In thinking through some recent conference comments by CEO, Mark Dankberg, it struck us how “differently” the narrative is for Viasat versus the deafening YACK out of the financial press breathlessly spitting out verbiage from the exploding VC and SPAC commitment to “space.” Let’s suppose it is conceivable that there is universal agreement on that statement and we are simply on the dead wrong side. But here on earth, there remain inherent limitations to cash raised, cashflow, and some rudimental math on industry economics that seem difficult to circumvent. Duration of the suspension of nearly any financial analysis? Assume always longer than you are assuming. So we will note three things:

1. Wrong we could be on the math of the new Viasat constellation, the extraordinary strategic position and strength of the Viasat defense business is worth the price of the stock at $52.
2. VSAT-3 launches in 12 months. The capacity available immediately post launch dwarfs that actually available from the LEO newcomers. That capacity is multitudes cheaper on a per bit basis for most applications. The demand remains there.
3. Doubling from a ridiculous $30 per share is not the “move.”

March 1 Dankberg answers:

“And then in the cybersecurity space, the other area, the growth areas for us are really twofold. One is data center-based devices. So the market for those has been growing as the DoD and some of the other U.S. agencies become more bigger users of cloud services. So in order for them to provide those cloud services to users on the edge. They need the data center equipped with the security equipment, and then we’re the leading provider of high-speed IP network security equipment at the data center side. And then that is also creating more of a market on the tactical allocation side, either for standalone devices or embedded devices. So those are the areas there.

Now on the commercial side, one of our biggest growth areas has been ground equipment for earth observation systems. And as more and more earth observation systems have come online, both commercial and there’s some government wins as well, one of the — as those systems get greater resolution and can provide better and more imagery, they require more capable ground systems. So think of one way to think about it is as the satellites get smaller, the ground equipment needs to get bigger in order to be able to provide that aggregate data. And so we’re really strong in those very large earth observation or sensing receiver systems. So that’s what’s really driving the backlog of that part of our business.

So one of the main themes with our ViaSat-3 constellation, which is really going to have a big lots of opportunity for growth for us, is the ability to provide global services. And so one of the things that RigNet does is they do provide services on a global basis, largely to the energy segment now, but also to things like mining and exploration and other enterprise applications that are all in remote areas. And so that is a good fit with our global coverage because a lot of their applications are in the ocean. That’s — one of the most difficult remote areas includes mobile vessels. They have licenses in dozens of countries around the world and existing business relationships, so we feel like one of the things that we can do with ViaSat-3 is provide a lot more bandwidth and help increase the market and the breadth of applications that we can offer to their customers, and it’s another area where just providing a data pipe is generally not sufficient. It requires a pretty fair amount of domain expertise and vertical integration to do that, and they’re kind of a leading independent provider of services to those markets.

So I think the history is one of the main — probably the main source of disruption was that — of the joint venture that we had was that the French government really wanted to subsidize French aerospace industry. And so they offered Eutelsat several hundreds — hundreds of millions of dollars to get a European satellite, and then they also brought subsidies for ongoing services to that. And that kind of made for a too good to resist opportunity for Eutelsat. And that really disrupted the joint venture that we had. And I think that their subsidies are largely in France, so there’s still a very substantial European market out there. We think that — 2 things that I would say about our approach to that. One is we have a really good understanding of what the satellite manufacturers, the toolkit that they have. We think that our ViaSat-3 is going to be extremely competitive on a bandwidth productivity basis. It has a lot of flexibility in how we allocate that bandwidth, and so we believe we’ll compete well. The estimates for the market size in Europe are pretty substantial. The other — so it doesn’t deter us from our views of the European market. Also, the European market, we think there’s a good opportunity for mobility, government applications. And then just to be clear, that satellite also covers a large amount of ocean, Africa and large amounts of West Asia as well. So we have plenty of opportunity to monetize the bandwidth in that satellite. And in terms of buying out the rest of the joint venture, what it does is it gave us the KA-SAT satellite, which think of that as it’s not quite a ViaSat-1 but comparable to ViaSat-1. And one of the important elements of our overall fleet strategy is that we can use the older satellites, combined with our newer satellites, in ways that enhance the productivity of each. And that really goes to the details of how you use those satellites and the — where the beams are, the beam contours are taking advantage of that — of using both satellites. We get more out of both of them. So we think that the combination of the asset that we got, the remaining life of that asset, the subscriber base that came with it, that’s going to be an accretive acquisition for us, both just on a purely financial basis and then on — there’s a little bit of synergy in terms of the fleet benefits of it as well.

But the biggest thing, the thing that really is striking about the broadband space is the growth in per-capita consumption, which is really driven by video. Let’s say — I would say in the first few years of the early 2000s, it was driven by audio and a little bit by photography, but audio files are. So that was like — came along. And all of a sudden, there was demand for bandwidth, and that drove things. That drove us out of dial-up stage and into the broadband stage, which includes DSL and megabit speeds. But video is that — the video — think of a tsunami. I mean that’s still continuing because we’re in the early stages of cord-cutting. And so the number of people that are joining that over-the-top video market are enormous, and that drives gigabytes and terabytes of consumption. So the upside of that is if you’re a bandwidth infrastructure provider, you have to think that your assets are steadily depreciating because there’s 2 factors that are at play here. Factor #1 is there’s been growth in ARPU. So think about it as the amount of absolute dollars that people are willing to pay has been growing, to some extent, call it, 6%, 7% a year, in general, industry-wide. But bandwidth consumption per capita is growing 25%, 30%, 35% a year. So what that means is when you deploy any broadband system — and this is really more applied to anything that is wireless. If you’re fiber-based, it’s — you’re a little more future-proof. But if you do anything wireless, which includes terrestrial wireless and satellite, then the real issue for you is how much bandwidth can you get through your assets. What’s the productivity in terms of bandwidth utilization? And don’t think there’s a point solution. So when we put ViaSat-1 almost 10 years ago, I remember one of satellite manufacturers asked, “Well, how are you going to sell 100 gigabits?” Right. Again, it’s more bandwidth that exists over North America. It was easy to sell. The question was can you get a decent yield on that. So basically, what’s — what — the idea is that competitive playing field is determined by your productivity because it is an inexhaustible demand, and people will make their choices in each of these domains. Whether it’s defense, aero, consumer business, enterprise, whatever it is, it’s generally going to be driven by how much bandwidth I get per dollar that I spend. And so what we want to do is we want to be the leader on that front, and you have — so it’s really not — what your point solution is, is the trajectory of improvement. That’s what drives that. It’s like the Moore’s law learning curve. And so the reason — well, there are a couple of things that go into that. So one would be, for instance, once I build one generation of satellite, so I just keep building that and count on driving the cost of building the same thing down or should I be looking at trying to get more utility out of roughly the same capital cost. And if you look at what’s happened in computing, in storage and in the rest of the transmission field, nobody has made money by saying, “Hey, I’m going to go to 1 gigabyte drive at the lowest cost possible.” I’d better be making terabyte drives when I used to make gigabyte drives, right? So we’re thinking, “Hey, we better be making multi-terabit per-second satellites instead of just lots of single terabyte — bit satellites.” And I think that’s really the ultimate source of competitive advantage. And that — and so what you need to do is have an underlying technology that enables that. And in the wireless space, that’s basically being forming technology. That’s what’s happening in the terrestrial world. It used to be you could get more and more throughput by getting more bits per second per hertz, but we’re pretty much at the end of the theoretical limits of what’s possible there. So now it’s really how do I make more and more beams? How do I make them smaller, put them in the right places? And that’s the underpinning of what we’re doing. And so then the big question is can we extend that into other satellites? And there’s some unique things that we have. That’s why we’ve become vertically integrated to both push that along faster and protect it from others.”

I think one thing that’s really, really interesting, if you look back when Starlink was first authorized, and I think this goes back to 2018. At that time, Commissioner Rosenworcel, who is now the acting FCC commissioner, put out a one-page statement, but one of the main points of that statement was it was that the regulations around large constellations need to be updated because we’re heading for some very serious problems in overcrowding in space and that the regulations that the FCC has used in the past are probably not sufficient for constellations of thousands or tens of thousands of satellites. And I think that there’s a growing awareness of that. So the big issue there is will anybody be able to scale by having thousands or tens of thousands of satellites. And then sort of the corollary that goes on with that is even if the U.S. FCC were to allow that, is physics going to allow that without having collisions in space? And what — how are we going to — or how is the world going to accommodate constellations from indicators in other countries as well? So I think that what we believe is that, ultimately, there is going to be a place for LEO, but it’s not going to scale just by having tens of thousands of satellites. And there’s going to be a bound, and there are multiple people that have already said it. There’s some limits to the number of satellites that you can have. The other point is, and this is one of the points that we make, is that there’s a really good opportunity for hybrids of LEOs and GEOs. And that’s because GEO is far more scalable. If we can put 10 terabits through a single satellite, that’s the same amount of bandwidth through one satellite that you get through thousands of LEOs. So in some sense, actually, we think that the GEO environment is far more scalable in bandwidth. And really, what’s happening in — we have things like computer architecture, where there are some parts of computers that need very fast access to data, but the bulk of it doesn’t need super fast memory. And that super fast memory is more bounded, more expensive, and so people have architectures that use hybrids of really fast-working storage and then more in slower storage that can be accessed, as needed. So think of that in the satellite broadband space is having some combination of low latency bandwidth, but the vast majority of bandwidth consumption because it’s video does not require the latency that you get from a LEO. So that’s really, really — I think probably what the long-term solution is going to be at most of the bandwidth that’s going to come from GEO.

Jeffrey Bronchick, CFA
Principal, Portfolio Manager