Business context and reporting period
ViaSat, Inc. filed this Form 10-K for the fiscal year ended March 31, 2018. The company operates in satellite services, commercial networks, and government systems, providing broadband services and communications products to consumers, airlines, enterprises, and government customers. Fiscal year 2017 is the prior comparable period.
Financial performance and key metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,594.6 million | $1,559.3 million |
| Operating income (loss) | $(92.2) million | $36.5 million |
| Net income (loss) attributable to ViaSat | $(67.3) million | $23.8 million |
| Diluted EPS | $(1.15) | $0.45 |
| Cash from operating activities | $358.6 million | $411.3 million |
| Cash and cash equivalents at year-end | $71.4 million | $130.1 million |
| Working capital | $146.1 million | $289.3 million |
Revenue increased 2.3%. Product revenue rose 5.8% to $755.5 million, while service revenue declined 0.7% to $839.1 million. Cost of revenues was $1,120.8 million, implying gross profit of approximately $473.8 million and a gross margin of 29.7%, down from approximately 32.7% in FY2017. Operating margin was -5.8%, compared with 2.3% in FY2017.
Segment results: satellite services revenue was $589.3 million and operating profit was $12.0 million (versus $629.6 million and $131.1 million); commercial networks revenue was $233.2 million and operating loss was $229.1 million (versus $244.6 million and $180.5 million); government systems revenue was $772.1 million and operating profit was $137.1 million (versus $685.1 million and $96.7 million). FY2018 independent research and development expense was $168.3 million, up 29.9%, primarily reflecting ViaSat-3 and other next-generation development.
Cash used in investing activities was $584.5 million, principally reflecting investment in satellites, property and equipment, and other assets. Cash provided by financing activities was $165.8 million. Principal debt outstanding was approximately $1.06 billion: $700 million of 5.625% senior notes due 2025 and $362.4 million under the Ex-Im facility; there were no revolving-credit borrowings. The revolving facility had $770.4 million available. The company reported total assets of $3.41 billion and total equity of $1.85 billion.
Material changes versus the prior year
- Despite modest revenue growth, ViaSat moved from operating income of $36.5 million to an operating loss of $92.2 million and from attributable net income of $23.8 million to a net loss of $67.3 million. Higher service costs, SG&A, and R&D, together with the absence of prior-year settlement-related revenue, weighed on results.
- Government systems revenue increased 12.7%, led by tactical data links and other products; operating profit rose 41.9%. Satellite services revenue fell 6.4%, including the loss of prior-year settlement revenue and fewer fixed-broadband subscribers. Fixed-broadband subscribers declined to approximately 576,000 from 659,000; aircraft using ViaSat IFC systems increased to 635 from 559.
- Operating cash flow declined $52.7 million. Cash decreased by $58.7 million during the year. The company issued $700 million of 2025 Notes and repurchased or redeemed all $575 million of its former 2020 Notes, recording a $10.2 million extinguishment loss.
- Firm backlog rose to $1.09 billion from $1.02 billion; funded backlog rose to $1.01 billion from $937.9 million. Backlog does not include fixed-broadband subscriber contracts or most anticipated aircraft installations.
Outlook, commentary, and principal risks
ViaSat launched commercial broadband service on ViaSat-2 in the fourth quarter of FY2018. The company expects higher FY2019 operating costs and interest expense as the satellite enters service and interest capitalization ends. Management expects fixed-broadband subscribers to increase and IR&D expense to be lower in FY2019 than FY2018, but anticipates significantly higher capital expenditures, including for customer-premises equipment. These are expectations, not quantified earnings guidance.
Two ViaSat-3 satellites were under construction; commercial service on the first was targeted for the second half of calendar 2020. The estimated combined project cost for the two satellites, launches, insurance, and related ground infrastructure was $1.2–$1.4 billion. The ViaSat-2 antenna deployment issue remained under investigation; management expected no material impact on coverage, planned services, or expected financial results, based on available in-orbit data.
Key risks include satellite construction, launch, performance and insurance; substantial capital needs and leverage; fixed-price contract cost overruns; reliance on U.S. government contracts, appropriations and audits; competition from terrestrial broadband and emerging technologies; subscriber churn; supplier concentration; regulatory and spectrum changes; cybersecurity; and execution of international partnerships. The company reported that the TrellisWare False Claims Act investigation was settled in FY2018 and the accrued $11.8 million was paid. DCAA incurred-cost audits for FY2016–FY2018 remained open. The 2017 U.S. tax law produced a provisional $5.3 million deferred-tax remeasurement expense; the company said its assessment was ongoing. Management stated that available cash, expected operating cash flow, and revolver capacity were sufficient for anticipated requirements for at least 12 months.
Important facts for investors to verify
- Whether ViaSat-2’s antenna issue is resolved and actual service capacity, coverage, costs, and financial contribution meet expectations.
- Whether fixed-broadband subscriber declines reverse, and whether airline IFC installations and anticipated orders convert to revenue.
- Whether ViaSat-3 construction, launch schedule, and estimated total project cost remain on plan, and how the projects will be financed.
- Whether margins and cash generation improve as launch-related costs, R&D investment, and capital spending evolve.
- Debt covenant headroom and liquidity after the May 2018 revolving-credit amendment, along with outcomes of outstanding government contract audits.
- Final effects of the tax-law changes and adoption of the new revenue-recognition standard in FY2019.