Iridium Communications Inc (IRDM) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Iridium first quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Steve Kunszabo, head of investor relations. You may begin.

Good morning and thanks for joining us. I'd like you to our first quarter 2012 earnings call. Joining me on the call this morning are CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of the 2012 first-quarter results, followed by Q&A. I trust you've had an opportunity to review this morning's earnings release, which is available on the investor relations section of Iridium's website.

Before I turn things over to Matt, I'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 fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. All remarks today should be considered in the 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, let me like to turn things over to Matt.

Thanks, Steve, and good morning, everyone. Thanks for joining us. This morning we announced first-quarter numbers that showed we're off to a solid start for the year and tracking towards our full year 2012 financial targets. I'll spend my time with you today outlining key competitor changes to our markets, taking you through our strategic initiatives and updating you on the progress of our Iridium NEXT build and hosted payload opportunity. Then Tom will take you through our financial results and guidance before we wrap up.

Let me start by immediately addressing the product recall we had last week for our Iridium Extreme phone which impacted our first-quarter financials. The bottom line is that the technical problem with the unit's antenna is understood and has been corrected. Our customers' handsets will be exchange by the end of the second quarter and we don't believe this issue will affect our equipment sales for the full year.

Now, Iridium Extreme is a great product and our partners continue to tell us that their customers love the device. And while I'm obviously disappointed we had this issue, I think we've addressed it appropriately and we'll have it behind us quickly.

So back to our business and continued growth. The core principles that set our business strategy apart and sustain our many competitive advantages still stand. We like our markets, and aside from that we believe is a temporary slowdown in the government voice business, they all continue to grow rapidly. Our current network is performing well, remains healthy and, thanks to its flexible design, is expected to stay that way through our Iridium next launch. We have a great partner ecosystem that continues to innovate around our products and extend our reach to customers in a low-cost way. High-margin recurring service revenue represented 72% of our total revenue during the first quarter, all of which leads to consistent operating cash flow growth. Two of the most important keys to our ongoing success lie in a diverse revenue profile and a robust suite of products. We are not defined by a single market. Our business doesn't turn on a revenue stream from just one or two core services.

Let me reinforce a few examples of what differentiates Iridium from the rest of the mobile satellite services sector. We compete in five vertical markets, at least three of which are predicted to have double-digit growth rates over the next several years. 42% of our total service revenue in the first quarter came from data services, and we are particularly well positioned to grow in this area, given the unique things our devices and network can do. We have a comprehensive strategy in the handset business that includes several full feature devices and a WiFi hot spot accessory. We will soon launch our third generation M-to-M device, which will enable further innovation in this space. We are integrating Iridium technology into low-cost commercial chipsets that our partners are planning to embed in even more devices and are packaging our radio technology into a software-based interface or waveform for tactical military radios.

And of course, we have a strategic relationship with the US government and offer them a suite of products with a secure, dedicated gateway that would be difficult for anyone to match.

I've heard Iridium described in many different ways over the years, and the truth is we're all of these great things. We are a voice company and a data company. We serve not just the land-based handset market, but aviation, maritime and M-to-M segments. We are an important player in the defense sector and serve commercial customers in industries ranging from energy to transportation. This diversity is the essence of what makes us successful. And as a CEO with many years spent in telecom business development, I really appreciate the quality of our revenue profile. It certainly beats having your fortunes tied to just one or two markets in a thin, commoditized product portfolio.

So in our commercial business, a few important trends jump out at me that I'd like to share. In the M-to-M business, we've now reported our sixth consecutive quarter of approximately 50% year-over-year subscriber growth, and revenue wasn't far behind that with a 45% gain. Our strong growth here actually goes back much further, but six quarters is how long we've reported specifically in this market. And we really don't see anything stopping us here. More partners are developing more applications for a market that's in its infancy when you consider device penetration. There are still many millions of containers, tractors, trucks and other assets that organizations want to monitor and track. And we'll soon launch our lighter and even smaller third generation 9603 transceiver, which is just one more device for our cost partners to customize their solutions around.

Competitive disruption and change has been the big news in the maritime space these last few months, much of which we see benefiting Iridium. First, we are seeing strong partner interest for our recently launched second-generation maritime broadband platform, Iridium Pilot. As I've discussed before, we made a number of enhancements to its durability and technology based on customer feedback, and the early reception has been great. In fact, our order book for Iridium Pilot reached 60% of our full-year 2012 target in the first quarter.

On the pricing front, we've held steady as the low-cost value provider while the competition has actually raised its prices to recapture lost revenue from customers who have migrated elsewhere. This move has really angered their customer base, who are now increasingly looking at alternatives such as Iridium.

We've also expanded our partnerships with leading VSAT operators, such KVH and Vizada, which grows our addressable market by a couple thousand deciles. We expect healthy sales on our own steam in the value segment to the maritime market and are happy to also go onboard with VSAT platforms as a truly global, complementary system or dedicated crew communication service. It's all part of a broader strategy to expand our market share in this space with a value-oriented broadband offering.

Lastly and perhaps most importantly, I think it's become apparent that we are not competing with our partners through a direct sales channel that takes profitability out of their hands. In my view, creating a direct channel is expensive, curtails your reach and stifles innovation. We are already seeing the benefits of more partners wanting to do more business with us in the maritime sector.

Iridium OpenPort as a broadband service for maritime and aviation is becoming a more significant leg of our sales, now representing a full 10% of our commercial service revenue. And while we spend much of our time discussing the maritime side of this business, we've also had success in the aviation piece with our technology partner, LiveTV, a subsidiary of JetBlue. We are starting to see wins in the commercial aviation sector and, combined with our recent authorization for aviation safety services, are bullish about our prospects in this space. In some ways, we have even better competitive dynamics in aviation than we do in maritime, as our systems are typically far less expensive than the alternatives and a truly global service is important to long-haul aircraft that often traverse over the poles.

As for our voice business, we continued to perform well in the first quarter with 13% subscriber and 8% revenue growth, respectively, over the year-ago period. As I mentioned before, while we don't believe it will have a full year impact, we did experience a short-term and manageable issue with the production of our new handset in mid-April. We have since supplemented a solution for the problem and have taken corrective action to replace the defective units while also fulfilling new orders. Again, we don't see any change to our outlook for unit sales or equipment revenue as a result of this issue when considering our prospects for 2012.

Turning now to our government operation, which we are confident will be a contributor to our long-term growth, I can't emphasize enough the strategic nature of our relationship with this anchor customer and why we continue to believe our differentiated offering and product set will be supportive of a long-term partnership. As we announced, the Department of Defense recently exercised the option for its fifth of five contract years. The current agreement takes us through March 2013 and we look forward to working with them on a new long-term contract soon. The US government also continues to spend with us on a multiyear monetization plan for its dedicated gateway. We expect follow-on investment in this area through 2015 as the DoD upgrades the capabilities of its dedicated infrastructure to become Iridium NEXT-ready.

Overall, the feedback from senior civilian and military leadership as well as soldiers in the field continues to validate the critical nature of the services we offer. And it's much more now than just the traditional handset. M-to-M data subscribers continue to grow at a healthy 33% year-over-year rate and we saw Netted activations tick back up in March with a few hundred new customers. We still expect our trend line for government Netted subscribers to be choppy in 2012 as these customers wait for additional features to be introduced in what's called phase three of this program.

As I mentioned before, we also continue to develop and test the software waveform for military tactical radios, another example of innovation that we expect will allow us to meaningfully expand our relationship going forward and drive future revenue growth.

Moving finally to our Iridium NEXT and hosted payloads progress, we are well underway in the detailed hardware and software design phase for the new satellite system, which will culminate in a number of critical design reviews within the next year or so. Fairly soon, Thales Alenia Space and the rest of what we call the Iridium NEXT mission team will be building prototypes of the key elements and really putting the design through its paces. We've also begun replacing our 27 Earth terminals for our gateways and telemetry facilities around the world as part of the upgrade program for our ground infrastructure, a process that will continue through 2014. We're still on track to begin deploying NEXT in early 2015.

As for our hosted payloads opportunity, we still plan to announce the details of our primary mission in June and we remain primarily focused on forming a global aviation monitoring business with strategic partners. To recap it again for you, Iridium will deploy a payload that monitors aircraft positions all over the world. The global aviation monitoring business would supply that information in near real-time for a fee to air navigation service providers, such as the FAA and now Canada.

While we initially thought our hosted payloads missions would be more like straightforward real estate transactions, we currently envision this endeavor as having elements of the real estate structure we contemplated but with the added benefit of offering Iridium a retained interest in what should be a valuable and durable enterprise. We've been through the value proposition with you a few times now. You know the ability to control commercial aircraft in large parts of the world where you can't today, billions of dollars in fuel savings, operational efficiencies for airlines, reduced emissions and improved safety. The business case to provide this service remains very attractive.

We are still doing system engineering work alongside our technical partners to develop the payload and are making steady progress in working out the business model. We also remain deeply engaged with the FAA and other navigation service providers around the globe whose support plays a critical role, and we have been encouraged by our interactions with all of them to date.

So in closing, the fundamentals of our business strategy are intact and we continue to expand our footprint and innovate in all of our key markets. We are seeing solid growth across much of the business and are off to a good start in 2012. We look forward to speaking with you again soon when we make our hosted payload announcement. So with that, I'll turn it over to Tom for a more detailed financial review.

Thanks, Matt, and good morning, everyone. We reported first quarter 2012 results that were in line with our expectations and demonstrated continued progress in several key areas. I also share Matt's assessment that the quality of our service revenue profile and expanding service portfolio are the keys to our ongoing success.

I think about it in these simple terms. We're the only company in our space developing a third-generation M-to-M device that works everywhere in the world with a network that's particularly well-suited for this type of data traffic. We stand out in the voice business with advanced handsets and a multi-device strategy that includes personal communicators and accessories. We're the only business developing and testing the global push-to-talk capability for our US government customer which will ultimately leverage for additional service revenue in the commercial business. We are the only truly global near real-time option for the aviation community in monitoring aircraft over oceans and remote regions, a key competitive advantage that really excites us as we continue to develop the business model for this hosted payload opportunity.

As I said before, it's meaningful to me to be part of an innovative company that delivers cutting-edge solutions. We are making commerce possible all over the world and in some cases saving lives and supporting national security objectives.

Onto our results now before I take you through our firm 2012 outlook. Iridium reported first-quarter total revenue of $93.5 million and operational EBITDA of $43.9 million, representing growth of 2% in both cases from last year's comparable period. Our operational EBITDA margin was 47% for the first quarter, which was unchanged from the year-ago period. First quarter net income was $12.4 million. This compares to net income of $8.3 million for the year-ago quarter. First quarter 2012 net income benefited from the favorable change to Arizona tax law that was enacted during the period.

From an operating viewpoint we reported commercial service revenue of $51.1 million in the first quarter, yielding 13% growth over last year. We added 21,000 net commercial customers during the quarter, a 24% year-over-year increase in subscriber additions. We had a total of 496,000 billable subscribers with approximately 15,000 of these net additions coming from the machine-to-machine business and 6000 from the voice market. Commercial M-to-M data subscribers now represent 37% of billable commercial subscribers, an increase from 31% during the year-ago period.

In the voice business, the competitive landscape continues to move in our favor. After unsuccessful attempts to take a bite out of our market share in the traditional handset business, one of our competitors has retreated and significantly hiked its prices. This only serves to give us more flexibility as we grow our leading position. Local coverage and advanced phones that work on demand are what matter most to our customers.

The maritime market has also taken some interesting turns these last several months as you may have heard in the industry press. The market really seems to support our strategy of not competing with partners for customer business and not raising prices abruptly in the midst of the busiest season for the sector. We've had many discussions in the last several months with our partners, all of which suggest that we're poised to get more of their business as a result of this disruptive activity from our closest competitor. We allow our partners to innovate around our technology and keep steady margins in their business while expanding our addressable market to many more vessels. It's a win for both of us as our open port service represents 10% of our commercial service revenue and is still growing rapidly.

Turning now to our government service business, during the first quarter we recorded government service revenue of $15.7 million, down 1% from last year's comparable period. We lost 1000 government voice customers during the quarter but grew M-to-M data subscribers 33% over last year. We ended the period with a total of 48,000 billable subscribers with M-to-M data subscribers now accounting for 25% of the installed base.

In building on a few of these key points we believe reliance on Iridium products and services will only grow as the US recalibrates its armed forces to be more contingency oriented. This realignment plays to Iridium's strengths. When soldiers have to deploy rapidly to all corners of the globe, they need a product that is rugged, has no setup time, can be easily carried and works anywhere.

While the traditional voice market is facing headwinds, as we thought it would, Netted Iridium is poised to rebound once the additional enhancements associated with phase three of this program are rolled out. We continue to test global push-to-talk capabilities as part of this product's evolution and expect this will more fully contribute to our service revenue as we look ahead to 2013.

Focusing next on equipment, which produced revenue of $21.5 million, a 12% year-over-year decline resulting from a 20% drop in handset unit sales, we anticipated this tough comparison for our year-over-year results as last year's first quarter was positively impacted by bulk customer orders due to favorable price incentives. I'll add that our M-to-M unit sales remained healthy during the first quarter, growing 29% year-over-year.

As Matt described, we also booked a $1.2 million warranty charge in the period related to a production issue with our Iridium Extreme handset. Because we addressed this matter so quickly and considering all of the other moving parts, we still expect that our operational OEBITDA contribution from equipment sales for 2012 will be similar to 2011.

Moving now to our financial and operating outlook for 2012, which we affirmed this morning, we continue to expect operational EBITDA between $210 million and $220 million for the full year 2012, which the midpoint of the guidance range would be 13% growth when compared to the $190 million we achieved in 2011. On the same basis for the full year 2012, we affirm the following -- total billable subscriber growth between 20% and 25% and total service revenue growth between 8% and 11%.

And finally, an update on our capital structure and liquidity position. As of the end of the first quarter, we had drawn $441.1 million from the COFACE facility relating to payments we've made to Thales for their successful completion of contractual milestones for Iridium Next. We had cash and cash equivalents balance of approximately $146.9 million.

Wrapping up my thoughts, we're off to a good start in 2012 for our commercial business and continue to expect that our government customer contributes to our long-term growth. We are pleased by the strength of our competitive position in the handset and maritime markets and really don't see anything that slows down our excellent performance in the M-to-M business. We are making nice progress on our global aviation monitoring and hosted payload opportunity and expect to have those details for you the next couple months. With that I'll turn things back to the operator for the Q&A portion of this morning's call.

(Operator instructions) James Breen, William Blair.

Great, thanks for taking the question. Just a couple questions -- one, Matt, if you could just talk about the timing of the approval of the air traffic control system upgrade. It seems like obviously that may take a couple years to implement, but it sounds like there's a potential for you guys to get revenue sooner as some of these systems get put in place ahead of the actual true implementation of it.

And secondly, can you talk about the M-to-M space in general? It seems like you had good data sub growth there. Do you think that these subs are coming from customers of other satellite providers, or is it overall an increase in the market size because some of the shipping companies and so forth are becoming more cognizant of the fact that using these types of devices makes it more efficient? Thanks.

So, Jim, on the first question, you were referring to the aviation and safety services approval for our systems to be installed in aircraft -- is that what you were referring to?

Yes, correct.

Yes, so just for everyone's knowledge, we did get approval for the data link component of that and are seeking voice approval here this year that would allow Iridium systems to go on commercial aircraft, primarily long-haul commercial aircraft, to replace or augment the high-frequency communications systems that they use today because we are lighter, we work more -- actually, we work more effectively everywhere and we are a lot more cost-effective to maintain and operate. So everyone is seeing -- especially since the data link portion is a very important piece, everyone is now looking to put us into airlines soon. And that has progressed.

I think that you won't probably see a big impact in revenues necessarily this year because it's still very early days. I think that starts to gather momentum over time. The nice thing is those systems are good ARPU generators, higher than probably our average ARPU because they are used fairly often and they're used all day long, typically, and every day of the month on most of these aircraft. So they're nice systems -- not high volumes, necessarily, but an important piece. And it does put us into the cockpit of long-haul airplanes, which frankly want to do many more things in the future. They want to support things like electronic flight bags, updating flight plan information and charts and have other things that they want to do, and that all complements the course of our long-term position in GA and corporate and other places where we've been.

Your second question was about M-to-M subs and our growth and where is it coming from. Is it new growth or is it taking away? I think it's primarily new growth. It's very early stages of an expanding market right now in M-to-M. It's an area that people are realizing they can get lots of efficiencies, cost savings, revenue generation, etc., by tracking assets, by tracking things, by controlling remote machinery, by all kinds of things that you can do with M-to-M. I think we are really early stages. Most of this is, I think, new business. There is some take away, especially as our device costs have gotten lower and lower and really -- because we were sort of the high end of the market sector. Now we can kind of serve almost the whole market. But it's a pretty big market, so I really think there's room for everybody there.

And just on the first point, in the cockpit of the commercial planes, I think there's also been a Congress-approved spending bill for the future upgrade of the ATC system in general. And I think there's been discussion about moving from the current STARS radar-based platform to something that's more satellite-based, just increasing efficiency, being able to land planes and handle the traffic at the airports and so forth. Is that something that is longer-term? But it seems like you are set up well for that if you already have approval to get into the planes' cockpits.

Well, what that's about is often called NexGen -- at least that is what FAA calls it. And they are building ground towers across the country; the country's actually partially built out with these NexGen receivers that can replace radar, particularly in remote areas, and allow aircraft to be controlled more efficiently, be able to operate point to point and self manage, etc., save a lot of cost. And yes, it's good news that that continues on.

That's actually more aligned -- while we are consistent with that with what we do in terms of our services in the airplane, that really is more aligned with what we're doing and talking about as it relates to a hosted payload. So when we talk about a global aviation monitoring business, what we are really talking about is taking that technology or that capability that's being deployed for terrestrial services and extending it around the world, allowing surveillance of aircraft over oceans, remote areas, places where they can't build those ground systems -- not that unlike how we complement, really, the cellular phone systems of the world that cover 10% or less of the world and we cover the other 90%. So it's kind of consistent with sort of our overall business model of complementary and important and growing capability. And so yes, we are going to take, I think, advantage of that and you will see a lot more of that soon.

Terrific, thanks very much.

Jonathan Atkin, RBC Capital Markets.

Yes, a couple of questions -- first, some of your peers have diverse government revenue streams, not just the US. And I wonder if you can just kind of recap to what extent there's opportunities to grow with foreign governments as a segment. And then, with regards to the product recall, I wondered if there's going to be any charges taken in second quarter, or were the Q1 charges kind of the extent of it?

I'll take the second question first. The charge we took in the first quarter, we believe, addresses the problem in its entirety and we don't expect to charge in the second quarter.

In terms of the first question, we are used by governments all around the world right now, and really quite a broad number of just about every friendly government, whether it's military, but also first responders, fire, police, through Europe and Asia and South America, all kinds of governments use our services. But they all really flow through our commercial gateway, so it's difficult to necessarily pinpoint exactly what our revenue stream is for them, except to the extent we know which partners serve those customers and have discussions with them and often have detailed discussions with their end customers when they bring us into it. And yes, there is still a lot of interest in not just this expanding portfolio of products that we have today; there's a lot of interest, for example, in Netted Iridium and where that is. People want that capability. A lot of machine-to-machine interest, especially as it relates to unattended sensors and Blue Force Tracking and those sort of things. A lot of them are able to encrypt their services and provide a kind of similar capability that the US government is getting as well.

So it's hard to describe what that capability is, of course. But we are very diversified around the world. And while we focus on the US government because we can both define its revenues and because of sort of the strategic private network it employs, I really do think it's a global opportunity for us.

Thank you. And then for Tom, if you assume second quarter EBITDA takes a similar kind of trend that we saw last year from Q1 to Q2, it looks like the EBITDA growth rate in the second half would need to accelerate into the double digits. And so I'm just wondering -- to hit your guidance, I'm wondering what your comment would be there and what gives you the confidence that you are reiterating your guidance. And then just from a housekeeping standpoint, what's the very first year that the hosted payload would hit the P&L?

I think the latter question -- I think will talk more about that in June. I think that's really what the focus of that should be about and we should really probably save that question for that. That will be an important part of what we describe in that way. But Tom, do you want to talk about that first part?

Sure. As you know, Jonathan, that business is inherently seasonal and the first quarter is -- tends to be a low point, if you look at last quarter or last year, for example. So just the effects of seasonality because of the usage in the spring and summer months spikes up. So our guidance is based on our funnel of activity, the growth in, most notably, machine-to-machine. We see significant growth in our recurring service revenues. And then kind of on the expense front, while the first quarter is seasonally low, it tends to be seasonally high in terms of expenses. And we noted last quarter that SG&A was low, in the mid-15 range, at 18.2 or whatever it was, 18.1; this quarter, it's high. So we see that moving down sequentially. Similarly, cost of service was a bit high in the quarter. Our Boeing activity tends to be -- not be even through the year, and so we have visibility into that expense moving down. So it's really the combination of all of those factors that underlie our affirmation of guidance.

Great, thank you very much.

James McIlree, Dominick & Dominick.

Thanks and good morning. Matt, you talked a little bit about potentially doing carried interest on the hosted payload. Could you expand on that, as well as indicate whether or not you are still comfortable with the $200 million or so from a potential hosted payload deal? And then lastly on that, would you be looking at putting your own cash into some sort of deal, potentially, with a venture where you would be a partner in that?

You're going to steal all our thunder, Jim, for June here, if you not careful here. But those are reasonable questions and you are directionally, I think, correct, at least in terms of how we are looking at setting up a business that truly could exploit this unique opportunity. I don't want to go into too much detail about the details of that right now, because obviously we're working goes out and want to make sure we're very clear about that. But as we said, we do believe there is what I described, a real estate element to this transaction, which means hosting fees during the time frame of building up NEXT, as well as both -- as what we've always expected to be data fees for this payload as well as -- in this case, you call it carried interest. I call it a retained interest or at least a profit out of the service and the unique nature of what that would be. And that's kind of a new piece of all this, obviously, is that we've become encouraged enough throughout this opportunity, the uniqueness of it, the fact that it can't be really done other ways, our partners' enthusiasm, customers' enthusiasm that says we probably want to be part of this long-term as well.

So that will be all part of it. Our job really is to really explain what all that means to you in June, and we will do that. And I think that's the time, really, to answer all those other questions. And we need to provide you as much information as we can then.

Okay, great. And Tom, is it -- are we going to see a big ramp in CapEx for the last three quarters of the year? And then secondly, there's a very large increase in accounts payable quarter to quarter. What was that about?

I think the payable increase was just -- there was a payment to Thales sitting in accounts payable. And swings in the accounts payable is going to be very susceptible to where we sit with the Thales vendor. And CapEx -- let me come back to you on the CapEx question; I have to pull that up. Let me take another question and I'll come back.

Great, thank you.

(Operator instructions) Chris Quilty, Raymond James.

Good morning, gentlemen. So as you mentioned, probably a good opportunity with Iridium's Inmarsat's price increase to pick up some customers there. However, it's also true that a lot of those customers are sort of locked into Inmarsat because of their position as the only certified GM DSS provider in the market. So I guess my question for you is, where are you at in the process of becoming certified for safety services?

Yes; we are committed to going after that. We believe the opportunity is probably the largest it's ever been for us. I would say when I got here five years ago, six years ago, it was pretty clear that even if we pursued it aggressively, it would be difficult to achieve just because of sort of the political dynamics around the world. We've demonstrated we can break into that kind of regulatory environment with the aviation safety services approval, and maritime, I think, is going to be similar. Some things that will have to happen to make that occur isn't really technical, so much, in that we can, I believe, resolve. It's just that those rules were written around a system that's very different than ours and we'll have to go through the process to educate why our system is not only -- is not equally reliable and reliant, but actually maybe even more so, in many ways, than the current systems that are -- the system that's being deployed today.

That isn't a real revenue generator, but I agree it's a nice mark to have. It's a big checkmark you can have and to give your customers and partners confidence that, whatever happens, you can serve that need because it's almost more of a cost than it is a revenue generator. It hasn't really affected, as you can tell, our growth to date. Don't think it will, necessarily, in the future. But we believe it's the right thing to do, to continue to pursue it. But I don't think it's going to happen this year, but we will keep focus on it for next year or the year after.

Any chance with Iridium's customers and Inmarsat's customers, writing a letter of complaint to the International Maritime Organization that they might speed up the process?

Well, I hope so. I really do think that there's -- we are getting a lot of support and encouragement across the board, not just from their customers, but from others in the industry who are in the maritime space who believe an independent partner like us is the right thing to have. So I expect a lot of help.

Great. Can you talk about the new -- I'll call it the 9603, your new M-to-M device in terms of timing and whether you might have any customers holding back as they wait for that, since you've already announced it?

Yes. The 9603 -- I mean, the 9602, which is driving all our growth, is quite small and everyone was very pleased with its size. The 9603 is something like 70% even smaller. So it really does, for some kinds of applications, really drive potentially even more growth because of -- or more innovation, at least, because things like consumer devices and really small asset tags and that sort of thing are possible. It's very imminent. It's almost ready to go out the door from a manufacturing perspective. Our early partners know its capabilities and are starting the process of designing it in. It does not replace our 9602 because there's a lot of people who have designed the 9602 in, and we can -- there's a lot of those, so it sort of adds to our portfolio. But that's our strategy is to keep providing more ways for people to innovate and put us into their networks. I don't believe there's really a wait for it. Most people find the 9602 perfectly acceptable. It's probably more of a new category of applications that I think that it may enable as opposed to somehow a replacement of existing systems that work very well.

And can you give an update on progress you are making with OEMs as well as the sort of growth you are seeing out of some of your new consumer tracking devices?

Yes. OEMs continue to expand. I think I used to call that a strategy. You've got to be careful not to let them expand in places where they don't need to expand. But we continue to have people being attracted and want to become value-added resellers and technology partners, etc. So the total count continues to grow. We are seeing some new partners, particularly like in the heavy industry space, so one that we probably haven't really addressed so much in the past, large equipment that we are now cost-effective to be able to track. And I think that will be an interesting growth space. As you said, just had a real detailed review of the consumer space. I think that's poised to really grow, particularly with some products that will be announced soon in that space. I think that our partners there still feel very good about their prospects. So a two-way personal communication and tracking devices -- there's a number of those in that category but a couple that are really now very cost effective.

We are going to see at CTI. I'm sure that's going to be part of the buzz with some of our partners at that point because there's a lot more intersections than ever with us, and the consumer mobile space around M-to-M because there's a lot of activity there, but we are kind of converging with some of the suppliers in that space who traditionally just focused on terrestrial M-to-M now focus on adding a satellite component to that and realizing we are probably the best choice for that to be added. So we're still feeling very good about our long-term growth prospects and that we are still very early days in this whole machine-to-machine world.

And final question, for Tom -- OpEx was up about 10% ex-D&A in the quarter, a little bit more than I was looking for. Is that a good level on a go-forward basis, or were there some one-time items in there or seasonal items that impacted Q1 on both SG&A and R&D?

Yes. I wouldn't call them onetime. If you look at last year's sequential quarters, Chris, you will see that SG&A was at its highest point in the first quarter. And so we think you're going to see something similar here this year. You will see SG&A move down through the year. In the first quarter, we always have our partners conference and we take that charge, we recognize that expense in the quarter when it happens. So first quarter tends to be higher. Similarly, some payroll-related taxes and bonus type things tend to hit more unevenly in the first quarter. So our expectation is that moves down. And similarly, in cost of service, the Boeing expense was heavy in the quarter, and we see that moving down.

Any R&D plan for the year?

That's going to be a bit more episodic. Over the course of the year -- 5.7 feels a bit high. I think you might see that come down a tad.

So full year around the 2011 level, higher or lower?

I would say in the area of the 2011 level.

Okay, great, thank you.

The R&D expenses typically, especially since we use a lot of outside contractors as well as some internal people, it sort of depends on what we're spending on that quarter. It's not necessarily a run rate of X number of bodies doing the same amount of work every year, like maybe a traditional supplier might have. So -- but I do think Tom's comments there are instructive.

And then could I come back to Jim's question on CapEx? Hey, Jim, just let me answer your question directly. So the cash CapEx and the source and use of $35 million-ish is low. If you take that number and add to it the PT&E received but not yet paid, and it kind of goes to your question of what's in accounts payable, that's $107 million kind of number, so it's $140 million plus. You won't see us ramp up from the $140 million level. You certainly will see us ramp up from the cash CapEx of $35 million.

(Operator instructions) Chris King, Stifel Nicolaus.

Hi, good morning, guys. Just two quick questions for you -- first of all, on the M-to-M consumer ARPU metric, you guys have been flat there for well over a year, certainly, around the $18 range. Obviously have a lot of puts and takes there with respect to some of the new products that you guys have launched and will continue to launch over the coming quarters there. I just was wondering if you could give us a sense whether you expect that ARPU number to remain flattish for the remainder of 2012 with all of those various changes taking place there?

And then secondly, just with the Iridium Extreme issue, just wanted to get your take on second-quarter impacts and whether you see any, I guess, meaningful or measurable impact with respect to voice ARPUs and voice usage or anything along those lines with respect of losing those handsets, at least for a brief period of time.

So I'll take the first question. We've guided and we say in our public filings we expect M-to-M ARPU to move down over time as we take on different applications that have very high volumes but lower ARPU per user. And so that is our expectation, and we think about ARPU as moving down over the course of the year as we continue to significant volumes and customers.

Yes, and to the second question, the number of units, and while Iridium Extreme has been very popular and I think it'll continue to be popular, and as I said we're going to not only replace the units, we think, in the second quarter that were affected, but still continue to grow new orders because there's still additional demand as it's even rolling into the second quarter. But in terms of like ARPU as well, we think that we'll be able to replace most of those units literally on a days or a week or two kind of basis for most customers. And so -- and overall, the total number of units we're talking about affected is a very small percentage of our overall -- I mean, it's still a fairly small percentage of our overall voice subscribers. So in terms of its overall impact on ARPU, I'd be surprised if it has a very material impact in terms of second quarter. So I don't really think there's that much impact.

Thanks, and then just to follow up on the consumer ARPU issue, so I'm clear -- so you do expect that $18 number to trend down, albeit slightly, by the end of 2012?

That's correct.

Okay, thanks.

And by the way, you've used the term a couple times -- consumer ARPU. I would call that commercial ARPU, because we sort of identify the consumer space sort of being a subset within the commercial space. There's an industrial segment and a foreign military segment. There's lots of other segments, none of which we really describe. But long-term, ARPU is expected in our plan to decline as we get into more and more applications that don't need as much data. But as I've described before to the market, ARPU's sort of a misleading term; it's not really a parallel to the terrestrial world for us because, incrementally, each of those revenues adds to the bottom line. They're not really related so much to cost, so it's not a direct comparison. But of course, just long-term in your modeling, you can't -- we're surprised, actually, still, that the number continues to hold so steadily. But I'm very pleased that it is.

And then I guess just one more quick question with respect to open port, arguably a little bit of a more cyclical business there, at least for a portion of it -- have you guys seen anything from a macroeconomic perspective that would give you more or less confidence, I guess, throughout the remainder of the year?

The shipping industry is not doing very -- hasn't done very well for a while and it's not necessarily in great shape. But I think the overall competitive dynamics and the fact that we are into this space with a new product for new builds and new systems at the right time really kind of overshadow that for us and allow us to continue to grow, which probably sets us apart from others. And as I said, the competitive dynamics are only helping right now in terms of people wanting to work with us even more. It's been good timing that we've introduced the Iridium Pilot just at the right time, and that -- are doing well. So that sort of adds to our overall confidence in the market. And yes, so it continues to grow.

Thank you.

Andrew Degasperis, Macquarie.

Yes, good morning. This call is for -- I'm putting it in for Amy Yong. But I just had a question on the subscriber equipment. I noticed you had a tough comp year-over-year because of the bulk sales from last year. I was wondering, is that going to be repeated sometime this year, or should we see subscriber trends go sort of normalized rate?

It's not subscriber trends, it's equipment sales. So last year, we put out incentives to cause our SPs to take delivery early in 2011. No such incentive existed in 2012, so 2011 equipment sales, we believe, were stronger in the first quarter. But we believe that on the full year, equipment sales and the margin from equipment sales is going to be in line with what we saw in 2011. So that's equipment sales. I guess if there's a subscriber question, maybe you could rephrase it because I'm not --

No, no, no; I meant equipment sales. Sorry. And just one follow-up, on the -- are you -- been getting more color from Inmarsat's partners regarding the shift in strategy? In general, could you give us some more information on the market opportunity there?

Yes, we certainly are getting color from them -- colorful language, probably, is appropriate. So it's been very disruptive across the board, and really everyone is talking right now about what to do about it. I think prices went up in May. A lot of people, as I think the previous questioner asked, are stuck right now. But that doesn't make them happy about being stuck, and I think it called to question sort of the competitive -- where they stood as partners, what it looked like going forward to them, what they could expect in terms of what used to be sort of an independent channel where they could develop their business kind of independently and now are seeing that business possibly leak away or taken away from them by their supplier. And that -- obviously, they have been looking for what to do about that, as they have been for a while.

So I think we are a safe harbor for that sort of partner, a kind of place for them to go to that provides a valuable service, a cost-effective service. I think it's made people want to talk with us more. We are seeing the effects start. It takes a while to ramp up; it's not going to be an immediate, huge impact right away, but I think it's more of a long-term trend and momentum that I think will occur, and will be the beneficiaries of that.

Great, thank you.

Brian Ruttenbur, CRT.

Okay, thank you very much. I have a big macro question, trying to understand your upcoming catalyst, obviously, this FAA deal -- what about the competition? Can Inmarsat or somebody else squeak in here and do the same thing and disrupt this? And talk about what you are seeing out there in the competitive environment from that angle.

One of the reasons we're developing the confidence to move forward in that space is the fact that it's technically challenging to be able to monitor aircraft all over the world from anything other than low-Earth orbiting. It's one of the advantages of having a cross-linked low-Earth orbit with satellites only a little less than 500 miles away, above the earth. The ability to actually -- that is an altitude at which you can see aircraft, see their transmissions and be able to really those to air traffic control facilities. So it isn't very likely that anyone else could do it, certainly not cost-effectively.

There are others that have proposed solutions that require massive new investments for aircraft beyond what's currently being proposed. There's mandates to actually put certain equipment on. One of the advantages of our approach is it doesn't require any new equipment besides what has really been mandated today. So even if another system came along, it would cost a lot of money. And I don't think there's a lot of interest or -- interest in the overall aviation market for significant new investments for commercial or general aviation aircraft to be able to get the benefit that we could suggest.

So our interest in this is it's quite unique. In fact, if we don't do this, some of the things that would -- the benefits that would accrue would not happen any other way for -- potentially ever, but certainly for many, many years, given the investment that would be required, and the next low-Earth orbiting system to be launched is a long, long way away, if ever. So that's why we're quite enthusiastic about the competitive dynamics.

Okay, so Globalstar is your next -- kind of having difficulty, but low Earth orbit peer. Correct?

It is another. I wouldn't know if they were next or not. I don't see a lot of them in the market these days, but they are low Earth orbit. Of course, remember, they are not cross-linked. So, being a bent pipe system, they really are more a terrestrial-based system. They're not a global system. They really operate where -- well under where -- ground stations are under their satellites, and when their satellites work, they are a quite different system than us.

So even in their case, first of all, they are not launching satellites that cover the whole earth and everything, anytime soon, that would be able to have any other payload to perform this service. And while they could be used as a sort of a data link for a system that would require new hardware and aircraft, that really isn't, I think, the dynamic anyone's looking for.

Okay, last question along these lines and I'm done -- budget delays. How much -- this potential award is tied to current budgets. What happens with, you know, there's all sorts of cuts being proposed out there for federal budgets. Is this already fully funded? Can you talk a little bit about that?

No; I don't really know that that makes a lot of sense to talk about now. Again, that's, I think, more of an item for June.

Okay.

I would say we wouldn't move forward unless we felt a lot of confidence about the ability and -- ability for us to generate the kind of returns that we are expecting. So I'll just -- I'll leave it for that. And I know you mentioned the FAA. Of course, remember, they're going to be a potentially important customer. But we are really talking about a global system with all the ANSPs, with all the NAV CANADAs and UK [NATs] and the Asian operators, etc. And that's the exciting part about this, is it's really a global system that the FAA is a really important part of but not the only part of.

Great, thank you.

Chris Quilty, Raymond James.

Speaking of aviation, I think this is the first time you've confirmed that you are now shipping your, I'll call it the Aero OpenPort, because I can never remember the name. Can you give us an idea of what the opportunity is in that market, in terms of volumes, ARPU contribution? And also, for Tom, where would that fall inside your reporting structure?

Yes, you know, that -- we don't -- we call it Aero Open Port, so you got the name right. And we say we are shipping it. Frankly, in many cases we are shipping parts to our technology partner, LiveTV, who really is the technology supplier behind the scenes to those. And so that is a little indirect.

You know, the opportunity, we think, is growing and extensive. There's a lot of interest in getting higher-speed service onto aircraft. At least it's particularly in our case, we believe, from the cockpit, which is the primary focus and the sweet spot for our product, we think. There's a lot of interest in the cabin, too, but I really think that that's more of a KA or KU or other kind of system, long-term. And so there, it's going to be more of a partnership we think we have, or at least a complementary system on the aircraft.

But as it relates to cockpit, we haven't been addressing -- because in some cases customers don't want to announce publicly at this point, their partners don't want to announce publicly. So it's difficult for us to be too specific, but we have seen carriers be interested in, in fact, adopting the technology. And the fact that it's starting to be deployed right now -- there are some regulatory things that have to happen for aircraft, this thing called an STC, a supplementary type certificate, that is required to be obtained for new equipment installations, and those are done by airframe. So different types of aircraft have that at different times. That is one of the things that will gauge the deployment.

But this is thousands of aircraft potentially as an opportunity over a number of years, and those are -- and the ARPUs of these are yet to be seen. But I think that they are at or above the maritime, potentially well above the maritime environment of maybe in the -- maybe these things could be $1000 per, because, again, they are used in a very important service that's sort of on all the time or on very often. And these services fly all the time; they don't sit in dock, that sort of thing, in port for a while. So they will be good contributors to our bottom line when they come..

And, Tom, now that the OpenPort is 10% of service revenues, does that mean you're going to break it out for us?

We haven't. I mean, it's part of commercial voice.

Okay. Can you at least give us sort of an update on where you are in terms of installed units and ARPUs?

I still think -- obviously, we will do that over time. I think that's very competitive information right now, in our mind, especially with the changing industry as it stands right now. We'd really rather, since it's not that material in terms of numbers compared to our overall subscriber numbers, we're kind of keeping that competitively quiet. But I think the 10% at least gives you an indication that it's starting to become an interesting part of our business.

Hey, Tom would have just said no.

That's why you want me to answer your questions, Chris.

Okay. And final, final one here -- the access point, I think that's been shipping for a little bit now. Can you give us a sense of what you're seeing in terms of types of users and usage patterns and how you feel about the product, how well it's taken off?

I'm pleased. We are really, I think, a relatively good number of units. Again, we haven't talked the total numbers. But there's -- for just a product that's now being really understood by our partner channel and their customers as to what it can do, I think we've had a lot of users and we've had a lot of great anecdotal evidence from people sending me pictures and tweets and telling me about how they've been able to do their BlackBerry at 18,000 feet in a general aviation airplane or be able to send messages from their smartphones in places they hadn't done. Or I hear of iPad apps that people use that work on our network very well.

So I'm hearing a lot of good things. I think our partners have told us that it's a nice addition to our product line. It does add ARPU, and in fact a pretty healthy ARPU, probably a significant percentage above what a typical user on an average would be. So I think we'll let that settle out a little bit more. I'd like to really give it a few more months, at least, before we start talking about what its sort of contribution is, if we do. But I -- because it's still early days and I'm not sure if it's totally indicative, but it's certainly above our expectations when we first put the product out.

Great, thanks for all the commentary.

Thank you, there are no further questions in queue at this time. I'll turn the call back over to management for closing remarks.

Well, thanks, everyone, for joining us again, and we'll look forward to talking you through the quarter and hopefully seeing many of you in June as well here. Thanks.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.