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spk11: Welcome to the Iridium third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 Ken Levy, Vice President, Investor Relations. Please go ahead.
spk06: Thank you, Andrew. Good morning and welcome to Iridium's third quarter 2021 earnings call. Joining me on today's call are CEO Matt Desch and our CFO Tom Fitzpatrick. Today's call will begin with the 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 ARIM'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 only 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, pro forma cash flow, free cash flow yield, and 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 in the investor relations section of our website for a further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.
spk05: Thanks, Ken. Good morning, everyone. As you saw in this morning's earnings release, we put up another exceptional quarter with really strong results. In fact, this quarter was our highest quarterly operational EBITDA in company history. The results are indicative of the strong rebound we've seen since last year during the early days of the pandemic. In the third quarter, we saw broad-based demand for our many solutions and continue to witness the strength of our wholesale business model. The ecosystem of around 500 global partners that we've built over the past two decades remains a real differentiator. It has shown its resilience during various economic cycles and market dislocations. Back in May, you will recall that Tom and I laid out the vectors for Iridium's five-year growth plan during our investor day. At that time, Visibility for growth in 2021 was still a bit clouded by how fast some of our partners' markets might recover from the previous year. However, we still had a strong grasp of the underlying demand for our services, and we had confidence that a full schedule of new product rollouts and planned service introductions, all supported by our substantial partner network, would deliver new subscriber additions just as it has in prior years. This perspective supported our announcement in May of a return to average high single-digit service revenue growth from 2023 through 2025. We're definitely on schedule for that, given our results this year. In light of the growth we continue to see across our commercial business lines, we're taking up our full-year outlook for service revenue growth to between 5% and 6% in 2021. This increase also supports a higher operational EBITDA, which we now expect to reach approximately $375 million this year which would represent about 5.5% growth on a year-over-year basis. We feel really good about the momentum we're seeing in our business, and it's not just confined to our bottom line. It's a combination of top-line growth, good execution on operations, and strong partner activity, which are all providing a clear runway for years to come. I mentioned last quarter that global supply chains were affecting equipment production because of a shortfall of a key part in some of our IoT modules. I want to update you on this situation. As you saw in our results, we had a strong quarter of equipment sales as demand from our partners remains particularly strong, even more robust than we expected earlier in the year. To date, our supply chain team has done a good job in managing the impact of this component shortage as much as possible. In fact, we now expect that the strong demand we continue to see will cause our equipment revenue in 2021 to exceed last year's levels. Still, I wish we were less constrained by this shortage, especially as we see demand outstripping current supply allocations for the next several quarters. Our partners seem to understand this constraint is a short-term problem. In fact, some of them are having their own issues. Based on the supply allocations we expect to receive over the next two quarters, it appears we'll catch up on the affected product lines in the summer of 2022. This equipment constraint is limited, and at least at this time, I don't see this issue affecting our long-term growth trajectory or relationship with our partners. That said, we, our suppliers, and our partners use a number of different chips across a great variety of products, and the global shortage of silicon chips is ongoing and wide-ranging, so we will continue to actively work these issues as they arrive. Moving along, let me talk to a few of our key market segments. To start, the personal communications sector has really shifted into top gear. After recording our best quarter of net sub-editions in quarter two, we followed up in quarter three with 71,000 net new IoT subscribers, putting us on pace for another excellent year of growth in this segment. As interest in these small portable communicators has grown, there's also increasing anticipation that satellite technology will be integrated into a broader set of mobile assets, including smartphones and automobiles. We believe that the adoption of satellite connectivity into mass-scale, consumer-oriented device is inevitable, and Iridium's global L-band network is ideal for that application. As cell phone use has become ubiquitous, the one limitation that remains is making connections outside of major metropolitan areas and corridors. connection in a smartphone is an elegant solution to this problem, which extends connectivity when consumers wander outside of terrestrial coverage. This evolution would be a natural extension of our IoT business today with our 1.1 million connections, including well more than 500,000 personal communication devices on our network today. During the third quarter, we reached the next big milestone of our Iridium Certus product line with the availability of Iridium Certus 100. Built on our Iridium 9770 module, this new mid-band service class offers much faster throughput than our current narrowband modems. It makes faster connections through standard IP rather than proprietary protocols, and is still a very compact and lightweight device with a small omnidirectional antenna, perfect for UAVs, maritime, aviation, and many new IoT applications. Iridium Certus 100 is now available with the first band products, and more are coming in the next few months. There's a lot of excitement in our partner base about the solutions they can now address with these devices and speeds. I'm also really happy with the continued adoption of Iridium Certus broadband in maritime. This product is resonating with the channel, both as a standalone service as well as a companion to VSAT, and this year's activations serve as an encouraging sign that the maritime market is recovering. In the third quarter, broadband revenue rose 26% compared to the same period last year. During the quarter, we also introduced our new Iridium Certus 200 class terminals, which are smaller and lower priced to complement our standard Iridium Certus 700 broadband terminal portfolio. These new terminals are just starting to enter the market now and should have a noticeable impact on our broadband growth going forward. They're a perfect upgrade for the slower connections and limited coverage of our competitors' products and a great successor technology for our own legacy Iridium open port terminals. Broadband ARPU's continued increase in the third quarter, as we're seeing Iridium Certus 700 adopted as both a standalone solution and a companion to VSAT in larger vessels. These uses are exactly what we envisioned when we introduced Iridium Certus in 2019, and should continue to allow us to grow our broadband service revenues. Aviation is another important source of future broadband growth, and our aviation vans continue to make progress with their various new Iridium Certus terminals. Some are on air and testing, and from what they're telling us, the first one should be ready near year end. This is a market where the end users already know Iridium and our capabilities very well. We still need to get these new terminals certified for safety services, like our partner's legacy aviation terminals, but that process is well underway. We continue to see a strong appetite for Iridium Certus for a number of cockpit services, using small terminals in the 100, 200, and 700 class ranges in the commercial, corporate, rotorcraft, UAV, and general aviation sectors. And with these coming new terminals, we'll start to be able to satisfy that demand. Now, an area we haven't seen the subscriber growth that we had from past years is the U.S. government. While service revenues remain as expected, administrative issues created by the transition of our EMSS contract from DISA to the U.S. Space Force has slowed user activations. As we mentioned last quarter, this has not been a seamless handoff and we continue to support the process they are going through together to ensure that the U.S. government can avail itself of all the benefits conferred by our contract. We still have a great relationship and they highly value our network. The government had about 149,000 subscribers at the end of the third quarter and we continue to work with them on a number of dedicated engineering development and gateway upgrade projects that are strategic to their needs going forward. Switching gears to Aerion, the company continues to see its business slowly improve as air traffic rebounds. Aerion expects to generate positive free cash flow for the year and remains very excited about its newest offering of data services, which could become a substantial contributor to their revenues. They continue to provide a very high quality and valuable service to their ANSB customers, including the FAA, and have additional customers in the pipeline, even though reduced air travel over the last 18 months has delayed customer decisions on new contracts. Still, they're in good shape for a company that's only been operational for two and a half years. We also continue to be very happy about our investment in Satellis, which provides alternate position navigation and time signals to protect important infrastructure and augment GPS services. They are seeing success in a number of commercial and government market segments, and we expect they will need to expand their use of our network in the coming years as well. As I said earlier this year, Iridium has more ores in the water than at any time in our history. New product launches are expanding our reach and allowing us to address the needs of a growing number of customers. With only a few months left in the year, we're very excited about our business position and the growth opportunities that we see. Iridium has emerged from the global pandemic with strong momentum, a pipeline of new products, and more demand than we can satisfy today. This positions us very well as we start planning for 2022. With that, I'll turn it over to Tom for a review of our financials. Tom?
spk09: Thanks, Matt, and good morning, everyone. I'll get started by summarizing our key financial metrics for the quarter and providing some color on the trends we're seeing in our business lines, which give us confidence in raising our full-year guidance. I'll then review our liquidity position and capital structure. Iridium enjoyed another strong quarter with broad-based growth. We generated total revenue of $162.2 million in the third quarter, which was up 7% from last year's comparable period. The improvement reflects strong demand for our services across all commercial business lines and serves as confirmation that the strongest headwinds of the pandemic which had slowed channel activities, are now largely behind us. Operational EBITDA reached a record $100.2 million in the third quarter, up 7% from the prior year's quarter. The increase from last year reflects strong momentum in service revenue, growth, and ongoing demand for subscriber equipment, which is on pace for one of its best years on record. In light of this strength, we are raising our outlook for EBITDA to approximately $375 million this fiscal year, based upon expectations that service revenue will increase between 5% and 6% in 2021. This change in forecast is a testament to the underlying strength of our business and the uniqueness of our offerings. On the commercial side of our business, service revenue was up 11% this quarter to $101.9 million. This increase reflected strength across all business lines. In addition to ongoing demand for IoT and broadband services, we also realized a material pickup in voice and data services. Commercial voice and data revenue increased 7%, 45.7 million in the third quarter, benefiting from the return of our normal seasonal business and a meaningful rise in net subscriber additions. This is a stark contrast to last year when a dearth of activity during the pandemic resulted in a decline in subscriber activations and voice revenue. Voice communications are a core part of our business and continue to perform better than we initially forecast, in part due to ongoing adoption of push-to-talk services, which helps to support our strong outlook for the year. Push-to-talk devices from our VAM ICOM are particularly popular. They've sold over 10,000 units since introducing them about two years ago. Consumer interest in our satellite IoT services also remains very strong. In commercial IoT, retail-oriented subscribers fueled 71,000 net activations during the quarter. We also saw a pickup in aviation, which continues its rebound from last year's headwinds. This drove an 18% increase in revenue from the year-ago period. IoT ARPU was $8.93 in the third quarter, compared to $9.48 in the prior year period. The decrease in ARPU from the year-ago period was caused primarily by the increasing proportion of personal communication subscribers, which use lower ARPU plans. We have, however, continued to see a rebound in high ARPU customers, most notably in aviation, which was hard hit by travel restrictions last summer. During the quarter, we added 78,000 net new commercial subscribers. Commercial IoT helped to fuel this growth, and IoT subs now represent 75% of Iridium's billable commercial subscribers, up from 72% in the year-ago period. We estimate that consumer-oriented plans account for about half of Iridium's commercial IoT users. Commercial broadband revenue is up 26% in the third quarter to $11.5 million from the prior year period. We continue to see improvement in the maritime environment as terminal installers gain access to ships in many geographies, and ARPU grew with the rising mix of new Iridium service activations. We anticipate continued growth in broadband revenue as travel restrictions lift and the offering of Iridium service maritime terminals expands with new product launches from Thales and La Restrena. Hosting and other data service revenue is steady at $14.6 million this quarter. Turning to our government service business, we reported revenue of $25.9 million in the third quarter, up 3% from the prior year quarter. This increase reflects the terms of our long-term EMSS contract, which included a contractual step-up in revenue in mid-September. Government subscribers grew 5% year-over-year to 149,000 in the third quarter. Subscriber equipment sales continued to benefit from strong demand, rising 7% to $26.9 million from the year-ago period. As Matt noted, we continue to work with our suppliers and explore options to source components in short supply. In general, we've been effective in utilizing inventory on hand, negotiating large allocations from suppliers, and finding alternative sources for certain equipment. As a result, we have largely managed the impact of the specific supply chain issue that Matt referenced through the first nine months of the year. We anticipate that the brunt of this component shortage will impact our ability to meet full customer demand in the fourth quarter. The challenge of sourcing components from alternative vendors is likely to result in some margin compression as we absorb certain costs in an effort to respond to strong channel demand. Engineering and support activities remain largely episodic and produce revenue of $7.5 million in the third quarter compared to $9.4 million in the year-ago period. As we noted on our July call, we continue to expect engineering activities to ebb and flow with schedules and the needs of our customers. Through the first nine months of the year, we've been very happy with our performance and the strong demand for Iridium's suite of services. It's clear that business activity has rebounded from the headwinds we experienced last year. Resumption of partner activities this year and continued channel demand is pushing revenue growth above our forecast. As a result, we're increasing our outlook for service revenue growth to between 5% and in 2021 and raising our full year guidance for EBITDA to approximately $375 million. Moving to our capital position, as of September 30th this year, Iridium had cash, cash equivalents, and marketable securities balance of approximately $289 million. Our cash position has increased by more than $100 million over the last 12 months, even when giving an effect to this year's share repurchases. Through the first nine months of the year, Iridium repurchased about $125 million of under its $300 million share repurchase authorization. With a balance of about $175 million in our share buyback program, we continue to be opportunistic in executing these repurchases. Net leverage was 3.6 times of EBITDA at the end of the third quarter, including the impact of our 2021 buyback program. This improved from 4.2 times a year earlier and 3.9 times last quarter. Our long-term target for net leverage continues to be between 2.5 and 3.5 times OEBITDA. We anticipate that we will be within this target range by year-end 2022, even after giving effect to the maximum $300 million share buyback. Capital expenditures in the third quarter were $8.8 million, and we continue to expect CapEx to be about $45 million this year. In light of our increase in OEBITDA, we have raised our outlook for pro forma free cash flow to approximately $242 million this year. We continue to expect growth in pro forma free cash flow will outpace the rate of growth in EBITDA. This figure is up from 20 percent from 2020 and highlights the strength of Iridium's business model. We arrive at this level by using our updated 2021 EBITDA guidance of $375 million and back off $66 million in pro forma net interest, $45 million in CapEx, and $22 million in working capital inclusive of the appropriate hosted payload adjustment. This spree cash flow reflects a conversion rate in excess of 60% in 2021, representing a yield of more than 4%. A more detailed description of these cash flow metrics, along with the reconciliation to gap measures, is available in a supplemental presentation under Events in our Investor Relations website. As we highlighted on our July call, Iridium completed a repricing of its term loan in the third quarter. The improvement to spread and the LIBOR floor represent an overall saving of 50 basis points on interest costs, which yields annualized interest expense savings of approximately $6 million. As I reflect on our strong progress to date, I'm reminded of the long-term guidance Matt and I shared at our Investor Day in May. We expected that 2021 would be a slow year of growth for Iridium, forecasting 3% growth at that time, but we were confident that given new products and our generally bright prospects that service revenue growth would accelerate and average in the high single digits for 2023 through 2025. Our updated guidance of 5 to 6 percent growth this year should give investors increased confidence in our longer-term guide. Service revenue is the primary driver of growth in EBITDA, And given our levered pre-cash flow profile, we believe that this growth will drive about $2 billion in levered pre-cash flow between 21 and 25. We believe this is a significant consideration for investors as it represents about 40% of our current equity market capitalization. With that, I'll turn things back to the operator for the Q&A.
spk11: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Landon Park of Morgan Stanley. Please go ahead.
spk01: Thank you and good morning. I'm just wondering if you can touch on the service, the service aviation products, you know, what type of timelines are you expecting and where are you with the FANS certification and what type of use cases do you see on the UAV side? And then secondarily, just on the EBITDA outlook, the 10 million sequential step down in 4Q, is that all driven by seasonality and supply chain, or are there any other elements that we should be thinking about on the sequential trend?
spk05: Okay, well, as I said, in aviation, that's a natural space for us. We're quite successful in aviation today using our sort of legacy devices. It has taken our VAM partners longer than expected to get their antennas completed, but they appear to be solving their issues right now. There's multiple suppliers, and a number of them have told us they're both on air. We've seen some of their terminals. They look great. and the first one should be available later this year, though I don't know that they will be in the market significantly till certainly well into 2022 and into 2023. But they're quite small. They offer services, in most cases, both up to 700 kilobits per second, which is quite effective for a L-band service. They also have low-cost versions coming using our Certus 100 or 200 technologies, which are small and omnidirectional and perfect for things like GA, for UAVs, and for smaller aircraft. Fans, you know, they'll go on airplanes regardless. They don't need to be fan certified to do that. They can be used for internet services and just cockpit, particularly cockpit, but even small aircraft cabin. Or we're seeing a lot of particularly Certus 100 interest right now in the UAV market, a number of new VAMs and VARs that want to supply that service, particularly for command and control kind of applications using Certus 100 since it's a global product and it's very small and lightweight and fits on a lot of those platforms. VAM certification is going to take longer. It, of course, requires the FAA and also additional development that's underway right now. I wish I could tell you exactly when fan certification would occur. That will obviously help drive penetration onto the larger commercial aircraft, the long-haul aircraft for flight safety services in the cockpit, but that won't be a That will just be a driver as opposed to a gating element for getting aviation terminals and revenues in 22 and 23. So that was the first part of the question.
spk09: Hi, Lenny. It's Tom. I'll take the second part. So the fourth quarter is seasonally a tad weaker than the third. The third is a stronger quarter just seasonality-wise. And then we're modeling equipment revenues in the fourth quarter down materially from where you saw it in the third quarter. We see equipment revenues up on the full year, but fourth quarter will be down sequentially, and that kind of accounts for the decrease in our outlook for EBITDA sequentially.
spk01: Great, thanks. And just one last one. On Arion, you guys recently provided some commentary about that payment, that first or the next lump sum payment coming in 24. Can you just walk through how confident are you in that revised you know, timeline and just some of the moving parts there.
spk09: Right. So we're very confident in Aerion's business model. They're cash flow positive this year. Their business is performing very well. They've just, you know, the effects of COVID on international air travel, it's just caused their business model to move to the right a bit. And so their anticipated refinancing has moved to the right, but we're highly confident that they will make those lump sum payments you know, in due course.
spk01: Great. Thanks very much.
spk11: The next question comes from Rick Prentice with Raymond James. Please go ahead.
spk03: Hey, Rick. Hey, Rick. A couple questions. First, with stock buyback, obviously you said you'd be opportunistic. It was a big drop-off between the buyback levels in the first and second quarter to the third quarter. How should we think about how you view the timing and pacing of the buyback? Is there anything else going on out there like any M&A for use of funds?
spk09: So the way we think of it, Rick, is we want to enhance some return to where we think intrinsic value is. And we think about it in terms of where we are in our level of leverage. So we want a higher return if we're above our leverage guide. And so that's how we think about it. And so we were opportunistic in the third quarter. As we've said, in terms of M&A, there are some things that we like, but it's not like we're holding back because of M&A.
spk11: Excuse me, Mr. Prentice, could you make an adjustment there on your end? I'm sorry to interrupt. It's kind of breaking up there on, I assume, your cell phone.
spk05: It's really hard, Rick. You're kind of really... You don't sound... I'm very clear, but give it a try, and we'll try to make it out your question. Okay.
spk03: Any better here? Perfect.
spk05: That's clear.
spk11: Yes. Thank you, sir.
spk03: You bet. No worries, guys. Second question. Appreciate that. Matt, you touched on it a little bit in your prepared remarks about the thought of L-band coming into smartphones. Can you walk us through kind of the timeline of and the process of what's involved in making that happen technically, but also in talking with the OEMs.
spk05: Yeah, so I'm not going to go into any more detail on that, Rick. As you might imagine, I bring it up because it's been so much in the public sphere, obviously around specifically Apple, you know, the rumors around them. But also there's some other companies that have emerged that are out claiming that they're going to go after this with great expense and new satellites and that sort of thing. And I just think it's important for people to understand this is core to our strategy, that our network is built for this sort of thing. We have the right spectrum and position for it, and we're pursuing it. But, you know, when, if, all those sort of things, I think are, it doesn't really make sense for us to go into any kind of detail. I don't want to even Presuppose exactly how how and what we would do because that would that would give away way too much about what our Approach and strategy would be towards that market segment.
spk03: So hope you understand makes sense, but conceptually the concept of Satellite linkages into smartphones or something courtier strategy and something you're working on Yeah, I mean we view ourselves as a personal communications company when it really comes down to it That's how we were built, you know, 25 30 years ago in
spk05: was about a highly efficient communication globally to small antennas and small devices around the world. And you can see it's played out in our IoT business. It's played out in the way we have been successful sort of in the personal communication sector around evolving from satellite phones to personal communicators. And we've been licensing our technology into other products for other applications. And by the way, smartphones will be just one direction. I mean, also there's a lot of interest, I think, in a lot of connected and other consumer products and automotive sectors and that sort of thing as well. So it's how we're built, you know.
spk03: Makes sense. And last one for me, obviously a lot of other thoughts about the capital being raised in the space, as you mentioned. How should we think about how you guys look to position yourself in kind of the new landscape of LEOs out there and anything you might be working as far as collaborative?
spk05: Well, you know, in the segment I just talked about, people who are trying to go after connecting to smartphones directly from space, either using standard protocols or terrestrial spectrum because they don't have any spectrum themselves. I think those companies have a long way to go Most of them don't have the technology built or available yet, don't have sometimes the financing. Some of their plans, as most people know, are quite ambitious is probably a nice way of saying it. And so I doubt that we'll be partnering or working necessarily with any of those companies towards things unless there's some sort of future spectrum sharing or something. But we are keeping our eyes out for the IoT sector. There are lots and lots of companies trying to build networks to go after what I would call the low-end IoT sector. There's been some sort of announcements in that space, none of which really demonstrate that anybody's been successful anytime soon. There have been some companies that have been purchased, but I don't know that they're even sort of a demonstration of the success of those companies yet. They still have a long way to go. as we know, because we've been now in the IoT business for, I think, about 17 years or so of our 21, 22 years. And it takes a long time to build up the solutions and ecosystems. And in addition to having sort of a low cost, but yet low end sort of product. So we're keeping our We're talking to a lot of them, and we're considering some of them want to use our network to possibly provide their services. We are open to that but are considering whether that makes business and economic sense and whether we should have other kinds of relationships with them as well. Great. We'll keep our eyes on that.
spk03: Yeah. Appreciate it. Stay well, guys. Thanks. Thanks, Rick.
spk11: The next question comes from Walter Pysak with LightShed. Please go ahead.
spk07: Thanks. Hey, Matt, do you think there's an opportunity for Satellis to have maybe a more formalized relationship with NextNav? If NextNav is successful in completing their SPAC, I saw the announcement from earlier in October, but it seemed like they're highly complementary businesses. And I'm just curious on your thoughts on those two companies going forward.
spk05: I'm not sure I can speak specifically to NextNav, nor probably should. I do think I can say that, I mean, Satellis has a well-established revenue stream business and probably, you know, is backable themselves if that was a smart strategy. I don't frankly know that that is. I'm I think SPACs personally, having been through one and finding the pain that was associated when we did it. The original SPAC. We were the original.
spk07: You were the original SPAC.
spk05: Yeah, exactly. We were SPACs before SPACs were cool, as I say. But, you know, it's an expensive way of going. It's an expensive way of going. It was an expensive way for us. It was required because of the 2008, you know, recession and everything. That was the only sort of direction we had in place. And I would say... If you absolutely have to go, I guess that's what you would do. But I don't know that I would wish it on anyone.
spk07: Your advice to Arion and Satellis, it sounds like, would be maybe to do a traditional IPO process as opposed to a SPAC. Absolutely. Okay, so can I just move on to Tom? On your prepared comments, I understand that companies don't like to change targets. But in your comments, you talk about like this, this three and a half to two and a half times debt leverage target. And you want to get there by the end of 2022. I mean, you're at three six now, if you go backwards on EBITDA, like if you just took the current quarter and annualize it, like many companies do, you're already within the target range of two and a half to three and a half times. Um, so I kind of want to come back to the share repurchase comment that I think, I think Rick was asking you, um, I mean, if you bring up a year to day chart and I look at the stock performance, Q1 and Q2, I mean, yeah, the stock kind of rallied on the whole Apple thing in September, but there was plenty of time in July and August to buy stock at the same price that you were buying it in June and in the June quarter. And in the March quarter, your stock was in the, in the low to mid fifties. Now you might not have bought stock there, but you found an opportunity to buy a $50 million worth of stock in the first quarter. and then the same amount in the second quarter. So I think investors might want a better clarification on why you didn't buy stock in Q3, because saying that you're opportunistic and not getting the same returns, that doesn't flip to the opportunities you had to buy the stock in the third quarter.
spk09: Right. So just your observation that we're at 3.6 times leverage now, the guide of being inside at three and a half times assumes the full $300 million of buyback so that we would buy back another $175 million worth of the stock. So that answers the leverage question. And I'm not going to get into any more of our thinking around buybacks other than to say that we want an appropriate return to what we consider to be our intrinsic value.
spk07: But you offered that as an answer. And the answer doesn't make sense if the stock was at the same price that you were willing to buy it at in Q1 and Q2.
spk05: I don't know if that's truly accurate. We've demonstrated, let's say, I would call discipline in terms of our view of value. And by the way, I think our value is increasing, particularly given back in quarter one and quarter two, we were still in sort of the post pandemic depth. We're now at a stronger place where we think our stock probably is even more valuable given our, you know, the confidence in our direction and what we have now told people in May and where we believe our market is in the latter half. So I wouldn't say that the exact same place or the stock that we should be, the price that we should be buying the stock should be identical in every quarter, you know?
spk07: I don't know, but you just, you supported the point though, Matt, if you're in a stronger position and, If your intrinsic value is greater, and if the stock's the same price that you're willing to buy it at in Q1 and Q2, because you had that price in July and August, I think investors just want to understand why more stock wasn't bought back in the third quarter. I don't disagree with anything you just said. It actually supports the argument.
spk05: I'm not sure it does. I think it's actually the opposite. But, you know, our view of what a valuable price might be going, if you will, up in some ways over time, you know, where our stock traded before and where we think it could trade again. But I don't really know if it makes sense right now. I believe we have a process internally. We're careful. We're disciplined. We're being opportunistic, as Tom said. I think you can almost evaluate what and where it was and as to what prices we are considering that to be. And if you analyze it correctly, you'll find that there is probably more discipline associated with it than you're giving us credit for. But, you know, so I don't really know that it makes sense to argue and describe anything more than that because it would just be describing prices and other things like that, which don't make sense.
spk07: But you're also just sending a message to investors that maybe they shouldn't be buying the stock if you're not willing to buy the stock at $42 or whatever it is.
spk05: I don't think that's what we're doing. Okay.
spk07: Thank you.
spk11: The next question comes from Greg Burns of Sedoti. Please go ahead.
spk10: Morning. Just to go back to the topic of increasing competition in space, I've seen – A recent SPAC talked about having ADS-B receivers on like a micro constellation that they're putting up. So I was just wondering what the potential for a competing service to Arion is, like how you view that market or potential for increased competition going forward and maybe what the differentiator for Arion is to maybe some of the other services that might be being launched.
spk05: Yeah, so I've seen that as well in competition. I have to say we kind of chuckle when we see people talk about building an aviation or ATC-grade competing service that would take many, many years and would require a different kind of network than these small sat networks are capable of doing. So we feel extremely confident, I don't know how to say it even higher than that, that those companies aren't going to be really competition to Arion certainly for many, many years to come. I mean, part of it is the network, you know, our service through interconnected inter-satellite links through a network that kind of can guarantee performance. It doesn't have satellites that just last a couple years and then you try to bring new satellites into place. you know, it doesn't just depend on certain locations based on bent pipe. It actually has a global connection. Those aren't easily replaceable things with a small sat network of any sort. So could there be data coming from aircraft that goes through small sat networks that maybe could be sold as sort of secondary data? Sure, but I think they're going to be competing with a what I would call a golden data set from Aerion that truly knows where every aircraft is at every second, everywhere in the world, as opposed to many at different times, and not globally, et cetera. So the other thing, too, is Aerion, through its ownership structure, obviously its customers are big owners of it and they demanded really the highest level of accuracies and in fact, certifications by like EASA, the European regulator, to prove that the service was bulletproof and worthy of the quality necessary to do air traffic control. That took many years and a lot of effort and a demonstration of quality levels that are kind of unprecedented that I don't think a small sat network could, could achieve, uh, for many, many, many years to come. So, uh, I think there's a big kind of competitive mode around the rare area on, um, perhaps there can be some competition around data services, but they're going to be competing with a really good set of data, you know?
spk10: Yeah. Okay, great. Thanks. And then, um, you had mentioned, uh, it sounds like in the, the maritime space and the broadband front, it's, um, You're starting to see a little bit of improvement there in terms of your access to ships, but the Fed ads didn't really increase too much over the year, and they're down a little bit sequentially. So if you talk about that comment, what you're seeing in the market, do you expect the additions to start increasing now, or do you just have a growth pipeline or a backlog that you're referring to? You're just talking about the outlook for the maritime broad market.
spk05: Yeah, what I track is sort of my monthly CERTUS activations in maritime. And, you know, looking back from kind of earlier this year, actually from last year and then earlier this year, I see sort of month-over-month improvements each month as more and more CERTUS terminals get activated on ships. I think the net number of subscribers is that – We are seeing some open port terminals deactivated, not nearly as many as we thought many years ago. They seem to be holding on ships, and there's more new Certus terminals going on board than open terminals that are replaced by others. I think that will probably accelerate a bit with Certus 200 now coming into the market and Certus 100 because that's a nice replacement for open port, and that might actually accelerate that transition. But the bottom line is, you know, service terminals are much faster and higher revenue generating. And so as you can see in the revenue growth we're seeing, that adds for a lot more service revenue growth with that 26% growth we see year over year. So that's probably the most important metric that we continue to have strong growth in that area. In addition, with these new products and being more cost-effective in both land and then eventual aviation applications and more government subscribers, all that will add to continued, I think, broadband growth going out in the future.
spk10: Okay. And honestly, with the Certus 100 and 200, is the revenue going to be recognized in broadband or is it going to depend, like with 100, depend on what the application is or the IoT? Like how are we going to... It will attract that revenue from those new services.
spk09: Hey, Greg, it's Tom. Broadband is just going to be above 128. That's the only thing that's going in broadband. And the 100, it will basically follow what it displaces. So we have L-band transceivers. It's in voice and data. If it replaces that, it will go into voice and data. And if it replaces IoT, it will go into IoT. Okay, thank you.
spk11: The next question comes from Hamed Khorasan with BWS Financial. Please go ahead.
spk12: Hi, good morning. Could you just talk about the earlier comments you made about the component issues that you went out and sourced different components? Does that change the quality of the product in any manner? And how did you find the solution of alternative component and how is that going to impact your partners in any way as far as feedback you've been getting from them as far as quality assurance is concerned?
spk05: We would never make any change that would affect the quality of our products. We won't sacrifice quality. That's our brand. A component is usually a like-for-like component that has absolutely the same capabilities sometimes even better capabilities. We just wouldn't go through the trouble to replace it if it was a component change out. In the situation I was describing on IoT, it was a specific component shortfall. Actually, they decided earlier this year, earlier in the summer, that where we had been ordering parts and they'd been delivering them within three months, they suddenly said, sorry, you can't get parts for 12 months, you know, because we're using those wafers for perhaps other things. Perhaps they're making car chips out of them or PC chips or whatever it was. So it was more that we were on allocation. And by the way, even with the great third, I mean, we had great third quarter equipment sales. We were on allocation in third quarter. It just shows you the kind of the level of demand we're getting right now that our partners much stronger than we thought when we budgeted for the year and earlier this year as we wondered how fast they would really grow. They've demanded a lot more product from us than we expected. And so it's obviously shown up. It's why our equipment revenues are up year over year, even with allocations that have been going on for the last quarter and will be going on through the fourth quarter and the first and second quarter of next year as well. I think for some of those IoT companies, components. So it has nothing to do with quality. This is something we do all the time. I mean, any high-tech supplier is constantly upgrading components, moving to different parts, different suppliers of the same sort of component, et cetera. But it's this shortage of silicon chips, which is the one that is most concerning. That's this whole supply chain issue that, you know, primarily comes out of lack of wafers and stuff coming out of Taiwan. That's the one I think we're mostly watching here. And I said our partners are having the same sort of issues. None of them have expressed, I would say, concerns that they could go anyplace else or want to go anyplace else. They know that, at least especially in this component that's in the IoT products, they know that that's a limited time. We're working sort of allocations around to them. to meet as much of their needs as we can. So it's, you know, it's a little frustrating, more frustrating than anything else because we would be just really killing it right now, you know, if this wasn't an issue, but it is a global supply issue.
spk12: Got it. And then the other question was on the consumer side, you're doing fine as far as getting the components of making devices, but are you, Are you certain they're getting to the shelf in time, especially given the holiday season coming up?
spk05: When you say we're doing fine, I said we'd be doing a lot better. I don't consider this to be fine. I mean, I would put up even bigger numbers in the third and fourth quarter and beyond if we didn't have any constraints here. So I'm not happy with the situation there. Is it affecting some of our partners who may be putting products And with their customers, absolutely. It is affecting a number of our IoT VAMs and VARs and their ability to get products on the shelves, as it is with many other companies right now. They're getting a lot of them on there, but not all the ones they want because they're getting high demand as well. So, yeah, it's affecting overall, and it affects the supply chain all the way out to the end customer. We'd have more subscribers, but for this issue, even through the third quarter, definitely through the rest of the year.
spk12: Okay, great. Thank you.
spk05: Thank you.
spk11: The next question comes from Chris Quilty with Quilty Analytics. Please go ahead.
spk02: Thanks. Two modeling housekeeping questions for Tom. First, SG&A was up like $2 million sequentially, $5 million over a year. It looks like most of that was equity comp driven by the stock price, which is unknowable. But fair to assume we should model, you know, at the same levels or up from here looking out in the next several quarters?
spk09: Yeah, I would say around this level. That's pretty safe, Chris.
spk02: And no Q4 bonus and whatnot that we should see it up in Q4?
spk09: Let's see how the quarter plays out. Like I said, about where the third quarter level, that feels right to us at the moment.
spk02: Okay. Okay. And on gross margins, better than expected in this quarter, especially given the component shortages, I think you mentioned that you expect to see an increasing impact due to that on a go forward. So should we be modeling in that same 40% to 42% gross margin range?
spk09: So the third quarter was really strong because it was handset heavy. So handsets are our highest margin. So I'd model it down. a bit into the fourth quarter because of the component shortage, but also a mix.
spk02: Gotcha. And a question on the consumer devices. Obviously, it's been very Garmin heavy in past years. You've mentioned lots of new partners. Are you seeing any of those partners that are standing out in terms of gaining traction And can you give us any color that you've gotten from your partners around use and applications, whether it's mostly for the same thing, just people doing outdoors, or are you seeing other upticks in the application for those personal communications devices?
spk05: Well, yeah, I mean, Garmin continues to still be the leader in that space, but they're not just a couple products. They're expanding their portfolio of connected devices, and that certainly is helping to drive, in addition to driving growth in terms of where they distribute. I think, you know, the other standout lately has been Zolio. I really think it's been fantastic. pleasing to see how that product has taken off and I think has exceeded expectations, certainly of ours, if not theirs. And I think that's a very interesting product. But as we said, there's a number of others, you know, from, you know, Somewhere and Bivi and, you know, in the ACR group, there's three or four others I know that have kind of unique channels that they go after, whether it might be a DOD application or it might be a maritime application or it might be something very specific. And I think overall it's just demonstrated that people want to stay connected and that there's a high demand for this. I think that's what's sort of been the interesting thing is people have realized how important personal communications are. And we've certainly seen that and are looking to play off of that.
spk02: Great. And final question on the push to talk, and I guess maybe specifically ICOM, are they yet at full global distribution for that product, and where are you seeing the demand? Is it primarily in government sort of first responder applications, or are you seeing it broaden out into more general commercial enterprise applications yet? PTT.
spk05: Oh, and PTT, yeah. PTT, it is broadening out. It has really taken off in the last two years, particularly, but the only thing that was missing was this ICOM handset, which is really, really, people really like that handset. I think a great example was this last week. You probably saw us tweet out a little bit about this Rebel rally, this all-women car rally, where all the By the way, a great place to talk to the automotive manufacturers who are in these extreme automotive areas because they see connectivity from satellites being very important, but everyone was using PTT and loving it because they're trying to coordinate a race over hundreds of miles, and these devices are just easy to use. They push to talk, and everybody hears exactly what you need to talk to, and they couldn't say enough about how they're how the management of the race is really transformed as using it. And we're just seeing more and more applications, whether they be first responders are kind of evolving from satellite phones to push to talk. We see people firefighting. We see other militaries around the world who are looking for alternate devices. We're seeing just, I think it's continuing to broaden out. It's not really, I would say, consumers at all. It's usually almost some sort of enterprise or civil kind of application of some sort. But we've had really good – we've been really pleased with the performance over the last couple of years in PTT.
spk02: Great. Thank you.
spk11: The next question comes from Anthony Carman with Deutsche Bank. Please go ahead.
spk08: Thank you. Most of what I had has been asked and answered, but maybe if I could, I'd like to, Matt, try to get a little additional – color on the commentary around the government contract. In many ways, it's your simplest and easiest agreement you have. It's a fixed price contract with some modest annual escalators. Each side has tremendous transparency as to what the spend is. And I'm wondering what the complexities or teething pains are as the agreement is handed off from DISA to the U.S. Space Force and what the challenges are there and Do you think that will have any implications on how the contract gets renegotiated in the future? Thank you.
spk05: Yeah, thanks, Anthony. No, it has nothing to do with the administration of our contract with the U.S. government. You're right, that's very simple, straightforward, and manageable. It's the issue of how the government itself manages it to their many end users. And so they set a pricing schedule that sort of recovers their costs to both internal and external users Unfortunately, because of the way they do their accounting, when they moved it over to the U.S. Space Force, it caused all the prices to go way up on their products to their users, many of whom had budgets and couldn't afford the uses. And so in some cases, they moved their use over to the commercial gateway that suddenly became less expensive, which is crazy because it's a fixed-cost contract. But it was really an internal administration issue between how they accounted for with their users. They recognize that. They are fixing it. And as with all things with the US government, it takes a long time to get news out and changes out to their end customers. And so it will take some time to fix. But I expect over some period of time in the future and next year that we'll start seeing significant increases in subscribers again. No, I don't think it will affect our long-term renegotiation because the strategic relationship and the general direction of that continues to be positive. But both they and we have been sort of frustrated with this issue that just resulted from sort of internal accounting stuff between two government agencies.
spk08: Thanks. And maybe as just a quick follow-on, I think one of the untapped opportunities in the government contract was the ability to sell CERTUS offerings into that because it was not inclusive of CERTUS. I think it was just sort of a restriking of the prior agreement. Would that also be, I guess, delayed or pending the resolution of this? I would imagine if pricing, if end-user pricing through some internal accounting has gone up, it might be more challenging to try to sell additional kind of Certus revenues into that contract. Is that fair?
spk05: No, no, it has nothing to do with Certus. It was really all about how you apportion a fixed price contract amongst the users and the different services and external customer bases. And that was, it completely was about an IoT device that used to cost X dollars a year and now costs Y dollars a year. Sirtis was completely independent of that. It's priced separately from that. They are buying it independently from VARs, and that is mapped to sort of a competitive price range. And so, no, it won't affect their Sirtis purchases. Great. Thank you for the additional color. Thanks, Anthony.
spk11: And the last questions today will come from Louis DePalma with William Blair. Please go ahead.
spk00: Matt, Tom, and Ken, good morning. Hey, Louis. Hey, Louis. Matt, you mentioned that you are receiving interest from drone providers for your new Certus 100. Are you pursuing partnerships with any of the very large consumer drone platforms?
spk05: Yes. There are some very large platforms that are very interested in maybe if not primary control, but a lot of those really big platforms have multiple technologies on them, and there's a lot of interest because we're a very cost-effective and truly global service in those kind of environments. But we do scale down to very smaller drones as well quite well, which I think is what the attraction is.
spk00: Great. And one final question. You previously, I think, mentioned how certain government users are using a commercial gateway. What is the status of Iridium finishing building out the U.S. government dedicated gateway for Certus connectivity?
spk05: Yeah, so... You know, it's been dependent upon government budgets, which, you know, start and stop. It looks like they're starting again, and so I expect that that will be completed next year. I mean, I guess it will be finally completed. I thought it would be this year. It hasn't stopped the government from buying services because they just buy it through the commercial gateway, but they would prefer to buy it through the government gateway, so I know it will will eventually be an additive to that. But we kind of wait for them to free up the money they need to sort of buy and contract for the work that needs to be done. But I believe that that's sort of on track to be done now, I think, next year. Not necessarily at the end of next year, sometime in next year.
spk00: Sounds good. Thanks, everyone.
spk05: Thanks, Louie. Thanks, Louie.
spk11: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk05: Well, it was a good quarter, and I know we'll see you all, I guess, next in probably February as we wrap up the year and give you guidance for 2022. So we look forward to seeing you all then, and take care. Thanks.
spk11: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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