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Edited Transcript of IRDM earnings conference call or presentation 28-Apr-20 12:30pm GMT

Q1 2020 Iridium Communications Inc Earnings Call

MCLEAN May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Iridium Communications Inc earnings conference call or presentation Tuesday, April 28, 2020 at 12:30:00pm 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 Desch;CEO

* Thomas Fitzpatrick;Chief Administrative Officer, CFO

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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

* 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

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research 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. Welcome to the Iridium Communications' first quarter earnings conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kenneth Levy. Go ahead.

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

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Thank you, Kate. Good morning, and welcome to Iridium's First Quarter 2020 Earnings Call. Joining me on the call this morning are our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our first quarter results followed by Q&A. I trust you've had an opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website.

Before I turn things over to Matt, I'd like to caution all participants that our call 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 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 filing 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, including operational EBITDA and pro forma free cash flow, free cash flow yield, free cash flow conversion. 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 further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures.

With that, let me turn things over to Matt.

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Matthew Desch;CEO, [3]

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Thanks, Ken. Good morning, everyone. Well, I guess it goes without saying that we're living in some very interesting times. This current global pandemic has changed the fortunes of many businesses around the world, at least temporarily, and we're starting to feel some effects too. Now while our first quarter was quite strong, the global business and social lockdown underway clouds our visibility to the rest of the year. During today's call, we'll share the trends that we've seen through April, and how they're coloring our outlook. You'll see from our comments that our business model is resilient, and unlike many other companies, we're happy to still be forecasting growth for the full year.

First, let me address Iridium's operations during the onset of the virus outbreak. We quickly took precautions almost 2 months ago to ensure the safety of our employees. We wanted to remain responsive to our customers and partners, protect the health of our employees and ensure that our operational cadence is maintained. Essential employees were identified that needed to work in our facilities to operate our satellite and ground networks as well as utilize testing equipment in our labs and facilitate product shipments to customers. Those decisions in retrospect have all been very effective. We were actually well prepared for remote work as our corporate IT and security are quite advanced. We really haven't missed a beat in terms of ongoing business operations, though, like all of you, we long for the comradery and social interactions of working in a close-knit office environment and even the travel to meet physically with partners around the world.

I can report that our supply chain is also in good shape, and we aren't having any significant inventory issues. We should have sufficient stock to meet these expected equipment. Our first quarter results were strong. And while I'll leave it to Tom to walk through the numbers, to me, the strong performance is indicative of the underlying strength of our business during normal times.

In the final weeks of March, the strong trend that typified 2019 and the first quarter started to slow. And into April, and -- with the whole world in lockdown, we seem to have entered an entirely new environment, which is unlike anything we've previously seen. Now from a historical perspective, we weren't affected much during the global market crash and recession of 2008, largely thanks to the mission-critical role our services play for enterprises and governments around the world. The current climate, however, is very different from 2008 or other past cycles. Social distancing has put healthy companies on hold, and there's not much precedent for that. So we're all working through this day-by-day to try to understand the impacts of COVID-19, how long it will last and what the long-term effects will be. Our partners are experiencing the same business and operational restrictions we are in terms of visiting with customers, completing new installations and closing on new business opportunities. We're keeping in close contact with them to understand the changes in their respective industries and their expectations of customer behavior for the rest of the year. While this is helping inform our outlook, we're all working from our own set of assumptions based upon where we sit in the customer value chain, and there is no consensus on how quickly things will return back to normal. Based upon this, we've revised our full year outlook.

We're comfortable confirming that we still expect to grow service revenue and operational EBITDA over 2019 levels, but that's as far as we can go at this time. There are too many variables and uncertainties to fully understand how long the economic shutdown spurred by the virus will last, and how long it may take for businesses to reopen. Remember, Iridium touches many different industries across the globe and each is on a different cycle in responding to the effects of the current lockdown.

From what we can see at this point, subscriber count should continue to grow in 2020, albeit at a slower pace. We expect that our high-margin service revenue will also grow from 2019 levels, driven by contractual step-ups in certain contracts and increased subscriber levels though at lower overall ARPU due to lower usage. Equipment sales are less clear. While they were in line with our expectations in the first quarter, the current economic environment makes it prudent to plan for a slowdown. Given that equipment contributes lower margins in our service revenue, the impact of this slowdown isn't as dramatic to our bottom line. Engineering revenues also seem to be holding up well as our primary customer for engineering services, the U.S. Government, is expected to continue to execute on their projects this year and has dedicated funding for these programs with us.

Despite all these puts and takes for 2020, the most important theme for Iridium remains our ability to generate strong free cash flow. We have been enthusiastic and vocal about our business transformation in recent years, and its theme of strong free cash flow is still very much intact despite the slowdowns that we're seeing. We're very fortunate that we are facing these challenges in 2020 rather than several years ago, when we were in the middle of the Iridium next capital program and bound by the financial requirements of our former credit facility. This year, we still plan to deliver significant free cash flow, and we'll continue to delever our balance sheet. So our financial transformation and plans to return capital to shareholders are still very much on the horizon.

I'm sure you still would appreciate more about the specific effects of the pandemic that we're seeing from our partners and their businesses, and how it might affect our revenues. Overall, it appears that the effects, at this time, are greatest in aviation, oil and gas and in maritime, particularly as it relates to installation of terminals. We're also seeing a disruption in the typically stronger summer sales and activation season for our legacy satellite phone business.

In aviation, safety service usage revenues are down with the drastic decrease in flight hours, though we're not seeing as many of deactivations as you might think. Deactivation of SIM cards on commercial aircraft can be a cumbersome exercise, and customers expect that flight schedules will eventually recover. Oil and gas partners are experiencing a slowdown in their business due to low oil prices and lower demand as people work from home and travel less.

On the maritime front, we're not very exposed to the well-publicized decline in the cruise industry, but we are experiencing slower activations than previously anticipated of Iridium Certus terminals on ships as crews don't want external installers on board while in port due to concerns of virus transmission. We still see very strong interest in Iridium Certus, but expect that we'll experience a temporary slowdown in activations for the next quarter or 2 until installations can resume. The good news is that feedback from users remains very positive. The maritime industry appreciates that Iridium now offers the most reliable and fastest L-band service available, and we're the only satellite company that can provide true global coverage. We continue to hold high expectations for Iridium Certus and know that our broadband service is an important vehicle of growth this fiscal year and out into the future. However, it makes no sense in the current environment to continue to try to peg year-end 2021 revenues. They will be what they will be, but we're confident they will be a lot higher than they are today. You can track the quarter-by-quarter growth for yourselves now that we're breaking out broadband revenues and subscribers in our financial tables.

The other impact related to COVID-19 that we're seeing that's worthy of discussion is a sudden and big slowdown in consumer product activations in the IoT area. 2-way personal communicators from companies like Garmin are often sold through retail stores that have been closed for quite a few weeks with the ongoing pandemic. We're expecting net activations to be lower than normal this year as the virus shutdown is hitting them right in the season we'd expect to see the most growth. A number of other IoT partners are also growing slower than in the past. Many have told us that they are hampered by COVID restrictions and the global slowdown in business, but expect to bounce back as things get back to something more normal, particularly since their end customers are dependent on these IoT solutions in their own businesses.

Overall, even though we don't yet know the complete depth and breadth of COVID-19, nor how long it will ultimately impact our subscribers and partners, let me be clear that our company is in a very strong financial position with excellent liquidity today. We're operating a brand-new constellation, completed 2 well time financings during the last 6 months, are coming off another great quarter's performance that demonstrates our competitive value and continue to generate significant free cash flow, which is helping our leverage position.

Now one area we haven't seen and don't expect to see much impact is with the U.S. government. We're fortunate to have completed the new 7-year fixed-price contract for our legacy services with this customer last year before the current economic slowdown. We're also not seeing much impact to the coronavirus on all the engineering programs underway with them, including the installation of Iridium Certus as the government's private gateway.

Switching gears to Aireon. It continues to deliver on its promise to improve aircraft surveillance and safety and provide operational efficiencies to air traffic controllers and aircraft using ADS-B. The COVID-19 crisis has had an outsized impact on global aviation traffic, which, for the near term, has significantly reduced the number of commercial flights and the resulting total number of aircraft being controlled by ANSPs. This will have some impact on Aireon's revenues. While the company continues to sign new contracts, less consumer demand for air travel will reduce the part of their revenue that's based on flight hours.

Overall, Aireon has a solid base of revenue and strong financial backing, including a $200 million credit facility they are accessing. Iridium's hosting and data service contracts with Aireon are contractually fixed price and are current, and we expect them to stay that way this year. Overall, our confidence in Aireon remains high, and they continue to execute well on their business objectives.

So as I turn the call over to Tom for his comments, let me just reemphasize that despite the unprecedented times that we're going through, Iridium's business is demonstrating itself to be quite durable. We are positioned well with a just -- diverse stream of income, customers around the globe and applications that are important and unique. Our wholesale business model proved its resilience in the 2008 downturn, and will see us through this one as well. We believe that our continuing strong cash flow stacks up well against other satellite companies and companies in many other sectors right now. Hopefully, we'll all pull-through the current crisis soon and get back to something more normal in terms of growth. I know our partners and employees look forward to that as do I.

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

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [4]

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Thanks, Matt. Good morning, everyone. I'd like to start my remarks by summarizing our key financial metrics for the first quarter and provide some color on the trends we're seeing in our major business lines. Then I'll recap our 2020 guidance, which we revised this morning and close with a review of our liquidity position and capital structure.

Iridium generated revenue of $145.3 million in the first quarter, which was a 9% increase to last year's comparable quarter. The improvement was driven by growth across all of our business lines with the largest dollar contribution coming from recurring service revenue. Operational EBITDA was $92.1 million, which was up 18% from the prior year's quarter.

On the commercial side of our business, we reported service revenue of $91 million for the first quarter, which was 7% higher than the prior year's period. This primarily reflected growth in hosted payload and commercial broadband services, along with positive trends in IoT and voice. Voice and data service revenue, which represents our telephony business, rose 1% this quarter.

For the first time, we're providing a breakout of our commercial broadband revenue, which totaled $8.7 million in the first quarter, up from $6.8 million in the prior year quarter, representing 28% growth. This new line item represents broadband revenue at 128 kilobits per second and higher and includes Iridium OpenPort and Iridium Certus Broadband. We continue to believe that broadband will be a long-term driver of subscriber growth and new revenue for our company and remain happy with the reception the product has received by our channel partners, though our rate of new activations is being challenged by recent coronavirus impacts.

Our IoT business continued to grow in the first quarter, but began to feel the effects of the recent world events in the second half of the quarter, with reduced usage of devices in aviation and a marked slowdown in activations and personal communication devices with the channel being closed by the global shutdown. IoT ARPU in the first quarter was $9.71 compared to $11.32 in the prior year quarter. The driver of this year-over-year decline in ARPU continues to be the significant addition of IoT subscribers on low data plan, most notably consumer-oriented personal communication devices. During the quarter, we added 27,000 net new commercial subscribers with the gain coming entirely from our IoT business. As I noted, we see a marked change in IoT growth, particularly in the number of net additions from personal communication services in mid-March as the retail channel closed. At present, commercial IoT data subscribers represent 70% of billable commercial subscribers, up from 65% in the prior year period. Hosting and other data service revenues increased to $16.3 million this quarter, up 17% from the comparable quarter in 2019. Substantially, all this increase was due to higher hosted payload and data service revenues associated with the step-up in Aireon's data service agreement with Iridium. The increase in this revenue coincided with Aireon clearing a key customer milestone in the first quarter.

Turning to our government service business. We've reported revenue of $25 million in the first quarter, up from $22 million in the prior year quarter, representing a 14% rise. This increase was due to contractual terms of EMSS contract, which was renewed last September. In the first quarter, government subscribers grew 22% year-over-year and total U.S. government customers reached a record 140,000 this quarter.

Equipment sales improved into the new year as they were largely unaffected by macroeconomic developments, but we expect this trend to change. We reported $22.3 million in revenue from equipment sales in the first quarter with equipment margin a bit higher than the year ago at 45%. With the impact of COVID-19 being felt across a number of commercial industries, we now anticipate a slowdown in equipment sales for full year 2020.

Engineering and support revenue, which is largely episodic, was $7 million in the first quarter as compared to $5.7 million in the prior year's quarter. The pickup from last year reflects an increase in work under our engineering agreement with Aireon for work in their operations center as well as an increase in government agency work to enable Certus capabilities for the U.S. government.

As you saw in our earnings release this morning, we have updated our 2020 full year outlook to better reflect our early assessment of the coronavirus and its impact in our business. We now expect that EBITDA of 2020 will be higher than the $331.7 million we reported in 2019. We will provide a more specific targeted range at a later date once the operating environment stabilizes. Our updated outlook is predicated on the following assumptions. We expect a decrease in our equipment revenue due to the combined effects of the distribution -- of the disruption in global business operations, the strength of the U.S. dollar and the deterioration of the oil and gas market.

We have also updated our growth outlook in our service revenue. Despite the negative effects of the coronavirus, we continue to expect growth in our service revenue. This is driven by the following factors. We expect growth in our government service revenues and hosted payload revenues based on contractual step-ups. We expect a decline in our commercial telephony business as a consequence of the current global economic shutdown and ongoing macroeconomic developments.

Iridium's business is seasonal, with the second and third quarters characterized by higher subscriber additions and higher usage. We expect that this fallout will be particularly impactful as the economic shutdown is occurring in the heart of our selling season. We do not expect growth in our IoT business in 2020. This segment's performance is being impacted by 2 primary factors arising out of COVID-19. First, we expect materially reduced activations of personal communication devices in 2020 and a reduced ARPU as subscribers increasingly adopt lower usage plans.

Personal Communications grew by $4.3 million or 51% in 2019, but we now expect it to be about flat overall in 2020. We also expect materially reduced usage in aviation. This has averaged about $2.6 million in quarterly revenue. Thus far in April, this is down about 60%. We expect similar reductions for the balance of the second quarter with some improvement in the third and the fourth quarters.

IoT's performance is also being negatively impacted by exposure to the oil and gas sector though this impact is not as material as aviation and is not as readily quantifiable. Further, other sectors such as asset tracking are experiencing lower activity with the global shutdown. IoT's performance this year will ultimately depend on the pace and time of recovery. We expect growth in our broadband business as our Iridium Certus offering continues to resonate in the market. The rate of activations of our terminal is being hampered by the global economic shutdown, but we still anticipate growth and have adjusted our revenue projections accordingly. We also continue to expect material growth in broadband revenue in 2021, but no longer expect to achieve an exit rate of $75 million due to slower Iridium Certus installations. We continue to expect negligible cash taxes through 2023 and forecast that depreciation and amortization expense remains steady at approximately $75 million per quarter. Together, these revisions provide us with the confidence in our 2020 outlook and support our forecast for operational EBITDA.

Moving to our capital position. Iridium had a cash equivalents balance of approximately $67.3 million as of March 31, 2020. Having completed 2 important refinancing activities since November, we expect pro forma annual interest expense to decline from $112 million in 2019 to $90 million in 2020. Full year maintenance CapEx costs remain at approximately $35 million.

We continue to believe that free cash flow provides a useful benchmark for the health and earnings power of our company. Based on the quarterly results we've delivered today and our revised outlook for EBITDA this year, we believe Iridium will generate pro forma free cash flow of at least $177 million for the full year 2020. For illustrative purposes, consider the following: if we start at EBITDA of $332 million and subtract $90 million in pro forma net interest to reflect our new debt structure and $35 million for CapEx and $30 million for working capital, inclusive of the appropriate hosted payload adjustment, 2020's pro forma free cash flow supports a conversion rate in excess of 50% and a dividend yield greater than 6%. This is up from pro forma free cash flow of $168 million in 2019. The important takeaway here is that we expect Iridium to grow cash flow even in this unprecedented business environment.

Iridium closed the first quarter with leverage of 4.6x EBITDA. And based upon guidance revision, expect to exit 2020 with net leverage of no more than 4.4x EBITDA. We expect continuing deleveraging in 2020 despite broad-based global economic challenges.

In closing, given the uncertainties we now face, we're glad we chose to be proactive and refinanced our debt earlier this year. And while we revisit our financial assumptions based upon current economic climate, we continue to be confident in Iridium's business. We know that Iridium is in a strong financial position even as we face the uncertainty posed by the coronavirus and look forward to keeping you updated on our progress.

With that, I'll turn things back to the operator for the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Ric Prentiss from Raymond James.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [2]

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Glad to hear you're doing okay and your employees are all safe. A couple of questions if I could. First, on the 2020 guidance. Obviously, a very good start to the year on 1Q numbers. As we think about the next 3 quarters, though, do you think you would have been able to grow service revenues and OEBITDA, if you hadn't had such a good start to the 1Q?

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Matthew Desch;CEO, [3]

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Well, I mean, if we hadn't -- do you mean if the coronavirus hadn't struck, would we continue to grow? I think the first quarter was -- I'd like to think the first quarter was indicative of the health and strength of our business overall. Might have indicated even a stronger year than we originally expected it to be. But of course, everything has changed in the last 7 or 8 weeks in terms of the market's ability to take things up. So it is -- that's where our new expectations for the year come from, at least in terms of what we've seen so far in the last 7 or 8 weeks. But I think the first quarter was maybe even better than we originally expected. And unfortunately, it just isn't what the year is going to pan out to be.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [4]

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Yes. I just -- I would echo that. I think the first quarter has got a good tick.

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Matthew Desch;CEO, [5]

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Go ahead, Tom.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [6]

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I was just going to say, the first quarter is a good picture of an unaffected Iridium, but we're a little bit in IoT. We saw some weakening in IoT in March. But if you look at our telephony business, it grew 1%. So it was -- and then COVID-19 happened, and if you look at our guidance, and how we're thinking about 2020 is highly colored by the trends we're seeing in April. If you consider our telephony business in the second quarter of 2019, we had net adds of 10,000 net adds. We're looking at April trends that suggest that the second quarter of 2020 is going to be a negative at least 5,000. And so that sort of happened overnight. And what's very interesting is if you study the activations and deactivations, the deactivations are just about equal to what we saw in 2019. It's all about a lack of activation. Because the channel is closed, it's a global lockdown, and we see that in our numbers almost to the day that it took effect.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [7]

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Okay. And when you think about the guidance for growth for the year? Would you guys suggest you're maybe thinking of maybe a U-shaped recovery as opposed to V or W or any other kind of thoughts that's kind of a U right now?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [8]

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Yes. Certainly more U than a V. And in my remarks, I highlighted, right, if you look at our trends for forever, those of you that followed us for a long time, the second and third quarter is when, in our telephony business, we're adding subscribers, right? That's when episodic, somebody that's going out on an expedition, et cetera, they buy a prepaid voucher. So the fact that the globe -- that we had a global shutdown right in the summer is impactful to us because if the U occurs, as you say, well, to the extent it happens in the fourth quarter, is not going to be as particularly impactful to us because our -- kind of our selling season is behind us.

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Matthew Desch;CEO, [9]

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Yes, I would also say -- I'd say I -- I'd also just sort of add, I don't think that -- I don't think you can -- we're not smart enough after 7 or 8 weeks of knowing exactly how the recovery is going to occur. Like, is there a catch-up, perhaps, with people who are dying to take those trips that they hadn't taken, expeditions that are still just been rescheduled. We don't know that. So I would say this is more in line with -- I don't even know what letter it is, but it's sort of more based upon just the trends of late March and the rest of April here and expectations that it will be a -- not a rapid recovery here for third quarter at this point.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [10]

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Makes sense. Last one for me. When you talk about leverage of no more than 4.4 in the year, how are you, how are you calculating that? Is that like an annual 12 months' worth of OEBITDA? Is that a 4Q OEBITDA annualized? Just trying to think of what the less than 4.4 on leverage means?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [11]

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Right. So it would be fourth quarter exit rate, so in our guide take $332 million as EBITDA, that would be LTM divided by the deck it gets you 4.4. It's the converse of at least last year's EBITDA.

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Operator [12]

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Our next question is from Greg Burns from Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [13]

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In terms of the hosted and payload data revenue, is that a clean number? Or is that how we should be thinking about it the rest of the year? Or was there any kind of onetime catch up revenues in that number?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [14]

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No, it's not clean. It's heavy, Greg. There was a $1.4 million out-of-period related to the Harris payload. And it was about $400,000 of out-of-period related to the Aireon payload. So it's high by close to $2 million. I think about hosted payload. We, for some time, have said the steady state is around $47 million. That's the number I would model 2021 and beyond.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [15]

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And then I just want to I guess follow up on the Aireon commentary. How comfortable are you with their ability to meet their financial obligations to you? If this drags on for too long, will they require additional financing or some forbearance on your part? What's your view on their financial situation?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [16]

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So their financial picture for this year is solid. They have their own operating cash flow and a credit facility. And so we expect them to pay us as they have been paying us all through 2020. We get into 2021, it's going to depend -- the expectation by IATA is that air traffic comes back. And so that is the expectation. You remember the ownership of Aireon is very well established, well established in aviation and believe in that business. So we think that they will be able to honor our -- their obligations to us in the normal course.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [17]

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Okay. Great. And then I guess, obviously, you're seeing an impact on the Certus, the pace of activations a lot due to what's going on with virus. But prior to kind of this all happening, what were you seeing? I know the activations were slow at the offset. Were you seeing a pickup in activity, barring what's happening now? What were you seeing in the market in terms of adopting activations and the pace of that business before the slowdown?

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Matthew Desch;CEO, [18]

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Well, I mean, it was building. I mean, there's still -- there's a lot of things to happen this year. For example, we just introduced the faster speeds, and that was starting to be implemented in all the terminals. So -- and really, the performance was excellent and people were seeing that. Of course, GMDSS is under -- actually, it's in beta trials right now and out on ships, but that was coming this year. There's another terminal coming here into the market. In fact, there's a number of terminals under development all this year. And there's a whole bunch of other activities. So I would say it looked like a strong business to us. It looked like a business that was competitively exactly where we wanted to be. And then we started seeing the partners telling us they weren't able to get on ships in many ports. And there's still -- by the way, there's still activations going on. I mean, there is still net positive activations each month. It's just lower levels because our partners are telling us they kind of have a backlog of ships and contracts that they can't really get to right now.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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Okay. Great. So the outlook is still for growth -- revenue growth on top of what we saw -- you showed this quarter just at a slower pace.

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Matthew Desch;CEO, [20]

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Yes. Broadband is still a grower for us this year. And maybe not the levels we had hoped or thought it would be pre-COVID-19, but it's definitely a grower for us and a bright spot, if you will, in our financial picture.

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Operator [21]

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Our next question is from Hamed Khorsand from BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [22]

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Could you talk about what kind of risk you're exposed to as far as accounts receivables and if you've seen any changes there in collections?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [23]

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Not particularly. We've been talking to our aviation partners. You'll see Speedcast most recently filed for bankruptcy. We are -- we do have receivables with Speedcast, but we would expect to be named a critical vendor to them. As we would, kind of in most circumstances. If you think about our relationship with the channel, we're the revenue of the channel. And so you can't get more critical than a vendor like we do. So Speedcast, we expect to collect that receivable, notwithstanding their bankruptcy. And so we are -- we have the leverage, et cetera, and a long-standing history of not having too much in the way of bad debt because of that circumstance.

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Matthew Desch;CEO, [24]

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Tom, you'd agree, though, that even Speedcast is not that unusual of an account receivable. I just saw their list of creditors and everything. And obviously, we're not on the list. We didn't make the list of the top 9 or 10. It's still relatively insignificant as it goes because while Speedcast was an important area of growth for us, it wasn't that large of an overall partner for us. It was more of a future partner. It was more they inherited some of our business from their acquisitions of Globecomm and a little bit from CapRock and that sort of thing. And so it's more what the potential was for them as opposed to necessarily a loss of -- or a concern really about the receivable itself, especially if we are an essential supplier to them.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [25]

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Okay. And then the other question I had was about pricing. Are you seeing any discounts? Or are you going to be doing any discounts in the market just given the low activity right now?

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Matthew Desch;CEO, [26]

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Well, we are being helpful in certain areas where it makes some sense. For example, we're generating a lot of goodwill right now in the maritime world by offering some free crew cards to our broadband customers there. Anybody who has an OpenPort or Certus terminal has the ability to get some chat cards, as they're called, for crew to call their families. They're paying the Internet anyway today. But it's obviously a better thing if they can talk to their families during this time and do that. So like until September, I think they have a number of minutes that their crew can use, and that's really well appreciated by them. But that isn't per se, a drop in price or a promotion. It's probably traffic that wouldn't have occurred anyway, and we just want them to be using our product.

Beyond that, no, there isn't any -- I mean, obviously, some industries are under more stress. You can imagine aviation is under a relatively amount of stress, but that's very much a usage-based business. So kind of the discount is that the customers aren't flying their airplanes right now or they're parked on airports waiting to get started again. And so that is just revenue that otherwise wouldn't be coming. So that really isn't -- I would, by the way, I mention -- I mentioned those crew cards. I mean, that's coming right in line, by the way, with Inmarsat, who has -- is raising prices soon on all their Inmarsat C customers, which are primarily their GMDSS customers, and they're creating a minimum revenue commitment per month for terminals that historically haven't charged anything.

So you can imagine, from a competitive environment, we're in a very positive position in that we're not raising prices on our customers right at their most vulnerable time as our primary competitor is doing. And that's obviously very appreciated, particularly in light of we expected long term to get a lot of GMDSS activations for new ships, but maybe there'll be a lot of existing ships that aren't very happy with their supplier either long-term and will want to change out their suppliers. So I'd say that's it. It's not so much -- they're not really discounts because I don't think you generate business when people are locked down. This isn't -- I don't think this is a recession kind of activity out there where these businesses couldn't afford it. They just can't -- they can't -- they're not active. If people aren't able to manufacture a new buoy or a heavy -- piece of heavy equipment, then they can't put a satellite tracker on it. And I'm sure that will get to be more normal when things come back to normal.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [27]

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Yes, Matt, I would just amplify that. This is nothing like -- we modeled the 2008, 2009 recessions. Our telephony business grew sub straight through that recession. We never had it in the second quarter, always strong net activation. This is different. This is a global lockdown. It's unprecedented and the corollary is not a recession.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [28]

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And finally, the lower usage that you're reporting, is that just from customers just being at port longer? Or is that just -- there is no activity going on in these ships?

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Matthew Desch;CEO, [29]

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Well, the ships, actually, the ARPUs are much higher than we've exhibited in the past because Certus has much higher ARPU than OpenPort. And really, when we talk about lower usage, I don't think we're really talking about our broadband service. That actually is higher revenues and higher usage than we had previously seen in our previous generation of product. What we're talking about is really if you're not out on -- you can't make that trip, you can't make that scientific expedition, you can't go on your hunting trip, you can't -- if you're not using that piece of equipment that you typically are tracking in that month, if you're not sending pictures from the piece of heavy game, that usage, and it's really because people can't use it right now. It's just they're remaining in the glove box right now, perhaps, and paying minimum charges, but they're not taking them out. So I, obviously, expect that will turn around eventually as people start -- able to be unlocked down and get out and about and do their normal business.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [30]

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I would say the acute impact on usage was evident in aviation, and that's in our IoT business. As I said in my prepared remarks, that equipment used for safety services on commercial airliners, 2 of our partners, in particular. And as I said, it ran $2.6 million a quarter and on a dime, it went down 60%. So that is kind of a very abrupt and acute impact on usage that we identified quite early.

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Matthew Desch;CEO, [31]

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It's a relatively small part of our business, but it's still an important one.

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Operator [32]

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Our next question is from Anthony Klarman from Deutsche Bank.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [33]

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A bunch of my questions were answered. But I think we're all trying to get to the same thing here. So maybe I'll try to ask it slightly differently. You broke out broadband this quarter, and it has a 28% year-over-year growth rate in it. And given that we can't model to the $75 million run rate exit 2021 level. I guess, Tom or Matt, could you provide any kind of anecdotal view as to what maybe the April trend in that looked like on a month-over-month basis? I guess we know broadband is going to continue to be a growth area for you, but I'm wondering if we can maybe help quantify what the change in the growth rate might have looked like in April relative to what you reported.

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Matthew Desch;CEO, [34]

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Tom can take a crack at this, too. It really comes down to installations. It's just that they've cut the growth rate dramatically, but we're still growing. So while we may have expected hundreds of ships to be installed in the month on a net basis, it's quite a bit lower than that. It's still growing. And again, each Certus activation is at a higher ARPU than any OpenPort terminal. And I will say, one of the things that's been surprising is that the OpenPort terminals are declining probably at lower rates than we thought. So people aren't taking them off either. So they're kind of staying off. We -- they're continuing to be active on ships. So net-net, we're adding Certus terminals faster than we're -- than OpenPort terminals are declining. But everything is just going slower right now. And I don't think it's -- we want to really try to look out too much further than that or give too much additional color on the year because it's just too early. We've only had about 7 weeks of this happening like this. And there are some positive things we're hearing out of Asia, where there is some -- some ports are starting to open up. Some countries are starting to push to get out, but we can't tell exactly how that will relate to the installation rate until we see it happen further. So anything further to try to describe what that means or exactly how it will mean to the end of the year, I think it's just a little premature right now.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [35]

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I would just say, Anthony, maybe our broadband business is unique and that it's growing subs right through April. We didn't do that in telephony.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [36]

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Yes. Look, I think that's helpful. On the telephony side, you mentioned you don't see tremendous exposure to people like Speedcast because you'll ultimately collect that receivable, whether it's at the resolution of their bankruptcy or some other period, and you're a critical vendor for most of those. I guess, could you talk a little bit about any exposure that you might have or that you see in the consumer and maybe small and medium-sized business area? Those seem to be the areas that are being hit particularly hardest and whether that -- I don't know if that's something that kind of shows up in access and airtime, or if there are maybe a collection of just a bunch of smaller businesses where there are some potential sort of end market impact as you think about what the trajectory of the numbers look like throughout '20.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [37]

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Yes. So in telephony, we're not seeing that. In telephony, there's one thing going on there, and that is channel is shut down, and we're not seeing activation. As I said in my remarks, I already said earlier, the deactivation in telephony it looks just like 2019. It's a lack of activation because of the lockdown. Where we are exposed significantly to the consumer is in our Personal Communications segment in IoT. That channel got locked down, those activations stopped happening, consumers started adopting lower usage plans, effectively suspend plans. And we've been talking to our channel partners, and that was a big grower for us. You'll recall in 2019, we grew by over $4 million. And we don't see that growing here in 2020. So that's a direct hit that is consumer related.

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Matthew Desch;CEO, [38]

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Yes. And obviously that business is -- I'm sorry, we're just -- we're very competitive in that segment. And actually, we have more products coming into the market this year. There are more partners who are introducing products. We've seen some new products be introduced in -- and doing very well in January and February. They were exceeding expectations. So I'd say we're positioned very well in that market. It just feels like it's locked down, and that's what our partners are telling us. They're not able to get into stores. And until the stores open up and people start feeling like they can -- like it makes sense to go out and get on an airplane and travel, that will be slow. Don't know if there'll be a catch-up there or if that will just sort of start again and grow from whatever point it starts from today, we'll have to see.

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Anthony Francis Klarman, Deutsche Bank AG, Research Division - MD and Global Head of High Yield Research [39]

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Final one for me. I think you guys had given some longer-range views on leverage a quarter or 2 ago as you were talking about, where you ultimately saw the business getting down to from a balance sheet perspective and that, that would maybe trigger returns of capital as you reach that. I guess, given that it may take longer now to achieve those metrics, any change in the view as to how you think about capital allocation in terms of deleveraging versus shareholder or capital returns?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [40]

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No, we still see -- we still like our targeted range of 2.5 to 3.5x leverage, and we'll do shareholder-friendly things to kind of maintain that level.

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Operator [41]

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(Operator Instructions) Our next question is from Louie DiPalma from William Blair.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [42]

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Are you guys decentralized this morning?

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Matthew Desch;CEO, [43]

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We are -- Ken and I are maintaining social distance here in our headquarters, which is quite lonely, I might add, and dark because all of our employees are working from home. But Tom is, I'm picturing him sitting on a beach someplace, but I think he's probably in his office.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [44]

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Nice. I hope you guys continue to do well. First, for Tom on the beach.

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [45]

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I'm not at the beach, Louie. I'm not at the beach.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [46]

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Tom, free cash flows are now the focus area for investors. Can you repeat what your pro forma free cash flow assumption is for 2020 and the new annual cash interest rate?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [47]

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Right. So Louie, on the levered free cash flow, there's a schedule on our website and -- that I took you through in my prepared remarks, the number's $177 million is if you use $332 million on EBITDA, and we lay out all the assumptions there on our website. So and -- on our interest rate, 60%, or we have about $1 billion fixed that we swapped, we have $1 billion, and that's just inside of 6%. And then the balance is L plus $350 million on our term loan base.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [48]

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Okay. Sounds good. And for Matt, you touched upon this several times, and this might also relate to Tom. But as it relates to your commercial plans for satellite phones, the aircraft cockpit plans, the Garmin personal navigation devices and asset trackers. Can you quantify how much of ARPU is like base, like fixed versus like usage-based ARPU? I know you suggested that like IoT seems to be more sensitive than the other plans. But can you just provide a quick overview across your different services, like base ARPU versus usage-based ARPU?

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Thomas Fitzpatrick;Chief Administrative Officer, CFO, [49]

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Sure, Louie. So for commercial services, right, for 2019, you'll check this number, like right around $300 million in commercial service. And so fixed or which is kind of access is 78% and air is like 22%. And that varies depending on telephony is heavier access. It's more like 82%. MRC 18% usage, whereas IoT is 73% kind of MRC recurring charge and 27% usage. So IoT is heavier usage-based whereas telephony is the opposite. But overall, it's 78%, 22% MRC versus usage.

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Louie DiPalma, William Blair & Company L.L.C., Research Division - Analyst [50]

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And the last one for me. For Matt, can you provide any comments on if there are any implications for Iridium as it relates to the FCC's recent Ligado ruling?

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Matthew Desch;CEO, [51]

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Yes. As you know, probably from seeing my tweets, I'm obviously not happy about that. We have been against their being approved for years out of concern that if there's too much usage that it would possibly impact our service quality in North America as it would, by the way, for GPS as well in sort of a different part of their spectrum. And we had been aligned on that. Obviously, we remain concerned long term because we can't move and are kind of surprised how fast this has moved, but it's not somehow a near-term threat to us in some ways. They still have to build base stations, which they don't have the capability of doing, which means they probably need to sell their -- themselves or sell their spectrum to somebody else to do that. And no devices currently can access that spectrum. Certainly, they talk about a 5G or IoT network someday, well, there aren't any devices today that can access that. So it's years down the road, but we shouldn't have to be dealing with it. That's what -- that's why we continue to reject it. We continue to fight it, and there are a number of ways in which we'll continue to work with the whole industry, particularly the GPS industry with the Department of Transportation, the aviation users that are concerned, the Department of -- the Defense Department, which is concerned about the usage of GPS and all the other concerns to keep fighting this because we just don't think it's something we should have to be dealing with. But it's not in any way an even intermediate or even medium-term concern for us [right now].

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Operator [52]

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Our next question is from Mathieu Robilliard from Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [53]

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First, coming back to one of your comments about the fact that activity in Asia is picking up in some countries. I was wondering if you could give us a sense of where the maritime activations in each one were taking place and where you were expecting them to take place throughout the year. Is it based North America-heavy? Or is it Asia? Or is it well spread? Because obviously countries will come in and out of lockdowns at different point in time. So maybe you could help us understand the trends for the year.

Second, with regards to Certus for the aviation segment, if I remember correctly, I think you had in mind a plan to launch a product by the end of this year. Does the current crisis impact, in any way, the launch plans in terms of the feasibility of launching it?

And then finally, back last year, you had signed MOU with OneWeb. I think it was still at the very beginning, but since OneWeb has filed for Chapter 11, I was wondering if there was any impact we should be aware with regards to your future plans?

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Matthew Desch;CEO, [54]

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Okay. Thanks, Mathieu. Yes, for maritime, I would say we're pretty well spread out over all the world in all the ports. So to the extent it relates to activation, particularly, as I said, we're more -- we're not a cruise ship sort of company even though we're used, in some cases, for like the bridge in a cruise ship, but we're really not that heavily exposed to that industry. So ships are moving, but they're really not putting in new installations on for the most part. And as that opens up in ports, perhaps we'll start seeing some improvements. But it's pretty well spread out over the whole world. We're broadly spread out there anyway.

And as far as aviation, yes, there are products underway. There's actually multiple products underway this year. There's really kind of 2 different products -- 2 different applications in aviation. There is sort of a basic service that could be put on any airplane from general aviation up to a commercial airliner for just communication. There's also a safety services -- service, which requires certification. The first one is going to come before the second one. We don't have a lot of control over it because actually, our overall satellite services is available today, and we support the certification for the safety services. It's more when the OEM terminal vendors are ready, and we're kind of reliant upon them, and we're working with them on their terminals. And I think we're going to see one on air here very soon, and we'll see more, I think, coming as the year goes on. I don't know what that really means in terms of when they'll be ready to implement their service, like perhaps we could see some by the end of this year, but I think that's more of a 2021 activity.

Your last question was about OneWeb. Yes, as I said in the past, I mean, OneWeb was a potential partner. It wasn't a competitor in any way to us. So we are sorry to see them go. However, there was no expectations of any revenue for the next couple of years with OneWeb because their service still had to be activated, had to go into service and products to combine our 2 services together had to be put together. We had no expectations of any revenue coming from that for a while. And in fact, we could see that OneWeb wasn't working too hard on the product even since we announced an MOU. So I don't think that has any effect one way or the other on us right now and continue to see that segment. I think it will have -- I think, obviously, COVID continues to impact financing and other things for those new mega constellations. I think it will probably slow some of them down a little bit in terms of going into service as it may affect that industry, but that really doesn't have any impact on Iridium at all. We're just completely independent of that industry.

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Operator [55]

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This concludes our question-and-answer session. I would now like to turn the conference back to management for closing remarks.

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Matthew Desch;CEO, [56]

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Well, I hope this is one of the last conference calls we have to take in this new coronavirus environment. But who knows how long this is going to last. But in the meantime, I hope all of you stay safe and stay at home. And -- but do keep in touch because I think this will continue to be an interesting year. And we're -- we'll look forward to seeing you and describe more about what the environment is when we are on our second quarter call together. Take care. Thanks.

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Operator [57]

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