ViaSat, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2015, ended October 3, 2014. Comparatives are the periods ended October 4, 2013; the prior-year second quarter included an extra week, which management said it did not believe materially affected results. Figures below are in millions of dollars unless stated otherwise. Interim statements are unaudited.
Financial performance and position
| Metric | Three months ended Oct. 3, 2014 | Prior-year quarter | Six months ended Oct. 3, 2014 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $358.8 | $353.9 | $678.2 | $675.0 |
| Operating income (loss) | $46.5 | $(0.5) | $45.3 | $2.9 |
| Net income | $24.0 | $2.3 | $17.7 | $0.8 |
| Net income attributable to ViaSat | $23.9 | $1.9 | $18.0 | $0.1 |
| Diluted earnings per share | $0.50 | $0.04 | $0.38 | $0.00 |
| Operating margin | 12.9% | (0.1)% | 6.7% | 0.4% |
- Quarterly product revenue fell 7.8% to $193.9 million, while service revenue rose 14.9% to $164.8 million. Six-month product revenue declined 7.8% to $362.1 million; service revenue increased 11.9% to $316.2 million.
- Quarterly operating improvement reflected lower product costs and SG&A, including $18.7 million of settlement proceeds recorded as an SG&A reduction. The settlement also contributed $21.0 million to product revenue and $0.3 million to interest income. Management attributed $39.7 million of satellite services segment operating earnings to the settlement.
- Six-month operating cash flow was $158.5 million, versus $102.8 million. Investing cash use was $217.9 million, including $137.6 million for property, equipment and satellites and $56.5 million for acquisitions. Financing provided $43.1 million. Cash declined $16.4 million to $41.9 million.
- At October 3, cash was $41.9 million and working capital was $280.5 million. Total debt was $725.2 million: $575.0 million of 6.875% senior notes due 2020 and $140.0 million drawn on the revolving facility, plus other debt. Revolver availability was $321.1 million after $38.9 million of letters of credit. The company reported compliance with its financial covenants.
- Total assets were $2.015 billion and total liabilities were $1.013 billion. Net receivables were $279.7 million; deferred revenue and customer advances within current liabilities were $81.9 million.
Material changes and business developments
- Satellite services revenue grew 35.5% in the quarter to $135.9 million, including settlement revenue. Exede subscribers increased 11% year over year to approximately 657,000; service growth also reflected higher average revenue per subscriber. Segment operating profit was $39.4 million, including settlement effects.
- Commercial Networks quarterly revenue declined 21.2% to $86.9 million; its operating loss widened to $7.3 million. Management cited lower fixed satellite network revenues as a large Australian project neared completion, lower terminal sales, and less favorable product mix.
- Government Systems quarterly revenue fell 5.1% to $136.0 million, while operating profit edged up to $19.0 million. Lower government satellite communications product revenue was partly offset by service, tactical data link and information assurance growth.
- NetNearU was acquired on June 6, 2014 for estimated consideration of $59.9 million in cash. The company expects its WiFi network management technology to support expansion into commercial and government markets. Preliminary goodwill recorded was $34.3 million.
- Firm backlog rose to $1.025 billion from $899.5 million at fiscal year-end; funded backlog increased to $949.5 million from $852.6 million. Backlog is not assured future revenue: many contracts may be terminated at the customer’s convenience and funding may be periodic.
Outlook, risks and unusual items
- Management estimated a fiscal 2015 annual effective tax rate of approximately 35%. Reinstatement of the expired federal research and development tax credit could reduce the rate, depending on the timing and terms.
- ViaSat-2 project cost through launch, including satellite, launch, insurance and related gateway infrastructure, was estimated at $600–$650 million. Management said available cash, borrowing capacity and expected operating cash flow should support the project.
- Management believed cash, expected operating cash flow and revolver availability would be sufficient for anticipated operating requirements for at least the next 12 months. The filing did not provide a specific revenue or earnings forecast.
- A 2014 jury verdict awarded ViaSat $283.0 million in its patent and contract litigation with SS/L, but the court ordered a new damages trial, scheduled for November 12, 2014. Separately, a settlement requires SS/L and Loral to pay $108.7 million, inclusive of interest, over two and a half years; amounts not yet realized are to be recognized in future periods as received.
- Government contract audits remain a risk: DCAA audits were not complete for fiscal 2011 and later years. Fiscal 2004 audit work was completed and fiscal 2005–2010 claims approved; reserves for possible government contract refunds were $5.2 million. Adverse audit outcomes could affect profitability, contracts or eligibility to bid.
- Other principal risks include ViaSat-2 construction, launch and operating performance; customer and government budget uncertainty; competition; reliance on significant contracts and suppliers; debt and covenant obligations; and litigation. No material off-balance-sheet arrangements were reported. Disclosure controls were deemed effective at a reasonable assurance level.
Most important facts for investors to verify
- How much of reported earnings and satellite services profitability reflects the one-time settlement, and when the remaining settlement payments will be recognized and collected.
- Progress, final cost and funding needs for ViaSat-2 relative to the $600–$650 million estimate.
- Whether Exede subscriber growth and service margins continue, and whether commercial and government product revenue weakness persists.
- Conversion of firm and funded backlog into revenue, including customer funding and termination risk.
- Outcome of the SS/L damages retrial and resolution of outstanding government contract audits.
- Liquidity and leverage trends as capital spending, acquisition activity and revolver borrowings evolve.