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

All right. Good morning. Good afternoon on the East Coast. I'm Rick Prentiss, Head of Telecom Services Research here at Raymond James. First, I want to say I hope everyone, you and your families, are doing okay in these difficult times. It's the 42nd Annual Raymond James Institutional Conference, my 25th. I think this is my 100th earnings season so definitely have -- high out there, but this is our first virtual one for an institutional conference, and we missed not getting together in person in Orlando. We were just reminiscing about last year, this was the last at the conference is in person. So it was nice to get together last year. Okay to get together virtually this year. We really, really are hopeful -- we're excited to go back in Orlando, see everybody in person again in sunny Florida. For those of you on the investment side, we are available for e-mail or chat. Then at the bottom of the chat and the question mark will show you how to ask questions throughout it. Mark and I have got a fireside chat set up, but we'll be monitoring both e-mail on my side and the Q&A coming through that side to see if you have any questions you want to ask. But we are really excited that Mark Dankberg, the Chairman of Viasat, has joined us today to update us on the progress. Mark and Bruce and team, good to see you guys.

Yes. Same to you, Rick.

I think now that we've been a year basically into the COVID process, Mark, why don't you update us as far as the visibility into what the calendar year '21 and beyond is looking like in your different silos?

Okay. So the main source of uncertainty is still the in-flight connectivity space. Although because of the significant way that we had with Delta Airlines, we expect that we'll actually have good year-over-year growth in the number of planes that we'll have in service. And I think as those planes get deployed, they'll come online during the course of our next fiscal year, which begins a month from now. The defense business has had a really good year in terms of new orders, so we have a record backlog there. And our commercial technologies business has also had a really, really strong year for orders. So that's not a very good backlog. And our residential business has been strong, so we have pretty good visibility going into our next fiscal year, which starts April 1, our fiscal year '22.

Great. And as you think about those new products that you're developing and sales momentum, why don't we spend a little bit on the area of government and talk about what the new products are that you're seeing and what the opportunities are for that record backlog that you talked about?

Okay. So the defense backlog is -- really reflects kind of a blend of all the areas that we have. So one is tactical data links, and the tactical data links area has been growing because, as we've been able to reduce the size and the cost of those terminals, we've been able to apply them to new applications. So those include handheld devices and more and more embedded weapons system. So as -- using late '16, you have access to targeting computers and tracking computers, which really help with the theme of precision targeting, precision munitions. So that element of late '16 is really not even quite underway yet, the precision targeting aspect of it. In the satellite space, the things that we've done well at is continue to win new types of platforms where we can put satellite broadband on, on those. And so over the course of the next year, more of those will become active, and then they'll become subscribers to ongoing services. And then in the cybersecurity space, the other area, the growth areas for us are really twofold. One is data center-based devices. So the market for those has been growing as the DoD and some of the other U.S. agencies become more bigger users of cloud services. So in order for them to provide those cloud services to users on the edge. They need the data center equipped with the security equipment, and then we're the leading provider of high-speed IP network security equipment at the data center side. And then that is also creating more of a market on the tactical allocation side, either for standalone devices or embedded devices. So those are the areas there. Now on the commercial side, one of our biggest growth areas has been ground equipment for earth observation systems. And as more and more earth observation systems have come online, both commercial and there's some government wins as well, one of the -- as those systems get greater resolution and can provide better and more imagery, they require more capable ground systems. So think of one way to think about it is as the satellites get smaller, the ground equipment needs to get bigger in order to be able to provide that aggregate data. And so we're really strong in those very large earth observation or sensing receiver systems. So that's what's really driving the backlog of that part of our business.

You've also made some acquisitions of -- or making some acquisitions of companies and some JV partnerships. Let's start with RigNet. Obviously, oil and gas is kind of back as well. As you look at that acquisition, what was the strategic rationale? And what do you think the outcome could be as we look out over the next few years?

Yes. So one of the main themes with our ViaSat-3 constellation, which is really going to have a big lots of opportunity for growth for us, is the ability to provide global services. And so one of the things that RigNet does is they do provide services on a global basis, largely to the energy segment now, but also to things like mining and exploration and other enterprise applications that are all in remote areas. And so that is a good fit with our global coverage because a lot of their applications are in the ocean. That's -- one of the most difficult remote areas includes mobile vessels. They have licenses in dozens of countries around the world and existing business relationships, so we feel like one of the things that we can do with ViaSat-3 is provide a lot more bandwidth and help increase the market and the breadth of applications that we can offer to their customers, and it's another area where just providing a data pipe is generally not sufficient. It requires a pretty fair amount of domain expertise and vertical integration to do that, and they're kind of a leading independent provider of services to those markets.

Okay. Speaking of ViaSat-3, let's talk about how much capacity is left on ViaSat-2. You've had success, obviously, taking ARPU up, but ViaSat-3 is important. So how much is left on ViaSat-2? And what should we expect by ViaSat-3, let's start with the Americas, can bring to the table as far as that extra capacity?

Okay. So the -- probably on ViaSat-2, probably in the 10%, 20% of capacity available to us. And we're -- so we have growth in a number of markets, including in Latin America. That's one of our good growth markets. And also, we've got good growth anticipated in the aeronautical market as well. We're -- I think the projections are that the in-flight space will come back, and then we're winning more airplanes. And so we have to make sure that we reserve sufficient capacity for that, and that's part of how we manage our fleet capacity. With the ViaSat-3 Americas, there's some really good opportunities here. One of the biggest is that with ViaSat-2, we provided transatlantic coverage, and we were able to capitalize on that pretty quickly with contracts, with a number of European airlines who provided service to the U.S., and that was things like SAS, Finnair, Icelandair and a couple of other smaller airlines. So with -- but I think of the first ViaSat-1 providing coverage kind of from Hawaii agreement. So one of the big opportunities for us on those Hawaii which flew from anywhere, North America or South America, and that's a big attraction because that's an important market to the airlines and then also kind of provide us coverage over the rest of South America. So right now, we have coverage down to kind of Venezuela and Colombia with ViaSat-2. And then in our partnership with Telebras gives us service over Brazil, both with ViaSat-3 on all South America, plus much, much more bandwidth in North America, which will allow us to both improve the service that we have to our existing customers and expand, although we have relatively modest expectations for subscriber kind of growth in the U.S. It's been a really good business for us. I think we have some opportunity for growth in there.

And when we think about in-flight connectivity, what's your view on how long it will take to get back to whatever normal is?

I don't think we're better qualified than some of the other guys. But I just -- in our own experience as a business, I said that -- and we're not the first to have said this. But I think that you can do a lot with Zoom or with virtual meetings, but I think that the companies that do face-to-face meetings will have an advantage over those that go purely virtual. I think a number of the airline executives have pointed this out, and we believe it's true. There's just no substitute for being there, and then that includes multiple markets. So some of -- for some elements of our business, despite the cutback in travel, mean we've maintained personal contact with a number of our customers. And so I think that will bounce back. The other thing that's kind of interesting is just to look at those countries, and China is a good example, where the pandemic -- let's say, community spread was a lot more under control. It seems like Air China will bounce back pretty quickly. So if that's an indication of what happens in the rest of the world, that would be a good outlook, good outcome.

And then how much traveling are you guys doing right now as a corporation?

Our corporate travel as a whole is down pretty substantially. So I'd say the ones that do travel are more the ones where we feel like we really need to and also where we have people that are willing and able to.

Okay. I think we're feeling pretty good about it. You've been there in the past -- part of the December summit. Feels like mid-August should be a good time to get one of those first in-person events back on the schedule, so feel pretty good about that August date.

Yes. I think a lot of people are anxious for real, personal meetings again.

Yes, yes. In Europe, you bought out the JV with Eutelsat. Talk a little bit about what happened there and where does it go forward.

Okay. So I think the history is one of the main -- probably the main source of disruption was that -- of the joint venture that we had was that the French government really wanted to subsidize French aerospace industry. And so they offered Eutelsat several hundreds -- hundreds of millions of dollars to get a European satellite, and then they also brought subsidies for ongoing services to that. And that kind of made for a too good to resist opportunity for Eutelsat. And that really disrupted the joint venture that we had. And I think that their subsidies are largely in France, so there's still a very substantial European market out there. We think that -- 2 things that I would say about our approach to that. One is we have a really good understanding of what the satellite manufacturers, the toolkit that they have. We think that our ViaSat-3 is going to be extremely competitive on a bandwidth productivity basis. It has a lot of flexibility in how we allocate that bandwidth, and so we believe we'll compete well. The estimates for the market size in Europe are pretty substantial. The other -- so it doesn't deter us from our views of the European market. Also, the European market, we think there's a good opportunity for mobility, government applications. And then just to be clear, that satellite also covers a large amount of ocean, Africa and large amounts of West Asia as well. So we have plenty of opportunity to monetize the bandwidth in that satellite. And in terms of buying out the rest of the joint venture, what it does is it gave us the KA-SAT satellite, which think of that as it's not quite a ViaSat-1 but comparable to ViaSat-1. And one of the important elements of our overall fleet strategy is that we can use the older satellites, combined with our newer satellites, in ways that enhance the productivity of each. And that really goes to the details of how you use those satellites and the -- where the beams are, the beam contours are taking advantage of that -- of using both satellites. We get more out of both of them. So we think that the combination of the asset that we got, the remaining life of that asset, the subscriber base that came with it, that's going to be an accretive acquisition for us, both just on a purely financial basis and then on -- there's a little bit of synergy in terms of the fleet benefits of it as well.

Remind people -- and I got to tell you, I hate fiscal years versus calendar years. But remind people on when you think RigNet and the JV closing would occur.

So we think there's a decent shot that the JV acquisition will close in March. If not, it shouldn't go much beyond that. And our estimate when we announced the RigNet deal was probably first half of calendar '21.

Yes. But that's going well, Rick. And they're going to have a shareholder vote. So I think we can get it closed pretty quickly after that.

Okay. Very good, done in other way. You've already started thinking about ViaSat-4 and maybe even ViaSat-5. Certainly, that bodes well for your view and what the marketplace is. So help us understand return on capital and why ViaSat-4 and what it's going to bring to the table.

Okay. So the -- this goes -- why we got into the satellite services business in the first place, the domino effect.

Because you're a market scientist?

No. I like to think of it because we're economically in financial analysis as well. But the biggest thing, the thing that really is striking about the broadband space is the growth in per-capita consumption, which is really driven by video. Let's say -- I would say in the first few years of the early 2000s, it was driven by audio and a little bit by photography, but audio files are. So that was like -- came along. And all of a sudden, there was demand for bandwidth, and that drove things. That drove us out of dial-up stage and into the broadband stage, which includes DSL and megabit speeds. But video is that -- the video -- think of a tsunami. I mean that's still continuing because we're in the early stages of cord-cutting. And so the number of people that are joining that over-the-top video market are enormous, and that drives gigabytes and terabytes of consumption. So the upside of that is if you're a bandwidth infrastructure provider, you have to think that your assets are steadily depreciating because there's 2 factors that are at play here. Factor #1 is there's been growth in ARPU. So think about it as the amount of absolute dollars that people are willing to pay has been growing, to some extent, call it, 6%, 7% a year, in general, industry-wide. But bandwidth consumption per capita is growing 25%, 30%, 35% a year. So what that means is when you deploy any broadband system -- and this is really more applied to anything that is wireless. If you're fiber-based, it's -- you're a little more future-proof. But if you do anything wireless, which includes terrestrial wireless and satellite, then the real issue for you is how much bandwidth can you get through your assets. What's the productivity in terms of bandwidth utilization? And don't think there's a point solution. So when we put ViaSat-1 almost 10 years ago, I remember one of satellite manufacturers asked, "Well, how are you going to sell 100 gigabits?" Right. Again, it's more bandwidth that exists over North America. It was easy to sell. The question was can you get a decent yield on that. So basically, what's -- what -- the idea is that competitive playing field is determined by your productivity because it is an inexhaustible demand, and people will make their choices in each of these domains. Whether it's defense, aero, consumer business, enterprise, whatever it is, it's generally going to be driven by how much bandwidth I get per dollar that I spend. And so what we want to do is we want to be the leader on that front, and you have -- so it's really not -- what your point solution is, is the trajectory of improvement. That's what drives that. It's like the Moore's law learning curve. And so the reason -- well, there are a couple of things that go into that. So one would be, for instance, once I build one generation of satellite, so I just keep building that and count on driving the cost of building the same thing down or should I be looking at trying to get more utility out of roughly the same capital cost. And if you look at what's happened in computing, in storage and in the rest of the transmission field, nobody has made money by saying, "Hey, I'm going to go to 1 gigabyte drive at the lowest cost possible." I'd better be making terabyte drives when I used to make gigabyte drives, right? So we're thinking, "Hey, we better be making multi-terabit per-second satellites instead of just lots of single terabyte -- bit satellites." And I think that's really the ultimate source of competitive advantage. And that -- and so what you need to do is have an underlying technology that enables that. And in the wireless space, that's basically being forming technology. That's what's happening in the terrestrial world. It used to be you could get more and more throughput by getting more bits per second per hertz, but we're pretty much at the end of the theoretical limits of what's possible there. So now it's really how do I make more and more beams? How do I make them smaller, put them in the right places? And that's the underpinning of what we're doing. And so then the big question is can we extend that into other satellites? And there's some unique things that we have. That's why we've become vertically integrated to both push that along faster and protect it from others.

Speaking of protect it from others, obviously, one of the top questions we get is, well, Elon Musk must know something the rest of us don't or they've got some solutions that is going to just crush a lot of other companies out there. Can you talk a little bit about how you see your competitive position versus the LEO satellites? Is there complete overlap? Is there different markets? And I think our view is there's a hybrid network in the future, but can you talk a little bit about the big bogeyman of the LEO?

Yes. Okay. So there's multiple dimensions there. One is there are very, very large markets, and I think that that's one of the things that Spacex talks about, as do others, when they invest -- literally, they're investing they're saying $10 billion to $20 billion, right? And Amazon is saying the same thing. So the underpinning there is that there has to be a very, very large market. The thing that is striking, especially about SpaceX, is that the way they're looking to scale is by having enormous numbers of satellites. And that's a very contentious value proposition because there are very substantial concerns about space safety and orbital degrees. And we're not the only ones that point that out. I think one thing that's really, really interesting, if you look back when Starlink was first authorized, and I think this goes back to 2018. At that time, Commissioner Rosenworcel, who is now the acting FCC commissioner, put out a one-page statement, but one of the main points of that statement was it was that the regulations around large constellations need to be updated because we're heading for some very serious problems in overcrowding in space and that the regulations that the FCC has used in the past are probably not sufficient for constellations of thousands or tens of thousands of satellites. And I think that there's a growing awareness of that. So the big issue there is will anybody be able to scale by having thousands or tens of thousands of satellites. And then sort of the corollary that goes on with that is even if the U.S. FCC were to allow that, is physics going to allow that without having collisions in space? And what -- how are we going to -- or how is the world going to accommodate constellations from indicators in other countries as well? So I think that what we believe is that, ultimately, there is going to be a place for LEO, but it's not going to scale just by having tens of thousands of satellites. And there's going to be a bound, and there are multiple people that have already said it. There's some limits to the number of satellites that you can have. The other point is, and this is one of the points that we make, is that there's a really good opportunity for hybrids of LEOs and GEOs. And that's because GEO is far more scalable. If we can put 10 terabits through a single satellite, that's the same amount of bandwidth through one satellite that you get through thousands of LEOs. So in some sense, actually, we think that the GEO environment is far more scalable in bandwidth. And really, what's happening in -- we have things like computer architecture, where there are some parts of computers that need very fast access to data, but the bulk of it doesn't need super fast memory. And that super fast memory is more bounded, more expensive, and so people have architectures that use hybrids of really fast-working storage and then more in slower storage that can be accessed, as needed. So think of that in the satellite broadband space is having some combination of low latency bandwidth, but the vast majority of bandwidth consumption because it's video does not require the latency that you get from a LEO. So that's really, really -- I think probably what the long-term solution is going to be at most of the bandwidth that's going to come from GEO.

Because obviously, it's a top question we get, people are trying to hear what is the addressable market. As you look at the addressable market, how would you think of your share versus other GEOs versus LEO satellite?

Well, I think in the long run that the share of the market is going to, more or less, follow your share of the supply. That is that those satellite operators that have the most bandwidth are probably going to have the most revenue, right? That seems like a natural thing. And so that's really what our objective is, is basically to have the most bandwidth, not to have the most bandwidth because we make the greatest amount of capital investment, but because the productivity of our capital investments is so much greater than others. That's what our focus is. And we want to get more bandwidth per capital invested dollar. We want that bandwidth to last a long time, and we want it to be focused on the places with the greatest demand. And all those things point to these beam -- these underlying beam-forming technology that the payloads are going to be far more important than the spacecraft itself.

The RDOF auction finally ended, the quiet period finally ended. You guys did not participate at the final stage. EchoStar had a de minimis amount. But Spacex Starlink did have $800-some-odd million over 10 years, so probably $80-plus million a year. How do you think that changes the landscape? And is it something that can be delivered by LEO satellites, the kind of latency speeds that are being promised?

Okay. So one is in the overall scheme of things, I don't think it's going to make a material impact on the SpaceX business case because they need to spend so much capital in such a compressed time frame that they may pull out -- that's $80 million a year if they're eligible through the long-form process, which is the part you're sort of alluding to now. And I think that one of the big -- well, there's a lot of questions about their ability to fulfill the obligations that come along with that. I think about 2 weeks ago, the fiber broadband association published an analysis that just looked at, okay, here's what the obligation is. Here's what SpaceX would have based on some of their filings. What's their ability to be able to support this? And I think it raises questions. And certainly, if it's not eye-opening to us because we've been doing all this analysis on capacity to geographic distribution of that capacity, what the constraints are. But I think it should be eye-opening to a lot of people about -- they're talking about hundreds of thousands of customers in the U.S. with 12,000 satellites, and it really questions their ability to serve the concentration of customers that they are obligated to serve under RDOF. So it will be -- and it's really -- I would say the fiber and terrestrial segment of the market or they're at least as concerned as other satellite operators about what the rules will be, how those rules will be enforced, not only for other satellite operators. There's similar questions about wireless providing gigabit-level services. I think all those things will be at the first level that we sorted out in the long form. But in the real world, in a few years, they'll be sorted out in the market, right, is whether or not they can deliver on the obligations that they have. So we'll see.

Yes. You mentioned the FCC earlier. Any thoughts with the new administration, any other impacts on your business, whether it's government, whether it's regulatory? Having a Biden administration, what does it do? And I'll remind folks, if you do have a question, you can pop it into the chat. We're watching that. We had a couple coming in, in the chat or the e-mail.

Yes. Let's say -- so first, on the defense side, I think there's going to be a little bit of a pause while they sort of look at everything that -- all the priorities of the prior administration and the programs that are associated with those. And that's -- that kind of happens, to some extent, on every administration change. I think this time might be a little more intense and drawn out, but that's kind of a normal process. I think that to the extent that there's more of a focus on near peer adversaries as opposed to global war on terror, that's really going to reinforce the need for global deployment capabilities and especially the role of the Navy and our ability to serve these oceans. So I think that's an important thing. And I think also, the other big thing, I think, on the Biden administration is probably a lot more focus on the environment and on -- and that includes probably space safety and orbital degree and the impact of -- the other thing that Aerospace Corporation has pointed out is that we're looking at having thousands, tens of thousands of small satellites would be reentering and burning up in the atmosphere. If these mega constellations really come to fruition, what was the environmental impact of that? There's definitely concern about that because all these vaporizing satellites come in from the top of the atmosphere, right? That's where the ozone layer is, and there's sort of a different effect than when they come from the ground. And so that's I think there's -- I think that's definitely one of the points that other people have made as well. So that needs to be considered, looking at how many satellites can be put into space. I think those are kind of 2 of the areas that will be interesting for us.

Okay. You mentioned beam-forming. How about antenna technology on the ground? What are you seeing as far as progress there?

Well, that's also -- so this notion of beam-forming, I think there's 2 parts to it. One is in the space payloads. The other part is in the ground. And that's -- you really want that for 1 of 2 reasons. One is to be able to track moving satellites, so that's LEO satellites and then orbit. And then the other one is if you want to hop around among multiple satellites. So that becomes valuable if you have a fleet of satellites with different capabilities as well, even if they're in GEO. So we've been working on that for quite a while. I just have a number of other companies. I think that's one of the things that's got to be deployed with these LEOs. The big issues are, number one, is if you want to go for low-ARPU applications, like residential, then you really need a much lower-cost antennas than anybody has. And if you look at kind of the teardowns of what SpaceX is using, I think they're certainly functional, and they look cool, but they're really, really expensive. And so that's one area. The other one is to make them work on environments like, in-flight or others, where you have very extreme environmental conditions and some very substantial safety and compliance issues as well. So we've been working on both of those. We believe that we'll be one of the most competitive, if not the most competitive, in those markets. And we've got some airborne test flights that we either just completed or are in the process of completing now. And I think the -- one of the areas that's really interesting for -- so we're interested in 2 areas. One is as a seller of equipment into those markets. Both -- remember, we provide equipment into the NEO and the LEO markets. We're a substantial ground segment provider for SAS' O3b and the -- also for the OneWeb system in ground antennas. And then we'll also use it for our own systems as well. And that would be -- it will be really valuable in this hybrid LEO/GEO environment that we're expecting as well.

Speaking of expecting, we're sitting here next year in Orlando, actually in person. When we look back from March of '22 to March of '21, what's going to be the thing you say, we did this. This was so exciting. It paid off? What do we think this next year brings before we sit together in Orlando?

Well, the biggest thing for us clearly is going to be launching our ViaSat-3 -- our first ViaSat-3 satellite. That is -- that's really going to have a very, very big impact on our business, and I think it's going to have a big impact on the space industry as a whole. It enables some other really, really interesting applications besides the ones that we're already in, including space relay applications, LEO/GEO communications, things like that, that I think are going to be really important, not only in the communications business, but in the observation business as well. So that's the #1 thing for us is the launch of ViaSat-3.

And when we think of those dates, what date are we anticipating the launch and service date for the first ViaSat-3?

So what we're thinking is early calendar '22, that's the way we framed it in our last report, and there's nothing changed since then. And in-service, it will be 1 to 2 quarters post launch with a little bit of orbit raising time. And because it's the first sale of its kind, a fair amount of orbit -- cast and checkout. And probably some data services as well. One point I just want to make is when we did ViaSat-2, when we did -- in order to check out, one of the things we've verified was it's capable of 300 -- we can go up to 300 megabits a second into a consumer terminal. With ViaSat-3, we should be able to get pretty close to 1 gigabit per second into a consumer-sized terminal. We're not going to offer -- we didn't offer like 300-megabit plans because that constrains the number of customers you can have. We're not going to offer gigabit plans, but the capability will be there.

Right. And any final thoughts on maybe 5G? What do you think 5G is and what does it mean for satellite?

So well, I think, look, what 5G means to consumers, basically, I think, is consistent with the 2 things that we've talked about for space, which is I think what consumers expect is faster speeds, and they expect to get more bandwidth for their money, right? It has a little bit of an increase in the price -- monthly price per subscription, they expect to get more gigabytes somehow, whether it's through greater efficiency, which will be through beam-forming; or application of higher frequencies. I think that those are the 2 biggest value propositions for 5G. And I think that, that is going to raise the expectations of people in the broadband space as a whole. It just goes with this main theme that people are going to want more bandwidth and more speeds. So there are some interesting applications there. One, also, is I think it will be -- just as there is now, there's been kind of WiFi and 4G have become relatively seamless, not totally seamless, but relatively seamless. I think that you're going to see more integration of these multiple networks within the 5G fabric, and so I think there's opportunities for us in the rural space. That's one of the big opportunities, whether it's providing backhaul or roaming, actually providing licensed services in some markets through partnerships or doing more roaming because I think that, that expectation of greater speeds is going to extend into markets where you'll be able to provide that locally but you won't necessarily have the network infrastructure to feed, and that's a good opportunity for us as well.

Well, great. We've come up on a lot of time. Appreciate your spending the time with us this morning out West or afternoon back East. Everybody stay well. We really are looking forward to being live in person, either in Park City for the summer summit in August or back in Orlando in March of '22. Mark, Bruce and team, thanks again so much. We can see you guys later, hopefully in person.

Yes, looking forward to it. Thanks a lot, Rick.

Thanks, guys. Take care. Stay well.