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Executives

Mark Dankberg – Chairman and CEO

Keven Lippert – VP, General Counsel and Secretary

Ron Wangerin – VP and CFO

Rick Baldridge – President and COO

Analysts

Richard Valera – Needham & Company

Thomas Watts – SG Cowen

Steve Ferranti – Stevens, Inc.

James McIlree – Collins Stewart

Chris Quilty – Raymond James & Associates

ViaSat, Inc. (VSAT) Q1 2009 Earnings Call Transcript August 5, 2008 11:00 AM ET

Operator

Welcome to ViaSat fiscal year 2009 first quarter earnings conference call. Today's conference is being recorded. Your host for today call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Mark Dankberg

Good morning everyone and welcome to ViaSat's earnings conference call for our first quarter of fiscal year 2009. I'm Mark Dankberg, Chairman and CEO, and I've got with me, Richard Baldridge, our President and Chief Operating Officer; Ronald Wangerin, Vice President and Chief Financial Officer, and Keven Lippert, our General Counsel.

Before we start, Keven will provide our Safe Harbor disclosure.

Keven Lippert

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

We would like to caution you that actual results could differ materially from those contemplated by our forward-looking statements. We refer you to those 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 on which they are made and we undertake no obligation to update any forward-looking statements.

Mark Dankberg

Okay. Thanks Keven. We will be referring to slides that are available over the Web, and we'll start with our fiscal year '09 first quarter financial results and our business overview perspective and some business highlights and discussion. And then after that, Ron Wangerin will discuss financial results in detail and update our outlook for the fiscal year and then we'll take questions.

As you can see, our first quarter results were very good, showing strong growth over last year which was itself overall a record year for us. We had record new orders of about $206 million and we'll discuss some of the more significant ones shortly.

Our revenues reached a new record at $153 million, up 19% year-over-year. We earned $0.29 per share on a non-GAAP diluted basis, up 38% compared to $0.21 last year, and GAAP net earnings per share was $0.20, which is 54% higher than last year's $0.13. Income before tax was up 66% over the same period last year, which we think is very good and reflects that we improved margins significantly.

You can also see that our effective tax rate this year is at about 35% compared to about 27% last year and this reflects the fact that there is not yet in legislation renewing the Federal R&D tax credit for calendar year 2008. The higher tax rate reduced our earnings by several cents a share this quarter.

Let's take a quick overview and put those top-level first quarter financial results in context. In summarizing the key financial points for 2001, we had a very good quarter for new contract orders. Some of the highlights there included a very good share of MIDS low volume terminal LVT Lot 9 production order, and additional funding on the joint tactical radio system or JTRS version of MIDS.

Orders for our inline network encryptor product like KG-250 were up sequentially, reflecting some pent up demand that was freed up by implementation of a revised delivery order agreement which had constrained sales in the last quarter. We also won an important addition to our previously announced joint IP modem contract that expands the target applications for that new standard depend [ph] satellite modem system.

Commercial orders and Ka-band broadband were in line with our plans and we also received an order for mobile broadband network infrastructure from KVH. That could be pretty strategic in terms of global, maritime, and aviation coverage.

We think we've got a pretty good shot at having another very good quarter for orders and we will talk about that as we discuss the business area highlights and outlook.

Margins and earnings in our core businesses were really quite strong, with pretax earnings up 66% compared to the same quarter last year. We're optimistic about the growth opportunities in a number of our business areas, so we continue to make discretionary investments to the extent that we can, consistent with our annual earnings objectives.

In the first quarter, we invested significantly in R&D, as well as other discretionary support expenses around new LINK 16 and UAV tactical terminals, next generation information assurance products, next generation Ka-band broadband ground segment, planning costs support potential Ka-band partnerships, and expenses to support the initial rollout of our AcceleNet WAAS or Wide Area Application Services mobile product through our OEM contracts.

It's always a balancing act to manage immediate and longer term results, but we think the investments we're making today are consistent with the kinds of investments we've made in the past that have contributed to our steady growth. We'll talk a little more about the potential for some of these areas when we get to the business areas.

Congress has not yet passed the Federal R&D Tax Credit Legislation for calendar year 2008. As I mentioned already, our tax rate is 8 percentage points higher than it would otherwise be. Assuming that credit is extended, then we'll get the benefit of that later this fiscal year.

We will look at some of the business highlights and start with the government area. Tactical data links is still our largest government area. We had very good orders in the first quarter including both the low-volume terminal production order and extended funding on MIDS JTRS.

Overall, we believe that MIDS Joint Tactical Radio System program as well as our competitive position has strengthened over the last few months. After the quarter closed, we were selected in a competitive procurement for the next lot of MIDS JTRS production transition terminals.

Our overall MIDS revenues for this year are anticipated to be pretty flat compared with last year. At this point, we anticipate that new orders in that area could increase by 10% to 20% compared to last year.

Sales had a good quarter for orders in complex communications environment simulators and we've also been investing a fair amount in R&D for next generation tactical UAV video data links. We've been earning design wins on some new platforms and anticipate those to turn into orders later this fiscal year.

Sales of existing products in the tactical UAV area have been in line with our plans to date. Results in the information assurance area were improved sequentially. As mentioned previously, sales of the in line network encryptor products have been delayed, pending implementation of a new delivery order agreement contract that [ph] was put in place. And so far, we are seeing orders and shipments that are pretty much in line with expectations.

We've continued to see incremental funding on the information assurance projects and are forecasting some meaningful orders in that area in this quarter. We also anticipate the government to select an initial contractor for media encryptors this quarter. That would not likely result in a large initial contract value but we expect to see good potential growth in the opportunity for Type 1 secure encryption of data at-rest.

Results in our government satellite area were very good. Orders, revenues, and earnings were strong from mix of products including the E-Band modems that are used on the wideband global satellite system, UHF satellite modems and software, and network upgrades, commercial link wave VSATs used in defense networks, and additional development work on the new standard joint IP modem and networking modem.

The orders outlook in this current quarter is also quite positive for satellite products. Initial testing of our Blue Force Tracking prototypes has been positive and we're engaged in negotiations for the next phase, which would be the next step towards the volume production and deployment program. We're also working hard on getting a jump on the market for the next generation Mobile User Objective System UHF satellite constellation ground segment, which is what we would be participating in, and we're in negotiations around an opportunity there.

We announced the first deployment of our ArcLight comm-on-the-move products by US Special Forces for aviation applications, and think that that is an important application in gaining more widespread Ku-band comm on the move for opportunities in DoD and we're seeing some follow-on orders.

During the quarter, DoD approved proceeding with the TSAT program which is about $15 billion multiyear defense satellite network. We have a very significant role on the Lockheed Martin team and that would have quite a positive incremental impact on our outlook, if they are selected. We're also investing in another significant defense satellite ground segment proposal opportunity.

On the commercial side, one important point is that the outlook for a consumer Ka-band broadband has improved relative to a quarter ago. WildBlue announced completion of network infrastructure capacity enhancements that opened up all their geographic coverage areas. Also, DirecTV began significant distribution of their Ka-band broadband service which is powered by WildBlue.

So, consumer Ka has been a little better than expected, and as pipeline inventory has been consumed, the forecasted terminal shipment is growing. We also have continued to deploy both Ka-band and Ku-band two-way product with Eutelsat in Europe, and we have seen the very beginnings of infrastructure orders associated with our next generation Ka-Sat satellite which is planned for launch in 2010, just about two years from now. Antenna systems results were very good and we continue to see good opportunity flow.

In recent quarters, we've been more focused on our conventional VSAT business and are seeing improvements there. There are some good opportunities that enable significant growth and we may have more to report there next quarter. We announced an important agreement with KVH that will increase our ArcLight mobile broadband system to near global coverage by the end of 2009.

KVH has had very good initial success in maritime applications and we've agreed to make them our exclusive partner there going forward. They ordered network infrastructure to light up important areas including Asia Pacific. We also have a services agreement that allows us to participate in ongoing revenue and creates roaming agreements between us. So the global ArcLight networks will support maritime and aviation services both.

We believe this will both stimulate demand for additional user terminals and increase the usage on existing terminals outside their initial coverage areas. Usage data for the few hundred existing maritime and general aviation terminals is pretty exciting. Customers seemed happy with broadband service feed and airtime pricing compared to the alternatives they have had using mobile satellite services bands. Pieces are also falling into place here and we are aiming to increase our distribution agreement and services channels over the next couple of quarters.

The recurring services component of the business will be reported in our satellite services segment. Obviously, the commercial aviation market is challenged right now and we're pleased to have these additional outlets for the mobile broadband products and services.

One particular commercial aviation opportunity, which is a little bit of a special case, continues to progress though despite being delayed relative to original plans. Another very interesting area for us right now is the wide area network optimization market and especially our OEM agreement with Cisco for their Wide Area Application Services or WAAS mobile product.

Cisco has had a good ramp on their WAAS appliance business. WAAS mobile opportunity is anticipated to be an important component of that total market. We are in the earliest parts of the ramp up with actual costumer sales data for just a couple of months or so. And even in that period, it was influenced by a planned product upgrade release which occurred during that time. It's taking a little longer to get started than we anticipated but the month-to-month growth rates are exciting even though the numbers are still very small.

It will probably take another quarter or two to have a better estimate of the growth trajectory. Support for the OEM agreement might impact us as much as $0.02 to $0.03 this quarter depending on the ramp rate. We think it's definitely worth sustaining that right now.

I'd encourage investors to both look into the WAAS market opportunity as well as industry reception to our AcceleNet product. Both of those are quite encouraging.

We'll talk a little bit about the ViaSat-1 in our Ka-Band. At this point, progress on ViaSat-1 in next generation Ka-Band is pretty much consistent with our plans. For seven months into the plan, 36 months satellite construction as scheduled. Capital costs and scheduled estimates are still overall consistent with our estimates at the start of the project. We've accomplished quite a lot in terms of details on the satellite design, the gateway infrastructure design, the ground segment, and service planning.

All of that are still pretty much consistent with our plans when we began. There's been a lot of technical work done in these areas. We've been engaged in a lot of discussions on other Ka-band broadband projects around the world. It's still too soon to tell how those will play out. We do expect at least a few satellites that will have Ka-band partial payloads along the lines of WildBlue-1 or Anik F2 type of satellite in some new coverage areas such as the Middle East. We also are working with potential satellite operators that are interested in very high capacity Ka payloads along the lines of ViaSat-1 or Ka-Sat, but in additional regions.

We continue to believe we will be well positioned to compete on those as those projects mature. We've been participating in market analyses for multiple geographic regions and the market factors in those regions were essentially the same as and consistent with the underlying market factors that make ViaSat-1 and Ka-Sat so compelling in North America and Europe.

Providing ground segment for additional Ka-band satellites would have a positive impact on our outlook leading us to the launch of ViaSat-1. We've also engaged in discussions for additional applications besides the direct-to-home consumer broadband market in both the US and Europe.

In general, those discussions support our initial assessment that there would be meaningful demand for other applications such as local and regional video distribution, video contribution uplinks, mobile broadband, and 3G or 4G wireless backhaul that will be much more economically served by these next generation Ka-band satellites.

At this point, we can't provide very much additional detail on partnership or investment discussions, but I'll try to add a little color to help convey our thought process. First, we're engaged in a constant flow of what we consider to be worthwhile discussions. There's a lot of interest. That includes both financial and the strategic investment and/or partnerships.

At this point, we're spending more time on the strategic partnership discussions as we believe they will convey greater value. Pretty much by definition, the strategic discussions are more unique to the specifics of each party. So, once you think of them as a series of rifle shots as opposed to a parallel or more shotgun approach involving a more uniform relationship with multiple potential candidates. In each case, the discussions also involve each party learning more about the risks and opportunities associated with each particular strategic area. We believe that both we and our potential partners find these discussions valuable.

While we have no announcements to make, we have not learned anything that we believe that is inconsistent with the underlying principles of our project. On the contrary, we believe that we and our potential partners have a more thorough and nuanced perspective on the details of the various broadband markets and we are, if anything, more encouraged about the long-term success of the project.

Because of the quantity and diversity of potential strategic relationships, we have to carefully manage our time and resources in considering them and we're spending more time with those where we anticipate a greater likelihood of resolution in the near term.

That contrast with other potential partnerships that were also optimistic about that will probably not mature until significantly closer to the satellite launch. We think there will be some resolution on one or conceivably two potential strategic relationships this year. But of course, we cannot dictate those time tables. We think the sequence of events is important and that other potential partnerships would be influenced by the right sequence, and we believe we're prepared for a patient and prudent approach.

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

Ron Wangerin

Thanks Mark. We will start with the P&L and segment results, then cover the balance sheet and cash flows. As Mark mentioned, operating results for the first quarter were very good. Revenues were $153 million, a new record, and a 19% increase over the first quarter of last year. The cost of revenue percentage reductions reflected improved margin performance particularly in our government product areas.

Selling, general, and administrative expenses were higher year-over-year mostly due to higher selling and support costs from increased business activity, as well as legal and other costs associated with our Ka-band satellite initiatives.

R&D was up significantly in the first quarter year-over-year due to the development of next generation tactical data link, information assurance, unmanned aerial vehicle, and broadband technologies. This reflects the market demand the company sees in these future products and its desire to increase the phase of investments in these key technologies.

Quarterly amortization of intangibles was slightly lower for the first quarter year-over-year due to the completed amortization of certain intangibles partially offset by the amortization of new intangibles from our JAST acquisition in the second quarter last year. Income from operations for the first quarter of fiscal year 2009 includes non-cash stock based compensation expenses of $2.2 million and it was $1.8 million for fiscal year 2008 first quarter.

Despite similar year-over-year average invested cash balances, other income decreased due to lower interest income earned from lower interest rates year-over-year. Our income tax provision for the first quarter reflects a quarterly tax rate of about 35% versus 27% in the first quarter of last year. The fiscal year 2009 effective tax rate does not include any benefit related to the federal R&D tax credit, whereas the fiscal year 2008 rate did.

Without the federal R&D tax credit, we expect the full year rate to be about 34% this year. Minority interest decreased slightly due to lower operating results in the quarter for our majority owned subsidiary TrellisWare versus the same quarter last year. So, all up, our pretax income was up by about 66% on revenue increases of 19%, despite increase in our R&D investments by $2.5 million, and net income and earnings per share were impacted by the delay in the extension of the R&D credit. We will address the difference between GAAP and non-GAAP earnings per share in a few slides.

In looking at our segments, if you recall, last quarter we made management and organizational changes to better align the organization with our recent strategic changes. Our satellite services segment is primarily comprised of our maritime and airborne mobile broadband and enterprise VSAT services, as well as our ViaSat-1 satellite.

Our commercial network segment comprises our former satellite networks and antenna system segments, except for the satellite services segment. We have 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 first quarter was $88.6 million, a 26% increase over the same period last year. The increase for the quarter is primarily related to sales of information assurance products in next generation military SATCOM systems, partially offset by lower development revenues of next generation tactical data link products and a change in accounting on MIDS production from the percent complete basis of accounting based on costs to units to delivery method for production Lot 8.

In the commercial network segment, revenues for the quarter were $52.9 million, a 12% increase over the same period last year. The year-over-year quarter increase is primarily related to mobile satellite enterprise VSAT and antenna system sales, offset by a decrease in consumer broadband sales.

For satellite services for the first quarter, sales were slightly lower year-over-year. In the first quarter, government systems segment posted operating earnings of $12.1 million, an increase of 96% from the prior year. The year-over-year operating earnings increase is due to higher revenues, improved margin in our SATCOM and information assurance products, offset partially by higher R&D investments of next generation tactical data link, information assurance, and UAV products, higher new business investment costs, and the change on MIDS mentioned earlier.

Commercial network segment operating profits were basically flat for the first quarter year-over-year. Although we experienced improved performance at our mobile satellite and antenna system areas, these were offset by reduced earnings from our consumer broadband product and from investment in our AcceleNet and next generation consumer broadband products.

For satellite services for the first quarter, the operating loss was higher year-over-year primarily due to legal and other costs associated with the ViaSat-1 satellite. For the first quarter for fiscal year 2009, operating earnings amount include non-cash share based compensation expense charges of approximately $2.2 million and they were $1.8 million in the first quarter 2008.

As we look at the GAAP and non-GAAP earnings per share differences, non-GAAP results exclude the effects of acquisition related intangibles and the effects of non-cash share-based compensation expenses net of tax. The changes year-over-year are primarily related to higher net income.

Looking at the balance sheet, our balance sheet continues to be strong. Cash and short-term investments decreased by about $14 million from the beginning of the year and we will talk about the movement of cash later when we review cash flows. The accounts receivable decreased on improved collection activities. Unbilled accounts receivable increased primarily due to MIDS progress payment production lot timing, and the timing of other contract milestones.

Inventory was down from the beginning of the fiscal year due to shipment of certain consumer broadband inventory to customers, offset by the transition of some products to units to delivery basis of accounting. Prepaid and other current assets are lower primarily due to lower prepaid supplier payments. Goodwill and intangibles decreased due to regular quarterly amortization. Net property and equipment is up about $16 million in one quarter due to capital additions, of which about $16 million is related to our new satellite project and about $3 million for quarterly facility expansion and test equipment to support out business growth offset by quarterly depreciation.

The change in other long-term assets is primarily due to deferred income taxes and amortization of capitalized software. As we look at liabilities and equities, accounts payable decreased despite revenue increasing. Days payable balances with our suppliers improved and is below historical averages. The biggest change in our balance sheet for the quarter was in advances, which were down mostly in our commercial segment reflecting the timing of receipts and contract milestones on certain mobile satellites and antenna systems programs. This balance is now back in line with historical level, but as we saw, it can fluctuate significantly from quarter to quarter.

The change in other current liabilities primarily relates to the payment of the secured borrowing in the first quarter of about $5.1 million associated with an enterprise VSAT program and the payment of discretionary compensation accruals of $4.7 million partially offset by changes in warranty and employee-related accruals.

Increase in other long-term liabilities is primarily related to an increase in long-term deferred revenues. Regarding the minority interest change, in the first quarter, our majority owned subsidiaries sold stock to existing stockholders. We also invested in the transaction to maintain our equity percentage. The result was an increase in minority interest of $1.5 million.

At the end of the quarter, we continue to have no outstanding borrowings, leaving our full line of credit available less standby letters of credit. As of quarter end, we had about $53 million available under our line of credit. We are in the process of expanding and increasing our credit facility through a new syndication.

As we look at cash flows, we had good net income and non-cash outback which was offset by changes in working capital. The net change in working capital is almost all related to advances which we discussed earlier, and the result is a modest increase in cash from operations. Cash flows related to investing activities for the quarters reflects capital expenditures for our satellite projects and business expansion activities as our company continues to grow and capital expenditures for licenses and patents related to our satellite project as well.

Cash use and financing activities is primarily from the payments on the secured borrowing, offset by stock issuance from our majority owned subsidiary and the net proceeds from common stock issuance. Our forecast for generating cash from operations is consistent with our previous estimates and our outlook at the time we announced our ViaSat-1 project.

I'd like to turn it back to Mark now to discuss our outlook.

Mark Dankberg

Okay. Thanks, Ron. At this point, I will give a quick update on our outlook for the rest of the fiscal year. Our outlook for the year as a whole remains pretty consistent with our estimates last quarter. At this point, based on awards timing, we might want to narrow the revenue range a little bit, consistent with where we see a reasonable midpoint of revenue in the mid $600 million.

We are still aiming at the same range of GAAP and non-GAAP earnings per share. Our estimates for both of those are based on a tax rate that's consistent with the federal R&D tax credit being extended and retroactive to the beginning of calendar year 2008.

Our estimate for timing has a little higher percentage of the total fiscal year earnings in the second half of the year that is indicated by the current consensus of analyst estimates. Much of the difference is due to the timing of the R&D tax credit. We expect earnings in the second quarter to be sequentially higher than the first quarter and have stronger earnings growth in the second half.

The growth rate on the AcceleNet WAAS Mobile is a little bit of a wildcard. To date, we have had good ramp rate, but on very small numbers. Based on that and the very favorable industry reviews and feedback we are getting, it makes complete sense for us to continue to support that at the level we have been, even though at this point, it's likely to impact earnings in the second quarter by a couple of cents a share or so.

We expect to know a lot more about the growth trends next quarter. There are several factors that effect the higher second half outlook including the shift that Ron mentioned earlier regarding delivery based accounting on MIDS LVT production, the benefits in the second half of the strong awards in the first half, renewed inline network encryptor order flow associated with the updated delivery order agreement, good order flow for (inaudible) government satellite products, forecasted higher shipment rates for consumer broadband in the third and fourth quarters, improvement in satellite services results including the effects of mobile broadband recurring revenue, resolution of pending orders in the VSAT products area, and anticipated continued growth in the OEM sales of AcceleNet.

Overall, we believe that the pace and mix of new contract awards is consistent with our view of the overall fiscal year targets and we recognize the uncertainties around the timing of R&D tax credit, but overall believe that the benefits of the tax credit for us are quite worthwhile.

So, now to summarize and in that regard, our overall earnings performance for the first quarter of fiscal year '09 was pretty consistent with our pretax objectives and reflected solid year-over-year growth. The higher tax rate due to not yet having the R&D tax credit reinstated had about a few cents per share impact on earnings per share.

Record new orders of about $206 million were excellent. We're optimistic about another very good quarter for new orders for this current period. We've got a number of opportunities both commercial and government which have timing consistence with that. A fair amount of our optimism derives from programs or projects that are already underway or involved – already made initial funding commitments or we've been – where we've been selected for award.

In the government side, revenues in our largest area, tactical data links, are anticipated to be relatively flat year-over-year but we anticipate good growth in information assurance and satellite communications, simulation, and tactically UAVs. Year-over-year new orders are expected to increase though in tactical data links as well as all in the other government areas.

On the commercial side, there is positive indications that demand for consumer Ka-band terminals will be stronger than it appeared last quarter. That's due to completion of network upgrades that had a capacity in areas that had been closed to new subscribers and working through pipeline inventory, resulting in increases in contractual order forecast relative to prior levels.

We also had good opportunities in our conventional VSAT business and Ku-band mobile broadband. We've had some small initial commitments on next generation Ka-band broadband and anticipate growth there. The impact of the AcceleNet WAAS Mobile (inaudible) agreement with Cisco is a little bit of a wildcard. But overall, we're still happy with the markets we are addressing and our competitive positioning within those markets. We think we've got some exciting growth opportunities ahead.

And that concludes our prepared remarks, and at this point, we'd be happy to take questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operators instructions) And for our first question, we go to Rich Valera with Needham & Company.

Richard Valera – Needham & Company

Thank you. Good morning. Rick, I was wondering if you could remind us what your cash flow from operations target for fiscal '09 is.

Rick Baldridge

We're looking in the north of $50 million range.

Richard Valera – Needham & Company

Great. And just to triangulate on your expectations for expenditures for ViaSat-1, you'd talk about $135 million of costs associated with that in fiscal ‘09. Can you say how much of that you've actually done year-to-date? And is it safe to say at this point that given the uncertainty of the timing of your strategic discussions that you are going to put to debt capacity in placed to be able to support that $135 million buy yourself at this point?

Ron Wangerin

I guess a couple of responses on that. Regarding the debt capacity, yes, we are expanding our line to a level that we think is appropriate, given our expected expenditures. Regarding the expected level for this year, we're basically spending at a level that we anticipated maybe a week or two slower, but I think that's fairly consistent with our plans. Some of it depends on the timing of some of the milestones that we hit relative to whether it's a launch contract or a satellite contract that could slide a quarter or slide out of a quarter that could influence the total for a year, but we don't see anything that's inconsistent with our original spend plans at this time, Rich.

Richard Valera – Needham & Company

Okay. Mark, in your prepared remarks, you made reference to a project that you are a partner with Lockheed Martin on that you said could be quite significant if they won. Could you just go over that project again with maybe a little more color?

Mark Dankberg

It's called TSAT, and TSAT has been in the work for quite a while. It's about a $15 billion multi-satellite, multi-year development aims for deployment coming at 2016-ish time frame. And we have a pretty big role in the Lockheed team, big meaning more than $100 million of involvement, somewhere in that range. The program has been sort of unclear whether or not it would proceed, but just in past quarter, DoD pretty much firmly decided to make a down select and an award to either – it's between Lockheed and Boeing – pretty much make a down select this year.

Richard Valera – Needham & Company

Great, that's helpful. In terms of the second quarter, should we be thinking about pretty much a full tax rate again for the second quarter since the – it doesn't look like we will get the R&D tax credit in time for that quarter?

Mark Dankberg

Yes, you can judge yourself as well as we can based on what's going on in Congress. I'd say it's probably safer to assume that it probably won't be implemented before the end of the quarter. But it might.

Richard Valera – Needham & Company

Great. That's helpful. Thanks very much guys.

Operator

We'll go next to Tom Watts with SG Cowen.

Thomas Watts – SG Cowen

Congratulations on a solid quarter. Just to clarify, when you say you're focusing on strategic relationships rather than financial, is that going to be primarily distribution, selling to provide distribution and should we think of – if you're going to do that, would that suggest that they're less likely to provide an investment?

Mark Dankberg

I would say, we would use strategic as meaning someone who has an interest in the industry and the industry would be a satellite partner or someone who's a broadband partner. And that broadband, such partners could either end up helping with distribution or facilitating distribution, that's kind of the way we define strategic. And I wouldn't say that because of that, that would mean that they're less likely to make an investment. I'd say that depending on the strategic partner, that still could make sense.

Thomas Watts – SG Cowen

And then also just, could you give us a little bit more color on two-way and how we should think about the take-off of the European market? I know that they've been – they're still putting distributors in place. Are we really waiting for the Ka-band satellite launch in 2010 for the takeoff? And in terms of shipment rates for them, is it still going to 100 per month at this point?

Mark Dankberg

Basically with two-way, the idea is to kind of understand the European market and to, I'd say, test it. And the idea is, in theory, is to kind of make strategic relationships that would be, let's say, blossom with the case of that satellite. And the total market for two-way prior to the launch of KA-SAT is in the tens of thousands as we have talked about before, and I mean it's like 40,000 and 50,000-ish. They may augment that a little bit Ku-band. But it would be in that tens of thousands range and so you could sort of figure between now and then. Now it means thousands per month. That would be kind of between now and two years from now, be it 24 months and tens of thousands of terminals. I'll give you some idea of what that would mean. That would be pretty – I mean I think that would be a really nice start and would help sort to pave the way so you could get a running start when KA-SAT is launched.

Thomas Watts – SG Cowen

And then just finally, you talked about how commercial VSAT was developing very nicely and you are expecting to close some additional orders. Is there something specific happening in that market and is that primarily US based, and are you stealing share or is the market having a little bit of pickup in growth?

Mark Dankberg

I guess the main thing that I'd say is we were just so absorbed in the Ka-band stuff that I'd say we probably neglected the conventional VSAT business a little more – a little bit for a time period. And so, over the last few quarters, we've made it more of a focused area, and I would say that whereas things have been sort of declining for us even when the market itself was growing a little bit, we've reversed that I've say it. So I think we're more holding our own and I think we have a good shot of getting back at least to where we were, and that – we're doing that through a combination of things. I'd say we've announced several product improvements, we've reallocated resources, we've cut costs and we're doing a variety of things that are improving that business but a more, let's say, execution oriented and market oriented.

Thomas Watts – SG Cowen

Thanks.

Operator

And for our next question, we go to Steve Ferranti with Stephens, Incorporated.

Steve Ferranti – Stevens, Inc.

Thanks guys. A quick follow-up on the KA-SAT opportunity with two-way, can you – over the next two years, can you sort of characterize for us how you expect the ramp for the infrastructure piece in it to role out and then when over that two year period you might expect those unit volumes to ramp up to what you described in the previous question?

Mark Dankberg

Okay. It's a little bit hard but I'd say a good way to look at it is sort of compare it to WildBlue in the United States. The WildBlue between their two satellites was about a 10 gigabytes capacity. Ka-Sat in Europe is about 70 gigabytes, so it's like seven times bigger. With WildBlue prior to launch, we did tens of millions of dollars in infrastructure, that being 20-ish million kind of infrastructure. So for Ka-Sat, because it's a lot bigger, you could expect the infrastructure to be bigger. I wouldn't – it's not only bigger by the ratios because of scale we've improved the economics, so the cost – the capital infrastructure cost per subscriber will be probably better than it was, but still you will have kind of like seven times bigger. So that's a factor. And the infrastructure stuff you would expect would be deployed between now and satellite launch in about two years. If you look of what we did with WildBlue in the first – WildBlue and Ka-Sat [ph] combined in the first two or three years, you're looking at a couple of hundred-ish million in terminal sales. So we think we – that's not going to – the uptake rates is going to depend on the distribution, but their capacity is certainly there. It has similar types of results. Does that give you an answer to some of the things you're looking for?

Steve Ferranti – Stephens, Inc.

Yes, absolutely, that was very helpful. And then in terms of the ground infrastructure that you assess, looking at putting in place versus what WildBlue put in place sort of prior to their ramp, is it similar infrastructure wise in terms of number of gateways?

Mark Dankberg

Yes, it is similar. The main thing is – so you can surely look at the ratios of capacity and then what you want to do is they will – you'd expect and we want to deliver efficiencies in capital cost per subscriber. So those two things will balance a little bit but we think the infrastructure opportunity is definitely bigger on Ka-Sat because of the capacity so much higher. And the number of gateways is comparable.

Steve Ferranti – Stephens, Inc.

Okay, great.

Mark Dankberg

We are really – just to be clear. If we are talking about the amount of infrastructure – network hub infrastructure equipment that goes at each gateway.

Steve Ferranti – Stephens, Inc.

Understand, okay. And are there any technology milestone that you've either hit or expect to hit in the near future on either I guess ViaSat-1 or Ka-Sat that would give you an increased confidence level in terms of your ability to hit the capacity targets that you're looking at?

Mark Dankberg

That's a good question. I mean basically a lot of it is, in terms of the capacity, the satellite [ph] that's based on engineering analysis and then that gets turned into specifications for the satellite payload and when we talk about technical progress on the satellite construction contract, we'd go through a series of designer views for the satellite payload and that puts a lot more specificity and the actual hardware implementation of the design. And so we've been having pretty good progress on that. We've been through a preliminary designer view, kind of next milestone around the end of this year would be a critical designer view on the satellite payload itself. And that really is design of the satellite has to be implemented. So that will be the next big milestone; that'd be this year. On the ground segment side, one of the big milestones has to do with things like placement of infrastructure. Kind of the exact placements of infrastructure and then going through the calculations of how that influences the economics and capacity. And that's the other big area that we've been making good progress on.

Steve Ferranti – Stephens, Inc.

Okay, great, very helpful. Last one from me is I guess in terms of the discussions that you've been having to date with strategic partners, can you characterize – are they more skewed towards the consumer broadband distribution under the spectrum or maybe perhaps towards the more traditional video distribution model? Any color you can give us there?

Mark Dankberg

I'd say consumer broadband is one area and just to reiterate we real like that area because it's so well understood and proven in the U.S. and we believe under way in Europe as well. But some of the other ones do involve kind of some of these additional uses, and I would say more traditional video is not, I think that's a good application. And that's not one of the areas that we've been working on these strategic partnerships; it's really more things like wireless backlog – 3G, 4G wireless backlogs is obviously a really good one. There's a lot more sensitivity to coverage areas of 3G now in the world just months ago that's still a hard problem. Some of the kind of more media-centric aspects of Internet also have some good promise for us. Those are kind of more the initial areas.

Steve Ferranti – Stephens, Inc.

Okay, and I assume obviously your guys are – part of the challenge there would be sort of optimizing the highest and best use of the asset at this point.

Mark Dankberg

Yes, I would say what we're trading asset [ph]. One of things you look at is the yield in satellite services from each of these applications and they have different characteristics, so I'll just give an example like consumer broadband. It has a pretty good yield, a pretty high yield. Most of the distribution agreements would likely be sort of on the lines of what exists now which are sort of best efforts distribution. So you may not have very high commitments but you have good yield and good underlying market dynamics. Some of the other applications might have a lower yield, but we might get more substantial commitments faster. And so then, we will sort of make some tradeoff in that area and what we are looking for is to have choices.

Steve Ferranti – Stephens, Inc.

Absolutely, very helpful, thanks guys.

Operator

For our next question, we go to James McIlree with Collins Stewart.

James McIlree – Collins Stewart

Thanks, good morning. Mark, I think you talked about some Enerdyne design wins. Can you elaborate on that at all?

Mark Dankberg

Yes. I don't want to be too specific but there are, in this tactical UAV world, some common tactical unmanned aerial systems, there's been a lot of activity and some new platforms and some new competitions and basically – and these could involve, for instance, payload upgrades to existing vehicles or they could involve new vehicles. We've basically been working with the vehicle manufacturers to provide video, primarily video data links and some associated other features which would be including things like metadata or fusing both data and video links together, and basically we've been pretty encouraged because what we're finding is that the Enerdyne products Interlinks products fills a void in the market. I think some of those – before I name names, I think we'd like to coordinate with these platform operators and just get their approval on them. But they are kind of – if you just looked at who the manufacturers of that class of UAV would be, it would be all the ones that you'd find in that class. That's what we are finding so far.

James McIlree – Collins Stewart

Okay, so you're not necessarily depending upon the UAV manufacturer to win some RFP or displace an incumbent for Enerdyne products, to get the proposals [ph]?

Mark Dankberg

No, it's not really proposals. These are more vehicles that are already in works. It has some upgrades on. Now there certainly can be uncertainties in the volume of production for each of these manufacturers and how (inaudible) market is, but I think by getting the design wins that we are getting, we are going to get growth over time.

James McIlree – Collins Stewart

Okay. And the satellite services operating income or operating lose of about $2 million, is that a relatively steady state given the investments that you're making in ViaSat-1 or is that set to become an even bigger loss in the upcoming quarters?

Mark Dankberg

I think that overall that there could be quarters where we have negative fluctuation but as we build critical mass in there, that's an area where you've got to have X – you have fix costs and you have to have X. We are growing revenue opportunities are primarily on the mobile area in near term.

Ron Wangerin

But there aren't necessarily a lot of operating losses associated with the new satellite on the quarter to quarter basis. There's nothing in there – this particular period, I'd say we had a higher than normal expense rate for legal and support costs.

Mark Dankberg

Yes.

James McIlree – Collins Stewart

Okay. Maybe that's a better way of what I was trying to ask, is that the expense rate that you have for the ViaSat-1 project is fully reflected in the quarter and you are probably not going to built it up going forward. Is that fair enough?

Ron Wangerin

That's fair. I mean we will have continued support costs for it, but we do think this quarter was particularly high.

James McIlree – Collins Stewart

Okay, good. And lastly on the Blue Force Tracking, Mark, I think you said that it went through a testing and then it was ready for the next stage. Could you outline what the next stage and the stage after that would be?

Mark Dankberg

The purpose of – what we had from about a year and a half ago was a prototype contract and the purpose of the prototype was to demonstrate some technical advances to the customer. That was really important and that's the part has gone well. We feel prototype testing that we've done has gone pretty well and that includes lab testing and then now there is some – right about now there is some kind of field demonstrations. So given that, that's kind of what the government was looking for. We're trying to figure out how we get from here to a production program and that will probably involve next contract which would be a relatively small amount of kind of building more of the prototype level product and then a productization phase. Kind of the government is looking to have to be able to declare the thing in production in some form kind of next year-ish, kind of end of 2009, so that gives you some idea of time scale. I think for the next year or so, we probably wouldn't expect to see orders that are much different than we saw on the prototype phase, but then beyond that things would grow assuming that things continue to go well.

James McIlree – Collins Stewart

Yes, that's perfect, great. Thank you very much.

Mark Dankberg

Why don't we take one more question?

Operator

And that question comes from Chris Quilty with Raymond James & Associates.

Chris Quilty – Raymond James & Associates

Thanks, gentlemen. Just to clarify, Mark, you were seeming to, on the guidance side, mentioned something about a narrowing of the revenue guidance and then you never followed through with actual number. Where you making any kind of a change or narrowing to the prior guidance you had given?

Mark Dankberg

I think that's so. We gave a range of 630 to 670. I think the 670 is a little lower than the top of range before, but the middle of that range is kind of right in the middle of where we'd be aiming for.

Chris Quilty – Raymond James & Associates

Okay, so is that in the slides?

Mark Dankberg

That's 630 to 670. Yes, that's in the slide.

Chris Quilty – Raymond James & Associates

Okay, I was having some problems there, so I didn't see it. Also on WildBlue, I think last quarter you gave us some volumes there, but I think you said we're moving up more towards 30,000 a quarter. Is it fair we assume with what you've said that the volume should had north of there through the back half the year?

Mark Dankberg

Yes.

Chris Quilty – Raymond James & Associates

Okay. And with the change in the segment revenues here, I'm having a little problem figuring it out. What did you have as the organic growth rate in the quarter ex the acquisitions?

Mark Dankberg

The acquisition didn't contribute anything meaningful to the results. Yes, I mean these are all organic growth.

Chris Quilty – Raymond James & Associates

Okay. And I guess a question for you, Ron, on the service revenues and the new way it's broken out. Just to be clear, you had an existing aero service in there of about 100 aircraft I think. You just picked up the KVH Maritime and eventually down the road you're going to pick up ViaSat-1. Is there anything else that's in that bucket?

Ron Wangerin

Maybe a little context around that with regards to – we've had some exciting Maritime already and what Mark talked about with the expanding KVH agreement for additional infrastructure and lighting up additional regions around the world that provides certainly an opportunity to grow that piece of it. And with that, there are revenue sharing arrangements and roaming arrangements that go with it. We also see some additional aviation opportunities that would close through there, under similar types of revenue sharing arrangements, and then our exciting VSAT satellite services business is also in there, in the U.S.

Chris Quilty – Raymond James & Associates

Okay. And when you look at the year-over-year increase, we're still talking real small numbers here, but is it fair to assume that a good portion of that was related to the KVH Maritime or did the revenue sharing not kick in until post the announcement?

Ron Wangerin

That won't kick in for a couple of more quarters.

Chris Quilty – Raymond James & Associates

Okay.

Mark Dankberg

It is really a combination of both Maritime and the general aviation.

Chris Quilty – Raymond James & Associates

Right. And of course, when the KVH actually purchase the gateway hardware, that does not go into the service piece, it gets dropped into the commercial networks.

Mark Dankberg

That's correct.

Chris Quilty – Raymond James & Associates

Right. And Delta had an announcement today that they are I guess the first major airline rolling forward with aero cell [ph] using a ground to air type of arrangement, obviously only good for domestic travel, but your thoughts on that?

Mark Dankberg

There are a number of different technologies that people are talking about for aviation. I think the ground-based air-to-ground stuff is – the attraction of that is kind of pretty low, initial cost. The main issue with it is just going to be what happens when you have a bunch of airplanes converging in a hub area like Dallas? It's for you, Dallas, Fort Worth or Atlanta. It's going to really stress the performance in those types of regions. I think satellite has got some definite benefits in terms of speed and capacity, and we're just (inaudible) high up in the market. I mean, I think it's going to take a lot for people to really understand the benefits of each and so we're factoring that into our longer term outlook.

Chris Quilty – Raymond James & Associates

Okay. And I guess final question here, just a follow-up on the Blue Force tracking timing. Is the guidance that you gave of production volumes end of ‘09, is that not a big pushback from what you've said previously of hoping to be in production by the end of this calendar year?

Mark Dankberg

No, as a matter fact, it's exactly that I have been saying all long, is that this kind of – what we've said is first contract was a prototype one. That was a ten-ish million dollar contract. Next phase, we said would be kind of a very low rate initial production and production readiness kind of in the same ballpark in aggregate. And then after that would be production. And that's basically what we are seeing now, is consistent with what we've said all along.

Chris Quilty – Raymond James & Associates

Okay. And the army seems to be moving the ball in terms of the technology and bandwidth that they're looking for everyday, of course, always wanting more and there were some recent articles in defense news and what not about how they're trying to look at that future combat systems variant. Anything in those discussions that leaves you perhaps wanting in your technology solution or do you think you have a good migration pass towards whatever they would think they want for FCS?

Mark Dankberg

Yes. There have been articles on kind of let's say, look at a migration path from what they call FBCB2 which is battle force management program that Blue Force Tracking is integrated into an FCS which is Future Combat Systems and basically the articles only reinforce that what they want is more bandwidth to do more things and if you look at what it is that our Blue Force tracking upgrade provides relative to the Blue Force Tracking 1 system that's out there, it's higher bandwidth and more capacity. So we think all it does is just reinforces why they are doing it in the first place and why we would think it's reasonably likely that they will follow through with us on what they said they were going to do because that's the dimension that we are aiming to improve. I mean I think that – if you look at FCS, think of FCS is really not hardware in the time frame nor satellite capacity in the time frame that goes along with FCS; that's (inaudible) anything better than what our Blue Force Tracking 2 version will do.

Chris Quilty – Raymond James & Associates

Okay. Great. Thank you, gentlemen.

Mark Dankberg

Thank you, Chris.

That concludes our Q&A section and our call for this quarter. So thanks a lot everybody for your participation and we look forward to talking to again next quarter.

Operator

And again, ladies and gentlemen, this does conclude ViaSat's fiscal year 2009 first quarter earnings conference call. We do appreciate your participation and you may disconnect at this time.

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