Viasat, Inc. (NASDAQ:VSAT) Q3 2023 Earnings Call Transcript

Viasat, Inc. (NASDAQ:VSAT) Q3 2023 Earnings Call Transcript February 7, 2023

Operator: Welcome to ViaSat’s FY 2023 Third Quarter Earnings Conference Call. Your host for today’s call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Mark Dankberg: Okay, thanks. Thanks for joining us today. We released our shareholder letter shortly after market close and its available on our website and we will be referring to that on this call. Joining me today on the call are Rick Baldridge, our Vice Chairman; Kevin Harkenrider, our Chief Operating Officer; our Chief Financial Officer, Shawn Duffy, Robert Blair, our General Counsel; and Paul Froelich from Corporate Development; and Peter Lopez from Investor Relations. So, let’s have Robert provide our Safe Harbor disclosure for the start.

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 Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. Back to you, Mark.

Mark Dankberg: Okay. Thanks Robert. So, I’ll start with a brief overview, and then we’ll go right into questions. So, the most important point for today is that construction and test on the ViaSat-3 and America satellite has been completed. We’re scheduled to launch on April 8th and which follows a pair of NASA international space station missions that have been pushed about one to two weeks later than previously planned because of the replacement mission to bring back from IFS. Bringing that satellite into service addresses our most immediately challenge, which is bandwidth constraints. In the US that have caused us to steadily downsize our residential business to support the strong growth we’ve had in inflight connectivity.

ViaSat-3, we’ll be able to serve areas that are currently full and to introduce updated plans with higher speeds, more bandwidth, and greater value. And also supports more of our existing customers in the Americas and capacity to the good growth we’ve had in Brazil and Mexico and opens additional new geographic and vertical markets. We’re confident it will drive growth. The satellite should reach its orbital site just a couple of weeks after launch and we expect to start initial services promptly and to start scaling during the summer. ViaSat-3, EMEA, Europe, Middle East, and Africa satellite is not far behind its planned for launch by ULA in September. That adds important coverage to our mobility businesses and capacity to a number of other markets.

Photo by Mika Baumeister on Unsplash

It’s also the catalyst expected to enable us to reach positive free cash flow. The Asia-Pacific satellite is not too far behind now. Overall, new orders are up year-over-year. We’re making very good progress on in-flight connectivity, especially. We think one exciting example is the recent announcement by Delta Airlines, making free Wi-Fi available on their full fleet, we’ve worked methodically with them to be sure, we both understand the growth in demand and how we can deliver the service quality that we expect at scale. Today, we’re at about a total of around 3,000 flights a day with free Wi-Fi, now that’s between Delta and JetBlue, and that’s growing pretty rapidly. And of course, we also continue to serve all the other lines we support, including at those same major US cities.

We see good opportunities in working with airline partners to scale past engagement with Wi-Fi affordably and in ways that pursuit their business models and brands. We shipped about 240 in-flight terminals in the third quarter for Commercial Air and brought about 160 planes into service, which is about a 17% year-over-year growth. New orders have been very good with both new and existing customers and we still have over about 1,200 additional planes at order. Our airline customers are seeing delays in some of their new aircraft deliveries probably in the range of about 50 to 60 cumulative by the end of our fiscal 2023. So, we expect deliveries and installs will grow sequentially in the fourth quarter anyway. We’ve also been equipping Station Airlines in China.

The US and China are the largest domestic air travel markets. And we believe the ability to serve international pipes to and from China with our partners there seamlessly will be important to many global airlines as well as to the Chinese international airlines. The other major point for today is around the close of the sale of our TDL business just after the end of the third quarter. Within that, as we expected about $1.8 billion in cash, which greatly strengthens our balance sheet. We’ll also realize again on the sale of over $1.5 billion. So, including that gain, FY 2023 will actually be a very profitable year for us. The sale will ensure we can drive our satellite services businesses since we have significantly greater growth potential.

As we mentioned last quarter, we have some rightsizing to do as a result of the sale, and that’s underway. And regarding Inmarsat, the remaining gates to close the transaction are primarily the U.K. and the European community antitrust approvals. We expect to have good insight into the regulatory — the regulators current views on the matter this quarter. So, the shareholder data of the shareholder letter also provides our financial data for our third quarter of fiscal 2023 and year-to-date. Those results are below our expectations for the year — in the quarter with the largest factor being the significant delay in launch of the first ViaSat-3 satellite relative to the schedule we expected entering the year. We’ve had other challenges on supply chain affecting cost or delivery schedule of some of our products, the right airplane deliveries to our customers and encryption product certification issues that are not specific to us, but the demand for our products and services is strong, and we’ve had good year-over-year performance on orders.

With the TDL gain, we’ll report our highest ever earnings for the fiscal year by. We expect to start fiscal year 2024 with the launch of the first ViaSat-3 and we think the outlook from there is very exciting, as described in the shareholder letter. So, with that, we’ll open it up for questions.

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Q&A Session

Operator: The floor is now open for your questions. Our first question comes from the line of Ric Prentiss from Raymond James. Please proceed.

Ric Prentiss: Thanks. Good afternoon, everybody.

Mark Dankberg: Hey Ric.

Ric Prentiss: I appreciate the shareholder letter. A couple of two questions. First, Mark, you talked about ViaSat — first ViaSat-3 coming over the Americas. We’ve got a launch at glad to have that. How long are you anticipating — it sounds like there’s pent-up demand from your letter. How long do you think it takes to fill that up? And when are we thinking that we need to be starting to think about ViaSat-4 is the first question?

Mark Dankberg: Okay. Well, the way we’ve operated in the past, which has worked well for us is, we kind of fill it up and then we people could say, groom or we basically tend to evolve our service — our customers’ mix to kind of higher-yielding customers, and that — which is kind of what we’re doing here. Think of them as that we’ve talked multiple times about this hierarchy of value and services, difficulty to serve with government, maritime and those types. So, we generally have been filled up the satellite two to three years post-launch. That’s typically what we tended to do. And then we evolve the subscriber will a couple of years or so. The kind of our approach to ViaSat-4, we’ve been — what we’ve been working on is really focused on the technology, making sure that we get the performance that we expect and that we can produce it at a more predictable schedule, but it’s pretty much the same platform.

So, the timing of that, we will adjust based on our cash flow rate of that current satellites and our assessment of demand. So, we don’t — we’re not going to put out a specific timetable for it yet.

Ric Prentiss: Okay. Also in the shareholder letter, interesting comment about direct to device and that Inmarsat obviously has L-band spectrum that you’re interested in. Can you maybe high level kind of obviously, the deal is not closed, but can you, from a high level, tell us, how do you feel that, that directed device satellite to smartphone is going to come to pass. There’s a carrier model in the marketplace. There’s handset models in the marketplace or coming into the marketplace, and then a chip fact one. So, how do you see this market kind of materializing? And do you all need to have a LEO type platform? Or how would that work? So, just high-level thoughts on direct-to-device slots.

Mark Dankberg: Okay. Well, first, so we’re interested in the direct-to-device market, with likely — I think a lot of people expect to be to address a very large market, but with probably relatively low average revenue per user. And — but we also see that a lot of the things that lot of the things in space and in the ground network that are done to be able to serve that market. Also we’re going to really enhance the existing mobile satellite services market. It will enable higher speeds, more bandwidth, lower airtime pricing, all of which we expect to also benefit those existing markets. For those operators that have access to mobile satellite services spectrum and the tools to address those markets. The big — I think the big issues or uncertainties around direct to satellite there handset market are really around what are the speeds certainly that can be delivered to each phone, how many phones can you serve in a geographic area what will the airtime pricing be would be used for more than emergency services.

And a lot of that, I think, is really going to depend on a lot of the same factors that drive the bracket market, which is as we talked about before really getting signal good density of bandwidth adjusted for the spectrum that it’s operating in the areas where there’s going to be the highest demand. And what is interesting about the handset market is it’s probably going to be even more geographically concentrated than the broadband markets will be. So, we’ve actually been looking at design architectures that are both GEO and LEO. We think they’re both interesting. We think that should be able to deliver pretty comparable services from each. It will probably take cooperation among some of the spectrum holders to achieve that. And we don’t think it’s necessarily a GEO or LEO-specific market.

We do have concerns — we’ve been one of the ones pointing out some of the issues around sustainable space in lower orbit. We are — we think that there should be concern around just the cross-section area and mass of some of the satellites that have been proposed for this service. We’re not sure that’s the right — that’s going to be in a good direction, and we do have ambitions to do is to be able to deliver services that are much more interesting than just emergency services and that can be scaled to very large numbers of customers. That’s kind of the — kind of the overview at this point.

Ric Prentiss: Great. I appreciate. And we’ll stay tuned as we access market and home.

Mark Dankberg: Thanks Ric.

Operator: Our next question is from the line of Phil Cusick from JP Morgan. Please proceed.

Unidentified Analyst: Hi, this is Nick on for Phil. Thanks for taking the question. I’m wondering if you could provide an update on how churn is trending in fixed broadband? And how any like increased competition may be playing into that? As well as what the strategy would be to return to fixed broadband growth once ViaSat-3 launches just given the competitive intensity? Thank you.

Mark Dankberg: Okay. Well, we haven’t broken out churn buying markets, specific markets. What I can tell you is recently churn has been subsiding for us. We had — some of the churn that we saw was probably tied to the COVID timeframe when people signed on their contracts and we’re very dependent on broadband at their home. But since those — since a lot of those are out of contract, that actually churns moderated for us. We think — we see — we do see that there’s going to be more competition in the markets that are targeted for bias people estimate kind of 10 million to 15-ish million homes that are reasonable candidates for satellite broadband, but the big issue is the value proposition of the service in terms of speed, volume, price.

And then I think the other thing that’s becoming more and more important and that we’re really focused on our — the ability to stream — to streaming. It’s not speed intensive, but it is very bandwidth-intensive. And so it’s difficult for pretty much any satellite terrestrial wireless surface to support that in an unlimited way. We think we’re going to be really competitive in that aspect of the market. So, I think for us, we — the big thing Viasat-3 allows us to do is to update our speed, bandwidth, and pricing. And I think we’ll continue to be able to drive churn down with the.

Operator: Our next question comes from the line of Landon Park from Morgan Stanley. Please proceed.

Landon Park: Thank you. Mark, did you get cut off or did you add anything else you want to add under that?

Mark Dankberg: No, no. I think the last thing I said was that we expect churn to continue to improve with the new plans that we can offer. That was the last thing I said. I don’t think cut off or not.

Landon Park: Okay. Thanks Mark. So, yes, on my side, I was wondering, Delta finally launching their free Wi-Fi product with you as a partner, they have a target laid out to have global — this has a global product by the end of 2024, what is the prospect for you to be able to gain retrofits on their international fleet? Or are there regional jets — and then maybe can you just review — I don’t know if you can talk about Delta specifically, but at a higher level potentially. What are your IFC contracts structured in terms of fixed versus variable? And how can we expect ARPA to trend and what are the current ARPA levels and where can those trend in the free Wi-Fi model?