We'll get started. Next up, we have Iridium. From the company, up on stage with me, is Tom Fitzpatrick, Chief Financial Officer. Tom, thanks very much for being out here.
Happy to be here, Aaron. Thanks for having us. I'll just give you a quick overview of the company, some points. I'll skip through the safe harbor language, and just talk a little bit about the company a bit. So we've completed a stark financial transformation of the company. It was completed in 2019. If you see the picture of the satellite on the right, that's our new generation constellation. It was, as I said, completed in 2019. And it replaced our old satellite constellation, that's the picture on the left, that was launched in the late 1990s. And importantly, for investor consideration, lasted well over 20 years. It was operating just fine when we deinstalled it in 2019.
And so that's a good indication of how long the new generation constellation will last. We think last at least 20 years. And so that ushers in a period, a long period of a CapEx holiday that we think is at least 10 years. We don't think that we're spending meaningfully on our next generation constellation until 2031, so that's a important credit consideration. The company has a proven track record of growing its EBITDA. We grew our EBITDA 9% since 2009 and grew it right through the CapEx cycle. And so the growth in EBITDA with the cessation of the CapEx has caused meaningful deleveraging. We peaked at 5.6x in 2018.
We ended 2022 at 3.2x, and we see ourselves right around 3x as we exit this year. Company is characterized by meaningful free cash flow generation, and we think that is the case until we start spending on our next generation constellation early in the next decade. The constellation that we operate is our source of competitive advantage. It's a very wide and deep competitive moat. It's why we were able to grow our EBITDA so consistently and meaningfully over the last two decades. And we think it's why we're gonna be able to continue to do that as we move through this decade.
And we've painted a picture of the company in 2030 to give investors you know an idea of where we see ourselves going. So let me describe the functionality of the network and differentiate it from the competition, because it is the source of our competitive advantage. It's a low Earth orbit constellation, so our main competitor is 50 x further from the Earth than we are, and so that's one element of our differentiation. So laws of physics apply when you have to go 50x further from the Earth to complete its transmission. The other element is we are 100% global. So Iridium is the furthest-reaching communications network of any type in existence. It is one of a kind. We cover the entire globe.
And so that's another point of differentiation, coverage everywhere. The way our network operates is unique as well. It's a mesh network. So, if you see the picture there on the globe, you cut the globe into six slices, if you will. We have 11 satellites going around the Earth in near polar orbit every 100 minutes, and they have multiple look angles at the Earth. And so, if, for example, the alternative would be a so-called bent pipe architecture, where the call needs to come down in close proximity to where it originated to be terminated. And so the satellites each have multiple look angles at the ground.
And so what that means is, in an alternative architecture, if the satellite is obstructed from the Earth, the call is not gonna go through or the data transmission is not gonna go through because the satellite isn't moving. In our architecture, because the satellites are moving around the Earth with multiple look angles, calls and data transmissions go through more seamlessly. And so that's another point of differentiation. We just completed a refinancing, basically just swapped and replaced our existing credit facility, and extended our maturities out through the 2020/2030 time period, and we were able to shave 10 basis points in doing so.
So we were quite pleased with that offering, and we're happy with the job that Deutsche did for us as they have done for us consistently. So...
All set?
Yep.
I appreciate those comments on the execution.
Sure.
So I want to dig in on a lot of the points that you just kind of went through with the overview. Let's start with at your recent Investor Day, you introduced 2030 targets, including $1 billion of annual service revenue in 2030. If I smooth that out, I think it implies around 8% annual growth. Walk us through the main drivers of that performance, potential new areas of growth, and maybe you can touch on each of your segments and what you see as the biggest opportunities there.
Right. Right. So, that's right. Your math, your math is right. I think it's just inside of 8% if you if you smooth it out. So the, the headline is: We have a proven track record of growing our service revenues. If you look at the last five years, I think it's that we have a 9% CAGR for over the last five years, so proven track record. And we have, really different, elements of our service revenue, and, and their competitive circumstance is different. The inherent market rates of growth are different. But what each of our elements share is a proven track record of growth, and we think an excellent, excellent prospects for growth.
As we look out into 2030, and that's why we were confident to kind of paint a picture of the 2030, you know, kind of revenue profile. So, you know, first and foremost, if you discuss our growth prospects, it starts with IoT. And within IoT, our fastest-growing segment is personal communications. It's products like the Garmin inReach, but it's other products like ZOLEO and Bivy that attach to a smartphone and enable you to, well, to text through your smartphone and other functionality of, like, GPS and other elements that people that know they're going to go off the grid are highly desirous of. That segment within our business grew by 45% CAGR over the last five years.
We think that there's a lot of room for growth there. The addressable market there is all the smartphones in the world. And so, you know, yeah, we've grown it by 45% CAGR, but that's got a lot of room to run. That, that growth within that segment is going to be augmented by a new functionality that we've introduced, faster data speeds. So our current offering is 2 kbps. We see that, you know, our new product takes that to 88 kbps, and so that's a more feature-rich experience on those devices. Think of pushing pictures, when you're, when you're off the grid, and so, that gives rise to new use cases and higher ARPUs.
And so that's gives what is a very fast-growing element of our business, even a shot in the arm as we look out into 2030. Within IoT, more classical IoT, if you just consider the estimates are, NSR put out a report that says they see IoT growing by 16% CAGR through 2030, as it's proliferated across all kinds of devices for asset tracking and monitoring, et cetera. We think that our track record is that we are the satellite solution for the IoT user requirements. Just the nature of our of our network. We were built for personal communications, that mobility, low power, small antenna size lines up really well with IoT requirements. So you've got a market that's growing very fast.
16% is what the estimate are, and our network lines up very well with it. Similarly, we have a proven track record of growing IoT. Similarly, these faster data speeds in our mid-band offering are going to port to industrial applications, just like they do in personal comms. So new use cases, you'll be able to do more, telemetry, more data-rich telemetry, be able to take pictures, when you're monitoring assets, et cetera. And so we think that's creates new use cases in IoT, that which we have a track record of growing. We think it's that gets a shot in the arm. We've announced an agreement with Qualcomm, where in their Snapdragon Satellite enabled chip that we think is going to resonate.
We think that it works today. It can provide two-way texting and two-way SOS that has been tested, and it works. And so we think direct-to-device is going to be a meaningful piece of our growth in as we look out through 2030. We think that's going to be a fundamental trend that in over time, increasingly smartphones are going to be enabled with satellite connectivity. So we think that's a growth driver for us. In our traditional satellite phone business, we have demonstrated that the competitive environment is a very good one. We've demonstrated pricing power.
We enacted a price increase at the beginning of last year, with very little fallout from churn, and that's just the nature of the competitive dynamic in that piece of our business. That's not going to change anytime soon. So we think that that pricing climate, if you will, is stable. And we also have some growthy products within there. We have a push-to-talk offering that is much more growthy than the traditional satellite phone business. It directly integrates with the land mobile radio, thus creating a much larger footprint with no CapEx. And so first responders really like that, and we think that grows; it's got a lot of room for growth.
Similarly, the new mid-band capabilities are going to be relevant in things like drones and other monitoring type of facilities. Again, taking a 2 kbps data speed up to 88 kbps creates additional use cases. And finally, our broadband businesses grew 17%, I think, over the last five years. And that's principally maritime. So maritime is not a growing macro business. That growth that we've enjoyed has been a straight takeaway from our primary competitor, Inmarsat. We have our offering of Certus. It's faster and cheaper than theirs, and we've been taking share from them.
As we look out into 2030, we don't have any broadband applications in aviation, but we will do, we think here imminently, and we think we're going to do just as well as we've been doing in maritime in aviation. And then I think our last growth vector is our satellite time and location business, which is basically enhanced GPS. GPS, as people, I don't know if you know, can be very easily spoofed and our DoD customer is very desirous of authenticated GPS, and that's what the Satelles business does for us. So we kind of wrap all that up, Aaron, and that's how we calibrate that $1 billion-ish number as we think about 2030.
All right. And you mentioned the Qualcomm opportunity with Snapdragon. What's the latest timing around that? When does the monetization of the deal take effect, and when do you expect to start seeing cash flow?
So we've this year, we see $5 million-$10 million in development revenues from Qualcomm associated with that. We're not in the driver's seat in that timing. We're actually not a party to Qualcomm's deal with the smartphone manufacturers. We have our deal with Qualcomm. We know our... And that's a signed and sealed deal. We know our economics as to Qualcomm. We're not a party to the Qualcomm negotiations with the end users. When Qualcomm lets us know, we'll let investors know.
Okay, but obviously, that opportunity, hopefully sooner there, rather than later, helps you on that trajectory towards-
Yes
the 2030
Yes, yes
- goals.
Yes.
Okay, got it. Globally, there seems to be a lot of new satellite capacity coming online or set to come online in the years ahead. How do you think about the supply-demand environment, and how is Iridium positioned to grow within that?
So the new supply that's coming in is all of it in the K-band, right? And so that is a very different band than we operate in. We operate in the L-band, and the characteristics of those two bands is very different. And they both have you know strengths and weaknesses. The K-band is very good for high data speed, high throughput applications. It is susceptible to rain fade, and so that's a limitation of the K-band. For example, we are certified for safety services in both aviation and maritime. It'd be hard to imagine that that certification would be afforded a K-band player.
All the new capacity is coming in the K-band, and it's coming in low Earth orbit. We operate in low Earth orbit, but we're in the L-band. So that's... Those two are, they're kind of in the same kinda neighborhood, but offering two different services because of the spectrum that we're both playing in. So, where we've seen new entrants take share is in maritime applications, where a very small aperture terminal is on a maritime ship. We've seen Starlink unseat VSAT players for that business. And we were the backup to the VSAT player, and so we're the backup to Starlink.
So we're kind of agnostic from that perspective. So that's basically it. The new entrants are all seem to be going for, all playing in the K-band, all seem to be prosecuting the, you know, what we call the commodity broadband opportunity, which is a very different space than we occupy.
If I could dig in a little more on the competition out there, I guess, how do you think about your position relative to competition from someone like Globalstar, which has a new constellation in the works, or newly combined Inmarsat/Viasat, which obviously have, you know, their own set of things they're dealing with, but it's one of your biggest competitors in the past, and how that evolves going forward, or Starlink, which has obviously made a lot of noise throughout? So maybe you can just touch on, again, whether you think that these other industry players start to impede on your growth opportunities.
So, Globalstar, I mean, I don't believe they even have phones to sell, so we don't... As they're currently configured, we don't really view them as much competition. Apple's, you know, relationship with Globalstar is such that I think they've procured, you know, the majority of Globalstar's capacity, so, and they're gonna prosecute the direct-to-device kind of opportunity. We're happy for them to do that. I mean, I think, Qualcomm is going after the Android world, and so there's a lot of Androids, there's one more Androids than there are smartphones, and so, we will compete, you know, we'll be part of the Android solution to the extent we're in the Qualcomm chip.
So, but as to a satellite provider, as to Globalstar, we don't see them as much competition, and but for the Apple initiative, you know, I think that's gonna be the circumstance for some time. Inmarsat, Viasat. So Viasat is not a competitor to Iridium. So we back them up on maritime applications, and so that, we don't see that changing. Inmarsat, we compete with them pretty much in kinda two, maybe three areas. In our satellite phone business, they have a satellite phone that is, they price it more cheaply than we do. We really don't consider them as we think of, you know, our pricing, you know, actions.
Like, we don't price based on Inmarsat. It's a different. We go after those people that want the Iridium experience. It's different than the Inmarsat experience. So, we've competed with them for a long time, and we don't feel like, you know, we give them much consideration in terms of how we go to market. It's a different offering. We're trying to take share from Inmarsat in maritime. That's, and we've been pretty good at it. We've grown by 17%, as I said, over the last five years. We have a better mousetrap than they do. We don't think the Viasat merger changes that very much. And then finally, Starlink.
So Starlink, as I said, if they unseat Viasat for broadband on a maritime ship, we're happy to be the backup to them, just like Viasat. Where we do see them is to the extent that they offer pricing on a primary low enough, and in an instance where you don't want a companion, we'll see them there. But like I said, we're happy to be a backup to them or to Viasat, so it's kind of similar circumstance.
Eutelsat and OneWeb, I think, just completed their combination last week. That brings together a LEO and GEO constellation. Any thoughts on that setup as a competitive threat, or is that more a response to Starlink at the enterprise value-
Yeah
at the enterprise level?
Right. They're both... That's K-band again.
Yeah.
So, I guess, they take a competitor out. That merger takes a competitor out, but it takes a competitor out in the K-band. It doesn't infringe on the L-band.
Okay. So no, it sounds like not an impact on kind of the suppliers you deal with, and you don't expect to see impacts on pricing as you go to negotiate new deals, with potential clients out there?
Right.
Okay. I wanted to speak on the government for a moment. The government's your largest customer, a little over 20% of revenues today. Can you discuss the relationship and how it's evolved over the years?
So the government is our oldest and largest customer. They were our first customer, pretty much stood the company up, you know, back in the early 2000s. So we've had multiple renewals with the DoD over the years. Our current contract that we're operating under is a 7-year deal, which is just by virtue of its duration, that's very unusual. It's unusual for the DoD to go that long, and it kind of speaks to the uniqueness of what we do for the DoD. That RFP that was issued was a sole source to us. The reason for that is we do things for the DoD that nobody else can. So I talked about the uniqueness of our network being the source of advantage.
That's particularly so with the DoD. If you think about our traffic, our traffic is routed in space, and as the DoD is terminated in their proprietary gateway in Hawaii, never touching the ground. So think of the DoD traffic as encrypted, et cetera. Their next best alternative would be to have the traffic land in close proximity to where it originated and be susceptible to intercept, et cetera. So that's why the DoD loves our network. It's the handoff in space and the termination in their proprietary gateway. You know, interestingly, this gateway that they have in Hawaii, they've spent $hundreds of millions on, and its only utility is to terminate the Iridium signal. So this is a very sticky customer.
And, in prior renewals, you know, the one I think that is most telling is the renewal in 2013, which is, you know, paint the picture there. The troops were coming home from Afghanistan, and in those days, our relationship with the DoD was a per device type of arrangement. So the troops were coming home from Iraq and turning in their satellite phone, and so our revenues were going down. And so, you know, we had a renewal coming up in 2013, and we said publicly for a year prior to the renewal, "We're gonna get a renewal, and our revenues are gonna go up." And, you know, investors kind of said, "Well, we'll believe that when we see it," kind of a thing.
Sure enough, when we did the renewal, we delivered on exactly that. Now, the revenues in the next contract went up, notwithstanding the fact that the subscribers had been going down. And that's because, you know, the DoD recognized, and we recognized that, you know, we built this constellation, this new constellation, a $3 billion constellation. They were a primary beneficiary of that, and we just couldn't have our revenues going down in the face of financing that, and kind of we saw eye to eye on that. That's just a good proof point on, you know, the nature of the relationship and that it's integral to the DoD's communications infrastructure.
Maybe this next question, the answer you just gave, answers this one. But as I think about when your contract comes up for renewal again in 2026, we discussed various new and old participants in the space a moment ago. Is there a risk that the government might look to spread the business around? They're not gonna leave Iridium completely, but that they look to kind of share the wealth with some other participants, or are you optimistic that Iridium can remain the sole provider on this contract?
Yes, the latter.
Yeah.
Yeah.
Okay. So as I think about the margins of the business, you've provided a three-year annual average revenue target growth of high single digits from, I think, 2023 to 2025. And as I think about the margins over that timeframe, how do they evolve for the business? Where do you see them ultimately landing?
Right. So I just wanna be specific on the guide. The guide is service revenue growth, averaging high single digits, 2023-2025. And that's relevant because of late, we've had substantially higher engineering revenues, and higher equipment revenues. The engineering revenues relates to our strategic importance to the DoD. We're doing project work for them, you know, their broader satellite requirements. That is engineering, very much smaller margins than our typical business, and we're doing it because it's strategic. We're helping them as they think through the Space Force initiatives. And so it's that strategic revenue, but and it's gotten much more material, but it is not of the variety like our service revenue.
So, think about our service revenues as being access and airtime. It's very hard to find the variable cost to produce an incremental minute of use on our network, and so it's there's significant operating leverage. And so, if you put our engineering revenues and our equipment revenues to the side and just consider service revenues and costs to deliver service revenues, the cost moves with inflation, whereas the service revenues move as the service revenues move. And so what that has done over time, if you looked at our EBITDA margins, I'm talking back when we started our construction in 2010, I think our EBITDA margins were, like, in the mid-40s, and when we got done the construction, they were around 60%. That model is very much in effect. It can be distorted by...
If you look at the overall, it can be distorted by the growth in engineering revenues, but the fundamental operating leverage of our access and airtime is very much intact.
So, you mentioned your CapEx holiday in your opening remarks. Your current constellation went up in 2019. Just recently, you launched some spares. You've said your satellites are performing better than original expectations, so you don't need to, again, start spending until at least through this decade. And so I'm curious, when do you foresee starting to spend ahead of the, you know, needing those satellites? If it's in 2030, 2031, does the spending start sooner than that, or is it truly through this decade that you have the holiday?
Right. So, to clarify, our... We completed the new constellation in 2019. We started in 2017, so there were 10 birds launched in 2017. And the point is that if you... Typically, if you look at failures of electronics, there's what they call a bathtub curve, where you have failures early, then a period of calm, and then towards the end of life, more failures. And so certainly as to the 20, well, to most of our satellites, we're through the bathtub curve. Or excuse me, the early on in the bathtub curve, where you have failures, we haven't had any. So there's the '17 vintage satellites are doing fine. That's, I think, what the point is. They've done better 'cause...
So, yeah, so we monitor the health of our constellation, et cetera, and we feel as though we're not gonna be spending until 2031 on the next generation constellation, based on everything we see to date.
Do you foresee needing to purchase additional spectrum for either additional capacity or in tandem with sending those next-gen satellites up?
So might we purchase additional spectrum if it, if it became available at a reasonable price? Sure. But there's two: reasonable price and, you know, might we? Because we're not spectrum rich, we've said that. So as we think about our next generation constellation, if you'd need to know what spectrum you have to engineer it in, engineer it into your next generation constellation, there's ways that you can get more capacity out of your existing spectrum. It has to do with adding more satellites, you can get more.
So we're gonna need to know what the formula is, but I would characterize us as, you know, keeping our eyes open for additional spectrum and thinking about the architecture of the next generation constellation, when we see what our circumstances and when we get ready to engineer that.
On the topic of leverage, you, I think, said you were going to finish this year at close to 3x. What's your expectation for leverage over kind of the medium-term horizon? And is that achieved mostly through EBITDA growth? Is it further principal debt paydown, some combination therein?
Right. So we've had a long-standing guide of target leverage between 2.5-3.5x . I think we initiated that in 2018, I want to say, when our leverage was probably around 5x . And so now we're around three, and we've kind of tacked on to that guidance that says that's gonna move down here as we get to, you know, 2026. We're gonna punch through 2.5x . We'll be below 2.5x , and we see ourselves there through 2030, wherein at which point we'll be below 2x , is our expectation. And we think that sets the table for the next build, right, pretty nicely. That's gonna be achieved very little principal amortization.
The Term Loan B is 1% a year. It's largely gonna be the growth in the EBITDA, and the debt's kind of staying static, and so it'll deleverage as a result.
Okay.
Mm-hmm.
On capital allocation, at your Investor Day, you spoke to capacity for around $3 billion in shareholder returns through 2030. Remind us what you've achieved so far to date, and are you able to hit this future target while still maintaining your leverage and investing adequately in the business?
Right. So yeah. We, the answer to that is yes. So we've got a multiple-pronged kind of plan here, right? As we move towards the next generation constellation in 2031, we've bought back 600 million of our shares. We initiated a $0.13 dividend. We've said that as to the dividend, we wouldn't have initiated if we didn't intend to grow it right through the next generation constellation. So well, all through the thirties, as we're building the next generation constellation. We bought 600 million in our shares. There's another authorization for 400 million more that we'll execute on that. And what we've said is we'll do tuck-in acquisitions that make sense strategically. So that's kind of the plan.
All the while, deleveraging. So we'll finish this year around three, and we'll exit 2030 below two. So it's we think it's reward the shareholders and de-risk the business as we get ready for the next generation constellation.
One follow-up on your comment around M&A. As we think about the opportunities Iridium is focused on, are there certain segments of the business that are more kind of in front of you than others in terms of potential M&A or... And then in terms of scale, you just said tuck-in. Are they going to be more along the lines of tuck-in versus something more holistic?
Right. So I would not characterize Iridium as acquisitive. So what will we not do? What we've said is, you know, we have 500 dealers that how we go to market, we're not gonna vertically integrate, and that's we don't want to compete against our channel partners. So, and that rules out a big list of potential candidates for us to acquire. So we're not gonna do that. We're not particularly acquisitive. I would characterize an acquisitions as, to the extent they cause a, you know, a tick up in leverage. It's just that, it would be a minor detour on our path to deleveraging, you know, over the end of the decade.
Okay. One area you have been investing in, Aireon, can you maybe describe what your focus is there, the background kind of behind that investment, and what future payments or income we should expect being directed there?
Right. So Aireon is a hosted payload on our network, and we're both a vendor to Aireon and an equity owner of Aireon. As to our capacity as a vendor, they pay us $25 million-ish a year in data fees, and they owe us for the hosting of the payload on our network. That was a $200 million liability that they have, and it bears interest at LIBOR plus 350. They've made payments against that. They pay us $16 million a year minimum. We expect that they'll take out the remainder, certainly, before 2030, as to that.
Then down the road, we expect dividends out of Aireon in our capacity as a shareholder.
Great. Tom, we're just about out of time, but thank you very much for being here.
Sure. Thanks for having me, Aaron.