Recent FY4Q results for Viasat didn't move the needle, but the bar moves higher from here: Morgan Stanley Research expects the next quarterly report to be particularly important as investors look for clear signs of a successful initial ViaSat-2 ramp.
Two key areas in the coming quarters are the focus:
1) subscriber and aircraft ramp, and,
2) a return to positive EBITDA growth in 2H and deleveraging.
Another focus will be any updates on finding a partner for the ViaSat-3 EMEA satellite. Consumer execution risk continues to keep us on the sidelines with an Equal-weight rating, though we lower our PT to $71 from $78 on lower EBITDA/higher capex estimates.
Margin for error narrows next quarter as net add expectations rise: The most recent quarter only had about one month of ViaSat-2 commercial service, and while net subscriber losses of ~1k were slightly below the firm's quickly. The company models ~30k net adds for FY1Q19 and ~171k for FY2019 vs 83k in losses last year. Additionally, ARPU growth is expected to remain positive in the ~5 percent range for the year. The company is also looking to significantly grow its commercial aircraft business: 85 adds are modeled this quarter and 390 for the year vs 76 last year.
Financials expected to be 2H weighted: On the last earnings call, management highlighted that "adjusted EBITDA growth due to residential broadband will occur in the second half, as we overcome higher marketing and SAC expenses, initial promotional pricing and the fixed costs associated with the ViaSat-2 network expansion."
The company also highlighted the government systems segment "tends to be significantly stronger in the second half of our fiscal years." As such, the company's model adj. EBITDA to fall ~10 percent in 1H before rebounding to ~70 percent growth in 2H, with leverage expected to peak in the 4.8x range in 2Q. Noted is that a recent amendment to the lending agreement gives the company room to take leverage as high as 5.25x, while the covenants also include ~$65M in additional EBITDA add backs. Insurance proceeds remain another outstanding question, and we now model a $125M payment in FY4Q.
Updated estimates drive PT to $71 from $78: The firm's model for recent results is being updated with estimates moving lower on a more conservative EBITDA ramp in satellite services and commercial network, with total revenue estimate moving down by 2 percent for FY2019 and 1 percent for FY 2020, while the firm's EBITDA estimates moves down by 15 percent for FY2019 and 3 percent for FY 2020 (see Financials).
Morgan Stanley Research's updated price target is based on the firm's DCF analysis and implies ~9x FY2020 EBITDA. The company notes that ViaSat continues to trade at a premium to the other publicly traded peers, reflecting in part its superior growth prospects.