ViaSat, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2016. Financial statements are unaudited. Comparisons are with the corresponding periods ended December 31, 2015, unless noted.
Business context
ViaSat operates in satellite services, commercial networks, and government systems, providing broadband services and communications products and systems. The quarter included the November acquisition of Arconics, an in-flight entertainment software company, whose results are included in satellite services from the acquisition date.
Financial performance and liquidity
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $380.6 million | $347.8 million | $1,142.9 million | $1,045.5 million |
| Operating income | $7.6 million | $10.4 million | $33.8 million | $33.6 million |
| Net income attributable to ViaSat | $4.2 million | $9.7 million | $17.1 million | $17.3 million |
| Diluted EPS | $0.08 | $0.20 | $0.33 | $0.35 |
| Operating margin | 2.0% | 3.0% | 3.0% | 3.2% |
- Q3 revenue grew 9.5%; service revenue rose 10.2% and product revenue rose 8.5%. Nine-month revenue grew 9.3%, led by service revenue growth.
- Q3 operating income and attributable net income declined despite higher sales. Independent research and development expense rose to $34.4 million from $19.2 million in Q3 and to $89.8 million from $55.6 million for nine months, principally reflecting commercial networks investment in ViaSat-3 technologies and mobile broadband systems.
- Q3 gross margin, calculated from reported revenue and product and service costs, was approximately 32.9%, versus 31.7%. Nine-month gross margin was approximately 32.2%, versus 31.0%.
- For the nine months, operating cash flow was $312.7 million, investing cash flow was negative $463.4 million, and financing cash flow was positive $394.0 million. Investing outflows included $390.2 million for property, equipment and satellites. Cash ended at $284.9 million, up from $42.1 million at March 31, 2016.
- At December 31, working capital was $473.2 million. Total debt, net of discounts and issuance costs, was $847.4 million, including $575.0 million principal of 6.875% notes due 2020 and $274.6 million principal outstanding under the Ex-Im facility. The company had no revolver borrowings and $757.3 million of revolver availability after letters of credit.
Material changes and segment trends
- Satellite services: Q3 revenue increased 13.4% to $160.1 million and segment operating profit rose to $34.8 million from $21.8 million. Growth reflected higher average revenue per Exede subscriber and more in-flight service activity. Broadband subscribers declined to approximately 675,000 from 687,000 year over year; aircraft in service rose to 555 from 446.
- Commercial networks: Q3 revenue declined 1.7% to $54.5 million, while segment operating loss widened to $48.6 million from $29.9 million, mainly due to increased R&D and weaker mobile broadband system revenue and margins. Nine-month segment loss was $128.0 million, versus $70.9 million.
- Government systems: Q3 revenue increased 9.9% to $166.0 million and segment operating profit rose 6.0% to $24.1 million. Nine-month revenue increased 10.3% to $488.6 million and operating profit rose 21.8% to $71.1 million, driven mainly by cybersecurity, tactical data link and government satellite communications products.
- The company raised $503.1 million net from a November public offering of 7.475 million shares and used $225.0 million to repay revolver borrowings. The offering increased cash and equity but diluted shareholders.
Outlook, commitments and risks
- No specific revenue or earnings guidance is provided. Management said existing cash, expected operating cash flow and credit availability should fund anticipated operating needs for at least 12 months.
- ViaSat-2 was awaiting shipment to the launch site; launch was expected early in fiscal Q1 2018. Estimated total project cost through launch was $580–$600 million. Two ViaSat-3 satellites were expected to launch in fiscal 2020 or early fiscal 2021, with estimated aggregate project cost of approximately $1.3 billion. Management expects ViaSat-3 R&D to continue weighing on commercial networks results.
- The proposed Eutelsat European broadband partnership was expected to close in fiscal Q4 2017, subject to regulatory approvals and other conditions. ViaSat expected to pay €132.5 million for a 49% interest in one venture.
- Contractual obligations totaled approximately $2.47 billion, including $1.08 billion of purchase commitments, much of which relates to satellite programs. Some commitments may be cancellable or adjustable; backlog is also not a guarantee of sales because customer contracts may be terminated and funding can depend on customer appropriations.
- A U.S. Attorney’s Office investigation into TrellisWare’s eligibility for certain prior government contracts and possible False Claims Act issues remained unresolved; the company said it could not determine the outcome or potential liability. Government contract audits and reviews could result in refunds, penalties, contract termination or limits on future bidding. Fiscal 2016 incurred-cost audits were not complete.
- Other key risks include satellite construction, launch and performance; project cost and timing; reliance on government contracts and large awards; competition and customer demand; debt covenant compliance; and execution of the Eutelsat arrangement. The company reported compliance with its credit-facility financial covenants at quarter end.
- Tax results were affected by research and development credits and the prior-year quarter’s discrete tax benefits. The company used a year-to-date actual tax rate because a reliable annual effective rate could not be estimated.
Important facts for investors to verify
- ViaSat-2 shipment, launch timing, total project spending and remaining Ex-Im financing availability.
- ViaSat-3 launch schedule, total funding needs, and the effect of elevated R&D on commercial networks profitability.
- Whether the Eutelsat transaction closes on schedule and the resulting cash commitment and economics.
- Trends in broadband subscribers, average revenue per subscriber, aircraft deployments and service margins.
- Outcomes of the TrellisWare investigation and pending government audits, including any resulting liability or contract impact.
- Cash generation relative to satellite investment, debt service and the company’s substantial purchase commitments.