Viasat, Inc. (VSAT) Q3 2018 Earnings Report, Transcript and Summary

Welcome to ViaSat’s Fiscal Year 2018 Third Quarter Earnings Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. And I would now like to introduce your host for today’s call, Mr. Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks. Good afternoon, everybody and welcome to ViaSat’s earnings conference call for our third fiscal quarter of 2018. So I am 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; Robert Blair, General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich in Corporate Development. So, before we start, Robert will provide our Safe Harbor disclosure.

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. That said, back to you Mark.

Okay. So we will be referring to slides that are available over the web and I will start with highlights and then Shawn will discuss the consolidated and segment of our financial results. Then I will come back and go into some depth on our residential broadband, in-flight government businesses and we will review our outlook and take questions. So, the first highlight is that ViaSat-2 is ready for service. We anticipate launching the service region by region starting as early as next week with national coverage planned for the end of this month. We will feature unlimited plans nationwide with the highest speeds available in high demand markets. Test marketing of the unlimited plans has gone well and I will discuss that in some more detail later. We have been anticipating a significant ramp in in-flight connectivity and that’s underway. In the third quarter, we entered production service with Qantas in Australia using our second generation platform and we began testing service on both new and retrofit aircraft with American Airlines. We have signed contracts for 92 additional aircrafts from existing airline customers during the third quarter and that brought our total of in-service and under contract airplanes to just over 1,500. Then today, we announced a new direct contract with the United Airlines for over 70 additional aircraft, including their new 737MAX fleet. And just to be sure, those new aircraft are in addition to the 92 planes that were signed during the third quarter, so that puts us closer to 1,600 total now and it’s also significant, because United was the only other airline besides JetBlue where we were originally in a subcontract situation. Now, we are really pleased to be working directly with both JetBlue and United. And we had another very strong quarter in government systems. Revenue was up 9% and adjusted EBITDA was up 20% in the third quarter on a year-over-year basis. Orders were strong at about $200 million in the third quarter and that also drove backlog to a record for government systems at just over $700 million. We see good growth prospects across all the government major product lines, which as a reminder were enabled by significant R&D investments that we have made in prior periods and we will give more information on that later as well. So, Shawn, just do that financial part.

Thanks Mark. Overall, our third quarter results were in line with our expectation based on the business drivers we have discussed last call. Looking forward, we are well-positioned on multiple fronts. Orders were up 23% year-over-year, with record backlog of $1.1 billion. We are about to launch ViaSat-2 services and we are beginning to transition to lower payload R&D expenses on the ViaSat-3 program, which will further support P&L and capital flow improvement. Turning to the quarterly P&L, revenues grew year-over-year just slightly despite the capacity constraints we have to contend with ahead of the ViaSat-2 commercial service launch. Let’s recall that our last year’s Q3 also included $6.8 million of Loral settlement proceeds. EBITDA reflected the impacts of the elevated expenditures associated with bringing ViaSat-2 into service, gearing up for strong IFC growth, flow-through of the year-over-year Loral settlement impact and the continuing R&D expenditures on next-gen technologies. However, I do want to point out that while our Q3 R&D levels were up year-over-year as expected, we do see a decrease of $6 million on a sequential quarter basis as we begin transitioning to the capital portion of the ViaSat based program. So, looking at our segment results, in Government Systems, Q3 was marked with nice growth across broad product service portfolio. Revenues were up 9% year-over-year reaching $182 million and adjusted EBITDA grew at double that rate of 20% year-over-year to $48 million. Product and service margins were up significantly more than offsetting a $9 million combined increase in R&D initiatives, which included elevated proposal efforts that help secure the $199 million in new orders bringing segment backlog to a record level of over $700 million. And remember, this excludes future awards anticipated under our ID/IQ contract such as the $350 million silicon agreement we have recently announced and we thought it was a very strong Q3 segment EBITDA quarter, with margins increasing over 200 basis points year-over-year. In Satellite Services, revenues were down year-over-year primarily due to a modest downtick in residential subscriber count, which is stabilizing ahead of our new service launch and the 6.8 million Loral settlement impact, I mentioned earlier. These factors were partially offset by an 8% ARPU growth to a new record high of 68.23. In IFC, we saw another quarter of revenue growth, with 34 more aircraft in service at quarter end versus Q3 last year and increases in ARPU. Turning to Q3 satellite segment earnings, we see the impact of the top line reductions plus the additional expenses we are incurring as we near ViaSat-2 service launch alongside our upcoming large-scale service ramp in commercial air. As we look forward to the ViaSat-2 commercial service launch this month, we expect this year of segment revenues resume growth with these ramp up expenses beginning to moderate as a percentage of revenue. Conversely, we also expect to see much heavier advertising activity over the next few quarters. Plus, in Q4, higher commission expenses related to higher subscriber additions. So, I want to take a moment here and quickly remind everyone that the new revenue standard will come into effect for us in April 2018 and they have two primary impacts to our consumer broadband business. Commissions incurred for new subs after April 1 will begin to be capitalized and amortized over those subscribers’ expected lives. And two, we will record our recaptured commission asset, net of amortization associated with the subscribers already on the network at that time, which also will be amortized over the estimating remaining customer lives. As part of our implementation efforts, we have completed review of many of our customer contracts, with this accounting difference being the single largest known Q1 impact and while our implementation review is still underway, I would expect this impact to result in approximately 80% to 85% of our stock being capitalized in the future versus the 60% to 70% we have ranged historically. So, taking all these elements into account, we should see our Satellite Services EBITDA margins in the first full quarter of ViaSat-2 commercial service higher than where we were when we started on ViaSat-1 and more similar to where segment margins were in early fiscal 2014, which was just over 1 year into service on ViaSat-1. From there, we should see margins begin to increase each quarter given that this is a high fixed cost, low variable cost business. Moving into commercial networks, quarterly revenues were up $1 million with increases in airborne terminal sales related to our IFC business more than offsetting lower ex-terminal sales. We also saw some exciting contract win for next generation antenna solutions generating a good order flow and positive book-to-bill ratio in Q3. Looking forward, we expect to see strong revenue growth from ramping Gen 2 chipsets installed as our airborne terminal sales are reporting commercial network segment with the subsequent service revenues being reported in Satellite Services. Segment adjusted EBITDA was negatively impacted by a modest increase in R&D expenditures, coupled with higher support cost as we prepare for the heavy production ramping commercial air. And again, although segment R&D was up year-over-year, it was actually down sequentially by approximately $6 million as we begin transitioning to our ViaSat-3 payload construction phase. Going forward, we expect R&D expense to continue stepping downwards year-over-year to recurring levels that are similar to early fiscal 2017 as a percentage of our revenues. Overall, our Q3 performance reflected the drivers we anticipated and have been preparing for. ViaSat-2 commercial service launches are right around the corner and we are seeing in-flight Wi-Fi systems deliveries ramping and our ViaSat-3 payload program is now transitioning to the construction phase. These milestones, coupled with record backlog at the company and at our government segment levels, have set the stage for another phase of strong growth companywide. Turning to Slide 5, we see revenue and adjusted EBITDA performance for the Q3 year-to-date period. Top line revenues and EBITDA year-over-year trends across the segment generally reflects the same quarterly drivers we just reviewed. So, I won’t go through all the details here. Additionally, I will note that while we have been awaiting for ViaSat-2 service launch and have been heavily engaged in preparing for those activities, our business as a whole is still growing with year-to-date revenues hitting a new record high of $1.2 billion. Similar to what we have provided in the last two quarters, Slide 6 shows a reconciliation of adjusted EBITDA for both the quarter and the year-to-date periods. The reconciliation isolates the large transitional items we have been highlighting in order to show the fundamental EBITDA growth in the base business. If you look at the Q3 year-to-date reconciliation on the right side of the page, you can see the increased R&D investment, the ViaSat-2 commercial mobility ramping cost, plus the $20 million impact due to the conclusion of the Loral settlement payments, all-in together accounting for approximately $100 million of negative variance, which was then partially offset by organic growth from our existing businesses. Turning to Slide 7, we see our year-to-date income, cash flows debt and leverage trends. In earnings, we see the EBITDA impacts I discussed earlier plus our $12.2 million impact related to the recent tax reform enacted in Q3, the net result with Q3 year-to-date GAAP net loss of $47.4 million and non-GAAP net income of $5.3 million. Among other things, the new tax legislation lowered the corporate federal income tax rate from 35% to 21%. As the company has a March 31 fiscal year end, the lower corporate tax rate will be phased in resulting in a U.S. federal rate of approximately 32% for fiscal year 2018 and 21% for subsequent years. Although the lower federal income tax rate will be positive for the company in the long-term, along with other provisions of the revised tax codes still under review. In Q3, we did revalue our net deferred tax assets based on future utilization dates of those assets to the new federal rate of 21%, which resulted in additional income tax expense of approximately $12 million for the 3 months and 9 months ended December 31, 2017. This non-cash charge reduced our per share figures on a GAAP and non-GAAP basis by $0.21 and $0.06 respectively for both the third quarter and the year-to-date periods. Turning to cash flows, despite the ramp of expenses and capacity constraints, our year-to-date cash generation from our operations was $283 million and this funded over 75% of our entire capital spend year-to-date, including the final phases of the ViaSat-2 ground network build-out and our ViaSat-2 constellation. Looking at the chart in the lower right, net leverage at the end of Q3 was 3.4 times EBITDA, which is well with our comfort range. As we look outward, this ratio will likely move higher over the next few quarters as we continue the ViaSat-3 constellation build, alongside incurring stack cost as we scale our ViaSat-2 subscriber base, with future de-levering as the EBITDA begin to grow again. And finally, our Q3 liquidity position remains very strong, with $162 million of cash, nothing outstanding under our $800 million credit facility. So, when we take these two amounts into account, outside of outstanding LCs, we have total liquidity of $933 million. So with that, I will turn it back over to you, Mark.

Okay, thanks, Shawn. So, I will start with our government segment. Once again, we had excellent performance in Government Systems across multiple product and service offerings. The products and services are steady and expanding portfolio of Link 16 tactical datalinks, information assurance and cyber appliances and software and narrowband and broadband satellite terminal products and services. We use this chart on the last call as it helps isolate the seasonality of the government business. You can see the year-over-year revenue growth on the left, that’s attributable to the products and services that I just mentioned. On the right, you can see EBITDA has been growing a little bit faster even taking into account higher R&D and other selling costs we are incurring to continue positioning us for the future. We ended the quarter with record backlog over $700 million after strong awards of about $200 million during the quarter. One of our growth strategies is to increase our addressable market by migrating products that have been very effective in early adopter organizations, such as Special Forces, to the mainstream Army, Navy and Air Force. During the third quarter, we executed a $350 million ID, indefinite delivery, indefinite quantity, or ID/IQ contract with Special Forces that helps illustrate the demand for products and services that are generally ViaSat unique non-developmental items as opposed to programs of record. Just to be sure, we only include firm purchase orders when received under that contract in our new awards and backlog. As those products and services are adopted by other users, we are also aiming to execute similar types of contracts with those organizations. We are having success with our migration strategy. The Department of the Army recently filed a report with Congress on their tactical network modernization strategy. The report emphasizes the Army needs to move faster to develop and deploy new and commercial technologies not just for cost effectiveness, but to close capability gaps and that report specifically calls out two ViaSat products we initially developed for early adopter organizations and it indirectly refers to others that we have done as well. We continue to be optimistic about our growth prospects. Having an approved DoD budget will be very helpful as the continuing resolution environment makes it more difficult to contract for new capabilities and/or with new organizations. So, turning to in-flight connectivity, we have been anticipating a significant ramp in aircraft starting in this current fourth quarter. And our objective in the third quarter was to pave the way for that. We began testing service on several American Airlines planes, including some of each, both factory line fit, new 737MAX as well as retrofits to existing planes that had air to ground. Passenger feedback for our service has been positive and there is a sample on the chart. We are also in production service with Qantas in Australia. Qantas has been very forward-looking in leveraging free Internet service to every passenger in one of their innovative applications is an agreement for live streaming cricket matches. They also have agreements for other media and entertainment including music, live streaming TV and video-on-demand. We are also making good progress in bringing our European airline customers online, with our European KSAT joint venture and forthcoming transatlantic coverage on ViaSat-2. As I mentioned earlier, we added 92 additional aircraft in the third quarter, which brought our total of in-service and contracted claims to just over 1,500 as of the end of that quarter. And just today, we announced a new direct contract with United Airlines for 70 plus additional planes, mostly new 737 MAXes and that puts us close to 1,600. That contract also includes our wireless in-flight entertainment product. We think there is a clear trend towards airlines capitalizing on in-flight connectivity as a cost effective way to both differentiate themselves and to drive passenger satisfaction and that will lead to higher levels of passenger engagement, which is our unique value proposition. Just to reinforce that point in the third quarter alone, we delivered over 4 million personal electronic device Wi-Fi Internet sessions for our in-flight connectivity customers. We are optimistic that as we expand our geographic coverage with ViaSat-2, ViaSat-3 and possibly additional regional partnerships that we can grow in other regions as we have in the U.S. Okay. So, now let’s turn to consumer broadband. Pretty much everything we did in the third quarter was aimed at launching service on ViaSat-2. We have long said that we want to grow the addressable market with higher speed plans with more bandwidth and more video streaming. So in the second half of the third quarter, we began test marketing new unlimited plans on ViaSat-1 that were coupled with video stream management to extend viewing hours, something we expected would be a good trade for many customers. We were still limited by the amount of bandwidth available on ViaSat-1 and the speeds that we could offer, but the test marketing results appeared very favorable. At the end of the third quarter, we already had over 40,000 subscribers on these new plans. About 20,000 of those are subscriber – are subscribers who migrated from other existing plans. So we have learned a lot about the attractiveness of these new unlimited plans relative to each of our older existing ones as well as gained insight into price elasticity and the effects of combining different plan types in the coverage areas. Overall, even given the bandwidth limits of ViaSat-1 and an appropriately limited marketing budget we have seen churn come down, gross adds increased due to the attractiveness of the plans and net subscriber losses moderate. Higher speeds and lower bandwidth also support higher ARPU, with the combination of the new plans and retail wholesale mix leading to an 8% year-over-year growth to a record of over $68. Just as an aside, given a macro environment of growing share of over the top Internet video, in January we have seen standalone cable broadband pricing from multiple suppliers rise to $75 a month for 25 megabit per second service, which just helps to illustrate the value of high speed, high bandwidth Internet access. So with that as the backdrop, we are really looking forward to the launch of service on ViaSat-2 starting regionally as early as next week and in the next couple of slides, we will go into more depth on that. So first, a quick review of what our objectives have been for the ViaSat-2 satellite and network. We think we are set for a good start on most of these points. We want to grow our addressable market with faster speeds and more bandwidth and thus bandwidth [ph] speeds up to 100 megabits per second in high demand areas and offering virtually all our new plans in an unlimited type format. We want to expand into new geographic markets. Our in-flight connectivity business will take advantage of the ocean coverage on Trans-Atlantic and Caribbean and likely include Mexico and south of there too. We have also been pretty rapidly expanding our Wi-Fi services in Mexico, but I will defer more on that for another day. One of the most important new capabilities with ViaSat-2 is flexible bandwidth allocation. The idea of there is to mitigate obstacles to revenue and earnings growth, where we have got bandwidth available on the satellite, but it’s not in the right place at the right time, which not in the right direction in terms of downstream versus upstream. ViaSat-2 has a lot of flexibility in each of those dimensions. So we can respond to long-term trends such as more demand in one geographic area versus another, where short-term imbalances such as due to different peak busy hour demand in different time zones were due to geographic variances due to airline schedules for instance. So with ViaSat-1 we found that downstream bandwidth was a bottleneck, we would have traded back some of the upstream that we had left over from more downstream if we could. We also had some markets with very high demand and sold that quickly and others with little demand that required more promotions or discounting or service plans with lower economic yield. Also we can use the flexibility to allocate bandwidth to different vertical markets that have different peak demand profiles such as businesses or mobility or government applications compared to residential. We know based on backlog for instance that our in-flight connectivity business could triple in the next 3 years and represent a significantly larger portion of our services revenue. We also have opportunities to scale other businesses with complementary demand profiles. So we have got opportunities to drive growth and returns using ViaSat-2 across multiple dimensions in addition to subscriber growth, such as higher ARPU, expanding the geographies and verticals we serve and more effectively allocating bandwidth in a thoughtful way to opportunities based on the demand environment and the long-term growth those opportunities represent. So it’s a different dynamic than we have launched ViaSet-1. On our current fleet, including ViaSat-1 90% to 95% of the bandwidth is generally allocated to residential broadband and the geographic allocation of capacity was fixed, that mix and those constraints should change with the addition of ViaSat-2. And beyond the geographic allocations, we also want to manage our growth trajectory in terms of loading our satellites and optimizing long-term value. In 2.5 years to 3 years, we are planning to have ViaSat-3 available, which is designed to have an even greater productivity improvement, more coverage and greater flexibility. So we can further scale existing businesses and enter new markets and geographies, just makes sense for us to consider these opportunities thoughtfully and strategically and not simply just focus on residential subscribers, while still understanding the path for largest part of our satellite services business. So, on the next slide, we will give some color on how we think about turning our additional bandwidth and productivity gains into economic value. The top left chart is about productivity gain allocation. Our services business sells bandwidth packaged in different ways and there must be a market value of the bandwidth that you can find by dividing the services revenue by the bandwidth sold. ViaSat-2 was designed to get twice the productivity of ViaSat-1. We do have an antenna deployment issue that may degrade capacity compared to the ground tests. So, we and the Boeing team are working to characterize the on-orbit performance to estimate the maximum capacity of the satellite. We currently estimate the maximum capacity could be around 260 gigabits when optimized for capacity given the antenna system as we understand it. Still, we believe ViaSat-2 will have at least double the usual bandwidth as ViaSat-1 taking into account its flexibility, geographic demand models, service mix, available spectrum and our current understanding of the satellite network performance potential. The really important question is how should we turn the bandwidth into revenue and earnings? The upper left chart shows 3 pod experiments and some test market data. The first column would be if we got all the productivity gain that is the market value in terms of dollars per gigabit and revenue just stays the same for the life of the satellite or for the next 3 years say. So, if we were to triple bandwidth which will be 1 unit on ViaSat-1 and 2 on ViaSat-2 and our revenue would triple and that’s probably too optimistic. The next column shows what happens in a hypothetical scenario or the market required to give all that productivity gain to customers. And ViaSat-2 respectively yields the same revenue ViaSat-1 did, since ViaSat-1 has about half the useful bandwidth of ViaSat-2 then its revenue would have. Combined the revenue would be about 50% higher than with ViaSat-1 alone and that likely seems too pessimistic. The third column reflects a bare case arguing that ViaSat-2 is purely called maintenance CapEx and we will in total get no more revenue than we did before with just ViaSat-1. So based on just two of the points we have shared today, the test marketing results for our higher value consumer plans in our rapidly growing in-flight connectivity backlog, it should be pretty clear that the market opportunity doesn’t seem to reflect that view, which is even more pessimistic than giving all the productivity gain to our customers. The fourth column is the most interesting, because it reflects data from the over 40,000 ViaSat-1 subscribers using the ViaSat-2 like plans as of the end of the third quarter and it supports what we expected and planned that we would share the productivity gain between customers and ViaSat and that would see a yield in between the first two cases. So just to be clear, we don’t intend this as guidance. It’s just the data point, but it’s an exciting one in terms of the growth opportunity. Some of the factors that could make things better or worse are also shown on that chart, next to that fourth column. Then the lower right hand chart is about the trajectory over time for achieving the economic yield that’s possible and represented in the upper left cases, when we start the only other revenue from ViaSat-1. So as I noted a moment ago, we would like to optimize that revenue on the combination of our fleet and we would like to do that by the time ViaSat-3 goes into service. That’s estimated as the second half of calendar year 2020, so roughly 2.5 to 3 years from now. ViaSat-3 is designed to improve productivity again. So, we would like to have filled our available bandwidth by the time it launches, service. So, if we sell bandwidth too fast, we may be undervaluing it relative to its market potential, so we might want to slowdown a little and increase our yield. If we are building revenue too slowly, we may have overestimated this market value, we only should probably try to speed up. Somewhere in there is the goldilocks not too hot, not too cold rate and that’s what we are focused on finding based on facts from the market and having knobs and levers to adapt. Just to be clear, we are really focused on the revenue and the earnings trajectory and that’s not exactly the same as focusing on subscriber counts. So, this chart on the service plan approaches helps illustrate how we look at subscriber counts. Residential revenue is simply the product as net subscribers times ARPU. Simply stated, fewer subs with higher ARPU is more profitable than more subs with lower ARPU. Subscriber acquisition cost expenses and investments are lower. Service levels are better, so churn can be lower given the right subscriber base. We have design plans that are consistent with this approach and still should help grow our addressable market. Based on our third quarter test marketing, the economic yield of the plans was good, demand currently seems sufficient to achieve the revenue trajectory we want and churn can be better than with lower price, lower performing plans. Also more attractive plans don’t require as much marketing and promotional spend. The up charge of all this is that will measure and adapt our consumer business based on the revenue and earnings trajectory we can obtain driven by economic yield of the service plan and find the number of subs that delivers those results. Finally, the other point that affects subscriber counts will be the total amount of bandwidth that we allocate to residential service. Based on our growth right growth rate in in-flight connectivity, Wi-Fi and government services and taking into account opportunities in enterprise and maritime, we anticipate that a significantly smaller portion of our total bandwidth of the fleet including ViaSat-2 would be allocated to residential than the 90% to 95% on our current fleet. So that could limit subscriber count until ViaSat-3 is in service, but it would likely improve revenue and earnings and it would enable additional markets that would increase our overall growth outlook. Okay. So to wrap up quickly summarize the main drivers we see in each of our business segments. Government systems has been executing really well, overall we see good opportunities to continue that. We continue to be successful with our unique non-developmental items as compared to programs of record although we have also been successful on a number of programs of record or turning our NDI products into programs of record to. The Defense Department has become more receptive to incorporating commercial technology to close critical capability gaps. We have got a number of unique capabilities that we can leverage in tactical data links, cyber security and satellite broadband products and services. In the short-term the lack of budget authority and reliance on continuing resolutions makes it kind of challenging to continue to introduce new products and services or to work with new organizations, because these continuing resolutions are intended to merely maintain the status quo. But so far, we have been successful in our special forces IDIQ is a good example of that, but short-term quarterly variations are always the possibility. Our commercial networks business has several leading indicators for revenue growth and lower R&D expenses. We have seen positive book to bills, anticipate a significant ramp and in-flight connectivity equipment sales, which show up in that segment and we have seen sequential reductions in ViaSat-3 quarterly R&D expense. We have continued long-term opportunities in advance ground networks including flat-panel phased arrays and our success in capturing new airline customers does create ongoing needs for retrofit and new line-fit supplemental type certifications or STCs for additional aircraft and that does involve additional R&D expense. On satellite services, the biggest factor is the launch of services on ViaSat-2. We have got just one more quarter of a year-over-year comparables that include the SS/L settlement payments, so that will go away. ViaSat-2 enables us to return to residential subscriber growth, but remember that we are most focused on revenue growth and associated earnings driven by higher value, higher speed and higher bandwidth service plans. Short-term revenue gains will be somewhat tempered by initial – by initial promotional pricing, near-term earnings will also be affected by SAC expenses. And as with ViaSat-1 though we expect to overcome increased fixed costs and create a fly wheel effect that progressively allows a higher proportion of revenues to fall to the bottom line as our satellites fill. We also anticipate a higher proportion of satellite services revenue to be generated from enterprise and government applications such as in-flight connectivity that may constrain total residential subscriber growth into ViaSat-3, but it will improve monetization through higher value applications with complementary peak geographic and temporal demand. As a reminder, government applications of broadband satellite bandwidth are reported in our Government Systems segment. So that may have some impact on Satellite Services segment results. So and with that let’s open it up for questions.

[Operator Instructions] Our first question comes from the line of Mike Crawford with B. Riley. Your line is now open.

Thank you. And in airborne mobile what percent of united fleet you now have and how is that carrier going to manage, do you believe that carrier will manage passenger in-flight experience expectations.

Okay. I think we had around 262 or 280 maybe or in 280…?

On the airplane.

Yes. 280 on the United roughly out of close to say 400 to 450 I think in their domestic mainline fleet, that’s…

Could be a little higher than that and closer to 300 of United planes.

Okay. So this will add to our proportion of that. I think United is still – but we don’t want to speak for United in terms of what their fleet wide planning is. I think they will speak for themselves in terms of how they are going to come and deliver the services through the course of the fleet throughout the fleet. I think our understanding is in general they are excited about the capabilities that we offer and I think you will see that they will more – probably more likely to try to figure out and leverage them to support them.

Okay. Thank you. And in Europe you have a dispute with the regulator there Ofcom regarding Inmarsat’s use of spectrum that was supposed to be for satellite mobile phones and etcetera – I m sorry our European aviation network where they have this 300 tower build out and so A, what do you think on your prospects in regards to that fight and then B, if that purpose without spectrum is able to be used for that purpose I mean what would you be able to use your Ka-band spectrum for 5G service in Europe?

Okay. Let’s open it up for that question. So basically our position is that the application that the EAN application will deliver something like 99% of all the bandwidth that’s delivered to passengers on airplanes through ground network as opposed to satellite that the intent was that the ground network augment the satellite not that it basically be the network and with the satellite providing a tiny part that’s our position I think will be about I think it will be resolved on the merits. So the argument probably on the jurisdiction by jurisdiction basis, I think our understanding is that there are already at least a couple of important countries that haven’t approved EAN and that where we are contesting it in others. And I think it will be resolved on the merits, but arguments pretty straightforward. I think that the – there is a difference in taking Ka-band spectrum and applying it to 5G networks because Ka-band spectrum is generally applied, this is the difference between what’s called fixed satellites or mobile satellite service. Fixed satellite service bandwidth is only allocated to operators at specific orbital locations whereas MSS spectrum like S-band and L-band is more omni-directional. And so it’s not really practical currently to allow each of the FSS operators to use MSS spectrum on the ground. There is really no protocol for doing that.

Okay. Thank you. And then last question also in Europe is any update on negotiations with Eutelsat?

Yes. I think both we and Eutelsat are working away on the agreements that would result in ViaSat-3 JV. We are not done. I think we are continuing to make progress on it.

Okay. Thank you.

Thank you. And our next question comes from the line of Rich Valera with Needham & Company. Your line is now open.

Thank you. Mark, something you are talking about the, it sounds like you are expecting at this point of what you know a bit lower capacity on ViaSat-2 260 I guess versus first the original 300, so I know you had before said you thought you could kind of bridge to your original financial projections even if the capacity was a bit lower, can you talk about maybe how you would bridge to your original financial projections if 260 turns out to be the number. And then what do you think the odds are that you can still come up with a fix that would get that backup closer to the original capacity? Thanks.

Okay. So let’s start with the second part first. There are still maneuvers that we can do with the satellites that may resolve the problem. We are working with manufacturer of Boeing and with the insurers to make sure that we understand the situation and that when we take those actions they are appropriate. And I would say, it’s not often a distinct future, it’s not something we are going do immediately either, but I think that there is still – we can’t really put a probability around what the outcome will be and the outcome is not binary, it could end up improving the situation, it could fix it completely. It’s not inconceivable that it could make things a little bit worse that’s where we are trying to do to make sure that anything we do is prudent. In terms of how we can work with the – work with the capacity that we have and still achieve our regional financial results, one of the things that we have said multiple times is basically when we intend to bring this capacity into service that will put it in a configuration that maximizes its revenue potential and that’s not exactly the same as the situation that maximizes the capacity. So, if you think about how you maximize capacity you sort of have to think of it as sort of spread that capacity fairly evenly over the whole coverage area and part of the point of having flexibility is to use capacity in the places where it has the most demand. So, we have basically – and the satellite has a great deal of flexibility. So, what we will intended to do was to allocate capacity to those places that have the most demand that makes it a little more concentrated and so the trade-off would be that at least for the beginning and this may change we think at ViaSat-3, but at the beginning, we look just like I said with VaiSat-1 we might be happy to have less total capacity in order to have that capacity in the right places and for the right uses. So we have demand models. We are putting the capacity in that configuration. The other simple reason for why we still think we can meet our plans is that we didn’t base our business plans on perfection that we had margin in there for problems and then also we have had things in other parts of the network work better than we planned. These are things that are on the ground and are not attributes of the satellite. So I just want to make one example would be, I think this is a really good way to think about it is imagine they had a satellite that had solar panel that didn’t deploy 100% right. So, that satellite has 10% less power than it used to. The satellite is impaired. There is a partial loss. It can’t do exactly what it could have done otherwise, but if you come up with modems that have better performance than what you originally anticipated where you have video codecs that have better performance than originally anticipated, you could still achieve your targeted performance even though the satellite itself is somewhat impaired and that’s pretty much the situation now we have when you consider all things put together.

Got it. And is potential insurance claims any part of that as well?

Yes, there are. So basically one thing we have notified the insurers that there is an anomaly on the satellite that we will try to – we are working with them to quantify what that anomaly is we would be entitled to coverage as a partial loss for the satellite. And we also think that in the end that the insurers will like us would want to try to fix it that will evaluate those risks and then we will make a decision.

Got it. That’s helpful. Thanks Mark. And then just with respect to the in-flight obviously very nice backlog now. And you have talked before about having a pretty aggressive ramp trajectory in terms of quarterly installs can you give us an update on how you think that might progress over the next two, three quarters?

I don’t know if you want to give any, Rick, would you like to give any numbers or any color on that?

No, there is two different things going on, because we are delivering to Boeing for line fit and then we are doing retrofits. And so our delivery schedule is ahead of the in-service schedules, but pretty much they start on a quarter-over-quarter basis you will see Q1 or Q4 had double, but it was in our Q3 I think those are numbers Shawn and then you will see Q1 double that, so it steps up pretty steeply until we get into summer and if the rate of growth slows down?

I guess it would still take a few quarters that I still thought our your peak was going to be pretty well over 100 per quarter, is that still your thought at your sort of peak run rate?

No, it will higher than that. It will be like…

Okay. Like 150, is that sort of the number or ballpark?

Yes. I think probably closer to 170. Shawn, I think it’s in the…

Yes. I think between 150 and 200, so 170 is good.

Yes, in that range and as we are adding more obviously that number is growing.

Great. And so and not to beat this one, but you think you might hit that in the next four quarters is that…?

Yes.

Got it, okay, that’s it for me. I will leave the floor. Thank you.

Thanks Rich.

Thank you. And our next question comes from the line of Ric Prentiss with Raymond James. Your line is now open.

Thanks. Good afternoon. And obviously exciting times as ViaSat-2 moves from launch to test the market, did a good job laying out a lot of your thoughts on market testing, help us understand maybe a little bit about the distribution channels were used, you have talked about maybe reducing the amount of bandwidth that goes to residential, how do you get out government mobility, obviously in fly you have got that handled, but just trying to think through how you are going to go to market to these different areas that are going to get bandwidth assigned to them?

Okay. So yes, just and actually one thing I didn’t talk about this in the first case residential distribution is still really important. We have mentioned in the past that we have been working on improving and expanding our residential distribution. And I think the steps on good things up there. Also one of things it’s important is that for about the last nine months we really have had very little direct to home TV distribution. And there is a good chance of that we will reengage with the new satellites a while. So those are things on the residential side. On the government side, essentially our distribution approach has been working directly with to configure this platforms, that is we have talked about for instance C-130s or Gulf streams. These are in government markets or specific types of ISR platforms. So one is to work with a lead on each platform in order to get qualified and say equivalent of the – it’s not exactly, but it’s the equivalent of getting qualified on that platform like an STC would be with the sponsor. And then we tend to go to other organizations that use those same platforms. So for instance Special Forces were are early adopters in C-130s or C-5s or C-17s – excuse me C-130s and C-17s. And then we have worked with other organizations on new platforms. And one of them for instance would be [indiscernible]. And then to go to different organizations that are users of those platforms. So it’s pretty much taken as a direct sales approach. These customers use our terminals and then they will buy services from us. We also have been working with ground organizations and as an example one of – again going back to this Army tactical networks modernization program, there is a lot of issues what’s called the T-program, when T-program was primarily a satellite program has very large terminals not on a bandwidth, that’s a really good example application for us to go into on the defense side. The another area I don’t want to talk about too much because we will talk about in more detail in a few weeks is Wi-Fi in emerging markets and there we have a couple of different distribution approaches that we are working with. One is a partner that provides current information think of it as information services in remote villages and those services are greatly enhanced and their markets greatly expanded by having connectivity along with that – those types of services. In terms of some other new markets, we have partners in enterprise who I think in the past we have mentioned on a range that we are working with Comcast as an example for a large quick serve chain, where we satellites could fill in sites that aren’t available to be served by their ground network as an example. We will expand other applications like that.

Okay. Obviously, not all subjects rated equal on this kind of new world as you mentioned higher ARPU ones, how are you thinking about reporting or educating the market then on kind of the type of subs you are getting and what we should think about from a modeling standpoint?

Okay. So I think on the residential side, we will continue to report ARPU. I think on the – we are still thinking about it when we have applications that are more shared and we’ll probably won’t do that until those applications become material. So, the thing for instance with in-flight connectivity at the current levels, it’s just not been a material part of our business, but as that backlog gets built out, it will be until we will come up with an appropriate mechanism for reporting it and giving investors and analysts a way to kind of value these relative approaches.

Okay. Also in the U.S., there has been a lot of discussions about the CAF II auction coming up in July, what are your views on that auction and what it might mean for competition or any interest from you guys as far as looking at what’s going on with the CAF II auctions?

Okay. So we have paid attention to the CAF auctions. There was at one point a movement to make them more technology neutral that was somewhat undermined by the bidding rules that allocated value to latency as an example relative to speed. We think that we are really interested in it. We will do – we will compete in the best way that we can given what the rules are and in the meantime through the adoption of our service plans and through studies like this when they came out from University of Indiana over the summer we are trying to demonstrate that a lot of customers really prefer higher speeds and more bandwidth to lower latency and when given the choice, but two of the CAF rules really fairly reflect that and we are constrained in what we can do.

Got it. And last from me is both Sprint and Softbank on their earnings calls recently were talking up OneWeb a little bit as possibly ultimately becoming a rural broadband solution. Can you just update us on your thoughts about OneWeb and how much bandwidth it actually brings and the ability to put that product into the market?

So I think OneWeb in low-earth orbit systems are definitely interesting from a technology perspective. I think that we have been pretty consistent and haven’t really seen any facts to the contrary that one of the challenges with low-earth orbit system is the geographic distribution of bandwidth. And just from the amount of time we have spent on how we expect to use it with our satellites we think that geographic distribution is really important and it’s just like imagine that you are a cellular operator and you can’t really control the geographic distribution of your bandwidth that you have to fairly uniformly spread it over around the world. I mean, that’s definitely a disadvantage relative to people that can employ their assets in a more targeted way. So, what I think at the end is that while low-earth orbit systems will have lower latency than we would that we will be able to use our assets to deliver higher speeds and more bandwidth for a comparable cost and that ultimately that’s going to be more valuable for a lot of the markets that we are serving. We do know that some fraction of bandwidth did generally less than 10% is more latency sensitive and one of the other things that we are doing to try to serve that part of the market is to partner with other terrestrial services, where we can use hybrid approaches to deliver some combination of really high speeds and high volume of satellite, coupled with lower latency for those services that needed over terrestrial. I think we are going to compete well. I don’t think it’s a zero-sum game. So, we are not predicting the failure of OneWeb, I just think that it’s not going to bring an amount of bandwidth to the markets that we serve that’s going to disrupt our ability to compete in those markets.

Great. Thanks for your thoughts. That’s really great.

Thank you.

Thank you. And our next question comes from the line of Andrew Spinola with Wells Fargo. Your line is now open.

Thanks. Shawn, I wanted to ask you about the accounting for these new ViaSat-2 plans with the 3-month promotion at a lower price, are you recognizing the revenue from those subscribers at the full rate from day one – and I guess – or as you – and then somehow amortizing that discount over time or what sort of the impact can we expect after the 3-month period from these new subscribers and did we see the ARPU boost from device it to subs in the current quarter?

Okay. So, couple dynamics happening there. So, when I would say that in general what you tend to see is kind of a blended effect. Those early price points are a little bit skewed lower based on some of those promotional and then we will see over time it skew upward, I would say that’s pretty – you should expect to see that and then when we look…

So Shawn in other words we don’t amortize that discount, we let it show up in the period that that transaction occurs?

Yes, pretty much. That’s pretty kind of pretty much the end result that happens subject to some other considerations that we look at with the customer on contract, non-contract, but at the end of the day, that’s a pretty good approximation.

Okay. Just to sort of break it down, those 40,000 plus subs, you are not seeing the full impact of the price points that they will be stepped up to after the 3 months in the December quarter, is that fair?

Yes, I would say, that’s fair.

Okay. And the second question for me is if you are willing, could you maybe talk from a high level about the EBITDA trajectory of the commercial networks business from fiscal ‘18 to fiscal ‘19, i.e., what you are expecting from the step down of ViaSat-3 expenses and then maybe particularly also what uptick could you potentially expect from the aircraft terminals?

So, I mean, I guess I would say without given a straight number is that if you look at the R&D tick down, we are going to see that tick down kind of quarter-over-quarter, all the way through to the end of the year. So, I think that if you look at a baseline R&D spend, so let’s say the percentage of revenues that we had early ‘17 we will see a pretty significant savings coming into ‘19 and then you did hit on the other driver to EBITDA next year is really around that commercial air terminal and that’s definitely going to contribute some additional increases. So, I think the piece of those we have talked about a little bit should be significant to next year. So, I think you could see a pretty significant improvement in EBITDA and we can give you guys some additional color to that as we head into next year or into next call.

Just to finish up on that point, the hardware that you ship is sold at a profit or is it breakeven?

No, it’s certainly sold at a profit.

It is. Alright, thank you very much.

Thank you. And our next question comes from the line of Simon Flannery with Morgan Stanley. Your line is now open.

Great, thank you very much. Good evening. Mark, can you talk a little bit more about the broadband rollout with ViaSat-2, how are you thinking about your addressable market given the greater speeds and capacity here? Are you going to really address the same sort of target markets that you went to with ViaSat-1 or is there going to be an expansion in that footprint that you hit? And any color you could give us around the shaping of the broadband ads when does it turn positive and when does it really start ramping in your view as you all set to churn on your ViaSat-1 versus the ads on ViaSat-2 as you scale that up? And then Shawn just a clarification you talked about the margins in the initial quarter looking more like ViaSat-1 after a year and just to check the math, are we in that kind of 19%, 20% EBITDA margin range, is that the right ballpark? Thanks.

Okay. So let me start with the first two. Okay. First, in terms of target market, I think so with our approach to marketing I would say is we are working to become more granular, right. And I think that the best – best places for us to sell are for people who want to rely on the Internet more and more for video entertainment. So that’s where we are targeting people who want higher speeds, so that they can they can do video streaming and they can do enough of it, because they are using Netflix or some other similar service. So we would like to target people who are doing that, but we would also mostly like to target the people who are doing that and don’t have access to say 25 or 50 megabit per second cable. And so that means really trying to better understand the intersections in those two. And that would be I think just as an example. And I just use this because you have kind of bunch of it, but for instance, Greg Moffatt [ph], when he looks at each of the cable companies will look at what fraction of each cable company’s footprint overlaps different computing services. For instance how much of it is ADSL or how much of it is fiber to the node, how much is fiber to the home, right. And so what we are trying to do is to market more to those intersections. Those are the places where we are trying to initially match our supplier bandwidth to where we think there will be demand. Now, I think when you look at it from a macro perspective at things and we think about where do the speeds that we are marketing fit in the – so the overall speeds that are available in the U.S. And one of the things we showed in the past is 25 megabits is kind of in the right around the median speed in the U.S. maybe just a little bit worse than median. But when we started with ViaSat-1 12 megabit was kind of median speed and now we will have 50 and 100 megabit per second plans. So overall, from a speed perspective we think we are – we have increased our addressable market, but we are trying to do is be a little more precise in the way we do our actual advertising and promotions and in some other channels that we are trying to engage to better target those intersections.

Okay.

On the shape of ramp – I am sorry go ahead.

Yes, that’s the…

Okay. So on the shape of the ramp, I think the main thing that we would try to get across and our thinking is that we are really looking at revenue growth trajectory as opposed to the subscriber growth trajectory. And part of that is we are trying to understand what the desirability is of the different plans. And there is definitely it’s not exactly linear, but there is certainly a proportional or fairly linear relationship between the speeds that we offer, the price of the plans and the amount of bandwidth that’s consumed by them. So think about it as we would have somewhat different yields, but if we can get a comparable yield that is dollars per gigabit by selling 100 megabit plans as opposed to 25 megabit plans, we would like to do that, alright. So that but because of the price points different that we just can’t as many of the 100 megabit one as 25. And so we are going to look at what that mix is. I think we learned a pretty fair amount from the test marketing, but we couldn’t test market 1,500 mega plans, because the satellite didn’t support those. So I think we are going to defer a little bit actual subscriber numbers until we get some experience with the actual marketing, with which we will start by the time we report next quarter, we have probably a full month of activity with all – with all the plans in all the markets.

Hey. And to your last question on that satellite services EBITDA, so that range was 19% to 20% looking at kind of the first full quarter or ViaSat-2 in service that’s a good range to start. And then we will increase sequentially each quarter from there.

Great. Thank you.

Thank you. And our net question comes from the line of Phil Cusick with JPMorgan. Your line is now open.

Hey, guys. Thanks. A little bit following up on Simon’s question for ViaSat-2 I like the unlimited plans, do you Mark expect to sell only unlimited going forward, how do you think about that?

Yes, that’s what the plan is. Clearly, there is a lot of demand for those. We can see that in the way people trade old plans even ones with either the soft caps or the very high caps for unlimited. That’s big part of what we are trying to understand is to be able to get a sense on the amount of bandwidth it takes to fulfill those on the price points and yields, but overall when you couple the unlimited with the video streaming management, it looks like a good way to go and that’s our plan going forward.

Thanks. And then can you give us an update on ViaSat-3, what are you thinking at this point in terms of timing and capacity, anything changing?

No, it’s – we are – the main thing that is reflected in the financials is that we are on that transition from testing, it’s basically engineering model testing and prototype testing to transitioning into building the flight hardware and we are getting more and more of the subsystems and modules into that. I think we have done a lot of testing on the pre-flight hardware, but basically in general for these satellite programs, the largest source of uncertainty is in the integration phase. So, that’s still ahead of us. And so that’s where we will really figure out what the deployment schedule is. We are also looking at different launch campaign options with the prospect of reducing the orbit raising time which was a big factor in ViaSat-2 in-service date. So right now, I think that the second half of 2020 is a reasonable range to think about for when that would come in service. In terms of the technical capabilities nothing has really changed. I mean, we have done a lot of – lots and lots of risk reduction integration testing and supply things still look really promising in terms of its technical and performance capabilities.

And if you could – this is I know you are just testing the limited plans now on ViaSat-2 but if you could push yourself forward 3 years and think about what those ViaSat-3 plans might look like, how do you imagine those evolving?

I think that’s clearly what people want – what we would expect is that we would be able to deliver those with more of them tending towards the higher speeds and probably being able to push up assuming market values risk that these plans are in some way more valuable or give us a bigger market whichever we need or increased the take rates, but we may end up with higher streaming speeds that go along with and you could think about moving the streaming speeds up a notch as an example as we do that as well. I think those are kind of the general trends.

Got it. Thank you.

Thank you.

Thank you. And we do have time for one last caller. And our next question comes from the line of Chris Quilty with Quilty Analytics. Your line is now open.

Thank you. Shawn, thank you for that very detailed breakdown on the selling costs and whatnot, except I am bad at math, so can you guide me a little more specifically where you think the service margins will go once ViaSat-2 subs kick in, is it kind of like the 2014 level or better or little less?

So, what I would say is we wanted to kind of give you guys where we thought kind of first full quarter or our starting point was, because it’s not going to be as low as it was when we started ViaSat-1. And then I would say you should see it continues to increase quarter-over-quarter sequentially and I would expect just to be able to do better than we did on ViaSat-1 ultimately.

Okay, got it. So, it looks like we are poised to get some double-digit Pentagon budget increases, Mark, is there any particular program or general area where you think you might be able to benefit disproportionately either because there was unavailable budget or think that might be money related?

I think that I would say that rather than just looking at the budget, I think that the things that are – it’s going to be most impactful for us. To go back and look at for instances Army tactical modernization report that the Army just filed I think about a week ago and that was really more focused on capability gaps. And I think that rather than thinking about it as okay people had more money to buy the things that they already buy from us. I think they are really looking at is taking the capabilities we have and clearing those gaps. And if we – if for instance the mainstream Army that we close several gaps, that means our market is going to be much bigger, it’s going to grow, things will do better than just by the growth in the budget, likewise if we could do similar things with certain Navy applications or Air Force applications. So I think that – that’s sort of a gating step is to deal with the – with the demand model and the capability gap model. I think that what we have seen is often the arguments when you feel those capability gaps are so compelling that it makes for that people find the budget one way or another. I think this make it a little easier to find the budget, but I think the big issue for us is really getting people to test and understand the functional value and performance value that we bring.

Okay. And one final quick question on ViaSat-2 major component that I think is that the Trans-Atlantic for in-flight connectivity, do you feel like you have got orders in the book already where that reflects an element of the customers plans or source selection on ViaSat-2 or do you think any orders related to Trans-Atlantic are yet to come?

On the Trans-Atlantic, I think we have got some of them. I think that there is – there are more opportunities to come. But I think, we have got some that already tend to use. We know I mean I think you will see first Trans-Atlantic flights from some of our customers immediately once we bring up the arrow service, which should be to shortly after we bring up the residential service. And I will let those carriers talk about it, because I think they would like to make kind of a big deal about it, but we have already got, we have got customers that are returning on that already.

Great. Thank you.

Thank you. And that concludes our Q&A session for today. So I would like to return the call to management for any closing remarks.

Okay. So I think that concludes our call for this afternoon. Thanks a lot everybody for your time and interest and look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a great day.