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Edited Transcript of VSAT earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q1 2020 ViaSat Inc Earnings Call

CARLSBAD Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of ViaSat Inc earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark D. Dankberg

Viasat, Inc. - Co- Founder, Chairman & CEO

* Richard A. Baldridge

Viasat, Inc. - President, COO & Director

* Robert James Blair

Viasat, Inc. - VP, General Counsel & Secretary

* Shawn Lynn Duffy

Viasat, Inc. - Senior VP & CFO

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Conference Call Participants

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* Michael Roy Crawford

B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Welcome to Viasat's FY '20 First Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [2]

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Okay, thanks. Good afternoon, everybody, and welcome to Viasat's Earnings Conference Call for our First Fiscal Quarter of 2020. I'm Mark Dankberg, Chairman and CEO; and I've got with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; Robert Blair, General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich, in Corporate Development.

Before we start, Robert will provide our safe harbor disclosure.

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Robert James Blair, Viasat, Inc. - VP, General Counsel & Secretary [3]

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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.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [4]

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Okay, thanks, Robert. So we'll be referring to slides that are available over the web. I'll start with an overview, and then Shawn will discuss the consolidated and segment level financial results, and then I'll provide some additional color. We'll review our outlook and take questions.

So last quarter, we talked about momentum carrying over from our fiscal '19 into fiscal '20, and that certainly helping drive our first quarter results. With 22% year-over-year revenue growth and adjusted EBITDA up 115% compared to last year. Underlying sources of momentum include a significantly higher residential ARPU base, more in-flight connectivity planes in service and a more diverse space of in-flight connectivity services, all compared to where we were a year ago. Plus sustained growth in government products and services orders has built a significant backlog, and we see expanding opportunities to grow our investable markets within the U.S. and with close allies.

Adjusted EBITDA growth is yielding lower net leverage. That's down from about 5x last year to 3.3x at the end of the first quarter. Delevering is due to our typical satellite launch investment cycle, revenue growth enabled by cost-effective bandwidth in attractive geographic markets and margins derived from the relatively low variable cost nature of satellite network infrastructure services. It also helps illustrate the longer-term potential for free cash flow in delevering offered by the ViaSat-3 Constellation, even while investing in follow-on networks.

In the midterm, we expect net debt to grow with ongoing investments in ViaSat-3 space and ground infrastructure, but corresponding adjusted EBITDA growth can maintain prudent levels of net leverage. Executing on a truly differentiated strategy takes persistence, constancy of purpose and actionable market technology and business insights. The AMCs are vertically integrated systems technology to be the most cost-effective manufacturer of bandwidth in space in the most attractive markets. We believe vertical integration, including direct relationships with end-users, is a key element in generating the greatest potential value for that bandwidth. That includes testing and refining innovative new delivery systems and business models and adapting to the unique characteristics of each vertical market. We've learned a lot already in the U.S. residential broadband, in-flight connectivity and government and defense applications. Over time, we've earned a reputation for innovation and performance, we're gaining leadership in total revenue as well as growth rate. We're continuing to innovate and learn in existing markets and have begun investing in new vertical and geographic markets. We believe our investments in market intimacy are paying off in growth, earnings and customer satisfaction as compared to just the wholesale transmission pipe approach.

As we make continued progress on the first ViaSat-3 satellites, it's important to understand the purpose of this generation relative to ViaSat-1 and ViaSat-2. ViaSat-1 and 2 were creative satellite designs. They used top-of-shelf payload component. ViaSat-3 incorporates a decade of innovation in space and ground network technology and lessons learned from multiple generations of payload prototypes. It's a fundamentally new highly integrated space-ground architecture, establishing a new set of tools for broadband satellite design and construction with an emphasis on scalability. If things continue to go well, ViaSat-3 is just the first instance of a new series of spacecraft, delivering significantly more bandwidth, higher speeds and greater flexibility with each generation.

System testbed performance to date supports the industry-leading bandwidth productivity we've been aiming for as well as superior real-time flexibility in geographic coverage. We haven't seen any technical architecture under construction or even proposed that we believe is comparable in the geosynchronous satellite space. They offer some real regulatory filings with aggressive and innovative payload architectures, but we believe that the ViaSat-3 architecture is the most scalable, considering long-term trends in payload device integration. We've now made enough progress on ViaSat-3 to begin designing and analyzing a ViaSat-4 follow on, that can achieve similar or better relative productivity advances as ViaSat-1, 2 and 3 did in their time. Or will, as we get that up. As we get more detail around the performance, schedule and budget tradeoffs over the coming months, we'll give more information on that. For now, we're excited about the progress on ViaSat-3 and we're very focused on executing the program. But we're definitely defining a path toward increasing our competitive advantage in the broadband space in the future.

So we're pleased with our financial results, and I'll just touch on the highlights here. Total first quarter revenues of $537 million were up 22% compared to the same period last year and was as high or higher than any broadband satellite network operator. Adjusted EBITDA in the first quarter was $97 million, up 115% compared to the year ago quarter, a very good start to the year. Shawn will go into more depth on sources of adjusted EBITDA growth. Awards, which are often lumpy in the government and commercial networks business, are a little bit down compared to an exceptional first quarter of last year. But backlog is still higher than this time last year as a result of robust awards over the last several quarters. In addition to the firm contract awards, we received a new GFA $450 million IDIQ contract, which is a timely purchasing mechanism for many of our Non-developmental Items, government products and services. As of the end of the first quarter, we had well over $1 billion in unawarded IDIQ and government -- and contract option value, that we expect to convert into revenue that's not included in our backlog. As our non-developmental item business grows, we anticipate these IDIQ, or Indefinite Delivery/Indefinite Quantity, contracts can facilitate a greater volume of our government revenue without necessarily showing up first in backlog.

We believe those IDIQs and the contract options are good indicators of demand. So with that backdrop, I'll turn it over to Shawn.

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Shawn Lynn Duffy, Viasat, Inc. - Senior VP & CFO [5]

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Thanks, Mark. Our fiscal 2020 is off to a very good start, with year-over-year trends supporting the solid growth we expect in fiscal 2020 and beyond. Total Q1 revenues of $537 million increased 22% year-over-year, led by 20-plus-percent growth in both Satellite Services and Government Systems segment, which more than offset the anticipated ramp down effect of lower [ComAir] terminal delivery in our Commercial Networks segment. Service revenues were up $53 million or 24%, while product revenues were up $45 million or 21%. First quarter adjusted EBITDA more than doubled year-over-year to $97 million, reflecting the operating leverage that underpins our service businesses. Adjusted EBITDA margin were 18%, up nearly 8 percentage points compared to the same period last year despite the growing investments we made internationally as we expand upon our fixed and mobile broadband opportunities abroad.

Looking at each segment, in Government Systems, we saw very strong revenue growth of $71 million, up 37% year-over-year. This was the result of strong product sales across many of our businesses, including record deliveries of our BATS-D handheld Link 16 radio and strong shipments of our small tactical data link terminals. Segment Service revenues also grew strongly up 9% year-over-year, predominantly from government mobile broadband service offerings. Government Systems adjusted EBITDA of $65 million represented a 49% increase over Q1 of last year. Gross margins were largely unchanged from the prior period, but a 40 percentage point decline in SG&A as a percent of revenue helped drive the higher adjusted EBITDA growth.

Segment awards in Q1 were $215 million. As we've said in the past, awards in our government segment can be somewhat lumpy. It's just looking at our quarterly numbers. On a TTM basis, awards were nearly $1.2 billion or 31% higher than the same TTM period last year, which increased Government Systems backlog to $879 million, which is up $100 million year-over-year, and this backlog figure excludes unawarded [ceilings] under the company's over $1 billion IDIQ portfolio and approximately $500 million in outstanding options under the AMSS service contracts, as Mark alluded to in his opening remarks.

Turning to Commercial Networks, we saw quarterly revenues decline by 17%, mostly as a result of lower mobility terminal shipments this year compared to last year's accelerated pace of shipments for the American Airlines program. Also, but to a lesser extent, the continued grounding of the 737 MAX aircraft negatively impacted terminal shipments. Looking forward, we believe this quarter's terminal deliveries represent a low point, that as long as the 737 MAX situation remains unresolved, there could be a continuing revenue impact in this segment as well as in Satellite Services. Stepping back, the business is strong and the pipeline is growing. We expect to install approximately 510 additional IFC terminals under existing contracts, which was a 4% increase sequentially.

For the quarter, adjusted EBITDA loss in Commercial Networks widened somewhat. Its higher SG&A expense and a slight increase in R&D investments more than offset a 2 percentage point improvement in gross margin. Awards for the quarter were $99 million, of which about 75% was for fixed antenna in integrated networking solutions, a record for that business, and the remainder was associated with commercial airborne terminals. This brought segment backlog to $371 million, which is the highest it's been in the last 4 years.

Finally, in Satellite Services, we continued to see good revenue growth and even stronger adjusted EBITDA growth despite the ramp in international activities I mentioned earlier. This quarter was our sixth quarter of sequential revenue growth, an also record high of $197 million, up 28% year-over-year. Both the consumer broadband and commercial IFC businesses hit record highs, with fixed consumer broadband accounting for just over half of the Q1 growth and the IFC business representing the bulk of the remainder, and we expect this trend to continue, with even more of our future growth coming from new verticals. This consumer broadband revenue benefited from a 16% year-over-year increase in ARPU from a growing premium service plan mix as well as a slight increase in the average number of subscribers compared to last year.

In Commercial Air, revenue growth was driven primarily by a 76% increase in the number of tails in service year-over-year, and to a lesser extent by an increase in ARPA. Our ending in-service tail count was 1,335 aircraft, and that excludes 46 Boeing 737 MAX that already have Viasat services enabled that are currently grounded.

In terms of overall financial impact, the reduced number of installs and delay in related service revenues could result in a fiscal year earnings pressure in the $5 million to $10 million range, which is based on a return to flight in the calendar year and time frame. However, there continues to be considerable uncertainty on when these planes will return to service, so we're monitoring the situation carefully.

Adjusted EBITDA for Satellite Service segment nearly doubled, increasing from $34 million in Q1 of 2019 to over $67 million in the current quarter. This represents a 76% flow-through of incremental revenue to adjusted EBITDA due to the low variable cost nature of the segment. On a sequential basis, revenue to adjusted EBITDA conversion was closer to 30%, which reflects the impact of the increased spending on our emerging international fixed and mobile broadband opportunities.

On the whole, a very good quarter with lots of momentum across our businesses, which is reflected in total company backlog position of $1.84 billion, a $200 million increase for the same period last year. In Slide 6, we see our income and cash flows for the quarter plus our debt -- net leverage trends for the last 2 years. On operating income line, we see the improvement in our adjusted EBITDA performance. While our net income reflects a lower tax benefit associated with the reduced current year loss, along with increased R&D credits. The net result was a Q1 GAAP net loss of $11.5 million and a non-GAAP net income of $6.4 million.

Looking to cash flow. We generated $46 million from operations, with a year-over-year comparison reflecting the substantially higher adjusted EBITDA this quarter, offset by a large increase in working capital. Most of this working capital change was an increase of product inventory to support the unit growth in our government business. Although the dollar value of inventory increased on a sequential basis, our inventory turnover was basically unchanged during this period.

In CapEx, we saw investments increase by about $25 million year-over-year due to higher expenditures on the ViaSat-3 Constellation, partially offset by lower expenditures on the Viasat-2 ground network activities we completed last year plus a year-over-year reduction in CPE investments.

So as I noted in previous quarters, Q1 FY '20 marked our adoption of ASC 842 related to the accounting for leases. Consistent to our previous discussions, the adoption had no material impact on our debt, leverage ratios or various income measures. And additional information regarding the growth of impacts on our balance sheet can be found in our Q1 FY '20 Form 10-Q to be filed with the SEC.

In the chart on the lower right, you can see that our net leverage position improved dramatically, down to 3.3x from 5x compared to the same time last year. And there was also a slight sequential improvement from Q4 fiscal 2019. We expect our net leverage to hover around the 3.5x area, plus or minus a half turn throughout the remainder of the year. Finally, our liquidity position continues to be very strong at $811 million, which includes cash on balance sheet plus availability under our $700 million revolving credit facility.

So with that, I'll turn it back over to you, Mark.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [6]

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Okay, thanks, Shawn. I'll give a little bit color on some of our business areas. The chart on the lower left shows the steady progress we've made over the prior 5 fiscal years in Satellite Services, and the trailing 12-month period ending with our first quarter of fiscal year '20. We've had 6 straight quarters of sequential segment revenue growth, catalyzed by ViaSat-2 entering service and the benefits of its technical innovations and bandwidth productivity, geographic coverage and flexibility. The chart illustrates 3 important points: one, long-term growth in the U.S. residential market, which was the natural entry application for us given the design trade-offs that were possible when we began the ViaSat-1 program back in 2008; second is the long-term steady diversification of the broadband services revenue base, and that's been led by the U.S. in-flight connectivity market, which was also a natural follow-on to the U.S. residential market, and that was enabled by ViaSat-1 bandwidth productivity and consistent with ViaSat-1 area design trade spaces, plus our acquisition of the WildBlue satellite fleet. And then you can also see the long-term growth in total Satellite Services revenues, a product of the sustained growth in each of the first 2 U.S. markets and now, augmented by regional and global growth enabled by the ViaSat-2 architecture and innovative business models, leveraging our network technology with regional satellite operators around the world.

Focusing in on the first quarter results, segment revenue growth was largely driven by higher value, higher bandwidth U.S. residential service plans, yielding a 16% ARPU growth compared to the year-ago period, along with some modest subscriber gains. Then growth in in-flight connectivity services revenue was also a strong contributor, as their planes in service increased by 76% compared to last year. So both of those markets benefit from our satellite bandwidth productivity gains compared to competitors.

We continue to carefully balance our U.S. residential service offerings for earnings growth and year to midterm cash generation, part of which we're using to finance ViaSat-3. We are reducing CPE capital expenditures, lowering churn and boosting customer satisfaction. We continue to work on improvements in each of those 3 areas. We believe that a market-facing focus on high-value plans in terms of speed and total bandwidth per dollar is a good strategy for a satellite bandwidth productivity leader. This fits the context of continued end-user demand for higher speeds and more bandwidth in the landscape of ARPU growth for high-speed terrestrial ISPs too. We're also continuing to invest in innovative new network technologies. For instance, we're aiming to expand market tests that offer low latency, comparable to the expected [Gruveo] systems suitable for gaming for instance to more U.S. customers this fiscal year. With continued success, those technologies could also meaningfully increase our addressable markets in the U.S. and internationally.

As Shawn mentioned, we've got 1,335 commercial aircraft in our in-flight connectivity service, excluding about 50 737 MAX planes that remain grounded at the end of Q1. The grounded planes are inhibiting our growth to some extent this fiscal year and that effect is likely to increase for a little while as new planes that otherwise would be flying are delayed, but it also means we anticipate a step increase when the Max fleet returns to service. Community WiFi, enterprise and new geographic markets are also contributing to growth and diversification. We think some of these early entries into new markets can yield significant contributions in the ViaSat-3 time-frame. Our early entry objectives include defining and testing service plans, building national and regional distribution and support networks, integrating with sovereign national infrastructure, adapting to national regulatory regimes and testing adaptations to widely varying local market environment.

After a year of work, we've obtained Brazilian court approval for the Telebras agreement we executed early in calendar year 2018. We've established a strong partnership with Telebras and have already connected thousands of remote schools and government facilities with high-speed Internet, with the goal of reaching around 15,000 sites by the end of 2019. Court approval enables us to work on a broader range of applications and markets.

So focusing in on in-flight connectivity, it's an important component of growth in our Satellite Services segment. It's a great example of the power of our vertically integrated strategy in terms of space system design, geographic coverage, network and user terminal technology, operational expertise and innovation and business models. We've earned strong positions in the U.S. and Australia, are making an impact in Europe, and with ViaSat-3 approaching, are laying the groundwork for global growth for both regional and long-haul intercontinental routes. But the growth opportunity for us is more than geographic expansion and market share. We're very focused on helping our airline partners leverage our network in distinctive ways that affordably enhance passenger experience and contribute to airline earnings growth.

It should be obvious that no airline can meaningfully drive overall customer satisfaction by leveraging fast WiFi if only a small fraction of passengers use it. So even while this remains one of our fastest-growing markets, we're still working closely with leading airlines to continue to increase engagement and enable innovative passenger cabin business models. We're making progress. Recently, more airlines are commenting publicly about the importance of in-flight connectivity in delivering a great passenger experience, or conversely about the risk of poor connectivity ruining an otherwise good flight.

Free WiFi is in the conversation more than ever. We've been delivering on that promise for JetBlue for years now. Continuing adoption of multimedia within messaging and social networks as well as on the web and through rapidly growing cloud-based streaming music and video services continues to put a spotlight on bandwidth resources. There is also growing awareness of the operational benefits to airlines of abundant, affordable broadband connectivity. Airlines aren't going to just need a lot of bandwidth, they're going to need a large and growing supply of affordable bandwidth, and that's the point of our focus on productivity.

We believe we've earned the best reputation for delivering affordable, high-speed, high-bandwidth connections for regional flights in North America, Australia and now within Europe and over the Atlantic. Now that the first ViaSat-3 launches are lining up with delivery schedules of popular new aircraft, we can compete on more global opportunities, making our industry-leading service platform available everywhere. We're pursuing four global initiatives. We recently introduced our new generation dual-band Ku/Ka band terminal well-suited for the retrofit long-haul W-IFE market or for new aircraft deliveries either before or early in the ViaSat-3 launch cycle. Second, we've engaged with existing and new airline customers to expand regional and long-haul intercontinental service over Latin America, leveraging the coverage of ViaSat-2 and our agreement with Telebras. Third, we're engaging with China Satcom on network planning and deployments for our partnership for Ka-band in-flight connectivity services beginning on ChinaSat-16, the leading broadband satellite for to the China market; and fourth, we're now engaging globally with airlines for new aircraft deliveries around the calendar year '21 and '22 time frame, leveraging the ViaSat-3 global constellation.

So we exit the first quarter with just over 500 additional aircraft anticipated under existing contracts, excluding our just announced JetBlue order, and the expansion of our relationship with United Airlines that was described in our earnings press release. The flow of new orders is pretty lumpy and always at the convenience of our airline customers. Excellent execution enabled us to show the compelling market share gains throughout fiscal year '19. Growth in active planes during the first quarter was not quite as robust partly because we were so successful in accelerating deliveries the last couple of quarters for American Airlines and partly because our strong position on the 737 MAX means we've got close to 50 planes temporarily out of service. But we're really excited about our new order pipeline and believe we've got very good growth opportunities as we begin to compete more globally.

Our Government Systems business continues to deliver very strong, steady profitable growth, in a defense market that's both in need of and increasingly receptive to disruptive innovation. Revenue increased 37% year-over-year to $261 million and adjusted EBITDA grew 49% year-over-year to $65 million, led by very robust product sales and steady services gains. We always point out that government business flow can be lumpy, while new contract awards of $215 million in the first quarter were below the first quarter of fiscal year '19 exceptionally high comparable value, our quarter ending backlog of $875 million is still 13% higher than it was at this time last year, driven by the sustained strong order flow we had over the last few quarters. It's also worth pointing out that our previously announced $450 million GSA IDIQ contract award in the first quarter increased our inventory of IDIQ value that we expect to convert to revenue to just over $1 billion. We don't include unawarded IDIQ contract values in our backlog until we receive firm delivery orders. So that $1 billion dollars is not included in the $879 million dollar backlog figure. IDIQs are important because they enable timely purchases for a number of our customers, especially for our unique Non-Developmental Item products and services as revenue associated with Non-Developmental Items such as the BATS-D Link 16 radio shown in this chart, as those continues to grow we anticipate a higher proportion of revenue could derive from these contracting vehicles.

We also wanted to mention here our previously announced award for the first ever Link 16-capable small lower orbit satellite or LEO satellite. We won an Air Force competition for this proof of concept spacecraft based on our payload capabilities. Our diverse and rapidly growing base of small Link 16 terminals creates an exciting prospect of leveraging a potential global constellation of such LEO Link 16 satellites. There's a lot of work remaining to make that happen, so winning this program helps further illustrate our capabilities and strength in nongeosynchronous satellite systems. The significance of payload technology in satellite design and the [underlying] synergies and conversions in our Government Systems product and service portfolio.

Overall, we are going to continue to be very enthusiastic about our near, mid and long term growth opportunities in Government Systems. We believe we're still in the early stages of expanding the market for our products and services from early adopters into the mainstream forces and to grow our presence in a number of attractive growth areas, including space, cybersecurity and next-generation high-performance terrestrial radio networks, in the U.S. and with our allies.

So finally, this slide, for outlook and key drivers is very, very similar to what we showed last quarter, which is at that time the result of our execution over the course of fiscal '19. The similarity of last quarter is a good thing because it means we're performing across our business areas pretty much according to plan. We've continued growth momentum for fiscal '20 as we build on what we accomplished in fiscal '19. That offers attractive year-over-year revenue and adjusted EBITDA growth opportunities. In Satellite Services, our active commercial in-flight connectivity fleet is up 76% year-over-year, net of the ongoing 737 MAX groundings, and our expanded services portfolio creates more revenue opportunities per plane. The ongoing grounding could pressure fiscal year '20 adjusted EBITDA in the range of as much as $5 million to $10 million depending on when they return to flight. But we also anticipate a step gain in quarterly revenue and adjusted EBITDA run rate when that does occur. U.S. fixed broadband ARPU is now 16% higher than the year-ago value on a modestly larger subscriber base. Our satellite broadband services leverage a high fixed cost low variable cost model, offering good opportunities for revenue to flow-through to adjusted EBITDA expanding our margins.

Government revenue and earnings jumped significantly year-over-year in the first quarter, and our backlog is 13% higher than at this time a year ago, supporting good growth prospects for fiscal year '20 as a whole. Plus we have this $1 billion-plus inventory of unawarded IDIQ contract value that we expect to convert to revenue over time.

Our success in our large -- in our target markets presents expanding growth opportunities in both government and commercial markets. We leveraged R&D and capital investments back in fiscal '17 and '18 into strong revenue and adjusted EBITDA growth, so we're mindful of comparable success-based investments on an ongoing basis. But the main takeaway is that our top level expectations for attractive revenue, adjusted EBITDA and margin growth for fiscal '20 remain intact.

So that's it for our prepared remarks. And at this time, we're happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from the line of Ric Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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I want to actually start with just a -- Mark, you touched on it a couple of times how the ViaSat-3 Constellations are really important and the timing could line up nice with some aircrafts. Can you just remind us of the launch and service dates that you're looking at? I think you have diversified your launch vehicles too. So I just wanted to know what's the current thoughts on I guess ViaSat-3A, 3B, and 3C?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [3]

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Yes. That hasn't changed since we last talked about it, so we're talking about probably in the early part of calendar '21 as the planned launch date for the first one. And then going into services, it is a new satellite, so there's always a little bit of uncertainty with that architecture. The main thing that we did talk about previously are the launch agreements that we have executed allow us a much shorter orbit rating period. So that part's condensed from months to probably around 1 month, and then it will just be in-orbit tests for the satellite before we go into service.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Okay. And how about like 3B, 3C as you look into EMEA?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [5]

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Those haven't changed. We've been looking at roughly 6-month interval from the launch of the America's one to the Europe, Africa and Middle East one. And then we've said that we expect to launch the third one to be before the end of calendar '22.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. And then you mentioned that you're already getting excited that you might start working on a ViaSat-4. Would that be after the 3A, 3B and 3C? Or is there a fourth ViaSat-3 that would have to come out? Or kind of what's the thought on ViaSat-4, rough timing as you look at the exciting demand for bandwidth?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [7]

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We're not going to give -- I think, right now, we're going through, as I mentioned, trade-offs on schedule performance costs. But what we're aiming for and what we expect is to have another pretty significant improvement relative to the ViaSat-3 series. We call it ViaSat-4 because it's really kind of an embellishment of ViaSat-3. Think of it as a natural extension building on that technology. You don't have -- I mean its main objectives would be significantly more capacity per dollar, big improvements in productivity. We'll talk about where we'll deploy and what the schedule will be, probably later this year as we complete the definition.

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Richard A. Baldridge, Viasat, Inc. - President, COO & Director [8]

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Ric, this is Rick Baldridge. Think of it in terms of not much reduced level of R&D to get to that solution versus what we went through at Viasat-3, as Mark said, more of an extension, and be compatible with all of our ground networks.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [9]

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And then you've also mentioned LEOs, you've got the Link 16 in there that you might be able to work with some of the -- or collaborate with some of the LEOs that are planned out there. It's probably one of the top questions we get from investors is what do these potential new billionaire space club LEO Constellations mean? Will they get funded? What does it mean -- so maybe just opine a little bit on how do you see the space, pun intended, playing out over the next few years?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [10]

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So we've got a view on what makes for the best capital investments. And I think that we really like our approach because it allows us to deliver them, we think, the most bandwidth per dollar invested into the places that have the most demand. I know we can reinforce those, but it's really difficult to do with the lower orbit satellites. We spent a lot of time examining the filings. We think we understand what their approaches are. Some of them have some really innovative payload architecture. I'd say, we still think ours is probably a better investment. But that doesn't mean that some of them won't be deployed to some extent.

One of the things we've mentioned multiple times is combining our geosynchronous satellites with either lower latency terrestrial infrastructure, and in some cases, possibly with lower latency LEO satellites if they're available, to deliver kind of this hybrid geo LEO experience. And so we're actively working that with some of the satellites. But if you -- I think it's a very technically complex space, but I think if you look at the overall, we think it's going to be really hard for these LEO systems to deliver the same type of bandwidth economics, which means that generally they will be subject to either lower volume caps than we would be at the same point in time, or their bandwidth would be significantly more expensive. So we think the market really want low-cost bandwidth.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [11]

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And then your comment there on low-latency threshold. Does that relate back to some of the cap 2 funding you've got? And how it might link with the ViaSat-3 Constellation?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [12]

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No. The cap 2 funding is really all based on purely satellite-based geosynchronous service. What we've alluded to about building hybrid networks with terrestrial is essentially putting a router in a user's home that allows them to sort of optimally combine satellite bandwidth with some terrestrial bandwidth that's not as fast as the satellite, but has lower latency. And that by combining those 2, we can create the effect of really high-speed, high-bandwidth, low-latency communications. That's what that refers to. We're kind of in early alpha testing now, and we're aiming to expand our testing of that this year.

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Operator [13]

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

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Simon William Flannery, Morgan Stanley, Research Division - MD [14]

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Mark, you talked a lot about the IFC business. Can you give us a sense on the Ka/Ku product? How much appetite are you seeing potentially for customers buying that in the next year or 2? Or [rather], kind of more interest in waiting for ViaSat-3 and just going with the pure Ka report -- approach? And then on the IFC revenues, what are the trends and average revenue per aircraft and usage that you're seeing there? Is that something where there continues to be -- not -- as the aircraft's online moderates with the American fleet kind of migrating over, are we going to see potential for upside in ARPA over the next year or 2 as usage grows?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [15]

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Okay. Sure. On the Ku/Ka, basically, what we wanted to do was to engage with airlines now on global routes. And as I mentioned, there's several different markets there. Think of it as there's some retrofit opportunity in there, where there are planes that are already in service. And depending on where those planes are, are good candidates for Ka/Ku now because for a number of them, a large fraction of their seat model expectations are in areas where we have Ka-band, and the Ku provides continuity, and basically this same level of service that you would get from any other in-flight connectivity service in those Ku areas. Then there are some that are, depending on the time, the delivery date of new aircraft where the Ku/Ka is also interesting.

And then also that -- as we kind of alluded to, having the Ku/Ka product has really brought us into the conversation with airlines that are taking delivery of new aircraft in, say, the '21 or '22 time frame and we don't have any announcements to make today, but we'll have a number of interesting takers on the hybrid Ku/Ka bands. We're seeing good interest in that. We're making progress on type certifications for that. And then that's also led to some discussions with airlines -- when they look at sort of the time frame of their airline -- airplane deliveries and maybe the uncertainties associated with that, and the delivery of our ViaSat-3 network basically saying, well, okay, given this -- that gap is that small, we'll just go all Ka. So we're seeing some of each. We're hopeful that in the next quarter or so, we'll be able to talk explicitly about some of those deals, on network. Okay?

And then on the bandwidth utilization, yes. I think general trend that we're seeing, I think, just reflecting Internet usage on a global basis as more and more people are interested in using the Internet onboard airplanes and those that are using it are tending to use more bandwidth, just because there's more media. Just think of it as music and video embedded now in social media and websites and then also in the streaming services. So yes. We're seeing more.

We're also delivering more services, so some of that comes from us being prime contractor. And for instance, if you look all of our expanded agreements with JetBlue and United, each of those agreements involve us being the prime contractor and us seeing more and more of those aircraft converted to us being the prime contractor. So that increases our responsibilities and revenue. And then finally, as we add services like broadcast TV, which we've done on American wireless IFE on American, you'll see that coming on additional airlines as well. And then some of these innovative services, like the arrangement that we have with Apple and American Airlines for free Apple Music, all those are contributing to growth in revenue for aircraft. So that plus a number of aircraft are what's driving our in-flight connectivity revenues.

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Operator [16]

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And your next question comes from the line of Phil Cusick from JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [17]

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A couple, if I can, government strength has been really amazing and starting to look like a trend, especially with all these different backlog categories. Is there a reason to think that this drops back to a lower level? And again, recognizing that there's lumpiness here, is this level a better norm to us going forward?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [18]

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Well, I wish we could do 35% growth every quarter. But we've been pretty consistent in the 10-ish, plus or minus, that's like a low double-digit percentage growth over the last few years, it's lumpy. I think that's probably a safer kind of outlook for us. As we grow backlog and these IDIQs and get more confidence, I think if things change, we'll probably say that. But that kind of double-digit, that's a good safe number.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [19]

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Got it. Double-digits are pretty big.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [20]

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Yes. It's pretty big in this market.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [21]

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And now that we were thinking more about the ViaSat-4 generation. How should we think about R&D over time? Should we look for this to ramp back up to the levels where it were -- was a couple years ago?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [22]

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No. One thing Shawn mentioned before, and I think you saw it this quarter is, we kind of came out at a trough at about 5% revenue. And this quarter, I think we're kind of at the 6% range. That's kind of our budget going ahead. We might -- I think if we're going to deviate from that, we'll probably say something. But I think look to the point that Rick made about the next generation of that constellation is there was a lot of new stuff associated with ViaSat-3, and then the next generation is really using those tools that, in a way, that should involve much less R&D both in the space side and the ground side. And so we're just doing that trade-off now.

The main point I wanted to get across in ViaSat-4 and that next-generation constellation is do not think of ViaSat-3 as the thing or an endpoint. Think of it as the first of a series and that there's a lot of growth in performance and productivity, which is -- that's the measure we keep coming up with. And if you look at -- I just -- using that to kind of contrast with these LEOs where we kind of argue like, I think some people think that LEO itself are a thing. And actually, if you look at what's going to make a LEO constellation good, if it's going to be good, it's really in the payload architecture, and we think -- we really like ours, and we think it's really scalable in contrast to some of what it would take to do some of these Leo systems. And that's the point we wanted to get across that we've done most of that work already.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [23]

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Great. And one more, if I can...

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Richard A. Baldridge, Viasat, Inc. - President, COO & Director [24]

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Just one thing about what Mark -- first thing about government side, Viasat-3, you're looking at how the government business is going today? When ViaSat-3 gets up there, it -- we believe that's going to have a big impact on our government business.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [25]

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Yes. That's true.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [26]

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And then the last one, if I can. You put in the press release a discussion of the 18-inch satellite antenna. What should we think about for the target market there? And what sort of conversations have you had already?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [27]

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Okay. That -- basically, there's application for a range of government aircraft, where basically with a larger aperture, which is supported by those aircraft. We can get higher peak speeds and better airtime costs, and so that's the dominant reason for it. So there are -- some of them are in the rotary wing or the hybrid aircraft market, and then the larger business jet market, those would be the kind of the types of applications for that. And it just makes for better economics for those applications.

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Operator [28]

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And our next question will come from the line of Mike Crawford from B. Riley.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [29]

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If I could just maybe rifle shot at you couple of quick ones. One, you've got this nice jury award in your litigation against Acacia Communications, a $49 million award. Do you have the time line for when the judge might add to that, given the extended period time of infringement?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [30]

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Okay. So we don't like litigations, but we litigate when we feel like we need to. We're gratified by the jury decision, but there's still a bunch of things to happen. There's going to be some post-trial motions by both sides, and there will be probably appeals. And so it's too early to really speculate about what will happen next or what the sequence will be. But I think it's a good indication that we certainly felt like we had a strong case in the matter.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [31]

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Regarding another company that has a lot of IP that you're on the board of, Mark, and have invested in is TrellisWare. Is there anything you can comment on how they're doing with their wave forms and business prospects?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [32]

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Yes. So TrellisWare, we're the majority owner of TrellisWare. It's essentially -- it's a majority-owned subsidiary of ours. We're really pleased with the progress that they've made in defense terrestrial radios. They've been a pretty rapidly growing provider of specialty radios, mostly into the special operations and early responder community. But based on what's going on in the larger army, there's some really good growth prospects in there. That -- hopefully that will play out over the next couple of years, but we're really pleased with what they've done and the technology that they bring.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [33]

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Okay. And on these Non-Developmental Items, like BATS-D but the STT was certainly one of those, but we saw just on July 31, army award for STTs. But does that mean that's also -- that's a program of record where you can get funding from both sources for those now?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [34]

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So what's happened with the number -- we call it something a Non-Developmental Item product. What that means is basically that we developed the underlying product on our own funds, then there may be customization or specific applications of those to specific platforms or operational needs. And when that happens, one of the things you'll see is that there will be an official DoD nomenclature for that product, and then often once it's achieved that state, they will consider it a program of record. So that happened with the STT, it's really become adopted as the primary small form factor. You've been around for a while, you remember there was a program called joint tactical radio system quite a while ago which didn't end up leading to production but there was what was called a small form factor radio in that.

One of our targets was that we would end up fitting in, that is the small form factor radio. And that's essentially what's happened with that product. So that -- now, that's become a program of record in a number of applications. That's happened with several of our Non-Developmental Items. I think it's in the works or has happened with the BATS-D as well. And so when those things happen, what you'll see is that some of those customers will be less reliant on the IDIQ types of contracts, and we'll have our own program of record awards. So that's a good sign of success for that product. And it really is I think the real market leader in the small form factor Link 16.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [35]

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Okay. And then the final 1, just relates to the Real-time Earth and where you would put that on the scale of future revenue opportunities. And then related to that would be, how these new ground station as a service installations with the 7.3 meter dishes factor into that versus maybe offloading other, like LEO constellation, ISR data and beam them up to ViaSat-3 and then back down through your ViaSat-3 ground architecture versus these specialized locations?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [36]

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Okay. I mean that's a good question. I think take a step back, when you think of the earth observation market in general, we're a lot more bullish about these proliferative small satellites because with a lot of satellites, you can see everywhere at once. And one of the big opportunities that can come with seeing everywhere at once is basically the opportunity to provide connectivity both to task the satellites so that they're looking in exactly the right place with the right sensors. And then the other is to get information in real-time instead of hours later or days later.

So if you look at what's happening, a lot of -- there's a lot of creativity in small relatively inexpensive Earth-sensing satellites, but building a ground network for each of those is -- that would tend to dominate the total system cost for that. So there's really -- there's 2 ways to go about, at least 2 obvious ways of going about turning this into a real-time business, one is to have a whole lot of ground stations. But that is probably limited. It's the first and easiest way to do it, but ultimately may be limited especially over ocean areas. And the other one is to do what's been done in kind of the government and defense space for quite a while and that's to use relays from high-orbiting satellites.

So our -- one of the things we're looking at is to build some relationships with a real-time earth-ground network, and that includes relationships with satellite-sensing operations as well as ground systems around the world. And we're doing that in multiple ways, some of it are on our own, some of it is as a technology provider to other players. And then the other thing is the thing that you mentioned, which is ultimately if you really want to be able to get real time anywhere in the world, doing relay through a geosynchronous satellite system especially one with really high bandwidth, is the best way to do it, we think. So we're working both. This is a good example of us testing market entries in what we think is a prudent way, but in a way that we think is consistent with the long-term trends. I think that's worth noting that we're doing it. But there is still a lot to do.

So I think that's it for our questions. Thanks a lot, everybody, for joining our call, and we look forward to speaking again next quarter.

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Operator [37]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.