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Edited Transcript of VSAT earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q2 2020 ViaSat Inc Earnings Call

CARLSBAD Nov 19, 2019 (Thomson StreetEvents) -- Edited Transcript of ViaSat Inc earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm 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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* Christopher David Quilty

Quilty Analytics, Inc., Research Division - Research Analyst

* Michael Roy Crawford

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

* Richard Hamilton Prentiss

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

* Sebastiano Carmine Petti

JP Morgan Chase & Co, Research Division - Analyst

* 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 Second 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 a lot. Good afternoon, everybody, and welcome to Viasat's earnings conference call for our second fiscal quarter of 2020. So I'm Mark Dankberg, Chairman and CEO, and also on the call with me are 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.

So 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. With that said, 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 Shawn will discuss the consolidated and segment-level financial results after that, and then I'll provide some additional color and we'll review our outlook and take questions.

So overall, we're executing well and generating the financial results we've intended from fixed U.S. broadband, in-flight connectivity and our government business while making steady progress on initiatives that can accelerate our growth with the approaching ViaSat-3 global network.

So Q2 and year-to-date revenues grew 14% year-over-year and 18%, respectively. Both are new records. The operating leverage from our high-performance satellites, the vertically integrated services businesses, our scaling government products and prudent cost control is driving adjusted EBITDA margin expansion, with adjusted EBITDA growth outpacing revenue growth substantially at 53% and 76% year-over-year for the second quarter and year-to-date, respectively.

The main factors behind our business momentum that we've previously described remain in place and support ongoing growth prospects. In Satellite Services residential, average revenue per user was 17% higher than last year, reflecting sustained demand for high-value service plans as well as industry macro trends. And we also had a slightly higher subscriber base.

Our in-service in-flight connectivity tail count was about 51% higher than it was this time a year ago, even with approximately 85 737 MAX aircraft currently out of service. And we also had higher revenues per plane, as we've got more aircraft with a direct prime relationship with our airline customers, and we've got a broader base of services being offered.

In Government Systems, our product sales have been exceptionally strong as we continue to expand our addressable markets for Tactical Data Links, network and cyber security and satellite communication systems. And we've had steady growth in government services as well. New contract awards remain strong, with a growing and record backlog of firm government orders along with over $1 billion of Indefinite Delivery/Indefinite Quantity or IDIQ delivery orders remaining open.

So we believe the root source of our growth momentum is thoughtful and market-tested competitive differentiation. We've earned a reputation for technology leadership in virtually every aspect of satellite networks. Vertical technology integration ensures that it works together to deliver the best performance and economics for our users, and it's paying off.

We believe our ViaSat-3 satellite system is state of the art and best suited to deliver high-performance, cost-effective services in the best geographic markets. The breadth and depth of our vertically integrated service delivery and distribution model is very unique. We believe we've got greater customer intimacy, greater flexibility and more tools to adapt to evolving business models and end user needs across more vertical and geographic markets.

And we're already in, and in some cases we're defining, redefining, what we believe are the most attractive vertical market opportunities for Satellite Services, and we're starting to demonstrate that we can scale globally. We're widely acknowledged to deliver the best in-flight connectivity services in the world. It's a highly specialized market and a very, very big opportunity. I'll give more details on how big and how well we're doing a little later in the call. We're in the early stages of other mobile broadband markets, too.

Global services to the U.S. government, along with our allies, is also a big opportunity. We serve the most demanding users and are constantly growing the addressable market through platforms, specific terminals and support infrastructure and by closely integrating advanced satellite services with new and existing terrestrial tactical solutions. And I'll give more insight into this later also.

We started with the U.S. consumer on ViaSat-1, and it's still our single biggest market. ViaSat-2 has enabled good revenue growth, and margins are following. And we believe we can continue to grow our business around our premium offerings as we bring more capacity to market.

We're also laying the groundwork to divest -- diversify and expand delivery and consumer services globally in postpaid residential and in prepaid mobile services such as community WiFi. We're at the early stages here but again, big opportunities.

So we're very happy with our Q2 results, which I'll quickly summarize. Total second quarter revenues of $592 million are a new high, and that's up 14% year-over-year. Year-to-date revenues are up 18% year-over-year. Adjusted EBITDA in the second quarter was $118 million, up over 50% year-over-year, while year-to-date adjusted EBITDA is up 76%. Adjusted EBITDA margins increased by 5 percentage points from high flow-through of the expanding services revenue, better product sales mix and a continued focus on overall cost efficiencies.

Awards were slightly lower compared to an exceptional second quarter of last year, but backlog of a little over $1.9 billion is up, both compared to last year and sequentially from the first quarter due to strong orders over the last several quarters. Plus unawarded IDIQ values, which we don't include in backlog, were at a $1.1 billion level at the end of the quarter, while options under our long-term AMSS services contract stood at over $450 million.

So with that high-level overview, I'll turn it over to Shawn.

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

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So Mark just covered the top-level highlights. I'll dive right into the second quarter performance. Looking at each segment, in Government Systems we saw robust revenue growth at $59 million, up 24% year-over-year, bringing Q2 segment revenues to a high of $299 million. This was resolved as strong product sales across many of our businesses, including Tactical Data Link products, sitcom radios and system products and mobile broadband products.

We saw a high volume of product deliveries in Q2 from our widening NDI product portfolio and strong IDIQ contract base, both of which facilitated end-of-year government sourcing requirements in an expedited fashion. Overall, our government business is off to a strong start and expected to deliver FY '20 revenues in excess of $1 billion for the year.

Government Systems' adjusted EBITDA was a record $79 million, representing a 27% increase over Q2 of last year. Gross margins were largely unchanged from the prior period, but lower R&D as well as SG&A as a percent of revenues helped drive the higher adjusted EBITDA growth. Segment awards in the quarter were $418 million, which is up over $200 million from Q1 and down about 7% year-over-year, when we had record awards in Q2 of fiscal 2019.

Based on a strong book-to-bill for the period of 1.4:1, we ended the quarter with Government Systems backlog of nearly $1 billion, a new record for this segment.

Turning to Commercial Networks, we saw quarterly revenues decline by $27 million or 23% due to the comparative impact of the prior year's accelerated install schedule for American Airlines. However, sequentially, segment revenues were up 11% on record revenues in the company's antenna system product line.

In segment earnings, Q2 reflected a larger adjusted EBITDA loss on higher SG&A expense and R&D investments, which more than offset a 3-percentage-point improvement in gross margins. Awards for the quarter were $62 million, of which roughly two-thirds was for commercial air terminals, and we ended the quarter with backlog of $338 million.

Lastly in Satellite Services, we continued to see good revenue growth and even stronger adjusted EBITDA increases. This quarter was our seventh quarter of sequential revenue growth, bringing Q2 to a record $206 million, a 26% year-over-year increase, both consumer broadband and commercial ISP businesses hitting highs, with fixed consumer broadband contributing just over half of the Q2 growth and the ISP business representing a large portion of the remainder.

In Consumer Broadband, revenues reflected a 17% year-over-year increase in ARPU, primarily from a growing premium service plan mix and a slight increase in average number of subscribers compared to last year.

In Commercial Air, revenue growth was driven primarily by a 51% year-over-year increase in the number of tails in service along with increased ARPU as our expanded onboard capabilities enabled broader passenger engagement for our airline partners. Our ending in-service tail count was 1,353 aircraft, which excludes approximately 85 Boeing 737 MAX that already have Viasat services enabled but are currently grounded.

Adjusted EBITDA for the Satellite Service segment was up $31 million or 77% year-over-year. This represents a flow-through of incremental revenue to adjusted EBITDA of approximately 72%, reflecting the scale efficiencies we see in this business.

So before we move on, I would just want to summarize some timing items to keep in mind for the remainder of FY '20. Our Government segment had a very strong Q2, and with this we saw some product demand pull forward from the second half. Additionally in Sat Services, we noted last quarter that the reduced number of 737 MAX installs and delay in related service revenues could result in a fiscal year earnings pressure in the $5 million to $10 million range based on a return to flight in the calendar year-end time frame. Based on our current assessment of the regulatory environment in the U.S. and internationally, it's more likely we'll be at the higher end of that range. However, we continue to anticipate a step-up function in ComAir revenues when these planes return to service.

We also just deferred some marketing expenses from this quarter, which was offset by our international investments in mobility and emerging fixed broadband markets. So while we expect our existing businesses will continue to see strong growth, we do expect revenue to adjusted EBITDA conversion to be more muted over the next few quarters as we continue to invest in new markets and incur incremental advertising expense deferred from this quarter.

However, we see strong momentum looking forward, and as a Q2 recap on a companywide basis, we closed the quarter with strong revenue growth of 14%, even stronger adjusted EBITDA growth of 53% and a backlog position of $1.9 billion, up slightly from the same period last year.

So this next slide has our year-to-date results. In the Government segment, we saw another high revenue growth quarter, year-to-date of 30% to $560 million. Segment adjusted EBITDA was up $38 million or 36% year-over-year to $145 million with about a 1% improvement in margins as a result of lower SG&A as a percent of revenue.

In Commercial Networks, revenues were down 20% to $167 million, primarily on the lower mobility shipments compared to 2019. Adjusted EBITDA decreased $10 million year-over-year on the combination of the lower revenue and higher SG&A and R&D expenses.

In Satellite Services, revenues were up 27% year-to-date. Year-to-date adjusted EBITDA was up 86% over the same period, as the lower variable cost nature of this segment brings solid incremental EBITDA despite our expanding startup investments brought.

So on Slide 7 we have our income and cash flows for the quarter and our debt and our net leverage trends. Our operating income improved substantially for the quarter and year-to-date periods, driven mostly by the improvement in adjusted EBITDA and partially offset by higher noncash expenses such as depreciation and amortization. Positive net income for the quarter and a large decrease in the net loss year-to-date reflect these operating income improvements and lower interest expense in our income statement as our ViaSat-3 constellation project base continues to ramp.

Our provision for income tax in the quarter and a reduction in the year-to-date tax benefit partially offset these improvement, yielding Q2 GAAP net income of $3 million and non-GAAP net income of $21 million, each reflecting approximately a $30 million improvement year-over-year. And on a year-to-date basis, we have a GAAP net loss of $8 million and a non-GAAP net income of $27 million, more than a $50 million improvement in each metric year-over-year.

So looking to year-to-date Q2 cash flows, we generated $183 million of cash from operations, which was up 65% from the prior year period, primarily driven by our strong year-over-year adjusted EBITDA growth. In CapEx, we saw our net outlays increase by $64 million year-over-year, with much of this increase due to last year's investments being offset by $44 million of ViaSat-2 insurance proceeds received in that period. The remaining CapEx was largely unchanged, with increases on the ViaSat-3 constellation offset by lower CapEx for CPE and the ViaSat-2 ground segment. Overall, our year-to-date operating cash flow has funded just over 50% of our CapEx investments.

Now turning to leverage, you can see in the lower right chart that our net leverage position is basically unchanged from Q1. And while net debt has grown year-over-year, our net leverage is down nearly 2 turns from 5x in Q2 of last year. This year-over-year decrease was anticipated, with strong adjusted EBITDA growth post ViaSat-2 launch outpacing our CapEx spend on a relative basis. We expect our net leverage to hover around the 3.5x area throughout the remainder of the year, as growth in adjusted EBITDA offsets continuing investments in the ViaSat-3 constellation and our global network footprint.

We continue to have ample liquidity, or approximately $770 million, which includes the cash on the balance sheet plus availability under our $700 million revolving credit facility.

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

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

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Okay, thanks, Shawn. So let me go into a little more depth on our Government Systems business, which continues to deliver very steady, strong and profitable growth.

Revenue increased 24% year-over-year to $299 million, and adjusted EBITDA grew 27% year-over-year to $79 million, led by very robust product sales and steady services gains. On a year-to-date basis, revenue is up 30% and adjusted EBITDA up 36%. New contract awards can be lumpy, but we're good at $418 million in the second quarter. Based on order flow over the last several quarters, we ended the period with record government backlog of $992 million. So backlog is continuing to expand even as we've achieved high revenue growth.

Again, we don't include the unawarded IDIQ contract values in backlog, even though those contract vehicles are a growing part of our business. IDIQs are important to enable timely purchases for a number of customers, especially for our unique non-developmental items, products and services. As revenue associated with those NDI items grows, we anticipate a higher proportion of revenue may derive from those contracts. At quarter end, unawarded IDIQ contract value was about $1.1 billion.

So (technical difficulty) on our Tactical Data Link products, those sales continue to grow. While we have program of record products whose sales are strong, these non-developmental item products that we developed using our own discretionary R&D investments have done really well. Those NDI products help fill operational gaps that are artifacts of the government's acquisition system.

So in dealing with Tactical Data Links, or Link 16 in particular, the most important thing to remember is that Link 16 represents tactical information. It's not just a radio or a data pipe, and there's a very small set of companies with state-of-the-art Link 16 expertise.

Our NDI products are expanding the number of participants who can contribute to and/or act on that tactical information, from thousands of users to tens of thousands, and we're on course for hundreds of thousands. If you think of the members of a Link 16 network in terms of Metcalf's Law, which says that the value of a network grows like the square of the number of users connected, you can get a sense of the amount of value we're helping enable among our government customers. Framing the network that way helps give important context to the potential for a global lower-orbit network of Link 16 capable small satellites we are working on under an Air Force contract.

Link 16 uses terrestrial radio, so participants must otherwise be connected by a chain of line-of-sight radio links. But an affordable space-based solution could extend the Link 16 networks globally and multiply that value even more. While we love satellite broadband, and that's one of our biggest growth areas, almost all the participants using Link 16 could not be connected directly to a satellite broadband network but could be connected to a satellite Link 16 network. That's just one of the very unique ways that we can interweave our space capabilities with terrestrial tactical networks and our information security products.

Overall, we're really enthusiastic about the near- and long-term prospects of our Government Systems segment, especially in the areas of space, information and cyber assurance and tactical radio and data networks. We believe there's a very large addressable market, and we're still in the early innings.

Turning to Satellite Services, this is the seventh consecutive quarter of sequential revenue growth for Satellite Services. In our residential business revenues were up, primarily due to a 17% increase in ARPU over the prior year period, driven mainly by an improving mix of higher-bandwidth service plans. Subscriber count was also up slightly compared to last year.

Commercial Air was also a major contributor to the revenue increase, with the in-service tail count up 51% compared to last year.

And we're making good progress on our initiatives in Brazil now that the court challenges are behind us. With our partner, Telebras, we've connected thousands of remote schools and government facilities with high-speed Internet. Our goal is to reach 15,000 sites by the end of this calendar year, and we're well on our way to that.

Subsequent to the end of the quarter, we signed a contract with Azul Airlines in Brazil. Azul serves more cities than any other airline in Brazil. Our contract covers their fleet of over 100 A320 and Embraer E195 and E2 aircraft. We also extended our relationship with El Al to provide in-flight connectivity on their full 777 and 787 wide body fleet and in-flight connectivity and wireless IFE on their full 737 fleet. We've got 1,353 commercial aircraft in service, excluding about 85 737 MAX planes. The timing's still not certain, but we'll get a meaningful boost in in-flight revenue when they return to service.

Now our expectations are to install our IFC on over 600 additional planes under existing contracts. That was at the end of the quarter, and we can add about 100 more aircraft associated with the new agreements concluded after the close of this quarter.

So we've updated the chart on the lower left to show the steady progress we're making in diversifying our Satellite Service revenue over the past 5 fiscal years and the trailing 12-month period ending with the second quarter of this fiscal year. So even though our U.S. consumer business has been growing absolute revenue and earnings nicely during that time, our non-U. S. fixed business has been growing faster, which makes sense, as those are earlier stages in markets that are in the very early innings. We're aiming to extend and accelerate this trend as we enter or scale verticals in enterprise, prepaid mobile consumer like consumer WiFi, community WiFi, and as we expand geographically.

In the next 2 slides, I'll give a little more color on the opportunity for IFC in particular. So one of the questions that we get from investors is, "How big is the IFC opportunity?" Our rapid growth, reputation for industry-leading performance and reliability and the highly specialized skill set needed for this market makes that a really pertinent question. We view IFC as still a very early-stage market. Business models are still evolving, so it's not obvious how to size the opportunity today, but we've consolidated a few data sources to help scope out the potential.

Forecasts from Boeing and others anticipate the global commercial airline fleet will about double by 2038 to around 50,000 planes. Retirements of the existing fleet along the way mean that about 87%, or 44,000, of those planes will be purchased in that period. Passenger count is forecast to grow by about 3.5% annually from a base of about 4.3 billion in 2018. So passengers will also double over that 20-year time frame. But flights are expected to travel further on average, so revenue passenger miles or kilometers are anticipated to grow by 2.3x.

Only about 30% of the global commercial fleet is connected at all today, so that's a lot of growth on its base, and a lot of the existing fleet will be retired. Just for context, we believe we've been exceptionally successful with line-fits and other new fleet deployments compared to competitors, which is good. And that's indicative of airlines' confidence in our long-term solution.

The next important point is that we see WiFi connectivity is undergoing a fundamental business model change, from being just a source of ancillary revenue for a small fraction of passengers to being an integral and foundational part of the in-flight experience. We think it's becoming increasingly evident that IFC really means delivering the Internet and everything that implies to all the passengers onboard. If passengers are not connected, they won't have access to streaming entertainment or e-commerce or be able to participate in a myriad of advertiser- and sponsor-related activities. In effect, one way to envision the fully realized in-flight connectivity opportunity is as the Internet economy in the air.

The London School of Economics issued a report called Sky-High Economics that's available online, and that sized this total ecosystem for in-flight online as growing from roughly $4 billion in 2018 to $67 billion in 2028. Now that $67 billion value is not the revenue for IFC service providers, but it's an estimate of all the onboard economic activity associated with in-flight connectivity. And that can accrue to the airlines, to e-commerce providers, online entertainment services and others, and some portion of that to an in-flight connectivity provider.

But the key point here is that airlines that do not have a scalable high-performance passenger Internet connection and high passenger engagement won't be able to tap into this source of value and will likely be at a substantial competitive disadvantage to those airlines that do figure out how to master this domain. That's why we're so focused on being able to connect every passenger on each flight with a reliable high-speed connection suitable for streaming, even at the busiest hub airports.

This expansive view of the economic impact of scalable high-performance IFC resonates with us, as we've seen our airline partners leverage our connectivity in various ways with valuable Internet brands such as Apple, Amazon, Netflix, Spotify and others, all of whom aim to interact with the high-value demographic of passengers riding in airplanes for hours and with access to a good broadband service that supports streaming audio and video for as many people as they can engage.

Our mission is to help our airline partners leverage connectivity and to tap into this ecosystem in whatever ways are best suited to their brand, their passenger demographics, their destinations, their targeted customer experience and their network of partners. Different airlines are in different stages of this journey, but we believe that all of the airlines that are farthest along in leveraging the Internet are our customers. There's still a lot of work to do, but we've made substantial progress, and our reputation speaks for itself.

This London School of Economics study explores multiple aspects of these business models but doesn't explicitly break out the portion of the $67 billion 2028 revenue that would constitute the in-flight service provider share of the market. Based on our experience, we estimate that roughly 10% to 20% of that total is addressable by the in-flight service providers, or roughly $7 billion to $14 billion annually in 2028, depending on how the ecosystem evolves.

Just as a cross reference, Euroconsult estimates the in-flight service provider and satellite operator portion of the market as about $8 billion in that time frame, so that's in that range. We refer investors to these reports for more depth.

Now this next chart on market share helps establish the point of this discussion on market sizing. It shows our progress in capturing market share in the North American narrow body fleet, which accounts for the majority of currently connected global connected aircraft. Correlating data from several sources, we believe we're serving just under 30% of this market, up from just over 20% at this time last year, and 3 years ago, we were only at 10%. No one is growing share as fast, and we still see opportunities to continue to gain share. We believe those share gains reflect the advantages of our vertically integrated strategy, enabling us to directly address every aspect of the in-flight connectivity and entertainment solution -- aircraft integration, flight operation support, the passenger experience, the streaming entertainment and the data analytics that help drive it.

We're already a multiregional player with strong positions where we've established international partnerships, including Australia, Europe and Brazil, and we're making progress in China. Now with the approach of ViaSat-3 and the lead time for delivery of the most popular new aircraft, we can compete on the global stage. Our new business pipeline is at its most robust ever.

You can see that our in-flight connectivity business alone can be a multibillion dollar per year annual business during the lifetime of the ViaSat-3 constellation if we can translate our success in North America to the global market. If we assume our current North American narrow body market share of roughly 30% can carry across globally, our revenue opportunity in 2028 would range from about $2 billion to $4 billion annually. That's in the range of 10 times where we are now.

So far our execution has been good. We're targeting being able to demonstrate meaningful progress towards being a leading global player in the next several quarters. Stay tuned.

So now we'll turn to our outlook. The chart on the left-hand side shows our trailing 12-month revenue and adjusted EBITDA growth over the last 6 quarters, and that's helpful in communicating our outlook. Since the first quarter of fiscal '19, we've grown revenue by 36% and adjusted EBITDA by 97%. We believe the underlying factors enabling this growth remain in place and are listed in the points on this slide.

Our Government Systems business is expanding its addressable markets. It's in the early stages of what we believe can be a long-term growth cycle. The Government Products business has been exceptionally robust to date this year. While individual quarters can be lumpy, we believe our Government Systems division year-over-year or trailing 12-month results have good prospects for continued growth. Our record Government System backlog of almost $1 billion, augmented by another $1 billion-plus of IDIQ opportunities, builds confidence in that outlook.

Satellite Services business also has good prospects continued year-over-year or trailing 12-month growth. ARPU's 17% higher than this time last year on a slightly higher subscriber base. We're also market testing new service plans that can increase the available bandwidth per user and/or enable us to support more subscribers and reduce latency to terrestrial levels for those applications that are latency sensitive.

We expect to see good flow-through of incremental revenue to adjusted EBITDA even as we continue to invest in these new growth markets.

We're also seeing the benefits of our growth surge in in-flight connectivity. That business is growing much faster than U.S. consumer and that, along with enterprise, international growth and emerging prepaid mobile community WiFi, continues to diversify our revenue and earnings base. The number of in-service commercial aircraft is up 51%, and revenue per plane is higher.

Our market share in North American narrow bodies has grown substantially to almost 30%, and there are about 85 737 MAX planes outfitted with our service that are still grounded and will get into service some time in the next couple of quarters. While the exact timing for getting them flying is still not totally certain, it will create a nice step increase when those revenues happen.

As we mentioned earlier, our performance and reliability has established an excellent reputation in the industry, and our pipeline of new global in-flight opportunities is very robust. The ViaSat-3 launches are approaching and lining up with more new aircraft deliveries, and our investments in dual-band Ku/Ka opens potential for early entry and retrofits. We're optimistic that can yield exciting growth in total tail count and that we can ultimately earn global market share comparable to what we've already achieved in North America. It's a very big addressable market, and we believe we're establishing leadership status.

Given the robust in-flight pipeline I described, you can expect us to continue to make prudent, success-based investments in growth for items such as FTCs or line-fits and regional network and support infrastructure. We've shown we can make those investments worthwhile. Those investments may dampen some of the earning flow-through in our Satellite Services segment, but we don't anticipate they will undermine our continuing trailing 12-month growth momentum in revenue or in adjusted EBITDA.

The final point I'd like to emphasize is that we're already involved in leading or pioneering a portfolio of synergistic vertical markets -- fixed satellite broadband, in-flight, government mobility, enterprise, prepaid mobile via community WiFi and maritime -- that are at different stages of development, but several of which have the potential over the next 5 to 10 years of yielding revenue significantly greater than the whole company achieves today.

Aside from the sheer growth opportunity, we see important benefits to Viasat in diversifying our business space, improving resilience to extrinsic risks and economic cycles in vertical or geographic markets and the opportunity to target those applications offering the greatest returns for our resources and skills. In each case, we believe competitive advantage will come from not just serving low-cost bids, but in optimizing the end user benefits that broadband Internet offers to each particular vertical and geographic market. This requires market intimacy, operational, technical and regulatory expertise, but those skills also create defensible moats that can help us achieve the attractive returns we expect.

So that's it for our prepared remarks, and at this point, we'd be happy to take questions.

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Questions and Answers

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Operator [1]

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[Operator Instructions.] Your first question is from Rick Prentiss from 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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A couple of questions. Mark, you sound pretty excited. I want to bore down on a couple of the areas. Government Services was obviously a very strong quarter. You called out early stage for a long-term growth cycle. Are you looking at that on the government side from both the product side and the services side as ability to grow? And what kind of margins can we expect in that segment as you continue to grow in that long cycle?

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

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So first, yes on both products and services. Products growth has been exceptionally good the first half of this year. And one of the things we have spoken about multiple times over the last couple of years is growing the addressable markets for our products from the leading edge/early adopter base, early responders like Special Forces, into the broader Army, Navy and Air Force. And that's happening. That's what's stimulating these product sales. And so those markets are much larger than the early adopter Special Forces markets that we've typically been in for many of our products.

The services segment, the services part, is growing steadily as well. One of the things that we see as a catalyst for even faster growth is getting greater global coverage as we expand our footprint, either through partner satellites or the launch of our satellites. The margins, I'd say margins will fluctuate with product and services mix, but the margins that you're seeing are pretty representative of what one would expect going forward.

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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 Slide 11 was a very interesting slide. I appreciate you putting that out there. As you think about that opportunity for that addressable market of in-flight connectivity bringing the Internet to the airline, what are the barriers to you guys growing that share, first on your narrow body count, and then what are the issues or barriers to getting your share of that revenue or getting paid for it?

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

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Okay, so our pitch with the airlines, and this is -- we can see it's clearly resonating -- is that think of it as engagement is really the key to the in-flight business, that you get no points for having in-flight connectivity from passengers that don't use it. So the #1 thing is really to facilitate engagement. And in some cases, you don't have to do anything; passengers want to use it. Maybe you may or may not need to take away a paywall to do that. In some cases you may need to just take away friction that the people who might want to use it but didn't know it was there might have -- to go through a portal, as an example, and we've got evidence that when you can take away friction like that, you can increase engagement.

Once you've got engagement and you can show, which is one of the things we've done multiple times with third-party Internet companies, that you can deliver a good experience reliably, even in the busiest places and times, now -- and this is why I think that that chart on Page 11 is so important -- is that you're really unlocking value, not just for the airline or for the passengers, but for the whole Internet economy. And as long as there's benefit to think of the participants or the passengers, the airlines, the Internet companies and us, as long as it's a win-win-win-win deal, there's a lot of value to be unlocked.

And I would say probably the biggest issue to overcome is that, given previous in-flight connectivity experiences and poor passengers, airlines may be skeptical that anybody, that third parties are interested. And we've seen, we have evidence that they are. These third parties are a little bit skeptical that a reliable and scalable experience can be delivered, and we're trying -- we're showing that. And I think it's working.

But then to your question about what the barriers are, a lot of them really are just coming from some of the forward-leaning airlines that are trying new things and having them be successful.

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

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Makes sense. I think we're starting to call it, "Why fly?" instead of WiFi.

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

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I like that.

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Operator [8]

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The next question is from Simon Flannery from Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [9]

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Mark, I wonder if you could just give us a little bit of the status of the ViaSat-3 build programs around the world and the latest thoughts on timing there. And also on the Link 16 LEO potential, what's the time frame for going through evaluation, trials, et cetera? Is that a contract that might come in calendar '20, or is it longer than that?

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

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Okay, first on ViaSat-3, we don't have any changes to our schedule or timing than what we talked about last quarter. And that, basically what we said is first half of 2021 for the first satellite, second half or end of 2021, 6 months later, for the second and end of '22 for the third. That's still the...

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Simon William Flannery, Morgan Stanley, Research Division - MD [11]

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These are launch dates?

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

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Those are launch dates, correct, yes. And those are the schedules we're working to. We always remind people that there are -- that the space business is risky. There's new technology involved and then there's conventional risks of in-orbit satellite platform issues or launch issues. We feel like we have a good launcher, we have a good satellite manufacturer, but there's new technology and there's always risk. But we haven't made any changes to our outlook from last quarter.

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Simon William Flannery, Morgan Stanley, Research Division - MD [13]

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And anything on just partnerships, and I think you mentioned something about ground networks in EMEA as well.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [14]

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Yes, so we are, right now our plan is to bring, launch the satellites, bring them to market ourselves. We will have partnerships in different regions. As an example, in the Americas we already have Telebras as a partner. In Asia-Pacific, we work with NBN. We're starting to work with China Sat. But I think you'll see, more likely to see strategic partnerships than some specific capital partnership around the satellites themselves.

Okay, shall I go on to the Link 16, or did you have any other questions?

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Simon William Flannery, Morgan Stanley, Research Division - MD [15]

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Yes, that's good.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [16]

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So on the Link 16, we have a contract with the Air Force Research Lab to build a prototype Link 16. It's a range extension satellite, so it does just what we described, which is it can interact with Link 16 terrestrial terminals or platform participants and relay those over the line, much larger line of sight of that satellite footprint. That program is underway. I'm not totally sure of the schedule, but I'll bet you it's next year, calendar 2020, for a demonstration. We will -- the Air Force will work with us to arrange the launch, and there is no launch scheduled for it yet. So it will depend on the progress and the status of the satellite itself.

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Operator [17]

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The next question is from 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 [18]

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Mark, you alluded to your new flex plans when you're talking about greater options and maybe reduced latency. How does that model work with your DSL partner or partners?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [19]

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Okay, so we have -- we're aiming to roll that out in, so we've begun with a DSL partner. What the first model we're using -- it may not be the only one -- is a wholesale arrangement where we acquire DSL and bundle it with our satellite service. And we have a pretty big multiregional -- it's not fully national -- but we have one pretty big footprint for that under our ViaSat-2 satellite now. We are in discussions with other DSL providers who are interested in doing the same thing with us. Likely, we could end up buying wholesale DSL. What we expect is at some point we'll have reciprocal marketing relationships, where a DSL provider can offer satellite along with that.

Then we're also using, we're also aiming to deliver this calendar year our first flex plans with mobile wireless. So that's a do-it-yourself. You can just use, if you have an unlimited wireless plan, you can allocate some amount of wireless bandwidth, and we automatically seamlessly route data packets over the best networks for your applications. And that one, that will have a nation -- pretty much a nationwide footprint from the start.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [20]

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Okay, thank you. Similarly, you demonstrated your hybrid adaptive network at this AFWERX conference. But the Air Force is also moving forward with this different program. I think it's called DUCI, where they're looking at these LEO constellations that may or may not get built. But are those efforts at the Air Force like stove-piped, or would they be integrated, where they would consider things like your range extension, LEO satellites and maybe even backhaul on ViaSat-3?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [21]

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Okay, so that's -- yes, that's a broad question. So one is I would give ourselves some credit for launching this hybrid adaptive network concept. I'd say the DoD likes it, and so they have an initiative to build their own version of it, and that's a little bit of a view of it as a network technology problem. We think there's a lot more to it.

And we basically do that already for a number of our existing government mobility customers, like the Leadership Fleet. So we can use Ku or Ka or MEO satellite constellations. We're working with the LEO operators to be able to do that. I think one of the things that you've seen recently is what the government really wants is they want terminals that are capable of operating on multiple networks, which we think makes complete sense. And so we're doing that, including their own, including their own organic satellite systems. So we're doing that.

And then it's really more of a business relationship. So what we would expect is that you'll see services offered under maybe the government version of it, but you'll also see private versions of it, where it's just seamlessly managed by some network provider, and that's an extension of what we're already doing.

I think the fact that the government has their own program is indicative that there's real operational value there. And just like we do with a lot of our NDI businesses, our challenge is to get there faster or to do it better or more effectively or to be able to propagate it through the organizations faster. We're up to those challenges.

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Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [22]

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Okay, thanks, and just a last quick question. Regarding the NDI, does that -- obviously, that protects you a little bit from Continuing Resolution, but are there other parts of your business where there's a new program that might not get funding or be delayed until we get a budget?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [23]

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That's a little bit of an effort. I don't know, Rick, do you think you want to -- I don't think -- nothing pops to mind right now. But the Continuing Resolution is something -- it's always...

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

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Yes, so yes, this is Rick. They are going through this cycle, and to the extent that they don't get -- they get a CRA that carries them through the end of the year, then they have to deal with this thing at the beginning of the year. So I'd say we're not immune to people not having money and being able to enter into new contracts. We're not immune to that.

In general, the IDIQs that we have are in place and most of the stuff is in place. But if the defense industry gets to be -- begins to be impacted by this, we'll be impacted as well, but probably at a less -- lower level.

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Operator [25]

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The next question is from Chris Quilty from Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [26]

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Mark, I think last quarter you indicated that after a good Q1 ARPU growth, we should expect a little bit of moderation, and you went ahead and put up an even stronger ARPU number in Q2. Was there something one-time in that number, or is this a good number to baseline off of going forward?

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

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Okay, there's no extraordinary, no extraordinary inputs to that number. That's what it was. One of the things we've said we want to do is we've outlined this program, which has worked really well for us. The short way of saying it is it's way better for us to have 1 $100 customer than 2 $50 customers from a cash management perspective, from a customer satisfaction perspective. The issue for us has really been in finding the edges of that -- how many hundred -- clearly, the market for $100 customers is less than the market for $50 customers.

But the secular trends are ARPUs are growing as well. And what we've found is good demand. I'd say also, we are putting a lot of work into optimizing our satellite network. And one of the things that we said was good about ViaSat-2 and has turned out to be the case is we've been able to reallocate bandwidth from areas with less demand to areas with high demand. And we may not get a 1-for-1 gain like we might if we moved bandwidth from a low-demand place to a high-demand place. We may get less bandwidth, but if the bandwidth is more valuable there, economically, that's a good trade. And I think factors like that are contributing as well.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [28]

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Understand. And not to get too far out in front, but the U.S. model, where you can find these high-value, $100 ARPU clients, is probably going to be very different in other parts of the world. Were there certain ways that you architected ViaSat-3 to enable both models, one of higher ARPU and one in perhaps the developing world that's lower ARPU, lower value in terms of the service you're providing?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [29]

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Yes, so when it comes to ViaSat-3, I'd say we have the top-level things that I think are going to be very impactful. Our #1 is just the sheer productivity of the satellite; that is, the low cost of bandwidth that we have will enable us to offer plans at low price points. And then the other really big factor is the flexibility in allocating that bandwidth to the best markets is even -- it's much better than it is on ViaSat-2. So that will help us a lot.

And then some of the things that we're testing now, like these flex plans also, they do the 2 things that I said. One is they give us more total bandwidth to work with, which is good, and we can use that to either get more customers at lower price points or better plans at the same price points. So those are the things that we'll be working with. I think we're getting good experience in Mexico and Brazil.

The other thing is we think of this community WiFi business as it's really addressing the prepaid -- what would otherwise be the prepaid mobile market out of emerging markets. And so one of the things we can do with that as well is we can sell, essentially think of a prepaid-postpaid type plan, where somebody says, "Oh, I'll give you $10 a month." I'm making up a number, but where we can integrate those access points with those types of low-end plans.

So we have a pretty fair amount of dimensions to work with. I think it's going to be quite different in different countries, and so I think we're still in learning mode.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [30]

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Great. And one final follow-up on the Link 16. Can you remind us the satellite cube sat that you're building Link 16 enabled -- was that fully funded, or did you put some investment in there? And would the idea be that eventually either the government or you would fund the development of a full constellation to operate a private-military Link 16 network?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [31]

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Okay, so we won a competition to develop that prototype satellite. It's a fully funded contract, and I think that that's where the government's headed, is to have -- assuming that we can demonstrate the functionality and that we can do it at a price that makes sense. I think that's where they'd be headed.

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Richard A. Baldridge, Viasat, Inc. - President, COO & Director [32]

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Yes, this is Rick. The only thing I would add there is we've built -- you call it a cube sat. I wouldn't necessarily say that's what we're building. We've built some small sats in the same time frame already, and so we have invested money previously that we used to help win this contract. Also on -- we've qualified some Link 16 hardware in a previous launch in space that we've proven can survive there. So there were some other initiatives.

Mark's absolutely right. We won a competition that's fully funded. But I just wanted to point out we brought with that our own intellectual property.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division - Research Analyst [33]

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So not a cube sat, but presumably a different production line than ViaSat-3?

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

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That's for sure.

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Operator [35]

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The next question is from Philip Cusick from JPMorgan.

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Sebastiano Carmine Petti, JP Morgan Chase & Co, Research Division - Analyst [36]

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This is Sebastiano on for Phil. I just wanted to see if you can give us any color. Where do you stand now with the Eutelsat JV, and how should we think about that evolving as you expand internationally? Any color you can give there?

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [37]

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I would say we're in a temporarily stable situation. That is, we have, I don't know, we have an accommodation with them. They're using our network; we're using their satellites. It's in a stable situation now. It's probably not the long-term solution for it. We're still working with them to sort out what the fully -- sort of the end state will be. There's not much. I don't think there's much more to say to it than that. Do you have some other specific question around that?

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Sebastiano Carmine Petti, JP Morgan Chase & Co, Research Division - Analyst [38]

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No, I was just thinking about where we are now and that's been a little bit -- not necessarily in limbo, but just been a bit quiet on that front. So I just wanted to see if there was anything you could potentially share, any recent developments. But that's fair. Thank you. And then just a quick follow-up on the IFC. Second straight quarter of just aircraft online net adds slowing a little bit here. Should we think of this fully attributable to what's going on with Boeing and the MAX fleet? Or is it just getting to a point now where the backlog is not maybe as robust as it had been and things are just slower? Or is just a one-off situation? Thank you.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [39]

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So okay. So I think last quarter what we described was around 1,300-ish planes in service and a little over 500 additional under contract, so maybe around 1,800 or so. Where we are now is, if you count the MAX, that we'd be at around 1,440 and around 700. So we're up to about 2,100-ish. So there's been pretty good progress, a lot of it with our existing customers. We haven't announced each of the orders that's built up into that total. But if you just add up all the things that we talked about, so I'd say we've made pretty good progress in orders.

The MAX grounding is a headwind because we have a number of those planes. We had the first line-fits. We have a number of airline customers that are counting on those planes. But I'd say stay tuned; we think things are going to get even better.

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Operator [40]

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I am showing no further questions at this time, presenters. I would now like to turn the conference back to Mr. Dankberg.

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Mark D. Dankberg, Viasat, Inc. - Co- Founder, Chairman & CEO [41]

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Okay, so that concludes our call today. Thanks very much for dialing in, and we'll look forward to speaking again next quarter.

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Operator [42]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.