Description
ViaSat, Inc.. 10% Owner PARTNERS LLC FPR bought 186,023 shares on 10-08-2012 at $ 38.78
BUSINESS OVERVIEW
Company Overview
We are a leading provider of high-speed fixed and mobile broadband services, advanced satellite and wireless networks and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and broadband service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies.
We conduct our business through three segments: satellite services, commercial networks and government systems. Financial information regarding our reporting segments and the geographic areas in which we operate is included in the consolidated financial statements and notes thereto.
Satellite Services
Our satellite services segment provides retail and wholesale satellite-based broadband internet services for our consumer, enterprise and mobile broadband customers in the United States. Our satellite services business also provides a platform for the provision of network management services to domestic and international satellite service providers.
In October 2011, our new high-capacity Ka-band spot-beam satellite, ViaSat-1, was successfully launched into orbit. The satellite manufacturer handed over operation of the satellite to us in December 2011, following the successful completion of the manufacturer’s in-orbit testing. At the time of launch, we believe ViaSat-1 was the highest capacity, most cost-efficient satellite in the world, with a data throughput of approximately 140 Gigabits per second. In January 2012, we commenced commercial operation of our ViaSat-1-based Exede SM broadband internet services. Our Exede services are designed to offer a high-quality broadband internet service choice to the millions of unserved and under-served consumers in the United States and to significantly expand the quality, capability and availability of high-speed broadband satellite services for U.S. consumers and enterprises. We recently announced our intention to award a satellite construction contract in 2012 for a second high-capacity Ka-band spot-beam satellite.
We believe that growth in our fixed and mobile broadband businesses will be driven in coming years by consumer demand for our Exede broadband services, as well as by increasing demand from enterprise and mobile users worldwide for mobile broadband solutions and broadband services offering greater bandwidth and higher speeds.
The primary services offered by our satellite services segment are comprised of:
• Retail and Wholesale Broadband Satellite Services. Our retail and wholesale broadband satellite services offered under the Exede and WildBlue ® brands provide two-way satellite-based broadband internet access to consumers and small businesses in the United States. We offer a range of service plans to both retail and wholesale customers, with pricing based on data speeds and volume limits. We offer wholesale broadband services to our national and regional distribution partners, including direct-to-home satellite video providers, retail service providers and communications companies. As of March 30, 2012, we provided broadband satellite services to approximately 385,000 subscribers.
• Mobile Broadband Services. Our Yonder ® mobile broadband services provide global network management and high-speed internet connectivity services for customers using airborne, maritime and ground-mobile satellite systems.
Commercial Networks
Our commercial networks segment develops and produces a variety of advanced end-to-end satellite communication systems and ground networking equipment and products that address five key market segments: consumer, enterprise, in-flight, maritime and ground mobile applications. These communication systems, networking equipment and products are generally developed through a combination of customer and discretionary internal research and development funding, and are either sold to our commercial networks customers or utilized to provide services through our satellite services segment.
With expertise in commercial satellite network engineering, gateway construction and remote terminal manufacturing for various types of interactive communication services, combined with our advanced satellite technology and systems integration experience, we have the ability to design, build, initially operate and then hand over on a turnkey basis, fully operational, customized satellite communication systems capable of serving a variety of markets and applications. Our networking equipment and products include consumer broadband networking and customer premise equipment (CPE), satellite modem and antenna technologies, earth stations and satellite networking hubs. In particular, our consumer broadband products, satellite modems and antenna technologies enable airborne, ground mobile and maritime broadband communications and support expanding mobile and consumer broadband markets worldwide. In addition, the strength of our core government systems business provides us with an effective platform to continue to design and develop new equipment and products, as we adapt and customize communication systems and products designed for the government systems segment to commercial use and vice versa.
We believe growth of the commercial satellite market will continue to be driven in coming years by a number of factors, including: (1) the continued growth in worldwide demand for communications services and, in particular, the rise in both consumer and enterprise demand for products and systems enabling broadband internet access, (2) our ability to leverage the launch of our ViaSat-1 satellite and other high-capacity Ka-band satellites worldwide to increase sales of next-generation satellite communication systems, ground networking equipment and products that operate on Ka-band frequencies, (3) the improving cost-effectiveness of satellite communications for many uses, and the ability to use satellite communication systems to rapidly deploy communications services across wide geographic areas and to large numbers of people within the satellite footprint, and (4) recent technological advancements that broaden applications for and increase the capacity and efficiency of satellite-based networks. As satellite communications equipment becomes less expensive and new capabilities emerge in satellite communications technology, we believe that the market for satellite communications will offer additional growth opportunities, as service providers seek to rapidly and cost-efficiently deploy broadband communications services across wide geographic areas, both in suburban and rural areas in the developed world and in developing countries where the deployment of terrestrial high-capacity solutions such as fiber-optic cable is neither cost-effective nor practical. Satellite communications also provide cost-effective augmentation capability for existing terrestrial networks or broadband service providers to address network congestion caused by the continued exponential increase in the volume of multimedia content accessed via the internet.
Our satellite communication systems, ground networking equipment and products cater to a wide range of domestic and international commercial customers and include:
• Fixed Satellite Networks. We are a leading end-to-end network technology supplier for the fixed satellite consumer and enterprise markets. Our next-generation satellite network infrastructure and ground terminals are designed to access Ka-band broadband services on high-capacity satellites such as ViaSat-1 and KA-SAT (Eutelsat’s high-capacity Ka-band satellite, which serves Europe and parts of the Middle East and Africa). Our SurfBeam ® network systems and modems enable satellite broadband access for residential or home office customers. We anticipate that demand for Ka-band network infrastructure and ground terminals will be driven by additional high-capacity Ka-band satellites around the world. In addition, our enterprise Very Small Aperture Terminal (VSAT) networks and products comprise VSAT satellite systems and products designed to provide enterprises with broadband access to the internet or private networks in order to support retail point-of-sale, voice-over-internet protocol (IP), distance learning and other web-centric or network applications. We also offer enterprise customers related products and services to address bandwidth constraints, latency and other issues, such as our AcceleNet ® wide area network (WAN) optimization product, which enables enterprise customers to optimize “cloud computing” services and other applications delivered over WANs. In developing countries, we also supply our enterprise VSAT networks and products to carriers to provide cellular backhaul and telephony services in under-served areas.
• Mobile Broadband Satellite Communication Systems. Our mobile satellite communication systems and related products provide high-speed, cost-efficient broadband access while on the move via small transceivers, and are designed for use in aircraft, high-speed trains and seagoing vessels. We also sell similar mobile satellite systems to government customers, which is included in our government satellite communication systems business.
• Antenna Systems . We develop, design, produce, test and install turnkey ground terminals and antennas for terrestrial and satellite applications, specializing in geospatial imagery, mobile satellite communication, Ka-band gateways and other multi-band antennas.
• Satellite Networking Development. Through our Comsat Labs division, we offer specialized design and technology services covering all aspects of satellite communication system architecture and technology, including the analysis, design, and specification of satellites and ground systems, ASIC and MMIC design and production, and WAN compression for enterprise networks.
Government Systems
Our government systems segment develops and produces network-centric IP-based secure government communications systems, products, services and solutions, which are designed to enable the collection and dissemination of secure real-time digital information between command centers, communications nodes and air defense systems. Customers of our government systems segment include the U.S. Department of Defense (DoD), armed forces, public safety first-responders and remote government employees.
We believe the following dynamics and trends will continue to offer growth opportunities for a majority of the markets that we address in our government systems segment over the next several years: (1) the U.S. military’s increasing emphasis on “network-centric” highly mobile warfare over geographically dispersed areas, which requires the development and deployment of secure, IP-based communications networks, products and service offerings capable of supporting real-time dissemination of data using multiple transmission media; and (2) increased use of IP-based network-centric applications and other more bandwidth-intensive applications at all organizational levels, which is expected to drive continued growth in government demand for bandwidth and higher-speed broadband services and associated ground systems.
The primary products and services of our government systems segment include:
• Government Satellite Communication Systems. Our government satellite communication systems offer an array of portable, mobile and fixed broadband modems, terminals, network access control systems and antenna systems using a range of satellite frequency bands for line-of-sight and beyond-line-of-sight Intelligence, Surveillance, and Reconnaissance (ISR) and Command and Control (C2) missions, as well as satellite networking services. Satellite-based systems are increasingly seen as the most reliable method of connecting rapidly moving armed forces who may out-run the range of terrestrial radio links. Our systems, products and service offerings are designed to support high-throughput broadband data links, to increase available bandwidth using existing satellite capacity, and to withstand certain catastrophic events. Our range of broadband modems, terminals and systems support high-speed broadband and multimedia transmissions over point-to-point, mesh and hub-and-spoke satellite networking systems, and include products designed for manpacks, aircraft, unmanned aerial vehicles (UAVs), seagoing vessels, ground mobile vehicles and fixed applications.
• Information Assurance. Our information security and assurance products provide advanced, high-speed IP-based “Type 1” and High Assurance Internet Protocol Encryption (HAIPE ® )-compliant encryption solutions that enable military and government users to communicate information securely over networks, and that secure data stored on computers and storage devices. Our encryption products and modules use a programmable, high-assurance architecture that can be easily upgraded in the field or integrated into existing communication networks, and are available both on a stand-alone basis and as embedded modules within our tactical radio, information distribution and other satellite communication systems and products.
• Tactical Data Links. We develop and produce advanced tactical radio and information distribution systems that enable real-time collection and dissemination of video and data using secure, jam-resistant transmission links from manned aircraft, ground mobile vehicles and other remote platforms to networked communication and command centers. Key products in this category include our Multifunctional Information Distribution System (MIDS) terminals for military fighter jets and their successor, MIDS Joint Tactical Radio System (MIDS-JTRS) terminals, “disposable” weapon data links and portable small tactical terminals.
Our Strengths
We believe the following strengths position our business to capitalize on the attractive growth opportunities presented in each of our business segments:
• Leading Satellite and Wireless Technology Platform. We believe our ability to design and deliver cost-effective satellite and wireless communications and networking solutions, covering both the provision of high-speed broadband services and the supply of advanced communications systems, ground network equipment and end-user terminals, enables us to provide our customers with a diverse portfolio of leading applications and service solutions. Our product and service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that many of the market segments in which we compete have significant barriers to entry relating to the complexity of technology, the amount of required developmental funding, the willingness of the customer to support multiple suppliers and the importance of existing customer relationships. We believe our history of developing complex secure satellite and wireless networking and communications technologies demonstrates that we possess the expertise and credibility required to serve the evolving technology needs of our customers.
• Blue-Chip Customer Base and Favorable Consumer Contract Terms. Our customers include the DoD, civil agencies, defense contractors, allied foreign governments, satellite network integrators, large communications service providers and enterprises requiring complex communications and networking solutions and services. We believe that the credit strength of our key customers, including the U.S. government and leading aerospace and defense prime contractors, as well as our favorable consumer broadband contract terms, help support more consistent financial performance.
• Experienced Management Team. Our Chief Executive Officer, Mark Dankberg, and our Chief Technology Officers have been with the company since its inception in 1986. Mr. Dankberg is considered to be a leading expert in the field of wireless and satellite communications. In 2008, Mr. Dankberg received the prestigious AIAA Aerospace International Communication award, which recognized him for “shepherding ViaSat into a leading satellite communications company through outstanding leadership and technical expertise.”
• Innovation of Next-Generation Satellite Technology. In October 2011, our new high-capacity Ka-band spot-beam satellite, ViaSat-1, was successfully launched into orbit. The satellite manufacturer handed over operation of the satellite to us in December 2011, following the successful completion of the manufacturer’s in-orbit testing, and in January 2012 we commenced our ViaSat-1-based Exede broadband services. With the market demonstrating increasing demand for satellite broadband services, ViaSat-1 and our associated next-generation ground segment technology are designed to significantly expand the quality, capability and availability of high-speed broadband satellite services for consumers and enterprises. In February 2012, the Society of Satellite Professionals International bestowed an Industry Innovators Award on us in recognition of the development and launch of our ViaSat-1 satellite.
• Innovative Product Development and Cost-Efficient Business Model. Maintaining technological competencies and innovative new product development has been one of our hallmarks and continues to be critical to our success. Our research and development efforts are supported by an employee base of over 1,200 engineers and a culture that deeply values innovation. We balance an emphasis on new product development with efficient management of our capital. For example, the majority of our research and development efforts with respect to the development of new products or applications are funded by customers. In addition, we drive capital efficiencies by outsourcing a significant portion of our manufacturing to subcontractors with whom we collaborate to ensure quality control and superior finished products.
Our Strategy
Our objective is to leverage our advanced technology and capabilities to (1) develop high-speed, high-capacity satellite broadband technologies to grow the size of the consumer satellite broadband, commercial enterprise and networking markets, while also capturing a significant share of these growing markets, (2) maintain a leadership position, while reducing costs and increasing profitability, in our satellite and wireless communications markets, and (3) increase our role as the U.S. government increases its emphasis on IP-based, highly secure, highly mobile, network-centric warfare. The principal elements of our strategy include:
• Address Increasingly Larger Markets. We have focused on addressing larger markets since our inception. As we have grown our revenues, we are able to target larger opportunities and markets more credibly and more successfully. We consider several factors in selecting new market opportunities, including whether (1) there are meaningful entry barriers for new competitors (for example, specialized technologies or relationships), (2) the new market is the right size and consistent with our growth objectives, and (3) the customers in the market value our technology competence and focus, which makes us an attractive partner.
• Evolve into Adjacent Technologies and Markets. We anticipate continued organic growth into adjacent technologies and markets. We seek to increase our share in the market segments we address by selling existing or customized versions of technologies we developed for one customer base to a different market — for instance, to different segments of the government market or between government and commercial markets. In addition, we seek to expand the breadth of technologies and products we offer by selling new, but related, technologies and products to existing customers.
• Enhance International Growth. International revenues represented approximately 21% of our total fiscal year 2012 revenues. We believe growth in international markets represents an attractive opportunity, as we believe our comprehensive offering of satellite communications products, systems and services will be attractive to government and commercial customers on an international basis. In addition, we expect that our domestic satellite broadband services business will provide a platform for the provision of network management and back-office services to international providers of satellite broadband services.
• Pursue Growth Through Strategic Alliances and Relationships. We have regularly entered into teaming arrangements with other government contractors to more effectively capture complex government programs, and we expect to continue to actively seek strategic relationships and ventures with companies whose financial, marketing, operational or technological resources can accelerate the introduction of new technologies and the penetration of new markets. We have also engaged in strategic relationships with companies that have innovative technologies and products, highly skilled personnel, market presence, or customer relationships and distribution channels that complement our strategy. We may continue to evaluate acquisitions of, or investments in, complementary companies, businesses, products or technologies to supplement our internal growth.
CEO BACKGROUND
Dr. Robert Johnson has been a director of ViaSat since 1986. Dr. Johnson brings significant business and corporate finance expertise to our Board through his role as an investor in companies in various industries. Dr. Johnson has worked in the venture capital industry since 1980, and has acted as an independent investor and served on the board of directors of a number of entrepreneurial companies since 1983. Dr. Johnson formerly served as a director of hi/fn, inc. Dr. Johnson earned B.S. and M.S. degrees in Electrical Engineering from Stanford University and M.B.A. and D.B.A. degrees from the Harvard Business School.
John Stenbit has been a director of ViaSat since August 2004, and is a consultant for various government and commercial clients. Mr. Stenbit provides our Board with significant technological, defense and national security expertise as a result of his distinguished career of government service focused on the communications, aerospace and satellite fields. From 2001 to his retirement in March 2004, Mr. Stenbit served as the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (C3I) and later as Assistant Secretary of Defense of Networks and Information Integration / Department of Defense Chief Information Officer, the C3I successor organization. From 1977 to 2001, Mr. Stenbit worked for TRW, retiring as Executive Vice President. Mr. Stenbit was a Fulbright Fellow and Aerospace Corporation Fellow at the Technische Hogeschool, Einhoven, Netherlands. Mr. Stenbit has chaired the Science Advisory Panel to the Director for the Administrator of the Federal Aviation Administration. He also has significant expertise and perspective as a member of the boards of directors of private and public companies in various industries. Mr. Stenbit currently serves on the board of directors of Loral Space & Communications Inc. (Nasdaq: LORL) and Defense Group Inc., a private corporation. He also serves on the board of trustees of The Mitre Corp., a not-for-profit corporation, and as a member of the Advisory Boards of the National Security Agency, the Missile Defense Agency, the Defense Intelligence Agency and the Science Advisory Group of the U.S. Strategic Command. Mr. Stenbit previously served as a director of Cogent, Inc., SM&A Corporation and SI International, Inc.
B. Allen Lay has been a director of ViaSat since 1996. Mr. Lay brings significant business and financial expertise to our Board due to his background as an investor in companies in various fields. From 1983 to 2001, he was a General Partner of Southern California Ventures, a venture capital company. From 2001 to the present he has acted as a consultant to the venture capital industry. Mr. Lay also has significant expertise and perspective as a member of the boards of directors of companies in various industries, including software and hardware. Mr. Lay formerly served on the board of directors of CADO Systems Inc., Meridian Data Inc., Westbrae Natural, Inc., NPI, LLC, Luminit, LLC, and Carley Lamps, LLC.
Dr. Jeffrey Nash has been a director of ViaSat since 1987. Dr. Nash provides our Board with significant operational and financial expertise due to his background as an executive of, investor in, and consultant to technology companies in various fields, including communications, aerospace and defense. From 2003 to 2009, Dr. Nash was President and Chairman of Inclined Plane Inc., a privately-held consulting and intellectual property development company serving the defense, communications and media industries. Dr. Nash also brings significant expertise and perspective through his service as a member of the boards of directors of private and public companies in various industries, including defense. Dr. Nash previously served as a director of REMEC, Inc., a former manufacturer of microwave products for defense, commercial communications and related applications, and Pepperball Technologies, Inc., a former manufacturer of non-lethal personal defense equipment for law enforcement, security and personal defense applications.
Mark Dankberg is a founder of ViaSat and has served as Chairman of the Board and Chief Executive Officer of ViaSat since its inception in May 1986. Mr. Dankberg provides our Board with significant operational, business and technological expertise in the satellite and communications industry, and intimate knowledge of the issues facing our management, having been a member of ViaSat’s founding group in May 1986. Mr. Dankberg also has significant expertise and perspective as a member of the boards of directors of companies in various industries, including communications. Mr. Dankberg serves as a director of TrellisWare Technologies, Inc., a majority-owned subsidiary of ViaSat that develops advanced signal processing technologies for communication applications, and was previously a director of REMEC, Inc., a former manufacturer of microwave products for defense, commercial communications and related applications. In addition, Mr. Dankberg serves on the board of Minnetronix, Inc., a privately-held medical device and design company. Prior to founding ViaSat, he was Assistant Vice President of M/A-COM Linkabit, a manufacturer of satellite telecommunications equipment, from 1979 to 1986, and Communications Engineer for Rockwell International Corporation from 1977 to 1979. Mr. Dankberg earned B.S.E.E. and M.E.E. degrees from Rice University.
Harvey White has been a director of ViaSat since May 2005. Mr. White provides our Board with significant operational, management and leadership expertise as an executive of large complex organizations in various industries, including wireless communications. Since June 2004, Mr. White has served as Chairman of (SHW)2 Enterprises, a business development and consulting firm. From September 1998 through June 2004, Mr. White served as Chairman and Chief Executive Officer of Leap Wireless International, Inc. (Nasdaq: LEAP). Leap Wireless filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in April 2003, and completed its financial restructuring and emerged from bankruptcy in August 2004. Prior to Leap Wireless, Mr. White was a co-founder of QUALCOMM Incorporated (Nasdaq: QCOM) where he held various positions including director, President and Chief Operating Officer. Mr. White also has significant expertise and perspective as a member of the boards of directors of private and public companies in various industries.
MANAGEMENT DISCUSSION FROM LATEST 10K
Company Overview
We are a leading provider of high-speed fixed and mobile broadband services, advanced satellite and wireless networks and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and broadband service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies. ViaSat operates in three segments: satellite services, commercial networks and government systems.
On December 15, 2009, we acquired WildBlue, a leading Ka-band satellite broadband internet service provider. In connection with the acquisition, we paid approximately $442.7 million in cash and issued approximately 4.29 million shares of ViaSat common stock to WildBlue equity and debt holders (see Note 9 to our consolidated financial statements).
On July 8, 2010, we completed the acquisition of all outstanding shares of the parent company of Stonewood, a privately held company registered in England and Wales (see Note 9 to our consolidated financial statements).
Sources of Revenues
Our satellite services segment revenues are primarily derived from our domestic satellite broadband services business and from our worldwide managed network services. Our domestic satellite broadband services business comprised approximately 15% and 16% of total revenues during fiscal years 2012 and 2011, respectively, and an insignificant amount during fiscal year 2010.
With respect to our commercial networks and government systems segments, to date, our ability to grow and maintain our revenues has depended on our ability to identify and target markets where the customer places a high priority on the technology solution, and our ability to obtain additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining awards in these markets.
Our products in these segments are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts, which require us to provide products and services under a contract at a specified price, comprised approximately 93% of our total revenues for fiscal year 2012, 95% of our total revenues for fiscal year 2011 and 91% of our total revenues for fiscal year 2010. The remainder of our revenue in these segments for such periods was derived from cost-reimbursement contracts (under which we are reimbursed for all actual costs incurred in performing the contract to the extent such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit) and from time-and-materials contracts (which reimburse us for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials utilized in providing such products or services).
Historically, a significant portion of our revenues has been derived from customer contracts that include the research and development of products. The research and development efforts are conducted in direct response to the customer’s specific requirements and, accordingly, expenditures related to such efforts are included in cost of sales when incurred and the related funding (which includes a profit component) is included in revenues. Revenues for our funded research and development from our customer contracts were approximately $228.2 million or 26% of our total revenues during fiscal year 2012, $210.6 million or 26% of our total revenues during fiscal year 2011, and $92.9 million or 14% of our total revenues during fiscal year 2010.
We also incur IR&D expenses, which are not directly funded by a third party. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials, testing and certification related to research and development projects. IR&D expenses were approximately 3% of total revenues in fiscal year 2012 and 4% of total revenues in each of fiscal year 2011 and fiscal year 2010. As a government contractor, we are able to recover a portion of our IR&D expenses pursuant to our government contracts.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates routinely require adjustment.
Revenue recognition
A substantial portion of our revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to these contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (ASC 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method.
The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. For contract claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During fiscal years 2012, 2011 and 2010, we recorded losses of approximately $1.4 million, $12.1 million and $9.3 million, respectively, related to loss contracts.
Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and future cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. We believe we have established appropriate systems and processes to enable us to reasonably estimate future cost on our programs through regular evaluations of contract costs, scheduling and technical matters by business unit personnel and management. Historically, in the aggregate, we have not experienced significant deviations in actual costs from estimated program costs, and when deviations that result in significant adjustments arise, we disclose the related impact in Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, these estimates require significant management judgment and a significant change in future cost estimates on one or more programs could have a material effect on our results of operations. A one percent variance in our future cost estimates on open fixed-price contracts as of March 30, 2012 would change our income before income taxes by approximately $0.5 million.
We also derive a substantial portion of our revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, we recognize revenue when an arrangement exists, prices are fixed and determinable, collectability is reasonably assured and the goods or services have been delivered.
We also enter into certain leasing arrangements with customers and evaluate the contracts in accordance with the authoritative guidance for leases (ASC 840). Our accounting for equipment leases involves specific determinations under the authoritative guidance, which often involve complex provisions and significant judgments. In accordance with the authoritative guidance for leases, we classify the transactions as sales type or operating leases based on (1) review for transfers of ownership of the property to the lessee by the end of the lease term, (2) review of the lease terms to determine if it contains an option to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date of the option, (3) review of the lease term to determine if it is equal to or greater than 75% of the economic life of the equipment, and (4) review of the present value of the minimum lease payments to determine if they are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease. Additionally, we consider the cancelability of the contract and any related uncertainty of collections or risk in recoverability of the lease investment at lease inception. Revenue from sales type leases is recognized at the inception of the lease or when the equipment has been delivered and installed at the customer site, if installation is required. Revenues from equipment rentals under operating leases are recognized as earned over the lease term, which is generally on a straight-line basis.
When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative fair value in accordance with the authoritative guidance for accounting for multiple element revenue arrangements (ASC 605-25), and recognized when the applicable revenue recognition criteria for each element have been met. The amount of product and service revenue recognized is impacted by our judgments as to whether an arrangement includes multiple elements and, if so, whether sufficient objective and reliable evidence of fair value exists for those elements. Changes to the elements in an arrangement and our ability to establish evidence for those elements could affect the timing of revenue recognition.
Collections in excess of revenues and deferred revenues represent cash collected from customers in advance of revenue recognition and are recorded in accrued liabilities for obligations within the next twelve months. Deferred revenues extending beyond the twelve months are recorded within other liabilities in the consolidated financial statements.
Warranty reserves
We provide limited warranties on our products for periods of up to five years. We record a liability for our warranty obligations when we ship the products or they are included in long-term construction contracts based upon an estimate of expected warranty costs. Amounts expected to be incurred within twelve months are classified as a current liability. For mature products, we estimate the warranty costs based on historical experience with the particular product. For newer products that do not have a history of warranty costs, we base our estimates on our experience with the technology involved and the types of failures that may occur. It is possible that our underlying assumptions will not reflect the actual experience, and in that case, we will make future adjustments to the recorded warranty obligation.
Property, equipment and satellites
Satellites and other property and equipment are recorded at cost or in the case of certain satellites and other property acquired, the fair value at the date of acquisition, net of accumulated depreciation. Capitalized satellite costs consist primarily of the costs of satellite construction and launch, including launch insurance and insurance during the period of in-orbit testing, the net present value of performance incentives expected to be payable to the satellite manufacturers (dependent on the continued satisfactory performance of the satellites), costs directly associated with the monitoring and support of satellite construction, and interest costs incurred during the period of satellite construction. We also construct gateway facilities, network operations systems and other assets to support our satellites, and those construction costs, including interest, are capitalized as incurred. At the time satellites are placed in service, we estimate the useful life of our satellites for depreciation purposes based upon an analysis of each satellite’s performance against the original manufacturers orbital design life, estimated fuel levels and related consumption rates, as well as historical satellite operating trends.
In October 2011, our new high-capacity Ka-band spot-beam satellite, ViaSat-1, was successfully launched into orbit. The satellite manufacturer handed over operation of the satellite to us in December 2011, following the successful completion of the manufacturer’s in-orbit testing. In January 2012, we commenced commercial operation of our Exede broadband services.
As a result of the acquisition of WildBlue in December 2009, we acquired the WildBlue-1 satellite (which had been placed into service in March 2007) and an exclusive prepaid lifetime capital lease of Ka-band capacity on Telesat Canada’s Anik F2 satellite (which had been placed into service in April 2005) and related gateway and networking equipment on both satellites. The acquired assets also included the CPE units leased to subscribers under WildBlue’s retail leasing program.
Occasionally, we may enter into capital lease arrangements for various machinery, equipment, computer-related equipment, software, furniture or fixtures. As of March 30, 2012 and April 1, 2011, assets under capital lease totaled approximately $3.1 million. We record amortization of assets leased under capital lease arrangements within depreciation expense.
Impairment of long-lived and other long-term assets (property, equipment and satellites, and other assets, including goodwill)
In accordance with the authoritative guidance for impairment or disposal of long-lived assets (ASC 360), we assess potential impairments to our long-lived assets, including property, equipment and satellites and other assets, when there is evidence that events or changes in circumstances indicate that the carrying value may not be recoverable. We periodically review the remaining estimated useful life of the satellite to determine if revisions to the estimated life are necessary. We recognize an impairment loss when the undiscounted cash flows expected to be generated by an asset (or group of assets) are less than the asset’s carrying value. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and charged to results of operations. No material impairments were recorded by us for fiscal years 2012, 2011 and 2010.
We account for our goodwill under the authoritative guidance for goodwill and other intangible assets (ASC 350). We early adopted the provisions of ASU 2011-08, Testing Goodwill for Impairment, during the fourth quarter of fiscal year 2012, which permits us to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two step goodwill impairment test. If, after completing our qualitative assessment we determine that it is more likely than not that the carrying value exceeds estimated fair value, we compare the fair value to our carrying value (including goodwill). If the estimated fair value is greater than the carrying value, we conclude that no impairment exists. If the estimated fair value of the reporting unit is less than the carrying value, a second step is performed in which the implied fair value of goodwill is compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be written down to its implied fair value, resulting in goodwill impairment. We test goodwill for impairment during the fourth quarter every fiscal year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist.
The qualitative analysis included assessing the impact of changes in certain factors including (1) changes in forecasted operating results and comparing actual results to projections, (2) changes in our weighted average cost of capital, (3) changes in the industry or our competitive environment since the acquisition date, (4) changes in the overall economy, our market share and market interest rates since the acquisition date, (5) trends in the stock price and related market capitalization and enterprise values, (6) trends in peer companies total enterprise value metrics, and (7) additional factors such as management turnover, changes in regulation and changes in litigation matters.
Based on the Company’s qualitative assessment performed during the fourth quarter of fiscal year 2012, the Company concluded that it was more likely than not that the estimated fair value of the Company’s reporting units exceeded its carrying value as of March 30, 2012 and, therefore, determined it was not necessary to perform the two step goodwill impairment test.
Income taxes and valuation allowance on deferred tax assets
Management evaluates the realizability of our deferred tax assets and assesses the need for a valuation allowance on a quarterly basis. In accordance with the authoritative guidance for income taxes (ASC 740), net deferred tax assets are reduced by a valuation allowance if, based on all the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Our valuation allowance against deferred tax assets increased from $12.7 million at April 1, 2011 to $14.7 million at March 30, 2012. The valuation allowance primarily relates to state net operating loss carryforwards and research credit carryforwards available to reduce state income taxes.
Accruals for uncertain tax positions are provided for in accordance with the authoritative guidance for accounting for uncertainty in income taxes (ASC 740). Under the authoritative guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The authoritative guidance addresses the derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, and income tax disclosures.
We are subject to income taxes in the United States and numerous foreign jurisdictions. In the ordinary course of business there are calculations and transactions where the ultimate tax determination is uncertain. In addition, changes in tax laws and regulations as well as adverse judicial rulings could adversely affect the income tax provision. We believe we have adequately provided for income tax issues not yet resolved with federal, state and foreign tax authorities. However, if these provided amounts prove to be more than what is necessary, the reversal of the reserves would result in tax benefits being recognized in the period in which we determine that provision for the liabilities is no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense would result.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Company Overview
We are a leading provider of high-speed fixed and mobile broadband services, advanced satellite and other wireless networks and secure networking systems, products and services. We have leveraged our success developing complex satellite communication systems and equipment for the U.S. government and select commercial customers to develop next-generation satellite broadband technologies and services for both fixed and mobile users. Our product, systems and broadband service offerings are often linked through common underlying technologies, customer applications and market relationships. We believe that our portfolio of products and services, combined with our ability to effectively cross-deploy technologies between government and commercial segments and across different geographic markets, provides us with a strong foundation to sustain and enhance our leadership in advanced communications and networking technologies. ViaSat, Inc. was incorporated in California in 1986, and reincorporated as a Delaware corporation in 1996.
We conduct our business through three segments: satellite services, commercial networks and government systems.
Satellite Services
Our satellite services segment provides retail and wholesale satellite-based broadband internet services for our consumer, enterprise and mobile broadband customers in the United States. Our satellite services business also provides a platform for the provision of network management services to domestic and international satellite service providers.
The primary services offered by our satellite services segment are comprised of:
• Retail and wholesale broadband satellite services offered under the Exede SM and WildBlue ® brands, which provide two-way satellite-based broadband internet access to consumers and small businesses in the United States. We offer a range of service plans to both retail and wholesale customers, with pricing based on data speeds and volume limits. We offer wholesale broadband services to our national and regional distribution partners, including direct-to-home satellite video providers, retail service providers and communications companies. As of June 29, 2012, we provided broadband satellite services to approximately 405,000 subscribers.
• Our Yonder ® mobile broadband services, which provide global network management and high-speed internet connectivity services for customers using airborne, maritime and ground-mobile satellite systems.
Commercial Networks
Our commercial networks segment develops and produces a variety of advanced end-to-end satellite and other wireless communication systems and ground networking equipment and products that address five key market segments: consumer, enterprise, in-flight, maritime and ground mobile applications. These communication systems, networking equipment and products are generally developed through a combination of customer and discretionary internal research and development funding, and are either sold to our commercial networks customers or utilized to provide services through our satellite services segment.
Our satellite communication systems, ground networking equipment and products cater to a wide range of domestic and international commercial customers and include:
• Fixed satellite networks, including next-generation satellite network infrastructure and ground terminals to access high-capacity satellites.
• Mobile broadband satellite communication systems, designed for use in aircraft, high-speed trains and seagoing vessels.
• Antenna systems for terrestrial and satellite applications, specializing in geospatial imagery, mobile satellite communication, Ka-band gateways and other multi-band antennas.
• Satellite networking development programs, including specialized design and technology services covering all aspects of satellite communication system architecture and technology.
Government Systems
Our government systems segment develops and produces network-centric internet protocol (IP)-based secure government communications systems, products, services and solutions, which are designed to enable the collection and dissemination of secure real-time digital information between command centers, communications nodes and air defense systems. Customers of our government systems segment include the U.S. Department of Defense (DoD), armed forces, public safety first-responders and remote government employees.
The primary products and services of our government systems segment include:
• Government satellite communication systems, including an array of portable, mobile and fixed broadband modems, terminals, network access control systems and antenna systems using a range of satellite frequency bands for line-of-sight and beyond-line-of-sight Intelligence, Surveillance, and Reconnaissance (ISR) and Command and Control (C2) missions and satellite networking services, as well as products designed for manpacks, aircraft, unmanned aerial vehicles (UAVs), seagoing vessels, ground mobile vehicles and fixed applications.
• Information assurance products and secure networking solutions, which provide advanced, high-speed IP-based “Type 1,” High Assurance Internet Protocol Encryption (HAIPE ® )-compliant, and other advanced encryption solutions that enable military, government and other users to communicate information securely over networks, and that secure data stored on computers and storage devices.
• Tactical data links, including Multifunctional Information Distribution System (MIDS) terminals for military fighter jets and their successor, MIDS Joint Tactical Radio System (MIDS JTRS) terminals, “disposable” weapon data links and portable small tactical terminals.
Sources of Revenues
Our satellite services segment revenues are primarily derived from our domestic satellite broadband services business and from our worldwide managed network services. Our domestic satellite broadband services business comprised approximately 14% and 17% of total revenues during the three months ended June 29, 2012 and July 1, 2011, respectively.
With respect to our commercial networks and government systems segments, to date, our ability to grow and maintain our revenues has depended on our ability to identify and target markets where the customer places a high priority on the technology solution, and our ability to obtain additional sizable contract awards. Due to the nature of this process, it is difficult to predict the probability and timing of obtaining awards in these markets.
Our products in these segments are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts, which require us to provide products and services under a contract at a specified price, comprised approximately 93% and 94% of our total revenues for these segments for the three months ended June 29, 2012 and July 1, 2011, respectively. The remainder of our revenue in these segments for such periods was derived from cost-reimbursement contracts (under which we are reimbursed for all actual costs incurred in performing the contract to the extent such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit) and from time-and-materials contracts (which reimburse us for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials utilized in providing such products or services).
Historically, a significant portion of our revenues has been derived from customer contracts that include the research and development of products. The research and development efforts are conducted in direct response to the customer’s specific requirements and, accordingly, expenditures related to such efforts are included in cost of sales when incurred and the related funding (which includes a profit component) is included in revenues. Revenues for our funded research and development from our customer contracts were approximately $52.7 million or 22% and $54.0 million or 28% of our total revenues in the three months ended June 29, 2012 and July 1, 2011, respectively.
We also incur independent research and development (IR&D) expenses, which are not directly funded by a third party. IR&D expenses consist primarily of salaries and other personnel-related expenses, supplies, prototype materials, testing and certification related to research and development projects. IR&D expenses were approximately 3% of total revenues during each of the three months ended June 29, 2012 and July 1, 2011. As a government contractor, we are able to recover a portion of our IR&D expenses pursuant to our government contracts.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. We describe the specific risks for these critical accounting policies in the following paragraphs. For all of these policies, we caution that future events rarely develop exactly as forecast, and even the best estimates routinely require adjustment.
Revenue recognition
A substantial portion of our revenues is derived from long-term contracts requiring development and delivery of complex equipment built to customer specifications. Sales related to these contracts are accounted for under the authoritative guidance for the percentage-of-completion method of accounting (Accounting Standards Codification (ASC) 605-35). Sales and earnings under these contracts are recorded either based on the ratio of actual costs incurred to date to total estimated costs expected to be incurred related to the contract, or as products are shipped under the units-of-delivery method.
The percentage-of-completion method of accounting requires management to estimate the profit margin for each individual contract and to apply that profit margin on a uniform basis as sales are recorded under the contract. The estimation of profit margins requires management to make projections of the total sales to be generated and the total costs that will be incurred under a contract. These projections require management to make numerous assumptions and estimates relating to items such as the complexity of design and related development costs, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs and manufacturing efficiency. These contracts often include purchase options for additional quantities and customer change orders for additional or revised product functionality. Purchase options and change orders are accounted for either as an integral part of the original contract or separately depending upon the nature and value of the item. For contract claims or similar items, we apply judgment in estimating the amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is considered probable. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. During the three months ended June 29, 2012 and July 1, 2011, we recorded losses of approximately $1.3 million and $0.3 million, respectively, related to loss contracts.
Assuming the initial estimates of sales and costs under a contract are accurate, the percentage-of-completion method results in the profit margin being recorded evenly as revenue is recognized under the contract. Changes in these underlying estimates due to revisions in sales and future cost estimates or the exercise of contract options may result in profit margins being recognized unevenly over a contract as such changes are accounted for on a cumulative basis in the period estimates are revised. We believe we have established appropriate systems and processes to enable us to reasonably estimate future cost on our programs through regular evaluations of contract costs, scheduling and technical matters by business unit personnel and management. Historically, in the aggregate, we have not experienced significant deviations in actual costs from estimated program costs, and when deviations that result in significant adjustments arise, we disclose the related impact in Management’s Discussion and Analysis of Financial Condition and Results of Operations. However, these estimates require significant management judgment and a significant change in future cost estimates on one or more programs could have a material effect on our results of operations. A one percent variance in our future cost estimates on open fixed-price contracts as of June 29, 2012 would change our loss before income taxes by approximately $0.4 million.
We also derive a substantial portion of our revenues from contracts and purchase orders where revenue is recorded on delivery of products or performance of services in accordance with the authoritative guidance for revenue recognition (ASC 605). Under this standard, we recognize revenue when an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered.
CONF CALL
Mark Dankberg
Okay, thanks. Good afternoon, everyone and welcome to our ViaSat's earnings conference call for our third quarter fiscal year 2009. And I am Mark Dankberg, Chairman and CEO and I have got with me Rick Baldridge, our President and Chief Operating Officer; Ron Wangerin our Vice President and Chief Financial Officer, and Keven Lippert, our General Counsel.
Before we start, Keven will provide our Safe Harbor disclosure.
Keven Lippert
Before we get started I want to acknowledge that be aware that our 8-K was released during market hours today.
Now getting back to the Safe Harbor, I would like to remind you that discussion today, we will contain forward-looking statements. we would like to caution you that actual results may differ materially from those projected in these statements.
Risk factors that could cause actual results to differ are discussed in our SEC filings including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website. That said let me turn it back over to, Mark.
Mark Dankberg
Okay thanks Keven. So there are slides that are available over the web and we will start with our fiscal year '09 third quarter and year-to-date financial results, give the business overview perspective and some business highlights and discussions.
After that Ron Wangerin will discuss our financial results in more detail. And finally I will update our outlook for this fiscal year and next fiscal year and with some other things and then we will take questions.
So overall we are really pretty happy with our financial situation in the context of the overall macro economic environment. Earnings and cash generation for the quarter and year-to-date have been inconsistent with our plans.
New orders were exceptional in our first half and that combined with us being little more cautious on spending and careful with our contract backlog management lending confidence to our outlook for continued revenue and earnings growth this year and next. And we are very pleased to be able to say that our earnings outlook for this year and next year is unchanged from last quarter.
Our third quarter results fed kind of right into that picture. GAAP diluted earnings per share increased from $0.32 to $0.34 year-over-year and non-GAAP diluted earnings per share grew from $0.40 to $0.43.
It has been well anticipated primarily due to the restoral of R&D tax credit. Our tax rate for the quarter had about 8% as much lower than the same period last year when it was actually higher than normal 30%.
So, we were able to achieve our earnings objective on revenue that was actually about 1% lower than last year.
New orders for the quarter were pretty good and actually skewed significantly towards commercial our government contracts took something of a breather after two consecutive outstanding quarters.
Our contact backlog remains pretty strong. This third quarter year-to-date chart is also consistent with this. As anticipated the year-to-date effective tax rate is about 15.5% versus last year is higher than normal 29%. And that contributes to GAAP earnings per share rising from $0.71 to $0.82 on a year-over-year basis and non-GAAP dilutive earnings per share are growing from $0.96 up to $1.11. Those are increases of 15% and 16% respectively on a year-over-year basis.
Revenues year-to-date are up about 8% from $427 million to $452 million. But again we are talking about very strong new orders activity in the first half year-to-date quarters are up over 30% compared to last year, at $604.5 million versus $461.5 million. Defense orders especially can be quite lumpy.
Let's take a quick overview and those top level third quarter financial results in some context.
From a top level perspective, we are managing pretty consistently with the way we usually do. We are aiming to achieve steady earnings growth in the present while investing to the extent we can in our future.
The fluctuations in our tax are certainly factoring there. We consider ourselves fortunate because we have a number of promising business areas worth investing in. The time horizons for these areas for realizing benefits in these areas really vary the cost of different area.
And while some of these markets maybe impacted in the near term by the economic climate as we have said before some of our government businesses conservatively benefit from a renewed DOD maples focus on cost containment.
For the areas listed in this chart, are consistent with where we have been focusing for the last year or so. And we will discuss each of them in more detail later in the call, without having to itemize them right here on this page.
Now I will switch to looking at our government business. While our government business continues to read our overall financial performance and our outlook remains good in each of these business areas.
The MIDS JTRS or joint tactical radio system program has continued to show good progress with completion of the second phase of security verification testing. And the navy has also conducted initial high qualification testing.
We believe we are making progress in gaining the attention of a number of new platforms and programs that need advance multi-channel, joint tactical radio system capable radios, and that would go beyond those current reserve by our MIDS LVT units.
The underlying dynamics there, are the program schedules for radios or radio upgrades on these new platforms relative to the current outlook for radio availability from the other JTRS development programs.
So there are projects in play to considerably expand our JTRS market. We anticipate in a word of initial MIDS JTRS low rate initial production or LRIP quantities to be sometime this summer.
And that would follow on go on to the production trend. This in turn will produce, we have already seen this fiscal year. And it's consistent with our view as MIDS J transitioning into volume production as a successor to the MIDS LVT or low volume terminal program.
And meanwhile, the international orders for MIDS LVT remain solid as those users deployments are scheduled to catch up to the deployments on US forces.
Sales of our legacy unmanned aerial vehicle or UAV data link products continues to be good. Well we seem to be consistently winning positions on the Tier-2 over tactical UAV class of vehicles.
We anticipate these design wins will provide very good year-over-year growth in that space for several years. We are almost done with the most current version of the government High Assurance Internet Protocol Encryption Standard or HAIPE secured networking standard for our KG-255 Inline network encryptors.
That creates additional space between the leaders in this area and the rest of that market. We are still seeing opportunities for embedment of our core security modules and other radios and communication systems.
Government satellite communication systems awards have been particularly strong this year. And we anticipate that continuing for the foreseeable future as the government takes advantage of existing commercial transponder leases. The new capacity on the wide band global satellite system and the upcoming launch of the next generation version of the UHF frequency band satellite or the Mobile User Objective System. MUOS is currently scheduled for launch next year in 2010.
In general, the deployment of new DOD satellites, both wide band global satellite and MUOS creates a positive environment for our ground terminals.
Subsequent to the end of the quarter, we received an order for an initial quantity of 45 low rate initial production transceivers for the Blue Force Tracking 2 situational awareness program. These terminals are to be used for field trials currently scheduled for this fall.
And that was basically the event that we have been expecting as the next step towards transitioning into volume production and it represents most of what we have been planning for fiscal year '09 as well as the next fiscal year.
The army has been planning to tie production of our Blue Force Tracking 2 terminals into deployment of the next generation, what’s called FBCB2, battle management software system.
Now considering options to introduce the benefits of Blue Force Tracking 2 including its security capabilities more quickly. We have also received additional words for our ArcLight product which is currently being off-setted on tactful military ISR intelligence surveillance and reconnaissance platforms. And we are getting a lot of interest from new platforms there. ArcLight is our broadband mobile Ku-band networking product. And integration into these ISR platforms is something that we have been working towards for quite a lot. And it could lead to significant growth opportunities. Our base of commercial aviation and maritime capability and coverage has been a big help and showing government customers that this is a mature off the shelve capability that can be deployed.
Just looking to our commercial business, overall there is really no major issues in our commercial business, which is probably not such a bad thing and have all things considered. Consumer broadband in the US is pretty stable in terms of gross subscriber additions, which ultimately is what drives our unit shipments, while Blue are down in US customer have been adding incrementally to capacity in high demand market areas. It is also been filling orders there. So, capacity limitations remain a factor in overall subscriber growth.
They have been promoting their service more in geographic areas that have lower demand to stimulate the demand in those areas. Overall, as we have been expecting unit shipments lower than last year and that reflects the capacity limitations as well as a desire on [WildBlue’s] part to continue to push down the inventory in the distribution pipeline. We are continuing also to work with [Eurocap] on the interim two-way branded service in Europe paving the way for next year’s Ka-band launch.
Planning for the Canadian portion of ViaSat-1 is also becoming more active and there are a number of opportunities to work with planned new Ka-band to another parts of the world. Also we are certainly aware of the new administration interests in investing in and stimulating the broadband access market in the United States. We have been active in communicating our views. We have been encouraged in that people inside the government as well as in the non-governmental public interest research groups seem to appreciate the difference in our approach to bandwidth provisioning and service quality compared to existing broadband satellites. We believe there are very compelling reasons to include very high performance satellite services as a component of an overall national broadband policy and we are hopeful that both legislation and implementation language will reflect that. In either way we don’t really anticipate any significant address impact on the market that we have aiming out with ViaSat-1.
The KU Mobile broadband area continues to expand in terms of geographic coverage and total number of platforms served. Our maritime efforts working with KVH are growing pretty nicely. We are also adding new channel partners to help reach other maritime customers. The overall business cap market is very tough and so we are adjusting our outlook for service revenue there downward a little bit and we are not really anticipating any near-term growth in unit shipments through business steps. We are although there are good long-term signs for the Ku-band and global mobile broadband market.
Our Antenna Systems business continues to perform within the plans. And the conventional VSAT business is challenging on an industry-wide basis, but we remain optimistic that we will see significant competitive advantage beginning next year, working with (inaudible) on KA 5.
In the mean time we received a new contract for a large international VSAT network near the end of the December quarter. This customer has executed its financing agreement and expects to initiate work on the project this quarter depending completion of some additional supporting documentation. We will provide more information in the next few weeks or so, as we can on that project.
Talking about our Accelenet, Wide Area Networking acceleration software business for about a year now. And so far this remains a lot more like potential energy than kinetic energy. While revenues are slowly increasing which saying something in this market for IT capital spending actually. We have invested more this year than we anticipated. But based on market reception and our good OEM relationship with Cisco as well as Cisco's progress in the market, we are maintaining our efforts to the extent we can while meeting our overall financial objectives.
Lets take a quick update on Ka-band ViaSat-1 project and we consider the macro environment for our Ka-band project to be steadily becoming more favorable in the year's since we started. We think there is in general a greater appreciation in the market for the cost and technical difficulties that wireless or other terrestrial technologies would face in bringing the level of service that we are targeting to the specific geographic markets we are aiming at.
It certainly seems that the expectations around WiMAX they are subsiding and that there is greater recognition that WiMAX is more evolutionary than revolutionary. It also seems clear that demand in the US is quite high in the geographic areas addressed by ViaSat-1 and the associated value of having new capacity there in 2011. And we actually believe the range of potential partnership and financing option is becoming broader and not narrower.
We continue to make steady progress on managing the satellite and its launch within budget non-schedule. We completed the satellite critical design review. International interest in Ka-band broadband and our budget remains quite high. We have also been doing more work with the government on potential applications for our own defense applications.
For working more closely with Loral and Telesat on their Canadian Sat-1 capacity. We should be beginning work on the ground segment for that and not to distant future. It appears that financing opportunities for us somewhat better now than they were about even a quarter ago. While we continue to make capital investments in the satellite, we extended our short-term credit facilities last quarter which we believe is adequate (inaudible). We continue to explorer a number of avenues for partnerships and additional financing approaches.
As we have consistently stated from start of the project we believe that our ability to finance the project on our own is an important component is ultimately reaching any potential or eventual partnership outcome. The list of factors we are considering in working through financing is pretty consistent with what it was last quarter. I am not go though those by points, but as we have mentioned we foresee that several of those factors are trending somewhat more favorably.
So, that’s kind of our business overview. 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 and cover the balance sheet and cash flows. Revenues were $150.4 million a slight decrease over the third quarter of last year with just specific revenue changes later in the segment results. Our cost of revenue percentage increased reflects two things. In the third quarter of last year we had some high margin sales that contributed to a higher gross margin. And secondly in the third quarter of this year we get a higher proportion of funded development projects which were at lower gross margins.
Selling, general and administrative expenses were higher year-over-year mostly due to higher selling and new business proposal cost for a record year-to-date awards, support cost from increased business activity as well as legal and other cost associated with our Ka-band satellite initiatives.
Research and development expenses were down 17% in the third quarter, year-over-year, principally due to the shift and some of our development efforts going from internal development projects to customer funded development. However, we continue to invest in next generation tactical data links, information assurance, unmanned area of vehicles and broadband technologies. Quarterly amortization of intangibles was slightly lower for the third quarter year-over-year due to the completed amortization of certain intangibles.
Income from operations for the third quarter of fiscal year 2009 includes non-cash stock-based compensation expenses of $2.5 million versus $1.9 million for the third quarter of last fiscal year.
Other income decreased due to lower interest income earned from lower invested cash balances and significantly lower interest rates year-over-year. Our income tax provision for the third quarter reflects a quarterly rate of about 8% versus 30% in the third quarter of last year. The quarterly rate is lower than the estimated annual effective income tax rate, primarily due to the expiration of the statutory limitations for previously filed tax returns resulting in the recognition of previously unrecognized tax benefits and the benefits from settlement of prior year taxes of approximately $1.8 million. We now expect our annual effective rate to be approximately 19% this year.
Minority interest decreased to lower operating results in the quarter of majority owned TrellisWare subsidiary versus the same quarter last year. We will address the difference between GAAP and non-GAAP earnings per share on a few slides.
And looking at our year-to-date results, year-to-date revenues continued on record pace at $42.6 million, an 8% increase over the same nine months of last year. The slight cost of revenue percentage reduction reflects improved margin performance, particularly in our government products area offset by lower margins on some funded broadband development programs.
SG&A expenses are significantly higher year-over-year, mostly due to higher selling and new business proposal cost from a record year-to-date awards, support cost from increased business activity as well as legal and other cost associated with their Ka-band satellite initiatives.
Research and Development expenses are down slightly year-over-year, year-to-date and reflects a high-level of R&D in the first quarter offset by reductions in the second and third quarters due to a shift to some of our development efforts going from internal development projects the customer-funded development.
Year-to-date amortization of intangibles was slightly lower 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 nine months of fiscal year 2009, includes non-cash stock-based compensation expenses were $7.6 million and it was $5.6 million for the same period in fiscal year 2008. Other income decreased due to lower interest income earned from lower invested cash balances and significantly lower interest rate year-over-year.
Following the expansion of the federal R&D credit from January 1, 2008 to December 31, 2009, our income provision for the first nine months of fiscal year 2009 reflects an estimated effective rate of about 19%.
The effective expansion of the R&D tax credit in our fiscal second quarter of this year and the exploration of the of the statute of limitations is previously filed tax resulting in a recognition of previously unrecognized tax benefits and a benefit from the settlement of prior year taxes of approximately $1.8 million in our fiscal third quarter.
Minority interest decreased to the lower operating results of our majority owned subsidiary TrellisWare versus the first nine months of last year.
Looking at our segments, in the Government Systems segments revenue for the third quarter was $93.8 million, a 10% increase over the same period last year. Year-to-date for the first nine months revenues were $279.7 million, a 19% increase over last year.
Increase for the quarter and year-to-date is primarily related to increases sales of next-generation information assurance product, higher information assurance development and next-generation military SATCOM systems revenues, partially offset by lower sales of our majority owned subsidiary TrellisWare.
In the Commercial Network segment, revenues for the third quarter were $54.2 million, a 17% decrease over the same period last year. The year-over-year quarterly decrease is primarily related to lower consumer broadband sales as our primary customer WildBlue managers' expenses.
We do not believe this is sustainable on should improve. This decrease was partially offset by increases in the mobile satellite system sales. Year-to-date for the Commercial Network segments, revenues were $176.4 million, a 5.5% decrease over the same period last year.
The change primarily reflects, lower consumer broadband sales offset by higher mobile satellite systems revenues. For satellite services for the third quarter and year-to-date, sales were slightly higher from the same period of last year.
In the third quarter, Government Systems segment posted operating earnings of $14.3 million, a decrease of 9% from the prior year, primarily due to mix of higher margin sales in the third quarter of last fiscal year when compared to this fiscal year.
Year-to-date Government segment operating earnings were $39.6 million, an 18% increase over the same period last year. The year-over-year operating earnings increase was principally due to higher revenues and the associated margin, offset partially by higher selling in new business investment costs and higher R&D investments of next-generation Tactical data link information assurance and UAV products.
Commercial network segment operating profit declined in the third quarter and year-to-date, year-over-year. Although we experienced improved performance in our Mobile satellite and Antenna Systems areas, these were offset by reduced earnings from our consumer broadband products, investments in our AcceleNet product and new business investment cost.
The satellite services for the third quarter, the operating loss was slightly lower. For year-to-date, the operating loss was higher year-over-year, primarily due to legal and other cost associated with our ViaSat-1 satellite.
For the third quarter of fiscal year 2009, operating earnings amounts include non-cash share-based compensation expense charges of approximately $2.5 million and were $1.9 million in the third quarter of 2008.
year-to-date through the third quarter of fiscal year 2009, operating amounts include non-cash share-based compensation expense charges of approximately $7.6 million and were $5.6 million for the same period in last fiscal year.
As we look at the GAAP and non-GAAP EPS difference, non-GAAP results exclude the effects of acquisition-related intangibles, and the effect of non-cash share-based compensation expenses net of tax.
The change is year-over-year, primarily related to higher net and pro forma income. Lower diluted common equivalent shares, year-over-year are primarily due to the treasury stock effects from lower average share prices.
Turning to the balance sheet, overall we continue to have a strong balance sheet. Cash and short-term investments decreased by about $61.5 million from the beginning of the year due to investments in our ViaSat-1 satellite project.
We will talk about the movement of the cash later when we review cash flows. Billed account receivables decreased on improved collection activities. Unbilled accounts receivable increased due to the timing of certain contract milestones, primarily with our mobile satellite and broadband system contracts.
Inventory was up by about $2 million in the beginning of the fiscal year primarily due to the transition of some products to units to delivery basis of accounting. Prepaid and other current assets are higher primarily due to an income tax receivable and an increase in prepaid rent due to the timing of the fiscal quarter end.
Goodwill and intangibles decreased due to a regular quarterly amortization. We are about one year into the construction of our ViaSat-1 satellite. And to-date, we have capitalized approximately $85 million through the third quarter, primarily related to progress payments for the satellite in the launch vehicle.
Net property and equipment is up about $4 million since the beginning of the year, and reflects normal capital projects to support our business growth, primarily lab and production test equipment and facility expansion.
Year-to-date, we have increased our investment in the satellite by over $77 million. The change in other long-term assets is primarily due to increases in deferred income taxes offset by amortization in capitalized software.
As we look at liabilities and equity, accounts payable increased slightly and is associated with inventory purchases from our supplier and capital equipment growth. Days payable balances remain below our historical averages.
The biggest change in liabilities was advances, which were down mostly in our Commercial segment, reflecting in timing of receipts and contract milestones, primarily on mobile satellite and antenna systems programs. The change in other current liabilities primarily relates the payment of the secured borrowing in the first quarter of about $5 million associated with an enterprise VSAT program, offset by changes in warranty and employee-related accruals.
The increase in other long-term liabilities was primarily related to an increase in long-term deferred rent. Regarding the minority interest change in the first quarter our majority owned subsidiary 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 and accretive variables less standby letters of credit. Including the effect of standby letters of credit, we currently have about $79 million available under this line to support our business growth.
As we look at cash flows, for the quarter and year-to-date, we had good net income and non-cash add back, which was offset partially by changes in working capital. The result with cash generated from operations of approximately $30 million for the quarter and $31 million year-to-date.
Cash flows related to investing activities for the quarter and year-to-date reflects capital expenditures for our satellite project, business expansion activities and capital expenditures for licenses and patents related to our satellite project, and a payment related to our JAST acquisition.
Cash provided by financing activities year-to-date is primarily from stock issuance by majority owned subsidiary and the net proceeds from common stock issuance offset by payments on the secured borrowings.
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. We recognized our use of cash over the past several quarters related to ViaSat-1 has increased substantially. We believe our cash on hand and cash we expect to generate from operations will be sufficient to meet our needs and have our line of credit available should we need to access it.
There continues to be multiple options with regard to financing the balance of our satellite project. To task we have most control over this time as a self funding options. Accordingly we will be working with our financial advisors and bank group to increase our available credit.
We believe our financial strengths a low projected debt to EBITDA leverage and the valuable satellite asset will enable us to secure the remaining capital necessary to complete the ViaSat-1 satellites if we have to go down that path.
Now I would like to turn it back to Mark to talk about our outlook.
Mark Dankberg
Okay thanks Ron. As I mentioned before our outlook for this year as a whole remains consistent with our estimates last couple of quarters. We are still aiming at the same range of GAAP and non-GAAP earnings per share which is shown in the slide in fact the 155 to 160 range for non-GAAP and 117 to 122 for GAAP.
We are still looking at about a 10 percentish year-over-year growth right now for our fiscal year 2010 which begins this coming April. Overall we think that’s a pretty good rate of growth right now specially in this environment. Our recent robust order activity as well as the breadth in diversity of potential new business opportunities are the main factors behind our current thinking.
As usual new orders for us can be quite lumpy. As we work towards all the additional orders we will need to achieve those results.
So then I will summarize on the last page here, by saying that we feel pretty fortunate at this point to be pretty much on the same earnings growth path that we were aiming at a year ago. Plus the strength of our new contract awards so far year-to-date lends confidence to maintaining that growth focus.
We are enthusiastic long term about our mix of technologies and market applications. We are seeing some favorable signs in the market. That's a poor transitions from some of our current generation product into their next generation versions, that will help sustain our growth in the long-term.
Well we still have a lot work to do on our Ka-band satellite project we are more than a year into it and are seeing things in the broadband market. We pulled so far pretty much in the way we have anticipated. The severity of credit crunch in general was worse than expected but indication seems that adequate financing is available on reasonable terms in our particular case.
Overall, we feel that our core businesses are strong and provide good enduring opportunities for continued growth.
So, that pretty much concludes prepared part of our presentation. At this point we would like to open it up for questions.
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Fund Letters
