Q3 2020 Earnings Call
Ladies.
Gentlemen, please remain on your line.
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<unk> third quarter earnings conference call will begin momentarily once again bias that <unk> third quarter earnings conference call will begin momentarily. Please remain on your lines. Thank you.
[music].
Welcome to bias that F wide 23rd quarter earnings Conference call.
Your host for.
This call is Mark Dankberg, Chairman and CEO you May proceed Mr. dankberg.
Hi, Thanks, Good afternoon, everybody and welcome to that that's earnings call, our third fiscal quarter 2020.
So I'm not tapered chairman and CEO and also on the call with me Rick Baldridge, our president.
Chief operating officer, John Duffey Rcs.
Player General Counsel research, our treasurer, and Paul Silicon corporate development and before we start Robert will provide our safe Harbor disclosure. Thanks, Mark as you know this discussion will contain forward looking statements. This as a reminder of the factors could cause actual results.
The differ materially additional information concerning these factors is contained in our SCC filings, including our most recent reports on form 10-K and form 10-Q.
These are available from the FCC or from our website, but that says let me turn back over to Mark.
Sure. So we'll be referring to size that are available over the web I'll start with.
The overview and Sean will discuss the consolidated and segment level financial results.
I'll give more color on the business progress on buys have three our global expansion plans.
And update our outlook.
Financial results continued to be strong revenue of 588 million for Q3 is up 6% year over year.
And $1.7 billion year to date is up 14% compared to last year.
EBITDA of 122 million for third quarter is up 13% year over year end up 337 million year to date is 46% higher than last year.
Year to date orders.
Good.
1.8 billion or slightly above last year and reflect a book to bill of just over one times.
The financial results demonstrate strong business fundamentals were scaling and refining and improving execution, we're able to deliver solid gains while investing for future growth.
And the near to midterm earn out.
Local broadband both government and commercial has great growth potential we're aiming to translate the accomplishments in market share gains we've achieved in north American in flight connectivity on a global basis, and we're making significant progress.
By the nature of how government platforms are deployed global expansion opportunities are already.
Yeah.
Government systems is firing on all cylinders and creating more opportunities for network effects across several product lines.
One of our strategic themes is diversifying our satellite services portfolio to increase resilient grow our total addressable market and prepare for global coverage.
We've shown progress.
Every quarter.
Well, we're efficiently driving revenue and earnings growth in U.S. fixed site service or other markets are growing even faster.
We're entering each vertical market and methodically expanding geographically we have a very substantial growth runway in front of us strategy is being proven.
The unique former discipline.
Aggression in space and ground technology and service delivery underpins a unified global approach with tailored playbooks for specific applications and geographic regions.
Through our work in platform specific terminal integration and user applications integration machine learning data analytics and cyber.
<unk>, we're delivering impactful outcomes for our customers not just bandwidth.
But we definitely intend to maintain our leadership in cost efficient production space based bandwidth in the places with the greatest demand.
We believe were exceptionally well positioned for long term growth mastering abroad service portfolio.
So valuable because each region of the world has dramatically distinct demand profiles, driven by vastly different geographic economic political and regulatory realities on the ground.
The diverse portfolio is far more resilient to the kind of economic congeal political disruptions rolled this is.
Experiencing right now.
Vertical integration offers exceptional synergies across the portfolio extending economic advantages, especially given our unique network architecture, allowing flexible geographic bandwidth allocations across time in space I.
Finally, the aggregate demand represented.
Yeah, our target surface portfolio far exceeds the supply of space based bandwidth being brought to not only by us but by the entire industry.
We anticipate 2020 will mark our major milestone for the bias had three constellation as we shipped our first fully assembled integrated and tested lies.
That's three payload module.
From then on the rest of the spacecraft integration and lunch campaign built on existing standard processes and schedules to achieve a mid 2021 watch.
And we've made important strides in the next evolution by set for that reinforces our confidence in preserving and extending our leadership.
In the primary satellite broadband value propositions bandwidth and speed relative to any geo meal or the alternatives.
So after we review the financials I'll go into more depth on each of these areas I've highlighted here.
Well for financial highlights this side clearly illustrates the summary financials I mentioned upfront just to.
Recap two Ti revenue of 588 million was up 6% you every year and at 1.7 billion year to date is up 14% Q3, adjusted EBITDA and 122 million is up 13% year over year, and 337 million year to date up 46% year over year Q3.
Awards of Fiveseventy 7 million are up 29% year over year year to date awards of 1.9 billion are up 5% year over year and they reflect a year to date book to bill of better than 1.11.
Overall, we continue to set the pace for the broadband space industry.
Our revenue run rate to the highest with a solid growth rate virtually all our major markets or growth markets, where the most vertically integrated from fundamental space and ground technology to end user and customer service delivery strategy is simple the executions tricky in difficult, but we're doing it it's what creates competitive.
Of note, we think anyone aiming to deliver a global broadband service that skill who's going to have to master the skills in markets that we are.
Finally, it should be clear from the last several quarters that availability of cost effective bandwidth in the right Geographic places is the fuel driving our growth we're benefiting from Viastat two and.
The international satellite partnerships that replenished our band supply.
Later on will help investors better visualize the economic potential of the bandwidth fuel coming with the approaching buys have three launches so with that that Scott I'll turn it over to Sean.
Thanks, Mark is as Mark just covered the top level highlights.
I will jump right into our segment.
The momentum in our government business continues to drive growth with third quarter, reflecting strong performance in both topline and earnings.
<unk> revenues grew 42 million or 17% year over year with higher product sales occurring across our diverse portfolio.
Including tactical radios mobile broadband tactical data links and government satcom product.
This comes on the heels of a very good Q2, which historically is a seasonally good book and ship a work order for of course bonding with the government fiscal year end budget goes out on September 30.
So we expect our.
Business continued its strong performance into Q4 easily exceeding the 1 billion dollar revenue threshold for F. I 20 that I mentioned last quarter.
Adjusted EBITDA for government systems, with seven 8 million, representing a 13% increase over Q3 of last year, the higher topline drove this growth.
As improved gross margins on higher and de I'd product mix from the prior period was offset by modest uptick in Nash DNA.
Segment awards in the quarter were 232 million I, almost 50% over here to a new Q3 record and resulting in a positive year to date to go position.
Government backlog stood at 928 million.
We ended the quarter and that excludes the I'd like to values, Mark mentioned earlier and approximately $450 million and remaining am asked us contract options, which to remind everyone is the contract we have to provide to lead global.
Like connectivity services on the U.S. government senior leader aircraft.
Turning to commercial networks, we saw a quarterly revenues declined by 42 million or 33% due entirely to the comparative impact of last year Spike in the I see terminal installations for American airline offset.
With other modest commercial product increases.
And despite the continued grounding of those 737, Matt our I see terminal deliveries picked up sequentially quarter over quarter as mounting interest burn out home in flight Internet experience dry ice tea to me handful Blaine.
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We'll networks Q3 earnings reflected a larger adjusted EBITDA loss on the lower revenues as well as higher next Gen satellite networks, and mobile terminal R&D and to a lesser extent higher asking there.
But worked for the quarter were very strong at 134 million with antenna systems and commercial air terminal.
Representing over 80% of this total and we ended the quarter with backlog of 385 million, which is the highest backlog position. We had in this segment over the last five years.
Lastly in satellite services, we continue to see strong revenue growth and even stronger adjusted EBITDA increases.
As a inherent operating leverage and our large skills service businesses expand the bias that too.
This quarter also marked our eighth quarter sequential revenue growth with Q3 revenues hitting a record $212 million, representing a 19% year over year increase and a 3%.
On a quarter over quarter basis, and while our overall broadband service purposive continues to expand our U.S. consumer broadband business is still growing generating an all time revenue high this Q3 and contributing about two thirds of the Q3 revenue increase with our IC business.
Isn't as representing the bulk of the remainder.
[noise] in consumer broadband revenues reflected a 15% year over year increase in ARPU, primarily from a higher premium service Pemex, while our commercial air topline expansion was twofold.
The biggest part was driven by a 23%.
<unk> year over year increase and killed and service alongside increased ARPU from our expanding onboard capabilities and services.
Our ending in service Telco was 13 79 aircraft, which excludes about 90 Boeing 737 mcelwain the already have buying.
<unk> services enabled that remain grounded as at the end of quarter.
Q3, adjusted EBITDA for the satellite service segment was up over $18 million or 33% year over year to 75.1 million.
The flow through of incremental revenue to adjusted EBITDA at 54%.
Was a little lower than what we've seen in the past primarily related to our global expansion investments, which offset the incremental contribution margins from are scaling fixed residential and mobility businesses.
With respect to our activities abroad things are continuing to look promising well our revenue basis small.
It is growing as expected, but more importantly, we're making good progress and building our in country execution capabilities, including gaining local expertise farming distribution relationships and establishing the operating infrastructure, we need as we ready for the bias South Recompletion.
Now before.
Before I move on let me touch on the impact of the continuing 737 Max grounding.
Last quarter, I said that the reduced number of this 737, Mac installs and delay and related service revenues could result in fiscal year earnings pressures in the 5 million to $10 million range based on a return to.
Fight in a calendar yearend timeframe and that we would likely be at the higher end of that range.
Based on Boeing's most recent public statements, we don't anticipate a return to fight before the end of fiscal year. So we can now confirmed that the full fiscal 2020 earnings impact will be approximately 10 million.
These.
His financial pressures are likely to carry into fiscal 2021. However, as we said before we anticipate a step function in commercial air revenues. When these planes returned to service.
But again for clarity overall, we expect to see solid satellite services segment momentum continuing into next.
Next year with revenue and adjusted EBITDA growth on a year over year basis.
So to recap we had another solid quarter year over year of topline and adjusted EBITDA result across our key business segments.
And we expect to continue this trend as we close out the year and into fiscal 2021.
And we have a good revenue line of sight based on our backlog position of $1.9 billion.
5% from the same period last year.
So this next side has our year to date resolved and consistent with our performance throughout fiscal 2020, we see year to date revenue and adjusted.
EBITDA expansion fueled by our prior technology portfolio investments.
10 size this a bit more the last 12 month of adjusted EBITDA totaled over 445 million, which is over $100 million higher than our historical high.
And as I previously highlighted we see.
Good momentum continuing next year.
And the government segment, we saw year to date revenue growth of 25% to 852 million a new high for that segment.
The drivers of this top line growth were basically the same product categories I mentioned in the quarterly result.
Segment, adjusted EBITDA was up 47.
<unk> or 27% year over year to 222 million with just under a half a percent improvement in margin as a result of lower SG any as a percentage of revenue.
In commercial network revenues were down 25% to 252 million on the anticipated lower.
There are a terminal shipments year over year, well that was partially offset by higher revenues in satellite networking antenna systems and fixed broadband products.
Adjusted EBITDA decreased 23 million year over year on the combination of the lower revenue and a higher absolute SGN eight and R&D expenses supporting our next gen.
Satellite networks, and our growing mobile broadband business.
And in satellite services revenues were up 24% year to date, while adjusted EBITDA was up significantly more 63% or 82 million over the same period.
Topline growth and margin.
Expansion were driven by the same scaling factors I discussed on the quarterly result.
Going forward, even with the investments are making it our international fixed and mobile broadband businesses and our other vertical market.
I still expect to see continued solid year over year absolute adjusted EBITDA growth in this segment.
On slide seven.
We have income cash flows and that lever trends for the quarter.
Operating income income improved substantially for the quarter end the year to date curious driven mostly by any improvement in adjusted EBITDA and partially offset other higher noncash expenses, such as depreciation and.
Station.
Positive net income for the quarter and our large decrease in year to date net loss reflects our operating income improvement as well as lower interest expense incurred and capitalization of interest out of the construction of the bias that Threeq population continues.
[noise] and taxes our.
Q3, and year to date periods reflect our federal R&D tax credit NFS offsetting the additional tax expense on our higher income level.
Collectively this brought our third quarter GAAP net income to $6.5 million and non-GAAP net income to 25 million year to date.
We again saw similar trends with the improved GAAP net income I $68 million year over year, bringing our year to date GAAP result to about breakeven and non-GAAP net income to $52 million $72 million improvement.
Looking at year to date Q3 cash.
Uh huh.
We generated $293 million of cash from operation, which was up 37% are almost $80 million compared to the same period last year.
This increase was primarily driven by our strong year over year adjusted EBITDA increased partially offset by additional working.
Capital supporting our growth.
Capital expenditures increased by $255 million year over year with about two thirds of this increased due to last year's investments being offset by the hundred $72 million a bias out to insurance payment.
The remaining cap ex increase was associated with the buyers have three.
Relation, partially offset by lower C.P.E. and buyers have to ground spend.
Overall, our existing business strength, which is fueled by our approximately 400 gigabit high capacity K E band portfolio.
Greatly expanded our operating cash flow generation and a funded a roughly about.
50% of our year to date.
So moving to leverage on the lower right corner of the chart. Our Q3 net leverage position increased slightly from last quarter as expected, but it's still down significantly year over year.
As noted in prior calls we expect leveraged to hover in this range or.
Perhaps increase slightly next quarter, depending on the timing of certain capital outlays.
Looking to fiscal 2021, we expect leverage to continue to increase modestly as we and our sub contractors had a wave of critical milestones alongside our transition to the final phase of our bias out three program construction activity.
But again against a backdrop of expected continued strong growth in our adjusted EBITDA performance.
Finally, we have continued to have ample liquidity I've just over $600 million, which includes the cash on the balance sheet and the availability under 700 million dollar revolving credit facility.
So that I'll turn it back over to you Mark.
Thanks, Sean.
So I'll go into more depth, starting with government seven systems, just to recap third quarter revenue was up 17% year over year to 292 million and year to date up 25% to 852 million and year to date government revenues just.
About half our total adjusted EBITDA and government grew 13% and 27% to 78 million and 22 million, respectively for the third quarter and year to date.
Drawn performance across the product portfolio drove the topline growth and third quarter year to date higher services revenue.
So added to growth.
Year to date contract awards reached 865 million, we ended the third quarter with $928 million a backlog in this segment.
Awarded I'd like to contract values about 1 billion or 1.1 billion.
As of Q3, and that's not including the backlog figure.
Growth year to date has been better than our expectations boosted by strong demand and government fiscal year end seasonality.
In government systems were aiming to augment defense procurement system that stressed by an incredibly broad threat spectrum.
With rapid technical advances, we built closer working were.
It's working relationships with our nation's global first responders, they encounter new threats and have the skills and agility to learn to overcome them. Then we help migrate the products and services proven in that environment to the much larger regular air Force, maybe an army.
We're also working with coalition partners, who leverage interoperability with.
Sources.
So almost all the link 16 products that we've shown on this side our non developmental items meeting we invented product guys can support them ourselves often directly with end user combatant organizations in response to specific operational needs.
And reduced the lead times agency.
By as much as a decade or more.
Products have been effective and inter operate using standards that creates a powerful network effects.
That is all that winning 16 users find their connections to be more valuable as new users platforms and operational processes joined the network.
We're enabling the number of network.
Enabled platforms and devices to grow by orders of magnitude.
Housing the tens of thousands.
Hundreds of thousands.
So in the early innings or the transformations needed by the U.S. Defense Department on this slide focuses on link seem between 16, if similar opportunities in other areas too.
We believe the biggest growth is still in front of us.
Based force with a mandate for faster innovation to address the rapidly evolving space threat environment as well as new operational models is indicative of the need for change, we're earning placements of customized secure bias that satellite terminals on a broad range of.
Operational platforms that can support.
Both Deo de organic satellites as well as buyers have three networks. We're steadily building a diversified global population of terminals ready to leverage five statthree and beyond bandwidth.
Segment services are over 20% of total government systems segment.
And you within that there's an arrow mobility services business that is comparable revenue to our commercial in flight connectivity business and also growing fast we're earning positions on a more fixed in rotary wing platforms, representing the early adopters of fleets and thousands of aircraft.
Government business is inherently lumpy in financial results will vary on a quarterly basis, but we believe the growth trends that have driven our results for the last several years can endure and even increase in the Viasat three era.
Turning to satellite services here, when we reported 212 million at 614 million and.
Q3, and year to date revenue gains of 19% in 24% year over year, respectively. Adjusted EBITDA was 75 million and 213 million in the third quarter and year to date increases of 33% and 63% year over year, respectively.
Eighth consecutive quarter of.
Total revenue growth.
And also gain of about 15% drove residential revenue while total revenue benefited from a 23% year over year increase in flight connectivity tails to 13 79 at the end of the third quarter and that includes about 97 37 Max.
As of Q3, and we had about 690 additional aircraft, we expect to install under existing contracts.
Together that totals two an increase of about 120 more planes in the third quarter.
That's derived from our expansion into South America, with a zoo airlines as well as additional planes from.
Existing customers.
And we've already accomplished our first fights with those rule.
So you can see in the chart in the lower left that while or U.S. residential business has grown rapidly our newer vertical and geographic markets continue to grow even faster.
And on a vast 12 month basis they've reached.
85% or satellite services revenue over doubled the proportion of four years ago.
We strongly believe that more diversity, both geographically and by vertical markets is the key to global growth in the resilient optimal service business.
For the U.S. fix market, we've consistently emphasized ARPU growth overall.
Subscriber count with Viasat, two that's worked really well.
The approximate cash benefit to date of this strategy compared to a constant ARPU higher sub count approach is already in the range of a couple of hundred million dollars.
We've grown ARPU by offering higher priced higher value plans that have.
Satisfaction and reduce churn.
Don't misinterpret those results as meeting the satellite addressable market is small or saturated we think the opposite.
The addressable market depends on offered price and performance compared to terrestrial alternatives. We're currently addressing only the high end, which is apparently.
Pretty big.
We could choose a different approach with viasat three.
Triangulating from multiple directions, including the existing DSL subscriber base demand for higher speed to more bandwidth as people switch from broadcast to over the top video preliminary beta tests of our hybrid low latency.
See services and demand at our current price points, it's reasonable to estimate a satellite addressable U.S. consumer market in the Twentyish million range.
Obviously for anyone to target a market of that size the competitions really terrestrial and the appeal would be delivering better video quality.
Our quality video.
We have streaming.
We believe we can compete well for streaming video among be underserved.
Today, we announced a partnership with food both TV, a sports and news focus to live TV streaming service that focuses on improving quality and quantity for both live.
Streaming video on demand services.
Over the Internet and they were leveraging technical specifications developed by the streaming video lives.
We'd encourage you to read that release it emphasizes the implied connectivity market at the same principles can apply to fixed services.
We've been developing the technology for a while and contributing to the standards process.
And now we're seeing adoption.
The main reason, we focused on higher in plain surface plan is to get better at streaming video.
The streaming video lines protocols can help content providers improve and user experience substantially reaching literally hundreds of millions of users over satellite in places that or otherwise.
Accessible for the best over the top services.
So the bottleneck for.
Services growth for us or any other play in our markets is bandwidth, we see plenty of demand given the right vertical and geographic markets in the right price points, but even though we have the most bandwidth in the market bandwidth is still a constraint or.
Hi, Good service and having a strong diversified portfolio gives us the best opportunity of optimizing the value of our assets across a broad range of demand characteristics will see globally, driven by geography regulatory politics, and other distinctions in each part of the world.
So this.
At about five satcom three constellation is really about this is the way to get more bandwidth. All three satellites are in full swing the figure on the slide shows a simplified schedule.
Fully shaded segments were completed for the first two satellites.
First satellite is in payload.
Billion test gradient, Phil is intended to show approximately where we are in the overall process.
The brackets under this schedule divided into two main portions. The first is buys have three payload unique and the second is more standard for our Boeing 700 to spacecraft.
The payloads build assembly and test is the portion with the greatest uncertainties, the known unknowns and the unknown unknowns if you will.
And scheduled pressures come mostly from subtract your sub contractor production schedule performance in this portion.
We've taken steps to mitigate those issues and are now.
No integrating sub assemblies onto the payload module.
Aiming to deliver the first payload module to Boeing by fall of this calendar year.
After that the program uses standard processes for integration and test of the spacecraft and Devons campaign similar to Viasat two.
Payload module deliveries an important milestone.
In reducing overall schedule risk and achieving mid 2021 launch date.
Viasat three program is built on innovative new technology and with it comes many challenges, but we've made great progress and were systematically retiring scheduling performance risk.
We expect the system to meet its coverage and performance objectives.
Oh, there's always schedule risks with space programs, we believe we're driving towards completion and narrowing those risks to be measured in weeks and months not in quarters are yours.
So the snack side helps illustrate the magnitude of the opportunity created by Viasat three.
Well that 10 portion.
The graph shows trailing 12 month revenue on a quarter by quarter basis. Since we entered the satellite services business with the Wildblue acquisition.
The growth rate inflection points that line up with Viasat, one and Viastat two.
Yes.
I've got two showed even sharper gains in total revenue growth.
We were able to time interval from now to Viasat three is the Viasat two runway, where we're achieving good growth momentum.
Black line that stocks and the lower left in turn sharply up with of onto the Viastat three constellation is actual and projected bandwidth capacity on our fleet with bandwidth measured.
In.
Gigabits on the right hand to access.
You can see an anticipated adx increased with the bias at three constellation in three roughly equal regional installments.
The chart vividly reinforces the point that bandwidth is a fuel for growth we've been very successful at the five.
And in creating executing new business models that have already in the process.
Transforming each vertical segments fixed residential commercial in flight connectivity and government federal mogul being the three biggest examples.
We're putting in place the remaining verticals for global expansion now we're methodically expanding.
Perfectly the productivity gains we can achieve create opportunities to transform end user experiences for bandwidth intensive applications.
If enough bandwidth productivity gains to share with customers, while earning good returns for buys that shareholders.
We don't see a situation where the supply of bandwidth is too large.
The aggregate demand across the entire portfolio is too great.
In the right geographic places with Viasat three architecture, we have a unique ability to allocate bandwidth in the most effective ways in geography in time.
So this slide helps illustrate the point of the value.
Our applications portfolio World map proximately illustrates the coverage areas. The three regional buys have three satellites that give almost total global coverage there label quite one Americas quite to EMEA and fight three a pack.
Hey pack cut.
Bridge wraps around the Pacific Ocean and overlaps the western edge of the Americas satellite over Alaska.
Our coverage includes the trends Continental Airlines coverage consists of many thousands of spot beams, but we don't show individual beams here. So we can focus on the applications, we expect to serve on the different satellites.
The pyramid and the lower left shows the vertical markets that we've targeted so far quite successfully we divide them into mobile.
That's not hearts cobalt blue and fixed code Green.
So by looking at the map you can see the demand profiles in each of the three regions are quite distinct with the.
Indicating the relative amount to fixed and mobile.
North and South America are pretty interesting markets for residential because of the U.S., Canada into a growing extent markets like Brazil and Mexico.
There's a large emerging market community.
Think of it as Wi Fi our community Wi Fi.
Similar to prepaid cellular in Latin America.
Currently the U.S. is the world's largest domestic air travel market and an important international destination, the Caribbean <unk> track of cruise ship market, but there's not that much military activity.
I mean is quite different there is an attractive residential.
The market Western Europe, but much of the rest of the region accesses unit via prepaid cellular we're like our community services.
Theres, a pretty interesting regional Aero markets, but also a number of global carriers in the region, who need global coverage. There is much more demand for U.S. government coalition partners services in EMEA.
Yeah, and then in the Americas.
Hey pack has different still.
Most striking thing of course is the high proportion of ocean.
Countries with high residential internet penetration, so densely populated as to be poor satellite markets, others are likely to be unavailable due to regulatory.
Actions.
Southeast Asia is attractive.
And the Internet there is largely.
Access through prepaid plans, such as our community services.
As a big opportunity for mobile satellite services in every segment commercial Aero Maritime and the government versions of those to position the Pacific Ocean.
Cretin big technically challenging market.
Our satellite architecture that lets us, but large amounts of capacity only in the places in times that Theres demand is a big advantage as well as its geographic coverage, which is actually better than most of the non geosynchronous filings that are out there.
We're finding and.
I mean valuable partnerships with important likeminded entities in each region as we grow our verticals. We list among these China Satcom telegraphs in Brazil, and Nbn in Australia.
We have others that are not yet announced or are in process.
Total demand among all these verticals in each market.
Our exceeds our capacity or even the projected capacity for all of a satellites under construction or planned.
And delivering value and many of these verticals requires customization for each one with tight integration between service delivery network management and user terminal and platform integration.
We believe were the best position to compete in this type of complex.
Sales and service delivery environment, It's why we've been so focused on building and expanding our services portfolio.
Okay, So let's turn to the outside.
Last quarter, we introduced the chart on the left which has been updated for our most recent results. It shows trailing 12 month revenue and adjusted EBITDA over.
Over the last six quarters.
The second quarter fiscal 19, we've grown revenue by 28% and adjusted EBITDA by 90%, we believe the underlying market factors, enabling this growth remain in place and there are listed in the points on the side government systems business can be lumpy, depending on timing of specific.
Contracts, that's been exceptionally strong this fiscal year.
Factors, we discussed remained in place.
Pleased with growth of the Arrow mobile business embedded in the service as part of the government segment.
Clubs strong in our idea Q an option portfolio is good.
Satellite services is benefiting from scale.
And continuous process improvement.
Financial results have been very good and fix market for high end services has been healthy.
In flight connectivity has exceptional growth potential as we aim to capture international market share along the lines of what we've achieved in North America.
You have a number of opportunities in process we're learning.
And how to optimize and expand our community Internet business. The logistics are challenging, but we're gaining strong partners in demand appears to be healthy too.
Overall, we're making good progress in this status in the expensive vertical market and geographic portfolio it'll take to capitalize on a global network.
Even with the rabbit.
The increase in EBITDA, we've been able to continue to make prudent investments for future growth. These are primarily in government systems commercial in flight community Internet access enterprise services and international we're metering our investments based on favorable market feedback, while being mindful of earnings.
Yes.
Finally, we've made enough progress on payload unit building test to be scaling up the payload Assembly and test portion of the first by Statthree. We're focused on completing the first buys that three payload module and delivering it to Boeing for spacecraft integration.
Will be a major milestone towards the first launch as we enter phase or the.
Program that uses proven processes.
Also today, we announced the addition of Dr. Teresa wise to our board of directors.
Teresa holds a Phd and applied mass from Cornell and she's been Chief Information Officer for Northwest Airlines, and then for Delta Airlines show at insight on information.
Technology data analytics asset optimizations and on hoping best serve our airline partners, we're really pleased to ever with us. So.
So that's it for our prepared remarks, we're really pleased with our overall progress this fiscal year and see the underlying business Packers, creating a strong foundation for Q4 for fiscal 21.
And into the Viasat three year, so we'll be happy to take questions now.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your telephone. If your question has been answered or you wish to move yourself from the Q. Please press the pound Keith.
Our first question comes from the line of.
Cusick with JP Morgan.
Hi, guys. Thanks, you know first Mark you already talked about government, but can you dig further forced into that revenue stream and talk about relative margins between product and service streams.
End of that product stream, how much of some kind of recurring revenue versus a onetime product and IP sales.
What's the book to Bill I'm sort of mix within that backlog that was very strong as well and you you mentioned government network effects what are the synergies of having these different business inside one company. Thanks.
Okay [laughter], okay. So we'll start.
I think my answer some of the ones we can answer.
The.
So the.
[laughter].
We're not gonna breakout product and service margins separately.
The in general this service margins are going to be healthier because they they are building on.
An asset base that we have.
In the products or are really more.
Yes, they are there.
There have more of a cost of goods sold component less of that amortized fixed asset component to them. So that's going to make the margins work.
Better on the product side the.
The.
Revenues are.
Generally driven by product shipments.
When if you think of a recurring revenue portion of that would what makes the products valuable you that all of the organizations that use the same operational concepts or.
Our weapons systems.
For inter operate with each other are going to need the same products in order to drop rate. So one of the ways you can sort of gauge what the recurring revenues will be by looking at the.
Oregon size of the organizations are the platform using with a number of platform. So if were integrated on things like.
Yes, F eighteens or on.
Apache helicopters and cuts how to Canada, you can count at the market sizes, there and anticipate that.
We'll we'll have shipments to cover all those flows spares that the.
Thing that we keep referring to.
Helped grow sales is that we're evolving to larger and larger organizations and.
Addressing platforms that have many move you know many more.
Numbers and some of the other platforms. So that's the thing where we go from since with our.
We used to do we'll use called Mids Lv teaser mids Jay Trs is we go to small tackling terminals lot more small tactical moves we've got a handheld there are many more handheld as we integrate weapons there's potential for many many more weapons.
Other when we talk about the network effects.
No.
I refer to them in the link 16 environment.
Newton definition network effect is that when you add more.
<unk> members to the network that the network becomes more valuable for all participants and the way that happens here is that each of these participants pick of them as a.
Source of sensor information they added as they contribute to the network, which makes that information more valuable to the other participants or they can act on the information within that network.
One way that makes the information within the network more valuable so when people contribute to it vacancy other.
Participants act on that Hey, that's increased the value to them and that as we expand the participants in the way we showed in that figure you can certainly CV.
The the network effects there.
We have those in other areas of business.
I think.
This is the place to.
Right on that too much.
Hi, I covered most of.
As opposed to park Mark Yeah. Yeah. This is Rick there's one more we have almost zero kind of non recurring license zener IP type purchases.
<unk>.
Okay. Thanks.
Thank you.
Your next question comes from the line of Rich Valera with Needham and company.
Thank you Rob a couple more questions on the government business.
So you had a nice bats bats de order with the Air Force.
And then that press release, you noted that you chip 2500 of those units into the field. Just wondering how you think of the kind of potential Tam for that product against that 2500, what's your sort of penetration rate and if you were thinking over the next five or 10 years like what what might be the penetration of that potential Sam.
So a lot of.
Okay, a lot of that depends on the the way the through the growth trajectory and adoption of Googling 16 products. What you know what those what this press release was about was a joint tactical Air controllers, who are people on the ground who are coordinating closely.
Support so as we get more or.
More of the.
Link 16 terminals on more airborne platforms that increases the potential for a ground based applications of it and so both of those things you get more ground based applications that they.
Can better use the airborne platforms that are supporting them.
So youre right now we refer to that market for that as kind of in the tens of thousands it's possible to break through into the hundreds of thousands but if it does we'll report on the events that occur that that would cause that happen.
And I guess related Lee can you give us a status update on the link 16, Leo constellation that you'd been sort of doing the early work on.
Yes, right now so right now the the main work is on building that first prototype satellite and coming up with operational concepts that would trend.
Insulate the capabilities of prototype into.
An operational constellation So I would say for the next year ish, we're going to be really concentrate focused more on the.
The prototype satellite itself, which right now I mean, it's.
Programs kind.
So in the early to middle stages.
I don't want to comment yet on an expected lunch based date, but with these small satellites, it's not going to be it's not years.
Will be closer then we'll be shorter than yours, and we can give an update on that in the next quarter too.
Okay and I just wanted to.
But to the commercial side and get maybe a more indepth update on your a rural wife, I activities and in Mexico, and Brazil. If you can just you mentioned some it's kind of logistical challenges, but I'm sure. There's been some successes as well. So if you just give a sense of sort of how the progress is there and.
And any color would be appreciated.
Okay. Yeah, that's the kind of first most important most important thing that we wanted to find out is it if you drop or.
Why don't they pay per use Wi Fi into these very rural towns and villages do people care I did that doesn't matter.
The people want to use it.
And.
And what are the tradeoff that they see between coverage you know price and performance and so.
I'd say, what we've learned is yes, they care I'd say they care a lot.
The challenges.
That will refer to logistical challenges there really around things like a number you are putting these small terminals into a town can we make sure that the terminal is on the air all the time.
That we do that and we can supported cash collection make sure that.
The residents their understand how to use it.
Those are the those are what I would call logistical challenges. The other and then there are other things around the exact forms of the service plans that we got we offer.
And.
Now, they're really more okay, you could buy internet tie the hour, but we expect that we're going to offer tailored plans that are kind of more like what you see in the sophisticated.
Prepaid.
Cellular environment the other than the other things were trading off our around coverage and capital.
And how to evolve those that that's what I would say the things Weve focused on the most in John mentioned this is due to people care will they use it measuring the way they use it the.
Let's see the friction on adoption or the limits to.
There's a there's a lot to work with their but were I'd say we're.
Overall, we're encouraged because of that that the demand that as you look at overtime in the towns that are connected in general you see more and more use now not last and that's that's probably the most important thing right now.
Got it okay. Thanks, Mark I'll yield the floor.
Thanks Rich.
Thank you.
Next question comes from the line up.
With William Blair.
Good afternoon, Mark and team.
[noise] annually.
I'm sorry, Sean.
Not not that Sean with the elevated Capex do you have a ballpark sense on where your net debt will peak before you turn free cash flow positive.
Yeah, I think what yeah, probably the way they care tried it for you guys. It's just it's kind of looking at where we think.
Free cash flow positive, it's Gonna chart, and what we think kind of you know our leverage levels will be you know I think we said you know we'd expect to be you know in Trina half range. You know throughout this year give or take an expected to increase you know a little bit over to next year can we can be scaling up on that.
I have three constellation starting the third satellite I will start to get a little bit but stay uncomfortable ranges throughout the bill I kind of put that as a backdrop and then the overall you know I think we said free cash flow positive about two years. After the first satellite and that's where we think we're still seeing it.
And just to add to that.
The reason we characterize it the way Sean described is because we have knobs and levers to manage it that way that's cool right. That's the way we're going to manager.
Okay, and do you have a sense on what's going to be the normalized capex level post viastat three.
Hello, [laughter], that's a you know a little bit more in are dependent on on the next generation you know the satellite when and where we're going to next obviously right now where an elevated state because we're building three.
Satellites that one time.
So you know I don't expect that that we're going to stay at these levels, a and that you ticked down to a little bit more normalized before kind of this this run up but you know that's kind of pace a little bit on some of the opportunities we've seen a future on what the pace of the next Dennis.
Okay, and the uptake rates on the uptake rates on this.
Satellites and that's.
Yep.
Okay, and Mark Starlink had some news today and I was wondering how large do you guys estimate is.
The international revenue revenue pie that you Starlink Oneweb and then the traditional players.
It was like Inmarsat has he asks you tell side and Intelsat will be theoretically sharing.
After virus that three is is completed.
[noise], so weve given.
In fact, you got you put you've got to do that.
Got to add up.
All of these different markets that we're addressing in that.
Fixed residential enterprise.
The commercial Aero market the.
Government market and especially in especially this community.
Hi market.
Good.
I'm not going I'm, not going to put a number out there I would say it is.
Yes.
It's tens of billions of dollars I mean, it's at least in that range right, that's going to be divide it up.
But I don't think we're going to go into more.
Than that on this call, but it's.
Big and I think we have given insight into.
Parametric ways to look at if for instance, you can look good in flight connectivity and see that growing to from four to seven ish billion annual passengers and think of revenue opportunities in the.
One too.
$3 a passenger depending on how you.
How do you can attack that market you look at.
And you estimate hundreds of millions of people that we can address in these community Wi Fi businesses look at.
Dollars <unk> prepaid mobile market you look at dollars.
Revenue per user per month as a as benchmarks. Those those are the way you construct it easily get to to these tens of billions of dollars numbers.
And and we expect that we're going to be near to the.
With that we're going to be among the leaders and dividing up that pie not near the end not.
For the back online.
Sounds good and and one last one your your mid Jay Trs contract vehicle as Ben.
A very large contributor for you and it's generally been Upsized every six months do you expect a new idea I Q after the existing.
In one soon ends in May of 2020.
Yeah, there are plenty of Ah, yes, yes, we do yes.
Sounds good thanks, Mark and Sean.
Thank you.
Our.
Next question comes from the line of Mike Crawford with B. Riley.
[noise], Thanks from C rising equity and net income affiliates line. It looks like your choice where subsidiaries probably doing quite well can you just talked about what's going on without waveform and the maybe potential network effect.
Possibilities with Charlesworth.
Yes. So are we talk about network effect, that's a really good example.
Good Travis where has developed is a.
Waveform, that's being adopted by the army for several of their books a special forces.
So as a hand the army for several of their.
Common radio programs manpack and handheld radios.
And that and transfer has a business model.
Where are those a wave forms are licensed into other contractors are better scale.
Production. So what's happening is licensing revenue is growing.
Pretty pretty rapidly there were pretty excited about about that there's a good growth runway there and you see some of that reflected in our.
Portion of in our Oh that would that we consolidated there based on.
Uh huh.
Over 50% ownership, but trying to square.
That and then from a network effects perspective again, though.
Big part of what makes those radio valuable as interoperability. So the fact that large numbers of users are adopting them is helping to drive adoption of those wave forms basically.
Very broadly across special forces Army and Marines as well.
Okay. Thank you and then if we could just turned back to these [laughter] satellite services.
Markets, both mobile and fixed that you're targeting along with some of these Leo.
Patients.
You know, obviously, if someone's going to try to play fortnight, you know maybe the latency matters there, but in terms of ability to deliver high speed in high bandwidth, how how does [noise].
Do you, I guess way, the limitations or or or or not.
Some of these of like Oneweb styling type or versus biceps reinvest that for.
Okay. So.
Our position has been pretty consistent if you. If there you have enough bandwidth latency is really important if you don't have enough bandwidth.
Then latency isn't as important because you have.
Congestion and other effects that mask latency, we think the big driver in a in addressing the biggest market.
I think 20 million people on DSL and the people that trying to be addressed.
By subsidies is the switch from broadcast video to over the top.
Video and the demand is enormous we think there are big advantages to our architecture in delivering bandwidth. The most cost effectively we've spent time to time.
Evaluating all these other ones and yes, there are going to we're really we're excited to see innovation in the industry where it.
With a lot of these non geosynchronous leave a meal systems in one way or another but.
We.
I think we understand them well, we're really confident in our approach is gonna be the most scalable and cost effective.
Okay.
Oh this is Bruce that's gonna have to be or last question.
Today, I apologize, but but we have some boston time constraints.
Alright, ladies it.
Ladies and gentlemen, we would like to thank you for participating in today's conference.
This does conclude the program and you may all disconnect everyone enjoy the rest of your day.
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