Viasat, Inc. (NASDAQ:VSAT) Q3 2024 Earnings Call Transcript
Viasat, Inc. (NASDAQ:VSAT) Q3 2024 Earnings Call Transcript February 6, 2024
Viasat, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Viasat Fiscal Year '24 Third Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.
Mark Dankberg: Thanks. Good afternoon, everybody, and thanks for joining us today. So with me, I've got Guru Gowrappan, our President; Shawn Duffy, our Chief Financial Officer; and Robert Blair, our General Counsel. So first, I'll have Robert provide our safe harbor disclosure.
Robert Blair: 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 Forms 10-K and 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.
Mark Dankberg: Thanks. Okay. So we encourage reading the shareholder letter that we posted on our website earlier this afternoon for more details. And we'll give an overview of the main points, and then we'll allow plenty of time for questions. I'll start with a quick overview of our results and status on our satellite fleet and then Guru will go into more depth on the quarter. Our 3 main priorities, as described in that letter, including the Inmarsat integration, and update our outlook. Our financial results for the third quarter were good. Revenue of $1.1 billion, was up 73% year-over-year compared to revenue from Viasat continuing operations last year. Inmarsat's contribution was about $443 million, up 12% year-over-year on a standalone basis.
Combined growth was 8% year-over-year. Our adjusted EBITDA for the third quarter was $383 million, up 214% relative to adjusted EBITDA from continuing operations last year. Inmarsat's contribution was $260 million, up about 17% last year. Combined adjusted EBITDA grew about 11% year-over-year. Awards were also very good at $1.2 billion for the third quarter, resulting in $3.7 billion in backlog, and Government Systems also has about $6.4 billion of unawarded Indefinite Delivery/Indefinite Quantity, or IDIQ, potential contract value. from our results, we're continuing to grow and win business in our core target market segments, including selected enterprise and government mobility services. We continue to compete with our customers that value 4 main attributes.
An expansive view of connectivity that integrates not just reliable, measurable and affordable speed and bandwidth, but also includes hardware, software and service products that are tailored to optimize those customers' unique requirements. And also where we bring scale, not only in bandwidth and coverage but also in operational support and/or partnerships that add value in key verticals and in important geographic regions. Three is where we earn trust of similar customers and partners through years and decades of performance and technology innovation; and finally, those customers recognize our history of identifying, applying and evolving both the right business models and technology for our target markets. I'll cover a few business highlights, including applying our existing infrastructure to new seamless nonterrestrial network, industry standard services through partnerships with Skylo and Ligado, expanding our hybrid in-flight connectivity network agreement in Europe with Deutsche Telekom, scaled up government cybersecurity production and winning and expanding some key government satellite services and new technology programs.
We continue to deliver leading in-flight connectivity service quality metrics, supporting our airline customers' initiatives to increase passenger engagement and offering scalable free WiFi with high-quality performance metrics, even at the busiest airports and now preparing for increased geographic coverage on important routes, such as from the continental U.S. to Hawaii. And next, I'll give a quick update on our satellite network, starting with progress on ViaSat-3 Flight 1. We've completed in-orbit testing and taken over operation, Flight 1 performance other than the affected antenna is nominal or better. We're configuring now for operational service and integrating, analyzing and measuring performance. Based on results to date, we're targeting commercial in-flight connectivity service in the first quarter of fiscal '25.
We've already demonstrated peak downstream data rates into consumer terminals in the 200 to 300 megabit per second range. The bandwidth allocation features of ViaSat-3, such as optimizing delivery to hotspots dynamically across the service area in real time support our product -- productivity initiatives. The Flight 1 antenna root cause investigation was completed in the third quarter. Based on its findings, we're implementing corrective actions on the F2 antenna. The F2 satellite is otherwise complete. The antenna with corrective actions is expected to be completed, thoroughly tested and delivered this calendar year, and F2 is expected to be launched in the first half of calendar '25. The ViaSat-3 F3 remains unaffected, and we expect it to launch late this calendar year.
We also have GX-10a and b, which are hosted payloads on polar satellites, and they completed their thermal vacuum testing and are expected to launch together mid-calendar year 2024 this year. They will improve coverage and performance for polar government and commercial routes. By next summer of calendar '25, we expect to have those 4 new satellites in our constellation to scale mobility services. Additionally, the GX-7, 8 and 9 satellites are being built by Airbus and are expected to be completed beginning early calendar '26 for additional geographic coverage and peak demand depth. Those highly flexible satellites will further improve our ability to optimize capacity and deliver high-quality, reliable services to our mobility customers. So with that, I'll hand it over to Guru to cover our third quarter results in more depth.
Kumara Gowrappan: Great. Thanks, Mark. I'll cover 3 key topics: Q3 financial performance, integration and transformation and an update on our combined outlook. We are executing on our strategy and delivered strong core financial and operational performance during Q3. Core revenue and adjusted EBITDA, both grew year-over-year by 8% and 11%, respectively, driven by our mobility and government businesses. Some of the key highlights from the quarter include: Government Systems had another quarter of strong demand for our information assurance, high-speed network encryption products and tactical SATCOM products, which drove product revenue up 55% year-over-year. During the quarter, we supported the U.S. Air Force in a major exercise called Mobility Guardian 2023.
Viasat provided interoperable communications through next-generation hardware and software products and systems to ensure robust and resilient connectivity. Our government business also had a fantastic quarter of awards, which were up more than 50% sequentially. While we can see lumpiness quarter-to-quarter in the business, the backlog is over $3.7 billion, adding confidence to our outlook. Recent trends in Satellite Services continued with strong growth in commercial IFC, ending the quarter with 3,500 aircraft in service, up over 17% year-over-year on a combined basis with over 1,400 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.
Subsequent to quarter end, we expanded our relationship with Lufthansa Group, adding over 150 aircraft on our hybrid EAN network alongside their existing Ka satellite fleet. It's a great example of the integrated network solutions enabled by adding Inmarsat and the teams are working together really well. We also began launching in partnership with Skylo Technologies and Ligado, the world's first global direct-to-device network-enabling mobile network operators devicemakers and chipset manufacturers to take 3GPP Release-17 compliant products to market for the first time with nonterrestrial network satellite service within our global L-band network coverage. And finally, on the list of highlights, our new business momentum is robust. We are winning in the large and growing mobility and government markets.
Our government business has very unique solutions that enable critical operations for the U.S. government and others. It is bolstered by IP that uniquely address these complex ecosystems that are evolving fast and where security and resiliency are at the forefront. Some key indicators are government product growth at 55% year-over-year, IFC installations 17% year-over-year, total awards at $1.2 billion, backlog of $3.7 billion and unawarded IDIQ value of $6.4 billion. Now some more color on the financials. Third quarter 2024 revenue was $1.1 billion. This was up 73% compared to revenue from continuing operations of $651 million in Q3 FY 2023, including Inmarsat in both years, Q3 2024 revenue was up 8% year-over-year, driven by strong growth in Government Systems products and IFC service.
Net loss totaled $124 million for Q3, up from $47 million net loss in the year-ago period, primarily due to increased interest expense associated with the Inmarsat acquisition and the nonrecurring Inmarsat acquisition-related charges. Adjusted EBITDA for the quarter was $383 million, an increase of 214% year-over-year from continuing operations, including Inmarsat in both years, Q3 FY 2024, adjusted EBITDA was up 11% year-over-year as good cost management leveraged our top line growth. Sequentially, net leverage increased 0.1x to approximately 3.8x estimated combined LTM adjusted EBITDA as of Q3 FY 2024, substantially favorable to plan at the time the Inmarsat acquisition was announced. We have significant financial flexibility with approximately $3 billion of liquidity, including $1.7 billion of cash, cash equivalents and short-term investments on our balance sheet at quarter end and no near-term funded maturities.
Importantly, we have a fully funded path to positive free cash flow. Finally, insurance recovery claims of $770 million are proceeding. Claims for ViaSat-3 F1 and I6 F2 were filed before calendar year-end. We expect to receive proceeds over the next few quarters. Subsequent to quarter end, we have received more than $200 million to date, with the majority anticipated to arrive in fiscal 2025. Overall, this was another strong quarter for Viasat. As Mark mentioned earlier, I will touch on 3 priorities we discussed in our letter, mainly around integration and transformation. First, building operational momentum and financial performance of our core business. Operational momentum is reflected in the financials I just covered. Aviation continues to be our fastest-growing area with good progress in aircraft served and passenger engagement and in the scope of services we deliver that help our customers use connectivity to benefit their unique business models.
We are proud of our reputation for predictable, reliable and measurable service quality. Our new order pipeline remains robust. Our service -- services businesses also benefit from an innovation and an innovative and differentiated portfolio of hardware and application software products. Our second priority is leveraging the Inmarsat integration to achieve operating capital and revenue synergies to reduce costs and expand the scale and scope of our products and services. We took a big step in Q2, integrating space and ground infrastructure, operations, go-to-market, engineering and supporting teams, reducing people resources is really painful, but necessary to sustain our growth and achieve the financial metrics we expect. We expect about $100 million annual cash savings by start-up FY 2025, better than the $80 million target when the acquisition was announced and sooner by about 2 years.
We're also integrating our global networks and support to further improve service quality, scale and resilience and to achieve the capital synergies to drive positive free cash flow. The third priority is sustaining mobility business growth while advancing the inflection to positive free cash flow. Our strategy is to measure and drive asset productivity by best matching bandwidth delivery to our target customers, geographic and peak time demand needs, especially in the world's mobility hotspots such as major airports and maritime ports. We are leveraging our extensive global operating data and applying machine learning techniques to dynamically optimize our existing satellite fleet as well as our forthcoming 7 Ka-band satellites under construction and third-party assets.
We're also using unique technologies to enhance video streaming quality and efficiency, a dominant factor driving bandwidth usage growth. Our revised capital budgets reflect the opportunity we have to scale productivity, cost savings, while simultaneously driving further measurable increases in service quality. Now moving to the next topic on outlook. We exclude -- in terms of outlook, we exclude satellite impairment charges and the nonrecurring benefit from the litigation settlement announced last quarter from our guidance. For FY 2024, we expect revenue growth in the high single-digit percentages over FY 2023 for the combined company in 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 are now expecting adjusted EBITDA in the top half of our previous range, $1.275 billion to $1.3 billion with continued growth in FY 2025 in both revenue and adjusted EBITDA. Capital expenditures are expected at approximately $1.7 billion in the current -- our current satellites under construction. In Q3, our investments in our satellite network projects and success-based CapEx, which both drive growth, where over 2/3 of our total capital spend as compared to less than 1/3 associated with other maintenance and general CapEx activities. In FY 2025, we expect CapEx to decline to a range of $1.4 billion to $1.5 billion, inclusive of a placeholder for the potential funding of an I6 F2 replacement. Capital expenditure guidance does not include the expected $770 million benefit from insurance recoveries.
So on a net basis, our planned growth spending fits well within our capital structure and liquidity framework. Note that we include capitalized interest in our CapEx guidance, which is approximately $200 million per year. We are working on reducing leverage and optimizing our balance sheet and that is closely tied to our capital investment plan, post-merger and taking advantage of the capital synergy opportunities we mentioned earlier. Before wrapping up, I have two important updates to share. We felt it was time to scale our Investor Relations program, given our nearly doubling in size post-merger. So I'm happy to announce that Lisa Curran has joined our team as VP of Investor Relations. Lisa brings a unique breadth and depth of experience across sectors and leading companies through growth transformations.
And I'm sure Peter -- Pete Lopez will facilitate introductions with all of you over the coming weeks. We've talked with a number of you about our plans for a Viasat Investor Day and listen to your feedback on multiple fronts. We've heard you and we will instead focus more immediately on enhancing our reporting disclosures and investor outreach, including giving more insight on our growth businesses. We look forward to getting more of your feedback. We are aware that we are competing for your capital every day, we have conviction in our path ahead, and we want you to match our confidence. We expect to provide an update on our next earnings call. Now 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, including mobility and government.
Ongoing execution on our sizable backlog, meaningful cost rationalization and prioritize CapEx spending, which benefits from the natural decline as we launch our satellites. We are driving cost structure improvements with synergies, scale and benchmarking. Our operational performance in Q3 was very good, and we are on track to achieve substantial synergy value and expect the combined company to grow revenue and adjusted EBITDA in FY '24 and FY '25. And to be clear, our FY '25 growth is based on a full 12 months of Inmarsat in FY '24. With that, I'll pass it back to Mark.
Mark Dankberg: Okay. Thanks, Guru. And at this point, we'll be happy to take some questions.
Operator: [Operator Instructions]. Your first question comes from the line of Ric Prentiss with Raymond James.
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