ViaSat Plans to Boost Fast Growth with Second Internet Satellite

5/20/13Follow @bvbigelow

After 27 years as an unobtrusive specialist in satellite-based communications, Carlsbad, CA-based ViaSat (NASDAQ: VSAT) is acquiring a much bigger footprint.

While ViaSat has experienced plenty of success over the years, the company’s business has been focused mostly on its low-profile military and intelligence-agency customers. But that began to change in 2011 with the successful launch of ViaSat-1, the world’s highest capacity communications satellite, which provides commercial broadband Internet service (at 140 gigabits per second) in key U.S. regions. Carlsbad announced plans to build ViaSat-1 in 2008, and acquired WildBlue Communications, a suburban Denver company providing high-speed Internet service, for $568 million in 2009.

Mark Dankberg, ViaSat’s chairman and CEO, laid out his grand strategy for me a few years ago, and the results were evident in record financial results reported last week. For the fiscal year that ended March 29, ViaSat said its new commercial Exede Internet services—which are still based in suburban Denver—have become the biggest factor driving the company’s growth.

“We are closing out the year with revenues surpassing the $1 billion mark, coming [in] at $1.1 billion for fiscal 2013, which reflects a $256 million increase [30 percent] over the prior year,” Shawn Duffy, ViaSat’s chief accounting officer, told investors and analysts in a conference call.

ViaSat-2 Satellite (artist's concept)

ViaSat added about 44,000 subscribers in the quarter, ending March with a total of 512,000 subscribers for its satellite-based Internet service—including nearly 300,000 subscribers on ViaSat-1, with an estimated total capacity of 1 million subscribers. That’s a big jump since March, and to boost subscriber growth even more, the company unveiled long-awaited plans to build and launch a second satellite, ViaSat-2, through an expanded partnership with Boeing.

Using new technology architecture, ViaSat says the second satellite would provide enough capacity for an additional 2.5 million subscribers—and cover seven times the geographic footprint of ViaSat-1. The new satellite, which is scheduled for launch in mid-2016, would cover North America, Central America and the top of South America, and all of the Gulf of Mexico and the Caribbean—as well as the primary airline and maritime routes between the U.S. and Europe. ViaSat already has established partnerships to provide satellite-based Internet service for United Airlines and JetBlue, with ViaSat-1 service for JetBlue passengers beginning this summer.

Internet service could be a particularly attractive added value on trans-Atlantic flights. As Dankberg told analysts and investors: “Everybody with a mobile device would use it…We can take advantage of our bandwidth effectiveness to drive the cost down to the point where it can be free to the subscribers. And so JetBlue has said that’s what they want to try…If it costs the same to give people in-flight connectivity as it costs to give them a coke and a bag of peanuts, that’s a great way to drive customer satisfaction, and we think that if you get high penetration, that’s a really good model for us.”

Dankberg estimated the cost for building, insuring, and launching ViaSat-2 would be 25 to 30 percent higher than the budget for the ViaSat-1 project, which was about $500 million. The company plans to fund the project with cash from operations and existing lines of credit, he added.

With the new satellite, ViaSat hopes to capitalize on its first-mover advantage as a provider of space-based Internet service for a market that Oppenheimer analyst Yair Reiner describes as “a vast and profitable opportunity”—the roughly 20 million U.S. households with substandard (less than 5 megabits per second) Internet service. (In addition, Reiner notes there are 5 million U.S. households that lack access to any ground-based option for Internet service.)

It’s worth noting that while ViaSat’s standing in telecommunications has been overshadowed by Qualcomm (NASDAQ: QCOM), the San Diego wireless technology giant, both companies share the same roots in Linkabit, the technology company that Irwin Jacobs, Andy Viterbi, and Leonard Kleinrock founded in 1968. Jacobs and Viterbi left Linkabit to start Qualcomm in 1985, about five years after selling Linkabit to Boston-based M/A Com. ViaSat’s three founders—Dankberg, Steve Hart, and Mark Miller—left the following year to start ViaSat.

During last week’s conference call, Dankberg also noted that ViaSat’s expanded partnership with Boeing builds on a long-term working relationship the two companies have had in a variety of defense and intelligence projects. In other words, Boeing represents a more suitable ViaSat partner than Space Systems Loral (SSL), which built the ViaSat-1 satellite.

ViaSat filed a patent infringement lawsuit against SSL, alleging that Loral copied features of ViaSat-1 in the design of a communications satellite for Hughes. The case is scheduled for a jury trial in federal court early next year.

While the patent litigation itself poses some significant uncertainty for ViaSat, Dankberg said the ViaSat-2 is based on fundamentally different technology. The company has declined to provide much detail about its technology, but analyst Chris Quilty of Raymond James speculated in a research note, “We suspect the company may be using ground-based beam forming (GBBF) technology to achieve dynamic capacity reallocation.”

Dankberg confirmed during the conference call that ViaSat-2’s bandwidth will be “dynamically configurable” across geographies and spot beams, satellite signals that are transmitted by a high-gain antenna to concentrate power in a limited geographic area on Earth.

Satellite-based Internet, Satellite Communications, ViaSat-2

Blue Shaded Area is Projected Coverage of ViaSat-2

In effect, the satellite will be able to adjust the focus of its high-capacity bandwidth to cover particular geographic areas as needed. The combination of geographic coverage and total capacity has never been done before, Dankberg said.

“The considerable operational flexibility will be really attractive for international markets,” Dankberg said. “We’re not going to go into detail on the technical approach. Other than that we’ll say this is not a steerable antenna spot beam that can only illuminate a relatively small portion of the footprint at any given point in time.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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