Iridium Communications Inc (IRDM) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iridium second-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, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Kunszabo, Head of Investor Relations. You may begin, sir.

Good morning and thanks for joining us. I would like to welcome you to our second-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 our 2012 second-quarter results followed by Q&A. I trust you have 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 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.

Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our expectations or views change.

During the call, we will also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Steve and good morning, everyone. Thanks for joining us. This morning, we announced second-quarter numbers, which is our 10th earnings report since going public in late 2009 and it is probably the first time we haven't lived up to or exceeded expectations as we lowered our service revenue and operational EBITDA outlook for 2012 and I'm obviously disappointed about that. However, I don't think you will find this to be a trend.

We remain very positive about our overall competitive position, the health of our current network and the progress we are making in replacing that with Iridium NEXT and our new hosted payload business and many other factors that give us confidence in our long-term growth path.

I will first address why we fell short this quarter, which was primarily due to further weakness in our legacy government handset business, before taking you through the strategic elements that will underscore our growth in 2013 and beyond. Let me be clear here. While we may have lowered our short-term expectations, I really like our long-term prospects. Tom will then run through the results in our revised financial guidance.

So to the government business. We have seen a higher number of deactivations by our traditional government handset customers largely due to reduced troop levels in the conflict areas. While we can't directly address its impact until we renew our long-term contract with the Department of Defense next year, we are confident that the strategic nature of our relationship with this anchor customer hasn't changed. They continue to spend with us on new product development and a multiyear modernization plan for their dedicated gateway and the feedback from senior civilian and military leadership continues to be constructive about our long-term partnership.

On another issue, I think we found we can do a better job managing our supply chain. While we believe that last quarter's Iridium recall was an isolated incident, we have intensified our focus in this area. We have diversified the manufacturing line for M2M device production, scrutinized supplier relationships and examined internal processes to improve efficiency. We are making some key improvements in this area because although our equipment revenue in the first half of 2012 was on track, we could have done even better in meeting what we are seeing as growing commercial demand.

Now if I step back and really take a complete top-down view of the business, we are in pretty good shape, especially on the commercial side, but really on the government side as well. It starts, of course, with a differentiated and very capable network. Our network is our greatest asset. Everything else we do comes from this sustainable competitive advantage. It impacts which markets we are successful in today, which markets we can enter tomorrow and ultimately the quality of our revenue profile.

When you compare Iridium to the rest of the mobile satellite services space, no one else serves the breadth of business areas and vertical markets that we do and no one else offers the same robust suite of products. So we are always focused on building upon the power of our most important asset, our unique satellite network. Thanks to its resilience and flexibility, that network continues to perform very well. Tom is going to have some additional information on this in his comments, but voice and data traffic performance statistics remain strong and we have recently begun implementing some innovative capabilities such as co-locating satellites in orbit to further enhance the customer experience.

This capability of co-locating satellites was developed by my technical team and the outstanding operations team we work with at Boeing. It gives us more flexibility in how we manage our network with 67 satellites rather than 66 now part of the operational constellation. It is not only a smart way to use our spare satellites, but also gives us greater confidence that we can continue to provide a high level of service.

We are also planning to implement this co-location approach when bringing Iridium NEXT satellites into the network, ensuring a smooth transition for our customers as the new system is brought online.

Speaking of Iridium NEXT, we are nearing the halfway point of our five-year build. We expect to complete the critical design review by early next year for which many of the component CDRs are underway this summer and Thales Alenia Space and the rest of the Iridium NEXT mission team have already built a number of engineering models and prototypes to verify performance of the key elements. We have also begun to replace Earth terminals for both gateways and are upgrading our telemetry facilities around the world, all of which keeps us on track for first launch in early 2015.

I would also like to take a minute here to applaud SpaceX on another successful launch of their Falcon 9 rocket in May and the pivotal role our launch services team played in selecting them in the early days of the primary delivery platform for our Iridium NEXT satellites. We are partnered with one of the most transformational companies in the space industry at a relatively low cost because we had the experience and foresight to bet on them early.

You may have noted in our SEC filing last night that we recently amended our contract with SpaceX to further enhance our launch strategy. They are now providing us with seven launches of 10 satellites in each launch rather than the previous eight launches of nine satellites in each launch. This is all thanks to the greater lift capability being demonstrated by the Falcon 9 system. Perhaps most importantly, it fits nice with our plan now to exercise our option for a first launch with our supplemental launch services provider, ISC Kosmotras, on their proven Dnepr rocket. This flexibility allows us to send up just two satellites in our first launch, which gives us the ability to thoroughly test the operation of our Iridium NEXT system before raising the bulk of the constellation with SpaceX in subsequent launches.

This new launch strategy still adds up to the 72 satellites we have always planned for, with the first two being on the Dnepr rocket in early 2015 and the remaining 70 on SpaceX's Falcon 9 platform starting in mid-2015. It is a smarter strategy for in-orbit testing and provides us some additional cost-savings. It also gives SpaceX a little more time to get through the two dozen or so launches that are on their manifest before Iridium NEXT.

So what is next after a great network? As I said earlier, it really defines how you go to market. With that in mind, the next two elements of our growth profile go hand in hand. We compete in five attractive and fast-growing business lines and we do it through a partner ecosystem that innovates around our products and extends our reach in a low-cost way.

Let me start with the partner channel as I can't emphasize enough how important it is to our business. By going to market with over 275 partners, we benefit from a wholesale distribution model that keeps our costs down and magnifies our operating leverage. In addition, our partners don't just resell our products. In fact, most of our partners innovate around our core technology by adding hardware and software to bring a specialized solution to the end customer. This is particularly true in the M2M sector where, for example, the requirements of an energy industry customer may be very different from a transportation company subscriber.

As for our core markets and leadership position, consider the following attributes -- favorable competitive dynamics with high barriers to entry, limited competition as most segments have just one or two players, three of our five key business lines are expected to have double-digit growth rates over the next several years, s number one or number two position depending upon the market with network leadership providing distinct advantages in coverage, mobility, security and device size.

Now that we have reviewed the foundation of our long-term profile, I will spend a few minutes on the growth areas. Let's start with Aireon, our recently announced global aviation monitoring venture. This is a new business that is not yet in our numbers. Not only is this expected to provide us with approximately $200 million in one-time hosting fees between 2014 and 2017, but we believe there will be a significant and incremental recurring service revenue associated with a long-term data contract and that is for at least the life of the new constellation to about 2030.

In addition, we believe there is significant value in being a key owner of an enterprise that offers a critical service to the world's air traffic control agencies. What is best about this opportunity is that no other satellite or terrestrial provider can be the technology platform for this business. It is a uniquely Iridium venture and I will note that we have had very positive feedback on Aireon on our hosted payload strategy since we went public with it on June 19.

We are also encouraged by the progress Harris, our payload development partner, has made in accommodating potential payloads that would fit into and be complementary to the core Aireon aircraft monitoring system. We expect to make one or more announcements before year-end on additional secondary payloads with a few interesting terrestrial and space monitoring missions on the list of possibilities we are directly working today.

The flexibility of the Harris design for the Aireon payload is actually one of the pleasant surprises we have had since our announcement. It may be pretty straightforward to include one or more additional payloads in the spare card slots they have designed into their platform. In the end, these additional payloads will add to the already $200 million in hosting fees we expect to receive from the Aireon venture while also representing additional ongoing data services revenue.

In the M2M business, the coverage, functionality and size of our products, combined with a market that is in its infancy when you consider device penetration, makes it a winner for years to come. We have delivered five-year compound annual growth rates in excess of 50% for subscribers and revenue and forecast double-digit growth rates through at least 2015 for both metrics.

Like with all of our markets, our network and partner channel are key differentiators. Customers want small devices and low latency, which you simply can't accommodate with a GEO network or a bent-pipe architecture and they want to track their assets all over the world. The US government and commercial industries ranging from heavy industrial equipment to shipping recognize this value. It is one reason our unit service revenue is more than three times higher than our closest competitor. In short, we expect M2M to be a big source of revenue for our core telecom business during the coming years.

As for the maritime market, there are several reasons to be confident about our course here too. We grew Iridium OpenPort subscribers 31% and revenue 21% during the last year and as we have shared before, this leg of our sales now represents 10% of our commercial service revenue.

These strong metrics have come from several factors that we believe will continue to benefit us. First, we have established a strong installed base in the historically price-sensitive crew communications market. More recently, we have partnered with VSAT companies at the high end of the maritime sector to provide a complete communications solution for ships business.

Lastly, we have fortified our already strong partner relationships by staying away from developing a competitive direct distribution channel. Overall, we believe this has increased our addressable market by a couple thousand vessels while also building inroads with commercial shipping and fishing customers, some of whom are deploying 50 or more Iridium pilot units at a time across their fleets.

With an expected market growth rate of 13% through 2015 based upon industry analyst estimates, coupled with our expanding position as the low-cost value provider, we expect to double the revenue of our maritime broadband service over the next three years.

One often overlooked growth area in our business that I want to draw attention to is the aviation market. It has the same good growth characteristics as maritime, but there are a few important differences. In some ways, we have even better competitive dynamics in aviation than we do in maritime. Our systems are smaller and far less expensive than the alternatives and a truly global service is important to long-haul aircraft that fly over the oceans and poles.

In addition, our FAA authorization for safety services bolsters our presence in this sector and will probably be our single biggest catalyst for growth in this space going forward. In fact, one of our partners recently signed a deal with a major aircraft manufacturer to outbid its workhorse commercial aircraft model with a communication package based upon our Iridium core 9523 voice and Iridium 9602 M2M devices. These units should generate hundreds of dollars in ARPU and aviation safety services are expecting to bring us between $5 million and $10 million in incremental service revenues in a few years.

Now moving now to the handset market where we are winning with an established and defensible position as the market leader, with the most complete product set in the industry. Our strategy includes the only one of its kind encrypted phone for secure use by government subscribers, full-featured commercial handsets that can also connect to your laptop and smartphone, as well as a number of accessories and applications. We have also deployed a push-to-talk handheld tactical radio, which has been well-adopted by the most demanding military users. All in all, we see consistent subscriber and revenue growth rates and a commercial voice ARPU that should firm up as we look ahead.

Now that I have laid out the key drivers we will see in our core markets, let me turn to the new products we are working on to supplement this growth. At the top of the list are netted services in both commercial and government businesses. We have already begun validating global push-to-talk capabilities with investment and support from the US government and expect that they will be first to field this service in 2013 and 2014.

From there, we will leverage the product into a commercial push-to-talk solution, which we think will be implemented by first responders, construction crews, oil and gas workers, and many other industries where work teams in remote areas don't have access to terrestrial wireless networks.

So in wrapping up my thoughts, I hope you share my confidence in our long-term growth profile. It is easy to make a strong case when you start with a superior network and a great partner channel. These differentiators support our growth in attractive, fast-growing markets and allow us to develop new products to capture additional revenue streams, all of which leads to consistent operating cash flow growth and strong returns. So with that, I will turn it over to Tom for a more detailed financial review.

Thanks, Matt and good morning, everyone. We reported second-quarter 2012 results that showed ongoing expansion in our commercial franchise while also highlighting greater-than-expected weakness in the government voice business. Consequently, we reduced our service revenue growth rate for 2012 to approximately 6% and now forecast that our operational EBITDA will be between $205 million and $210 million.

I will first focus on our results and then take you through a more detailed view of our updated 2012 and long-range outlook. Iridium recorded second-quarter total revenue of $97.3 million and operational EBITDA of $52 million, yielding growth of 1% and 7% respectively from last year's comparable period. Our operational EBITDA margin was 53% for the second quarter, which was an expansion from 51% in the year-ago period.

It is worth noting that we are nearing striking distance of the approximately 60% operational EBITDA margin we anticipate reaching by 2015. This not only speaks to the operating leverage of our business, but to the room we have for margin expansion when you consider that our more mature satellite peers have EBITDA margins in the high 70% range. There is no structural or competitive reason we won't achieve similar margins over the long term.

Second-quarter net income was $17.7 million. This represents 51% growth over the $11.7 million we posted for the year-ago quarter. Second-quarter net income benefited from a $6.6 million reduction in depreciation expense due to an extension in the estimated useful life of our current satellite constellation. We consider many factors under generally accepted accounting principles when evaluating the appropriate depreciable life of our network and place considerable emphasis on the periodic assessment provided to our Coface lenders by their aerospace consultant.

During the second quarter, this consultant materially increased their estimate of the remaining useful life of the constellation due to its good health and expected resilience. This reduced level of depreciation expense in the second quarter will recur in future quarters through 2014.

From an operating viewpoint, we reported commercial service revenue of $52.9 million in the second quarter, representing 8% growth over last year. We added 32,000 net commercial customers during the quarter, a 23% year-over-year increase in subscriber additions. We had a total of 528,000 billable subscribers with approximately 19,000 of these net additions coming from the M2M business and 13,000 from the voice market. Commercial M2M data subscribers now represent 38%. Billable commercial subscribers, an increase from 32% during the year-ago period.

Being bullish about our long-term growth trajectory really starts with the diversity of our revenue in the commercial business and it is not just the nice spread we have amongst some of the fastest-growing markets, namely M2M, maritime and aviation. We are also heartened by the mix of voice and data when you consider total service revenue. At 58% voice and 42% data, it mirrors the breakdown at leading terrestrial wireless peers with the data component moving rapidly higher.

In addition to core market strength, Matt also discussed netted services being at the top of the list in terms of new product contribution. Let me add a few items to that list. We see GPS augmentation and global data broadcast services also having great promise. iGPS and Boeing timing and location technology, or BTL, will improve the accuracy, reach and security of current location-based services used by the government and industry. Global Data Broadcast, a new product we expect to introduce next year, would establish the capability to quickly simultaneously deliver data to a wide audience of subscribers.

Turning now to our government service business, during the first quarter, we recorded government service revenue of $15.6 million, down 3% from last year's comparable period. We lost 1000 government voice customers, but grew M2M data subscribers 20% over last year. We ended the period with a total of 48,000 billable subscribers with M2M data subscribers now accounting for 25% of the installed base.

As in the commercial sector, our revenue diversity has improved dramatically here too. Years ago, we were entirely dependent on adding traditional handsets with the Department of Defense. Whereas today, we are also selling tactical push-to-talk radios and customized M2M products.

These newer products are growing at a nice rate, but we just haven't reached a point where their growth offsets the current decline in our highest ARPU voice subscribers and the disproportionate impact these handset losses have on service revenue.

With our netted and M2M services expected to make a bigger impact over time, the most important thing we can do to stem the slowdown is negotiate a favorable contract with the Department of Defense in 2013. We look forward to working with them on a new long-term agreement when the current one expires next year that not only gives them more value as they expand their business with us, but provides us with a path to renewed growth.

Focusing next on equipment, which produced revenue of $23.9 million, a 9% year-over-year increase, resulting primarily from solid Iridium Extreme and M2M sales volumes. Specifically, we booked a 70% gain in M2M unit sales showing a continued strong uptake of our device in a market that is expected to be one of the most significant contributors to our future revenue growth.

Moving now to our financial and operating outlook for 2012, as I noted at the start, we now expect operational EBITDA between $205 million and $210 million for the full-year 2012. While below our historical average, it still represents a solid 9% growth rate at the midpoint of our guidance range when compared to the $190 million we achieved in 2011.

On the same basis for the full-year 2012, we are projecting the following -- total billable subscriber growth between 20% and 25%, which didn't change from our previous estimate and total service revenue growth of approximately 6%. This is down from a range of 8% to 11% primarily reflecting reductions in our legacy government voice business.

As for our long-range guidance, we are revising our service revenue projection and affirming the other financial targets we gave during our fourth-quarter earnings conference call back in March. More specifically, average service revenue growth between 8% and 12% per year between 2013 and 2015. In light of our revised 2012 guidance, this higher range still makes sense when you consider the solid growth we expect in our core commercial market, the contribution from new products, the positive impact from affirming commercial voice ARPU and a new contract with the US government.

I would add that we expect 2013 will look better than 2012 and be within our long-range view. We expect an operational EBITDA margin of approximately 60% in 2015, which again represents the natural operating leverage in our business. We continue to see negligible cash taxes from 2013 to approximately 2020, which is unchanged from our last update. 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, also unchanged from our last update. We expect a rate of deleveraging that equates to a half to a full multiple of operational EBITDA beginning from 2016.

And finally an update on our capital structure and liquidity position. As of the end of the second quarter, we had drawn $568 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 a cash and cash equivalents balance of approximately $166.7 million.

As Matt noted, we also filed an 8-K last night that included several key amendments to our credit facility. Most importantly, the Coface agreement was modified to allow us to establish the Aireon venture, to reflect changes in the expected timing of cash flows from hosted payloads and to accommodate the revised agreement with SpaceX. Given these important concessions, we agreed to raise capital in the event that our expected $100 million in $7 warrant proceeds doesn't come in when the warrants expire in February of 2013. Specifically, by the end of April 2013, we will be required to issue convertible preferred or common equity to the extent that the amount received from the exercise of the $7 warrant is less than $100 million.

In closing, I would observe that our commercial business is in fine shape. We are recording double-digit year-over-year growth rates in the M2M, OpenPort and aviation businesses and we don't expect that to change anytime soon as market dynamics are in our favor. The reach and unique functionality of our network will give us an advantage here for the foreseeable future.

We will successfully defend and grow our beachhead in the handset market with an unmatched product portfolio. And we will continue to navigate a couple of atypical challenges over the coming months in our government market before we return to something closer to our historical growth trajectory after our contract is renewed next year. With that, I will turn things back to the operator for the Q&A portion.

(Operator Instructions). James Breen, William Blair.

Thank you very much. Just a couple questions. One, you obviously highlighted the strength you had in the commercial business and a little bit of a stepdown in the government side. Can you talk about -- do you expect the government to sort of remain at the current level going forward? And then as a part of that, engineering and support services has been coming down over the last couple of quarters. Is that basically tied into and should move in step with the government revenue?

And then secondly just, Tom, if you could just go through what you just talked about in terms of some of the changes you made to the credit agreement in terms of potentially issuing some convert or preferred stock in the beginning of next year. Can you outline for us what the potential dilution would be or maybe the total number of debt that would have to be issued?

Do you want to take the --?

Well, I mean I can speak -- we have put the government services in -- it is sort of baked in the new guidance that we've put into. As we've said, we sort of still see -- we now think we understand more the effect that the downturn in Afghanistan and Iraq and everything are causing in terms of the squeeze on a certain part of the business, but we still see a diversification of business into M2M and netted and other things here. So overall, it is going to be on this path here for another little while and that is why we baked that into our projections. But think we can kind of get that back starting particularly later next year and into 2014, '15 to a more stable course.

Jim, on the engineering and support, that is not going to move and let's just break government apart. The problem is with our legacy voice handset within the government. Our netted business is growing, our SBD business is growing as this larger piece of our business with them is declining on the back of handset deactivations. Government continues to spend with us on improvement to their --

Their gateway.

-- their gateway in Hawaii and we would see increases in that. It is kind of episodic. They pay us for certain functionality to be delivered and so we are not calling that engineering support data happens to be down this quarter, but that is because they completed a project and there is other projects in the queue that will represent additional investment there. So you can't think about government as just down. There is an element of it that is down and that is our problem this year, but there are other elements of it that continue to grow.

And in fact, there is a considerable investment that has been planned and approved to upgrade that gateway to NEXT capability and it really just depends on what we are installing and doing in a specific quarter that relates to that, as well as some of the R&D that is being spent on some future projects and products that they want to have. Some of those get slowed down a little bit and I think they're a little slower than they might have otherwise been, but they are continuing to flow just at a slightly slower rate.

And then so the second question, Jim, about the issuance of capital, so as you know, in our prior filings, we have indicated that the proceeds from the $7 warrants were part of how we thought about our funding plan for NEXT. So the lenders thought of it the same way and all this commitment essentially does was make sure that the capital from those warrants will come into the Company. If those warrants are not exercised, we essentially have a makewhole to the extent that the warrants don't come in. So if it is less than 100, we will have to issue the difference between what does come in and 100.

Okay. And it is your choice whether it is a convert or preferred stock or straight debt or is there a certain --?

The choice is between a convert and equity.

Okay. And then just lastly on the revenue trends, it seemed like last year 2011, a little bit of a slowdown in the second quarter in the commercial business. Is there any seasonality around the commercial business in the second quarter that you generally see?

No, actually second and third quarter typically are our biggest quarters. Fourth quarter and first quarter are a little slower because of what we call the Northern Hemisphere effect where a slight bit more of our traffic is in the Northern than in the Southern Hemisphere and it is warmer and fishing vessels are out in the summer more and people are outside more, etc. So this actually is usually one of our bigger quarters and I think you will see, if you go back over seven or eight years, including this year, the summer is a -- or the summer and fall, if you will, is bigger quarters than the winter.

Okay, great, thank you very much.

Jim McIlree, Dominick & Dominick.

Yes, good morning.

Good morning.

This is Jim McIlree. I am not sure what name he said.

We knew who you were.

Okay.

How are you, Jim?

Great. Thank you. I just wanted to make sure I understand the reduction in the guidance. You are saying it is mostly from government or all from government services?

Substantially all from government. We see our commercial business kind of on track with our historical growth rates.

Okay. And it seems like, just backing into it, that you are saying that the government services is going to be, I forget the language you used, kind of like this for the next few quarters and kind of like this in my mind means that it's this $15 million, $16 million-ish revenues for the next few quarters. Is that a fair assumption?

The way we look at it really is, of course, since we really get paid by the subscriber and as Tom said, in specifically that one part of the business, the core voice point-to-point handsets, there is going to potentially be a continued leakage I think over the coming quarters in terms of the absolute numbers of those. They are not that big a number and there is still a substantial business there as we go along, but I think there will just continue to be some pressure over the next year on those numbers as we go forward, which puts pressure on the fact that the other growth areas really aren't quite making up for that yet. They will over time, but they aren't quite yet. So it pushed our government business down a little bit. As I said, I think that is more of a short-term trend than a long-term trend. We really do see really based upon all the activities, many of which Tom and I talked about that are going forward, as being positive long term.

And given the changes that have taken place over the past few months with the hosted announcement to now and now the government push-out and the change in the launches, etc., can you just summarize again the path you have to finance the NEXT constellation?

I will let Tom reiterate that. I don't know what you meant by push-out in the launches. There was no push-out in the launch.

Well, excuse me. The changes in the launches. I misspoke.

Yes, it is a different strategy that, as I said, just is actually smarter and a little less expensive frankly and still delivers 72 satellites over the same time, but with less risk. So that really is just sort of a slightly reshuffling. You might say that there might have been a couple of months slip on the first Falcon 9 launch, but that is probably a benefit too in some ways if anything. So we will still get our first satellites up when we thought we would be, test them out thoroughly and then still be on track to get all the satellites over the two-year launch window. But in terms of the total (multiple speakers) money profile hasn't really changed.

Yes, as Matt said, the changes to the SpaceX agreement are nothing but goodness to how we think about our plans for Iridium NEXT. It derisks our launch strategy. It was a savings. It's a savings to our approximate $3 billion plan. So there is nothing but goodness there. And so as we said many times, our plan for the funding of NEXT, which is approximately $3 billion, has three elements to it. The first element is our $1.8 billion Coface facility. The second element is approximately $200 million to $300 million in hosted payload fees of which Aireon is $200 million and others that we are working kind of make up the balance. And finally our operational EBITDA, which on our current guidance is north of $200 million run rate. And you can consider that over eight years of the construction of NEXT, that is what aggregates to our plan.

Okay, great. Thank you.

Chris Quilty, Raymond James.

Good morning, gentlemen. I wanted to address some of the commercial voice ARPU issues. I think that was probably one of the bigger year-over-year declines you have seen in the voice ARPU in a while. I wanted to get a sense of what you think is driving that? Are there competitive issues with some maritime customers moving to VSAT solutions? Is it your much heralded Inmarsat competitor taking business with the Isatphone or is it just a change in customer usage patterns moving from postpaid to prepaid that is impacting in the near term?

Chris, it is not price; it's usage and it is usage most acutely in our very high users of LBTs for circuit switched data and they're moving to either OpenPort or to other solutions just because the price per minute is cheaper. So that is where we see it. That is where it is most acute. But just I would say generally a decrease in usage across the board is what the driver is there.

I agree with Tom. We have a number of very high users that were using the LBT in a maritime and aviation perspective that some of those are now moving to OpenPort, but at a lower cost per bit. And that is part of the impact or it is a good size of the impact. I don't think we see it really that much in the handset side of the business. Those have sort of stayed pretty stable and really still don't see a lot of impact from any kind of competitive dynamic from anyone really in that case. If anything, we feel like we have strengthened a bit with the broadening portfolio that we have and additional solutions like access points and other things, which will help from that perspective. Though are very early days and really aren't contributing materially to the ARPU, but down the road, I think they would be helpful.

So I really think it is just that one -- really dynamic and primarily I would say in more like a maritime market or specific applications of an LBT for some high users that are moving to other technologies and I think those will get recovered over time.

Got you. M2M, I think you are still aiming to launch the new 9603 sometime in the near term and that launch doesn't seem to have slowed the growth rate in the near term. What are your -- what is your outlook on a go-forward basis for the impact of that product either with an absolute growth rate or if you can discuss trendlines with new OEM customers?

Well, the device side of the equation, the M2M is a very important piece of it and so the fact is we are really diversifying our portfolio with the 9603. It doesn't replace the 9602 like the 9602 replaced the 9601. It is 70% smaller, but it is about the same price. So more than anything else, the 9603 enables some new applications that probably wouldn't possibly have even gone to a satellite M2M solution because the tax on putting satellite in a solution really is even less with the 9603 than the 9602.

So we have both government and commercial customers, specifically consumer devices really are excited about the 9603 and while we did launch that in the spring, it is actually only starting to ship now to our initial customers and probably won't get into a lot of products until later this year and on into 2013. But it more broadens the range of applications that we can address as opposed to sort of changing any kind of dynamics.

But overall, I mean as you can see, our M2M business remains very healthy. I think that there has been some good moves from some traditional players towards us because of the broadening portfolio, but also just because they are realizing our network advantages and other advantages and we have got a lot of plans still in terms of continued developments and things that we think will even give us more advantages going forward.

Okay. Switching to the government side, can you give us a sense of where you think the netted Iridium Phase 3 progress is of when you will complete that development process, when you might see new orders for devices and then more specifically, what you think the structure of the new five-year contract will look like? Will it be very similar, just different pricing terms or will this be a radically restructured contract from what you have seen in the past two cycles?

To the first part, the netted -- the what we call the distributed tactical communications system as the government calls it, you're right. As we have talked about before, we are in sort of a development cycle right now where they are not deploying as many Phase 2 radios because they are really waiting for the Phase 3 product to be available and there is a development process right now. It is a little slower than we would like because just sort of the R&D continues to flow, but not quite at the rates if it would, it would go faster. So we are sort of feeling that that is not going to make as much of an impact until later next year or certainly 2014 is really when I think you would see the impact of that.

Simultaneously, that development also enables us to put Iridium into other existing tactical radios, either as an add-on or as a waveform into those radios and a lot of those discussions continue to progress and will be -- I think we will see some parallel activity. So it won't just be our devices going out there; it would be existing devices that might otherwise have another technology in them loading Iridium into their library of technologies.

So that is that and I think that will play itself out over the next year, year and a half. On the contract, I mean I don't think we want to negotiate in public right now in terms of describing our contract process. So I would rather not go into detail. Just the details of that, there is -- the current contract is up, so it has to be complete really at the end of the first quarter of next year. I think it is -- is it May I think it is or is it --?

March.

March, it's March, yes. So March. Obviously, we will be talking with them throughout the rest of this year and early into next year. They can extend that six months if they want to. Though we have been already working around and actually working with them on what that new contract might look like, but there is still work to be done. I won't go into details other than we feel very positive about the potential there of what we can do in terms of, as Tom said, bringing more value and really shoring up our growth rate going forward here as we look at that.

Well, maybe just a clarification. I think Inmarsat's contract got folded into [Ficsa] and is it your understanding that the Iridium contract will still remain its own vehicle?

That is our strategy, yes. I mean that is our expectation.

Okay. Great. I will circle back into the queue.

Glenn Tongue, T2.

Good morning. A lot of good news embedded in this. I wanted to touch on the change in the depreciation schedule on the existing constellation, which I guess implies that it is going to be more longer lived than you expected. Is there any way to take advantage of the greater useful life?

If you mean in terms of stretching out the capital program, probably not nor would we want to. I mean we are really pleased that our constellation is going to be healthy well into next now and it's been proven. We've always thought that, but frankly now our even external consultants that are independent and paid for by the banks view that in the same way.

But the problem is that you push out or you delay a big capital program and in my experience from having does this a lot, it ends up costing more and it has unintended consequences, so you drive and get it done. And the other reason for not doing that would be we have some exciting new hosted payload businesses we would like to start generating data service revenues from that would far outweigh any kind of benefit we would get from it. So I think it is more flexibility and it is great to have, but it is not something you really kind of take advantage of other than obviously if depreciation schedules improve.

Well, and I guess it takes one of the risks off the table in terms of the gap between existing constellation and NEXT. In terms of the Aireon business, is there any more color that you can add as far as what is going on there? Any thoughts of capitalizing that business independently in the relatively near future?

Well, there is a number of kind of milestones that we are set to do through this year with our partners. We have got to finalize some of the initial contracts that we have with that, which includes with our first customer for that service, which would be NAV CANADA, but a lot of work we're doing right now with the FAA and continuing to sort of support the sort of analysis and effort that are going on with them.

Clearly, we want to get a little bit further down the road on the technology and as I said, we are feeling very good about sort of the launch of that and what that platform will be able to do for us. So I don't see anything what I would call near term from that perspective, but we are quite bullish about the potential for that business obviously and as I said, it is only generating even more enthusiasm as now what had been obviously a rumor and discussed is now a lot more clear as to how we are doing it, who we are doing it with, when it is going to do, what it is going to do. And I hope to be more fulsome in terms of our describing that business in the future as we clear a few of those milestones we want to have.

Keep up the good work.

Thanks, Glenn.

Chris King, Stifel Nicolaus.

Hi, good morning. Thanks for taking the question. I just had to add one I guess as kind of a follow-up to Chris's question specifically on the voice side of things. It looks like in terms of the guidance that you are laying out that you do expect kind of a reacceleration or an acceleration I guess of specifically commercial services revenue growth to kind of get to your guidance in the 2013 to 2015 range versus what it is this year. Just was wondering how we should kind of look at that with respect to the voice versus the M2M split. Is that acceleration going to be almost entirely from an M2M standpoint or do you expect the trends that we saw in the most recent quarter here on the voice side -- do you expect those to materially accelerate as well as you get more kind of OpenPort subscribers into the base and that type of thing?

Right, Chris. So we said that we expect a higher growth rate in our service revenues in 2013 than in 2012 and there are a number of reasons for that expectation. We expect accelerated growth in netted Iridium within the government sector given the rollout of our Phase 3 offering. We expect accelerated growth in SBD within the government sector. In our commercial business, we expect firming ARPU. In 2012, we have been experiencing about a $3 year-over-year reduction in ARPU. We don't expect that to continue in 2013 for a number of reasons. We expect accelerated growth in OpenPort in 2013 based on growth we are already seeing in 2012 that will be accretive to ARPU.

Similarly, our 2012 introduction of bands of Iridium will yield increased growth in the aviation sector in 2013. ARPU's in this product are approximately $250 and will be accretive to overall commercial voice ARPU. We expect that our prepaid revenue will increase. It will experience increased growth in 2013 and similarly be accretive to commercial voice ARPU. We expect that more revenues will be recognized in 2013 than in 2012 due in part to a higher number of expiring minutes on prepaid plans in 2013 than in '12, which is the trigger for revenue recognition. We also expect that our new product offerings in commercial push-to-talk, Global Data Broadcast and Boeing location services or BTL will contribute modestly to 2013 and materially to 2014 and beyond.

Thanks. I guess just a quick follow-up then in terms of the lower postpaid customer usage that you talked about in the press release, do you expect a material change there going forward in terms of the usage patterns for voice?

No, we do not, but the changes that I discussed that are accretive to ARPU will dominate that.

Okay, got it. Thanks.

(Operator Instructions). Brian Ruttenbur, CRT Capital.

Okay, thank you very much. The main question I have is a question of why or what has driven the credit agreement change. Is that because of the change in the launch strategy? Is that the change in your guidance? What has -- maybe just explain that a little bit better that triggered the change in the credit agreement.

It wasn't the change in the guidance. The ability to invest money in Aireon was basically the triggering event and it happened at the same time as the renegotiation of the SpaceX agreement. So those were the two drivers.

By the way, the announcement last night just happened because it was completed yesterday and it happened to work out that it was the day before our earnings announcement. The two aren't really tied together in any way. We have been working on knowing we had to do the credit facility change because of SpaceX because of Aireon frankly for six, nine months anyway and have been working with the banks on that change. That was always in the plan and had to happen and underway for quite a while.

And the 8-K, we put that out last night just to give investors time to absorb it and be prepared for questions this morning. So it was really just kind of in your interest that we put it out that way.

Okay. The other thing is the change in launch strategy. How much are you going to save? I have heard some -- I haven't heard definitive numbers. Do you have a specific we are going to save $50 million or we are going to save X? I deal in hard numbers.

Yes, it is in the area of $15 million when you consider the reduction in SpaceX and kind of what we will pay to Kosmotras for the first two.

Okay, so with that savings, the way it is going to work is the first launch will be early 2015 and then SpaceX will launch another group of satellites in '15 or is it going to be '16? When will the next --?

No, it would be mid-'15. So the expectation before was that SpaceX would be our first launch of nine satellites in say the first quarter. Now we are going to launch two satellites in that first quarter, test them out a little bit more thoroughly and then, in the summer of 2015, we will start our launch campaign on the Falcon 9 rockets, launching 10 at a time and literally that launch campaign -- we have launch slots confirmed and really every quarter or so, quarter or two, we launch 10 more satellites until it is complete, about mid-2015. So it is a two-year launch campaign of seven launches over two years spread somewhat evenly over that time.

So I just want to reiterate I mean the $15 million you talked about, this is already probably the most cost-effective launch campaign maybe in history when you think about the per kilogram to low-Earth orbit. The deal we got was an excellent one to begin with and obviously we got that because we started very early with SpaceX before they were quite as popular and as cool as they are to everybody today. We knew them when they weren't quite as cool and we worked with them very closely and it is a very important campaign that I think we both wanted to be part of. So it was already a great deal and I think this is just even better and reiterate even more how great a program this is going to be.

Thank you very much.

Chris Quilty, Raymond James.

I just wanted to circle back on a point that you made earlier on the Boeing launch services. I think this is the first time I have heard you talk or -- not launch -- location services. You haven't talked about that previously in terms of actually having a revenue contribution. Can you just quantify for us, is that the commercial or the government aspect of that GPS enhancement service that they are looking at?

Well, specifically, since it is probably not many people have been following this thing, there is two different capabilities and they are not really -- they are not the same in any way. They are actually two different technologies. Both though developed in conjunction with Boeing who really developed the invention, if you will, on both sides. But one is with the government and it is called iGPS. It is really an anti-jam capability and there is a lot of activity continuing underway in terms of potential demos this year and we really do see a value to that, but that still has its own sort of profile.

And then the commercial capability, which Boeing created and I would say they are loosely related, but it has been termed Boeing Time and Location or BTL and it is a technology that can go into commercial devices. It could go into smartphones, go into femtocells, it could go into all kinds of interesting things that would enable in-building coverage of -- in-building sort of navigation or location services in a superior way and we support both of them.

Boeing is really the lead on both of them in terms of sort of the technology. We get airtime. There is a lot of other benefit that comes out of this and really I think Tom was sort of mentioning it not because there is a specific revenue stream, but we do see it and there is enough activity n that over the next couple of years that we will see -- it will start contributing over the next couple of years here. I don't think it is going to be a big adder next year, but 2014, 2015, those could add service revenues as we turn on those capabilities in our network over either continence or the whole world.

Okay and a follow-up on the maritime business, which you seem pretty positive on. Can you talk about number of units installed, what you're seeing in ARPU trends and any impact you have seen from Inmarsat's change in pricing strategy?

We didn't call out numbers yet still, but we will consider doing that here soon again. I would say that this has been a better year than last year. In fact, it was substantially better, which I think is due to a number of reasons. I mean, one, our Iridium pilot has been really well-received. It is even more capable and bulletproof, if you will, from a perspective than previous model and I think our service providers really like it a lot. It has been out there only about six months or so, but it has really been well-received.

Inmarsat is helping a lot. Their price changes, they are competing with their customers. It has been a little confusing obviously what their strategy is, but I think it has confused the market quite a bit. I think they have clearly told the FSS market that they want to compete with them. I say FSS broadly -- the VSAT market. That has created some new relationships and partnerships that we have because we think that is actually a best-in-class relationship between our completely global, low latency L band solution, coupled together with a Ku or a Ka band kind of technology with the best throughput cost per bit.

And you are seeing that right now and we're starting to get into KVH and a number of other different VSAT players are starting to deploy us alongside almost all their VSATs and I think that's going to -- Inmarsat used to be used for that. We are going to be used for that probably more going forward. So the dynamics are good there. ARPUs are -- I think they are all over -- coming down slightly there a little bit, but I think that is -- as we kind of -- is more of a mix issue. I mean we still have very high ARPU users in fishing and some other vessels that are smaller and we have lower ARPU units that are more backup and component.

So I think that is going to be -- that is going to move around, but overall the net effect of OpenPort is adding more and more every year to our bottom line. As we said, it is up to 10% now of our service revenues. So I think that will continue to expand, but I think it is a really important -- I know we focus on M2M, but I think pilot OpenPort is going to be another really important leg as people see and by the way both in the maritime and in the aviation business, as well as we are starting to see it get onto aviation.

Great. Thank you.

Thanks, Chris.

I am not showing any further questions at this time. I would like to turn the conference back to our host for closing comments.

Well, I appreciate everybody for joining us. We will see you again next quarter. I think obviously we will be glad to take any questions and support after this as usual, but thanks again for joining us.

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