Viasat Inc (VSAT) 2016 Q1 法說會逐字稿

Welcome to ViaSat's Fiscal Year 2016 First Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks. So this is Mark Dankberg, and I've got with me today Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; Keven Lippert, our General Counsel. And before we start, Keven will give our Safe Harbor disclosure.

Thanks, Mark. As you know, this discussion will contain 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 10-K and Form 10-Q. Copies are available from the SEC or from our website. With that said, back to you, Mark.

Okay, thanks. So as usual, we'll be referring to slides that are available over the web. And I'll start with some highlights and a top-level overview. And after that, Shawn will go into more detail on the consolidated and segment-level financial results. Then I'll come back for some additional color. And finally I'll summarize our outlook, and we'll take questions.

So before we get into the details, I did want to make one point for context. And as our ViaSat-1 satellite is filling up, one of the questions we get from investors is, what happens between now and when ViaSat-2 goes into service. And is our growth going to flatten?

And we think our growth outlook for this fiscal year 2016 and next year fiscal year 2017 is really good. And we've got an opportunity to continue to grow our adjusted EBITDA at about a 20% historical average through that interval using the bandwidth resources that we have now.

And so one of our objectives for the call is to give more insight into our thinking about how we do that. The main drivers are to manage our bandwidth wisely, and grow our average revenue per user by earning premium prices with good quality of service, and growing our commercial and government and aero broadband businesses on those same principles that we think are gaining momentum, from the cumulative effects of investments we've made over the last few years.

And we think that all these factors are also the best way to grow value in the long run. And that's especially true when ViaSat-2 goes up and into service.

So with that, overall first quarter results were good. Companywide revenues were up 8% from last year, same period last year. And adjusted EBITDA was up by almost 30%. Satellite Services and Government Systems segments both had very good growth, and more than offset declines in our Commercial Networks segment, where comparisons primarily reflect the wind-down of our big Australian national broadband satellite network infrastructure project, and also growing investments in R&D costs for ViaSat-2 and ViaSat-3 generation networks.

This is the first quarter where our total services revenue, companywide, made up more than half our sales. The Satellite Services segment, including both consumer and commercial in-flight Wi-Fi, led the way with year-over-year gains of about 21% in revenue, and 67% in adjusted EBITDA. The annualized revenue run rate for that segment is over $500 million now.

Net subscribers were essentially flat for the period, at about 685,000. But we continue to increase the proportion of higher value and retail subscribers. So our ARPU reached a new record at $55.79. We've got 249 more commercial Wi-Fi planes in service compared to the first quarter of last year. So that also contributed to Satellite Services revenue, earnings and network utilization.

Plus we're seeing exciting interest in video streaming for in-flight Wi-Fi. And that's an important discriminator for us compared to other in-flight Wi-Fi offerings, as well as a really attractive feature for the airlines to promote. It also increases network utilization too. And we'll give more details on Satellite Services' results and our strategy a little later in the call.

Besides that, we had really strong growth in our government business this quarter, especially in light of the macro environment for defense contractors. Sales were up about 24%, and adjusted EBITDA grew almost 35% compared to last year.

Government growth was somewhat anticipated, because we'd had really strong book-to-bill performance last year. Government backlog is still up 22% year over year. And that's a good indicator of continued growth. One important element of the growth is sales of our airborne Ku- and Ka-band terminals, the same type of capability that we're delivering to Virgin America Airlines. That ensures that aircraft can work over the best available bandwidth wherever they fly.

We're working on the service agreements for those platforms as the terminals are installed. So this is quickly growing into a meaningful contributors to services sales, which will show up within our government segment. And they're also a significant contributor to network utilization. We'll give more insight into government and commercial aero mobile a little bit later in the call.

There are a number of good effects that follow on from the growth in our recurring services businesses, and the growth of government and commercial aero mobile in particular. One is that it gives a little more visibility into planning our future outlook, because of the recurring revenue streams and the duration of the services relationships.

So with that I'll turn it over to Shawn, who will go through our financial results.

Thanks, Mark. Slide 5 shows revenue and adjusted EBITDA performance for the first quarter of fiscal year 2016 compared to the same period a year earlier. Strong revenue increases in our Satellites Services and Government Systems segment more than offset declines in Commercial Networks, resulting in overall revenue growth of 8%.

A key point worth noting this quarter surrounds our revenue mix. Q1 FY16 was a tipping point for us, with our service revenues reaching $176 million, outpacing our product revenues at $168 million. This shift has been long in the making. And as we look out to this year and next, we expect to see this be the leading driver of our adjusted EBITDA performance.

Our Satellite Services top lines were driven by higher average subscribers year over year, coupled with higher ARPUs, plus additional growth in our commercial air Wi-Fi service revenues, which is becoming a more meaningful contributor to our Satellite Services segment overall results.

Our Government Systems segment revenues also continued to grow, up year over year by over 24%, with lifted sales in our satellite communication systems, and tactical datalink product lines. Our acquisition of NetNearU in the late first quarter of fiscal 2015 also made year-over-year contribution, with a full quarter of revenues included in this period, as well as organic growth in our Wi-Fi hotspot footprint, and related recurring revenue base.

In Commercial Networks we continued to wind down activities on the NBN Co program. Plus our Q1 overall R&D was up nearly $6 million. We've talked about in prior quarters reinvesting a portion of our overall FY16 top-line growth in R&D this year. Expanding technologies and mobile broadband solutions, next-generation consumer broadband and next-generation satellite payload technologies, all key areas fueling our current and our long-term growth.

So with our strong year-over-year revenue increases, specifically from our service offerings and the ensuing improved contribution margins, we generated adjusted EBITDA of $78 million, nearly a 30% increase compared to the same period last year, and adjusted EBITDA margin expansion of roughly 370 basis points overall.

We've covered our top lines and adjusted EBITDA results already. So on this slide I'll review some of the other major influences on reported net income and earnings per share. Our net interest expense for the quarter declined by $2.7 million, with continued growth in capitalized interest on our ViaSat-2 program, partially offset by higher overall interest expense on our larger outstanding debt balances.

As construction of ViaSat-2 progresses, reductions in net interest will continue directly in relation to the growth in our construction in-process balances.

Looking at our taxes, our first fiscal quarter reflected a provision for taxes related to our current quarter income compared to the same period last year, where a pre-tax loss resulted in an income tax benefit. As we mentioned at yearend, we are anticipating strong pre-tax performance this year. And with the expiration of the federal R&D credit, assuming it doesn't get reinstated, our income tax provision expense is going to be elevated year over year.

We're estimating an effective rate of around 35%, based on our current blended statutory rates. However, we can see these fluctuate from time to time, based on changes in regulatory tax rates, as well as shifts in our income allocations across the jurisdictions we operate in. Keep in mind that we don't expect to pay any material amounts of cash taxes for FY16, in particular due to our favorable tax elections on our satellite and other PP&E asset base.

So we swung from nearly a $6 million net loss last year to $2.6 million net income this year. And the change in our non-GAAP net income was even greater, with almost a $10 million improvement year over year, increasing our non-GAAP diluted EPS from $0.05 per share last year to $0.25 per share this quarter, a five-fold increase.

So reference on the right side of the chart, we've again provided a reconciliation of adjusted EBITDA to net income, and net income to non-GAAP net income, to detail the primary elements of each of these metrics, and the related relationships between them.

Turning to slide 7, we have cash flow, liquidity and leverage information. You can see that our cash flow from operations declined from the prior-year period, primarily as a transitional result of a large increase in our working capital. The drivers were twofold. We saw an increase in accounts receivable, specifically on some of our larger infrastructure projects. While in other programs we saw decreases in customer advance positions relative to the prior period, both due to the natural timing of our contractual milestone billings.

Capital expenditures and investments for our current first fiscal quarter actually decreased by $68 million from the prior-year period. Most of this decrease is associated with our acquisition-related activities last year, reflecting our net cash investment in NetNearU at $57 million, while current year investments were approximately $4 million, related to our acquisition of Engreen, which we expect will help us lower both our CapEx and OpEx spend in the future, as well as minimize overall network complexity.

Capital expenditures for ViaSat-2 were also down about $23 million year over year, due to just the natural timing of our milestone payments.

We ended the quarter $225 million outstanding on our revolver of $500 million, and $62 million drawn on the $525 million Ex-Im loan commitment. We are still in a very good liquidity position. We have $498 million of liquidity today, plus another $240 million of future liquidity associated with the Ex-Im Bank commitment, which effectively comes available to us as we make additional payments on the related ViaSat-2 satellite contracts.

Our net debt increased by about $55 million sequential from Q4 of last year. But given the corresponding increase in our adjusted EBITDA results, our net leverage ratio still remains quite low at 2.3 times trailing 12-month adjusted EBITDA. So we remain at a very comfortable leverage position, with ample liquidity going forward.

Before I turn it back to Mark, we'll just take a brief moment and look at some of our key Satellite Services metrics for Q1. The top left chart shows our consumer subscriber counts at quarter end, which were about flat quarter over quarter, in the seasonally challenging period.

Bandwidth constraints to our current and projected network utilization are the single biggest factor in year-over-year comparisons on gross adds, leading to slight decrease in this period of about 1,000 net subscribers. Historically March through May are expensive months for subscriber acquisition. We returned to net positive sub growth in June, and are continually assessing and grooming bandwidth availability.

But as Mark mentioned in the highlights, we are consistently increasing the value of our subscriber base, even at the same net subscriber count, through higher-priced, higher-value plans and a growing proportion of retail subscribers.

This approach has brought another quarter of sequential ARPU expansion, rising year over year by nearly $3.59, or 7%, to a new record high of [$54.79]. Mark will provide a little bit more insight into our consumer strategies in a few minutes.

Our Exede in the Air business maintained its strong growth, with a 174% year-over-year increase in terminals in-service to about 384 at the end of the first quarter. This also represented a 14% increase on a sequential quarter basis.

So our Satellite Services quarterly adjusted EBITDA grew once again significantly, year over year and on a sequential quarter basis. Each point further illustrating the broader contribution margin themes we've been discussing the last few quarters.

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

Okay. Thanks, Shawn. So the point of this next slide is to touch on sort of what we mean by providing a high-quality service, and how that relates to our addressable market. So what we're showing here are customer satisfaction survey data from a leading consumer research magazine for the major fiber, telco, cable and satellite broadband internet service providers for the last six years.

So their data for 2014, last year, was just recently published. And each of the ISPs is rated for categories of value, reliability, speed, their phone support and in-home support if applicable. And then the survey data in each category is combined into an overall customer survey rating value.

Then to help simplify the results, we took the averages of that customer survey rating value for the leading cable and DSL internet providers, and put each of those into a single line. And then we used FiOS to represent fiber in the home, and U-Verse for fiber to the node.

So obviously people would weigh the different category rankings differently, just like different people would weigh safety or reliability or fuel efficiency and other factors in buying a car differently. The broadband space is even more complicated, because most people can only choose from a very limited number of ISPs in their local area.

But when you look at the chart, obviously the most striking thing about it is that we have increased our satisfaction rating over this time in what looks like a really challenging macro environment for ISPs of all types. The improvement in our rating directly corresponds to the introduction of ViaSat-1. And our overall rating is now middle of the pack for the average of DSL and cable.

If you look at the individual data, you'd actually find eight DSL or cable service providers with overall rankings that are lower than ours. And since it's a composite rating, although ranking ISP might have higher speeds than ours, but worse customer service or it could be the other way around.

Importantly the data compiled here at a high level, is pretty consistent with our own research on consumer satisfaction for Exede and terrestrial alternatives. It supports the theory that the addressable market for satellite broadband grows as we increase speed and reliability and/or customer service improves relative to the alternatives.

While this survey doesn't explicitly address usage caps, we know from our own research that customers who run into volume caps perceive the issue in terms of speed or reliability. Because hitting the caps causes their speeds to slow markedly.

We can also quantify the benefits with what happens when we remove those caps, based on our Freedom and Liberty Plan trials in our lower demand beams. And the result is that it improves scores into the range of the fiber to the node and fiber to the home scores.

So that data supports our view that removing volume caps through much more efficient satellites like ViaSat-2 is probably the single-most important element to growing our addressable market. And we don't believe these ratings mean that all the customers of lower or equally-rated ISPs would be happier with our service. But we do believe it means that we are improving more quickly in the context of our customers' expectations than competitors. And that almost certainly increases our addressable market.

Also remember that about a third of our customers actually came from those terrestrial alternatives, and that's a factor when we consider what those expectations are.

Finally, there's a striking contrast with the competing satellite service. Even though they currently have roughly comparable bandwidth resources, if you were to look at the individual ratings on speed, reliability and telephone support factors which we didn't show here, that would shed light on those differences.

The point is that we have worked hard, and we've made some difficult choices in an effort to build brand value and confidence, so that as we invent technology to improve the speed, bandwidth and reliability of satellite broadband, we've got a market position and market credibility to capture that value through a premium-priced service.

We don't feel like we're quite there yet. But ViaSat-2 will get us a lot closer. We think we would be destroying value if we stuffed too many customers into limited pools of bandwidth in the interim to show some arbitrary increase in net subscribers. And that's especially true when we can obtain equal or better financial results with higher customer satisfaction by having fewer customer on higher-value service plans.

So then this slide on the aeronautical broadband gives us some context for an update on our in-flight connectivity progress. And last year we said that 2014 was about getting aircraft into service and showing what we could do. And that this year, 2015, would be the year that the airlines and their passengers would begin to understand the difference our bandwidth delivers.

So we're halfway through this year. And we believe that's just what's happening. And so here's a quick recap of some of the highlights from our perspective this year. JetBlue now has most of their A320 series equipped with Wi-Fi. While they've started charging baggage fees, they've kept Wi-Fi free.

In the first quarter, JetBlue led the industry in gains in PRASM, or passenger revenue per available seat mile. And in a CNBC interview, their CEO Robin Hayes, cited Wi-Fi and their revenue management team as key points when he was discussing their performance in that factor.

And then JetBlue after that also supported a live test flight with 30 mobile devices simultaneously streaming video for over a 1,000 miles, in addition to normal usage on that plane and hundreds of others we had in service on our network that day. After that JetBlue announced a partnership with Amazon, including free Prime video. And that should take effect later this year.

We've also signed a contract with Virgin America to bring our technology in-service to 10 new A320 series aircraft, including capability for streaming video. Our Ka- and Ku-band hybrid antenna also can enable Virgin to leverage our existing global Ku-band network to offer Wi-Fi on mainland-to-Hawaii routes. And that will be a first.

And then last week, JetBlue released their second quarter results, and again had the highest passenger revenue per available seat mile out of the top five US airlines, even though they also had the greatest growth in capacity or available seat miles of that same group.

So overall we feel we're helping to bring a new and better business model for in-flight connectivity to the commercial aviation market. From the airlines' perspective, the economic value to be gained by even small incremental movements in passenger preference manifested in fill factor or revenue yield, is a lot greater than the revenue share of the sell-through retail model, even if the retail prices are as high as $50 for a flight.

From the passenger's perspective high-speed broadband fast enough and plentiful enough to stream video is a pretty desirable amenity. And it helps drive engagement far beyond the single-digit percents that define the sell-through model.

And our passenger take rates get the attention of mobile, internet and media companies that see great potential in engaging tens to hundreds of millions of US airline passengers that have no other form of connectivity for the duration of their flight.

So right now I'd say there's a lot of confusion in the in-flight Wi-Fi market about how much bandwidth can be delivered to passengers and how much is needed to deliver a good user experience. But streaming video is kind of the acid test. And we haven't seen any other aero mobile company step up to that. We can say that pretty much all the US airlines are paying attention. And we think that will only increase when the JetBlue and Amazon partnership goes live.

So all this is an important backdrop for our bandwidth capacity planning in the context of the previous slide on customer satisfaction. So we see much higher in-flight broadband adoption, including video streaming on aircraft as a highly differentiated and very attractive market for us. And we want to be sure that we can deliver that when it scales up, which should be a little bit later this year.

Nobody yet quite knows how that will translate into bandwidth demand. But one of the good features is that the daily busy hours of bandwidth demand for residential users are not highly correlated with commercial air. So it's really not a zero sum game between them.

And also as I mentioned earlier, one of the main components of our growth in government business has been in orders for Ku- and Ka-band airborne terminals. Many of those aircraft spend most of their time over the US, Europe and the Atlantic crossing. Our government customers are very focused on both performance and reliability. And the scale we've achieved in the US commercial and the global general aviation markets have been very helpful in showing that we can meet their requirements better than any other government or commercial network.

We expect those airborne terminal orders to result in steady growth in government service contracts for both our Ka- and our Ku-band services. The [service level] agreements for government aircraft are more demanding than for commercial, and they have less predictability in routes and schedules. And they are significantly higher value services with higher network utilization.

But our bandwidth advantages mean we can deliver much, much higher performance than any other existing systems, and can do that at prices that should substantially expand the market.

So hopefully the upshot of all of this is that I've been able to convey how we think about our network utilization. We're doing things with satellite broadband that have never been done before. We're gaining traction in several markets where customers are beginning to see the differences between our satellites and lower bandwidth alternatives. We see really good opportunities to use all our bandwidth at prices and terms that are good for us and good for our customers.

The mobile market is especially interesting, because it helps smooth out the lumpiness in geographic demand we see in fixed-services markets. The difference in peak busy hours lets us get more yields on the bandwidth than a single-minded focus on consumer. And we've got the unique combination of skills that let us combine technology and domain knowledge to optimize our service revenues over these consumer, enterprise and government applications.

Okay, so now let's go over our outlook, pretty quickly. And our current outlook for adjusted EBITDA for this fiscal year 2016 hasn't changed from last quarter. We've been targeting about 20% year-over-year growth, excluding the non-recurring portion of the Loral settlement. And that would put us in the range of about $360 million. We're anticipating that growth will come from Satellite Services, which is driven by growth in consumer broadband as well as commercial aero.

On the consumer side, growth is planned through a combination of more subscribers, higher revenue per user, and operating margin improvements. On the aero side, we'll have more airplanes in service, and especially with video streaming, anticipate more bandwidth per aircraft.

We also anticipate very good growth in our government business. Based on the strong backlog we've built over the last year, growth in the airborne terminal orders and in the anticipated follow-on contract for airborne connectivity services. We've also had good government growth in our Link 16 tactical radio business.

So as I mentioned at the beginning, we've been steadily increasing the proportion of our business that comes from recurring services sales. And that helps give us a little more visibility further out in time. We believe that a cumulative effect of growing our subscriber base in residential, consumer aero, general aviation and government aero enables us to apply our bandwidth resources very efficiently, and that we can continue to grow adjusted EBITDA at an attractive rate through our fiscal year 2017 as well, with the current target of about 20% growth relative to fiscal 2016.

So that's it for our prepared remarks. And at this point, we'd happy to take questions.

(Operator Instructions) Tim Quillin, Stephens Inc.

Hi. Good afternoon. Could you give us an update on the launch window for ViaSat1, and do you see any impact from the accident that SpaceX had? And are you considering any alternative launch partners?

Okay. Yes, so I think the main information came from SpaceX themselves. And they put out a release describing their understanding of the accident, the failure they had on their last Falcon 9 launch, and what the fix was.

And basically it does reinforce our sort of confidence in SpaceX. And the main points are they had thousands of points of telemetry data. I think they had very good insight into what the failure mode was. They had a lot of-- in their release they talked about less than one second from the time that they started having a problem to when they stopped getting telemetry. So they had good understanding of it.

What they said is they expect to be back in service with Falcon 9 this fall, and to be caught up in Falcon 9 launches by the end of this year.

So our launch is pretty much scheduled for last quarter of next year. That's when we'd expect it. There are a couple more things that have to occur along the way that will give us much more insight into that. And those are really things that are more specific to the heavy than to the Falcon 9 incident that they just had. So they've got a newer higher-thrust version of the Falcon 9 engine that will be going up this year, and their first heavy launch early next year.

I think what we believe is that they have a good shot at fitting in that launch window. Definitely we're monitoring the situation. We're considering alternatives. I don't really want to go into to what they are. But we are considering alternatives. But right now, we still think that SpaceX is by far the most likely way that we'll go up.

Okay. That's a great recap. And then Mark, could you give us also a little update on the development of ViaSat-3? What are the milestones we should be looking for? And considering how you're thinking about the effective bandwidth increase that you might pick up with ViaSat-3, is there any thought to launching multiple satellites simultaneously? Thank you.

Okay. So you can tell from the discussion we had, you know, we're really focused on the bandwidth economics. We've been doing a lot of work on the payload design and the system design for ViaSat-3. And I think we said last quarter that this year we would give-- but by the end of this year we'd give some more guidance on when we think we can do a ViaSat-3, whether we would do another ViaSat-2 variant as our next satellite for the American market.

And I think that we'll kind of hold to that schedule. I'd say we're optimistic about the ViaSat-3, but we're not quite done yet.

And then on the second part of your question about launching multiple satellites at once, all the work that we're doing says that we get the greatest efficiency by maximizing the fraction of the launch that goes to payload, the fraction of the spacecraft that goes to payload. So right now we can see is the best way to do that, and the best way looks really, really attractive. The best way to do that is with big satellites like we've been doing with ViaSat-1. It was pretty big. ViaSat-2 is a little bigger. ViaSat-3 would be a little bigger still.

But the improvement in capacity is far greater than the growth in the payload mass we get. We're getting a lot of efficiency in the payload electronics. That's going to be our approach for the near term.

Tim, were you talking about that, or were you talking about covering different geography?

Yes, Rick. I was talking about-- yes, thank you. I was talking about different launching multiple satellites to cover the entire world.

Okay. Yes. So we are still very interested in global expansion. And we are working on I'd say plans for each region of the world that would get there. But probably it's another quarter or so before we'd have more guidance on that and more insight into that.

Okay. Thank you very much.

Rich Valera, Needham & Company

Thanks. Good afternoon, guys. Mark, I just wanted to clarify when you thought the launch window could be for ViaSat-2. Did you say the calendar fourth quarter of 2016? And if so, then what with this sort of in-service target date be, if in fact they could make that window?

Calendar fourth quarter of 2016 is right. That's what we think now. And the in-service date will depend a little bit on the orbit raising time and the test time for the satellite. So typically it would be somewhere, for the way this satellite is constructed, probably 4 to 6 months after launch, in that range.

Okay. Got it. Perfect. And then your churn seemed to drop pretty significantly quarter over quarter, at least from what I could infer from the numbers, I think below your kind of nominally targeted sort of 2.5-ish percent. And I'm wondering if there was anything unusually favorable in the quarter, and how we should think about churn as we look forward.

Yes. We're making progress. And there's two elements, obviously, involuntary and voluntary churn. So over the last year we've been obviously working on both of them. But we've seen good improvement in the involuntary churn in the recent months. So that's where most of it's coming from recently.

So I think we continue to try to work on this. And the best way, in our view, to help the churn element, other than getting people that can't pay on the involuntary side, is to continue to improve our service quality. And so that's why we're really hyper-focused on operating plans that are better, better and better plans.

So maybe I'll just try again. I mean do you think that this churn is sustainable? Do you think you have sort of, given what you've learned, maybe a somewhat structurally lower churn than you've had over the past couple years?

And it's a balancing act. You know there's countervailing forces. One is I think we're definitely getting better at customer selection and qualification. So that part I think-- you'll see steady improvement. On the voluntary churn I think we're getting better at the way we manage the service. But one of the things you can see from that customer satisfaction chart we put up there is that people's expectations are constantly increasing. And so that's the counterbalancing point.

You know, it's a little bit challenging to deal with that, as you can see from all the ISPs. Everybody's got a problem with that. For us, because we're trying to compete, all of our customers have a choice, which is a little different than a lot of the ISPs in there that are monopoly providers in their markets, for at least for the speeds that they provide. So that's the balancing act for us. And I think we're getting better at it. But it's going to be a little bit of a challenge.

That's great. And I think last quarter you'd talked about after-- I don't think you expected many net subs this quarter, which was pretty consistent with your expectations. I think you talked about maybe having 10K to 15K sort of net adds per quarter in the back half of the year. Is that still in line with your thinking?

It could be. We'll have to see. It's not as cut and dried for us, partly because we have this difference mix of plans. And the other thing is we're expecting in the next couple of quarters pretty significant growth in aero traffic, especially with the streaming.

So we're just constantly assessing how many people we should add to beams. And I think we mentioned during this call that probably the single-biggest factor effecting the rate at which we add subscribers is the way we decide which beams we can add subscribers to. And that's where the uncertainty really is. I think that the good thing is, it's if we don't add them on the consumer side, a big part of the reason will be because we've got demand on the aero side, which is just as good for us, if not better.

So I think--

Just from a monetization standpoint, you think a mg of bandwidth on the aero side, it sounds like you're saying is actually maybe a little better from you economically than the equivalent uptake on the fixed consumer side?

Yes it is. And part of it has to do with this overlap that I described. You know, the fact that they're out of phase from a peak busy hour perspective. So they're not 100% out of phase. But you think about it, when we bring consumers on, all of their peak load aligns with the consumers that are on there. Whereas with the aircraft, only a portion of their peak loan aligns with the consumers.

So to the extent that there is demand on the aero side, whether it's commercial or government, what it tends to do is it gives us better overall bandwidth utilization. So that's an economic factor.

But we want to serve demand. We want to work through our consumer distributors. So we're constantly working on understanding sort of the mix of plans. We're constantly making sort of improvements to our network to optimize performance. And those are the factors that go into it. I just think from our-- I think it's fair to say that when we think about it, each month and each day, what we're thinking about is economic performance, not just subscriber adds. And that's the main point that I'd make. And it's a little bit unpredictable.

All right. That's great color, Mark. I appreciate it. Thank you.

(Operator Instructions) Mike Crawford, B. Riley & Company

Thank you. Just to go a little further into this theme of more aero traffic in the next couple of quarters, last month Space News quoted Gogo's CFO, was talking about 2Ku saving some. It doesn't sound right, the amount of savings per plane. $1.8 million, which implies like $150,000 a month per plan of bandwidth savings. With the 380 planes you have in service, I mean can you give us a rough idea of what the revenue per plane is now, and maybe where that might go if people are consuming more bandwidth on these flights?

We don't really break that out. The thing I'd bring up again though, and we pointed this out a few quarters ago. At the time I think it was this time last year, we said that an airplane is kind of like 100-- each airplane is kind of like 100 consumer subscriptions. And that-- it's a little bit rough. Because the airplane has some benefits in there's really subscriber acquisition costs. We're not investing in subscribers. Churn, there's no churn.

But what we would expect to see is if the bandwidth consumption goes up that that ratio will improve quite a bit. I mean it could improve a pretty substantial amount. And that's what we're waiting to see. And we'd want to see that that works out well, not just for us but for JetBlue and Amazon and the other-- Virgin, if they go with streaming as well that we work out a good economic deal all around.

But I think there's definitely the potential to see that number rise pretty substantially on equivalent subscribers.

Okay. Thank you, Mark. And then on that [sack], it would seem more efficient, easy to install terminals would help to lower that cost. Now I believe you might be working on something like that. Is that something that would come on a ViaSat-1 network? Or would that be something that would come with ViaSat-2?

So we are working on that. And we think there's a number of benefits in the ecosystem for doing it. But it's probably more timed towards ViaSat-2 than ViaSat-1.

Okay. Thank you.

(Operator Instructions) Rich Valera

Yes, thank you. Obviously a nice, strong start to the year in the government business. Wondering if anything's changed here in terms of your outlook for growth in that business. I think you'd previously talked about maybe for the full year seeing roughly double-digit growth in that segment overall. Is that still a pretty good number we think for that business?

Yes. I think if you look outward, we are still on track to where we thought we'd be last quarter, and it's in that range. We have a lot of backlog to work on, and a lot of growth opportunities on the service side.

I actually think we said it was better than double-digit. It was closer to 20% year-over-year growth this year, Rich.

For the whole year?

Yes.

Oh, okay. Yes, I mean so you had--

That's on the revenue side, not as much on the earnings side.

Right, right. Yes. I guess I thought the comp was sort of relatively easy in the first quarter when you posted that sort of 20% plus, but as the comps get a little tougher, I wasn't sure if you--

Yes. I think our book-to-bill last year was over 1.21 and we expected most of that to come through.

Right. Right. Okay. Thank you for that color.

Chris Quilty, Raymond James

Thank you. Mark, can you comment on the customer ARPU if you look at it on a year-over-year basis, what's been the biggest contributor to the ARPU lift? Is it the addition of services or migrations in plans? And on that last point, have you seen any particular change in the split between the three-level plans?

Okay. Yes. I mean so one thing that contributes some to it is our VoIP service plan. So that's an ancillary service. It's really the main one that we offer. And that has a little bit of a lift. But the biggest factor is the thing that you described, which is the split among the service plans that we offer. That when we've offered these especially higher-volume service plans, like our unlimited Freedom plans, and we have these plans called Liberty plans in sort of the mid-fill beams. Those are higher-priced plans.

But people like them a lot more. And that really accounts for a large fraction of the lift in ARPU. And then the other ingredient is the split between retail and wholesale has moved a little more towards retail over the last year. So that also contributes to a higher ARPU.

Got you. And just on the government business with the forecast of close to 20% growth, would a continuing resolution, which is probably likely, have any impact on that growth forecast?

No. We've been looking at sort of the budget, kind of the budget battle wars, and looking at them in the context of our program outlook. And we think we're in a fairly robust position relative to that.

Got you. Shawn, can you give us a sense of the estimated CapEx either for ViaSat-2 or just on a whole for the year.

Yes, sure. So I think from ViaSat-2's perspective, if you just kind of look at the primary cost of the satellite and the launch and the insurance, we're about 62% paid to date. So if you kind of look out to the rest of the year, we probably will make another $100 million in payments, around that, just based on when certain milestones hit.

And just the baseline CapEx, non-satellite related?

I think that we have some network expansion and some areas that we may be investing in towards the end of the year. If you look at probably 2015 and kind of compare that to what we'd see for the full year of 2016, kind of all in, with all activities, you may see a lift of somewhere around 10% to 15%, just based on when those milestones hit.

Okay. And final question just on the WildBlue satellite. Where are you at in terms of subscribers? Have you been continuing to shed subscribers to provide capacity for the aviation business, or is that necessary as you start bringing on higher bandwidth streaming plans?

We've been, I'd say, optimizing our network to get the best use out of it. And so that does involve moving some of the subscribers around a little bit. But we're-- the fraction of our subscribers that are on the old-- or the consumer subscribers that are on the old satellite has been going slowly down. And so I think we were in the 80-something-thousand range, between WildBlue1 and Anik-F2 on the old satellites, in that range.

We are using those satellites quite a bit for the Aero Mobile. For the mobile as well.

Got you. Actually one more question on the-- you had mentioned with the JetBlue that as the streaming plans come on and bandwidth usage goes up, revenue goes up. So does that imply that the contract is structured on capacity usage rather than per-passenger usage?

No. What we've done is we have a pretty-- I think we have a contract with JetBlue that's really denominated in passenger usage. But there are adjustments for it when you add streaming to that mix. So at the beginning, we didn't anticipate much streaming. What I think JetBlue has found is that across the whole plane, adding streaming sort of definitely adds a lot to customer satisfaction, and at a price that's pretty attractive from their perspective. And it's good for us.

So I'm not going to go into the exact details. But it's basically, the phrase that they used when we started was-- and this was sort of their thought was, hey. If we could give really good broadband for the cost of a bag of peanuts and a coke, that's a great investment for us. So maybe it's like now you're getting a second glass of coke, or another bag of peanuts or something like that.

But it's basically, that's the way to think about it. They get a little bit more, but they get a lot more value out of it. And so we benefit both by a little more bandwidth, and more penetration in the airplane, both of those.

Perfect. Thank you very much.

Okay, so one more question?

Andrew Spinola, Wells Fargo

Thank you. Shawn, is the first quarter, the first fiscal quarter of the year in defense a seasonally weak quarter in terms of margin or mix? And just in general in the long term for government, can we expect a tailwind in your margin as it sounds like services is going to become a bigger part of that revenue line?

Yes. I think traditionally this quarter has been, looking over the spectrum of the four, can be a little bit softer quarter. And we see certain opportunities with government sweep-ups at the September 30 timeframe that tends to build on the last half, as well as the service base growing.

Got it. And then Mark, on your-- on slide number 9 where you show the customer satisfaction rankings, I try to do some work on this and try to understand how you compare against your peers. And you show this as you being sort of more favorable than cable. But does that suggest that you've reached the point with satellite broadband where you've solved a lot of the connectivity issues and consistency issues that seem to have plagued the service in the past and it can legitimately compete against some of the wire-line services? I mean is that essentially what you're saying with this slide, and what you believe?

So we really tried to be pretty careful about it. I mean that is a composite ranking which includes speed, reliability, customer support, and kind of the way I'd put it is, for people who don't-- right now for people who don't use a lot of bandwidth and aren't gamers, our service is pretty comparable, I mean pretty equivalent, if they're using bandwidth within the amount that we serve. That's part of the point, is that people when they don't know the details of satellite works or DSL works or cable works, and they just give a rating of it, hey, it turns out in the overall scheme of things that our rating is pretty comparable.

And so we think we are a pretty good substitute. Now the issue that we've talked about that we think is really the one that most limits our growth in the market is the bandwidth caps. That if people know of the existence of bandwidth caps and it inhibits their usage or-- they're reluctant to use it as much, or they hit the bandwidth caps, then our scores go down, markedly.

So that's the main thing that we're focused on. And the other thing that people like is speed. You know, the picture we had on that same chart were those FCC, just sort of the cover page from the FCC's measuring broadband America test. In there the cable companies did fine in terms of delivering their advertised speeds. But in general the DSL companies did not. They delivered lower than their advertised speed. And usually their advertised speed is slower than ours. So there's really an opportunity for us to be very competitive and preferable to a terrestrial service. And there's still 25 million-ish DSL customers out there.

So basically what we're saying is we think that when we deliver the service well, and you can see that not every satellite service can be delivered well. Right? If we do ours well that we think we're growing our addressable market. And especially when we go to ViaSat-2, and we can lift those volume limits substantially, or take them out of play and increase the speeds, we should do really well. We should get a lift in customer satisfaction and for a bunch of customers be preferable to some of those terrestrial alternatives. That's the plan.

And part of the reason I asked that question is sort of lead-in to this next question. But you started to offer streaming video on the planes. And there are these introductions and new over-the-top services like Sling TV. And I'm wondering just when you think about ViaSat-2, do you see yourself more becoming sort of like a triple-play provider with voice, broadband and video? Or do you think your demand and end market is going to skew more towards staying at just a broadband and voice type package?

That's a good question. You know, I think that clearly, especially this week, this whole notion of cord-cutting is pretty topical. I think for us, what we would like to be, and this is what we're aiming for with ViaSat-2, is to be a really good broadband plan for which subscribers can add their own choice of over-the-top services, and that we perform really well there.

And I think that's becoming a bigger and bigger opportunity. So that's more the way we view it. It's not so much that we'd be a branded video provider of our own, but that we'd be a good choice for people that are interested in cord-cutting.

It makes sense. Thank you very much.

We have no further--

Okay. Yeah, I think that's it for our time for today. Thanks a lot, everybody, for listening in. And we look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.