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Company: ViaSat (Nasdaq: VSAT)

Capital Structure:

Investment thesis:

ViaSat (VSAT, “the company”) is a short, because:

1. The market has been enraptured by the company’s visions for super-high capacity satellites that

will overtake the competition.

2. Fueled by this speculation, the market has bid up the valuation of VSAT to 16.4x ttm EBITDA, a

multiple that is significantly higher than its peer average of 11.9x, and its most direct North

American competitor, Echostar (SATS), which trades at just 5.1x.

3. Terrestrial competition has gained more traction with the government’s efforts in subsidizing

the rollout of fixed wireless broadband to “hard to reach” places. In light of this competition,

VSAT’s 16.5x multiple looks fragile.

4. Consistently poor customer reviews place the stickiness of VSAT’s subscriber base into question,

as competition from other broadband providers heats up.

5. The satellite services industry is a difficult industry to operate in, as evidenced by VSAT’s

consistent low-single digit to negative returns on capital. This observation is also compounded

by VSAT’s cumulative negative $468 million free cash flow burn over the last 6 years.

6. VSAT’s management was significantly incorrect in its subscriber forecast, projecting 1.5 million

subscribers by 2014. As of the end of the first quarter of FY 2017, VSAT only had 696,000

subscribers. Where did the other 804,000 go?

7. Management’s allocation of its ViaSat-3 R&D expenses to its commercial networks segment is

fundamentally incorrect.

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Business Overview:

VSAT operates within three business segments: Government; Commercial networks; and Satellite

services.

Government segment (~43 percent of EBITDA):

The government segment is part of VSAT’s legacy business, which the company has been operating since

inception. In this segment, the company designs and builds mobile and fixed broadband products,

tactical data disbursement equipment, and data encryption products for the Department of Defense,

other US government agencies, foreign governments, and defense contractors. This segment makes up

around 43 percent of total sales, and has an average operating margin of 13 percent.

Commercial networks segment (~-17 percent of EBITDA):

The commercial networks segment is also part of VSAT’s legacy business. This segment designs and

builds fixed and mobile broadband network products and systems for enterprises, such as satellite

network integrators, and large communications service providers. This segment makes up around 18

pecent of total sales, and has garnered a negative operating margin since 2011.

Satellite services segment (~74 percent of EBITDA):

The satellite services segment is the segment that has been driving VSAT’s stock performance. This

segment provides fixed and mobile broadband internet in the US, via its Exede and WildBlue brands, to

consumers, enterprises, and other internet distributors through its two owned Ka-band satellites:

ViaSat-1, and WildBlue-1. The company also provides broadband over leased Ka-band capacity through

Telesat’s Anik F2 satellite. As a percent of total sales, the satellite services segment makes up around 39

percent, however, that percentage has been growing significantly over the past 6 years. Satellite service

operating margins have been choppy, but ended 2016 at 15 percent.

VSAT entered into the retail broadband space in 2009, when it paid $568 million for WildBlue – paying

roughly 6.7x EBITDA and 11x FCF. At the time, WildBlue was struggling for bandwidth capacity, and was

forced to turn down potential broadband subscribers. ViaSat, on the other hand, having no luck in

finding broadband retailers for its newly ordered ViaSat-1 satellite, decided to acquire WildBlue in order

to provide direct – to – home broadband without having to build out sales and distribution capabilities

from scratch. Shortly after the acquisition, Mark Dankberg, the longtime CEO of ViaSat, stated in an

interview1 that the company would be able to achieve 1.5 million broadband subscribers by 2014. As

stated before in my thesis bullets, VSAT only grew subscribers to 696,000 as of the end of the first

quarter of FY 2017, with management stating that they are nearing full capacity on ViaSat-1. This

significant deficit of around 800,000 subscribers, suggests that competitive forces have played a key role

in preventing VSAT from achieving its projected subscriber base. There is a trade off when it comes to

satellite capacity: companies can either charge customers more money for higher quality internet and

faster speeds with more bandwidth (thus, sacrificing capacity), or charge customers less money and

apply more restrictive bandwidth caps (thus, allowing for greater capacity and a larger subscriber base).

VSAT has taken the former of the two strategies, with Dankberg stating the following in a recent

1 http://spacenews.com/wildblue-acquisition-viasat-doubles-bet-satellite-broadband-0/

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interview2: “It has taken awhile for people to get comfortable with our emphasis on quality, not the

number of subscribers. But the effect is you’re offering high-priced, higher-value plans. That raises [the

Average Revenue Per User] and raises your results.”

Segment Financials:

2 https://www.spacenewsmag.com/feature/viasats-1-4-billion-move/

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Providing Satellite Broadband is a Difficult Business:

According to a paper3 written by two VSAT employees which was presented at the 31st Space

Symposium in 2015, “To participate in the mainstream of mission performance, requires keeping pace

with rapid growing broadband demand for both speed and capacity. This means that a satellite designed

for today’s demand will be obsolete before it is launched. Estimates of capacity demand must take into

account the explosive growth in the demand for broadband speeds and capacity.” As implied by this

statement, the satellites behind fixed and mobile broadband internet are constantly changing and

improving, and will continue to place significant CapEx burdens onto VSAT. After entering into the

broadband provider space, VSAT’s CapEx has averaged negative 24 percent as a percentage of total

sales, and has consistently outpaced D&A expense. VSAT is essentially spending billions of dollars on

higher capacity satellites, in the hopes that demand for the company’s broadband internet service will

be there years down the road to fill the heightened capacity. In my view, this is a business model fueled

by speculation, and with competition increasing from terrestrial (land based) internet providers, VSAT’s

speculation on future demand for its service may turn out to be sorely incorrect.

Furthermore, ROIC has languished between 1 percent and 4 percent over the past 6 years, with ROIIC

less than ROIC four times out of the last six years:

$ millions

Returns 2010 2011 2012 2013 2014 2015 2016

EBIT 43.01

39.25

2.19

(20.36)

3.30

83.14

41.12

less taxes 5.44

(0.00)

(13.65)

(50.05)

(25.95)

13.83

(4.17)

NOPAT 37.57

39.25

15.85

29.69

29.25

69.32

45.29

Incremental NOPAT 1.68

(23.41)

13.85

(0.45)

40.07

(24.02)

ROIC incl. intangibles 4% 3% 1% 2% 2% 4% 2%

ROIIC incl. intangibles 1% -15% 11% 0% 19% -10%

ROIC less intangibles 4% 4% 1% 2% 2% 4% 2%

ROIIC less intangibles 1% -13% 10% 0% 24% -9%

3 https://www.spacesymposium.org/sites/default/files/downloads/tt_papers/R.VanderMeulen_31st_Space_Symposium_Tech_Track_paper.pdf

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$ millions

Free cash flow burn 2010 2011 2012 2013 2014 2015 2016 Q1-17

Operating cash flow 112.55

169.62

141.45

91.80

205.14

349.52

296.94

62.12

Less capex (134.54)

(208.29)

(204.97)

(176.30)

(307.63)

(366.49)

(377.89)

(120.58)

Free cash flow (22.00)

(38.67)

(63.52)

(84.50)

(102.49)

(16.98)

(80.96)

(58.46)

% margin -3% -5% -7% -8% -8% -1% -6% -16%

Cumulative FCF burn (467.56)

Subscriber growth 2010 2011 2012 2013 2014 2015 2016

VSAT subscribers 424,000.00

409,000.00

385,000.00

512,000.00

641,000.00

686,000.00

697,000.00

% y-y growth -4% -6% 33% 25% 7% 2%

6 year CAGR 9%

Government-Fueled Terrestrial Competition is Cutting into VSAT’s End-Market:

The US government has long expressed the need to get broadband internet access to the rural and

“hard to reach” areas of the country.

Unfortunately, for satellite broadband providers, the FCC has yet to recognize satellite internet as a

reliable substitute for what it now defines as being broadband internet. According to the FCC,

broadband internet should provide users with 25 mbps of download speed, and 3 mbps of upload

speed. VSAT provides speeds of up to 12 mbps/3 mbps. The FCC has also taken issue with the high

latency problems of satellite internet, stating in its most recent broadband progress report that it

disagrees4 with VSAT’s assertions that “latency is not an effective proxy for broadband service quality,”

and that “low latency is not necessary to ensure the availability of high-quality service to consumers.”

Latency, a measurement of how quickly data packets are sent from the sender’s computer and back

again, was 19 times greater than the terrestrial average for VSAT, according to the FCC.

Also factoring into the FCC’s decision making is their view that the costs of earth stations, the

communication stations that provide the communication links to the satellite, are too great for

widespread consumer offerings when compared to terrestrial offerings: “Due to size and cost, however,

such earth station equipment is generally not suitable for widespread consumer offerings comparable to

those for terrestrial mobile services.”

As a result of the sub-par quality of satellite-provided internet relative to terrestrial alternatives, satellite

operators have missed out on government subsidies that are financing terrestrial internet build-outs in

4 https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-6A1.pdf

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the US. This government funding is coming directly from the FCC’s Connect America Fund (CAF), which

was started in 2011 with the goal of getting “broadband to every American by the end of the decade.”

In 2015, the FCC authorized $1.5 billion in government financing to 10 telecommunications carriers:

AT&T, CenturyLink, Cincinnati Bell, Consolidated Communications, FairPoint Communications, Frontier

Communications, Hawaiian Telecom Inc, Micronesian Telecom, and Windstream Communications. Over

the next five years, these companies will provide 10 mbps/1 mbps to 7.3 million Americans who live in

rural areas that don’t have access to high speed internet. While 10 mbps/1 mbps falls below the FCC’s

current definition of broadband, the Telecommunications Industry Association explains5 that the

networks that are being built will allow rural areas to upgrade to speeds comparable to their urban

counterparts. These plans are competitive with satellite broadband, as the data caps are significantly

higher than satellite, and the associated latency is multiple times lower. According to AT&T’s Access

plan, which is the plan associated with the rural build-out, users will only have to pay $10 a month for 5 -

10 mbps speeds, and will have a data cap of 150 GB per month. VSAT, on the other hand, offers 12 mbps

speeds with a 30 GB per month data cap at $149.99 a month!

Map of CAF phase II deployment (Green represents areas that accepted funding; white represents areas

that have not received funding):

5 http://www.tiaonline.org/news-media/blog/fcc-hits-connect-america-fund-phase-ii-out-park

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Even VSAT acknowledges the threat that the CAF financing could have on their business in the

company’s 10-K:

“Depending on the extent to which the CAF, as implemented, gives incumbents a competitive advantage

in providing broadband services in supported areas, or terrestrial technologies a competitive advantage

over satellite technologies, the CAF could have a material adverse effect on our business, financial

condition and results of operations.”

Terrible Customer Reviews places VSAT’s Customer Base at Risk of Leaving:

Many of the complaints filed on www.consumeraffairs.com focused on VSAT’s poor customer service,

the expensive $300+ contract termination fee, the slow speed (some complained that the speed is

worse than dial-up, which a far cry from VSAT’s advertised 12 mbps speed), the high latency, how

quickly the data caps were met and exceeded, and weather interference. Apparently, Exede is so bad

that one review stated in all caps, “RUN. TURN AROUND AND RUN. NO INTERNET IS BETTER THAN

USING EXEDE/WILD BLUE/VIASAT.” Another customer took a screenshot of his speed history, and the

photo showed that over a three-day period, his internet speed bounced between 0.90 mbps, and 2.02

mbps. This range is much lower than VSAT’s advertised speed of 12 mbps. A few customers

recommended switching to HughesNET, the satellite internet service offered by SATS.

These terrible reviews go back as far as 2011, the year in which ViaSat-1 was launched, and therefore it

does not seem new capacity was an improvement for customers. Out of 67 reviews, 65 gave Exede a

one-star rating.

I even found a Twitter profile set up by a real estate agent that is almost dedicated to pointing out his

speed and latency issues with Exede. While Exede advertises speeds up to 12 Mbps, pictures posted by

this Twitter profile suggest that speeds well below 12 Mbps are the norm. Here’s one picture out of

many that he’s posted:

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Furthermore, the Netflix ISP (Internet Service Provider) Speed Index, an index that measures the

performance of ISP’s streaming speeds, clearly shows that VSAT is dead last, even below HughesNet:

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Finally, data from the FCC confirms that VSAT has the lowest ratio of consistent speed to advertised

speed out of all of its competitors:

(Note: 80/80 refers to the minimum actual speed that was experienced by at least 80 percent of panelists

during at least 80 percent of the peak usage period.)

Is Satellite Broadband going the way of the Dodo?

According to Boston Consulting Group6, satellite broadband is a “last resort technology for remote,

rather than rural, locations.” In that same report, BCG concludes that “fixed wireless, which uses the

same underlying technology as mobile wireless but is designed to do a different job – may represent the

wave of the future.”

As things stand now, fiber optic, and hybrid fiber-coaxial cable networks, present the two fastest and

reliable internet solutions. Both of these solutions offer 100 mbps+ speeds with low latency, yet

expanding these two solutions to the rural areas of the US is uneconomical. Fixed wireless, as

determined by BCG, is the most economical for rural areas (areas that have between 100 and 1,000

inhabitants per square kilometer). This suggestion is also evidenced by AT&T’s rollout of fixed wireless

broadband in connection with the CAF financing that it is receiving, as well as Google’s increased

interest in using fixed wireless broadband to expand to rural areas in conjunction with its “fiber-to-the-

home” broadband rollout. Compared to satellite broadband, fixed wireless can, according to BCG,

deliver a “guaranteed speed of 25 Mbps or better.”

In fact, the divergence between terrestrial options and satellite broadband is so great, that the editor of

www.thinkbroadband.com stated that “[M]ost satellite users would happily switch to any terrestrial

6 https://www.bcgperspectives.com/content/articles/telecommunications_digital_economy_connecting_rural_markets_fixed_wireless_unlocking_digital_everywhere/

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service that can provide speeds of 5 to 10Mbps, due largely to the better usage allowances and lower

latency.”

Emmanuel Cleaver II, a congressman from Missouri went so far as to bash satellite broadband and fixed

wireless broadband, stating, “Satellite or fixed-wireless access will not meet the needs of our rural

residents, either now or in the future.” His letter to the FCC urged Chairman Tom Wheeler to host

reverse auctions for fiber-to-the-home, rather than fixed wireless or satellite.

Language from SATS’ Q4 2014 conference call also plainly states that even they are losing subscribers to

terrestrial competition, not VSAT:

Chris Quilty - Analyst

Pradman, wanted to follow-up, you mentioned that you were losing some subscribers to competition. Is that competition from new terrestrial services coming into your service area or are those churn across to ViaSat?

Pradman Kaul – President

No, we don’t really see any churn to ViaSat. I think when we lose any sub to competition it’s primarily because of cable or fiber or wireless enters that particular area. So it’s primarily to new - cable fiber kind of terrestrial technologies.

Chris Quilty - Analyst

And do you know when you sign up new subscribers whether they had service previously or not and has anything changed with that trend line?

Pradman Kaul - President

What we do know by - almost by house is what kind of technologies are available for that particular house. So we try to avoid, for example, selling to a particular resident where we know there is an option to go to fiber or cable, so we try to be as selective as we can. In fact, in our call center, people are trained to - if somebody calls in from a fiber area just tell that customer that they are probably better off going the other way.

Competition is not going away:

The satellite industry is intensely competitive and capital intensive. As satellites reach full capacity,

another one needs to be built in order to grow subscribers and revenue. While VSAT continues to make

claims that ViaSat-3 will inflict serious damage to its competition, I find it hard to believe that the

competition will just halt its innovation. SATS, for instance, has over $1.5 billion in cash and equivalents

on its balance sheet, while VSAT only has a little over $47 million. SATS has also generated over $900

million in cumulative EBITDA less capex over the past five years, while VSAT has generated a cumulative

deficit of over $500 million during the same time frame.

Telecom, Media and Finance Associates, Inc., (TMF) a consulting firm that specializes in the satellite and

telecom sectors, noted that SATS has been consistent in announcing new satellites in response to VSAT’s

announcements: “After all, Hughes announced Jupiter – 1 in 2008 in response to ViaSat – 1, and then

pre-empted ViaSat – 2 with its own Jupiter – 2 announcement in 2013.” It is also important to note that

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SATS’ Jupiter-2 is scheduled to be launched in the fourth quarter of 2016, ahead of ViaSat-2’s launch,

thus potentially eroding VSAT’s end market further.

Interestingly, SATS also just began including in its 10-K’s and 10-Q’s, a new disclosure that states that its

own financial resources will be negatively impacted by increases in investments in order to keep up with

the constantly evolving competitive landscape:

“Our industry is evolving with the increase in worldwide demand for broadband internet access for

information, entertainment and commerce. In addition to fiber and wireless systems, other technologies

such as geostationary high throughput satellites, LEO orbit networks, balloons, and High Altitude

Platform Systems will likely play significant roles in enabling global broadband access, networks and

services…We may allocate significant resources for long-term initiatives that may not have a short or

medium-term or any positive impact on our revenue, results of operations, or cash flow.”

TMF noted that this change in disclosure fell in conjunction with SATS’ July 2016 $1.5 billion debt

financing. TMF believes that SATS is planning on continuing the satellite race with VSAT with this new

liquidity, stating that a partnership with another operator is possible.

Inmarsat, which competes with VSAT’s in-flight WiFi business, considers the speculation surrounding

ViaSat-3 largely to be moot. On the Q2 2016 call, the CEO of Inmarsat stated:

“[ViaSat-3] is no longer a mythical beast, I’ll accept that, but it isn’t funded. It isn’t designed. It isn’t built.

It certainly isn’t launched. So we’re tilting at windmills a little bit here. But from what we know about

ViaSat-3 today, I am very confident that EAN will have superior economics in the sense that we’ll have –

in terms of cost-per-bit economics. So on that metric alone, we will be fully competitive in Europe like for

like…Let alone the fact, of course, that EAN will be in full service by the middle of next year and will have

several years advantage in the market over a ViaSat-3 proposition.”

Aside from satellite competitors, VSAT also faces threats stemming from the favorable adoption of fixed

wireless broadband.

According to Jeff Kohler, the founder of Rise Broadband, a fixed wireless broadband provider to rural

internet users:

“We actually get very little competition from satellite. Satellite ends up being the solution just for

remote, unserved areas. I would classify us as more of a rural, suburban type of provider. Satellite is truly

the service of last resort. The reason for that, is satellite capacity is so limited, that cannot offer what we

call the gigabyte level of monthly data allowance. A satellite plan typically only provides 5 to 15

gigabytes per month, and you have to pay extra for anything over that. Our average customer uses 95

gigabytes per month, and that’s just the average. Our plan will typically allow from 150 to 250 gigabytes.

To get satellite service comparable to our service, it would cost you $700 to $800 in satellite usage, just

to handle as much data as our average customer. That doesn’t make any sense, when they can pay $50

for us and have great usage and faster speeds. And that’s not even considering latency in satellite. They

have a latency of well over 100 milliseconds, and that really makes it difficult to run things like gaming,

home phone service and VoIP. You just can’t do that via satellite, and you can’t even access your

workplace VPN. Satellite is inferior, and not really scalable for these other services.”

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Mr. Kohler’s response also seems to be in direct conflict with what VSAT categorizes as its target

markets. According to Lisa Scalpone, the Vice President of VSAT’s broadband services group, VSAT is

targeting both the unserved and underserved markets. As stated above in Mr. Kohler’s interview,

however, satellite tends to focus on the unserved target market because satellite broadband is not

competitive with terrestrial offerings.

Competition from 5G Applications Could Threaten Satellite:

On July 14, 2016, the FCC decided to open up 11 GHz of spectrum above 24 GHz for 5G wireless

applications. This decision was met with very negative reactions from satellite industry participants. The

satellite industry has invested heavily into the 28 GHz band, and VSAT has expressed its worries about

potential interference from 5G transmissions into its satellite receivers in its 10-K filing.

Unfortunately for the satellite sector, the FCC has shown little sympathy in protecting large satellite

investments in the 28 GHz band. According to FCC Chairman Tom Wheeler, “[S]haring will be required

between satellite and terrestrial wireless, an issue that is especially relevant in the 28 GHz band…We will

strike a balance that offers flexibility for satellite users to expand, while providing terrestrial licensees

with predictability about the areas in which satellite will operate. However, we must reject any notion

that the 5G future will be the sole province of urban areas.”

Chairman Wheeler also had this to say to the satellite sector:

“I offer a bit of hard-earned experience: It is far more practical to get on the train than to be run over by

it.”

Verizon, in particular has been excited about rolling out its 5G fixed wireless applications. For a while,

Verizon has attempted to roll out fiber-to-the-home broadband, although because of the massive costs

surrounding FTTH, Verizon now claims that wireless broadband is the future. According to Lowell

McDowell, the CEO of Verizon, 5G deployment is limitless.

Recent Accounting Change is Fundamentally Incorrect:

In VSAT’s 2016 10-K, it was disclosed that the R&D expenses associated with the ViaSat-3 satellites were

expensed in the company’s commercial segment. When thinking about this disclosure, however,

expensing these R&D costs in its commercial segment is not correct. VSAT’s commercial segment

designs and builds satellites and associated ground equipment for its customers, not for its own use.

Since ViaSat-3 will be owned by VSAT, expensing the R&D costs associated with the satellites in its

satellite service segment makes more sense.

Every quarter VSAT breaks out adjusted EBITDA for each of its segments. By expensing its ViaSat-3 R&D

expenses in its commercial segment, which seems like the company’s least attractive segment, VSAT

potentially allows analysts to make the case for a higher valuation for the stock via a sum-of-the-parts

valuation method.

Valuation:

VSAT currently has one of the highest relative valuations on an EV/EBITDA basis as compared to many of

its peers. VSAT’s 16.4x EBITDA multiple is around 4 turns higher than its peer average of 11.9x.:

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When applying the average multiple onto my aggressive estimate of VSAT’s 2017 EBITDA, 10 percent

downside is implied.

The drivers of my 2017 EBITDA are as follows:

1. Total revenue increases by 18 percent, driven mainly by a 33 percent increase in VSAT’s

subscriber base with an ARPU of $65.71.

2. Gross margin expands 200 bps to 34 percent. This expansion assumes cost of sales grow by 15

percent – a growth rate that is in line with VSAT’s ViaSat-1 launch, as well as the company’s 21-

year median cost of sales’ growth rate of 17 percent.

3. Operating expenses expand by 100 bps to make up 29 percent of sales. This increase is driven by

the 33 percent increase in subscribers and a $417 subscriber acquisition cost.

4. EBIT margin expands by 200 bps to 5 percent, and incremental margin increases to 17 percent.

D&A expense was kept at 17 percent of sales.

5. As a result, EBITDA margin ends up at 22 percent, representing 33 percent incremental EBITDA

margin.

In contrast, consensus believes that revenue will only grow 8 percent in FY 2017, yet the consensus’

EBITDA estimate is almost identical to mine. The difference lies within gross margin assumptions; I

assume margins expand to 34 percent, while analysts assume expansion to 37 percent. I believe a gross

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margin of 37 percent is highly aggressive. Over the last 21 years, VSAT’s gross margin has only averaged

29 percent, and has bounced around in a range between 23 and 31 percent. In reconciling the consensus

EBITDA estimate, the only way that gross margins could expand to 37 percent with revenue growing 8

percent, would be if cost of sales declined. This outcome seems unlikely with ViaSat-2 scheduled to

launch in a few months. Consensus’ EBIT margin of 5 percent with a 8 percent revenue growth also

seems strange, as this estimate implies over $500 in subscriber-acquisition costs, which is well above the

$417 average.

With competition fierce, a fickle customer base, and an end market that is being chipped away by

terrestrial broadband, I don’t believe VSAT’s satellite service EBITDA multiple should be greater than

SATS’. SATS, which competes directly against VSAT in the North American market, has greater margins,

much deeper pockets, and over 1 million subscribers compared to VSAT’s 697,000. According to SATS’

CEO when asked about competition from ViaSat, he stated: “I think there’s a normal trend where the

caps have been increasing over time and the speeds have been increasing over time. And I would expect

that once Echo 19 (Jupiter-2) is launched we will continue to react to the market by providing people

some more capacity and some more speeds…”

When extrapolating the EBITDA segment breakdown from FY 2016, VSAT’s SOTP valuation implies 39

percent downside when applying SATS’ EBITDA multiple onto VSAT’s satellite services segment, and a

12x multiple onto the company’s government segment. This valuation, featured below, also ignores the

negative contribution from VSAT’s commercial segment.

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Risks:

1. Satellite broadband improves to the point where the FCC includes it in the CAF financing rounds.

I believe this risk is mitigated by the views that the FCC has towards the latency issues

surrounding satellite broadband, and their views that earth stations are too costly for

widespread consumer use.

2. There’s always the risk that the technological advances of ViaSat-3 somehow overcome

traditional competitive dynamics, but I believe this risk is mitigated by the fact that these

satellites are largely just ideas on “paper.” End markets will be diminished and competitors will

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be more sophisticated by 2020, and there’s also the possibility that ViaSat-3 will be delayed by a

few years, as was the case for ViaSat-1.

3. There’s a risk that SATS’ launch of Jupiter-2 goes awry, as evidenced by SpaceX’s failure in

launching Falcon 9 which destroyed the satellite it was carrying. Fortunately for SATS, Jupiter-2

is being launched by Atlas 5, a rocket that is operated by a Lockheed - Boeing joint venture.

4. A significant issue to monitor is VSAT’s in-flight Wi-Fi business. Currently, the company services

around 476 aircraft, which represents around $34 million in sales according to the rough

economics outlined by Mark Dankberg in recent conference calls. While a small amount, the

runway for growth seems open-ended given the estimated 19,000 commercial aircraft TAM, as

stated by Gogo, an in-flight Wi-Fi competitor.

Concluding Thoughts:

In a world where broadband usage averages 190 GB per month7, with forecasts calling for 500 GB per

month stemming from an increase in HD streaming, how can VSAT (or satellite broadband as a whole)

compete effectively when the company struggles to provide 30 GB per month? Simply given the laws of

physics, satellite broadband will consistently be worse than terrestrial broadband, therefore leaving

satellite broadband as the “last resort” solution. With the market believing that VSAT is somehow better

than a provider of a commoditized broadband solution, herein lies the opportunity to short the stock as

the laws of competition heat up.

7 http://stopthecap.com/2016/09/27/average-broadband-usage-reaches-cap-bustin-190gb-month/