Viasat Inc (VSAT) 2018 Q2 法說會逐字稿

Welcome to ViaSat's Fiscal Year 2018 Second Quarter Earnings Conference Call. Your host for today's call is Mr. Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Good afternoon, and welcome to ViaSat's earnings conference call for our second fiscal quarter of 2018. So I'm Mark Dankberg, and I've got with me Rick Baldridge, our President and COO; Shawn Duffy, our Chief Financial Officer; Robert Blair, General Counsel; Bruce Dirks our Treasurer; and Paul Froelich, in Corporate Development. Before we start, Robert will provide our safe harbor disclosure.

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent report on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

With that said, I'll turn it back to Mark.

Good. Thanks, Robert. So we will refer to slides that are available over the web. I'll start with highlights, and then Shawn will discuss financial results. Then I'll go into a little more depth on government, in-flight and consumer broadband, and then we'll review our outlook and take questions.

Government Systems had another great quarter, continuing a trend of strong revenue gains and double-digit earnings growth. Highlights include 7% revenue growth and a 15% increase in EBITDA compared to second quarter of last year. Year-to-date revenue and EBITDA growth was about double that at 15% and 30%, respectively. New awards were also good, and we ended the quarter with near record backlog.

In-flight connectivity is poised for strong growth. In Europe, we've begun installation on SAS and EL AL is flying our system on their routes. We've also got next-gen systems on American and Qantas, and we're now operating on 3 continents: North America, Europe and Australia. We're also about to begin full-scale deliveries with European customers, FinnAir and Icelandair. We'll see growth in installations this quarter but anticipate significantly greater growth beginning in the March quarter. We've had -- we've got 576 aircraft in service and 833 additional under contract as of the end of the second quarter.

We're also really happy to announce significant growth in our relationship with JetBlue. We've executed a new contract as prime for both aircraft connectivity and now onboard WiFi distribution as well. We're excited to help them achieve even greater passenger engagement with their award-winning Fly-Fi network, which is already an industry leader. We'll upgrade their feet with our next-generation connectivity suite, providing access to more coverage and capacity with ViaSat-2. And of course, we're highly focused on the upcoming consumer service launch on ViaSat-2 early next calendar year. I'll give more detail on that a little later.

In anticipation of the ViaSat-2 service launch several weeks ago, we began testing new ViaSat-2 like service plans to the extent we can on ViaSat-1. Although it's only been a few weeks, we're really pleased with demand for those plans, and we'll talk about that a little bit more later as well.

So now Shawn will give some more detail on the financial results.

Thanks, Mark. Overall, our financial results for the quarter were about where we expected them to be, characterized by continued strength in Government Systems, managing resources in Satellite Services during gap periods before the ViaSat-2 service launch, and the impact to Commercial Networks have elevated R&D target on next-gen programs.

Looking quickly at our segments for Q2. As Mark highlighted, we had another excellent quarter in our Government Systems segment, continuing the growing momentum we've achieved over last several quarters. Revenues were up 7% year-over-year reaching $189 million, which was the second best quarter ever for the segment, while adjusted EBITDA was up 15% year-over-year to a record $51 million.

Revenue growth was spread across our [Gross] product line, including strong growth in cyber security and information assurance products. This is just one example of how we've often made discretionary investments to propel a technology far beyond its initial use case to drive new growth opportunities.

About 2 years ago, we decided to make some larger discretionary investments, which resulted in certification for several new data security solutions in late fiscal 2017. And now in Q2, our information assurance products generated our largest revenue quarter in the history of the company. We saw product and service margins expand by just over 4 percentage points despite higher R&D investments for our next-gen government mobility platform.

Our Q2 government awards were $183 million. And while we can see lumpiness at times, we generated a positive book to bill for the company and the segment in the first half of the year with government segment orders exceeding revenues by 16%. This resulted in Q2 segment backlog of about $690 million and total company backlog of about $1.1 billion.

In Satellite Services, revenues were down slightly year-over-year primarily due to the completion of the $6.6 million quarterly Loral settlement payments in Q4 of fiscal 2017. Our residential business reflects the migration of our subbase to premium service offerings as the revenue impact from subscriber attrition was mostly offset by another record ARPU quarter. In IFC, our top lines grew sharply. ARPU was higher year-over-year, and we had 42 more [apps] in service at quarter-end compared to the same period last year, ending the quarter with 833 additional planes under contract.

Segment earnings reflect the year-over-year impact of the Loral settlement, higher cost associated with our planned large-scale service ramp-up in commercial air and the additional expenses we're incurring ahead of the ViaSat-2 service launch. These ramp-up expenses have been higher than we expected, and with the ViaSat-2 in-service date shortly ahead of us, we expect these levels to continue, then begin to moderate as a percentage of our revenues similar to what it did, if not better than the scale efficiencies we achieved on ViaSat-1.

In Commercial Networks, quarterly revenues were down about $9 million as a result of reduced fixed terminal sales partially offset by year-over-year increase in airport and terminal sales related to our IFC business. And as we already noted, we expect to see a significant ramp with Gen 2 installs later this fiscal year, particularly on American Airlines and Qantas. Since these sales are reported on our commercial segment, we should see some strong quarter-over-quarter revenue comparisons in the second half of fiscal 2018.

Our segment EBITDA comparisons primarily reflect an additional $12 million in R&D investments for ViaSat-3 and the airborne terminal development and STCs compared to the same period last year. Looking out, we're going to begin to see certain ViaSat-3 payload modules enter the construction phase. So activities are slowly transitioning to the capital portion of the program, while on the IFC side, we are now expecting IFC-related R&D to stay elevated a while longer due to new business opportunities that we're developing. So that may keep overall R&D elevated a bit longer into 2018 and into next year.

Company-wide, we closed the quarter with $62 million of adjusted EBITDA, which included the higher R&D, completions of Loral settlement and higher cost as we stage growth for ViaSat-2 and our commercial air ramp-up.

On Slide 5, we see revenue and adjusted EBITDA performance for the fiscal 2018 first half compared to the same period last year. In the government segment, revenues increased 15% year-to-date compared to the quarterly increase of 7% due to very strong growth across our product lines just as we saw in Q2, and adjusted EBITDA was up by a healthy 30% over the same period.

Satellite Service revenues were off just about 3% due to the completion of the Loral settlement last year, driving a $13 million year-over-year variance, offset partially by growth in our IFC business. As a result, a reduction in first half 2018 Satellite Services EBITDA year-over-year was essentially again related to completion of Loral payments, plus the ramping costs associated with our commercial air business and the upcoming ViaSat-2 service launch.

In Commercial Networks, year-to-date top line performance reflected exactly the same drivers we saw in our Q2 results with our year-over-year EBITDA results reflecting the $27 million increase in R&D related ViaSat-3 airborne terminals, STCs and our next-gen mobility platforms.

So similar to what we've provided last year, Slide 6 shows the reconciliation of adjusted EBITDA for both the quarter and year-to-date period. The reconciliation isolates the large transitory items we've been highlighting in order to show the fundamental EBITDA growth in the base business. If you look at the Q2 year-to-date reconciliation on the right side of the page, you can see that the increased R&D investment and conclusion of the Loral settlement accounts for almost all of the $50 million year-to-date variance as the increase ramping costs were basically offset by organic growth from our existing businesses.

Turning to Slide 7. Our year-to-date cash flow from operations was $186 million, despite the $36 million uptick in R&D investment and the $23 million in ViaSat-2 and commercial air ramping costs. This operating cash flow funded most of our capital investments, including expenditures for ViaSat-2 and our ViaSat-3 programs. Our GAAP and non-GAAP net income reflected lower EBITDA, higher non-cash items and higher depreciation and amortization expense, all net of tax benefit, which reduced the overall impact to net income. This quarter also included a onetime $10 million charge associated with the bond refinancing we completed in September, which had an after-tax impact of about $0.11 per share.

A couple other comments as we walk through the P&L details. In SG&A, our Q2 expenses grew year-over-year in absolute terms and as a percentage of revenue. This uptick was due to the higher employee-related costs supporting the upcoming ViaSat-2 service launch and our commercial air growth activities as well as in support of our expanding international businesses. Keep in mind that in the second half of fiscal 2018, we will still be under the existing revenue recognition accounting rules with the new 606 rules coming into effect in Q1 of FY '19. That means any commissions incurred upon stacking initial customers in the fiscal 2018 Q4 will continue to be expensed, which will show up as higher SG&A. Beginning in 2019, we expect to begin capitalizing certain of these costs and amortizing them over the estimated subscriber life. The exact amounts to be capitalized and amortized over the life [are] under review, so expect to talk about more about these in the next call.

We also expect to see marketing expenditures begin to increase for the next several quarters from the very low level currently as we near service launch on ViaSat-2. And these costs will continue to be expensed in SG&A even after the adoption of the new accounting rules.

Looking at our CapEx. Year-to-date activities were $244 million, down $56 million compared to the same period last year. This decrease was due entirely to lower ViaSat-2 expenditures as ViaSat-3 project CapEx was relatively flat. And looking at our capital structure overall, in September, we refinanced our $575 million senior unsecured notes due in 2020 and replaced them with the new 8-year notes due in 2025. We originally targeted a $600 million offering, but due to very strong demand and favorable market conditions, we upsized the offering by $100 million to $700 million. This lowered our cash coupon on the original accounting amount by $7 million per year and also allowed us to push out the maturity by 5 years. This quarter, we also made the final draws on our Ex-Im loan, bringing the total amount outstanding to $362 million with our first semi-annual principal plus interest payment scheduled to begin in April 2018.

In terms of liquidity, we ended the quarter with $242 million of cash on the balance sheet and no outstanding borrowings on our $800 million revolver. That brought our liquidity to just over $1 billion.

In the net leverage trend chart on the lower right, we see a tick up to 2.8x as a result of the higher overall net debt and the impact of the lower EBITDA this quarter compared to the same period last year. And while we expect to see continued modest uptick in leverage over the next few quarters as we continue the ViaSat-3 Constellation build and begin incurring the [success-based] subscriber acquisition cost as we ramp subs up on ViaSat-2, we expect to stay well within our comfort zone from an overall leverage perspective. The main takeaway from this slide is that we're focused on keeping the company in a healthy liquidity position, and we're preserving the flexibility to maintain our growth as we move through this investment period. And the September bond refi is a very good example of how we're being opportunistic in doing that.

Okay. Thanks, Shawn. So this slide shows our Government System business is continuing to perform extremely well. We've got momentum in each of our main products and service lines, as Shawn mentioned, including satellite tactical data links and information in cyber security.

Although individual quarters can be pretty lumpy, you can see from the chart we've had strong steady growth in both revenue and EBITDA. Strong new orders have helped us grow and sustain backlog. So far this fiscal year-to-date, revenue's up 15% and EBITDA 30% on a year-over-year basis. A significant portion of our growth has come from identifying and developing new products and services that fill end user needs that are not served by existing or planned programs of record. We've also been successful at transitioning products and services to new platforms, new organizations and missions within the government. We believe these overall trends have good prospects of continuing over the next several years.

The main point on in-flight connectivity is that we've been achieving the milestones we need to rapidly scale the business starting now in the second half of this fiscal year. We've got our next-generation connectivity system flying on several airlines, and we're really happy with the new contract we announced today with JetBlue.

Of course, we've been providing Internet connectivity to JetBlue's fleet for almost 4 years. Our new contract increases the scope of our work as JetBlue adopts our complete second-generation in-flight connectivity suite, enabling us to manage and distribute that connectivity more efficiently and reliably directly to all its passengers and their devices. We've been qualifying this new generation on other carriers already, and it's ViaSat-2 and -3 compatible. With ViaSat-2, JetBlue will have access to expanded coverage and capacity. We're excited to help realize JetBlue's objectives of creating even more passenger engagement with innovative new services and applications and greatly appreciate their confidence and commitment.

We're actively engaged with additional airlines and expect our progress and investments to generate additional momentum over the rest of this fiscal year. Overall, we see more and more airlines understanding that the more passengers that use in-flight connectivity, the better. And that's a great environment for us.

Okay. Our consumer business continues to be constrained by available bandwidth on ViaSat-1 in the legacy satellites as well as by growth in bandwidth usage in our in-flight connectivity and government applications. But we know when ViaSat-2 enters service about 3 months from now -- from today, we'll go from being bandwidth constrained to a bandwidth-rich environment. So our strategy has been to define, test and then refine, improve residential service plans that leverage that advantage to the extent we can with our existing network and do that in advance of scaling with the launch of ViaSat-2 services. And we're encouraged by the results we've seen to date, though things have played out a little differently than anticipated. We've seen demand skewed more towards higher-priced, higher-speed plans offering more data usage.

We've begun offering different combinations of unlimited plans in select markets and have found substantial increases in order volume even with very limited advertising and distribution compared with what we expect to do for the ViaSat-2 service launch. We're testing the interactions of different combinations of plans on subscribers' choices and the bandwidth economic yield. Overall, demand for higher-speed, higher-bandwidth plans continues to drive ARPU to record levels, up 9% year-over-year, though at lower net subscriber counts.

Consumer revenue has only decreased slightly on our existing fleet, and operating margins are relatively steady. Churn, though it's moderating to some extent by increasing migrations to the newer plans, remains higher than historical norms, and that's essentially driven by the bandwidth constraints. Migrations to newer plans by existing subscribers is obviously closely related to acquiring new ones. We believe that these early migrations will offset subsequent migrations on ViaSat-2 service launch later this fiscal year.

Also really importantly, we've seen strong enthusiasm from distributors for the new service plans. We expect to continue to grow our distribution channel substantially, leading up to ViaSat-2 service launch. This includes significant expansion in our already strong dealer channel, plus a number of other new sales-only partners. Initial reception in the direct-to-home TV channel is also positive.

We think our emphasis on higher performance, higher value service plans will enable us to maintain and grow our addressable market in the presence of evolving terrestrial alternatives. They'll improve customer satisfaction, reduce overall subscriber acquisition cost and deliver attractive financial returns, especially as we continue to lead in bandwidth productivity through our ViaSat-3 Constellation and beyond.

So this chart summarizes the key events remaining in the time line to ViaSat-2 service launch. Orbit raising has been the long pull since launch, and that will be done in less than 3 weeks from today. We've been doing field alpha trials on the ground network for several months using our existing fleet, and we're now engaging trials of ViaSat-2 like services to the extent that we can on the existing fleet. In-orbit testing begins immediately upon conclusion of orbit raising, and we anticipate having control of the satellite for final integrated network performance testing before the end of calendar year '17. We anticipate scaling production consumer services in early February.

Okay, these points on our outlook are basically the same as we cited last quarter. Our government business continues to trend well, and the outlook's for sustained growth. We believe we set the stage for strong growth in in-flight connectivity with a significant increase in shipments and installations expected in the March quarter. We should now be in the last quarter where bandwidth constraints stifle growth in consumer broadband. Given strong growth in ARPU and preliminary data showing strong demand for high-speed, high-bandwidth premium plans, we're looking for deleveraging our ViaSat-2 bandwidth to ignite growth in the fourth quarter.

And with that, let's open up for questions.

(Operator Instructions) Your first question comes from the line of Rich Valera with Needham & Company.

Nice announcement with JetBlue. I was wondering if you could talk about how the economics per plane could change with this agreement for you, both in terms of revenue and margin, and also if you could remind us roughly how many planes this would impact that are in the air today. And over what time frame would you expect to convert over to -- convert that whole fleet over to the direct model?

Yes. This is Rick, Rich. I think the -- this is really us -- we were a sub to another provider to JetBlue, so this kind of moves us into the prime position and helps us do other things with JetBlue [network]. And the overall goal for us that we've been working on is to try to get actually more passengers engaged and for them to do more things on the airplane. So we're motivated for the actual cost to come down on a per bit basis but to expand amount of services. So we think we'll see some ARPU growth out of it, but the real goal is to get them more engaged with their subscribers and be able to be more creative and more nimble. So right now I think we're on, I think Shawn says here, 235 airplanes, so this will apply to essentially all the current aircraft and hopefully, to the extent that they expand their fleet, to new aircraft.

And then last quarter, you had talked about potentially increasing your net sub adds quarter-over-quarter in the current December quarter. Has anything changed on that front? If you can just give us a sense of how you expect that trajectory to play out over the next quarter or 2.

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Yes. It's -- right now we're doing trials and experiments, and we're -- I'd say we're more interested in what those experiments tell us about how to roll out the ViaSat-2 services than the exact number of subscribers we get -- we end up with. Right now our projections are that we'll probably go down in net subscribers, but not as much as we did in the second quarter. But a lot just depends on which plans the subscribers choose and how much data usage is associated with those plans. So that's basically it. It's really just finding out what the market wants. And so far, I think that the results that we've seen so far are actually good for us, the fact that people really like these high-end plans because we're, we think, relatively uniquely capable to deliver those in the markets we're aiming at.

Got it. Just one final one if I could. You had the conversion of the DISH relationship to agency, and I think they kind of stopped, effectively, selling I think the ViaSat-1 gen plans but I believe will start selling once you get ViaSat-2 online. Is that correct? And have you kind of figured out what the shape of that relationship will be going forward?

Yes. I mean, basically, what you said is the case, and so they've not been involved in our plans for this fiscal year. But we expect that they will. We think they like the plans that we're going to offer, and so we think we'll reengage.

Your next question comes from Ric Prentiss with Raymond James.

Couple of questions following along the same lines. On the aircraft, you guys installed, I guess, 8 in the quarter. Can you talk a little bit about the ramping? I think you mentioned mostly American and Qantas as you look out, but just help us understand how that might ramp throughout the coming quarters and what kind of seasonality we should expect?

So overall, I think what we indicated that we're starting to ramp -- we're just now starting to ship the Gen 2 equipment, and that's mostly what we're going to be shipping except for some of the aircraft in Europe. And that -- I think we had indicated before that ramps to just under 100 installations in the March quarter, and then it ramps to pretty close to 150 in the June quarter. So between here and there, I think that slope is not perfectly linear but obviously, starts to ramp pretty soon.

Okay. And then on the JetBlue contract or the expansion of the relationship, like you said, bringing yourself into the prime position, would assume there was maybe an extension of the contract, too, given that it's ViaSat-2 with ViaSat-3 components as well. Can you update us just maybe on how long that relationship now is locked in for?

Yes. No, I mean, we're -- there are some interesting features in there. There is an extension of what we had before. Kind of our view with these contracts is we've got to keep them happy to keep them being our customers. And so that contract term is less important than is it working. And I think what's happened here is great evidence that we're working really well together.

Okay. And on the U.S. wireless side -- or sorry, the broadband side, the unlimited plans, you're seeing a lot of interest in those higher-speed, higher-priced plans. We have had U.S. Cellular report today as well, and then they took a big write-down because concern on the wireless side that unlimited plans are proving hard to monetize and data demand is clearly there, but the ability to monetize on the revenue side was difficult. And so literally, they took a big write-down at U.S. cellular, saying they're having trouble recognizing the revenue. Can you walk us a little through, if you're seeing such high demand for high priced, high speed, several of the plans are unlimited, maybe give us an idea of what kind of the take rate is looking like and then how you get comfortable on the unlimited plan pricing and then the unlimited plan economics?

Okay. So one of the themes that we've made over the last few years is really understanding the economic yield of the satellites, and I think we've done a good job of optimizing that. And that really comes from having a good understanding of bandwidth consumption and sort of the knobs and levers that go into having policies that provide a good experience and still keep bandwidth consumption under control. So we've been -- we basically use a combination of empirical data because we've had our freedom plans in the market for probably like 2 or 3 years with tens -- I think in the 50-ish thousand subscribers using those plans. So these plans are kind of, I'd say, derivatives of those. They're, in some ways, a little more favorable for subscribers and carry a little higher pricing in some cases. So we have this combination of both empirical evidence, and then we're very aware and cognizant of residential broadband use in cable homes and telco homes. We track that data. We track over-the-top viewing hours as another way to just kind of triangulate on bandwidth, expected bandwidth consumption. It's a little bit tricky because if you have relatively small numbers, usually the first adopters of the plans are people that are more intense bandwidth usage -- users, but if you can scale them to hundreds of thousands, I think they more reflect the statistics of the population as a whole. So basically, one of the things that we've been saying is that we're producing more bandwidth than other people, and we should be able to deliver more bandwidth to our subscribers at good economics both for them and for us. So that's what we're testing. Right now we're really enthusiastic about the results. I'd say they're overall within the range of what we're -- what we've been expecting.

Okay. And then I think noticing on the price plans, it looks like there's a throttle at 150 gigabytes or a prioritization at 150 gigabytes. How do you guys -- is that same thing you look at in cell, where the breakpoint was and who was like just being a hog?

Yes. Those -- I mean, there's -- one thing we talked about last quarter was kind of those distributions of demand and what fraction of the subscribers use how much bandwidth. And so some of it's derived from that. Those -- the 150 gigabytes is -- has been a relatively common limit on DSL plans, which is sort of the -- basically the area where we see a big opportunity to drive more subscribers by offering higher speeds and comparable volume. That number may change. It's one of the things that we're testing. But whatever it is, it's probably going to be a lot higher than the unlimited amount that's on wireless plans, and that's why we're really confident that we'll be able to do -- compete very well against those.

Your next question comes from Philip Cusick with JPMorgan.

This is Sebastiano on for Philip. Just regarding the residential broadband opportunity more ecosystem wise, it looks like growth is slowing for the telco. Losses are slowing for telco operators. Cable net adds are slowing. Just taking a 10,000-foot view. What gives you confidence, I guess, in your ability to continue capturing share? And along those lines, video being a bit pressured with the rise of OTT and virtual MVPDs, would you at all ever consider potentially partnering with them or doing some sort of bundle offering?

Okay, 2 points. So number one, on the why do we think we can continue capturing share. Last quarter, we talked about sort of what are the speeds that are available in the market. And then at 25 megabits, you're about -- we're about medium speed -- little just under medium speed in the market, and at 50 and 100 megabits, we're well above medium. And speed is the dominant factor affecting subscribers' choice. So as long as we can provide good value and speed, we think we have good opportunities. We've talked also about the volume issues, and we think volume is also a factor. And that's why we're so excited about these unlimited plans and our ability to drive gains from that. And as you mentioned, video is a big driver on the volume consumed. We think, looking at all of the data that's out there, we can deal well with a VOD type of over the top. That would be Netflix as an example. The live over-the-top services like Sling, as an example, or the new Hulu or DIRECTV Now services consume a lot more bandwidth. And right now they are a relatively tiny fraction of video subscribers, so it's not going to skew our results that much. But in the long run, we do think that satellite could be a really good way to deliver those services, and that may involve partnering with one or more of those service providers.

Just one other quick follow-up. Can you just give us an update as to where you are at the Eutelsat JV and potentially in terms of plan and distribution changes related to the infrastructure co? And then do you have any surprises, learnings you have and maybe an update to the ViaSat-3 EMEA? How are those negotiations and conversations progressing?

Okay, yes. So with Eutelsat, we've been engaged with them for about 8 or 9 months on the existing KA-SAT business, and we feel we've learned quite a bit about the economics there. I think it's been kind of a learning experience for both us and for Eutelsat as we get more familiar with the landscape in Europe and they get more familiar with our approach to managing that business. And I think, overall, our ability to evolve the business and make progress has been good and encouraging. I think there's -- it's like saying there's like no battle plan survives first contact with the enemy. And so I think both we and Eutelsat are learning things and working with each other, but I would describe the working environment as good. Now what we are doing there is we're trying to translate things that we've learned -- that we're learning on KA-SAT into the ViaSat-3 joint ventures agreement. And so I think that's causing us to -- both to rethink some of the detail terms that we have but not really the conceptual terms. I think that's still on track, and hopefully, somewhere around the end of the year or early next year, we'll have more announcements to make on that.

Your next question comes from Louie Dipalma with William Blair.

First, can you talk about the decision by the U.S. Army to shut down the Win-T program and whether that has had any impact on your government bookings?

Okay. So we do have equipment that's in Win-T but I would say, overall, so far, really hasn't been a material effect on our government business. I think the bigger issue is that I think that it reflects that -- Win-T is a big system, big physically large system that doesn't necessarily deliver the value that can be obtained through the kinds of systems that we've been doing. So overall, we think that the sort of the dissatisfaction that's reflective with Win-T is a good thing for us because it reflects what's possible, which is what we've been pushing and what we think our satellites and our networks are uniquely capable of delivering. And I think that, overall, that dissatisfaction with the status quo is overall a big benefit for us and part of what's fueling our growth in government. So I would describe Win-T as kind of an artifact or symptom of that, which is good for us. And we certainly trade growth in the type of services we're delivering for just the products that go into those types of terminals.

Okay. And is the target for ViaSat-2 residential broadband services to be live in February?

Yes.

Okay. And with the timing of that launch, do we expect positive net adds in that fiscal fourth quarter?

Yes.

Okay. And lastly, the JetBlue deal was obviously a positive development because it seems that Thales has been very aggressive in the market with their Air Canada deal. And despite Thales' aggression, does this JetBlue deal give you confidence that you'll also be involved in the upgrade of the United Airlines 737s and 757s that Thales is also partnering with you with?

You would think so. We never -- I don't -- we don't want to be presumptuous, right? We have to deliver value to all of our customers. I think that we were in a situation with both JetBlue and United where they had kind of a mixed contracting agreement because of the history of LiveTV. And JetBlue resolved that in a way that we think was good for them and good for us. And to the extent that, that needs to get resolved on others, I think we're going to do the best we can to get a good outcome there as well.

Okay. And lastly, do you view some of the LEO service providers, and in particular O3b, as being a potential partner for you for some low-latency services?

Yes. I think there's certainly some overlap where we'll probably compete for some areas, but it's a really big market. Different systems have different strengths and weaknesses. The thing we've been most focused on is, I think, is getting lots and lots of bandwidth, really high speeds, very high bandwidth density, that is the ability to deliver lots of bandwidth to relatively small geographic areas where demand is high, and to get global coverage. And I think with that combination of factors, I think we have a fairly unique advantage. So it's not like we're concerned about competing with these other systems. We think there's room in the market for all of them. We don't think we're going to drive them out of business. They're not going to -- I think they are partnering with us because the combination of some of the lower-latency features with the features that we have can be powerful. And we'll just see how the market plays out.

Your next question comes from Andrew DeGasperi from Macquarie.

First on JetBlue. Could you maybe tell us if the hardware reset will be essentially, from a time frame standpoint, pretty quick given you're upgrading just a portion of the aircraft? And secondly, could you maybe comment on the Ofcom lawsuit? Do you have plan -- I know Inmarsat reports in a few hours, so just wondering if you have any updated thoughts on that.

So on JetBlue, no, it takes -- it'll take a couple of years to go back to all those aircraft. It's really almost all their airplanes, so -- we'll upgrade. So we can continue -- they can continue to fly. The real -- the new system is really forward compatible to ViaSat-2 and ViaSat-3. But they can continue to fly on our other legacy platforms in the meantime. So it's really going to fit around their maintenance schedule, the upgrade cycle. Yes, and then the...

Don't have any comment on the Ofcom?

No.

Got it. And just sort of a follow-up to Louie's question. I mean, what about your own NGSO plans? I know you had an application with the FCC. They've recently issued some approvals to Telesat and OneWeb as well. Just wondering what are your thoughts on your own systems going forward beyond ViaSat-3.

So we are interested in NGSO. I mean, they can have unique (inaudible), primarily the low latency. The economic -- we still think the economic case is hard, but we're working away on figuring out ways in which we could use that to augment our fleet. Right now from a capital investment perspective, we're very focused on the geos.

Understood. And just one last question for me. Maybe, Dawn (sic) [Shawn], if you can comment on your R&D statements you made. Just wondering, I mean, is it safe to assume that maybe that margins directionally should improve with the March quarter?

Yes. I think probably the better way is to just give you a feel for where R&D is going to go in kind of over the next couple quarters. So I think what we talked about is that the ViaSat-3 R&D is going to start to moderate a little bit, and we expect some commercial air opportunities to come in and to offset some of that benefit. So if you think about the next couple quarters, probably see the R&D start to work itself from this peak level down to levels that are probably similar to the kind of between Q3 and Q4 of FY '17.

Got it. But then the offset to the commercial air, that should be about -- you said not all of it. But should that essentially ramp up? Or should we be seeing that at the same level?

So I think what I would say is total R&D, we're expecting to come down kind of in the ranges that I just gave you. It's just offsetting to some degree the ViaSat-3 takeup.

Your next question comes from Mike Crawford with B. Riley FBR.

Can you comment some on this forward electronic phased array antenna you're developing in conjunction what the ESA, and then what that might mean for residential SAC and also ability to serve connected car market, including what kind of link budget might factor into the equation?

Okay. So we are really interested in electronic phased arrays. I think that we're excited to be working with the European Space Agency to seize similar opportunities in there. The -- kind of the big thing about the ViaSat-3 Constellation, why we're so focused on this bandwidth economics is that if we can create very large amounts of bandwidth economically in space, then we can use it a little bit less efficiently on the ground with some of these phased arrays. And a couple of the applications that we're looking at, one is residential. And so the idea would be that you could essentially buy in a box a little flat panel antenna that you could take home to your house and stick it on a wall facing, basically, south, and it would acquire the satellite. It would basically reduce our SAC costs for those types of self-installs fairly significantly or create an opportunity where subscribers could just take on an installation on their own sort of like a Geek Squad type of thing that you'd see in Best Buy. The connected cars opportunity is also really interesting because we can make antennas that we think are sort of the size of like a GPS or a satellite radio antenna that's essentially invisible on modern cars and still get really high interactive broadband data rates on a ViaSat-3 class satellite. So those are the -- those are 2 of the applications that we're really trying to help work with -- work through with ESA. I think we've got some technology to get through. If successful, we should get the performance and class points that we don't think are available anywhere else in the industry, and it ought to create some exciting prospects.

Jumping to Government Systems. Are there any milestones that we should look for or programs here going forward now you can talk about?

Thanks for asking, but I don't think we want to bring up any particular programs at this point. I think in the near term, we may be able to but not today.

I'll try one last question. In Satellite Services, if you're offering -- once you're offering 50 megabits and above plans of good value, can you just talk about what you think the cadence and/or duration might be of gross adds anyway, including as you approach ViaSat-3 -- the first ViaSat-3 launch over in the Americas?

Sorry, I'm going to hedge a little bit. But basically it's something we've got to figure out. I mean, if we go really, really fast, it will sell out the satellite quickly, and it might mean that we've, basically, priced our plans below market. So what we'd like -- I mean thinking of what we'd like to do is kind of have ViaSat-2 relatively full before ViaSat-3 goes up -- goes in service. So think of that less than 3 years, is that we want it to be completely full. And we'd like to fill it at a good pace but not so fast that we undervalue it. And right now I think I don't want to -- I'm reluctant to put numbers out because we're trying to figure out, that's the sort of the point of these tests that we're doing, how high the demand is and what prices we should charge for services that make them -- still make them really attractive. And I know a lot of people are really focused on number of subscribers, but we're also really -- we really like looking at ARPU and economic yield. And we've got to figure out those 2 things in the market. But I think we're going to get off to a fast start. That's what we're aiming to, and then we'll fine tune from there. So we'll -- I think we'll be able to give more feedback based on real data in the next couple quarters.

Your next question comes from Chris Quilty with Quilty Analytics.

Mark, I wanted to follow up on that flat panel antenna contract, very nice one. That's kind of been the Holy Grail to the industry for a long time, and a lot of people have failed. I'll take the size of the ESA award as some indication that you're bringing some -- maybe a technology readiness level to the table. Can you help us understand what's different in what you're doing perhaps versus you've got the [Phasors] and [Kymetas] that are out there, the Boeings that have tried and failed? And is there any legacy development or product that you can point to on the development path?

Okay. So flat panel -- like to say flat panel antennas have been kind of the Holy Grail, and a lot of people have tried at them. It's not -- I wouldn't say so much that they failed. Well, they haven't been successful in the market, you can say that. That part's true because there are really difficult tradeoffs about price and especially performance with the big issue being that once -- if you were to start looking at off-axis, (inaudible) those flat panel antennas have this [cosine data loss] problem, which really, really hurts performance. And so you end up with antennas that are big or more antennas, and they can be expensive. So we -- one is we're a buyer of really good antenna systems from other people. So we've been encouraging other flat panel makers, and we're pretty aware of everything that they're doing. We think we have some pretty unique technology approaches that essentially should really reduce the costs of these antennas relative to other technologies that are out there and still get performance that is as good as what as what's achievable with more expensive ones. But I think one of the really cool missing ingredients is that, at the end, a user really cares about how much bandwidth he gets and how much he's paying. And so if we have a really, really cost-effective satellite with lots of bandwidth, the combination of that and putting in antenna on a platform that you otherwise couldn't possibly support or couldn't support at that price point, that's a really powerful combination. So I think it's not -- think of it as -- I do think we have some really good flat panel technology, but I think it's the interaction of the flat panel and the space system that's what's made this so appealing to European Space Agency.

Got you. You also mentioned earlier the importance of global footprint. Is there any update on the ViaSat-3 [Pacific Bird]? And any negotiations there?

We are working on a configuration for that satellite. What we hope to be able to talk about is a platform that has some big improvements relative to what we did on the first 2 satellites, and we think we can achieve that in the time scale that we need. And hopefully, I think it's going -- that's going to go into '18, but I think it'll be worth it. So probably be first half of '18 that we'd give more detail on that. But we're making -- we feel like we're making good progress.

Okay. And a final question, I think it was already asked in one way. But on the government side, you've been killing it for the past several quarters here. Obviously, a lot of that is just your internal product development. But are there any particular either products or programs or applications where you think you're going to see incremental upside from what's been pretty good growth up to this point?

Yes. So there's 2 -- well, there's 3 general areas. And we've sort of touched on it. Maybe I'll give a little more insight. But one, one area that's been great for us is really an artifact of the fact that the whole JTRS program never really went anywhere. And that meant that there are a bunch of platforms that didn't have capabilities, and there were also waveforms that were associated with JTRS that were supposed to bring capabilities to the field that actually they didn't or didn't in a way that was worthwhile. And so that's an area that our tactical data link product is just a big vacuum. Remember, JTRS was a multi-billion-dollar development program with multiples of that in deployment. So there's a big void there that we're not filling all of it, but we've had a good opportunity to fill good parts of that. And I think the biggest parts of that are still ahead of us. On the crypto appliance cyber security side, there never really were programs to do that, and I think we've been really successful at investing prudent amounts and making advances in the field. And clearly, that whole cyber info appliance area is also really, really good target. Then the final one kind of goes back to this issue that was raised at the beginning about -- earlier about Win-T, and that is the Win-T program is really just sort of an instance of where, in many ways, these defense organic programs have become far behind what's possible in the commercial space. And so that's also a really big opportunity for us. And that combination of those 3 things that we're really filling in the gaps in has been great.

And the MIDS program is just Steady Eddie.

Well, MIDS -- yes, think of MIDS as sort of an anchor around the whole tactical data links area. You've got a big, big fleet of close air support aircraft and fighter aircraft that are networked together. Now you can leverage that in multiple ways, and we're doing that with our handheld and by connecting helicopters to that network. We think there's lots of opportunity beyond that. So the MIDS is just sort of an anchor program in there, but it's really around the edges of that, that we've been very successful.

And that actually brings up one other question. I almost forgot the -- on the government mobility side, it looks like KVH, which has been a big partner for you on the Ku network side, is migrating towards an Intelsat and iDirect platform. Does that hurt either your coverage or your potential margins as you lose volume there?

No. It was a good relationship with KVH. I think what they're doing is what -- and we've talked to them a lot. I think it's fine for them. It's -- I think it's clearly just an interim approach for them -- I mean, the whole Ku-band, I think, is interim to what's going to be possible with global Ka. So it's not really a material issue.

Your next question comes from Andrew Spinola with Wells Fargo.

Just want to try Mike Crawford's question one more time. When I talk to investors a lot, one of the things that concerns them a lot about ViaSat is it's such a wide range of net adds in fiscal '19 and fiscal '20. And I know you don't want to guide to it, but we -- since we have sort of the historical run rate from the last ramp, where you did -- you sort of maxed out at 130 -- 130,000 in a 12-month period, and I think some people are maybe looking for as high as 200,000 plus. Can you kind of at least calibrate for us, should we anchor to that 130,000 number? Are there reasons to think you can grow faster because of XYZ or can't because of a big base or something else? Anything you can give us to help us rein in the range for fiscal '19?

Okay. I understand. It's a fair question. I think the big issue for us and the thing we keep coming back to, I'm going to come at this from 2 angles, okay? So one thing for us is there's this relationship between the number of subscribers we can have and the amount of money we can charge them. We feel like what we're really trying to do is maximize that balance. And so we like -- for the reasons that we've said, which is fewer subscribers using more bandwidth should be happier, they should churn less, should be easier to acquire, we would like to find a point that has -- that's more aware of the direction that we're going on ViaSat-1, which is higher ARPU, higher value subscribers. So think about that. The flip side is, in the -- when we launched ViaSat-1 and we grew our fastest, we didn't have the distribution and fulfillment network that we have now. So we actually have, we believe, the capability to deliver -- to add more subscribers than we could back then. And I think that we should be able to do significantly more than 130,000 net adds in a year. We'll have to see what that mix is, and then we'll be able to project that forward. But we should be able to do quite a bit better than that in the first year just from a fulfillment perspective. And we'll get -- part of it is making sure that we have our offers match the demand side and that we're not leaving too much money on the table nor are we growing too slowly. Those are the things that we're trying to balance. But we should be able to do quite a bit better than that 130,000 number that you mentioned.

Got it. And similar question. I think the last time when the last satellite launched, you were sort of capacity constrained as well, and your expectation was, at the time, that once you had capacity you were going to -- you thought you'd see a lot more demand for the $50 plans, and so you would expect ARPU to come down. It sounds like this time around -- I'm just wondering, when I'm thinking about ARPU in '19 and '20, you've been going through a period where you've really been trying to maximize the return on each sub because of your lack of capacity. Does that mean that we probably will see a greater share of $50 plans in the future and maybe a little bit of downward pressure on the retail ARPU, not necessarily the blended but the retail? Anything you can give us on that?

So right now just based on what we've seen so far, I don't think that's going to be the case. We're -- we will have plans at that price point but -- and we could see in what we showed just on the slide that we're offering plans at that price point. But the higher priced ones seem to be having stronger demand. So right now we're kind of optimistic that ARPU will -- retail ARPU will continue to grow.

That's retail ARPU's going to be well over 90% of our business as well.

Yes, so blended ARPU continues to grow.

Yes. And I think we just -- so these are things that we want to test and see. If you look in the trends, trends are ARPU's growing for the cable environment, and there aren't really a lot of good choices in a lot of the places that we are competing in. So we just have to test it. But right now we're kind of optimistic that retail ARPU will continue to grow.

And I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Mark Dankberg for closing remarks.

Okay. Well, thanks a lot. We really appreciate everybody's time and interest, and we're really looking forward to next quarter when the satellite will be in service. So talk to you then.

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