Viasat, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2020 (fiscal 2021 second quarter and first half). The interim financial statements are unaudited. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Viasat operates in satellite services, commercial networks and government systems, providing satellite broadband, connectivity services, communications equipment and government communications and cybersecurity solutions. The U.S. Government represented about 32% of second-quarter revenue. The filing reports the ongoing effects of COVID-19, particularly on commercial aviation.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2020 | Year-over-year | Six months ended Sep. 30, 2020 | Year-over-year |
|---|---|---|---|---|
| Revenue | $554.3 | Down 6% | $1,084.8 | Down 4% |
| Operating income | $12.7 | Down from $18.4 | $7.4 | Down from $10.4 |
| Net income (loss) attributable to Viasat | $2.0 | Down from $3.2 | $(10.4) | Compared with $(8.3) |
| Diluted earnings (loss) per share | $0.03 | Compared with $0.05 | $(0.16) | Compared with $(0.14) |
| Cash provided by operating activities | Not separately provided | — | $333.5 | Up from $183.3 |
| Purchases of property, equipment and satellites | Not separately provided | — | $426.3 | Up from $329.6 |
Calculated gross margin was about 30.1% for the quarter, versus 30.8% a year earlier; first-half gross margin was about 28.8%, versus 29.6%. Operating margin was about 2.3% for the quarter versus 3.1%, and 0.7% for the first half versus 0.9%. First-half operating cash flow less purchases of property, equipment and satellites was negative $92.8 million; this measure excludes other investing outlays.
At September 30, cash and cash equivalents were $350.4 million, working capital was $416.5 million, and total debt including finance leases was $1.871 billion before unamortized discounts and issuance costs. Cash less that gross debt was approximately $1.521 billion of net debt. The $700 million revolving facility had no borrowings, $32.5 million of letters of credit and $667.5 million available. Viasat reported compliance with debt covenants.
Material changes and segment trends
- Quarterly product revenue fell $50.9 million, while service revenue rose $12.9 million. First-half product revenue fell $63.8 million and service revenue increased $19.3 million.
- Government Systems quarterly revenue declined 13% to $259.5 million, principally from lower product revenue; operating profit fell 23% to $47.9 million. First-half revenue declined 7% to $520.9 million and operating profit declined 10% to $97.4 million.
- Commercial Networks quarterly revenue declined 10% to $78.9 million. Its operating loss narrowed slightly to $45.4 million, while the first-half operating loss was essentially unchanged at $96.8 million. Lower aircraft-related product demand was partly offset by reduced research and development expense.
- Satellite Services quarterly revenue increased 5% to $215.9 million and operating profit rose to $11.5 million from $5.1 million. Fixed broadband growth and higher subscriber plan mix offset weaker in-flight connectivity.
- First-half operating cash flow increased $150.2 million year over year, primarily reflecting changes in working capital and timing of customer billings and collections. Investing cash outflow increased $97.2 million, mainly due to satellite construction.
Outlook, risks and unusual items
- Management said COVID-19 had not materially affected the period’s overall financial position, results or cash flows, but commercial aviation remained significantly affected. Viasat expected continued negative effects on in-flight connectivity revenue and operating cash flow during the second half of fiscal 2021, with improvement dependent on air traffic and aircraft returning to service. About 320 of 1,390 installed aircraft were inactive at quarter-end; roughly 750 additional aircraft were anticipated under existing agreements, but timing was uncertain.
- Fixed broadband demand strengthened: Viasat reported about 603,000 U.S. subscribers, compared with 587,000 a year earlier, excluding customers retained under pandemic-related programs. Quarterly U.S. subscriber ARPU was $102.66.
- Management expected fiscal 2021 capital expenditures to increase from fiscal 2020, reflecting a third ViaSat-3 satellite and international ground-network investment. The company reported progress despite pandemic-related productivity challenges and targeted a late-calendar-2021 launch for ViaSat-3 Americas. It stated cash, expected operating cash generation and revolver availability should cover anticipated needs for at least 12 months.
- Firm backlog was $2.305 billion at September 30, up from $1.871 billion at March 31; funded backlog was $2.199 billion. A little over half of firm backlog was expected to be delivered in the next 12 months. Management cautioned that backlog is not necessarily future sales: many contracts are terminable, and unfunded work depends on customer funding.
- In June 2020, Viasat issued $400 million of 6.5% senior notes due 2028; proceeds helped repay $390 million outstanding under the revolver. In July, it issued 4.475 million common shares in a private placement for net proceeds of about $174.7 million, for general corporate purposes. The issuance increased shares outstanding.
- Key execution and financial risks include ViaSat-3 construction, launch and operating performance; high satellite investment and purchase commitments; aviation-market weakness; product delivery and customer-funding timing; leverage and covenant restrictions; and government contract audits. DCAA incurred-cost audits for fiscal 2019 and 2020 were incomplete; recorded reserves for potential customer refunds on certain government contracts were $8.3 million.
- The filing described ordinary-course legal matters and government audits, but management did not expect current pending matters to have a material adverse effect. It warned adverse government-contract audit or compliance outcomes could lead to refunds, penalties, contract termination or suspension from government work. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether ViaSat-3 construction, funding and the targeted Americas launch schedule remain on track, and how any delay would affect capital spending and returns.
- Whether commercial air traffic and in-flight connectivity utilization recover as assumed, including activation of inactive and planned aircraft.
- Whether government awards convert to funded work and product shipments, given administrative delays, backlog cancellation provisions and pending cost audits.
- Whether operating cash generation can support the elevated satellite investment program, and how debt service, purchase commitments and available revolver capacity evolve.
- How fixed broadband subscriber growth and ARPU develop, and whether they continue to offset weakness in aviation-related businesses.