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

All right. Good afternoon, everyone. We're almost at the finish line. My name is Edison Yu, I lead the Space and Satellite Equity Research here at Deutsche Bank. We're very pleased to have Vince from Iridium, CFO. Thank you for joining us.

Thank you.

I won't say too much on the preamble, but Iridium is a leading SATCOM operator focusing on narrowband, on L-band. It has a long history of being one of the few companies in SATCOM that has emerged to be successful. And we're here to hear -- learn more about the story. And also, maybe talk about some of the developments going on in the world in just the last couple of weeks.

Yes. So just for those of you who might not be that close to the story or seen our story before, we're -- as Edison said, we're a satellite provider in the L-band space. And there's two characteristics that I would highlight. One is the L-band spectrum. And spectrum is the lifeblood of any satellite company. And we have global L-band spectrum with global [ lending ] rights that we got 25, 30 years ago when the company was first formed. And so the first thing I would say is, in today's geopolitical climate, that's [ enlighting ] to happen again. But that's a great asset for us to have. And the L-band propagates in a certain way, L-band spectrum, where it's very resilient to tough weather, rain fade, things like that. That lends itself to the use cases that we, as a company, go to prosecute on. And why is that important? Well, you hear a lot about Starlink in the industry today, but they're a Ka/Ku provider where they have big pipes, they send a lot of data down those pipes. And we're very opposite from that. We operate in the L-band, which is safety certified for both maritime and aviation safety. And effectively, you have to be in L-band to get that. So it's just Iridium and Inmarsat who are certified for those services. The second thing I would mention is that our network itself, is we have a global network of 66 satellites that goes around the globe. I think each satellite is about 120 minutes. And there's a lot of inbuilt resiliency and redundancy into the network. So it's very much a self-healing network, which again leads itself to the safety aspects that I just talked about. The other point that I would highlight outside of the unique characteristics of the network before I hand back to Edison is that we're a company that throws off a lot of cash. We put our second-generation network up there between 2017 and 2019. And we instituted a share buyback program in Q1 of '21. We've done over $1 billion of share buybacks in that period. In 2024, just gone, we executed $400 million of share buybacks and we bought back 11% of our outstanding shares, as well as initiating a dividend 2 years ago where we've now annually prosecuted or agreed 6% and 5% increases. So a unique set of assets for Iridium in the satellite industry and a fairly unique financial profile as well in terms of we're throwing off cash and we're returning that cash to shareholders.

Let's certainly come back to the cash story. You're one of the few companies out there that has a 2030, actually, outlook or has the confidence to do that. What gives you this amount of visibility? And what are the growth drivers that get us there?

So we had an Investor Day in September 2023, and we outlined our outlook to 2030. And if you look at our guidance today for 2025, that would leave us, call it, $650 million in change of service revenue. And we outlined a plan that we believe gets us to approximately $1 billion by 2030. The first reason for the long-range outlook is we're in a highly capital-intensive industry, and we wanted to give investors a profile of what we thought -- what we think we will look like out through the end of the decade from both a revenue perspective, CapEx perspective in terms of -- we don't have huge sums of CapEx to invest in the network going forward. We've invested the approximately $3 billion it cost to put this generation out there. And we also believe we're going to throw off $3 billion of free cash for shareholders, investors, strategic initiatives over that same period of time. We also go to market through a wholesaler program -- a wholesaler partner program. So we've got roughly 500 partners worldwide. And that's what we -- that's how we sell our products and sell through those partners to the end user. And that takes a number of forms. We sell through our partners like finished products like the handset, which is probably a product that most people associate with Iridium that durable satellite handset. But we also sell our transceivers that get integrated into other finished products that either end up on aircraft or end up on ships or other mobile assets throughout the world. But it's part of belonging to that partner network and having the relationship that we do with those partners that, one, allows us to reach a lot of niche markets, but two, to Edison's point, gives us insight into those markets as well and what we think we can sell and what we think our opportunity is. So if you think about the big building blocks that get us from $650-ish million to date to that $1 billion, it's really our telephony business. We have a very steady and stable telephony business. We think that continues to grow as we go through the decade. We have premier pricing power in that market, and we've demonstrated that over the last 10 years. We've instituted 3 price increases and barely seen a ripple from a customer perspective in terms of the subscriber base. We -- our fastest growing line at the moment is our IoT, our Internet of Things business. And a big grower in there is the personal communications business, which has grown at 30% ARPU over the last 5 years. One of the products within that suite is the Garmin inReach, for example, and that's a product that you can take off the grid, you compare it with your smartphone, it gives you two-way text messaging capability, and it also gives you SOS capability. So that's been a very attractive grower out in the marketplace. And we believe that, that will continue to have a strong tailwind as we go through the rest of the decade. We recently acquired a company in the PNT space, Position, Navigation and Timing, the Satelles. And Satelles is basically -- think of it as a replacement but more likely a backup for GPS. So I don't know how many people know this, but there are apparently more GPS receivers in the world than there are toothbrushes. And what's been very topical in the news recently is GPS is everywhere. GPS is obviously in this room. GPS is everywhere, and it's critical to the running of our infrastructure. And -- but it's also quite fragile. And it's easy to spoof and jam GPS. And this is starting to become more and more into the public consciousness and public awareness. And so we think a product like Satelles, which runs on a first channel on our network on each of our satellites, which has a signal that is 1,000x stronger than GPS, so you can't spool for jam in the same way that you would with GPS; we think that, that has huge applicability for both government applications. And we are currently working with the government but also commercial applications as well. So we think that will be a $100 million business by the end of the decade. And then a couple of the other growth tools would be direct-to-device, which is obviously very topical within the satellite industry right now. We're pursuing a standard space solution there. And also something called narrowband IoT. And this opportunity has opened up to us because we are pursuing a standards-based solution, and we think it expands our TAM within the whole IoT space. So they're the broad building blocks that get us to $1 billion, Edison.

One of the hot topics, D2D, you mentioned that as a growth driver. How do you make sense of the market right now? You have Apple, you have AST, you have some potentially Starlink or Starlink getting involved. Where do you hope to play? And how do you differentiate yourself versus seemingly very well-capitalized big players?

Yes. So what we have said from day 1 with D2D is we think there's room and that there will be more than one winner, and there will be more than one type of solution. I think there's going to be a couple of losers too, but we think there's at least 2 or 3 winners in that space. And there are a number of different ways to approach direct-to-device. One is what Starlink is doing with T-Mobile, where you use terrestrial spectrum and what's called Supplemental Coverage from Space or SCS. Another approach is Apple's approach where -- and that's more proprietary in nature, where they've acquired 85% of -- rights to 85% of Globalstar's spectrum, and they're pursuing a solution through that. Note, that doesn't stop them doing other things like they announced recently with our Starlink, where AT&T and Verizon customers would also have access to the same kind of solution that T-Mobile subscribers do on D2D today, at least in the short term. And then the third broad approach is to take what's a standards-based solution, which is what we're currently doing. We had an agreement in place 2, 2.5 years ago with Qualcomm, that solution was basically where they would take our waveform and our technology, and they will put it on their high-end Snapdragon chip. And the good news was the technology works really well. The negative was that Qualcomm couldn't sell that into the Android community for a couple of reasons. But I think a big one was that the Android community didn't want to bear extra cost on the chip that would impact their BOM. So basically, our deal with Qualcomm terminated, and we pivoted to a standards-based solution. We've just been accepted into Release 19 for 3GPP. We'll be rolling out -- we've been accepted the technical spec there. That solution will be rolled out as part of the release in Q4 of this year. So in 2026, we will be in chips, where we can be embedded in devices with satellite capability. So there's a lot to make sense of in the D2D space. I've just talked to it there more from a technical perspective and how you would approach the market technically. But there's still huge question marks out there in terms of what is the customer ultimately willing to pay how and when will they use the device. I'm of the view that it will be more occasional type use for an iPhone or an Android user. But certainly, there's room for more than one solution like -- and our solution -- the beauty of our solution is it's global, we already have the network in place. And for us, it's gravy on top of our business, it's icing on the cake, and it will work anywhere in the world. So we think that will be a big growth for us as we look out through the rest of the decade.

Can you remind us just as background, who is part of the standards? What kind of entities are supporting?

So it's typically the manufacturers and the OEMs themselves. So a number of the big OEMs are in there. And one of the ironies of the -- when we got accepted into the release Edison. We didn't fully expect to get into Release 19, honestly, because it was on a very short time spent in a very short leash for this kind of thing. And ironically enough, one of our biggest advocates and biggest proponents were Qualcomm. But most of the operators have been very supportive because they want Iridium as part of the standard solution set that they're going to offer as part of the release.

Just want you to know, Samsung recently joined, if I recall right, the standard rate.

That's right, yes. That's right. And our expectation is that if they haven't already, most of the Android providers will. And this is something I would expect the Android universe will make full use of. And by the way, back to my pointer about there being more than one solution, Apple will have their solution with Globalstar, but that also doesn't stop them from offering a standards-based solution either. So I could easily see the day where Apple users have got two or three options available to them, and maybe it depends on what part of the world you're in, in terms of what you use. So you could see the Starlink T-Mobile solution, like that's only going to work where T-Mobile spectrum is. So that's the United States. So if you're a T-Mobile user on that spectrum and you go you go climb Mount Kilimanjaro, you're not going to have connectivity, you'll have connectivity to us. So I can certainly see the day once we go through the release and this gets rolled out that we would be part of the solution that you would then avail of in that situation. And it's not going to be a one-size-fits-all answer.

Let's assume for a second that [ ADD ] takes off, are you comfortable with the amount of spectrum you have at the moment to support that?

Yes. I mean we've said capacity-wise is that -- well, first of all, on our network on our satellites, they will build with a 12.5-year design life. And design lives are typically conservative by nature. Our first generation had a 7.5-year design life and the satellites operated for 20 years. And the vast majority of them are still working quite well when we took them down. We had a 12.5-year design life from the current constellation that went up in '17 -- between '17 and '19. But we just recently increased the design life to 17.5 years and -- which would take you out through the middle of the next decade. So it would take you like out through 2035, 2036. And we've said we believe that we have enough capacity on the network today between spectrum and the satellites themselves to last us through the middle of the next decade. The good thing for us is our network was really built, and some of this, again, goes back to the [ spectrum ] and the L-band spectrum. But our network is really built for mobility, sips of data, small form factor. So things like direct-to-device and SBD and IoT are very efficient forms of communication from a capacity perspective on our network.

On the spectrum side, we obviously had a pretty big deal earlier this year with AST and Ligado. What did you make of that? And what was sort of some read-throughs from your perspective?

Well, a couple of read-throughs are: One, it's obviously a complex deal. I'm not sure I still fully understand it, candidly. But it's a very complex deal. There's still a lot of regulatory hurdles there to jump through. The other read-through I had was talking about these different solutions around direct-to-device. AST, we're pursuing a SCS supplemental coverage from space type solution, where they would use the spectrum of AT&T or Verizon. And the fact that they've decided to go out and try and acquire or get access and use of Ligado's dedicated MSS North American spectrum, to me, was a clear change in the strategy and thinking in terms of how the network would work. But the deal itself is complex, and there is a lot of hurdles to jump, both regulatory and financial.

You've talked about looking at, I think, incremental L-band potentially for the next constellation, we can talk about later. But -- what's your -- I guess, what's your framework on valuing that L-band? Is it based on some sort of NPV? Or how do you look at the value of that spectrum?

Yes. I mean for us, Edison, it's pretty simple. It's just -- it's got to be an NPV-positive trade. So whatever you would pay for any spectrum, you'd have to feel pretty good about the incremental opportunity it was opening up for you in the incremental TAM. And at the end of the day, then it's got to be an NPV-positive trade. Spectrum right now is tough because I think within the industry, people are holding spectrum and they're holding high valuations to that spectrum. And I think it makes it difficult to get anything done. We've always said that we would be interested in incremental spectrum if it became available. That would really be more about our next constellation rather than the current constellation. Our current constellation is configured with the spectrum that we have. So that would be spectrum for future use. But there's not many opportunities out there today in the environment we're operating in and the valuations people are ascribing to that spectrum.

Any thoughts on the S-band side, [ if I should ask ]?

Yes. I mean I guess people talk a lot about the EchoStar spectrum there. I think they've got some good spectrum position within the S-band with both primary and secondary rights. I'd have to go back and look, I'm not -- I haven't viewed it recently, but I know they've got milestones tied to those rights in terms of building it out. But again, from everything you hear, that's -- there are high valuations placed on that spectrum, too. And if you think about it, you've got a spectrum, you still got to go and build out a network, which is not exactly a minor or a trivial event. So that's a significant investment that -- as we sit here today, will take a fair amount of time to execute.

So shifting gears to Starlink, generally speaking, where to be at least that view that you're mostly insulated, but you have seen a little bit of impact in Maritime. Can you just explain what's going on there?

Yes, sure. I mean the one area of our business that's seeing some impact from Starlink is our Maritime business. And so when you look at our financials, you'll see that within our broadband category. And Maritime is one of the verticals within that broadband category. And first of all, just for context, that broadband category is about 6% to 7% of our revenue stream. There's 3 or 4 verticals within that category, of which Maritime is the biggest, but it's not the only one. And then as you think about our Maritime business at a very high level -- a little bit generically, but as you think about that at a very high level, it really kind of splits up into two use cases. One is on the VSAT companion side, which is where we're complementary to Starlink and we're complementary to the VSAT. And we get paired with them on vessels, especially SOLAS-class vessels, where above a certain tonnage, you are legally obligated to have a VSAT backup companion. And that's going to be either us or Inmarsat because we're the only ones that are safety certified. But paired in those instances with the VSAT solution, in SOLAS vessels, but sometimes smaller-tonnage vessels as well. And that would be -- that's the vast majority of our Maritime business. So that's certainly the biggest change in our Maritime business. We have a smaller chunk of our Maritime business, which is what we call primary. And that basically just means we're the primary comms on vessels. So in smaller vessels, you might find that they only have one means of communication on there, and we might be that means with our Certus broadband solution. And in those cases, what we've seen is Starlink has come down the value chain and about 12 to 18 months ago, they came out with their $250 a month for 50 gig a data; for some of our high primary users, they just make sense for them to switch to Starlink and take that usage and use it on the Starlink in either -- and in cases we were kept on the ship as a backup and in some cases, we weren't. But the really important point is it's a really small part of our revenue base, and we're in the process of working through that. So we have said we expect our broadband revenue to be roughly this year as we still work through some through some ARPU pressures. But certainly, as you think about the $1 billion and you think about our growth prospects to 2030, that was never one of the growth planks that we outlined. So -- but that's the one area where we've seen a small impact from Starlink.

You mentioned, obviously, it's complementary. Are there cases or are there instances where it makes sense for actually you and Starlink to work together?

Yes. Well, as I just said, specifically in the Maritime space, Edison, we're complementary to Starlink and we're complementary to any of the VSATs, and we will typically be paired with them as the backup companion service. Certainly, in the case of the example I just gave, where we have had an impact from Starlink, that's the kind of business we would never chase because it's what we call commodity broadband. And we've made a very specific point of staying out of that business. For us, it's all about guaranteed communications. When people use our devices, it's typically is a form of insurance. So probably the best example is when you take that Iridium handset out of the [ covered ], it's got to work. And so there are no -- there can be no compromises on that. But yes, I think that's where we are complementary to Starlink.

What about aviation?

Potentially, although honestly, haven't seen as much to this point -- certainly, with the evolution of the market there, I haven't seen as many opportunities. Again, the way it certainly works today with the commercial airlines, and I'm sure some of you have seen that Starlink won the -- or got the contract with United, and I think not long after that was Air France. But you will find those VSAT players in the cabin in the airplane, you'll find us in the cockpit. That's where we play. So we're in a totally different space to Starlink and the other providers. And so in the cockpit, again, it's about safety communications, it's about that L-band and it's about the resiliency of our network.

On aviation, just one more follow-up on that. I think you're in the process of rolling out the next-gen product, how is that going?

Yes, it's gone pretty well. I think internally, we've gone through some of the certifications. It's also gone through our partner network. So at this point, it's really more a function of how quickly does it get certified through our partners, Edison. But certainly, we expect that at some point in the next 6 months of this year that, that would happen. But that's really in the process now of the FAA certification process. And you have to do so many hours, and partners are working through that at the moment in terms of the line fits on aeroplanes.

On government, you obviously have a pretty decent amount of business there. Has there been any impact from some of the geopolitics that we've seen recently, [ go ]? Any risks or opportunities in light of those things?

So what I would say very broadly on the government is that we have an EMSS airtime contracts with the DoD. And what we do for the DoD, nobody else can do. We -- they -- if you're -- if you've got to get a communication through and you're in a compromised area, we will take that data or that message, will go up to our satellite, will travel across our satellites encrypted. So it never hits the ground until it goes into a proprietary U.S. government gateway. That contract has been a sole-source contract for the last 20, 25 years. I can't remember the exact amount of time, but certainly the last 4 or 5 renewals. The renewal we went through with them in 2019, we renewed the contract in 2019, and it was a 7-year sole-sourced contract that runs through September '26. We also have a contract with the government where we maintain that proprietary gateway that they have, that is only configured for Iridium traffic. So it's their proprietary gateway just for Iridium traffic. And they just extended that contract through 2029. So the gateway contracts to maintain the gateway is extended through '29. The airtime contract come up for renewal in '26. So we think that gives a window into how they're thinking. In terms of other things that we're hearing from the government, the government, they have a philosophy, Edison, where I believe what they're looking at is it's called PACE, Primary Auxiliary Contingency Exception. And so companies like Starlink and some of the VSATs, they operate more in the primary space, again, whether they be primary communications. But we're more on the contingency exception side. Again, back up, but back up when you know it's got to work and it's there, and it's going to perform. So we feel pretty good about our government business, and we haven't heard anything specific out of that other than we do have the SDA contracts with them, the Space Development Agency, where we would help them launch and fly their satellites. And all we're hearing on that side is that I think they want to go faster rather than slower.

Is there an element of -- on Aireon side that you could actually help the FAA?

We believe so. We believed that for a long time. But certainly, with certain things that have happened recently, a lot of talk about the FAA, a lot of talk about the need to upgrade to more modern infrastructure, a lot of talk as well about like expanding funding for the FAA in the short term to finance some of those initiatives so technology can take that leap and take that jump; and we think, for Aireon, and all that into their [indiscernible] and their sweet spot because they're certainly part of that technology leap that the FAA can take. Now the flip side of that is there's nothing specific there, Edison. But certainly, you would be hopeful that, that's something we can avail of here in the coming years, just -- for just for the good of air traffic control with nothing else.

You mentioned the buyback earlier, probably buying back a lot, taking on a little bit more leverage. Can you just remind us what the targets are? And at the pace you're going, I think you'll probably buy back what, half the company in 2, 3 years?

Yes. So we initially had a leverage guide out there. I think when we were here last year, we probably had a leverage cut out there that was 2.5x or lower by the end of 2026 and less than 2x by the end of 2030. And obviously, with the dislocation that took place in the stock, the '26 number at 2.5x is somewhat arbitrary. And so with the dislocation that took place in the stock, we decided last summer that we were going to issue another $200 million of the term loan. We would take the leverage up in the short term. So we say we're comfortable taking our leverage up to slightly less than 4x, but will still come down to 2x or less when we get to 2030. And with the amount of cash that we throw off, we feel very comfortable with that because between our EBITDA growth and the cash, we can delever very quickly if we so choose to do. But what we did in 2024 was we bought back -- first of all, we returned close to $0.5 billion to shareholders between repurchases and dividends. About $400 million of that was in repurchases and we bought back 11% of our net outstanding shares. And as I referenced earlier, we said we think we can be a $1 billion service revenue company by 2030, that we can throw off $3 billion of free cash flow. And so if you look at our -- and by the way, the acceleration of the stock price and taking up the leverage, just to be clear, if it's not, it was in response to what happened to the market and the dislocation that had taken place in the stock, where we felt, and still feel, the stock is very undervalued. And so we've executed against that. But with $3 billion cash flow opportunity between '23 million and 2030 that we've outlined on our Investor Day, if you look at our market cap today, it's about [ 3 2, 3 3 ], I mean we end up buying back most of our market cap. We have aggressively pursued share repurchases over the last 3 years. And to Edison's point at the current prices, we could buy back a lot of the stock here over the next 2 or 3 years.

Thinking long term, the next constellation on this CapEx holiday, what are you thinking about or what should people be thinking about as they view the next year probably in the 2030s?

So as I said earlier, we extended the life on the assets on the constellation to 17.5 years. If you just quickly think about it this way, we throw off -- we're throwing off $300 million plus the free cash flow per year. So even if you don't give us any benefit for growth, that's an extra $1.5 billion that's going to come off the constellation in terms of cash generation. We have said that between now and 2030, we've given a CapEx guide this year at $90 million. That was a bit elevated because of investments we're making in the Iridium end-to-end program, our standards-based solution that we just talked about. And that will moderate as we go through the rest of the decade. We wouldn't expect, given the life of the Constellation through 35%, 36%. And by the way, we're not ruling out that it can't last longer than that. That's obviously something, at this point, we just can't commit to. But even in 2035, 2036, it will be well into the next decade before you would be spending significant funds on that network. As you think about that network and you think about the cost of that network, there's really a number of variables. So today, if you thought of it simply as a like-for-like replacement, you look at where we're at today with the cost of launch, cost of manufacturing, of satellites, cost per kilo is coming down significantly as well; all of that would lead you to believe it would be significantly less than the $3 billion we spent in the last decade, which may be where we end up. But there's a lot of different options that are available to us, like, for example, we could be a payload in somebody else's satellite system. That's -- I'm not saying we will, but that's an option. Some of the requirements may obviously get driven by where we are in the marketplace and some of the competitive dynamics and the end-user cases we're trying to solve at that point as well. Long-winded way of saying that we have a lot of flexibility as we sit here today, and we'll have a lot of options available to us when the time comes. It is something internally we're thinking about and talking about. But as I said and as you can imagine, there's a lot of variables. And it's not too far out there in the future yet because you have to plan and design and build the satellites. But we do have a little bit of time.

I guess for investors wondering about that long-term number, do you have any sense how much lower that could be? I know you had [ Talos ] build the last one. Maybe they're not the cheapest option anymore. Any -- is it 25% less, 50% less?

It's hard to put a number on that, Edison. And again, there -- going back to my point about there being a number of solutions and a number of variables because, for example, one variable could be -- we've talked about buying spectrum and purchasing spectrum, but one variable could be that instead of having a 66-satellite constellation, you double it and you have a 132 satellite constellation. And you get a big uptick in terms of your frequency reuse, like it's roughly double. So you're effectively -- and if an engineer was here that probably could correct me, but directionally, that's correct. You get a 2x uplift in your capacity from your spectrum. So there are a number of variables and a number of different ways to think about it. If we did do a like-for-like, it would be significantly cheaper, I think. But at this point, it's -- they are all options that are being considered. But the good news is that we have different options, and we have different solutions that are available to us. And over the next number of years here, we're just going to have to figure out the one that works best for our situation.

Fantastic. And I know I think time is up. Thank you, Vince.

All right. Thanks, Edison.