Viasat Inc (VSAT) 2016 Q4 法說會逐字稿

Welcome to ViaSat's FY16 fourth-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. Welcome to our earnings call for our fourth quarter and full-year FY16. I'm Mark Dankberg, Chairman and CEO, and I've got with me here today Shawn Duffy, our CFO; Keven Lippert, our General Counsel; Bruce Dirks, our Treasurer; and Rick Baldridge, our COO, is traveling.

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 the SEC or from our website.

With that said, back to you, Mark.

Okay. Thanks, Keven. We will be referring to slides that are available over the web. I'll start with some highlights and a top level business review, and then after that Shawn will discuss the consolidated and segment level financial results. And then I'll give some additional details and color on our business segments, and then finally I'll summarize our outlook and we'll take questions.

So we think it's most helpful to think of our fourth-quarter and FY16 results in three pieces. First, we focus on the revenue and earnings growth in the satellite services and government systems segments. We expect those segments will drive most our growth in the next few years. Those segments results very effectively show the competitive advantage of our highly productive satellites and the end-to-end vertical integration, as well as our overall business strategies. Those segments had record revenues in the fourth quarter and for the year.

In Q4, satellite services was up 12% year over year and government up 9% year over year on revenues. For FY16, satellite services had 17% year over year recovery revenue growth, and government systems had 13%. For FY16, we had record revenues company-wide also. Adjusted EBITDA growth was even stronger in those two segments with both segments reaching record levels. Satellite services was up 21% in the fourth quarter and up in recurring adjusted EBITDA for the full year by 45% on a year-over-year basis. Government systems was up 22% in the fourth quarter and 20% for FY16 in adjusted EBITDA.

Second, we think we have an attractive growth outlook. In government, we booked a record $241 million in orders in the fourth quarter on a $164 million in revenues, and we had a very strong book-to-bill ratio of 1.2 to 1 for the year. Satellite services ARPU grew 7% year over year in the fourth quarter and 3% sequentially over the third quarter, and commercial aircraft in service and revenue per plane are also up significantly, all positive leading indicators for FY17, despite being close to capacity on the existing satellites. We also set company-wide records for new orders in FY16.

Third, we can see that our bandwidth productivity competitive position is resonating in all of our target markets, including some that we haven't even entered yet. ViaSat-2 is making good progress, and our launch window starts in less than seven months. Starting construction on the ViaSat-3 constellation spurred even more interest, especially with customers who have very large bandwidth needs and/or are in new geographic markets for us.

We see a big opportunity to accelerate our growth while creating formidable competitive advantages. So we're investing to bring that to market. Since we're building the ViaSat-3 payloads in-house, we are incurring R&D expenses that would otherwise be capital investments in a more conventional satellite procurement. We'll go into more detail on those investments later on in the call.

We're also having a big impact on the commercial in-flight connectivity market, and that's leading to higher incremental R&D investments, especially for STCs or what's called Supplemental Type Certificates on new aircraft on a success basis. Total discretionary R&D investments increased by about 65% year over year in FY16 to a total of about $77 million with a large majority of that reported in our commercial segment. The upshot to our revenue and earnings growth in the government and satellite services segments combined with growing market interest in our technology is motivating us to invest to get the productivity gains and geographic coverage of the ViaSat-3 class satellites as fast as we reasonably can.

We believe there's a Moore's Law type learning curve effect we can leverage to gain even more separation from other satellite systems and operators. With the launch of ViaSat-2 now approaching, we're seeing a smooth segue from optimizing the applications of ViaSat bandwidth to a rapid growth given by leveraging our superior bandwidth economics and across a footprint that will triple the total bandwidth inventory and substantially greater geographic coverage.

So with that as a top level overview, Shawn will go into more depth on our financial results for the fourth quarter and year end.

Thanks, Mark. I will spend a brief moment on slide 5 which shows revenue and adjusted EBITDA performance for the fourth quarter. Then I will move to our annual results.

As Mark mentioned, the government systems and satellite service segment drove our revenue and adjusted EBITDA growth more than offsetting declines in commercial network. Specifically, revenues were up 12% and 9% in the period for satellite services and government systems while adjusted EBITDA was up 21% and 22% respectively. These were record revenues in both segments.

In satellite services, our adjusted EBITDA margin hit 44%, up 4 percentage points from last year. And our government segment had an incredibly strong earnings quarter as well hitting a new record for adjusted EBITDA of $43.5 million driven by our fastest growing area, government mobility and our legacy stronghold, tactical data link. So we are happy with how we are doing in both top-line growth and operating margins in these areas.

In commercial networks, our Q4 reflected the large program wind downs we saw throughout this year in antenna systems and on our NBN co-project, plus lower consumer terminal sales to distributors. In Q4 FY16, these large programs are very near complete so our commercial networks business has pretty much stabilized from an operating perspective. And our adjusted EBITDA results mostly reflect our scaling R&D investment for ViaSat-3, as well as expanding commercial air business which I'll hit on a bit more as we look to FY16 as a whole on the next slide.

FY16 was a very strong year for us both financially and strategically. We achieved record top-line performance with consolidated revenues up $1.4 billion, driven by strong gains in government systems and satellite services. Our government systems revenue grew by $72 million, a 13% year-over-year gain led by government mobile broadband growing over 25% this year plus strong growth in tactical data link and ViaSat wireless services. These results highlight the Company's calculated focus on the growth markets of broadband and mobility where we began investing on the government side two to three years ago and which are now a driving force for our EBITDA growth trend. In satellite services, our FY16 revenues also grew strongly, up $59 million or 12%. And we have success on multiple fronts.

Our ARPU continue to grow as we expanded our retail plan offerings and value added services. We also grew our residential subscribers as a whole resulting in a higher mix of retail subs compared to the prior period. And commercial air revenues are up sharply, and again, we are seeing the fruits of key investments we began making just a few years back. And we are posed to continue that growth into next year right alongside our preparation for ViaSat-2's launch. In commercial networks, our FY16 revenues reflected the lower consumer terminal sales and the larger program wind downs I discussed before. So in total, we grew consolidated revenues at over 2.5% compared to last year and over 4% when you exclude the non-recurring impact of the SSL settlement in Q2 of FY15.

Now looking at adjusted EBITDA, our annual performance shows the same strong trend. Government and satellite services were both up for the fiscal year as a result of our higher revenues plus improving operating margins. For the year, adjusted EBITDA increased 20% and 17% in government systems and satellite services respectively, both of which were new records. As you exclude the $40 million one-time gain associated with the SSL settlement last year, our satellite services adjusted EBITDA grew by 45%.

Within commercial networks, our adjusted EBITDA reflected the revenue impact plus a $34 million year-over-year increase in R&D investment. As a mentioned on the prior slide, we believe the current quarter reflects an operational low point for us in the segment.

In FY17, we will see ViaSat-3 and commercial air R&D investment grow steeply resulting in total R&D growth of approximately 50% compared to this year. And a meaningful portion of this increase is success-based R&D related to our expanding ISE business. However at the segment level, this impact should be mitigated by growing consumer terminal sales associated with NBN service launch in April and expanding commercial mobility opportunities. So we expect to be at or slightly above these quarterly segment levels throughout FY17.

So to summarize, our FY16 was a great year financially. Our business contributions grew strongly evidenced in our year-over-year revenue growth and conversion to adjusted EBITDA of nearly 50% after we take out last year's Q2 SSL non-recurring impact.

So as we turn to the next slide, we see both our quarter and full-year operating income results, reflecting our higher depreciation and amortization expense year over year on slightly lower Q4 and full-year adjusted EBITDA. Non-GAAP income for Q4 and full year was down $3.1 million and $15 million respectively, as result of the Q2 FY15 SSL non-recurring amount in last year and our earnings per share figures follow the same relationship.

However, it is worth summarizing that the non-recurring impact of the Loral settlement in FY15 represented a benefit of $0.49 per share. So excluding that, our non-GAAP diluted EPS increased about 14% year over year.

From the cash flow statement, you see that we generated approximately $300 million in cash from operations in FY16, which reflected another strong year. Our core operations funded all our recurring maintenance CapEx activities and CPE [pool] replenishments. $45 million in network and back-office expansion in preparation for ViaSat-2, $40 million to secure land for our Carlsbad campus extension, plus contributed to our three satellites under construction.

Our year-over-year investing activities also reflected last year's acquisition of NetNearU for $56 million in Q1 FY15. So we ended the quarter with $180 million outstanding on our revolver and $197 million outstanding on our current $387 million XM loan commitment. Our net leverage increased slightly to 2.8 times trailing 12 months adjusted EBITDA due to our higher debt balances. Yet, our Q4 liquidity position remains very strong.

An additional point regarding our liquidity, I wanted to note that today we finalized a significant amendment to our existing revolving credit facility. Working very closely with our strategic [think] partners, we were able to increase the size of the facility by 60% from $500 million to $800 million and reset the maturity to approximately five years. We also added flexibility to expand our global footprint while maintaining our favorable existing pricing. Overall, this is a significant step in improving our overall financial flexibility and solidifying our long-term growth plans.

On the next slide, our satellite service metrics. Adjusted EBITDA leveled out a bit on a sequential basis. But this was primarily due to higher sat costs associated with a 15% increase in gross adds compared to third quarter, which you can see in the chart on the top right. As we see when we are filling out ViaSat-1 and we expect to see when ViaSat-2 goes into service, EBITDA is negatively impacted by the expensing of success-based commissions and advertising expenses, also which are a component of sat. So with our higher gross adds and a slight decrease in churn, we posted 9,500 net subscriber additions. As we talked about earlier, we are continuing to see a great trend in ARPU, now at $58.46, as a result of our improving plan mix and sales of ancillary services such as voice and [speed] plans and a higher percentage of retail subscribers.

Overall, our satellite services conversion of revenue to adjusted EBITDA for the quarter was exceptional at 74% compared to the same period last year, which really illustrates the continuing gains of operating leverage in this business. On the in-flight conductivity front, we added another 30 commercial aircraft during the quarter and ending the year with 476 commercial aircraft on our Exede network. Revenues in this area continue to increase at a strong rate with ongoing growth in our [tail] counts and higher overall service adoption by passengers. And keep in mind, this chart doesn't show the number of business jets and government aircraft on the Exede and Yonder global network.

So in summary, we are seeing strong growth in this area and in FY17, we expect this to continue more planes coming online, coupled with more revenue per plane, as this service continues to change the game for consumers and airlines.

So now, I'll turn it back over to you, Mark.

Okay, thanks, Shawn.

So with that financial background in mind, it's helpful to take a broader view of our strategic approach for satellite services and government system segments. In general, we like to find business strategies that are disruptive in the sense that they change the dimensions of competition and in the underlying business models in our target markets. That means bringing value propositions to market that are fundamentally different than those that currently exist. It's not just same things overpriced or even same price for incremental performance improvements.

When we can bring true abundance where incumbents have depended on scarcity in markets that crave bandwidth, it's likely going to be a good bet. Incumbents with substantial assets built on the scarcity model generally find our approach difficult to depend and we can leverage powerful macro market forces. That theme is most obvious in our high capacity satellite services but there are similar effects in tactical data links and information security. Finally, each of these markets already involve significant entry barriers, and we believe that the technologies we inject into those markets can create durable competitive advantages and yield attractive returns. So we've got good success with ViaSat-1 in using disruptive bandwidth economics to move up market in satellite services.

We've been constantly refining our marketing approach, and in FY16 with very little bandwidth to work with and therefore very modest subscriber account growth, we grew revenue by 17% and adjusted EBITDA 45%, excluding the non-recurring portion of the SSL settlement. We achieved this by making our service plans more attractive by increasing bandwidth availability and peak speeds.

We anticipate continued solid growth built around that strategy and we see great potential in expanding it with ViaSat-2 where double the bandwidth economics gives us much more speed and bandwidth to work with, and our uniquely flexible satellite design enables us to better match bandwidth supply to geographic demand.

Our bandwidth competitive advantage is gaining great traction in the commercial in-flight connectivity market. Our partnership with JetBlue is reframing the entire industry away from a scarcity model of single-digit percentages of passengers paying very high prices for meager bandwidth and turning that into planes full of passengers using the whole internet including video streaming. It's still early days but our commercial in-flight connectivity business is seeing strong growth in connected aircraft, passenger engagement per plane, and bandwidth usage per passenger.

Our satellite assets and partnerships along with scale from our defense business makes us uniquely suited to serve the bandwidth abundance model, and we anticipate continued strong growth ahead. And we're having striking success in the government market by delivering unprecedented amounts of bandwidth at very competitive cost to hundreds of previously un- or under-served airborne platforms and by investing in making the powerful situational awareness data embedded in Link 16, available to thousands and ultimately tens of thousands more participants, we are accomplishing similar effects in digital terrestrial networks.

Our FY16 defense business results with strong double-digit growth in revenue and EBITDA in a macroenvironment where pretty much every other significant competitor is shrinking, lends weight to our approach. Our 1.2 to 1 book-to-bill for the year sets the stage for continued growth in FY17. Tapping into long-term growth markets like these with good returns and enduring competitive advantage is a relatively rare opportunity, and we're very encouraged by our success to date. So that's why we're investing in ViaSat-3.

The chart on the lower right is indicative of the competitive advantages we can build. So I'll add a little more color on each of these areas. We're really proud of our progress in the in-flight connectivity market in FY16. We are pretty unanimously recognized as having by far the best Wi-Fi service in the industry, and pretty much every competitor is reframing their go-to-market strategy around either imitating toward denying the existence of our competitive advantages.

We have almost 500 planes in service. Our service quality is still excellent. We established ourselves with a prime contract with Virgin America. We received our first Supplemental Type Certificate for our global Ku-/Ka system on an A320. We've got other STCs underway, and we've signed an MOU with Qantas, our first commercial airline in the Pacific Ocean region. We're engaged in, in-depth negotiations with multiple airlines around the world and anticipate citing growth again in FY17.

The abundance versus scarcity framework is really helpful in understanding our strategy. The lower left corner chart is a simple S-curve to illustrate the relative value of bringing incremental bandwidth to airline passengers. Think of the X axis as total bandwidth delivered in terms of connected passengers times the amount of bandwidth used per passenger. The Y axis is indicative of value delivered to the passengers and by extension, to the airline.

Systems at the lower left corner exhibited classic underpowered S-curve behavior. They have so little bandwidth that even when improving them by factors of two or three or more, there's essentially no discernible impact. So think about an air-to-ground system that doubles or triples its bandwidth efficiency but still doesn't meaningfully improve the customer experience or result in higher take rates. Or conventional Ku-band service where the service provider has multiple additional satellite transponders and still doesn't move the needle on apparent performance.

In contrast, our ViaSat-1 base system is universally recognized as the first one to really distinguish itself with speed and bandwidth even supporting streaming video from Netflix and Amazon at scale. We think our current performance is really just at the inflection point of the S-curve and we can deliver even greater impact and value to airlines and their passengers by substantially improving the service with ViaSat-2 and 3.

While Ku-band's spot beam satellites should be better than existing broadcast FSS ones, we also know the economics and capacity density of those satellites are much worse than ViaSat-1 is delivering now. Scarce bandwidth ultimately has limited utility and can't move beyond existing business models of charging hig prices to small percentages of passengers while delivering a limited and often disappointing user experience.

In fact, the in-flight entertainment business models of some competitors are built around managing scarce bandwidth to make those economics work for them and their airline customers. We think that type of model is not sustainable once we move up that S-curve. Abundance and [rick a] allows airlines and their passengers to leverage macro market forces delivering virtually unlimited choice of premium high-resolution live and on-demand video and music entertainment directly to passengers' personal devices using rights the passengers already have.

We are hoping airlines that embrace the abundance model to attract more passengers, earn more revenue, avoid expensive in-flight entertainment business models, and attract value-creating partnerships with leading internet and media brands like Amazon, Netflix, Spotify, and others. So ultimately, the success of our business model depends on passengers expressing their preference for connectivity similar to what they get on the ground today, and we are encouraged by progress to date.

We've already covered the financial highlights for government systems, and usually we emphasize our success in government mobile broadband satellite. That is still the fastest growing part of our government segment, but this year we've had really strong growth in tactical data links including very strong new orders. From a strategic perspective, our tactical data link business has two different portions. In the upper right corner of the graphic, we show a progression of radio form factors starting with MIDS low-volume terminal or LVT, and ending with our newest product, the BATS-D. The first three are shown in gray and those are the current programs of record where we basically compete in a duopoly with Data Link Solutions.

Remember, the MIDS joint tactical radio system radio didn't start out as a program of record but it's turned into really the only ongoing joint tactical radio system production radio. The last two boxes shown in blue are ViaSat discretionary products that extend the capabilities of Link 16 to hundreds, and if successful ultimately tens of thousands of participants that otherwise would not have had access to that valuable real-time situational awareness data.

We've had very good success in FY16 with the selection of the small tactical terminal, the Apache helicopter, and the initial testing of the BATS-D handheld. We've invested substantially in those products over the past several years, and we are really pleased to see them contribute to our strong growth in the government systems segment.

We're doing similar things with information security products, and we anticipate growth there in our FY17. Almost all our considerable success in the government and broadband market has come from identifying and uniquely serving those bottoms-up growth markets that aren't being addressed by government programs of record. Our strong book-to-bill in FY16 gives us confidence going into FY17.

But we also see several of our initiatives on the path to ultimately being adopted as programs of record in significant growth markets addressing real gaps and capabilities. So we continue to think we've got strong growth opportunities in our government segment leveraging core fundamental technologies with very high entry hurdles even for substantially larger players.

It is also important to keep in mind the significance of the approaching launch of ViaSat-2. In many ways, ViaSat-1 began creating important impacts even before it was launched, and we are seeing the same sorts of effects now with ViaSat-2. The launch is scheduled for a window beginning seven months from now. We are continuing to make good progress. Payload module functional testing has been completed, and the entire spacecraft is almost fully integrated. We are close to completing insurance coverage at favorable rates, integration planning with Arianespace is proceeding well, and all of our testing to date is consistent with achieving our design targets for capacity and performance.

From a go-to-market perspective, some of the most salient points are the geographic coverage, improved capacity density in attractive markets, higher peak data rates, substantially improved bandwidth economics, and geographic allocation flexibility. Coverage-wise, the bridge to Europe, especially for aeronautical services, the Caribbean and Gulf of Mexico coverage for aero, maritime, and oil and gas, and our ability to serve Mexico and Central America down to Venezuela and Colombia are all valuable capabilities.

We think the skills we've been refining on ViaSat-1 will serve us very well with the bandwidth abundance of ViaSat-2. We expect to be able to grow our addressable consumer markets by offering plans with even higher speeds and virtually unlimited bandwidth without hard usage caps.

We're also aiming for more growth in, in-flight connectivity, enterprise services, government, and to begin to grow in new markets including Wi-Fi, maritime, oil and gas, and Ka-band general aviation.

So this slide on maximizing productivity is mostly just to recap the investment thesis behind the ViaSat-3 constellation. Fundamentally, we think that maximizing the productivity of expensive satellite assets, in terms of delivering the most gigabits per second focused on the high demand geographic regions per unit capital cost invested, is a really powerful source of competitive advantage.

While ViaSat-2 is already the most productive satellite broadband asset underway, we see big opportunities in driving even greater productivity. The payoff is not only to distinguish ourselves from other space-based competitors but to substantially grow our addressable terrestrial markets on a global scale.

We believe it's extremely difficult to attack the technology needed to reach this kind of productivity without the level of vertical integration we've achieved. It requires close coupling of multiple technology and business domains in ways that are not practiced by incumbent satellite operators, satellite manufacturers, or other members of the existing business ecosystems. We started this journey years ago, and we've got a systematic approach to burning down the technical and systems risks.

We just recently opened our new Arizona facility that includes a cleanroom high bay for assembling two concurrent ViaSat-3 payloads. Initial market reactions to the ViaSat-3 constellation have been very encouraging. We continue to make progress with multiple potential partners as well as users of the system. We also making good progress on the system space-based technology, spacecraft integration, and regulatory fronts. And we're lining up addtional capital resources including the expansion of our revolving credit line that Shawn mentioned.

Finally, I will give a little bit of color on our growth outlook. Overall, we do see good opportunities for revenue and adjusted EBITDA growth company-wide driven by various strong government systems performance, good satellite services growth, and relatively flattish operational results in the commercial networks segment, relative to our current run rate. About a $1.5 billion in new contract awards in FY16 provides a good foundation for high single-digit total revenue growth for the Company in FY17. Growth in mobile broadband and continued improvements in consumer broadband are anticipated to help improve our operational adjusted EBITDA margins by as much as several percentage points relative to FY16.

But overall, adjusted EBITDA growth will be constrained by the growing incremental R&D expenses for the ViaSat-3 payload program. And also as Shawn mentioned, by success based R&D expenses in commercial air, primarily to support Supplemental Type Certificates for new airlines and aircraft configurations.

On ViaSat-3, if we were just buying a complete satellite from a manufacturer, we wouldn't be incurring these incremental R&D expenses. While the actual payload flight hardware builds would be capitalized investments, the preflight hardware builds and tests will be expensed. Those preflight hardware expenses are by definition front-loaded in the overall ViaSat-3 program so we will be encouraging a large portion of them in FY17.

Shawn mentioned an estimated 50% total increase in R&D expenses for FY17 relative to FY16. Of the FY17 total, close to $100 million of that is estimated for ViaSat-3 specific R&D and success-based commercial aero R&D investments. On the aero side, we do even better than anticipated in winning new airlines and aircraft types that might increase that short-term R&D hit, but obviously it would be very, very good in the long term.

And of course, we get significant long-term benefits by designing and building our own payloads both in terms of capital cost savings on future satellites and in creating and sustaining long-term competitive advantage in entry [loads.] We will start to address FY18 on our next call. That year will be exciting because of the launch of ViaSat-2 and while rapid growth in subscribers is good, it does complicate the EBITDA calculations.

So that's it for our prepared remarks. At this point, we would be happy to take questions.

(Operator Instructions)

Rich Valera, Needham & Company.

Thank you. Good evening. Just wanted to circle back to the EBITDA guidance you had given for FY17 last quarter. I think it was around $380 million to $390 million. Can you just refresh that? Where we expect to be relative to that number?

Yes, so the big thing would be to go -- I think go through that the methodology that I just described in that outlook side and think about our -- what our revenues would be like. I think it's single-digit, high single digits. Could be ballpark, given $1.5 billion range, and we had 25%-ish operational EBITDA, adjusted EBITDA in FY16. So think about it -- that improving by a few percentage points.

That would get you to what our adjusted EBITDA would be, but then the main difference relative to last quarter is we've got more insight on the rate of the ViaSat-3, primarily those ViaSat-3 R&D expenses and we back out that, about close to $100 billion from there to get to adjusted EBITDA for FY17.

Got it and so just to revisit the fourth quarter, so you came in around $15 million shy of what you expected a quarter ago. Was that just the rate of Via-3 expenditures and was there also some incremental STC work in there that drove that?

Sure, so Rich, this is Shawn. I think a couple things is we did have some acceleration of the ViaSat-3 activities in the quarter and have started to start on some of the STC work as well. The other part of it is we had a fantastic award quarter in the government; Mark mentioned that in the script. However, some of those awards came literally in the last week, so there are some timing differences on some of the shipments and fulfillment of some of those orders, but very strong performance overall.

Great, and then just with respect to the STC work, you mentioned, I think, Mark, success base several times which would seem to suggest that you've won some business. And you have disclosed Qantas, but does this suggest that you've actually won business that has yet to be disclosed, these -- this work you're doing on STCs at this point?

Yes, so we have some cases, we have ongoing programs for additional STCs, for instance, with El Al Airlines, that's one. And then we also have some early authorizations that precede actual contract awards.

Okay. Is anything you can say just about your pipeline of in-flight wins, the potential there or any more color on your recent activities there?

I really can't -- it's really hard to say until you actually have contracts signed, but we're -- the thing I mentioned is we're in multiple detailed negotiations with several airlines, so we are optimistic but we don't have anything to report right now.

Got you. And the Eutelsat JV, that's expected to close, I think within this current quarter, and I'm assuming that's not contemplated in your -- the guidance you laid out for FY17; is that correct?

The timing of it, we definitely have that based into outlook and the anticipation of that closing. We are in the final phases of some of the post-closing conditions and I think we're estimating that coming in, in a few months.

So is that baked into the outlook that you've put forth?

It is.

Can you say how much incrementally that's expected to contribute from an EBITDA perspective or revenue perspective?

Yes, so I would say it's probably a little bit early to shape that. I think that a couple things you'll see when we definitely included a little bit of additional SAT investments into next year for some adds that we -- as we start to launch the retail service. But it's probably pretty early to say -- I don't think it's going to be a significant next year impact, though.

Great, and sorry, just one final one for me. Mark, just the BATS, the Link 16 seems like it -- is a pretty significant new form factor, I'd say, for Link 16, clearly, and with potential for, I think, much higher volumes. Anything you can say in terms of the potential longer-term production value of that program?

Well, that's really dependent on how widely adopted it is, and I think we will learn a lot more over the course of FY17 to be a little early to speculate. But we've invested in it and our customers have invested in it as well because we think it would be big and impactful. But I think it would be good to wait a couple quarters before we speculate on the total value.

Got it. Fair enough. Thanks very much.

Andrew DeGasperie, Macquarie.

Thanks for taking my questions. First, could you maybe expand on the subscriber trends as well as your ARPU jump? It seems like you added 10,000 net adds even though your satellite beams are filled up. I'm just trying to figure out what drove that. Secondly, on the Eutelsat joint venture, could you maybe comment if you could use that satellite or that joint venture for potentially extending your Ka-band connectivity market there? Thanks.

Okay, yes, on the consumer service, basically, we've been describing over the last year a number of things we're doing to optimize the performance. And some of that involves, what's on the ARPU side, is higher value plans and also, these additional services. So for instance, we recently introduced this Boost 25, which allows subscribers to pay an additional monthly fee and get peak data rates in 25 megabit per second range as opposed to a 12 megabit that we advertise otherwise. That's a relatively new promotion that's been pretty popular so that helps account for the ARPU.

On the subscriber side, especially as we've -- as it's become more predictable and systematic about how we can acquire subscribers, we've been doing -- investing more and more things to groom or refine the satellite capacity to create more subscriber spots in markets where we can do that, partly by moving, either making some changes to the operational parameters on the satellite or upgrading some of the infrastructure or re-jittering some of how we allocate bandwidth.

That's what created the opportunity for us to grow in net adds. We don't really expect that -- nobody should expect that type of net add growth to continue each quarter. I think from here, we'll probably we fluctuate in the low thousands; it could be up or down over the next -- over the -- probably over the course of the next fiscal year.

On the Eutelsat JV and Ka-band mobile, yes, we actually have already announced roaming agreements with Eutelsat where we each can have platforms roll -- roam on the other's satellite networks, and so that was already in the works even before the JV.

Got it and separately, can you maybe walk us through the milestones that are left on ViaSat-2 regarding testing or manufacturing? Manufacturing seems to be almost done, but maybe just let us know what the calendar looks like from now on until the several months before launch?

Yes, there's just a few months of basically final integration, which is pretty close to done. From then, there will be the main environmental testing, which is the vibration testing, thermal testing, vacuum chamber testing. Those are really the main things that are left before launch.

Got it. Thank you very much.

Mike Crawford, B. Riley.

Thank you. Mark, last week, you used Chicago air hub as an example of capacity or bandwidth availability. And I was wondering if you could walk us through that. And I think you said you had about 1 gigabit per second bandwidth over Chicago now and what do you think would be your effective bandwidth capacity over there once ViaSat-2 is fully operational?

Okay. So yes, so what Mike's referring to, just for everybody, is one of the big issues that we see in the in-flight connectivity market, we've been going over with the airlines is that when you think about things like what's the total data rate per aircraft, you have to think about how those airplanes for one or more carriers will converge on hub markets. And Chicago is important, as an example, because it's hub for multiple airlines.

So as an example, some of the -- I think the example I described in that situation was if you had 100 airplanes coming into single airport and you're advertising 70 megabits per second per airplane, you've got to -- that's going to require 100s -- or gigabits of capacity if all those airplanes were using that bandwidth all at the same time.

So the -- and point we wanted to make, that's really -- reflects on this concept of capacity density, which is how much capacity can you bring into an individual market. So the big thing about Ka-bands spot beam satellite and ours, in particular, especially going ahead, is that we have relatively small beams so those small beams allow us to discriminate and haven't -- the beam that covers Chicago is different than the beam that covers Dallas or Atlanta or New York or Boston.

And that's not true for either BroadBEAM conventional satellites or these Ku-band spot beam satellites or even the Global Xpress Ka-band satellite that tends to have like very large beams, only five or six covering the whole country. So what we said is we already had about 1 gigabit or more capacity in that Chicago area and with ViaSat-2, would be probably close to tripling that, I believe. For that particular area. Similar things you could say about Dallas, or Atlanta, and that's really the thing we're trying to get at is capacity density which allows you to deliver a lot of bandwidth per plane in a lot of plane conversions, simply put.

Okay, thank you. Also you're on 476 installed commercial aircraft now. That does not include your Yonder network, more this VIPSAM endeavor where you're putting Ku/Ka-band terminals on high-value government aircraft. Can you put any numbers on how many of those other business aviation and government aircraft you're serving?

Yes, we're well over 1,000 in combined aircraft, and that's growing pretty well.

Over 1,000 combined including the 476?

Yes. Yes. I'd say well into the 1,000 -- I don't know -- I'm not going to go into much more detail than that, but it is well over 1,000.

Okay. And then with -- back to the tactical radios, is the ASP as high as $25,000 for a radio like that or is that something that would come down if you're talking tens of thousands of units of volumes versus maybe just something for just for more expeditionary and special forces?

That's -- well, I'd say we'll figure that out as we get into production; that's probably not going to be that high, not if we're making tens of thousands of them. It will be lower than that.

Okay.

It's still a big aggregate market.

Okay. Thank you.

Chris Quilty, Raymond James.

Thanks, Shawn, I just want to get clarification. When -- for adjusted EBITDA, your definition of it, does that include or exclude the R&D spending for ViaSat-3?

The -- our reported numbers include the spend.

Okay. And I think Mark said $100 million next year, which is both ViaSat-3 and some of the STC work?

Yes --

Or is that just sViaSat-3?

No, that's ViaSat-3 plus some success-based R&D work for commercial air, but as we noted, if we have some acceleration in that, could go up a little bit.

Got you. So is that STC work the biggest part of the delta from last quarter, I think you said ViaSat-3 R&D spending would be up $40 million in 2017 and now it's $100 million, so it is pretty big jump.

I would say that, that -- I wouldn't say it's necessarily the largest part. I'd say there's some acceleration of the ViaSat-3 spend, as Mark mentioned, it was a heavier year into next year. And then there is some incremental -- I would say probably the other portion is the STC, maybe two-thirds, one-third.

Got you. And not that anybody cares about quarterly earnings, but do you share any kind of a progression of what that R&D spend looks like throughout the year?

Yes, it's probably going to be starting to already ramp into Q1 and be pretty consistent through the year. Maybe slightly above in Q4, but it's really going to be based on some of those timing items that we hit on, but pretty consistent throughout the year.

Okay, and does the -- obviously, that all falls into critical networks. Does the STC work also fall in that segment?

Yes, it does.

Okay. On the Aviation business, can you give us an idea of what the backlog of aircraft you currently have? And tied into that, what's your current ability to install aircraft and how has that been mostly improving over time?

Well, okay, so our book -- right now, the -- a lot of the aircraft that we're installing on, I'd say, more and more of them are getting to be new deliveries as opposed to retrofit, so some of the rate at which we're installing is really a function of what those aircraft deliveries are and what schedules the airlines are providing -- the airlines -- the individual aircraft to be upgraded are. But more and more, we're seeing them be new deliveries.

Our ability to install aircraft is going up a lot, mostly because of the success we're having. We have a lot of interest among MROs who are eager to do the work. So we would have more installation facilities available than we're employed at the peak when we're doing both United and JetBlue aircraft (multiple speakers). Pardon?

Sorry.

No, go ahead, Chris.

No, I was saying, so you don't do any of the installs yourself. It's either done by the OEM or it's done at the MRO level; is that true on your government side also?

On the government side, we don't really -- don't use commercial MRO so much but we tend to use integrators. L-3 is a good example. We do a lot of work with L-3 that pairs the integration and the installation of the equipment.

Got you. I wouldn't bring it up, but you brought it up first, FY18, since 2016 is in the books and you've got to have a couple years of forecast out there. Two questions regarding how we should model the consumer subgrowth. Number one, should we expect that as you increase the data speeds and data caps associated with ViaSat-2, that ViaSat-1 will see some subscriber attrition? Or was the -- your previously stated capacity of 900,000 subs on ViaSat-1, did that incorporate expected step-ups in the service plans?

Okay. So just on the ViaSat-1 thing, basically, what we expect to when we have the ViaSat-2 satellite is to offer plans and services that allocate more bandwidth per subscriber than we currently do. So those plans will also be made available to existing ViaSat-1 subscribers who make -- choose to adopt those plans. So we'd expect that the absolute number of subscribers on ViaSat-1 will probably go down and that the yield on ViaSat-1 will go down a little bit as well. So think about yield being absolute revenue per satellite, but the combined of the two, ViaSat-1 and ViaSat-2 is going to grow pretty meaningfully.

So the -- a lot of that will be determined by the specific plans that we offer, and we'll give more guidance on that. If you look at -- one of the ways to think about it, the effect is when we talk about our total satellite services revenue now, we talk about, over 90% of it is on ViaSat-1 compared to Anik F2 and WildBlue-1 but actually, ViaSat-2 has a lot more than 90% of the bandwidth.

So that means that the older satellites are really, in some sense, overproducing in terms of their relative contribution to bandwidth and we expect to see some of that. But that -- with ViaSat-1 and 2, especially at the beginning. So those are the factors that enter in. We're not really going to give more explicit guidance yet until we start coming up with more definition on what the service plans will be.

Got you, but it wouldn't be unreasonable to think that even accounting for churn on ViaSat-1, the high-growth on ViaSat-2 could allow you to get back to that 50,000 net adds a quarter that you peaked out on ViaSat-1 when it was running lean?

Yes, we actually did -- I think we did 100,000 installs a quarter at the peak on ViaSat-1. And I think we will do at least that, well or better with the -- at the peak of ViaSat-2. We see really good growth rates ahead and that we will be able to grow the total numbers of subscribers pretty significant. And ultimately, what you'd expect would be that there's an equalization of the revenue yield on a per unit basis. So think about, if you think about, okay, we allocate X number of kilobits per second, or megabits per second per subscriber, we'd end up with comparable types of allocations on both satellites.

It will -- I think as we've gotten more and more refined, there's geographical nuances. We offer different plans and different places and those have different yields. But if you think about it, ultimately, the yield of the -- each satellite in terms of dollars per megabit would converge over time. But because ViaSat-2 is twice the megabits, it would have twice the revenue of ViaSat-1. Ultimately, that's really the source of competitive advantage and improvement.

Makes sense. One final question or maybe request is, I know you've given your forecast leverage of getting up to about 3.5 times and regardless of how I try to model it, I can't seem to get the leverage up that high, I'm off by about a turn, which either means my denominator is not big enough or my numerator is too big. And with the R&D spend, it looks like the numerator will come down.

But would it be possible with the guidance you've given for the ViaSat-3 spend, that perhaps give us a more granular breakdown of what you're going to be spending on the satellite, the Gateway Infrastructure, the launch and insurance piece of that and the capitalized interest, just to make sure we get the total CapEx spend size correctly?

Okay. I think we will consider that whether we come out with more detail on that. I would say one thing, we gave in terms of total investment, cash investments, we gave a breakdown on that last quarter. One thing, I would say, it hasn't really changed very much. What's happened -- the thing that's happened is that we're still working on, especially the accounting treatment of what's R&D and what's capitalized. And like I said, there are things that tend to be R&D expense are things -- the things that aren't light-hardware, so that line we're refining and those tend to be expenses that are earlier in the program. And that's why you've seen the increase -- the apparent increase in R&D for FY17 over 2016. It's not really total cost of the program that's grown. It's really -- has to do with the timing of the R&D expense and the classification of the expense. Did you want to clarify that a little bit, Shawn?

Yes, sure. And I think I'd push it back to one of the questions that was asked earlier. Just to clarify, last quarter, we talked about the incremental R&D going up about $40 million for next year. When Mark and when we were talking about the total investment up $100 million, that's the total amount, not the incremental so just wanted to clarify that.

Okay, got you. I think you could say that a big portion of that was the STC and success-based wins.

The big part of it was the ViaSat-3 R&D expense, so we had incurred $77 million-ish in R&D expenses this year; that goes up by around 50% for next year in the $115 million-ish range and a little less than $100 million of that -- we're basically devoting our R&D budget primarily to ViaSat-3. So that's a big part -- a very big part of that is ViaSat-3 expenses. It's the R&D expenses for pre-flight activities and then there's within that close to $100 million, there's also this variable estimate for what we'll do for success-based [arrow].

Got you. Okay, thank you.

Andrew Spinola, Wells Fargo.

Thank you. I think that last little bit clarified the guidance for the most part for me, but I wanted to just ask one more specific question on SG&A. It was up a lot this year. It bounced around the prior year. Can you give us any color? Can we expect a smaller increase this year, because I think that might be consistent with the guidance you were giving, so maybe that would help clarify things a little?

Yes, so a couple things to keep in mind for this year. One is last year in FY15, recall that a portion of the Q2 Loral settlement, about $17 million went to contract SG&A, so that skews the year-over-year performance. And then I think if you look out to next year, we're going to -- we'll see some normalized growth and growth in our business and some of that growth could also be time-based on the timing of the JV closure as well.

Okay. Just to clarify, because the question just keeps coming back to us is, are you reiterating the guidance that you gave for FY17 EBITDA, or are you just stepping away from that and giving us more general guidance? How should we think about that?

It's -- so we're trying not to be too explicit on the guidance, pretty clearly. I think actually, if you were to reconstruct it both ways, I think what you'll find is things haven't really changed very much except for the amount. The thing that's really changed is the amount of R&D associated with ViaSat-3; that's the main thing. If you were to attack it from what did we describe last quarter, and then take out what looks like the incremental ViaSat-3 specific R&D expense, you should get to ballpark pretty close to the same places.

Perfect, thank you. On a higher level, Mark, the FSS industry has come under quite a bit of stress in the last six or nine months, probably not to your surprise, but you're about to pour a lot of CapEx into ViaSat-3 to go after this very industry. And I'm just wondering, when you look at everything that's going on, does anything that's happened change your view of the opportunity specific to you, or do you think it's specific to the industry? And as a corollary to that, are you at all surprised by what seems to be a lack of elasticity of demand here? The pricing seems to be going down and all we see are revenue declines; is that surprising to you at all?

Okay. The whole investment thesis here is that we're not doing incremental things; we're doing order of magnitude things. So the part I would say is it's not super surprising that people go from 1 gigabit or 2 gigabit per second ViaSat-1 to 7 gigabit or 10 gigabit or 15 gigabit per second, and don't find a lot of growth because the satellite bandwidth pricing has been so high for so long that there's a lot of catching up to do.

So when -- we went to 140 gigabits with ViaSat-1 and we're going to double that for ViaSat-2 and triple or quadruple it for ViaSat-3. What that means is the amount of bandwidth that we can give relative to others is like a factor of 10 to 100 different. And we think that's what's setting expectations in the market, of what bandwidth pricing ought to be. But the way I'd describe it -- to go back a little bit. I would say people in the industry look at ViaSat-1 as an outlier. Hey, it's only in the US; it's only for consumer broadband. It doesn't really reflect what's going to happen in the rest of the world and then so ViaSat-2 expands that coverage, but ViaSat-3, we should be everywhere.

We're seeing a lot of interest for bandwidth priced at the types of levels that we can with those satellites. So this notion that there's no elasticity in demand or not much, I think it's really just a question of whatever that price -- how sensitive people are to price and that's why I was going back to this test curve thing.

If you go back to somebody that's flying on an airplane and say, the cost of bandwidth went down by 65% and I'm going to make your in-flight Wi-Fi 55% better, they're probably not going to be very excited about that. It's so far away from what is needed.

But when you say, okay, I'm going to give you streaming video at a fraction of the price, you definitely get people's interests and that's -- that just reflects the big difference in bandwidth productivity. That's been our investment thesis all along and we certainly -- we feel like it's playing out the way we thought. Does that answer your question or is that --

Yes, it does. Exactly. I wanted to ask, does that extend to the government market? Traditionally, the government market has been a little different than the other data markets, almost exclusively, Ku-band. How do you -- do you think that market is an opportunity for you and will it take a lot longer because the DoD moves slower or how do you think about that market?

So, one, it is happening in the government market, and what happened in the government market is we got out ahead on the Ku-band side where we were basically replacing Ku-band on mobile platforms. We put Ku-band instead of L-band for a lot of pipeline, or UHF or nothing, and so that gave them a big lift. One of the things we started talking about -- when Shawn was -- two years ago, when we started doing the KA/KU demonstrations was, well, when you start putting Ka-band in there instead of Ku-band, another whole level.

So that's a big part of what's driving our government results now, but we think we're really only in the early phases of that. The places where we're getting the most traction are the places where it's been most difficult to get connectivity at all; that's in the mobile market. We see really good growth ahead there and I would say we're seeing indications that, that success we've had in the airborne market is going to extend all the government markets, so we're really bullish on that, is that it absolutely happening in the government business as well.

One last question for me. Are you any closer to either securing or identifying additional capacity for the Eutelsat JV in Europe? Thanks.

That's in terms of closing the JV. We're working very -- we're working closely with our Eutelsat partners, to answer that question, so I think we'll end up with a joint statement on what our plan is for there once we reach closure on the agreement.

Great, thank you.

Michael French, Drexel Hamilton.

Good afternoon. I had a quick one to start with on the STC for the A320; does that also apply to that A321? The reason I ask it's pretty much the same plane, but it flies more passengers and particularly on popular business routes, like New York to Chicago.

Well, that's -- you got me on that one. I would guess it doesn't, but I'm not the one to answer that one.

Rick is traveling. He's probably on A321 as we speak. Okay and I can move on. You mentioned the take rates that your competitors are seeing on the Ku side, with -- on the in-flight. And I agree, it's not very competitive. You're paying $15; there's not a lot you can do. But they've been specific, they are in the single digits, six, seven seats a plane. Can you give us more detail on the take rates you're seeing?

Yes, so I think we definitely see variance in take rates depending on the duration of the flight, the seating payers, time of day. The thing that we're really excited about and our airline partners are really excited about are on really valuable competitive routes, like especially cross-country routes. We're seeing on some aircraft, you see more mobile devices than passengers. So that's indicative of the levels. There is over 100% penetration relative to the passengers and that's -- I think what some of our airline customers are seeing is that's a really good way to differentiate their price and so one of the things we're doing is we're working with them to help promote awareness of it and to get remove friction and get more people on, especially like, for JetBlue, where the service is free. And I think JetBlue has, in the past, commented that they see take rates close to 40%, I think fleetwide.

So that would be -- that would average out over the shorter flights and the longer flights and the different times of day, but that -- those numbers are -- we don't look at them as the endpoint. We look at them as -- and I think JetBlue feels the same way is that's really a good starting point from which to grow, but it's pretty striking difference from the take rates on other in-flight Wi-Fi systems.

Right, right. I agree. Okay, and then shifting onto the defense side, on the BATS-D, what would you -- what do you think in terms of the timing of that if it's going to become a program or record, what should we think about it in terms of the timing? And if it goes in that direction that, would there necessarily be a competitor involved or could that be something where you are a sole-source?

I think if it goes into production, it will be us as a sole-source since we developed the product using our technology. What we said, what we're aiming for is to have a first production program by the end of this year. I don't -- we're not going to see tens of thousands to start with, but I think what we're aiming for and our customers are aiming for is to put it in the hands of people -- make sure that it provides the desired capability operationally, but then if you were to extrapolate that out, that's where the markets could be really good.

Okay, very good. Thank you.

Matt Robison, Wunderlich.

Thanks for taking the question. Mark, do you think on the business in government aircraft, do you think that can keep pace with the commercial in terms of numbers?

No, the -- I think the commercial market is probably bigger for us. You're looking at tens of thousands of commercial airplanes in the global feet that are candidates versus thousands of government fixed-wing aircraft. If we get into rotary wing and others, then it becomes interesting. But I think that the -- there's kind of an order of magnitude difference in the total addressable markets between the two. But the government market demands are really high and the service-level agreements are very -- they are very demanding, and so the value of the government aircraft is generally quite a bit higher than that at commercial aircraft on a per plane basis.

I was asking about government-plus business, but it's okay, I get the point. It seems like right now, the value is quite comfortable between commercial and the rest.

Government -- I would say right now, in our Government Mobile Broadband business shows up in our Government segment and the commercial shows up in the Satellite Services segment. But the Government business on a per aircraft basis is quite a bit more valuable. (multiple speakers)

Yes, I was thinking about the business because there's still a pretty good chunk of revenue away from consumer broadband and commercial that's coming into that Satellite Services business, it seems.

That's the 100 -- general aviation portion.

Shawn, what do you expect to have for tax rate in 2017?

Sure, so probably the best way to think about it with the R&D credit extension is just maybe around $8 million or so of potential R&D credits and then just take the income at the statutory rate.

You'd call it 35% for the statutory rate?

I'd probably -- a little closer to 40%.

Okay. Thanks.

I'm showing no further questions in queue at this time. I'd like to turn call back to Mark Dankberg for closing remarks.

Okay. Good. Thanks. We appreciate everybody's attendance on today's call, and look forward to speaking to you again next quarter.

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