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

It feels like we've been on a marathon already, but thanks for being here for the 46th Annual Raymond James Institutional Investor Conference. My 29th Institutional Investor Conference here at Raymond James. I'm Ric Prentiss, Head of TMT Research. And as Brent and I like to say that's T for towers, M for media and T for telecom and Satellite Services. So we're pleased that Iridium is here today from the Satellite Services side. And given the shout out, do appreciate we got word that we got ranked in II in the TMT Comm Infrastructure category. And as you know, you maybe don't know. We don't ask, beg, plead or steal any of those votes. We just don't even do anything with it, it just shows up. So kind of a right in victory for us, and we appreciate the sincere message that, that sends to us that you appreciate what we're doing. But yes, we're on the satellite services side. So we've got Vincent O'Neill here from Iridium, CFO. First time sitting up here on the stage as CFO at our conference. We'll start off with -- I think this is going to throw you to the safe harbor one here in a second. But we'll start with the fireside chat, take some Q&A and then go into the breakout session. But Vince, welcome your first time in the hot seat.

Thanks, Ric. Good to be here, so.

And then Ken is going to make sure you say there's a safe harbor statement somewhere here.

Yes. There's a safe harbor statement up here just for reference. I try to mention that to keep our lawyers happy. So there'll be some questions at the end of the session on the page.

Great. Vince, the elephant in the room is Elon Musk, right? I mean, anybody that's got satellite associated in their title of their company and description of their company, the question we get from investors is, is Musk going to with his influence, his funding, his companies, why can't he just launch tens of thousands of satellites and change your life forever?

Yes. Well, I think for sure, I mean, Starlink has been a major disruptor in the satellite space. I think we've seen that over the last 2 or 3 years. And certainly, when you look at the geos and the maritime space, for example, he's had a big impact there. I think one of the things that gets lost sometimes is Starlink is so big. Elon himself is so public, and has such a big public persona, it tends to overshadow everything else. But when you look at us and you go back and think more specifically about Iridium, and you start to get into the satellite industry and the different pockets and the different aspects of the satellite industry, there are a couple of characteristics. And one very important characteristic is spectrum, which is hugely important to any telecom company. And Iridium operates in the L-band spectrum. We have dedicated -- we've got about 8.5 megahertz of dedicated L-band spectrum that's got global rights and global landing rights. And that means that we can provide global coverage anywhere in the world, which no other satellite company does. And certainly, for somebody like Elon to replicate that is extremely difficult and has huge regulatory hurdles to it. So it would take a huge amount of time, investment money, and that's if it's even possible. The second thing I would say is, apart from the spectrum, we have a network of 66 satellites up in LEO that orbit the earth basically. And if you think of them as 6 planes of 11 satellites in each plane, they're all connected to each other. So it's a mesh architecture. We have 14 in-orbit spares, and the value of all of that is, first of all, there's a huge amount of redundancy in the network. So if you've seen in the news recently, challenges that Thuraya and Inmarsat and ViaSat had with satellites, we're in a slightly different space. We have huge in-built redundancy and resiliency in the network. And we also have a mesh architecture, where the satellites are connected to each other, and the context and the so what of that is, it means that if you send a signal up to the satellite, so you go outside, send a signal up to satellite, that traffic gets carried across our network, and terminate it close to the point of termination. And that has real applicability for people like the U.S. DoD, for example, who want to carry traffic on our network and want to terminate at their own proprietary gateway. So a long-winded way of saying that Elon's has a big shadow, but there are things we do that are not easily replicated, and it comes back to spectrum and it comes back to the uniqueness of our network.

Great. When we think about one of the other hot topics that we get from investors, whether it's about satellites or wireless or tower companies is the -- aren't satellites going to replace terrestrial wireless. Are towers going away? Is wireless going away? Is traditional legacy satellite phones going away? Talk a little bit about what this direct-to-device or nonterrestrial network aspect is of connecting satellites with phones. What's the reality and what's your opportunity?

Yes. So direct-to-device is obviously the easiest way to think about it, obviously, is that you would have capability on your smartphone, so that when you went outside the terrestrial grid or you went off the terrestrial network, you would still have connectivity, and you would still have, for example, messaging capability from your phone. There's a number of different ways to potentially do that. But just more in terms of the marketplace itself, there's been a lot of hype around this over the last couple of years. And we've always said we believe this is an opportunity for us going forward. We're a bit skeptical in terms of how fast it will happen and what the ultimate size of the market will be. Like there's a lot of things out there today that are known, things as basic as how much is a customer willing to pay. So in terms of supporting the investment that's going into some of those networks, I think that's very much TBD. For us, we have a network that's already built that's up there today. We're generating $500 million of OEBITDA, and we have the capability or will have the capability to deliver this service in the near future. And the path we're going down is a standards-based solution. So basically, what that means is we were just accepted into Release 19 of 3GPP. And basically, what it means is in Q4 of this year and into early next year, chip manufacturers will have the capability to embed the Iridium waveform on a chip, which means for a smartphone, for a laptop, for a device you'll have the capability to connect to the Iridium network when you're off the grid. And we think that, that will generate incremental service revenue opportunity for us going forward.

And what's the difference between that and what you're trying to do with Qualcomm?

Well, so with Qualcomm, we were going down the path of offering what would have been called a proprietary standard. So if you think about what Apple is doing with a Globalstar, Apple have invested in Globalstar and they basically bought rights to 85% of their network. But that's a proprietary solution between Globalstar and Apple. So Apple are working with Globalstar to embed Globalstar technology on their chips. And we were going down a similar path with Qualcomm, where on their Snapdragon chips which is their high-end chips that they're selling to device manufacturers, they would put the Iridium waveform, and they did put the Iridium waveform on the Snapdragon chip. The technology works fine. We actually previewed the technology at CES. I think it was in January '23, financial media were there, we did demonstrations, and everybody was very happy with the quality of the solution. The challenge became when Qualcomm were trying to sell it into the Android universe and the Android MNOs, and they were, I think, sensitive to 2 things. They're very sensitive to anything that increase the price of their BOM, which just would have done on the Snapdragon chip. But they're also sensitive to the fact that I think it was Qualcomm, and it was a proprietary device and they didn't want to be tied in that way, and they wanted a bit more flexibility than that. So the agreement with Qualcomm terminated. And that's when we went down the standards-based solution. And we've had tremendous support from some of the MNOs as we've gone down that path. And we've had great support from Qualcomm as well ironically enough, as we have gone down that path. They've been a big advocate for us. So that's the solution we're going to roll out here in the next year or so.

Okay. You've got your guidance for '25 is out. You've got targets to grow that service revenue to be $1 billion by 2030. Remind us of what the '25 range is and kind of what gets you down the path that by 2030, we're sitting in here and the $1 billion is in hand?

Yes. So there's 3 or 4 tools to the $1 billion. First of all, if you take our -- we recently issued guidance for 2025. So I think if you take the midpoint of our '25 guidance, service revenue is $650 million and change, so...

The ballpark of 50% by 2030.

Yes. Exactly. And so as you think about the building blocks there, one, there's the IoT space. IoT has been an exponential growth for us over the last 4 or 5 years. Revenue on the personal comm side of the IoT business, and this is where probably the best known product in that space is the Garmin inReach. So you can have Garmin inReach, you can go after terrestrial grid. And you have 2-way messaging capability back and forth. With some of the recent product launches, new product launches that Garmin did now have the capability to push pictures as well. But that business has been over 30% CAGR for us over the last 5 years. We still see a long tail on that business as we go through the rest of this decade. So that's one block. I think another tool to the growth profile is we recently invested in a PNT business called Satelles, so position, navigation, timing. And we've said that we believe that business will be a $100 million business by 2030. And just to give you a sense, some analysts have sized that or when you look at analyst reports, they roughly approximately size that in '24 at about $10 million. Basically what Satelles does is, it runs on a separate burst channel on our network. And because we're in LEO and because that's a separate channel, it's signal is 1,000x stronger than GPS. And there's much more public awareness and public consciousness around GPS today than I think there's ever been before. And I think there's an awareness that it's not that hard jam to jam or spoof GPS. And GPS is everywhere. Like there's a stat that there's more GPS receivers in the world than there are toothbrushes. GPS is in this room everywhere. And so it's not hard to see, and you've seen it. I think you've seen some of it in Ukraine in the recent conflict there. It's becoming a big issue in commercial aviation, but it's becoming more and will become more and more of an issue for us as a society moving forward. Well, Satelles can act as a replacement to GPS, but more realistically and more practically, it connects as a backup to GPS, so that when GPS goes down, you can use Satelles as the full safe. And because it's signal is a 1,000x stronger, you can't spoof or jam it in the same way that you can with GPS. And so we think that, that has huge both government and commercial applications. Obviously, we're already working with government today. But there's huge commercial applications for that going forward. You think about wireless infrastructure, you think about data centers. Just think about the critical infrastructure that we have and how dependent that is on GPS. And we're currently working on an ASIC chip, commercial ASIC chip, which should be ready, I think, towards the end of this year or early next year, and that will help proliferation of commercial-type applications in the Satelles/GPS world. So we're very excited about that business, and we think we've got a really big tailwind there as we look through the rest of the decade. A couple of other things I would highlight is telephony has been a steady business for us. We have about 2.4 million, 2.5 million subscribers, about just over 400,000 of telephony subscribers. We think that, that business has been a good grower for us over the last 5 to 10 years, and we think that continues to be the case going forward. We have pricing power in that area. We have a cadence of doing price increases every 5 years there. We did them in '13, '18 and '23. There's nothing set in stone that says we have to follow that cadence going forward. And when we have implemented those price increases, we've seen little to no churn on the network. So I think that just highlights the point.

And when you did those every kind of 5-year boost, was it like 10% growth in ARPU?

Yes.

And then step up and then 5 years and then 10% [indiscernible].

Yes, something like that, like 8% to 10% of ballpark, Ric. And as I said, little to no impact on the customer base.

And I think that gets to some people think of casual users versus real users. It feels like your network is more for people that rely on it as opposed to that are just casually using it?

Yes. I mean the way I think about our network is because of the L-band and because of what I talked about with the network architecture, very resilient, high level of redundancy. It's very important for critical applications. So think about maritime, you think about aviation, we're safety certified in both of those verticals. So you will find us in the cockpit of an aircraft, for example, because we're safety certified because of that L-band spectrum. When you're in the cabin, you're streaming [indiscernible] Starlink, you certainly won't find us there. Our use case is typically small sips of data. I mentioned the recent the inReach device where you got the 2-way tax messaging capability. So small sets of data, but high reliability because it's got to get through and it's got to work when you need it. So you take our handset business, our handset business like we don't have high usage on our handsets. But we do see spikes in usage during hurricanes, for example. People -- like government entities, NGOs, disaster response that's kind of a perfect use case for our network. And as you think about our handset being used to say in a hurricane, we're the ones being used during the hurricane, like it's our handset that's been used during the hurricane. People can talk about Starlink and other companies in terms of what they're doing, but they're coming in afterwards, very important, but they're coming in afterwards. And they're part of the response to what's just happened. So think of Starlink, can they come in, they need to plug their terminal into something. They're not doing that in the teeth of the hurricane, while it's ongoing and maybe you don't have power and maybe [indiscernible] different things. So that's very much the use case and the characteristics of how our network is used.

So a large part of the Iridium story is you've got the constellation up there. You've got the capital holiday that you don't need to build Constellation 3, Constellation 1 couple of decades ago, Constellation 2 went in service about 6 years ago or so, 5 years ago. Talk a little bit about your comfort that both technically and commercially, you don't need another satellite constellation built until when?

Well, so first of all, if you look at it technically, the last launch, I think, went up in early 2019. The initial design life of the network was 12.5 years. And design lives by their very nature are tend to be conservative. So to give you a sense, our first-generation network had a design life of 7 years. It lasted for well over 20 years. We've been very happy with the performance of the second-generation network. On virtually all or most of the metrics, it's outperformed our expectations. And so in Q4 of '23, we felt comfortable taking up the useful life 5 years to 17.5 years. And if you do the math, that would take you out through 2035, 2036. It's not inconceivable that, that could go up again. I mean, we monitor this every year. We sit down with the technical staff and [indiscernible] technical team, and we go through the analysis of that. But we're certainly very comfortable saying that the constellation will comfortably work through the middle of the next decade. When you think about it commercially, I mean, we view ourselves as having enough capacity to support the commercial applications that are out there today and what's coming in the future, Ric. One of the beauties of it for us is that if you go back to the growth tools that I was talking about, IoT is very low capacity on our network. Our network is very efficient with IoT SBD traffic. You're talking about direct-to-device or narrowband IoT, again very efficient, highly capacity efficient on our network. You think about Satelles that's got its own dedicated channel. So it doesn't take anything away from capacity of the other services or products. So we feel like we have enough capacity on the network and enough room to grow and support what's happening commercially out there in the marketplace through the life cycle of the constellation.

So when you think about that service revenue growing 50% ballpark from '25 guidance to the target of 2030, fairly high margins 60%, 70% kind of margins, produces a lot of free cash flow. So the plans, as you've illuminated have been -- we're going to do a lot of shareholder returns.

Yes.

$3 billion from '23 to 2030. Remind us of where did you end last year towards that $3 billion number? And how do you look at that? Like why not accelerate stock buybacks if the market is concerned about the boogie man and you're not?

Well, so what I would say is, first of all, we've said we would be $1 billion service revenue company approximately by 2030. With that, we'll throw off $3 billion of free cash. And that, to Ric's point, that obviously gives us a lot of flexibility with share repurchases and dividends. In 2024, we returned close to $0.5 billion to shareholders between mostly repurchases, but also via dividends. We bought down our outstanding share count, if I can say it that way, by about 11%, which is pretty significant. And if you think about the $0.5 billion number for a second, I don't know where we're trading today. I think we're over [ 30, over 31 ], like we have a market cap of about $3.2 billion, $3.3 billion. So $0.5 billion on that is a pretty significant number. We did accelerate repurchases in 2024. So we did a $200 million tack on to the term loan. And we executed accelerated share repurchases against that, and we took our leverage up in the short term. So we finished last year with net leverage of 3.6x. I think our plan going forward, Ric, is we still continue and still plan to continue to return cash to shareholders. We had a recent $500 million authorization, share repurchase authorization announced and approved by our Board back in September. That brings our authorization to $1.5 billion since we started this program in early 2021. And we've got $430 million left on that authorization. So we will continue to execute repurchases. We just announced an over 5% increase in the dividend for 2024, which will kick in, start in Q3. So that will be very much our path going forward. In terms of doing something to take the leverage up again in the short term, I think for now, we feel pretty comfortable with what we did in 2024. We're going to throw off over $300 million of cash in '25. We're going to return a big chunk of that to shareholders. So we feel like we've got a pretty good plan going forward.

Okay. See if there's any questions in the audience. I'll throw one more in our remaining couple of minutes. The short interest continues to go up on the stock. The stock buyback obviously helps mitigate some of that, but use this forum this stage and say, what do you think the shorts are getting wrong? Help those in the audience figure out why the shorts are right or why the shorts are wrong and why? Help the investors sitting in the room and on the webcast understand your view.

So I think it goes back to what we talked at the start, which is I think there is a big Starlink overhang on the industry. And Starlink are obviously big, Elon's big, and it just sits over everything. And I think some people are looking at that. And as I said earlier, they're not getting into all the nuances of, there are different satellite solutions out there, and there are different problems we're all solving. And I think with the uniqueness of our L-band spectrum and the uniqueness of our network, I think we have a very strong, robust business. I think we proved some of that during COVID. Like we were very resilient during COVID, and we actually grew during COVID. I do think investors are a bit spooked if I can say it that way, by the fact that Starlink has been a major disruption in the industry, has had a major impact on some of the geos. But what I would say to you is go look at our performance over the same period over the last 2 or 3 years. We've continued to grow revenue. We've continued to grow OEBITDA, and we've continued to return cash to shareholders. And that's based on the uniqueness of our network, the L-band spectrum, and I don't see that changing going forward. So I think that's what the shorts are missing. And I think for us, it's just about continued execution and keep executing against our plan.

It feels to us almost like Starlink and Iridium are more -- Iridium is more complementary to what Starlink is trying to do as opposed to Starlink is competitive against Iridium?

Yes. I mean, to that point, as I said, Starlink have obviously had a big impact in areas on the geos and taking share. For us, there are areas where we get stitched together with Starlink as part of a complementary solution. And Maritime is a good example of that, where we have a companion service and it will be stitched together with Starlink as a primary service or could indeed be stitched together with another VSAT as well. So for the most part, we see Starlink as being complementary. And maybe in cases even growing the TAM that might not have otherwise been available to us, so overall a positive.

Great. Well, we'll wrap it there, get everybody off to their lunch. We've got a breakout that we'll do downstairs. Thanks, everybody.

All right. Thank you.