VIASAT INC quarterly report, Q2 FY2020

Business context and reporting period

Viasat, Inc. filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2019 (fiscal 2020 Q2), comparing results with the corresponding 2018 periods. The company operates in satellite services, commercial networks, and government systems, providing broadband services and communications products. Amounts below are in U.S. dollars; financial figures are in millions unless noted.

Financial performance and position

• Quarterly revenue grew 14%; service revenue rose 20% and product revenue rose 9%. Six-month revenue increased 18%.
• Gross margin, calculated as revenue less product and service costs, was approximately 30.8% for the quarter versus 24.2% a year earlier, and 29.6% for the six months versus 22.9%.
• Operating margin was approximately 3.1% for the quarter versus negative 4.2%; for the six months it was approximately 0.9% versus negative 8.0%.
• Quarterly segment results: satellite services revenue $205.7 and operating profit $5.1; commercial networks revenue $88.0 and operating loss $46.8; government systems revenue $298.5 and operating profit $62.1.
• Cash from operations was $183.3 for the six months, compared with $111.3 a year earlier. Investing activities used $362.7, including $329.6 for property, equipment and satellites. Cash declined $174.7 to $87.0. Operating cash flow less property, equipment and satellite purchases was negative $146.3; this is a simple calculation, not a company-defined measure.
• At September 30, cash was $87.0 and working capital was $253.9. Total current liabilities were $501.7 and current assets $755.6.
• Reported total debt, including finance lease obligations, was $1,497.8 carrying value; cash was $87.0. The company had no revolving-credit borrowings and $681.1 of availability, net of letters of credit. It reported compliance with debt covenants.

Material changes versus prior comparable periods

• Quarterly improvement in operating results reflected higher government systems revenue and profitability, and satellite services’ return to operating profit. Government systems quarterly revenue increased 24% and operating profit increased 38%.
• Satellite services revenue grew 26% in the quarter; U.S. fixed-broadband subscribers were approximately 587,000 versus 585,000 a year earlier, while aircraft using Viasat in-flight connectivity increased to 1,353 from 898.
• Commercial networks quarterly revenue fell 23%, primarily as in-flight terminal deliveries normalized after accelerated deliveries in the prior-year period. Its operating loss widened to $46.8 from $39.2.
• Six-month SG&A increased 12% to $252.5, and independent research and development expense increased to $67.8 from $64.7.
• Cash and working capital fell from $261.7 and $401.7, respectively, at March 31, 2019. The balance-sheet increase in assets and liabilities also reflects adoption of lease accounting: Viasat recognized $319.7 of operating lease right-of-use assets and $338.6 of operating lease liabilities at September 30.

Outlook, commentary, risks and unusual items

• Management said cash, expected operating cash flow, and revolving-credit availability should be sufficient for anticipated operating requirements for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
• Viasat expected fiscal 2020 capital expenditures to increase versus fiscal 2019, citing construction of a third ViaSat-3 satellite and international ground-network investment. Two ViaSat-3 satellites were in full construction; a July 2019 agreement with Boeing covers a third satellite intended for the Asia-Pacific region.
• Management expects satellite-services earnings to benefit as fixed broadband and in-flight services scale, while noting there is no assurance of significant revenue growth or segment profitability. It also anticipates increased operating costs as future satellites enter service.
• Firm backlog was $1.945 billion at September 30, of which approximately half was expected to be delivered in the next 12 months. Funded backlog was $1.933 billion. Backlog is not a guarantee of revenue: many contracts can be terminated, and realization depends on customer funding. More than 600 additional aircraft were anticipated for activation under existing agreements, but activation is not assured.
• Viasat-2 had an antenna deployment issue identified before commercial service. The company previously recorded a $177.4 reduction in the satellite’s carrying value with a corresponding insurance receivable; it received the remaining $2.3 of insurance proceeds during this six-month period and applied proceeds to Ex-Im debt repayment.
• Government contract audits and reviews remain a risk. Fiscal 2019 incurred-cost audits were not complete; the company recorded $4.9 of reserves for potential refunds or cost adjustments on certain government contracts. The filing warns that adverse audit findings could affect profitability and potentially lead to penalties or contract consequences.
• Contractual obligations totaled $4.422 billion, including $1.680 billion of purchase commitments, some of which may be cancellable or adjustable before firm orders. The filing describes ordinary-course legal matters and says their resolution is not expected to have a material adverse effect, while acknowledging uncertainty.
• The ViaSat-2 issue, satellite construction commitments, reliance on government contracts and funding, customer termination rights, leverage and covenant limits, satellite performance, and the uncertain timing of contract awards are key risks. Management reported effective disclosure controls as of September 30, 2019.

Important facts for investors to verify

• Whether satellite-services margin improvement and growth in in-flight connectivity persist, and whether subscriber counts and revenue per subscriber develop as expected.
• Government systems backlog conversion, contract awards and margins, including exposure to U.S. government audits, funding decisions and customer termination rights.
• ViaSat-3 construction schedule, total funding needs, planned capital expenditures, and satellite launch and operating risks.
• Liquidity and debt trajectory as cash is invested in satellites and network expansion; review debt maturities, interest costs, lease liabilities and covenant headroom.
• Whether the $4.9 million government contract reserve and other estimates prove adequate, and whether any legal, tax, warranty or audit matters produce material adjustments.