Iridium Communications Inc. (IRDM) Earnings Call Transcript & Summary

Welcome back, everyone. Apologies for the delay. We're having some technical difficulties on the back end. Our next session is the connected devices panel featuring Iridium and Astro past. We'll discuss at a high level the emergence of very, very big support behind some of these connectivity constellations and also discuss the opportunity in IoT. To begin, we love the panels to just provide a work introduction by themselves and the company. Matt, would you lead us off?

Sure, Edison. Thanks. Iridium, I'm Matt Desch. I'm the CEO of Iridium. I have been the CEO a little more than 16 years now, 40-year career in wireless going back to the early days of wireless and certainly satellites since I joined Iridium. And Iridium has a very interesting history. It's -- I don't think I need to remind most people now, we've been in business for over 30 years in one form or another, 20-some years as in our current incarnation. We've been public for the last 12 years, I guess, since 2010. Probably arguably the most valuable company right now in the satellite space in terms of having completed a $3 billion network upgrade a couple of years ago and currently delivering a whole bunch of interesting services in the L-band right now, including IoT, but a number of others as well. So glad to talk about industry trends where we're going, and we'll participate here. Thanks.

And Fabien?

Yes. Hi, everyone. Thank you, Edison, for having us on this panel. Honored to be with you, Matt, on this panel as well. Huge respect for what Iridium has achieved. And especially under your command, that was quite an inspiration for us. We are coming from the nanosatellite world. So I'm the founder and the CEO of Astrocast. My first job as a young engineer was to build a nanosatellite. I build the first Swiss satellites back in 2006, and we launched it in 2009. This is how everything started for me as a young engineer. Apologies for the noise around me, if you hear it. I mean, I'm currently in Saudi Arabia, attending the connectivity for -- Connecting the World from the Sky conference, which is a great event. And I've been invited to his excellency Sheikh Al-Waleed, and I'm actually calling from his house now. So it's a very interesting event where we see a lot of the recent move in our industry. And as a nanosatellite operator, we have a role to play in that future of connectivity for the Internet of Things. And what we have built at Astrocast is really a complete network, a complete infrastructure that allows us to connect assets all around the planet with a very optimized and low-cost approach. And this is what we have been developing for the past 7 years. And we -- early this year, we started to sell our first service and our first product. And so we are going through a very interesting transition now, focusing the market and building new products with our partners. And this is very exciting. With me, Kjell Karlsen, our CFO, I'll let him also introduce himself briefly.

I'm Kjell Karlsen, the CFO of Astrocast. I have 20-plus years of experience in the space industry, 2/3 of that on the launch vehicle side with Sea Launch and the last 6 years with Astrocast. As Iridium, we are a public company and public on the Euronext Growth Exchange in also last August and very happy with the future of Astrocast and very excited about the future prospects. So thank you for being here, and thank you, guys.

Thanks for the introductions. I want to start off at a high level and discuss connectivity more broadly. We've seen in recent years a lot of attention, a lot of hype, some would say, around the mega constellations, Starlink, Hiber, OneWeb. Matt, maybe you can start off. What's your view on this trend, this new trend? And how viable realistic do you think some of these very big numbers are being thrown out there are?

So first, just so investors understand, all constellations aren't the same. Satellites are built for purpose, built for a function and typically, at least in communications, are usually oriented around the service, around a specific spectrum band. Just so we remind them, we're talking about mega constellations in the Ku-band Ka-band, which used to be called a VSAT or fixed satellite services band that many years, there were geostationary satellites who perform that function from Intelsat, Eutelsat and SES and Telesat and a number of others. And so it's a different orbit to go after that same services, but as in Low-Earth Orbit is where they've chosen to do it. But they're really providing basically the same kind of function, which is a commodity broadband connection to a powered large terminal. I just want to make sure everybody understands it's not what we do. We're really more about delivering things to very small things, people, assets tracking. Fabien and Kjell are in the same sort of mode where they're really providing an Internet of Things kind of service to devices at a very low cost. These mega constellations are really going after a very specific market, which is connectivity on airplane ships and then people's backyards, remote environments. And there's been a lot of skepticism, which is why the value of those mega constellations are relatively low for the most part are challenged because there's a big question over whether the -- how much capacity is required and what it will do to pricing. Space is a very expensive place to be. It's very capital intensive, lots and lots of money has to go into space to do these things. When you have a billionaire like Elon Musk or Amazon who don't look like they have necessarily a cash flow or a business goal per se other than somehow make enough money to go to Mars, it sort of skews the industry in some ways in terms of -- or skews the sort of expectations of what the success of everyone else will be. We've already had one of those mega constellations go bankrupt. OneWeb, they were rescued by the U.K. and Indian carrier, et cetera. There's others that are struggling to seem to get financed like Telesat. You still have the Chinese launching a system. You have the Russians, potentially EU is talking about launching a network. I think there's -- probably most people would agree the jury is still out in terms of the long-term sort of cash flow business success. I define success as free cash flow and growth, not just 15 to 20 years of investment and then with no -- nothing to come out of it. That model or that measure of success is a long way away for those constellations. But I do want to again reiterate there are other kinds of constellations. What Astrocast is looking to launch with what we have do very, very different functions shouldn't be viewed in the same way and should be viewed based upon their business cases. By the way, there's a lot of suspected business cases there, too. I'm sure I'll leave Astrocast to talk about there. They're potentially in a bit of a race to with 30 other companies that have announced that they're going to build smaller constellations, yet still a busy area there, too. I like the fact that nobody has come to launch network to kind of compete with us in a general way, and we'll -- I'm sure you'll talk about things like smartphones and that sort of thing. But it seems like there's a lot of interest right now in using L-band and S-band to connect to consumer devices, and we'll talk about that later.

Great. And maybe just keep staying on the topic of connectivity. And I think Matt did a really great job of outlining the difference between you guys and the mega -- so-called mega constellations. What do you see is your role in this ecosystem? And does it sort of complement? What's going on over there? Or are you just kind of in a different role altogether?

So we -- I totally agree with what Matt just said. We are in a different game. It's a completely different infrastructure that we're building. We're not providing broadband connectivity. We're providing a way to send short messages back and forth at very low power, very low cost in a very agile way and to really answer the needs of the IoT market, which is a cost-sensitive market. But if you look at the IoT markets, even in that huge market, you have high-margin business that usually requires realtime communication. And here, a solution like Iridium is the best. Iridium is really designed to answer this critical realtime where there is a higher margin application. And us at Astrocast, we cover the other part of the market where you don't need real time. However, you need to last a long time, you need very low power and you need to be very cost effective. And this is something we really well achieved at Astrocast because the entire system has been optimized for just 1 goal for 1 service that we do super well at very low cost, and this is really the achievement here. And I think in that sense, it's highly complementary to the IoT offering of Iridium. And you -- as we progress in our journey, we see more and more use cases and we become better and better at understanding exactly where we have an opportunity and typically the verticals where we can do a lot of business, it's the supply chain, the shipping containers, for example, tracking shipping containers in the agriculture business, tracking livestock, ag tech sensors in the environmental industry as well. So there are plenty of opportunity where you don't need the real time. Our customers don't need more than a few messages per day. And they just want a system that has a cost that is more or less consistent with what they see in the terrestrial IoT world. And this is really where we can play a role and have a differentiator and extend the coverage of the terrestrial network. Now when it comes to the other players and new players in the IoT industry, it's true that many people are talking about launching IoT constellations, but it takes time. It's really hard, and there are only a few players who really managed to not only raise the capital, but deploy the constellation efficiently and make the system work really well. And so we think we are one of the only, and we are leading in that sense with an offering that is really, really attractive. And we are right now open in 73 countries. We have market access in 73 countries, which is already a lot. It's Europe, Africa, some countries in Southeast Asia, Middle East and Oceania, plus the international waters. So this gives us already a really nice footprint where we can tackle some really exciting challenges in the supply chain, in particular. So yes, I think it's highly complementary to what -- to the IoT offering of Iridium. It has nothing to do with broadband connectivity of voice. It's really designed only to transmit short messages from and to assets in remote areas.

Great. I appreciate that run down. I wanted to cover one sort of topic before we move on to IoT. I think to Matt's point earlier, a lot of these tech companies with very deep pockets are coming into the broadband side. I'm curious if you have some thoughts on kind of three use cases. So the first is the -- this idea of autonomous driving. You're going need some sort of connectivity with something now -- I don't know what the connectivity will be with broadband connectivity or how that works in this story, but that's one use case. In the cyber situation, I think there's a belief that it could involve AWS in some capacity. And then the third -- I guess the third use case would be, you, in theory, have a lot of space where, especially in perhaps countries that can afford it, these underserved areas where there's not broadband. So there may be some sort of, I don't know, we call humanitarian or government NGO effort to kind of boost the fees there. And sorry, fourth one, the Apple situation with Globalstar. So kind of taking into account these four topics, is that -- do you think these have continue to maybe make that broadband connectivity opportunity a little bit more viable? Or is it still kind of too hard to tell to each of the market?

So you just described something that I'd call apples, oranges, spaghetti and -- sure.

[indiscernible]

I mean those were 4 different concepts that I'm not sure really have a lot to do, honestly, with the mega constellations or broadband. I mean they're not specific to them or would they be. I think, in any case, really the reasons why they'd be successful or not successful, we've taken in -- I think there's -- those are broad category. So autonomous driving, something that will come about in the next 5 to 10 years probably. I've been using on my Tesla for a while, and it's not ready for prime time and won't be for quite a while, but you can hope that some days, it will be. I think when it does come, it's not going to be 1 technology. It's going to be 5G to start with or 6G probably by that time, maybe even 7G by the time it really gets around, but that's going to be the primary technology for it. You want something extremely high -- extremely low latency, extremely high bandwidth, et cetera. And that will always be over satellite. However, I think just like the military and other places, you're going to get multiple technologies on the car. You might even need multiple GPS sources or P&T sources. And there's a lot of talk about putting something like ourselves because we're just so global, and 5G has many variants and only covers 10% of the world even at its best. So it's not the answer or the thing anymore than I think drones are going to be or unmanned aerial vehicles, et cetera. On AWS, and assuming cloud kind of services, I think that's going to be incorporated with every satellite system. I don't think that's unique to mega constellations. Everybody -- all our new services are starting to become native cloud type orientation. You just have to help your -- help the data world connect into the cloud the way they want to connect into because that's where almost all applications are going. By the way, we're moving our system into the cloud somewhat, our terrestrial system. Again, not really related to the broadband. Underserved humanitarian, well, that's been that market for -- since I've been in telecom, and everybody is trying to find ways of delivering rural or capacity lower, but the money around the world to do that is not there. You certainly wouldn't justify doing a mega constellation or a Ku/Ka-band system for that. That's a core part of our business, obviously, as first responders, our business and all over the world during natural disasters, but it's not really -- it's not a business that anybody is trying to necessarily expand our goal. Now when you talk about Apple, Globalstar, you're in the whole another category. You're not really talking mega constellations any more, except that Elon just announced with T-Mobile that maybe he'll build a new version of satellite with a new radio that will support terrestrial kind of bands, forget his business today, and that will then use terrestrial spectrum. And you have Globalstar, which was, frankly, struggling as a satellite provider and running out of gas, and Apple wanting to connect smartphone devices. And I've said, I think that's right. We've been working on that for 2 years as well. And one of these days, we'll talk about what we're doing as well or somebody will talk about what we're doing. That, again, doesn't really relate all to the mega constellations that you talked about Amazon because they don't have the right spectrum for it. You really have to -- what people realize is that L-band or S-band, which is about between 1.6 gigahertz up to 2.4 is the ideal spectrum to use from space to connect consumer devices on the ground. There's only 5 or 6 of us that have that spectrum. It's all been allocated for the most part. It's ourselves and Globalstar, but includes Inmarsat, EchoStar Omnispace, I guess, is sort of in that category as Ligado, technically Thuraya. Those are the only companies that really could provide direct connectivity to consumer devices. We're the only one with a real network in Low-Earth Orbit that could really do it on a global basis, but Globalstar's argue is somewhat of that category. I think that's a great opportunity, but it's not for those mega constellations. It's going to be frankly, for a couple of us who go after this. And there's a couple of new start-ups that are trying to do this, however, including AST-Link. And as I said, maybe even SpaceX, if they build a brand-new satellite for this, et cetera, in their announcement. But those right now are all utilizing terrestrial spectrum, so the spectrum of Vodafone and T-Mobile and AT&T and Verizon. And both the technical challenges to do that are huge, but the regulatory challenges are massive as well. So my expectations is those aren't global systems for -- maybe as long as autonomous cars are going to be like 10 years or so before you really ever see widespread usage of those kind of systems. So interesting approach, but huge technical and regulatory challenges to overcome.

Appreciate insights. Let's pivot to the IoT side. I think this is an area where there's a lot of potential. And Fabien, maybe you could go into why you think this is very attractive from your point of view. And I know both the companies are laying deeper and generating more growth here. Can you maybe dive into where you see the best use cases and also maybe any sort of way to quantify those opportunities in that going forward?

Well, I'll give a start. And by the way, interesting you threw me together with Astrocast on your chat here, which, by the way, I do have a lot of respect for. I mentioned there's an awful lot of companies going after that non-realtime, narrowband IoT opportunity, and Astrocast is still definitely one of the companies, I think, is in the top tier of that. And I -- hats off to Fabien and Kjell on the work that they're doing so far here. And I do agree with him, by the way, that we're very complementary. But we got into IoT in 2003. So we've been at it now 20 years, that was our first device that we put into place and started selling it to the first initial customers, started adding partners and making the device smaller and lower cost and lower power. And it started addressing more and more use cases going from transportation to oil and gas to maritime to unattended sensors for militaries and DoD to animal tracking to -- I mean there's really unlimited applications. Satellite is just a tiny part of the overall IoT space, IoT in general with your ring doorbells and tracking of your tile things for your keys and stuff is massive in terms of many, many billions of devices. Satellite is on the order of millions of devices still, but it's covering all those use cases that go outside the 10% of the coverage. And we seem to have been the most successful in an area because we had the most global network, the highest reliability, the best service. And now we have, I mean, overall, close to 2 million devices on our network. But it's taken 20 years to get there. There's maybe 350, 400 partners of our 500 partners are building solutions around us. So there's thousands of applications right now. By the way, we call it IoT, though, the most interesting one is personal communicators like from a Garmin and ZOLEO and others who basically take IoT kind of applications but put them into a very small messaging device that you can buy as a consumer device. That business has grown 50% a year over the last 5 years in terms of subscribers and revenue. So I think there's a lot of opportunity. Obviously, we continue to think this is one of our pillars of growth. In many ways, we started out with a satellite phone, and now we're an IoT company that does a lot of other stuff. I agree with Fabien, we're going to -- our businesses are primarily complementary in the sense we're kind of the high end, real time, absolutely need to have that service of which is a very, very important market segment, a very large one. But there's a larger -- we're not the best thing to track every cow in the world, and there's billions of those. I'm sure if you really wanted to track them, I think I'd use a service a lot more like what they have with a $0.50 ARPU instead of our $7, $8 ARPU type application. So that's my overview.

Yes, I agree. It's the -- I think what really affected the growth in the IoT market for the legacy L-band players was really the power. That's what we hear from our customers, they are very sensitive to power consumption, lifetime of the -- or size of the battery or cost of the battery because the power consumption translates into the cost for the integrator, but also the cost. So we see a massive opportunity for non-realtime IoT. For all these applications, we never really had the opportunity to think about satellite because it was not affordable. And we managed to find a way to -- even though it's not realtime, but we can still fit, we can still answer the needs of this opportunity. You mentioned livestock, this is a great example. And to get back to one of your point, Edison, about NGOs, one example, I think which is interesting is the Red Cross, which has launched a massive campaign of vaccination for smaller ruminants. So we're talking about goats and sheeps, cows as well, probably. They are going to vaccinate 14 million of them. And in that context, they're going to connect some using Astrocast. And for us, even though it's a market with a tiny margin, there is clearly an opportunity if you can make your offering affordable enough and make your business model work in these kind of markets. And if we can connect the car, then we can connect all the other devices in other verticals where there is a bit more margin. And here, we see really plenty of opportunities. It takes time to build products. It takes time to bring these products to market for our customers because we are not putting together the full solution. We have a connectivity provider very much like Iridium, so there is -- it takes time to build these products. But once they are there and then we can ride on the shoulders of giants and they distribute these products massively, this is when we really see the kind of margin that we want to see. But it's going to take time. It's a long journey. But we -- I think Iridium has shown everyone that it's possible, and we're very confident we can make it happen.

I'm a little worried that we've made it look too easy, maybe. It only took us 30 years to get to this kind of strong cash flow and investor shareholder, and patience is definitely a requirement for space in many cases because it takes time, as Fabien have said.

I think one thing that sets us a little bit apart too, because, Matt, you've mentioned that with your CapEx for, look, 3 years ago when you did your $3 billion investment, we can get an entire constellation of less than 100 satellites and 200 for less than $100 million. More like $50 million for 100 satellites. So the CapEx profile of Astrocast afford us to give an opportunity to the customers to buy a product at the lower price and the lower cost, and that will really drive the growth in the future. So -- and that's also what sets us and Iridium apart from these mega constellations that started because we have a lower launch need, right, and it's a lot easier to get ours -- Matt is done launching a satellite, and we're now launching 8 more satellites this year. But we don't have a lot of satellites to be launched, and it's easier to find space with us. When you're talking about launching huge satellites in the thousands, it's going to be really difficult to find enough launch vehicles to do that because all the large launch vehicles, except for SpaceX, are delayed. And you can't launch all in SpaceX and PSO vehicles. And you can't launch in any Russian vehicles these days. So there's very slim pickings to get to orbit. And I really like where we're sitting because we're launching 4 return satellites at a time, and we need a very little space to get into orbit, right, and at a very, very affordable cost.

And Matt, you alluded to sort of...

[indiscernible]. I'm sorry, go ahead, Edison.

Okay. No worries. Go ahead.

No, I was going to say, I was just picking up there on what Kjell was saying. I don't get kind of what -- this is another aspect of mega constellations in general, this concept of never having a capital holiday of some sort of like we're taking. I mean we're taking a 10-year CapEx holiday right now, and we're generating billions and billions of dollars of cash. But you're never going to see that from some of these companies because they are building 5-year satellites and maybe on the order of 4,000 to 10,000 satellites that are constantly going to need to be refreshed every 4 to 5 years. So the amount of revenue that you have to produce to generate significant amount of free cash flows is tremendous. And that's going to -- even if it's possible, it's going to take quite a few years. You've been spending less cash or capital as these guys are doing or, in our case, a fair amount but one that with satellites that last 20 years, 15 to 20 years. It's a whole different kind of model. So I think that's one of the bigger challenges in the way we kind of differentiate ourselves. I guess, though, if you have your own rocket and that sort of thing, it lowers your cost, but it's still -- I mean we're talking next-generation satellites for these companies that are significantly more expensive than the first generation, but they don't last that longer. They totally last 4, 5 years at most.

We got about 3 or 4 minutes left. I wanted to hit on some of the numbers. Matt, you alluded to a fairly big, I think, ARPU differential. How do we think about the unit economics in IoT for the various end markets? I don't know if you want to start, Matt, and then maybe Fabien can go over his view.

Yes. Well, a lot of the companies won't say Astrocast necessarily. They'll all say we're just like Iridium, but we're cheaper. And that's not really technically true. We're -- our end-user device costs are pretty low, to be honest with you. I mean they're in the tens of dollars, not hundreds of dollars. And really, frankly, even if you could cut that cost in half, that's not the real issue we see as the cost of the end-user device. It's going to -- I agree battery life might be -- I mean a lot of what we're doing is line-powered and stuff. If you're in oil and gas pipeline, you not necessarily agree. It's the revisit time. But I think that is an advantage of some of the low-power technologies that people like Astrocast are using it. If a battery can last 6 to 10 years, that's great. Now we have solar-powered devices, and that's sort of thing that last a long, long time as well. It could be the cost per the data itself. But when you see that we have like $6 ARPUs or $7 or $8 ARPUs, and those guys got $1 or $2 or $3 ARPUs, they're not necessarily talking that cheaper data per megabyte or per byte or kilobyte. They're talking about just using less of it because our applications are 2-way, and you get a message through in seconds. And you can kind of depend on anywhere in the world with that kind of latency. People are using a lot more of it. There are more important applications that are critical. We're not a good service to track that goat. I mean that goat's not moving that much, at least hopefully. And we only need to make sure what field he's in every day, once a day. But we are tracking elephants, for example, for poaching -- anti-poaching because you can't go for 6 hours wondering where that elephant is if you're trying to protect them from poachers. So it's a variation of sort of the criticality of the applications, and therefore, the amount of data that's utilized, the number of messages, how much is tracked. But again, I think we're going to address very, very different types of applications.

Yes. I agree that the ARPU varies a lot depending on the application. We -- so the key is to be flexible. You want to be able to address the application that will send one ping in case of an emergency once a year all the way to application that's 10, 20 messages per day. And this is the range of services that we could offer with this first generation of satellites that we have built, and there are many, many applications. So the ARPUs will vary a lot. But on everything in our model, we think it will be around $2 per month per device. And on the device side, then we can go very low. We have a chipset-based module. So the chipset itself cost already $1 to manufacture. So it can be mass produced and becomes almost invisible for the integrators. But right now, we have a module that we sell around $30 in -- depending on volume, et cetera. But that's the range, but there is really some room to go down if needed. But the combination of the hardware and the data plan then drives the story. It's really important for us to put ourselves in the shoes of the integrator and look at the connectivity like they look at it, and there are many other factors that are important. I will -- Matt mentioned it already, but L-band is so critical for this type of application where you have a small device for an asset that is highly mobile. You need small antennas. And ideally, you want to use the same patch antenna for both the GPS reception and the IoT communication, which further reduced the size of the device, which we have done already. You can use other advantages of L-band that reduce your power consumption. And at this stage, we reached a -- as a first product, we reached something that is already super optimized compared to what some people are planning the market in 3 years from now. So this gives us a good -- because of L-band, this gives us a really good confidence that we have an offer that will stick and that we can build a credible business on that. Back to the shipping container industry where we have huge opportunities right now, talking with the companies in the top 10 in this market. We see a need for a lifetime of 7 years. So -- and here not talking about satellite only, we're talking connectivity devices that have cellular, Bluetooth, LoRa and Astrocast. And then you still need to be able to function for 5 to 10 years. But on average, they ask -- in the industry, they ask 7 years. So that's a real challenge, and I'm very proud of the team who managed to put together that product that can achieve this kind of performance. And we -- this is really a massive opportunity for Astrocast.

That's a great way to close out. I know we're running over on time. Really appreciate everyone for joining. Just a reminder, Matt will be having a fireside chat with my colleague, Anthony Klarman, a little bit later at 3:00 p.m. So absolutely tune into that for a deeper dive on Iridium. So with that, thank you all once again for joining and looking forward to speaking again soon.

Thanks, Edison.

Thank you very much.

Goodbye.