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

All right. Good morning, everyone. I'm Ric Prentiss, Head of Telecom Services Research at Raymond James. Welcome to the 44th Annual Raymond James Institutional Investor Conference, my 27th Raymond James Institutional Investor Conference, longevity, really excited. I think Jimmy Fallon always says, you're here, you made it at the tonight show. You're here, you made it. You made it to day 3. Good morning. Good to see everybody up and at them. It's been a great conference, a lot of good buzz out there. So I appreciate the companies and the investors all coming to participate with us. We've had a good lineup of digital infrastructure companies, telcos and satellite companies, and I was really pleased. I don't know if you've walked around and see a little icons on the signs here. But we've got a satellite picture in one of the icons. We've got a tower and wireless picture one of the icons. We've got an airplane picture on one of the icons and very pleased to have Mark Dankberg, CEO of Viasat's here today, and they touch on a lot of the stuff. How do you get broadband, how do you get connectivity on airplanes, we're going to do is a few minutes of prepared remarks by Mark. We'll do a fireside chat format, take some questions, and then we'll head down to the breakout session. But Mark, welcome.

Thanks, Ric. Good morning, everybody. So I'll give you a quick overview of the company, give everybody time to read that. Okay. So Viasat is a real satellite-centric company, moving more and more towards recurring satellite services revenue that we generate from our systems in space. We're -- we report in 3 segments: Government; Satellite Services is now the largest segment significantly; and Commercial Networks mostly sell satellite-centric products that would be -- one of the largest ones in there would be selling ground stations for earth observation systems, both commercial and government. And then also another big example would be selling the terminal equipment that goes on airlines. For instance, we have very successful in-flight connectivity business, the product portion of that would be in the Commercial Networks services part in the Satellite Services business. We are -- this is a very significant inflection point for the company because we're about to bring 3 new satellites online. Satellites have the bandwidth, which is the inventory that drives our services sales. So we've had -- look at kind of where we are for this year so far, revenue will flat because of the delay in getting our next satellite up. Awards are strong. We did sell a portion of our Defense business, which was not as well aligned with where we're going, which is more and more global broadband satellite services, and that's really improved our balance sheet substantially, gives us plenty of maneuvering room to bring our satellites into service and to do our contemplated acquisition of Inmarsat. In-flight connectivity is one of our strongest suits. We've been developing that business for about 10 years, have a very, very strong position in the U.S. market serving American -- virtually all of Delta Airlines, virtually all of American Airlines, all of JetBlue, about half of United's domestic fleet and just recently won all of Southwest Airlines new aircraft. So 5 of the top 6 airlines in the U.S. We think the value propositions that have made us successful there play well globally. And that business has been growing well. Over time, we are migrating more and more of our Satellite Services business to reflect where we're going, which is a little less focused on the U.S. market, which is where we started. U.S. residential market, much more on global mobility and then international. And you can see that our revenue growth in the Satellite Services segment reflects both our ambition and our success in doing that so far. So this -- I mentioned the 3 main business areas. In the Satellite Services portion, Fixed Broadband, that's mostly U.S. That's that 50-ish plus percent. In-Flight Connectivity is the fastest growing part of it. We did an acquisition in the energy space, but there's quite a -- there's a lot of market left that's really unaddressed by anybody in global mobility. Now it would be land mobility, things like trains, buses, big swaths of the maritime market are still unserved. And then Commercial Networks, as I mentioned, antenna systems, mobile and fixed. It's also where we record all the investments we make in our space systems infrastructure. One of the unique things about us compared to many other satellite companies is we now develop and build our own space systems, so whereas others, if they buy a complete space system from someone else, would capitalize all of those purchases because we're developing new technology, if the work we do in space systems that doesn't actually fly in space is expensed. And so that -- those expenses show up in that segment. We've talked about this before. We see very large -- this is annual recurring revenue in billions kind of in the 2020 time frame where we think in the 2030 time frame. And what you see is, think of it as most valuable services that is those requiring the greatest amount of integration generally with customers, value-added work. At the top, we're pretty strong in the Government segment as is Inmarsat also, that's the pending acquisition for us. Inmarsat's virtually all in those top 2 segments, which are the most valuable. That's where we're aiming. But in order to get scale in the business, you also want to do those lower ones. And that's where one of the differences between us and Inmarsat is because we have presence in these lower ones, we have far more scale and bandwidth and can -- and basically have, I think, technology that's going to help not only our businesses in those upper tiers, but theirs as well. So this is kind of our strategy in a nutshell. The point I want to make is we have 2 very complex optimization problems that we deal with. Optimization problem number one is how do we get bandwidth at the lowest cost into these markets. And one of the things I'm going to show you is that doing that at the lowest cost means having a really good understanding of where the demand is because even though we call it global mobility, I'm going to show you that demand is very geographically centric, and that is a big part in that optimization. The flip side is once you invest in getting bandwidth that is your inventory to sell, how do you optimize the value you earn from that. And again, that's a very complex optimization problem. I think we're -- the things that we've been working on are making sure that we have architectural and design approaches that will let us do those optimizations. So I'm going to -- I'll give you some examples of how we go about that. The thing that is just now pending is the launch of our next-generation satellite systems. We have been investing for about 5 years on that. The first satellite is expected to launch next month, April. We undertook going from regional to global, which meant we had the highest amount of CapEx relative to our revenue and sales ever. And that is -- that caused us to accumulate more debt, the recent sale of this Government anti-jam radio business, TDL business really boosted our balance sheet, I think, positions us well on a go-forward basis. These next 2 charts, really, just to give you a sense of if you want to go into these Global Mobility businesses, I'm going to just touch on the In-Flight business and the Maritime business. Think of it as -- the first thing you have to understand is where the demand is, right? What you think of the -- our customer base represents the demand that our market presents, our satellite fleet represents supply and fulfillment. And that would be the -- same would be true if you're in geosynchronous satellites, which are mostly ours or if you're in low-earth orbit satellites as some of these newer systems are. And what this -- what you're seeing up here is data from FlightAware. And what it shows is how many -- think of it as how many seat minutes are in every geographic square on the earth. If you broke the earth down into little geographic regions, the brighter and taller those bars are, the more demand there is. So what this tells you is if I want to be -- this is what makes a Global Mobility business really tricky and why the entry barriers are high is what you can see is very high demand, pretty much where the population centers are, but there's some demand you can see almost everywhere in the Northern Hemisphere. And there's some -- and you can see the flight paths in the Southern Hemisphere. So what I would really like to do is have way more bandwidth where those peak cities are because the bandwidth that I have over the whole rest of the world is not going to see very much demand. So I'd like to match -- there's optimization problems, how do I match my demand with my supply. The issue that you have, if you do it with low-earth orbit satellites is you can't control -- the way you control your satellite is where their orbits take them. And if they're very close to the ground, the satellite, let's say, over the Atlantic Ocean can't see any demand in either continent, in Europe or the U.S. So one of the ways in which we do these optimizations and just is to put way more demand there in the places where there's way more supply, where there's a lot of demand. The other thing that's really interesting here is much of the highest-demand markets are port cities. So not only do you have to deal with the demand for in-flight, but you'd also have to deal with the demand for maritime traffic in those port cities. And then when you look at the land mobile, again, most of the transportation networks on the ground also serve those same areas. What this shows is kind of an animation of what these markets look like and how this demand shifts over time. So if you look, for instance, in the In-Flight market, where there's purple, there's demand there. This is really kind of over times a day. But you see that there are hotspots in different places. So as an example, one of the optimizations you might like to do and that you can do it at a space system unlike with the terrestrial one is that I might want to project a lot of bandwidth over the East Coast at certain times a day and then move that bandwidth to the West Coast rather than letting it like follow, I wouldn't get the return on that bandwidth. So that space systems allow you that type of flexibility if your architecture supports it. What you can see in here is maritime traffic, both ocean-based and then, in some cases, inland waterways as well. And you can see that moves around as well, but also there's large overlaps with certain parts of the global mobile space. So this is a really big part of what we do is -- are these optimizations and it turns out, if you look at it, the difference between being able to do those optimizations and not probably -- it's like an order of magnitude 10 -- somebody who can optimize placement of bandwidth might have a 10:1 advantage or somebody who can't do that, who has their bandwidth statically allocated around the world. These are some of the markets that we have been going after with -- in these global mobile areas. We see -- one of the -- as an example, one of the biggest markets -- satellite markets -- existing satellite markets in the world is broadcast TV close to 1 billion homes globally, not as many in the U.S. anymore, but very large numbers internationally, get their entertainment through satellite TV broadcast as more and more content moves to the Internet. That's a really, really big opportunity for satellite broadband operator. We have to hit the right price points, right? Distribution, but the opportunity is really big in that one. The other area that we're also looking to participate in and have just started some alliances around that is this direct-to-device business that -- with Globalstar and Apple working together has got a lot of attention recently. Potentially, the Inmarsat acquisition that we have pending, it's really to accelerate our global mobile strategy. We don't feel like it's something we had to do, it's something we want to do. Still want to do it. The way we evaluated it was just we felt it was accretive on an EBITDA-per-share basis and accretive on a cash-flow-per-share basis on a go-forward basis, excluding all the upside from the direct-to-device market, which we are very, very interested in. We see it as a very large potential satellite market. Not quite as easy to quantify over the next 3 to 4 years. So the things that we have, I think, going for us are the ViaSat-3 launches, good backlog of aircraft under order, Government Systems business, good backlog and the Antenna Ground Systems business as well, recurring subscription revenues, what we're aiming for. And we think we're doing it in large and attractive markets.

Great. Thanks, Mark. So a lot going on.

Yes. There is.

I think I want to lead with competition. People hear a lot, but don't know a lot about what the heck is really SpaceX, Starlink doing. And -- but it's kind of the big bogeyman out there, like people just -- how do you all think about in those different silos, the competitive dynamics of what you bring to market, what your moats are competitively and where the competition really will impact you?

Yes. So we look at these as very quantitative, economically driven markets. Our major advantages and what's led to our success so far is driving down the cost of bandwidth and optimizing the yield in that bandwidth. The thing that SpaceX brings and Amazon may bring as well is if you look at -- one of the things we're focused on is earning a return on the assets we put in space. So we price our services to -- so that we earn cash on the assets that we've invested in, and we've done very well in growing operating cash flow. What SpaceX is doing, and I think Amazon will almost certainly do as well is they're not pricing to make the current constellation profitable, they are pricing to make maybe the next generation profitable or the one after that. And so that's a challenge for us because they're really -- what they can do is come up with -- if you look carefully in the market, what you see is there -- monthly prices, prices are higher than ours, the unit value of their bandwidth, they're selling at a lower price than us, which is attractive in those markets. So what we feel like is we have lower -- significantly lower cost, ViaSat-3 will lower than further. But the other constraint that they have, and you're already seeing this in the market is no matter how much money, the cash they're willing to burn by charging less than their costs, they still are constrained in the amount of bandwidth they have. And you can see that because their service is declining -- service speeds are declining in certain areas. So think of it as they have the ability to set whatever prices they want, but they can only do that to the extent that they have bandwidth in those markets, and that's getting constrained. And their growth -- think of it as their year-over-year growth in the amount of bandwidth they have is asymtotic because they're just launching more satellites, but when they go from 3,000 to 4,000, to how less than 1,000 to 2,000. So it's a challenge for us to deal with somebody with that kind of funding. But we feel like our advantages are in our productivity and the breadth of markets that we address. And the other thing is for certain classes of enterprise customers like airlines -- here's the other really big thing is that for airlines, as an example, what SpaceX is doing, it makes sense from theirs is, is selling, hey, here's the best our service will ever be. If you look at airlines, and it might sound a little bit less -- not as sexy, but airlines are super sensitive to what's the worst our service will ever be. And you can certainly see that, like with Southwest Airlines is like one of the premier airlines for 50 years reputation. It's like one of the best airlines in the world, they have a bad week. And they are in the dumps, right? It's like everybody is picking on them because they had a bad week. JetBlue is our first customer, David Neeleman, a brilliant entrepreneur basically, was forced out because they had a few bad days in snowstorms in New York, right? So that's really the thing that we've been able to offer to them is -- and I think this is one of the things that's going to help us in these global mobility spaces is having the resources to ensure that they don't have bad days in terms of -- at their hub airports, very highly reliable service.

Yes. When we look at In-Flight Connectivity, what is the opportunity there that you see, particularly as you go global?

Yes. So I mean, what's going on in the market -- and we've really been the catalyst for this is when we came into the market, In-Flight Connectivity and penetration rates of 5% or 6% on airlines, take rates among the passengers $25 to $50 a passenger kind of. With JetBlue, I mean, they offered it for free, hell we've done that with them for over 10 years. Take rates are in the 70-ish percent range. And that has turned out to be valuable to passengers. So now you're seeing Delta being the biggest example of that, probably, I think maybe now the world's largest airline by passengers is going free with our technology, big investment. And I think that's just the beginning, right? So what we've got going for us is good growth in the number of planes served, the number of airlines served and then behind that, good growth in the take rates. And because of that geographic concentration of bandwidth, those are formidable problems to be solved by others. And think of it as the more airlines you get, in some sense, the harder the problem is. That's -- I think that's a really good opportunity for us. We think similar effects will play out in other mobile markets as well.

You had up there the direct-to-device. Barcelona, Mobile World Congress, is kind of a boring show, it seemed like, except there was some direct-to-device buzz out there. You mentioned the Globalstar, Apple. Iridium has been talking with their Qualcomm announcement. That seems like the right word as far as what the opportunity is, but confusing as far as who's going to provide it? How do you bill for it? What's the customer facing, what's the right spectrum band? I mean help us understand what vast means to you particularly as Viasat?

Yes. So I mean the opportunity -- what makes the opportunity exciting is the notion, this is both enormously exciting and for many countries, terrifying is the notion that every cell phone can connect to satellites in space and get access to information, send pictures, images, all that. That's the opportunity. You're talking about billions of -- literally billions of devices and what can be interesting is single-digit dollars per month per device. Some you may get because that's the only form of connection they have. Others you may get because they're out of touch, small areas of time. What we think and I can go into this later, is that the best way to serve that is going to be with satellite-specific spectrum. That is if you try to reuse spectrum that's used terrestrially, you will have large parts of the world you won't be able to cover. So satellite-specific spectrum, I think, is going to be the key. That's one of the things that Inmarsat brings.

So L-band, S-band?

L-band and S-band, right? Those are the valuable ones. They fit within the band plans that are going into those phones anyway. So that's one of the things that's changing is the integration within the phone that makes that possible. The other thing that's changing is people are realizing, if I put -- if I have enough power for my satellite, no matter what altitude it's at, and we think this is one that's interesting for LEO as well as GEO. But if I have enough power for my satellite, I can close the link reliably to those devices. And depending on how I do it, I can go from text messaging to images, voice, and things like maps or other services. That's the opportunity, technically very challenging. What's exciting to us is the technical challenges are almost exactly the same as the ones that we've been facing in broadband. And I'll give you one other thing that we think is -- illustrates what the challenge is what people are talking about is they might model and say, "Hey, if I can get a message from anywhere on earth, text message and a $0.01 a message, that's a pretty good opportunity. And we agree it is we're working -- we're trying to work with Ligado and another company, SKYLink, to start doing that in the U.S. right away. Penny a message is really good for messaging. But imagine -- now what you want to do is send a picture of where you are. And that's, let's say, a $0.01 a message is on the order of $100 a megabyte. So the message itself is inexpensive. The picture that goes with that, very expensive. So the challenge is just like what's worked in the broadband space is to drive that $100 a megabyte down to under $1, and that's going to be through satellites and space. I think that -- I think when you do that, that will increase the market very, very substantially.

Time to fruition of that?

It can't be done with existing space segment, right? So in order to get to those types of price points, you're looking 3 to 4 years out in that time frame. The issue will be what spectrum do you use, what space resources, how do you bring that to market. Those are the things that we're working on now.

Take a second and see if there's any questions from the audience. I'll keep going on mine. We have a few minutes left up here. Inmarsat transaction, you got the U.K., CMA, the EU is still out there. Update us just on time line as far as EU official time line, any unofficial time line that you're hoping that it might come under?

Okay. Yes. So we think that the EU is going to come to the same conclusion as a CMA. The CMA has been the more aggressive of the 2 on any trust. What's -- what we see is the definition of the markets are the same between the 2 and the facts under consideration are the same. The EU started a little bit later, whereas the CMA process was scheduled to conclude at the end of March, and they're on that schedule. CMA process was scheduled to include -- conclude at the end of June. What we think is they've got other stuff to do, and they generally tend to collaborate. They tend to share data and their rationales are pretty similar. So there's an opportunity to finish sooner than that, but we'll see. But what we think is that, that will -- that they will reach the same conclusion because the facts and the market definition are the same.

So stock's been under pressure, was up the other day. I guess we got another index change. That always helps. But what is it that you see that you don't think the market is seeing and what would change?

Well, so there's -- I think there's a couple of things. One is we did an asset sale. And one of the things you can see on the asset sale is we got almost the entire market cap of the company for less than 20% of our EBITDA, right? And we have other businesses that we think are at least as valuable. This one from -- whether from a growth margin perspective is really kind of representative of the rest of the business. So I think one is, that's another way to value what our business is. The other one is that I think what people need to understand is there is enormous demand for bandwidth. What's a little bit uncertain is what the economic yield is. That's the other optimization we talk about is how much revenue can you get per bit. And those -- the trajectories for that have been pretty, I'd say, pretty smooth. The entry of SpaceX into certain markets does change those yield values in some markets, but only to the extent that they have sufficient bandwidth to do that in those markets. When they don't have sufficient bandwidth, those yields are not super affected. So I think that's really what people need to kind of have a good understanding is what is the demand, what's the geographic distribution of the demand, what are the alternative sources of supply? How do you project that out? But I think if you go through all that work, and you look at -- we've had pretty close to $2 billion -- not quite $2 billion of investments so far in assets. We haven't been able to bring to market with those 3 assets coming to market over the next 14 to 15 months. First one in the best geographic location should be launched next month, we think the upside is pretty evident.

We'll wrap it up there. We'll take into the breakout session. Thanks, everybody. Thanks, Mark.