ViaSat, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 30, 2012. Although the request labels the period “2011 Q4,” this filing reports FY2012 annual results; fourth-quarter figures are separately noted below. Amounts are U.S. dollars.
Business context
ViaSat provides satellite broadband services, commercial satellite communications equipment and networks, and secure government communications systems. It reports three segments: satellite services, commercial networks, and government systems. ViaSat-1 launched in October 2011, was handed over to ViaSat in December, and began commercial Exede service in January 2012. The company reported approximately 385,000 broadband subscribers at year-end.
Key financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $863.6 million | $802.2 million |
| Product revenue | $542.1 million | $523.9 million |
| Service revenue | $321.6 million | $278.3 million |
| Gross profit (revenue less product and service costs) | $227.6 million; 26.4% margin | $251.6 million; 31.4% margin |
| Operating income | $2.2 million; 0.3% margin | $39.3 million; 4.9% margin |
| Income before taxes | Loss of $6.1 million | Income of $36.4 million |
| Net income attributable to ViaSat | $7.5 million; diluted EPS $0.17 | $36.1 million; diluted EPS $0.84 |
| Cash from operations | $141.4 million | $169.6 million |
| Cash used in investing | $229.0 million | $237.7 million |
| Cash and cash equivalents at year-end | $172.6 million | $40.5 million |
| Working capital | $327.1 million | $167.5 million |
FY2012 revenue grew 7.7%, but operating income fell sharply as service costs increased, including $26.3 million of costs tied to ViaSat-1, its gateways, data center, billing system, and Exede launch. A $13.7 million income-tax benefit contributed to positive net income despite the pretax loss.
Segment revenue and operating results: satellite services revenue was $222.7 million, with a $16.8 million operating loss (versus $38.2 million profit in FY2011); commercial networks revenue was $251.7 million, with a $13.0 million operating loss; government systems revenue was $389.3 million, with $50.7 million operating profit.
FY2012 fourth-quarter revenue was $240.5 million; operating loss was $5.9 million, net loss attributable to ViaSat was $7.4 million, and diluted loss per share was $0.17.
Changes, liquidity, and debt
- Revenue growth was led by commercial networks, whose revenue rose 37.4%; government systems revenue increased 1.3%, while satellite services revenue declined 5.2%.
- Operating margin contracted to 0.3% from 4.9%. Higher service costs and SG&A more than offset revenue growth. Government systems operating profit improved, partly because FY2011 included an $8.5 million forward loss on a development program.
- Operating cash flow declined $28.2 million, primarily reflecting inventory and receivables growth; inventory increased as ViaSat prepared for Exede subscriber demand. Capital investment remained substantial.
- At year-end, total principal debt was $550 million of senior notes, plus approximately $2 million of capital leases. The notes comprised $275 million of 8.875% notes due 2016 and $275 million of 6.875% notes due 2020. No revolver borrowings were outstanding; $313.4 million remained available under the credit facility.
- In February 2012, ViaSat issued the $275 million 2020 notes. The credit facility was amended after year-end, in May 2012, extending its maturity to 2017 and revising certain covenants.
- Firm backlog rose to $618.5 million from $528.7 million; funded backlog was $600.5 million. The company cautions that backlog is not a guarantee of sales and many contracts may be terminated by customers.
Outlook, risks, and unusual items
- Management expected operating income to decline substantially over the next few quarters as ViaSat-1 depreciation and higher sales and marketing costs outpaced early subscriber revenue. It expected the trend to reverse as the broadband customer base grew, but gave no assurance. Management also expected higher interest expense after ViaSat-1 entered service and significantly higher FY2013 capital expenditures, including subscriber acquisition costs.
- ViaSat announced an intention to award a construction contract in 2012 for a second high-capacity Ka-band satellite. Satellite construction, launch, operating performance, insurance, and customer adoption are material execution risks.
- U.S. government revenue was approximately 20% of total revenue, and government systems represented about 45%. The five largest contracts generated about 20% of revenue; MIDS tactical data-link products alone contributed about 10%. Budget delays, contract cancellations, fixed-price cost overruns, and customer concentration could affect results.
- DCAA incurred-cost audits remained incomplete for FY2003 and later years. ViaSat carried $6.7 million of reserves for potential customer refunds or cost adjustments on government contracts; audit outcomes could require additional adjustments.
- ViaSat and satellite manufacturer SS/L filed competing patent and contract-related lawsuits in 2012 concerning ViaSat-1 and satellite broadband technology. The company said pending matters were not expected to have a material adverse effect, while acknowledging litigation costs and uncertain outcomes.
- Other significant exposures include satellite failure or degradation, dependence on third-party suppliers and foreign authorizations, regulatory changes affecting rural broadband support, competition, cybersecurity, and compliance with government contracting and export-control rules.
- FY2012 included a $20.5 million settlement payment in a WildBlue appraisal action, funded by $20.0 million received from former WildBlue investors under an indemnification arrangement; ViaSat bore the remaining $0.5 million. There were no FY2012 acquisition transaction or restructuring charges reported.
Most important facts to verify
- Subscriber additions, churn, service quality, and unit economics for Exede as ViaSat-1 costs and depreciation enter the results.
- Cash generation and capital spending, including subscriber acquisition costs and any commitment to a second satellite.
- Government audit developments and whether the $6.7 million reserve adequately covers potential adjustments.
- Fixed-price contract performance, backlog funding and cancellations, and exposure to major programs such as MIDS.
- Debt covenant headroom, future refinancing needs, and the effect of higher cash interest expense.
- Developments and potential financial impact of the SS/L litigation and satellite-related insurance coverage.