Building and launching three satellites spanning the globe is no small financial feat, something Viasat’s Chief Financial Officer Shawn Duffy can confirm. In this podcast, we asked Duffy what makes the ViaSat-3 constellation a smart investment, and how geostationary orbits provide advantages over satellites in other, lower orbits. Additionally, Duffy discusses Viasat’s unique and diverse business strategy and how that helps drive the company’s success.
Duffy points to the overwhelming financial successes of the company’s existing satellites to illustrate how the ViaSat-3 constellation may prove to be an even more profitable venture. One feature that makes ViaSat-3 stand out is its ability to easily shift bandwidth to where there is more demand.
In this podcast, Duffy talks with Alex Miller, editor of the Viasat corporate blog.
Shawn Duffy, June18, 2019
Alex Miller: Hello and welcome to the Viasat podcast. I’m Alex Miller with corporate communications. And with me today is Shawn Duffy, chief financial officer for Viasat. Shawn, thanks for being on the podcast today. Viasat is right in the middle of construction of a three satellite constellation that, when it’s complete in just a few years, will cover the globe. So there’s a lot of interest around the world in what some are calling the new space race, and Viasat is poised to potentially be the world’s first global internet service provider. So we wanted to talk to you today about the financial proposition for building a global satellite network. How should Wall Street View Viasat’s mission to connect the unconnected with a global constellation?
Shawn Duffy: Thanks Alex and I appreciate being here as well, and getting the opportunity to talk with you. So that’s a pretty broad question. I’d have to say when I think about the investor view of where we are and where we’re going and the investment thesis there, it’s really fundamentally similar to the thought process you would have, for example, if you were thinking about buying a company. For example, what makes the target company interesting to invest in - things you think about or how are they positioned in the market. Are they a leader? Is their leadership position enduring? Do they hold the keys to the components that make it successful like IP? The other things are: How is the competitive environment right? How near is the competition from bringing competitive alternatives and how big are the markets that the company is in and are they growing? And of course, there’s always the financial picture as well as the investment – what is it going to take to be able to bring those markets to bear so ... Back to your original question, I think through that lens that’s what makes us a very unique opportunity. We’re really endeavoring to do something that’s pretty unique. We have a very good leading position. No one else is even close to doing, as you mentioned, the ViaSat-3 constellation. These are other? terabit type satellites with visible Earth coverage connecting the whole globe, right? We hold the IP to do it. And when we look across the market opportunity, you know we see within the approximately 7 billion people today in the world there’s still 50 percent of the population that’s not connected. So we’re really aiming to connect those people wherever they are - at their home, at their business, flying in an airplane, even the warfighters out in the battlefield. So that really checks off the first kind of two considerations: great markets, great leadership position in these markets. And then finally to the financial model, you know we’ve had a very strong history of revenue growth - EBITDA growth - and cash generation. I think we talked a little bit on our last call with our ViaSat-1 project, that on that project we spent about - it was about five hundred million dollars for that satellite. And that included the launch, insurance and all the initial ground to go into service. We’re about seven years in on that satellite. It’s a 17 year asset for us. So we have about 10 years still to go, and so far we’ve generated over a billion dollars in EBITDA. So there’s a lot of smart people around there, they can do the math. That’s a pretty good investment story. So hopefully ... when you look through all of those lenses that’s how they view us.
Alex Miller: Great. Well that’s a great overview of kind of our whole business. If we zero in a little bit on the ViaSat-3 constellation ... we know there are several several companies looking at something similar to this. Ours is a geostationary satellite constellation, which are in the high orbits. How does that differ from the others that have a lot more satellites?
Shawn Duffy: Yeah. That’s it’s an interesting question, Alex. We actually get this question a lot. There’s a lot of folks out there that are touting and talking about connecting the world... and people are trying to understand the differences between GEO constellations, and how that solution works, versus some of these other LEO/MEO type constellations that are out there. So from a financial front, I’d say it really comes down to some of the fundamentals, which are: What’s the pure cost per gigabit to bring the constellation to market? And there’s different parts to that for sure. So as I mentioned before, the ViaSat-3s add a terabyte each or more of capacity so all three of them will have about ... over three terabits, and the full constellation to build that out for us for one two and three should be around 2.1 billion dollars. The first two were about 1.4 billion dollars and then we just started the third one. So that’s what pushes it over that two billion dollar mark for the full constellation. Again, that includes the satellite, the launch and the initial ground network. That’s about three times the amount of bandwidth that we’re able to bring to market for about the same price that we did a ViaSat-2. So we’re bringing a lot more bandwidth. We have a lot more flexibility to put the bandwidth where the demand is. Which equals a lot more revenue generating capability. So now, if we look at the other capabilities that are out there and the uniqueness of those constellations, these projects are some very big financial endeavors. Number one, I’d say one of the more talked about constellations is spending over eleven billion dollars. Clearly, that’s a pretty big number. So that’s one thing as a takeaway, that’s kind of unique about them. I think the second thing is that the bandwidth, or the way that those constellations are designed, puts the capacity down across the globe and kind of I would call it like a peanut buttered effect, where it’s just laid down kind of evenly around the globe. So when you think of it financially, the question is how effective or utilized is your investment? Remember that 50 percent of the world’s population lives on about 1 percent of the land. That means that fixed broadband demand is really geographically concentrated, and we see the same things in the mobile markets as well. The highest traveled flight paths are very densified and there’s large amounts bandwidth that is demanded around the busiest airports. So financially, if those gigabits are placed over regions where there isn’t demand it just creates a very high cost to revenue dollar. It puts a lot of pressure on the financial returns simply ... like a really easy example you could think of is a rental car fleet. If you had that rental car fleet spread across the globe, and you had the same amount of cars in sites where no one goes and you have other sites where they’re very busy and you have the same amount of cars there ... The overall cost that you bear... per the revenue dollar that you generate is just very high because you have a very high percentage of idle assets. So the other component to this is these lower earth constellations, they’re much smaller satellites. And there are thousands of them. The smaller satellites usually last around four to five years which means you’re in a constant redeployment mode. So again, it just brings a really high cost per gigabit delivered. When I think through all these dimensions together, I think through the capital cost to per gigabit deployed, the holding cost of the assets that you physically bear and how much of them you’re able to utilize at any point in time. It just seems to be a really high cost profile for the markets that we’re addressing. We feel like the way we’re going, it’s the right direction and makes a lot of sense for the businesses that that we’re striving to be on.
Alex Miller: Great. Yeah. And visually, if you look at how these satellites cover the earth you see the ones that take more satellites, and they do cover a lot of ocean. If you look at a geostationary ones you can really point them out a lot more easily. You don’t have to put them over places where you can’t sell the bandwidth.
Shawn Duffy: Yeah. And you know with the technology that we’re bringing with ViaSat-3, we have a lot more flexibility so we can move bandwidth as demand moves across that full visible earth view. So that gives us a lot of ability to meet and mirror demand over the life of the satellite versus just where it’s put down originally.
Shawn Duffy: And I think also another thing related to that is you could go into a market and see how it works and if it doesn’t, you can move that capacity elsewhere. which is something you really couldn’t do with cable or fiber or something like that.
Shawn Duffy: It gives us a lot of flexibility to manage risk and to prioritize because we are in so many diverse markets, and can serve so many different customer sets, that as the opportunities move, we have a lot of flexibility to move our capacity to meet business needs. So that’s a pretty unique difference and a much unique capability. Big step forward in flexibility from what we were able do in ViaSat-2 to ViaSat-3.
Alex Miller: So Shawn, you’ve been with Viasat for a while, and so you’ve been through several satellite launches. And so I wanted to ask you about the cyclical nature of satellite business, where you’ve got a fair amount of R & D investment, followed by the launch, and then the profit-making years of the satellite. How do you manage that kind of business cycle?
Shawn Duffy: Yeah. So I think there’s a couple parts. Definitely with our GEO satellites, we’re making them more and more powerful satellites. We’re making some pretty big leaps in technology, and we’re kind of next-genning ourselves. So it takes us three to four years, takes a couple of years, from visioning to development and three to four years to build them. After that, though, we get a 15 to 17 year asset, and it’s much more powerful than its prior generation. So there definitely are challenges in ... having that cycle and taking that longer period of time to bring it to market. But because we’re making those big leaps, we’re able to drive more and more service offerings that are premium service offerings into the markets that others aren’t able to do. So we think that drives a lot of value as well. I think if I was to think about that a little bit further and think about the investments that we’re making, that elongated cycle, it’s important that people really understand you know that cycle and the success that we’ve had around it. We had a really big, good success story with ViaSat-1 as I mentioned before. So when we started to build the ViaSat-2 satellite which had more than 2X capacity, we also brought to that not just more capacity but we brought reach. So we’re able to cover the U.S., as well as make it a regional play and stretch over to Europe and down into Latin America. So we were really able to prove the point of being able to bring more and more capacity but also gain more and more geography that we were able to cover. So ... we’re taking advantage of our technical leadership there. We’re trying now to shorten those cycles with the ViaSat-3 constellation. We now have three satellites under construction versus just one. But I think the business model is paying off. Now, last quarter in Q4 we reported another quarter of record revenues. We had $557 million. It was an all-time high for us. Our EBITDA performance was $108 million, and that was double where we were at the same point the same quarter last year. So we’re just really getting started ViaSat-2. So we do have cycles; it does take time to work through those cycles, but I think what we’ve proven is that when we do make these investments, we’re able to grow our business and we’re able to grow the contributions that they make to the business and the overall returns. So the investments pay off as long as we keep performing the way that we do.
Alex Miller: Okay. So in addition to the coverage and capacity, I know one of the things that we’re also focusing on is diversification of our services. So I wanted to ask if you could talk a little bit about what that means today both for the company and for our end user.
Shawn Duffy: Sure. So diversification of our business is actually one of our greatest assets that we have. It obviously makes it a lot more challenging for us to operate the business. It spans so many different markets and so many different customer sets that you’re trying to manage to. And frankly, I hear from stakeholders, investors that it’s more challenging to get to know us as a company and to understand our business financially, and what the drivers are and the value that they bring. But it’s actually one of the things that makes us very unique, and we’re able to cross-pollinate our technical capabilities across our businesses and across our customer sets. For example, when we entered into service with ViaSat-1 in 2012 we were entirely predominantly a U.S. residential broadband play. That’s where we had really set our eyes at first and had a vision for that market. But soon after that within a pretty small time we saw what was possible in the mobile connectivity market, and that we could really change the equation of what we could do on a plane - really kind of turned the market upside down there. So one of our very first customers was JetBlue. They were very visionary as well on what they wanted to bring to the passenger and cabin experience. And that really aligned with our vision of what we thought was possible with high capacity satellite solutions. So we entered that market; it’s been very successful for us. Last year, we delivered 700 commercial air IFC terminals - that’s in-flight connectivity - to the market. So we’re clearly continuing to diversify our business and taking on next gen technology to more and more markets. I think if you look at our mix of our business, just in the service side or just in the satellite service segment alone, last year our non-U.S.-fixed broadband business made up over 22 percent of our revenue. So clearly, since the time that we started on this endeavor with ViaSat-1, we’ve diversified the business quite a bit. We see good opportunities out there in other markets in enterprise, and now we’re starting to bring Wi-Fi to communities that didn’t have connections before. So we’re really excited about that Latin American market and looking what we can do, and other broader markets. Trust me, I hear a lot on how challenging it is for folks to get their arms around us because we’re just so unique, and I often tell them it’s a feature, not a bug. It gives us a lot of agility, a lot of flexibility and a lot of growth opportunity as well.
Alex Miller: So following from that diversification and thinking again about the ViaSat-3 constellation: What are some of the different applications and revenue streams that we’ll potentially see in? ViaSat-3?
Shawn Duffy: I think there’s a lot of different markets and things in places that we’re going to be able to expand into that we’re not into today. Having the global reach with ViaSat-3, and to have that capability be a high capacity Ka? solution that really just gives us a lot of tool sets. I think that we really endeavor to bring the fastest high-speed broadband connected experience that we can, no matter where people are, and that’s a game changer. So hopefully, I think that we’re going to continue to see growth across the globe in our business, and we’re going to expand in the markets that we’re in today. But I think we’re gonna expand in them in bringing new capabilities that aren’t available today. I think one of the examples I think about is in our government sector. Today, they really are underserved as far as the capabilities that they have in a global footprint, and bringing high-capacity Ka into some of these regions. And giving that customer set the opportunity to leverage commercial capabilities all the way down from on the move to the warfighters in the field - that brings them a lot of resiliency versus using a single network. It gives them a lot of flexibility and clearly we’ll just be able to give them some service offerings that are not out there today in the global set. In the commercial air market, you know we’re going to continue to see expansion on that side as we gain footprint across the globe. I think we’re creating a platform there that really is going to change that passenger experience that already is changing dramatically. I’m sure as you’ve been in flight, five, 10 years ago you couldn’t stream in-flight. You could barely have a text message. So today people are - it’s a completely engaging experience where they’re having that at-home experience in the plane. And that’s what we’re trying to strive to deliver everywhere. So I think there’s a lot of richness that we can bring and build on this connected platform across the globe and all of these environments. And then some of the things that we’re doing around connecting communities and schools and local service sites, as I mentioned earlier ... there’s a lot of exciting things there, and it gives you a lot of good feelings that come from the difference that you’re making in these regions and how exciting it is. So I think our business is just ... we’re just at the very edge of all the opportunities that we’re going to be able to do with the diversity and the reach that the ViaSat-3s bring.
Alex Miller: I would have to guess that once you have something like that in place, you will probably find things that you haven’t even thought of, and the people that need connectivity and all kinds of different applications and places around the world.
Shawn Duffy: We’re good at that, right? We continue to diversify ourselves as we grow and we think we can make a difference and we’d like to be there.
Alex Miller: All right well Shawn, thank you so much for taking the time to talk with us on the podcast and I’m sure we’ll want to catch up with you again as maybe we get closer to the launch of the constellation and see how things are going, so thanks. Thanks again.
Shawn Duffy: Absolutely. I appreciate and talking with you. So many exciting things going on, so we’re just getting started. So definitely stay tuned.
Alex Miller: Thank you.