Iridium Communications Inc. (NASDAQ:IRDM) Q1 2024 Earnings Call Transcript

Iridium Communications Inc. (NASDAQ:IRDM) Q1 2024 Earnings Call Transcript April 18, 2024

Iridium Communications Inc. misses on earnings expectations. Reported EPS is $0.1585 EPS, expectations were $0.16. Iridium Communications Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Iridium Communications First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After the today’s presentation, there will be an opportunity to questions. [Operator Instructions] Please note today’s event is being recorded. I’d now like to turn the conference over to Kenneth Levy, Vice President of Investor Relations. Please go ahead, sir.

Kenneth Levy: Thanks, Rocco. Good morning, and welcome to Iridium’s first quarter 2024 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 fact and include statements about our future expectations, plans, and prospects.

Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today. And while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views or expectations change. During the call, we’ll also be referring to certain non-GAAP financial measures, including operational EBITDA, pro forma free cash flow, free cash flow yield, and 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.

Matthew Desch: Thanks, Ken, and good morning, everyone. So the first quarter often sets the tone for the rest of the year and activity to-date has been upbeat and quite strong. Service revenue continues to expand on our growing subscriber base and our partner ecosystem remains quite dynamic whether it’d be an IoT, maritime, aviation, or defense. We remain busy as well since the beginning of the year with a lot of new product development and the completion of our first-ever company acquisition on April 1. We met with a number of you during the many investor conferences in March and have been active in the debt market with our tack-on financing to upsize our term loan to complete the Satelles acquisition. We’re really excited about this transaction and the business opportunities that bringing Satelles in-house provides Iridium and our partners.

With this acquisition, we’ll go from just a wholesaler of Satelles to secure signals to an end-to-end solution provider of PNT services for customers globally. For those who are not yet familiar with this new business area, this acquisition makes us the leader in satellite-based time synchronization and location services that complement and protect GPS and other GNSS systems. As the world increasingly has come to realize, the prevalence of GPS jamming and location spoofing during conflicts and for general mischief is on the rise and is impacting critical infrastructure, military operations, aircraft and shipping navigation, and other important functions for governments and enterprises around the world. Iridium’s expanding PNT solutions can cost-effectively reduce these vulnerabilities and provide an alternative to GPS reliance, particularly for critical infrastructure that we all depend upon.

Going forward, this new business offering will be referred to as Iridium Satellite Time and Location, or STL, for short, and be reported within our hosted payload and other revenue line. The entire 70 person Satelles team is being integrated into Iridium as the PNT business unit, and Mike O’Connor, who is the CEO of Satelles will report to me as the leader of that business. We anticipate that STL will generate over $100 million in service revenue per year by 2030, with additional revenue on top of that from equipment and engineering services. These PNT solutions ride on Iridium’s LEO constellation and utilize small, very low-cost hardware. With a secure signal that is 1,000 times stronger than GPS, Iridium STL can even be used indoors to add redundancy and protection to data centers in building wireless networks and other critical infrastructure.

Best of all, STL is sold as a wide area broadcast service that can support an unlimited number of users while using minimal capacity on our network. These applications are already proving their worth in the market today, and we think we enjoy at least a five year to 10 year head start on other viable solutions that are global and have the resiliency of a space-based approach like ours. With Iridium’s broad and growing ecosystem of partners, we expect that STL will be able to address many additional customer challenges in maritime, aviation, the UAV market, protecting energy grids, as well as some innovative new applications in areas like cybersecurity. I hope you can sense my excitement for this transaction. It’s strategically in line with Iridium’s priorities and vision, doing things that are unique, special, and important from our LEO L-band network and better than anyone else can do.

We’re ready now to step on the gas and expand the availability of Iridium STL to new markets and customers. You will recall from our September Investor Day that I laid out a number of vectors that would support Iridium generating $1 billion in service revenue by 2030 and supporting our capacity to return $3 billion of capital to shareholders over this same eight-year period. Let me be clear, there have been no competitive developments since last year’s Investor Day that changed our view on our long-term financial outlook. STL is one of the financial drivers that supports this plan and is a great tuck-in acquisition that will create synergies across our other market vectors. For those who had the opportunity to tune into our conference presentations during the first quarter, you’ve heard us reiterate many of these long-term growth drivers.

It should come as no surprise that the largest opportunities we see for revenue growth through the end of the decade come from services we already know very well and are already working on. To achieve our long-term growth objectives, we don’t have to change our strategy or wholesale business model. Instead, it will be more of the same. We will stay in our lane, grow our network of business partners, execute on product launches and innovation, and deliver on our unique strengths. This is our objective and we have a pretty good track record of delivering. Beyond Satelles and other potential tuck-in acquisitions, we highlighted four other drivers during our September Investor Day that are key to Iridium’s revenue growth in the coming years. First, IoT.

We are the leader in personal satellite communications as well as industrial IoT, and we continue to believe that double-digit revenue and subscriber growth we have produced in these commercial applications will continue for the foreseeable future. You can see that really demonstrated again in our first quarter results. Second, midband. Leveraging our leadership in IoT, we will continue to move forward with partners to roll out new applications and devices that take full advantage of our very unique Iridium Certus platform that is optimized for size, speed, mobility, and takes full advantage of our L-band spectrum position. Highly mobile, power-efficient devices using Iridium’s midband services, which support speeds up to about 100 kilobits per second in a small form factor, will drive IoT ARPUs and open Iridium services up to new industries.

Some of these devices have already entered the marketplace, and we envision Iridium’s midband services will offer added functionality and connected solutions to industries like security and surveillance, autonomous vehicle, and other remote applications that demand higher bandwidth, but still need mobility or operate on batteries and are often small and need to be lightweight. Third, Direct-to-Device. You previously heard me speak of our investment in Project Stardust. This is a multi-year investment that will make Iridium technology available to chipset manufacturers adopting new satellite oriented 3GPP standards for IoT devices and consumer devices like smartphones. This is a very large market and our work will expand our IoT opportunities into a broader set of cost sensitive industries.

Lastly, Telephony. We strongly believe that satellite-based personal communication devices have a bright future even as we and others develop direct-to-device capabilities. I want to underscore that Telephony is an important revenue source for us with more than 400,000 users of per purpose-built voice devices of all types on our network, and we expect that number to continue to grow into the future. These devices are mainstays for first responders, governments, and loan workers and they become so completely integrated in their operations because of their reliability, global reach, and the challenging environments in which they are used. They allow organizations to plan and execute without interruption and ensure that communications facilitate the accomplishment of goal rather than hindering it.

The advent of high quality push-to-talk services over the last five years is a proof-point of these purpose-built devices and remains a driver of expanding the subscriber base and revenue Iridium continues to see in this area. Historically, Iridium has served the needs of niche and specialized communities of users. And while we are proud to have grown this niche to more than 2.3 million subscribers globally, I assure you we are far from finished. My team constantly questions the status quo and given our history, has a healthy humility and even an appropriate level of paranoia about the continued leadership position we have attained in the satellite industry. Some investors seem to be skeptical about our future right now, but we think they underestimate the utility of our global services, misunderstand the needs of the particular customers we serve, and are discounting the capabilities of our network relative to others in the satellite sector.

We are highly confident in our long-term revenue drivers and capital generation through 2030, and we have a lot of visibility into the fundamentals of our business. The vast majority of our revenue is recurring, what we refer to as service revenue. While we do not require our service to be sold with long-term contracts, our customers often opt to purchase iridium solutions for years at a time. In fact, they’ve often tried other L-band offerings prior to settling on Iridium’s network, and they choose our service because it provides a level of reliability, coverage, and customer support that they cannot get elsewhere. I’m proud of this fact and encourage investors to validate this with their own due diligence. We continue to show our commitment to return capital to shareholders.

In the first quarter, we were active with our repurchase program and continued with our quarterly dividend. As we noted in February, our Board will increase Iridium’s dividend starting with our June payment. This will result in a dividend increase that is equivalent to about 6% in 2024. These programs underscore our confidence in Iridium’s continued business growth and the strength of our enterprise to generate free cash flow. I would be remiss not to touch on Iridium’s stock price and the market’s current assessment of our equity valuation. While Iridium is a satellite service provider, we don’t operate or look like anyone else in the satellite industry. I would go so far to say that this group is not who we should be compared to for valuation purposes.

Other satellite operators have continued to see competition grow and seen their fundamentals deteriorate. With perhaps one or two exceptions, they don’t generate free cash flow like we do, don’t have growing service revenue and subscribers like we do, and surely none can claim to have the unique network and business profile that we do. We continue to believe that Iridium is more comparable to other companies generating both growth and free cash flow. We encourage investors to look at Iridium’s levered free cash flow to evaluate the strength of our business and assess the relative value of our common shares. When considering measures like free cash flow yield and conversion, we believe that Iridium continues to stack up quite well against the tower sector and data centers, some of which trade at twice our enterprise value to OEBITDA multiple.

We believe our competitive dynamics are also similar to these infrastructure companies and that we occupy a unique business space and have strong visibility to future growth. As such, we believe that the underlying strength and growth of our business should be rewarded with a higher valuation. Perhaps some of the decrease in our valuation comes from the market’s overall concerns for the space industry in general and disruption impacting VSAT players. I would remind you that Iridium faces a very different competitive environment and set of business opportunities than the commodity broadband players in the VSAT industry. In fact, we have been deliberate in avoiding commodity services like VSAT broadband and are focusing on being the L-band safety complement to VSAT and other K-band broadband services.

Our L-band ensures that mariners can operate globally and reliably in the face of weather, where service is unavailable, or in ports, where VSAT services are restricted. And later this year, our companion Iridium Certus broadband terminal will be able to provide the mandated GMDSS function as well. We continue to believe our shares offer a compelling value today based on our fundamentals. We are converting on business opportunities, adding subscribers, growing revenue, and adding new avenues of growth. We remain an active buyer of our shares and continue to believe our equity is an attractive investment for investors looking to outperform the broader industry. As we have previously said, we don’t expect to spend any CapEx on a next-generation satellite constellation through 2030.

We expect that when we do commence spending post-2030, it will ramp slowly as we shouldn’t need to launch satellites until the latter half of the 2030s. As we contrast the amount and profile of spending with our anticipated OEBITDA during the construction period, we expect to generate meaningful levered free cash flow throughout a next-generation constellation build. This will support continued share repurchases and a growing dividend throughout the future construction period. So Iridium has a healthy balance sheet, strong business fundamentals and is positioned well for growth. We see no new competitive developments impacting our outlook or long-term guidance. As we have said during last year’s Investor Day, Iridium expects to have the capacity to return approximately $3 billion to shareholders through 2030.

This represents just about 100% of the company’s equity market value as of this morning. You must admit that’s an extraordinary fact at this time. Everything we see supports our outlook for continued growth and achieving our long-term vision. While the market may not appreciate this at the moment, we expect that to eventually correct as we continue to execute, expand on our unique opportunities of our network and return capital to our shareholders along the way. With that, I’ll turn it over to Tom for a review of our financials. Tom?

Thomas Fitzpatrick: Thanks, Matt, and good morning, everyone. I’d like to start my remarks by summarizing our key financial metrics for the first quarter and providing some color on the trends we’re seeing in our major business lines. Then, I’ll recap the 2024 guidance, which we affirmed this morning, and close with a review of our liquidity position and capital structure. Iridium continued to execute well, delivering another quarter of subscriber growth and strong service revenue expansion. Operational EBITDA was $115 million in the first quarter. This was a 3% increase from last year’s quarter, driven by growth in recurring revenue. On the commercial side of our business, service revenue was up 8% this quarter to $122.1 million.

This increase was broad-based and reflected continued strength in voice and data and IoT as Matt mentioned. Voice and data revenue rose 5% from last year’s comparable quarter to $55 million. The increase was largely driven by subscriber growth as we continue to benefit from strong demand for our push-to-talk services. The one-to-many services push-to-talk has widespread application in organizations that coordinate and respond to dangerous and changing circumstances like first responders, safety organizations, and government entities. Commercial IoT revenue totaled $39.4 million in the first quarter, up 23% from the prior year quarter. It was favorably impacted by a new two-year contract with a large, fast growing partner. This new contract has the effect of materially increasing revenue from this customer in 2024 compared to 2023.

It also results in revenue being recognized approximately equally in each of the four quarters of 2024. In prior years, revenue was recognized as subscriber counts ramped throughout the year and as seasonal usage picked up in the second and third quarters. That will not be the case under the new contract as we have agreed to a more deterministic approach to pricing with this large customer, which creates more certainty for both of us. As a result of this contract change, the quarter’s — this quarter’s revenue growth will compare most favorably to our lowest prior year revenue quarter, and future quarters will show somewhat lower year-over-year growth in this quarter. Given the certainty of these contractual revenues and with positive developments across a broad range of other IoT customer segments, including personal communications, heavy equipment OEMs, fleet management and aviation, we expect full year IoT revenue to exceed the 13% growth rate experienced in 2022 and 2023.

Accordingly, we are guiding IoT revenue growth in the mid-teens in 2024. IoT is a central plank in Iridium’s billion-dollar service revenue target for 2030. Developments in 2024 in IoT bolster our confidence in achieving this long-term target. Revenue in commercial broadband grew 2% from the year ago period, $13.7 million. As we have previously noted, we are seeing the effect of commodity broadband pricing in a limited portion of our broadband business. We expect this impact to be short-lived and expect growth in broadband in 2025 to improve from 2024, as we are routinely used as a backup to VSAT and all K-band players. This impact was anticipated in our $1 billion service revenue target for 2030. I would point out that while broadband was not one of our five central planks identified for growth in our September 2023 Investor Day, we do expect respectable growth in this area over the period.

During the quarter, we added 54,000 net new commercial subscribers. Commercial IoT data subscribers now represent 81% of billable commercial subscribers, up from 79% in the year ago period. We estimate that consumer-oriented plans now account for more than 930,000 of our 1.8 million commercial IoT users. Hosting and other data services revenue was $14 million this quarter, down 7% from last year’s comparable quarter. As we outlined during our last call, we increased the estimated useful life of our satellites by an additional five years based upon the health of these assets. This extension of the satellite’s useful life extends the time over which we recognize revenue from our fixed price hosting contracts. It’s important for me to reiterate that this accounting update does not affect our cash flow.

Government service revenue was stable in the first quarter at $26.5 million, reflecting the terms of our EMSS contract with the U.S. government. Subscriber equipment, which is coming off two years of record sales driven by partner supply chain stock-up related to the pandemic, is now returning to more normalized levels. We sold $24.9 million in hardware in the first quarter and continue to expect equipment sales this year will be more in line with historical levels. Engineering and support revenue was $30.4 million in the first quarter as compared to $24.2 million in the prior year period. The increase reflects growing activity related to our government work for the Space Development Agency, a contract that we won in 2022. We continue to forecast year-over-year growth in engineering revenue in 2024, and again expect growth in 2025, based upon an increase in the scope of work and new business opportunities with the SDA.

Our first quarter results as well as the trends we are seeing into April allow us to affirm our full year guidance on service revenue and EBITDA. In support of this outlook, I want to highlight a few items that may be relevant to your models. We remain comfortable with our outlook for service revenue growth between 4% and 6% in 2024. This equates to a 5% to 7% range without the accounting update related to our satellites. The Satelles acquisition, which we completed earlier this month is accretive to our previous revenue guidance for service revenue growth of between 4% and 6%. However, we expect the effect to be less than 100 basis points in 2024. So we are reiterating our previous guidance this morning, but now see ourselves higher in the stated range after giving effect to the acquisition.

Commercial voice and IoT data continue to enjoy strong momentum and drive much of Iridium service revenue growth in 2024. Revenue from our U.S. Government EMSS contract will remain steady at $26.5 million per quarter in the first half of 2024 and will rise with a contractual step-up in September. Full year revenue in the government business will be $106.3 million in 2024. Equipment sales will moderate this year with revenue expected to revert to pre-pandemic levels as the channel absorbs safety stock it accumulated during the pandemic. On the expense side of the ledger, SG&A is expected to remain stable in 2024, while R&D spending will nudge up about $5 million to support our Stardust initiative on NB-IoT and direct-to-device. Depreciation and amortization will decrease by about $83 million in 2024.

This is entirely related to the change of satellite useful life, which I touched upon earlier. Iridium expects cash taxes of less than $10 million in 2024. This minimal level incorporates additional R&D credits we expect to realize through ’26. Taken together, these trends allow us to reiterate our forecast for service revenue growth between 4% and 6%, an operational EBITDA between $460 million and $470 million this year. We feel very good about the momentum we’re seeing across our businesses. Moving to our capital position, as of March 31, Iridium had a cash and cash equivalents balance of $174 million. Iridium received cash of approximately $125 million as a result of an increase in the term loan, which was used to fund the Satelles acquisition in early April.

You’ll see the full impact on our cash balance of this transaction when we report on our second quarter results. Term Loan B tack-on funding was completed at an OID of 99 and 7As (ph) and with the same terms as Iridium’s existing facility. We’re very happy with these terms and appreciate the confidence the debt community continues to show in Iridium. As of March 31, Iridium’s term loan balance increased to $1.62 billion to reflect this new funding. When we report out our second quarter results, you’ll see the full impact of this transaction on our balance sheet, which will have the effect of increasing Iridium’s net leverage to approximately 3.4 times of EBITDA. As we’ve said previously, we think Iridium naturally delevers over time and expect net leverage to fall below 2.5 times OEBITDA as we exit 2026 and be below 2 times of EBITDA by the end of the decade.

This outlook gives effect to our planned dividend program and all share buybacks authorized by our board. In the first quarter of 2024, Iridium retired approximately 1.8 million shares of common stock at an average price of $30.41. This left us with an outstanding balance of $277.4 million under our Board approved authorization through December 31, 2025. During the first quarter, we also made a quarterly dividend payment of $0.13 per share paid on March 28. Beginning in the second quarter of 2024, Iridium’s Board will increase Iridium’s quarterly dividend to $0.14 per share, representing an increase of approximately 6% over the full year 2023. This reflects our confidence in the company’s business opportunities and prospects for continued strong free cash flow generation.

Capital expenditures in the first quarter were $14.6 million. As we noted on our fourth quarter call in February, we expect capital expenditures to average $60 million annually through 2030. CapEx will be over $60 million in the next couple of years as we invest in new product development initiatives like Project Stardust and then trend below $60 million in the latter part of the decade. Turning to our pro forma free cash flow. If we use the midpoint of our 2024 EBITDA guidance and back off $84 million in net interest pro forma for our current debt structure, approximately $69 million in CapEx for this year, $5 million in cash taxes and $6 million in working capital inclusive of the appropriate hosted payload adjustment, we’re projecting pro forma free cash flow of approximately $301 million for 2024.

These metrics would represent a conversion rate of EBITDA to free cash flow of 65% in 2024, and a yield of approximately 10%. A more detailed description of these cash flow metrics, along with a reconciliation to GAAP measures is available in a supplemental presentation under events on our Investor Relations website. In general, we’re happy with the performance of our business and believe that Iridium continues to make solid progress on the long-term growth initiative it laid out at the 2023 Investor Day. I also want to echo Matt’s comments on our equity valuation. Iridium stands in stark contrast to the other satellite companies and occupies a truly differentiated position. We will generate approximately $300 million in free cash flow in 2024, and it will grow from here.

We should not be compared to other satellite companies, who face direct competitive challenges and many of whom don’t even generate positive free cash flow. With that, I’ll turn things back to the operator and look forward to your questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Ric Prentiss with Raymond James. Please go ahead.

Ric Prentiss: Thanks. Good morning, everyone.

Matthew Desch: Good morning, Ric.

Thomas Fitzpatrick: Good morning, Ric.

Ric Prentiss: Hey. Appreciate the competitive landscape picture and all the details found on your part. I do want to hit on the Satelles side. So it sounds like service revenue can move to the high end, but Satelles helps with that, but less than 100 basis points. How should we think on the cost side? I think Matt, you mentioned 70 people coming in. Where are those — how much of the cost of Satelles coming in and kind of what line items should we think that’s coming into?

Matthew Desch: Yeah. I think mostly in SG&A, wouldn’t it? Yeah. In SG&A and probably disproportionately, exactly as you would see it add to our overall total.

Ric Prentiss: Okay. And IoT, appreciate the color on that large contract, two year contract, I think, I heard you say flattish effect, kind of, I guess ARPUs versus the seasonality. What should we think of in ’25 on that two year contract and what’s the risk that it falls off after that, then?

Matthew Desch: What — the risk at what falls off Ric?

Ric Prentiss: You said it was a two year contract. So is that like a benefit and then those subs and revenues drop off or maybe give us a little more color on?

Matthew Desch: We think that’s a growing customer. They just happen to sign a two year contract, but that’s a grower for a long time in our view.

Ric Prentiss: Okay. And you said the revenue recognition is different this time around with this particular customer and that there’ll be future quarters would be lower year-over-year percent increases versus what we saw in 1Q. Just trying to think of how should we be thinking about what that means throughout ’24 and what it means for ’25 on the initial two year contract then?

Matthew Desch: Right. So I think we’re sitting on a 23% growth in the first quarter. What we’re saying is future quarters, the next three quarters is not going to be that. It’s going to be down, but you should model mid-teens growth on the full year for IoT.

Ric Prentiss: Got you. Okay. And the final one for me. Obviously, you both touched on which we agree with the stock price looks very compelling. The stock buyback in the quarter was $57 million or so. What would allow you to ramp that higher? Obviously, you’re keeping leverage in balance. You have the Satelles acquisition. But why not go heavier at the stock buyback program since you see such compelling value there?

Matthew Desch: Yeah. I would say, we agree with you. It could go higher.

Ric Prentiss: Was there anything that kept it muted in the first quarter or anything external we should think about that might have governed it?

Matthew Desch: There’s constraints in terms of windows and that sort of thing. And as you saw, we took the leverage up for Satelles. There were some investors thought that we would maybe back off of the share buybacks. There was no chance we were doing that. So we took the leverage up for Satelles. And we’re — we think that the share price right now is a really compelling buy, so stay tuned.

Ric Prentiss: Message understood. All right. Thanks, guys.

Operator: Thank you. And our next question today comes from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery: Great. Thank you very much. Good morning. Matt, you talked about the Satelles being your first deal here. I know you’ve been very disciplined over the years and you’ve laid out the benefits that gives you. So perhaps just a little bit more context about what got you over the hump here in terms of deciding with the Board that this was the right thing to do and should we think that this might be the start of a more active deal environment for you? And I know it’s only been a couple of weeks here, but I presume bringing Satelles into the broader organization open up — opens up a lot of other conversations. So it’d be just great to hear what the early impact has been with your customers, etc., and your ability to leverage this and take it to another level?

Matthew Desch: Yeah. Good question, Simon. So I would say, we’ve always been interested in potential acquisitions, but there haven’t been many compelling ones out there in our space that really fit our model, didn’t really want to change our business model. Obviously, we knew Satelles very well. We were part owner. I really feel personally responsible for having helped create the business, going back almost 15 years, and helping spin it out the technology out of Boeing and sort of nurturing the business along. They’ve actually done quite well. We were excited to see the space was — well, I’m not excited to see the space growing. And that means that GPS jamming and spoofing and all kinds of other issues are growing quite dramatically.

But we saw the recognition of those problems were expanding around the world. And Satelles was being well recognized for that, was being successful, and was sort of at a turning point in their business. And I think they recognized that as well because they had their Board approve the consideration of selling themselves. And, in fact, it opened up a process. So they were thinking with that additional growth that they might find a partnership, say, with another government contractor, another place that might expand them. And I certainly wasn’t against that, because whoever bought them would be a partner of ours. But immediately started thinking, why are we not the one that really should be the right owner of this? This is a good time for us to jump into this segment.

It doesn’t change our business model. It doesn’t put us in competition with our partners. It really has a chance of creating other synergies across our business. And I would say that, that has been absolutely the conversation we’ve been having over the last couple of weeks. One limitation they had is that they were very limited in terms of what — where they could lay the signal down around the world and the applications that they could pursue because they didn’t want to pay too much money to us in terms of that signal. Well, we’re not limited in that way. We can expand into things like maritime and aviation, which require the signal to be placed across the big part of the world. They viewed those applications out, five, six, seven years as sort of organic growth opportunities, where we look at those as more near-term opportunities that we can pursue right away because we have the ability to broadcast that signal anywhere we want to.

So there’s been a lot of synergy discussions already, a lot of things we hadn’t even considered before. I will tell you the customer — their customer base was thrilled to hear that we were the acquirer. I gave them even more confidence about them as a supplier in the market segments they were pursuing, so it’s been really a win-win. And we’re really quite excited about the potential for that business.

Simon Flannery: Right. Good to hear. And maybe just one follow-up. I appreciate the color on the next constellation and really the spend being pushed out into the latter part of the 2030s. That would seem to suggest that 2.0 on leverage is pretty conservative if you’re not going to have a big step up in CapEx in the early part of that decade. Is — so has something changed there or why do you need to be there if you’re not necessarily going to need that capacity for three, five years later?

Matthew Desch: I think, when you give guidance eight years out in the future, it’s really just model-based at that point. I mean, I don’t disagree that if we were still trading at this level, out later on in the decade that would be a crazy multiple to be keeping at, so — because there’s many other things we could be doing with that instead. So I just think that that’s the right kind of model right now for the future, and we’ll revisit that as we go out in the future. But, I mean, like I said, I think the more important part is showing — continuing to show investors that this growth rate that we’ve experienced over all these years is going to continue. I think we’ve given lots of reasons why that should continue and why we believe our projections are appropriate, and we’ll let the rest of it take care of itself.

Simon Flannery: Great. Thanks. Makes sense.

Matthew Desch: Thanks, Simon.

Operator: Thank you. And our next question comes from Walter Piecyk with LightShed. Please go ahead.

Walter Piecyk: Thanks. Tom, I think in the prepared remarks, you said the free cash flow guidance is $301 million last quarter and the supplemental is $309 million. I assume the difference, or it looks like the difference, obviously, is the $8 million for added interest expense for Satelles.

Thomas Fitzpatrick: That’s right.

Walter Piecyk: Which seems a little high, I think, relative to the amount, but whatever, that’s $8 million. So that just imply that Satelles adds — it’s basically a breakeven EBITDA business, or how do we think about that consensus?

Thomas Fitzpatrick: Said that — we said it’s breakeven.

Walter Piecyk: Got it. And then by year whatever, three, four, what’s the expectation in terms of EBITDA contribution specifically for Satelles? How do you expect that to ramp in the upcoming years to get to the — get to your longer-term targets?

Thomas Fitzpatrick: Our guide on Satelles is, it was $5 million in service revenues in 2023. We see it as $100 million in 2030 and EBITDA margins in that business are going to be as good or better than ours.

Walter Piecyk: All right. And then on Stardust spending $5 million on it this year, is that early stage spending? Does that go up in subsequent years and what are the decision factors? Well, I guess two-part question on this. Are there other applications other than direct-to-device that the Stardust investment enables? And if not, what are the decision factors in the upcoming quarters or years? If you see major manufacturers kind of go a different direction in terms of the connectivity that they want to implement in their devices, cell phone manufacturer that is.

Matthew Desch: So the — Stardust is really a — there’s some additional capital required in there as well as far as some standardized boxes and gateways and things like that, that perhaps we don’t have, that we’ll be purchasing, but most of it is development into our network itself. We don’t have to develop the end user device because that’s being done by the standards community and by chip manufacturers and we’re having those discussions today. But it’s really because we have a very flexible, software-defined network. Most of it is reconfiguring our network over time. So don’t expect that the investment’s going to dramatically increase from where we’re at this year. It’s a couple-year investment in capital and R&D, and will enable us to do not just direct-to-device, I mean, when we say that word, I think the bigger opportunity really for us is narrowband IoT.

It’s an expansion of the opportunities that we have in the IoT space. That is a more direct play, where our partners are excited about being able to offer standardized devices that really are very low cost and roam flexibly onto the terrestrial networks or roam from the terrestrial networks to space. And I would say that’s the biggest part of the opportunity. We also are having a lot of discussions about that technology being put into the chipsets that are going into phones and other consumer devices and would expect that that could be an opportunity in complement to other technologies because we’ll be a global L-band capability that can be in every country where at least right now it looks like most D2D technologies are quite regional, limited by sort of spectrum and regulatory issues and other things right now that a global capability that can do sort of a messaging and emergency services on a global basis could be very complementary to that service.

So that’s a pretty broad-based opportunity set that we’re looking at with Stardust, and certainly justifies why we’re investing in it.

Walter Piecyk: Got it. And I think I might have missed this when I think Ric might have asked this question. So I apologize if this is the second time. But on the IoT contract, was there a timeline on that contract? Thomas, it sounded like from your comments — it sounded like a one-year deal. But is this like, does it auto-renew? Is it more than one year? Can you just give a little bit more color on, I guess, the terms? And I guess, more importantly, obviously, it doesn’t show up in units, but it’s showing up in revenue, like, just functionally, what — how is this — can you just give us a little bit more color on the customer, I guess, and the length — potential length of the contract?

Matthew Desch: I’ll take it. Tom, you can too. But I would just say this is a longstanding customer, who has been a big user of our services and expects to do that in the long term in the future. And they wanted more — they want more consistency, sort of in the expectations they had. So we struck a two-year deal with them, which we’ve given good guidance about. Don’t expect that to end because they’re going to continue well out in the future. But we felt that would be a good place to start. And so we struck a two-year deal, which was sort of a win-win for both of us and have provided you the effects of what that looks like in our business this year and what it could be.

Walter Piecyk: When you say consistency, are you talking like dedicated? What does that mean? Is that dedicated bandwidth or what exactly are they getting?

Matthew Desch: A more view of exactly what kind of revenues — what kind of costs that they would be spending on their service revenue over time because we have enough experience with each other to know how they’re using our network and what — and so we were able to kind of, instead of going device-by-device and service-by-service, we could kind of spread that over time in a more consistent way, both for them and gave us more consistency as well, to know what our expectations were looking like going out in the future.

Walter Piecyk: It sounds like a tower master lease agreement as opposed to what, basically charging them on a per unit basis, an overall usage-based contract.

Matthew Desch: Yeah. I don’t disagree. That’s not a bad reference somehow.

Walter Piecyk: Okay. Thank you.

Matthew Desch: Yeah. Thanks, Walt.

Operator: And our next question today comes from Chris Quilty with Quilty Space. Please go ahead.

Chris Quilty: All right. The horse is not quite dead. One final hit on it. Is it fair to assume, like, I had been modeling kind of mid-single digit decline in commercial IoT subs or IoT ARPUs for this year? Q1 turned out to be your first increase since I went back and looked at the first quarter of 2012. Like, we’re not expecting the ARPUs for IoT to be up this year. They’re still down. You don’t have to confirm mid-single digit, but the long-term trend still holds because the personal communications is still sort of dragging down overall ARPU?

Thomas Fitzpatrick: You have that right. You have that right.

Chris Quilty: Okay.

Thomas Fitzpatrick: So think about the picture this way. I think on the full year, this year, they’re not going to — they will not follow trend. They’re going to be better than that. I’d call it flattish on the full year. They’re up in the first quarter, but looks like flattish. So that’s atypical and that’s this contract. But the longer-term kind of effects are two, right, it’s the personal communications is outweighing the sub-growth by long shot, that’s lower ARPU. So that’s going to cause the ARPUs to trend down, kind of offsetting that is new functionality with higher data speeds, right, that will cause higher ARPUS within personal communications. So that will serve to temper what should continue to be a downward sloping line in terms of ARPUs.

Chris Quilty: Got you.

Matthew Desch: But I would say longer term, Chris, I mean, there’s another effect as we get into the narrowband IoT space, which could be lower ARPUs as we expand into new applications. But then there would be much bigger volumes and stuff as well to kind of counteract that. So it’s hard to exactly say where this is going to go, but certainly, it’s positive.