Viasat Inc (VSAT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to ViaSat's FY16 second quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks. Good afternoon everybody, and welcome to our earnings call for our second quarter of FY16. I am Mark Dankberg, Chairman and CEO, and I have with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; and Keven Lippert, our General Counsel. And 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 10-K and form 10-Q. Copies are available from SEC or from our website. With that said, back to you, Mark.

Okay, thanks. So, we will be referring to slides again. They are available over the web. I will start with some highlights and a top-level business overview. And then Shawn will go into more detail on the financial results. Then I will give some additional color on our business and strategy, and then I will summarize our outlook and we will take questions.

Starting with our financial highlights, remember Q2 of last year was when we reached our legal settlement with Space Systems Loral that resulted in recognizing a one-time benefit of about $21 million to revenue and about $40 million in total [investments]. When you normalize for the settlement impact, our results were in line with our outlook and keep us on track for a strong FY16.

Excluding those one-time benefits of that settlement, our revenues and adjusted EBITDA in Q2 grew 5% and 24%, respectively, on a year-over-year basis. On a six month year-to-date basis, revenue and adjusted EBITDA grew 6% and 26% respectively. That is also including -- excluding that benefit of the SSL settlement.

Our Satellite Services segment was our biggest source of adjusted EBITDA and growth. That is 75% for the second quarter and 71% year-to-date, respectively, on a year-over-year basis, and again, excluding those one-time benefits. That growth comes from gains in in-flight connectivities, continued consumer ARPU expansion, and margin improvement due to scale and sustained gains in bandwidth utilization effectiveness.

On the in-flight Wi-Fi front, our partnership with Virgin America and Netflix really put an industry wide spotlight on our streaming video, which is a very desirable feature for passengers, and highlights our ability to deliver lots of bandwidth at very affordable costs.

We also had good growth in our Government Systems segment in both revenue and EBITDA. That is pretty exceptional given the macro environment in that sector. Government orders very strong and mobile broadband terminal orders are a good leading indicator of upcoming demand for satellite services. We believe our first half results are indicative of our opportunities for sustained growth for the balance of the fiscal year and longer-term as well.

On the consumer side, we see good opportunities for sustained margin expansion through more effective bandwidth utilization, higher value plans, and continued cost improvements. We anticipate good continued growth in in-flight Wi-Fi as we grow the number of planes in service, increase passenger engagement, and then lastly growing interest in video streaming such as JetBlue's upcoming promotion with Amazon Prime Video. We also anticipate very good growth in Ka-band satellite services for government customers as well as growth opportunities in other government markets.

Finally, the upcoming launch of ViaSat-2 is getting close enough to influence key customers and partners, and our global plans for the ViaSat-3 generation are coming into focus. Shawn will go into more depth on the financial data, and then I will come back and give more color on these points.

As Mark indicated, our operating performance is solid and on track with our plans in fiscal Q2. Slide 5 shows revenue and adjusted EBITDA performance for the second quarter of FY16 compared to the same period last year. Comparisons with the prior period, however, are skewed by the aggregate $40 million impact of the Loral settlement realized Q2 of FY15.

As a reminder, in the second quarter of last year, we booked a one-time benefit product revenue of $21 million and a one-time G&A credit of $19 million as a result of the settlement. The terms of the agreement also required recurring payments of $6.9 million in future quarters until the fourth quarter of FY17, with the first such payment being realized in our third fiscal quarter last year.

So, all of the comparisons I'm about to talk about in the next few slides will not take into account the nonrecurring portion of the settlement from the second quarter of last year to better highlight the recurring portion of our Business and the related drivers. Our core operating revenues continued to grow, up about 5% year-over-year with another quarter of solid revenue growth in our Satellite Services and Government Systems segments, more than offsetting the declines in Commercial Network.

In Satellite Services, or segment revenues reached a new record high. Growth from our core service offerings drove revenues up 22% and adjusted EBITDA by 75%. Our weighted average subscribers were also higher during the period. ARPUs continue to grow plus we saw another quarter of growth in our commercial Air Wi-Fi service revenues.

Our Government Systems segment revenues also continued to grow, up 8% year-over-year with growth in global mobile broadband, situational awareness projects, as well as services growth from ViaSat wireless services formerly called NetNearU. Our adjusted EBITDA was also up 12% from the prior period. As a result of the higher topline revenue, and lower SG&A and R&D expenses, our Government Service revenues grew by 11% year-over-year, outpacing our top line product revenue growth.

In the Commercial Networks segment, the continued wind down of our very successful NBN infrastructure program, lower consumer terminal sales, lower end connect system sales, and higher R&D investments all contributed to nearly a $14 million decrease in adjusted EBITDA year-over-year. In recent quarters we increased our investment activities in our next generation consumer and mobile offerings as well as in advanced satellite payload development, nearly doubling the levels incurred last year at this time.

These are our most strategic NextGen solutions, each being developed in our Commercial segment so we expect these trends to continue for the next few quarters. In summary, modest revenue growth and a growing mix of high-margin service revenues, and improved service margins, allowed us to generate adjusted EBITDA of $87 million, a 24% increase year-over-year and an overall adjusted EBITDA margin expansion of almost 380 basis points, (inaudible) business.

Slide 6 shows revenue and adjusted EBITDA performance for FY16 year-to-date period compared to the same period a year earlier. I won't spend too much time on this slide as you can refer to the MD&A and our 10-Q for each of the key year-to-date drivers which trends very similar to the drivers in our second quarter. However, I would like to point out that our topline revenues hit record first half levels.

Revenues were up 6% and adjusted EBITDA was up 26% on a comparison period basis. Our adjusted EBITDA margins also showed year-over-year expansion, up 370 basis points over the same period last year despite our significant uptick in NextGen systems developed activities, again illustrating the strength of our growing service base.

On this next slide I will review some of the major influences on reported net income and earnings per share that fall below the adjusted EBITDA line. Our net interest expense for the quarter declined by $1.9 million with continued growth in capitalized interest on our ViaSat-2 program, partially offset by a slightly higher overall interest expense on our larger outstanding debt balances.

As we look out our debt relative to assets under construction has reached a level where our net interest expense should remain within range close to the Q2 level. Turning to taxes, our second quarter reflected a reduction in tax expense year-over-year, primarily related to last year including the $40 million Q2 settlement benefit. Focusing on our core business, we grew year-to-date free tax income sharply year-over-year by $22 million, and we expect good pre-tax income generation to continue into the second half.

Additionally, the federal R&D credit still remains expired. We're hopeful that a form of the credit legislation will get reinstated and may have some retroactive benefits. But assuming it does not, we expect our annual income tax rate to continue around the 36% range based on current blended statutory rates which can fluctuate from time to time with regulatory and income shifts across the jurisdictions we operate in.

However, with favorable tax elections on our satellite and other PP&E asset base, we don't expect to pay any material amounts of cash taxes this year or next. Net income for the quarter decreased by $19 million from the prior-year period, primarily as a result of the lower adjusted EBITDA figures we discussed previously, and up $5 million without the Q2 FY15 settlement net of tax.

Non-GAAP net income diluted and non-GAAP diluted EPS year-over-year performance reflect the same relationships, bringing our non-GAAP EPS to $0.30 per share, nearing double the amount generated from our core recurring operations last year. Again, for reference on the right side of the chart we provided a reconciliation of adjusted EBITDA [to negative] 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.

Moving to slide 8, we have cash flows along with liquidity and leverage information. You can see that our year-to-date cash flow from operations was slightly under last year's levels after adjusting for the $40 million Q2 settlement payment. Increases in accounts receivable on some of our larger infrastructure projects alongside decreases in customer advances on other programs both due to a normal timing fluctuations and contractual milestone billings, drove in increase in working capital.

Overall, our DSOs are sitting about flat to Q2 last year. And in recent weeks, we have seen very strong cash collections as we hit some key contractual milestones on certain commercial segment contracts.

Capital expenditures and investments for our FY16 first half decreased by $4 million -- excuse me, $44 million primarily as a result of reduced acquisition activities versus last year, which included our purchase of NetNearU for $56 million. So we ended the quarter with $165 million outstanding on our $500 million revolver and $127 million on the $525 million Ex-Im Bank loan commitment.

Our leverage remains low at 2.4 times EBITDA, and liquidity positioning is very good, with $520 million of liquidity to-date plus another $162 million of future liquidity associated with the Ex-Im Bank commitment, which becomes available as we make additional payments on ViaSat-2. Before turning it back to Mark, I will take a moment and review some of our key Satellite Service metrics for Q2.

The top left chart shows our consumer subscriber counts at quarter end, which were up just over 2000 quarter-over-quarter, and up 30,000 year-over-year. And as you can see on the upper left chart, our adjusted EBITDA is growing at a faster rate than overall subscribers.

Note the rapid increase in adjusted EBITDA over the one year period from Q2 of FY15 to the current quarter, increasing by 75% on only a 4.5% increase in the consumer subscriber base. This reflects a higher ratio of retail subscribers relative to wholesale subscribers, increases in both retail and wholesale ARPU, and the high marginal economics of each new subscriber.

And we will grow on other dimensions as well such as our Commercial Air Wi-Fi business, now at 419 aircraft in service, double that of last Q2 and 35 higher than Q1 end. And we continue to see growth in Passenger Engagement trends as well. Taken together, it's a pretty compelling illustration and validation of the profitability and operating leverage of our Satellite Service businesses.

So we feel strongly that our strategic approach of emphasizing consistent delivery of higher value services while protecting service quality in the face of growing user expectation is achieving the financial results we want. The chart on the right shows growth [ads] for the current quarter of FY16 Q1 of 2016 and the second quarter of FY15.

Growth [ads] were up on a sequential quarter basis primarily due to the seasonality of the Business, offset somewhat by limiting growth ads in certain geographies as we choose to closely manage distribution channels to bound or in some cases reduce net subscribers on as many as two thirds of our ViaSat-1 beam. These decisions take into account growth already achieved in our consumer and in-flight base while maintaining capacity for future growth in the Commercial and Government Mobility businesses.

As Mark stated earlier, this is a conscious decision on our part to help capture fast-growing attractive Commercial and Government Mobility markets, maximize the economic value of the ViaSat-1 satellite, and at the same time protect the Exede brand, all in anticipation of the launch of ViaSat-2. With that, I will turn it back over to you, Mark.

Thanks, Shawn. In these next few slides I would like to build on that discussion around differentiated service quality and quantity in the in-flight communications and government markets.

Broadband performances are all relative. If you oversell your bandwidth performance will be bad no matter how much absolute bandwidth you have. Anybody who has used competing in-flight Wi-Fi services has already experienced that. Since we believe our competitive advantage is delivering by far the best bandwidth economics, then we should act differently than others so we can prove the benefits of those bandwidth economics.

That means preserving the integrity of services and building credibility because we know our upcoming satellites will enable us to improve our services and create even greater separation from competitors. We think in-flight Wi-Fi is a good growth opportunity because there is passenger preference and demand for good connectivity. And the root source of competitive value is large supplies of affordable bandwidth in the right places at the right times.

Virgin America prominently featuring Netflix streaming was something of a watershed event. The Netflix branding featuring House of Cards, increased exposure, and credibility. It is now something all the airlines and many more passengers are aware of and there are a couple of tweets from Reed Hastings about those Virgin and JetBlue that we included on this slide just to show that.

JetBlue has also announced that they will have free Wi-Fi on all of their flights by mid-2016. All of their Airbus aircraft already have our service and installs are now underway for the remaining Embraer E190 regional jets. JetBlue has also announced a number of existing and planned partnerships and sponsorships for their free Wi-Fi service.

Their revenue per seat mile performance has been excellent this year and free Wi-Fi is an important factor. High engagement with Wi-Fi attracts high quality media and Internet partners, too. The prospects of higher passenger revenue coupled with sponsored Wi-Fi are definitely gaining attention within the industry.

Also, enabling in-flight entertainment to passengers over the Internet using their own rights, or by sponsored content, reduces in-flight entertainment expenses. Video is the draw for gaining passenger attention and engagement with Wi-Fi. And the ability to use in-flight communications has an element of in-flight entertainment.

JetBlue's partnership with Amazon is anticipated to start this quarter and we're committed to making that one very successful, too. Finally, we believe that Virgin America shows that in-flight connectivity competition isn't just a land-grab. No in-flight connectivity provider is going to keep its customers merely by having gotten there first.

We believe an affordable high-quality, high speed, high-volume service is a key component to passenger satisfaction and that the airlines are realizing that. There's a lot of new aircraft being delivered in the next few years and a lot of existing contracts up for renewal.

So we see most of the air volumes pending some of their executives to fly on JetBlue themselves to test it out. They see it as a big difference compared to what they have now and they are paying a lot more attention to understanding what the technical and business factors are that make this service good. It is not that complicated, it is just having by far the deepest bandwidth resources and the best bandwidth economics. And in a few minutes on one of the later slides I will show more about our plans to expand that both economically and globally.

Government Systems business also had a really good quarter, especially in light of the defense macro environment. We are seeing the growth for the year that we anticipated based on last year's business progress and new order flow. This quarter also had fantastic new orders totaling over $200 million.

One of the keys to our success has been the ability to develop new products and services outside the normal acquisition process, that better fulfill critical operation requirements. One really good example is our small tactical terminal, a Link 16 capability for smaller aircraft such as the Apache helicopter. That need at one time was going to be met by one of the joint tactical radio system products.

Last quarter the US Army recognized that our small tactical terminal would say the government almost $250 million just for these initial deployments compared to the alternative program of record. And they approved it as the Apache solution. We see a big opportunity to significantly grow our Link 16 business through similar and related applications.

We have accomplished the same effect in many key government airborne satellite applications. Tests and demonstrations of Ka-band service on our satellites as well as on partner Ka-band satellites have been compelling in both performance and service pricing.

This quarter we have won a number of influential orders for our Ku- Ka-band terminal and that is a government equivalent of a product that enables Virgin America to have the best in-flight Wi-Fi over the US and also use the best available Ku-band on its way to Hawaii. Those government orders position us very well for significant growth in ongoing service subscriptions.

The C-17 pictured is a good example of an important global platform that spends most of its operational time under high-capacity Ka-band satellites. Additionally, because of our strong base in information assurance and cyber security, we are also gaining really valuable expertise and credentials, extending those capabilities to airborne users. That is creating operational and scale advantages which we expect will ultimately become important in general aviation and commercial markets too.

Our position on so many important government aircraft has also helped us become a good channel for other international satellite operators with cost-effective Ka- or Ku-band resources. We're pleased to be able to blend their services with our own and those of our existing partners.

Our rapidly growing base of global government customers provides a really important foundation for our next slide, especially when you consider it how much the government already spends on commercial satellite bandwidth. We have spoken several times about our ongoing investments in Ka-band payload technology, and our objectives to continue to improve bandwidth economics well beyond ViaSat-2 and also established global coverage.

We have made a lot of progress and we have already started sharing that with key customers and partners. So we thought it important to also communicate with investors about our ViaSat-3 objectives. We're not quite at the point of announcing the first ViaSat-3 contract, but we are getting close.

So think of ViaSat-3 as not a particular satellite, but a class of satellites that's based on fundamental new technology. We have been working on the payload portion ourselves and we began working spacecraft [plus] integration earlier this year. The ViaSat-3 class satellites will accomplish our most important objectives.

That is visible Earth coverage, which enables essentially global service, much better bandwidth economics than even ViaSat-2, which we already believe will be the best in the world, much improved bandwidth allocation flexibility, again approving on the ViaSat-2 benchmark, lower spacecraft cost, and a standardized payload implementation which can have the effect of greatly reducing satellite lead times. ViaSat-3 will complete our evolution from domestic to regional to global service provider.

ViaSat-3 system technology will be compatible with ViaSat-2 terminals, it will just extend coverage, improve transmission speeds, further reduce bandwidth costs to a fraction of what they are today. The technology continues the trend of moving teleport technology into the cloud, greatly simplifying individual gateway terminals and improving system liability and flexibility.

A ViaSat-3 satellite constellation would provide essentially global coverage. We are targeting the first satellite which is shown in blue in the figure for the Americas. As I said, we're not yet announcing a contract or a schedule, but we do expect that the time interval between the launch of ViaSat-2 and the first ViaSat-3 will be quite a bit shorter than the gap between ViaSat-1 and ViaSat-2 launches.

We won't be the first Ka- satellite over South America, for example but we are targeting a decisive bandwidth advantage over any other existing or planned satellites, similar to what we had in the US when we first launched ViaSat-1. What are the key points for end-users, distribution partners, and investors alike is that we have a deliberate technology and business plan to do deliver very unique and unprecedented connectivity services from space. It is important for us to establish credibility that well-designed satellites can do the things that we expect.

Since we are -- seem to be the only ones with technology and plans that are quite like this it makes sense that we'd be the only ones in the market so focused on measuring and preserving service quality at scale. It's important for us to continue doing that, especially when we can continue to grow our earnings through higher value, more efficient service plans.

Based on our second quarter results, we have growth outlook of about 20% EBITDA growth excluding the nonrecurring benefit of the settlement is unchanged, and the main growth drivers are pretty much the same. We anticipate continued improvement in consumer ARPU through higher value, higher priced plans, growth in the number of commercial aircraft in service, and increasing engagement and usage among commercial airline passengers.

Plus we anticipate significant growth in connectivity services for government applications including on our own Ka-band satellites and on partner resources, too. We also are anticipating growth in other government markets including Link 16 and information assurance products in cyber security, when we anticipate the name risk factors for our FY16 outlook are kind of the usual ones, timing of new programs and contract awards, going on up to ongoing R&D investments. That completes our prepared remarks, and at this point we are open to taking questions.

(Operator Instructions)

Tim Quillin, Stephens.

Mark, it sounds pretty exciting around the develop of ViaSat-3. And you allude to a three satellite constellation, is that -- how firm is the plans to build 3? Would you do it in partnership with other companies? I know you don't want to get maybe into the precision of timing, but what are you thinking in terms of the timing of launching the first, the second, and third satellites?

It is pretty much, like I said, we are currently working on the plans for the first one. That is the contract that we will announce -- that we expect that we will announce first. The second and third we are looking at partnerships, is one of our main approaches.

We have plans to deploy them anyway, based on the operational cash flow of the satellites that we already have. It is really more a question of what the timing will be. Until we announce the first one it is kind of premature to speculate on the second and third.

And in terms of tempo, just on the first ViaSat-3 class satellite would to be thinking a couple of years after the launch of ViaSat-2 or just if you could bracket that up a little bit, and also, maybe bracket up what it might cost for the satellite?

Yes. On the cost, one of the things we mentioned in there, is that one of the objectives is to actually decrease the cost of the satellites. That is what we're working on and hopefully we will be able to provide more information on that when we announce the first contract. In terms of spacing between the satellites, probably the fastest it would go is six months centers from the launch of the first one. It could be one year centers, but it is not going to be a lot longer than that under, I would think under any circumstances.

Great. That sounds exciting. And then, just a couple other questions. One is that R&D is trending even a little bit higher than I thought. As you had alluded to, the development -- or rapid development this year -- more spending on R&D this year, does it stay at that level throughout the year and then drop off next year or should we kind of view this as a new normal given that those plans for ViaSat-3?

And then if you could just a detailed question, would you be able to estimate for us what kind of revenue you are getting from in-flight revenue today? Thank you.

Okay. First I want to answer your R&D question in two parts. One part I wanted to point out is that we do - when we are looking at the development that we're doing we are looking at the systems as a whole. One of the things that we're finding now, for instance still around ViaSat-2 development, is that by spending a little more on R&D we can reduce our capital investments fairly substantially.

Some of it is just a question of which buckets some of the spending falls into. We are going to do things that minimize our total expenses, but independent of how the buckets fall. That is part of what you're seeing now. Shawn can give you a little more detail on what we expect, on R&D? Or what we expect (multiple speakers).

I think from an R&D perspective, looking at this quarter it is probably going to trend somewhere to those levels to the rest of the year. Those are things that we can kind of lever based on the pace of some of the next generation solutions. I'd probably expect in to be about similar to Q2.

We're not breaking out the in-flight R&D -- the in-flight connectivity revenue separately on our satellite services.

I said that as last question but also, Mark, if you could comment on the latest expected timing on the launch of ViaSat-2. Thank you.

We're still planning on a launch in the last quarter of 2016.

Thank you.

Rich Valera, Needham & Company.

Thank you. A question about the satellite service revenue and particularly the sequential increase over the first quarter. Was there anything kind of one-time nature in that, or is that sort of a new baseline we should look at going forward for the satellite service revenue?

Yes. I would say for the quarter there wasn't anything that wasn't non-recurring in nature in this quarter. It was all pretty much our core recurring revenues in Q2.

Got you. I noticed the churn did tick up pretty meaningfully quarter-over-quarter, at least by our calculation. It sounds like from some of your comments that some of that is actually planned and that you want to manage the number of subs in various beams to make sure you keep your service quality up. Is that accurate -- an accurate way to characterize the way you are managing the total net subscriber base?

No. I think churn picked up marginally but I wouldn't say significantly.

Okay.

I don't think there is really a trend there. Actually, if anything, longer churn. We have been doing pretty well at trying to identify sources of churn and try to improve it. There's -- one affect that is helping is our ability to understand it and to address it I think fairly effectively. Another one that makes it harder is constantly increasing expectations for bandwidth. Those are the ones that are bouncing that.

Overall, I think we are doing pretty well. The point about being able to allocate bandwidth for the other applications, it is not we want to increase churn but that the fact that churn is somewhat predictable allows us to better plan how to allocate our bandwidth. So that if we know that we're going to have demand in particular markets for other applications in the next quarter or two we can deal with that without having to make service worth -- worse by taking advantage of what we expect to be the churn in those places.

Got it. That makes sense. Mark, can you talk about the RFP outlook, if you will, for in-flight connectivity, what you're seeing out there in terms of opportunity both domestically and international, and how important are your plans for ViaSat-2 and ViaSat-3 in these discussions, assuming you are sharing the ViaSat-3 plans with prospective customers and the in-flight -- international in-flight side?

Okay. So, one is certainly the demand for in-flight Wi-Fi. I would say the depth of understanding and maturity in using in-flight Wi-Fi is greatest in the US and flights coming to and from the US. That is fine for us because we have ViaSat-1 and then ViaSat-2 is also really valuable, especially for some of our existing customers, it provides service to the Caribbean and then down into Mexico and across the Atlantic. That is our strongest market.

I would say pretty much every -- we are talking pretty much to every airline about their new opportunities and the disposition long-term of their fleets as well. I think -- I am not aware on a North American domestic basis of much substantial that we're not getting to look at. Internationally there is a lot of airlines.

We are engaged with a number of them. Probably the ones that are most interested in us are the ones that are interested in having really good service. Anybody that wants a really good service is certainly aware of what we're doing. Part of the reason that we have been talking about ViaSat-3 on an international basis is the timing of ViaSat-3 so that we can play into to the plans of some of these important international carriers.

I would say we were sort of engaged with a lot of them. They are all aware of us. The Netflix thing really -- I don't want to put an exclamation point on it, but the number of inbound calls we got -- that we get went up sharply after that. Does that answer your question?

That does. Thank you, Mark. Just one more for Shawn I think. On the $6.9 million of quarterly settlement you get from Loral, what is the split on that between the revenue and the G&A credit? Is it the same as the initial one-time payment?

No. The recurring portion of the settlement is just $6.9 million to product revenue.

Got it. (Multiple speakers.) That is what I thought. Okay. Thanks very much.

Matt Robison, Wunderlich.

I just wanted to try to get to this sequential uptick in satellite revenue again given that's what you can impute from your ARPU and some of that data. Did you add closer to 300 or closer to 400 aircraft in the quarter? My other question would be if we should expect R&D to be comparable to the second quarter as the current quarter?

On the aircraft I think we said we added 35 sequentially. That is how many -- that was the increase in aircraft sequentially

Okay. I guess I must have snap fingered something because it seems like the rate, the sequential increase net revenue, is much more than what we have talked about for your per plane type of revenue. Was there a revenue from fitting up planes that was in there that was different from normal?

No. Not in satellite services. Satellite services really dominated right now the combination of consumer services and the in-flight connectivity. Just services components.

Okay. We will have to take it off-line. What about the R&D?

I think we hit on that already, but I would expect it to be real similar to the Q2 levels. We may have some slight pacing things based on how we close out the year, but pretty close to Q2.

Okay. Sorry I missed it the first time.

Mike Crawford, B. Riley & Company.

Mark, you mentioned with the ViaSat-3 class satellites that there would also potentially be a shorter time to build and launch the satellite. Can you quantify that at all?

Yes. Right now one of the things people always sort of grumble about with these powerful geosynchronous satellites is that the lead time from the time you decide to acquire it, until we have it in service, is three to four years, and lot of that is because the satellite are customized.

That is they're customized for their (inaudible), they're customized for their coverage and often for the distribution of coverage. The theory with these satellites is that they are largely assembly-line. That in that would allow you to pipeline them.

You could imagine that you could build a flow of satellites that are not dependent on a particular orbital spot or a particular coverage. And then those satellites could be -- you could imagine customized from there and launched within a year ballpark of the time that you choose a particular market or identify a market need.

Okay. So, hypothetically if you announced a contract on a certain date, call that time zero, then you -- because you could arrange a launch satellite, is this quickly as a year-and-a-half, are you saying?

Yes. You wouldn't actually be a one year construction time from the time you started a satellite. Think of it as the first ones, the first three that we do will have lead times that are pretty consistent with what we have seen so far. There is new technology there so there will be some uncertainty. We will talk about that when we talk about the actual contract.

Then think of it as from then on if you know that you will have some form of demand in different parts of the world and that you can project that you could start building an inventory of satellites that could be useful in different orbital slots or in different geographic markets. And think of it as a very large portion of the satellite is completely generic and a very small part of it would be customized. That last part of customization would be what would put you in a one year type of lead time. That is ballpark.

What you would do is you would arrange launches that you could pull out of your launch inventory but that you wouldn't have to take the time to design and customize satellites. That is really what drives the [long] schedules. People associate now with these types of advanced satellites.

And from the slide in your deck -- when you're talking about that megabits for megabits picture is that like a terabit, a gigabit per second?

Yes. That is what we have been talking about. And if you think about that, yes, the ViaSat-3 is in that 1000 gigabit class range. That is what we have been saying. I think we have a solution there.

Okay. Just to continue on this line, so, obviously, potential customers you talked to about taking a ViaSat-2 type of payload from you and Boeing might be somewhat aware of these designs. Would you say that has been the hesitation for partners to jump in and order a ViaSat-2 class satellite?

Yes. As we have gotten closer and closer to having a ViaSat-3 available, for the partners that have expressed interest in the same business model, the same resource of value that we are which is having really cost-effective bandwidth delivered into these markets, then we have shared the ViaSat-3, kind of the information we have shared here and, yes, there is interest there for sure.

At some point you get to the point where you wouldn't want to buy a ViaSat-2 anymore. I think for some of the most strategic partners we have talked to that is the point where we are at.

Great. Thank you. And then just last question goes back to the Government Systems business where your Link 16 technology seems to be opening new markets for use. Is that a reason why you think you are getting larger award quantities than your main competitor in the MIDS market?

There's really two different things going on. One is there is kind of this competition duopoly for MIDS-LVT and MIDS-JTRS. Those, I think historically we have held on there and done well and I think we will in the future. But there are these other markets that are not standardized and not duopoly markets.

Some of them have either been made up for grabs because programs like JTRS that were going to meet those didn't come to fruition. That would be an [STT] example. And then we have other applications of Link 16 that really weren't anticipated by the acquisition process, where Link 16 has turned out to be a lot more useful in operations than people thought it would be.

We have products and applications that are doing really well in those markets. We haven't really highlighted them but there are some fairly unique products that are -- even make Link 16 available in very small [foreign] factors or integrate Link 16 into fire controllable and target assessment systems.

Thank you.

Tim Quillin, Stephens.

Thank you for taking my follow-up. I will probably be confused for a few years about ViaSat-3 so forgive me, but as we think about the build cycle on that for the first ViaSat-3 class satellite, after you select the vendor should we be thinking about it launching and going into service on the first one roughly three years after that?

Roughly. So, the gap between ViaSat-1 and ViaSat-2, ViaSat-1 was launched in 2011. ViaSat-2 should be launched the end of 2016. That is a five year gap.

We think the gap between ViaSat-2 and ViaSat-3 will be less that five years. If it's four that'll put it in the 2019-ish range. That is kind of the ballpark

In terms of the next build, the second ViaSat-3 class and third, it really depends on what kind of partnerships you can align? Those could theoretically be built somewhat simultaneously with the first one?

Yes. It won't be simultaneous. I would say it's probably a minimum of six months centers. That is what we think makes sense. Six months centers meaning that the second one would be scheduled to follow up six months after the first.

The reason we're talking to customers and partners is, part of this is what we talked about in the government business, we are already building up a big base of government services. Lot of the services could be run on these ViaSat-2 and ViaSat-3 satellites, the second and third satellites.

Essentially we are just going through a planning exercise on cost avoidance, new cost growth, cash flow, and the timing of those cash flows. And then output partners, not at the front of that line but at the end of that line, the factors that will determine the spacing between the satellites.

Got it. That makes sense. And on ViaSat-2, can you remind us what CapEx you have in front of us, what will fall in FY16 and what will fall in FY17? And then, how you might massage the plans after you launch ViaSat-2, where caps might go and what you're thinking about where you want to take the throughput as well?

I think from just the pacing and timing of ViaSat-2 from a spend profile, at the end of the quarter we are about 67% complete on the satellite itself. That kind of helps you [tease out] what we have left to go. Probably the rest of this year you're going to have spend that is pretty close to what we have had on a year-to-date basis, average per quarter spend.

And then the plans market?

One of the things we have talked about a lot over the last couple of years is this relationship between what our service plans are and how big target market is. One of the things we have shown, we had really good data on this, is that when we -- even when we don't increase the speeds, we get 12 megabits per second just by increasing the volumes or making the volume caps go away we appeal to a much broader segment of the market.

Actually we will be test introducing higher-speed services this quarter, very soon. We will have speeds that are significantly faster than the ViaSat-1, exceeds plan that we had so far. That will let us test that element. We have said ViaSat-2 service speeds can be well over 100 megabits a second. We are figuring out what will bring to market, the price points.

The other point is that we have been looking at how to make caps that are not scary or that are virtually uncapped where subscribers don't experience a failure load which is I have reached my cap and so my speeds are slowed or I have to pay more money. So those are really the two main ingredients that we think we will be able to get to with ViaSat-2.

Obviously ViaSat-3 gives us a lot more maneuvering room above that and lets us turn a lot of the bandwidth economics that we get into some combination of expanded markets or higher margins or better services. We are still assessing that in each of these different vertical applications.

Those are the main ingredients, are faster speeds, and essentially uncapped services in all of these markets. Services that don't have a failure mode of a cap.

Right. That makes sense. And then on the commercial networks business, the award flow over the trailing 12 months has been relatively low. I think something like $185 million in trailing 12 months reported awards.

Generally I think about revenue eventually trending towards award levels. If we stay at these same levels maybe we should go down to that revenue level. Are there things in the pipeline that would make me believe that we are going to pop-up to better award levels and get growth going the right direction on the commercial network side?

On the commercial network side over the last four or five years we have had two big drivers which were ground infrastructure projects for Eutelsat and for NBN. We have also had some other Ka-band ground infrastructure projects. One of the things that we talked about, again as well, is that the big divergence between the kind of Ka band satellites we are making and what we are seeing other people buy.

Generally, what we are tending to see people buy are 10, 20, 30 gigabit Ka-band satellites. You can see we are aiming at 1000 gigabit satellites. There is kind of a mismatch in our infrastructure investments that we're investing in things that aren't really optimized for these smaller satellites. We think when services come to market that the bigger satellites are going to be far more competitive in the market. That is a better way to monetize the technology.

More and more we have kind of gone away from the selling of commercial technology and more into being able to bring commercial services globally. That is part of it. The flip side is we do have a base of commercial technology products that will continue on. We're doing earth sensing, imaging, infrastructure. We have some really interesting plans to actually grow that market.

We also, when we sell things like airborne terminals to potential customers those things show up in there. There is a base in there and it's going to be kind of [asintotic] to what those markets will be.

This is Rick. I want to add that when NBN now goes in to service we will start shipping (inaudible) there and same thing with FCI in the ViaSat-2 launches. Large projects like what we are seeing we aren't seeing any of those in the pipeline.

When we talk about our growth prospects more and more of it will be realized through the government segment and the satellite services segment.

Okay. I appreciate that. Thank you very much.

Jonathan McLean, Morgan Stanley.

Hi, thanks for taking the question. ViaSat has been around since 1986. I'm sure your business has changed over the decades. What do you, as a macro question, what do you see as your biggest risk currently or coming down the road?

Would it be competition, or technology change, or -- you are a small cap, do you see a potential of a bigger company coming in or acquiring you? Just kind of the macro question.

Personally I consider myself an opportunist when it comes to the Company with two other friends and we tend to see opportunity as [more than risk]. I think the biggest opportunity that we see, and I think this will deal a little bit with your risk question, is that there is really nobody else that is aiming to do the things we are doing in terms of these really high-capacity satellites that we think that the key to making satellites more competitive is driving down bandwidth costs.

At some point -- I think there was some sense that there was risk that value proposition wouldn't play out. That we can make bandwidth arbitrarily cheap and arbitrarily fast and nobody would want it. We're not seeing that at all. As a matter of fact, we're seeing really good demand for bandwidth at the speeds and price points that we can deliver.

Right now I think what we're focused on is just communicating that value proposition. It is still not totally clear to everybody in our ecosystems. There is that. Things can develop at a slower pace than we think, but we see a lot of opportunity in the value proposition. We don't see other people competing to create the same value proposition. I think that is the dominant story for us, the big picture looking out ahead.

Thank you.

Operator, maybe one more last question.

Rich Valera, Needham & Company.

Thank you. From your chart it looks like you are expecting the bandwidth economics of VS3 to be around 5X that of VS2. Is that about right, Mark?

We will finalize it when we announce it, but it is in that range. It could be a little better.

So, how much of that, just roughly proportionally, do you expect to come from the lower absolute cost of the satellite versus greater efficiency from the satellite or is that too early?

That is a very fair question. What I would say is the thing we're really focused on is more and more throughput. Big step increase in throughput and I would say meaningful but not nearly as big reduction in the cost of the satellites. It is mostly from productivity or yield of the satellite, getting a lot more bandwidth through the satellite.

When you think of the whole satellite system, for instance, the satellites -- our approach is take advantage of the space infrastructure, things like solar panels, propulsion, navigation, so you have all of those things centralized. You want to put as much payload as you can on those.

That is one way to improve efficiency. When you do that, that means launch costs are still pretty substantial. You are not going to be able to get a 4X reduction in the satellite in space but you can get a 4X or more increase in the fee for the satellite and those are the things we are focused on.

So when you look at the VS3 architecture and it sounds like you have dramatically higher throughput than her other state-of-the-art satellites, whether they are HT -- let's call them HTS satellites, are there things it won't be able to do that a quote conventional HTS satellite will be able to do?

Why wouldn't others in the industry look at your architecture and say can we have one of those? Can we use that? Unless there is some limitation. I'm just trying to figure out how you're thinking about that.

We ask the same questions. One thing is in terms of functional capability this satellite does things no other HTS satellite can do. There is no -- it doesn't do everything perfectly but it does everything far more effectively than any of -- like a ViaSat-1 class satellite and better than ViaSat-2.

Those things are -- some of the things that are really, really valuable, for instance, are dynamic redistribution of the bandwidth, the ability to tolerate failures on the ground, the ability to build out the ground segment incrementally, to be able to get to much higher speeds, greater concentrations of bandwidth in high demand geographic areas. All of those things are really, really important operationally in monetizing the bandwidth. Those are the things that this does far more effectively than existing HTS satellites.

The thing that we see mostly in the market is there are very few other people that draw the correspondence that we do between bandwidth economics and retail value, monetization. And, partly, a lot of satellite operators are not motivated to undermine business models that have worked for them for a long time. I think that is one part.

Also, the satellite manufacturers, because they have been responding mostly to the demands of the satellite operators, have not really been motivated to work on the technologies that we're working on. We have said over the years we have invested a lot of R&D money in this, tens of millions of dollars over five years. You have to have some sense of commitment and understanding of the value to do it.

We see it as a big opportunity. We kind of wonder why wouldn't everybody want to do this? You should ask other people why they don't.

That's a very fair statement, Mark. Thanks for that color. Much appreciated. Good luck.

Thanks for the question. I think that concludes our call for this quarter. We thank everybody for dialing in and for your participation. We look forward to speaking again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.