ViaSat, Inc.

Welcome to Viasat's FY21 Third Quarter Earnings Conference Call. Your host for today's call is Rick Baldridge, President and CEO. You may proceed, Mr. Baldridge.

Okay. Thanks for joining us today. We tweaked things a little bit in response to some customer input. We've adjusted the timing of our call so that people would have a little bit more time to review our shareholder letter and prepare for the Q&A session. We released our shareholder letter earlier today, and hopefully you've had a little time. Today's call will primarily consist of Q&A, but first let's have Robert Blair provide our safe harbor disclosure.

Thanks, Rick. 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 filing, including our most recent report on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. With that said, back to you, Rick.

Thanks, Robert. And hello, everyone. Thanks for joining us on the call today. In addition to Robert, we've got Mark Dinkler, our Executive Chairman, our CFO, Sean Duffy, and Paul Frohlich from our Corporate Development and investor relations teams. Like I said, we're going to have to do something a little bit different today with our Q&A. We've had some inbound questions from investors in advance. So, in addition to the questions from analysts, as usual, we'll review some of the investor questions to the extent they haven't already been covered during the Q&A. So, we thank those investors for submitting the questions. So, before getting to the Q&A, we'll do just a very quick highlights from the letter. First, another really solid quarter performance-wise, continuing our really strong EBITDA growth throughout fiscal year 21. In fact, we anticipate the full year will be another record for the company on the EBITDA and operating cash flow front. The performance drivers remain pretty consistent with what we've been seeing through the pandemic period. The fixed driven by strong demand in the markets we're in. Our government franchise performance was solid, but it's being impacted by the logistics issues associated with COVID, like we've talked about before. This is pretty much expected, and it reflects some of the inherent lumpiness we usually see in several categories and in awards. Overall, we feel really good about our outlook on the government. We've had a big order backlog, really good first growing and still growing in that area, which helps underpin our confidence in the future. IFC remains impacted by the travel volume, but we did see a sequential pickup in the quarter, and we've had a really strong quarter in our commercial network business. We've generated $224 million in operating cash flow in the quarter and over $700 million on a trailing 12-month basis. Net debt was flat, and our leverage ratio declined, helped by our continued growth in EBITDA. But the bill was positive, and backlog grew to $2.4 billion, not counting over $3 billion in unawarded delivery indefinite quantity contracts, IDIQ contracts in our government business. Numbers aside, during the quarter and early here in the new year, we've announced some important The agreement to purchase the remainder of our EBI business in Europe from our joint venture over there, which we think helps us establish a good market position and helps reduce the risk in our fixed broadband business as we prepare for Biosat 3. The announced acquisition of Rignet, which we've been looking at for a while. of our Viaset 3 launch. Our new ISC win with Delta was pretty exciting, and it's an entry point with a major new, really high-class customer, and a new distribution partnership in Sky Brazil as we completed the rollout of our fixed broadband offering in South America's largest market. So these developments all underline our focus on execution ahead of Viaset 3. our global footprint and kind of build out a diverse set of existing and new markets. Speaking of ISF-3, we continue to make really good progress on the program, and we're moving closer to delivery of the first payload. The record COVID spike seen in the quarter, especially in our Arizona where our payload facility is located, however, those things haven't really worked in our favor. They've caused some intermittent work delays, both internally and with our supply chain. Here in this recent quarter, mostly internally. That's unfortunately moved our first launch into the first quarter of 2022. Us and Boeing will be hunting in our schedule. We really remain excited about the big picture. Opportunity to revise that free program and we'll open up the company for our shareholders. The performance on that satellite is we're well over 95% complete with just a couple remaining things to get done, so we should be done here in a few weeks for the delivery of Boeing.

Thank you. As a quick reminder, to ask a question, you would need to press star then 1 on your telephone. To withdraw your question, please press the power key. Our first question comes from the line of Phil Cusick with J.P. Morgan. Your line is now open.

Hi, guys. Thanks a lot. In your shareholder letter last quarter, you highlighted the strong government backlog to drive sequential revenue growth into year end. Now we're talking more about friction with the administration. How should we think about that? You know, in the past, under administration changes, you've seen a sequential decline from December to March, but nothing that's outside of your normal year. Since you're calling this out, should we be looking for something stronger?

No, I don't think so, Phil. We're seeing kind of some of the same trends. I think without the COVID thing, it would have been quite outstanding. That's why we say it's just a little bit been impacted by the COVID stuff, and we're seeing that. We're seeing, you know, an example would be people can't COVID's impacted people from actually showing up and doing live witness of testing. That's an example where that test milestone is required for us to actually ship a new set of products. It's things like that that we're seeing that are unusual, but the rest of the business cycle is pretty similar. I think the only reason why I want to point out is we set such a great order flow. That order flow is not going to create an unusually high level of sales through, didn't through the December quarter or through the March quarter. So nothing really outside the normal.

And is there any kind of product cycle in your government sales or is this relatively the same amount of products and, and any sort of ins and outs quarter to quarter is more driven by sort of vagarities in, in, um, you know, procurement than it is in, in what you're shipping?

Yeah, I think that's, I think that's a fair statement. Um, We haven't seen any weaknesses in any of our specific business areas on the government side, so I think that's a fair statement. The administrative transition is just more a normal course for what happens during a transition from one administration to another that we anticipate.

Okay. And one more, if I can, you know, margins in, in set services and commercial networks continue to trend really well. Um, can you unpack some of the underlying trends in those segments? There's been a lot of upside to margins lately. How should we be thinking about that going forward?

You know, on the, on the, uh, satellite services side, this is what we've seen every single time by set one, by set two, uh, uh, We have some upfront costs that we experience as we launch those new satellites, and when we cross that line of covering those costs, the margins have expanded the last couple times, and that's what's happened here on BISA, too. We've covered all the costs of the incremental margin. If you look at it year over year, it's actually over 100%. More revenue has flowed through than So, you know, we've had a little delay in bias at three, and so what we've done is we've been able to reduce cost in that area and generate cash, operating cash. So that's a normal trend that we've seen. On the commercial networks piece, it's a little bit different. There, you know, we're nearing the end. You know, we're getting ready to ship our payloads. We had a bunch of R&D driving the margins in that business down during that development cycle, and those are facing off.

Is that right, Sean? Should that R&D sort of bounce back up, or is this a good line for a while?

Yeah, so I would say that when you – I think we've kind of come down to a steady state from a percentage of revenues. It's been around this 5% of revenues, and so I kind of expect those levels.

Great. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Rick Prentice with Raymond James. Your line is now open.

Hey, good morning or good afternoon, depending where you're at. Good morning, Rick. Hey, a couple questions. First, as you manage capacity with the VICE-A2 filling up and getting good margins, as Phil pointed out, you're managing capacity, but you're also starting to earmark some for the in-flight connectivity ramp. How should we think about the trend for broadband net ads versus how much capacity you need, and what kind of pacing should we think on that in-flight connectivity order flow?

You know, we've had some additional orders subsequent to the quarter, pretty good orders from existing customers. So we're starting to see that come back. follower of that. So we have some models, some high and low and mid models. But I think it's going to be, I don't think you'll see a lot of increase until we get past a certain point just in terms of vaccinations and that. But we're seeing it come back for sure. I think on the consumer residential broadband side, Mark, you might want to chime in here, but I think we're, you know, you saw a little bit of, we're not seeing a slowdown in demand. What we're seeing is people upgrade or choosing to upgrade services and expect that to actually slow a little bit as well. And so we're making trades for a higher and upgraded plans for subscribers and someone slight reductions in subscribers for a little while. We've got some ideas and things we're trying that could offset that, but I wouldn't want you guys to put that in your models here in the near term. We have some ideas about how to improve it, but for right now, I think we expect some continued slight decline in subs.

And the VISA 3A slipping out to calendar year first quarter 22, how fast can you get that in service? And then remind us, is it still like a six-month lag for the 3B, and how about 3C?

Yeah, the first one's going to be probably the longest cycled. thorough testing. We'll launch with a minimum amount of subs for a while and test, but it'll be several months before we have a real full launch on that satellite after it gets in orbit. We expect a pretty short cycle time to get in an orbit after we launch versus what we had last time. Very short. So in the order of order of, you know, 30 days type thing before we're ready to go. So that's, you know, that helps that overall period. So we'll be launched and in service faster than we were launched to own orbit last time. That's what we expect. And then the second one, yeah, it's in the order of, you know, five or six months behind the first one. That's what we're expecting. The third one may be a little closer than it was before behind the second one. Mark, do you want to chime in there at all?

No, I think you covered most of it. The main thing I'd say, you know, Rick mentioned at the beginning that we're trying to do things to recover schedule. Those areas where we can do integration and test in advance, which is what we're doing now, give us opportunity to bring in that schedule.

Okay, and then one bigger picture question. I've got to tell you, probably the top question we get, and you guys probably are too, is the whole Leo question. SpaceX Starlink, you've got now AST and Science out there talking with folks. The RDOF auction is now over, so quiet period, thank God, finally ended. What can you share with us as far as your view of the addressable market, the competitive landscape, and what the future kind of looks like? I know it's a big picture question, but we get it a lot. All right.

Okay. So, uh, well, one part we can, one part we can deal with really quickly is the AS and AS and T thing is, is, uh, direct to mobile. It's not a, uh, it's not, not a competitive service to what, to what we're doing. We don't see, see that as impacting us. And, uh, uh, we'll just put that one aside for a second, you know, on the, uh, on the Rios, uh, and, and Ardoff, um, you know, I think, uh, You know, we anticipate a trend where there is more build-out in the market, more due to RDOF than to other satellite competition. But, you know, one thing, you know, with RDOF, there's still a lot left to be determined because, you know, there's a lot of concern that a lot of the money was won by technologies that, are unproven and may not be able to meet the obligations that are associated with them. So there's still some steps to go before those things are finalized. And I think from our perspective, to the extent that they are awarded to it and don't fulfill their obligations, that certainly creates more, you know, this just leaves a bigger market for us. On the other hand, there are, you know, the one thing I would say is, we have had a service offering that's been positioned relative to the market the way the market has been and the way it is now. But we're not. We have a lot of maneuvering room in terms of how we do go to market. And there are many people that have terrestrial services that are not happy with them in one way or another, whether it's price, their ability to support certain types of applications, or the service that goes along with them, where, you know, we believe we can compete. So the main things I would say is, you know, our expectations, our plans for service, you know, are in the low single-digit percents of the U.S. market and most markets we go into. And so here in the long run, we don't see those. those types of addressable markets changing for us that much as a result of these things. The way we go about those markets, that might be the service plans, the specific service plans we have, the specific price points, or the way we go about it certainly could evolve, and I think you'll see that evolve. It makes complete sense for us to do that in response to changes in the market as they unfold over what we think is a pretty long period of time, three to five years. That's kind of what our view is. But, you know, we see that we'll evolve. We always have. We've evolved from where we started. Great.

Does that? Okay. Good. Yeah. And Mark made a really good point there that I think shouldn't be lost as the reason why we've been going after higher ARPU and higher quality services. We have limited capacity, and we have more demand for capacity, so that's what we did. So one thing is if the situation is different than that, we'll have a different tactic, and so people shouldn't just expect we're just going to go after higher ARPU things all the time. We're going to do what makes sense.

Right, yeah, and one other thing I would add is right now, you know, we're in a very intense capital spending campaign relative to our revenue and earnings. So, you know, optimizing for cash flow makes a lot of sense. We don't expect to be in the same position after the Biosat 3 is launched. So that creates more maneuvering room as well.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Louis De Palma with William Blair. Your line is now open.

Great. Rick and Sean, good afternoon. And also good afternoon to you, Mark, as well. I was wondering, you announced the Delta win. And for the economics of the hardware installation for Delta, are those economics similar to the economics for your other recent customer wins for in-flight connectivity?

I mean, you could assume that. In other words, if what you're asking for is Are we selling hardware to them and then providing services? Yeah, I mean, we don't go into the details of every customer, but the answer would be yes. It's fairly representative of our offerings. Each offering is unique, but the overall thing, you should assume, yes.

Great. That is helpful. And on this same – In-flight connectivity topic, do you have an update in terms of the total number of aircraft under contract that you have now, if you include the Delta planes? And you also mentioned subsequent to the end of the quarter that you won other orders from your existing customers. I was just wondering if you have a count of your total number of aircraft under contract.

Yeah, through the end of the quarter, it's a little over 1,000 backlog. Great. You can assume it's grown a little bit since then.

Yeah. And we have about 1,500 now, so the total under contract would be close to 2,500.

Great. Thanks. Thanks, Mark and Rick. And I was also wondering, do you have updated thoughts on what – Free Wi-Fi could mean for average annual revenue per aircraft relative to what your current average annual revenue per aircraft is for your existing base. And I know this is a future catalyst, but investors are wondering what could be the implications post-COVID as airlines switch to a free Wi-Fi model?

I would say, basically, the way to think about it is that the variable revenue that we get really is going to be related to the number of passengers that use it and the types of activities that they use and the way the airlines choose to deal with that. And And a lot of that discretion goes to the airlines. But the general trend, and we've seen this trend anyway, is that if you put a really good Wi-Fi service on, engagement tends to go up, and that tends to drive additional revenue, you know, in one form or another. But the exact amounts, you know, will vary depending on the airline and the type of service they choose to present and the other types of partnerships that they will recreate. to engage passengers. So it's very hard to be specific, but the general trend is.

Thanks, Mark. And I have a question related to your government business. You have referenced that you have $3 billion in government slash defense IDIQs. And I know that $3 billion, I think it represents the ceilings. value, and I was wondering, based on your conversations, how much of that ceiling value do you expect to convert the actual past borders and contracts over the next several years?

There's a saying that past performance doesn't guarantee future performance, so I'll start with that, but we've had our history is essentially we consume the ceilings of the IDIQ contracts we have. Very rarely do we not. So kind of we're expecting that. That doesn't guarantee that's going to happen because they're a little bit unique and they're different than each other. But we've had a really good history of fulfilling those. Like I said, that doesn't guarantee the future, but that's kind of what we expect.

Thanks, Rick. And one last one. Mark just talked about the intense CapEx cycle that you're going through right now as it relates to Biosat 3. And I was wondering, can you give us an update in terms of how much of the Biosat 3 CapEx you've completed and how much remains?

Yeah, sure. I can take that, Louie. So, you know, right now, We're over halfway, you know, through the program. So you can think of that as, you know, over a billion dollars is behind us. And, you know, so we're pretty far along that. And I think one of the other things to kind of put around that is if you look at our liquidity position today, you know, strong operating capital is like 700 million, the last TTM, that we're in a really good position. We're basically fully funded to finish the build-out.

Great. And, you know, for CapEx, like this quarter, hypothetically, are you able to break out, you know, what the CapEx would have been this quarter if there was no Viasat 3? Like, in other words, what is the CapEx that you incurred this quarter related to, you know, the other portions of, you know, your business, whether it's the customer premise equipment or, maintenance capex. Are you able to break that out?

Yeah, and I think the best way to maybe look at that, Louie, is just kind of look at our, look at that TTM cash flow that we had. And if we had taken, you know, taken our buy us out free spend out of that, our free cash flow for that same 12-month period would have been about $275 million. That's probably a best way to kind of size it up.

Yeah, that's what I was looking for. Thanks, Sean. And thanks, everybody. That's everything that I have.

All right. Thanks, Blake.

Thank you. Our next question comes from the line of Mike Crawford with B-Raleigh Securities. Your line is now open.

Thank you. With the Viasat-3 constellation and the terabit per second capacity of the three satellites, I think you're going to increase your total bandwidth you have to sell about eightfold. And what would be some rough approximations of what selling those bits could mean to revenue in EBITDA for Viasat today, where you're looking at a little over $2 billion in revenue and around $500 million in EBITDA today?

Yeah, go ahead, Marty. Yeah, so it creates a lot of opportunity. One of the things that we've said in the past is that part of the way that we've been successful in competing is that we get these productivity gains, right? So we'll have, you know, eight times the bandwidth at a lot less than eight times the cost that we've put in place so far, maybe like double the cost, double the CapEx that we've spent so far. So we'll end up offering a fair amount of the productivity gains to our customers, and that will vary depending on the market and the way that we bring the bandwidth to market, the terms of the contract, what the support that goes with them, So, you know, it's very difficult to give an answer. But just to, you know, one of the things I'd throw out there is, you know, ballpark, if we gave, you know, substantial productivity improvements, we can still increase our revenues pretty significantly. And I don't really want to – it's not fair or meaningful to put out a single number. But it's – but you can just look at – what's happened over the last eight or nine years where bandwidth consumption has grown by close to a factor of 10 per capita consumption over about the last 11 or 12 years. We need to be prepared for that pace of growth over the next decade as well. Actually, we look at that as an opportunity, not a problem, because that's what, you know, as long as our productivity improves faster than other options, then we compete really well. But then, you know, it just depends on what, you know, what goes on in the market, how we deal with it. But it's not, I don't think we want to put out any specific numbers. The one thing I would say is back in September when we did our annual shareholders meeting, we did put out a five-year forecast which showed that in aggregate we think we can around double revenue over five years. And so that will give you a sense of sort of how that product, to the extent that some of that's satellite services, not all of it's satellite services. We did give a break out of that. You can kind of get an implicit view of what we think, how we think, we're going to apply the bandwidth and what that means for revenue growth. That's probably the best way to interpret it for now.

Okay, thank you, Mark. And then it seems, you know, under that construct that after the VISA 3 EMEA satellite starts to load, that that's around the time when you flip into generating positive free cash flow. Even if you build another satellite every year and maintain this – capex regimen around somewhat just south of a billion dollars a year. Can you remind us what types of capacity we might see in Viasat 4 and Viasat 5 types of satellites that you're currently contemplating?

Yeah, so that's a really good point. I think that the point that this per capita consumption is going to continue to grow means you have to have a plan if you want to maintain competitiveness. And just to price your service offerings on a go-forward basis, you have to continue to improve productivity. So, you know, we've talked about bias at four a couple times over the last few quarters, and we are, you know, we're working on the detailed design of that. And, you know, what we think is somewhere in the range of five, six, seven terabits is what's possible there. there are still trade-offs associated with that, but that's kind of the range. Think of it as maybe a factor of five-ish, five-plus improvement relative to Biosat 3. The next generation, it's a little bit harder to have clarity on it. On Biosat 4, this is based on design work. That's where we are now. On Biosat 5, it's based more on conceptual stuff, but we think there's another factor, too, that can be gained at least beyond that. So altogether, that means we've got like an order of magnitude of productivity gains in front of us that we're working on.

Okay, thank you. Mike, one of the questions, one of the points I just don't want to go unnoticed is you're right in that After we launch the second one over the EMEA, it's two or three quarters after that, and we think we'll go free cash flow positive. And as a company, we expect to stay there after that. So I think it's a really important point regardless of our build-out, unless we do something completely different that I don't know about.

Okay, thank you, Rick. And then the last question is if a – Leo constellation of let's say 2,000 satellites was circumnavigating the globe at like 550 kilometers like Starlings. How many of those at any given point in time would be over the U.S.? And then how many of those would be visible from one point on the ground like say over Chicago O'Hare Airport?

Okay. So The answer, the exact answer to that question depends on the orbit selection. What Starlink and Amazon have done, and not everybody has done, and not all of their satellites follow this, but basically they've tried to incline their orbits in a way that they don't cover. The satellites that don't cover the poles spend more of their time over, you know, the mid-latitudes where the U.S. is. But think of it as, you know... 6%, 7%, 8% of the satellites would be over the U.S., would be within sight of the U.S. But even that depends a lot on the specifications of the ground terminals because the fact that the satellites are inside of the U.S. doesn't necessarily mean that the ground terminals are inside of the satellite's and can do that with the latency specs that they have. So it's a little bit – there's some complications there. And then just the fact that they're over the U.S. doesn't mean that they're all over places in the U.S. where there's demand. That's the other factor. And then for your question about a place like O'Hare, so there are regulations around what's called – EPFD, which is equivalent power flux density. And the whole point of that is to prevent non-geosatellites from putting an amount of power into a specific location that could cause interference to geosynchronous satellites. So the answer to how much of a bandwidth they could bring to a particular place depends on the specifics of that. But it definitely puts a bound on the amount of bandwidth that can go into small locations. And the specific answer, again, depends on the orbits and the look angles of the satellites. But with a couple thousand, you can think of it on the order of 10-ish satellites that could be in sight of a particular place in the U.S., but that not all of them They may not all be usable for a variety of reasons, depending on some of these specifications.

Okay, thank you, Mark. Thank you.

Thanks, Mike.

Thank you. Our next question comes from the line of Chris Quilty with Quilty Analytics. Your line is now open.

Thank you. I wanted to follow up first on Delta. I know with American, you guys had a crazy fast rollout of antennas uh, to the aircraft. Should we expect that type of installation or, or will this one be more gradual?

It'll be a little more fast though. I mean, they, they, uh, you know, they want to get these air, the ones they've identified outfitted, uh, uh, quickly. So we won't have at the same level. Remember we had quite a few more aircraft initially awarded by American than we do here. Uh, and so the rollout was very, very rapid. Um, We'll go as fast as Delta wants to go, but we'll be quite as fast. But it'll be definitely a pretty big increase from where we are.

Okay. And I guess part of that is, you know, of the 300-plus aircraft, what is new aircraft versus retrofits? And presumably they've got new aircraft that are parked, that are easy. Have you kind of given a breakdown of what you expect the penetration to be of new versus retro?

We haven't. who have that. I'm not sure that we've got that cleared with Delta to release.

Okay. And final question on Delta. Somebody kind of knocked around it, but the ARPA for the aircraft, given that this is going to be an all-you-can-eat plan, is it going to overall impact your reported revenue per aircraft substantially from what you're – well, okay, right now the revenue per aircraft is down because of COVID, but, you know, if you compare it on sort of a nominal regular basis, is it in the same ballpark of what you've been generating historically?

There, you know, Mark said earlier that it depends on what type of third party deals are done on either side. It depends on how fast, you know, if they go free and how fast, and there's a lot of factors in there. So, The other thing is the airlines are very sensitive to us talking about ARPA. And so as opposed to because of more competitors in the past that have single-point businesses that the only way they kept investors happy was focused on ARPA, this is part of our satellite services business, so we blend that. I think our goal is to work with the airlines in a way that going, either going free or having really high penetration and high passenger engagement is a good thing for them and is worth the, either in a way that generates additional revenue for the airlines or something that makes this a very positive deal. But, yeah, I think that's kind of all I want to say about that.

Okay, that's significantly, I got it. And I guess on that same note, you guys had historically provided the backlog, and I didn't see it in the shareholder letter. I guess either that or the consumer ARPU. Are those numbers you intend to give on a go-forward basis?

You know, things are changing pretty fast. You know, we're going to, especially with the onboarding of the European business, That's definitely at a lower ARPU than kind of where we are currently in the U.S., bringing Brazil on. And so we're working through how to best disclose those things. You know, we've said many times, for instance, back to your previous question, we think satellite services revenue and EBITDA is going to grow next year. And it's going to be a blend of things as as in-flight connectivity comes back, and also said kind of expect our residential broadband in the U.S. to decline somewhat, slightly. So things are changing pretty rapidly, and just like we did this last time, we were really focused on subscribers. Subscribers didn't grow that much. Our group grew a lot. We'll make whatever changes make sense so that The overall economics are, you know, we're getting the most out of it than we think we can get. So we're sorting through what type of disclosures we're going to have in the future.

Okay, because that was a question I was going to ask to Sean, is once you take on the European business, you're going to bring on, you know, a slug of subscribers and obviously a very different ARPU, and how are you going to report that? Yeah. Hopefully when you... you know, start the new fiscal year, you'll have an entirely new set of aligned metrics, possibly with RigNet folded in as a different business segment or something that we can follow on a go-forward basis?

I think that's a good, I think that timing is appropriate. Chris? Okay.

So one question on the commercial networks business. You guys have been really strong in the antenna business, kind of a boring, large-diameter business. What's going on there?

We had another actually just really, really good new business quarter in that business. And, you know, just so you know, we do – it's usually through – another prime, but we do a reasonable amount of government business in that segment too. And so that's helped contribute to future growth there. And we have some very, very good opportunities in front of us as well. So it continues to just be a good growth area for us with very little invested capital.

Chris, keep in mind, that is where we report the product sales for the airlines as well, is in that segment.

Oh, I know, but the language in the last queue, or maybe it was in your letter here, talked specifically about some of the large diameter stuff, and I thought it said the Earth Observation customers.

Yeah. Right. So that's a little – yeah, I'm basically – that's one of the things that's driving interest in space is, you know, besides communication is earth observation, right? And generally that's kind of the way you get really, really high throughput on these earth observation satellites is by having large apertures on the ground, right? Because you want the satellites themselves to be inexpensive. And unlike in the communication space where you have way more earth terminals and you have satellites in this case, you have a lot of times you have more satellites than you have earth terminals. So, So it's a really, really interesting field. I think there's lots of opportunity there, and I think we've got a leadership position in that. So that's part of what's driving the results there on both the commercial and the government side. And there's more to it than just the large apertures as well. I think there's more stuff that we're working on than we have – Also, a shared service initiative that's doing really well. That's what we call real-time Earth. And I think that this notion of real-time access to Earth observation data is going to be a growing phenomenon as well.

Good. Speaking of little antennas, when you look at the Viasat-3 rollout, and you don't call them gateways. You call them something else now.

Yes, satellite access nodes, SANs.

SAN, okay. When do you begin the rollout of that infrastructure in anticipation of ISAT? And does that show as a significant CAPEX movement in any way?

Yeah, we've already started. And so, you know, as you can imagine, the first thing you have to do is locate those points, make sure you have good fiber there, get fiber brought there, you know, get power and get leases executed, get all the regulatory approvals for each one of those sites. And there's a process to go through here. We're well into that process here in the U.S., and we're actually well into that process in Europe and have begun that in the Asia-Pacific region. So we've already begun to incur expenses associated with that in front of including fiber leases and that. In addition, we actually have some more gateways up and running. And we're running, doing some tests of various elements of the Biosat-3 network over some of our existing satellites in preparation. Like Mark talked earlier, to the extent that we can do some concurrent integration and testing, we can help accelerate those things later. So we're currently doing some of that today. So we're well on our way here for the rollout of ISA-3. We've begun to incur expenses, you know, in the low millions of dollars per quarter, and that's going to increase quarter by quarter as we prepare for ISA-3.

Gotcha. And final question on commercial networks for Sean is, I mean, the margins in that business have improved by like 30 points since the beginning of the year. And I'm just I know you've said the R&D is going to flatten out the internal R&D. So that element we kind of know. But, you know, modeling that on a go forward basis. I mean, can you drive that business to an actual profit on a go forward as you begin to ship all the. mobility antennas and all these ground equipment, or is it still, should we still model that as a loss leader?

Yeah, so probably a couple things.

Well, first of all, loss leader isn't a good example.

That's a whole different type of... Yeah, yeah. So I think there's a couple things, you know, as you're looking at, right? One is, as I talk about, we're going to, that is where we put the terminal delivery for the IOC, so... As Rick was talking about on the Delta program, we'll expect to see a lift there. That'll help that segment. We think our R&D is, you know, hitting kind of a baseline rate, but I'd expect that to stay there as we grow. So, you know, I think we'd expect improvement, you know, on a year-over-year basis, look into next year. But we're going to continue to invest, too.

Got it. And if I can ask one final question? the consumer business, most of your growth, your incremental growth in subscribers has been in Latin America and Brazil. And I know Sky Brasilia is talking, you're looking at expansion into other parts of South America. What do you have for capacity in the region right now, either on satellites or in terms of incremental subs that you think you can grow in the region before Viasat 3 hits the market?

It's going to be limited. I mean, we're working with, you know, obviously with the Brazilian satellite down there today. In Mexico and Central America, we're working on Viasat 2. All the way down a little bit in Colombia, all the way down to the top part of South America. But it's, you know, it's reasonably limited until we get Viasat 3 for the Americas on board.

Yeah, plus the other thing is, you know, we have to portion that bandwidth among all the different markets that we have. So we have in-flight customers. We'll have remote enterprise customers as we get Rignet. And so, you know, we just have to allocate the bandwidth. We're just in a situation where there's a lot more demand than there is supply.

Very good. Thank you.

Thanks, Chris.

Thank you. Our next question comes from the line of Giles Thorne with Jefferies. Your line is now open. Giles Thorne, your line is now open.

I'm just happily sitting here talking to myself on mute. Sorry about that. It happens a lot. So my first question is, would you be willing to tell us back in early 2017 when you were putting the investment case together for Viasat 3 and Viasat 3 EMEA, what your target subs were for the point at which that satellite came online? And then where are you today?

So one is, you know, like I said, it's a dynamic marketplace, and it would be kind of presumptuous, it would be very presumptuous for us to have picked a subscriber number. But what we're more focused on is can we, how much revenue can we get in total and how much, And what's the return on that revenue, and does it justify the capital expense? And so one of the things we keep working on is having multiple markets. And I just described sort of what's going on in South America, where because we have multiple markets, the aggregate demand for bandwidth is greater than the supply, which is a good thing, right? That's what we want. That's just what we're doing in Europe, too, through our government work, through the remote enterprise stuff that we can do with Rignet, through the in-flight connectivity market. And a lot of those markets are doing quite a bit better than what we would have projected back in 2017, as an example. That's the situation we're trying to create. So the short answer is we don't have a subscriber gap. We don't have a residential subscriber target, and we will dynamically set one in the context of all the demand among all these different services. That's basically how we've done things.

Okay, but just to push on that, the success of Viasat 1 was having Wild Blue there ahead of it, and the objectives I don't know. It doesn't feel like you didn't have a subscriber number in mind, but that's fine.

I just want to go back on the history on Wild Blue. What Wild Blue really got us was distribution, back office. It enabled us to do retail. And once we had that retail, one of the main reasons we did the acquisition was because we wanted to rejigger the number of, you know, the way that we went to market, right, based on the things that we learned about the market from having the Wild Blue experience. And so remember with Biosat 1, and I have to go by memory here a little bit, but we basically had like 10 times the bandwidth, we probably ended up with two to three times the subscribers and three-ish times the revenue. But the margins were much, much better because of the productivity of the satellite. So the things I'd say will apply to Europe is we're looking, these are the things that we're doing now and we'll do with the KSAT and the capability we have there is, The, you know, all the back office stuff is more complicated. The support stuff is more complicated because of the diversity of countries and languages. So we're going to be able to test that. We're going to be able to, we also need to make sure we have the distribution and support channels we want in place. And we'll be able to do a lot more experiments regarding the service offerings and the way we bring those to market. And so we'll get, we expect to get the same types of knowledge and experience and information. through this as we did with Wild Blue in the U.S., although we're starting from a different place. But it still doesn't make sense. You know, it doesn't make sense that we have a subscriber target number. The way I describe it is we're going to do it in the context of all the demand for all the services.

Okay. And then just something like you are – going to be building out what it is that you thought you were going to get by working with Big Blue. You're going to be doing that yourself. There are aspects of the customer journey that you weren't going to do, but you are going to have to build that out now.

That was our plan. If you look at the reason for doing a joint venture with Utilsat was that we were going to lead the retail part of it. Big Blue You know, if they were working with K, you know, with Eutelsat at the time, they would have been a component of that. But there's other ways to achieve that as well. We don't look at that as a decisive issue.

Do you have any mechanism to prevent?

I would say, as a matter of fact, we have been investing in this entire customer journey side. And so... And so to me, this is a really good way to put our own tools in place, which we've already begun to do in a couple of those markets. Spain is one, and Norway is another. So I think this is just a really good opportunity for us to get those things in place prior to the Viasat 3 launch.

And, Rick, is that what you're talking to when you say buying in Big Blue and you know, should accelerate and improve momentum around fixed broadband in Europe?

No. No, I think that we've been developing end-to-end customer journey tool set that's far more digital and being able to roll that out in, for instance, in some markets, but ahead of ISAT 3 launch, where it's going to be a big launch, is a much safer way to begin that process in a way that we can rapidly roll things out, learn, and iterate.

And do you have the subs that you brought in with EBI, is there a mechanism Stop UtahSAP taking them from you once ConnectVHTS comes online.

It was a little hard to hear you, Kyle. Could you say that one more time?

Yeah, sorry. Forgive me. I'll come a bit closer to the phone. If I understand correctly, with the purchase of VBI, you now own completely a set of subscribers, and by the way, it'd be really useful to know how many subscribers, but a set of subscribers that are legacy wholesale to BigBlue. And I'm wondering, with BigBlue now firmly in bed with UtahSat for ConnectVHTS, do you have a mechanism to keep hold of those subscribers and stop BigBlue migrating them at some point in the future onto ConnectVHTS? Is it like a non-compete, something like that?

There are elements in our agreement with UnilSAT that deal with what you're talking about specifically. We talked about a little bit of it in the way we announced the deal, but there are more embedded elements that deal with that specifically. So yes, we have a structure that with any type of poaching of those subscribers. We also have economic remedies that deal with those types of things. So honestly, it's a component of this. It is by far not the most important thing. Well, I'd say that by far the most important thing where we think the demand is going to exceed the supply of our capacity over there.

I would not interpret this as us battling with somebody else to keep subscribers on comparable plans. I think the real battle here is going to be what types of service plans can you offer? How do you distribute them? What are the pricing of those plans? How much demand is there? And actually, the other really big thing is going to be what's the trajectory of your future supply of bandwidth? Because that has a big influence on the types of services you can offer. So this is kind of a set of initial conditions. And to Rick's point, there's economic consideration that's baked into the agreement that deals with the issue that you said, but it's not the main event at all. It's a side light.

And then final question, sticking with the same topic, what is the goal going to be for the go-to-market strategy going to look like? Just what's the latest thinking there, please?

What is the go-to-market strategy? Are you talking about on the residential side? Yeah, yeah, that's right. Yeah, so remember, residential is only one component. Basically, what we're going to end up doing is we're going to define very different service plans. I think we'll be able to deliver a more consistent quality of service for the plans that we do have. And we'll come up with pricing and terminal strategies that are consistent with those. And it's a little bit premature to say what those are because we want more experience in the market. And this is what's going to give us the opportunity to do that. But it'll be, you know, clearly the European market is very diverse, more so than the U.S. market. And there won't be a single point of solution that we apply all across the continent, it's going to vary by market. And one of the things that we're getting better and better at in the United States, and we're applying the same things to Europe as well, is really marketing on a more localized basis. Because we can't, because we can deliver different types of services and different price points into different specific market subsegments pretty easily with our system.

The last thing we're going to do, Giles, is tell the people that we can beat again exactly what we're going to do right now.

That's appropriate.

Fair enough. All righty. Thank you very much. Thank you.

Thank you. Our next question comes from the line of Matthew Roquevillard with Barclays. Your line is now open.

Yes, good morning, good afternoon. If I could start with a question on the government side. So as you pointed out and we've been used to, it is a volatile segment, but the trajectory has been very positive over the last many years. And I was trying to see how we could frame a little bit from our side on on the analyst side, what is the potential market you're going after? I don't know, is it the market where you expect to gain market share from other players? Is it just new application, new services that are developing? But if you could frame in any way how big is the opportunity there, that would be super helpful.

You know, one thing, again, So, guarantee that fast performance equals future. We've had, you know, 35, you know, we have had a lot of years of really, really good consistent growth. I think we've only grown, maybe not grown a couple of those years. And it really is by going in, consistently going into new and bigger markets and environments. We've moved from tier two to tier one to moving to tier zero in some of those applications. We've We've been able to develop and rapidly deploy products that are around the programs of record in a way that's really helped our growth. We're working on the things security and secure tactical communications and things that are absolutely critical to actually accomplishing what the warfighter needs. expanding globally through joint warfighter concepts. So just from a position standpoint and needs, we think we're in really, really good markets. So security, tactical comms, strategic comms, hybrid networks that integrate line-of-sight radio and SATCOM, satellites in that same network. And the cloud really is just very, you know, coming into play in that, which we think only strengthens what we're bringing. So we really like this government communications market, and it's been a good one. And I think the bias in three constellations only enables further growth, not just in the global SATCOM piece, but in the other pieces that we bring.

Okay. But just another way to think about it is what's driving the growth in the defense business is very similar to what's driving growth in commercial businesses, which is what used to be just voice communication. Now it's imagery and computer to computer. You know, there's more things computerized. So one of the ways to look at our growth is can we get satellite antennas on more platforms, than we used to, and that's happening for sure. You can see we've announced lots of different platform wins, whether they're ground or helicopter or different types of aircraft. And then the other is the amount of data that those platforms get. And then the other dimension that Rick described is where it used to be acceptable just to encrypt a link, encrypt a communications link, now you've got to worry about trust and cybersecurity So that's another component of our growth. And then the other thing, the third area is the terrestrial radio links, whether it's tactical data links or others. So the three big thrusts are satellite, cyber, tactical radios, and then moving a lot more data. Those are really big picture trends that we have good competitive positions in.

Thank you. That's helpful. I had a follow-up question on the comments you were making about Viasat-4. If I heard correctly, you were talking about a capacity of 5 to 7 terabytes per second. I wasn't entirely clear if you were talking about one single Viasat-4, which would seem like a material leap, or if you were talking about a couple or three satellites for this kind of capacity.

That's per satellite, one individual satellite. And then we could have multiples of those satellites if that's what made economic sense. But, yeah, it is a big leap. And I think that one of the things that everybody needs to take into consideration when they look at all these different approaches to broadband from space is how each of these things compare relative to the others. And I'm going to just throw out one other thing, which is that, When you're doing geosynchronous satellites, it's very straightforward to increase frequency reuse and increase capacity on individual satellites without affecting either our other satellites or anybody else's satellites in the geo arc. One of the big issues with non-geosynchronous is that every non-geosynchronous satellite can interfere with every other non-geosynchronous satellite, whether your own or somebody else's. And so that's one of the things that's really important in those filings is understanding how much spectrum they include in their filing and the way that that spectrum can interfere with other systems. That's one of the biggest issues that's going on now in these non-geosynchronous ones. It's very, very difficult to increase your capacity without impinging on some other filings. So anyway, what we think is not only do we have a productivity advantage now, but that we'll be able to expand that productivity advantage over time.

Great. And to follow up on that, a question that was asked before, but obviously I think for a lot of investors, a question mark in this industry is where does the CapEx race end? Because technology changes, you have to adapt. You're looking to lower your costs, increase your market potential. But that always has to be balanced against free cash flow at some point, right? And the way you think about it is it has, as you expressed it before, which is really from once Viasat 3F or it is behind us and gain scale, really your objective is not to be free cash or negative anymore, and you think you have enough scale to continue to invest as you should?

That's right, yes. Yes, yes, that's the answer. And just to be clear, and you pointed this out, the BISAC4 thing, customers don't care how much CapEx we spent or how many satellites we have. What they care is how much bandwidth we have. So if we can, the way you manage your CapEx is to get, as much bandwidth as possible per capex dollar. That is the entire point of what we're doing, and BISAC4 is a really good example of that.

Excellent. If I may ask, just a last one, just on the airline side. So I hear people talking more and more about free Wi-Fi. I didn't fully understand if in the case of Delta that was going to be the offering. But in any case, that seems to be a big discussion, free Wi-Fi in airlines. At the same time, you look at the industry, and obviously it's offering. It will go back on its feet, but it's going to take some time. So I'm wondering how realistic is it to assume that all the airlines that started are going to offer free Wi-Fi in the next few years when they have so many – headwinds to face. Is that your working assumption when you model?

First of all, we should state that in no way did we say today that Delta is going free or anybody else is going free. We're not stating what the airlines are going to do. I just want to make that clear.

Yes, totally clear. And the other point is, really, in a lot of ways, all this is up to the passengers. If the passengers express a preference for airlines that have free Wi-Fi and some airlines have free Wi-Fi and can leverage that preference in a way that's more profitable, that's what will cause, that's what will drive the adoption of free Wi-Fi. That's what's really at issue. And we've worked with airlines that have been able to do that. And and to do it in a way that's economically profitable for them. But I'd say it's a tricky thing to do, and it will evolve as airlines compete with each other. So we're going to take our lead from what the airlines do. What we think is we're learning a lot and that we can offer suggestions to the airlines that will help them drive passenger engagement at lower cost to themselves or even in a way that drives enhanced revenue. The other point is the way we've been able to do that is through the same argument that I just described before, which is high productivity, which means that we can give them a lot of bandwidth value. Those are the ingredients, and now we have to see how the market responds.

But if you're an airline and you don't have a choice, because your provider actually can't provide the capacity to enable that, that's not a good position to be in.

Right, yeah. Yes, makes a lot of sense. Thank you, guys. Very helpful.

Thanks, Matthew. We've got a last question for this, and then Paul may have. Anyway, last question.

Our last question comes from the line of Simon Flannery with Morgan Stanley. Your line is now open.

Great. Thanks for fitting me in. If I can continue on the IFC, obviously nice to see the Delta win. Could you just talk about the opportunities that you see out there in the medium term to continue to take share in that business, and then expanding aviation into, I think you've talked in prior earnings calls about the opportunity with government in the military to do more on this front, and also I think you had an announcement about some new antennas on the business aviation side. So any color about the kind of the opportunities there to, to grow into that town. Thanks.

Yeah. You know, we're having, we've talked a little bit before about that a little bit surprising, but the amount of discussions we're having globally didn't really decrease during the pandemic. I mean, some of the actions people were willing to take immediately, there was a pause in that obviously. But a lot of, ongoing discussions. And as that business took a pause last year, the point of time at which Biosat 3 is going to come on globally gets a little closer. Those people are making decisions to buy airplanes that's fallen closer into the time in which we'll have global coverage. So that's helping the discussions. And I think that's where a lot of the growth will come from is in international over the next few years. And we know most of the growth in the airline industry is going to come in some of the international markets. So being there with global coverage is going to be a really important factor for us. And a lot of that isn't really just taking share. It's connecting new aircraft that have never been connected in some of these airlines that they're ordering and in the growth of aircraft that will be ordered in some of those new emerging markets. And a couple of things we're doing is we're continuing to make real progress in, you mentioned one, there was an announcement out about our demonstration of our phased array antenna on a business jet. And, you know, we continue to invest in new technologies that will hopefully allow for shorter installation cycles, lower cost, better quality, I mean, all those things. And we share those roadmaps with our airline partners and potential new airlines. So just continue to lead investments in this area, I think, in a way that enables not only – because

able to offer. The other thing I would add to that is we've been very successful in the North American market. I think that's been our best market, partly because that's where we had the most coverage to start with. But that's also the market where penetration is the highest. That is, more planes have Wi-Fi in that market, the domestic U.S. market, than any other market. And I think that the airlines have become the most knowledgeable about the role that in-flight connectivity plays in their overall competitive strategy. And the other things I would mention is that the times when we don't win, when we're not successful in the market, it's usually because Somebody discounted equipment or installed or dangled some offer that they weren't able to fulfill because, as Rick mentioned before, they didn't have enough bandwidth to really scale the offer. And so I think that the fact that we've been very successful in the North American market is going to help us in these international markets where the airlines have less experience about the role of in-flight connectivity in their overall value proposition. And I think people are noticing that. So I'd say we're really optimistic. A lot of growth is going to come in that Asia-Pacific market. And the thing that's really notable about that is that so much of the travel routes are over oceans. And so that's where the VICE app three value propositions really important because that will give us much more bandwidth over oceans than anybody else. And I think that's what creates optionality for the airlines. So we're really optimistic about the growth prospects, and so far the responses that we're getting back from the market are supporting that.

Thank you. Okay.

Okay. Paul, was there anything we didn't cover? If there's no other questions, I think, Paul, most of the questions that we had from investors were actually covered in today's conversation. So thanks, everybody, for coming. And if you guys have some feedback on this format, providing the letter a little early and giving some time, Any type of other timing feedback you want to have, if you could reach out to Paul Froelich on our end or Jeff Manteca, we will take any comments into consideration. So thanks again, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.