Iridium Communications Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the Iridium Communications Second Quarter Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ken Levy, VP of Investor Relations. Please go ahead.

Thank you, Anthony. Good morning, and welcome to Iridium's second quarter 2022 earnings call. Joining me on this morning's call are our CEO Matt Desch and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our second quarter results followed by Q&A. I trust you've had an opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures, including operational EBITDA, pro forma free cash flow, free cash flow yield and free cash flow conversion. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken, and good morning, everyone. Well, we all saw Iridium's business outperform nicely in the quarter, recording record revenue and operational EBITDA. This momentum gives us confidence to raise our top and bottom line guidance for the year. We're seeing sustained strength from our partner channel in signing up new customers and purchasing equipment, which is the result of Iridium’s strong competitive position and unique offerings. This underlying strength helps to shield us against changes in the global financial environment. We believe we're positioned well to grow just as we have through past cycles, even if recent concerns of an economic downturn come to fruition. Our business remains vibrant and resilient. This is owed to the unique business Iridium is focused on, characterized by safety services and mission-critical applications, as well as the durability of our business model. While no business is recession-proof, we've grown nicely through past downturns in large part due to the diversity of our customer base and the industries that we serve. Iridium continues to occupy a unique lane, even among satellite companies. And today that lane is characterized by its strong demand, growth opportunities and some pronounced areas of upside, which I'd like to call accelerators. Let me speak to each of these three areas. First, demand for Iridium equipment and services has never been stronger. This has been driving hardware sales over the last 12 months and kept net subscriber additions near all-time highs in our commercial business. In the second quarter, we added 95,000 net subscribers, which means over the last year we've grown our subscriber base by 16% to almost 1.9 million users. I can't think of another satellite communications company that makes more connections to things from space than Iridium. We've continued to see momentum in our core handset business, in part due to ongoing demand in Ukraine, continued strong growth in Iridium push-to-talk services for global work groups and governments, and general acceptance by the market that our satellite phones and Iridium GO! smartphone hotspots are the gold standard through remote communications. We also believe that our successful management of supply chain obstacles over the past year or so has allowed us to ship devices when others could not. Further, Iridium enjoys a global reputation for service reliability. This is particularly relevant to the recent demand we've seen in Ukraine. Partners and subscribers tell us that Iridium's handsets work much better in battle zones where GPS is now being jammed, because our devices do not rely on this location technology to connect like others do. All these things are combining to create a very strong year of growth for these core product lines. And as Tom will go into further, we believe commercial voice and data is a resurgent area of growth for us into the future. Moving on to IoT. Our industrial partners continue to prosper and grow their subscriber counts, but it is the personal user that remains the real story lately. We've continued to ride a wave of demand for Iridium-connected personal satellite communication devices as partners like Garmin, ZOLEO, Bivy and others have developed new solutions. These small lightweight consumer devices are great for mobility and offer users reliable two-way connectivity which they often pair with their smartphones even when they're off the grid. Our personal satellite communication services have gained in popularity, especially as the prices of these devices have fallen in recent years and retail consumer awareness of them has grown. In maritime, we're pleased to see the growing adoption of Iridium Certus reach quarterly installation levels that we long have been expecting. Shipowners are realizing that Iridium Certus provides highly capable and reliable L-band service at a price point that makes it accessible and attractive to both small boat owners and large fleet operators. Net activation of these terminals continue to expand, quarter two was another strong quarter with subs up 12% from the same quarter last year. Overall, broadband revenue growth also remained strong, up 14% from a year ago. This is even before we have started to see a widespread use of the new lower cost Iridium Certus 200 terminals that are just now getting into the channel. I think it's quite clear that demand for our commercial satellite services is healthy and growing across the board. Now in terms of opportunities, let me highlight three that I think you should keep a close eye on. First, within IoT, I discussed the momentum we're seeing for personal satellite communications. We already have more than 670,000 active users on our network and that number appears to be accelerating with the introduction of new products and features from our partners. We expect that these consumer-oriented devices will continue to be a long-term driver of IoT revenue and subscriber growth. Our next big opportunity is being fueled by Iridium Certus 100 service, which we call midband. It delivers a higher speed data connection than our legacy narrowband offerings in a very small form factor, perfect for applications where size, weight and power are considerations, like in segments of aviation where our partners are introducing new terminals for the growing unmanned aerial vehicle market. Our opportunity has only expanded in the last year, now that our technology partners have enabled efficient video transmission over the Iridium Certus platform. The intersection of these applications with new Iridium Certus 200 devices should unleash a new wave of users and applications that have higher ARPUs. Some of the early technical applications are now available to Iridium customers and we expect these solutions to only grow in the quarters and years ahead. Lastly, I want to highlight our emerging opportunity in aviation broadband. We're expecting to finally see Iridium Certus aviation terminal start activating on our network this year and next. The timeline for aviation services have been necessarily long due to the regulatory testing and rigorous certifications required for each piece of equipment that enters the cockpit. As a pilot, this is one business opportunity that I remain very excited about, and I can't wait to see it come to market. Iridium has been working with a handful of partners who will be launching their respective products using Iridium Certus in the second half of this year. These partners are closing critical certification milestones, performing successful flight tests, and some will be entering service with first installations in the coming months in both rotary and fixed-wing applications. In terms of my third theme on future upside accelerator, Iridium is always active and looking to expand beyond our traditional markets to grow even faster. I'd like to highlight three accelerators that hold great promise for us. One of these new business opportunities was awarded in late May when the Space Development Agency chose General Dynamics Mission Systems and Iridium to build and operate their ground operations system for their new LEO satellite network. This $324 million prime contract leverages Iridium's expertise in flying satellites and managing ground system operations to provide this entry into a new type of business with the US government. We're proud of our capabilities and know that this contract with the Space Development Agency will enhance knowledge of the advanced technology around an important network like this. The $133 million in revenue that we expect to receive over seven years from this award will be seen in our top line results, but the strategic impact of a closer alignment with the SDA is what is most important. We're excited to begin the work and are honored to see our capabilities recognized and explore what else might become of this expanding relationship with the Department of Defense. Another accelerator for us is Aireon and their continued product evolution and adoption. In late June, Iridium augmented its position in the 10-year-old joint venture. Our new $50 million preferred equity investment will help accelerate Aireon’s development of their commercial data service business, which will allow Aireon to monetize their high quality ADS-B dataset with customers beyond its core use in air traffic surveillance. Aireon’s data has value to commercial enterprises that assess, manage and interface with the commercial aviation industry. In fact, Boeing just signed up Aireon to use their data for its own safety toolkit and advanced data analytics capabilities. As Aireon grows, the benefit to Iridium will be an increase in the value of our substantial equity stake in this enterprise, as well as dividends down the line. And another area of long-term promise to us is that today you'll also see from the 8-K filing accompanying our press release that we furthered our vision of connecting millions of consumer devices to our network by entering into a development agreement with a strategic partner to enable Iridium's technology in smartphones. We likely won't have much more to say about this arrangement until products are ready for market. But, obviously, it’s a demonstration that we're making good progress on the execution of our vision and something that can provide some significant upside in the future. In total, all three of these partnership opportunities are additive to Iridium's business. Rest assured that we will provide additional details about each of them as the time is right. However, it is safe to say that they serve as accelerators to our story, which should further excite our shareholders. So to summarize, we are continuing to experience strong demand this year. We are excited about the areas of growth we're developing, and we are actively working on some accelerators to our business, which we believe will be material in the future. We feel very good about where we are and look forward to continued strong growth in 2022 and beyond. I think you'll have to agree whether you're a long-time Iridium shareholder or you've only recently come to our story, we're a particularly interesting company to watch in the space industry or any industry, for that matter, given our unique potential. With that, I'll turn the call over to Tom for a review of our financials.

Thanks, Matt, and good morning, everyone. I'll get started by summarizing our key financial metrics for the quarter and providing some color on the trends we're seeing in our business lines. Now I'll recap our increased guidance for 2022 and close with a review of our liquidity position and capital structure. Iridium continued to execute well in the second quarter in an environment characterized by robust equipment demand and meaningful subscriber growth. We generated total revenue of $174.9 million in the second quarter, which was up 17% from last year's comparable quarter. The improvement reflects ongoing strength in our commercial business lines, a pickup in engineering and support work and unprecedented demand for subscriber equipment. Operational EBITDA hit a record $105.9 million in the second quarter, this was up 12% from the prior year's quarter and supported by strength across all business lines. These trends give us confidence in raising our full year outlook to better reflect the ongoing demand for our L-band services, which we expect to continue in the second half of the year and drive incremental subscriber growth. On the commercial side of our business, service revenue was up 11% this quarter to $106.4 million. This increase reflected continued strength in voice services, IoT and broadband. Commercial voice and data revenue grew by $5.2 million or 12% in the second quarter. As you know, we have historically characterized this business as a low single-digit grower. As Matt noted, there were two contributors to this outsized growth this quarter. First, our newer service offerings, Iridium GO! and push-to-talk are really hitting their stride. We experienced combined growth of about 50% on these two products in the second quarter. Together they accounted for about a third of the growth in the voice and data business line. We expect continued strength, strong growth from these products going forward. Second, we experienced materially higher sales of prepaid vouchers in the quarter. We believe this strength was driven by two factors. The first, we have noted previously, higher sales volumes associated with the conflict in Ukraine. While the second, we attribute to increased sales volumes resulting from our primary competitors not having handsets in stock to meet the demand. Prepaid revenues accounted for about a third of the growth in our voice and data business this quarter. The balance of our growth in this business line came from our core service offerings that also benefited somewhat in the competitive environment as described. So in summary, the new product growth will recur, but some of the other growth may wane a bit as circumstances change. We expect the voice and data business line will generate high single-digit growth this year and we'll see where things settle out, but it now appears that this business is more like a solid mid-single digit grower on average based on latest trends. In Commercial IoT, we continue to benefit from consumer demand for personal satellite communications. IoT revenue totaled $30.6 million in the second quarter, up 13% from the prior year quarter. While these subscribers generate lower ARPU than our traditional industrial IoT users, they remain very attractive contributor to our service revenue growth in light of the minimal comparative network resources they consume. As a result, IoT ARPU was $7.96 this quarter, compared to $8.69 in the prior year period. Commercial IoT subs grew 22% from last year's second quarter, fueled in part by 80,000 net new additions. This was the second best on record. These data subscribers now represent 76% of Iridium's billable commercial subscribers, up from 74% in the year ago period. Through June 30, we had over 670,000 personal communication devices on our network and we continue to believe that these consumer-oriented users will drive IoT growth for the foreseeable future. Commercial broadband revenue rose 14% from the prior year quarter to $12.1 million. Activations were driven by ongoing adoption of Iridium Certus terminals in maritime. Our partners are seeing good access to vessels, which should keep subscriber growth strong in broadband, where we continue to grow our offering and are seeing strong adoption of Iridium Certus as a companion to VSAT terminals. Hosting and other data services revenue was $15.2 million this quarter, up 5% from the prior year quarter on higher data usage. Turning to our government service business. We reported revenue of $26.5 million in the second quarter, up 3% from $25.8 million in the prior year quarter. This increase reflects the contractual terms of our long-term EMSS contract. Subscriber equipment continues to benefit from strong demand, rising 53% from the prior year period to $33.8 million. As Matt noted, we continue to receive new orders for equipment which support our forecast for full year equipment sales well above 2021's level. We expect equipment margin dollars to be up materially as well. Equipment margin as a percentage of revenue is expected to decline this year to a range between 35% and 40%. The reduction in margin percentage is primarily driven by a mix shift toward chipsets that have lower margin, which are widely utilized by our personal communication partners and driving significant subscriber growth. We are also, to a lesser extent, experiencing some cost increases as we manage through supply chain issues. Engineering and support revenue was $8.3 million in the second quarter, as compared to $6.8 million in the year ago period. The rise reflects activity related to the episodic nature of our contract work for the US government and commercial customers. In all, the trends we saw in the second quarter were quite strong. Accordingly, we are increasing our growth outlook for service revenue to between 7% and 9% in 2022 and raising our full-year guidance for operational EBITDA to between $410 million and $420 million. Some of the items helping to frame our thoughts on EBITDA includes the recent SDA award and our outlook for SG&A. With the award of the Space Development Agencies contract to General Dynamics Mission Systems and Iridium in May, we anticipate that Iridium will receive $133 million in revenue under the award over its seven-year term. But this could grow with future opportunities. Revenue will vary from year to year and appear in our engineering and support line. We expect work under the SDA contract to generate small margins, which we view as acceptable given its strategic importance. This, in combination with the increase in equipment revenues and decrease in equipment margin percentage will drive our EBITDA margin percentage below 60% this year. On the expense side of the ledger, we continue to expect spending on SG&A to rise this year as we incur higher recruiting and development costs accrual for higher stock compensation expenses and also make additions to our support infrastructure. I noted these items back in April, and anticipate that in total they will result in SG&A being about 20% higher in 2022 compared to last year. Moving to our capital position. As of June 30, 2022, Iridium had a cash and cash equivalents balance of approximately $227 million. Iridium's growing cash flow is one of the reasons that our Board upsized our share repurchase program with an additional $300 million earlier this year. In the second quarter, Iridium purchased approximately 1 million shares of common stock at a total purchase price of $35 million. Into July, we have remained active in the market purchasing an additional 290,000 shares at a cost of approximately $11.2 million. And since the original authorization of our buyback program in 2021, we have retired approximately 9.4 million shares at a total price of about $344 million or $36.47 per share. At this time remaining capacity on our program is approximately $256 million. We will continue to be disciplined in executing on share repurchases. Net leverage was 3.4 times OEBITDA at the end of the second quarter. This was down from 3.9 times a year earlier and includes the impacts of our buybacks during the first half of 2022. Our long-term target for net leverage continues to be between 2.5 times and 3.5 times OEBITDA at the end of 2023. We expect to be within this target range even after giving effect to all share buybacks authorized by our Board. Capital expenditures in the second quarter were $17.5 million and included initial spend of $7.5 million related to our launch of up to five ground spares satellites. You will recall that this launch of our ground spares is a one-time event with the total expected cost of about $35 million, which will be spent this year and next. We anticipate that the launch will take place in 2023. We have previously indicated that we expect annual CapEx to average about $40 million during our CapEx holiday. So inclusive of the launch of our ground spares, we do not expect our CapEx spending in 2022 to exceed $75 million. This spending can be comfortably supported by Iridium’s strong cash and cash equivalents balance and ongoing expectations for strong free cash flow in 2022. If we use the midpoint of our 2022 EBITDA guidance and back off $66 million in net interest pro forma for our current debt structure, the maximum expected $75 million in CapEx for this year and $14 million in working capital, inclusive of the appropriate hosted payload adjustment, we're projecting pro forma free cash flow of approximately $260 million. These metrics represent a conversion rate of 63% in 2022 and a yield of nearly 6%. I would note that Iridium put in place an interest rate cap in July of 2021 to hedge $1 billion of notional value on our term loan. This positioned us well to weather the current interest rate environment. More detailed descriptions of these cash flow metrics along with the reconciliation to GAAP measures is available in the supplemental presentation under events on our Investor Relations website. In closing, we're very excited about Iridium's business prospects and the new revenue streams we will soon realize from the SDA contract awarded in June, as well as our entry into new markets. We have all worked hard through the challenges of the pandemic during the past two years to execute efficiently and get to this point. As Matt noted, we are enjoying strong demand trends today and executed on a number of promising business opportunities. As I look back on the dozen years I've been with Iridium, I've witnessed an accelerated pacing of growth and technological capabilities. It took Iridium 18 years to get to 1 million subscribers, which occurred in 2018. We expect to reach 2 million subscribers as we exit this year, illustrating the acceleration of our business. It's very rewarding to see this progress and given the strength of our personal communications business and current pace of growth, we will likely surpass 3 million subscribers in less than four years. This is an especially exciting time for our company, our partners and employees. We're committed to returning capital to our shareholders while still investing in the business and pursuing new vectors for growth. I truly believe that for Iridium the best is yet to come. With that, I'll turn things back to the operator for the Q&A.

We will now begin the question-and-answer session. Our first question will come from Ric Prentiss with Raymond James. You may now go ahead.

Thanks. Good morning, everyone. Obviously, we'd like to see the guidance raise, particularly in this economic environment. Matt, you talked a little bit about how you guys had weathered different economic situations. Help us understand where you are at today? And looking into this current environment, how you see it playing out in your mid-term guidance? Any thoughts about updating that guidance or how this current market conditions are affecting that.

We have been closely monitoring trends and haven't observed significant changes so far. It's reasonable to anticipate some impact, particularly on equipment, as consumers are becoming more cautious with their purchases. However, we haven't seen this reflected in our results yet, and we are considering it as we look ahead. I recall the period during 2008-2009; although we went public in 2019, we experienced growth in our service revenue throughout that time. We did encounter a decline in equipment sales in 2009, but it rebounded quickly in 2010. This resilience is largely due to our highly diversified business and the critical nature of our services in our respective industries. As of now, we do not foresee any need to adjust our mid-term or long-term outlook, as the reasons for doing so are not evident at this time.

And you mentioned on your long-term accelerants, in the 8-K you were talking about the development agreement to bring your technology into smartphones. I know you can say a lot about that, but any thoughts about timeframe we should be thinking about that? And we do not have enough time to get all through the 8-K and the extra language there that we should be particularly looking for?

Well, you're right, there's not much more we can say about that, which I'm sure is a little frustrating, but certainly we thought it was important to show some progress that we're making in that area. Obviously, an important strategic relationship and excited about the potential there, but the timing really is not something I can speak to. I think you’ll just have to wait until products are introduced. Mainly in some ways, we can talk about it, because it's not really that much within our control at this point. We have some work to do ourselves, but it's really up to our partner and others to execute on that.

And, obviously, some big news in satellite over the last two days was LEO operators' start-up OneWeb now officially announced the merger with GEO operator Eutelsat, any thoughts about what that says for the industry or anything that it means for Iridium?

I don’t believe it has significant implications for Iridium. It highlights the competitive dynamics in the commodity broadband sector that we have previously discussed. This area is somewhat peripheral to our core business. There is substantial competition and concern regarding future market conditions. We have observed a realignment among partners like Inmarsat and ViaSat, and it seems there may be ongoing consolidation within that market segment. I think this situation reflects competition and other related factors more than it does orbital dynamics, but that’s better addressed by others in the industry rather than us.

Okay. Thanks, guys. Stay well.

Thanks, Ric.

Thanks, Ric.

The next question will come from Landon Park with Morgan Stanley. You may now go ahead.

Thank you for taking my questions. Good morning, everyone. I would like to ask one more question regarding the smartphone announcement. Can you provide any details about the type of company you are partnering with on this agreement? Looking ahead five to ten years, do you believe this could become your largest source of revenue if the technology proves successful? Additionally, how confident are you in your ability to successfully integrate your technology into smartphones?

That was a good question, Landon. I'm not sure I can provide much information about either of those inquiries, and I apologize for that. We've discussed this opportunity a bit over the past few quarters. This is a positive milestone, but it's not conclusive, and we don't have a specific way to express what it means, when it means, or who it involves at this time. However, there are over 1 billion new smartphones introduced each year, with around 7 billion smartphones expected in the coming years. Clearly, connecting to these devices is something that others have suggested we will pursue. I believe it's going to be a significant market for connecting to devices like smartphones, and I wouldn’t limit it just to smartphones. We’re considering various consumer devices that individuals may own. We believe this aligns with our vision and our network is well-equipped to handle it. What we've done over the past 23 years has set us up for this market, and while I don't want to comment on the market size, we certainly don’t view it as insignificant.

Great. I appreciate that. And can you speak at all to the timeline that we should be looking for? I guess, the 8-K references from our agreement by the end of the year, is that sort of the next milestone we should be looking at?

We do need to finalize a service provider agreement, and the development agreement is dependent on that. As for when this will impact our business, that is in the future and not within our control. I don't want to set specific expectations, which I understand can be frustrating and may not aid your models, but we needed to announce that we are taking clear steps forward.

Understood. And then just last one on the settlement. How should we think about the capacity in the next network in terms of, if you do end uploading on a lot more sort of low usage subs here and how should we think about what does the capacity of your network really allow for over the next decade? And then just on a separate item, I'd love for you to opine just on the area on investment and how you're thinking about the TAM there and the type of value, you think you can create out of your holdings?

Our network is designed for highly efficient forward communications, which is crucial for IoT, a key growth area for us. We have significant capacity that has yet to be fully utilized, as our network is very effective for managing more devices. This will change the model of subscriber counts on our network, shifting the focus to the volume of messages and data transmissions, which our network can support effectively. Regarding Aireon, we believe their addressable market is expanding, particularly in air traffic management. As air travel returns to pre-pandemic levels, their revenue is growing alongside the increase in subscribers. We are particularly interested in how they are monetizing their dataset in commercial data services, having achieved several successes and developed new products. With our investment, they can enhance their offerings and explore new opportunities with that dataset. While I can't provide specific numbers, we have previously discussed the surveillance market and noted other competitors trying to enter, but they lack our unique dataset. They may project high market potential, but it's still early, and we believe there's substantial growth ahead. This is why we decided to increase our investment, as we anticipate it will pay off over the next few years.

Just in terms of size, Aireon has estimated their TAM to be $750 million a year. They’ve said that for some time and we've said that we expect our dividends from Aireon to exceed what we get out of them from hosting, so we get $37 million in hosting and data out of Aireon. And so we expected dividends to eventually be greater than that. So we're excited by this opportunity.

I would say that $750 million was an estimate for the pre-commercial data services market, but it's difficult to determine exactly how much that contributes in this situation.

And on the dividends, when should we expect those to start flowing?

We said eventually we have.

Fair enough. The questions.

Our next question will come from Walter Piecyk with LightShed. You may now go ahead.

Thanks. So what is the process for, I guess, how a technology gets enabled in smartphones? Meaning that, does the ultimate demand have to come from the device maker who drives it, whether the agreements with the device maker and some of our component guy or whatever it is, like, how does that typically manifest itself? Because I wouldn't imagine that if it's not the device maker that someone else would expend development dollars unless they knew that at the end of the day there was going to be a device maker that would actually want to put it in their phone.

Yes, I appreciate the question, Walt. It's a good one, but I'm unable to provide details at this time. This really goes beyond what we can say today. However, I agree that we wouldn't enter into agreements unless everyone recognized it as a significant opportunity for the future.

Thanks. So why does someone need a service provider agreement, because if I'm thinking about my AT&T phone, then I have got a soft SIM I can be using AT&T in my terrestrial network, I go to Utah, whatever, and I can just flip to a soft SIM, that's another service provider. So why is there a need in this case for a service provider agreement?

Yes. So I'm not going to go into the business model that we are anticipating for this, but we are not the service provider. So any time we provide service through others there has to be sort of an agreement on how it would be priced and how it would be delivered and that sort of thing. So it’s more of our agreement with them about how it would be delivered.

I understand your point, but a device manufacturer could simply promote their phone and claim it works in more locations even when it roams off the user's current cellular provider. So I'm unclear about the necessity of having a service provider in that scenario.

Sure. We need a service provider agreement and so that's why we're negotiating it.

Okay. Just last question. And the share repurchase, it was down, obviously, given the quarterly results and this announcement, is the reason you didn't buy as much stock back this quarter because you knew this announcement was coming or were there other factors that went into this share repurchase activity this quarter?

I don't think we're going to go into exactly why and how we do that, obviously, that's sort of disclosure, but I think that's probably all we can say about that.

The reason wasn't that we wanted to purchase the stock at the levels we saw in June, but that wasn't possible.

Why wasn't it feasible though?

We're not going to go into that.

Okay. Thank you.

Our next question will come from Hamed Khorsand with BWS Financial. You may now go ahead.

Good morning. I just wanted to see how comfortable are you with channel inventory? How are you managing and making sure partners aren't pre-ordering too much ahead of expected installs?

Yes, that has been an ongoing process that our sales and marketing team has carried out in collaboration with our nearly 500 partners. There has clearly been significant demand for us, much higher than we anticipated at the start of the year. We have been on allocations for many of our components and devices for about the last 12 months. While we are making progress, we needed to engage with each partner individually to understand their own supply issues. It has been a combination of art and science, leading to numerous discussions to ensure that we allocate our devices effectively where they will make the most impact. I'm pleased with how things have gone, as our partners have indicated that the process has been open, transparent, and productive. We are catching up in some areas, though still lagging in others, but we performed even better in the second quarter. I believe we will continue to catch up throughout the year, provided we don't experience any significant supply chain disruptions. Overall, our supply chain team has done an exceptional job managing a complex environment to sustain equipment-level growth amid unprecedented demand while addressing various challenges that arise in the current environment.

Okay. And then my other question was on the personal devices. Is this predominantly still a North America sales process? Are you seeing partners come on board from different geographies?

It has never been solely focused on North America. While North America has been a strong market for us, we also have partners in Europe, Asia, and really all around the globe. I recently attended a partner conference in Europe, where I saw a robust and growing group of partners in Europe and the Middle East, and we have been expanding significantly in Asia as well. I can't recall the exact number we added last year in Asia, but it spans the entire region. So, it's clear that our partner base is a global phenomenon.

Next question will come from Greg Burns with Sidoti & Co. You may now go ahead.

Good morning. The hosted and data payload increased slightly this quarter, likely due to growth from Certus. Are there new growth opportunities emerging for Certus? Should we anticipate continued growth in that line item? Thank you.

Yes, Greg. We expect that to grow over time.

Okay. Regarding the SDA contract, what is the timing for when we should expect to see revenue from that reflected in the profit and loss statement? It seems like the revenue realization won't be straightforward.

It will be more pronounced in the first two years, followed by a decline over the final five years. There is a significant effort required initially, but it will transition to maintenance in the later five years.

And revenues should start flowing this quarter, like in the third quarter?

Yes.

Okay. And then in terms of the timing on Certus-100, it sounds like you're making progress there, bringing some new applications to market. When should we expect to see revenue start picking up from those new applications?

You're going to see that flow into both voice and data lines, as well as the IoT line depending on the applications. There are many new products being announced regularly. For instance, Oshkosh is launching this week, and a couple of our partners are releasing new products for the general aviation market that utilize Certus-100 technology. Expect to see some consumer devices in the upcoming quarters that will leverage that technology for both voice and high-speed data services. The UAV market has several partners exploring opportunities there, although it depends on their individual market growth. There's a lot of excitement around it. We're seeing surveillance devices and various applications, with significant interest from government sectors for state and military applications. It's a wide range. We're already starting to see the first revenues, and I anticipate this will grow over time. It often requires additional development for a technology that is new. We have observed this with other technologies, such as push-to-talk, which tend to grow slowly in the first year or two before gaining momentum and taking off as solutions and sales channels become established. I expect this will follow a similar trajectory.

Okay. Okay, great. Thank you.

Our next question will come from Caleb Henry with Quilty Analytics. You may now go ahead.

Thank you. Hi guys. I just had a couple of questions about the Relativity launch deal. I think it's been a couple of years since it was announced. So you said the launches there happening in 2023. How many missions do you expect? I think this is all their smaller rocket. I think you said Terrain 1, and then the original announcement was for up to six and you said on the call this will be five satellites that are launching. So I'm just curious what the logic was behind launching five and keeping one ground spare? Thanks.

Hi, Caleb. Yes, I think you're assuming a little too much there. We do have an arrangement with Relativity for future launches that have been prescribed, but the vehicle that we were talking about there can only launch really one of our satellites. We haven't named the launch provider for our launch in '23, but you can probably figure out, it's five satellites instead of one and that wouldn't necessarily fit the current profile for the launch provider you just suggested.

Okay, so the spare launches are not going to involve Relativity then?

Well, I said we haven't named the launch provider, but I've given you a lot of information to figure that out. Just haven't decided the name of the launch provider yet.

Okay. And I guess just one follow-up and then I'll let it go. Do you still have an arrangement with Relativity to launch spares, or has that been replaced by this future agreement?

We still have an agreement in place. It hasn't been terminated; it allows us to launch satellites in the future at our discretion. However, it did not stipulate a specific number of satellites we must launch. After this upcoming launch, we will still have one spare left, so we'll see how it goes.

Okay, thanks.

Okay.

Our next question will come from Louie DiPalma with William Blair. You may now go ahead.

Good morning, Matt, Tom and Ken, what an action-packed earnings call.

Thank you, Louie. I agree.

First, I just wanted to commend Tom for hedging the floating rate debt. And then I cover another company, it was downgraded recently because of floating rate debt exposure. So that was very savvy, Tom and your team.

I have to pay him more if he keeps that up, Louie.

Second, related to the smartphone announcement and the seven or eight questions that followed. Are you looking to be exclusive with the smartphone OEM or are you going to be open to several smartphone OEMs?

A great question and one I can't really answer at this time. But, obviously, our goal long term is to address the market as broadly as we can.

It sounds good. And in response to, I think, Ric's question, you mentioned other consumer devices potentially as part of the agreement. Just broadly, is it feasible for the Iridium technology to be embedded in a device as small as a smartwatch?

Yes. First of all, this development agreement only includes smartphones, as stated in the 8-K, but it doesn't prevent us from exploring other applications and devices. Although I can't provide a definite answer since we haven't specifically tested it yet, we anticipate that with the appropriate antenna and the integration we've observed in smartwatches, our technology should be capable of functioning in small devices. If it's equipped with a smart chip and the necessary components, a low data rate connection with our system is achievable. Additionally, I won't need to establish a new network to support this.

Right. And in terms of the term service provider agreement, you already have service provider agreements with Garmin, ZOLEO and other partners such that they pay you either a wholesale rate per message, per byte or per month, and then the service provider actually charges their end customers whatever economic arrangement they've set, right?

Yeah, that's right. I mean, obviously, as a wholesale supplier we don't really develop retail prices and we don't deliver the market to end consumers. So we always go to market through what we call our service provider agreement. And doing so in this kind of area would require the same thing. So it's an arrangement by which how is it that we would price, what it is that we would be delivering and on what terms and that's just a natural evolution we do it all the time; we just have to do it in this case as well.

Thanks, Matt, Tom and Ken.

Okay. Thanks, Louie.

Thanks, Louie.

Our last question will come from Chris Quilty with Quilty Analytics. You may now go ahead.

Thanks, Matt. Can you give us the first letter of the name?

Well, that's an appropriate question anyway, Chris, thank you.

Second letter, you just didn't think someone could come up with an original way to ask the question, right?

You can do better.

I actually I did have a legitimate technology question. So one of the reasons you've been so successful integrating with Garmin and GPS devices is because the location of your spectrum and its adjacency to GPS signals and the ability to integrate with internal antennas. And so from a technical perspective, as you look at smartphones, do you have the same ability in sort of the existing hardware, their chipsets or antennas, which are kind of the two critical components for you to work with another device? Or does a device manufacturer, more likely than not, have to do some significant or even minor hardware adjustments to the existing?

Yeah, it goes into a little bit too much detail. Chris, it was a good try though.

But it’s a technical question.

It is a technical question. I would just say that this is something I've been discussing for the last three quarters or so. There's been a lot of work done, and we feel confident that a usable connection can be established between smartphones and low earth orbiting satellites. This shouldn't be a complete surprise, as many others are also interested in this market. I truly believe this will not be exclusive to Iridium; others will want to enter this market as well. Given the vast potential, if we can approach it in multiple ways, there are numerous opportunities to create new networks to support this. While I'm not certain if that will happen, some expect to explore or utilize existing technologies. What I feel optimistic about is having a truly global network that is adaptable, a system that has demonstrated its flexibility over many years. The underlying physics of this are quite favorable right now. Although it won't be a stock device, I believe that any necessary changes will be manageable and appear very promising.

So I'll just add a couple of real quick questions. Commercial broadband ARPUs have been marching up, but you have some mix change in the few products. Tom, should we generally expect ARPU, given your expectation of product shipments to kind of trend up or flat or down just generically?

The Certus-100 will be integrated into commercial voice and data, which should positively impact ARPUs due to increased data usage. We believe that in broadband, the introduction of additional Certus units and the replacement of the legacy product, OpenPort, will also enhance those ARPUs.

There are many developments in the broadband sector, with applications that could lead to higher average revenue per user. In areas like commercial aviation, we see lower-priced products such as Certus-200 entering markets that may not have previously considered higher ARPUs. There is a wide range of ARPU potential. As we shift from traditional OpenPort lower speeds to higher speeds, we typically see increased usage, and we anticipate continued growth in this area. However, it's still early to predict exactly where ARPUs will land, but the trends we're observing are promising.

And I know this doesn't really impact revenues, but your subs, your government subs have been kind of trending down. And you mentioned the Space Force transition, do you see a resolution in that and that being a potential driver for equipment sales looking out over the next year?

We have had many positive discussions and acknowledge that it is a recognized issue that is being addressed. The situation is complex, particularly within the U.S. government context. However, they are eager to leverage their current contract more effectively and need to make some internal changes to ensure that the incentives align appropriately. They understand that the demand is not decreasing; there are numerous applications and significant programs anticipated that could lead to considerable volume, depending on their success and pace of implementation. We remain very optimistic about our long-term relationship through this contract and the potential for another contract in the future, focusing on our core business and continued growth in broadband and other applications. A major demonstration is scheduled to occur in Asia this summer, and I am looking forward to showcasing the applications, which comprise a wide range of possibilities that could benefit them and other allies. It is still a long-term strategic relationship; even though subscriber numbers aren’t increasing, we have the right contractual framework in place that minimizes any impact on revenue.

And are you still discussing a separate service contract and is that something we should expect in the near to medium term?

The service will be delivered separately through a number of partners we've signed up, which is around six, somewhere between five and seven. These partners are pursuing various broadband applications. Some of these applications are already being processed through our commercial gateway and the government gateway, which will increasingly handle the applications that are priced per terminal. Therefore, we anticipate growth in government broadband revenues over the coming years, contributing to our overall broadband revenues. However, there won't be a specific contract with the government directly; any agreements will go through those designated government service partners.

Got it. So currently, all international business is processed through your commercial line since that's where your partners operate. You're indicating that any Certus business, at least for now, would similarly flow through the commercial line along with those partners?

Yes, that's correct. It goes through our commercial broadband revenue line.

And I do have one other clarification question on the handset thing in the FD disclosure. Tom had indicated that there is some reimbursement for expenses. So are we to assume that on a P&L basis it sort of looks like revenue goes up and R&D goes up and they offset?

So that's going to be in engineering and support revenues and engineering and support costs. Those are the lines that will be affected by what the 8-K references.

Understand. Okay, great. Appreciate the color and congrats on a great quarter.

Thanks, Chris. Appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, it has been an action-packed quarter. I appreciate that. So it's great to be in a good environment. We really are enjoying some strong demand and love the opportunities we're working on and we'll keep you updated on the progress of those accelerators as we've described them as. And I appreciate you being on the call. See you in the third quarter. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.