ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period. ViaSat provides secure government communications systems, commercial satellite communications equipment and broadband and managed satellite services. This unaudited filing covers the second quarter and first six months of fiscal 2012, ended September 30, 2011; comparisons are with the periods ended October 1, 2010. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $223.0m | $197.9m | $418.1m | $389.9m |
| Operating income | $5.0m | $13.1m | $6.3m | $20.5m |
| Operating margin | 2.2% | 6.6% | 1.5% | 5.2% |
| Net income attributable to ViaSat | $8.0m | $7.8m | $9.7m | $11.0m |
| Diluted EPS | $0.18 | $0.18 | $0.22 | $0.26 |
| Operating cash flow | Not separately stated for the quarter | $23.8m | $96.1m |
- Quarterly revenue rose 12.7%; six-month revenue rose 7.2%. Product and service revenue both increased overall.
- Margins and operating income declined despite higher revenue. Cost of product revenues rose 22.0% in Q2 and cost of service revenues rose 30.0%. Management cited lower-margin product mix and higher satellite-service costs, including ViaSat-1 gateway connectivity and WildBlue data-center and billing-system costs.
- Cash used in investing activities was $141.6m for the six months, including $133.3m for property, equipment and satellites. Operating cash flow less these purchases was negative $109.5m; this simple measure excludes other investing activity.
- At September 30, cash was $36.0m and working capital was $235.3m. Total debt was $445.2m: $275.0m principal of 8.875% Senior Notes due 2016, $170.0m drawn on the revolving facility, and capital lease obligations. The $325.0m facility had $146.2m available after outstanding borrowings and letters of credit; the facility’s weighted-average borrowing rate was 3.23%.
Material changes versus comparable periods
- Government Systems revenue increased 8.9% in Q2; segment operating profit rose to $14.3m from $12.8m. Commercial Networks revenue increased 44.9%, but the segment’s operating loss widened to $2.9m from $2.3m.
- Satellite Services revenue declined 5.5% in Q2, and the segment moved from $7.7m operating profit to a $1.7m operating loss. For the first six months, its operating profit fell to $0.2m from $19.2m, mainly reflecting higher service costs.
- Firm backlog increased to $575.4m from $528.7m, while funded backlog decreased to $449.1m from $480.5m, principally due to slower government funding. Backlog is not guaranteed revenue; many contracts may be terminated by customers.
- Operating cash flow fell $72.3m year over year, primarily from increased investment in operating assets, including inventory and receivables, and lower accrued liabilities. Borrowings under the credit facility increased from $60.0m at fiscal year-end to $170.0m.
Outlook, commentary, risks and unusual items
- ViaSat-1 launched successfully on October 19, 2011, after the quarter-end, and was undergoing manufacturer testing before transfer of control. The filing gives no specific revenue or earnings guidance. Management stated that cash, expected operating cash flow and facility availability should cover anticipated operating requirements for at least the next 12 months.
- On October 31, 2011, ViaSat amended its credit facility to revise the EBITDA definition for certain earnings impacts related to the ViaSat-1 launch delay. The company reported compliance with financial covenants at September 30.
- Satellite operations carry risks including testing or performance problems, outages, cost overruns, insurance limitations and the need for replacement or backup capacity. Management also cited the risk that ViaSat-1 service and customer ramp-up may not meet expectations.
- Government contract cost audits remain incomplete for fiscal 2003 and later years. The company held $6.7m in reserves for potential adjustments; adverse audit outcomes beyond estimates could reduce profitability. Management said pending legal matters were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- The company recorded a $3.7m income tax benefit for the six months and estimated a 54.8% tax benefit rate for fiscal 2012, primarily due to expected research and development credits. The estimate reflects the federal credit’s scheduled expiration on December 31, 2011 and could change if it is reinstated.
- Prior-year results included an $8.5m forward loss on a government satellite communications program in the first quarter of FY2011; six-month loss-contract charges were $0.7m in FY2012 versus $9.2m in FY2011. ViaSat adopted new multiple-deliverable revenue guidance with no material reported impact.
Important facts for investors to verify
- ViaSat-1 testing, transfer of control, entry into service, customer uptake and the costs required to support the launch.
- Whether satellite-service margins recover as ViaSat-1 services commence and WildBlue subscriber trends change.
- Conversion of the $575.4m firm backlog into funded orders and revenue, particularly in Government Systems.
- Cash generation, capital spending and reliance on revolving credit borrowing; also monitor covenant headroom after the amendment.
- Outcomes of outstanding government contract audits and whether the $6.7m reserve remains adequate.
- Assumptions underlying the fiscal 2012 tax-benefit estimate, including the status of research and development tax credits.