ViaSat, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended December 30, 2011; comparable periods ended December 31, 2010. Fiscal 2012 is the year ending March 30, 2012. Financial statements are unaudited.
Business context
ViaSat provides government communications and security systems, commercial satellite-network products, and satellite broadband and managed services. Its three reporting segments are Government Systems, Commercial Networks and Satellite Services. ViaSat-1 launched successfully in October 2011; operating control transferred to ViaSat in December, and commercial service began in January 2012 after quarter-end.
Financial performance
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $205.0m | $195.9m | $623.1m | $585.8m |
| Operating income | $1.8m | $7.0m | $8.0m | $27.5m |
| Net income attributable to ViaSat | $5.1m | $12.9m | $14.9m | $24.0m |
| Diluted EPS | $0.12 | $0.30 | $0.34 | $0.56 |
| Operating margin | 0.9% | 3.6% | 1.3% | 4.7% |
| Operating cash flow | Not presented by quarter | $65.0m | $123.3m |
Quarterly revenue growth was 4.6%; nine-month growth was 6.4%. Service revenue rose 19.6% in the quarter and 12.2% year to date, while product revenue declined 3.6% in the quarter and grew 3.2% year to date. Costs of service revenue rose 36.7% in the quarter and 31.1% year to date, weighing on profitability. The nine-month tax benefit was $7.3m; management used the year-to-date effective tax rate because it could not reliably estimate the annual rate.
Segments and material changes
- Government Systems: Q3 revenue declined 2.8% to $94.9m, but operating profit rose to $13.1m from $8.2m. Nine-month revenue increased 1.1% to $284.4m and operating profit rose to $34.8m, partly because the prior-year period included an $8.5m forward contract loss.
- Commercial Networks: Q3 revenue increased 39.4% to $54.4m, while operating loss widened to $5.2m from $4.2m. Nine-month revenue increased 32.4% to $170.7m; operating loss widened to $11.3m from $7.7m.
- Satellite Services: Q3 revenue decreased 6.2% to $55.7m and the segment recorded a $1.4m operating loss versus $7.9m profit. Nine-month revenue decreased 4.3% to $167.9m and the segment recorded a $1.2m loss versus $27.1m profit. ViaSat attributed the decline in profit mainly to ViaSat-1 preparation costs, including gateway connectivity, a new data center and billing system. WildBlue subscriber additions also fell as channels prepared for the new service.
Firm backlog increased to $575.3m from $528.7m at April 1, 2011; funded backlog decreased to $459.3m from $480.5m. Management attributed the funded-backlog decrease mainly to government funding timing. The company cautions that backlog is not a reliable guarantee of future sales because many contracts may be terminated or depend on future funding.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $65.0m, down from $123.3m. Management attributed most of the decline to higher cash tied up in operating assets, including a $31.2m inventory increase and lower deferred customer collections.
- Investing cash outflow was $176.3m, primarily including $159.2m for property, equipment and satellites. Financing provided $116.6m, including $130.0m of credit-facility borrowings and $20.0m of repayments.
- Cash was $45.8m at December 30, 2011, versus $40.5m at April 1, 2011; working capital was $226.4m. Total debt was $445.0m, including $275.0m principal of 8.875% Senior Notes due 2016 and $170.0m drawn on the revolving facility.
- The $325.0m revolving facility matures January 2016. After $13.0m in letters of credit, availability was $142.0m; the weighted-average borrowing rate was 3.79%. ViaSat reported compliance with financial covenants. Management said cash, expected operating cash flow and facility availability should meet anticipated operating needs for at least 12 months.
- Capital investment remained substantial: ViaSat spent $159.2m on property, equipment and satellites and $17.1m on patents, licenses and other assets during the nine months. Total contractual obligations disclosed were $1.183bn, including purchase commitments, debt, leases and satellite performance incentives.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management described the January 2012 launch of ViaSat-1 commercial service and Exede as a key business milestone; results will depend in part on service uptake and execution.
- ViaSat recorded a $22.3m present-value liability for ViaSat-1 performance incentives; maximum scheduled payments, including interest, could total $39.4m over 15 years, subject to satellite performance.
- A WildBlue appraisal-action settlement required a $20.5m payment. The company recorded a $20.0m liability and matching indemnification receivable; in January 2012 it received $20.0m from former stockholders and paid the plaintiffs $20.5m. A company executive and an affiliated former stockholder received portions of the settlement proceeds, as disclosed in the filing.
- On February 1, 2012, ViaSat sued satellite manufacturer Space Systems/Loral (SS/L), alleging patent infringement and breach of contract concerning ViaSat-1. The case was pending; ViaSat sought damages and injunctive relief. The filing does not quantify a potential recovery or exposure.
- Government contract costs remain subject to audits; DCAA incurred-cost audits for fiscal 2003 and later had not been completed. ViaSat held $6.7m in reserves for possible contract cost adjustments. Management said pending ordinary-course matters were not expected to have a material adverse effect, while noting litigation and audit outcomes are uncertain.
- Other notable risks include fixed-price contract cost-estimation exposure, customer termination and funding risk, service ramp-up costs, and interest-rate and foreign-exchange exposure. A 50-basis-point increase in the credit-facility rate would add about $0.9m of annual interest before capitalization, assuming borrowings stayed constant.
Important facts for investors to verify
- Whether ViaSat-1 and Exede achieve expected subscriber growth, service performance and margins after launch.
- Drivers of elevated service costs and whether Satellite Services returns to profitability.
- Cash conversion and working-capital trends, especially inventory and customer milestone collections, alongside ongoing capital commitments.
- Government contract funding and audit outcomes, including the adequacy of the $6.7m reserve.
- Progress and financial implications of the SS/L litigation, settlement-related indemnification, and satellite incentive obligations.
- Debt levels, revolving-facility availability, covenant compliance and refinancing requirements as the 2016 notes mature.