Q1 2020 Earnings Call

Your host for today's call is Mark Dankberg, Chairman and CEO you May proceed mr. Thanks.

Okay. Thanks.

And everybody and welcome to Gosh, That's earnings conference call for our first.

Just a good quarter of 2020.

Mark Dankberg, Chairman and CEO and I've got with me, Rick Baldridge, our President and Chief operating Officer, Shawn Duffy, Our Chief Financial Officer, Robert Blair General Counsel, Bruce Turks are treasurer, and Paul <unk> corporate development.

Before we start Robert will provide our safe harbor disclosure like smart.

As you know this discussion will contain forward looking statements. This is a reminder that factors could cause actual results to differ materially additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q copies are available from the FCC or from our website.

Thank you Mark.

Okay. Thanks Robert.

So we will be referring to size that are available over the web and I'll start with an overview and then Sean will discuss the consolidated.

And segment level financial results and then I'll provide some additional color.

Well review, our outlook and take questions.

So last quarter, we talked about momentum carrying over from our fiscal 19 into fiscal 2000, and that's certainly helping drive our first quarter results with 22% year over year revenue growth and adjusted EBITDA of 115% compared to last year.

Underlying sources of momentum include a significantly higher residential ARPU base.

More in flight connectivity planes in service and a more diverse space of in flight connectivity services.

Oh compared to where we were a year ago.

Plus sustained growth in government products and services orders has built a significant backlog and we see expanding opportunities to grow our addressable markets within the U.S. and was close allies.

Adjusted EBITDA growth is yielding lower net leverage that's down from about Fivex last year to 3.3 X at the end of the first quarter.

De levering is due to our typical satellite launch investment cycle revenue growth enabled by a cost effective bandwidth in attractive geographic markets and margins derived from the relatively low variable cost nature of satellite network infrastructure services.

It also helps illustrate the longer term potential for free cash flow and de levering offered by the Viastat three constellation.

Even while investing in follow on networks.

In the mid term, we expect net debt to grow with ongoing investments in Viasat, three space and ground infrastructure that corresponding adjusted EBITDA growth can maintain prudent levels of net leverage.

[noise] executing on a truly differentiated strategy takes persistence constancy of purpose and.

Actionable market technology and business insights, we aim to use our vertically integrated systems technology to be the most cost effective manufacturer of bandwidth in space in the most attractive markets.

We believe vertical integration, including direct relationships with end users is a key element in generating the greatest potential value for that bandwidth.

That includes testing and refining innovative new delivery systems and business models and adapting to the unique characteristics of each vertical market.

We've learned a lot already in the U.S. residential broadband in flight connectivity and government and defense applications.

Overtime Weve earned a reputation for innovation and performance, we're gaining leadership and total revenue as well as growth rate.

We're continuing to innovate and learn in existing markets and have begun investing in new vertical and geographic markets.

We believe our investments in market intimacy are paying off in growth.

Earnings and customer satisfaction as compared to just a wholesale transmission pipe approach.

As we make continued progress on the first Viasat three satellites, it's important to understand the purpose of this generation relative to Viastat, one invisalign too.

Hi, it's at one and two were creative satellite designs.

They use off the shelf payload component Viastat three incorporates a decade of innovation in space and ground network technology and lessons learned from multiple generations of payload prototypes. It's a fundamentally new highly integrated space ground architecture, establishing a new set of tools for broadband satellite design and construction with an emphasis on scalability.

If things continue to go well I sat three is just the first instance of a new series of spacecraft, good delivering significantly more bandwidth higher speeds and greater flexibility with each generation.

System test bed performance to date supports the industry, leading bandwidth productivity, we've been aiming for as well as superior real time flexibility in geographic coverage.

We haven't seen any technical architecture under construction or even proposed that we believe is comparable in the geosynchronous satellite space.

There are some leo regulatory filings with aggressive and innovative payload architectures. We believe the Viasat three architecture is the most scalable considering long term trends and payload device integration.

We've now made enough progress on Viasat three to begin designing in analyzing by asset for follow on that could achieve similar or better relative productivity advances as buys one two and three did and their time, we will as we get data as we get more detail around the performance schedule and budget trade offs over the coming months, we will give more information on that for now we're excited about the progress on Viasat three and we're very focused on executing the program.

But we are definitely defining a path toward increasing our competitive advantage in the broadband space in the future.

So we were pleased with our financial results and I'll just touch on the highlights here total first quarter revenues of $537 million were up 22% compared to the same period last year enter as higher higher than any other broadband satellite network operator.

Adjusted EBITDA in the first quarter was $97 million up 115% compared to the year ago quarter very good start to the year Shawn will go into more depth on sources of adjusted EBITDA growth.

Awards, which are often lumpy in the government and commercial networks business are a little bit down compared to an exceptional first quarter last year, the backlog still higher than this time last year as a result of robust awards over the last several quarters.

In addition to the firm contract awards, we received a new.

Gee, I say $450 million.

Q contract.

Which is a timely purchasing mechanism for many of our non development developmental item government products and services.

As of the end of the first quarter, we had well over $1 billion in an awarded.

Q and government.

And contract option value that we expect to convert into revenue.

Thats not included in our backlog.

As our non developmental item business grows we anticipate these IDI Q or indefinite delivery indefinite quantity contracts can facilitate greater volume of our government revenue without necessarily showing up first in backlog.

We believe those I'd like to than the contract options are good indicators of demand.

So with that backdrop, I will turn it over to Sean.

Thanks Mark.

Our fiscal 2020 is off to a very good start with year over year trends supporting the solid growth, we expect in fiscal 2020 and beyond.

Total Q1 revenues of 537 million increased 22% year over year led by 20 plus percent growth in both satellite services and government systems segment, which more than offset the anticipated ramp down effects of lower comair terminal deliveries in our commercial network segment.

Service revenues were up 53 million or 24%, while product revenues were up 45 million or 21%.

First quarter, adjusted EBITDA more than doubled year over year, and 97 million, reflecting the operating leverage that underpins our service businesses.

Adjusted EBITDA margin for 18% of nearly eight percentage points compared to the same period last year. Despite the growing investments we made internationally as we expand upon our fixed and mobile broadband opportunities Brad.

Looking at each segment in government systems, we saw very strong strong revenue growth of 71 million up 37% year over year.

This was result of strong product sales across many of our businesses, including record deliveries of our Bassi handheld link 16 radio and strong shipments of our small tactical terminal.

Segment service revenues also grew strongly up 9% year over year predominately from government mobile broadband service offerings.

Government systems adjusted EBITDA of 65 million represented a 49% increase over Q1 of last year.

Gross margins were largely unchanged from the prior period, but a three percentage point decline in ESG any as a percent of revenue helped drive the higher adjusted EBITDA growth.

Segment Awards in Q1 were $215 million.

As we've said in the past awards in our government segment can be somewhat lumpy is just looking at our quarterly numbers.

On a TTM basis awards were nearly $1.2 billion or 31% higher than the same TTM period last year.

Which increased government systems backlog to $879 million, which is up $100 million year over year and this backlog figure excludes unawarded ceilings under the company's over 1 billion dollar idea Q portfolio and approximately 500 million in outstanding options under the MSS service contract as Mark alluded to in his opening remarks.

Turning to commercial networks, we saw quarterly revenues declined by 17%, mostly as a result of lower mobility terminal shipments this year compared to last year's accelerated pace of shipments for the American Airlines program.

Also but to a lesser extent that continued grounding of the 737 Max aircraft negatively impacted terminal shipments.

Looking forward, we believe this quarter's terminal deliveries represents a low point.

But as long as a 737 Max six ration remains unresolved there could be a continuing revenue impact in this segment as well as in satellite services.

Stepping back the business is strong and the pipeline is growing we expect to install approximately 510 additional IC terminals under existing contracts, which was a 4% increase sequentially.

For the quarter adjusted EBITDA loss in commercial networks widened somewhat as higher SGN expense and a slight increase in R&D investment more than offset a two percentage point improvement in gross margin.

Awards for the quarter were $99 million of which about 75% was for fixed antenna in integrated networking solutions a record for that business.

And the remainder was associated with commercial airborne terminal.

This brought segment backlog to $371 million, which is the highest it's been in the last four years.

Finally in satellite services, we continue to see good revenue growth and even stronger adjusted EBITDA growth. Despite the ramp in international activities I mentioned earlier.

This quarter was our sixth quarter of sequential revenue growth and also a record high of $197 million up 20% year over year.

Both the consumer broadband and commercial IC businesses hit record high.

With fixed consumer broadband accounting for just over half of the Q1 growth on the IC business, representing the bulk of the remainder.

And we expect this trend to continue with even more of our future growth coming from new verticals.

Fixed consumer broadband revenues benefited from a 16% year over increase in ARPU from a growing premium service by mix as well as a slight increase in the average number of subscribers compared to last year.

In commercial air revenue growth was driven primarily by a 76% increase in the number of sales and service year over year and to a lesser extent are an increase in ARPA.

Our ending in service Telecom was 1335 aircraft.

And that excludes 46, Boeing 737, Max to already have bias out services enable that are currently grounded.

In terms of overall financial impact the reduced number of installs and delay and related service revenue could result in a fiscal year earnings pressure in the $5 million to $10 million range, which is based on a return to flight in the calendar year end time frame.

However, there continues to be considerable uncertainty only claims both returned to service. So we're monitoring the situation carefully.

Adjusted EBITDA for satellite service segment, nearly doubled increasing from 34 million in Q1 of 2019 to over $67 million in the current quarter.

This represents a 76% flow through of incremental revenue to adjusted EBITDA due to the low variable cost nature of this segment.

On a sequential basis revenue to adjusted EBITDA conversion was closer to 30%, which reflects the impact of the increased spending on our emerging international fixed and mobile broadband opportunity.

On the whole our very good quarter with lots of momentum across our businesses, which is reflected in total company backlog position of 1.84 billion a $200 million increase to the same period last year.

In slide six we see our income and cash flows for the quarter plus our debt net leverage since last two years.

On the operating income line, we see the improvement in our adjusted EBITDA performance, while our net income reflects a lower tax benefit associated with the reduced current year loss along with increased R&D credits.

The net result was a Q1 GAAP net loss of $11.5 million and a non-GAAP net income of 6.4 million.

Looking at cash flow, we generated $46 million from operations with the year over year comparison, reflecting the substantially higher adjusted EBITDA this quarter offset by a large increase in working capital.

Most of this working capital change was an increase of product inventory to support the unit growth and our government business.

Although the dollar value of inventory increased on a sequential basis, our inventory turnover was basically unchanged during this period.

In Capex, we saw investments increased by about $25 million year over year due to higher expenditures on the viastat three constellation, partially offset by lower expenditures on the Viastat two ground network activities, we completed last year, plus a year over year reduction in CP investments.

So as I noted in previous quarters, Q1, 40, 20 March our adoption of AMC 42 related to the accounting for leases consistent to our previous discussions the adoption had nowhere material impacts on our debt leverage ratios or various income measures and additional information regarding the growth of impacts our balance sheet can be found in our Q1 quite tiny Form 10-Q to be filed with the FCC.

In the chart on the lower right you can see that our net leverage position improved dramatically down to 3.3 x. from Fivex compared to the same time last year and there was also a slight sequential improvement from Q4 fiscal 2018.

We expect our net leverage to hover around the three point Fivex area, plus or minus a half turn throughout the remainder of the year.

Finally, our liquidity position continues to be very strong.

$811 million, which includes the cash on the balance sheet plus availability under our $700 million revolving credit facility. So that I will turn it back over to you Mark.

Okay. Thanks, John I'll give a little color on some of their business areas.

The chart on the left shows the steady progress we've made over the prior five fiscal years in satellite services.

And the trailing 12 month period, ending with our first quarter fiscal year 2000.

We've had six straight quarters of sequential segment revenue growth catalyzed by Viastat, two entering service and the benefits of its technical innovations and bandwidth productivity geographic coverage and flexibility.

The chart illustrates three important points.

One long term growth in the U.S. residential market, which was the natural entry application for us given the design tradeoffs that were possible. When we began the Viasat one program back in 2008.

Second is the long term steady diversification of the broadband services revenue pace.

Thats been led by the US in flight connectivity market, which was also a natural follow on to the U.S. residential market and that was enabled by buys one bandwidth productivity.

And consistent with Viastat, one area design trade spaces, plus our acquisition of the Wildblue satellite fleet.

And then you cannot see the long term growth in total satellite services revenues a product of the sustained growth in each of the first to U.S. markets and now augmented by regional and global growth enabled by the buyers have to architecture and innovative business models, leveraging our network technology with regional.

Satellite operators around the world.

Focusing in on the first quarter results segment revenue growth was largely driven by higher value higher bandwidth use residential service plans, yielding 16% ARPU growth compared to the year ago period, along with some modest subscriber gains.

Then growth in in flight connectivity services revenue was also a strong contributor has airplanes in service increased by 76% compared to last year.

So both of those markets benefit from our satellite bandwidth productivity gains compared to competitors.

We continue to carefully balance our us residential service offerings for earnings growth in near to mid term cash generation part of which we are using to finance viastat three.

We are reducing CP capital expenditures, lowering churn and boosting customer satisfaction.

We continue to work on improvements in each of those three areas.

We believe that our market facing focus on high value plans in terms of speed and total bandwidth per dollar.

Good strategy for satellite bandwidth productivity leader.

This fits a context of continued end user demand for higher speeds and more bandwidth and the landscape of ARPU growth for high speed terrestrial high ASP is too.

We're also continuing to invest in innovative new network technologies for instance, we're aiming to expand market tests that offer low latency comparable to that extent did for live systems suitable for gaming for instance to more U.S. customers. This fiscal year with continued success those technologies could also meaningfully increase our addressable markets in the us and internationally.

So as Sean mentioned, we've got 1335 commercial aircraft in.

Our in flight connectivity service, excluding about 57 37 next plane that remain grounded at the end of Q1.

The grounded planes are inhibiting our growth to some extent this fiscal year and that effect is likely to increase for a little while as new planes that otherwise would be fine are delayed.

It also means we anticipated step increase when the Max fleet returns to surface.

Community Wi Fi enterprise and new geographic markets are also contributing to growth and diversification.

We think some of these early entries into new markets can yield significant contributions in the bias at three timeframe.

Our early entry objectives include defining and testing service plans building national and regional distribution and support networks integrating with sovereign national infrastructure.

Adapting to national regulatory regimes and testing adaptations to widely varying local market environments.

After year work, we've obtained Brazilian court approval for the Teller pass agreement, we executed early in calendar year 2018.

We've established a strong partnership with tele bras and have already connected thousands of remote schools and government facilities with high speed Internet.

With the goal of reaching around 15000 sites by the end of 2019.

Court approval enables us to work on a broader range of applications and markets.

So focusing in on in flight connectivity, it's an important component of growth in our satellite services segment.

It's a great example of the power of our vertically integrated strategy in terms of space system design geographic coverage network and user terminal technology operational expertise and innovation and business models.

Weve earned strong positions in the us and Australia are making an impact in Europe .

And with Viasat three approaching are laying the groundwork for global growth for both regional and long haul Intercontinental routes.

But the growth opportunity for us is more than geographic expansion and market share. We're very focused on helping our airline partners leverage our network and distinctive ways.

For doubly enhance passenger experience and contribute to the airline earnings growth.

It should be obvious no airline can meaningfully drive overall customer satisfaction high Levered gene fast Wi Fi if only a small fraction of passengers unit.

So even while this remains one of our fastest growing markets. We are still working closely with leading airlines to continue to increase engagement and enable innovative passenger cabin business models.

We're making progress recently more airlines are commenting publicly about the importance of in flight connectivity in delivering a great passenger experience or Conversely about the risk of poor conductivity ruining an otherwise good flight.

Free Wi Fi is in the conversation more than ever.

We've been delivering on that promise for Jetblue for years now.

Continuing adoption of multimedia within messaging and social networks as well as on the web and through rapidly growing cloud based streaming music and video services continues to put a spotlight on bandwidth resources. There is also growing awareness of the operational benefits to airlines have abundant affordable broadband connectivity.

Airlines aren't going to just need a lot of bandwidth they are going to need a large and growing supply of affordable bandwidth and that's the point of our focus on productivity.

We believe we are in the best reputation for delivering affordable high speed high bandwidth connections for regional pipes in North America, Australia, and now within Europe and over the Atlantic.

Now that the first viasat three launches are lining up with delivery schedules of popular new aircraft. We can compete on more global opportunities, making our industry, leading service platform available everywhere.

We are pursuing for global initiatives.

We recently introduced our new generation dual band K., you and K band terminal well suited for the retrofit long haul wide body market or for new aircraft deliveries either before early in device entry on cycle.

Second we've engaged with existing and new airline customers to expand regional and long haul Intercontinental service over Latin America.

Leveraging the coverage of Viastat, two and our agreement will tell us.

Third, we're engaging with China, Satcom and network planning and deployment for our partnership for came in in flight connectivity services, beginning on China's hat 16, the leading broadband satellite for the China market.

And fourth.

We are now engaging globally with airlines for new aircraft deliveries around the calendar year, 21, and 22 timeframe leveraging the viasat three global constellation.

So we exited the first quarter with just over 500 additional aircraft anticipated under.

Existing contracts, excluding our just announced jet Blue order and the expansion of our relationship with United Airlines that was described in our earnings press release.

The flow of new orders is pretty lumpy and always at the convenience of our airline customers.

Excellent execution enabled us to show compelling market share gains throughout fiscal year 19.

Growth in active planes during the first quarter was not quite as robust partly because we are so successful and accelerating deliveries. The last couple of quarters for American Airlines and partly because our strong position on the 737 Max means we've got.

Close to 50 planes temporarily out of service.

We're really excited about a new order pipeline and believe we've got very good growth opportunities as we begin to compete more globally.

Our government systems business continues to deliver very strong steady profitable growth in the defense market. That's both in need of an increasingly receptive too disruptive innovation.

Revenue increased 37% year over year to $261 million and adjusted EBITDA grew 49% year over year to $65 million.

Led by very robust product sales and steady services games, we always point out that government business flow can be lumpy.

While new contract awards of $215 million in the first quarter were below the first quarter fiscal year 19 exceptionally high comparable value.

Our quarter ending backlog of $875 million is still 13% higher than it was at this time last year driven by the sustained strong order flow we had over the last few quarters.

It's also worth pointing out that our previously announced $450 million TSC idea Q contract award in the first quarter increased our inventory of.

Q value that we expect to convert to revenue to just over $1 billion.

We don't include Unawarded idea acute contract values in our backlog until we receive from delivery orders. So that billion dollars not included in the $879 million backlog figure.

I'd like to use are important because they enable timely purchases for a number of our customers.

Especially for our unique non developmental ITOM products and services.

As revenue associated with non development items, such as the bat stealing 16 radio shown in this chart.

As those continues to grow we anticipate a higher proportion of revenue.

Could derive from these contracting vehicles.

We also wanted to mention here, our previously announced award for the first ever link 16.

Capable small lower orbit satellites Leo satellite.

We won an airforce competition for this proves that proof of concept spacecraft based on our payload capabilities are diverse and rapidly growing base of small link 16 terminals.

Creates an exciting prospect of leveraging a potential global constellation of such Leo Link 16 satellites Theres a lot of work remaining to make that happen, but winning this program helps further illustrate our capabilities and strength in non geosynchronous satellite systems. The significance of payload technology in satellite design and the under the synergies and convergence and our government systems product and service portfolio.

Overall, we are.

We continue to be very enthusiastic about our near mid and long term growth opportunities and grow government systems.

We believe we are still in the early stages of expanding the market for our products and services from early adopters into the mainstream forces and to grow our presence in a number of attractive growth areas, including space Cyber security and next generation high performance terrestrial radio networks in the us and with our allies.

Okay. So finally decide outlook and key drivers is very very similar to what we showed last quarter, which was at that time. The result of our execution over the course of fiscal 19.

The silver similarity to last quarter is a good thing because it means we're performing across our business areas pretty much according to plan.

We have continued growth momentum for fiscal 20, as we build on what we accomplished in fiscal 19 that offers attractive year over year revenue and adjusted EBITDA growth opportunities.

In satellite services, our active commercial in flight connectivity fleet up 76% year over year net of the ongoing 70 737 Maxs groundings.

And our expanded services portfolio creates more revenue opportunities per plane.

The ongoing grounding could pressure fiscal year 28, just to EBITDA in the range of as much as $5 million to $10 million, depending on when they return to pipe.

We also anticipate a step gain in quarterly revenue and adjusted EBITDA run rate when that does occur.

You have fixed broadband ARPU is down 16% higher than the year ago value on a modestly larger subscriber base.

Our satellite broadband services, leveraging our high fixed costs low variable cost model offering good opportunities for revenue to flow through to adjusted EBITDA expanding our margins.

Government revenue and earnings jumped significantly year over year in the first quarter and our backlog is 13% higher than at this time, a year ago supporting good growth prospects for fiscal year 20, as a whole plus we have this $1 billion plus inventory of Unawarded ideally Q contract value that we expect to convert to revenue over time.

Our success in our large in our target markets.

Presents expanding growth opportunities in both government and commercial markets, we leveraged R&D and capital investments that in fiscal 17, and 18 into strong revenue and adjusted EBITDA growth.

So we're mindful of comparable success based investments on an ongoing basis.

But the main takeaway is that our top level expectations for attractive revenue adjusted EBITDA and margin growth for fiscal 20 remain intact.

So thats it for our prepared remarks and at this time, we are happy to take questions.

Ladies and gentlemen, if we have a question at this time. Please press Star then the number one key on your telephone keypad.

Thanks for your question has been answered or you wish to remove yourself from the queue.

Please press the pound key.

And our first question will come from the line of Ric Prentiss from Raymond James You May begin thanks, good afternoon.

Correct.

Actually start with just Mark you touched on a couple of times held the Viasat three constellation is a really important in the timing could line up nice with some aircraft can you just remind us of the launch and service dates that you're looking at and I think you have diversified your launch vehicles too. So just want to know what's the current thoughts on the I guess viasat three athree the hthreec.

Yep that hasnt changed since we last talked about it. So we are talking about.

Probably in the group.

Early part of calendar 21, as the planned launch date for the first one.

And then going into services.

It's a new new satellite so.

There is a there is always a little bit of uncertainty with that with that architecture.

The main thing that we did talk about.

Previously our.

The lunch agreements that we.

We have executed allow us a much shorter orbit raving period, so that part has that part's condensed from month to probably around one month.

And then it will just be.

In orbit test for the satellite before we go into service.

Okay, and how about like three the Threec as you look into EMEA. So those haven't changed we've been looking at roughly.

Six month interval from the launch of.

The Americas, one to the Europe Africa Middle East One and then we said that we expect the launch of the third one to be before the end of calendar 2002.

Okay.

And then you mentioned that you're already getting excited that you might start working on a bias for would that be after the three athree the threec or is there a fourth.

Bias at three that have to come out or kind of what's the thought on viasat for rough timing as you as you look at the exciting.

Demand for bandwidth.

We're not going to give I think right now we're going through as I mentioned tradeoffs on schedule.

Performance cost.

But what what we're aiming for and what we expected to have another pretty significant improvement relative to the Viasat three series. So we've taught by set forward because it's really.

Kind of an embellishment viastat three think of it as a natural extension.

Building on that technology.

I have.

I mean, its main objectives will be significantly more capacity.

Per per dollar big improvements in productivity.

We'll talk about where we'll deploy it and what the schedule will be probably later this year as we complete the definition.

But think of it.

This is Rick.

Think of it in terms of.

Not so much reduced level of R&D to get to that solution versus what we went through advised that free except marks have more of an extension and.

Be compatible with all of our drilling that were.

And then you also mentioned Leo's you've got the the link 16 in there that you might be able to work with some of the ore collaborate with some of the leaders that are planned out there that's probably where the top questions. We get from investors is what are these potential new billionaire space club Leo Constellations mean will they get funded what does it mean, so maybe just opine a little bit on how do you see the space.

Unintended playing out over the next few years.

So we've got a view on what makes for the best capital investments and.

I think that we really like our approach because it.

Allows us to deliver them, we think the most bandwidth.

Her.

Dollar invested into the places that have the most demand and then we can reinforce that.

Really difficult to do with those lower orbit satellites.

We've we've spent a lot of time examining the filings.

We think we understand what their approaches are.

Some of them have some really innovative payload architecture I'd say, we still think ours is.

It is probably a better investment.

But it doesn't mean that some of them won't be deployed to some extent.

One of the things we've mentioned multiple times is.

Combining.

Our geosynchronous satellites with either lower latency terrestrial infrastructure and in some cases, possibly with lower latency real satellites, if they're available to deliver kind of this hybrid Geo Leo.

Up experience and so we're actively working that.

With.

With with some of the satellites, but if you.

I think the new it's a very technically complex space, but I think if you look at.

The overall its going up we think it's going to be really hard for the Leo systems to deliver the same type of bandwidth economics, which means that generally they would be.

Subject to either lower volume caps, and we would be at the same point in time, where their bandwidth would be significantly more expensive. So we think the market really want low cost bandwidth.

Great and then your comment there on low low latency terrestrial set relate back to some of the Caf two funding you guys and how it might linked with the bias at three constellation.

No no. The Caf two funding is really that all based on.

Purely satellite based geosynchronous service.

The what weve alluded to about.

Building hybrid networks with terrestrial is essentially putting that.

Router in a user's home that allows them to.

Sort of optimally combine.

Satellite bandwidth with.

Some terrestrial bandwidth, it's not as fast as the satellite but has lower latency and that by combining those two we can create the effect of really high speed high bandwidth low latency communications.

Thats what that refers to we're kind of in early alpha testing now and were aiming to expand our testing of that this year.

Great. Thanks.

Thank you and our next question comes from the line of Simon Flannery from Morgan Stanley You may begin.

Great. Thanks, very much good evening.

Mark you talked a lot about the eye of Si business can you give us a sense on.

The K.K. you product how much appetite are you seeing potentially for customers buying that in the next year or two or are there kind of more interest in waiting for viasat, three and just going with that.

Pure K report.

Approach and then on the.

The I have see revenues what are the trends in average revenue per aircraft and usage.

That you're seeing there is that something where there is continues to be.

As the aircraft online.

Moderate swing either with the American fleet kind of migrating over are we going to see potential for upside in our power over the next year or two as usage grows. Thanks.

Okay.

Sure. Thanks, Thanks Simon.

On the Kuka.

The basically what what we wanted to do was to engage with airlines now on global routes.

And.

As I mentioned there is good news.

Several different markets there.

Think of it as there's some retrofit.

Opportunity in there were other planes that are already in service.

And depending on where those things are good candidates for K 8-K, you now because.

For for a number of them a large fraction of their seat expectations are in areas, where we have K band in the K U provides continuity and basically this same level of service that you'd get from any other inphi Connectivities service.

In those cases you areas.

Then there are some that are depending on the time.

The.

Delivery date of new aircraft, where did the K UK is also interesting.

And then also that as you kind of alluded to having the K UK product has really brought us into the conversation with airlines that are taking delivery of new aircraft in say, the 21 or 22 timeframe.

And we don't have any announcements to make today, but we will have a number of interesting acres on the hybrid K.U. K band terminal were seeing good interest and that we're making progress on type certifications for that.

And then Thats also led to some discussions with.

Airlines, who when they look at sort of the timeframe of their do airline airplane deliveries and maybe the uncertainty associated with that and the delivery of our.

Viasat three network are basically, saying well, okay given effect gaps that small we'll just go okay. So we're seeing some of each we're hopeful that in the next quarter or so we'll be able to talk.

Explicitly about some of those deals.

Im not right.

Okay, then on the bandwidth utilization, yes, I think the general trends that we're seeing I think just reflecting.

Internet usage on a global basis is.

More and more people are interested in using the internet.

Onboard airplanes and those that are using it.

Tending to use more bandwidth just because theres more.

Media voice.

Think of it as music and video.

Imbedded in now in social media in web sites and then also in the streaming services. So.

Yes, we're seeing we're also delivering more services so that some of that comes from us being.

Prime contractor and for instance, if you look at our expanded agreements with Jetblue and United.

Each of those agreements involve us being the prime contractor and seeing more and more of those aircraft converted to us being the prime contractor so that increases our responsibilities in revenue and then finally and as we add services like.

Broadcast TV, which we've done on American.

Wireless IP on American and you'll see that coming on additional airlines as well and then some of these innovative services like the arrangement that we have with Apple and American Airlines for three Apple music. All those are contributing to growth in revenue per aircraft. So thats good that plus the number of aircraft or what's driving our in flight connectivity revenues.

Great. Thanks, a lot.

Thank you Simon.

Thank you and our next question comes from the line Phil Cusick from JP Morgan you may begin.

Hi, guys. Thanks.

A couple if I can get that strength has been really amazing and starting to look like a trend, especially with all these different backlog category.

Is there a reason to think that this drops back to a lower level.

And again, recognizing that Theres theres lumpiness here.

Level, a better norm to assume going forward.

Well I wish.

I wish we could do 35% growth every quarter.

We've been we've been pretty consistent in that 10 ish plus or minus so like a low double digit percentage growth over the last few years, it's lumpy I think thats, probably a safer.

Kind of outlook for us.

As you know.

As we grow backlog and these ideas accuse and get more confidence I think if things change, we'll probably say that but that kind of double digit which is a good that's a good safe.

Taped number got it.

Double digits, a pretty big.

Yes.

Okay.

Right. Another we're thinking more about the virus that for generation, how should we think about R&D over time should we look for this to ramp back up to the low elsewhere at work was a couple of years ago.

No.

I want to thank Shawn mentioned before and I think you thought this quarter is we kind of came at a trough at about 5% of.

Revenue in this quarter I think we're kind of at the 6% range and that's that's kind of the our budget going ahead, we might think we're going to deviate from that will probably say something.

I think look to the point that Rick made.

About the next generation of that constellation is.

There was a lot of new stuff associated with Viasat three and then the next generation is really using those tools that in a way that should involve much less R&D. Both in this space side in the ground side and so we're just doing that trade off now what were the main point, we wanted to get across on Viasat floor.

And that next generation constellation is is to not think of Viastat three as a thing or an endpoint think of it is the first event.

Series and that there's a lot of.

Growth in.

Performance and productivity, which is that's the measure we keep coming up with and if you look at.

Just using that to kind of contrast, with the Leo's where.

Kind of our view like so I think some people think that Rio itself RF thing and actually if you look at what's going to make a meal constellation. Good if it's going to be good it's really in the payload architecture, and we think we really like ours and we think it's really scalable in contrast to some of what it would take to do some of the leaders systems and that's the point, we wanted to get across that we've done most of that work already.

Great and one more if I can.

Hi, just one thing.

Mark first thing about government side.

Vice that freezing, but you're looking at how the government funds drawn today on Viasat three gets up there.

We believe it's going to have a big impact on our government.

Yep.

That that's true.

Got it and then last one if I can.

You you put in the press release, a discussion of the 18 inch satellite antenna.

What should we think about the target market, there and what sort of conversations have you had already thanks.

Okay that theyre basically there's application for a range of government aircraft where.

Basically with a larger aperture, which is supported by.

Those aircraft, we can get higher peak speeds and better airtime costs and so thats. The dominant reason for so there are.

Some of them are in the rotary wing or the hybrid aircraft market and then the larger.

Business jet market those would be the kind of the types of.

Of applications for that.

And it just makes for better economics for those applications.

Okay. Thanks, guys.

Thank you.

I think one more okay.

One more question.

Thank you and our next question will come from the line of Mike Crawford from B. Riley you may begin.

Thank you if I could just maybe rifle shot at news a couple of quick ones.

One you got this nice jury award in your litigation against Acacia Communications at $49 million Award.

Do you have a timeline for when the judge might add to that given the extended period of time of infringement.

Okay. So.

I'm going to go to face extreme we don't like litigation.

We mitigate when when we feel like we need to we're gratified or.

By the by the jury decision, but there's still a bunch of things to happen there.

Going to be some post trial motions.

By both sides and there will be probably appeals and so it's too early to really speculate about what will happen next year with a sequence will be but I think it's a good indication that.

Yeah, we certainly felt like we had a strong case in the matter.

Regarding another company that has a lot of IP that you're on the board of Mark add investment is cialis, where is there anything you can comment on how they're doing with their.

Waveforms and business prospects.

Yes, so tell us where we are.

Where the majority owner of travel swear to centrally.

It's a majority owned subsidiary advisor.

We're really pleased with the progress that they've made in defense terrestrial radios.

They've been.

Pretty rapidly growing provider of specialty radios, mostly into the special operations and early responder community, but based on what's going on and.

And the larger army, there's some really good growth prospects in there.

That hopefully that'll play out over the next couple of years.

Overall, we're really pleased with what they've done in the technology that they renew.

Okay.

Thanks, and then just on these.

Non developmental items.

Mike Thats, Steve, but the S.P.T. was certainly one of those but we saw just.

On July 31st.

Army it.

Award.

For SDTS, but.

Does that mean, that's also that's a program of record or you can get funding from both sources from further still.

What's happened with a number of our will.

We call something a non developmental item product with what that means is basically that we develop the underlying product on our own funds. Then there may be customization or specific applications of those two specific platforms or operational needs and when that happens when things you will see is that there'll be a an official via the nomenclature for that product and then often once it to achieve that state, though considered a program of record. So thats happened with the FTP, it's really become adopted as the primary schools small form factor.

You've been around for a while you remember that there is a program called joint Tactical radio system quite a while ago, which didnt end up leading to production, but there was what was called a small form factor radio in that one of our targets was that we would end up.

Fitting in that has the small form factor radio and that's essentially what's happened that product.

So that.

So that now that's become a program of record in a number of applications that's happened with.

Several of our non developmental items I think it's in the works has happened with the bats D as well and so when those things happen what you'll see is that some of those customers will be less reliant on the Q types of contracts and we will have our own.

Program of record awards.

But that's that's a good sign of success for that for that product and it really is I think.

The real market leader in this small form factor link 16.

Okay. Thank you and then the final one just relates to real time, or if and where you would put that in.

On the scale of a future revenue opportunities and then related to that would be.

How these new.

Ground station as a service installations with the 7.3 meters additions factor into that versus maybe offloading.

Other like Leo.

Constellation is our data beam them up to Viasat, three and then back down through your vice that Threed Crown.

Architecture versus these specialized locations.

Okay. Yeah, I mean, that's a good question I think just to take a step back.

When you think of the Earth observation market in General you know, we're a lot more bullish about these proliferated small satellites because with a lot of satellites you can see everywhere at once.

And one of the one of the big opportunities that can come with seeing everywhere once.

Is is basically the opportunity to provide connectivity both to task the satellites, so that theyre looking in exactly the right place with the right sensors and then the other is to get information in real time instead of hours later or days later.

So.

If you look at what's happening a lot of there's a lot of.

Creativity in small.

Relatively inexpensive sensing satellites.

But building a ground network for each of those is that would that would tend to dominate the total system cost for that so.

There's really no.

Two ways to go about.

At least two obviously, they're going about turning this into a real time business. One is to have a whole lot of ground stations.

But that is probably limited.

It's the first in the easiest way to do it but ultimately may be limited, especially over ocean areas and the other one is to do what's been done and kind of the government and defense space for quite a while and thats to use relays from hi orbiting satellites. So are you know one of things. We're looking at is to build some relationships with.

A real time or ground network and that that includes relationships with.

Satellite sensing operations as well as.

Ground systems around the world and we're doing that in multiple ways some of it our own our own some of it as a technology provider to other players and then the other thing is the thing that you mentioned, which is ultimately if you really want to be able to get real time anywhere in the world doing relay through a geosynchronous satellite system, especially one with really high bandwidth is the best way to do it we think so we're working both this is.

A good example of us.

Testing market entries in what we think is a prudent way, but in a way that we think is consistent with the long term trends.

So I think it's worth noting that we are doing it.

But there is there's still a lot to do.

Okay, all right. Thank you very much.

Thanks, a lot I can really appreciate your question.

So I think that's it.

Questions.

Thanks, a lot everybody for joining our call and we'll look forward to speaking again next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program and you may all disconnect everyone have a great day.