ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period. ViaSat provides satellite broadband services, commercial communications networks and secure government communications systems. This unaudited filing covers fiscal 2013’s second quarter, ended September 28, 2012, and the six months then ended; comparisons are with the corresponding 2011 periods. ViaSat reported approximately 429,000 satellite broadband subscribers.
Key financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended Sep. 28, 2012 | Three months ended Sep. 30, 2011 | Six months ended Sep. 28, 2012 | Six months ended Sep. 30, 2011 |
|---|---|---|---|---|
| Revenue | $282.8 | $223.0 | $524.6 | $418.1 |
| Operating income (loss) | $(0.9) | $5.0 | $(14.6) | $6.3 |
| Net income (loss) attributable to ViaSat | $(7.9) | $8.0 | $(22.3) | $9.7 |
| Diluted earnings (loss) per share | $(0.18) | $0.18 | $(0.51) | $0.22 |
| Operating cash flow | Not separately stated for quarter | $42.1 | $23.8 |
- Quarterly revenue grew 26.8% year over year; six-month revenue grew 25.5%. Product revenue rose 14.9% in the quarter and service revenue rose 49.6%.
- Operating margin was approximately (0.3)% for the quarter and (2.8)% for the six months, versus 2.2% and 1.5%, respectively, in the prior-year periods. Gross margin was approximately 23.3% for the quarter and 22.9% for the six months, down from approximately 27.3% and 27.4%.
- Interest expense was $11.6 million in the quarter and $23.1 million for the six months, compared with $0.2 million in each prior-year period. The increase reflected interest on the 2020 Senior Notes and reduced capitalization of interest after ViaSat-1 entered service.
- At September 28, cash and cash equivalents were $136.1 million, working capital was $319.3 million and total assets were $1.74 billion. Total debt was $549.4 million, including $548.0 million of Senior Notes, net of discount.
- Six-month investing cash outflow was $87.0 million, chiefly property, equipment and satellite purchases of $74.7 million. Cash declined $36.5 million to $136.1 million during the period.
Material changes and segment performance
- Satellite services: Quarterly revenue increased 21.5% to $67.3 million, but the segment recorded a $19.4 million operating loss versus a $1.7 million loss a year earlier. ViaSat-1 depreciation and operating support, plus Exede marketing and subscriber acquisition costs, weighed on results. Management attributed broadband service growth to subscriber gains and a more favorable retail/wholesale mix.
- Commercial networks: Quarterly revenue increased 34.8% to $86.5 million, mainly from consumer broadband products. The operating loss narrowed to $1.8 million from $2.9 million.
- Government systems: Quarterly revenue rose 24.7% to $129.0 million, primarily from military broadband networking services. Operating profit increased 70.2% to $24.4 million.
- Firm backlog rose to $965.8 million from $618.5 million at fiscal year-end; funded backlog was $951.8 million. Management cautioned that backlog is not a guarantee of sales: contracts may be terminated, and some amounts require future customer funding.
Outlook, risks and unusual items
- Management expects incremental Exede broadband revenue to improve satellite-services operating results over time, but stated there is no assurance. It expects capital expenditures to increase in the remainder of fiscal 2013 for subscriber equipment and potentially additional high-capacity satellites. The filing provides no specific revenue or earnings guidance.
- Management said existing cash, expected operating cash flow and available credit should cover anticipated operating requirements for at least 12 months. The $325 million revolving facility had no borrowings and $286.5 million available at quarter-end; ViaSat was in compliance with its financial covenants.
- After quarter-end, ViaSat issued $300 million of additional 6.875% 2020 Notes at 103.5% of principal and tendered for approximately $262.1 million of its 8.875% 2016 Notes for approximately $282.5 million including accrued interest. It planned to redeem the remaining $12.9 million of 2016 Notes. The company estimated a $27 million debt-extinguishment loss in fiscal Q3.
- ViaSat’s patent and contract dispute with satellite manufacturer Space Systems/Loral and its parent Loral includes counterclaims alleging ViaSat patent infringement. Management did not expect current proceedings to materially adversely affect the company, but noted litigation costs and potential adverse outcomes.
- Government contract cost audits remain incomplete for fiscal 2004 and subsequent years. ViaSat maintained $6.7 million in reserves for potential refunds; unfavorable audit adjustments or compliance findings could affect profitability, contracts or eligibility for future government work.
- Management estimated a fiscal 2013 effective tax rate of approximately 40.5%, subject to possible reinstatement of the expired federal research and development tax credit. The company also recorded $1.1 million of loss-contract charges in the quarter and $2.4 million for the six months.
Most important facts for investors to verify
- Whether Exede subscriber growth and revenue gains can outpace the satellite-services segment’s depreciation, network support, marketing and acquisition costs.
- Whether the improved commercial-networks and government-systems performance and higher backlog translate into sustained margins and funded deliveries.
- The completed 2020/2016 Notes refinancing, resulting debt and interest burden, and the actual fiscal Q3 extinguishment loss versus the estimated $27 million.
- Outcomes of outstanding government contract audits and the SS/L/Loral litigation, including potential financial, operational or contract consequences.
- Cash conversion and capital spending needs, including CPE investment and any new satellite construction; interim results are not necessarily indicative of full-year results.