Viasat, Inc. (VSAT) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody. Now it's time to take it up to 22,000 miles. And certainly, one of the hardest sectors so far this year has been the space sector. So we're delighted to have Mark Dankberg. Welcome back Mark, CEO of Viasat.

Thanks for having me.

So looking forward to our conversation. Before we get started, please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures appear in the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk.

So maybe we'll just start off with you had a series of strong earnings results, and you're talking about some great opportunities that you see around the IFC opportunity about the ViaSat-3. So just help frame for us the key priorities for Viasat in 2020.

Well, first one is to keep going with our growth and our execution, that's number one. And I think we have all the resources in place to be able to do that. Good backlog, good order book. I think nothing is really changing in an adverse way in those markets. And I think we've got good momentum for this year. The other, obviously, really high priority for us is to make progress on the ViaSat-3 satellite construction. And the thing we talked about as kind of the, I'd say, a big near-term milestone is completing the spacecraft payload module and then delivering that back to billing. So remember the -- each of the ViaSat-3 satellites is -- consists of 2 parts. There's main spacecraft and a payload module. Boeing builds those 2 pieces, they ship the payload module to us. We populate that, all the payload electronics, test that. When that's done, we deliver that back to Boeing. Once that happens, it looks like almost any other Boeing 702 satellite program. So it's a lot more predictable from there. So that's -- we were aiming to do that this autumn, and that will be another big priority for us.

Great. And if we look at that, take the payroll, is that for the first ViaSat-3?

Yes. Yes. So right now in our satellite assembly area or satellite factory in Arizona, we have the first 2 payload modules. And those -- so once we're done with the first one, second one is -- it seems to be about 6 months -- that was our plan of 6 months spacing to the next one. That was like -- that should be achievable. And launch. So that would -- we're aiming to be able to get a launch mid-2021. That's what we said at the last earnings call.

And then 6 months after that?

Yes, roughly, there's about a month to get it on orbit. And there's some basically satellite housekeeping checkout, and then we have fairly several months allocated for payload test, which is -- which will be new for us because it's a new form of payload integrated with the ground system. We're doing tons of bench testing. So right now things look really good. And we're actually expecting to be able to do some space testing using the existing satellite in a way that is similar or analogous to the way ViaSat-2 satellite will work for some functional tests.

And what about the Asia Pac satellite?

So that satellite is aimed to be launched by the end of '22. So that is -- that's like 9-ish months right behind in '21, '22, about 1 year behind the second satellite.

And you haven't chosen a launch partner for that?

Yes, we have. We've -- so we have 3 launches lined up. So a SpaceX 1, an Ariane and a ULA.

Okay. And you were looking for a partner for Asia Pac at one point?

No, I think not in the sense that...

For another antenna maybe?

No, neither one, okay? Basically, one of the things we talked about in our last earnings call is the different applications that will be used on the different satellites. So the Asia Pacific one, we expect to be more because that region has so much ocean. We think that that region will be -- will have a higher proportion of in-flight connectivity, a higher proportion of government use and a higher proportion of maritime. So in some sense, think about the other airlines that we sign up and a lot of the government platforms that we install equipment on are really -- that's what's going to help drive the uptake on that satellite in that region. The other service that we're likely to look at for growth in that region is our Community WiFi-type service with the shared service. And that we may have partners, but they would be ground partners in the countries where we look to bring...

So like what Facebook was doing with you?

Yes, yes. And think of -- Facebook is certainly a good partner. They have access to data. They're very motivated for us to get coverage. They -- one of the things that's good about them is that they're measuring to see which of the people that connect to their network over our network have never been connected before or they don't see in other connectivity devices. So that's a good measure for us about how we're doing in reaching unconnected people. But the types of partners we're also looking for are people that have access to the towns and villages where we're going to provide service. So they travel through these towns, they can help us pick sites, they can help with cash management, operation. And those are not satellite partners, they were like ground partners.

Okay. So for people who aren't familiar with the ViaSat-3 concept, maybe just remind us of the capabilities, the throughput, the cost per bit advantage, and compare it to what else is out there and what's coming?

Okay. So the -- one of the things that we emphasize is that we have been obsessed with cost efficiency as -- cost per bit is the short way of putting it. We talk about gigabits per megabyte, there's -- something like that. But -- so that's the thing that we've been really fixated on. And we think that is the dominant measure. The most important dimension of value for broadband satellites, okay? The thing that we've talked about that enables that is frequency reuse. You can go back to fundamentals. And basically, having a lot of power, trying to overpower a link is much less efficient than having a lot of frequency reuse. So frequent -- and that's essentially what you're seeing in terrestrial networks. To all, 5G is about frequency reuse, beam forming, small cells, things like that. So what we're looking is to be able to do that in space. And what that means is very large numbers of beams. So we will have gone from dozens of beams on ViaSat-1 to hundreds on ViaSat-2 to many thousands on ViaSat-3. Then the other -- that basically, having lots of beams and having lots of frequency reuse enables very high throughput. So we're -- we've been talking about a terabit per second of throughput, 1,000 gigabits through a single satellite, which is by far the most cost-effective of anything that's either in works or -- out there. And then the other thing that's really important when you start putting down all these beams, and we have seen this over and over, and not only we have seen it, but everybody that has done data over satellites is, in some places, demand on the ground is very high. In other places, it's low. And then when you overlay mobility on top of that, the classic example would be in-flight connectivity, where when you have a hub city like New York, Chicago, Dallas, Houston, San Francisco, Los Angeles, what you'll see is 3 or 4 times a day, when lots of planes come in, very high demand in that area, but only for a short period of time. For that hour, a lot of planes are there, then they go away. And then they'll come back 3 or 4 hours later. That contrast with like a residential demand, which may be very variable depending on where you are, but it would be relatively constant at -- over time. So obviously, the way to get really high efficiency is to be able to move your beams around or to move the resources that you have from beam to beam. So that's a totally unique capability that we have with that satellite.

And so what sort of reception are you getting from the airlines on that? Because I think you've pointed out in the past that that Ku has a real struggle with that problem, right?

So yes, Ku has a -- Ku has multiple problems. One is because of the frequencies that they're at, given the antennas that you put on satellites, their beams are larger. So as an -- I'm just going to give you an example. If you look at what we do in the Northeast, we have Boston, New York, Chicago, Washington, they are on different beams. So what that means is we can deal with peak loads at each of those airports independently. Ku-band beams tend to be a lot bigger, and you'll see multiple airports in there. So they might as well combine them and look at them as a single airport. So one is just the size of the beams. The other is because there's less spectrum at Ku-band, even if they have similar numbers of beams, they have less bandwidth to work with. And that means they have less throughput or less capacity to offer. So the -- so Ku-band, I would say, is multiple disadvantaged. They would be, we're soft than we are with static beams, and none of them have dynamic beams. The other contrast. I just want to draw, which is -- because now we're getting discussions about GEO versus LEO. So you started 22,000 miles up, so at that altitude -- remember, our satellites are at a fixed location relative to the earth. So if we can make beams, we can see 1/3 of the earth. And if we aim a beam someplace, it stays on that place. With -- when you're with low earth orbit satellites, you're very close to the surface of the earth. Your field of view is limited, and you're constantly moving. So you can only make beams in the places that you can see. So the distribution of your bandwidth is really largely determined by the orbitals -- the orbital locations that you choose and the parameters of those orbits. What the inclination they're at, what altitude you're at, those have a very big impact on the distribution of bandwidth. They can -- the newer LEOs have a lot of flexibility within the field of view of their satellites, but a satellite that's over the middle of the Pacific Ocean is only going to see the middle of the Pacific Ocean. It -- that's all it got for options. So this mobility thing is a really -- that's one of the big attractions of our approach.

And so I think you've talked a lot about the in-flight opportunity. So what are you seeing from the airlines? You've talked about the Ku/Ka antenna. Yes, it's -- we think we'll see more of those or people are going to wait for ViaSat-3?

No. I think you'll see -- so Ku/Ka -- just to back up a little bit, we've been very successful in North America. That's where we have our satellites are. Market share has grown from 5% or 10% to 25% over the last 3 or 4 years there. I think we have a really good reputation of being able to deliver a high-speed service and to be able to do that reliably. So -- and I think the airlines have been able to learn that the number of beams we have, the amount of bandwidth, location of the beams, all those things matter. So we've had a lot of interest about global airlines. The Ku/Ka that you mentioned is a dual-band antenna that can work on Ku-band and Ka-band that -- those have been flying on government planes for many years. That's what's on Air Force One as an example. And so what the theory for us was that that would let us attract business with wide-body intercontinental aircraft before ViaSat-3 was in service globally. And so we do have takers for that. We haven't announced them yet, but we will over the next couple of quarters or so based on the timing of our airline partners, of airlines that are buying those. The other thing is that as airlines have looked at the timetable for that and the timetable of the launches, a number of airlines have said, "Well, we're getting new aircraft that won't be delivered until 2022 or 2023. We'll just take the Ka-band version." That antenna is a little less expensive, and it's a little bit lighter. So that -- those are both valuable to them to have Ka only. So the Ku/Ka or Ku/Ka has gotten us into discussions with a number of airlines. Of those, some have opted for that and some have just said, "Oh, well, hey, given that timing, we'll buy the Ka."

They'll buy Ka only?

Yes.

And I don't think you have much exposure of flights into and out of China, but are you seeing any impact from travel -- traffic, air traffic or...

So we -- right now we have -- we don't have any Transpacific. We have U.S., Europe flights. I think that the vast majority of our in-flight connectivity is single aisle, which is within the U.S., within Europe or within Australia or within Brazil. Those are our markets. And I think we're just now, maybe this week, going to start seeing more of an impact on that.

Yes. And do you charge by the bit -- by the gate?

For our customers, we provide multiple services. Some of them are -- if a plane is in service, we provide maintenance and support for those. We also provide in-flight entertainment, which is kind of a flat fee independent of usage. Our connectivity services are usage-based, and so that -- if we see a decline in passengers, we would see a decline in that component of our revenue.

Okay. And what about GEO, LEO combo antennas? Is that something we might see as well?

Yes, we're interested. We're interested in that. We do think -- we think that in the long run, that we have a substantial cost advantage for bandwidth. That most of the bandwidth that's used for Internet, whether it's on the ground or in the air, it tends to be for things that are not latency-sensitive. And so that's basically, I think, what the good traction for us with our airline partners. But for those things that are latency-sensitive, if we can blend in low earth orbit satellites, that would make sense. And then we do it -- we would adaptively route traffic over LEOs or GEOs depending on what the demand is. We're just now starting to do that terrestrially using DSL as the low-latency channel. So it's essentially the same routing strategy. And we can do the same. We've been testing it with wireless services. So that's a way that we can provide low-latency services for our customers, whether they're mobile or fixed without having to take the cost hit of doing LEOs.

Sure. And I think when ViaSat-3 -- ViaSat-2 was first launched, consumer broadband was seen as one of the big applications, and you've certainly driven a lot of revenue out of that through the ARPU but less on the subscriber side. Where do we sit today in terms of the ViaSat-3 and the consumer broadband opportunity? That's something I think the LEOs have also targeted, although they have some antenna.

Yes. So there's challenges on the CPE side, Customer Premises Equipment side, for LEOs because you need tracking antennas, which are generally more expensive, take more power, and they have different constraints in where you can put them in terms of around the trees, buildings, things like that. What we've been doing because we're in a capital investment cycle, we chose with ViaSat-2 to maximize earnings, cash flow from our residential business. And one of the things we talked about 1.5 years ago was how much better the economics were for us if we had -- I'm just going to use this as an example, if you imagine, could I choose 1 customer at $100 a month versus 2 at $50 a month, the 1 customer at $100 a month is a much better value for both of us. We can give them more -- a lot more bandwidth. They pay a higher price. There's fewer of them, but they tend to be happier. For us, we have substantial savings in subscriber acquisition cost and in support costs. So that's much more profitable for us. So our strategy has been, as long as the market is receptive to that, as long as there are enough customers for that $100 value proposition, we would prefer to do that at least until ViaSat-3 is launched. And so far, I think it's working well for us. We've gotten great ARPU gains. Customer satisfaction is higher, churn's lower. There's just a number of benefits to that. When ViaSat-3 comes out, we'll have a lot more bandwidth. We may choose to offer services that are lower-priced and address the larger market. And we haven't decided that yet.

Okay. And you touched on CapEx and the investment cycle there. And I think there's a -- people understand the investment, but I think there's also a lot of investors want to understand the path to free cash flow generation. So how do you answer that question?

So the main thing -- I think the -- the thing I think would give investors the most confidence would be to go through the math themselves. And the main thing we've talked about is, I want -- let's make 2 distinctions: one is the market value of the bandwidth that we sell. So you could look at how much revenue we're getting and how much bandwidth we have. And then you can figure out roughly what is that market value of that bandwidth. Then you can look at our productivity, which is the amount of bandwidth we get per unit cost investment. And with ViaSat-3, we're looking to get over a terabit per second. With ViaSat-2, it was about 250 gigabits, so it's about 4x the bandwidth per satellite. The satellite is a little bit more expensive than ViaSat-3 was. And then factoring in the insurance proceeds, there's a bigger gap there. But you can see that essentially -- and I just want to put things in perspective now. I'd say for the last trailing 12 months, we've got about $800 million run rate last 12 months in satellite services revenue, plus there's close to another couple of hundred million, not quite that, but close to that on the government side that is attributable to our satellite services. So if each satellite has 4x the -- let's say -- so that would be, let's say, between the ViaSat-1 and ViaSat-2, call it, 350 to 400 gigabits, and ViaSat-3 alone would have 1,000 gigabit. If our market price stayed the same, our revenues would like triple, right? So that would be $2.4 billion. Margins would be really high. That's not what we expect, right? What we've said every time is, no, we're going to give some of that productivity gain to our customer. We're going to use that to compete with other satellite operators who aren't as efficient as us. And so if you think about the productivity gains, if we split them, we might get close to $1 billion-ish. But with 3 satellites, if we could be in the $3 billion range in satellite services at 50-ish percent margins, that's $1.5 billion of cash flow just from that portion of our business. If we're running even $500 million, $600 million, $700 million a year in CapEx, we'd still be very cash flow positive. So I think that the...

And that's over a 3- to 5-year horizon?

So the time frame -- basically, what we expect is it doesn't take 3 satellites to get us there. We think 2 satellites will. So what we've said is we expect shortly after the second ViaSat-3 goes into service, we should start being incrementally cash flow positive. That would be in the mid -- second half of '22, early '23 time frame.

Great. You touched on the government systems. And I think it's -- you make it very hard for us to model it because each quarter, you say it's going to slow down and then it doesn't. And it's -- we can't look at whatever appropriations are ever because you're always taking share in that space. So help us understand, pulling back the curtain there, what is the pipeline like? And how should we think about your ability to sustain greater than GDP-type growth rates in that business?

Yes. So what we've said is 2 main themes in our government -- for growth in our government systems area: number one is migrating products and services from early adopters in the defense space to the more mainstream services. So early adopters are generally special forces or maybe second airborne or the marines expeditionary forces. So these are early adopters that are generally engaged in conflict or on the threat of conflict now. And so they're very forward looking, looking for any advantage they can get, they find that with our equipment. And one of the dynamics is, if they're happy with it, and they get advantage in the battlefield, that spreads to mainstream: Army, Navy, Air Force. So one of the things that we're seeing are some of our products that have been more niche-oriented growing into those mainstreams.

Like the Link 16?

Link 16 being an example of that. Now Link 16 had been -- it's not so much early adopters. It's been fighter jets, very expensive assets, but now we've been able to migrate downstream to helicopters and handheld and smart weapons. So that -- there's lots of growth, lower unit prices, but much bigger addressable market. So that's part of what's driving our growth. It's a little bit hard to predict because it happens in lumps. We need to be adopted by specific organizations to get those increments of growth. The good thing is on Link 16, for the growth that we've had, there's no other competitors offering products that have the form factors and the functions that we do. So that's one area. The other area we're getting growth is in the satellite services space, the broadband space, where we -- as we get orders from new platforms and platforms we've talked about, for instance, would be the Osprey V-22, that's a tiltrotor aircraft. So vertical takeoff and flies like an airplane. As we get adoption in that and people -- one organization like the Marine says, "Wow, this is really good." And then you'll see other saying, "Why can't I have that as well?" Getting into Black Hawk helicopters. So what you see -- one of the things that you'll see is, as we get orders for antenna systems on these aircraft, it's fairly likely that there will be subscription business to come along with that. I take 1, 2, 3 years as we build out those fleets, but it's basically the same model that's working for us in the in-flight connectivity space. And one of the things we said last quarter is, if you look at our government business, there is embedded in that in-flight mobile broadband business that doesn't have quite as many airplanes as the commercial, but the value of that business is very similar to our in-flight business.

Okay. Great. Well, we do have time for a couple of questions here.

I was wondering if you could talk more broadly about the state of the GEO industry, and whether or not you think you have any role to play in consolidation?

Yes. So I think the GEO industry is going through a couple of things. One is the decrease in broadcast. And so one of the things that we find very frustrating is that people will talk about the satellite industry and think that the broadcast dynamics are the same as the broadband or data dynamics. And those satellites are about as different as they can possibly be. So what you're seeing is most of the satellite operators either didn't make investments in broadband satellites, invested poorly, that is they spent a lot of money on satellites that don't have a lot of throughput, so the economics aren't good, or didn't invest the way we did in bringing those -- that bandwidth to market. So when you go through intermediaries, if those intermediators are buying bandwidth from multiple players that are less motivated to share the productivity gains with the end users as we have. So I'd say a lot of the traditional satellite industry is struggling. There's -- a lot of them don't have assets that would fit well with us because they're not -- they don't meet our value proposition, which is really good productivity when it comes to bandwidth. So we're sort of watching. I think that it's making things simpler and more clear for airline customers and defense customers who have been a little bit confused by all the different claims of different satellite operators. I think the trends on broadcast are clear that OTT is a better service for customers, so the broadcast industry is challenged, I think. And there's not a ton of consolidation opportunity in the data space for us.

Okay. And just one last one then, Mark. Free WiFi, and they still charged me on the way over here for WiFi. You've done it with JetBlue for a long time. Delta seems to be focused on getting there at some point over the next couple of years. But what's the -- why is it so hard for these airlines to get there? And what's the secret to it?

So it's that bandwidth density that we talked about. So I mean Delta is a very difficult one because they have a huge hub in Atlanta, one of the busiest airports in the world from -- when it comes time for connecting. So I think one of the things that they've learned is while there's -- and they've kind of said this is it's not a technical problem. It's an economic -- no, I said, it's not an economic problem. It's a technical problem, right? That's what they said, trying to go back. That it's not that they can't afford to or don't want to pay for a free broadband, but there's not enough bandwidth to do it. So we raise our hand and say, "Well, hey, we have enough bandwidth. We can do that." And so I think it's really actually sort of put a spotlight on the problem. Now what I'd say -- and it's indicative of the value that some airlines see in good WiFi as a discriminator. But how that plays out? We'll still have to see. I mean -- but I think it's -- I think it's very -- I think it confirms the value proposition that we've been working on all these years. It's just a great example of that.

Great. Well, maybe when you're here next year, we'll have free WiFi?

Hopefully, yes, we'll see.

Good. Mark, thank you so much. Appreciate it.

Sure. Thanks very much for having us. We appreciate it.