Viasat Inc Q4 FY2022 Earnings Call

Hello and welcome to Viasat's Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. Your host for today is Rick Baldridge, President and CEO. Thank you for joining us today. I want to point out that we released our Shareholder Letter shortly after the market closed, and it is available on our website. We'll be referring to it throughout the call. So, joining me today on the call are Mark Dankberg, our Executive Chairman; our CFO, Shawn Duffy; Robert Blair, our General Counsel; and Paul Froelich, Corporate Development; Peter Lopez from Investor Relations. Today's call will consist of a few brief opening remarks, followed by Q&A. Let's have Robert provide our Safe Harbor.

Thanks, Rick. 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. Back to you, Rick.

Thanks, Robert. Fiscal 2022 was a great year for Viasat. We delivered the financial results that we targeted and communicated to our investors, continuing to execute on a number of very strategic and operational fronts. For the year, we achieved record revenue of $2.8 billion and record adjusted EBITDA of $611 million. Our revenue represented a 24% year-over-year increase, and adjusted EBITDA was up 15%, consistent with our guidance of double-digit revenue growth and mid-teens adjusted EBITDA growth. We hit our goals for the year. While we outperformed in the first three quarters, we anticipated Q4 would be sequentially softer based on factors communicated in our last call, including increased ground network costs for the upcoming ViaSat-3 America satellite, increased R&D investments, and changes in product mix. These were exacerbated by certain government secure product certification delays, as well as some sudden, but since resolved, supply chain issues that impacted certain government product shipments. Touching briefly on Satellite Services, as anticipated, we're seeing very good growth to date in our IFC business, with both aircraft returning to service and additional aircraft from new and existing customers. We also benefited from the recent RigNet and EBI acquisition. Fixed broadband growth was a little weaker than managed as we handle our limited bandwidth supply in the U.S. to support high-value data plans and growing IFC demand. In IFC, we are adding new customers and increasing tail counts with existing customers. We are particularly proud of our agreement with Southwest Airlines, which was announced subsequent to the end of the quarter. Despite bandwidth constraints in the U.S. leading to subscriber decline, we are steadily progressing in fixed broadband elsewhere. For instance, we recently surpassed the 50,000 subscriber mark in Brazil after only having nationwide commercial service there for about 18 months, lending us confidence in our ability to execute retail service launches in new international markets we're targeting. The letter does a good job of covering our government and commercial segments. Moving on to the ViaSat-3 constellation, we achieved several large risk reduction milestones in the past several months. The ViaSat-3 America satellite has completed vacuum extreme temperature testing at Boeing. We were pleased to see payload performance exceed expectations during testing. We should finish with the vacuum chamber by the end of today, allowing us to move the spacecraft out and proceed with the rest of our integration efforts. Alpha testing on the ViaSat-3 ground network has gone very well, and we remain on track to have sufficient infrastructure in place to launch commercial services, which we were targeting for early in our fiscal fourth quarter — within a week or so, as planned last quarter. The ViaSat-3 EMEA payload module is now complete and undergoing final testing at our Tempe, Arizona facility for shipment to Boeing, expected to occur sometime this quarter. Based on our experience with the America satellite, this second payload was completed at a much faster pace, with a more predictable schedule. The same is true for the third satellite, the Asia-Pacific satellite. Regarding Inmarsat, we continue to advance on various transaction milestones. Since our last quarterly update, we completed an agreement with the U.K. Government for specific economic undertakings that demonstrate our long-term commitment to the U.K. We filed the definitive proxy statement with the SEC and set a date of June 21 for a special meeting of our shareholders regarding the transaction. Inmarsat just reported another quarter of solid financial operational results, highlighted on page 10 of the shareholder letter, which can be viewed on their website. We expect to complete the transaction by the end of this calendar year, but the antitrust approval processes in the U.S. and U.K. present some delays due to the nature of their processes. In March, we completed a term loan for $700 million in financing, which was used to pay down our revolver, with the remaining cash allocated to continue funding the ViaSat-3 constellation. I remind everyone that we have all remaining transaction financing in place, fully committed at the time we signed our purchase agreements last November, including provisions that limit the impact of current debt market volatility on our ability to complete the transaction or achieve our financial targets. Looking ahead, our company-wide outlook remains strong, and we believe we'll achieve our standalone financial targets, including an average annual adjusted EBITDA growth in the mid-teens for FY 2023 relative to FY 2022, which we achieved for our last fiscal year. The quarterly revenue and EBITDA trajectory for FY 2023 will be weighted towards the second half as we ramp up commercial airlines in service over the course of the year to an anticipated 2,400 tails. As we begin commercial services on ViaSat-3 in our fourth fiscal quarter, we also have to consider normal seasonality and near-term certifications and supply chain issues we described. Longer-term, we believe we are on track to achieve more than double-digit adjusted EBITDA by FY 2025 relative to FY 2020 on a standalone basis. While we're excited about the upcoming ViaSat-3 launch and Inmarsat acquisition, our strong operational and financial performance demonstrates that our teams are focused on solid day-to-day execution. The same can be said for Inmarsat based on their results. With that, let's take your questions.

Thank you. Our first question comes from Landon Park with Morgan Stanley. Your line is open.

Great. Thanks for taking the questions everyone. I'm wondering if you can just confirm the actual launch timing for the ViaSat-3 satellite versus the late summer window given last quarter? And wondering if you can delve a little bit more into some mobility markets, maybe what you're seeing out breaking now that we're experiencing better demand in the oil and gas industry? And maybe touch on your ambitions within the business aviation market and where you're at with your ESA development?

On the ViaSat-3 schedule, it has slipped weeks since our last call. Right now, we're anticipating being in service by the end of the year and we're in early what would be our fiscal fourth quarter, so the January timeframe is what we're expecting now. It's been weeks, and what we have is a launch window, and where we fall within that window could slightly adjust this expectation. We've mitigated the fiscal slip for the delivery for launch a bit, though, due to the ongoing build-out of our ground network and testing; some of this testing we would normally conduct on orbit, we are completing with our existing satellites on our ground network. With that, we're trying to manage the impact, hence our expected early next year service launch. I'll discuss RigNet and the oil and gas market now. When we acquired RigNet, the value here isn't just about significant growth on the oil and gas side; it's actually about substituting bandwidth, which we really need from the ViaSat-3 satellites for how they conduct business and expand service offerings in their market segments. Thus, much of that growth will hinge on the need to get this constellation up and running. In the meantime, we are focusing on integration efforts with RigNet and also collaborating with Inmarsat to leverage some of the assets that RigNet customers are also Inmarsat customers.

Can you size that in any way?

Yes, we aim for a substitution model—not simply growth. In these markets, we prefer not to disrupt what's currently in place in favor of a more efficient and robust service. Instead of looking for 10% to 20% more from existing services, we’re aiming for significantly greater value or multiples of what they currently achieve. So yes.

Regarding synergy numbers and timing?

Most of the cost synergies that we've sought with RigNet revolve around stopping ongoing fees to other satellite operators and replacing that with our own capacity. These synergies will occur as we bring on the ViaSat-3 satellites.

Yes, business jets have also been growing for us and for Inmarsat. Our primary focus is to develop relationships with OEMs, as that’s a straightforward way to gain service opportunities. We’re additionally working with fleet operators to expand our market reach. We're also increasing our collaboration with distributors to make our services more attractive. The key takeaway in business jets is improving coverage with ViaSat-2, particularly over Europe, a significant market for us. The upcoming ViaSat-3, in combination with Inmarsat’s coverage, presents promising possibilities.

And regarding your ESA development?

From an ESA perspective, we've already performed a flight demo on a business jet as the first step. Currently, we are working on converting that demo into commercially viable products. A key focus for us in the commercial market is to develop a follow-on product that is multi-orbit and future-proof. We aim to apply these technologies also to the business jet and smaller regional aircraft markets. In essence, we're productizing what we demonstrated earlier.

Thanks very much, Mark.

It's also directly applicable to our land mobile markets in the future, encompassing many common elements.

I have a couple quick questions for Shawn regarding rates on the financing and some insights on the CapEx outlook for the fiscal year?

Regarding rates, I won't disclose all the specifics of the underlying agreement, but the framework is that our U.K. style deal overall informed the structure we had in place in November. It sets the framework with respect to protections built in at that time, giving an upper limit benefit in our outlook. Concerning CapEx, you can see that this fiscal year was lighter than previously targeted. However, as we step into the next fiscal year, we expect investment levels of around $350 million per quarter. This may see a little increase in the last quarters, but that’s a rough estimate.

Got it. Thanks, Shawn.

Thank you. Our next question comes from the line of Ric Prentiss with Raymond James. Your line is open.

Hey, everyone, this is Brent on for Ric. Good afternoon. A few questions. First, appreciate the updates on the ViaSat-3 timeline. I'm also wondering what are the current expected timelines for launch as well as in-service for the EMEA and APAC satellites?

We've said for a while that they are typically six months behind the primary satellite, but I would note the second one hasn't slipped as we experience delays over the past few weeks. So, it could come just inside that timeline. The expectation is that our third launch will occur around the year-end mark of calendar 2023, but it might slip into early 2024; our expectations are flexible.

That’s helpful. Regarding the OpEx spending, how much did you allocate in Q4 specifically for ground systems in ViaSat-3? And what’s the expected magnitude and pacing of OpEx related to ViaSat-3 preparations moving forward?

In Q4, the expenditure was approximately $7 million to $8 million, and that amount will continue to grow sequentially next year, leading to a full-year projection across the fleet of around $60 million.

Great, got it. Additionally, you’ve mentioned R&D spending and several exciting projects for government and mobility. Which projects should we be most excited about in the near, mid, and long-term?

The government projects likely have the closest timelines as they present opportunities to integrate new types of aircraft or extend our offerings to existing customers. Longer-term opportunities lie in both air mobility and land mobility markets, which are crucial. The air mobile market is still lightly penetrated, with commercial aircraft numbers growing from 30,000 to 40,000; we view the commercial air mobility market as particularly promising. The land mobile market also presents exciting broadband IoT opportunities, mirroring a lot of air mobility trends. Our goal is to maintain a presence in all subsectors of mobility which together add up to our target market of $1.5 trillion. This strategy ensures we continue driving bandwidth consumption and revenue, enabling us to enhance bandwidth productivity down the learning curve.

Thank you, that’s helpful. Lastly, regarding the Inmarsat timeline, what could potentially cause a deviation from your year-end timeline, and what are your primary concerns at this point?

That's essentially dependent on the antitrust reviews in the U.K. with the CMA and here with the DOJ. We’re producing tens of thousands of documents for these reviews, and it’s simply a matter of processing at this stage. We don’t foresee any major issues as our discussions have been progressing well, going into this with a solid understanding of the questions raised. The two processes differ significantly, and we've made strong progress with several countries in addressing their hurdles. Thus far, we don’t see anything indicating negative outcomes. We anticipate adhering to our previously communicated timeline of 9 to 18 months.

Thank you, everyone. Stay well.

Thank you. Our next question comes from the line of Ryan Koontz with Needham & Company. Your line is open.

Thanks for the question. Most of my queries have been addressed, but could you provide an estimated magnitude of revenue slip on the government side due to NSA approvals?

In Q4, we noted these pressures impacting Q4 into early next year, which is precisely what we are experiencing. Additionally, Q1 is seasonally a lighter quarter in that government segment, so we should weigh both those factors. When we think of the sequential performance, this issue will be a highlight.

In our previous discussions, we mentioned these delays moving out from the December quarter. The expectation is now that this will push into Q1 or Q2 of FY 2023; therefore, we might not see these products delivered until Q3 or Q4. Therefore, while we have not experienced demand reduction, we are merely navigating the certification process to enable delivery. We expect no overall demand reduction for those products, but a delay in their availability.

Got it. Thank you for the clarity.

Thanks, Ron.

Thank you. Our next question comes from the line of Louie DiPalma with William Blair. Your line is open.

Rick and Mark, good afternoon.

Hey, Louie.

Hey, Louie.

What drove the sequential decrease in Satellite Services revenue? Was it entirely due to lower subscribers on the consumer broadband side due to the capacity shift towards mobility? Or were there any one-time items present in the quarter that affected that decrease?

Hey Louie, this is Shawn. Primarily, we faced some pressure from fixed broadband that was offset by growth in LatAm. Additionally, there was a hint of seasonality from Q4 against Q3 in our ISP business, so keep that in mind.

Sounds good. With the expected launch of ViaSat-3, do you anticipate stabilization for residential broadband revenue? Or do you predict a continued decline in fiscal 2023, potentially offset by increases in aviation revenue?

Overall in 2023, for the first three quarters, we expect residential to continue declining as we allocate more bandwidth to IFC, following the anticipated activation of many aircraft, which will ultimately retract residential subscribers. However, in the fourth quarter, we expect to stabilize and begin growth again. We are optimistic about growing residential subscribers both in the U.S. and internationally going forward.

The initial pattern you'd see is stabilization followed by growth. It’s important to recall that when the IFC business was affected by COVID, we redirected many resources to residential to offset that. Now, with IFC recovering, we’re reallocating bandwidth once again.

So, you ultimately predict both U.S. consumer broadband subscribers and potentially ARPU to increase beginning towards the end of fiscal 2023?

Yes, we expect sequential growth in subscribers starting in Q4 as we acquire additional capacity. Regarding ARPU, this will depend on market conditions; one of the factors increasing our ARPU was the limited bandwidth we had. With increased bandwidth, we’re looking to implement better, more valuable plans. Some of these could come at higher prices compared to our current offerings, while others could be lower priced but provide improved capacity. We'll have clarity on ARPU trajectories as we launch these new services.

Regarding Inmarsat, are there any plans to develop a Ka-Band antenna compatible with both the ViaSat and Inmarsat networks, enabling international aircraft to operate efficiently with redundancy?

Indeed, we’ve designed our Ka-Band terminals to be compatible with a wide array of different Ka-Band satellites. While we haven’t fully utilized all compatibilities yet, we currently work on NBN satellites in Australia, Brazilian Telebras satellites, and various third-party satellites across Europe and Asia. In particular, our antennas are capable of working on Inmarsat satellites, and vice versa. There may be certain compatibility issues related to networks or modems we'll need to address on specific aircraft, but we have considerable flexibility to maneuver here.

Think of it as enabling roaming on networks, allowing movement between ours and theirs.

Thanks. One final question: Do you have a rough estimate of your backlog for aviation, specifically commercial aircraft under contract? I know you mentioned having 1,830 online with an expectation of 2,400 by the end of fiscal 2023. Any insights on the current backlog?

Currently, we have slightly under 1,000, and to clarify, this does not include the Southwest order.

Understood. Given the backlog, do many of your airline contracts include options for future airplanes or are they exclusively for firm orders?

All that’s in our backlog is for firm orders made to date. Some orders, like the Southwest order, include aircraft that have yet to be delivered to Southwest. The goal is to earn the role of preferred provider so that as they order new aircraft, they come equipped with our services. This is a fundamental aspect of our mission—to satisfy our customers and provide them with the best available connectivity and value, ensuring that future acquisitions maintain our equipment.

There are also strategies in place aimed at motivating existing customers to upgrade their fleets over time, ensuring steady growth in our order volume.

On the subject of airline contracts, has there been consideration for a potential transition to free Wi-Fi, and could you provide a ballpark estimate on the impact of average revenue per aircraft with such a transition?

Yes, that's been a significant discussion point. The airline industry has seen a recent shift toward recognizing the value of Wi-Fi connectivity, and the utility it brings to customer satisfaction. As they consider offering free Wi-Fi, it becomes critical for them to ensure reliable connectivity across their fleet, especially at hub locations. In conjunction with that mindset, when airlines consider Wi-Fi purchases, the potential to provide free service is part of the negotiation process. While this option could modify specific revenue numbers, it also leads to increased usage, which is positive for both us and the airlines. Hence, we are currently emphasizing working with airlines to ensure this service remains mutually beneficial.

Understood. Thank you. Finally, can you clarify the backlog estimate including Southwest? Would it look like around 1,400?

No comment.

There are many estimates of customer outlooks and no comment from us, but one can certainly look at the Southwest delivery estimates, which should give you insight into what we might capture.

It seems interesting because a couple of years ago you announced an order for United Airlines' 737 MAX—albeit small in quantity—now given their large MAX order and substantial option availability, are those orders part of your backlog too?

It's strictly the firm orders in our backlog that are included.

For context, our aim is to guarantee that services on currently equipped aircraft are compelling so our customers choose to upgrade their existing fleet.

Another point on this—what strategies are in place to evaluate airline contracts for transitions to free Wi-Fi? What potential impacts could this introduce?

Indeed. Our focus has shifted towards understanding how airlines will adapt Wi-Fi offerings in a way that enhances the customer experience. The concept of transitioning to free Wi-Fi acknowledges the overall trends toward widespread connectivity, leading airlines to rethink how they offer Wi-Fi services. When this occurs, it places increased importance on providing reliable service for the entire fleet, not just individual aircraft. So, our goal is to work closely with airlines to ensure our Wi-Fi services meet their needs effectively and consistently. Additionally, we will discuss potential estimates for average revenue impact per aircraft as this plan unfolds.

This clarity on backlog indicates a healthy position of just under 1,000 aircraft, not considering Southwest orders.

Correct. We have an excellent opportunity as the plan stabilizes.

Thank you. Our final question comes from the line of Milan — of Chris Quilty with Quilty Analytics. Your line is open.

Thanks. You mentioned that it's better for customers to communicate their strategy. One aspect to note in the recent Southwest announcement is they’ve typically been a Ku customer. Do you perceive this as a permanent transition toward a Ka-Band system for Southwest?

I don't believe this is strictly a Ka or Ku situation; it’s about providing Southwest with aircraft operating efficiently on our network. Our mission now is to deliver such a high-quality service that it would motivate them to convert the rest of their fleet to our offerings. That said, understanding their decision-making and supplier relationships remains essential.

Broadly speaking, when designing satellites and other space systems to optimize their capabilities, results must align with what we aim for service quality. Our goal is to enable them to maximize the features of our satellites for superior service delivery. Our mission is to support their needs while enhancing our service quality.

Understood. Shifting gears, regarding ground antenna segments—should we anticipate continued strong performance next fiscal year, slated to increase or level off? What factors do you see driving that growth?

Looking ahead, next year's component of growth is derived from IoT terminal deliveries, which will remain critical. We delivered around 450 this year, and we expect it to exceed 600 next year. We’re enthusiastic about that potential.

There will be slight softening in Q4 and Q1 metrics driven by demand schedules and also aircraft deliveries; systems will need to finalize certifications, which can create delays in improvement.

The ground antenna business had significant wins in this segment and can maintain continued momentum into the next year.

Chris, your question highlights a critical aspect: we receive business at different points, whether through government contracts, large antenna contracts, or airline wins. Timing influences the growth trajectory. The U.S. residential side isn't subject to these fluctuations and is feeding the inflight unit. Hence, the expected growth rate in FY 2023 can shift over quarters depending on those contracts and allocations.

Could you give us an update on your electronically-steered flat-panel antenna? What’s the market entry timeline, and how are you positioning relative to competitive products?

Our primary objective remains enhancing service efficiency through these antennas. We aim to design these not only as standalone antennas but to complement our service delivery, which represents a divergence from conventional marketing strategies. Some attributes of performance will reflect service experiences rather than merely connection strength.

Indeed, our efforts are more about the integration of services than standalone product sales. We’re building antennas aimed at delivering the best service rather than merely focusing on a flat-panel offer.

In some contexts, we foresee land mobile applications emerging first as models showcasing the technology we've flown on business aviation aircraft. Ultimately, our goal is in commercial aviation, which we will elaborate further as we near the launch.

To clarify the strategy, we are designing antennas focused on our service delivery, allowing for maximal capacity and flexibility based on our satellite architecture. This concept emphasizes a value-proposition driven approach—not just delivering an antenna.

Can you elaborate on your multi-orbit strategy?

Our multi-orbit strategy is intended to take advantage of the best attributes of each orbit. Our geo-synchronous satellites allow for effective delivery of substantial bandwidth, particularly in congested regions such as airline hubs; meanwhile, non-geo satellites provide lower latency and latitude for less reachable places. Our approach also flexibilities to serve hotspots or specific markets that we might not have anticipated.

Thank you for the insights.

Thanks, Chris.

Thank you. I will now turn the call back to Mr. Baldridge for closing remarks.

Thank you for joining us today. I’d like to express my gratitude for the participation of everyone on the call today. We understand there were numerous conflicts that made attendance challenging, and we appreciate the excellent questions. I'd like to emphasize a few points before we close. As we experienced in Q4 and throughout this year, we are constantly balancing investments and EBITDA for target achievement while securing capital for the ViaSat-3 constellation. Overall, we are excited about the anticipated launch of ViaSat-3, which is within our sights, and the operational momentum we have observed is strong and positive. The impending launch presents an exciting opportunity for us as it provides the much-needed capacity to enhance our service capabilities. I remind all that the Inmarsat acquisition aligns with our vision, enhancing our mobile focus globally. Our team remains committed to executing our plans for business expansion. We look forward to updating you next quarter with further details. Thank you.

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