Viasat, Inc. (VSAT) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to ViaSat's Fiscal Year 2016 Second Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, thanks. Good afternoon, everybody, and welcome to our earnings call for our second quarter fiscal 2016. So I'm Mark Dankberg, Chairman and CEO, and I've got with me Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our Chief Financial Officer; and Keven Lippert, our General Counsel. And before we start, Keven will provide our Safe Harbor disclosure. Keven K. Lippert - Secretary, Vice President & General Counsel: Thanks, Mark. As you know, this discussion contains 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. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, thanks. So we'll be referring to slides again. They're available over the web. I'll start with some highlights and a top-level business overview, and then Shawn will go into more detail on financial results. Then I'll give some additional color on our business and strategy, and then I'll summarize our outlook. And we'll take questions. So starting with our financial highlights, remember Q2 last year was when we reached our legal settlement with Space Systems/Loral that resulted in recognizing a one-time benefit of about $21 million to revenue and about $40 million in total. So when you normalize for the settlement impact, our results were in line with our outlook and keep us on track for a strong fiscal 2016. Excluding those one-time benefits for that settlement, our revenues and adjusted EBITDA in Q2 grew 5% and 24% respectively on a year-over-year basis. On a six-month year-to-date basis, revenue and adjusted EBITDA grew 6% and 26% respectively. That's also excluding that benefit of the SS/L settlement. Our Satellite Services segment was our biggest source of adjusted EBITDA and growth at 75% for the second quarter and 71% year-to-date respectively on a year-over-year basis, and again excluding those one-time benefits. That growth comes from gains in in-flight connectivity, continued consumer ARPU expansion, and margin improvements due to scale and sustained gains in bandwidth utilization effectiveness. On the in-flight Wi-Fi front, our partnership with Virgin America and Netflix really put an industry wide spotlight on our streaming video, which is a very desirable feature for passengers and highlights our ability to deliver lots of bandwidth at very affordable cost. We also had good growth in our Government Systems segment in both revenue and EBITDA, and that's pretty exceptional given the macro environment in that sector. Government orders were very strong, and mobile broadband terminal orders are a good leading indicator of upcoming demand for Satellite Services. So we believe our first-half results are indicative of our opportunities for sustained growth for the balance of the fiscal year and longer term as well. On the consumer side, we see good opportunities for sustained margin expansion through more effective bandwidth utilization, higher value plans, and continued cost improvements. We anticipate good continued growth in in-flight Wi-Fi, as we grow the number of planes in service, increase passenger engagement, and then we hope to see growing interest in video streaming such as JetBlue's upcoming promotion with Amazon Prime video. We also anticipate very good growth in Ka-band satellite services for government customers, as well as growth opportunities in other government markets. Finally, the upcoming launch of ViaSat-2 is getting close enough to influence key customers and partners, and our global plans for the ViaSat-3 generation are coming into focus. So Shawn will go into more depth on the financial data, and then I'll come back and give some more color on these points. Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: As Mark indicated, our operating performance was solid and on track with our plans in fiscal Q2. Slide 5 shows revenue and adjusted EBITDA performance for the second quarter of fiscal 2016 compared to the same period last year. Comparisons with the prior period, however, are skewed by the aggregate $40-million impact of the Loral settlement realized in Q2 of fiscal 2015. As a reminder, in the second quarter of last year, we booked a one-time benefit product revenue of $21 million and a one-time G&A credit of $19 million as a result of the settlement. The terms of the agreement also required recurring payments of $6.9 million in future quarters until the fourth quarter of fiscal 2017, with the first such payment being realized in our third fiscal quarter last year. So all of the comparisons I'm about to talk about in the next few slides will not take into account the non-recurring portion of the settlement from the second quarter of last year to better highlight the recurring portion of our business and the related drivers. Our core operating revenues continued to grow – up about 5% year-over-year, with another quarter of solid revenue growth in our Satellite Services and Government Systems segments, more than offsetting declines in Commercial Network. In Satellite Services, our segment revenues reached a new record high. Growth from our core service offerings drove revenues up 22% and adjusted EBITDA by 75%. Our weighted average subscribers were also higher during the period. ARPUs continued to grow, plus we saw another quarter of growth in our commercial air Wi-Fi service revenues Our Government Systems segment revenues also continued to grow – up 8% year-over-year, with growth in global mobile broadband, situational awareness projects, as well as services growth from ViaSat wireless services formerly called NetNearU. Our adjusted EBITDA was also up 12% from the prior period as a result of the higher top-line revenue and lower SG&A and R&D expenses. And Government Service revenues grew by 11% year-over-year, outpacing our top-line product revenue growth. In the Commercial Networks segment, the continued wind-down of our very successful NBN infrastructure program, lower consumer terminal sales, lower antenna system sales, and higher R&D investments all contributed to nearly a $14-million decrease in adjusted EBITDA year-over-year. In recent quarters, we increased our investment activities and our next-generation consumer and mobile offerings, as well as an advanced satellite payload development, nearly doubling the levels incurred last year at this time. These are our most strategic next-gen solutions, each being developed in our commercial segment, so we expect these trends to continue for the next few quarters. In summary, modest revenue growth and a growing mix of high-margin service revenues and improved service margins allowed us to generate adjusted EBITDA of $87 million, a 24% increase year-over-year and an overall adjusted EBITDA margin expansion of almost 380 basis points, all from our core business. Slide 6 shows revenue and adjusted EBITDA performance for fiscal 2016 year-to-date period compared to the same period a year earlier. I won't spend too much time on this slide, as you can refer to the MD&A and our 10-Q for each of the key year-to-date drivers, which trends very similar to the drivers in our second quarter. However, I would like to point out that our top-line revenues hit record first-half levels. Revenues were up 6%, and adjusted EBITDA was up 26% on a comparable period basis. Our adjusted EBITDA margins also showed year-over-year expansion, up 370 basis points over the same period last year despite our significant uptick and next-gen systems development activities, again illustrating the strength of our growing service base. On this next slide, I'll review some of the major influences on reported net income and earnings per share that fall below the adjusted EBITDA line. Our net interest expense for the quarter declined by $1.9 million, with continued growth in capitalized interest on our ViaSat-2 program, partially offset by slightly higher overall interest expense on our larger outstanding debt balances. As we look out, our debt relative to assets under construction has reached a level where our net interest expense should remain in a range close to the Q2 level. Turning to taxes, our second quarter reflected a reduction in tax expense year-over-year, primarily related to last year, including the $40-million Q2 settlement benefit. Focusing on our core business, we grew year-to-date free tax income sharply year-over-year by $22 million, and we expect good pre-tax income generation to continue into the second half. Additionally, the federal R&D credit still remains expired. We're hopeful that a form of a credit legislation will get reinstated and may have some retroactive benefit. But assuming it does not, we expect our annual income tax rate to continue around the 36% range based on current blended statutory rates, which can fluctuate from time-to-time with regulatory and income shifts across the jurisdictions we operate in. However, with favorable tax elections on our satellite and other PP&E asset base, we don't expect to pay any material amounts of cash taxes this year or next. Net income for the quarter decreased by $19 million from the prior year period, primarily as a result of the lower adjusted EBITDA figures we discussed previously, and up $5 million without the Q2 FY15 settlement net of tax. Non-GAAP net income diluted and non-GAAP diluted EPS year-over-year performance reflect these same relationships, bringing our non-GAAP EPS to $0.30 per share, nearing double the amount generated from our core recurring operations last year. Again for reference on the right side of the chart, we provided a reconciliation of adjusted EBITDA to net income and net income to non-GAAP net income to detail the primary elements of each of these metrics and the related relationships between them. Moving to slide 8, we have cash flows, along with liquidity and leverage information. You can see that our year-to-date cash flow from operations was slightly under last year's levels after adjusting for the $40-million Q2 settlement payment. Increases in accounts receivable on some of our larger infrastructure projects, alongside decreases in customer advances and other programs, both due to normal timing fluctuations and contractual milestone billings, drove an increase in working capital. Overall our DSOs are sitting about flat to Q2 last year, and then recently we have seen very strong cash collections as we hit some key contractual milestones on certain commercial segment contracts. Capital expenditures and investments for our fiscal 2016 first-half decreased by $44 million, primarily as a result of reduced acquisition activities versus last year, which included our purchase of NetNearU for $56 million. So we ended the quarter with $165 million outstanding on our $500-million revolver and $127 million on the $525-million Ex-Im bank loan commitment. Our leverage remains low at 2.4 times EBITDA, and liquidity position is very little good, with $528 million of liquidity to date, plus another $162 million of future liquidity associated with the Ex-Im bank commitment, which becomes available as we make additional payments on ViaSat-2. Before turning it back to Mark, I'll take a moment and review some of our key Satellite Service metrics for Q2. The top left chart shows our consumer subscriber count at quarter-end, which were up just over 2,000 quarter-over-quarter and up 30,000 year-over-year. And as you can see on the upper left chart, our adjusted EBITDA is growing at a faster rate than overall subscribers. Note the rapid increase in adjusted EBITDA over the one-year period from Q2 of FY2015 to the current quarter – increasing by 75% on only a 4.5% increase in the consumer subscriber base. This reflects a higher ratio of retail subscribers relative to wholesale subscribers, increases in both retail and wholesale ARPU, and the high marginal economics of each new subscriber. And we'll go on another dimension as well, such as our commercial air Wi-Fi business now at 419 aircraft in service, double that of last Q2 and 35 higher than Q1 end. And we continue to see growth in passenger engagement trends as well. Taken together, it's a pretty compelling illustration and validation of the profitability and operating leverage of our Satellite Service businesses. So we feel strongly that our strategic approach of emphasizing consistent delivery of higher value services while protecting service quality in the face of growing user expectation is achieving the financial results we want. The chart on the right shows gross adds for the current quarter of fiscal 2016, Q1 of 2016, and the second quarter of fiscal 2015. Gross adds were up on a sequential quarter basis, primarily due to the seasonality of the business, offset somewhat by limiting gross adds in certain geographies as we choose to closely manage distribution channels to bound or in some cases reduce net subscribers on as many as two-thirds of our ViaSat-1 beam. These decisions take into account growth already achieved in our consumer and in-flight base, while maintaining capacity for future growth in the commercial and government mobility businesses. As Mark stated earlier, this is a conscious decision on our part to help capture fast growing attractive commercial and government mobility markets, maximize the economic value of the ViaSat-1 satellite, and at the same time protect the Exede brand – all in anticipation of the launch of ViaSat-2. So with that, I'll turn it back over to you, Mark. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, thanks, Shawn. So in these next few slides, I'd like to build on that discussion around differentiated service quality and quantity in the in-flight, communications, and government markets. In broadband performance is all relative. If you oversell your bandwidth, performance will be bad no matter how much absolute bandwidth you have. So anybody who's used a competing in-flight Wi-Fi service has already experienced that. Since we believe our competitive advantage is delivering by far the best bandwidth economics, then we should act differently than others so we can prove the benefits of those bandwidth economics. That means preserving the integrity of services and building credibility because we know our upcoming satellites will enable us to improve our services and create even greater separation from competitors. We think in-flight Wi-Fi is a good growth opportunity because there's passenger preference and demand for good connectivity. And the root source of competitive value is large supplies of affordable bandwidth in the right places at the right times. So Virgin America prominently featuring Netflix streaming was something of a watershed event. The Netflix branding featuring House of Cards increased exposure and credibility, and it's now something all the airlines and many more passengers are aware of. And there are a couple of tweets from Reed Hastings about both Virgin and JetBlue that we included on this slide just to show that. JetBlue's also announced that they'll have free Wi-Fi on all of their flights by mid-2016. All of their Airbus aircraft already have our service, and installs are now underway for the remaining Embraer E190 regional jets. JetBlue's also announced a number of existing and planned partnerships and sponsorships for their free Wi-Fi service. Their revenue per seat mile performance has been excellent this year, and free Wi-Fi is an important factor. High engagement with Wi-Fi attracts high-quality media and internet partners too. The prospects of higher passenger revenue coupled with sponsored Wi-Fi are definitely gaining attention within the industry. Also enabling in-flight entertainment to passengers over the internet using their own rights or by sponsored content reduces in-flight entertainment expenses. Video is the draw for gaining passenger attention and engagement for Wi-Fi, and the ability to use in-flight communications has an element of in-flight entertainment. JetBlue's partnership with Amazon is anticipated to start this quarter, and we're committed to making that one very successful, too. Finally, we believe that Virgin America shows that in-flight connectivity competition isn't just a land grant. No in-flight connectivity provider is going to keep its customers merely by having gotten there first. We believe that affordable, high-quality, high-speed, high-volume service is a key component of passenger satisfaction and that the airlines are realizing that. There's a lot of new aircraft being delivered in the next few years and a lot of existing contracts up for renewal. So we see most of the airlines sending some of their executives to fly on JetBlue themselves to test it out. They see there's a big difference compared to what they have now, and they're paying a lot more attention to understanding what the technical and business factors are that make the service good. It's not that complicated. It's just having by far the deepest bandwidth resources and the best bandwidth economics. And in a few minutes on one of the later slides I'll show more about our plans to extend that – both economically and globally. So our Government Systems business also had a really good quarter, especially in light of the defense macro environment. We're seeing the growth for the year that we anticipated based on last year's business progress and new order flow. This quarter also had fantastic new orders totaling over $200 million. One of the keys to our success has been the ability to develop new products and services outside the normal acquisition process that better fulfill critical operational requirements. One really good example is our small tactical terminal, a Link 16 capability for smaller aircraft such as the Apache helicopter. That need at one time was going to be met by one of the joint tactical radio system products. Last quarter, the U.S. Army recognized that our small tactical terminal would save the government almost a quarter of a billion just for these initial deployments compared to the alternative program of record, and they approved it as the Apache solution. We see a big opportunity to significantly grow our Link 16 business through similar and related applications. We've accomplished the same effect in many key government airborne satellite applications. Tests and demonstrations of Ka-band service on our satellites as well as on partner Ka-band satellites have been compelling in both performance and service pricing. This quarter, we've won a number of influential orders for our Ku/Ka-band terminal, and that's the government equivalent of the product that enables Virgin America to have the best in-flight Wi-Fi over the U.S. and also use the best available Ku-band on its way to Hawaii. Those government orders position us very well for significant growth in ongoing service subscriptions. The C-17 pictured is a good example of the important global platform that spends most of its operational time under high-capacity Ka-band satellites. Additionally, because of our strong base in information assurance and cyber security, we're also gaining really valuable expertise and credentials, and extending those capabilities to airborne users. So that's creating operational and scale advantages, which we expect will ultimately become important in general aviation and commercial markets too. Our position on so many important government aircraft has also helped us become a good channel for other international satellite operators with cost-effective Ka- or Ku-band resources. And we're pleased to be able to blend their services with our own and those of our existing partners. Our rapidly growing base of global government customers provides a really important foundation for our next slide, especially when you consider how much the government already spends on commercial satellite bandwidth. Now we've spoken several times about our ongoing investments in Ka-band payload technology and our objective to continue to improve bandwidth economics well beyond ViaSat-2 and also establish global coverage. We've made a lot of progress, and we've already started sharing that with key customers and partners. So we thought it important to also communicate with investors about our ViaSat-3 objectives. We're not quite at the point of announcing the first ViaSat-3 contract, but we're getting close. So think of ViaSat-3 as not a particular satellite but a class of satellites that's based on fundamentally new technology. We've been working on the payload portion ourselves, and we began working spacecraft parts integration earlier this year. The ViaSat-3 class satellites will accomplish our most important objective. That's visible Earth coverage which enables essentially global service; much better bandwidth economics than even ViaSat-2, which we already believe will be the best in the world; much improved bandwidth allocation flexibility, again improving on the ViaSat-2 benchmark; lower spacecraft costs; and a standardized payload implementation, which can have the effect of greatly reducing satellite lead times. ViaSat-3 will complete our evolution from domestic to regional to global service provider. ViaSat-3 system technology will be compatible with ViaSat-2 terminals. It'll just extend coverage, improve transmission speeds, further reduce bandwidth costs to a fraction of what they are today. The technology continues the trend of moving teleport technology into the cloud, greatly simplifying individual gateway terminals and improving system reliability and flexibility. A ViaSat-3 satellite constellation will provide essentially global coverage. We're targeting the first satellite, which is shown in blue in the figure, for the Americas. As I said, we're not yet announcing a contract or a schedule, but we do expect that the time interval between the launch of ViaSat-2 and the first ViaSat-3 will be quite a bit shorter than the gap between ViaSat-1 and ViaSat-2 launches. We won't be the first Ka satellite over South America, for example, but we are targeting a decisive bandwidth advantage over any other existing or planned satellites – similar to what we had in the U.S. when we first launched ViaSat-1. So one of the key points for end-users, distribution partners and investors alike is that we have a deliberate technology and business plan to deliver very unique and unprecedented connectivity services from space, and it's important for us to establish credibility that well designed satellites can do the things that we expect. Since we seem to be the only ones with technology and plans that are quite like this, it makes sense that we'd be the only ones in the market so focused on measuring and preserving service quality at scale. It's important for us to continue doing that, especially when we can continue to grow our earnings through higher-value, more efficient service plans. So based on our second quarter results, our growth outlook of about 20% EBITDA growth excluding the non-recurring benefit of the settlement is unchanged, and the main growth drivers are pretty much the same. We anticipate continued improvement in consumer ARPUs through higher-value, higher priced plans, growth in the number of commercial aircraft in service, and increasing engagement and usage among commercial airline passengers. Plus we anticipate significant growth in connectivity services for government applications, including on our own Ka-band satellites and on partner resources too. We also are anticipating growth in other government markets, including Link 16 and information assurance products and cyber security. So we anticipate the main risk factors for our fiscal year 2016 outlook are kind of the usual ones – timing of new programs and contract awards, relative to ongoing R&D investments. So that completes our prepared remarks, and at this point, we're open to taking questions.

Thank you. Our first question is from Tim Quillin of Stephens. Your line is open.

Hey, good afternoon. Mark, it sounds pretty exciting around the development of ViaSat-3, and you alluded to a three-satellite constellation. How firm is the plans to build three? Would you do it in partnership with other companies? And I know you don't want to get maybe into the position of timing, but what are you thinking in terms of the timing of launching the first, the second, and third satellites? Mark D. Dankberg - Chairman & Chief Executive Officer: So it's pretty much like I said. We're currently working on the plans for the first one. That's the contract that we'll announce – that we expect that we'll announce first. The second and third, we are looking at partnerships... is one of our main approaches. But we have plans to deploy them anyway. Just based on the operational cash flow of the satellites that we already have, it's really more a question of what the timing will be. Until we announce the first one, it's kind of premature to speculate on the second and third.

And in terms of tempo, just on the first five ViaSat-3 class satellite would you be thinking a couple years after the launch of ViaSat-2, or just if you could bracket that up a little bit and also maybe bracket up what it might cost for the satellite? Mark D. Dankberg - Chairman & Chief Executive Officer: So on the cost, one of the things we said – we mentioned in there that one of the objectives is to actually decrease the cost of the satellites. So that's what we're working on, and hopefully we'll be able to provide more information on that when we announce the first contract. In terms of spacing between the satellites, probably the fastest it would go is six-month centers from the launch of the first one. And then it could be one-year centers, but it's not going to be a lot longer than that, I would think, under any circumstances.

Okay, great. That sounds exciting. And then just a couple other questions: one is that R&D is trending even a little bit higher than I thought. As you had alluded to, the development or rapid development this year, more spending on R&D this year, does it stay at that level throughout the year and then drop off next year, or should we kind of view this as a new normal, kind of given those plans for ViaSat-3? And then if you could, just a detailed question, would you be able to estimate for us what kind of revenue you're getting from in-flight revenue today? Thank you. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay. So first we'll answer your R&D question in two parts. One part I wanted to point out is that we do – when we're looking at the development that we're doing, we are looking at the systems as a whole. And so one of the things that we're finding now for instance around ViaSat-2 development is that, by spending a little more on R&D, we can reduce our capital investments fairly substantially. And so some of it's just a question of which buckets some of the spending falls into, and we're going to do things that minimize our total expenses and dependent of how the buckets fall. But that's part of what you're seeing now. I mean, Shawn can give you a little more detail on what we expect on R&D. Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: Yeah. Mark D. Dankberg - Chairman & Chief Executive Officer: And what we expect on revenue. Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: Yeah. I think from an R&D perspective, looking at this quarter, it's probably going to trend similar to those levels for the rest of the year. I mean, those are things that we can kind of lever based on the pace of some of the next-generation solutions. But I probably expect it to be about similar to Q2. Mark D. Dankberg - Chairman & Chief Executive Officer: At then we're not breaking out the in-flight R&Ds – the in-flight connectivity revenue separately on our Satellite Services.

Okay, and I said that was the last question, but also, Mark, if you could comment on the latest expected timing on the launch of ViaSat-2. Thank you. Mark D. Dankberg - Chairman & Chief Executive Officer: We're still planning on a launch in last quarter of 2016.

All right, thank you.

Thank you. Our next question is from Rich Valera of Needham & Co. Your line is open. Richard F. Valera - Needham & Co. LLC: Thank you. A question about the Satellite Service revenue and particularly the sequential increase over the first quarter – was there anything kind of one-time nature in that, or is that sort of a new baseline we should look at going forward for the Satellite Service revenue? Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: Yeah, I would say for that quarter there wasn't anything that wasn't non-recurring in nature in this quarter. It was all pretty much our core recurring revenues in Q2. Richard F. Valera - Needham & Co. LLC: Got you. And then I noticed the churn did tick up pretty meaningfully quarter-over-quarter, at least by our calculation. It sounds like from some of your comments that some of that is actually planned and that you want to sort of manage the number of subs in various themes to make sure you keep your service quality up. Is that an accurate way to characterize the way you're sort of managing the total net subscriber base? Mark D. Dankberg - Chairman & Chief Executive Officer: No, I think churn picked up marginally, but I wouldn't say significantly. Richard F. Valera - Needham & Co. LLC: Okay. Mark D. Dankberg - Chairman & Chief Executive Officer: And I don't think there is really a trend there. Actually if anything, longer term we've been doing pretty well at trying to identify sources of churn and to try to improve it. One effect that's helping is our ability to understand it and to address it, I think, fairly effectively. Another one that makes it harder is constantly increasing expectations for bandwidth. And so those are the ones that are balancing that. But overall I think we're doing pretty well. The point about being able to allocate bandwidth for the other applications, it's not that we want to increase churn, but the fact that churn is somewhat predictable allows us to better plan how to allocate our bandwidth so that, if we know that we're going to have demand in particular markets for other applications in the next quarter or two, we can deal with that without having to make service worse by taking advantage of what we expect to be the churn in those places. Richard F. Valera - Needham & Co. LLC: Got it. That makes sense. So, Mark, can you just talk about the RFP outlook, if you will, for in-flight connectivity – sort of what you're seeing out there in terms of opportunity both domestically and international? And how important are your plans for ViaSat-2 and ViaSat-3 in these discussions, assuming you're sharing the ViaSat-3 plans with prospective customers in the international in-flight side? Mark D. Dankberg - Chairman & Chief Executive Officer: Okay. So one is certainly the demand for in-flight Wi-Fi, and I'll say the depth of understanding and maturity in using in-flight Wi-Fi is greatest in the U.S. in-flights that come through and from the U.S. So that's fine for us because we've got ViaSat-1, and then ViaSat-2 is also really valuable, especially for some of our existing customers. It provides service to the Caribbean and then down into Mexico and then across the Atlantic. So that's our strongest market. And I would say we're talking to pretty much every airline about their new opportunities and the disposition long term of their fleets as well. I'm not aware on a sort of North American domestic basis of much substantial that we're not getting to look at, I'd say. Internationally there's a lot of airlines. We are engaged with a number of them. Probably the ones that are most interested in us are the ones that are interested in having a really good service. I mean, anybody that wants a really good service is certainly aware of what we're doing. And part of the reason that we have been talking about ViaSat-3 on an international basis was that the timing of ViaSat-3 certainly can play into the plans at some of these important international carriers. So I'd say we were sort of engaged with a lot of them. They're all aware of us. The Netflix thing really – I don't want to put an exclamation point on it, but the number of inbound calls that we get went up sharply after that. Richard F. Valera - Needham & Co. LLC: Got it. Mark D. Dankberg - Chairman & Chief Executive Officer: Does that answer your question? Richard F. Valera - Needham & Co. LLC: That's good. Thank you, Mark. Just one more for Shawn – on the $6.9 million of quarterly settlement you get from Loral, what's the split on that between the revenue and the G&A credit? Is it the same as the initial sort of one-time payment? Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: No, the recurring portion of the settlement is just $6.9 million to product revenue. Richard F. Valera - Needham & Co. LLC: Okay, got it. That's what I thought. Okay, thanks very much.

Our next question is from Matt Robison of Wunderlich. Your line is open.

Thanks for taking the question. I just want to try to get to this sequential uptick in satellite revenue again, given that's what you can impute from your ARPU and sub add data. Did you add closer to 300 aircraft or closer to 400 aircraft in the quarter? And then my other question would be if we should expect R&D to be comparable to the second quarter – the current quarter. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, on the aircraft I think we said we added 35 sequentially. That was the increase in aircraft sequentially.

Okay. I guess I must have figured something because it seems like the sequential increase net revenue is much more than what we've talked about for your per-plane type of revenue. Was there a revenue from fitting up planes that was in there that was different than normal? Mark D. Dankberg - Chairman & Chief Executive Officer: No, not in Satellite Services. Satellite Services, really it's dominated right now with a combination of consumer services and the in-flight connectivity just in services components.

Okay, we'll have to take it offline. What about the R&D? Mark D. Dankberg - Chairman & Chief Executive Officer: We already answered that. Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: Yeah, I think we hit on that already. But I'd expect it to be real similar to the Q2 levels. We may have some slight pacing things based on how we close out the year, but pretty close to Q2.

Thanks. Sorry I missed it the first time.

Our next question is from Mike Crawford of B. Riley & Co. Your line is open. Mike Crawford - B. Riley & Co. LLC: Thank you. Mark, you mentioned with the ViaSat-3 class satellites that there would also potentially be a shorter time to build and launch the satellite. Could you qualify that at all? Mark D. Dankberg - Chairman & Chief Executive Officer: Yeah, I mean, right now one of the things people always sort of grumble about with these powerful geosynchronous satellites is that the lead time from the time you decide to acquire it till you have it in service is three to four years. And a lot of that is because the satellites are customized. That is they're customized from an orbital slot, and they're customized for their coverage and often for the distribution of coverage. So the theory with these satellites is that they're largely assembly line (39:15) allow you to pipeline them so that you could imagine you could build a flow of satellites that are not dependent on a particular orbital slot or particular coverage area. And then those satellites could be, you can imagine, customized from there and launched, say, within a year of ballpark of the time that you choose a particular market or identify a market need. Mike Crawford - B. Riley & Co. LLC: Okay. So hypothetically if you announced a contract on a certain date, call that time zero, then you could get that satellite potentially into an orbital slot, as long as you can arrange a launch, in as quickly as a year-and-a-half, are you saying? Mark D. Dankberg - Chairman & Chief Executive Officer: Yeah. So it wouldn't naturally be a one-year construction time from the time you start a satellite. So think of it as the first three that we do will have lead times that are pretty consistent with what we've seen so far. There's new technology in them, so there'll be some uncertainty. We'll talk about that when we talk about the actual contract. But then think of it as, from then on, if you know that you'll have some form of demand in different parts of the world and that you can project that, you could start building an inventory of satellites that could be useful in different orbital slots or in different geographic markets. And think of it as a very large portion of the satellite is completely generic, and a very small part of it would be customized. And that last part of customization would be what would put you, say, in a one-year (41:14) time. That's ballpark. And what you would do is you'd arrange launches that you could pull out of your launch inventory, but that you wouldn't have to take the time to design and customize satellites. That's really what drives the long schedules that people associate now with these types of advanced satellites. Mike Crawford - B. Riley & Co. LLC: In some slide in your deck, when you're talking about that megabits-for-megabucks picture, is that like a terabit – a gigabit per second? Mark D. Dankberg - Chairman & Chief Executive Officer: Yes, that's what we've been talking about. And so if you think about that, yeah, the ViaSat-3 is in that 1,000-gigabit-plus range. That's what we've been saying – that we think we have a solution there. Mike Crawford - B. Riley & Co. LLC: Okay, and then just to continue on this line, so obviously potential customers you talked to about taking a ViaSat-2 type of payload from you and Boeing might be somewhat aware of these designs. And so would you say that has been the hesitation for partners to jump in and order of ViaSat-2 class satellite? Mark D. Dankberg - Chairman & Chief Executive Officer: Yes, so as we've gotten closer and closer to having a ViaSat-3 available, for the partners that have expressed interest in the same business model – the same root source of value that we are, which is having really cost-effective bandwidth delivered into these markets – then, yeah, we've shared the ViaSat-3 kind of information we've shared here. And, yes, there is interest there, for sure. And at some point it gets to the point where you wouldn't want to buy a ViaSat-2 anymore. And I think for some of the most strategic partners we've talked to, that's the point that we're at. Mike Crawford - B. Riley & Co. LLC: Okay, great. Thank you. And then just last question goes back to the Government Systems business, where your Link 16 technology seems to be opening new markets for use. Is that a reason why you think you're getting larger award quantities than your main competitor in the MIDS markets? Mark D. Dankberg - Chairman & Chief Executive Officer: There are really two different things going on. One is there's kind of this competition duopoly for MIDS-LVT and MIDS JTRS. And I think historically we've held our own there and done well, and I think we will in the future. But there are these other markets that are not standardized, not duopoly markets, and some of them have either been made up for grabs because programs like JTRS that were going to meet those didn't come to fruition. That's probably an FPT example. And then we have other applications of Link 16 that really weren't anticipated by the acquisition process. Link 16 has turned out to be a lot more useful in operations than people thought it would be, and so we have products and applications that are doing really well in those markets. And we haven't really highlighted them, but there's some fairly unique products that either make Link 16 available in very small form factors or integrate Link 16 into fire control and target assessment systems. Mike Crawford - B. Riley & Co. LLC: Okay, thank you. Mark D. Dankberg - Chairman & Chief Executive Officer: Thanks, Mike.

Thank you. We have a follow-up with Tim Quillin with Stephens. Your line is open.

Hey, thank you for taking my follow-up. And I'll probably be confused for a few years about ViaSat-3, so forgive me. But as we think about the build cycle on that for the first ViaSat-3 class satellite, after you select the vendor, should we be thinking about it launching and going into service on the first one roughly three years after that? Mark D. Dankberg - Chairman & Chief Executive Officer: Yeah, roughly. I mean, the gap between ViaSat-1 and ViaSat-2 – ViaSat-1 was launched in 2011. ViaSat-2 should be launched end of 2016. That's a five-year gap. We think the gap between ViaSat-2 and ViaSat-3 will be less than five years. So if it's four years, that would put it in the 2019-ish range. That's kind of the ballpark.

And in terms of the next build then – the second ViaSat-3 class and third – it really depends on what kind of partnerships you could align. So those could theoretically... it would be built somewhat simultaneously with the first one. Mark D. Dankberg - Chairman & Chief Executive Officer: Yeah, I think it won't be simultaneous. I'd say there's probably a minimum of six-month centers. That's kind of what we think makes sense – six-month centers, meaning that the second one would be scheduled to follow six months after the first. And the reason we're talking to customers and partners is we're – and part of this is what we talked about in the government business. We're already building up a big base of government services. Lots of those services could be run on these ViaSat-2 and ViaSat-3 satellite... on the ViaSat-3 satellites – the second and third satellites. So essentially we're just going through a planning exercise on cost avoidance, new cost growth, cash flow, and the timing of those cash flows. And then I'd partners sort of not at the front of that line, but at the end of that line – factors that'll determine the space in between the satellites.

Got it. Yeah, makes sense. And then on ViaSat-2, can you remind us what CapEx you have in front of us – what will fall in fiscal 2016, and what will fall in fiscal 2017 – and then how you might massage the plans after you launch ViaSat-2, where caps might go and what you're thinking about where you want to take the throughput as well? Shawn Lynn Duffy - Chief Financial Officer & Senior Vice President: Sure, I think from just a pacing and timing of ViaSat-2 from a spend profile, at the end of the quarter we're about 67% complete on the satellite itself. So that kind of, I think, helps you kind of tee up what we have left to go. And probably the rest of this year, you're going to have spend that is pretty close to what we've had on a year-to-date basis average per-quarter spend.

And then the plans market? Mark D. Dankberg - Chairman & Chief Executive Officer: So one of the things we've talked about a lot over the last couple of years is this relationship between what our service plans are and how big the target market is. And one of the things we've shown – and we have really good data on this – is that even when we don't increase the speeds – we get 12 megabits per second – just by increasing the volumes or making the volume caps go way, we appeal to a much broader segment of the market . So actually we will be test introducing higher speed services this quarter, I believe – very soon. So we'll have speeds that are significantly faster than the ViaSat-1 Exede plan that we've had so far. So that'll let us test that element. We've said ViaSat-2 service speeds can be well over 100 megabits a second. So we're figuring out what we'll bring to market – what price points. The other point is that we've been looking at how to make caps that are not scary or that are virtually uncapped where subscribers don't experience a failure load, which is, oh, I've reached my cap and so my speeds are slow, or I have to pay more money. So those are really the two main ingredients that we think we'll be able to get to with ViaSat-2. Obviously ViaSat-3 gives us a lot more maneuvering room above that and lets us turn a lot of the bandwidth economics that we get into some combination of expanded markets, sort of higher margins, or better services. We're still assessing that in each of these different vertical applications. But those are the main ingredients... are faster speeds and essentially uncapped services in all of these markets – services that don't have a failure mode of a cap.

Right, right./ Makes sense. And then on the Commercial Networks business, the award flow over the trailing 12 months has been relatively low – I think something like $185 million in trailing-12 month reported awards. Generally I think about revenue eventually trending towards award levels. And so if we stay at these same levels, maybe we should go down to that revenue level. Are there things in the pipeline that would make me believe that we're going to pop up to better award levels and get growth going in the right direction on the Commercial Network side? Mark D. Dankberg - Chairman & Chief Executive Officer: On the Commercial Network side, over the last four years or five years, we've had two big drivers which were ground infrastructure projects for Eutelsat and for NBN. We've had some other Ka-band ground infrastructure projects. And one of the things we talk about again as well is that there's kind of the big divergence between the kind of Ka-band satellites we're making and what we're seeing other people buy. Generally what we're tending to see people buy are 10-gigabit, 20-gigabit, 30-gigabit Ka-band satellites. And you can see we're aiming at 1,000-gigabit satellites. And so there's kind of a mismatch in our infrastructure investments – that we're investing in things that aren't really optimized for these smaller satellites. Now we think when services come to market that the bigger satellites are going to be far more competitive in the market, and that's a better way to monetize the technology. So more and more we've kind of gone away from the selling of commercial technology and more into being able to bring commercial services globally. So that's part of it. Now flip side is we do have a base of commercial technology products that will continue on. We're doing earth sensing, imaging infrastructure. We have some really interesting plans to actually grow that market. Also when we sell things like airborne terminals to potential customers, those things show up in there. So there's a base in there, and it's going to be kind of add some product to what those markets will be. Richard A. Baldridge - President & Chief Operating Officer: I would add – this is Rick, and I would add that, when NBN goes into service, we'll start shipping terminals there, and same thing with FCI in ViaSat-2 launches. But it's large projects like what we're seeing (53:06) pipeline. Mark D. Dankberg - Chairman & Chief Executive Officer: When we talk about our growth prospects, more and more of it will be realized through the Government segment and the Satellite Services segment.

Okay, I appreciate that. Thank you very much. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, thanks.

Our next question is from Jonathan McLean of Morgan Stanley. Your line is open.

Hi. Thanks for taking the question. ViaSat's been around since 1986, and I'm sure your business has changed over the decades. As a macro question, what do you see as your biggest risk currently or coming down the road? Would it be competition or technology change? Or you're a small cap. Do you see a potential of a bigger company coming in or acquiring you? Just kind of the macro question. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, well, so personally I consider myself an entrepreneurial side of the company with two other friends, and we tend to see opportunities more so than risk. I think the biggest opportunity that we see – and I think this will deal a little bit with your risk question – is that there's really nobody else that's aiming to do the things we're doing in terms of these really high-capacity satellites that... We think that the key to making satellites more competitive is driving down bandwidth costs. So at some point, I think there was some sense that there was risk that that value proposition wouldn't play out – that we could make bandwidth arbitrarily cheap and arbitrarily fast, and nobody would want it. And we're not seeing that at all as a matter of fact. We're seeing really good demand for bandwidth at the speeds and price points that we can deliver. So right now I think what we're focused on is just communicating that value proposition. It's still not totally clear to everybody in our ecosystems, so there is that. I mean, things can develop at a slower pace than we think, but we see a lot of opportunity in the value proposition, and we don't see other people competing to create the same value proposition. I think that's the dominant story for us in the big picture looking out ahead.

Thank you. Keven K. Lippert - Secretary, Vice President & General Counsel: Operator, maybe one more last question.

The final question is from Rich Valera of Needham & Co. Your line is open. Richard F. Valera - Needham & Co. LLC: Thank you. From your chart, it looks like you're expecting the bandwidth economics of VS-3 to be, I guess, around 5x that of VS-2. Is that about right, Mark? Mark D. Dankberg - Chairman & Chief Executive Officer: We will finalize it when we announce it, but it's in that range; could be a little better. Richard F. Valera - Needham & Co. LLC: So how much of that just roughly, proportionally, do you expect to come from the lower absolute cost of the satellite versus greater efficiency from the satellite, or is it sort of too early to sort of... Mark D. Dankberg - Chairman & Chief Executive Officer: No, that's a very fair question, and what I'll tell you is, well, the thing we're really focused on is more and more throughput – big step increase in throughput and I'd say meaningful but not nearly as big reduction in the cost of the satellites. It's mostly from productivity or yield of the satellite – getting a lot more bandwidth through the satellite. So when you think of a whole satellite system, for instance, our approach is take advantage of the space infrastructure – things like solar panels, propulsion, navigation – so you have all of those things centralized. You want to put as much payload as you can on those. That's one way to improve efficiency. So you do that. I mean, launch costs are still pretty substantial. So you're not going to be able to get a 4x reduction in the satellite in space, but you can get a 4x or more increase in the throughput of the satellite. And those are the things that we're focused on. Richard F. Valera - Needham & Co. LLC: And so when you look at the VS-3 architecture – and it sounds like have dramatically higher throughput than other state-of-the-art satellites, whether they're HTS... let's call them HTS satellites – are there things it won't be able to do that a "conventional" HTS satellite will be able to do? Why wouldn't others in the industry look at your architecture and say: can we have one of those; can we use that? Unless there's some limitation, or do you... I'm just trying to figure out how you're thinking about that. Mark D. Dankberg - Chairman & Chief Executive Officer: We ask the same question. So one thing is, in terms of functional capability, this satellite does things no other HTS satellite can do. There's no – it doesn't do everything perfectly, but it does everything far more effectively than any... like a ViaSat-1 class satellite and better than ViaSat-2. And those things are – some of those things that are really, really valuable, for instance, are dynamic redistribution of the bandwidth, the ability to tolerate failures on the ground, the ability to build out the ground segment incrementally, ability to get to much higher speeds, greater concentrations of bandwidth in high-demand geographic areas. All those things are really, really important operationally in monetizing the bandwidth. And those are the things that this does far more effectively than existing HTS satellites. The thing that we see mostly in the market is there are very few other people that draw the correspondence that we do between bandwidth economics and retail value – monetization. And partly a lot of satellite operators are not motivated to undermine business models that have worked for them for a long time. I think that's one part. Also the satellite manufacturers, because they've been responding mostly to the demands of the satellite operators, haven't really been motivated to work on the technologies that we're working on. And we've said over the years, we've invested a lot of R&D money in this – tens of millions of dollars over five years. And you have some sense of commitment and understanding of the value to do it. So we see it as a big opportunity. And we kind of wonder why wouldn't everybody want to do this. But you should ask other people why they don't. Richard F. Valera - Needham & Co. LLC: Well, that's a very fair statement, Mark. Thanks for that color. Much appreciated. Good luck. Mark D. Dankberg - Chairman & Chief Executive Officer: Well, thanks for the question. Mark D. Dankberg - Chairman & Chief Executive Officer: Okay, I think that concludes our call for this quarter. We thank everybody for dialing in and for your participation. We look forward to speaking with you again next quarter.