Earnings Call Transcript - VSAT Q1 2021

Mark Dankberg, Chairman and CEO

Hey, thanks very much. So we published our shareholder letter last night that described our first-quarter results, and most of the details that we'll discuss are in there. I just want to make a few quick points before we go ahead and take questions. So overall, the results came in better than what we had expected, looking at things from the opening in March. EBITDA grew about 8%. Just on revenue, that was just slightly lower despite all the headwinds that we had from the COVID situation, especially on our commercial in-flight connectivity business. We've got, I think, very good diversity in our business space, and that was really what helped us have such strong results. Government business did really well. Fixed broadband showed very significant demand, and that helped the results along with our cost management. In-flight connectivity business was actually probably a little worse than what we had expected in that first quarter, but we're still able to grow adjusted EBITDA. Overall, our new contract awards were really strong, which gave a lot of confidence for the rest of this year. That kind of leads into our second theme here, the second main point, which is opportunity for us. We have a lot of opportunities in our government segment. I'm talking about very strong demand plus proposal activity and value. We see opportunities for our aeronautical business to grow out of the low point of the first quarter. Our international businesses, we expect to be able to start expanding after some delay that we encountered and our partners encountered during the first quarter, again, due to the COVID pandemic. Last point that I want to make is just that we're making good progress on our ViaSat-3 satellite program. The COVID pandemic is definitely creating some issues for us to overcome, but we continue to make good progress. We're at the point of the program where the payload integration is coming together. We're testing larger and larger subsets of the payload, and we're making really good progress on those milestones. We were aiming for being able to ship that payload around the time that we reported next quarter. It doesn't look like we will have shipped by then, but we'll be close enough to have a more definitive date that we can report when we report earnings next quarter. So with that, I'd be happy to take questions now.

June Harrison, Head of Investor Relations

Just to add quickly before we take questions. I'll just give you our safe harbor disclosures. As you know, this discussion will contain forward-looking statements. Just as a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Now, to questions.

Philip Cusick, Analyst

Hey, thanks for getting up early. I wonder if we can start with government. Last quarter, you had some delays from getting signings. What's the status of getting things signed off at this point?

Mark Dankberg, Chairman and CEO

I think the things that we highlighted last quarter, the biggest issues were on direct government prime contracts, especially ones that involve security classification. We had two main issues where, in some cases, just being able to get the contracts signed off, and the other was acceptance of products that required security. I would say those kind of went as we expected, and it's better but not gone, kind of the way I'd put it.

Philip Cusick, Analyst

I noticed in your shareholder letter this morning that you mentioned government systems momentum will build in the second half of the year. Do you expect the signing issues to be resolved for that to happen, or will it progress despite those issues?

Mark Dankberg, Chairman and CEO

I think things continue on the trajectory that we're on, that's consistent with our outlook for that segment. The other good thing is that the backlog that we've got is really good. I mean, we had just a good awards quarter. We've got backlog going in. It’s not like everything is all locked up. But based on the way things are going, the outlook seems good for us to continue to build revenue and earnings through the year as we usually have in that business.

Philip Cusick, Analyst

Okay. That's helpful. And then it sounds like ViaSat-3 timing getting pushed out a little bit. You mentioned some scheduling pressure and shipping a little bit later. Should we look at that still being launched in calendar '21?

Mark Dankberg, Chairman and CEO

Yes. That's what we're aiming for. Like we have said before, the shipping of the payload back to Boeing is a really big milestone because then from there onward, the rest of the program is really pretty straightforward as F&O two production program for them. The last thing that we said was that we were aiming for around the middle of the year. So I'd say we're certainly aiming to have a launch next year. I think we feel a lot more comfortable giving the specifics next quarter because, at that point, we'll be quite close to being able to ship that payload back to Boeing.

Philip Cusick, Analyst

Sounds good. And then last one if I can. The equity raise, $175 million very recently. Can you help us understand, number one, why you wanted to raise equity? And number two, the timing seems a little bit strange post the quarter pre-earnings release. Why do it then?

Mark Dankberg, Chairman and CEO

Okay. So the equity raise was with two investors, Intercorp and Baupost. Really, it was catalyzed by our relationship with Intercorp, who we see as a really helpful partner in our international expansion. We have been working on it for quite a while, probably a few months, and it came together at the time that it did. I would say the overall market environment is very dynamic. We figured that it would be better to execute the deal when it was ready as opposed to waiting weeks just because markets are so volatile. That's what explains the timing once we put the deal together. Baupost expressed interest in participating in that same deal.

June Harrison, Head of Investor Relations

It wasn't outbound, and that's the key.

Mark Dankberg, Chairman and CEO

Yes, that's fair. I would say that in terms of why, it's a volatile environment we're in. We see a lot of opportunities, and having an additional equity base gives us more flexibility to take advantage of those opportunities. There are definitely situations where I believe this will prove beneficial.

Rick Prentiss, Analyst

Great. Yes. Good early morning. I hope you guys are doing okay, your families, and employees as well in COVID-19. It sounds like business is obviously doing well. Question and one follow-up on Phil's question there. Then, Mark, you mentioned there's opportunities out there. The shareholder letter talked about potential strategic growth opportunities in evaluating success-based investments. Can you elaborate a little bit on that about what's interesting out there, what you might want, or what you might need in the array of your diversified portfolio?

Mark Dankberg, Chairman and CEO

No. It's hard to give specifics. I think we have a pretty good track record of doing strategic transactions that generally, they're kind of tuck-in type things that help us either with specific elements of technology or in specific market segments or possibly in specific geographic areas. Those are, in general, the kinds of things we would look at. It would be, in general, things that would be helpful to either defense, broadband services properly, and possibly some things that we might do in the aeronautical space. There's also some potential opportunities to make interesting value propositions in some of our markets that could be enabled by some of these potential transactions. That's kind of the theme that we're looking at.

Rick Prentiss, Analyst

Okay. And obviously, a lot of discussion with the RDOF, the Rural Digital Opportunity Fund. You talked about it some last quarter. Other satellite operators have started talking about it as well. Can you update us as far as where you think satellite providers can play in the RDOF given the latency requirements? But then also, Mark, if you could expand it more broadly into what's happening in the competitive universe. A lot of incoming calls about fiber moving deeper into the marketplace and also all the speculation on the new LEOs as far as what they'll be as a competitive dynamic particularly versus your businesses.

Mark Dankberg, Chairman and CEO

Okay. So those are all good and fair questions, Rick. The RDOF program has reached the point where none of the potential participants can make any comments on RDOF whatsoever. So we're taking that very seriously. So I'm out to pasture pretty much everything you asked.

Rick Prentiss, Analyst

And how about the new LEOs as far as what competitive threat they might pose?

Mark Dankberg, Chairman and CEO

I believe the LEOs are developing as we anticipated. It shouldn't come as a surprise that the Amazon Hyper system received FCC approval. This will complicate the LEO situation, as the orbital dynamics will make that area more congested. We will address some of these issues in the FCC's approval notice, but there's still work to be done. Our main points about LEO remain that the cost of useful bandwidth will be significantly higher than for our GEO satellites, which we see as a considerable advantage in most of our markets. We'll also provide extensive coverage, particularly in ocean regions, likely before the LEO systems do. We feel confident about our position. This will foster growth and expansion in the market. Each time we've launched new satellites, we've anticipated being able to increase the bandwidth available to our customers in those markets, and I don't think anything has changed regarding these key points in the last quarter.

Rick Prentiss, Analyst

And maybe one, you could elaborate a little deeper since I hit a couple of tough subjects. Obviously, military and government doing quite strong. Where are you at as far as maybe moving your product beyond special forces into mainline forces in that backlog and the opportunity set for the government business?

Mark Dankberg, Chairman and CEO

We are making good progress, which is one of the reasons our business has been steadily growing for a long time. The main goal is to engage first responders and early adopters in various markets, creating examples for larger forces to see and adopt. This requires effort, as much of our government business involves demonstrating operational capability rather than being part of established programs. Our customers are learning to allocate funding for these capabilities. We have successfully introduced technology like handheld Link 16 for special forces and tactical air controllers, as well as connections for satellite broadband on more rotary-wing platforms. Typically, special forces from different services are the first to adopt these innovations, and they usually start small but grow over time. Major events often involve introducing these technologies to specific platforms and user groups, which then expand. Additionally, there's a significant shift toward focusing on the Asia Pacific and near-peer competitors, which is influencing the Department of Defense's priorities and creating good opportunities for us. Many of these opportunities begin with studies or technical demonstrations, and if they are successful, they can lead to larger programs. If we see progress in this area, we may announce developments in the coming quarters.

Rick Prentiss, Analyst

Okay. Great. Good to get your thoughts, and then wish you all well and your family, employees. Stay safe in these crazy times.

Mark Dankberg, Chairman and CEO

Thank you very much. You, too.

Simon Flannery, Analyst

Great. Thank you very much. Good morning. Mark, I wonder if you could talk a little bit more about IFC. What have you been seeing for the last several months in terms of the ramp-up in that? It seems like you've got a few more planes flying perhaps than the industry overall. Is that continuing to build through the third quarter? And what about the pipeline? There's been a lot of focus about Delta's plans to go free WiFi and other potential opportunities in the pipeline. Is that all on hold given COVID and their financial environment for the industry overall? But any color there would be great.

Mark Dankberg, Chairman and CEO

Okay. This is obviously like the most challenging time ever for our commercial airline customers, and the progression out of the bottom of the market is happening slowly but steadily. For instance, one of the first things that we've seen, and you can see this a little bit from our report, is that the proportion of claims that are filed is a lot higher than the proportion of passengers that are on those planes. That's really the biggest issue for the airlines to deal with. If you use TSA checks as a metric, we saw those down 90% in May, about 80% in June, and 75% in July. So things are coming back. As the planes fill up a little more, I think you'll see more planes coming back into service. The airlines themselves have had a lot of empathy for them given the issues that they're dealing with. The attention that they're paying to in-flight connectivity is significant. They’re seeing that this is probably even more important than it was before, that people want to be connected while they're flying. We've had many discussions with them about helping them through this time. All those discussions have been constructive, centered around how to improve offerings, make it more available, and possibly expand the ways that it's offered. The last part is that we are dealing with a lot fewer retirements than some of the other IFC providers, which I think will help us coming out of this situation. Activity among airlines that either don't have it yet or were going to expand their service is still seeing robust activity. We've been doing many virtual meetings with airlines. We're optimistic, but anything that we describe will be on a schedule that's convenient for our airline customers, and that's how we'll be able to announce things. The orders that we had entering the pandemic are still intact, and we still expect to deploy them once the market picks up again.

Simon Flannery, Analyst

Great. And then turning to the consumer broadband, obviously, a very valuable product in a time like this. How is your capacity availability to continue to satisfy demand there? Are you pushing up against the limits of ViaSat-2? Or do you think there's still room to continue to add subscribers?

Mark Dankberg, Chairman and CEO

The primary theme we have observed is that demand is concentrated in areas with high interest. In these locations, demand has significantly increased, and while there is also growing demand in less sought-after areas, it does not match the demand seen in high-demand regions. We are experiencing limitations in our ability to meet this demand, which is a factor for us. Looking ahead to the launch of ViaSat-3, we view this positively as it will enable us to offer more attractive plans to a broader audience due to increased bandwidth availability. We see potential for growth in lower demand regions within the U.S. and significant opportunities internationally. In the interim, until ViaSat-3 is operational, our focus will primarily be on these growth areas. On the international front, we plan to collaborate with our distribution partners who have faced limitations during the pandemic but are now starting to reopen. We aim to expand in both the lower demand markets and internationally. Our long-term goal is to enhance service quality, and while demand growth is putting some pressure on our resources in high-demand areas, we are committed to maintaining the quality of our service. We were pleased to be recognized among the top 10 ISPs in a U.S. news report last quarter, and we intend to uphold and build upon that reputation.

Simon Flannery, Analyst

Understood. Thanks, Mark.

Mark Dankberg, Chairman and CEO

Thank you, Simon.

Chad, Analyst

Hey, this is Chad on for Rich Valera. I was just wondering in terms of the recent equity raise. If you could give us any more color around potential business opportunities in Latin America that could arise from it.

Mark Dankberg, Chairman and CEO

Okay. We mentioned Intercorp as a strategic partner in Latin America. We are looking to expand our relationship with them. It will help us with service distribution in a number of markets and with some specific services that we can bring to those markets. It’s less about needing funding to do it and more about valuing the strategic relationship and the skills and resources that Intercorp brings. I wouldn’t necessarily draw a connection between that and investment into Latin America. I would more think about it as a strategic relationship with a really strong partner in that region. That gives us more flexibility and maneuvering room for strategic opportunities globally across the businesses and geographies.

Mathieu Robilliard, Analyst

Yes. Good morning. Thank you for making that call early. I had a question about ARPU on the satellite service. Obviously, very impressive progression this quarter. What I'm trying to understand is how much is linked to some of your consumers topping up on their existing plan or other consumers actually moving up the ladder on the plans and taking bigger packages. What I'm really trying to understand is how sustainable that increase in the ARPU is.

Mark Dankberg, Chairman and CEO

Okay. There have been ongoing reasons in the growth of ARPU over the last two years that we've talked about, which is generally a higher proportion of retail subscribers, a lower proportion of wholesale subscribers. We aimed our services at higher value, higher bandwidth plans. In the last quarter, there was an additional ingredient, which is the upgrades you mentioned. The way our plans work, we minimize top-ups in terms of purchasing additional gigabytes during the month and more having plans that have higher speed and more bandwidth allocation. This is the trend that happened. We don't expect that ARPU will continue to rise in the same way. There are dynamics that will affect ARPU. One is we expect that as we go into ViaSat-3, we'll offer service plans at lower price points than we do now. We expect, over the longer term, ARPU to come down. Our international business will continue to grow, which will impact our total ARPU in the fixed broadband business. We’ll also expand our WiFi hotspot sites. That has a funny impact on ARPU, as individual users spend much less money per month but there tend to be a lot of them per site. Our revenue per site is one metric we'll start to look at as we get this mix of sites. It might trend up a little or down a little, depending on the growth mix in those categories over the next few quarters.

Mathieu Robilliard, Analyst

Thanks. I'm following up on how the upgrade process works. If I’m a consumer on a package like Liberty 25 and I want to upgrade, is it easy to do? Are there any restrictions, even if I’ve been on that package for a while? And similarly, is it just as easy to downgrade?

Mark Dankberg, Chairman and CEO

Yes, yes, yes. We give customers the ability to go up or down.

Mathieu Robilliard, Analyst

Great. Following up on one of your points in emerging markets. Have you seen any noticeable pickup in volumes or in programs by governments realizing the importance of broadband connectivity in this time in some of the emerging markets where you operate?

Mark Dankberg, Chairman and CEO

We've definitely seen the issue of government interest in making broadband more universally available. We're seeing that in the U.S. at every level, whether it's federal, state, local municipalities, and counties. There's strong demand there. Internationally, I would say the same theme, maybe not with quite the same intensity as domestically, where we've gone to more school from home and work from home, which has spiked that interest. We will see similar themes internationally, but we’re probably not as embedded in those markets to discern them quickly or get the inbound as quickly as we have seen in the U.S. We will see it in Brazil, where the main premise for our biggest program was to reach rural schools and rural communities. We will see that. As we become embedded in those markets, it will factor for us, but the notion of universal connectivity is getting more and more attention internationally.

Mathieu Robilliard, Analyst

That's great. Thank you very much.

Mark Dankberg, Chairman and CEO

Sure. Thank you.

Mike Crawford, Analyst

Mark, were gross fixed broadband adds around 67,000 in the quarter?

Mark Dankberg, Chairman and CEO

I'm sorry. Did you ask if gross adds were that or net? Did you mean net?

Mike Crawford, Analyst

No. Net gross.

Mark Dankberg, Chairman and CEO

The gross adds always. You mean net adds? I would say churn has been relatively constant, slightly improving for us. For the net adds to go up by that amount, it consumes a corresponding improvement in gross adds.

Mike Crawford, Analyst

Right. I was kind of wondering, and I know churn has been improving, especially as you have a better fit customer with these higher-value plans always. I was just wondering if I could sneak in what around where churn is.

Rick Baldridge, CEO

So you're pretty close, Mike. I mean, we've moved away from trying to get all these in. The actual gross of net adds in this space are becoming less and less an indicator of where our business is going, especially as we talk about brand enterprise customers, we're adding some of these other community Internet sites. They all differ from a standpoint. We don't have blended ARPU now, but we will in the future, probably.

Mike Crawford, Analyst

Okay. Thanks, Rick. And then switching gears. With your hybrid adaptive network concept that gives more roaming flexibility to government customers, is there a chance you could get prebuys or precommitment on the ViaSat-3 network before you launch ViaSat-3 from commitment from the DoD purchase capacity?

Mark Dankberg, Chairman and CEO

I'd say yes and no. Let me explain how the government business operates. It's challenging for the government to make long-term commitments. When we engage with new platforms, such as aerospace or many of the ground-based terminals, our customers often acquire that equipment primarily to access the accompanying services. These typically come in the form of firm contracts with options or under IDIQ contracts. You might not see announcements indicating that a specific organization has purchased a certain amount of bandwidth over a five-year period. Instead, contracts may be for six or seven years with a base year and multiple options. These aren't necessarily take-or-pay contracts because the option years may or may not be executed, but once those contracts are in place, they tend to be quite predictable. Additionally, most defense operations occur outside of the U.S. or its territories. With our ViaSat-3 coverage and global partnerships with other satellite operators, one of the benefits is the ability to utilize that bandwidth wherever those forces may operate. In some situations, they may roam worldwide, while in others, their locations are more predictable. Nonetheless, we anticipate having a substantial amount of business secured by the time these global satellites are launched. There is the resilience concept here, being able to access a broad range of networks that’s been the focus on the operational needs of the current environment.

Chris Quilty, Analyst

Thanks. Mark, had a question on the backlog. I mean, in the old days, it was two-thirds MIDS. Can you give us a sense of the mix? Was that somewhat unexpected? Were the government trying to accelerate orders in this difficult time? Or were most of these on schedule?

Mark Dankberg, Chairman and CEO

One of the points I always make, we want to make it in both the good quarters and the back quarters is that orders are lumpy in DoD. The contracts we received are things that we've been working on. There are no bluebirds. It was a good awards quarter for us. Proposal activity is high. In terms of the makeup of the backlog, it's definitely not two-thirds of MIDS. It’s a more diverse space than that. The Link 16 business itself has become a lot more diverse. We have multiple products within that. MIDS’ proportion of our total tactical data links has gone down since we've diversified. The other areas helping growth are information assurance appliances, and the satellite broadband part has been really good for us. It's a very diverse area, more platforms, including our defense mobile broadband services. I think it will bring a lot of growth to our business.

Chris Quilty, Analyst

Okay. On that point, what launch did you sneak that Link 16 small satellite into orbit? Can you talk about the networking opportunity? What is at play in terms of DA PAR? I guess more specifically, what does SDA have in terms of the different information layers?

Mark Dankberg, Chairman and CEO

We do have our first small sat in orbit. It’s not the Link 16 satellite; it was for a different mission. That we can’t describe, but the customer is pleased with the performance of it, which creates additional opportunity for us in that market. The Link 16 satellite is probably a year away. The communication systems they talk about are not necessarily focused on broadband. They’re more about connections among sensors and shooters. That’s definitely an interesting area. Right now, it’s in proof-of-concept phase. Other government organizations are interested in mission-specific small satellites. There are many missions out there. Some would shore up or make vulnerable systems resilient. Overall, we’re looking for ways to better understand the missions of the organizations to seize those opportunities.

Chris Quilty, Analyst

That does. And maybe just a quick clarification. Who is funding the current work on that Link 16 satellite?

Mark Dankberg, Chairman and CEO

That’s the Air Force Research Lab.

Chris Quilty, Analyst

Okay. Final question on the IFC market. I guess I’ll just be blunt here, which is Global Eagle is for sale, Global Gogo's CA business can be bought. Everything else is a mess. If we woke up one day and there’s a press release that Viasat acquired something in that IFC space, why would it make sense?

Mark Dankberg, Chairman and CEO

The value proposition we’re offering is to provide connectivity to everybody on the plane and allow everyone to use the Internet. It's difficult to do using the terminals that exist with some competitors. There isn't enough space segment resources to fulfill that value proposition. Acquiring assets that don't align with that value proposition isn’t something we’ll do. Unless it's part of a strategy the airline wants for transitioning. We feel we’re in a good position. Our business base is diverse, and airlines have confidence in us. We’ve got a good reputation for reliability. Those are the reasons we're likely to take over the next few quarters and years.

Chris Quilty, Analyst

Understand. You also have talked about the potential of using a dual-band antenna as a way to expand airline coverage. Is that still a focus for you?

Mark Dankberg, Chairman and CEO

We have shipped and flying dual-band Ka/Ku in commercial air now. We have it on government, too, but it's on the newer wide-bodies, that’s good. There could be opportunities in Ka/Ku, but we’re focused on building lower cost, lower profile antennas that are more agile. They will bring all our Ka band satellites in and the non-geosynchronous satellites as well. This is all a broader theme of being able to access multiple cars when the number of participants grows. That’s a valuable aspect of what we do, and having agreements with those operators is good. The airlines appreciate it, as the government does.

Louie DiPalma, Analyst

Mark, Rick, Sean, and Bruce, good morning. Can you hear me?

Mark Dankberg, Chairman and CEO

Yes, we can. Good morning.

Louie DiPalma, Analyst

SES appears to be moving ahead with their mPOWER constellation with Boeing and a plan to target the U.S. Department of Defense. Can you discuss your partnership with SES for the terminals for that constellation? You and SES seem to be on fairly friendly terms relative to the other competitors. Was SES related to your bookings in the Satellite Systems group this quarter?

Mark Dankberg, Chairman and CEO

We expect they're going to deploy that system. The satellites make sense. Boeing knows how to build them. They’ll fund and deploy them. It's a very interesting non-geosynchronous system, just like any other, with its strengths and weaknesses. We have worked with SES on O3b for quite a while. We've done demonstrations where we've shown defense customers how to switch between geosynchronous and non-geosynchronous satellites. Our customers like these non-GEO systems, and they value multiple systems through common terminal hardware. SES values having terminals accessing their system, too. From our perspective, if they can deliver a service that’s better for particular conditions, that's good for us. Our focus is really on quantity of bandwidth, with ViaSat-3, probably, we’ll have broader coverage than mPOWER does. However, the mPOWER may be able to provide higher peak speeds for specific platforms. We also announced our relationship with SES for phased array terminals for mPOWER, which has progressed well.

Louie DiPalma, Analyst

Sounds good. Also during the quarter, you announced a partnership to bid on the Skynet Wrap services contract. Do you anticipate that Skynet will utilize ViaSat-3 as part of a multi-satellite commercial government-owned architecture?

Mark Dankberg, Chairman and CEO

We do a lot of business with the U.K. Ministry of Defense. If you look at our defense business, the focus is the U.S., next is the Five Eyes, which includes the U.K., and interoperability among those is a high priority. Skynet itself has a long history. The U.K. is figuring out how to transition to a more capable system with more integrated space assets. I think that we’re on a good team and a competitor for the long-term program they envision, but it will take some time. The short answer, though, is yes, we think it will go beyond just dedicated Skynet. Thank you very much. Really appreciate everybody's interest and everyone joining us early in the morning. We'll look forward to speaking again next quarter.

Operator, Operator

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