ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the first quarter of fiscal 2013, the three months ended June 29, 2012; comparisons are with the three months ended July 1, 2011. ViaSat provides satellite broadband services, commercial satellite and wireless networks, and secure government communications systems. Its ViaSat-1 satellite entered commercial service in January 2012.
Financial results and liquidity
| Metric | Q1 FY2013 | Prior comparable quarter |
|---|---|---|
| Revenue | $241.8 million | $195.1 million |
| Operating income (loss) | $(13.8) million; (5.7)% margin | $1.3 million; 0.7% margin |
| Net income (loss) attributable to ViaSat | $(14.4) million; $(0.33) per share | $1.8 million; $0.04 per share |
| Operating cash flow | $0.8 million | $8.9 million |
| Cash and cash equivalents, period end | $129.9 million | $172.6 million at March 30, 2012 |
Gross margin was approximately 22.4%, versus 27.4% in the comparable quarter, based on reported revenue less product and service costs. Cash used in investing activities was $43.2 million, including $36.9 million for property, equipment and satellites and $6.3 million for patents, licenses and other assets. Cash declined $42.7 million during the quarter.
At June 29, 2012, working capital was $317.1 million. Total debt was $549.6 million, primarily $550 million principal of senior notes (8.875% notes due 2016 and 6.875% notes due 2020), plus capital leases. There were no revolver borrowings; $17.0 million of letters of credit left $308.0 million available under the $325 million credit facility. The company reported compliance with its credit-facility financial covenants.
Material changes versus the prior comparable period
- Revenue increased 23.9%: product revenue rose 20.6% to $147.7 million and service revenue rose 29.6% to $94.0 million.
- Operating results shifted from a $1.3 million profit to a $13.8 million loss. Costs of service revenue grew 59.3%, faster than service revenue, and SG&A rose 35.4% to $56.5 million.
- Satellite Services revenue increased 4.3% to $59.3 million, but the segment moved from $1.9 million operating profit to a $22.5 million operating loss. Management attributed the change to ViaSat-1 and Exede launch/ramp costs, including additional depreciation, infrastructure and support, advertising, and commissions.
- Commercial Networks revenue grew 46.2% to $76.1 million; its operating loss narrowed to $2.1 million from $3.2 million. Government Systems revenue rose 23.4% to $106.3 million, and operating profit increased to $14.9 million from $7.4 million.
- Interest expense was $11.5 million versus none reported in the prior quarter, reflecting the 2020 Notes and less interest capitalized after ViaSat-1 entered service. The company recorded a $10.8 million income tax benefit, but still reported a net loss.
- Firm backlog increased to $705.2 million from $618.5 million; funded backlog increased to $666.6 million from $600.5 million. New awards were $332.6 million, versus $253.6 million.
Outlook, commentary, risks, and contingencies
- Management expected Exede subscribers to grow beginning in Q2 FY2013 and said higher service revenue could improve Satellite Services operating results; it cautioned there was no assurance. The filing provides no consolidated revenue or earnings guidance.
- Management expected capital expenditures to increase during the remainder of FY2013, including for subscriber acquisition and expected construction of an additional high-capacity satellite. It said cash, expected operating cash flow, and revolver availability should cover anticipated operating needs for at least 12 months.
- Satellite broadband had approximately 405,000 subscribers at quarter end; subscriber count was 2% lower year over year, although broadband revenue increased due in part to subscriber mix and higher average revenue per subscriber.
- Firm backlog is not a guarantee of sales: contracts may be terminated, and some amounts depend on future customer funding. U.S. government contract cost audits for fiscal 2004 and later were incomplete; $6.7 million was reserved for potential cost adjustments/refunds.
- ViaSat and Space Systems/Loral (SS/L) and its parent Loral are in patent and contract litigation relating to ViaSat-1; SS/L filed patent-infringement and declaratory counterclaims. Management said pending matters were not expected to have a material adverse effect, while noting litigation costs and the possibility of an adverse outcome.
- The estimated FY2013 effective tax rate was approximately 42.6%, reflecting expiration of the federal R&D tax credit; reinstatement could reduce the rate. Government audits, budget delays or spending cuts, customer concentration, competition, execution of the satellite broadband rollout, debt and covenant compliance, and litigation were identified risks.
- The 10-Q reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Exede subscriber growth and improved Satellite Services economics materialized after Q1, and how subscriber acquisition spending and satellite operating costs developed.
- Actual cash generation and capital spending against management’s expectations, including plans and commitments for an additional satellite.
- Government contract awards, funding, backlog conversion, and outcomes of outstanding DCAA/DCMA audits and the related $6.7 million reserve.
- Developments in the SS/L/Loral litigation and any potential financial, operational, or intellectual-property consequences.
- Debt service and covenant headroom, including the terms and obligations of the senior notes and credit facility.