Business Context and Reporting Period
Company: ViaSat, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended September 28, 2007 (Fiscal Year 2008)
Business Overview: ViaSat provides advanced digital satellite communications, wireless, and secure networking equipment to government and commercial markets. The company operates two primary segments: Government (defense communications, information assurance) and Commercial (satellite networks and antenna systems).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 28, 2007 |
Three Months Ended Sep 29, 2006 |
Six Months Ended Sep 28, 2007 |
Six Months Ended Sep 29, 2006 |
|---|---|---|---|---|
| Revenues | $146,625 | $131,501 | $275,187 | $260,202 |
| Cost of Revenues | $104,513 | $97,444 | $200,909 | $195,559 |
| Gross Margin % | 28.7% | 25.9% | 27.0% | 24.8% |
| Operating Income | $10,864 | $9,814 | $15,530 | $17,704 |
| Operating Margin % | 7.4% | 7.5% | 5.6% | 6.8% |
| Net Income | $8,585 | $6,539 | $12,766 | $11,900 |
| Diluted EPS | $0.27 | $0.21 | $0.40 | $0.39 |
| Cash from Operations (6mo) | $37,688 (2007) vs $13,484 (2006) | |||
| Cash & Equivalents (Sep 28, 2007) | $128,001 | |||
| Working Capital (Sep 28, 2007) | $222,498 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 11.5% year-over-year for the quarter and 5.8% for the six-month period. Growth was driven by a higher beginning backlog ($396.1M) and new awards ($189.5M in Q2).
- Government Segment: Revenues rose 14.0% (Q2) and 11.7% (6mo), led by next-generation military satellite systems and information assurance products.
- Commercial Segment: Revenues rose 8.7% (Q2) but were flat year-over-year for the six months. Growth in consumer/mobile broadband and antenna systems offset declines in enterprise VSAT sales.
- Profitability: Net income increased 31.3% for the quarter and 7.3% for the six months. Operating margins improved in the quarter due to cost reductions in consumer products and better government program performance, though six-month operating income declined due to higher R&D and SG&A expenses.
- Expense Increases:
- SG&A: Increased 21.6% (Q2) and 16.9% (6mo) due to higher selling/proposal costs and increased stock-based compensation ($1.3M vs $0.3M in Q2).
- R&D: Increased 74.5% (Q2) and 64.3% (6mo) to support development of next-generation information assurance, UAV, and VSAT technologies.
- Cash Flow: Operating cash flow surged to $37.7M for the six months (vs $13.5M prior year), driven by improved collections and reduced operating assets.
Guidance, Outlook, and Risks
- Backlog: Firm backlog reached a record $439.0M (up from $388.7M), with $225.4M expected to be delivered in the remainder of fiscal 2008. Funded backlog is $406.0M.
- Acquisitions: Completed the acquisition of JAST, S.A. (Switzerland-based antenna developer) on August 2, 2007, for an initial purchase price of ~$2.1M, with up to $4.5M in additional contingent consideration based on performance targets.
- Tax Outlook: The estimated effective tax rate for fiscal 2008 is 27.7%, reflecting the expiration of the federal R&D tax credit on December 31, 2007. A reinstatement of this credit would lower the rate.
- Liquidity: The company maintains a $60M revolving credit facility with $51.2M available. No borrowings were outstanding as of September 28, 2007. Management believes current cash and operating cash flows are sufficient for the next 12 months.
- Risks:
- Contract Termination: A majority of contracts can be terminated at customer convenience with limited penalties.
- Revenue Recognition: Significant reliance on percentage-of-completion accounting; a 1% variance in cost estimates on open fixed-price contracts could impact pre-tax income by ~$385,000.
- Loss Contracts: Recorded $2.6M in loss contract charges for the quarter and $3.5M for the six months.
Investor Verification Checklist
- Backlog Realization: Verify the conversion rate of the $439M backlog into revenue, noting that unfunded government contracts depend on future appropriations.
- Loss Contract Exposure: Monitor the $3.5M in recorded losses on contracts and assess if further provisions are needed for long-term government programs.
- R&D ROI: Evaluate the return on the significant increase in R&D spending (up 64% YoY) regarding the development of next-gen UAV and information assurance technologies.
- Commercial Segment Mix: Track the shift in commercial revenue from enterprise VSAT (declining) to consumer/mobile broadband (growing) and its impact on margins.
- Tax Rate Volatility: Confirm the impact of the expiring R&D tax credit on the full-year effective tax rate and potential legislative reinstatement.