Iridium Communications Inc. Q1 FY2023 Earnings Call

Good day, and welcome to the Iridium Communications First Quarter 2023 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 Kenneth Levy, Vice President, Investor Relations. Please go ahead.

Thanks, Stacy. Good morning, and welcome to Iridium's first quarter 2023 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 first 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 reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken. Good morning, everyone. Well, as you can see, we're off to a great start in 2023. We're continuing to experience the momentum that's been building over the last few years as we take full advantage of our second-generation network. Subscriber growth, service revenues, equipment, and engineering services all remain strong; we're really hitting on all cylinders, and this continues to generate meaningful growth in our pro forma free cash flow, as well as in value for our partners and user ecosystem. All this reinforces our expectations for another strong year of sales and growth in partnerships and subscribers. On a personal front, it's been a busy few months since our last call, with increased travel for industry events, investor conferences, and getting out again to interact with new and existing partners. It's been particularly satisfying to see Iridium's profile rise at these conferences, as we are directly in the middle of conversations on key topics shaping the satellite industry, like direct-to-satellite services for smartphones, the rise of LEO networks, and particularly for governments of all kinds, the proliferation of services, and the increased penetration of satellite connectivity in maritime, aviation, and other industry segments. It also made me happy to hear so many established satellite operators acknowledge what Iridium has known for decades; there are natural advantages to operating in low Earth orbit, and the ability to connect small mobile assets is an important distinction for us with global utility. For those who have followed Iridium's story over the last five or six years, this is likely not a revelation. We have been focused on IoT and commercial applications that leverage our very unique network, and the emerging opportunities on which the satellite sector is now focused are a great fit with Iridium's constellation architecture and operational strength. In fact, this is what our network was built for. A lot of industry focus has been on the new direct-to-device market; Iridium continues to lead the way to connect people wherever they are, and to the personal devices that they use the most. For example, Iridium has more than three-quarters of a million ruggedized personal satellite communicators on our network, and that number is expected to continue to grow significantly in 2023. These consumer-oriented devices allow users to navigate routes, share location, send and receive texts, and even secure emergency services via SOS. The small, lightweight devices have become a mainstay for outdoor enthusiasts, remote workers, government users, and safety response organizations in recent years, allowing Iridium to drive a compound annual revenue growth of more than 45% from this growing customer segment since 2017. ARPUs from these users are relatively low today, but we expect some to adopt our faster service and integrate IoT technologies to drive additional utility and higher ARPUs in our commercial IoT business line in 2024 and beyond. We've also had a great reception for our new Iridium Go Exec that we introduced in the first quarter, with over 4,000 orders booked already. That device expands our Iridium Go line and satellite hotspot devices to connect with smartphones and tablets to provide a richer data connection when on the move and in remote environments. Best of all, our partners are seeing strong market interest, which underscores longer-term demand for the Iridium Go line of services. Success here should also drive higher ARPUs for voice and data business in the coming years. We believe the consumer-oriented satellite segment represents a meaningful growth opportunity for Iridium, confirmed by the growing number of devices on our network. The value of providing highly mobile data services on a global basis is indisputable, and we expect to add to this growth by supporting new satellite direct-to-device capabilities that are being introduced later this year. We're excited about our new partnership with Qualcomm Technologies announced in the first quarter, as well as the introduction of their Snapdragon satellite processor incorporating Iridium technology. This chip will integrate Iridium two-way messaging and SOS services into next-generation Android smartphones. A half dozen smartphone OEMs have already announced they will include Snapdragon satellite in their phones, and we are working with Qualcomm to further expand this list. We're excited about the application of the Iridium network for direct-to-device and the potential upside to our growth projections it will create. We also see additional opportunities in the automotive industry as well as for applications in the government sector and expect to eventually be relevant in other mainstream consumer devices like computers and tablets. Satellite direct-to-device is an example of a technology convergence going on today between satellites and the traditional terrestrial world. But interest appears to be growing, and I think the opportunities for satellite solutions are endless. We have already seen a lot of convergence within industrial IoT, with many of our partners' satellite IoT applications deployed with cellular connections too. But we expect we'll see even more of this in the future. We believe Iridium's unique constellation is an ideal platform for this convergence, and best of all, the sector opportunities are incremental to our core business growth. But they're not a material driver of the strong service revenue growth we're forecasting today. In our other business areas like maritime broadband, aviation, and land mobile, we continue to benefit from strong demand and strategic opportunities. You can see proof of this in our first quarter performance. We continue to take share in the maritime broadband space, where our revenue grew 17% year-over-year in the first quarter, and we're receiving positive channel feedback that keeps us optimistic about the future. We're hearing from our maritime partners that Starlink is disrupting the traditional VSAT market, and while they aren't making much margin on this product, most of them deploy Starlink when requested by their customers. While interesting, this trend has little effect right now on our market expectations. As with other VSAT solutions, these partners are deploying Iridium as a companion service with Starlink and, of course, are also deploying this for their GMDSS requirements, as well as vessel monitoring solutions on fishing vessels, anti-piracy, and Citadel solutions for cruise safety and other diverse applications in maritime. We estimate that an Iridium terminal of some kind is installed on four out of five commercial class vessels at sea today, and we calculate that Iridium is now installed in some kind of solution on about 250,000 ships of all kinds around the world, and that number is still growing. We also feel very good about the opportunities we're seeing in the aviation market, both in fixed-wing and rotorcraft. We are already installed on nearly 70,000 aircraft of all types today, including commercial, business aircraft, helicopters, as well as other general aviation aircraft. And that doesn't count all the pilots who take us along as a portable solution for their safety or to take with them when they land. In the aviation market, we're starting to see a transition or expansion from our traditional narrowband voice safety data and IoT services to Iridium Certus mid-band for faster speeds and new services, and we expect to also see Iridium service broadband start to deploy on larger aircraft now that the first two antenna systems from partners have been certified. We're expecting additional certifications in 2023 of other partners' antennas, as well as the first supplemental type certificates where the FAA approves the terminals onto specific aircraft types. We've been waiting for this kind of progress for a long time, and look forward to the tailwind it can provide for our aviation revenues, which should build into 2024 and beyond. Of course, I also want to highlight our strong land mobile performance. You can see the ARPU was up year-over-year, and demand trends continue for equipment services as we implemented some targeted pricing actions after holding the access and airtime pricing stable for several years. Subscriber growth is still strong. They're not quite at the level of 2022, which was an unusual year with the incremental demand we experienced from the Ukrainian conflict, as well as the handset shortages experienced by our competitors. We feel good about the durability of our voice business. And now believe that the continued growth for push-to-talk and Iridium Go Exec services will help to generate high single-digit growth on average for at least the next few years. Overall, our business environment continues to be robust, and demand for all of our primary business lines remains strong. As you can see, we logged another record quarter for equipment sales, with orders for handheld devices remaining above trend. Based on feedback from our partners, the supply chain fulfillment issues experienced by our competitors on handsets have continued into 2023. We still have our own supply chain issues affecting delivery intervals, but we see them mostly abating by midyear, allowing us to build back our inventory to traditional levels. You'll also note that our engineering and service revenues are up substantially in 2023 on the growing work we're doing for the Space Development Agency, and building the ground components of their next-generation network. That's a strategic effort for us, and it's going very well, even expanding beyond the initial award into new work. As we've said before, margins around this business are low compared to our service revenues. But along with other work for commercial and government customers, it's an important enhancement to our relationships and will further our capabilities. Tom will provide additional color on our first quarter results, but I would like to acknowledge the important historical milestone we made on March 30 with a payment of our first-ever dividend. We believe paying a dividend is a smart way to generate returns for shareholders, in addition to our ongoing share repurchase program, which is also very active in the first quarter. Together, these shareholder-friendly programs underscore the confidence that we have in our business moving forward, and the strength of our enterprise to generate free cash flow. I hope you've had the chance to review our latest environmental, social, and governance report which was published in March. In it, we highlight our priorities for ESG and speak to our corporate values and culture. I believe our activity in this area demonstrates our commitment to being a good corporate steward on what I would call real ESG matters without sacrificing on business performance or business opportunities. In fact, our support for the communities in which we operate enhances our position with our employees and new hires, and has been welcomed by our partner ecosystem as we demonstrate values that align with their business priorities and interests. You'll notice in this year's report some enhancements to our disclosures, which we hope will allow investors to better appreciate with more detail the factors around our social stewardship priorities and impact. So as we celebrate this year, the 25th anniversary of Iridium's initial service launched in 1998, we continue to believe that Iridium is positioned better than any other time in our history, both for the evolving opportunities in the satellite industry and with our ability to fund growth and reward shareholders. 2023 will be another great year for us with new product rollouts, and more exciting announcements. I look forward to keeping you abreast of our progress. With that, I'll turn it over to Tom for a review of our financials.

Thanks, Matt. Good morning, everyone. I'd like to start my remarks by summarizing our key financial metrics in the first quarter and providing some color on the trends we're seeing in our major business lines. Then, I'll recap the 2023 guidance which we reaffirmed this morning and close with a review of our liquidity position and capital structure. Iridium continued to execute well, generating total revenue of $205.3 million in the first quarter, up 22% from the prior year’s quarter. Operational EBITDA was $111.9 million in the first quarter. This was an 8% increase from last year's quarter and driven by increasing engineering and support revenue, growth in service revenue, and another record quarter of equipment sales. On the commercial side of our business, service revenue was up 13% this quarter to $112.8 million. This increase was broad-based and reflected continued strength in voice, IoT, and broadband, as Matt mentioned. Voice and data revenue rose 17% from last year's comparable quarter to $52.4 million. The increase was largely driven by higher ARPU, predicated by the targeted price changes adopted in the first quarter. We also benefited from strong growth in our push-to-talk and Iridium Go services. As Matt noted, the increase in access charges was our first price action in commercial voice since 2018, and we expect to be durable, keeping ARPUs in the mid-40s and providing a growth tailwind to voice and data this year. To date, we've been pleased with how the new pricing has been received by the market. It has meaningfully affected net subscriber additions, demonstrating the value that end-users see in our services. Commercial IoT revenue totaled $32 million in the first quarter, up 12% from the prior year quarter. We continue to see ongoing demand for personal satellite communications, an area in which our partners continue to invest in their retail-focused products. While these subscribers generate lower ARPU than our traditional industrial IoT users, they remain a very attractive contributor to our service revenue growth in light of the minimal comparative network resources they consume. As a result, IoT ARPU was $7.22 this quarter compared to $7.78 in the prior year period. We believe this consumer-oriented sector will remain a strong driver of revenue and subscribers and believe that the integration of new Iridium service technologies into these products will increase data usage and potentially ARPU too. Revenue from commercial broadband grew 17% from the year-ago period to $13.4 million. Supporting this growth was an increase in ARPU driven by a mix shift among maritime subscribers to Iridium service from our legacy Iridium Open Connect service, as well as market share gains driven by Iridium Certus 200 and 700 services. Broadband remains an important component of our long-term growth, and we continue to expect it will drive double-digit revenue and subscriber growth in 2023. During the quarter, we added 52,000 net new commercial subscribers, predominantly in IoT. As a result, commercial IoT data subscribers now represent 79% of billable commercial subscribers, up from 76% in the year-ago period. We estimate the consumer-oriented plans now account for about half or 1.5 million commercial IoT users. Posting other data services revenue was $15 million this quarter in line with last year's comparable quarter. Government service revenue was also stable in the first quarter at $26.5 million, reflecting the terms of our EMSS contract with the U.S. government. Subscriber equipment, which has remained at record levels over the last year, grew 24% in the first quarter as demand for hardware supporting our commercial business lines remains robust. Equipment sales registered $33.7 million in the first quarter, compared to $27.3 million in the prior year period. Engineering and support revenue was $24.2 million in the first quarter compared to $8.4 million in the prior year period. The rise in activity reflects new government work for the Space Development Agency, a contract that we won last year, as well as incremental development revenue from our commercial relationships. While we continue to forecast year-over-year growth of engineering revenue in 2023, it will fluctuate from quarter to quarter based upon execution and milestone achievements. Our first quarter results as well as the trends we are seeing into April allow us to affirm our full-year guidance on service revenue and EBITDA. In supporting this outlook, I want to highlight a few items that may be relevant to your models and a cadence of Iridium growth this year. We remain comfortable with our outlook for service revenue growth between 9% and 11% by 2023, in part due to continued strong net activations and revenue growth across all of our commercial business lines. As I mentioned earlier, the price actions for commercial voice will serve as a tailwind this year. Given the positive effect of this higher ARPU, and considering other favorable trends in this business, we now expect that annual growth in commercial voice and data will average in the high single digits between 2023 and 2025. Revenue from our EMSS contract with the U.S. government will remain steady at $26.5 million per quarter in 2023. There is no increase in the contractual fee schedule this year. The next step up will occur in 2024. Equipment sales set another record this quarter as demand for our satellite handsets in all our products remains elevated. Based upon current partner orders, we continue to believe that hardware sales in 2023 will be in line or even possibly exceed '22's record level. On the expense side of the ledger, we continue to forecast higher costs related to stock-based compensation and new employee hires as we upgrade and retool business systems. These dynamics resulted in a 48% increase in SG&A in the first quarter, which we expect to moderate in the balance of the year. You recall the SG&A grew over the course of 2022, with first-half expenses at $54.8 million and second-half expenses at $68.7 million. Accordingly, we expect the second half of 2023 to be much more in line with 2022 expenses and continue to forecast that full-year 2023 expenses will be up by about 20%. R&D will also run higher in 2023 as our team supports a number of new products coming to market. We feel very good about the broad-based growth we are seeing across our businesses and believe that the incremental expenses we will have in 2023 are appropriate and necessary as our business continues to grow. Taken together, these trends allow us to reiterate our forecasts for service revenue growth between 9% and 11% and operational EBITDA between $455 million and $465 million this year. Moving to our capital position. As of March 31, Iridium had a cash and cash equivalents balance of $126.6 million. Iridium's robust cash flow is one of the reasons that our board continues to support our share repurchase program and initiated a quarterly dividend program. As Matt noted, Iridium's board initiated a quarterly dividend in December 2022, and on March 30, we paid a dividend of $0.13 per share. Iridium's dividend program will allow for the return of approximately $65 million to common holders in 2023 and reflects our confidence in our business opportunities and strong free cash flow generation. In the first quarter of 2023, Iridium also purchased approximately 900,000 shares of common stock at an average price of $59.84 for a total of $53.1 million. Since the end of the quarter, we bought back an additional 500,000 shares for a total of $29.4 million, leaving us with $97.1 million of capacity outstanding on our share repurchase program. We will continue to execute on our buyback program, balancing our objective for deleveraging with a desire to maximize return on investment. In the first quarter, we also increased our investment in a satellite time and location service by $10 million as they raise additional capital to expand their commercial business. This satellite time and location service continues to have relevance to commercial partners and governments who seek a complement to GPS and other GNSS services, which are susceptible to interference and spoofing. This offering leverages Iridium's global constellations to protect critical national infrastructure and assured P&T solutions, and we remain very optimistic about their unique offering and business opportunities. Iridium's net leverage was 3.2 times EBITDA at the end of the first quarter. This was down from 3.5 times a year earlier, even when factoring in our share repurchase and dividend activity during the first quarter. Our long-term target for net leverage continues to be between 2.5 and 3.5 times EBITDA at the end of 2023, inclusive of quarterly dividends and giving effect to all outstanding share buybacks authorized by our board. Capital expenditures in the first quarter were $22.9 million, including one-time spending of approximately $11 million related to this year's planned launch of spare satellites. As we noted in our fourth-quarter call in February, we expect annual capital expenditures over the forecasted 10-year CapEx holiday period to average between $50 million and $60 million, excluding launch-related costs. 2023 capital expenditures should fall in line with this long-term forecast. Turning to our pro forma free cash flow. We use the midpoint of our 2023 EBITDA guidance and back off $75 million in net interest, approximately $75 million in CapEx for this year, and $14 million in working capital inclusive of the appropriate boosted payload adjustment. We're projecting pro forma free cash flow of almost $300 million. These metrics represent a conversion rate of EBITDA to free cash flow of 64% in 2023 and a yield of approximately 4%. A more detailed description of these cash flow metrics, along with the reconciliation to GAAP measures, is available in our supplemental presentation under events on our Investor Relations website. In closing, Iridium continues to benefit from a robust operating environment and strong demand for our equipment and services. We plan to return capital to our shareholders, fund new projects, make strategic investments, and are looking forward to the launch of five ground spares next month. We think this quarter is a good reflection of the Iridium game plan, generating strong operating results, returning capital to shareholders, and making strategic investments that position us for future growth. With that, I'll turn things back to the operator for the Q&A.

We will now begin the question-and-answer session. First question comes from Ric Prentiss with Raymond James. Please go ahead.

Thanks. Good morning, everyone.

Hey, Ric.

Hey. Obviously, a strong start to the year. I have a couple of questions. One of the bigger areas that people are trying to focus on is the direct-to-device opportunity. Can you help us understand? I know you've said there's not going to be much meaningful impact on the service revenue side this year from direct-to-device. But have we seen some direct-to-device already showing up? It seems like the engineering support levels that got reported might have already had some in there. So I'm just trying to gauge when you will break out kind of direct-to-device as a category and have we already seen some to date?

You look at our commercial engineering and support increase; it is principally related to the direct-to-device or Qualcomm relationship.

Okay, makes sense. And then how long should that development fee concept continue? Does it run for several more quarters of this year? Does it run into next year?

We'll see. We don't expect it currently, but we'll see. There's opportunities for additional but time will tell.

Okay, and then the royalties start kicking in back; will that go into that same line item, commercial engineering support?

The vast majority is going to be in service revenues. It's going to initially be in hosted payloads and then, when it gets big enough, we'll likely break it out.

So royalties would go into hosted payload and other and then maybe break it out. Okay. Obviously, a lot of people are watching IoT ARPUs as well. You call it out that you've seen, obviously, the mix change, but maybe service can help. How should we think about the current ARPUs in that personal communication area? Is that kind of mid-single digits? As we think of direct-to-device, it feels like that service may be priced a little bit underneath and given what that will bring to the market. Is that fair thinking?

Ric, the last part of your question—what is priced underneath the market?

So the current personal communication devices should we take that's kind of a mid-single digit ARPU, as we think of direct-to-device coming online; is that something that would be ARPU below kind of personal communication device ARPU?

Yes. It would be below. You're right, roughly in terms of what personal communications ARPUs are, maybe just slightly below mid-level, single digits, but yes, it would definitely be below that level.

Okay. That's it for me.

The volume is a lot higher, so that obviously was part of it.

Yes, exactly. Price times quantity could be a lot of quantities. Okay, and the last one for me. The pacing in the quarter of stock buyback ramped up significantly in March. It sounds like you've done a good bit in April. How should we think about how you look at that shareholder return equation and putting money to work on the stock buyback? What's the lever that says, 'Okay, now it's time to put more of the free cash flow production into the buybacks'?

So our algorithm is; we want to return to where we think, appropriate return to where we think intrinsic value is. And we execute on the buybacks when we think the return is appropriate.

Okay. Great. Appreciate all the answers. Everyone do well.

Okay, thanks, Ric.

The next question comes from Landon Park with Morgan Stanley. Please go ahead.

Good morning, everyone. Thanks for taking the questions. I want to dig in on the voice and data segment that's obviously been a pretty surprising source of upside over the last year or two here. Can you maybe disaggregate that high single-digit growth target that you're laying out and maybe just delve a little bit more into what gives you the confidence that the current trends can continue out a couple of years, even if we potentially have to lap or the comp against this Ukraine benefit reversing at some point? And just on that, maybe if you could size what you think that Ukraine benefit has been, and how you're thinking about that moving forward?

Well, maybe Tom can talk to the Ukrainian benefit, which I think in the biggest scheme is kind of small overall. But we have for the last several years seen strong demand for our handsets. There is a competitive dynamic there. It appears we’ve definitely sort of outlasted everyone, and our services seem to be appreciated more than anyone else's and have a very strong position in the market that we've been appreciating for a while. We clearly have, as you can see, we’ve finally sort of announced a price increase this year; it’s a price increase, by the way we’ve been planning for a long time. I know there were a number of questions in previous calls over our ability to do that. And we certainly felt it was an appropriate time after not having done that for a good four or five years. Markets seem to not be affected very much in terms of that. They still— the demand for our devices, continues to remain high, and our partners have told us that they see long-term demand and are almost working in a very competitive way with us versus anybody else at this point. So all those things, in addition to new technology, things like Go Exec, and things like push-to-talk—all those are now giving us kind of the visibility for the next couple of years in which Tom described through '25 high single-digit growth rate. Yes, that’s a big difference; that’s on the average of course, but that is a big difference from sort of where we thought five to ten years ago; we thought this was clearly a strong, steady low single-digit kind of grower, but I think that the market dynamics and demand and technology have all given us a lot of confidence now that is not going to be that for the next couple of years.

I would like to emphasize Matt's comments. In 2023, based on the ARPU I've mentioned, we expect to see solid double-digit growth. The guidance is meant to help you consider 2024 and 2025. When you combine everything, we anticipate an average annual growth rate in the high single digits, which reflects all the factors Matt discussed. We believe this segment is stronger than it has been in the last decade. After reviewing last year's results, we see that Go and push-to-talk continue to be advantageous, altering the nature of this segment. While there are competitive factors that are difficult to forecast, what we are seeing in our handset sales provides us with the confidence to project high single-digit growth on average from 2023 to 2025.

And by the way, I also would say that we've already seen the reversal is sort of the Ukrainian situation. I mean, that was a strong bump in the first quarter of last year. We're not seeing that this year. And so all of our guidance is really relevant to sort of a reversal of that already.

Well, you're laughing has it come out of the base I guess or was more of the quiet.

Yes, I wouldn't say it come out of the base. We didn't see the ads. So if you look at commercial voice and data net ads in the first quarter, look at that for the past five years; last year, first quarter jumped off the page. So clearly we got a bump in ads last year and I thought that's come out but you didn't get the activation occurred and are still being used but there's no bump of activations.

So just to the extent that it could reverse, actually reverse out at some point, are you able to talk about them and just on the ARPU, I just wanted to, I might have missed your comment. Can you clarify the size of the pricing action?

Yes. So we said that ARPUs are going to be in the mid-40s. So that’s what we expect that we've been running. And that's durable notwithstanding Ukrainian reversal.

Okay. And the magnitude of what that would look like reversing out or?

The number of devices in Ukraine increments, that was all turned off immediately would be, I mean, less than a percent of our base, probably less than a percentage of our base. So that's not really driving our results at all at this point.

Understand. That's very helpful. And then just two more, if I could. Your primary LEO competitor has had an outage recently in the APAC region. You talked about the value of LEO and the proliferated LEO design up top. Can you talk about if you think there might be some sort of competitive impact of that outage? And I don't know if you've heard anything; it's obviously a fluid situation. Anything you can comment there?

We haven't heard anything more than anyone else publicly has. Obviously, they've made public statements about that. And there has been probably a focus in the Asia-Pacific region after that happened a couple of times; they're on our services, and it may have a positive impact going forward. I think it highlights the difference in our architectures. We haven't had any kind of satellite outages. But if we did satellites move around the planet in LEO so quickly, it would never have this kind of impact on any region that would have literally minutes at any one point on Earth during the day. So we obviously have a lot of spare satellites and more coming even next month. So I think our brand is resiliency and quality and a high level of service and we'll continue to focus on that. And perhaps all the benefits there.

Right. Just one last one on direct to device. The royalty payments associated with the future unit sales, should we expect that to be something below like $0.50 per unit? Are you able to provide any color there in terms of what that will look like on a per-unit basis?

Yes. We really aren't exposing our contracts at this point yet. We don't even have the first units in service; that will happen in the coming months. Now, when I think sometime in the future, you'll hear more about that. But we're really trying to give you a range or something that would be really inappropriate at this time. That would just be too much information, really at this point.

Understood. Thanks for taking all the questions.

Yes. Thanks, Landon.

The next question comes from Hamed Khorsand with BWS Financial. Please go ahead.

Good morning. Could you first talk about your comments about the different vertical tangents that you're looking at in auto in particular? Is that happening now, or is that just conversation? Where does that stand from a revenue opportunity for you?

We're working on the details and planning and discussions. Given that the technology work is largely completed at this point because the integration has been in and tested and is being integrated with smartphones, it wouldn't take long, essentially, to implement the technology into automotive. What's different about automotive, though, is those design cycles for cars are quite long. And so I don't know how long it would take for Snapdragon satellite to enter into the automotive space, but I doubt that it will impact revenues nearly as fast as the smartphone industry just based on how that kind of design work happens. So I think that's a few years away. We're just giving the highlights of the sort of upside to this technology integration. And the fact that we have selected such a strong and strategic partner here that we're working with, who has broad-based capabilities in other industries as well.

Okay, and then my other question was on the IoT side. The number of additions this quarter was I think approximately 38,000, which seems like it's slowing down. Is that purely because of consumer spending changes or is that partners delaying new product introductions?

Yes. Just seasonality. The first quarter is slower; first and fourth quarters are slower, second and third are stronger.

And I don't think your numbers are right. I think it's more like net billable subscriber additions were 53,000 in '23 versus 50,000 last year. So it's actually up a bit. But each quarter is hard to validate within a few thousand exactly how many they'll be. We have so many different partners and so many different segments. I don't think you can read much into first-quarter results either way.

Okay, thank you.

Yes. Thanks, Hamed.

The next question comes from Louie DiPalma with William Blair. Please go ahead.

Matt, Tom, and Ken. Good morning.

Good morning, Louie.

For Matt and Tom, at the Barcelona conference, Qualcomm announced that it will make Snapdragon satellite available for, I believe, mid-tier Snapdragon four devices, in addition to the previously announced Snapdragon eight high-end premium devices. Last quarter, you provided a TAM estimate of around 80 million to 100 million phones a year. And I was wondering how is that impacted with the potential inclusion of Snapdragon 4 devices that may incorporate the satellite feature?

It will, I mean, our view of from what we understand is there are a lot more of those mid-tier Snapdragon devices being shipped to satellite phone manufacturers than there are high-end ones that we've already sort of described. So the opportunity is quite large. It will just depend on how many phone manufacturers decide to adopt the technology. Our hope would be high because it's not incrementally a lot to necessarily do that. But I think most of the focus really on 'late '23 and '24 introductions will be at the high end. But I do see long-term that that will expand.

Great. Thanks, Matt. And are you able to say if the royalty rate for the mid-tier Snapdragon 4 devices is lower than the royalty rate for the premium Snapdragon 8 devices? Or is that still in negotiations?

It's totally premature to talk about either relative levels or actual levels of royalties of any sort at this point. Sorry.

No problem. That's completely understandable. And for Tom, Tom you referenced higher R&D this year I think for new devices. Is that R&D to support the Qualcomm partnerships such that our Iridium software developers and like radiofrequency engineers are actually working on that? Or is this higher R&D to support like other new devices, perhaps in the consumer IoT sector?

I would say other devices in the consumer sector and generally.

We feel there's a lot of opportunity right now for Iridium. And given our success and growth, we have a long list of things that we want to develop, both in the work that requires both work on the ground and gateways, work in the cloud, and work in devices. There is just a lot of opportunities, and so we have expanded our investment because we believe it’s the right time to do that, because we believe we can support it in our growth projections here.

Great. And, Tom, did you also say as it relates to the IoT ARPU that there might actually be expansion going forward? Or did I mishear that?

No. We said that the service functionalities should drive higher data usage, which would drive higher ARPUs load.

Okay. Got it.

There’s been some adoption amongst our partners, and they have plans to introduce products in the future, which would offer even more capabilities than we have today. I mean, obviously, it will take some time for that to affect overall ARPUs because those have to get in the market. And there's an awful lot of devices already given that we're going to be pushing a million devices as well, just that use more narrowband technology. But it's obviously a positive long term on ARPU.

Great. Thanks. That's it for me.

Thanks, Louie.

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

Yes, obviously, we'll see you again in July. But I'd remind you that we are scheduled to have an investor day in New York on September 21. I hope you all can join us there because we are planning to provide more details about what makes us confident in our longer-term projections and how we think our long-term model looks like and why we believe our growth projections are the way they are. So join us and we'll look forward to seeing you, but thanks for joining us on this call.

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