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ViaSat Inc. (NASDAQ:VSAT)

F4Q08 Earnings Call

May 13, 2008; 5:00 pm ET

Executives

Mark Dankberg - Chairman and Chief Executive Officer

Keven Lippert - Vice President, General Counsel and Secretary

Ronald Wangerin - Chief Financial Officer and Vice President

Analysts

Chris Quilty - Raymond James

Richard Valera - Needham & Company

Thomas Watts - Cowen & Company

James McIlree - Collins Stewart

Operator

Good day, everyone and welcome to the ViaSat FY2008 fourth quarter earnings conference call. Today’s conference is being recorded. Your host for today’s call is Mark Dankberg, Chairman and CEO. You may proceed Mr. Dankberg.

Mark Dankberg

Okay thanks. Good afternoon everyone and welcome to the ViaSat's earnings conference call for our fourth quarter and fiscal year ending March 28, 2007. I'm Mark Dankberg, Chairman and CEO and I have got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin, our Vice President and Chief Financial Officer and Keven Lippert, General Counsel. Before we start, Kevin will provide our Safe Harbor disclosures.

Keven Lippert

Thanks Mark. As you know during the course of the discussion today we will make forward-looking statements including those relating to the anticipated benefits and strategic relationships, expected future business, projections of financial performance growth and trends in our business or key markets, the anticipated performance of products or service, and plans, objectives and strategies for future operations.

We would like to caution you that the actual results could differ materially from those contemplated by our forward-looking statements. We refer you to the risk factors contained in our SEC filings available at the SEC’s website including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We would like to caution you not to place undue reliance on any forward-looking statements which speak only as of the date which they are made and we undertake no obligation to update any forward-looking statements.

Mark Dankberg

Okay thanks Kevin. So as usual, we will be referring to slides that are available over the web. Before we start I would like to make a quick strategic point regarding our business. So, right now we are undertaking two pronged task. First is to continue to grow our core business and earnings at an attractive and sustainable rate and second is to construct a satellite asset that we believe can accelerate our growth in multiple dimensions when it’s launched in 2011. We think it’s an exciting challenge and that we’re off to a good start.

So, today we’ll focus on the financials and the growth prospects for our core business first, but also give a brief update on the status of the satellite assets and we will start with our fiscal year ’08 fourth quarter and fiscal year 2008 financial results for year end, our business overview prospective and some highlights. After that Ron Wangerin will discuss our financial results in more detail. Then we will update our outlook for fiscal year ’09 and give a quick summary and take questions.

So, turning to the slide on Q4 financials summary, as you can see our fourth quarter results were very good especially when compared to last year. We earned $0.41 a share on a non-GAAP diluted basis up 21% compared to $0.34 last year. GAAP net income was $0.33 a share, about 24% higher than last year’s $0.27. Income before tax was up 37% over the same period last year which we think is very, very good. Revenue is at $147 million; we’re up 12% over last year meaning we improved margin significantly.

New orders for the quarter were a bit of a challenge at about $98 million. We had several contact awards spillover into the current quarter. Total new order activity for this first quarter to date has been excellent and counting MIDS Lot 9 which we expect soon already put us well ahead of the total for the fourth quarter.

So, while order timing is always a little unpredictable this suggests that the combined value for the fourth and first quarters is anticipated to be pretty consistent with our growth outlook, even if the distribution isn’t quite what we planned. That’s actually one of the good things about carrying some backlog; it helps to mitigate the lumpiness of orders especially in the Government business. When we get to the business highlights section I will give a little more detail on orders and some of the factors in the lumpiness.

The next chart shows the fiscal year financial summary for our fiscal year ’08 year end results. We had record GAAP diluted earnings per share of $1.04 per share this year and that’s up 7% compared to $0.98 last year and we had record non-GAAP diluted earnings per share of $1.36 which is also 7% higher than $1.27 for fiscal year ’07. We will provide explicit bridge data from GAAP to non-GAAP later in the call.

Earnings per share comparisons on a year-over-year basis are a little complicated because of the timing of Federal R&D tax credit legislation. Our fiscal year ’07 tax rate was much lower than fiscal year ’08 because it contained five quarters worth of R&D tax credits. Our fiscal year ’08 tax rate only includes three quarter of R&D tax credits because the credit has not yet been extended in to calendar year ’08. It turns out to be about an $0.08 swing and Ron will give more detail on this in his portion of the call, but to help illustrate this point we had very, very good growth in pre-tax income which was up 29% on a year-over-year basis.

We also set a record for revenues at about $575 million which is up 11% over last year and that again reflects good gains in margin for the fiscal year as a whole. Net new contracts awards for the year were $560 million which is lower than we planned but that’s due to the same factor we just discussed for the fourth quarter.

So, let’s take a quick overview and put those top level fourth quarter financial results in some context. In summarizing those key financial points for the fourth quarter, the first is the timing of significant follow on to existing programs that were straddling the quarter boundary contributed to lower than planned new orders in the fourth quarter.

The timing of those programs have essentially no impact on revenues or earnings in the quarter, but it did significantly affect our overall book-to-bill in our backlog and besides those there were some smaller product awards that would have had a smaller impact on backlog but those did affect our sales and earnings in this most recent quarter. Still we were able to manage our discretionary expenses to yield good overall earnings.

Overall our core business was very strong with good growth and tactical data links, government satellite communications, antenna systems and others. Our operating margin improved to approximately 12% and with the exception of a fairly large receivable of one customer which is being paid subsequent to the end of the quarter our cash flow was on or ahead of our target.

Our overall results for fiscal year ’08 were new records in awards, revenue and earnings. As I pointed out on our previous slide pre-tax earnings were up 29% year-to-year which was very strong in light of the growth and company funded R&D which was up 50% for the year. Our tax rate for the year was up 10 percentage points over last year due to the timing of the R&D tax credit legislation. Ron will go into this in more detail in his section and provide some guidance as to what we expect going forward.

So, now I will turn to some business highlights starting with government. The tactical data links, MIDS area is still our largest. We continue to compete well and grew sales in our fiscal year ’08. We are targeting continued growth in fiscal year ’09 through the combination of LVT production, a MIDS, JTRS development programs and smaller new initiatives including weapons data links and new link 16 applications, including our first orders for shipboard MIDS units.

Just after the fourth quarter closed we received substantial additional contractual commitments on MIDS JPRS, which helps set the stage for additional funding for another new addition called the Airborne Networking Waveform and that’s been in the works for quite a while as well as possibly other waveforms. Just to help illustrate how lumpy awards timing can be at this point we are targeting a total of around $100 million in orders in the data link area alone in this first quarter. It obviously is a big factor in our excellent start to the year.

Execution has been good with its record LVT shipments in our fourth quarter. Our tactical UAV data link business has also been growing fast through a combination of existing legacy products and new products introductions funded mostly through discretionary R&D. We have always had high expectations for the information assurance area and that continues to show good growth prospects.

There has been a sustained long term good growth trend in the KG 250 Inline Network Encrypting products, but that area is also quite lumpy and it was down sequentially in the fourth quarter. The government procurement agency that we work through instituted a major change in its ordering system which required us to adapt our sales channels and it stretched out the ordering pipeline. That was one of the factors constraining our fourth quarter orders.

So, far we see sequential improvements this quarter but it may not return to normal levels to the second or third quarter. Meanwhile we see a rich set of Information Assurance project opportunities with robust proposal activity. The government is also planning its first delivery orders for media encryption this year, which we consider an exciting new product line in our Information Assurance area. This area received a significant amount of our R&D investments in fiscal year ’08 and based on past successes we anticipate seeing returns on that beginning this current fiscal year ’09.

Government satellite networks had a very good year in fiscal ’08 driven by the completion of some key product development and increased production orders. We have a growing set of product franchises there including our UHF satellite band products, the enhanced bandwidth efficient modem or EBEM, which is doing very well, our upgraded LinkWay system used on the joint network node or JNN terminals and the emerging joint IP modem and BlueForce tracking products, which are still in development.

We just recently deployed our mobile broadband ArcLight product on a DoD aircraft for operational missions. It’s been very successful and could be an icebreaker in other DoD applications.

Now turning to commercial, the situation in consumer broadband has not changed significantly. We are expecting lower revenues in fiscal year ’09 due to capacity constrains in the US Market. WildBlue has started advertising in their lower full beams to help stimulate demand there, plus new software upgrades are creating enough capacity for them to reopen all their beams to some extend, but there is just not the capacity to reach the same levels as we did in fiscal ’08.

Eutelsat's Tooway network has begun operations in Europe and we are working to open a few other international markets. On the other hand we are expecting growth and higher earnings in all of our other commercial business areas this year. Antenna systems had a very strong fiscal ’08; good backlog entering fiscal ’09 and is positioned to bid on some key government and commercial antenna programs. Our enterprise VSAT business had been declining last year as we worked through some organizational changes, new product releases and strategy evolutions.

The fourth quarter showed market improvement compared to the third quarter, especially in new orders and that trend has continued so far in our first quarter of ’09. We’ve integrated all our international satellite products into a single organization including our LinkStar and SurfBeam networks, LinkWay Mesh networks, the enhanced band width efficient modem which is one of our SCPC modems, our ArcLight mobile systems and also the AcceleNet wide area network acceleration products. The organizational changes should yield cost and efficiencies plus we had new generations of the LinkStar and LinkWay products and have had very good success with mobile broadband networks and are expanding geographic coverage significantly.

Geographic coverage seems to be a key discriminator in the mobile market for aviation and maritime since those users often cover a lot of territory and based on our growing base of business jet and maritime users we have been able to attract a growing set of regionally strong satellite operator partners. We have also come up with some very capital efficient methods to increase our ongoing service revenues in the mobile broadband area.

The AcceleNet, WAN acceleration software also is an important factor in our commercial satellite network strategy. It offers compelling bandwidth and performance efficiencies and the OEM agreement with Cisco adds another valuable dimension to it. We have already integrated AcceleNet into some of our Key enterprise VSAT accounts. We have been investing fairly significantly in this area and they anticipate it may turn profitable in the second half of our fiscal ’09.

Our Comsat Labs division continues to lead our work in the mobile satellite services sector and recently earned some additional scope in our contract with Boeing in mobile satellite ventures. We anticipate growth there this year due to progress on the ground-based Beamforming contract as well as other areas.

So, now I will switch to the next generation Ka-band projects. Our ViaSat-1 satellite program has been progressing consistently with our clients. We are about four months into a three year project. We are working on several different aspects; first there is a detailed engineering design of the satellite with space systems that are on. We believe that’s progressing well. We have also been working on this Fiber Ground Network Access and are making good progress there to.

During the last quarter Tom Moore who is Co-Founder and CEO of WildBlue, joined us as a Corporate Vice President and President of our ViaSat-1 satellite initiative. Tom has been a tremendous addition for us in virtually all aspects of developing this business. Besides the technical programmatic aspects we have also been engaging in strategic discussions with some specific potential partner’s, with maybe customer’s, distribution partner’s, investors or in some cases combinations of all those.

Our discussions have been very constructive based on the much higher user speeds we can offer and the much greater and steadily increasing volumes of bandwidth we can deliver. There is no question that broadband daily usage is growing and that the increasing percentage of the traffic is video and media content that just like satellite TV it is not at all sensitive to latency. Our confidence that ViaSat-1 will be successful within the un-served and underserved markets in the US is only increasing.

We have also worked with independent market analysts retained by potential investors we have also supported that conclusion. We’ve had good interest in pretty much every satellite application market where the cost of satellite bandwidth is an issue such as Enterprise VSAT, 3G or 4G cellular backhaul, local video or video uplinks, local video distribution maritime and aviation broadband and government and defense applications.

Our demand for consumer broadband is strong and demonstrated. We also see at least as much demand in these other adjacent markets. In terms of timing of either distribution or investment commitments we have interested parties that see our high capacity satellite as a very unique asset and that recognize the lead-times in obtaining such an asset and are interested in detail discussions now. While we obviously cannot give any assurances we are very pleased with the progress we have made to date.

We are working to have our first investor on board within a quarter too and possibly a second, later this year. We may be able to signup our first distribution partner within a year as well. We continue to work closely with Eutelsat on their Ka-Sat project. Probably worth digressing for a moment on who Eutelsat it is, they are the leading satellite TV provider in Eruope. Their Hot Bird video neighborhood is received by more than 40 million direct-to-home users and over 120 homes in total through multiunit dwellings or cable. That is far more than both DirecTV and EchoStar combined in the US.

Ka-Sat is about a 70 gigabit per second satellite, which is the second highest capacity satellite ever along with our ViaSat-1 and is designed to run on next generation SurfBeam ground segment. Ka-Sat is schedule for launch in the second half of 2010 about 6 months earlier than ViaSat-1. It will be co-located with Eutelsat’s video satellites and some of the capacity is intended to be used for enhanced local, high definition, video on-demand ethnic or other video programming.

One of the benefits of our closed collaboration with Eutelsat is we can develop an integrated consumer terminal that integrates broadband services with video and video on-demand into a single package. While we have been very successful to date with stand-alone Ka-band broadband, we believe this added dimension of home video integration will further differentiate us in both the US and the international markets.

For example at the satellite expo in Rome we and Eutelsat demonstrated a single integrated direct-to-home satellite dish antenna that for the first time delivered both Ka-band broadband and high definition video through a single antenna via Eutelsat corporate satellite. Both we and Eutelsat continue to be very enthusiastic about the strategic potential of our partnership.

Okay so at this point I would like to introduce Ron Wangerin our CFO who will discuss the financial data in more detail.

Ronald Wangerin

Thanks Mark. We will start with the P&L and segment results and then cover the balance sheet and cash flows and provide an update on ViaSat-1 cash needs. As Mark mentioned for the fourth quarter operating results were good relative to the sales level. Revenues were $147.4 million, a 12% increase when compared to the last year. The cost of revenue percentage reflects the mix of products where margins were slightly lower quarter-over-quarter particularly in the government segment.

SG&A expenses for the quarter were lower year-over-year included higher selling and support costs from increased business activity when compared to last fiscal year, which is offset by a cumulative adjustment to lower discretionary cash compensation in fiscal year 2008, when compared to cash compensation that grows from last year.

R&D was similar to the other quarters of this fiscal year, but up significantly in the fourth quarter year-over-year due to the development of next generation information assurance, unmanned aerial vehicles, global antenna and broadband technologies and this is inline with our expectations. Quarterly amortization of intangibles is basically flat year-over-year. Income from operations for the fourth quarter fiscal year 2008 includes non-cash stock-based compensation expenses of $1.6 million and it was $1.4 million for fiscal year 2007 fourth quarter.

The increase in other income represents primarily interest income earned from higher invested cash balances year-over-year. Our income tax provision for the fourth quarter reflects an effective tax rate of about 28% versus 18% for last fiscal year. The higher year-over-year effective tax rate is due to the timing of Federal R&D credits. In fiscal year 2007 the effective rate included five quarters of Federal R&D benefit due to the timing of the credits renewal and in fiscal year 2008, the effective rate only includes three quarters of benefit reflecting an expiration of the Federal R&D credit at the end of December 2007.

So, all up we are pleased with our improved margins. This pretax income was up by about 37% and revenue increases to 12% and we will address the difference between GAAP and non-GAAP earnings per share in a few slides. For fiscal year results, we established a number of new records for the company. Revenue rose to $574.7 million, an 11% increase when compared to last year. The cost of revenue percentage reduction reflects improved margin performance particularly in our consumer broadband and antenna systems areas.

Selling, general and administrative expenses were higher year-over-year mostly due to higher selling and business support costs from increased business activity when compared to last fiscal year offset by lower discretionary compensation in fiscal year 2008 when compared to cash compensation expenses from last year. The company increased R&D investments by almost 50% year-over-year in next generation technology for the development of information assurance, unmanned aerial vehicle, mobile antenna and VSAT technologies and this was consistent with our plans. We expect fiscal year 2009 R&D expenses to be flat to slightly lower.

Amortization of intangibles is flat and reflects the completed amortization of certain intangibles partially offset by amortization of new intangibles from our JAST and ICT acquisitions. Income from operations for fiscal year 2008 includes non-cash stock-based compensation expenses of $7.1 million and $5 million for fiscal year 2007.

The increase in other income is primarily interest income earned from higher invested cash balances year-over-year. Qualitatively, for fiscal year 2008 our income before taxes reflects higher revenues, increased margins and a reinvestment of some of this margin and new contract proposal expenses and next generation products to support future growth. Year-to-date income, our tax provision reflects an effective income tax rate of about 28%, which was about 18% for the same period last year.

The rate last year was lower relative to historical levels due to the inclusion of an extra quarter of Federal R&D benefit from fiscal year 2006, being recorded in fiscal year 2007 due to the timing of Federal R&D tax legislation. The effective income tax rate for this year assumes only three quarters of Federal R&D benefit as the rate expired in December. This amounts to an approximately $0.08 swing per share of net earnings year-over-year.

We have seen these swings for the past several fiscal years due to the timing of the Federal R&D credit renewals. We expected Federal R&D credit to be retroactively reinstated this fiscal year. For fiscal year 2009, we are planning for an effective rate of approximately 28%. If the Federal R&D credit is not reinstated, our effective rate will be about 36%.

Minority interest increased due to improved operating results of our majority owned TrellisWare subsidiary. I would like to address a particular matter here regarding our dispute with WildBlue and the resellers related to field failure rates on transceivers, which are part of our outdoor portion of the customer premise equipment. This is a contractual dispute around damages that occurred in the past. We believe there is not an on going product issue based on data provided by our customers. We believe we have a fair contractual and financial position that is properly reflected in our results at this time.

Looking at our segment as you saw in our earnings pres release today in the fourth quarter, we made management and organizational structure changes to better align the organization with our recent strategic changes. Our Satellite Services segment is primarily comprised of our ViaSat-1 satellite and our mobile broadband and enterprise VSAT service businesses. Our commercial network segment comprises of former satellite networks and antenna system segments except for the Satellite Services component and we’ve recapped the data for the prior fiscal year period presented to conform to the current period presentation.

In the Government Systems segment revenue for the fourth quarter was at $84.1 million, an 18% increase over the same last year. The increase for the quarter is primarily related to sales of tactical Data Links and next generation military platform systems partially offset by lower information assurance product sales. In the commercial network segment revenues for the fourth quarter was $61.6 million, a 3% increase over the same period last year.

The year-over-year quarterly increase is primarily related to higher consumer broadband, mobile satellite and antenna system sales offset by decreases in enterprise VSAT sales. For satellite services, the fourth quarter and fiscal year sales are essentially flat year-over-year.

In the fourth quarter, the government system segment posted operating earnings $12.1 million and increase of 33% from the prior year. The year-over-year operating earnings increases due to higher revenue, improved margins in our government SATCOM and Data Links products offset partially by higher R&D investments of next generation information assurance and unmanned aerial vehicles products and higher new business investment costs.

Commercial Network segment operating profit was down slightly in the fourth quarter year-over-year. Although we experienced improved performance in our mobile satellite and antenna systems areas these were offset by reduced earnings from our enterprise VSAT products and from investments in our ICT products. For the fourth quarter operating earnings announced include non-cash share-based compensation expense charges of approximately $1.6 million for fiscal year 2008 and $1.4 million in the fourth quarter of fiscal year 2007.

For the fiscal year in the government segment revenues were $319.5 million, a 15% increase over last year and this increase is primarily related to sales of next generation military SATCOM systems and tactical Data Links products. Fiscal year 2008 commercial network segment revenue were $248.3 million, a 7% increase over last year. We experience increases year-over-year in consumer broadband, mobile satellite and antenna systems sales, all of which were offset by decreases in enterprise VSAT product sales.

For the fiscal year the Government System segment posted operating earnings of $45.8 million, a 7% increase when compared to last year. We saw higher earnings from higher sales that was partially offset by increased R&D investments and higher new business investment cost. Fiscal year 2008 commercial network segment and operating profit increase was due to improved performance in our consumer broadband, mobile satellite and antenna systems area partially offset by reduced earnings and enterprise VSAT products and investments in ICT.

Included in our fiscal year 2008, commercial network segment operating profits, are investments of over a $4 million in our ICT products and $3 million in our ViaSat-1 project. For Satellite Services the fiscal year loss increased year-over-year primarily due to a customer bankruptcy in our managed broadband service area. Year-to-date operating earnings amount include non-cash share-based compensation expenses of approximately $7.1 million for fiscal year 2008 and $5 million for the same period of fiscal year 2007.

As we look at the GAAP and non-GAAP EPS differences, non-GAAP results exclude the affects of acquisition related intangible and the affects of non-cash share-based compensation expenses. For fiscal year-to-date 2007 stock-based compensation amounts also include a one-time approximately $1.2 million charge we recorded from the cumulative impact of accounting corrections related to employee option expense and the related tax impact.

As we turn to the balance sheet, our balance sheet continues to be strong. Cash and short-term investments increased by almost $22 million from the beginning of the year and we will talk about the moment of cash later when we review cash flows. Accounts receivable had been trending down in the first half of the year, but increased this quarter primarily due to a customer holding over $10 million at fiscal year-end and these payments have since been received. Had we received those payments, accounts receivable would have actually decreased to around $82 million and cash would have eclipsed $135 million.

Unbilled accounts receivable increased due to the timing of certain contractual milestone. Inventory is up about $14 million since the beginning of the fiscal year reflecting the transition of some products to units of delivery basis accounting and inventory build up for delayed awards we referenced earlier and deferred consumer broadband shipments to customers.

Deferred income tax increased primarily as a result of the adoption of FIN 48 and the related accounting. Prepaid and other current assets increased primarily due to prepayments to suppliers and a shift of a long-term receivable to short-term of the current asset. Goodwill and intangibles decreased due to regular quarterly amortization offset partially by new goodwill and intangible from our JAST acquisition in the second quarter of this fiscal year.

Net property in equipment is up about $13 million due to capital additions, of which $8.1 million is related to our new satellite project and the remainder was for facility expansion and test equipment to support our business growth offset by quarterly depreciation. Our capital expenditures for the satellite project were little lower than planned in the fiscal fourth quarter.

The change in other long-term assets is primarily due to deferred income tax as also from these option of FIN 48 offset by amortization of capitalized software and the reclassification of a long-term receivable to a short-term other current asset. As we look at liabilities and equity accounts payable increased consistent with our growth and revenues and days payable balances with our vendors is still well below historical averages. Advances were up mostly in our commercial segment reflecting the timing of receipts and contract milestone and this amount can fluctuate quarter-to-quarter.

The change in other current liabilities primarily relates to payments made in the first quarter of about $8.7 million associated with the ECC acquisition provisions and from the issuance of stock of approximately $5.6 million from the Enerdyne acquisition and lower year-over-year discretionary cash compensation accruals partially offset by changes in warranty accruals.

The increase in other long-term liabilities is primarily related to an increase in long-term deferred income taxes also associated with the adoption of FIN 48. At the end of the quarter we continue to have no outstanding borrowings, leaving our full line of credit available with standby letters of credit. As of quarter end we had about $52 million available under our line of credit.

Looking at the cash flow statement, the quality of cash flows from operations has been very good. Strong net income and non-cash outback have contributed to most of the cash flows. The cash flows from operations for fiscal year 2008 was excellent at $48 million and could have been better without the delayed $10 million receivable receipt I spoke of earlier.

Cash flows from investment activities for the quarters reflect capital expenditures for our satellite project and business expansion activity since our company continues to grow. Capital expenditures for licenses and patents related to our satellite project and the maturity of short-term investments. Last quarter due to the decline in interest rate we began to purchase short-term investments in order to enhance our return on cash. We will do this from time to time. This quarter those investments matured.

Year-to-date cash flows from investing activities reflect the cash payout of the acquisition provisions for ECC and Enerdyne as well as our JAST acquisition and capital expenditures for our satellite project and business expansion previously discussed.

Cash provided by financing activities is primarily from the net proceeds from common stock issuance. For the fiscal year cash from financing activities also includes the purchase of common stock related to net share settlements from restricted stock units divested in the third quarter.

We expect to generate cash from operations in the future; however with the ViaSat-1 satellite project, we expect to increase our capital expenditure level significantly during satellite construction and speaking of ViaSat-1 satellite we are frequently asked about the capital expenditures and sources of cash related to the ViaSat-1 satellite project. We expect the cost of re-launch to be in the $400 million and it will depend on the timing of the Gateway rollout.

We have a current strategy that we are executing to that would limit ViaSat's total required investments. Under this path our equity participation is similar to our cash on hand plus investments to-date. Alternatively we believe we have adequate sources of funding for the project which includes our cash on hand, available borrowing capacity and the cash we expect to generate over the next few years. We believe this provides us great flexibility to execute this project in an appropriate manner and obtain outside equity in a range indicated under terms that we consider reasonable and favorable.

So, with that I would like to turn it over to Mark to talk about our outlook.

Mark Dankberg

Okay, thanks Ron. At this point I will review our current outlook and then give a quick summary. So, turning to our fiscal year '09 outlook, we expect pretty good revenue growth and our earnings to grow a little faster on a relative basis. The key drivers of revenue growth coming from information assurance, government satellite communications and mobile broadband.

Earnings growth is anticipated to be primarily attributable to our government business and decreased investments in the AcceleNet and enterprise VSAT, which we believe will significantly improve the profitability of our non Ka-band commercial business overall. Our outlook does include a significant reduction in US Ka-band consumer sales and earnings due to satellite capacity constraints.

Our fiscal year '09 plan aims at non-GAAP earnings per share of between $1.55 and $1.65 and GAAP earning per share of between $1.19 to $1.29. These ranges assume the R&D tax credit will be extended and retroactive to the beginning of this calendar year. Also we do expect earnings for fiscal year '09 to be shaped similarly to this current fiscal year or past fiscal year '08 with the second half being stronger than the first half though not to quite the same extent as this current year.

So in summary our overall earnings per performance for fiscal year '08 was pretty consistent with the low-end of our range when adjusted for the higher tax rate due to only three quarters worth of R&D tax credits and the additional R&D and startup expenses associated with the ViaSat-1 satellite initiative.

The second half of the year was quite strong with earnings of about $0.81 a share on a non-GAAP basis. So returning to our two-pronged task, we believe our current outlook for fiscal year '09 in the $1.55 to $1.65 range on a non-GAAP basis seems quite achievable. Even give our ViaSat-1 investment plans and the extension of the R&D tax credit into 2008, 2009 calendar years and that would put us in the range of about 15% or so year-over-year growth in non-GAAP earning per share.

We anticipate that earnings growth would be driven primarily by our government business and especially by product sales. On the commercial side despite the expected decrease in Ka-band consumer networks earnings due to satellite capacity constraints we anticipate that growth in most of our other commercial areas will offset that. We see potential for good margins due to our higher portion of sales and products, but also note the product sales for us tend to carry less backlog; so timing of contract awards can certainly affect quarterly results.

Going into the first quarter of fiscal year '09 we've got a little bit of head start because of product orders that slipped out of the last quarter of fiscal '08 and we also believe we are making good progress on that second prong on construction of satellite asset. That includes satellite and ground segment designing construction, working with potential partners on financing, applications and distribution.

Overall we remain optimistic about our long-term growth outlook. We like the markets that we address and believe we’ve got sustainable competitive positions in our target segments. In the longer-term we see excellent opportunities in leveraging high capacity Ka-band satellites both domestically and international.

That concludes our prepared statements and at this point we would be happy to open it up for questions.

Question and Answer Session

Operator

(Operator Instructions) We will take our first question from Chris Quilty with Raymond James.

Chris Quilty - Raymond James

Question for you; the fourth quarter SG&A was down below levels I would have expected. Was there anything in particular that you would attribute that to and what should we look for in terms of on a go forward basis, either the SG&A on a growth basis or on an absolute percentage of sales?

Mark Dankberg

Well, I think what we do Chris is we make trades with those discretionary accounts to the extent that we can within the period, we will make investment in those areas and throttle back where we think we need the performance, so what we don’t like to do is isolate any one element of that and I think we expect just normal growth in SG&A year-over-year Ron, on the other percentage next year that we are targeting. Now, we've got that model I think you guys do to and I don’t think you ought to change what I have seen out there, right.

Chris Quilty - Raymond James

Okay, fair enough and just for the next year, I mean your overall revenue guidance is down by about $20 million. Is it fair to assume that it's all in the consumer broadband business?

Mark Dankberg

Yes I think if you look in our commercial business basically consumer broadband revenue will certainly be down, but we think on an earnings basis due to the effects that we describe because of the earnings growth and decreased investments in enterprise VSAT and ICT that will achieve pretty much the targeted earning with lower revenue.

Chris Quilty - Raymond James

Okay and on your discussion on ViaSat-1 program, when you say $400 million through launch that is including in the launch I assume?

Mark Dankberg

Yes.

Chris Quilty - Raymond James

Okay and you obviously haven’t started to target any of those launch providers at this point in time?

Mark Dankberg

I would say no we are engaged in launch provider discussions.

Chris Quilty - Raymond James

Okay fair enough and in terms of the order for the Lot 9 on the MIDS, what time is it realistic to assume that. I mean is that a first half of the year event or a back half and what should be driving the timing decision there?

Mark Dankberg

We would say it’s eminent. It would be a good way to discuss it. We expect it in the next couple of weeks I would say.

Chris Quilty - Raymond James

Okay and in terms of development on both MID-J and BlueForce tracking, can you give us an update?

Mark Dankberg

On MIDS-J as I mentioned there was an increase in the funding commitment that we received right at the very beginning of this fiscal year and that covers the program as described. There are other potential increases to MIDS JTRS. The one that we’ve identified in the past and that we think is sort of enabled as we look at the sequence of events and the extension, the funding commitment that they just gave us is intended to support this airborne networking waveform. That’s kind of 10s, low 10s, mid 10s of millions of dollars kind of range for that. Then there are a couple of other things that are sort of also in the works, but are not yet as mature as the airborne network from waveform for MIDS-J. On BlueForce tracking, the kind of the next steps would be limited or what they call lower rate initial production, kind of a small number of initial terminals and probably enhancements to the prototypes types that we have done already and that’s what’s in the works now and we will be able to talk about that I would say munch more in the next quarter.

Chris Quilty – Raymond James

Okay, I think last year at the time the contract was originally announced you were talking about possible [Inaudible] within a year and it sounds like that’s within a little bit but certainly it’s something you would expect before the end of the year?

Mark Dankberg

Its, yes I mean based on the discussions that we are having now and the timing that the government customers says that they want, that’s what seems likely.

Chris Quilty – Raymond James

Okay and final question, your maritime product that you are doing with the -- sorry I got a background phone here. I’ll pull it out of the wall. If you could give us an update on the maritime products and the ArcLight modem?

Mark Dankberg

Well, we’ve been going after maritime business. We have got a partnership that we have been developing with KVH. I think KVH reports on that as well. We are pretty pleased with how that’s done and we are looking to expand it. They have had good demand for the product and I would say pretty robust use by those that have bought it and so that’s when I referred to expanding the geographic coverage areas for maritime, airborne that’s an important part of our plans for that area. Does that answer your question there?

Chris Quilty – Raymond James

Yes it does, but you are really dependent on the rate at which FDS builds out those ground earth stations correct?

Mark Dankberg

I wouldn’t say that. I would say that is one of the things that we talked about. We talked about kind of relationship with a set of regional satellite operator partners. I think what’s going on is that the products and without say kind of our view is; one of the things about our network is the ability to support multiple products. Multiple products meaning things like business aviation or commercial aviation, maritime, other ground, mobile, even defense applications on a single platform and so the fact that we’ve had good growth in the uptake of platforms and that some of those platforms just will either fly or just sail from one place to another makes it pretty attractive to other regional partners to just say, “hey, oh yeah, I’d like some revenue” if those platforms come into my area and so that we are working on with our expansion plans and it goes beyond any single individual satellite operator.

Operator

(Operator Instructions). Will move to Rich Valera with Needham

Richard Valera - Needham & Company

Mark in your prepared remarks you talked about a potential North American reseller partner a year away. Just wondering what would limit it to not being closer? Is it just conservatism on your part or could that happen sort of sooner, but you just don’t want to promise that?

Mark Dankberg

Definitely don’t want to promise. I am trying not to over promise, that’s in one practice. I would say there’s like two considerations that go into this when we talk to people about our satellite. Number one is we are happy with the response and interest that we’ve got for sure okay, pretty much everyone we talked to, but one camp will say “well okay, three years is pretty far away. I’m really, really interested, but when we get closer maybe we can discuss in more detail.” So, that’s an understandable response. We are also getting others you say, “oh okay I know its far away, but if I am really interested in having satellite capacity like that, it will never be closer than three year from anyone and if I really want to use it or use a lot of it then I should engage in discussions now” and so we’ve actually had both favors of responses and we don’t know if the second ones will really -- how those will play out. It’s still a little early in the process and that’s kind of a snapshot of what’s going on there. Does that make sense?

Richard Valera - Needham & Company

Yes that’s helpful. I just wondered if you have any sort of commentary on the progress with Cisco with the AcceleNet products. It seems like those are pretty key to, improving the profitability and offsetting some of the lower WildBlue sales. Is there any commentary you can give us on how that’s going or visibility sort of ramp there?

Mark Dankberg

Yes, we’d say it’s early in the process. They did a global rollout just a weak or two or actually it’s the end of January when they announced it and we think overall Cisco, their response to the wireless product seems to have been good. We are seeing a lot of increased pipeline activity the way I’d describe it with some early result. It’s a little too soon to call it either way, but I would say that we are pretty happy so far, that way we really need to see that turn into other results most likely in the second and third quarter.

Richard Valera - Needham & Company

Okay and so, just try to gauge I mean how risky this ramp is since it seems like from a profitability perspective that’s pretty important in sort of making it up. I mean is there -- just trying to get any sense of how conservative or aggressive I guess you’ve been in terms of that ramp expectation?

Mark Dankberg

Well, we would say we have been reasonable. There is two components to the improvement; one is less spending, so we have a lot of control over that one and the other one is improved sales and where we are now is if you just go through the sales cycle on this, one of the things that the sale cycle included is trials. That, I think it’s a product that’s well suited for trails where what you do is you bring your customer into a trail program, give them a server and have them put clients in the field and one of the things that we are seeing is it is a lot more activity at the front end to the pipeline and that’s kind of all you could want at the very beginning of a process. So, as far as we’re -- I think we feel like we serve a reasonable position, put it in the middle.

Richard Valera - Needham & Company

Okay, just one final one. To say you hit the midpoint of your revenue guidance, can you give us a sense of the relative growth rates expected in the government and commercial businesses?

Mark Dankberg

I think when you look at the growth and profitability, I think what we said is a lot of the growth is going to come in the government side, some on the commercial side. Within the commercial side we expected within our antennas, systems area, some of our mobile satellite services and mobile broadband and there will be some reduction we expect in the consumer broadband side. From a profitability standpoint, some of our activities that we’ve done in our enterprise VSAT as well as in our ICT side, with a little bit of activity we can see a much higher earnings turnaround in those areas. So, profitability wise we see the offset of those items against the consumer broadband, those are lower sales we expect from the consumer broadband.

Ronald Wangerin

I mean what we are saying is if you look at it on a dollar basis, most of the growth in absolute dollar earnings will be in government.

Mark Dankberg

In government correct. Is that the point…

Richard Valera - Needham & Company

I was getting just to the revenue, sort of absolute revenue growth in the respective categories.

Mark Dankberg

That would be a higher rate of growth in the government system side versus the commercial sides…

Richard Valera - Needham & Company

Do you still expect growth in the commercial side?

Ronald Wangerin

It’s fairly moderate this year because of the decline in consumer broadband. Now we’ve got really good growth in both Government SATCOM and information security. In both those we are expecting above 20% growth rate and so given an overall growth rate that will be given you around 15%. The commercial side of business we are expecting very nominal growth.

Operator

And we will move onto Tom Watts with Cowen & Company.

Thomas Watts – Cowen & Company

You mentioned the order more than $100 million you gotten in tactical Data Links alone early this quarter. Can you comment overall how orders are coming so far in the quarter and could we see a quarter over a $160 million or $170 million in orders?

Mark Dankberg

Yes, absolute. Just to be clear we said we are targeting over a 100, that’s kind of what we think is achievable for that particular area and yes definitely we could see doing better than 160 and 170 and what we would like to see as I said before is the combination of the two quarter when you look at Q4 plus Q1 that someone would look at those and say “yes, that’s consistent with the kind of growth that we are looking at” which should get us in the 640’s range in the revenue next year.

Thomas Watts - Cowen & Company

Okay and then on the consumer broadband terminals, did I understand that the inventory increase was primarily related to those and how much of that is in consumer broadband and are you holding inventory that is to be shipped under contract to some of those customers?

Mark Dankberg

On the inventory side there’s really two components for some of the growth. The first is in some of our government products areas where we were building to a product forecast and with some of the new contract towards being delayed kind of it’s a timing issue and we believe that will be worked out over the next quarter or two. .

Ronald Wangerin

Mainly KB 250.

Mark Dankberg

The other primary cause is from the consumer broadband equipment and we are working with both demand on the manufacturing side as well as our customer side to get that back down to more normalized levels.

Thomas Watts - Cowen & Company

Okay, then on the consumer broadband you mentioned some software success that could increase capacity and some of the sold out beams; is this a 5% or 10% and also what has the WildBlue said recently about -- what are your installed rates running? Are they below 10,000 at this point per month?

Mark Dankberg

As far as this is they are just planned product evolutions that we and WildBlue both were planning to deploy. So, those are being rolled out and I think we said once of course the actual amount of capacity increase of debt we will depend a little bit and how they manage the service, but you could expect something in the 25%, 30%, 35% range and those are our estimates. I really don’t think it would be less than 25%, its really up to them how they manage their network, could be in a 30%, 35% plus percent range in terms of capacity increases. So, that will open up meaningful amounts of capacity in all there sold out beams and WildBlue has made public statements that said that they expect that they -- not they expect that they have reopened all of their beams, but they expect to be able to add new subscribers to all other beams throughout this year, so that also sort of calibrate that and I think that their add rate should actually have been a little more robust in what they thought. I will think that in some of the segments they have made in conferences that is over 10,000 a month so far.

Thomas Watts – Cowen & Company

Okay and just a final question on that the KaSat, could you update us where -- at some point do you anticipate orders starting to accelerate there and what are they doing on the distribution side to make that happen?

Mark Dankberg

Well KaSat in one way, what you will find about this is a kind of a continuation of Tooway service that they have launched now on their Hot Bird Satellites and they’ve had lots of demand there. The main issue is they just don’t have sufficient capacity at bandwidth pricing that’s consistent with the offer they want to make. So, that’s what’s going to broad all terminal orders in the next two years and what we would expect to see with KaSat is probably sometime this year an infrastructure order that would just be a repayable. What we had installed with Intel software you’ll see an infrastructure order ahead of the satellite launch and some nominal amounts of terminals that would be ordered as well and then ramps once the satellite is launched. So, kind of the near term targets in Ka-band for Europe would be -- and we’ve kind of talk about these numbers before on a low 10’s of thousands of total terminals that could be deployed on Hot Bird. I would say kind of low 10’s of million of dollars in infrastructure orders that would go along with the satellite at some point.

Thomas Watts – Cowen & Company

Could that be the current year?

Mark Dankberg

Yes it could.

Operator

And we will move on to Jim McIlree with Collins Stewart.

James McIlree - Collins Stewart

On the tax rate you say that 28% for the year, so how are you going to accrue for that? Are you assuming a higher tax rate in the June quarter and then going down to 28% or taking a catch up when it gets, should it be reinstated?

Mark Dankberg

Well, to the extent that it’s not reinstated at the end of the fiscal first quarter we would have to exclude it from our overall effective rate calculation. So, we would be using a higher rate earlier in the year. Then should it be reinstated depending upon what the terms of the reinstatement are we would have adjusted our rate accordingly.

James McIlree - Collins Stewart

Right, so if it’s retroactive then you will take a -- you will catch up in whatever quarter that’s implemented?

Mark Dankberg

Correct.

James McIlree - Collins Stewart

Okay, great and on the R&D spending Ron I think you’re suggesting flat year-over-year, but you also mentioned that ICT and Enterprise VSAT consumed $7 million of spending. I am assuming that spending goes down but it doesn’t go down to zero is that correct?

Ronald Wangerin

Well, the spending in those two areas was not just -- I think what I said was relate it to the ViaSat-1 was $3 million and we invested $4 million in ICT, not all of which is R&D for the ICT piece. The significant portion provides that one less R&D, so when we look at the overall again we view R&D as another discretionary component and for fiscal year ’09 we see it flat to slightly lower year-over-year. So, depending it will be a mix of between the areas, the other parts of the business.

James McIlree - Collins Stewart

Okay and so what would get the attention for R&D spending in fiscal ’09?

Ronald Wangerin

We have some continued investments in our information Next Generation Information Assurance products as well as in the first part of the year continuing for our unmanned aerial vehicle products, we do have and throughout the year some planned investments for ViaSat-1 on the next generation SurfBeam system. Those will be the three primary areas and then there will be normal levels of spending in other products areas, some for data links and some for SATCOM area.

James McIlree - Collins Stewart

Right, so I am assuming now that the ViaSat-1 investment goes up substantially versus the $3 million that you spent in fiscal ’08.

Ronald Wangerin

Yeah.

James McIlree - Collins Stewart

Okay that $3 million it can’t be a good run rate for the year, can it?

Mark Dankberg

Well, I think what we said when we talked about the launch of the project back in early January that those are primarily over the second half of the year. So, it depends on the timing and nature of some of the potential manufacturing/development and manufacturing contracts that we get as well, but it’s a relatively constant rate throughout the year but a obviously higher year-over-year since most of the spending for the ViaSat-1 next generation system occurred in the latter of the year.

Ronald Wangerin

It’s probably on a quarter-by-quarter basis the piece that we’ll put in R&D is probably a little less than that, but not a lot. We kind of gave you an idea of what we thought would be an expense in the current year in our Q3 conference call.

James McIlree - Collins Stewart

Okay and the MIDS order that you are hoping for eminently, would there be a deliveries on that this quarter, the June quarter?

Mark Dankberg

No. The normal [Inaudible]

Ronald Wangerin

Hoping for isn’t that a good way to characterize, I would say we have sort of been notified.

James McIlree - Collins Stewart

Right, right I am just trying to differentiate between it hasn’t actually been awarded in.

Mark Dankberg

Okay that’s fine.

James McIlree - Collins Stewart

And then usually the June quarter is kind of flattish down sequential from the March quarter but the March quarter was kind of weak, so is it reasonable to think of that same seasonal pattern or a little bit different this year.

Mark Dankberg

Yeah, I think we do expect that and I think as made in the statement, it may not be as severe as last year, if you remember last year’s Q1 was way off, but I think, Jim I think all of your guys have models out there; we don’t generally comment on analysts things, but in general I think people understand the locality of it and have a pretty good idea where it’s going to be.

Ronald Wangerin

Okay, so I think that’s it for all the questions and that’s all for our conference call for today. Thank you all very much for listening and we will look forward to speaking with you again next quarter.

Operator

That does conclude our conference call for today and we do thank you everyone for their participation.

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Source: ViaSat Inc F4Q08 (Qtr End 03/28/08) Earnings Call Transcript

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