ViaSat, Inc. — FY2017 Form 10-K
Business context and reporting period. This 10-K covers the fiscal year ended March 31, 2017, with comparisons to FY2016. The filing also reports fourth-quarter results; “2016 Q4” in the request does not match the filing’s reporting period. ViaSat provides satellite broadband services, commercial satellite and wireless networking products, and government communications and cybersecurity systems through three segments: satellite services, commercial networks, and government systems.
Key financial metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,559.3 million | $1,417.4 million | +10.0% |
| Operating income | $36.5 million | $41.1 million | -11.3% |
| Operating margin | 2.3% | 2.9% | -0.6 percentage points |
| Net income | $21.8 million | $21.8 million | Approximately flat |
| Net income attributable to ViaSat | $23.8 million | $21.7 million | +9.3% |
| Diluted EPS attributable to ViaSat | $0.45 | $0.44 | +$0.01 |
| Operating cash flow | $411.3 million | $296.9 million | +$114.4 million |
| Cash used in investing activities | $715.0 million | $456.3 million | Greater investment outflow |
FY2017 cost of revenues was $1,049.0 million, implying a 32.7% gross margin, compared with 30.5% in FY2016. SG&A rose 11.8% to $333.5 million, while independent R&D increased 68.0% to $129.6 million, largely for ViaSat-3 and other next-generation technologies.
At March 31, 2017, cash and cash equivalents were $130.1 million, working capital was $289.3 million, and total assets were $2,954.7 million. Principal debt was approximately $849.9 million: $575.0 million of 6.875% senior notes due 2020 and $274.6 million under the Ex-Im facility; there were no revolver borrowings. Revolver availability was $761.4 million. The filing reports $29.5 million in accrued ViaSat-2 completion exposure fees expected to be financed under the Ex-Im facility.
Material changes versus FY2016
- Revenue grew 10.0%, driven by service revenue growth of 12.3% and product revenue growth of 7.4%.
- Satellite services revenue increased 12.6% to $629.6 million and segment operating profit rose to $131.1 million from $81.8 million. Fixed broadband subscribers declined to about 659,000 from 697,000, while aircraft using ViaSat in-flight internet increased to 559 from 476.
- Government systems revenue increased 12.8% to $685.1 million; segment operating profit rose 11.0% to $96.7 million. Higher SG&A included an $11.8 million TrellisWare legal contingency.
- Commercial networks revenue declined 2.4% to $244.6 million, and segment operating loss widened to $180.5 million from $111.3 million, principally because R&D expense rose $51.1 million.
- Operating cash flow improved, while investing outflows increased, including for satellite construction and the $141.9 million net investment in the Eutelsat European broadband venture.
- A November 2016 public offering of 7.475 million shares generated net proceeds of approximately $503.1 million; $225.0 million repaid revolver borrowings. Shares outstanding rose to 57.6 million from 48.9 million at year-end FY2016.
Quarter, outlook, risks and unusual items
- Fourth quarter: Revenue was $416.4 million versus $372.0 million a year earlier; operating income was $2.7 million versus $7.5 million; net income was $4.2 million versus $4.4 million; and net income attributable to ViaSat was $6.7 million versus $4.5 million. Q4 included the $11.8 million TrellisWare accrual.
- Satellite plans: ViaSat-2 launch was delayed by civil unrest in French Guiana and was expected in June 2017. Management expected the launch and service rollout to affect satellite-services results in FY2018 and beyond. Two ViaSat-3 satellites were under construction, with launches anticipated in approximately three to four years; projected combined project cost was $1.2–$1.4 billion. ViaSat-3 R&D was expected to continue weighing on commercial-networks results in FY2018, with ground infrastructure investment continuing thereafter.
- Liquidity outlook: Management stated that cash, expected operating cash flow, and available credit facilities should cover anticipated operating needs for at least 12 months. No specific revenue or earnings guidance was provided in the filing text.
- Contingency: TrellisWare was under a U.S. Attorney’s Office False Claims Act investigation. ViaSat accrued $11.4 million in uncharacterized damages and $0.4 million in penalties; the company said the investigation’s outcome and final amount could not be determined with certainty.
- Other unusual items: FY2017 included $26.8 million of product revenue and $0.7 million of interest income from the SS/L/Loral settlement; all payments were recorded and no further impacts were anticipated. The settlement contributed to reported revenue and segment profit. The company also recorded approximately $6.0 million of losses on loss contracts.
- Principal risks: satellite launch, construction and in-orbit performance; execution and returns on major satellite investments; broadband competition and subscriber churn; fixed-price contract cost overruns; U.S. government funding, audits and contract concentration; leverage and covenant compliance; and spectrum, regulatory, supplier and cybersecurity risks. The U.S. government represented about 28.8% of FY2017 revenue, and the five largest contracts represented about 19.6%.
Important facts for investors to verify
- Whether ViaSat-2 launched, completed in-orbit testing and entered service on the anticipated schedule, and whether costs or operating effects differed from management’s expectations.
- ViaSat-3 construction, launch timing, total funding needs, and the effect of continued R&D and ground-network investment on commercial-networks losses and cash flow.
- Whether fixed broadband subscriber losses persist and whether higher revenue per subscriber and in-flight growth offset them.
- The final resolution and financial impact of the TrellisWare investigation, including any effect on government-contract eligibility.
- Whether operating cash flow can sustain planned capital spending and contractual commitments while meeting debt obligations and covenants.
- The contribution of settlement-related revenue to comparisons and the consequences of its expiration; verify underlying recurring revenue and segment profitability.