Yet Another Value Podcast - Cove Street Capital on Viasat $VSAT

Episode Date: March 23, 2021

Eugene Robin and Ben Claremon from Cove Street Capital discuss the battleground stock Viasat (VSAT). They discuss the biggest misperception among bears, why they think VSAT's government business is a hidden gem, and how the risk from Elon Musk's SpaceX (and other burgeoning competitors) is overblown.Some relevant links:Cove Street's March 2020 Viasat deck: http://covestreetcapital.com/eugene-robin-discusses-viasat-on-the-valuewalk-podcast/Kerrisdale's short report: https://www.kerrisdalecap.com/investments/viasat-inc-vsat/Cove Street's Kerrisdale rebuttal: http://covestreetcapital.com/wp-content/uploads/2017/06/Satellite-Potshots-ViaSat.pdf Chapters0:00 Intro2:50 Viasat overview8:15 Residential Broadband: the biggest VSAT misperception15:45 Is Cove Street too close to VSAT?25:00 Could a big increase in capacity create issues?31:00 VSAT's all-in cost advantage and the SpaceX risk36:45 VSAT's hidden jewel: the Government business43:50 "Stock price bro" and capital allocation bear case52:50 Why GEO can compete with LEO1:06:00 Ben's quick run through of lingering points1:17:00 Quantifying a reasonable bull case

Great. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have two people from Cove Street Capital, Ben Claremont, who is a partner and portfolio manager, and Eugene Robin, who is a principal and research analyst at Claremont. Guys, how's it go? At Cove Street, I'm sorry. Guys, how's it going? doing well thanks for having us on great well hey let me start this podcast the way i do every podcast and that's uh by pitching i guess the two of you for this one but i actually first heard of cove street uh three or four years ago when you guys published a very detailed short rebuttal report on the stock that i'm going to talk that we're going to talk about today bias at and it just stuck in my head because i remember reading it and thinking yourself this is a really really good piece of research and you know especially three or four years of ago, you know, it was still on the heels of all the reverse China merger frauds. I mean,

a lot of people did not want to speak up against activist shorts for fear of being embarrassed. And I thought you guys published a really detailed response. And I thought it was, it spoke to how convicted you were that you were willing to go out and say, hey, no, like the Carousel published a short piece, this short report. And you guys said, hey, no, this is wrong. And, you know, I thought it spoke to conviction, how much work and how much confidence you guys had in it. So that always really stuck with me. I've talked to both of you, one off about other ideas. and I can say that you guys have done an extreme amount of due diligence, research, thought, and all of the ideas we've discussed.

So I'm just really excited to have you guys on the podcast and to talk about BISAP. Yeah, well, thanks for having us. I mean, that I think Eugene did all the work there. And but it goes to our philosophy to some degree that, listen, we don't have monopoly on good ideas and we are always looking for disconfirming information. So if someone's willing to engage with us in a productive, discussion about one of our securities. We love that, right?

We want to hear the short points. We want to hear what people are concerned about. We want to have a chance to respond. So, you know, for us, you know, we try not to get married to our ideas and our convictions and our theses. We want to have a valuable mindset and we want to be able to take people's input and really investigate short points that people put out. So, you know, I think.

that is, it's emblematic of the amount of work we've done in general, but especially when it comes to bias at. I'm with you. You know, a lot of times if I'm, if I'm, you know, one to ten, if I'm an eight or a nine on a company, I'm not going to get the most from talking to someone who's an eight or a nine. And I probably won't get a lot talking to someone who's a one, because they might be so biased that it's almost not worth. But if somebody's a two or a three on a company or four, that's often the best conversation because you, you have different lenses and different angles, and that's where you can really explore and learn a lot about the company and push back on the thesis. So, yeah, I guess, Ben, why don't, I think you can start, why don't

we just discuss, you know, bias at, what is it, broad overview, why are you guys so attracted to it? Yeah, so I'm happy to do that. And the reason, you know, we, at Cove Street, we team tackle ideas. And so, you know, like, and we work on ideas at joint low. While a lot, while, you know, it's, uh, by side is one of our largest positions in our small cap strategy, and it's a second largest position in the strategy that I co-manage, um, Eugene's elite. And he really has the longest history here. And I'll, I'll briefly describe that. Um, you know, Eugene worked for the company. His father worked for the company. Um, and so that gives us, it gives us a lens that it's really hard, I think, to replicate. And, and I'm just going to say it outright,

we have no inside information here. We haven't, no one's worked there for years. Like we, you know, we, we, we, we, everything happens at arm's length with the company, but to understand the culture and the people, which is a big part of our process, having that background, I think is really important. And the other thing is just having a nuanced understanding of the business. I've just having owned this company for, I think Eugene said since 2014, it's just amazing to understand like the degree to which you can build a new. nuanced understanding of that business and the people, if you had an inside point of view. And so that, that I think if you're wondering, we're always looking for what distinguishes us

or what distinguishes our position in a company. I think that longevity is helpful. So I'm just going to go really high level and talk about Biasat because it may seem like a difficult company to understand, but it's really not. it's they they they basically are supplying high throughput satellite connectivity to any number of end uses um so if you think about the world where um every day there is more and more demand for connectivity there's more and more demand for bandwidth and what is 5g 5g from the wireless companies is a play on that what is the love that you see in the u.s cable market the broadband market right the the fixed the fixed the fixed cable market, you know, that comes, you know, it comes from the demand for bandwidth. And so Biaside is just another provider and, and they'll be global. But right now, it's mostly, it's mostly in North America and a little bit of South America, providing bandwidth to

anyone from rural consumers to in-flight Wi-Fi will talk about the military, which is a big opportunity. And they also supply equipment into that space. And you know, hopefully we'll get into their military business, which is a little different. It's, it, they are supplying, um, equipment and, and eventually connectivity, but there's other, there's other things that we like about that. So, um, you know, what's, what's really funny about this stock is it, it really in, it, it just brings out animal spirits and, um, big, you know, opinions about the ability for it to be successful. One of the reasons is because, um, so many satellite companies have gone bankrupt. I mean,

especially people who operate in the Leo space, which is low Earth orbit, and we'll get into that. I hope what all that is. But it's just, you know, that and the fact that SpaceX and through their Starlink sub is a competitor here, it's amazing to the degree that, you know, VISA gets all kinds. You know, there's just people have very, very divergent opinions here. And in our experience, when people have that level of divergent opinions, there can be really interesting opportunities. So I have, you know, Eugene and I have done a podcast and an interview on this, and a presentation on this before and some of our slides, which we're happy to send over

and put in the show notes maybe, you know, talk about myths and misperceptions. And I think those are some things that we'd like to address here because I think there's a lot of misperceptions about this company, which is where, you know, where we think the value is. But I also, you know, at some point I want to talk about just just pulling back from all of that hyperbole you read about and all the love for Elon Musk and all the, you know, all the worry about competition. I think there's like, it's really valuable to dig into the weeds, but it's also really valuable to step back and look at the industry overall and look at the tailwinds it has and the growing town and any number of new uses that will be enabled, you know, as connectivity starts to. kind of be late rolled out as Biasat launches satellites. So that's the really high level of like our ownership, our history.

Oh, by the way, Jeff, our founder has owned this company on and off for a couple decades, actually. And we have letters going back from like the 1990s where Jeff was harassing management. So, you know, this is a business that we've known for a long time. And we've, you know, it has changed over time as well. and having Eugene on the team with his experience at the company has just been invaluable for us to like kind of pivot and understand the company as it's grown and changed. So Eugene, you know, when I look at BISET,

I think the first thing when anyone mentions Biasat, Battleground Stock, right? Carousel published a short report. You guys published a rebuttal. I think, Eugene, you were the one who published the rebuttal if I'm remembering the report correctly. Short interest, 13% of the float. Analyst price targets. I don't really look at sell side that much, but I just put up Bloomberg, analyst price targets from 42 per share to 145 per share. I mean, huge range. When you look at all these different perspectives and everything, what do you think is the biggest thing that people miss or the biggest misperception about bias at? You know, maybe it's among the bears or maybe it's just among the people or blah. But what do you think the biggest misperception is?

I think the biggest perception is that this is a play on residential broadband. And that misperception actually goes back to Carousales piece. And Sam wrote a great piece and he had certain really great points. And fast forward six years and those points are still very relevant. So I've always said this to people. I'm not arguing that, you know, this should never be shorted or all the short points are incorrect. I'm arguing that they're just focusing on the wrong things. The fact is that residential broadband was the initial, like, impetus for them to get into

the satellite services space in the first place when they bought Wild Blue, which is true. But over the past six years, it's actually morphed into a multi-legged stool. So they have residential broadband. And they have implied Wi-Fi. They're going to have maritime services and offshore with the RigNet acquisition that they did. They have community Wi-Fi, which is effectively what everyone from Facebook to, well, Elon back in the day before he started charging $100 a month, I used to say, like, oh, this is going to bring connectivity to poor people around the world. And that's not happening with Starlink. It's actually happening with Biasat right now.

they have they have uh business jest services they have um you know kind of various i don't know i guess co-ventures with uh with governments from brazil to Mexico to um in some of the European countries that they have through the util set uh former jv so they have a lot of different kind of irons in the fire right they don't just rely on residential broadband too sort of make the returns on their capital investments work. The other thing, and I think the real biggest miss that everyone just completely whiffs on, the crown jewel here is actually the government system side. So I mean, when I worked at BISET, that's what BISET was. It was a government contractor. And they had, you know, they were the upstart actually in the encryption networking

piece of a lot of how the DOD does real-time battlefield communications. And so, you know, I worked within that network systems group and I saw from inside out, you know, what Viassad is really, really good at versus the competitors. And I was tell you that this was the case back then, and it's more so the case now. most of the larger contractors, L3 or, I mean, Northrop or Lockheed, would love to get their hands on, by I said, it's the government business. I think the private market value, you know, we put out pieces, you know, ad nauseum about this, but on some of the parts, that value itself is, you know, you can argue that it's, I'm not talking

about, you know, ex the debt, right? It's probably somewhere where the stock is right now, right? And that's always given us comfort that while the shorts may be correct in some of their points, they're not actually correct about the value and the inherent value within the system. So I think that's the biggest misperception is that this is just a residential play and that, oh, my God, Starlink is going to come in and eat everyone's lunch and there's going to be a singular winner. And it's going to be, you know, Elon with the pizza, the pizza on a stick. And that's going to be the end of Viassad and Hughes and Intelsat and Inmarsat and Uttelsat and SES and all, everyone else.

Now, our arguments really more about, I think what he's doing at Starlink is incredible. And I think he's going to be successful. But he's going to expand the pie for everyone. And there will be losers. And what people forget is that the Vysat geo system actually was the disruptor within GEO, as opposed to saying like, oh, they're this, you know, they're the sleepy government contractor and a person who's rolled the coattails of, you know, terrible connectivity for years and years and years.

And you could kind of point your finger at Hughes or SES or IntelSat or Enrassad for that title. I mean, the incumbents really wore those folks. Viasat just basically changed the game. And the concept of a high throughput satellite didn't exist until VySat 1 was launched. Most people said like, oh, that's nonsense. No, Dankberg is out of his mind. There's no way that he's going to get those big economics for Vysat 1. He got him.

Bycet 2, that's nonsense. It's never going to happen. They're never going to get, you know, those sorts of connectivity, you know, down to the C now. a plane. They got them. And now, you know, they have the third generation, which if you extrapolate it out after the full system is launched across the world, three terabits, it's going to be more than every single competitor in geo puts together multiplied by, I think, a factor of roughly eight. So, you know, there's a, I always talk about one of the things that, you know, who's going to win, right? And I think Mark does a great job when he talks about the industry.

you know, there's going to be a pie and your share of the pie is going to be your bandwidth capacity in space. So if I have three and a half terabits and the overall bandwidth capacity, it's 15 terabits and people are sucking up bandwidth as much as they can, which I agree with with Elon and everyone who's going into kind of space connectivity, you know, roughly you're looking at a 20-ish percent market share. And I think that's the overall point. You know, if you aggregate all the existing satellite systems, it's probably around 10 billion, it depends on how you define it, 10 billion of revenue right now, today. So people are valuing bias as if it's going to get 0 to 2 or 4% of it. And that's, I don't, I think that's a miss, just a misperception of the value that they're going to put for.

And that's really, that's what we're kind of betting on with the fact that, you know, the military side gives us a base level of comfort from which to start from. Again, I'm happy to go through. I know that's kind of a long-winded response to your question. That was perfect. Let me just jump right into some pushbacks, right? I think the first pushback, anybody who's like, who's an investor is going to have is they're going to say, hey, Eugene is the lead on this, right?

And he used to work at Biasat, which gives him great insight. But it does, like, first thing the gyms up to me is he worked on the government side and then he's going to say, hey, the government side is the crown jewel. He worked there. He worked there. Like, I think the obvious first pushback is, Eugene, are you too connected to this? So, like, how do you separate out kind of your pass from an objective look at this company? That's a great question. Well, A, I have everyone else at Vice at Cove Street that kind of pushes me to not prove, but at least defend. the the long points that we have and it's a constant thing right i mean there's there's new slow happening daily on leos and things like that so um you know i i certainly get internal pushback but you know ex you know for my own sort of sanity um i've uh you know i'm not going to tell you that i haven't changed my assumptions or expectations as as time has progressed and i have

I think one of the biggest ones is I did used to believe that they could have a bigger and bigger install base for residential and that has changed, right? Because I'm not going to sit here with my head in the sand and saying like, oh, Starlink isn't going to work. I mean, it's not only is it going to work, it's working, right? So you can't say like, oh, well, that's not going to happen. Okay, so that is something that's different from, I think, when Sameth Carysdale wrote his short, as there's an actual, I mean, his short was based on 4G, which was, I don't think he quite understood the nuances of where towers are built and things like that. But, you know, I think, fast forward, there is a real competitor that I believe will capture a very large share of, you know, traditional rural residential broadband. So, you know, that assumption changed over time. not the same time, like I, you know, I didn't think that they'd be as successful as they are

in flight Wi-Fi. And, you know, in 20, obviously being a very bizarre year, everyone, you know, kind of took a break from expanding the in-flight Wi-Fi capabilities of the fleets. But that's just a breather, right? In longer term, it's hard to argue that when you go on a plane, whether it's international or domestic, and I'm saying around the world, not just, in the U.S. I'm saying, you know, Europe, Asia, Pacific, Middle East, Africa, wherever you are, I think you're going to go on with the expectation and the realization that you can, in fact, have some version of high-speed connectivity at your seat, right? So I think that has actually progressed faster than I thought. So that was like a bump up in my model. You know,

going through to their international kind of footholes in Brazil and the things that they're doing Europe. You know, I check in on people, resellers and whatnot once in a while to see how things are going. And I will tell you, again, the maximum of, if you build it, they will come, it fits here. Like, it's all about bandwidth availability. It's not that there's no desire for bandwidth. It's just there is no bandwidth, right? Historically, satellite has been so terrible that, you know, people said, oh, it's a horrific service. And, you know, I'd never use it. But if, if you actually provide someone with a good service, it's been shown in the wild that people will buy it.

So anyway, I constantly like pick at my assumptions of value, right? And what are the drivers for it? You know, like I said, residential broadband, infight connectivity, some community Wi-Fi, what they consider to be other kind of avenues for growth, whether it's their, the Mexican ventures or some of the schools that they're doing. Brazil and then obviously the military being the big one biggest ones that I think that people kind of you know again I don't think they quite understand what's happening there but anyway so I I do push back at like what is the earnings power when this entire system is up and running

and this is such a difficult company really to defend because it's a show me stuff right like I can tell you everything I just said but in reality until they have a world worldwide, capable network of satellites up that pumps out over three terabits per second of available capacity. It's speculative in that sense. And I think that's truly why people hate this thing. It's not that it's, you know, they haven't done a good job. I mean, look at their results.

I think starting from a base level of zero and learning how to sell residential and learning how to be in, you know, in-flight Wi-Fi and things like that. They've done a fantastic job. They destroyed Go-Go. They destroyed Global Eagle, right? When they pointed their connectivity at that market, they won not only a fair share, but a great part of the rural broadband kind of pie, and they took it from Hughes and they've kept it, right?

So it's not like they've been doing this in a vacuum of no competition. So anyway, my biggest thing is I know the drivers of value and I know what it'll take to make each satellite economic and hit their internal rates of return. And I constantly measure whether or not I can see them marching towards that goal. And the day that I can, you know, someone can show me that, you know what, you thought that this constellation would provide X dollars of profitability. and it's not revenue, it's profitability for me. And it's only like X times 0.65. If you can, if someone can show me that, then I would say, you know, I'm wrong and I'm selling the stock tomorrow because their model isn't working and they're, you know,

it's just, you know, they're maybe going to get their cap X back in terms of returns, but they're certainly not going to make a, you know, a positive return on that's the capital. But I, you know, the way that I track it internally, I still see them earning very high returns on their invested dollars. So I guess that's, and look, I wasn't trying to to accuse you that. I was just saying that that's the obvious first red flag. Ben, I don't know if you want to add anything to that. Yeah. I mean, we have a process that involves two longs and one short for every idea. And the short analyst on Viassat guys probably jumped around multiple times over the years so that everyone could get their shots at Eugene. And we just have we have a very, iterative process by which every day we're sending emails to Eugene, be like, what is this? What does this mean? You know, is this, is this good?

Is this bad? What about regulation? I mean, there's just, this stock just comes with a lot of baggage is probably the right word because you've got all these competitive set. You've got the, you've got the hype of Elon Musk. You've got all this, like, what in the world are the regulators going to do if we're launching tens of thousands of satellites into the sky? is that ever going to be, is that ever going to slow down?

Like, are the regulators ever going to look at whether that makes sense? Like, there's so many things that go along with this, that there, as Eugene said, there's constant news flow. And so we have to keep him fresh. We have to keep the idea fresh. We have to continually update our understanding of the competitive set, the TAM, and then emerging opportunities. And so for sure, the investment thesis has changed to some degree.

As, you know, the military business has gotten bigger as in-flight Wi-Fi has actually become a very large, you know, opportunity for them. So I think we've evolved with the idea and, you know, there are no, they're not a week goes by where we are not poking at Eugene's thesis. And, you know, to some extent, what can, what can he say other than let's see what Viassad 3 looks like, right? We've got three satellites that are going to go up over the next two, two and a half years. They're going to have global coverage of, you know, for implant Wi-Fi. They're going to have incredible assets as a result of having a satellite over Asia and the Middle East, right? There's all kinds of defense applications for that, which, you know what, it's a show-me stock. Until it's up, the military is not going to buy connectivity.

But I think, and I hope we'll get into this a little bit, Biasat planted a number of Trojan horses within the military that are going to lead to connectivity relationships. They have a lot of equipment on the ground already, whether it's the Link 16 business or there's just all the base stations and the ground stations that they've been installing and they will be installing. These are the things that you have to be able to look around the corner to be able to understand to size and to actually know that they're going to be there.

And that's where the nuanced understanding of the business comes from. So let me just stick with broad concerns here. So, you know, I think if I said three, eight or 10 X is their capacity, I can't remember the exact. But it's a lot of extra capacity. And, you know, I invest in telecom. You know, one of my largest positions is cable. And when I hear, hey, we're doing a ginormous increase in capacity and all this capacity is going up across the industry, like that actually caused me concern, right? because I had visions of Verizon Fios coming in and overbuilding and Google Fiber or, you know,

people who have a little bit more gray here than both of us might think back to kind of the 2000 time frame where all these telecoms are just laying down huge amounts of capacity. And then all the capacity lights up and the demand isn't quite there. And there's a, you know, prices are just dropping, dropping, drop and dropping. So, you know, when you look at Bioset, you see, hey, Biaset 3 is coming on. That's going to be a huge increase in capacity at the same time that, you know, start. SpaceX, as you guys mentioned, is dropping huge increasing capacity with LEO. It's a little bit of a different business.

But, you know, I see lots of capacity coming online across the board. And that, to me, says, ooh, there could be the potential for price increases. And I think I kind of overlay that thought with the, and Eugene, you mentioned it, you know, the history of satellite providers is there's a lot of bankruptcies. Go, go, IntelSat, just, you know, most satellite companies end up in bankruptcy at some point. So I see both of those two kind of coalescing into one giant. overarching sector risk, if that makes sense. So I don't know which one of you wants to respond or how you want to respond, but I think

that's probably another big sticking point. It's a great point. I think that the way that I've always looked at it, and what you said is 100% correct. And I think even when I responded to Carersdale back in the day, I said, you know, one plus one does not equal to in the satellite industry. One plus one is like, you know, I said 1.8, but it's probably even less than that. And what I meant by that, and it still is the case, when you increase your capacity by 8x, that doesn't mean that you have eight times as many customers.

In fact, you might only have 20% more customers. But what happens is you price on a per bit delivered basis much lower, right? And in the end, people just have to think about connectivity and even the way that you get connectivity at your house. I mean, connectivity is a commodity, right? I mean, it's, what do you care about? You care about. I want to have the fastest speed I can get with the highest, you know, available actual capacity for the lowest dollar cost.

And the government is no different. I mean, they have certain requirements in terms of encryption and, you know, things that are more hardware dependent. But even than then, they care about that too, right? And so my answer to anyone who was like, oh, well, what will do this? capacity. Totally. But let's let's just let's say that again, think of it as the pie example, right?

If the pie of capacity is, I'm just making a number of 10, 10 terabits, right? And you buy us, I had to control three and a half of this. On all else being equal, right, if you're just pricing per bit at

the exact same price as your competitors, right? So you're undifferentiated because you're commodity. You should get roughly 35% of the bottom, right? I mean, just, I'm, it's not rocket science. Here's, here's the little, the nuance that comes in. On a perfect basis, the third generation of ISAT satellites are going to come in at something around 90 cents roughly. Hues in Jupiter two is at 250. The UTIL SAT system is at $7. The NMarsat GX, which was once upon a time a great network, is at 56. I should just say that's probably the generation before the

current one, but even the current generation is, it's not that great. So my overall point is that if I control the lowest-priced commodity on an actual marginal cost basis, I'm going to win versus my competitors. And in the end, the competitors in Europe and the Middle East and Asia haven't seen bias up. The ones in the United States have. And what happened is, you know, GoGo went away, Global Eagle more or less went away. Hughes had to scramble and spent a lot of money and, you know, it wasn't them, but, you know, Laurel stole the designs for Viasset, one from Viassad in order to actually, the Jupiter system is Viasset, which is funny. No one talks about that, but the core building blocks that came from technology that, you know, Hughes bought from Laurel, which then Laurel stole.

So in essence, our premise is that once the Viasat system has activated over Europe, and if they have, if this is the key for them, if they have a good enough distribution strategy on the ground in Europe, they will win a piece of the pie. I don't know how big, again, we can all make conjecture and projections and things like that, but it will be greater than zero. And that will be additive, right? Let me ask you a stupid question from someone who is not a satellite expert, right?

You mentioned Biasat 3, the cost per bit will be 90 cents versus, you know, a bunch, everyone else is multiples higher, right? When I think of satellite or any type of data, right, I think the marginal cost of getting that bit is extremely low. So when you say the cost of a bit on Biasat is 90 cents versus a competitor at two or $3, is that the marginal cost per bit? Or is this, is that the all-end cost? Like, how are you thinking about that? Because I would almost think for all these guys, the marginal cost is going to be zero, but it sounds like I might be a little off on this.

No, no, no, 100% in your, when I say like marginal cost, and this, I guess it's the improper term, because it's, yeah, if you're correct in an economic terms, it would, they're, everyone's marginal cost is zero because they have all the sum costs that they've already put into the capital expenditures. And the same thing provides that. I look at people on a baseline, all-end basis,

which I've done the analysis for, you know, Leo side too. And, you know, the thing that, you know, I think that Starlink and Musk have that other Leo's never had is they have Musk. And he is a money-raising machine. And this is why I really do think he's going to be, it's going to be like Eritian, right? You know, there is, there was a once a Leo player that survived the late 90s, early 2000s. And I, and Starlink will survive and thrive because they have.

have a very large pool of capital that doesn't really seemingly care about economics. And so they will provide that capital to build out the system. And again, one of the things that I was wrong about, and you know, you can ask Ben, and we had many discussions, this is like three or four years ago about like, you know, whether or not the system would be built. I was like, this is crazy. Who would fund this? This is going to take nine and a half billion dollars.

They're getting funded. So I was clearly wrong, right? So there are a lot of Tesla shorts who make. this uh who made this same mistake and uh it was a lot more costly for them totally and you know what and this goes back to like you know i adjusted my expectations for residential broadband accordingly because you know i was like i couldn't believe my eyes but sure enough it was getting built and you know he's going to provide a very interesting service not to admit as many people as people think but he's going to be a very interesting service and not to talk too much spacex but i do i mean

you know as a cable investor space x one uh what is it the rdio app or whatever the rural bed out. I think they're getting 800 leave from the government or something. And I know a lot of cable investors were like, oh, my God. And especially not, especially generous for like, Elon Musk coming for the cable companies, bro, what are you going to do? But I just don't think that, you know, for rural, I think it makes sense. But right now, SpaceX, they're rural in it. It's like $500 for the equipment plus $80 per month. I'm sure they'll come down over time. But like, unless you're real rural, it just doesn't make any any economic sense. So again, I I still don't quite know how much of the demand for Starlink are just fan boys from the urban areas.

I know obviously if you're in the middle of North Dakota, you know, I track the speed tests and whatnot. People post on Reddit. And so certainly, you know, like those folks are, that's fantastic. What a great service. And he's going to make their lives a lot better by providing that service. So, you know, I know there's a, there's like a need for it. To say that they're going to compete against cable, it's a joke. I mean, I was trying to explain this.

The satellites aren't infinite, right? I mean, there's actual like physical, like as in physics that are involved with the available capacity, right? And when you have your satellite system up on the ground, technically speaking, I can hit tarabit speeds, right, if I have the available capacity, if there's one person on my network. Right? Yeah. So I like people that say, well, how fast can it be? He can make it as fast as he wants it, right?

I mean, he's like, oh, it's going to, the speeds are going to double next year. He could do that. How? Well, you just reduce the available number of users and the ones that are on your platform have really high speeds. It's not, it is rocket size. This is one thing Biosat's been saying, right? With Biasat, too, they've been saying, hey, we're having to make this tradeoff.

Yes. Do we want more customers who we give less speed? or do we want less customers, do we kind of live up to their speed expectations and we wait to get BISET 3 up there and can kind of provide them the speed they want to need? In Satellite Talk, it's called, it's link budgeting. So link budgeting is the key to life.

I mean, that's how you can go from, you know, having 1,000 users with great service to 10,000 users and 9,500 of them put, you know, writing customer service report saying, like, you guys are terrible. It is what it is, right? this is, this is the problem, has always been the problem with satellite and goes back to the point of, you know, you rightfully mentioned that there's this massive, you know, explosion of capacity. And honestly, most of the people that have had satellite service, look at the consumer

reports, right, hated because there's not enough capacity. So while, as I said, it's not going to be additive in the sense of you're going to, you're going to generate more users, but the users that you will have, you will give them a better service, right? So part of the CAPEX is basically a giveaway to your existing customers. And the growth part of that, though, is it will allow you to allocate to link budget, things more and more to invite Wi-Fi to the military, to community Wi-Fi applications, to maritime areas that haven't actually been touched by anyone. And I think, honestly, this is why, you know, Elon is doing what he's doing,

because I think he sees this massive pot. And I think he believes honestly and rightfully so that if you build it, they will come because no one has provided that great of service before. And he's right about that. So, you know, anyway, the – Let me switch track. So one of the things I like the most about your short report, all these reports, is the argument, hey, if you look at this on some of the parts basis,

there's this hidden gem in the government business, right? which you mentioned earlier. I think the rough math is, hey, most other government contractors with size and scale margins this good trade for 15 times EBITR or something. And if you do the math on that, that's worth, you know, closing in on the current stock price of bias out. Obviously, you've got to take some debt out and everything. But I guess there are a couple questions on it. The first was, I remember in the short roller report, you specifically said, hey, if you gave us a week, we could call and have eight bidders for this in the next week very easily. My first question would be, how the government contracting, I mean, it all operates off

the satellite, right? So how can you hive this off as a different piece than the satellite business? Does that make sense? Yeah. No, it does. So in essence, we, you transfer pricing, and it basically be, you know, a fair price, you know, compensation for whatever the defense side buys and right now the defense side of you people can break it apart right they'll they break it between product and service so this part of the service revenue uh runs through vice that's existing network but the biggest chunk of it actually comes from reselling other connectivity providers because obviously why i said doesn't have connectivity connectivity over the middle east which is you know uh large demand for uh government services um and doesn't have connectivity over

APEC. So I believe that the margin profile would still be the same. People have said to me like, well, if you know, if you hive off this part, then you're going to have to pay market rates or go the margins for government systems are going to decline. And I'm like, yeah, true, that would be the case of 100% of the services was running through the VISA network, but that's not the case. They're actually reselling other people's connectivity right now, which, by the way, you know, Let's forget about some of the parts. And if you think about what happens when they have a global network and they don't have to pay people for, you know, buying their bandwidth.

Yep. You know, you magically create value just by flipping on the switch and redirecting the bits on your own system. All of a sudden, all that cost drops to zero because as we talked about, the Marshall cost, once they get buys that three up, it's zero. So all these costs for reselling the Middle East and Asia. Anyway, so going back to your question about the defense side, I think, you know, it is separable. They, you know, if you speak to the company and it is the case that a lot of the R&D

that's initiated at the defense level helps the commercial networks. And so, you know, it's it's a fair point. Like, it's, it's been put together in the way that it's been put together for a reason. But that's not to say that you couldn't separate. You mean, you could. You really could. And by the way, there are two different cultures. I was there probably, I don't know, a year and a half ago at last.

And just walking around the campus, you know, seeing the commercial connectivity side versus the people that I used to work with. And just what you would imagine to be a more. software like millennial culture on the connectivity side versus like the old stodgy like I you know I was a Marine and you know I and I sell like a hardened communication equipment to guys who are in so calm who are on the ground like killing people in Syria completely different right in terms of the way they are so it doesn't seem like obviously you've got this some of the parts as kind of your a fundamental backdrop of the thesis but it doesn't sound like you you think government's getting hived off and sold away from satellite and the core buys that business any time.

Has there ever been a satellite business that has sold just their government services businesses and kind of retain the rest of the business? That's a great question. I don't think so because also, you know, like the traditional satellite providers like SES and IntelS and Marsat, they always just had, you know, connectivity line, right? I mean, they're going to between like government services and commercial maritime, but in the end, it's all the same to them. And for VISA, their government systems is very specifically unique in the sense that the Link 16 family of products from MidsJ to BatsD to the KG family of encryptors. I mean, those are products, right?

So they have technically speaking nothing to do at all with the satellite. Now, as Ben mentioned, those are the Trojan horses because the warfighters are out there, you know, risking their lives using unified communication systems. Those systems are powered by Viasats, hardware, and encryption algorithms. So you can see that if I'm going to bid for an RFP, again, I'm not saying that that's how the government is doing this, but if they were saying like, hey, we'll bundle our, you know, the Bats D handhelds that are given to the individual war fighters with a promise of connectivity at x right it's it's it's a better value proposition for the u.s military than going through separate vendors and you know picking and choosing

this and that so anyway i i think i think that i've been referenced it before i think that gives them a little bit of a better edge and if if you want to you know kind of say like oh maybe this guy's full of, you know, crap and then check on stuff themselves. The vice had just literally won a contract to design the military's next generation to have the connectivity, not system, but approach. So they're basically acting as a consultant to the DO, to the Air Force specifically to say like, hey, you know,

there's Leo, there's geo, what should you know, what should you guys do to that? better or best optimizes what you actually need in terms of the connectivity for the various programs that you have. And so, you know, like they're giving this ability to decide to have input to someone who's a vendor on the geo side. I mean, that I think should tell people everything they need to know about what the parts of the DoD think about the people have bias at their importance to secure and encrypted communications for people who are actually on the ground doing the fighting.

That's great. Ben, let me zoom out for a second because I think we got into the weeds. Actually, I think we did a really nice job of explaining how this government specific piece actually is really good. But let me zoom out for a second and hit you with what I'm going to call the stock price bro bear case, right? The short repair came out 2016, 2017. you guys published a rebuttal. At the time, the stock's in the 60s or 70s. Here we are today.

It's in the 50s. You know, last July, multi-year lows. The company does an equity issuance at $40 per share. They do another, I think they issue 5% of the company to buy Rignet and what I think is an intrusion acquisition. But, you know, if I'm just, if I'm just looking at, I'm saying, hey, you guys have been wrong. The stock's down. This is a satellite company. Yes, it's KAPX intensive, but it's not exactly like that KAPX is a secret. And they just had to dilute shareholders pretty massively at multi-year lows in, you know, at the height of the pandemic in July. When I look at all that, I say, hey, this company doesn't treat their equity very dearly. If stock price has gone the wrong way, it's been wrong, you know, like why am I not

looking at a company that I think in other bare pieces, they've never really generated true free cash flow. I know you guys have pushed back on that. But, you know, if I roll all that up, it does paint a little bit of a, oh, something weird is going on here. And the company might think their shares are, you know, better sure of issuing shares than kind of keeping the share count down. So how would you respond to that as portfolio manager? Yeah, I mean, listen, anything that you can come up with, we have relayed to them regarding our concerns about, you know, timing of equity issuance, you know, why use equity for regnet? I mean, these are things that we talk about. But let's, let's talk a little bit about the unique circumstances that that, you know, 2020 put them in.

Absolutely, absolutely. So first of all, you have the IFC. in-flight Wi-Fi business, which was about to really start to hit a trajectory as, I mean, you can see that recent news that they just won 300 new planes from Delta that would be switched over from one of their competitors. I think they had an enormous amount of momentum to start really building that business. And then, of course, COVID hit and people stop flying. So not only are you not winning new business because the airlines are freaking out and not spending a lot of time, spending money, you know, outfitting planes to work with Biasat versus some of the competitors. You also have, you know, just the, the variable nature of that business, the variable

revenue based on how many people are flying, take rates and stuff like that for Wi-Fi, those are way down. And in the middle of that, you're spending for a three satellite constellation that you just can't stop spending for, right? Like, this is to some extent, no pun intended here, but there's a space race here, right? And they really need to be able to, you know, hit the timelines in order to work with Boeing to get these satellites launch. So, you know, I think they found themselves last year staring down a situation where there was a potential liquidity problem. And so the question is, do you want a slightly, you know, smaller, you know, slightly smaller pie for everyone? Or do you want to risk something really catastrophic where, you know, the pot that you have, you know, permanent

capital impairment from some kind of dilute of financing you have to do? Look, I mean, in hindsight, anybody who raised a dollar of equity and didn't just lever their balance sheets more in 2020 looks foolish, right? And but I will say, and I say this all the time when people are asked about like, you know, what did you guys miss in 2020? What were you wrong about? Yeah, in hindsight, we were wrong about a lot of things. We should have just, you know, levered up and bought everything that was that, you know, because everything went up. But my point is that, you know, there were other paths, right? There was a, there were other outcomes whereby, you know, maybe things don't get better as quickly as they have. So I think, you know, these are very fair points and these are things that we

debate internally a lot. I think, you know, having bow posts there as a board observer and having bow posts be the largest shareholder, they participated in the offering. You know, I think that gives us a little bit of comfort, but, but, you know, it was, there was a confluence of factors that were sort of unlucky. They kind of hit a perfect storm. The Rignet deal, I'll let Eugene, weighing a little bit, but if you read through the proxy, the deal proxy, they've been working on this. What? It was like since 2016, Eugene or something like that. They've been looking at this deal for five years. It makes an enormous amount of sense. We don't want to say too much. It's not that we know something that no one else knows. Just open up the rig net 10K and look how much

they spend on, you know, other getting connectivity from other people and just kind of getting to your point, Andrew, about, you know, what happens when you have your own capacity, all that reselling and buying capacity from others goes away, you know, we think that, you know, this is a very, very good deal. As they need a shareholder vote, they're going to, they're being slightly coy about, you know, talking about all the synergies that are going to come from it because they need the rig net shareholders to approve it. But the only way this was going to get done was through equity. And so again, if this is an enormously logical deal from a, from a sales channel perspective from a new totalable addressable markets where you know kind of admit the maritime oil and

gas right all of these uses that have never had legitimate connectivity um you know were were you excited to issue equity where they did i of course not right you wish what you really want is you want you want to issue equity at an enormous price and enormous multiple and buy something that trading at a really low multiple and then get all the synergies from it that's the holy grail they're not going to get that here but that's the deal makes an enormous amount of industrial logic, and we don't think there's a lot of dilution relative to the opportunity. Eugene, any other thoughts on the equity stuff? No, I think, you know, from on the RigNet side, they've been talking to them for a long time. And at the end,

it was up to KKR. And, you know, seemingly that since KKR is ruling, that indicates that they probably wanted equity and didn't want to check. Because if you look at their own proxy, people approach them in cash offers, and they said no to those. So you can just do the math, right? And I think it's pretty evident that, you know, this deal was going to be an equity deal. And it's unfortunate that, you know, bias that was hated, as it's often have been hated for the off and on for past five years. And it was a low point. And, you know, I agree with you. The optics are pretty bad.

Issuing equity, you know, what in hindsight was the bottom. And the COVID-20s, looks terrible as well. I can't even defend, you know, Markinkberg is a great,

you know, cultural leader. And, you know, I personally put them up there and in terms of tech visionaries for her specific vertical. But, you know, I can't say that he cares per se what you or I think about the short-term stock price because he doesn't manage this business like that.

He never talks about stock prices and all the town halls that I was ever a witness to myself. He manages a business for 10 years. That's how he thinks and acts. So, you know, it's a problem in our world because we think of things that may be in three-year terms, right? And so the people who are like, oh, this has been a terrible investment, all right, well, you know, in June or whatever, June of 2019, it was a great investment. Yep. So I don't know. Has anything changed since then?

I mean, Starlink, I guess, is now operational. So that's probably the biggest change, I would say. But other than that, nothing, right? I don't see a competitive dynamic changing on the In-Flight Wi-Fi. I only see them continuing to win more and more tails. So anyway, you know, I again, all fair points. And as I've said, you know, people who dislike the stock have, you know, very specific reasons.

And, you know, I can reason them away in my mind, right? But I think those are fair points. And, you know, certainly I think similar to when Carostell wrote their short, we're in this air gap period between system launches. And I believe that once, specifically once the European one is up, that a lot of these conversations about bad returns and no cash flows and this and the questions about growth, potentials, and all that other stuff that I think people have always piled on in these areas.

gap specifically, those will be cleared away for the uplift that we see. Let me just obviously look, there's lots of different segments and they're competing for a lot, like, you know, in-flight is a much different competitive landscape and technical capabilities and everything that's different from the government. Let me just zoom out a second. You know, again, I've invested in cable. And for a long time, one of the bare cases for cable was, hey, 5G wireless broadband is coming. and it's going to beat cable.

And all the cable execs, and I believe this, you know, that's why I have the position cable, all of them said, hey, look, 5G wireless, great, yes, it could serve, it might serve some rural homes, it might serve, but if you really wanted to over, if you really wanted to compete with cable, you're basically an overbuilder, right? Because you're going to have to build that within 200 yards

of someone's home, get that signal going, give them equipment and stuff like, it looks very much like an overbuilder. And the real thing is what wins with home broadband, band and what wins with the internet is having that pipe, that cable or fiber pipe, as close to the consumer as possible. That's the most important thing. So if I zoom out and I look at bias at, you know, which is geo, which is hundreds of miles in the air, you can correct me from wrong, versus LEO, which is what SpaceX is doing, which is a lot closer. I think it's

65 miles into the atmosphere. I can't remember off the top of my head. You can correct me from wrong. But when I just look at that in general, I say, oh, you know, overall, LEO is closer to the, is closer to the consumer, maybe for rural broadband, maybe we're talking government, whatever we're talking about. It's closer to the consumer. Closer to the consumer generally means lower latency. It generally means better speeds, all that type of stuff. So why does ELEO, why is VISA's geo option, the right option overall? Does that make sense? Well, I think those are all correct statements except for Leo being lowered as a mean faster speeds. Speeds are independent of the plane of which. you orbit the earth, it means certainly less lag, just, you know, the actual physical distance

between the connectivity point and the satellite is lower. So, I mean, I guess if you're a gamer and you use Twitch a lot or a live streamer, that will matter to you. If you're a video podcaster, you've got to have that latency tight. So I have to interview two people on Coast Street at the same time. All those video podcasters in the middle of North Dakota are, you know, just SOL right now in terms of Vassad and Hughes. So they're going to have to switch over to Elon. But, you know, I just don't think that there are that many people who care enough so that they're going to pay $500 for equipment and then $100 a month for service, right? And in the end, you know, what does someone care about?

They care about. Again, I want to watch Netflix and Hulu and whatever. And I want to go on YouTube and waste three hours of my life. And I want to browse the Internet and go on whatever, Reddit and the other 55 things that people do, order food or go on Amazon. None of those things are prevented right now. What you're describing is on the rural broadband side, which I think there's value, but as you said, it's become less important over time. But like if I'm the government and Biasat's coming and pitching to me, why is my answer to them not, hey, SpaceX has this LEO system, which is lower latency, which is huge for government, right? Because milliseconds can make all the difference in the world in a battle or fight or whatever. So why is the government not saying three years from now, hey, Biasat, we're going to start dialing back because this huge SpaceX systems in the air. And, you know, Wall Street Journal has the Elon Musk and Amazon are battling to put internet in your backyard. Obviously, we're not talking real, but there's SpaceX, Amazon, Jeff Bezos, its blue origins are looking to put up. Why is the government not trying to shift more to LEO? Why is that not a risk in the medium term? So the answer is there they are. And I encourage everyone to read, actually, of all places, the GAO came out with an audits of government's

satellite service purchasing in 2019, and they put a big, like, 80-page paper out about it. And they talked about, you know, what's the appropriate use of, and I think it's somewhere around $4.5 billion that the U.S. between the DOD, State Department, and all the agencies you know, spend on connectivity just so you understand how big that pie is, besides the residential broadband site. And what they said is, like, you know, speaking. to various stakeholders, you know, ranging from the Air Force, Navy, the State Department, and we think that the best solution going forward is a hybrid system, of geo and Leo. And so I 100% agree with you that I think Leo, and I don't know, but it's, I think SpaceX has a higher,

is going to have a much higher hill to climb there because the way that they've designed their satellites doesn't actually embed a lot of jam-resistant or encryption-protected connectivity elements within it. And plus, they're not, in order for them to get to the price points that he's talking about, they're cheap, meaning that they're not high-rel, which is high-reliability componentry. So he would, they would, they will get some piece, right? some maybe lower priority communication systems that the military will put through their networks. I actually think that the DOD will have a hybrid of their own Leo system plus a commercial back end that's more palatable in terms of their encryption capabilities and a geo backbone.

And then the reason why there are certain applications. like you said, that you would want to have low latency. And there are other applications where it's just about, you know, connectivity in various regions. And Leo's problem is that without, and if you want, you know, now you got me, you know, start getting me to dork out on this, but if you do not have landing gateways in various parts of the world, then you're not going to have a gateway in China or Russia or Mongolia or Iran or any of the countries that the DOD cares about. So how do you get that information back?

The answer is inter-satellite lasers for Leo. Unfortunately, for Elon and SpaceX and everyone else, that still is a, you know, it's a dream. Now, what do I mean by that? You can do it, but you can't do it at the price. point that he wants. Yeah. And so sure, you know, again, like I look, I always check, you know, my, you know, my desire to say, oh, that's never going to happen because I was, you know, clearly wrong, right? People funded him and it's going to happen. But these bad, these first 1,400 or whatever he's

at now, satellites don't have ISL. And he, and his initial launch requests and petitions to the SEC had those and they had to take them out because they couldn't get the lasers correct. And I know he tweeted out and it's coming. Okay, well, let's see. I've also checked in a bunch, you know, specialized as laser people who that's the only thing that they do. And they don't think that, you know, that he can do it at the price point. I'm not saying functionality that there's two different things. Functionality and price, right? So you can have the functionality, but if he wants to have a system that doesn't cost him 18 billion as opposed to 9 billion, then he needs to be correct on the actual cost side. And as far as I can tell, I haven't found anyone that can hit those

numbers and they're coming from a very specialized perspective. So maybe you can do it. Let's see. Anyway, going back to my point, like, what you're talking about is a five to seven year problem. Maybe. Maybe if they can figure out how to do inner satellite lasers and actually put a, birds up that can communicate and backhaul information to the necessary government elements. You know, if you're flying the reconnaissance drone in the middle of Iran looking for, you know, a nuke base, like, that's great, but you have to have a way to get the info back. Anyway, long story short, there is a need for, there will be a need for geo in many locations that Leo is irrelevant.

and most of the locations that the government cares about, Leo will be irrelevant. I think the coolest thing you said in that entire thing was the fact that you have specialized laser guys that you talk to. It's pretty cool to have a specialized laser guys. Can I jump in real quick? Yeah, I was actually going to just to jump in on that a little bit.

So I think we as a firm do not want to underestimate any of the competition, especially Starlink and SpaceX. But they're just reality. that are, that everyone has to take into consideration, one is that SpaceX doesn't have, well, SpaceX, but Starlink does not have really a government military business right now. We spoke to a former SpaceX engineer who said that Elon had to be convinced almost after the fact that encryption and jam resistance were an important part because he wasn't really thinking about it from a military perspective. Now, of course, they can solve any technological problem. But my point

is that Biaside has a multi-decade relationship with the government and the military. They're going to have a multi, like half a decade to a full decade lead in terms of providing connectivity and equipment to the military. And then if the layer on on top of that, the fact that sorry i lost it um where was i going with that um you know this this conversation does remind me again and not to bring everything back to cable but you know google fiber was everyone was terrified of google fiber for the longest time that that's the company that was i mean google is a behemoth they've got unlimited pocketbooks

they they could argue for google fiber that they were building out and they didn't even need to be economic because they could make the vague argument hey owning the customer having them do four more searches a month or something is going to be great for our business. They had all these arguments, but in the long run, they ran into physics, and they ran into the issues of physics, you know, going and lying this fiber and doing home-by-home builds is really expensive. And even for a company with Google's pocketbooks, the physics and the economics of it, eventually it came back to haunt them, and they looked at it and said, we can't do this. And, you know, with LEO, I think there's advantages. But as you guys are saying, eventually they're

going to run into, there's physics and economic problem that even SpaceX, a hundred billion dollars can't uh can't overcome sorry i remember what i was going to say go ahead biosat's already making leos which we haven't said bysat is already making lios for the military right it right eugene this is already happening right so they have a trial uh that they've i think to that they've um built for uh was it the air force i think it was the air force um to try um again going back so i the the military will never ever go to 100% anything, right? Redvency is the number one thing for them.

They still have a WGS system in the satellite space that was built in design in 1986 that they're operating and spending billions of dollars on why? Because they know that in a nuclear blast, I think it'll still be, you know, transmitting. So, you know, again, it's, I love the military side. I honestly think that people just don't get it. It's much harder to do diligence on that side as well because, you know, what are you going to do? Are you going to call up the Air Force General and ask them about, you know, the future programs that they're on? Yeah, right, right?

So anyway, you know, I think I think that's really where people miss what the bias that is. And, you know, and I get it, right? Like you said, the Wallster Journal puts out these pieces and gadget and whoever, right? I mean, it's cool to write about SpaceX and as it should be. That is it cool, but people want to read it, right? Like, Elon Musk tweets are some of the most popular engaging tweets out there. People want to read. It's a sexy, exciting story.

People don't want to read Biasat's got a four-year-old satellite that covers a lot of things and delivers data pretty cheaply. They want to hear 500 satellites flying around in space and covering everything really quickly. Look, I wouldn't be cognizum of time. It's been over an hour. It's an interesting sort of complicated story. Obviously, you guys have done a lot of work on it. I want to make sure with both of you and, Ben, why don't we start with you?

Is there anything that you wish we had covered or any piece that you think a lot of people miss when they think of Viassette that you think they should be where? We'll start with Ben and then Eugene, we'll flip it over to you after this. So we can make sure everybody's getting the overall overview of this. Yeah, there's not one thing. I actually have a list of bullet points that I'd like to go through. And it'll be a couple. Pretty quick. The prior FCC and regulators basically allowed Starlink and others to put up Leo's and basically cover this guy with very, very limited from what we can see, regulation or desire to study.

whether it makes sense or worry about space debris or the environmental impact. And so I think everyone just assumes that he's going to get, this is Elon, you know, what are eight to 12,000 satellites. I will just say that there's a lot of pushback, you know, and a lot of pressure on the Biden administration to reconsider just like unfettered access to the sky, whether it's. Other governments have issues with that. I know there's been discussion, so I'm leading you somewhere. But, you know, like if I'm Russia, EU, whatever, I'm not going to be super happy that the U.S.

are just saying, hey, Elon, put 10,000 satellites up there, just kind of leave you. Correct. Correct. And so if the base case of every investor who's looking at this space is that there will be no regulation, we see regulation at all of, you know, and we think there's a legitimate reason for it as well. And Eugene can talk about it, but there's something called the Kessler syndrome, where the number, especially with this many, objects are going to be in low orbit, it's not like you add one more satellite and there's only, there's a linear increase in the, in the risk of a space collision, it's actually exponential. And so, you know, there is an enormous amount of risk here that where, where, whatever,

you put X number of satellites off there, that you hit a tipping point, then the space junk problem already exists is that, and then all of a sudden you, you know, there's, there's a bunch of debris that, that's created as a result of a collision. It's close to the International Space Station. All of these things have already happened, right? And if you're going to be putting tens of thousands of more satellites up there without understanding that risk and appreciating that risk, we just think that the regulators could look at this more closely.

And if it does, I think that benefits, you know, the incumbents and Biasat because they have a geo, right? They're going to put up one more, you know, three more satellites versus, you know, must launch to 60 at a time. You know, another thing about Biasat is people, are always, and this is a, people think very linearly, and they're like, well, what, what's going to make this grow? And they look for a silver bullet. There is no silver bullet here. It's all, the answer is everything, right? So maybe rural broadband's not what we thought it was going to be.

But community Wi-Fi wasn't even on our radar, really a few years ago, until they started off in Mexico, IFC, in-flight Wi-Fi, you know, we didn't really talk about it. But the fact is, you know, when the two by set, three constellations are up in Amia and Apak, we're going to have transatlantic and trans-Pacific connectivity that do not exist today. So you're going to be able to hop on a plane from Tokyo to L.A. or L.A. to Munich. And you're going to have connectivity through a lot more, through a large portion of that. And it's going to be fast. And it's going to completely change transatlantic, transit Pacific flying, because you're going to have an internet connection. So the answer is not one thing. It's everything. And, and, and so one of the things that Eugene

pointed out is like, this is a really hard stop for people to evaluate because they're like, well, what is the growth? Well, it's, it's everything. It's military plus imply Wi-Fi, community Wi-Fi and broadband. I think the other thing, you know, Vysets, not to the degree that SpaceX is where they can launch their own satellites with their launch vehicles, but VISX is heavily vertically integrated, right? And they become more vertically integrated, and that means they're going to be more profitable. As we talked about, I look at the being involved in the hardware for the link 16 and and base stations that that's a form of vertical integration because you you're providing the hardware and then you can provide the connectivity. I just don't think a lot of people appreciate the synergies between those two things.

And then another thing that people don't talk about is that look, there's a lot of hype around space, right? You know, you know, Kathy Wood's going to, you know, launch a space ETF and there's all these SPACs that are merging with space. companies. Now, Biasat has hardware that they can sell to all of these companies, ground stations and bay stations. And so they can benefit from the commercial network segment from just that activity. So there's another thing that really people don't talk about and maybe underappreciating. I think, you know, Eugene put this out there, but I think people are too, again, thinking two binary. Leo or Gio? Which one? The answer is both. And, you know, whether that's rural broadband, whether that's military, and we talked about this before,

but at home, as you're getting your broadband, is there one provider? No, I mean, unless you're in a rural place where there's almost no fiber, right, you're probably having, you have probably two or three different options, right? This is not a winner take all market. If anything, like people are so used to looking at software companies, this is one of the least, the satellite connectivity is one of the least scalable things you can possibly imagine. As opposed to network effects, they're actually disinergies and negative effects, the more users that go on. So the more successful you are, the more users you get, the worst experiences for the existing

players. So that's the other thing to remember is that, you know, no one's, this is not a winner take all, right? There's not going to be one satellite player out there serving everybody. Just like in home broadband, there's going to be multiple players. there's going to be, you know, they're going to have different sales forces. And the competitive advantage is how cheaply you can provide it, I think. And then, you know, I think, again, another binary way of thinking is that everyone thinks that Starlink success means that Viassat cannot be

successful. And we just don't agree with that. If Starlink is successful and it expands the total addressable market for everybody, Viassat, as Eugene pointed out so eloquently, is going to get a share of that. And they're kind of a play on the same thing, which is that you have exploding bandwidth demands, which we haven't really, you know, really dove into. But I think 70, I think I read that 70 to 80 percent of usage right now is video in the U.S. for connectivity. And if you look at the amount of growth that we've seen, I mean, some of it's COVID-induced as people are staying at home.

But if you look at the consumption as all of the streaming services have absolutely proliferated, it's enormous, right? So that gets to the tan. It gets to the capacity. question you asked, like, there is demand for that capacity, right? And so I don't think Starlink and Biasat are like these binary things where you can only own one. You can own both, you know, assuming Elon finds a way for other people who invest in it. But in any case, like you're not, it's not like one is six, it's not a zero sum game. It's probably the best way to describe it.

And I think, I think those are my, my top ones. So those, the things that we just, see here over and over again that we kind of tear our hair out. And look, the company has not done an amazing job at PR or IR to be out there arguing these points. And Musk, with his unbelievable ability to hype things, has won the PR battle. But you'll notice that Biosat has started to get the message, and they are out there a lot more. I think there's just, they've been in this waiting game. And until they have Biasat 3 up, until you have the Americasat 3 up, until you have the Americas one up until you start putting the email one up people are going to doubt it um but it's when you start seeing the results you've seen the subscribers you're seeing the free cash flow that's when it's going to be

okay this is this is what mark said it was going to be um and i think there's going to be a sentiment shift regarding like you know the all of the shorts you mentioned and and and all of the you know the naysayers who are just sure that that starlink or or hyper or tell us that are going to you know, destroy what the existing bias that is. Eugene, same thing, anything you wish we had discussed or anything you kind of just wanted to hit on a little harder before we maybe wrap this thing up. Yeah, that's a, I think I've been a pretty good summary. I mean, the only thing I would add is no one ever talks about the commercial network side

and I know Ben kind of touched on it, but the fact that, you know, they can provide their priority hardware to remote sensing stations and folks that are in, you know, juice. Other avenues of satellite tech delivery, aka, like taking pictures of the Earth and how do you get that information back down? And they just, they can provide a lot of the hardware necessary to enable some of the more very cool stuff that's coming down the pipeline. and a lot of the SPACs that are being raised are kind of concentrated, a lot of the things that will actually help with order backlogs

in the commercial network system. So that's kind of my only thing. But I know I've already kind of touched and literally everything else. So I'll end it there. I have one more for us. ESG VISA, ultimate ESG company. How so?

The idea that we were going to, that Mark Zuckerberg and who, else was it some and and google we're going to connect through loon we're going to connect all these people who would never touch the internet in places like you know mexico and brazil and africa and all the places that viasad is already doing so right like if you if you think that there's a there's a societal global social benefit of people having internet connectivity in a way that they never have bias that has created a community Wi-Fi model that actually gives people connectivity And so, you know, from a, you know, from an ESG perspective, I think that's actually a pretty

cool thing that they don't talk about. And other people have like, you know, like had all these goals of doing it and have failed at it. And somewhere under the radar, Vice, that's already doing it. Look, I love that you're out here pitching for ESG. I know Viassette and Laal, I've had people say, hey, I'd like to come on the podcast and talk, Viassette or Lao or when they heard you were coming on the email and they're like, look, the most important thing at this point is, I need them to pitch this as a space play and get it into Kathy Wood space ETF. That's what's really going to drive the flows in the near term. So I did think when you said you guys want to talk about it, I thought, oh, maybe they want me to tag Kathy Wood when I post this on Twitter and see we can get this put in.

Let me wrap this up with one thing, just something I'm trying to do with all my things. So, you know, I'm looking at your March 2020 slides, Best Idea of Buy Sat, Price 42, Target within three years, 125 to 160. As we mentioned, there's been a little equity issuance. the shares are at 52 so it's actually done pretty well since then but uh you know if i'm thinking three five seven years out you know what's kind of the not the super bowl case not the you know what's kind of y'all's most reasonable base case for what we're playing for here they both they both thought looked at you after evil do we want to say 200 do you want to say Look, I don't know.

Okay, you said reasonable. Okay, so, you know, not like, you know, I guess best case. I think reasonable is 105 to 115 once they start kind of showing, you know, showing the show me crowd actual revenue coming from the satellites and an expanding of the cash flow generation from their network, from the not only the North America one, but the MIA one comes up, and you'll start seeing the cash flow from operation start to inflect upwards again and approach not only a break-even on the CAPEX,

but actually provide free cash flow. I think that'll be one of the big drivers of the stock. They'll take it into the hundreds, even after the dilution. And now, you know, Kuku values, yeah, yeah. The Kuku value was the Intel set. You know, if they had been allowed to monetize CBAN, that stock would have been, you know, it might have been 200 for sure these days. You said I'm just going to use 100.

And I think that's approaching around a $10 billion EV if I'm doing the math in my head correctly. So would I be right in saying you think this company, you know, five years out, 300 to 400 million annually in free cash flow is kind of right? Or how are you kind of just thinking about the long term steady state? economics of this once buys that threes uh buys up all that okay well and now you're getting to like we are running really long so if no no that that's cool um you know again models are almost entirely worthless i think you know farther than like one week out um so but uh if you're

asking you are uh after the full constellation is up the maintenance capex and they'll never really be at maintenance because Marks are already talking about, you know, the fourth generation, which is you put out an 8-teribit number per satellite, which is insane to think about. But anyway, you know, the maintenance numbers be somewhere between $4 and $600 million of capital expenditures, right? And like, I usually, you know, I tell people like, they're, I hate EBITDA in this case because they truly have a, you know, a capital charge. Yeah, exactly.

It's not, this isn't like, oh, well, you know, epithos a proxy. No, it's not. It's the, you know, they're a real capital charge. But the cash flow from operations number should start approaching somewhere around like 1.3 to 1.5 billion. So you can kind of. You're talking about this is after tax, CFO, less cap. You're talking about a billion dollars annually. And the market cap is, what is it?

I'm just pulling up blue. Current market cap's three and a half billion, EVs, five billion. So, you know, if you're right. and you do that. Actually, you said 100, but if you're right, you're probably playing for a lot more than a hundred on that. I don't even want to say it because, again, I've already, you know, I've already looked stupid for most of you like, oh, this guy's putting out of, you know, one, that 125 to 160, and this thing is like $30 a moron. But, you know, honestly, this is, this is a, I think what you, when, you know, again, I don't look at the sales side stuff too, but I think that that, that

cone of variability as you put it out, like 42 to whatever the top one was, that's indicative of a stock that you can make outsize returns on because the general, you know, kind of dispersion of expectation is so immense that I don't believe that this could be properly priced in the market. Look, it sounds stupid when you say it's at 40 and I think it can be worth, I'm just going to pull it number 400. But, you know, I think one of the biggest mistakes I made and I'm trying to get better is I buy a stock at five and I put in my notes, hey, I think this could happen and I think if it does happen, this is not a $5 stock. It's a $50 stock. And then it drifts up to 11. I'm like, oh, you know, let me trim a lot here. And I'm not adjusting for, oh, the case where it was really

bullish that I thought could happen, no one else that could happen. It's increasingly more likely. So I need to hold this because this home run scenario, not only is it on the table, it's like in play and increasingly the odds are for it. Ben, I'll wrap up with you. Any last thoughts or anything we haven't hit you wanted to mention briefly. No, I mean, if I think Eugene has done a really nice job of summarizing why this is one of our largest positions, we're very close to it. And to your point, maybe too close to sometimes. And so that's why we're always interested in engaging with people and understanding, you know, what what they think is wrong with this thesis, where they think we're missing something, where we might be overstating things. But I think I just want to finish with

this. The idea is that in, you know, this, it's not that hard to understand. what they do, right? It's not, this isn't some kind of esoteric biotech where, you know, there's this, you know, you have to understand the chemistry and the science. It's, it has a technology aspect to it, but it's not too hard to understand, like, you know, they're providing broadband and hard work for people. It's not an esoteric biotech. It's only rocket science. It's only rocket science. Um, you know, easy, easy stuff for Eugene, but for the rest of us, but my point is, like, there's just a lot of nuances here and there's a lot of work to do. And And the typical cell side analyst, not that we pay, you know, to pay attention to, but the

self-side analyst, like the typical person who covers is this, a telecom stock doesn't cover defense, right? And so, you know, they have a lot of trouble, I think, understanding it. So there's, there's a lot of misunderstandings and misperceptions. You know, we, a lot can go right and a lot can go wrong. If you go through our recent presentation on this, we list any number of risk factors. So we want to make sure that you understand, like, we have a pretty balanced view of this. It's just, the fact is, if they do what they can say they can do on a cost per bit basis and they get those satellites up and the TAM continues to grow, it's almost going to be, I hate the word inevitability, but it's really just going to be filling up satellites

as opposed to all of this, any other heavy lifting. And if they can do that with a commercial organization they have and, you know, continue to build a military business, this is going to be a forever stopped for us. And that's, and that's why we've been such good, I think we've been evangelist for it for that reason, because we see something that we've, that has been latent. It's been hidden by COVID. It's been hidden by delays in satellite launches. It's been, you know, hidden in this like delay between Vysat 2 and the Vysat 3 constellation. And this is kind of the inflection point. And that's why we think it's interesting for people to start working now, because it's going to take you a little time to get up on it. So, um, so, um,

Please feel free to reach out to us. Go to our website, hostrycapital.com. You can see other podcasts we've done on this topic. We've also, you know, there's a number of PowerPoint presentations we've done. But if you have questions or comments, we'd love to hear from you. And, you know, anybody who has the short case, we look forward to engaging with you. Well, look, I'll be sure to include a link to the website and the show notes. So anybody's listening and see it there.

I have the presentation. I think I can link to it in the show notes. If no, not we'll figure it out. But Eugene, Ben, thank you guys so much for coming on. The work's been great, really interesting name, great conversation. And looking forward to having you guys again in the future, whether it's when Vy's had three launches or when we're talking about the next one. But thanks again, guys.

Thanks, Leandro.