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

Okay. We'll get started. Next up, we have Iridium. From the company up on stage with me is Tom Fitzpatrick, Chief Financial Officer. Tom, thanks very much for being out here.

Happy to be here, Aaron. Thanks for having us. I'll just give you a quick overview of the company, some points. I'll skip through the safe harbor language. And just talk a little bit about the company a bit. So we've completed a stark financial transformation of the company, it was completed in 2019. And if you see the picture of the satellite on the right, that's our new generation constellation. It was, as I said, completed in 2019. And it replaced our old satellite constellation. That's a picture on the left that was launched in the late '90s. And importantly, for investor consideration lasted well over 20 years. It was operating just fine when we de-installed it in 2019. And so that's a good indication of how long the new generation constellation will last, we think last at least 20 years. And so that ushers in a period -- a long period of the CapEx holiday that we think is at least 10 years. We don't think that we're spending meaningfully on our next-generation constellation until 2031. So that's an important credit consideration. The company has a proven track record of growing its EBITDA. We grew our EBITDA 9% since 2009 and grew it right through the CapEx cycle. And so the growth in EBITDA with the cessation of the CapEx has caused a meaningful deleveraging. We peaked at 5.6x in 2018. We ended 2022 at 3.2x, and we see ourselves right around 3x as we exit this year. So company is characterized as by meaningful free cash flow generation. And we think that is the case until we start spending on our next-generation constellation early in the next decade. And so the constellation that we operate is our source of competitive advantage. It's a very wide and deep competitive moat. It's why we were able to grow our EBITDA so consistently and meaningfully over the last two decades. And we think it's why we're going to be able to continue to do that as we move through this [ deck weight ]. And we've painted a picture of the company in 2030 to give investors an idea of where we see ourselves going. So let me describe the functionality of the network and differentiate it from the competition because it is the source of our competitive advantage. It's a low earth orbit constellation. So our main competitor is 50x further from the earth than we are. And so that's one element of our differentiation. So laws of physics apply when you have to go 50x further from the earth to complete it -- transmission. The other element is we are 100% global. So Iridium is the furthest reaching communications network of any type in existence. It is one of a kind. We cover the entire globe. And so that's another point of differentiation, coverage, coverage everywhere. The way our network operates is unique as well. It's a mesh network. So if you see the picture there on -- of the globe, you cut the globe into slices, if you will. We have 11 satellites going around the earth and near polar orbit every 100 minutes. And they have multiple look angles at the earth. And so for example, the alternative would be a so-called bent pipe architecture where the call needs to come down in close proximity to where it originated to be terminated. And so the satellites each have multiple look angles at the ground. And so what that means is in an alternative architecture, if the satellite is obstructed from the earth, the call is not going to go through the data transmission is not going to go through because the satellite isn't moving. In our architecture because the satellites are moving around the earth with multiple look angles calls and data transmissions go through more seamlessly. And so that's another point of differentiation. We just completed a refinancing basically just swapped and replaced our existing credit facility and extended our maturities out through the 2030 time period. And we were able to shave 10 bps in doing so. So we were quite pleased with that offering, and we're happy with the job that Deutsche did for us as they have done for us consistently.

All said.

Yes. I appreciate those comments on the execution.

I appreciate those comments on the execution. So I want to dig in on a lot of the points that you just kind of went through with the overview. Let's start with at your recent Investor Day, you introduced 2030 targets, including $1 billion of annual service revenue in 2030. And if I smooth that out, I think it implies around 8% annual growth. Walk us through the main drivers of that performance, potential new areas of growth? And maybe you can touch on each of your segments and what you see as the biggest opportunities there?

Right, right. So that's right. Your math is right. I think it's just inside of 8% if you smooth it out. So the headline is -- we have a proven track record of growing our service revenues. If you look at the last 5 years, I think it's -- we have a 9% CAGR over the last 5 years. So proven track record. And we have really different elements of our service revenue and their competitive circumstance is different, the inherent market rates of growth are different, but what each of our elements share is a proven track record of growth and we think in excellent prospects for growth as we look out into 2030. And that's why we were confident to kind of paint a picture of the 2030 kind of revenue profile. So first and foremost, if you discuss our growth prospects, it starts with IoT. And within IoT, our fastest-growing segment is personal communications. It's products like the Garmin Inreach, but it's other products like ZOLEO and Bivy, that attached to a smartphone and enable you to text through your smartphone and other functionality of like GPS and other elements that are -- that people that go -- that know they're going to go off the grid are highly desirous of. That segment within our business grew by 45% CAGR over the last 5 years. We think that there's a lot of room for growth there. The addressable market there is all the smartphones in the world. And so yes, we've grown it by 45% CAGR, but that's got a lot of room to run. That growth within that segment is going to be augmented by a new functionality that we've introduced, faster data speeds. So our current offering is 2 kilobits per second. We see that -- our new product takes that to 88 kilobits per second. And so that's a more feature-rich experience on those devices, think of pushing pictures. When you're off the grid. And so that gives rise to new use cases and higher ARPUs. And so that gives what is a very fast-growing element of our business even a shot in the arm as we look out into 2030. Within IoT, more classical IoT, if you just consider the estimates are NSR put out a report that says they see IoT growing by 16% CAGR through 2030 as it's proliferated across all kinds of devices for asset tracking and monitoring, et cetera. But we think that our track record is that we are the satellite solution for the IoT user requirements, just the nature of our network. We were built for personal communications that mobility, low power, low small antenna size lined up really well with IoT requirement. So you've got a market that's growing very fast, 16% is what the estimate are and our network lines up very well with it. Similarly, and we have a proven track record of growing IoT. And similarly, these faster data speeds in our mid-band offering are going to port to industrial applications, just like they do in personal comms. So new use cases. You'll be able to do more telemetry, more data-rich telemetry, be able to take pictures when you're monitoring assets, et cetera. And so we think that's creates new use cases in IoT, at which we have a track record of growing. We think that gets a shot in the arm. We've announced an agreement with Qualcomm, where in their Snapdragon satellite enabled chip that we think is going to resonate. We think that it's -- today, it works. It can provide 2-way texting and 2-way SOS. That has been tested and it works. And so we think direct-to-device is going to be a meaningful piece of our growth in, as we look out through 2030, we think that's going to be a fundamental trend that over time, increasingly smartphones are going to be enabled with satellite connectivity. So we think that's a growth driver for us. In our traditional satellite phone business, we have demonstrated that the competitive environment is a very good one. We've demonstrated pricing power. We enacted a price increase at the beginning of last year with very little fallout from churn, and that's just the nature of the competitive dynamic in that piece of our business. that's not going to change anytime soon. So we think that pricing climate, if you will, is stable. And we also have some growthy products within there, we have a Push-to-Talk offering that is much more growthy than the traditional satellite phone business. It directly integrates with the land mobile radio, thus creating a much larger footprint with no CapEx. And so first responders really like that. And we think that grows -- it's got a lot of room for growth. And similarly, the new mid-band capabilities are going to be relevant in things like drones and other monitoring type of facilities. Again, taking a 2 kilobit per second data speed up to 88 kilobits per second creates additional use cases. And finally, our broadband businesses grew 17%, I think, over the last 5 years. And that's principally maritime. So maritime is not a growing macro business. That is a straight -- that growth that we've enjoyed has been a straight takeaway from our primary competitor Inmarsat. We have our offering of Certus. It's faster and cheaper than theirs, and we've been taking share from them. As we look out into 2030, we don't have any broadband applications in aviation but we will do, we think here imminently. And we think we're going to do just as well as we've been doing in maritime, in aviation. And then I think our last growth vector is our satellite time and location business, where -- which is basically enhanced GPS, GPS as people, I don't know if you know, can be very easily spoofed. And our DoD customer is very desirous of authenticated GPS, and that's what the satellite business does for us. So we kind of wrap all that up, Aaron, and that's how we calibrate that $1 billion-ish number as we think about 2030.

And you mentioned the Qualcomm opportunity with Snapdragon. What's the latest timing around that? When does the monetization of the deal take effect and when do you expect to start seeing cash flow?

So we -- this year, we see $5 million to $10 million in development revenues from Qualcomm associated with that. We're not in the driver seat in that timing. We're not actually not a party to Qualcomm's deal with the smartphone manufacturers. We have our deal with Qualcomm. We know our -- and that's a signed and sealed deal. We know our economics as to Qualcomm. We're not a party to the Qualcomm negotiations with the end users when Qualcomm lets us know we'll let investors know.

Okay. But obviously, that opportunity, hopefully, sooner rather than later, helps you on that trajectory towards the 2030 goals Okay. Got it. Globally, there seems to be a lot of new satellite capacity coming online or set to come online in the years ahead. How do you think about the supply-demand environment? And how is Iridium positioned to grow within that?

So the new supply that's coming in is -- all of it is in the K-band, right? And so that is a very different band than we operate in. We operate in the L-band. And the characteristics of those two bands is very different. And they both have strengths and weaknesses. The K-band is very good for high data speed, high throughput applications. It is susceptible to rain fade, and so that is a limitation of the K-band. For example, we are certified for safety services, in both aviation and maritime. It would be hard to imagine that, that certification would be afforded a K-band player. All the new capacity is coming in the K-band. And it's coming in -- yes, it's coming in low earth orbit, we operate in low earth orbit, but we're in the L-band. So that's -- those 2 are -- they're kind of in the same neighborhood, but offering two different services because of the spectrum that we are both playing in. And so where we've seen new entrants take share is in maritime applications where a very small aperture terminal is on a Mars ship. We've seen Starlink unseat VSAT players for that business. And we were the backup to the VSAT player, and so we're the back up to StarLink. So we kind of -- we're kind of agnostic from that perspective. So that's basically it. It's -- the new entrants are all seem to be going for all playing in the K-band, all seem to be prosecuting the what we call the commodity broadband opportunity, which is a very different space than we occupy.

And if I could dig in a little more on the competition out there. I guess, how do you think about your position relative to competition from someone like Globalstar, which has a new constellation in the works? Or newly combined Inmarsat ViaSat, which obviously have their own set of things they're dealing with, but it's one of your biggest competitors in the past and how that evolves going forward or StarLink, which is obviously made a lot of noise throughout. So maybe you can just touch on, again, whether you think that these other industry players start to impede on your growth opportunities?

So Globalstar, I mean, I don't believe they even have phones to sell. So we don't -- as they're currently configured, we don't really view them as much competition. Apple's relationship with Globalstar is such that I think they've procured the majority of Globalstar's capacity. So -- and they're going to prosecute the direct-to-device kind of opportunity. We're happy for them to do that. I mean, I think Qualcomm is going after the Android world. And so there's a lot of Androids -- more Androids and there are smartphones. And so we will compete -- will be part of the Android solution to the extent we're in the Qualcomm chip. So but as to a satellite provider as to global store, we don't see them as much competition and -- but for the Apple initiative, I think that's going to be the circumstance for some time. Inmarsat Viasat. So ViaSat is not a competitor to Iridium. So we back them up on maritime applications. And so that -- we don't see that changing. Inmarsat, we compete with them pretty much in kind of two, maybe three areas in our satellite phone business, they have a satellite phone that is -- they price it more cheaply than we do. We really don't consider them as we think of our pricing actions like we don't price based on Inmarsat. It's a different -- We go after those people that want the Iridium experience it's different than the Inmarsat experience. So we've competed with them for a long time, and we don't feel like we give them much consideration in terms of how we go to market. It's a different offering. We're trying to take share from Inmarsat and Maritime. That's -- and we've been pretty good at it. We've grown by 17%. As I said, over the last 5 years, we have a better mass trap than they do. We don't think the ViaSat merger changes that very much. And then finally, Starlink. So Starlink, as I said, if they unseat ViaSat when -- for broadband on a [ mayorship ], we're happy to be the backup to them just like ViaSat. Where we do see them is in when -- to the extent that they offer pricing on a primary low enough that in an instance where you don't want a companion, we'll see them there. But like I said, we're happy to be a backup to them or to Viasat. So it's kind of a similar circumstance.

And Eutelsat in one web I think, just completed their combination last week. That brings together a LEO and GEO constellation. Any thoughts on that set up as a competitive threat? Or is that more a response to Starlink at the enterprise value -- enterprise level.

Right. They're both -- that's K-band again. So they're going -- there -- I guess, they take a competitor out, that merger takes a competitor out, but it takes a competitor out in the K-band. It's not doesn't infringe on the L-band.

Okay. So now, it sounds like not an impact on kind of the suppliers you deal with, and you don't expect to see impacts on pricing as you go to negotiate new deals with potential clients.

Right.

Okay. With -- I wanted to speak on the government for a moment. The government is your largest customer, a little over 20% of revenues today. Can you discuss the relationship and how it's evolved over the years?

So the government is our oldest and largest customer. They were our first customer pretty much stood the company up back in the early '2000s. So we had multiple renewals with the DoD over the years. Our current contract that we're operating under is a 7-year deal. Which is just by virtue of its duration, that's very unusual. It's unusual for the DoD to go that long, and it kind of speaks to the uniqueness of what we do for the DOD. [indiscernible] that was issued was a sole source to us. And the reason for that is we do things for the DoD that nobody else can. So I talked about our the uniqueness of our network being the source of advantage. That's particularly so with the DoD. If you think about our traffic. Our traffic is routed in space. And as the DoD is terminated in their proprietary gateway in Hawaii, never touching the ground. So think of the DoD traffic is encrypted, et cetera, their next best alternative would be to have the traffic, land in close proximity to where it originated and be susceptible to Intercept, et cetera. So that's why the DoD loves our network. It's the handoff and space and the termination in their proprietary gateway. Interestingly, this gateway that they have in Hawaii, they've spent hundreds of millions of dollars on and it's only utilities to terminate the Iridium signal. So this is a very sticky customer. And in prior kind of renewals. The one I think that is most telling is of the renewal in 2013, which is -- paint the picture there. The troops were coming home from Afghanistan. And in those days, our relationship with the DoD was a per device type of arrangement. So the troops came out -- were coming home from Iraq and turning in their satellite phone, and so our revenues were going down. And so we had a renewal coming up in 2013, and we said publicly for a year prior to the renewal, we're going to get a renewal and our revenues are going to go up. And investors kind of said, well, believe that when we see a kind of a thing. And sure enough, when we did the renewal, we delivered on exactly that. The revenues in the next contract went up, notwithstanding the fact that the subscribers have been going down. And that's because the DoD recognize and we recognize that we built this constellation -- this new constellation, a $3 billion constellation. They were a primary beneficiary of that, and we just couldn't have our revenues going down in the face of financing that and kind of we saw eye to eye on that. That's just a good proof point on the nature of the relationship and that it's integral to, I think, the DoD communications infrastructure.