Fiscal Year 2021 results show record earnings for Viasat

A letter to shareholders


Viasat reported its Fiscal Year 2021 earnings in August 2021, and the results set new records for revenues and growth. Learn about Viasat’s strategic approach by reading the letter to shareholders in the Fiscal Year 2021 Annual Report from Viasat President and CEO Rick Baldridge and Executive Chairman Mark Dankberg. The full Fiscal Year 2021 Annual Report can be found here.

Dear Fellow Shareholders,

Before we jump into our results, it is important to acknowledge the “elephant in the year” – COVID-19. While we hate to give the pandemic top billing, let’s face it, we were all dramatically impacted by this terrible virus. Overnight, work-from-home became the norm, Zoom zoomed to the tip of our tongue, outlooks became foggy, and timeframes were unpredictable.

The most immediate and obvious impact to Viasat was that our fastest growing business, In Flight Connectivity (IFC), was going to be enormously affected by the dramatic reduction in travel and the financial distress of our airline partners. We immediately developed and executed a plan to reduce costs, preserve capital, and focus on strategies to position our businesses to emerge stronger than when the pandemic began. As the year progressed, other macro effects became clearer. Our Government Systems business was negatively affected due to the difficulty in transacting with the government in a work-from-home environment – especially with respect to contracts involving classified information. But we also found substantially greater demand for residential broadband resulting from increased speed and bandwidth demands for school-from-home and work-from- home and much increased demand for over-the-top (OTT) streaming video entertainment.

With all that as background, our fiscal year 2021 (FY21) yielded another record year for Viasat. Our performance was directly driven by the incredible flexibility and commitment of our employees and the diversification of our businesses. While we did experience a dramatic reduction in IFC revenue, our residential broadband business saw increased demand for plan upgrades, our government business fought through the administrative headwinds, and by the end of the fiscal year we began to see a return to air travel.

Our FY21 highlights included:

› Consolidated revenues were roughly flat year-over-year at $2.3 billion, just barely shy of an annual record, and up year-over-year in the 4th quarter.

› Non-GAAP diluted per share net income grew slightly from $1.14 in FY20 to $1.15 in FY211.

› Consolidated Adjusted EBITDA increased 16% year-over-year to $531 million,

a new record.

› New contract awards were $2.7 billion, a new record, resulting in a backlog of $2.3 billion, a 23% increase year-over-year (this value excludes an additional $3.1 billion in unawarded Indefinite Delivery Indefinite Quantity contracts).

› Another record was a remarkable $727 million in operating cash flow, which helped to reduce our net leverage ratio to 2.9x LTM Adjusted EBITDA.

› Delta Air Lines and KLM Royal Dutch Airlines selected our industry leading IFC platform for their mainline aircraft, adding to our backlog as we enter FY22.

› We were awarded CNET’s 2021 Best Satellite Provider for U.S. rural internet services.

› Our Commercial Networks segment made substantial progress on the ViaSat-3 satellites, with the first of the three payloads essentially complete at the end of FY21 and undergoing final test and checkout. Subsequent to the end of the fiscal year, we delivered our first ViaSat-3 payload, serving the Americas, to Boeing for integration with the satellite bus in preparation for launch.

› We reached agreement to acquire the remaining 51% of Euro Broadband Infrastructure Sàrl (EBI), our European joint venture with Eutelsat, putting us in a position to launch services in the region prior to the launch of our second ViaSat-3 satellite covering the Europe, Middle East, and Africa (EMEA) region, and to acquire RigNet, Inc. (RigNet), which is expected to accelerate our expansion into enterprise verticals and maritime.

› We were awarded a new satellite antenna system contract for Tier II and Tier II+ Unmanned Aerial Vehicles (UAVs) that paves the way to serve hundreds of existing and planned aircraft.

While we entered last fiscal year with substantial headwinds, we enter this fiscal year with tailwinds. We anticipate revenue and Adjusted EBITDA growth across our businesses this year, with IFC contributing the most year-over-year improvement. We expect leverage to increase somewhat, as a result of the continuing expenditures on the three ViaSat-3 satellites under construction, roll-out of their respective ground networks, and payments under satellite launch contracts. We will also begin to incur operating expenses associated with lighting up the ground network for the first ViaSat-3 (Americas) satellite. We continue to believe we will turn cash flow positive within quarters after the launch of our second ViaSat-3 satellite, which will cover the EMEA region.

While our investments in the ViaSat-3 constellation are substantial, we have shown we can earn good returns for our shareholders through a diverse and growing portfolio of geographic and vertical markets. As we expand our reach with much more total bandwidth, global geographic coverage, and substantially increased flexibility in allocating our bandwidth, we see an opportunity to potentially double our revenue from FY20 to FY25, while growing margins to deliver even stronger growth in Adjusted EBITDA. Our global footprint is expected to help reshape our long-term portfolio, becoming more international and more mobility-oriented than it is today. Since most of our global bandwidth will be outside the U.S. after the ViaSat-3 global constellation is brought into service, we expect those international and global mobility markets, including international requirements of the U.S. government, will drive growth.

Shareholders should be quite familiar with our strategic thinking around satellite broadband services and our focus on bandwidth productivity (i.e. delivering more bandwidth per unit capital and operating costs than any other space-based provider). We are intensely focused on analyzing any and all technologies that can make more bandwidth available in the right places, at the lowest cost. During FY21 we continued to invest in research and development (R&D) in an effort to be at the forefront of the most productive technologies. That includes development of the ViaSat-4 class satellite, which is expected to be even more powerful than our ViaSat-3 class satellites, with each satellite able to deliver multiple Terabits per second. The scale and scope of broadband connectivity needs were highlighted by the pandemic. Per capita broadband consumption continued to increase at a compound annual growth rate estimated in the 30% range, driven by work-from-home, school- from-home, and sustained migration from broadcast entertainment to OTT streaming (with higher streaming data rates reflecting larger displays and higher resolution content). That means that whatever the market is for bandwidth this year, it is expected to be multiples larger in the next few years.

Our thinking is not restricted to just broadband geosynchronous (GSO) satellites. In fact, Viasat has been a key supplier to non-geosynchronous (NGSO) constellations in low earth orbit (LEO) and medium earth orbit (MEO) for the past two decades. According to PitchBook, about $13.5 billion has been invested in “New Space” companies in just the past 5 years. PitchBook identifies about 58 top New Space companies, with 37 of those being outside the U.S. A Harvard Business School article, The Commercial Space Age is Here, considers New Space in terms of “Space for Earth” or “Space for Space.” The existing space economy is almost entirely driven by applications of space technology or resources to life on earth, such as TV delivered via satellite, GPS for navigation, earth imagery, weather prediction, etc. New Space companies might aim to serve these existing markets with new technology, processes, or business models. There are visions of New Space applications that would be targeted at users or destinations in space rather than on earth. That might include space-to-space internet connectivity that would link manned or unmanned outposts in space, on the moon, or elsewhere for purposes that are space-centric. It could include space tourism, asteroid mining, and more. There are companies that aim to manage traffic in space to avoid collisions, or to service vehicles in space, or even attempt to solve one of the most urgent problems in space by removing space debris (spent or expired vehicles or fragments of the same) that if left unchecked could ultimately make space inaccessible, to everyone.

In our view, New Space rests on a few key technology foundations:

1. Lower launch costs that can be obtained by:

› Larger launch vehicles – even though there are not yet any launchers more powerful than the Saturn V used by NASA over 50 years ago.

› Re-usable launch vehicles – depending on the trade-offs between fixed and variable costs.

› Faster launch cadence (i.e. more launches per week or month) – which allow fixed costs to be amortized faster even if variable launch costs remain the same.

2. Leveraging spacecraft technology substantially reducing the mass or volume of a spacecraft’s structure, propulsion, bus functions, or payload can deliver the same benefits to end customers as reduced launch cost. Instead of delivering more kilograms to space per dollar, one could deliver more value to the customer per kilogram, which delivers more value per dollar spent on launch. In fact, since learning curves for electronics are almost always better than learning curves for mechanical functions (e.g. rockets), expertise in payloads can readily overcome expertise in launch. And better still, reductions in spacecraft volume, area, and mass also reduce the risk of collisions in space and the Kessler syndrome further discussed below. From a sustainability perspective, delivering more value from less volume, area, and mass in space is way better than putting more in space!

3. Space traffic management and tracking technologies are attempting to reduce collisions and the resulting creation of more debris that can deny access to space for everyone.

4. Space tourism, exploration, settlement, and exploitation that would increase human access to space.

5. Information technologies intend to make space more productive, secure, and reliable.

Viasat has a leading position in a number of New Space related categories and those businesses are growing. New Space technology businesses are reported in our Commercial Networks segment and our Government Systems segment. New contract awards in Commercial Networks increased by over 50% from $420 million in FY20 to $637 million in FY21. There were three important New Space markets that contributed to our new business growth: earth observation, which falls into both the Space for Earth and Space for Space categories; Space Components and Modules, which also falls into the Space for Space and Space for Earth categories; and LEO satellites.

1. Various forms of earth sensing space systems have been among the earliest investments in New Space. Viasat has been a leading provider of full motion ground systems for earth observation for decades. We are expanding that business in several ways: new ground technologies, new partnerships and business models, and New Space technologies. There are several main trends in earth sensing being brought to market.

a. Higher resolution imaging – getting higher quality, higher resolution images has been the dominant trend for decades. That requires more information per image, and therefore higher capacity space to earth links. We have seen very substantial growth in our Commercial Networks business to accommodate this.

b. More frequent images – even at the same or lower resolution. Some start-ups are aiming for more images, and more frequent revisit rates, instead of higher resolution. That means many more earth sensing satellites, and a need for more ground stations to get those images back to earth in a timely way – which is essentially the entire value proposition. Our “Real Time Earth” technology and services are meeting this demand by offering “Ground Station as a Service” to multiple existing and new earth sensing systems. We are also working with customers on space-to-space relay technologies that can get high priority data back to earth instantly, without having to wait for a ground system to come into view. Space-to-space relay is especially critical when sensing satellites are over oceans and there are no ground stations in view.

c. New sensor systems – a variety of new sensors are being deployed to provide a more complete view of the earth environment. All these new systems also require communications networks to receive this new information in a timely manner. Some of these can require even more data than existing sensing systems.

2. Space networking. We have been a leader in space-to-space intersatellite links (ISLs) and notably provided the ISLs to Thales for the Iridium Next constellation. More recently we have received key funded development contracts to further integrate ISLs for government customers. Those contracts are unlocking new opportunities for space-to-space networking and space-to-ground networking for both government and commercial applications. Space-to-space networking is a fundamental requirement for the “Space for Space” market – enabling space-based assets of all types to communicate with each other for a wide variety of reasons. Historically, space-based systems have communicated back to earth almost exclusively through dedicated networks for those vehicles, or a few specialized shared networks, such as NASA’s Tracking and Data Relay Satellite (TDRS). New Space will depend on systems interacting with each other, not just with earth, or even through an earth-based relay. Our space-to-space networking technology has applications to both GSO and NGSO satellites. We are working with government and commercial users to leverage our space networks. Notably, some of the space-to-space missions are best served by GSO satellites.

3. LEO satellites. We have received contracts for innovative new LEO satellites and associated ground systems. Our first LEO satellite is in orbit and its mission has been very successful. Notably, we have unique opportunities to integrate our terrestrial line-of-sight networks with LEO satellites. Our next mission is expected to be ready for launch within a year. Each has good opportunities for follow on. The technology underpinning these missions opens new applications, which we are exploring in depth.

Space investors should be mindful that there will be no New Space (or old space, for that matter) opportunity unless there is safe, sustainable access to space. Access to space cannot be taken for granted, and threats and risks have come sharply into focus over the past year. There is no law enforcement for space, no peace-keeping authority, and no global precedents on LEO mega- constellations to adjudicate disputes. Access to space has depended for decades on norms and standards that have evolved as technology evolves (though those norms often fall behind technology, as is often the case on the ground, too). There are several imminent failure modes if mankind collectively is unable to contain the risks of proliferated LEO spacecraft:

1. By far the most catastrophic is known as the “Kessler Syndrome,” first identified by NASA researcher Donald Kessler. Space debris (expired spacecraft, expendable vehicles, and fragments of the same) remain in orbit for years, decades, or even centuries and randomly collide with each other. Those random collisions disperse fragments of objects like buckshot over wide swaths of orbits. Those fragments become the dominant source of risk because they are hard to track, their trajectories are not fully predictable, and there are tens of thousands to many millions of those objects in space, depending on their size. The vast majority of space debris is in LEO. Even small fragments can pulverize a spacecraft, or damage it in a way that makes it uncontrollable, creating more and more fragments in a chain reaction until there are no safe orbits left. The risk of a Kessler Syndrome grows exponentially when satellites have overlapping or intersecting orbits or they become uncontrollable and cannot be maneuvered to avoid collisions. While space traffic management might delay the problem, that alone cannot solve it. There must be equitable, sustainable policies considering the properties of all objects in each region of space since virtually every system may interact with all others – including those that came before and those that will come after.

2. Another threat is the militarization of space. The Center for Strategic and International Studies (CSIS) recently published a study called Defense Against the Dark Arts in Space. This highlights some of the risks to the U.S. (as well as all space faring nations) from an ineffectively regulated space environment, or from individual nations exploiting gaps in norms.

3. There are increasing levels of concern about the effects of certain uses of space on the earth environment. The total mass of alumina from tens of thousands of larger mega- constellation LEO satellites burning up in the atmosphere each year may worsen global warming. Recent studies on orbital decay trajectories suggest that global warming is slowing the rate of decay of LEO objects – increasing the risk of space collisions. Also, LEO satellites are impacting both radio and optical astronomical observations.

4. A significant, but less catastrophic failure mode is the loss of functionality that derives from lack of harmonized global regulations reflecting the rush to NGSO. Spectrum interference due to overcrowding and/or conflicting national regulatory policies risks undermining the purpose and effectiveness of space systems (communications, sensing, and otherwise) over geographic regions both within nations and outside international borders (e.g. over oceans).

It is becoming increasingly clear that the number of satellites that can safely occupy LEO, in particular, is bounded. The exact number of satellites that might safely be sustained is a complex function of the properties of the satellites in space. For satellites with properties similar to existing mega-constellations, in orbits as low as 500 km or 600 km altitude, a safe number might only be in the low tens of thousands. Yet there are already filings for well over 100,000 larger mega-constellation satellites (including a recent filing from Spain for over 77,000 satellites), and the rate of growth in that number is accelerating. The International Telecommunication Union (ITU) is intended to help control spectrum interference – but does nothing to manage space collision risks due to NGSO constellations. Newer satellites – using technologies such as those Viasat has developed with government research funding – could be only a small fraction of the size of the satellites in the current largest mega-constellations. Far smaller volume, cross-sectional area, and mass would make constellations of such satellites far less likely to collide than existing mega-constellations, and would greatly reduce the impact of any collisions that may occur. As more countries and non- governmental organizations learn about and understand these risks there are growing concerns about how to determine acceptable sustainable space policies and practices, and then how to equitably allocate scarce orbits among space faring nations.

This brings us back to the PitchBook findings about New Space investments. Of the 58 top companies, 37 are non-U.S., in countries ranging from China, India, and Russia, to Poland, Lithuania, and Bulgaria. And there are hundreds of companies or institutions engaged in CubeSats alone, including from countries that may not have been considered “space faring” in the past such as Kenya or South Africa. According to PitchBook, as of 2019 eleven African countries have launched a total of 38 satellites and twenty are maintaining space programs. The barriers to entry are falling. The New Space economy is global. While some companies might believe they can seize scarce orbits – possibly even being cheered on by nationalistic regulators – there is no way to squat on orbits in space. Satellites are becoming smaller, individually less expensive, and more capable. If they are cheap enough, concerns for reliability are forgotten. Clearly, an economic market theory driven approach to space where each player acts in its own best interest would be a disaster (known as the “tragedy of the commons”). What is required is a game theoretic approach where individual nations and companies must act with the common interest in mind, lest everyone loses. Surely, the U.S., as the leading player in space, would be the biggest loser in a land grab, race to the bottom that threatens both the space and terrestrial environments. Indeed, the U.S. Space Force has called for America to set an example of responsible space behavior. Unfortunately, instead some U.S. LEO companies are fostering a land grab mindset through their actions and their regulatory filings.

As a leading global player in space, we have been successful by cooperating with a broad range of responsible nations and global partners. The issues of space safety, sustainability, and equity are not new – they are just new to the current state of space technology. Safe space practices have enabled the global space economy in GSO orbits for broadcast and communications, and in NGSO orbits for Positioning, Navigation, and Timing (PNT) and earth sensing for decades. We believe similar principles will be applied to LEO to achieve the same effects. In order to participate successfully in the New Space economy, we will need a clear vision of what the globally regulated environment will entail, and how it will come about.

In May 2021, the Swiss Federal Institute of Technology at Lausanne (EPFL), International Risk Governance Center (IRGC), held a conference on the risks of orbital debris. Their report cited the urgency of the space debris issue and included this statement: “As constellations can have difficulty coexisting at the same altitude, there is some form of appropriation of space by constellation operators. For example, once Starlink is completed, it is unlikely that another operator will be able to launch a constellation at the same altitude without taking an unbearable level of risk.” Fortunately, there are mechanisms to enable nations to assert their own national interests in a peaceful and economically impactful way through their own domestic policies on “landing rights.” Each nation can make its own decisions, laws, and regulations on which systems can have access to spectrum over its own country and the terms and conditions under which they consume limited orbital resources to serve that country. Since NGSO systems are inherently global, they depend on having spectrum access in all or most of the world. No individual country’s market is large enough to economically sustain a global constellation. Collectively, nations can establish norms that reflect accessibility to LEO in a safe, sustainable, and equitable manner that is consistent with their common individual sovereign interests in internet access, national security, economic progress, and technology innovation. Conversely, technology could encourage new entrants to compete by lowering the economic cost (including launch) of satellites and ignoring the associated sustainability risks to the point where theirs are so economically expendable that the level of increased risk is more acceptable to them than to the occupant that originally aimed to seize an orbital region. That form of “race to the bottom” surely has a bad ending.

We are seeing increased awareness of these issues among nations with their own space investments and are optimistic that wider understanding will help drive a sustainable outcome. Such mechanisms are already in place for other orbits. Nations are beginning to understand the limits to LEO and that granting landing rights to unsustainable foreign systems undermines their own national interests.

Viasat is proud to be a leader in proactively addressing the risks that threaten the sustainable, peaceful use of space. We encourage investors to access our website for compilations of regulatory filings, academic research, relevant publications from other responsible space players, and other information on space safety, collision risk, environmental risks, spectrum regulation, and other factors that urgently require global attention and cooperation. We are confident that an equitable, environmentally sustainable allocation of scarce orbital resources will create enormous opportunities for companies that are responsible, transparent, and collaborative. We believe that being a truly global company means being a leader in bringing the benefits of space technology to the world in equitable and mutually beneficial ways. We hope we have offered new insight into the ways that Viasat is helping to lead the New Space era, and the growing opportunities for our people, our investors, and our customers and business partners associated with our mission of bringing connectivity to the most challenging places on (and off) earth.

On behalf of all of us at Viasat, thanks for reading our FY21 Annual Report. As always, we would like to extend our appreciation to all of our employees for their commitment and dedication and resilience this last year, to our customers for hiring us, to our suppliers and partners for their support, and to our shareholders for their trust in our commitment to value creation.