ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period
ViaSat provides satellite broadband services, commercial communications networks, and government communications systems. This unaudited report covers the second quarter and first six months of fiscal 2014, with the quarter ended October 4, 2013. Fiscal 2014 includes an extra week; management said it did not expect a material effect on results.
Financial performance and liquidity
- Revenue: Second-quarter revenue was $353.9 million, up 25.1% year over year; six-month revenue was $675.0 million, up 28.7%. Quarterly product and service revenue rose 24.9% and 25.5%, respectively.
- Profitability: Second-quarter operating loss was $0.5 million, versus a $0.9 million loss a year earlier. ViaSat-attributable net income was $1.9 million ($0.04 per diluted share), compared with a $7.9 million loss. For six months, operating income was $2.9 million and ViaSat-attributable net income was $63,000, versus a $22.3 million loss a year earlier. The current-period tax benefit was $12.7 million for the quarter and $17.9 million for six months; the quarter included a $3.7 million release of a state tax valuation allowance.
- Margins: Gross margin, calculated from reported revenue and cost of revenue, was approximately 25.9% for the quarter and 26.3% for six months, compared with approximately 23.3% and 22.9%, respectively, in the prior-year periods. Quarterly operating margin was approximately -0.1%; six-month operating margin was approximately 0.4%.
- Cash flow and investment: Six-month operating cash flow was $102.8 million, up from $42.1 million. Investing cash outflow was $184.7 million, including $160.8 million for property, equipment and satellites; financing provided $43.3 million. Cash declined by $38.6 million to $67.1 million.
- Liquidity and debt: Working capital was $247.2 million, down from $297.7 million at March 29, 2013. Total debt was $621.9 million, including $575.0 million principal on 6.875% notes due 2020 and $35.0 million drawn on the revolving facility. The $325.0 million facility had $251.3 million of remaining availability after borrowings and standby letters of credit. The company reported compliance with its financial covenants.
- Segments: Quarterly revenue was $100.4 million in Satellite Services, $110.2 million in Commercial Networks, and $143.3 million in Government Systems. Segment operating results were losses of $14.6 million and $0.4 million, respectively, and profit of $18.3 million. For six months, Commercial Networks returned to operating profit ($3.0 million); Satellite Services’ operating loss narrowed to $27.6 million, while Government Systems operating profit fell to $34.9 million.
Changes versus prior comparable periods
- Satellite Services revenue growth reflected 38% subscriber growth, from approximately 429,000 to 591,000, and higher average revenue per subscriber. Its operating loss narrowed as service revenue and margins improved, partly offset by higher selling and support costs.
- Commercial Networks revenue increased on consumer broadband products and mobile satellite systems; six-month results improved from an operating loss to a profit. Government Systems revenue grew, but operating profit declined amid higher research, selling and support costs.
- Quarterly SG&A increased 36.1% to $73.6 million, and independent R&D increased 70.3% to $14.9 million. For six months, SG&A rose 25.1% and R&D rose 79.9%.
- Firm backlog declined to $805.9 million from $851.9 million at fiscal year-end; funded backlog declined to $773.7 million from $842.5 million. Six-month new awards were $645.1 million, down from $880.6 million.
- Operating cash flow increased, but investing outflows rose substantially, driven by ViaSat-2 construction and increased purchases of customer-premises equipment and other equipment.
Outlook, risks and unusual items
- ViaSat entered a Boeing contract for ViaSat-2 at approximately $358 million plus launch-support services. Estimated total project cost through launch, including satellite, launch, insurance and related gateway infrastructure, is $600–$650 million. Management expects capital expenditures to increase during the rest of fiscal 2014 and says cash, operating cash flow and facility availability should cover anticipated needs for at least 12 months.
- Management expects Exede subscriber and service-revenue growth to improve Satellite Services results over time, but cautions that continued subscriber growth is not assured. The company estimates an 80% annual effective income tax benefit rate for fiscal 2014; the rate could change if federal R&D tax credits are extended.
- Key risks include ViaSat-2 construction, launch and performance; dependence on government contracts and budget funding; customer contract cancellations and funding; fixed-price contract cost estimates; debt and covenant obligations; and competition and supplier dependence. Management noted that a 1% change in estimated future costs on open fixed-price contracts would change pretax results by approximately $0.7 million.
- Pending litigation includes ViaSat patent and contract claims against Space Systems/Loral and related counterclaims, including allegations that ViaSat infringed SS/L patents. Outcomes are uncertain; the company says current matters are not expected to have a material adverse effect, while acknowledging litigation costs and possible adverse effects.
- Government contract cost audits remain incomplete for fiscal 2004 and subsequent years. The company recorded $7.3 million in reserves for potential customer refunds from cost adjustments. Adverse audit findings could lead to refunds, penalties, sanctions, or contract consequences.
- Purchase commitments totaled $712.7 million, including satellite-related agreements; the filing notes that some commitments may be cancelable or adjustable before firm orders. Backlog is not necessarily indicative of future sales, and many customer contracts can be terminated with limited or no penalty.
Important facts for investors to verify
- Whether subscriber growth and improving Exede margins continue, and whether the Satellite Services segment narrows its operating losses.
- ViaSat-2 project spending, schedule, launch and insurance arrangements, total cost, and any third-party funding or partnership contributions.
- Backlog conversion, new contract awards, government budget timing, and customer funding or cancellation risks.
- Cash generation relative to capital spending, revolver usage, debt covenant headroom, and the company’s ability to fund its commitments.
- Developments in SS/L litigation and government cost audits, including potential financial exposure beyond recorded reserves.
- Whether the stated fiscal 2014 tax benefit estimate and related deferred-tax asset assumptions remain supportable.