Right, thank you. Thanks, everyone, for being with us today. I'm Brent Pinter on the Raymond James TMT research team, working with Ric Prentiss covering satellite, media, and towers and digital infrastructure. Some very busy spaces right now with a lot of news going on, so a lot to talk about. I'm joined by Vince O'Neill.
Hey, Brent.
The CFO of Iridium. Vince, thanks for being with us today.
Thank you, Ric, for having us. Brent, sorry.
So, you all announced a lot on your recent quarterly call, several changes, I think a change in tone as well. Obviously, there are significant industry developments going on that kind of kicked off by the SpaceX EchoStar spectrum deal. And you all announced you paused buybacks, you lowered your leverage target from sub-4 to sub-3x by year-end and deleveraging thereafter. You withdrew your 2030 guidance, but you also gave free cash flow guidance of $1.5-$1.8 billion from 2026 to 2030. So, obviously, some seismic changes in the industry going on right now, and I think a welcome acknowledgment of the current situation. What discussions happened at Iridium that led to those changes that you made?
So, I think for us, the first thing was the S-band spectrum had been held by EchoStar. It had obviously been held by them for a number of years. And so our working assumption always was that at some point, EchoStar would build out a 5G radio network. In terms of timing, I think most market consensus, which we would have agreed with, was early to mid next decade before maybe that became a reality. So, the big change for us with the Starlink announcement was obviously the acceleration. Starlink talked about having a network up there within the next two years. We know Starlink move at a fast pace, but that still seems somewhat aggressive to me, Brent. But we know that they're going to have something up there in the next three to four years.
As we look out on our timeline towards the end of the decade, that changes things in terms of the competitive landscape. The discussions we had internally were that we still believe we have a runway. We have a very resilient and cash-flowing business, currently throwing off $300 million a year. We also wanted to acknowledge and start planning for the fact that there are elements of our market that will come under competitive pressure from Starlink as they roll out this network. With that in mind, we really had two objectives. The first one was that we wanted to build cash and build financial flexibility on the balance sheet. We decided to pause the buybacks.
I think what you'll see from us over the next, certainly over the next two or three quarters where it's a priority, you'll see us building that cash position on the balance sheet with a view to providing us financial flexibility around M&A. Secondly, we looked at our leverage target, and leverage is currently three and a half times at the end of Q3. You'll see us naturally deleverage here over the next, call it three or four quarters as we build cash on the balance sheet. We do have a long-term leverage target in 2030 of net leverage at or less than two times.
Given the fact that we still believe we're going to throw off significant cash flow over that period, as you quoted, $1.5-$1.8 billion, and if you think about that, we're at $300 million today, so it's really maintaining the run rate. Given that we are going to throw that level of cash off through the business, we feel very comfortable with that leverage target in 2030.
Okay. And building a net cash position, bringing leverage down, you mentioned flexibility for M&A. What could that look like?
I think it could take a couple of forms. I mean, if you look at what we've done historically, we own 30% of Aireon, for example. We helped stand up Aireon all those years ago. We own 30% of that today. 70% is owned by some of the major air navigation service providers around the world. But that was very strategic to us and runs on our network. Recently, about 18 months ago, we acquired Satelles, which is a position navigation timing company. And they have technology that's 1,000 times stronger than GPS. And obviously, we think that that has huge import today given the whole discussion around jamming and spoofing and how strategically important GPS is to critical infrastructure. And that was a bolt-on acquisition. So, certainly going forward, we could look at things that would be bolt-ons that would be strategic to us.
But we're also very open and considering transformative M&A. And an example, or illustrative example, of a form that could take is certainly you look at us today, we're in the cockpit. We provide mission-critical aviation services in the cockpit of commercial airlines. We have this joint venture with Aireon where they have close relationships with a lot of the major ANSPs around the world. They're great relationships. And we think that we can potentially take a bigger share and play a bigger part in the aviation safety platform space. That may require acquisition, and that would probably look more transformative in nature if that was to happen.
Okay. So, it sounds like maybe something in the aviation space is interesting. I mean, what kind of synergies could there be in a combination like that?
I think it would build on, and the aviation space I would characterize as just an illustrative example. That is a good example where, as I said earlier, you could build on the unique capabilities that we have in the cockpit. We already provide mission-critical safety communications there. It would really be building out that offering and taking more of the value chain than we do today. Another one we mentioned, which runs adjacent to position navigation and timing, is we are looking at an opportunity around identity access management. That's still in its very early stages. If we had to do an acquisition there, which would accelerate go-to-market, accelerate revenue opportunity, I mean, that's something that we would obviously seriously consider and look at. There are others as well, but they're two good illustrative examples of where we think acquisition might be more transformative.
Okay. And since we're on the topic of M&A, when we look back at the geosatellite industry over the past few years, the SpaceX-Starlink disruption really, I think, hit that industry first, and they responded in many ways with a lot of M&A. Do you think as Starlink now enters into the narrowband space that you operate in, as well as others like Amazon Project Kuiper or Amazon LEO, as it's now called, do you foresee a similar kind of industry restructuring within your space?
It's always hard to predict what will happen. I think for us, we have a very strong, resilient business today. We know the competitive environment around that, as I said, is going to change over the next four or five years as we go through the decade, but we think we have a lot of opportunity for future incremental revenue growth as well, and as we sit here today, that's what we're focused on executing against and trying to drive value for.
Okay. And I guess last question on this M&A topic, but there's a lot of 800-pound gorillas playing now, the ones I just mentioned, SpaceX, Amazon, Apple's not directly in the space, but they have a relationship with GlobalStar. What is the importance, do you think, of being attached in some way to an 800-pound gorilla versus obviously you all are kind of an independent company, much smaller market cap than some of those other names out there?
I think, and we talked about this on our recent call, our strategy is, Brent, we want to, as much as possible, be adjacent to Starlink or move into areas and markets where it's harder for them to compete with us. It might be due to regulation. It might be due to other factors. But they're the kind of markets and the kind of opportunities that we are trying to prosecute against. And again, as I said earlier, on the illustrative example of the aviation safety platform, I think that's a perfect example from a regulatory perspective that we feel would be protected and would be market share that we could legitimately capture.
Okay. And one area that's driving a lot of the discussion around the consolidation is thinking about spectrum. And there's clearly a lot of value in spectrum. EchoStar's recent transactions have highlighted that to a lot of investors, I think, and now that's being reflected in other companies' stock prices. Can you frame for us how much you think your spectrum is worth?
What I would say on our spectrum is that a couple of things. One, the first thing is that we have 8.5 megahertz of L-band spectrum. What I say to investors all the time is we've got prime beachfront property. We don't have a huge amount of it with 8.5 megahertz, but it's prime beachfront property. People should know that it's global. You have ubiquitous service. If you're in the North Pole, China, upstate New York, you have ubiquitous service on our network. And we have global landing rights. We provide signal across the globe, which no other satellite company, including SpaceX, can do that. I think that's a big selling point, first of all. The second thing is that we haven't sat on our spectrum or our spectrum hasn't lain fallow since it was granted to us.
We've been pretty successful at building a $500 million valuation company and a company that's throwing off $300 million of free cash flow per year. Anybody looking at the value of our spectrum would obviously have to contemplate that and the present value of the future opportunities that we can execute that we think will drive even further value through that spectrum.
Right. Right. And there's a couple comps out there recently that people look at on, let's say, opposite ends of the spectrum, no pun intended, in terms of SpaceX's deal for EchoStar spectrum, a really high valuation, terrestrial kind of valuation, and then AST SpaceMobile, their deal with Legato and Viasat and Inmarsat. How do you think about your spectrum relative to those comps?
I think if you look at the SpaceX deal, I agree with you. I think the general consensus was that it was a big number. But even the EchoStar spectrum that SpaceX acquired isn't global. So, it's obviously North America. I think most of the major markets in Europe. But I think that's the major concentration with that S-band spectrum. When you think about AST, I think that's almost exclusively a North American play in terms of spectrum. I don't think there's any spectrum outside of North America. So, from that perspective, it's relatively limited geographically. And I go back to the point I made earlier, our spectrum is global and we carry a signal everywhere in the world.
Right. Right. And so, a lot of the conversation recently has been about competition and what is Starlink doing, what is Amazon doing. But you all are going after the direct-to-device market as well, and you all are playing offense. Can you update us on the latest developments there? What are the next catalyst events people should look forward to that show that you all are making progress in that space?
Sure. So, I think for us in the direct-to-device, and I would say direct-to-device narrowband IoT space, because we're very excited about the narrowband IoT opportunity. But for us, we've always viewed this opportunity as something that's on top and provides an incremental TAM and incremental profit, basically, for Iridium. As I said earlier, we have a base business of about $500 million of annual revenue. We invested approximately $3 billion to get the network up there. And so, for little further incremental investment, and our CapEx this year is going to be about approximately $90 million, and will probably be something similar in 2026 as we look to execute that D2D opportunity. So, we think that that's a relatively small investment for the TAM that it opens up to us.
Some of the proof points that I think we can point to in our strategy as we've gone down that standards-based path are Nordic Semiconductor, who are a big chip player in the IoT space. They've been in the process of manufacturing a standards-based chip, if you like, pre-standard. We were obviously accepted into Release 19 this time last year, which was a big milestone for us in terms of offering standards-based solutions. We've signed recent agreements with both Deutsche Telekom and Vodafone, MOUs with them that I think are big proof points of our offering and our solution, and both of those carriers, by the way, have heavy IoT-centric concentration as well. I know that was part of the attraction for them.
And finally, we signed an MOU, I believe it was, with Syniverse, which is kind of the back office that holds a lot of this stuff together around roaming and just the general plumbing and engineering, if you like, of some of that. I think what you should expect to see going forward there, Brent, is that we will continue to sign agreements. We'll continue to sign up MNO and carriers as we go forward. And certainly, we're very encouraged by the discussions that we've been having with them. And we're talking to all the names that you would expect or anticipate that we would be talking to.
Okay. Great. So, signing up agreements, you have Release 19. Can you update us on when should we start to see revenues and cash flows from these efforts, and when might those become more material?
So, I think, as I said, we were accepted into the standards this time last year. We're in the process of having those standards codified, I think is the technical term. And that will be this month or first quarter. I think in the second half of 2026, you should start to see chips coming, being manufactured and coming forward. So, maybe some revenue in 2026 as we look to roll the service out. But I think more meaningful revenue impacts will be 2027 and beyond.
Okay, and you're talking a lot about Narrowband IoT, and when people think of this direct-to-device market, a lot of the headlines and attention is around smartphones. How do you size the TAM, I guess, industry TAM and Iridium's TAM between IoT relative to the smartphone opportunity?
We've always said that we think for us, the Narrowband IoT opportunity might be bigger than the actual device opportunity and the smartphone opportunity. Our background as a company and our network is very much suited to IoT and critical communications when you have to get a signal or you have to get data through. As you think about cellular IoT today, one of the big stumbling blocks for expanding the footprint of cellular IoT is the cost of the chip and basically what it does to the cost of the device. You're dealing with a population there that is very price sensitive. The neat thing about the standards is the standard removes the cost friction.
It makes it obviously easier for the chip manufacturer to put that technology or take that technology and implement it on a chip in a very cost-effective manner, have it integrate into a device with very little impact on the BOM or the actual end price for the user. And so, that's always been a big friction point for trying to roll out IoT beyond that cellular footprint. So, we think that that will be a very seamless process going forward. And we think that that gives us the opportunity for a big TAM that we're just not addressing today.
Right. Right. And what are your biggest advantages and maybe disadvantages as well going after this market as there's a lot of companies, a lot of capital chasing D2D?
You're 100% right. There is a lot of capital chasing D2D. I think the first advantage we have is we don't have much capital chasing it. As I said, we've increased our investment incrementally. You've seen us bring up our CapEx in 2025. It'll be a similar level in 2026, but it really is peanuts compared to what the rest of the industry is spending around the D2D opportunity. So, I think that's the first thing there. As you think about other advantages in terms of prosecuting the opportunity for both direct-to-device and the Narrowband IoT, it comes back to the global nature, the global coverage of our network, and the reliability of that network. Most of these D2D offerings won't be, I think apart from ours, won't be global in nature, certainly regional, certainly cover a lot of significant areas like we've talked about, like North America and Europe.
But there's a lot of other markets to which they won't be accessible. You think about China, you think about Russia, you think about Brazil. So, we think we have a lot of opportunity with relatively small capital cost and investment upfront to increase our revenues and increase profit.
Okay. And a lot of the fears around Iridium have been how do these D2D offerings, how do they compete with your base business? So, can you just talk to us about that? And your satellite phones, there's Garmin inReach and other personal communications devices. How does your customer base maybe differ? Maybe where is it similar to someone who might be a customer of these D2D offerings?
So, as we talked about the increased competitive threat that's going to come towards the end of the decade, we still look at large areas of our revenue base and do believe that we have a moat around that business. There's certainly areas where it will come under increased pressure. So, if I go through our major verticals, I would say if you take telephony, the most prominent use case in telephony is typically NGOs, first responders, disaster recovery, that type of use case, Brent. They really value the ruggedized nature of the handset and the device and the battery life. You've got long-lasting batteries, so you don't need, obviously with your iPhone, you've got to plug that in every night to get a charge to it. So, we think those use cases still play very well and still have a lot of application even in the D2D world.
Certainly, there are more leisure users maybe on the handset side where that part of the business may come under a little more threat. And you could certainly see that maybe having an impact on handsets that we would sell moving forward or going forward as that D2D solution is rolled out. I think if you look at our IoT business, I roughly split that in two between IoT industrial solutions and personal comms. On the IoT industrial side, we go to market through a 500 reseller partner community that's been built up over 20 years, 20, 30 years really, with very direct relationships there. Our IoT solutions in those spaces tend to be highly engineered, highly customized, deeply embedded in those solutions. Within those solutions, like you think about the handset, the handset's a finished product.
For those IoT solutions, they're typically part of a bigger solution or a bigger application that the partners are rolling out with the customer. So, we think that's very embedded and sticky. Certainly, on the personal comm side, you do have people who use the device on the personal comm side where it's a lifestyle choice, where they know they're going to be off the grid. They get things like maps and breadcrumb trails and weather. I don't know that those types of users are going to give it up for the iPhone, but certainly if you have more occasional users or as we look to grow that market going forward from that point, I could certainly see it having an impact there in terms of the competitive environment just being tougher.
Is there any way you can size for us as a portion of your customer base or revenue base? You called them occasional users, leisure users, how large that base might be?
I think we've said if you look at telephony, I think, is a good example, a good illustrative example. We have experienced some churn this year. That churn has come from government DoD actions. I think we mentioned earlier in the year that we'd seen some impact from USAID. We've seen some impact with NGOs from some of those programs, like the UN, for example, where they had phones. Most of those, they're industrial use cases. Where we hear these stories coming back to us and where we're seeing churn in the telephony base, it's typically those industrial-type use cases where we're seeing it.
Okay, and the U.S. Government, your largest customer, how do you think about that customer in terms of your relationship with them as these competitive offerings come in? And, you all announced recently an $86 million five-year IDIQ contract related to the infrastructure on your EMSS business. So, can you just first talk about that contract and then just more broadly your relationship with the government?
Yeah. Well, and our relationship with the government is they were effectively our first customer. So, we have a highly strategic relationship with the U.S. government and the DoD. That contract is a sole source contract. It comes up for renewal in September of 2026. The government have at their behest that they can extend the contract six months, which we probably would expect them to do. So, that would take it out to March of 2027. But as you just alluded to, we just recently signed a gateway evolution contract with the government, which is basically they have a proprietary gateway. And what that contract does is it ensures that from a technological perspective, that that proprietary gateway is kept in sync with our commercial gateways.
Another data point I would offer there is the other contract that's tied to that gateway is the maintenance contract, which came up for renewal last year and was renewed for five years through 2029. So, both of those contracts were renewed through over the straddles over the time period of the renewal of the current EMSS contract. And what we've said publicly is that we expect a favorable outcome on that contract and that view hasn't changed.
Okay. Great. So, what I'm hearing from you is obviously there's these fears out there. You all have, you've made some changes in terms of your buybacks and leverage. You're aware of everything that's going on in the industry. You're watching it closely. But you still sound confident, certainly for the next three to four years in a lot of areas where you have a larger moat. I guess in the last minute or two here, what's giving you all confidence right now in terms of what Iridium stock price should be worth and that investors should be buying Iridium?
Yeah. I mean, I feel very confident, Brent, as I look out here over the next three to five years. I think first of all, we've proved in the past that we have a very resilient business. We provide mission-critical safety comms, which are obviously very sticky and highly valued by our customer base. We throw off $300 million of free cash flow a year, as I said. What that does for us is it does give us flexibility as we look at this runway here over the next four years or so to execute and prosecute on opportunities that I think will drive even further value for us, and I would highlight there, we feel very bullish about the PNT opportunity. We've talked about that being $100 million by the end of the decade.
Certainly, as I look at the application for that across government and commercial customers, I haven't seen anything that would change my view on that. As I said earlier, you should continue to look for announcements around our end-to-end standards-based solution, both from a Direct-to-Device and a Narrowband IoT perspective, so I think we've got plenty of future growth opportunities as we look out there, and so we feel pretty good about the future.
Okay.
Understanding that the competitive environment has changed and is getting tougher, and just to highlight, as I said earlier, it does mean that we're more focused on looking at some of these acquisitions that we talked about and also making sure that we move into more adjacent markets or away from Starlink and away from some of those 800-pound gorillas that you were talking about.
Yes. Yes. The competitive environment has changed, but you all are adapting.
Yes. Yeah, absolutely.
Great. Thanks, Vince.
All right. Thank you, Brent.