Good day, and welcome to the Iridium Communications Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would like to turn the conference over to Ken Levy, VP of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Iridium's third 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 third quarter 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 Web site. 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 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 earnings release in the Investor Relations section of our Web site for a 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, and good morning, everyone. So as many of you know, Iridium priced at 1.45 billion term loan and an additional revolver earlier this month. I’d like to talk for a minute about this transaction before discussing our third quarter activities and financial performance. This refinancing, which we expect to close next week, is a major milestone for us. It will replace and payoff our long-standing $1.8 billion French export bank facility that was instrumental in the construction and launch of her new constellation. The BPI facility, as it’s now called, was put in place in 2010 and provided Iridium cost effective financing for Iridium NEXT when debt funding for companies like ours was difficult to come by. While the facility was perfect for Iridium at that time, the completion of our new network allows us to take another step forward to a structure that is a better fit for our company today. The new deal we just priced will completely retire the French facility and in doing so improves our capital structure, provides us flexibility to leverage our growing free cash flow for investors and kicks off a new era for our company. I can't overstate the relevant and symbolism of this transaction to Iridium. This is really a key milestone and we feel a tremendous amount of optimism as we begin this new chapter of growth for the company and its shareholders, and many of you on the call today have been vital to see it through to this day. As for the third quarter results we reported this morning, they reflected another strong quarter and a healthy business that continues to grow. As such, we’re on track to exceed our original service revenue guidance for the full year and today we're tightening our operational EBITDA guidance…

Thanks, Matt, and good morning, everyone. As you saw from our press release this morning, we enjoyed strong results in the latest quarter with double-digit growth in service revenue and operational EBITDA. I’d like to kickoff my remarks by reviewing some of our key financial metrics for the quarter and highlight some trends that underlie our revised 2019 guidance. I’ll also provide an update on our refinancing activities and review our capital plans and liquidity position. In the third quarter, Iridium generated total revenue of 144.8 million. This was a 6% increase to the prior year's quarter and largely driven by growth in both commercial and government service revenue, somewhat offset by lower equipment revenue. Operational EBITDA was 88.5 million, which was up 11% from last year's comparable quarter. In the commercial side of our business, we reported service revenue of 90.2 million in the third quarter, which was 8% higher than a year ago. The increase reflected continued strength in IoT as well as growth in revenue from hosted payload and other data services. During the quarter, voice and data revenue rose 3%. This increase was driven by a rise in subscriber count and an increase in ARPU to $48 that primarily benefited from new Iridium Certus activations. Commercial IoT revenue grew 12% during the quarter to 25.3 million or 25% growth in billable subscribers continuing at trend. Demand for consumer-oriented devices like Garmin's growing suite of personal location and messaging devices continue to provide us with momentum. In addition to introducing a new satellite navigation device this summer, Garmin has expanded its Iridium offerings to consumer products hardened for the maritime environment. The IoT subscribers that Garmin and other consumer-oriented companies bring to our network are particularly attractive in terms of revenue generation relative to network resources used.…

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Ric Prentiss with Raymond James. Please go ahead.

Good morning, guys.

Good morning, Ric.

A couple of questions if I could. First, Matt, I appreciate all those details on the development of the new products on the service line and family. Definitionally [ph], I assume like a Certus midband product in the IoT that might go on it as well. Is that all included in the now 50 million incremental by '21 exit rate revenue target? I’m getting a little confused on Certus broadband versus Certus normal. Just trying to think of what that – how are you going to be reporting it?

Yes. We have focused that guide really on the broadband, say, the Certus 350 and 700 type range products only. So midband would be more incremental and would go into two categories that would go into sort of the voice and data category and it would go into the IoT category. So those are products that will sort of help those two other lines.

Okay. I think you mentioned in Certus midband maybe some apps in '20 and then ramping in '21.

Yes, we have a bunch of our partners who are actually trialing or testing and starting to integrate that new – the first modem into their products right now and we expect their products to hit the markets sometime in 2020. But really I think this is going to be more – really a bigger part of the ramp into 2021. It just takes time to put those new products to a number of other solutions.

Sure, makes sense. And then, Tom, obviously probably out on the leadership on the refinancing and financing plan, a long journey and now you’re there. As you think about that equity friendly component, you’ve laid out a leverage target 2.5 to 3.5, but how should we think about how soon you might make board-level decisions on stock buybacks or dividends and when we might see it come into the marketplace?

So, we think about 2020 as a delevering year and then immediately thereafter sort of as we exit 2020, those initiatives become top of mind.

Okay. And I noticed in the quarter, R&D dropped down to I think about $3 million. Is that kind of the new runway – in fact these new products that Matt was talking about, but obviously the constellations are up there? So how should we think about R&D on a go-forward basis versus what we saw this quarter?

I’d say 3 to 4, Ric.

All right. And then the last one from me in a busy earnings day is you called out the 2 million of capitalized interest in the quarter, so it was really 8 million of cash CapEx. How should we expect capitalized interest to go forward now that the constellation is up there? Is capitalized interest really going to go away, will be expense interest or all we’ll really see is the 35 million kind of traditional CapEx or will there still be some capitalized interest?

There will be a little bit, I’d call it 3 million or less for the year.

And will that be included in the 35 million or will that be added --

No, because that’s what we quote interest expense. That is not cash CapEx. That’s GAAP accounting. It’s not part of – we quote cash CapEx as what we spend on CapEx and we quote interest expense as cash interest expense, just GAAP mixes them together in the public filings. So that’s why we call it to your attention.

Got you. I appreciate the extra information. Thanks, guys.

Thanks, Ric.

The next question is from Greg Burns with Sidoti & Co. Please go ahead.

Good morning. Regarding Certus and the revision in the near-term growth outlook, have you seen any competitive response from Inmarsat and if that has any impact on your [indiscernible] growth on service?

Yes, Greg, not really. I don’t think that there has been anything that they’ve done that’s really been significant or impacting to that. The slight – the change in sort of the outlook at the end of 2021 was really only based on sort of the slowness out of the ramp of some of our partners being able to sell the product. That’s starting to ramp now as we expect. We’ll see the new products come onboard in aviation and there’s a bunch of other new products that were announced by some of our internal manufacturers for 2020 and 2021. So we feel pretty good about the guide as we have it right now and don’t really expect a competitive sort of answer to that in any kind of significant way. I think Certus is better in just about every capacity and the competitive dynamic really with our partners wanting to sell it hasn’t changed at all. So we feel really good about where Certus is.

Great. And then in terms of Aireon, you highlighted two of the new contracts. Can you share with us how much airspace they’re currently contracted to cover right now and also remind us of that milestone payment for – the hosting milestone payment, where we’re at with those and what the expectation is for that cash coming in?

I’m not exactly sure about the percentage of the world. There’s like 14 ANSPs right now that are contracted and having seen their pipeline, they got a bunch of them that are in the queue and looking to close here in the coming quarter or two. And I think they’ll be brought on as well. It’s a pretty big part of the world already, but there’s still a lot of opportunity ahead for them. As I said, I’m quite excited because the revenue is flowing. It’s a pretty significant revenue amount that’s already getting into cash flow positive next year. By the way, it’s working very well over the northern Atlantic from what I understand and really helping visibility to flights there. They’re using it. I know flights are actually getting better time door-to-door especially as they go through Aireon airspace. And so there’s a lot of momentum on that front. But in terms of – there’s still a number of ANSPs in the world that they’re looking to sign up. And of course, the FAA which is starting to move has got a whole kind of rollout plan that they’re working to see if they can accelerate with the FAA to get the benefits even earlier to the FAA and more part to the FAA airspace which is still a big part of the world. That’s certainly positive but that’s something for them to really kind of develop and announce. Tom, do you want to --?

Sure. To the milestone payments, Greg, you’ll remember as we entered the year they had paid us $43 million. They may have made another payment of 11 million here in the quarter and we expect another payment of 4 million. So we’ll get 15 million from them this year. So that’s a total of 58. And so you will recall those are contractual minimum annual amount that lines up to our rev rec of 16 million a year. So think of the 58 that they have paid us as essentially they are prepaid through mid-2021. Their plan is to access the high yield market in late 2021 and do a high-yield deal that retires the facility that they arranged last year and upsides – because they’ll have a significantly larger revenue contracted at that point in time and they intend to take us out in our entirety for the hosting payment plus interest which is accruing at LIBOR + 350.

Okay, great. Thanks.

Sure.

The next question is from Mathieu Robilliard with Barclays. Please go ahead.

Good morning. Just three questions from me please, first in terms of the guidance. So you raised your guidance for service revenues. And when I look at the Q3 actually, there was a very good progression on EBITDA. I was wondering why you weren’t raising the guidance on EBITDA. Are there some particular cost items in Q4? Is that a revenue mix impact? The second question was on aviation. I think, Matt, you mentioned a number of installed customers with your current aviation products, if you could repeat that because I missed it. But more importantly when we think about the ramp up of the aviation product, as you’ve explained, there’s been a little bit of delays in activating some of the service products on maritime. Have you also taken a more conservative view on the ramp up of aviation in your new guidance or you’ve left that unchanged? And then finally you mentioned an activation of some services, Amazon. If you can maybe give a bit more color about that? Thanks.

Let me take the first one, Matt. So we basically took the bottom end of our range out of play, so our prior guide is 325 to 335. We’re taking the 325 out of play and 330 is the number we feel very good about. To the extent we beat that is going to be dependent on where equipment revenues shake out in the fourth quarter, so we’ll wait and see and that’s the rationale for the guide as it is.

Okay. And then on the second question, Mathieu, in aviation I quoted the number of active devices that we have of our subscribers as being around 40,000 or so on aircraft of all types. That’s been true over the years. Those are traditionally what we call VDs [ph], voice and data revenues that are used for voice and transferring of things like basic weather and flight bag updates or actually air traffic control. It’s a pilot messaging that sort of thing on commercial aircraft. We’ve been certified for a number of years as to what’s called aviation safety services, as other acronyms. So we’re able to be put on commercial aircraft in the cockpit. So it has been a pretty successful position because of our global network and because we have very small antennas, we have been very popular in aviation scale and all the way down to smaller aircraft. We’re not the revenue leader in L-Band aviation but we definitely are the unit leader in aviation as we’ve attacked more the lower end of the aviation cycle, say, in rotorcraft. We have a clear majority of rotorcraft that have satellite connections on them, general aviation aircraft, et cetera. So as far as that evolving into Certus, that’s underway now. Certus antennas are being developed by a number of terminal manufacturers different from the maritime manufacturers. There’s no complexity involved because of the size and scale and because of the certification requirements that are necessary to put something on an aircraft. So it’s taking them – we always expected that would be around mid-2020 to have those really starting to ramp into the market and that seems to be what they are. So we really haven’t changed our forecast much due to aviation because it really wasn’t hitting in a…

Great. Thank you very much.

Thanks, Mathieu.

The next question is from Chris Quilty with Quilty Analytics. Please go ahead.

Matt, I just wanted to follow up on the aviation safety services. I know Inmarsat with their Swiftbroadband safety, it took quite a long time to get certified. What gives you the confidence that you can get that certified by the end of next year?

Yes, we’ve been working on it for quite a while. It’s in the committees right now. The language is being reviewed in all the different various committees. It does require antennas to be validated and those are nearly ready. Some of them are actually starting to have initial tests and that sort of thing. So given it’s a fairly straightforward upgrade to our network, it’s not new satellites, it’s not – our current satellites are really, if you will, certified for it. It’s really just more of a new service class. It’s relatively straightforward. We just have had to get the antennas ready. So everything we see right now is that it’s on track to be certified and able to be in the market and be selling later in 2020, so that’s still looking good for us.

And speaking to certification, GMDSS still on track?

Yes. GMDSS – in fact, just after this call I’m going to another project management review of that, but it’s a development that’s underway to get deployed in the first quarter of next year. A lot of testing underway right now and connections to the various rescue services and that sort of thing. You’ve seen that we have an exciting new terminal in the market that [indiscernible] has created. There’s a number of others in the works. So a lot of enthusiasm about that. So yes, everything is on track for GMDSS as well.

And so the follow up, I think in your script, you mentioned you expect to add about 100,000 personal communication devices this year. Can you give us a sense of how many were added last year and is that going on only or did that include new partners?

We don’t remember how many it was, it was less than that last year. So that’s an accelerating --

I think it was in the area of 75.

Yes, so it’s probably 25% or more actually higher than last year in terms of the overall numbers. There is probably about almost 10 different personal communication devices ranging from commercial applications to government applications. There’s some exciting new ones that are quite small and easy. They’re coming out of sort of some startups and some other interesting companies that are focused at the enterprise as well as sort of outside the traditional consumer spaces. Garmin is certainly the majority of the devices and they’re expanding their line and SKUs that are integrating Iridium into them. So there’s a majority, but there’s a lot of other consumer devices in the market as well.

Got you. And, Tom, can you give us a breakdown of the hosting in other fees for this quarter?

You mean --

I meant in past quarters we had a number of true-ups and I’m just wondering how clean that 12 million was? I think that Aireon hosting is pretty set at 4 million a quarter, the data be like 3.2 million and then --

I think 12 is clean for us.

Okay. And so have we hit all of the step up that we’re going to see for the balance of the year?

So, as I said, there’s an area on customer – post customer milestones that we haven’t hit through the third quarter. We expect to hit it in the fourth quarter at which time revenues go up by 100,000 per month.

Then how about on Satelles?

No. That’s the run rate until they hit another volume clip. So in the quarter for Satelles were at 1.275 million. That’s the current rate. They need to clear a volume clip for that to increase.

Got you. All right, very good. Thank you.

Thank you.

Thanks, Chris.

The next question is from Hamed Khorstan with BWS Financial. Please go ahead.

Hi. Good morning. The first question I had, what kind of impact, if anything, is there on the FAA delay going into 2020 for Jamaica with your Aireon revenue?

I’m not sure I’m following what you’re talking about, Hamed. What FAA delay are you referring to?

Last quarter and previous quarters you have been talking about FAA doing this testing in late 2019 in your prepared remarks. That’s why you’re talking about early 2020.

I wasn’t referring to a delay. They’re actually still testing. I was just more talking about the actual use of the service and active air traffic control and stuff and probably the use of it to manage. I wasn’t trying to make a distinguish of any sort of delay there. That seems to be on track and going well.

Okay. And then my other question was, what kind of ramp did you see in the service user base now that you’re entering the winter months where there’s more ship support?

We’re continuing to see activations on new ships. We’re seeing fleets that are working to convert. While some ships go into port, there’s still – the digitalization of them continues and the ones out in the field really, they’re still out in the field need to upgrade over time. So no, we’ve always had – it’s always been a little slower in terms of activation rates across all of our products in sort of the fourth quarter and first quarter, but it doesn’t look anything unusual to us. It looks like it’s sort of continued growth rates that we experienced in the past and other maritime areas.

And then finally on your commercial IoT, is that an area where you could see ASPs increase or is this pretty much more of a declining business which is more volume driven for the commercial side?

There’s no element of that business being declining. So subscribers that we’re gaining are more heavily weighted to personal communication which is lower ARPU. We’ll take all of the subscribers we can get. They’re highly efficient. They have a lower ARPU, but that’s not something that’s kind of declining, certainly not. ARPUs are being influenced by and they’re going to lower, but that’s great business.

Yes, that’s just an average ARPU. Prices haven’t declined, nor has usage declined. In fact, if anything, it’s going up. There are some potential counteractions as we start to develop Certus IoT products. As I said, when we start transferring rich messages and pictures and things like that, there’s a change that we’ll see some very interesting applications that will take advantage of that which should be higher ARPU customers. Aviation when it comes onboard is often a little higher ARPU customer. So there’s counteracting effects, but if – as Tom said, if consumer IoT and all these personal communication devices keep exploding, I’d take those all day. They don’t use much resources. And while they don’t drive a lot of incremental revenue in each one, there’s just a lot of volume of them.

And last question, is there any difference if the IoT product is on service or your legacy and how much percentage of the IoT is on Certus?

So what we are describing as Certus today, when we talk about a guidance for how much Certus would be in 2021, we are really only talking about a broadband product, not IoT. In the future, say in a year from now, there will be Certus IoT products. We would expect those revenues would go probably into the IoT category. Those would go into the IoT category at that time. They wouldn’t be going into that Certus broadband. And the Certus revenues that go into these midband products, a lot of those will go into the voice and data line. So you’ll see a breakout of the voice and data line here in the coming months for Certus broadband services, which would include open port in Certus broadband anything if you will 128 kilobits per second and up primarily. And then you’ll see these midband products kind of going into the – primarily into the voice and data line and some Certus IoT going into the IoT line.

Okay. Thank you.

Thanks,

The next question is from Louie DiPalma with William Blair. Please go ahead.

Good morning, Matt, Tom and Ken.

Hi, Louie.

Good morning, Louie.

You guys knocked off your checklist this year with the completion of the new $3 billion Iridium NEXT constellation in January, then the Certus launch in late January, the EMSS contract in September and now the new term loan in October. So I just wanted to say nice execution on all four.

I thought you were going to say, what are we going to do next? I usually get what’s next, but anyway yes, thank you very much.

Thank you.

But moving forward, the Certus guidance was reduced from 75 million to 50 million for the year exiting 2021. I was wondering, do you have a new target year on when you think you will reach that $75 million Certus/$100 million total broadband milestone? Is 2023 reasonable or do you not want to give out that?

A couple misconceptions there. Just because we had 25 in open port didn’t – that isn’t necessarily a Certus number. We’re talking about $75 million of broadband revenues which could be frankly – but it wouldn’t be, but it could be all Certus by that time, but probably won’t be and there will be still be open port revenues because that product continues to be shipped and won’t be converted over. So I wouldn’t just do the math and do the comparables. And we’re going to be ramping up we believe pretty significantly in 2021 as we exit 2021 to that 75 number. So I don’t think you would see that as liner or anything. Our expectations would be we’ll cross the 100 million line pretty shortly thereafter. I just don’t know exactly when it is. We’re not going to start making new guidance on when we cross the 100 million right now. But I would be disappointed if it was out in 2023.

Okay. And just one more point of clarification. The EMSS contract contains IoT services and I believe they are narrowband IoT services. So are the new Certus midband IoT services incremental to the fixed price DoD EMSS contract?

Yes, they are. So we only included, if you will, legacy services in that DoD contract. A new Certus technology that’s anything faster, they will be buying if you will separately and we’ll be paying for the airtime as they go. So, yes, both Certus broadband and Certus midband and to the extent these midband applications are IoT applications, those were all incremental.

Thanks. That’s all I have.

Thanks, Louie.

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

Thanks. I think it was another good quarter. Obviously, as Louie said, a lot of milestones this year and we’re not done yet. So we look forward to seeing you at our fourth quarter call. And onward and upward. Thanks, everybody, for joining us.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.