ViaSat, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (fiscal 2018 second quarter); unaudited. Comparisons are with the corresponding 2016 periods unless stated otherwise. Amounts are in U.S. dollars.
Business context and reporting period
ViaSat provides satellite broadband services and develops commercial networking and government communications systems. Its segments are satellite services, commercial networks, and government systems. ViaSat-2 launched on June 1, 2017, but orbit raising, placement, and in-orbit testing remained before operational control and service entry. Two ViaSat-3 satellites were under construction. The company reported approximately 589,000 broadband subscribers and 576 commercial aircraft using its in-flight service at quarter-end.
Key financial metrics
| Metric | Three months ended Sep. 30, 2017 | Six months ended Sep. 30, 2017 |
|---|---|---|
| Revenue | $393.1 million, down 1.5% | $773.1 million, up 1.4% |
| Operating income (loss) | $(15.9) million; margin (4.0%) | $(33.8) million; margin (4.4%) |
| Net income (loss) attributable to ViaSat | $(13.7) million; diluted EPS $(0.24) | $(22.7) million; diluted EPS $(0.39) |
| Operating cash flow | Not presented for the quarter | $185.8 million, versus $191.6 million |
- Quarterly service revenue was $211.3 million and product revenue was $181.8 million. For the six months, service revenue was $425.2 million and product revenue was $347.9 million.
- Quarterly operating costs included $90.1 million of SG&A and $46.3 million of independent R&D. Six-month amounts were $179.3 million and $91.3 million, respectively.
- Six-month cash used in investing was $243.6 million, including $206.6 million for property, equipment, and satellites and $37.0 million for patents, licenses, and other assets. Cash provided by financing was $169.8 million.
- Cash and equivalents were $242.7 million at September 30, up from $130.1 million at March 31. Working capital was $417.4 million.
- Debt included $700.0 million principal of 2025 Notes and $362.4 million under the fully drawn Ex-Im facility; there were no revolving-credit borrowings. Debt carrying value, including the current portion, was approximately $1.019 billion. The $800 million revolving facility had $769.9 million available after letters of credit.
Material changes versus the prior comparable periods
- Quarterly revenue fell $6.1 million. Government systems revenue grew, but satellite services and commercial networks revenue declined. For the six months, revenue rose $10.8 million, primarily from service revenue.
- Operating performance weakened: the company moved from operating income of $18.4 million in the quarter and $26.2 million in the six-month period to operating losses. Higher SG&A and sharply higher R&D were major factors.
- Commercial networks reported operating losses of $59.4 million for the quarter and $125.5 million for six months, versus losses of $40.9 million and $79.4 million. Lower fixed satellite-network product sales and increased ViaSat-3-related R&D contributed.
- Government systems revenue increased 6.7% for the quarter and 15.3% for six months; segment operating profit rose to $34.2 million and $66.8 million, respectively.
- Satellite services segment revenue decreased 5.6% for the quarter and 2.9% for six months. The prior-year comparison included revenue from a settlement whose payments ended by March 2017; subscriber counts also declined year over year.
- On September 21, ViaSat issued $700 million of 5.625% notes due 2025 and repurchased or redeemed all $575 million of 6.875% notes due 2020. The refinancing resulted in a $10.2 million extinguishment loss.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, expected operating cash flow, and revolver availability should cover anticipated operating requirements for at least 12 months. No specific revenue or earnings guidance was provided in the filing text.
- Management expected ViaSat-2 rollout, ground infrastructure spending, and subscriber acquisition investment to affect results in the remainder of fiscal 2018 and beyond. It expected ViaSat-3 and commercial mobility R&D to be higher in fiscal 2018, weighing on commercial networks results.
- The projected total cost for the two ViaSat-3 satellites, launches, insurance, and related ground infrastructure was $1.2–$1.4 billion. Purchase commitments, including satellite-related agreements, totaled approximately $1.107 billion; the filing notes some commitments may be cancellable or adjustable.
- Firm backlog was $1.079 billion, including $1.006 billion funded. Management expected $375 million of firm backlog to be delivered in the remaining six months of fiscal 2018, but cautioned that backlog is not necessarily indicative of future sales and many contracts may be terminated for customer convenience.
- TrellisWare, a majority-owned subsidiary, remained subject to a U.S. Attorney’s investigation concerning eligibility for prior government contracts and possible False Claims Act issues. ViaSat had accrued an $11.8 million contingency; the outcome and whether the amount would be final were uncertain.
- DCAA incurred-cost audits for fiscal 2016 and 2017 remained incomplete. Adverse government contract reviews could lead to refunds, penalties, contract termination, or suspension from future bidding. The company stated that it believed pending matters would not materially affect it, while acknowledging uncertainty.
- Other notable items: the six-month tax benefit was $20.6 million, including effects of research credits and accounting changes; the company adopted share-based compensation guidance, recording a $58.7 million cumulative retained-earnings adjustment. ViaSat stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- ViaSat-2 testing, acceptance, service-entry timing, and actual rollout costs and subscriber response.
- Whether falling consumer broadband subscribers stabilize, and whether in-flight aircraft growth improves satellite-services margins.
- Commercial networks order trends, especially fixed satellite-network demand, and the scale and timing of R&D spending.
- ViaSat-3 schedule, total project cost, funding plans, and any changes to purchase commitments.
- Resolution and potential financial effect of the TrellisWare investigation and outstanding government contract audits.
- Conversion of backlog into funded deliveries and cash flow, alongside debt service and compliance with credit-facility covenants.