Viasat Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 11 speakers on the call.

Operator

My name is Meg, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to ViaSat's First Quarter Fiscal Year 20 25 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Ms.

Operator

Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Speaker 1

Thanks, Meg. We will present certain non GAAP financial measures on today's call. Information required by the SEC relating to these non GAAP financial measures is available in our Q1 FY 2025 shareholder letter on the Investor Relations section of our website. Please note that to provide a more meaningful comparison of our results of operations year over year, results for the Q1 of FY 2025 are compared against supplemental combined results for the prior year period. These supplemental combined results are based on the combination of ViaSat's historical reported results with Inmarsat's historical reported results for periods prior to the acquisition, with adjustments to reflect purchase price accounting, the conversion of Inmarsat's results from IFRS to GAAP and conforming changes to reflect ViaSat's presentation of its results.

Speaker 1

This supplemental combined financial information was prepared to better illustrate for investors the performance of our business following our acquisition of Imersat. Unless otherwise noted, the presented financial measures reflect year over year increases or decreases relative to the supplemental combined financial data in our Q1 FY 2025 shareholder letter on the Investor Relations section of our website. During the presentation, we will describe certain of the more significant factors that impacted year over year performance. We will also make forward looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward looking statements that we make today.

Speaker 1

Information regarding these factors that may cause actual results to differ materially from these forward looking statements is available in our SEC filings and annual report on Form 10 ks. These forward looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward looking statements. With that, I'll turn it over to Mark Dankberg, Chairman and CEO.

Speaker 2

Good afternoon, and thanks for joining us today. With me along with Lisa, we have Guru Gurrapin, our President and Sean Duffy, our CFO. We encourage reading the shareholder letter and referencing the slides we posted on our website earlier this afternoon for more details. I'll give a quick overview of the shareholder letter, Guru will cover the financial results and the highlights and our growth outlook, and then we'll take questions. Our Q1 fiscal year 2025 results were a little better than expected in terms of year over year revenue and adjusted EBITDA growth on a combined basis as described in the shareholder letter slides.

Speaker 2

We also continued to take actions to strengthen our capital structure while thoughtfully investing in positioning for a promising future. Our ongoing services revenue coupled with expected activations in aviation, good defense and advanced technology orders, existing and new backlog and order pipeline enable us to increase our outlook for fiscal year 2025. We're pleased with the financial results this quarter, but remain focused on our agenda of both near and long term goals, including overcoming the ViaSat-three point one anomaly. We're making steady progress that's supporting the improvements in our growth outlook. While these points are all very important, the headway we're making on multiple fronts creates optionality in the ways and sequences in which we address our challenges and opportunities.

Speaker 2

So that list is first get our satellites under construction into service and holistically address our capital structure and trim our leverage ratios from current levels. We want to continue to groom our business portfolio to the highest leverage satellite and network technologies that attract customers and partners and ultimately yield attractive recurring revenue. We want to continue the Inmarsat integration to drive higher returns on our network and harmonize our services and operations and achieve our cash flow inflection objectives. We want to cultivate an enduring and economically accretive satellite operator partnership ecosystem to augment coverage and capacity and increase multi orbit capability. We want to continue to win and execute new defense and advanced technology programs with attractive growth potential and durable competitive advantages in key technologies such as ground networks, unique free space optical applications, mission specific phased array terminals, space based cybersecurity and others.

Speaker 2

We can leverage these technologies into recurring revenues for commercial and government customers. And we can use these technologies to help create and promote a competitive ecosystem of partners. And finally, we want to capture a leadership position in the emerging direct to device services market by leveraging our substantial installed base of aero, maritime and mobile users, emerging 3GPP standards, open architectures and our existing resources. We want to foster innovative business models, distributing an extremely large base of satellite enabled mobile devices and platforms, optimizing our mobile satellite services spectrum licenses and evolving L band to create value for the millions of people that depend on our services for safety and connectivity in the air, at sea and on land. Some of the near term satellite milestones include ViaSat-three Flight 3 completed thermal vacuum testing as an important integrated satellite testing milestone.

Speaker 2

We announced this week that ViaSat-three Flight 1 entered into commercial service over the Americas. We've achieved operational speeds well over 200 megabits per second to in flight aircraft and it's now in use for in flight connectivity. It will both cover new routes and enhance services on existing coverage we've been able to prove dynamic beamforming and terabit per second payload technology that it works. We expect our partner EOSAT to launch our 2 ks A band polar coverage payloads GX-ten A and B very shortly. They're expected to enter service in early to mid-twenty 25.

Speaker 2

As a reminder, our financial results have been reframed to give investors more insight into the business areas already yielding attractive growth, those with attractive potential that are currently challenged and a place for emerging areas such as the direct to device and other advanced technologies that we believe merit investor attention. Google will provide more detailed information on the composition of our new segments and the segment revenue breakouts that we have added for our quarterly performance updates. While we're very focused on executing in the near term, ViaSat's always planned for the long term. That's enabled us to sustain growth for decades, build key franchise businesses and evolve our technology, business models and market segments to sustain competitive advantages even in the presence of generational technology evolutions and consistently shifting playing fields and competitive environment. We're balancing those near and long term challenges and opportunities.

Speaker 2

With that, I'll hand it over

Speaker 3

to Guru. Great. Thanks, Mark. I will cover 3 topics: financial performance, our new segment structure and an update to our outlook. ViaSat generated good financial performance during Q1 FY 2025.

Speaker 3

We earned combined revenue growth of 6% year over year and combined adjusted EBITDA growth of 16% year over year driven by Defense and Advanced Technologies and Aviation. The positive operating leverage reflects strong revenue flow through from IP Licensing and Tactical Networking and Advanced Technologies and the continued benefit from our acquisition related operating synergies. Now some color on the financial results. Q1 FY 2025 revenue was $1,100,000,000 up 44% compared to $780,000,000 in Q1 FY 2024. Combined revenue was up 6% year over year, largely driven by growth in our Defense and Advanced Technologies segment and Aviation.

Speaker 3

Net loss of $33,000,000 for Q1 FY 2025 improved compared to the net loss of $77,000,000 in Q1 FY 2024, primarily due to improved operating performance, which was partially offset by higher interest and tax expenses. Q1 FY 2025 adjusted EBITDA was $404,000,000 an increase of 120% year over year. Adjusted EBITDA increased by 16% year over year from the incremental revenue flow through in Defense and Advanced Technologies, which more than offset expected decline in fixed broadband service revenue and higher R and D expenditures. Q1 FY 2025 capital expenditures declined 20% year over year to $301,000,000 Combined capital expenditures decreased 33% year over year, primarily due to lower satellite expenditures, customer premise equipment and general infrastructure costs. Sequentially, net leverage declined 0.1 times to approximately 3.5 times LTM adjusted EBITDA as of Q1 FY 2025, which is substantially favorable to the plan at the time the Inmarsat acquisition was announced.

Speaker 3

We ended the quarter with $2,900,000,000 of liquidity, including $1,800,000,000 cash and cash equivalents at quarter end, and we have a fully funded path to our positive free cash flow inflection by end of Q1 FY twenty twenty six. And finally, subsequent to quarter end, ViaSat deployed approximately $150,000,000 of cash to repurchase $152,000,000 principal amount of Inmarsat and ViaSat nodes in the open market. We opportunistically repurchased $102,000,000 principal amount of Inmarsat 2026 secondured nodes at an average price of 98.2 $50,000,000 principal amount of ViaSat 20 25 unsecured notes at an average price of 99.2 percent. Before we go further, I want to provide a bit more color on our new segment, Communication Services and Defense and Advanced Technologies. We initiated the new segment reporting structure to give additional insight into our portfolio and drivers of value.

Speaker 3

Last month, we provided historical financials for the new segments and business lines. Our Communication Services segment includes all the businesses using our satellite network for connectivity services. All the Inmarsat businesses are included in this segment. Communication Services is comprised of aviation, government SATCOM, maritime and fixed services and other or FS and all. FS and all includes U.

Speaker 3

S. And international residential fixed broadband, energy and enterprise. The majority of the segment is recurring service revenue. The product revenue is primarily related to terminal sales supporting services. The majority of our CapEx is for our satellite network, which includes space and ground enabling these services.

Speaker 3

The Defense and Advanced Technologies segment has 4 business lines: Information Security and Cyber Defense, which sells our Type 1 encryption products Space and Mission Systems, which includes antenna systems tactical networking, which is mostly our Trello Square subsidiary, of which we own approximately 60% and advanced technologies and other, which includes IP licensing revenue. Most of the revenue in this segment is product revenue, which includes IP licensing and can be lumpy quarter to quarter. The service revenue in the segment is primarily warranty and support for the products. The Defense and Advanced Technologies business line have a low capital intensity. And we appreciate the feedback investors provided in this process.

Speaker 3

It is an important step in raising the visibility of our valuable franchisees. We will continue to work to highlight and unlock the value that ViaSat is creating for its shareholders. Now let's take a closer look at Communication Services performance during the quarter. Aviation continues to compete very well in the market. Commercial IFC ended the quarter with 3,750 aircraft in service, up about 16% year over year with over 1460 aircraft in contracted backlog.

Speaker 3

We're also in the contractual process of adding about 350 incremental aircraft to the backlog, including from 6 new airlines. We achieved mid teens year over year growth in both the number of commercial and business aviation aircraft in service. And while we are confident in the year over year growth outlook and trajectory for aviation, it's worth noting that we expect quarter over quarter results to reflect continued OEM delays and some impact due to the effects of the recent global cybersecurity software outage impacting our customers. U. S.

Speaker 3

Fixed broadband revenue declined as expected, driven by fewer residential subscribers. We continue to deemphasize U. S. Fixed broadband to support our rapid and higher margin commercial IFC in aviation. Our government SATCOM business line announced we are expanding work with Airbus Defense and Space to integrate ViaSat's dual band broadband terminal, which is called the GAT-fifty five-thirty into the Spanish MOD's C295 Maritime Patrol Aircraft fleet to provide a highly flexible multi band, multi orbit broadband SATCOM capability to support missions utilizing next generation Painsat NG satellites.

Speaker 3

We are excited because the Airbus C295 aircraft is operated by 37 countries around the world with hundreds of aircraft in operation and hundreds more on order. We are seeing more international government product and service opportunities within Marsat. During the quarter, we began collaborating with UAvionics, a pioneer in certified avionics for crude and uncrewed aviation to integrate ViaSat's Velaris module into its compact multi linked airborne radio system. Velaris provides secure, resilient L band communications for commercial UAVs and enables real time monitoring for beyond visual line off-site UAV operations. We believe L band unmanned vehicles of all sites are an exciting growth opportunity, especially as we modernize our L band capability.

Speaker 3

Nexus Wave, maritime's new hybrid multi orbit managed service targeting commercial shipping customers brings global coverage, speed, capacity, security and resilience to meet enterprise class operational needs and crew welfare. NexusWave is building anticipation in the market and we expect to launch beta service during Q2 FY 2025. In Q1 FY 2025, communication services revenue was $827,000,000 up 48% compared to $560,000,000 in Q1 FY 2024. Combined revenue was down 2% year over year, driven by the expected decline in U. S.

Speaker 3

Fixed broadband services and segment product revenue. Q1 FY 2025 Communications Services adjusted EBITDA was $308,000,000 an increase of 98% year over year. Combined adjusted EBITDA declined 4% year over year, primarily from lower revenue flow through from U. S. Fixed broadband in the FS and L business line and maritime services.

Speaker 3

Now to Defense and Advanced Technologies performance during the quarter. Space and Mission Systems received awards of approximately $85,000,000 related to multifunction phased array antennas, pre space optics and antenna systems infrastructure with supported services. Tactical networking received a tool that allowed activation of certain product upgrades. Once activated, we recognized IC licensing revenue on these products that have been sold over the prior few years. The business is expected to benefit from the ongoing sales, but with substantially fewer units per quarter than were recognized in Q1 FY 2025.

Speaker 3

Advanced Technologies also benefited from strong IP licensing revenue. There are 2 components to the current licensing revenue, an annual fee, which typically occurs in Q1 as it did this quarter and a per unit sold fee, which is distributed throughout the year. During Q1 FY 2025, we benefited from both the annual license and the per unit component. And for remainder of FY 2025, we expect to generate revenue from the per unit component only. Information Security and Cyber Defense won awards for Type 1 encryption products totaling over 45,000,000 dollars largely reflecting growing data center demand driven by geographic expansion and AI applications.

Speaker 3

Q1 FY 2025 book to bill ratio was 1.2 times with continued momentum into Q2 FY 2025. In Q1 FY 2025, Defense and Advanced Technologies revenue was $300,000,000 up 37% compared to $220,000,000 in Q1 FY 2024. Product revenue was up 45% year over year, driven by the strong IP licensing revenue in Tactical Networks and Advanced Technologies. Q1 FY 2025 Defense and Technology adjusted EBITDA was $96,000,000 more than triple the year ago period reflecting the value of the technology portfolio. Strong operating leverage from revenue flow through in both Tactical Network and Advanced Technologies drove exceptional performance.

Speaker 3

Overall, it was a good quarter and a strong start to FY 2025. Next, we are raising our outlook slightly to reflect strong Q1 results, confidence in our market competitive positions and pipeline and despite continued aircraft OEM delivery headwinds. Our Q1 financial performance reflects our competitive solutions and strong execution in our Aviation and Defense businesses. Within our Defense and Advanced Technology segment, we generated high flow through IP revenue in 2 businesses. Our tactical networking business benefited from a couple of years of retroactive product upgrades in the quarter.

Speaker 3

We expect the business to continue to benefit from upgraded product sales going forward at a normalized level. Advanced Technologies benefited from annual licenses in the quarter. Throughout the year, we expect more modest per unit licensing revenue. Finally, because this is only the Q1 of FY 2025, we are raising the low end of our FY 2025 revenue and our adjusted EBITDA outlook and maintaining our view of FY 2020 6. For comparison purposes, we removed the $95,000,000 revenue $86,000,000 adjusted EBITDA catch up benefit from the litigation settlement from FY2024 reference results.

Speaker 3

Therefore, our guidance is based on FY 2024 revenue of approximately $4,500,000,000 and adjusted EBITDA of approximately 1,500,000,000 dollars We now expect FY 2025 revenue to be flat to slightly up year over year, with year over year adjusted EBITDA growth in the mid single digits. We believe FY 2025 revenue growth excluding an expected decline in U. S. Fixed broadband associated with the ViaSat-three Fcone anomaly would have been up mid single digits. We have also provided additional segment level details in the outlook section of our shareholder letter.

Speaker 3

We remain prudent with our top line guide given uncertainties with delayed OEM commercial aircraft deliveries and airline overcapacity. In FY 2025, we expect capital expenditures to decline to a range of $1,400,000,000 to 1,500,000,000 dollars We include capitalized interest in our CapEx guidance, which is approximately $200,000,000 per year, but will decline in future years as we place satellites into service. We continue to expect our investments in our satellite network projects and success based CapEx to exceed 2 third of our total percent with less than 1 third associated with our maintenance and general CapEx activities. Looking forward, we expect our investments in growth CapEx to continue to decline and generate an improving free cash flow trend. In FY 2026, we continue to expect to grow revenue and adjusted EBITDA relative to FY 2025 as the majority of our 3,400,000,000 assets under construction go into commercial service.

Speaker 3

Capital expenditures for FY 2026 are expected to decline to a range of $1,100,000,000 to 1,200,000,000 accelerated growth in revenue and adjusted EBITDA growth and continue to step down in CapEx in FY 2020 6. As Mark mentioned, we are making steady progress on multiple fronts in support of the improvements in our growth outlook. We continue to expect an inflection point in positive free cash flow by end of Q1 FY twenty twenty six. Our path to positive free cash flow is expected to be driven by double digit operating cash flow growth and continued declines in capital expenditures as we normalize capital expenditure in line with satellites going into commercial service. Before closing, let me provide an additional update.

Speaker 3

As we discussed earlier in our prepared remarks, our new reporting segment structure was designed to better reflect the diverse and attractive nature of the end market that the company serves, as well as introduce greater visibility into our performance and value drivers. As part of our initiative to provide additional transparency into our business, we will be holding a webcast teach in on October 17, focusing on the Defense and Advanced Technologies segment, which houses our information security and cyber defense, space and mission systems, Tactical Networking and Advanced Technologies Business Lines. The feedback was overwhelming that you want to learn more about this valuable part of our portfolio. We plan to cover the breadth of our technology, products and services in this segment, its unique business model, the market and competitive dynamics and expected future growth drivers. As Mark mentioned, we believe we have a proven, differentiated and enduring competitive advantages with our attractive growth assets within this portfolio.

Speaker 3

Our objective is to help you become better equipped to value how our various businesses are contributing to ViaSat's overall growth and profit profile. We hope that all of you will be able to join us via webcast. More details to follow later. In closing, Q1 FY twenty twenty five operational performance was very good. We are capturing our share of large and growing markets and are focused on improving operational and capital productivity, which is yielding positive operating leverage.

Speaker 3

While IP revenue in Tactical Networking and Advanced Technologies was stronger in Q1 than we expected to be in the coming quarters, we raised the low end of guidance to reflect the Q1 outperformance and underlying strength of our recurring Aviation and Government Satcom Businesses. Toward the rest of FY 2025, we expect to continue to make significant progress on our satellite road map and towards positive free cash flow with good increases in operating cash flow and moderated CapEx. With that, I would like to hand it back over to Mark.

Speaker 2

Thanks, Drew. We feel we're off to a pretty good start for this fiscal year. Thanks to the global ViaSat team for all the work so far. There's been a lot of work on integration within Marsat and to overcome the ViaSat-three flight 1 issue, but we've made really good progress, especially in bringing that satellite into service and proving out the technology. We also believe that progress on multiple fronts is building the bridges for the opportunities in front of us.

Speaker 2

So okay, Meg, let's open it up for questions now. Thanks.

Operator

Thank you. The floor is now open for questions. Your first line comes from the line of your first question comes from the line of Sebastiano Petti with JPMorgan. Please go ahead.

Speaker 4

Hi, thank you for taking the question. Just wanted to touch on I think there's a comment in the shareholders letter just and I think you touched on as well Mark in your prepared remarks, but working on working to strengthen the capital structure through cash flow, debt maturity, extensions and non core portfolio monetization. I was wondering if you could perhaps elaborate on that. Is this a shift in tone or is this perhaps just a reflection of or related to some of the change in segment reporting and I think perhaps giving some visibility into non satellite KPIs and businesses that I think looks pretty good on the surface and maybe it was underappreciated. And then just a housekeeping question.

Speaker 4

In terms of the aircraft online, are we still on track to reach the 4,200 goal, I think, exiting fiscal 2025? Obviously, recent developments, are those having any bearing on you hitting that target just when considering I guess the healthy backlog that you have as well? Thank you.

Speaker 2

Okay. So thanks for the question. And on the first point, really we just wanted to make sure that investors know we're going to take a holistic view at how we address our capital structure. And, so in doing that, we just wanted to let people understand that, we're looking across the board. And also the fact that we're taking a broad view gives us options in terms of the way that we address it.

Speaker 2

Certainly, we're going to we're focused on creating durable competitive advantage and building shareholder value. But we're going to take a holistic view. And I think it's really more just to remind investors that we're taking that view as opposed to a change in the way we're approaching the problem. On the in flight, yes, we still have our target of 4,200 aircraft in service at the end of FY 2025.

Speaker 4

Thank you.

Operator

Thank you. Your next question comes from the line of Griffin Boss with B. Riley Securities. Please go ahead.

Speaker 5

Hi. Yes. Thanks for taking my question. So first for me, I'm curious to hear your thoughts on if you have any thoughts on the viability of putting 12 small satellites in 1 geo orbital slot like what Stratus is talking about? And then also, along with that, could you compare the service levels that ViaSat could bring to market versus what Stratus reportedly is Omega satellite?

Speaker 2

Okay. So I don't really understand exactly what the Astronaut's strategy is, so it's a little bit hard to comment on it. The one thing I would say is that there are so definitions of what a slot consists of can vary from organization to organization. There are ITU guidelines, the regulations, but there are guidelines and regulations that do are intended to preserve safety and to avoid collisions. So that would be an example of a consideration that anybody would have to deal with depending on what they mean by a spot.

Speaker 2

I think there's multiple strategies to trying to compete in space. We tend to be very open minded between big and large satellites. And I think depending on what the competitive environment is, access to capital, what technologies you have in mind, different people will have different preferences. I can tell you, we really liked our strategies so far. And our strategies are really based each time on a kind of a current assessment of the incremental value of any assets we put in space in the context of our whole fleet and the markets that we're serving.

Speaker 2

Those are more of the measures we're using. One of the things I think you can sort of tell from our letter is as we've grown, we've evolved our metrics of capital efficiency to reflect the performance of entire fleets, including those parts that we lease from others as opposed to just looking at the capital efficiency of an individual satellite. And the theory is that by using it in a fleet, it makes individual satellites more effective than they would be on their own and we're seeing that effect as we integrate more of the Inmarsat and third party assets. Hopefully that answers that part.

Speaker 5

Yes. No, that was great. I appreciate the color, Mark. Thanks. And then so next for me, could you compare and contrast Viasat's L band spectrum holdings with other competitors and related just what the company has planned for ViaSat's small GEO L band satellites that are currently ordered with SWISS 212 and the humming stats that are slated to launch in 2026?

Speaker 2

Okay. Yes. When we we've put a few things on our website in the past, including when we first announced the Inmarsat acquisition that kind of listed all of our L band assets, spectrum assets. And we are in a pretty strong position, which is really an artifact of the mission that Inmarsat serves of aeronautical and maritime safety. So we have a pretty significant inventory of L band spectrum assets.

Speaker 2

We use right now we have a variety of assets that we use in space in Marsat prior to the ViaSat acquisition acquired. Their most recent one was 3 mini satellites from probably called SWISKA 12 that make up our I8 portion of the constellation. Since that acquisition and I think based on sort of what's going on in the market for direct to device, open architecture solutions for space and these emerging 3 gsPP standards, one of the things we've talked about is raising our sights on L band modernization for existing customers and to be able to get into the direct to device market, which is estimated to be pretty substantial. So we are so one thing is we will be adding to our L band fleet strategy. We just haven't yet disclosed how we'll do that.

Speaker 2

I think on the I-8s, just to be sure, we're expecting those to be in service in 2028.

Speaker 5

Great. Thanks for all that color, Mark. Appreciate it. I'll pass it off and thanks for taking my questions.

Speaker 2

You're welcome. Thank you.

Operator

Your next question comes from the line of Brian Koons from Needham and Company. Please go ahead.

Speaker 6

Great, thanks. Really nice progress on the IFC market there and lots of commentary about slowing OEM deliveries. And I'm wondering to what effect you've already seen that impact in your current growth rates? Or do you think that the growth rate for that business slows because of expected further problems in turning

Speaker 2

OEM deliveries have been around for quite a while. Okay. So, good question. The real catalysts for the OEM deliveries have been around for quite a while. I mean, so we're already seeing those effects.

Speaker 2

We have for at least a couple of quarters. And we haven't really seen that the delivery rates have been diminished over the last couple of months. So it's really more a projection of what we're seeing so far absent a change in the OEM delivery environment. Really been there's a few issues on 737s. There are some issues, there's also delays, couple of the wide bodies and then there's been engine issues associated with Airbus planes.

Speaker 2

So those are really the dominant issues that have affected it and they're not getting worse, but they're persisting.

Speaker 7

And maybe to add on to that, Mark, real quick, Brian, I think as Mark is saying, a little bit we've talked about is our deliveries to be a little bit more back weighted.

Speaker 3

But I

Speaker 7

think just to keep in context from the quarter over quarter performance is from Q1 to Q2. I just wanted to kind of put a couple of things out there for everybody to kind of keep in mind. From Q1, this quarter we had some really 2 unique royalty and licensing agreements. Our portfolio there is extending more of that in our portfolio, but we did get a little bit of an uptick in this quarter. So next quarter, we'll see that tick down, but we will start to see benefits as some of the product revenues grow from Q1 to Q2 offsetting some of that.

Speaker 7

And then we'll see a bit of additional R and D expenses. So kind of net big picture is we'll see our revenues tick down from $40,000,000 quarter over quarter just related to that royalty component and $50,000,000 on EBITDA. But we're going to continue to see growth in our IFC and we'll see our product revenues and IFC start to tick up as well, but more back weighted in the year. Great.

Speaker 6

That makes sense, Sean. I interpreted that, but that's great clarification. Thank you. Another question for Mark, just on kind of this integrated service offering. I know you've talked about historically when you announced Inmarsat having kind of a unified service offering and then now your hybrid offering with LEO partners, what sort of technical challenges, obviously there I think there's business demand out there, what sort of technical challenge do you have with a truly unified offering to roll that out across your customer base across both Inmarsat and ViaSat as well as third parties?

Speaker 6

Thanks.

Speaker 2

Okay. Yes. The one thing is we are aiming to harmonize the offerings and then also to be able to extend them to the legacy Inmarsat fleet and then kind of upgrade what the ViaSat services are. Probably the single biggest one we have is that they were they originally were 2 different networks. There is the Global Express network, a K band for Inmarsat and ViaSat had its own network.

Speaker 2

So that's what we're working on. There are intermediate things that we can do to improve, especially the legacy GX services short of that, but that harmonization is probably going to occur over the next 1 or 2 years. It's a little bit harder in the aviation space because every any type of changes have to go through FAA flight worthiness certifications. So that kind of extends that timeline. In the maritime front, we have a little more flexibility in implementing multi terminal solutions.

Speaker 2

So that's one of the reasons that we can start harmonizing some of the maritime stuff, which we think will drive some improvement sooner, as early as next quarter is when we'll start that.

Speaker 6

That's super helpful. Thanks for that. And just follow on to that, do you look at things like WAN optimization and ESA antennas and these sorts of things as part of that solution for

Speaker 2

kind of multi or base and multi? Yes. And I want to make the distinction though that there are there's really 2 parts to it. One part is how we harmonize all the existing fleet, whether it's aviation or maritime or government. So there because there's a large installed base, we're very focused on doing that, bringing up the level of service across the existing fleet.

Speaker 2

And then we have another roadmap, which is what we're going to do for new installs. And there we work with customers. We have a lot more a lot of new installs, for instance, in the aviation market or lines here. So that gives us a roadmap for when we can install terminals that use things like phased arrays like you just mentioned. But we also have the ability to upgrade the existing fleet with things like multi orbit on many of the platforms just taking advantage of the equipment that's on there already.

Speaker 2

We're using both of those.

Speaker 6

Okay, great. Thanks, Mark. Appreciate the insights. That's it for me.

Speaker 3

Yes. Thank you.

Operator

Thank you. Your next question comes from the line of Ric Prentiss with Raymond James. Please go ahead.

Speaker 8

Thanks. Good afternoon, everybody, on a very busy earnings day.

Speaker 2

Yes. Hi, Ric. Thanks for joining us.

Speaker 8

Hey, you betcha. Couple of ones, I want to follow-up. Sean, I think you said the royalty, but I wasn't sure if that was the royalty and the licensing had about $40,000,000 revenue, dollars 15,000,000 adjusted EBITDA that were kind of more almost out of period stuff that we should think about dropping off. Was that for both the items that Guru mentioned, the royalty and then the licensing?

Speaker 7

Yes, Rick. Let me clarify that for you. So in Q1, we had kind of a combination both of them that showed up in our top to phone networking and some that showed up in advanced technologies. In total, that was about 60. And then what I wanted people to kind of understand is from a sequential basis, offsetting that as we go from Q1 into Q2, we'll see some other product revenue growth coming in.

Speaker 7

So the net revenue impact is $40,000,000 from Q1 to Q2. Hopefully that helps shape it up a little bit better.

Speaker 8

That does. And the EBITDA effect was $50,000,000 then compared to the $40,000,000 revenue, is that right?

Speaker 7

Yes. Then we kind of the flow through of that plus a little bit of incremental R and D, you could shape the EBITDA impact net about $50,000,000

Speaker 8

Sure. Okay. That helps. And then on the non core question from earlier and then the letter, what would be considered non core? Is it something that's not integrated in?

Speaker 8

Is it something that's not really using satellite capacity? But just trying to think of how would you slice up what you have right now as far as broad strokes, what's kind of core versus non

Speaker 2

core? Well, the things that we're really focused on are the mobility markets and the government markets, especially government mobility. So the main things we're looking for are technologies and this is what we've cultivated. Cultivated. So it's not like we have a lot of divergence in where we are now, but what we've cultivated are technologies that as an example, government customers might want or in some cases commercial customers might pay us to develop that enhance our ability to deliver those services.

Speaker 2

So a lot of those are there's can be ground technology, antenna technology, some of it might have to do some of the things we're doing with phased arrays, optical feeder link, all those things are pretty valuable. Even especially for instance as cyber security becomes more of an issue in space, things that bear on what you can do for cyber defenses may become more strategic and have synergies with our services business. But over time, other technologies or other capabilities that we have may recede in importance. And so the main point I was just trying to make is that we're constantly evaluating those technologies and that we're not going to do things just because we did it that way in the past. That's all.

Speaker 2

As I mentioned when the question first came up, it's really more just a reminder of the way we think and less a signal that the way we're thinking is changing.

Speaker 8

Just open minded and always watching, but core right now at least is mobility and government.

Speaker 2

Yes. And technologies that will enhance our ability to compete there. And one of the things we just from our own perspective, I mean, one of the things that we're excited about in the growth in the defense and advanced technology area is a fair amount of that. We're winning on technologies that in our view are going to be really important in both the defense and the commercial markets, including in low earth orbits or medium earth orbits or geo secrets orbits. We have new technology initiatives in all of those areas.

Speaker 2

And the fact that they're getting funded is a has always been one of the best indicators that the technology is competitive and valuable.

Speaker 8

Makes sense. I apologize if this was asked earlier, but what on the Flight 1, what capacity would you kind of earmark that you're actually able to get out of that one? And is there an update as far as where Flight 2 will eventually cover, Flight 3 would cover? Just want to get an update on that one, but again, I'm joining in progress.

Speaker 2

Yes. Okay. When we first encountered the anomaly a little over a year ago, we estimated that the that we would might be able to get as much as up to 10% of the capacity and things haven't changed. I think that we've been able to validate some of those assumptions. That's what we're working on.

Speaker 2

Some of that we've also reminded investors that we may need to make additional investments in ground equipment need to get to those levels. So that's pretty much it. That's what we expected the outlook. The other thing is that is important is even though the end we had an intended appointment anomaly that where we are now validates the rest of the payload technology. So that's really important.

Speaker 2

That will help us bring the new assets into service faster. It's also we believe, a good indication that when those new satellites do get launched, we're going to get great value out of them. In terms of where they're going to go, probably the places where they will deliver the most value, the remaining 2 satellites are over the Americas and in Asia Pacific. And it's most likely that the existing satellite will the impaired one will end up over the EMEA region, Europe, Middle East, Africa.

Speaker 8

Okay. That helps. And as we think about the margins in the communication services business, are we seeing kind of the 3rd party supply affect those margins since Flight 1 was capacity constrained, we'll move some capacity over to the Americas at some point. But the 3rd party usage, is that impacting margins to a noticeable amount on comm services?

Speaker 7

Yes, go ahead.

Speaker 2

Yes, I think I mean the main thing one of the things that I just want to emphasize been very focused on return on capital. That's one of the things investors have emphasized with us. And so one of the ways in which we can enhance return on capital is by leasing and it's not buying. What we're doing is we are doing that very judiciously, right? And one of the things that we've emphasized a lot, we think is worth investor and analyst attention is especially in the mobility markets is understanding those demand patterns and where there's bandwidth demand.

Speaker 2

What's really interesting is different. This is actually a pretty interesting phenomenon is different operators with different customer bases will have different views of where those demands are. So by if the operators trade with each other in ways where, hey, I've got a surplus here, but you've got but I have demand there and you have complementary things, it can be a win win situation. So one of the things we're really looking at is tools that let us lease bandwidth, I would say strategically. It's not I mean, the fact that we're that we don't have all the bandwidth to be expected with ViaSat-three fifty one, that is a big issue for us.

Speaker 2

We are far more bandwidth to do that, but also I think that there's a strategic value to it as well.

Speaker 7

Yes. And Rick, if I was to add on to that real quickly, I think big factor is that our growth size is more than offset that impact. It's been all factored into our outlook. I just want to

Speaker 5

make sure that's clear. Yes.

Speaker 8

That makes sense. And one quick one, if I can squeeze 1 more in there. Earlier question about the L band, but what about the S band? And maybe frame out when do you think direct to device becomes a ready for prime time noticeable material type of item?

Speaker 2

Okay. So our spectrum holdings are primarily in L band. We do have S band in Europe that right now we use for the European Aviation Network. One of the things that we have led is creation of the Mobile Satellite Services Association, which is we'd really encourage people to look into, but the underlying premise there is that what's going to be most important in really scaling the direct device market is the amount of bandwidth that's available in the aggregate. And so what we are creating have created is an industry association to try to leverage spectrum holdings from different spectrum holders, including L and S band to use that in a common way, that is with common standards, open architecture in a way that benefits all operators in meeting customer demand at affordable prices.

Speaker 2

And also going back to one of your other points, it creates opportunities for shared space and ground infrastructure that can support multiple spectrum buildings. So that ties a little bit together into our strategy for how do we evolve into this market in a very capital efficient way, meet our capital objectives, but still grow. When does that market arrive? One of the things that is exciting is it's already starting to happen. And that is there are devices being deployed, some have been deployed already, others will really start scaling this fall, which will have chips in them with the 3 gsPP, it's called narrowband IoT standard and that standard will support things like SOS services, but also messaging, it was like notifications that you can get on devices.

Speaker 2

So, we one of the things we talked about starting 6 or 9 months ago was forming a partnership to support those devices starting in the U. S. And that's happening. We already are supporting devices. Right now, they're more like emergency location and signaling devices, but the same chips that support that into the same infrastructure are coming in handsets, we expect, just within the next few months.

Speaker 9

So I

Speaker 2

think that's the way you'll see it start. The next big step is what's called the 5 gs new radio version of those chip standards. Those standards are still being defined, probably will start being deployed end of 2025, 2026. What we think is the number of devices that support the basics functions is going to start scaling fairly soon. The number of the quality of the services and speed and number of devices that can be supported will start scaling as these new chips come online and more of the spectrum in space is allocated to that assumption.

Speaker 8

Great. It sounds like return on capital and positive free cash flow are the mantra. So appreciate all that extra info. Thanks.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Chris Quilty with Quilty's Place. Please go

Speaker 9

ahead. Thanks. And thanks for all the additional disclosure and putting out the prior financials or the restated financials prior to the quarter that was helpful. Quick question on the maritime business. It looks like the terminal count continues to go up, but revenues are going down.

Speaker 9

Is that ARPU compression primarily happening on the legacy L band side or are you seeing some on the GX? And can you talk about what you're seeing with StarLink competition in the market?

Speaker 2

Yes. So the majority of the revenue decline is not in Ka band. Is basically said. It's certain of the L band services. We have a pretty we have multiple different L band services, different services are seeing different effects.

Speaker 2

The one that is seeing the largest decline and this has gone on for several years is what's called fleet broadband, which is really the L band broadband service. And that is we Inmarsat has known that that's going to be in decline. And so that accounts for the bulk of the revenue. So actually some of the L band services may grow, different L band services may grow. On the Ka band, that's still that is still growing, but not as fast as we'd like it.

Speaker 2

And we need some we have some work to do to turn that around. I think that the Nexus wave is really the most obvious thing, near term thing to do that and then followed by the ViaSat-three bandwidth after that. So those are the things we're doing there. And I think the other thing I just want to emphasize is the things that we do to position us for direct to device are going to we expect are going to have a pretty transformative impact and beneficial impact on all of our L band services. But it's really going to take refresh in the space segment to do that.

Speaker 2

But all those all the things we're trying to do at L band are aligned. They'll all benefit from the same investments and the same types of agreements that we're looking to make, building on these open standards and open architecture.

Speaker 9

Got you.

Speaker 7

And then Chris, I just want to also note some real quick before we move up there. Just from a comparative perspective, when you're looking to last year, there was about $6,000,000 of a take or pay benefit that came into revenue. So just wanted to make sure you guys have that as a one time item. Yes.

Speaker 9

Got you. And is Nexus Wave intended to be I know it's multi orbit, but is it multi frequency? And what are you thinking about partnerships on Ka non geo?

Speaker 2

Yes, it is at Maritime and there are a couple of other places where multi orbit can be done at multi band. So we're forming a partnership around that. We definitely want to take advantage of that. Others are going to be are going to perform way better and simpler with Ka only. So we're working on that as well.

Speaker 2

So we do expect to have Ka band multi orbit partnerships as well. And actually we do already in some cases, what we're really looking to do, I should what I would say is we're looking to expand it more broadly.

Speaker 9

Got you. And that I guess, brings us to the flat panel antenna or the ESA. Are you designing one for both maritime and aviation services?

Speaker 2

So we one of the things one of the things we keep saying is we don't have to do everything ourselves. So we have some really good flat panel technology, which we can use. I mean, basically, one of the things I think people are discovering is that phased array is a technology, it's not necessarily a product and that the products need to be adapted to different market segments. It's like different from maritime versus aero versus ground and then different in different types of platforms in each of those market segments. So we will do some ourselves.

Speaker 2

We think we have really good core technology. It is one of the areas where we're winning our government contracts and commercial contracts on product, but we're also working with supplier partners who also have been working on phased arrays. And so what we expect is to have a mix of our own technology and third party technology, probably segmented by application band and platform.

Speaker 9

And if I can final question, what are you doing in FreeSpace Optics?

Speaker 2

We're not going to talk about it too much, but I would say is what we are doing is different than the I've got for instance, we're not going to go in and compete with the SDA's interoperable standard for inter satellite optical cross links. We have some other pretty interesting applications and actually it's an area we've worked on for a while and have had support from European Space Agency and now we're getting more support from the U. S. As well. We think it's a really interesting application, but we prefer not to talk about it right now.

Speaker 9

Okay. But these are space based applications and not terrestrial applications?

Speaker 2

We have both actually. The technology base that we're working from has both terrestrial and space based applications.

Operator

Your next question comes from the line of Louie DiPalma with William Blair. Please go ahead.

Speaker 10

Good afternoon.

Speaker 2

Hi, Valerie. Hi, Valerie.

Speaker 10

Hi. Geopolitical conflicts have contributed to satellite broadband growth and tactical systems hardware growth for you and many others in the industry. What is the revenue exposure if U. S. Funding were to subside under a new administration for like weapon systems or communication systems for some of the ongoing conflicts.

Speaker 10

Would that is that a risk for Viasat?

Speaker 2

Yes, so there's lots of risks. I think that I would look, there's competitive risks, there's program risks, there can be changes risks due to changes in administration or policy. So we always have those risks. We try to factor them in to our outlook. And I think I would say that our outlook reflects our view of the likely go forward business in each of those areas.

Speaker 10

That makes sense. Thanks. And Mark, you just hinted at a potential direct to device implementation in the U. S. Perhaps in the second half of the year.

Speaker 10

In terms of Reviasat's go to market, will you need a roaming partnership with 1 of the big three U. S. Wireless carriers? Or will your implementation look similar to what Apple has with Globalstar and Viasat will get paid by either the handset OEM or a chip manufacturer?

Speaker 2

Okay. So first of all, that's a really good question. What what our perspective is, is that ultimately these will be roaming agreements between carriers and likely what we expect is just like roaming like for instance, if you look at the way roaming works terrestrially now, you take your AT and T or Verizon, T Mobile plan and you go to Europe, there's a whole list of roaming partners that each one of those has. So what we expect is that probably the services will be relatively standardized and the big carriers will have roaming agreements with pretty much everybody who can fulfill them. And we think that's a good environment for us.

Speaker 2

So that's kind of what we're working towards is anticipating that that will be the business arrangements.

Speaker 10

Great. And do you already have a roaming partnership with 1 of the big three wireless carriers or how is your implement how is your setup going to be implemented in the second half of the year?

Speaker 2

What we expect is that when there are devices in the market that are supported by those carriers that they will have that they will be curious, so I'd put it right now as to what services can be delivered with what quality and what places at what prices. And that will determine kind of what those roaming agreements are. And so that is still a little bit up in the air, partly because none of the major device makers have yet announced their devices with this capability and whether it's enabled. So that's kind of a gating item. There will probably be announcements on that front over the next could be weeks to months.

Speaker 2

I think that, that will open up or maybe sort of drive to closure the potential for roaming agreements with carriers.

Speaker 10

Thanks. And one final one, and I may have missed this from earlier, but what is the full year forecast for the IP licensing revenue? I know you said that there was 2 different components. One had the annual fee and then there was the per device fee. But what should we model for the general full year revenue?

Speaker 2

Well, one thing I'd say and then Sean can add on is, what we have is our different we have different forms of licensing agreements. Some of them some of the licensing agreements we get revenue on and things like integrating a capability into a device that's sold. That'd be an example. Some of it would be annual fees. And then right now, the parts that are really going to drive what happens the rest of the year are shipment based licenses.

Speaker 2

So as units are shipped or activated, we get a recurring fee. And so there's some uncertainty on that. We have forecast for it. I don't know that we're going to tell you what exactly what those forecasts are. But Shawn, you can do you want to add anything to what I just said?

Speaker 2

Yes.

Speaker 7

I can get a little bit of additional color. I think as Mark said, we have a lot of different agreements and even the ones that come in a little lumpier do have longer term multiyear recurring streams, that may have lumpy timing. But I would say kind of going forward over the next few quarters, I'd expect that, kind of a quarterly rate to be more like ticking down to like an annual rate of like $20,000,000 for 4 quarters. And it's both in our advanced technologies and others as well as in our tactical networking.

Speaker 10

Great. That is helpful. Thanks, Sean. And thanks, Mark and Guru.

Speaker 2

You're welcome.

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Earnings Conference Call
Viasat Q1 2025
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