ViaSat, Inc. — Form 10-Q Summary
Business context and reporting period
ViaSat provides satellite broadband services, commercial satellite and wireless networks, and secure government communications. This unaudited filing covers the fiscal third quarter and nine months ended January 3, 2014; the comparable periods ended December 28, 2012. Fiscal 2014 is a 53-week year. The company reported approximately 620,000 broadband subscribers at quarter-end and began construction of its ViaSat-2 satellite.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $332.6 million, up 16.1% | $1,007.5 million, up 24.2% |
| Operating income (loss) | $1.5 million | $4.4 million, versus a $13.4 million loss |
| Net loss attributable to ViaSat | $6.0 million; $0.13 per share | $5.9 million; $0.13 per share |
| Operating cash flow | Not presented for quarter alone | $134.9 million, versus $49.1 million |
| Cash used in investing activities | Not presented for quarter alone | $280.5 million, versus $139.1 million |
Quarterly gross margin was approximately 26.9%, compared with 26.2% a year earlier; nine-month gross margin was approximately 26.5%, compared with 24.1%. Operating margins remained thin. Nine-month cash flow after purchases of property, equipment and satellites was negative approximately $110.0 million; total investing outflow was higher due also to patents, licenses, other assets and an acquisition payment.
At January 3, cash was $41.4 million and working capital was $250.1 million. Total debt was $671.6 million, including $575.0 million principal of 6.875% senior notes due 2020 and $85.0 million drawn on the revolving facility. The new $500 million revolver matures in November 2018; $375.5 million remained available after outstanding letters of credit. The company reported compliance with its financial covenants.
Material changes versus prior comparable periods
- Quarterly service revenue rose 13.9% and product revenue rose 17.7%. For nine months, service revenue increased 27.6% and product revenue 21.9%.
- Satellite Services growth was driven by broadband subscribers, up 33% year over year to approximately 620,000; the segment’s operating loss narrowed to $9.8 million for the quarter and $37.4 million for nine months.
- Commercial Networks revenue increased, but quarterly segment operating loss widened to $6.5 million, principally reflecting higher independent research and development (IR&D) and support costs.
- Government Systems revenue declined 2.7% in the quarter, and operating profit fell 20.4% to $21.5 million. Nine-month revenue increased 11.0%, while segment operating profit decreased 15.0% to $56.3 million.
- Quarterly IR&D expense nearly doubled to $15.1 million; nine-month expense increased 86.0% to $44.2 million. Nine-month SG&A rose 20.1% to $207.5 million.
- Firm backlog decreased to $797.9 million from $851.9 million at fiscal year-end; funded backlog fell to $714.0 million from $842.5 million.
Outlook, commentary, risks and unusual items
- Management stated that cash, expected operating cash flow and revolver availability should be sufficient for anticipated operating needs for at least 12 months. No specific revenue or earnings guidance was provided in the filing text.
- ViaSat-2’s projected total cost through launch, including satellite, launch, insurance and related gateway infrastructure, was estimated at $600–$650 million. The company expected capital expenditures to increase during the remainder of fiscal 2014. The satellite contract price was approximately $358 million plus launch-support services.
- Management expected subscriber growth and scaling service revenue to improve Satellite Services’ operating results over time, while cautioning that continued subscriber and revenue growth was not assured.
- Quarterly results included a $1.7 million charge for loss contracts. The prior-year comparable periods included a $26.5 million debt-extinguishment loss associated with refinancing; no such charge was recorded in the current periods.
- Risks include ViaSat-2 construction, launch and performance; execution and funding of broadband expansion; dependence on government contracts and customer budgets; government contract audits and possible cost adjustments; debt and covenant obligations; and competition, suppliers and litigation.
- Patent and contract litigation with Space Systems/Loral remained pending, with trial on remaining claims scheduled for March 25, 2014. ViaSat reported a favorable summary judgment on one counterclaim and dismissal of specified claims, but outcomes and potential effects remain uncertain.
- DCAA incurred-cost audits for fiscal 2004 and later years remained incomplete. The company held $7.3 million in reserves for potential government-contract cost adjustments. Management said pending matters were not expected to have a material adverse effect, while acknowledging an unfavorable resolution could be material.
Important facts for investors to verify
- Whether broadband subscriber growth, average revenue per subscriber and service margins continued to improve after the reporting date.
- ViaSat-2’s updated total cost, schedule, funding sources and construction or launch risks.
- Backlog conversion, new awards and government funding, given the decline in funded backlog and customer termination rights.
- Cash generation and capital spending relative to the satellite build, and the company’s reliance on the revolver.
- Developments in government audits, contract reserves, tax-asset realizability and the pending litigation.