Viasat Inc (VSAT) 2015 Q2 法說會逐字稿

Welcome to ViaSat's fiscal year 2015 second quarter earrings conference call. Your host for today's call is Mr. Mark Dankberg, Chairman and CEO. As a reminder, this call is being recorded. You may proceed Mr. Dankberg.

Okay thanks and good afternoon everyone and welcome to ViaSat earrings conference call for our second quarter of fiscal 2015. I'm Mark Dankberg, Chairman and CEO and I got with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; and Kevin 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.

More information concerning these factors as contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.

Okay, thanks Kevin. As usual we will be referring to slides that are available over the web and I'll start with some highlights in a top level business overview and after that Shawn will discuss our segment and financial results, consolidated financial results and then I will give a little more detail and color for the business and finally we will summarize our outlook and we will take some questions.

So overall we got good results for our second fiscal quarter of 2015 including record revenues, adjusted EBITDA and back log. Our adjusted EBITDA was about $110 million including about $40 million of benefit associated with the legal settlement with base systems [around]. Even without the effective of the settlement, adjusted EBITDA was $70 million which was about a 29% year or year gain and a new company record. As well as more than a 500 basis point improvement year over year.

Year to date EBITDA was $170 million or about $130 million excluding the effects of the settlement. Shawn will go into more detail on the accounting treatment for the settlement later.

Orders for the quarter were $499 million and that results in firm backlog of over $1 billion. That is also a new record for us. And a 27% increase year over year.

We added just over 16,000 net subscribers on our exceed consumer service. Gross ads were $68,000. We ended the quarter with a little over 657,000 subscribers. And about 553,000 of those are on ViaSat 1. Average revenue per subscriber continued to improve. We have been able to reduce unit operational costs and churn also improved.

In our aero business, we increased the number of in-service Wi-Fi aircraft by almost 50%. So all that combined to drive a 91% year over year gain in satellite services segment EBITDA, and that is before the benefits of the settlement.

We were happy with the results of our limited introduction of higher capacity and virtual unlimited plans and a little later, I'll show why that is a good indicator of how we can continue to grow our addressable market through introduction of new space and ground technology over the next several years.

During the quarter, we also reached a new distribution and fulfillment agreement with Perfect-10 and that will further enhance our retail channel. We will really begin to see the effects of that in this current third quarter which will help us sustain and possibly improve our subscriber growth.

Finally, during the quarter, we received a financing commitment from the US export and import bank to provide up to $525 million in fix rate long term financing for the ViaSat 2 satellite. This financing package enhances the economics and better matches the long term nature of the satellite asset.

We also had a really good quarter in our government segment. That helps position us for more growth. Even given a very challenging macro environment.

Government new orders were $232 million in the quarter. That is a new record for us. Revenue for that segment was down about 5% on a year over year basis, but it was up over 15% sequentially.

We have had two very strong quarters in a row for orders resulting in exceptionally good year to date book to bill ratio of about 1.5 to 1 in the government segment. So that reinforces the expectations we had mentioned before about a strong second half in government.

Margins were good and EBITDA increased 9% year over year even with a year over year revenue decline. So with those highlights, I will turn it over to Shawn and she will quickly review our second quarter financials in more detail.

Our fiscal 2015 second quarter results were quite strong. Topline revenue for the quarter was essentially flat compared to the prior period but was up 6% substantially and over 12% including the effects of the settlement. In prior quarters, we noted the winddown effects of [MDM Co] project in our commercial segment and BFT program in our government segment. Which combined accounted for nearly $50 million of year-over-year Q2 revenue reductions. However, the strength of our core diverse product and service portfolio was able to overcome to these impacts.

What you are seeing in our Q2 government segment revenues which grew $18.4 million or 16% from our first quarter. We had notably higher revenues in antenna systems, tactical data links, information assurance as well as higher service revenues associated with our service offerings in both fixed and mobile broadband.

Our satellite service segment continues to fuel our top line momentum up $36 million or 35% year over year and it expanded in many dimensions. Consumer ARPU grew to a record level of 53.07%, consumer subscriber counts increased to over 657,000, commercial aircraft served grew to over 200 as of quarter end and our average revenue per plane grew nearly 45% from the first quarter this year. All in addition to $21 million Q2 revenue from this agreement with SSL which I'll walk through a bit more later.

Our Q2 adjusted EBITDA of $110 million also hit a new record, up 102% from last year, with Satellite Services being the largest element of growth. Reporting a new EBITDA record of $75.1 million which more than tripled year over year. Clearly, the Q2 settlement contribution of $37.5 million net of the Q2 legal expenses was significant; however, our core Satellite Services business also grew substantially, generating year-over-year EBITDA growth of nearly 91% and this occurred despite a good growth at quarter and related sequential uptick in subscriber acquisition costs focused on launching our newest consumer offering.

Additionally, our government segment Q2 results reflected improved gross margins and managed discretionary expenses which combined drove EBITDA growth by 9% over last year and 40% sequentially. Also, with the strong government awards, this quarter we should be positioned for government segment growth to continue in the second half.

So let's turn to our Q2 Income Statement and look at a few more details. Looking at our top line mix, service revenues continued to grow quite nicely in the areas described on the previous slide. Product revenues were down somewhat at the strength in our other business areas and the implied license fee from the legal settlement weren't quite enough to offset the anticipated wind down of [NB Yanko] and lower BFT production volume.

Higher gross profit margins in both government and satellite service segments, and lower year-over-year R&D also drove second quarter operating income growth.

Turning to our SG&A. As a percent of revenue, it was largely flat compared to the prior period, before taking into account the positive impact of the Q2 legal settlement of $18.7 million or $16.2 million net of our current quarter legal expenses. As we have previously disclosed, on September 5, 2014, the Company entered into a Settlement Agreement with SSL and Loral for $108.7 million. In Q2, we received and realized $40 million of the settlement with $6.9 million per quarter to be received and realized each of the next 10 quarters. Thus, the agreement had two primary elements, to which we allocated the proceeds based on fair value.

Effectively, a lifetime implied license to the intellectual properties stipulated in the agreement and other past damages suffered by us, including the breach of the company's satellite construction contract. So our second quarter financials reflect a reduction to SG&A of $19 million for realization of the breach of contract portion of the agreement and the remaining amount realized of $21 million as product revenues and our satellite service segment related to the implied license, which is also where the future payments realized will be reflected in our overall results. Additional information regarding the agreement between the parties and the related impacts can also be found in our upcoming Form 10-Q filing for the Second Quarter.

With that, I'll circle back to our Q2 Income Statement and jump down to the income tax line. Our Q2 income tax effects reflect the positive net income we achieved and related tax provision of approximately 38% on an annual effective rate basis, which is a reasonable range to expect the rest of the year.

Keep in mind, our current year-to-date taxes do not include any benefits related to the expired R&D legislation compared to last year at this time when the credit was still in place, so changes in that area could have additional positive impacts to our second half net income performance.

Overall, we achieved positive net income of $23.9 million or $0.50 per share on a GAAP basis and $32.4 million or $0.68 per share on a non-GAAP basis. This quarter we also wanted to provide some details of the relationships between our adjusted EBITDA and non-GAAP income and related earnings per share, I'll reference for you to review as part of your review of our results. You can also see these details in our quarterly Press Releases.

In summary, our core business continues to grow. On this quarter, we continued non-GAAP earnings per share generation increasing over 230% from Q1 and this is before any effects of the Q2 Settlement Agreement, so let's turn to the next slide.

Our year-to-date cash flow from operations was up over 50% compared to the prior periods. Corresponding with our strong second quarter EBITDA performance. Our year-to-date investments grew by $33 million year over year due to the $56 million NNU acquisition in the first quarter offset by a year-over-year decrease in CapEx of $24 million as reduced CPE outlays have continued alongside reduced other maintenance CapEx spend which combined to offset the $21 million year-to-date increase in ViaSat 2 payments.

So our free cash flow, cash flow from operations less capital expenditures improved by approximately $23 million for this six-month period compared to the same period last year. We ended the quarter with $42 million in cash and still have $320 million of availability under our line. Thus continuing to have a very good liquidity position and our core operating performance continues to de-lever the business as well.

So above on the charts, we have provided a summary of our overall leverage and liquidity position, which is sitting at a very comfortable level at Q2 end of around 2.5 times. As Mark mentioned earlier, in September, we received a commitment from XMB for up to $525 million of financing related to our ViaSat 2 satellite project. Today, we're still in the loan documentation phase. So final terms of the agreement are being negotiated, but overall upon closing we will have access to a fixed rate, long term direct loan that provides a better matching to ViaSat 2 assets.

We will eliminate the floating interest rate risk associated with our credit facility while preserving the flexibility to drawdown the debt as needed through our construction build, leaving our line for future strategic initiatives.

So with that I'll turn it back to you Mark.

Okay, thanks, Shawn. So this next page summarizes key metrics for the Satellite Services segment. The top left chart shows the growth in consumer subscribers and Satellite Services segment EBITDA over the last ten quarters. And the EBITDA value shown is without the effects of the settlement. And as we've mentioned, it's up about 91% on a year-over-year basis.

As we've discussed in the past, we are focused on driving value on our satellite fleet and we believe the earnings growth reflects that. Growing the absolute number of subscribers is a key part of that and the chart shows that we added over 16,000 net this quarter to end at about 657,000.

The right hand chart shows gross additions for the year ago quarter, previous quarter, Q1 and our current Fiscal Year 2015 second quarter. Gross adds are down year over year but up sequentially.

So that reflects a number of factors including availability of satellite capacity in high demand areas, variations in demand for our basic service plans across the satellite beams on ViaSat 1, introductions and tests of new service plans and specific geographic markets, our efforts at filtering new additions to improve involuntary and voluntary churn, seasonal variations in demand, variances in our advertising and promotional spending, and changes in our retail, distribution and fulfillment channels.

So in particular the most recent quarter benefited from seasonality relative to the June quarter, increased advertising and promotions, and introductions of new plans to lower demand markets in the middle of the quarter. We didn't show churn explicitly but it's down somewhat both year-over-year and quarter-over-quarter and if you'd like you can drive it from the net and gross charts.

The lower left chart shows steady increase in blended consumer ARPU on a year-over-year and a quarter-over-quarter basis. Consumer operating margins and unit economics have been steadily improving due to an effective combination of rising ARPU and ongoing fixed and variable unit cost reductions.

ARPU continues to benefit from growth in our voice-over-IP plans, introduction and option of higher priced higher valued service plans. In December of 2013, we also started our in-flight Wi-Fi service on Jet Blue, and portions of United Airlines which has been very popular with passengers.

We had almost a 50% growth in airplanes in service in our second quarter ending with 208 in service compared to 140 at the end of the first quarter.

The orange portion of the chart shows airborne terminals delivered, but not yet activated and that gives a sense of the rate of growth for the next couple quarters. Finally, we've also started receiving significant orders for government airborne terminals, which will also be used on our own satellites, and we anticipate that will begin contributing meaningfully to Satellite Services segment revenue once they are installed.

All these factors contribute to drive EBITDA growth that is much faster than the growth in absolute subscribers. Last quarter, we introduced a measure of subscriber equivalents that reflects the future value of current subscriptions using a capital adjusted contribution margin. That metric increased from about 900,000 last quarter to close to 1 million equivalents as of this quarter end. At the end of Q2 we had a little over 100,000 legacy subscribers remaining on the older satellites.

So one of the important market tests we began roughly around the middle of the second quarter was our new freedom plans and that offer virtually unlimited bandwidth in a few selected lower demand geographic areas. Market response to those plans has been very good resulting in quick and meaningful increases in demand and ARPU, so we had two distinct purposes for introducing those plans.

One is as a way to help spur sales and of course increases customer satisfaction in areas where lower population density means less absolute market demand. The other was to help us learn how to best define price and manage higher value service plans that will be enabled by our Next Generation space and ground technologies. So the US satellite broadband sector as a whole, while still small, grew by about 60% to over a combined 1.6 million subscribers based on the introduction of the two ViaSat 1 class satellites that are in service now.

We expect that ViaSat 2 will enable another substantial expansion of the satellite addressable market and this chart helps illustrate why we think that. So we've color enhanced the chart that was presented by FCC Chairman Tom Wheeler in September and what it shows is a number of terrestrial broadband competitors available for different speed tiers and that is based on NTIA survey data as the FCC compiled, and this data says that there should be somewhere around 8% of the market, where there's essentially no competition for a 10 mega bit per second downstream service, and that compares to about 20% of the market with no terrestrial competition for 25 mega bit per second service. So let's break that observation down into a couple of different thoughts.

So the very first column, the one that shows 4 mega bits has both people who can't get 4 mega bits and essentially it also has all of the underserved homes they can't get 4 mega bits they can't get anything. But as the speed tiers increase the number of people who are totally underserved doesn't increase with it.

What you're really seeing in those other columns, the 10 and 25 and 50 mega bits service is the underserved market. Those are people who want a faster broadband product, but don't have the faster speeds available. And as the portion of the market with no terrestrial choices increases, the fraction of that market that could be open to the faster speeds of satellite could increase too.

Second, as I mentioned before, all those underserved customers have a choice. They might be interested choosing a faster satellite product or they could just stay with a lower speed terrestrial one, if that better meets their needs.

There are two clear and obvious reasons why people would stick with a slower terrestrial service instead of going satellite and those would be bandwidth limits and latency effects. Of those, the bandwidth limits appear to be the dominant factor, so our initial test with the freedom plans are consistent with that, when we offer virtually unlimited plans at the same speed tier in a particular geographic market, even when we significantly increase the price point for those plans demand so far has increased significantly.

So, if we could effectively take bandwidth limits off the table we should be able to grow our addressable market and that would be even at the same speed tier. So we've been investing in technology that addresses all the market adoption factors I just described. Speed, bandwidth limits and latency effects. One of the main benefits from our perspective of the Loral settlement is that it generated a bunch of cash that can help us bring those technologies to market faster.

Our freedom plans are our best plans, but they are limited to our lowest demand markets, with ViaSat 2 we'll be able to improve both our best plans and make them available in the highest demand markets. We haven't yet decided exactly what those plans will be, where we will offer them, when exactly we will offer them or how we will price them, but we're confident that when we take advantage of those levers, our addressable market will be substantially bigger than what it is for the current basic service plans.

So our government business had a very good quarter in Q2 with strong sequential gains relative to the first quarter. The primary growth areas are information assurance and cyber security, tactical radios and data links and mobile broadband. We believe by the end of this fiscal year that momentum in those areas will more than offset the expected weaker demand we've seen in a couple of areas, notably those correlated with ground forces in the Middle East such as blue force tracking.

That growth is coming from a blend of funded new product developments and tactical data links and information security, increasing market share for our network security devises and introductions of new products in each area. The chart shows how revenue, adjusted EBITDA, and new awards for fiscal year 2015 second quarter compare on a year-over-year and quarter-over-quarter basis.

Revenue is slightly down year-over-year but EBITDA and awards are up both year over year and sequentially. Book-to-bill for the government segment is exceptionally strong, as I mentioned before at 1.5 to 1 year-to-date, and margins are strong with adjusted EBITDA up 9% on revenue that was actually down 5% year over year.

We believe we're well positioned for a very good second half on the strength of the orders in the backlog. Longer term, we see sustained growth opportunities especially in information security and global mobile broadband.

So in summary, we're pretty pleased with the results and the accomplishments in our second quarter. New company records in revenues, EBITDA and backlog are good indicators we're making progress in our integrated set of businesses. We set records in key financial categories even without the benefit of the Loral settlement.

Strong orders and renewed growth in core consumer and government segments lend confidence to our expectation of a good second half. So last quarter, we said we thought we could achieve EBITDA growth in our fiscal year 2015 that was close to what we earned in fiscal 2014 which was about 30% and that would have implied an EBITDA for this fiscal year of about $300 million. Given the $40 million of EBITDA benefit that we got at the second quarter, due to the settlement, currently we believe full year fiscal 2015 EBITDA could be closer to about $340 million.

We believe the main ingredients for achieving that are in place based on backlog in our government business and continued growth in Satellite Services along the lines of what we achieved in second quarter, relatively modest growth in net subscribers, continued gains in needed economics via higher ARPU, lower unit operating costs, increased adoption of our VoIP plans and development of the in-flight Wi-Fi backlog.

So that level of EBITDA would incorporate growth in technology R&D spending that's facilitated by the settlement as I mentioned before and that we think will boost our competitive position in the overall broadband services landscape, the wherewithal to accelerate these technology investments, as I mentioned, was one of our motivations for concluding the settlement when we did.

Finally, we see the benefits of our growth in the government segment and steady progress in the Satellite Services segment on both consumer and air and mobile will sustain growth in fiscal 2016 and beyond. We think we can aim to grow at our 20ish percent compound annual EBITDA growth rate again in fiscal year 2016 building on the fiscal year 2015 results, subtracting out only the $20 million breach of contract non-recurring portion of the settlement gain.

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

Thank you. (Operator Instructions)

Our first question comes from the line of Matt Robison of Wunderlich.

Yes, so is the remaining $68.7 million, if my arithmetic is right are from the SSL award, is that included in the satellite backlog or bookings?

Yes, the remaining value is in the Satellite Services backlog.

Okay, that was my question.

Thank you. Our next question comes from the line of Tom Quillin of Stephens Inc.

Hi, good afternoon.

Hi, Tom.

That was a brief question I guess everybody wants to get home on a Friday, but Mark I think you talked about the potential for subscriber growth to go even higher than 16,000 as you move into the third quarter.

How much did the freedom plans contribute to the net additions in Q2 and because they were introduced maybe mid quarter, is there potential to go up quite a bit from 16,000 or just a little bit?

Those plans are only in our lowest demand beams so they're a pretty small fraction of the total gross adds that we had for the quarter. I'd say the opportunity for higher growth in the December quarter would come more from the increase in retail distribution that we got, we talked about Perfect-10 adding to our retail distribution and probably a little bit stronger seasonality and also we'll benefit because in the fraction of the area where we do have the freedom plans we'll get them for a whole quarter instead of a half a quarter. Those would be the main ingredients.

Got it and then on churn --

I would, Tim just say one thing and one is that while we increased our advertising in that period to take advantage of the seasonality, we also pulled back out of the markets around election timeframe, so there's some mixed things going on in the quarter.

That doesn't change anything Mark just said. I just wanted to make sure you understood that.

Right there wasn't any other commercials except political adds.

Right.

At least here. So on the churn, so the churn I think is coming down very gradually, but still high. Can you talk about how that varies by channel and some of the things, some of the encouraging things that you might be seeing that suggest that churn will continue to come down?

Yes, I mean we've talked about churn in the past as having two components, the involuntary and voluntary churn. Involuntary churn, mostly has to do with the ability to pay and so we've been trying to be careful at screening. I think this is sort of a -- we mentioned it last quarter, has more of an industry-wide effect and I think that seems to be the case, so we made good progress there.

The voluntary churn has more to do with, as we talked about it before, sort of matching expectations and fit of the service to the people that buy it and so one of the things that we're learning, especially through the freedom plans, is that people who get to use as much bandwidth as they want are a lot happier, so we're I think that over time, one of the ways in which we will be able to reduce the voluntary portion of churn we think fairly significantly is through being able to make the plans better, even if they are higher priced. It's a better match customers expectations right now since those plans are a small fraction of our subscriber base that impact is not that high.

The other factor that's been good for us in voluntary churn is in the retail dealer channel. That is those dealers that not only sell the equipment but install it and service it, so the fact that we expanded that channel is likely to have a, over time, beneficial impact on our voluntary churn rate as well.

Good, and then on ViaSat-2, can you tell us as close as you can what the launch timing might be and do you see any risk of Jupiter 2 coming to market earlier and maybe have an ability for [hues] to raise caps before you're able to launch ViaSat-2 and raise caps on your own?

Okay, the schedule for ViaSat-2 hasn't changed. We are looking at completion during the middle of the second calendar quarter of 2016 and a launch sort of mid-year 2016, that's sort of a timeframe for that. It's possible that Jupiter 2 could be in service sooner. I think at this point we're sort of looking at the [vague arees] of the actual satellite integration and test schedules and the launches, but we should be prepared for that.

I think that one of the things that we think is fundamental, we've always talked about, is the unit cost of the bandwidth is really the dominant factor in the amount of bandwidth that you can offer, not necessarily in the speeds that you can offer, but in the volumes of bandwidth and we think that the unit bandwidth of Jupiter 2 from what we can tell, the cost of bandwidth is really probably not that much different from Jupiter 1 or ViaSat-1. It's one of the reasons that we took such care in the schedule and timing of ViaSat-2.

We think it's substantially better at the unit bandwidth economics which is what translates into the volume of bandwidth so basically, it doesn't appear to us that that really would change what you could do with Jupiter 2. They could offer more bandwidth now or later. It's really more I think a competitive factor than an economic factor.

Just the last question, when do you expect to start building ViaSat-3 and what might the bandwidth economics look like on that [birth]? Thank you.

Okay so we are very focused on the long term. One of the things we're excited about with our ViaSat-3 plans are that we think we can do a lot better on [its] economics and that again we think it's a really strong factor in the market. We don't really have anything else to say about ViaSat-3 at this point. I think, maybe next year we'll be able to talk about it more.

All right, thank you.

Thanks, Tim.

Our next question comes from the line of Rich Valera of Needham & Company.

Thank you. I just wanted to understand the mechanics of the flow through of the settlement money. Did I hear right it's about $6.8 million you expect per quarter going forward?

It's about $6.9 million.

So that will come through as revenue with no cost in services revenue, that's correct?

Predominantly it's going to come in as product revenues and the satellite service segment with a small amount of it going into interest income.

Okay, and then you mentioned you plan to increase R&D and take some of those funds effectively and reinvest them into sort of bandwidth enhancement technologies, so how should we think about the R&D line going forward relative to recent levels and likewise on SG&A, how should we think about the normalized level now that you're through with the legal side of things and just give sort of a good baseline for those two lines that would be really helpful.

Sure. The R&D line I think what Mark talked about a little bit was that, we're going to be looking at, we have some really good opportunities both in payload technologies as well as in commercial mobility so I would expect in the second half to see a lift to where we are today and I think from the G&A perspective, looking at Q1 might be a better marker and then probably just lift that a little bit with the additional stack that we'll have in Q3.

Rich, [I did this] Rick. I do think that, and for everybody, we're as Mark said we're going to spin some of the proceeds of this stuff on to accelerate some R&D so do want to make sure everybody just doesn't add it on top of what you had out there before.

You mean in terms of the proceeds?

Right.

It doesn't just flow right through to the bottom line, I understand. That makes perfect sense. And then on the commercial network side, understanding you have the MBN headwind this year but can you give us any sense of how you're looking at that business for the year as a whole?

I mean it looks like it's going to be down for the year, but any sort of fine tuning of that would be helpful just to give us a sense of what you're looking for in the second half or maybe second half relative to first half. Any color you'd be willing to give would be helpful.

I think that we've said it's coming down. We've got other projects that are increasing our XCI projects coming up, and I think in general, what we gave you is some aggregate guidance and we haven't even been given that Rich, so I think that we'll just not guide by each one of these elements here.

Okay, fair enough. I figured I'd ask. And then just wanted to get a sense -- maybe this is for you Mark. If you didn't have issues with some of your higher demand beams filling up essentially if you had the same capacity you had on day one with ViaSat-1, can you give a sense of where you think your net adds would be today, totally uninhibited by bandwidth restrictions?

Just trying to get a sense of has the market changed or would you say the market opportunity is sort of the same as it was day one and that the flowing in additions is mainly a function of restricted capacity, just was hoping you'd give some color on that.

Okay, sure I'll be happy to. No, I wouldn't say that the main issue is just capacity and the way to think about it is that when we brought the service to market, which is almost three years ago, 12 megabits [which is where we are] is a higher than the average speed for the country and now it's probably a little bit lower. Also, bandwidth consumption has in that three years probably doubled, so I would say that probably the biggest factor is that if we didn't change the definition of our service plan, the demand for those plans would be lower, so the good thing is we aren't locked into the definition of our service plans.

We can increase them and what we're trying to do, and we sort of described this before, of what we're doing right now is I'd say we're a little bit in an optimization mode where we sort of can harvest the value of ViaSat-1 and try to do tests which are really in more behavioral economics and the way I'd describe it is one of the ways we can neutralize the effects that I described before of growth in the terrestrial market is we could say well instead of 10 gigabyte plan we have a 14 gigabyte or a 16 gigabyte plan instead of 12 megabits we're offering 15 megabits but those, we think that those, that subscribers don't necessarily value the incremental additions in gigabytes or speeds at our marginal cost.

There's sort of a disconnect there, so what we're doing is we're coming up with plans that speak more to how subscribers think and they do when we make more, say, more discrete steps in the value of the plans especially in volume so for instance we've done evolution plans that have unlimited use except for streaming video and we've done the freedom plans that have completely unlimited use and we are trying doubling the volume caps, as an example, or tripling them.

We're testing all those things, so I would say we'll implement some of those in selected markets, in the way that sort of optimizes our revenue, we'll get higher value for those. That's probably what you'll see happening over the next couple years.

I think we'll be able to expand the areas in which we offer some of those plans and we'll probably get a lot higher speeds and then we'll see a big step increase when we have ViaSat-2 and the geographic coverage of those plans and then the quality of the plans and that's how we will grow the market. Does that answer your question?

It does. That's helpful. Yes, thank you very much.

Okay, thanks.

Our next question comes from the line of Mike Crawford of B. Riley. Your line is open. Please go ahead.

Thank you. Can you talk about your Global Aero Terminal and how the ability to offer Ku, Ka roaming to both commercial and government VIP aircraft, what you think that opportunity is for ViaSat? And also, how you're going to recognize that given that some of that revenue has been in government systems in the past with the [gulender] service as opposed to Satellite Services?

Okay, so the deal with the first part is one of the -- so one of the things that we did and we talked about this is integrated Ka, Ku terminal which we've been able to show to selected customers especially government ones and one of the most valuable things that that did is we were able to show two customers that the quality of satellite service that they could get was really a property of the satellite and not just the terminal because here we took the same terminal, Ka and KU.

And we showed them here is what you do with that terminal when you play it over KU band and here is what you can do with it when you play it over an older Ka band satellite like [andycap 2] or AMC 15 or 16, those are sort of 10 year old vintage satellites and then here is what happens when you play it over ViaSat-1 and that really helped people understand the value of using that type of satellite, so what that drove was people who would take the natural reaction [as not] what I want is, I want to use those kind of satellites whenever I can and that would be ViaSat-1, ViaSat-2 [youdulsat] and I'll use the other satellites when I have to and that is exactly the reaction we're trying to evoke and it worked really really well when people can see it that clearly so that has sparked a lot of demand in the government market.

We're only seeing sort of the start of that now, but we think over the next year or two, that will turn into equipment orders and services orders and we're starting to get some of the commercial customers sort of understand the same effects, and I think in terms of how we will account for that revenue. Shawn, do you want to talk about where the different pieces will show up?

Sure. So the product sales continue to be showed in the government side of our business and then the other side from the service streams if their premium customers that are on the Ka, Ku network, that will show in the government as well.

And those are more, generally they're private network users, where we have specific contracts with those customers delivering a level of service that is different than quite a bit above what we provide to commercial airlines.

Okay, thank you. That's helpful, so we didn't see any significant orders relative to that yet in the current bookings?

Well, we have had some orders, but we haven't called them out separately.

Okay, thank you. And then, even broader question is, what, if you can, discuss please opportunities and threats to your business that you see with both small satellites as an alternative or addition to and also terrestrial low power service.

Do you mean in the consumer space?

I think it would primarily be in the consumer space, yes.

So, we don't really see small satellites as a threat for quite a while. We're actually pretty interested them and we are doing work on them. We worked a lot with O3b on their medium earth orbit satellites. It's an area we're interested. We don't quite see it -- we don't see it as a threat.

I don't know maybe in the future we see it as an opportunity more than a threat I'd say. In terms of the terrestrial services or terrestrial low power service, the terrestrial wireless services like Verizon HomeFusion and probably along the lines that AT&T is talking about as expanding their footprint with the DirecTV merger, I think those can make sense. I think that it's never say never.

We don't know what with the service providers will do. We don't think that the returns on those services and the use of that bandwidth is as good as mobile service. We would be a little bit surprised to see them getting up in the 50 megabit unlimited service range or 25 megabit unlimited service range, so I think the competition is always a factor and we pay attention to it, but we don't see it fundamentally changing our outlook for our business.

Okay, thank you Mark and then last question relates to interest you are or aren't seeing in someone else taking up ViaSat and Boeing on your offer to supply ViaSat-2 architected type partial or full pay load system.

Okay, so we continue to look at that. We have, these are big capital projects, $600 million projects but we have a few candidates.

We're also looking at a way to take our technology and deliver it in bite size chunks. So chunks that would be smaller than that which is what you've seen others satellite operators do in the market. Where they will buy a satellite, pick a number, satellite in orbit that might cost half of what ViaSat-2 would cost but deliver 1/4 or a 1/5 or 1/6 of the bandwidth. So the bite is smaller, the purchase price is smaller but the unit economics are proportionately quite a bit worse.

But there seems to be demand in the market for those project sizes so one of the things that again that we wanted to be able to do with the settlement was to be able to turn our attention away from having to deal with our old technology and towards being able to come up with offers based on our new technology. So we're working on that and I think over the next couple quarters, we'll have more to say about that which we think has probably a broader demand than the expensive ViaSat-2 class satellites that have better unit economics but are daunting for a lot of operators.

Great. Thank you very much.

Thanks, Mike.

Thank you. Our next question comes from the line of Andrew De Gasperi of Macquarie Capital. Your line is open please go ahead.

Thanks for taking my question. Just had -- on the ARPU side I was wondering if you could maybe map out for us what the impact would be going forward from the promotional activity on your unfilled beams versus your filled beams.

Okay, so those are adding to ARPU, first of all we don't have any filled beams. Oh, yes. Okay.

So we talk high demand, low demand areas but basically the ARPU on those is higher, so even though they represent a relatively small fraction of the total plans, they have a good lift for ARPU. It's a measurable lift for ARPU as a whole.

Right, and secondly, can you remind us what the opportunities would be if the SEC redefines broadband download speeds at the end of the year?

Yes. The SEC is looking at experiments for different speed tiers. They are trying to figure out what constitutes good broadband.

From our perspective and I think this is part of the point of Chairman Wheeler's discussion and presentation is that as those speeds go up, their minimum speeds go up, it makes the market of unserved and underserved look more attractive, bigger for us because it's pretty straightforward for us to be able to deliver 25 and 50 megabit per second speeds. So overall we think that that creates opportunity for us.

Great, thank you.

Thanks.

Our next question comes from the line of Michael Funk of Bank of America Merrill Lynch. Your line is open, please go ahead.

Yes, thank you for taking the questions. Just a few this afternoon. Maybe you could give us some color on the mix of wholesale and retail gross adds.

Obviously Dish had some commentary the other day about fill rates of beams, now it's kind of impacting their business. And then second, you comment on seasonality. I'm pretty familiar with seasonality across broadband historically. Just wondering if most of what you're seeing is related to college students or snowbirds and how we should think about maybe it's a quarter-over-quarter change there going from 3Q into 4Q.

Okay. So just on the seasonality part, some of them may have to do with our distribution channels, but we see demand lower in the spring quarters basically and I think maybe it has to do with people's movement patterns having to do with school years. We see more of a lift in the summer and around the holiday seasons.

Late summer holiday seasons tend to be the best times for us. Did you want to add anything, Rick?

No, I think that's fine.

I mean is there any quantification there where you think of seasonality versus just normal demand?

Well for us, normal demand.

Well what would you think would be it other than with seasonal trend? I'm just trying to think about the quarter-over-quarter change here, how to think about that.

Yes, so I think going quarter-over-quarter, and I'll come back -- I want to come back to the first part of the question. But going quarter-over-quarter one of the things that we've seen is that the holiday season, people buying new devises or new computers tends to stimulate demand for broadband plans, especially if you'll go into a home and they get new tablets or iPads and that drives demand for streaming.

Basically one of the things that works for us is we have a higher speed and if you have a lower speed DSL going back to the whole issue of underserved stuff, you have low speed DSL or low speed wireless, then you try to use two or three tablets at a time it just doesn't work.

You just don't have the speed to do that. And so that's one where I think people's awareness of satellite probably grows, especially if you advertise it and that creates opportunities for us especially around the holidays and maybe just after. But there are and I made up this long list of factors that contribute to what happens to us quarter-over-quarter.

And I would say our business is so new in many ways and marketing dynamics are so new and changing it's hard to ascribe pure seasonality just because we're changing so many things and on the overall though, I think our mix of retail and wholesale, it might be trending up a little bit, but it hasn't really moved that much over the last four quarters.

Some of that has to do with the way the legacy subs playoff and the new subs come on, but it hasn't really changed that much. Of course there's always a potential that can change and that in itself, given the numbers that we have, would make a meaningful difference in a quarter-over-quarter basis.

And I'm just trying to get a sense of the traction you're getting on the retail side and the efforts you put forth there versus maybe Dish's dynamic shifting from Hughes to your satellites because of capacity at Hughes and obviously they have different meanings so I'm just trying to get a sense of that.

It's what you'd think in the long term is that in order to preserve the integrity of the service, in order to preserve quality of service which not everybody might. But you want to preserve the integrity of the services, there's only a certain amount of over subscription or a certain amount of provisioning that you can support. So what you would think is that if one gets way ahead of the other in subscriber counts, that if they want to preserve the integrity of that service, that they are going to end up -- that Dish if they are drawing from both of us would eventually need to equalize that to some extent.

That's I think the biggest macro effect. There are some assumptions based in there and our overall footprints aren't exactly the same and the bandwidth allocations with specific markets aren't exactly the same so there's a bunch of factors in there. But the macro one is probably true. Maybe, we'll see that next year, maybe we won't.

Thank you for the time.

Sure, thank you.

Our next question comes from the line of Chris Quilty of Raymond James. Your line is open, please go ahead.

Thanks, just wanted to start off with a clarification, I think your original guidance was for $300 million of EBITDA and if I'm doing the math correctly you're assuming settlement related proceeds of about $54 million for this year and you're raising your guidance to $340 million so my question is, am I doing my math right, and if so, where would you attribute the downward delta [of] $14 million in the core business?

What we said -- I think basic idea is pretty close to correct. What we said is we'll spend some of that in increased R&D relative to what our plans were before and, at this point, that closely would account for the difference.

Okay, also just on the ARPUs, I know there's an effect in there with the aero. Can you talk to, if you exclude the contribution from the aeronautical, what were the core consumer ARPUs doing in terms of quarter to quarter or year over year?

Chris, we don't have, our ARPU that we talked about doesn't include anything for aero. It's really just residential and it's a blend between wholesale and retail.

Okay, perfect. Also on the Yonder or the Ka, Ku effort, I know that Yonder network is pretty reasonably global but can you talk to whether if you were to sign up commercial airline, is there enough capacity there on the network that you could support one or more airlines in a dual-mode capacity or would you have to beef up some of the beams beyond what you currently have in place?

We've been steadily adding capacity to the Yonder network based on what our subscriptions require based on the expected utilization of aircraft demand in the beams and the particular customers that we sign up. So we would take that into account if we got commercial airlines. We absolutely are talking to commercial airlines about hybrid Ka, Ku. Which would include either using capacity that we have available on the network or expanding that capacity.

In terms of expansion capacity a lot of the Ku capacity that's being built for global mobility tends to be high throughput Ku which, I guess, just a basic question. Can you run your ArcLight modem across some of those satellites being built by Intelsat and others or would you have to add a third modem into the aircraft in order to be able to use those types of beams?

So from a technical perspective it supports it. From a business perspective we're still talking to satellite operators to understand the most economical way for us to use their capacity and it doesn't necessarily require additional modems. It depends on the equipment that's on board the aircraft and the modes in which it's used.

Okay, back to the consumer for two final quick questions. One is can you give us the -- I think you indicated the churn was down in the second quarter. Can you give us the churn both sequentially and year over year? I think Shawn said it was in the charts but I didn't see it at least directly in the charts.

Sure, so for this quarter the churn was about 2.7% and that we said it was down from Q1. It was down a couple percentage points, 2.9% basis points I should better say, so last quarter about 2.9%.

And then on the year-over-year period?

It was about the same last year, 2.9%.

Okay. And then the final question just in terms of the ViaSat-1 capacity, I think in the past you've said you've got a capacity of about 900,000 and just wanted to clarify. Is that a capacity at current rates, their rate plans, or is that the capacity given what you anticipate the new rate plans to be with ViaSat-2 and the fact that you'll likely have to step up the data rates for your existing customers, data rates and/or data gaps?

Just to review that. When we first announced ViaSat-1, we talked about a million subscribers and that was sort of at the nominal plans that we introduced which exceed 12 plants so about a million. And then what we said is we were going to take about 10% of that capacity away for other applications especially things like our commercial and government aero ones and that left 900,000. For those plans at -- sort of [rememoring] that that was at a point somewhere around it, now to a year from now, based on expected bandwidth usage and what we've talked about since then is we found a lot depending on how we package the plans, we get more value from subscribers and it's a good trade.

The subscribers actually like the plans better and we can earn better returns on the satellite by doing that. So, that was kind of the point of our equivalent subscriber discussion last quarter, which is we're not talking about a specific number of subscribers because we're trying to match this behavioral economics effect that I described which is the best fit of what the subscriber expects and what the prices would be. So, for your question, yes, what [it] happens is that if we offer plans that have higher bandwidth consumption, the number of subscribers on those plans would be less and so what we'll end up with is a blended amount of subscriber account that we'll end up with and that number's going to constantly shift. And one of the things we've learned really well over the last few quarters is it's kind of silly to say we're just going to have X number of subscribers on one basic plan that we think we're way better off not only on ViaSat-1, but on ViaSat-2 adapting our pricing and our provisioning to best fit the market. And that's what we're doing.

I think the net effect of that is the actual number of subscribers becomes less and less meaningful and it's really about EBITDA and value generation [of] the satellite.

That is basically what we're finding on -- seems to make sense on a theoretical basis, but certainly out in the market, on an empirical basis, we're getting lots of validation of that.

Okay and just a technical question again. I know I believe you're building out entirely new gateway infrastructure for ViaSat-2. Will the ViaSat-1 and ViaSat-2 be fully forward and backward compatible or will there be a requirement if somebody wants to migrate up-plan to have to do an equipment slot? I guess the same question would hold for the aviation market.

Yes, so we are constantly evolving both our space and ground technology and that's one of the things that's pretty [careful] to say that we can do things on both space and ground that can achieve the market effects that we want. So what we're trying to do is make those bandwidths be interchangeable and that involves gradual evolutions of what we do on the ground for ViaSat-1, as an example, which is exactly what we've done with the older satellites [and then get to them all blue one] is that we can apply infrastructure improvements to those, which means the terminals can go back and forth as an example or at least certain classes of those terminals can. So that's the approach that we're going to use.

Technically, we'll be able to achieve the market effects we want on either satellite and it will involve some migrations on the ground to give us the flexibility to do that the way we want. But I wouldn't think about -- what we won't end up with is big wholesale equipment swap-outs in order to achieve the effects that we want.

Perfect. Thank you very much.

I think that's, Mark, that's times that I think we were trying to get out of here in an hour.

Okay, good. So I guess that concludes our time for this quarter. Look forward to speaking with you all next quarter as well.

Ladies and Gentlemen thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.