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

Okay. We're going to get started. I'm Aaron Watts, the credit analyst here at Deutsche Bank covering media, cable, satellite and business services. Next up, we have Iridium Communications. Very pleased to have them back this year. On stage with me is Vince O'Neill, Chief Financial Officer, effective this coming January. And Suzi McBride, Chief Operating Officer of the company. Thank you both for being here. So we are certainly going to miss peppering Tom with questions at these gatherings, but I appreciate you stepping up to the plate.

Vince, in August, you were named the new CFO of the company, again, effective the start of next year. Congratulations on that. As you prepare to take the financial reins, how are you and Tom working to make this a seamless transition? And what should investors expect in terms of any notable changes in financial policies or strategies?

Yes. Well, first off, thanks for those sentiments, Aaron. Very excited to be named as Iridium's Chief Financial Officer from the 1st of January. I've been at Iridium for 10 years. And what I tell people is that I roughly divide my time in 2. First 5 years was really about getting the network built and getting it up there, making sure we retied the business continuity risk that we had and that we could obviously fund that. And then the second 5 years was really quite a contrast where we went from being this company that was fully focused on the launch, getting the birds up there. As I said, making sure they were funded and every penny we were generating was going into that. And it flipped to where we're now throwing off around $300 million of free cash flow a year. So the last 4 or 5 years has really been about shareholder-friendly activities, looking at strategic investments, different things like that. And I've worked closely with Tom over the last 10 years, but especially over the last 5 in terms of outlining that strategy, looking at that financial strategy, what's the right financial policy for us, where are we comfortable with leverage, all of those kind of things that you would think about. We had an Investor Day in September of '23, where we outlined our strategy. I was central and integral to that and worked closely with both Tom and Matt. So we obviously knew with Tom, this date was coming. Tom is 67, I'm sure you won't mind me saying. And so we've been preparing for this for the last 2 or 3 years. I didn't know the exact day or date, obviously, but we knew this was coming. So my message to investors is pretty simple. We have a transparent financial policy out there. And I think you can expect to see more of the same as we go forward here.

Okay. So Matt has described 2024 as a bit of a transition year for Iridium. For the uninitiated, walk us through what's been accomplished this past year and how it positions the company for future growth in the years ahead.

Yes. So I think what we had said for 2024 is that it was going to be, as Aaron said, a year of transition, and that was primarily because we had a number of nonrecurring headwinds that we had to "fight" through from an OEBITDA perspective. And very briefly, they were -- one was we took a pricing action in our voice and data business in 2023, which obviously wouldn't recur in 2024. Secondarily, and we had talked about this going through COVID that we were going to have a normalization of our equipment revenue. You're starting to see some of that now where we had a really strong '22, very strong first half to '23. But you can see in the second half of '23 that those levels started to moderate. And certainly, as we go through Q3 and Q4 of this year, those comparatives get easier. But there was a level of moderation or -- sorry, normalization that needed to take place there for equipment from '22 and '23 levels. And then finally, really good news was we announced that we could extend the life of our satellites. So our initial satellite life was 12.5 years for accounting purposes. Suzi's team do a technical study and a technical analysis every year. Suzi will probably talk about this a bit more later, but we're really happy with how the network is performing. We put up another 5 spares in May of '23, I believe it was. And with that, we felt comfortable taking the life up to 17.5 years. So we've extended the life on the constellation by 5 years. That has the effect of spreading out revenue over a longer period of time. So there was a $7 million headwind that we had to take in '24 that won't recur in '25. So we fully expect in 2025, we'll get back to more normalized growth rates around OEBITDA.

Okay. That's a helpful backdrop there. Now there's been a lot of going on around the company. So I wanted to kind of check the boxes on some current events. Back in April, you completed the acquisition of Satelles, which is a leading provider of positioning, navigation and timing services. While I appreciate it's still early days, how is the integration going? And remind us your financial targets for the business?

So I'll quickly talk to the financial application of this, and then I think Suzi will get into more of the applications around Satelles and why we're so excited. But we had a 20% stake in Satelles for about 5 or 6 years prior. It's very strategic to us. It runs on our network, has a diverse channel on our network. And we think it has a lot of applications and a large runway for growth going forward through the rest of the decade. So we have said is that -- we outlined our $1 billion -- approximately $1 billion service revenue plan in our last Investor Day. We sized the Satelles opportunity at about $100 million. So we feel very excited about that. The Satelles people are very excited to come on board and be part of Iridium and which happened in April. And certainly, to this point, we've been very happy with how the integration has gone.

And I'll just add, I mean, I think the integration is going wonderfully. I mean, they are a great fit with our company, both culturally, but also from a business side, very complementary to what we're doing and why we went after the full purchase of them. I mean they utilize Iridium. They do a burst service that provides this PNT capability. So it exists today. It works today, which is phenomenal. And they've already gotten some business going. But why I get excited is I think there's a lot more opportunity now Iridium can open up for that business side and being a larger company clearly with our existing markets like maritime, aviation, even personal comms, there's a lot of applications where a ship or plane in a place that it might even have GPS jamming or spoofing happening. And so having a resiliency and having another source for that position or timing, especially is really critical. And so it plays really well for a lot of our existing markets. But it also opens, I think, new markets for Iridium. It's got a much broader application, not just on the remote satellite needs areas, but it's really around cybersecurity and a lot of -- there's a lot of timing used in things like data warehouses, data centers and oil and gas. And so there's a lot of places where I think we can naturally start expanding in a larger market areas with our capabilities and our size. And what I also love is -- because it's a burst service, it's something that when we burst it, it's -- there's no real cost to us to do that, to generate that, but we can have one user or thousands or millions of users, it doesn't take up capacity on the network. So it's a great opportunity to grow without having like -- with really hitting the bottom line much faster than having something we got to go develop and then every incremental user takes some of our capacity or usage of our network.

Okay. Great. So let me go to the next event. In the second quarter, you repriced your term loan and reduced the spread you were paying by 25 basis points. That will save you around $4 million in annual interest expense. And then in late July, you completed a $200 million add-on to your Term Loan B with the proceeds expected to provide additional capacity for share repurchases. This took your gross leverage up, though, from 3.6 to 3.9 and also came with some adjusted leverage guidance for the future. Can you walk us through the motivation for increasing the debt load for buybacks and how the capital allocation shifts impact your leverage targets going forward?

Yes. Sure, Aaron. So again, when you go back to our Investor Day, what we had outlined was that we were targeting net leverage at or less than 2.5x in December '26 and ended the decade targeting at or less than 2x net leverage as we went into 2031. And what we've done is we've taken a slight detour. And basically, I would think of this as more of a timing adjustment where we have accelerated repurchases that we would have otherwise been doing in the normal course. And we've done that because we believe that our stock is significantly undervalued. So we're currently trading at, I think, about a 10x multiple. We consider ourselves significantly undervalued. So with that dislocation that had taken place in the market, we just wanted to take advantage of it. And we felt it made sense to release that leverage guide or release the pressure on that leverage guide up to -- just up to or just under 4x, which is where we're comfortable. We added $200 million to the term loan, as Aaron said, and we will use that and are currently executing that to do accelerated share repurchases.

And then just remind us how much stock you've bought back to date and what remains on your authorization for the future? And I know you just had an adjustment there if you can highlight that.

So we have -- we had authorized up until a couple of days ago, which I'll get to. We had authorized $1 billion in share buybacks. We've done that in 3 tranches of $300 million, $300 million, $400 million. All of those tranches, we basically exhausted before the end of the authorization. We're currently $820 million as at the end of Q2 into the $1 billion. As I just said, we've upsized the term loan by $200 million to add to that. And we just recently announced in the last few days that our Board has authorized a further $500 million through the end of 2027. To the earlier point about upsizing the leverage, we feel very comfortable with that. And given that we throw off around about $300 -- $300 million, sorry, of free cash flow a year, we feel we can delever quickly if that's something that we chose to do. But that's where we're at on the buyback, Aaron.

Okay. So clearly, taking the leverage up temporarily indicates to me that you have some comfort in the business going forward?

Yes. We feel very comfortable given the -- especially given the mission-critical nature of the applications and solutions that we support. We feel the business, the cash flow within the business is very resilient. I think we've shown that through prior recessions. I think you could see some of that coming through COVID as well. So we feel very comfortable doing that. And as I said, we have the opportunity to delever and we'll delever quickly when we choose to do so. So we're very comfortable in that range. The one point that I would make is that we did release the short-term leverage target to allow us to accelerate some of the share repurchases, but the 2x net leverage guide remains in place for the end of the decade.

Okay. And on the business performance, during the second quarter call, you reiterated your full year outlook calling for service revenue growth of between 4% and 6%, [ OEBITDA ] between $460 million, $470 million, you mentioned the $300 million of free cash flow. Any updates on that today? Or this is still the right range?

I think that's still the right range. We're very happy with how the business has performed through Q1 and Q2, and we'll provide appropriate updates on our next earnings call.

Anything we should be thinking about as we look ahead to next year in terms of the components that go into free cash flow, such as CapEx or working capital and maybe in particular, cash taxes, which I believe were set to kind of ramp up going forward?

Yes. We had said cash taxes will ramp up as we go forward. They'll ramp to where we think in 2028 will be a full taxpayer. But you shouldn't expect to see much impact from that in 2025. I think that ramp will occur as we move forward here. The other thing I would highlight, though, as we think about '25, and we touched upon it earlier, is we have said that we expect to be about approximately $500 million of OEBITDA in 2025 and get back to what we would consider a more traditional run rate growth rate in the business for OEBITDA.

Okay. And I certainly don't want to overlook the capital expenditures and the story there. Your current constellation, and you mentioned this earlier, consists of, I think, 66 primary satellites, 14 spares. Your primaries went up in 2019. You said they're performing better than your original expectations. When do you see starting to spend again on your next constellation? And any goalposts around potential costs of that project relative to what you spent for your current one?

Yes, I'll take that one. Yes. So we do have a very healthy constellation right now. We've got 66 operational satellites plus 14 spares, which is why we went ahead and not only are they performing better, but with the spares as well that we just launched, we definitely feel very confident going into the mid-2030s with the life of our constellation services. So there's no hurry or need to execute in terms of when we need to go into the next generation. However, we are obviously always thinking ahead. We're watching the markets. We're watching more of the industry, where is launch going, where satellites going. And given a lot of the movement that we've seen in terms of new entrants and competitiveness in some of those markets, the costs are certainly coming down. The cost per satellite is coming down with Starship coming on board, the launch costs will go down. So we do anticipate that we can build a more complex and capable third generation, but the cost to do that would be much -- should be lower or not much, but it should be lower than we did the first round and also our capabilities to keep it more of a flatter profile, cash profile is also very achievable with the way the market is going. It's something we're going to keep watching. I mean it's kind of early to tell exactly where we'll be in the next 5 to 10 years. But the way the industry has been moving, we will be well situated to take advantage of some of that, especially as I think right now, there's a lot of activity. And so I'm glad I'm not trying to buy launches today given where the market is at. But I think by the time we will be going into that market of buying satellite components and launches, we might be hitting it very well where there'll be a lot of capacity available and hopefully good pricing.

Okay. Maybe this is -- on a related note, as you think about that next constellation, is there any need for the purchase of additional spectrum as you think about the business and how it's evolving?

Yes. I think a couple of years ago, we thought we might need that. But what we've done is we -- basically we've just invested in kind of rewriting some of our own current systems to enable us to get a better efficiency on our network to improve our overall capacity already just on what we have. We're always -- we've had this system for over 25 years. So we really understand the market. We understand the growth. We understand how to stay ahead of our network growth and capacity. So that's not an issue. And I'm not worried about us hitting any limits in the next couple of years because of our plans and what we're doing there. And in terms of -- into our next generation, one of the challenges that Matt, our CEO and myself threw out to our team is how do we do this next time around, but with the same spectrum, but increased capacity, like 10x what we need to do. And we've proven we can do that. So I don't feel like we need to go out and buy any spectrum tomorrow. We've got the ability to continue our growth and even higher growth in the future with our next generation. With that said, I mean, there's a lot happening right now. So we'll clearly continue to be opportunistic and keep our eyes out if any spectrum that is particular to the kind of market we want to go after should become available through any kinds of different means.

Okay. So one last current event item I wanted to cover. You've announced a couple of new contracts recently with your largest customer, the U.S. government. including one with Partner General Dynamics related to the SDA and another new 5-year deal that expands your relationship with the Space Force. What are the key takeaways here? And how should we think about the financial impact of those new deals?

So I would just say on the financial impact and how to think about the deals is. Certainly on the SDA side, we have a growing and developing relationship there with the U.S. government. We've been in that program now, I think, for 12 to 18 months. I think you should continue to expect to see revenues to grow there. I would highlight, however, that these contracts are highly strategic to us, and they're very much in support of our 7-year airtime contracts with the government. But while you would expect to see revenue grow, it is a low-margin business, and it's more the strategic value of that we track and we value as it relates to our airtime contract.

Okay. So on the government, they're your largest customer. They account for over 20% of revenues. Your largest agreement with them was a 7-year deal, $740 million fixed price contract that expires in 2026. What are you expecting in terms of competition for that contract as it comes up for renewal? There's clearly legacy competitors as well as newer entrants in the space. Is there a risk that the government might look to spread that business around, divvy up the opportunity? Or are you optimistic that Iridium can maintain its slow provider status on that front?

Yes. On that one, I think we're optimistic. I mean, in terms of -- it's a very good relationship. We've had this relationship for multiple years now, and it continues to be supported. And I think it offers a very unique service to the government because they have their traffic being rounded to their own gateway in terms of their capabilities. There's -- clearly, I think the government is always going to want to have multiple solutions at hand, and I think that's what they're always investing and ensuring that they've got -- they can pick and choose on what's available for what they need, right? I don't think that's going to change or go away, and it's how it should be and how they operate. But what we can say is that we just announced our extension or we got another renewal of our ground maintenance contract, which is basically to help support that gateway for them in terms of the sustainment and maintenance and support of that. And that just got renewed for another 5 years. So that shows that they're definitely going to keep investing in keeping the service and capability for their base to have going forward. They're also investing in more capabilities to be added to that network as well. So I don't feel like it's coming. I mean that they're not going away. I mean there'll definitely be more offerings from other competitors that they will probably also use, but nothing is going to change, I think, in terms of where we think the future is going in terms of use of Iridium on the global scale. Given that we are L-band and given that we are global in nature, it does provide a unique aspect that is critical to some of those needs for the communications of the government.

Yes. And I would just add very quickly to Suzi's point. Given the 5-year nature of that contract, it straddles the renewal in September '26. That will probably get pushed out 6 months because the government can do that at their request. But to Suzi's point, we kind of see that as a very important data point, and our expectation is that we will have a favorable renewal of the government contract.

Great. So the most frequent topic of discussion that we have with investors is around the competitive environment today and into the future with Starlink obviously being the most disruptive across the space. Can you elaborate on that and how you think about your competitive moat across your various end-user applications, including land, maritime, aviation, Internet of Things, all your different kind of touch points.

Yes. I think there's a lot of information out there and people hear about L-band -- I'm sorry, LEO and they hear about Starlink and so they immediately think, well, that must be your neighborhood and what your business is. And what they're doing right now is all about broadband services in the K-Spectrum. So their Ku-band spectrum, which is really good for broadband. I mean, yes, it happens to be LEO, which is the same neighborhood that we are in, but it's really more about the application and the usage that makes them different than who we are. And I know Vince can talk to kind of where we have seen some edges that have been eroded in some of our maritime areas, and we can explain that in a bit. But I think the difference is in maritime and also in aviation, we're very critical for safety services. And in fact, the regulations require that there's L-band systems on board, especially certain fleet sizes above a certain level and also for aviation. And not only you have to be a certain kind of L-band, you have to meet the requirements of the regulations and be certified. And we are one of two that are certified for both the maritime and the aviation safety services. So I think that's where we have a very protective moat around given the nature of our system and the ability to do these safety services. And that continues to grow. And I think that continues to be a big avenue for us. In fact, we just announced a couple of weeks ago for the Global Maritime Distress systems that are certified. We now have that same capability on our Certus product, which is our broadband Certus -- our broadband service. So now you can get not only a companion terminal for the ships that offers the safety service now also has a little bit of the broadband companion and backup capability as well. And we're in the process of doing one also for aviation on our Certus product. So we're expanding into both -- you can do legacy and/or a Certus product with these safety services. And then furthermore, for the competitiveness with like a broadband Starlink kind of system is IoT. I mean one thing that makes L-band phenomenally good and why I think Motorola went after this spectrum in the '90s is not only does it work well for certain conditions and rain, like why safety likes it, but it also makes for smaller antennas that are more power efficient. So for anything that's very small in mobile, like an IoT, if you want to have something remote monitoring something in the middle of an agricultural field that doesn't have connectivity, doesn't have a lot of power, it's important that they have small devices, small antennas and small power. Likewise, if you're a personal communications, you want to have a device out in the woods for the next 5 days without a power source. It's really important to have these very efficient usage, which L-band is critically for enabling those type of activities.

Yes. And I would just quickly add to that. We did highlight that we have seen Starlink on the edges in our business. And I just want to put some numbers around that for people. We have a broadband business. It's about 7% of our revenue stream. It very loosely splits into 2 parts, 2 types of use cases. One is a companion service. So that's where we would complement a Starlink or we would complement a VSAT. And because of our L-band spectrum, we would use this as the backup on the ship to provide comms when the VSAT or the Starlink goes out. In some of the bigger ships, that's mandated. But in general, will be used as a backup in those scenarios and a companion service. Then the other side of it is will be used as a primary maybe on some smaller ships where we'll be the primary or the only source of comms on those ships. Starlink has come down the food chain in terms of its pricing. It came out recently with a $250 plan for, I think it was 50 megabits. So for those primary users where they don't need the critical comms and they don't need the global coverage, then it makes sense for them to go and churn to Starlink, which we've seen. That's a very small part of our revenue base. It's -- the broadband is 7%. A chunk of that is maritime and then a piece of that maritime is primary. Most of our business has been and will continue to become an even stronger mix towards companion. We have said that we've seen the impact of that in our results in late Q4 of '23 and that we'll work through that headwind in '24, and it will abate in '25.

Can I also add, I mean I think some of the other parts that we're seeing now in the market as well, even in the maritime is that regulatory spectrum and availability to use that in different parts of the world is also a critical factor. So one thing we do have is because we do have that global authorization to use everywhere, it means that if you're on a ship a plane or even if you're in a device traveling to another part of the country, you know it's going to work. And there are parts of the world like especially Starlink has been extremely disruptive in the broadband sector, but we are seeing even on some of the ships, the large fleets and things. They'll have 3 devices now. They'll have the VSAT. They will have -- for the broadband guarantee kind of coverage and access when they need it, they'll have a Starlink because it's very cheap and it gives them access, especially if the crew wants to watch Netflix or do videos home. And then they'll have like the Iridium or the L-band services for the safety component and the backup because there's still times when you can't access it. So if you're coming into a port where one like Starlink might not be authorized to use, you might use a VSAT, you might use Iridium. And we know we've been used to when the K-band system goes down, the way that they use is they'll use the Iridium system, the L-band to have connectivity to talk to the person to help how do we fix this device. So we are seeing that there's still sort of regional aspects of things that only Iridium really kind of brings to the table that really does work everywhere in the world if they want to make sure they always have connectivity.

And just one more question around this. So in aviation, for instance, Starlink just announced a deal with United to provide free WiFi in all its aircraft. How do you think about them encroaching on that area? I know aviation is an area that you had kind of highlighted as a growth area for you in the future. Does that change that line of thought at all?

Well, I'll let you talk on the growth, the dollars. But I mean, I think the one thing to remember is that is back of the plane mostly, right? That is really the streaming. And as you know, when we travel, we use it, and it's great. And so that's what they're mainly being used for is that streaming capability for the passengers. We've always sort of [indiscernible] in the cockpit, the pilots, right, the critical safety flight. And again, that's a certified L-band mandated solution that they need to have from a safety aspect to ensure that the planes can always get connectivity back on any kind of emergency and/or critical communications. So in that aspect, we are still certified. We're the ones that are in the front of the plane is the biggest difference. When you hear aviation, like that's a big -- there's a lot of different pieces of aviation like as is maritime. But do you want to talk to maybe the numbers.

Well, I would just say on the growth, and it just ties back into exactly the use case that Suzi was describing. Because of that, we don't see any change in terms of our growth profile, Aaron, because that's not the space we're operating in basically.

Okay. I want to make sure we cover direct-to-device. Can you talk about where you're at with that opportunity? What investment is being made right now and what will be required? And what the time line is for this effort to have a meaningful impact on revenue and profits?

So let me start. I would say that, obviously, we had an approach around direct-to-device where we had an agreement in place with Qualcomm. The technical solution on that works really well. The challenge was for Qualcomm to sell that commercially into the Android community. And that's where that endeavor kind of came up short. And so what we've done since then is we basically pivoted to a standards-based approach. We're working with the standards bodies to be part of the 3G PTT releases. We're getting a broad range of support there. So we feel very good about our prospects in that space. But in terms of timing, Aaron, what it means is it has pushed out the revenue opportunity a couple of years. And I think what we've said is it would probably be '26 before we would start to see revenue flow from that opportunity.

Okay. So perhaps we can end on this note. Clearly, there's a disconnect between your view on the opportunity and value of the company and where the market is currently pricing the stock. What do you think needs to happen to get investors on board to get them comfortable with the competitive threats we talked about and the confidence -- the same comments that you have in the growth story going forward?

Yes. I mean the thing I would say is that we believe we have a strong competitive moat around our business. I think if you look at our financial numbers, I think we're demonstrating that in terms of our growth rates. You look at our subscriber growth, 14% last year, 13% year-to-date as you go through this year. But I do appreciate with investors that this might be a show-me story for a while, and we're just going to have to keep knocking down quarter-after-quarter financial performance in terms of both revenue and OEBITDA growth metric targets. But we feel very confident about that given the competitive moat that we have around the business.

I was going to say the same thing. It's execution. I mean I think we're going to continue to execute on our plan and our strategies. And I think as we continue every quarter to show up and what we've done, as my husband always say, hear me now, believe me later, right? But we have a plan, and we feel very confident, I think, in the execution now we will continue to do that and be hopefully resilient to that.

Yes. Okay. Suzi, Vince, thanks so much for the time.

Thanks.