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

I'm Ric Prentiss, Head of TMT Research at Raymond James. As you all know, we referred to in my space, T for Towers, M for Media, T for Telecom Satellite Services. So on the 47th Annual Raymond James Institutional Investor Conference, my 30th Institutional Conference at Raymond James. We're pleased to have Vince O'Neill, CFO of Iridium, with us. Brent is going to run it from here. So Brent, Vince, you're on.

Thanks, Ric.

Thanks for the introduction, Ric.

Yes. Thanks to everyone for being here in Orlando for the Institutional Investor Conference. Thanks, Vince, for joining us. This is an all-cap, all sector conference. So there's a lot of generalists, international investors, a lot of PMs here. So can you start us off just an introduction to Iridium, who you are and where you fit into -- obviously, there's a lot of excitement right now about space and satellite, where you fit into that equation?

Sure. Thanks, Brent. Good to be here. Yes, just high level for us, we operate in the mobile satellite spectrum space. We have a network that covers the globe. So just very quickly, our network architecture is 66 satellites, 6 planes of 11 satellites in each plane. And they're constantly circumferencing around the globe. The importance of that is that you always get a signal no matter where you are in the world. So you can think of coverage as being ubiquitous in the North Pole as in Upstate New York. The other thing that's really important is that has in-built redundancy and resiliency into the network in that if you did happen to lose one of those 66 satellites, you've got another satellite coming quickly along at another look angle. So you're never going to be without service for a long period. And we also have -- with the 66 satellites, we also have 14 in-orbit spares. So there's a lot of inbuilt redundancy there. And that's really important. Why do I go through that? Well, we operate in the L-band spectrum, which we have 8.5 megahertz of global rights to -- global landing rights to L-band spectrum. the L-band spectrum itself is very resilient by its nature. And it means that we're certified for critical safety services in both aviation and maritime. And there's only 2 companies in the world that have that certification. We're one. There is another satellite provider that has that, and that's because they have the L-band spectrum. So we're big in critical safety services. And also think of us anywhere where you need to get a signal where a connection is absolutely necessary. If you're not moving big chunks of data, you're probably doing it on our satellite network if you're off the grid. So a great example would be we have an IoT personal communications business. And you can take -- you can go in with a major retailer, take one of their devices, pair it with your cell phone and you have 2-way text messaging and SOS capability when you're off the grid. And as I said, you get a signal anywhere. In terms of financially, the company is extremely sound. We have revenue of close to $900 million, service revenue of close to $650 million, which is basically think of that as airtime and access. We generate close to $500 million of OEBITDA a year. And for a satellite company, we're really unusual because we actually throw off cash, and we throw off about -- this year, we'll throw off over $300 million of pro forma free cash flow. So I think high level, I think that's it, Brent.

That's a great overview. And I heard a lot of safety, mission-critical, emergency, and that's all driven by the L-band spectrum you have kind of a unique resilient spectrum. And that's been your moat for a while. And so often, when we talk about satellite, SpaceX, Starlink comes up, it's hard to talk about satellite without talking about Starlink. And this past summer, they bought some spectrum in the S-band. And so now they can more directly compete with you. What was you all's reaction at Iridium when you saw that announcement? And what does that mean for you? What are they going to be able to do in your markets?

Well, I think, first of all, when they bought the S-band spectrum, they obviously paid a lot of money to EchoStar for that spectrum. And they talked about the direct-to-sell space like connecting with cell phones down here on Planet Earth. And for us, I think in the short term, it really doesn't change much, Brent. As we operate our business today, we don't see that much of Starlink. They've had a very acute impact on a very small piece of our maritime business, but that's very much ring-fenced. We do think that we have moats around other areas of our business. A classic example I give people all the time is we've got about 2.5 million subscribers, about 400,000 of those are telephony, voice and data subscribers. And they're the kind of subscribers that they pay $48 of ARPU a month, and they really want our specialty service, and they're really paying for the fact that we've got that redundancy and that resiliency in our network. So think of highly industrialized commercial use cases, governments, NGOs, disaster recovery type organizations. And the idea that they're going to trade that in for a consumer direct-to-device product, I think is -- I just don't agree with. I don't think that's right. Having said all of that, I do think that Starlink will have -- Starlink will encroach on some limited areas of our business as we go forward. I do think -- the first thing I would say is I do think it's going to take them at least 3 to 4 years to build that network out. They've got a lot of wood to chop. They've obviously shown that they can chop wood. So I'm not doubting that they're going to chop it, but I think it's going to take them longer than the 2 years they've said. And there's a lot of regulatory barriers and hurdles that they will have to overcome, especially in Europe, maybe less so in the U.S., but especially in Europe. So -- but I think for us as well, so we think we have -- we think in a lot of areas, we have moats around our business, like I talked to in the telephony business, I think IoT to a large extent. And then we obviously have a lot of -- which I know we've talked about on our prior quarterly calls, and I'm guessing you'll get to, Brent. We think we have a lot of incremental opportunities for revenue growth as we look forward here.

And one thing a lot of investors are trying to figure out is how many more casual users do you have because people who might not necessarily need the robust, resilient devices and connectivity Iridium can offer. Is there any way you can quantify for us your exposure to those customers?

So I think what I would say is that certainly, if you look at our telephony base, for example, I would say that they're mission-critical type applications. So I think of it either -- it's either regulatory mandated in terms of it's a safety backup and you have to have it or it's some mission-critical application. And so I look at our telephony base, and I think it's definitely covered by the mission-critical aspect of that. I think where we get the question most often, Brent, is maybe in the IoT space where we have a big personal comms business that has grown at a very healthy clip over the last 4 or 5 years. But typically, what I say to investors is that the users that we have or certainly the majority of the users that we have in that personal comm space are -- it's a lifestyle. It's -- they're call them professional hikers or whatever it is they're doing, where they know on a regular basis that they are going to be off the grid, and they want the bells and whistles that comes with those products and that functionality. I've always said, and I still feel that direct-to-device itself or direct-to-sell, as we call it, is more of casual usage. And I think it's going to be more of a use case where people in this room, you might find yourself off the grid when you don't expect to be, or I have my own -- personal examples from my own life where I actually think I have terrestrial coverage, and I don't. And it's in those instances that I would actually pay a lot for a connection via my smartphone at that point. So that's typically how I think about it, Brent.

Yes. And you talked on the 3Q call, you acknowledged competition from Starlink. And on the most recent 4Q call, you all got more specific in terms of the 4 areas that you can invest that you think are much more insulated from that competition. PNT, NTN, IoT, a lot of acronyms national security, including Golden Dome and aviation safety. So I guess I'll kick it off to you to just start with why you identified those 4 areas?

Because we think that there are areas that play very much into the characteristics and the strength of our network, and I'll go through each of those 4 briefly. And also that they are areas that I would classify as being adjacent to Starlink or having a moat from Starlink. So if you think of our -- if you think of PNT, which is the first one Brent mentioned, that's our position navigation timing solution. And that's basically -- think of that as a GPS backup. So we have a product on our satellites. We acquired a company called Satelles about 18 months ago. And it's their technology that runs on our satellites. And basically, their signal is 1,000x stronger than GPS. And this honestly is one of the most products, if not the single most product I'm most excited about in our quiver at the moment because you can see over the last 2 or 3 years that there's a much higher awareness around GPS resilience or lack of resilience, I should say, and the fact that GPS isn't really that hard to jam. And I think the Ukrainian war has brought some of that to the fore with some of the jamming of the weapon systems there that effectively rendered millions and millions of dollars of high-technology weapons worthless because they didn't have a GPS signal. Another interesting factoid, which gets thrown a lot -- around a lot by the PNT people is that there's actually more GPS receivers in the world than there are toothbrushes. So GPS is everywhere. So there's a much higher awareness around the vulnerabilities of GPS. And this is something where we think like our Satelles PNT product comes in where it's got a lot of government and commercial application, where it can act as a backup to GPS. And it's -- as I said, it's much, much harder to jam or spoof it. The signal is 1,000x stronger. So it's almost like a failsafe or a backup for GPS. The second area that Brent mentioned was NTN, our standards-based IoT solution. So we've gone down the standards-based path for our narrowband IoT solution. And while everybody talks about direct-to-sell, we're actually really excited about the opportunity for narrowband IoT, which is effectively taking cellular IoT today. And the challenge with cellular IoT today has been that once you go off the grid and you go into satellite, it gets very expensive. So the cost of equipment was a real inhibitor to actually growing that market. And the fact that it's now part of the standards, it will be specced into manufacturers' chips. Nordic Semiconductor, for example, are currently rolling out a standards-based version of the chip. They're big chip manufacturer in the IoT space. But the fact that, that's now happening and that technology is on the chip. We believe which makes it very cost effective to roll out narrowband IoT beyond nonterrestrial coverage. We have signed MOUs with some of the most prominent MNOs in the world, Vodafone, for example, Deutsche Telekom. Both have significant chops in the IoT space. And I think you can expect to see more of those announcements coming. But that's a greenfield opportunity for us where I wouldn't expect to see much revenue in '26, but certainly '27 and beyond, I would expect to start to see that ramp. I think the third example was with the U.S. government. I know everybody talks about Golden Dome at the moment, but we have a unique relationship with the U.S. government. They were our first customer over 30 years ago. We have a fixed price service revenue contracts with them for access and air around satellite handsets and SBD. The engineering part of our business has grown significantly over the last few years, which has primarily come from the U.S. government, and it has primarily been part of the Space Development Agency contract where we're heavily involved and integral to that activity. And so we think going forward that we have a lot of incremental revenue opportunity, sorry, to grow revenue there. And I would just tell you anecdotally that over the last 6 to 12 months, I've been at Iridium for 11 years, and I've never seen as much activity with the USG as I've seen over the last 6 to 12 months. So we think that's significant for us. And then the last piece is aviation safety services. And just very quickly, as I said, you'll find us in the cockpit of an airplane, you'll never find us in a cabin or in the cabin or at least I hope you don't. And -- but we do believe that with our position in the cockpit, we have an opportunity to take a significant share -- and Matt's talked about this, that we have an opportunity to take a much more significant share of that business, both from a critical safety information perspective, but also noncritical safety data for the airlines. And I think the airlines are keen and they're hungry for that. So we would expect those 4 areas to contribute significantly to our revenue profile over the next 3 or 4 years.

And on the last one there, aviation safety, you've talked about the possibility of M&A in that area and maybe some other areas as well. But help us understand why that's an opportunity to you, how you get 1 plus 1 equals 3 with something in that space?

Well, I think some of that -- and I don't think it's just aviation. I think it's a little bit broader than that, Brent. But where we have the opportunity to accelerate opportunities, whether that's by acquiring technology in cases or in some cases, it could be just relationship-based and a way to get to market and go-to-market quicker, we will do that.

Okay. Okay. And a lot of what you just described your business, really almost all of it -- it's enabled by the spectrum that you own. And you all more openly have talked about the ability to monetize that spectrum. And I think ever since the EchoStar deal. They sold their spectrum. People have been looking for where else is their spectrum value. So can you expand on how you all might be able to monetize your spectrum beyond the businesses you have today?

Well, I think, first of all, we have always recognized the value of our L-band spectrum. We have built a business of that, that's $500 million of OEBITDA and throwing off $300 million of free cash flow a year across a number of diverse product portfolios, serving mission-critical applications across the globe. I think some of the unique properties of our L-band spectrum is, one, it's global. It's truly global. Nobody else has truly global L-band spectrum. We have landing rights all over the world. As I said earlier, you can get a ubiquitous experience, whether you're in New York or -- sorry, Upstate New York or in the North Pole. So it's truly unique in that way. L-band is certified for safety services. So we're certified for aviation and maritime. And it's been critical to us building out the business we've had. The perception of mobile, specifically dedicated mobile satellite spectrum, the perception of that value, I think, has changed probably over the last 12 months. If you go back a couple of years ago, when everybody was talking about direct-to-sell, people were talking about how do they address that opportunity. There was the approach where you take the Starlink approach where you partner with T-Mobile and you parse some of the terrestrial spectrum and you use that or you could take more of an AST approach where you're rolling out these big satellites in the sky and you're just -- you're basically -- I know this isn't technically correct, but basically, you're blasting down and you're picking up the antenna on the cell phone. Then you've seen what Apple did with Globalstar. Apple went and partnered with Globalstar, got access to 85% of their spectrum, which I think was Apple acknowledging you need MSS spectrum if you want to do this. And I think you can see that the market has moved to that over the last 12 months. You've had the deal between AST, Ligado and Inmarsat, I know that's subject to litigation at the moment, but that would give AST rights to most, if not all, of Inmarsat's L-band spectrum in North America. And you've seen the EchoStar deal that was just announced 6 months ago. So we've always placed a lot of value on our L-band. We've got 8.5 megahertz, Brent. It's prime Beachfront property. And as we said on the last call, we will look at any future business alliances that maximizes shareholder value. I mean that's what we're here to do.

Yes. How open-minded are you on that? Is there anything that's off the table that is a nonstarter in terms of monetizing that spectrum?

I wouldn't say there's anything off or on the table. I think it's really a question of what's the best solution that maximizes shareholder value, and that's ultimately what we're going to do.

Okay. So you all are in a CapEx holiday right now. We thought it might stretch to 2030. Now it sounds like it might stretch to the mid-2030s. And then the question is becoming, do you all launch another satellite constellation? Do you maybe hitch hike on someone else's satellites? Can you update us in terms of -- it's still early, but what is your thinking in terms of what are your different options for that next-generation constellation?

So I think, first of all, as you think about the current constellation, which is currently throwing off over $300 million of free cash flow and growing. We had an initial useful life on that of 12.5 years. We extended it a couple of years ago, 17.5 years. So if you just follow the math on that, we launched this current constellation across 2017 to 2019. That would take you out to 2035, 2036. We're very happy with how the network is performing. Network health is really good. And I think at this point of its life cycle, it's probably tracking. I think it's tracking ahead of virtually all metrics that we had laid out. So we're very happy with the health of the network. And my hope sitting here as a CFO would be that it could last longer. Obviously, I can't commit to that here today. But certainly, at a minimum, we expect to have it through the middle of the next decade. In terms of the next generation, I mean, it is early. There's a lot of different variables there. Cost of manufacturing and cost of launch has come down significantly since we paid approximately $3 billion to put the current constellation up there. So if we were doing a like-for-like constellation today, I don't know what it would cost, but I would expect it to be significantly cheaper. That being said, there are other potential variables to look at as well. If you wanted to get better spectrum reuse out of the constellation that we currently have, you put more satellites up there. So instead of a 66 satellite constellation, maybe the next one will be 132 satellite and you just have much tighter spectrum reuse and you're getting much more efficient use out of your spectrum. Another option, which I think you alluded to, Brent, is to maybe run as a payload on somebody else's satellite system. And they're all options that are on the table. Some of that's going to come back to what are the types of markets that we're trying to serve, what's it going to take to serve those markets and what do the economics ultimately look like.

Okay. Great. And you talked about your strong relationship with the U.S. government. There are several contracts in place there. Can you expand upon what is your moat with the government as Starlink and others enter satellite space, what prevents them from being able to compete for -- or win some of that business? Just expand upon that.

So what we do for the U.S. government, I don't think anyone else can do. And again, I think it goes back to the characteristics of our network that I've been talking about. But specific to the U.S. government, they have the capability with us to send a signal up. So you can imagine that somebody is in a bad place with bad actors. They want to send a signal up. That goes up to our satellite is encrypted across all of our satellites and lands in their proprietary gateway in the United States, the U.S. government's proprietary gateway. Nobody else sees that traffic. That gateway is basically engineered for only Iridium traffic. It's not like they're landing other satellite traffic there. It's just Iridium traffic that gets landed there. And they have -- there are 2 other ancillary contracts tied to that. One is the gateway maintenance contract. So we help them maintain that gateway. And that contract was renewed. I think it was renewed in '24 through '29. Ken, keep me honest here, but something like that. And then the gateway evolution contract, which is a separate contract to the maintenance contract, that was renewed last year, and that was renewed through '29 or 2030. Point being here that those run past the current renewal, which is in September '26. Now we fully expect that as part of the EMSS contract, the government has the right to push out the contract 6 months, which we fully would expect them to take advantage of that. They've done that for prior renewals. For those of you who are new to the story, by the way, at least the last 3 or 4 contracts, which have been 7-year, or 5-year contracts, have been sole-sourced. But they will probably push that out 6 months, and we'll negotiate a renewal with them at that time, which will be March of next year -- this time next year.

And obviously, we're all watching closely what's going on in Iran. Can you talk about how that would affect your business?

I think right now, I don't know that it would have a huge impact per se, Brent. I mean, if things change there and it was -- it became an elongated exercise or activity that, that might change things. And certainly, if you're in a position where you would have troops on the ground or something like that, I think that would probably dramatically change things. But as we stand here today, I don't think it's going to have a major impact. And that's -- for the government, that's one of the great things about the contract they have. They have -- they effectively have within reason all-you-can-eat airtime contract for both handset and SBD. They like that price certainty, and they want that surety of use as well when they need it.

Okay. So you all put out a guidance of $1.5 billion to $1.8 billion of free cash flow cumulatively between 2026 and 2030. Help us understand the variables that go into what would cause you to hit $1.5 billion versus $1.8 billion? And what's your level of confidence of being within that range?

So I would say high level of confidence of being within the range. If you think about it today, we're throwing off over -- just over $300 million of free cash flow. So if you just flatlined it for the next 4 years, whatever, you got 5 years, you're at the $1.5 billion. I think in terms of getting to the $1.8 billion, it's really -- it's about proving our competitive moat on the business and also growing some of those revenue streams that we talked about across the 4 growth pillars: PNT, narrowband IoT, national security missions and aviation cockpit services. My hope, obviously, sitting here as CFO is that, that we're hugely successful growing that and that we're here in a couple of years' time, and you're giving me a hard time for under calling it, but high degree of confidence.

Never give you a hard time. We're in the last few seconds here. A lot of generalists here. Can you give us your one liner pitch on why people should dig more into Iridium?

My one liner pitch would be we're a very different satellite company. We're throwing off cash today. I don't think that the moats and the customized niche products that we offer around our business are fully understood. And I think if they were, I think investors would understand that there's a much longer tailwind on our revenue than they've given us credit for at the moment.

All right. Great. Thanks, Vince.

All right. Thanks, Brent.

Thanks, everyone.