Viasat Inc (VSAT) 2021 Q2 法說會逐字稿

Welcome to Viasat's FY '21 Second Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Executive Chairman; and Rick Baldridge, President and CEO. You may proceed, Mr. Dankberg.

Okay. Thanks for joining us today. I'm Mark Dankberg, Executive Chairman of Viasat, and we also have with us Rick Baldridge, our President and new CEO; Shawn Duffy, our Chief Financial Officer; Bruce Dirks, our Treasurer; and Paul Froelich, VP of Corporate Development.

So we hope you've had time to review our shareholder letter that we posted on our website that provides information on our second quarter and year-to-date financial performance as well as a current overview. So today's call is primarily going to be questions and answers but before we start let's have Robert provide our (inaudible) Robert Blair, our General Counsel. [I miss] Robert. Sorry. So now let's have Robert 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 reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

Okay. Thanks, Robert. So before we take questions, I did want to point out that today, we announced that Rick has assumed the President and CEO role, and I've become Executive Chairman.

So it's really the next step in a process we've been working on for a couple of years as part of our long-term approach to new management succession. I held the CEO title for almost 35 years. But Rick has really been doing most of the executive management for the last few years. I'm really happy that he has accepted the CEO position. We've been a close team in building Viasat for more than 2 decades. And so I think this is really truly going to be a seamless evolution.

He's got the confidence of our people, our customers, our Board and our investors. And it's a great outcome for the company. Personally, I'm not going anywhere. With Rick taking on the CEO position, I'm going to be able to focus more fully on our technology and business strategies and also on the overall space regulatory environment, which is essentially being figured out on a national and global scale in real-time now. It's what I've been doing most of the time for the last couple of years anyway.

So Rick, congratulations. And now over to you.

Thanks, Mark. I'd like to say it's been a great ride, but I really think our best years are still ahead of us. And I think we've captured the transition in the shareholder letter. Let's just say that I'm looking forward to the challenge, and I appreciate the confidence of the Board, and especially, Mark.

So now for the fun part. We've had a great quarter. COVID continues to bring challenges for all of us, but we've managed really well so far, even with the tailwinds from the IFC that we're supposed to -- even without the tailwinds, but I see they were supposed to be a big driver this year.

We're exceeding expectations across the rest of our business. $1.5 billion in new awards for the first half of the year. Over $2 billion in backlog, not included another nearly $3 billion in IDIQ awards that still haven't been -- the details haven't been awarded. Government service is in outstanding shape. Overall, we had a 1.7x book-to-bill for the first half. Our fixed broadband business has been a great source of strength for us in the U.S. and now we rolled it out completely across Brazil.

Even in the IFC, we continue with our market share momentum with exciting new win with KLM that we just announced. And ViaSat-3 continues to hit milestones, even with some minor schedule slippage, mainly due to the pandemic, its impact on us and our suppliers. Reiterating we hand over the payload to Boeing and are zeroing in on 1 year before our first launch of the first of the 3 satellites.

We're looking forward to what we think will be a really good year for growth, setting us up for an exciting 2022 -- FY '22 as our constellation begins to enter service. With that, let's go on to questions.

(Operator Instructions) We have our first question from Rick Prentiss.

First, Mark, it's been great working with you. I'm glad you're not going anywhere. And Rick, also been good working with you, congrats on the promotion.

Thanks.

I want to talk some more high-level items first on a busy afternoon and earnings season. Been a lot of movement in the In-Flight Connectivity landscape out there. Intelsat proposing to buy Gogo, Inmarsat with a collaboration with Hughes.

Take a second, just walk us through the business. COVID obviously has hit it. How do you see the time frame for a recovery? And then how do you see the competitive landscape tying off?

Well, we're -- from a recovery standpoint, it's obviously, the airlines are leading the way. So we're talking to each one of our customers and getting their feedback. They're very cooperative in sharing, kind of, fill rates, what their expected fill rates are, aircraft retirements, when they plan on having MAXes back in. So we're kind of following their lead. And we had a little uptick in the summer and then it flattened off a little bit. But quarter-over-quarter, we were up a little, and we're seeing a little bit more demand.

Some of the guys are saying it's going to take 3 or 4 years to fully recover. Other guys are saying 2 years. So we've got an outlook, but the thing that's encouraging for us through this cycle, we've continued to get a bunch of RFP traffic. And so -- with airlines that we're not on yet.

So the KLM was a win. We actually had a quarter or so ago, but we couldn't announce it. We've had more and more RFP activity through the cycle. So we're encouraged. I think people want high-quality service. I think -- I get a lot of different views from the industry analysts in terms of recovery. And they're just all over the map, quite frankly. So we have our own outlook.

Mark, do you want to talk about, kind of, what's going on with the other players in the industry?

No. I think that -- our approach, which is vertically integrated and based on a lot of usage is the right model. I think we're still growing really. I think we're very well positioned in that. I also think there's going to be business model evolution. One of the things that we did point out in the letter is that we're doing more work in -- with some of our airline partners in being out of -- offer passengers lower free services, come up with a way to make in-flight connectivity a revenue source for the airlines instead of a cost center.

And I think that the amount of bandwidth that we have available on the airlines that we work with is a really unique competitive advantage for us to be able to do that. That's out of our focus, in the near term. I think we're more focused on making that -- and what's going on with competitors.

And do you expect further consolidation or changes in the industry in the short term or medium term?

Yes. I wouldn't be surprised.

Okay. And the second high-level question. Where obviously, you probably are too, getting tons of questions about Elon Musk, SpaceX, Starlink beta test. Can you talk a little bit about how you view the beta test? How competitive is it? What it means to your kind of -- your game that you're running out there. Just help us shed a little light on your view of the beta test.

Yes. Sure. So one is -- we've been expecting them to roll out the beta test, they've been saying they're going to do it. And the beta -- it's pretty much what we thought they would do. It's still a beta. But we expect that they're going to manage things so that the service is good. I mean they have a small number of users on a lot of satellites. So it should be really good right now, no matter what. And so that's what we're expecting.

But there's also a lot of demand in the market now already more than we can serve. And what we've seen is every time we've made a meaningful improvement in the speed and bandwidth that we offer, our addressable market has grown. I mean we can sell more services into areas that we didn't sell before.

So ViaSat-3 is -- it's our plan to be able to make major improvements in both speed and bandwidth. So we expect the market is going to grow significantly. Obviously, that's what they're intending to do is offer more speed and bandwidth, too. So the market, we think the market will grow from what it is now, and we'll get our fair share of that.

I would want to point out that we already have tens of thousands of subscribers that have 1,500 megabit per second plans, and they're pretty happy. We've got maneuvering room. So we can be competitive in the interim even before ViaSat-3 to the extent that we choose to.

And also, we've been pretty clear that we think that lots of bandwidth for streaming video is going to be a really important factor in a lot of buying decisions. And that's going to be a really rapidly growing reason for growth in that satellite broadband. And we think we're going to do really well there.

And how important is latency? Because obviously, the LEOs make a point of they have lower latency than the GEOs might. How important that -- how important is that in the marketplace as you see it?

No. So 2 things. One is, we do think latency is important. We don't think it's decisive, right? I think the thing that we've seen that's really the most decisive is being able to get a lot of bandwidth, especially for video streaming and that if you can do that well, that that's more important. So that's why we've been so focused on the bandwidth economics and the volume. And so I think we're going to do well there.

Now we've also said that we think that latency is -- it is -- it's important, right? It's just not as decisive, but it is important. And so we've been working on multiple ways to be able to deliver low latency through our system as well. We talked for a while about doing services where we combine terrestrial and satellite.

We've got -- we've got our own beta tests of that in the market. And actually, it's gone pretty well. There's definitely technical complications there, but one of the things we found is that when we add low latency terrestrial to our satellite service, that people's satisfaction goes up. So that's good. So what we can do that. We've been doing it with wired. So that's generally been DSL. We are expanding to be able to do it with wireless. And I think that will allow us to scale that up.

And -- so I think the point being that LEO's not the only way to achieve low latency at scale. But I think that we look at it as kind of it's a sweetener or it's -- it can be a tie breaker for sure. But we think speed and volume is really the most important parts.

We have our next question from Rich Valera.

Let me add my congratulations to Rick and Mark on your new positions and best of luck in them. So just continuing on the IFC market. It sounds like you saw some improvement quarter-over-quarter. I guess, big in percentage terms, but I'm guessing in absolute terms still pretty well off of where you were pre COVID. I wonder if you could give us a sense of just where that business stands -- the IFC business relative to pre COVID levels?

And then just give us a sense that -- congrats on the KLM win, but could you give us a sense of what the rest of your IFC pipeline opportunity looks like? Is that pretty active right now? Are airlines in survival mode? Or are they looking at sort of next-gen in-flight connectivity at this point?

We're about -- we're still less than half. Running less than half of what we were running pre COVID. We went down for a while, Rick, it was down to -- we have different types of contracts with different customers. So it was early on, it was down close to 90%. But we're still under half. And as we recovered about 5 percentage points or so in the quarter from where we were in the previous quarter.

So we've moved up. What we're seeing is fill rates on airplanes increasing. And kind of what we're looking for, and they started a little bit this quarter, bringing some airplanes -- additional airplanes back online. And certainly, American has said they plan to start bringing some of the MAXes back online, hopefully, by the end of the year.

So that's really what's going to drive that growth back into that business. So one of the things that caused it to be off so much was we had so many terminal deliveries last year. Obviously, people aren't doing a lot of installation on the aircrafts right now.

So we expect that to start back up again early in the calendar year. So those are the -- those are the biggest changes. Our -- in terms of backlog. Our -- the backlog we had is still there. One of the things is it's mostly on new aircraft and -- or newer aircraft and the retirements that are occurring over -- around some of the older aircraft. So if everything was static, just from a share standpoint, we think we can pick up share.

And then like I said, the RFP activity is pretty broad. I don't think you're going to get -- you're not going to get us to talk about which airlines are going to make it and not make it or where they are, but the discussions are very, very active.

You guys just had a nice announcement with respect to the rollout of service in Brazil. Can you talk about the materiality of maybe your rural kind of Latin American service in general? I know you've already had an initiative ongoing kind of in Mexico and Central America for a while. But can you talk about in aggregate, the scale of that and when that might be a material driver of revenue in the service business?

No, it's not material when you say material, I don't know, I have to define material. It's not -- we certainly continue to be dominated by the U.S. residential business, but it's growing fast. So it's growing probably a little faster than we would have thought. We paused for a little while down there while we got some of the tools in place, but it's growing very fast.

So we think with that, we actually have launched kind of a small launch in Africa. We've got stuff going in Guatemala. We've been in Mexico for a while. With this Brazil add, it's pretty quickly. I think we're going to -- we're thinking about how to start showing numbers that include the international adds to our overall data. But we -- I'd say we're not quite ready to do that, but we'll be ready pretty soon.

I think we've announced that the [GSAT] program, which is a government program and we've announced some of those numbers a few quarters ago. But the residential process we just, like we said, we just finished the countrywide line. So we weren't quite ready yet to start throwing those numbers out there yet.

Yes. And I think one other thing to keep in mind, right, as far as Latin America, it really starts to scale and grow with ViaSat's rates with that additional capacity and reach.

Got it. That's helpful. And then just one more, if I could, on the government business, fantastic bookings there for the second quarter in a row. It sounds like you're pretty confident of seeing strong growth in the second half. Rick, can you just talk about what programs...

Our government business has been a mix kind of -- we've talked about for quite a while. One area is the tactical data links area. One area is the information assurance and cybersecurity area and the other is the satellite part. And I would say we're seeing good opportunities in all 3 of those areas. So it will be tech and data links business, very strong awards, first half, you can see we've got options exercised on the AMF satellite services business.

And the cyber and information assurance business is also doing really well. And one of the things that, I'd say, it's happening more and more is that we're seeing the integration of cyber with the satellite space that as people want security and monitoring services that go along with those connectivity functions. So those -- in general, those are the main areas. Does that cover what you're looking for, or you're looking for something else?

Yes. That's helpful.

We have our next question from Caleb Henry.

Mark, Rick. Congrats again on the new transition and the quarter. I have 3 questions. I think it's probably best if I just do them one at a time.

The first is that Viasat was listed as one of the eligible bidders -- or I should say having completed an application to bid on C-band in the FCC's upcoming December 8 auction. I was curious why Viasat chose to complete that application, seeing how you do not operate C-band satellites currently? What's the motivation there?

Optionality.

Okay. We'll leave it at there then. The next question. Going back to latency, you were talking about latency being beneficial, but not maybe critical or the end all be all. I was curious a couple of quarters ago, you talked about a prospective LEO constellation that Viasat would be interested in pursuing, possibly for RDOF. Can you give an update on the status of that? Is Viasat still pursuing RDOF? And what are the odds that you do go forward with a Viasat-owned and operated LEO broadband system?

Okay. So we can't talk about RDOF. So no comments regarding that. Now regarding our LEO, yes, we're definitely interested in LEO. And it's -- maybe it's too fine a point, but I would say speed and bandwidth are 1 and 2 in price -- speed, bandwidth, price. Those are 1, 2 and 3 but latency is probably 4. And what you'd like is to be able to deal with all of them.

And so what I think what we're looking at is what are the best ways to do that. And LEO is one of them. Now on our overall priority list, I would say, it's lower than the speed and bandwidth. But there are things -- there are things that we can do with terrestrial. So those are -- they're economical and they kind of check the box and some of our customers definitely appreciate it. There's no benefit to having longer latency, right? It's just -- there's definitely a benefit to having higher speed and more volume, right? So that's what we focus on.

So on the LEO, we proposed a system that is quite different from the others. It's much higher capacity per satellite, fewer satellites needed to get a lot of capacity. So we think that is important in itself because of the -- because people are becoming more aware of what the issues are with proliferated LEOs and space safety and spectrum sharing.

So I think one is we wanted to show that, that can be done. And the other is, I'd say, we're working on it. And we'll provide more updates when that's appropriate. We're still interested in it.

Okay. I wanted to go back to the C-band thing. You said, optionality. Can you give any more color on what exactly that means?

No.

Okay. I thought I'd try. And then my last one is going back to, actually, the satellite conference, I want to say it was satellite 2018, when Viasat was announced as one of the partners for O3b and power on phased array antennas and terminals.

Can you give an update on Viasat's work on phased arrays? Do you hope to have an antenna and/or a terminal available in the near term? And if so, what would the applications be for it as well as the price?

Yes. Okay. So yes, we are definitely interested in phased arrays. We've been working on it for quite a while. I think we only wanted to do it if we had something that was significantly different from the other efforts that were out there. And we do, and it's worked out pretty well. I think it will let us get high-performance and very attractive price points.

So we are working with some companies that would be buyers of NGS -- phased array antennas. So those would be the NGSO systems, but we're also working with prospective customers of our own. And when you're working with geosynchronous satellites, the main application for a phased array is mobility applications. So that's the area that we're kind of more focused on. And that -- it has multiple benefits. One is that -- one of the main benefits is that you can use a phased array with multiple satellites at once, if you build it well enough.

So one of the things that we've done, budget work on with DoD is being able to build a network management system that hops around among all the available satellites, whether commercial or government. So that's a really good example of a phased array application. There are similar things in being able to do hybrids between NGSOs and GEOs with other people's NGSOs. So that's another one of the applications that we're working on.

We also think there's a really, really attractive land mobile market with -- that phased arrays can open if they're low cost. And going back to the whole bandwidth issue, if you've got a lot of bandwidth then you can put in small undersized antennas that are really attractive in land mobile applications. So those are some of the things that we're looking to do with them.

And do you have a plan to roll that out as well as prices?

Do we have a plan to roll it out? Yes. Yes. I mean, we're working on -- yes, absolutely, we're working on...

We're not rolling it out. The main market for us is to expand the addressable market for our own services. Mark said we will work with other guys and do it, but we're not hawking our antenna out there with a schedule and a price on it. That's not the main purpose for what we're doing.

Yes, correct. Right, right. That's our -- we are working with some prospective buyers, and we're interested in selling antennas, but the main reason we've been working on is to augment our services.

Correct.

And we will take one more call from Mike Crawford of B. Riley Securities.

As you've seen more of these LEO constellations like Starlink, has any of your opinions been refined as to what type of bandwidth and capacity that might be able to get out of them such as once Starlink, say, gets more congested over a specific service area, what might be required to deliver residential broadband at 100 megabit per second speeds to not just 1 or 2 users with a tripod, but to tens of thousands of users?

Well, I don't -- okay. Personally, I don't think anything is real -- really surprising has happened with LEO systems. They have to go through all the same calculations that we do, which is how much bandwidth you have per satellite? How much do you need to give per person? Do I want to have a lot of people with a small amount of bandwidth, a small amount of people with a lot of bandwidth?

I mean, it's all the same. The thing that I think is becoming more evident is the difficulty of having a strategy of scaling by having enormous numbers of satellites. And there's just more and more concern about the orbital debris and collision risk problem.

And it's -- the issue is, I'd say, becoming more -- I think the sharper points being put on it because if you look at what's happened as a result of the collisions in low earth orbit already, that the debris from those collisions is it collides with itself and it creates more debris. And so European space agency put out a really thorough report in, I think, the end of September, that has a lot of detail on the orbital debris issue.

The FCC has had a focus on it. There was a proposed rule-making that they deferred back in March and April. And at that time, we were one of the -- maybe the only one, one of very few that supported the FCC's position. But in the comments that have been filed now, you've seen a lot more entities come in and say, wow, this is something that really needs to be addressed.

And I think that's -- that issue about how many orbital trajectories are really available. There's already contention for orbital trajectories and then the risks of satellites that are -- that fail in orbit, take a long time to deal a bit that contributes to the orbital debris risk. I think that is going to be one of the biggest issues in scaling the -- oh, it's not in making them work at all with the number of satellites you have. The issue is how scalable it is. And I think that's becoming more clear that, that's just going to be a really challenging issue. That's the main thing.

Okay. With your -- this Link 16 satellite, your lower satellite that you're building that extends Link 16 to beyond line of sight applications, which has the opportunity to open up a lot of your devices to be used in more broader fashion than been already today to get data to the tactical edge.

Is this a business where you might envision Viasat becoming a builder of many LEO satellites? Or are these satellites that could further extend Link 16 up to ViaSat-3 as well? Or what can you comment regarding Link 16 in space?

Okay. So the notion of extending the range of Link 16 through space is really pretty interesting. And you can see there's -- there are government, there's government programs talking the same thing. We won a program with the Air Force to build a prototype satellite for it.

The advantage is that there are many thousands and going into the tens of thousands and potential for hundreds of thousands of devices that are Link 16 capable. So if you can extend the range of communication, I think there's pretty good consensus that's a valuable thing, both for the -- for the devices that are on the ground and in the air, and at sea and also that's a space business.

So one is, we're really interested in it as an enabler for our Link 16 business. We think that, that makes that business have a much bigger addressable market, more valuable. So we would like it to exist.

And I think the work that we've been doing in payloads and delivering a satellite does certainly help to do that. I think the technical problems are more complex than just putting a Link 16 transceiver in space. And so we're working on those as well, again, as an enabler. That -- we're really interested. Yes, if we could make a fleet of satellites that does that, sure, of course, we're really interested in that. And we have other applications that we've been working with government customers that do involve that, that involve either sensing or communications satellites in space.

And so I think you're going to see us do more of that. But with a real focus on the payload and mission aspects of it, and especially the networking parts of those payloads.

Okay. And then finally, real quick, ViaSat-3 EMEA. Is that something you expect to launch in the summer of '22?

Yes, 6 months behind the Americas satellite. So the Americas satellite has -- basically, it's been the trailblazer for us. So when we surface issues, they've been on that one, but the EMEA one, as a result, it's pretty smoothly behind it. So that looks good.

Okay. That looks like that's all the questions we have. So thank you, guys. We'll see you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.