Satellite Innovator Laying the Groundwork

ViaSat (Nasdaq: VSAT) reported its fiscal 2018 second quarters on Wednesday after the market close. Revenues of $393.1 million missed The Street’s expectation by roughly $9 million, but the company posted a surprising profit, earnings $0.09 per share, beating expectations for a $0.03 loss.

After dipping at the open the next day, shares staged a late rally to finish the day in the green. The momentum continued on Friday, as the stock gained more than 5 percent.

The company’s Government Systems segment enjoyed another strong quarter. Revenue grew 6.7 percent and EBITDA (earnings before interest, taxes, depreciation, and amortization) increased approximately 14.6 percent on a year-over-year basis. Through the first half of the fiscal year, segment revenue and EBITDA are up 15.3 percent and 30.0 percent, respectively.

ViaSat serves the U.S. Department of Defense as well as allied foreign governments and their armed forces. It provides secure, high-speed broadband communication products and services to these entities. In the modern age, expect the need for faster, more secure, communication services to grow.

Strong growth was particularly seen in areas like cybersecurity and information assurance. Going forward there’s no doubt that cybersecurity will be an increasingly important component of national defense so the strength is not surprising. CEO Mark Dankberg noted during the conference call that he expects the strong trends in the Government segment to continue over the next several years.

ViaSat’s in-flight connectivity business also has good momentum. It now operates in North America, Europe, and Australia and expects growth to significantly accelerate in this niche segment beginning in the March 2018 quarter. The company ended the fiscal second quarter with 576 connected aircrafts in service and another 833 under contract. JetBlue’s (Nasdaq: JBLU) award-winning Fly-Fi network, which provides free high-speed Wi-Fi service to every seat on an equipped plane, uses ViaSat services. ViaSat announced that it has recently expanded its relationship with the airline and will be installing ViaSat-2 compatible connectivity suite on its planes.

ViaSat-2 is now in space, but it is still on the way to its final geostationary orbit and won’t be able to provide service until then. However, soon ViaSat-2 will be able to provide more coverage and higher speeds than its predecessor.

In its Satellite Services, revenues were down slightly compared to a year ago. One reason for the decline is the $6.6 million in quarterly settlement payments from Loral (Nasdaq: LORL) were completed two quarters ago. In other words, ViaSat did not benefit from the $6.6 million Loral payment this quarter.

Average revenue per user increased to $67.35, from $61.55 a year ago, a 9.4 percent increase, reflecting a migration of certain customers to more expensive, premium services. On the other hand, the number of residential subscribers has decreased by 14 percent over the past year. The company has seen some capacity constraints on the residential consumer side as its other growing businesses are taking up more bandwith. However, once ViaSat-2 enters service, in about three months, the capacity will greatly open up. ViaSat expects net subscribers additions to turn positive in that quarter.

But ViaSat-2 is intended to be just a transition phase. ViaSat is already working on its ViaSat-3 system, consisting of three different satellites. Once launched, ViaSat-3 will be capable of providing ultra-fast coverage to nearly the whole world. Indeed, it is this prospect of having the most advanced satellite system in the world and a wide array of potential application that makes this company so exciting. The company has proven adept at finding additional ways to monetize its technological capabilities, and we don’t doubt it is the huge world of opportunities that ViaSat-3 will open up that attracts Seth Klarman to the stock—his Baupost group owns a 22.6 percent stake in the company.

By traditional metrics like P/E, VSAT looks very expensive, which explains why short sellers target the stock, but it’s a different animal. Stocks run by leaders with grand visions usually don’t follow the normal script. For example, Amazon (Nasdaq: AMZN) once traded at ridiculously high earnings multiples—by normal standard—and was a favorite of short sellers, but it now trades over $1,100 a share. We are not saying VSAT is the next AMZN, but with the groundwork that the company is laying, if things proceed according to plan—no guarantee obviously—the company could be worth a lot of money and the stock could reach well into the triple digits.

After the rally, VSAT ended Friday right around our suggested buy-up-to price of $68. For the time being, we will leave it at $68 and see how the stock acts over the next few days. Subscribers who follow our recommendation should already have some shares. Again, we stress that the buy-up-to price is meant as a short-term guide whether to buy the stock or not at its current price. It is not a price target. We think VSAT can go well beyond $68 a share.

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