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Viasat Inc (NASDAQ:VSAT)
Q3 2020 Earnings Call
Feb 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Viasat's FY 2020 Third 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 CEO

Okay. Thanks. Good afternoon, everybody, and welcome to Viasat's earnings call for our third fiscal quarter of 2020. So I'm Mark Dankberg, Chairman and CEO; and also on the call with me are 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.

And 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, let me turn it back over to Mark.

Mark Dankberg -- Chairman and CEO

Thanks, Robert. So we'll be referring to slides that are available over the web. I'll start with an overview, and Shawn will discuss the consolidated and segment-level financial results. And then I'll give more color on the business, progress on ViaSat-3, our global expansion plans and update our outlook. Financial results continue to be strong. Revenue of $588 million for Q3 is up 6% year-over-year. And $1.7 billion year-to-date is up 14% compared to last year. EBITDA of $122 million for third quarter is up 13% year-over-year and at $337 million year-to-date is 46% higher than last year. Year-to-date orders of $1.8 billion are slightly above last year and reflect a book-to-bill of just over 1-times.

The financial results demonstrated strong business fundamentals. We are scaling and refining and improving execution. We're able to deliver solid gains while investing for future growth. In the near to mid-term aeronautical broadband, both government and commercial, has great growth potential. We're aiming to translate the accomplishments and market share gains we've achieved in North American in-flight connectivity on a global basis, and we're making significant progress. By the nature of how government platforms are deployed, global expansion opportunities are already in motion. Government systems is firing on all cylinders and creating more opportunities from network effects across several product lines.

One of our strategic themes is diversifying our satellite services portfolio to increase resilience, grow our total addressable market and prepare for global coverage. We've shown progress every quarter. While we're efficiently driving revenue and earnings growth in U.S. fixed site service, our other markets are growing even faster. We're entering each vertical market and methodically expanding geographically. We have a very substantial growth runway in front of us. Our strategy is being proven, our highly unique form of vertical integration in space and ground technology and service delivery underpins a unified global approach, with tailored playbooks for specific applications in geographic regions. Through our work in platform specific terminal integration, end user applications integration, machine learning, data analytics and cybersecurity, we're delivering impactful outcomes for our customers, not just bandwidth. But we definitely intend to maintain our leadership in cost-efficient production of space-based bandwidth in the places with the greatest demand.

We believe we're exceptionally well positioned for long-term growth, mastering a broad service portfolio is so valuable because each region of the world has dramatically distinct demand profiles, driven by vastly different geographic, economic, political and regulatory realities on the ground. The diverse portfolio is far more resilient to the kind of economic and yield political disruptions the world is experiencing right now. Vertical integration offers exceptional synergies across the portfolio, extending economic advantages, especially given our unique network architecture, allowing flexible, geographic bandwidth allocations across time and space. Finally, the aggregate demand represented by our target service portfolio far exceeds the supply of space-based bandwidth being brought to market, not only by us, but by the entire industry. We anticipate 2020 will mark a major milestone for the ViaSat-3 constellation, as we ship our first fully assembled, integrated and tested ViaSat-3 payload module.

From then on, the rest of the spacecraft integration and launch campaign built on existing standard processes and schedules to achieve a mid-2021 launch. And we've made important strides in the next evolution, ViaSat-4, that reinforces our confidence in preserving and extending our leadership in the primary satellite broadband value propositions of bandwidth and speed relative to any GEO, MEO or LEO alternatives. So after we review the financials, I'll go into more depth on each of the areas I've highlighted here. For financial highlights, this slide clearly illustrates the summary financials I mentioned upfront. Just to recap, Q3 revenue of $588 million, up 6% year-over-year and at $1.7 billion year-to-date is up 14%. Q3 adjusted EBITDA at $122 million is up 13% year-over-year and $337 million year-to-date, up 46% year-over-year. Q3 awards of $577 million are up 29% year-over-year, year-to-date awards of $1.9 billion are up 5% year-over-year, and they reflect a year-to-date book-to-bill of better than 1.11.

Overall, we continue to set the pace for the broadband space industry. Our revenue run rates are the highest, with a solid growth rate. Virtually all of our major markets are growth markets. We're the most vertically end-to-end integrated from fundamental space and ground technology to end-user and customer service delivery. The strategy is simple. The execution is tricky and difficult, but we're doing it -- it's what creates competitive moats. We think anyone aiming to deliver global broadband service at scale is going to have to master the skills and markets that we are. Finally, it should be clear from the last several quarters that availability of cost-effective bandwidth in the right geographic places is the fuel driving our growth. We're benefiting from ViaSat-2 and the international satellite partnerships that replenished our bandwidth supply. Later on, we'll help investors better visualize the economic potential of the bandwidth fuel coming with the protein Viasat-3 launches.

So with that backdrop, I'll turn it over to Shawn.

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Thanks Mark. As Mark just covered the top level highlights, I'll jump right into our segment performance. The momentum in our government business continues to drive growth, with third quarter, reflecting the strong performance in both top line and earnings. Segment revenues grew $42 million or 17% year-over-year, with higher product sales occurring across our diverse portfolio, including tactical radios, mobile broadband, tactical data links and government.com products. This comes on the heels of a very good Q2, which historically is a seasonally good book and ship work quarter for us corresponding with the government's fiscal year-end budget closeout on September 30. So we expect our government business to continue its strong performance into Q4, easily exceeding the $1 billion revenue threshold for FY 2020 that I mentioned last quarter. Adjusted EBITDA for government systems was $78 million, representing a 13% increase over Q3 of last year. The higher top line drove this growth as improved gross margins on higher NDI product mix from the prior period was offset by a modest uptick in SG&A.

Segment awards in the quarter were $232 million, up almost 50% year-over-year to a new Q3 record and resulting in a positive year-to-date book-to-bill position. Government backlog stood at $928 million at the end of the quarter, and that excludes the IDIQ values, Mark mentioned earlier, and approximately $450 million in remaining AMSS contract options, which to remind everyone is the contract we have to provide to lead global in-flight connectivity services on the U.S. government senior leader aircraft. Turning to commercial networks, we saw quarterly revenues declined by $42 million, or 33%, due entirely to the comparative impact of last year's spike in the IFC terminal installations for American Airlines, offset with other modest commercial product increases. And despite the continued grounding of the 737 MAX, our IFC terminal deliveries picked up sequentially quarter-over-quarter as mounting interest for an out home in-flight Internet experience drives IC demand globally.

Commercial Networks Q3 earnings reflected a larger adjusted EBITDA loss on the lower revenues, as well as higher next-gen satellite networks and mobile terminal R&D and to a lesser extent, higher SG&A. And awards for the quarter were very strong at $134 million, with antenna systems and commercial air terminals, representing over 80% of this total. And we ended the quarter with backlog of $385 million, which is the highest backlog position we've had in this segment over the last five years. Lastly, in satellite services, we continue to see strong revenue growth and even stronger adjusted EBITDA increases, as inherent operating leverage and our large-scale service businesses expand the ViaSat-2. This quarter also marked our eighth quarter of sequential revenue growth with Q3 revenues hitting a record $212 million, representing a 19% year-over-year increase and a 3% on a quarter-over-quarter basis.

And while our overall broadband service portfolio continues to expand, our U.S. consumer broadband business is still growing, generating an all-time revenue high this Q3 and contributing about two-thirds of the Q3 revenue increase with our IFC business, representing the bulk of the remainder. In consumer broadband, revenues reflected at 15% year-over-year increase in ARPU, primarily from a higher premium service plan mix, while our commercial air top line expansion was twofold. The biggest part was driven by 23% year-over-year increase in TILs and service, alongside increased ARPU from our expanding onboard capabilities and services.

Our ending in-service telcos was 1379 aircraft, which excludes about 90 Boeing 737 MAX planes that already have Viasat services enabled but remain grounded as of the end of the quarter. Q3 adjusted EBITDA for the Satellite Service segment was up over $18 million or 33% year-over-year to $75.1 million. The flow-through of incremental revenue to adjusted EBITDA of 54% was a little lower than what we've seen in the past, primarily related to our global expansion investments, which offset the incremental contribution margins from our scaling fixed residential and mobility businesses.

With respect to our activities abroad, things are continuing to look promising, while our revenue base is small, it is growing as expected. But more importantly, we are making good progress in building our in-country execution capabilities, including gaining local expertise, farming distribution relationships and establishing the operating infrastructure we need as we're ready for the ViaSat-3 conciliation. Now before I move on, let me touch on the impact of the continuing new 737 MAX grounding. Last quarter, I said that the reduced number of the 737 MAX installs and delay in rebated service revenues could result in fiscal year earnings pressures in the $5 million to $10 million range, based on a return to flight in the calendar year-end time frame. And that we would likely be at the higher end of that range.

Based on Boeing's most recent public statements, we don't anticipate a return to flight before the end of fiscal year. So we can now confirm that the full fiscal 2020 earnings impact will be approximately $10 million. These financial pressures are likely to carry into fiscal 2021. However, as we said before, we anticipate a step function in commercial air revenues when these plans return to surface. But again, for clarity, overall, we expect to see solid Satellite Services segment momentum continuing into next year, with revenue and adjusted EBITDA growth on a year-over-year basis. So to recap, we had another solid quarter year-over-year of top line and adjusted EBITDA results across our key business segments, and we expect to continue this trend as we put out the year and into fiscal 2021. And we have a good revenue line of sight based on our backlog position of $1.9 billion, up about 5% from the same period last year.

So this next slide has our year-to-date results and consistent with our performance throughout fiscal 2020, we see year-to-date revenue and adjusted EBITDA expansion fueled by our prior technology portfolio investments. To size this a bit more, the last 12 months of adjusted EBITDA totaled over $445 million, which is over $100 million higher than our historical high. And as I previously highlighted, we see good momentum continuing next year. In the government segment, we saw year-to-date revenue growth of 25% to $852 million, a new high for that segment. The drivers of this top line growth were basically the same product categories, I mentioned in the quarterly results.

Segment adjusted EBITDA was up $47 million or 27% year-over-year to $222 million with just under a 0.5% improvement in margins as a result of lower SG&A as a percentage of revenue. In commercial networks, revenues were down 25% to $252 million on the anticipated lower air terminal shipments year-over-year, but that was partially offset by higher revenues in satellite networking, antenna systems and fixed program products. Adjusted EBITDA decreased $23 million year-over-year on the combination of the lower revenue and a higher absolute SG&A and R&D expenses supporting our next-gen satellite networks and our growing mobile broadband business. And in satellite services, revenues were up 24% year-to-date, while adjusted EBITDA was up significantly more at 63% or $82 million over the same period. Top line growth and margin expansion were driven by the same scaling factors I discussed on the quarterly results. Going forward, even with the investment we're making in our international fixed and mobile broadband businesses in our other vertical markets, we still expect to see continued solid year-over-year absolute adjusted EBITDA growth in this segment.

On slide seven, we have income, cash flows and net leverage trends for the quarter. Operating income improved substantially for the quarter and the year-to-date period, driven mostly by the improvement in adjusted EBITDA and partially offset by the higher non-cash expenses such as depreciation and amortization. Positive net income for the quarter and a large decrease in the year-to-date net loss reflects our operating income improvements, as well as lower interest expense incurred and capitalization of interest as the construction of the ViaSat-3 constellation continues. In taxes, our Q3 and year-to-date periods reflect our federal R&D tax credit benefits, offsetting the additional tax expense on our higher income levels. Collectively, this brought our third quarter GAAP net income to $6.5 million and non-GAAP net income to $25 million. Year-to-date, we again saw similar trends with the improved GAAP net income by $68 million year-over-year, bringing our year-to-date GAAP results to about breakeven and non-GAAP net income to $52 million, a $72 million improvement.

Looking at year-to-date Q3 cash flows, we generated $293 million of cash from operations, which was up 37% or almost $80 million compared to the same period last year. This increase was primarily driven by our strong year-over-year adjusted EBITDA increase, partially offset by additional working capital supporting our growth. Capital expenditures increased by $255 million year-over-year with about 2/3 of this increase due to last year's investments being offset by the $172 million of ViaSat-2 insurance payments. The remaining capex increase was associated with the ViaSat-3 constellation, partially offset by lower CPE and ViaSat-2 ground spend.

Overall, our existing business strength, which is fueled by our approximately 400-gigabit of high-capacity, Ka-band portfolio, greatly expanded our operating cash flow generation and have funded roughly about 50% of our year-to-date capex. So moving to leverage on the lower right corner of the chart, our Q3 net leverage position increased slightly from last quarter as expected, but it's still down significantly year-over-year. As noted in prior calls, we expect leverage to hover in this range or perhaps increase slightly next quarter, depending on the timing of certain capital outlays.

Looking to fiscal 2021, we expect leverage to continue to increase modestly as we and our subcontractors had a wave of critical milestones, alongside our transition to the final phase of our ViaSat-3 program construction activities. But again against the backdrop of expected continued strong growth in our adjusted EBITDA performance. Finally, we have continued to have ample liquidity at just over $600 million, which includes the cash on the balance sheet and the availability under our $700 million revolving credit facility.

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

Mark Dankberg -- Chairman and CEO

Thanks, Shawn. Okay. So I'll go into more depth, starting with government systems. Just to recap, third quarter revenue was up 17% year-over-year to $292 million and year-to-date, up 25% to $852 million and year-to-date, government revenues just about half our total. Adjusted EBITDA and government grew 13% and 27% to $78 million and $222 million, respectively, for the third quarter and year-to-date. Strong performance across the product portfolio drove the top line growth in the third quarter. Year-to-date, our services revenue also added to growth. Year-to-date, contract awards reached $865 million, and we ended the third quarter with $928 million of backlog in this segment. Unawarded IDIQ contract values about $1 billion -- $1.1 billion as of Q3, and that's not included in the backlog figure. Growth year-to-date has been better than our expectations, boosted by strong demand in government fiscal year-end seasonality.

In government systems, we're aiming to augment a defense procurement system that's stressed by an incredibly broad threat spectrum with rapid technical advances. We built closer working with -- close working relationships with our nation's global first responders. They encounter new threats and have the skills and agility to learn to overcome them. And we help migrate the products and services proven in that environment to the much larger regular Air force, Navy and Army. We're also working with coalition partners who leverage interoperability with U.S. forces. So almost all the Link 16 products that we show on this slide are non-developmental items, meaning we invented, productized and support them ourselves often directly with end user combatant organizations in response to specific operational needs and reduce the lead times agency by as much as a decade or more.

The product has been effective in interoperate using standards that creates powerful network effects. That is all the Link 16 users find their connections to be more valuable as new users, platforms and operational processes join the network. We're enabling the number of network enabled platforms and devices to grow by orders of magnitude from thousands to tens of thousands to hundreds of thousands. We're still in the early innings of the transformations needed by the U.S. defense department. While this slide focuses on Link 16, we have similar opportunities in other areas, too. We believe the biggest growth is still in front of us. The space force with a mandate for faster innovation to address the rapidly evolving space threat environment, as well as new operational models is indicative of the need for change. We're earning placements of customized secure Viasat satellite terminals on a broad range of operational platforms that can support both DoD organic satellites as well as ViaSat-3 networks. We're steadily building a diversified global population of terminals ready to leverage ViaSat-3 and beyond bandwidth. Government services are over 20% of total government system segment revenue.

Within that, there's an aeromobility services business that is comparable in revenue to our commercial in-flight connectivity business and also growing fast, where earning positions are more fixed and rotary wing platforms, representing the early adopters of fleet to thousands of aircraft. Government business is inherently lumpy, and financial results will vary on a quarterly basis, but we believe the growth trends that have driven our results for the last several years can endure an even increase in the ViaSat-3 era.

Turning to satellite services. Here, we reported $212 million and $614 million in Q3 and year-to-date revenue, gains of 19% and 24% year-over-year, respectively. Adjusted EBITDA was $75 million and $213 million in the third quarter and year-to-date, increases of 33% and 63% year-over-year, respectively. Its eighth consecutive quarter of sequential revenue growth, an ARPU gain of about 15% drove residential revenue, while total revenue benefited from a 23% year-over-year increase in in-flight connectivity tails to 1,379 at the end of the third quarter, and that includes about 90 [Phonetic] 737 MAX planes as of Q3 and we had about 690 additional aircraft, we expect to install under existing contracts. Together, that totals to an increase of about 120 more planes in the third quarter have derived from our expansion into South America with Azul Airlines, as well as additional plans from existing customers. And we've already accomplished our first flights with Azul.

So you can see in the chart in the lower left that while our U.S. residential business has grown rapidly, our newer vertical and geographic markets continue to grow even faster. And on a last 12-month basis, they've reached 25% of our satellite services revenue over double the proportion of four years ago. We strongly believe that more diversity, both geographically and by vertical market is the key to global growth in the resilient optimal service business. For the U.S. fixed market, we've consistently emphasized ARPU growth over subscriber count with ViaSat-2. That's worked really well. The approximate cash benefit to date of this strategy compared to a constant ARPU higher sub count approach is already in the range of a couple of hundred million dollars.

We've grown ARPU by offering higher priced, higher value plans that have increased satisfaction and reduced churn. Don't misinterpret those results is meeting the satellite addressable market is small or saturated, we think the opposite. The addressable market depends on offered price and performance compared to terrestrial alternatives. We're currently addressing only the high end, which is apparently pretty big. We could choose a different approach with ViaSat-3, triangulating from multiple directions, including the existing DSL subscriber base demand for higher speeds and more bandwidth as people switch from broadcast to over-the-top video, preliminary beta test of our hybrid low latency services and demand at our current price points, it's reasonable to estimate a satellite addressable U.S. consumer market in the $20-ish million range. Obviously, for anyone to target a market of that size the competition is really terrestrial and the appeal would be delivering better quality -- better quality video streaming. We believe we can compete well for streaming video among the underserved.

Today, we announced a partnership with fuboTV, a sports and news focused live TV streaming service that focuses on improving quality and quantity for both live and assuming video on-demand services, over the Internet, and they're leveraging technical specifications developed by the streaming video alliance. We'd encourage you to read that release. It emphasizes the in-flight connectivity market, but the same principles can apply to fixed services. We've been developing the technology for a while and contributing to the standards process, and now we're seeing adoption. The main reason we focused on higher-end plans -- service plans is to get better at streaming video. The streaming video alliance protocols can help content providers improve end-user experience substantially, reaching literally hundreds of millions of users over satellite in places that are otherwise inaccessible for the best over-the-top sources.

So, the bottleneck for services growth for us or any other player in our market is bandwidth. We see plenty of demand given the right vertical and geographic markets and the right price points. But even though we have the most bandwidth in the market, bandwidth is still a constraint for a differentiated service and having a strong, diversified portfolio gives us the best opportunity of optimizing the value of our assets across the broad range of demand characteristics, we'll see globally driven by geography, regulatory, politics, and other distinctions in each part of the world. So, this slide about ViaSat-3 constellation is really about this is the way to get more bandwidth. All three satellites are in full swing. The figure on the slide shows a simplified schedule. The fully shaded segments are completed for the first two satellites. The first satellite is in payload assembly and test. The gradient fill is intended to show approximately where we are in the overall process. The brackets under the schedule divided into two main portions. The first is ViaSat-3 payload unique, and the second is more standard for our Boeing 702 spacecraft.

The payload build assembly and test is the portion with the greatest uncertainties, the known unknowns and the unknown unknowns, if you will, and schedule pressures come mostly from subcontractor production schedule performance in this portion. We've taken steps to mitigate those issues and are now integrating subassemblies onto the payload module. We're aiming to deliver the first payload module to Boeing by fall of this calendar year. After that, the program uses standard processes for integration and test of the spacecraft and the launch campaign similar to ViaSat-2. Payload module delivery is an important milestone in reducing overall schedule risk and achieving the mid-2021 launch date.

The ViaSat-3 program is built on innovative new technology, and with it comes many challenges, but we've made great progress and we're systematically retiring schedule and performance risks. We expect the system to meet its coverage and performance objectives. Others always scheduled risks with space programs, we believe were driving toward completion and narrowing those risks to be measured in weeks and months, not in quarters or years.

So this next slide helps illustrate the magnitude of the opportunity created by ViaSat-3. The left-hand portion of the graph shows trailing 12-month revenue on a quarter-by-quarter basis, since we entered the satellite services business with the Wildblue acquisition. The growth rate inflection points that line up with ViaSat-1 and ViaSat-2 are obvious ViaSat-2 showed even sharper gains in total revenue growth rate. We've able to time interval from now to ViaSat-3 is the ViaSat-2 runway, where we're achieving good growth momentum. A black line that starts in the lower left in turned sharply up with the launch of the ViaSat-3 constellation is actual and projected bandwidth capacity on our fleet with bandwidth measured in gigabits on the right-hand access.

You can see an anticipated 8x increase with the ViaSat-3 constellation; and three roughly equal regional installments. The chart vividly reinforces the point that bandwidth is the fuel for growth. We've been very successful at defining, creating and executing new business models that have already or are in the process of transforming each vertical segment with fixed residential, commercial in-flight connectivity and government aero mobile being the three biggest examples. We're putting in place the remaining verticals for global expansion now. We're methodically expanding geographically. The productivity gains we can achieve, create opportunities to transform end user experiences for bandwidth intensive applications. We have enough bandwidth productivity gains to share with customers while earning good returns for Viasat shareholders.

We don't see a situation where there's a pie bandwidth is too large. The aggregate demand across the entire portfolio is too great in the right geographic places. With the ViaSat-3 architecture, we have a unique ability to allocate bandwidth in the most effective ways in geography in time. So this slide helps illustrate the point of the value of our applications portfolio. The world map approximately illustrates the coverage areas of the three regional ViaSat-3 satellites that give almost total global coverage. They're labeled Flight 1, Americas; Flight 2, EMEA and Flight 3, APAC.

The APAC coverage wraps around the Pacific Ocean and overlaps the western edge of the Americas satellite over Alaska. Our coverage includes the transcontinental air routes. Coverage consists of many thousands of spot beams, but we don't show individual beams here, so we can focus on the applications we expect to serve on the different satellites. The pyramid, on the lower left, shows the vertical markets that we've targeted so far quite successfully. We divide them into mobile, that hearts colored blue and fixed colored green. So by looking at the map, you can see the demand profiles in each of the three regions are quite distinct with the shading indicating the relative amounts of fixed and mobile.

North and South America are pretty interesting markets for residential because of the U.S., Canada and to a growing extent, markets like Brazil and Mexico. There's a large emerging market community think of it as WiFi, our community WiFi, similar to prepaid cellular in Latin America. Currently, the U.S. is the world's largest domestic air travel market and an important international destination. The Caribbeans and attractive cruise ship market, but there's not that much military activity, EMEA is quite different. There's an attractive residential market in Western Europe but much of the rest of the region access the unit via prepaid cellular, more like our community services.

There's a pretty interesting regional aero market, but also a number of global carriers in the region, who need global coverage. There's much more demand for U.S. government and coalition partner services in EMEA than in the Americas. APAC is different still. The most striking thing, of course, is the high proportion of ocean. In countries with high residential Internet penetration are so densely populated as to be poor satellite markets. Others are likely to be unavailable due to regulatory restrictions. Southeast Asia is attractive and the Internet there is largely accessed through prepaid plans, such as our community services.

There's a big opportunity for mobile satellite services in every segment, commercial, aero, Maritime and the government versions of those. The Pacific Ocean creates a big and technically challenging market. Our satellite architecture that lets us put large amounts of capacity only in the places and times that there's demand is a big advantage. As well as its geographic coverage, which is actually better than most of the non-geosynchronous filings that are out there. We're finding informing valuable partnerships with important like-minded entities in each region as we grow our verticals. We list among these China Satcom, Telebras in Brazil and NBN in Australia. We have others that are not yet announced or are in process. Total demand among all these verticals in each market far exceeds our capacity or even the projected capacity for all the satellites under construction or planned and delivering value in many of these verticals requires customization for each one, with tight integration between service delivery, network management and user terminal and platform integration. We believe we're the best positioned to compete in this type of complex space and service delivery environment. That's why we've been so focused on building and expanding our services portfolio.

Okay. So let's turn to the outlook side. Last quarter, we introduced the chart on the left, which has been updated for our most recent results. It shows trailing 12-month revenue and adjusted EBITDA over the last six quarters. Since the second quarter of fiscal 2019, we've grown revenue by 28% and adjusted EBITDA by 90%. We believe the underlying market factors enabling this growth remain in place, and they're listed in the points on the slide. Government systems business can be lumpy, depending on timing of specific contracts, but it's been exceptionally strong this fiscal year. The factors we discussed remain in play. We're pleased with the growth of the aero mobile business, embedded in the services part of the government segment. Backlog is strong and our IDIQ and option portfolio is good. Satellite services is benefiting from scale and continuous process improvement.

Financial results have been very good in the fixed market for high-end services has been healthy. In-flight connectivity has exceptional growth potential as we aim to capture international market share along the lines of what we've achieved in North America. We have a number of opportunities in process. We're learning how to optimize and expand our community Internet business. The logistics are challenging, but we're gaining strong partners and demand appears to be healthy, too. Overall, we're making good progress in establishing the expansive vertical market and geographic portfolio it will take to capitalize on a global network. Even with the rapid increase in EBITDA, we've been able to continue to make prudent investments for future growth. These are primarily in government systems, commercial, in flight, community Internet access, Enterprise Services and international. We're metering our investments based on favorable market feedback, while being mindful of our earnings objectives.

Finally, we've made enough progress on payload unit building test to be scaling up the payload assembly and test portion of the first ViaSat-3. We're focused on completing the first ViaSat-3 payload module and delivering it to Boeing for spacecraft integration. That will be a major milestone toward the first launch, as we enter a phase of the program that uses proven processes. Also today, we announced the addition of Dr. Teresa Wise to our Board of Directors. Teresa holds a Ph.D in applied math from Cornell, and she's been Chief Information Officer for Northwest Airlines and then for Delta Airlines. She'll add insight on information technology, data analytics, asset optimizations and on helping best serve our airline partners. We're really pleased to have her with us.

So that's it for our prepared remarks. We're really pleased with our overall progress this fiscal year and see the underlying business factors creating a strong foundation for Q4 for fiscal 2021 and into the ViaSat-3 year. So we'll be happy to take questions now.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Philip Cusick with JPMorgan.

Philip Cusick -- JPMorgan -- Analyst

Hey guys. Thanks. First, Mark, you already talked about government. But can you dig further for us into that revenue stream and talk about relative margins between product and service streams? I know that product stream, how much is some kind of recurring revenue versus one time product in IP sales? What's the book-to-bill sort of mix within that backlog that was very strong as well? And you mentioned government network effects, what are the synergies of having these different businesses inside one company? Thanks.

Mark Dankberg -- Chairman and CEO

Okay, OK. So, we'll start -- I think, we'll answer is some of the ones we can answer. The -- so let's talk about -- we're not going to break out product and service margins separately. In general, the service margins are going to be healthier, because they are building on an asset base that we have, where the products are really more -- they're more of a cost of goods sold component, less of that amortized fixed asset component to them. So that's going to make the margins look better. On the product side, the revenues are generally driven by product shipments. When -- if you think of the recurring revenue portion of that, what makes the products valuable is that all of the organizations that use the same operational concepts or weapon systems or interoperate with each other are going to need the same products in order to interoperate.

So one of the ways you can sort of gauge what the recurring revenues will be is by looking at the size of the organizations or the platforms that are using with a number of platforms. So if we're integrated on things like FA teams or on Apache helicopters, certain type of helicopters you can count up, you can count up the market sizes there and anticipate that we'll have shipments to cover all those, as well as spares. The thing that we keep referring to that's helped grow sales is that, we're evolving to larger and larger organizations and addressing platforms that have many more numbers than some of the other platforms. So that's the thing where we go from since, with our -- we used to do, what we used to call, MIDS-LVTs or MIDS JTRS'. We got the small tactical terminals, a lot more small tactical terminals. We've got to handhelds, there're many more handhelds. As we integrate weapons, there's potential for many, many more weapons.

Also when we talk about the network effects, and I can refer to them in the Link 16 environment. The definition of network effects is that, when you add more members to a network, that the network becomes more valuable for all participants. And the way that happens here is that, each of these participants think of them as a source of sensor information, take that as they contribute to the network, which makes that information more valuable to the other participants, or they can act on the information within that network in a way that makes the information within the network more valuable. So when people contribute to it, they can see participants act on that, that's increased the value to them. And that, as we expand the participants in the way we showed in that figure, you can certainly see the network effects there. We have those in other areas of the business. I think, this isn't the place to elaborate on that too much. I covered most of it.

Philip Cusick -- JPMorgan -- Analyst

Mark, yes, maybe others have asked, there is one more. We have almost zero kind of non-recurring licensing or IP-type purchases.

Mark Dankberg -- Chairman and CEO

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Rich Valera with Needham & Company.

Rich Valera -- Needham and Company -- Analyst

Thank you. A couple more questions on the government business. So you had a nice -- that's the order with the Air Force. And in that press release, you noted that you'd shipped 2,500 of those units into the field. Just wondering how you think of the kind of potential TAM for that product against that 2,500, what's your sort of penetration rate? And if you were thinking over the next five or 10 years, like what might be the penetration of that potential TAM?

Mark Dankberg -- Chairman and CEO

Okay. A lot of that depends on the way -- let's say, the growth trajectory and adoption of the Link 16 products. What this press release was about was joint tactical air controllers who are people on the ground who are coordinating close air support. So as we get more of the Link 16 terminals on more airborne platforms, that increases the potential for ground-based applications of it. And so, both of those things, as you get more ground-based applications of it. They can better use the airborne platforms that are supporting them. So right now, we refer to the market for that as kind of in the tens of thousands. It's possible it will break through into the hundreds of thousands. But if it does, we'll report on the events that occur that would cause that to happen.

Rich Valera -- Needham and Company -- Analyst

And I guess, relatedly, can you give us a status update on the Link 16 LEO constellation that you've been sort of doing the early work on?

Mark Dankberg -- Chairman and CEO

Yes, right now -- so right now, the main work is on building that first prototype satellite and coming up with operational concepts that would translate the capabilities of the prototype into an operational constellation. So I would say, for the next year-ish, we're going to be really focused more on the prototype satellite itself, which right now, I mean, it's programs kind of still in early to middle stages. I don't want to comment yet on an expected launch date, but with these small satellites, it's not going to be -- its not years. It will be closer than, it will be shorter than years. And we can give an update on that in the next quarter or two.

Rich Valera -- Needham and Company -- Analyst

Okay. And I just wanted to pivot to the commercial side and get maybe a more in-depth update on your rural WiFi activities in Mexico and Brazil, if you can just -- you mentioned some it's kind of logistical challenges, but I'm sure there's been some successes as well. So if you could just give us a sense of sort of how the progress is there? And any color would be appreciated.

Mark Dankberg -- Chairman and CEO

Okay. Yeah, this is the kind of the first most important thing that we wanted to find out is that, if you drop WiFi, let's say, paper use WiFi into these very rural towns and villages, do people care. I did -- does it matter? Do people want to use it? And -- and what are the trade-offs that they see between coverage, price and performance. And so I'd say, what we've learned is, yes, they care. I'd say they care a lot. The challenge is that, when we refer to logistical challenges, they're really around things like remember, you're putting these small terminals into a town, can we make sure that the terminal is on the air all the time that we do -- that we can support it. Cash collection, make sure that the residents there understand how to use it. Those are what I would call logistical challenges. The other and then there are other things around the exact forms of the service plans that we offer.

And right now, they're really more -- OK, you could buy Internet inside the hour, but we expect that we're going to offer tailored plans that are kind of more like what you see in the sophisticated prepaid cellular environment. And then the other things, we're trading off are around coverage and capital investments and how to evolve those. That's what I would say. The things we've focused on the most, and John mentioned, this is -- it's due to people care, will they use it, measuring the way they use it, the -- let's say, the friction on adoption or the limits to usage. There's a lot to work with there. But we're -- I'd say, we're -- overall, we're encouraged, because of the -- the demand. And as you look at over time in the towns that are connected, in general, you see more and more use, not less. And that's probably the most important thing right now.

Rich Valera -- Needham and Company -- Analyst

Got it. Okay. Thanks, Mark. I'll leave the floor.

Mark Dankberg -- Chairman and CEO

Thanks, Rich.

Operator

Thank you. Our next question comes from the line of Louie Dipalma with William Blair.

Louie Dipalma -- William Blair -- Analyst

Good afternoon, Mark and team. Shawn, with the elevated capex, do you have a ballpark sense on where your net debt will peak before you turn free cash flow positive?

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Yeah. I think what -- probably, the way I would characterize it for you guys is just kind of looking at where we think the free cash flow positive is going to turn. And what we think kind of our leverage levels will be. I think we've said, we'd expect to be in the 3.5% range throughout this year give or take, and expect it to increase a little bit over to next year because we're going to be scaling up on the ViaSat-3 completion, starting the third satellite will start to scale a little bit, but stay in comfortable ranges throughout the build. So I'd kind of put that as a backdrop, and then the overall, I think we've had free cash flow positive, about two years after the first satellite. And that's where we think we're still seeing it.

Mark Dankberg -- Chairman and CEO

All right. And just to add to that, the reason we characterize it the way Shawn described, is because we have knobs and levers to manage it that way. That's the way we're going to manage it.

Louie Dipalma -- William Blair -- Analyst

Okay. And do you have a sense on what's going to be the normalized capex level post ViaSat-3?

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Well, I think that's a little bit more dependent on the next-generation in the satellite and where we're going to next. Obviously, right now, we're in an elevated state because we're building three satellites at one time. So I don't expect it that we're going to stay at these levels and that you tick down to a little bit more normalized before this run up. But that's going to pace a little bit on some of the opportunities we see in the future and what the pace of the Next-Gen is.

Mark Dankberg -- Chairman and CEO

And about the -- and the uptake rates on the satellite. And that's, yes.

Louie Dipalma -- William Blair -- Analyst

Okay. And Mark, Starlink had some news today. And I was wondering, how large do you guys estimate is the international revenue pie that you, Starlink, One Web and then the traditional players like Inmarsat, SES, Utilsat and Intelsat will be theoretically sharing after ViaSat-3 is completed.

Mark Dankberg -- Chairman of the Board and Chief Executive Officer

Well, so we've given some insight. You got -- what you got to do is you've got to add up all these different markets that we're addressing, and that's fixed residential, enterprise, the commercial aero market, the government market and especially this community Wi-Fi market. But I'm not going to put a number out there.

I would say, it is -- it's tens of billions of dollars, I mean, it's at least in that range, right? That's going to be divided up among this, but I don't think we're going to go into more depth than that on this call, but it's big. And I think we have given insight into parametric ways to look at it. For instance, you can look at in-flight connectivity and see that grow into -- from $4 billion to $7-ish billion. And your passengers and think of revenue opportunities in the $1, $2, $3 a passenger, depending on how you can attack the market, you look at and you estimate hundreds of millions of people that we can address in this community Wi-Fi businesses, look at dollars in the prepaid mobile market. You look at dollars of revenue per user per month as benchmarks.

So, those are the way you construct it, but you usually get to these tens of billions of dollars numbers. And we expect that we're going to be near the -- that we're going to be among the leaders in dividing up that pie, not near the end, not near the back of the line.

Louie Dipalma -- William Blair -- Analyst

Sounds good. And one last one. Your mid JTRS contract vehicle has been a very large contributor for you, and it's generally been upsized every six months. Do you expect a new IDIQ after the existing one soon ends in May of 2020?

Mark Dankberg -- Chairman and CEO

Yeah, there are plenty of -- yes, yes, we do. Yes.

Louie Dipalma -- William Blair -- Analyst

Sounds good. Thanks, Mark and Shawn.

Operator

Thank you. Our next question comes from the line of Mike Crawford with B. Riley.

Mike Crawford -- B. Riley -- Analyst

Thanks. From the rising equity and net income affiliates line, it looks like your TrellisWare subsidiary is probably doing quite well. Can you just talk about what's going on with that waveform and maybe potential network effects possibilities with TrellisWare?

Mark Dankberg -- Chairman and CEO

Yes. So when we talk about network effects, that's a really good example. TrellisWare has developed is a waveform that's being adopted by the Army for several of their -- the Special Forces and the Army for several of their common radio programs. Manpack and held radios, and that -- and TrellisWare has a business model where those waveforms are licensed into other contractors that are scaling up production. So what's happening is licensing revenue is growing pretty rapidly there. We're pretty excited about that. There's a good growth runway there, and you see some of that reflected in our portion of -- in our -- that we consolidate in there based on a little over 50% ownership of TrellisWare.

That -- and then from a network effect perspective, again, a big part of what makes those radios valuable as interoperability. So, the fact that large numbers of users are adopting is helping to drive adoption of those waveforms, basically, very broadly across Special Forces, Army, and Marines as well.

Mike Crawford -- B. Riley -- Analyst

Okay. Thank you. And then if we could just turn back to these satellite services markets, both mobile and fixed that you're targeting along with some of these LEO constellations. Obviously, if someone is going to try to play Fortnite, maybe that latency matters there. But in terms of ability to deliver high-speed and high bandwidth, how do you, I guess, weigh the limitations or not of some of these like One web Starlink, Hyper versus ViaSat-3 and ViaSat-4

Mark Dankberg -- Chairman and CEO

Okay. So, our position has been pretty consistent. If there -- you have enough bandwidth, latency is really important. If you don't have enough bandwidth, then latency is as important because you have congestion and other effects that mask latency. We think the big driver in addressing the biggest market, which is like 20 million-ish people on DSL and the people that are trying to be addressed by subsidies is the switch from broadcast video to over-the-top video. And the demand is enormous. We think there are big advantages to our architecture in delivering bandwidth.

The most cost effectively we've spent tons of time evaluating all these other ones. And yes, they're going to -- we're really -- we are excited to see innovation in the industry. We're involved with a lot of these non-geosynchronous LEO systems in one way or another. But we -- and I think we understand them well, we're really confident in our approach is going to be the most scalable and cost-effective.

Bruce Dirks -- Senior Vice President, Treasury and Corporate Development

Okay. This is Bruce. That's going have to be our last question for tonight. I apologize, but we have some time constraints.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Mark Dankberg -- Chairman and CEO

Robert Blair -- Vice President, General Counsel and Secretary

Shawn Duffy -- Senior Vice President and Chief Financial Officer

Mark Dankberg -- Chairman of the Board and Chief Executive Officer

Bruce Dirks -- Senior Vice President, Treasury and Corporate Development

Philip Cusick -- JPMorgan -- Analyst

Rich Valera -- Needham and Company -- Analyst

Louie Dipalma -- William Blair -- Analyst

Mike Crawford -- B. Riley -- Analyst

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