Iridium Communications Inc. (NASDAQ:IRDM) Q1 2023 Earnings Call Transcript April 20, 2023
Operator Good day, and welcome to the Iridium Communications First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.I would now like to turn the conference over to Kenneth Levy, Vice President, Investor Relations. Please go ahead.Kenneth Levy Thanks Stacy. Good morning, and welcome to Iridium’s first quarter 2023 earnings call. Joining me on this morning’s call are our 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 Web site.Before I turn things over to Matt, I’d like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that are not historical 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 generally accepted accounting principles. Please refer to today’s earnings release and the Investor Relations section of our Web site for further explanation of these non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures.With that, let me turn things over to Matt.Matthew Desch Thanks, Ken. Good morning, everyone. Well, as you can see, we’re off to a great start in 2023. We’re continuing to experience the momentum that’s been building over the last few years as we take full advantage of our second generation network. [indiscernible] subscribers, service revenues, equipment and engineering services all remain strong, we’re really hitting on all cylinders, and this continues to generate meaningful growth in our pro forma free cash flow, as well as in value for our partners and user ecosystem.
All this reinforces our expectations for another strong year of sales and growth and partnerships and subscribers.On a personal front, it’s been a busy few months since our last call was increased travel for industry events, investor conferences, and getting out again to interact with new and existing partners. It’s been particularly satisfying to see readings profile rates at these conferences, as we are directly in the middle of conversations on key topics shaping the satellite industry, like direct to satellite services for smartphones, the ascendancy of Leo networks, and particularly for governments of all kinds of proliferated services, and the increased penetration of satellite connectivity in maritime, aviation and other industry segments.
It also made me happy to hear so many established satellite operators acknowledge what Iridium has known for decades. There are natural advantages to operating in low Earth orbit and the ability to connect small mobile assets is an important distinction for us that has global utility.For those who have followed Iridium story over the last five or six years, this is likely not a revelation. We have been focused on IoT and commercial applications that leverage our very unique network and the emerging opportunities on which satellite sector is now focused are a great fit with the readings, constellation architecture and operations strength. In fact, this is what our network was built for.A lot of industry focus has been on the new direct to device market, Iridium continues to lead the way to connect people wherever they are, and to the personal devices that they use the most.
For example, Iridium has more than three quarters of a million ruggedized personal satellite communicators on our network, and that number is expected to continue to grow significantly in 2023.These consumer oriented devices allow users to navigate routes, share location, send and receive texts and even secure emergency services via SOS. The small lightweight devices have become a mainstay of outdoor enthusiast remote workers government you users and safety response organizations in recent years, allowing Iridium to drive a compound annual revenue growth of more than 45% from this growing customer segments since 2017.ARPUs from these users are relatively low today. But we expect some to adopt our faster service, a reinserts IoT technologies to drive additional utility and higher ARPUs in our commercial IoT business line in 2024 and beyond.
We’ve also had a great reception for our new Iridium Go Exec that we introduced in the first quarter with over 4000 in orders booked already. That device expands our reading goal line and satellite hotspot devices to connect with smartphones and tablets to provide a richer data connection when on the move and in remote environments. Best of all, our partners are seeing strong market interest, which underscores longer term demand for the Iridium goal line of services. Success here should also drive higher ARPUs for voice and data business in the coming years.We believe the consumer oriented satellite segment represents a meaningful growth opportunity for Iridium confirmed by the growing number of devices on our network. The value of providing highly mobile data services on a global basis is indisputable.
And we expect to add to this growth by supporting new satellite direct to device capabilities that are being introduced later this year. We’re excited about our new partnership with Qualcomm technologies announced in the first quarter as well as the introduction of their Snapdragon satellite processor incorporating Iridium technology.This chip will integrate Iridium two way messaging and SOS services into next generation Android smartphones. A half dozen smartphone OEMs have already announced they will include Snapdragon satellite in their phones and we are working with Qualcomm to further expand this list. We’re excited about the application Iridium network for direct to device and the potential upside to our growth projections it will create.We also see additional opportunities in the automotive industry as well as for applications in the government sector and expect to eventually be relevant in other mainstream consumer devices like computers and tablets.
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Satellite direct to device is an example of a technology convergence going on today between satellites and the traditional terrestrial world. But interests appears to be growing and I think the opportunities for satellite solutions are endless. We have already seen a lot of convergence within industrial IoT where many of our partners satellite IoT applications are deployed with cellular connections as well. But expect we’ll see even more of this in the future. We believe Iridium’s unique constellation is an ideal platform for this convergence and best of all, the sector opportunities incremental to our core business growth. But it’s not a material driver the strong service revenue growth we’re forecasting today.In our other business areas like maritime broadband, aviation and land mobile, we continue to benefit from strong demand and strategic opportunities.
You can see proof of this in our first quarter performance. We continue to take share in the maritime broadband space where our revenue grew 17% year-over-year in the first quarter, and receiving positive channel feedback that keeps us optimistic about the future. We’re hearing from our maritime partners that Starlink is disrupting the traditional VSAT market and while they aren’t making much margins on this product, most of Starlink deploy when requested by their customers. While interesting, this trend has little effect right now in our market expectations.As with other VSAT solutions, these partners are deploying Iridium as a companion service with Starlink and of course, are also deploying this for their GMDSS requirements, as well as vessel monitoring solutions on fishing vessels, anti-piracy and Citadel solutions for cruise safety and other diverse applications in maritime.
We estimate that an Iridium terminal of some kind is installed on four out of five [indiscernible] class vessels at sea today. And calculate that Iridium is now installed in some kind of solution on about 250,000 ships of all kinds around the world. And that number is still growing.We also feel very good about the opportunities we’re seeing in the aviation market both in fixed wing and rotorcraft. We are already installed on nearly 70,000 aircraft of all types today, including commercial, business aircraft, helicopters, as well as other general aviation aircraft. And that doesn’t count all the pilots who take us along as a portable solution for their safety or to take with them when they land.In the aviation market, we’re starting to see a transition or expansion from our traditional narrowband voice safety data and IoT services to Iridium cert as mid band for faster speeds and new services and expect to also see Iridium service broadband start to deploy on larger aircraft now that the first two antenna systems from partners have been certified.
We’re expecting additional certifications in 2023 of other partners antennas, as well as the first supplemental type certificates where the FAA approves the terminals onto specific aircraft types. We’ve been waiting for this kind of progress for a long time and look forward to the tailwind it can provide for our aviation revenues which should build into 2024 and beyond.Of course, I also want to highlight our strong land mobile performance. You can see the ARPU was up year-over-year and demand trends continue for equipment service as we implemented some targeted pricing actions after holding the access and airtime pricing stable for several years. Subscriber growth is still strong. They’re not quite at the level of 2022 which was an unusual year with the incremental demand we experienced from the Ukrainian conflict, as well as the handset shortages experienced by our competitors.
We feel good about the durability of our voice business. And now believe the continued growth for push to talk and Iridium Go Exec services will help to generate high single digit growth on average, for at least the next few years.Overall, our business environment continues to be robust and demand for all of our primary business lines remain strong. As you can see, we logged another record quarter for equipment sales with orders for handheld devices remaining above trend. Based on feedback from our partners, the supply chain of fulfillment issues experienced by our competitors on handsets have continued into 2023. We still have our own supply chain issues affecting delivery intervals. But we see the mostly abating by midyear, allowing us to build back our inventory to traditional levels.You’ll also note that our engineering and service revenues are up substantially in 2023 on the growing work we’re doing for the space development agency, and building the ground components of their next generation network.
That’s a strategic effort for us. And it’s going very well, even expanding beyond the initial award into new work. As we’ve said before, margins around this business is low compared to our service revenues. But along with other work for commercial and government customers it is an important enhancement to our relationships and will further our capabilities.Tom will provide additional color on our first quarter results, but I would like to acknowledge the important historical milestone we made on March 30 with a payment of our first ever dividend. We believe paying a dividend is a smart way to generate returns for shareholders, in addition to our ongoing share repurchase program, which is also very active in the first quarter. Together, these shareholder friendly programs underscored the confidence that we have in our business moving forward, and the strength of our enterprise to generate free cash flow.
I hope you’ve had the chance to review our latest environmental, social and governance report which was published in March. In it, we highlight our priorities for ESG and speak to our corporate values and culture.I believe our activity in this area demonstrates our commitment to being a good corporate steward on what I would call real ESG matters without sacrificing on business performance or business opportunities. In fact, our support for the communities in which we operate enhances our position with our employees and new hires, and has been welcomed by our partner ecosystem as we demonstrate values that align with their business priorities and interests. You’ll notice in this year’s report some enhancements to our disclosures, which we hope will allow investors to better appreciate with more detail the factors around our social stewardship priorities and impact.So as we celebrate this year, the 25th anniversary year of Iridium’s initial service launched in 1998.
We continue to believe that Iridium is positioned better than any other time in our history, both for the evolving opportunities in the satellite industry and with our ability to fund growth and reward shareholders. 2023 will be another great year for us with new product rollouts, and more exciting announcements. I look forward to keeping you abreast of our progress.With that, I’ll turn it over to Tom for a review of our financial. Tom?Thomas Fitzpatrick Thanks, Matt. Good morning, everyone. I’d like to start my remarks by summarizing our key financial metrics in the first quarter and providing some color on the trends we’re seeing in our major business lines. Then I’ll recap the 2023 guidance which we reaffirmed this morning and close with a review of our liquidity assumption and capital structure.
Iridium continued to execute well, generating total revenue of $205.3 million in the first quarter up 22% from the prior year’s quarter. Operational EBITDA was $111.9 million in the first quarter. This was an 8% increase from last year’s quarter and driven by increasing engineering and support revenue, growth and service revenue and another record quarter of equipment sales. On the commercial side of our business service revenue was up 13% this quarter to $112.8 million. This increase was broad based and reflected continued strength in voice, IoT and broadband as Matt mentioned.Voice and data revenue rose 17% from last year’s comparable quarter to $52.4 million. The increase was largely driven by higher ARPU, predated the targeted price changes adopted in the first quarter.
We also benefited from strong growth in our push to talk and Iridium Go services. As Matt noted, the increase in access charges was our first price action in commercial voice since 2018 and we expect to be durable, keeping ARPUs in the mid 40s and providing a growth tailwind to voice and data this year. To-date, we’ve been pleased with how the new pricing has been received by the market. It has meaningfully affected net subscriber additions, demonstrating the value that end users see in our services.Commercial IoT revenue totaled $32 million in the first quarter up 12% from the prior year quarter. We continue to see ongoing demand for personal satellite communications, an area in which our partners continue to invest in their retail focused products.
While these subscribers generate lower ARPU than our traditional industrial IoT users, they remain a very attractive contributor to our service revenue growth in light of the minimal comparative network resources they consume. As a result, IoT ARPU was $7.22 this quarter compared to $7.78 in the prior year period. We believe this consumer oriented sector will remain a strong driver of revenue and subscribers and believe that the integration of new Iridium service technologies into these products will increase data usage and potentially ARPU too.Revenue commercial broadband grew 17% from the year ago period to $13.4 million. Supporting this growth was an increase in ARPU driven by a mix shift among maritime subscribers to Iridium service from our legacy Iridium open towards service as well as market share gains driven by Iridium Certus 200 and 700 services.
Broadband remains an important component of our long term growth, and we continue to expect it will drive double digit revenue and subscriber growth in 2023. During the quarter, we added 52,000 net new commercial subscribers with the gain predominantly by IoT. As a result, commercial IoT data subscribers now represent 79% billable commercial subscribers up from 76% in the year ago period. We estimate the consumer oriented plans now account for about half or 1.5 million commercial IoT users. Posting other data services revenue was 15 million this quarter in line with last year’s comparable quarter.Government service revenue was also stable in the first quarter at $26.5 million, reflecting the terms of our EMSS contract with U.S. government. Subscriber equipment, which has remained at record levels over the last year grew 24% in the first quarter as demand for hardware supporting our commercial business lines remains robust.
Equipment sales reporting 1.7 million in the first quarter, compared to 33.7 million in the prior year period. Engineering and support revenue was $24.2 million in the first quarter as compared to $8.4 million in the prior year period.The rise in activity reflects new government work for the space development agency, a contract that we won last year, as well as incremental development revenue from our commercial relationships. While we continue to forecast year-over-year growth of engineering in 2023 revenue will fluctuate from quarter-to-quarter based upon execution and milestone achievements. Our first quarter results as well as the trends we are seeing into April, allow us to affirm our full year guidance on service revenue and EBITDA. In supporting this outlook I want to highlight a few items that may be relevant to your models and a cadence of Iridium growth this year.
We remain comfortable with our outlook for service revenue growth between 9% and 11% by 2023, in part due to continued strong net activations and revenue growth across all of our commercial business lines.As I mentioned earlier the price actions for commercial voice will serve as a tail wind this year. Given the positive effect of this higher ARPU and considering other favorable trends in this business, we now expect that annual growth in commercial voice and data will average in the high single digits between 2023 and 2025. Revenue from our EMSS contract with the U.S. government will remain steady at $26.5 million per quarter in 2023. There is no increase in the contractual fee schedule this year. The next step up will occur in 2024.Equipment sales set another record this quarter as demand for our satellite handsets in all our products remains elevated.
Based upon current partner orders, we continue to believe that hardware sales in 2023 will be in line or even possibly exceed ’22’s record level. On the expense side of the ledger we continue to forecast higher costs related to stock based compensation and new employee hires as we upgrade and retool business systems. These dynamics resulted in a 48% increase SG&A in the first quarter, which we expect to moderate in the balance of the year. You recall the SG&A grew over the course of 2022 with first half expenses at $54.8 million and second half expenses at $68.7 million.Accordingly, we expect the second half of 2023 to be much more in line with ’22 expenses and continue to forecast at full year 2023 expenses will be up by about 20%. R&D will also run higher in 2023 as our team supports a number of new products coming to market.
We feel very good about the broad based growth we are seeing across our businesses and believe that the incremental expenses we will have in 2023 are appropriate and necessary as our business continues to grow. Taken together these trends allow us to reiterate our forecasts for service revenue growth between 9% and 11% and operational EBITDA between $455 million and $465 million this year.Moving to our capital position. As of March 31, Iridium had a cash and cash equivalents balance of $126.6 million. Iridium’s robust cash flow is one of the reasons that our board continues to support our share repurchase program and initiated a quarterly dividend program. As Matt noted, Iridium board initiated a quarterly dividend in December 2022 and on March 30, we paid a dividend of $0.13 per share.Iridium’s dividend program will allow for the return of approximately $65 million of cash common holders in 2023 and reflects our confidence in our business opportunities and strong free cash flow generation.
In the first quarter of 2023, Iridium also purchased approximately 900,000 shares of common stock at an average price of $59.84 for a total of $53.1 million. Since the end of the quarter, we bought back an additional 500,000 shares for a total of $29.4 million leaving us with $97.1 million of capacity outstanding on our share repurchase program.We will continue to execute on our buyback program balancing our objective for deleveraging with a desire to maximize return on investment. In the first quarter we also increased our investment in [indiscernible] by 10 million as they raise additional capital to expand their commercial business. [indiscernible] satellite time and location service continues to have relevance to commercial partners and governments who seek a complement to GPS and other GNSS services which are susceptible to interference and spoofing.The [indiscernible] is offering leverages Iridium global constellations to protect critical national infrastructure and assured P&T solutions and we remain very optimistic about their unique offering and business opportunities.
Iridium’s net leverage was 3.2 times EBITDA at the end of the first quarter. This was down from 3.5 times a year earlier, even when factoring in our share repurchase and dividend activity during the first quarter. Our long term target for net leverage continues to be between 2.5 and 3.5 times EBITDA at the end of 2023, inclusive of quarterly dividends and giving effect to all outstanding share buybacks authorized by our board. Capital expenditures in the first quarter were $22.9 million, including one time spending of about approximately 11 million related to this year’s plan launch of spare satellites. As we noted our fourth quarter call in February, we expect annual capital expenditures over the forecasted 10 year CapEx holiday period to average between [$50 million and $60 million] excluding launch related costs 2023 capital expenditures should fall in line with this long term forecast.
Turning to our pro forma free cash flow. We use the midpoint of our 2023 EBITDA guidance and back off 75 million in net interest of approximately 75 million in CapEx for this year, and 14 million in working capital inclusive of the appropriate boosted payload adjustment. We’re projecting pro form free cash flow of almost $300 million. These metrics represent a conversion rate of EBITDA of free cash flow of 64% in 2023 and a yield of approximately 4%. A more detailed description of these cash flow metrics, along with the reconciliation to GAAP measures is available in our supplemental presentation under events on our Investor Relations website. In closing, Iridium continues to benefit from a robust operating environment and strong demand for our equipment and services.
We plan to return capital to our shareholders, fund new projects, make strategic investments, and are looking forward to the launch of five ground spares next month. We think this quarter is a good reflection of the Iridium gameplan, generating strong operating results, returning capital to shareholders, and making strategic investments that position us for future growth.With that, I’ll turn things back to the operator for the Q&A.
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Question-and-Answer Session
Operator: We will now begin the question and answer session. [Operator Instructions] First question comes from Ric Prentiss with Raymond James. Please go ahead. Ric Prentiss Thanks. Good morning, everyone. Thomas Fitzpatrick Hey Ric.Ric Prentiss Hey. Obviously a strongest start to the year.
I have a couple of questions. Obviously, one of the bigger areas that people are trying to focus on is the direct to device opportunity. Can you help us understand I know you’ve said there’s not going to be much meaningful impact on the service revenue side this year from direct to device. But have we seen some direct to device already showing up? It seems like the engineering support levels that got reported might have already had some in there. So just trying to gauge when will you break out kind of direct to device as a category and have we already seen some to-date?Thomas Fitzpatrick You look at our [Q-rate] we say that the commercial engineering and support increase is principally direct to device or Qualcomm relationship.Ric Prentiss Okay, makes sense.
And then how long should that development fee kind of concept continues? That’s something that can run for several more quarters of this year? Does it run into next year?Thomas Fitzpatrick We’ll see. We don’t expect it currently, but we’ll see. There’s opportunities for additional but time will tell.Ric Prentiss Okay, and then the royalties start kicking in back, we’ll go with that go into that same line item, commercial engineering support.Thomas Fitzpatrick The vast majority is going to be in service revenues. It’s going to initially it’ll be in hosted payloads and other and then we’ll then when it gets big enough will likely break it out.Ric Prentiss So royalties would go into hosted payload and other and then maybe break it out. Okay. Obviously, a lot of people are watching IoT ARPUs as well.
You call it out that you’ve seen obviously the mix change, but maybe service can help. How should we think about the current ARPUs in that personal communication areas, that kind of mid single digits? As we think of direct to device, it feels like that service may be priced a little bit underneath and given what that will bring to the market. Is that fair thinking?Matthew Desch Ric, the last part of your question. You said what is priced underneath the market?Ric Prentiss So the current personal communication devices should we take that’s kind of a mid single digit ARPU as we think of direct to device coming online, is that something that would be ARPU below kind of personal communication device ARPU?Matthew Desch Yes. It would be below. You are right, roughly in terms of what personal communications ARPUs are maybe just slightly below mid level, single digits, but yes, it would definitely be below that level.Ric Prentiss Okay.
That’s it for me.Thomas Fitzpatrick The volume a lot higher, so that obviously, was the part of it.Ric Prentiss Yes, exactly. Price times quantity could be a lot of quantities. Okay, and the last one for me appreciate all the questions. The pacing in the quarter of stock buyback ramped up significantly in March. Sounds like you’ve done a good bit in April. How should we think about how you look at that shareholder return equation and putting money to work on the stock buyback? What’s the lever that says okay, now it’s time to put more of the free cash flow production into the buybacks.Thomas Fitzpatrick So, our algorithm is we want to return to where we think, appropriate return to where we think intrinsic value is. And we execute on the buybacks when we think the return is appropriate.Ric Prentiss Okay.
Great. Appreciate all the answers. Everyone do well. Thomas Fitzpatrick Okay, thanks Ric.Operator The next question comes from Landon Park with Morgan Stanley. Please go ahead. Landon Park Good morning, everyone. Thanks for taking the questions. I want to dig in on the voice and data segment that’s obviously been a pretty surprising source of upside over the last year or two here. Can you maybe disaggregate that high single digit growth target that you’re laying out and maybe just delve a little bit more into what gives you the confidence that the current trends can continue out a couple years, and even if we potentially have to lap or the comp against this Ukraine benefit reversing at some point? And just on that, maybe if you could size what you think that Ukraine benefit has been and how you’re thinking about that moving forward?Matthew Desch Well, maybe Tom can talk to the Ukrainian benefit, which I think in the biggest scheme is kind of small, overall.
But we have for the last several years seeing strong demand for our handsets. There is a competitive dynamic there. It appears we’ve definitely sort of outlasted everyone and our services seem to be appreciated more than anyone else’s, and have a have no have a very strong position in the market that we’ve been appreciating for a while.We clearly have a, as you can see, we’ve finally sort of announced a price increase this year. It’s a price increase, by the way we’ve been planning for a long time. I know there were a number of questions in previous calls over our ability to do that. And we certainly felt it was an appropriate time after not having done that for a good four or five years, markets seem to not be affected very much in terms of that.
