Q2 2023 Iridium Communications Inc Earnings Call
Speaker 2: Good morning and welcome to the Iridium Communications 2nd Quarter 2023 Earnings Conference Call.
Speaker 2: All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. And to withdraw a question, please press star, then 2.
Speaker 2: Please also note that this event is being recorded.
Speaker 2: I would now like to turn the conference over to Ken Levy, Vice President Investor Relations. Please go ahead, sir.
Speaker 3: Thanks, Joe. Good morning and welcome to our second quarter 2023 earnings call. Joining me on the call this morning are our CEO Matt Dash and our CFO Tom Fitzpatrick.
Speaker 3: Today's call will begin with discussion of our second quarter results followed by Q&A.
Speaker 3: I trust you've had an opportunity to review this morning's earnings release, which is available on the investor relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1985.
Speaker 3: Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans, and prospects.
Speaker 3: and expectations and are subject to risks which could cause actual results to differ from forward-looking statements.
Speaker 3: our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks.
Speaker 3: 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 3: During the call, we'll also be referring to certain non-GAAP financial measures, including Operation Libida, Proforma Free Cash Flow, Free Cash Flow Yield, and Free Cash Flow Conversion.
Speaker 3: These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles.
Speaker 3: Please refer to today's earnings release and the investor relations section of our website for further explanation of these non-GAAP financial measures, as well as a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt. Thanks, Ken. Good morning, everyone. Thank you for joining us today.
Speaker 2: It was another good quarter. We again posted double-digit revenue growth and record operational EBITDA.
Speaker 4: Interest in Iridium's unique network services is broad-based, running from commercial and industrial customers through to consumer products, and we continue to see tailwinds from our expanding and strategic R&D and network development work for the US government.
Speaker 4: Since our last call, we were happy to add five more spare satellites to our network, which increases our network's resilience.
Speaker 4: These were existing ground spares that were built as part of the original Aridium-next mission, and we launched them in May on a ride share with one web.
Speaker 4: They've all checked out now in space and our ops team is moving them to position each optimally across our six orbital planes.
Speaker 4: Though our operational constellation is young and very healthy, I am glad we took this cost-effective opportunity to get these assets into the sky rather than keep them in storage on the ground. They give us a total of 14 on-orbit spares to enhance the redundancy of our network for years to come.
Speaker 4: We haven't needed to use any of our spares yet. The primary 66 satellites are not only operating well, but they're performing even better than our original engineering models and statistical expectations, which is also why we're so confident about our extended CapEx holiday.
Speaker 4: The quality and resilience of a reading to network remains a strength and continues to be a strong selling point to partners and their customers.
Speaker 4: This fact and our best in class coverage have really differentiated a rhythm in the market and made our brand synonymous with reliability, safety and performance.
Speaker 4: Many of you may also be aware that Iridium made its second quarterly dividend payment on June 30th.
Speaker 4: We expect to return about $65 million to shareholders in 2023 through this program and also expect to complete the full outstanding share repurchase authorization.
Speaker 4: In general, I'm very happy with the reading's performance and execution this year. We are growing our top line nicely, executing well on operations and innovation, and returning capital to our shareholders.
Speaker 4: All of this is happening as we prosecute on a growing number of opportunities in the L band mobile satellite services sector and remain true to what I've often called our lane and identity.
Speaker 4: There's a lot of disruption underway in our industry caused by the new broadband players, and I'm glad that we're not part of that.
Speaker 4: We also don't believe that any of the merger activity in the industry like the recent bias that in our set closing impacts our business
Speaker 4: Actually, it's probably been a net benefit to us ever since the deal was first announced in 2021.
Speaker 4: That's because we've largely avoided the allure of delivering commodity services and speeds to instead focus on the niche services that we do better than any other company in the industry. That's because we've largely avoided the allure of delivering commodity services and speeds
Speaker 4: Our commitment to invest in our unique network architecture and service focus has continued to pay dividends Literally.
Speaker 4: Iridium is very well positioned to capitalize on new demand for L-band services in the commercial sector.
Speaker 4: Many of the opportunities that I've spoken to over the past 12 months are now taking shape and could add to a Ritiam's already strong revenue growth and drive additional new users onto our network.
Speaker 4: A good example of one of these is a Rhythm Service 100.
Speaker 4: You will recall this midband service as we call it, delivers a data connection that is about 35 times faster than our legacy Narrowband offering, but still uses low power and requires a very small antenna.
Speaker 4: The service's perfect for applications were size, weight, and power considerations, like for the new uncrewed aerial vehicle market, or for connectivity to smaller aircraft or helicopters.
Speaker 4: The service has been adopted by many of our partners and some of the first applications are now available in market, including our new Iridium GO Exec which is getting good early traction.
Speaker 4: We expect the new opportunities that our mid-band service creates will help increase ARPUs over time. I'm quite excited specifically about the UAV or drone opportunity.
Speaker 4: I haven't mentioned it much on past calls because the market was so early in development, but we see a lot of momentum underway recently from all the drone companies we've attracted to be partners. Thanks for watching.
Speaker 4: They plan to use a RIDIUM in their command and control architecture.
Speaker 4: Some of you may have even seen that we recently put out a very innovative white paper on that topic. It introduces an approach and justification for using satellite networks for beyond visual line of site control of drones or BVLOS as it's often referred to.
Speaker 4: The feedback we received over the past few weeks from that paper has been incredible and it's attracted even more partner interest and industry discussion. BVLOS has been a real issue that needs to be overcome for the growth and long-term success of using drones for industrial applications.
Speaker 4: The solution proposed in our white paper would enhance situational awareness and safety for remotely piloted UAVs.
Speaker 4: This study was made with a consortium of partners and has generated a lot of interest from drone operators and regulators who are all seeking to more effectively and safely commercialize the use of UAVs in the nation's airspace.
Speaker 4: This is a fast growing industry and we think a ridium is well positioned with its a ridium service 100 services to support the long-term growth and operation of these aircraft.
Speaker 4: Another early example of the utility of Iridium's mid-band services comes from partners like SkyTrack, who are leveraging our network to support real-time messaging in fixed-wing and rotorcraft, and even in-flight payment verification for smaller airliners.
Speaker 4: These services have already gained a lot of industry attention and are being positioned for deployment on narrow body aircraft run by low cost carriers.
Speaker 4: Leaning further into aviation, I'm also very excited about the progress of our partner Honeywell and Collins on their respective Iridium-Cirtus broadband terminals.
Speaker 4: They've already announced some big customers like Bombardier and Dassault who will line fit this new equipment on some of their business jet models, which should allow service revenues to start in 2024.
Speaker 4: These aviation services are incremental to our existing broadband revenues coming from maritime and land mobile and are just in time for the backlog of commercial aircraft orders expected in the coming years. Overall, our broadband subs grew at 14 percent during the second quarter, helping us pass 10,000 commercial subscribers using our Iridium service platform.
Speaker 4: This is a great milestone to reach since we introduced our broadband services in the maritime and land mobile industries about four years ago, and only recently expanded our RIDium service offerings.
Speaker 4: We continue to take market share in the industry, and our momentum and broadband has remained strong, as our partner ecosystem has broadened, and they've experienced our competitive advantage.
Speaker 4: Next, I want to highlight our emerging opportunity in directed device.
Speaker 4: We think this offering is a great way to leverage our satellite network and expand into more consumer applications as well as into a variety of new industries starting with Android smartphones using Qualcomm Snapdragon processors.
Speaker 4: We see a lot of opportunity here and are awaiting adoption and service introductions as I'm sure you are.
Speaker 4: The evolving market for satellite connectivity to smartphones is potentially very large.
Speaker 4: But to really achieve the big number of some analysts are talking about could take a long time. Probably 10 to 15 years when you factor in the need for many players to build and launch new satellites and get global regulatory approvals to achieve the full promise of D to D.
Speaker 4: We believe the near-to-mid-term opportunities in SOS, like the service being pioneered by Apple with the iPhone 14, and that we plan to support for the Android ecosystem.
Speaker 4: Our service also provides for real-time messaging and I expect apples will eventually too.
Speaker 4: The good news for customers with Iridium technology inside is that our solutions will have our trademark reliability and superior global coverage.
Speaker 4: I don't have any more news for you today on our D2D rollout. We've completed our qualification work with Qualcomm, but know there's development and integration work required for these smartphone OEMs that adopt this new satellite technology.
Speaker 4: We don't have very good visibility in the timing or volume of specific smartphones, but from what we do know, we now expect the first activations will move into 2024.
Speaker 4: Specific information on what products in their specific timing will all come from Qualcomm and their smartphone customers in due time.
Speaker 4: Our full year guidance continues to assume that directed device will not be material to our service revenue in 2023. We believe that a reading's network is ideal for differentiating smartphones, using our service by providing a reliable, valuable SOS and messaging capability that is truly global and that users will appreciate. Longer term.
Speaker 4: We're also excited about the potential Qualcomm provides us in a number of other markets beyond smartphones.
Speaker 4: The initial development work we've done with Qualcomm on the smartphone capability can be readily tracked on our income statement. You can see it flow through the commercial portion of our engineering and support revenue.
As I said, we expect that it will take time for directed device services to be adopted and generate meaningful revenue, but it is clear even from the current limited reach of the iPhone 14 that SOS services on smartphones do save lives, and that's something we want to be part of.
Lastly, I want to highlight a room's work with the U.S. government.
You're no doubt aware of our fixed price EMSF contract with the DOD, but it is our expanding strategic relationship with the government that is our long-term focus in real opportunity. The space development agency selection of Eritium, along with our partner general dynamics, to build a ground network and operate their next generation network is a testament to Eritium's experience and strong relationship we've cultivated.
and the technologies for our own future next generation network.
These are about a few of the projects on which we've been working that are now coming to fruition.
Tom will share details on our financial performance from the quarter, but I think you can see that we're making good progress, continue to be well positioned, and are focused on longer term growth opportunities.
Even in a RITIMS core sat-phone business, which is largely driven by traditional voice and data services, we're experiencing strong demand.
We are a leader in voice and data services and with our traditional core businesses growing well and strong opportunities in the newer business lines I preview today, we are confident in our forecast of high single digit serviceman who growth on average through 2025.
We see lots of new opportunities after 2025 as well, some of which we will unpack during our investor day on September 21st.
For this event, we'll be focusing on our growth plans and cash generation through 2030 based upon the efforts underway with partners today and those that we anticipate in the coming years.
We have an exciting long-term vision which we look forward to sharing with you.
We take great pride in the way our business is performing and our ability to add new partners and create new network functionality to drive their growth and support our free cash flow.
Like our past, our future is based on continued strong execution and staying in our unique lane.
With that, I'll turn the call over to Tom for a review of our financials, and I look forward to your questions.
Thanks, Matt and good morning, everyone. I'll get started by summarizing our key financial metrics for the quarter and providing some color on the trends we're seeing in our business lines. Then I'll recap the 2023 guidance which we affirmed this morning and close with a review of the liquidity position and capital structure. A RIDIUM continue to execute well in the second quarter.
Generating total revenue of 193.1 million up 10% from the prior year's quarter.
The improvement reflects ongoing growth in our commercial business lines and continued strength in engineering and support and subscriber equipment. Operational EBITDA hit a record 115.8 million in the second quarter. This was up 9% from the prior year's quarter and was driven by strength across.
all commercial business lines and engineering and support revenue. On the commercial side of our business, service revenue was up 12% this quarter to 118.6 million.
Strength was broad-based and reflected continued momentum in voice, IOT and broadband.
Commercial voice and data revenue grew 6.5 million or 13% in the second quarter to 55 million. The increase was largely driven by the price changes we implemented earlier this year, our first since 2018. The increase was largely driven by the price changes we implemented earlier this year.
To date, we have been pleased with how the new pricing has been received and expect that Voice ARPU this year will remain in the mid 40s.
In commercial IoT, we continue to benefit from demand for personal satellite communications.
Revenue rose 13% from the prior year quarter to 34.6 million.
As we enter our seasonally strong summer period, we continue to see strong consumer demand for personal satellite communication devices.
This ongoing trend and the shifting mix of subscribers using lower RPU plans resulted in IOT RPU of $7.48 during the quarter.
As I've discussed before, we love the service revenue these subscribers generate given the minimal comparative network resources they consume. Commercial IoT subs grew 19% from last year's second quarter, fueled in part by 77,000 net new additions. This was the fourth strongest in our history.
IoT data subscribers now represent 79 percent of billable commercial subscribers, up from 76 percent in the year-ago period. We estimate that consumer-oriented plans account for about half of our 1.6 million commercial IoT users.
Commercial broadband revenue grew 16% from the year ago period to 14 million. In maritime, we continue to benefit from new subscriber adoption of a Ritium service 200 and 700.
These new customers predominantly use a RIDIM as a companion service to VESAT and have higher usage trends than our legacy RIDIM open port subscribers.
At the same time, we continue to see those open-port subscribers upgrading to a Ritium service for the faster speeds. Maritime remains an important component of our broadband growth, but it's mad to tell our partners have also made good progress with their respective aviation terminals, and we expect that these will add to our broadband revenue as this equipment is installed on commercial aircraft.
Hosting another data service revenue was $15.1 million in the squatter in line with last year's comparable quarter and consistent with our hosting contracts.
Government service revenue was also steady in the second quarter at $26.5 million, reflecting the terms of our EMSS contract with the U.S. government.
Subscriber equipment remains strong at 27.4 million in the second quarter.
We continue to believe that hardware sales will remain robust this year and will be in line with 22's level for the full year.
Engineering and support revenue was 20.6 million in the second quarter, as compared to 8.3 million in the prior year period.
this year, but will fluctuate from quarter to quarter based upon execution and milestone of human approximately Pablo Clinical Elementary will soon be featured and <expletive> Escape will
Based upon our results through the second quarter and the trends we're seeing into July , we're reaffirming our full year guidance for service revenue growth between 9 and 11% in 2023 and operational EBITDA between $455 million and $465 million.
I'd like to highlight a few items coloring our guidance as they may be relevant to your models and the cadence of Iridium's growth. We continue to expect strong subscriber activations across all our commercial business lines, which will, together with price increases in commercial voice and data, drive service revenue growth between 9 and 11 percent in 2023.
This year's outlook continues to support our three-year expectation that total service revenue growth will average in the high single digits from 2023 through 2025.
To put that in context, given that our current year guidance at the midpoint is 10%, our guidance indicates that average growth in 2024 and 2025 is expected to be less than 10%.
This is because 2023's growth is being favorably impacted by the price increase in commercial voice and data that occurred earlier this year.
This increase is not expected to recur in 2024 or 2025.
Our average growth rate guidance of high single digits also includes our best estimate of Qualcomm service revenues over this period.
With regard to our EMSS contract with US government, there is no increase in contractual fees this year. Therefore, quarterly revenue in our government business will remain steady at $26.5 million for the balance of the year.
Equipment sales while bidding off their recent record pace in the quarter continue to be on track for another strong year in line with 2022.
Engineering and support revenue will also grow as we continue contractual work for the Space Development Agency and recognize Qualcomm Development Revenue this year.
On the expense side of the ledger, we continue to forecast higher costs this year related to stock-based compensation and new employee hires.
as we also retool and upgrade business systems. These dynamics resulted in a 30% increase in SGNA in the second quarter, which was down from the first quarter and is expected to moderate further during the second half of the year. We continue to forecast that full year SGNA will be up by about 20%.
in 2023. As previously guided, R&D will run higher in 2023 as we support a number of new products coming to market, including the new commercial aviation terminals which Matt highlighted earlier and new mid-band technology we're developing with partners. In all, we believe the incremental expenses we will incur in 2023 will be less than $1.8 billion.
can be comfortably absorbed while still achieving our EBITDA guidance for the year.
These expenses, as well as our investments in new products and systems, are appropriate as our business grows and we prepare to capitalize on a number of new business opportunities.
Moving to our capital position as of June 30th.
A Ritium had a cash and cash equivalent's balance of 103.5 million. A Ritium's growing cash flow has been a source of liquidity and is one of the reasons that our board continues to support our share repurchase program and initiated a quarterly dividend program.
Iridium paid its second quarterly dividend on June 30th and expects this program will return approximately $65 million of cash to common holders in 2023.
In the second quarter, we also purchased approximately 1.1 million shares of common stock at an average price of about $59.48.
for a total of 66.1 million.
We have approximately 60 million of capacity outstanding on our share repurchase program, and we'll continue to execute on buybacks, balancing our objective for deleveraging, with a desire to maximize return on investment.
Iridium's net leverage was 3.1 times O'Ipita at the end of the second quarter. This was down from 3.4 times a year earlier, even when factoring in our share repurchase and dividend activity during the second quarter.
Our target for net leverage continues to be between two and a half and three and a half times of EBITDA at the end of 2023, inclusive of quarterly dividends and giving effect to all outstanding share buybacks authorized by our Board.
Capital expenditures in the second quarter were 22.4 million, including one time spending of approximately 6 million related to May's launch of five spare satellites.
over Iridium's forecasted 10-year CapEx holiday period.
is there on the IoT service? No, I don't think so. I think we're competitive and we see a dynamic market with a number of partners in that space and they are expanding their product lines and see a lot of potential there. So I don't know that that's like a target really for us to do something really specific that way. I mean, we're always looking to adjust our...
Contributing your question could you give us a bit of color as to.
Why there was this variation in Q2 I realized it's very hard to predict.
It's Julien here at any color as to why it declined this quarter to be great.
I think you could probably say its more of a year over year comparison to a really strong second quarter of last year I mean, I think we were.
We were getting.
Unbelievable demand that we were struggling to meet with absolutely no inventory last year and hand them out this year.
I think that.
I think we see an overall demand level as we said is similar to last year's record levels.
But it just probably did really really well in the first quarter and fourth quarter of last year.
And expect to see that.
<unk> sort of downturn in comparison from a quarter over quarter. This year, but I don't really think it means anything.
Just as.
You started out.
Hard to predict exactly what quarter will do on a quarter by quarter basis.
Fair enough. Thank you second question was on the.
I think you mentioned the drone.
Food equipment and drones.
Any sense of what kind of market potential that could represent I mean, I guess, it's early days, but.
What kind of number of films.
Speaking about in terms of potential Tam.
Tom.
Well I mean.
There's a whole industry, that's developing right now and as I said, it's everything from <unk>.
Replacing and automating a lot of work activities that people do that are difficult like monitoring oil and gas wells are monitoring oil rigs and thats one.
Things that perhaps helicopters might've been used for the drones might be able to do more safely quickly and cheaply.
And there is obviously package delivery.
I don't know that its going to be dropping.
Fixed pack of beer to our front door anytime soon but there is an awful lot of industrial applications. There that we've started to see where they are.
Everything from medicine delivery too.
Areas that are remote that have to get samples back and forth and that sort of thing and theres just a lot of companies right now going after that space.
I was mentioning one of the big issues for that is that today.
You have to control those drones from the ground via.
Your line of sight. So if you really want to do something you have to be able to see it.
And if youre doing that you might as well just use a direct line of sight technology between the.
The controller and the <unk>.
Drone and.
If he even goes a little further you might use cellular technology, but that isn't really.
The market is not going to grow on that basis, it really needs beyond visual line of sight capabilities. So that drones can go long distances.
<unk>.
And they will need to know where they are at all times and they'll need to know whether they were successful and the mission that they had et cetera, and you need a small lightweight.
Radio that can connect to it no matter, what and Thats, what we do so.
That's where a lot of the energy has been around I think the numbers are going to still be small for the next.
Year, or two but I think theres a lot of hope in the industry that that will ramp up quite quickly, particularly as some of these regulations are.
Are worked out and Thats why.
That's why we were focused on that paper and why there is an awful lot of interest and regulators in talking to us about that because they want to solve that problem too.
That's very helpful. Thank you and then last one from me.
Terms of the Qualcomm contribution today in your revenues.
Correct.
At the moment.
Engineering and support.
Can you give us a little bit of color as what is the magnitude of that currently and how long that will last because I understand that at some point.
You move to the next phase of royalties from the service revenues in defense with finite life.
The engineering and development fronts.
So.
Development fees from from Qualcomm and I would characterize it in the area of $5 million to $10 million in the full year.
Thank you very much.
And our next question will come from Louie Dipalma with William Blair. Please go ahead.
Matt Tom and Ken Good morning, Good morning, Larry.
First on.
Early on.
International airline traffic is rebounding in a big way what needs to happen for Ariane to pay the remaining money than iridium.
That caught up in a refinancing date, they intend to do but that's in our estimation a couple of years out.
Okay great.
Sure Matt.
Previously discussed plans for multi media personnel.
Consumer handheld devices potentially for next year.
Research and development expenses are elevated this year.
Preparations for the.
Those devices.
Are those devices still on track for next year.
Yes, yes that's.
Work with partners.
As well as kind of the work we're doing ourselves on taking that service.
Technology, and creating basically a next generation Iot capability, that's much more flexible and fast and easy to deploy.
That technology is going to go into Iot devices in general, but into personal communications devices, specifically and we will support things like.
Picture transfer in.
Richard data sort of flows in that sort of thing into I think new personal communication products that could hit the market as early as next year. So yes, it's on track going very well, we're excited about the potential it has for the future.
Yes.
And I think the user experience that people have when they when they use those personal communication devices.
Great and Theres been a lot of discussion about provide.
Providing iridium connectivity for drones.
We're also quick ability to provide a regime iridium connectivity for the E VTOL market.
As that emerges in the United States.
Yes.
We're already doing.
We're already doing work with I know one one partner I won't mention who they are but they are actually doing quite what I would call large autonomous aircraft today and have expectations for.
Moving into EV tall space.
That whole U.
On crude air mobility market.
Tall.
Is exciting I think it's taking a long time to kind of develop for lots of different reasons, both the technology and the standards in the regulatory bit.
I think it's going to have the same.
Our expectations, particularly as it moves to autonomous sort of capabilities I think the early ones are going to be all I'll, probably crude but eventually.
A desire and that industry has to move to autonomy.
You need connectivity to those.
Aircraft and Theyre, not real big and they have rotors on them. So again, a perfect fit for someone like Iridium network given our.
Size weight and power type of our of our Transceivers. So it's still early days for those I've had some discussions with them. They all express interest, but they seem to be more focused on certification of their platforms. Today then.
Then the connectivity of them because thats more of our implementation into the user into the national Air space.
Thanks, and one last one for Tom.
Regarding SG&A is the.
On the 20% increase for this year unusual relative to your long term view, yes.
It is.
We hired as we've said we hired a lot last year and you saw our SG&A ramp on the on the full year last year.
So we have basically easier comps.
In the third and fourth quarter. So we're sitting on wider like year to date, I guess, 35% increase or something like that and we're guiding to 20, so youre going to see that that rate of increase moderate here in the third and fourth quarter. Two to result in a 20% increase on the full year.
We're not going to keep that pace up.
Louis I think there was a little bit of catch up after we completed Iridium next and we were really kind of focused on.
On sort of the capital build out of our program.
Ben.
As a result of having a new network, we have the innovation platform that we wanted to exploit and fall, you'll see lots and lots of opportunities to do that.
And a number of different areas and realize we just didn't have the staff and all of the places we needed to be able to.
Accomplish that.
So we were filling out.
And in marketing and sales as well as in operations and technology.
And have a lot of.
We think we have a pretty rosy environment going forward that we're going to talk more about in the investor.
Investor Day next month.
Thank you.
That's all our questions today, and we will now conclude our question and answer session.
I would now like to turn the conference back over to management for any closing remarks.
Well again, thanks for joining us I look forward to visiting with many of you.
Next well two months here on September 21 in New York City, and I think we are.
It's going to have a productive session thats focused particularly on sort of our long term potential opportunities, which we which we're quite excited about.
Look forward to talking to you more about that so thanks for joining.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.