Edited Transcript of IRDM earnings conference call or presentation 29-Oct-19 12:30pm GMT

This refinancing, which we expect to close next week, is a major milestone for us. It will replace and pay off our longstanding $1.8 billion French export bank facility that was instrumental in the construction and launch of our new constellation. The BPI facility, as it’s now called, was put in place in 2010 and provided Iridium cost-effective financing for Iridium NEXT when debt funding for companies like ours was difficult to come by. While the facility was perfect for Iridium at that time, the completion of our new network allows us to take another step forward to a structure that is a better fit for our company today. The new deal we just priced will completely retire the French facility and, in doing so, improves our capital structure, provides us flexibility to leverage our growing free cash flow for investors and kicks off a new era for our company. I can’t overstate the relevance and symbolism of this transaction to Iridium. This is really a key milestone, and we feel a tremendous amount of optimism as we begin this new chapter of growth for the company and its shareholders, and many of you on the call today have been vital to seeing it through to this day.

As for the third quarter results we reported this morning, they reflected another strong quarter in a healthy business that continues to grow. As such, we’re on track to exceed our original service revenue guidance for the full year. And today, we’re tightening our operational EBITDA guidance to better reflect the momentum supporting the outlook.

The third quarter is always a busy one for us. This year, we hosted our annual partner conference in September, during which we brought together the many developers, manufacturers and resellers who create Iridium solution. It’s an opportunity for our growing ecosystem of more than 450 partners to network with each other and exchange ideas. We provide them our vision of the future, and they help shape our growth and ensure that our one of a kind network remains the network of choice for their customers and application.

There were many important announcements at this year’s conference and a lot of excitement around Iridium Certus, which launched earlier this year. To date, we have nearly 800 active Certus users and overall sales of these terminals by our manufacturing partners to our licensed distributors have been several multiples of this figure. So we have a very good pipeline of product in the channel today, which bodes well for future activations and demonstrates the channel’s expectations for demand.

Despite this data, as you know, in the third quarter, we trimmed expectations for the sales ramp of Iridium Certus through year-end 2021, as we saw sales and deployment cycles that were a little longer than we originally anticipated. For example, it took almost 6 months from the service launch for the last of our 20 Maritime resellers to complete their technical requirements to sell Iridium Certus and fully integrate us into their proprietary service offering. I can report that the rate of installations has been steadily increasing since our revenue update in mid-September. Overall, I think we’ve set expectations appropriately at this time for that part of our outlook going forward.

Our newest offering, Iridium Certus 700, is under test now and will be available to partners by year-end. It’s being delivered as a firmware upgrade and will be straightforward for partners to update existing terminals and customers.

Last week, Intellian became the latest partner to develop a new Maritime terminal based on the Iridium Certus platform. Intellian has a great brand in the industry and will be very attractive to many fleets. With the speed upgrade, continued strength in terminal demand and positive end user feedback, we are confident that Iridium Certus will deliver on its promise as the industry’s best L-band service.

At our partner’s conference, we also had a lot of discussions about the coming use of Iridium Certus for aviation. Today, you probably know, Iridium has a strong presence in aviation with about 40,000 installed subscribers from commercial aircraft and business jets to rotorcraft and general aviation. As a group, these subscribers pull up Iridium’s average voice and data ARPU. Once the aviation terminals are ready, we expect Iridium Certus to turbocharge our existing suite of aircraft safety services as well as deliver Internet capabilities, such as electronic flight bag services, graphic weather, black box streaming, e-mail and more.

We’re also seeing a lot of interest in the UAV area and have been adding some new partners addressing the opportunities that are coming for beyond line of sight control of drones. We have a number of avionics partners developing solutions to meet all of these aircraft platform requirements. Testing of Iridium Certus aviation terminals is currently underway, and we expect the first one should be ready by mid-2020 with certified cockpit safety products to follow later in the year.

We also used our partner conference as a launching pad for new services, like the one that we’re calling Iridium Certus midband, which will be available next year. Midband represents a new category of Certus devices that are optimized for size, power, weight, antenna size and cost. They will operate much faster than our current narrowband transceivers that are embedded in our phones, personal communication devices and IoT modems.

There’s a lot of excitement in our partner channels for the first device in this category, the new Iridium 9770 transceiver, and we expect to see applications for that starting later in 2020 and ramping into 2021.

Today, we have over 767,000 commercial IoT users, and we’ve seen compound annual subscriber growth greater than 20% since going public in 2009. All of this growth was generated by our legacy service offering, which is very capable, despite having a very slow data rate. New midband devices that are up to 35x faster will move Iridium from just delivering data points, like location and asset status, to more diverse, feature-rich information, like pictures, graphic messaging and e-mail.

Iridium’s partners were also excited to hear about our plans to deliver some new IoT devices in the coming months that expand on Iridium Edge, which we introduced in 2017. The Iridium Edge line of finished IoT terminal aims to simplify our partners’ work of putting their customers on the Iridium network and speed time to revenue for Iridium and its partners. In 2020, we will roll out 2 new IoT products to our partners: the Iridium Edge Pro, which incorporates a processor and a suite of development tools to give partners a complete solution to develop their applications directly on the device; and the Iridium Edge Solar device, which is a very low-cost solar power tracking — tracker, which we think will be the best device in that category for tracking nonpowered assets, like shipping containers and the like.

These and other new capabilities we’re introducing, like Iridium CloudConnect powered by Amazon Web Services that’s going live this quarter, are generating a lot of excitement for our IoT partners and validate why we’re the best network for them to develop their satellite IoT services.

One other announcement that coincided with our partner conference was the memorandum of understanding we entered into with OneWeb. The MOU envisions integrating Iridium into a possible combined service offering available to their future customers. While OneWeb isn’t planning to offer global services for another 2 years or so, they felt a combined offering could leverage the strengths of both companies’ LEO networks and that our L-band complements their Ku-band service very well. This is likely not the only announcement we’ll make with new mega constellation owners.

I think this announcement also serves as a clear message to investors that our L-band and the new Ku- or Ka-band LEO networks are not direct competitors. It’s helpful to have these reminders for investors, especially with the high frequency of satellite launches planned by mega operators for next year.

As you know, the U.S. government renewed our enhanced mobile satellite services contract in mid-September. We’re really happy with the contract. It gives both parties good visibility into the future and is a foundation for our mutual relationship going forward. A fixed price 7-year deal is unprecedented in the satellite industry or, frankly, most other industries and demonstrates the value the U.S. government sees in our unique network. We expect the DoD to be a strong customer for Iridium Certus services on top of this contract and expect they will eventually procure a lot of Iridium Certus broadband service through our partner, COMSAT and new Certus midband service and equipment through other partners in the government space.

In addition to the EMSS airtime contract, the U.S. government awarded 2 other notable contracts to Iridium this year. The most recent was the Gateway Evolution contract, which provides for technical refresh and life cycle upgrades to the government’s existing ground gateway equipment to ensure continued compatibility with Iridium’s commercial architecture. This is a 5-year IDIQ contract focused on infrastructure upgrades, which can generate up to $76 million in revenue for Iridium. It will be used to help the government launch services like Iridium Certus through their dedicated Iridium gateway.

The other contract we announced in April was for gateway maintenance and support services. It’s a 4.5-year contract worth $54 million and is being used to procure Iridium software and engineering services in support of the DoD. Revenues from this contract and the Gateway Evolution contract flow through Iridium’s engineering and services line. And while lower margin than the EMSS airtime contract, these contracts are very important in optimizing the DoD’s use of Iridium services.

Overall, our relationship with the federal government is fundamental to our story. The U.S. government has been a source of tremendous collaboration and often enables commercial solutions as well. We’re happy to have formalized these important new contracts with the DoD, especially in a year that is tracking to be their biggest year of subscriber growth in our history.

Finally, I want to touch on Aireon, which is live and delivering on the benefits they’ve promised. Revenue is flowing, and the company will have positive free cash flow next year. This is an amazing feat given that the company was a little more than an idea just a few years ago. Since our last call, they have signed 2 more customers, AAIA (sic) [AAI] of India and COCESNA, the organization managing air traffic for 6 Central American states. We expect to see more customers sign up shortly and also look forward to the FAA starting to use Aireon service in the Caribbean early next year. We continue to believe that our equity stake in Aireon will yield significant cash flow for Iridium in the coming years and are very proud of the progress the team is making.

So overall, another great quarter and with some pretty big milestones achieved as well.

To provide some more detail. I’ll now turn it over to Tom, who, by the way, deserves a lot of credit for his leadership on the execution of our recent financing and for his leadership on our overall financial plan. Tom?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [4]

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Thanks, Matt. Good morning, everyone. As you saw from our press release this morning, we enjoyed strong results in the latest quarter with double-digit growth in service revenue and operational EBITDA. I’d like to kick off my remarks by reviewing some of our key financial metrics for the quarter and highlights and trends that underlie our revised 2019 guidance. I’ll also provide an update on our refinancing activities and review our capital plans and liquidity position.

In the third quarter, Iridium generated total revenue of $144.8 million. This was a 6% increase to the prior year’s quarter and largely driven by growth in both commercial and government service revenue, somewhat offset by lower equipment revenue.

Operational EBITDA was $88.5 million, which was up 11% from last year’s comparable quarter.

On the commercial side of our business, we reported service revenue of $90.2 million in the third quarter, which was 8% higher than a year ago. The increase reflected continued strength in IoT as well as growth in revenue from hosted payload and other data services.

During the quarter, voice and data revenue rose 3%. This increase was driven by a rising subscriber count and an increase in ARPU to $48 that primarily benefited from new Iridium Certus activations.

Commercial IoT revenue grew 12% during the quarter to $25.3 million or 25% growth in billable subscribers, continuing a trend. Demand for consumer-oriented devices, like Garmin’s growing suite of personal location and messaging devices, continue to provide us with momentum. In addition to introducing a new satellite navigation device this summer, Garmin has expanded its Iridium offerings to consumer product [targeted] for the maritime environment.

The IoT subscribers at Garmin and other consumer-oriented companies bring to our network are particularly attractive in terms of revenue generation relative to network resources used. We expect to add about 100,000 new personal communications subscribers this year to last year’s base of about 225,000 users.

During the third quarter, we added 50,000 net new IoT commercial subscribers. Commercial IoT data subscribers now represent 67% of billable commercial subscribers, up from 63% in the year ago period.

Turning to our government service business. We recorded revenue of $25.6 million in the third quarter, which reflected the renewal of our EMSS contract as well as revenue from short-term extensions during the quarter. As Matt noted, the U.S. government signed a 7-year $738.5 million contract, which will pay Iridium $100 million in the initial year of the contract and step up to $110.5 million in the seventh year in 2026. EMSS contract reflects the strong, collaborative relationship that Iridium has built with the U.S. DoD, which will serve as an important source of recurring revenue well into the next decade, while also leaving additional room for growth from Iridium service, which will be procured separately. In the third quarter, government subscribers grew 16% year-over-year to reach a record 131,000 users.

Revenue from equipment sales was $21.4 million in the third quarter and continues to reflect our outlook for moderation from a record pace last year. Equipment margin was 40% in the latest quarter.

Engineering and support revenue was $7.6 million in the most recent quarter and continues to reflect increased activity with the U.S. government.

In general, the third quarter came in much as we had expected and continued to reflect growth in recurring service revenue. Service revenue accounted for 80% of total revenue in the third quarter, up about 300 basis points from last year. We now expect that total service revenue will be between $445 million and $450 million for the full year versus our prior guidance of approximately $440 million.

We’re also using today’s call to update our outlook for operational EBITDA, tightening our guidance to approximately $330 million for the full year.

We continue to anticipate a step-up in data service revenue, corresponding with the customer contract milestone that Aireon is on track to reach. We expect Aireon data revenues will rise from about $1.1 million a month currently to approximately $1.9 million a month when this milestone is satisfied later in the fourth quarter.

As you consider our implied guidance for service revenue in the fourth quarter, it is important to remember that we recorded an out-of-period true-up relative to Satelles in last year’s fourth quarter of $4 million. The midpoint of our full year guidance for service revenue was $447.5 million. This is a 10% growth year-over-year. Pro forma for the Satelles adjustment, our fourth quarter growth rate would be in line with the full year growth rate of 10%.

Also depreciation and amortization expense should continue at a quarterly rate of about $75 million, reflecting the completion of the Iridium NEXT program.

With the upgrade of our global constellation now behind us, Iridium enters a new phase in the corporate life cycle. We have a strong capital position and are at the beginning of a prolonged period of free cash flow generation. As of September 30 this year, we had a cash and cash equivalents balance of $171.6 million. During the quarter, we incurred $10.2 million of capital expenditures, which reflected maintenance CapEx now that spending for Iridium NEXT mission has concluded. Moving forward, we anticipate maintenance CapEx to average approximately $35 million a year for the next 10 years.

As Matt indicated, we are delighted with the terms of our new $1.45 billion term loan. The term loan will improve Iridium’s covenant flexibility and amortization profile and aligns better with our intention to undertake shareholder-friendly actions. We’ve been talking about refinancing for some time, but were waiting to get the new DoD contract under our belt before doing so. Since April, when the previous 5-year EMSS contract expired, LIBOR has fallen about 60 basis points to around 1.9%, so that move has been favorable. At the same time, however, the market for leveraged loans has softened with spreads widening by close to 50 basis points for single B credit like ours. In fact, there have been a couple of single B credit that were pulled recently due to insufficient demand. Against this backdrop, we moved quickly after signing our new EMSS contract in September to prepare for marketing our new term loan. Our expectations were colored by the fact that there was another well-known satellite company marketing a term loan in the weeks immediately prior to our planned launch. That term loan was downsized, and the pricing increased in order to close the deal. This presented a challenge for us since the company was in the same industry as Iridium and also had a higher credit rating. Despite their higher credit rating, we and our bankers believe that Iridium’s growth and significant free cash flow represented a superior credit, and our results bear this out. Our offering was oversubscribed by over 3x with orders of about $5 billion on our $1.45 billion term loan. As a result, pricing was achieved at LIBOR plus 3.75% with LID of 99.5%. Very favorable terms, particularly in comparison with the other recent satellite deal. We’re very proud of this outcome, particularly since we are a first-time issuer in this market. We provide this color on our debt offerings because we think equity owners should know that another class of investors has given us such a ringing endorsement.

Our pending debt transaction greatly simplifies Iridium’s capital structure and is better suited for our ongoing corporate priorities, especially as we enter a new era of free cash flow generation. We expect this deal to close on November 4 and provide Iridium with significant flexibility in deploying the excess cash generated from our business.

As you reflect on our capital plan, I want to also provide some perspective on our financial priorities and review certain metrics, we believe, investors should consider in evaluating the appropriate trading multiples for our equity.

As we’ve said repeatedly, we intend to delever our balance sheet and are targeting a level of net leverage between 2.5 and 3.5x OEBITDA. As evidenced by our September 30 balance sheet, that process has already begun. We closed the quarter with net leverage of 4.8x OEBITDA, down more than 0.75 of a turn from our peak of 5.6x last year. We have indicated that cost associated with our refinancing would impact our prior guide for year-end 2019 leverage by approximately a 0.25 turn. So accordingly, we have updated our 2019 year-end net leverage to 4.8x versus our prior guide of 4.5x.

I want to also underscore the relevance and durability of the most recent quarterly figures we published this morning and reflecting an ongoing capital spending. For the first time, investors can stay within our financial statement, the level of capital expenditures that we expect will characterize our 10-year CapEx holiday. If you look at the Form 10-Q we filed this morning, the statement of cash flow shows capital expenditures for the 9 months ended September 30 of $102.8 million. This compares to capital expenditures of $92.6 million from the same statement for the 6 months ended June 30. The difference between these 2 statements was approximately $10 million. Backing out the quarterly change — chart change related to GAAP capitalized interest of approximately $2 million, you are left with a cash CapEx amount of $8 million. This figure is squarely in line with our guidance for CapEx to average $35 million per year over the next 10 years.

Investors can use this input to characterize Iridium’s cash flow and cash flow yield. Using the $35 million figure in our normalized calculation of 2019 levered free cash flow yields $167 million, which is better than a 50% conversion rate on our EBITDA guide. Normalized levered free cash flow per share for 2019 would be $1.22, representing a yield of 5%.

Investors should also note that today’s updated guidance for 2019 OEBITDA represents more than 9% growth from 2018. So when combined with the levered free cash flow yield, it is apparent that Iridium represents a rare combination of growth and levered free cash flow generation.

We believe that using these measures, Iridium’s characteristics resemble companies in the tower sector, which trade in the range of a 24x multiple. This is an important investment consideration in our view. Iridium remains well positioned to generate meaningful free cash flow in the coming years and deliver on the financial transformation that our team outlined more than 5 years ago. As I reflect on our accomplishments this year and the current trajectory of Iridium’s business, its subscriber growth and revenue pipeline, I’m very proud of our team’s execution and the metamorphosis of the company that has resulted in significant benefits for our shareholders.

With that, I’ll turn things back to the operator for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Ric Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [2]

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A couple of questions, if I could. First, Matt, appreciate all those details on the development of the new products and the service line and family. Definitionally, I assume like a Certus a midband product and the IoT that might go on it as well, is that all included in the now $50 million incremental by ’21 exit rate revenue target? I get a little confused on the Certus broadband versus Certus normal. Just trying to think through what that — how you’re going to be reporting it.

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Matthew J. Desch, Iridium Communications Inc. – CEO [3]

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Yes. No, we have focused that guide really on the broadband, say, the Certus 350 and 700 type range products only. So midband would be more incremental than would go — into 2 categories that would go into sort of the voice and data category, and it would go into the IoT category. So those are products that will sort of help those 2 revenue lines.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [4]

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Okay. And I think you mentioned the Certus midband, maybe some apps in ’20 and then ramping in ’21.

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Matthew J. Desch, Iridium Communications Inc. – CEO [5]

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Yes. We have a bunch of our partners who are actually trialing or testing and starting to integrate that new — the first modem into their products right now. And we expect their products to hit the market sometime in 2020. But really, I think this is going to be more — really a big — bigger part of the ramp into 2021. It just takes time to put that new product to a number of their solutions.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [6]

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Makes sense. And then, Tom, obviously, you called out on the leadership on the refinancing, the financing plan, a long journey, and now you’re there. As you think about that equity-friendly components you’ve laid out a leverage target, 2.5 to 3.5, but how should we think about how soon you might make Board-level decisions on stock buybacks or dividends and when we might see it come into the marketplace?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [7]

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So we think about 2020 as a delevering year. And then immediately thereafter, sort of as we exit 2020, those initiatives become top of mind.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [8]

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Okay. And I noticed in the quarter, R&D dropped down to about, I think, $3 million. Is that kind of the new run rate that these new products that Matt was talking about, but obviously, the constellations up there? So how should we think about R&D on a go-forward basis versus what we saw this quarter?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [9]

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I’d say, $3 million to $4 million, Ric.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [10]

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Okay. And then the last one for me in a busy earnings day is you called out the $2 million of capitalized interest in the quarter, so it was really $8 million of cash CapEx. How should we expect capitalized interest to go forward now that the constellation is up there? Is capitalized interest really going to go away and will be expense interest, so all we’ll really see is the $35 million of kind of more traditional CapEx? Or will there still be some capitalized interest?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [11]

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There’ll be a little bit. I’d call it, $3 million or less for the year.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division – Head of Telecommunication Services Equity Research [12]

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And would that be included in the $35 million? Or would that be added?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [13]

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No, no, no, because that’s how we quote interest expense. That is not cash CapEx. That’s a GAAP — traditional GAAP accounting, but it’s not part of — we quote cash CapEx as what we spend on CapEx. And we quote interest expense as cash interest expense. It’s just GAAP, mixes them together in the public filings, so that’s why we call it to your attention.

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Operator [14]

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The next question is from Greg Burns with Sidoti & Co.

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Gregory John Burns, Sidoti & Company, LLC – Senior Equity Research Analyst [15]

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Regarding Certus and the revision in the near-term growth outlook, have you seen the competitive response from Inmarsat? So would that have any impact on your iridium’s new growth on Certus?

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Matthew J. Desch, Iridium Communications Inc. – CEO [16]

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Yes, Greg, not really. I mean I don’t think that there’s been anything that they’ve done that’s really been significant or impacting to that. The slight — I mean the change in sort of the outlook at the end of 2021 was really only based on sort of the slows — slowness out of the ramp of some of our partners being able to sell the product. That’s starting to ramp now as we expect. We’ll see the new products come on board in aviation. And there’s a bunch of other new products that were announced by some of our terminal manufacturers in — for 2020 and 2021. So we feel pretty good about the guide as we have it right now and really — don’t really expect a competitive sort of answer to that in any kind of significant way. Really, I think Certus is better in just about every capacity. And the competitive dynamic really with our partners wanting to sell it hasn’t changed at all. So we feel really good about where Certus is.

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Gregory John Burns, Sidoti & Company, LLC – Senior Equity Research Analyst [17]

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Great. And then in terms of Aireon, you highlighted 2 of the new contracts. Can you maybe — can you share with us how much airspace they’re currently contracted up right now? And also remind us of that milestone payment for — the hosting milestone payments, where we’re at with those and what the expectation is for that cash?

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Matthew J. Desch, Iridium Communications Inc. – CEO [18]

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Yes. I mean I’m not exactly sure about the percentage of the world. I mean there’s like 14 ANSPs right now that are contracted. And having seen their pipeline, they’ve got a bunch of them that are in the queue and looking to close here in the coming quarter, too. And I think they’ll be brought on as well. It’s a pretty big part of the world already, but there’s still a lot of opportunity ahead for them. As I said, I’m quite excited because the revenue is flowing. It’s a pretty significant revenue amount that’s already getting them the cash flow positive next year. By the way, it’s working very well over the Northern Atlantic, from what I understand, and really helping visibility of the flights there. They’re using it. I know flights are actually getting better time door-to-door, especially as they go through Aireon airspace. And so there’s a lot of momentum on that front.

But in terms of — there’s still a number of ANSPs in the world that they’re looking to sign up. And of course, the FAA, which is starting to move, got a whole kind of rollout plan that they’re working to see if they can’t accelerate with the FAA to get the benefits even earlier to the FAA and more part to the FAA airspace, which is still a big part of the world. That’s certainly positive, but that’s something for them to really kind of develop and announce. So Tom, do you want to touch…

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [19]

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Sure. I’ll handle it. To the milestone payments, Greg, you remember, as we entered the year, they had paid us $43 million. They have made another payment of $11 million here in the quarter. And we expect another payment of $4 million. So we’ll get $15 million from them this year. So that’s a total of $58 million. And so you’ll recall, there’s a contractual minimum annual amount of — that lines up to our rev rec of $16 million a year. So think of the $58 million that they’ve paid us. Essentially, they’re prepaid through mid-2021. Their plan is to access the high-yield market in late 2021 into a high-yield deal that retires the facility that they arranged last year and upsizes it because they’ll have a much significantly larger revenue contracted at that point in time. And they intend to take us out in our entirety for the hosting payment plus interest, which is accruing at LIBOR plus 3.50%.

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Operator [20]

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Next question is from Mathieu Robilliard with Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division – Research Analyst [21]

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Three questions for me, please. First, in terms of the guidance. So you raised your guidance for service revenues. And when I look at the Q3, actually, there was a very good progression on EBITDA. And I was wondering why you weren’t raising the guidance on EBITDA. Are there some particular cost items in Q4? Or is that a revenue mix impact? The second question was on aviation. I think, Matt, you mentioned a number of installed customers with your current aviation products, if you could repeat that because I missed it. But more importantly, when we think about the ramp-up of the aviation product, as you’ve explained, there’s been a little bit of delays in activating some of the Certus products on Maritime. Have you also taken a more conservative view on the ramp-up of aviation in your new guidance or you’ve left that unchanged? And then finally, you mentioned an activation of some service with Amazon, if you can maybe give a bit more color about that.

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [22]

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Do you want me to take the first one, Matt? Okay. So right. So we basically took the bottom end of our range out of play. So out of — we — our prior guide was $325 million to $335 million, but taking the $325 million out of play and $330 million is a number we feel very good about. To the extent we beat that is going to be dependent on where equipment revenues shake out in the fourth quarter, so we’ll wait and see. And that’s the rationale for the guide as it is.

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Matthew J. Desch, Iridium Communications Inc. – CEO [23]

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Okay. And then on the second question, Mathieu. In aviation, I quoted the number of active devices that we have of our subscribers as being around 40,000 or so on aircraft of all types. That’s been true over the years. Those are traditionally what we call LBTs, voice and data revenues that are used for voice and transferring of things like basic weather and flight bag updates or, actually, air traffic control to pilot messaging, that sort of thing on commercial aircraft. We’ve been certified for a number of years as to what’s called aviation safety services, as other acronyms. So we’re able to be put on commercial aircraft in the cockpit. So it’s been a pretty successful position because of our global network and because we have very small antennas. We’ve been very popular in aviation scaling all the way down to smaller aircraft. We’re not the revenue leader in L-band aviation, but we definitely are the unit leader in aviation as we’ve attacked more of the lower end of the aviation cycle. Say in rotorcraft, we have a clear majority of rotorcraft that have satellite connections on them, general aviation, aircraft, et cetera. So as far as that evolving into Certus, that’s underway now. Certus antennas are being developed by a number of terminal manufacturers different from the Maritime manufacturers. There’s more complexity involved because of the size and scale and because of the certification requirements that are necessary to put something on an aircraft. So it’s taking them — we always expected that would be around mid-2020 to have those really starting to ramp into the market, and that seems to be what they are. So we really haven’t changed our forecast much due to aviation because it really wasn’t hitting in a big way until 2021 and was not nearly as large as the Maritime opportunity, at least in the near term. So that hasn’t really changed much. So I wouldn’t say we’re taking a conservative — more conservative view. We still feel very, very good about it. In fact, aviation has always been one of the most, I don’t know, pure advantages where Iridium has over almost any other network because of our ability to cover the pulls and because the size of our antenna and because the cost of them, et cetera.

Now the last one you mentioned was Amazon Web Services. We did announce last year a — kind of a groundbreaking relationship with Amazon Web Services to develop a product called — which we call Iridium CloudConnect. That’s been under development underway for the last year by AWS. What that does is sort of incorporate Iridium into the AWS cloud suite that their many developers — they have the largest market share of cloud services. So it’s particularly great advantage for those who deploy terrestrial solutions using AWS as their backbone that they can now add Iridium much more easily into sort of their solution because all those sort of commands are sort of in the development suite. And that’s been under development now for the last year and is going live this quarter. So we expect to — it doesn’t drive revenues directly to Iridium. That’s really more for them. But what it does is it simplifies our partners’ ability to put solutions on the network and, hopefully, speeds time to revenue and time for devices to get out there, which we think is a really good thing for our continued IoT growth.

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Operator [24]

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The next question is from Chris Quilty with Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [25]

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Matt, just want to follow-up on the aviation safety services. I know Inmarsat with their SwiftBroadband safety, it took quite a long time to get certified. What gives you the confidence that you can get that certified by the end of next year?

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Matthew J. Desch, Iridium Communications Inc. – CEO [26]

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Yes, we’ve been working on it for quite a while. It’s in the committees right now. It’s — the language is being reviewed in all the different various committees. It does require antennas to be validated, and those are nearly ready. Some of them are actually starting to have initial test and that sort of thing. So given it’s a fairly straightforward upgrade to our network, it’s not new satellites, it’s not — I mean, it’s — our current satellites are really, if you will, certified for it. It’s really just more of a new service class. It’s relatively straightforward. We just have had to get the antennas ready. So everything we see right now is that it’s on track to be certified and able to be in the market and be selling later in 2020. So that’s still looking good for us.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [27]

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And speaking of certification, GMDSS still on track?

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Matthew J. Desch, Iridium Communications Inc. – CEO [28]

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Yes, GMDSS. In fact, just after this call, I’m going to another project management review of that. That’s a development that’s underway to get deployed in the first quarter of next year. A lot of testing underway right now and connections to the various rescue services and that sort of thing, seeing that we have an exciting new terminal in the market that Lars Thrane has created. There’s a number of others in the works. So a lot of enthusiasm about that. So yes, everything is on track there for GMDSS as well.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [29]

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Got you. And a follow-up, I think in your script, you mentioned you expect to add about 100,000 personal communication devices this year. But can you give us a sense of how many were added last year? And is that Garmin only? Or does that include new partners?

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Matthew J. Desch, Iridium Communications Inc. – CEO [30]

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You don’t remember how many it was. It was less than that last year, so that’s an accelerating number.

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [31]

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I think it was in the area of 75,000.

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Matthew J. Desch, Iridium Communications Inc. – CEO [32]

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Yes. So it’s probably 25% or more, actually higher than last year in terms of the overall numbers. There is probably about almost 10 different personal communicator — communication devices ranging from commercial applications to government applications. There’s some exciting new ones that are quite small and easy. They’re coming out of some startups and some other interesting companies that are focused at the enterprise and — as well as outside their traditional consumer spaces. Garmin is certainly the majority of the devices, and they’re expanding their line and SKUs that are integrating Iridium into them. So they’re the majority, but there’s a lot of other consumer devices in the market as well.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [33]

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Got you. And Tom, can you give us a breakdown of the hosting and other fees for this quarter?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [34]

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You mean…

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [35]

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Well, I know in past quarters, we had a number of true-ups. I mean I’m just wondering how clean that $12 million was. I think the area on hosting is pretty set at $4 million a quarter. The data fee like $3.2 million and then…

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [36]

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I think $12 million is clean, Chris.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [37]

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Okay. And so have we hit all of the step-up that we’re going to see for the balance of the year?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [38]

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So as I said, there’s an Aireon customer milestone that we haven’t hit through the third quarter. We expect to hit it in the fourth quarter, at which time, revenues go up by $800,000.

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Christopher David Quilty, Quilty Analytics, Inc., Research Division – Founder & Partner [39]

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And how about on Satelles?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [40]

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No, Satelles, that’s the run rate until they hit another volume clip. So there’s — in the month — in the quarter for Satelles, we’re at $1.275 million. That’s the current rate. They need to clear a volume clip to — for that to increase.

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Operator [41]

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The next question is from Hamed Khorsand with BWS Financial.

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Hamed Khorsand, BWS Financial Inc. – Principal & Research Analyst [42]

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The first question I had, what kind of impact, if anything, is there on the FAA delay going into 2020 for Jamaica with your Aireon revenue?

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Matthew J. Desch, Iridium Communications Inc. – CEO [43]

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I’m not sure I’m following what you’re talking about, Hamed. What FAA delay are you referring to?

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Hamed Khorsand, BWS Financial Inc. – Principal & Research Analyst [44]

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Well, last quarter and the previous quarters, you have been talking about the FAA doing this testing in late 2019. In your premade remarks today, you’re talking about early 2020.

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Matthew J. Desch, Iridium Communications Inc. – CEO [45]

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No, I wasn’t referring to a delay. They’re actually still testing. I was just more talking about the actual use of the service and active air traffic control and stuff and probably the use of it to manage. I wasn’t trying to make a distinguish of any sort of delay there. That seems to be on track and going well.

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Hamed Khorsand, BWS Financial Inc. – Principal & Research Analyst [46]

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Okay. And then my other question is, what kind of ramp did you see in the Certus user base now that you’re entering in the winter months where there’s more ship support?

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Matthew J. Desch, Iridium Communications Inc. – CEO [47]

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We’re continuing to see activations on new ships. We’re seeing fleets that are working to convert. While some ships go into port, there’s still — the digitalization of them continues. And the ones out in the field, really, they’re still out in the field, need to upgrade over time. So we’ve always had — it’s always been a little slower in terms of active rate — activation rates across all of our products in the — in sort of the fourth quarter and first quarter, but it doesn’t look anything unusual to us. It looks like it’s sort of the continued growth rates that we experienced in the past in other Maritime areas.

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Hamed Khorsand, BWS Financial Inc. – Principal & Research Analyst [48]

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And then finally, on your commercial IoT, is that an area where you could see ASPs increase? Or is this pretty much more of a declining business, but just more volume-driven for the commercial side?

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Thomas J. Fitzpatrick, Iridium Communications Inc. – Chief Administrative Officer, CFO [49]

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So there’s no element of that business being declining. So there’s — the subscribers that we’re gaining are more heavily weighted to personal communication, which is lower ARPU. We’ll take all of those subscribers you can get. They’re highly efficient. They have a higher — they have a lower ARPU, but that is not — that’s not something that’s kind of declining. They’re certainly not. ARPUs are being — are influenced by it and they’re going lower, but that’s great business.

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Matthew J. Desch, Iridium Communications Inc. – CEO [50]

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Yes, that’s just an average ARPU. Prices haven’t declined, nor has usage declined. In fact, if anything, it’s going up. There are some potential counteractions as we start to develop Certus IoT products. As I said, when you start transferring message — rich messages and pictures and things like that, there’s a chance that we’ll see some very interesting applications that will take advantage of that, which should be higher ARPU customers. Aviation when it comes on board is often a little higher ARPU customers. So there’s counteracting effects, but if — as Tom said, if consumer IoT and all these personal communication devices keep exploding, I take those all day. They don’t use much resources. And while they don’t drive a lot of incremental revenue in each one, there’s just a lot of volume of them.

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Hamed Khorsand, BWS Financial Inc. – Principal & Research Analyst [51]

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And last question. Is there any difference if the IoT product is on Certus or your legacy? And how much of a percentage is — of the IoT is on Certus?

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Matthew J. Desch, Iridium Communications Inc. – CEO [52]

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So what we are describing as Certus today, I mean, when we talked about a guidance for how much Certus there would be in 2021, we were really only talking about a broadband product, not IoT. In the future, say, in a year from now, there will be Certus IoT products. We would expect those revenues would go probably into the IoT category. Those would go into the IoT category at that time. They wouldn’t be going into that Certus broadband. And the Certus revenues that go into these mid-band products, a lot of those will go into the voice and data line. So you’ll see a breakout of the voice and data line here in the coming months. Two for Certus broadband services, which would include OpenPort and Certus Broadband, anything, if you will, 128 kilobits per second and up primarily. And then you’ll see these midband products kind of going into the — primarily into the voice and data line and some Certus IoT going into the IoT line.

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Operator [53]

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The next question is from Louie DiPalma with William Blair.

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Louie DiPalma, William Blair & Company L.L.C., Research Division – Analyst [54]

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You guys knocked off your checklist this year with the completion of the new $3 billion Iridium NEXT constellation in January and the Certus launch in late January, the EMSS contract in September and now the new term loan in October. So I just want to say nice execution on all 4.

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Matthew J. Desch, Iridium Communications Inc. – CEO [55]

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I thought you were going to say, what are we going to do next. I usually get the what’s next. But anyway, yes. Thank you very much.

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Louie DiPalma, William Blair & Company L.L.C., Research Division – Analyst [56]

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Moving forward, the Certus guidance was reduced from $75 million to $50 million for the year exiting 2021. I was wondering, do you have a new target year on when you think you will reach that $75 million Certus/$100 million total broadband milestone? Is 2023 reasonable? Or do you not want to give out that…

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Matthew J. Desch, Iridium Communications Inc. – CEO [57]

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A couple of misconceptions there. Just because we had $25 million in OpenPort, didn’t — that didn’t — that isn’t necessarily a Certus number. We’ve talked about $75 million of broadband revenues, which could be — frankly, probably won’t be, but it could be all Certus by that time, but probably won’t be. And there will still be OpenPort revenues because that product continues to be on ships and won’t be converted over. So I wouldn’t just do the math and do the comparables. And we’re going to be ramping up, we believe, pretty significantly in 2021 — as we exit 2021 to that $75 million number. So I don’t think you would see that as linear or anything. I mean our expectations will be we’ll cross the $100 million line pretty shortly thereafter. I just don’t know exactly when it is. We’re not going to start making new guidance on when we cross $100 million right now, but I would be disappointed if it was out in 2023.

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Louie DiPalma, William Blair & Company L.L.C., Research Division – Analyst [58]

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Okay. And just one more point of clarification. The EMSS contract contains IoT services. And I believe they are narrow-band IoT services. So are the new Certus midband IoT services incremental to the fixed price DoD EMSS contract?

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Matthew J. Desch, Iridium Communications Inc. – CEO [59]

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Yes, they are. So we did not — we only included, if you will, legacy services in that DoD contract, new Certus technology that’s anything faster, they will be buying, if you will, separately and will be paying for the airtime as they go. So yes, both Certus broadband and Certus midband. And to extent these midband applications or IoT applications, those are all incremental.

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Operator [60]

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

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Matthew J. Desch, Iridium Communications Inc. – CEO [61]

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Thanks. I think it was another good quarter. Obviously, as Louie said, a lot of milestones this year, and we’re not done yet. So we look forward to seeing you at our fourth quarter call, and onward and upward. Thanks, everybody, for joining us.

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Operator [62]

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