ViaSat, Inc. — FY2016 Form 10-K
Business context and reporting period. ViaSat provides satellite broadband services, communications networks and government systems. This 10-K covers the fiscal year ended March 31, 2016; the filing also reports fourth-quarter results. FY2016 was slightly shorter than 52 weeks following a change to a March 31 year-end. Management said the change in year length had no material financial impact.
Financial performance and liquidity
| Metric | FY2016 | Prior comparable period |
|---|---|---|
| Revenue | $1.417 billion | $1.383 billion, FY2015 |
| Operating income | $41.1 million | $83.1 million, FY2015 |
| Net income attributable to ViaSat | $21.7 million; diluted EPS $0.44 | $40.4 million; diluted EPS $0.84, FY2015 |
| Cash from operations | $296.9 million | $349.5 million, FY2015 |
| Cash and working capital at year-end | $42.1 million; $243.3 million | $52.3 million; $223.4 million, FY2015 |
- Revenue increased 2.5%: service revenue rose 15.0% to $752.6 million, while product revenue declined 8.7% to $664.8 million. Operating margin fell to 2.9% from 6.0%; net margin was 1.5%, versus 2.9%.
- Satellite Services revenue grew 11.9% to $559.2 million and segment operating profit increased to $81.8 million. Commercial Networks revenue declined 27.8% to $250.7 million and its operating loss widened to $111.3 million. Government Systems revenue grew 13.4% to $607.5 million and segment operating profit rose to $87.1 million.
- Cash used in investing activities was $456.3 million, including $377.9 million for property, equipment and satellites. Financing activities provided $149.1 million.
- Year-end debt principal was approximately $973.7 million: $575.0 million of 6.875% senior notes due 2020, $180.0 million drawn on the revolving facility and $197.2 million under the Ex-Im facility, plus other obligations. The balance sheet reports $954.3 million of debt net of discounts and premiums. Revolver availability was $277.2 million; the company was in compliance with facility covenants.
- Firm backlog was $941.9 million, of which $879.1 million was funded; $507.4 million of firm backlog was expected to be delivered in FY2017. Backlog may be terminated by customers and is not necessarily indicative of future sales.
Material changes and notable items
- Service growth was led by satellite broadband and in-flight connectivity. Consumer and small-business broadband subscribers increased to approximately 697,000 from 686,000; aircraft using Exede in-flight service increased to 476 from about 330.
- Commercial Networks’ product revenue fell as large infrastructure and other programs neared completion. Its operating loss also reflected a $33.9 million increase in independent R&D, much of it for ViaSat-3 and next-generation broadband technologies.
- FY2016 net income included a $4.2 million income tax benefit, compared with $13.8 million of tax expense in FY2015. The filing attributes the benefit in part to research tax credits; FY2016 included 15 months of federal research credit following legislative extension.
- The SS/L and Loral settlement contributed $27.5 million recorded in FY2016, including $25.3 million of satellite-services product revenue and $2.2 million of interest income. FY2015 included $53.7 million of settlement proceeds recognized across product revenue, SG&A reduction and interest income. These settlement items affect period-to-period comparability.
- In February 2016, ViaSat agreed to a proposed European broadband partnership with Eutelsat. ViaSat expected to pay €132.5 million for a 49% interest in one entity; closing was subject to approvals and was anticipated in FY2017’s second quarter.
Outlook, risks and contingencies
- Management gave no numerical earnings or revenue guidance in the provided filing text. It expected continued investment in subscriber acquisition and ViaSat-2/ViaSat-3 projects, with ViaSat-3 R&D expected to weigh on Commercial Networks results. ViaSat-2 was expected to launch in FY2017; ViaSat-3 launches were anticipated in late 2019 or 2020.
- Estimated ViaSat-2 project cost through launch was $600–$650 million. Estimated ViaSat-3 project cost, including two satellites, launches, insurance and related ground infrastructure, was approximately $1.3 billion. The filing notes execution, launch, cost-overrun and funding risks.
- Cash from operations declined year over year, while investment needs remain substantial. The company said cash, expected operating cash generation and credit-facility availability should meet anticipated requirements for at least the next 12 months. After year-end, the revolver was amended to increase capacity from $500 million to $800 million and extend its maturity.
- In March 2016, TrellisWare was notified of a U.S. Attorney’s Office investigation into its eligibility for certain prior government contracts and possible False Claims Act issues. The company could not determine whether a case would be brought or the potential outcome.
- Other significant risks include satellite anomalies or launch delays, intense broadband and defense-market competition, reliance on U.S. government contracts and a limited number of contracts, fixed-price cost overruns, government audits and appropriations, regulatory and spectrum changes including 5G, supplier dependence, leverage and debt covenants, and cybersecurity threats. Management stated that pending ordinary-course matters were not expected to have a material adverse effect, while noting that outcomes are uncertain.
Key facts investors should verify
- Underlying profitability excluding settlement-related revenue and the prior-year SG&A benefit, and the causes of the sharp decline in operating income.
- Commercial Networks’ revenue pipeline, loss trajectory and expected returns on rising ViaSat-3 R&D investment.
- Satellite project cost, financing plans, contract status and launch schedules, including whether final ViaSat-3 construction agreements are completed as anticipated.
- Progress and final terms of the Eutelsat transaction, including approvals, funding and expected economics.
- Resolution and potential financial or contracting consequences of the TrellisWare investigation and ongoing government cost audits.
- Debt covenant headroom, cash-generation capacity and liquidity after planned satellite and partnership spending.