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

Live from New York. It's Monday morning. Next year's 50th anniversary of Saturday Night Live and I -- I must admit I saw season one. It was great. It's lost a little bit [indiscernible], but Raymond James has not. Excited today to have Suzanne McBride, COO; and Vince O'Neill, Vice -- VP Treasury and Finance.

Yes, you got it right.

From Iridium join us -- busy presentation day, today and tomorrow for me and Frank as well, covering TMT and Consumer. Iridium is Here. Interesting news over the last couple of weeks.

Let's start first with direct-to-device and how you see what that opportunity might be, what Iridium brings to the table and what the heck happened with Qualcomm.

That's the golden question since -- Yes. So I mean I think we still believe that the direct-to-device is still a market. I mean, it's going to come. It's kind of early. I think it's still -- people are figuring out how to adopt it, what people are going to pay, what is the whole market strategy look like for all the players in the supply chain there. So I think we still believe in it. It's just a matter of timing and the total cost in business case going forward.

Yes. No, I agree with Suzi. I mean I think our view on direct-to-device is, we believe in the opportunity as much, and we believe the opportunity is as big as we sized it and thought about it before the Qualcomm announcement. So nothing's really changed there, Ric. It's really just a question of how do we go to market now. The Qualcomm announcement was a disappointment. There's no way around that. But the good side is it does give us the opportunity to work with other partners and widen that breadth and open up other opportunities to us as well. So that's what we're going to look to prosecute here over the next 12 to 24 months.

One question we get a lot is, is the direct-to-device market kind of like wipe out cellular and towers? Or is it truly an adjunct?

I believe it's an adjunct. I mean I think it's still going to -- you're still going to have services that are in major cities, capacity, everything. It's probably more efficient, still have in ground, the direct capabilities. So I still think it's adjunct for those more remote locations or areas where it's very costly to do a cellular coverage where you can quickly use satellite coverage to do that. And that's -- we know the market very well. We've been doing this for over 25 years now. And especially like in the IoT and direct-to-device -- I was [indiscernible] D2D, I've been with D2D for 25 years. We've got directed to device. It's just not a handheld phone. Well, actually, [indiscernible] phone still, but to a smartphone. So we know the market, we know where people need and use it and what those markets rely on. And we still believe it's a very -- well, I think the differential for Iridium too, is that we have both the L-band service as a 2-way communication. And we do -- having watched a lot of the markets over the years evolve. A lot of our big customers, especially the IoT space and personal comms, really do rely on critical information, timely information happening. So latency was -- is important because have to be like nanoseconds, maybe not, but they can't wait 15, 20 minutes or hours, that really impacts if you've got a pipeline that you're measuring or persons in emergency issue really need to have something that's reliable.

Okay. Yes. When you think about all the people you have talked about direct-to-device, there's a lot of companies that are thinking or looking or trying to get into the space. You mentioned the ecosystem. It does seem to us that you got to have a chip guy and a handset people and the carrier, spectrum is pretty complicated. So walk us through now that the Qualcomm ration has been terminated. As you think about who you want to work with in the future, how is this ecosystem play out? And what do you bring to the table that's unique and important?

Certainly. For us, I mean we've announced we are looking at the standard base. I mean that's something that we know makes it easier for adoption by -- and in the OEMs, and you can go and get any chipset. There's multiple chipsets that can build against the standard that opens up for a lot of the players a little bit easier. So we are doing the narrowband IoT standards to ensure that we're in that play space, and we've got our network up there. So it doesn't cost us -- we don't have to invest in a whole new satellite system. It's really just software-defined solutions on our existing satellites and working with some of the chip makers that are doing the standard-based solutions going forward to ensure that kind of we're built into those in the coming years to open that part of the market up.

Yes. No, I agree with all of that. And the thing I would reiterate as well, Ric, is that for us in terms of what do we bring to the table, technically, the solution worked. Everybody was really happy with the solution. OEMs came into the labs, tested, great feedback on the quality of service. So we know we have the technical capability to deliver this. To Suzi's point, we've got the network to deliver it. And we've always thought of this business in direct-to-device. We've always thought of it as the kind of cherry on the top for us because we already have a big cake. We already have a business that's almost $500 million OEBITDA business. So for us, this is very much incremental in terms of how we thought about the future moving forward.

Okay. It seems to us that direct-to-device isn't just one market with one winner. It feels like there will be different price points out there. How do you all kind of view, how this will develop over the next 5, 10 years?

You're going to start...

Yes. I mean, look, what I would say is we have a technical solution that works. I think the market is -- the market is still evolving. If you think about what Apple are doing, they've offered their one-way messaging capability. They came out again this year. They basically said that, that will be free for another year. So I think there's still -- like as the market develops, there's still this whole question about willingness to play -- willingness to pay, sorry, and how that will evolve. And to Suzi's earlier point, in what parts of the supply chain, who's going to bear what cost. But I think there will come a point or I personally believe they will become a tipping point where -- for me, it's like you need someone at the retail point of sale, walking into with an Apple phone or an Android phone and saying, I want to have satellite service, I want to have satellite capability. And I don't think we just have that yet. We're not quite at that point. But when we get there, I think things will move very fast.

Yes. So I think from the Qualcomm question, obviously a tough one to answer, but it sounds like it wasn't the network. It wasn't really the chip in the phone as far as would it work or not. It wasn't -- it was more just are we ready for it? Are we ready to market? And are we ready to figure out the monetization model? Is that maybe a fair way of...

Yes. I mean, my personal opinion is, it's kind of the market timing is kind of hard year, right? I mean, first of all, a lot of the phone manufacturers are having a down year. I mean, let's face it, you can look at all the numbers, they got hit pretty hard across the board. And when you start talking about putting satellite capability, that's an extra BOM cost right? And so -- and I think they were watching to see what Apple is doing and it hasn't that pressure like you [ see ] hasn't come that like, oh, my gosh, I need this because everybody is walking in and saying, where is my capability to Android? So I think -- and plus there's a bunch of discussions going on a standard base. A lot of companies are announcing what they're going to do. And so that people are kind of seeing what's going to happen in this area and what will be the end business evolution of that supply chain, who makes what money where and what's the ultimate end customer [ going to ] pay.

Watch the BlackBerry movie on the plane right over here. So anybody in the audience or webcasting in, if you've been involved in wireless or technology, recommend watching the movie. It's an entertaining movie, but it also does kind of talk about early stage, boom, bust, innovation. So it's an interesting movie. It's not a documentary, but it's certainly entertaining. As you all look at that, it sounds like in the direct-to-device isn't that aha moment like the iPhone when it came out, '07 and everybody had to have it. It feels like this is something that people maybe don't even know they need, but they do need it. So it's still an education process. Is that also maybe what I'm hearing?

Yes, I think so.

Yes, I agree. And I would say in terms of the aha moment, not yet. I do think, as I said earlier, Ric, there will become a tipping point. In terms of the TAM, in terms of the opportunity, in terms of what it could be, and I think as we've said before, there's room for more than one winner. I think you'll have a number of winners. But that opportunity is still there. Personally, I think in 10 years' time, 5 to 10 years times, so everyone's going to have this in their phone. Everyone is going to want to use it, and it's not just going to be phone. It's going to be proliferated across a number of devices from watches to whatever, you name it. But as I said earlier, I don't think the market was quite there yet for that.

Yes. How does that affect Garmin, because Garmin has been very successful for you all, the inReach product talk about that product a little bit and then also how you see it kind of working in the world of the future in 5 or 10 years when the smartphone base has something in it.

Yes. So I'll take a stab at that, and then Suzi can add on. But -- so first of all, Garmin and personal comms in general has been a great story for us. We've had 45% CAGR growth over the last 5 years on our subscriber base there. I think when you talk about Garmin, which is this really cool inReach device that you can pair to your phone when you're off the grid. So if you're a hiker, you go climb whatever Mount Rainier, you can like text home and say, to your spouse and say, I got here, they can text you back. We're going to have the capability to deliver pictures over that and other feature-rich text functionality in the next year or so. But that's a device for people that really know that they're going to be off the grid on a regular or semi-regular basis. So it's more planned application. It's more planned use cases, where it's part of your lifestyle, if you like, right? I think with the direct-to-device, I think it's more for those more surprising maybe episodic events that happen. And I don't think it's just outside terrestrial coverage. An example I give a lot of people. I may have been given it to you in the past was, about 1.5 years ago is I was at a wedding with my wife. And it's not outside terrestrial coverage, but it's out there. And we're trying to get out of the place at 12:00 at night, had a great night. But now we're trying to get back to the bed and breakfast, and I can't get a signal on my phone to get an Uber to come and collect us. And I'm thinking if I could point this thing to a satellite right now, I'd pay $5 or $10 for that connection within terrestrial coverage. I think that's more the kind of usage you'll get for direct-to-device as it starts to proliferate, which I think will be a little bit different and distinct from Garmin and personal comms.

Okay. I should know this, but I don't. What's the battery life of the Garmin inReach. So if you think about your cellphone to, boy, it seems every night, you better be recharging it, it's using so much. How often do people need to charge the Garmin inReachn do you know?

It's not at top of my head, but I don't. But it's certainly not at all. I mean it can go weeks and months depending on how often they're using it if [indiscernible] if they're both theirs and -- we [indiscernible] ZOLEO, their partner Bivy that do these as well. It depends if you -- you can set it up to like be giving breadcrumbs every minute or every 5 minutes. So depending on how they set it up, it can change the battery life. But it's in fact, some of the new stuff we're coming out, that even has better battery [indiscernible].

I don't know. It's a lot longer than your cell phone, but I don't know the exact specifics, Ric.

And I'll just say, I mean, I think because it's also very purposely built for that. I mean that's the other key, right? I mean Garmin's very brilliant as our other partners on really designing the application about how the use case is going to be, which is very different than what a phone normally is because people are charging all the time, right? It's kind of known.

Right, right. All right. So we move into some of the other businesses. You've touched on IoT a little bit. That certainly seems like one of the still big growth areas as we look at the 2030 $1 billion -- approximately $1 billion service revenue. How sustained can that IoT be? And then another associated question with it, how comfortable are you with that 2030 view? What's kind of going into those assumptions to kind of help you get to that $1 billion service revenue.

Yes. Why don't you start with the last question I can, yes...

So in terms of the $1 billion and we came out and we reiterated this after the Qualcomm announcement, that doesn't change about how we think of the approximately $1 billion by 2030. First of all, as I said earlier, we still think we're going to be a big player in D2D. We think it's what our network was initially built for, honestly. So we still think we have a big runway for growth there. But as we look across all sectors of our business, Ric, we think we have a lot of different growth vectors. We think that there's still a long runway left on the personal comm side. That's -- within Iridium, we call that kind of our consumer product by real measurements or real definition, it's not consumer, it's still niche. So we feel like there's a long tailwind for growth there. We've got new products coming out in [indiscernible] band space over the next year or two, which we think will give a further shot in the arm to our IoT business. As I mentioned earlier, even on the Garmin and personal comm side, we're coming out with products that will increase the functionality of what we have today. So we feel very comfortable with the approximately $1 billion that by 2030 at the end of the decade that we put out there on investor day.

Yes. And I'll say, I mean, we're also very confident and comfortable just because we know our markets well. I think we also know our -- we have a -- for those that don't know Iridium, we have a large 500-plus wholesale model with all these different partners that build products that know those markets really well. And so we've been working with them for multiple years. We have a close relationship in terms of their market projections going into our projections as well. So I think that also helps understanding where the growth vectors are. And we're planning with them on their next-generation solutions ahead of time. So I mean IoT, I think, is definitely one of the big growers for us going forward. And we are really embedded in a lot of devices and solutions that still require high availability if you think about if you are monitoring something, they need to know when it's down, when there's issues. So our market really is in that kind of sweet space, something you get really embedded in a high technology solution that requires high availability and sometimes -- a lot of times, the 2-way messaging as well.

Yes. So Ric, one second. I want to keep Ken happy, and I've got to keep my legal department happy as well. So I just have to advise people, we have financial disclosures and a reconciliation to GAAP financials on our website. So that's specifically for our legal group.

Yes. The top question we probably get after D2D with the Qualcomm one is people are like, isn't SpaceX going to come in and just take over the world, literally. How do you all view SpaceX Starlink, and how they are going to play in the space versus you? And any other competition that you want to address in that question.

Yes. I mean, they're clearly a big disruptor in the broadband in the large broadband solutions or the VSATs and others are -- we are seeing it in some markets, not our markets, I mean but other players, and especially the VSAT's side. in the big markets that we play in, like Maritime, we are still companions. I mean if you talk about the big ships out there, they want -- first of all, they want to have the Global Maritime Distress signals that we are certified for, we're 1 of 2 companies that are certified. They also know that there's coverage issues and/or there's outages or whatever else it is. So they -- especially the bigger ships always want to make sure they've got multiple solutions to ensure that they always have communications back. And as Starlink's deploying, what we're seeing is we still go on as a companion package like we do at other VSATs. In fact, we're seeing a lot of the large ships, I think of those one that's just announced it. Has now offer 3. We aren't -- like they'll help 3 maritime solutions. So that would [indiscernible] VSAT or Starlink and the Hub Iridium or another L-band solution to ensure that they've always got those communications there. I think we'll see. I think people are still excited about the market that they're bringing and the price point, but it gets back to reliability and quality and bandwidth and can they get what they sell. So I think they will disrupt that. They are disrupting that market. . On our side, more on the personal comms, IoT, the L-band GMD assess, which is, again, the safety services or even aviation safety, which we also play a large part in. We don't see them as disrupting that. I mean it's first -- so getting certified takes time. Having the spectrum is also a big key of that. That's one of the reasons we are in those safety markets is because we have the L-band, because of the availability and the reliability. So can they, of course, we'll always watch and we always keep our eyes on all competition where they're coming, but we still think we've got a pretty good -- we still have a pretty good niche market that's developed over many years, and we've got the reputation of the brand that people trust us to be there when they need it.

So what is the most direct competitor for all the different product lines that you guys are selling? Is it Inmarsat now part of ViaSat because of the Spectrum rights? Is it another LEO operator? How should we think about who you then view as more direct competitors and tougher competitors? .

Yes. I mean it's...

I think it depends on the particular market you're in, honestly Ric, I mean if you think about handset and telephony, I think traditionally, that would have been more Inmarsat but that's...

[indiscernible] Globalstar.

And Globalstar. And you've seen we had a pickup there in '22 as we went through the supply chain crisis. So that was -- that particular aspect was a positive for us. I think in the maritime market, traditionally, it's been very much Inmarsat because that's what Inmarsat were set up for initially by the IMO. But obviously, Starlink or -- Starlink are changing that. And Starlink is certainly becoming a major player in that space, very similar to what Suzi said, we would see our services as mainly complementary to what Starlink do, especially the critical safety service aspect of what we provide but it really depends on the market. In the IoT space, I would say we're very much the premier provider in terms of providing the specific IoT solutions that we provide, whether it's personal comms or more on the industrial side.

Okay. So the revenue side, good insight from your partners, your distribution partners and the end market, comfort on where you're at with direct-to-device that will come around, just -- I think everyone is agreeing that this is a market that really hasn't gelled yet. People are trying to figure out -- but the opportunity does look to be quite significant from the number of people that would maybe sign up for something. So on the revenue side, it feels pretty good as far as that view to that growth rate. I think our model -- well, official guidance was kind of, what was it, high single, 9% to 11% in '23, high single digit, maybe beyond other than the -- next year...

We have said, obviously, our guidance is 9% to 11% for this year. We've said we'll average high single digit between '23 and '25. And then we've got the $1 billion number out there in 2030 that's...

I think our model -- we're not a [ detail printed ], but I think we're kind of like 8% growth rate in the long term kind of thing.Operating margins then as far as layering in that extra revenue, how much extra cost should we think about coming in there. Margins, I would expect hopefully continue to move upward. Given the fixed cost nature of the [ satellite ].

Yes, absolutely. We have said over the last couple of years, we've made investments in the business in terms of systems and tools and headcount, and people. And that's very specific. Our -- I think we guided for this year that our SG&A would be up on average 20%, which is what it's tracking to. Exit rate for the year will be much lower. Q1 and Q2 higher. You can see in Q3, and you're seeing in Q4, that's really starting the tail, which we planned for. R&D, we guided, I think, about 20% increase, which again is a reflection of the investments I just talked about. But certainly, going forward, you should expect the business to scale. I think Tom has said it many times before, it's hard to find the variable cost on the incremental service revenue.

Okay. And then CapEx, right? So you got the constellations out there the NEXT, and then at some point, we will get NEXT with the three in there, I guess. But as we think about the time line for that NEXT constellation, when do you need to start thinking about it, one, from a capacity standpoint, but two, from a technological relevant standpoint?

So I mean we did an Investor Day, we have always been thinking about it. I mean, we don't need to do it. That's the nice part. I mean, we knock on wood. I would say like our satellites are healthy, we just did five extra spare launches, satellite launch earlier this year. So we've got 14 spares on orbit plus active satellites that are all healthy, and we just did our longevity study. So everything is looking very favorable in terms of extending these constellations as we need. We're looking more from a business standpoint. It's really going to be more, what, when and what growth do we want to do in other sectors. So we're evaluating options right now. Nothing's changed in our plan. We're still on the CapEx holiday and we don't plan to do anything until the 2030 time frame. The one thing we have announced though is we will be looking at the standard-based narrowband IoT into our existing network, but that's not doing a third generation system.

Okay. And when from the outside, can we get a sense as far as what the magnitude of that cost might be? .

I don't know publicly when we're ready to have it. We're doing the evaluations and plans right now. We've got a lot of technical technology we've been working on. We've got that done. The team is actually over there right now working on it. So I'd say sometime next year, we'll come out with more what the exact plans are and timing and cost.

Okay. Because it seems like launch costs are coming down.

We don't have to launch for this. And the NB IoT is all -- yes, we're third generation.

Right. Yes, we're third generation.

Yes, we've always been -- also been uniquely in a nice I think it's a sweet spot for the large development CapEx cycles and that we're kind of -- we can watch what's going to happen here. And we did this before, like when we were launching the NEXT constellation, we came in after a couple of their big constellations developed, which we got to take advantage of both technologies, also ramping down of factories that were really advantageous for us. And we think we're going in the same position this time around, right? There's a lot of companies that are building right now, lots of satellites being launched who knows where they're going to be when we need to start kind of building. And so we think we'll be at a good cycling time to kind of come in and watch where technologies go and be well positioned for the third generation into the 2030s.

So CapEx looks okay for a long time. So revenue growth, margin growth, CapEx stays pretty modest for quite a period of time. Yes. As people think about, obviously, the stock price big run-up with the direct-to-device and other items and big pull back down, you've got the buyback program in place and the dividend in place. How should we think about the levers and how you all think about the levers of returning value to shareholders, dividend, which is hopefully forever type concept and stock buybacks. .

So when we initiated the dividend this time last year, I think, was the -- when we announced it.

Right after we all were here.

That's right, that's right. Actually, that's correct. We had always said that the dividends had to live through the next construction cycle, right? And so we had to have enough confidence in the growth prospects of our business, the resiliency of our cash flow generation to support that dividend. We also said that when we initiated the dividend that we would expect to grow the dividend as we move forward. And none of that's changed, obviously, and that's still very much our expectation. So we'll continue with the dividend and the expectation for folks is that, that will continue to grow. I think we'll announce the dividend for next year, probably early in the new year January, February time frame. So that's one aspect of it. On the buyback side, we -- I think we initiated our buyback -- someone keep me honest here, but I think we initiated early '21 break. We bought back over $600 million of our stock in that time period. We just announced 5 or 6 months ago, a reauthorization of another $400 million, which takes us up to $1 billion through '25. And so our expectation is that we will continue to execute against that. And then similar to prior authorizations, once we've depleted that, you should expect it to continue through the decade. So I think our view is that the repurchase of the dividend, that's -- we've been pretty upfront, that's our strategy, and that's what we've executed on so far.

You might not know the answer to this one, always a dangerous setup. But introducing the dividend, have you noticed any change in your shareholder base? And any income yield kind of investors coming in or that you're talking to might be a better one for Ken or others, but...

Yes. It's probably a better one for Ken. I would say the way I would couch that is, I think we've noticed a marginal change, not a huge change, Ric. But I would say that's very much in keeping with our expectation as well. Expectations when we announced the dividend were that it would take a while for it to work through and then change some aspects for one of a better term of the investor base. So we're still very much in progress and working towards that, but that will happen over time.

And on the balance sheet side, walk us through a little bit about how you're thinking about then leverage versus stock buyback and the target leverage zone and current interest rate environment that we're in.

Yes. So we have said that -- we have said that we feel like target leverage for this business is probably 2.5 to 3.5x. We're currently at 3x with the cash the business throws off, it's naturally going to delever. So I don't know what the math is. But when you look at the cash that we throw up -- our pro forma free cash is about $300 million. So that's $300 million and will continue to grow. So we're naturally going to delever before the -- below the 2.5x leverage as we go through the next like 2, 3 years here. What we have said in terms of guidance and as we look out towards 2030, is that we would expect to exit 2030 with leverage at or less than 2x, which sets us up in terms of the next investment cycle and what we would have to do there potentially. I think the other thing I'd mention just in terms of interest rates, we currently have a $1.5 billion Term Loan B. That was through November 26, and we managed to extend the maturity on that last September through 2030 with no change in price. It was actually a marginal decrease in pricing, but effectively no change in pricing. And we have a hedge on that through 2026 of $1 billion, a 1.5% cap strike price. So in the short term, we're pretty well hedged against any interest rate fluctuations. And obviously, as we go through the next 12 to 24 months, we'll look to hedge the tail on that, the '27 to '30 time frame.

So as you look at that long-term time frame, is investment-grade something that the rating agencies, as you look to say, can I get down not just to 2.5% to 3.5%, can I get down into the 2s and sub-2ses. Would that qualify, do you think, for investment-grade?

The honest answer is, I'm not sure, Ric. I think it might go close whether we'd quite get there based on size and different things. I'm not 100% -- I'm not 100% sure, but -- it certainly [indiscernible] -- certainly puts us in the ZIP code.

So we're up to 000 on the time. So I appreciate the time today, and thanks for coming.

Thank you.

All right. Thanks for seeing.