Viasat Inc (VSAT) 2019 Q1 法說會逐字稿

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

Thanks. Good afternoon, everybody, and welcome to ViaSat's earnings conference call for our first fiscal quarter of 2019. I'm Mark Dankberg, Chairman and CEO. I've got with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our CFO; 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 from Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

Back to you, Mark.

Thanks, Robert.

So we'll be referring to slides that are available over the web. And I'll start with highlights, and Shawn will present the consolidated and segment-level financial results. And then, I'll discuss our government, in-flight and fixed broadband businesses. And we'll wrap up with our outlook and take questions.

So we've got an excellent opportunity to achieve really good growth in revenue and even better in earnings this year, and our first quarter is a promising start. We entered our fiscal year '19 with a lot of potential across all of our businesses. And if we continue to execute well, we can turn that into sustained momentum.

The big factors for us are the ViaSat-2 service ramp, a big book of commercial airline orders for in-flight connectivity and already strong momentum in a big order book in our government segment. So these are all reflected in the highlights from our first quarter summarized on the chart.

Total revenue was $439 million, up 15% year-over-year with all our business segments contributing to that. Awards are up even more at $570 million, up 29% year-over-year, and that's a book-to-bill ratio of about 1.3. Government Systems revenue was up 4% year-over-year and had a very strong orders quarter with the book-to-bill of 1.6. We activated 122 commercial aircraft on to our IFC, our in-flight connectivity network, and that got us to 757 in service at the end of the first quarter. That helped drive over 100% increase in revenue in our Commercial Network segment. And we've still got over 850 additional aircraft under contract as of the end of the first quarter.

And then subsequent to the end of the first quarter, we received an additional order of 100 new planes from American Airlines. At the end of May, based on all the modeling and measurements we've performed on ViaSat-2's on orbit performance, we expanded the geographic coverage areas for our high demand markets to be much closer to their original intended size. And that significantly increased the number of people that could get our best service plans on ViaSat-2. Given that, we ramped up our marketing spend and that drove sales.

We ended the first quarter with a significant increase in ARPU and a slight increase in total subscribers and returned a fixed broadband subscription revenue growth on both a sequential and year-over-year basis. The run rate at the end of the first quarter was good, and that's carried over into the current period. Consolidated EBITDA for the first quarter decreased relative to last year, primarily due to those planned expenditures that drove the growth we've been anticipating, including higher fixed costs associated with the ViaSat-2 ground network, higher fixed business infrastructure costs that are largely to support growth in the in-flight connectivity and government broadband services, and increased marketing expenses to grow our fixed broadband services business.

The good news there is that the variable cost associated with ongoing growth in our services businesses are relatively low, so margins can expand significantly with revenue growth. We've got a big order book in in-flight connectivity and government. We've shown that we can execute to fill those orders and drive revenue, and we're at a good run rate in adding fixed broadband subscribers. So we believe we can sustain or accelerate our revenue growth rate and grow adjusted EBITDA significantly faster throughout the year and that Q1 will prove to be the low point for adjusted EBITDA.

So that's it, the big picture. And now I'll turn it over to Shawn for more detail on the financials.

Thanks, Mark.

Our fiscal 2019 is off to a strong start on our path to profitable growth. We saw top line growth across all of our segments. With revenues up 15% year-over-year, with product revenues up $52 million or 31% while service revenues were up $7 million or 3% year-over-year. Adjusted EBITDA came in at $45 million, about where we expected and which should be the low point for fiscal 2019 due to the expenses associated with the ViaSat-2 service launch, IFC ramp and normal seasonality in the government segment. We also had our second highest award quarter ever at the company level at $570 million and our book-to-bill ratio was 1.3:1.

Looking at each segment. In Government Systems, we saw revenue growth of over 4% year-over-year, and that's compared to an unusually strong and record Q1 last year.

Our current quarter growth was supported by a broad array of both our products and our service offerings. We had growth across many of our product lines with next gen, tactical data link product being the most significant contributor to revenues and earnings performance as we reached a new record of STT shipments in Q1 and achieved a milestone of over 1,000 STT units delivered to date.

Q1 segment EBITDA performance was solid with year-over-year reflecting our growth in revenue, offset by a few factors, including increased selling cost supporting our high-volume proposal activities, growth in R&D associated with our expanding government mobility platforms, plus the sales mix across the segment's government TACAN programs.

And quickly on segment awards, in Q1, the volume of new contracts resulted in a record segment backlog of nearly $780 million with $170 million of these contract wins in our tactical data link product line. And these figures do not include any future awards anticipated under IDIQ contracts, such as the $350 million SOCOM agreement reported last quarter.

As Mark mentioned earlier, we just recently got out of the gate for our full-scale service launch in ViaSat-2. However, the diversity of our broadband business, plus growth in premium plan take rates enabled in our Satellite Service segment revenues, fueled our growth, plus we've increased year-over-year and sequentially, on our top lines to $153.6 million.

Our large-scale in-flight WiFi ramp planned for fiscal 2019 is also off to a strong start. At the end of first quarter, we had 757 planes in service, reflecting 33% year-over-year growth as another 122 aircraft came into service versus where we were at the end of March. On the ground, our fixed broadband businesses saw another quarter of strong ARPU gains, rising sequentially and year-over-year by 9%, which offset the revenue impact from ViaSat-2 and service delays. In segment earnings, we see the year-over-year effect of ramped operating cost for ViaSat-2 service launch, plus IFC growth, which scaled up over fiscal 2018.

Other than marketing and advertising, a large portion of these costs are fixed, which means that increasing revenues will drive strong EBITDA as our fixed subscriber business scales alongside our rapidly growing commercial air in-service store scale count.

Before we jump to Commercial Networks, I'll pause here and give a quick overview of our ASC 606 adoption this quarter. As the primary impacts are seen in our Satellite Service segment. As part of this effort, we've been working in the necessary changes to our existing and new contracts in order to have a more seamless transition. Thus, the largest, single impact we have is related to commissions as we pay them upon it -- obtaining our new customer contracts in our fixed broadband business.

Historically, these contract acquisition costs were expensed in the period we added new customers. Now under the new rules, we're required to capitalize this cost, then subsequently amortize them over the customer estimated contract life. Also with the adoption approach, we were required to calculate a day 1 asset associated with the commissions paid in the past for existing customers, which totaled $38.3 million. And net impact of amortizing that offset -- asset, offset with capitalizing new commissions, was approximately $2 million with the remaining Q1 adjusted EBITDA net benefit of $3 million related to other small differences being spread across our business.

Further information related to our adoption of these new rules and the related disclosures can be also be found in our Q1 Form 10-Q filed with the SEC.

In Commercial Networks, we saw quarterly revenues grow by 110% year-over-year and 25% on a sequential quarter basis. Our fast-growing IFC equipment business drove the majority of this increase with a high volume of airborne terminal deliveries, about double the shipment levels we had just 3 months ago in Q4 2018. That brought our second generation terminal install base to over 200 aircraft, across 8 airlines and 3 continents, and we expect to see these delivery trends continue for the next few quarters.

In segment-adjusted EBITDA, our loss improved by over [$70 million] year-over-year due to lower R&D of about $10 million related to our ViaSat-3 program as it transitions to the capital bill phase, plus additional gross profit associated with the expanded segment revenue.

I also wanted to mention our commercial segment quarterly awards were the largest we've had in over 4 years. Orders for the quarter were $114 million, nearly 170% year-over-year increase and 72% increase over the fiscal fourth quarter with contributions across our fixed antenna and integrated networking solutions, satellite platforms and commercial airborne terminals.

This quarter, we did not include a separate EBITDA walk forward chart since we are no longer pumping against the SS/L settlement payments and the changes to R&D investments are starting to moderate. However, to briefly sum up our recent activities on a sequential basis, our Q1 adjusted EBITDA results versus Q4 of fiscal 2018 reflects reductions in our program-based businesses, both in government and commercial infrastructure, due to the normal seasonality and lumpiness we have seen in the past, offset by a decreased R&D of $3 million, plus rising contribution from our fixed and our mobile broadband offerings of over $10 million. So our first quarter really reflected our fiscal 2019 execution strategy in motion, setting the stage for our continued top line growth and adjusted EBITDA acceleration, especially in the second half as our revenues scale alongside the improve in margins.

Turning to Slide 5. We have our income and cash flows for the quarter and debt and net leverage trends for the last 2 years. In the operating income line, we see the adjusted EBITDA impact I just discussed earlier, plus higher depreciation and amortization, which grew approximately [$40 million] year-over-year with our ViaSat-2 network now in service. In net income, we see higher interest expense or inversely, less interest capitalization, also corresponding to ViaSat-2 network completion, plus the tax benefit associated with the current year loss. The net result was a Q1 GAAP net loss of $34 million and a non-GAAP net loss of $17 million.

Looking to cash flow. We generated $54 million from operations with the year-over-year comparisons reflecting the lower EBITDA we talked about, plus lower working capital contribution as Q1 last year included a large uptick in customer advances. In CapEx, we see the ramp we were anticipating with Q1 investments rising to $160 million, as CP investments growth supporting our ViaSat-2 sub-based expansion, along with other investment, such as our ViaSat-3 program. So all in, our debt balances increased in the quarter by approximately $90 million, net of our first semiannual repayment to Ex-Im of approximately $23 million.

In the chart on the lower right, we see our net leverage trends with Q1 and sitting at about 5x adjusted EBITDA. As we denoted in prior calls, we expected our leverage levels to rise in the front half of fiscal 2019 corresponding to the impact of marketing and ramp-up expenses weighing in on EBITDA, plus simultaneous accelerations in CapEx as we stock our new ViaSat-2 subs all alongside our investments in 2 ViaSat-3 satellites. And much like we saw historically with ViaSat-1, we expect leverage to increase again slightly next quarter as we demonstrated on the chart, after which we should begin deleveraging as adjusted EBITDA scales throughout the fiscal year.

Also, I want to remind everyone that our EBITDA for our loan covenant purposes has other add-backs and adjustments that provide additional cushion when evaluating our leverage ratios. And to give us a bit more maneuvering room during this growth phase, during the quarter, we worked with our revolver bank group and with Ex-Im Bank to give us another half turn of cushion on the leverage ratio for the next several quarters. So we're comfortable with where we are there and our liquidity position continues to be very strong with $720 million, including cash on the balance sheet and availability under our $800 million credit facility.

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

Okay. Thanks, Shawn.

So I'll go into a little more depth on each area and start with our Government segment. This chart summarizes some of the key financial numbers for Government Systems in the first quarter, and it also shows 4 years of historical revenue and earnings results. It's important to note the seasonality effect we've seen each of those years in our government business.

Q1 has always been the lightest quarter in terms of revenue and earnings with increases throughout the year. So we believe we'll see the same pattern this year. We've had a 13% compounded annual growth rate in revenues and 19% in adjusted EBITDA over the past 4 years, and that's indicative of the strength and momentum in the business. Strong orders and book-to-bill in the first quarter build confidence in sustained growth.

Although the first quarter adjusted EBITDA decreased relative to the year-ago period, you can see from the trend in the lower right-hand chart that the comparable period was exceptionally strong and the first quarter's still consistent with that 19% 4-year adjusted EBITDA CAGR.

First quarter adjusted EBITDA reflected a significant amount of new business and proposal activity, discretionary R&D projects and was affected by product and service mix. We ended the quarter with a backlog in Government Systems of $775 million, and that's 12% higher than where we were last year. That's another good indicator of sustained growth prospects.

Government Systems' growth was exceptionally strong in tactical data links in the first quarter, but we see sustained growth in each of our market areas, including mobile broadband services and product sales and network security appliances, cybersecurity and satellite. Some of our best and largest opportunities involve integrating all of our skills, including mobile broadband, situational awareness and targeting and layered cybersecurity into unique mission solutions. We've been afforded opportunities to demonstrate these solutions, and those have gone well.

Overall, we had a -- we've had a pretty exceptional run in our defense business, but we still believe our biggest opportunities are in front of us, and our Government Systems team's definitely energized by that potential.

So next, commercial air. We've talked about the coming ramp in in-flight connectivity growth. The beginning was evident in the fourth quarter of last year, but it really took off this quarter. We activated 122 new planes this past quarter with the majority of those being retrofits on the American Airlines fleet. We're actually ahead of that pace so far in the second quarter, and we've now deployed over 200 planes with our second generation of ViaSat-2 and ViaSat-3 compatible terminals across 8 airlines.

We also began testing the mobility network on the ViaSat-2 satellite and have done flights across the Atlantic Ocean and through the Caribbean, down to the Northern Coast of South America. Those flights help confirm the performance of the satellite across its entire coverage footprint. As we've said previously, the design coverage of the satellite is intact. Sales of those in-flight terminals help more than double Commercial Networks' revenue on a year-over-year basis. The growth in activated terminals contributes to broadband services' segment recurring revenue, and that effect will gather momentum over the course of the fiscal year, especially as we continue to add new aircraft at the same or possibly faster pace.

If you follow the interim press releases from some of our airline partners, you'll know that satisfaction with the service continues to be very high. We're at a run rate of connecting nearly 5 million mobile devices per quarter. Based on our take rates in aircraft in-service and those reported by other in-flight connectivity providers, we're confident that's the most of any satellite IFC provider.

Obviously, we're expecting that number of connected devices to grow substantially as we more -- as we add more aircraft online. At our current pace, we'll easily surpass 1,000 commercial aircraft in-service by the end of the fiscal year. The growth in commercial aircraft helped increase our total broadband services' revenue on both a year-over-year and quarter-over-quarter basis. As we've anticipated, in-flight connectivity will become an increasingly significant portion of our broadband services revenue.

We're also establishing a reputation to have a unique ability to deliver Internet, media, content and commerce in the air. We think that's attractive to passengers and can create competitive advantages for our airline partners and for ourselves.

In the long run, we believe that scale in connected passengers will be the catalyst that creates a true, multisided marketplace through the Internet in the air, and that will be what turns in-flight connectivity into a win-win-win for all parties. So on those lines, we're extremely pleased to have been selected by American Airlines to outfit their new fleet of 100 A321neo aircraft. That order came after the end of the quarter, so it's not included in the 854 additional aircraft we had under contract at the end of the first quarter.

Our customer base is also becoming increasingly global. That's helping us reach agreements with more Ka-band satellite operators around the world so that we can back up or reinforce our coverage in high demand markets and serve attractive new markets. It's also worth noting that our commercial in-flight connectivity business is a very good complementary fit with our global U.S. government broadband mobility services and our general aviation business debt market. We have hundreds of global Ka- and Ku-band equipped aircraft in addition to the commercial airlines. And that number is also anticipated to grow significantly as well. Many of those are equipped with dual-band antennas, so we can provide global connectivity with the best available network in each part of the world and dynamically select the best service along those routes. We can bring our best-in-class Ku- and Ka-band mobility networks to partner satellites and are working to create long-term, trusted relationships in key regions and countries. We already have multiple regional partnerships in Europe, plus in Africa, the Middle East, Asia Pacific and South America, as well as global coverage relationships. We're working to create additional ones with both regional and global operators.

So on to broadband services. There was a lot of activity in our fixed broadband services business this past quarter, and not all of it is obvious from the first quarter financial results. So the most significant is at the end of May, based on extensive modeling and testing, we were able to redefine the geographic coverage area in our high demand ViaSat-2 markets to a size that's much closer to that originally intended. We're basically much better adapted to the satellite as it is. The benefit is that we greatly increase the number of homes and businesses that could get our best service plans, so that made our marketing spend much more effective. And so we ramped that up, and consequently, we ramped sales as well as subscribers at the end of the quarter. The results were good, and we've continued to improve in the second quarter. As of now, we're approaching 100,000 fixed broadband terminals in all the verticals and markets over the whole ViaSat-2 footprint. So we're confident we have a good understanding of the satellite performance.

We're planning to grow fixed broadband services revenue across a number of diverse vertical and geographic markets. Of course, U.S. residential broadband is still the largest. We've been planning to grow revenue and earnings in that market by introducing more premium plans with higher speeds and higher amounts of bandwidth. The highest speed, 50- and 100-megabit-per-second plans have seen good demand, and that's contributed to a 9% year-over-year increase in ARPU. ARPU helped total broadband services revenue grow in the first quarter, both year-over-year and sequentially, quarter-over-quarter. At our current pace in Q2 we'll drive U.S. residential broadband service revenue and adjusted EBITDA through both ARPU and more meaningful net subscriber growth. As we've said in the past, we're more focused on providing better service to the right amount of subscribers than just maximizing the number of subscribers. Initial results from the market supports that this is a good approach for us. We're also testing service plans and distribution strategies that would allow us to expand our target market in specific geographies or more broadly if we so choose.

To that point, with ViaSat-2, we now have enough capacity and coverage to begin to scale up 2 new applications that we've been preparing for. The first is Community WiFi. We had been testing a prepaid WiFi service in Mexico that we began to build more rapidly in the first quarter. As of now, we're approaching 500,000 people that are within a short walk of one of our hotspots. Take rates are approaching 100,000 unique devices each month. It's a challenging but very exciting and rewarding business opportunity. The unit economics are promising. We've got the coverage and capacity with ViaSat-2 to reach several million potential users, and we're growing very quickly. A number of other countries in the Caribbean and Latin America have shown interest in having us enter. Per capita spend rates are low. And those are consistent with prepaid in mobile cellular, but we're optimistic that there's a real opportunity here to do well by doing something really good.

We've also started slowly scaling in enterprise broadband service. We're finding that the speeds we can offer, coupled with the bandwidth economics of our Ka-band satellites, are a game changer compared to the conventional Ku-band VSAT market. We've created a distribution network of thousands of independent dealers, as well as relationships with a number of well-established corporate brands.

While the Community WiFi and enterprise markets are not necessarily material today, they've got attractive growth potential, and both offer important opportunities to contribute significantly to global broadband services revenue, along with fixed residential, in-flight connectivity and government in the ViaSat-3 timeframe.

So overall, we're excited to be ramping up ViaSat-2 and setting the stage for what we think will be robust growth with improving margins across a diverse set of attractive services.

Okay. So we'll wrap up with outlook and the key drivers. And overall, like we said, our first quarter's a promising start to what we're intending to be a strong growth year in both revenue and adjusted EBITDA. Government Systems has delivered double-digit growth in revenue and earnings for several years in a row and is well positioned to continue directionally in that vein. We're anticipating the same seasonality this year, as in prior years. So expect we'll see year-over-year and quarter-over-quarter revenue and adjusted EBITDA growth trends over the course of fiscal '19. Remembering, there's always risk of quarterly lumpiness. Record government backlog can help mitigate that, if need be.

We still believe our best opportunities are ahead of us as we engage with larger user organizations and offer more comprehensive system solutions that integrate all of our unique products and services. We've already got the order book in the commercial in-flight connectivity market to drive even stronger growth contributions to our Commercial Networks and broadband services segments.

We did well in the first quarter and are on pace to do even better in the second. It's an intensely competitive environment, but we think we're separating ourselves from the pack in the eyes of the airlines, their passengers and importantly, with the Internet, media and commerce companies that would like to reach those passengers and who can participate in new business models that are win-win-win for all the parties. The in-flight connectivity market has been about connecting handfuls of business users with barely adequate Internet. We think in the future, it'll be about engaging all the passengers and thinking about connectivity as a means to an end, not just an end in itself. If in-flight connectivity can truly be a multi-sighted marketplace, not just ancillary passenger revenue, then our bandwidth advantage, our low airtime cost and exceptional passenger engagement will be a big differentiator in that environment.

We've also returned to subscriber growth in the U.S. residential market, and we can combine that with steady ARPU appreciation to obtain meaningful revenue growth. We're still focused on profitably providing better services to the right number of customers versus chasing the quantity of subscribers. Our results in the first quarter and into the second quarter helped build confidence in that approach.

Community WiFi and enterprise fixed broadband are both small, but can grow faster and measurably contribute to revenue and adjusted EBITDA over the course of the year. Over time, we want to add to our services portfolio to give us a rich set of diverse service markets that are -- that can scale globally, and these are the next ones we're developing. All the services businesses we're pursuing are high fixed cost, global variable cost operations, so as we ramp revenue through the year, we can grow adjusted EBITDA even faster. That effect grows strong adjusted EBITDA growth and operating cash flow when ViaSat-1 went into service, and we see the same opportunity now.

We believe the first quarter is the low point in adjusted EBITDA for fiscal '19, and we're aiming to turn sustained revenue growth into accelerating adjusted EBITDA growth over the course of the year, building on the flywheel effect of recurring revenues. Total adjusted EBITDA for the year would be quite backloaded, but confidence would grow based on each period.

So in summary, we've had to work through some challenges last year due to the delays in getting ViaSat-2 launched and into service, while simultaneously, we're investing a lot of money and resources into our future with ViaSat-3 and our in-flight connectivity foundations. It's taking a little longer, but now, we're at one of those unique moments when pretty much all of our initiatives across the company are growing at the same time. We know we've still got some work ahead of us, but we're really looking forward to capitalizing on the opportunities ahead. And with that, let's open it up for questions.

(Operator Instructions) And our first question comes from Mike Crawford of B. Riley FBR.

Could you please provide an update on when you might launch your first 2 ViaSat-3 satellites and when they might go into service, as well as the earliest you can get a potential ViaSat-3 over Asia given that you haven't finalized plans or selected a final business plan for that satellite?

Okay. Yes, so -- haven't changed the ViaSat, the first 2 ViaSat-3 satellites. The first one, we're aiming for in-service around the end of calendar '20. So just, say, within 2 -- a little over 2 years from now, 2.5 years. The next one, which will be Europe, Africa, Middle East, ought to be about 6 months behind that. We'll probably talk about the ViaSat-3 schedule once we've committed to a contract on it. We're aiming to do that, as we said before, by the end of this calendar year. And -- well, I think we'll talk about the schedule when we do that.

Okay. And then while recognizing the look angle and [certain] capacity problems with our handicaps with LEO and MEO constellations, have you -- are you still interested or have your thoughts changed on how you might have potential interest in adding some of those capacity options to your overall network?

So we have a filing for a nongeosynchronous MEO orbit system. And we're putting a bunch of work into figuring out how to optimize that. Overall, there are definitely challenges with the -- with nongeo systems when they're trying to provide 100% persistent coverage everywhere in the world. And so the direction that we've been looking at is really looking at the nongeo and the GEO as an integrated system in that relieves that constraint. We don't have to use the nongeo to provide coverage everywhere. And that, we think, can help improve the economics and still get us some pretty interesting opportunities to reinforce coverage in high demand places and to get polar service. And that's kind of more the angle we're looking at. I think it's -- as we've said, we think it's probably going to be a little more expensive on a per-unit basis than what can be done with really good GEOs, but still could be -- I think it could be a worthwhile addition to our fleet, and that's the direction we're going.

All right. And last quick question is, given declining but still robust R&D spend, is there a rough Commercial Networks revenue level where you think ViaSat could -- would return to breakeven EBITDA in that segment?

Hey, this is Shawn. So I think, one, we look at the segment almost in 2 parts, which is kind of isolate investments that we're making to grow the business as a whole and then our different lines of business. So I wouldn't say there's necessarily a target revenue level that we're hitting. I think as you're looking in this year, I think as we noted, we're going to continue to see heavy volumes of terminal shipments. So we should see a really strong year-over-year growth. From an R&D perspective, I think our R&D as a percentage of revenue this quarter was about 8%. We've been ticking down. I think we'll tick down a bit more, but I wouldn't go below kind of that point we've said, like 6% to 7% of revenues, I wouldn't go below that. That's kind of how we look at it.

Our next question is from Ric Prentiss of Raymond James.

A couple of questions. First, Mark, you talked about wanting to go after the right subscribers and that really was the end of May, when you were able to get the faster speed plans out there. How should we think about the pacing into second quarter and then for the rest of the year as you look at those opportunities? But then also, the opportunities of the Community WiFi and the enterprise as far as where those beams might be, how should we think about the pacing of those different line items?

Okay. I think this current quarter, which will be -- September-quarter, this will be the first quarter that we've really had all of the geographic areas in the high demand markets in service for a whole period. And I think the best thing to do is to wait and see how that -- how we report that. I think you'll see stronger net subscriber add growth as well as continued ARPU growth. And there will be some mix of those, too, that drives revenue throughout the year. In the past, what we've talked about is -- we've shown those charts that show productivity gains and what our target revenue objectives would be and how we'd like to achieve those over the course of about 2.5 years until ViaSat-3 gets into it -- into account, and I'd look at that slope. It's a little bit of work, but I'd look at that slope as sort of the product of the subscribers and the revenues as what we're aiming for. I think this quarter will be good from that perspective. Better be -- best to wait, and we'll report that. And then that will be an interesting base going forward. The -- in terms of the Community WiFi, right now, that's mostly outside of the U.S. Mexico was our first real target market. We'll have more bandwidth to deploy there than in any other country. And we've got a lot of room to grow probably, a factor of 5 to 10 in total over the course of the next couple of years or so. And so far, it's gone well, but we're paying attention to the incremental results so that we'll know how much to invest in it.

Okay. And enterprise, same thing? Starting to -- sounded like starting slow there or scaling over time?

Yes, the enterprise -- enterprise market is -- it's new for us at Ka-band. We've been preparing for it for a while. And it's -- right now, it's on the order of thousands of terminals, and we think that will grow faster than the residential will. There are good things about it. Obviously, the ARPUs are quite a bit higher. Also the peak busy hour usage is countercyclical with the residential, and so it provides really good returns for us. We've got a good distribution network. We want to make sure that the networks performs the way we expect that we can scale up the billing and the customer support before we really turn up the volume on that one.

Okay. The other one I want to ask about is the backlog. Obviously, pretty big point on your results for the quarter with the contract wins. Obviously, you're absorbing the numbers quickly and then getting on the call. But the government, quarter-to-quarter, look like the firm backlog might have gone up by almost $100 million and Satellite Services look like it went up huge, maybe from $130 million to $500 million. What sort of timeframe should we expect those firm backlogs to turn into revenues given the big step-up that you saw?

Guys, this -- I think the way to look at it -- and we've provided additional information for you guys in the Q around the backlog. So I -- just to separate the Satellite Services backlog, one of the things that we did this quarter was conform the backlog reporting that we need to do under 606 to the backlog that we're providing to you guys. So the element that is an additive into Q1 of this year is the backlog associated with our consumers that are currently under contract. So that's just to point that out, and you guys can see further discussion in the 10-Q on that. That's just part of the adoption of the 606 this quarter.

That was a backlog adjustment, not quarters, within the period.

Okay. Yes, that's it.

There was nothing in the...

True. I was like, well...

Yes, yes. For the consumer.

But government was...

But on the government orders, those are new real orders. And those -- typically, those would be worked off over a 1- to 3-year period in general. Most of the services contracts are a single year at a time, so we'll only put 1 year in backlog. But typically, 18 months is kind of -- if you wanted to have an average of when the backlog would be put into service. That's sort of a good average.

Okay. And the last one for me, kind of more philosophical, strategic question, Charlie Ergen was on the EchoStar call, first time in probably 7.5 years. Talking about M&A, talking about strategic combinations or partnerships and joint ventures and suggesting that the industry -- people have strength. People have weaknesses. Would make sense for people to think about some relationships. If you look at ViaSat, what do you consider your biggest strength? And what's the biggest thing you're missing as you look at what the future might hold for the services you're trying to provide?

Okay. Well, I think our strengths -- I mean, our fundamental strength's really in our vertically integrated technology platform that we can do everything from designing the payloads in the networking system to delivering the -- to packaging and delivering those services into each market. I think that's really very unique in our space. And I think that what we're really focused on is turning those vertically integrated technologies into competitive advantages in the way that we can deliver services. And mostly, that's in terms of being able to deliver a lot more bandwidth in -- at the same or lower cost, which is fundamentally what's really driving the broadband Internet as a whole. So that's the thing that we're most focused on, trying to capitalize on. The thing that's going to be important for us on a go-forward basis is globalness, I would say. And that is owning to operate in all the different countries around the world and having the right partnerships in each of those countries. So that's the thing that we're working on. And I think that there's not a hot -- a lot of satellite companies that are really good at globalness in the context that we're trying to do. That is really understand each market and be able to deliver services to end users in those markets, not just to sell to intermediaries. And we think that, that's a really important part of capturing the value of what we do. And so we're looking for ways to exploit that. Some of that may be by partnering with entities that are well outside in the satellite industry. It's not at all clear that the satellite industry is really the place to look for consolidation.

Our next question comes from Simon Flannery of Morgan Stanley.

Nice results in the aviation space and more backlog coming. Can you help us think about the seasonality of that business? I think you talked about strong momentum through the year. But should we expect that the pace of Q1 to continue pretty much at a level set or might there be a little bit of seasonality during the busy season in the summer? And any clarity on what's going on with average revenue per aircraft? You talked about the strong growth in volumes and traffic. But what's the overall impact of these new planes coming on on revenue per aircraft? And then any update on the insurance recovery process?

Okay. I'll try to cover those -- so first, I think that for -- probably for the duration of this fiscal year, we'll see installs go at the rate that we've done or increase, assuming that things continue to go well. The install rates, really -- is an artifact, of multiple things. One is the extent to which we're doing retrofits versus new aircraft. So as -- for instance, one of the things we've been pretty successful at is getting new orders per line fit, 737 MAXs with a number of fleets. Of course, those will roll out at the rate at which those planes are delivered, the same will be true for the new American Airlines A321 orders. The retrofits, those will tend to go faster, and we've got a big bunch of retrofits that we'll work through over the course of next year. In terms of the revenue per airplane, that -- there's a pretty big variance in revenue per airplane depending on the carriers that we're working with and where they are in their go-to-market strategies. And I would say it's a little bit premature to draw conclusions on that because the diversity is so wide. And what we're seeing, I would say, at the top level, what, I think, people should expect is that the average revenue per plane overall isn't going to change that much on a go-forward basis and that you could think about scaling revenue as the tail count scales. But over time, I think we'll see different patterns in revenue per aircraft from different carriers. And as we learn more about that, we'll probably give more color on it. The other thing that's -- I think -- I mean, I'd say the overall trend will be positive, that revenue per aircraft will grow, and it's partly because we're doing more things for the new carriers, right? So we're providing more tech support. We're providing more maintenance. We're adding in-flight entertainment to the offering as opposed to just in-flight connectivity. I think one of the big factors will be the way that the airlines -- that market -- bring their in-flight connectivity to market. And this thing that I mentioned about the potential for drawing in third-party payers, who are these Internet media and commerce companies, I think that's going to be -- I think that's going to surprise some people in a positive way as well. The last thing you mentioned was the insurance. And where we are for ViaSat-2 insurance is we've provided a bunch of data to the insurers with models that we think describe the situation. We've gotten questions back. Remember, there's a bunch of independent insurers. I would say that, overall, I think the process is converging, but it's still a little too early to make any predictions.

Our next question comes from Philip Cusick of JPMorgan.

Let's dig into 2 of those things you just mentioned, Mark. First on the insurance side. You said the design footprint of the satellite is intact, but did you actually lose capacity?

Yes. Okay, yes. The short answer to that is yes. The -- our estimates of the capacity satellite really haven't changed. I mean, one of the things that we're happy about is the models that we developed with Boeing and the antenna manufacturer back in January have proven to be really good estimates of what the situation is. So it hasn't -- yes, there's a capacity loss, but the foot -- the total footprint of the satellite is still what we expected.

Can you give us an idea of the sort of percentage of the capacity loss versus max?

No. I mean, what we did, and I think we did this back in January, is using that antenna modeling data, we made an estimate that the total capacity was in the -- let's see, the maximum potential capacity was in the 260 gigabit per second range. Right. That was the number that we gave back then. That hasn't changed.

Okay, understood. And then let's dig into your comment on Internet media and commerce companies that would like to connect with in-flight customers. When finally, we brought Gogo public, this was a big part of the story, but never really played out. What have you seen from companies these days?

So -- well, I think it's been different for us. I mean, the big issue, the big thing that these companies want is that they're going to -- there's our view of it, but we've had successful engagements with some of these companies. And what they'd like when they go on the plane is that if they're promoting a service that everybody that wants to on that flight can use it. And obviously, most of the in-flight connectivity systems just didn't meet that. The more people that tried to use the -- whatever that service was, the worse it performed. So for us, I mean, a great example has been our relationship with JetBlue, where they offer free in-flight connectivity. We have many fights with more devices connected than passengers and they can still stream. And so JetBlue, as an example, worked out an initial sponsorship/partnership with Amazon, where Amazon would sponsor a portion of JetBlue's cost. They would work out agreements around e-commerce. And I think it's been a win-win situation. One of the things we've said is that -- one of the things Amazon got out of that agreement was much higher viewing rates on Amazon Prime video at a time when Amazon Prime video didn't have the same amount of viewership as, say, Netflix or YouTube or even Hulu. So that's an example. With other airlines, we've had agreements which would either involve payments or other forms of nonfinancial partnerships, including Spotify and Netflix, for instance, with Virgin America. When Virgin America launched, they painted an airplane with Netflix and had a good promotion around House of Cards. Qantas in Australia has really embraced these types of media relationships. They also have a free service, very high penetration and offer both a streaming media and live sports on their flights. So those are the kind of relationships we want. I think each of those partners will tell you that the way they look at it, the more people that use it, the better. That's the arrangements that we're trying to get to.

Understood. And then lastly, can you help us think about the TAM of fixed broadband in the U.S., not only for ViaSat-2, but when ViaSat-3 launches as well? Hughes has had weaker subscriber growth than we expected, and yours has taken some time to take off. Do you think the TAM is as large as you expected a couple of years ago?

So I -- we always think of the addressable market as being defined by the relationship between what we offer and what the next best alternatives are. And we think in pretty large parts of the country that alternatives are generally limited to DSL. And we're talking about here generally there's long loop DSL, where the speeds that can be delivered for a relatively long loop DSL hasn't improved because there's just not -- technologies to do that like there are with shorter loops and a G.fast or something that are more metro type of technologies. There may be some -- there are going to be some improvements with 5G but not necessarily in the rural areas. So we think that market is in the millions. It's probably in the 5 million to 10 million. I don't -- no, I don't think that the market for the services that we're offering right now and the price points that we have right now would be in the 10 million range, but it doesn't need to be because we can't serve that many customers. So basically, what we're trying to do is sort of match our capacity to serve customers well, which is bounded by the amount of bandwidth we have and the demand for each customer to match that with the market. But if we can -- I think with ViaSat-3, we'll be able to offer, higher -- more -- I'll say more speed, more bandwidth. We'll be able to do that in more geographic places than we can now. And I think that will expand our market, but we'll still only be able to serve, even with adding that satellite to our fleet, low single-digit millions, for sure. So our main concern is just that the addressable market be a lot bigger than what we're aiming at. And I think it'll continue to be that way for a while.

Our next question comes from Chris Quilty of Quilty Analytics.

Mark, the net adds in the quarter were a little less than I was expecting. And I know you don't report gross adds and churn. But when you characterize the quarter here, is it still more of just a slow ramp of ViaSat-2 services as you test out the satellite? Or are there churn issues or substitution issues with legacy customers transferring over to the new service? And wrapping that altogether, would you expect that as we move throughout the year, you kind of see that tens of thousands of customers on the net add side that we've seen traditionally when new satellites came -- come online?

Okay. So for first quarter, the -- I mean, for the quarter that we just finished, probably, the dominant effect. And the thing that you'll see most different in the second quarter is that the number of people that we could address due to the size issue with the high demand market area as I described. So we -- as I said, we increased our addressable market for the best plans at the end of May. We had June -- basically got the benefit of June for that. In the September quarter, we'll have the benefit of that for all 3 quarters. That increases the number of adds we can get. But remember, who are on ViaSat-1 or in our older satellites, what we're doing is we're offering plans that are higher price but use more bandwidth, so we can only have -- we could -- we're going to go down in the number of subscribers on those while we go up in the number of subscribers on ViaSat-2. So that -- we described that effect a few quarters ago. So that -- I think that's what's going to pace the net add growth. And so what we think is a better measure of the financial performance is that it's just total revenue and adjusted EBITDA growth more than subscribers. But I wouldn't be looking for tens of thousands of net adds. We don't need that per quarter to get really good growth in revenue and adjusted EBITDA.

Also, you had mentioned earlier about the growth on the international front. And you've got, I don't know, 300, 350, 400 government aircraft. You've got large business jets that are all Ku. When you talk about the growth of that network or the Ku network, does that imply that more dual-band antennas get out there? Or does that imply that those customers are going to have to shift over to Ka over time?

Well, okay. So both. Well, one is that we are going to put out more dual-band antennas because for -- especially for our government customers and for the next couple of years for our business jet customers, they operate in areas where -- in areas other than where our high demand Ka is. And kind of -- the analogy that we use is like you see with mobile service operators, that you want the best 4G or 5G coverage you can get, but you also want GSM in your -- or 3G in your phone because if you go out of an area that has the best coverage, you want something. And so that's what the Ku-band, the dual Ku-band stuff does for us. Our customers tend to have high dwell rates in the areas where we have our best coverage, that would be the U.S., Transatlantic, Europe as examples. They spend a lot of time there. And so they want something that's way better than what they would get with Ku or other Ka services while they're there, but they want the Ku so they can operate anywhere. And then in terms of the migration to Ka, I can tell you, they all migrate to Ka because they want to, not because they have to. They want the benefits of Ka. And that's what we're making available to them. We're not forcing them to do that.

Understand. And I think you mentioned that you've got 200 or so of Gen2 terminals out there. Can you remind us, do you have to go back and replace all the legacy aircraft, the modems, in order to transition to a ViaSat-2 service for the install base?

Yes, we don't. So the first generation doesn't have to be migrated to a second generation. But the -- to get the ViaSat-2 footprint coverage, you do need the Gen2. So as I've said -- so JetBlue is an example, has chosen to migrate to the second generation because they really want that coverage. But you don't have to do that. And...

Well, nobody stays with the standard definition TV.

(inaudible)

Pardon? I'm sorry, I didn't hear that.

I'm sorry, Rick. Go ahead, Rick.

Oh, Rick was just saying that the Gen2 equipment laws would be compatible with Gen3, with the ViaSat-3.

Got you. But I was saying, nobody sticks with the standard definition TV nowadays. Everybody moves to HD. So is that something that the customer pays for? Or do you subsidize that?

We'll work that out with each of our customers based -- depends on a number of factors. But yes, we'll work that out with each of our customers. In general, we're selling it. We're selling it as an upgrade, in general.

Okay. And final question with the Community WiFi. I know in a lot of developing countries, those are traditionally government-run programs. Does that mean you have to go out and bid and compete and win government programs or are you going to market in a different way?

Yes, we're going -- our version of Community WiFi is very different. We've done many programs with governments. We've done that in Mexico as well, where the government will subsidize WiFi hotspots. And in general, those -- we don't think those have provided really good service. That -- they have limited amounts of bandwidth, often they're on Ku-band satellites as an example. So for ours -- I mean, the big thing is we're doing this ourselves. We'll go into markets. Selecting the right market's really important. Figuring out what the right service plans are, the right price points, we do all that stuff. That's -- and right now, we're pretty excited about it. It's like -- so we wouldn't say it doesn't have its challenges. But so far, it's been really promising, and we're excited about it.

So does that mean you're actually like doing site selection, putting up a building and doing that all on your balance sheet? Or is a partner doing that?

We're putting them up as ours, and we can do it pretty affordably in these markets. And we are -- in some cases, we are working with partners to help support the terminals. But basically, we do the site selection. We define the service plans and the locations in each of the places that we do them. We're doing lots of tests in big markets and small markets, in unserved markets, in underserved markets to understand what it is that drives the economic performance we want.

Got you. And how is that branded? Is it a ViaSat-branded service center?

Yes. Yes, it is.

Very good. You got a good, new logo to go on the building.

Yes. Yes, we do.

Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the call back to Mark Dankberg, Chairman and CEO, for any closing comments.

Okay. Well, I'd like to thank everybody for spending your time with us this afternoon, and look forward to speaking again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may now disconnect. Have a great day.