Iridium Communications Inc (IRDM) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iridium First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host for today, Mr. Steve Kunszabo, Head of Investor Relations. Sir, you may begin.

Good morning and thanks for joining us. I'd like to welcome you to our first quarter 2013 earnings call. On the call this morning with me are CEO, Matt Desch and our CFO, Tom Fitzpatrick.

Today's call will begin with a discussion on the 2013 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 facts and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks.

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

During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release and the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, let me turn things over to Matt.

Thanks, Steve. Good morning, everyone. Thank you all for joining us. I'm sure you noticed that this has been a really busy week for us with two important announcements. We're also pleased to share with you this morning that we just closed on an important deal with Caterpillar, which establishes us as their primary provider of satellite M2M services. Yeah, that's a big deal, but I'll talk about that more in a minute.

These announcements are important, because they validate the long-term trajectory of our business. Even though we focus on quarterly results during these calls, to me, it's really about how our Company will look over the coming years and these announcements confirm that our long-term plan remains very much on track. With this in mind and as I often do, I'll spend most of my time today on these subjects, including the performance of our current satellite network and the Iridium NEXT development.

I'll also take you through the [area in] business model as we've had some exciting developments there while sharing the latest news on our complementary hosted payload deal. I'll review our M2M market opportunity in light of the new multi-year agreement with Caterpillar. I'll wrap up by revisiting our plans for geographic expansion, which in addition to Russia now show renewed promise in India and China.

As always, Tom will then focus more specifically on our results and financial outlook.

Before I get started on these key strategic areas, I wanted to share just a few quick thoughts on the quarter. As we anticipated, some of the headwinds we faced in 2012 have carried into 2013, but we're pretty much on track for where we expected to be for subscriber service revenue and operational EBITDA growth and we reaffirmed our 2013 guidance today for those areas.

Equipment revenues were a little off in the quarter, but that's mostly timing in comps. We're still absorbing lower voice and circuit switch data usage in our commercial business from reduced non-US military traffic in Afghanistan, but we continue to work methodically towards a successful contract renewal with the Department of Defense in the third quarter, which will help position us for the future with that important customer.

When you consider how our year shapes up in the context of our outlook, it's really back-end loaded in terms of financial contribution. So the operating environment we outlined, when we gave our annual financial guidance, hasn't changed much in the last couple of months. We continue to have visibility to accelerating service revenue and cash flow growth as we execute against these short-term objectives.

So getting back to our long-term profile, let me begin with a current network, which continued to perform very well, as evidenced by our voice and data traffic metrics. In fact, our call establishment rate is as good as it's ever been in our recent history. I encourage you to test drive our network for yourself and you'll experience what our customers and partners do, fast and reliable connections, good voice quality, consistent data speeds and global coverage. Our performance is appreciated by our customers as we continue to grow our industry-leading market share and renews our confidence that we'll have a smooth transition to Iridium NEXT starting in just under two years.

As for our Iridium NEXT program, we've spent a lot of time on this topic the past few quarters. So, I will just emphasize a few key points. Most importantly, we remain on budget and on schedule for the design and construction of the new satellite. We feel good about the overall plan now that we're more than halfway through the development cycle and have spent more than $1 billion on this $3 billion initiative.

At this stage, the design is essentially complete and we're building the first full-scale test vehicle. We're also pleased that SpaceX is on schedule for qualification of its new Falcon 9 launch platform. After another successful deployment to the International Space Station in March, we're looking ahead to their next three missions this year, which include missions for NASA and two of our commercial satellite peers.

So shifting gears just slightly, I'll move to our evolving business model for Aireon. I'd like to take a step back though and retrace the path we've taken since first announcing this global aviation monitoring invention, a venture nearly one year ago. Back in June 2012, we first outlined its transformational capability to continuously track aircraft anywhere in the world and began the process of putting this new business together. We've teamed up with several partners around what we saw as a pretty straightforward business case, which included $6 billion to $8 billion in fuel savings for the airlines by safely enabling more efficient aircraft operations and routing and reducing greenhouse gas emissions.

Iridium would serve as a global technology platform to make this once in a generation opportunity possible, while our partners would provide financial, operational, regulatory, and technical support to get it off the ground. At the time, we announced that Aireon would generate $200 million in hosting fees that would be paid to Iridium between 2014 and 2017 while also collecting annual data fee revenue from Aireon, which was more difficult to size without the venture having signed its first customer contract.

And lastly, we believe that there would be significant potential value for Iridium from having a substantial interest in the joint venture. Looking back at what we announced nearly one year ago, we made strong progress in [standing] up this new business. We closed our formal agreement with our joint venture partner, NAV CANADA, back in November, and they've now made their first investment of $15 million.

NAV CANADA's planned total investment of $150 million will be made in multiple tranches as Aireon reaches critical commercial, financial and regulatory milestones. As the world's second largest air traffic management agency and largest provider of oceanic services by flight volume, NAV CANADA has not only been a supportive financial partner, but a leader in developing and reviewing technical requirements for the system and coordinating regulatory action.

As we expected all along, NAV CANADA also recently became Aireon's first customer, signing a long-term commercial data service contract. This is what we announced on Monday. This agreement was important as it provides the baseline for the many contracts Aireon expects to sign during the next 12 to 18 months. On that front, we're getting increasing enthusiasm and support from international air traffic agencies regarding their use of Aireon's services.

For its part, the FAA has allocated financial and technical resources to complete the first of two major steps in their formal assessment and we expect that they'll be an important customer of Aireon. With the first Aireon customer contract having been executed by NAV CANADA, we're now targeting nearly $0.5 billion revenue opportunity for Iridium. So to be clear, we continue to expect $200 million in early hosting fees from the Aireon venture and now believe we will receive nearly $300 million in recurring service revenue through about 2030 from the data service contract we have with Aireon.

All in all, we remain excited by the prospects for this new business, which we project will add approximately $20 million annually to our run rate revenue once Iridium NEXT is launched and the system is fully operational.

Harris, our payload development partner for Aireon, is also moving nicely toward their critical design review of the platform this month.

In addition, we recently formalized our partnership with Harris for a complementary payload deal worth up to an additional $45 million in hosting fees based on the final configuration of these missions while also generating incremental service revenue for data transport and payload management services. We've already generated some payments from that new contract although they won't hit our bottom line until we launch Iridium NEXT.

[Before I send it over to] Tom, I want to wrap up by spending a few minutes on our M2M market opportunity and our sales expansion in new markets including Russia, India and China. As we've demonstrated through our strong financial results during the last few years, satellite M2M remains both an important business and a huge opportunity for us. We grew M2M subscribers and revenues 31% and 23% year-over-year respectively in the first quarter and there's nothing we see on the horizon that stands in the way of continuing to deliver double digit growth rates.

As I've noted in the past, this market is characterized by low device penetration and a robust partner channel that is developing custom solutions for a diverse set of vertical markets. This sector is forecasted to grow at annual revenues by approximately $700 million in the next few years according to Northern Sky Research.

Our global coverage and low latency service makes up leaders in the satellite M2M space as does the functionality and form factor of our devices. M2M customers represent 41% of our installed subscriber base and 18% of our total service revenue today, having approximately doubled in size during the last three years.

In an important competitive win that both extends and validates our leadership position, we recently closed on a multi-year agreement with Caterpillar to become its primary provider for satellite M2M data services. We haven't had an opportunity to issue a press release yet as we just got the deal signed, but I wanted to emphasize this agreement with you today as it's central to our growth strategy in the M2M business. This watershed agreement with the world's leading heavy equipment manufacturer underpins our strategy to provide real-time data communications for telematics asset and fleet management and location-based services for global OEMs and aftermarket solution providers.

Caterpillar appears to be adopting a comprehensive telematics strategy for a big part of its extensive product line, and we think our new contract clearly demonstrates that the market demanding the highest quality and best value is picking Iridium for their needs. We expect this will be the first of a number of significant contracts in the coming quarters and years and believe that this deal will be meaningfully contributing to our commercial M2M subscriber and revenue growth beginning in 2014.

We plan to issue a press release with additional details in the coming weeks and continue to work closely with Caterpillar in developing our relationship. So stay tuned.

As for our entry into new markets, we remain confident that Russia and the renewed potential we see in India and China will contribute to our long-term revenue profile. As many of you know, we entered the Russian market last year, after a lengthy licensing and regulatory approval process. We now have partners actively selling our products and services in countries and the initial progress has been good.

We continue to build out our back office infrastructure in the country and have also begun to make the necessary capital investment to build out our required gateway. We're also looking forward to meeting with our Russian service providers and customers in May during our first local conference. As we've noted before, we believe we can capture a 40% share in a market that could ultimately be worth over $70 million annually in the coming years.

After a long hiatus, during which Iridium didn't operate in India, we've also begun to take steps to re-enter this market, but still very early in the process. We hope to finalize a partnership with local telecom operators during 2013 and then pursue Indian regulatory authorizations.

Much like Russia, we'll be obligated to spend capital to construct local ground infrastructure, but unlike Russia, we don't have any network traffic or revenue coming from India today. So our subscriber and revenue growth would be entirely incremental to our commercial service business.

I also mentioned China, where there is growing market opportunity for commercial satellite services, particularly for handheld aviation, maritime and M2M. We're working with our partner China Telecom on developing new service offerings and complying with regulatory requirements to expand our business there.

In closing, I'm encouraged by our strong progress we continue to make in strategic areas that are important to our long-term profile. Most importantly, we're on target for our Iridium NEXT build and can now really begin to appreciate the economic potential of our area and joint venture. Our competitive position in our commercial markets is strong, particularly in the M2M space and we're on track for a successful contract renewal with the US government later this year. We continue to believe that 2013 will be a period of renewed growth and look forward to what the rest of the year brings for us.

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

Thanks, Matt, and good morning, everyone. Our first-quarter 2013 results were in line with our short-term expectations. And we also took important steps forward in many of the initiatives that mattered the most to our long-term success. In short, our Iridium NEXT net program is on track.

We delivered on a big M2M customer win and we continue to make steady progress towards a successful US government contract renewal later this year.

I will first focus on our results and then wrap up, by taking you briefly through the 2013 financial guidance we affirmed this morning in our earnings press release.

Iridium reported first-quarter total revenue of $89.2 million, representing a 5% decline from last year's comparable period, driven largely by reduction in equipment revenue and lower overall sales volumes. I will have more insight for you regarding our full-year projections for equipment revenue and gross margins later in my remarks.

Operational EBITDA came in at $46.8 million, representing growth of 7% from the prior-year quarter. Our operational EBITDA margin was 53% the first quarter, which was an expansion from 47% in the year-ago period. First-quarter net income was $14.9 million, up from the $12.4 million we posted in the year-ago quarter.

As a reminder, our $12.4 million in net income last year benefited from a favorable change to Arizona tax law that did not reoccur this year.

From an operating viewpoint, we recorded commercial service revenue of $53.7 million in the first quarter, yielding 5% growth over last year. We added 10,000 net commercial customers during the quarter, resulting in a 15% year-over-year increase in subscribers. These net additions were entirely in the M2M business. Commercial M2M data subscribers now represent 42% of billable commercial subscribers, an increase from 37% during the year-ago period.

The M2M business remains a jewel in our portfolio for the many reasons Matt discussed earlier. I'd add that it's not just the M2M market opportunity that excites us, but rather a broader focus on advanced data services throughout our product line.

In fact, for the first time in our history, data revenue, as a component of total service revenue, measured approximately 50% during the first quarter. This split was more like 60% voice and 40% data two years ago, showing we're well positioned for further expansion in this rapidly growing market.

As for the voice business, while subscribers grew 6% year over year during the first quarter, we continue to see lower overall usage of our voice and circuit switch data services primarily as a result of falling airtime, maritime and non-US military traffic in Afghanistan. We've covered much of the detail behind this trend last quarter, so I won't go through it again here. However, I would emphasize two key points.

First, we anticipated a significant reduction in usage when we initially gave and today affirmed our 2013 outlook. And second, we continue to expect that our commercial access fee increase and prepaid policy change will offset this usage pressure, resulting in comparable commercial voice ARPU for the full-year 2013 versus the full-year 2012.

Turning now to our government service business, during the first quarter, we reported government service revenue of $15.1 million, down 4% from last year's comparable period. Government voice customers declined 6%, but we grew M2M data subscribers 42% over last year. We also grew Netted Iridium subscribers 11% from the year-ago period, showing ongoing uptake of our beyond line of sight tactical radio service.

We ended the period with a total of 51,000 billable subscribers, up 6% year over year with M2M data subscribers now accounting for 33% of the installed base.

As illustrated by the figures I just described, two legs of our US government service business, namely M2M and the Netted tactical radio service continue to have strong growth, while softness in the traditional telephony business has disproportionate impact at our service revenue. As we've consistently said for nearly a year, this interplay will continue until we renew our agreement with the Department of Defense at the end of the third quarter.

We continue to follow a solid plan and have the right team in place to finalize the contract. We're taking a comprehensive approach that expands our value proposition with them as we look ahead to Iridium NEXT. It's worth noting that the US government continues to invest with us on cutting-edge future capabilities, including upgrades to their dedicated gateway that support Iridium NEXT readiness. Specifically, we're anticipating another award soon under their multi-year $47 million contract to continue with the modernization plan for their ground infrastructure.

Focusing next on equipment, which produced revenue of $17.3 million, 20% year-over-year decrease, primarily resulting from lower overall sales volume. We really see this as a timing issue as we have a strong committed order book from our partner channel. Overall, we expect that our equipment business will make roughly the same contribution to consolidated operating results in 2013 as it did in 2012.

Moving now to our financial and operating outlook for 2013, which we affirmed across the board this morning. We expect operational EBITDA between $215 million and $225 million for the full-year 2013, which is the midpoint of the guidance range, would be 7% growth when compared to the $206 million we achieved in 2012.

On the same basis for the full-year 2013, we reiterate the following. Total billable subscriber growth of between 15% and 20%, which will continue to be largely driven by ongoing success in our M2M business as well as opening up the Russian market. In total, service revenue growth between 8% and 10%.

And finally a review of our capital structure and liquidity position, as of the end of the first quarter, we had drawn $751.8 million for the Coface facility, relating to payments we've made to Thales for their successful completion of contractual milestones for Iridium NEXT. And we've now invested over $1 billion in the last three years towards this approximately $3 billion project.

While the outstanding balance of our Coface facility is the same as it was in the fourth quarter, this doesn't imply an adjustment to our capital spending profile or Iridium NEXT schedule. In short, it's just a timing issue related to how the funds are disbursed. Our contractual milestones at Thales simply fell outside of the first quarter. So you should see both our capital expenditures and Coface balance ramp up as we make future payments.

Lastly, we had a cash and marketable securities balance of approximately $271.9 million.

In wrapping up my thoughts, I like how we started the year by making steady progress towards our long-term goals. Our competitive win of Caterpillar really changes the landscape for us in the M2M space, and having Aireon's first customer contract under our belt is an important step in the foundation of this transformational venture. Like Matt, I look forward to updating you again in early August as we head into the second half of the year.

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

(Operator Instructions) Chris Quilty, Raymond James.

Hello, hello.

Hey, Chris.

Yes, okay. I know you're going to follow up with a full press release on the Caterpillar agreement, but I was hoping you might at least at this point, be able to give us an idea of what elements you think swayed the decision from Caterpillar to switch vendors. Was it the global coverage or other elements of the current network or future network?

Well, I would say that, first of all, we've been working on this a long time and it's important to note Caterpillar has embarked on at least appears to us a corporate strategy to connect via Telematics everything that they manufacture. Satellite M2M, we think, will be a big part of that, but I think that sort of -- I think they were working it a bit more opportunistically, but now it's taken sort of a corporate wide approach and that led them to rethink who they were going to use long term for satellite M2M and I think they really looked at the industry extensively and we reiterated many times why we think we would be selected by these kind of suppliers.

It's latency, it's speed, it's the two-way attributes, it's sort of the uncompromising nature of if you're making all those assets and they are showing up every part of the planet not worrying about where they are and how fast that you can respond to them. And sort of a more of a portfolio of product, because this isn't just a SPD, but includes two-way, higher speed services to connect larger assets and I don't say just track, but actually connect to provide information about the health of the vehicle, where it is, how it's performing and other attributes that they want to find out about it. So yeah, I think if you're -- you think our view is if you're really looking for the overall best M2M supplier, we're going to get picked in that case.

I would say what's been different a little bit in the last two or three years that's made us more capable now than we were, say, five years ago when perhaps, say, they were getting more started in this area or even before is the cost of our devices has really, really come down over the last couple of years. The size and scope of those.

So, we had traditionally played more at the higher level of the M2M market but now I think this contract shows that we can compete very effectively at what I would call the lower, lower ARPU but you know, wider scale, larger volumes area of the industry.

And probably fair to assume that at least on the early ends this is more about, you know, forward fit of equipment rather than an attempt to chase down and retrofit tens of thousands of pieces of equipment around the world?

Yes, I don't know that for sure, but I would assume so, yes.

Okay.

But they make an awful lot of equipment every year and I think that will be a nice enough market, we'll just focus on that.

Okay. And since we don't expect CAD to contribute in '13 materially, what specifically gives you confidence about the subscriber growth, which was a little weak at least by my pen in the first quarter, that you'll achieve a pickup in the back half of the year?

I think it's the kind of the funnel that we see. There is a lot of leading indicators for subscriber growth, which includes equipment shipments, it includes -- which looks weak from a comp perspective. As I said we're shipping a lot of equipment and see sort of what the order commitments that have been made by customers throughout the end of the year continue to look very comparable to previous years.

And it's driven by M2M. I mean, the subscriber growth is driven by M2M and it's just the funnel of M2M opportunities that we expect to close and activate here during the latter half of the year.

But I think Caterpillar, potentially long term could become one of our largest M2M customers, but we have quite a broad range of customers today. It's really a long list and all of them discuss with us constantly about what their needs are, how they see the year, they make commitments for equipments and they go down plans and sometimes they don't meet exactly the commitment they make to us, but we are getting better and better all the time in figuring that out. And I think we have enough visibility to still be able to say it will be a strong year on subscriber growth.

Okay. Shifting over to the voice side, subscribers are flat, can you give us a sense of how that broke down between traditional handsets and the OpenPort product line, and if you've been able to trace down the reason for the large customer shift in OpenPort last quarter?

So, the subscriber -- just the subscribers gains were flat sequentially, so their net addition is really driven by deactivations as a result of our price increase. I would characterize the increase in deactivations as consistent with what we've seen within prior price increases that we've enacted. We think we've worked our way through that.

At the OpenPort, we continue to work to improve our situation there as we said. We had deactivations that kind of had their roots in early different issues we have with the product. We think we've addressed the product issues and our activation rate remains strong, but we're working our way through (inaudible) situation, Chris.

And I think we're pretty -- I think it was been pretty public about the a fleet that we lost in the fourth-quarter competitive environment, etc., and what it was, but as you said, our activation rate continues to be very strong for that product. It was the kind of deactivations due to that and some early product issues that we had, which were higher than they had been traditionally and we think that's going to reverse here going forward, and this year we'll continue growth for 2014, 2015 will continue to be a very good year for OpenPort.

Got you. I'll take one more and then jump back to the queue. Just the mention of India as a potential new market, which I think that's kind of new, at least in terms of your emphasis this quarter, is there anything that gives you confidence that you can get a regulatory approval sometime before the end of the decade? Is there something that's changed about the regulatory environment in India that I'm unaware off?

Actually the regulatory environment is fairly straightforward in India. I don't think we've ever described -- I hope I've never described that the regulatory issue is more than economic issue and whether or not it makes sense to go into the marketplace. If you build a gateway in India, you just highlight that you are going to be approved and could be approved very quickly and now the market isn't large enough, I don't think, for every player and I think you have to look very carefully at the business case for doing that and who does what, but our recent discussions with operators have confirmed that there is a growing opportunity there.

We think there is a kind of a potential first mover advantage if we get our partnership together quickly. And I don't think the regulatory environment will be an impediment, it's just a matter of constructing the gateway and moving forward. All of us have been trying to avoid -- having to build a gateway when one's not required, but India does require a full gateway, very, very specific about that and the rules are fairly clear. So, we just have to comply with the rules and we believe we'll be like -- it's more about getting the partnership together.

And that's ballpark $10 million investment for a gateway?

Probably a little bit more than that, but close, it's not that too far off in terms of the hardware required for a gateway.

Okay. Thanks, guys.

Greg Burns, Sidoti & Company.

Good morning. Just had a question in terms of the [in-time] market in terms of the pipeline behind the Caterpillar, what that looks like and do you still expect to have a couple more announcements in the near-term?

There is an awful lot of action. As I said, there is literally over 100, I think, different partners who are deploying M2M capabilities. I don't know what the exact number is, but it's a big list, probably dominated by the first 30 or 40 players in terms of numbers. And -- but, there's an awful lot of players on the list. So, we are talking to a number of new ones. I think this whole equipment OEM market is starting to open up.

One of the reasons why Caterpillar was very important to us is because as Caterpillar goes, so goes the rest of the industry. There are a bellwether kind of player, who are highly noticed by all their peers and I think when they make a selection, it's respected by the rest of the industry. And so, we're clearly very interested in expanding into that market segment, but there is a broad number of other segments that really are expanding across the board that we apply very well to on a number of different fronts.

So, yes, I think you'll see more announcements, I'm not going to say when and where, but I certainly think it will be over the next coming quarters and year too.

And on the Aireon revenue guidance, when we look at that, what exactly or probably what makes up -- what is baked into that guidance and looking forward is there any areas of any potential upside that you don't currently factor into that number?

Well, there is a number of parts of our hosted payload strategy, if you will, in which Aireon is the biggest part of. So Aireon, as we said, is made up of three revenue streams.

The first one is hosting fees, which is a contract with Aireon and they will pay us as the system is being launched over the next coming years and that's $200 million. So, as I said, we just recently announced the $300 million in data service revenues, which is basically $20 million a year. As they go into operation, they will be paying us to deliver that data back to the growing ANSPs.

The upside, if you will and you can determine that for yourself, is really in effect that we're going to be an owner of Aireon.

So, to the extent that it is continuing to be more successful and we obviously think it will be, there will be distributions from Aireon in its profitability to its ownership and we'll make money that way. And that will be more in the out years as it gets quite -- but I mean that we haven't given any kind of guidance for what that will be and you have to make your own estimates for that.

Thank you.

And then of course there is on top of Aireon now, of course, we said there's additional hosting platform that Harris -- the deal have with Harris, we have said that that's up to $45 million and that's underway, so that's on top of all that and there is some additional data service revenues that come out of that as well.

So I think we've done -- pretty much accomplished our goals here in terms of finalizing our plans for our hosted payloads. I think we've done it in good form and fashion, maybe in some ways different than what we originally expected five years ago when we started down this path, but in some ways probably even better, because of the way we've constructed our approach.

Thank you.

Thanks, Greg.

Brian Ruttenbur, CRT Capital.

Yes, thank you very much. Just a couple of quick questions, on the government services side, I think the guidance that you are giving is that you expect some erosion quarter to quarter for the next couple quarters and then a bounce back on the government services side. Is that right?

That's right, we expect government service revenues down in each of the first through third quarters and we expect it to be up materially in the fourth on the back -- on the fourth quarter on the back of our new contract.

Perfect. And then, R&D was down year over year. Can you give us some kind of guidance on, is this -- was there anything unique that came out this quarter or sequentially and should it be bouncing back or is this the number that we should be looking at going forward, around the [16, 17] number?

No. It's artificially low in the quarter just due to timing. It'll bounce back, it'll be up materially sequentially. So into the second quarter we see it up.

Okay. And then, also on SG&A was up sequentially kind of flattish year over year. Can you give us some kind of -- is it going to be essentially flat as a number from 2012 levels or is there anything that's in there that needs to go higher?

There is nothing of note like I just mentioned in R&D and SG&A. So we aren't going to guide specifically on that, but R&D was clearly low due to timing. You should look for that to come back next quarter.

Great, thank you very much.

Jim McIlree, Dominick & Dominick.

Thank you and good morning.

Good morning.

I think you mentioned regarding the CAT deal that you were the preferred provider. Does that mean exclusive or what is the full implications of that?

Yeah. We said primary provider and I'm trying to avoid -- I use that word carefully. I think it's appropriate. Primary means primary and I think you're going to see us the vast majority of satellite M2M sales going forward. I can't say for sure. That means exactly 100%, but -- and exactly won't know when and where that will be, but I think primary provider speaks very well to it.

Okay. And then I'm trying to understand better the timing of the design of the hosted payloads from Harris versus the timing of the next constellation and how that all integrates together. Does Harris have to have their payload fully set in stone by some date certain in order to get it onto the next constellation? And how does that work with the additional customers that they are trying to get for that space on the payload?

Yes. So they're delivering 81 payloads essentially to us and I think I've mentioned before that when we selected them for Aireon, they offered a very sophisticated and capable platform to monitor air traffic -- of air traffic signals and to relay them to us, but we -- I mean, I guess one of the happy surprises from all that is we didn't know that they were really delivering us a platform. We thought it was a specific customized payload.

So as they're developing and they're right on track for developing the payload, we realized that there were still additional weight power in the available, really from the, what was Aireon requiring, but the platform actually could take additional cards and capability into it pretty effectively. So the real, the real complications of integrating our hosted payloads into a satellite is really the power, the data, the bus and all that sort of thing, but that's all well locked down with Aireon and the whole platform that they delivered.

So adding additional capabilities to it, at least certain kinds of capabilities, are not that difficult. And so they really have some additional time really between now and frankly until the networks are launched to configure that platform the way they want to and depending upon the customers and applications and choices that they make in terms of configuring the remainder aspects of that platform.

So, I know we used to talk about that the cut-off date really for a hosted payload was about this time and in fact it is, but the fact that they are really developing into a highly integrated platform gives them additional time to work out some final details literally over the next two years or, frankly, they could even configure a little bit satellite by satellite, I suppose, as the satellite can be configured for launch in 2017. So, and that's why there's still a little uncertainty about what the total amount will be. There's certainly going to be some base amount and we've already, as I said gotten some revenues from that and we think pretty good the chance for them, but the actual numbers really won't be known for the next two years to three years, the final number.

Okay, okay, great. And then lastly, on the commercial ARPU increase that -- I think you are looking for a commercial ARPU increase in either Q3 or Q4. Is that mostly going to be in Q4 or is it partly Q3 and partly Q4?

No, it's Q4. Q4 will benefit from the prepaid policy change. So basically we have an inventory of prepaid minutes that will expire and it will expire in the fourth quarter. So that's why it's back ended it -- it's basically will -- there will cease to be sort of liability on our part, but we'll take it into revenue in the fourth -- it's our expectation, the fourth quarter.

Okay.

And so we're looking for an increase in the fourth quarter. As I said in my remarks, we think ARPU on the full year will be roughly comparable to what you saw in 2012. So the trend of decreasing ARPU that you saw through all the quarters of 2012, we think the price increase in the prepaid policy change dominates that. That's been our expectation for some time.

And so what happens to ARPU in Q1 of 2014 relative to Q4 of 2013? Is there an artificial drop or does it flatten out at that point?

What I would say is the headwind will be less, because we're working our way through the non-US military drawdown in Afghanistan. So that headwind is pronounced in 2013 and will be less in 2014.

But is there a big drop quarter to quarter assuming the headwinds stop simply because you haven't -- simply because that booking of or debooking of the liability isn't there anymore?

Sequentially from the fourth into the first?

Yeah.

Yeah, that's a fair statement, but as we look at ARPU for 2013 versus 2014, there will be less headwind from lower usage, because of the non-US (technical difficulty).

Right, now I'm with you on that. Okay, great. Thanks a lot.

Erik Rayner, William Blair.

Hi, good morning. This is Erik Rayner for Jim Breen. Just a quick question on CapEx. It came in a little over than expectations for the quarter. You didn't tap into the credit facility. I was wondering if you could give us a little more clarity as to why that was slow in the quarter and then maybe provide a little more clarity on the timing of CapEx as we move throughout 2013. You guys are way out of plan where you've expected to spend over $500 million in CapEx for the year. So, just curious if that changes at all or if some of that is pushed into 2014. Thank you.

Yes, no change to that to our expectation for the full year. The way our contract with Thales works is there is predefined milestones that trigger payments under the contract and just out of itself there weren't any in the first quarter. So the first quarter CapEx is artificially low as a consequence to that, it doesn't -- it's not a change in plans or a delay or anything like that, it's just how it fell as they usually look for CapEx to be up materially in the second through fourth quarters.

Okay, do you expect it to ramp second through fourth or just flat throughout?

I think it's unremarkable. It should be up materially in the second quarter.

Okay, perfect. Thank you.

Amy Yong, Macquarie Capital.

Thanks. Just two quick questions, can you update us on the M2M business in the sense, can you just give us a sense of overall margins for M2M products relative to the other parts of your business, ARPU trends over the next few quarters and who your competitors are at this point? And then also, Tom, can you just clarify what the marketable security number was in the quarter? Thank you.

Our ARPU is it's still holding as the best in the industry in the high teens as you know, and first quarter was kind of different as far as that goes most of the rest of the industry. And there is a couple of other players frankly in our sets Globalstar and ORBCOMM and I guess technically Thuraya, all have some level of M2M business as all ORBCOMM does, but it's part of the others business and I believe almost all of their ARPUs are in the really low-single digits -- low-to mid-single digits. And again it's not because of pricing or anything, it's just because we get utilized more often because our network works better than others.

As far as margins go, I mean obviously service revenue represents extremely high margin for every dollar we generate there as almost all margins. On the equipment side, we make money on our equipment and we make a number of devices. Again, the costs of those devices have come down dramatically in the last couple years. So, technically, the revenue is -- from an equipment perspective is kind of challenged, because our newer products are so much less expensive than the older products, but the margins still remain very good on those, because we're able to lower the prices and therefore be more competitive against anyone else.

And the overall M2M market is, as I said, I think you can read anything out there and you can see, I don't think anyone would say that almost everything is being connected these days or being considered to be connected at some point. I'd say we're still in the very nascent early days of the M2M industry. We're still in sort of what I would call the experimentation stage. It feels a lot like it was like, like I felt like in the early '90s in terms of wireless, voice penetration, you're seeing M2M penetration is still early and the CAT is a good example of that as they've been working this into their product lines and now they really are focused on a commitment to do 100% of the assets they make. And I think you're going to see all your automobiles are being connected, tracking of all types of assets and they're getting really less and less expensive assets to be tracked, but also monitored in railways and things in the air, pipelines and units of all types of things.

So it's a very healthy early stage of that market. We think we're extremely well positioned. As that market grows, we'll do very well. And Tom, the latter part of the question.

Yes, Amy, there's [$66,600] in marketable securities and I would just direct you to our 10-Q that we filed this morning. There's fulsome disclosure in the footnote there.

Okay, thank you.

Thanks Amy.

Robert Hoffman, Princeton Opportunities.

Yes, thanks. Just wanted to drill down a little bit into the CAT relationship. I know you can't give too many details, but is Caterpillar going to then resell the capability to the end buyer? Is that the way it would work?

Well, it's -- the way it could be described is they are sort of their own value-added reseller in some ways in that they put the product on and they maintain the relationship, the billing relationship essentially with the end device. How they do that, I don't have a lot of visibility to or how that plays out to their dealers and that sort of thing and on an international basis. But they kind of take that responsibility for figuring out how to pay for essentially the service time that each of those different devices and then we basically send one bill to Caterpillar, if you will, each month for all the devices that they are growing over time that they are going to be using.

So in other words, you will only get paid when a end customer says you know, effectively yes, I want to connect with that data.

Yeah, I think what happens is, of course, we sell equipments and of course we make -- we'll have equipment revenues of whether this is, by the way, not just a 9602 M2M but our 9523, which provides circuit switch data, which you could say is also an M2M device would also be utilized here. Those will go out and they'll be installed on the vehicles. I'm sure maybe hopefully a majority of the types of things that come off their lines and they go into operation and how they decide to either activate those or which ones they decide to activate and when, yes. They'll come online, as those vehicles really go out in the field and need to be tracked or monitored or maintained or whatever might be.

We have a sense of, I'm sorry, I have no concept of how many units Caterpillar produces. I mean, is it in the hundreds of thousands per year? Is in the tens of thousands or single thousands? Any?

No. Caterpillar doesn't disclose that. You know, it's a big number. They are a huge company. It's certainly more than tens of thousands a year. So it's a big number. You know, hopefully satellite makes up a big part of that, but I can't give you specific numbers. We kind of have internal expectations but they don't disclose numbers.

And then switching over to Aireon, when you talk about your ownership in Aireon, I guess what Aireon as an entity will then be charging more to the airlines than they are passing through to you, correct? So that's where the kind of the extra boost comes from. You're going to own X% of an entity that's generating cash flows?

Yes, I mean the thing about the whole business model really for air traffic surveillance, essentially just -- I mean, the reason why this week's announcement was important is because NAV CANADA and Aireon established essentially what it was that Aireon would charge NAV CANADA for every flight, for every -- for every -- for what it really provides NAV CANADA. NAV CANADA agreed to that number based upon what they thought they could charge airlines. And again, that's a fraction of what it is believed that that the airlines would save in terms of fuel savings and time and cost savings.

So the airlines will be happy, because they are improving their bottom line as they fly particularly international oceanic routes. NAV CANADA is happy, because they increase their profits somewhat in that area or at least certainly can lower their cost of service essentially to their customer base, based upon on growing revenues. Aireon's happy because it's making money, and in excess of its cost and we, of course, are happy because they're passing on data revenues, data service revenues to us as we deliver that data to them.

So this kind of established the overall model, which is why we've been able to sort of give much more specifics on what this is worth.

One quick question back on the Caterpillar. How easy is it to retrofit an older machine with the same capabilities as something new that's coming off the line? Is it fairly simple?

Yes, again, I don't want to imply that this is necessarily for retrofits, but if something was in for service, I think you pretty much can just take off, if there was a previous device on it, you pretty much can take it off and put a new one on. These things are being designed to be consistent really with their overall electronics architecture that they've had in place for a while and they're doing really the work with their other OEM partners who are involved in their telematics strategy.

And so, yeah, I mean that I think over time, I think these things will be in retrofits for ones that they can, but more importantly, every new device going on out the door will probably have one of these things on it.

I guess what I was thinking is if I'm a huge contractor and I have 2,000 Caterpillar machines out there and I'm buying just 200 a year, I don't want two different systems.

Well, I think you're right, I think consistency will be part of this. I'm only being careful, because I really think it's their strategy and that's not in our contract exactly how they will use it. So -- but I think the general feeling over time is they want one supplier and they want simplicity and the end customer would want to have a sort of one approach, but I think that's a logical conclusion, anyway, of what we're doing with them.

Thank you.

(Operator Instructions) Chris Quilty, Raymond James.

Thanks, just want to follow up quickly on the Aireon announcement and clarification, the $300 million in service revenues that you talk about includes what? Is that NAV CANADA and ANSP customers, is it -- does it assume a global rollout and does it include potential third-party revenues directly from airlines, insurance carriers and other third-party sources that might also be interested in the data?

Yes. So, Aireon will -- has a broad range of revenues that they can make. They only have the first contract and they're in discussions with many other internationally ANSPs and I expect that they'll conclude additional deals patterned after the NAV CANADA contract in the coming year or two. And of course the FAA is the big one of that, too, that eventually, they'll get. That number, and by the way, reusing that data in many other ways possibly reselling it to other agencies, non-real time data, all the things that they can do with it, really I think has a lot of potential for growth. The amount we described in $300 million is somewhat fixed, if you will. We have a -- we want Aireon to be successful. So, it's not a variable number from zero to an unlimited number based upon that growth. The $20 million a year is pretty much what that number we think will ultimately be with a number of ANSPs making decisions, but not all of them have to and they don't' have to sell the data in lots of ways. So I think we could get to that number pretty quickly and we'll stay at number like that. Our upside as we described in the previous discussion has really been a part owner of Aireon and the fact that they get more and more successful and sell the data more times, they are going to become more profitable and we'll get our percentage share of that entity for ownership percentage there.

Okay. And Tom, a clarification when you talk about a strong order book. Can you clarify that in terms of a traditional book-to-bill or at least on a relative basis strong order book you've had in some period of time?

Yeah I mean we expect machine-to-machine activations and that to be higher this year than last year. And that is backed up by a customer-by-customer estimate of what those activations will be aggressive. So...

We don't disclose the specific numbers, but one of the reasons, one of the things we do every year at the beginning of the year is we set prices and volume commitments with our customers. They cost less for them to buy devices the more that they commit to buy within a year and it's a strong leading indicator for us as to what percentage still of the year essentially we have at the beginning of the year in those initial commitments.

And I think what we're saying is that we see very comparable and strong commitments to units from a broad range of partners as you know we have over 300, but we have a lot of visibility to all those and that's again not just for [hand down], but that's for voice devices and that's for -- it's what we're looking at in terms of OpenPort devices and throughout our range. And so the reason why we were able to say that we believe that equipment revenues will be fairly comparable year-over-year is that we have that visibility into our high percentage really, frankly, of what the expectations are for our partners.

And that would imply something like 20,000 to 25,000 net ads through the balance of the year compared to '10 in the first quarter. Would we expect that to ramp as the year goes or you've got a suitable look into Q2, do you expect sharp sequential step-up?

Yes, and it's driven by [SPD] .

And remember second or third quarter are always been historically the hardest two quarters. So fourth and first quarter is that we go into northern hemisphere and it will pull there and lot of these devices get put outdoor. They are always a little slower than the second and third quarter. So that all plays in.

Okay. And final question no mention of Aero OpenPort, can you give us an update on where that product line stands?

Yes. Just too busy I guess to include that. I mean it's an exciting prospect for the future. We're continuing to get interest in not just Aero OpenPort, which by the way is a great opportunity and we've seen it on still initial early aircraft, because it needs to be supplemental type certificate that we see need to be created for aircraft, so they can be deployed on them, but really our services in general in aircraft, in monitoring the -- and actually providing aircraft safety services, standard call feature and navigation services advance over Iridium is a great opportunity all around the world right now. And given that we've been approved, I think that started to really ramp up nicely right now and getting ourselves on all kinds of aircraft platforms for cockpit voice and data services in general. And those are narrow band, in some cases, there will be broadband in the future with OpenPort Aero, but that continues to ramp nicely. Just don't have a big customer announcement that really talks about this quarter, but we will over time as we do.

But you have engaged with some partners that are looking at drilling that out on I believe commercial airline fleets?

Our safety services you mean?

Well, not for safety services, but more the cockpit and perhaps cab and data services.

Yes, there is a number of different engagements underway from our partners to commercial aircraft and general aircraft, generally the Asian aircraft and military aircraft around OpenPort Aero. I just don't have any kind of projections or news to give you on that yet.

Okay. All righty. Thank you, guys.

Thanks, Chris.

Chris.

[Jennifer Grace], Private Investor.

Hi, good morning. Thank you for taking my question. Having watched Iridium become a viable competitor in the satellite industry, particularly coming out of the bankruptcy, I just wonder why is it with continual good news that seems to be coming out over the last several years in particular with its growth and realizing the DoD and the changes that are happening there that that might be a bit of a bump in the road, but why is it that with all the good news that continually comes out does the stock continue to remain depressed or flat. There is an exception to that. If you look back to, what would that be, second quarter of or third quarter 2012 where it actually peaked above $9 and then that's the highest its been and then it's fallen back down. I don't understand what the source of this is. If you want to say in the old days to me this wouldn't have happened and by that I mean say 20 years ago, the way the world worked and there's so much great stuff going on with this Company and I just want to know if your opinion is that it's short-sellers, if it's that not enough at least from the civilian part of it point of view versus business or military customers, why aren't we doing better in the stock price and why would it boost up last year?

So, Jennifer, thanks for the question and thanks for -- I agree with your sentiments about all the good news that we've been having over time. I wish I could tell you why I understood investor behavior, but I don't. And if I did I'd do more of that than what I do here. Look, we're patient and maybe you're not, but we have a long-term plan is what we're focused on here. Clearly, I think investors are focused on the fact that we're going through a capital cycle right now with -- and we're investing a significant amount of our current revenues in a globally uncertain environment where the economies around the world are difficult to challenge. You mentioned the DoD and they are going through sometimes. So I think this is all going to work itself out. I don't know when it will, but I think we'll be fairly valued over the long haul. When that will happen, I don't spend a lot of time worrying about because that's just not our role. Our role is to just continue building the Company, launch our next-generation network, keep winning good contracts and frankly I think investors will appreciate that over time. So that's all I can say.

Thanks anyway. I appreciate that. Thank you very much.

Thank you. And with no further questions in queue, I'd like to turn the conference back over to management for any closing remarks.

No. Thanks all for joining us. We'll see you in the second quarter call and look forward to talking to you all again. Thanks.

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