Viasat, Inc. (NASDAQ:VSAT) Q2 2024 Earnings Call Transcript
Viasat, Inc. (NASDAQ:VSAT) Q2 2024 Earnings Call Transcript November 8, 2023
Viasat, Inc. beats earnings expectations. Reported EPS is $1.07, expectations were $0.48.
Operator: Good day everyone and welcome to Viasat's FY '24 Second Quarter Earnings Conference Call. Your host for today is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.
Mark Dankberg: Thanks. Good afternoon, everybody. Thanks for joining us today. So with me, I've got Guru Graben, our President, Shawn Duffy, our Chief Financial Officer; and Robert Blair, our General Counsel. So, Robert could you please start us with our safe harbor disclosure.
Robert Blair: Sure 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 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.
Mark Dankberg: Okay. Thanks. So we encourage reading the shareholder letter that we posted on our website earlier this afternoon for more details. I'll start with an overview of the main points, and then we'll have time for questions. Our main objective today is to bring you up-to-date, organize some information and provide clarity on our plans. So I'll start with a quick update on performance in the quarter, which was really good. Overall, up well into double digits on revenue and adjusted EBITDA on a combined operating basis. I'll give an update on the status of the two satellite anomalies. They have the financial implications of putting those behind us and describe the go forward plan. And then, I'll give a quick reminder of our overall strategy and why we're well positioned for growth, primarily in the $108 billion market for commercial and government global mobility.
So after that, Guru will go into more depth on the quarter with business highlights and financial results give a little bit more color on the Inmarsat integration and give an update on our fiscal year '24 and '25 growth outlook. Just for context at the beginning, we have a good track record of identifying and building profitable and enduring positions in a succession of specific, somewhat esoteric market segments, including against much larger competitors. And we think the sale of the tactical data links business earlier this year to a leading aerospace and defense company for about $2 billion, it's indicative of our ability to build long-term value, while also transforming target market segments. We've been targeting global mobile broadband for over a decade, and we've had a big impact on the commercial in flight connectivity market in the U.S. We aim to leverage our technology and domain knowledge and the extensive operational data that we've accumulated, along with Inmarsat heritage to lead specific segments of this rapidly growing market for commercial and government global mobile.
We can do it by focusing on quantitative performance metrics that are critical to our customers and bringing together the asset skills and ecosystems needed to win on those metrics. Our financial performance in the second quarter demonstrates strength in global mobility. Core operating financial results were good across the business, both at Viasat and with legacy Inmarsat. Excluding the onetime benefit of a legal settlement, operating revenue was up 16%, year-over-year on a combined basis. And then excluding that onetime mitigation benefit in the satellite impairment charges, operating adjusted EBITDA was up 20%. Our aviation business continues steady growth. Our customers' fleet of planes is up to 3,350 and still growing, passenger engagement is growing, and we've got a robust pipeline of new orders.
Information assurance products for secure government data centers and antenna systems are also growing very well. Maritime is growing modestly and we see opportunities to build momentum there. Our outlook is also quite good. We anticipate continued growth in revenue and adjusted EBITDA during fiscal year '24 and fiscal year '25, and to reach free cash flow positive in the first half of calendar '25. So go up to the satellite anomalies, those, on ViaSat-3 Flight 1, and Inmarsat 6, Flight 2 this summer were two totally different events. And they were setbacks, but we have plans to deal with each. Now I6F2 will result in a total write-off. A claim for about $349 million will be submitted to insurers shortly. I6F2's near-term contribution to revenue was expected to be small.
It was part of a longer term planned evolution of Inmarsat's redundant global l band coverage to a newer generation of satellites. We have a provision in our updated capital budget to replace that mission of I6F2 in a timely manner. ViaSat-3 Flight 1 is impaired. And as we disclosed recently, we expect it will have less than 10% of nominal total throughput. We expect to file an insurance claim this calendar year for about $421 million. The anomaly affected what's called the feeder link antenna. The rest of the satellite has operated nominally or better to date. Our focus has been on characterizing the affected antenna so we can compensate for the anomaly optimally. We've made a lot of progress there. The satellite system is, software defined on the ground, which gives us a lot more tools that we can use.
We can use them to optimize available throughput for global mobility, especially by dynamically steering coverage beams on moving airplanes and ships, and to the busiest airports, seaports, or wherever there's instantaneous demand is greatest. We also can effectively increase the capacity of our other satellites in our fleet for global mobility by the way we use each of the ViaSat-3s including Flight 1. Our fixed U.S. business though depends more on the volume of bandwidth than on dynamic beam steering, so we expect it will decline until we launch and position the next ViaSat-3. We expect to grow in fiscal 2024 and fiscal 2025 nonetheless, driven by the backlog and outlook in global mobility and government. ViaSat-3 Flight 3 has a launch contract now for the fourth quarter of calendar '24, about a year from now.
Either ViaSat-3 Flight 2 or Flight 3 would replace Flight 1 over the Americas, and then Flight 1 would be relocated. Report on the Flight 1 antenna root cause, and then the corrective actions for Flight 2 from the antenna manufacturer is planned for next week. The Flight 2 satellite is awaiting corrective actions to the effect of the antenna and then integration with the completed spacecraft. So, we'll give an update on that schedule next quarter. The other satellite update is that we don't anticipate additional material investment in ViaSat-4, and we've written down that asset. It was designed prior to the Inmarsat acquisition when fixed services were a higher priority. Given the timing on the ViaSat-3s and our focus on mobility, its need date is farther out than originally planned, so deferring capital investment now saves several 100 to 1,000,000 of dollars in the near-term and accelerates our free cash flow generation, and it improves profitability.
We expect that key technology work that was performed on ViaSat-4 will apply to a future broadband satellite flight that'll deliver better returns in mobility applications. The end result is a write-off of the three satellite assets of about $900 million net of insurance. The schedule for Flight 1, remember the build schedule for Flight 1 was much longer than for Flight 2 or 3 due to both COVID issues and learning curve. So its cost was higher than the others. The bulk of the write-off is due to flight ViaSat-351, ViaSat-652, about $350 million of capitalized interest. So just I just briefly touched on our strategy before we go to Guru. And just to me, be sure. Our strategy is to lead specific government, commercial, global mobility market segments that have common characteristics that drive value creation for our customers and for us.
So, we're looking for broadband customers whose connectivity is directly coupled to operational needs or wants and where customers are motivated to understand and measure the quality of connectivity that they need for those purposes. And we're looking for customers that want contractual assurance they get the connectivity activity they need for their missions over all the times and places their platforms travel. So that means measuring the times and places where connectivity is most stressed those congestion hot spots that can undermine achieving their operational purposes. We can attract and serve those customers by meeting specific, granular service level commitments, and then giving them the data and insight they need to optimize their own financial performance.
We think that describes a large and growing portion of the global mobile market, our success in flight connectivity, the outcome of applying that strategy over a journey of discovery and we take in with our airline customers. There is quantifying the demand elasticity and value creation for different forms of in flight Wi-Fi service offerings and then measuring highly concentrated demand at peak times at busy airports that comes with high passenger engagement and where other services haven't really performed reliably. And then finally, as good connectivity becomes more widely available across airlines and routes, it becomes critical to each airline to both differentiate their brand and their value propositions from other airlines while also capturing the value that's created by that connectivity.
So, we can apply these points to multiple market segments. Once a few 100s customers understand the significance of connectivity measurements over entire routes and the hotspot challenges and then translate that into competitive advantage that tends to drive change across entire market segments. The dynamic global coverage and beam steering of the ViaSat-3 constellation even with an impaired Flight 1 as well as the capabilities of the upcoming GX789 series support our strategy. So this continues to resonate with customers and it's resulting in new business globally, including some examples this quarter such as Korean Air, Malaysian Airlines, Atlantic Offshore, Porter Airlines, and with the U.S. Space Force, and more. The other important element of our strategy is to better leverage Inmarsat's global L-band leadership.
L-band is very well suited to low cost, highly reliable, weather resilient coverage for emergency voice and operational data, and there's growing opportunity to integrate both satellite and terrestrial coverage for Internet of Things and mainstream mobile devices. There's already substantial overlap in the customer base between our broadband and L-band markets, and there's good opportunity to further differentiate our integrated service offerings. So our near-term growth outlook is good, and longer term's even more exciting. As part of our comprehensive review upon closing the Inmarsat acquisition, we're refining our strategy to make sure we're focused on the right market segments and refining value propositions that resonate with customers.
And as we complete and deploy the capital investments to take those value propositions global that we generate the cash flow we're aiming for. We're planning an investor day in March of 2024 where we'll go into more depth on the analytics and the customer journeys, describing that underpin our approach. So now, hand it over to Guru, who'll talk about our second quarter.
Guru Gowrappan: Great. Thanks Mark. I will cover three key topics today, our Q3 financial performance, integration and transformation and an update on our combined outlook. We are executing on our strategy and delivered a strong core financial and operational performance during Q2. Core revenue and adjusted EBITDA both grew by double-digits year-over-year driven by our government, aviation and maritime businesses. Legacy Inmarsat and Viasat both performed well with strong contributions. Some of the key highlights from the quarter include, Garmin Systems had another quarter of strong demand for our information assurance encryption products, which drove product revenue up 50% year-over-year. And during the quarter, we were awarded a proliferated LEO satellite based services contract by the U.S. Space Force as part of their 900 million IDIQ program.
Services will be comprised of our current and future satellite constellation capabilities as well as the partner LEO MEO Networks to deliver integrated multi orbit solutions that may include space relay services. Next, UK National Cybersecurity Center evaluated our next generation data test cryptography solid state drive for top secret classification, which was successful and we are only hardware encrypted SSD using the industry standard interface and form factor to attain the status. Recent trends in satellite services continued with strong growth in commercial IFC which ended the quarter with 3,350 aircraft in service, up 19% year-over-year on a combined basis and 1,600 aircraft in backlog. U.S. fixed broadband revenue declined as fewer residential subscribers were partially offset by higher ARPU.
We continue to reallocate bandwidth to support our rapid IFC growth. In addition, we announced several commercial air customer updates as Mark mentioned earlier, Malaysia Airlines selection of our IFP solution for its new Boeing 7378 aircraft, Korean Air's selection of our IFC solution for its upcoming Airbus A321neo aircraft and Additional orders for both IFE and IFC solutions on Porter Airlines' new Embraer E195-E2 aircraft. Maritime revenue continued modest growth. The total KA band mobility platforms which include vessels and aircraft grew to over 19,000 up about 2% sequentially. Finally, awards for the quarter were up 15% Year-over-year to $1 billion backlog was $3.6 billion at quarter end. We have a couple of one off items in Q2. In the commercial network segment, we recognized a non recurring benefit to product revenue of $95 million and adjusted EBITDA benefit of $86 million as a result of litigation settlement.
In the prior year period, we recorded revenue of $56 million and adjusted EBITDA of $51 million related to the same litigation. We also announced $900 million of net asset impairment charges primarily related to the previously announced satellite anomalies which includes approximately $350 million of capitalized interest. Now some color on the financials. Q2 FY 2024 revenue was $1.2 billion. This was up 85% compared to revenue from continuing operations of $664 million in Q2 FY 2023. Excluding the nonrecurring litigation benefit from both years and including Inmarsat in both years Q2 2024 revenue was up 16% year-over-year. Net loss totaled $767 million for fiscal Q2 which increased from $48 million net loss in the year ago period primarily due to net asset impairment charges related to satellite anomalies.
Adjusted EBITDA for the quarter was $486 million, an increase of 210% year over year from continuing operations. Excluding the nonrecurring litigation benefit from both years asset impairment charges and including Inmarsat in both years, Q2 FY 2024 adjusted EBITDA was up 20% year over year. Sequentially, net leverage decreased to approximately 3.7 times estimated combined last 12 months adjusted EBITDA as of Q2 FY 2024, which is a 0.2 times sequential improvement and substantially favorable to the plan at the time the Inmarsat acquisition was announced. We have significant financial flexibility with more than 3 billion of liquidity, including approximately 2 billion of cash and cash equivalents on our balance sheet at quarter end and no near-term maturities.
And we have a fully funded path to positive free cash flow. In addition to our solid results, we were also proud to be recognized by the U.S. government at this year's G20 Summit for our work to help close the gender digital divide and bring internet access to women in remote areas of the world. You can find a more complete review of our results in the shareholder letter that we posted today. Overall, as you heard from Mark as well, which this was an excellent quarter for Viasat. Now moving to the next topic which is integration and transformation. Our integration of Inmarsat and the transformation of our combined organization is going well and is ahead of the plan bringing greater certainty that we will deliver and exceed our synergy goals for the Inmarsat acquisition.
Last week, we took the required labor actions to achieve annual operating expense savings of approximately 100 million beginning fiscal year 2025 which positions the Company for improved profitability going forward. This timeline represents a multiyear acceleration relative to our targets. Separately, the benefit to capital expenditures was included in our FY 2025 guidance of 1.4 billion to 1.5 billion announced last month. We expect to incur 45 million of onetime costs related to these actions. As financial discipline remains a top priority, we are working every opportunity to improve our cost structure and operational efficiency, including taking a closer look at our third-party procurement spend, more disciplined capital expenditure and benchmarking to accelerate the timing and magnitude of free cash flow.
Now transitioning to outlook. I'll wrap up with a high level summary of our financial outlook. We're excluding satellite impairment charges and the nonrecurring benefit from the litigation settlement announced today from our guidance. For FY 2024, we expect revenue growth in the high-single-digit percentages over FY 2023 for the combined company with revenue growing to a range of 4.1 billion to 4.25 billion. For FY 2024, we expect adjusted EBITDA growth in the mid-single-digit percentages over FY 2023 for the combined company. We expect FY 2024 adjusted EBITDA to grow to a range of 1.25 billion to 1.3 billion. In FY 2025, we continue to expect both revenue and adjusted EBITDA to grow. FY 2024 capital expenditures are expected to be approximately 1.7 billion then decline in FY 2025 to a range of 1.4 billion to 1.5 billion inclusive of a placeholder for the potential funding of an I6F2 replacement.
Capital expenditure guidance does not include the expected 770 million benefit from insurance recoveries. Note that we include capitalized interest in our CapEx guidance. Our path to positive free cash flow in the first half of calendar year 2025 is driven by sourcing growth from our large and growing markets which includes government, aviation and maritime Realizing realization of our sizable backlog, meaningful cost rationalization and a disciplined CapEx spending which benefits from the natural decline as we launch our satellites. We are driving cost structure improvements with synergies, scale and benchmarking. And the magnitude of free cash flow is expected to increase meaningfully as we place ViaSat-3F and F3 3 satellites into service.
So there you have it. While we've had unfortunate satellite setbacks, we have a very good hand and we are optimizing and growing the strong assets we have. Our operational performance in Q2 was excellent and we are on track to achieve very material synergy value then expect the combined company to grow revenue and adjusted EBITDA in FY 2024 and FY 2025 while creating a powerful global mobility and government business. And to be clear, our FY25 growth is based on a full 12 months of Inmarsat in FY24. With that, I'll pass it back to Mark.
See also 15 Most Shorted Stocks Hedge Funds Are Buying and 15 Best Performing Dow Stocks in 2022.
To continue reading the Q&A session, please click here.
