Iridium Communications Inc

Good morning and welcome to the Iridium fourth quarter 2023 earnings 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 telephone keypad To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Ken Levy, Vice President of Investor Relations. Please go ahead.

Thanks, Megan. Good morning, and welcome to Arim's fourth quarter 2023 earnings call. Joining me on this morning's call are CEO Matt Desch and our CFO, Thomas Fitzpatrick. Today's call will begin with a discussion of our fourth quarter results, followed by Q&A. I trust you've had the opportunity to review this morning's earnings release, which is available on the investor relations section of Aridium'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, 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 the 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, as well as a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Ken. Good morning, everyone. As you saw from our release this morning, we finished out 2023 very well. Service revenue and operational EBITDA both were strong, and we generated more than $300 million in pro forma free cash flow for the full year. That last point, growing cash flow, is the real storyline for Iridium. It supports our growth and investment and allows us to return capital to shareholders through dividends and share buybacks. Since turning cash flow positive in late 2019 after completing our second generation constellation, Iridium has generated approximately $1 billion in free cash flow, and as we discussed with you at our investor day in September, we expect to have the capacity for approximately $3 billion in shareholder returns between 2023 and 2030. In fact, Iridium returned more than $310 million to shareholders last year. As part of this program, we initiated a quarterly dividend, which paid 65 million to shareholders in 2023. And as we announced in our 8K today, our board plans to increase the quarterly dividend to 14 cents per share starting in June. This will result in a full year increase of approximately 6% to Iridium's dividend in 2024. Our board has also authorized a billion dollars in share repurchases since February 2021. Of this amount, about two-thirds has been utilized and a third, a bit more than $330 million, remained available at year-end 2023. Iridium's ability to generate and grow free cash flow has been fueled by robust commercial service revenue. While equipment and engineering revenues can vary year-to-year, which they've been doing the last few years around the pandemic, commercial service revenue growth has proven quite resilient. If you look at our commercial service revenue since the completion of our second-generation network in 2019, it has grown at an 8% CAGR. Subscriber growth has also been robust, growing at a compounded annual rate of about 15% over the same four-year period. 2023 marked our network's 25th year of operational service, which means we've had a lot of experience successfully navigating changing business environments and the evolving needs for satellite connectivity. The key reasons for our success have been Iridium's extremely reliable and truly global network, our globally allocated and coordinated L-band spectrum position, and probably most important, our laser-like focus on personal communications and doing what others can't do as well as we can. Our network has become the cornerstone of communications for safety services and mission-critical applications. This reliability is what truly differentiates Iridium from other service providers. In recent months, investors have asked us about the impact that Starlink is making on the satellite industry and if we are being affected, whether from the existing broadband service or from the direct-to-cellphone service that they're in the early stages of developing. Starlink has been very disruptive to the satellite industry, but we're fortunate that Iridium has carved our own unique path, which has allowed us to continue our growth even with their entry, and we are confident that we will continue going forward. With regard to high-speed broadband, we've never really competed with the KU and KA band satellite operators on this front, and that remains the case with the entry of Starlink. We positioned Iridium Certus as a reliable companion to all of the VSAT offerings in maritime, and we're often a companion to Starlink installations as well. We also continue to be differentiated by our L-band spectrum's ability to support safety services in both maritime and aviation. That remains an important focus for us. It's a long-term niche where we'll continue to see growth that other broadband LEO services, including Starlink, can't address. On the direct-to-device front, we're also following a unique path and expect to coexist with Starlink and others who are each delivering a very different service proposition to the market. Starlink is planning to offer a more regional solution using terrestrial cellular frequencies, which will need approval on a market-by-market basis. Iridium, on the other hand, is planning to offer a standards-based solution that will leverage our existing global MSS L-band frequencies. There's a lot of varying opinions about the potential size of the D2D market, but I think most would agree it could eventually be a sizable opportunity, though I think everyone is beginning to understand it will take a long time to really mature. We're now just in the very early stages of development, and we expect Iridium to be a core long-term player with a very strong offerings. Being standards-based, we don't have to be first to market. We just have to be one of the best, and we've had success doing that in the mobile satellite industry since our founding. In the case of directed device, we believe our plan, which we're calling Project Stardust, will be one of the most practical solutions because it's an incremental development on our very flexible and robust network. It won't require launching new satellites every few years and will be global from day one. It will use our existing spectrum position rather than relying on regulatory bodies for approval market by market. We're also focused on a very specific set of use cases for complementing terrestrial narrowband IoT and smartphone messaging, both of which will attract new partners like the mobile network operators to sell our services. You probably know I'm a bit skeptical about the business case for D2D broadband from space, not because I don't think there will be some user demand and interest, but because our experience at Iridium shows that a 2G or 3G-like service offering that only works outside or inconsistently inside buildings will not translate well into the mass market experience that customers now expect from a 5G, 6G world. We believe that the foundational capabilities and capacity of these D2D broadband networks will not attract the customer use or price premiums necessary to sustain the high ongoing capital costs for continued satellite replacement and network operations to deliver them, certainly not for many years and without massive continued investment, if at all. We believe that Iridium's Project Stardust strikes the right balance for a high-quality user experience and will be the kind of service that smartphone makers and MNOs will be proud to offer to their roaming customers at an affordable price. Iridium's strong position in IoT and use in small form factors and mobile device also positions as well. We have an extensive partner ecosystem and are familiar with operating through this wholesale model, and most importantly, believe that Project Stardust will expand and extend our existing leadership in IoT to lots of new use cases and applications. So 2024 will be a year of investment for Iridium. We are increasing our spending on R&D a bit, and moving forward in a few product areas that position us to capitalize on longer-term growth opportunities. We want to maintain our lead in traditional areas of growth like IoT, mid-band data, and U.S. government services, and we also plan to undertake initiatives that augment future business growth. Together, we believe these efforts will allow us to reach our long-term service revenue guidance of about $1 billion in 2030. We highlighted our financial outlook and growth drivers during last fall's Investor Day, including how we expect incremental growth from voice, IoT, and broadband, which will complement our expanding relationship with the U.S. government. Initiatives, like many of our partners' mid-band service expansions this year, will drive new IoT and data applications in emerging industries like uncrewed aerial and maritime vehicles and support higher-speed consumer products, that can send pictures and other important information for users on the move. Our partners are really excited about our new IoT transceiver that we'll finalize this year. It's natively IP and cloud-based and will enable even more compact designs for their applications. We're also excited to expand our safety service offerings in maritime and aviation in 2024. This is the year aviation will complete certification of the Iridium's end-to-end safety offering using Iridium Certus technology. Iridium Certus will become the most cost-effective solution for cockpit voice and data solutions, delivering increased value through safety and analytics to airlines, business jet, and general aviation operators for the next generation of airspace. On top of these items, we're investing in incremental R&D with Project Stardust because we believe it will position us well for standards-based narrowband IoT growth. by which I mean expanding the opportunities we are already addressing with our proprietary offering today, and also help to expand our business to MNOs and others delivering service to smartphones, laptops, watches, and tablets. Together, these investments give us great confidence in Iridium's cash flow and growth plans through 2030, all themes we highlighted to you last September. Shifting gears a bit, I want to share an update on Iridium's Constellation Health. When we launched the Iridium NEXT constellation between 2017 and 2019, we were required to make an initial estimate of the network's life. As a starting point, we pegged it to the manufacturer's assessed design life. However, we were and are hopeful to eventually get the same life from the Iridium NEXT constellation that our first network achieved. It ended up lasting over 20 years by the time it was retired. But we had no practical information at the time of launch to make our own assessments. Based on the manufacturer's assessment, we've been using a 12 and a half year useful life for accounting purposes since 2019. We reevaluate that assessment periodically, and our most recent review in the fourth quarter prompted us to update the Constellation's estimated life, which we now believe will perform well through at least 2035. That's great news and continues to support our expectations of a CapEx holiday through the rest of this decade. The updated assessment also reflects the successful launch of five additional spares in 2023 and the overall performance of the constellation since its initial launch. These incremental data points led us to formally change our forecast for satellite life from 12 1⁄2 years to 17 1⁄2 years. While this change doesn't impact cash flow, it does have some accounting implications that Tom will discuss in detail, including impacts of how we recognize hosted payload service revenue and depreciation expense and the resulting effect on our operational EBITDA guidance. Overall, there are a lot of moving parts in our 2024 guidance. While we are still forecasting strong subscriber and service revenue growth, with our increased investments, our equipment shipments normalizing, and some challenges to comps from 2023, on the surface, 2024 doesn't look like a normal year of operational EBITDA growth. If you look deeper though, our growth profile and overall outlook really hasn't changed much. Tom will go through that analysis along with a peek into 2025 where most of those one-time effects normalize. To me, the bottom line for Iridium continues to be free cash flow growth, which will continue in 2024 to support our ongoing investor-friendly activities. We expect share repurchases and dividends to continue And we're as excited as we've ever been about business opportunities, growth, and cash flow we will generate. So I look forward to another exciting year for Iridium. So with that, let me turn it over to Tom. Tom?