Iridium Communications Inc (IRDM) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Iridium fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)As a reminder, this conference may be recorded. And now I'll turn the program over to Steve Kunszabo, Head of Investor Relations. Sir, the floor is yours.

Good afternoon, and thanks for joining us. I'd like to welcome you to the fourth quarter 2010 earnings call. Joining me on the call this afternoon are CEO Matt Desch and our CFO, Tom Fitzpatrick . Today's call will begin with a discussion of the 2010 fourth quarter and full year results, followed by Q&A. I trust you've had an opportunity to review this afternoon's earnings release which is available on the Investor Relations section of Iridium's website.

Before I turn things over to Matt, I'd like to caution all participants that our call this afternoon 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 the forward-looking statements. Such risks are more fully disclosed 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 expectations or views change.

During the call we'll also be referring to certain non-GAAP financial measures. 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. We'll also use the term Iridium. This term refers to Iridium Holdings LLC for the periods before September 30, 2009 and Iridium Communications, Inc. after September 30, 2009. With that, let me turn things over to Matt.

Thanks, Steve and good afternoon, everyone. Thank you all for joining us. First of all, I would like to take a moment to thank those of you who attended our first ever analyst day in New York in December. It was a well attended and productive event that allowed our senior management team to meet our analysts and current and future shareholders. We were able to share our story with you in a very comprehensive forum, including providing you with a long range financial outlook for our business and build a foundation for an active and healthy dialogue in the months and years to come.

This afternoon we reported fourth quarter and full-year results that reflect our ability to grow cash flow by sticking to the fundamentals of a proven strategy. That is, we operate in attractive and growing markets with favorable competitive dynamics and higher barriers to entry. We benefit from sustainable, competitive advantages, owing to our network leadership and fully funded plan for Iridium NEXT. We benefit from a large, low-cost and growing ecosystem of partners, a robust and growing product portfolio and a large, highly profitable recurring service revenue base, and as our recurring service revenue base continues to grow, our operating margins will expand due to the leverage created by our largely fixed cost business model. As I meet with our stakeholders throughout the year, the two most fundamental questions I'm asked time and time again are, first, how do you compete in the evolving competitive environment and second, will Iridium be able to seize and execute against growth opportunities in its vertical markets. I'll answer these important questions before Tom takes you through our results and outlook for fiscal 2011.

In our commercial business, we serve a diverse set of businesses in a variety of markets, both for voice, and more often these days, for data. We're leading in the handset market with feature-rich reliable voice communications, and based on what we're seeing in our business results and hearing from our partner channel, we're confident we're going to stay the market leader. In addition, we're working with our value added partners to create new revenue streams in the aviation, maritime and machine to machine, or M2M markets, rapidly diversifying our business beyond voice to fast growing data services. Our commercial service revenue now represents 51% of our total revenue, and we grew this sales stream 13% when compared to last year's fourth quarter.

Our revenue quality and diversity comes from having a number one or fast growing number two positions in serving multiple core markets. And when you consider we've more than tripled our mobile satellite services market share since 2001 and expect a compound annual growth rate of 10% for the industry through 2015, we're confident that we'll continue to successfully generate predictable and consistent recurring revenue streams and cash flow. These statistics are great guideposts as we consider the health and outlook for our commercial business, but nothing is a better measure than direct feedback from our partners and customers, as well as the encouraging trends we've carried from 2010 into 2011.

We recently spent a week in New Orleans in late January at our annual Partners Conference, which was attended by more than 400 decision-makers across our now 250-strong partner channels. The conference had too many highlights to name here, but what was most meaningful to me was listening to our partners describe why Iridium remains their first choice, even as they offer products and services from many of our competitors. A superior, reliable and available network was at the top of their list, and they're all very excited that we're all fully funded now in building Iridium NEXT. Also at the top of their list was a better -- the better economics they often see when they sell our products and services.It is not just about having the cheapest device and usage plant. Our partners and their subscribers recognize the innovations we made with the Iridium 9555 phone, the introduction of the 95 -- the Iridium 9602 transceiver in the M2M space last May and the value of Iridium OpenPort in the maritime and aviation segments. As a more recent example of this in the maritime market we recently created a worldwide network of maritime service centers and announced one of the industry's best warranties for Iridium OpenPort ship-based units.

While we're discussing devices, it is worth noting that much has been made about the perceived linkage between our 2011 guidance for an equipment revenue decline of 15% to 30% and the changing competitive landscape. While we expect to continued decline through 2015, albeit a slower pace than we're guiding to in 2011, it is important for me to reinforce with you that we are primarily a service revenue as opposed to primarily an equipment company. Overall equipment volumes are actually up in 2011. While the revenue mix is being pressured by a rapid adoption of the lower cost Iridium 9602 M2M device and modest pricing changes we have made to sustain our leadership in the handset business. In fact, we see a move from selling voice and data devices to our partners, towards having partners integrate our low-cost chipsets or even air interface into their products in return for a royalty fee. This would allow our technology to penetrate an even wider variety of applications and integrate with higher-volume technologies. We'll continue to explore ways to lower the costs of getting our technology into the market which allows us to give customers better value and generate more air time.

Overall, as I said, we're primarily focused on being a long-term recurring service revenue business where there is significant room for margin expansion as we harness the operating leverage of our business model. Despite this, M2M equipment sales continue to be a highlight for us. We've already received more than 30,000 orders for the Iridium 9602 transceiver in the first two months of 2011, and in a very strong start we had after introducing the product in mid-year 2010. Taken together, these decisions to invest in the M2M business have fortified an already leading competitive position by driving unit sales that will ultimately translate into high margin recurring service revenue.

As I listened to a panel of experts during our M2M seminar at the Partners Conference I was reminded what an increasingly important contributor this business will be to our success. I'm always is stunned at the size and scope of this market. Organizations really want to track or connect just about everything they can in a cost effective way, and the ingenuity of our value added partners to build a custom application for almost anything allows them to do that globally. It doesn't matter if you're tracking shipping containers or ocean buoys, it seems that one of our partners has already deployed or is working on an application that does just that. And now there will be applications for consumers, too, with the recent announcement of our partnership with ACR Electronics and DeLorme, leaders in the personal communications and location services space. This market has been largely untapped by us in the past, but with the addition of these well known partners, we see the potential for many thousands of new subscribers and a meaningful expansion of our M2M business.

Turning now to our government operation, we grew year-over-year revenue by 15% during the quarter, finishing strong in one of the best years ever serving this important customer. We've grown in the last several years from being a niche supplier of products to a pretty integral element in the US government communications infrastructure. Just like in our commercial business, we have a robust partner channel. Our government customer continues to make significant investments in devices and their dedicated gateway, as well as innovative new capabilities like Netted Iridium. This allows us to provide a unique value proposition with them that is not easily duplicated. DTCS, or Netted Iridium, again led the way during the fourth quarter as soldiers and military personnel increasingly rely upon us for this adaptable, reliable and rugged product. And Netted Iridium is just beginning to take root as we envision long-term and an operating environment where a software-based Iridium radio channel is built into many thousands of tactical radios that are already deployed across the military's communication network.

We also continue to capitalize on the same encouraging trends on the M2M side as the government's need to track and monitor a complex network of resources that's only expected to grow. We grew government M2M data subscribers 75% from the year ago period and continue to expect great progress when you consider the addressable market that includes a huge universe of aircraft, vehicles, vessels, unattended sensors and other critical assets. Moving finally to our Iridium NEXT progress and first hosted payload customer announcement, since we were last together in New York, we've made good progress moving along the design and development time line for our NEXT generation constellation. With the financing closed several months ago, our engineers and business leaders have had numerous productive meetings on the preliminary design and technical specification for this important project. We also announced our first hosted payload agreement with Orbital Sciences, a $10 million deposit on 20% of our satellite's hosted payload capacity that has the potential to be worth more than $100 million. It's important to have taken this first significant step with a great partner like Orbital, and we expect announce additional hosted payload deals in the next 12 to 18 months.

As I shared with many of you at our analysts day, we have and expect to successfully compete in this rapidly changing industry by running a superior network and expanding an already strong partner ecosystem to seize opportunities in our core markets. This strategy generates predictable and consistent service revenue streams and cash flow. I want to thank my colleagues at Iridium and our many partners and customers for their loyalty, dedication and hard work in making 2010 a year of robust growth. I look forward to strong execution and continued momentum in 2011. With that, I'll turn it over to Tom for more detailed financial review.

Thanks, Matt, and good afternoon, everyone. As Matt discussed, Iridium announced strong fourth quarter and full year financial results highlighted by double-digit service revenue and operational EBITDA growth with meaningful contributions across our product portfolio including LAN mobile handsets, machine to machine, maritime and government. We also affirmed our 2011 financial targets, which I'll review with you in a few minutes.

We believe that we'll deliver shareholder returns in the following ways. First, by rapidly growing service revenue, which was 68% of total revenue during the fourth quarter. Second, by benefiting from significant operating leverage in a largely fixed cost business model that creates operational EBITDA margin expansion, giving growth that outpaces that of revenue. And, third, by capitalizing on organic growth opportunities in each of our businesses through a leading competitive position and expanding servers' portfolio. And finally, by sticking to our rational and fully funded plan for Iridium NEXT construction and launch. Simply put, these steps take us to a roughly $400 million recurring service revenue company in 2015 with a manageable capital structure and healthy cash flows that drive rapid deleveraging.

Iridium reported fourth quarter total revenue of $87.9 million and robust operational EBITDA of $42.3 million, representing growth of 16% and 40% respectively from the year ago period. Our operational EBITDA margin was 48% for the fourth quarter and expansion from 39% in last year's comparable period. This not only speaks to the operating leverage we'll continue to emphasize going forward, but to the room we have for margin expansion, when you consider that our more mature satellite peers have EBITDA margins in the high 70% range. There is no structural or competitive reason we won't achieve similar margins over time, and we expect to reach a 60% operational EBITDA margin by 2015.

For the full-year 2010 we recorded total revenue of $348.2 million and operational EBITDA of $158.9 million, delivering on our targets for the year and representing year-over-year growth of 9% and 19% respectively. Our operational EBITDA margin was 45% for 2010. Fourth quarter net income was $10.1 million. This compares to a net loss of $5 million for last year's fourth quarter. As we've shared with you before, our net income during the fourth quarter was again impacted by non-cash purchase accounting adjustments related to last year's transaction. The fourth quarter included $11.9 million of purchase accounting adjustments net of tax. Excluding these adjustments, it is easy to see that our net income growth mirrors our growth in operational EBITDA.

From an operating viewpoint, we generated commercial service revenue of $44.5 million in the fourth quarter, representing 13% growth from the year ago period. Whether customers are choosing us for anytime, anywhere communications with Iridium's 9555 phone or selecting Iridium OpenPort where we've now shipped nearly 3,500 terminals for ships, business and crew communications needs, it is clear that we're capturing share in our core markets. We added 13,000 net commercial customers during the quarter for a total of 384,000 billable subscribers to end the year with approximately 11,000 of these net additions coming from the machine to machine business. Commercial machine to machine data subscribers now represent 29% of billable commercial subscribers, an increase from 23% during last year's comparable period. And like Matt, I see this number being much higher in future quarters and years. With so many value added partners breaking new ground in this business and with personal location services just recently out of the gates for us, I can only be encouraged by the contributions we'll see from this segment going forward.

Moving now to our government service business, during the fourth quarter, government service recorded revenue of $15.6 million, up 15% from the year ago period. As I witnessed first hand at our annual Partners Conference in January, we're an essential lifeline and mission critical partner for the US Department of Defense and other government agencies. Our voice and data solutions improve situational awareness for military personnel and track critical assets in tough environments around the globe. Our most recent innovation, Netted Iridium, which is a push-to-talk tactical radio, is quickly becoming a must-have in the military's communications tool kit. Government services added 1,000 new customers during the quarter for a total of 43,000 billable subscribers with machine to machine data subscribers growing 75% year-over-year and now accounting for 16% of the installed base.

Focusing next on equipment which produced revenue of $21 million, a 21% gain from the year ago period, resulting from strong handset sales and increased volume for machine to machine units. On the full year, equipment revenues increased by 8%. As Matt noted, our success is not tied to equipment revenue and pricing because we're primarily a service business. While we expect equipment revenue to take a hit in 2011 and a solid year -- after a solid year in 2010, much of this decrease is expected to result from our own actions to drive more profitable recurring service revenue. It would be a mistake to use this single metric alone in gauging the health of our business or our competitive standing.

As you saw from our results today, high margin service revenue drives cash flow, and we'll continue to make practical decisions such as introducing lower cost devices to achieve that objective. I also want to spend just a minute on cost of services, which is an item we discussed before as an important driver of operational EBITDA growth in 2011. As a result of our amended Boeing contract in the second half of last year for the operations and maintenance of our satellite constellation, we expect a meaningful decrease in cost of services in respect of that contract in 2011 as we benefit from the full-year effective savings under this agreement.

Moving now to our financial and operating outlook for 2011, which we first gave at our December analysts day and reaffirmed across the board this afternoon, we expect operational EBITDA between $180 million and $190 million for the full year 2011, which at the midpoint of the guidance range would be 16% growth when compared to the $159 million we achieved in 2010. On the same basis for the full year 2011, we project the following. Total billable subscriber growth to be approximately 20%, total service revenue growth of between 10% and 13% and lastly, an equipment revenue decline of between 15% and 30%.

In closing, I'd like to update you on our capital structure and liquidity position. As of the end of 2010, we drew $135.1 million from the Coface facility and had a cash and cash equivalents balance of approximately $119.9 million. It's worth reinforcing that we have a rational and fully funded plan for our next generation satellite constellation with manageable debt and leverage targets as we grow revenue and cash flow during the planned construction period. With that, I'll turn things back to Steve for the Q&A portion of this morning's call -- this afternoon's call.

Thanks, Tom. Operator, lets begin taking questions.

Sure thing. (Operator Instructions)One moment for questions to queue. Our first questioner in queue is Jonathan Atkin with RBC Capital. Your line is open.

Yes, good afternoon. Two questions. First, I wonder if you can give us kind of an update on secondary payloads. And secondly, I wanted to drill down a little bit on the government sector and the voice ARPU decline, I'm wondering if any of that reflects contract renewals at more favorable rates or whether that's just a reflection of the incremental uses that you're seeing on the part of your customers. And on the M2M ARPU within the government sector, how would you expect that to trend this year? It looks like the trend was more favorable than you saw for commercial M2M, and I wondered what you're expecting based on the types of applications you're seeing in government M2M compared to commercial M2M. Thanks.

Thanks, Jon. You had a couple of questions on the first one, secondary payloads, a lot of activity in that space, especially -- which I think was triggered as much as anything by last year's selection of our prime, and the financing allowed a lot of discussions to start to mature. Again, as most people know, we have about 12 to 18 months to close those deals, and we're fortunate to have the first one under our belt with Orbital Sciences. That was -- I think that generated additional interest as people recognized that it's a finite amount of space and a unique opportunity. Been talking about a number of different applications publicly, you probably heard me talk a bit about the aviation application more than most, which I am quite excited about. But there is still a number in the climate monitoring and space situational awareness area that we're working very hard, great discussions, and you'll see more news in the future as those mature. Tom, did you want to take the second one on government -- I think government ARPU?

Yes, that's what it was. It was government -- the reason for the government ARPU decline, Jon?

Yes, exactly. On the (inaudible) side.

It is the growth in netted is significantly greater than the growth in elsewhere. And so netted has slightly lower ARPU and that's bringing down the blended ARPU.

And the last area -- you're right, the M2M area in DoD is really starting to pick up. I think a lot of that is that some of the applications for M2M and DoD actually were started several years ago, but they're starting now to come to fruition. It takes sometimes things longer, and the DoD, of course, once they're created and out there in the market, they also ramp more effectively, I guess, as those become kind of programs of record. But they're in a wide variety of areas, in logistics, in tracking, in unattended sensors, in communicators for different agencies and devices, et cetera. One thing to make on both of those points. Just to point, most people know this, but our government business is typically fixed-price, for the most part. It is a little more variable sensitive in the data area. It's not -- but especially on the voice areas in both netted and in our standard point to point radio business, those are primarily fixed cost businesses, if you will. They're all you can use for a specific price. And our traditional price, as Tom said, was at -- as one price. The netted radio, it does -- it is a very powerful function, but it is priced underneath the standard point to point radio and so therefore, as that grows, it will sort of change the mix a little bit. All good, because it is just diversifying our business with the government.

Great. Thank you for the clarity.

Thank you, sir. Our next questioner in queue is Chris King with Stifel Nicolaus. Please go ahead.

Hi, good afternoon, guys. Just wanted to flip to the other side and talk about the commercial ARPUs for a second, and the -- I think it was a little over 14% decline in -- on the M2M side of things. Is that -- certainly that's -- most of that, I assume, has to do with your 9602 short burst data product offering. Was that certainly in the realm of expectations in terms of the overall data ARPU decline that you had expected to see in the quarter? And then I guess just a bit of a follow-up as well, kind of same general question on the voice ARPU, 4% year-over-year decline. Is that the trend for voice ARPU that you expect to see over the course of the next year or two at least?

On -- let me just take the voice ARPU first. So, that's really mix. If you see in our subscriber stats, prepaid grew at a faster rate than post-paid, and prepaid has a lower ARPU. So, it's really mix. And it's kind of hard to call the trend because OpenPort is -- we also categorize that in our voice ARPU. And to the extent that OpenPort grows, the trend -- you're going to have conflicting trends fighting each other. It depends on which one wins, OpenPort versus prepaid.

One thing, Chris, as you know, we're a little different than terrestrial operators in terms of thinking about ARPU because as a primarily fixed cost business, you're not tracking ARPU to figure out how your capital costs, et cetera, measures up against incremental, as well as the -- when you're investing to get customers by subsidizing devices, et cetera, like the terrestrial operators do, declining ARPU can be very challenging. For a satellite operator like us, we've planned long term that as our devices get lower and lower costs, we're going to be attracting more and more applications that can afford to -- couldn't have afforded us to use us at a higher price, but now can afford to use us. And sometimes their data demands are less, maybe they only need to track a device once a day or something. And so it almost uses no resources whatsoever on our network. It doesn't generate that much ARPU, but we weren't investing anything to go get that customer because there is no acquisition costs. So, long, long-term, as we generate potentially millions of M2M devices, we expect our ARPUs to decline over a long period of time, just because we're getting into consumer and other very price-sensitive segments that don't have the needs, really, for the data requirements that perhaps some of the commercial applications did.

Okay. Thank you.

Thanks, Chris.

Thank you, sir. (Operator Instructions)Our next questioner in queue is Chris Quilty with Raymond James. Your question, please.

Good afternoon, gentlemen. I think at the analysts day you talked about introducing some new products, specifically, some new handsets. I thought that might have come out at the partners conference, but is that something we should expect in the first half of the year?

Yes, we're not giving timing at all on that, Chris. We wanted to -- at the analysts day what we were more describing and perhaps disclosing, was an overall strategy about our handsets. We believe that as a long-term leader in the handset business we have a lot to work with here. We had always planned to introduce, I think, a more -- a broader strategy that covers more of the base. We have been always at the high end premium end, and as we've lowered our price slightly a little bit to keep competitive, long-term we see our ability to kind of cover this whole space much more completely than we do today, and that's what we're describing. And we will be introducing a new handset as we described in the year, but we would like to save that for really the announcement as it gets a little closer and what it will do.

Okay. And the DTCS, you had, I think three joint urgent operational needs last year. Are you getting any indications that there is going to be follow-on orders in 2011?

Yes, first of all, as far as there is a lot of activity continuing in the way under DTCS. The momentum of it from it as an important program within the DoD is only expanded, if anything. The demand is increased for outside even where it's currently being deployed in other commands, and there is also a fair amount of demand from non-DoD customers who would like to use the capability as well, but they're gated really by how fast the DoD can deploy. This is an area where everyone says our product is working great, but frankly, the government's ability to deploy it right now is gated by their ability to move -- to implement the training programs. So, I think that we'll continue to see growth in 2011, but we're going to be -- it's somewhat not gated by the product right now. In addition, they're investing into the next generation of the product. So, that's coming, as well. There is always a plan to make it even more efficient, to operate even more quickly. They love it now, but I think they're going to love it even more as the development continues to evolve to add some exciting new capabilities to it that we're pretty excited about. So, that's also happening in 2011. That's not really changing how much we think it will be deployed this year because that is more of a 2012 deployment activity, but I think we'll still see it grow this year. But it is really more we're waiting for the customer, frankly, the IT department or the customer to fully integrate it into their operations and make it even more deployable.

Okay. Your personal location OEMs announced recently in general, how long does it take or would you expect it to take for them to come online with actual products?

Yes, I don't want to steal their thunder, because I think they should be the one to announce their own products. But typically from announcement, it can take anywhere from, depending upon whether they've been working three motion to 12 months. And some of those announcements were last year, so you would expect to see those products be introduced some time out -- some time this year in 2011. But really, it is more up to their time schedule when they believe the product is fully ready to go and supported, et cetera.

And are all these products dependant upon 9602 modem being integrated into their form factor? Or how soon can you actually turn to a chipset licensing model that I think would more realistically open up the market to a lot more OEM partners?

Well, all those products that you've heard about are primarily adopting the 9602 initially, but a couple of them are interested in chipsets because they can think about what they can do further. We've had our first chipset customer that we're working with, we're talking to others right now about implementing chipsets in those products. I'm really -- I like to introduce the product we have today for volume as soon as possible with more of a chipset for a longer-term strategy with most, and that's what we're encouraging. It's both, I think best for us and best for them as they build their businesses out and get -- since the 9602 is very small and very attractive as it stands, and we think there is a lot they can do in that area.

And specifically on the 9602, I think you had 100,000 orders by the summer of last year, when you first announced it. Are you actually shipping 9602s, and are they being deployed, or are they still burning through their 9601 inventories?

No, we've shipped a lot of 9602s in the second half, so as I said, it ramped up quickly with a lot of orders. As we were putting those -- as we were describing those, those were orders, really for the next 12 to 18 months. So they were -- they have been going out and in fact, are what you see in the fourth quarter results and throughout 2011. Frankly, almost all of our partners have now shifted over to the 9602. They're all implemented. Some are -- many of them are shipping products based on the 9602 today. And if they are not, they will be very soon because we're really not getting that many orders for 96 -- the remaining 9601 inventory that they have. So, almost everything has really moved over to 9602. It is far in excess 9602s to 9601s at this point.

Thank you. Our next questioner in queue is Glenn Tongue with T2. Please go ahead.

Good afternoon. Congratulations on a terrific year of accomplishments, and I'm especially pleased to hear about these new M2M unit opportunities. I want to talk a little bit about the competitive environment, specifically, the market share on the handset side. There is a lot of scuttlebutt from competition in that arena, A. And the B is, can you address the current network health, the satellite health, an update on that?

Yes, Glenn, I -- certainly a lot of talk about the handset business. As you can tell, fourth quarter we were in the middle of that competitive environment and we, as you saw, we -- our units were up 51% on handsets versus the previous quarter so -- when we didn't have any competitions, so I would say that's a good sign that we're not really seeing the impact that everyone thinks we should be seeing at this point. So, I suppose if there is -- if Inmarsat, which is the one we're talking about here, is selling any and from this morning, it didn't sound like a lot because they said it's still immaterial, they must be selling them at the real low end where we were never competing to begin with and if so, they're expanding the market. So, I still think we have a great market position. I like our competitive position right now with what we have today and what we're doing. Our partners are telling us that -- and they're the ones that really matter here, them and the customers are saying that they're selling our product, they like the way it works, they like its performance, they don't feel as comfortable about the other product and they make a lot of money on our product which they like a lot, too. So, I think we're in pretty good shape there.

The other question was the health of the network. Thanks. I guess we don't talk about it as much. We made a lot of discussion about that in December. We're feeling very good about the health of our network, probably more than we have in previous years. As we reported in December, as we continue to operate our network we continue to see it performing very well with spares in orbit. We did the analysis in the second half of last year, which told us that the one concern that we'd have, that we would end up something like a Globalstar network with a radiation issue.Doesn't seem like it is going to impact our network whatsoever, really, between now and the time we launch NEXT, because our system was toughened against radiation more than we really thought even it was. So, that was great news. And on that basis, we continue to not have issues with our satellites. Our network performance remains very high. We still believe that our network will provide a -- that we'll have a very good network even when we launch NEXT, and I'm feeling as confident about that as I ever felt.

Terrific. Thanks.

Thanks for your question.

Thank you. (Operator Instructions)We do have a follow-up question from Chris Quilty with Raymond James. Your line is open.

Just a follow-up again on that issue of 9602 shipments. Your hardware revenues were up at a higher level than I was expecting. Can you give us a sense of what sort of the revenue mix is there in the hardware? Is that large shipments of 9602s or OpenPorts or things that haven't yet been turned on that give you insight into what to expect in the second quarter and beyond?

Tom, you want to take that, or -- ?

Well, equipment volumes were up both for handset and 9602 in the quarter, Chris.

And that was helpful. Okay. Different question since I have you, Tom. The cost of service, you said it's down materially. Can you help us quantify that for 2011?

That's as much as we're going to say, Chris. That's what's baked into our EBITDA assumptions, and we're not going to give any more color around that.

Okay. And some of the turmoil here during the first quarter in the Mid East, New Zealand, are you seeing any impact from either of those global events?

No, I just -- I asked my network guys to actually run a report this last week to see it, and we are seeing more traffic in the Middle East. Obviously, as everybody -- especially as there's uncertainty in the terrestrial networks, you'll always see us being used more as networks get turned off, someone like Iridium is a good choice. As I saw that there was some jamming by a competitor, where we're less susceptible to jamming than a geostationary system, so that also probably drives a bit of impact to even to a competitor that is more Middle East based. So yes, we do see -- any time there is trouble in the world, we see a little -- we usually see a little bit of a spike. We're getting too big to see it be that material to change our prospects or anything within the year, but it is always nice to know we're being of service and being helpful in times of trouble.

Great. And, final question on the Iridium OpenPort. Can you give us a sense of where you're seeing those OpenPorts ship by type of customer, large vessel, small vessel, new installation, substitution effect? And the second part of the question, the aero OpenPort is that we should see later this year?

Yes, to the first point, it's really across the board. It is really surprising to me that it is on the largest of tankers to the smallest of fishing vessels. I think OpenPort has proven to be a great value product to a lot of operators. They see that it not only works and is more cost effective than the competition, but it's -- it generates more revenue for our service partners, so I think that they're starting to see that it could make them more money, as well. So, -- and we're trying to, obviously, provide information to them about one service partner and others who is getting good support to ensure everybody knows that. But it is -- by the way, I heard that there was a comment that our OpenPort is more skewed towards voice than data. That's wrong. There is actual more data revenues coming from OpenPort units in our voice revenues, but our product architecture and design has been very valuable, and I think because it does generate a lot of good voice traffic as well, and that makes money for a service provider and for the ship a lot of times. I don't know whether there is any other aspect of that other than it continues to be viewed very favorably and frankly, things like adding the new warranty, the long-term warranty just demonstrates, I think, our confidence in the quality of the product. And by the way, the attributes that it has can't be matched. It is truly a global product and works everywhere in the world versus just in the up to reasonably northern latitudes or something. So, that's an advantage we'll always have over anybody else.

Anyway, the other question was about aero OpenPort, that is an area of potential for us with our partner LiveTV. We're seeing some -- frankly, I'm very pleased with the momentum in that area. I think that we're going to start seeing this year, more operators pick that up. It's not really adding that much to our revenues right now. I think that's more later in 2011 to 2012. But I think that there is a lot of opportunities in the aviation sector, particularly in the cockpit. We're starting to see a lot of examples in things like electronic flight bags that are down -- that have charts that are updated automatically, say, in an airliner. Weather information that's being able to be supplied, Blackberry on-board, mid-size aircraft. We're seeing it as a gap-filler right now for other technologies because we do cover the world. And despite what everyone else says, a lot of time the coverage for other systems is sort of patchy and we've heard people have to fly out of their way to stay within the coverage of some of our other competitive solutions and that they don't see that they have to do that with aero OpenPort. So, I think that there is a lot of potential for that product in the future. Not just in the commercial segment, but in the general aviation segment and even in the military segment.

Great, thank you gentlemen.

Chris, I just want to come back to your earlier question. If you look in our press release, we cite the specific unit growth rates in handsets and machine to machine. So, maybe I missed your question, but we cite 51% growth in handset unit sales and 58% in machine to machine. So --

I missed that. So, I'll apologise for my sarcastic statement.

(laughter) Never do that, Chris. Thanks, Chris.

Thank you, sir. Our next questioner in the queue is Jim McIlree with Merriman. Please go ahead.

Thanks, good afternoon. It doesn't look like there has been any impact on the results from the government's continuing resolution or budget delays, but I'm wondering if you perceive there to be any potential hiccups in the next couple of quarters because of the budget issues?

You mean if it continues on that there's budget impasses and for some reason that -- or for example, that budgets get drastically reduced, et cetera, Jim?

More on the delays, but also on the reductions.

Not so much, I think, in service revenues and what's going on there. I think that that's kind of programmed and there's a very important need, and that kind of acts outside that. Maybe more so in activities with our hosted payload customers, sometimes I can see it's a frustration to them as they want to work with us and wonder what their budget environments are. That has always been an issue on the government side, which is why we have a very diversified group of customers there and I think there's a lot of ways of making sales. But I'd say it's more on that kind of activity which creates an uncertainty environment in that space, but I don't think so much in terms of our service growth, say, like an M2M or netted or whatever on the DoD side.

Thank you.

Thanks, Jim.

Thank you. There appears to be no additional questioners in the queue. I'd like to turn the program back over to Matt Desch for any closing remarks.

Well, I appreciate all the great questions, and thanks to everyone for attending. It was a great quarter and great year. 2010 is the in the books, we look forward to 2011 and seeing you all back here pretty shortly, actually, for our first quarter 2011 results. But until then, we'll see -- we'll talk to you all soon. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect at this time.