ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the three months ended June 30, 2017, ViaSat’s first quarter of fiscal 2018, and compares results with the three months ended June 30, 2016. ViaSat operates satellite services, commercial networks and government systems businesses. The company launched its ViaSat-2 satellite on June 1, 2017; orbit raising, placement and in-orbit testing remained to be completed before transfer of control.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $380.0 million | $363.1 million |
| Operating income (loss) | $(18.0) million | $7.8 million |
| Net income (loss) attributable to ViaSat | $(9.0) million | $1.9 million |
| Diluted EPS | $(0.16) | $0.04 |
| Operating cash flow | $153.7 million | $62.1 million |
| Cash and cash equivalents, quarter-end | $160.6 million | $47.3 million |
- Revenue rose 4.7%. Product revenue was $166.1 million, up 3.4%; service revenue was $213.9 million, up 5.7%.
- Gross profit, calculated as revenue less product and service costs, was approximately $119.5 million, or 31.4% of revenue, versus $114.9 million, or 31.6%, a year earlier. Operating margin was approximately (4.7)%, versus 2.1%.
- Operating expenses included $89.2 million of SG&A, up 12.3%, and $45.1 million of independent R&D, up 79.0%. R&D was 11.9% of revenue, compared with 6.9%.
- Cash from operations increased substantially, but benefited from working-capital movements, including higher customer collections in excess of revenue/deferred revenue and lower receivables. Investing cash outflow was $128.1 million, including $109.8 million for property, equipment and satellites. Financing provided $4.9 million. Cash increased $30.5 million during the quarter.
- At June 30, cash was $160.6 million and working capital was $312.2 million. Debt carrying value was approximately $850.1 million, including $19.3 million current; principal debt was $879.4 million before unamortized discounts and issuance costs. The $800 million revolving facility had no borrowings, $37.1 million of letters of credit and $762.9 million available. The company reported compliance with debt covenants.
Changes versus the prior comparable period
- Despite revenue growth, ViaSat shifted from operating and net income to losses. Operating results were pressured by higher service costs, SG&A and R&D investment.
- Government systems revenue increased 25.8% to $182.6 million and segment operating profit rose to $32.6 million from $18.0 million, reflecting higher tactical data link, mobile broadband and government satellite communications sales.
- Commercial networks revenue declined 31.0% to $45.2 million, primarily on lower fixed satellite network product sales. Its operating loss widened to $66.1 million from $38.5 million, including increased R&D for ViaSat-3 and commercial aviation systems.
- Satellite services revenue was nearly flat at $152.2 million, while segment operating profit declined to $18.8 million from $30.9 million. Service revenue growth was offset by the absence of prior-year settlement-related product revenue and higher ramp-up costs. Broadband subscribers fell to approximately 625,000 from 696,000; aircraft using ViaSat in-flight service increased to 568 from 509.
- The $9.2 million income tax benefit (51.2% effective benefit rate) contrasted with a $0.8 million tax provision a year earlier; management cited research and development tax credits. The filing also records a $58.7 million opening retained-earnings adjustment from adopting new stock-compensation guidance, principally recognizing deferred tax assets related to share-based compensation.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash, expected operating cash flow and available credit were expected to cover anticipated operating requirements for at least 12 months.
- ViaSat-2 rollout is expected to require further ground-infrastructure spending and increased subscriber acquisition investment after entry into service. Management expected the rollout’s financial impact to be less than the ViaSat-1 rollout, but noted there was no assurance of expansion-plan success.
- Two ViaSat-3 satellites are under construction. Their projected aggregate project cost, including launches, insurance and related ground infrastructure through launch, was $1.2–$1.4 billion. Management said funding was expected from cash, borrowing capacity and operating cash generation, potentially supplemented by third-party arrangements. ViaSat-3 R&D was expected to weigh on commercial networks results in FY2018, with ground-infrastructure investment continuing in later years.
- Firm backlog was $1.086 billion and funded backlog $1.012 billion at June 30, up from $1.024 billion and $937.9 million, respectively, at March 31. The filing cautions that backlog is not necessarily indicative of future sales; many contracts may be terminated, and some require future customer funding. Approximately $487 million of firm backlog was expected to be delivered in the remaining nine months of FY2018.
- Material commitments included $1.038 billion of purchase commitments, including satellite-related agreements, and total listed contractual obligations of $2.590 billion. The ViaSat-3 satellite construction agreements alone were approximately $368.3 million, excluding launch support and broader project costs.
- ViaSat’s TrellisWare subsidiary remained under a U.S. Attorney’s Office investigation concerning eligibility for certain prior government contracts and potential False Claims Act issues. ViaSat had accrued an $11.8 million loss contingency in FY2017; $8.8 million was current and $3.0 million long-term at June 30. The company said the investigation’s outcome and final damages or penalties could not be determined.
- DCAA incurred-cost audits for FY2016 and FY2017 were unfinished. Adverse government audits or contract-compliance findings could lead to refunds, penalties, contract termination or limits on future awards. The company had $1.6 million in reserves for potential government contract cost adjustments.
- Management identified satellite construction, launch and operating risks; competition and customer demand; government budget and contract dependence; execution of the Eutelsat partnership; debt and covenant risks; and litigation as factors that could cause results to differ materially. The company reported no material off-balance-sheet arrangements and stated disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether ViaSat-2 completed testing, was accepted and entered service on schedule, and whether rollout costs and customer growth matched management’s expectations.
- Whether commercial networks revenue and losses improved as anticipated mobile-terminal deliveries and ViaSat-3 development progressed.
- Whether government systems growth and backlog converted into funded, profitable revenue, and whether contract funding and termination risks changed.
- Cash flow quality and capital requirements, including ViaSat-3 spending, purchase commitments, and the availability and terms of financing.
- Developments in the TrellisWare investigation and unresolved government cost audits, including any changes to the accrued contingency or potential customer refunds.