Iridium Communications Inc

Good morning. Welcome to Iridium Communications' third quarter 2020 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. Please note this event is being recorded. I would now like to turn the conference over to Kenneth Levy of Vice President of Investor Relations. Please go ahead.

Thanks, Kate. Good morning and welcome to our Iridium Q3 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 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 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 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, including operational EBITDA and pro forma free cash flow, free cash flow yield, and free cash flow conversion. These non-GAAP financial measures are not prepared in accordance with generally accepted county principles. Please refer to today's earnings release in the Investor Relations section of our website for further explanation of these non-GAAP financial measures and a reconciliation of the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken. Good morning, everyone. As I'm sure you saw in our release this morning, we had a strong third quarter. As many of you know, we started the year on a record-setting pace in January and February and then were hit abruptly by the global lockdown in mid-March and April. With little visibility to understand how the industries we serve would respond, we were comfortable with the steady month-on-month improvement that the second quarter delivered. Now, with the results of the third quarter in hand, it's clear that we've trended back to the fast pace that kicked off the year. In light of our strong subscriber growth during the past quarter, and the momentum we're carrying into the final months of the year, we have greater visibility as to how we'll finish out 2020. This year, our business has once again demonstrated its resiliency, perhaps most evident by the surge in net subscriber additions, which reached a record 67,000 this quarter, more than doubling growth from the last quarter. With an ongoing thaw in the global business environment, Iridium's financial prospects have continued to improve and we're now on a glide path to end the year with better top and bottom line growth than we expected when we updated guidance on our second quarter call. Our prospects for free cash flow have also improved to approximately $200 million for the full year as a result of these improved operating results. So what's driving our recovery from the effects of the coronavirus? First, the service we provide is both important and unique and our satellite applications are often essential to the mission critical functions of our customers. I think our offering, particularly with our new constellation in place, is second to none. We do mobile and remote connectivity better than anyone else in the industry. Third, and maybe most importantly, we have a very diverse and effective partner ecosystem covering every important market segment, and almost all are telling us they are open for business again and bullish about their futures. Our more than 450 partners and their businesses are very diverse in terms of geography, industry, and application. With the exception of our partners in aviation and to a more limited extent maritime, both of which may take a few years to fully rebound, the majority of our ecosystem partners are back at work generating new business and activating new customers. We've worked for decades to develop and cultivate our distribution network, and I credit this one-of-a-kind wholesale ecosystem for Iridium's ability to endure economic recessions and keep growing even during a global pandemic. Based on our performance Through the first three quarters of the year, we are raising our full year guidance for service revenue growth and operational EBITDA. This move reflects the underlying strength of our business and a greater pace of subscriber additions than we originally expected during our peak summer selling season. Demand for Iridium services also spurred robust hardware sales in the third quarter and drove engineering revenues. Despite the strong business trends in the third quarter, there are still some parts of our business that have yet to fully recover. I'll speak to broadband and aviation in a minute, but want to start with our voice business. It's been running softer than a year ago, even though net subscriber additions have been quite a bit better than we initially expected after the pandemic surfaced. Consistent summer improvement spurred incremental demand for handsets, and that has benefited overall equipment sales. This firming in our legacy voice business is a good indication that this part of our business is returning to its more normal cadence. In IoT, the consumer bounce back we talked about last quarter has continued, and while most of our IoT applications are adding subscribers again, in particular, retail demand for consumer personal communication devices really accelerated in the quarter. Iridium added 61,000 net new subscribers in IoT. This shatters the previous quarterly record set last year by almost 30% or an additional 14,000 net new users. With an increasing number of consumer-oriented SKUs and a growing number of partners going after these personal communication services, as well as having the ideal network to support them, this should be an important and growing market for us for a long time to come. In terms of new products, late last month we launched our latest IoT turnkey end-user device called Iridium Edge Pro, and it's already generating a lot of interest with current and potential partners. The Edge Pro is a programmable device with built-in sensors for asset tracking and performance monitoring that lets a partner reduce their development costs and expedites their time to revenue. This hardware offering will continue to make Iridium relevant for a growing number of global IoT applications. We'll add the Iridium Edge Solar device to the mix with its launch later this quarter, and that will represent another low-maintenance, turnkey device that will drive incremental IoT partner solutions. An area we don't have full recovery from yet is maritime. While we added 300 net new broadband customers during the quarter, the pandemic has continued to cause operational and logistical headwinds for the maritime market. We've talked previously about these issues, and while we are seeing growth in subscribers each month, global travel restrictions and installation issues are still creating headwinds. For example, some of our partners centralized installation crews, and they have often been unable to travel to meet ships and ports. Those with distributed installation teams are having an easier time of it, so it's going to take longer for this market to fully recover, and we believe that installation challenges are likely to persist into 2021. On a positive note, we continue to see good demand and interest in Iridium Certus. Our partners are excited about selling the product and are very pleased with its performance in the field, and ARPUs from our broadband service continue to rise, reflecting the propensity for larger data service plans from subscribers. During the third quarter, we saw a 12% increase in year-over-year broadband revenue and an increase in ARPU. Overall, Iridium Certus remains an important vehicle of our growth, and we look forward to seeing it hit its stride in the coming years. I haven't talked much about aviation this year, though you probably started to see some press highlighting a few of our equipment suppliers like Collins and SkyTrack in recent months. We currently have six partners working on new aviation hardware and these terminals targeting the commercial transport, corporate, rotorcraft, and general aviation markets. This equipment will be available for retrofit as well as new builds and there's a lot of activity taking place today by these partners to develop and certify these terminals for commercial availability in 2021. Iridium is also very involved in obtaining safety certification for Iridium Certus to match the safety services we provide today on legacy aviation terminals. From what we see, the global aviation market, particularly the commercial side, may take about two to three years to fully recover. Given the progress being made, we think our partners will be ready with Iridium Certus aviation products well within that timeframe to take advantage of it. As far as the U.S. government goes, we continue to work with them on upgrades to their dedicated Iridium Gateway. These engineering upgrades and maintenance services support the government's use of our services and also provide for their ability to utilize Iridium Certus services globally. On September 15th, the government's EMSS contract also reached its first of four revenue step-ups. This resets the contract's base rate at $103 million for the next 12 months. Lastly, Aerion continues to develop their business despite the global aviation downturn. They signed another high-profile customer, the Civil Aviation Department of Hong Kong, that is the latest ANSP planning to deploy Ariane's space-based ADSP system. The region manages more than 400,000 aircraft each year and supports a critical corridor in the South China Sea. Including Hong Kong, Ariane's data services are now being deployed by ANSPs covering 38 countries globally. I am also happy to announce today that the FAA has expanded its relationship with Aerion after the progress of their initial trials in the Miami Flight Information Region. The FAA signed a significant contract in September to access Aerion's global data set to support test and integration into their air traffic controller automation platforms, as well as to support the FAA evaluation of a variety of applications, including airspace safety analysis, accident investigation data analysis, search and rescue, and Commercial Space. This is an important milestone for Aerion as well as for the FAA and I think signals that their long-standing relationship is progressing to the next level, which will assist in increasing safety and efficiency even further for U.S. passengers and operators. We congratulate the FAA and the Aerion team for getting this done. It's a big deal for the U.S. airspace and U.S.'s leadership in aviation. Before I pass things over to Tom, I'd like to provide an update on our capital investment plans. Since completing Iridium Next, we've guided and kept our capital spending to about $35 million per year. Given the strong subscriber growth during this period and the potential we see for growth with our new network's added capabilities, particularly in personal communications and the higher speeds and efficiencies we can create for IoT services, I'd like to step on the gas a bit and invest more right now for the next couple of years. Our partners are telling us they see opportunities with our system that they'd like to see us develop sooner rather than down the road. Additionally, like many companies, COVID has caused us to rethink the work from home model, which we expect to persist in a hybrid mode even after the pandemic has passed. This presents a timely opportunity for us to consolidate some facilities and save on overhead. To address these initiatives, Iridium plans to increase CapEx for the next three years, 2021 through 2023. As such, our CapEx will rise to about $45 million as we move quickly on product development and a real estate refresh. We expect to be back to a $35 million run rate in 2024. I think this plan is the prudent course to ensure we take full advantage of our competitive position, technical leadership, and the opportunities we see today. To close, let me reiterate that Iridium has remained disciplined this year and continues to execute well. Our focus on mission critical services, global connectivity, and reliable communications has allowed us to manage through this challenging year and deliver both subscriber and revenue growth. Our business is performing well and we continue to have strong visibility across our partner channel that underscores our confidence. In addition to top and bottom line growth, the health of our partner network will also help us to improve net leverage and Free Cash Flow this year. So with that, I'll turn it over to Tom for a more detailed review of our financials. Tom? Thanks, Matt, and good morning, everyone.