Viasat, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2018; comparative periods ended September 30, 2017. The interim financial statements are unaudited. Viasat operates satellite services, commercial networks and government systems businesses.
Financial performance
| Metric | Three months ended Sept. 30, 2018 | Year-over-year change | Six months ended Sept. 30, 2018 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $517.5 million | +31.6% | $956.3 million | +23.7% |
| Operating loss | $21.6 million | Prior-year loss: $15.9 million | $76.1 million | Prior-year loss: $33.8 million |
| Net loss attributable to Viasat | $25.7 million; $0.43 per share | Prior-year loss: $13.7 million; $0.24 per share | $59.7 million; $1.00 per share | Prior-year loss: $22.7 million; $0.39 per share |
| Operating cash flow | Six-month period: $111.3 million | Prior-year period: $185.8 million |
Quarterly product revenue rose 54.3% and service revenue rose 12.2%. Higher product sales in commercial networks and government systems drove much of the growth. Cost of revenue grew faster than revenue: gross margin, calculated from reported revenue less product and service costs, was approximately 24.2% for the quarter versus 31.5% a year earlier. The six-month gross margin was approximately 22.9% versus 31.5%.
Quarterly segment results: satellite services revenue was $163.0 million and operating loss was $24.8 million; commercial networks revenue was $114.5 million and operating loss was $39.2 million; government systems revenue was $240.0 million and operating profit was $44.9 million. Satellite services profitability weakened as ViaSat-2 and in-flight connectivity services ramped, while government systems operating profit increased.
Financial position, debt and liquidity
- At September 30, 2018, cash and cash equivalents were $44.5 million and restricted cash was $7.2 million. Working capital was $322.3 million.
- Total debt principal was $1.231 billion: $700 million of 5.625% senior notes due 2025, $225 million drawn on the revolving facility and $306 million under the Ex-Im facility. The revolving facility had $555 million of borrowing availability; its weighted-average effective rate was 4.88%. The Ex-Im facility rate was fixed at 2.38% (4.6% effective).
- Six-month investing cash outflow was $299.1 million, including $333.5 million for property, equipment and satellites, partly offset by insurance proceeds and property-sale proceeds. Operating cash flow less purchases of property, equipment and satellites was negative $222.2 million.
- Management said cash, expected operating cash flow and revolver availability should meet anticipated operating requirements for at least the next 12 months. The company was in compliance with debt covenants at quarter-end.
Material changes and unusual items
- Revenue increased substantially, but losses widened and operating cash flow declined year over year. Management cited lower satellite-services margins during the ViaSat-2 service launch and the ramp-up of airline connectivity, as well as lower margins in certain government products.
- Viasat completed its root-cause analysis of the ViaSat-2 antenna deployment issue and recorded a $177.4 million reduction in the satellite’s carrying value with a corresponding insurance receivable. It had received $44.4 million by September 30; $133.0 million was recorded as a probable receivable. An additional $57.8 million was received after quarter-end. Insurance proceeds are required to pay down Ex-Im borrowings.
- Viasat adopted ASC 606 revenue recognition on April 1, 2018 using the modified retrospective method, recording a $25.9 million opening retained-earnings adjustment. The company’s ASC 606 reported six-month loss attributable to Viasat was $9.3 million lower than the pro forma result under the prior accounting method, so reported comparisons are affected by the accounting change.
- Firm backlog was $1.912 billion at September 30, up from $1.090 billion at March 31; funded backlog was $1.783 billion. Backlog excludes some anticipated airline installation orders and future recurring in-flight service revenue, and contracts may often be terminated by customers.
Outlook, risks and contingencies
- Management expected fixed-broadband subscribers to increase in fiscal 2019 and satellite-services operating profit to improve over time, but stated there is no assurance subscriber expansion will be achieved. It expected significantly higher fiscal 2019 capital expenditures, particularly for subscriber equipment.
- Two ViaSat-3 satellites were under construction. The estimated aggregate project cost through launch, including related infrastructure, was $1.2–$1.4 billion. Management expected lower IR&D spending in fiscal 2019 than in fiscal 2018, while continuing ViaSat-3 infrastructure and other development work.
- Key risks include satellite construction, launch and performance; the ViaSat-2 antenna issue and insurance collection; execution and costs of ViaSat-3; government-contract audits and funding; customer concentration and contract termination; competition, regulation and spectrum access; leverage and covenant compliance; and litigation.
- DCAA incurred-cost audits for fiscal years 2016–2018 remained incomplete. The company had $2.6 million in reserves for potential government contract cost adjustments. Management believed pending legal matters would not have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Progress, service capacity and financial impact of the ViaSat-2 issue, and timing and application of remaining insurance proceeds.
- Whether satellite-services margins recover as ViaSat-2 and in-flight connectivity operations scale, and whether subscriber counts and revenue improve as management expects.
- ViaSat-3 construction, launch schedule, total project costs and funding needs relative to the $1.2–$1.4 billion estimate.
- Cash generation, capital spending, revolving-credit usage and covenant headroom as debt service and investment requirements continue.
- Backlog conversion, customer funding and cancellations, including the effect of ASC 606 on backlog and period-to-period comparisons.
- Outcomes of outstanding government audits and any resulting contract adjustments, refunds or other sanctions.