Viasat Inc (VSAT) 2018 Q4 法說會逐字稿

Welcome to Viasat's Fiscal Year 2018 Fourth Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO.

You may proceed, Mr. Dankberg.

Yes, thanks. Good afternoon, everybody, and welcome to our earnings call for our year-end fiscal 2018. I'm Mark Dankberg, Chairman and CEO; and I've got with me, Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our CFO; Robert Blair, our General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich, Corporate Development. And 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 from Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

That said, back to you, Mark.

Okay, thanks. So we will be referring to slides that are available over the web, and I'll start with an overview and Shawn will discuss the consolidated and segment-level financial results, then I'll give some additional color or review our outlook and then we'll take questions.

So the main thing is that while our fiscal '18 was impacted by launch delays and the antenna issue on ViaSat-2 as well as the insubstantial investments we made in space and ground network and in-flight connectivity restructure, we did achieve the milestones we intended, so that we can enable significant growth in fiscal '19 and beyond. So beside this, top level accomplishments set the stage for that growth. After several launch delays, we got ViaSat-2 in-service. Even with the antenna issue, we believe it's the most capable broadband satellite ever. It's got a powerful combination of speed, bandwidth, broad geographic coverage and real-time operational flexibility.

The ground network is state-of-the-art, with much smaller fiber gateways, and it's highly diversified. We deployed our second generation of in-flight connectivity terminals on our new airlines, and now we can rapidly scale in-flight connectivity services through our existing orders.

We market tested new consumer plans and features that we intend to scale in this fiscal year '19 and beyond. We added to geographic and vertical markets for broadband Satellite Services. Government Systems had a fabulous year, with 13% year-over-year growth in revenues, 27% in adjusted EBITDA and 42% in operating earnings, all driven by new products and services and expanded applications in the customer organizations. And finally, we successfully completed preflight hardware and testing on ViaSat-3 that enables flight hardware production.

So our mission for fiscal '18 is to capitalize all this with strong growth in revenue and earnings. The growth drivers are on the slide and they're already underway. First, is to rapidly scale our in-flight connectivity aircraft in-service. That started in the fourth quarter, and it's moving fast. Next is continued growth and market expansion and Government Systems. That's hardly driven by products services applications and user organizations that are already underway. Next is to grow our U.S. residential revenues, subscriber count and adjusted EBITDA. We started that with sequential quarter-over-quarter revenue growth in the fourth quarter. And then with ViaSat-2, we can also begin scaling new vertical and geographic markets. We've also continued to test and analyze the ViaSat-2 antenna issues, and our confidence in our assessment of the situation has grown. We still have some more ground network work to make the best of the situation, and we'll submit our proof of loss to obtain insurance reimbursement in this current quarter. And finally, we're also going to continue ViaSat-3 satellite production.

So that's a top-level overview. Shawn will go into more depth onto the financials for the fourth quarter and for fiscal '18 as a whole.

Thanks, Mark. Our fourth quarter fiscal 2018 was marked by achievement of important execution milestones across our businesses and our Q4 financial results were in line with our expectations.

Satellite Services saw the introduction of commercial service on ViaSat-2. Stable subscriber count, strong ARPU growth and American Airlines connected aircraft are ramping.

Our Commercial Network segment reflected strong uptick in IFC terminal delivery. And ViaSat-3 payload R&D expenses decreased sequentially once again. And our Government Systems segment achieved record levels of Link 16 product family deliveries and strong adjusted EBITDA margin increases.

Looking closer at Q4, we see Government Systems had top line growth of $22 million, representing record revenues and an 11% year-over-year increase. Much of this growth was from the data link product lines I mentioned earlier, which brought improved overall margins and drove segment adjusted EBITDA to a record $58 million. To give a bit more color here, this quarter we shipped record levels of JTRS units, small tactical terminals and our newest data link solutions, the handheld Link 16 radio. These last 2 products are considered NDI products, or Non-Developmental Items, meaning they're platformed through the company's funded development efforts. Therefore, they tend to yield higher contribution margins than the earlier generation customer-funded Data Link solutions. So overall, this represented a 30% year-over-year adjusted EBITDA increase, or 10% year-over-year, if you exclude the $8 million adjusted EBITDA impact of the TrellisWare contingency reserve we booked in Q4 of FY '17, and that's despite the increased segment R&D investments of approximately $2 million associated with our next-generation government mobility solutions.

In Satellite Services, we saw our fourth quarter revenues grow on a sequential basis for the first time in several quarters, driven by our ViaSat-2 service launch and growth in commercial air revenues. Also, Q4 had 2 fewer days than Q3, so it was a shorter quarter. On a year-over-year basis, segment revenues were down due to completion of the quarterly $6.8 million Loral settlement payment in Q4 last year, plus the revenue impact from 13% fewer consumer subs, corresponding to ViaSat-2 satellite delays. Offsetting these impacts were revenue contributions from continued consumer ARPU increases and growth in our IFC service businesses.

As we look forward, with ViaSat-2 now opened nationwide, we expect revenue growth to accelerate, driven by subscriber growth, new aircraft installations and shared WiFi services. And the year will be back-end loaded, as service revenues scale following the delay in our service on ViaSat-2.

Q4 segment operating profit and adjusted EBITDA was lower compared to the prior period, primarily as a result of the revenue decrease. The fourth quarter also reflected additional investment in commercial IFC support. We expect these costs to stay elevated for several more quarters for the revenues from the growing residential subscriber base and the installed aircraft fleet will begin to drive contribution margins in the second half of fiscal 2019, highlighting the operating leverageability of this segment.

In Commercial Networks, quarterly revenues grew 29% year-over-year and 37% sequentially, driven by increased sales of airport terminals. We also saw new contract awards ramp up in Q4, growing 29% year-over-year and 17% higher on a full year basis. Continued demand for IFC equipment and new contract wins for next-generation broadband capability also resulted in positive book-to-bill position for fiscal 2018. We expect mobility product sales to continue to strengthen throughout the year, as we execute American Airlines' program and those of other airline customers.

This quarter also included initial shipments of our newest fixed consumer terminals to our third-party customer in Canada, and we expect to see those to grow in the coming quarters as well. And finally, the segment also saw another sequential quarter of decreased segment R&D expenses of $3 million, as our ViaSat-3 payload program continues to shift to the capital portion of the project. Achieving these operating milestones reduced our commercial segments operating profit and adjusted EBITDA losses compared to the prior year period and sequentially.

On Slide 5, we see revenue and adjusted EBITDA performance for our full fiscal 2018 compared to fiscal 2017. In Government Systems, revenues increased 13% from last year, reaching a new record of over $0.75 billion. The increase was mostly the result of higher product sales across our diverse portfolio, with tactical data link, global mobile broadband, cyber, information assurance, and tactical SATCOM radio products, all contributing to the increase. Service revenues also increased in the areas of SATCOM and global mobile broadband and tactical data link.

This year, we also invested an incremental $60 million in government segment R&D, with a heavy focus on expanding our government mobility product platforms to next-generation satellite capabilities. So despite these ticked-up investments, adjusted EBITDA in the segment achieved a new record of $207 million, driven primarily by the higher margin Non-Developmental Item products sales I mentioned earlier as well as our service portfolio.

Looking to our full year, Satellite Services revenues were up about $40 million, with the bulk of that $27 million due to completion of the Loral settlement payment last year. The remaining 2% year-over-year revenue decrease was due to the lower overall number of residential subscribers, offset by both higher ARPU and expansion of the ISP business. Adjusted EBITDA was impacted by the lower revenue as well as higher operational and marketing costs associated with ViaSat-2 service launch and our commercial mobility ramp, which were more prevalent in the second half of the year.

In Commercial Networks, our full year revenues were down slightly compared to last year, mostly attributable to lower consumer terminal sales, offset by our second half ramp-up in commercial air terminal sales. Adjusted EBITDA was impacted by lower revenues and the margin mix between our mobile terminals compared to our fixed consumer terminals, plus higher G&A for our ISP business and the anticipated year-over-year increase in R&D for the ViaSat-3 program of about $22 million.

As I mentioned earlier, Commercial Networks generated a positive book-to-bill ratio, which increased segment backlog by 8% year-over-year and this backlog continues to exclude anticipated rewards under the company's existing IFC contract.

So similar to what we provided the last few quarters, Slide 6 shows the walk-forward of adjusted EBITDA for both the quarter and the fiscal year period, and it isolates the large transitory items we've been highlighting. What you can see in the chart on the left for Q4, is that our overall R&D actually decreased year-over-year and was the higher costs associated with ViaSat-2 service launch and commercial mobility ramping that were dominate headwinds to adjusted EBITDA growth.

On Slide 7, we had summarized income and cash flows for the year, and debt and leverage trends for the last few years. In the net income line, we see the adjusted EBITDA impact I discussed earlier, plus higher depreciation and noncash costs, primarily offset by a tax benefit associated with the current year loss. Also included in our fiscal 2018 results were a $10.2 million extinguishment charge related to our Q3 debt refi and approximately $12 million of additional tax expense related to the revaluation of deferred tax assets as a result of the Q3 tax reform legislation, which did reduce the Federal tax rate to 21%. The net impact was a GAAP net loss of $67 million for the year and non-GAAP net income of just over $2 million.

So before I move on, I'll quickly remind everyone that the new revenue standards will come into effect for us next quarter, Q1 FY '19, which will primarily impact our consumer broadband business: one, commissions incurred for new subs after April 1 will be capitalized and amortized over those customer expected lives; and two, we'll record a recapture commission asset net of amortization associated with our existing sub, which would also be amortized over the estimated remaining life. With this change, you should expect to see approximately 80% to 85% of our staffing capitalized in the future versus the 60% to 70% we've ranged historically.

As we close out our fiscal 2018, our standard implementation activities for ASC 606 are still heavily underway, so we expect to provide further details concerning any other identified differences in next quarter's call.

Turning to cash flow.t Despite the higher R&D and the ramping expenses incurred throughout the year, we generated over $350 million of cash flow from operations. In CapEx, our fiscal 2018 investment levels were down, about $130 million or an 18% decrease compared to last year.

Looking across our project portfolio, ViaSat-2 satellite network expenditures were down as that project moved to completion, offset by a second half stretch out for the related CPE investment and higher investment in the ViaSat-2 program.

So in summary, the year-over-year variance is primarily due to fiscal 2017, including our investments in Eutelsat, KA-SAT satellite and our acquisition of the IFC and aviation public company, Arconics. Also keep in mind that as we grow our subscriber base on ViaSat-2, we would expect to see CPE investments stay elevated, alongside our ViaSat-3 activities, which will continue to ramp throughout fiscal 2019.

Looking in the chart, on the lower right, our Q4 net leverage ended the year at 4.2x adjusted EBITDA. This increase was mainly driven by our transitory FY '18 adjusted EBITDA headwind, plus by the factors we've been discussing on the last few calls. As we've discussed previously, we expect to see leverage continue to trend upward for another 2 quarters, as we stack new ViaSat-2 subscribers plus ramp our ViaSat-3 satellite construction activities. Starting in the December quarter, we should begin to see deleveraging again, as adjusted EBITDA growth begins to accelerate. Also, I should point out that our covenant adjusted EBITDA in our loan agreement and bond indenture has a number of additional noncash add-backs, which are not included in our reported adjusted EBITDA. Thus, our net leverage ratio for covenant purposes is quite a bit lower than what you see here. And with our recently amended bank credit agreement, we're able to partner with our bank and obtain additional flexibility throughout the next year to maintain our current growth trajectory and our investments in our ViaSat-3 satellite.

So finally, our Q4 liquidity position remains very strong, with $71 million of cash, and nothing outstanding on our $800 million credit facility. So taking these 2 amounts into account, less our outstanding LCs, we continue to have significant liquidity of $842 million.

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

Okay. Thanks, Shawn. So I'll give a little bit more color on each of our business segments. We're anticipating strong in-flight connectivity growth in fiscal '19 by enabling our new airline partners to get their fleets equipped with our service. We made good progress on that in the fourth quarter, with 46 new planes placed into service, which is more than we've done in the prior 3 quarters combined. We also delivered a total of over 80 terminals in the fourth quarter and expect that number to grow in the coming quarters. So we expect to see accelerating growth of connected aircraft in-service in the current quarter and beyond.

We, and our airline customers, have continued to have very positive feedback on the quality of the in-flight connectivity service. SAS airlines had a very successful media flight to introduce service last week. And we now also have wireless in-flight entertainment operating with 2 airlines, and we've established prime contractor relationships with all of airline customers. So our fiscal year '19 mission is to scale. We've got an opportunity to reach over 1,000 aircraft in service by the end of the fiscal '19 year. The combination of equipment sales and new in-flight connectivity service revenues are anticipated to be the greatest contributor to year-over-year revenue growth. Our existing aircraft under contract lends confidence to that growth health.

Of course, we still have opportunities to add new airlines as well as to increase our tail count from growth with existing customers. We're also working on exciting new Internet, media and content partnerships that leverage our connectivity advantages for our airline partners and their passengers. We believe the growth we can achieve can help establish that we're going to be the best long-term player in the global in-flight connectivity market, offering the best value to the airlines, with an economically viable and scalable business model that delivers an on-the-ground like seamless, frictionless WiFi Internet experience to all of their passengers.

Government Systems had a very strong quarter and an excellent year. Revenue grew 11% year-over-year in the fourth quarter, 13% for the fiscal year. Adjusted EBITDA grew 30% year-over-year in the fourth quarter, and reached $207 million, which was up 27% for the year as a whole. And operating profit increased 59% year-over-year for the fourth quarter and 42% for the year as a whole. Revenue, adjusted EBITDA and operating profit all set new records for the government segment. Year-end backlog was also up 6% from last year.

Slide 9 shows the pattern of growth for the past 4 fiscal years, where we've achieved a 13% compound annual growth rate in revenue over that period, with good margins as the business has scaled. Overall, we believe the main factors that have fueled that growth remain present. We've had good success in information assurance appliances, have footholds in cyber services, continued market expansion opportunities in tactical radios as well as in mobile satellite broadband equipment and services. After lots of years of delays and cancellations in defense communications programs of record, there's strong interest in commercial technology and non-developmental items such as we make, and we've got a very good track record there. Our government growth can be lumpy but we believe we have good opportunities for sustained growth, and our backlog helps win confidence in that outlook. We anticipate revenue and earnings should continue to grow in fiscal year '19 and to be somewhat backloaded as had been our pattern in prior years.

So we're also very focused on growing revenue and adjusted EBITDA for our U.S. residential broadband business in fiscal year '19. This slide shows a sample speed test taken from a ViaSat-2 user terminal. We think that speed, well over 100 megabits per second, is pretty impressive in such a small dish. So as we've discussed previously, we're emphasizing more premium higher-speed, higher-volume service plans. We're targeting plans that can support much more streaming video on-demand viewing than traditionally capped plans. It's a challenge, but we're aiming to tap into long-term demand for Internet-delivered video, while leveraging our competitive advantage in satellite bandwidth capital efficiency. Those plans led to an 8% year-over-year increase in ARPU in the fourth quarter, which helped us grow U.S. residential broadband revenue sequentially quarter-over-quarter, despite a very small sequential decrease of a few hundred subscribers.

ARPU growth was almost completely due to core broadband services revenue, which reflects substantially more broadband per subscriber for the new plan sets. Overall, in fiscal '19, we continue to plan for revenue growth to be driven by a combination of higher sub counts and higher-value premium plans, with the ultimate proportions depending on market demand and planned mix.

Things are going pretty well. We're rapidly growing the number of subscribers on ViaSat-2. Growth is accelerating each month, as we incorporate more geography, bring on additional distribution and ramp our marketing spend. We currently have tens of thousands of subscribers on ViaSat-2, and network performance has largely been quite good. We anticipate that subscriber growth will continue to accelerate as we refine and grow the service areas that support our higher-speed plans.

The ViaSat-2 antenna issue does present some complications. We've been working for several months with a model that predicts the antenna patterns for the effective beams. Data to date has confirmed our understanding of the issue, including our estimate for the satellite's maximum potential capacity. The ongoing root-cause analysis has helped confirm and refine our assessment of the antenna issue, but it add some temporary delay to the rate at which we've been able to expand the geographic coverage of the effective beams and add subscribers to the satellite. Additional data and measurements were helpful in preparing our proof of loss due to the antenna issue. We expect we'll file our insurance proof of loss in the current quarter.

We're taking a number of measures to adapt to the effects introduced by the antenna issue. We're continuing to compensate through technical business and operational means. Those measures will evolve over the next few months.

One of the big advantages of ViaSat-2 is it's very broad geographic coverage. As we've said before, that's fully operational and unaffected by the antenna issue. We have full and contiguous coverage from the Northern tip of South America, up to Central America, the Caribbean, the U.S., large parts of Canada, and across the Atlantic Ocean. We've had very good initial success with our WiFi hotspot business in Mexico using our legacy fleet. We've began ramping that significantly with ViaSat-2, and we're planning to expand into more markets.

The availability of ViaSat-2 bandwidth also lets us scale our enterprise broadband services. We're making good progress on construction of the Americas and the Europe, Middle East, Africa satellite in the ViaSat-3 series. Preflight R&D expense activities for the spacecraft are winding down and capitalized spaceflight hardware production is ramping up. Moderating R&D expenses creates a little bit of a tailwind for fiscal year '19 adjusted EBITDA growth.

As we've previously said, we're still planning for the Europe, Middle East, Africa satellite approximately 6 months after the first America's one, although Eutelsat ultimately chose to build [their own] satellite to target that region. The existing JVs with Eutelsat using KA-SAT remain in place. The primary impact to us is that our capital budget is a little tighter, but it's manageable.

We're methodically entering retail service in European countries, starting with the most difficult markets since that's where KA-SAT bandwidth is most readily available. We're still aiming to have the first ViaSat-3 satellite in-service in the second half of calendar year '20, taking into account spacecraft integration, launch of [initial] orbit raising and nonorbit testing. System performance budgets are still on plan, and we've steadily been able to burn down risks through ground testing.

Our early experience with ViaSat-2 reinforces our view of the competitive advantages we can achieve with ViaSat-3 performance. We believe our 100-megabit per second service plans are years ahead of the rest of the satellite market, and then ViaSat-3 should enable us to push those speeds up several fold. We'll be able to bring our highest-speed plans everywhere in the U.S. and then Europe. And our bandwidth economics will enable us to deliver even more video streaming hours and with more attractive pricing.

U.S. residential broadband is planned to contribute to ARPU and adjusted EBITDA growth during fiscal year '19, along with the in-flight connectivity and government systems businesses. Residential broadband doesn't have the benefit of a big, predictable order book, like those other 2 businesses, but based on market results to date, we're confident that residential broadband will contribute meaningfully to this year's growth story.

Okay, in terms of our outlook, we're excited about what we accomplished this past fiscal year and our prospects for growth in revenue and adjusted EBITDA in fiscal '19 and beyond. We've already covered the main drivers, but I'll summarize them here. First, we're ramping in-flight connectivity hardware shipments to enable our airline partners to get their planes in service. We've got an excellent opportunity to grow to over 1,000 aircraft in-service by the end of fiscal '19. We've got a prime contractor relationship with all of our airline customers now. So by taking on that role and the associated functions, we expect to also grow revenue per aircraft as well. Hardware deliveries are already well underway, and services revenue will scale as those aircraft are activated.

Our Government Systems business also a good opportunity to continue its track record of strong growth. We've been expanding our market, with additional tactical radio, information assurance, and cyber and satellite products and services. We've begun crossing over from early adopter organizations to much larger and more mainstream user organizations. We've added new platforms and helped create more effective operational concepts. The Defense Department's currently more receptive to new commercial and Non-Developmental Item technologies. Our government business does exhibit seasonal quarterly effects, based on government funding cycles for our products and services and tends to be significantly stronger in the second half of our fiscal years. Individual quarterly reporting periods can be lumpy.

We've also got good opportunities for U.S. residential broadband growth in fiscal '19. We turned the corner in our fiscal '18 fourth quarter, with sequential quarter-over-quarter revenue growth, driven by more premium service plans on essentially flat subs. We continue to emphasize higher-speed, higher-volume premium plans that support much more streaming video on-demand.

Revenue growth for fiscal '19 is anticipated to reflect some mix of ARPU, plus subscriber growth, in proportions reflecting market demand. Adjusted EBITDA growth due to residential broadband will occur in the second half, as we overcome higher marketing in SAC expenses, initial promotional pricing and the fixed costs associated with the ViaSat-2 network expansion.

We also experienced -- anticipate growth in our WiFi hotspot in enterprise verticals and in additional geographic markets.

Adjusted EBITDA growth will also have a tailwind effect from moderating quarterly R&D expenses as we plan to return to levels that we've had in the past, generally in the range of 7% of revenues.

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

(Operator Instructions) Our first question comes the line of Philip Cusick of JPMorgan.

This is Sebastiano for Phil. I just had a quick question regarding the satellite anomaly. I know you said -- there appears to be no effect on the coverage, but you also said you're looking at the affected geographic coverage of the beams. I mean, have you lost any particular capacity in a geography or how should we think about the capacity issue across the footprint?

Okay. So the way we designed this satellite -- and it's a pretty unique design for this particular satellite is think of it as having one very large contiguous coverage area, and that's due to one set of antennas. And then within that, we augment that coverage in what we anticipated to be the highest demand areas, and that's another set. And that second set is where the -- there's an antenna issue. And that is -- that's basically what we're describing. And so in some of the areas covered by those antennas, we have the issues that we described before. That's what we referred to the coverage, the coverage issues. And so they're only within the larger coverage areas and they're only in specific markets. Does that help?

Yes. Now that makes sense. And then just looking at the independent R&D, obviously, continues to decline. You called that out. How should we think about the steady state for that? Should we see further declines through here -- is this a rough level that we should expect for fiscal '19?

What we've said, Evan, if you look at this historically, before we had the ramp due to the R&D expenses that were associated with preflight on ViaSat-3, we tend to run in the 6%, 7% of revenue range. And that's kind of a good target for where we're headed back to.

Our next question comes from the line of Ric Prentiss of Raymond James.

A couple of questions, following along on Sebastiano's. Mark, you mentioned the estimated max capacity of ViaSat-2. Is that still looking like the 260 down from the 300, or just wondering what you found -- I think you said you've been working on some ground station work to make the best of the situation?

Yes. So last time we had it -- estimate of about 260 gigabits is the maximum potential capacity for the satellite, given the antenna issue as we understand it. And that's right where we stand still, basically the work we've done since has just confirmed that -- just given more weight to that estimate.

And that's down from the 300 theoretical that you'd provided way back when?

So 300 was sort of the initial capacity that we estimated for the satellite. Just as a reminder, when we did ViaSat-1, our original estimate was 100 -- we ended up with 140 gigabits after it was in orbit, and we did all the measurements and that -- and took advantage of additional spectrum. So the 300 was just, it was just the preliminary estimate of the satellite. It wasn't necessarily the maximum potential capacity of the satellite.

That makes sense. And then I'll stay on that line, you mentioned that you'll file the claim this quarter. Do you expect the proof of loss this quarter -- do you expect to get compensated within this current quarter as well?

No. That would be no. We don't expect to be compensated this quarter.

How long would that process kind of take to get the money in hand?

I don't really want to speculate on that one. We think we have a very clear argument, but it's a big claim, and we've not been through the process before.

Okay. And then for Shawn, you mentioned a little bit about ASC 605, going to 606, with this current quarter now. Can you give us an idea of what kind of magnitude we're talking about on revenues and EBITDA, and I assume the direction is improving since you'll be capitalizing and amortizing stuff. But is there any kind of rough magnitude we can think of?

Yes. I think it's a little bit early to give you, guys, kind of quantification of all the impact. We're still having an -- in the process, and we'll give you guys -- we'll implement in Q1, so we'll give you, guys, more updates then. I think kind of one of the things I mentioned is the most significant change that we've noted is around the commissions. And the new commission is being capitalized, but keep in mind that we do have to put up to, say, one asset that will get amortized off into the P&L. So the benefit due to the capitalization of the commission gets muted.

Okay, and then last one from me, the Eutelsat JV, other phase going away, what are you guys doing internally since the insurance benefit won't come in this quarter either? What are you doing internally as far as looking at projects, controlling costs, just trying to think through the liquidity item you talked about? Has there been any changes in kind of procedures there?

Yes. This is Rick. We definitely focus in the near term on cost reduction, any kind of capital allays we can do that only impact near-term revenue streams. We've got cost savings program in place. So we're trying to do the things to make sure that we have some -- describe it as absorbing boundaries in the near term. And as Shawn said, we have about 2 quarters for that to deal with, before we begin deleveraging. So we've done just prudent things in the near term.

Our next question comes from the line of Simon Flannery of Morgan Stanley.

Getting into the 1,000, is that something that will kind of steadily increase the installs each quarter? I know that sometimes the summer, busy period for some of the airlines so might it sort of slow in the summer and then ramped into year-end? Any color around that? And I think you've mentioned ARPA might be going up, so any color around how we should think about modeling ARPA. And then coming back to Europe, are you so interested in finding a partner for Europe? Or is the intention in that to go it alone and where is your thought process on having ViaSat-3 Asia -- Asia-Pac, is that something that you have got any more clarity on?

Okay. So the first part of your question got a little cut off. I think what you're asking was the rate at which we are going to deploy aircraft getting to the 1,000.

Yes.

And basically, we are, we're working with our airlines -- the airline themselves are actually managing the installs and the rate at which they refurbish airplanes. And so for instance, American Airlines has a number of refurbishments going on for other purposes as well, and so that's probably the largest contributor to growth, and we're really piggybacking on that install rate. I think they're probably going to continue to expand the rate at which they install aircraft over the next 2 or 3 quarters. I think you'll see it grow. It will level off, but that's several quarters away. So let's see -- you asked about Europe?

ARPA.

So ARPA -- so the ARPA -- ARPA will -- okay. ARPA is going to depend on rate at which the installs get done, the mix among the airlines that we're installing on because different airlines have different plans. And then also, it's going to depend a little bit on the way that the airlines bring the service to market, and that's evolving, I'd say, a little bit. And that's really up to their discretion. I mean, we're going to support them in, however, they want to do it. So I think we'd be able to give, I'd say a clearer view on that in a couple of quarters. You'll be able to tell a little bit of it as more and more the airplanes go into service. And you see, especially, how American chooses to offer that service. And I think each of the airlines, they're all looking around to see what other airlines are doing and the best ways to take advantage of the connectivity that we have. I'd say that's constantly evolving. In Europe, let's say -- I think one of the things that -- one of the things that you've seen with us is we think we really need to have some measure of control over the way Satellite Services are presented because we've had issues with distribution partners in the past that -- are really have some conflicts or really trying to preserve some other business model -- it's not necessarily the best for projecting the Satellite Services. So in Europe, and this is what we've been doing in other markets as well, we're very oriented towards retail services, at least as a starting point so we get the best understanding of the market. And that's what we're doing now. We're also -- we're looking for partners that don't have any conflict of interest with that. Often, if we partner with telecom partners that have fixed facilities on the ground, whether they're wired or wireless, generally, their variable costs for providing service under existing facilities is low and they'd rather do that and provide a better service by satellite. So that's where -- that's really the issue that we're most concerned about when we think about the channels that we go to market with. But we think there will be other partners. But right now, it's -- we don't really have enough scale, given the bandwidth resources to try to drive that. We may as we get closer to [service one with] ViaSat-3 have announcements on that. For Asia-Pacific, we're still working on the Asia Pacific satellite. Probably, the dominant effects on pacing for starting that satellite have been coming up with the best configuration for the Asia-Pacific market. The Asia Pacific markets, as we said before, is kind of complicated because very large amounts of ocean, land masses are dispersed, and you've got couple of large markets that are heavily regulated where we may not be able to get access, sort of, or we're not going to bet heavily on access with this first satellite. But we do -- we've been converging on the right configuration for it. We also have some technical improvements that will increase the capacity pretty meaningfully from what we're able to do with the first 2. So we're getting those 2 in place and we're renegotiating with the spacecraft manufacturers to get a good deal on that. I think there's a pretty good shot we'll be able to announce something, probably in the next couple quarters after this one.

Our next question comes from the line of Louie Dipalma of William Blair.

Shawn highlighted very strong small form factor Link 16 shipments. I was wondering was that part of the $350 million SOCOM IDIQ or were those shipments for a different customer?

Those -- we can use that IDIQ contract, let's say -- is that SATCOM customers can use that contract to purchase their -- to purchase those radios. Those aren't the only customers for those radios. We have -- we deliver radios, those radios to other customers, to other vehicles, but SOCOM can use that contract to purchase those radios, if they choose.

So far, they've really been -- so far, they've really been directly towards certain platforms that weren't part of that IDIQ.

Okay, Rick. And I was wondering in the remarks, you were talking about programs of record. And were you alluding to the BATS-D becoming a program of record sometime in the near future?

Well, basically, it's one of the major investments that the DoD, and DoD had several investments that just haven't turned out the way they anticipated. Those are things like joint tactical radio systems. And so for instance, our Link 16 small tactical terminals have ended up going on a lot of platforms that were originally going to get that JTRS radio. And the Small Tactical Terminal has been so successful, that it has been designated a program of record, but there are others as well. So there really was no program of record for handheld Link 16. That's a really, a totally new concept that we came up with. We think that that's -- there's a lot of good applications, we're getting very good reception for it. We wouldn't be surprised for it to become a program of record in the future, but that's not the case now. And there are other programs of record that haven't really scaled the way they were intended, that gives us opportunities for our products and services, especially satellite programs. It's such a good opportunity for us.

I think that's what Mark was talking about in the prepared remarks -- is that sometimes programs pause, waiting for the delivery of these programs in their record and so they need something. They haven't been -- those things haven't been delivered by the programs of record.

Yes.

Got you. So there is increased agility when it's not part of the program of record?

It's really demand. There's pent-up demand because they didn't get things delivered.

Got you. And for the ViaSat-3 initial America satellite that is set to come into service in the second half of 2020, does Viasat plan to launch retail services in Brazil, Colombia, and Argentina? And does Viasat have a spectrum landing rights or the rights to operate in those countries right now? I know you have that partnership in Brazil, but does those give you the access to use ViaSat-3 in those Latin American countries?

Landing rights are a country-by-country issue. Based on our partnership with Telebras, that program does give us landing rights in Brazil for that satellite. Now one of the things that we mentioned at the time was that through our relationship with Telebras, and the mission that we're helping them perform, I think there's good prospects for us to expand the landing rights that we have to other satellites as well in which could include our ViaSat-3. We will, when we choose to enter specific markets, only do it in those places where we do have landing rights. The big part of what we're trying to do with things like our community WiFi hotspot service, is to create an environment where countries want us to come in there. And that's been going well. I think that's one of the reasons that Brazil was excited about working with us. The program that we had in Mexico which we just kind of announced preliminarily in the last few weeks, took a little bit of a reference account for us because it's been very, very successful there, both for us, and I think for Mexico as well.

Okay. And lastly, can you talk about the decision by Congress to fund the WGF11 and 12 satellites? And does that impact at all your projections for how you're going to fill the ViaSat-3 EMEA satellite?

Okay. So I think the stated government argument for why they acquired additional WGF satellites is that they really hadn't been able to, I'd say institutionally, from a Defense Department perspective, converge on an alternative to WTF. And they looked at the age of existing WTF satellites and said, okay, we want to buy 2 more. So I think that was what the rationale was. From our perspective, if you look up the services that we're offering through our satellites, there are basically no way to perform most of those services using WTFs. So in some sense, it's really -- it's really doesn't have any effect on our expectations of revenue growth for our services because WTF isn't a substantive for it. It does other things, but it doesn't do the things that we do.

Our next question comes from line of Andrew Spinola of Wells Fargo.

A couple of questions on the health of ViaSat-2. Mark, you described the performance during the quarter as largely good. And I'm wondering if you can just help me understand, when it's not performing well and what that means for the customer and what, if anything, you can do to fix that.

Okay, yes. So the -- that's a fair question. So basically, here's the way I'd put it, we spent about 3 years preparing all the plans and configuration and operating parameters for ViaSat-2 based on where the antennas would work. The satellite is incredibly flexible and programmable. And once we found the issue on orbit, we had about 2 months to reboot all those plans to accommodate that. And I'd say in a couple of places, we basically configured it in a way that didn't -- that led to some bandwidth shortages, and so that was -- when I say largely, that's basically the issue that we've had, is in a few beams that we just configured it wrong because we just didn't anticipate all of the maybe operational impacts of the on-orbit, the antenna issue. Once we realized that, it didn't take us very long. Whenever we had those problems, we realized that we'd reconfigure the satellite to fix that problem. So that's when I say largely, it hasn't been glitch-free, but there's not been -- the thing I'd emphasize is there hasn't been anything that we've seen that our models don't explain. So it's really just been a question of fixing and ironing out those glitches.

Got it. Exactly. And so at this point in time, all of the glitches have been fixed and all of the beams are turned on, so that -- because you've said a national rollout, but I guess I had a sense that maybe some of the beams have been a little late in rolling out. So is everything turned on now or as of when were they fully turned on?

Okay. So I would say 98% or 99% of the beams are on. The 1% or 2% that's left, we might not turn on. So I think we're pretty much in coverage. Now that the finer point of it is that while we've been refining these estimates, we haven't -- think of a beam as having a contour on the ground. We can say, hey, here's where the beam is. But the issue that we have to really confirm, and we wanted to do this with direct measurements on the ground, was like understanding where the edges of those beams were because we don't want to offer service to people without having good understanding of the satellite performance of each of those areas. So basically, we've turned all the beams on in -- to some extent. But think of it, the outer -- think of the outer edges of those beams we've delayed turning on, so that we'd have some margin for error in case the models didn't turn out to be correct. But so far, things have checked out really well. Like I mentioned, we have tens of thousands of terminals on the ground in all the beams. So with those, we can measure what the actual performance is. And we're just now about to expand all the beams to sort of then -- kind of what we believe will be -- probably their end-coverage state. The other thing, I also mentioned that we have a few things going on still. One of them is we designed the satellites so that we could cover all of the service area and not need all of the ground gateways to do that. But because of the antenna issue, there's a lot more value in getting all those gateways deployed, so once we have all that done, we're doing that -- ahead of when we originally anticipated, that will probably be done, I think July/August time frame. And that will get us pretty much all the tools we need to be able to manage all the service in all the areas.

One of the net effects, Mark, if I can, just -- is that because of these contours that Mark talked about is we limited the service areas that we were selling in. So you can think of it as limiting the geographies in the high-demand areas that we were selling in.

Yes. They're constrained demand a little bit in the growth rate. But things -- we're pretty excited about the way things are going.

That kind of leads to my next question, which is, could you give us some help on what you've seen in April and May so far, that we can think about net adds in this quarter? And also, a couple of quarters ago I asked you if you thought, ViaSat-2, we'd see more than 140,000 net adds that you did in the first 12 months with ViaSat-1. Since then, last quarter, this quarter, you've made some sort of commentary that has made a lot of people think that you were walking back from that expectation. And so I'm just wondering, honestly, what can you tell us about Q1? What can you tell us about what you're trying to message in terms of net adds on a 12-month basis?

Okay. So we're not going to give a net add guidance. Here's the issue for us is -- think about -- we're offering plans that use a lot more bandwidth. So basically, as people adopt those plans, on ViaSat-1, the faster they adopt those plans, the fewer subscribers we would have. What we really want to do is we want to put people on ViaSat-2. That's really what matters, right? And so -- because that's what we're going to get growth. And ViaSat-2 has a lot more bandwidth than ViaSat-1, like what we talked about, more than double. So the issue with predicting net adds in the shorter term is that we know that the subscriber count of ViaSat-1 is going down. It's supposed to do that, right? We're getting higher revenue from the people, but we're getting less revenue per unit bandwidth that we can support through our subscribers, but that's what's supposed to happen. At the same time, ViaSat-2 is ramping up. And the rate at which it ramps is somewhat proportional to the amount of coverage that it has. So we're just now getting to the point where we're at full coverage. So what we do when we're trying to look at how we're doing compared to our plans, is we look at what that growth rate is on ViaSat-2, especially. And think of it as, okay, we've got 10 or 11 quarters of time where we want to have ViaSat-2 filled up. Are we going at a rate that's going to do that? And the answer so far looks like yes. I mean, I hate to -- we're not going to declare victory this early, but so far, it's going well. And as we expand coverage, I think it will go better. But that net is really the combination of the 2 factors. So what you'll see, I think is, you'll see growth in ARPU, and you'll see revenue growth early on, but it'll probably take a couple of quarters before we know what that net add per quarter will look like.

I also think that just given the other areas that Mark talked about earlier, enterprise in IFC, that more -- a higher percentage of ViaSat-2 is going to go toward these other applications than historically been.

Right, yes. So that's -- I mean, right now, we have an allocation for each of those. I think we have enough maneuvering room so that if some of the new services don't grow as we expect, we'll fill them with existing services. But whereas ViaSat-1 was well over 90% residential, ViaSat-2 percentage of residential, we think, will be quite a bit less than that because that's the way we would want it to be because those other services are more valuable.

Yes. I definitely get that. And when you say quite a bit lower, we used to talk about 75%. Is it -- it would be great if it's 50% Aero, right? So is it -- are you going a lot low -- is it going to be a lot lower than that?

Yes, that's in the ballpark what you described. It's in the ballpark, yes.

Got it. Got it. All right. I should hop off. I have to ask one more question. There was a huge jump in cost of service in the fourth quarter. Shawn, you used the word transitory a couple of times. But Mark, you used the word fixed costs in ViaSat-2. What if, anything in here, is really transitory? Because it was a huge jump and -- is anything really onetime in there that I can expect to go away in the next quarter and going forward?

Well, if you're looking at the cost of service line, you need to factor in the satellite going into service and ground network going into service, and all of our software and so on and so forth. So if you're just looking at that line alone, that component, I would say is not as transitory, but it is lumpy, in a sense that it's just coming in, in Q4. If you're looking kind of a...

So what are the...

Go ahead.

What is the growth area, say, that we have some transitory growth and relative to the revenue is more in the in-flight connectivity piece as we're launching kind of the new terminals in the -- and some development front-end loaded services. That should shrink as a percentage of revenue. But the -- well, so should the fixed cost from ViaSat-2. But we turned on all the gateways. As Mark said, we're accelerating gateways versus turn-on versus the original plan. I mean all the fiber gets lit up, all the front-end fixed costs get put up a little earlier than when we had planned.

On an absolute basis, a lot of the costs are fixed, right?

Yes. 5 Percentage of fixed costs.

Yes. But it's a onetime increase in those fixed costs.

Our next question comes from the line of Rich Valera of Needham & Company.

With respect to the retail JV over in Europe, the Eutelsat was quite clear saying they thought that JV was not working well, and they thought that retail was not the right way to go to market. So you guys, obviously, have a different take on that, but what is your take on how that JV has gone so far? And if it's not gone great, what do you guys think you could do differently to make it go better in the future?

Look, yes, I'd say, we and Eutelsat have different views of what the best way to market satellite bandwidth is. We tend to be very vertically integrated on each of our segments. Historically, most of the FSS operators have been more wholesale-oriented and rely on other partners for distribution, whether that's in-flight connectivity or residential broadband or enterprise or whatever. And so I think there's a philosophical difference there. Clearly, the wholesale approach has worked for many years for existing operators. Our approach has been really very different. I think, in some ways, we march to the beat of our own drummer. I think that we still like the way that we've gone about it in the U.S. market. And I don't really want to get into an argument with Eutelsat over the best way to do it, but we like the way that we're doing it. I think it will work for us. It will give us more control. I think the notion of wholesale, and one of the things that Eutelsat has talked about and I think was influential in their decision was arrangement with our launch for distribution for consumer broadband, but subsidized by the French government. So that's fine, I think that will probably work to some extent to them. We don't think that's the best long-term approach. We think that the path that we're on is, and we're -- I'd say we're happy with the rate of progress on it. The other thing I would say is that -- one of the things I referenced in the prepared remarks is that Eutelsat's existing wholesale approach has basically sold out most of their bandwidth in what are the easiest markets. And so the objective for retail was to not -- was to go into these markets that hadn't sold in some period of time. So those are clearly the most difficult markets and try to open those up through retail. So that's what we're doing still. It make -- I mean, I think that's a -- that was the kind of a compromise for the 2 JV partnerships because the other JV is a wholesale business. So that's what we're doing. I think we're -- relative to the difficulty, I think we're pretty happy with the progress that we've made, and we think that will translate into other markets as we have more and more capacity there. In other words, you disagree.

Our next question comes from the line of Chris Quilty of Quilty Analytics.

Mark, just a follow-up question on capacity. First of all, with the ViaSat-1, if you have subs going down and ARPU's going up, in the long term once that transition is made, does that mean that ViaSat-1 is generating more or less or the same amount of revenues as it was when it was sold in full in selling old plans?

Yes. So that is exactly what we've been saying for a couple of years is that the amount of revenues, that, that satellite will generate will go down because we're giving people more bandwidth for the same amount of money, right? And we only have a finite amount of bandwidth. And we think that's what the market wants. And we think that's what the future is. So the way we deal with that is we have satellites that have way -- produce way more bandwidth for the roughly the same capital costs, and we actually gain in that on a satellite like ViaSat-2. But right, ViaSat-1 will go down, but we think ViaSat-2 will go up even faster. That's the plan.

Great. And a question on the -- the way you described the beam coverage on ViaSat-2, it sounds like you've got a broad geographic overlay, which is fine, but your concentrated beams, which were on the areas where you're expecting to get the highest subscribers and where in the past you've run out of capacity, am I correct that those are the beams that are having the issues? And if so, did that -- does it limit your, let's say, theoretical number of subscribers to a greater degree than the actual impairment in terms of megabits or gigabits per second because you've now got stranded capacity in general areas and inhibited capacity in the areas where you needed it?

Yes, so that's the whole -- okay. So yes, the question you're asking is the whole point of why we put the flexibility into the satellite, so we can allocate the capacity in the places where we believe there is the most demand. So we had -- when we did the design of satellite we had good -- I'd say we had good market data that led us to place the capacity in the places that we chose. Now, now that we know where the beams are, we can recalculate what the address -- what the address market is. And we think the address market is fine. I mean, we think there's still plenty of demand, we just needed to know where it was. And so that's the theory. And now that the satellite is in service and we're scaling geography, we're getting the real world results from that. And so far, it's good. I think we're, so far, we're pretty optimistic that things will continue to go well. But I'd sure like to have more than a few months of experience before we pronounce that.

Got you. The Asia Pacific satellite, are you still attempting to try to bring in a partner for that? Or is there a path of going forward on your own?

Yes, there's a path going forward on our own. We are talking to partners on it, but we'll make a decision -- if we think that having a partner makes the overall investment better for us. But the default plan is to do it on our own.

Okay. You also mentioned, in terms of your IFC customers, that you're prime on all of them now, which means -- I think you publicly announced that you took over that relationship, for both JetBlue and American. But where there others where you'd sort of assumed the role of prime?

Yes. So when we started with United, we also went through LiveTV, which was eventually acquired by TELUS. So the last order that we got from United had all of the new planes as with us as a prime contractor.

Okay. And final question for Shawn. You gave a lot of color around R&D coming down in markets that we're growing and the tailwind for EBITDA, but I couldn't get to an exact number. Could you maybe give us a band of where you think EBITDA might land this year, is it 3 to 3 50, 3 50 to 4, something like that, to help us all?

Yes. Guys, we're not going to give an exact number. It should be a strong growth year, but we're not going to provide a number.

So I think that's all the questions that we've got time for, and we appreciate everybody's participation in this quarter's call and look forward to speaking again next quarter.

Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.