Yeah. Thanks. Good afternoon, everybody, and welcome to our earnings call for our full year fiscal 2020 and fourth quarter results. So I am Mark Dankberg, Chairman and CEO. And also on the call are Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our CFO; Robert Blair, General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich in Corporate Development. And as you may have seen in the press release announcing this call, this quarter we're introducing a new format for quarterly earnings, where the financial results and business discussion and other special topics that we normally would have covered in opening remarks and slides are now contained in a shareholder letter, that's on our website. So this should allow us to use the bulk of the time in this call for more in-depth Q&A. And before we start, Robert will provide our Safe Harbor disclosure.

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

Thanks, Robert. So as our letter described, we finished up fiscal year 2020 with record results, and we've taken some additional steps to make sure that we've got a secure financial position going forward. Unfortunately, this is against a really terrible backdrop of this ongoing global pandemic. I'm not going to spend too much time reviewing what was in the letter, so that we can get to Q&A, but I would like to highlight a few key points. So we set revenue, operating cash flow, and adjusted EBITDA records for fiscal 2020 and ended with our balance sheet in solid shape and slightly lower leverage than we had at the end of the third quarter. Our diverse portfolio of vertically integrated service and product offerings across multiple markets have so far largely insulated us from the negative business aspects of the pandemic, with our in-flight connectivity business being the only one materially negatively affected. While it's hard to predict the future impact of the ongoing crisis, we’ve continued towards our goal of shipping the first ViaSat-3 payload later this fall, but the pandemic does increase schedule risk in the form of supply chain and health-related disruptions. We have taken cost reduction measures earlier this quarter to address the downturn in commercial in-flight connectivity. We've been through other global financial crises before and we understand the importance of financial discipline and the potential for strong companies to emerge even stronger. We want maneuvering room to do so this time, and we will continue to act appropriately as the situation evolves. While we don't expect those cost actions to fully compensate for the downturn in in-flight connectivity, we do anticipate stability and growth opportunities in our fiscal 2021, and at this point better growth opportunities and adjusted EBITDA and in revenue. So that's it for opening remarks, and we'll be happy to take questions.

And our first question comes from Philip Cusick from JPMorgan. Your line is now open.

Hey, Mark. Thanks. Can you hear me?

Yes, I can, Philip.

Great. Thank you. Maybe start with the cost cutting that you discussed in the letter. What was done late in the quarter or early in the first quarter of this year? And how should that impact projects or spending going forward?

Yes, Phil. This is Rick Baldridge. We implemented several measures. We had layoffs of just over 300 employees and are undergoing additional furloughs in areas affected by the current work schedule. We have frozen salaries for a large portion of our workforce, except for those earning below a certain threshold. Hiring has also been generally frozen, although we still need to hire some critical positions. Additionally, we took steps to reduce or delay various overhead expenses, resulting in total cost reductions exceeding $100 million for the year.

Okay. Any, sort of, major…

The main focus of your second question is on in-flight connectivity and support. Those are the primary areas affected. Due to the downturn, there is significantly less demand for work in that sector, which is where we are seeing the greatest cost reductions.

We’ll be able to go ahead.

Should we think about any projects that are being put aside from the Aero business?

Not really. No. And as a matter of fact, what we're trying to do is, we think there's opportunities for additional new projects.

I assume one of those is the LEO constellation. Can you dig more into the, sort of, likelihood or timeframe of information of finding out if you're going to start spending that money and sort of range for us what that LEO constellation might look like?

The first step involves our recent filing for the NGSO constellation at MEO, which primarily aims to shift the orbit from MEO to LEO. Initially, our purpose for MEO was clear, but the driving reason for lowering the altitude relates to the FCC's funding focus on low latency specifications, specifically a threshold of 100 milliseconds. We have been closely monitoring the bidding rules for those subsidies, having previously participated in the CAF II or Connect America Fund subsidies. This experience gives us a solid understanding of the rules and their implications, including the low latency requirements. Some time ago, we started exploring what would be required to lower the altitude of our recently granted license. This change would necessitate more satellites compared to what we would have used in MEO, but the new satellites will be smaller and more cost-effective. The primary benefit we perceive is that, assuming the FCC permits LEO eligibility for the Phase 2 portion of the rural digital opportunity fund, the funding potential outweighs the increase in constellation costs. We are still in the early stages of this process; the first step was our amendment filing to allow us to utilize the already granted spectrum at a lower altitude. We've spent considerable time evaluating the trade-offs regarding service and bandwidth economics across various applications we are involved in. We have shared some insights in a letter and would be glad to provide more details if there are questions about it. The key takeaway is that the scalability and reduction in bandwidth costs are driven by network and payload advancements. Our recent progress enables us to achieve significantly more capacity through lower orbit satellites than has been accomplished before. We believe that having fewer satellites with greater bandwidth per satellite is a much more economical approach compared to having more satellites with less bandwidth and throughput. We are making substantial strides in this regard, which is the economic rationale supporting our filing.

Is it fair to say that without significant government funding, you wouldn't be planning to develop the low Earth orbit satellite constellation?

The funding is certainly the most obvious attraction to it. I wouldn't say that there aren't others, but that's a really big chunk.

Thank you. And our next question comes from Rich Valera from Needham & Company. Your line is now open.

Thank you. Good afternoon. Just a follow-up on the commentary regarding the cost cuts. I want to clarify the $100 million in annualized cost reductions; it seems that this amount will not fully compensate for the decrease in IFC revenue. Is that correct? I just want to ensure I grasp the scale of both the cost reductions and the expected impact from the decline in IFC flights?

Yes. It's really just over the next year that we can quantify this, but not everything will carry forward because some of these measures are temporary. For example, salary freezes won’t last indefinitely. So, you can't assume that all of this will extend into the future. Certainly, the headcount reductions we implemented should continue, but eventually, we will need to staff the business we have. Additionally, as mentioned earlier, our cost cuts did not completely counterbalance the impact we're experiencing in the IFC, nor the effects we expect in the IFC business outlook.

Got it. And presumably, that’s a blend of both service and fewer terminal sales. Is that correct?

Yes, correct. Yes.

Got it. You mentioned that you've had some success in redirecting bandwidth from IFC applications to consumer. Can you explain how seamless that transition is? Is it possible to do that on a one-for-one basis? I'm curious about how efficient that process is. Also, does this affect your timing expectations for the satellite fill as you approach the VS-3 launch?

We can indeed allocate and share bandwidth. We are closely monitoring the in-flight market to respond accordingly. One factor facilitating this is the churn in the residential sector, which allows us to predict how much bandwidth will become available and its locations. All of this information informs our forecasting, enabling us to adjust our mix of applications to better align with current demand. It's a straightforward process.

Got it. And then the ARPU was pretty impressive. Wondering if you could give any color on kind of what drove the strong ARPU and how we should think about that going forward? Is it sustainable or is there potentially even upside from these levels?

There are multiple factors that have contributed to the growth of ARPU. One is the shift from wholesale to retail that we previously discussed. Another factor is the migration of customers from older plans to newer ones, along with the churn of older customers being replaced by those choosing higher value plans. We haven't reached the peak of ARPU yet, but the growth rate in ARPU will be lower this year compared to last year because a lot of the migrations that contributed to ARPU growth have already taken place. Additionally, bandwidth is a crucial issue in delivering residential broadband service, particularly now as more people work or attend school from home, leading to increased demand for high bandwidth applications. There is also a significant trend of moving from broadcast TV to over-the-top broadband video, which is generating more interest in higher bandwidth plans among our newer subscribers. This interest likely contributes positively to ARPU this quarter compared to a year ago. Furthermore, many people who previously relied on mobile services at home are now finding their bandwidth insufficient, making them more inclined to consider services with better value for bandwidth, such as ours. In the short term, these factors will likely drive ARPU. However, as we aim for a broader market segment with ViaSat-3, we do not expect ARPU to continue to rise indefinitely.

Got it. That makes sense. Thanks for that, Mark.

You’re welcome.

Thank you. And our next question comes from Simon Flannery from Morgan Stanley. Your line is now open.

Great. Thanks very much, and thanks for all the information and the shareholder letter, very helpful. On ViaSat-3 and COVID, can you just talk about have you actually had delays so far, or are you just being cautious about the steps? And maybe you can just think about where the challenges are. Do you think you still have a shot of making that mid-2020, 2021 timing, or is it likely to slip later? And then maybe, Shawn, you can help us with some color as we think through the CapEx and margin implications as we run-up to the ViaSat-3 launch and beyond? Thank you.

Yes. I think we're being cautious. We've had a lot of challenges just in performing, because working on the payload requires both us and our subcontractors that have people working together. So we've been, I think, pretty resourceful on that, and it's held up pretty well. Not perfect, but pretty well. But there's going to be challenges. And as time goes on, we'll probably run into more people that get exposed to the virus, and that we'll have to work around. Do you want to add anything, Rick, to that?

I think we have one critical sub that was down for two weeks, as a result of – result that impacting their facility. But other than that they've just been minor.

Yeah. So – and Simon, I think as far as the CapEx, so you'll know that kind of FY 2020 was a little bit lighter than what we were anticipating. And so when I think about that for next year, I kind of plan on that uptick that we thought was going to happen in this year happen into next year. So I think that's a backdrop on the CapEx. And then when you look out, and I think the other point to that, which was clear in the shareholder letter that we talked about is, we think we're going to be able to stay comfortable within our target ranges on the leverage side, creep up a little bit with the normal satellite, in the cycles of the satellite, well within the target ranges.

Great. And then just one follow-up. There's been a number of the players in the industry have been under financial duress during the last couple of months. Do you think this might, kind of, lead to a realignment in the industry from a consolidation perspective, both through the satellite operators and the kind of the third-party providers, et cetera, and any opportunities for you to take part in that?

Yes, we're definitely attentive to the situation. If you observe the players facing the toughest challenges, you'll notice they operate under very different business models than ours. One critical issue that has emerged is the lack of alignment between satellite operators and distributors, such as those providing value-added services to customers like governments, airlines, maritime, or oil and gas. There is clear contention over margins and strategic value. Our vertically integrated model is strong and more straightforward, although it was difficult to develop and required significant investment over the years. It is functioning well and enables us to be fully aligned and focused on our customers. There are not many assets designed around this business model, making it challenging to identify targets for acquisition. Our primary focus is on gaining specialized skills or market access that can enhance our model. Additionally, we are concentrating on our bandwidth value proposition; few assets can match our productivity. While market repricing is something we are considering, it remains uncertain if other assets will approach our capabilities. Overall, we have been more focused on attracting customers rather than competing with rivals. Thus, it is unclear how this situation will affect our trajectory. However, I believe the industry will consolidate, and we will emerge with a strengthened strategic position. This is where our focus lies.

Okay. Thank you.

Thanks, Simon.

Thank you. And our next question comes from Ric Prentiss with Raymond James. Your line is now open.

Thanks. Good afternoon. I hope you, your employees, and families are all okay during this difficult time. I have a couple of questions. First, can you remind us of the target leverage zone you plan to approach? I believe you mentioned this in the shareholder letter. Regarding the timing of government contracts possibly being delayed beyond early fiscal 2021, does that suggest they may come in the middle of the year or during fall or winter?

Okay. So to start-up on the leverage question, I think what we typically said is, kind of, in the 3.5% to 4% range. So around the 4% range, so I think, is kind of that upper level. And then, as far as the government contracts, what we're just saying is kind of delays, its administrative delays. It's not losses. We're not seeing business contraction. Things are moving to the right within notional like weeks, not months, so it's kind of we get in that range.

The government bureaucracy is finding it more challenging to adapt to remote work compared to commercial customers. This is largely due to security concerns and the specific equipment required for their jobs. To alleviate the administrative backlog, improvements in processing and remote security, as well as increasing the number of personnel able to work from the facilities, will be beneficial.

Okay. Should still be able to ship than catching up, because you probably have built some of the stuff, it really is more just on the receipt side of it sounds like.

No. You also need to have government approvals at the time of shipment, and those can be a bit difficult to obtain. I believe everyone is doing their best, but it's unexpected and there’s really no precedent for this situation. I think that’s what the customer is working through, but there are issues on both sides regarding final acceptance and the issuance of final orders.

Okay. And you talked little bit about the Rudolph auctions coming up. First, can you remind us of how much cap to funding subsidy you were winners for and when that might start being received? And the second question related would be any concern on what competition for more cyber deeper into network might being either from Rudolph or future infrastructure build maybe coming out of COVID-19?

The current plan for Rudolph includes $16.4 billion for phase one and approximately $4 billion for phase two. Not all funds were awarded in CAF II, so we anticipate that some funding may shift from phase one to phase two, which could be substantial. The competitive dynamics for Rudolph will differ from those of CAF II, potentially due to increased satellite competition, which might mean some areas are not served. Our expectations for cyber participation in the RDOF auction are cautious, as it was limited in the CAF II auction, generally around 20% to 25%, but it utilized a significant portion of the subsidy. We constantly consider the overlap between our subscriber base and the subsidized areas as this evolves. While there is some correlation, it doesn’t have a major impact, and we primarily do not compete with fiber. The fiber market is growing; for instance, if it were to cover about 6 million homes, a 25% share would represent around 1.5 million homes, but we feel confident competing with most other areas effectively.

Great. Appreciate that color. And again, best wishes everybody at this difficult time.

Thank you, Rich.

And thank you. And our next question comes from Mike Crawford from B. Riley. Your line is now open.

Thank you. So Mark, just as FCC subsidies could make LEO business case tenable, can we look at the OneWeb constellation is being tenable if you consider the initial equity holders is basically subsidizing, whoever is going to pick up the pieces and build out the rest of that constellation?

Okay. So one is, I don't think I would go so far as to say that, an FCC subsidy would make a constellation in general tenable. The – if you're – I'm just – I mean, if you're drawing up, if you're investing $10 billion in a constellation getting $1 billion or $2 billion, probably not going be decisive and making that economically good. But if you know what the locations are, what the range of subsidies are, and you can design a system that's really kind of explicitly aimed at that, I think you have a way better shot of being able to do that. OneWeb, the big issue with OneWeb in the context of the subsidies, I guess, it doesn't have anywhere near enough total bandwidth over the U.S. to have a meaningful impact on that, while – well, while the low latency or laser requirement's are hard, the bandwidth demands that are associated with RDOF are priorities. Those are much harder. And so, I think bandwidth is going to turn out to be the low-value metric, and that's why we focused on that. So you got a lot – these systems are just in total lot of trade offs, and we don’t see other systems that have the right balance with trade offs that we could achieve with this particular constellation.

Okay. Thank you. And then related to LEO constellation, viability would be cost of ground equipment and particularly spot panel antennas. So do you see that as a hurdle that through brute force will be overcome overtime, or is that still just proven to be too elusive?

It's not going to be solved easily. It's a challenging task, but the notion of flexible beamforming is central to our work over the past decade. I believe we can succeed. We have significant advantages in the ground terminals for users and gateways, which will have a considerable impact on the economics. However, as indicated in the chart, we cannot ignore the issues related to lifetime and the limitations of clustering non-geosynchronous satellites over specific areas due to orbital dynamics. Nevertheless, I feel confident in our strength regarding the ground elements and believe we can effectively address the user terminal aspect.

Thank you. If ViaSat were to receive a subsidy and establish a small LEO constellation, it would likely delay your transition to generating positive free cash flow from the investments you are making in the ViaSat-3 constellation. You mentioned earlier that once the first two ViaSat-3 satellites begin operations, that is when you expect to transition to positive free cash flow and not look back. Is that still accurate, or when do you expect ViaSat to reach that point?

Sure. That's a good question, and it's definitely on many people's minds. No, it does not change. We have consistently stated that our revenue comes from deploying bandwidth into space and monetizing it. We do plan to build additional satellites beyond ViaSat-3, specifically ViaSat-4. This constellation won't need to be operational until 2026. We're anticipating that achieving positive free cash flow will occur with the second satellite in orbit, which will happen much sooner than the timeline for deploying this constellation. We understand the importance of reaching positive free cash flow, and we are fully supportive of that goal. However, this does not mean we will halt satellite launches. We are focused on whatever drives incremental returns, and having the opportunity to compete in an environment where subsidies might be available presents an attractive return. This will be one of the factors influencing our capital allocation beyond the first ViaSat-3 satellites.

Okay. Thank you very much.

Thanks, Mike.

And thank you. And our final question comes from Chris Quilty from Quilty Analytics. Your line is now open.

Thanks, guys. A question on the IFC market. And maybe it's a little bit generic, but how are you thinking about the market and its recovery? And sort of what actions are you seeing by customers in terms of their ability or willingness to install new aircraft, have they just signaled to you that, hey, we are on hold for the next several months, is there the possibility of the actual aircraft getting retired that are currently installed? And when do you think they'll get back to a more normal rhythm of installing aircraft?

It's challenging to generalize among different carriers since they have unique strategic orientations influenced by their individual business cycles and current situations. Generally speaking, for the carriers we collaborate with, there are two key issues. The first is ensuring their survival through the pandemic, maintaining their workforce, assets, and customer relationships. This represents immediate concerns. The second issue for the stronger carriers is assessing what post-pandemic recovery will look like and the role of connectivity in that context. Among the airlines we work with, both existing and new customers, there is a sustained and likely increased interest in in-flight connectivity. There is considerable discussion around the expected shape of recovery, with many carriers considering retiring older, less efficient aircraft, a trend we have already observed with some announcements. From our perspective, we are focused on newer planes, so we anticipate fewer retirements compared to other in-flight providers. For instance, there's not much talk about the MAX grounding, but the MAX is among the most fuel-efficient planes, and its return is beneficial for us. We also have a favorable position with the 787s, indicating a tilt towards newer aircraft. Consequently, we expect to see fewer retirements. Additionally, if some planes remain grounded and take longer to return to service, it presents a great chance to upgrade or install in-flight connectivity at a lower cost compared to fully operational aircraft, which is also recognized by carriers. This presents a solid opportunity for us.

Yes, given the number of aircraft currently parked, this would be an ideal time to install upgrades. However, with the main focus on preserving cash, I assume not much of that is taking place. My question is, do you see a path to long-term profitability for the airlines? If they are limited in passenger capacity and load factors, that could impact overall profitability. Where do you think they will make cuts? Will they reduce investments in in-flight connectivity services for customers? Is that something to be concerned about?

I believe that airlines generally do not view in-flight connectivity as a money loser. Instead, they see it as a potential money maker. Their aim is to improve fill factors, ticket pricing, and yield in variable pricing. Different strategies exist, but they are not fully proven yet. We have been emphasizing that airlines need high engagement in order to monetize in-flight connectivity effectively. This requires high bandwidth, which has been our consistent message. Some airlines are taking this more seriously and considering how to integrate it into their business models, and we believe we can assist them in that process. Historically, during tight financial periods, companies are more open to exploring new business models, and we have creative approaches to offer. The notion that we can collaborate with airlines to enhance their business models through increased passenger engagement and high bandwidth activities is gaining traction, especially given budget constraints. We will see if we can advance these opportunities with various carriers in the coming months, but it is clear that they exist.

That’s good. Thank you for the explanation and question for Shawn, I mean, have you seen any issues with bad debt?

Yeah. I would say that we did have a bit of pressure points in the infrastructure side of the business. And, I think Google recently filed one with bankruptcy, so we had a small amount, very small amount in the way we partnered with them there. Don't expect to see a lot more.

Great. And a final question here. I hate to ask the LEO thing, because it's kind of non-relevant in the near-term. But is there a regulatory precedent that you can cite of changing from a MEO to a LEO? I mean, I know SpaceX, for example, has done some filings to change the altitude of their satellite and they are fighting Amazon and others with what are relatively minor altitude changes. I can't recall an example, and I just don't know what the regulatory precedent would be for that kind of a shift. And this is a Ka-band system, correct?

Our filing is for Ka-band, and while I won’t go into extensive detail, the filings are public and available for you to read and understand our arguments. Essentially, these are primarily spectrum filings. The main focus is to demonstrate that the modified constellation would not produce any more interference to other constellations than what was expected from the original filing. This is the standard that SpaceX and others have adhered to when they adjusted their altitudes. Our filings include data that supports this claim, indicating that in some cases, we would create less interference even with more satellites at a lower altitude. The rationale is detailed in the filings, which contain charts and graphs that back up our arguments. In summary, the altitude change is not the problem; the key issue is ensuring compliance with the spectrum license.

Understand. Thank you.

Thanks, Chris.

Thank you. And our final question comes from Louie DiPalma with William Blair. Your line is now open.

Hi, Mark, Rich, Shawn and Bruce, good afternoon.

Hi, Louie.

Hi, Louie.

There have been a couple of questions about CapEx and leverage. Should we still expect CapEx for the next three years of fiscal 2021, 2022 and 2023 to be in the $900 million to $1 billion range?

Yeah. I think those range is okay, right? You're stepping into the sixth part of the ViaSat result from a milestone perspective with our subcontractors.

Okay. And Shawn, should it fall by like around 40% or so, like following the build-out of the ViaSat-3 APAC? Is that the type of CapEx cliff that you're expecting?

I think what I would say is, absent follow-on satellite investments and things we may do in the portfolio. It's, obviously, bringing down the satellite investment stack has a significant drop-off, yes.

Okay. Thanks. And…

Don't view CapEx as a fixed variable while everything else fluctuates. We will consider all aspects together. However, we have variables in our spending on CapEx, operating expenses, as well as in our revenue and earnings. We will analyze it all as a system. What Shawn has described aligns with our current assessment of the situation.

Got you. Thanks. And related to the government division, Mark, for any delays that may happen for government procurements in the near term, should we expect an elevated second half of the year, or do you expect some of the orders that you previously anticipated for fiscal 2021 to shift into fiscal 2022?

No, I think the point we've been trying to make is that it's difficult to predict the future right now. All of the strategies we've implemented to grow our government business are still in place and performing well. The main issue is that the execution of certain orders and the acceptance of certain products will be slow until people are either able to work from the office or adjust better to working from home. We believe this will be resolved by the second half of the fiscal year, which may result in some revenue and earnings being shifted from the first half to the second half. Overall, the government side is looking good, with plenty of opportunities. We recently won a $1 billion IDIQ contract, which is a strong indicator. However, some of our customers are still facing challenges due to working from home.

Sounds good. And related to the $1 billion IDIQ for the MIDS JTRS, I think during the quarter, BAE Systems, they announced the acquisition of Raytheon's Airborne Tactical Radios and Rockwell Collins GPS assets. Do these two acquisitions have any impact on your business? I know you compete with BAE Systems through their Data Link Solutions joint venture.

Yes. As of late 2016, BAE's business is largely represented through DLS. There was some overlap with our old UHF business and the Rockwell ARC-210 and Variant business, but that's probably the main area. They took over our competitors, including the old Magnavox and Fort Wayne businesses, and retained the ARC-210. From BAE's standpoint, this includes parts of Raytheon and Fort Wayne, with a bit of overlap, but it is not significant.

Okay. And final one for me, you announced an in-flight connectivity contract win for American Airlines' new Boeing 787s. Do you have anything brewing with Delta that you're able to disclose or did you have anything thrilling prior to the pandemic?

Louie, we are not going to comment on that. However, I can point out that our backlog of airplanes has grown, including some new customers. We are unable to announce anything currently, but our customers will make announcements when they are ready. We are still winning business, but we cannot comment on any specific airline.

Great. Thanks. Thanks Mark. Thanks everybody.

Thanks, Louie.

Thanks Louie.

Okay.

Thank you. And I'm showing no further questions. I'd now like to turn the call back to Mr. Dankberg.

Okay. So, thanks. Really appreciate everybody taking the time. Hopefully, we've got to spend more of it on your questions. And if anybody has feedback or would like to give us feedback on the side on our new format, we'd really appreciate that. So, with that, I look forward to speaking again next quarter. Thanks.

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