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Viasat Inc  (NASDAQ:VSAT)
Q2 2019 Earnings Conference Call
Nov. 01, 2018, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Viasat Fiscal Year 2019 Second Quarter Earnings Conference Call. Your host for today's call is Mark Dankberg, Chairman and CEO. You may proceed, Mr. Dankberg.

Mark Dankberg -- Chairman and Chief Executive Officer

Okay, thanks. Hello, everybody, and welcome to Viasat's earnings conference call for our second fiscal quarter of 2019. I'm Mark Dankberg, Chairman and CEO, and I've got with me; Rick Baldridge, our President and Chief Operating Officer; Shawn Duffy, our CFO; Robert Blair, General Counsel; Bruce Dirks, our Treasurer; and Paul Froelich in Corporate Development.

Before we start, Robert will provide our Safe Harbor disclosure.

Robert Blair -- Vice President, General Counsel and Secretary

Thanks, Mark. As you know, this discussion will contain forward-looking statements. This is a reminder that factors could cause actual results to differ materially. Additional information concerning these factors is contained in our SEC filings including our most recent reports on Form 10-K and Form 10-Q. Copies are available from the SEC or from our website.

With that said, I'll turn it back over to Mark.

Mark Dankberg -- Chairman and Chief Executive Officer

Okay, thanks. I'll start with highlights and then after that Shawn will go into more depth on the financial results and then I'll come back and give more detail on this quarter's results in fixed broadband, in-flight connectivity, and our government segment. And after that, I'm going to discuss our overall satellite broadband strategy, especially on the main growth drivers. And we'll show how some of the data we've already been disclosing gives more visibility into the factors that are driving our growth and how those factors affect our near and long-term outlooks.

Remember, during fiscal 2017 and 2018, we invested a lot for growth in in-flight connectivity and government products and services with growth we're aiming to achieve in the years here and it's gaining momentum. Second quarter revenues were up 32% year-over-year to a record $517 million and up 24% year-to-date to a record of $956 million. There is strong growth in all our segments. As expected, in-flight connectivity is leading the way with equipment sales in the commercial network segment and the recurring services from those sales in the satellite services segment. Government Systems is doing exceptionally well, delivering excellent revenue and earnings growth due to our satellite mobility services and growth in other product areas. The US fixed broadband portion of satellite services segment revenue is running at a record rate, also contributing to satellite services segment growth and sequential earnings growth.

Forward momentum is exceptionally strong with record second quarter orders of nearly $740 million, that's up 92% year-over-year. Year-to-date, book-to-bill companywide is over 130% and record backlog of about $1.9 billion lends confidence to continued growth opportunities for the balance of the fiscal year and into the next. We are executing on our orders and converting revenue growth into adjusted EBITDA, which is up 72% sequentially quarter-over-quarter and up 25% year-over-year. Sequentially, over 50% of satellite services segment revenue growth flowed through to adjusted EBITDA. There are comparable effects in the government satellite services. Government and in-flight connectivity services can also carry additional revenues such as technical support, equipment maintenance, in-flight entertainment, cyber security, or others and so they amplify the pure bandwidth sales.

We're really happy with execution so far this year. We began with a strong order book in the in-flight connectivity and government that have been focused on product shipments, activating aircraft, and delivering on services. It's gone well as evidenced by the high pull rate for our commercial airline -- I mean some of our commercial airline customers and the recent extension of our Defense Department's AMSS contract that serves the US VIP fleet. We're really proud of being the company that serves the most important aircraft in the world. In the second quarter, that was reinforced with the contract extension worth over $0.5 billion, including auctions.

We are creating more diversity in our satellite services revenue portfolio. ViaSat-2 is enabling faster growth in vertical and geographic markets, both in and outside the US. So even while US fixed broadband is growing, the overall satellite services portfolio is growing faster. Later in the call, the simple analysis of the data we report, shows just how positive the trend has been and what the long-term benefits are for the company and investors.

All our services markets benefit from a common set of strategic competitive advantages, the bandwidth productivity of our satellite assets achieved through our unique vertical technology integration and the economic leverage from our vertically integrated go-to-market strategy. Both those approaches required a lot of investment, but they can yield real competitive advantage. We believe our exceptional revenue growth compared to peers supports our strategic choices.

In the second quarter, we completed the analysis of the root cause of the ViaSat-2 antenna issue. Our estimate of the capacity of ViaSat-2 has not changed and measurements of performance have been consistent with those estimates as we increase usage. Total geographic coverage remains unaffected. We submitted an insurance claim of $188 million in our new enclosure with the many insurers involved. We've received about 25% of the cash proceeds in the second quarter and expect the majority of the balance in the third quarter, all of which go to reduce net debt. The value of the claim is based on the capacity the satellite would have delivered had the affected antennas deployed normally. Similar to our initial capacity estimate for ViaSat-1, the initial capacity estimates for ViaSat-2 at 300 gigabits were really quite conservative. Absent the anomaly, ViaSat-2 would have delivered significantly more throughput. Yes, we definitely rather have that capability than the insurance proceeds, but it's still a very formidable asset and it's supporting our growth strategy.

It's also important to emphasize that while we're very pleased with our second quarter revenue and adjusted EBITDA growth, our very healthy backlog and order book are just as important and that they build confidence we can continue to grow revenue and earnings. One key objective in this call is to give better visibility into the landscape for satellite services and how we can capture the value of the competitive advantages we have earned in our target markets.

So Shawn will come in on now with the financial results.

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Thanks, Mark. As Mark indicated, we are very happy with our financial results for the quarter and the year-to-date. A key point before I walk through the Q2 details is that, this quarter, we had both top line and adjusted EBITDA growth on a sequential quarter basis across every segment, marking a turning point as we exit our Q1 adjusted EBITDA level.

Looking at our Q2 results, overall revenue was up 32% compared to the prior year period with a 54% increase in product revenue and a 12% increase in service revenue. And growth in product revenue for IFC and government satellite terminals this period will enable service growth in future periods. We also saw strong gains in our adjusted EBITDA performance with a year-over-year increase of nearly $16 million or 25% and on a sequential quarter basis by $32 million or just over 72%.

Government Systems continued to produce record results with revenues reaching a new high of $240 million, up 27% and record adjusted EBITDA of $62 million, up 21% from the prior year period. In segment-adjusted EBITDA margins, we had a slight dip due to lower developmental product margins associated with one of our larger international programs, partially offset by an improvement in G&A and R&D as a percentage of sales. Our sequential performance was also outstanding, generating an additional $19 million or 43% increase in segment-adjusted EBITDA.

Additionally, I wanted to note that while most of our service revenue show up in the satellite service segment, there is a large and growing service component in Government Systems. There our service revenues in Q2 had a new record high of $64 million, up 16% from last year. Also, this quarter we experienced another strong contract win flow which resulted in Q2 government awards of $451 million, up 147% year-over-year to a new high, along with our record book-to-bill ratio of nearly 2x. This resulted in Q2 segment backlog of $988 million, which is also a record and an increase of 43% from the same period last year. And to be clear, this only includes $56 million of the $560 million, eight-year contract win for global IFC services on the US government VIP fleet that Mark mentioned earlier.

In Satellite Services, revenues were up 10% from the prior year period and up just over 6% sequentially from Q1. Subscribers increased by about 7,000 from the first quarter and ARPU increased 3% over the same period, reflecting an increase in higher value premium service plans. IFC also contributed significantly to satellite services growth as aircraft and service increased by 141 and in Q2 with 898 aircraft in service, up 56% compared to last year. Collectively, our growth across these markets drove our Q2 segment revenues to an all-time high. Reported revenues in both our fixed and our mobile broadband markets, and outpacing the annualized rates that surpassed prior records.

Segment-adjusted EBITDA reflected the higher fixed cost of ViaSat-2 compared to the prior year period as well as sales and marketing expenses associated with our expanded coverage areas. However, sequentially, adjusted EBITDA performance grew by over 16% due to our revenue growth, plus margin improvements, as evidenced by the 200 basis points margin gain in adjusted EBITDA compared to Q1 of this year. In commercial network, quarterly revenues were also up sharply at 104% year-over-year, which was driven by terminal sales to our IFC partners, plus strong revenue growth in our antenna systems division.

Q2 marked another quarter of record mobile IFC terminal deliveries to our airline partners. And while this quarter is seasonally a peak period for aircraft maintenance cycles, well suited for retrofit installs, our customers are looking to maintain these elevated delivery volumes into the second half of the year. Adjusted EBITDA in the segment also improved materially, year-over-year and sequentially due to a combination of lower absolute R&D investment and higher gross margins.

As we've discussed in the past, R&D investments declined as we wound down the preflight R&D base of the first two ViaSat-3 satellites and completed significant investments in mobile broadband terminals, FCCs and line sets. And while we won't see the benefit of the ViaSat-3 R&D until those satellites are in service, we believe that the prior mobility investments are driving a very substantial part of our current growth that we are now experiencing.

Companywide, we closed the quarter with $77 million of adjusted EBITDA, which includes the effects of elevated selling and marketing expenses with the wrap of ViaSat-2 and we are still in the early stages of overcoming ViaSat-2 fixed costs. Our total backlog is at record levels at $1.9 billion with strong government momentum, plus we still have a large order book for IFC shipments and service activations.

On Slide 5, we see revenue and adjusted EBITDA performance for our fiscal 2019 first half compared to the same period last year. In the Government segment revenues increased 16% year-to-date, due largely to the same factors I discussed for the Q2 period. Adjusted EBITDA for the year-to-date period was up 5%, which is somewhat muted due to an exceptionally strong Q1 in the year-ago period. Satellite service revenues were up 6% year-to-date due to higher IFC revenue and to a lesser extent, higher consumer services revenue.

Year-to-date adjusted EBITDA is slightly below last year's level as a result of the fiscal Q1 decline versus prior year. However, as our Q2 sequential growth demonstrates, we are starting to see material margin improvements as we scale, with good prospects to continue to do so based on growth and trends in our IFC, fixed broadband, and our small but rapidly growing community WiFi and enterprise contributions. In Commercial Networks, year-to-date top line performance more than doubled from last year and reflected essentially the same drivers as our Q2 results. The adjusted EBITDA loss improved substantially, almost cut in half, with about two-thirds of the improvement coming from lower R&D expenditures and the remainder from improved margins.

As we turn to Slide 6, although our year-to-date adjusted EBITDA was roughly flat, the large GAAP and non-GAAP losses in the current period reflect over $50 million of both higher interest expense, which was previously being capitalized and depreciation associated with the commencement of service on ViaSat-2 which occurred in the Q4 of last year. This was partially offset by a higher net tax benefit and the fact that the prior year period often included a one-time $10 million charge associated with our bond refinancing. Year-to-date cash flow from operations was $111 million, with the decrease from the prior-year period primarily a function of the interest expense that's now running through the income statement whereas last year was helped by the $84 million prepayment by (inaudible) for ViaSat-2 satellite services in the Canadian region.

Looking at CapEx, year-to-date activities were $299 million, up about $55 million compared to the same period last year as we enter into the heavier bill periods of our ViaSat-3 satellite projects. To-date, we've incurred about nearly 30% of the total expected prelaunch project cost of the first two Viasat-3s. So investments in this area going to grow steadily over the next couple of years. We saw lifts in CP investments associated with our growth in fixed broadband and other fixed assets as we continue to build out our global platforms such as in Latin America, partially offset by lower ViaSat-2 related CapEx and cash received to-date under a ViaSat-2 insurance claim.

I'll take a moment here to explain how the insurance claim and related accounting are reflected in our Q2 financials. This quarter, we completed the root cause analysis of the ViaSat-2 antenna anomaly and made really good progress on discussions with our various insurers. Accordingly, we recorded a Q2 non-cash charge related to reducing ViaSat-2's net book value by sub $177 million. This was offset dollar-for-dollar by the related insurance receivable and, therefore, there was no impact to our Q2 adjusted EBITDA or income results. The CapEx and investment sections of our cash flow statement reflects the $44 million of payments we received to-date, and future insurance payments will be reflected in our cash flows in a similar matter.

Turning to our overall capital structure. We had $225 million outstanding under the revolver, $700 million of notes outstanding and $306 million outstanding on our EXIM loans compared to $362 million on the EXIM loan at this time last year. This $56 million reduction reflects the first principal repayment we made in April this year, plus the application of $37 million of the $44 million of insurance proceeds I mentioned earlier. There is a slight delay between the time the trustee receipts the proceeds and when they get applied against the loan balance. That's why you see about $7 million of restricted cash on our balance sheet this period. So, all in, our Q2 Liquidity remains really healthy at $607 million at the end of the quarter.

Finally, we mentioned in our Q1 call that we anticipated that our leverage ratio would grow slightly quarter-over-quarter to a peak level this quarter. However, as you can see on the lower right chart, we were able to improve that profile with the Q2 net leverage ratio, it was actually flat relative to Q1. The two drivers of this result were our strong Q2 adjusted EBITDA performance and the application of the insurance proceeds related to our progress in the ViaSat-2 insurance settlement activities. In the chart, you can see that net leverage is just slightly above 5 times adjusted EBITDA. If you compute a pro forma leverage calculation that includes remaining insurance proceeds, the leverage ratio would have been about 4.5 times. Since we expect to receive the bulk of the remaining insurance claims in the next few months, we should also see a step improvement in Q3, so not the entire amount.

As we look out, all our ViaSat-3 spend is beginning to accelerate. We're aiming to grow our adjusted EBITDA faster on a relative basis to our overall capital spending, which should contribute to a gradual deleveraging over the next few quarters. As we said in our Q1 conference call, we believe that last quarter's $45 million adjusted EBITDA result was a low point, driven by the convergence of multiple factors including the service launch delay on ViaSat-2 due to the antenna anomaly. So we would anticipate that our overall leverage will improve substantially when that quarter resolves the TTM interval for measuring adjusted EBITDA.

So with that, I'll turn it back to you, Mark.

Mark Dankberg -- Chairman and Chief Executive Officer

Okay. Thanks, Shawn. So I'll start going into our fixed broadband services. The US residential business is more sensitive to capacity than other services. So we're focused on optimizing that given the antenna anomaly. In the second quarter, fixed broadband contributed to good revenue and adjusted EBITDA growth in the satellite services segment with about 7,000 net new subscribers and 10% higher ARPU on a year-over-year basis. While, for competitive reasons, we don't break out details of the different components of our satellite services segment, I'll show that our second quarter end run rate of net subscribers times and ARPU is at a record high for us. Those results are consistent with our strategy of ViaSat-2 fixed services growth through a combination of ARPU and subscriber count. Until we get ViaSat-3 in service, ARPU growth through higher priced, higher value service plans is the best way to improve the value of our service to customers and to optimize cash flow.

To illustrate that, consider two different alternatives for incremental revenue growth with just notional round numbers for simplicity. One subscriber at $100 a month generates the same recurring revenue as two at $50 a month. But over a three year period the single $100 subscriber generates well over $1,000 favorable benefit to cash through SAC and variable cost avoidance. Even with just 100,000 subscribers, that means over $100 million of benefit to cash flow. We have an opportunity to apply that trade-off to several hundred thousand.

Since we want to optimize cash flow from ViaSat-2 in the medium term, until Viasat-3, we want to favor ARPU growth over subscriber growth to the extent that the market allows. We've been trending in that direction on both ViaSat-1 and on ViaSat-2. Of course, we have strategies to adapt in those times and places where there is less demand for higher priced, higher value plans and with ViaSat-3, we anticipate much more bandwidth and much better bandwidth economics and plenty of opportunity to address the much larger market that would be enabled by lower price points.

As we've previously discussed, the capacity on ViaSat-2 opens new markets that were previously unavailable either because our capacity has essentially been sold out for the last several years or because we now have coverage in new places. We're enthusiastic about early results in both international, community WiFi, and US enterprise services. Community WiFi grew significantly in the second quarter and we exited nearing 1 million people within walking range of one of our hotspots. In the long run, community WiFi is a global opportunity since the vast majority of Internet users in the world are on prepaid mobile plans. So to the extent we can better understand and perfect our strategy and tactics for that market, there is substantial long-term value.

Our in-flight connectivity business is growing fast. We already have orders for a significant amount of bandwidth for that market and I'll show data that helps put that in perspective. Our government satellite services business is also growing quickly and again we have orders for bandwidth there too. One of our competitive advantages compared to other satellite service providers is that we can capitalize on the counter-cyclical peak demand profiles of different vertical markets to deliver both more and better services for each application. That requires an effective forecasting mechanism to manage bandwidth allocations. Those forecasts can constrain the bandwidth for US fixed broadband even while revenue from that bandwidth helps drive growth. Our go-forward strategy for US fixed satellite services is to continue to grow revenue and adjusted EBITDA through localized service plan set, intended to optimize the combination of net subscribers and ARPU on each satellite, as well as key metrics around service delivery, and subscriber satisfaction, and quality. We're finding stronger-than-anticipated demand in some of our beams and they're filling faster than we intended, others are filling more slowly.

We have strategies to adapt to both types of localized market conditions and it will take several quarters for us to get all the market feedback that will help us further optimize results. In the meantime, one of our objectives in this call is to provide more visibility into all the factors that are driving our growth in new orders, revenue, and adjusted EBITDA so that investors can put our fixed broadband strategy and subscriber counts in perspective. Another important achievement in the second quarter was being selected for a total of just over $120 million in Connect America Fund funding over a 10-year period. We see it as a good opportunity to more effectively offer competitive services to a meaningful set of the most difficult to reach US households. We'll report more on that opportunity at a later time.

So, as I've said for the last couple of quarters, we've anticipated in-flight connectivity would reap growth in fiscal 2019 and that's the kicks. In-flight connectivity equipment sales are captured in the Commercial Network segment and recurring services revenue in the Satellite Services segment. We ended Q2 with 898 planes in service, a sequential increase of over 140, even better than the first quarter. Our airline customers determine the pace of terminal installations, so we're proud of that result because it reflects customer satisfaction and market pull.

We added two new airline customers in recent weeks. Aeromexico is our first North American airline customer outside the US and La Compagnie is an all business-class premium Transatlantic carrier, planning to feature our best-in-class WiFi as one of its amenities. American Airlines also announced they are adding live TV to their domestic mainline fleet which adds to the prime contractor services we provide. We also continue to work with several airlines to help them take advantage of reliable, high speed, low cost WiFi to create operational performance benefits. Our order book of 859 additional aircraft builds confidence in sustained growth. And our new business pipeline is probably bigger and broader than ever, another reflection of our success and reputation in the market.

So this slide gives some more insight and context to the evolution of our Satellite Services segment performance. For competitive reasons, we don't provide detailed breakup of the services mix, but you can see the trends by a simple analysis of the data that we do disclose. While US consumer broadband was the primary growth driver for ViaSat-1, it wasn't the only one. You can get a useful approximation of relative contributions by multiplying net subscribers times the ARPU for each reporting period and compare that value to total Satellite Services segment revenue and estimate what came from in-fight connectivity or other revenue by taking the difference.

Aeromobile connectivity has been the primary source of other revenue, but now we are seeing promising growth in nascent enterprise and community WiFi services. So this chart shows this calculation to illustrate historical trends and the current run rates. Some key points are in-flight connectivity and other satellite service revenues have been growing faster than fixed broadband and have increased their percentage of segment revenues steadily for the last five years. The year-to-date first half run rate of fiscal 2019 accelerates that trend and already shows that 20% of our revenue is contributed outside of US fixed broadband in that segment. The dip in fiscal 2018 is really a consequence of the ViaSat-2 launch delays and uncertainties associated with the antenna anomaly. The inflection point you can see this fiscal year reflects the rapid growth in in-flight connectivity, planes in service, and the additional non-bandwidth revenues from our transition to prime contracting, as well as community WiFi and enterprise.

The US consumer revenues are also growing through a combination of significant ARPU gains and modest net subscriber growth, with second quarter being a record high. The growing proportion of other revenue is likely to continue as we activate more aircraft, increase prime contractor relationships, increase international revenues, and scale new WiFi hotspot businesses and enterprise services. The number of outstanding aircraft under contract is close to the current tails and service. So that along with ARPU growth, or average revenue per aircraft growth could double existing other revenue in the near to medium term even if we didn't capture more airlines and aircraft or scale the new fixed site businesses. But, in fact, we see strong momentum in in-flight connectivity and good opportunities for significant additional growth. But, we also anticipate continued growth in fixed broadband, so that would tend to moderate the percentage gained in the in-flight connectivity and other.

Obviously the net US sub count alone isn't really a good predictor of broadband services revenue and adjusted EBITDA growth opportunities even over the near and medium term. This analysis excludes satellite service revenue growth in our government segment. New orders, contract options, and revenue growth trends are all more useful indicators of growth in that segment, including growth in Government Satellite Services revenue. I'll give a little more insight when we discuss the Government segment. Our Satellite Services revenue opportunities, including in the Government segment are enhanced by global services on third-party satellites. A great example is the AMSS US DoD contract where we support global coverage on the VIP fleet with Ku- and Ka-band satellite partners. We see more opportunities like this for commercial and government aircraft.

Finally, one of the best aspects of satellite services growth through IFC and government verticals is that the backlog gives confidence and visibility in future growth. Our Government Systems segment continues to deliver exceptionally strong financial results. This slide itemizes some highlights, $240 million in second quarter revenue, up 27% year-over-year. Adjusted EBITDA in the second quarter is up 21% year-over-year to $62 million, up $451 million in second quarter orders, up 147% year-over-year. And as a reminder, the new awards total doesn't even include options such as the option years of the AMSS VIP fleet contract and firm backlogs approaching $1 billion in this segment and is up 43% year-over-year.

Firm backlog has been a good predictor of future revenue. We had good growth in both product sales and services in the segment. In general, we've been successful in applying core technologies to products and services with broader applications and markets than they had previously addressed. Continued success there, which supports sustained long-term growth. Q2 saw revenue growth and new order opportunities in tactical data links, information assurance, and cyber and of course, in satellite networking products and services. We've done well at developing and delivering targeted products and services for unmet end user needs, and we've also done it well at earning their trust of end user organizations so they'll test and integrate those products and services into their missions.

I am going to come back to government airborne mobile in a few minutes in the context of our satellite services landscape. So after those Q2 highlights, it's really helpful to set context for how these results fit our overall satellite strategy. We've always thought of our satellites as unique assets that can create value in multiple vertical and geographic markets. The more markets we can serve well, the faster we can fill the satellites and the better the opportunity to find and optimize the best markets. And if we can continue to innovate in pay load technology, the faster we fill, the faster we can launch new generations that extend our competitive advantage.

So the pyramid here shows our target verticals. The higher ones are natural satellite markets where we believe we have the greatest competitive advantage. These customers are just choosing which satellite service if any best meets their needs. They often need additional integrated services that amplify the value of the bandwidth, but sales cycles are long and we have to prove the advantages of our systems to win those customers. If these top tier ones were our only outlets, the long sales cycle would have made it impossible to get a good economic return when we launched ViaSat-1.

In the contrast, the lower verticals are direct to consumer. So sales cycles are short, but the trade-off is, we might also compete with terrestrial solutions where competitive advantage can shift. Based on the US and Canadian coverage of ViaSat-1, and our objective for strong economic return, we focused on US fixed broadband with very good results. We still anticipate a large and profitable US fixed business too, but we've also done exceptionally well at establishing ourselves at the top of the pyramid too, as shown by the rapid growth in big order book and we're in the early stages of international expansion.

So given our success in aero and government, our early results in enterprise and community WiFi and the total capacity available in our fleet, we've got a three-point strategy to sustain growth and turn it into strong EBITDA and operating cash flow. One, continue to evolve the mix to leverage the growth we are already delivering in revenue, incremental EBITDA, and orders. Two, optimize our US fixed services and prepare for ViaSat-3 by emphasizing differentiated high speed, high value plans that optimize cash flow to the extent the markets allow. And three, integrate partner Ka and Ku bandwidth into our broadband services mix. Our success across our whole portfolio has created good opportunities here too.

So we operate business models with relatively high fixed costs and lower variable costs, so we have the ingredients to turn revenue growth into strong operating cash flow. One of the benefits of the expanding and evolving services portfolio is that the fastest-growing of those in-flight connectivity and government are more predictable due to long contract durations, very low churn, and substantial and growing order books. Large part of our growth in the near and mid-term is mostly dependent on execution and that's why we're so focused on and highlighting in-flight equipment revenue and activations, winning new airlines, aircraft, and geographic markets and the corresponding achievements in our government mobility markets.

So the main point of this slide is just to build on the vertical markets pyramid from my side and to give a sense of the relative opportunities. So the targeted fleet capacity column chart on the right helps you visualize how much more bandwidth we can have with the first three ViaSat-3 satellites compared to where we are now, which we believe is already market leading. It's a big potential advantage in that timeframe and suggests the prospects for revenue and earnings growth depending on the value that bandwidth delivered in each market. The bandwidth is global, so we don't expect any individual geographies, including the US to dominate the portfolio. The pie chart is a notional depiction of the relative revenue opportunities in the early ViaSat-3 global timeframe and it is not a depiction of the total addressable market for the satellites or for each vertical or for each geography.

Just as an example, you could estimate the US fixed broadband market by the number of subscribers we could serve multiplied by ARPU or you could estimate commercial in-flight connectivity by the number of planes at that time multiplied by ARPA. We can find analogous parameters for each target markets. The pie chart illustrates the relative value of parametric estimates. It's not a forecast of how revenue would be divided, because we won't capture that notional amount of each market, nor are all the markets mutually exclusive. If you were to add up all those target markets, the dollar value would be far, far greater than we could possibly serve with the first three satellites.

We're already active in each of the verticals, though not in all the anticipated global locations. Our ability to compete effectively in all these markets should yield much greater resilience to adversity in any particular vertical or geographic space. It would also create optionality in how we choose to go to market, where we can best compete and in optimizing the growth and earning potential of the assets, plus there are substantial synergies across these market segments, which enhances competitive advantage compared to companies that compete in only one or a few.

So this next chart on narrow-body North American market share is a good way to describe success in in-flight connectivity and the long-term potential of the market. When we entered commercial IFC with our unique bandwidth value proposition about five years ago, the (inaudible) market was basically where we can compete, leveraging the bandwidth economics of ViaSat-1. Initial contracts with JetBlue, United Airlines and then Virgin America gave us the opportunity to prove ourselves and show what was possible with advanced state-of-the-art broadband satellites and that's reflected in the left hand bar chart, reaching just over 500 aircraft in September of last year. A year later, we've grown US planes and service by over 60% and earned prime contractor roles with all our customers, including a strong relationship with American Airlines, the world's largest.

The chart also shows our estimate of what tail counts might likely look like this time next year. The right hand side of the chart shows the data expressed as market share. We believe our share has more than doubled in two years to 20% and could grow to over 25% by this time next year. We believe we've taken share across the board and while establishing reputation for performance yielding exciting regional and global growth opportunities. We see more airlines coming to believe that full, fast, and free Internet access is going to be the benchmark and we're the only service provider that can do that at scale. We've also found our vertical integration is a differentiator too. We design and build our own in-flight connectivity, wireless IFE systems and terminals, have extensive in-house engineering and operations and over time that's becoming more and more appreciated and valued by all our customers.

So one of the most exciting opportunities of the ViaSat-3 value proposition is extending our current regional strategic advantage to be global. We're already seeing the benefits of that in the discussions with international, global, and regional airlines. Our multi-year US defense VIP fleet service agreement leveraging integrated Ka and Ku-band antennas offers powerful evidence of technical superiority along with economic synergies for an early global start transitioning into a long-term ViaSat-3 solution. We certainly have ambitions to achieve the same market share we've captured in North America on a global basis. This slide shows an estimated potential addressable market of about 28,000 airplanes over the next five years, broken down by region. So not only can in-flight connectivity carry a large proportion of satellite services revenue growth in the ViaSat-2 era, it represents a large attractive market in the long run. We are enthusiastic about the opportunity.

We also know it can be difficult to anticipate the factors that are driving our Government segment growth. So the point of this slide is just to offer some insights that can help investors relate the success we've had in the government aero mobility market to analyze in commercial IFC. So think of the US Defense Department as the world's largest aircraft operator. We estimate about 25,000 fixed and rotary wing aircraft that are candidates for broadband satellite connectivity. Of those, we estimate about 5,200 we could serve with our current suite of in-flight connectivity products.

We've grouped the 5,200 into five categories in the pie on the left and the relative numbers are shown in the left hand in that pie chart. The right hand pie chart just shows the relative fleet size of the 10 largest US airlines. We have a total of about 5,400 planes. So the number of aircraft in the two pies is comparable, even if the mix is different. So, it's easy to understand what it means if we win an airline like American Airlines or United Airlines. You can see what we've won, count the planes, look at the fleet expansion plans and make an estimate of the long-term value. But it's less clear what it means when we are selected for a combat tilt rotor aircraft or how large the US command and control platform market is.

So the pie chart just gives some interesting comparisons. For instance, if we will add the VIP, C3 and tanker market, that'd be analogous to winning the sixth through tenth largest airlines in the US, starting with SkyWest. We're capturing the compact rotary market that can host our existing airport terminals, might be analogous to winning the fleets of Southwest, United and Federal Express. Of course the missions are totally different, military aircraft don't fly scheduled routes, nor as many hours as commercial planes, but the defense market is much more demanding than commercial. Our vertical integration, extensive domain knowledge, strong reputation and state-of-the-art satellites are significant competitive advantages.

While aero mobile broadband is not the only component of the services portion of our Government Systems segment revenues, it's the biggest and it's the fastest growing. A chunk of the products portion of our government revenues are for terminals that customers are buying to support recurring services in future periods. In our slide on notional ViaSat-3 revenues are simple parametric view estimates the global government aero market opportunity as comparable to a notional commercial in-flight connectivity market. It's a big attractive market.

Unlike the commercial in-flight market, we're starting as a leader in this and many of the platforms we've been selected for have been via non-traditional DoD acquisitions where there is no program of record. But the platform operators have been able to show crucial operational performance or cost benefits due to our unique value proposition. We already serve at least one platform type in each of the five aircraft categories shown. Often, we were selected because of targeted R&D investments. Of course, we're constantly working to broaden our portfolio and grow our market, but it's big enough already to make the point that the growth potential of our government market is meaningful and that our existing backlog, business mix, and growth rate is so far consistent with continued growth in the ViaSat-3 timeframe. The column chart in the upper right hand corner shows we've got 16% year-over-year growth in the services category on our government segment. The annualized run rate of that value, which is largely, but not exclusively, recurring aero mobile satellite revenue is much bigger than our fast growing commercial in-flight connectivity business.

Okay. So the objective of all that was to give some context on our current growth drivers in the mid and longer-term opportunities in different verticals. We identified some indicators that add visibility into the growth rates of IFC and/or newer satellite services, verticals, and government aero mobile. This slide summarize the factor we think will influence growth over the next several quarters. It's quite similar to what we've said for the last few quarters and it's consistent with our results. We still anticipate commercial IFC will be our biggest growth driver in fiscal 2019, given a high degree of visibility we have. The keys are to ship and activate existing orders.

We've executed well in the first half and expect to continue to do so. That generates strong product revenue growth and contributes earnings in the Commercial Networks segment. We're also growing recurring revenue in the Satellite Services segment through both plane count and ARPA. We've shown an inflection point in satellite services segment growth due to IFC in fiscal 2019 and our existing order book suggest we could double or more that portion of Satellite Services segment revenue as we activate the existing order book in the second half of 2019 and beyond. Our pipeline of new in-flight opportunities is very strong and we are aiming to meaningfully grow the order book by growing our share of the global market as we have in North America.

Government Systems continues to the deliver exceptional growth in product and recurring service revenue. Our record award levels and firm contract backlog builds confidence we can continue to grow at the historical rates. The large attractive market in aero mobile alone suggest we wouldn't max out government systems growth soon. In the services portion of Government segment results is a meaningful, but not explicit indicator of recurring satellite revenue in this segment, somewhat analogous to and currently larger than commercial IFC recurring services.

While the US fixed broadband portion of satellite services has resumed growth and is at a record revenue run rate, it's the most affected by the ViaSat-2 antenna issue. So we operate that business in a cash-efficient manner. Almost 100% of ARPU growth falls to the bottom line as compared to only our average margins for subscriber growth. Higher priced, higher bandwidth service plans deliver more value to customers while potentially generating hundreds of millions of dollars in net cash benefits through SAC and variable cost avoidance.

We understand that higher price plans temporarily limit our addressable market, but we've got the flexibility to adapt to localized market demand and in fact we're seeing more demand than we expected here in the number of local markets. It's hard to predict how net sub count and ARPU results will fluctuate from period to period because we expect to respond to the market in each local area, while also factoring in bandwidth demands from other applications. This applies to all our satellites, not just ViaSat-2. So on ViaSat-1, we're also replacing many low ARPU drivers with fewer high ARPU ones and achieving the same benefits. We see good opportunities to grow total satellite service segment revenues and adjusted EBITDA and that's the focus.

With ViaSat-3, we expect to have a lot more bandwidth, better economics, and more geographic flexibility, which would enable us at that time to more aggressively address a larger fixed market. Meanwhile, our selection in the FCC Connect America Fund auction creates both near and long-term additional opportunities in the most difficult-to-reach US geographic markets and can enhance absolute fixed services growth even while other satellite services grow faster. Overall, we've shown good incremental flow through in revenue to adjusted EBITDA, especially in satellite services. We believe we can continue those trends and begin to grow adjusted EBITDA faster than revenue.

And, as we've previously indicated, we're past the bulge in R&D due to the ViaSat-3 payload development and initial investments that enabled the surge in in-flight connectivity. But we want to retain flexibility for additional success-based R&D or capital investments and believe we've shown those are driving growth, not just maintenance of the existing business space. We expect to increase capital spending for construction of the third ViaSat-3 constellation, including the third one and network infrastructure. But we aim to grow adjusted EBITDA at a higher rate than that of capital spending. That would reduce our leverage ratio over time and the insurance proceeds from the ViaSat-2 anomaly can enable a pro forma step decrease of about a half a turn in itself.

We are especially pleased with our strong contract awards here to-date. Our $1.3 billion book -- 1.3 book-to-bill ratio builds confidence we can achieve our continued sequential EBITDA earnings growth objectives for the balance of the year. Recall, we've been anticipating adjusted EBITDA growth in fiscal 2019 would be weighted to the back half, because of two main factors. The quarterly seasonal effects we've seen in our government business each year where earnings have tended to grow through the course of the year and the flywheel effect of adding recurring satellite services revenue whether in fixed broadband, in-flight or government. So we're looking forward to continuing an exciting growth year.

So that's it for prepared remarks and be happy to take questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Philip Cusick with JPMorgan. Your line is open.

Sebastiano Petti -- JPMorgan -- Analyst

Thank you. This is Sebastiano on for Phil. Thanks for taking the question. Just wanted to see if you could update us on ViaSat's business plans in Europe. I mean, Eutelsat JV has kind of gone and you're now more on a go-to-alone strategy. So I think ahead of the ViaSat-3 EMEA launch, anything you could potentially -- any color you can give us on what you're doing in those markets as well as any conversations -- you alluded to it in the slides just from an RFP perspective on (technical difficulty) any additional color on that opportunity?

Mark Dankberg -- Chairman and Chief Executive Officer

So, for Europe obviously unwinding the joint venture, the future joint venture work with Eutelsat is going to have an impact on the growth rate in the interim in Europe and that's factored into our plans. I think we will still continue to develop all of our broadband markets in Europe. I think we will be able to support that. It won't go as fast. In the overall scheme of things, it's not a material impact to our results.

Sebastiano Petti -- JPMorgan -- Analyst

Okay. And then in terms of your -- one of your comments toward the end here just on predictability of whether it'd be volumes on broadband, residential broadband net add basis and/or ARPU as you take a more market localized approach, I mean just how do we balance that with because you talked about balancing the inflection and the characteristics of both profitability post of ViaSat-1 launch? Obviously now you're focused more on profitability. How should we think about the margin recovery from here? Is there any changes or mismatch whether it'd be from a fixed cost perspective ahead of revenue? Just how should we kind of think about that in light of somewhat of a pivot in strategy focusing on profitability?

Mark Dankberg -- Chairman and Chief Executive Officer

Okay. I think the way to think about it is what we're really -- what we're really doing is, we're selling bandwidth. We're selling it into different markets, but the underlying dynamics are very similar. We have a relatively high fixed cost and we've expanded our network, so we do that, but the variable costs of selling bandwidth are low. So whether we bring it to market in government, or in-flight connectivity, or fixed broadband, the underlying dynamics are the same in terms of margins. As a matter of fact, depending on where we sell it, if we sell it in places, for instance, in government, mobility, or in-flight connectivity where our customers buy equipment and there is essentially no churn, in the long run the margins actually can be better. So I think the way to think about it is just to look at the total revenue growth rate. And one of the points that we've made is, if you look at the history on ViaSat-1 and as we brought more bandwidth into service, got scale advantages, our margins generally expanded. We should see the same effect here no matter how we sell that bandwidth.

Richard Baldridge -- President and Chief Operating Officer

This is Rick. The only thing I would add is, this has been our plan. So, this is not really a change. This has been our plan.

Sebastiano Petti -- JPMorgan -- Analyst

Thanks.

Operator

Thank you. And our next question comes from Rich Valera with Needham & Company. Your line is open.

Rich Valera -- Needham & Company -- Analyst

Thank you. Mark, I was wondering, if you could give any color on any of the other large orders that comprise the $450 million or so of Government Systems bookings. It sounds like you only called out specifically I think $50 million to $60 million. So, any color there would be appreciated. And then, with respect to what that implies for longer-term growth, I mean, you guys have sort of been pretty steady at kind of a very low double-digit growth, kind of 10%-plus in that business. Does the recent very strong bookings, I think you've got kind of a trailing 12-month 1.4 to 1 book-to-bill suggest this business might be able to actually accelerate its growth rate over the next 12, 18 months. Thanks.

Mark Dankberg -- Chairman and Chief Executive Officer

Okay. Yes, so we'd like that. I think one of the things we've always said is that bookings tend to be very lumpy and they don't necessarily directly -- I mean, it's very difficult to directly translate that into a much faster growth rate. Obviously, we're really happy with the bookings and I think they give us a chance to grow faster, but you'd need to see that turn into a sustained revenue growth rate. So, we are working on that. The underlying theme that we've been talking about in government products and the products are a big component of the orders, that we've been looking to evolve our customer base more into the mainstream services and little less focused -- I mean, not that we're less focused on it, but that we can break through beyond the sort of special forces,early responders types, who are the most receptive to new technology and those are the ones that try things out.

What we're finding is, which is really good, is that a lot of the things that are working well for the special forces and the early responders and getting the attention of the regular Army, Air Force, and Navy. So to the extent that we can continue that, you could see a real step growth in our product sales. That's what we're working toward. I'd say the early signs are encouraging, but it's too early to declare victory there. The other and until the -- just to put that in perspective, what you're seeing is, we're selling these integrated systems, more complete integrated systems that include components of satellite terminals, Link 16 products, especially that's the tactical data links product, especially the ones that we've developed on our own that there was no program of record for their turning into programs of record. That's also a really good sign. And the other area of product growth that's growing well in our future revenues -- services revenue are satellite terminals of various types. So, then it's pretty much across the board.

Rich Valera -- Needham & Company -- Analyst

Got it.

Mark Dankberg -- Chairman and Chief Executive Officer

I think that answered -- yeah, I think that answered all your questions. Was there any others?

Rich Valera -- Needham & Company -- Analyst

No, that was it on that. I had one other one. Just wanted to follow-up on the consumer broadband topic. So I get the focus on fewer, higher ARPU subs and the favorable -- more favorable economics there. I guess the question is, was there anything, any transient factors affecting the number of subscribers this quarter or was this kind of a quote, normal quarter and should we think of the kind of sub adds in ARPU this quarter as kind of a baseline going forward? It sounds like you can be plus or minus off this, but I guess the question is, was there anything unusual in this quarter or transient that that might have been suppressing subs or is that sort of the baseline we should kind of think of going forward? Thanks.

Mark Dankberg -- Chairman and Chief Executive Officer

Okay. Yeah. So, I think the way we're going about the market, while the underlying fundamentals are really similar to what we have in the past, the price points are higher. The service plans are good where we are delivering much higher speeds. We're delivering a lot more video stream viewing which is ultimately what we think a lot of people buy higher performance broadband plans for, but the price points are high. In this quarter we had a -- basically the satellite was just coming into view, so we had -- coming into service, so we had kind of an open playing field. As I mentioned in, some markets, we basically had more demand than we expected. And we may need to slow down in some of those markets. And in other markets, the demand wasn't as high and we'll probably adjust the service plans to help drive more demand. And some of that stuff takes -- think of it as a quarter or so to understand, and adapt, and respond.

So, I think the only thing I can say is, what I said before, which is people should probably expect things to fluctuate around those results. We had really good ARPU growth, but if we -- think of the two of them as sort of combined. If we reduce service plans, we might get reduced service plan pricing in some markets. We'll probably get more net subscribers, but the ARPU would go down, the product might be roughly the same. Flip side, if we can raise -- if we choose to either come up with a mix of more premium plans in other markets, subscribers might go down and ARPU might go up. But we're just totally oriented toward the combination of the two. And we don't really want to give any guidance either way on just one element of it, which would be the sub count.

Richard Baldridge -- President and Chief Operating Officer

Other than that we expect continued EBITDA growth.

Mark Dankberg -- Chairman and Chief Executive Officer

Yes, thanks.

Rich Valera -- Needham & Company -- Analyst

Okay. Thanks for that, Mark. Appreciate it.

Mark Dankberg -- Chairman and Chief Executive Officer

We have time to take only one more question. We've got to cut if off at that today.

Operator

Okay. Our last question comes from Ric Prentiss with Raymond James. Your line is open.

Ric Prentiss -- Raymond James -- Analyst

Thanks, guys. I guess the message is, well, careful what you ask for, because you might get it. You're squeezing the analyst day into 15 minutes here. Appreciate all the topics. A couple if I could. One on the insurance payment. Some people had been thinking on the claim that it would be reflective on like what percent of capital was impaired, but it really sounds like we should be thinking about it from bandwidth, because that's really what you're selling. So, how should we think about that having said you've got a $1 million reserve and what it means to your ability to sell bandwidth?

Mark Dankberg -- Chairman and Chief Executive Officer

Okay. So, that is -- yes, Ric, that's a good way to put it. It's really impactful also that the insurers understand that ultimately the product we're selling and the purpose of the satellite is bandwidth. So that was the basis of the claim and the settlement. So we have less bandwidth than we would have if the antennas had deployed nominally. We're disappointed about that, but we still have a lot and we have a lot of outlets in which to deploy it. So we see good growth prospects. We still describe it as a pretty formidable asset, but the amount of bandwidth we have we think is the most of any satellite operator. And now we have a more asset base for it and so we can still get really good returns.

We see -- as I mentioned, we do forecasting. One of the reasons we've switched to these higher priced, higher value plans while again it sort of reduces the near-term addressable market, it's a way for us to make up for the bandwidth efficiency. Basically that's what we're doing. It's made life more challenging in that particular market. But I think we're overcoming it. In the other markets, basically we already had all the agreements. We have plenty of bandwidth. We're not constrained in the government and the in-flight connectivity or these other international markets. And so we're -- I'd say we know what our challenges are and I think we are working on achieving the conversion of that bandwidth into the revenue and earnings that we wanted.

Ric Prentiss -- Raymond James -- Analyst

Okay. And from a strategic level, Baupost was brought on-board I think in an observational role into the Board. Can you touch a little bit about what the thoughts are in doing that and what it might be the message you would want the Street to think about bringing them over the wall, if you will?

Mark Dankberg -- Chairman and Chief Executive Officer

So, one is, we're really pleased to have them working with us more closely on the Board. Obviously, many people understand we are a capital-intensive company. At this time, we're investing in assets that we think are really good. They are obviously very good at allocating capital and capital structures. We think that they can help us. We think it's good for us. It represents something of a commitment on their part. We are very pleased that they have made it. We're happy to have the support.

Ric Prentiss -- Raymond James -- Analyst

Anything as far as what it might signal strategically or what thoughts might be?

Mark Dankberg -- Chairman and Chief Executive Officer

You'd have to ask them. I think the main thing we're focused on is doing really, really well on what we're doing.

Richard Baldridge -- President and Chief Operating Officer

I mean, their main message to us is that they have been in the stock for a long time and this is a very supportive move.

Ric Prentiss -- Raymond James -- Analyst

Yeah. Okay. And then final one on just on the bandwidth. Is there some number that we should be focusing on as far as what that bandwidth is you're able to sell. I know it gets complicated, you got different beams, different locations, durability, but just how should we think about what that is that you're able to sell to kind of answer Sebastiano's question about you really selling bandwidth? How should we think about modeling the ability on the outside of the company to figure out how you're selling bandwidth?

Mark Dankberg -- Chairman and Chief Executive Officer

I think that was part of the point of going through all the different vertical applications. So think of it as yield management on an asset. We have large assets that we've acquired. They can be very valuable when projected into different markets. The value in different markets is determined by different factors. A lot of it is determined by what's the next best alternative in each of those markets. And so once you come around to the notion that the purpose of the satellite, the way you value the asset is by the amount of bandwidth it has, I think you can see that in a lot of our markets where we're competing with other satellite operators, the bandwidth is really valuable.

And so what we look at is, what is the competitive offer in the market that still allows us to earn a good return on our bandwidth sales and we want to do that on a diversified basis. We think there's great value in having these multiple outlets because different vertical markets undergo different stresses or strains at different times, different geographic markets have the same thing. So we put some value in maintaining that diversity. We also get a lot of value out of having all these countercyclical peak demand. So one of the things we emphasize in bandwidth is, people look at what the average revenue for bandwidth is, but it's like a utility. It's like electric power, you want it to work when you need it the most, right, you don't buy electric power so that you can have it on the average, you buy it for the peak. Same thing for bandwidth. So when we have all these uses and have different peak demands that we can combine them effectively and still meet our obligations, we get even more value out of the bandwidth.

So basically one of the things to do and this is one we're not going to disclose competitive information, but I think one of the things analysts can sort of look at is, well, how much value do we derive from bandwidth in each of these different markets. And then that's a way to sort of be able to turn the bandwidth that we have into revenue and then to look at how we're competing in those markets. We think we're competing really, really well in most of the markets and that will give you some sense of the growth. That's why we suggested these parametric approximations in each of the different markets. I know there's a bunch of work. We think it's worth it for us. We're going through it, because we think we can get a lot of value, but that's how we look at it.

Ric Prentiss -- Raymond James -- Analyst

Great. That's really helpful. Thanks for all the details, guys.

Mark Dankberg -- Chairman and Chief Executive Officer

Thank you, Ric. Okay, so thanks. Sorry, we took a lot of time in our explanation. We really appreciate everybody's time and patience and look forward to talking again next quarter or sooner.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 67 minutes

Call participants:

Mark Dankberg -- Chairman and Chief Executive Officer

Robert Blair -- Vice President, General Counsel and Secretary

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Sebastiano Petti -- JPMorgan -- Analyst

Richard Baldridge -- President and Chief Operating Officer

Rich Valera -- Needham & Company -- Analyst

Ric Prentiss -- Raymond James -- Analyst

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