Viasat, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022 (Viasat fiscal 2023 first quarter). Unaudited interim results; comparisons are with the three months ended June 30, 2021 unless otherwise stated. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Viasat provides satellite broadband and connectivity services, commercial satellite and wireless network products, and government communications products and services. Its reportable segments are satellite services, commercial networks, and government systems. The quarter’s results reflected growth in satellite service revenue, lower product revenue, higher service costs and SG&A, and ongoing spending on satellite projects. The proposed acquisition of Inmarsat remained pending regulatory and other closing conditions.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Total revenue | $678.2 | $664.9 |
| Product revenue | $268.8 | $293.3 |
| Service revenue | $409.4 | $371.6 |
| Cost of revenue | $482.4 | $454.0 |
| Gross profit and approximate gross margin | $195.8; 28.9% | $210.9; 31.7% |
| Operating income (loss) | $(27.1) | $16.3 |
| Net income (loss) attributable to Viasat | $(21.6) | $17.0 |
| Diluted EPS | $(0.29) | $0.23 |
| Cash from operating activities | $39.6 | $65.1 |
| Capital expenditures: property, equipment and satellites | $246.9 | $246.2 |
Revenue increased 2%, as service revenue rose 10%, more than offsetting an 8% decline in product revenue. Service costs grew 16%, and SG&A increased 16% to $179.6 million, including $13.1 million of acquisition-related expenses, mainly for Inmarsat. The resulting operating loss compared with operating income in the prior-year quarter. Approximate gross margin is calculated from reported revenue less cost of product and service revenue; the filing does not present it as a separate line item.
Segments and operating trends
- Satellite services: Revenue increased 14% to $312.1 million, primarily from in-flight connectivity; in-flight service revenue rose $37.6 million as aircraft and passenger traffic returned. Segment operating profit declined to $3.5 million from $12.5 million, including higher transaction and network activation costs.
- Commercial networks: Revenue decreased 5% to $112.8 million, while segment operating loss widened to $42.4 million from $37.7 million. Lower product revenue and margins contributed.
- Government systems: Revenue decreased 7% to $253.3 million and segment operating profit fell to $19.4 million from $47.4 million. The filing cites lower revenue, an unfavorable product mix, higher SG&A, and continuing COVID-related manufacturing and shipment complications. Management said new awards remained strong.
Firm backlog was $2.065 billion at June 30, versus $2.033 billion at March 31; funded backlog was $1.958 billion, versus $1.941 billion. New awards were $782.6 million, compared with $595.0 million a year earlier. A little over half of remaining performance obligations of $2.1 billion is expected to be recognized over the next 12 months. Backlog excludes certain future recurring in-flight revenue and is not necessarily indicative of future sales; many contracts may be terminated by customers.
Cash, debt and liquidity
- Cash and cash equivalents were $221.5 million at June 30, down from $310.5 million at March 31. Working capital was $402.2 million. The current ratio was approximately 1.55, based on reported current assets and liabilities.
- Operating cash flow was $39.6 million; investing activities used $270.9 million, chiefly reflecting $246.9 million of property, equipment and satellite purchases. Financing activities provided $144.2 million, including $150.0 million of revolving-credit borrowings.
- Debt principal and finance lease obligations totaled approximately $2.665 billion; reported debt, net of discounts and issuance costs and current maturities, was $2.590 billion. Cash-adjusted principal debt was approximately $2.443 billion.
- The company had $150.0 million drawn on its $700.0 million revolving facility and $486.7 million of stated borrowing availability after letters of credit. It reported compliance with applicable financial covenants at June 30.
- Management stated that cash, expected operating cash flow and revolver availability should be sufficient for anticipated operating requirements for at least 12 months. This assessment includes significant planned satellite investment and the pending Inmarsat transaction.
Outlook, risks and unusual items
- Inmarsat transaction: Consideration comprises $850 million in cash, subject to adjustments, and approximately 46.36 million Viasat shares. Inmarsat’s April 2022 dividend reduced the cash consideration by $299.3 million. Viasat expected to incur about $1.3 billion of additional debt under transaction financing commitments and planned to assume $2.1 billion of Inmarsat bonds and debt under its $2.4 billion credit facilities. Closing remained subject to conditions, including regulatory approvals. Certain termination circumstances could require a fee of up to $200 million or reimbursement of seller expenses up to $40 million.
- Satellite program and airline exposure: Viasat is building its ViaSat-3 constellation and expects higher operating costs and possible bandwidth constraints around launch and service ramp-up. About 1,930 aircraft had Viasat IFC systems installed and in service, with approximately 30 inactive; about 1,210 additional aircraft were anticipated under existing agreements, but timing and activation were uncertain. The company expected some negative IFC revenue and cash-flow effects to continue in fiscal 2023 and potentially beyond.
- Contract and government risks: The DCAA audit of fiscal 2021 incurred costs was unresolved. Viasat held $12.1 million of reserves for potential cost adjustments and customer refunds on government contracts. Adverse audits or compliance findings could lead to refunds, penalties, contract termination, or suspension from government work.
- Other risks: Management cited uncertainty from COVID-19, global supply chains, customer demand, satellite construction and operation, competition, regulation, and substantial indebtedness. No specific earnings or revenue guidance was provided in the supplied filing text.
- Subsequent event: After quarter-end, Cisco paid Viasat approximately $62.2 million, fully satisfying a July 2019 judgment concerning Acacia’s breach of contract and misuse of Viasat technology.
- Management reported effective disclosure controls as of June 30, 2022 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Inmarsat transaction closes, its final cash and share consideration, financing terms, and resulting leverage.
- ViaSat-3 construction, launch and service timelines; remaining capital requirements; and the pace of customer and revenue ramp-up.
- Whether service growth can restore margins as costs rise, particularly in satellite services, and whether commercial networks and government systems improve profitability.
- Cash generation, liquidity and covenant headroom against substantial purchase commitments and planned transaction debt.
- Aircraft activation and passenger-traffic trends, government contract awards and funding, and outcomes of pending government cost audits.
- The treatment and timing of the $62.2 million Cisco payment and any other material litigation or contingent liabilities.