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Presentation

Viasat, Inc. beats earnings expectations. Reported EPS is $15.56, expectations were $9.49.

Operator: Hello, and welcome to Viasat’s Q4 Fiscal Year 2023 Earnings Conference Call. Your host for today’s call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Mark Dankberg: Thanks. Good afternoon, everybody. Thanks for joining us for our call today. We released our shareholder letter shortly after market close this afternoon, and it’s still available on our website. We’ll be referring to on this call. So joining me on the call today are Guru Graben, our new President, Kevin Harkerider; our COO; Shawn Duffy, our Chief Financial Officer; Robert Blair, our General Counsel; and Paul Froelich from Corporate Development; and Peter Lopez from Investor Relations as well. So before we start, Robert will provide our safe harbor guidance.

Robert Blair: Thanks, Mark. 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 SEC or from our website. Back to you, Mark.

Mark Dankberg: Thanks. Okay. So to start, I’ll briefly try to recap to the business and financial highlights and also I’d like to introduce our new President, Guru Graben. And then we’ll open it up for questions. So for us, the biggest highlight is that our Viasat ViaSat-3 Americas satellite has arrived at its orbital location, and it’s beginning its final deployments. But that stunned, we can complete in orbit testing, and we can start bringing it up the network. We’re aiming to be in service around mid-summer, and that’s going to greatly expand our coverage and provide bandwidth to grow all of our satellite services businesses. It’s been an enormous undertaking by our whole team, and I want to thank everybody for their commitment and dedication.

We’ve got just a few more steps to go for this first one, with the Europe, Middle East, Africa satellite launching later this calendar year and then Asia Pacific satellite, again, almost complete global coverage. The Asia Pacific satellite is now in final integration and test with Boeing. We believe the combination of virtually global coverage, the amount of useful bandwidth per capital dollar invested and the ability to dynamically move that bandwidth to the places with the greatest demand are unique to the [indiscernible]. These satellites and will prove to be especially valuable in the global mobile markets. We now anticipate closing the Inmarsat transaction this month. We received approval in the U.K. and have only two more steps to go.

We believe the transaction will be accretive to adjusted EBITDA and free cash flow on a per share basis and can help both companies provide better services to our customers at lower cost. Both Viasat and Inmarsat have continued to grow our global mobile businesses in the 18 months since we reached agreement. Inmarsat just reported their most recent results, and you can find them on their website. And we also continue to expect that together, we can bring more important innovations and growth to their L-band business as well, especially I think the rapidly evolving Internet of Things and direct-to-device markets. Early in our fourth quarter, we did close the sale of our Link 16 TDL business for $1.9 billion. That increased our liquidity and significantly reduced our leverage on a standalone basis as well as prospectively on a combined basis with Inmarsat.

Post cause, we did quickly rightsize the company to the new run rate, which reduces annual run rate operating costs by about $40 million. We presented our financial performance in the letter in terms of continuing operations that excludes Link 16 TDL business in prior periods and also our total results of operations including Link 16 TDL in the period that we owned it. Continuing operations provides context for results on a go-forward basis. We achieved new records in awards and revenue from continuing operations for fiscal year 2023 at $2.8 billion and $2.6 billion, respectively. Adjusted EBITDA from continuing operations was $501 million, and with three quarters of TDL results prior to the Q4 sales, total adjusted EBITDA was $583 million for the year.

Q4 results on a continuing basis were good and provide momentum going into fiscal ’24. Q4 revenue from continuing operations grew 10% year-over-year to $666 million and adjusted EBITDA from continued operations was $124 million, which was up 21% year-over-year. In Government Systems, the certification of key products, some cryptographic products cleared pent-up demand that had been accruing and that drove significant year-over-year revenue growth in the quarter. We grew our commercial in-flight connectivity in service fleet to 2,230 aircraft. We added Etihad Airways as a new airline partner, and we expanded our Delta Airlines free Wi-Fi initiative. We continued market testing and analysis of new ViaSat-3 era of fixed broadband plans, offering a significant higher speeds and more bandwidth per subscriber.

We’ve been working and investing in a very capital-intensive phase for several years to develop and deploy technology and business models, transform from a strong range of player into a leading global satellite services operator. Now we can see tangible evidence of the pieces coming together and the opportunity to generate real free cash flow returns from those investments. That includes not only our own business areas, but the very complementary people, resources and assets from Inmarsat. Given all those elements, now we need to execute and scale. And to that end, I’d like to briefly introduce a new member of our leadership team, Gurugram, who joins us as President, and we really want to thank Rick Baldridge, our Vice Chairman, for all he’s done for us in his operating calls.

With Guru here, Rick will continue to support special projects and will remain on our board as Vice Chairman. Guru’s previous position was at Verizon Media as CEO of the former media division that included Yahoo, AOL, Huffington Post, Techcrunch and other media brands. He is a very accomplished leader with experience in integrating large technology operations, operating scaled Internet platforms and creating powerful global partnerships. So Guru, introduce yourself, please.

Guru Gowrappan: Thank you, Mark. And thanks to all of you joining us today on my first earnings call. I’ll provide — so I’m thrilled to have joined Viasat company as you all know with a rich history of success and innovation. Our foundational technology advantage which has delivered healthy growth over time and we are poised for an incredible exciting future as we continue as a team. Having dedicated my carrier to fostering global connectivity and interactivity across key tech consumer and B2B products including telecommunications, I am now embarking on my biggest mission yet. Moreover, as you know, I’ve joined Viasat at an inflection point with the launch of our ViaSat-3 Americas satellite. The first step in placing more than 2 billion of assets into service and three satellite constellations is expected to increase the scale of our network more than eight times the combined bandwidth of ViaSat-1 and ViaSat-2 with the flexibility to move capacity to high-demand locations all while expanding our coverage globally.

And it’s also important to me that space sustainability is a priority here. We intend to grow our network where our customers are, delivering the services they want and need in a globally inclusive and environmentally sustainable manner and all through technology innovation. Finally, the closing of Inmarsat acquisition will be great for all our stakeholders as it will accelerate our global expansion and our growth in mobility and government. Areas that are well-suited for our products and solutions. Inmarsat legacy will also help us achieve our goals for global inclusive growth and space sustainability. And as our CapEx cycles wane, the deal is expected to double our free cash flow per share compared to standalone Viasat. I’m also personally very excited about the potential for growth in L-Band, IoT, that is Internet of Things, and direct-to-device as it has the potential to enormously expand the number of individual customers and B2B relationships we can achieve collectively.

And as Mark said earlier, I do want to congratulate the team Rajeev, Tony and the entire team at Inmarsat for a record quarter with growth across all of their businesses. Now having been in the business of making impactful and rewarding connections for customers, I am humbled to be on this endeavor alongside this incredible team. And throughout my career, I’ll always focused on five key areas employment culture, technology innovation and products, customers and partners, society, and shareholders. And I believe with hard work and relentless execution, coupled with humility and teamwork, that we can build a brighter future for all our stakeholders. And our goal is to drive excellent financial performance while maximizing our impact on the world.

And here at Viasat, I am eager to collaborate with Mark, Rick, Shawn, Robert and our entire team to do just that, because the opportunities here are extraordinary. And with that, I’ll hand it back over to you, Mark.

Mark Dankberg: Good. Thanks, Guru. So thanks and welcome to Viasat. So with that, open it up for questions.

Operator: [Operator Instructions] And your first question comes from the line of Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks. Good afternoon, everybody.

Mark Dankberg: Hi, Ric.

Ric Prentiss: Hi. Good to see the finish line is getting closer for the Inmarsat deal. Can you update us as far as what’s happening with the debt package? What are the terms? Are there any changes to that as you get closer to being able to close the transaction?

Shawn Duffy: Hi, Ric. This is Shawn. So I think there’s a lot — there’s still a lot of moving parts. I mean, things are looking really good as we go to the — as we head to the finish line here. I think the way we look at it is, we secured that package back when we signed the transaction and have pulled the elements of that deal that reflects the market at the timing. And our intentions are that execute on those economics. So — and I think that’s the best way to shape it up.

Ric Prentiss: Okay. Can you just remind us what the terms were in that package that was obviously a different moment in time would be great. But just remind us what the terms were.

Shawn Duffy: Yes, we didn’t — those aren’t public Ric. But I think obviously they are more favorable than we are today.

Ric Prentiss: Sure. Although I can’t remember it. The — following along the line, Guru, first welcome, I should have said that first. Help us understand, you mentioned a couple of times about how you’ve got a lot of integration with technology items. As you look at this integration of Viasat and Inmarsat, help us understand what your top priorities are going to be there, wat’s the timeline like? And could there be any segment reporting changes?

Mark Dankberg: So on the – one of our top priorities are. One is we are, as we’ve said, really intending to grow in the global mobile markets, which are — we’re really in open sort of a broadband basis, there are markets in which we both participate. And those are government, commercial in-flight, business jets and maritime markets are the main ones. What we really are aiming to do is to get the best of both companies. And it’s going to take — I think that’s — one of our main priorities is if you look at the kind of go-to-market differences between the companies, Viasat has tended to be primarily direct sales. That requires more technical support, delivers lower margins, gives us a little more control of the customer experience.

On the other hand, Inmarsat’s margins are very, very good. They tend to be primarily wholesale. They have an existing global network. And there are attributes of each company’s business models and service delivery techniques that we think we want to combine. And so that’s one of our most important points. Just to be clear, we have — we place great value on the distribution relationships that Inmarsat has. We expect to continue — we may be able to augment some of the ways in which we deliver services to our distribution partners. But in other cases, by connectivity, we provide a greater range of services than some of their distribution partners do. So that issue kind of capture the best of both is high on our list. Another one that we really want to emphasize is integrating the two networks, one of the real attractions of the combination that Viasat and Inmarsat is that we both operate cases and networks.

And so that — there’s some really important synergy opportunities by being able to make over time, the platforms that we support work across each of the networks. So that — obviously, with the Inmarsat network, we’ll be instantly global even before we get the next two ViaSat-3 satellites. But with the ViaSat-3 satellites, our depth and coverage will be much, much greater, and I think that will allow us to extend some of the services that we’ve done so successfully in the U.S. to work on a global basis. So those are — I’d say those are probably the top two priorities. And then the next one is to really apply some of the technologies that we’ve been developing here at Viasat into the L-band markets. Because ultimately, what we see is a lot of opportunity in the L-band market if we can do some of the same things that we’ve done in the Ka-band markets using some of those same technologies, which are to increase the speed, increase the amount of bandwidth that we can offer and drive down air time prices.

We’re really excited about the opportunities there. So I’d say those are kind of our top three priorities.

Guru Gowrappan: And Mark if I can add. And Ric, thanks for the comment earlier. What I would say on top of it, when you think about integration, we have a very good plan in place as and when the deal gets closed. And lot of focus is, if you look at performance of individual companies, as Mark said, there are things that are working well, and we want to make sure we don’t miss a beat on those things, including you saw the latest results from Inmarsat for the last quarter. So we want to make sure we maintain that and then these incremental things, as Mark talked to, we at least have a good thinking and plan and place to start executing on it.

Ric Prentiss: And the final one for me to wrap up on that third opportunity, L-band. Is there an opportunity for S-band as well in this directed device category? And how this business take off the directed device? And what do you need to have in place besides just the spectrum?

Mark Dankberg: So the opportunity, I think, for direct device is really going to be driven by the — when we talk about direct-to-device, a lot of times what people are referring to our devices that are primarily intended to operate on terrestrial networks, but that can also work directly on satellite networks. And so the big opportunities are, especially there for those frequencies that are easy to integrate into those terrestrial devices. And that includes both L and S-band. What — and there are different approaches to it. One of the things that we think is a big advantage of being able to do that with a dedicated device MSS spectrum is that, that spectrum will appear with the terrestrial frequencies and those through devices to operate on.

And we think that, that will allow us to address geographic locations, many geographic locations that are within the territory areas of these terrestrial networks but just get poor service for a variety of reasons, poor placements of cell towers, shadowing, all those kinds of things. That’s to be one of the biggest tractions of using licensed MSS spectrum. One of the things that’s going to be a challenge in the rate of growth is that these are new capabilities for those devices. So the market can scale any faster than the market for serving those devices can’t scale faster than those devices get to market. But on the other hand, one of the really attractive things about us and Inmarsat than both having existing L-band MSS businesses is that we can evolve that without having a big ramp-up period.

That’s one of our objectives is we think that the same techniques that will make our services available and attractive to the terrestrial devices will also expand the market for the existing can devices. We can just provide much better services. That’s what our objective is. And we see that as a — it’s not going to be an interesting thing, but we think it’s a really attractive growth market for us.

Ric Prentiss: Great. Appreciate it. You stay well.

Mark Dankberg: Thanks Ric.

Operator: Your Next question comes from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery: Great, thank you very much. Good evening and Guru good to connect with you again. Could we talk about IFC for a minute. First, any color on the backlog, it sounds like you’ve been continuing to win there, so what’s the outlook in terms of adding additional aircraft and growing volume on those aircraft and what are you seeing in terms of the competitive landscape, the opening of the airlines to consider some of these LEO constellations. Is that something that they are exploring or they really prefer the geo solution for now?

Mark Dankberg: Okay. So one, our implied business has been really, really good. I think we’ve got a backlog of over 1,300 claims. So even though we’ve been installing at a high rate, we’ve been winning at an even higher rate, it’s great. I think that the — and I think the reason we’ve been successful are the things that we’ve been highlighting to the airlines, which is kind of the simplest way to put it is like three, four years ago, if you want — if you wanted an impressing airline with your capabilities on in-flight connectivity you find an airplane around and show them a speed of 100 megabits or 200 megabits and then [indiscernible] that’s good. I think what the airlines have really come to appreciate is what’s really hard is serving the peak demands at the busiest airports, especially those airports that have not only airline traffic but are on port cities with maritime traffic.

There are other traffic as well. It’s that geographic concentration of demand that I think is really going to be the most challenging issue. And from our perspective, what we’re hearing from the airlines is they want a good solution that offers their passengers not only the connectivity, but the connectivity is pretty closely intertwined with their entertainment options both live and stored entertainment. And yes, of course, they’re open to LEO, GEO whatever will allow them to deliver the services that their passengers want affordably. I think that’s what they’re going to be open to. So we’re going to make sure that we’re competitive there. That’s what’s driving us. And I think this Inmarsat transaction is going to really help us do that.

Guru Gowrappan: Simon, sorry, great to reconnect. The other point I would just say what Mark said, in the end, great products win. I think what we have is a much superior experience and product that’s why the backlog and how we’ve been winning the customers as well. So that speaks to our core product and technology.

Simon Flannery: Great. And then on the consumer broadband, you’ve been constrained on capacity for several years now. What do you think the TAM is? Is it 5% of U.S. households? We’ve obviously seen Starlink make some strides there. How does your product stack up against that as we commercialize ViaSat-3?

Mark Dankberg: Sure. Yes. I think — and if it’s — if you define the addressable market for satellite broadband broadly, to be those homes where we can — we lead the satellite industry can deliver a service that is, I’d say, best than what they can get from a terrestrial option. That’s how you define it. So don’t think of it as generally the hurdle for doing that has continued to rise. But if you can deliver 25, 50, 100 megabits per second, and you can deliver sufficient bandwidth to allow people to meet their streaming needs, that’s going to be competitive. And probably what today is roughly 10 million to 15 million homes. What we’re anticipating is that say by five years to the end of the decade, that may go down to 5 million to 7 million homes with the infrastructure build-out that’s currently contemplated is comes to fruition.

So that’s kind of both where we are and where we think the market is heading. And then we think that, that our objectives are really to capture a reasonable, I’d say, a reasonably modest portion of that growth for broadband. Yes, that market, I think, reasonably conservative moderate version share of that market.

Simon Flannery: Great. All right, thanks.

Mark Dankberg: Thanks, Simon.

Operator: [Operator Instructions] Your next question comes from the line of Mike Crawford with B. Riley. Please go ahead.

Mike Crawford: Thank you. Just to return to the first question about the debt. I thought there was some public disclosure that you had — that agreement was in place through the end of May. Is that — you would potentially need to renegotiate in something if it’s close to extended past two weeks from now?

Shawn Duffy: Mike, this is Shawn. So I think the way I look at it is, as I said, still lots of moving parts. But I think we’ve had some really good milestones and we’re trying to close within our expected time frames. But again, I agree there were lots of moving parts.

Mike Crawford: So there was not an end of May component.

Shawn Duffy: The financing did have a time frame to it. Absolutely. So it stretched a bit originally beyond the original far date. So I think it’s right around that time period is a good time.

Mike Crawford: Okay. Thank you. And then change in topic. The SEC’s NPRM for single network future with supplemental conversion space and your comments, Viasat’s argument for a technology-neutral approach that enables GSO systems in addition to non-geostationary systems to participate in direct-to-handset connectivity. And so the rules aren’t proposed, that way do you care to handicap the likelihood that the FCC is going to include GSO when by the time we get a final report in order here?

Mark Dankberg: Okay. One thing is, there’s no restriction on devices that can be used with geosynchronous networks, right? So if the geosynchronous networks are capable of closing those links with the service level, the availability and the price points that customers want, then they’re going to be completely fine. And there’s already work underway both in the U.S. and globally to both demonstrate that and to bring those services to market. But it is a little bit of a complicated regulatory environment. What we think, and we think this is and we’ve kind of said this for both broad markets as well as narrow direct-to-device markets is that we think that the solution is going to end up being a combination of geosynchronous and non-geosynchronous satellites.

One of the biggest issues in this direct-to-device market is going to be the geographic concentration of demand because especially in the direct-to-device market, the amount of demand, there will be over oceans or in populated areas, is not nearly as great as it will be in the population centers, especially in an environment where you can use dedicated licensed spectrum and conserve those populated areas that have all those kind of ticking these black spots. So I think it’s a dynamic area, but we don’t see any reason that it’s going to be exclusive to any particular orbit.

Mike Crawford: Okay. Thank you, Mark. And then just one separate last question for me is, previously, you were building a test — the online site satellite that used Link-16. And I think that led with the Link-16 sales but the Viasat retain the capability and our desire to consider being a merchant satellite manufacturer.

Mark Dankberg: Okay. So two things. One is the contracts that we had for Link-16 in space did go with the TDL sale. We still have working relationships around Link-16 with L3 has. But there’s also other tactical link programs other than Link-16 in and around L-band that are interesting to terrific radio customers. So we are continuing to work on that. And that’s one of the attractions of L-band direct-to-device market is that it does open some really unique defense opportunities that are outside of Link-16 area. So we are still working on those.

Mike Crawford: And just ancillary to that just tell us where waveform has been into all this?

Mark Dankberg: It certainly could. That’s possible.

Mike Crawford: Okay, thank you.

Mark Dankberg: Thanks, Mike.

Operator: And there are no further questions at this time. I will turn the call back to Mark Dankberg.

Mark Dankberg: Okay. Well, thanks very much, everybody, for joining us this time. And we’ll look forward to speaking with you again next quarter.

Operator: This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.