Iridium Communications Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 18, 2024

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Iridium Communications First Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I'd now like to turn the conference over to Kenneth Levy, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Rocco. Good morning, and welcome to Iridium's Q1 2024 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 Q1 results followed by Q and A. I trust you've had an opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website.

Speaker 1

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

Speaker 2

the Private Securities Litigation Reform Act of 1995. Forward looking

Speaker 1

statements are statements Such forward looking statements are based upon our current beliefs and Such forward looking statements are based upon our current beliefs and expectations and are subject to risks which could cause actual results to differ from forward looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward looking statements represent our views only as of today. And while we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change.

Speaker 1

During the call, we'll also be referring to certain non GAAP financial measures, including operational EBITDA, pro form a free cash flow, free cash flow yield and free cash flow conversion. These non GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for further explanation of these non GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Speaker 3

Thanks, Ken, and good morning, everyone. For the Q1 often sets the tone for the rest of the year and activity to date has been upbeat and quite strong. Service revenue continues to expand on our growing subscriber base and our partner ecosystem remains quite dynamic whether it be in IoT, aviation or defense. We remain busy as well since the beginning of the year with a lot of new product development and the completion of our first ever company acquisition on April 1. We met with a number of you during the many investor conferences in March and have been active in the debt market with our TAC on financing to upsize our term loan to complete the Sotelis acquisition.

Speaker 3

We're really excited about this transaction and the business opportunities that bringing Sotelis in house provides Iridium and our partners. With this acquisition, we'll go from just a wholesaler of Sotelis' secure signals to an end to end solution provider of PNT services for customers globally. For those who are not yet familiar with this new business area, this acquisition makes us the leader in satellite based time synchronization and location services that complement and protect GPS and other GNSS systems. As the world increasingly has come to realize, the prevalence of GPS jamming and location spoofing during conflicts and for general mischief is on the rise and is impacting critical infrastructure, military operations, aircraft and shipping navigation and other important functions for governments and enterprises around the world. Iridium's expanding PNT solutions can cost effectively reduce these vulnerabilities and provide alternative to GPS Reliance, particularly for critical infrastructure that we all depend upon.

Speaker 3

Going forward, this new business offering will be referred to as Iridium Satellite Time and Location or STL for short and be reported our hosted payload and other revenue line. The entire 70 person Sotelis team is being integrated into Iridium as the P and T business unit and Mike O'Connor who is the CEO of Satellis will report to me as the leader of that business. We anticipate that STL will generate over $100,000,000 in service revenue per year by 2,030 with additional revenue on top of that from equipment and engineering services. These P and T solutions ride on Iridium's LEO constellation and utilize small very low cost hardware. With a secure signal that is a 1000 times stronger than GPS, Iridium STL can even be used indoors to add redundancy and protection to data centers, in building wireless networks and other critical infrastructure.

Speaker 3

Best of all, STL is sold as a wide area broadcast service that support an unlimited number of users while using minimal capacity on our network. These applications are already proving their worth in the market today and we think we enjoy at least a 5 to 10 year head start on other viable solutions that are global and have the resiliency of a space based approach like ours. With Iridium's broad and growing ecosystem of partners, we expect that STL will be able to address many additional customer challenges in maritime, aviation, the UAV market, protecting energy grids as well as some innovative new applications in areas like cybersecurity. I hope you can sense my excitement for this transaction. It's strategically in line with Iridium's priorities and vision, doing things that are unique, special and important from our LEO L band network and better than anyone else can do.

Speaker 3

We're ready now to step on the gas and availability of Iridium STL to new markets and customers. You will recall from our September Investor Day that I laid out a number of vectors that would support Iridium generating 1,000,000,000 return $3,000,000,000 of capital to shareholders over this same 8 year period. Let me be clear, there have been no competitive development since last year's Investor Day that changed our view on our long term financial outlook. STL is one of the financial drivers that supports this plan and is a great tuck in acquisition that will create synergies across our other market vectors. For those who had the opportunity to tune into our presentations during the Q1, you've heard us reiterate many of these long term growth drivers.

Speaker 3

It should come as no surprise that the largest opportunities we see for revenue growth through the end of the decade come from services we already know very well and are already working on. To achieve our long term growth objectives, we don't have to change our strategy or wholesale business model. Instead, it will be more of the same. We will stay in our lane, grow our network of business partners, execute on product launches and innovation and deliver on our unique strengths. This is our objective and we have a pretty good track record of delivering.

Speaker 3

Beyond Sotelis and other potential tuck in acquisitions, we highlighted 4 other drivers during our September Investor Day that are key to Iridium's revenue growth in the coming years. First, IoT. We are the leader in personal satellite communications as well as industrial IoT and we continue to believe that double digit revenue and subscriber growth we have produced in these commercial applications will continue for the foreseeable future. You can see that really demonstrated again in our Q1 results. 2nd, mid band.

Speaker 3

Leveraging our leadership in IoT, we will continue to move forward with partners to roll out new applications and devices that take full advantage of our very unique Iridium Certus platform that is optimized for size, speed, mobility and takes full advantage of our L band spectrum position. Highly mobile, power efficient devices using Iridium's mid band services, which support speeds up to about 100 kilobits per second in a small form factor will drive IoT ARPUs and open Iridium services up to new industries. Some of these devices have already entered the marketplace and we envision Iridium's mid band services will offer added functionality and connected solutions to industries like security and surveillance, autonomous vehicle and other remote applications that demand higher bandwidth, but still need mobility or operate on batteries and are often small and need to be lightweight. 3rd, direct to device. You previously heard me speak of our investment in Project Stardust.

Speaker 3

This is a multiyear investment that will make Iridium technology available to chipset manufacturers adopting new satellite oriented 3 gsPP standards for IoT devices and consumer devices like smartphones. This is a very large market and our work will expand our IoT opportunities into a broader set of cost sensitive industries. Lastly, telephony. We strongly believe that satellite based personal communication devices have a bright future even as we and others develop direct to device capabilities. I want to underscore that telephony is an important revenue source for us with more than 400,000 users of purpose built voice devices of all types on our network and we expect that number to continue to grow into the future.

Speaker 3

These devices are mainstays for first responders, governments and loan workers and they've become so completely integrated in their operations because of their reliability, global reach and the challenging environments in which they are used. They allow organizations to plan and execute without interruption and ensure that communications facilitate the accomplishment of goal rather than hindering it. The advent of high quality push to talk services over the last 5 years is a proof point of these purpose built devices and remains a driver of expanding subscriber base and revenue Iridium continues to see in this area. Historically, Iridium has served the needs of niche and specialized communities of users. And while we are proud to have grown this niche to more than 2,300,000 subscribers globally, I assure you we are far from finished.

Speaker 3

My team constantly questions the status quo and given our history has a healthy humility and even an appropriate level of paranoia about the continued leadership position we have attained in the satellite industry. Some investors seem to be skeptical about our future right now, but we think they underestimate the utility of our global services, misunderstand the needs of particular customers we serve and are discounting the capabilities of our network relative to others in the satellite sector. We are highly confident in our long term revenue drivers and capital generation through 2,030 and we have a lot of visibility into the fundamentals of our business. The vast majority of our revenue is recurring what we refer to as service revenue. While we do not require our service to be sold with long term contracts, our customers often opt to purchase Iridium solutions for years at a time.

Speaker 3

In fact, they've often tried other L band offerings prior to settling on Iridium's network and they choose our service because it provides a level of reliability, coverage and customer support that they cannot get elsewhere. I'm proud of this fact and encourage investors to validate this with their own due diligence. We continue to show our commitment to return capital to shareholders. In the Q1, we were active with our repurchase program and continued with our quarterly dividend. As we noted in February, our Board will increase Iridium's dividend starting with our June payment.

Speaker 3

This will result in a dividend increase that is equivalent to about 6% in 2024. These programs underscore our confidence in Iridium's continued business growth and the strength of our enterprise to generate free cash flow. I would be remiss not to touch on Iridium stock price and the market's current assessment of our equity valuation. While Iridium is a satellite service provider, we don't operate or look like anyone else in the satellite industry. I would go so far to say that this group is not who we should be compared to for valuation purposes.

Speaker 3

Other satellite operators have continued to see competition grow and seen their fundamentals deteriorate. With perhaps 1 or 2 exceptions, they don't generate free cash flow like we do, don't have growing service revenue and subscribers like we do and surely none can claim to have the unique network and business profile that we do. We continue to believe that Iridium is more comparable to other companies generating both growth and free cash flow. We encourage investors to look at Iridium's levered free cash flow to evaluate the strength of our business and assess the relative value of our common shares. When considering measures like free cash flow yield and conversion, we believe that Iridium continues to stack up quite well against the tower sector and data centers, some of which trade at twice our enterprise value to OEBITDA multiple.

Speaker 3

We believe our competitive dynamics are also similar to these infrastructure companies and that we occupy a unique business space and have strong visibility to future growth. As such, we believe that the underlying strength and growth of our business should be rewarded with a higher valuation. Perhaps some of the decrease in our valuation comes from the market's overall concerns for the space industry in general and disruption impacting VSAT players. I would remind you that Iridium Paces a very different competitive environment and set of business opportunities than the commodity broadband players in the VSAT industry. In fact, we have been deliberate in avoiding commodity services like VSAT broadband and are focusing on being the L band safety complement to VSAT and other K band broadband services.

Speaker 3

Our L band ensures that mariners can operate globally and reliably in the face of weather, where service is unavailable or imports where VSAT services are restricted. And later this year, our companion Iridium Certus broadband terminal will be able to provide the mandated GMDSS function as well. We continue to believe our shares offer a compelling value today based on our fundamentals. We are converting on business opportunities, adding subscribers, growing revenue and adding new avenues of growth. We remain an active buyer of our shares and continue to believe our equity is an attractive investment for investors looking to out outperform the broader industry.

Speaker 3

As we have previously said, we don't expect to spend any CapEx on a next generation satellite constellation through 2,030. We expect that when we 1,030, it will ramp slowly as we shouldn't need to launch satellites until the latter half of the 2030s. As we contrast the amount and profile of spending with our anticipated OEBITDA during the construction period, we expect to generate meaningful levered free cash flow throughout a next generation constellation build. This will support continued share repurchases and a growing dividend throughout the future construction period. So Iridium has a healthy balance sheet, strong business fundamentals and is positioned well for growth.

Speaker 3

We see no new competitive developments impacting our outlook or long term guidance. As we have said during last year's Investor Day, Iridium expects to have the capacity to return approximately $3,000,000,000 to shareholders through 2,030. This represents just about 100% of the company's equity market value as of this morning. You must admit that's an extraordinary fact at this time. Everything we see supports our outlook for continued growth in achieving our long term vision.

Speaker 3

While the market may not appreciate this at the moment, we expect it to eventually correct as we continue to execute, expand on our unique opportunities of our network and return capital to our shareholders along the way. With that, I'll turn it over to Tom for a review of our financials. Tom?

Speaker 4

Thanks, Matt, and good morning, everyone. I'd like to start my remarks by summarizing our key financial metrics for the Q1 and providing some color on the trends we're seeing in our major business lines. Then I'll recap the 2024 guidance, which we affirm this morning and close with a review of our liquidity position and capital Iridium continued to execute well, delivering another quarter of subscriber growth and strong service revenue expansion. Operational EBITDA was $115,000,000 in the Q1. This was a 3% increase from last year's quarter driven by growth in recurring revenue.

Speaker 4

On the commercial side of our business, service revenue was up 8% this quarter to 122,100,000 dollars This increase was broad based and reflected continued strength in voice and data and IoT as Matt mentioned. Voice and data revenue rose 5% from last year's comparable quarter to $55,000,000 The increase was largely driven by subscriber growth as we continue to benefit from strong demand for our push to talk services. The one to many service of push to talk has widespread application in organizations that coordinate and respond to dangerous and changing circumstances like first responders, safety organizations and government entities. Commercial IoT revenue totaled $39,400,000 in the first quarter, up 23% from the prior year quarter. It was favorably impacted by a new 2 year contract with a large fast growing partner.

Speaker 4

This new contract has the effect of materially increasing revenue from this customer in 2024 compared to 2023. It also results in revenue being recognized approximately equally in each of the 4 quarters of 2024. In prior years, revenue was recognized as subscriber counts ramped throughout the year and as seasonal usage picked up in the 2nd 3rd quarters. That will not be the case under the new contract as we have agreed to a more deterministic approach to pricing with this large customer, which creates more certainty for both of us. As a result of this contract change, the quarters this quarter's revenue growth will compare most favorably to our lowest prior year revenue quarter and future quarters will show somewhat lower year over year growth in this quarter.

Speaker 4

Given the certainty of these contractual revenues and with positive developments across a broad range of other IoT customer segments, including personal communications, heavy equipment OEMs, fleet management and aviation, we expect full year IoT revenue to exceed the 13% growth rate experienced in 20222023. Accordingly, we are guiding IoT revenue growth in the mid teens in 2024. IoT is a central plank Iridium's $1,000,000,000 service revenue target for 2,030. Developments in 2024 in IoT bolster our confidence in achieving this long term target. Revenue in commercial broadband grew 2% from the year ago period to 13,700,000 dollars As we have previously noted, we are seeing the effect of commodity broadband pricing in a limited portion of our broadband business.

Speaker 4

We expect this impact to be short lived and expect growth in broadband in 2025 to improve from 2024 as we are routinely used as a backup to VSAT and all anticipated in our $1,000,000,000 service revenue target for 2,030. I would point out that while broadband was not one of our planks identified for growth in our September 2023 Investor Day, we do expect respectable growth in this area over the period. During the quarter, we added 54,000 net new commercial subscribers. Commercial IoT data subscribers now represent 81% of billable commercial subscribers, up from 79% in the year ago period. We estimate that consumer oriented plans now account for more than 930,000 of our 1,800,000 commercial IoT users.

Speaker 4

Hosting and other data services revenue was $14,000,000 this quarter, down 7% from last year's comparable quarter. As we outlined during our last call, we increased the estimated useful life of our satellites by an additional 5 years based upon the health of these assets. This extension of the satellites useful life extends the time over which we recognize revenue from our fixed price hosting contracts. It's important for me to reiterate that this accounting update does not affect our cash flow. Government service revenue was stable in the 1st quarter at $26,500,000 reflecting the terms of our EMSS contract with the U.

Speaker 4

S. Government. Subscriber equipment, which is coming off 2 years of record sales driven by partners' supply chain stock up related to the pandemic is now returning to more normalized levels. We sold $24,900,000 in hardware in the Q1 and continue to expect equipment sales this year will be more in line with historical levels. Engineering and support revenue was $30,400,000 in the first quarter as compared to $24,200,000 in the prior year period.

Speaker 4

The increase reflects growing activity related to our government work for the Space Development Agency, a contract that we won in 2022. We continue to forecast year over year growth in engineering revenue in 2024 and again expect growth in 2025 based upon an increase in the scope of work and new business opportunities with the SDA. Our Q1 results as well as the trends we're seeing into April allow us to affirm our full year guidance on service revenue and EBITDA. In support of this outlook, I want to highlight a few items that may be relevant to your models. We remain comfortable with our outlook for service revenue growth between 4% and 6 percent in 2024.

Speaker 4

This equates to a 5% to 7% range without the accounting update related to our satellites. The Satellis acquisition, which we completed earlier this month, is accretive to our previous revenue guidance for service revenue growth of between 4% 6%. However, we expect the effect to be less than 100 basis points in 2024. So we are reiterating our previous guidance this morning, but now see ourselves higher in the stated range after giving effect to the acquisition. Commercial voice and IoT data continue to enjoy strong momentum and drive much of VIRIDIUM service revenue growth in 20 24.

Speaker 4

Revenue from our U. S. Government EMSS contract will remain steady at $26,500,000 per quarter in the first half of twenty twenty four and will rise with a contractual step up in September. Full year revenue in the government business will be $106,300,000 in 2024. Equipment sales will moderate this year with revenue expected to revert to pre pandemic levels as the channel absorbs safety stock it accumulated during the pandemic.

Speaker 4

On the expense side of the ledger, SG and A is expected to remain stable in 2024, while R and D spending will nudge up about $5,000,000 to support our Stardust initiative on NB IoT and Direct to Device. Depreciation and amortization will decrease by about $83,000,000 in 2024. This is entirely related to the change of satellite useful life, which I touched upon earlier. Iridium expects cash taxes of less than 10 $1,000,000 in 2024. This minimal level incorporates additional R and D credits we expect to realize through 2026.

Speaker 4

Taken together, these trends allow us to reiterate our forecast for service revenue growth between 4% and 6% and operational EBITDA between $460,000,000 $470,000,000 this year. We feel very good about the momentum we're seeing across our businesses. Moving to our capital position as of March 31, Iridium had a cash and cash equivalents balance of $174,000,000 Iridium received cash of approximately $125,000,000 as a result of an increase in the term loan, which was used to fund this TELUS acquisition in early April. You'll see the full impact on our cash balance of this transaction when we report on our 2nd quarter results. Term Loan B tackle on funding was completed at an OID of 99.7% and with the same terms as Iridium's existing facility.

Speaker 4

We're very happy with these terms and appreciate the confidence the debt community continues to show in Iridium. As of March 31, Iridium's term loan balance increased to 1.6 $2,000,000,000 to reflect this new funding. When we report out our 2nd quarter results, you'll see the full impact of this transaction on our balance sheet, which will have the effect of increasing Iridium's net leverage to approximately 3.4 times of EBITDA. As we've said previously, we think Iridium naturally delevers over time and expect net leverage to fall below 2.5 times OIBDA as we exit 2026 and be below 2 times OIBDA by the end of the decade. This outlook gives us back to our planned dividend program and all share buybacks authorized by our Board.

Speaker 4

In the Q1 of 2024, Iridium retired approximately 1,800,000 shares of common stock at an average price of $30.41 This left us with an outstanding balance of $277,400,000 under our Board approved authorization through December 31, 2025. During the Q1, we also made a quarterly dividend payment of $0.13 per share paid on March 28. Beginning in the Q2 of 2024, Iridium's Board will increase Iridium's quarterly dividend to $0.14 per share, representing an increase of approximately 6% over the full year 2023. This reflects our confidence in the company's business opportunities and prospects for continued strong free cash flow generation. Capital expenditures in the Q1 were $14,600,000 As we noted on our Q4 call in February, we expect capital expenditures to $60,000,000 annually through 2,030.

Speaker 4

CapEx will be over $60,000,000 in the next couple of years as we invest in new product development initiatives like Project Stardust and then trend below $60,000,000 in the latter part of the decade. Turning to our pro form a free cash flow. If we use the midpoint of our 2024 EBITDA guidance and backlog $84,000,000 in net interest pro form a for our current debt structure, $69,000,000 in CapEx for this year, dollars 5,000,000 in cash taxes and $6,000,000 in working capital inclusive of the appropriate hosted payload adjustment, we're projecting pro form a free cash flow of approximately $301,000,000 for 2024. These metrics would represent a conversion rate of EBITDA to free cash flow of 65% in 2024 and a yield of approximately 10%. A more detailed description of these cash flow metrics, along with a reconciliation to GAAP measures is available in a supplemental presentation under Events on our Investor Relations website.

Speaker 4

In general, we're happy with the performance of our business and believe that Iridium continues to make solid progress on the long term growth initiative it laid out at the 2023 Investor Day. I also want to echo Matt's comments on our equity valuation. Iridium stands in stark contrast to the other satellite companies and occupies a truly differentiated position. We will generate approximately $300,000,000 in free cash flow in 2024 and it will grow from here. We should not be compared to other satellite companies who face direct competitive challenges and many of whom don't even generate positive free cash flow.

Speaker 4

With that, I'll turn things back to the operator and look forward to your questions.

Operator

Thank you. We will now begin the question and answer session. Today's first question comes from Ric Prentiss with Raymond James. Please go ahead.

Speaker 5

Thanks. Good morning, everyone.

Speaker 3

Good morning, Ric.

Speaker 5

I appreciate the competitive landscape picture and all the details on your part. I do want to hit on the Suttellus side. So it sounds like service revenue can move to the high end, but Sotelo helps with that, but less than 100 basis points. How should we think on the cost side? I think Matt, you mentioned 70 people coming in.

Speaker 5

Where are those how much the cost of Sotelo is coming in and kind of what line item should we think that's coming into?

Speaker 3

Yes, it could be mostly in SG and A. Yes. Yes, in SG and A and probably just proportionally exactly as you would see it add to our overall total. Okay.

Speaker 5

And IoT, appreciate the color on that. Large contract, 2 year contract, I think I heard you say, flattish effect kind of, I guess, ARPUs versus a seasonality. What should we think of in 2025 on that 2 year contracting? What's the risk that it falls off after that then?

Speaker 4

What the risk that what falls off, Rip?

Speaker 2

So you said it was

Speaker 5

a 2 year contract. So is that like a benefit and then those subs and revenues drop off or maybe give us a little more color on?

Speaker 4

We think that's a growing customer. They just happen to sign into your contract, but that's a grower for a long time in our view.

Speaker 5

Okay. And you said the revenue recognition is different this time around with this particular customer, and that there'll be future quarters being lower year over year increases versus what we saw in 1Q. Just trying to think of how should we be thinking about what that means throughout 2024 and what it means for 2025 on the initial 2 year contract then?

Speaker 4

Right. So I think we're sitting on a 23% growth in the Q1. What we're saying is future quarters, next 3 quarters is not going to be that, it's going to be down, but you should model mid teens growth on the full year for IoT.

Speaker 6

Got you.

Speaker 5

Okay. And the final one for me, obviously you both touched on, which we agree with the stock price looks very compelling. The stock buyback in the quarter was $57,000,000 or so What would allow you to ramp that higher? Obviously, you're keeping leverage in balance, you have the Sotelis acquisition, but why not go heavier at the stock buyback program since you see such compelling value there?

Speaker 4

Yes, I would say we agree with you. It could go higher. Was there anything that kept it

Speaker 5

muted in the Q1 or anything external we should think about that might have governed it?

Speaker 4

There's constraints in terms of windows and that sort of thing. And as you saw, we took the leverage up for Satellis. There was some investors thought that we would maybe back off of the share buybacks. So there's no chance we were doing that. So we took the leverage up for Satellis and we think that the share price right now is a really compelling buy.

Speaker 4

So stay tuned.

Speaker 5

That's understood.

Speaker 4

All right.

Speaker 5

Thanks guys.

Operator

Thank you. And our next question today comes from Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thank you very much. Good morning. Matt, you talked about the Suttellus being your first deal here. I know you've been very disciplined over the years and you've laid out the benefits that gives you.

Speaker 7

So perhaps just a little bit more context about what got you over the hump here in terms of deciding with the Board that this was the right thing to do. And should we think that this might be the start of a more active deal environment for you? And I know it's only been a couple of weeks here, but I presume bringing Sotelis into the broader organization opens up a lot of other conversations. So it'd be just great to hear what the early impact has been with your customers, etcetera and your ability to leverage this and take it to another level?

Speaker 3

Yes. Good question, Simon. So I would say we've always been interested in potential acquisitions, but there haven't been many compelling ones out there in our space that really fit our model, didn't really want to change our business model. Obviously, we knew Suttellus very well. We were part owner.

Speaker 3

I really feel personally responsible for having helped create the business going back almost 15 years and helping spin it out as a technology out of Boeing and sort of nurturing the business along. They've actually done quite well. We were excited to see the space was well, I'm not excited to see the space growing and that means that GPS jamming and spoofing and all kinds of other issues are growing quite dramatically. But we saw the recognition of those problems were expanding around the world and Sotelis was being well recognized for that, was being successful and was sort of at a turning point in their business. And I think they recognize that as well because they had their board approve the consideration of selling themselves.

Speaker 3

And in fact, it opened up a process. So they were thinking with that additional growth that they might find a partnership say with another government contractor, another place that might expand them. And I certainly wasn't against that because whoever bought them would be a partner of ours. But immediately started thinking why are we not the one that really should be the right owner of this. This is a good time for us to jump into this segment.

Speaker 3

It does change our business model, doesn't put us in competition with our partners. It really has a chance of creating other synergies across our business. And I would say that that has been absolutely the conversation we've been having over the last couple of weeks. One limitation they had is that they were very limited in terms of what where they could lay the signal down around the world and the applications that they could pursue because they didn't want to pay too much money to us in terms of that signal. Well, we're not limited in that way.

Speaker 3

We can expand into things like maritime and aviation which require the signal to be placed across the big part of the world. They view those applications out 5, 6, 7 years opportunities where we look at those as more near term opportunities that we can pursue right away because we have the ability to broadcast that signal anywhere we want to. So there's been a lot of synergy discussions already, a lot of things we hadn't even considered before. I will tell you the customer their customer base was thrilled to hear that we were the acquirer, gave even more confidence about them as a supplier in the market segments they were pursuing. So, it's been really a win win and we're really quite excited about the potential for that business.

Speaker 7

All right. Good to hear. And maybe just one follow-up, I appreciate the color on the NEX constellation and really the spend being pushed out into the latter part of the 2030s. That would seem to suggest that 2.0 on leverage is pretty conservative if you're not going to have a big step up in CapEx in the early part of that decade. Is So has something changed there or why do you need to be there if you're not necessarily going to need that capacity for 3, 5 years later?

Speaker 3

I think when you give guidance 8 years out in the future, it's really just model based at that point. I mean, I don't disagree that if we were still trading at this level out later on in the decade, that would be a crazy multiple to be keeping at. So because there's that's that's the right kind of model right now for the future and we'll revisit that as we go out in the future. But I mean, like I said, I think the more important part is showing continue to show investors that this growth rate that we've experienced over all these years is going to continue. I think we've given lots of reasons why that should continue and why we believe our projections are appropriate and we'll let the rest of it take care of itself.

Speaker 7

Great. Thanks. Makes sense.

Speaker 2

Thanks, Tom. Thank you.

Operator

And our next question comes from Walter Piecyk with Leitstead. Please go ahead.

Speaker 6

Thanks. Tom, I think in the prepared remarks, you said the free cash flow guidance is $301,000,000 last quarter and the supplemental is $309,000,000 I assume the difference or it looks like the difference obviously is the $8,000,000 for added interest expense for Satellis.

Speaker 4

That's right.

Speaker 6

Which seems a little high, I think relative to the amount, but whatever, that's $8,000,000 So does that just imply that Sotelus adds, it's basically a breakeven EBITDA business or how do we think about that consensus?

Speaker 3

We've said

Speaker 4

that We've said it's breakeven. Got it. And then

Speaker 2

by year whatever

Speaker 6

3, 4, what's the expectation in terms of, EBITDA contribution specifically for Sotelis? How do you expect that to ramp in the upcoming years to get to the into your longer term targets?

Speaker 4

So our guide on Satellis is it was $5,000,000 in service revenues in 2023. We see

Speaker 2

it as

Speaker 4

$100,000,000 in 2,030. And EBITDA margins in that business are going to be as good or better than ours.

Speaker 6

All right. And then on Stardust, you're spending $5,000,000 on it this year. Is that early stage spending? Does that go up in subsequent years? And what are the decision factors?

Speaker 6

Well, I guess, 2 part question on this. Are there other applications other than direct device that the Stardust investment enables? And if not, what are the decision factors in the upcoming quarters or years if you see major manufacturers kind of go a different direction in terms of the connectivity that they want to implement in their devices, cell phone manufacturer that is?

Speaker 3

So the Stardust is really a there's some additional capital required in there as well as for some standardized boxes and gateways and things like that that perhaps we don't have that we'll be purchasing. But most of it is development into our network itself. We don't have to develop the end user device because that's being done by the standards community and by chip manufacturers and we're having those discussions today. But it's really because we have a very flexible software defined network because most of it is reconfiguring our network over time. So don't expect that the investment is going to dramatically increase from where we're at this year.

Speaker 3

It's a couple of year investment in capital and R and D and will enable us to do not just direct to device. I mean, when we say that word, I think the bigger opportunity really for us is narrowband IoT. It's an expansion of the opportunities that we have in the IoT space. That is a more direct play where our partners are excited about being able to offer standardized devices that really are very low cost and roam flexibly onto the terrestrial networks or roam from the terrestrial networks to space. And I would say that's the biggest part of the opportunity.

Speaker 3

We also are having a lot of discussions about that technology being put into the chipsets that are going into phones and other consumer devices and would expect that that could be an opportunity in complement to other technologies because we'll be a global L band capability that can be in every country where at least right now it looks like most B2D technologies are quite regional, limited by sort of spectrum and regulatory issues and other things right now that a global capability that can do sort of service. So that's a pretty broad based service. So that's a pretty broad based opportunity set that we're looking at with Stardust and certainly justifies why we're investing in it.

Speaker 6

Got it. And I think I might have missed this when I think Rick might have asked this question, so I apologize if this is the second time. But on the IoT contract, was there a time line on that contract? Did Thomas, it sound like from your comments, it sounds like a 1 year deal, but is this like does it auto renew? Is it not is it more than 1 year?

Speaker 6

Can you just give a little bit more color on, I guess, the terms? And I guess, more importantly, obviously, it doesn't show up in units, but it's showing up in revenue, like just functionally, how is this what is can you just give us a little bit more color on the customer I guess and the length potential length of the contract?

Speaker 3

I'll take it. Tom, you can too. But I would say this is a long standing customer who has been a big user of our services and expects to do that in the long term in the future. And they wanted more consistency sort of in the expectations they had. So we struck a 2 year deal with them, which we've given good guidance about.

Speaker 3

Don't expect that to end because they're going to continue well out in the future. But we felt that would be a good place to start. And so we struck a 2 year deal, which was sort of a win win for both of us and have provided you the effects of what that looks like in our business this year and what it could be.

Speaker 6

When you say consistency, are you talking like dedicated? What does that mean? Is that dedicated bandwidth or what exactly are they getting?

Speaker 3

A more view of exactly what kind of revenues what kind of cost that they would be spending on their service revenue over time because we have enough experience with each other to know how they're using our network and what and so we were able to kind of instead of going device by device and service by service, we could kind of spread that over time in a more consistent way both for them and gave us more consistency as well to know what our expectations were looking like going on in the future.

Speaker 2

So it

Speaker 6

sounds like a tower master lease agreement as opposed to basically charging them on a per unit basis, an overall usage based contract.

Speaker 3

Yes. I don't disagree that's not a bad reference somehow.

Speaker 2

Okay. Thank you.

Speaker 3

Yes. Thanks, Will. And our

Operator

next question today comes from Chris Quilty with Quilty Space. Please go ahead.

Speaker 8

Sorry. The horse is not quite dead. One final hit on it. Is it fair to assume like I had been modeling kind of mid single digit decline in commercial IoT subs or IoT, ARPUs for this year. Q1 turned out to be your first increase since I went back and looked at the Q1 of 2012.

Speaker 8

Like we're not expecting the ARPUs for IoT to be up this year. They're still down. You don't have to confirm mid single digit, but the long term trend still holds as the personal communications is still sort of dragging down overall ARPU?

Speaker 4

You have that right. You have that right, Chris. So think about the picture this way. I think on the full year this year, they're not going to they will not follow trend. They're going to be better than that.

Speaker 4

I'd call it flattish on the full year. They're up in the Q1, but it looks like flattish. So that's atypical and that's this contract. But the longer term kind of effects are 2, right? The personal communications is outweighing the sub growth by long shot, that's lower ARPU.

Speaker 4

So that's going to cause the ARPUs to trend down. Kind of offsetting that is new functionality with higher data speeds, right, that will cause higher ARPUs within personal communications. So that will serve to temper what should continue to be a downward tope line in terms of ARPUs.

Speaker 2

Got you.

Speaker 3

But I would say longer term, Chris, I mean, there's another effect as we get into the narrowband IoT space, which could be lower ARPUs as we expand into new applications, but then there would be much bigger volumes and stuff as well to kind of counteract that. So it's hard to exactly say where this is going to go, but certainly it's positive. Yes.

Speaker 8

Well, I was going to say even before the NB IoT, when so it's been more than 10 year trend of declining ARPUs here, which has been good because it's the growth of the personal communication stuff. At what point does the growth of the mid band, which should be higher ARPU, turn you into positive territory? Is that like a couple of years out or 5 years out?

Speaker 3

Yes. I don't know. I mean, probably a year or 2 at least before it really makes a major impact because the new 9,604 which comes out late this year starts getting into devices that would hit the IoT line and then some of this mid band is hitting more of the voice and data line, which is a positive there. So it takes time for these new technologies to get into products and start ramping. That's usually a couple of year kind of cycle.

Speaker 3

And fortunately, the mid band stuff started a year or 2 ago. And so we're just going to start I think seeing more growth as we get into this year and next year. But again, I mean, since we don't have really costs associated with it, I think the ARPU argument as we made the point is not like the argument made in the terrestrial wireless world where CapEx sort of followed every subscriber. So ARPU declines had concerns. We more focus on how much resources are being utilized by the customer and these low ARPU personal communication subscribers are using almost no usage on our network.

Speaker 3

So that's a fantastic use of our service.

Speaker 4

So I would just amplify, Chris, that Matt's point about the relative significance of ARPA. I think what investors should take note of is take a look at this IoT business. It grew the last 2 years by 13%. We're saying here it's a much bigger business than it was 2 years ago, and you see accelerating growth. We're guiding mid teens.

Speaker 4

I think that's the real takeaway on IoT.

Speaker 8

Good stuff. Maritime, so last quarter, you became the probably the very last company in the maritime service market to feel the StarLink impact. I think you said it was limited to those vessels that used sort of service only terminal, which was fairly limited number of vessels. Is that playing out as you thought? And the second part of the question is, as StarLink starts to penetrate the vast number of vessels that have no connectivity, Do you have some kind of a definitive strategy to pull along with them as the backup?

Speaker 8

You've already established yourself as a backup to VSAT. And when I say VSAT, I'm talking about the traditional geo VSAT. Technically, STARLINK is a VSAT, but they're different. Or do you think that those new users who historically haven't had connectivity are just not inclined to have a backup system regardless of whether STARLINK is blotchy or whatnot in its performance?

Speaker 3

Yes, great questions. To the first part, it's absolutely playing out exactly the way we thought it would play out and over the same timeframe and is kind of I think will play out over the next couple of quarters and we'll get back to growth in 2025 as we expected there. To the latter part, we've now talked to every one of our partners, all the people who are deploying both Starlink and VSAT solutions and they all are absolutely both committed and convinced it's the right strategy that Iridium be the backup, be a companion to StarLink because StarLink still is despite all it's a great product, which I think by the way is expanding the market a bit too, but extent it's on existing fleets. Fleet owners understand the limitations of where it can't operate. It's restricted to operate.

Speaker 3

It still has the same limitations around rain fade and that sort of things as VSAT solutions do and it can't be used in many ports. And a solution, particularly one as cost effective as ours that works 100% on the planet and before long we'll actually have a GMDSS and LRIT and SSAS function all embedded in the same companion terminal is the best way to provide a high quality service to a fleet. And so that is we're convinced that's the long term approach

Speaker 8

Government question, you were one of I forget how many now, sort of mid teens number of companies that were awarded contracts under the PLEO, which was like a $900,000,000 IDIQ. I think you're one of like only 3 companies that actually operate the PLEO and the only one that does it in comms. Have you seen any activity on that contract vehicle because I haven't seen any announced specific announcements?

Speaker 3

Yes, there hasn't been there's a lot of activity around it. A lot of the other players want to partner with us and work together with us to provide an advantage especially if they're commodity supplier of sort of PLEO services. And but I haven't seen any big awards under that right now that are kind of hitting our bottom line. There still is a lot of talk and activity around that. We'd expect to see some more activity over time.

Speaker 3

I mean, I think as you said, we're very well positioned for business, but it's still sort of an early times for that I think.

Speaker 8

Got you. And final DoD question in the last several weeks here now, the DoD and Space Force have come out with their commercial space strategies and of the 13 mission areas they identified, GPS was one of the few that was identified as military only. And yet earlier this week, the Space Force came out and announced that they want to use a quick start program on resilient GPS. So sort this out for me or maybe the Pentagon needs to sort out its strategy here. How does that impact Satellis?

Speaker 8

I you're primarily government today. Do you think there is incremental growth opportunities or large programs on the government side or is most of your focus commercial?

Speaker 3

We believe we're well positioned there. The government is deploying lots of different technologies and has additional science projects well out in the future. Our expectations is we'll continue to be part of that and we'll play across a number of different sectors, especially as we get into other critical infrastructure and other places as well. I would say the longer term bigger opportunities as we talk about the $100,000,000 is probably in the commercial side, globally on the commercial. That's the bigger area.

Speaker 3

That's probably the more area we focused on in terms of potential growth. We think both civilian and governmental and critical infrastructure all over the world needs this technology and this is the easiest technology to deploy. It doesn't need ground infrastructure. It's not subject to the same issues on the ground that would cause the original problems anyway. So yes, I mean, I would say commercial is the bigger opportunity.

Speaker 9

Great. Thank you.

Speaker 2

Thank you. Thank you.

Operator

And our next question today comes from Hamed Khorsand with BWS Financial. Please go ahead.

Speaker 2

Hey, good morning. So first off, could you just talk about what's the cost component that your partner would be seeing? Are you increasing your costs? Are they seeing some sort of benefit because it's there's more clarity due to this contract?

Speaker 3

The cost associated. So this is all around service revenue sort of pricing and sort of creating more clarity on a quarter by quarter basis as to what they would be paying for the collected service that they have, which includes growing subscribers and everything instead of charging them on an incremental subscriber basis or on usage, we would supply sort of an overall pool of service on a quarter by quarter basis. So it's a win for them and that there's clarity on the amount that they really have to pay as they implement new products and get into the market and expand their market share. They kind of have a better idea about their cost structure on our side. Obviously, it's the same thing for us.

Speaker 3

We have more visibility on exactly what's going to happen and aren't as worried about exactly how many subscribers are added in that quarter or etcetera. And we're able to do that because it's a big partner and they've been in market been in service with us a long time and we have a lot of visibility to how they're using the network.

Speaker 2

And then could you just provide a little bit more details of what you mean by normalization in the equipment revenue and where inventory stands in channel as far as you're concerned?

Speaker 3

Yes. I mean for many years we supplied about the same amount of equipment. Obviously our equipment was as we move from bigger devices to smaller devices, it was more equipment, but overall, the revenue was roughly about the same. During the pandemic that spiked. I mean it really went up.

Speaker 3

Our business was doing fine as well, but a lot of other companies well, some other companies had some really supply chain issues and we were able to manage through that better than anyone else. But all of our a lot of our partners certainly maybe all of our partners really were quite nervous about the fact that we couldn't supply on a 3 day notice like we had been before. And in some cases, it was taking 3 months or 6 months for us to be able to fill orders. So they all started ordering more to try to get in the front of the line and to be sure that they had enough so that their businesses which were continuing to grow even during the pandemic as you saw we did very well during that timeframe that they wouldn't be in any way constrained. Well, they're not as constrained anymore.

Speaker 3

They don't have the same concerns. We're able to deliver on a very short notice now. We've worked through all that. And so they had been stockpiling, I think, a number of chips or modules or whatever that they had been ordering to us and they don't need to do that as much. It doesn't I know that there was a little bit of a well that growing equipment revenues must mean accelerated service revenue growth,

Speaker 2

but I don't think we ever really suggested that during that timeframe.

Speaker 3

As you saw, we consistently grew at or a little bit above the service levels we're growing right now, but continue to grow exactly the way we're growing and that equipment was feeding that. So normalizing means we're going to get back to sort of the same level. So we're kind of it looks like a headwind on the overall revenue line, but it really doesn't mean anything in terms of our long term potential or growth. Does that make sense?

Speaker 4

Yes. Great. Thank you.

Operator

Thank you. And our final question today comes from Louis DiPalma with William Blair. Please go ahead.

Speaker 9

Matt, Tom and Ken, good morning.

Speaker 2

Hey, Louie. Hey, Louie.

Speaker 9

As it relates to revenue synergies with Sotelis, why is Sotelis' revenue only $5,000,000 today? In that, were they previously not utilizing your vast distribution network and now that they're part of your team that they have access to your 500 plus channel partners and whatnot. And like if Sotelis were standalone, would its revenue in 2,030 be significantly below $100,000,000

Speaker 4

So the $5,000,000 you quote, Louie, I would think of that as wholesale. That's what they paid us in 2023 for the signal essentially, right? And so they then turn around and mark that up to their customers. So their revenue is a markup on that 5, which was their wholesale payments to us. Think of the 100 that we quoted in 2030 is us stepping into their shoes as the retail provider and providing the turnkey service, which includes our signal, but they're kind of proprietary service.

Speaker 4

Yes.

Speaker 3

So we didn't tell you what their revenue was. We didn't give you what their markup was. It's obviously above that $5,000,000 if they're roughly a breakeven business on us today already. So their business has proceeded very well and I think it's an inflection point because some technology that they've been developing, which will make their business even more cost effective in the market. But I do believe that there are a lot of synergies that they weren't able to go after because we can lay down that signal.

Speaker 3

I mean that was that $5,000,000 was expensive to them. As you could imagine that constrained their business if they lit up the whole world, it would have been many times that cost and they really weren't ready to do that. We can light up the rest of the world because we're not really using any additional capacity or anything to do that. It's a little more power on our satellites, which we have plenty of and can start marketing services say to the whole maritime market and cover the whole Pacific Ocean or the Red Sea where there's an awful lot of GPS jamming and spoofing and that sort of thing going on or other conflict zones around the world without impacting their business. So together, I think there is a lot of synergy.

Speaker 9

That makes sense. And related to all of the commentary on the IoT customer seemingly going by a fixed price contract over the next 2 years. Is that related to the new 9,604 terminal that you're releasing next year and that you've discussed how the pricing for the mid band multimedia applications will be higher than the traditional narrowband price plans. So did the customer just want visibility in terms of the spend that they would have for the Iridium network? Is that related at all?

Speaker 3

I believe it is related. But I really want to go into that at this point here. But certainly as technology transitions occur and new offers go into the market, the ability to kind of manage that effectively, collectively was in our common interest. So yes, I would say that that was somewhat related.

Speaker 9

And I guess would there be other customers that could adopt similar pricing structures this year that would have an even greater positive benefit that's not currently contemplated in the guidance?

Speaker 3

I don't think so, but it's always possible. I mean, we're constantly working with our partners on what's the most effective way of kind of managing on a fair basis what the cost and prices of our services. So we're always in those discussions, but I don't think there's going to be any others like that.

Speaker 9

That makes sense. And one final one, you've discussed a lot of the competitive dynamics and some of the competitors in the D2D realm have been talking about offering voice services. And I was wondering for Project Stardust, will it be possible for Iridium to offer voice services? And can you assess the what you think of the viability of competitors offering D2D voice services?

Speaker 3

We're looking into that, but frankly, I don't really see that voice services are going to be in the market via D2D for at least a couple of years. And even when they do, they're going to be very limited in terms of the markets that they're going to be providing. I mean, as you know that there's really D2D as it's been projected for the next at least 5 to 8 years is a regional based solution that really expands the footprint of cell phone use within a market. Not even clear if Rome certainly doesn't operate in Europe or probably South America will not operate in the maritime environment etcetera. So the fact that a cell phone can operate go from I don't know what current coverage of cell phone usage is what 11%, 12%, 13% of the earth surface.

Speaker 3

And if it expands a couple percent including voice and data. I really don't think again that's our business. That is not how our devices are being utilized. It hasn't been our expectations as we provided guidance. We don't as I've said publicly in these meetings, we don't sell to Wyoming.

Speaker 3

Wyomians, what the term for that is, I don't even know to use in Wyoming. We if the market expands there, we sell it to them because there are firefighters who are operating going to South America for the latest flood. We're not being used by the Broward County Rescue Services because they don't have cell phone usage. It's for when the hurricane happens or when they end up being redeployed down to Haiti or some other place where there is a disaster. So this sort of focus that everyone has on what currently is the coming of D2D services on smartphones is really not something that we are we believe is really a direct competitor to us anywhere in the near to medium term and we will be in that market in the same timeframe as well with some services that even if it sort of has an effect around the edges of our service that we will make up easily in what we're doing ourselves.

Speaker 3

So that's why we feel so confident in our projections to 2,030. We believe our L print and the 25 years we've been in operation and the services we have are very resilient and robust and are not really at risk as apparently people must fear. And I think that will just come to be understood in the coming quarters years and we'll just have to continue to execute and demonstrate that.

Speaker 9

And related to this discussion, how unique is the push to talk service to Icom and that you design your own satellite handset radio. Are you able to also offer push to talk or is that something that only Icom does?

Speaker 3

No. Some of our push to talk and that's a growing business for us use our handset. I think the majority use the Icom handset and we encourage that. I mean Icom is a fantastic device. We promote it.

Speaker 3

We don't care if they use ours or theirs. It's just an alternative. Ours is maybe a better device if you're also doing point to point satellite phone usage, if that's more of an application. But I think Icom integrates better into public safety networks because of their global scope and capability. So I mean, yes, really it's been offered by a lot of our partners today and I'm excited if they're using ICON's portfolio because it's great.

Speaker 9

Awesome. Thanks, Matt. Thanks, everyone. Thanks, Tom.

Speaker 2

Thanks, Louie. Thank you, Louie. And ladies

Operator

and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to management for closing remarks.

Speaker 3

Well, you can see why we're probably going to be out talking to investors and in conferences a lot more in the coming weeks months here. And I'm sure we'll see you on the road as we do that and see you next quarter regardless. Thank you very much.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
Iridium Communications Q1 2024
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