|Shares Out. (in M):||43||P/E||29.5x||35.0x|
|Market Cap (in $M):||1,751||P/FCF||12.5x||10.6x|
|Net Debt (in $M):||269||EBIT||0||0|
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ViaSat Short Investment Thesis
ViaSat (VSAT) presents a short opportunity where street expectations and current valuation assume little risk inherent in the company's business model and flawless execution of its relatively new consumer strategy. VSAT is both a consumer broadband satellite service provider as well as a corporate and government contractor of VSAT systems. The company was transformed in late 2009 when it acquired Wild Blue - a provider of rural satellite broadband services, a fundamentally different business than VSAT's legacy business. The street has completely ignored the lackluster performance & outlook for the defense-focused business, as well as the margin-less corporate business. Instead, the stock is being solely valued on the prospects of a new high capacity Ka-band satellite, Viasat-1, which is expected to be launched in July and will provide faster speeds than current satellites to rural US consumers lacking a wired alternative. Expectations have focused on an overly aggressive estimate of subscriber growth; leading to a massive EBITDA ramp expected in FY 2013 (FY ends Mar 31). The stock currently trades at 12.5x FY 2011 EBITDA, 10.6x FY 2012 EBITDA, 7.1x FY 2013 EBITDA and 30x, 35x and 24x FY 2011/2012/2013 EPS respectively.
Description & Competitive Landscape
ViaSat operates in 3 segments: Government Systems, Commercial Networks & Satellite Services.
|ViaSat Satellite Broadband Net Adds|
|Net Adds / Month||24,142||22,569||20,254|
Clearly the capabilities of ViaSat-1 are superior to those of Hughes current generation satellite, the company has indicated that price points will remain similar to current levels, or about $60-$80 at retail. The rural population has a lower per capital income than the balance of the US, and those that are not currently purchasing satellite broadband, may be not because they are holding out for a better product, but because they are income strapped, especially in an environment with 9% unemployment. Price elasticity won't be in effect, as pricing will remain stable. Despite this, the street is estimating that customers are going to come running to this product at a rate 4x faster (on a net basis) than Hughes is acquiring customers and anticipates adding customers for the next 4 years. The comparison to WildBlue's initial ramp is flawed for multiple reasons, but most importantly broadband penetration in the US has expanded rapidly from initial Wildblue launch until ViaSat-1 launch, and other alternatives in the marketplace exist.
Broadband penetration in Q3 2005:60%
Broadband penetration in Q1 2011: 96%
To be fair, I would expect Hughes to see increased churn in the 1 year period between launch of ViaSat-1 and Jupiter, increasing the pool of potential customers for ViaSat. Assuming a 1% increase in churn from about 2% currently, an additional 70k subscribers would be available in year 1 for ViaSat. Churn should still remain relatively low at Hughes, as customers have signed 2 year contracts. In addition - new RUS funding (part of the federal stimulus plan) gave Hughes 60% of available rural broadband financing - about $60 mm. This will allow Hughes to offer a product at subsidized rates - roughly $550 / customer - to lower the cost to the customer of $40 / month from $70 / month, and lock customers in for 1 year contracts. This program began at the beginning of the year - and arguably could fill some of the rural demand at the lower income level
Lastly, and importantly - While Jupiter is being launched in the middle of FY 2013 for VSAT, nobody has taken into consideration that a comparable product will be in the market, and net adds will most likely be more evenly split than if ViaSat-1 was the only high capacity satellite in the sky. It is interesting to note that there is barely any overlap in the sell side analyst coverage of HUGH and VSAT -as HUGH was not widely covered due to its high PE ownership, and low liquidity, and VSAT has a large portion of coverage out of the Aerospace & Defense groups.
Incremental EBITDA margins as the company is loading ViaSat-1 are around 70-80%, with fixed operating costs roughly 80% of cash costs/user, a small amount of variable CCU and in the direct channel SAC which is wholly variable. To the extent that subscriber growth is not as robust out of the gate as the street expects, EBITDA will be hit disproportionately to Revenue. Below shows a sensitivity if net adds/month are lower by 10-30% of current estimates and the Revenue & EBITDA impact on the company, and the corresponding share price implications.
|Subscriber Growth Sensitivity|
|Net Adds / Month||24,142||22,569||20,254|
|Sub Growth Lower by x% / Month:|
|Revenue Impact (in $mm)|
|10.0%||$ 16.4||$ 30.3||$ 41.2|
|20.0%||$ 32.8||$ 60.7||$ 82.4|
|30.0%||$ 49.2||$ 91.0||$ 123.7|
|EBITDA Impact assuming 70% EBITDA Flow Through|
|10.0%||$ 11.5||$ 21.2||$ 28.9|
|20.0%||$ 23.0||$ 42.5||$ 57.7|
|30.0%||$ 34.5||$ 63.7||$ 86.6|
|Stock Price Impact|
|10.0%||$ 2.97||$ 3.70||$ 3.53|
|20.0%||$ 5.95||$ 7.40||$ 7.06|
|30.0%||$ 8.92||$ 11.09||$ 10.59|
A significant deviance from analyst expectations in terms of monthly net adds, has a material effect on EBITDA and the share price assuming constant multiples to where the stock is trading currently. In the 30% case (NOTE - THIS STILL ASSUMES 200,000 NET ADDS / YEAR) total company EBITDA falls by almost 30% in 2013/2014, impacting the stock price accordingly.
Risk 2: The above analysis does not factor in any impact from SATS acquisition of Hughes. In fact - there may be significant disruption to VSAT's wholesale distribution, as DISH represents almost 50% of current VSAT wholesale distribution.
The distribution agreement between SATS/VSAT comes up for renewal in June 2011. I would anticipate that this will not be renewed. If the SATS/HUGH deal has not closed yet, it's possible a temporary agreement could be signed. When asked on the Q4 SATS earnings call if he expected a distribution deal between DISH and Hughes, Ergen commented that Hughes has been trying to get a deal with DISH for quite some time. He goes on to say "I know the guy over at DISH, he would probably see who gives him the best deal [b/w Hughes/SATS & VSAT]. Given Ergen's other comments on the call about this almost being a land grab for high capacity satellite customers, and acknowledging VSAT's time to market advantage, I would have trouble believing that he would seed the ViaSat-1 with new subscribers, which would end up hurting him on the SATS side.
Assuming a loss of 50% of wholesale subscribers is not made up immediately, the effects again on the potential subscriber ramp as well as EBITDA for VSAT are significant
|Impact of Losing DISH Distribution assuming 50% of Wholesale|
|FY Ended 3/31||2012||2013||2014|
|% Wholesale of Total||55.0%||65.0%||70.0%|
|Wholesale subs foregone||39,835||88,021||85,069|
|Wholesale ARPU / Sub (in $mm)||Cumulative|
|$ 25.00||$ 12.0||$ 12.0||$ 12.0||$ 35.9|
|Total Revenue Impact||12.0||38.4||63.9||114.2|
|% of Revenues||1.3%||3.3%||4.5%|
|% of Service Revenues||4.5%||10.8%||14.5%|
|Incremental EBITDA Margin of Wholesale Subscriber @ 70%|
|$ 8.4||$ 26.8||$ 44.7|
|% of Total EBITDA||4.4%||9.5%||11.1%|
|Foregone commercial Revenues @ $275 Wholesale ASP|
|Revenue Impact||$ 11.0||$ 24.2||$ 23.4|
|% of Revenues||1.2%||2.1%||1.6%|
|EBITDA Impact - 10% Margin||$ 1.1||$ 2.4||$ 2.3|
|% of Total EBITDA||0.6%||0.9%||0.6%|
|Total Impact on Wholesale Loss Assuming no Direct Gains|
|Revenue Impact||$ 22.91||$ 62.56||$ 87.27|
|EBITDA Impact||$ 9.46||$ 29.27||$ 47.05|
|Current EBIDTA Multiple||10.6x||7.1x||5.0x|
|$ 100.41||$ 209.01||$ 235.94|
|Stock Price Impact||$2.35||$4.89||$5.52|
Risk #3: Competition in Commercial Business
|ViaSat Valuation & Capitalization|
|Recent Price||$41.00||Free Float||36.580|
|Shares Out||42.717||Short Interest||2.800|
|Market Cap||$ 1,751.4||SI / Float||7.7%|
|Debt||319.3||Days to Cover||14|
|Enterprise Value||$ 2,020.8||Baupost Group||23.4%|
|Valuation Multiples for FY 3/31||2011||2012||2013|
|Revenue||$ 800.8||$ 933.9||$ 1,152.8|
|EBITDA||$ 161.4||$ 190.4||$ 283.0|
|EV / EBITDA||12.5x||10.6x||7.1x|
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