Viasat's existential problem

In this paper, we will try to consider how a chain of bad strategies turned a once bright star into a black hole for finance.

There have been many such companies in history, and the list is quite long. Here are just a few recent examples: Kodak, Nokia, Worldcom, GlobalCrossing Telecom etc.

But the topic of our work today is the Viasat Inc. (NASDAQ: VSAT). The task of our work is to determine medium and long term prospects of this company, as well as to share the reasons for our pessimism.

The Lifecycle

Viasat, Inc was founded in 1986 by three young entrepreneurs Mark Dankberg, Steve Hart, and Mark Miller. In our opinion, the company has played a huge role in the development of satellite communication systems, as well as in the availability of such systems for civilian needs, and this is worth emphasizing. In addition, over the next twenty years since its foundation, the company has been able to offer innovations and elegant technical solutions in this area. But the last few years have been for Viasat as if they have reached their technical and financial limits. And this is most likely the beginning of the end. 

We have divided the history of the company's development into several periods with characteristic features. The periods into which we have divided the history of the company are not accidental. They represent evolutionary processes both in the company’s development path itself and in its financial performance:

1986-1996: “The period of qualitatively new developments, innovations and intensive growth”

Image source: created by the authors

1997-2006: “Dominating innovation and stable growth”

VSAT Revenues/Net income 1997-2006 / Image source: created by the authors based on SEC reports

Viasat 1997 – 2006 Market Cap / Revenues / Net income / EPS Diluted / image source: YCHARTS

2007 – 2016: “Extensive growth path, broad services but lack of breakthrough technologies” 

VSAT Revenues/Net income 2007-2016 / Image source: created by the authors based on SEC reports

Viasat 2007 – 2016 Market Cap / Revenues / Net income / EPS Diluted / image source: YCHARTS

2017-2020: “Technological stagnation, falling margins, reaching technical and financial limits”

If we pay attention to the quality of new services and opportunities during this period, then we can clearly see the development and improvement of the "old technologies" of the company and attempts to compensate for the lack of innovation by increasing "capacity" in a broad manner. Of course, this also affected the company's financial results.

Viasat Revenues/Net income 2017-2020 / Image source: created by the authors based on SEC reports 

Viasat 2017 – 2016 Market Cap / Revenues / Net income / EPS Diluted / image source: YCHARTS

In 2006, with total revenues of $433 million, the company's net profit was more than $23 million. Starting from 2016, with revenues of more than $1.4 billion, and further with growing revenues reaching 2.3 billion, the company's net profit over these years has not been able to reach the modest $23 million benchmark of 2006. At the same time, the company's market capitalization as of December 15, 2020 is 4 times higher than in 2006. By the way the EPS in these years were negative and were at all-time lows. 

A missed opportunity

In recent years, Viasat has actively invested in the construction of new geostationary satellites, trying to increase capacity. The company has invested millions of dollars in geostationary satellites while more efficient alternatives were already available. Investing in expensive large geostationary satellites, the company did not notice the possibilities of new technologies and continued to increase capacity using traditional technologies.

In 2021, the company plans to launch 3 additional satellites under the Viasat-3 program. These are the satellites that the company has been building since 2015. 

The launches of these satellites have already been postponed earlier due to production delays.

Viasat new satellites will be able to offer 100+ Mbps speeds for residential internet and VoIP services. But the planned speed that is so widely advertised by the company is still much lower than the already tested speed of rival's network. The speed already achieved by StarLink is above 150Mbps. The number of StarLink satellites currently in orbit is 901. There is also an obvious signal transmission advantage of LEO (low Earth orbit) satellites over geostationary ones, which plays against Viasat-3.

Moreover Viasat-2 launched in 2017 experienced antenna problems which led to drop in capacity of the satellite. Obviously, there is no guarantee that this may not happen with Viasat-3. And let us mention that generally potential satellite losses are not fully covered by insurance companies. This is one of the risks associated with the inability to diversify this class of satellites.

Recently Federal Communication Commission awarded SpaceX with $885 million worth of federal subsidies to support rural broadband customers through Starlink satellite internet network. This news came after FCC awarded Viasat $19.9 million in July to expand rural broadband in Pennsylvania. The difference in numbers is very indicative and shows the real advantage of small-sized LEO satellites over geostationary ones. It clearly shows the changing trends in the satellite communications market. On the other hand, this should cause concern for Viasat, since 49% of the company's revenue comes from government contracts. 

It is obvious that the huge investment in expensive geostationary satellites is not reasonable in terms of competition with technically more advanced and economically efficient diverse network of low orbit small sized satellites.

Neither the largest military spending in 2019-2020, nor the COVID-19 pandemic, which caused an increase in demand in the communications sector, have been able to help Viasat during these years. To fulfil its objectives the company issued more than $1.5 billion debt in senior notes in 2017, 2019 and 2020.

Even in the best years (at the turn of the 2000s), the company's profitability remained at the level of modest 25-35 million per year. This was the time when the company offered the best technical solutions and innovations on the market. With the current costs and lack of innovative uniqueness, the company may not be profitable at all in future.

Financials

As per recent SEC filing Viasat had $350.43 million cash and cash equivalents on balance.

Image source: Viasat recent 10-Q SEC filing

Given the growing costs associated with the launch of Viasat-3 satellites, as well as an increase in debt repayments in 2021 (Senior Notes due 2025: $700 million/ interest rate: 5.625% per year; Senior Secured Notes due 2027: $600 million / interest rate: 5.625% per year; Senior Notes due 2028: $400 million / interest rate: 6.50% per year), the company will need additional funds in the near future. Let’s emphasize that interest expense will reach $99 million in 2021. 

We believe that without radical changes, the company may not survive in the long term.

Conclusion 

In more than 30 years of its existence, despite early technical excellence, the company has failed to turn this excellence into a successful business model. Moreover, in recent years Viasat has shown a lack of understanding of trends in the satellite communications market, relying only on its long-standing merits. The planned massive investment in geostationary satellites is unlikely to change the current situation. On the other hand, starting in 2021, the company's financial difficulties will only get worse. We believe that the company's current capitalization does not adequately reflect these risks. Moreover, without additional substantial funds the company will not be able to fulfill its obligations in the medium term.

A company that was once on a wave of innovation has now become an endangered dinosaur.

*Based on all above we are short Viasat. 

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The information in this presentation is not investment advice and is not intended as investment advice.

The information included in this document is based upon selected public market data and reflects prevailing conditions and the Authors’ views as of this date, all of which are accordingly subject to change. The Authors’ opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. Authors are not obligated to update this report, or any information contained herein.

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