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

Welcome to the informal portion of today's Annual Shareholder Meeting. Before we start the presentation, we'd like to remind everyone that this presentation contains forward-looking statements as described in the disclosure. I'm Mark Dankberg, CEO, Chairman and Co-Founder of Viasat. As an overview, we'll cover these topics. We're very focused on increasing shareholder value, and we intend to achieve that through revenue and earnings growth. We're equally focused on generating free cash flow by delivering satellite services through the most capital-efficient fleet optimized for our target markets. Most of this presentation is meant to show how we'll do that. We've had a very good track record of revenue and adjusted EBITDA growth and that continues. We'll quickly review that record and some key events. Our growth strategy centered on global mobile satellite services. That was the point of the Inmarsat acquisition, and we believe we're off to a good start. We'll show how we intend to continue to win in the market and grow along with it. Today, we'll mostly focus on commercial broadband mobility, but we also have very good opportunities in government satellite services and related products and technology and also in narrowband markets such as direct-to-device. We'll show why we believe we're poised for growth and some of the indicators supporting our competitive position. Mobility is forecast to be the fastest-growing segment of the satellite services market. We'll show some of the challenges that come with that growth and why we believe we can not only defend our specific market segments, but that we can continue to improve our competitive position as the markets scale. I'll start with our recent financial track record. This shows our 3-year trend for revenue and adjusted EBITDA for continuing operations. Results reflect removing the effects of the sale of our tactical data links business. Q1 FY '24 includes approximately 1 month of Inmarsat. Starting with Q2, our results will fully include Inmarsat. We're off to a very strong start to fiscal year '24, with new orders 21% higher than the prior year. Some of the business highlights from fiscal year 2023 including earning over $1 billion in GAAP net income, considering the gain from the sale of the tactical data links business, we believe that shows underlying value in all our businesses and also enabled closing the Inmarsat transaction with a stronger balance sheet and less net debt leverage than originally anticipated. We had very good growth in commercial in-flight connectivity in fiscal year '23 with our connected fleet growing over 20% that year and shipment of over 575 commercial in-flight connectivity terminals from just the Viasat portion of the combined company. We also saw strong growth in our ongoing IFC service revenues, as more passengers used onboard Wi-Fi. And we had good strength in 2 product businesses with the certification of a new type 1 data center, high-speed encryption device and good growth in our large fixed antenna business. Those technology businesses both benefited from increased use of cloud computing and government data centers and in growing use of space-based resources for national security. Historically, we've achieved our growth by choosing target markets that have been large enough to sustain that growth. We've done that for more than 3 decades. We've competed well within those target markets. Now with Inmarsat, we're especially focused on the opportunities for satellite services. More specifically, on global mobility, where we already have leading positions and can differentiate in ways important to those customers. Finally, we'll show where we can be most competitive in specific enterprise fleet segment and why. We have used this representation of the satellite services total addressable markets before. In total, these are very large markets, estimated to be worth over $1 trillion annually. Global mobility is estimated to be the fastest-growing portion of that. We'll drill into that here. Today, we'll just focus on the broadband commercial global mobile markets. We have other attractive markets, too, such as government and the emerging direct-to-device opportunity. Now let's give a quick overview of the global mobility markets we'll focus on today. [Presentation]

There are good features of the commercial and global mobility market. It's satellite-centric. We compete mostly with satellite solutions we understand well. There are subsegments in aviation, maritime and land mobile. There are good opportunities for differentiation. A large portion of the total addressable market consists of enterprise fleet operators with mission-critical needs. They want assured connectivity, measurable service level agreements and confidence in data showing they're achieved. Some operators serve individual platforms like yacht or personal jet. It might be more tolerant of outages or congestion in high-demand airports or maritime ports. With individual platforms, it's also harder to discern patterns and network performance that are evident to larger fleets. We'll show that the hardest places to serve are in and around major cities with aviation, maritime and or land mobile hubs, where demand is greatest and most concentrated, will show how we could gain advantage in serving enterprise fleet operators with mission-critical connectivity applications and the highest demand places in terms. We've refined our value proposition over more than a decade of serving the commercial in-flight connectivity market in particular. We know certain classes of customers need a shared performance to meet their business objectives. They can't just live with best efforts, if those efforts are unreliable, unpredictable and don't meet their needs consistently. Our customers want high performance. They want confidence they'll get the connectivity, speed and bandwidth they need over both the short and the long run. That includes equipment, reliability and support as well as bandwidth delivery. Because our customers are competing with other fleet operators and whatever business they're in, they need to be sure they're getting the best value and connectivity. They want insight to know they have the right amount to accomplish their mission at the lowest cost. Here's a recent example of that thought process from a Delta Air Lines Investor Day in June of this summer. Fast and free in-flight Wi-Fi is now an integral part of their business model. It enables them to expand their digital relationship with customers, and they depend on it to improve passenger net promoter scores and help drive membership in their SkyMiles frequent-flyer program. They have a good track record of engagement with that membership across a range of business opportunities that drives value for their shareholders. Delivering Wi-Fi to a high proportion of their passengers with consistently good performance across their entire route structure is a must-have, not a nice to have. It has to be measurable reliable and predictable, they want confidence their supplier can do that. Our approach has resonated with our target market segments and today between the legacy Viasat and Inmarsat, we have leading positions in commercial air, business jets in the enterprise maritime. We'll focus on these and how we can use the approach that's been so successful in commercial pair across all these segments with enterprise fleet customers and need the same confidence in their mobile connectivity. It's challenging and somewhat complex to ensure meeting high-performance service agreements we stand behind. As we work closely with many of the world's largest and most successful airlines, we've adapted many of the same data-centric skills our customers use to achieve success in large-scale transportation networks. In order to deliver high performance consistently, you must know how much bandwidth will be needed everywhere in customers' mobile transportation routes, to be sure there's enough supply to meet the service agreements. It's a fundamental requirement for every telecom service to meet peak demand, not just the average over different days, times and places. Being better, some places and times doesn't matter much. It's not good enough in others. Streaming buffers or responses slowed down at home or on your mobile device, it's often because peak demand exceeds what the network can deliver it. It's irritating for individuals, but it cost enterprise fleets real money. Telecom companies design networks and especially infrastructure build out to meet peaks and satellite is no different. We use detailed models to forecast demand, measure actual usage and input infrastructure in the places where it's needed to meet performance requirements. We'll show you how we can use that to build advantage. All satellite customers in a given place and time are competing for available bandwidth. There's more demand and supply that creates opportunities to segment the market. Since the bandwidth available from any individual operator in any one place is finite, we should expect that if demand at certain places is higher than a single operator can provide, that operator won't be able to satisfy all customers. We want to understand those constraints. We don't control what other operators say, how they set prices, but we and savvy customers can observe what's actually possible to deliver compared to what's needed or been committed. What we want to observe is supply versus the peak demand that occurs at hotspots at peak times. Those peak times are when networks are most likely to fail to meet expectations. So we want to anticipate them and acquire and serve customers that need assured performance to meet their own value propositions to their customers. Plus, we know the global mobility markets are growing. We can anticipate the rate of demand growth and the likely rate of supply growth from ourselves and each other provider that also can create opportunities in times and places where we know demand will exceed supply. To understand the peak demand in each place at each time, you want to account for all the users that are likely to be there, including users outside the global mobility market such as residential users. We consider all the factors that can drive bandwidth consumption, including consumption by passenger and crew and operational data. There's a probabilistic component to forecasting demand even for scheduled mobile services. But if you have enough data and analyze that data appropriately, you can determine how its bandwidth is likely to be needed at the busiest places and times. And you can compare your forecast, actual usage and further refine estimates and your ability to fulfill expectations, we collect and analyze data from all potential forms of global mobile platforms even those we don't serve or aren't even aiming to serve. We also evaluate multiple different forms of service agreements to help assess customer expectations in the different markets. That gives us insight into our own performance and opportunities where other competitors may not be meeting customer expectations. We are especially focused on commercial air Business Aviation and Enterprise Maritime because we have good insight into how connectivity translates to value creation for those customers. Those customers are also among the most thoughtful in selecting connectivity providers because it directly affects their own business performance. We'll start with a dynamic view of global commercial airline traffic. What you see here is a fast motion dynamic view of the daily patterns of air routes over a couple of days. It helps us understand not only where we need to deliver bandwidth to our airline customers, but also what the peak loads will be by day time and place. Of course, the exact times are subject to variations and schedules for a whole host of reasons. But we need to anticipate the range and probabilities of these variations to ensure good service to our customers that we can zoom in on busy airports. Passengers want gate-to-gate service because our Wi-Fi is often faster than terrestrial networks when onboard the plane, especially when the doors are closed. We have data for how much bandwidth is used on which portions of flights taking into account factors such as route, time or day, season, the airline, the type of plane, the role of Wi-Fi and entertainment, and the different ways airlines and sponsors offer Wi-Fi. Because some airlines offer fast free streaming quality Wi-Fi, we have data reflecting high passenger engagement and satisfaction. Based on this data, we build a global model of instantaneous bandwidth demand each day and especially when lots of planes are at or near major airports. To meet customer expectations, we have to plan around peak demand. Because when demand exceeds supply, that disappoints passengers, and that disappoints our airline customers. This visualization show the location of [ Pinson ], our network in North America. We can zoom in on airports to measure usage, forecast demand and refine our performance for each customer. The busiest airports can have hundreds of planes on the ground and in the immediate vicinity. And that number of planes drives the peaks. Now we can aggregate data for all the planes to model how much bandwidth is needed in each place and time, shown for our current service in North America, the challenge is not directly the amount of bandwidth needed for each plane, it's the amount needed in each place. It's the same for mobile cellular. People want reliable, consistent coverage from a mobile cellular network. They won't just choose the carrier that gives them high speed when they're only one on a highway in the middle of nowhere or the middle of the night. You want to know what the service will be like when there are lots of cars and people around because that's when networks congest. It's the same for airplanes or ships. So we use data analytics to find the stress points and be able to deliver an attractive, reliable, affordable service level even in the most difficult places and times. Enterprise fleet customers with mission-critical needs depend on that and those are our primary market segment targets. With Inmarsat, we can bring the same data-intensive approaches to more geographic and vertical market segments. We'll come back to another important point a little later. The demand at each location is relatively changing. Our satellites have a large field of view. If we can move our bandwidth around from individual satellites to serve the places and times with the most demand, we would get [ variable ] utility, much better than a competitor that has to supply the same peak bandwidth separately at each location. Now here's the visualization of regulative peak speed demanded in standard geospatial database spreads for all global commercial air markets. For clarity, we only show those locations with a modeled peak demand of about 1 gigabit per second or more. The highest demand locations would have peak demand in the tens of gigabits. Those peaks are expected to grow significantly relative to other locations as more airlines come into service, more people fly and more of the passengers use Wi-Fi. You can see that even though it's a global market, the bandwidth demand is very highly geographically concentrated. You can see the relative sizes of the 3 major regional markets, U.S., China and Europe. The prominence of global destination cities in the U.S., including major hubs and how much more total demand there is concentrated in the major population centers than there is spread around the world. We'll show that other global mobile markets are geographically similarly concentrated, and they're all quite correlated and that their peak demands are, not surprisingly, also in and around major population centers. This visual doesn't show the time barring nature of demand, but it does show the route of amounts of demand needed in each place. The main point being that to serve the commercial aviation market and each other market reliably and cost efficiently, we would want the geographic distribution of our supply, that's a good match for this demand. Here's a dynamic visualization of a global maritime enterprise market. This is data from over 100,000 ships that's cargo freighters, tanker ships, commercial fishing ships and others. It's very representative of these portions of the market. It's much faster than real-time location view of about 2 weeks of maritime traffic. Here's a static view of the relative approximate peak instantaneous demand seen over that 2-week period on a global basis for locations that need about 100 megabits per second or more. We want to avoid congestion and slow performance. This is an indication of the relative amount of bandwidth needed at some point in time over each location. We've filtered out with the very low levels of traffic that are needed, so we can focus on the higher demand locations where congesting is more likely. Enterprise maritime traffic has some demand in a broader geography, but overall, is very concentrated at high demand locations. We will go through all the same steps for every global mobile market segment, but we use the same process to build a picture of the peak bandwidth demand as a function of place and time for each one. Of course, if you want to serve multiple markets, you need to be sure you have enough bandwidth supply to serve all your customers across all those markets at each place and time. So this shows another high bandwidth demand market, which is ocean-going cruise ships. Again, you can see that demand is only concentrated in small portions of the world. There are only hundreds of large cruise ships, but they usually have thousands of passengers each contributing to the high concentration of demand. There's a lot of overlap in high-demand cruise markets and commercial airline markets. That's not too surprising, but it makes it difficult for an individual operator to provide consistently good service to both cruise and commercial air in the same places at the same times. That's where market segmentation comes in. Now let's jump to a picture of the aggregated global demand where we had the peak bandwidth demands from multiple mobility market segments combined. The main point is that the aggregated picture is also very highly geographically concentrated. Even though these markets each have global components, think of all these transportation networks as moving people and goods from city to city with most of the traffic being in and around the biggest cities. Again, that shouldn't be too surprising. We can analyze the data to help us build our network to have the right amount of bandwidth in the right place at the right time for each customer, won't happen by itself just by having a lot of satellites. The amount of bandwidth needed by each market segment in each specific location, [indiscernible] and are different scales, hourly, daily or seasonally. For instance, when demand is at peak in New York City dominated by aviation, especially taking into account 3 major commercial airports plus mobile region [indiscernible] in very close proximity. But at other times, demand is more evenly distributed across multiple mobility market segment including enterprise maritime. On the other hand, the peak in Miami is usually dominated by cruise ships. Although depending on the day in time, in-flight connectivity could have the highest demand. Amsterdam is a very substantial seaport and those other waterways and also as a major hub airport. It has very high levels of demand that is peak significant variations by day, time and season. It's important to understand why hotspots matter. All satellites at any orbit have emissions limits for power and spectrum radiated to any one place. A combination of power, spectrum and user terminal defines the available bandwidth. That and the number of users sharing the bandwidth determines performance. You want each satellite to deliver useful bandwidth as much as possible, that's where higher altitude orbits have an advantage. The closer you are to earth, the smaller your field of view. Satellite very close to earth is like really to [indiscernible] tower and geo-altitude each satellite can see 1/3 of the earth, big field of view. So each satellite could contribute to hotspots over a very large area. Flexible satellites can move bandwidth dynamically, always being sure to deliver power and spectrum at each hotspot needed lower orbit. The majority of satellites at any point in time, so little or no demand contributing nothing to serving peak demand. Terrestrial networks also have limited fields of view, but they can put more towers where there's more demand, low orbits, satellites, orbit the earth, you can't concentrate them where demand is. If global bandwidth demand was evenly spread around the world, then geosynchronous orbit wouldn't have an advantage. But the fact that it's so concentrated can be a big advantage for geo and geo satellites that can dynamically have bandwidth to match demand in real time can have an even bigger advantage. This chart shows how concentrated global mobile market is for commercial aviation, business jets, enterprise maritime, private yacht, ocean crews, fishing vessels and passenger ferries in aggregate. The story that numbers tell is that while a [indiscernible] and bandwidth circling the earth by town attracted, there's very little demand for bandwidth in the vast majority of the world. For these global mobility market models, 70% of the bandwidth is needed on just 5% of the earth, 85% on 10% of the earth and 90% on just 15%. That's a bad batch for a space network that has to spread its satellites uniformly around the earth. Satellites very close to the ground with a limited field of view, further hurts efficiency. When there aren't many satellites and not any customers yet, it's not that obvious because starting from 0, there is some demand in large parts of the world. But because that demand is limited as a low earth system scales, each new satellite delivers less useful bandwidth than the ones before because the low demand prices have already been statutory. These models indicate that low orbit satellites don't get more efficient with scale in global mobility markets, they get less efficient with scale. Think of it this way. Orbit is a place. It's not a technology. Now earth orbit satellites can't be clustered in the prices that have high demand and like cell towers on the ground or stationary satellites in higher orbits. This video ties together the high geographic concentration, the time bearing nature of demand at each place and why satellites with a large field of view that have a constant location with respect to high demand prices can be more efficient than satellites with a small field of view and that are in constant motion all around the earth. [Presentation]

Starting with the space system, we use a time and place map of demand by modeling customer needs, then we build the space system and infrastructure to fulfill that. That's in contrast to starting with the constellation and trying to fit demand maps to it. Like terrestrial mobility, we want to know where and when customers want service, how they measure it and how to deliver at attractive prices. Global customers are different from fixed ones, they travel in both high and low demand places and fixed user might be happy only in low demand places, but that's not the global mobile market we target. Flexible satellites can dynamically move bandwidth to follow mobile demand that can double or more the efficiency compared to satellites that can't do that. Enterprise fleets want to measure service know what they're getting and know it meets mission-critical needs. Models can forecast peak loads, so we and customers can build confidence. Forecasts of supply and demand enable optimizing economic value by modeling the revenue from service agreement. We can deliver terabits and effective bandwidth and optimize cost of supply against demand models. It allows us to focus on customers that find the greatest value in our services and to measure and predict the potential returns on capital. As we bring satellites into service, we anticipate increasing returns on capital and free cash flow. Combined with Inmarsat and our regional satellite partners, we have a robust, resilient fleet. Demand data shows multiple satellites in each region of the world are needed to serve peak times and places, win-win partnerships and roaming agreements with regional partners help serve high-demand hotspots. Our fleet and partners use diverse payload technologies, orbits or places, not technologies. Technologies in the payload and network on the satellites, we have 7 Ka-band satellites planned in the next 3 years. ViaSat-3 is expected to provide flexible global bandwidth. Inmarsat-7, 8, 9 add flexible regional coverage. We're optimizing the existing fleet to improve productivity for demand models from our target markets. We're assessing the performance of 1 antenna on the first flight of ViaSat-3. We've communicated end-to-end through the satellite, which is positive. We're aiming to determine the throughput of the satellite around the time of our earnings in November. The antenna suppliers progressing on root cause and corrective actions. To date, we believe the rest of the payload is performing nominally. The corrective actions will be applied to the ViaSat-3 flight 2 satellite. Corresponding antenna on the ViaSat-3 flight 3 satellite from a different manufacturer, we don't expect it scheduled to be affected by flight 1. We believe the ViaSat-3 satellite designs are very efficient for the global mobile markets we're [indiscernible]. What we're aiming to do is to match the geographic and time distribution of our bandwidth supply to the bandwidth demand in our target markets. That means we want the prices with high demand to be in the field of view of our satellite at the right times. The locations of the satellite dictated by their orbits. The reason that geosynchronous orbits are used is because their location is constant with respect to the earth, so that can best match supply and demand. Any nonsynchronous orbit, including LEO, is, by definition, not synchronized terrestrial rotation, so those satellites are distributed around the world. For low orbit, the closeness to the earth also means they have a limited field of view and most of them see little or no demand. What you'd expect if bandwidth supply is evenly distributed and demand is highly concentrated is that performance would degrade in important high demand places. Speeds would slow because too many share too little bandwidth. The rest of the world would have too much bandwidth and speed will be higher. As more satellites are launched, the demand concentration becomes more pronounced. That's consistent with the services feedback in the image on the left from Starlink's website. In places with high demand, especially the eastern half of the U.S., speeds are quite a bit slower than most of the rest of the world. The map shows fixed use but the same effect occurs in high-demand mobility areas. The image on the right is a freeze frame view of locations for a constellation of about 40,000 [indiscernible] in the low orbit. A large majority can only see or serve places with little to no demand. Satellite networks have high fixed costs and low variable costs, so operators often reduce prices in places with low demand and raise prices in places with high demand. But when demand is geographically concentrated, not having enough bandwidth and high-demand places, means mobile customers are less interested in using the bandwidth in the low demand places. If we can better match supply and demand, we have a good opportunity to provide attractive pricing and attractive performance over the entire mobile journey, especially including those congested hotspots. So far, we've shown, we believe that our large addressable markets from mission-critical global mobile broadband and that we believe we can have an advantage in delivering high performance, reliable, affordable connectivity in the most important and highest demand places and times. Another point that we highlighted is that global mobile market is the fastest growing among the total addressable markets identified at a 12% compounded annual growth rate. This slide gives some context for that in the commercial aviation space, one of the single largest segments in global mobility. The commercial aviation market is very large, relatively widely penetrated in terms of number of planes equipped and also widely penetrated in percentage of total passengers served. This slide shows Boeing's expectations for the overall growth of the commercial aviation market for the next 20 years. They expect mainline jets to about double, passenger revenue kilometer miles flown to about triple. We anticipate that will increase the geographic concentration of demand. They also show that the low-cost carrier segment of the airline industry will be the fastest growing. That should also reinforce the need for high-value cost-effective connectivity solutions for that price-sensitive segment of the market. So let's tie all this stuff together. We focus on global mobility satellite services, and we further refined that to enterprise fleet operators and admission critical needs for connectivity. We offer high performance, reliable, predictable and measurable service. To do that, we build models of where and when peak demands would otherwise cause network congestion. Those models depend on the transportation routes, our customers served and their individual business models for connectivity usage. The model show that peak demand is very geographically concentrated with 90% of the demand on just 15% of the earth. There are physics, economic, spectrum, regulatory and environmental constraints to how much bandwidth can be radiated from space to single places on the earth, especially those near major population centers. Satellites that are stationary have an advantage because you can cost to them. We expect nonstationary satellites will have too little supply in high demand areas and not enough bandwidth in low demand ones, constraining how much of the market they could serve reliably at peak times and places, that creates opportunities for us in the enterprise fleet market segments where we are already strong. Commercial air, enterprise maritime and business jet fleets. We believe those markets believe to be large in the fastest growing among satellite services can help us continue to increase revenue, adjusted EBITDA and free cash flow and increased shareholder view. So thanks very much for your time and participation in today's meetings. We look forward to updating investors again at our next quarterly earnings call.