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ViaSat: Air Business Prospects Bright, Competition a Drag


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On Sep 26, we issued an updated research report on ViaSat Inc. (VSAT - Analyst Report) .

Headquartered in Carlsbad, CA, ViaSat is a global broadband services and technology company, enjoying a dominant position in the satellite and wireless communications market. The company continuously leverages on its advanced technology and competency to occupy major share of the market. ViaSat’s sturdy government and commercial air business, in-flight Internet services and mobile broadband services have been propelling its growth momentum.

In particular, robust sales of government satellite communication systems and tactical data link products have been improving the company’s government business. Moreover, ViaSat’s Satellite business has been benefiting from growth in residential broadband offerings. These, in turn, hold brilliant prospects, as indicated by the year-over-year residential ARPU (Average revenue/user) growth of 8% to $60 per month, which is a new record.

Also, ViaSat’s Commercial Air business is proving to be a key profit driver, strongly supplementing growth. Going forward, higher value service plans, including the recent 25-megabit speed boost, strategy to serve more people per plane and addition of other ancillary services looks promising. Additionally, ViaSat’s in-flight Internet services are on a roll, winning lucrative contracts from leading commercial flights like Virgin America Inc. (VA - Snapshot Report) and American Airlines Group Inc. (AAL - Analyst Report) . This is also proving to be conducive to top-line growth.

Previously, the company had entered into a partnership with Eutelsat Communications to integrate ViaSat's broadband technologies and consumer Internet Service Provider (“ISP”) business expertise with Eutelsat's current European broadband business. This alliance is progressing extremely well, with the partners clinching some major contracts from leading airliners like Finnair and Scandinavian Airlines, during second-quarter fiscal 2017.

We believe that ViaSat’s ambitious plans regarding its satellite business will also contribute to the company’s growth. The company has garnered enough economics of scale and scope to serve vast emerging markets in South America, Africa, the Middle East and Western Asia. Momentous market traction of ViaSat-1 satellites, along with strategically planned launches of ViaSat-2 and ViaSat 3 satellites, are expected to provide ViaSat with a solid competitive edge over its peers, thereby bolstering growth.

Despite these positives, stiff competition in the industry proves to be a major growth deterrent for the company. While its satellite services segment faces stiff competition from companies like AT&T, Inc. (T - Analyst Report) , the government systems segment has been grappling  with challenges from  aerospace and defense giants like General Dynamics Corporation. Rise in competition results in price reductions, reduced margins, and loss of market share, which adversely affect the results of operations, financial position, and cash flows.

Increasing operating costs are also posing as a major headwind for the company. ViaSat has been experiencing huge rise in research and development activities related to the launch of ViaSat-2 and ViaSat-3 satellites that are likely to hurt its margins and bottom line, going forward. For instance, in fiscal 2016, the company’s discretionary R&D investments surged by over 61% year over year. Further, R&D expenses for ViaSat-3 for fiscal year 2017 are estimated to increase substantially, which are likely to put significant pressure on EBITDA.

The Defense Department’s decision to reduce its budget by nearly $500 billion over the next decade may significantly impact ViaSat. This is because the company is highly dependent on the U.S. Government contracts for revenue generation. In the future, any additional Federal budgetary pressures may result in deeper-than-expected cuts in defense spending, which may affect the company’s business prospects. This apart, the seasonality of demand materially impacts the Zacks Rank #3 (Hold) company’s satellite services segment, thereby thwarting growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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