Iridium Communications Inc (IRDM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iridium first-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Steve Kunszabo, head of Investor Relations. Please go ahead.

Good morning and thanks for joining us. I would like to welcome you to our first-quarter 2011 earnings call. Joining me on the call this morning are CEO Matt Desch and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of the 2011 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 website.

Before I turn things over to Matt, I would like to caution all participants that our call this morning 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 facts 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 described 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 will 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 and the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, let me turn things over to Matt.

Thanks, Steve, and good morning, everyone. Thanks for joining us. So this morning, we announced first-quarter results that underscore our high-quality revenue profile. We have now posted double-digit year-over-year subscriber and operational EBITDA growth rates in every quarter since becoming a public company in 2009.

These results are built on a foundation of competing in attractive vertical markets, operating a superior network, and benefiting from a highly profitable recurring service revenue base. We spent lots of time during the last few quarters discussing our business strategy, the key elements of our competitive environment, and our plans for our next-generation constellation Iridium NEXT.

These are all important topics for our customers, partners and shareholders alike to understand the value of our Company, but I wanted to take a step back today to outline who we are when you consider the big picture.

We are a global communications company that connects people with people and increasingly connects all the critical assets that are part of many industries' commercial ecosystems, or as many like to say, the Internet of things. Simply put, key industries around the world have come to rely on our solutions.

Sure, we excel in environments like the recent tragedy in Japan, when many other communications networks failed. But that's really a small part of our business. It's important to us to be there supporting communities when no one else can, but we are really about making connections happen every single day.

It's easy to lump us into the mobile satellite services or MSS space, and that's a reasonable place to start. But the similarity to our satellite peers ends with the fact that we all have, albeit very different, satellite networks. We compete across the globe to multiple industries and markets with a rich portfolio of solutions for voice and data services and a robust partner ecosystem.

Many of our MSS peers can't say the same. They are regional, sometimes compete in just a single vertical market, and have more narrow product sets.

We think we are more like terrestrial wireless communications companies when you consider the strategic elements of our business, except that we don't really compete with terrestrial wireless players. In fact, we complement them by extending their reach for customers beyond their cell towers. We also have very different technologies than ground-based towers. It's what allows us to provide 100% global coverage.

Connectivity is also one of the single biggest driving forces in our daily lives. Our vision with the world's furthest reaching network is to connect people, assets and organizations anywhere at any time.

We also have an increasingly data-centric service and revenue profile. Consider these proof points from our first-quarter results. 30% of our total billable subscribers were M2M data customers, and our M2M data revenue grew 60% year over year. When you combine our M2M data and Iridium OpenPort data revenue, it grew 56% year-over-year. And our handset business continues to see a meaningful revenue contribution from circuit switched data services.

Taken together, we are a global communications company with a rapidly diversifying and recurrent service revenue base and a largely fixed cost business model that supports robust cash flow growth.

In our commercial business, we continue to outsell our closest competitor in the handset market by a wide margin based on the latest feedback we are getting from a large -- from a number of large distributors in our partner channel. The Iridium 9555 phone has been a market share leader for years, but we think there's a lot of innovation still possible to ensure our future success. We expect to launch our new phone soon as part of an overall handset portfolio strategy and have even more products in the works, along with others that some of our partners will bring to market.

As an example of innovation in the maritime sector, which has a significant addressable market of over 220,000 vessels, we have now operationalized our partnership for a worldwide network of maritime service centers and launched the longest warranty in the industry for Iridium OpenPort ship-based units. These key product enhancements have been well-received by our partners and customers and it's clear that we continue to capture market share in this important core business.

The M2M sector remains our fastest-growing market with a recent Frost and Sullivan report forecasting a compound annual growth rate of 18% for M2M devices in the next five years, up from approximately 2.5 million devices in use today. We are also piggybacking on rapid adoption in the terrestrial wireless data market, where Intel recently suggested growth to 15 billion devices by 2015, up from 5 billion devices today. If we capture just a fraction of this rapid growth, including devices that work with and complement our terrestrial wireless peers, we expect we will continue to post great results.

And all of this just scratches the surface when you consider our technology licensing strategy and consumer-oriented applications, such as personal location services.

Now turning to our government operation, we grew year-over-year revenue by 15% during the quarter, picking up where we left off in 2010 as one of our best years ever in serving the US government. Our voice and data solutions improved situational awareness for soldiers and tracked critical assets in tough environments around the globe.

Our most recent innovation, Netted Iridium, which is a push to talk tactical radio service, is quickly becoming a must-have in the military's communication toolkit. We now have approximately 6,000 Netted Iridium subscribers and announced a $13.4 million investment in March by the US government for further development and expansion of the service. These additional enhancements will support theater-wide deployments, command and control reporting modules, higher capacity, and even faster call setup for the military personnel who have come to rely on us for daily operations.

We are also benefiting from the same encouraging trends on the M2M side as the government's need to track and monitor a complex network of resources is quickly growing. We increased government M2M data subscribers 80% and more than doubled our government M2M data revenues from a year ago period. We have a great group of value-added partners who specialize in government M2M applications around Iridium service and continue to expect strong progress when you consider the addressable market that includes the huge universe of aircraft vessels, vehicles, unattended sensors and other critical assets.

Moving finally to our Iridium NEXT and hosted payload progress, when we were together at our analyst day in December, we laid out a growing pipeline of potential hosted payload missions for our Iridium NEXT constellation. These opportunities included everything from weather and space debris monitoring to various government missions. We took an important first step with Orbital Sciences earlier in the year to begin building this business, and I want to spend a minute today on one of the opportunities that's recently been gaining momentum, the global air traffic monitoring mission.

This mission is one we've really focused on recently because of its potential and our unique capability to deliver the proposed service. It is a program that provides aircraft tracking services to air traffic control authorities and other regulatory bodies in a way that extends already planned terrestrial coverage over ocean routes, remote areas and developing nations. Today, and even in the currently planned next-generation air traffic management environment, there are still large parts of the world where we all fly that have no radar coverage and where airplanes are still kept far apart due to the lack of visibility and control.

We think a hosted payload system on Iridium NEXT could change all that dramatically. We have received a warm reception from the global air traffic management community and have developed a lot of momentum with this idea over the last few months.

One reason it's very interesting is that we believe Iridium's interlink global coverage from low-Earth orbiting is the only way to provide this service. There is unlikely to be anything else in the foreseeable future that can carry the next gen traffic monitoring receivers and provide such a dramatic extension in safety, capacity, fuel savings and system flexibility at such a low cost than the system we are proposing. The hosted payload sensors we are considering don't use up all the weight and power we've budgeted on our spacecraft, leaving room for additional payloads from other customers if we go this route.

Despite the progress we're making on this opportunity, there is still a lot of work to be done, and we're also working on other promising alternative payloads at the same time. We expect to update you on the air traffic monitoring mission and perhaps others in the near future, and as we've discussed in the past, anticipate announcing hosted payload deals in the next 12 to 18 months.

So in closing, we are a global communications company that continues to execute well quarter after quarter and year after year. We compete in attractive and growing markets and have a sustainable competitive advantage in our network leadership. Our service revenue base continues to grow and represents 67% of our total revenue in the first quarter. All this leads operating margin expansion and cash flow growth. I look forward to continuing strong execution and momentum during the rest of 2011.

With that, I'll turn it over to Tom for more detailed financial review.

Thanks, Matt, and good morning, everyone. As Matt discussed, Iridium recorded strong first-quarter financial results that reflect our ability to grow cash flow by sticking to the fundamentals of the proven strategy. That is, we operate in attractive and growing markets with favorable competitive dynamics and high barriers to entry.

We benefit from sustainable competitive advantages, owing to our network leadership and a fully funded plan for Iridium NEXT. We benefit from a large low cost and growing ecosystem of partners, robust product portfolio, and a large, highly profitable recurring service revenue base. As our recurring service revenue base continues to grow, we expect our operating margins will expand due to the leverage created by our largely fixed cost business model.

Before I take you through our financial results, I would like to put in perspective our planned warrant tender offer, which we also announced this morning. By way of background, we have two traunches of warrants that are a legacy of the SPAC transaction that brought Iridium public. We have a $7 traunche with approximately 14 million warrants outstanding and an $11.50 traunche with approximately 14 million warrants outstanding. This represents $28 million in total before giving effect to the transactions involving the $11.50 or Z warrants we announced last week.

These Z warrants are the subject of our planned tender offer. The private transactions announced last week retired about 8 million of the $11.50 warrants. In addition, Greenhill has informed us that they plan to accept the terms of the tender offer, and they own approximately 4 million warrants. That leaves a balance of approximately 2 million Z warrants that will remain available for the tender offer.

The $7 or W warrants are unaffected by these transactions. This warrant exchange will simplify our capital structure and significantly reduces potential future dilution to shareholders.

As a reminder, our fully funded plan for the construction of Iridium NEXT, which was developed in coordination with the Coface lenders, as part of our financing last year, does not rely on warrant proceeds, and this foreign exchange transaction is being undertaken with the support of the Coface lenders.

Iridium reported first-quarter total revenue of $91.3 million and robust operational EBITDA of $43.1 million, yielding growth of 12% and 29%, respectively, from last year's comparable period. Our operational EBITDA margin was 47% for the first quarter, an expansion from 41% in the year ago period.

First-quarter net income was $8.3 million. This compares to a net loss of $1.3 million for last year's first quarter.

From an operating viewpoint, we generated commercial service revenue of $45.3 million in the first quarter, representing 11% year-over-year growth. We added 17,000 net commercial customers during the quarter for a total of 401,000 billable subscribers with approximately 11,000 of these net additions coming from the M2M business. Commercial M2M data subscribers now represent 31% of billable commercial subscribers, an increase from 23% during last year's comparable period.

As we've noted in the past, our revenue quality and diversity comes from having the number one or fast-growing number two position in serving multiple core markets. And when you consider that 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 are confident we'll continue to generate consistent recurring revenue streams and cash flow.

It's also worth emphasizing our strong competitive footing in the M2M market, a sector that is expected to have a compound annual growth rate of 14% for revenue through 2015. Simply put, we have a significant network advantage when you consider performance metrics such as coverage, latency and throughput, and with a quick ramp of our Iridium 9602 SBD transceiver, we have lowered the cost of access, allowing our partners to develop new applications across a variety of markets.

Moving now to our government service business, during the first quarter we recovered -- we recorded government service revenue of $15.9 million, up 15% from the year ago period. We added 3,000 new government customers during the quarter for a total of 46,000 billable subscribers, with M2M data subscribers growing 80% year over year and now accounting for 20% of the installed base.

Our government business is off to a great start in 2011, posting a third consecutive quarter of midteens service revenue growth compared to a historical average closer to 6%. As Matt noted, we've developed in the last several years from being a niche supplier of products to an integral element of the US government communications infrastructure.

Just like in our commercial business, we have a robust partner channel. US government customer continues to make significant investments in devices and in their dedicated gateway as well as innovative capabilities such as Netted Iridium. This allows us to provide a unique value proposition for them that is not easily duplicated.

And with Netted Iridium, we envision an operating environment where a software-based Iridium radio channel is built into the tens of thousands of tactical radios that are already deployed across the military's communications network. While our subscriber growth for Netted Iridium was solid in the first quarter, we expect our net additions for this service to be skewed toward the second half of the year as the US government recalibrates its provisioning and support infrastructure.

Focusing next on equipment, which produced revenue of $24.4 million, a 12% year-over-year gain, resulting from strong M2M in handset unit sales. M2M unit sales grew 134% from the year ago period, due to rapid adoption of the smaller and lower cost Iridium 9602 transceiver, while handset unit sales increased 39% despite increased competition during the last four quarters. As we've discussed during past quarters, these are strong results on their own for an equipment revenue stream that enjoys better than 40% gross margins.

We are also pleased by our prospects for translating these equipment sales into subscriber growth that brings us even more profitable recurring service revenue. Higher margin service revenue drives cash flow and we'll continue to make sound decisions to achieve that objective.

When we initially formulated our outlook for 2011, we consider that we would be selling the Iridium 9602 M2M device for about half the price we were selling its predecessor. We expected higher unit sales for the new device, but thought our M2M equipment revenue would be down in 2011 because of the lower price.

Our view has meaningfully changed due to significant sales volumes, and we now expect year-over-year growth in M2M equipment revenue. Our favorable adjustment to total equipment revenue guidance reflects this positive development. In addition, we now expect to sell more handsets at a higher average price than we anticipated when we first shared our 2011 outlook with you back in December.

Moving now to our financial and operating outlook for 2011, which we've reaffirmed in key areas this morning and favorably adjusted for equipment revenue as a result of the strong unit sales in the first several months of 2011 I just discussed. We continue to 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 now project an equipment revenue decline of between 5% and 15%, which is improved from an equipment revenue decline of between 15% and 30% in our initial guidance. We also reaffirmed our 2011 outlook for subscriber and service revenue growth.

And finally an update of our capital structure and liquidity position. As of the end of the first quarter, we drew $174.7 million from the Coface facility and had a cash and equivalents balance of approximately $103.9 million. We also announced last week that we paid the $22.2 million remaining principal amount of our note with Motorola, which wasn't due until December of 2011. This prepayment will result in approximately $1.6 million of interest savings in 2011.

With that, I'll turn things back to the Operator for the Q&A portion of this morning's call.

(Operator Instructions). Jonathan Atkin. RBC Capital Markets.

Yes, I had a question about the M2M segment, if you could talk a little bit about the geographic mix, particularly applications and how you expect that to maybe trend over time and who do you view as your primary competition in this space?

First of all, we are very geographically diverse when we look at where the M2M units are showing up in the world. They really truly show up every part of the world in an extremely wide variety of applications, from maritime applications on buoys and tsunami warning devices and chips and tracking assets going across the oceans to tracking aircraft to tracking assets which travel across land to tracking oil and gas pipelines and machines like wind towers and all kinds of devices, applications, assets that are in remote territory or travel through remote territory, frankly, maybe even have a terrestrial device on them at all.

So we don't notice a necessarily geographical split. I would say a majority of the companies who are developing applications, and there are quite a number of them who embed them into their solutions, are North American and European focused, though I'm increasingly seeing Asian and South American and other companies who are tailoring devices for their applications, like ones perhaps in Brazil and other places or in Africa and a number of places around Asia or seeing growth in Vietnam in some places like that.

So it's really a very geographically diverse business, and that's just the commercial side. That's not even including the government M2M business.

So I think the trends are going to continue to stay that way. We continue to expand the partner base in specific areas. I think one of the most recent expansions is in the personal locator beacon space, which are more consumer-oriented like companies. Most of those are North American and European companies, but again they sell to consumers their products all over the world. So it's quite geographically diverse.

And then, with respect to the higher revenue guidance for equipment, are there particular segments or again geographies that are driving up the higher expectations for both units and pricing?

Not geographies. As I said in my prepared remarks, the single biggest factor is the strength in the 9602 device. The price of that is roughly half of its predecessor, the 9601. And so when we formulated our initial guidance, we thought that the unit volumes would be up, but not enough to offset the lower selling price. In fact, they are up, more than enough to offset the lower selling price, and we expect growth in the machine to machine segment in our revised guidance.

Additionally, we think we are going to sell more handsets at a higher effective selling price than we had estimated in our original guidance. So they are the drivers, Jonathan.

And on the engineering side, if you could maybe just provide an update on just the health of the constellation, I think the interest that you're seeing in the secondary payload space probably speaks to continued strength there. But anything different than you're seeing compared to three, six months ago?

No. Our network continues to perform well, we have still seven spares in orbit that -- and still in fact, every quarter brings less time between the time when we'll be launching new satellites. And so we fully expect that constellation to be healthy and providing a high quality of service. I think you remember we updated investors in December with our new radiation study that showed that that wasn't really going to be a concern. We didn't expect it to be, but we have now tested and feel comfortable that that is absolutely not going to be an issue.

So we are really just down to wear out mechanisms that are well understood and for which we have plenty of redundancies and other things to accommodate. So we are feeling very comfortable and confident about the very high quality of service our network will perform until we are launching new satellites and probably actually well into our -- I think well into the launch and deployment really of NEXT, I think our system is going to perform very well.

Great. Thank you. I will get back in the queue.

Chris Quilty. Raymond James.

Congratulations on the results. A question for you on the 9555 voice handset. The unit shipments that are up, I think you said 42% or 49% in the quarter, would seem to imply that you should see the service revenues begin to pick up in latter quarters as those units get activated. Is that a fair assumption?

And the second part of the question, I think you said in your script that you are now expecting pricing on this handsets or for the voice business in whole to be higher than your original expectation. Is that an indication that you have backed off potential pricing gas price cuts that you had planned for?

Well, let me try, I will try, and Tom, you can pick up on both. On the first question, was around the 9555 usage and everything and of course, obviously, additional units than expected add service revenues. I don't know that I would want to go so far as to describe a pickup or some sort of expectations, because there's another number of other variables, including usage and that sort of thing, and patterns and whatnot that affect that. That certainly isn't in our model.

I think all of our expectations are in the guidance that we've given out for the year in terms of service revenues and others. But -- and I think that's all sort of loaded in there. I think more importantly this sort of your second question, what does this mean, obviously I think it demonstrates that the competitive environment, which is changing, and we recognize that and frankly have been saying we've been preparing for, for quite a while, isn't quite turning out as probably maybe our conservative approach and our conservative estimation has expected it to.

The new phone that Inmarsat has is obviously selling out there but it's selling, I think, at a completely different kind of customer base than we have right now. And customers who expect a high-quality global experience are still very attracted to our phones. At prices now -- we had lowered our prices for the year, but we had expected, given ourselves room to even lower them further if necessary and don't really think that that's necessary or appropriate this time to do that.

So I think that's what Tom's comment was about we're seeing a little higher than even our expectations were, and we're selling more than our expectations were because of continued good demand for the product. I think it speaks well of our long track record and market -- market leadership in this area. And as I said, we are not leaving it at that, either.

We obviously have new products coming and a variety of new products coming in the future. And I think we can cover a number of different price points and service points, if you will, in the industry for a number of customers.

Great. And the OpenPort, I didn't really hear much of an update. Can you give us an idea of how that's [volt] sales are trending as well as usage patterns?

OpenPort continues to grow. That, as everyone knows, was a new product for us two, three years ago in a new segment that we hadn't been into. And we continue to grow sales and activations literally month by month, week by week and continue to be pretty consistent ARPUs really, too, in that sort of 450 to 500 kind of range, which is what we've always been sort of hoping and expecting that kind of product would deliver, which is significantly above other products in our portfolio.

So we are very pleased with the progress of the OpenPort. Our customers continue to see the advantages to it in terms of coverage, in terms of the additional voice lines it provides, its cost-effectiveness for many, many vessels. And so we have additional plans for that product area in the future, too. We talked about some that we have implemented already, like the service network and the warranty and other things, which I think continued to be received well. But overall, we are very pleased with the progress of the OpenPort.

I still expect to see aeronautical versions of that antenna being put into service this year?

Yes. And those are in testing now, and we continue to see a number of applications and services and business opportunities emerging on a variety of different areas there. And I think that is an area we will be talking more about the future.

Okay. And with regard to the M2M business, again, are you seeing any indications of particularly large deployments that might happen in the future, either thousands or tens of thousands of units that are in trial of testing?

Yes, there are a number of different very significant opportunities that we are tracking and for which we know our partners are pursuing or have told us about and are involved in. Obviously some of those are reflected in the good numbers that I think we are posting already, even in this quarter, and for our expectations as I think Tom described for equipment sales and expectations on service revenue and revenue growth for the year. So I think they are in there. There are some big ones that could be out there.

I think we are getting into more of a consumer type space I think in the future, and you note that that could drive higher numbers. We are also -- I think the area like the personal locator beacon or messaging space with lower costs and wider distributions could generate bigger numbers. But we are hearing a wide variety of applications that are larger than the ones we've traditionally seen in the last couple of years.

And on that final point, have you seen any broadening of partners that are looking at a chipset-based solution beyond -- I think you've said so far you've got one customer working on something?

We are in discussions with others right now about that right now, have not anything to announce or discuss. But there is certainly interest, not just in chipsets but in waveform, as well, which is something we're also considering for, probably not as much on machine to machine, but certainly in higher cost applications like Netted and voice you could see a software defined radio kind of solution that could maybe not even require chips from us but could require more our waveform, if you will, to be embedded in their devices.

So that is our strategy, is to be able to enable people to deploy an Iridium connection anywhere in the world. It's great if we sell the modular device to support it, but we are glad and certainly open to supporting any level of technology development that enables a partner to cost-effectively put our solution in the market.

And the government's M2M is up pretty significantly. Is there a specific government program that has been funded or a certain application, or is that again just broad-based sales?

No, that is an area where there are a significant numbers of potential in the future from your previous question. But really, I think the numbers are really growing because a lot of the partners who are working on products a year or two ago took time to really get to market to test their solutions completely to get certified with their customer and to start the deployment.

I just think we are seeing a wide variety of applications in a number of different areas that are starting to hit at the same time. So that is kind of the lifecycle development model. There is interest. The partnet comes to pass, they sell the solution, we sell them devices, they embedded, they spend R&D and certify it, then they deploy it. We are starting to hit that deployment cycle for a number of different opportunities that we've heard of.

Glenn Tongue of T2.

Thanks for yet another terrific quarter, and for such an effective way of removing the $11.50 overhang. That's really terrific.

Matt, I see such strong earnings and sort of powerful metrics in the first quarter, and you didn't change your guidance for the year at all. So I've got to conclude either you're getting more conservative from that or something else. Which is it?

I wouldn't say we are getting more conservative. I would say we remain conservative. I wouldn't say we are aggressive because we continue to, one, to outperform or at least perform on our expectations and potentially outperform.

We are giving a wide variety of information out, more than most companies do. A lot of companies just focus on one metric, perhaps EBITDA guidance or maybe just subscribers. We are giving other aspects of our business, and they interact in interesting ways that it's sort of hard to describe completely.

One aspect obviously in this case is that our equipment sales are going to be less down than before. But our margins on equipment are lower anyway. So it doesn't have quite the overall impact and it's still yet to be seen exactly how the service revenue numbers at what point in those range will we believe we will end up being.

So I think it's appropriate this time to put the guidance out that we have. I think it's the right kind. It's guidance we can stand behind for the year.

And just to drill down a little bit more on the Inmarsat phone, you talked about that in, I guess, Chris's question, but a key pillar of the [bare thesis] was Inmarsat taking material equipment share from the Iridium user. Do you see share -- you talked about the difference in the Iridium customer experience versus the Inmarsat.

Do you really see any market share erosion to your core customer, losing customers that are switching?

No, frankly, we don't. I have to be honest with you, we don't both see it nor do we really hear it from our key partners who sell both of our products in the space.

I think there has been a market at what I would call -- there's no specific term for it in the MSS space, but the low-end of the handset business. I think they have gotten in that space. That is probably the space in which was already occupied by Thuraya and Globalstar and perhaps they are losing share. I don't know. I don't have visibility to their business.

But frankly, we don't see the impact right now because there's a lot of obviously words out there about the relative performance of the product. And I think you just got to look at perform -- you got to look at financial performance more than that. I think our results speak for themselves right now in terms of what's happening.

So, I feel very good about where we're at and what we are doing. I think the numbers speak for that.

Yes, I agree for you. I do think the results do speak for themselves. So, thanks.

(Operator Instructions). Chris King, Stifel Nicolaus.

Two quick questions for you, I guess. One, just following up on Chris's question to a certain extent related to equipment revenues and obvious strength there. Just was wondering if you are seeing significant upside and perhaps upselling to existing customers moving from the 9601 to the 9602 type of thing.

Obviously, you've mentioned significant growth rates in the M2M unit sales, I think 134% kind of year over year. I guess that would imply some upselling to existing customers. Just was wondering how that was trending related to the expectations that you had at the beginning of the year. And second question I guess, more of a housekeeping issue, the next expenses in the quarter looked to be up I guess about $1 million or so sequentially.

Just was wondering how we should think about trending that going forward throughout the remainder of the year.

I will leave the second one to Tom. The first one, no, that isn't the way really the M2M business works. It isn't a transfer from one device to the other because the 9601 is a perfectly good device. It performs extremely well, and when it gets put into a device in a remote environment, it's going to work for many years and perform good service. I think what you're seeing, though, in terms of this is that the new device, which is quite a bit smaller and less expensive and is very attractive to the customers, is that they did move to it because it costs them less money to buy, which means that they can charge less for their product, which means that they are more attractive to their customers. And so that all flows back to basically more demand and more volume in terms of the kinds of applications.

We might be addressing certain applications we couldn't have seen ourselves -- our partners go after before, where they were using perhaps low-cost alternatives that came from other customers. I think that was a question I realized I didn't completely answer from Jon, who is our biggest competitor in this space?

I would say originally, Inmarsat was in the space, but frankly the real players in the last couple of years have primarily been OrbComm, ourselves and to some extent Globalstar too in their Simplex business or their one-way product. I see right now that we believe we have the most momentum, our performance, our cost structure, the two-way nature, the -- really all the attributes or partners are telling us that we are the premium product, but we don't necessarily have a premium cost anymore.

I think that's all going into the fact that if you're looking to expand your solution set beyond a terrestrial type M2M solution into satellite, you're probably going to be looking at us probably more than others. But I still think there's a lot of room in this market for other players. It's not like we are constantly running into the same people and the same bids. I think there is growth in other people's areas, too, because it's just such a big expanding market that we just happened to be very well positioned in it.

And I will let Tom into the NEXT expense question.

Right. So if you look at the year-over-year quarters, net NEXT expenses were $3.3 million in the 2010 quarter and their $6.2 million call in the 2011 quarter. Substantially all of that increase relates to the undrawn fee on that Coface facility. It's .008% of the undrawn facility per year is the fee and that works out to about $3 million in the quarter.

So the $6.2 million is a decent number to use going forward for the remainder -- ?

I think that's a decent run rate, yes.

Thanks.

Jeff Matthews, Ram Partners.

Thanks very much. Two questions. You talked about applications being developed for the 9602. Could you give some specific examples of new applications?

And then secondly, on the containership market, are companies developing applications specifically for the containers themselves? Because that's where it would seem to me the mother lode is. Thanks very much.

Thanks, Jeff. Yes, it's a couple -- it's a very diverse market with lots and lots of applications. It's always easy when you can just say it's the X product and everybody knows what X is, and they can think about that. But in this case, I bet there's hundreds potentially of solutions out there. But we do see it in as far as new applications for it we are seeing it get into another, more of a communicator kind of space.

I hate to use the word BlackBerry, but think about is a very powerful two-way kind of messaging device with GPS to allow police, military individuals to find themselves and to contact and interact with others doing things. And that's a much more broader market, particularly if you're talking about something that might cost hundreds of dollars instead of thousands of dollars. I think that's one of the broadest ones.

But I can tell you a lot of the existing applications, whether it's a buoy in the ocean or a truck tracking application for trucker monitoring or whatever it might be, those have all benefited and are expanding really because their solutions now are less expensive. And so they can sell more of them expand their business.

I'm not sure how to describe it any other way than that. I'm always surprised -- sometimes I don't even know what our products are being used into, because it's a module and really, frankly, one of the great parts about our business model, we don't have to understand every aspect of the end partners customer base, what their certification R&D sales requirements are, because they're doing a lot of that work.

And then they tell us about it when they are -- and sometimes we're finding out about them after they've already been developed and have become very successful. I think that was your first question.

The second one was --.

Containers themselves as opposed to the ships.

Yes, there are a couple of container partners in that space. The name of the company? Yes, Cubic Tracking Systems was one. I think there's a couple others that are -- have deployed the 96 or deploying the 9602 in that application. I agree that's a high-volume application, particularly for valuable assets. I've seen it on refrigerator containers. Those are quite important to be tracking on an ongoing basis because you lose the refrigerant, you might lose the whole pallet and it's important to keep track of it.

I know we also see it in military logistics systems for tracking containers in that case. We are seeing some regulations in this area and potential regulations in this area where it's not enough to just have a manifest and say what the ship is containing when it comes to the poor, but you would like to be able to track it across the ocean to see if anyone opened the container and to be able to report on that real-time and monitor. Some partners are offering those kinds of services.

So if there is -- one aspect of that was price. Those are very price-sensitive markets that are hundreds of thousands if not millions of these containers. And to think you could put it on every one, you really, really want to get that low cost.

So I think the 9602 is starting to get into that price category, but it may not be there. It certainly is there for valuable applications. If somebody came along at high enough volumes, it might be there, but it's probably -- I think that that continues to become a good market for us going over, especially as solutions get less and less expensive.

Okay, great. Because my understanding is that these guys have no idea where the containers actually have been or where they are until they actually go through a gate. And --.

You're right.

From a security point of view, it would be terrifically helpful. But, okay.

As you know, security has become even more important over the years, and it is becoming more valuable. And there's a lot of other things that there's a lot of. Generators, power generators, whether it was in Japan recently or in Haiti. Katrina was a good example where literally thousands if not tens of thousands of power generators get put in the market and then somehow go missing and nobody ever finds them again or can't figure out where they are to even fill them with fuel because people move them around.

And that's just another idea of an application that people are developing solutions for. And they're doing the same thing for trains and trucks and lots of other things. So we're starting to see potential applications in high-end vehicles for airbag deployments and, if you will, satellite OnStar capabilities, etc. So there's just an awful lot of applications.

Okay. And I guess in sum, have you been somewhat surprised at the price elasticity (multiple speakers)?

Do you mean in terms of the 9602 being less cost and therefore driving more applications?

Right, right.

Not really. We knew over the previous years that we were not winning things because even though we had a premium service experience and our customers liked that it would work anywhere and it was two-way. They just couldn't -- they didn't like the price of the 9601. We know the price of our 9602 and that's one of the reasons we invested so much in it, was going to be attractive.

So I guess it wasn't a complete surprise. But what we don't know is exactly how many people, how fast would be attracted to it. And so I guess we are pleased, if anything, if not maybe a little surprised by the volume increases that we've seen in it.

Got it. Thanks very much.

Amy Young, Macquarie.

Thanks for taking my question. Just turning a little bit on the handset side, are there any particular areas where you're seeing strength either in markets where your handsets are considered mission-critical or maybe in recreation? Also, can you talk many trends you are seeing in April and a little bit in May, given the seasonal strength? Thanks.

Well, it's hard to exactly see that because as a wholesaler we go through a wide variety of distributors, retail distributors that more tell us anecdotally. So it's not so much that we have that end-to-end exact view. But we do hear and understand from them that a lot of the -- what we call mission-critical, a lot of people that use a satellite handset in the world think of themselves probably even more mission-critical than we think of them. If you're going to be a remote place, you don't want to wonder if you're going to be in the coverage area if it's going to work because it may be a hazardous remote site.

So I think you find a general proclivity actually for people who are attracted to satellite voice and data solutions to go for quality. And if given a choice, they are going to -- I think they're going to be attracted to something they're absolutely sure is going to work, not something that works pretty well.

That is showing up in the numbers. I think it's -- I don't know if I could describe a specific market set. Certainly first responders are going to think that way. I know they're attracted to low price if they can get it, but I think that they'd be quite embarrassed of a natural disaster occurred or some reason where they really needed to depend upon that phone and found that it wasn't as usable or required a lot of effort to be as good as it was.

So I'd say that's more -- and then I don't think we really should go any further than what we've talked about. Overall, I will say, though, that there is seasonality in our business. There certainly is, second and third quarters are higher volumes typically than the first and fourth quarters, mainly because I think our traffic, while global, is slightly more skewed to the Northern hemisphere. And so you start seeing fishing vessels and more people outside and so I think you will see there is a seasonality. I think a lot of people have modeled that in. Hope you have.

But -- and by the way, thanks and congratulations on your new report. I certainly appreciate it. But I think that that's probably all I feel he can say about that right now.

Okay.

Jonathan Atkin of RBC Capital Markets.

Thanks. I wondered if you could maybe update us on the exposure of your business to one-off global events, either for 1Q or since then. How do we think about the magnitude of that? Is it at all material?

Give me an example of one-of kind of events you're talking about.

Japan, Libya, that sort of thing.

Good things -- usually that question could be interpreted other ways. No, obviously, Japan had a positive impact on us in the first quarter, but I would say was not an overwhelming effect. We are getting large enough now that any specific disaster ends up -- I do believe for the first week or two, we were absolutely critical in Japan and were used extensively. We could see it in our traffic numbers.

Over time, though, people get their terrestrial systems back online or perhaps other systems like VSAT or something come in and possibly provide a little longer term solution. So I think it was positive. I don't believe it was that drama -- I mean, I think our increases for example in our equipment sales weren't that dependent upon that though I think we did see a bump there.

In that case, our partner, KDDI, which is I think was pretty well-prepared -- they had lots of phones, they needed more. They provided them. They had uses, by the way, not just for voice phones but for other things -- tracking, helicopters, fire and rescue. Of course, we were used in tsunami buoys.

So there's a lot more things we were participating and supporting this time around than I think in previous years, where it was really about SAT phones. But again, we moved on. I'm sure we're probably being used right now as floods are occurring in North America. I'm sure we're being used around the world because there seems to be something happening all the time. And I think it's an ongoing business.

If anything, I can't tell you how many people come up and said, Boy, I think I need some kind of satellite solution, after Japan, because I think it was an eye opener again for the world that even in the very mature places that are well-prepared for disasters, disasters happen. And they happen on a regular basis. And so that is why you need a complement to the terrestrial infrastructure.

Great. Thanks a lot.

Chris Quilty, Raymond James.

A follow-up on the government part of the business. It looks like you had a small number of DTCS or Netted Iridium sales in the quarter, but is it fair to assume we shouldn't see significant numbers shipping into the back half of the year after the phase 3 contract is completed?

Yes, it's actually not say 3-related as much as it is our customer telling us that there is a lot of demand out in the field for it, so they had to satisfy that demand earlier. But they hadn't completely got all their systems in place to support it in the way that they would like. Training systems and service and support and those kind of systems that are traditional for a core business, it was fielded initially almost as an experiment and then realized what demand there was for it and the interests involved in it from across the theater.

In fact, we've heard it's not just being used in places like Afghanistan, but it was used and it's been used in Alaska. It's been used in Japan. It's been used a lot of different places. So, I think there's a wide demand, but there's really been a slowdown where the systems are coming in place.

So I think it's those phase 2 systems or the current systems will continue to deploy over the next year. But I think it's more of a second-half deployment according to the customer on their schedule. And then I think more phase 3 happens more next year, I think, is when that probably starts coming to pass. So I think that will even generate even higher levels of interest.

But there's enough demand that I think keep driving some more additional phase 2 sales, if you will, until it evolves even further into phase 3.

Okay. On the air traffic control hosted payload opportunity, do you have a sense at this point of what the financial structure that would look like? As I understand it, it's not going to be an FAA or government-funded effort. It would have to be funded by yourself or other companies.

So does it still allow for this sort of upfront cash payments that you've been looking for in a hosted payload program? And what do you see as sort of the longer term ramifications or revenue opportunities from that type of a system as deployed?

We do have an idea. We have a strategy on how to do that and we are working that extensively with partners and advisors and many others about how to do that. While it may be different than maybe we had contemplated in the past, other kinds of payloads that were also still working that might be more directly government-funded.

I don't know that it would necessarily change our overall expectations for pre-NEXT launch revenues or post-NEXT kind of revenues. I think overall, we see maybe structures in that sort of deal that is still consistent, even though it might be a slightly different financial structure or contracting process or whatever. I don't know that it's appropriate to go into a whole lot more detail because we are really still in the midst and throes of that.

Certainly we will tell you more as we have it or as that becomes a payload that we deploy.

Okay. And quick questions for Tom, the Motorola payment. That's not reflected in the current balance sheet as (multiple speakers).

No, it's not. No. We just did it last week, Chris.

And so words that come out of? What line item?

Payable.

Notes payable.

Okay. And you had a little bit of a jump in other assets. Was there anything in particular in there?

That's debt service reserve account.

Okay. That's it for me. Thanks, guys.

I am showing no further questions at this time. I would like to turn the call back over to Matt for any closing remarks.

Well, thanks. Those are great questions. I think that was a great call. I really appreciate everyone's joining us for this and we look forward to seeing you in the next quarter. Or before. Thanks, everybody, for joining us.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.