ViaSat Counsels Patience on Exede Broadband Business

by

IBIZA, Spain — Satellite broadband hardware and services provider ViaSat Inc. asked investors Aug. 2 to look past the operating loss for the three months ending June 30 to the day when the company’s Exede satellite broadband service is adding new subscribers at 70 percent gross-profit margins.

In a conference call, Carlsbad, Calif.-based ViaSat said investing in the satellite broadband business means spending now for a payoff that the company said is not far off and well worth the near-term damage to earnings.

“We think this quarter is the bottom, in terms of operating results,” ViaSat Chief Executive Mark Dankberg said, adding that ViaSat’s defense business, which shares some technologies with the commercial division, continues to do well despite the pressure on U.S. defense spending.

“From our perspective, some amount of the budget pressure is a source of opportunity,” Dankberg said, explaining that defense customers are now forced to look for lower-cost, innovative solutions “to replace troubled programs of record.”

ViaSat has staked its near-term business outlook on the use of Ka-band satellite frequencies to provide broadband links to consumers and small businesses, and also to military customers who are adding Ka-band capacity to their mobile platforms.

As the military does this, Dankberg said, ViaSat is benefiting from the synergies between its defense and commercial portfolios. The company’s ViaSat-1 Ka-band satellite, in service since January, is first and foremost aimed at the commercial consumer market. ViaSat believes, and used early subscriber results to demonstrate, that satellite broadband with the new high-throughput satellites like ViaSat-1 can win not only customers in areas without terrestrial broadband but also customers with slow DSL or terrestrial-wireless connections.

As it is for commercial customers, so it should be for military customers, according to ViaSat.

“It is becoming evident that new commercial satellites like ViaSat-1 are not only better than today’s government satellites for broadband applications, but they’re also better than what [the U.S. Defense Department] will have even for the foreseeable future,” Dankberg said.

The three months ending June 30 constituted the first full quarter of Exede service. By that date, ViaSat’s satellite broadband service, Exede and the older, lower-performing WildBlue combined, had 404,000 subscribers.

ViaSat said it added 66,205 Exede subscribers in the three months ending June 30. The trick for the company is how to distinguish new customers being attracted to Exede from heritage WildBlue customers electing to upgrade to Exede.

Because sales agents get lower commissions for booking a WildBlue customer to Exede than they do for finding a new customer, several thousand WildBlue customers were encouraged to register for Exede under new names, or using only initials, to disguise the fact that they were in fact simply upgrading to a better service.

Dankberg said it took ViaSat a while to see through this and take steps to better determine heritage customers from new ones.

The bad news for ViaSat is that early Exede customer data for new subscriptions turn out to have been exaggerated. The good news is that early data on “churn,” which means customers quitting the service, were also exaggerated, as many of these homes were upgrading under different names.

Stripping out the upgrades, ViaSat concluded that it booked 20,000 new Exede customers in the three months ending June 30. The average monthly revenue from WildBlue and Exede customers combined is $46.44.

It costs ViaSat a total of around $700 to sign up each new customer. Two-thirds of that figure is the cost of the broadband satellite equipment. The remaining costs are divided about evenly between marketing and advertising, and sales commissions.

“We expect that [new-subscriber figure] to grow meaningfully for the next few quarters,” Dankberg said. The company has now loaded about 100,000 total subscribers onto the ViaSat-1 satellite.

Dankberg said it will take Exede several quarters before it works through what he called a “bubble” of WildBlue customers who elect to pay $50 per month for 12 megabits-per-second downlink speeds instead of half a megabit per second.

ViaSat had been expected to order a ViaSat-2 satellite by July. Dankberg said the company is negotiating the “price and terms” of a ViaSat-2 contract, which industry officials had expected would be signed by now with Lockheed Martin Space Systems of Sunnyvale, Calif.

In addition to operating the ViaSat-1 satellite and providing the Exede service, ViaSat sells broadband terminal and Earth station equipment. The company recently won a $240 million order from NBN Co. of Australia for that nation’s broadband rollout, which Dankberg said will make Australia a showcase for other national broadband efforts.

ViaSat’s government systems division reported revenue of $106.3 million in the three months ending June 30, up 23 percent from the same period a year ago.

ViaSat’s overall revenue for the quarter was $241.7 million, up 15.8 percent from a year ago. But the company reported an operating loss of $13.8 million because of research and other expenses related to its Ka-band technology and the cost of adding Exede subscribers.