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Edited Transcript of IRDM earnings conference call or presentation 28-Feb-19 1:30pm GMT

Q4 2018 Iridium Communications Inc Earnings Call

MCLEAN Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Iridium Communications Inc earnings conference call or presentation Thursday, February 28, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth B. Levy

Iridium Communications Inc. - VP of IR

* Matthew J. Desch

Iridium Communications Inc. - CEO & Director

* Thomas J. Fitzpatrick

Iridium Communications Inc. - Chief Administrative Officer, CFO & Director

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Conference Call Participants

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* Anthony Francis Klarman

Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research

* Christopher David Quilty

Quilty Analytics, Inc. - Founder & Partner

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

* Louie Dipalma

William Blair & Company L.L.C., Research Division - Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

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Presentation

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Operator [1]

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Good morning and welcome to the Iridium Communications' Fourth Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Ken Levy, Vice President, Investor Relations. Please go ahead, sir.

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Kenneth B. Levy, Iridium Communications Inc. - VP of IR [2]

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Thanks, Cole. Good morning and welcome to Iridium's fourth quarter 2018 earnings call. Joining me on this morning's call are CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our fourth 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 would like to caution all participants that our call today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks which could cause actual results to differ from 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 views or expectations 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that let me turn things over to Matt.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [3]

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Thanks, Ken. And good morning, everyone. So by my count this is the 37th quarterly earnings call we've held since going public in 2009. And it's certainly one of our most satisfying in terms of results in achieving our long-term goals. As I'm sure you saw in our press release, 2018 was an outstanding year for Iridium in terms of subscriber growth, financial performance and business execution. Our subscriber base grew 16% over 1.1 million active users, top line revenue grew 17%, our highest rate of growth as a public company. And operational EBITDA rose 14%, our best in 7 years. And of course shortly into the New Year we realized our crowning achievement, the completion of Iridium NEXT. As a result, we entered 2019 with tremendous business momentum. We enjoy our best competitive position in corporate history and are now able to fully leverage our brand new powerful network platform.

On February 5th the final Iridium NEXT satellites went operational, completing our network of 66 new satellites. This historic event completes a decade long design, construction and launch program, retires a lot of execution risk and allows Iridium to move from a period of capital investment to a new exciting era of free cash flow. As I reflect on this milestone I am reminded that nothing in space comes easily and this journey has not been without its fair share of challenges.

In completing Iridium NEXT we had to react to changes in technical plans, schedules and financial events along the way, always keeping in mind our objective. Some would say we also caught a few breaks along the way like the incredible resiliency of our original network. I would respond however that we made most of our own breaks thanks in large part to the immensely capable and highly performing team we've assembled over the years. I am proud that roughly 470 Iridium employees who brought the Iridium NEXT mission to fruition. Many of them have supported the Iridium network since its inception and there isn't a better group of hardworking, committed people. Though the final satellites only arrived to their operational orbit positions earlier this month, we have been managing, controlling and living with these new Iridium NEXT satellites for over 2 years now.

The satellites are operating extremely well, delivering better statistical performance than we'd ever even hoped for. We've had very few issues with the new satellites given the complexity of the whole project and that gives us tremendous confidence in long-term resilience of the network. With the completion of the constellation upgrade we've also now launched our first new service, Iridium Certus, and are already hearing lot of good feedback. The service was formally launched in mid-January for the maritime and land mobile sectors, more than half of the 38 partners that signed up so far to offer this service globally have completed their interconnects and launched their sales activities and the rest are quickly on-boarded -- are being quickly on-boarded.

You can expect a few more new partner announcements this year as everyone we've talked to is excited about offering the service to their customers. Early feedback on their sales pipelines and the first month of activations have been encouraging although 2019 remains an introductory year and we've kept our expectations appropriately measured. We see Iridium Certus ramping in subscriber additions and revenue over the next 3 years. And as we've said before, we forecast an incremental $75 million in broadband revenue, leading to a $100 million run rate for Iridium's broadband revenue as we exit 2021.

This year the number of aviation antenna suppliers like Collins Aerospace and Thales are working to bring their Iridium service offerings to market as well. Given the regulatory work involved in aviation products I expect that will take most of this year to occur. So we remain excited about the revenue stream that Iridium Certus aviation will add to today's existing mix of maritime, terrestrial and government customers. We positioned Iridium Certus to be a best-in-class solution for broadband users. One of the benefits of our offering is that it scales very efficiently both up and down. This means that it has broad utility for a wide variety of current and emerging applications. Iridium Certus is being developed as a multiproduct platform which can be used for broadband applications but is agile enough to fit into more optimized packaging that's focused on low cost and small size rather than throughput. Examples of these uses might include new consumer devices supporting feature rich chat applications with pictures, fully featured e-mail or even low-resolution video for security application.

Our network is optimized for and we see a tremendous market in highly mobile low-cost industrial-grade application. Frankly not a market that other satellite network operators are designed to address. Our users prioritize size, weight or power over throughput. Iridium Certus has been designed this way to get the most data possible through low cost smaller antenna. As a result we believe our network will continue to appeal to an expanding base of developers and users. You may have heard that we're working on a lower speed smaller device this year called the Iridium Certus 9770. This transceiver really targets the highly mobile enterprise in IOT space, hitting the sweet spot for low cost highly mobile applications in a variety of speed ranges between 22 and about 100 kilobits per second.

While we've been quite successful over the years with a product that uses only 2.4 kilobits per second of data, a lot of user applications around the world are looking for a little more speed but still want a small low cost and low power antenna and devices. We think our network in the Iridium Certus technology platform are the perfect solution for expanding into these opportunities. Our new 9770 transceiver is actually the first of a new family of devices we will be introducing for partners, optimized for high volume consumer and enterprise applications, which is a growing segment that should be a significant source of revenue in the future. Think of them as ways to expand our current voice and data business as well as our IoT revenue line well into the future.

Another big priority for us this year is the renewal of our enhanced mobile satellite services contact with the U.S. government. I don't have a lot of specifics to report on this effort today except to say we remain very engaged and continue to have positive discussions towards making this new contract a win-win. Given that government subscribers grew 13% to a record 113,000 subs in 2018, the cost per user continues to fall under the EMSS contract. We think we should be able reach an agreement on a contract that continues to drive down cost per user for the government while supporting overall revenue growth for Iridium.

The management of Iridium's EMSS contract officially transitioned from the Defense Information Services Agency, or DISA, to the Air Force at the end of last year. This move does not change anything regarding our negotiation but it seems so far to be a positive step for centralizing the management of commercial satellite with military satellite operations, and that should be a good thing for the industry.

Aireon continues to make good progress. And in 2018 made some significant payments on its hosting fee obligation as it continue to pay its data services fee. We believe that Iridium's equity stake in Aireon as well as its contributions to our cash flow will provide long-term benefits to our shareholders. As you know, Aireon is creating a unique and powerful global air traffic surveillance service that we believe will revolutionize air traffic management. With the FAA's and Europe's mandate requiring all aircraft be equipped with ADS-B transmitters by the end of this year we expect Aireon to increasingly be very busy this year with new customers and turning on commercial services for their initial customers this spring. Especially now that they have 100% complete network. I would also expect the company will continue to be a picture in the media as these deadlines approach.

As I reflect on the completion of the Iridium NEXT constellation, I'm reminded that we considered several dozen hosted payload opportunities for Iridium NEXT. Aireon rose to become our top choice for the primary hosted payload due to its game-changing potential and strategic fit with Iridium. Clearly, we hit a home run. It is not often that you get to turn a good idea into a revolutionary service with global impact on an industry the size of aviation with such significant potential for value creations.

So we'll be exciting to see Aireon go live this year. Following the final testing and certifications of the system, Aireon will began operational use of the service with their first customers over the North Atlantic. I don't think investors really appreciate how successful Aireon should become. Aireon provides an essential air traffic surveillance service that is useful to every air navigation service provider in the world in addition to utility in commercial aviation.

Together this is a $750 million annual addressable opportunity. Given forecasts for Aireon's growth in margins, we believe that the company will ultimately generate substantial earnings that should generate significant dividends for Iridium in just a few years. So I'm very excited about the record performance and strong progress we made in 2018.

I continue to feel very good about the underlying strength of our business and the growth that our new broadband services will deliver. We enter the era of Iridium NEXT as a technology leader with a strong track record of successful execution. 2018 was truly an historic year for Iridium, and it's safe to say that 2019 will be equally exciting now that Iridium NEXT is fully operational.

With that, I'll turn it over to Tom for review of our financials, Tom.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [4]

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Thanks, Matt. Good morning, everyone. For 9 years, Matt and I have been predicting a financial transformation for Iridium at the completion of the Iridium NEXT capital campaign. That day has now come and the transformation is underway. From this quarterly conference call forward we expect to continue to talk about Iridium's EBITDA growth but will also add new commentary on Iridium's leverage-free cash flow.

With the completion of Iridium NEXT Iridium has become a rare company. One that is characterized by robust EBITDA growth and material levered free cash flow. In a few minutes I'll introduce some measures of Iridium's levered free cash flow we think our investors should consider moving forward.

Let me start however by summarizing Iridium's key financial metrics for the full year and provide some color on our fourth quarter results. I'll then walk through the 2019 financial targets we updated this morning and review our leverage liquidity position and suggested levered free cash flow metrics.

2018 was a record year for Iridium. Total service revenue grew 16%, our best rate as the public company. And full year operational EBITDA totaled $302 million. This strong performance was driven by continued momentum in our commercial business and a meaningful ramp in hosted payload revenue associated with the deployment of Iridium NEXT.

In the fourth quarter Iridium reported total revenue of $132.2 million which was up 14% from last year's comparable period. This growth was attributable to incremental hosting fee and data service revenue in conjunction with strong trends in commercial voice and continued growth in commercial IoT.

In the fourth quarter, operational EBITDA rose 19% than the prior year's quarter to $75.5 million. The commercial side of our business remains strong in the fourth quarter, generating record revenue of $85.3 million. This was 23% increase from the prior year's quarter and almost double the growth we enjoyed the year earlier.

Strength was evident across every segment of the commercial business. Revenue from commercial voice and data increased 9% from the prior-year period, reflecting an increase in ARPU related to price changes adopted early in the year. That said, subscriber growth in Iridium OpenPort was also strong as we continue to see Iridium's services and brand attract more maritime customers with the recent launch of Iridium Certus.

In commercial IoT, revenue increased 12% to $21.8 million, driven by a 27% increase in billable subscribers which benefited from continued strong growth in consumer IoT, in particular personal communication services sold by Garmin. In all, commercial subscribers grew 16% year-over-year and IoT subscribers now represent 64% of valuable commercials subs, up from 59% in the year-ago period.

Revenue from hosted payload and other data service was up $9.7 million year-over-year to $14.2 million in the fourth quarter. $7.7 million of this amount reflect the hosting and data service fees paid to Iridium by its hosted payload partners. This steady advance in payload revenue is continued as more Iridium NEXT satellites have been put into service.

Also of note in the fourth quarter, Aireon closed its financing and remitted a cash payment of $35 million for our hosting fees. Of the total payments of approximately $43 million in 2018 we recognize $14 million as hosting fee income this year. The balance of this payment is deferred revenue on our balance sheet.

In the fourth quarter we also recognized a $4.5 million nonrecurring item from satellite time allocation services. Favorable developments at our partners, Thales, caused us to recognize revenue earned in prior period. With the U.S. government exercising its option to extend the EMSS contract for an additional 6 months at the prevailing rate, revenue from our government service business remained $22 million in the fourth quarter.

Government subscribers grew a robust 13% in 2018 and in the year at a record 113,000 subscribers. We continue to make positive headway on a new EMSS contract and expect to update you in the second quarter of this year. Revenue from subscriber equipment grew by 4% in the prior-year quarter to $20.1 million driven by demand of IoT equipment.

2018 was a record year for equipment sales, driven by higher-than-expected demand for satellite handset which have now returned to more normalized levels.

Moving to our 2019 financial guidance. In 2019 we forecast operational EBITDA in a range of $325 million to $335 million predicated on total service revenue of approximately $440 million for the fiscal year. The key elements supporting this outlook are as follows. First, we expect continued strength in IoT from heavy equipment manufacturers and customers providing reliable low latency telematics.

We also expect continued strength in personal communication services. These factors make us quite confident in forecasting double-digit subscriber growth for this business line in 2019 and well beyond. Second, we anticipate approximately $35 million to $40 million in revenue from hosted payloads in 2019. This revenue includes hosting fees and data service fees from Aireon and Harris Corporation which are tied in part directly to the successful deployment of Iridium NEXT satellite and therefore will reach a steady state run rate given network completion.

Aireon's annual data service fee further steps up from $13 million to $23 million when they reach a customer contract milestone. We expect this milestone to be met sometime in the second half of 2019. Third, we expect an increase in revenue from our fixed price contract with the U.S. government from 2018. Ongoing subscriber growth within the U.S. government bodes well for our negotiation and should lead to a new contract that will be a win-win for both parties.

Fourth, we expect equipment revenues in 2019 to decrease from 2018 on lower handset sales. Fifth, we continue to expect negligible cash taxes in 2019. Based upon our most recent estimate, we now expect negligible cash taxes through 2023. This is a change from our prior long-term guidance of negligible cash taxes through 2020.

We expect to exit 2019 with a net operating loss carry forward of approximately $1.3 billion. Finally, as Matt mentioned, Iridium Certus launched commercially last month. We expect a relatively small amount of revenue from Iridium Certus in 2019 as the service launches but continue to believe that this new broadband service will be the major contributor to a $100 million revenue run rate for broadband services as we exit 2021. Up from $25 million currently.

After the successful execution of 8 launches and the flawless deployment of 75 brand new satellites, Iridium NEXT is complete and the associated capital spending will cease. Investors can clearly see this transformation in our 2019 guidance. We expect total CapEx of approximately $95 million this year, comprised of about $35 million in non-Iridium NEXT capital expenditures and the final Iridium NEXT invoice payments of approximately $60 million in the first and second quarters.

With our newly issued EBITDA guidance, investors can calculate the financial metrics that should be additional consideration for our valuation going forward. Today Iridium is a completely different company than the one you have known for the last 9 years. Today we have a very different risk profile with material free cash flow generation capability. I'd expect that investors will increasingly consider metrics like levered-free cash flow, levered-free cash flow growth, levered-free cash flow yield, levered-free cash flow conversion and CapEx intensity in assessing the fair market valuation.

Investors who calculate and track these statistics will see that we are unlike any other satellite player. And given our growth rate and competitive position, traditional satellite peers are not appropriate comparables. We'd encourage investors to benchmark Iridium against the tower sector and fiber company, both industries that enjoy strong recurring cash flow, low revenue risk and low maintenance capital expenditure. We think that you will find that we stack up quite well.

We've also been clear that we intend to undertake debt refinancings in the short term that will facilitate the payment of dividends and share repurchases. Given successful execution of our business plan, we estimate that Iridium's capacity for returns of capital through 2025 to be approximately $2 billion dollars. Compare that to our current market capitalization and you can see why we have such a unique financial profile.

As of December 31, 2018, Iridium had a cash and marketable securities balance of approximately $273.4 millions. Late in 2018 Aireon closed its financing and remitted a cash payment of $35 million to -- for Iridium's hosting fees. As Aireon has disclosed, the facility totals $200 million. Quite impressive for a prerevenue company. This is indicative of a robust operating model with firm contracts, with high quality customers aggregating to hundreds of millions of dollars.

You'll note that Iridium's deleveraging has already begun. We closed the year with leverage at 5.2x EBITDA, down from a peak of 5.6x in the first quarter. We continue to expect that net leverage will fall to approximately 4.5x as we exit 2019. This leverage would be impacted slightly should Iridium effect a refinancing. We expect this impact to be approximately 1/4 turn of leverage should it occur.

In closing, I feel very good about the progress we made this past year and the clear path we have sown for Iridium's financial transformation. We appreciate the support that our investors have provided during the capital-intensive Iridium NEXT mission and look forward to rewarding this patronage and confidence in our company.

With that, I'd like to turn things back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [2]

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We're ready for our first question.

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Operator [3]

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And the first question comes from Rick Prentiss with Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [4]

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Obviously exciting times with the operational fully functional, so that's good news. Couple of questions on the guidance side. Previously the operational EBITDA excluded the revenues and recurring cost associated with NEXT. Can you also update us like in your '19 guidance are you expecting that that adjustment will go away starting 1/1 or does is go away starting in 2Q? Just what should we think about what's baked into the guidance as far as that NEXT adjustment?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [5]

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Sure, Rick. Substantially all of the NEXT expenses in 2019 relate to the in-orbit piece of our launch insurance under GAAP. That needs to be amortized over the 12 month following launch because that's the coverage period. So our launch is from 2018. The insurance associated with the in-orbit coverage get amortized into 2019. And since our last launch took place in January of '19, we have about less than $0.5 million that will also leak into 2020. That's substantially all of the NEXT expenses and that's about, you know, around 10 million bucks that will be excluded.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [6]

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Okay. We also appreciate the update on the government contract. Has there been any impact from the government shutdown? And I guess you said it's moved toward the Air Force as the one doing the negotiations. So just wondering should we expect the April date is going to hold?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [7]

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Yes, the April date is a sort of a firm ending that was -- there is a date in April that has to be completed by. It's unlikely there'd be an extension. But they're not sure they could -- I'm assuming they could ask for one, but they would have to be a appropriate new contract of some sort that would be appropriate for that sort of thing, but as far as like the shutdown effect to Iridium, I would say generally not, especially since most of our interactions were with agencies that really weren't affected by that. I didn't really see any kind of necessary business slowdown or anything from that perspective. So we were sort of immune to that I guess.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [8]

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That's good. And final word from me. Tom, you've kind of touched on it obviously, the balance sheet. You mentioned debt refinancing in the short term. Are there any provisions, call provisions, any penalty points and how soon should we think that you might be able to go into the marketplace. And obviously the pricing looks more attractive than maybe it would have been couple of quarters ago.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [9]

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So we're paying close attention to the market, Rick. The market backed up in December and it appears to be coming back where -- so I would just characterize us as looking very closely at it, you know, and couldn't rule out something happen as early as mid-year.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [10]

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I think by the way, Rick, that that will be a good topic obviously for March 7th as well. I mean and I hope we will be able to discuss that a bit more fully then too.

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Operator [11]

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And our next question comes from Greg Burns with Sidotti and Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

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Just about Aireon, I guess the market opportunity there. You've been talking about a $750 million TAM. I was just wondering, based on the contracts they have in hand, how penetrated are they? And I guess we could start there. How penetrated are they into that opportunity based on the contracts they've already signed?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [13]

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They have contracts in hand valued in the hundreds of millions of dollars, Greg. They're well down the road.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [14]

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It's still early days though, I would say. I mean it's certainly probably less than a quarter of the opportunity so far yet, even though it's substantial. You know, that $750 million is computed by sort of taking the way that they price their service by flight region and sort of multiplying it based upon each of those flight regions if it was sort of a 100% covered in the world and might not even include completely the whole, all the commercial opportunities that are sort of a spin out of having all this data available, things like what they do with FlightAware and other kinds of services. So it's not an unreasonable expectation to see that the whole world someday will be using it, but it won't happen for quite a few years. But given they're fairly low costs in general, those are -- that's very, very high margin revenues, so very high profit overall in terms of what it's able to support.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [15]

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I think that the implications of them closing a $200 million credit facility should, investors should reflect on that in terms of, this is a prerevenue company that was able to close a loan like that and use the proceeds to pay Iridium $35 million, that is a very strong indication of A robust operating model that was able to secure that type of financing.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

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And in terms of the $2 billion in capital you expect to return shareholders through 2025, is that a reflection of your outlook for operational cash flow? Or does that also include maybe some dividends from Aireon? How do you get that to that $2 billion number?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [17]

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Sure. So the building blocks are new disclosure around taxes, no cash taxes through 2023, and let me say the statutory rate is probably 24%, 25%. It takes us years to get to that level. So cash taxes sub after 2023 tether in very gradually. Think of 24% and 25% as being low single digit kind of rate. So the taxes is an important component. We see leverage between 2.5 and 3.5x in terms the amount of leverage we have on the company. And yes, we do expect lot of things from Aireon right. We expect the remainder of our hosting fees to be paid. We expect interest on that hosting fee, we expect dividends and we expect then to buy back the stock for $120 million. Those are all components to our $2 billion expectation of capacity, shall we say, for shareholder returns. Obviously should the strategic opportunity present itself that we think would be more beneficial to our shareholders we would proceed accordingly. But that $2 billion is the capacity number. And the operating assumptions around that are if you reflect on this business since we came public we've got a CAGR of about -- an EBITDA of about 9.5%. We've got some significant new revenue opportunities in the area of Certus that if it's -- if Certus is what we think it is, we think we're on a path to putting up those in kind of results through 2025. I would say though one doesn't have to believe in 9.5% CAGR and EBITDA to get to $2 billion when you consider things like Aireon dividends and that sort of thing. So that's why we're comfortable with the $2 billion number as the capacity.

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Operator [18]

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And our next question comes from Hamed Khorsand with BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [19]

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So first off, could you just talk about the inventory of equipment at the retail channel? And how much of that is old stock versus new stock? And how are you going about as far as the commercializing, the sort of service to minimize the amount of people on the old legacy service as you go forward?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [20]

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Yes, I mean if you just specifically talk about the, say the maritime opportunity that we have now, first we've had a product in the market called OpenPort for the -- for a number of years here and it still continues to do well even as we move into this year. It hasn't suddenly fallen off, its actually still being put on ships because it work so well and its reliable and a lot of people are comfortable with it. There is probably still quite a bit of inventory out there of OpenPort. It's hard to tell exactly how much. But we get the impression that there is still a fair amount of inventory. And I expect that that will continue to be deployed even going onto this year and perhaps in the next year as well. At the same time you have these new Certus terminals are also now shipping from our primary suppliers of Cobham and Thales, and we see -- we can kind of get visibility to the number of transceivers we've sent to them and how many they tell us that they have been shipping, that a fair amount of those are now going into the roughly 38 partners that are out there distributing them to their distributors. And those are starting to get into the channels now. And so I think -- and we've seen some pretty good activations even over the first month as that product starts to ramp into the market. So I think we're going to see both products continue to go for a while, but in the long run I think Certus given its performance, value and everything else is going to be the predominant product. I assuming you are mostly talking about broadband as supposed to handsets and IoT services because those are -- that's all new stock out there in the market if you will.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [21]

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Yes, are you doing like a mandatory push to Certus service? I mean how are you going about as far as managing the conversion and just getting people to convert the new service?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [22]

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So I would say that this isn't about conversion. Well it is about conversion, it's conversion of our competitors' products into our service because they've been the one for the last 20 years that have been the sole one to offer a service. And so there is a lot of interest in our regard of taking, of converting those customers to our customers with a better product that has a higher value and longer-term dynamics. We're not managing a conversion, per se. Our partners naturally want to deploy that product because it's competitively superior, they like the idea that we're not a competitor to them, they see its performance and that it operates more globally than other products. The antennas are smaller and lighter and easier to operate et cetera. So it naturally is going to go into the market. As we said, we're trying to measure our own expectations about how fast that is. But based upon everything we've seen and talked about, it makes us comfortable with sort of the guidance we've given on the next 3 years of deployment for it. But we're really not trying to convert our existing 9 to 10,000 OpenPort subscribers. I'm expecting that over time that those will be upgraded and in fact given the fact that the speed and other things are faster I would expect that ARPUs might even increase on the ships when those get converted. But I really rather more focus on converting my competitor's products than our own.

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Operator [23]

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And our next question comes from Chris Quilty with Quilty Analytics.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [24]

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Tom, just a clarification on the guidance. The service revenue number you provided includes or excludes the -- any hosting fees? And can you also give us a breakdown of how the hosting fees would look in 2019 with component pieces?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [25]

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Sure. So yes, the service revenue guide has always included the hosting fees. And the hosting fees, think of it in this way, Chris, they ramp to a steady state, a full -- kind of full ramp of $47 million. This year we think will be somewhere in the $35 million to $40 million range as -- giving effect to all the hosting revenues, the only component that bridges from the $35 million to $40 million to the $47 million at full ramp is as for the Aireon data fee. There is a customer contract and sort of concentration milestone that takes that from $13 million annually up to $23 million. And we're expecting that that will occur in the second half of 2019 such that 2020, if you will, would be a full $47 million up from the $35 million to $40 million we expect this year.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [26]

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Got you. And the other component of that, if I remember correctly, the host -- Aireon hosting fee is around $16 million I think for...

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [27]

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That's right. So Aireon, I think Aireon as $16 million, $23 million -- and $16 million, $23 million in data, $16 million in hosting at full ramp and Harris about $8 million, so that's how you get to $47 million.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [28]

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Okay, good. With the equipment, you mentioned also equipment down, is that down a little or down hard? I mean as you begin to shift to more of an outsource model on pushing those equipment revenues down to your partners, how quickly does that come down? And is it driven primarily by the adoption of Certus or are there other factors that might?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [29]

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No, it's nothing to do with that because it's just handsets were very strong this year. If you looked at a 3-year trend, the 18 handset shipments and sales jumps off the page. We've seen that softening to more historical levels and our guide of down reflects what we're seeing. I would say it will be down, we wouldn't bring it up, it would be down not immaterially, right. But that's what -- the degree of decline is fully anticipated in our EBITDA guidance.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [30]

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Got you. And there seem to be a step down in the government voice business in Q4. Was that just kind of end-of-year housecleaning on their part?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [31]

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No, no, you mean the service revenue? This is $22 million, I mean that's contractual.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [32]

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No, no, number of subs.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [33]

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Number of subs.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [34]

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There was a cleanup. Actually there was good growth in the quarter but there was one service that sort of had an optimization thing that was going on. And they over a period of just a week or 2 sort of cleaned out a number of subs that were, they didn't think were really active or were in the field or anything like that, just to optimize their sort of service numbers. So it was -- there was just a one-time sort of cleanup from one place that I guess affected sort of and made it look like it's flat even though there was still growth in other areas.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [35]

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And actually now that I think about it, are we still dealing mostly with the old [9055] handset or has the new encrypted certified handset been approved in shipping out to the market?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [36]

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Yes, the -- what we call the 9575A, which is the secure device I think went into service early in the year. It's actually shipping quite well. And quite a few of them went out in 2018. It's proven, it looks like a very popular device. We actually had a gap for a while, I think going back in '17 when we almost ran out of the old 9505s that used to -- use with secure devices. But now it's back into full operation with the 9575A, which continues to be a popular service. But remember they're also now doing tactical radios, a lot of IoT business. And we're already starting to see some Certus revenues from the government as particularly in the land mobile side there they're driving a lot of the initial sales as they put things on certain vehicles and that sort of thing to provide broadband service.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [37]

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Okay. So how are they paying for Certus because you haven't -- if I recall, that contract for Certus services is going to be separate from the EMSS contract that you're negotiating. Obviously neither of those are in place. So I'm assuming this is more special operation using their funny money?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [38]

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Well, it is true that variable rate services particular with higher speed data is always going to be a separate sort of contract and revenue stream from our fixed cost narrowband services. So Certus is new revenues. They are going to ultimately -- today those are I think flowing really primarily through our commercial business as opposed to the government line until the government gateway gets fully in operation, which they're moving towards right now, that -- and that will give them complete secure capability, but because there -- have so much interest, they've been deploying some initial product using the -- going through our commercial gateway and through our commercial revenue line. But those will be those will be based upon how much service they deploy, what speed they operate, how much data is flown -- flows through it, and that will be independent of our EMSS contract.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [39]

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Okay. And sticking with the voice theme, an update on push-to-talk, is that starting to gain traction either government or commercial industrial?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [40]

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We have had some nice pickups lately. I would say that we're really excited about a new terminal coming in the second quarter. Many of you heard that a partner, Icom, Japanese supplier that is very -- makes very good products. I'm really impressed with the initial device that I've seen, going through certification right now. It's on track to probably deliver in the next few months and we think it's going to really, really make our push-to-talk service even more attractive. Our previous handset which was built on our 9575 handset was good, but it really wasn't built to be a push-to-talk device. And I think once we have a purpose-built device for that it's really going to help convert a lot of the opportunities we still see around the world. Still lot of interest and we are getting new customers every month for that. I'd say overall it's still small compared to our, the rest of our business, but we still feel very positive about the future and potential of that business.

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Christopher David Quilty, Quilty Analytics, Inc. - Founder & Partner [41]

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And one final question, shifting back to the commercial IoT business. Good numbers in Q4, but in terms of subs on the consumer side presumably things were shipping for the Christmas season, they really don't show up as subs until the first quarter. Are you getting any good indication of consumer uptake for some of your devices? And notably that would be the Garmin inReach which seemed to get some good coverage from them in their earnings call?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [42]

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Yes, I mean that's a little forward-leaning here in terms of sort of not hitting the 2018 results as you said, but I can tell you where we continue to see a really robust IoT subscriber growth and have really good expectations for broad-based growth. Garmin in particular really continues to execute extremely well. Just very impressed with them as a partner as they both expand their product lines and their distribution around the world. You clearly see in our results. I think you're going to continue to see it in the coming years in our results. We're continuing to look to diversify even beyond that. But right now, I'm pretty excited about future products that they have as well. Clearly this is, I think they've seen positive results from sort of connected devices and their channels as well. And I think that's going to be a great partner in the coming years.

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Operator [43]

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And our next question comes from Anthony Klarman with Deutsche Bank.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [44]

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Just a couple of questions. First, I apologize if this came out in the text or the commentary and I missed it. But I wanted to just understand on the 2019 outlook, what that assumed in terms of the run rate for the government contract and to the extent it was the government contract at the current rate. Would you envision providing us clarity on sort of what that new contract looks like when that is signed by providing guidance or sort of giving us what the incremental run rate might be?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [45]

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Hey, Anthony, the -- our guide assumes what we expect to be the increase effective April 19th, so it would be a stub period. So that we've put -- we've included what we expect the increase to be. We haven't disclosed that. And certainly the government contract would be material, in that its terms would be disclosed. And if it's materially different than our guidance we would update accordingly. But we have factored in what we think the rate, the increase is going to be in our guide.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [46]

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Got it. So it essentially winds up being the current run rate per 1Q, the stub period for 2Q and then the new run rate for the full period for the back half of the year.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [47]

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That's right.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [48]

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And then I guess if I look at that and then I look at the guidance around the $75 million in incremental broadband opportunity. Can you just talk about what the path of that or what the rhythm of those numbers look like as they pace out because I guess if I just pull the current run rate of the business forward and I layer in some incremental broadband opportunity plus some modest presumed step-up in government, guidance certainly looks like it is on the conservative side. Can you help us just think about maybe if there are other one timers or (inaudible) in there that we should consider or how the how the ramp of the of the EBITDA progresses throughout the year?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [49]

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Yes, so there is a one-timer that I did talk about in my commentary, which is on our satellite time and location we had a $4.5 million true up there. We -- the Thales, it was a startup operation, we have in the contract with them that GAAP says should come into revenue at $5.1 million a year notwithstanding the fact that the payments are not level, they're back ended as you'd expect with a startup. And so in the early years we could have recognized $5.1 million. But given the fact that the collection of that was not probable we only collected what we got in cash. There were developments there this year that caused the certainty of the collection to cross the probable line and so that -- so we basically brought in the revenues that we chose not to recognize in prior periods. That was a benefit to '18 that implicitly decrements the year-over growth into '19. So pro forma for that, the '18 revenue growth looks like 16%, it would come down to 15%. And '19 growth would not be 8%, it would be more like 9.4%. That's as to your question in terms of the one-timers. As we think about the growth, if you take the kind of pro forma 9% growth into '19, there's very little service in there. And so if you model a ramp to 100, you see that Certus revenues into '20 and '21 to get to $100 million exit rate there's material growth there that takes that 9.4% '19 pro forma growth well into the double-digit.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [50]

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Understood. And then -- I know we've covered this previously, but I was wondering if you could maybe remind us. You mentioned Aireon's remaining hosting fee account payable to Iridium. Can you just remind us if there are any milestones that still need to be achieved that would trigger additional payments from Aireon to Iridium or whether it's just sort of the commencement of commercial operations on their end and that'll change the revenue rec? And then a remainder on what the timing is on the equity repurchase agreement.

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [51]

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Sure. So the facility that they just close contemplates an additional payment to Iridium at $15 million pending them signing up some contracts that they are they are looking to do. What we have said is that we expect there is that payment and then facility could be expanded. But we expect it to be fully paid by 2021 as to the hosting fee. And then the buyback of the dock would be subsequent to that hosting fee payment in 2021.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [52]

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Got it, okay. And then Tom, just finally on the refinancing comment you made. I was wondering if when you talk about the refinancing you are talking about just the BPI piece or if you're all talking about more of a holistic refinancing in light of I think you've sort of mentioned that the refinancing could cost you about 1/4 turn with respect to the net leverage target [in the GAAP]?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [53]

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Right, so we think about it as a two-step process with the first step would be to refinance the BPI facility. And then we have our eyes on the high yield bond when it becomes economical kind of in the April-May timeframe of 2020.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [54]

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Got it. So you would imagine that the high-yield bond probably stretches out somewhere close to the first call date...

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [55]

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Yes, we have our eye on the first call date. Yes, we have our eye on the first call date there.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [56]

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So I guess I'm not aware of -- then I guess in mentioning the 1/4 turn impact to net leverage I guess other than just sort of normal fees and expenses I'm wondering what the breakage costs are on the BPI. Is there a call protection on that facility or is it prepayable? And what would lead to that 1/4 turn of incremental leverage?

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [57]

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It's not that. It is we've assumed that there are things going both ways, there's money that due back to us and there's [swap] fees that they can lay claim to. In our 1/4 of a turn we're just purely dealing with the fees to put at a range $1.5 billion credit facility. So we model the exit cost, if you will, from the BPI facility as kind of neutral. And we think we're being conservative there. And so our 1/4 turn of leverage is just because we have a formal guide out there of 4.5x, we would be remised if we didn't say, look, we're also thinking about a refinancing that could make that go wide by about a 1/4 of a turn should we do it.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [58]

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Got it. And when you say exit cost, I guess my presumption was that you could probably refinance BPI into a normal way, first lien credit facility at an all-in rate that below PPI, but are you assuming for modeling purposes that we should think about it as may be flat...

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Thomas J. Fitzpatrick, Iridium Communications Inc. - Chief Administrative Officer, CFO & Director [59]

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No, it's not, it'll be -- the cost will be up because that's 5% money. So we'd be -- we fully anticipate that our interest cost will go up. But it's right thing to do for the business. We need the flexibility of regular way financing to run our business that was the BPI facility was a wonderful instrument to use during the construction period but we need to run a business at this point and are focused on paying dividends and buying back shares, none of which we can do with that facility.

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Operator [60]

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(Operator Instructions) And our next question comes from Louie Dipalma with William Blair.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [61]

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Further EMSS contract, you expect it to gradually increase from year 1 to year 5 similar to the existing contract?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [62]

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It's a little too early to give that kind of guidance, to be honest with you. We're still in discussions. It could go -- I think that's the most likely approach but we want as much flexibility as possible here. Overall the total value should go up because the usage and cost per user have come down so dramatically and the expectations of future usage are really strong right now given all the different projects that the government has, going to deploy the technology on. But exactly how that will be profiled over the next number of years, I can only say broadly that's probably just a general expectation, but we'll know in a month or 2.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [63]

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Okay. And also on the defense side, you mentioned or I think you mentioned a new Department of Defense Certus gateway. Is that a separate gateway from their voice gateway in Hawaii?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [64]

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No, it's additional equipment that would be built and installed at that location so that they can take and deliver basically Certus service through the same sort of approach, a secure global service. But that's actually been under development now for a while. They committed to deploying it and there is a plan right now to do that over the next year or 2 to deploy that technology.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [65]

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Okay, and I'm assuming it's necessary for that gateway to be completed before they establish a Certus contract with your partner, Comsat.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [66]

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No, I mean they could have that. I mean they just -- the revenues would maybe flow through Comsat through the commercial -- our commercial broadband lines if you will and will account for it through the commercial service. So they can deploy service and Comsat can be involved, it just won't go through our government line if you will and through that government...

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [67]

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Got that. Got you. And lastly, your competitor Inmarsat, they're beginning to announce vendor contract for their new sixth generation I-6, L-band constellation. Are you confident that your Certus services with Iridium NEXT will be able to achieve similar levels of performance relative to their future constellation?

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [68]

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I believe our -- I believe very confidently in our business projections around what Certus will do for many years. Inmarsat or anyone here deploying the services, it's not again about speed. Add another megabit per second might be interesting. But again it's more about cost size, coverage, competitive dynamics et cetera, by any measure we should never have been able to sell an OpenPort device over the last 10 years because it was a fraction of the speed. That's supposedly the headline speed of what Inmarsat did. And of course we did quite well with that. I think Certus is going to carve out -- by the way not just exactly identical service as to what they do, but I think it's going to expand the market. For example, they really can't do effectively what we can with our MissionLink land mobile business right now because we're providing a highly mobile service broadband on the move instead of what you could call broadband on the pause where you really have to kind of set up or have an extremely expensive antenna to do that. Those kind of advantages are going to remain well into the future and someone might come up with a higher headline rate than the megabit or so that we're doing, but just having a 2 megabyte terminal or 1.5 megabyte or whatever they want to call isn't really what it's completely about because it's not just speed that really is going to be I think the competitive dynamic for the coming years. So I'm really confident with the really potential that we have for Iridium service -- Certus well into the future. And you can also see how excited we are at a area that I don't know that anyone can compete against this which was I called 100 kilobyte per second and below using a low-cost small antennas. That's going to be a whole brand new market that I don't think anyone can touch us on. And no one looks like they're even designing anything to go after that market.

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Louie Dipalma, William Blair & Company L.L.C., Research Division - Analyst [69]

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Sounds good. I look forward to hearing more about the 9770 on March 7.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [70]

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And it will be good to see you, Louie. And I think that will be a great chance for us to really expand and tell our story a bit more broadly. So I hope everybody tunes in for that too if you're not with us.

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Operator [71]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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Matthew J. Desch, Iridium Communications Inc. - CEO & Director [72]

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Well obviously it was a great year and it's exciting to have a brand new network in service. I know you've been following us, as I said, for a number of times. I think March 7 is going to give us an opportunity to really flush out the story, our strategy going forward and how people should be looking at us. And it's going to be an exciting year. So thanks everybody for joining us again.

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Operator [73]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.