ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period
ViaSat provides satellite broadband services, commercial communications systems and government communications products and services. This filing covers the quarter and six months ended September 30, 2015. Under the company’s newly adopted March 31 fiscal year-end, this was fiscal 2016’s second quarter; comparisons are to the three and six months ended October 3, 2014. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2015 | Prior-year quarter | Six months ended Sep. 30, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $353.3 million | $358.8 million | $697.7 million | $678.2 million |
| Operating income | $13.8 million | $46.5 million | $23.2 million | $45.3 million |
| Net income attributable to ViaSat | $4.9 million | $23.9 million | $7.5 million | $18.0 million |
| Diluted EPS | $0.10 | $0.50 | $0.15 | $0.38 |
| Operating margin | 3.9% | 12.9% | 3.3% | 6.7% |
- Quarterly revenue declined 1.5% as service growth was more than offset by lower product revenue. Six-month revenue rose 2.9%, with service revenue up 15.7% and product revenue down 8.3%.
- Calculated gross margin was approximately 31.8% for the quarter versus 32.6% a year earlier; for six months, approximately 30.6% versus 29.3%. Operating income fell sharply in the quarter, reflecting higher SG&A and independent research and development (IR&D) costs and a prior-year settlement benefit.
- Six-month operating cash flow was $107.5 million, down from $158.5 million. Investing cash outflow was $173.6 million, and financing cash inflow was $60.2 million. Cash decreased $5.9 million to $46.4 million.
- At September 30, working capital was $331.7 million. Total debt was $859.4 million, comprising $575.0 million principal of 6.875% notes due 2020, $165.0 million under the revolving facility and $126.6 million under the Ex-Im facility. Revolver availability was $288.8 million; Ex-Im availability for ViaSat-2 costs was $354.9 million. The company reported compliance with facility covenants.
- Total assets were $2.25 billion and total liabilities $1.15 billion. ViaSat-2 construction costs capitalized on the balance sheet were $391.6 million.
Material changes and segment results
- Satellite services: Quarterly revenue increased 3.1% to $140.2 million; operating profit fell to $21.0 million from $39.4 million. The year-earlier period included $18.7 million of settlement proceeds recognized as a reduction to SG&A. Subscribers grew 5% year over year to approximately 687,000, and 419 aircraft were in service for in-flight internet.
- Commercial networks: Quarterly revenue fell 23.6% to $66.4 million and the operating loss widened to $22.3 million from $7.3 million. Lower project and product revenue, together with increased IR&D, contributed to the deterioration. Six-month revenue declined 25.7% to $133.1 million.
- Government systems: Quarterly revenue rose 8.0% to $146.8 million and operating profit increased to $19.7 million. Six-month revenue rose 15.2% to $292.0 million, supported by government satellite communications and services.
- Firm backlog decreased to $897.8 million from $915.6 million at April 3, 2015; funded backlog was $835.1 million versus $841.4 million. New awards were $691.7 million for the six months, compared with $809.0 million. Backlog excludes subscriber contracts and is not necessarily indicative of future sales; many contracts may be terminated by customers.
Outlook, risks, contingencies and unusual items
- Management said available cash, expected operating cash flow and credit-facility capacity should meet anticipated operating requirements for at least 12 months. The estimated total ViaSat-2 project cost through launch, including related infrastructure, is $600–$650 million; timing of ground-infrastructure rollout affects the estimate.
- Management expects continued subscriber-acquisition spending and further ViaSat-2 investment. It noted that the ViaSat-2 rollout may affect future satellite-services results, though it expects the relative impact to be less than the ViaSat-1 rollout. No revenue or earnings guidance was provided.
- The estimated fiscal 2016 effective tax rate is approximately 36%. Reinstatement of the expired federal R&D tax credit could lower the rate, depending on the law’s terms and timing.
- The SS/L and Loral settlement requires total payments of approximately $108.7 million over two and a half years. Current-period recognition included $6.3 million in product revenue and $0.6 million in interest income for the quarter. Prior-year settlement accounting included a substantial SG&A reduction, affecting comparisons.
- Government contract audits remain a risk: fiscal 2015 incurred-cost audits were not complete, and adverse audit outcomes could require refunds or otherwise affect profitability. Contract-related reserves for potential customer refunds were $2.9 million. The filing also identifies satellite construction, launch and performance risks; fixed-price contract cost-estimation risk; customer funding and termination risk; competition, government-budget and debt-covenant risks; and pending litigation. Management did not expect current pending matters to have a material adverse effect.
- Subsequent to quarter-end, on October 6, ViaSat purchased adjacent headquarters land for $39.5 million. The filing reports no material off-balance-sheet arrangements and says disclosure controls were effective.
Important facts for investors to verify
- Whether service-revenue and subscriber growth can offset declining commercial-networks product revenue and the segment’s widening operating loss.
- How much of the profit comparison reflects settlement timing, and the amount and timing of remaining settlement payments.
- ViaSat-2 project cost, schedule, financing needs and remaining launch and execution risks.
- Backlog conversion, new awards, customer funding and termination exposure, particularly in commercial and government contracts.
- Cash generation, working-capital needs, debt levels and covenant headroom as ViaSat-2 spending continues.