VSAT - Time To Connect With Viasat Inc.

2023-08-15 04:04:59 ET

Summary

• Growing demand for global connectivity drives the satellite internet market, with new companies like Starlink posing competition to legacy player Viasat.
• Viasat's recent launch of its ViaSat-3 satellite was met with issues, impacting its ability to expand broadband capacity and compete with rivals.
• Viasat has seen good growth with their inflight services to commercial airlines. I do not know if this growth is enough to offset the slowdown in fixed broadband.
• Viasat recently completed the acquisition of Inmarsat. This could help it grow, particularly in the European region. The acquisition was needed to help it compete with new market entrants.

The world is becoming more and more connected and that is not going to change. There is a growing demand for the ability to connect anywhere and everywhere. While satellites beaming the internet around the world is not necessarily new, it has become a much more viable option for your everyday user. A lot of this has been spurred on by new and/or advancing technology. There has been a spat of new companies coming onto the scene. This added competition has been good for consumers.

I think the market for connectivity is only going to increase. People are not going to start demanding less internet. Satellites offer a viable option for the internet in many rural, remote, and developing areas. It does not require significant infrastructure build out and capital investment to get the internet. Viasat, Inc. ( VSAT ) is a major player in this market. They are not a new entrant trying to disrupt the market, but rather a legacy player. I am going to give a deeper look into VSAT and see if they would make a good investment.

Viasat, Inc.

Viasat is not a new company in the satellite and communications market. The company has been around since 1986 and went public in 1996. The company offers high-speed and broadband and advanced communications products and services. Viasat operates an orbital regime that is referred to as geostationary ((GEO)), rather than medium earth orbit (MEO) or low earth orbit ((LEO)). GEO satellites are further from the earth, are much larger, and provide service to a much larger area.

The Company owns four satellites in commercial service — three over North America (ViaSat-2, ViaSat-1 and WildBlue-1) and the KASAT satellite over Europe, Middle East, and Africa (EMEA). The Company successfully launched the first of its third-generation ViaSat-3 class satellites, ViaSat-3 Americas, into orbit on April 30, 2023 and is planning to launch two additional third-generation ViaSat3 class satellites currently under construction to complete its global constellation. This is a topic that needs its own discussion and will be reviewed in a later section.

The company generates revenue through the services that it provides along with the sale of products. It operates in three segments:

• Satellite services: The satellite services segment provides satellite-based high-speed broadband services around the globe for use in commercial applications. A part of this business is also inflight services, where the company provides internet to airlines.

• Commercial networks: The commercial networks segment develops and sells a wide array of advanced satellite and wireless products, antenna systems and network and terminal solutions that support or enable the provision of high-speed fixed and mobile broadband services.

• Government systems: This includes the functions of both satellite services and commercial networks but providing for government agencies. It provides broadband product and services, satellite communications services, secure networking, and more.

Competition

This market is not different than many in the technology space. A new entrant is bound to come along and disrupt the industry norm. We have seen that with satellite internet. Space X crashed onto the scene with their rockets. Then they took that ability to launch things into space and created Starlink. Starlink uses LEO satellites to provide internet access. OneWeb is another competitor utilizing LEO satellites. Although nothing compares to Starlink in terms of size and competition.

LEO offers some real advantages over the GEO system operated by ViaSat. GEO satellites are 36,000 km away from the earth's equator whereas LEO satellites are only 550 km away. That distance makes a big difference on latency. The latency on Starlink network is 25ms whereas a GEO satellite is going to be closer to 600ms. Basically you are going to get a low latency network that is far faster from the LEO network. Starlink operates over 4,500 satellites. You only need three GEO satellites to cover the entire earth.

I will say I don’t think there is a lot of competition for the consumer market. Starlink offers higher internet speeds, more data, convenience, and better pricing than ViaSat. ViaSat provides other services than just for the consumer internet market. I am specifically talking about their internet service for a consumer. The only reason I can see someone using ViaSat over Starlink is if Starlink did not offer service in your area. The charts below show the start performance difference between Starlink and the competition in terms of both download speed and latency.

You can just head over to the two websites and the decision would be made quickly. Starlink has a very sleek design that provides the information you need in a clean format with information conveyed simply. It also makes it very quick and easy to make a purchase. I work in website design and marketing and the website is so much more optimized to get someone checked out. It is the first click on the front page that gets you to checkout. ViaSat is layers deep to get to checkout, not to mention confusing to even find what you need. Basically it is not built to get consumers to purchase. Now once again this is in discussion about an individual getting a connection for their home, cabin, or whatever option.

A couple of other big things are the mobility and vehicle options from Starlink are strengths. It also has great options for personal jets. Now it does not compete like Viasat with commercial aviation but seems to focus on the consumer market. You can take the set up with you when traveling in an RV or Trailer. It provides an easy set up to get the internet wherever you go. Their installation on a vehicle is impressive as well. This leads to the other thing that makes Starlink superior is the ability to self-install. You don’t have to have a tech come out and do installation. This is so much better for the consumer; you don’t have to schedule an appointment and so forth. You install it on your own at your convenience. They send everything to you in the mail and you set it up. It is also super slick to do. If there are technical issues you can adjust and get it fixed without having to schedule and pay for a tech. This alone is a big selling point over ViaSat for me. This also makes the business much leaner and easier to manage.

I think Starlink is a big threat for Viasat and specifically for its Satellite Services business. This is the largest business line for the company. Although it does include inflight services as well, which I feel is a good growing business line for ViaSat. I might be missing something, but I think ViaSat will continue to lose a lot of customers to Starlink.

ViaSat-3

This is the new satellite network that Viasat is launching. The Company successfully launched the first of its third-generation ViaSat-3 class satellites, ViaSat-3 Americas, into orbit on April 30, 2023. The company has 3 planned ViaSat-3 satellites: ViaSat-3 Americas, ViaSat-3 EMEA, and ViaSat-3 APAC. All three satellites are to supply over 1 Tbps, or 1,000 Gbps of total network capacity. It is expected that this new constellation of satellites will have approximately 8x the capacity of Viasat’s current satellite fleet combined. This will drastically help ViaSat compete with the likes of Starlink.

The only problem with this plan is that while ViaSat-3 Americas had a successful launch, the satellite has since had issues. The company announced that an unexpected event occurred while deploying the reflector of its Viasat-3 Americas satellite “that may materially impact” performance. The company is working to resolve the issues but in the meantime there is no ViaSat-3 Americas satellite in use. The company has a few options, one of which is to deploy one of its other ViaSat-3 satellites to the region. This is obviously a blow to the company. Also this is one of the negatives to a GEO network. The satellites are very expensive and if something goes wrong it can set you back for an extended period of time.

The current network is still running fine and will not be impacted. There is of course the potential that this does not cost the company significantly as they are likely to get an insurance payout. Industry publication SpaceIntelReport noted that, if the satellite is lost, Viasat may trigger a $420 million claim . That being said, it needs the new satellites in order to compete with the new upstart companies that are stealing its customer base. This will slow down the company rolling out its updated and faster network.

This news caused the stock to drop 20% in a single day. This might have been an overreaction, but it could cost the company a lot of customers in the meantime and also shows the risks of running a GEO network. This is a development that adds risk to investing in the company and is an item to watch and see how it plays out.

Financial Performance

The company is a loss making entity on an operating income basis. The operating income for the last three years is included in the table below.

The main concern here is that the company is experiencing a declining operating margin. Even though revenues continue to grow, the operating margin is not improving. Although the company seems to be lossmaking, this does not provide a full picture. They have large capital expenses, satellites (who would have thought those are expensive) which are depreciated. This depreciation expense is what pushes the company into a loss making entity. The company has consistently been able to produce positive cash flow. Although as can be seen that cash flow has been decreasing each year. Part of the decrease in cash flow for 2023 was that the company sold off a big part of the business in the government systems segment. They sold Link 16 Tactical Data Links (TDL) business to L3Harris Technologies (LHX) for approximately $1.96 billion in cash. The TDL business was a profitable business and provided solid cash flow and EBITDA for the company.

The company also breaks down its operations on an EBITDA basis by business segment. This helps provide a picture of which one of the segments is actually providing positive cash flow to the company.

Satellite services and government systems are both providing solid EBITDA for the company. Commercial Network saw strong growth in its profitability over the past year and is on its way to a positive EBITDA.

The last thing I wanted to look at was the revenue and growth of each segment over the past few years.

Satellite Services is the largest business segment. It is also cash flow positive for the company. This is the business segment that is most under threat from competitors such as Starlink. Growth has come to a stop in the past year. After growing revenues 36% in 2022 that slowed to 1.8% in 2023. The trend also gets worse in Q4 2023 as the company saw negative growth in the Satellite Services business. The company noted that the decline in broadband revenue was due to capacity constraints. That was part of the reason that ViaSat-3 was so important for the company and why the delay could continue to cause some real growth issues. It said it expects revenue to return to growth once ViaSat-3 is online. Unfortunately, that is going to get pushed back. We are not sure exactly how long it will take for a new satellite to replace the malfunctioning satellite. While not noted by the company, I think we are also seeing the effects of competition come to play here as well. This is going to be a hard trend to change without the new ViaSat-3 satellites operational.

The positive here is the company continues to grow revenues from commercial airlines. This continues to be a good revenue driver for the company and can help offset the decline in broadband revenue. The chart below shows the growth in services to commercial airlines.

The Commercial Networks business is a loss making segment for the company. It is fast growing and the losses are shrinking with that revenue growth. This segment also experienced a drop off in growth but it still saw revenues grow nearly 20%. If this segment is able to continue its growth then it should be able to achieve EBITDA in the near future.

The Government Systems segment is actually a surprise to me here. It is good to see that the company is still able to grow its government systems revenue without the TDL business line as part of it. The company also noted that you will see higher EBITDA out of the segment as it works to rightsize the ship following the sale of TDL. I thought the sale of TDL might hurt the company more than it did. The company still has a profitable and growing business selling to the government.

Inmarsat Acquisition

The company closed the acquisition of Inmarsat on May 31, 2023 . There is not a ton of analysis or numbers to crunch on this acquisition as it is brand new. It will be interesting to see how it plays out. I think this is a necessary purchase by the company. Consolidation and expansion are needed in order to compete with the new upstarts that are challenging the market. This acquisition gives them more satellites, more customers, more influence, and the biggest thing is that it helps open the market more overseas. Particularly in the European region. There will be synergies to capitalize on and redundant costs to cut out. Overall I think it was a needed acquisition that will help the company in the long term.

Risks

The company is competing in an increasingly competitive landscape. The competition could make it hard for the company to grow its revenues. The company is currently having issues with its newest satellite. This is going to slow its ability to increase broadband capacity and speeds.

A large risk with GEO satellites has unfolded in front of us with ViaSat-3. These are expensive satellites that take a long time to build and get into operation. If something goes wrong then it can have serious repercussions on the business. This is in contrast with smaller and cheaper satellites used in the LEO network. If one of those satellites malfunctions it is a minor issue that does not have much effect.

Conclusion

Viasat has gone through some recent trouble with its latest satellite. The stock price has fallen more than 36% since its peak seen in June. This fall is mostly due to the issues with its latest satellite ViaSat-3. The market might be overreacting to the news of satellite issues, and it might be a buying opportunity. The company is facing stiff competition in the broadband business. In my mind the competition is far superior to ViaSat on its broadband services. Viasat needs its new network of satellites to compete in terms of speed and capacity. Satellite Services is the largest revenue driver for the company. I think this business will continue to struggle with growth, which means the company as a whole is going to struggle to grow revenues.

The company is seeing growth in the other two business segments, Commercial Networks and Government Systems. I am not sure if this growth will be enough to make up for the slowdown in Satellite Services. At least not on a cash flow or EBITDA basis.

The company recently completed its acquisition of Inmarsat, which should provide additional opportunities to compete and grow its network. This acquisition is new for the company and I look forward to more news about the integration.

Right now I am a hold on the stock. I think it does have some good things going for it with the acquisition and potential there. It has growing business lines and also it has a solid network of satellites. I just see the competition as too much right now for the company to see much growth overall. The risks around the ViaSat-3 system cannot be overlooked. Also any more delays on this will only continue to fuel the competition forward. The stock is worth watching, especially to see how they resolve the ViaSat-3 issues and how they integrate Inmarsat.

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