Earnings Call Transcript - IRDM Q1 2021

Operator, Operator

Good morning and welcome to the Iridium Communications' First Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Kenneth Levy, Vice President of Investor Relations. Please go ahead, sir.

Kenneth Levy, Vice President of Investor Relations

Thanks, good morning and welcome to Iridium's first quarter 2021 earnings call. Joining me today are our CEO, Matt Desch, and our CFO, Tom Fitzpatrick. We will start with a discussion of our first quarter results, followed by a Q&A session. I hope you've had a chance to review this morning's earnings release, which can be found on the Investor Relations section of Iridium's website. Before I hand it over to Matt, I want to remind everyone that our call may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are not historical facts and involve our expectations, plans, and prospects for the future. They are based on our current beliefs and expectations, which are subject to risks that could lead to actual results differing from those projections. We discuss these risks further in our filings with the Securities and Exchange Commission. Please consider our remarks today in light of these risks. Any forward-looking statements reflect our views only as of today, and while we may choose to update them in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we will also refer to certain non-GAAP financial measures, including operational EBITDA, pro forma free cash flow, free cash flow yield, and free cash flow conversion. These measures are not prepared in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release on the Investor Relations website for further details on these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Matt Desch, CEO

Thank you, Ken, and good morning everyone. So, Iridium’s first quarter came in pretty much as we expected. It’s tough to compare it to the first quarter of last year as that quarter was hitting on all cylinders before the pandemic struck the world and our many partners and customers in the last week or two of March. Though the pandemic continues to impact certain industries and geographies, 2020 really underscored the strength and resilience of Iridium’s wholesale business model. Across our global ecosystem of more than 450 partners, each felt something different. Some felt a rapid slowdown; others missed the seasonal pickup that’s typical of their business, while some actually saw an increase in activity. Fortunately, our business is off to a good start this year. Economic activities picked up in many parts of the globe and even in the most hard-hit industries like commercial aviation, consumer activity has returned in air travel volumes are on the rise. This year, we've been pleased with partner activity, the renewed pace of equipment sales, and subscriber growth and feel like we're on track to achieve the full-year guidance we provided about two months ago. I'm looking forward to seeing the remaining economic headwinds that our partners have been grappling with fall away as we move further through the year. We're really encouraged by the vaccination rates here in the U.S. and the optimism we're hearing from our partners about continued business recovery through the rest of 2021. As I said, we had a tough comparison this quarter in light of the strong start to characterize our business in the first quarter of 2020. As a result, we expect to see an acceleration of service revenue growth for the balance of the year. I feel good about 2021 as a year when we continue to emerge back to the growth rates we're capable of. And the trends I'm now seeing bear this out. Equipment sales and subscriber counts continue to grow in the first quarter, which highlights strengthening demand and the underlying health of our business. Most of our business partners have acclimated to operating with the many logistical challenges and business restrictions over the past 12 months, and have made good progress in rebuilding their sales pipelines, scheduling installations, and improving their revenue cadence. As I discussed in February, 2021 will be a year of new product introductions. Within IoT, we are seeing many signs of normality. In the first quarter, we passed a symbolic but important milestone, 1 million commercial IoT subscribers using our network, and we continue to expect double-digit subscriber growth well into the future. In the last six months, we rounded out the Iridium Edge line of commercial IoT devices with a long-lived solar-powered unit and an all-in-one integrated unit with processor and development platform to facilitate the creation of new applications without a lot of additional engineering. We're pleased with the momentum of these new products that they’re creating, and look forward to expanding our existing base of tens of thousands of Iridium Edge family devices. Our strategy has been to make it as easy and as fast as possible to add Iridium connectivity to an existing or competitive IoT offering, and we're reaping the benefits of this plan now. Within the retail environment, demand for personal communication devices seems to have largely recovered. We estimate that these many messaging devices account for approximately 40% of all our commercial IoT subscribers now. Obviously, this is a market that Iridium is very well suited to support. Though these devices currently operate at legacy narrowband data rates, they allow for global connectivity and allow subscribers to keep in touch even when off the grid. We're talking now to these consumer companies about expanding into our higher-speed Iridium service platforms, and are excited about the new products they're planning that we expect will drive higher ARPUs in the future. Overall, we're seeing a lot of enthusiasm from our partners for our newest transceiver, the Iridium 9770. This mid-band speed transceiver offers throughput that is 35 times that of our legacy modems, and we're seeing a number of new industrial IoT solutions starting to roll out this year from partners. With growth of subscribers in our commercial IoT segment averaging 20% per year, we still see plenty of runway for meaningful revenue growth and new subscriber adoption. Well, you'll see more on this later in the year. We believe Iridium connectivity can be embedded in many more consumer devices and are working towards that now. We've been very aggressive at licensing our core technology, whether they be chipsets or waveforms to companies that can embed them into their own products and will continue to do so. Our network spectrum and coverage are well suited for this and there continues to be good interest from the industry. In maritime, after the launch of Iridium GMDSS late last year, we've continued to see a steady stream of new orders and installations as fleets and shipowners seek out affordable solutions for global safety voice and distress services. Today, hundreds of terminals have shipped to the channel destined for end users in the new build market, as well as for vessel retrofits. We see Iridium GMDSS as a gateway service to the largest maritime vessels, yet priced at such an attractive level that will expand the GMDSS market to smaller vessels that would otherwise go without this maritime safety device. This safety distress terminal will gain additional momentum when paired with our new Iridium Certus 200 terminals, which start hitting the market this quarter. We're seeing strong interest in Iridium Certus 200 already. It is viewed as the successor to our Iridium pilot terminals with compelling value at its lower entry-level price point. Beyond affordability, it is lighter, smaller, and faster than competing services with global coverage that they cannot offer. Among our current broadband offerings, we're seeing continued growth of our Iridium Certus 350 and 700, maritime and land mobile high-speed terminals. Terminal installations are still slower than expected on ships, but picking up month by month. Increasingly, Iridium is being sold as a companion to Maritime in addition to being a standalone terminal for satellite communications. As we look forward, we expect that Iridium service will be the service of choice for VSAT backup, as it remains the most cost-effective broadband offering with true global coverage and the fastest L-band speeds in the industry. In the first quarter, we saw 10% growth in broadband subscribers with ARPUs pretty consistent to the year-ago period. Going forward, broadband will continue to be an important contributor to our revenue growth. As you would expect, our business with the U.S. government has remained steady throughout the pandemic. The government continued to add subscribers in the second year of their seven-year fixed price contract with us to maximize their use of Iridium service. We expect to see an increase in engineering and support work this year as the government continues its upgrades to its private gateway in preparation for broader use of Iridium Certus. Switching gears to Aireon, despite lower international air travel, use of Aireon service by ANSP seems to be getting back to growth on the apparent backside of the pandemic. In the first quarter, I was excited to see NAV Canada NATs using Aireon to give direct shorter point-to-point routes to airlines flying between North America and Europe, rather than using the traditional and less efficient North Atlantic track system, proving out the benefits of oceanic ADS-B surveillance. During the quarter, Aireon operationalized service with the ANSPs of India, Iceland, and Papua New Guinea. In the case of NiuSky Pacific in Papua New Guinea, Aireon space-based ADS-B service is replacing the country's ground-based radar infrastructure, which alleviates the expense of maintaining, upgrading, and repairing radar stations throughout the country's mountainous terrain, providing a more cost-effective solution. In the first quarter, Aireon also announced a new contract with the ANSP of Norway for helicopter surveillance in the North Sea. This is the first space-based ADS-B use case specifically targeted for monitoring helicopters, and there's an innovative way to enhance safety and rescue operations in this region where helicopters are required to be equipped with ADS-B antennas. In this particular use case, Aireon will make Norway's low-flying traffic visible to controllers and also allow them to be integrated into the country's automated air traffic platform. With these recent deployments, Aireon Technology is now in service or will be in service in about half of the world's airspace. This is a remarkable achievement for a company that just went operational in 2019. Aireon continues to deliver on its promise to improve aircraft surveillance and safety, and we're very proud of their progress, and to be an equity stakeholder. I would also point out and highlight that we recently published our inaugural report on environmental, social, and governance matters in March. Iridium has always taken pride not just in doing well, but also in doing good. I would encourage you to review our 2020 report to learn more about our approach to ESG. Before I turn things over to Tom, I want to point out that we took advantage of the volatility in the market to purchase our first shares of stock under our buyback program in the first quarter. This, of course, demonstrates that we are now delivering on our strategy of leveraging our strong free cash flow to return capital to shareholders. So, in closing, Iridium’s business has demonstrated itself to be quite durable, even during the pandemic. We continue to generate significant free cash flow and have already deployed some of that cash through our new share repurchase program. We also see open lands for growth and are continuing to invest in R&D and new services to add to our diverse streams of income. Looking forward, service revenue growth will accelerate in the coming quarters as global lockdowns and travel increases, powered in part by new product launches and unique applications. We have a busy year ahead, and our plate is full. We'll cover a lot more of this and a more comprehensive, sort of five-year outlook in our coming Investor Day next month. And I hope you'll join us. So with that, I'll turn it over to Tom Fitzpatrick for a review of our financials.

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 providing some color on the trends we're seeing in our major business lines. Then I'll recap the 2021 guidance, which we reiterated this morning and close with the review of our liquidity position and capital structure. Iridium continued to execute well as we entered the second year of the pandemic generating total revenue of 146.5 million in the first quarter. Revenue was up 1% from the prior year's quarter and in line with our expectations. As we noted on our February call, we started the New Year against a particularly tough comp as much of the prior year's quarter was unaffected by the COVID-19 pandemic. This change in operating environment accounted for the off-trend growth we saw in the first quarter and sets the table for improved growth trends for the balance of the year as we lap the start of the pandemic. Operational EBITDA was 89.8 million in the first quarter. The 2% decline from last year's quarter reflects the impact that the pandemic has had on our subscriber usage versus a relatively clean quarter a year ago. In light of our expectations for steady improvement over the course of 2021, our full-year EBITDA guidance remains at 365 million to 375 million. On the commercial side of our business, service revenue was down 1% this quarter to 90.4 million. This decrease primarily reflected a tough comp, presented by a one-time billing settlement and hosting data revenue in the year-ago period, as well as lower usage in the first quarter related to the pandemic. Commercial broadband revenue totaled 9.4 million in the first quarter, up 8% from the prior year quarter. While growth from our new broadband offering has remained steady, travel restrictions continue to hamper installations and the activation of new equipment. This said, we’ve been pleased with the feedback from the channel, particularly on the performance and reliability of our broadband service. Iridium Certus broadband remains an important component of our long-term growth and we expect installations to improve once travel restrictions lift and serve as a tailwind to revenue. In commercial IoT, we continue to benefit from retail use of personal communications devices. This led to revenue growth of 4% in the first quarter, even with the ongoing headwinds in aviation and oil and gas amid the pandemic. IoT ARPU was $8.39 this quarter, compared to $9.71 in the prior year period. The primary driver of this decrease was lower usage as a result of the effects of COVID-19, most notably in aviation. During the quarter, we added 41,000 net new commercial subscribers driven predominantly by IoT. As a result, commercial IoT data subscribers now represent 73% of billable commercial subscribers, up from 70% in the year-ago period. We estimate that consumer-oriented plans now account for more than 40% of our 1 million commercial IoT users. Posting and other data services revenue is 14.8 million this quarter, down 9% from the comparable quarter in 2020. As we've noted previously, in the first half of 2020, we benefited from a billing settlement and cumulative catch-up with revenue associated with an updated estimate based on observed usage patterns on the Harris payload that totaled about $2.3 million. Approximately 1.3 million of this was recognized as revenue in the year-ago period and the balance in the second quarter of 2020. This accounted for the decline in hosting and other data services revenues this quarter, and will present itself again in the second quarter. Turning to the Government Service business, we reported revenue of 25.8 million in the first quarter, up from 25 million in the prior year quarter, representing a 3% rise. This increase reflects the contractual terms of our long-term EMSS Contract. Government subscribers grew 9% year-over-year and reached a record 153,000 in the first quarter. Subscriber equipment started the New Year on a strong note rising 8% in the prior period to 24 million. Favorable shipments in the first quarter lead us to believe that seasonal activity could improve in 2021, compared to what we saw at the outset of the pandemic a year ago. We continue to forecast full-year equipment sales will remain in line with last year's total. Engineering and support revenue, which is largely episodic, was 6.4 million in the first quarter, as compared to 7 million in the prior year's quarter. As Matt noted, the U.S. government is upgrading their dedicated Iridium gateway to enable Iridium service capabilities. As a result, we continue to expect government engineering work to ebb and flow from quarter to quarter as these upgrades are completed. In all, the first quarter came in much as we had expected. Travel and business restrictions tied to the pandemic continue to weigh on certain industries that we support. While trends are improving, the impact of the pandemic was largely absent from our results a year ago. We were fortunate to have a number of new products they recently launched, as well as a strong pipeline of new partner products that we’ll roll out this year. Together, these should provide incremental revenue and subscriber growth with each quarter. As a result, we continue to reiterate our full-year guidance for service revenue growth of approximately 3%. This outlook for service revenue suggests growth of approximately 14 million in 2021. Given that revenue was flat year-over-year in the first quarter, I'd like to provide perspective to put our revenue guidance in clearer focus. To achieve our full-year guidance, we need to generate approximately 5 million of quarterly service revenue growth in each of the remaining quarters of the year. This outlook is quite reasonable if you consider the following: First, as we've noted for some time, the virtual standstill in commercial aviation in 2020 impacted our quarterly revenue by about $1 million to $1.5 million per quarter starting in the second quarter of 2020. So, our comparison should ease by that amount. And we're also expecting improving usage as air travel increases going forward. Second, there was a true-up and hosted payload in the first quarter of 2020 to the tune of about 1.3 million, creating a headwind that will not recur at all in the third and fourth quarters, and will occur to a lesser extent in the second quarter. Third, we expect year-over-year performance in our voice and data business to improve steadily during the balance of the year, coinciding with the improving conditions in the global economy and a reopening of cross-border travel. Depending on the region, an increase in vaccinations and a return to normalcy is expected to have an impact on the use of telephony and personal communications during Iridium’s important summer selling season. As an example, I would call out last week's deployment of our push-to-talk service by the Indonesian government. PTT has been a bright spot with the addition of new equipment and functionality and is generating increasing interest around the world. We also anticipate improved broadband performance this year. Improvement should follow an increase in activity at global ports, which will allow our business partners to access maritime vessels and install Iridium Certus 700 terminals. Within the government market, we expect additional traction from our partners that sell Iridium Certus into the DoD in the second half of the year. Finally, we expect the introduction of our new mid-band products in the coming months to gain traction by the end of the year, generating incremental revenue. These factors give us confidence in our ability to produce service revenue growth that averages approximately 3% this year, following an essentially flat quarter. Moving to our capital position as of March 31, Iridium had a cash, cash equivalents, and marketable securities balance of approximately 222.3 million. Our growing cash flow has been a source of liquidity and is one of the reasons that our board authorized the share repurchase program in February. In the first quarter of 2021, Iridium purchased 1.6 million shares of common stock at an average price of 37.50, leaving the company with a balance of 240.7 million in its $300 million share buyback program. We expect to continue to be opportunistic in executing these repurchases. Net leverage was four times EBITDA. At the end of the first quarter, this was down from 4.6 times a year earlier, and includes the impact of our buybacks during the first quarter. Our long-term target for net leverage continues to be between 2.5 times and 3.5 times EBITDA. We anticipate that we will be within this target range by year-end 2022, even after giving effect to the maximum $300 million share buyback. Capital expenditures in the first quarter were 9.4 million, and we continue to expect maintenance CapEx of about 45 million this year as we accelerated investments in real estate and support new product development. We continue to expect pro forma free cash flow of approximately 232 million this year, up 15% from 2020. We arrive at this level by using the midpoint of our 2021 EBITDA guidance at $370 million and backing off 71 million in net interest pro forma for our repriced debt, 45 million in CapEx, and 22 million in working capital inclusive of the appropriate hosted payload adjustment. This free cash flow reflects a conversion rate of 60% in 2021, representing a yield of more than 4%. We continue to expect growth in pro forma free cash flow will outpace the rate of growth in EBITDA this year. A more detailed description of these cash flow metrics along with the reconciliation to GAAP measures is available in a supplemental presentation under events in our Investor Relations website. In closing, Iridium continues to enjoy a strong free cash flow and improving financial position and will realize incremental revenue growth as the effects of the pandemic abate this year. We see many opportunities both near-term and long-term for incremental growth and are happy that our many new products will be available to our partners this year to attract new subscribers and gain traction in new geographies and verticals. With that, I'll turn things back to the operator for the Q&A.

Operator, Operator

Thank you. Today's first question comes from an unidentified source. Please go ahead. Mr. unidentified, your line is open, sir. Alright, well, let's move on to our next question, which comes from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss, Analyst

Hey, everyone. I'm sure Walt will join us again soon. I have a couple of questions. First, I'd like to discuss ARPUs a bit. Tom, you mentioned that the IoT sector has been impacted by aviation, but you're approaching a recovery from that. How should we understand the recovery process back to typical levels regarding the aviation impact on IoT, and what trends can we expect for IoT ARPU considering the variety of personal communication devices involved?

Tom Fitzpatrick, CFO

Right. So the second quarter, in terms of the comp, when you compare year-over-year, you're going to have 1.5 in the area of 1 million to 1.5 million in the prior year quarter that's going to be affected by the aviation usage. So, it should not be as much of a decrease in the second quarter as the first because it's kind of apples-to-apples with the aviation impact. And then as sequentially as you go forward, you know, the improvement in air travel should be accretive to the IoT ARPU.

Ric Prentiss, Analyst

And you should have some of that 1 million to 1.5 million a quarter over time.

Tom Fitzpatrick, CFO

Say it again, Ric.

Ric Prentiss, Analyst

We should have a clawback similar to the 1 million to 1.5 million in quarterly revenue that declined over time due to aviation.

Tom Fitzpatrick, CFO

Over time, that’s right. Yeah, that's right.

Ric Prentiss, Analyst

Okay. And then within broadband, obviously saw a small base of customers, but starting to install some – how should we think about is there seasonality in that business from an ARPU standpoint on the broadband side? And as you think about selling companion and backup pieces, where do you think ARPU has in the broadband segment, as you continue to hopefully see more sales results come online?

Matt Desch, CEO

Yeah. There is a bit of seasonality there. I mean, winter, in the Northern Hemisphere is the least amount of usage across many of our businesses, but maritime is one of them, a lot of ships get put away or aren’t as actively sailing. So, you know, it's typically the fourth quarter and particularly first quarter, they're a little lower, and then fishing seasons and more travel occurs in the second and third quarter that I think ARPU picks up a bit, and that's been sort of a historical rate. In terms of ARPUs, I mean, ARPUs on VSAT companion are relatively fixed, you know, that sort of a typically more of a fixed price with an overage in case they use it a lot. And that's a bit lower level, obviously, than primary units. I think increasingly long-term, you know, VSAT companion will be the predominant service along with other smaller vessels. And that sort of thing, though, I think that that's going to be buoyed a bit as we move into this new service 200 round of products, because those are very cost-effective for ships to be – act as both primary services, as well as VSAT backup. I'm not expecting, you know, huge growth in broadband ARPUs necessarily, certainly recovery back to traditional levels in the summer and everything, perhaps, and so there might be some growth in that regard. But I don't think this is necessarily about that. This is more about continued volume, continued usage, and continued revenue growth in that segment.

Ric Prentiss, Analyst

Make sense. And as you think about that addressable market, are you still kind of thinking there's 60,000 vessels of the larger ones, and then you get into some smaller ones, help us just kind of understand where you're at, as far as gaining share and what that addressable market is?

Matt Desch, CEO

There will be additional vessels built and entering the market. Overall growth is slow, and the market's size and usage are relatively fixed. The 60,000 figure refers to larger GMDSS qualified vessels, but there are hundreds of thousands of smaller vessels looking to connect. These smaller vessels are not ideal for the VSAT terminal due to its fixed monthly costs, as they tend to have occasional or pay-as-you-go usage. We consider these vessels as targets. I view the overall LBAND market as remaining flat to slightly declining over time, but we are gaining market share due to our advantages and terminal over the competitors, along with increased usage of VSAT companion as the market expands. Growth is likely to be more prominent at the lower end. As we progress to higher speed services, including higher speed lower-end and mid-band products, we will expand our voice and data services as well.

Ric Prentiss, Analyst

Obviously, an interesting event in the industry ORBCOMM receiving an offer to go private, what can we glean from that offer as far as re-through to Iridium?

Matt Desch, CEO

Well, you know, I think it certainly doesn't mean anything much to us going forward, if anything other than lack of less visibility to them. I feel like we've been pretty successful over the years that sort of winning the predominant share of, sort of the business on the satellite side. They've moved much more heavily into the cellular side and more into solutions as they've, sort of moved away from that segment. You know, for example, we've done very well in the heavy equipment segment. And I think that's, you know, they've been looking to find ways of growing perhaps on a public basis, that's been more challenging. So, I think what it says overall, though is that this is, you know, the space industry is pretty hot in terms of investor interest. There's a lot of people who are looking to, sort of participate in, you know, what will continue to happen in this industry, whether it be consolidation at certain levels and growth in new technologies and new areas at other levels, and I've said this publicly before, a lot of people are talking to everybody right now, because of the, sort of amount of liquidity and activity in the market. And I think that means that there could be continued activity around a number of different segments. And I think ORBCOMM is just sort of an example of that right now.

Ric Prentiss, Analyst

It's good to see the free cash flow production. Keep up the good work, guys. And hope you're doing well through these COVID recovery times.

Matt Desch, CEO

Thanks, Ric. Appreciate it.

Tom Fitzpatrick, CFO

Thanks, Ric.

Operator, Operator

Thank you. Our next question comes from an unknown source. Please go ahead.