Viasat Inc Q1 FY2025 Earnings Call

My name is Meg, and I will be your conference facilitator this afternoon. I would like to welcome everyone to Viasat's First Quarter Fiscal Year 2025 Earnings Results Conference Call. I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Thanks, Meg. We will present certain non-GAAP financial measures on today's call. Information required by the SEC relating to these non-GAAP financial measures is available in our Q1 FY '25 Shareholder Letter on the Investor Relations section of our website. Please note that to provide a more meaningful comparison of our results of operations year-over-year, results for the first quarter of FY 2025 are compared against supplemental combined results for the prior year period. This supplemental combined results are based on the combination of Viasat's historical reported results with Inmarsat's historical reported results for periods prior to the acquisition with adjustments to reflect purchase price accounting. The conversion of Inmarsat's results from IFRS to GAAP and conforming changes to reflect Viasat's presentation of its results. The supplemental combined financial information was prepared to better illustrate or invest for the performance of our business following our acquisition of Inmarsat. Unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases relative to the supplemental combined financial data in our Q1 FY '25 Shareholder Letter on the Investor Relations section of our website. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and annual report on Form 10-K. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'll turn it over to Mark Dankberg, Chairman and CEO.

Good afternoon, and thank you for joining us today. Along with Lisa, we have Guru Gowrappan, our President, and Shawn Duffy, our CFO. We recommend reviewing the shareholder letter and the slides posted on our website for more details. I will briefly summarize the shareholder letter. Guru will discuss our financial results, highlights, and growth outlook, after which we will take questions. Our fiscal year 2025 first quarter results were slightly better than anticipated regarding year-over-year revenue and adjusted EBITDA growth, as outlined in the shareholder letter and slides. We are also taking steps to strengthen our capital structure while carefully investing and preparing for a promising future. Our ongoing services revenue, along with expected activations in aviation, solid defense and advanced technology orders, and our existing and new backlog and order pipeline allow us to raise our outlook for fiscal year 2025. We are satisfied with this quarter's financial results but remain focused on both our immediate and long-term goals, including addressing the ViaSat-3 F1 anomaly. We are making consistent progress to enhance our growth outlook. While all these factors are significant, our advancements on various fronts provide us with flexibility in how we tackle our challenges and opportunities. Our priorities include getting our satellites under construction into service, comprehensively addressing our capital structure, and reducing our leverage ratios. We aim to refine our business portfolio to focus on high-leverage satellite and network technologies that appeal to customers and partners, which will ultimately lead to strong recurring revenue. We want to continue integrating Inmarsat to improve returns on our network, harmonize our services and operations, and reach our cash flow goals. We are working to build a sustainable and profitable satellite operator partnership ecosystem to enhance coverage and capacity and boost multi-orbit capabilities. Additionally, we aim to secure and implement new defense and advanced technology programs that offer promising growth and lasting competitive advantages in crucial technologies such as ground networks, free space optical applications, specific phased array terminals, and space-based cybersecurity. We can turn these technologies into recurring revenue streams for commercial and government clients and foster a competitive partner ecosystem. Lastly, we want to establish a leadership position in the emerging direct-to-device services market by leveraging our extensive installed base of aero, maritime, and mobile users, along with developing 3GPP standards and open architectures. We seek to promote innovative business models that serve a vast base of satellite-enabled mobile devices and platforms while optimizing our mobile satellite services spectrum licenses and advancing L-Band to provide value to millions who rely on our services for safety and connectivity across air, sea, and land. Some near-term satellite milestones include the completion of thermal vacuum testing for ViaSat-3 Flight 3, marking an important milestone in integrated satellite testing. This week, we announced that ViaSat-3 F1 began commercial service over the Americas, achieving operational speeds exceeding 200 megabits per second for implied aircraft and is now being utilized for in-flight connectivity, covering new routes and improving services in existing areas. We demonstrated that our dynamic beamforming and terabit per second payload technology operates effectively. We expect our partner to soon launch the two Ka-band polar coverage payloads, GX-10A/B, which are anticipated to enter service in early to mid-2025. Remember, our financial results have been adjusted to give investors greater insight into business areas that are currently delivering strong growth, those facing challenges, and emerging sectors like direct-to-device and other advanced technologies that we believe are worthy of investor interest. Guru will provide additional details on the composition of our new segments and segment revenue breakdown for our quarterly performance updates. While we are keen on achieving our near-term objectives, Viasat has consistently planned for the future, which has allowed us to maintain growth for decades, develop key franchise businesses, and adapt our technology, business models, and market segments to uphold competitive advantages even amid significant technological changes and evolving competitive landscapes. We are balancing both immediate and long-term challenges and opportunities. Now, I will hand it over to Guru.

Great. Thanks, Mark. I will cover 3 topics: financial performance, our new segment structure, and an update to our outlook. Viasat generated good financial performance during Q1 FY '25. We earned combined revenue growth of 6% year-over-year and combined adjusted EBITDA growth of 16% year-over-year, driven by defense and advanced technologies and aviation. The positive operating leverage reflects strong revenue flow-through from IP licensing and tactical networking and advanced technologies and the continued benefit from our acquisition-related operating synergies. Now some color on the financial results. Q1 FY '25 revenue was $1.1 billion, up 44% compared to $780 million in Q1 FY '24. Combined revenue was up 6% year-over-year, largely driven by growth in our Defense and Advanced Technologies segment and Aviation. Net loss of $33 million for Q1 FY '25 improved compared to the net loss of $77 million in Q1 FY '24, primarily due to improved operating performance, which was partially offset by higher interest and tax expenses. Q1 FY '25 adjusted EBITDA was $404 million, an increase of 120% year-over-year. Adjusted EBITDA increased by 16% year-over-year from the incremental revenue flow-through in Defense and Advanced Technologies, which more than offset expected declines in fixed broadband service revenue and higher R&D expenditures. Q1 FY '25 capital expenditures declined 20% year-over-year to $301 million. Combined capital expenditures decreased 33% year-over-year, primarily due to lower satellite expenditures, customer premise equipment and general infrastructure costs. Sequentially, net leverage declined 0.1x to approximately 3.5x LTM adjusted EBITDA as of Q1 FY '25, which is substantially favorable to the plan at the time the Inmarsat acquisition was announced. We ended the quarter with $2.9 billion of liquidity, including $1.8 billion cash and cash equivalents at quarter end, and we have a fully funded path to our positive free cash flow inflection by end of Q1 FY '26. And finally, subsequent to quarter end, Viasat deployed approximately $150 million of cash to repurchase $152 million principal amount of Inmarsat and Viasat notes in the open market. We opportunistically repurchased $102 million principal amount of Inmarsat 2026 secured notes at an average price of $98.2, and $50 million principal amount of ViaSat 2025 unsecured notes at an average price of $99.2. Before we go further, I want to provide a bit more color on our new segments: Communication Services, and Defense and Advanced Technologies. We initiated the new segment reporting structure to give additional insight into our portfolio and drivers of value. Last month, we provided historical financials for the new segments and business lines. Our Communication Services segment includes all the businesses using our satellite network for connectivity services. All the Inmarsat businesses are included in this segment. Communication Services that comprised of: Aviation, Government Satcom, Maritime and Fixed Services & Other or FS&O. FS&O includes U.S. and international residential fixed broadband, energy, and enterprise. The majority of the segment is recurring service revenue. The product revenue is primarily related to terminal sales supporting services. The majority of our CapEx is for our satellite network, which includes space and ground enabling these services. The Defense and Advanced Technologies segment has 4 business lines: Information Security and Cyber Defense, which sells our type 1 encryption products; Space & Mission Systems, which includes antenna systems; Tactical Networking, which is mostly our TrellisWare subsidiary, of which we own approximately 60%; and Advanced Technologies & Other, which includes IP licensing revenue. Most of the revenue in this segment is product revenue, which includes IP licensing and can be lumpy quarter-to-quarter. The service revenue in the segment is primarily warranty and support for the products. The Defense and Advanced Technologies business line has low capital intensity. And we appreciate the feedback investors provided in this process. It is an important step in raising the visibility of our valuable franchises. We will continue to work to highlight and unlock the value that Viasat is creating for its shareholders. Now let's take a closer look at Communication Services performance during the quarter. Aviation continues to compete very well in the market. Commercial IFC ended the quarter with 3,750 aircraft in service, up about 16% year-over-year with over 1,460 aircraft in contracted backlog. We're also in the contractual process of adding about 350 incremental aircraft to the backlog, including from 6 new airlines. We achieved mid-teens year-over-year growth in both the number of commercial and business aviation aircraft and service. And while we are confident in the year-over-year growth outlook and trajectory for aviation, it's worth noting that we expect quarter-over-quarter results to reflect continued OEM delays and some impact due to the effects of the recent global cybersecurity software outage impacting our customers. U.S. fixed broadband revenue declined as expected, driven by fewer residential subscribers. We continue to deemphasize U.S. fixed broadband to support our rapid and higher-margin commercial IFC in aviation. Our Government Satcom business line announced we are expanding work with Airbus Defense and Space to integrate Viasat's dual-band broadband terminal, which is called the GAT-5530 into the Spanish MoD's C295 Maritime Patrol Aircraft fleet to provide a highly flexible multi-band, multi-orbit broadband Satcom capability to support missions utilizing next-generation SpainSat NG satellites. We are excited because the Airbus C295 aircraft is operated by 37 countries around the world with hundreds of aircraft in operation and hundreds more on order. We are seeing more international government products and service opportunities with Inmarsat. During the quarter, we began collaborating with uAvionix, a pioneer in certified avionics for crude and uncrude aviation to integrate Viasat's Velaris module into its compact muLTElink airborne radio system. Velaris provides secure, resilient L-band communications for commercial UAVs and enables real-time monitoring for Beyond Visual Line of Sight UAV operations. We believe L-band unmanned vehicles of all types are an exciting growth opportunity, especially as we modernize our L-band capability. NexusWave, Maritime's new hybrid multi-orbit managed service targeting commercial shipping customers brings global coverage, speed, capacity, security, and resilience to meet enterprise-class operational needs and crew welfare. NexusWave is building anticipation in the market and we expect to launch beta service during Q2 FY '25. In Q1 FY '25, Communication Services revenue was $827 million, up 48% compared to $560 million in Q1 FY '24. Combined revenue was down 2% year-over-year, driven by the expected decline in U.S. fixed broadband services and segment product revenue. Q1 FY '25 Communication Services adjusted EBITDA was $308 million, an increase of 98% year-over-year. Combined adjusted EBITDA declined 4% year-over-year, primarily from lower revenue flow-through from U.S. fixed broadband in the FS&O business line and Maritime Services. Now to Defense and Advanced Technologies performance during the quarter. Space & Mission Systems received awards of approximately $85 million related to multifunction phased array antennas, pre-space optics, and antenna systems infrastructure with supported services. Tactical networking received a tool that allowed activation of certain product upgrades. Once activated, we recognized IP licensing revenue on these products that have been sold over the prior few years. The business is expected to benefit from the ongoing sales but with substantially fewer units per quarter than we recognized in Q1 FY '25. Advanced Technologies also benefited from strong IP licensing revenue. There are 2 components to the current licensing revenue and annual fee, which typically occurs in Q1 as it did this quarter, and a per unit sold fee, which is distributed throughout the year. During Q1 FY '25, we benefited from both the annual license and the per unit component. And for the remainder of FY '25, we expect to generate revenue from the per unit component only. Information Security and Cyber Defense won awards for Type 1 encryption products totaling over $45 million, largely reflecting growing data center demand driven by geographic expansion and AI applications. Q1 FY '25 book-to-bill ratio was 1.2x with continued momentum into Q2 FY '25. In Q1 FY '25, Defense and Advanced Technologies revenue was $300 million, up 37% compared to $220 million in Q1 FY '24. Product revenue was up 45% year-over-year, driven by the strong IP licensing revenue in tactical networks and advanced technologies. Q1 FY '25 Defense and Technologies adjusted EBITDA was $96 million, more than triple the year-ago period, reflecting the value of the technology portfolio. Strong operating leverage from revenue flow-through in both tactical network and advanced technologies drove exceptional performance. Overall, it was a good quarter and a strong start to FY '25. Next, we are raising our outlook slightly to reflect strong Q1 results, confidence in our market competitive positions and pipeline, and despite continued aircraft OEM delivery. Our first quarter financial performance reflects our competitive solutions and strong execution in our Aviation and Defense businesses. Within our Defense and Advanced Technologies segment, we generated high flow-through IP revenue in 2 businesses. Our tactical networking business benefited from a couple of years of retroactive product upgrades in the quarter. We expect the business to continue to benefit from upgraded product sales going forward at a normalized level. Advanced Technologies benefited from annual licenses in the quarter. Throughout the year, we expect more modest per unit licensing revenue. Finally, because this is only the first quarter of FY '25, we are raising the low end of our FY '25 revenue and adjusted EBITDA outlook and maintaining our view of FY '26. For comparison purposes, we removed the $95 million revenue and $86 million adjusted EBITDA catch-up benefit from the litigation settlement from FY '24 reference results. Therefore, our guidance is based on FY '24 revenue of approximately $4.5 billion and adjusted EBITDA of approximately $1.5 billion. We now expect FY '25 revenue to be flat to slightly up year-over-year with year-over-year adjusted EBITDA growth in the mid-single digits. We believe FY '25 revenue growth, excluding an expected decline in U.S. fixed broadband associated with the ViaSat-3 F1 anomaly would have been up mid-single digits. We have also provided additional segment-level details in the outlook section of our shareholder letter. We remain prudent with our top line guide given uncertainties with delayed OEM commercial aircraft deliveries and airline overcapacity. In FY '25, we expect capital expenditures to decline to a range of $1.4 billion to $1.5 billion. We include capitalized interest in our CapEx guidance, which is approximately $200 million per year, but will decline in future years as we place satellites into service. We continue to expect our investments in our satellite network projects and success-based CapEx to exceed 2/3 of our total capital spend with less than 1/3 associated with our maintenance and general CapEx activities. Looking forward, we expect our investments in growth CapEx to continue to decline and generate an improving free cash flow trend. In FY '26, we continue to expect to grow revenue and adjusted EBITDA relative to FY '25 as the majority of our $3.4 billion assets under construction go into commercial service. Capital expenditures for FY '26 are expected to decline to a range of $1.1 billion to $1.2 billion. We believe FY '25 provides the foundation for multiyear accelerated growth in revenue and adjusted EBITDA growth and continued step down in CapEx in FY '26. As Mark mentioned, we are making steady progress on multiple fronts in support of the improvements in our growth outlook. We continue to expect an inflection point in positive free cash flow by end of first quarter FY '26. Our path to positive free cash flow is expected to be driven by double-digit operating cash flow growth and continued declines in capital expenditures as we normalized capital expenditure in line with satellites going into commercial service. Before closing, let me provide an additional update. As we discussed earlier in our prepared remarks, our new reporting segment structure was designed to better reflect the diverse and attractive nature of the end markets that the company serves, as well as introduce greater visibility into our performance and value drivers. As part of our initiative to provide additional transparency into our business, we will be holding a webcast teach-in on October 17, focusing on the Defense and Advanced Technologies segment, which houses our information security and cyber defense, space and mission systems, tactical networking, and advanced technologies business lines. The feedback was overwhelming that you want to learn more about this valuable part of our portfolio. We plan to cover the breadth of our technology, products and services in this segment, its unique business model, the market and competitive dynamics and expected future growth drivers. As Mark mentioned, we believe we have a proven, differentiated, and enduring competitive advantage with our attractive growth assets within this portfolio. Our objective is to help you become better equipped to value how our various businesses are contributing to Viasat's overall growth and profit profile. We hope that all of you will be able to join us via webcast. More details to follow later. In closing, Q1 FY '25 operational performance was very good. We are capturing our share of large and growing markets and are focused on improving operational and capital productivity, which is yielding positive operating leverage. While IP revenue in tactical networking and advanced technologies was stronger in Q1 than we expect it to be in the coming quarters, we raised the low end of guidance to reflect the Q1 outperformance and underlying strength of our recurring Aviation and Government Satcom businesses. Towards the rest of FY '25, we expect to continue to make significant progress on our satellite road map and towards positive free cash flow with good increases in operating cash flow and moderated CapEx. With that, I would like to hand it back over to Mark.

Thanks, Guru. We feel we're off to a pretty good start for this fiscal year. Thanks to the global Viasat team for all the work so far. There's been a lot of work on integration with Inmarsat and to overcome the ViaSat-3 Flight 1 issue, but we've made really good progress, especially in bringing that satellite into service and proving out the technology. We also believe that progress on multiple fronts is building the bridges for the opportunities in front of us. Okay, Meg, let's open it up for questions now. Thanks.

Your first question comes from Sebastiano Petti with JPMorgan.

I wanted to bring up a point mentioned in the shareholder letter, which you also addressed, Mark, regarding strengthening the capital structure through cash flow, extending debt maturities, and monetizing noncore assets. Could you provide more details on that? Is this indicative of a change in strategy, or does it relate to the adjustments in segment reporting? It seems like there is potential in non-satellite key performance indicators and businesses that might not have received enough attention. Additionally, on a different note, are we still on track to achieve the goal of having 4,200 aircraft by the end of fiscal 2025? Do recent developments impact this target, considering the healthy backlog you have?

So thanks for the question. And on the first point, really, we just wanted to make sure that investors know we're going to take a holistic view of how we address our capital structure. And so in doing that, we just wanted to let people understand that we're looking across the board. And also, the fact that we're taking a broad view gives us options in terms of the way that we address it. And certainly, we're focused on creating durable competitive advantage in building shareholder value. But we're going to take a holistic view. And I think it's really more just to remind investors that we're taking that view as opposed to a change in the way we're approaching the problem. On the insight, yes, we still have our target of 4,200 aircraft in service at the end of FY '25.

Your next question comes from the line of Griffin Boss with B. Riley Securities.

I'm interested to hear your thoughts on the feasibility of placing 12 small satellites in one geo orbital slot, similar to what Astranis is proposing. Additionally, could you compare the service levels that Viasat could offer with what Astranis is suggesting, which might reach up to 50 gigabits per second per omega satellite?

I find it challenging to fully grasp the strategy of Astranis, which makes it difficult to comment. One aspect to consider is that the definition of what constitutes a slot can differ from one organization to another. There are ITU guidelines and regulations aimed at ensuring safety and preventing collisions. This is an important consideration depending on how a slot is defined. There are various strategies for competing in space, and we maintain an open-minded approach regarding both large and small satellites. The competitive environment, access to capital, and available technologies will influence different companies' preferences. We are quite pleased with our strategies, which are based on a current assessment of the incremental value of assets we place in space relative to our entire fleet and the markets we serve. Our metrics for capital efficiency have evolved to consider the performance of whole fleets, including leased assets, rather than just the efficiency of individual satellites. The idea is that using satellites as a fleet increases their effectiveness compared to operating individually. We are observing this improvement as we incorporate more of the Inmarsat and third-party assets. I hope that clarifies this part.

Yes, that was great. I appreciate the insights, Mark. Now, could you compare and contrast Viasat's L-band spectrum holdings with those of other competitors and explain what the company has planned for Viasat's small GEO L-band satellites that are currently ordered with SWISSto12, as well as the upcoming satellites scheduled to launch in 2026?

We have previously shared information on our website regarding our L-band assets, including details about the Inmarsat acquisition. Our position is strong, largely due to Inmarsat’s focus on aeronautical and maritime safety, which has given us a significant inventory of L-band spectrum assets. Currently, we utilize various assets in space. Inmarsat acquired several satellites from SWISSto12, which contribute to our I8 portion of the constellation. Following this acquisition and in light of developments in the market for direct-to-device open architecture solutions and emerging 3GPP standards, we are looking to enhance our L-band modernization efforts for existing customers and explore opportunities in the direct device market, which is expected to be substantial. We plan to expand our L-band fleet strategy, although we haven't disclosed specific details yet. Regarding the I8, we expect those satellites to be operational by 2028.

Your next question comes from the line of Ryan Koontz from Needham & Company.

Great. Really nice progress on the IFC market there and lots of commentary about slowing OEM deliveries. And I'm wondering to what effect you've already seen that impact in your current growth rates? Or do you think that the growth rate for that business slows because of expected further problems in turning and receiving new aircraft?

That's a good question. The primary factors affecting OEM deliveries have been in play for quite some time, and we are already observing their impact. This has been evident for a couple of quarters now, and we haven't noticed any decline in delivery rates over the past few months. What we're witnessing is mainly a continuation of current trends, without significant changes in the OEM delivery landscape. There are a few challenges with the 737s, as well as some issues related to larger wide-body aircraft and engine concerns with Airbus jets. These are the key challenges affecting the situation; while they are not worsening, they are still ongoing.

And maybe to add on to that, Mark, real quick, Ryan. I think as Mark was saying, a little bit we've talked about is our deliveries to be a little bit more back weighted. But I think just to keep in context from the quarter-over-quarter performance, just from Q1 to Q2, I just wanted to kind of put a couple of things out there for everybody to kind of keep in mind. From Q1, this quarter, we had some really unique royalty and licensing agreements. Our portfolio there is extending more of that in our portfolio, but we did get a little bit of an uptick in this quarter. So next quarter, we'll see that tick down, but we will start to see benefits as some of the product revenues growth from Q1 to Q2 offsetting some of that. And then we'll see a bit of additional R&D expenses. So kind of net big picture is we'll see our revenues tick down from up $40 million quarter-over-quarter, just related to that royalty component and $50 million on EBITDA. But we're going to continue to see growth in our IFC, and we'll see our product revenues and IFC start to tick up as well, but more back weighted in the year.

Great. That makes sense, Shawn. I understand that clarification. I have another question for Mark regarding the integrated service offering. You mentioned the unified service offering announced with Inmarsat and now the hybrid offering with LEO partners. What technical challenges do you face with truly unifying the offering for your customer base, including Inmarsat, ViaSat, and third parties?

We are working to harmonize our offerings and extend them to the legacy Inmarsat fleet while upgrading Viasat's services. The main challenge is that there are two distinct networks: the Global Express network, which uses Ka-band for Inmarsat, and Viasat’s own network. We are currently focused on merging these networks. In the meantime, we can enhance the legacy GX services to some extent. We expect the full harmonization to take place over the next one to two years. The aviation sector presents additional challenges due to the need for FAA flight worthiness certifications, which can lengthen the timeline. In the maritime sector, we have more flexibility to implement multi-terminal solutions, allowing us to start harmonizing maritime services sooner, potentially as early as next quarter.

That's super helpful. And just a follow on to that. Do you look at things like WAN optimization and ESA antennas and these sorts of things as part of that solution for kind of multi-orbit and multi...

Yes. I want to clarify that there are two main components to this. One component involves how we integrate the entire existing fleet, whether it's in Aviation, Maritime, or Government sectors. Given the sizable installed base, we are dedicated to enhancing the service levels across this fleet. The other component is our plans for new installations, where we collaborate closely with customers. We have numerous new installations, particularly in the aviation sector with airlines, which helps us outline when we can install terminals that utilize advanced technologies. Additionally, we have the capability to upgrade the current fleet by incorporating features like multi-orbit on various platforms using the existing equipment, and we are leveraging both strategies.

Your next question comes from the line of Rick Prentiss with Raymond James.

A couple of ones. I want to follow up, Shawn, I think you said the royalty, but I wasn't sure if that was the royalty and the licensing had about $40 million revenue, $50 million adjusted EBITDA that were kind of more almost out-of-period stuff that we should think about dropping off. Was that for both the items that Guru mentioned, the royalty and then the licensing?

Yes, Rick. Let me clarify that for you. In Q1, we had a combination of factors affecting our tactical networking and advanced technologies, accounting for about 60%. I also want to highlight that as we transition from Q1 to Q2, we will experience additional product revenue growth. The net revenue impact from Q1 to Q2 is $40 million. I hope that provides more clarity.

It does. And the EBITDA effect was $50 million when compared to the $40 million revenue, is that right?

Yes, kind of the flow-through of that plus a little bit of incremental R&D, you could shape the EBITDA impact net about $50 million.

That helps. And then on the noncore question from earlier and in the letter, what would be considered noncore? Is it something that's not integrated in? Is it something that's not really using satellite capacity? But just trying to think of how would you slice up what you have right now as far as broad strokes, what's kind of core versus noncore?

We are primarily concentrating on the mobility and government markets. Our focus is on the technologies we have developed, which address the needs of government customers and, in some cases, commercial clients who may pay us to enhance our service delivery capabilities. These technologies include ground systems, antenna systems, and developments in phased arrays and optical feeder links, which are increasingly valuable. As cybersecurity becomes a greater concern in space operations, advancements that enhance cyber defenses may also prove to be strategic and synergistic with our services. However, it's important to note that some technologies may become less important over time. The key takeaway is that we are continuously assessing our technologies and we will not cling to outdated practices. This serves as a reminder of our evolving perspective.

Just open-minded and always watching, but core right now at least is mobility and government?

Yes. We're excited about the growth in the Defense and Advanced Technology sector, particularly because we're securing advancements in technology that we believe will be crucial for both defense and commercial markets, including low earth orbits, medium earth orbits, and geosynchronous orbit. We have new technology initiatives in all these areas, and the support they are receiving is a strong indicator of their competitiveness and value.

Makes sense. I apologize if this was asked earlier. What capacity do you expect to achieve with Flight 1? Also, is there an update on what Flight 2 and Flight 3 will cover? I'd like to get an update on that. I'm joining in progress.

When we first identified the anomaly over a year ago, we estimated that we might achieve up to 10% of the capacity. That assessment remains unchanged. We believe we've confirmed some of those initial assumptions, which is our current focus. We also want to remind investors that we might need to invest more in ground equipment to reach those targets. This is essentially our outlook. Additionally, the anomaly we experienced has validated our other technology, which is significant. This validation will enable us to bring new assets into service more quickly. We also believe it indicates that when we launch the new satellites, they will provide substantial value. The remaining two satellites will likely operate over the Americas and Asia Pacific, while the impaired satellite is expected to be positioned over the EMEA region: Europe, Middle East, and Africa.

That helps. And as we think about the margins in the Communication Services business, are we seeing kind of the third-party supply affect those margins since Flight 1 was capacity constrained, we'll move some capacity over to the Americas at some point. But the third-party usage, is that impacting margins to a noticeable amount on comm services?

I want to emphasize that we have been very focused on return on capital, which is something that investors have highlighted to us. One way we can enhance return on capital is through leasing instead of purchasing, and we are doing this very carefully. We believe it is important for investors and analysts to understand demand patterns, particularly in the mobility market, and where there is bandwidth demand. What's interesting is that different operators with varying customer bases perceive these demands differently. If operators exchange resources where one has a surplus and the other has higher demand, it could benefit both parties. We are looking into tools that would allow us to strategically lease bandwidth. The fact that we do not have all the bandwidth we anticipated with ViaSat-3 F1 is a significant concern for us, and we are working on increasing bandwidth. However, there is also a strategic value in this approach.

And Rick, if I was to add on to that real quickly. I think big picture is that our growth upside is more than offset that impact and it's been all factored into our outlook. I just want to make sure that's clear.

That makes sense. And one quick one, if I can squeeze one more in there. Earlier question about the L-band, but what about the S-band and maybe frame out when do you think direct-to-device becomes a ready for primetime noticeable material type of item?

Our spectrum holdings are mainly in the L-band, with some S-band in Europe currently utilized for the European Aviation Network. We have played a key role in establishing the Mobile Satellite Services Association, which we believe is worth looking into. The main idea is that expanding the direct device market significantly depends on the total available bandwidth. We have formed an industry association aimed at combining spectrum resources from various holders, both L- and S-band, to utilize them in a unified manner with common standards and open architecture. This approach benefits all operators in fulfilling customer demand at reasonable prices and creates opportunities for shared space and ground infrastructure that can accommodate multiple spectrum licenses. This strategy aligns with our goal of advancing in this market efficiently while achieving our capital targets and fostering growth. The market is already beginning to emerge, with some devices being deployed now and others expected to scale up this fall. These devices will feature chips compliant with the narrowband IoT standard, which will enable services like SOS messaging and notifications. We have initiated partnerships to support these devices in the U.S., and they are already operational, primarily for emergency location and signaling, with similar chips soon to be integrated into handsets. We anticipate this rollout within the next few months. The next significant advancement will be the introduction of the 5G new radio versions of these chip standards, which are still in the definition stage but are expected to be deployed by the end of 2025 or early 2026. We believe that the number of devices supporting basic functions will grow rapidly, and as new chips become available and more spectrum is allocated to this purpose, the quality and capacity of the services will also improve.

Great. It sounds like return on capital and positive free cash flow are the mantra. So I appreciate all that extra info.

Your next question comes from the line of Chris Quilty with Quilty Space.

Thanks for all the additional disclosure and putting out the prior financials or the restated financials prior to the quarter that was helpful. Quick question on the Maritime business. It looks like the terminal count continues to go up, but revenues are going down. Is that ARPU compression primarily happening on the legacy L-band side? Or are you seeing some on the GX? And can you talk about what you're seeing with Starlink competition in the market?

The decline in revenue is primarily not from Ka-band but rather from certain L-band services. We offer multiple L-band services, and they are experiencing varying impacts. The most significant drop is in fixed broadband, specifically the L-band broadband service, which has been declining for several years. Inmarsat has anticipated this decline, which constitutes the majority of the revenue loss. However, some L-band services may actually grow, and while Ka-band is still expanding, it’s not at the pace we would prefer, indicating that we have work ahead to address this. The NexusWave is our immediate focus for improvement, followed by the ViaSat-3 bandwidth. Additionally, I want to highlight that our efforts to prepare for direct-to-device services are expected to have a transformative and positive effect on all our L-band offerings. However, to achieve this, we will need to refresh the space segment. Our initiatives at L-band are aligned, utilizing shared investments and agreements based on open standards and open architecture.

And then, Chris, I just want to also note real quick before we move on. Just from a comparative perspective, when you look at last year, there was about $6 million of a take-or-pay benefit that came into revenue. So I just wanted to make sure you guys were aware that this was a one-time item.

Got you. And is NexusWave intended to be multi-orbit, but is it multi-frequency? And what are you thinking about partnerships on Ka non-GEO?

Yes, it is maritime, and there are several other areas where multi-orbit can be achieved at multiband. We are actively pursuing a partnership in this regard, as we want to capitalize on this opportunity. Some competitors are likely to perform significantly better and more simply with Ka only, so we are also addressing that. We expect to establish Ka-band multi-orbit partnerships as well, and in some instances, we already have these partnerships. Our goal now is to broaden this expansion.

And that, I guess, brings us to the flat panel antenna or the ESA. Are you designing one for both Maritime and Aviation Services?

One of the things we keep saying is that we don't have to do everything ourselves. We have some strong flat panel technology that we can utilize. Essentially, what people are finding is that phased array technology is not just a product, but products need to be tailored for different market segments, such as Maritime, aerospace, and ground, and then further differentiated across various platforms within those segments. While we will develop some technology in-house and believe we have excellent core technology—which is helping us secure government contracts and certain commercial agreements—we are also collaborating with supplier partners. We have been working on phased arrays and expect to have a combination of our own technology and third-party technology, likely categorized by application, band, and platform.

And if I can, final question, what are you doing in free space optics?

We're not going to discuss it in detail. However, I can say that what we're doing is different from competing with the FDA's interoperable standard for inter-satellite optical cross-links. We have some other interesting applications in this area that we've been developing for a while, with support from the European Space Agency and now increasing support from the U.S. We believe it's a fascinating application, but we prefer not to elaborate on it at this moment.

Your next question comes from the line of Louie DiPalma with William Blair.

Geopolitical conflicts have contributed to satellite broadband growth and tactical systems hardware growth for you and many others in the industry. What is the revenue exposure if U.S. funding were to decline under a new administration for weapon systems or communication systems relevant to some ongoing conflicts? Is that a risk for Viasat?

Yes, there are multiple risks involved. We face competitive risks and program risks, and there can also be risks resulting from changes in administration or policy. We consistently consider these risks in our outlook. Our perspective on future business in these areas is reflected in our outlook.

That makes sense. And Mark, you just hinted at a potential direct-to-device implementation in the U.S. perhaps in the second half of the year. In terms of Viasat's go-to-market, will you need a roaming partnership with one of the big 3 U.S. wireless carriers? Or will your implementation look similar to what Apple has with Globalstar and Viasat will get paid by either the handset OEM or chip manufacturer?

That's an excellent question. First, I'd like to clarify that we aren't in a position to speculate on Apple's plans. However, our viewpoint is that there will ultimately be roaming agreements between carriers. We anticipate that, similar to how terrestrial roaming currently operates, major carriers will have a network of roaming partners. This means that services are likely to become standardized, and the major carriers will establish agreements with nearly all entities capable of fulfilling those services. We believe this creates a favorable environment for us, and we are focusing on preparing for these business arrangements.

Do you already have a roaming partnership with one of the major wireless carriers? Additionally, how is your setup going to be implemented in the second half of the year?

What we expect is that when devices compatible with those carriers are available in the market, there will be interest in understanding the services that can be offered regarding quality, speed, and pricing, which will influence the roaming agreements. This situation remains uncertain because major device manufacturers have not yet announced their devices with this capability or confirmed if they are enabled. There are likely to be announcements in the coming weeks to months that could facilitate or finalize the potential for roaming agreements with carriers.

And one final one. And I may have missed this from earlier, but what is the full year forecast for the IP licensing revenue? I know you said that there was 2 different components. One had the annual fee and then there was the per-device fee, but what should we model for a general full year revenue?

Well, the one thing I'd say is that we have different forms of licensing agreements. Some of these agreements generate revenue from integrating a capability into a device that's sold, for example. Others involve annual fees. Currently, the aspects that will significantly influence the rest of the year are shipment-based licenses. As units are shipped and activated, we receive a recurring fee, which introduces some uncertainty. We have forecasts for this, but I can't share the specifics with you. Shawn, would you like to add anything to what I just mentioned?

Yes, I can provide some additional insight. As Mark mentioned, we have various agreements in place. Even those that may vary in timing still contribute to longer-term, multi-year recurring revenue streams. Looking ahead over the next few quarters, I anticipate that the quarterly rate will align more closely with an annual rate of around $20 million over four quarters. This pertains to both our advanced technologies and other segments, including our topical networking.

Since there are no more questions, I will now turn the conference back over to Mr. Mark Dankberg, Chairman and CEO, for closing remarks. Please go ahead.

Okay. So thanks, everybody, again, for joining our call. We look forward to speaking again next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.