Welcome to Viasat's FY 2020 third quarter earnings conference call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Yes. Thanks. Good afternoon everybody and welcome to Viasat's earnings call for our third fiscal quarter of 2020. So I am Mark Dankberg, Chairman and CEO. And also on the call with me are Rick Baldridge, our President and Chief Operating Officer, Shawn Duffy, our CFO, Robert Blair, General Counsel, Bruce Dirks, our Treasurer and Paul Froelich in Corporate Development. And 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. With that said, let me turn it back over to Mark.

Thanks Robert. So we will be referring to slides that are available over the web. I will start with an overview and Shawn will discuss the consolidated and segment level financial results. And then I will give more color on the business, progress on ViaSat-3, our global expansion plans and update our outlook. So financial results continue to be strong. Revenue of $588 million for Q3 is up 6% year-over-year and $1.7 billion year-to-date is up 14% compared to last year. EBITDA of $122 million for third quarter is up 13% year-over-year and at $337 million year-to-date is 46% higher than last year. Year-to-date orders of $1.8 billion are slightly above last year and reflect a book-to-bill of just over one times. The financial results demonstrated strong business fundamentals. We are scaling and refining and improving execution. We are able to deliver solid gains while investing for future growth. In the near to mid term aeronautical broadband, both government and commercial, has great growth potential. We are aiming to translate the accomplishments and market share gains we have achieved in North American in-flight connectivity on a global basis and we are making significant progress. By the nature of how government platforms are deployed, global expansion opportunities are already in motion. Government systems is firing on all cylinders and creating more opportunities from network effects across several product lines. One of our strategic themes is diversifying our satellite services portfolio to increase resilience, grow our total addressable market and prepare for global coverage. We have shown progress every quarter. While we are efficiently driving revenue and earnings growth in U.S. fixed site service, our other markets are growing even faster. We are entering each vertical market and methodically expanding geographically. We have a very substantial growth runway in front of us.…

Thanks Mark. As Mark just covered the top level highlights, I will jump right into our segment performance. The momentum in our government business continues to drive growth, with third quarter reflecting the strong performance in both topline and earnings. Segment revenues grew $42 million or 17% year-over-year, with higher product sales occurring across our diverse portfolio including tactical radios, mobile broadband, tactical data links and government satcom products. This comes on the heels of a very good Q2, which historically is a seasonally good book and ship work quarter for us corresponding with the government's fiscal year-end budget closeout on September 30. So we expect our government business to continue its strong performance into Q4, easily exceeding the $1 billion revenue threshold for FY 2020 that I mentioned last quarter. Adjusted EBITDA for government systems was $78 million, representing a 13% increase over Q3 of last year. The higher topline drove this growth as improved gross margins on higher NDI product mix from the prior period was offset by a modest uptick in SG&A. Segment awards in the quarter were $232 million, up almost 50% year-over-year, to a new Q3 record and resulting in a positive year-to-date book-to-bill position. Government backlog stood at $928 million at the end of the quarter and that excludes the IDIQ values Mark mentioned earlier and approximately $450 million in remaining AMSS contract options which, to remind everyone, is the contract we have to provide to elite global in-flight connectivity services on the U.S. government senior leader aircraft. Turning to commercial networks. We saw quarterly revenues decline by $42 million or 33%, due entirely to the comparative impact of last year's spike in the IFC terminal installations for American Airlines, offset with other modest commercial product increases. And despite the continued grounding of the…

Thanks Shawn. Okay. So I will go into more depth, starting with government systems. Just to recap, third quarter revenue was up 17% year-over-year to $292 million and year-to-date up 25% to $852 million and year-to-date government revenues just about half our total. Adjusted EBITDA and government grew 13% and 27% to $78 million and $222 million, respectively, for the third quarter and year-to-date. Strong performance across the product portfolio drove the topline growth in the third quarter. Year-to-date, higher services revenue also added to growth. Year-to-date, contract awards reached $865 million and we ended the third quarter with $928 million of backlog in this segment. Unawarded IDIQ contract value is about $1.1 billion as of Q3 and that's not included in the backlog figure. Growth year-to-date has been better than our expectations, boosted by strong demand in government fiscal year-end seasonality. In government systems, we are aiming to augment a defense procurement system that's stressed by an incredibly broad threat spectrum with rapid technical advances. We built close working relationships with our nation's global first responders. They encounter new threats and have the skills and agility to learn to overcome them. And we help migrate the products and services proven in that environment to the much larger regular Air Force, Navy and Army. We are also working with coalition partners who leverage interoperability with U.S. forces. So almost all the Link 16 products that we show on this slide are non-developmental items, meaning we invented, productized and support them ourselves often directly with end user combatant organizations in response to specific operational needs and reduce the lead times they would see by as much as a decade or more. The product has been effective and interoperate using standards that creates powerful network effects, that is all the Link 16…

[Operator Instructions]. Our first question comes from the line of Philip Cusick with JPMorgan.

Hi guys. Thanks. First, Mark, you already talked about government. But can you dig further for us into that revenue stream and talk about relative margins between product and service streams? You know that product stream, how much is some kind of recurring revenue versus one time product and IP sales? What's the book-to-bill sort of mix within that backlog that was very strong as well? And you mentioned government network effects. What are the synergies of having these different businesses inside one company? Thanks.

Boy, okay. So we will start, I think we will answer some of the ones we can answer. We are not going to break out product and service margins separately. In general, the service margins are going to be healthier, because they are building on an asset base that we have, where the products they are more of a cost of goods sold component, less of that amortized fixed asset component to them. So that's going to make the margins look better. On the product side, the revenues are generally driven by product shipments. If you think of the recurring revenue portion of that, what makes the products valuable is that all of the organizations that use the same operational concepts or weapon systems or interoperate with each other are going to need the same products in order to interoperate. So one of the ways you can sort of gauge what the recurring revenues will be is by looking at the size of the organizations or the platforms they are using or the number of platforms. So if we are integrated on things like F-18s or on Apache helicopters or some type of helicopters, you can count up the market sizes there and anticipate that we will have shipments to cover all those as well as spares. The thing that we keep referring to that's helped grow sales is that we are evolving to larger and larger organizations and addressing platforms that have many more numbers than some of the other platforms. So that's the thing where we go from since, what we used to do or what we used to call MIDS-LVTs or MIDS JTRS'. We have got small tactical terminals, a lot more small tactical terminal. We have got handhelds, there're many more handhelds. As we integrate weapons, there's potential for many, many more weapons. Also when we talk about the network effects and I can refer to them in the Link 16 environment. The definition of network effects is that when you add more members to a network that the network becomes more valuable for all participants. And the way that happens here is that each of these participants think of them as a source of sensor information they add as they contribute to the network, which makes that information more valuable to the other participants. Or they can act on the information within that network in a way that makes the information within the network more valuable. So when people contribute to it, they can see other participants act on that, that's increased the value to them. And that, as we expand the participants in the way we showed in that figure, you can certainly see the network effects there. We have those in other areas of the business. I think, this isn't the time nor the place to elaborate on that too much. I covered most of it.

Mark, yes. This is Rick. There is one more. We have almost zero kind of non-recurring licensing or IP-type purchases.

Okay. Thanks.

Thank you. Our next question comes from the line of Rich Valera with Needham & Company.

Thank you. A couple more questions on the government business. So you had a nice, that's the order with the Air Force and in that press release, you noted that you had shipped 2,500 of those units into the field. Just wondering how you think of the kind of potential TAM for that product against that 2,500? What's your sort of penetration rate? And if you were thinking over the next five or 10 years, like what might be the penetration of that potential TAM?

Okay. A lot of that depends on the way, let's say, the growth trajectory and adoption of the Link 16 products. What this press release was about was joint tactical air controllers who are people on the ground who are coordinating close air support. So as we get more of the Link 16 terminals on more airborne platforms that increases the potential for ground-based applications of it. And so both of those things, as you get more ground-based applications of it, they can better use the airborne platforms that are supporting them. So right now, we refer to the market for that as kind of in the tens of thousands. It's possible it will break through into the hundreds of thousands. But if it does, we will report on the events that occur that would cause that to happen.

And I guess, relatedly, can you give us a status update on the Link 16 LEO constellation that you have been sort of doing the early work on?

Yes. So right now, the main work is on building that first prototype satellite and coming up with operational concepts that would translate the capabilities of the prototype into an operational constellation. So I would say, for the next year-ish, we are going to be really focused more on the prototype satellite itself which, right now, I mean, program's kind of still in early to middle stages. I don't want to comment yet on an expected launch date. But with these small satellites, it's not years. It will be closer than, it will be shorter than years. And we can give an update on that in the next quarter or two.

Okay. And I just wanted to pivot to the commercial side and get maybe a more in-depth update on your rural WiFi activities in Mexico and Brazil, if you can just. You mentioned some it's kind of logistical challenges, but I am sure there's been some successes as well. So if you could just give us a sense of sort of how the progress is there? And any color would be appreciated.

Okay. Yes, this is the kind of the first most important thing that we wanted to find out is that, if you drop WiFi, let's say, pay per use WiFi into these very rural towns and villages, do people care? Does it matter? Do people want to use it? And what are the trade-offs that they see between coverage, price and performance? And so I would say, what we have learned is, yes, they care. I would say they care a lot. The challenge is that when we refer to logistical challenges, they are really around things like, remember, you are putting these small terminals into a town, can we make sure that the terminal is on the air all the time that we do that we can support it. Cash collection, make sure that the residents there understand how to use it. Those are what I would call logistical challenges. The other and then there are other things around the exact forms of the service plans that we offer. And right now, they are really more, okay, you could buy Internet by the hour, but we expect that we are going to offer tailored plans that are kind of more like what you see in the sophisticated prepaid cellular environment. And then the other things we are trading off are around coverage and capital investments and how to evolve those. That's what I would say. The things we have focused on the most and John mentioned, it's do the people care? Will they use it? Measuring the way they use it, let's say, the friction on adoption or the limits to usage. There's a lot to work with there. But I would say, overall, we are encouraged, because of the demand. And as you look at over time in the towns that are connected, in general, you see more and more use, not less. And that's probably the most important thing right now.

Got it. Okay. Thanks Mark. I will yield the floor.

Thanks Rich.

Thank you. Our next question comes from the line of Louie Dipalma with William Blair.

Good afternoon, Mark and team.

Hi Louie. How are you?

Not bad. Shawn, with the elevated CapEx, do you have a ballpark sense on where your net debt will peak before you turn free cash flow positive?

Yes. I think probably the way I would characterize it for you guys is just kind of looking at where we think the free cash flow positive is going to turn. And what we think kind of our leverage levels will be. I think we have said, we would expect to be in the 3.5% range throughout this year, give or take. And expect it to increase a little bit over to next year because we are going to be scaling up on the ViaSat-3 completion, starting the third satellite. We will start to scale a little bit, but stay in comfortable ranges throughout the build. So I would kind of put that as a backdrop. And then the overall, I think we have said free cash flow positive, about two years after the first satellite. And that's where we think we are still seeing it.

All right. And just to add to that, the reason we characterize it the way Shawn described, is because we have knobs and levers to manage it that way. Right, that's the way we are going to manage it.

Okay. And do you have a sense on what's going to be the normalized CapEx level post ViaSat-3?

Well, I think that's a little bit more dependent on the next-generation satellite and where we are going to next. Obviously right now, we are in an elevated state because we are building three satellites at one time. So I don't expect it that we are going to stay at these levels and that you tick down to a little bit more normalized before this run up. But again, that's going to pace a little bit on some of the opportunities we see in the future and what the pace of the next-gen is.

And the uptake rates on the satellite. And that's, yes.

Okay. And Mark, Starlink had some news today. And I was wondering, how large do you guys estimate is the International revenue pie that you, Starlink, OneWeb and then the traditional players like Inmarsat, SES, Eutelsat and Intelsat will be theoretically sharing after ViaSat-3 is completed.

Well, so we have given some insight. What you have got to do is you have got to add up all of these different markets that we are addressing. And that's fixed residential, enterprise, the commercial Aero market, the government market and especially this community WiFi market. But I am not going to put a number out there. I would say, it's tens of billions of dollars. I mean, it's at least in that range, right. That's going to be divided up among this. But I don't think we are going to go into more depth than that on this call, but it's big. And I think we have given insight into parametric ways to look at it. For instance, you can look at in-flight connectivity and see that growing from four billion to seven-ish billion annual passengers and think of revenue opportunities in the $1, $2, $3 a passenger depending on how you can attack the market. You look at and you estimate hundreds of millions of people that we can address in these community WiFi businesses., look at dollars in the prepaid mobile market. You look at dollars of revenue per user per month as benchmarks. So those are the way you construct it, but you usually get to these tens of billions of dollars numbers. And we expect that we are going to be among the leaders in dividing up that pie, not near the end, not near the back of the line.

Sounds good. And one last one. Your MIDS JTRS contract vehicle has been a very large contributor for you and it's generally been upsized every six months. Do you expect a new IDIQ after the existing one soon ends in May of 2020?

Yes. There are plenty of, yes, we do. Yes.

Sounds good. Thanks, Mark and Shawn.

Thank you. Our next question comes from the line of Mike Crawford with B. Riley.

Thanks. From the rising equity and net income affiliates line, it looks like your TrellisWare subsidiary is probably doing quite well. Can you just talk about what's going on with that waveform and maybe potential network effect possibilities with TrellisWare?

Yes. So when we talk about network effects, that's a really good example. TrellisWare has developed a waveform that's being adopted by the Army for several of their, for both the Special Forces and the Army for several of their common radio programs. Manpack and handheld radios and TrellisWare has a business model where those waveforms are licensed into other contractors that are scaling up production. So what's happening is licensing revenue is growing pretty rapidly there. We are pretty excited about that. There's a good growth runway there and you see some of that reflected in our portion that we consolidate in there based on a little over 50% ownership of TrellisWare. And then from a network effect perspective, again, a big part of what makes those radios valuable as interoperability. So the fact that large numbers of users are adopting is helping to drive adoption of those waveforms, basically, very broadly across Special Forces, Army and Marines as well.

Okay. Thank you. And then if we could just turn back to these satellite services markets, both mobile and fixed that you are targeting along with some of these LEO constellations. Obviously, if someone is going to try to play Fortnite, maybe that latency matters there. But in terms of ability to deliver high speed and high bandwidth, how do you, I guess, weigh the limitations or not of some of these like OneWeb, Starlink typer versus ViaSat-3 and ViaSat-4?

Okay. So our position has been pretty consistent. If you have enough bandwidth, latency is really important. If you don't have enough bandwidth, then latency isn't as important because you have congestion and other effects that mask latency. We think the big driver in addressing the biggest market, which is like 20 million-ish people on DSL and the people that are trying to be addressed by subsidies is the switch from broadcast video to over-the-top video. And the demand is enormous. We think there are big advantages to our architecture in delivering bandwidth the most cost effectively. We have spent tons of time evaluating all these other ones. And yes, they are going to, we are really excited to see innovation in the industry. We are involved with a lot of these non-geosynchronous LEO, MEO systems in one way or another. And I think we understand them well. We are really confident in our approach is going to be the most scalable and cost effective.

Okay. This is Bruce. That's going have to be our last question for tonight. I apologize, but we have some time constraints.

All right. Ladies and gentlemen, we would like to thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, enjoy the rest of your day.