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

All right. Good afternoon, and welcome to the afternoon sessions of day 2 of the 23rd Annual Needham Growth Conference. For our next session, I'm very pleased to have with us the senior management team of Viasat. We've got Founder and Executive Chairman, Mark Dankberg; relatively newly promoted CEO and President, Rick Baldridge, both of whom have very long histories with the company, needless to say. So thanks again for joining me, gentlemen. Really pleased to have you here.

So maybe to level set the audience, and I don't know if one or both of you want to take this. But can you just maybe talk about very broadly what Viasat does across both the commercial and government markets and how you sort of look to extract synergies between participating in those 2 markets. And then we can dive into a lot of other, perhaps, more meaty topics.

Yes. Thanks, Rich. Thanks for having us. We're happy to be here. So as -- just as a fundamental, we build and operate communication networks. It's wireless and satellite and even terrestrial networks of multiple dimensions. So we do security, but we're really, really focused on connecting people, oftentimes in really hard to reach places, both on the government and commercial side, in a secure environment that lets them accomplish what they're trying to accomplish. It might be situational awareness for the government, or it might be residential broadband or access to community Internet in places that don't have it. But it's really trying to allow people to accomplish the things that they need to accomplish by being connected. We -- so I mean that's the fundamental. And in doing that, we have -- in most of our investments have gone into design and building satellites and satellite networks, where we pool many of these things together. So we've had actually really, really strong financial performance this year in light, even in spite of what's going on in the commercial air market, which is a very, very high-growth market for us and growth business for us. But we've been able to overcome that, have record EBITDA and are growing revenue. And so it's pretty exciting. And we also think that this market that we're aimed at, especially with the diversity that we have is just exploding globally. And obviously, that's attracting other people. We think that's a really, really good sign that we're going to continue. We think we can capture a reasonable share of that and grow a lot over the next several years. I think it's -- the global TAM for what we're doing is in the high tens of billions of dollars. It's not -- we're not scrapping around for a 50% share of some low billions. It's an enormous market and expanding. And we'll talk a little bit about ViaSat-3, I'm sure, but this is what we've been waiting for. We've been obviously, inventing new classes of satellites, but we've been investing an enormous amount of money into ViaSat-3 for us, from a company our size. And we're getting ready to move from a regional provider to a global provider with the best capacity of anybody in the world. So we're really excited for the next few years and working very hard right now in trying to get these satellites in the air.

Got it. Mark, did you have anything to add to that? Or are you going to...

Nothing. Just in terms of your specific question about the interaction between defense.

Sure.

It goes both ways. We think that those markets are highly synergistic. One example would be that we get to work on things in the defense environment that aren't yet commercially viable, as an example. And one good example of that, which is kind of topical, is how do you do space-to-space inter-satellite links, for instance. It's an area that we've worked on for many years. I think we're among the strongest companies in the world in understanding where that is in providing that, starting with defense. And then we've also, for instance, did the inter-satellite links through Iridium. So we've done it in commercial LEO systems. And then the other direction is that because of our global broadband services like In-Flight Connectivity and some of the things that we do internationally, we can make global networks that are economical that are available for our defense customers that otherwise wouldn't exist. If you didn't have the commercial base, you wouldn't be able to do what we're doing in the defense world and especially with the ViaSat-3 satellites that provide very large amounts of analytics, a terabit a piece, but also cover oceans. And these really, really remote areas that are difficult to reach otherwise with any system, whether it's LEO or GEO. So there's -- I think there's a lot of synergy between the two. There's things that we do in some of these mobility networks on the defense side and on the commercial side that originate with one, but then are really valuable in the other.

Got it. So I wanted to jump into the Government Systems business. I think probably you could argue a more straightforward business in terms of just seeing -- understanding the business, seeing the value and the relative, maybe, lack of competition. But just for listeners that aren't familiar with it, it's about $1.1 billion of annual revs, $300 million of EBITDA and has a firm plus IDIQ backlog of about $4 billion. You guys have been growing that at a roughly double-digit CAGR over the last several years. So really, a very impressive business. And we've certainly maintained in our written research that we think it justifies the value of the company by itself and then some. So just thinking about this business, I wondered if you could give us your view of kind of the long-term growth prospects for it. What drives that? And then what specifically does ViaSat-3 open up for the business? Like how could that change the business? What's the incremental opportunity with having a terabit of capacity and 3 different terabit capacity satellites around the globe for that business specifically?

Mark, you want to?

Okay. So yes, on the defense side, the -- so I think there's a couple of different things that make us -- have made us successful there, and I think will continue to do so. Number one is that the area that we're in is it's just hugely important. And that's this ability to connect, especially to provide higher speed connectivity for lots of different platforms in an environment where you're seeing this whole -- the whole concept of Internet of Things and auto -- cloud-based automated decisions is probably going to be the biggest theme, I think, in defense going forward for the next decade or 2. And think of that as you need sensor information, you need computation around what that means, how you should act upon that information and then you need to act on it. And you need to do it at great distances very, very quickly with less, fewer and fewer people. And that means essentially creating -- some people call it like an Internet of Battlefield Things. And so if you look at the types of networks that we're in where we have leading positions, 2 of them, Link 16 and Blue Force Tracking, are among the most proliferate. Yes, they're proliferated in terms of being able to connect sensors and shooters. And the other area that we're really strong in that is in the network security or cybersecurity aspect of that. And we're really the only ones that have that on an end-to-end basis where you can -- we provide the data center security that goes into the cloud environment, and we also provide the edge security that goes for individual devices. A lot of people take some of the things that happened in the commercial Internet for granted, which is, hey, I can immediately find the device I want to talk to. I can look up IP addresses. All those things are very, very complicated in what's called type 1 secure -- secure secret, top secret classified network. And so those are some of the things that have made us successful. The other thing that I think has made us really successful besides the positions we occupy are the way we got there. And a big part of our business is really what we would call market-based, that is you can look and see what our end users and our customers and the organizations that use our equipment are doing. And then we can anticipate where they're going to go and what they're going to need next. And we can do that more quickly than the defense procurement environment has been able to respond, just because of the very long lead time in defining programs, getting them authorized and funded. And so some of it -- more recently, some of the things that have really helped propel our growth, like handheld Link 16 units that really shortened the time frame to be able to act on air to ground support, that would be an example. That's one that -- was no program to create that, but we did. And then a number of the services have adopted that, it's what's called the program of record. Same thing with small Link 16 terminals that go on helicopters, number of areas like that. One of the biggest ones is what you mentioned, which is ViaSat-3. And for us, we have had, really, over a decade of kind of leadership in the in-flight or mobility space for the defense department, think of it as -- I always like to describe it, if you look at the U.S. government as the largest airline in the world, whether it's combat aircraft, logistics aircraft, other transport, support aircraft. And so I think people can see our commercial in-flight business. But the defense in-flight business is as big or bigger in terms of revenue, not in terms of aircraft connected because [indiscernible] but in terms of revenue as our commercial business is. And we've grown a lot of that on a multiregional basis, as Rick mentioned, going in, where -- because our satellite started being North American-centric, a lot of the time, we were using third-party satellites in order to provide that capability. With Viasat-3, we'll have full global coverage. And one of the themes that's been important to us since we've really started being in the satellite services business is that we have our own satellites, not because we're just trying to insert our own bandwidth to replace somebody else's bandwidth, but because we can deliver far more bandwidth in any given area at a given price point than other people can. And that's enabling new missions. So what we'll be able to do with ViaSat-3, especially -- and this is especially important in Asia Pacific over the oceans because that is where a lot of the sort of the contest is going to be, is how can you provide the connectivity that naval surface ships need in order to protect themselves, be aware of the environment and then get all the sensor information, the compute power they need and then be able to affect activities hundreds of thousands of miles away. That's going to be one of the biggest issues for the U.S. defense department. And ViaSat-3 is uniquely able to do that. We'll have more capacity over the Pacific Ocean than anybody will, at LEO, GEO or anybody. So that's an example of some of those synergies between them. Same capacity also serves Asia Pacific air routes and maritime traffic and all that. And so we're able to do that quite affordably for our defense customers.

The other thing I would add there is just given that history and knowledge of what they needed and building terminals that can operate on multiple different networks, our ViaSat-3 satellite network was designed with the requirements for the government mission in mind as well as the commercial side and that's kind of unique as well.

That's helpful. And it certainly plays with the theme I wanted to certainly to address pretty upfront in this chat, which is there appears to be a perception maybe around -- at least a portion of the investment community, that the success of your GEO-based constellation is somehow mutually exclusive with that of a number of LEO-based constellations. And one thing I wanted you guys to highlight was areas of your business that are sort of exceptionally sticky. I think you just highlighted one. I mean you guys have a decades-long track record with the U.S. government. And there seems to be massive demand, latent demand there that you will be able to fulfill. So yes, in sort of any of the topics, to the degree you can discuss the stickiness, you think, of this particular business and why it's not likely to be displaced by some LEO constellation that is not of your making. I'd appreciate your thoughts there. So maybe just to quickly address the government side as far as that question.

I'll let Mark talk in just a second. But the one thing I would just upfront say is we've oftentimes taken advantage of companies that thought that they were irreplaceable, that they thought they own the customer, and we weren't going to get them and displace them. So one of the things that we're hyper-focused on is not taking our customers for granted and be totally focused on winning them again and again, constantly. So while I think there are some really sticky issues, we're not going to sit back and just say, "Hey, we own those guys." I think it's just an enormous mistake made again and again by companies.

Yes. Yes, that's exactly where I was going to start. The other thing is what we do get from having worked with these companies over a long period of time with our companies or government organization is a really good understanding of what their requirements are. And one of the other points I want to make is that there are -- everything is a trade-off. I mean when you come to the engineering of these things, you have to make a bunch of trade-offs. And so there are trade-offs in these GEO versus LEO systems. And so what we've done, I would say, is we haven't built an all things for all people system, what we've done is trying to address what are the most decisive requirements. And for most of our customers, that's really encapsulating 2 things: one is they need a lot of bandwidth; and the other is they need reach. That is they need to be able to get to all the places that they go. And so one of the areas that's going to be most difficult for people to duplicate, which is kind of how we got on the path of designing new space systems and panels in the first place because there's no other way to do it, is providing mobility coverage on a global basis at great depth of bandwidth, enormous amounts of bandwidth. So for the U.S. DoD who doesn't know where they're going to be deployed at any given time, and when they do deploy, it is going to have intense hotspots of need. And I'm sure you're aware that space is considered a huge asset for the U.S. Other countries are trying to either imitate our abilities in space or, in some ways, figure out how to deny our abilities in space, being able to protect that bandwidth with those places has grown really valuable because of the sensor information that they get and the sort of the action, right, the things that they can cause to have happened by having that bandwidth. So that -- so that's kind of the biggest thing for us. And one of the -- basically, if you think about the way we got in with the DoD, remember, we were a technology company that provided equipment for 20 years before we got into the space services business. And so we are the principal provider of tactical broadband for the DoD anyway, whether it's UHF, X-band, EHF, Ka-band, so we already provided all that. So one of the things we've been able to do is show them how they can get user terminals that work on their own organic systems, which would be their preference, and it was -- used to be the only way that they could reach these markets. Not necessarily with the bandwidth that we can, but they could at least get there. So we've been able to provide them with user terminals and then provide multi-mission terminals that can work on both the defense organic systems and our own systems. And that's what really creates that power. Because most of these platforms aren't going to have multiple satellite terminals, they're going to have one terminal, and they want to make sure they have access to both their own and these augmentation ones. And so we built our system to do that. So that's one. And kind of the stickiness comes from your ability to add not only to having a pipe, but to be able to connect that pipe into the missions that they're performing. So that deals with the distribution systems on board these platforms, the software applications that they support and especially the cybersecurity that they support. And now cybersecurity extends not just to sort of what bits are in flight, but also the physical facilities in which bandwidth is banded, where does that happen? Are there vulnerabilities there? So we have -- those are examples of some of the things that are really difficult to duplicate. But I tell you, the one thing that there's really nobody is even on a clear path to be able to do at scale is to provide those deep ocean coverage, okay? So that makes us valuable, not just with U.S. mobility, but also with commercial mobility users. So well, again, we started primarily with North America, well we've extended into South America, Europe and Australia and then have been providing more intercontinental service. ViaSat-2 was really the first one that provide that amount of bandwidth on intercontinental routes. And we also are doing intercontinental routes between North and South America, which traverse a lot of open ocean. But the really big things that are coming with ViaSat-2 are these global routes, and that includes especially Asia Pacific. And then the other areas that we can -- there are other issues in the mobility business I'm just going to touch on, which is one example is that in order to serve these intercontinental routes, you need to be able to not only serve the origin and the destination, but every place in between. And a lot of that is tangled up in international regulatory environments. You can't just shine your satellite into any place you want and provide commercial service. You need regulatory approval. And in many markets, what you're going to find is that, I'd say, not so many, but in a large fraction of the geography of the world, controlled by a small number of countries that airline routes traversed, you need to be able to work with those countries. And oftentimes, what that may mean is not even using our satellites, even if we have the ability to cover it, but using their satellites because they want to participate in the program or they have their own regulations that prohibit third-party satellites. So again, one of the things that's really, really important is to be able to provide a network that works on multiple different company satellites. And that's another example where the fact that we built technology for third-party networks, including in places like China and Russia and have worked with their satellites for decades, that gives us kind of the ability to design our own system so that they work seamlessly with theirs. Those are -- I would say, when it comes to stickiness, now there's other things that are special -- specialization or that involve logistics support, regulatory compliance, interactions between in-flight connectivity and broadcast TV or in-flight connectivity and in-flight entertainment, all those things are things that we -- skills that we've developed over a long period of time. And well, I think those skills make us difficult to replace. I do want to reemphasize what Rick said as that we're not going to hold any of our customers captive, right? We're going to make sure that we're the most competitive service for them, whether they're government or commercial. But there's -- but we're only -- we are 5% penetrated into these markets. And to one of Rick's points, our business -- achieving our own goals in these businesses doesn't require 50% and 60% penetration. Just 20% penetration in these markets, we can more than achieve the growth goals that we've set out.

Got it. So that -- it sounds like you kind of pivoted into the next topic I wanted to talk about, which is your commercial In-Flight Connectivity business. And just to level set the audience, you guys, I think, have about 1,400 planes installed, some -- most of which are flying, but obviously, unlimited capacity right now given COVID and about 1,100 in backlog. So about 2,500 planes all in if you include sort of installed plus backlog. And by the way, congratulations on your nice win with Delta that was announced last week. So as far as that business goes, can you talk about your position in the market? You've talked about the difficulty and sort of complexity of offering global -- sort of a global network to these -- to commercial, sort of global commercial airlines. But talk about what you think some of your strengths and advantages are in that market and then the opportunity to expand that business beyond the 2,500 planes you have over time. And obviously, thinking ahead to sort of having the ViaSat-3 constellation up.

Yes. So it's been a great market for us. We've been doing, as Mark said, connectivity to airplanes for the government and then for business jets. And then for -- then we entered the commercial air market. And one of the things we've done is we've made sure that before we go into one of these markets, we can actually perform. And it's also been one of the criticisms from us because some people rushed in with products that just weren't very good. And so we've waited and entered those markets where we could provide what we think is a at-home-like service in the air. And so we've been hyper-focused on that. It's restricted growth for us early on. I remember people saying, you won't be able to hand one airplane off from these spot beam satellites to another beam, and we did that in our first flight. And we've been building, our entire global network is built with mobility in mind. And so we're pretty excited. Just an example from -- I mean, I think -- we think this -- the TAM in this market is enormous. We're barely penetrated globally. And just as an example, the type of -- we've been said, can you get over $1 billion in this market? That would represent roughly a 25% penetration in the market today at the type of services people have. So we think -- and again, we know that this market is projected to more than double over the next 15 years or so. So just in terms of aircraft flying, and we're barely penetrated on the actual aircraft and that includes the government side of things. So this is a huge market for us. We're very, very focused on not just providing connectivity. You've seen some of the press releases we've had. One is with Apple Music that we did with American Airlines. Another one was with Amazon Prime that we did with JetBlue. And so one of the things we think we bring is the ability for these third-party payers to enter the market and provide -- we've been building our platform so that we can integrate those third party players in a very seamless way. And if you think about -- including over-the-top video in connectivity and broadcast video connectivity and seamlessly integrating that. So it's -- what we're looking for and what the airlines are looking for is engagement. And what they've found is some of the other paths from an entertainment has not led to the type of engagement that we have. And we know when people get connected and what they're doing, that they're engaged. So we can bring engagement, we can bring other people willing to get access to those customers. And so we're bringing more than just good connectivity. But those people -- Apple was a good example, when we did this with American, that they chose not to allow their service provided on the other provider, but only on the ViaSat-equipped airplanes because of the quality of service we could deliver. So they didn't want their name attached to a bad experience. So that's what we're bringing to this market. And then obviously, with ViaSat-3, we're already providing global routes with the Ku, Ka-band what we call Ku/Ka terminals. But with ViaSat-3, we'll be able to provide this high-performance in a seamless way to the airlines. And especially -- and what's happened a little bit with COVID, as you saw some order cancellations and you saw some delays, is that those, in a weird way, have kind of worked a little bit to our advantage, in that now the Viasat-3 constellation is closer, they can see it coming. So the international interest in getting selected on those platforms has just grown.

Sure. That makes sense. So I wanted to pivot to your consumer broadband business, both where it exists primarily today, which is North America, and where I think a lot of expansion opportunities may lie, sort of, outside of North America, particularly, I think, near-term in Latin America, and you had a nice announcement today, I think, on that front. But can you just talk about that business, sort of where it is today, what the -- what ViaSat-3's capacity and bandwidth economics could do to it? And then address sort of the elephant in the room, which is what do we think LEO is, which the admitted advantage they have is lower latency. So there's certainly a portion of the market that's latency-sensitive. But what are your thoughts on sort of the portion of the market that's not latency-sensitive and your ability to compete there long term, given your bandwidth economics? So a lot in there, but wanted you to kind of address holistically your consumer broadband business and outlook.

Okay. Okay. So first, one thing -- we started in the U.S. And the U.S. is [indiscernible] thickens, it's sort of like the best of places and the worst of places. It's the best of places because one of the things that stimulates bandwidth demand is having lots of other people connected. When the large fraction of the population of the country is connected, those who aren't connected want a piece. So that described the U.S. [indiscernible] good ability to pay. The worst of things about the U.S. is that it's very heavily already connected with good cable infrastructure. But one of the other good things about the U.S. market is that it's relatively unregulated and it was easy to enter. It was foreign territory for us and [ we had to test and prove our thing ]. And it's worked well, I would say that we've been in the U.S. market for close to 10 years. We've achieved our goals. We haven't -- I think that we haven't aimed just for numbers what we -- what I would tell you is we divide the world up. One of the things we do is we show this hierarchy of different applications with defense and in-flight connectivity near the top and consumer near the bottom. But the things that separate those things near the top and bottom is the higher value markets are natural satellite markets. Nobody is going to provide a cable connection or LTE connection in the middle of the Pacific Ocean, right? So in the terrestrial markets, like consumer broadband, it is possible to provide terrestrial connectivity. And so that's one of the things that we deal with. In the U.S., the market is still pretty big. There's probably 20-ish million people on DSL. We have 600,000. So we're lightly penetrated into that. The main value proposition that we offer relative to the lower speed terrestrial is much higher speeds. And we have plans now to go up to 100 megabits per second. The bugaboo for it is that people use lots and lots of bandwidth. And one of the things -- we've been in this market for a long time, tracked it for even longer when we were working as a technology provider, demand for bandwidth grows by about 35% to 40% every year, okay? So just think about that. I mean the way that we've been able to kind of keep up, and we're keeping up more with the median consumption than with the average, though, is that we built satellites that are much more capable every few years, right? So we've gone from WildBlue having 2 and 7 big gigabits [indiscernible] being 1,000 with 2 steps in between, and we've [indiscernible] on our way that the next one would be close to around 6 terabits per second. So that's just kind of keep up. One other point I want to make, if you have a constellation of satellites that's finite, what that means is, if you can't put up more satellites because you've got limitations in the orbital trajectories that you're entitled to, or your interference with other systems or the number of satellites [ that's without ], all of which are real constraints, then, okay 1 year you might provide really good service, but the next year you need 35% of your satellites. If I have 1,600 this year, I need 2,200 next year, 3,000 the year after that, 4,000 the year after that just to keep providing the same service. So there are -- while latency is important to some people, what we found is most people -- other than hardcore gamers, don't necessarily know what latency means if they don't see a ping time measurement. So again, we're not all things for all people. The things that we've really focused on the most have been to provide high-speed in a sufficient amount of bandwidth. And we're especially focused on video streaming because that is what's driving the growth in bandwidth consumption. The reason people need more bandwidth every year is because more and more video consumption is moving online. And so there are things that we can do with our network that are pretty unique that we'll be introducing this year. We're trialing with some of the major -- some of the most popular video streaming environments, which will give people high-def -- ultra-high def 4K in essentially unlimited quantities. And while -- so I think that's going to be a really, really interesting aspect of what we can do and pretty unique to our network. All that said, again, going back to one of the points Rick made at the beginning, these are really large markets. The U.S. market is probably bounded in the $10 million to $20 million range, depending on what your price point is and what your speeds are. And we expect that, that market may shrink over the next 5 years. And so our expectations for growth in the U.S. market are very, very modest. I think there's some upside potential to it, but it's not something that's baked into our plans. Now on the other hand, in a lot of these international markets where more and more entertainment is moving online, you're seeing the growth of streaming services. They are kind of little later than the U.S., but what's happened is content moves from being -- the good content moves from being on the broadcast networks to being on the over-the-top networks, which means you really need Internet connectivity. So we look at it from an international basis, that just the popularity of international satellite TV is a proxy for the demand for satellite Internet because of the over-the-top content. And that is a much, much bigger market than the U.S. market. We expect to see growth in that. But again, there's plenty of opportunity there for multiple players. I think that that's kind of the environment that we expect. And I think LEOs, they can be quite effective over land. I think their band -- one of the things we've said, and we encourage people to do is just look at it, estimate the cost of a LEO, look at what their filings, how much bandwidth they have, look at the life of a satellite and then look at -- you can take a freeze frame and we publish these, where the satellites will be at any given time, and what you'll see is because the earth is 80% water, right, that only a fraction of the satellites that are up at any given time are useful. Now the same satellite traverses the whole world. But if you take that freeze frame, that is totally representative of the average time that each satellite spends in certain places. And so what you'll see is, for instance, in the U.S., only a fraction of way less than 10% of the satellites that a LEO operator offers will be over the U.S. and then you could add up how much will be over Europe. And let's say South America, it could be a good market, Australia. But when you add all that stuff up, you're getting a pretty small fraction of the total time. So what analysts have done when they've done this, they've come to the same conclusion we have, which is from a bandwidth perspective, our bandwidth is much more cost effective. That is we should be able to give a lot more per dollar to our customers. Our terminals are a lot less expensive, which means that we can go after lower end markets, which is that's going to be the dominant markets in the rest of the world. The U.S. is a pretty high-priced market. So again, one of the reasons that it's a good place to start with. But we can go to much lower price points because the cost of our equipment is a much smaller fraction of the total cost of serving those customers. So there's just a lot of factors that go into it. Latency is one. The other thing I would -- well, I think the one other question that we get I'm just going to bring up is, if you look at the data on Starlink, people are going, wow, hey, that's -- well, that's an incredible service. And I would agree that if you have an uncapped service with low latency at our prices, sure, that's really attractive. The issue...

With 100 people on the network.

Yes, that's exactly the point, right? If you only got -- if you've got 1,000 satellites and a few hundred people, that's not a very scalable experience. And so we haven't seen what Starlink really will be. Now they should decide to say, hey, hey, I'm going to raise billions of dollars, and I'm going to deliver an experience that's not economical and don't worry, I'll make it up later. But if the number of satellites they can launch is limited, eventually -- let's say, the way I put it is the way you get -- you don't get an advantage from a low cost of capital by burning that capital, right? You get a lower cost of capital by delivering the return on the capital and that's what we've -- that's what we're aiming to do is to deliver a good return on the capital and not use shareholders' money to create an impression that's not sustainable.

Okay. Unfortunately, we're at time, and we're going to have to wrap up. Mark and Rick, thanks. It was fascinating, I think we could have gone on for another hour. But we're going to have to cut it there. So I hope you have a good and productive rest of your conference. Thanks, guys.

Thanks, Rich.