ViaSat Inc.VSAT posted its second consecutive earnings beat as its third-quarter fiscal 2017 results surpassed estimates. The company's adjusted earnings (including stock-based compensation adjustments) of 12 cents crushed the Zacks Consensus Estimate of 6 cents by a whopping 100%.
However, the non-GAAP earnings plunged 27.5% to 29 cents compared with the year-ago quarter. Rise in cost of product and services revenues, selling, general & administrative expense, and research and development costs hurt the bottom-line performance.
Inside the Headlines
The company posted revenues of $380.6 million in the fiscal third quarter, which fell short of the Zacks Consensus Estimate of $384 million. However, revenues rose 9.5% compared to the prior-year quarter tally. Robust growth in Government and Satellite Services businesses supported the top-line performance. Also, the company won record level of new contract awards, highlighting sustained demand for both products and services.
Segment wise, Satellite Services revenues were up 13.4% year over year to $160.1 million. Impressive sales were driven by premium higher bandwidth broadband internet plans and growth in value-added service offerings. Particularly, growth of Average Revenue Per User (ARPU) in ViaSat's residential broadband internet business proved to be a major profit churner for value-added services.
However, Commercial Networks revenues continued to show weakness, edging down 1.7% on a year-over-year basis to $54.5 million. This segment continues to witness an increase in research and development investment associated with internal development of the ViaSat-3 payloads and expansion of the commercial in-flight Internet solutions.
On the other hand, Government Systems reported revenues of $166.0 million, up 9.9% year over year. The company's focus on bringing commercial innovation to the government sector continued to fuel growth in this segment. Robust market traction of products, including Satcom Modems and ISR Data Links, also proved conducive to the growth of this segment.
During the quarter, sales backlog climbed 22.6% year over year to $1061.9 million. However, adjusted EBIDTA fell 2.4% from the comparable quarter last year to $83.9 million.
ViaSat, Inc. Price, Consensus and EPS Surprise
Additionally, ViaSat and Eutelsat expect to add the ViaSat-3 class satellite, currently under construction, for the Europe, Middle East and Africa (EMEA) region to the partnering arrangement, later this calendar year, after concluding the final legal and business terms.
During the reported quarter, ViaSat and Eutelsat Communications agreed to close their previously announced joint venture. Per this deal, two entities will be set up. One of them, with 51% Eutelsat ownership and 49% ViSat ownership, will own and operate Eutelsat's KA-SAT satellite and the wholesale broadband business. The second entity, which will have 51% of ViaSat's ownership and 49% Eutelsat's ownership, will purchase wholesale KA-SAT satellite-based capacity to offer retail broadband internet services in the European region.
The closing of this arrangement is scheduled to occur by the end of Feb 2017, subject to the completion of certain administrative procedures. Going forward, the companies have also declared their plans to add the ViaSat-3 class satellite to the partnering arrangement, later this calendar year, after the final conclusion of the deal. Currently, the ViaSat 3 class satellite is under construction for the Europe, Middle East and Africa (EMEA) region.
In addition, the company fortified its aircraft operation capabilities with the acquisition of Arconics, which provides pioneering software solutions to the aviation industry. ViaSat had a partnership with Arconics prior to the acquisition, which focused on catering to the wireless In-flight Entertainment ("IFE") needs of airline customers.
The buyout will enable ViaSat to gain access to aviation-grade software, broader expertise and mobile applications, which will boost safety and efficiency of flying for pilots, cabin crews and flight operations teams. The company will also gain access to entertainment applications and will be able to explore opening new services.
ViaSat exited the quarter with cash and cash equivalents of $284.9 million, compared with $51.3 million as of Sep 30, 2016.
Also, during the quarter, the company completed the sale of 7,475,000 shares of common stock in an underwritten public offering. The net offering proceeds were approximately $503.1 million after deducting underwriting discounts and offering expenses. To repay all outstanding borrowings under its revolving credit facility, the company used $225.0 million of the net proceeds. Remaining net proceeds are to be used for general corporate purposes.
ViaSat posted mixed third-quarter fiscal 2017 results with a bottom-line beat, but top-line miss. On the positive side, strong backlog levels, robust prospects of core government business and impressive demand for higher speeds of broadband connectivity in residential, in-flight, and government markets are likely to accelerate the company's growth impetus. In addition, the newly launched ViaSat-2 and the upcoming ViaSat-3 satellites are likely to help the company fortify its foothold in new geographic markets.
We also believe the collaboration with Eutelsat is a strategic fit for ViaSat to embark on a global expansion drive. Despite these positives, escalating research and development costs remain a major concern for the company in the near term. Further, the company's satellite services segment is highly affected by seasonality of demand due to traditional retail selling periods. In addition, stringent competition and "fixed-priced" nature of the contracts are likely to pose as headwinds, restricting growth of the Zacks Rank #4 (Sell) company.
Stocks to Consider
Some better-ranked stocks in the same space include Barracuda Networks, Inc. CUDA , Science Applications International Corporation SAIC and CDK Global, Inc. CDK . All three stocks carry a Zacks Rank #2 (Buy).
Barracuda Networks company has a striking earnings surprise history. It surpassed estimates in each of the trailing four quarters, with a remarkable average positive surprise of 475%.
Science Applications International has a striking earnings surprise history for the trailing four quarters, having beaten estimates in each of them, for a remarkable average of 9.2%. You can see the complete list of today's Zacks #1 Rank stocks here .
CDK Global has an impressive earnings surprise history for the trailing four quarters, beating estimates all through for an average of 8.0%.
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