ViaSat, Inc. — Form 10-Q summary
Business context and reporting period
Unaudited results cover the three months ended June 30, 2016, ViaSat’s first quarter of fiscal 2017, compared with the three months ended June 30, 2015. ViaSat operates satellite services, commercial networks, and government systems businesses.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $363.1 million | $344.4 million |
| Operating income | $7.8 million | $9.4 million |
| Net income | $2.2 million | $2.5 million |
| Net income attributable to ViaSat | $1.9 million; $0.04 diluted EPS | $2.6 million; $0.05 diluted EPS |
| Operating margin | 2.1% | 2.7% |
| Operating cash flow | $62.1 million | $18.0 million |
| Cash used in investing activities | $142.1 million | $86.7 million |
Service revenue grew 15.0% to $202.5 million, while product revenue declined 4.6% to $160.7 million. Net income attributable to ViaSat fell despite higher revenue. Cash and cash equivalents were $47.3 million at June 30, 2016; working capital was $267.6 million. Total debt, net of discounts and issuance costs, was $1.034 billion, versus $945.8 million at March 31, 2016. The company had $557.0 million of availability under its revolving credit facility and reported compliance with debt covenants.
Capital spending remained substantial: purchases of property, equipment, and satellites were $120.6 million, with an additional $21.0 million spent on patents, licenses, and other assets. The increase in operating cash flow primarily reflected lower cash tied up in operating assets, including receivables; investing outflows exceeded operating inflows.
Material changes and segment results
- Satellite services revenue rose 15.1% to $152.4 million and segment operating profit increased to $30.9 million from $17.0 million. Broadband subscribers grew to approximately 696,000 from 685,000 a year earlier; 509 aircraft used ViaSat in-flight broadband, up from 380.
- Commercial networks revenue declined 1.8% to $65.6 million. Its operating loss widened to $38.5 million from $18.7 million, largely due to a $11.5 million increase in independent research and development, including work on ViaSat-3 technologies and next-generation broadband.
- Government systems revenue was essentially flat at $145.2 million, while segment operating profit improved to $18.0 million from $15.9 million.
- Overall operating income declined 17.4%. Independent research and development expense rose 61.3% to $25.2 million; SG&A increased 11.7% to $79.4 million. Interest expense decreased to $5.1 million, partly because more interest was capitalized during satellite construction.
- Firm backlog fell to $912.9 million from $941.9 million, and funded backlog declined to $864.1 million from $879.1 million. New awards were approximately $336.3 million. Backlog is not necessarily indicative of future sales and contracts may often be terminated by customers.
Outlook, risks, and unusual items
- Management expected ViaSat-2 to launch during fiscal 2017 and the two ViaSat-3 satellites during fiscal 2020 or early fiscal 2021. Estimated total ViaSat-2 project cost through launch was $600–$650 million. In July 2016, after quarter-end, ViaSat signed Boeing agreements for two ViaSat-3 satellites for approximately $368.3 million, plus launch support; the estimated total project cost including launches, insurance, and ground infrastructure was approximately $1.3 billion.
- ViaSat expected ongoing investment in subscriber acquisition and satellite projects, and said ViaSat-3 research and development would continue to weigh on commercial networks results. Management believed cash, operating cash flow, and available credit would cover anticipated operating needs for at least twelve months.
- The planned Eutelsat European broadband partnership was expected to close in fiscal 2017, subject to approvals and other conditions. ViaSat expected to pay €132.5 million for a 49% interest in Eutelsat’s wholesale broadband subsidiary; the arrangement also includes a jointly owned retail-services entity.
- TrellisWare, a majority-owned subsidiary, was under investigation by the U.S. Attorney’s Office concerning eligibility for certain government contracts and possible False Claims Act violations. The company could not predict whether a case would be brought or its outcome; an unfavorable resolution could materially affect results.
- Government contract audits and reviews remain a risk. The DCAA had not completed the fiscal 2016 incurred-cost audit; recorded contract-related reserves for potential customer refunds were $2.4 million. Adverse audit findings could result in refunds, penalties, contract termination, or restrictions on government contracting.
- Other key exposures include satellite construction, launch and operating risks; reliance on government contracts and customer funding; substantial debt and covenant restrictions; and uncertain contract cost estimates. A 1% variance in estimated future costs on open fixed-price contracts could change pretax income by approximately $0.4 million.
Important facts for investors to verify
- Progress, cost, financing, and launch schedules for ViaSat-2 and the ViaSat-3 program, including the post-quarter Boeing agreements.
- Whether satellite-services growth and improving margins can offset continued commercial-networks losses and elevated R&D spending.
- Developments in the TrellisWare investigation, government audits, and related potential financial or contracting consequences.
- Debt levels, credit-facility availability, covenant headroom, and funding needs for satellite investment and the Eutelsat transaction.
- Backlog conversion and customer funding, given the decline in firm and funded backlog and the potential cancellation of orders.