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ViaSat's Government Prospects Bright, Huge Expenses a Drag

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Much has been happening with ViaSat Inc. (VSAT - Free Report) in recent times. The company recently launched the ViaSat-2 satellite, which has immense prospects. Just a couple of days ago, ViaSat released disappointing earnings numbers for first-quarter of fiscal 2018. The company’s shares too have trended badly, having fallen 19.1% over the past one year, much worse than the industry’s average decline of 2.9%.


Escalating research and development costs, and costs related to the ViaSat-2 service launch activities badly affected profits. However, fundamentals of the business look quite strong. New contract awards for the company (up 31.4% to $441.8 million) grew sharply in the fiscal first quarter, driving impressive backlog, and highlighting strong demand for both products and services.

ViaSat’s Government Systems business has been outstanding, and has been gaining even greater momentum, which should reflect well on the quarters to come.

The segment reported impressive revenue growth of 25.8% year over year in the fiscal first quarter, driven by an expanding service base and strong momentum in tactical datalink products, government mobility platforms and satellite communications solutions. Splendid growth in revenues drove record operating profit (up 82% year over year) and Adjusted EBITDA (up 51% year over year) for the quarter.

In-flight connectivity is also sustaining robust growth momentum. ViaSat is already connecting nearly 3 million devices a month on its existing fleet of 568 aircraft. The Commercial Air business will likely prove to be a key profit driver in the quarters to come.

ViaSat maintains a leading position in the satellite and wireless communications market. 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. ViaSat-2 services are expected to begin in fourth-quarter fiscal 2018.

ViaSat, Inc. Price and Consensus

The company successfully rolled out ViaSat-2 satellite in June. ViaSat-2, touted to have twice the bandwidth and seven times more broadband coverage, is a massive improvement over ViaSat-1.Some other features which make it more powerful than ViaSat-1 include high-capacity connectivity, smaller gateway antenna and twice as many gateways. ViaSat believes that these advanced smaller gateways can help it place the latest satellites in proximity of popular internet access points, delivering greater network reliability and security.

Lately, ViaSat’s earnings have suffered quite a lot due to R&D expenses, but per the company, total R&D investments are set to peak this fiscal year. The primary drivers are the ViaSat-3 payload, pre-flight development and testing, and commercial in-flight connectivity, STCs and line-fit activity. This indicates that we can see more pressure on profits in the upcoming quarters. Also, the costs related to the ViaSat-2 service launch activities and preparations for the large-scale in-flight Wi-Fi ramp are expected to further burden the bottom line.

Also, stiff competition in the industry proves to be a major growth deterrent for the company, particularly for its satellite services segment. The business is also highly affected by seasonality of demand due to traditional retail selling periods.

Strong backlog levels, robust prospects of core government business and significant demand for higher speeds of broadband connectivity in residential, in-flight, and government markets are likely to accelerate the company’s growth momentum. In addition, the just-launched ViaSat-2 satellite is likely to help this Zacks Rank #3 (Hold) company fortify its foothold in new geographic markets.

Overall, while we acknowledge that ViaSat has a robust foothold in numerous markets and is enjoying strong growth momentum, we feel its earnings are set up for more pressure in the quarters ahead.

Stocks to Consider

A few better-ranked stocks in the broader sector include Lam Research Corporation (LRCX - Free Report) , Advanced Energy Industries, Inc. (AEIS - Free Report) and Applied Materials, Inc. (AMAT - Free Report) . While Lam Research and Advanced Energy Industries sport a Zacks Rank #1 (Strong Buy), Applied Materials carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Researchhas an impressive earnings surprise history for the trailing four quarters, beating estimates all through, with an average positive surprise of 4.4%.

Advanced Energy Industries has a decent earnings surprise history as well. The company surpassed estimates thrice over the trailing four quarters, with an average positive surprise of 11.3%.

With four back-to-back earnings beats, Applied Materials has an average positive surprise of 3.4%.

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