Iridium Communications Inc

Good morning. Welcome to the Iridium Communications first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kenneth Levy. Go ahead.

Kenneth Levy Thank you, Kate. Good morning and welcome to Iridium's first quarter 2020 earnings call. Joining me on the call this morning are CEO Matt Desch and our CFO Tom Fitzpatrick. Today's call will begin with a discussion of our first 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 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 fact and include statements about 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 filing 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 including operational EBITDA and pro forma free cash flow, free cash flow yield, free cash flow conversion. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for further explanation of these non-GAAP financial measures in a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken. Good morning, everyone. Well, I guess it goes without saying that we're living in some very interesting times. You know, this current global pandemic has changed the fortunes of many businesses around the world, at least temporarily, and we're starting to feel some effects too. Now, while our first quarter was quite strong, the global business and social lockdown underway clouds our visibility the rest of the year. During today's call, we'll share the trends that we've seen through April and how they're coloring our outlook. You'll see from our comments that our business model is resilient, and unlike many other companies, we're happy to still be forecasting growth for the full year. First, let me address Iridium's operations during the onset of the virus outbreak. We quickly took precautions almost two months ago to ensure the safety of our employees. We wanted to remain responsive to our customers and partners, protect the health of our employees, and ensure that our operational cadence was maintained. Essential employees were identified that needed to work in our facilities to operate our satellite and ground networks, as well as utilize testing equipment in our labs and facilitate product shipments to customers. Those decisions, in retrospect, have all been very effective. We were actually well prepared for remote work, as our corporate IT and security are quite advanced. We really haven't missed a beat in terms of ongoing business operations, though, like all of you, We long for the camaraderie and social interactions of working in a close-knit office environment and even the travel to meet physically with partners around the world. I can report that our supply chain is also in good shape, and we aren't having any significant inventory issues. We should have sufficient stock to meet the expected equipment needs. Our first quarter results were strong, and while I'll leave it to Tom to walk through the numbers, to me, The strong performance is indicative of the underlying strength of our business during normal times. In the final weeks of March, the strong trend that typified 2019 and the first quarter started to slow. And into April, and with the whole world in lockdown, we seem to have entered an entirely new environment, which is unlike anything we've previously seen. Now, for historical perspective, we weren't affected much during the global market crash and recession of 2008. largely thanks to the mission-critical role our services play for enterprises and governments around the world. The current climate, however, is very different from 2008 or other past cycles. Social distancing has put healthy companies on hold, and there's not much precedent for that. So we're all working through this day by day to try to understand the impacts of COVID-19, how long it will last, and what the long-term effects will be. Our partners are experiencing the same business and operational restrictions we are in terms of visiting with customers, completing new installations, and closing on new business opportunities. We're keeping in close contact with them to understand the changes in their respective industries and their expectations of customer behavior for the rest of the year. While this is helping inform our outlook, we're all working from our own set of assumptions based upon where we sit in the customer value chain, and there is no consensus on how quickly things will return back to normal. Based upon this, we've revised our full year outlook. We're comfortable confirming that we still expect to grow service revenue and operational EBITDA over 2019 levels, but that's as far as we can go at this time. There are too many variables and uncertainties to fully understand how long the economic shutdown spurred by the virus will last and how long it may take for businesses to reopen. Remember, Iridium touches many different industries across the globe, and each is on a different cycle in responding to the effects of the current lockdown. From what we can see at this point, Subscriber count should continue to grow in 2020, albeit at a slower pace. We expect that our high margin service revenue will also grow from 2019 levels, driven by contractual step-ups in certain contracts and increased subscriber levels, though at lower overall ARPU due to lower usage. Equipment sales are less clear. While they were in line with our expectations in the first quarter, the current economic environment makes it prudent to plan for a slowdown. Given that equipment contributes lower margins than our service revenue, the impact of this slowdown isn't as dramatic to our bottom line. Engineering revenues also seem to be holding up well as our primary customer for engineering services, the U.S. government, is expected to continue to execute on their projects this year and has dedicated funding for these programs with us. Despite all these puts and takes for 2020, the most important theme for Iridium remains our ability to generate strong, free cash flows. We have been enthusiastic and vocal about our business transformation in recent years, and its theme of strong free cash flow is still very much intact despite the slowdowns that we're seeing. We're very fortunate that we are facing these challenges in 2020 rather than several years ago when we were in the middle of the Iridium Next Capital program and bound by the financial requirements of our former credit facility. This year, we still plan to deliver significant free cash flow and will continue to deliver our balance sheet. So, our financial transformation and plans to return capital to shareholders are still very much on the horizon. I'm sure you still would appreciate more about the specific effects of the pandemic that we're seeing from our partners and their businesses and how it might affect our revenues. Overall, it appears that the effects at this time are greatest in aviation, oil and gas, and in maritime, particularly as it relates to installation of terminals. We're also seeing a disruption in the typically stronger summer sales and activation season for our legacy satellite phone business. In aviation, safety service usage revenues are down with the drastic decrease in flight hours, though we're not seeing as many deactivations as you might think. Deactivation of SIM cards on commercial aircraft can be a cumbersome exercise, and customers expect that flight schedules will eventually recover. Oil and Gas Partners are experiencing a slowdown in their business due to low oil prices and lower demand as people work from home and travel less. On the maritime front, we're not very exposed to the well-publicized decline in the cruise industry, but we are experiencing slower activations than previously anticipated of Iridium Certus terminals on ships as crews don't want external installers on board while in port due to concerns of virus transmission. We still see very strong interest in Iridium Certus, but expect it will experience a temporary slowdown in activations for the next quarter or two until installations can resume. The good news is that feedback from users remains very positive. The maritime industry appreciates that Iridium now offers the most reliable and fastest L-band service available, and we're the only satellite company that can provide true global coverage. We continue to hold high expectations for Iridium Certus, and know that our broadband service is an important vehicle of growth this fiscal year and out into the future. However, it makes no sense in the current environment to continue to try to peg year end 2021 revenues. They will be what they will be, but we're confident they will be a lot higher than they are today. You can track the quarter by quarter growth for yourselves now that we're breaking out broadband revenues and subscribers in our financial tables. The other impact related to COVID-19 that we're seeing that's worthy of discussion is a sudden and big slowdown in consumer product activations in the IoT area. Two-way personal communicators from companies like Garmin are often sold through retail stores that have been closed for quite a few weeks with the ongoing pandemic. We're expecting net activations to be lower than normal this year as the virus shutdown is hitting them right in the season we'd expect to see the most growth. A number of other IoT partners are also growing slower than in the past. Many have told us that they are hampered by COVID restrictions and the global slowdown in business, but expect to bounce back as things get back to something more normal, particularly since their end customers are dependent on these IoT solutions in their own businesses. Overall, even though we don't yet know the complete depth and breadth of COVID-19, nor how long it will ultimately impact our subscribers and partners, let me be clear that our company is in a very strong financial position with excellent liquidity today. We're operating a brand new constellation, completed two well-timed financings during the last six months, are coming off another great quarter's performance that demonstrates our competitive value, and continue to generate significant free cash flow, which is helping our leverage position. Now, one area we haven't seen and don't expect to see much impact is with the U.S. government. We're fortunate to have completed the New seven-year fixed price contract for our legacy services with this customer last year before the current economic slowdown. We're also not seeing much impact of the coronavirus on all the engineering programs underway with them, including the installation of Iridium Certus at the government's private gateway. Switching gears to Aerion, it continues to deliver on its promise to improve aircraft surveillance and safety and provide operational efficiencies to air traffic controllers and aircraft using ADS-B. The COVID-19 crisis has had an outsized impact on global aviation traffic, which for the near term has significantly reduced the number of commercial flights and the resulting total number of aircraft being controlled by NSPs. This will have some impact on Arian's revenues. While the company continues to sign new contracts, less consumer demand for air travel will reduce the part of their revenue that's based on flight hours. Arian has a solid base of revenue and strong financial backing, including a $200 million credit facility they are accessing. Iridium's hosting and data service contracts with Arian are contractually fixed price and are current, and we expect them to stay that way this year. Overall, our confidence in Arian remains high, and they continue to execute well on their business objectives. So as I turn the call over to Tom for his comments, let me just reemphasize that despite the unprecedented times that we're going through, Iridium's business is demonstrating itself to be quite durable. We are positioned well with a diverse stream of income, customers around the globe, and applications that are important and unique. Our wholesale business model proved its resilience in the 2008 downturn, and we'll see us through this one as well. We believe that our continuing strong cash flow stacks up well against other satellite companies and companies in many other sectors right now. Hopefully, we'll all pull through the current crisis soon and get back to something more normal in terms of growth. I know our partners and employees look forward to that, as do I. With that, I'll turn it over to Tom for a review of our financials. Tom?