Viasat reported its Fiscal Year 2019 earnings in May 2019, and the results set new records for revenues and growth. Learn about Viasat’s strategic approach by reading Viasat Chairman & CEO Mark Dankberg’s letter to shareholders in the Fiscal Year 2019 Annual Report. The full Fiscal Year 2019 Annual Report can be found here.
A letter to shareholders from Mark Dankberg
I am pleased to report fiscal year 2019, ending March 31, 2019, was one of the most rewarding in our 33-year history. The numbers are impressive and tell an exciting growth story:
› Record annual revenues of $2.1 billion, up 30% year-over-year. We added almost a half billion dollars in revenue compared to fiscal year 2018.
› New contract awards also reached a record, at $2.4 billion. That was approximately $700 million higher than fiscal year 2018, an increase of 42%, and a strong indication of growth opportunities for fiscal year 2020.
› Fourth quarter revenues set a new record at $557.2 million, a 27% increase over the same quarter of fiscal year 2018.
› Adjusted EBITDA grew 44% compared to fiscal year 2018, to $339.4 million. That growth in Adjusted EBITDA almost off set approximately $109 million in incremental depreciation, amortization and interest expense associated with placing the ViaSat-2 satellite in service. We believe our Adjusted EBITDA gain is an indicator of continued earnings growth opportunities.
We’re not your traditional satellite operator
We aim to be the world’s leading satellite broadband service provider. We believe there is a large attractive market opportunity where we can be the best choice for unserved, and underserved people and devices wherever they may be — on the ground, in the air or at sea. Global internet protocol (IP) traffic is expected to nearly triple over the next five years. It is anticipated the global internet community will swell by about a billion people — from 3 billion in 2015 to 4 billion by 2020. But that would still leave 4 billion unconnected people in the world, and even the otherwise “connected” often get little or no service in many locations. We believe we are well positioned to serve many of these unconnected people and places. We believe we can create greater global economic opportunities and social inclusion, while earning attractive returns by building what we believe to be the most cost-effective global satellite broadband network.
Notably, fiscal year 2019 was among our best growth years yet, with fourth quarter total revenues being greater than any of our satellite operator peers. It should be obvious, highest revenue coupled with high annual growth rate is a powerful combination. However, we’re going after a much larger opportunity than traditional Fixed Satellite Services (FSS) operators, the group by which Viasat has often recently been measured for investment analysis purposes. In fact, as we’ve highlighted in previous investor communications, we believe traditional metrics that were indicative of value in the FSS broadcast market are counter-productive to serving the needs of today’s satellite broadband data market. Our focus on metrics unique to broadband service has positioned us as a disruptor in the satellite operator environment.
A common perception is that Viasat is a “complicated” company with a difficult to understand strategy. We’ll show here that our strategic concepts are clear and simple. We strongly believe the success we achieved in fiscal year 2019 is compelling evidence of a thoughtful business strategy that is designed to create even more value for our shareholders, customers and partners in the coming years. We believe superior value creation depends on strategic differentiation. We want to be different in a value creating way. We also want to be difficult to imitate — to establish a moat around our success. Our main point in this year’s letter is to use the market realities illustrated in fiscal year 2019 to more fully illuminate the foundations of our strategy — and why we believe Viasat can continue to be an attractive investment opportunity for years to come.
Building an effective strategy
The essence of effective strategy centers on making difficult choices that deliver value customers will pay for — yet that competitors are unwilling or unable to imitate. The sequence of descriptors in that last sentence is critically important when competing against entrenched incumbents. Disruption theory holds that incumbents will predictably, and in a short-term sense, rationally, cling to existing dimensions of value when those metrics are associated with success in their largest markets — even if new emergent market trajectories demand different, and oft en conflicting, metrics. Disruptors don’t “cause” customers to seek new forms of value, they enable them to choose products or services that better meet their evolving demands.
Viasat’s strategy reflects what is happening in the world: the internet is re-defining what users want in almost every form of information, entertainment and communication. Because we had no stake in the old (broadcast centric) dimensions of value we can embrace new market preferences in ways that would undermine metrics key to incumbents’ identities, and/or investment theses. New entrants, or disruptors, can displace incumbents when a few conditions hold:
- The strategic choices must be difficult or there’s no damage to an incumbent’s existing business model by embracing them. There has to be tangible downside to incumbents imitating a disruptor or there’s no disruption opportunity. As a consequence, a disruptor’s business model is often initially under-valued or even ridiculed — because at first there is little evidence the choices underpinning the strategy are valued by sufficiently large markets. That’s because the new entrant is purposely eschewing old metrics in favor of new ones. In Viasat’s case, our consistent focus is on maximizing useful bandwidth per total lifetime capital cost. We refer to this often as “bandwidth productivity” at investor conferences or on quarterly calls. We see this metric as a key factor in return on satellite investment. We believe our existing and planned satellite fleet substantially outperforms other satellite operators on bandwidth productivity and would also outperform our expectations for proposed low earth orbit (LEO) constellations from new entrants. Historically, incumbent broadcast satellite operators have been less focused on bandwidth productivity — and benefited from other metrics such as number of orbital slots, certain spectrum rights, number of satellites in orbit, network effects of video broadcast “neighborhoods,” size of user installed base, 1-for-N redundancy advantages or other factors that still drive the majority of their value to customers and investors. But, those legacy metrics don’t necessarily create the same value for broadband services.
- Disruptors must choose new metrics wisely. When markets shift it’s not always obvious what the new dimensions of value are, or will be. For instance, non-geostationary orbit (NGSO) constellation builders appear to value earth-to-satellite round trip latency as a dominant metric. It’s difficult to evolve from existing metrics associated with the success of incumbents to new ones that may or may not ultimately lead to success in emergent markets. It’s especially tricky when there are trade-off s that require sacrificing performance in one dimension to achieve better performance in another. A disruptor, or other aspiring new entrant, choosing the wrong new metrics is often disadvantaged. Incumbents could adopt the strategic choices a disruptor makes, but are often unwilling to do so when they perceive those choices as destroying value. We believe our growth rate in satellite broadband, and our success in multiple vertical and geographic markets built on bandwidth productivity, indicates Viasat has the market demand feedback to make wise choices. The commercial in-flight connectivity (IFC) market is a great example. We are recognized as the fastest growing IFC player, oft en causing incumbents to significantly alter their business models to compete — even when their assets or processes are poorly suited to new market demands and business models.
- Finally, successful disruption benefits from new learning curves that enable the disruptor to outperform incumbents, or other new entrants, in emergent markets and eventually in the “old” markets, too. When disruptors benefit from learning curve effects that create value and separation from competitors, then eventually the incumbents are unable to catch up, even if they eventually decide to abandon old metrics for the new. For instance, we expect the unique ViaSat-3 system architecture can yield a faster rate of improvement in our chosen metric (bandwidth productivity) than any other currently known satellite system architecture — from other geostationary orbit (GSO) operators to the newer NGSO providers (such as LEO). If we are correct, then we could steadily improve our competitive position across satellite centric broadband markets — while also growing our addressable markets compared to some terrestrial alternatives. We can benefit from learning curves in related dimensions that are consistent with our objectives of bandwidth productivity and return on invested capital — for instance, optimizing total geographic coverage, economically matching bandwidth geographic density to a very wide dynamic range of end-user demand and flexibility in allocating bandwidth supply to time varying demand over large geographic areas. Each generation of Viasat broadband satellites has been designed to steadily improve these metrics.
Breaking away from the past
One of the more diabolical elements of disruption is that the old metrics, honed by years or decades of refinement, are seemingly so simple, clear and logical. Inevitable even. How could they be wrong? And, how could any upstart that disdains those measures ever be successful? In the FSS industry there are financial metrics that were valued by investors and drove incumbent strategy that we believe are counter-productive for the satellite broadband data market.
- Transponder market pricing is eroding steadily — a point seen as “bad” for satellite operators. In fact, Viasat is a leading contributor to the decline in air time pricing. End-user value is highly dependent on bandwidth pricing (unit bandwidth price, along with speed, are critical metrics for broadband), and demand is highly elastic to price. Bandwidth productivity gains and distribution efficiencies that lower our unit cost of delivered bandwidth can allow us to offer more value to end-users, grow addressable markets and earn attractive returns, even with lower retail prices.
- High EBITDA margins for FSS operators have been considered “good” indicators of both operational efficiency and market demand. Operators with “low” EBITDA margins may be considered less efficient, competing in “bad” markets, or battling supply/demand imbalances. Over time, this led to strategic choices that outsourced or avoided activities that reduced margins and were often better performed by other players in a broadcast centric ecosystem. But, EBITDA margins are only proxies for value creation in a capital-intensive business. Absolute return on capital is the goal — and we may do better with highly productive broadband satellites by undertaking more activities avoided by incumbents and generating much more revenue and absolute earnings per invested dollar, even if those activities reduce our EBITDA margin.
- The combination of A and B above led to highly leveraged capital structures in a period of stable transponder pricing. But stable transponder pricing and high EBITDA margins don’t necessarily translate well to broadband service. The notion that long-term stable pricing is needed to close business models has even led some to conclude shorter satellite lives are “better” than longer — because longer lives make cash flow forecasting less certain. That might be true if satellites with shorter lives had commensurate bandwidth capital cost productivity, but given current technology trade-off s that’s not the case. Optimizing productivity along with business models that anticipate pricing trajectories are better ways to profitably serve broadband markets.
Our strategy is built around a few clear and simple principles
We believe space-based broadband is a tremendously exciting and potentially highly-rewarding market. Clearly prospective new entrants, successful in other markets, believe that, too. Our challenge, and opportunity, is to leverage decades of unique technology innovation in virtually every aspect of satellite networking into a highly differentiated strategy. We can prosper by taking market share in “natural” satellite markets that are unsuitable for terrestrial networks, and by driving down bandwidth costs to enable new markets. Satellite broadband — in any orbit — is very likely to be capital intensive for decades, to come. A focus on bandwidth productivity, learning curve trajectories and distribution optimized to leverage those advantages can gather momentum and snowball over a long time.
› Capital efficiency. Broadband satellites are capital intensive. Broadband users consume ever increasing amounts of bandwidth, and the number of users keeps growing. Trends point to global IP networks supporting up to 10 billion new devices and connections, increasing from 16.3 billion in 2015 to 26.3 billion by 2020. We have experienced that most users value speed, bandwidth volume (e.g. gigabytes per month) and economic value (how much speed and/or bandwidth volume they are getting per dollar spent) more than other attributes (e.g. latency). Speed, bandwidth volume and economic value are heavily dependent on space system bandwidth productivity metrics and distribution efficiency.
› Prioritize the end-user. We learned many existing distribution channels were successful by finding business models tolerant of high cost satellite bandwidth on low productivity space systems. We believed those business models were conflicted and would not deliver our productivity gains to end-users. We thought “sell-through” to end-users would be decisive in ultimately winning market share and expanding addressable markets. That caused us to invest significantly in vertically-integrated distribution capabilities focused on sharing space system productivity gains with end-users. We believe this is working in the market. We have had to invest in these capabilities, but are earning a reputation for high performance and value. For example, we know our U.S. government end-users require geographic reach and unique bandwidth intensive solutions. Coupling these capabilities was a key objective of our ViaSat-3 project, and will enable us to deliver the communications they need at the tactical edge. Our revenue growth is indicative of this success in residential broadband, commercial IFC and government mobile broadband. Additionally, we are pleased with our early market entry into the Community Wi-Fi and enterprise broadband markets. We anticipate substantial growth opportunities as we invest in additional verticals and geographic markets — and we believe our reputation for delivering performance, quality and high-value broadband connectivity can continue to grow.
› Relentless execution. We believe successful strategic differentiation derives from making difficult choices. Our bandwidth productivity strategy is technically very difficult. It would be much easier to settle for far lower productivity than what we aim for. Or, to focus on less meaningful metrics that are easier to achieve. We have an enviable track record for identifying and bringing to market impactful communications technologies in space systems. ViaSat-1 was the highest capacity communications satellite when it launched; ViaSat-2 was almost double the capacity of its predecessor; and the ViaSat-3 constellation is anticipated to have roughly eight times more capacity than Viasat’s current fleet combined. We follow a rigorous methodology:
– We study and learn about every known approach to satellite communications. We believe we have fundamental understandings of competing/proposed broadband space systems through regulatory filings, and/or market/competitive research. We never assume we have a monopoly on innovation. We have a successful track record of acquiring and successfully integrating companies with key technologies that can enhance end-to-end space systems service delivery.
– We continually research, analyze and prototype innovative new techniques proprietary to Viasat that can improve space system productivity. We believe we have strong intellectual property protections for our unique technology.
– We compete to develop and deliver state-of-the-art technologies to other satellite operators, and/or government customers, as the best way to thoroughly understand those technologies. Viasat has been a leading provider of space payload and ground technologies for both satellite operators and/or government customers across narrowband LEO, broadband LEO, earth sensing NGSO, broadband mid earth orbit (MEO), and broadband GSO. We believe we are the only satellite operator with this capability.
– We buy, or lease, what we can on the open market.
– When economic analysis conclusively shows a business case for internally productizing new technology consistent with substantial services productivity or distribution advantages we develop the capability we need to earn those economic gains.
› Manage for the long run. Viasat has been in business for 33 years. We have always managed for the long run. We believe the potential learning curve advantages we can gain in space systems productivity represent the most exciting growth opportunity in our history. Learning curves accrue value when organizations get exponentially “better” in the most important dimension(s) of value with each iteration of a key operation. In this case, an iteration would be development of a new generation of broadband satellite (e.g. from ViaSat-1, to ViaSat-2, to ViaSat-3, etc.) and the dimension of value is “useful” bandwidth per time weighted unit capital invested. Organizations benefit when their exponential gain per iteration is greater than competitors, and/or when they perform iterations at a faster cadence. We seek both forms of advantage. Scalable architecture is critical to learning curves, and we believe ours can yield more exponential gain than alternatives. For instance, leveraging low cost data centers for complex spatial processing computation is a scalable way to gain high bandwidth productivity. While launch costs are coming down — that is a transient effect and is unlikely to scale at the same pace as digital computation or payload integration. Our network is pure last mile “access.” We leverage improvements in long haul, thick route terrestrial fiber cost — we don’t compete with it. We also want a faster learning curve cadence — more iterations. That is a key reason for entering multiple vertical markets. If multiple outlets “fill up” our satellites faster than competitors we can iterate faster. The long term benefits are substantial both for winning in “natural” satellite markets, as well as expanding our addressable markets. When bandwidth “learning curve” productivity is a fundamental competitive advantage, multiple vertical markets is a key element of speed down the learning curve.
Building a wider moat
We have been a leader in developing enabling system technologies and distribution approaches for satellite broadband networks. We believe our results in fiscal year 2019 offer a glimpse of the potential we can achieve as we come down our learning curve and continue to build market momentum. While we’ve focused a majority of this letter on our bandwidth productivity strategy — which represents the bulk of our investments over the past three years — we believe we have pragmatically addressed other avenues of space system value creation.
› Leveraging new partner-based business models to gain traction in ‘hard-to-enter’ global markets. Not all satellite broadband systems are totally economically based. Factors such as sovereign control of national infrastructure, the national interests of spacefaring nations or national politics are very important considerations. We have successfully used our technology and market expertise to bring network operation and distribution solution partnerships, with innovative win-win business models, to key markets including Europe, Australia, Brazil and China leveraging partner-owned space assets. We also can use our own space assets to enhance the value of governments, state-owned enterprises or private regional operators’ own assets. Different markets require different models. We are innovating steadily, learning quickly and adapting as needed.
› Innovative integrated space/ground architectures. While our market experience has consistently shown that bandwidth productivity is the single most important dimension of value in delivering high-speed, high-quality broadband services, that doesn’t mean we have stopped innovating elsewhere. Quite the contrary. Our innovative ground system architectures, coupled with investments in artificial intelligence, machine learning, cloud/ virtualization techniques and more, are enabling us to further strengthen our moat by testing new ways to reduce latency for key applications without sacrificing our productivity advantage. We are prototyping and testing diff erent approaches to improving this aspect of our service that we believe are much more capital eff icient than burdening all space assets with a trade-off that would undermine bandwidth productivity. We plan to test some of these in the market in fiscal year 2020.
› Recognizing broadband connectivity is a means to an end, not an end in itself. The value of the broadband network is in the applications it enables. With this understanding, we have worked closely with leading edge providers including brands such as Apple, Facebook, Amazon and Netflix to enhance end-users’ experiences with their online and streaming media services over our network — helping them leverage the potential of making affordable broadband available in places where it never was before. We have also worked with leading U.S. government agencies, major airline brands on multiple continents and others to ensure their end-users have great, and aff ordable, broadband experiences on our network — while also being mindful of their future needs for global services reach, which we believe will be met with our ViaSat-3 constellation. And finally, we have been working with international governments to bring digital and social inclusion to their constituents, through eff icient satellite-enabled Community Wi-Fi hotspots. By making broadband connectivity accessible to millions of people living in regions where traditional terrestrial and wireless internet services were either non-existent or cost prohibitive — we have been able to help generate positive socio-economic impacts — in education, e-commerce, finance, healthcare and more — at lower bandwidth costs.
Our goal is simple: connect the unconnected and under-connected through advancements in communications systems
We see huge opportunity to capture value through the deployment of innovative, high-capacity and productive satellite broadband data networks. We are addressing this opportunity from a growing position of strength, founded on disruptive technology, thoughtful strategic choices, strong global partnerships, exposure to a diverse set of end markets and a vertically-integrated business model that affords us the ability to learn quickly to build on our advantages. Fiscal year 2019 was a satisfying illustration of what we can accomplish. We entered the year with an ambitious growth agenda, and a commitment to capitalize on prior period investments in ViaSat-2, in IFC and defense products. We executed well, transforming sales backlogs into record revenue and compelling Adjusted EBITDA growth. We achieved impressive market share gains and global recognition for quality and reliability. We also made good progress on our growth initiatives in new vertical and geographic markets — aided by key agreements with global strategic and regional satellite partners. But we think all of this is just the start of what we can achieve longer-term. I’d like to thank our customers for giving us the opportunity to earn their business; our suppliers and partners for their ongoing support; the Viasat team for their dedication to innovation and execution; and to our investors for their trust in our commitment to use their resources wisely