Iridium Communications Inc (IRDM) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Iridium fourth-quarter 2011 earnings conference call. At this time, all participant are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn your call over to your host for today, Mr. Steve Kunszabo, Head of Investor Relations. Sir, you may begin.

Good morning and thanks for joining us. I'd like to welcome you to our fourth-quarter 2011 earnings call. Joining me on the call this morning are CEO Matt Desch, and our CFO Tom Fitzpatrick. Today's call will be with the discussion of the 2011 fourth-quarter and full-year results followed by Q&A. I trust you 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 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, 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, the me turn things over to Matt.

Thanks, Steve and good morning everyone, thanks for joining us. This morning we reported fourth-quarter and full-year results that delivered on the operating and strategic targets we set for ourselves in 2011, again demonstrating the consistency and leverage of our business model. We'll grow again nicely in 2012 and beyond, and Tom will have more on our financial profile and the trajectory a little later on. Our industry is still evolving rapidly and the competitive landscape continues to take interesting turns, mostly in a positive direction for Iridium. Frankly, we continue to perform so well because, as we say, we do some very important things in different ways than the rest of our industry.

We spent a fair amount of time with you in 2011 discussing our business strategy and reviewing the sustainable, competitive advantages that set us apart. I hope everyone understands them by now. Attractive and growing markets and a superior network. A great partner ecosystem and recurring service revenue business with strong operating leverage and predictable cash flow growth. These pillars are the foundation of our success but they don't fully capture what pushes us to deliver cutting-edge communications devices and services. Obsessive innovation is a common thread. The creativity and diversity of our partner channel is a common thread. Revolutionizing the way people and organizations connect is a common thread.

So, I would like to spend our time today highlighting how we do important things differently and what that means for 2012 and beyond. Perhaps the clearest way I can say this, we're not just about satellite phones or data modems. We're not just about leading on a single product category or legacy market or about adjusting pricing on the same product when nothing else has changed. What excites us building this business is being a catalyst for technology innovation. What inspires us, along with our partners, is innovating to meet the critical communication needs of our customers. For example, we're integrating Iridium technology into small- and low-cost commercial chipsets for M2M applications and personal communication devices and recently launched a first of its kind solution with our partner, Quake Global.

We're also developing our own software-based error interface or waveform for tactical military radios expanding them from land-based terrestrial devices to global beyond line-of-sight communication tools. We're working with something like 26 partners now who are developing unique devices around our new Iridium Core 9523 platform which is just entering commercial availability. By providing developers with the essential core of our new Extreme phone, we've opened up our technology to support the creation of exciting new devices and handsets. This is, of course, on top of the good early traction we've had with our own recently launched personal communication products and location-based data portals. In the end, we want our technology to be embedded all over the place in global communications infrastructure and we've already begun to make this happen.

In our commercial business, the profile of our markets and competitive footing is only growing stronger mostly because of things we are doing and in part due to the actions of our competitors. We grew voice subscribers 13% over the year-ago quarter and posted our fifth consecutive quarter of at least 50% year-over-year M2M subscriber growth. But our consistent execution is just part of the story. We've already filled several thousand new orders for our Iridium Extreme handset and our WiFi hotspot accessory is contributing healthy double-digit ARPUs right out of the gate. We're also seeing a nice balance in the uptick of the higher priced Iridium Extreme handset against our lower priced work horse 9555 phone which is supportive of our already strong operating margins in our voice business. While it is still early, we can't help but be excited by the positive impact these new products may have on ARPU and service revenue in the months and years to come. When you consider the many location-based data portals being introduced by nearly three dozen developers, and distribution partners that work with Iridium Extreme, our technology is reaching even further into the communications ecosystem.

In the maritime business, we are emboldened by the very positive reception we're getting to our second generation maritime broadband platform, Iridium Pilot. It's small, durable and it has enhanced capabilities to optimize communications across fleets. Most importantly, it provides fully global voice and broadband data connectivity to our maritime customers at an affordable cost. We've also combined truly global coverage and even faster data speeds through our partnerships with KVH and ViaSat and their VSAT platforms. This integrative package provides a complete communication solution for this market and is great example how are motivated partner channel magnifies our impact and reach. This is really part of a broader strategy to be the leader with a value-oriented broadband offering in this space. Stay tuned for more news from us on that front.

This same heritage of inventiveness holds true in our M2M business, whose subscribers now represent a meaningful 35% of our commercial customer base. Our 9602 M2M device continues to set the standard for us with more than 40,000 units sold during the fourth quarter, which was 101% year-over-year increase, and there is more we can do here. In the next few months we will launch our next generation 9603 transceiver. It will be 70% smaller, lighter, and equally cost competitive for our customers. Some of our value-added resellers have its specs and are already developing applications using this new platform. While it will not replace our hugely successful 9602 M2M device, we expect it to be one more great product for our partners to innovate around.

As we are gaining traction in the consumer space it is early going here, too, as two-way personal communicator devices from partners such as BriarTek and DeLorme are just being rolled out. BriarTek specializes in man down systems for the maritime market and has a strong history working with both commercial and government customers on personnel tracking solutions. DeLorme, as many of you know is focused on the consumer segment, and recently shared with us that they are pleased with the early uptick of their inReach device. As our innovation and progress in each of these segments adjusts, it's important for me to reinforce how critical a diverse and economically incentivized partner channel is to our success.

I am just back from our 2012 Partners Conference and it's clear listening to them that they are more energized than ever to grow their business with us. We had over 360 attendees and more than 40 trade show booths, the vibe was incredible open and positive with many senior executives in attendance, and partners came away excited about our product roadmap and mutually supportive relationship. We appreciate their independence as it drives creativity and innovation on a scale that we couldn't do alone. We incentivize our partners with clear and simple economics and don't compete against them for the same customers. This strategy makes sense to our partners because they can sell more of our services and make higher margins. It benefits Iridium because we expand our presence in a low-cost way and amplify our operating leverage.

So, turning now to our government operations, where the diversity of our service revenue profile is expected to sustain our long-term growth despite a few near-term challenges for this area. While our basic voice subscriber and service revenue growth has slowed down these last two quarters, our M2M business continues to grow and Netted continues to be a new area of growth. More importantly we continue to be regarded as a key partner in the government's communications network. We believe reliance on Iridium products and services will only grow as the US recalibrate its armed forces to be more contingency-oriented. Soldiers will need always-ready, always-available communication devices on short notice and we're part of that tool kit.

As we said before, there are certainly headwinds in this business from reduced government spending and troop levels and we'll continue to monitor how these changes may impact our business going forward. Overall, we expect to continue to see lower net activations in our traditional handset business. We are also going to see slower Netted Iridium orders in 2012 as the US government customer continues to make a $13.4 million investment to further develop and expand the service. The Department of Defense customers are waiting until the next phase is launched later this year which is why we expect to see a return to more robust subscriber growth in government Netted in 2013.

While the voice market may be growing a little more slowly, the M2M side of the government business continues to ramp nicely, posting 57% year-over-year subscriber growth in the fourth quarter. With our next-generation M2M device, which is really tailor-made for government applications, and specialized tracking services on the horizon we expect continued momentum in this segment. I think it is also encouraging to note that the US government continues to spend millions of dollars with us to upgrade its proprietary gateway to the Iridium NEXT ready, further validating the lasting and long-term nature of our relationship with this important customer.

So, moving finally to our Iridium NEXT and hosted payload progress. We've completed the preliminary design review for our new satellite system, the first major milestone in a five-year development schedule and Thales continues to make good progress on our builds. My very experienced team works closely with Thales to ensure our design requirements are met and we're still on track to begin deploying Iridium NEXT in early 2015, just three years away. This is all in context of our current network, which is healthy, and continues to perform very well and for which -- thanks to our in orbit spares and flexible design, we fully expect to remain that way through the launch of NEXT.

As for our hosted payloads opportunity, we are close to announcing the details of our primary mission, which you should expect in the second quarter. We're spending the majority of our effort and time on forming a global aviation monitoring business with strategic partners. Which we deploy a payload that monitors aircraft all over the world and then supplies that information in near real-time to air navigation service providers such as the FAA, and Nav Canada. Let me quickly remind everyone of the value proposition there. It would be a relatively small and cost-effective payload that extends already planned, next-generation terrestrial coverage over ocean routes, remote areas, and developing nations. Today, we fly in large parts of the world where there is no radar coverage and where airplanes are still kept far apart due to their lack of visibility and control. We think a hosted payload system on Iridium NEXT could change all that and create excellent returns for our shareholders.

We are doing a system engineering and evaluating technical partners to develop the payload. We're working with business partners including air traffic management system integrators, aircraft manufacturers, airlines, and avionics suppliers not just in developing the business model, but as potential, strategic sponsors alongside us. We are deeply engaged with the FAA and other air navigation service providers around the globe, who's support plays a critical role in the success of this project. To that end, we are working with these regulators to adopt satellite-based global aviation monitoring. We're also working to put together the best consortium of commercial partners to successfully exploit this opportunity before we announce the full details of our plan. Again, we expect this to be quite soon in the second quarter.

We remain excited about the possible benefits. Airlines would save billions in fuel and improve operational efficiency. Airlines could take advantage of optimal climb gradients, preferred routes, and more capacity as the spacing of aircraft would be significantly improved. Flight safety would also improve in remote and uncovered regions, where there is no air traffic management surveillance infrastructure. The business case appears very attractive to provide this service.

So in closing, while the foundation of our business strategy and sustainable competitive advantages haven't changed, the common threads of innovation and delivering cutting-edge communications are what guide us forward. We are revolutionizing the way people and organizations connect in ways they never thought possible. I want to talk my colleagues at Iridium and our many partners and customers for their loyalty, dedication and hard work, in making 2011 a year of robust growth. I look forward to a strong execution and continued momentum in 2012. With that, I will turn it over to Tom for a more detailed financial review.

Thanks, Matt and good morning, everyone. As Matt discussed, we announced fourth-quarter and full-year 2011 results and achieved our upwardly revised financial targets. We continue to grow for the same reasons we always have. Strong grounding in attractive markets, a superior network, a robust partner channel, and a recurring service revenue business. We'll continue to win because we are doing things in our industry that no one else can.

Let me put it as plainly as possible. We're innovating and introducing products that no one else has considered or even can consider from a technology standpoint. We've developed a multiple-device handset strategy, a WiFi hotspot accessory, and push-to-talk capabilities. We are engaged in business and technical development for new chipset solutions and software-based waveforms. We're investing to introduce a variant of our Iridium Extreme handset which will be qualified for sale to US government customers in mid 2012. We're pushing the form factor limits with our soon to be announced next generation M2M device. It's invigorating to work for a truly global growth Company, where we and our partners are catalysts for technology innovation.

On to our results before I take you through our newly issued 2012 outlook, and a firm, long-range financial guidance. Iridium reported fourth-quarter total revenue of $95 million, and operational EBITDA of $44.3 million, gaining growth of 8% and 5% respectively from last year's comparable period. As we shared with you in our last call, we expected a substantial increase in our R&D expense during the fourth quarter, as we boosted spending on several projects with high expected returns. As a result, our operational EBITDA margin was 47% for the fourth quarter, a modest contraction from 48% in the year-ago quarter period.

Fourth-quarter net income was $8.4 million. This compares to net income of $10.1 million for the year-ago quarter. Net income in the prior-year period was favorably impacted by a one-time tax benefit. From an operating viewpoint, we recorded commercial service revenue of $50.6 million in the fourth quarter, representing 14% growth year-over-year. We added 16,000 net commercial customers during the quarter, for a total of 475,000 billable subscribers, with approximately 14,000 of these net additions coming from the M2M business and 2,000 from the voice market. Commercial M2M data subscribers now represent 35% of billable commercial subscribers, an increase from 29% during the year-ago period. In the voice segment it should be clear by now, that we not only have the ability to defend but grow our leadership position. Global coverage, mobility, and devices with advanced features play to our core strengths and we're now waging a multi pronged attack to capture new service revenue streams.

Our customers want to send e-mail messages, share data, and stay connected no matter where they are in the world; we're the only ones that can enable that all of the globe with a portfolio of devices. Our customers can simply connect their iPhone or laptop to the Iridium network and work the way they want to work. It's a similar story in the M2M sector. Global coverage and low latency [merit]. Size, weight, and form-factor and thus innovation matter. Customized solutions for the requirement of different vertical markets distinguish what we and our partners bring to the table.

I also came away from our recent Partners Conference feeling great about the prospects for our business. Partners want to do more with us, particularly in the maritimes segment because we are not introducing our own direct channel that takes sales out of their hands. The meetings were standing-room only and our partners came away with a clear understanding of why it makes financial sense to align with the industry's best innovator.

Turning now to our government service business, during the fourth quarter, we reported government service revenue of $16 million, up 3% from last year's comparable period. We lost 1,000 government voice customers during the quarter, but grew M2M data subscribers 57% over last year. We ended the period with a total of 48,000 billable subscribers, with M2M data subscribers now accounting for 23% of the installed base. As Matt noted, we expect our government voice business to us experience slower growth in 2012 as our traditional handset business has been more volatile these last few months, while Netted Iridium subscribers wait for additional features to be introduced. These additional enhancements will support theater-wide deployments, command-and-control reporting modules, and higher capacity for the military personnel that have come to rely on us.

We've already begun to test and validate these global push-to-talk capabilities on our network, and have received a great reception from our customers. We offer our government subscribers customized voice and data solutions that other network operators simple can't support and the strategic nature of our relationship has not changed. In fact, the Department of Defense continues to invest with us on its entire product portfolio and proprietary gateway, which is a positive sign as we approach the renewal of our long-term contracts in 2013. With these service enhancements already underway for existing products. With a pipeline that includes a software-based Netted waveform that has the potential to be built into the many tens if not hundreds of thousands of tactical radios that are already deployed across the military's communication network. We are confident that we will see a return to more robust growth in 2013 and beyond.

Focusing next on equipment which produced revenue of $22.5 million, a 7% year-over-year gain, resulting from strong handset and M2M unit sales. Our equipment revenue growth has continued to surprise the upside after the clearly, very conservative guidance we began with the 2011, further validating how formidable our competitive position really is in the voice market and how successful we've been in growing unit sales in our M2M business. While we're not providing an equipment revenue target for 2012 today, we continue to expect that healthy unit sales will make a positive contribution to our growth as in past years. In short, we don't expect a material change from the $41 million operational EBITDA contribution we derived from equipment revenue in 2011.

Moving now to our financial and operating outlook for 2012 which we issued for the first time this morning. We expect operational EBITDA between $210 million and $220 million for the full year 2012, which at the midpoint of the guidance range would be 13% growth when compared with the $190 million we achieved in 2011. On the same basis with the full year 2012 we now project the following. Total billable subscriber growth between 20% and 25%, in line with our five-year compound annual growth rate for subscribers of 23%. Total service revenue growth between 8% and 11%. As for our long-range guidance, we are affirming these targets we first shared with you at our December 2010 Analyst Day, across the board. More specifically, average service revenue growth between 9% and 13% per year between 2011 and 2015.

It's worth noting that we think this range still makes sense in light of our 2012 guidance when you consider the boost we expect from the next phase in Netted Iridium products, commercial push-to-talk capabilities, a software waveform, global data broadcast including GPS services, and the many other innovations that have been recently introduced or are in our pipeline. We also expect an operational EBITDA margin of approximately 60% in 2015 which continues to represent the natural operating leverage in our business. We expect negligible cash taxes from 2011 to approximately 2020 which we updated you on last quarter. We expect net leverage of approximately three times at the end of this year and between four and five times at the end of 2015. We expect a rate of deleveraging that equates to 0.5 to 1 full multiple of operational EBITDA beginning in 2016.

Finally, an update on our capital structure and liquidity position. As of the end of the fourth quarter we had drawn $417.1 million from the COFACE facility relating to payments we made to Thales for their successful completion of contractual milestones for Iridium NEXT. We've now invested nearly $600 million in the last two years for this approximately $3 billion project. We had a cash and cash equivalent balance of approximately $136.4 million. I am also proud of the many accomplishments we've made together with our colleagues, customers, and partners in 2011 as they were important markers on our path to growing cash flow and building Iridium NEXT. 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.

On the topic of the long-range guidance, I know you reaffirmed the targets but I wondered if there is a qualitative change in terms of where you feel you might all within the revenues that you put out for 2015? And then secondly, on the operating and partner site is there any update on KVH? And just for clarification does that include Iridium Pilot or is that strictly open for in terms of that partnership?

We're not going to get any additional clarity around the guidance, John. That's our estimate and we reaffirmed it and we feel confident with it. For the reasons that we said, we have a lot of products in the pipeline that we think accelerate growth in 2013 and forward. That's as much as we are going to say about that.

In terms of KVH you're probably referring to the announcement yesterday when they picked up a big order from V Ships. They are a new partner of ours that we're excited about the potential partnership, I think it is indicative of our strategy change which has occurred over the last 6 to 12 months and we are now expanding our broadband OpenPort business for being sort of a value play for -- value, low-cost offering for a broad set of ships out there to being a complimentary product to the VSAT industry which enables us to go in a new direction and KVH is part of that. That announcement I think that they made really doesn't -- has nothing to do right now with our relationship. They haven't announced, nor do we necessarily know how many of those require complimentary backup, but we certainly would expect given our good relationship and growing possibility to be part of that. So, I think that's really good news for us.

A bit apart from that specific announcement, anything since you've put out the release in January in terms of just the tone of discussions and possibility of converting that into new business?

You mean from KVH specifically?

Exactly.

I think you'll hear more about that going forward, especially as opportunities are won, but I think again the broader news here is I think there is a really huge change going on right now in the maritime industry right now. It's coming down to a battle between the guys who want to do it all themselves, and you know who I am talking about, who are expending a lot of money to go after the FSS industry with a product and trying to force-fit it into the industry versus a newly growing partnership between ourselves and the FSS industry to supply what we think to be best-in-class solutions. Our best-in-class global, and we're more global, more lower latency, more able to operate anywhere with a value-based cost-effective solution for voice and data. With probably what's going to ultimately be best-in-class cost-per-bit high-speed broadband data in the VSAT players and KVH, and Vizada which has been announced by Vizada in the past are examples of that. I think you're going to see more those which is why I said stay tuned, and I think it also demonstrates just how that whole broadband maritime industry is really getting frustrated right now with where they stand in the system and they are coming our way, right at the time when we are introducing a great new product in Iridium Pilot that's even more capable than ever before. So, I think it's -- we see a lot of potential in the maritime market going forward.

Thank you.

James Breen, William Blair.

Just a couple of questions, one, a little bit on the back of Jonathan's question about the longer-term guidance. I understand you don't want to give a lot more detail, but as generally as you're thinking about your longer-term growth rates, more of that backend loaded, as some of these new developments move further along the path, and so more likely to see higher range of growth in the out years than in over the next couple of years. And then secondly, with respect to where you guys are now, just on the balance sheet side, can you just talk about where you are in terms of the debt levels and then how you can think about drawing down over the course of the next couple of years ahead of the launch? Thanks.

Hey, Jim, yes we are clearly predicting an acceleration in our service revenue growth in '13 to '15, on the back of the products that I'd describe, the way form, as I said in my prepared remarks, literally there's tens if not hundreds of thousands of tactical radios that we could build wave form into. In 2012 our Netted product, which we think is going to be a big grower for us is on the sidelines as we are developing the next generation of that product. So, we think we are going to see that growth come roaring back in 2013 as it gets deployed first in military applications, and then we are very bullish about our prospects in commercial push-to-talk. Similarly we feel the same way about global data broadcast.

So there are a lot of products that we see in that are not ideas but that we actually have working models. We have a working global push-to-talk handset that is being tested right now. And so, these are not, like I said ideas, these are real products that we think are going to resonate in the military -- in military applications as well as commercially. So that's what's behind what our guidance clearly implies, an acceleration of growth in '13 through '15. And I think we've guided in terms of the debt. Our expectation is that we will draw the whole $1.8 million Coface facility as of 2016 and the variable will be what our cash balance is to arrive at net debt which we've guided as 3% at the end of this year -- excuse me 3 times leverage at the end of this year, and between 4 and 5 times in 2016. Does that answer your question, Jim?

That does, great. Thank you very much.

Brian Ruttenbur, Morgan Keegan.

Great quarter. In terms of sequestration, specifically on the government voice side, where do you see this will impact you if sequestration does happen? I know it is a big what if and it is difficult to see, but I just want to know how you're planning for it and if you are in fact planning for it?

Well, sequestration specifically doesn't play into it, it's really more of just lower budgets in the Defense Department which creates pressure across the board. As I have said before we are not really changing our perspective on this. We are not lumped in with the big capital plans and other things that really get affected in those situations. We're part of the core telecom infrastructure now of our customer there and so it's really more around the edges that tighter budgets affects us. We are seeing a little bit right now in terms of as you can tell in the quarter and last quarter of some cleanup activity, I'd say, the clean up and tightening of units, which is still a fairly small percentage and we still think, going forward, that while we are keeping an eye on that, we really don't think our voices subscribers, while they may decline slightly as opposed to grow as they have in the last 10 years, in the long run will be more than offset by machine-to-machine growth and Netted growth.

So we are diversification play, we are a core operating asset, if you will, or operating goal, so we still are positive about our relationship. Even though there is going to be significant budget cuts, they are not going to affect us like they would say a brand-new program or something specific. I say in some ways it is creating some opportunities for us because again, you don't really necessarily want to build your own systems when you have a great commercial supplier who can provide you support. So in many ways, we only see our relationship growing stronger, we see our R&D programs continuing to happen, et cetera. So we are still on the same strategy, I think. It might slow us down slightly but, I think it's almost more in 2012 because this Netted, there is so much excitement about what's called Phase 3 of Netted which goes to global nets and more customers and moves us into the waveform tactical radio business, and so I think that's probably more reason than anything else really for 2012.

Okay to just a couple other, thank you. A couple other follow-ups. Of course hosted payloads, you still expect to have something announced this year, is that correct, 2012?

Yes, I was trying to be very specific there, we are saying second quarter that we'll be announcing something and for all the reasons we have said in the past, both we will be ready to I believe and we want to because it's a time to finalize our plans and get onto building that business and I think as I said, I'm more optimistic than ever about the potential of the payloads that we have. The kinds of people we are working with and the value those payloads -- the payload will do. So, I tried to be as specific as I could about that and leave a little bit for announcement in the second quarter, but for the most part I think you've heard pretty clearly where we're going in that direction.

That's perfect. And it's going to be one announcement? And then will there be others? I guess that's what I should have asked. I heard the second quarter part and that's more than likely a long the potential aviation market? Is that --?

Yes I was mentioning, clearly that's the primary payload that we are working on right now and has the most potential really long-term business potential as well as just a business case really plays out very well for us. So that is clearly our primary mission. There are still several other, what I would call supporting missions that sort of fill around the edges that are being worked to, that still fit within the overall payload, power and other aspects of the payload budget. I don't think those will probably be announced at the same time in the second quarter, they may be announced later, there is some flexibility which we designed in to fit in around the edges if you will over time, but we've clearly got to nail down and announce our primary payload mission. And more specifically not just what it is but how we are doing it, with whom and what we think the real benefits and potential for that will be going forward which we think are quite positive.

Okay, so the way would work is second-quarter the big announcement and then third or fourth quarter, or hopefully this calendar year you get other, smaller ones along the way and you start seeing a trend, is that how you see momentum building in this area?

Yes. I think the second quarter announcement is the primary announcement. I don't know that I would say that I know exactly when the other announcements are. They will happen when they happen. We have a lot of flexibility to do that really on through next year but really, the real economic value is in the primary payload mission anyway, so the rest just adds to that. Puts a little icing on the cake.

Okay, and then just a real simple housekeeping SG&A was about $15.5 million, is that a number that we should be using going forward? Or is there any aberration in there?

It was a little low, we had some true-ups, it's probably $1 million or something like that in the quarter.

Chris Quilty, Raymond James.

Hello, just a question or a clarification on the service revenue growth for 2012 which is a nudge below the long-term rate. Is that primarily reflecting the government business? Or is there other factors in there?

It's just government. We did 11% at the midpoint of our guidance it's 9.5%, so it's moved in 150 bits and you can think about that as being government for the reasons we talked about. Netted is not going to grow, we don't expect in 2012 because as we talked about the development of Phase 3 is essentially postponing orders there. We think that, as I said, will be a grower, clearly in 2013 and similarly we are seeing some trimming on the edges of our traditional handset business, and so the government is the reason for the slight contraction between '11 and '12.

Okay. And it seems like the primary issue with the government is not the fact that there's any budget pressure per se but simply that they are awaiting the availability of a type 1 secure Extreme handset in the Netted phones and have basically stopped buying?

Stopped buying? I mean, I think there is still activations, they're just a little higher deactivation's right now going on at different units, probably as they come home, are putting stuff on the shelf. Again, it's a small percentage so far. Remember, our strategy around the government has always been a diversification strategy. We had one product for the first eight years and now we have three or four and expanding. Of those three or four, one really grew well -- M2M continues to grow, and I think will continue to expand and I really don't think is all that affected so much by any budget pressures. Netted, we really had a great last two years, which really accelerated our growth in the last two years and frankly, I think we would still be doing this year if there wasn't an even better product on the horizon. I think it surprised us a little bit, and we've now realized shouldn't have surprised us that they want to wait for that new product. So it's a wait for a year now in 2012 and then as I said I think there'll be some -- I would have to call it troop draw downs and budget pressures that relate to the core voice business but again, I still think that's been described more around the edges. So we're still see expansion, just a little slowdown in 2012.

And that new, 9603 modem, is supposed to be launched when?

There are some customers who will be using it over the next coming months but the official version of it kind of comes in the fall. That really is the product for all customers. With M2M as you know people need to design this into their solutions and so there is typically a 6 to 12 month design cycle. So what has been important is that we give the specs of that product to people and most of our customers now have that speced so they're designing it into their next-generation, the ones that want to use it. Some still are very happy with the 9602 and I think they'll continue to use that, but the ones who really need the 9603 because it will even create a more competitive consumer product for example, or even a tinier sensor, or whatever it might be, they are the ones that will be looking forward to in the fall. But that's not so much a wait for, that's a new product that we think that will create out of that.

Okay. And on the M2M side of the business on commercial, can you give us an update on what's happening with the consumer products? I think you've got at least two partners now that are shipping, have you seen an increase in the number of OEMs that are looking at the product? And what volumes are you expecting out of the consumer side?

Yes we're still expecting some pretty big numbers, based upon what they're telling us they think will happen, I know there is expectations since that announced that it would immediately start coming in but it takes time I think for consumer businesses to grow their points of presence and where they are going in the market and get market notice. There is probably in the two-way personal communicator devices now there's probably -- I don't know there's probably at least 10 companies that are selling solutions but most of them have been focused on the government or industrial spaces. It's been more DeLorme and BriarTek now and a couple others, and there are others still looking at what I would call the consumer space where you're talking just a few hundred dollars, say maybe $250 a year in the case of inReach versus the $500, $600 that other industrial solutions have created. But, like I said, DeLorme has told us they are very happy with how they're off the base, BriarTek's quite excited, the others are coming in still see a lot of opportunity here. And so we still think this is overtime something that could be 100,000's of subscribers as opposed to the typical partner that might be 10,000's of subscribers. For us.

Great. And on the consumer Netted product, which I think you said we shouldn't expect until next year, would that be a distinct product? Or, would that be a software patch that you could load onto existing Extreme handsets to enable that capability on the install base?

Well, the Extreme handset was built with commercial Netted in mind. With a firmware upgrade, which could be done, it could probably supply -- it could be a commercial Netted handset. But I'd look at commercial Netted a lot more broadly. We are seeing interest not just in the personal handset, which you typically think of almost like the old Nextel handset, that certainly is an application we think will provide the best-in-class satellite solution for that. But, we are seeing interest in Netting all kinds of things. Netting aircraft, Netting maritime devices at sea, and maybe even built in maritime systems that can be both VHF, UHF and Netted kind of devices. We are even seeing the concept of Netting M2M and OpenPort type devices. So it's almost more of a core technology that we think we can develop that we can exploit in many different ways. And you're going to see lots of our partners take it to market in a number of different unique ways. So we are very bullish about the potential for that technology.

Amy Yong, Macquarie capital.

Is there any way you can quantify your FAA agreements either just long-term, how we should think about the contribution to the topline growth? And also can you talk about margins for 2012 a little bit? Thanks.

With the first one, I have to leave something for excitement in the second quarter when we announce this, I describe a lot about what we are trying to do here. But, I really think that's really more of a -- that's really what our announcement will be about when and if we announced that, that one is our primary payload is to describe what we think the value of it will be specifically over time and where that will go. Again I'd just remind you the benefits are really exciting to airlines and others around the world. The FAA's is one of many customers around the world since it will be a global operation that can be sold to not just to data feed to the FAA for say oceanic coverage or remote filling coverage of the FAA, but can also be sold to Nav Canada, to UK NATS, to Air Services Australia, to remote users in Africa and other places to provide frankly air traffic control visibility where it is never been seen before. So, the excitement about that is it's data that can be sold many times and many ways and therefore creates a great business case.

I would just amplify that, Matt, to say we've said that we see multiple billions of savings in terms of fuel to the airlines. I would characterize as highly confident in that, that's something we've spent a lot of time with. We and other people that are consultants who are looking at and other people who are evaluating this opportunity. So that's how you should think about it. This is multiple billions of fuel savings alone and that is not the only benefit of this functionality, it's also about safety and passenger value of time, et cetera. So we are very excited about it and the folks we're talking to are as well, Amy.

Okay, thanks.

And then on margins, so the flat points are, we finished this year just inside of 50%, we were 49% in the full year. We've guided that we will be at 60% in 2015 so, you are going to get the leverage that falls out of service revenue growing between 8% and 11%, I'm not going to quote a number, but you would see it up, logically like you would think between going from 49% to 60% where we will be in 2015.

Got it, thanks.

Chris King, Stifel Nicolaus.

Just wanted to touch a little bit and I know you guys hit on it briefly, already, but just wanted to follow up with respect to Inmarsat's pending price increases in the maritime side of things. And just wondering, one, a couple of things. First of all, do you guys have any near-term plans to aggressively go after Inmarsat's customers on the maritime side? In other words any changes that you see in your pricing structure as a result of their pending price increases? And then two, do you view this as Inmarsat looking to get out of the maritime business in some way? How do you view this longer-term with respect to your market share positioning in the maritime sector? Thanks.

It's obviously a lot of opportunity for us here and yes we are certainly going to go after that with our partners. The big change here is that Inmarsat, is not growing right now as you know. I think the issue is for them is the pressure they felt at the high-end by VSAT players who are offering a very valuable, all-you-can-eat service that is getting more and more cost-competitive in their space. That is not a space we play in or want to, in fact if anything, you've seen our strategy here is that we believe that's an opportunity for us is to work with that side of the industry, even as we move to higher speeds, because we can be the most value a customer can get for those who really want to get say pay $1,000 and less for a service per month. And for the customers who are comfortable paying $1,000 and up for all they can use, they will get the most value from a VSAT solution. We also can complement it very well by filling in all the holes that there currently is in VSAT coverage and provide lower latency and all kinds of other things that work very well.

There have been price increases, that's not going down well with their channels, I think they described it as I heard that they said they are not getting much squeals except from the largest. I can tell you very certainly that there are squeals from every one of their partners. And many of them are coming to work with us on how they can possibly even replace Inmarsat on some of their vessels and with their customers who are going to be feeling this additional pressure, but I think Inmarsat is getting forced into that by their lack of growth and they're trying to manufacture growth by price increases. By the way, it's not just in the maritime space but they're raising prices in other places, I found it interesting that they're raising handset prices as you've probably seen, which I always expected at some point or another because they are not making any money at that business. And, for which, in fact you've seen, we've gone up market because we see that the market really wants a high-performing solution and is willing to pay for that in remote locations.

So frankly the competition is even lessening on that front as well. It doesn't change our view of maritime. We still see a lot of growth and potential in the maritime market. I know that they are not seeing that right now. They are seeing growth they think coming back long-term when they come up with a new product in the out years. I think they're going to have a lot of challenges because they are going to be up against the VSAT industry and ourselves that are even stronger in that time than we are today, but be that as it may, we're still very positive -- they're certainly not going to get out of the maritime business, that's why Inmarsat got created really and they still a major part of their business. It's an important part of our business, though not as big as theirs and ours is growing.

Thank you.

Jeffrey Matthews, Ram Partners.

Two questions, one is what are the M2M applications on the government side that you're seeing an increase in subscriber growth? And number two, just give me an example of a couple? And then number two, on the hosted payload announcement, is this -- does this mean it is a done deal? Does this mean it's a concrete plan going forward? What inning with that put the hosted payload opportunity in? As far as towards being an actual revenue producing item for you down the road? Thanks.

Yes, so the first one, the machine-to-machine, in the government, there's just a whole lot and in fact the expanding group of applications and everything from tracking assets, so putting it on to all kinds of big pieces of equipment to make sure they know where it is, to what would be called unattended sensors often is a broad category of very small things that can be put around to sense things around them and installed and be operating without notice to tell them if something is happening. To tracking aircraft, to what would be called blue force tracking, that is tracking the good guys. Where you put on -- you put in a device and as soldiers want to know where each other are and what they're doing they can message each other and see the locations of where they happen to be.

There's a lot of applications frankly we don't know about. That's part of the value of our ecosystem of partners. We have 200 partners overall but probably I don't know how many 20, 30 at least in the government space who focus on developing all kinds of applications, contracts that they have and they embed us in at the communication channel into a much broader solution that does all kinds of interesting, unique things. And sometimes, the scalability for us is that we don't have to know about what those are or have to put a lot of attention, they just come on board and start generating service revenues. So that's the M2M I hope that gives you some samples.

Yes, absolutely.

In terms of the hosted payload, obviously, we are still saying we're going to announce something in the second quarter and we are still confident we will announce and there is more to announce. I would say certainly we are in the ninth inning. Maybe even bottom of the ninth here since and I'm saying it's really very, very soon. And obviously I think you can see from my comments where we certainly are focused on one payload plan and our energies are primarily around that. There have been some other things that are still being worked on and frankly, continue -- it's possible that some of the things could change our view but frankly, all our energy is around the one that we think has the most value, fits our system the best and creates really the most long-term value for our shareholders and that's what we really want to describe in more detail soon.

Got it. Thanks a lot, appreciate it.

(Operator Instructions)

Chris Quilty, Raymond James.

Tom, can you give us a ballpark of what you're expecting for R&D this year and are there any quarterly patterns we should be aware of?

Chris, it's not our experience to guide line by line, I think we're out there with a lot of guidance, I don't want to give individual line item guidance.

Okay. Secondarily, you mentioned for driving incremental revenue growth in the long-term, global data broadcast, is that a euphemism for the iGPS capability that you guys were demonstrating?

That's a good question. And, iGPS or a different capability, which is actually on the commercial side that Boeing has developed called Boeing Time and Location, which I know some of you have passed on the video. I think a YouTube video of it that is out there of them describing that service, which is very different from iGPS, but is an example, of using our higher power signals in our system to deliver important data to applications to do very important unique things. And so in those cases, it is delivering timing information to protect against jamming or to locate a cell phone indoors perhaps, whereas global data broadcast is a much broader capability which we think has even bigger value, goes beyond that to really delivering data very cost effectively to unlimited numbers of devices, if you will, broadcasting important information through our powerful paging channels that can get inside buildings and delivering that to very low-cost devices that could be embedded in any number of industrial applications. Think of it as maybe a car that can be listening for itself to download software to it or to upgrade a problem or to upgrade the streets database, or to add advertising, but do it on a global basis.

That can be done today through cell phone networks but you would have to come up with lots and lots of agreements with many, many different operators and you have to pay each time something is sent as opposed to in our case possibly just pay for the use of that channel for a short period of time to deliver your data through us. Which is much more cost effective and powerful and can work anywhere on the planet as opposed to only in the less than 10% of places in the world where there happens to be cell phone coverage. So we think there is a lot of potential for it, we're still in the early stages, we have a customer or two of that capability that are starting but we're more in the business development phase with some interested partners. Thinking about how to use that. Again, that's more of a 2013 and '14 thing but it's a much broader, broader capability than BTL or iGPS.

Okay. And on the air traffic control hosted payload you mentioned working with a consortium of commercial partners. Is that for the ADS-B hardware? And the avionics end of things or is that working on the finance end? The corollary is this an effort that you're willing to self-finance in terms of developing and building the payloads?

And the answer to that, first of all we're working on the complete solution. So when we describe this in the second quarter, that's what we are going to talk about here, we're going to talk about payload, the ground infrastructure, the whole system, how it will be delivered and what we think the overall business model for that will be. And yes, I think there is obviously we're signaling a bit of a transition here getting someone to write a single check to us which was maybe the original vision years ago has always been a challenge if anything and it's still a possibility. But we think there is possibly even more benefit by developing a business with a number of our interested technology partners and sponsors here that would own the data and actually exploit that data in many different and unique ways that would be even possibly more valuable than the model we've described in the past. So that's what we'll be talking about, we owe you more information here in the second quarter about that and we'll talk about that as soon as we are ready.

And final one, aviation OpenPort? Or Aviation Pilot, is that product is still in the pipeline?

Yes, it is called OpenPort Aero. It's not just in the pipeline, it's actually, we're starting to see a take-up of it, I know you haven't seen announcements but I think you'll see those pretty soon. We are seeing strong interest in Asia and South America in a couple places right now. It's kind of building on top of that certification last year of aviation safety services on our core platform, so we are starting to see ourselves getting put in the cockpits of more aircraft and OpenPort Aero allows us to expand that data pipe if you will to support even more interesting applications in the cockpit, like electronic flight bags and updates and other important applications in the cockpit. But I think you're going to start seeing 2012 and 2013 as the year where a take-up of OpenPort Aero happens. And a lot of discussion around that at our partners conference. I think you're starting to see that from our Aero partners where that starts getting taken up, so yes.

And from the segment -- I'm sorry from a segment reporting basis, has it gotten to the size where you are going to call it out as a separate line item at some point in the future? Or, could you give us a general idea of the installed base and the ARPU trends on that product line?

We'll consider that but I don't think that's going to happen soon. We don't call out an Aero business or maritime business per se because it's frankly very difficult for us to do that. Our partners, many of our partners that sell our solutions sell multiple solutions and it's hard to track exactly how it is being used to the point that we could prove for sure that what we called out was there. Aero is -- has been an important part of our business, by the way. It might be -- I'm not sure but maybe less than 10% of our overall business perhaps, but it still continues to grow, we thought we saw a lot of growth in 2011 in that business. We're probably the volume leader there because we're on more aircraft than anyone else just because of the cost effectiveness of our solution.

OpenPort is going to add to that, I think you're going to see the revenues more show up in what I would call where OpenPort revenue show up right now, it will be part of that, it is still a small part compared to maritime, but I think it will start adding something to that business over time. But I don't know that we will either call it out separately, we still haven't called out OpenPort separately, or have we tried to in fact frankly it's very challenging to break up our business by market segment, because hard to track that blip going across the ocean as a ship or an airplane right now. So anyway that is something for the future.

Great. Thank you.

Thank you. This does conclude our question and answer session for today. I'd like to turn the conference back over to Management for any closing remarks.

Thanks again for joining us, for this call. I think we had another good year. We are looking forward to another good one in 2012. I know we are going to see you very soon on the first-quarter call in just a couple of months, so we look forward to seeing you then. Thanks for joining us.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.