Earnings Call Transcript
Iridium Communications Inc. (IRDM)
Earnings Call Transcript - IRDM Q1 2020
Operator, Operator
Good morning. Welcome to the Iridium Communications First 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 Kenneth Levy. Go ahead.
Operator, Operator
Thank you, Kate. Good morning. And welcome to Iridium’s first quarter 2020 earnings call. Joining me on the call this morning 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 have 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 a historical fact and include statements about 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 the actual results to differ from forward-looking statements. Such risks are more fully discussed in our filing 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 will also be referring to certain non-GAAP financial measures, including operational EBITDA and pro forma free cash flow, free cash flow yield, 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 initial measures and a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.
Matt Desch, CEO
Thanks, Ken. Good morning, everyone. Well, I guess it goes without saying that we are living in some very interesting times. This current global pandemic has changed the fortunes of many businesses around the world, at least temporarily, and we are starting to feel some effects too. Now while our first quarter was quite strong, the global business and social lockdown underway clouds our visibility to the rest of the year. During today’s call, we will share the trends that we have seen through April and how they are coloring our outlook. You will see from our comments that our business model is resilient, and unlike many other companies, we are happy to still be forecasting growth for the full-year. First, let me address Iridium’s operations during the onset of the virus outbreak. We quickly took precautions almost two months ago to ensure the safety of our employees. We wanted to remain responsive to our customers and partners, protect the health of our employees and ensure that our operational cadence was maintained. The essential employees were identified that needed to work in our facilities or operate our satellite and ground networks, as well as utilize testing equipment in our labs and facilitate product shipment to customers. So decisions, in retrospect, have all been very effective. We were actually well-prepared for remote work as our corporate IT and security are quite advanced. We really haven’t missed a beat in terms of ongoing business operations. Though, like all of you, we long for the camaraderie and social interactions of working in a close-knit office environment and even the travel to meet physically with partners around the world. I can report that our supply chain is also in good shape and we aren’t having any significant inventory issues. We should have sufficient stock to meet as expected equipment demand. Our first quarter results were strong, and while I will leave it to Tom to walk through the numbers, to me, the strong performance is indicative of the underlying strength of our business during normal times. In the final weeks of March, the strong trend that typified 2019 and the first quarter started to slow, and in April, with the whole world in lockdown, we seem to have entered an entirely new environment, which is unlike anything we have previously seen. Now for historical perspective, we weren’t affected much during the global market crash and recession of 2008, largely thanks to the mission-critical role our services play for enterprises and governments around the world. The current climate, however, is very different from 2008 or other past cycles. Social distancing has put healthy companies on hold, and there’s not much precedent for that. So we are all working through the day-by-day to try to understand the impacts of COVID-19, how long it will last and what the long-term effects will be. Our partners are experiencing the same business and operational restrictions we are in terms of visiting with customers, completing new installations and closing new business opportunities. We are keeping in close contact with them to understand the changes in their respective industries and their expectations of customer behavior for the rest of the year. While this is helping inform our outlook, we are all working from our own set of assumptions based upon where we sit in the customer value chain, and there is no consensus on how quickly things will return back to normal. Based upon this, we have revised our full-year outlook. We are comfortable confirming that we still expect to grow service revenue and operational EBITDA over 2019 levels, but that’s as far as we can go at this time. There are too many variables and uncertainties to fully understand how long the economic shutdown spurred by the virus will last and how long it may take for businesses to reopen. Remember, Iridium touches many different industries across the globe, and each is on a different cycle in responding to the effects of the current lockdown. From what we can see at this point, subscriber count should continue to grow in 2020, albeit at a slower pace. We expect that our high-margin service revenue will also grow from 2019 levels, driven by contractual step-ups in certain contracts and increased subscriber levels, though at lower overall ARPU due to lower usage. Equipment sales are less clear. While they were in line with our expectations in the first quarter, the current economic environment makes it prudent to plan for a slowdown. Given that equipment contributes lower margins on our service revenue, the impact of the slowdown isn’t as dramatic to our bottom line. Engineering revenues also seem to be holding up well as our primary customer for engineering services, the U.S. Government, is expected to continue to execute on their projects this year and has dedicated funding for these programs with us. Despite all these puts and takes for 2020, the most important theme for Iridium remains our ability to generate strong free cash flow. We have been enthusiastic and vocal about our business transformation in recent years, and this theme of strong free cash flow is still very much intact despite the slowdowns that we are seeing. We are very fortunate that we are facing these challenges in 2020 rather than several years ago when we were in the middle of the Iridium NEXT Capital program and bound by the financial requirements of our former credit facility. This year, we still plan to deliver significant free cash flow and will continue to delever our balance sheet. So our financial transformation and plans to return capital to shareholders are still very much on the horizon. I am sure you all would appreciate more about the specific effects of the pandemic that we are seeing from our partners and their businesses and how it might affect our revenues. Overall, it appears that the effects at this time are greatest in aviation, oil and gas, and maritime, particularly as it relates to installation of terminals. We are also seeing a disruption in the typically stronger summer sales and activation season for our legacy satellite phone business. In aviation, safety service usage revenues were down with the drastic decrease in flight hours, so we are not seeing as many deactivations as you might think. Deactivation of SIM cards on commercial aircraft can be a cumbersome exercise, and customers expect that flight schedules will eventually recover. Oil and gas partners are experiencing a slowdown in their business due to low oil prices and lower demand as people work from home and travel less. On the maritime front, we are not very exposed to the well-publicized decline in the cruise industry, but we are experiencing slower activations than previously anticipated of Iridium Certus terminals on ships, as cruise operators don’t want external installers onboard while in port due to concerns of virus transmission. We still see very strong interest in Iridium Certus and know that our broadband service is an important vehicle of growth this fiscal year and out into the future. However, it makes no sense in the current environment to continue to try to peg year-end 2021 revenues. They will be what they will be, but we are confident they will be a lot higher than they are today. You can track the quarter-by-quarter growth for yourselves now that we are breaking out broadband revenues and subscribers in our financial tables. The other impact related to COVID-19 that we are seeing that’s worthy of discussion is a sudden and big slowdown in consumer product activation in the IoT area. Two-way personal communicators from companies like Garmin are often sold through retail stores that have been closed for quite a few weeks during the ongoing pandemic. We are expecting that activation will be lower than normal this year as the virus shutdown is hitting them right in the season we would expect to see the most growth. A number of other IoT partners are also growing slower than in the past. Many have told us that they are hampered by COVID restrictions and the global slowdown in business, but expect to bounce back if things get back to something more normal, particularly since their end customers are dependent on these IoT solutions in their own businesses. Overall, even though we don’t yet know the complete depth and breadth of COVID-19 or how long it will ultimately impact our subscribers and partners, let me be clear that our company is in a very strong financial position with excellent liquidity today. We are operating a brand new constellation, completed two well-timed financings during the last six months, are coming off another great quarter’s performance that demonstrates our competitive value, and continue to generate significant free cash flow, which is helping our leverage position. Now one area we haven’t seen and don’t expect to see much impact is with the U.S. Government. We are fortunate to have completed the new seven-year fixed-price contract for our legacy services with this customer last year before the current economic slowdown. We have also not seen much impact of the Coronavirus on all the engineering programs underway with them, including the installation of Iridium Certus at the government’s private gateway. Switching gears to Aireon, it continues to deliver on its promise to improve aircraft surveillance and safety and provide operational efficiency to air traffic controllers and aircraft using ADS-B. The COVID-19 crisis has had an outsized impact on global aviation traffic, which for the near-term has significantly reduced the number of commercial flights and the results in the total number of aircraft being controlled by NSPs. This will have some impact on Aireon’s revenues. While the company continues to sign new contracts, less consumer demand for air travel will reduce the part of their revenue that’s based on flight hours. Overall, Aireon has a solid base of revenue and strong financial backing, including a $200 million credit facility they are accessing. Iridium’s hosting and data service contracts with Aireon are contractually fixed price and are current, and we expect them to stay that way this year. Overall, our confidence in Aireon remains high, and they continue to execute well on their business objectives. So as I turn the call over to Tom for his comments, let me just re-emphasize that despite the unprecedented times that we are going through, Iridium’s business is demonstrating itself to be quite durable. We are well positioned with a diverse stream of income, customers around the globe, and applications that are important and unique. Our wholesale business model proved its resilience in the 2008 downturn, and we will see it through this one as well. We believe that our continuing strong cash flow stacks up well against other satellite companies and companies in many other sectors right now. Hopefully, we will all pull through the current crisis soon and get back to something more normal in terms of growth. I know our partners and employees look forward to that as do I. With that, I will turn it over to Tom for a review of our financials. Tom?
Tom Fitzpatrick, CFO
Thanks, Matt, and good morning, everyone. I’d like to start my remarks by summarizing our key financial metrics for the first quarter and provide some color on the trends we are seeing in our major business units. Then I will recap our 2020 guidance, which we revised this morning, and close with a review of our liquidity position and capital structure. Iridium generated revenue of $145.3 million in the first quarter, which was a 9% increase from last year’s comparable quarter. The improvement was driven by growth across all of our business lines with the largest dollar contribution coming from recurring service revenue. Operational EBITDA was $92.1 million, which was up 18% from the prior year’s quarter. On the commercial side of our business, we recorded service revenue of $91 million for the first quarter, which was 10% higher than the prior year’s period. This primarily reflected growth in hosted payload and commercial broadband services along with positive trends in IoT and voice. Voice and data service revenue, which represents our telephony business, rose 1% this quarter. For the first time, we provided a breakout of our commercial broadband revenue, which totaled $8.7 million in the first quarter, up from $6.8 million in the prior year, representing 28% growth. This new line item represents broadband revenue at 128 kilobits per second and higher and includes Iridium OpenPort and Iridium service broadband. We continue to believe that broadband will be a long-term driver of subscriber growth and new revenue for our company and remain happy with the reception the product has received from our channel partners. Though our rate of new activations is being challenged by recent Coronavirus impact. Our IoT business continues to grow in the first quarter. We began to feel the effects of the recent world events in the second half of the quarter with reduced usage of devices in aviation and marked slowdown in activations in personal communication devices with the channels being closed by the shutdown. IoT ARPU in the first quarter was $9.71, compared to $11.32 in the prior year. The driver of this year-over-year decline in ARPU continues to be the significant addition of IoT subscribers on a low data plan, most notably in consumer-oriented personal communication devices. During the quarter, we added 27,000 net new commercial subscribers, with the gain coming entirely from our IoT business. As I noted, we see a marked change in IoT growth, particularly in the number of net additions from personal communication services in mid-March, as the retail channel closed. At present, commercial IoT data subscribers represent 70% of billable commercial subscribers, up from 65% in the prior year period. Hosted and other data service revenues increased to $16.3 million this quarter, up 17% from the comparable quarter in 2019. Substantially all of this increase was due to higher hosted payload and data service revenues associated with the step-up in Aireon’s data service agreement with Iridium. The increase in this revenue coincides with Aireon achieving a key customer milestone in the first quarter. Turning to our Government Service business, we reported revenue of $25 million in the first quarter, up from $22 million in the prior year quarter, representing a 14% rise. This increase was due to the contractual terms of the EMSS contract, which was renewed last September. In the first quarter, government subscribers grew by 22% year-over-year, and total U.S. Government customers reached a record 140,000 this quarter. Equipment sales improved into the New Year as they were largely unaffected by macroeconomic developments, but we expect this trend to change. We reported $22.3 million in revenue from equipment sales in the first quarter, with equipment margins a bit higher than the year ago at 45%. With the impact of COVID-19 being felt across a number of commercial industries, we now anticipate a slowdown in equipment sales throughout full year 2020. Engineering and support revenue, which is largely episodic, was $7 million in the first quarter, as compared to $5.7 million in the prior year’s quarter. The pickup from last year reflected an increase in work under our engineering agreement with Aireon to work in their operation center, as well as an increase in government agency work to enable Certus capabilities for the U.S. Government. As you saw in our earnings release this morning, we have updated our 2020 full-year outlook to better reflect our early estimate of the Coronavirus and its impact on our business. We now expect the EBITDA for 2020 to be higher than the $331.7 million we reported in 2019. We will provide a more specific target range at a later date once the operating environment stabilizes. Our updated outlook is predicated on the following assumptions. We expect a decrease in our equipment revenue due to the combined effects of the disruption in global business operations, the strength of the U.S. dollar, and the deterioration of the oil and gas market. We have also updated our growth outlook for our service revenue. Despite the negative effects of the Coronavirus, we continue to expect growth in our service revenue. This is driven by the following factors. We expect growth in our government service revenues and hosted payload revenues based on contractual step-ups. We expect a decline in our commercial telephony business as a consequence of the current global economic shutdown and ongoing macroeconomic developments. Iridium’s business is seasonal, with the second and third quarters characterized by higher subscriber additions and higher usage. We expect this fallout will be particularly impactful as the economic shutdowns are occurring in the heart of our selling season. We do not expect growth in our IoT business in 2020. This segment's performance has been impacted by two primary factors arising out of COVID-19. First, we expect materially reduced activations of personal communications devices in 2020 and a reduced ARPU, as subscribers increasingly adopt lower usage plans. Personal Communications grew by $4.3 million or 51% in 2019, but we now expect it to be about flat over 2020. We also expect materially reduced usage in aviation. This has averaged about $2.6 million in quarterly revenue; thus far in April this is down about 60%. We expect similar reductions for the balance of the second quarter, with some improvement in the third and the fourth quarters. IoT’s performance is also being negatively impacted by exposure to the oil and gas sector, though this impact is not as material as aviation and has proven difficult to quantify. Furthermore, other sectors such as asset tracking are experiencing lower activity due to the global shutdown. IoT’s performance this year will ultimately depend on the pace and timing of recovery. We expect growth in our broadband business as our Iridium service offering continues to resonate in the market. The rate of activations of our terminals is being hampered by the global economic shutdown, but we still anticipate growth and have adjusted our revenue projections accordingly. We also continue to expect material growth in broadband revenue in 2021, but no longer expect to achieve an exit rate of $75 million due to slower Iridium service installations. We continue to expect negative cash taxes through 2023. We forecast that depreciation and amortization expense will remain steady at approximately $75 million in the quarter. Together, these revisions provide confidence in our 2020 outlook and support our forecast cooperation EBITDA. Moving to our capital position, Iridium had a cash equivalent balance of approximately $67.3 million as of March 31, 2020. And we completed two important refinancing activities. Since November, we expect pro forma annual interest expenses to decline from $112 million in 2019 to $90 million in 2020. Full-year maintenance CapEx costs remain at approximately $35 million. We continue to believe that free cash flow provides a useful benchmark regarding the earnings power of our company based on the quarterly results we delivered today and the revised outlook for EBITDA this year. We believe Iridium will generate pro forma free cash flow of at least $177 million for the full year 2020. For all those greater purposes consider the following: If we started EBITDA at $332 million and subtract $90 million in pro forma net interest to reflect our new debt structure and $35 million for CapEx, and $30 million for working capital inclusively appropriate of hosted payload adjustments, 2020’s pro forma free cash flow conversion rate is expected to be in excess of 50%, and a dividend yield greater than 6%. This is up from pro forma free cash flow of $168 million in 2019. The important takeaway here is that we expect Iridium to grow cash flow even in this unprecedented business environment. Iridium closed the first quarter with leverage of 4.6 times EBITDA and based upon our guidance revision, we expect to exit 2020 with net leverage of no more than 4.4 times EBITDA. We expect to continue deleveraging in 2020 despite broad-based global economic challenges. In closing, given the uncertainties we now face, we are glad we chose to be proactive and refinance our debt early this year. While we revisit our financial assumptions based on the current economic climate, we continue to be confident in Iridium’s business. We know that Iridium has been in a strong financial position even as we face the uncertainties posed by the Coronavirus, and we look forward to keeping you updated on our progress. With that, I will turn things back to the operator for the Q&A.
Operator, Operator
Our first question is from Ric Prentiss from Raymond James. Please proceed.
Ric Prentiss, Analyst
Thanks. Good morning, guys.
Matt Desch, CEO
Good morning, Ric.
Tom Fitzpatrick, CFO
Good morning, Ric.
Ric Prentiss, Analyst
Glad to hear you are doing okay and your employees are all safe. A couple of questions if I could, first, on the 2020 guidance, obviously, a very good start to the year on 1Q numbers. As we think about the next three quarters, though, do you think you would have been able to grow service revenue and EBITDA if you hadn’t had such a good start to the 1Q?
Matt Desch, CEO
If the Coronavirus hadn't struck, would we have continued to grow? I believe the first quarter reflected the overall health and strength of our business, and it might have even suggested a stronger year than we initially anticipated. However, everything has changed over the last seven to eight weeks regarding the market's ability to progress. This is the basis for our new expectations for the year, based on what we've observed recently. The first quarter was perhaps even better than we originally expected, but unfortunately, this isn’t how the year is going to turn out.
Tom Fitzpatrick, CFO
I would add that I think the first quarter is a good time for us to discuss this. Go ahead, Ric.
Ric Prentiss, Analyst
Go ahead, Tom.
Tom Fitzpatrick, CFO
I was just going to say the first quarter is a good picture of unaffected Iridium. However, we did notice some weakening in IoT in March. Our telephony business group grew by 1%. Then COVID-19 hit, and our guidance and outlook for 2020 are heavily influenced by the trends we are observing in April. In the second quarter of 2019, our telephony business had net additions of 10,000. Based on the April trends, it appears that the second quarter of 2020 is showing a decline of at least 5,000, and this change happened almost overnight. Interestingly, if you examine the activations and deactivations, the deactivations are roughly on par with what we experienced in 2019. The issue lies in the lack of activations due to closed channels, which reflects the global lockdown evident in our numbers almost immediately after it took effect.
Ric Prentiss, Analyst
Good. And when you think about the guidance for growth for the year, would you guys suggest or maybe thinking of maybe a U-shaped recovery as opposed to a V or W or any other kind of thought right now?
Matt Desch, CEO
Certainly, we see more of a U-shaped recovery than a V. In my remarks, I pointed out that historically, our telephony business adds subscribers in the second and third quarters. This typically happens when individuals purchase through prepaid vouchers while on expeditions. The global shutdown during the summer has significantly impacted us. While you mention the U shape, our expectations for the fourth quarter won't be as heavily affected because our sales strategy extends beyond that period.
Tom Fitzpatrick, CFO
Yeah. I would also say, Ric, that after seven or eight weeks, we still don't have a clear understanding of how the recovery will unfold. There may be a catch-up effect with people eager to take trips they had postponed, but we can't say for sure. I think we're looking more at trends from late March and April, and I expect the recovery in the third quarter will not be rapid.
Ric Prentiss, Analyst
Make sense. Last one for me, when you talk about leverage of no more than 4.4 for the year. How are you calculating that? Is that like an annual 12-month worth of EBITDA, is that a 4Q EBITDA annualized? I am just trying to think of what the less than 4.4 on leverage means?
Tom Fitzpatrick, CFO
Right. So, with the fourth quarter exit rate, so in our guide, take $332 million as EBITDA, that would be LTM, divided by the debt, it gets to 4.4. It’s a converse of at least.
Matt Desch, CEO
EBITDA.
Ric Prentiss, Analyst
Right. Right. Okay. Good luck and best wishes through this crazy time.
Matt Desch, CEO
Thanks, Ric.
Tom Fitzpatrick, CFO
Thanks, Ric.
Operator, Operator
Our next question is from Greg Burns from Sidoti & Co. Go ahead.
Greg Burns, Analyst
Good morning. So, in terms of the hosted payload data revenue, was there any kind of one-time catch-up revenue?
Tom Fitzpatrick, CFO
No. It’s not clean. It’s heavy, Greg. There was a $1.4 million out-of-period related to the Harris payload and there was about $400,000 of out-of-period related to the Aireon payload. So, it’s tied by close to $2 million. I think about those two payloads, we, for some time, said that steady state is around $47 million. That number I would model for 2021 and beyond.
Greg Burns, Analyst
And then, I just want to follow up on the Aireon commentary. How comfortable are you with their ability to meet their financial obligations, and does this require additional financing?
Matt Desch, CEO
Their financial outlook for this year is strong. They are managing their operating cash flow and credit facility well, and we anticipate they will continue to make payments as they did throughout 2020. Looking ahead to 2021, we expect that air traffic will return, which is based on IATA's expectations. Their ownership of Aireon is well-established in the aviation sector, and they have confidence in that business. Therefore, we believe they will fulfill their obligations to us as expected.
Greg Burns, Analyst
Okay. Great. And then, I guess, obviously, you are seeing an impact of the sort of impact of the Coronavirus. But prior to kind of this all happening, what were you seeing? I know the activations were offset. Were you seeing a pickup in activity barring what’s happening now? What were you seeing?
Matt Desch, CEO
It has been progressing. There are still many developments expected this year. For instance, we recently introduced faster speeds that are being implemented across all terminals, and the performance has been outstanding. Additionally, GMDSS is currently in beta trials and is being tested on ships, with more rollouts planned for this year. We also have another terminal entering the market, along with several others in development throughout the year. Overall, we perceive the business to be strong and competitively positioned. However, we've heard from our partners that they've been unable to get on ships in many ports. There are still activations happening, with positive net activations each month, although at lower levels due to our partners facing a backlog of ships and contracts that they can't process at this time.
Greg Burns, Analyst
The outlook continues to indicate revenue growth beyond what we experienced in the previous quarter.
Matt Desch, CEO
Yeah. No. Broadband is still a grower for us this year and maybe not at the levels we had hoped or thought it would be pre-COVID-19, but it’s definitely a grower for us and a bright spot in our financial picture.
Greg Burns, Analyst
Okay. Great. Thank you.
Matt Desch, CEO
Thanks.
Operator, Operator
Our next question is from Hamed Khorstan from BWS Financials. Go ahead.
Hamed Khorstan, Analyst
Hey. Good morning. Could you talk about what kind of risk you are exposed to as far as accounts receivables, and if you have seen any changes there in collection?
Tom Fitzpatrick, CFO
Not particularly. We have been in discussions with our aviation partners. Recently, Speedcast filed for bankruptcy. We do have receivables with Speedcast, but we expect to be recognized as a critical vendor to them. In most situations, considering our relationship with the channel, we are integral to their revenue, which makes us a crucial vendor. Therefore, we expect to collect that receivable despite their bankruptcy. We have the leverage, and our long history shows that we don’t typically encounter significant bad debt due to this situation.
Matt Desch, CEO
Tom, you would agree that cash is not an unusual form of an account receivable. I recently reviewed their list of creditors, and we are not included among the top nine or ten. It remains relatively minor since, while Speedcast was an important growth area for us, it was not a significant partner overall. They were more of a future partner, inheriting part of our business through their acquisition of Globecomm and a bit from Caprock. The focus was more on their potential rather than a significant concern about the receivable itself, especially considering we are an essential supplier to them.
Hamed Khorstan, Analyst
And... Cash is not an unusual account receivable. I just reviewed their list of creditors, and we are not on it. We didn’t make the top nine or ten creditors. Overall, it's relatively insignificant because while Speedcast was an important area of growth for us, it wasn’t a large partner. It was more of a future partner, as they acquired some of our business from their acquisition of Globecomm and a little from Caprock. The focus was more on their potential rather than a real concern about the receivable itself, especially since we are an essential supplier to them. Okay. And then the other question I had was about pricing. Are you seeing any discounts, are you going to be doing any discounts in the market just given the low activity right now?
Matt Desch, CEO
We are being supportive in certain areas where it makes sense. For instance, we are generating goodwill in the maritime sector by providing free crew cards to our broadband customers. Anyone with an OpenPort terminal can receive chat cards for their crew to communicate with their families. They are already paying for the Internet, but it’s better if they can speak to their families during this time. So, until September, crews can use a certain number of minutes, which has been well received. However, this isn't really a price drop or a promotion and is likely traffic that wouldn't have happened anyway since we preferred they not use our product. As for other industries, some are under more pressure. For example, the aviation industry is particularly stressed. It's a usage-based business, so revenues are affected as customers aren't flying their planes as much right now, resulting in revenue that wouldn't be coming in otherwise. I also want to mention those crew cards, which align with Inmarsat's upcoming price hikes for their fleet customers, especially GMDSS customers, who will now have a minimum revenue commitment per month for terminals that previously incurred no charges. This puts us in a strong competitive position because we aren’t raising prices on our customers during a vulnerable time, unlike our primary competitor. This is greatly appreciated, especially considering the expectation of long-term GMDSS activations for new ships, and the possibility that many existing ships might seek to switch suppliers. So, overall, this isn't really about discounts because businesses can't generate activity when they are locked down. This situation isn’t indicative of a recession, as companies would be able to afford it if they were active. However, manufacturing of new equipment is halted, which impacts their ability to put satellite trackers on them. I believe things will return to normal as conditions improve.
Tom Fitzpatrick, CFO
I would like to emphasize that this situation is nothing like the recessions of 2008 or 2009. During those times, our telephony business continued to grow. We consistently had strong net activations, even in the second quarter. However, this situation is different; we are facing a global lockdown, which is unprecedented. This is not merely a recession.
Hamed Khorstan, Analyst
And finally, the lower usage that you are reporting is that just from customers just being poor longer or is that just there is no activity going on these ships?
Matt Desch, CEO
The average revenue per user is significantly higher than in the past because it exceeds what we saw with OpenPort. When we mention lower usage, we are not indicating that our broadband curve is down; in fact, it has generated more revenue and greater usage than our previous product generation. The lower usage is more about missed opportunities—if customers aren't able to go on trips or scientific expeditions, or if they're unable to use the equipment they normally track, such as sending pictures from their heavy gear, that affects usage. Currently, many devices are just sitting unused, leading to minimal charges. I anticipate that this will improve as people are able to get out and resume their regular activities.
Tom Fitzpatrick, CFO
I would say, a huge impact on usage was evident in aviation and that’s in our IoT business. As I said in my prepared remarks, that equipment used for safety services on commercial airliners, two of our partners in particular. And as I said, it ran two sticks a quarter and on a dime, it went down 60%. So that is a kind of very abrupt and acute impact on usage that we identify quite early.
Matt Desch, CEO
Relatively small part of our business, but it’s still an important one.
Hamed Khorstan, Analyst
Okay. Thank you.
Matt Desch, CEO
Okay. Thank you.
Operator, Operator
Our next question is from Anthony Klarman from Deutsche Bank. Go ahead.
Anthony Klarman, Analyst
Hi. Thanks. Thank you. A bunch of my questions were answered, but, I think we are all trying to get to the same thing here. So maybe I will try to ask it slightly differently. You broke out broadband this quarter and had a 28% year-over-year growth rate in it. Given that we can’t model to the $75 million run rate exit 2021 level, I guess, Tom or Matt, could you provide any kind of anecdotal view as to what maybe the April trend looked like on a month-over-month basis? I guess we know broadband is going to continue to be a growth area for you. But I am wondering if we can maybe help quantify what the change in the growth rate might have looked like in April relative to what you recorded?
Matt Desch, CEO
Tom can take a crack at this too. It really comes down to installation. It’s just that they have cut the growth rate dramatically but we are still growing. So, while we may have expected hundreds of ships to be installed in a month on a net basis, it’s quite a bit lower than that. It’s still growing, and again, each Certus activation is at a higher ARPU than any OpenPort terminal. And I will say one thing that’s been surprising is the OpenPort terminals are declining probably at a lower rate than we thought. So people aren’t taking them off either. So they are kind of staying off. They are continuing to be active on ships. So net-net, we are adding Certus terminals faster than OpenPort terminals are declining. But everything is just going slower right now. And I don’t think that we want to really try to look out too much further than that or give too much additional color on the year because it’s just too early. We have only had about seven weeks of this happening like this. And there are some positive things we are hearing out of Asia, where there are some ports starting to open up. Some countries are starting to push to get out. But we can’t tell exactly how that will relate to the installation rate until we see it happen further. So anything further to try to describe what that means or exactly how it will mean at the end of the year, I think it’s just a little premature right now.
Tom Fitzpatrick, CFO
I would just say, Anthony, maybe our broadband business is unique and it’s growing sales right through April. We didn’t do that in telephony.
Anthony Klarman, Analyst
I think that's helpful. Regarding telephony, you mentioned that you're not very exposed to companies like Speedcast because you'll eventually collect that receivable, whether at the resolution of their bankruptcy or at another time, and you are a key vendor for most of those. Could you discuss any exposure you might have in the consumer space, particularly in small or medium-sized businesses? Those sectors seem to be particularly affected, and I'm curious if that's related to access to airtime or if it's a collection of smaller businesses facing potential impacts on their end markets as you consider the trajectory of the numbers throughout 2020.
Tom Fitzpatrick, CFO
We are currently facing challenges in the telephony sector, particularly due to channel shutdowns, and we are not seeing activations. The deactivation trends in telephony resemble those from 2019, primarily driven by a lack of activations as a result of the lockdown. Our significant exposure to consumers is within our personal communication and IoT segments, where the lockdown has halted activations. Consumers have begun shifting to lower usage or suspended plans, which had previously been a strong growth area for us. In 2019, we experienced a growth of over $4 million, but we expect to see a decline in this area in 2020. This represents a direct impact related to consumers.
Matt Desch, CEO
I would say that we are very competitive in that segment, and we have more products coming into the market this year. More partners are introducing products, and we are seeing some new offerings being launched in January and February that are exceeding expectations. We are well positioned in that market, but it feels like there is a lockdown, which is what our partners are indicating. They are unable to access stores, and until stores reopen and people feel comfortable going out and traveling, progress will be slow. I'm not sure if there will be a catch-up or if growth will begin again from its current point. We will have to wait and see.
Anthony Klarman, Analyst
Thanks. Final one for me, I think, you guys had given some longer range views on leverage a quarter or two ago as you were talking about where you ultimately saw the business getting down to from a balance sheet perspective and that that would maybe trigger returns of capital as you reach that. I guess given that it may take longer now to achieve those metrics, any change in the view as to how you think about capital allocation in terms of deleveraging versus shareholder capital returns?
Tom Fitzpatrick, CFO
No. We still like our targeted range of 2.5 times to 3.5 times leverage, and we will do shareholder-friendly things to maintain that level.
Anthony Klarman, Analyst
All right. Thank you.
Operator, Operator
Our next question is from Louie DiPalma from William Blair. Please go ahead.
Louie DiPalma, Analyst
Matt, Tom, and Ken, good morning.
Matt Desch, CEO
Hey, Louie.
Tom Fitzpatrick, CFO
Hey, Louie.
Louie DiPalma, Analyst
Are you guys decentralized this morning?
Matt Desch, CEO
We are Ken and I are maintaining a social distance here in our headquarters, which is quite lonely, and dark because all of our employees are working from home. But I picture Tom sitting on a beach somewhere. However, I think he’s probably in his office.
Louie DiPalma, Analyst
Nice. I hope you guys continue to do well. First, for Tom on the beach, free cash flow…
Tom Fitzpatrick, CFO
I am not in a beach, Louie. I am not in a beach, just so you know.
Louie DiPalma, Analyst
Tom, free cash flow is now the focus area for investors. Can you repeat what your pro forma free cash flow assumption is for 2020 and the new annual cash interest rate?
Tom Fitzpatrick, CFO
Right. So, Louie, regarding the levered free cash flow, there's a schedule available on our website. The number is $177 million, and we used $332 million for the EBITDA, with all the assumptions detailed on our website. As for our interest rate, we have about $1 billion fixed that we swapped with another $1 billion, which is just under 6%, and the remaining balance is L plus $350 million on our Term Loan B.
Louie DiPalma, Analyst
Okay. Sounds good. For Matt, you mentioned this several times, and it may also relate to Tom. Regarding your commercial plans for satellite phones, aircraft cockpit plans, Garmin personal navigation devices, and asset trackers, can you quantify how much of ARPU comes from fixed versus usage-based sources? You mentioned that IoT appears to be more sensitive than the other plans. Could you provide a brief overview of your different services, comparing base ARPU to usage-based ARPU?
Matt Desch, CEO
For commercial services in 2019, the revenue was about $300 million. The fixed access accounted for approximately 78%, while air access represented around 22%. This distribution varies, as telephony tends to be heavier on access, with about 82% as monthly recurring charges and 18% as usage. In contrast, IoT shows a higher reliance on usage, with 73% as recurring charges and 27% based on usage. Overall, the breakdown is roughly 78% for MRC and 22% for usage.
Louie DiPalma, Analyst
Thanks. Thanks, Tom. And the last one for me for Matt, can you provide any comments on if there are any implications for Iridium as it relates to the FCC’s recent Ligado ruling?
Matt Desch, CEO
Yeah. As you know probably from reading my tweets, I am obviously not happy about that. We have been against there being approved for years out of concern that if there’s too much usage that it would possibly impact our service quality in North America, as it would, by the way, for GPS as well in front of a different part of their spectrum. And we have been aligned on that, obviously, we remain concerned long-term, because we can’t move and are kind of surprised how fast this has moved. But it’s not somehow a near-term threat to us in some ways. They still have to build a base station, which they don’t have the capability of doing, which means they probably need to sell themselves or sell their spectrum to somebody else to do that, and no devices currently can access that spectrum. Currently, they talk about 5G or IoT someday, well, there aren’t any devices today that can access that. So it’s years down the road, but we shouldn’t have to be dealing with that. That’s why we continue to reject it. We continue to fight it, and there are a number of ways in which we will continue to work with the whole industry, particularly the GPS industry, with the Department of Transportation, the aviation users that are concerned, the Department of Defense which is concerned about the usage of GPS, and all the other concerned to keep fighting this because we just don’t think it’s something we should have to be dealing with. But it’s not in any way even an intermediate or even medium-term concern for us, right.
Louie DiPalma, Analyst
Sounds good. Thanks, Matt. And I hope everybody stays healthy.
Matt Desch, CEO
Thanks. You too, Louie.
Operator, Operator
Our next question is from Mathieu Robilliard from Barclays. Go ahead.
Mathieu Robilliard, Analyst
Yes. Good morning all and thank you for taking the questions. First, coming back to one of your comments about the fact that activity in Asia is picking up in some countries, I was wondering if you could give us a sense of where the maritime activations, which ones were taking place, and where you were expecting them to take place throughout the year, as it is based North America heavy or is it Asia, or is it spread?
Matt Desch, CEO
Thank you, Mathieu. For maritime, we are well distributed across the globe and all ports. Regarding activations, we are not primarily a cruise ship company, even though we are utilized in some instances for bridge systems on cruise ships. Our exposure to that industry is limited. Ships are operational, but there haven't been many new installations recently. As port activities gradually reopen, we may see some improvements. Regarding aviation, we have multiple products in development this year, focusing on two different applications. One is a basic service applicable to any aircraft, from general aviation to commercial airlines, primarily for communication. The other is a safety service that requires certification. The basic service will launch before the safety service. We don't have much influence over the timeline because our satellite service is currently available, and we support the certification process for safety services. Our progress depends largely on when the OEM terminal vendors are prepared, and we are collaborating with them on their terminals. A launch in the air is expected soon, with more to follow throughout the year. However, I’m not certain about the exact timing for service implementation, though there may be some by the end of this year; I believe it's more in line with activities planned for 2021. As for OneWeb, I’ve mentioned before that they were a potential partner but not a competitor. It’s unfortunate to see them exit, but we had no expectations of revenue from OneWeb in the near future since their service needed activation and integration with our products. We were aware that progress on their product was slow, even after we announced the MOU. Therefore, their departure does not influence us significantly at this time. The segment will likely be affected by COVID, which continues to impact financing for new mega constellations and may delay their launch into service. However, this situation does not affect Iridium at all, as we operate independently of that sector.
Mathieu Robilliard, Analyst
Great. Thank you very much.
Matt Desch, CEO
Thanks, Mathieu.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the conference back to management for closing remarks.
Matt Desch, CEO
I hope this is one of the last conference calls we need to hold in this new Coronavirus environment, but we can’t be sure how long it will last. In the meantime, I wish everyone stays safe and at home, and I encourage you to keep in touch because this will be an interesting year. We look forward to sharing more about the situation during our second-quarter call together. Take care. Thank you.
Operator, Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.