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ViaSat (VSAT) Q1 Earnings Fall Y/Y on Escalating R&D Costs

ViaSat Inc.’s VSAT first-quarter fiscal 2018 non-GAAP earnings came in at 4 cents, down drastically from the figure of 23 cents recorded in the year-ago quarter. Despite posting record first-quarter revenues, ViaSat’s profits were hurt by escalating research and development costs, and costs related to the ViaSat-2 service launch activities.

On a GAAP basis, the company actually swung to a net loss of 16 cents per share, in stark contrast to earnings of 4 cents recorded in the year-ago period.

Inside the Headlines

The company posted revenues of $380 million in the fiscal first quarter, which missed the Zacks Consensus Estimate of $387 million. However, revenues rose 4.7% compared to the prior-year quarter tally, and were at a record high for the fiscal first quarter. Terrific growth in government business drove top-line growth, which was somewhat offset by contraction in Commercial Networks revenues.

New contract awards (up 31.4% to $441.8 million) grew sharply in the quarter, driving impressive backlog, and highlighting strong demand for both products and services.

Segment wise, Satellite Services revenues were nearly flat (down 0.1% year over year) at $152.2 million. The segment witnessed strong revenue growth in commercial air, along with higher consumer broadband revenues. Particularly, growth of Average Revenue per User (ARPU) in ViaSat's residential broadband internet business grew 11% year over year.

Commercial Networks revenues continued to be strained, plunging 31% on a year-over-year basis to $45.2 million, dragged bylower fixed terminal sales for Australia's nbn satellite broadband service.This segment continues to witness an increase in research and development investment (up 67% year over year) associated with internal development of the ViaSat-3 project and expansion of next-gen mobility solutions.

On the other hand, Government Systems reported impressive revenues of $182.6 million, up 25.8% year over year, driven by an expanding service base and strong momentum in tactical datalink products, government mobility platforms and satellite communications solutions. Impressive growth in revenues drove record operating profit (up 82% year over year) and Adjusted EBITDA (up 51% year over year) for the quarter.

During the quarter, sales backlog climbed 18.9% year over year to a record $1,085.8 million, driven largely by a robust backlog at Government Systems segment.

However, adjusted EBIDTA plunged 23.7% from the comparable quarter last year to $61.2 million, dragged by start-up costs associated with the ViaSat-2 network, and planned rapid growth in in-flight connectivity based on installing existing backlog.

ViaSat, Inc. Price, Consensus and EPS Surprise

Quarterly Highlights

The company launched ViaSat-2 satellite in the quarter successfully. ViaSat-2, touted to have twice the bandwidth and seven times more broadband coverage, is a massive improvement over ViaSat-1.

Some other features which make it more powerful than ViaSat-1 include high-capacity connectivity, smaller gateway antenna and twice as many gateways. ViaSat believes that these advanced smaller gateways can help it place the latest satellites in proximity of popular internet access points, delivering greater network reliability and security.

ViaSat maintains a leading position in the satellite and wireless communications market. The company has garnered enough economics of scale and scope to serve vast emerging markets in South America, Africa, the Middle East and Western Asia. ViaSat-2 services are expected to begin in fourth-quarter fiscal 2018.

The company has also been investing in the next generation of ViaSat-3 class satellites — which will provide even more bandwidth globally from satellites slated to launch starting in 2019.

Liquidity

ViaSat exited the fiscal year with cash and cash equivalents of $160.6 million compared with $130.1 million as of Mar 31, 2017. The company also generated record levels of operating cash flow in the fiscal first quarter, which hit $153.7 million.

To Conclude

ViaSat posted mixed results for the quarter, but set multiple records. Strong backlog levels, robust prospects of core government business and significant demand for higher speeds of broadband connectivity in residential, in-flight, and government markets are likely to accelerate the company’s growth momentum. In addition, the just-launched ViaSat-2 satellite is likely to help the company fortify its foothold in new geographic markets.

Despite these positives, escalating research and development costs remain a major concern for this Zacks Rank #3 (Hold) company in the near term. Further, the company’s satellite services segment is highly affected by seasonality of demand due to traditional retail selling periods.

Despite such headwinds, increasing adoption of satellite networking, in-flight Wi-Fi services in commercial aircraft data links and encryption-product based businesses are expected to drive the company’s long-term growth. We also believe the collaboration with Eutelsat is a strategic fit for ViaSat to embark on a global expansion drive.

Stocks to Consider

Some better-ranked stocks in the broader sector include Lam Research Corporation LRCX, Advanced Energy Industries, Inc. AEIS and Applied Materials, Inc. AMAT. While Lam Research and Advanced Energy Industries sport a Zacks Rank #1 (Strong Buy), Applied Materials carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research has an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.4%.

Advanced Energy Industries has a decent earnings surprise history as well. The company surpassed estimates thrice over the trailing four quarters, with an average positive surprise of 11.3%.

With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.4%.

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