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

Good afternoon, everybody. I'm Tom Fitzpatrick. I'm the CFO of Iridium Communications. Iridium Communications is a mobile satellite communications company. We operate the world's furthest-reaching network -- communications network. I'm going to start -- skip through the safe harbor and we will be talking about some non-GAAP measures, and you can just go to our website for a reconciliation. So this next chart is what I call -- I'd like to say a picture is worth a thousand words. And so if you take a look at the blue shaded area, that's CapEx over time. You see it's kind of spiked, I don't know, $400 million and some in 2017, '18, it was really low for the period prior to 2010, and now it's really low again. And the reason for that is we were -- from 2010 to 2019, we were building our brand new satellite network, which fully replaced our first-generation constellation, which was launched in the late '90s, and it lasted about 20 years. So what we're enjoying right now is a CapEx holiday that we think is going to last for 10 years. And how do we know that, or why are we confident in that? Well, the original constellation had a design life of 8 years and it lasted 20. This new constellation has a design life of 12.5 years, so we're pretty confident it's going to last for 20 or more. And you see -- so all of a sudden the company becomes, is a significant provider of free cash flow, a significant generator of free cash flow. And you see the company did a nice job of growing EBITDA from 2009, about a 9% CAGR. Our 2021 EBITDA was $378 million, our '22 guide is $420 million. So continued growth. What's the source of competitive advantage of the company, is the network. It's called a low-earth orbit mesh network and I want to spend some time describing it and differentiating it from the competition. So our new generation constellation is the same network architecture as the original, except for it's got additional functionality that's given us additional juice in terms of the revenue growth that we're able to go after additional revenue streams. Now let me describe the network. So we're a low earth orbit mesh, low earth is about 500 miles from the earth. Our primary competitor is a company called Inmarsat, they're a geostationary provider. So they're 50 times further from the earth than we are, and that gives us a competitive advantage because there's something called [ latency ] like calls going through data going through. If you have 50x further to go, it's just -- laws of physics apply, and that benefits us in the fastest-growing segment of our business. So if you look at the picture there, I'm just going to describe the operation of the network. So if you stand in the moon and look down at the earth and you cut the earth into 6 planes, we have 11 satellites going around each plane, in near-polar orbit, right? That is very unique. Traffic is handed off in space, that's one of a kind. So if you went out and initiated a call or a data transmission, it would be go up to the satellite above you and be handed off in space, to if it's commercial traffic, it comes down in Tempe, Arizona, whereas the U.S. DoD, who is our largest and oldest customer, they have their own proprietary gateway in Hawaii, where they terminate all their traffic. And so this handoff in space of the data is far superior to the alternative, which is called bent pipe. On a bent pipe architecture, the traffic needs to land in relatively close proximity to where it originated. You can imagine the DoD, that's the last thing they want. They love the handoff in space and to be able to terminate it on their own network. The other element of it is look angles. So if you are obstructed by a building or a mountain on our network, there's another satellite -- if one satellite is obstructed, there's another satellite coming right behind it and has a different look angle at you, and so your call goes through. So all you know is, hey, my call went through. If that same blockage as occurs on the Inmarsat network, for example, you're blocked. You have to move far from where you were. So that is another aspect of the latency, that is highly relevant, and it's why we win. And I'm going to talk to you about our -- the areas of our business, but it's a big reason that we win and have one for some time. So these are just the areas that we play in. Land Mobile is our satellite phone business. We compete against Inmarsat Global, though to a lesser degree these days, and they're a regional player. We're regarded as the gold standard in satellite phones. Our network was built for satellite phones. Interestingly, the network architecture for satellite phones transmits very easily to IoT services, which is a very fast-growing sector in the market. We're also playing in maritime. We have a broadband offering that was significantly upgraded on our new network. We basically leapfrogged the competition, who is Inmarsat and offer faster data speeds and a lower price. And we also play in aviation. What's interesting about the company is, how we go to market. We've got about 450 partner ecosystem. So we -- the only customer we build directly is the U.S. DoD. We go to market through our partners. So that's very efficient from a back-office perspective and sales and marketing perspective. But probably just as important is, our partners have deep domain expertise in the vertical markets that they cater to. And they come to us with ideas for, hey, you could do this or that, that would really resonate. And so that's -- it's been really a virtuous cycle, that has led to product innovation and over time, and [indiscernible] start to show -- to give you an example of that. So the company was built for one product, the satellite phone and look at what has happened over time. We've gotten into broadband, maritime, IoT is a big area for us, DoD product lines. And that's not going to stop. We're going to continue to develop new products over time, as our partner channel comes to us with good ideas. This is just an illustration of that. We have a new product offering called Certus that we initiated at 350 to 700 kilobits per second, and that's growing about 18% a year, and that's a straight takeaway from the competition. But now we've kind of morphed into what we call mid-band offerings, that is more like 100 kilobits per second. And our current offering is only 2.4 kilobits per second. So there's a big difference between 2.4 and 100. Think of things like pushing pictures, et cetera, and that's not even in the results yet that I'm going to go through with you in a minute. So a big highlight, 80% of the revenue is recurring in nature, okay? So it's highly predictable and that's highly predictable against 80% of our revenues. But the balance is equipment and engineering, unlike our terrestrial wireless -- unlike in terrestrial wireless, we don't subsidize our equipment. So we make good money on our satellites, whereas a typical model is, you have to subsidize the smartphone or whatever, that is not our circumstance. So the growth prospects and competitive position of our service revenue, which was $463 million in 2020, grew about 6% from 2021. In 2022, our guide is for 8% to 9% growth. So you see acceleration in revenue growth. Our commercial voice, that's our traditional satellite phone business. That grew 4% in 2020 -- in 2021. We see that year-to-date, it's up 10%. So we've seen a couple of new products really resonate push-to-talk offering and a product we call Go, it's like a mobile hotspot. Commercial IoT is up 14%. We think that's a grower for a long time. Broadband is up 20% in '21, that is a straight takeaway from the competition with a product called Certus, that is faster and cheaper. Hosted payload is a fixed contractual revenue source and other data services is up 9%, and that's primarily a GPS authentication service from a company called Satelles. The U.S. DoD is a fixed -- it was a fixed 7-year contract for $738.5 million. Interestingly, that was the sole source, right? So that just tells you how sticky that customer is. The U.S. DoD has invested hundreds of millions of dollars in its proprietary gateway, and the only utility of that gateway is to terminate the Iridium signal. So it's a really, really sticky customer. So again, the 6% in '21 growth is more like 8% to 9% this year as our guide. Third quarter financial performance, there you see the service revenue was up 9%. Commercial was up 10%, government -- it was 2%, because government is contractual. Equipment revenue was up 4%. We just signed a new contract with the Space Development Agency, and that's why the engineering and support revenue is up. EBITDA was up 8% to $107.8 million. As I said, our guide is $420 million on the full year. And subscribers, we're flirting with 2 million. We may have hit it. We should hit it within a matter of weeks. And this is really an interesting statistic. It took the company 18 years to get to 1 million subscribers. It got to 2 million in 4 years. And we've said it's going to get to 3 million in less than 4 years. And the driver on that growth is IoT -- on that subscriber growth is IoT. And here are some of the examples of how we use it in commercial applications, used by high-value goods for just basically asset tracking and various applications like that. Caterpillar is a big customer. They use us for telemetry on their heavy equipment that's out in the field. And in fact, we have a number of heavy equipment customers in our stable. But the really fast growth within IoT is personal satellite communications. It has a CAGR of 50% since 2017, and that's where the action -- that rapid acceleration in subscribers is driven by or largely attributable to what's happening with personal communications. Garmin makes a device called an inreach, I don't know if you've heard of it. And we also have other customers, ZOLEO and Bivy that have, what I would say, are competing products to the Garmin device. And so with the Garmin devices is, you can use it as a stand-alone or like sync it to your smartphone and you're able to text anywhere in the globe. So just imagine that, right? So your smartphone is a brick in 90% of the planet, okay? You sync that Garmin phone to it and it becomes a communication device. So that's why that is growing 50% and that's going to grow by a rapid pace, it feels to us for a long time, just because of the installed base of smartphones in the world. So this is another illustration, if you will, of the differentiation of our network. So while ZOLEO competes with Garmin and Bivy competes with ZOLEO, they all operate on our network, right? So this -- you can't get a personal communication device in a geo, for example. The power and antenna size just cannot meet that requirement. So this is just an interesting statistic and a piece of our business that we're really enthused about. So our 2022 financial guidance is for service revenue growth, as I said, between 8% and 9%, operational EBITDA of about $420 million. We don't see ourselves as a cash payer through 2024 -- cash taxpayer through 2024. And our guide on net leverage is -- that will be -- will be between 2.5 and 3.5x, that's our target leverage range, and we're in that range now. I think we're 3.3 or something like that. And that's -- by the end of 2023, and that's pro forma for remaining share buybacks, because we've been very active at share buybacks this year and last. Hosted payload is an interesting kind of side business, if you will. There is a payload on our -- on all 66 of our satellites, it's called Aireon. And folks might not know this, but there's a new technology that's been deployed, called automated-dependent surveillance broadcast. Google it, you can read it for a long time. It basically replaces radar for air traffic control. And it's -- and by law, in most industrialized countries, you must be fitted out with that equipment to come into the airspace. But the trouble with this new technology is, it's got the same limitation that radar had, which is you can't see the planes over vast landmasses, where there's no ground infrastructure and over the oceans. Okay? Enter Aireon. Aireon is essentially an antenna on all of our 66 satellites, that takes the ability to surveil and actively manage air traffic from 30% of the globe to 100% of the globe. And so what that is, when a plane goes over an ocean with no ability to surveil, the requirements for how that plane has to fly with 60 nautical miles from the next closest plane, very limited ability to ascend and descend. And with Aireon, it can be surveilled just like there was ground infrastructure. Surveilled -- what I should say, surveilled and directed and managed. Well, the fallout of that is there's not going to be a Malaysia air again. But the commercial argument -- so what [indiscernible] is massive fuel savings fall out of that. The ability to more closely have planes fly much more closely in ascend and descend. That results in huge fuel savings. Aireon estimates that their cut of the fuel savings or kind of their TAM is like $750 million. There is nobody else that can do this. This -- our network in low earth -- is close enough to the earth that they can see the equipment. You couldn't do that with a geo. There's a lot of other aspects of it as well. So this is really an interesting piece of our business. And so we're both a vendor to Aireon and a part owner of Aireon. And so our hosted payload revenues you see there in 2021 is $48 million. There's a side business, that's a payload on our satellites, that's managed by Harris. Harris manufactured the Aireon payload, and we're smart enough to know that there was enough space and power allocated to Aireon that they could squeeze in some other payloads, and they just happen to know who might want it. So we get about $8 million from them a year, on top of the Aireon revenue. We think our ownership percentage, which is going to be about 27% will eventually be bigger than our -- what we get out of Aireon in our capacity as a vendor to them. So this is another way of looking at the capital -- capital migration, if you will, it's just like the first chart I showed. And so we've said that we think that we throw off about $2 billion in levered free cash flow between 21 and $25 million, and what we anticipate doing with that, is to maximize shareholder returns. I already talked about our share buybacks. We've bought back -- there's a total of $600 million authorized in share buybacks already, and we think that continues. And we've said that we would consider a dividend -- paying a dividend. We just want to make sure that, any dividend we put in place can make it through the next capital cycle, post 2030. And so we're all about levered free cash flow, and we have this as an exhibit. You can go into our Investor Relations page. We put it up there every quarter. You can see that we're calling for free cash flow of $264 million. That's about $2 a share, and -- or about 4.8% yield and strong free cash flow conversion. We invite investors to benchmark us against the tower sector, against these metrics. So just in summary, we have a unique network. The network is one of a kind, and it's why we win. Strong business fundamentals, 80% recurring revenue stream. We think we're poised for revenue growth. We have a guide out there that we think our service revenue averages in the high single digits between 2023 and 2025, and we're right on top of that this year. We're 8% to 9%. So that's looking good. The global ecosystem of distribution partners, we think, is a source of advantage and new product development, and the CapEx holiday, which we're quite certain of, creates a really strong profile for free cash flow. With that, I'll turn it over to Q&A. Hearing none?

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I don't think we qualify. No, I don't think so. I think our tax guys have looked at it, I don't think we qualify. Anybody else? All right. Thanks a lot for your time.