Iridium Communications Inc (IRDM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iridium third-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; instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Mr. Steve Kunszabo. Sir, you may begin.

Good morning, and thanks for joining us. I'd like to welcome you to our third-quarter 2011 earnings call. Joining me this morning, our CEO, Matt Desch, and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of the 2011 third-quarter results, followed by Q&A. You'll have an opportunity to review this morning's earnings press release with the summary financial statistics shortly, 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 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 discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today. And while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our 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 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. This morning, as you've seen, we announced results that were characterized by record operational EBITDA of $55 million, and for the first time in our history, total quarterly revenue of more than $100 million. As a result of our continued strong performance and future visibility, we've also raised key elements of our 2011 guidance. And, as you can see, we're knocking on the door of almost $200 million in annualized cash flow.

These are important milestones when you evaluate our fully funded plan for Iridium NEXT, and you'll hear more on that later from Tom. Put simply, we've consistently executed against our capital, operating, and strategic targets for many quarters and years, and we feel better than ever about our competitive position and path forward.

Despite continued economic and capital markets uncertainty, we kept our heads down and stayed focused on our most important task -- growing cash flow and translating that into value for our shareholders. We're confident that we'll continue to deliver on all the short and long-term targets we've shared with you, and that the markets will ultimately recognize the full value of Iridium.

In terms of how we continue to win, let's review the basics before I share our new initiatives in progress with you. First, we like our markets and our competitive position. They're fast-growing and have high barriers to entry.

Second, we're not just a mobile satellite business; we're a global communications company, driven by the fundamental need to connect anyone and anything all over the world. The global reach, flexibility, and health of our current network allows us to do just that, better than anyone else.

Third, we're obsessive innovators. It's always about expanding and improving our service portfolio. It's no longer about offering a single handset, but a suite of personal communication devices that now include the Iridium Extreme, our new premium phone; the Iridium AxcessPoint, a WiFi hotspot accessory; and location-based data services. We're developing new products across the board, including the smaller end-to-end device, enhancements to our Iridium open port maritime solution, and new voice offerings.

Fourth, our partners are energized. They can sell more of our services and make higher margins. Plain and simple economics drive them to pull Iridium products off the shelf first.

And finally, our superior network continues to perform well. Boeing does a great job managing the health and operation of our satellite constellation, a role they've filled for the last 11 years. Through the Boeing partnership, the availability of in-orbit spares and the many other redundancies built into our current network, we remain confident that our customers will have a smooth transition to Iridium NEXT beginning in early 2015.

In our commercial business, a quick look at our numbers in the third quarter demonstrate what a strong, growing business we have. We grew net voice subscriber additions 25% year-over-year, with 10,000 net additions in the third quarter of 2011 versus 8,000 net additions in the third quarter of 2010. So we actually accelerated customer additions on an installed base of 305,000 subscribers, despite nearly two years of increased competition.

We've recorded at least four consecutive quarters of year-over-year, end-to-end data customer growth above 50%. This segment now represents more than one-third of our total commercial subscribers. We increased service revenue 12% year-over-year, with solid contributions from products across all of our vertical markets. This represents the strongest quarterly gain we've had in 2011.

In the voice segment, it should be clear by now that we not only have the ability to defend, but grow our leadership position. The last two years have shown that while a low-cost solution may have its place as a niche offering, the overall business seems to be highly priced and elastic, and wants the truly global, truly mobile product that only we can provide. This plays to our core strengths in attracting the highest-value customers.

We give these customers, who represent a majority of the market, choice with an expanded portfolio of personal communication devices. We give them flexibility, making it possible for them to send email messages and update their Facebook status via their smartphones. With our partners, we develop applications that really matter to our customers' daily operations. These include geo-fencing for a crew on the fire line of Texas and a tracking portal for the site boss on an oil field or a mining job.

The high-growth numbers I just shared for this business don't even consider the potential positive impact of service revenue from our products like our recently-launched Iridium AxcessPoint. These new solutions not only give us competitive flexibility in how we go to market and price our offerings, but should bolster usage of our network, support ARPU, and capture new high-margin service revenue.

It's a similar story in the end-to-end sector, where M2M customers have grown to 34% of our subscriber base and 16% of our commercial service revenue. We've only begun to scratch the surface for a myriad of enterprise applications and personal tracking devices aimed at the consumer market. Just as in our voice business, global coverage and low latency matter. Customized solutions for the requirements of different vertical markets distinguish what we and our partners bring to the table.

One of our newest partners, KORE Telematics, integrates us into an oil and gas pipeline monitoring system for one of its customers. The network has to be reliable; the traffic has to be without delay; and it must work anywhere in the world. When you're monitoring an industrial pipeline in a remote area and it ruptures, our customers can't wait an hour to take action. This is the essence of the value that our customers recognize. This is why we're confident in our future prospects and competitive position in the M2M market, that is expected to see compound annual growth rates in the high-teens for at least the next few years.

As for gaining traction in the consumer space, our results don't yet factor in exciting new products such as the one recently announced by DeLorme. The value proposition and market opportunity here is pretty straightforward -- DeLorme will launch its inReach product this month, with an attractive price of approximately $250. It, of course, comes with global coverage powered by Iridium, and advanced messaging and data service features. Perhaps what isn't fully appreciated yet is that it's the only device positioned for consumers with two-way communications capabilities.

Hundreds of thousands of consumers currently use competing products that don't have global coverage and can only send traffic one way, because they don't have a better alternative. With a uniquely differentiated product in a market this big, we're excited about this new channel, further bolstering M2M growth.

Turning now to our government operation, which continued a string of solid quarters on the back of M2M growth and good netted Iridium orders, our government service revenue profile is now diverse, as we're no longer just selling a single handset or application to this important customer.

We're viewed as a critical partner in the communications infrastructure, and money that we believe is viewed as well-spent even in a shrinking defense budget. With an expanding portfolio that includes M2M and Netted Iridium in addition to traditional handsets, and with opportunities like iGPS and specialized tracking devices on the horizon, we're fortifying our competitive position in this business. While we'll continue to monitor geopolitical trends and the impact they may have on this segment, we believe that the government business will remain an important contributor to our overall long-term growth.

Moving finally to our Iridium NEXT and hosted payloads progress. We're close to completing the preliminary design review for the new satellite system, and Thales continues to make good progress for our Iridium NEXT build. We're still on track to begin deploying Iridium NEXT in early 2015, just a little more than three years away.

As for our hosted payloads opportunity, with a preliminary design review for Iridium NEXT nearing completion over the winter, we're getting closer to that critical threshold of narrowing down and selecting the most attractive missions. We've spent lots of time in the last two quarters emphasizing the global air traffic monitoring opportunity, and that's developing nicely. But as you've seen in the press, the range of potential outcomes is actually wider than that, given the number of additional and alternative products we're considering.

The list of these missions includes everything from scientific applications, such as the NASA Deep Space Atomic Clock Research payload and the Johns Hopkins APL mission to study climate change, to various other government missions. So it's coming down to crunch-time for us to make a decision on one or a combination of these missions. I've made this a personal priority in making sure we get across the finish line on time.

On closing, we've had a busy 2011, marked by innovation, robust growth across our key business lines, good execution in meeting or exceeding our financial targets, and substantial improvements in our competitive position. While we're not giving a specific outlook for 2012 today, we're better positioned than we've ever been for growth across the board in the year ahead. I look forward to a strong finish and to updating you on our progress when we speak again in early March.

So with that, I'll turn it over to Tom for a more detailed financial review. Tom?

Thinks, Matt, and good morning, everyone. As Matt discussed, we announced third-quarter results this morning that included a few key financial milestones, while also raising our 2011 financial outlook. This ongoing success comes from our particular strength in the highest growth segments of our market, having the superior network, and a sustainable set of product-related competitive advantages anchored by a hungry partner channel. We're executing well and staying focused on both our near-term performance and increasingly certain path to generating internal cash flows, which support the Iridium NEXT build.

On to our results, before I take you through our upwardly revised guidance for this year.

Iridium generated third-quarter total revenue of $102.1 million, and robust operational EBITDA of $54.6 million, yielding growth of 8% and 16%, respectively, from last year's comparable period. Our operational EBITDA margin was 53% for the third quarter and expansion from 49% in the year-ago period. Third-quarter net income was $11.3 million. This compares to a net income of $10.7 million for the year-ago quarter.

From an operating viewpoint, we reported commercial service revenue of $53 million in the third quarter, representing 12% growth over last year. We added 28,000 net commercial customers during the quarter for a total of 459,000 billable subscribers, with approximately 18,000 of these net additions coming from the machine-to-machine business, and 10,000 from the voice market. Commercial machine-to-machine data subscribers now represent 34% of billable commercial subscribers, an increase from 27% during the year-ago period.

As Matt shared, we're very pleased with our performance in the commercial voice business this year. Low-priced offerings from competitors have clearly not resonated with our customers. Our subscribers want advanced features that are available anywhere in the world, exclusively on the Iridium network. They want to be able to use their iPhone or laptop when they connect, and expect simplified global connectivity. We're the company that best delivers this differentiated experience to them, and they're willing to pay a premium for it.

The same is true in the M2M segment. Global coverage, network performance, and customized applications are critical to the operations manager, at a remote job site, using heavy industrial machinery. The ROI is clear in this example -- reduced equipment downtime; more efficient deployment of assets; and operator safety, all of which adds to the bottom line for this customer. We've also begun to stake our claim in the consumer market, and have received a great reception to our 2-way personal communicator devices for many of our consumer, enterprise, defense, and specialty partners.

Turning now to our government service business. During the third quarter, we recorded government service revenue of $16.3 million, up 6% from last year's comparable period. We added 1,000 new government customers during the quarter for a total of 49,000 billable subscribers, with machine-to-machine data subscribers growing 83% year-over-year and now accounting for 22% of the installed base.

As we've shared with you in the past, the customized voice and data solutions offered by our partners allow our government customer to achieve a level of operational readiness and mission effectiveness that other network operators simply can't support. In addition, the US government continues to be a development engine for new products and services, that will be fielded by them first, but also have great crossover potential into our commercial markets. To that end, we expect a substantial increase in our R&D expense during the fourth quarter, which is reflected in today's operational EBITDA guidance update, as we boost spending on several projects with high expected returns.

These projects include new handset functionality based on the Iridium Extreme platform and our next-generation machine-to-machine device. So, even with this increased R&D spending, we're raising our full-year operational EBITDA outlook for 2011.

Focusing next on equipment, which produced revenue of $25.9 million, this represents a 4% year-over-year decline that's largely based on a tough comparison to the year-ago quarter, due to an anomaly in that quarter filling backlog orders. You'll recall that we anticipated this during our second-quarter earnings call. We actually did much better than we expected during the third quarter, and as a result, are raising our equipment revenue guidance today. We continue to see healthy demand for our devices, as overall unit sales grew 32% during the third quarter, and equipment margins approached nearly 47%.

Moving now to our financial and operating outlook for 2011, which we raised in several key areas this morning. We now expect operational EBITDA of approximately $190 million for the full-year 2011, which would be 20% growth when compared to the $159 million we achieved in 2010. This robust growth in 2011 would come behind similarly strong 19% operational EBITDA growth in 2010, and 21% growth in 2009. On the same basis for the full-year 2011, we now project the following -- total billable subscriber growth to be approximately 25%, up from approximately 20%. This also follows a compound annual growth rate for subscribers of 24% between 2003 and 2010.

For equipment, we now expect approximately flat revenue, up from a decline of 5% to 15%. With the benefit of hindsight, we now know that we began 2011 with very conservative equipment guidance. Our original outlook considered a potential competitive threat to our commercial handset sales in our transition to the lower-priced Iridium 9602 machine-to-machine device. It's now clear how formidable our competitive position really is in the voice market, and how successful we've been growing unit sales in our machine-to-machine business.

We're also affirming our previous guidance for commercial service revenue growth of between 10% and 13%. And finally, an update on our capital structure, l position, and fully funded plan for Iridium NEXT. As of the end of the third quarter, we had drawn $325.3 million from the COFACE facility relating to payments we've made to Thales, our prime contractor, for their successful completion of contractual milestones to Iridium NEXT. We had a cash and cash equivalents balance of approximately $124.8 million.

As for our fully funded plan for the approximately $3 billion Iridium NEXT build, I'll ask you to consider the following key points. Our $1.8 billion COFACE credit facility is a contractual obligation of a diverse syndicate of banks. Substantially all of the loan is backed by the French state. It's also worth reminding everyone that we don't take all of this debt onto our balance sheet at one time, but rather draw on the facility in increments through 2015, as we're building Iridium NEXT and growing our operational EBITDA. We expect peak NEXT leverage between four and five times in 2015.

Our updated full-year 2011 guidance for operational EBITDA is on the cusp of $200 million. This performance builds on many consecutive years of growth at a compound annual growth rate for operational EBITDA of 26% between 2005 and 2010. We think our prospects for continued growth are excellent, given the projections for growth in our key markets and our strong competitive position.

Having said that, if you simply assume annual operational EBITDA of $200 million through 2017, which implies virtually no growth from our current run rate, it yields $1.4 billion in cash flow. As we continue to achieve higher levels of operational EBITDA, we believe we're setting new floors for the level of cash we'll generate over the period we're constructing and paying for Iridium NEXT.

This is particularly true when you consider that we expect cash taxes will be negligible through approximately 2020. You'll recall that during our Analyst Day presentation last December, we stated that we didn't expect to pay cash taxes between 2016 and 2020. We're providing this additional guidance regarding the 2011 through 2015 period to give greater clarity on the funding of Iridium NEXT. In short, we're more confident than ever in what the coming years hold for our business, and our ability to translate that increasingly certain future into shareholder value.

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

James Breen, William Blair.

Thanks for taking the question. Just a couple of questions. Can you talk about some of the new products that you've got out there, whether it's the hot spot or the new DeLorme product that I've seen quite a few advertisements for? Additionally, any changes in terms of the relationship with the US government in terms of some of the services you're providing for them? Thanks.

Well, there have been a lot of new things coming out recently. I note that something like more than 40% of our revenues comes from, in the last three years of our service revenue growth, has come from new products. So it's very important that we continue to deliver. And we have a continued R&D program that will continue innovating and delivering new things.

But yes, the Extreme handset has just been launched. I guess, you remember that about a month and a half ago or so. It's just starting to ship, so it's still very early days. We have some activations, but the response for it has been very, very positive and, in fact, has exceeded our expectations in the early days, of the number of orders that we've seen coming from the partner channel.

I think one of the big reasons is that it has an open location-based services interface and our partners can even develop more revenues and services by using it. The AxcessPoint, the WiFi hotspot, has generated a lot of interest too. I know that probably was the most unexpected part of this year's announcements. But it's unique because it really could be an ARPU generator in the future, because it makes it real simple to do mail and Web over our system. You could always do it but it was sort of complicated. And this really makes it simple for people to use their smartphones and the product in their Pocket.

You mentioned the DeLorme. That's actually one of our partners. One of the things that people don't realize is with over 250 partners, there's constantly new products coming out from them, going to all the different vertical market channels. We've not really been in the consumer space before. We've been more of an enterprise -- defense, government services, utilities, et cetera. But moving -- and, in fact, we don't want to be in the consumer space ourselves. We don't want to develop the infrastructure, the marketing dollars, et cetera, to be a consumer player -- but our partners can.

And someone like DeLorme is well-regarded in that space. They're winning all kinds of awards for this inReach product that they've come out. And we're kind of excited with the price point and the value that that comes, because it really does bring a brand-new capability in a space that's already been proven already -- this emergency navigation and locator device space. So that's pretty exciting.

It's coming out this month in time for Christmas, so we're expecting to see orders start to ramp up and activations start to ramp up for that. And I expect we'll see other products as well, because that's one of the things we do, is we provide that core capability to our partners, and they deliver it into services, and there's competition.

As far as the government, you asked about the relationship with the government, I'd only say it's been continuing to be improving, I would say, very positive. It's obviously a very uncertain time for the US government with their budgets, but that doesn't really change our core fundamental relationship with them as being critical to their operations.

I know one of the questions probably out there is what does Afghanistan and Iraq do? And as you can see so far, not much -- it really continues to -- I think it's because -- not just to the importance of our business, of our products to them, because we do what they can't do, but because we're diversified. There's more areas that the government has been using us in, and that allows more products like M2M and Netted to really pick up for any potential slowdown in voice, which we haven't seen yet but sort of expect at some points in the future. So we're still expecting to see government growth in the future.

Great. And then just one follow-up. There's been some press recently about some of the news services being offered in the commercial airlines space around WiFi and so forth. I think I read somewhere that someone is going to start offering a satellite-based WiFi service where you can stream movies to the seats, to the iPads and such devices. Can you talk about any interest you've seen there? Any partnerships that you've talk about in terms of moving more to that area?

Yes. Well, I mean, first of all, we've been in the aviation segment for the last six, seven years, and in fact, probably are the volume leader in terms of being on aircraft, because we have the lowest cost solution for voice and low-speed data. So that's been sort of a core part of our business on helicopters and corporate aircraft.

It was only recently that we've been now certified by the FAA, approved by the FAA and international bodies to be put on airliners for what's called Aviation Safety Services, which means we can replace systems like high-frequency boxes they've had in the cockpits to provide data connection for flight plan exchanges and other communications. We're lighter and we work everywhere instead of the operations. So we're going to be in more and more cockpits with our core voice and data technologies.

As far as -- you mentioned WiFi in the cabin. Our products aren't optimized for that. Most of the products you see going out there -- in fact, I saw one last night, I think it was Continental and United moving to a KU-band system. That requires very, very high bandwidth. And in fact, at very high cost. So the cabin is a completely different system. That's more provided by what I would call the fixed service providers -- fixed satellite services providers as opposed to us.

Our focus in the airline segment is more on the cockpit, where our systems, because they're reliable, low-cost, and really bring value to the airline operator, can be used for things like electronic flight bag updates, so they don't have to carry all those paper charts, and they can be automated -- automatically updated; certainly things like flight plan exchanges; maintenance data -- that's really our strategy in that segment.

I expect, as we move forward, we'll probably move into the back of some aircraft, primarily more like regional jets or larger -- I mean, or I'd say smaller carriers in the very value-oriented segment. But we're really never aspired to really go on what I would call the Internet part of the IFEC world -- In-Flight Entertainment and Communication segment.

Great. Thank you very much.

Jonathan Atkin, RBC Capital Markets.

I wondered if you could talk a little bit about the EBITDA guidance and the implication for 4Q, and how conservative that -- how would you rebut the allegations that that seems quite conservative, given the implied quarterly decline? Is there seasonality here? Or what are some of the factors?

And then on unit growth, this is a general comment -- if you could talk about your different segments, how much of that came from market expansion versus displacing competitors?

I'll take the first question, Jon. There is seasonality. If you look at 2010, we moved down sequentially from 47 in EBITDA to 42. So if you add 190, that would be a more pronounced step-down. That's why we gave the additional color around increased R&D spending.

Yes. And for the latter part of that, so I think it's almost all market expansion and growth really. And for newbuilds and new opportunities, I'm sure there's a little bit of replacement, particularly some of our own technology in the maritime segment, and a primary competitor of a little bit of unit sales, in terms of some replacement of what I call narrowband technology with higher-speed data technology. But for the most part, it's all really mostly about growth.

I don't -- in the end-to-end sector, I think we're getting a lot of the new opportunities and newbuilds, because we have, I think, the best value proposition right now in that space. It doesn't mean everybody can come over, because other competitors have been built into systems for a long time, and people don't want to change us necessarily, or don't want to necessarily spend money, even if we're a better opportunity quickly. But I think some of those, we have -- I know we've got more net takeaways in that segment, and I'm not really sure we've ever lost any business, really, to competitors in the M2M segment.

And clearly, in the voice segment and handsets, again, I think that's new expansion; the replacement of the Globalstar systems was years ago, for the most part. I don't -- I think this is really where we're getting most of the new growth, particularly in the mid to high range segments. So I think that's really not takeaways either.

And then on the R&D, if you could maybe elaborate on what's causing you to spend more versus your partners, who usually incur the development costs and devices. Is your R&D -- is it device-related, back office systems? Or can you maybe provide a little bit more color on that?

Well, it's kind of across the board. As I said, with I think a big part of our success has been the fact that we've continued to bring new products to the market that are lower-cost, that are lighter, smaller technology like AxcessPoint and Extreme this year. We have an evolution planned for even M2M. We're not stopping with the 9602. We have new products, and actually new voice and data services that take advantage of our unique constellation, and can deliver new capabilities to different market segments that we think are going to be real attractive in the future, too.

So without giving you all the different things we're working on right now, and I think you're going to continue to see new products coming out of us that will help us maintain our differentiation and our competitive advantage, and lengthen that. So, Tom did mention we're spending a bit more in fourth-quarter. I think it's because we had some really good opportunities we want to go after, that we think will really bring high value and continue to keep the growth going.

So we're -- it's not a temporary, I mean -- I don't think it's a long-term increase really in our overall spend. It just happens to be there's probably a little bit more in fourth-quarter than you might expect, which is probably why we're there.

Thank you.

Chris King, Stifel Nicolaus.

Thanks for taking the questions. Just two of them for you. I guess, first of all, without getting too specifically into any guidance for 2012, just was wondering if you could talk a little bit about the equipment revenue trends, and how we should think about those going forward. Is that something where we should anticipate a little bit of a step-down in going forward into 2012, specially when considering how strong that line item has been, at least year-to-date, even versus your previous beginning of the year type of guidance there? How you see that playing out in the intermediate term.

And then secondly, just was wondering if we could get a broad-based look at the Iridium NEXT expenses -- OpEx versus CapEx, and how we should expect to see that ramp over the course of the next couple of years, I guess, from a CapEx standpoint. And how we should think about the trend from an OpEx standpoint. I guess you guys did a little over $5 million in the quarter here -- how we should expect to see that trend going forward over the next several quarters. Thanks.

Well, I mean, on the first ones, obviously, we're not going to give guidance today. We'll do that sometime early next year, but we'll -- in terms of any specific segments. But you're right, equipment -- as Tom said, the equipment sales were probably higher than we originally expected. We expected more competition. And we did lower our prices somewhat, particularly in the end-to-end sector, where we came out with a brand-new product that was almost half the cost of the previous product.

And so it was going to -- we're going to have to ship a lot more of them to make up the same level of revenues. It turns out we did. And the impact of that has been mitigated, because it's been very attractive and the take-up in the market has been good.

I still think volumes are going to expect to be good going forward because the products are attractive. We have more products in the voice segment than we did before. We have multiple products. We have M2M products. So I don't expect big, big changes really; more kind of technology we bring out, the better it is. But I don't want to give what that necessarily means, because we still have to run the numbers in terms of the pricing for next year, volume. But there isn't -- I can tell you from a quarter perspective, there hasn't been major changes really in the behavior of the markets about our equipment.

So, you want to talk about [the NEXT] and CapEx?

So, Chris, I would direct you to our Investor Day presentation from last year, where we showed pretty much year-by-year how that's approximately $3 billion cost [that] Iridium NEXT comes in. We started to spend on it in 2010 and it will be complete in 2017. And we've given pretty specific year-by-year guidance there and we can send you that presentation. I don't have it in front of me but it's readily available. That's one.

And as far as expenses, the single biggest expense in the $5 million that you referenced is the undrawn fee on the COFACE facility. So that should come down over time as we draw on the facility, it will be less than an undrawn fee. And the other expenses, they've been running in that [three-ish] a quarter level and we don't see a material change there.

Thanks.

Brian Ruttenbur, Morgan Keegan.

A couple of questions. On the D&A, you expect then at the -- just to summarize the $26.8 million is the number that you're going to be using going forward is a pretty good number? Is that correct?

Yes, in that area. It's going to be influenced by additions to the extent that we open up Gateway in Russia. There'll be some capital expenditures associated with that, that will impact depreciation and amortization. But that's a good estimate.

Okay. And then I know that you're not going to be paying cash taxes, but your tax rate did spike in the quarter, and you expect it to, on an income statement basis, resort -- come back to some kind of a stabilized level going forward?

Right. It was -- it spiked for a couple of discrete items in the quarter, but I would say 200 bps below where it is in the quarter, it feels like a steady-state rate. And that's a book tax rate. Obviously, we, as most companies do, have differences between book and tax, and that's why we're not -- we don't see ourselves as a material cash taxpayer for some time. But we'll obviously put up the book tax expense and the difference will go into deferred taxes.

Okay. And then if you could talk about hosted payloads, give us an update, what's going on there? Has there been any movement forward with the hosted payloads?

Well, there's been a lot of movement, in fact. I'd say we spend a lot of our time right now, primarily, as I said, due to the timing, that it's really in the next couple months that the selection and the announcement probably of exactly what will be flying with us and how much and where, and the impact of that will be.

Not much change in terms of our optimism and positivity about the potential there. If we've learned anything, it's we have a very valuable property anyway, to offer the industry in terms of Leo -- interconnected Leo that's very close to the earth, is very unique and very valuable. And we expect it to be -- expect to do something with it.

As I mentioned in my remarks, there's a number of different opportunities. And really what gets over the line, if you will, what we talked about, that's still yet to be decided. There's a lot of moving parts and a lot of activity going on. And we'll just have to ask you to be patient and wait for that announcement anyway.

Thank you very much.

Chris Quilty, Raymond James.

Tom, did I hear you confirm that you're moving forward with the Gateway in Russia?

That is a -- I mean, it's very much on our radar screen. We haven't announced when we'll be doing it, but that's an example of an item that would move the depreciation a bit. So, we haven't announced plans to do that, but we've said that we intend to enter Russia. And so that would be an expenditure that would be attendant to that.

I didn't talk much about that, but we have made a lot of progress in Russia, both in the regulatory and partner fronts. Lots moved on there. We decided not to say anything today about it, but I think you'll eventually hear our plans there. But we still believe that's a very -- that's a great market for Iridium. And we are optimistic about making more progress there, which I think will bode well for our continued growth overall, to enter a new market in a big way.

Great. Matt, you mentioned for the aeronautical market, airline JP services, but you didn't talk about the Aero OpenPort. Should we expect any progress in the next 12 months in that area?

Yes, we're starting to see some take-up right now by a couple of ours, who are looking to deploy that in some very specific opportunities. One actually announced themselves that they were going to deploy it, though I don't have any specifics on exactly the timing and the extent of that. There was one in Asia.

But I am expecting to see more announcements. The slowness, if you will, of the take-up there is just due primarily to the regulatory environment. There's a lot of certification aspects -- not just of having gotten approved for Aviation Safety Service, but then it needs to be approved by specific aircraft types, and partners need to put it on and exploit it. So I think we'll see more and more of that over time.

And did you mention anything specific to the maritime OpenPort and how you're doing there?

Well, yes, I mean, in general, I think we have. We continue to make progress. That market continues to grow for us. It certainly is a lot of movement in the maritime market, primarily with our big competitor there and what they're doing. I think we've -- we're kind of running underneath what they're doing. We're still seeing growth in the maritime space, and OpenPort continues to grow and add to our bottom line. And it's making up a bigger and bigger part of our revenues, as I think you'll see in the detailed schedules. Overall, it's contributing to the -- our lines.

But I mean, we haven't specifically talked about unit numbers or anything; we'll consider updating that here in the future. But it continues to grow and will continue to get good ARPUs out of that; much higher than any other ARPUs. So it contributes very positively to our overall service revenues. And we're kind of in the season right now, we're lining up 2012 and I continue to see that there's going to be progress there, too.

Speaking of ARPUs, obviously, the OpenPort has contributed positively to the voice ARPU trend overall. If you were to back that out, I suspect that the voice ARPU is going down. Would you attribute that primarily to customers shift from postpaid to prepaid? Or are there any other pricing concessions that you've made in the market?

Yes, Chris, for sure, OpenPort is accretive to the stat that we published, the commercial voice ARPU. Actually, the traditional voice handset is very stable and the volatility is really -- two competing factors. There's OpenPort, which is accretive; and then there is the ARPU of users using devices for circuit switched data, that is also we actually reported there. And we have a concentration of very heavy users of circuit switched data using on an L-band terminal over the network. And that's literally a few thousand with very high ARPU.

And what we've seen is that for many of them, it can make sense actually to incur the upfront costs of switching to [IP], either OpenPort or another device, to buy down the data rate. And we've seen that dilutive effect on ARPU.

So, this quarter, on a year-over-year basis, you saw the stat decline from 52 down to 50, so that the LBT phenomenon I just described, sort of one out versus OpenPort. And as much as that's a small, like, literally a few thousand subs, their effect on ARPU over time will dissipate just because it's a small number of users. And we think we'll continue to grow our OpenPort and that is, as I said, a plus in terms of ARPU.

And how will the AxcessPoint get reported, both in terms of where the subs get impacted and the ARPUs -- is that in the voice segment?

Well, it can be in both the voice and data segments. And that -- the voice will come through typically in terms of units and service revenues to the voice line. The SPD data revenue, because it does have an SPD, will come through the M2M line, as location-based services get taken up, both in subscribers and service revenues.

The AxcessPoint -- specifically you won't really see in the numbers. We have visibility and perhaps we can share that with you in the future, we'll consider that about the numbers and take-up. But overall, that's a device that can be purchased somewhat independently, if you will. It can work on either a 9555 or an Extreme handset.

And when you plug it in and you turn it on, it creates a WiFi hotspot and starts -- your Blackberry or whatever starts operating through it, if you want it to. We think that will be very positive to ARPU, because it makes it just very easy for people to use what they really want to use to get their data in very remote locations. And it operates without lots of setup, like you had to do before, where you'd have to hook it up to a laptop to try to make that work.

So I think it's going to be positive but it's very early -- I mean, very early days. We're just getting the very first units out there and we'll see what we do, in terms of talking about the specific effect. But I think it's certainly a positive.

So just to be clear, it doesn't count as a sub? It (multiple speakers) --

No, it doesn't count as a sub. It's more of an accessory, if you will, and probably comes through our accessory revenues. I don't know if it'd go through equipment line or accessory, whatever; but it's all part of that equipment line.

Got you. And shifting to the M2M business, I know that DeLorme announced packages, pricing packages for their service, which ranged from something like $10 to $50 a month. Can you explain how you will see those revenues? Is it just your applying your standard packages to DeLorme? Or is there some kind of special arrangement that you've set up with their subscription packages?

No, I mean, we have a diverse set of packages that our partners can draw from. And we probably created a couple new ones at DeLorme and others in more of the consumer segment, that are more attractive to them, that package up a certain amount of data in a certain way that makes it positive. Though I don't know you'd say it necessarily fundamentally changes our price structure that dramatically per kilobyte or anything. But it makes it more usable in terms of base fees and the amount of kilobytes you get per data.

So DeLorme draws from those packages, and then they mark those things up and they make money on that. And that's what goes into it. So I mean, I think that consumer segment is going to be a little more lower ARPU than maybe more the industrial military segments. So I would expect that that will -- incremental subscribers there might be a little lower ARPU. But overall, there's a lot more of them. So that really adds -- I think it could add very nicely to overall service revenues and contribution.

And have you made any further progress with either chipset or waveform licensing with OEM customers? And I guess on the waveform side, specifically with the government tactical radio market?

Lots of discussions. In fact, some recent ones -- we were just talking about recently over the last couple of weeks. Still a lot of interests. Nothing to really announce right now, because I really think that those partners would be the ones that would probably be more announcing, or we would announce it in conjunction. Continues to be good interest from the platforms you would expect, and progress -- now that we've made some progress internally, about being able to support them on waveform.

Also progress on the chipset front. So I think you'll start seeing some of our partners actually delivering products in the coming quarter that are based on chipsets. So again, you won't really see us -- I guess there will be a chipset line probably; we'll consider whether we put that or that's just in our equipment -- but there will be -- that's more equipment that goes out there. And obviously, the service revenues come through the products that they deploy.

So chipsets do make it much more attractive for some of our partners, especially our very high-volume partners, to be able to offer even more customized solutions for their base. And there's been a lot of interest in the industrial segments, which have special requirements and the ability to tailor solutions for bigger players has worked. So we do have a couple there in the works already and they're actually operating now, and building the chipsets.

(Operator Instructions). Amy Yong, Macquarie.

So I know you've been guiding down ARPU for the M2M segment, but the decline was a little bit more steeper than we expected. Can you talk about trends going forward?

And then also, can you talk about the competitive landscape and has it changed over the last few months? Or has it been pretty steady? Thanks.

Take the first one?

Yes. So in government, it moved down. And that's just because of the mix of devices. It was a higher proportion of tracking devices in government, I guess, caused that decline.

And you're right, we have been saying that we saw the long-term trend in M2M is down -- personal locator devices in the commercial space that you'll see to a greater extent in 2012 is going to cause the slope of that line to go down. But remember, the lower ARPU comes with lower data -- you get less for it. So we're tailor-making the plans to the needs of these large-scale customers who provide very profitable revenue to us. So I don't think there's -- I think that is the single most efficient product line we have, in terms of network utilization per dollar of revenue.

Yes, and in terms of the competitive landscape in the last couple of quarters, I haven't seen a real big change in most segments. Obviously, the handset market has been out there for quite a while, as we said. And we don't see any major changes to it. Our competitor there doesn't seem to be doing too well. And I think, really, in terms of contribution, in terms of what they're doing, really hasn't changed our outlook too much from that regard. I don't think that's going to change too much, too soon.

The M2M market, again, we're very competitive in that space. If anything, we've improved our position in that space. So that hasn't changed for the negative in any way.

I would say the only one that's, I think, changed a bit has been the maritime segment. I think, as I've said in the past, I think a lot of the issues there with our major competitor have been self-inflicted, in terms of what they've done to respond to pressure -- not just from us, but more from the larger VSAT segments. I think they've made a lot of disruptive moves in the channel, in terms of acquiring channels and competing with their partners.

And in terms of pricing, dramatically pricing and commoditizing some small segments of that space -- again, we see some little bit of effect on that, I guess, and that would have been reflected over the last couple of quarters. As you can see overall, that's mostly upside to us anyway, so we're continuing to make progress because it's still more new business, as opposed to a change-off from something we've had in the past. So -- but I'd say that's the only really change in the environment this year has been sort of a very reactive and disruptive moves in maritime pricing and offerings, as Inmarsat tries to work their challenges.

Okay. Great, thanks.

Jeffrey Matthews, Ram Partners.

Matt, I wondered if you could just share where you stand now versus if you look back, say, at the beginning of the year, how the competitive landscape looks, how your product opportunities look? And what you see in the future for Iridium, versus what you might have seen 9, 12 months ago? Thanks.

Well, I've been pretty bullish all along here, but I would say that we probably, as you can see in the equipment guidance we gave at the beginning of the year, we were, as Tom said, in retrospect, conservative. At the time, I felt pretty strongly that we were -- our value proposition was much better; that the market was -- last stick in was going to more focus on quality and performance. In a critical market segment, where it's life or death, you worry more about that.

So I really -- as you probably know, I've been out there saying that I think we would do fine. But we could -- we took a more conservative view of what we thought might happen. And as I guess I kind of expected, given the margins our product delivers to our partners, given the end-to-end channel, we've done very well.

So I'd say, if anything, our competitive position and our belief in the market has improved over the year. Because I'd say we now know very well how we're going to compete in the voice segment. And if anything, as I said, we're not just defending that; we're actually growing our leadership position in that segment.

M2M is also considered -- continued to grow, including the areas we work with more partners; with the consumer segment coming, I'd say that's been positive. I'd say the maritime segment has gotten a bit more competitive, though, again, we're kind of a unique player in that segment. We address a specific unique market segment. And in some ways, the competitive dynamics are working towards us in some ways. Because of the very disruptive nature of what Inmarsat has done to the market, they've driven some of their competitors into our arms as possible natural partners to us.

So I think going forward -- I mean, I think we're in a solid position there to be a very good competitor in that space, where we've always been the value player and a number two market player to it. And I think we'll continue to support and grow that position.

So overall, and I said the DoD is only expanded and diversified. And as I'd say we're in as good a position for the future as we've ever been. Again, not being specific to the future, but I don't see anything really changing in terms of our general outlook of optimism for the future right now; for anything, that's strengthened through the year.

And how about the way new opportunities like Russia have come along? (multiple speakers) As expected or --?

(multiple speakers) Yes, Russia and China -- no, that's actually been making good progress this year. I know I've been hoping that would happen any time. And in fact, it may be that we'll -- that would be sooner rather than later that we can announce more definitive things there, but that's actually progressed nicely. Made some decisions there with some of our partners; gotten a lot of support from the regulators to have us reenter the market. And I'm optimistic that Russia is more of a near-term improvement as opposed to a longer-term.

China hasn't made as much progress. We'll still continue to sell around China and I'm sure our products get in China for unique attributes. I think it's needed in China. We have some regulatory spectrum challenges there, but I still think -- I'm optimistic about China long-term, but that's not near-term; that's a little bit more long-term. So those opportunities [you can see] develop.

Got it. Thanks.

And by the way, you can see in our engineering and support revenues, we continue to provide -- there's a lot of things we're doing with our partners, in terms of R&D, particularly in the government segment. There's been a lot of evolution of the government gateway to the next capable technology, as it mirrors what we're doing on the commercial side.

Work that we're doing right now, we haven't talked a lot about DPCS Netted service. We're in a bit of a lull right now, so that growth is, I think, going to continue more in the future. But we're right now developing with our government partners the next generation of that service, called Phase III technology. And I think that's going to bring, along with waveform, going to bring a lot of growth in that area. But we're sort of in a lull right now, as they're moving and waiting for that next generation to be available, which is more next year and 2013 area. So I'd tell you, I'd say we're in a very positive position.

Okay. Thanks.

Thank you. We have a follow-up question from Chris Quilty with Raymond James. You may begin.

Any exposure to the Thailand flooding?

No, we don't really -- I mean, that's a partner base. If anything, I haven't really looked to see if we had some greater activations and usage. But I don't see really any -- I haven't heard of really any kind of -- certainly, no negative impact to us. I think it demonstrates, more than anything else, just another advertisement that disasters continue to go work at a regular pace around the globe. And it's hard to really forecast what the next one will be. But we continue to be a support really to infrastructure that has problems. But right now, we don't see any -- certainly, there's no downside to that.

Tom, do you know of anything?

No.

Thank you. I'd now like to turn the call back over for closing remarks.

Well, thanks for joining us. Obviously, this was another great quarter. But more than anything else, it's not just about this quarter, it's about the consistency we've felt over the last couple of years here in terms of continuing to do it. And that's where we're focused on. We're just going to focus on continuing to do what we do in our way and continue to look positively to the future.

So thanks, everybody, for joining us. Look forward to seeing you at our year-end call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.