Q2 2020 Earnings Call
Host for today's call is Mark Dankberg, Chairman and CEO you May proceed Mr. Dan.
Okay. Thanks, a lot a good afternoon, everybody and welcome to <unk>, That's earnings conference call, probably second fiscal quarter, but 2020.
Hi, Mark Dankberg, Chairman and CEO and also on the call with me are Rick Baldridge, our President and Chief operating Officer, Shawn Duffy.
Two financial Officer, Robert Blair General Counsel restricts, our treasurer, and Paul <unk> corporate development.
So before we start Robert will provide our safe Harbor disclosure.
Or from our website, but that said back humor.
Okay. Thanks, Robert So we'll be referring to slide that are available over the web I'll start with an overview and Sean I'll discuss the consolidated and segment level financial results. After that and then I'll provide some additional color and will review our outlet can take questions.
So overall, we're executing well and generating the financial results Weve intended from fixed U.S. broadband in flight connectivity and our government business.
We're making steady progress on initiatives that can accelerate our growth with the approaching buys had three global network.
So Q2 and year to date revenues grew 14% a year over year, an 18% respectively Poker New records the operating leverage from our high performance satellites, the vertically integrated services businesses.
Our scaling government products in a prudent cost control is driving the adjusted EBITDA margin expansion with adjusted EBITDA growth outpacing revenue growth substantially at 53% and 76% year over year for the second quarter and year to date, respectively.
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The main factors behind our business momentum that we previously described remain in place and support on growing ongoing growth prospects in satellite services residential average revenue per user was 17% higher than last year, reflecting sustained demand for high value service plans as well.
Well its industry macro trends.
And we also had a slightly higher subscriber base.
Our in service in flight connectivity I tell count was about 51% higher than it was this time a year ago.
Even with approximately 85 737 Max aircraft currently out of service.
And we also had higher revenues per plane as we've got more aircraft.
Where with the direct prime relationship with our airline customers and we've got a broader base of services being offered.
In government systems, our product sales have been exceptionally strong as we continue to expand our addressable markets for tactical data links network and cyber security and satellite communication systems.
And we've had steady growth in government services as well.
New contract awards remained strong with a growing and record backlog of from government orders.
Along with over $1 billion of indefinite delivery indefinite quantity or I'd like to delivery orders remaining open.
So we we believe the root source of our growth momentum is thoughtful and market tested competitive differentiation. We've earned a reputation for technology leadership in virtually every aspect of satellite networks.
Vertical technology integration ensures that it works together to deliver the best performance in economics for users and it's paying off.
We believe our vice had three satellites system is state of the art and best suited to deliver high performance cost effective.
Services in the best geographic markets.
The breadth and depth of our vertically integrated service delivery and distribution model is very unique.
We believe we've got a greater us customer intimacy greater flexibility and more tools to adapt to evolving business models and end user needs across more vertical and geographic markets.
And we're already in and in some cases were defining redefining what we believe are the most attractive.
Vertical market opportunities for satellite services, and we're starting to demonstrate that we can scale globally.
Were widely acknowledged to deliver the best in flight connectivity services in the world. It's a highly specialized markets and I'm very very big opportunity.
Give more details on how big and how well we're doing a little later in the call.
We're in the early stages of other mobile broadband markets too.
Global services to the U.S. government.
Along with our allies. It's also a big opportunity we serve the most demanding users and are constantly growing the addressable market through platform specific terminals and support infrastructure and by closely integrating advance satellite services with new and existing terrestrial tactical solutions and I'll give more insight into this later also.
We started with U.S. consumer on five one and it's still are single biggest market.
I sat too has enabled good revenue growth in margins are following and we believe we can continue to grow our business around our premium offerings as we bring more capacity market.
We're also laying the groundwork to divest diversified and expand delivery of consumer services globally in postpaid residential and in prepaid mobile services such as community Weichai. We're at the early stages here, but again big opportunities.
[noise], who were very happy with our Q2 results, which I'll quickly summarize.
Total second quarter revenues of $592 million are a new high and that's up 14% year over year year to date revenues are up 18% year over year.
Adjusted EBITDA in the second quarter was $118 million up over 50% year over year, while year to date adjusted EBITDA is up 76%.
Adjusted EBITDA margins increased by five percentage point from high flow through the expanding services revenue better product sales mix and a continued focus on overall cost efficiencies.
Awards were slightly lower compared to an exceptional second quarter last year, but backlog of a little over $1.9 billion is that both compared to last year and sequentially from the first quarter due to strong orders over the last several quarters.
Unawarded IDI Q values, which we don't include in backlog.
At a $1.1 billion level at the end of the quarter well options under our long term.
MSS services contract stood at over $450 million.
So with that high level overview, I'll turn it over to Sean.
[noise] I'm just covered that top level highlight all dive right into the second performance.
Looking at each segment in government systems, we saw robust revenue growth.
$59 million at 24% year over year, meaning Q2 segment revenues JPY 299 million.
This merger was resolved at strong product.
Ross many of our businesses.
Moving tactical dealing <unk>.
I'm radios, consistent product and mobile broadband product.
Hi, buying the product deliveries in Q2 from our whitening <unk> product portfolio and strong I'd like to contract.
Well, which facilitated end of your governments working requirements and an expedited fashion.
Overall, our government business is after a strong start and expected to deliver after my 20 revenues in excess of 1 billion figure.
Government systems, adjusted EBITDA was a record 79 million, representing a 27% increase over Q2 last year.
Gross margins were largely unchanged from the prior period at lower R&D as well as S. Genie as a percentage of revenues drives a higher adjusted you've got growth.
Segment Awards in the corner were 418 million, which is up over 200 million from Q1 and down about 7% year over year. When we had record words in Q2 fiscal 2018.
Based on a strong book to Bill for the period 1.4 to one we ended the quarter with government systems backlog of nearly $1 billion a new record for this segment.
Turning to commercial network, we saw what do you need revenues declined by 27 million or 23% due to the comparative impact of the five years accelerated in schedule on American airline.
However sequentially segment revenues rose, 11% on record revenues and the company's antenna system pipeline.
And second the earning Q2 reflected a larger adjusted EBITDA on higher asking from an R&D investments, which more than offset a three percentage point improvement in gross margin.
Awards for the quarter were 62 million I've, which roughly two thirds was for commercial air terminal and we ended the quarter with backlog of 338 million.
Lastly in satellite services, we continue to see good revenue growth and even stronger adjusted EBITDA increases.
This quarter was our second order a sequential revenue growth, bringing Q2 to a record $206 million, 26% year over guaranteed.
Consumer broadband and commercial I see businesses hitting high VIX consumer broadband contributing just over half of the Q2 girls and I see business, representing a large portion of the major.
In consumer broadband revenues reflected a 17% year over year increase in Arkansas, primarily from a growing premium service on there and a slight increase in average number subscribers compared to last year.
In commercial air revenue growth was driven primarily by 51% every increased and the number of children stirred up along with increased ARPU.
As our expanded onboard capabilities enable broader passenger engagement for airline partners.
Our ending in surface count was 1353 aircraft, which excludes approximately 85 showing 737, Matt the already a bias. After this has enabled are currently grounded.
Adjusted EBITDA for the satellite service segment was up 31 million worth 77% gonna be here. This represents a flow through incremental revenue to adjusted EBITDA of approximately 72%.
Selecting the scale efficiencies, we see in this business.
So before in Bonn, I'm, just wondering sunrise and timing items keep in mind for the remainder of definitely 20, our government segment had a very strong Q2 and with this we stop and product now in full for from the second half.
Additionally, in South services, we noted last quarter, that's been reduced number of 737 Mac install cancellation related service revenues could result in fiscal year earnings pressure in the 5 million to $10 million range based on a return to find in the calendar here in timeframe.
Based on our current assessment of the regulatory environment in the U.S. and internationally, it's more likely will be into higher end of that range. However, we continue to anticipate [laughter] function in comair revenues.
These planes returned to service.
We also just deferred some marketing expenses from this quarter, which was offset by your international investments in ability and emerging scrap and market.
Well, we expect our existing businesses will continue to see strong growth. We do expect revenue to adjusted EBITDA conversion to be more muted over the next few quarters as we can he got to you mark market and incur incremental advertising and different from this holder.
However, we see strong momentum looking forward and adds in Q2 recap on a companywide basis, we closed the quarter with strong revenue growth of 14%, even stronger adjusted EBITDA growth of 53% and a backlog position of $1.9 billion up slightly from the same period last year.
So this next slide has our year to date resolved.
Permanent segment, we saw another high.
Revenue from quarter year to date of 30% to 560 million.
<unk> adjusted EBITDA was up 38 million or 36% year over year to 145 million with about a 1% improvement in margin as result of lower <unk> percent of revenue.
In commercial network revenues were down 20 from time to 167 million, primarily on the lower mobility shipments compared to 2019.
Adjusted EBITDA decreased $10 million you'd be here on the combination of the lower revenue and higher SGT in R&D expenses.
In satellite services revenues were up 27% year to date your to de adjusted EBITDA was up 86% over the same period at the low variable cost nature of this segment from solid incremental EBITDA, despite are expanding startup and dozens Brian .
So on slide seven we have our income and cash flows for the quarter under GAAP net leverage trends.
Our operating income improved substantially for the quarter and year to date period.
Driven mostly by the improvement in adjusted EBITDA, and partially offset by higher noncash expenses, such as depreciation amortization.
Positive net income for the quarter and a large decrease in net loss year to date reflects these operating income improvement and lower interest expense and our income statement as our bias out three constellation project base continues to ramp.
I provision for income tax in the quarter and a reduction in the year to date tax benefits, partially offset these improvements yielding Q2, GAAP net income of $3 million and non-GAAP non-GAAP net income of $21 million eatery fucking approximately a 30 million dollar improvement year over year.
And on a year to date pieces, we had GAAP net loss of $8 million and a non-GAAP net income of $27 million more than 50 million dollar improvement in each metric year over year.
So looking to your today Q2 cash flow, we generated 183 million of cash from operations, which was up 65% from the prior year period, primarily driven by a strong year over year adjusted EBITDA growth.
In Capex, we saw net outweighs increased by $64 million year over year with much of this increase due to last year's investment.
Hi, $44 million a bias that you insurance proceeds received in that period.
During meaning that this is largely unchanged with increases on the bias that three constellation offset by lower capex for CP and device that to ground segment.
Overall, our year to date operating cash flow assigned to just over 50% of our Capex investments.
Now turning to leverage you can see in a lower right chart that are not leverage position is basically unchanged from Q1.
And while net debt has grown year over year, our net leverage is down nearly two turns from buying back in Q2 as last year.
This year over year decrease was anticipated strong adjusted EBITDA growth, whose viastat two launch outpacing our capex spend on a relative basis.
We expect are not leveraged to hover around a three point fivex area throughout the remainder of the year is growth in adjusted EBITDA offset continued investments in the bias out three constellation under global network footprint.
We continue to have ample liquidity of approximately $770 million, which includes the cash on the balance sheet have availability under 700 million dollar revolving credit facility, so that I'll turn it back to Mark.
Okay. Thanks.
So Oh go talk in a more depth on our government systems business, which continues to deliver very steady strong and profitable growth.
A revenue increased 24% year over year to 299 million and adjusted EBITDA grew 27% year over year to $79 million led by very robust product sales and steady services gains.
On a year to date basis revenues up 30% and adjusted EBITDA of 36%.
New contract awards can be lumpy, but we're good at $418 million in the second quarter.
Based on order flow over the last several quarters. We ended the period with record government backlog of $992 million. So backlog is continued continuing to expand even as we've achieved high revenue growth.
Again, we don't include the Unawarded I'd like to contract values in backlog, even those those contract vehicles are growing part of our business.
<unk> queues are important to enable time, we purchases for a number of customers, especially for our unique non developmental items products and services as revenue associated with those.
Andy I items grows we anticipate a higher proportion of revenue may derive from those contracts at quarter end and awarded I'd like to contract value was about $1.1 billion.
[noise] talk.
That's on our tactical Datalink products, most sales continue to grow.
Well, we have program of record products, who sells are strong he's non developmental item products that we developed using our own discretionary R&D investments I've done really well.
This is Andy I products, how cool operational gaps that are artifacts or the government's acquisition system.
So in dealing with tactical data links or link 16 in particular.
The most important thing to remember is that link 16 represents tactical information, it's not just a radio or a data pipe.
And there's a very small set of companies with state of the our link 16 expertise.
R&D I products are expanding the number of participants who can contribute to and or act on that tactical information from thousands of users to tens of thousands and we're on course for hundreds of thousands.
If you think of the members of a week 16 network in terms of met caps law.
Which says that the value of a network grows like the square of the number of users connected you can get a sense of the amount of value, we're hoping enable among our government customers.
Framing that worked that way helps give important context to the potential for a global lower Thorbert network of link 16 capable small satellites, we are working on under an air force contract.
I think 16 uses terrestrial radio so participants must otherwise be connected by a chain of minus high radio links.
And affordable space based solution could extend link 16 networks globally and multiply that value even more.
Well, we love satellite broadband and that's one of our biggest growth areas.
Almost all the participants using link 16 could not be connected directly to a satellite broadband network, but could be connected to a satellite link 16 network.
That's just one of the very unique waves ways that we can enter weve, our space capabilities with terrestrial tactical networks and our information security products. Overall, we're really enthusiastic about the near and long term prospects of our government systems segment, especially in the areas of space information.
In cyber assurance and tactical radio and data networks, we believe there's a very large addressable market and we're still in the early innings.
Turning to satellite services. This is a seventh consecutive quarter of sequential revenue growth for satellite services.
And our residential business revenues were up primarily due to a 17% increase in ARPU over the prior year period, driven mainly by an improving mix of higher bandwidth service plans.
Subscriber count was also up slightly compared to last year.
Commercial Air was also a major contributor to the revenue increase.
The in service tail count up 51 to one per cent compared to last year.
And we're making good progress on our initiatives in Brazil, now that the court challenges are behind us.
With our partner Telegraphs, we've connected thousands of remote schools and government facilities with high speed Internet.
Goal is to reach 15000 sites by the end of this calendar year, and we're well underway to that.
Subsequent to the end of the quarter, we signed a contract with the dual airlines in Brazil.
Rules serves more cities than any other airline in Brazil. Our contract covers their fleet of over 108, 320, and Embraer E 195, I need to aircraft.
We also extended our relationship with the Hell out to provide inflight connectivity tivity on their full triple seven and 787 widebody fleet and inflight connectivity to the and wireless I see on their full 737. Please.
We've got 1300 53 commercial aircraft in service, excluding about 85 737 matched planes.
The timing still not certain but we'll get a meaningful boosting in flight revenue when they returned to service.
No.
We are our expectations are to install our high let's see on over 600 additional claims under existing contracts that was that the ended the quarter and where you can add about 100 more aircraft associated with the new agreements concluded after the close.
So this quarter.
[noise]. So we've updated the chart on the go are left to show the steady progress, we're making in diversifying our satellite service revenue over the past five fiscal years and the trailing 12 month period, ending with the second quarter of this fiscal year.
So even though our U.S. consumer business has been growing absolute revenue and earnings nicely during that time, our non U.S. fixed business has been growing faster, which makes sense. Those are earlier stages in markets that are in the very early innings.
We're aiming to extend then accelerate this trend as we enter or scale verticals in enterprise prepaid mobile consumer like Super why five community wildfire and as we expand geographically.
Next to side I'll give a little more color on the opportunity for high F.C. in particular.
So one of the questions that we get from investors is how big is the high FC opportunity.
A rapid growth reputation for industry, leading performance and reliability.
And the highly specialized skills that needed for this market makes that a really pertinent question.
We view I FC is still a very early stage market.
Business models are still evolving so it's not obvious how to size the opportunity today.
Huh.
But we've considered we've consolidated a few data sources to help scout scope out the potential.
Forecasts from Boeing and others anticipate the global commercial airline fleet will about double.
2038 to around 50000 planes.
Retirements of the existing fleet, along the way mean that about 87% were 44000 to those planes will be purchased in that period.
Passenger for account passenger count is forecast to grow by about 3.5% annually from a base of about 4.3 billion in 2018.
So passengers will also double over that 20 year timeframe.
But fights are expected to travel further on average so revenue passenger miles or kilometers are anticipated to grow by.
2.3 X.
Only about 30% of the global commercial fleet, it's connected at all today. So that's a lot of growth on its face.
How did the existing fleet will be retired.
As for context, we believe we've been exceptionally successful with line pits and other new fleet deployments compared to competitors, which is good and that's indicative of airlines competence and our long term solution.
The next.
Important point is that we see well ipi connectivity is undergoing a fundamental business model change from being just a source of ancillary revenue for a small fraction of passengers.
Being an integral and foundational part of the implied experience.
We think it's becoming increasingly evident that I have to see really means delivering the internet and everything that implies to all the passengers onboard.
Passengers are not connected they wouldn't have access to streaming entertainment or e-commerce would be able to participate in a myriad of advertiser in sponsor related.
Activities in effect, one way to envision the fully realized in flight connectivity opportunity.
As the Internet economy in the here.
The London School of Economics issued a report Cogs Sky High economics, that's available online and that size. This total echo system for in flight online has growing from roughly $4 billion in 2000 $18 billion to $67 billion in 2028.
How about 67 billion dollar value is not the revenue for I have to see service providers, but it's an estimate of all the onboard economic activity associated.
With inflight connectivity and that can accrue to the airlines to E Commerce providers online entertainment services and others.
Some portion of that to it in flight connectivity provider.
But the key point here is that airlines that do not have a scalable high performance passenger internet connection and high passenger engagement engagement.
Wont be able to tap into this source of value and will likely be at a substantial competitive disadvantage to those airlines that do figure out how to master this domain.
That's why we're so focused on being able to connect every passenger on each play with reliable high speed connections suitable for streaming even at the busiest hub airports.
This expansive view of the economic impact of scalable high performance biopsy resonates with us as we've seen our airline partners leverage our cotton activity in various ways with valuable Internet brands, such as Apple Amazon, Netflix Spotify and others.
All of whom aim to interact with a high value demographic of passengers writing in airplanes for hours and with access to a good broadband service support streaming audio and video put as many people as they can engage.
Our mission is to help our airline partners leverage conductivity and to tap into this ecosystem and whatever ways are best suited to their brand air passenger demographics, there destinations their targeted customer experience and their network of partners.
Different airlines are in different stages or this journey, but we believe that all the airlines that are farthest along in leveraging the internet or our customers.
Still a lot of work to do but we've made substantial progress in our reputation speaks for itself.
This London school of economic study exporters multiple aspects of these business models, but doesn't explicitly breakout the portion of the 67 billion dollar 2028 revenue that would constitute the in fights service provider share of the market based on our experience.
We estimate that roughly 10% to 20% of that total is addressable by the inside service providers were roughly 7 billion to $14 billion annually in 2028.
Depending on how the eco system a box.
Just as a cross reference euro consult estimates the implied service provider and satellite operator portion of the market has about $8 billion in that timeframe. So that's in that range. We refer investors to these reports for more debt.
Hi. This next chart on market share helps establish the point of this discussion on market sizing. It shows our progress in capturing market share in the North American narrow body fleet, which accounts for the majority of currently connected.
Global connected aircraft.
Correlating data from several sources, we believe we're serving just under 30% to this market up from just over 20% at this time last year.
Three years ago, we were only a 10%.
No one is growing share as fast.
And we still see opportunities to continue to gain share.
We believe those share gains reflect the advantages of our vertically integrated strategy, enabling us to directly address every aspect of the in flight connectivity and entertainment solution aircraft integration flight operations support the passenger experience to streaming entertainment in the data analytics that help drive it.
We're already a multi regional player with strong positions, where we've established international partnerships, including Australia, Europe in Brazil, and we're making progress in China.
Now with the approach a bias at three and the lead time for delivery of the most popular new aircraft. We can compete on the global stage, our new business pipeline is its most robust ever.
You can see that are in flight connectivity business alone can be a multibillion dollar per year annual business during the lifetime of the Viasat three constellation if we can translate to our success in North America to the global market.
If we assume our current north American narrow body market share of roughly 30%.
Can carry across globally, our revenue opportunity in 2028 would range from about 2 billion to $4 billion annually and that's in the range of 10 times, where we are now.
So far our execution has been good we're targeting being able to demonstrate meaningful progress towards being a leading global player in the next several quarters.
Stay tuned.
So now I will turn to our outlook.
The chart on the left hand side shows that arch chose our trailing 12 month revenue and adjusted EBITDA growth over the last six quarters and that's helpful and communicating our outlook.
Since the first quarter fiscal 19, we've grown revenue by 36% an adjusted EBITDA by 97%.
We believe the underlying factors, enabling this growth remain in place.
And our listed in the points on this slide.
Our government systems business is expanding its addressable markets. It's in the early stages of what we believe can be a long term growth cycle.
The government products business has been exceptionally robust.
To date this year well individual quarters can be lumpy, we believe our government systems division year over year or trailing 12 month results have good prospects for continued growth.
Our record government system backlog of almost $1 billion augmented by another billion plus the body Q opportunities builds confidence in that outlook.
Satellite services business also is good prospects for continued year over year or trailing 12 month growth ARPU, 17% higher than this time last year on a slightly higher subscriber base.
We're also market testing new service plans that they can increase the available bandwidth per user.
And or enable us to support more subscribers and reduced latency to terrestrial levels, but those applications that are latency sensitive.
We expect to see good flow through of incremental revenue to adjusted EBIT EBITDA, even as we continue to invest in these new growth markets.
We're also seeing the benefits of our growth surge in implied conductivity that business is growing much faster than U.S. consumer and that along with enterprise international growth in emerging prepaid mobile community why pie.
Continues to diversify our revenue and earnings base.
The number of in service commercial aircraft is up 51% and revenue per plane is higher.
Our market share in North America, narrow bodies has grown substantially to almost 30% and they're about 85 737, Max planes outfitted with our service that are still grounded and we'll get into service sometime in the next couple of quarters.
Well the exact timing forgetting them flying is still not totally certain it will create a nice step increase when it when those revenues happened.
As we mentioned earlier our performance in Rod reliability has established an excellent reputation in industry and our pipeline of new global.
In flight opportunities is very robust viastat three launches are approaching and winding up with more new aircraft deliveries in our investments in dual band K UK opens potential for early entry and retrofits.
We're optimistic that can yield exciting growth in total tail count and that we can ultimately earn global market share comparable to what we've already achieved in North America.
It's a very big addressable market, we believe we're establishing leadership status.
Given the robust in flight pipeline I described you can expect us to continue to make prudent success based investments in growth for items, such as Stcs or line fits and regional network and support infrastructure.
We've shown we can make those investments worthwhile.
Those investments made dampen some of the earning flow through in our satellite services segment, but we don't anticipate they will undermine our continuing trailing 12 month growth momentum in revenue or in adjusted EBITDA.
I don't point I'd like to emphasize is that we're already involved in reading or pioneering a portfolio synergistic vertical markets fix satellite broadband in flight government mobility enterprise prepaid mobile via community why pie in maritime.
That are different stages of development, but several of which have the potential over the next five to 10 years of yielding revenue significantly greater than the whole company achieved today.
Aside from the sheer growth opportunity, we see important benefits divide that into first buying our business base, improving resilience to extrinsic risks and economic cycles in vertical or geographic markets.
And the opportunity to target those applications offering the greatest returns for our resources and skills in each case, we believe competitive advantage will come from not just serving low cost bit but in optimizing that end user benefits that broadband internet offers to each particular vertical and geographic markets.
This requires market in Tennessee.
Operational technical and regulatory expertise.
But those skills also create defensible modes that can help us achieve the attractive returns we expect.
So that's it for our prepared remarks and at this point, we'd be happy to take questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone is your question has it been answered all your wish to remove yourself from the Q. Please press the pound key.
Your first question is from Rick Prentiss from Raymond James Your line is open.
Thanks, Good afternoon.
Correct.
A couple of questions Mark you sound pretty excited.
Got a board out in a couple of the areas government services was obviously very strong quarter you called out early stage for a long term growth cycle.
Are you looking at that on the government side from both the product side and the services side is the ability to grow and what kind of margins could we expect in that segment as you continue to grow that long cycle.
So Ah first yes on both products and services products growth has been exceptionally good the first half of this year.
And what you one of the things we have spoken about multiple times over the last couple of years is growing the addressable markets for our products.
From kind of the leading edge early adopter base early responders like special forces into the broader Army Navy and Air Force and that's that's happening that's what's.
Ah stimulating these products sales and so those markets are much larger than the.
Early adopters special forces markets that Weve typically been in for many of our products.
The services segment, you know the services part is growing steadily as well one of the things that we see as a as a catalyst for even faster growth is getting greater global coverage as we as we expand our footprint either through partners.
No I tend to go onto a bar satellites, you know the margins I I'd say.
Margins will fluctuate with product and services mix, but the margins that you're seeing are pretty representative of of what one would expect going forward.
Okay and slide 11 was a very interesting slide appreciate you putting that out there.
As you think about that opportunity for that addressable market.
In flight connectivity, bringing the internet to the airline.
What are the barriers to you guys growing that share I guess first on your narrow body.
And then what are the issues or barriers to getting your share of that revenue or getting paid for it.
Okay. So.
Well you know all or.
Our our pitch with the airlines and this it's we can see it's clearly resonating is that.
Think of it as engagement is really the key to to the implied business that you get no points for having in flight connectivity from passengers that don't use it. So feel good number one thing is really too.
Silicate engagement and in some cases.
You don't have to do anything passengers want to use it maybe you may or may not need to take away a pay wall to to do that.
Some cases or you may need to just.
Take away friction that the people who might want to use it but didn't know was there might have.
Not have to go through a portal as an example, we've got evidence that when you can take away friction like that you can increase engagement once you've got engagement.
And you can show, which is one of the things we've done multiple times with a third party internet companies that you can deliver a good experience reliably even in the busiest places in times.
Now.
This is why I think that that chart on page 11 is important is that you're really unlocking value not just for the airline for the passengers, but for the whole internet economy and as long as.
Has there as you benefit to think of the participants are the passengers the airlines the internet companies and us as long as it's a win win win win deal. There's there's a lot of value to be unlocked and.
You know that I'd say, probably the biggest.
Issue to overcome is that given previous in flight connectivity.
Experiences and poor passengers.
Airlines baby skeptical that anybody but that third parties are interested we've seen we have evidence that they are.
Third you know these third parties are little bit skeptical that arrival and scalable experience can be delivered and we're trying to show, we're showing that and I think that ER.
I think it's working.
But that then trick question about what the you know what the barriers are a lot of them really are just coming from.
Some of the forward leaning airlines that are trying new things and having them be successful.
Makes sense I think we're starting to call out why fly instead of Wi Fi [laughter] like that.
Right and have good luck safe travels thanks, Rick.
Next question as from Simon Flannery, Some Morgan Stanley . Please open.
Thanks, So much good evening, Mark I Wonder if you could just give us a little better jobs to start us off the bias had three.
Build programs around the world and the latest thoughts on timing there and also on the link 16, Leo potential what's the timeframe floor going through evaluation trials with Cetra and is that a contract that might come in calendar 20 or is it longer than not.
Okay, a person on Viasat three.
We don't have any any changes to our no toward.
Yeah, Joe or timing than what we've talked about last quarter.
And that basically what we said his first half of 2021 for the first satellite or second half.
End of 2021 six months later for the second and of 22 for the third that's still that these are long launch dates.
On states correct, yes.
And those are the schedules are working too we are.
We always remind people that there are you know that space business is risky there's new technology involved and then there's a conventional risks of.
So in orbit satellite platform issues over lunch issues, Oh, we feel like we have a good luxury of good satellite manufacturer, but Ah, but theres, new technology, and there's always risk, but but we haven't made any changes to our outlook from last quarter and anything on just partnerships and I think your mad men something a background networks.
In EMEA as well.
Yeah. So we are right now are.
Our plan is to bring the launch of satellites bring them to markets ourselves, we we will have.
Partnerships in.
Different regions. It as an example, you know we're in the Americas, we have already have.
Calibrate us as a partner in Asia Pacific, We work with Nbn, we're starting to work with China's hat, but I think you'll see more likely to see strategic partnerships and some.
Specific capital partnership around the the satellite themselves.
Okay.
Got to try gone to link 16 or did you have.
That's good that's on links on the link 16, we have a contract with the Air Force research lab to to build a.
Prototype link 16 with it it's a range extension satellites. So it it does just what we described which <unk>, which is it can interact with link 16 terrestrial terminals for platform or participants and relay those.
Over the line much larger line of sight of that satellite footprint, a that that program is underway.
I'm not totally sure of the schedule, but I'll bet you its next year calendar 2020.
For a demonstration or we will they air force will work with us to arrange the launch and there's no launch scheduled for it yet it will depend on that.
Yes, the progress and the status of the of the satellite itself.
Okay great.
Thank you.
[laughter].
Next question from Mike Crawford from F.B. Riley. Please open.
Thanks, Marc you alluded to your new flex plans, when you're talking about greater options or maybe reduce slate and see how does that model work with your DSL partner or partners.
Okay. So we have a we are.
We're aiming to roll that out in the figure with so DS where weve begun with a DSL partner what the the first model. We're using it may not be the only one is a wholesale arrangement, where we acquired DSL and bundle it with our satellite service.
And we have a pretty big.
You know multi regional national it's not fully national but.
One a pretty big footprint for that under.
Our viastat two satellite now.
We are in discussions with other DSL providers, who are interested in doing the same thing with us.
Likely you know, we make we could end up buying wholesale DFL, what we expected at some point, we'll have sort of reciprocal marketing relationships, where DSL provider can offer satellite along with that then we're also using we're also aiming to deliver.
This calendar year.
Our first.
Blacks plans with ER with mobile wireless so that's kind of a do it yourself you can just use.
If you have an unlimited wireless plan you can allocate some amount of wireless bandwidth and we automatically.
Ah Kinda seamlessly route.
Data packets over the best network for your applications and that one that'll have a nation pretty much a nationwide footprint from the start.
Okay [noise]. Thank you similarly.
You demonstrated your hybrid adaptive network at the half works confidence, but the Air Force is also moving forward what's different program I think it's called do see [laughter], where they're looking at these you know Leo constellations that may or may not get built but.
Those efforts are the air force like stove piped or would they be integrated where it would.
They would consider things like Youre range extension, Leo satellites, and maybe even dot call on Viasat three.
Okay. So that's yeah, that's a broad customer. So one is are we.
I would I will give ourselves some credit for.
Sort of launching this hybrid adaptive network concept, the I'd say that the de likes it and so they have there they have an initiative to sort of build their own version of it.
And that's a little bit of a view of it as a.
Sort of a network technology.
Uh huh.
Kind of problem.
There's a lot we think there's a lot more to it and where we basically do that already for a number of our.
Existing government mobility customers like the.
Leadership fleet. So we we can use.
Hey, you are K or MEO satellite constellations, we're working with a the Rio operators to be able to do that I think one of the things that you've seen recently is that what the government really wants is they want terminals that are.
Capable of operating on multiple networks, which we think makes complete sense and so so we're doing that including the wrong right they including their own organic satellite systems. So were so we're doing that and then it's really more of a business relationship. So what we would expect is that.
You'll see.
Services offered under government.
The government version of it but you also see private versions of it where it's just sort of seamlessly managed by.
Some network provider that that's that's an extension of what we're already doing I think the side I think the fact that the government has their own program is indicative that there's real operational value there and.
Just like we do with a lot of R&D I businesses kind of our our challenge is to get there faster, we're doing better or more effectively or to be able to propagated through the organizations faster and we're up to those challenges.
Okay. Thanks, and just a last quick question regarding the Hendi I, just I mean, obviously that protects it a little bit from continuing resolution, but are there other parts of your business, where there's a new program that might not get funding or be delayed until we get a budget.
And that's a little bit of an effort out I don't know Rick do you think you want to you I don't think nothing pops to mind or.
Right now, but the continuing resolution is something that was it yes.
Yeah. This is Rick I, they are going through the cycle in to the extent that they don't get you know they get a CR rate.
Here is in through the end of year than they have to deal with this thing at the beginning the year. So I'd say, we're not immune to people not having money in being able to enter into new contracts not immune to that in general.
The idea cues that we have are in place and most of stuff is in place, but but if the defense industry gets to be begins to be impacted by this will be impacted as well.
Probably a little less well lower level.
Alright, Thank you very much.
Thanks, Mike.
Next question asked from Chris School T. from close analytics line is open.
Hi, Mark I think last quarter, you indicated that a after a good Q1 ARPU growth, we should expect a little bit a moderation and you went ahead and put up an even stronger ARPU number in Q2 was there something one time in the number or is this a good number to baseline baseline.
In off of going forward.
Okay, No there's not there's no extraordinary no extraordinary inputs to that number that's what it was you know.
You know what things we've said.
You know that we want to do.
Outlined this program, which has worked really well for US you know the.
The short way of saying it is its way better for us to have $100 customer than $250 customers from a cash management perspective from a customer satisfaction perspective, the issue for US has really been in Ah Ah you feel kind of finding the edges.
You know how many hundreds clearly the market for $100 customers is less than the market for $50 customers, but you know the secular trends. Our ARPU is are growing as well and what we found is good demand I'd say also.
We we're putting a lot of work into optimizing our satellite network and one of the things that we.
It was good about vice had two is turned out to be the case.
As we've been able to reallocate bandwidth from areas with less demand two areas with high demand and we may not get a one for one game like we might if we move bandwidth from although demand place to high demand place, we may get less bandwidth.
But if the bandwidth is more valuable there economically that's a good trade and I think that.
The factors like that are contributing as well.
I don't understand then you know not to get too far out in front, but you know the the U.S. model, where you can find these high value hundred dollar ARPU clients is probably going to be very different in other parts of the world.
We are there certain ways that you architected viastat three to enable both models.
One of higher ARPU and one.
Perhaps the developing world, that's lower ARPU lower value in terms of the service you're providing.
Yeah. So when it comes device that three I'd say you know we have the top level things that are I think are going to be very impactful are number. One is just the sheer productivity. The satellite that is a low cost to bandwidth that we have will enable us to offer plans at low price points then the other really big factor.
Is the.
Next ability and allocating that bandwidth to the best markets is.
And it's much better than it is on Viasat two.
So that that will help us a lot or and then you know some of the things that we're testing now I P. Flex plans also.
You know they do the two things that I said one of the they give us more Bam total bandwidth to work with which which is good and we can use that to either get more customers a lower price points are better plans or at the same price points and so those are the things that we'll be working with.
You know I think were.
We're getting.
Good experience in Mexico, and Brazil, the other thing.
Is.
We think of this community why Pi business as it's it's really.
Addressing the prepaid what what would otherwise be the prepaid mobile market you know out of emerging markets and so one of the things where we can do with that as well as we can sell.
Essentially.
Pick of a prepaid postpaid type plan for somebody says I'll give you see a $10 a month, making up a number but where we can integrate those access points with those types of low and plans. We've we've a pretty fair amount of.
Yeah.
Dimensions to work with a I think it's gonna be quite different in there in different countries and so we're you know I think we're still in learning mode.
Great and one final follow up on the link 16, if can you remind us the satellite cubes out that you're building link 16 enabled was that fully funded or did you put some investment in there and you know with the idea be that eventually.
He either the government or you would fund the development of a whole constellation.
To operate a.
Private military link 16 network.
Yeah. So we won a competition or two to develop that a prototype satellite or it's a fully funded contract and.
I think that that's kind of where the government is headed is too.
I have a assuming that we can you know demonstrate that the functionality and a that we can do it at a at a price that makes sense I think thats, where their they'd be headed.
And just remind me your bill.
Starting with the I would add yeah. The only thing I would add there as we build.
You called it the cubes I wouldn't necessarily say, that's what we're building we've built some small psas in the same timeframe already and so we have invested money previously that we used to help when this contract also in the we've we've qualifies link 16 hardware in a previous launch and stay so we've proven concern.
Hi, there. So there were some other initiatives marks absolutely right. We want to competition, that's fully funded but I just wanted to put out was brought with that our own intellectual property.
So not a keeps that but presumably a different production line and viastat three.
Yeah, that's for sure.
[laughter] alright, thanks, guys.
Okay, Mark, we probably just take more or less from here.
Yes.
Next question is from southern <unk> from JP Morgan line is open.
Hey, Thanks, especially on for Phil just wanted to see if you can give us any color where do you stand now with it you know sat JV and how should we think about that evolving as you kind of expand internationally any color you can give there.
I would say you know work we're.
We're in a temporarily stable situation that is you know weve.
We have.
No we have an accommodation with them. We're you know.
They're using our network we're using their satellites were it's interesting it's in a stable situation now it's probably not the the long term solution for it still you know, we're still working with them to sort out what the what the.
Fully but you know sort of the end state will be.
There's not much I don't think there's much more to say to it than that.
There's no did you have some other specific question around that.
No no I, just thinking about where we are now and just you know that's kind of been yeah, a little bit and not necessarily in limbo, but just kind of a minimal quiet on that front. So just wanted to see if there's anything you can potentially share any recent developments, but that's fair. Thank you and then just a quick follow up on the I.M.C. I mean second straight quarter of just.
Aircraft online increase net adds kind of slowing a little bit here I mean should we kind of thing. It is fully attributable to I'm, you know, what's going out with Boeing and the Max fleet or is it just getting to a point now where.
Yeah. The backlog is not maybe as robust as it had been and things are just slow or is it just you know kind of what our situation. Thank you.
Okay. So I think last quarter. What we described was around 13 hundredish planes in service and a little over 500.
Under Cancilla additional under contract so maybe around 1800, or so where we are now is if you count the Max.
That we'd be at around 14, a 40 at around 700, so up to about 2100 ish.
So they've been pretty good progress a lot of it with our with our existing customers, we haven't announced each of the of the orders that's built up into that total, but if you just add up all the things that we talked about so we've made I'd say, we've made pretty good progress in orders the.
Max grounding is a headwind because oh, we have a number of those planes.
We had the first lying pits, we have a number of airline customers that are counting on those planes.
But I'd say stay tuned we think things are going to get a even better.
Great. Thanks, guys.
Thank you for thank you for your question.
I'm showing no further questions at this time for so I would now like to turn the conference back to Mr. Jeffrey.
Okay. So that concludes our call today, thanks, very much for dialing in and we look forward to speaking again next quarter.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.