ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover ViaSat’s first quarter of fiscal 2014, the three months ended June 28, 2013, compared with the three months ended June 29, 2012. ViaSat operates satellite services, commercial networks and government systems businesses. The company noted that fiscal 2014 has 53 weeks; its second quarter includes an extra week, which management did not expect to materially affect results.
Financial results and liquidity
- Revenue: $321.1 million, up 32.8% year over year. Product revenue was $182.2 million, up 23.3%; service revenue was $138.9 million, up 47.8%.
- Profitability: Operating income was $3.4 million versus an operating loss of $13.8 million; operating margin was 1.1% versus negative 5.7%. Net loss attributable to ViaSat was $1.8 million, or $0.04 per diluted share, compared with $14.4 million, or $0.33 per share. The quarter included a $5.2 million income tax benefit.
- Cash flow: Operating cash flow was $53.8 million versus $0.8 million. Investing activities used $87.2 million, including $73.0 million for property, equipment and satellites. Cash declined $26.1 million to $79.7 million. Operating cash flow less property, equipment and satellite purchases was negative $19.2 million.
- Balance sheet: Working capital was $261.7 million, down from $297.7 million at March 29, 2013. Total debt was $588.1 million, including $575.0 million principal of 6.875% senior notes due 2020. No credit-facility borrowings were outstanding; availability was $286.5 million. Total assets were $1.84 billion and equity was $930.0 million.
- Segments: Satellite services revenue was $85.8 million and operating loss $13.0 million; commercial networks revenue was $97.4 million and operating profit $3.3 million; government systems revenue was $137.9 million and operating profit $16.6 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher satellite-services broadband revenue and increased commercial-networks and government-systems sales and services. Exede and WildBlue subscribers increased 36%, from approximately 405,000 to 550,000.
- Satellite-services operating loss narrowed by $9.5 million, primarily from subscriber growth and improved margins, partly offset by higher selling and support costs. Commercial networks returned to operating profit, mainly on increased revenue and improved margins. Government systems profit rose $1.7 million, but its segment margin declined to 12.0% from 14.0%.
- Independent research and development expense rose 91.2% to $14.1 million. Interest expense fell $1.4 million, primarily reflecting refinancing of the former 2016 notes with lower-rate 2020 notes and increased interest capitalization.
- Firm backlog decreased to $778.7 million from $851.9 million; funded backlog fell to $755.1 million from $842.5 million. New awards were $254.0 million versus $332.6 million.
Outlook, risks and unusual items
- ViaSat entered into a Boeing contract for ViaSat-2 at approximately $358 million, plus launch-support services. Management estimated total project costs through launch, including launch, insurance and gateway infrastructure, at $600 million to $650 million. It expects higher capital expenditures for the remainder of fiscal 2014 and stated it believes cash, operating cash flow and available credit are sufficient for anticipated needs for at least 12 months.
- Management expects subscriber growth to improve satellite-services operating results over time, but cautioned there is no assurance subscriber growth or service revenue will continue. No specific revenue or earnings guidance was provided.
- Government contract audits remain incomplete for fiscal 2004 and later years. ViaSat held $7.2 million in reserves for potential customer refunds from cost adjustments; adverse audit outcomes could reduce profitability or result in penalties, refunds or contract sanctions.
- ViaSat and Space Systems/Loral have pending patent-infringement and contract litigation, including counterclaims. The company said it did not expect current pending matters to have a material adverse effect, while noting litigation costs and the possibility of an adverse outcome.
- The estimated fiscal 2014 annual effective tax benefit rate was approximately 75%, primarily due to research and development tax credits; the rate could change depending on extension of the federal credit and eligible expenses. ViaSat also acquired early-stage LonoCloud during the quarter.
Important facts for investors to verify
- Whether subscriber growth, revenue mix and improving satellite-services margins continue, and how acquisition and support costs evolve.
- ViaSat-2 project spending and schedule relative to the $600 million to $650 million estimated total cost and available funding.
- Backlog conversion, customer funding and awards, particularly given the quarter’s backlog decline and termination rights in many contracts.
- Outcomes of government contract audits and the adequacy of the $7.2 million reserve, as well as developments in the SS/L litigation.
- Cash generation and liquidity after satellite and network investment, including compliance with credit-facility covenants and the 2020 notes’ restrictions.