Viasat Inc (VSAT) 2019 Q3 法說會逐字稿

Welcome to ViaSat Fiscal Year 2019 Third Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks. Good afternoon, everybody, and welcome to ViaSat's earnings call for our third fiscal quarter of 2019.

I'm Mark Dankberg, Chairman and CEO. And I've got with me here, Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; Robert Blair, General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich, our VP of Corporate Development.

Before we start, Robert will provide our Safe Harbor disclosure.

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

Okay, thanks. So our primary goal entering this fiscal year was to capitalize on all the investments we've made in prior years in in-flight connectivity and government systems, the launch of ViaSat-2, by showing substantial growth in revenue and adjusted EBITDA. We have been progressing steadily towards this objective throughout fiscal 2019, and our results for the third quarter are another big step forward.

Third quarter revenue was up 45% year-over-year driven by growth across all segments. Our third quarter adjusted EBITDA was up 93% year-over-year and 40% sequentially quarter-over-quarter. As you'd expect, adjusted EBITDA growth generally translates into non-GAAP and GAAP earnings generation. In fact, third quarter non-GAAP earnings were $7 million, up over $9 million from $2.4 million loss same quarter last year.

We're achieving these results by executing on the growth drivers we described going into this fiscal year: in-flight connectivity, equipment shipments and activations, government products and services growth and focused management in fixed U.S. broadband. We're working hard to sustain the factors that set the stage for this year's strong growth: a solid order book, significant competitive advantages in total bandwidth and bandwidth economics, large addressable markets, vertical integration and strong customer relationships, particularly, with government organizations and airlines. And we're continuing to develop nascent but potentially very substantial new markets such as Community WiFi and broadband enterprise services. All these factors, plus year-to-date orders being up 39% compared to this time last year, support sustained opportunities for growth into fiscal 2020 and beyond.

The combination of strong adjusted EBITDA growth and receipt of the ViaSat-2 insurance proceeds is improving our balance sheet, too. As expected, net leverage decreased significantly from 5.0x at the end of our second quarter to 4.0x as of the third quarter. We are working to maintain a prudent balance sheet as we continue to invest in future growth, primarily through our global ViaSat-3 constellation. As anticipated, we've reached an agreement with Boeing for the third or Asia Pacific satellite, which is planned for launch in the second half of calendar '22.

We believe our strong growth affirms our basic strategy that broadband service success is driven by superior bandwidth productivity. We are achieving that productivity through a combination of vertically integrated technology and go-to-market strategies that allow us to overcome structural satellite industry bottlenecks that were artifacts of a broadcast-centric business model. As we discussed in some depth last quarter, we're aiming to apply those bandwidth productivity advantages across a broad range of attractive growth markets, many of which are either completely disconnected and unserved today, or in some cases, are severely underserved in an environment where more and more services depend on reliable, affordable connections to the Internet, to cloud-based services and the coming Internet of Things.

The top level financial highlights are pretty exceptional. So it's worth summarizing them upfront. Third quarter revenues were up 45% year-over-year to a record $555 million. Year-to-date, we're up 31% to $1.5 billion. While we're achieving exciting growth in terrestrial tactical data links and information assurance and cyber, the bulk of our revenue growth is being driven by our unique version of satellite broadband connectivity across government, commercial aviation and fixed broadband markets. We're encouraged that we are seeing more and more acknowledgment in our target markets that our bandwidth economic strategy is differentiated in ways that are valuable to end users, and our revenue growth is a powerful reflection of that.

Third quarter revenues benefited from a bulge in IFC equipment shipments, driven by demand from our airline customers, which is a good thing, because it helps bring more airplanes into service sooner and helped our airline partners benefit from the competitive advantages they can derive from reliable, high-speed, low-cost broadband Internet. As expected, we are turning strong revenue growth into even stronger adjusted EBITDA growth. Third quarter adjusted EBITDA was up 93% year-over-year to $109 million, while year-to-date adjusted EBITDA was up 29% on a year-over-year basis. Also, as expected, we're showing strong progress in overcoming the startup costs of bringing ViaSat-2 into service and the investments needed to enable the surge in in-flight connectivity.

Our sequential quarter-over-quarter results indicate that continuing to execute on our backlog and increasing the momentum of our flywheel of Satellite Services, can continue to translate into attractive revenue growth and then into strong adjusted EBITDA growth. New contract awards for fiscal '19 year-to-date are at $1.8 billion. That's up 39% year-over-year, which is even higher than year-to-date revenue growth and it's yielding a year-to-date book-to-bill of about 1.2 and another indication of good opportunities for continued growth in revenues and adjusted EBITDA.

So with that backdrop, I'll turn it over to Shawn.

Thanks, Mark. To reiterate what Mark said, we had an excellent financial result for the quarter and year-to-date periods, posting both record revenues and adjusted EBITDA for the quarter. And this growth was broad-based with top line and adjusted EBITDA increases in all 3 segments, both year-over-year as well as sequentially for the second quarter in a row.

Looking at our Q3 results, the 45% increase in revenues over the prior-year period was driven by a 72% increase in product revenue and a 23% increase in service revenue. The exceptional product revenue growth was driven by record IFC terminals as well as strong sales across most of our government businesses. As Mark indicated, some of our sales growth was pulled forward from Q4, as we meet the strong install pace at American Airlines, which is -- correspondingly should help the accelerated pace of our IFC service revenue growth in the upcoming quarters. We closed third quarter with $109 million in adjusted EBITDA, reflecting very strong growth year-over-year, increasing $52 million or 93% and $31 million or 40% increase on a sequential quarter basis.

Looking first at Government Systems, results continue to be impressive with revenues reaching a new high of $250 million, up 38% and adjusted EBITDA record reaching $69 million, up 44% year-over-year and 11% sequentially. This performance was driven by a higher mix of NDI or non-developmental item product revenues across our datalinks, information assurance, satcom, and government mobile product suites versus those generated on a more traditional government-funded development programs. In addition to the strong sales growth, we also saw improved adjusted EBITDA margins from scale efficiencies in our government service revenue base plus G&A and R&D activities, all reflecting lower costs as a percentage of revenue.

Segment awards for the quarter were $156 million, driving year-to-date to a record $909 million, up 44% year-over-year and backlog to $888 million, which grew 26% compared to fiscal 2018 Q3 end. And to be clear, this backlog only includes $56 million of the $560 million 8-year contract win for global IFC services on U.S. government senior leader aircraft we secured in our second quarter.

In Satellite Services, revenues were a record $178 million, up 23% from the prior-year period and 9% sequentially from Q2. This quarter, our U.S. fixed broadband business hit a new record high alongside our fast-growing IFC business, each contributing significantly to our year-over-year topline growth. In our consumer business, we closed ending subs essentially flat to Q2 and up versus the 577,000 sub count a year ago. Our Q3 ARPUs reflected another quarter of good growth, up 5% sequentially to a record $77.93 and up 14% compared to the same period last year. Most of this ARPU growth is being driven by improving product mix with take rates of our higher speed premium service plans and ViaSat-2 approaching 50%. In addition to higher ARPU, these plans tend to have better term profiles.

In our IFC business, we ended the quarter with 1,123 tails in service, nearly double the number last year and up 225 from the second quarter. American Airlines is now our largest IFC customer with over 380 aircraft in service and growing. As Mark will highlight later, the increasing tail count along with the growing suite of services beyond pure connectivity is driving our nonconsumer service revenue mix to record highs. Segment adjusted EBITDA was also very strong at $57 million, which represented a year-over-year increase of 22%. Additionally, this quarter included $4 million gain offsetting G&A related to our ViaSat-2 insurance recovery activities to date. By the end of Q3, we collected approximately $172 million of our insurance claims with a higher-than-expected overall recovery rate leading to the gain recorded this period. And there could be additional gains in the future, if we're successful in resolving the remaining outstanding claim matters.

The healthy adjusted EBITDA growth year-over-year was driven by strong revenue growth and a very high sequential revenue to adjusted EBITDA conversion of 87%, which illustrates the operating leverage inherent in this business plus the value of the diversifying portfolio. While our U.S. fixed broadband and IFC businesses are driving strong adjusted EBITDA gains, we are beginning to grow our international fixed broadband and Community WiFi activities as well. These businesses should add to total segment EBITDA but could moderate EBITDA conversion efficiencies going forward.

In Commercial Networks, quarterly revenues were up dramatically at 129% year-over-year, which was driven by accelerated terminal sales to our IFC partners, record revenues in our antenna systems division and growing satellite network product sales. Delivery of 234 IFC terminals to our airline partners was another record. Most of these terminals were installed during the period. So we should begin to see the corresponding service revenues next quarter in the Satellite Services segment. Adjusted EBITDA in this segment also improved materially year-over-year due to higher revenues, substantially improved gross margin and lower absolute R&D expense, which together, reduced the loss recorded by -- from last year by 55%.

This quarter, our total R&D investments were $29 million, reflecting a fiscal 2019 low point in total dollars as well as a percent of revenues. Looking out, we may see R&D as a percent of revenues closer to the target range of around 6% to 6.5% we've previously noted, based on the mix of nextgen satellite, mobility and other platform development efforts. On a sequential basis, adjusted EBITDA improvement reflected our higher revenues plus higher gross margins along with a lower G&A as a percentage of sales. Commercial segment awards in the quarter were $107 million, up 23% compared to the same period last year with Q3 marking the third consecutive quarter of plus $100 million in award flow in this segment. Collectively, this brought our year-to-date awards to $345 million or an 87% increase year-over-year, and segment backlog to $351 million, a 19% increase compared to our Q3 fiscal 2018. So to recap, we closed the quarter with record revenues, substantial EBITDA growth and a backlog position of $1.8 billion, up significantly from the same period last year.

Slide 6 has revenue and adjusted EBITDA performance for the first 3 quarters of fiscal 2019 compared to the same period last year. In the government segment, revenues increased 23% year-to-date and adjusted EBITDA was up 18% due to largely the same factors I discussed for the Q3 period.

Satellite Services revenues were up 11% year-to-date due to higher revenues in both fixed broadband services and IFC while year-to-date adjusted EBITDA was low -- was below last year's level as a result of the higher fixed operating costs and the marketing activities associated with our ViaSat-2 service launch. However, on a sequential basis, we are seeing very strong adjusted EBITDA growth as a result of our growing diversified revenue base and the overall operating leverage inherent in our service business, which converts a high percent of each incremental revenue dollar into adjusted EBITDA.

Finally, in Commercial Networks, our year-to-date topline performance was more than doubled year-over-year and reflected essentially the same drivers as our Q3 results. This generated a substantial segment EBITDA loss improvement of approximately 44%, with about 2/3 of that improvement coming from our lower R&D expenditures and the remainder from our improved margins.

Turning to Slide 7. We have a summary income statement for the third quarter and our year-to-date period with a comparison to the prior-year period.

For the third quarter, we've posted non-GAAP net income of nearly $7 million compared to a non-GAAP net loss of almost $2.5 million in the prior year period. On a year-to-date basis, although our adjusted EBITDA was up 29%, you can see that we posted larger GAAP and non-GAAP losses. This is due to $41 million of higher net interest expense, primarily related to our reduced interest capitalization effects and $52 million of additional depreciation and amortization, all associated with the commencement of service on ViaSat-2 in Q4 of fiscal 2018. This was partially offset by a higher net tax benefit and the fact that prior-year period also included a onetime $10 million charge associated with our bond refinancing.

Year-to-date cash flow from operations was $215 million, which was lower than the prior-year period primarily as a function of the interest expense that is now running through the income statement plus the comparative impact of last year's $84 million prepayment by Xplornet for the ViaSat-2 Satellite Services in the Canadian region. Looking at CapEx. The year-to-date figure was $340 million net, which represents $513 million of investment plus $172 million of insurance proceeds associated with ViaSat-2. So comparing the $513 million to last year's figure of $410 million, the increase is comprised of higher expenditures on ViaSat-3 program, CPE investments associated with our growing ViaSat-2 subscriber base and investments in our back-office software platforms and international networks, collectively offset by our lower ViaSat-2 related investments.

Turning to our overall capital structure. We had outstanding balances of $325 million on the revolver, $700 million of notes and $152 million on our EXIM loan. The reduction in the EXIM loan balance from $362 million at this time last year reflects the application of the $172 million of ViaSat-2 insurance proceeds plus a few scheduled principal repayments. Sequentially, our debt balances have dropped approximately $54 million, bringing our total liquidity position to nearly $500 million at the end of the quarter.

So before I move on to our Q3 leverage levels, I'll quickly provide an update on the next large accounting standard change, ASC 842, related to accounting for leases, which is scheduled to go into effect in our fiscal 2020 Q1. Based on our implementation work thus far, we expect the standard adoption to have minimal impact to our reported financial performance and related income and adjusted EBITDA measures. The primary impact we expect is a gross up of the balance sheet with our right-to-use assets as basically the present value of our then-outstanding operating leases offset by a corresponding lease liability in the same amount. We expect the new lease expense that runs through the income statement to be materially same to what we record today. And these ASC 842 lease liabilities are not expected to impact our leverage ratios or other covenant metrics.

Now looking to the leverage chart on the lower right, we ended the quarter at 5x -- excuse me, at 4x adjusted EBITDA, down a turn from 5x at the end of Q2. Higher adjusted EBITDA this quarter drove more than 3 quarters of the improvement with the balance coming from the application of ViaSat-2 insurance proceeds and operating cash flow, partially offset by CapEx. Despite our continuing investments in long-term growth platforms such as the ViaSat-3 constellation and success based investment such as CPE, our goal is to grow adjusted EBITDA in a relative ratio basis, at least as fast as our overall capital spending, which should contribute to slight deleveraging over the next few quarters. I would also like to point out that we recently amended our $800 million revolving credit facility with the primary objectives of improving pricing as well as resetting the 5-year term. The bank group was very supportive, and we were able to improve pricing by 50 to 75 basis points across the pricing grid. A pretty strong endorsement from our lenders, especially considering how difficult the market conditions were this last December.

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

Okay. Thanks, Shawn. So as we described last quarter, we're very focused on growing our Satellite Services segment profitably. Cash flow from Satellite Services is anticipated to fund a large part of our global ViaSat-3 constellation. Third quarter Satellite Services revenues were up 9% sequentially quarter-over-quarter from $163 million to a record $178 million. Conversion from sequential revenue growth to sequential adjusted EBITDA growth was exceptional at about 87%. Consistent with our plan, in-flight connectivity, Community WiFi and other new broadband businesses contributed a little more to growth than fixed U.S. broadband. So as the chart in the lower left shows, our annualized year-to-date revenues grew significantly compared to the same chart that we showed last quarter and the proportion of revenue associated with other services increased from 20% to 21% also on a year-to-date annualized basis. U.S. fixed broadband subscribers were flat but ARPU was up 14% year-over-year. On our last call, we explained how prioritizing ARPU growth over subscriber growth optimizes cash flow in the business. This quarter's results were consistent with that as our subscriber mix continues to shift favorably to a greater proportion of retail and higher value plans.

We continue to make progress in new emerging businesses in enterprise and Community WiFi. We're putting some emphasis on better understanding demand characteristics in these new markets, so we can get a better handle on the growth prospects and the factors that can drive sustained profitable growth in each. We mentioned that of the -- that as of the end of third quarter, we're already within walking distance of well over 1 million people in Mexico and still growing fast and that gives a sense of the geographic reach we're attaining. In-flight connectivity is leading the charge in terms of growth of the other businesses, so we will go into more depth on that in the next couple of charts. So last quarter, we showed how our in-flight connectivity market share is growing in the U.S. Well, Q3 was another really good quarter. We brought another 225 commercial airplanes into service. That gets us to a total of 1,123 tails, a 91% increase from the same period last year.

We've included some data from Valour Consultancy below that shows our increasing share of the net global in-flight connectivity installations for the last 3 calendar quarters. And as you can see, we have been growing much faster than any other player over that time interval. In fact, over the last 3 quarters, they show that we've added more aircraft net than all of the other competitors combined. Third quarter was exceptional in that we captured about 80% of net additions. We anticipate that installations in the current fiscal year '19 fourth quarter will also be robust. After that, we will have completed a lot of our retrofit installations on American Airlines, so our growth rate will moderate. We will be in a very strong position in North America, though. Our earned reputation for quality and performance has enabled us to extend key relationships with existing airline partners. And today, we announced expanded contracts with both United Airlines and AeroMexico.

On United, we'll bring our latest generation in-flight entertainment and connectivity system to an additional 34 A319 aircraft that will be joining United's Airbus fleet. And AeroMexico executed an option to increase the total number of ViaSat-equipped Boeing 737 MAX aircraft from 18 to a total of 60 planes, its full fleet of the latest narrow-body. We're aiming to leverage our success in North America, Europe and Australia into comparable performance on a global basis. Based on our existing Ku- and Ka-band global network combined with the progress on the first 2 ViaSat-3 satellites and now having executed a third Asia Pacific satellite agreement with Boeing, we believe, we're well positioned to capture a good portion of the global market. Also, we're very intent on helping our existing customers leverage the capabilities of our network to gain competitive advantages relative to carriers with less capable systems, and that's the topic of the next slide. So one of the peculiarities of in-flight connectivity is that even when a relatively small fraction of passengers buy it, high-quality WiFi still has a very meaningful impact on passengers' choice of airlines.

JetBlue and Qantas leverage our in-flight connectivity system by including free WiFi as one of their amenities and by partnerships with valuable Internet brands, which help increase passenger engagement. We believe increasing passenger engagement with high-quality Internet service can be a powerful competitive advantage for all our airline partners compared with competing carriers whose in-flight connectivity system can't reliably serve a high proportion of passengers and airlines can use the Internet and all it enables to differentiate themselves based on the broader partnerships, relationships and characteristics they use to define and project their valuable brands. Our rapid growth is enabling an opportunity to engage hundreds of millions of passengers a year across multiple airlines around the world, and that group of people being transported at 30,000 feet for hours at a time is an appealing captive audience for many Internet, media and consumer brands.

Last week, American Airlines and Apple announced a program that allows Apple music subscribers free access to Apple's music streaming service and also provides free access to prospective subscribers to sign up while in flight. This capability is only available on the American Airlines planes equipped with Viasat WiFi. And that will be a substantial majority of American's mainline domestic fleet. We've also been experimenting with American and their media partners on live streaming events like the Willie Nelson concert on Austin City Limits that is shown on the slide. An article in the LA Times last week described the American Airlines-Apple agreement as an example of how airlines are competing through various forms of in-flight entertainment. It equated the Apple music offering to free movies or broadcast linear TV or seatback entertainment on other airlines. What the article overlooks is that buying entertainment, whether it's broadcast TV, movies, music or others and offering that to passengers free and/or seatbacks is actually a pretty expensive thing for airlines to do.

With Apple Music, American Airlines is enabling the best in high-quality popular content to its passengers, leveraging the personal relationships that already -- that Apple already has or creates with new subscribers directly to the devices they already own. To the extent passengers see it as a desirable substitute for the expensive content competing airlines have to buy and/or seatback display systems and their associated operational costs, it can be a meaningful competitive advantage for American.

We've been working hard to demonstrate that our in-flight connectivity makes innovative agreements like this possible, and we think there are many more opportunities in multiple Internet media, entertainment, information, commerce and other categories and forms. The objective is to engage more people with high-quality entertainment or other relevant Internet services on their own devices leveraging pre-existing or new individual relationships between passengers and Internet brands. So there's benefits all around -- to the airline, its passengers, the Internet, the media companies and to us as well. But it takes a lot of bandwidth available in the right places at the right times to deliver a great user experience at scale. Nobody wants to find out that if their offering is popular and drives high engagement that, that very success causes the in-flight connectivity to break or congest. We think we can outperform competitors and turn great in-flight connectivity into compelling passenger engagement and create an even more powerful and tangible advantage for our airline partners. We're really pleased with the progress in the market, the prospects for innovation on the airline and the Internet brand sides, and are enthusiastic about the opportunities ahead.

So our Government Systems business had another really excellent quarter. Revenue hit a new record at $250 million, up 38% year-over-year. EBITDA for third quarter was up 44%, also a record for the segment. We still have a backlog of almost $900 million, which is up 26% compared to the same time last year. The backlog value excludes the out-years of incrementally funded multiyear contracts such as our U.S. Air Force AMSS agreement. Our business is being driven by strong growth in both product and government-specific services. A significant part of our growth is being catalyzed by products and services that we are initiating and creating based on our own discretionary R&D investments. One of the themes we have been working on is to take products that provide substantial benefits to relatively small groups of elite or special user organizations and make those products and/or the information they generate or distribute available to a much larger mainline forces.

For instance, we are making tactical data link terminals smaller, lighter, less expensive and easier to use. We're doing similar things with network information security and access to reliable and resilient broadband satellite. In some cases, we need to scale up to support larger organizations such as with multi-gigabit network security for data centers. The upshot is we can make variants of products that have addressed markets of thousands of users or tactical platforms and make them useful to markets of tens or even hundreds of thousands.

So far, things are going pretty well, and we've been able to steadily grow both revenues and earnings in our Government Systems. As we scale to support larger numbers of users with more globally distributed demand, there's actually more synergy with many of our commercial efforts, such as in-flight mobility or emerging markets internet. One example of such synergy would be among global Ku, Ka-band, services, commercial -- for commercial in-flight connectivity in business jets and our $0.5 billion multiyear government aeronautical mobility contract. Another would be a commonality between distribution of cloud-based tactical video products and live over-the-top audio or video streams for in-flight connectivity. Overall, we continue to be pleased with our steady growth in government services and our opportunities to sustain that growth into the future.

Okay. So finally, our outlook and key growth drivers message is very similar to what it was last quarter, which, we think, is a good thing. As expected, the combination of in-flight connectivity products and services growth has been the largest contributor to our growth this year. Based on strong demand from our airline partners, we've overachieved our internal plan in the last 2 quarters, shipping and activating more terminals than we expected, and that was a significant contributor to this quarter's exceptionally strong adjusted EBITDA growth. In-flight connectivity shipments and activation should continue to be strong in Q4 though not necessarily at these exceptional third quarter levels.

Meanwhile, the flywheel effect of bringing all those new planes into service during this fiscal year is gaining momentum. While in fiscal '19, we're seeing significant benefits from equipments sales, entering fiscal '20, we'll see greater cumulative benefits in our Satellite Services segment from the associated services. We also have a number of opportunities we are pursuing with new airlines as well as opportunities to expand with existing partners such as United and AeroMexico. And we're working with all our airline partners to better leverage our in-flight connectivity to project their brands, engage more passengers, avoid costs associated with other forms of entertainment and help them create new revenue streams. Also, as expected, government systems has been the next largest contributor to growth this year. We've had strong order flow benefiting substantially from well-aimed discretionary R&D in prior periods, and we've turned that into product shipments and service revenue. We see good opportunities to sustain our growth into the next several fiscal years.

Looking out further, we see the ViaSat-3 constellation as a strong catalyst for government services growth, and we continue to position ourselves to capitalize on that. As always, government segment revenues and earnings can be quite lumpy, and it's important to consider results in that context. As we said previously, we remain committed to profitably grow U.S. fixed broadband revenue through a judicious combination of ARPU and subscriber count. This quarter, it was all ARPU. But we believe future growth will include subscriber growth consistent with our financial objectives. We're aiming to grow total Satellite Services segment revenues and earned good incremental adjusted EBITDA margins on our fixed-cost investments. This quarter, on a sequential basis, we generated about $13 million of incremental adjusted EBITDA, excluding the $4 million gain Shawn talked about earlier, on $15 million of incremental revenue, which is excellent, better than our historical flow through and affirms our prudent financial approach. We won't necessarily do the same each quarter, but it's indicative of the way we're managing the business. Simultaneously, we're making investments in more nascent Community WiFi and enterprise businesses that are small, but growing rapidly, and have significant upside potential.

As we've said, our R&D expenses are moderating, primarily on the ViaSat-3 constellation, as it shifts into the more capital-intensive manufacturing phase. Third quarter is at or near the floor in terms of both absolute R&D expenses and as a percentage of total revenue. We believe our strong growth this fiscal year shows that we've done a good job of allocating discretionary R&D into attractive markets in the past and will continue to do so on an opportunistic basis. We continue to make significant capital investments into the ViaSat-3 constellations, and we're making good progress on the production of the first 2, the Americas and Europe, Middle East Africa satellite -- we're well into the manufacturing stage.

The first ViaSat-3 class satellite is targeted to launch late calendar 2020 to early 2021. Some scheduled phases of the first satellite program are taking longer, while others have shortened. On balance, an early 2021 launch is more likely now than it was last fall, which would be a little later than previously anticipated. Our financial and bandwidth management planning is conservative, and it takes this into account. As expected, we've reached agreement with Boeing for the third Asia Pacific satellite and that launch is targeted in the second half of calendar '22. We're working on concluding launch arrangements for the constellation as a whole. Also, as expected, we have significantly reduced our net leverage through a combination of strong adjusted EBITDA growth and the ViaSat-2 insurance proceeds. We can we continue to finance capital investments largely through cash flow from operations augmented by debt, while maintaining a strong balance sheet with plenty of liquidity.

We're seeing some very attractive potential growth opportunities unlocked by our success in in-flight connectivity, Government Systems and emerging markets, Community WiFi, and we continue to consider and/or act on those as they arrive. Our significant backlog and order book continues to build confidence in continued revenue growth, and so we see good opportunities for sustained adjusted EBITDA growth through the balance of fiscal '19 and into fiscal '20.

So that concludes our prepared remarks. And at this point, we'd be happy to take questions.

(Operator Instructions) And your first question comes from Simon Flannery with Morgan Stanley.

This is Landon Park on for Simon. I was just wondering if you can talk about the margin progression in sat services from here after the strong incremental flow through this quarter? And when we might start to see ViaSat-3 cost begin to come online and what those might look like for each of the 3 different satellites?

Sure. So I think when we had [Scientific] flow through this quarter. And we're going to -- we expect to see our -- of course next year, good revenue gains and EBITDA gains that outpace revenue gains. But I wouldn't expect the margin flow-throughs to be at the same levels that you saw this quarter. So I think looking closer to what you saw in the earlier part of this year is a better look forward for next few quarters.

And then longer-term, how should we think about the timing of the fixed cost for the ViaSat-3 satellites? When those might start to come online? And what magnitude those might be for at least the first 2 satellites?

Well, I think you're going to see something as far as trend basis, similar to what you saw with ViaSat-1 and ViaSat-2 in the sense that the year before the launch of service on the satellites, we tend to start having those fixed costs come on, and they tend to grow right up to -- right before the service launch. So -- and I think that we can provide a little bit more context to magnitude of those based on as we sort out the ground network and the proportion that we are lighting up when we go service. But I would expect there to be some fixed costs, and they tend to grow quarter-by-quarter right up to -- before launch.

Okay. And then just one last one on the residential ARPU side. Can you talk about for the gross adds that you saw in the quarter, what the average ARPU loading was at? And is there much remaining retail wholesale shift that's flowing through and impacting that number?

Well, I mean, obviously, because the ARPU grew so much the incremental ARPU -- or the ARPU of the plans that we're selling is quite a bit higher. There is kind of steady decline of the wholesale base, mostly because the wholesale plans are older plans. They're not the current ones; we are offering upgrades to those wholesale plans for wholesalers that are interested in that.

So there's still -- I guess, the upshot is, there's still room for ARPU growth based on the new plans we are offering. And as Shawn kind of alluded to in hers, we're doing a pretty good job of selling the mid- and higher-tier plans as opposed to just the lower-tier plans and that mix between the plans is another factor that's been helping with ARPU growth. But I would say there's an element of us learning the market, discovering the market and doing a better job of micro-targeting those markets. And I would say, it's a little bit hard for us to forecast what that mix will be. But to the extent we can capitalize on demand for these more premium plans, the point is, we'd like to do that.

Okay. Have you started reselling any capacity on ViaSat-1? Or is that still not taking on new subscribers?

So as there is churn on ViaSat-1, and we can then repackage that bandwidth into plans that we can offer. We're also -- there is also some complex geographical considerations in what plans we offer on which satellite, in which places. And I would say, part of what -- what's got -- been going on through kind of the December quarter and gives us a little more maneuvering room now is, we've created more opportunities to sell plans on ViaSat-1, and those are ViaSat-1 type plans, and we're still looking at what the best mix of those will be. And so that will -- and/or may change the trajectory of ARPU versus net subscribers during calendar year '19. And it takes a little while for all those things to take effect.

Your next question comes from Philip Cusick with JPMorgan.

This is Sebastiano on for Phil. In regards to the ViaSat-1 to ViaSat-2, and you're migrating the subscriber base. Any color you can provide us on where you are in the transition of ramping down legacy ViaSat-1 offerings and trying to move subs over? Or -- and for those subs, you did talk about you're still selling some legacy ViaSat-1 type plans. I think I heard you say that. Are you also, at the same time offering more ViaSat-2 like plans on that original satellite, ViaSat-1 satellite? And if so, any color on their churn characteristics for subs that do migrate to higher plans, anything like that?

Okay. So just to be clear, I think, what I intended on the last question was to say, we have subscribers who are wholesale subscribers on ViaSat-1 plans and that's -- the fact that they are the older plans is what's leading to churn off on the wholesale base. So that one of the factors driving ARPU gains is that the mix between wholesale and retail is shifting to be more retail. So that will drive ARPU.

Now in terms of the new -- when we bring on new gross adds, the plans that we're using are really more of the ViaSat-2 unlimited type. But on ViaSat-1, the top speeds are more capped by the network infrastructure on ViaSat-1. The -- and then as I mentioned, we're basically learning what the market offers us in terms of demand for these higher-priced, higher-value plans. And that varies beam by beam and then more and more we're able to target more finely, more granularly, on these beams and tap into demand for these higher-priced, higher-value plans. So that's -- basically, what's going on is, we're doing what we said last quarter, which is -- and I'm just going to use this as a gross example is that, if we can sell one $100 plan, there is demand for that. That's better than selling 2 $50 demands -- 2 $50 plans, and we would like to do that as long as we can to the -- to the extent the market offers. So that's the effect, and it's a little bit hard to predict or forecast exactly how that mix will play out over time. But right now, we're happy with the [players], we're happy with the results, we're happy with the flow through, it's very capital efficient. So to the extent that we can continue to do that, we will. We can augment it with other plans in places that we need to, we will -- we will do that, too.

And then just -- just any incremental color or any thoughts that you might have currently in regards to whether it'd be partnering on the residential broadband side, whether it's with wireline providers to potentially try to sell-in to certain geographies? Or again, just selling being partnering with the likes of an Amazon or Hulu, and YouTube TV? Things along those lines, any considerations on how you would think about it?

So the answer is yes. We are looking at ways to partner with different terrestrial service providers in a way that could either improve our product offerings or increase our distribution. I think it's a little premature to talk about that. Hopefully, in the next quarter or 2, we will have more color on it.

Your next question comes from Ric Prentiss with Raymond James.

Obviously, a big quarter for you guys, beating estimates. We got push back that our numbers were too high, but you blew us away. Big question we get is, where do you go from here? When we think about revenue and margins, Mark, you talked a little bit about sat services, but it's getting harder to model you guys as far as what's U.S. versus international? What's residential versus enterprise? How should we think about modeling you guys going forward from the outside?

Okay. So one thing -- the one thing that we have talked about, which is a big factor this year is really just looking at things like our order backlog, because you can see there was a lot of good growth in product shipments, both in [defense] and the commercial side. One of the things that I think people should be paying attention to is especially, it's more straightforward on the commercial side where when we bring airplanes into service that you can model those as driving Satellite Services revenue, and we're not breaking out the details of all that. But in the past, we've said that you can think of like getting an airplane is like 100 subscribers, that is sort of the ballpark number we've used.

And what's going on is, we're adding ancillary revenues to the in-flight connectivity space, and we've talked about, especially on American Airlines, adding LiveTV, now we have the Apple Music service, that -- that's good. But so even as ARPU has grown like 50-ish plus 50%, 60% over the last several years, for that ratio to take hold, clearly we want to be doing better in the in-flight connectivity space as well. They're not going to go in lockstep, but that's a way to think about how we can drive the services growth.

And then we've also given some view into what is the general progression and the trends as we turn these other Satellite Services like in-flight connectivity, the international stuff, how does that relate to our total Satellite Services revenue, right? And we've shown over the past few years, it's grown from like 10% to 20%, it's still growing. And that will give you some parametric ways to think about how to turn the product stuff, which is a little bit more visible because of backlog, into services stuff, which -- it depends on these blends and things that we're still getting out of the market. Does that help?

It does. It does. And then on the government side, obviously, it can be quite lumpy, how should we think about seasonality in that business? And did the government shutdown have any impact? Or are you expecting any impact on from the [air flow]? I would expect not given how mission-critical it is, but thought we'd ask.

Yes. The government side, it is lumpy. The -- as we do well, the September quarter, because it is government fiscal year-end, is an opportunity for us to capture good awards, and it's really us capturing those awards is indicative of the demand associated with our Non-Developmental Item products especially.

I think the other things that can help when you think about government demand -- and it doesn't deal with the lumpiness, but it gives you -- when you think of things over a longer-term, some of these ordering agreements or multiyear contracts, which don't show up in backlog, but are multiyear agreements, you can sort of anticipate -- our history has been very good at those agreements even though they are not binding contracts in the out-years tend to be executed over that period of time. So that's another way to help get some -- at least some form of predictability underlying, not necessarily on a quarter basis, but on an annual basis.

So Ric, this is Rick. One more thing I'd add to that is, Mark gave you some key fundamentals for considering longer-term, how these things flow from orders in through revenue. But one of the things I wanted to point out, remember, we pulled some shipments forward from what we expected to shift into our Q4 into Q3. And so Q3 would come up -- relative to what we expected, Q4 would be down for a similar amount. So just in the near-term, take that into -- factor that into consideration. The other one is back on this government stuff, we will see because of government funding things, we see some zigzag effects a little bit, but we definitely expect the trend to be up.

Yes. And then regarding the shutdown, we haven't seen any short-term impact for that. I mean, it might take a little while. But right now, it hasn't, we're not aware of material impacts.

All right. And the last one for me is, the wireless guys have been reporting results and there has been a lot of focus on 5G. It's picking up a lot of buzz and several of the wireless carriers have talked about targeting a fixed wireless broadband solution. How do you think about that and what it might change in the competitive dynamics with your satellite offerings?

Well, so far -- I mean, based all the work that we've done, and we basically, we voraciously consumed all the research that is available on it. Wireless, even -- whether it is 5G or I mean, it's 5G, call it millimeter wave spectrum, it's basically LMDS, which has been around for a while. Those things only tend to work well in geographic markets where household density is sufficiently high -- both household density is sufficiently high and ability to pay is sufficiently high. So kind of our sense is that the biggest impact there, if there is any, we think there is lots of issues with overbuilders in terms of any technology. But if there is to be an impact, probably the place you would see it first is in the cable market, not necessarily in the places where we are. And where -- we find that when we go into those markets that have those levels of high-density, those subscribers tend to churn more often, they're less valuable to us in the long run. And so we actively are seeking other geographic markets than those.

Your next question comes from Rich Valera with Needham & Company.

I just want to follow-up on the modeling aspect for the consumer business. Is there anything you'd be willing to say about where ARPU could go, sort of where are the high-end plans today? And assuming you can convert a very significant percentage of your subs to these high-end plans, what's sort of a theoretical high-end ARPU? And then Mark, you alluded in your prepared remarks to the fact that it sounds like you do expect to have net adds in some quarters. Is there any more color you could give on that so from a modeling perspective we could have any sense of how we should think about net adds over the next few quarters -- or couple of years as the case might be -- until VS-3?

Okay. So one, just on the ARPU. One of the things that we look at are measures of ARPU for other forms of broadband to ISP services that come either from the government or from other for [I and L subs] terrestrial. And I would say that our ARPUs are approaching but not higher than indices that the government uses for trying to set subsidized broadband pricing in very rural areas. And those indices tend to be growing, increasing. We don't have a number in mind, and basically, we're -- our subscriber base is a relatively small fraction -- less than 1% of the total subscriber base, so it can vary from that. So those are the things we look at. We're not just trying -- we are looking to see what the market offers, and especially, in the time prior to ViaSat-3, we're going to see what the market offers to us in the places that we have bandwidth. And it wouldn't be meaningful for us to make net sub forecasts in the next few quarters, because we don't really -- we're responding to what the -- what we see in the market. And we -- all I would say, that if we can sustain the types of earnings growth that we have in flow through, we'd be happy. We'd -- we know, we're always looking to do better in every one of our segments, but we're going with the market.

Sure. Fair enough. And then on the IFC front, first, the planes you mentioned in your prepared remarks, the ones you won with United and AeroMexico, are those in the backlog that you reported for the quarter or are those after the end of the quarter?

Those are -- I don't think that all of those are within the backlog in the quarter.

Definitely, AeroMexico is not.

Yes, for sure. So -- and remember our backlog...

And United is not either.

Yes, yes, there you go, yes.

I'm sorry, what was that last part? So AeroMexico is not, are the United ones in as well or not?

No, they are not either.

Got it. And I was just wondering if you could give a little color on the landscape in terms of the pipeline for IFC opportunities, you sounded sort of optimistic there. I mean, one thing we've been hearing out there, obviously, is that there's some rebids going on. Can you guys just talk about opportunities there in terms of going after things that might be rebid? And just in general, how you kind of see the landscape for additional IFC wins?

So yes, I mean, we're -- so one is, I'm glad that it comes across that we are optimistic. I think the reasons we're optimistic are, I think, if you look at our growth rate and our -- basically, customer satisfaction, both passengers and the airlines, and it's a -- technically, it's a very challenging business. I think we're doing well. I think that our vertical integration helped us -- we feel like our reputation is strong. When we've been -- when we can help some of our customers, do things like this Apple Music thing, it can be really meaningful to airlines that are under intense cost and competitive pressures. So I think airlines are looking at those. The big -- and just to be clear, what's gone on so far is in the markets where we have all Ka-band, that is North America, now Central America, Europe, Australia, we've competed very very well. What we're really aiming to do is to get into the global market. And so some of that will come with the timing of our satellite onto -- as relative to airline acquisition of new planes. And so just to remember, one of the ways that we've been pretty successful in penetrating airlines and once we get in with them and establishing good relationships is we get into their new planes. And then based on them liking us, or liking the service that we do or the reliability, the economics, that whole package, we get opportunities to go after retrofits and sometimes replacement of existing ones. So that's kind of the way we're going about the global market, which is as we look at the ViaSat-3 constellation and you look at the timeframe of that, airlines are seeing that line up with their new orders, and that's clearly good fertile ground for us. And then the other thing that we are doing is, airlines can start looking at how much of their total seat miles are under our Ka-band satellites. Can we augment that with our Ku-band global network? And that's also getting their interest, both for new planes and retrofits. So those discussions are -- have been going on, and I could tell you there is, we feel like there's been good progress. But the execution of those contracts and the announcements are all going to be at the pleasure of the airlines, and we have got to respect that. And so it's hard for us to be specific about specific airlines or locations.

One of the things, Rich, is -- yes, I think you're going to see some competitors making desperate attempts in some of these recompetes or competitions. And we're trying to stay away from that and really, really focus on how do we help the airline accomplish what they want to accomplish. And not just milk them for every last dollar, but don't go in and do -- compete in a desperate way where we can't deliver a high-quality service.

Sure, make sense. Just one more if I could, on the first ViaSat-3 launch delay, I wasn't clear exactly what caused that, could you give a sense of the magnitude of that delay?

Yes. So we just said, we have been saying end of '20 -- calendar '20 for launch, could be early '21 for launch. It's -- the thing we are saying is, there is a -- the schedule includes multiple phases, some phases have lengthened, some we are doing better. Obviously, we're trying to shorten the future phases to the extent we can. And I would think of it more as a probability distribution than I would a point estimate. And so what we said is that probability distribution has shifted a few months more into early '21.

There's also -- and that's the launch. There's other factors, and it would be false precision for us to try to describe each phase in detail. But there's other factors, things we're also working on, and I think we're making progress on, and we'll discuss later is shortening the postlaunch phases as well, things like orbit raising, in-flight testing as well. So right now I would say, at least we talked about, probably the potential of a few months, or the increased likelihood of a few months delay.

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

Staying on launches. If ViaSat-3 Americas and then 6 months later, EMEA, go as expected in, say, 2021. And then you launch the APAC satellite in the second half of 2022. Would you expect 2022 to already be a year where ViaSat would be generating free cash flow?

I think -- this is Shawn. So I think it's highly based on the timing of these -- of our activities. And a little bit is reliant on the level of the ground network build-out that we do at in-service. But I think what we have been saying is that free cash flow should kind of be in that time a couple of years after our first ViaSat-3 launch. So I think that's the right point, Mike, to look at right now, and we will keep you updated.

Okay. And then also in a couple of weeks, there's going to be the first few OneWeb cubesat's launch. Now SoftBank has really stopped talking about OneWeb as one of its vision fund investments. They listed a whole bunch of companies in their last couple of 6 months updates; not OneWeb. I think they are about $1 billion short of equity needed to launch the kind of constellation they were initially talking about. But if that's a reduced sized constellation, how, if at all, do you see that impacting anything that ViaSat might do or not impacting?

Okay. So first of all, one of our points -- and I think others have made this as well, is that, the amounts of bandwidth that we're talking about in these constellations, which are low terabits per second, represents less than 1% of the estimated access network bandwidth that would be in play in global markets in that time.

So one is, we don't want to come across as winner-take-all, zero-sum game. We really like our position. I think our economics are really good. I think that if the -- to the extent that costs are increasing for the LEO or people are recognizing higher constellation costs for the LEOs, and total capacity is going down, because they use fewer satellites or that the -- if that the satellites have to cover a larger area on the ground, which reduces the average gain that they get, reduces bandwidth efficiency. All those things tend to degrade unit economics, that is, what is their cost of a unit of bandwidth. And for us, that's the thing that we're most likely to compete really favorably on, and we think that's the dominant metric that people look at in the market -- is how much bandwidth do I have and what's the unit cost? So we don't see -- in general, we don't see our position eroding. I think, as more things have come to light, I think our position looks stronger in terms of competing on both a unit bandwidth basis and then also being able to deliver sufficient bandwidth into the highest demand places. So we're happy with our position. We think it's improving, it doesn't mean that all the others are doomed to fail. I do think that some of the things that you're seeing in the market are making their unit economics more difficult, though.

Okay. And then a final question is on your hotspot business. So given rapid expansion in Mexico or maybe other markets to pursue in Central America, down into South America, maybe using your capacity in Brazil. How do we -- how should we think about the cash conversion on the hardware that needs to be put into all of these sites?

So far, the way we look at it is think of it as a sat cost, except that now instead of having a subscriber acquisition cost devoted to a single residential subscriber, we choose a site, we invest in that site and then we get a return from that site from the aggregate of all the people that use that. And right now, those unit economics look more favorable than do our individual subscriber economics. So to the extent that we can sustain that, and it looks like there is underlying demand. So if we can sustain that in the sites that we have and then we can find more sites that have the same characteristics, that's a good business. And we'd continue to do that as much as we could.

And think of that, Mike, as that starts -- what Mark's just talking about, that starts with connectivity and that's good. But after you are in those places for a while, there are other ways to monetize those sites.

Yes. That's on our list, yes.

Your next question comes from Wilton Fry with Royal Bank of Canada.

Yes. Your press release on December 10 stated you just hit 1,000 aircraft mark. Well, that's 102 aircraft in the first 70 days of the quarter. You ended up doing 225, which means, I guess, you did 123 in the last 20 days of the year. I was wondering if you can explain that 400% increase in the installation rate per day, as you hit the sort of last part of the quarter? Were there any sort of contractual financial obligations you had to meet by the 31st of December that helps explain that?

You're talking about the press release? Is that what he's talking about? The 1,000 -- press release...

You put out a press release on December 10.

Yes, you can't measure those as if the timing is absolute perfectly there. So we start that process, we hit a milestone, start that process. The week in preparing that, there were probably another -- there were probably another couple dozen aircraft that were delivered. So it's not that precise.

Sorry, the press release did say you hit the 1,000 mark that day. So I took it as a precise release. Okay. Was there any Q4 -- were there any Q4 aircraft fall-forward into Q3?

There were.

Yes, we had aircraft that we had planned for Q4 that were delivered in Q3, yes. Also, I think we will have situations, especially with new airlines where they'll be flying terminals for a while, but not declare them in-service. So that -- so it's not like they were all literally installed in that time.

But you are right, there was a lot of pressure. And it wasn't from us, it was from our airline partners trying to get these aircraft in service. So American has done a phenomenal job of stepping that up.

And this concludes our question-and-answer session. I'd like to turn the call back over to Mr. Mark Dankberg for closing remarks.

Okay, thanks. Thanks very much, everybody for dialing in to our call today. And we'll look forward to speaking again a quarter from now.

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