Viasat, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019, Viasat’s first quarter of fiscal 2020. Unaudited results are compared with the three months ended June 30, 2018.
Business context
Viasat operates satellite services, commercial networks and government systems businesses, providing broadband services and communications products to commercial and government customers. The U.S. government accounted for approximately 30% of revenue, up from 28% a year earlier.
Financial performance and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $537.0 million | $438.9 million |
| Gross profit and gross margin | $152.6 million; 28.4% | $94.0 million; 21.4% |
| Operating loss | $8.1 million; 1.5% of revenue | $54.5 million; 12.4% of revenue |
| Net loss attributable to Viasat | $11.5 million; $0.19 per diluted share | $34.0 million; $0.57 per diluted share |
| Cash from operating activities | $46.5 million | $53.8 million |
- Revenue increased 22%, with service revenue up 24% and product revenue up 21%. Government Systems revenue rose 37% to $261.2 million; Satellite Services rose 28% to $196.8 million. Commercial Networks revenue declined 17% to $79.0 million.
- Operating performance improved as Satellite Services’ loss narrowed to $2.1 million from $29.9 million and Government Systems operating profit increased to $45.9 million from $24.9 million. Commercial Networks’ operating loss widened to $49.9 million from $47.0 million.
- Income tax benefit was $7.2 million, at a 39% effective benefit rate, compared with a $29.2 million benefit and 44% rate a year earlier; R&D tax credits were a key factor.
- Cash and cash equivalents were $129.9 million at June 30, down from $261.7 million at March 31. Working capital was $314.1 million, down from $401.7 million.
- Investing cash outflow was $185.8 million, including $166.1 million for property, equipment and satellites. Cash declined by $131.8 million during the quarter.
- Debt principal totaled $1.428 billion: $700 million of 5.625% notes due 2025, $600 million of 5.625% secured notes due 2027, and $127.7 million under the Ex-Im facility. No revolver borrowings were outstanding; available capacity was $680.7 million. The company reported compliance with debt covenants.
- Adoption of lease accounting increased reported assets and liabilities: June 30 operating-lease right-of-use assets were $320.2 million and lease liabilities were $338.7 million. Management said adoption did not materially affect earnings or cash flow.
Material changes and business indicators
- Satellite Services growth reflected fixed broadband and in-flight connectivity. U.S. fixed broadband subscribers were approximately 587,000 versus 577,000 a year earlier; aircraft using Viasat IFC systems increased to 1,335 from 757.
- Government Systems product revenue increased $65.7 million, led by satellite communications, tactical radios, tactical data links, mobile broadband and cybersecurity products. Commercial Networks product revenue fell primarily because IFC terminal deliveries normalized after accelerated deliveries in the prior-year quarter.
- Firm backlog was $1.840 billion, down from $1.866 billion at March 31; funded backlog was $1.814 billion, down from $1.847 billion. Remaining performance obligations were $1.8 billion, with a little over half expected to be recognized in the next 12 months.
Outlook, risks and unusual items
- Management expects fiscal 2020 capital expenditures to increase versus fiscal 2019, reflecting construction of a third ViaSat-3 satellite and increased international ground-network investment. It believes cash, expected operating cash flow and revolver availability are sufficient for anticipated requirements over at least 12 months. No specific full-year revenue or earnings guidance is provided in the filing text.
- In July 2019, after quarter-end, Viasat entered a Boeing agreement to build a third ViaSat-3 satellite for the Asia-Pacific region. The two initial ViaSat-3 satellites, intended for the Americas and EMEA, were already in full construction.
- The ViaSat-2 antenna deployment issue remains a key operational risk. Viasat recorded a $177.4 million satellite carrying-value reduction and matching insurance receivable in fiscal 2019; it received another $2.3 million of insurance proceeds in the quarter, bringing cumulative receipts to $188.0 million. Insurance proceeds are required to repay Ex-Im borrowings.
- Government contract audits and reviews could lead to adjustments, refunds, penalties, contract termination or restrictions on future awards. The company had $4.9 million in reserves for potential cost adjustments; fiscal 2019 incurred-cost audits were not complete.
- Satellite construction and other purchase commitments were significant: total contractual obligations were $4.299 billion, including $1.639 billion of purchase commitments. Some supplier commitments may be cancelable or adjustable. Backlog is not assured revenue: many contracts can be terminated, and government funding is required for portions of the work.
- Management believes pending legal matters will not materially harm the company, while noting litigation and government-contract compliance risks. Disclosure controls were assessed as effective at a reasonable assurance level.
Investor verification priorities
- Track ViaSat-2 service capacity, customer performance and insurance recovery, and confirm how related proceeds affect Ex-Im debt.
- Monitor ViaSat-3 construction schedule, total funding needs and the new Boeing agreement’s cost and commitments.
- Assess whether Satellite Services’ subscriber and IFC growth can translate into sustained segment profitability and whether Commercial Networks losses improve.
- Review cash conversion, capital spending, backlog conversion and government-contract funding, audits and potential cost adjustments.
- Check leverage, covenant headroom, liquidity and the effect of lease liabilities and contractual commitments on future cash needs.