Viasat - Q1 2025

Transcript

Operator (participant)

My name is Meg, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Viasat's first quarter fiscal year 2025 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Ms. Curran, you may begin your conference.

Lisa Curran (VP of Investor Relations)

Thanks, Meg. We will present certain non-GAAP financial measures on today's call. Information required by the SEC relating to these non-GAAP financial measures is available in our Q1 FY25 shareholder letter on the Investor Relations section of our website. Please note that to provide a more meaningful comparison of our results of operations year-over-year, results for the first quarter of FY25 are compared against supplemental combined results for the prior year period. These supplemental combined results are based on the combination of Viasat's historical reported results with Inmarsat's historical reported results for periods prior to the acquisition, with adjustments to reflect purchase price accounting, the conversion of Inmarsat's results from IFRS to GAAP, and conforming changes to reflect Viasat's presentation of its results. This supplemental combined financial information was prepared to better illustrate for investors the performance of our business following our acquisition of Inmarsat.

Unless otherwise noted, the presented financial measures reflect year-over-year increases or decreases relative to the supplemental combined financial data in our Q1 FY25 shareholder letter on the Investor Relations section of our website. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings and annual report on Form 10-K.

These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'll turn it over to Mark Dankberg, Chairman and CEO.

Mark Dankberg (Chairman and CEO)

Good afternoon, and thanks for joining us today. With me, along with Lisa, we have Guru Gowrappan, our President, and Shawn Duffy, our CFO. We encourage reading the shareholder letter and referencing the slides we posted on our website earlier this afternoon for more details. I'll give a quick overview of the shareholder letter. Guru will cover the financial results and highlights in our growth outlook, and then we'll take questions. Our first quarter fiscal year 2025 results were a little better than expected in terms of year-over-year revenue and adjusted EBITDA growth on a combined basis as described in the shareholder letter and slides. We also continued to take actions to strengthen our capital structure while thoughtfully investing and positioning for a promising future.

Our ongoing services revenue, coupled with expected activations in Aviation, good Defense and Advanced Technology orders, existing and new backlog, and order pipeline enable us to increase our outlook for fiscal year 2025. We're pleased with the financial results this quarter, but remain focused on our agenda of both near and long-term goals, including overcoming the Viasat-3 F1 anomaly. We're making steady progress as supporting the improvements in our growth outlook. While these points are all very important, the headway we're making on multiple fronts creates optionality in the ways and sequences in which we address our challenges and opportunities. So that list is first, get our satellites under construction into service, and holistically address our capital structure and trim our leverage ratios from current levels.

We want to continue to groom our business portfolio to the highest leverage satellite and network technologies that attract customers and partners and ultimately yield attractive recurring revenue. We want to continue the Inmarsat integration to drive higher returns on our network and harmonize our services and operations and achieve our cash flow inflection objectives. We want to cultivate an enduring and economically accretive satellite operator partnership ecosystem to augment coverage and capacity and increase multi-orbit capability. We want to continue to win and execute new Defense and Advanced Technology programs with attractive growth potential and durable competitive advantages and key technologies such as ground networks, unique free space optical applications, mission-specific phased array terminals, space-based cybersecurity, and others. We can leverage these technologies into recurring revenues for commercial and government customers, and we can use these technologies to help create and promote a competitive ecosystem of partners.

Finally, we want to capture a leadership position in the emerging direct-to-device services market by leveraging our substantial installed base of aero, Maritime, and mobile users, emerging 3GPP standards, open architectures, and our existing resources. We want to foster innovative business models serving an extremely large base of satellite-enabled mobile devices and platforms, optimizing our mobile satellite services spectrum licenses and evolving L-band to create value for the millions of people that depend on our services for safety and connectivity in the air, at sea, and on land. Some of the near-term satellite milestones include Viasat-3 Flight 3 completed thermal vacuum testing. That's an important integrated satellite testing milestone. We announced this week that Viasat-3 Flight 1 entered into commercial service over the Americas. We've achieved operational speeds well over 200 Mbps to in-flight aircraft, and it's now in use for in-flight connectivity.

It will both cover new routes and enhance services on existing coverage areas. We've been able to prove dynamic beamforming and terabit per second payload technology that it works. We expect our partner, Heosat, to launch our two Ka-band polar coverage payloads, GX10A and GX10B, very shortly. They're expected to enter service in early to mid-2025. As a reminder, our financial results have been reframed to give investors more insight into the business areas already yielding attractive growth, those with attractive potential but are currently challenged, and a place for emerging areas such as the direct-to-device and other Advanced Technologies that we believe merit investor attention. Guru will provide more detailed information on the composition of our new segments and the segment revenue breakouts that we have added for our quarterly performance updates.

While we're very focused on executing in the near term, Viasat's always planned for the long term. That's enabled us to sustain growth for decades, build key franchise businesses, and evolve our technology, business models, and market segments to sustain competitive advantages even in the presence of generational technology evolutions and consistently shifting playing fields and competitive environment. We're balancing those near and long-term challenges and opportunities. With that, I'll hand it over to Guru.

Guru Gowrappan (President)

Great. Thanks, Mark. I will cover three topics: financial performance, our new segment structure, and an update to our outlook. Viasat generated good financial performance during Q1 FY25. We earned combined revenue growth of 6% year-over-year and combined adjusted EBITDA growth of 16% year-over-year, driven by Defense and Advanced Technologies and Aviation. The positive operating leverage reflects strong revenue flow-through from IP licensing and Tactical Networking and Advanced Technologies, and the continued benefit from our acquisition-related operating synergies. Now, some color on the financial results. Q1 FY25 revenue was $1.1 billion, up 44% compared to $780 million in Q1 FY24. Combined revenue was up 6% year-over-year, largely driven by growth in our Defense and Advanced Technology segment and Aviation.

Net loss of $33 million for Q1 FY25 improved compared to the net loss of $77 million in Q1 FY24, primarily due to improved operating performance, which was partially offset by higher interest and tax expenses. Q1 FY25 adjusted EBITDA was $404 million, an increase of 120% year-over-year. Adjusted EBITDA increased by 16% year-over-year from the incremental revenue flow-through in Defense and Advanced Technologies, which more than offset expected declines in fixed broadband service revenue and higher R&D expenditures. Q1 FY25 capital expenditures declined 20% year-over-year to $301 million. Combined capital expenditures decreased 33% year-over-year, primarily due to lower satellite expenditures, customer premise equipment, and general infrastructure costs. Sequentially, net leverage declined 0.1x to approximately 3.5x LTM adjusted EBITDA as of Q1 FY25, which is substantially favorable to the plan at the time the Inmarsat acquisition was announced.

We ended the quarter with $2.9 billion of liquidity, including $1.8 billion cash and cash equivalents at quarter end, and we have a fully funded path to our positive free cash flow inflection by end of Q1 FY26. Finally, subsequent to quarter end, Viasat deployed approximately $150 million of cash to repurchase $152 million principal amount of Inmarsat and Viasat notes in the open market. We opportunistically repurchased $102 million principal amount of Inmarsat 2026 secured notes at an average price of 98.2, and $50 million principal amount of Viasat 2025 unsecured notes at an average price of 99.2. Before we go further, I want to provide a bit more color on our new segment: Communication Services and Defense and Advanced Technologies. We initiated the new segment reporting structure to give additional insight into our portfolio and drivers of value.

Last month, we provided historical financials for the new segments and business lines. Our Communication Services segment includes all the businesses using our satellite network for connectivity services. All the Inmarsat businesses are included in this segment. Communication Services is comprised of Aviation, Government Satcom, Maritime, and Fixed Services and Other, or FS&O. FS&O includes U.S. and international residential fixed broadband energy and enterprise. The majority of the segment is recurring service revenue. The product revenue is primarily related to terminal sales supporting services. The majority of our CapEx is for our satellite network, which includes space and ground enabling these services.

The Defense and Advanced Technology segment has four business lines: Information Security and Cyber Defense, which sells our Type 1 encryption products. Space and Mission Systems, which includes antenna Tactical Networking, which is mostly our TrellisWare subsidiary, of which we own approximately 60%. Advanced Technologies and Other, which includes IP licensing revenue. Most of the revenue in the segment is product revenue, which includes IP licensing and can be lumpy quarter to quarter. The service revenue in the segment is primarily warranty and support for the products. The Defense and Advanced Technologies business lines have a low capital intensity. We appreciate the feedback investors provided in this process. It is an important step in raising the visibility of our valuable franchisees. We will continue to work to highlight and unlock the value that Viasat is creating for its shareholders.

Now, let's take a closer look at Communication Services performance during the quarter. Aviation continues to compete very well in the market. Commercial IFC ended the quarter with 3,750 aircraft in service, up about 16% year-over-year, with over 1,460 aircraft in contracted backlog. We're also in the contractual process of adding about 350 incremental aircraft to the backlog, including from six new airlines. We achieved mid-teens year-over-year growth in both the number of commercial and business Aviation aircraft in service. While we are confident in the year-over-year growth outlook and trajectory for Aviation, it's worth noting that we expect quarter-over-quarter results to reflect continued OEM delays and some impact due to the effects of the recent global cybersecurity software outage impacting our customers. U.S. fixed broadband revenue declined as expected, driven by fewer residential subscribers.

We continue to de-emphasize US fixed broadband to support our rapid and higher margin commercial IFC in Aviation. Our Government Satcom business line announced we are expanding work with Airbus Defence and Space to integrate Viasat's dual-band broadband terminal, which is called the GAT-5530, into the Spanish MOD's C295 Maritime patrol aircraft fleet to provide a highly flexible multi-band, multi-orbit broadband satcom capability to support missions utilizing next-generation SpainSat NG satellites. We are excited because the Airbus C295 aircraft is operated by 37 countries around the world, with hundreds of aircraft in operation and hundreds more on order. We are seeing more international government product and service opportunities with Inmarsat. During the quarter, we began collaborating with uAvionix, a pioneer in certified avionics for crewed and uncrewed Aviation, to integrate Viasat's Velaris module into its compact multi-link airborne radio system.

Velaris provides secure, resilient L-band communications for commercial UAVs and enables real-time monitoring for beyond visual line of sight UAV operations. We believe L-band unmanned vehicles of all type are an exciting growth opportunity, especially as we modernize our L-band capability. NexusWave, Maritime's new hybrid multi-orbit managed service targeting commercial shipping customers, brings global coverage, speed, capacity, security, and resilience to meet enterprise-class operational needs and crew welfare. NexusWave is building anticipation in the market, and we expect to launch beta service during Q2 FY25. In Q1 FY25, Communication Services revenue was $827 million, up 48% compared to $560 million in Q1 FY24. Combined revenue was down 2% year-over-year, driven by the expected decline in U.S. fixed broadband services and segment product revenue. Q1 FY25, Communication Services adjusted EBITDA was $308 million, an increase of 98% year-over-year.

Combined adjusted EBITDA declined 4% year-over-year, primarily from lower revenue flow-through from US fixed broadband in the FS&O business line and Maritime services. Now to Defense and Advanced Technologies performance during the quarter. Space and Mission Systems received awards of approximately $85 million related to multifunction phased array antennas, free-space optics, and antenna systems infrastructure with supported Tactical Networking received approvals that allowed activation of certain product upgrades. Once activated, we recognized IP licensing revenue on these products that had been sold over the prior few years. The business is expected to benefit from the ongoing sales, but with substantially fewer units per quarter than we recognized in Q1 FY25. Advanced Technologies also benefited from strong IP licensing revenue.

There are two components to the current licensing revenue: an annual fee, which typically occurs in Q1 as it did this quarter, and a per-unit sold fee, which is distributed throughout the year. During Q1 FY25, we benefited from both the annual license and the per-unit component. For the remainder of FY25, we expect to generate revenue from the per-unit component only. Information Security and Cyber Defense won awards for Type 1 encryption products totaling over $45 million, largely reflecting growing data center demand driven by geographic expansion and AI applications. Q1 FY25, book-to-bill ratio was 1.2 times, with continued momentum into Q2 FY25. In Q1 FY25, Defense and Advanced Technologies revenue was $300 million, up 37% compared to $220 million in Q1 FY24. Product revenue was up 45% year-over-year, driven by the strong IP licensing revenue in tactical networks and Advanced Technologies.

Q1 FY25, Defense and Technologies adjusted EBITDA was $96 million, more than triple the year-ago period, reflecting the value of the technology portfolio. Strong operating leverage from revenue flow-through in both tactical network and Advanced Technologies drove exceptional performance. Overall, it was a good quarter and a strong start to FY25. Next, we are raising our outlook slightly to reflect strong Q1 results, confidence in our market competitive positions in pipeline, and despite continued aircraft OEM delivery headlines. Our first quarter financial performance reflects our competitive solutions and strong execution in our Aviation and defense businesses. Within our Defense and Advanced Technology segment, we generated high flow-through IP revenue in two businesses. Tactical Networking business benefited from a couple of years of retroactive product upgrades in the quarter. We expect the business to continue to benefit from upgraded product sales going forward at a normalized level.

Advanced Technologies benefited from annual licenses in the quarter. Throughout the year, we expect more modest per-unit licensing revenue. Finally, because this is only the first quarter of FY25, we are raising the low end of our FY25 revenue and adjusted EBITDA outlook and maintaining our view of FY26. For comparison purposes, we removed the $95 million revenue and $86 million adjusted EBITDA catch-up benefit from the litigation settlement from FY24 reference results. Therefore, our guidance is based on FY24 revenue of approximately $4.5 billion and adjusted EBITDA of approximately $1.5 billion. We now expect FY25 revenue to be flat to slightly up year-over-year, with year-over-year adjusted EBITDA growth in the mid-single digits. We believe FY25 revenue growth, excluding an expected decline in U.S. fixed broadband associated with the Viasat-3 F1 anomaly, would have been up mid-single digits.

We have also provided additional segment-level detail in the outlook section of our shareholder letter. We remain prudent with our top-line guide given uncertainties with delayed OEM commercial aircraft deliveries and airline overcapacity. In FY25, we expect capital expenditures to decline to a range of $1.4 billion-$1.5 billion. We include capitalized interest in our CapEx guidance, which is approximately $200 million per year, but will decline in future years as we place satellites into service. We continue to expect our investments in our satellite network projects and success-based CapEx to exceed two-thirds of our total capital spend, with less than one-third associated with our maintenance and general CapEx activities. Looking forward, we expect our investments in growth CapEx to continue to decline and generate an improving free cash flow trend.

In FY26, we continue to expect to grow revenue and adjusted EBITDA relative to FY25 as a majority of our $3.4 billion assets under construction go into commercial service. Capital expenditures for FY26 are expected to decline to a range of $1.1 billion-$1.2 billion. We believe FY25 provides the foundation for multi-year accelerated growth in revenue and adjusted EBITDA growth and continued step-down in CapEx in FY26. As Mark mentioned, we are making steady progress on multiple fronts in support of the improvements in our growth outlook. We continue to expect an inflection point in positive free cash flow by end of first quarter FY26. Our path to positive free cash flow is expected to be driven by double-digit operating cash flow growth and continued declines in capital expenditures as we normalize capital expenditure in line with satellites going into commercial service.

Before closing, let me provide an additional update. As we discussed earlier in our prepared remarks, our new reporting segment structure was designed to better reflect the diverse and attractive nature of the end markets that the company serves, as well as introduce greater visibility into our performance and value drivers. As part of our initiative to provide additional transparency into our business, we will be holding a webcast teach-in on October 17, focusing on the Defense and Advanced Technology segment, which houses our Information Security and Cyber Defense, Space and Mission Systems Tactical Networking, and Advanced Technologies business lines. The feedback was overwhelming that you want to learn more about this valuable part of our portfolio. We plan to cover the breadth of our technology products and services in this segment, its unique business model, the market and competitive dynamics, and expected future growth drivers.

As Mark mentioned, we believe we have a proven, differentiated, and enduring competitive advantages with our attractive growth assets within this portfolio. Our objective is to help you become better equipped to value how our various businesses are contributing to Viasat's overall growth and profit profile. We hope that all of you will be able to join us via webcast. More details to follow later. In closing, Q1 FY25 operational performance was very good. We are capturing our share of large and growing markets and are focused on improving operational and capital productivity, which is yielding positive operating leverage. While IP revenue Tactical Networking and Advanced Technologies were stronger in Q1 than we expected to be in the coming quarters, we raised the low end of guidance to reflect the Q1 outperformance and underlying strength of our recurring Aviation and Government Satcom businesses.

Throughout the rest of FY25, we expect to continue to make significant progress on our satellite roadmap and towards positive free cash flow with good increases in operating cash flow and moderated CapEx. With that, I would like to hand it back over to Mark.

Mark Dankberg (Chairman and CEO)

Thanks, Guru. We feel we're off to a pretty good start with this fiscal year. Thanks to the global Viasat team for all the work so far. There's been a lot of work on integration within Viasat and to overcome the Viasat-3 Flight 1 issue, but we've made really good progress, especially in bringing that satellite into service and proving out the technology. We also believe that progress on multiple fronts is building the bridges for the opportunities in front of us. Okay, Meg, let's open it up for questions now. Thanks.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Sebastiano Petti with J.P. Morgan. Please go ahead.

Sebastiano Petti (Senior Research Analyst)

Hi, thank you for taking the question. Just wanted to touch on, I think there's a comment in the shareholder letter just, and I think you touched on it as well, Mark, in your prepared remarks, but working to strengthen the capital structure through cash flow, debt maturity extensions, and non-core portfolio monetization. I was wondering if you could perhaps elaborate on that. Is this a shift in tone, or is this perhaps just a reflection of or related to some of the change in segment reporting? And I think perhaps giving some visibility into non-satellite KPIs and businesses that I think looks pretty good on the surface and maybe was underappreciated. And then just a housekeeping question. In terms of the aircraft online, are we still on track to reach the 4,200 goal, I think, exiting fiscal 2025?

Obviously, recent developments, are those having any bearing on you hitting that target just when considering, I guess, the healthy backlog that you have as well? Thank you.

Mark Dankberg (Chairman and CEO)

Okay. So thanks for the question. And on the first point, really, we just wanted to make sure that investors know we're going to take a holistic view of how we address our capital structure. And so in doing that, we just wanted to let people understand that we're looking across the board. And also, the fact that we're taking a broad view gives us options in terms of the way that we address it. And certainly, we're going to, we're focused on creating durable competitive advantage and building shareholder value. But we're going to take a holistic view.

I think it's really more just to remind investors that we're taking that view as opposed to a change in the way we're approaching the problem. On the inside, yes, we still have our target of 4,200 aircraft in service at the end of FY25.

Sebastiano Petti (Senior Research Analyst)

Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Griffin Boss with B. Riley Securities. Please go ahead.

Griffin Boss (Equity Research Analyst)

Hi, yes. Thanks for taking my question. So first for me, I'm curious to hear your thoughts on if you have any thoughts on the viability of putting 12 small satellites in one GEO orbital slot like what Astranis is talking about. And then also, along with that, could you compare the service levels that Viasat could bring to market versus what Astranis reportedly is talking about with perhaps up to 50 Gbps per Omega satellite?

Mark Dankberg (Chairman and CEO)

Okay. So I don't really understand exactly what the Astranis strategy is, so it's a little bit hard to comment on it. The one thing I would say is that there are definitions of what a slot consists of can vary from organization to organization. There are ITU guidelines, the regulations, but there are guidelines and regulations that are intended to preserve safety and to avoid collisions. So that would be an example of a consideration that anybody would have to deal with depending on what they mean by a slot. I think that I think there's multiple strategies to trying to compete in space. We tend to be very open-minded between big and large satellites. And I think depending on what the competitive environment is, access to capital, what technologies you have in mind, different people will have different preferences.

I can tell you we really like our strategies so far. Our strategies are really based each time on a kind of a current assessment of the incremental value of any assets we put in space in the context of our whole fleet and the markets that we're serving. Those are more of the measures we're using. One of the things I think you can sort of tell from our letter is as we've grown, we've evolved our metrics of capital efficiency to reflect the performance of entire fleets, including those parts that we lease from others as opposed to just looking at the capital efficiency of an individual satellite. The theory is that by using it in a fleet, you can make individual satellites more effective than they would be on their own.

And we're seeing that effect as we integrate more of the Inmarsat and third-party assets. Hopefully, that answers that part.

Griffin Boss (Equity Research Analyst)

Yeah, no, that was great. I appreciate the color, Mark. Thanks. And then so next for me, could you compare and contrast Viasat's L-band spectrum holdings with other competitors and related just what the company has planned for Viasat's small geo L-band satellites that are currently ordered with SWISSto12 and the HummingSats that are slated to launch in 2026?

Mark Dankberg (Chairman and CEO)

Okay. Yes. We've put a few things on our website in the past, including when we first announced the Inmarsat acquisition that kind of listed all of our L-band assets, spectrum assets. And we are in a pretty strong position, which is really an artifact of the mission that Inmarsat serves of aeronautical and Maritime safety. So we have a pretty significant inventory of L-band spectrum assets.

Right now, we have a variety of assets that we use in space in Inmarsat. Prior to the Viasat acquisition, their most recent one was three mini satellites from a company called SWISSto12 that make up the I-8 portion of the constellation. Since that acquisition, and I think based on sort of what's going on in the market for direct-to-device, open architecture solutions for space, and these emerging 3GPP standards, I think one of the things we've talked about is raising our sights on L-band modernization for existing customers and to be able to get into the direct-to-device market, which is estimated to be pretty substantial. So one of the things is we will be adding to our L-band fleet strategy. We just haven't yet disclosed how we'll do that.

I think on the I-8, just to be sure, we're expecting those to be in service in 2028.

Griffin Boss (Equity Research Analyst)

Great. Thanks for all that color, Mark. Appreciate it. I'll pass it off. And thanks for taking my questions.

Mark Dankberg (Chairman and CEO)

You're welcome. Thank you.

Operator (participant)

Your next question comes from the line of Ryan Koontz from Needham & Company. Please go ahead.

Ryan Koontz (Senior Analyst)

Great. Thanks. Really nice progress on the IFC market there and lots of commentary about slowing OEM deliveries. And I'm wondering to what effect you've already seen that impact in your current growth rates, or do you think that the growth rate for that business slows because of expected further problems in receiving new aircraft?

Mark Dankberg (Chairman and CEO)

Okay. So good question. The real catalysts for the OEM deliveries have been around for quite a while. I mean, so we're already seeing those effects. We have for at least a couple of quarters.

And we haven't really seen that the delivery rates have been diminished over the last couple of months. So it's really more a projection of what we're seeing so far, absent a change in the OEM delivery environment. Really, there's a few issues on 737s. There are some issues also with the wide bodies. And then there have been engine issues associated with Airbus planes. So those are really the dominant issues that have affected it. And they're not getting worse, but they're persisting.

Shawn Duffy (CFO)

Yeah. And maybe to add on to that, Mark, real quick, Ryan, I think, as Mark is saying, a little bit we've talked about is our deliveries to be a little bit more backweighted.

But I think just to keep in contact from the quarter-over-quarter performance just from Q1 to Q2, I just wanted to kind of put a couple of things out there for everybody to kind of keep in mind. From Q1, this quarter, we had some really two unique royalty and licensing agreements. Our portfolio there is extending more of that in our portfolio, but we did get a little bit of an uptick in this quarter. So next quarter, we'll see that tick down, but we will start to see benefits as some of the product revenues grow from Q1 to Q2, offsetting some of that. And then we'll see a bit of additional R&D expenses. But kind of net big picture is we'll see our revenues tick down from $40 million quarter over quarter, just related to that royalty component, and $50 million on the EBITDA.

But we're going to continue to see growth in our IFC, and we'll see our product revenues in IFC start to tick up as well, but more backweighted in the year.

Ryan Koontz (Senior Analyst)

Great. That makes sense, Shawn. I interpreted that, but that's great clarification. Thank you. Another question for Mark, just on kind of this integrated service offering. I know you've talked about historically when you announced with Inmarsat having kind of a unified service offering, and then now your hybrid offering with Leo Partners. What sort of technical challenges? Obviously, I think there's business demand out there. What sort of technical challenge do you have with a truly unified offering to roll that out across your customer base, across both Inmarsat and Viasat, as well as third parties? Thanks.

Mark Dankberg (Chairman and CEO)

Okay. Yeah. So one thing is we are aiming to harmonize the offerings and then also to be able to extend them to the legacy Inmarsat fleet and then kind of upgrade what the Viasat services are. Probably the single biggest one we have is that there originally were two different networks. There's the Global Xpress network at Ka-band for Inmarsat, and Viasat had its own network. So that's what we're working on. There are intermediate things that we can do to improve, especially the legacy GX services. Short of that, but that harmonization is probably going to occur over the next one or two years. It's a little bit harder in the Aviation space because any type of changes have to go through FAA flightworthiness certifications. So that kind of extends that timeline. On the Maritime front, we have a little more flexibility in implementing multi-terminal solutions.

So that's one of the reasons that we can start harmonizing some of the Maritime stuff, which we think will drive some improvement sooner, as early as next quarter is when we'll start that.

Ryan Koontz (Senior Analyst)

That's super helpful. Thanks for that. And just following on to that, do you look at things like WAN optimization and ESA antennas and these sorts of things as part of that solution for kind of multi-orbit and multi?

Mark Dankberg (Chairman and CEO)

Yes. And I want to make distinction though that there's really two parts to it. One part is how we harmonize all the existing fleet, whether it's Aviation or Maritime or government. So because there's a large installed base, we're very focused on doing that, bringing up the level of service across the existing fleet. And then we have another roadmap, which is what we're going to do for new installs. And there we work with customers.

We have a lot more a lot of new installs, for instance, in the Aviation market or line fit. So that gives us a roadmap for when we can install terminals that use things like phased arrays, like you just mentioned. But we also have the ability to upgrade the existing fleet with things like multi-orbit on many of the platforms, just taking advantage of the equipment that's on there already. So we're using both of those.

Ryan Koontz (Senior Analyst)

Okay. Great. Thanks, Mark. Appreciate the insights. That's it for me.

Mark Dankberg (Chairman and CEO)

Yeah. Thank you.

Operator (participant)

Thank you. Your next question comes from the line of Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Hey. Good afternoon, everybody, on a very busy earnings day.

Mark Dankberg (Chairman and CEO)

Yep. Hi, Rick. Thanks for joining us.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Hey. You betcha. A couple of ones. I want to follow up. Shawn, I think you said the royalty, but I wasn't sure if that was the royalty and the licensing. Had about $40 million revenue, $50 million adjusted EBITDA that were kind of more almost out of period stuff that we should think about dropping off. Was that for both the items that Guru mentioned, the royalty and then the licensing?

Shawn Duffy (CFO)

Yeah. Yeah, Ric. So let me clarify that for you. So in Q1, we had kind of a combination, both some that showed up in Tactical Networking and some that showed up in Advanced Technologies. In total, that was about $60 million. And then what I wanted people to kind of understand is from a sequential basis, offsetting that as we go from Q1 into Q2, we'll see some other product revenue growth coming in. So the net revenue impact is $40 million from Q1 to Q2.

Hopefully, that helps shape it up a little bit better.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

That does. And the EBITDA effect was $50 million then compared to the $40 million revenue. Is that right?

Shawn Duffy (CFO)

Yes. And kind of the flow through of that, plus a little bit of incremental R&D, you could shape the EBITDA impact net about $50 million.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Sure. Okay. That helps. And then on the non-core question from earlier and then the letter, what would be considered non-core? Is it something that's not integrated in? Is it something that's not really using satellite capacity? But just trying to think of how would you slice up what you have right now as far as broad strokes, what's kind of core versus non-core?

Mark Dankberg (Chairman and CEO)

Well, the things that we really focused on are the mobility markets and the government markets, especially government mobility. So the main things we're looking for are our technologies.

This is what we've cultivated. So it's not like we have a lot of divergence in where we are now. But what we've cultivated are technologies that, as an example, government customers might want, or in some cases, commercial customers might pay us to develop that enhance our ability to deliver those services. So a lot of those are there can be ground technology, antenna technology. Some of it might have to do some of the things we're doing with phased arrays, optical feeder link. All those things are pretty valuable. Especially, for instance, as cybersecurity becomes more of an issue in space, things that bear on what you can do for cyber defenses may become more strategic and have synergies with our services business. But over time, other technologies or other capabilities that we have may recede in importance.

And so the main point I was just trying to make is that we're constantly evaluating those technologies and that we're not going to do things just because we did it that way in the past. That's all. As I mentioned when the question first came up, it's really more just a reminder of the way we think and less a signal that the way we're thinking is changing.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Just open-minded and always watching. But core right now, at least, is mobility and government.

Mark Dankberg (Chairman and CEO)

Yes. Yep. And technologies that will enhance our ability to compete there.

One of the things we just from our own perspective, I mean, one of the things that we're excited about in the growth in the Defense and Advanced Technology area is a fair amount of that we're winning on technologies that, in our view, are going to be really important in both the defense and the commercial markets, including in low Earth orbits or medium Earth orbits or geosynchronous orbits. We have new technology initiatives in all of those areas. And the fact that they're getting funded has always been one of the best indicators that the technology is competitive and valuable.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Makes sense. Apologize if this was asked earlier. But on the flight one, what capacity would you kind of earmark that you're actually able to get out of that one?

Is there an update as far as where Flight 2 will eventually cover, Flight 3 would cover? Just wanted to get an update on that one. But again, I'm joining in progress.

Mark Dankberg (Chairman and CEO)

Yeah. Okay. When we first encountered the anomaly a little over a year ago, we estimated that we might be able to get as much as up to 10% of the capacity. Things haven't changed. I think that we've been able to validate some of those assumptions. That's what we're working on. Some of that, we've also reminded investors that we may need to make additional investments in ground equipment to get to those levels. So that's pretty much it. That's what we expect as the outlook. The other thing that is important is, even though we had an intended deployment anomaly, that where we are now validates the rest of the payload technology.

So that's really important. That'll help us bring the new assets into service faster. And it's also, we believe, a good indication that when those new satellites do get launched, we're going to get great value out of them. In terms of where they're going to go, probably the places where they will deliver the most value, the remaining two satellites are over the Americas and in Asia-Pacific. And it's most likely that the existing satellite, the impaired one, will end up over the EMEA region, Middle East, Africa.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Okay. That helps. And as we think about the margins in the Communication Services business, are we seeing kind of the third-party supply affect those margins since flight one was capacity constrained, will move some capacity over to the Americas at some point. But the third-party usage, is that impacting margins to a noticeable amount on comm services?

Shawn Duffy (CFO)

Yep. Yep. Go ahead.

Mark Dankberg (Chairman and CEO)

Yeah. I mean, the main thing, one of the things that I just want to emphasize, has been very focused on return on capital. That's one of the things investors have emphasized with us. So one of the ways in which we can enhance return on capital is by leasing and not buying. What we're doing is we are doing that very judiciously. One of the things that we've emphasized a lot, we think is worth investor and analyst attention, especially in the mobility markets, is understanding those demand patterns and where there's bandwidth demand. What's really interesting is different. This is actually a pretty interesting phenomenon. Different operators with different customer bases will have different views of where those demands are.

So if the operators trade with each other in ways where, "Hey, I've got a surplus here, but I have demand there," and you have complementary things, it can be a win-win situation. So one of the things we're really looking at is tools that let us lease bandwidth. I would say strategically. I mean, the fact that we don't have all the bandwidth we expected with Viasat-3 F1, that is a big issue for us. We are acquiring more bandwidth to do that. But also, I think that there's a strategic value to it as well.

Shawn Duffy (CFO)

Yeah. And Ric, if I was to add on to that real quickly, I think big picture is that our growth at size is more than offset that impact. And it's been all factored into our outlook. I just want to make sure that's clear.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Yes. That makes sense. One quick one, if I can squeeze one more in there. Earlier question about the L-band, but what about the S-band? And maybe frame out when do you think direct-to-device becomes a ready-for-primetime noticeable material type of item?

Mark Dankberg (Chairman and CEO)

Okay. Our spectrum holdings are primarily in L-band. We do have S-band in Europe that right now we use for the European Aviation Network. One of the things that one of the things that we have led is creation of the Mobile Satellite Services Association, which we'd really encourage people to look into. The underlying premise there is that what's going to be most important in really scaling the direct-to-device market is the amount of bandwidth that's available in the aggregate.

And so what we are creating, have created, is an industry association to try to leverage spectrum holdings from different spectrum holders, including L-band and S-band, to use that in a common way. That is, with common standards, open architecture in a way that benefits all operators in meeting customer demand at affordable prices. And also, going back to one of your other points, it creates opportunities for shared space and ground infrastructure that can support multiple spectrum holdings. So that ties a little bit together into our strategy for how do we evolve into this market in a very capital-efficient way, meet our capital objectives, but still grow. On when does that market arrive? One of the things that is exciting is it's already starting to happen. And that is there are devices being deployed. Some have been deployed already.

Others will really start scaling this fall, which will have chips in them with the 3GPP, what's called Narrowband IoT standard. And that standard will support things like SOS services, but also messaging, notifications that you can get on devices. So one of the things we talked about starting 6 or 9 months ago was forming a partnership to support those devices starting in the US. And that's happening. We already are supporting devices. Right now, they're more like emergency location and signaling devices. But the same chips that support that into the same infrastructure are coming in handsets we expect just within the next few months. So I think that's the way you'll see it start. The next big step is what's called the 5G New Radio version of those chip standards. Those standards are still being defined. Probably will start being deployed end of 2025, 2026.

What we think is the number of devices that can support the basic functions is going to start scaling fairly soon. The quality of the services and the speed and number of devices that can be supported will start scaling as these new chips come online. And more of the spectrum in space is allocated to that function.

Ric Prentiss (Head of Telecommunication Services and Media Equity Research)

Great. And it sounds like return on capital and positive free cash are the mantra. So appreciate all that extra info. Thanks.

Mark Dankberg (Chairman and CEO)

Thanks.

Operator (participant)

Your next question comes from the line of Chris Quilty with Quilty Space. Please go ahead.

Chris Quilty (Co-CEO and President)

Thanks. Thanks for all the additional disclosure and putting out the prior financials or the restated financials prior to the quarter. That was helpful. Quick question on the Maritime business. It looks like the terminal count continues to go up, but revenues are going down.

Is that ARPU compression primarily happening on the legacy L-band side, or are you seeing some on the GX? And can you talk about what you're seeing with Starlink competition in the market?

Mark Dankberg (Chairman and CEO)

Yeah. So the majority of the revenue decline is not in Ka-band. This is basically what we said. It's certain of the L-band services. We have multiple different L-band services. Different services are seeing different effects. The one that is seeing the largest decline, and this has gone on for several years, is what's called FleetBroadband, which is really the L-band broadband service. And that is, Inmarsat has known that that's going to be in decline. And so that accounts for the bulk of the revenue. Actually, some of the L-band services may grow. Different L-band services may grow.

On the Ka-band, that is still growing, but not as fast as we'd like it. And we have some work to do to turn that around. I think that the NexusWave is really the most obvious thing, near-term thing to do that, and then followed by the Viasat-3 bandwidth after that. So those are the things we're doing there. And I think the other thing I just want to emphasize is the things that we do to position us for direct-to-device are going to we expect are going to have a pretty transformative impact and beneficial impact on all of our L-band services. But it's really going to take refresh in the space segment to do that. But all the things we're trying to do at L-band are aligned.

They'll all benefit from the same investments and the same types of agreements that we're looking to make building on these open standards and open architecture.

Chris Quilty (Co-CEO and President)

Gotcha.

Shawn Duffy (CFO)

And then, Chris, I just want to also note real quick before we move up there. Just from a comparative perspective, when you're looking to last year, there was about $6 million of a take-or-pay benefit that came into revenue. So just wanted to make sure you guys had that as a takeaway. It was a one-time item. Yep.

Chris Quilty (Co-CEO and President)

Gotcha. And is NexusWave intended to be? I know it's multi-orbit, but is it multi-frequency? And what are you thinking about partnerships on Ka/Non-GEO?

Mark Dankberg (Chairman and CEO)

Yes. It is Maritime. And there are a couple of other places where multi-orbit can be done at multi-band. So we're forming a partnership around that. We definitely want to take advantage of that.

Others are going to perform way better and simpler with Ka only. So we're working on that as well. So we do expect to have Ka-band multi-orbit partnerships as well. And actually, we do already in some cases. What we're really looking to do, I would say is we're looking to expand it more broadly.

Chris Quilty (Co-CEO and President)

Gotcha. And that, I guess, brings us to the flat panel antenna or the ESA. Are you designing one for both Maritime and Aviation services?

Mark Dankberg (Chairman and CEO)

So one of the things we keep saying is we don't have to do everything ourselves. So we have some really good flat panel technology, which we can use. I mean, basically, one of the things I think people are discovering is that phased array is a technology. It's not necessarily a product.

That the products need to be adapted to different market segments. It's different for Maritime versus aero versus ground, and then in different types of platforms in each of those market segments. We will do some ourselves. We think we have really good core technology. It is one of the areas where we're winning government contracts and commercial contracts on product. But we're also working with supplier partners. We've also been working on phased arrays. What we expect is to have a mix of our own technology and third-party technology, probably segmented by application, band, and platform.

Chris Quilty (Co-CEO and President)

If I can, final question. What are you doing in free space optics?

Mark Dankberg (Chairman and CEO)

We're not going to talk about it too much. But I would say what we are doing is different than, for instance, we're not going to go in and compete with the SDA's interoperable standard for inter-satellite optical crosslinks. We have some other pretty interesting applications. And actually, it's an area we've worked on for a while and have had support from the European Space Agency. And now we're getting more support from the US as well. We think it's a really interesting application. But we prefer not to talk about it right now.

Chris Quilty (Co-CEO and President)

Okay. But these are space-based applications and not terrestrial applications?

Mark Dankberg (Chairman and CEO)

We have both, actually. The technology base that we're working from has both terrestrial and space-based applications.

Chris Quilty (Co-CEO and President)

Great. Thanks, everybody.

Mark Dankberg (Chairman and CEO)

Thanks, Chris.

Operator (participant)

Your next question comes from the line of Louie DiPalma with William Blair. Please go ahead.

Louie DiPalma (Research Analyst of Industrials)

Good afternoon.

Mark Dankberg (Chairman and CEO)

Hi, everybody.

Shawn Duffy (CFO)

Hi.

Louie DiPalma (Research Analyst of Industrials)

Hi. Geopolitical conflicts have contributed to satellite broadband growth and tactical systems hardware growth for you and many others in the industry. What is the revenue exposure if U.S. funding were to subside under a new administration for weapon systems or communication systems for some of the ongoing conflicts? Is that a risk for Viasat?

Mark Dankberg (Chairman and CEO)

Boy. Yes. So there's lots of risks. I think that I would look, there's competitive risks. There's program risks. There can be risks due to changes in administration or policy. So we always have those risks. We try to factor them into our outlook. And I think I would say that our outlook reflects our view of the likely go-forward business in each of those areas.

Louie DiPalma (Research Analyst of Industrials)

That makes sense. Thanks. And Mark, you just hinted at a potential direct-to-device implementation in the U.S., perhaps in the second half of the year.

In terms of Viasat's go-to-market, will you need a roaming partnership with one of the big three U.S. wireless carriers, or will your implementation look similar to what Apple has with Globalstar and Viasat will get paid by either the handset OEM or a chip manufacturer?

Mark Dankberg (Chairman and CEO)

Okay. No. So first of all, that's a really good question. First thing I'm going to say is we're the last ones to ask what Apple is going to do. So I can't comment on that. But what our perspective is, is that ultimately, these will be roaming agreements between carriers. And likely, what we expect is just like roaming. For instance, if you look at the way roaming works terrestrially now, you take your AT&T, your Verizon, or T-Mobile plan, and you go to Europe, there's a whole list of roaming partners that each one of those has.

So what we expect is that probably the services will be relatively standardized. And the big carriers will have roaming agreements with pretty much everybody who can fulfill them. And we think that's a good environment for us. So that's kind of what we're working towards, is anticipating that that will be the business arrangements.

Louie DiPalma (Research Analyst of Industrials)

Great. And do you already have a roaming partnership with one of the big three wireless carriers, or how is your setup going to be implemented in the second half of the year?

Mark Dankberg (Chairman and CEO)

What we expect is that when there are devices in the market that are supported by those carriers, that they will be curious, the way I'd put it, right now, as to what services can be delivered with what quality and what places at what prices. And that'll determine kind of what those roaming agreements are.

And so that is still a little bit up in the air, partly because none of the major device makers have yet announced their devices with this capability and whether it's enabled. So that's kind of a gating item. There'll probably be announcements on that front over the next could be weeks to months. I think that that will open up or maybe sort of drive to closure the potential for roaming agreements with carriers.

Louie DiPalma (Research Analyst of Industrials)

Thanks. And one final one. And I may have missed this from earlier, but what is the full-year forecast for the IP licensing revenue? I know you said that there were two different components. One had the annual fee, and then there was the per-device fee. But what should we model for the general full-year revenue?

Mark Dankberg (Chairman and CEO)

Well, one thing I'd say, and then Shawn can add on, is what we have is we have different forms of licensing agreements. Some of the licensing agreements we get revenue on in things like integrating a capability into a device. That'd be an example. Some of it would be annual fees. And then right now, the parts that are really going to drive what happens the rest of the year are shipment-based licenses. So as units are shipped or activated, we get a recurring fee. And so there's some uncertainty on that. We have forecasts for it. I don't know that we're going to say exactly what those forecasts are. But Shawn, do you want to add anything to what I just said?

Shawn Duffy (CFO)

Yeah. I can get a little bit of additional color. As Mark said, we have a lot of different agreements. And even the ones that come in a little lumpier do have longer-term multi-year recurring streams that may have lumpy timing. But I would say kind of going forward over the next few quarters, I'd expect that kind of a quarterly rate to be more like ticking down to an annual rate of like $20 million for four quarters. And it's both in Advanced Technologies and Other, as well as in our Tactical Networking.

Louie DiPalma (Research Analyst of Industrials)

Great. That is helpful. Thanks, Shawn. And thanks, Mark and Guru.

Mark Dankberg (Chairman and CEO)

Thank you.