Welcome to ViaSat's FY 2020 Second Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg Chairman and CEO. You may proceed, Mr. Dankberg.

Okay, thanks a lot. Good afternoon, everybody, and welcome to ViaSat's earnings conference call for our second fiscal quarter of 2020. So I'm Mark Dankberg, Chairman and CEO; and also on the call with me are 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. With that said back to you Mark.

Okay, thanks, Robert. So we'll be referring to slides that are available over the web. I'll start with an overview and Shawn will discuss the consolidated and segment-level financial results, after that and then I'll provide some additional color and we'll review our outlook and take questions. So overall, we're executing well and generating the financial results we've intended from fixed U.S. broadband in-flight connectivity and our government business, while making steady progress on initiatives that can accelerate our growth with the approaching ViaSat-3 global network. So Q2 and year-to-date revenues grew 14% year-over-year and 18% respectively. Both are new records. The operating leverage from our high-performance satellites the vertically integrated services businesses our scaling government products and prudent cost control is driving adjusted EBITDA margin expansion with adjusted EBITDA growth outpacing revenue growth substantially at 53% and 76% year-over-year for the second quarter and year-to-date respectively. The main factors behind our business momentum that we've previously described remain in place and support ongoing growth prospects. In Satellite Services residential average revenue per user was 17% higher than last year reflecting sustained demand for high-value service plans as well as industry macro trends, and we also had a slightly higher subscriber base. Our in-service in-flight connectivity tail count was about 51% higher than it was this time a year ago, even with approximately 85 737 MAX aircraft currently out of service. And we also had higher revenues per plane as we've got more aircraft with a direct prime relationship with our airline customers and we've got a broader base of services being offered. In Government Systems, our product sales have been exceptionally strong as we continue to expand our addressable markets for Tactical Data Links, network and cyber security and satellite communication systems. And we've had steady growth in government…

So Mark just covered the top-level highlights. I'll dive right into the segment performance. Looking at each segment in Government Systems we saw robust revenue growth at $59 million, up 24% year-over-year bringing Q2 segment revenues to a high of $299 million. This was resolved as strong product sales across many of our businesses including Tactical Data Link products, sitcom radios and system products and mobile broadband products. We saw a high volume of product deliveries in Q2 from our widening NDI product portfolio and strong IDIQ contract base both of which facilitated end-of-year government sourcing requirements in an expedited fashion, Overall our government business is off to a strong start and expected to deliver FY2020 revenues in excess of $1 billion for the year. Government Systems' adjusted EBITDA was a record $79 million representing a 27% increase over Q2 of last year. Gross margins were largely unchanged from the prior period, but lower R&D as well as SG&A as a percent of revenues helped drive the higher adjusted EBITDA growth. Segment awards in the quarter were $418 million, which is up over $200 million from Q1 and down about 7% year-over-year when we had record awards in Q2 of fiscal 2019. Based on a strong book-to-bill for the period of 1.4:1 we ended the quarter with Government Systems backlog of nearly $1 billion a new record for this segment. Turning to Commercial Networks, we saw quarterly revenues decline by $27 million or 23% due to the comparative impact of the prior year's accelerated install schedule for American Airlines. However sequentially segment revenues were up 11% on record revenues in the Company's antenna system product line. In segment earnings, Q2 reflected a larger adjusted EBITDA loss on higher SG&A expense and R&D investments, which more than offset a 3 percentage…

Okay, thanks, Shawn. So let me go into a little more depth on our Government Systems business, which continues to deliver very steady strong and profitable growth. Revenue increased 24% year-over-year to $299 million and adjusted EBITDA grew 27% year-over-year to $79 million led by very robust product sales and steady services gains. On a year-to-date basis, revenue is up 30% and adjusted EBITDA up 36%. New contract awards can be lumpy, but we're good at $418 million in the second quarter. Based on order flow over the last several quarters, we ended the period with record government backlog of $992 million. So backlog is continuing to expand even as we've achieved high revenue growth. Again we don't include the unawarded IDIQ contract values in backlog even though those contract vehicles are a growing part of our business. IDIQs are important to enable timely purchases for a number of customers especially for our unique non-developmental items products and services. As revenue associated with those NDI items grows we anticipate a higher proportion of revenue may derive from those contracts. At quarter end unawarded IDIQ contract value was about $1.1 billion. So – on our Tactical Data Link products, those sales continue to grow. While we have program of record products whose sales are strong these non-developmental item products that we developed using our own discretionary R&D investments have done really well. Those NDI products help fill operational gaps that are artifacts of the government's acquisition system. So in dealing with Tactical Data Links or Link 16 in particular, the most important thing to remember is that Link 16 represents tactical information. It’s not just a radio or a data pipe and there’s a very small set of companies with state-of-the-art Link 16 expertise. Our NDI products are expanding the number…

[Operator Instructions] Your first question is from Rick Prentiss from Raymond James. Line is open.

Thanks, good afternoon.

Hey, Rick.

A couple of questions. Mark, you sound pretty excited. I want to bore down on a couple of the areas. Government Services was obviously a very strong quarter. You called out early stage for a long-term growth cycle. Are you looking at that on the government side from both the product side and the services side as ability to grow? And what kind of margins can we expect in that segment as you continue to grow in that long cycle?

So first, yes on both products and services. Products growth has been exceptionally good the first half of this year. And one of the things we have spoken about multiple times over the last couple of years is growing the addressable markets for our products from kind of the leading edge/early adopter base, early responders like Special Forces, into the broader Army, Navy and Air Force. And that’s happening. That’s what’s stimulating these product sales. And so those markets are much larger than the early adopter Special Forces markets that we’ve typically been in for many of our products. The services segment, the services part, is growing steadily as well. One of the things that we see as a catalyst for even faster growth is getting greater global coverage as we expand our footprint, either through partner satellites or the launch of our satellites. The margins I’d say margins will fluctuate with product and services mix, but the margins that you’re seeing are pretty representative of what one would expect going forward.

Okay. And Slide 11 was a very interesting slide. I appreciate you putting that out there. As you think about that opportunity for that addressable market of in-flight connectivity bringing the Internet to the airline what are the barriers to you guys growing that share, first on your narrow body count and then what are the issues or barriers to getting your share of that revenue or getting paid for it?

Okay, so our pitch with the airlines and this is – we can see, it’s clearly resonating – is that think of it as engagement is really the key to the in-flight business, that you get no points for having in-flight connectivity from passengers that don’t use it. So the number one thing is really to facilitate engagement. And in some cases, you don’t have to do anything; passengers want to use it. Maybe you may or may not need to take away a pay wall to do that. In some cases, you may need to just take away friction that the people who might want to use it, but didn’t know it was there might have – to go through a portal as an example and we’ve got evidence that when you can take away friction like that you can increase engagement. Once you’ve got engagement and you can show, which is one of the things we’ve done multiple times with third-party Internet companies that you can deliver a good experience reliably even in the busiest places and times, now – and this is why I think that that chart on Page 11 is so important – is that you’re really unlocking value, not just for the airline or for the passengers, but for the whole Internet economy. And as long as there’s benefit to think of the participants or the passengers, the airlines, the Internet companies and us, as long as it’s a win-win-win-win deal, there’s a lot of value to be unlocked. And I would say, probably, the biggest issue to overcome is that given previous in-flight connectivity experiences and poor passengers, airlines may be skeptical that anybody, that third parties are interested. And we’ve seen we have evidence that they are. These third parties are a little bit skeptical that a reliable and scalable experience can be delivered and we’re trying – we’re showing that. And I think it’s working. But then to your question about what the barriers are a lot of them really are just coming from some of the forward-leaning airlines that are trying new things and having them be successful.

Makes sense. I think we’re starting to call it "Why fly?" instead of WiFi.

I like that.

Good luck.

Thanks, Rick.

Next question is from Simon Flannery from Morgan Stanley. Line is open.

Thanks so much. Good evening. Mark, I wonder if you could just give us a little bit of the status of the ViaSat-3 build programs around the world, and the latest thoughts on timing there. And also on the Link 16 LEO potential, what’s the time frame for going through evaluation trials, et cetera? Is that a contract that might come in calendar 2020 or is it longer than that?

Okay, first on ViaSat-3, we don’t have any changes to our schedule or timing than what we talked about last quarter. And that basically, what we said is first half of 2021 for the first satellite, second half or end of 2021 six months later for the second, and end of 2022 for the third. That’s still the...

These are launch dates?

Those are launch dates, correct, yes. And those are the schedules we’re working to. We always remind people that there are – that the space business is risky. There’s new technology involved and then there’s conventional risks of in-orbit satellite platform issues or launch issues. We feel like we have a good launcher we have a good satellite manufacturer, but there’s new technology and there’s always risk. But we haven’t made any changes to our outlook from last quarter.

And anything on just partnerships and I think you mentioned something about ground networks in EMEA as well.

Yes. So we are – right now our plan is to bring – launch the satellites, bring them to market ourselves. We will have partnerships in different regions. As an example, in the Americas, we already have Telebras as a partner. In Asia-Pacific, we work with NBN. We’re starting to work with China Sat. But I think you’ll see more likely to see strategic partnerships than some specific capital partnership around the satellites themselves. Okay, shall I go on to the Link 16 or did you have any other questions?

Yes, that’s good.

So, on the Link 16 we have a contract with the Air Force Research Lab to build a prototype Link 16. It’s a range extension satellite, so it does just what we described, which is it can interact with Link 16 terrestrial terminals or platform participants and relay those over the line much larger line of sight of that satellite footprint. That program is underway. I’m not totally sure of the schedule, but I’ll bet you, it’s next year calendar 2020 for demonstration. We will – the Air Force will work with us to arrange the launch, and there is no launch scheduled for it yet. So it will depend on the progress and the status of the satellite itself.

Okay, great. Thank you.

Thanks.

Next question is from Mike Crawford from B. Riley. Line is open.

Thanks. Hey, Mark, you alluded to your new flex plans when you’re talking about greater options and maybe reduced latency. How does that model work with your DSL partner or partners?

Okay, so we have – we’re aiming to roll that out in, so we’ve begun with a DSL partner. What the first model we’re using – it may not be the only one – is a wholesale arrangement, where we acquire DSL and bundle it with our satellite service. And we have a pretty big multiregional – it’s not fully national – but we have one pretty big footprint for that under our ViaSat-2 satellite now. We are in discussions with other DSL providers, who are interested in doing the same thing with us. Likely, we could end up buying wholesale DSL. What we expect is at some point we’ll have sort of reciprocal marketing relationships where a DSL provider can offer satellite along with that. Then we’re also using – we’re also aiming to deliver this calendar year, our first flex plans with mobile wireless. So that’s kind of a do-it-yourself. You can just use if you have an unlimited wireless plan, you can allocate some amount of wireless bandwidth and we automatically, kind of, seamlessly route data packets over the best networks for your applications. And that one that will have a nation – pretty much a nationwide footprint from the start.

Okay, thank you. Similarly you demonstrated your hybrid adaptive network at this AFWERX conference. But the Air Force is also moving forward with this different program. I think, it’s called DUCI, where they’re looking at these LEO constellations that may or may not get built. But are those efforts at the Air Force like stove-piped or would they be integrated, where they would consider things like your range extension LEO satellites and maybe even backhaul on ViaSat-3?

Okay, so that’s – yes, that’s a broad question. So one is, we – I would give ourselves some credit for sort of launching this hybrid adaptive network concept. I’d say the DoD likes it, and so they have an initiative to build their own version of it. And that’s a little bit of a view of it as sort of a network technology kind of problem. We think there’s a lot more to it. And we basically do that already for a number of our existing government mobility customers like the Leadership Fleet. So we can use Ku or Ka or MEO satellite constellations. We're working with the LEO operators to be able to do that. I think one of the things that you've seen recently is what the government really wants is they want terminals that are capable of operating on multiple networks, which we think makes complete sense. And so we're doing that including their own, right, including their own organic satellite systems. So we're doing that. And then it's really more of a business relationship. So what we would expect is that you'll see services offered under maybe the government version of it, but I think you'll also see private versions of it where it's just sort of seamlessly managed by some network provider and that's an extension of what we're already doing. I think the fact that the government has their own program is indicative that there's real operational value there. And just like we do with a lot of our NDI businesses kind of our challenge is to get there faster or to do it better or more effectively or to be able to propagate it through the organizations faster. We're up to those challenges.

Okay, thanks. And just a last quick question, regarding the NDI does that – I mean obviously that protects you a little bit from Continuing Resolution, but are there other parts of your business where there's a new program that might not get funding or be delayed until we get a budget?

That's a little bit of an effort. I don't know Rick do you think you want to – I don't think – nothing pops to mind right now. But the Continuing Resolution is something – it's always...

Yes, so yes, this is Rick. They are going through this cycle and to the extent that they don't get – they get a CRA that carries them through the end of the year then they have to deal with this thing at the beginning of the year. So I'd say we're not immune to people not having money and being able to enter into new contracts. We're not immune to that. In general, the IDIQs that we have are in place and most of the stuff is in place. But if the defense industry gets to be – begins to be impacted by this we'll be impacted as well but probably at a less – lower level.

All right. Thank you very much.

Thanks, Mike.

The next question is from Chris Quilty from Quilty Analytics. Your line is open.

Hi, Mark, I think last quarter you indicated that after a good Q1 ARPU growth we should expect a little bit of moderation and you went ahead and put up an even stronger ARPU number in Q2. Was there something one-time in that number or is this a good number to baseline off of going forward?

Okay. There's no extraordinary inputs to that number. That's what it was. One of the things we've said we want to do is we've outlined this program, which has worked really well for us. The short way of saying it is, it's way better for us to have one, $100 customer than two $50 customers from a cash management perspective, from a customer satisfaction perspective. The issue for us has really been in finding the edges of that – how many hundred – clearly the market for $100 customers is less than the market for $50 customers. But the secular trends are ARPUs are growing as well. And what we've found is good demand. I'd say also we are putting a lot of work into optimizing our satellite network. And one of the things that we said was good about ViaSat-2 and has turned out to be the case is we've been able to reallocate bandwidth from areas with less demand to areas with high demand. And we may not get a 1-for-1 gain like we might if we moved bandwidth from a low-demand place to a high-demand place. We may get less bandwidth, but if the bandwidth is more valuable there economically that's a good trade. And I think that factors like that are contributing as well.

Understand. And not to get too far out in front, but the U.S. model where you can find these high-value $100 ARPU clients is probably going to be very different in other parts of the world. Were there certain ways that you architected ViaSat-3 to enable both models one of higher ARPU and one in perhaps the developing world that's lower ARPU, lower value in terms of the service you're providing?

Yes, so when it comes to ViaSat-3, I'd say we have the top-level things that I think are going to be very impactful. Our number one is just the sheer productivity of the satellite; that is the low cost of bandwidth that we have will enable us to offer plans at low price points. And then the other really big factor is the flexibility in allocating that bandwidth to the best markets is even – it's much better than it is on ViaSat-2. So that will help us a lot. And then some of the things that we're testing now like these flex plans also they do the two things that I said. One is they give us more total bandwidth to work with, which is good and we can use that to either get more customers at lower price points or better plans at the same price points. So those are the things that we'll be working with. I think we're getting good experience in Mexico and Brazil. The other thing is we think of this community Wi-Fi business as it's really addressing the prepaid – what would otherwise be the prepaid mobile market out of emerging markets. And so one of the things where we can do with that as well as we can sell essentially think of a prepaid-postpaid type plan where somebody says "Oh I'll give you $10 a month." I'm making up a number but where we can integrate those access points with those types of low-end plans. So we have a pretty fair amount of dimensions to work with. I think it's going to be quite different in different countries and so I think we're still in learning mode.

Great. And one final follow-up on the Link 16. Can you remind us the satellite cube sat that you're building Link 16 enabled – was that fully funded or did you put some investment in there? And would the idea be that eventually either the government or you would fund the development of a full constellation to operate a private-military Link 16 network?

Yes. So we won a competition to develop that prototype satellite. It's a fully funded contract and I think that that's kind of where the government's headed is to have – assuming that we can demonstrate the functionality and that we can do it at a price that makes sense. I think that's where they'd be headed.

Yes, this is Rick. The only thing I would add there is we've built – you call it a cube sat. I wouldn't necessarily say that's what we're building. We've built some small sats in the same timeframe already. And so we have invested money previously that we used to help win this contract. Also on – we've qualified some Link 16 hardware in a previous launch in space that we've proven can survive there. So there were some other initiatives. Mark's absolutely right. We won a competition that's fully funded. But I just wanted to point out we brought with that our own intellectual property.

So not a cube sat, but presumably a different production line than ViaSat-3?

That's for sure.

All right. Thanks, guys.

Okay. Mark we probably should just take one last one here.

Yes, sir. The next question is from Philip Cusick from JP Morgan. Your line is open.

Hey, thanks. This is Sebastiano on for Phil. I just wanted to see if you can give us any color. Where do you stand now with the Eutelsat JV and how should we think about that evolving as you expand internationally? Any color you can give there?

I would say we're in a temporarily stable situation. That is we have I don't know we have an accommodation with them. They're using our network; we're using their satellites. It's in a stable situation now. It's probably not the long-term solution for it. We're still working with them to sort out what the fully – sort of the end state will be. There's not much. I don't think there's much more to say to it than that. Do you have some other specific question around that?

No, I was just thinking about where we are now and that's been a little bit – not necessarily in limbo, but just been a bit quiet on that front. So I just wanted to see if there was anything you could potentially share any recent developments. But that's fair. Thank you. And then just a quick follow-up on the IFC, I mean second straight quarter of just aircraft online net adds kind of slowing a little bit here. I mean should kind of we think of this fully attributable to what's going on with Boeing and the MAX fleet? Or is it just getting to a point now where the backlog is not maybe as robust as it had been and things are just slower? Or is just a kind of one-off situation? Thank you.

So okay. So I think last quarter what we described was around 1300-ish planes in service and a little over 500 additional under contract, so maybe around 1800 or so. Where we are now is if you count the MAX that we'd be at around 1440 and around 700. So we're up to about 2100-ish. So there's been pretty good progress a lot of it with our existing customers. We haven't announced each of the orders that's built up into that total. But if you just add up all the things that we talked about so I'd say we've made pretty good progress in orders. The MAX grounding is a headwind because we have a number of those planes. We had the first line-fits. We have a number of airline customers that are counting on those planes. But I'd say stay tuned; we think things are going to get even better.

Great. Thanks, guys.

Okay. Thank you for your questions.

I am showing no further questions at this time presenters. I would now like to turn the conference back to Mr. Dankberg.

Okay, so that concludes our call today. Thanks very much for dialing in and we'll look forward to speaking again next quarter.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day.