Iridium Communications Inc (IRDM) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Iridium third quarter 2013 earnings conference call. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to [do so, here comes] Steve Kunszabo. You may begin, sir.

Good morning and thanks for joining us. I'd like to welcome you to our third quarter 2013 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 2013 third 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 in 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 it over to Matt.

Thanks, Steve; and good morning, everyone; thanks for joining us. I'll get started by noting that we made strong progress in several critical areas of our business during the quarter while also continuing to tackle some challenges that led us to revise our outlook again last week. And when I reflect on the to-do list we had heading into 2013, I can say that we've checked some big and important boxes, now that we're three-quarters of the way done with the year.

First, as I'm sure many of you've heard by now or seen by now, we announced a successful renewal of our agreement with the Department of Defense. Tom will spend more time on this during the call, but for now, it's enough to emphasize that these landmark agreements worth $438 million in total will provide us with growing and predictable cash flow from our single biggest customer for the next five years.

Getting the deal done was a huge accomplishment for the Company. I'm proud we achieved it on win-win terms and I'm also happy to have visibility on an important chunk of our business through 2018. And when I say win-win, I think this contract will drive new and diverse usage of our network by the DoD, making us even a more strategic asset for this customer as we prepare to launch Iridium NEXT.

Second, but no less important to our long-term profile, is the health of our current network in keeping the Iridium NEXT program on budget and on schedule. We've done that too. With true global coverage and a strong 99% availability this entire year, we've had the best network in the industry today. As for the next-generation constellation, we've recently completed the critical design review for the entire satellite system. This important step signifies the transition from the design phase to the fabrication and testing phase of our new space vehicles. From here, we'll embark on flight qualification and testing activities that will ultimately culminate in full-scale satellite production by mid-2014. All-in-all, we're on track for our first launch in about 15 months.

Let me just add that we continue to be pleased with SpaceX's performance as our primary launch services provider. In late September, they had a successful commercial mission with the same upgraded version of the rocket we'll be using. For the first time, they also launched from the same base we'll be lifting off from, Vandenberg Air Force Base, and delivered satellites for the first time into orbit rather than a single capsule. SpaceX continues to stay on schedule and we expect it will be ready for our first launch with them in mid-2015. Third, we made significant progress this year in standing up our Aireon hosted payload business. NAV CANADA, our joint venture partner, has now invested $55 million of its planned $150 million investment as Aireon has hit a list of important milestones.

Other potential international players also continue to show great interest and a variety of discussions are still underway for both customer and investor relationships. For its part, the FAA remains fully engaged in the project, having made a commitment to Aireon by funding $10 million to support analysis and engineering work for its procurement decision process; great overall progress for a strategic initiative, which remains a big piece of our funding profile and future growth.

Finally, our M2M business continues to enjoy double-digit growth rates in 2013 in what is one of the most promising growth segments for our industry. We grew total M2M revenue by about 18% in the third quarter, while growing M2M subscribers by over 20%. The growth trajectory can at times be choppier than we like given the evolving and somewhat fragmented nature of the business, it's still in its early days; but with our network superiority and device functionality, we really like our prospects in this space.

A growing funnel of large OEM customers gives us added confidence that we'll continue to be leaders in the satellite M2M market. From a business development perspective, we're in various stages of bringing new business on board, from initial discussions about our value proposition and field trials all the way to contract negotiations with brand name players in the agriculture, construction, energy, and mining sectors. These large global enterprises look to Iridium as long-term technology partners for their telematics solutions, which allows us to stimulate demand for M2M services across the entire ecosystem. Signing up Caterpillar earlier this year was really just a first step in our broader OEM strategy and we expect continued momentum here as we look ahead to 2014.

Before I jump to the lingering short-term challenges we face in 2013, let me wrap up the positives by giving my perspective of our recently announced Iridium PRIME program. As the world's first turnkey hosted payload solution, we expect to carry third-party payloads on stand-alone satellites that will leverage the already significant investment we're making in Iridium NEXT.

With the Iridium NEXT payload space fully utilized and many other missions having been left on the cutting room floor, we're open for business again to meet the growing demand for potential missions, including earth observation, space-based weather monitoring, tracking, and other government missions. With more flexibility around launch schedules, mission scope, and key technical requirements such as mass and size, we can offer these missions at an estimated cost savings of 50% or more, compared to current stand-alone solution. We just kicked off this business in the quarter, but we like its long-term revenue potential and will keep you updated on its progress.

As for the issues we're facing that weight on our outlook this year, let me begin with an update on our maritime business line. I'll start by saying that we remain cautiously optimistic about a meaningful turnaround in 2014. The newly fielded improved units, of which we've already shipped almost 500 terminals, are performing well under strenuous real-world conditions. We had to incur additional costs in the quarter to support our partners in moving to the improved equipment, but feel like it's money well spent to regain our footing in the market.

Our new customer activation rates remain reasonably strong. Customer churn is starting to slowly turn around and we see a nice pipeline developing that supports a return to growth next year. It's very evident that our partners have been looking for alternatives to our primary competitor given their price increases and distribution changes. They want us to succeed, because we serve an important role in the value segment to this sector. Without us, the incumbent operator would have tremendous pricing power and market share in our markets and our customers would be left with few alternatives. So, the market dynamics are good and we like our competitive position. But as I said, we have more work ahead of us to get back on the right track.

Another area where growth has slowed a bit in the last few quarters is the handset business and with the passage of time, our viewpoint of the situation has evolved. As a wholesale distributor that goes to market through a partner channel, we don't always have clear and immediate visibility when you think of demand trends and customer behavior. What we heard from our distributors in the first half of the year initially suggested that, while there was some increased competition at the low end of the market, they expected a rebound in the second half of the year, particularly during the peak selling season of the summer months. This was in part reinforced by the fact that our net additions in the second quarter weren't that far below what we did in the same period last year at 11,000 voice net additions this year in that quarter versus 13,000 voice net additions last year. We actually did okay during that period, but it masked a larger trend.

After taking a deep dive with our partners and analyzing volume trends over the extended period, the broad consensus is now that we're seeing a market-wide pullback. Looking at our competitors' recent results for comparable subscriber growth also lend support to this position, as their growth has similarly slowed. We still believe that the impact of direct competition on our handset results actually continues to be pretty marginal. So where do we go from here?

To some extent, recently introduced dealer promotions and marketing campaigns have stimulated incremental demand, although it hasn't been able to offset our unit sales shortfall. We'll continue to tweak these offerings to get the most out of the channel and we believe our upcoming data-centric product will help our trajectory in 2014. This product will allow our customers to connect to our network in easier ways and in the ways they want to connect; and on the most important metric, subscribers and revenue share, I think we'll have overall stability despite a rough spot for the broader market.

We are the leaders in this segment with a global low latency network and robust product portfolio and have demonstrated we have a very defensible competitive position. Tom will have more on this topic during his remarks, but as we said, the slowdown in our handset business strongly correlates to lower overall equipment sales and voice subscriber growth in our commercial market, which is why we further lowered our 2013 outlook last week. While we see growth in the next two years, we need to take our time and work with our channel partners to get a handle on our 2014 outlook, which is why we've taken long-term guidance off the table for now.

In closing, let me take it back to where I started. We've had some important successes this year that keep us optimistic about our long-term prospects. The network is doing really well and the Iridium NEXT program is coming along as we expected. The Aireon business has been largely stood up and Iridium PRIME represents long-term revenue potential in our hosted payload business that we're still working into our long-range plan.

Our new deal with the US government successfully answers one of the biggest questions we've had around our story all year. But we have to get parts of our commercial business back on more solid ground and we'll remain intensely focused on all this during the next several months. Overall 2013 cash flow looks like it will be pretty flat to 2012, but we don't think it has much to do with our longer-term view of growth. I look forward to updating you on what we speak when we speak again in early 2014.

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

Thanks, Matt; and good morning, everyone. I'll first outline our key financial metrics, then step through the changes to our 2013 outlook and long-range guidance, and wrap up with a review of our capital structure and a progress update on discussions with our credit facility lenders.

Iridium reported third quarter total revenue of $100.6 million, which was unchanged from last year's comparable period. While commercial service revenue grew $5.2 million on a year-over-year basis, equipment revenue fell $6.1 million, eating up the entire gain.

Our overall sales volumes have not recovered in the second half of the year as we anticipated and I'll have more color on this topic later in my remarks. Operational EBITDA came in at $53.3 million, a decline of 7% from the prior-year quarter. Our operational EBITDA margin was 53% for the third quarter, falling from 57% in the year-ago period, primarily due to $3.1 million of Iridium OpenPort warranty-related costs.

From an operating viewpoint, we reported commercial service revenue of $61.3 million in the third quarter, representing 9% growth over last year. We added 8,000 net commercial customers during the quarter, with 75% of that coming from the M2M business, compared to 18,000 net subscriber additions in the year-ago quarter.

Commercial M2M data subscribers now represent 43% of billable commercial subscribers, an increase from 39% during the year-ago period. Building on Matt's discussion of the recent slowdown in the handset market, I'd like to think about it in terms of how many net additions we're picking up as a percentage of last year's subscriber gain. Said differently, I'm comparing the strengths of our net additions in a particular quarter versus the year-ago period given the significant seasonality in our business. It's a good comparative measure in assessing our ability to add new subscribers and where the market may be headed. On that basis, the second quarter of 2013 looked okay from a trend perspective. But the third quarter was notably weaker. Fourth quarter is also shaping up to be down now that we have October results. So it really feels at this point that the strength we saw in the second quarter [defaults signal].

When looking at this trend over a period of several quarters, it becomes clear that we're not adding many net commercial voice customers as we have in the past regardless of seasonality and other factors. We investigated this issue further by looking at our key competitors' results and observed that they're also adding fewer customers. So this analysis, along with a broad consensus we've reached with our partners, suggest that the handset market is in a period of slower growth for various reasons, but as Matt outlined, we're working to expand the market and capture incremental revenue by launching a datacenter product and by working with our partners to optimize promotional activity and marketing campaigns.

Turning now to our government services business where reviewing this quarter's financial results isn't terribly instructive given the successful renewal of our key contracts with the Department of Defense a couple of weeks ago. So, I'll spend my time discussing what these contracts mean for Iridium going forward. The fixed-priced, five-year nature of the airtime deal gives both us and our defense community users much welcomed stability, gives an even greater number of government subscribers low-cost access to our network and its full capabilities without concern for price increases based on usage changes or demand growth.

Importantly, it provides us with the predictable and growing cash flow during the launch and construction period of Iridium NEXT, when you consider that as our single biggest customer, they represented 20% of our revenue in 2012. We expect their need for commercial satellite services will grow in the future and we're proud to be an optimal solution for their critical missions, no matter where our war fighters are around the globe. We've benefited from a valuable strategic relationship for many years and look forward to continuing to support them with global, secure, voice and data communications and enhanced services that will become available with Iridium NEXT. These two deals worth $438 million, $400 million for the services component and $38 million for supporting their dedicated gateway, are a great success for both of us, as we mark the next chapter of our partnerships.

Focusing next on the equipment line, which produced revenue of $20.3 million, a 23% year-over-year decrease, resulting primarily from lower overall sales volumes. When laying out our second quarter results back in early August, we expected handset shipments to pick up in the second half of 2013 due to two factors. This recovery in unit sales didn't occur and I want to pause here to reconcile those trends for you.

First, we anticipated a notable increase in handset shipments from a few service providers, which did no business with us in the first half of the year, but were major accounts in prior years. Specifically, they delayed their orders in the first two quarters due to separate issues within their own organizations and we thought all of their orders for 2013 would occur in the back half of the year. These service providers have now resolved their issues, but it came too late to have a meaningful impact on our unit sales volumes for 2013. Some of this volume will be displaced to 2014, as they continued to rebuild their inventories, but it likely won't fully offset what appears to be the broader macroeconomic trends in this slower market.

Second, we also expected higher unit sales in our Russian market, as this geography continued to ramp up after being recently licensed. Our Russian partners have in fact generated significant handset sales when you measure it as absolute growth, but the shipments have ramped up more slowly than their forecast.

Moving now to our recently updated 2013 guidance, which we reiterated this morning, we expect operational EBITDA of between $200 million and $205 million for the full-year 2013, which compares to $206 million in 2012. Again, the primary reason for essentially flat cash flow this year can be traced to equipment revenue coming in below our initial projections and higher Iridium OpenPort warranty-related expenses. On the same basis for the full-year 2013, you should also note the following.

Total billable subscriber growth of approximately 10%. We set the low end of our previous range and continues to be largely driven by our M2M business expansion, while also considering slower growth from core telephony and maritime subscribers. Further, we expect total service revenue growth of approximately 6%. We also gave one piece of guidance for 2014, which is that we expect full-year 2014 EBITDA to increase from full-year 2013 level.

As for our long-range guidance, we've decided to withdraw everything but the cash taxes piece for now, as we assess the impact of lower commercial equipment sales and subscriber additions as well as the long-term revenue potential from our Iridium PRIME hosted payload program on our operating plan. As you heard throughout our call this morning. Our fundamental path to value creation remains solid, when you consider the attractiveness of the markets we operate in, our relative competitive position and network leadership. We still anticipate double-digit growth in the promising M2M sector, while defending our revenue share, albeit in a slower market in the handset business. We also forecast a meaningful recovery in 2014 for our maritime business, as we continue to put our Iridium OpenPort issues behind us and capitalize on the needs for a value product in this space.

And finally, a review of our capital structure and liquidity position. As of the end of the third quarter, we had drawn $936.3 million from the COFACE facility relating to payments we've made to TELUS for their successful completion of contractual milestones for Iridium NEXT. We've now invested over $1.2 billion in the last three years towards this approximately $3 billion project. We had a cash and marketable securities balance of approximately $270.3 million.

As we shared last quarter, our operating plan is tighter now due to some of these moving parts. We've had productive discussions with our credit facility lenders during the last few weeks and have started the process of modifying certain financial covenants. Nothing specific to report on today, but I expect to have a full update around the time we report fourth quarter 2013 earnings in the early part of next year.

In wrapping up my thoughts, we remain optimistic about our prospects for long-term value creation despite the weaker-than-expected results we've posted in 2013. Iridium NEXT will be transformational, not just in terms of network of capabilities, but also for our financial results. Having the launches completely behind us in 2018, our annual capital expenditures are projected to fall below $30 million while we expect our operating cash flow will rise meaningfully from current levels.

Our new contract with the DoD, representing our single biggest customer, will provide for at least a $22 million service revenue increase in 2018 from what we'll see in 2014. In addition, recent developments with our Aireon joint venture only increase our confidence that it will become the standard for oceanic and remote airspace monitoring. This makes us optimistic that Aireon will have the ability to honor their contractual commitments to Iridium. Under these contracts, Iridium would recognize $14 million in recurring annual hosting revenue, an additional $20 million in recurring annual data service revenue in 2018. So adding these two important customers together, we have visibility to potential recurring service revenue growth of over $50 million during this period. When you combine this with the excellent attributes and competitive dynamics of our commercial business, we believe that Iridium's future is bright.

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

(Operator Instructions) Brian Ruttenbur, CRT Capital.

Yes, thank you very much. My first question is about the need to potentially raise capital. Is there a need to raise anymore capital with your current financial situation?

Brian, as we said in the past, we see issues with our financial covenants as we look in -- as in period beyond one year and we're in discussions with our lenders to address that. And that's as much as we can say at this point, as far as that's concerned. We're talking to our lenders currently.

Okay. And then, in terms of your guidance, as I look at it in terms of revenue and earnings, it would be essentially flat revenue and earnings in 2014 versus 2013, looking at your guidance, your subscriber growth and your operational EBITDA. Is that the right ballpark to be thinking?

So let's be clear. In 2014, we have not issued any guidance in respect of service revenues or subscribers. We've issued guidance in respect of EBITDA and that event will be up from 2013.

Okay. But you didn't say how much it's going to be up, correct?

Did not.

Perfect. Thank you very much.

Chris Quilty, Raymond James.

Good morning, gentlemen. Wanted to dial in a little bit on the commercial M2M growth, which -- and I think that's the weakest quarter you've seen in a number of years. Can you talk about some of the dynamics going on there?

Yes, Chris, it is a little weaker I think than we've seen in the past, and I think that's sort of been exhibited really for the last couple of quarters as our partners. And we have a substantial group of partners had given us forecast at the beginning of the year for certain net activation rates and equipment sales; and it's really been all over the map; some have been up from where they have, some have been down; but net, it's been a little weaker this year than we have in past years. I can tell you, I don't -- we don't see any dynamics as it relates to sort of competitive dynamics. In fact, we believe we're growing market share. We think it's timing for the most part.

We have some new, very interesting opportunities coming on board that we think will be contributing; it did contribute this year, but will be contributing more in 2014 and 2015. Our partners aren't telling us anything, that there is unique about that, it's really just the fact sort of what I would call general choppiness of quarter-by-quarter behavior. But in reality, we think we still have the best product in the space. Our partners are telling us that and we're still attracting a very interesting significant and funnel of new opportunities that we think will be coming in over the next coming quarters. So it probably related a little bit to the partner -- a couple of partners in particular that we might have brought on a year or two ago that's sort of underperformed based upon their unique circumstances, but I really don't think it could be with any kind of general trend or anything.

Got you. And can you talk about the trend toward OEM customers, chipset sales, waveform integration, some of the opportunities to kind of move away from selling the traditional modem?

Well, there has been growth in that area. There is more chipset sales going on right now from a partner two who has taken our chipset and has put it in that there's not much waveform really right now going on except activity really going on towards the government. There's a lot of interest in the government of embedding a couple different waveform or service types into various different opportunities. And by the way, most of those are all upside to the fixed-price contract that we announced, but in terms of embedding chipsets where growing number of chipsets are going out there and I think that will only help the dynamic as it makes our products even more competitive in the future for different things.

When you mentioned OEMs, I mean, specifically, you're talking about a specific class of M2M customers. That's an area we had almost no visibility to about 12 months to 18 months ago; and now, I feel like that's a big part of our potential. We're engaged across the board in a number of players around the world in that area. Only really announced one to speak of, but I think you'll see more in the coming quarters. And I think that that's a good area of growth, particularly of what I would call it more the low-end, but there's some high-end business there too in terms of monitoring of equipment, engines, engine state, that sort of thing. So I think you'll see across the board growth in the O&M space for us.

And on the OpenPort product line, can you talk about any impact you've seen from Inmarsat's recent price increases?

Yes, I was just reading a report this morning from the kind of the market team and there does seem to be a lot of activity in the field right now as the partner base is kind of going after that opportunity. It's certainly created an opportunity because it's sort of pushing a whole class of customers. I think they're hoping to push them to FleetBroadband, but I think we're going to build a very attractive alternative or opportunity for that, particularly with -- as we regain the trust in the market for our product, which is occurring now.

So I think that's a part of the dynamic that gives us that cautious optimism about a meaningful turnaround next year. We really didn't lose too many people really in the last six months and I'm really pleased with that. I think it really goes to this dynamic where the market really likes the product, they like the dynamic of it, it was failing too often in the field, but with the new units going out there, I think there is a lot more enthusiasm about getting it on to more ships and I think that will help us.

Thank you. James Breen, William Blair.

Thanks for taking the question. Just can you give us a little bit more color maybe in terms of timing on the OpenPort and when you think we'll sort of be through the drag that's from the equipment that had been repaired or getting repaired? And then, secondly, on the voice market, do you think it's just a global slowdown in terms of penetration for the product or is it competition, maybe a little bit of color there as well? Thanks.

So in terms of OpenPort, I mean obviously, the drag this year has been, as we've built up our warranty reserves and cost to basically manage the move from the older units to newer units and that is -- wasn't planned necessarily and certainly, I expect that to be for the most part over at this point. So that at least takes that off the table. So, going forward, next year, we won't have that weighing against us.

There was also a real slowdown really over the last couple of quarters as people were waiting for the new and improved units and now that those are shipping in volume, as I said almost 500 units have shipped, which is a significant number really off the bat, but there's still a lot more demand in pipeline for more. I think, we're going to start seeing through the end of this year still that what we're forecasting, but 2014 really should start turnaround the other way. Also starting to see some progress on the aviation side in that space. We also think you'll see some more activity on the land in that as sort of something coming next year. So I think next year, hopefully, will be a pretty different year for OpenPort than it was this year.

As far as handsets, like we said, we were a little bit surprised by that. I think our partners have been a bit surprised by that, who said it's been sort of a market-wide pullback, it feels like, because everyone -- I think it has to do a bit with uncertainty out there. It doesn't help when governments, who are big buyers for first responders and for emergency uses and for others, aren't really sure whether they're going to have the funds and whether their government's going to be open and I think that hasn't helped.

As you said, I don't really think it's been so much competition though I would like to have a new product in the market, that would help a lot, that would help us grow and stabilize that, and we're still playing on that coming in the next few months. So that will help a lot, but we're -- said, we're seeing I think a general slowdown, but I don't think it's saturation per se, but we've never ever really expected the handset market to be a big grower. We just thought it would be more of a stable slow grower in our space and I think that's what it will ultimately be, sort of a long-term view. We still believe that's how it fits into our portfolio.

Great, thanks.

Thanks, Jim.

Greg Burns, Sidoti & Company.

Hi, just a question about PRIME and the pipeline of opportunities you see there. Is there anything that is or maybe you can give us an idea of the size of some of the things in the pipe, the stage of development or if we could expect any kind of announcement within a reasonable time frame around PRIME?

Yes. We literally just kicked off that business in this quarter. So it's still early days, but I have to say it's gotten off with a bang. There is a significant and growing pipeline of engagements that we've had, both with end customers for a lot of people who suddenly realized that maybe they can get their missions up since they didn't have the money to do them on their own and are now considering this as a better platform, maybe more reliable platform that they can start planning towards. The first launch would still be in at earliest late 2017 to more likely 2018, as we complete the next program. So as you back up from that, you start needing to make sales three years, four years from then.

So, I'm not expecting you're going to hear something about that this quarter or next quarter, but I wouldn't be surprised that we won't be able to update you on some interesting ideas that we're engaged with in 2014 and as that sort of grows in 2015, that could also potentially bring some revenues as we do engineering and analysis work for people, but possibly even engaged with building some extra satellites going beyond the 81 that we're going to be building for Iridium NEXT. But the interest has come not just from end customers, but it's also come from system integrators and technology players. So, some of the payload players in the industry who already are out there really talking to people about their missions are now talking to us about how can they move towards PRIME as a more cost-effective platform for them and so I'll update you as we hear more.

Okay. And in terms of Caterpillar, when do you I guess expect first piece of equipment to roll off the line with Iridium on them?

Well, it's in testing stage right now and it's in integration and testing through their technology partners and integration teams, and I would expect the ramp will really start up in 2014 and ramp through 2014. We've only announced a part of really what we believe are long-term business for Caterpillar to be. There will be still more business I think to come there out of that, that you'll hear more of as the time comes, as they're looking for expanded partners for more applications as part of their business, but the stuff that we've announced so far I think will start rolling out earlier in 2014.

Thank you.

(Operator Instructions) Jim McIlree, Chardan.

Yes, good morning.

Good morning.

Do you have a guess on how long the weakness in the handset market might be? Do you guess this might be just a quarter or two, or is this something that you think might extend to the middle of next year?

I think it's too early to say. I mean that's one of the reasons why we really want to take the next couple of months. So I would really like to come back with our fourth quarter results and talk about 2014 in more detail. And I think we'll have a lot more visibility to it then. As I said, we want to see how new products play into that as well as our existing products and how it relates to everything else and see how everyone else is still doing, but as I said, wouldn't be in this situation. We had really great visibility this year. So we really want to expand that visibility here before we give a lot more detail about it.

Okay, fair enough. And then, on the government side, can you just remind me how these contracts might affect handset sales to the government? And then, what is the implication of the contract on with NEXT? Does the government get access to the NEXT network as well?

Yes. Well, first, on the latter one, Iridium NEXT is sort of a seamless transition from the current products. So as it evolves to NEXT, they continue to get access to NEXT for all the products that they've bought. There will be new products coming with NEXT that aren't necessarily included in the current contract. So those would be additive to the contract and I should say too that I'm not sure everyone completely appreciates just how groundbreaking this contract is.

We've been subject to ebbs and flows of demand depending upon how many devices the customer used, they were able to use unlimited usage, but for only the number of devices that they were paying for each month and that was clearly in a decline over the last two years almost that they've been declining usage now.

This is a five-year fixed contract, which really sort of takes off that whole issue off the table, because at least for a lot of core services, which include paging, handsets, DTCS, whether it's tactical radio usage, even includes a small part of OpenPort, which I'm excited about, because it gives them a chance to sort of experience OpenPort.

So there's upside there and really then gives them the ability I think an SPD [verse] machine-to-machine, which I think is going to make them take a look at those services and considering expanding some of those, because it won't cost them incrementally more to say, go after some M2M applications, maybe that they were concerned about going after before. So equipment isn't in that fixed-price contract. So all equipment sales are above and beyond that. So to the extent that this generates incremental subscribers, grows more M2M customers or handset customers, those will be products that we'll be selling them and will hit our equipment line separately. So that's all good.

It also doesn't include few things like waveform as I mentioned, which is something we've been working with them. We really like to embed this push-to-talk tactical radio service in a lot of their core terrestrial products and there is some activity underway and that's sort of incremental to this business and there are some other kind of projects that we're working together, which I think we'll even add. So it gives us a really solid base, it gives us visibility over five years to a big chunk of our revenue and gives us some upside that we can play off as well and could drive incremental equipment sales in the future.

Right. That's great, thank you very much.

Thanks.

Chris Quilty, Raymond James.

On that point, the push to talk or DTCS and I know that's been delayed a bit due to some R&D funding with the government kind of back working or are you seeing some of those R&D dollars starting to flow and can you give us a sense of when you expect to see some product and network completion on that project?

Yes, good question and there is some kind of news to report there. You're right, over the last, actually, about a year to 18 months, R&D had started slowing down towards building what they really wanted, which they call -- which we used to call Phase III service or they've been calling recently Global Services, which takes it from a satellite-based service under a really big footprint, having lots of devices to a global footprint and lower latency and advanced capabilities. And everybody was in sort of a wait mode until that new product could be developed and implemented.

And the R&D was slow because of the government's uncertainty, et cetera, and contract uncertainty and everything else, that seems to have been unblocked in the last two months or three months. R&D, looks like there is more visibility to R&D now. There had been some confusion over who was really kind of driving the show in the government, which agency that seems to have been sorted out. And the sort of the Phase II product, as it stands today, the evolution of it, the Phase III seems to have been sorted out. So, I'm encouraged by the fact that, I think, that will start giving us some potential sales. Of course, most of the core sales are in the fixed-price contract though it could still be maybe some incremental equipment and everything, but it starts freeing up the potential for some of those waveform opportunities that could turn into incremental sales as well.

And correct me if I'm wrong, but Phase II, you didn't see any hardware revenue, but with Phase III, you have a product and we'll be seeing hardware revenue?

That could potentially be true, that's still -- there is a couple of different opportunities for handset potential. We do have a handset and we may be part of it, but there could be other handsets as well, because we want to create a multiple opportunity for devices for the government there.

Okay.

Now, this all, by the way, Chris, have been sort of a foundation for a commercial product as well and we're still forecasting that to come out in 2014, too. And so as we sort of think about our handset business and voice and data business, that also gives us sort of another service that we can add to the mix that sort of helps us give confidence that that area will be stable and possibly even growing in the future.

And how quickly can you turn a commercial product once the DoD product is launched? I mean is it a matter of months or quarters?

Actually, we've disconnected the two just to ensure that we really aren't tied. The two had played off of each other. We're taking advantage of investment that the government has made in the past and built on top of it and vice versa, really. I think the government's now taking advantage of the work we're doing on the commercial product. But really, we now have much more visibility to our timeline and availability of our product in 2014 and it won't really be guided on if there was any further slowdowns where we should be in trials sometime in 2014 and hope to see that ramp up towards later in 2014 into 2015 and believe there is a fair amount of pent-up demand around the world for that application for both foreign militaries as well as search and rescue, public safety, a lot of activity around that area.

And in the absence of that product, which doesn't sound like it's going to be much of a 2014 contributor, I think you had some other commercial products that were supposed to launch in Q3. Presumably, you've had some slippage to the right and without providing I guess discrete details, do you still see those as a potential revenue driver for 2014?

We do. I don't know if I -- we might have initially hoped for quarter three. I think we were really more focused on quarter four. I think it's going to more quarter one now. We want to make sure that's the highest quality product that we can have. We don't want to have any issues there. So we're in testing right now and we'll make sure that is extremely robust and has the right value proposition for customers and it's completely ready. But yes, I think it'll be -- should be ready early enough in 2014 to make contributions to 2014.

And a question for Tom, he had mentioned, I just missed it, something about the CapEx being down $30 million?

The comments were relative to 2018 in that NEXT would be transformational, not just in terms of the network capabilities, but our financial results. And when you look out to 2018, when the launches are behind us, CapEx goes to sort of a maintenance level of below $30 million.

Good. So no change there.

No.

Perfect. Okay, thank you very much, gentlemen.

Thanks, Chris.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing remarks.

Okay. Well, thanks everyone for joining us. Have a nice Halloween and we'll see you at the end of our fourth quarter. Thanks.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.