Hello and welcome to the Iridium Communications 2019 Second Quarter Earnings Conference Call. You will be in listen-only during the presentation, but there will be an opportunity afterwards to ask questions. Instructions will follow at that time. [Operator Instructions] This conference is being recorded. I now would like to turn over the call to Ken Levy. Please go ahead.

Thanks, Ben. Good morning, and welcome to Iridium's second quarter 2019 earnings call. Joining me on today's call are our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our Q2 results followed by Q&A. I trust you've had an opportunity to review this morning's earnings release which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts and include statements about our future expectations, plans, and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today and while we may elect to update our forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Please refer to today's release and the Investor Relation section of our website for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken. Good morning, everyone. As you saw in our press release this morning, we continue to enjoy good momentum through the first half of the year which sets us up nicely to achieve our full year guidance for service revenue and operational EBITDA. As I highlighted during our Investor Day earlier this year, Iridium is well-positioned for continued growth market, share gains, and free cash flow generation. With the Iridium NEXT program now behind us, we are in a unique phase in our corporate life cycle. Capital spending has fallen off dramatically and our upgraded constellation is now generating new revenue streams. Now while there's a lot of fun to create and launch, I'm glad to say that we won't have to embark on another satellite replacement campaign for at least a decade. This position is a luxury that most satellite companies don't enjoy and with it, our focus can shift to a new set of priorities. First, we need to keep the growth going. We'll do this by doubling down on exploiting our wholesale model and unique network to sign-up new partners, drive new subscriber growth, and capture market opportunities. Second, we will leverage our upgraded constellation to support new applications that were previously not possible with our first generation network. Our network is ideal for truly mobile applications, small form factor devices often running on battery power, and providing mission-critical functions. While some describe this as niche service, we embrace that role as we've developed a wide competitive node that cannot easily be duplicated and it provides us significant room to grow. Finally, we are committed to taking advantage of our financial transformation. After 10 years of investing in Iridium NEXT, we are now positioned to harvest returns. Subscriber growth is robust and cash flows are expected…

Thanks, Matt, and good morning to everyone. I'll get started by summarizing our key financial metrics for the quarter, and provide some color on the trends we're seeing in our business lines, then I'll recap the 2019 guidance we affirmed this morning and close with a review of our capital structure and liquidity position. Iridium generated total revenue of $143.1 million in the second quarter, which was a 6% increase to last year's comparable quarter. This improvement was attributable to growth in total service revenue, as well as an increase in engineering and support revenue during the quarter. Operational EBITDA was $85.1 million, which was up 8% from the prior year's quarter. On the commercial side of our business, we reported service revenue of $86.3 million in the second quarter, which was 5% higher than a year ago. This increase reflected growth in both IoT revenues and voice and data services, partially offset by decline in hosted payload revenue. The decline in hosted payload revenue was entirely due to a one-time $4.2 million revenue recognition catch-up in the prior year quarter. During the quarter, voice and data revenue rose 3%. This increase was driven by an increase in ARPU to $46 that primarily reflected price changes in our handset programs implemented in April of 2018. Commercial IoT revenue grew 15% during the quarter to $23.9 million on a 25% increase in billable subscribers. Demand for consumer-oriented devices like Garmin's inReach continues to provide us with momentum. These personal messaging services are particularly attractive to Iridium in terms of revenue generation relative to network resources used. This new class of devices has driven more than 240,000 new subscribers to our network, and these consumer-oriented services remain a welcome and growing source of revenue for Iridium. During the second quarter, we added…

[Operator Instructions] Our first question comes from Ric Prentiss with Raymond James. Please go ahead.

Thanks. Good morning, guys.

Hey, Ric.

Couple of questions. Obviously the government contract with the fourth extension gets a lot of focus. When you say long-term contract are we thinking 3, 5, 10 years because we're almost a year extension from when it was originally expired back in October and had the 6-month extension of it. So what are you thinking as far as what does long-term kind of mean?

Well the long-term will commence upon the execution of the contract. So the time that is past is past. So it will be a contract that commences when it's signed.

Yes and our expectation is that, it will at least be as long as the last contract which was five years.

Okay. Yes, there was a big step-up here on the fourth extension as if I remember right it was kind of 8.3, 8.45, 8.58 now up to 8.8. How should we think about how that's reflected into your guidance and what we should be looking at as far as expectation of what the second half of the year might mean as we look at modeling of the government contract?

Well I would say, as you can see the rate of increase increased this month and that just reflects the fact that it's taken longer than we would like. In any type of a short-term month-to-month arrangement there is a premium exactly and that's what you see reflected here. You should consider our guidance that says that long-term contract will be higher than the $88 million. So the month-to-month and the long-term contract are not related and you shouldn't relate them you should just look at our guidance on what the long-term expectation is, that's what we would suggest.

Okay. And one of the other interesting things in the quarter to us was SG&A dropped from year-over-year and quarter-over-quarter from what has been about $24 million down to $21 million. Is there any one-timers there and how should think about what the run rate of SG&A is particularly as you start ramping up the Certus sales?

Yes. So our non -- our foreign consultants that work for us around the world are on stock appreciation rights plans. And those plans when the stock goes up, it causes SG&A to go up. The stock came in this quarter and so you saw that take-back of that accrual in the quarter that accounted for a lot of the sequential decrease from kind of the 24 area back to 21-or-so in the current quarter.

Because obviously as you ramp sales, we're going to see some more upward movement on SG&A, I guess as the revenues come in?

I don't know. Well, we have a fairly fixed cost structure. So I don't really know that, I would make that as an expectation. I mean, that's just Tom said, as far as mark-to-market happens to be sort of a volatile thing that goes quarter-to-quarter based upon the stock pricing that's obviously difficult for you to model overall. But overall, our number of resources is growing quite slowly in terms of what we expect. So obviously that's why we expect, operating leverage to continue to grow over time as revenues increase.

Yeah, I mean, I think we were – SG&A was 978 on the full year of 2018 and we don't see it higher than that. It will be around that or maybe – we don't see it up materially from that in 2019.

And last one from me. Obviously interest rates have stayed pretty attractive the environment looks good out there, what kind of rates are you seeing at the different types of that you might look at. Is there any kind of illustrative examples of how you see the rate environment out there right now or what bankers are telling you that the market might be interested in?

I would just say that they're attractive Ric, and we are ready to move as soon as we get this DoD contract signed up.

Okay, great. Thanks guys.

Our next question is from Greg Burns of Sidoti & Company. Please go ahead.

Hi. Just a question on your outlook for the new PTT product, I know you've talked about PTT a lot in the past and maybe you've not had as much success as you fully would have maybe historically getting market adoption for that type of service on your network. But what's different this time around with this new product and why do you think that you're going to have a little more success at this time?

I wouldn't counter that we had poor success or anything else like that. It certainly in terms of the total numbers, the number of PTT units is relatively small compared to our satellite phone-type services. But I would say that, when we introduced the service a couple of years ago, while it was quite unique that you could have a handheld device work in a top group environment with a number of others around the world, the one thing that we were kind of the weak spot in our offering was the fact that we had to sort of repurpose our 9575 Extreme phone which didn't have a very loud speaker in it. I mean, we're really kind of using it in a way that it wasn't ever expected to operate. And while some other devices have been created this new Icom device is really outstanding it was built as a Push-to-Talk radio, it's sort of military grade. It will really work in consumer environments and interwork with existing land mobile radio systems. So our partners, who were selling the PTT were saying that was the one thing, we are missing, because the service operated really well, but they weren't – but their customers weren't terribly impressed with the handset devices. So we're expecting this new device and the interoperability will help increase sales in this it will still won't be massive numbers, but these are good ARPU customers, they're long-term in scope. And they will help continue to support sort of a slow growth kind of environment in that voice and data environment, which is what we've been driving to as sort of underpin our IoT Broadband and Other Businesses.

Okay. And on the IoT side of the businesses Garmin is your only consumer-based product or customer? And do you have a pipeline of opportunity in that personal communication space beyond Garmin and within Garmin are you seeing them looking to expand your service into more products as we move throughout the year? Thanks.

Garmin is our largest consumer product, but they're not the only one. There are other consumer companies, but none of them are nearly the scale and scope that Garmin is. There are a number of new I think very attractive-looking consumer-like products coming out and actually have been out there of different form factors and different types. Some of them are operating in the consumer space, some crossover in the enterprise and government spaces. But it's sort of – it demonstrates just really how good Iridium is in the personal communications kind of environment, and I think that will continue to expand in the future as we add more devices, which add more speed, which add higher other service like faster messaging platforms and everything which are coming. So as far as Garmin, I think you really should talk to them. I will say that they are – I mean, I can tell you they're expanding their view. They've been quite successful in not just expanding into new markets, but into new product types. But I really think that they should more speak to their future than we should, but certainly its quite interesting market.

Okay. Thank you.

[Operator Instructions] Our next question is from Hamed Khorsand with BWS Financial. Please go ahead.

Hi. Good morning. Could you – two-pronged question here. First, could you just talk about the subscriber increase this quarter versus last year? If those are just old customers coming back online because the ships are being put in use and if that's – if they're upgrading any services, or just paying those actual increase in subs, just trying to figure out the quality here? And also with the equipment that's being sold in the quarter is that NEXT-related equipment? Or is that the old network equipment? Could you just provide a little bit more insight into this?

Well, in terms of subscribers, I mean, it's – first of all, it's very difficult to exactly tell what a net new subscriber is. Subscribers and the growth in subscribers this quarter are related to lots of new subscribers and then some subscribers stop and then the net is really what you see and obviously you see its quite strong. Most of those subscribers are in the IoT space, I mean, the majority of them are. And I would describe those probably as mostly new subscribers, a lot of them new personal communication-type subscribers like we were talking about with Garmin, but many across our over 200 other partners are also growing in all kinds of applications from buoys to oil and gas pipeline monitoring, to heavy equipment sales with companies like Caterpillar and many others. It's really a broad-base and they're typically net new subscribers in those cases. So I would call them high quality from that perspective. So – and in terms of equipment sales, I mean, again, that's a lumpy type thing. We never know exactly how much as we said it's not quite as much as last year, which was a record year. Its broad-based, lots of IoT devices, handsets its PTT devices. It's not old equipment with the old network, because all equipment works with both the old and the new networks so there is no -- we don't really differ that. A handset really operates today on the new network as well or better than it did on the old network. There is new NEXT equipment, that is related to this new Iridium Certus. In our case, we sell the core device called the BCX, it's sent to companies like Cobham and Thales who turn it into terminals and that's what made those 2,000 terminals we talked about that have already gone out to partners to sell to their customers. So, that's in the mix there as well and those are being sold in the quarter, though they're probably be -- are really being dominated by IoT devices and handsets and other type of equipment that goes out.

Okay. So, what I'm trying to also understand is given that you're seeing the strong increase in revenue and subscribers and so forth, what's leading you to be a little bit apprehensive as far as the service guidance goes now that we are halfway through the year?

We're not apprehensive. We affirmed it, right? So, we affirmed the $440 million that, as you know Hamed, that has been our long-term guide, it's a couple of years old that guide. We affirmed it here. We feel quite good about. We feel like it's a number we won't miss, and we'll see how the year progresses in terms of the third and the fourth quarter will it be appropriate to take that guide up, but I would not characterize this as apprehensive.

Yeah.

Well, I used that word, because you're almost suggesting Q3 and Q4 will be flat at $111 million to hit that number and you're growing subscribers and you're in a growth mode with IoT increasing. It still seems like you're reluctant to increase guidance. I'm trying to understand -- we're at a loss to your thinking you might lose?

Yeah. I don't know what your model looks like, Hamed. But summer is always a strong time of the year. We are -- we have a little bit of a seasonal business that is the strongest in the second and third quarters and a little bit less in the fourth and first quarter. So, I mean, based upon that, obviously we're looking ahead. It is really a good year, but as Tom said, we'll see how the third and the fourth quarter play out and make sure that we continue this kind of growth. We are not wanting to -- we don't like missing guidance at all. And so, we want to make sure that we stay within what we said before.

Okay. Thank you.

Our next question is from Louie Dipalma with William Blair. Go head.

Good morning, Matt, Tom and Ken.

Hey, Louie.

Hi, Louie.

Tom, annual cash interest expense at the Analyst Day was guided to $120 million for 2019. Based on your current discussions with investment banks in today's low interest rate environment, can you provide a ballpark range for Iridium's long-term annual cash interest expense and should we assume something in the range of 350 to 450 basis points above LIBOR for a new term loan, or am I way off there?

I wouldn't say way off, but let's see how things progress here, Louie. What we have said is we expect the interest rate on the new instrument to go up. Our current rate is around 5%. And so, it will go up slightly. But then as you think about the long-term -- long-term interest rates where we settle out, we'll take the high yield out that's an expensive coupon that's 10.25. And so the blend probably shouldn't be far off of where we are currently is where we're thinking …

Okay. And …

… on a steady-state pro forma for the removal of the high yield.

Okay. Sounds good. And for Matt, is there any way to quantify the improved battery efficiency on the new 9770 devices that are in beta right now?

No. I mean, I don't think so. I mean, relative to what, it's relative to other devices that would be produced that could still perform that kind of power using that small of an antenna and deliver those kind of data rates. So, it's a little hard to compare it to something. The device has been made to be very battery efficient, very power efficient. It has sort of a new sleek mode that our partners can kind of take advantage of which will help applications using battery, a lot of it will be used in line powered applications as well, so that doesn't really help in that case. But I'll say the 9770 is only the first of a number of devices that we plan to make that will offer data ranges, various power profiles, various size and various antenna configurations. It's why I said that I really think that this is sort of the lead device in sort of a whole new segment for us that bodes well for our voice and data and IoT services, because it really provides a lot more capability in terms of just efficiency on our network, in terms of data rates for customers, in terms of just the kinds of applications you can envision putting across our network.

Okay. And a final one. Europe's GNSS service experienced an outage last week. Can you go over the value proposition of Satelles and provide any update on when Satelles could launch commercial services, or that you can monetize that investment?

Yeah. I think you're talking -- I think you said Satelles. Yes.

Yeah.

Satelles is our partner for this service called Satellite Time and Location. That's the service we've had the last couple of years and it's been actually deployed number of places around the world already with a number of customers, both commercial and civil and government. You're referring to the Galileo system which was launched a few years ago and I think experienced almost a six-day -- six or seven-day outage I can't -- I don't know exactly how long it was. I know it's been recovered. You could imagine if there was a six or seven-day outage of the GPS system in the U.S. we'd all be running into things in our cars. We have no idea where to go. Actually all the digital systems that we come to depend upon, like our mobile phones would cease operating because they're all-digital based and use time reference signals, the New York Stock Exchange would have challenges and NASDAQ and others would all have significant problem. So, it is viewed as a big concern. GNSS is the sort of the general terms for those kind of systems, their viability, their ability to be spoofed or jammed is a big concern. Satellite Time and Location is a technology that has been proven to really offer a backup to those systems. It would offer kind of the reference system to check the viability and quality of the signals that go on. And as such, it has a lot of promise we think. We're really quite excited about it. It's one of the reasons why we made a investment into Satelles. So we're a small owner of that right now, it's not really competitive to any of our other partners, in fact it's synergistic. And I would expect to see things like the Galileo outage of last week as almost just as an advertisement for a why a service like that is so important around the world. So we have a -- we're quite excited about the potential for Satellite Time And Location. It's providing revenues this year, but we see growth in that and we see growth and the potential for Satelles as a partner and investment.

Thank you very much.

Thanks, Louie.

[Operator Instructions] Our next question comes from Chris Quilty of Quilty Analytics. Go ahead.

Tom, just want to start with a quick clarification on those hosted payloads revenues. I mean, you gave us the -- where it will kick in up to $1.9 million a month. Is that feather or is there a discrete step-up when you meet the milestone?

It is a discrete step-up. It will occur in a month and it will step-up from whatever I said $1.1 million to $1.9 million.

And this is probably fourth quarter?

We've said second half, let's see.

Okay. And Matt, I just wanted to circle back a little bit on the maritime market. You're about six-months into the service launch. Two questions for you. Number one, where are you now in terms of partner terminals that are available now versus beginning of the year. And do you expect to see additional terminals available, let's say a year from now? And the second part of the question is what are you seeing in terms of ARPU trend relative to the old open port service?

Yes. So as you know, we announced Certus service, service in the maritime industry with two terminals one from Cobham and one from Thales. And there is one terminal right now in the land mobile area from Thales called Thales MissionLINK, a great terminal. And there is a whole bunch of them really right now under development for aviation. So those aren't announced in the market yet, but we are working with partners as they develop those and are watching them work through their development and certification processes for putting them on airplanes, which we expect to happen more next year. As far as will there be more terminals next year at this time, potentially like in maritime? Yes, there will be potentially more terminals haven't been public about that, but that certainly likely. And we also will see other terminals, not just built for this 700 kilobit per second service, it's available at the end of the year, but also for as I said, these mid narrowband terminals there'll be a lot of those next year as well. So yes, I think the terminals are going to expand to provide service for broader-based Certus applications and we're quite excited about the potential for that.

Got you, and on the ARPU side?

Oh, yes, thanks. Sorry, on the ARPU side. Yes, we had expected ARPUs to be significantly above our open port ARPUs, which were in the low to mid-200 range. And they are kind of coming out quite a bit above that, almost not quite double that, but they are really significantly higher. We haven't really announced that number yet. But as you would expect with higher speeds, we're getting higher ARPUs out of those devices. And I think they'll bode well, especially as the firmware upgrade goes in late this year to allow all those existing terminals that are going out right now to kind of double their speed that will only probably help even bolster those ARPUs more. But I'd say, we're kind of more in what you would call Inmarsat-type ARPU ranges as opposed to the traditional for the similar kinds of terminals as we had with ours than we had with our previous 128-kilobit per second open port terminal.

Understand. And to the degree you've got visibility, is it basically, you're saying traditional customer buying the product or are you seeing entry into new market niches where you hadn't previously seen adoption?

Well a member of the terminals are Inmarsat replacements. So I would say, that's a new market in a sense of these are people who would have selected an Inmarsat L-band product and in this case selected an Iridium product. So we're seeing some fleets move over and that sort of expected since that's the target market for us. It is -- I would say, we've always been in the VSAT companion market the last couple of years. I think we're even more firmly into that right now, because our partners really wanted to deploy Iridium as a companion to their Ku-band services, since they're in competition with Inmarsat for their Ka-band, their Ka-band Global Xpress service. So I am only seeing even more kind of commitment to that companion application. And then, I would say that there were some stand-alone kind of shifts that 128-kilobit per second open port pilot just wasn't fast enough for them, but a product that can do 700 kilobits per second on a pay-as-you-go kind of basis is what they were looking for. So we are seeing those start to come on too. It is still early. As you even saw, I think another one of our partners announced their interconnection was complete this morning. Our products -- our partners are still interconnecting with us, they're still integrating their proprietary products into it, they're still training their sales forces, we're still working on lots of seminars around the world. So we're still in sort of the early ramp of that. I'm pleased to see that we are ramping up and the excitement is high. And we'll talk numbers and stuff maybe more as we exit this year on exactly how many we have as we start thinking about 2020, but still early days, but a lot of excitement out there.

Okay. Also wanted to circle back on the Satelles question. I think you mentioned the Galileo, which I think was more of a ground network issue. But I think more importantly, there were some new stories about Israel experiencing spoofing and jamming of aircraft. Is that a problem that Satelles or Satellite Time and Location can address and part two of the question within the DoD, they have now created an assured PNT office, is that an organization that you're engaged with at this time?

On both questions, yes. So there's a number of applications that Satellite Time and Location solves. One of them is spoofing, what you can do since it touch a powerful signal coming from the Iridium signal. It's kind of -- you can compare another Galileo or GPS signal to our and to see if the two are different, because it's very difficult to say spoof or jam both. Certainly, helps with jamming, because it would have to be a very, very big jamming system to jam an Iridium, Satellite Time and Location signal. It helps with in-building applications, because it can penetrate well into a building, so instead of having to put say a GPS or other type GNSS thing on the roof of your building to bring a timing signal in to synchronous your digital signals, you can just directly have the STL signal right in your building and a number of applications are using that today in commercial applications. So it really solves a number of things. And yes, both the U.S. and other governments are looking at this technology to support their applications. I think that would just only make sense. They're looking at a number of different technologies, but STL is available today and it's very robust and it's in operation and we expect it to be used in many places.

Great. Thanks very much.

Our next question is from Ric Prentiss with Raymond James. Please go ahead.

Hey, guys. Appreciate the follow-up. I wanted to follow-up on some of Chris' questions there. You mentioned what are you seeing as far as sales with Inmarsat replacements in the companion market as well. What has been the response that you've seen from Inmarsat in the marketplace to you guys coming in and you anticipate as they look to go private any changes to that response?

Oh, they've welcomed us with open arms – everywhere I can tell, and we really appreciate that. No. They obviously are working hard to compete, and especially at this sort of low end, they've made a number of offers to try to sort of stem the tide. I don't see any major movements that really affect our excitement and confidence in our ability to continue to grow and meet sort of our overall long-term objectives, which are to take a sizable piece of that business. But we're not looking to kind of completely replace them. They're going to continue to have an L-band business. We'll share it much more equally going forward, if not maybe unequally is our goal. But it can take some pricing actions, but they probably have to be very careful not to re-price their base and basically kill their existing maritime business, which is quite large piece of their business, where it's really almost all new ground for us. It's all sort of open for our taking right now. So I like our prospects very well. I think you asked the second follow-up there.

As far as, when they go private any thoughts on what they…

Private. Yeah. Thanks. No. I don't see any changes to that. I mean, I think they still have business objectives that they have to do. It will be more difficult to see exactly probably publicly what they're doing, and how they're doing. But I really don't see any changes to their strategy as a result of this. They certainly haven't announced any or do we see any movement that are coming from that in the marketplace, nor our partners telling us they're hearing anything different. So I do think that they're really focused on growing their Global Xpress business and that's understandable, with the strong focus on aviation, again, that's not really where we compete directly. And I think that's a good focus area for them, but I don't really see any changes with their going private.

Matt, you also mentioned your long-term goals. Anecdotally, is there any update to how that broadband revenue number has been starting to move probably not much movement yet? But I think previously you've been doing maybe $25 million a year and you want to head towards at least $100 million if not more? Any anecdotal update on, how that broadband revenue line is doing?

No. I think you saw in my comments, my opening comments about, I think that's a pretty big number 2,000 terminals already out in the marketplace given that our previous business, which has taken well over 10 years to create maybe achieved almost 10,000 so net terminals in the market. I think that's pretty good right out of the gate for the first six months. But I don't want to give too much information right now on this, it's something I would really rather wait until sort of the end of the year to start providing more detailed breakouts on our Certus revenue. We know we have to do that and want to do that really in the marketplace, it's appropriate for us to do that, but it's just a little early and I don't want to create any kinds of unexpected expectations, or anything based upon that. But I think you got enough from my overall comments to probably get a sense that we are still very excited about our strategy and our approach, and what we are trying to accomplish here.

That one sounds very good. Okay. Thanks for the follow-up.

Sure.

This now concludes our question-and-answer session. I would like to turn the call back over to management for any closing comments.

Yeah. Thanks for joining us all. We'll certainly keep you abreast of any progress that we – progress that we expect to be making with the U.S. government. I'm sure, I'll see some of you in Paris in the September time frame, and I think you'll also probably, should stay tuned for good news from Aireon as well here in the near term. But beyond that, we will see you next quarter. Thanks.

The conference is now concluded. You may now disconnect.