VSAT

Business Context and Reporting Period

Company: ViaSat, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended June 27, 2008 (First Quarter of Fiscal Year 2009).
Business Overview: ViaSat is a producer of satellite and wireless communications systems for government and commercial customers. Operations are organized into three segments: Government Systems, Commercial Networks, and Satellite Services. The company is currently constructing the ViaSat-1 high-capacity satellite, with a planned launch in early 2011.

Key Financial Metrics

Liquidity: The company maintains a $60 million revolving credit facility with $53 million available (after $7 million in letters of credit). There were no outstanding borrowings under the facility as of June 27, 2008.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 19.0% to $153.0 million, driven by higher customer awards ($205.9 million vs. $136.0 million in the prior year) and conversion of awards into revenue.
• Segment Performance:
  • Government Systems: Revenues rose 25.5% to $88.6 million; operating profit increased 95.7% to $12.1 million due to higher sales in information assurance and military satellite communications.
  • Commercial Networks: Revenues rose 12.0% to $62.9 million; operating profit remained flat at $1.5 million despite revenue growth, impacted by higher R&D costs.
  • Satellite Services: Revenues declined 21.1% to $1.4 million; operating loss widened to $2.1 million due to increased SG&A expenses and slightly lower revenue.
• Profitability: Operating margin improved from 3.6% to 6.0% of revenue. Cost of revenues as a percentage of revenue decreased from 75.0% to 70.6% due to better program performance.
• Cash Flow: Net cash provided by operating activities dropped significantly to $0.4 million from $15.8 million in the prior year, primarily due to a net increase in operating assets and liabilities (specifically a decrease in collections in excess of revenue).
• Investing Activities: Cash used in investing activities increased to $13.0 million, largely due to $10.2 million in capital expenditures for the ViaSat-1 satellite construction.

Guidance, Outlook, and Risks

• Backlog: Total firm backlog increased to $427.4 million (from $374.4 million), with $254.6 million expected to be delivered in the remainder of fiscal 2009. Funded backlog stands at $390.1 million.
• Tax Outlook: The estimated effective tax rate for fiscal 2009 is 34.3%, reflecting the expiration of the federal research and development tax credit on December 31, 2007. A reinstatement of this credit would lower the rate.
• Capital Requirements: The ViaSat-1 project has a projected total cost of approximately $400 million. Management believes current cash, operating cash flows, and borrowing capacity are sufficient to fund the project, though they may seek outside equity or debt.
• Risks:
  • Revenue recognition relies on percentage-of-completion estimates; a 1% variance in cost estimates on open fixed-price contracts could impact pre-tax income by approximately $0.4 million.
  • Significant portion of contracts are subject to termination at customer convenience.
  • Dependence on government funding and contract awards.

Investor Verification Checklist

• Backlog Realization: Verify the convertibility of the $427.4 million backlog into revenue, noting that a majority of contracts can be terminated at customer convenience.
• ViaSat-1 Funding: Monitor the funding strategy for the $400 million satellite project and potential dilution from future equity offerings.
• Operating Cash Flow: Investigate the sharp decline in operating cash flow ($15.8M to $0.4M) and the sustainability of working capital management.
• Tax Rate Volatility: Confirm the impact of the expired R&D tax credit on future net income and watch for legislative changes regarding reinstatement.
• Segment Margins: Review the widening operating loss in the Satellite Services segment and its impact on overall profitability as the satellite becomes operational.