eutelsat which would let us buy bandwidth on Ka sat to serve that customer through their account with us.

Likewise, if Air France, I'm just going to pick an example, if Air France flew a jet to the US and that was a Eutelsat customer, that Eutelsat would be able to serve him. And the idea of a bilateral agreement is to take advantage of our common competitive advantage and competitive position in the two markets.

And just as one more aside, we already have a global Ku band network that we use for business jets and government customers. And there we just were buying bandwidth from third parties to fulfill that network.

Our customers know, just like if you have a phone with multiple modes in it, you know you will pay less in your domestic market and you will pay higher when you roam. The service may not be as good when you roam. And so we make all of that stuff clear, but the main point is to get the quality of service that's associated with the satellite in each market.

So is the margin, timing around margins should not significantly shift? In other words, you are not going to see costs sort of spike up before those revenues are realized? Or they should be recognized (multiple speakers) --

That's correct, yes. We, in general, we try to avoid situations where we speculate on bandwidth. We have enough, generally we have enough aircraft in service that our demand is relatively predictable.

Got it. And lastly, I know you have said at length what the subscriber number was for last quarter, that's fiscal 4Q. But can you maybe give us the legacy versus ViaSat-1? I'm sorry if you already gave that out.

For the quarter just ended it was on the chart, and it was about --

No I mean the previous quarter.

No, no. That is one of the things we have not been disclosing. So what we're tried to do, just to clarify, what we tried to do this quarter is convey two things.

One is that if you look at subscribers on this adjusted contribution margin basis, that we have been growing much more rapidly than just by counting noses. And then what we tried to do separately is give a snapshot of what that blend is right now.

Got it.

But we are not going to do both all the time.

So I should expect going forward that numbers, those two numbers will not be given? Is that right?

Right. The ViaSat-1 and legacy one. But I think it is fair to assume, you just kind of go through sort of migration churn stuff and you can project that out. We expect that the legacy subscriber base will be small in a couple of years.

Okay.

It becomes less meaningful, though, because we are repurposing a bunch of that bandwidth on these legacy satellites for other services.

Right. So we have Excede-5, for instance, services or we have the in-flight arrow services and other services as well that use that bandwidth.

Understood. Thank you very much.

Thank you.

Michael Funk, Bank of America Merrill Lynch.

Yes, great. Thank you, guys, for taking the questions. I have a few. First a clarification to help me out here with drawing a line between the old reporting method and the new.

So in the equivalence of subscriber units that you are giving here, the 900,000 you provide for 1Q, is that simply with a factor of 1.4 times the old reporting method? And if that is the right, I guess, factor to apply, are you basically dropping your longer-term target for the sale rate in ViaSat-1, everything else being equal, not accounting for the higher assumed value because of the associated ARPU and everything else.

And second, you mentioned that the SAC cost was down during the quarter. Maybe some more details there on how you are managing that? I'm curious to hear how you're bringing down the SAC, it'd be interesting to hear about that.

One more, if I could and thank you for the time. Last quarter, I think you highlighted you are seeing an increase in early termination where subs were signed up, maybe dissatisfied with the service early on because some of the data caps, were terminating a month or two into the contract without payment.

I just want to maybe hear about how you are managing that, and the trend that you are seeing there? Thank you very much.

Okay. So just on how we build out the equivalent subs, it is not a simple multiplication. What we do is for every use of bandwidth we have, for every service plan, we build out a model that talks about what our capital investment's in the service, what are the revenues, what are the actual margins that we are receiving for that service, what are the life of the uses on that service.

And then what we end up with is, think of it as sort of a factor for each of the service types. And the way it would work out is, it is just normalized so that a wholesale, basic wholesale subscriber, basically I think C-12 subscriber that's on a wholesale plan, works out to be one to one. The others come out to be higher if they have higher margin relative to the amount of investment they require, but we have to do it on kind of a line by line basis.

You asked the question about how does SAC came down. There's really -- there's multiple components to it, but it has come down for the main reasons being as we have scaled and built more subscriber terminals for longer periods of time, we have been able to bring down the cost of our subscriber equipment. And in some ways we may use lower cost to inject other features or capabilities that we think will drive revenue in other ways, but the general trend has been to reduce costs. The other thing, as we built up a base of subscribers and we have a flow of disconnects, we talked in the past about how we can refurbish some pieces of subscriber equipment, and that contributes to lower churn -- or lower SAC, I'm sorry. To lower SAC.

Other component of SAC that we target to try to be cost effective on are marketing and advertising, and we have done, we constantly monitor the unit effectiveness of our advertising. So that gives us the ability to do that. And then, depending on our distribution channels, they have different commission fee structures, and so if we optimize those channels with the best distribution costs, those also contribute to lower SAC.

The last one was on the early termination that you commented on last quarter.

Yes. So one of the things we have said in the past is that when you think about churn, we want to understand why people churn, and basically I would say we are coming into sort of two dominant modes. One is involuntary where people unfortunately cannot afford to pay. They sign up for the service, they intend to pay, but they cannot.

And it's a little bit of a high-class problem, because in the old days when our service was 0.5 a megabit for $50, people wouldn't want that. They would not sign up for it in the first place.

Now what they are finding is, well if -- and this is sort of an issue we think we are seeing in the video world, too, is that there are people who have poor credit who can't get on a plan on terrestrial service, and they will sign up for ours. And so what we try to do is come up better screening techniques to make it more likely that they will be able to pay for an enduring period of time, and those seem to be working.

That is probably the single -- involuntary churn is a fairly significant part of what we're seeing and dealing with that one issue, is will people be able to pay. We have come up with some pretty effective ways to do it. That filters out some adds, but the net effect seems to be worth it.

The other mode is that, even though we try to be very upfront on the volume caps, we have different distribution channels. They are not always as effective at communicating it, and I think the fact is that people don't really understand them well.

So even if it is communicated, people do not understand the impacts of that. Those subscribers often churn fairly quickly. So one of the things we're working on, we've said in the past, trying to filter out subscribers and geographic markets that we think would be less likely to stay.

The other thing that ultimately we think the right answer is, and we that we'll have it with ViaSat-2, and we're going to try it in here, is to take the volume caps out of play. But if people don't run into the volume caps, we think our churn levels will go down pretty meaningfully. So that is one of the things we're going to find out.

We'll be able to report more on in a couple of quarters from now. Did that answer your question on those?

That did. One really quick follow-up, if I could please. So when you have a confirmed installation, you are not expensing all of the cost, is that correct? Or are you expecting the entire thing when you install? You have an equipment component to it as well, right?

Correct. So there's a capital portion that we capitalize, both the equipment in the install cost. And then the other elements of SAC, commissions and marketing expenses are what we expense in the period.

Okay. So if we saw acceleration in those early terminations, where we see that, then? Where we see that write-down?

Well, it depends on the customer's behavior and whether they return the equipment are not. If they return the equipment it comes back into our pool and we can redeploy it. If they don't, then we have some early termination fees that we can conduct with them, and we will take the net value of that and that will hit in the current period for the disconnect.

Great. Thank you for being so thorough. I appreciate it.

Ryan Rackley, Raymond James.

Thanks, guys. So I got a bit mixed up on that churn language with the voluntary and involuntary. But is it fair to say based on the data that you did give, which I think included reduced churn, that gross adds were down sequentially?

We did not cover -- we did not disclose gross adds for this quarter. You could sort of figure out from just estimating where our churn has been and what the net was.

Okay.

First thing was that, even on the last call, that we said that the June quarter's our seasonally -- we are predicting it's seasonably lowest quarter, and we did decline in April and May and began to grow again in June.

Okay. Then looking at the Government business, can you talk about the RFI for BFT 2.5? What that implies for future BFT 2 shipments? Does that mean that they're done shipping those? Or do you expect that to kick in later?

No. We continue to deliver some BFT units to different customers. But it's -- the next award has been delayed a little bit here. So we're kind at a low point in terms of shipping units, but they are doing installs and we expect more orders.

You get random orders from different customers here and there. But it is definitely off considerably from what was last year. BFT was, I would say, more of a wartime-specific capability. That during wartime there is very clear urgent needs for it.

Now they're less clear what the urgency is around the installation and appointment of the units that they have. But they found the capability to be really, really worthwhile. And I think overall that is what would make it enduring. Just won't have the intensity that it did during the peak parts of the war.

So are you guys considering or looking at 2.5 as an opportunity, or is that --

Sure, yes.

All right, great. Thank you.

Mark, why don't we take one more?

Andrew Spinola, Wells Fargo

Thank you. Just on the fiscal Q2 commentary you gave on net adds, the bounce-back to a level closer to the fiscal Q4. I am trying to understand how much of fiscal Q1 was maybe one-off?

And how much of the rebound is the result of sort of optimizing your filters and letting customers in that previously were blocked but are appropriate plus lower churn now that you've worked through the problem? How much of the improvement is because of that versus just a normal rebound from seasonality?

I don't know if we would break it out specifically, but it was really -- it was the factors that we described, which is [first] in -- some of our distribution partners wanted to understand some of these churn effects. They also -- we also -- we tend to have a strategy that says we like to get a lift from seasonality in our marketing and promotion as opposed to fight seasonality.

So the combination of -- they sort of accentuate each other, they're self-reinforcing. So it is a little hard to break out the impact of our marketing spend from the seasonality, because we tend to do them in tandem.

And then the other part that I think is going to be pretty rewarding is that some of our distributors really are excited about these new plans because they see the same affects we do, which is the affect of caps. And I think that, and this goes back to the question I had before about what are we going to do when the promotions end.

What we're really trying to understand is, okay if this is a good way to project bandwidth, how should we price and present that in a way to make that part of the business grow and get kind of a unit economics that we have had in the past. And we see some pretty good ways to do that with some of our distribution partners.

I think what you'll see is some of our distribution channels will turn out to do better this quarter as well. And we don't really know how to -- right now we don't really know how to assess the net combination of all of those. But that's why we sort described it as a similar to Q4. But the mechanisms will be different.

Fair enough. And then just one last one from me. If you think about this business on a much longer-term timeframe then just a couple of quarters, I think we used to talk about maybe 20 million to 30 million homes as the addressable market for the unserved and underserved. It feels like maybe that number is a little on the big side now.

I think it makes plenty of sense that you are adjusting your business to where the best opportunities are, makes complete sense. But I'm just wondering how do you think about the broadband market specifically, and how does that translate into how you think about the economics and the addressable market for ViaSat-2 and beyond?

Okay. That's a really good question to end with. That's a really important one. So basically the way I put it is, what it looks like is if we're going to go to market with a 12 megabit 10 Gigabyte plan for indefinite period of time, our market would not be 20 million to 30 million.

The other things you want to take into effect -- into account are people's expectation for broadband are rising. So if you just look at, what is the definition of underserved. Maybe this year the government will say that instead of being a four-meg user, you're underserved they might say if you don't have one megabyte, 10 megs, you're underserved, and there's some interest in driving that to three megs by 25 megs.

So when we think about ViaSat-2, what we think is we're thinking of plans that are much more in that type of speed range. And as we've talked about, we think if we can get rid of the volume caps, we're going to increase our addressable market. Now, as an example, a 3 meg by 25 megabyte plan that is priced sort of in the range where we are now with no volume caps, does that have a 20 million to 30 million addressable market? Not sure. Maybe it takes a little more than that. And depends on who we are competing with and what people's expectations are.

But what we are excited about is that we can sort of use views each increment in technology and package it, and that's what I talk about those package things, in way that gives us sort of both a combination of a good addressable market and a good return. But it won't be that we offer a plan in 2014 or 2015 that we think is going to address 20 million or 30 million homes on its own two or three or four years from now. Does that answer your question about how we think about it?

It does. Thank you very much.

Thank you. Okay. I think that covers our call for today and all the questions. Really, thanks everybody for your time and attention, and all of the questions. We appreciate it.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.