ViaSat, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months of fiscal 2013, ended December 28, 2012. The interim financial statements are unaudited; fiscal 2013 ends March 29, 2013.
Business context
ViaSat operates satellite services, commercial networks, and government systems businesses. Its offerings include satellite broadband and managed network services, communications equipment, and secure government networking products and services. The company reported approximately 467,000 satellite broadband subscribers at quarter-end.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding prior-year periods.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $286.4, up 39.8% | $811.0, up 30.2% |
| Operating income (loss) | $1.3 vs. $1.8 | $(13.4) vs. $8.0 |
| Operating margin | 0.4% vs. 0.9% | (1.7)% vs. 1.3% |
| Net income (loss) attributable to ViaSat | $(20.8) vs. $5.1 | $(43.1) vs. $14.9 |
| Basic diluted-equivalent EPS | $(0.47) vs. $0.12 | $(0.99) vs. $0.35 |
| Cash provided by operations | Not separately provided here | $49.1 vs. $65.0 |
| Capital spending on property, equipment and satellites | Not separately provided here | $120.2 vs. $159.2 |
Quarterly revenue growth came from both products ($164.7 million, up 35.1%) and services ($121.7 million, up 46.5%). Higher costs accompanied growth: quarterly cost of revenues rose 44.0% to $211.4 million, faster than revenue. For nine months, cost of service revenues increased 65.4%, and SG&A rose 31.1% to $172.8 million. The filing attributes increased costs to growth in government services and broadband, ViaSat-1 operations, and subscriber acquisition and support.
- Segments, quarter: Satellite Services revenue was $71.8 million, with an $18.4 million operating loss; Commercial Networks revenue was $68.7 million, with a $3.4 million operating loss; Government Systems revenue was $146.0 million, with $27.0 million operating profit.
- Segments, nine months: Satellite Services revenue was $198.4 million, with a $60.2 million operating loss; Commercial Networks revenue was $231.3 million, with a $7.3 million operating loss; Government Systems revenue was $381.3 million, with $66.2 million operating profit.
- Cash and cash equivalents were $112.7 million at December 28, down from $172.6 million at March 30. Working capital was $316.0 million, versus $327.1 million.
- Total debt carrying value was $586.4 million, including $585.3 million of Senior Notes; principal outstanding on the 2020 Notes was $575.0 million. The $325 million revolving facility had no borrowings, $38.6 million of letters of credit, and $286.4 million of available capacity. The company reported compliance with its financial covenants.
Material changes and unusual items
- ViaSat issued $300 million of additional 6.875% Senior Notes due 2020 at 103.5% of principal, receiving a $10.5 million premium, and used proceeds in connection with repurchasing and redeeming all $275 million principal amount of 8.875% Notes due 2016.
- The debt retirement generated a $26.5 million extinguishment loss, including $19.8 million of cash costs and $6.7 million of noncash charges. Quarterly interest expense rose to $10.7 million from $0.3 million; nine-month expense was $33.8 million versus $0.5 million.
- Satellite Services revenue grew, but its operating loss widened as ViaSat-1 depreciation and service, marketing, and subscriber-growth costs exceeded incremental revenue. Management said it expects subscriber-related revenue growth to improve segment results over time, but gave no assurance.
- Firm backlog increased to $939 million from $618.5 million at March 30; funded backlog was $922 million. Management cautions that backlog is not necessarily indicative of future sales and many contracts may be terminated at the customer’s convenience.
Outlook, risks and contingencies
- Management said current cash, expected operating cash flow, and facility availability should cover anticipated operating needs for at least the next 12 months. It expects capital expenditures to increase in the remainder of fiscal 2013 for subscriber acquisition and possible construction of additional high-capacity satellites. No specific revenue or earnings guidance is provided.
- The estimated fiscal 2013 effective tax rate was approximately 40.1%. A tax law enacted after quarter-end retroactively reinstated the research and development credit; ViaSat expected an $8.0 million tax benefit to be recognized in the fourth quarter.
- Risks include U.S. government contract audits and funding, reliance on significant contracts and suppliers, satellite anomalies or launch/construction delays, regulatory changes, competition, debt covenant compliance, and intellectual-property litigation. DCAA incurred-cost audits for fiscal 2004 and later years remained incomplete; the company had recorded $6.9 million of related potential-refund reserves.
- ViaSat’s patent and contract litigation with Space Systems/Loral includes counterclaims alleging patent infringement and seeking declaratory relief. Management believed pending matters would not have a material adverse effect, while noting litigation outcomes are uncertain and costs may be significant.
Important facts for investors to verify
- Whether broadband subscriber growth and higher average revenue per subscriber translate into improved Satellite Services operating performance.
- Whether Government Systems’ strong revenue and profit growth is sustained and supported by contract funding and awards.
- Cash conversion, capital spending needs, and the timing and economics of any additional satellite construction.
- Debt-service burden and covenant headroom after the refinancing; the filing provides facility availability but not a specific covenant cushion.
- Outcomes of government contract audits, the SS/L litigation, and the realization of deferred tax assets and the expected R&D tax benefit.