Earnings Call Transcript - VSAT Q2 2026

Operator, Operator

Hello, and thank you for joining us. My name is Mark, and I will be your operator for today’s call. I would like to welcome everyone to the Viasat Q2 2026 Earnings Conference Call. Now I will hand the call over to Lisa Curran. Please proceed.

Lisa Curran, Executive

Thank you, Mark. 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 Q2 fiscal year '26 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.

Mark Dankberg, Chairman and CEO

Thanks, Lisa. Good afternoon, and thanks for joining us today. With me, along with Lisa, we have Gary Chase, our Chief Financial Officer; and Shawn Duffy, our Chief Accounting Officer. As always, we encourage reading the shareholder letter and referencing the slides we posted on our website earlier this afternoon for more details. Our second quarter fiscal year 2026 performance and the imminent launch of ViaSat-3 Flight 2 reflect the meaningful progress we're making against our highest priorities and commitment to building value for our employees, customers and shareholders. We're especially pleased with our awards growth and cash performance, as we balance investing for future growth while reducing capital intensity. For Q2 FY '26, our net loss of $61 million improved from a net loss of $138 million in the second quarter of FY 2025, and was primarily due to favorable service revenue mix, lower depreciation and amortization and lower SG&A expenses. Revenue grew 2% year-over-year, led by a 3% growth in the Defense and Advanced Technologies segment and a 1% year-over-year increase in the Communications Services segment. Adjusted EBITDA increased by 3% year-over-year, as better-than-expected adjusted EBITDA growth in Communication Services was partially offset by an expected year-over-year decline in the DAT segment. We were hopeful to have already had launched ViaSat-3 Flight 2 by today, but the United Launch Alliance Atlas rocket carrying the Flight 2 mission was scrubbed last night due to an issue with an Atlas booster liquid oxygen tank vent valve. ULA is evaluating it and is now aiming to launch in a week. The launch of ViaSat-3 Flight 2 will be a very meaningful milestone for the company. An incredible amount of dedication went into preparing the satellite for launch, and I really appreciate the efforts of our entire team. We remain focused on getting both Flight 2 and Flight 3 into service as reflected in the accompanying satellite road map. As a reminder, each of the new ViaSat-3 satellites is designed to enable more bandwidth capacity than our entire existing fleet, with the unique flexibility to aim that bandwidth exactly where needed, creating opportunities to grow in each of our franchise businesses and to accelerate growth and drive meaningful free cash flow contributions in Communication Services. Our DAT segment outlook is promising, as backlog increased to a record of $1.2 billion, up 31% year-over-year and up 14% sequentially. The long-term growth trajectory is supported by several attractive secular growth drivers, including increased reliance on space-based assets for national security purposes, both domestically and internationally, which creates a growing set of global opportunities for the commercial space industry especially for dual-use capable systems. Increased demand for highly resilient communications, integrating both terrestrial and satellite and multi-domain operations that require seamless interoperability, as well as growing demand for digitized military infrastructure to support highly computationally intensive, autonomous, cloud-centric and AI decisions while simultaneously defending against increasingly sophisticated cyber threats. There's also the growing global recognition of the importance of sovereign control over those space systems; and finally, there's the increased integration of commercial and defense dual-use technologies together with the rise of non-terrestrial network connectivity, including direct-to-device mobile services. Not surprisingly, we're seeing a significant uptick in interest for commercial and mobile space networks that enable direct-to-consumer device non-terrestrial network connectivities. Given some of the market transactions we're seeing in this space and our own coordination agreement with AST and Ligado, it seems there's a greater appreciation of the value that we can create with our mobile satellite spectrum. The announcement we made in September regarding our intention to form Equitus with Space 42 and potentially other operators is an example of how we believe we can continue to build on the value of our large, coordinated and highly strategic global position in mobile satellite services, while managing and reducing capital intensity and creating meaningful competitive advantages. As I mentioned last quarter, we're continuing to opportunistically strengthen our capital structure, be it cash flow improvements, addressing debt maturities and conducting ongoing portfolio reviews. The Strategic Review Committee of our Board of Directors continues to evaluate our capital allocation portfolio priorities, including the potential merits of separating our government and commercial businesses within a competitive environment of government commercial dual-use and vertical integration opportunities. We're focused on building shareholder value and reinforcing our competitive positions, and we see accelerating deleveraging and collapsing debt silos and thinking critically about our portfolio as important components to that. We believe the overall strong start to our first half is an important proof point, as we compete not only for business success and outcomes but also for investor confidence and capital. Once again, we recognize there's challenges, but we're planning to win. So with that, I'll hand it to Gary.

Gary Chase, Chief Financial Officer

Thanks, Mark. Thanks, and good afternoon to everyone joining us on the call, and of course, a special thank you to the Viasat team for all the hard work that went into producing these results. I recently celebrated my 1-year anniversary here and have been reflecting back on the progress the team has made during that time. We laid down 3 key priorities for our financial journey that by now you know well: Build our franchises and earnings power, generate and grow free cash flow and set a path to a value-maximizing long-term capital structure. I'm really proud of what the teams have accomplished in the past year and very excited for all the opportunities that lie ahead of us. Our franchises are developing, and we've seen strong growth in aviation, government SATCOM and DAT, while we continue to win new awards that leave us with a backlog to underpin future growth in these areas. The teams have done a nice job stabilizing our maritime revenue base and creating growth opportunities with the development and market acceptance of a new multi-orbit solution that's at the same time, a great solution for our customers now and a great development of a key future-facing capability. We know we still have work in front of us on the fixed broadband business, and the capacity Flight 2 will provide supplies the bandwidth to enable progress there. Free cash flow is an even bigger highlight. On a trailing 12-month basis, we generated $147 million of it, and we've achieved positive free cash flow for 3 quarters in a row. As we get beyond the CapEx goals related to the completion of ViaSat-3, we see continued cash generation that will be the fuel we need to reduce leverage, optimize our capital structure and invest with discipline for the future. As a result of the first 2, we're better positioned to optimize our capital structure. We'll be opportunistic given market conditions but focused on achieving a desired end state that targets a leverage ratio of 3x net debt adjusted EBITDA or lower, where marginal borrowing costs tend to flatten and equity valuations are maximized. Our desired end state will also include a collapse of our debt silos. During the second quarter, the U.S. Bankruptcy Court approved Ligado's restructuring plan, including our agreement with Ligado and AST. Following the receipt of the first $16 million quarterly payment in September and last week's $420 million lump sum payments subsequent to the end of the second quarter, we intend to take the first step soon and repay the remaining $300 million under the original Inmarsat term loan B facility. This move will save about $23 million in cash interest payments annually. I'd like to thank the Viasat team again for delivering and making these things a reality. I'm proud to have been part of the journey thus far and excited for the great work we still got in front of us. Now let's turn to the second quarter. We generated revenue of $1.1 billion, up 2%, adjusted EBITDA reached $385 million, up 3%; and drove a 34% adjusted EBITDA margin. Cash flow from operations was $282 million, up 18%, with CapEx of $214 million, resulting in free cash flow of $69 million in the quarter. The first half was a good start to our fiscal year and there's still work ahead, as we focus on achieving our full year target and exiting the year well positioned for growth. We're committed to delivering long-term value and confident in our strategy, as we drive it forward. Before we dive into more detailed results, let me clarify that all my statements in this section will reference the second quarter of fiscal '26 and the prior year period comparable to the second quarter of fiscal '25. Awards were $1.5 billion, up 17%, led by Communication Services, including a large international dual-use satellite win serving Australia, New Zealand and key maritime zones. Backlog was $3.9 billion, up about $140 million despite the sale of our energy system integration business last year, which reduced backlog by $106 million. Revenue was $1.1 billion, up approximately 2%, reflecting growth in both DAT and Communication Services. Net loss was $61 million, an improvement of $76 million, principally due to favorable service mix, lower depreciation and amortization and reduced SG&A. Adjusted EBITDA was $385 million. The 3% increase was driven by strong operating performance in aviation, government SATCOM and InfoSec and cyber, tempered by fixed services and other and space and mission systems. Free cash flow remains a critical focus area, and we generated $69 million of it this quarter despite heavier cash interest payments bringing our year-to-date free cash flow total almost $130 million. Operating cash flow grew 18% year-over-year. We're laser-focused on driving the sustained and growing free cash flow in the years ahead and using it to retire debt is the best way to reduce the capital base of our business, driving returns higher, reflecting strong free cash generation. We ended the quarter at approximately 3.5x trailing 12 months adjusted EBITDA, a slight year-over-year and sequential improvement. Now let's turn to some segment highlights. In Communication Services, awards of $1.03 billion increased 35%, driven by government SATCOM, aviation and maritime. Revenue was $837 million, up 1%. Growth in aviation and government SATCOM was moderated by the sale of our energy system integration business in the prior year, along with an expected decline in fixed broadband. Aviation revenue grew 15%, led by an 11% increase in commercial aircraft in service, combined with higher average revenue per aircraft. With continued growth in our installed base of more than 425 aircraft in the last 12 months and with 2Q, our strongest order of installs since the fourth quarter of fiscal '24, we did see our backlog decline slightly to about 1,470 aircraft. We feel good about how we're competing. Our awards and wins were in line with our expectations, but the time to contract can vary widely from airline to airline. Aircraft are included in our backlog after they're contracted, and some of our deals take time to get to formal contracts. We have line of sight to backlog stability and/or growth ahead despite continued growth of the installed aircraft base. Our government SATCOM revenue grew 9%, reflecting strong growth with U.S. and international government. Maritime revenue declined 3% as vessels and service were down slightly. NexusWave orders were strong and installations were up 40% sequentially paced by vessel availability. With a much larger base of yet to be installed orders, we're focused on installations and expect the installed base to grow faster over the next few quarters. Nonsafety stand-alone L-band offerings continue to migrate to multi-band multi-orbit solutions like our NexusWave offering, and we expect L-band will continue to be an important component of those solutions. Our revenue base in maritime is relatively stable and will grow as our NexusWave installed base grows. We expect year-over-year growth in Maritime to resume by year-end. Fixed services and other revenue was down 16% as U.S. fixed broadband subscribers continued to decline as expected. We ended the quarter with 150,000 subscribers and an average revenue per user of $113. These revenue impacts, along with a higher mix of service revenue and good cost control drove Communication Services adjusted EBITDA to $337 million, up 6%. Turning to Defense and Advanced Technologies, awards of $467 million declined 9% due to a difficult comparison in space mission systems. SMS awards remained healthy but were extraordinary in the prior year with a number of large multi-year project awards. Excluding SMS, data awards grew year-over-year. More importantly, the book-to-bill in DAT was 1.5x overall and greater than 1.1x for each of our DAT business lines. We continue to see exciting growth ahead across the segment. Revenue was $304 million, up 3%, driven by growth in Infosec and cyber that was tempered by tactical networking. Infosec and cyber product revenues were up 14%, driven by high assurance encryption products. We're pleased with growth prospects in this arena supported by a healthy backlog, strong secular drivers and exciting opportunities to innovate. Space and Mission Systems revenues were down 1% year-over-year due to lower development funding for certain programs. Mark talked about how SMS is a promising growth area for us with strong secular drivers. We specialize in working through complexity and building cutting-edge capabilities for our customers, and we're excited for the future opportunity in this area. This quarter reflects some of the lumpiness from early development of innovative technology. As the market shifts to address needs for more sovereign dual-use and government purpose-built satellite communication systems, we believe SMS will generate the growing returns we've seen in other areas of our portfolio, similar to encryption and TrellisWare. Tactical Networking revenues, including TrellisWare were down 7% and partially reflecting lower IP licensing revenue in this quarter. Defense and Advanced Technologies adjusted EBITDA was $48 million, down $9 million despite good growth from Infosec and cyber, reflecting declines in SMS as well as higher segment research and development investments supporting future growth, along with declines in tactical networking. Overall, the quarter's results were good, and we're on track to achieve what we set out to this year. We drove growth in both of our segments, controlled costs, and drove strong cash generation after making efficient investments and innovation for future growth. Our ViaSat-3 Flight 2 is imminent, and we made good progress on our Flight 3 satellite. Let's move on now to our outlook. We continue to expect fiscal '26 revenue to be up low single digits year-over-year with flattish year-over-year adjusted EBITDA and expect continued variability quarter-to-quarter. We're pleased with the second quarter and focused on delivering not just the numbers for the year, but the business outcomes that are critical drivers of stronger performance in the years ahead. We've provided additional segment level detail in the Outlook section of our shareholder letter and slide. Let me take a moment to talk to the government shutdown. We're watching the U.S. government work through the budget and continue to see broad support for national defense priorities. The strength of our awards and backlog reflects the growing importance of our technologies and innovations to tie nicely to key secular trends in defense, including space, communications and security. Over time, we don't envision major impact to results. However, based on what we understand now, we estimate the shutdown in the third quarter may delay DAT awards of up to $100 million and impact DAT adjusted EBITDA by up to $20 million. We'll also need to watch the magnitude and duration of impact to flights in the U.S. system. That picture is just emerging as you see in the news today. But based on current information, we don't see material impacts to the year. 3Q is likely to see some impact. Our focus on cash flow remains, as does our focus on increasing the capital efficiency of our business. We continue to expect cash from operations to grow double digits for the year. We expect capital expenditures for the year to be about $1.2 billion, breaking down as follows: $200 million is capitalized interest, $500 million is maintenance capital spending, about $100 million is success-based, $250 million is related to the completion of ViaSat-3, and the remainder, we're investing in new products and capabilities. Approximately $400 million of this overall spend will occur within Inmarsat. On prior calls, I've indicated we expect to spend $250 million of CapEx on items that are both large and close in time to the launch of our ViaSat-3 satellites in fiscal '26. In the first half, we spent $50 million of this $250 million and expect to spend the remaining $200 million in the second half. Given the much larger spend rate for those items, we expect negative free cash flow in the second half. We'll provide updates tracking our spending of the remaining $200 million in upcoming quarters. Once beyond those payments, we expect to return to free cash generation and have guided to positive free cash flow for fiscal '27. For clarity, our free cash flow guidance does not include the anticipated free cash flow benefit from the Ligado lump sum payment, but it does include the benefit of recurring quarterly payments we expect to receive. During the quarter, we moved $175 million in cash from Inmarsat to Viasat. As noted previously, we expect the total funds will move over time to be $400 million to $500 million, including the $175 million just referenced. Our teams are working actively on our 5-year plan as we always do at this time of year. A critical focus of that exercise will be continuing to drive for the intersection of growth, innovation, capital efficiency and returns. We're looking at all areas of our portfolio and capital structure for value-accretive opportunities. In closing, in the fiscal year, we're working to deliver our commitments and to position our franchises for sustained and profitable growth and free cash flow with using capital requirements following the deployment of our second and third ViaSat-3 satellites. We're determined to close out the year strong and well positioned for the future. With that, I'll turn it back to Mark.

Mark Dankberg, Chairman and CEO

Thanks, Gary. So we think there's a lot to be excited about, including the forthcoming launch of ViaSat-3 Flight 2 and the progress to launch on Flight 3. We're building momentum with multi-orbit solutions across businesses that are very attractive for our customers, and we're being disciplined with costs and CapEx, which is building the foundation for strong cash generation. We believe there is tremendous value in our franchises as a leader in satellite infrastructure and connectivity, in-flight connectivity and critical military and government communication and defense solutions. So with that, let's open it up for questions, please.

Operator, Operator

Our first question comes from Brent Penter with Raymond James.

Brent Penter, Analyst

I appreciate the comments on the split and some interesting comments there regarding government commercial dual-use and vertical integration opportunities as well as the debt silos. So can you just update us what inning are we in, in terms of evaluating that possibility? And maybe you could just elaborate on those comments regarding vertical integration and the debt side of things.

Mark Dankberg, Chairman and CEO

Okay. I'm not sure I can provide a specific timeframe, but we are constantly evaluating our options. This process doesn't have a definitive end date. Regarding vertical integration and dual-use, we see examples of this both domestically and internationally in space systems, as the reliance on these systems is growing. However, the challenge is that these systems are costly, making it difficult for many countries to allocate such significant funds from their economies. A clear example of this is what Europe is doing with IRIS². It's evident that national security systems must also hold their own commercially and economically. We view this as a great opportunity for us and are benefiting from it. We are assessing the advantages of this compared to any potential benefits of a spin-off. These options are not mutually exclusive; we may find ways to connect them to maintain our competitive advantages while also developing potentially more attractive investment opportunities. This is the trade-off we are navigating regarding the spin.

Brent Penter, Analyst

Okay. Okay. That's helpful. And then spectrum value, you all talked about it and it's clearly getting a lot of attention right now given some of the activity in the industry. Just focusing on your international spectrum, can you all remind us what exactly you own in terms of megahertz and priority rights? And given some of the existing businesses on that spectrum as well as now the JV with Space 42. How open are you all to alternative ways to monetize that spectrum and maximize the NPV there?

Mark Dankberg, Chairman and CEO

In terms of our spectrum holdings, our positions are publicly available and clearly defined. The key advantage of our spectrum is its global reach, and we possess significantly more spectrum on a global scale than most other companies. This spectrum is currently utilized effectively in essential services such as maritime, aviation, and land mobility. These services are critical to nearly every nation, providing us with well-coordinated access worldwide, which is a unique advantage. We are focused on evolving these services to meet the needs of the aviation and maritime industries while also supporting network standards that facilitate a large potential direct-to-device market. Many upcoming applications that will drive these uses include vehicular autonomy, aeronautical autonomy, maritime autonomy, and edge-based AI applications, which will rely on both terrestrial mobility where possible and space capabilities. We are continuously assessing how to extract value from our assets, either through ongoing investment in the infrastructure necessary to utilize them or by exploring how others might leverage these assets, allowing for collaboration that can enhance value. We believe we have been responsible in managing this. We recently completed a transaction that we believe serves our best interests, which had been in development for quite some time. We will remain flexible and fair-minded while being mindful of our public interest obligations related to the spectrum, ensuring we utilize it effectively for both our needs and those obligations.

Brent Penter, Analyst

Okay. I appreciate all the detail there. And then final question for me on the topic of Equitus. Can you all just talk a little bit more about that project? And who you view as the ideal customer that this is going to be most appealing to? And I realize it's early, but any conversations you've had with other potential partners or customers? And then I would also appreciate any details you can give in terms of economics, CapEx and how we should think about that?

Mark Dankberg, Chairman and CEO

The main purposes of Equitus are to provide modern infrastructure for spectrum allocations that are specific to satellites or could support supplemental satellite allocations. The key factor influencing direct-to-device connections is the ability to link cell phones at the established power levels, along with advancements in the space segment that facilitate those connections. Typically, global constellations handle this, but there are also several regional operators. Thus, the concept of shared infrastructure is a practical means to extend access, allowing regional players to utilize that infrastructure more frequently than they could on their own. Equitus offers various advantages. For instance, operators would essentially only pay for the services they utilize within their regions, thereby avoiding costs during inactive periods elsewhere. The cooperative model allows for the sharing of infrastructure expenses. Additionally, operators who coordinate their spectrum with others can aggregate it, leveraging information theoretic principles to treat the spectrum as a unified block, which is the most economical strategy for enhancing capacity and minimizing airtime costs. We are currently in discussions with several regional operators, in addition to Space42, which covers a significant area, about two-thirds of the globe. Some regional operators are keen on maintaining sovereignty in their territories while managing costs effectively. One of our ongoing partnerships is with Europe, where we collaborate with the European Space Agency to establish a sovereign element within a global constellation, potentially much more affordable than standalone solutions. This serves as a good example, and while there are more partners we could mention, we prefer not to disclose their names at this time.

Brent Penter, Analyst

Okay. And anything you can help us out with in terms of sizing CapEx there?

Mark Dankberg, Chairman and CEO

No, I think we'll address that as we gain more clarity on the program. There are still many variables regarding its structure and our collaboration with partners. Therefore, at this stage, it would be premature to provide details on that.

Gary Chase, Chief Financial Officer

Just to emphasize Mark's point, we continue to discuss capital efficiency. Keep in mind that the concept of shared infrastructure is a significant idea in this regard.

Operator, Operator

Your next question comes from the line of Sebastiano Petti with JPMorgan.

Sebastiano Petti, Analyst

Just to follow up on one of the questions, Mark, regarding your global portfolio, the Space42 announcement mentioned that you'd be capable of supporting well over 100 megahertz of harmonized MSS spectrum. Is that accurate in relation to Viasat's global harmonized spectrum?

Mark Dankberg, Chairman and CEO

I think the 100 megahertz refers to the combination of what Viasat and Space42 have together that was underpinning.

Sebastiano Petti, Analyst

Okay, I understand. That’s helpful. Regarding the Equitus Space42, as you move forward and prepare for service launch within the next three years, when should we expect to hear more about partnerships with MVNOs, any additional investors coming on board, and what milestones we should look out for in the upcoming months and years?

Mark Dankberg, Chairman and CEO

I believe you're correct in saying that this will unfold over the next few quarters and years. We still have work to do with Space42, but we're making solid progress in defining it and facilitating transactions necessary for attracting additional customers and investors. There's a lot of interest, and we're starting to see discussions about the advantages of shared infrastructure, which seems quite logical. The key lies in the details, and that's what we've been focusing on for some time to ensure we can provide all the necessary information for real transactions. This includes clarifying what it means for various stakeholders, such as other operators, investors, and MVNOs who will utilize the system. We're making good strides in this area, and the next step is to finalize each of those details.

Sebastiano Petti, Analyst

That's helpful. I have one last question. Gary, despite the potential effects of the government shutdown on awards, revenue, and EBITDA, when we consider the overall business, one area where some people might have difficulty is understanding the backlog growth. The awards have been impressive quarter-on-quarter and continue to grow at a healthy rate. You mentioned that CS awards are up 35% quarter-on-quarter. Can you provide some insight on how the growing backlog might influence its recognition over time? We've discussed the book-to-bill ratio, but are there any additional metrics we should consider regarding your ability to monetize that backlog?

Gary Chase, Chief Financial Officer

I'm considering the best way to respond to that. We emphasize the metrics we believe are important for our future growth. You'll observe that, and I should also revisit some of our goals for this year. If you recall, we indicated that our focus wasn't solely on the numbers but rather on achieving certain outcomes, such as sustained growth in Aviation and Government SATCOM. We aimed for stabilization and a return to growth in our Maritime business. Additionally, we wanted to ensure we had access to Flight 2's capacity to address the consistent declines in our fixed broadband business. As I reflect on the year, I feel we are making good progress primarily in these areas. We are not closely monitoring specific numbers, but I am optimistic about our capacity to convert our efforts this year into future growth. We definitely have the backlog to support this, and the necessary capacity in some areas will be available soon with Flight 2.

Operator, Operator

Your next question comes from the line of Mike Crawford with B. Riley Securities.

Mike Crawford, Analyst

First, on HaloNet, that seems to be the commercial environment as something you talked about and advocated for quite some time. But is that something that's going to take a year or 2 to get off the ground because say, Leo sensor and low earth orbit would have to have in that center pointing it up to GEO and then it would signal get bounced back down to a gateway into the edge via your growth segment?

Mark Dankberg, Chairman and CEO

I'm sorry, Mike, I missed the very first part, which system are you referring to?

Mike Crawford, Analyst

HaloNet.

Mark Dankberg, Chairman and CEO

We're targeting several different markets with HaloNet. One of the initial markets we're entering is launch telemetry, where our aim is to handle space relay comprehensively. This includes aspects like launch telemetry, as well as the relaying of sensor data or other information from low Earth orbit to geostationary orbit and back to ground stations to minimize latency for earth-sensing and observation. We're also exploring shared sensor infrastructure. Additionally, our collaboration with Inmarsat focuses more on relaying tasking and command and control for satellites rather than the sensor data itself, which is crucial for timely information. We are also considering other types of space vehicles that are currently dependent on government assets that may be bottlenecked or phased out. Each of these markets has different communication paths based on their specific applications. Did that answer your question?

Michael Crawford, Analyst

Yes. You mentioned offering to earth observation companies the capability to receive data without waiting for a pass, allowing for quicker data delivery to the edge. I have another question, Mark. With your strong cryptographic and encryption capabilities, how does the rise of quantum computing impact those?

Mark Dankberg, Chairman and CEO

The first application is in what is referred to as quantum-resistant cryptography. A primary use of quantum computing is number factoring, which poses a threat to current cryptographic systems. Therefore, ensuring quantum resistance has become a top priority for secure infrastructure, prompting a significant update of secure systems, particularly in the U.S. but also globally. Additionally, the growth in our crypto business is significantly driven by the demand for data centers, which handle computations that are too intensive for other environments. For example, artificial intelligence is one such application, along with other big data needs. Quantum computing represents another way to address computationally intensive algorithms that will take place in data centers. This trend is increasing demand for data center cryptography. Moreover, there’s rising demand for cryptos on the user side, requiring networking flexibility to connect to the appropriate data centers that possess the necessary computational resources or raw data, as well as the required speeds and quantum resistance to combat evolving cybersecurity threats. Overall, several factors are contributing to the modernization of cryptography, increased speed, and the importance of achieving low power consumption and minimal footprint in data centers, especially given the rapid increase in overall speeds in these environments. Those are the primary drivers.

Michael Crawford, Analyst

And then just one last quick one for me is how are you accounting for the $420 million cash received on Halloween and the $100 million of additional cash you're going to get on March 31?

Shawn Duffy, Chief Accounting Officer

I can take this for you. This is Shawn. I think Gary kind of summarized up how we see the cash coming in. I think if you look at the earnings, we don't expect it to be a large impact to EBITDA. So most of the lump sum proceeds are going to go to deferred revenue, and they're going to get recognized over the life of the contract. The interest portion will come in, and that will come into interest income, which obviously is EBITDA neutral.

Gary Chase, Chief Financial Officer

We're still finalizing the details. You should see a chunk of that as well in operating cash flow when you see the next set of financial statements.

Shawn Duffy, Chief Accounting Officer

Yes. And we'll give you guys more details on that in Q3.

Michael Crawford, Analyst

Okay. So you're going to recognize $520 million of deferred revenue over 80 years?

Shawn Duffy, Chief Accounting Officer

There's a good portion will go to deferred revenue, but we'll also have a portion that will go to interest income.

Operator, Operator

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

Ryan Koontz, Analyst

I wanted to ask about the communication services backlog there, and obviously, Flight 2 going up and the capacity. How should we think about pent-up demand and timing? I know it's about 6 months from launch to service. But what percentage of that backlog in comp services would you say is dependent on Flight 2?

Mark Dankberg, Chairman and CEO

Actually, you won't necessarily see that come out of backlog. For example, growth in consumer services isn’t a backlog item for us. We have effective methods for estimating that growth based on service plans and pricing. Similarly, in aviation, we are experiencing more bandwidth consumption due to greater penetration or additional service plans, which will show up as air time. This will generate recurring revenue, but it won't come from backlog either. The same applies to Maritime, where we're noticing increased usage. Therefore, it will be reflected in ARPA or plane counts. You will see conversions of ships and airplanes, but that won't directly correlate to all revenue growth derived from it.

Ryan Koontz, Analyst

In aviation, there is more bandwidth consumption due to greater penetration or additional service plans, which will show up as air time. This will create recurring revenue, but it won't come from backlog. The same trend is evident in Maritime with increased usage. The impact will be reflected in ARPA or plane counts. While ships and airplanes will be converted, this won't directly correlate with all the revenue growth stemming from it.

Gary Chase, Chief Financial Officer

The continued growth of our franchises, including aircraft, vessels, and residential subscribers, is essential for availability.

Ryan Koontz, Analyst

Sure. So you've got the relationships in place. It will show up as more usage, but you haven't per se booked committed revenue in backlog for that capacity to come on, you just believe that it is there.

Mark Dankberg, Chairman and CEO

Yes. However, what we have as an example is considering how airlines approach their service plans. From that, we can determine potential penetration rates, airtime consumption, and viable airtime pricing models. Additionally, when we monetize these services, the subscriber statistics can influence advertising and promotional revenue, as it's integrated into the service relationships with those customers.

Ryan Koontz, Analyst

Makes sense. And another if I could just sneak it in. Just in terms of the aviation environment there. I mean, any updated thoughts on how you see that evolving? Obviously, it seems like changes happen every quarter. So I would love your thoughts on that, Mark.

Mark Dankberg, Chairman and CEO

Yes. The main trends we’re observing include greater penetration of airlines, with a focus on various types of airlines. There is an increased emphasis on providing fee-free services to support streaming, which is driving higher penetration. However, we anticipate some consequences that are becoming more evident, particularly concerning high-demand locations. We’ve noticed these effects for quite some time at major hub airports, as well as combinations of airports and seaports. Additionally, a key aspect of our business models is that although free WiFi in an airline setting is generally appreciated by passengers, if every airline offers the same free service, it leads to additional costs without any competitive edge. Thus, we are collaborating with airlines to explore how to achieve competitive advantage and differentiation beyond just providing free WiFi. This will be vital as we continue to implement various monetization strategies, especially as airlines recognize the necessity of connecting nearly all passengers with high-quality WiFi.

Operator, Operator

Your next question comes from the line of Colin Canfield with Cantor.

Colin Canfield, Analyst

As we think about the building blocks on Viasat shares, we just sort of run the following concept by you in terms of kind of like headlines that are out there, right, you have $50 of share value in the DAT unlock and then we have the organic SATCOM business, which just according to kind of the most recent investors are getting for free. So as we think about the precedent transaction of SpaceX and EchoStar, and the roughly $20 billion of value for, we'll call it, 75 megahertz of S-band. How do we think about ViaSat's 75 megahertz of S-band in that concept, right? And then within that, is it fair to characterize that deal is comparable, a; b, does the company have a preference of cash versus equity and c, kind of how does the management team think about the arbitrage opportunity of carrying something like that on the balance sheet? So a complex question, but basically, how do you think about spectrum and what's your preference on terms?

Mark Dankberg, Chairman and CEO

I think when you examine the terrestrial market, there are similar challenges in valuing spectrum. The primary considerations are whether we can make it available in the most modern and effective ways while fulfilling our public interest obligations and then generating value from that. Another consideration is whether someone else could manage it better and if we can establish coordination agreements or other means to collaborate. Additionally, in the terrestrial sector, alternatives to spectrum in terms of service economics or performance can include node splitting. In space, a corresponding concept to node splitting exists, which is influenced by beam-forming and satellite size. These are all contributing factors. Our main focus is on how to provide value to end-users while aligning with the interests of regulators who allocate the spectrum. We need to address all these issues. It's challenging to simplify this into purely transactional methods, as the circumstances surrounding different transactions can vary significantly. We're not going to speculate on various transactions, but we are concentrating on how to utilize the spectrum we've been allocated in ways that comply with our license obligations and provide value to our customers and shareholders. This is our primary perspective. If other opportunities arise that would benefit shareholders, we will definitely consider them.

Colin Canfield, Analyst

Got it. And turning to defense bookings, while the U.S. market shows strong performance, I'm curious about demand signals in Europe. There seems to be a concern about whether the IRIS timetable aligns with national security risks. Some recent awards indicate an increased interest in new constellations or capabilities. Could you elaborate on the additional government demand you are observing outside the U.S. and how you foresee this developing over the coming years?

Mark Dankberg, Chairman and CEO

If I were to discuss national security broadly, I see two main points emerging. One is a significant priority reflected in IRIS, which is sovereignty. Countries prefer not to rely on individual foreign corporations or governments for critical national security. This leads them to seek ways to obtain necessary capabilities without needing their own low Earth orbit systems. Instead, they want to achieve the desired effects with a sovereign approach. These capabilities typically include small terminals that can be rapidly deployed, resist becoming targets, are resistant to jamming and other countermeasures, and are cyber-secure. There is a specific set of requirements that is becoming clear, particularly with Ukraine serving as a case study for what is needed to defend effectively in a modern tactical environment. The key question is how to obtain these capabilities while maintaining sovereignty. Some solutions may involve infrastructure sharing, while others can be achieved with the right geostationary systems or even existing systems to varying degrees. These are the discussions we're currently engaged in: how to access these effects while retaining control, which are the two most pressing issues.

Operator, Operator

Your next question comes from the line of Edison Yu with Deutsche Bank.

Edison Yu, Analyst

Happy Friday! I wanted to come back to the spectrum. I believe you have quite a bit of spend in Europe. And I'm wondering if you can clarify the future intention with that? And if I'm not mistaken, some of it or all that comes up for renewal in 2027 and so curious on what you plan to do about that? Do you think you'll get all back and how you see that situation?

Mark Dankberg, Chairman and CEO

The S-band spectrum in Europe has its origins in a specific program. We hold a spectrum grant from the Inmarsat acquisition, and there is an ongoing process in the European Union to decide how to allocate that spectrum after 2027. We have submitted an application for this allocation, and it is currently being reviewed. As an operator, we believe we uphold the commitments made by Inmarsat when it was first allocated to us. In our application, we present a strong case for being a responsible steward of that spectrum, outlining our plans for ground systems, space operations, and user terminals. This is the current status, and the European Union is expected to allocate our portion of the spectrum, along with additional portions, within the next year or two.

Edison Yu, Analyst

Understood. I appreciate that. I wanted to come back on Flight 2 and Flight 3. Is there any way to dimension, let's say, you're fully up in service, how much of a growth bump or sales bump, whatever, that you'll get once those two are fully operational?

Mark Dankberg, Chairman and CEO

One way to think about it at a high level is that those two satellites together would essentially triple our bandwidth capacity. How we monetize that will depend on the mix of services and their locations. We're also very aware of our role as a leader in providing service level agreements, which means we need to pay attention to where the demands for those services are. I believe we've been successful in meeting our service commitments. It's important to identify any potential bottlenecks, but we have significant opportunities for growth with these two satellites. Additionally, we plan to purchase Flight 2 for the Americas and Flight 3 for the Asia Pacific, along with three Inmarsat satellites, GX789, to address capacity needs in high-demand areas in the EMEA region. We've also secured bandwidth from third parties and LEO systems. One challenge we face is the increasing demand for bandwidth per customer. Those are the factors influencing our strategies. When we provide guidance, we incorporate these elements into our outlook and aim for transparency regarding the growth in different areas. Currently, we see substantial opportunities, particularly in mobility services, where we have a competitive advantage and provide significant value. We're also utilizing fixed services to optimize bandwidth usage, but over time, we will gradually shift towards these higher-value services.

Operator, Operator

There is no further questions at this time. I will now turn the call back over to Mark Dankberg for closing remarks. Mark?

Mark Dankberg, Chairman and CEO

So just want to remind people that we remain very committed to building a solid foundation for accelerated and sustained growth, capital efficiency and cash generation. Our future growth outlook is underpinned by large installed base in a number of our markets, strong secular drivers across our different vertical applications and a diversified portfolio. We operate across one of the largest blocks of mobile satellite spectrum in the world. We've been a very responsible user of that spectrum since Inmarsat's inception over 45 years ago. We're dedicated to providing and evolving the vital services that our commercial and government customers need around the world. And we believe this drives meaningful upside value, including to associated with our spectrum position, and we've got a comprehensive plan to reinforce our competitive positions, drive returns and enhance shareholder value. So thanks, everybody, for your participation in this call, and we look forward to talking again next quarter.

Operator, Operator

That concludes today's call. You may now disconnect.