Viasat Inc (VSAT) 2019 Q4 法說會逐字稿

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

Okay. Thanks. Good afternoon, everybody, and welcome to Viasat's earnings call for our fourth fiscal quarter of 2019. I'm Mark Dankberg, Chairman and CEO; and I've got with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our CFO; Robert Blair, our General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich in Corporate Development.

Before we start, Robert will provide our safe harbor disclosure.

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

That said, back to you, Mark.

Okay. Thanks, Robert.

So we'll be referring to slides that are available over the web. I'll start with a summary of financial highlights and an overview and then Shawn will discuss the consolidated and segment-level financial results, I'll provide some additional color on the businesses and then we'll review our outlook and take questions.

So financial results for the quarter and full fiscal year were exceptional. Fourth quarter revenues were up 27% from last year to a record $557 million, and revenues for the full year were up 30% to a record $2.1 billion. All operating segments achieved double-digit top line growth in both the quarterly and full year periods. Fiscal '19 contract awards were $2.4 billion, up 42%. And that excludes about $1 billion in recent multiyear defense, Indefinite Delivery/Indefinite Quantity, or IDIQ contracts, and our AMSS contract options that aren't counted in backlog whose IDIQs and contract options are not definitive orders but have often led to firm orders and are indicative of demand.

Top line growth enabled even stronger adjusted EBITDA growth. Our fourth quarter adjusted EBITDA was up 95% year-over-year to $108 million, while fiscal '19 full year adjusted EBITDA was up 44% year-over-year. We've increased revenues at a 14% compounded annual growth rate for the last 15 years. This year, at 30%, is the fastest growth rate in that entire period. Next closest was the year we introduced ViaSat-1, and that year was highly driven by residential broadband. This year was way more diverse and we believe more robust including additional Satellite Services and associated equipment, plus other defense and commercial products, all at attractive growth markets where we hold strong competitive positions. Over the same 15 years, we've grown adjusted EBITDA at 16% compounded annual growth rate and this is the second best year in that time period.

The results show that our strategy of designing and building the most innovative and cost-effective satellite systems is working. We feel we're just getting started and that we've got good momentum for the long term. With the ViaSat-3 series and the enhancements that can follow, we can create even greater competitive separation. But we're not just about the bandwidth supply side. We've invested to build distribution, operations and end-to-end support for the most promising vertical markets with the greatest growth potential. We've formed strong partnerships with other satellite operators in key geographies. Our integrated technology and business strategy is bold and unique.

Since fiscal '13, when ViaSat-1 went into service, we've generated over $10 billion in revenue and about $2 billion in adjusted EBITDA. We're not building this satellite on speculation, they're uniquely capable of serving the most challenging customer demands in markets we understand in great depth and serve well.

The ViaSat-1 system has been in service for about 7 years so far and has enabled about $1 billion in adjusted EBITDA and a $500 million capital investment. And unlike small satellite constellations costing 10x that or more, with typical design lives of only 5 to 7 years, the ViaSat-1 asset still has over 10 years of expected remaining service life.

It's exciting to see these results. We're not only the fastest-growing satellite data networks operator, on a March quarter basis, we're the largest in terms of revenue. That is due to having the most bandwidth despite having the smallest satellite fleet and the ability to deliver and leverage that volume of bandwidth to the most valuable geographic markets with great efficiency is the core of our strategy.

So as we said a year ago at the start of fiscal '19, our focus for the year was to execute on the potential we had created. In order of priority and revenue contributions, we had a big order book of in-flight connectivity deliveries, a strong backlog of products and services in defense, and new ViaSat-2 bandwidth to apply to our fixed U.S. broadband business.

Our to-do list also included adapting to the ViaSat-2 on-orbit antenna performance, resolving the associated insurance claim, beginning to scale Community WiFi and enterprise services, lighting up and entering new geographic markets and continuing production of ViaSat-3. We executed well. Fiscal '19 was a really successful year. We capitalized on the opportunities we anticipated and set the stage for attractive growth in fiscal '20 and beyond.

We'll go into more depth on the key points later in the call but I wanted to point out a few business highlights here that we anticipate will drive fiscal '20's growth. We achieved over 100% increase in the number of commercial aircraft in service with our in-flight connectivity during fiscal '19, and we also increased the scope of our service offerings. While in-flight connectivity equipment sales are expected to decrease following the rapid ramp-up of installs with American Airlines, the strong growth in tail count implies corresponding year-over-year growth in in-flight connectivity services revenue. And our impressive in-flight connectivity market share gains this past year, along with regional geographic expansion, the approach of ViaSat-3 global coverage and the availability of our Ku/Ka dual-band systems creates exciting opportunities to add new planes from our existing customer base as well as new global airlines during fiscal '20.

Our exceptionally strong order book for government products and services is indicative of sustained steady growth opportunities in that segment resulting directly from R&D investments we've made. U.S. fixed broadband subscribers increased modestly but fiscal '19 ending ARPU is up 15% year-over-year and climbing, providing a solid foundation for comparable revenue gains in fiscal '20 and optimizing cash flow in the time leading to ViaSat-3 while also delivering more bandwidth to individual subscribers. We also see opportunities to continue to grow new vertical markets and anticipate total Satellite Services revenues will continue to diversify. Given the size of the U.S. fixed services market, that business can generate substantial absolute revenue growth again.

As we've seen historically, we tend to gain operating leverage as we scale Satellite Services, including adjusted EBITDA market expansion -- margin expansion, excuse me. We're also working steadily on the 3 ViaSat-3 satellites in the global ground infrastructure. It's a bold and ambitious technical approach, highly differentiated from any satellite communication system we're aware of. There have been and will be challenges along the way but we're making steady progress on this ViaSat-3 generation and ways to leverage that architecture to sustain and grow competitive advantage with even more productive versions for years to come.

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

Thanks, Mark. As Mark just summarized, our financial results were very strong for the quarter and full fiscal year as we executed well on multiple fronts. We also crossed over new annual revenue thresholds, reaching $2.1 billion for fiscal 2019 comprised of solid growth throughout our businesses.

For the quarter, revenues increased between 21% and 31% across each of our 3 main segments, with record revenues in Satellite Services and Government Systems, and we're seeing the bandwidth economics we've invested in convert into growth, with year-over-year adjusted EBITDA gains surpassing top line performance for both the quarter and the annual periods.

So starting with the quarterly results. Our Satellite Service segment saw the highest percentage growth for the quarter of 31% year-over-year, reaching a record of $190 million, with sequential quarter revenues increasing 7%. This strong year-over-year performance was due to higher ARPUs, up 15% year-over-year and 5% sequentially as we execute on our premium service strategy across our residential and our enterprise markets. We're seeing higher customer satisfaction and lower churn rate and improved operating efficiencies, which contributed to the Q4 adjusted EBITDA gains I mentioned earlier. In IFC, we signed another quarter of strong revenue increases with an in-service fleet double the size we had last year even with the approximately 40 737 MAX planes that have been grounded. Our services onboard continue to broaden as our airline partners find ways to monetize the platform to differentiate themselves with unique offers like Apple Music on American Airlines, integrated IFC solutions and other entertainment offerings.

Overall, our Satellite Service segment revenues continue to diversify with revenues other than U.S. fixed broadband businesses now having grown to approximately 24% for the current quarter.

On the international front, the fourth quarter of fiscal 2019 presented opportunities for expansion coupled with elevated investments in both fixed and mobile broadband spanning across Latin America, Europe and into the Asia Pac region. Despite these investments and activities, the Satellite Service segment continued to generate strong sequential revenue quarterly revenue conversion into adjusted EBITDA of 69%, bringing Q4 adjusted EBITDA improvement of 117% year-over-year and up 15% sequentially from Q3.

The adjusted EBITDA margin for the quarter was just over 34% compared to 21% a year earlier, up over 200 basis points sequentially from Q3, and these significant margin improvements demonstrate the operating leverage inherent in our fixed and mobile broadband service businesses. In Commercial Networks, quarterly revenues grew 21% year-over-year from a combination of increased revenues in our Antenna Systems division, higher IFC terminal sales and ramping service revenues from IFC equipment maintenance agreement.

Adjusted EBITDA was down slightly as higher SG&A expenses associated with the company's accelerated antenna system contract wins offset the reduced R&D investment over the same period.

On a sequential basis, recall that last quarter we had higher-than-expected IFC terminal deliveries due to accelerated customer install demands. That pull-forward moved approximately $4 million of the EBITDA from Q4 to Q3, thus exaggerating the anticipated quarter-over-quarter ramp-down effects.

Segment awards also reflected strong growth, totaling $96 million, a 45% increase year-over-year, again dominated by another quarter of strong IFC activities plus high levels of antenna system contract wins.

Moving to Government Systems. This quarter marked another outstanding quarter with many new quarterly and fiscal year segment highs. Fourth quarter revenues hit a record of $275 million or 26% increase year-over-year with most of this growth spread across the segment product lines. In services, strong gains were also seen, with increases of 15% as our unique, high-capacity secure mobile broadband capabilities widened operational capabilities across more geographies and platforms. Segment adjusted EBITDA was up, reflecting the flow-through of the top line performance while lower G&A and R&D as a percentage of revenue also helped deliver 140 basis point improvement in overall adjusted EBITDA margins.

On Slide 6, we see revenue and adjusted EBITDA performance for the full fiscal 2019 compared to fiscal 2018. On a consolidated basis, revenues were up 30% with adjusted EBITDA again growing at a significantly higher rate improving by 44% or more than $100 million from the prior year. Satellite Service revenues were up $95 million for the year or about 16% compared to last year led by growth in fixed consumer broadband business as well as increasingly strong contributions from our leading IFC business.

While ViaSat-2 full in-service launch delays compressed our service ramp earlier this year, we continued to make strong gains in the back half bringing our fiscal 2019 consumer broadband revenues to record levels as our focus on premium service offerings grew blended ARPU by 12%.

On IFC front, most of the revenue increase was driven by having about 60% more tails in service on average as well as higher ARPA due to the expanding onboard services I mentioned earlier.

Adjusted EBITDA for the segment was up $2 million compared to last year despite the high fixed operational expenses associated with full-scale service launch on ViaSat-2 plus 50% year-over-year growth in new product marketing and advertising expenses as well as costs we incurred earlier this year associated with ramping our IFC activities. However, as I talked about in our quarterly results, adjusted EBITDA grew steadily on a sequential basis throughout the year as our revenue scaled on both our fixed and our mobile broadband businesses.

In Commercial Networks. Full year revenues were up 84% to $428 million compared to last year. The bulk of this increase was due to sales of commercial mobility terminals as we executed on our American Airlines contract and extended tail count across other airline customers. We also saw strong revenue growth from our antenna ground systems product and payload technology development programs, and long-term IFC equipment maintenance agreements, which were partially offset by lower sales of fixed consumer terminal to third parties.

Fiscal 2019 was a very high-volume delivery year for IFC products with terminal shipments stretching over 700 units. Now that we've successfully executed on this large demand influx, we're migrating down to more normalized delivery volumes into next year, which we anticipate will keep our segment revenues at a solid level but somewhat decrease year-over-year.

For adjusted EBITDA, the segment loss narrowed sharply by about $57 million due to a significant decrease in segment R&D plus the pull-through of higher revenues to gross margin partially offset by higher SG&A for the period. We expect total R&D levels to grow somewhat next year as we complete development on the ViaSat-3 ground network and make some other opportunistic investments in mobility and emerging market application, all of which we believe will extend our market reach and our long-term growth.

Segment awards for the year were $441 million, up 76% from last year, and commercial networks ended the year with $354 million in backlog, which represents just over a 1:1 book-to-bill ratio.

Within Government Systems, revenues increased 24%, reaching a new record of nearly $1 billion, plus the segment achieved its first-ever $1 billion contract win year, with new orders growing 50% year-over-year to $1.2 billion bringing the fiscal 2019 book-to-bill ratio to a very strong 1.3:1. Product revenues were up 27% while service revenues also increased, up 15%.

Full-year revenues reflected the same trends we found in Q4 with solid growth across our multiple product lines and record full year service revenues. Company-wide, we achieved record awards of $2.4 billion and ended the year with a backlog position of $1.9 billion, which alongside our growing service base, puts us in a solid position for strong growth as we look into next year.

Slide 7 summarizes income and cash flows for the year and debt and leverage trends for the last 2 years. Through Q4, we had positive GAAP income as a result of improved income from operations and a $5 million net tax benefit partially offset by increased interest expense. And for the full year, our loss was essentially flat as our strong adjusted EBITDA growth overcame the additional $109 million of depreciation, amortization and interest expense now flowing through our P&L each associated with ViaSat-2's full-service launch earlier this year.

Turning to cash flows. We generated $328 million of cash flow from operations compared to $359 million last year. Taking into account the $85 million prepayment we received last year by Xplornet for ViaSat-2's Satellite Services in Canada and the $46 million of additional interest expense now flowing through the income statement versus being capitalized during the ViaSat-2 builds, our operating cash flow generation actually improved year-over-year by approximately $100 million.

In CapEx, our investments were lower compared to last year. This is net of the $186 million of insurance proceeds received for ViaSat-2. So backing this out, overall capital expenditures increased by $88 million year-over-year with increased investments on the ViaSat-3 program and higher CPE investments partially offset by lower expenditures on the ViaSat-2 satellite and ground network.

So before I move on to our Q4 leverage trends, I wanted to remind everyone that in fiscal Q1 2020, we will implement ASC 842 related to accounting for leases. Consistent with our comments last quarter, based on our implementation work thus far, we expect the standard adoption to have minimal impact for our various reported income-related measures and no anticipated impact for leverage ratios and other covenant metrics. The primary impact we expect is gross up to the balance sheet with our right-to-use asset offset by a corresponding lease liability in the same amount.

So moving to the chart in the lower right, our net leverage continued to improve as anticipated. We ended the quarter at 3.5x net leverage, nearly entirely as a result of our strong growth in adjusted EBITDA. Looking forward, we expect net leverage to hover between 3.5x to 4x as expected adjusted EBITDA growth in the coming year should offset continuing investments in the ViaSat-3 global network and other emerging market opportunities. It's subject to some of the seasonality we typically experience.

Before I turn it back to Mark, I want to provide a brief summary of our recent secured bond offering. During the quarter, we issued $600 million of senior secured notes at par with a 5.625% coupon and an 8-year maturity. We used the proceeds of the notes to term out our borrowings under the revolver and for general corporate purposes. We were originally targeting a $500 million raise but decided to upsize the issue due to very strong demand and favorable pricing. As part of the upsizing, we also reduced our revolver facility from $800 million down to $700 million.

Collectively, this brought our Q4 liquidity to a strong $942 million which represents the $262 million of cash on the balance sheet and the $700 million undrawn revolver plus our outstanding letters of credit.

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

Thanks, Shawn. So I'll start my part with Satellite Services highlights. We grew quarterly Satellite Services revenues and adjusted EBITDA sequentially and year-over-year on a broadening vertical market space. U.S. fixed broadband subscribers grew slightly, consistent with our strategic focus on higher-value plans, and in-flight connectivity tails in-service continued to increase significantly, more than doubling from the prior year period. We've also continued to grow Community WiFi sites and revenue in Mexico as well as Internet connectivity to schools and other government sites in Brazil with our partner Telebras.

We're surfacing and overcoming operational and logistics challenges and believe underlying demand for affordable connectivity is strong. The chart on the lower left corner is derived from total Satellite Services revenue, ending U.S. fixed subscribers for the period and ARPU. It makes several important points. You can see total Satellite Services revenue for fiscal '19 is at a record high as is U.S. fixed broadband. Other Satellite Services led by IFC are also at record levels and continue to grow even faster and made up 22% of total Satellite Services revenue for the fiscal year according to this measure. That was sequentially higher quarter-over-quarter and showed substantial growth year-over-year. We're working to continue all these trends in fiscal '20 and beyond, that is continued total revenue growth and continued U.S. fixed broadband revenue growth while building a more diversified and robust portfolio.

We make new investments when we enter new vertical or geographic markets, we're supporting new platforms, but you can see we achieved robust adjusted EBITDA growth nonetheless. We aim to continue investing to expand our target markets in fiscal '20 while also achieving attractive adjusted EBITDA growth.

So on to in-flight connectivity highlights. We're really pleased with our rapid growth in IFC and impressive market share gains in North America. We're focused on helping our airline partners achieve competitive advantage through new and creative business models unique to their own brand that leverage low cost and abundant bandwidth on all their flights.

We ended the fourth quarter with 1,312 tails in service, up by 189 sequentially and more than double the year-ago number. We expect to install IFC equipment on approximately 490 additional commercial aircraft under existing contracts, which means we're getting closer to the 2,000 mark of in-service aircraft.

Looking ahead, we like the momentum and opportunity we see in IFC. We see promising opportunities to add new aircraft with existing customers as well as to serve new airlines and have a good shot at passing that 2,000 milestone in the not-too-distant future, depending on the timing of the individual airlines involved.

Our success in North America is helping us engage with airlines on a global basis. The approach of ViaSat-3 helps a bunch. Our target launch dates for the Americas and EMEA satellites now line up well with new wide-body deliveries for many international and global airlines, with Asia Pacific not far behind. Our partnerships in important regional markets can help accelerate international narrow-body and wide-body growth, and our commercial version of a very successful U.S. government dual band, Ku/Ka band terminal is an attractive solution for intercontinental routes. We're already flying on international 787s and see good opportunities with the 777X as well as Airbus wide-bodies.

The investments we made in Supplemental Type Certificates, geographic expansion to Europe and Australia, and end-to-end operational support in prior years were stressful at the time but they clearly catalyzed our success and our rapid growth. Now in fiscal '20, we're in a position to make new success-based investment in new terminals, new platform integrations and very attractive geographic expansions.

Given our rapid revenue and adjusted EBITDA growth, we've got a lot more maneuvering room in fiscal '20, but investors should understand that these new and very promising incremental investments mean the full benefits of our rapid growth will be a little bit understated in future financial results.

So switching to Government Systems. That segment continues to shine with record results across the board. Q4 revenues grew 26% year-over-year to $275 million on surging product sales and steady growth in services. Fiscal '19 revenues of $956 million were up 24% compared to fiscal '18. We've continued to invest in future growth and that yielded record new orders of $1.2 billion.

We always caution that quarterly results in the government segment can be lumpy, but the chart in the lower left shows the long-term trend of growing new contract awards and backlog over the last 5 years. We've got a good track record of converting orders to revenue so the growing backlog in fiscal '19 book-to-bill ratio builds confidence in sustained growth in fiscal '20.

We've had good success in filling the white spaces between what the military's operational units need and the government's procurement regulations can deliver. That's been true for information and cybersecurity appliances, satellite products and systems, and tactical data links. We're also working to expand our addressable markets by leveraging success with early-adopter organizations into the larger forces. Two good examples are shown in the lower right-hand part of the chart.

Our STT and BATS-D Link 16 tactical data link products are seeing rapid adoption, with both having now reached over 1,000 shipments and having potential for far greater unit volumes than the traditional MIDS LVT and MIDS JTRS terminals.

And then this week, we've announced 2 events that we believe further enhance our government growth prospects. We received a $450 million IDIQ contract from the General Services Administration that enables Special Forces and general operating forces to acquire our new advanced products and services. Coupled with last fall's $560 million AMSS VIP fleet contract extension options, that's around $1 billion of multiyear contract value in addition to the $1.2 billion we've reported as firm orders.

We don't consider IDIQ award values or option values as contractual backlog until firm orders are placed. Historically, we've got a good track record in converting them into revenue over the life of the contracts and they're indicative of demand.

We also received a contract from the Air Force Research Laboratory Space Vehicles Directorate to develop a prototype of the small satellite to extend the range of the terrestrial Link 16 networks. This leverages our proven track record in advanced payload integration and the integration we've achieved in handheld Link 16 Data Links.

There's a sharp focus in the Defense Department to preserve and extend U.S. competitive advantage in space, in earth observation, situational awareness and communications through a variety of systems, orbits, platforms and payloads. We believe our success in disruptive commercial payload architectures, components, modules and associated ground networks, coupled with our deep expertise in tactical networks, cybersecurity and end-user applications makes us well qualified to contribute materially to rapidly improving critical U.S. space capabilities. We believe we can compete very effectively in designing and building small satellites for those applications where they're appropriate.

Okay. So we'll conclude our prepared remarks with an overview of our fiscal '20 outlook and the key drivers.

We believe we've got significant growth momentum for both revenue and adjusted EBITDA as we look at the full year. In Satellite Services, our year ending record ARPU, coupled with modest subscriber growth, means we enter fiscal '20 with a fixed broadband revenue run rate over 15% higher than when we entered in fiscal '19. While we still have ARPU growth opportunities in fiscal '20, we wouldn't expect the same year-over-year percentage growth. We see opportunities for some subscriber gains, so that depends on choices we make to optimize overall network bandwidth resources, the bandwidth value delivered to individual customers and the profitability across all services.

Our IFC tails in service are over 100% higher than they were a year ago, and the scope of delivered services continues to expand increasing total service revenue per aircraft. IFC is still the largest contributor to those other Satellite Services, which have grown steadily over the last several years and reached about 20% -- 22% of total Satellite Services in fiscal '19 as a whole.

Finally, emerging markets, Community WiFi and geographic expansion, though still quite small, have good growth prospects. In aggregate, we expect the Satellite Services portfolio to continue to diversify.

In Commercial Networks, we do not expect to sustain the same rate of in-flight connectivity equipment sales in fiscal '20 that we had in '19, but we are seeing growth in other parts of the communications network business especially for antenna products and space, and that will help mitigate the effect of lower terminal revenue.

The Government segment is poised for sustained steady growth. Q4 of fiscal '19 was exceptionally strong as we worked hard to fulfill heavy near-term demand for government products. Q1 is typically a seasonally low period for our defense business and the strength of Q4 might increase that effect. But strong government backlog, 1.3:1 fiscal '19 book-to-bill plus the IDIQ contracts and contract options are indicative of long-term growth in defense, quarterly lumpiness notwithstanding.

So we see tremendous opportunities throughout the business to build on our momentum in fiscal '20. When we think about the business trajectory during the year, though, there's a couple of factors to keep in mind.

Relative to the first quarter, I've noted the usual seasonality in our Government business. Additionally, the grounding of the 737 MAX aircraft will be a growth drag for us in the first half of the year with the first quarter now already impacted by lost service revenue and aircraft delivery delays.

In Satellite Services, we've had good opportunities for long-term margin expansion as we scale, and we demonstrated that in fiscal '19.

While we'll continue to drive scale benefits from our existing services, we'll also be investing in opportunities that will temper Satellite Services margin expansion this year, and those include the build-out of ViaSat-2-enabled services in Mexico and Central America, expansion of services in Brazil, the -- our partnership with Telebras, support for our China opportunity, and our Ku/Ka systems capabilities that will drive new opportunities on long-haul fleets of existing customers and potential new airline customers.

Overall, as a result of these and other factors we discussed today, we anticipate our fiscal '20 growth to be weighted toward the second half of the fiscal year similar to what we saw in fiscal 2019.

So wrapping up, the term inflection point's often overused, but we think it's a fitting description for our fiscal '19. We've got strong competitive positions in attractive growing markets, we've got unique scales on the bandwidth supply and end-user application delivery side, and we've shown we can execute to capitalize investments when the products of those investments reach the market.

Our fourth quarter revenue exceeded that of all our satellite data network operator peers on a more diversified base with every one of our segments achieving double-digit growth. We think we've got the assets, the technology, the employee, talent and the end-to-end distribution expertise in the best growth markets to extend our lead even further. So we're enthusiastic about the opportunities before us, and we're looking forward to an exciting fiscal '20.

So with that, we'll take the -- we'll open it up for questions.

(Operator Instructions) Our first question comes from Rich Valera with Needham & Company.

Mark, I was hoping you could start off with talking about the Telebras partnership. You've put some numbers in the press releases. I think there's around 4,500 points sort of lit up at this point and with a target of, I think, 15,000 by the end of the year. Can you give us any sense of the economics of that business, perhaps maybe comparing it to the village WiFi business that you're doing in Mexico just to give us a sense of the revenue opportunity there?

So our business in Brazil is going to be on a diversified basis as we've talked about before. In some way, it's similar to what we're doing on our own satellites, and we have different agreements covering those different businesses. So the ones that we've done so far are under what's called the Gesac program, which is really an agreement between Telebras and other parts of the Brazilian government to provide connectivity that they're -- basically Telebras contractually agreed to do. And that was the purpose of that satellite.

There are other businesses that are more like our Community WiFi business that we'll be doing on that satellite, and we may do others as well, including mobility. But all those have really been pending the final court approval that we just announced this week. And there's a separate press release on that. So I think we'll go into maybe a little more depth on that but the point of all that is just to say we really are just going to get started on Brazil this fiscal year. And we'll probably be able to talk more about the business models once we have that going.

Got it. That's helpful color. And then just a question on ARPU. I mean, you had really impressive ARPU growth over the course of this year. And that's obviously helped drive your service revenue growth. You did comment that you thought it would -- the growth would understandably moderate this year. But is there kind of a theoretical upper limit on that? I mean, if you look at sort of your high-end plans sort of where they are, how should we think about ARPU over the next year or 2 in that consumer business?

Okay, okay. So 2 points, one is -- and we pay a lot of attention to what's going on in the residential broadband business in general. But if you look at what's going on, let's say, in the cable environment, which represents the majority of residential broadband in the U.S., ARPUs are going up pretty substantially in that field driven by mostly what's going on with video. And so you're seeing video unbundling. Unbundling tends to take away discounts that people otherwise would get for broadband. So broadband prices are rising. So there's some amount of ARPU updraft that's sort of industry-wide.

And then we've had, let's call it, some incremental ARPU gain that's due to migration primarily -- or the big factors are migration away from wholesale business, so we have a higher proportion of retail versus wholesale. So that's a big contributor to ARPU. And then the other is we have emphasized these higher-value plans. But it wouldn't be appropriate to think it's all just a phenomenon for us. If our plans are competitive and we believe our speeds are and we're providing more video, more bandwidth per subscriber, more video content, some of that updraft is just industry-wide.

The -- for us -- and I think this quarter showed a little bit that there's clearly trade-offs that we can make in -- that we can -- and we've done lots of tests and we're going to continue to test this, that we can get more subscribers if we offer more lower-priced plans. But it's just not clear that, that's a good economic trade for either us or our subscribers. So that -- I think that's the part where I would describe it as market discovery, marketing refinement, and more and more localization of the service plans that we offer.

And it's a little bit hard to predict, but I think that you could sort of think of it as a little bit of a trade of ARPU versus subscribers for us. But as we said before, the trade-off that yields fewer subscribers and higher ARPU is better for us economically, and it seems to be better for those subscribers that buy those plans. So we would tend towards that.

Okay. Fair enough. And one more for me. The Link 16 LEO order for the single satellite is pretty intriguing. Is there anything more you can say about what might be behind that? Are you privy to what that constellation might look like if they were going to go forward with it? Or is there any other color you can provide on that potential opportunity?

Well, right now, I would say we're the leading industrial provider for that. So what the system ultimately turns out to be and how big it is, I think that will be influenced by how well we do and the concepts we put forth on it.

I think it's a good endorsement of our skills in tactical networking in Link 16 and in space, but it's a little early to tell. It's a rapid prototype so we'll learn more. But I think that the trends that I described in DoD space, which are fairly evident just by the headlines that you see about space and the need for a space force, a space development agency, all those things are indicative that if we can deliver more capability -- and the capability in a nutshell is what we described in the press release, which is to turn this very, very valuable data link into more of a beyond-Line-Of-Sight capability instead of just Line-Of-Sight. That's the fundamental value proposition. I think to the extent that we can do that and integrate it with existing and planned terminals it's a powerful opportunity.

Our next question comes from Ric Prentiss with Raymond James.

A couple of questions. First, I think you mentioned that the final fulsome of the insurance came in the March quarter, how did that affect the financials? How was it booked through on the income statement side?

So most of the cash just was an offset to the insurance receivables and how we record it against the satellite, so the impact to the income statement was pretty small. I think for the quarter it was around $3 million, $3.5 million.

And was that into SG&A that, that would have come in as a consequence?

Yes, hitting us on the SG&A.

Okay. And then you called out a couple of times about your entering into more markets in Lat Am, Europe and Asia. Some of it was in the quarter. Can you help us frame just a rough size about how much that impacted the quarter and you're expecting could impact the coming quarters? And is that in cost of service? Or is that also in SG&A?

Yes, it's -- there are different pieces to it. I'd characterize it for the quarter, we're just getting started, so maybe to the tune of a couple of million is a good number. But that is kind of sprinkled between the lines.

Okay. And I think you also called out the 737 MAXs, 47 aircraft grounded starting to affect, obviously, the -- now the June quarter. How should we think about the ARPA and the effect of what that drag might be? And would you assume that those could return to flight?

Yes. You're the right man for that.

Well, okay, yes. I think -- I mean you can look at it as a fraction of our fleet. It's 4-ish percent of our fleet. But those planes get used a lot. I think that -- we don't profess to know anything more than what the market as a whole knows. So there's some hope that they'll be in service again during the September quarter. We're going to do the best -- we're going to do what we can to support our airline customers, and I think that you can -- given that its -- that size of our fleet, you could think of it as having roughly proportional effect on revenue in that space.

The only thing I'd add to that, Mark, is we have that many that are grounded, but there would have been more that entered if we had just kept going. So the longer it goes versus our forecast, the short-term impact is larger.

Right. Because you would have had more installs and so the in-flight -- the comm network's equipment subs been slipped out a little bit?

Yes, I mean that's obviously what we've missed goes away, but then it just comes back when they start flying again.

Okay. And then I think I saw a story that you guys have gotten STC on some -- what they call super midsized cabin business jets. Can you talk a little bit about what you see in the business aviation side of things or what kind of antenna items you're looking at there?

The main thing we are trying to do or are doing in the middle of doing with our business jet service, which we've had going for quite a while has been Ku-band. And the big -- kind of the big change with ViaSat-2 is a much bigger coverage area and our ability to provide Ka-band coverage for -- out of North America now and all of Europe and the Trans-Atlantic. That serves a big portion of -- bigger portion of the business jet market. So our approach there has been I think to look at scaling up, has really been to deal with the OEMs and to provide Ka-band as a -- basically a line fit option. So that's one of the options that you can choose.

We think our Ka- band service is really attractive. And the availability of the Ka-band antennas and the STCs that we're announcing along the way and the OEM agreements, we think, are the first part of our strategy to build up that. And so we're looking at some combination of -- some will be swapped out of existing customers. Some of our customers are just looking to add Ka-band to their Ku-band. But we think the biggest portion of growth will be on new planes that are line-fit. And we've announced a few OEM agreements to be able to do that.

We're talking about on the order of hundreds. I mean, that's where we are. We've been in the hundreds range for quite a few years in that space, and we'd like to grow that pretty significantly.

And the time frame to grow it really is into the orders or just getting line fit and getting them to produce. What do you see the total market per year that they might go to get those up to?

I don't have the numbers at my fingertips for the production rate on these planes. We're still competing with others. I think that the -- basically, part of what's helping us a lot is the quality that people associate with us due to our commercial in-flight connectivity. People look at in-flight connectivity we're providing on commercial airlines and see the difference between what we're delivering versus others. And to the extent that they can get on their business jets it's pretty attractive.

But we're going to need to develop additional channels beyond just the line fit OEM one to really move the needle on this. So it's kind of a -- it's a multiyear, long-term project but one that we're pretty positive about.

Our next question comes from Simon Flannery with Morgan Stanley.

I wonder if we could come back to ViaSat-3. I know that you say in the release you're progressing through the final module test and validation for the first 2 payloads, and you're nearing final migration to the capital portion of the project. So perhaps just update us on the time line when you think you'll -- the latest thoughts on launch and in-service for the first couple? And then maybe, Shawn, you can just take us through how that flows through the income statement and cash flow statement, how do we expect OpEx and CapEx to trend as a result of the kind of final stages before launch.

Sure. So I think on the timing, there's not any real change to what we told you guys last quarter. So no new updates there. As far as how to think about the flow through, income statement-wise, what we need to do is finish out the development on the ground. So when we think about next year, our R&D levels, I kind of noted, we don't expect those to go down. We kind of think of those around the 6% of revenue target, and that's probably a good mark. And that incorporates a lot of activities related to the ground R&D wrap-up.

And then on the CapEx side, obviously, next year is going to start to grow upwards. Taking out the impacts of the insurance that we had this year to FY '19, I think our capital was $675 million or so. So expect that to maybe tick up next year $300-ish million mark, somewhere around there. I mean, we can have milestones that move from year-to-year, so that they can flip over $50 million easily to one year to another. But that's with ViaSat-3, which is the dominant part of year-over-year growth to tick up next year.

So just to be clear, it would be $300 million higher than the underlying $675 million?

Yes. I think that what we said is think about how we're growing year-over-year, and at the upper peak value I think you would add that on to this year.

Perfect. Okay. Great. And then just coming back to IFC, you talked about doing more internationally. And can you just talk about how that plays into ARPA in IFC and maybe just expand a little bit on the announcement with China Satcom and the potential there?

Okay. I'm sorry, Simon, could you please say the first part of the question.

Yes. The first one was just on IFC ARPA, what do you see as the trends as you get into more international markets, and then with the China Satcom deal?

Okay. So the -- it's sort of -- the ARPA trends really depend on the strategy of the airlines. So some airlines, including international ones like Qantas, have come up with really comprehensive strategies about what's the in-flight connectivity sponsorship programs, sports, entertainment, things like that. And so ARPA on those is -- can be higher than other domestic ones because of the way they're using it. Other airlines have -- basically are just more entry level, may have a paid WiFi product, and that may be in line or less depending on how often the planes fly, what the take rates are for those particular markets. So it's difficult to pinpoint a trend that isn't tied to the way each airline wants to use it.

What we're working on with the airlines are trying to help them show ways -- find ways where they can both get more passengers engaged. Because we think that makes most sense is they're going to flip the equipment on, they ought to try to expose it to more passengers, and how they can get more third parties to participate in those. And so the one that we started in this March quarter, that really -- what went to market in the March quarter was the Apple agreement with American Airlines. And that's gotten a bunch of attention. And so I think that's basically opening discussions with a number of both domestic and international airlines about how they might use the in-flight connectivity.

And I would say the way those application trends evolve is going to have the biggest impact as opposed to the mix of domestic and international planes. Now that said, a couple of other things, we're doing international in a couple of different ways. One is -- one example would be in Australia, where we have the regional Qantas service. But with this Ku/Ka product offering that lets us go to intercontinental flights, which are more wide-bodies. And the wide-bodies, just because they have so many more passengers, will magnify whatever the ARPA effects are due to the airline strategy.

And then for China, I think the main points there are we think China Sat has a really good satellite. We think that the airlines in China have expressed a desire to have a really good service. A lot of them say, "We'd like to have what JetBlue has." That's the experience that they've had, a free service that all the passengers can use. So they see that as somehow representative of what they'd like.

Now I think the real test of how things go in China, and we're just getting started with this, is we China Satcom are jointly in discussions with airlines. And some -- initially they're both Chinese airlines for domestic and international use, and then there are international airlines that fly into China. And so there's -- I think we have a little bit different dynamics on each of them, but really, the thing to look for is to look for announcements with airlines. That will be the way that we'll know that we're getting traction in those markets. I think that the partnership that we have is a really good and attractive one to the airlines, but the test will be announcements with specific airlines.

And our next question comes from Philip Cusick with JPMorgan.

Mark, can you comment on M&A in the space? We have Inmarsat going private, Hughes seems to be cleaning up their structure, do you think further consolidation makes sense for Viasat given what's going on in the ecosystem?

I don't know. There are elements of different organizations that should -- that could generate synergies and savings and/or revenue expansion opportunities. But most of the organizations that are involved are multi-faceted and multidimensional so it makes it complicated. It's hard to come up with a simple answer in the absence of something more specific.

Okay. And then on the government business, we saw a new record this quarter, and revenue grew more than 20% in 2019. Just trying to think about how we should think about that pace being maintained in 2020 given the current backlog.

Well, I think there's a good shot that we can grow in the 10-ish percent range. We've been above and below that a little bit, right around there. I think from a book-to-bill basis, you'd think we could do better, but some of it has to do with the timing of deliveries on those things -- orders. I think in general, they tend to go over an 18-ish month time frame for firm orders. So not all of that will fall in the quarter -- in the fiscal year, but we do go through these peak periods like we have in the last couple of quarters, where there's just a lot of demand for deliveries in those periods, and we were able to accommodate them. I wouldn't count on that all the time. So I think 10-ish percent is probably a pretty good target.

Okay. And then one more if I can. Mark, you mentioned that given all the investments that's needed out there, not all of the revenue growth will come through on the cash flow line, on the EBITDA line. Shawn, you mentioned R&D picking up back to around 6%. Any other costs that we should be thinking about ramping in the next year?

No, I think those are the 2 primary drivers. It's just keeping in mind that the R&Ds aren't ticking down. We've got some incremental investments and that we are investing in expanding markets, both in fixed broadband and mobile broadband applications.

It's Rick. One of the things we talked about was Ku/Ka, for instance. And then we talked about in the international expansion, we have more -- there's more STCs in those markets. And then, obviously the Community WiFi and in the emerging markets space. So those are areas that the revenue isn't catching up yet to the investments that we're making. We're making them because it has, when we previously made those announcements, and we think it will.

And our next question comes from Chris Quilty with Quality Analytics.

Rick, I wanted to follow up on the Ka/Ku antenna. I know a couple of years ago you were kind of only focusing on that for the government market. And just generically, what has changed here in the last couple of years that -- obviously, you had some development efforts under the cover and you're now aggressively moving with that product. Is that just due to the timing of the market opportunity that's boiling up and when ViaSat-3 comes online? Or do you think that's a product that kind of has staying power after ViaSat-3 is global?

Mark, why don't you go ahead?

Yes. So yes, one is -- basically, we've deployed the Ku/Ka in the government markets, where 12 customers like it. And we've had a lot of inbound -- we have lot of inbound requests from international airlines who are really excited about ViaSat-3. And so the main thing we've been doing with them is lining up the timing of either their new aircraft deliveries or their planned conversion retrofit programs. And basically -- and also, the other thing which is a little bit of a fact of the space life is just there's some uncertainties in getting satellites on orbit, which we've seen, whether it's launch issues or problems with other satellites that affect launchers or whatever. So the notion that for -- basically, on a wide-body the application of the Ku/Ka is -- makes a lot of sense. It's kind of an insurance policy against the timing of a satellite launch. It also allows us to bring a lot of these aircraft into service much more quickly.

And one of the points that I think people don't always appreciate is when we started with JetBlue, who's been really, really great launch partner for us in the in-flight connectivity space, everybody has been very impressed with their service. But until we got ViaSat-2 up, I mean we only really served around 80%, I think -- I can't remember the exact number, 75%, 80% of their seat miles because we didn't cover the Caribbean.

So one of the things that the international carriers are looking at is not just do we have 100% of their routes covered, but what fraction of their seat miles do we have covered. And once you get into those 70%, 80% ranges, it's really interesting. And then if you can use Ku-band to fill in the gaps at a modest upfront cost, that's a pretty attractive offer as well. So I think a lot of it's really been due to the inbounds that we've gotten and the enthusiasm about Ka-band. And this is just the way to both accelerate that and to sort of back up the initial uncertainty around either launch timing or the timing of the different schedules.

Okay. And just a follow-up, I think one of the other issues that you pointed out again a couple of years ago was both the kind of cost and weight as well as performance detriment that, that product entailed. Have you been able to bring those more in line with traditional single-band antennas?

So one is -- for the current configuration, mostly, we're talking about wide-bodies, and so the -- and the cost is -- we believe the cost is attractive. The weight is sort of -- the weight differential was kind of negligible on a wide-body. The performance is really good. There's no performance impact whatsoever to the Ka-band terminal -- the Ku-band antenna. So I think those are the factors that have made it really competitive and attractive.

So one thing I'd add is think about this as again best available network. So these -- a lot of these aircraft spend a lot of their times in our high-capacity Ka coverage. So we're really just talking about the fraction of the time they're outside that coverage.

Understand. And a final question just on coverage. In Europe, can you talk about with your partner there, what sort of capacity you feel you have for partner -- or airline expansion opportunities? Are you kind of stuck in gear for now? Or can you use the Ka/Ku as a way to expand until the ViaSat-3 comes online?

I think we're well situated for capacity in Europe, based on some of our airline partners, who are actually looking more at geographic expansion than capacity expansion in those regions. And we have additional partners who are interested in helping us in those areas.

Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the call back over to Mr. Dankberg for any closing remarks.

Okay. Thanks a lot, and we've had a lot of material to cover. Thanks, everybody, for your time and attention for this quarter, and we look forward to speaking again next quarter.

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