Business context and reporting period
ViaSat, Inc. filed this unaudited Form 10-Q for the quarter and six months ended September 30, 2016, the second quarter of fiscal 2017. The company operates satellite services, commercial networks, and government systems businesses. Comparisons below are with the corresponding 2015 periods unless noted.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Six months ended Sep. 30, 2016 | Six months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Revenue | $399.2 | $353.3 | $762.3 | $697.7 |
| Operating income | $18.4 | $13.8 | $26.2 | $23.2 |
| Net income attributable to ViaSat | $11.0 | $4.9 | $12.9 | $7.5 |
| Diluted EPS | $0.22 | $0.10 | $0.26 | $0.15 |
- Quarterly revenue rose 13.0%; product revenue increased 14.4% and service revenue 11.7%. Operating margin was approximately 4.6%, versus 3.9%; net margin was approximately 2.7%, versus 1.4%.
- For the six months, revenue increased 9.3%, operating income 12.7%, and attributable net income 70.7%. Six-month operating margin was approximately 3.4%, compared with 3.3%.
- Quarterly segment results: satellite services revenue of $156.3 million and operating profit of $32.6 million; commercial networks revenue of $65.5 million and operating loss of $40.9 million; government systems revenue of $177.4 million and operating profit of $29.0 million.
- Quarterly satellite services and government systems operating profits improved; commercial networks’ operating loss widened, mainly with higher ViaSat-3 and mobile-systems R&D and lower mobile-systems earnings.
Cash flow, liquidity and debt
- Six-month operating cash flow was $191.6 million, up from $107.5 million. Investing cash outflow was $299.1 million, compared with $173.6 million, including $260.0 million for property, equipment and satellites. Financing provided $116.9 million. Cash increased $9.2 million to $51.3 million.
- Working capital was $244.5 million at September 30, 2016. The company reported $532.1 million of availability under its $800 million revolving facility, after outstanding borrowings and letters of credit; the Ex-Im facility had $93.9 million undrawn, of which $84.6 million was available for eligible ViaSat-2 costs once incurred.
- Debt carrying value, net of applicable discounts and issuance costs, was $1.061 billion, versus $945.8 million at March 31, 2016. Principal outstanding comprised $575.0 million of 6.875% notes due 2020, $225.0 million under the revolver, and $264.4 million under the Ex-Im facility. A further $28.4 million of Ex-Im completion exposure fees had accrued and were expected to be financed. The company reported compliance with facility financial covenants.
- Major contractual obligations totaled $2.690 billion, including $1.035 billion of purchase commitments, substantially including satellite-related commitments. Management said cash, expected operating cash generation, and facility availability should cover anticipated operating needs for at least 12 months.
Material changes, outlook and risks
- Satellite services growth reflected higher revenue per broadband subscriber and expanding in-flight connectivity: 533 aircraft were in service, compared with 419 a year earlier. Consumer and small-business broadband subscribers were approximately 686,000, broadly flat year over year.
- Government systems benefited from higher tactical data-link and cybersecurity product revenue. Commercial networks revenue was slightly lower for the quarter and its six-month operating loss increased to $79.4 million from $41.0 million, primarily because independent R&D rose $21.5 million.
- Firm backlog rose to $1.091 billion from $941.9 million at March 31, 2016; funded backlog was $941.8 million. Backlog is not assured revenue: customer funding and termination rights can affect conversion.
- ViaSat-2 launch was expected late in fiscal Q4 2017 or early fiscal Q1 2018; its projected total project cost through launch was $580–$620 million. Two ViaSat-3 satellites were under construction, with launches expected in fiscal 2020 or early fiscal 2021 and projected aggregate project cost of approximately $1.3 billion. Management expected continuing ViaSat-3 R&D to pressure commercial networks results. These are estimates and forward-looking expectations, not guarantees.
- The Eutelsat European broadband arrangement was expected to close in fiscal 2017, subject to approvals and other conditions. ViaSat expected to pay €132.5 million for a 49% interest in Eutelsat’s wholesale subsidiary.
- After quarter-end, in November 2016, ViaSat said it was selected by a North American airline to retrofit more than 500 aircraft, with installation expected to begin in the first half of fiscal 2018.
- Material risks include a U.S. Attorney’s Office investigation into TrellisWare’s eligibility for prior government contracts and possible False Claims Act issues; the filing says an unfavorable outcome could materially affect results. Fiscal 2016 incurred-cost audits remained incomplete, and government contract reviews could lead to refunds, penalties, contract termination, or other sanctions. Ordinary-course litigation and claims were also disclosed.
- Revenue and contract profitability depend on estimates for long-term contracts; reported loss-contract charges were $1.6 million for the quarter and $2.0 million for six months. The filing also identifies satellite construction, launch and operating risks, government budget and contract dependence, debt covenant constraints, and execution risks for the Eutelsat partnership.
Important facts for investors to verify
- Progress, launch schedules, total costs, financing and service deployment for ViaSat-2 and both ViaSat-3 satellites.
- Whether operating cash flow can sustain the satellite investment program, Eutelsat payment and other commitments without materially increasing debt or using equity financing.
- Commercial networks’ R&D burden, product margins and ability to convert development spending into future sales; also whether satellite subscriber trends improve.
- Conversion and funding of backlog, including customer cancellation rights and the timing of government awards and appropriations.
- Developments in the TrellisWare investigation and government audits, including any resulting exposure beyond recorded contract reserves of $1.7 million.
- Debt covenant headroom, refinancing or repayment requirements for the 2020 notes, and availability of revolving and Ex-Im borrowing capacity.