Earnings Call Transcript - VSAT Q2 2021

Mark Dankberg, Executive Chairman & CEO

Ok, thanks for joining us today. Mark Dankberg, executive chairman. And we also have with us our president and CEO, John Duffy, our chief investment officer at Texaco, and all of them. So we hope you've had time to review our shareholder letter that we posted on our website that provides information on our second quarter financial performance, as well as a current overview. Today's call is primarily going to be questions and answers. So before we start, let's have Robert provide our books and Robert Black, general counsel for our department so that I can provide a safe disclosure. Thanks, Mark.

Robert Blair, General Counsel

As you know, this discussion will contain forward looking statements. This is a reminder that factors can cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on 10K information. Copies are available from the FTC or from our website.

Mark Dankberg, Executive Chairman & CEO

Okay, so before we take questions, I do want to point out that today we announced a request from the president and CEO and Hypercom executive chairman. So that's really the next step in the process we've been working on for a couple of years as part of our long-term approach to management succession. I know the CEO title for almost 35 years has really been doing most of the executive management for the last few years, and I'm really happy that he's accepted the CEO position. We've been a close team in building ViaSat for more than two decades. And so I think this is really, truly going to be a seamless evolution. He's got the confidence of our people, our customers, our board and our investors, and it's a great outcome for the company. Personally, I'm not going anywhere. By taking on the CEO position, I'm going to focus more fully on our technology and business strategies and also on the overall space regulatory environment, which is essentially being figured out on a national and global scale in real time. Now, what I've been doing most of the time for the last couple of years anyway, so congratulations. And now over to you.

Rick Baldridge, President & CEO

Thanks, Mark. I would like to say it's been a great ride, but I really think our best years are still ahead of us. I think we've captured the transition and the shareholders. Let's just say that I'm looking forward to the challenge and I appreciate the confidence of the board and especially Mark. So now for the fun part, we've had a great quarter and continue to face challenges for all of us, but we've managed to do really well so far, even with some tailwinds that were supposed to be without some tailwinds. This year, we're exceeding expectations across the rest of our business. One and a half billion dollars in orders for the first half of the year, over two billion dollars in backlog, not including another nearly three billion dollars in awards that still haven't been given details. Government services are in outstanding shape. Overall, we had a 1.7 book. The first half of our fixed broadband business has been a great source of strength for us in the US, and now we rolled it out completely across Brazil. Even in the IFC, we continue with our market share momentum, which is exciting. The new Windscale and KLM that we just announced. Both the three continues to evolve with some minor central slogans, mainly due to the pandemic's impact on us and our suppliers. We're ready to hand over the payload to Boeing and we zoom in on one year before our first launch of the first three satellites. We're looking forward to what we think will be a really good year for growth. So it's set up for an exciting twenty twenty-two as our constellation begins to enter service. For that, let's go on to questions.

Operator, Operator

Thank you. Presenters, at this time, for the purpose of Stotsky question, please press star one on your telephone keypad. We have our first question from Rick Prentiss. Your line is open.

Rick Prentiss, Analyst

We're glad you're not going anywhere. Also doing good work with you, Congressman. We'll talk some more high level homes for sale in the afternoon and early season, a lot of movement on the in-flight connectivity landscape out there, Intelsat proposing to buy Global Inmarsat with a collaboration with Hughes. Take a second. Just walk us through the business code. It obviously has had it. How do you see the timeframe for recovery? How do you see the competitive landscape coming off?

Rick Baldridge, President & CEO

Well, you know, we're moving from a recovery standpoint. Obviously, the airlines are leading the way. We're talking to each one of our customers and getting their feedback. They're very cooperative and sharing kind of celebrates what they expect rates our aircraft retirements when they plan on, you know, having their Max's back in. So we're following their lead. We had a little uptick in the summer, and quarter over quarter, we were up a little. And we're seeing a bit more demand from some of the guys, saying it’s going to take, you know, three or four years to fully recover. So we're watching that closely. We have an outlook for the future. The encouraging thing for us is that through this cycle, we've continued to see a bunch of RFP traffic. With airlines we’re not yet working with. So the KLM win was something we actually had a quarter or so ago, but we couldn’t announce it until now. We have more and more airlines adding to the cycle, and we’re encouraged by that. I think people want high-quality service. I give a lot of different views from industry analysts in terms of recovery. They seem to be all over the map. Quite frankly, we have our own outlook. But, Mark, do you want to talk about what's going on with the other players in the industry?

Mark Dankberg, Executive Chairman & CEO

No. You know, I think that our approach, which is vertically integrated and based on a lot of usages, is the right model. I think we're still really well positioned in that. I think there's going to be a business model evolution. One of the things that we pointed out in the letter is that we're doing more work with some of our own partners and being able to offer passengers more free services. We’re trying to come up with a way to make in-flight connectivity a revenue source for the airlines instead of a cost center. I believe that is a significant competitive advantage for us. That's our focus in the near term. I think we're more focused on that than what's occurring with competitors.

Rick Prentiss, Analyst

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

Rick Baldridge, President & CEO

Yeah, I wouldn't be surprised.

Rick Prentiss, Analyst

Ok, and the second high-level question, we are obviously you probably are getting tons of questions about Elon Musk's SpaceX, Starlink beta test. Can you talk a little bit about how you view the beta test? How competitive is it, and what does it mean to your kind of game that you're running out there to help us shed a little light on your view of the beta test?

Rick Baldridge, President & CEO

Yes, sir. So one is, we've been expecting them to roll out a statement saying they're going to do it. That's pretty much what we thought they would do. It's still a hoot, but we expect that they're going to manage things so that the service is good. I mean, they have a small number of users on a lot of that, so it should be really good right now no matter what. And so that's what we're expecting. But there's also a lot of demand in the market now, already more than we can serve. What we've seen is every time we've made a meaningful improvement in the speed and bandwidth that we offer, our addressable market is growing. We can sell more services into areas that we didn't sell before. So ViaSat three is going to make major improvements in both speed and bandwidth. We expect the market's going to grow significantly. Obviously, that's what they're intending to do, to offer more stability to the market. We think the market will grow from what it is now and we'll get our fair share of that. I want to point out that we already have tens of thousands of subscribers that have 50-100 megabit per second plans, and they're pretty happy. We have room to be competitive in the Internet even before ViaSat three to the extent that we choose to. And also, you know, we've been pretty clear that we think that lots of bandwidth for streaming video is going to be a really important factor in many buying decisions, and that's going to be a rapidly growing reason for growth. That's how we think we're going to do really well there.

Rick Prentiss, Analyst

And how important is latency? Because obviously the lawyers make a point that they have lower latency than the geos. How important is that in the marketplace?

Rick Baldridge, President & CEO

As you say, latency is important, but we don't think it's decisive. The thing that we've seen that's the most decisive is being able to get a lot of the analysts, especially for video streaming. If you can do that well, that's for sure. That's why we've been so focused on the bandwidth economics and the volume. I think we're going to do well there. Now, we've also said that we think that latency is important; it's just not as decisive, but it is important. We’ve been working on multiple ways to deliver low latency through our system as well. We talked for a while about doing services where we combine terrestrial and satellite. We have our own beta test of that in the market, and actually, it has gone pretty well. There are definitely technical complications, but we found that when we had low latency terrestrial to our satellite service, customer satisfaction went up. That’s good. So we do what we can do that. We’re expanding to be able to do that with wireless. I think the point is that it’s not the only way to achieve an advantage at scale, but we see it as a sweetener or a tie-breaker for sure; we think speed and volume are the most important parts.

Rick Prentiss, Analyst

Great, thanks, guys. And congrats again.

Operator, Operator

We have our next question from Rich Valera. Your line is open.

Rich Valera, Analyst

Thank you. Let me add my congratulations to Rick and Mark on your new positions and best of luck in the suit. Just continuing on the IFC market. It sounds like you saw some improvement quarter over quarter. I guess big, big in percentage terms, but I'm just in absolute terms, still pretty well off where you were. Pretty cool. But I wonder if you could give us a sense of just where that business stands, the IFC business relative to what levels. And then just give us a sense of congrats on the scale then. But give us a sense of what the rest of your IFC pipeline opportunity looks like. Is that pretty active right now? Are airlines in survival mode or are they looking at sort of next and in-flight kind of activity at this point?

Rick Baldridge, President & CEO

We're still running less than half of what we were running. This coming down for a while, it was down. Early on, it was down to nine percent, but we're still under half. We recovered about five percentage points or so in the quarter from where we were in the previous quarter. So what we're seeing is a range of airplanes increasing. What we're looking for is that they start a little bit clearing some airplanes back online. Certainly, American said they plan to start bringing some of the Max's back online, hopefully by the end of the year. That's really what's going to drive growth back into that business. One of the things that caused the office to decrease so much was all the thermal deliveries last year and obviously people aren't doing a lot of installations on aircraft right now. We expect that to start back up again early in the calendar year. Those are the biggest changes. In terms of backlog, our backlog is still there. A lot of it is mostly on new aircraft and retirements occurring from some of the older aircraft. It was static just from a share standpoint. We could pick up share.

Rich Valera, Analyst

Thanks, Rick. You guys just had a nice announcement regarding the rollout of service in Brazil. Can you talk about the materiality of maybe a rural kind of Latin American service in general? I know you've already had it ongoing in Mexico and Central America for a while. But could you talk about the scale of that and when it might be a material driver of revenue in the service business?

Rick Baldridge, President & CEO

There is some material, but I don't know how much. We're certainly still dominated by the US residential business, but it's growing fast, probably a little faster than we would have thought. We paused for a little while down there, but we got some tools in place for this growth. We launched a small launch in Africa. We've got stuff going in Guatemala. We've been in Mexico for a while; with this Brazil launch, pretty quickly, I think we're going to start showing numbers that include the international adds to our overall data, but we're not quite ready to do that. We'll be ready pretty soon. We announced a new program, which is a government program, and we finished the countrywide launch. We’re not ready to throw those numbers out there again. And I think one thing to keep in mind is this: as far as Latin America, it really starts to grow.

Rich Valera, Analyst

Got it, that's helpful. Just one more, if I could, on the government business. Fantastic bookings there for the second quarter in a row. It sounds like you're pretty confident of seeing strong growth in the second half. Talk about what programs you think could really ramp up in the second half and into the next fiscal year on the government side.

Rick Baldridge, President & CEO

The government business is a mix that have been cut off for quite a while. One area is the information, insurance and cyber security area, and the other is the satellite part. We’re seeing good opportunities in all three areas. So it will be very, very strong for these customers. The satellite services business and the cyber and information insurance business are doing really well. And one of the things that I say is happening more and more is that we're seeing the integration of cyber with satellite space. That is what people want: security and monitoring services for those connectivity functions. Those are the main areas that cover what you're looking for, hoping for something else that’s helpful.

Operator, Operator

We have our next question from an unidentified analyst. Your line is open.

Unidentified Analyst, Analyst

Hi, Mike. Congrats again on the new translation and quota. I have three questions and I'll ask one at a time. The first is, is ViaSat listed as one of the eligible bidders for the FCC auction coming on December 8th? I’m curious why they chose to complete the application, saying how you do not operate the satellite currently. What’s their motivation or optionality? Ok, we've got our next question going back to latency, talking about latency being beneficial, but not critical. A couple of quarters ago you talked about perspective, rural population that I thought would be interested in pursuing the possibility for Aadhar. Can you give us an update on the status of that? Is that still in pursuit? What are the odds of going forward with the bias that opened up the broadband system so we can't talk about?

Mark Dankberg, Executive Chairman & CEO

Regarding RVO, yeah, we're definitely interested in the area and it's hard to find a point. I would say speed and bandwidth are one and two, and price are one, two, and three. What we'd like is to be able to deal with all of them. What I think we're looking at is what are the best ways to do that? LEO is one of them. On our overall priority list, I would say it's lower than speed and bandwidth. There are things that we can do for asteroids. They kind of check the box and some of our customers definitely appreciate that taking place. There's no benefit to downloading latency; right? There's definitely a benefit to having higher speed and more volume. That's what we focus on. So with LEO, we proposed a system that is quite different from others. It’s much higher capacity, requiring fewer satellites to meet a lot of capacity. We think that is important because people are becoming more aware of the issues with proliferating vehicles and space safety and spectrum sharing. We think we want to show that that can be done.

Unidentified Analyst, Analyst

Okay, can you give any more color on what exactly that means? No, that's okay. I'll try and my answer going back to the satellite conference where the satellites were announced as was a catalyst for the power on road and cameras and terminals to get an update on the current status of those. Do you hope to have an antenna and terminal for that in the near term? And if so, what did the applications do for it?

Mark Dankberg, Executive Chairman & CEO

Yes, we are definitely interested in factories. We've been working on it for quite a while. We only wanted to do it if we had something that was significantly different from the other efforts that are out there, and we do. It has worked out pretty well. I think that's good, high performance and very attractive price points. We are working with companies that will be buyers of energy; you know, those would be the energy systems. But we're also working with prospective customers. When you work with geosynchronous satellites, the main application for a phased array is mobility applications. That’s the area we’re focused on, and it has had multiple benefits. One is that one of the main benefits is you can use a phased array with multiple satellites at once if you build it well enough. One of the things we've done a bunch of work on with DOD is building a network management system that works with all the available satellites, whether commercial or government. That’s a really good example of a phased array application. There are similar things to hybrid between our system and different access points. That’s one of the applications we’re working on. We also think there's a really attractive and mobile market if there are low-cost satellites. If you have a lot of bandwidth, you can create small, undersized antennas that are attractive for mobile applications. Those are some of the things we’re looking to do.

Unidentified Analyst, Analyst

Ok, I got to roll that out as oil prices.

Rick Baldridge, President & CEO

I do have a plan to roll it out. Yes, I mean, we’re working on it. The main market for us is to expand the addressable market for our services. We will work with other guys and do it, but we're not hawking our antenna out there with a schedule and price on it. That’s not the main purpose for what we’re doing. We are working with some prospective buyers, and we’re interested in selling antennas. But the primary reason we've been working on this is to get our services correct.

Operator, Operator

And we will take one more call from Mike Crawford with B. Riley Securities. Your line is open.

Mike Crawford, Analyst

As you've seen more of these cancellations, have any of your opinions been refined as to what type of bandwidth and capacity they might be able to get out of them? For instance, once Starlink gets more congested over a specific service area, what might be required to deliver residential broadband at 100 megabits per second speeds to not just one or two users with a tripod, but to tens of thousands of users?

Rick Baldridge, President & CEO

I don’t think anything surprising has happened with Starlink systems. They have to go through all the same calculations that we do, which is the first outside. How much do you need to give a person? I want to have a lot of people with a small capacity, and vice versa. The main point is really difficulty in scaling by having numerous satellites, and more concerns about orbital debris and collision risk problems. The issue is becoming sharper because of previous collisions in low Earth orbit; the debris from those collisions collides with itself and causes even more debris. The European Space Agency put out a thorough report in September, detailing the orbital debris issue. The FCC had a focus on this as well, deferring a proposed rule earlier this year. At that time, we were one of the very few that supported the FCC’s position, and we’re seeing more entities come in that believe this is something that needs to be addressed. The question of how many orbital trajectories are available is already contentious, and the risks of failed satellites taking a long time to deal with contribute to levels of risk. I think that’s going to be one of the biggest issues in scaling.

Mike Crawford, Analyst

Thank you so much. With your 16 satellite, your lower satellite, are they building that extends 16 to the online site applications, which has the opportunity to open up a lot of your devices to be used more broadly than already today to get to the tactical edge? Is this a business where you might envision ViaSat becoming a builder of many LEO satellites, or these satellites that could further extend the link-16 up to ViaSat 3 as well? Or what can you comment on regarding 16 in space?

Rick Baldridge, President & CEO

The idea of extending the range of A-16 through space is interesting. There are government programs to do the same thing. We want a program with an existing partnership to build our prototype satellite for it. The advantage is there are tens of thousands of devices that are 16 capable. If you can extend range communications, there's consensus that this is a valuable thing both for the devices that are on the ground and in the air and sea, and also as a space business. We're really interested in it as an enabler for our link-16 business, which we think makes that market have a much larger addressable market and hence more valuable. We're looking to it, and the work we’ve been doing in payloads and delivering a satellite has certainly helped. The technical problems are more complex than just putting a link-16 transceiver in space. We're working on those as well, but again as an enabler, we’d be really interested in pursuing it. If we could make a fleet of satellites, we would be very interested. We have other applications we’re working on with government customers that involve either sensing or communications satellites in space. We’ll continue to do more of that but with a focus on the payload and mission aspects as well as the networking parts of those payloads.

Mike Crawford, Analyst

Ok, thank you. And finally, regarding ViaSat 3, is that something you expect to launch in the summer of 22?

Rick Baldridge, President & CEO

Yes, we're about six months behind the Americas. So the American satellite has been the trailblazer for many surface issues.

Mike Crawford, Analyst

Excellent. Thank you.

Mark Dankberg, Executive Chairman & CEO

Ok, that looks like that's all the questions we have.

Rick Baldridge, President & CEO

Thank you, guys. We'll see you next quarter.

Operator, Operator

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