Business context and reporting period
Viasat, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2018, its first quarter of fiscal 2019 (the filing metadata labels it 2018 Q1). The company operates satellite services, commercial networks and government systems. Unless noted otherwise, financial figures below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended June 30, 2018 | Comparable 2017 period |
|---|---|---|
| Revenue | $438.9 million | $380.0 million |
| Gross profit and margin | $93.9 million; 21.4% | $119.5 million; 31.5% |
| Operating loss and margin | $54.5 million; (12.4%) | $18.0 million; (4.7%) |
| Net loss attributable to Viasat | $34.0 million; diluted loss per share $0.57 | $9.0 million; diluted loss per share $0.16 |
| Cash from operating activities | $53.8 million | $153.7 million |
| Purchases of property, equipment and satellites | $146.6 million | $109.8 million |
At June 30, 2018, cash and cash equivalents were $54.8 million and working capital was $166.7 million. Gross debt principal was approximately $1.155 billion: $700 million of 5.625% notes due 2025, $339.8 million under the Ex-Im facility, and $115 million drawn on the revolving facility. The company had $664.9 million of revolver availability and reported compliance with its debt covenants. Cash fell $16.7 million during the quarter. Cash from operations less satellite, property and equipment purchases was negative $92.8 million.
Material changes versus the prior comparable period
- Revenue increased 15.5%, led by commercial networks product revenue, up $48.7 million. Commercial networks revenue more than doubled to $95.1 million; government systems revenue rose 4.2% to $190.2 million; satellite services revenue was nearly flat at $153.6 million.
- Profitability weakened: cost of revenue rose 32.4%, exceeding revenue growth. Management cited lower satellite-services margins during the ViaSat-2 service launch and IFC ramp-up, and lower margins on certain government systems products. SG&A increased $23.5 million, partly from ViaSat-2 support and selling costs.
- Satellite services swung to a $29.9 million segment operating loss from $18.8 million of profit a year earlier. Commercial networks narrowed its operating loss to $47.0 million from $66.1 million, helped by lower IR&D and higher revenue. Government systems operating profit declined to $24.9 million from $32.6 million.
- Operating cash flow declined $99.8 million year over year, which management attributed to weaker operating results and increased cash use for net operating assets. Investing cash outflow increased to $160.9 million. Financing provided $91.7 million, principally from net revolver borrowings.
- Viasat adopted ASC 606 on April 1, 2018 using the modified retrospective method, adding $25.9 million to opening retained earnings. For this quarter, reported net loss was $4.9 million lower than under the former accounting method; reported revenue was $438.9 million versus $438.4 million under the former method. The 2017 comparison is not presented as a restated ASC 606 period.
Outlook, commentary, risks and unusual items
- Management expects fixed-broadband subscribers to increase in fiscal 2019 and believes growth could improve satellite-services operating profit over time, but gives no assurance of successful subscriber expansion. It expects significantly higher fiscal 2019 capital expenditures, particularly for customer-premises equipment, and additional ViaSat-2 operating costs. It expects fiscal 2019 IR&D spending to be below fiscal 2018 levels.
- Two ViaSat-3 satellites are under construction. Their estimated combined project cost, including launches, insurance and related ground infrastructure through launch, is $1.2–$1.4 billion. Management believes cash, borrowing capacity and expected operating cash generation will provide adequate funding.
- ViaSat-2 has an antenna deployment issue; the company is reviewing the issue and related damage with insurers. Management currently expects no material impact on coverage, planned services or system financial results. Any insurance proceeds received must be used to repay Ex-Im borrowings under the facility terms.
- Firm backlog was $1.629 billion and funded backlog $1.558 billion at quarter-end; approximately half of firm backlog was expected to be delivered in the next 12 months. Backlog includes fixed-broadband subscriber contracts following ASC 606 adoption, so the March 31 comparison is not fully comparable. Backlog excludes some anticipated IFC orders and future recurring IFC revenue; contracts may be terminated, and funding and conversion to revenue are not assured.
- DCAA incurred-cost audits for fiscal years 2016–2018 remained incomplete. Viasat had $1.6 million of reserves for potential customer refunds on certain government cost-reimbursable contracts; adverse audit adjustments beyond estimates could reduce profitability. Government contract audits and compliance failures could also lead to penalties, refunds, contract termination or suspension from bidding.
- The company reported no material adverse effect expected from pending legal matters and no material off-balance-sheet arrangements. It stated that available cash, expected operating cash flow and revolver availability should meet anticipated operating needs for at least 12 months.
Important facts for investors to verify
- Whether ViaSat-2 antenna remediation, insurance recovery and service performance ultimately match management’s expectations.
- Whether satellite-services margins and subscriber trends improve as ViaSat-2 and IFC operations scale, and the resulting capital and operating cash needs.
- ViaSat-3 project cost, schedule, funding plan and future cash-flow impact against the stated $1.2–$1.4 billion estimate.
- Conversion, funding and cancellation risk in backlog, including anticipated IFC installations and government-contract awards.
- Results of pending government cost audits, covenant headroom after amendments, and the company’s ability to manage debt and liquidity amid substantial investment commitments.