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

Good morning, everybody. I'm Ric Prentiss, Head of Telecom Services Research at Raymond James. Welcome to the closing day of the event. So a lot of people here, day 3 and made it through the virus scare a little bit in the conference. We've had a good group of towers and wireless and data centers and wireline and cable and satellite. So my final presentation will be with Viasat. Mark Dankberg, CEO. But just for those watching on the webcast as well as those here. We are on for the DC Satellite Show next week. Our schedule is still intact. Mark, I think you're one of the keynote speakers as well as that, and maybe a couple of keynotes on the panel and individual. So if people are listening on the web, you haven't had our schedule. We talked to your salesperson we're resending it out again today. I think some other sell-side first maybe have canceled their event. So we're on. We're going to be there with an exciting show. So Mark, thanks for coming.

Sure, thanks for having me.

I think we started with 5G in a lot of these sessions because we get a lot of questions from investors on it. What the heck is 5G? Is it happening is what does it mean for our company. So as you think about 5G, what does it mean for Viasat?

Not much. I think the short answer is not much. I think you have to divide 5G into, there's 3 kind of regimes. There's the millimeter wave, high-band stuff, which is clearly only for metro areas and very limited coverage. I think Verizon's been trying it as a home service in a few markets. But again, in pretty dense areas not necessarily urban, but suburban. Those are not our target markets. There's the low band, which is 600 megahertz that would be a T-Mobile kind of covering -- including -- covering more of the country with theirs. But at that -- those frequencies, it's very much LTE like you could look at the rate of improvement of LTE performance and the 5G stuff would overlay just on it. So it's not a big change. There's a mid-band stuff, which will be more suburban to -- than the millimeter wave have longer coverage distances, have pretty interesting speeds. So I think that's the only one that's possible but we haven't really seen. I mean, it will be quite a while before those bands are explored. I think the interesting thing will be T-Mobile using Sprint's band stuff. We don't -- but we still don't anticipate a big impact to that.

The other one that we get a lot as far as what's the impact going to be on Viasat, from all these new LEOs that are getting launched, affiliate or space club and different ones get press releases and thoughts of maybe the [ LEOs ] in the future. But how do you view those new constellations, what do you think they're going after. And how's your compared to them?

Okay. So that could be a more involved discussion. The -- I'd say the short answer will be -- let's break the Satellite Services business into 2 parts. One part would be supply that would be putting satellites up in space and basically having bandwidth to sell. The second would be the distribution part. That is bringing that bandwidth to market. So the things that are most obvious right away is none of the LEOs systems have any distribution yet. And OneWeb, as an example, which will be -- which is one of the ones that is launching now will be one of the first to market. It's really dependent on third parties for distribution. That's clearly what their strategy is. And so there isn't any. And one of the odd things about these LEOs is because they have basically made low latency as the dominant value proposition. There's no way to do early entry with those systems. You can't really create a distribution network until the satellites are up. So one is it's we think -- well, the other thing is we are the most vertically integrated of any of the Satellite Services companies. One of the things that we -- going back to the distribution, one of the things we talk about is, we have this portfolio of services, which range from government and in-flight connectivity down to residential. The things that we do at the high end of the pyramid are much more involved in just providing a data pipe. We think that those services are going to be very difficult for the LEOs to penetrate. And then the other thing that's really interesting about both the in-flight connectivity space and the government space is that a lot of the service areas won't be served by the LEO systems at all because, for instance, they don't cover oceans, or they don't cover very far into the oceans, offshore. And then the newer LEO systems don't cover the high and low latitudes because they're not polar orbiting, which turned out polar orbiting was not a very efficient thing to do in terms of usage. So I think on the go-to-market side, there is -- there's a lot, I think, we have a lot of competitive advantage in that space, which will be enduring, and I think that we're going to expand. The -- on the supply side, the simplest way to put it is that we think the economics of GEO are both more scalable and much -- and there's substantial advantage on a cost per bit basis. That -- the big things that you have to look at, let's say, the way that we would measure productivity is look at what you're selling and what you're generally, what you're selling is subscriptions by the month for a certain amount of bandwidth. So what we think is a really good way to measure productivity. That is what is the cost per bit is to look at those two things. So if you take, right now, we're getting to how many terabit per second years, you get per billion-dollar of investment. And we think we're going to have like a factor of 2 to 10 advantage with ViaSat-3, when it goes up. And we see how we can multiply that with the next generation. That's why we've talked about ViaSat-4 because I think people are worried about bandwidth deflation, but you have to remember, there's built in bandwidth deflation into the transmission market because people expect more bandwidth per $1 every year, no matter what, right? So the issues with the LEO systems are twofold. Number one is, near to 77% water, 50% of the people in the world were about 1% of the land, 95% of the people in the world were about 10% of the land, 10% of land is like 2% or 3% of the surface of the earth. So if you look at where the LEOs are and where they have to be because of their orbit, independent of how good the payloads are, 80-plus percent of them are not useful. And then even once you look at where they are and say they're over land, I now have to find fiber infrastructure within the view of that satellite. So a lot of what could be served it's going to be very expensive or impossible. Like Central Africa, there's fiber around Africa, not necessarily in the middle, same thing with South America, Central Asia. So those things impinge on their productivity. The other big thing is, is the lifetime of a satellite. So right now, the satellites are being optimized so that you can launch a lot of them on a rocket, right? So -- and what -- if you look at the faring or the space on the rocket for housing these satellites, there's not a lot of volume in there. So the main thing you're seeing is compromises in the lifetime of the satellite in order to make the launch costs below. So the targets for these -- for the lifetimes are typically are 5 years. So if you were to then derate what the cost of the satellites would be with -- relative to this utilization factor and the lifetime compared to GEOs, you've got a factor of like 15 to 20. The other thing that you have to look at, and it's a little bit interesting on -- LEOs is launch cost. So as an example, OneWeb, they're launching, I think, 34 satellites per launch. It's about a $50-ish million launch. So that's about $1.5 million per launch if the satellites were free. SpaceX is launching 60 on a Falcon 9, so you don't know what their cost is for that. But on the other hand, what they've talked about is spinning off Starlink and then you'd know what the price would be, would basically be the market price. So that's like $1 million of satellite, even if the satellites are free. So when you start looking at those kinds of numbers, then you can see that the productivity advantage we have is pretty substantial. Just to put things in perspective, remember, you're talking about a terabit per satellite with ViaSat-3, the entire useful, theoretical output of the OneWeb constellation's about a terabit. That's about $5-ish billion is what people are estimating that to be for a 5-year life compared to our 15. So I think those are pretty formidable advantages. The other thing is if you want to think about, okay, so is there going to be a flood of bandwidth, whether or not they're economically successful, that's going to depress pricing. So with OneWeb, again, you look at the number of satellites they have, what the orbits are and what you can see is there will be less than 10 of them over the U.S. at any given point in time. So that, the total bandwidth that they'll bring to market is probably less than a ViaSat-1 in terms of capacity in the U.S. market. So it's spread -- there could be some impact, but it's spread all around the world. And then getting distribution outside the U.S. or onto things like Aero or government challenging. For SpaceX, theirs could be -- they could have more. The issue is -- and they've kind of talked about this themselves is because their satellites are a lot closer to earth, they need a lot more of them in order to provide continuous coverage. So whereas they're talking about maybe going into service with 360 or so satellites, which they could get, let's say, in a couple of months, takes about 6 months to get them in position. And then with that many satellites, they essentially have coverage over the U.S.-Canadian border. And it'll be another -- depending on their launch rate, another 6 to 9 months or so 12 months before they get the whole in U.S. By that time, we'll be pretty close to when we'll have our Via 3 in service. The other really big thing is that you also have to look at everybody, including the LEOs, including SpaceX, which could have more bandwidth and OneWeb is you have a fine item out of inventory. So now you have this choice of, do I provide a lot of bandwidth to a small number of customers or a little bandwidth to a large number of customers. The -- if you provide a little bandwidth to a large number of customers, then -- okay, they could be price competitive, but the service won't be cable like, which I think would disappoint a number of people relative to the expectations that have been set for that service. Now if they decide, hey, we want to make a cable like service with the fine item of bandwidth they have, that's probably hundreds of thousands of customers, like below hundreds of thousands. If you look at services, where you're delivering 200 or 300 or 400 gigabytes a month of service. So that would have -- well, it could be a really good service. And I think they could sell that out. And they did that at an attractive price, it's not going to have a really big impact on the total addressable market. So I think anyway, so we just covered sort of the main highlights of these angles. I think that the main thing we had encourage is that people try to figure out what the facts are, in terms of supply, in terms of distribution market, what the impacts are on the market, how they affect the market size. And we're happy to spend time with investors going through those.

And you probably have been, right?

Yes. Yes, we have. Yes. But I think the upshot is, we feel confident on the supply side, and we feel confident on the distribution side.

Yes. We also hear people talk about the cost of the ground equipment.

Oh, yes. So that's the other big thing is. There's 2 big things with the ground equipment. One is because they have constantly moving satellites, you need essentially electronically steered antennas on the ground. Right now, those are compared to the cost of a fixed point antenna, hundreds of dollars more, which affects what your acquisition cost would be or the subscribers upfront cost. The other big thing is the power it takes the amount of electric power it takes to keep those antennas operating, which has -- would have a big impact on their ability to do things like the rural types of connectivity that we're doing in Mexico or Brazil.

Yes. So the jury's out a lot on this, but the investor base has kind of gotten scared, I would say.

Yes, I think it's -- boy, we've been in this business a long time. There have been scares, and there was a WiMAX scare, there's a 5G scare. I think that each time, what's given us confidence is going through all the details of each one of these, looking at what their economics would be. The point I would make is, everything that people are talking about is -- in doing with these things, it's already technically possible. We're doing low latency services by combining with terrestrial. We're doing 100 megabit services already. We could do 300 megabit services. We could give people 500 gigabytes a month, it's all economics. That's not -- there's no technical breakthrough involved here, it's all economics. And that's what we focus on.

Do you see a future where there's hybrid networks?

Yes, absolutely. So that is one of the things that we've been looking at. And because we've been in the business a long time, and we're in all these different venues, we know what all the applications are. And the application that are latency sensitive, but by hybrid, it's about 2 different transmission media providing a combined service. And the thing that -- the only thing that we're really lacking is the low latency when we do GEOs. So we've talked about doing low agency services with telco. So we're doing that now. We will be later this year, we'll be doing it with wireless. And we think doing it with GEO, LEO or GEO MEO makes sense. We've done a couple of trials with GEO MEO doing O3b. In general, the low latency services either lower speed or more expensive than what we're doing, but it's only 4%, 5% of the total bandwidth usage, mostly for online interactive games. And so we're interested in doing that with LEOs. And that's actually one of the discussions we're having with some of the LEO operators is how we could cooperate to do that.

Makes sense. And with the telcos, is this with rural telcos? Is this to get the fiber to where you [indiscernible] versus [indiscernible].

No. What we're doing is and this is really -- we're just going as premarket in those subsidies or anything right now is combining a GEO satellite service with a low-speed DSL service and routing anything that's latency sensitive over the lower speed service. And so the main thing we observed, I'd say, two things that we observed is, if we have the same volume caps, and a low latency service, all people care about the volume caps. If you're giving them 35 or 50 or 100 gigabytes a month and they want more, they don't care that it's little latency, how they care about is how much bandwidth. So that's not surprising. That, to us, is completely consistent with our value proposition that focuses on low-cost bandwidth. But the one thing we will see is that the people who have it tend to play more online video games. So that's the thing that we're kind of unlocking by doing that. And I'll tell you, it works -- I mean, it works. There's some technical challenges in terms of coordinating like telco installation and a satellite installation. So we're working through those. But if you do it wireless, and people already have unlimited plans, it's basically free for them to do that. And it's going to be a really attractive offer.

All right. Moving to in-flight connectivity for a little bit. It seems also that when you get to the airports, whether you're taking off or landing, that's another kind of bottleneck spot. Talk a little bit about what you guys bring to bear there versus maybe the LEOs.

Okay. So yes, for in-flight connectivity, I would say, especially in the U.S. market, as the airlines have scaled up, and people have come to expect it. What we're hearing from airlines, not ones that have our service but in general is that complaints about in-flight connectivity are now the biggest source of passenger complaints for these airlines. It's not losing luggage, and it's not on-time performance. It's in-flight connectivity. And the main stress points are when you have a lot of airplanes coming into a hub airport for connecting flights. So that could be Chicago, Dallas, Savanna, Houston, Denver, whatever they're those hub airports, and you bring 100 or 150 planes all at once, that's where others tend to run out of bandwidth. So the good thing about our spot being satellites. We have small spots. We have spots on individual airports. We have more bandwidth at those airports than anyone else does. The -- that's what's allowed us to be so successful. Service like OneWeb, which has fixed beams, doesn't have steerable beams would have exactly the same issue. And I think that the airlines are sensitive to that. What's interesting about the Starlink and the Amazon 1, which is 4 or 5 years away, is they are trying to do phase to raise on board like, which is beam forming, beam steering, which is like what we're doing on our satellites. And they can put a lot of bandwidth at airports. So they would be more competitive there. The big issue is that one of the things that we have for us that makes our service more affordable is by combining all these multiple applications. Remember, an airport might have peak demand only 3 or 4 times a day. You don't want to buy all that bandwidth for the entire day. We need to use it over short periods of time. So having this big portfolio of applications like we do spreads those costs and makes us a lot more competitive.

And where are we at on the 737 MAX issue? Other than you'd like to stop talking about it at one point.

Yes, yes. So I don't think we have any more insight into when the planes will be coming into service. The thing that has been good for us is that most of our airline customers are buying them as a line fit, so they're coming off the factory with that. So actually, our inventory of grounded planes have been growing. I think people are expecting to hoping summer this year that you'll start seeing them come back into service. It's up to in the range of $1-ish million a month for us that we're not recognizing because of the planes aren't in service.

And when you think about the line set, what's your win rate these days on new airline contracts? And where do you see is the opportunity to get more contracts?

Our win rate is pretty high on the competitions that we enter. I would bid higher than anybody else. But we don't win all the time. The ones that we win -- but okay the ones that we don't win. The common theme is, purely is, price. It's basically it represents a fairly big investment on the part of the airline, especially upfront. So we don't subsidize the equipment. What we do give is the airline, the flexibility to use the equipment in creating services in any way they wish. But others, I'd say, the main way we lose is when people cut their upfront price. The -- our pipeline of new opportunities is really good. And what we've told people to expect us more international wins. And so we will be announcing those later this year.

And speaking of international then, I refuse to call it the coronavirus because 38% of Americans think you get it from drinking beer, which is just scary of our education and news sources in America. But with the virus or COVID-19, as I'm going to call it. What impact have you seen on the supply and then the demand side for your business?

Okay. So right now, we have around 1,400 planes in service and 90-ish percent of those are narrow-bodies that are used, say, either within the U.S., within Australia, within Europe, we have -- well, actually, a lot of our trans-European ones are also narrow-bodies or MAXs that are grounded. We have a small number of 787 wide-bodies that are intercontinental. I would say probably this week is kind of the first week where you're seeing an impact in domestic U.S. travel. Haven't seen it in Australia, as an example. So it might -- it's possible that if it's enduring, that will have some impact. Now the things would say is you're looking at our airtime revenues and in-flight connectivity are probably a little less than 10% of our total revenues. And then within the airtime revenues, a fair amount of it is not usage based. So if the plane's flying, we're still collecting support maintenance-type revenues. And then we also -- 1 of the other things that goes with it now as you really rarely win a connectivity package that doesn't include in-flight entertainment and broadcasting and all those skills. And those are not usage based pricing, those are fixed price. So it's only a portion of our in-flight revenues that would fall out. But there is some exposure there.

Let's see if there's some questions in the audience. Sure.

Mark, I was reading your last quarterly report, you have 586,000, U.S.A. based customers that are called vertical satellite customers. I think [indiscernible]. You have recently [indiscernible] what percentage are they, are they the long-term contracts 1 or 2 years, city contracts and are not vulnerable to competition. Whereas about 40 million outside of -- have you guys had a count 560,000 possibility of revenue $82 a month. So as what rate -- what percentage of your customers are [indiscernible] contract. Which might be vulnerable to telco competition there.

So the question is, of your rural broadband customer base, about 586,000. How many are in contract, how was the contract -- the layout of contract? And how exposed are they?

So we have 2 year contracts. That's basically what our agreements generally are, it's 2 year contracts. And we tend to keep subscribers for 3-ish plus years. So you might think about that at any given time, close to 2/3 are under contract. If you just look -- it's a fairly steady state. We've had the existing satellites for quite a while. So that would kind of be a rough assessment of that. I think for the vulnerability, I think the main issue really has to do with the relative values of our offers compared to other authors out there. And so we'd love to see -- if we -- OneWeb have said they're not going to go into the residential business. SpaceX, at one point, said they were then they said they weren't, then they said they were, it was not clear whether or not they will or will not be in the residential business. And to what extent geographically, they'll be in that business at what point in time.

We've got time for a couple more questions. Let's move on to the government side, that area has been really doing great. When you think about opportunities to do even better. What do you see that created the success and work with that success go and why?

Okay. So government success has been mostly because we have unique products, a little more than half of our business is our products that are, what we call nondevelopment items. So there was not a requirement for them. So that being said, basically, they're sole-sourced products. We're the only ones that make them. And often, they've become standard products for organizations. So the -- on the product sales side, the best, most exciting thing about it is that we're very lightly penetrated into our potential markets. Most of the product started in sort of niche products. So as, for instance, in Link 16, in fighter jets, which are -- they'll pay auto money, but there's only a few thousand. As we've expanded into helicopter, where there's tens of thousands. We have a sole source position, and we're very lightly penetrated in there. So that's one of the things that gives us confidence there in the long term. In the short term backlog is really strong and our inventory of these delivery order contracts is really strong. The other area that's been growing nicely is our services business. So that is airtime sales. So one of the things we talked about in our last conference call is for in-flight connectivity, we basically have the equivalent of a commercial Air Force -- airline in-flight connectivity business built within of our defense business. So that would be under the services portion of our defense revenues. They're, again, very lightly penetrated into the potential market, but they are, instead of being an upstart, that's growing market share. We've been the absolute leader in market share, and we have the best key customers, the Air Force One, the senior leadership fleet. Those are under long-term contracts. In many cases, we have -- the other thing that's a really good leading indicator is we have contracts for equipment that's going to be installed on these airplanes for years to come. And generally, the equipment is not worth anything if they don't buy the subscription services from us. So that So our -- I would say, on a macro basis, our confidence in sustained growth is really good.

Well we're going to stop it there. We will go down to the breakout session. Thanks, everybody.