VSAT

Business Context and Reporting Period

Company: ViaSat, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended January 1, 2010 (Fiscal Year 2010).
Key Event: On December 15, 2009, ViaSat completed the acquisition of WildBlue Holding, Inc., a provider of satellite broadband internet services. The financial statements include WildBlue's results from the acquisition date forward.

Key Financial Metrics

Profitability: Operating margin for the nine months was approximately 5.3%. Net income margin was approximately 4.4%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 2.8% to $475.4 million for the nine months ended Jan 1, 2010, compared to $462.6 million in the prior year period. Service revenues grew significantly (46.5%) due to the WildBlue acquisition.
• Profitability Decline: Net income attributable to ViaSat, Inc. decreased 21.3% to $20.7 million from $26.2 million in the prior year period. This was driven by increased operating expenses related to the acquisition and restructuring.
• Balance Sheet Expansion: Total assets more than doubled to $1.25 billion from $623 million, primarily due to the acquisition of WildBlue's satellites and intangible assets.
• Debt Increase: The company incurred significant new debt to finance the acquisition, issuing $275 million in Senior Notes due 2016 and borrowing $140 million under its Credit Facility. Total debt was $0 as of April 3, 2009.
• Segment Performance:
  • Government Systems: Revenues increased 1.7% to $284.5 million; operating profit decreased 6.2% to $37.2 million.
  • Commercial Networks: Revenues decreased 2.1% to $172.7 million; operating profit increased to $3.0 million from $0.6 million.
  • Satellite Services: Revenues increased 179.7% to $18.3 million; operating loss widened to $10.2 million from $3.3 million due to acquisition costs and restructuring.

Guidance, Outlook, and Risks

Management Commentary:

• Acquisition Integration: Management expects the WildBlue acquisition to integrate bandwidth capacity with existing distribution resources to reduce service costs and improve subscriber growth.
• ViaSat-1 Satellite: Construction of the ViaSat-1 satellite is ongoing, with a projected launch in early 2011. The company capitalized $5.0 million of interest expense related to this project in the nine-month period.
• Backlog: Firm backlog increased to $478.7 million, with $118.5 million expected to be delivered in the remainder of fiscal 2010.

Risks and Contingencies:

• Satellite Risks: Significant risks associated with satellite launch, in-orbit performance, and potential failure of WildBlue-1 or ViaSat-1.
• Regulatory: Dependence on government authorizations for satellite operations and spectrum usage.
• Integration: Risks related to the successful integration of WildBlue operations and achieving projected synergies.
• Customer Concentration: A significant portion of revenue is derived from a few large government contracts.

Investor Verification Checklist

• Acquisition Accounting: Verify the preliminary purchase price allocation of the WildBlue acquisition and the status of the purchase price adjustment.
• Debt Covenants: Confirm continued compliance with financial covenants under the new Senior Notes and Credit Facility, particularly leverage ratios post-acquisition.
• Satellite Project Costs: Monitor the budget and timeline for the ViaSat-1 satellite construction and launch, including potential cost overruns.
• WildBlue Subscriber Growth: Track subscriber numbers and churn rates for the WildBlue business to assess the path to profitability for the Satellite Services segment.
• Tax Position: Review the impact of the expiration of the federal R&D tax credit and the valuation allowance on deferred tax assets acquired from WildBlue.