PARIS — A well-known Wall Street short seller has mounted a sustained attack on satellite broadband provider ViaSat Inc., saying ViaSat has inflated its consumer-broadband results with non-bandwidth-related add-ons that mask the real story.
In a report on ViaSat that reads like a prosecution brief, Kerrisdale Capital largely bypasses ViaSat’s defense and aeronautical businesses to focus on its core North American consumer satellite broadband service:
Kerrisdale has made a presumably large investment that the inherent weakness of consumer broadband, aided by Kerrisdale’s agitation, will drive down ViaSat’s stock price.
For Kerrisdale, satellite consumer broadband is doomed
The core thesis is that terrestrial broadband, including DSL and wireless, is improving so fast that it will make any expansion of ViaSat’s current subscriber base all but impossible.
It says ViaSat — contrary to what ViaSat officials have said repeatedly — will need to approach the capital markets for another $1 billion or more “over the next few years” to fund the three-satellite ViaSat-3 project and its terabit-per-second satellites.
ViaSat has recently reiterated that its ViaSat-3 program, for which two satellites are under contract, is on schedule and on budget and does not require a new capital raise:
Kerrisdale says the ViaSat-3 foresees ViaSat entering into complicated European and Asian markets it knows nothing about, and whose prospects are much dimmer than the U.S. market.
But this same U.S. market is now seeing the rollout of new-generation DSL services that are materially better than the previous generation and wipe out any advantage in the suburbs that ViaSat may have had in 2012, when the ViaSat-1 satellite entered service.
ViaSat-2, with at least double the throughput of ViaSat-1, will serve mainly to hold onto ViaSat’s current subscribers by offering higher throughput speed and monthly bandwidth caps.
Underserved: addressable or unwilling to pay?
Kerrisdale ridicules addressable-market estimates used by ViaSat and its satellite broadband competitor, EchoStar’s Hughes Network Systems, saying most people who don’t have broadband by now simply don’t want to pay for it.
Finally, Kerrisdale says that while many of its arguments also hold for Hughes in addition to ViaSat, Hughes has a six-month advantage on ViaSat with the launch of the Jupiter-2 satellite, which is already in service. ViaSat-2 is in orbit but is not expected to enter full service until near the end of the year.
ViaSat-2 is billed as being much more powerful, with a lower cost-per-megahertz/megabit, than Jupiter 2. How much Hughes will be able to take advantage of its newly available capacity, and how much damage it will do to the ViaSat-2 market, is unknown.
Unpacking the ARPU bag
The most trenchant argument made by Kerrisdale is that ViaSat is playing games with how it measures average monthly subscriber revenue, or ARPU.
ViaSat has said in recent months that, as it awaits ViaSat-2, is has seen subscriber count drop but that it is offering premium packages to the better customers, resulting in increased revenue.
ViaSat is also using it existing satellite capacity to serve in-flight WiFi to a growing fleet of commercial aircraft.
What exactly is included in the average ARPU is not clear, but Kerrisdale concludes that more than one-third of it is for products and services that have nothing to do with bandwidth:
— A voice-over-IP service for $29.99 a month.
—Anti-virus protection at $2.99 a month.
—Installation fees of $149.99 or $99.99 included in ARPU as a “nonrecurring service revenue.”
— Equipment fee of $9.99 per month.
In one of the most astonishing claims in the report, Kerrisdale says these add-ons account for 40% of ViaSat’s current ARPU.
Kerrisdale concludes that these fees will be rejected by sophisticated ViaSat subscribers and in any case should not be embedded into the ARPU numbers.
“Unlike telecom carrier peers, the company has delayed adoption of accounting standards and disclosure requirements (ASC 606) that would clearly delineate these sources of revenue and the impact that items such as installation fees have on reported ARPU,” Kerrisdale says. “ViaSat does not report gross adds, churn, subscriber acquisition costs or retail service ARPU.”
A dinner in New York organized to air the Kerrisdale allegations to investors held out the hope of a valuable debate when it was disclosed that ViaSat CEO Mark Dankberg would attend.
But the dinner, held June 29, turned out not to include a precise point-counterpoint, according to three people who attended.
ViaSat has declined to comment on the Kerrisdale report, but directed queries to several positive analyst reports.
The opposing view: Kerrisdale is inventing numbers
One, written by Cove Street Capital, which describes ViaSat as “one of our largest holdings,” seeks to disassemble the Kerrisdale argument:
Cove Street starts by saying Kerrisdale is attacking a company for which the defense business is now more than 40% of total revenue. Cove also says Kerrisdale vastly oversells the performance improvements in DSL, which according to the U.S. Federal Communications Commission (FCC), has not much changed in the past six years.
The flaw in Kerrisdale’s reasoning, Cove Street says, is that the short seller extrapolates the limited penetration of VDSL, or very-high-bit-rate DSL to the entire United States. That will not happen anytime soon, if ever, given the investment needed in fiber-to-the-curb deployment, Cove Street says.
About the dubious add-ons that ViaSat hides in its ARPU figures, Cove Street concludes that the Kerrisdale estimates are “entirely fictitious.”
“The take rates of VoIP, EasyCare, [anti-virus], WFi Modem and Boost 25 are entirely made up. There are no publicly available data sets that would indicate that half of customers take anti-virus protection and a quarter subscribe to VoIP,” Cove Street says.
“Kerrisdale’s ARPU-decline-focused narrative is predicated on an overextension of these services and a ‘core’ ARPU of only $42. In reality, core ARPU appears to be closer to $60.”
Cove Street agrees that ViaSat-2’s arrival likely will not double ViaSat’s subscriber count, now around 650,000, saying that “in satellite land, 1 + 1 = 1.8. Our model has the combined satellites [ViaSat-1 and 2] getting to 1.05 million subscribers by the time ViaSat-3 is launched.”