Viasat Inc (VSAT) 2015 Q4 法說會逐字稿

Welcome to ViaSat's FY15 fourth-quarter earnings conference call. Your host for today's call Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thanks. Good afternoon everybody, and welcome to our earnings conference call for the fourth quarter of FY15. I'm Mark Dankberg, Chairman and CEO. And I have here with us Shawn Duffy, our Chief Financial Officer; and Keven Lippert, our General Counsel. And Rick Baldridge, our President and Chief Operating Officer is attending by phone. Before we start, Keven will provide our Safe Harbor disclosure.

Thanks, Mark. As you know, this discussion contains forward-looking statements. This is a reminder that factors could cause actual results to differ materially.

Additional information concerning these factors is contained in our SEC filings including, our most recent reports on form 10K and form 10Q. Copies are available from the SEC or from our website. That's it. Back to you, Mark.

Okay, thanks. We'll be referring to slides that are available over the web. And I will start with some highlights and a top-level business overview. And then Shawn will go over the consolidated and segment financial results. And I'll give some additional details and color on each of our segments. And then I'll summarize our outlook, and we can take questions.

The headline for the fourth quarter and FY15 as a whole, certainly growth in adjusted EBITDA. That increased 55% and 56% in the fourth quarter and FY15 year-over-year respectively. We achieved that on relatively modest year-over-year revenue growth of 6% in Q4 and 2% for the year. The numbers really reflect our continuing transformation to capture the value of our technologies by bringing services to market.

In FY15 we had pretty difficult year-over-year comparisons in product sales for two main reasons. We had declines in certain government product sales, especially our Blue Force Tracking 2 System, and a difficult comparison because of a bulge in product sales last year for our large National Broadband Network Project in Australia.

But strong growth in Satellite Services, especially consumer, but also in enterprise and government, overcame those headwinds in revenue and they drove strong growth in adjusted EBITDA. Services made up a growing proportion of our total revenues, and through steady operational improvements as well as leveraging the benefits of our bandwidth economics, we increased the margins on those services businesses too. Shawn will go into more depth later, but for FY15 we grew adjusted EBITDA by about 38% year over year, even excluding the nonrecurring effects of the Space Loral settlement regarding the ViaSat 1 intellectual property.

By now it should be clear that our growth rate is not so much constrained by aggregate demand for our Satellite Services as it is by availability of bandwidth and the transient mismatch in the geographic demand compared to our bandwidth supply. We're in some form of capacity rationing regime in about 0.5 of ViaSat's 1 coverage, while yielding better than projected unit operating results.

Our services for commercial airlines and government customers are growing. And since those are mobile services, they're actually helping equalize demand over the whole coverage area. The new service plans we're introducing and testing in lower demand geographic markets are helping us improve customer satisfaction, prove new bandwidth management efficiency technologies and test market in anticipation of the ViaSat 2 satellite.

All these factors have helped us enhance our consumer distribution and fulfillment channels and improve operational alignment with our existing partners. In the past few months we've had some significant accomplishments in both commercial aeronautics and government markets that we expect will drive services growth in both of those.

So until ViaSat 2 launches and enters service, we believe we have something of a high-class problem in balancing the bandwidth demands among these customer and distribution bases. Nevertheless, because of the underlying demand driving our services businesses and our government business as a whole, we still have a good opportunity to continue to grow adjusted EBITDA at about our historical 20% compounded annual growth rate, excluding the non-recurring effects of the Loral settlement, even for the time interval before ViaSat 2 goes into service.

This is also a good time to point out that one of the most important and unique elements of ViaSat 2 is that it's fundamentally a new system design that significantly improves bandwidth economics, geographic coverage area, and it substantially improves our ability to better match bandwidth supply to time bearing geographic demands. We think that's a unique combination in the satellite industry, and it's one of the reasons we're so enthusiastic about the results we've achieved this past year.

We believe a combination of those ViaSat 2 technologies enable real competitive advantage in each of our target markets.

I will get back in a little while to go into more depth on the businesses and our outlook, but now Shawn will go into more detail of the financials

Thanks, Mark. Slide 5 shows revenues and adjusted EBITDA performance for the fourth quarter and fiscal year compared to the same period a year earlier. As to our revenue performance, Satellite Services continues to be the clear driver of overall revenue growth, offsetting declines in Government Systems and Commercial Networks for FY15.

Our Satellite Service segment is being [sold] for multiple dimensions. Growth in overall sub-base, strong increases in revenues earned per sub, as our Q4 ARPU reached over $54, and continued growth in broadband aviation revenue.

The wind-down effects of two very large, very successful programs drove the year-over-year top-line reductions in our Government and Commercial segments, The VST program completion last year in the Government segment and the NVN co-program in our Commercial segment, which will continue to scale downward to completion in FY16. An important notable in our Government segment was its record award year, pushing government backlog to $382 million, an increase of 36% year over year; which is a pretty strong metric as we look outward to this market sector.

Our adjusted EBITDA growth continues to be significant, both in the quarter and for the full year, closing out at $345 million, $123.6 million year-over-year increase. Strong top-lines plus margin expansions as we steadily improve unit profitability on our existing customer base drove the Satellite Service segment performance, as Mark mentioned earlier. Additional margin gains and reduced R&D in our Government mobility area, plus contributions from our newly acquired managed Wi-Fi service business, NetNearU, all in contributed to our FY15 earnings growth, setting a new record for adjusted EBITDA performance.

We talked about our top-line revenue and adjusted EBITDA results on the previous slide. The next slide highlights some of the other major influences on reported net income and earnings per share.

Our net interest expense declined $8.5 million from FY14, primarily due to more capitalize interest on ViaSat 2, partially offset by additional interest expense on our higher outstanding debt balances during the fiscal year. Keep in mind that our capitalized interest will continue to increase year over year as our total CIP balances grow with the construction of ViaSat 2, balanced by our decreasing weighted cost of borrowing, as draws on our revolver and EX-IM financing vehicles increase relative to our senior notes.

In taxes, we saw a large swing year over year from a net benefit of $26 million in FY14 to an expense of $13.8 million this year, primarily as a result of moving to a profit position. As we have mentioned in prior quarters, our FY15 taxes also include impacts from the retroactive extension of this federal R&D credit legislation.

Specifically looking at the year-over-year impacts, our FY14 included only three quarters of tax credit benefits, while in FY15 our results included four quarters of benefit overall, one from Q4 2014 and three from 2015. Up until the legislation expired yet again on December 31, 2014. So all in all, we recorded approximately $0.20 per share benefit this year which will not reoccur in 2016 unless the legislation once again gets extended.

Another important note around taxes is the relationship between our GAAP income tax expense and actual cash taxes. Through our acquisition of WildBlue in FY10 and other favorable tax elections on our asset base, we have been able to nearly offset all of our current year cash tax obligations, which is pretty favorable position to be in as we look outward to the next couple of years.

So overall we saw very strong net income growth, swinging by nearly $50 million from a net loss of $9.4 million in FY14 to net income of $40.4 million this year. Our non-GAAP net income performance was even slightly better, with $56 million increase from the prior year representing $1.14 per share improvement to $1.58 income per share for FY15. For reference, on the right side of the chart we have provided a reconciliation of adjusted EBITDA to net income and net income to non-GAAP net income to reflect the relationship between these metrics and the related components.

Let's turn to the next slide where we show graphically the change in non-GAAP net income between FY14 and FY15, which provides some context as we look outward to next year. Given the large increase in FY15 non-GAAP net income, we wanted to provide a walk forward of the major drivers contributing to this increase and show the relationships between our EBITDA growth and non-GAAP income, taking into account all of the below-the-line elements such as interest and taxes, as well as our year-over-year cost mix.

Starting at our FY14 non-GAAP income of $20 million, then moving to the right we see the $84 million increase in recurring adjusted EBITDA, as our overall core business continues to grow strongly. Continuing to the right, we see the additional $40 million of nonrecurring adjusted EBITDA we recognized in the second quarter related to the SSL settlement, followed by the unfavorable impact to income of $33 million related to additional depreciation and other amortization commensurate with our growing business.

Then sequentially, the effects of other nonoperating elements, with cap interest benefits of $8.5 million offset by a $43 million variance related to our taxes on our core income growth, net of the FY15 R&D credit benefit. The key takeaway is, we continue to grow, with FY16 reflecting good core operating adjusted EBITDA growth, which Mark will touch on a bit more later.

However, keeping in mind the significant nonrecurring items, the Q2 SSL nonrecurring settlement gains and our R&D credit benefits, plus shifts in our cost mix corresponding to our growing service business such as depreciation and amortization, is important as we look outward to FY16 earnings on a per-share performance basis.

Moving to the next slide, we have cash flow, liquidity and leverage information. Our cash flow from operations for the year grew by over 70%, or $144 million from FY14. This pretty closely tracks to the $124 million increase in adjusted EBITDA, plus a year-over-year improvement in working capital position.

Capital expenditures and investments for FY15 increased by $122 million from last year with two primary parts. First, due to our PP&E expansion, namely ViaSat 2; and second, associated with the purchase of our managed Wi-Fi business, NetNearU, in the first quarter.

Additionally we closed on $525 million funding commitment for ViaSat2 from the US Export Import Bank in March and have started making our initial draws. To recap, the loan is available to fund up to 85% of the cost under the Boeing contract, Space X launch contract and related insurance.

This includes amounts previously paid before the EX-IM loan was closed. Given the overall favorable interest rate environment, we locked in a fixed 2.38% recurring rate for the term of the loan.

Taking into account upfront exposure fees associated with each draw and commitment fees on undrawn amounts, the overall effective cost of the loan is approximately 4.4%, based on the expected timing of our draw-dawns, which is quite favorable to our existing fixed rate debt stack. This puts us in a very good liquidity position of over $550 million today. And I should point out that this does not include another $200 million of liquidity associated with the overall commitment with EX-IM bank, which technically becomes available as we make additional milestone payments under the related satellite contracts.

We closed FY15 with a net leverage position improvement to about 2.2 times our trailing 12-month adjusted EBITDA from the previous quarter, which keeps us in a very comfortable level position and provides us for a lot of balance sheet flexibility for other strategic opportunities going forward.

With that, I will turn it back to Mark.

Okay, thanks. The metrics for our Consumer business are consistent with our balancing act for bandwidth supply and demand across our target consumer enterprise and government markets.

The top left chart shows Satellite Services quarterly adjusted EBITDA has grown almost fivefold over the past 10 quarters on about a 50% increase in consumer subscribers. And note that we haven't increased our recurring basic service plan unit prices at all over this time period. We understand that to be competitive, unit bandwidth pricing should come down over time.

We've grown EBITDA through scale effects, operational improvements including subscriber acquisition cost and network work operations, churn reduction initiatives, an increasing proportion of retail subscribers through value-added services like VOIP, and higher price but higher value service plans, and by growing enterprise services especially aeronautical. Then over the past year we've made progress on some important aspects of the consumer business like better customer qualification criteria that help reduce involuntary churn, we've enhanced our retail distribution and fulfillment network, we've been testing new service plans in lower demand markets that help us frame the elasticity demand and customer satisfaction for service plans that deliver more bandwidth in different forms. And of course we've continued our operational cost efficiency initiatives.

So in general, gross and net add trends reflect seasonality and are moderating as the satellite builds, but we've continued to grow ARPU and EBITDA at a faster rate while aiming to carefully balance market supply and demand affects with the needs of our end customers and our distribution partners. As I mentioned, we're in some form of capacity allocation regime in over the 0.5 the beams of ViaSat 1, and that proportion's likely to increase.

Our basic a strategy is to continue to balance the long-term interest of each of our stakeholders, including investors, end users, and distribution partners for the time interval until ViaSat 2 enters service. But as I mentioned before, this still should offer good opportunities for a continued attractive EBITDA growth. This situation really highlights the importance of better balancing the supply of cost-effective satellite bandwidth with time bearing geographic demands.

ViaSat 1 was a breakthrough in satellite bandwidth unit cost reduction, but it actually reduced geographic coverage and didn't really address the flexibility. ViaSat 2 is a significant advancement for the industry on both fronts.

We believe it's in our best interest to keep our partners engaged in our long-term strategy so we can have the best opportunity to grow quickly when ViaSat 2 allows us to expand our addressable market through more attractive service plans. And we think our attention to service quality, which does constrain growth in the near term is a good investment in the long run for ViaSat for our end users and for our distribution partners.

In the meantime, we're also making important progress for mobility applications that inherently have more distributed geographic demand characteristics than those fixed services and could help improve financial results further. So the lower right chart shows how we've been increasing the number of Exede-equipped commercial aircraft in the past few quarters.

On the next two charts I'll talk more about our growth prospects through enterprise and government satellite services. We think this FY16 can be a very exciting year for our commercial aero-Wi-Fi business. We've worked really hard to support our launch customer, JetBlue, and their disruptive approach at bringing free Wi-Fi to the commercial airline business.

Fundamentally we believe that's the best way for an airline to capture the value of high-speed, high bandwidth connectivity is to drive passenger satisfaction by engaging all its passengers instead of just charging the highest possible price to a small fraction each flight. As JetBlue has rolled out Wi-Fi to more of its fleet, we're reaching a tipping point where this effect ought to become evident. And a few weeks ago, JetBlue's first-quarter calendar 2015 results included noteworthy gains in passenger revenue per available seat mile, or PRASM, relative to its industry peers.

We don't intend to attribute those results to in-flight connectivity beyond the commentary that JetBlue itself has expressed. But in discussing its first-quarter results JetBlue did emphasize both Wi-Fi and its revenue management's team performance. And it also noted that its tiered baggage fees hadn't yet become effective.

And we'd like to observe that if Wi-Fi were a key factor, than the revenue management team would be the one to capitalize on it. And that PRASM is the metric where it would show up. If that is sustained, JetBlue's out-performance in PRASM would dwarf any incidental revenue gain due to charging a small fraction of passengers outrageous fees for Wi-Fi. We think great Wi-Fi for all the passengers is going to be a very powerful way to attract customers.

Then to even add to that, earlier this month JetBlue announced a totally unprecedented partnership enabling its free Wi-Fi broadband Internet to offer unlimited instant entertainment from Amazon. We anticipate this will create even greater separation between JetBlue and other airlines and enhance the prospects for driving improved financial performance.

It can create a win/win/win opportunity to enhance the appeal of JetBlue's service, directly engage tens of millions of passengers with Amazon's catalog of Internet offered on-demand video and music content in both streaming and downloadable form and vastly increase both penetration and total engagement of in-flight connectivity while reducing the cost of other forms of in-flight entertainment. Needless to say, we're thrilled with the opportunity and we're working with both JetBlue and Amazon in exploring other ways to leverage these synergies.

There's also a pretty interesting footnote to this announcement. Given everybody's experience with the limitations of other -- every other in-flight Wi-Fi system, JetBlue and Amazon both wanted to see some form of a test flight that would demonstrate that we really could support dozens of simultaneous streaming users on a single airplane.

So one day they sent some testers with 30 smartphones, tablets, Kindles of all kinds on one single flight the length of the East Coast to stress test the Exede service by having all those devices simultaneously streaming video. Obviously, it worked. And not only that, that's along with the 300-plus other airplanes that flew that day. We're confident no other in-flight Wi-Fi service could do that even years from now without creating a black hole of bandwidth that would cut off dozens or hundreds of other aircraft from getting any service at all.

When ViaSat 2 enters the picture, we'll be able to extend this service to JetBlue's premium markets in the Caribbean, new markets in Mexico and Latin America and serve flights across the Atlantic. We're excited to see our vision of in-flight connectivity expand into the mainstream media markets and anticipate even more to come later this year.

Our Government business had a very good quarter in Q4, with record revenues and adjusted EBITDA and strong sequential performance relative to Q3. Similar to quarters earlier in the year, the growth areas were information assurance and cyber-security, tactical radios and data links and government mobile broadband.

As expected, those areas more than offset weakened demand in Blue Force Tracking and other products and services that were associated with ground forces in the Middle East. The chart shows how revenue and adjusted EBITDA for the fourth quarter of 2015 compared year over year and quarter over quarter.

At $150 million, quarterly revenue set a new record and it increased 6% year over year and 14% from the third quarter. Adjusted EBITDA also set a new record and was up 18% year over year. The overall expansion in the EBITDA margin is mostly due to the higher service mix, as well as improved service margins compared to last year.

FY15 was also a record year in terms of orders for Government Systems, and that enabled us to end the year with a strong overall book to bill ratio of 1.2 to 1. Another key factor in Government Systems is that we're expanding the fleet of government aircraft using our in-flight connectivity solutions for more general communications purposes, and that includes aircraft based in the US, which is a pretty meaningful departure compared to our prior applications which were largely outside the continental US.

So that increases our ability to use and demonstrate the benefits of ViaSat 1 bandwidth economics in real-world applications compared to any other existing or planned satellite mobility solution. Initial orders we've received have been for airborne equipment with subsequent purchase of connectivity services expected to follow. And that will add to service revenue in the Government segment, and potentially improve margins on our Satellite Services segment as proportionate network and bandwidth costs are allocated to the Government segment.

So switching to the outlook. Back when we began the ViaSat 1 project and our transformation from a products to a services-driven technology company, we switched our focus to adjusted EBITDA as the single best metric to gauge our earnings progress. This chart summarizes our annual performance in revenue and adjusted EBITDA over the past 12 fiscal years.

While, FY15 included a nonrecurring adjusted EBITDA benefit of about $40 million due to the Loral settlement on ViaSat 1 intellectual property, we still grew recurring adjusted EBITDA by 38% on a year-over-year basis compared to 2014, even excluding net nonrecurring effect. Over the past few quarters we've suggested a 20% compounded annual growth rate in adjusted EBITDA, also excluding the nonrecurring effect of the Loral settlement as a target for FY16. And back at that time that put our FY16 adjusted EBITDA target in the range of around $360 million.

While there are many factors that can cause actual performance for FY16 to be different, and if the right opportunities arise we might elect to accelerate certain investments to build long-term value, we still believe that range is a reasonable outlook for the year as a whole. In general, we anticipate good growth in Consumer Satellite Services' EBITDA due to continued growth in ARPU, improvements in operational efficiency, and relatively modest subscriber growth.

Fiscal first quarter is seasonally our most challenging quarter for consumer growth, and combined with these other demands for satellite capacity and the geographic supply-and-demand mismatches we've got, we anticipate little to no growth in net consumer subscribers in the first quarter but continued gains in ARPU and EBITDA. We believe the rest of the year could yield in the range of 10,000 to 15,000 net consumer adds on average per quarter, and again with increasing ARPU and associated earnings.

Anticipated growth in non-consumer aero and government applications could be a better fit between supply and demand, and that may impinge to some extent on the consumer subscriber counts. Opportunities for renewed government revenue growth year over year are good, based place on the strong FY15 book-to-bill ratio.

Besides government mobile satellite services, we continue to see good opportunities in tactile data links and radios and cyber-security. Recent contracts for government mobile broadband connectivity hardware increases our confidence in follow-on service orders. And our fiscal first quarter historically's been a slow one for our government segment. Company-wide we anticipate stronger earnings in the last three quarters of the year compared to the first one.

As Sean described earlier, the conversions from adjusted EBITDA growth to non-GAAP and GAAP income and earnings per share can be complex, and we really urge investors to model these effects thoughtfully. In the near term we see our current growth outlook being bounded more by this mismatch between Satellite Services' geographic demand and available bandwidth supply and less due to the aggregate amount of market demand.

Longer term we are very enthusiastic about our prospects for enhanced growth with the arrival of ViaSat 2. As I mentioned, ViaSat 2 is a very unique technology solution to that supply-and-demand issue that brings industry-leading improvements in geographic coverage, bandwidth economics, and flexibility in matching bandwidth supply to geographic demand.

ViaSat 2 satellite construction phase will complete this summer and then it'll enter integration and testing. Satellite performance and economic outlooks remains as we anticipated.

We see continued opportunities to grow our addressable markets through better improvements, greater improvements in satellite payload technology offering further gains in bandwidth economics, geographic coverage and flexibility. We see those technology improvements as the key root source of competitive advantage. And our FY16 outlook includes significant increases in R&D aimed at bringing these ViaSat 3 Class satellites to fruition. And we will update our outlook for that over the next couple of quarters.

That's it for our prepared remarks. At this point, we'll take questions.

(Operator Instructions)

Our first question comes from Rich Valera of Needham & Company. Your line is now open.

Mark, just want to get your take on the Gulfstream announcement you made today. How incremental do you think that is to the historical relationship you've had with Gulfstream, and if you could put any numbers around that, if it is incremental? Thanks.

I wouldn't putting any numbers around it. As we mentioned in the release, we've had a good long-term relationship with them. And now we're working with them directly.

I think it's a good endorsement for our technology. And I think also it really paves the way for us to introduce K-band into that market, which is obviously one of our main objectives, given the impending launch of ViaSat 2.

Got it. That makes sense.

I don't think you actually addressed it, but it looked like churn bumped up a bit quarter over quarter. Can you talk about what maybe drove that bump in churn and how we should think about churn as we look into this fiscal year?

Yes. There was an incremental churn in the quarter. And the main thing is, don't think of -- we don't think of churn as a single monolithic thing across all of the subscriber base. It tends to -- it's specific to the different distribution channels and the attributes of the subscribers that come in those channels and different point in time.

And in this quarter we had, for one of our channels sort of a big cohort of subscribers that went through a two-year anniversary of their initial subscription plans and probably had higher churn rate among that cohort than others. And that's what led to that overall churn increase for the quarter.

Got it. So when we're looking for the balance of the year, you think we can be back in the 2.4% to 2.5% level that we've seeing recently?

I think it's a little over 2.5%.

So around 2.5%-ish?

It's going to be a little higher than that. More like 2.6% or 2.7%. Somewhere in that rate. I think we're sort of in that range.

You were about 2.7%, I think, this most recent quarter. I thought the quarter before that you were --

2.6%.

About 20 bps lower.

Okay, yes.

You think more like the most recent quarter or the one before it, or somewhere in between?

Between.

I think between is probably a good metric.

Very good.

Then you gave the guidance for flattish net subs in the first quarter and then 10,000 to 15,000 in the balance of the year. I'm just wondering how you think about the gross sub adds as you work through the year? And as you noted, the capacity issue is becoming, I would think to some degree, a bit of an increasing headwind as time goes on. But you seem to feel reasonably comfortable that you can keep adding, I think, roughly the same number of gross sub adds.

Just wonder if you could talk through those dynamics a bit? How much of that maybe is using more of the unutilized beams? Any commentary (multiple speakers).

There are a number of factors involved. Some of it is using the underutilized beams.

One thing is that would certainly become -- well, because we are capacity constrained we've been investing more money in what I would call harvesting and grooming, that is capturing pieces of unused bandwidth by reallocating some of the bandwidth across our fleet. And that's frees up some bandwidth, gives us some growth.

The other thing is, we've invested a lot in analytics and metrics in the way we can drive call volume and how we can convert that call volume into subscribers. So we've talked about over the last few quarters, I think we were reducing our cost for those, or improving our ability to do that. In some sense that is a little bit of a balance against the ceilings that we are running into.

I think those are most of the factors that give us confidence that we'll be able to get to those levels. I think we've done -- we feel like we've been able to understand and forecast sort of the effects of the different distribution channels.

Again, it's not a monolithic. There are different characteristics for each of the channels. And this represents a net balance of what we expect of all of them in aggregate.

That's helpful. Thanks, Mark.

One more for Shawn. Just want to try to understand the tax situation for FY16. I know at one point you said there's essentially you are expecting a $0.20 hit year over year, assuming the R&D tax credit doesn't get reinstated.

Is that the main reason for the higher tax expectations this year? And is there a rate you could associate with your -- kind of a pro forma tax rate you could give us to model?

Yes. Probably a good, what we talked about the past, is looking at the statutory rates maybe somewhere like 37%, 38%. And then that's probably a good target for next year, just kind of taking out the R&D credit benefit.

And then if you got that, obviously whatever, it'd probably be retroactively applied, whatever, for the year, so --

Yes. We would have one credit that would coming from this quarter if it comes into place that could fall into next year as well.

Okay. That's helpful. All right, thank you. I'll yield the floor. Thanks.

(Operator instructions)

Our next question comes from Matt Robison of Wunderlich. Your line is now open.

Thanks for taking my question.

I wanted to talk a little bit about ViaSat2 and the launch plans there. We're still talking about late summer 2016 and using the Falcon Heavy vehicle, is that right?

Yes.

I looked at something on the web. I don't know how current it is. It looks like you guys might be the first flight after the Air Force for Falcon Heavy. Is that right? It looks like you got in there in the schedule ahead of InnoSAT, right?

I think we'll be, depending on how things go, the third or fourth flight of the Falcon Heavy. And that includes an Air Force flight and the Inmarsat flight. I don't think InnoSAT has a Heavy booked, but Inmarsat does.

I guess I was looking at some old information. When should we get an indication of how that launch vehicle is making headway according to schedule, do you think?

I'd follow Space X's progress in the news. We have -- we are, as part of our agreement with Space X, we are allowed to participate in design reviews and status certification milestones along the way. And so we have pretty current information. If we believe that that moves materially, we will disclose it as well.

Do you have a Plan B in place at this point?

I'd say we're always figuring out something, assuming that that schedule stretches unreasonably long. Right now we don't expect that, but we'll have some contingency plan for that.

As far as -- is that really the principal calendar item, or should we also be considering the spacecraft manufacturing side of it at this point?

I think that satellite manufacturing has gone pretty well. I did mention the construction is going to be complete this summer. I think that's pretty predictable. You always go in to integration and test.

We think that, given the visibility we've had into the way that the subsystems have come together, we don't anticipate big delays there. It's possible there'll be some. I think that we're probably right now, people ought to be a little more focused just on the launch schedule.

Okay. Basically you will have about the better part of the year of integration and test time -- well, and transport time, I guess?

Yes, it's less than a year. But yes, in that range.

Did you mention that part of your churn was attributed to folks coming off of contracts, to your contracts?

Yes, that's one of the -- for a cohort of subscribers through a particular channel. There was a bulge of that. And the churn rate for those particular subscribers was a little higher, and that drove the weighted churn for the quarter.

And what drove the ARPU so high?

It's the same things we've been talking about for the last couple of years.

(Multiple speakers) customers better and fine-tuning and that sort of thing?

Well, the big things are again, it's greater increase in the proportion of retail subscribers. It's higher value, higher priced plans. The value-added services like VOIP. Those are probably the biggest contributors to ARPU.

So in a sense the popularity of streaming is in a way driving your ARPU as well as stressing the capacity?

Yes, one of the things -- I mean, we've talked about this and we think this is a good factor going forward, is that clearly, especially people who can't get 12 megabits a second, which is where we are at now, really are interested in streaming. We brought plans to market that had virtually uncapped usage or much higher caps that certainly drove demand. And that's helped skewed our ARPU up.

How big of a component of the growth (inaudible) is the Freedom Plan at this point?

Well, we're not going to break that out. But the thing I would say is that that Freedom -- and this is the one of the ways we characterize that. A couple of quarters ago is what we are doing is we're bringing our best plans to our worst markets. They are really popular and you get a lift there, but those are our -- the smallest spaces to work from.

What we really want to do is bring our best plans to the biggest markets, and that is what we're aiming to do with ViaSat 2. For now, we get a sense of elasticity demand, how best to price them, what the usage will be and how to define the plans to sort of get the best value out of them.

Thanks a lot.

Sure. Thank you, Matt.

Our next question comes from Mike Crawford with B. Riley and Company. Your line is now open.

Thank you.

You talked about further increases in R&D to bring ViaSat 3 Class satellites to fruition. When would you be looking to choose a ViaSat 3 build partner or set some kind of a schedule for a ViaSat 3 Class satellite?

Good question. That is something we are really focused on, because right now the performance of that class of satellite, really attractive. So what we're doing probably over the next couple of quarters is putting more into R&D and trying to come to a decision point as to when we think we could plan for that Class satellite.

We'd like to see would be that that would be our next big satellite, our next major satellite acquisition. And we're just not in a point yet to say. That's part of the reason we're doing all of this R&D.

I think over the next couple of quarters we'll be able to give a better timeline for that.

And is it fair to say that it's looking like a ViaSat 3 Class satellite will likely cost less to build than ViaSat 2 and maybe in a shorter time frame as well?

ViaSat 2, so far it's gone pretty well. I don't know about the schedule for the first one.

The first -- basically there, we've talked in the past about a couple of things that we are trying to do. One thing that makes the lead times of satellites difficult, especially satellites that are as capable as the ones that we are doing, that have these great bandwidth economics and coverage and flexibility characteristics, is that they're really tailored to specific orbital slots and geographic coverage.

And one of the ways to break that -- one thing we like to do is break the dependency. And that will allow you to really come up with satellites on a much shorter demand time schedule. So we think that the ViaSat 3 technical approach allows that.

That's not something that you'd necessarily see with the first one, but you'd certainly see with subsequent ones. And some of those same features are going to help drive down costs pretty substantially, too. I think for the first one we might see costs that are -- costs and schedules that are more like ViaSat 2, but capacity, flexibility that's a lot greater. And so bandwidth economics that are a lot more attractive.

Okay. Thank you. A couple more, if you don't mind.

You talked about mainstream media market expansion. We also know you've been investing heavily in distribution of content across networks. So can you just elaborate more on what you might have in mind there?

Yes. Basically, the main thing we'd like to achieve, and I think this is what broadband customers want, is they want -- people really like streaming media. You're seeing that sort of -- there's a video-on-demand component, which is like Netflix, but then there's also a live video-on-demand -- well, not -- call it live video component, which would be like, say, Sling TV. But it has also been around in the form of Major League Baseball. That's a live event that's streamed.

There's going to be more streaming. So what we think is that the distribution things that we're doing, good for customers, good for users. They're good for the media companies as well.

And we'd like to see those things be embraced by media partners. And one of the very cool things is that when you've got all these people trapped on airlines with their mobile devices and they would like to use rights they already have in airplanes just like they do on the ground, I think that's a really interesting and intriguing market for these media companies. And it requires, I'd say, some technical interventions, which are the kinds of things that we're doing.

So that's basically what I'm referring to, is getting a little bit of the attention and the cooperation of the media companies to help us do that job better, to get there faster, to do it seamlessly across a lot of different devices and players and media formats. Those are the kinds of things that we need to do.

And we think that this Amazon one is a fabulous start. And I think we're optimistic that we'll see more media companies that want to present their media live to airplane users, and that hopefully, I think, JetBlue and we will be the first to do that.

Right. If I'm an Amazon Prime subscriber, who's to tell me I can't to watch House of Cards on a JetBlue flight? Right.

Anyway, the final question relates to terminals. Can you talk about what might be some major differences in your envisioned ViaSat 2 residential terminals and how that might affect subscriber acquisition costs?

The main thing I'd say now is one of the things we're trying to do is make it easier to distribute and install terminals, reduce subscriber acquisition costs, maybe improve the ability of subscribers to do things themselves, to install them or adjust them themselves. Certainly keep them in better performing conditions.

Those things improve subscriber satisfaction. So we're looking at a bunch of technologies that will -- that can help us do that. Some are pretty mundane, some are very advanced.

I think that those can include things like flat panel antennas and simpler, smaller parabolic reflectors, and simpler ways to point name things. We're looking at a range of things.

I think it's one of the areas that we are investing in. It's one of the things that we can help speed the adoption of services on ViaSat 2. We'll make more announcements on that as we get closer to it.

Thank you very much.

Our next question comes from Andrew Spinola of Wells Fargo. Your line is now open.

Thank you. I just had one question on the guidance.

Does the $360 million include the $6.9 million quarterly litigation settlement revenue?

Yes, it does.

It does, okay.

Then, Mark, on in the JetBlue deal that you announced with Amazon, it's obviously highly sensitive. But when we're think about modeling this business, you're obviously going to be delivering a lot more bandwidth to them. How can we think about, at a really high level, your revenue per plane, how it increases because of this deal, or does it not increase?

One thing I think that all of us probably think is that more passengers will use the in-flight Wi-Fi. They'll use it more. And that will drive bandwidth consumption, which will drive our revenue.

How much that happens and how JetBlue -- and really the announcement was between JetBlue and Amazon. We're involved because it uses our service and we're the engine behind it.

But how JetBlue and Amazon aim to support that and how they drive value from it, that's really between them. And I think that will turn out to be sort of the limiting factor on bandwidth growth, if there is any limit. I think so far what we've found is that more engagement has been -- JetBlue has said, and I don't want to speak for JetBlue, but they said they think Wi-Fi is a contributor.

They like the fact that it's free. They're trying to get more passengers engaged. I think this has happened even though passengers have continued to use more bandwidth.

So I'd be a little surprised if the fact that it drives lots of people to use lots of bandwidth is a bad thing. But we'll have to see. And it's hard for us to make projections about what that will mean for us. We'll have to see, as they introduce it and roll it out and promote it.

Got it.

The 519 terminals that you reported as having been shipped to date, if my memory recalls, it seems to be more than the combined JetBlue, United, EL AL that we were expecting. Are you shipping to other customers in this number? Or are there some business jet numbers included here? Or is my recollection incorrect?

You're right. It includes some number, and I'd say probably low tens of terminals that are going on airlines where we are not a service provider.

Okay.

For instance, we've worked with live TV Telus, and they have some agreements where they're using our network -- they're using satellites with our network on them, and they're using our satellite terminals. So we're not initially a service provider for them.

It's conceivable that at some point they could engage us in that role. But for some few tens of terminals we are not necessarily a service provider.

Got it. I guess just one last question for me, Mark, you made a comment at an investor conference last week that ViaSat might sort of, particularly in developing markets, increasingly integrate wireless with what you do. And I was wondering if you can expand on that? What sort of wireless technologies are you working on, and how could we see you use that in the field?

That's a really good question. The US market is a great market and Western Europe is kind of the same way in that you've got a big addressable market of people who have their own broadband service at home and they pay tens of dollars a month for that service.

But there are lots of other emerging markets you probably don't have that same ability to pay. And wireless distribution or Wi-Fi distribution is likely a good way to reach lots more people with lower subscriber acquisition cost. That presents both opportunities and challenges.

So that's one of the reasons that we acquired NetNearU, which is a very good -- very good Wi-Fi distribution company. They administer literally millions of Wi-Fi hotspots.

We provide pay-per-use Wi-Fi services in a number of locations, not necessarily satellite, but that's fine. It gives us great experience in Wi-Fi distribution. And more and more as we can bring these really advanced high-capacity wireless services to things like airlines, that's our face to passengers and users is through NetNearU, or now we've renamed as ViaSat Wireless as our face to -- interface to those devices.

Especially, again in a lot of emerging markets, you're likely to see many more users using mobile devices such as smartphones and tablets compared to PCs like you do in the US. So we want to be a leader in that environment.

That's the dominant mode that we see Wi-Fi. It's unlicensed. It's easy to proliferate. There's (technical difficulties) interesting business models that we think we can develop around it. And that's what we're working on.

So, maybe satellite back call to a Wi-Fi access point type thing?

Yes, that's an example. That's exactly what you see on airplanes. You'll see in other environments as well.

Interesting. Okay. Thank you very much.

Mark, just to clarify one of Andrew's questions there. Let's go back to when we announced the settlement and one of the reasons why we took the settlement, took was to accelerate some of the R&D spending.

So the issue of the recurring royalty being in our EBITDA, one of the things we said was we're going to spend a large percentage of that on accelerated R&D to try to create value for that. That's worth what we think more than what the settlement could have been in the future. So I just wanted to clarify that.

Good point. Thanks.

Our next question comes from Chris Quilty of Raymond James. Your line is now open.

Rick, you just previewed my question, which is you did mention increased R&D spending. Can you give us an order of magnitude or a percentage 2016 over 2015?

This is Shawn, and I can probably scope that up to you.

If you look at the FY14 spend, we thought as we went into 2015 it was a little bit less. Some of it pushed out into 2016. So probably looking at FY14, maybe increasing it by 5% to 10% based on that might be a good range.

Okay.

I think it's hard to say that here's how much that increase because of that, because you've got other things in the (inaudible). So the idea, though, is that we accelerate this settlement and it would give us the ability to create more value for our shareholders by investing that money in R&D advances than to hang on it -- onto it right now.

Fair enough. Just because you called it out, I just wanted to make sure I wasn't -- you weren't planning a 50% increase or something like that, that we would model incorrectly.

Shawn, do you have the NetNearU revenue contribution from the fourth quarter?

We're not giving that out separately, you guys. But they are doing really well and they definitely made a meaningful mark into the margins for the quarter.

Okay.

Can you also perhaps give us a little bit of a walk-through in terms of your FY16 EBITDA projection? Just on a segment-by-segment basis, what should we expect, either on a percentage or dollar basis, how the three segments play out, which ones are growing, flat or down?

I think I can give you directionally.

Mark talked about and I talked about in the context of the Government segment, the strong backlog base going into the year. And we also talked about in 2015 that we had a year-over-year down-take in revenues but we had a really good margin improvement due to the service base growing. If you take that in consideration of a growing backlog going into 2016, and I think that we'll see the Government, in the government space grow.

From Commercial EBITDA, just as Rick and I both -- and Mark touched on, is that's the segment that we make the investments in. So as well as add onto that the down-take in NBN as we start to wrap that up. We'll see a little bit, I think, of year-over-year transitionary in that segment. And then the Satellite Services is just going to continue to grow strongly.

Okay.

We also -- let me add to that. It's Rick, again. We're also increasing our R&D investments in our Government segment as well. I don't think you're going to see EBITDA grow as quite as fast as revenue in that segment this year.

Where are those investments? You said on the aviation side?

Yes, it's cyber-security, aviation. Our global mobile piece of that business. Both of those, we're [making] investments.

Okay. Also, on aviation can you confirm, are you rolling now El Al in addition to JetBlue and United in those numbers that you provided?

They're not in there yet because that's not deployed yet. But they're in the backlog.

Got you. When do you think that program will kick off?

We're going through aircraft-type certification, which is probably the long pole in the tent. So that could be probably next calendar year before we see that in service. Somewhere around the end of this calendar year to next calendar year.

Okay. And Eutelsat in their last conference call mentioned that they're also seeing some capacity constraints in certain regions. Does that in any way limit your ability to offer an aviation service in Europe?

I know here in the US you obviously can make the choice to reserve a certain percentage of your capacity specific for aviation. But is it fair to assume that Eutelsat do the same for you in Europe?

We won't make commitments to any of our customers that we don't feel are backed up by Eutelsat. They are aware of the issues.

We're jointly coming up with ways that we can (technical difficulties) to airline customers service that they will like and that we can fulfill. I think Eutelsat's very interested in growing that market with us. So it looks promising.

Okay. Final question. I'll ask aviation one.

The Gulfstream win is on your legacy KU band Yonder service. Can you talk about how you see that service fitting into the holistic global picture as you deploy ViaSat 2 and ViaSat 3 and partner with other satellite operators? Does that become an integral piece of your KA-KU strategy, or is it dependent upon Yonder or other providers in order to provide that KU band backup?

The way we look at it is that the bandwidth economics, the way you can project to an end user the capabilities of an in-flight Wi-Fi system, are really dominated by the economics of the satellite system itself, not the antenna. That's really a very second-order issue. When you're increasing bandwidth efficiencies by a factor of 10 or 100 on a satellite, the fact that you can make an antenna or 40% or 80% better is not really the driving factor.

So, basically what we've done is come up with -- we have a set of antenna products, we have KU-only antennas, we have KA-only antennas and we have hybrid KA-KU. Depending on the antennas that our customers choose, we can provide them a service that is the best available in any given geographic area using -- with access to the resources that the antennas can support.

So in some cases we have agreements to use, for instance, Inmarsat with KA band. We've been doing work with Inmarsat Wi-Fi in some areas where that's the best available satellite. In the areas where we have ViaSat 1, we use that. Areas where we can use Eutelsat, we'll use. Wherever the best available one is.

In general, the high end of KA is going to be way better than that high end of KU. The high end of KU may be a little better than the low end of KA, depending on the specific satellites. There is some overlap in there.

In some cases we will draw on KU, in some cases we will draw on KA. It's going to really be dependent on the geographies where airplanes or mobile terminals dwell, where they spend most of their time.

We want to be able to use -- take advantage of the best available resources. And so far most satellite operators, to the extent they have bandwidth available, they're fine with selling us bandwidth to use for our customers in their coverage areas.

Does that answer your question?

Yes, it does.

Just to clarify, does that mean you would want to own and lease the transponders, or there are situations where it makes sense to buy it third-party through someone else on a contracted basis?

Yes. What we've done so far is we've tried to do a good job of matching our customer demands, what we have demand for with what we will go out and purchase in the market. And we don't feel like we need to go off and speculate and acquire large amounts of bandwidth way in advance on multiyear contracts in order to get the lowest bandwidth price because all the bandwidth pricing that we can get is much higher than the bandwidth pricing we could make in the regions that we provide coverage, or where our KA partners are.

So, that's really our source of competitive advantage. It's not really speculating or making long advance purchases in bandwidth.

Got you. That helps. Thank you very much.

That's our final question. That concludes our call.

Great. Thanks a lot, everybody. We appreciate your time, and look forward to talking to you next quarter.

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