VSAT - NASDAQ

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. [Operator Instructions] 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.

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 FY '25 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 FY 2025 are compared against supplemental combined results for the prior year period. This 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. The supplemental combined financial information was prepared to better illustrate or invest for 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 FY '25 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.

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 the highlights and 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 continue 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 the 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 yields 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 capabilities. We want to continue to win and execute new defense and advanced technology programs with attractive growth potential and durable competitive advantages in 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. And 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 in 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 included ViaSat-3 Flight 3 completed thermal vacuum testing as an important integrated satellite testing milestone. We announced this week at ViaSat-3 F1 entered into commercial service over the Americas. We've achieved operational speeds well over 200 megabits per second to implied aircraft and is now in use for in-flight connectivity. It will both cover new routes and enhanced services on existing coverage areas. And we've been able to prove the dynamic beamforming and terabit per second payload technology that it works. We expect our partner -- [ Viasat ] to launch our 2 Ka-band polar coverage payloads, GX-10A/B 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 that 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 breakout that we have added for our quarterly performance updates. While we're very focused on executing in the near term, Viasat has 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.

Great. Thanks, Mark. I will cover 3 topics: financial performance, our new segment structure, and an update to our outlook. Viasat generated good financial performance during Q1 FY '25. 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 FY '25 revenue was $1.1 billion, up 44% compared to $780 million in Q1 FY '24. Combined revenue was up 6% year-over-year, largely driven by growth in our Defense and Advanced Technologies segment and Aviation. Net loss of $33 million for Q1 FY '25 improved compared to the net loss of $77 million in Q1 FY '24, primarily due to improved operating performance, which was partially offset by higher interest and tax expenses. Q1 FY '25 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 FY '25 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 FY '25, 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 FY '26. And 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 segments: 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 that comprised of: Aviation, Government Satcom, Maritime and Fixed Services & 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 Technologies segment has 4 business lines: Information Security and Cyber Defense, which sells our type 1 encryption products; Space & Mission Systems, which includes antenna systems; Tactical Networking, which is mostly our TrellisWare subsidiary, of which we own approximately 60%; and Advanced Technologies & Other, which includes IP licensing revenue. Most of the revenue in this 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 line have a low capital intensity. And 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 6 new airlines. We achieved mid-teens year-over-year growth in both the number of commercial and business aviation aircraft and service. And 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 deemphasize U.S. 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 defense 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 products and service opportunities with Inmarsat. During the quarter, we began collaborating with uAvionix, a pioneer in certified avionics for crude and uncrude aviation to integrate Viasat's Velaris module into its compact muLTElink 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 leads and crew welfare. NexusWave is building anticipation in the market and we expect to launch beta service during Q2 FY '25. In Q1 FY '25, Communication Services revenue was $827 million, up 48% compared to $560 million in Q1 FY '24. Combined revenue was down 2% year-over-year, driven by the expected decline in U.S. fixed broadband services and segment product revenue. Q1 FY '25 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 U.S. fixed broadband in the FS&O business line and Maritime Services. Now to Defense and Advanced Technologies performance during the quarter. Space & Mission Systems received awards of approximately $85 million related to multifunction phased array antennas, pre-space optics and antenna systems infrastructure with supported services. Tactical networking received a tool that allowed activation of certain product upgrades. Once activated, we recognized IP licensing revenue on these products that have 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 FY '25. Advanced Technologies also benefited from strong IP licensing revenue. There are 2 components to the current licensing revenue and 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 FY '25, we benefited from both the annual license and the per unit component. And for the remainder of FY '25, 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 FY '25 book-to-bill ratio was 1.2x with continued momentum into Q2 FY '25. In Q1 FY '25, Defense and Advanced Technologies revenue was $300 million, up 37% compared to $220 million in Q1 FY '24. Product revenue was up 45% year-over-year, driven by the strong IP licensing revenue in tactical networks and advanced technologies. Q1 FY '25 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 FY '25. Next, we are raising our outlook slightly to reflect strong Q1 results, confidence in our market competitive positions and pipeline, and despite continued aircraft OEM delivery. Our first quarter financial performance reflects our competitive solutions and strong execution in our Aviation and Defense businesses. Within our Defense and Advanced Technologies segment, we generated high flow-through IP revenue in 2 businesses. Our 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 FY '25, we are raising the low end of our FY '25 revenue and adjusted EBITDA outlook and maintaining our view of FY '26. For comparison purposes, we removed the $95 million revenue and $86 million adjusted EBITDA catch-up benefit from the litigation settlement from FY '24 reference results. Therefore, our guidance is based on FY '24 revenue of approximately $4.5 billion and adjusted EBITDA of approximately $1.5 billion. We now expect FY '25 revenue to be flat to slightly up year-over-year with year-over-year adjusted EBITDA growth in the mid-single digits. We believe FY '25 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 details 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 FY '25, we expect capital expenditures to decline to a range of $1.4 billion to $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 2/3 of our total capital spend with less than 1/3 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 FY '26, we continue to expect to grow revenue and adjusted EBITDA relative to FY '25 as the majority of our $3.4 billion assets under construction go into commercial service. Capital expenditures for FY '26 are expected to decline to a range of $1.1 billion to $1.2 billion. We believe FY '25 provides the foundation for multiyear accelerated growth in revenue and adjusted EBITDA growth and continued step down in CapEx in FY '26. 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 FY '26. 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 normalized 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 Technologies segment, which houses our information security and cyber defense, space and mission systems, tactical networking and advanced technologies business lines. The feedback was overwhelmed 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 FY '25 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 in tactical networking and advanced technologies was stronger in Q1 than we expect it 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. Towards the rest of FY '25, we expect to continue to make significant progress on our satellite road map 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.

Thanks, Guru. We feel we're off to a pretty good start for this fiscal year. Thanks to the global Viasat team for all the work so far. There's been a lot of work on integration with Inmarsat 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 Instructions] Your first question comes from the line of Sebastiano Petti with JPMorgan.

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 noncore 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 -- 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 it 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?

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 focused on creating durable competitive advantage in building shareholder value. But we're going to take a holistic view. And 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 insight, yes, we still have our target of 4,200 aircraft in service at the end of FY '25.

Your next question comes from the line of Griffin Boss with B. Riley Securities.

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 1 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 gigabits per second per omega satellite?

So I don't really understand exactly what the Astranis strategy is. So it's a little bit hard to comment on that. The one thing I would say is that there are -- so 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 do -- are intended to preserve safety -- 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 there's multiple strategies to try 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 that -- and 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. And 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. And the theory is that by using it in a fleet, you 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.

Yes. No, that was great. I appreciate the color, Mark. 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 humming stats that are slated to launch in 2026?

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. Inmarsat prior to the Viasat acquisition acquired their most recent one was 3 -- many satellites from -- probably called SWISSto12 that make up our I8 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 sites on L-band modernization for existing customers and to be able to get into the direct device market, which is estimated to be pretty substantial. So we are -- so one of the thing 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 I8 just to be sure, we're expecting those to be in service in 2028.

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

Great. 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 turning and receiving new aircraft?

So good question. The real catalyst 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 the change in the OEM delivery environment. Really there's a few issues on 737s. There are some issues [ also to me ] upper wide-bodies and then there's 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.

And maybe to add on to that, Mark, real quick, Ryan. I think as Mark was saying, a little bit we've talked about is our deliveries to be a little bit more back weighted. But I think just to keep in context 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 2 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 growth from Q1 to Q2 offsetting some of that. And then we'll see a bit of additional R&D expenses. So kind of net big picture is we'll see our revenues tick down from up $40 million quarter-over-quarter, just related to that royalty component and $50 million on EBITDA. But we're going to continue to see growth in our IFC and we'll see our product revenues and IFC start to tick up as well, but more back weighted in the year.

Great. That makes sense, Shawn. I interpret that, but that's a great clarification. 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, there -- 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?

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 upgrade what the Viasat -- what services are. Probably the single biggest one we have is that they were -- they originally were 2 different networks if there's Global Express network, a 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 1 or 2 years. It's a little bit harder in the aviation space because every -- any type of changes have to go through FAA flight worthiness certifications. So that kind of extends that time line. On the Maritime front, we have a little more flexibility in implementing multiterminal solutions. So that's one of the reasons how we can start harmonizing some of the maritime stuff, which we think will drive some improvement sooner as early as next quarter. We will start with that.

That's super helpful. And just a follow 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...

Yes. And I want to make the distinction that there are -- there's really 2 parts to it. One part is how we harmonize all the existing fleet, whether it's Aviation or Maritime or Government. So there -- 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 road map, 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, airlines. So that gives us a road map for when we can install terminals that use things like [indiscernible] I can decide it, like I 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 or we're using both of those.

Your next question comes from the line of Rick Prentiss with Raymond James.

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?

Yes, Rick. So let me clarify that for you. So in Q1, we had kind of a combination, both of them that showed up in our tactical networking and some that showed up in advanced technologies. In total, that was about [ 60% ]. 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.

It does. And the EBITDA effect was $50 million when compared to the $40 million revenue, is that right?

Yes, 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.

That helps. And then on the noncore question from earlier and in the letter, what would be considered noncore? 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 noncore?

Well, the things that we're really focused on are the mobility markets and the government markets -- so especially government and mobility. So the main things we're looking for are our technologies, and 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 to our 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 these 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. Even 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, some 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 the last a signal that the way we're thinking is changing.

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

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

Makes sense. Apologies if this was asked earlier. But what -- on the Flight 1, what capacity would you kind of earmark that you're actually able to get out of that one? And is there an update as far as where Flight 2 will eventually cover Flight 3 would cover? Just want to get an update on that one. But again, I'm joining in progress.

Okay. When we first encountered the anomaly a little over a year ago, we estimated that the -- that we would might be able to get as much as up to 10% of the capacity. And 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 needs to get to those levels. So that's pretty much it. That's what we expect as the outlook. The other thing is -- that is important is, even though the end -- we had an intended appointment anomaly that where we are now validates the rest of the payable technology. So that's really important. That will help us bring the new assets into service faster. 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 2 satellites are over the Americas and in Asia Pacific. And it's most likely that the existing satellite will -- the impaired one will end up over the EMEA region: Europe, Middle East, Africa.

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 1 was capacity constrained, we'll 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?

I mean, the main thing -- one of the things that I just want to emphasize, we've been very focused on return on capital. That's one of the things investors have emphasized with us. And so one of the ways in which we can enhance return on capital is by leasing and it's not buying. What we're doing is we are doing that very judiciously, right? And one of the things that we've emphasized a lot, we think is worth investor and analyst attention is, especially in the mobility market 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 by -- if the operators trade with each other in ways where, "Hey, I've got a surplus here but you've got better demand there. You have complementary things, it can be a win-win situation." So one of the things we're really looking at is tools that led us lease bandwidth, I would say, strategically, it's not -- I mean, the fact that we're -- that we don't have all the bandwidth we expected with ViaSat-3 F1, that is a big issue for us. We are firing more bandwidth to do that. But also, I think that there's a strategic value to it as well.

Yes. And Rick, if I was to add on to that real quickly. I think big picture is that our growth up 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.

That makes sense. And 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?

So 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 we have led is creation of the Mobile Satellite Services Association, which is -- we really encourage people to look into, but the underlying premise there is that what's going to be most important in really scaling the direct 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- 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 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. When does that market arrive? One of the things that is exciting is it's already starting to happen. And that is the -- our devices being deployed, some have been deployed already, others will really start scaling this fall, which will have chips in them with 3GPP, it'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 we -- one of the things we talked about, starting 6 or 9 months ago, was forming a partnership to support those devices starting in the U.S., 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 '25, '26. But what we think is that the number of devices that support the basic functions is going to start scaling fairly soon. The number of -- the quality of the services and the speed and number of devices that can be supportive will start scaling as these new chips come online and more of the spectrum in space is allocated to that function.

Great. It sounds like return on capital and positive free cash flow are the mantra. So I appreciate all that extra info.

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

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?

So the majority of the revenue decline is not in Ka-band. Basically, we said, it's certain of the L-band services. We have a pretty -- 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 fixed broadband, 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 need some -- 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 -- 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 a refresh in the space segment to do that. But all the things we're trying to do at L-band are aligned. A lot of 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.

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, it was about $6 million of a take-or-pay benefit that came into revenue. So I just wanted to make sure you guys had that as a onetime item.

Got you. 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?

Yes, it is maritime, and there are a couple of other places where multi-orbit can be done at multiband. So we're performing a partnership around that. We definitely want to take advantage of that. Others are going to be -- 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 -- what I would say is we're looking to expand it more broadly.

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

So we -- 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 as a technology, it's not necessarily a product. And that the products need to be adapted to different market segments. It's like different for Maritime versus aero versus ground and then different -- in different types of platforms in each of those market segments. So we will do some ourselves. We think we have really good core technology. It is one of the areas where we're winning our government contracts and named commercial contracts on product, but we're also working with supplier partners. We've also been working on phased arrays. And so what we expect is to have a mix of our own technology and third-party technology probably segmented by application, band and platform.

And if I can, final question, what are you doing in free space optics?

We're not going to talk about it too much. But I would say what we are doing is different than the -- I got, for instance, we're not going to go in and compete with the FDA's interoperable standard for inter-satellite optical cross-links. 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 European Space Agency and now we're getting more support from the U.S. as well. We think it's a really interesting application. But prefer not to talk about it right now.

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

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

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

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 -- like weapon systems or communication systems for some of the ongoing conflicts. Would that -- is that a risk for Viasat?

Yes, there's a lots of risks. I think that -- I would -- there's competitive risks, there's program risks. There can be changes -- 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.

That makes sense. 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 3 U.S. wireless carriers? Or will your implementation looks similar to what Apple has with Globalstar and Viasat will get paid by either the handset OEM or chip manufacturer?

So first of all, that's a really good question. I'm going to 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, like for instance, if you look at the way roaming works terrestrially now, you take your AT&T or Verizon, 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.

And do you already have a roaming partnership with one of the big 3 wireless carriers? Or how is your implement -- how is your setup going to be implemented in the second half of the year?

What we expect is that when there are devices in the market that are supported by those carriers that they will have -- they will be curious, so I'd put it right now as to what services can be delivered with what quality and what paces, at what prices, and that will determine kind of what those roaming agreements are. And so that is still a little bit up in the air, partly because the -- 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 will 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.

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 was 2 different components. One had the annual fee and then there was the per-device fee, but what should we model for a general full year revenue?

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

Yes, I can get a little bit of additional color. I think as Mark said, we have a lot of different agreements. And even the ones that come in a little lumpier do have longer-term multiyear 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 -- taking down to like an annual rate of like $20 million for 4 quarters. And it's both in our advanced technologies and others as well as in our topical networking.

Since there are no more questions, I will now turn the conference back over to Mr. Mark Dankberg, Chairman and CEO, for closing remarks. Please go ahead.

Okay. So thanks, everybody, again, for joining our call. We look forward to speaking again next quarter.