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

Hello, and welcome to Viasat's Q4 Fiscal Year 2023 Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Thanks. Good afternoon, everybody. Thanks for joining us for our call today. We released our shareholder letter shortly after market close this afternoon, and it's still available on our website. We'll be referring to on this call. So joining me on the call today are Guru Gowrappan, our new President, Kevin Harkenrider, our COO; Shawn Duffy, our Chief Financial Officer; Robert Blair, our General Counsel; and Paul Froelich from Corporate Development; and Peter Lopez from Investor Relations as well. So before we start, Robert will provide our safe harbor guidance.

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings, including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.

Thanks. Okay. So to start, I'll briefly try to recap to the business and financial highlights and also I'd like to introduce our new President, Guru Gowrappan. And then we'll open it up for questions. So first, the biggest highlight is that our ViaSat-3 Americas satellite has arrived at its orbital location, and it's beginning its final deployments. When that's done, we can complete in-orbit testing, and we can start bringing it up the network. We're aiming to be in service around mid-summer, and that's going to greatly expand our coverage and provide bandwidth to grow all of our satellite services businesses. This is an enormous undertaking by our whole team, and I want to thank everybody for their commitment and dedication. We've got just a few more steps to go for this first one, with the Europe, Middle East, Africa satellite launching later this calendar year and then Asia Pacific satellite to get almost complete global coverage. The Asia Pacific satellite is now in final integration and test with Boeing. We believe the combination of virtually global coverage, the amount of useful bandwidth per capital dollar invested and the ability to dynamically move that bandwidth to the places with the greatest demand that are unique to the designs of these satellites and will prove to be especially valuable in the global mobile markets. We now anticipate closing the Inmarsat transaction this month. We received approval in the U.K. and have only 2 more steps to go. We believe the transaction will be accretive to adjusted EBITDA and free cash flow on a per share basis and can help both companies provide better services to our customers at lower cost. Both ViaSat and Inmarsat have continued to grow our global mobile businesses in the 18 months since we reached agreement. Inmarsat just reported their most recent results, and you can find them on their website. And we also continue to expect that together, we can bring more important innovations and growth to their L-band business as well, especially I think the rapidly evolving Internet of Things and direct-to-device markets. Early in our fourth quarter, we did close the sale of our Link 16 TDL business for $1.9 billion. That increased our liquidity and significantly reduced our leverage on a stand-alone basis as well as prospectively on a combined basis with Inmarsat. Post-close, we did quickly rightsized the company to the new run rate, which reduces annual run rate operating costs by about $40 million. We presented our financial performance in the letter in terms of continuing operations that excludes the Link 16 TDL business in prior periods and also our total results of operations including Link 16 TDL in the period that we owned it. Continuing operations provides context for results on a go-forward basis. We achieved new records in awards and revenue from continuing operations for fiscal year 2023 at $2.8 billion and $2.6 billion, respectively. Adjusted EBITDA from continuing operations was $501 million, and with 3 quarters of TDL results prior to the Q4 sales, total adjusted EBITDA was $583 million for the year. Q4 results on a continuing basis were good and provide momentum going into fiscal '24. Q4 revenue from continuing operations grew 10% year-over-year to $666 million and adjusted EBITDA from continued operations was $124 million, which was up 21% year-over-year. In Government Systems, the certification of key products -- some cryptographic products cleared pent-up demand that had been accruing and that drove significant year-over-year revenue growth. In the quarter, we grew our commercial in-flight connectivity in service fleet to 2,230 aircraft. We added Etihad Airways as a new airline partner, and we expanded our Delta Air Lines' free Wi-Fi initiative. We continued market testing and analysis of new ViaSat-3 era fixed broadband plans, offering significantly higher speeds and more bandwidth per subscriber. We've been working and investing in a very capital-intensive phase for several years to develop and deploy technology and business models, transform from a strong major player into a leading global satellite services operator. Now we can see tangible evidence of the pieces coming together and the opportunity to generate real free cash flow returns from those investments. That includes not only our own business areas, but the very complementary people, resources and assets from Inmarsat. Given all those elements, now we need to execute and scale. And to that end, I'd like to briefly introduce a new member of our leadership team, Guru Gowrappan, who joined us as President and we really want to thank Rick Baldridge, our Vice Chairman, for all he's done for us in his operating role. With Kudu here, Rick will continue to support special projects and will remain on our board as vice chairman. Guru's previous position was at Verizon Media's CEO of the former Media division that included Yahoo!, AOL, Huffington Post, Techcrunch and other media brands. He's a very accomplished leader with experience in integrating large technology operations, operating scale internet platforms and creating powerful global partnerships. So Guru, introduce yourself.

Sure. Thank you, Mark, and thanks to all of you joining us today on my first earnings call for Viasat. So I'm thrilled to have joined via that company, as you all know, with rich history of success and innovation. Our foundation technology advantage, which has delivered healthy growth over time, and we are poised for an incredible, exciting future as we continue as the team. Having dedicated my carrier to fostering global connectivity and interactivity across key tech consumer and B2B products, including telecommunications, I'm now embarking on my biggest mission yet. Moreover, as you know, I've joined Viasat at an inflection point with the launch of our ViaSat-3 Americas satellite, the first step in placing more than $2 billion of assets into service, the 3 satellite constellation is expected to increase the scale of our network more than 8x the combined bandwidth of ViaSat-1 and ViaSat-2 with the flexibility to move capacity to high-demand locations all while expanding our coverage globally. And it's also important to me that space sustainability is a priority year. We intend to grow our network, where our customers are delivering the services that they want and need in a globally inclusive and environmentally sustainable manner and all through technology innovation. Finally, the closing of Inmarsat acquisition will be great for all our stakeholders as it will accelerate our global expansion and our growth in mobility and government, areas that are well suited for our products and solutions. Inmarsat's legacy will also help us achieve our goals for global inclusive growth and space sustainability. And as our CapEx cycles [ rain ], the deal is expected to double our free cash flow per share compared to stand-alone Viasat. I'm also personally very excited about the potential for growth in L-Band IoT, that is Internet of Things and direct-to-device as it has the potential to enormously expand the number of individual customers and B2B relationships we can achieve collectively. And as Mark said earlier, I do want to congratulate the team, Rajiv, Tony and the entire team at Inmarsat for a record quarter with growth across all of their businesses. Now having been in the business of making impactful and rewarding connections for customers, I am humbled to be on this endeavor alongside this incredible team. And throughout my career have always focused on 5 key areas: employee and culture; technology, innovation and products; customers and partners; society and shareholders. And I believe with hard work and relentless execution, coupled with humility and teamwork that we can build a bright future for all our stakeholders. And our goal is to drive excellent financial performance while maximizing our impact on the world. And here in Viasat, I'm eager to collaborate with Mark, Rick, Shawn, Robert and our entire team to do just that because the opportunities here are extraordinary. And with that, I'll hand it back over to you, Mark.

Thanks, Guru. So thanks, and welcome to Viasat. So with that, we'll open it up for questions.

[Operator Instructions] And your first question comes from the line of Rick Prentiss with Raymond James.

Good to see the finish lines getting closer for the Inmarsat deal. Can you update us as far as what's happening with the debt package, what are the terms? Are there any changes to that as you get closer to being able to close the transaction?

Rick, this is Shawn. So I think -- there's a lot -- there's still a lot of moving parts when things are looking really good as we get to the -- as you said, to the finish line here. I think the way we look at it is we secured that package back when we the transaction and then have pull the elements of that yield that reflects the market at the timing. And our intentions are to execute on those economics. So I think that's the best way to shape it out.

Okay. And can you just remind us what the terms were in that package, that was obviously a different moment in time, that would be great? But Just remind us what the terms were?

We didn't -- those aren't public Rick, but I think, obviously, they're more favorable than we are today.

Surely, although I can't remember it. The following line -- Guru, first welcome, I should have said that first. Help us understand -- you mentioned a couple of times about how you've done a lot of integration with technology items. As you look at this integration, of Viasat and Inmarsat. Help us understand what your top priorities are going to be there? What's the time line like? And could there be any segment reporting changes?

Okay. So on the -- what our top priorities are. One is, we are, as we said, really intending to grow in the global mobile markets, which are -- we're really in open sort of a broadband basis. There are markets in which we both participate. And those are government, commercial in-flight, business jets and maritime markets -- of main ones. What we really are aiming to do is to get the best of both companies. And it's going to take -- I think that's one of our main priorities is if you look at the kind of go-to-market differences between the companies, Viasat has tended to be primarily direct sales. That requires more technical support, delivers lower margins, gives us a little more control of the customer experience. On the other hand, Inmarsat margins are very, very good. They tend to be primarily wholesale. They have an existing global network. And there are attributes of each company's business models and service delivery techniques that we think we want to combine. And so that's one of our most important points. Just to be clear, we have -- we place great value on the distribution relationships that Inmarsat has. We expect to continue that we may be able to augment some of the ways in which we deliver services to our distribution partners. But in other cases, by connectivity, we provide a greater range of services than some of their distribution partners do. So that issue of kind of capturing the best of both is high on our list. Another 1 that we really want to emphasize is integrating the 2 networks, one of the real attractions of the combination that Viasat and Inmarsat had is that we both operate Ka-band networks. And so that -- there's some really important synergy opportunities by being able to make over time, the platforms that we support, work across each of the networks. So that -- obviously, with the Inmarsat network will be instantly global even before we get this ViaSat -- connect through ViaSat-3 satellites -- but with the ViaSat-3 satellites, our depth and coverage will be much, much greater, and I think that will allow us to extend some of the services that we've done so successfully in the U.S. on it to work on a global basis. So those are -- I'd say those are probably the top 2 priorities. And then the next one is to really apply some of the technologies that we've been developing here at ViaSat into the L-band markets because ultimately, what we see is a lot of opportunity in the L-band markets if we can do some of the same things that we've done in the Ka-band markets using some of those same technologies, which are to increase the speed to increase the amount of bandwidth that we can offer and drive down air time prices, we're really excited about the opportunities there. So I'd say those are kind of our top 3 priorities.

And Mark, if I can add. And Rick, thanks for the comment earlier. What I would say on top of it, when you think about integration, we have a very good plan in place as and when the deal gets closed. And lot of focuses, if you look at performance of individual companies, as Mark said, there are things that are working well, and we want to make sure we don't mess up on those things, including you saw the latest results from Inmarsat for the last quarter. So we want to make sure we maintain that and then these incremental things, as Mark talked to, we at least have a good thinking and planning place to start executing on.

And final one for me to wrap up on that third opportunity, L-band. Is there opportunity for S-band as well in this direct-to-device category. And how on does this business take to take off the direct-to-device? And what do you need to have in place besides just the spectrum?

So the opportunity, I think, for direct-to-device is really going to be driven by the -- when we talk direct-to-device, a lot of times what people are referring to are devices that are primarily intended to operate on terrestrial networks, but that can also work directly on satellite networks. And so the big opportunities are, especially there for those frequencies that are easy to integrate into those terrestrial devices. And that includes both L- and S-band and there are different approaches to it. One of the things that we think is a big advantage of being able to do that with dedicated licensed MSS spectrum is that, that spectrum will appear with the terrestrial frequencies and those through devices to operate on. And we think that, that will allow us to address geographic locations, many geographic locations that are within the coverage areas of terrestrial networks but just get poor service for a variety of reasons, poor placements of cell towers, shadowing, all those kinds of things. That's to be one of the biggest tractions of using licensed MSS spectrum. One of the things that's going to be a challenge in the rate of growth is that these are new capabilities for those devices. So the market can't scale any faster than -- the market for serving those devices can't scale faster than those devices get to market. But on the other hand, one of the really attractive things about us and Inmarsat and both having existing L-band MSS businesses is that we can evolve that without having a big ramp-up period. That's one of our objectives as we think has the same techniques that will make our services available and attractive to the terrestrial devices while also expand the market for the existing [ category of ] devices and we can just provide much better services. That's what our objective is. And we see that -- it's not going to be interesting thing, but we think it's a really attractive growth market for us.

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Could we talk about IFC for a minute. First, any color on the backlog sounds like you've been continuing to win there. So what's the outlook in terms of adding additional aircraft and growing volume on those aircraft? And what are you seeing in terms of the competitive landscape, the openness of the airlines to consider some of these LEO constellations. Is that something that they are exploring or they really prefer the geo solution for now?