Iridium Communications Inc. (IRDM) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iridium Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Kunszabo, Head of Investor Relations. You may begin, sir.

Good morning, and thanks for joining us. I'd like to welcome you to our second quarter 2012 earnings call. Joining me on the call this morning our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 2012 second 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 this morning 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 the 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 expectations or views change. During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release and the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, let me turn things over to Matt.

Thanks, Steve, and good morning, everyone. Thanks for joining us. This morning, we announced second quarter numbers, which is our 10th earnings report since going public in late 2009, and it's probably the first time we haven't lived up to or exceeded expectations as we lowered our service revenue and operational EBITDA outlook for 2012, and I'm obviously disappointed about that. However, I don't think you'll find this to be a trend. We remain very positive about our overall competitive position with the help of our current network and the progress we're making in replacing that with Iridium NEXT and our new hosted payload business and many other factors that give us confidence in our long-term growth path. I'll first address why we fell short this quarter, which was primarily due to further weakness in our legacy government handset business before taking you through the strategic elements that will underscore our growth in 2013 and beyond. Let me be clear here. While we may have lowered our short-term expectations, I really like our long-term prospects. Tom will then run through the results in our revised financial guidance. So to the government business. We've seen a higher number of deactivations by our traditional government handset customers largely due to reduced troop levels in the conflict areas. While we can't directly address its impact until we renew our long-term contract with the Department of Defense next year, we're confident that the strategic nature of our relationship with this anchored customer hasn't changed. They continue to spend with us on new product developments in a multiyear modernization plan for their dedicated gateway. And the feedback from senior, civilian and military leadership continues to be constructive about our long-term partnership. On another issue, I think we found we can do a better job managing our supply chain. While we believe that last quarter's Iridium recall was an isolated incident, we've intensified our focus in this area. We've diversified the manufacturing line for M2M device production, scrutinized supplier relationships and examined internal processes to improve efficiency. We're making some key improvements in this area because although our equipment revenue in the first half of 2012 was on track, we could have done even better in meeting what we're seeing as growing commercial demand. Now if I step back and really take a complete top-down view of the business, we're in pretty good shape, especially on the commercial side but really, on the government side as well. It starts, of course, with a differentiated and very capable network. Our network is our greatest asset. Everything else we do comes from this sustainable competitive advantage. It impacts which markets we're successful in today, which markets we can enter tomorrow and ultimately, the quality of our revenue profile. When you compare Iridium to the rest of the mobile satellite services space, no one else serves the breadth of business areas and vertical markets that we do, and no one else offers the same robust suite of products. So we're always focused on building upon the power of our most important asset, our unique satellite network. Thanks to its resilience and flexibility, that network continues to perform very well. Tom's going to have some additional information on this in his comments, but voice and data traffic performance statistics remain strong, and we've recently begun implementing some innovative capabilities, such as co-locating the satellites and orbit to further enhance the customer experience. This capability of co-locating satellite was developed by my technical team and the outstanding operations team we work with at Boeing. It gives us more flexibility in how we manage our network, with 67 satellites rather than 56 now part of the operational constellation. It's not only a smart way to use our spare satellites but also gives us greater confidence that we can continue to provide a high level of service. We're also planning to implement this co-location approach when bringing Iridium NEXT satellite into the network, ensuring a smooth transition for our customers as the new system is brought online. Speaking of Iridium NEXT, we're nearing the halfway point of our 5-year build. We expect to complete the Critical Design Review by early next year, for which many of the component CDRs are underway this summer. And Thales Alenia Space and the rest of the Iridium NEXT mission team have already built a number of engineering models and prototypes to verify performance of the key elements. We've also begun to replace earth terminals for both gateways and are upgrading our telemetry facilities around the world, all of which keeps us on track for first launch in early 2015. I'd also like to take a minute here to applaud SpaceX on another successful launch of their Falcon 9 rocket in May, and the pivotal role our launch services team played at selecting them in the early days of the primary delivery platform for our Iridium NEXT satellites. We're partnered with one of the most transformational companies in the space industry at a relatively low cost because we had the experience and foresight to bet on them early. You may have noted in our SEC filing last night that we recently amended our contract with SpaceX to further enhance our launch strategy. They're now providing us with 7 launches of 10 satellites in each launch, rather than the previous 8 launches of 9 satellites in each launch. This is all thanks to the greater lift capability being demonstrated by the Falcon 9 system. Perhaps most importantly, it fits nice with our plan now to exercise our option for our first launch with our supplemental launch services provider, ISC Kosmotras, on their proven Dnepr rocket. This flexibility allows us to send up just 2 satellites in our first launch, which gives us the ability to thoroughly test the operation of our Iridium NEXT system before raising the bulk of the constellation with SpaceX and subsequent launches. This new launch strategy still adds up to the 72 satellites we've always planned for, with the first 2 being on the Dnepr rocket in early 2015 and the remaining 70 on SpaceX's Falcon 9 platforms starting in mid-2015. It's a smarter strategy for in-orbit testing and provides us some additional cost savings. It also gives SpaceX a little more time to get through the 2, 000 or so launches that are on their manifest before Iridium NEXT. So what's next after a great network? As I've said earlier it really defines how you go to market. With that in mind, the next 2 elements of our growth profile go hand-in-hand. We compete in 5 attractive and fast-growing business lines, and we do it through a partner ecosystem that innovates around our products and extends our regional low-cost way. Let me start with a partner channel as I can't emphasize enough how important it is to our business. By going to market with over 275 partners, we benefit from a wholesale distribution model that keeps our cost down and magnifies our operating leverage. In addition, our partners don't just resell our products. In fact, most of our partners innovate around our core technology by adding hardware and software to bring a specialized solution to the end customer. This is particularly really true in the M2M sector where, for example, the requirements of an energy industry customer may be very different from a transportation company subscriber. As for our core markets and leadership position, consider the following attributes: favorable competitive dynamics with high barriers to entry; limited competition as most segments have just 1 or 2 players; 3 of our 5 key business lines are expected to have double-digit growth rates over the next several years; a #1 or #2 position depending upon the market, with network leadership providing distinct advantages and coverage, mobility, security and device size. Now we'll review the foundation of our long-term profile. I'll spend a few minutes on the growth areas. Let's start with Aireon, our recently announced global aviation monitoring venture. This is a new business that's not yet in our numbers. Not only is this expected to provide us with approximately $200 million in onetime hosting fees between 2014 and 2017, but we believe there'll be a significant and incremental recurring service revenue associated with the long-term data contract. And that's for at least the life of the new constellation to about 2030. In addition, we believe there are significant value in being a key owner of an enterprise that offers a critical service to the world's air traffic control agencies. What's best about this opportunity is that no other satellite or terrestrial provider can beat the technology platform for this business. It's a uniquely Iridium venture. And I'll note that we've had very positive feedback on Aireon on our hosted payload strategy since we went public with it on June 19. We're also encouraged by the progress Harris, our payload development partner, has made in accommodating potential payloads that would fit into and be complementary to the core Aireon aircraft monitoring system. We expect to make one or more announcements before year end on additional secondary payloads, with a few interesting threshold and space monitoring mission on the list of possibilities we're directly working today. The flexibility of the Harris design for the Aireon payload is actually one of these pleasant surprises we've had since our announcement. It may be pretty straightforward to include one or more additional payloads in the spare card slot they've designed into their platform. In the end, these additional payloads will add to the already $200 million in hosting fees we expect to receive from the Aireon venture while also representing additional ongoing data services revenue. In the M2M business, the coverage, functionality and size of our product, combined with a market that's in its infancy when you consider device penetration, makes it a winner for years to come. We've delivered 5-year compound annual growth rates in excess of 50% for subscribers in revenue and forecast double-digit growth rates to at least 2015 for both metrics. Like with all of our markets, our network and partner channel are key differentiators. Customers want small devices and low latency, which you simply can't accommodate with the Geo network or a bent-pipe architecture, and they want to track their assets all over the world. The U.S. government and commercial industries ranging from heavy industrial equipment to shipping recognize this value. It's one reason our unit service revenue is more than 3x higher than our closest competitor. In short, we expect M2M to be a big source of revenue for our core telecom business during the coming years. As for the maritime market, there are several reasons to be confident about our core Tier 2. We grew Iridium OpenPort subscribers 31% and revenue 21% during the last year and as we shared before, this leg of our sales now represent 10% of our commercial service revenue. These strong metrics have come from several factors that we believe will continue to benefit us. First, we've established a strong installed base in the historically price-sensitive crude communications market. More recently, we partnered with VSAT companies at the high-end of the maritime sector to provide a complete communications solution for ships business. Lastly, we fortified our already strong partner relationships by staying away from developing a competitive, direct distribution channel. Overall, we believe this has increased our addressable market by a couple thousand vessels while also building inroads with commercial shipping and fishing customers, some of whom are deploying 50 or more Iridium Pilot units at a time across their fleets. With an expected market growth rate of 13% through 2015 based upon industry analysts' estimates, coupled with our expanding position as the low-cost value provider, we expect to double the revenue of our maritime broadband service over the next 3 years. One often overlooked growth area in our business that I want to draw attention to is the aviation market. It has the same good growth characteristics as maritime, but there are a few important differences. In some ways, we have even better competitive dynamics in aviation that we do in maritime. Our systems are smaller and far less expensive than the alternatives. And a truly global service is important to long-haul aircraft that fly over the oceans and poles. In addition, our FAA authorization for safety services bolsters our presence in this sector and will probably be our single biggest catalyst for growth in this space going forward. In fact, one of our partners recently signed a deal with a major aircraft manufacturer to outfit its workforce commercial aircraft model with a communication package based upon our Iridium Core 9523 voice and Iridium 9602 M2M devices. These units should generate hundreds of dollars in ARPU, and aviation safety services are expecting to bring us between $5 million and $10 million in incremental service revenues in a few years. And moving now to the handset market where we're winning with an established and defensible position as the market leader with the most complete product set in the industry. Our strategy includes the only one of its kind encrypted phone for secure use by government subscribers, full-featured commercial handsets that can also connect to your laptop and smartphone, as well as a number of accessories and applications. We've also deployed a push-to-talk handheld pocket radio, which has been adopted by the most demanding military users. All in all, we see consistent subscriber and revenue growth rates and a commercial voice ARPU that should firm up as we look ahead. Now that I've laid out the key drivers we'll see in our core markets, let me turn to the new products we're working on that supplement this growth. At the top of the list, our netted services in both commercial and government businesses. We've already begun validating global push-to-talk capabilities with investment and support from the U.S. government and expect that they'll be first to feel the service in 2013 and 2014. From there, we'll leverage the product into a commercial push-to-talk solution, which we think will be implemented by first responders, construction crews, oil and gas workers and many other industries where work teams in remote areas don't have access to terrestrial wireless networks. So in wrapping up with my thoughts, I hope you share my confidence in our long-term growth profile. It's easy to make a strong case when you start with a superior network and a great partner channel. These differentiators support our growth in attractive, fast-growing markets and allow us to develop new product that capture additional revenue streams, all of which leads to consistent operating cash flow growth and strong returns. So with that, I'll turn it over to Tom for a more detailed financial review.

Thanks, Matt, and good morning, everyone. We've reported second quarter 2012 results that showed ongoing expansion in our commercial franchise while also highlighting greater-than-expected weakness in the government voice business. Consequently, we reduced our service revenue growth rate for 2012 to approximately 6% and now forecast that our operational EBITDA will be between $205 million and $210 million. I'll first focus on our results, and then take you to a more detailed view of our updated 2012 and long-range outlook. Iridium recorded second quarter total revenue of $97.3 million and operational EBITDA of $52 million, yielding growth of 1% and 7% respectively from last year's comparable period. Our operational EBITDA margin was 53% for the second quarter, which was an expansion from 51% in the year ago period. It's worth noting that we're nearing striking distance of the approximately 60% operational EBITDA margin we anticipate reaching by 2015. This not only speaks to the operating leverage of our business but to the room we have for margin expansion when you consider that our more mature satellite peers have EBITDA margins in the high 70% range. There's no structural or competitive reason we won't achieve similar margins over the long term. Second quarter net income was $17.7 million. This represents 51% growth over the $11.7 million we posted for the year ago quarter. Second quarter net income benefited from a $6.6 million reduction in depreciation expense due to an extension in the estimated useful life of our current satellite constellation. We consider many factors under Generally Accepted Accounting Principles when evaluating the appropriate depreciable life of our network and place considerable emphasis on the periodic assessment provided to our Coface lenders by their aerospace consultant. During the second quarter, this consultant materially increased their estimate of the remaining useful life of the constellation due to its good health and expected resilience. This reduced level of depreciation expense in the second quarter will recur in future quarters through 2014. From an operating viewpoint, we reported Commercial Service revenue of $52.9 million in the second quarter, representing 8% growth over last year. We added 32,000 net commercial customers during the quarter, a 23% year-over-year increase in subscriber additions. We had a total of 528,000 billable subscribers, with approximately 19,000 of these net additions coming from the M2M business and 13,000 from the voice market. Commercial M2M data subscribers now represent 38% of billable commercial subscribers, an increase from 32% during the year ago period. Being bullish about our long-term growth trajectory really starts with the diversity of our revenue in the commercial business, and it's not just a nice spread we have among some of the fastest-growing markets namely M2M, maritime and aviation. We're also heartened by the mix of voice and data when you consider total service revenue. At 58% voice and 42% data, it mirrors the breakdown at leading terrestrial wireless peers, with the data component moving rapidly higher. In addition to core market strength, Matt also discussed netted services being at the top of the list in terms of new product contribution. Let me add a few items to that list. We see GPS augmentation and global data broadcast services also having great promise. IGPS and Boeing timing and location technology, or BTL, will improve the accuracy, reach and security of current location-based services used by the government and industry. Global data broadcast, a new product we expect to introduce next year, would establish the capability to quickly and simultaneously deliver data to a wide audience and subscribers. Turning now to our government service business. During the first quarter, we recorded government service revenue of $15.6 million, down 3% from last year's comparable period. We lost 1,000 government voice customers but grew M2M data subscribers 20% over last year. We ended the period with a total of 48,000 billable subscribers, with M2M data subscribers now accounting for 25% of the installed base. As in the commercial sector, our revenue diversity has improved dramatically here too. Years ago, we were entirely dependent on adding traditional handsets with the Department of Defense whereas today, we're also selling tactical push-to-talk radios and customized M2M products. These newer products are growing at a nice rate, but we just haven't reached the point where their growth offsets the current decline in our highest ARPU voice subscribers and the disproportionate impact these handset losses have on service revenue. With our Netted and M2M services expected to make a bigger impact over time, the most important thing we can do to stem this slowdown is negotiate a favorable contract with the Department of Defense in 2013. We look forward to working with them on a new, long-term agreement when the current one expires next year that not only gives us -- not only gives them more value as they expand their business with us but provides us with a path to renew growth. Focusing next on equipment, which produced revenue of $23.9 million, a 9% year-over-year increase, resulting primarily from solid Iridium Extreme and M2M sales volumes. Specifically, we booked a 70% gain in M2M unit sales, showing a continued strong uptick of our device in a market that is expected to be one of the most significant contributors to our future revenue growth. Moving now to our financial and operating outlook for 2012. As I noted at the start, we now expect operational EBITDA between $205 million and $210 million for the full year 2012. While below our historical average, it still represents a solid 9% growth rate at the midpoint of our guidance range when compared to the $190 million we achieved in 2011. On the same basis for the full year 2012, we're projecting the following: total billable subscriber growth between 20% and 25%, which didn't change from our previous estimate, and total service revenue growth were approximately 6%. This is down from a range of 8% to 11%, primarily reflecting the reductions in our legacy government voice business. As for our long-range guidance, we're revising our service revenue projection and affirming the other financial targets we gave during our Fourth Quarter Earnings Conference Call back in March, more specifically, average service revenue growth between 8% and 12% per year between 2013 and 2015. In light of our revised 2012 guidance, this higher range still makes sense when you consider the solid growth we expect in our core commercial markets, the contribution from new products, the positive impact from affirming commercial voice ARPU and a new contract with the U.S. government. I'd add that we expect 2013 will look better than 2012 and be within our long-range view. We expect an operational EBITDA margin of approximately 60% in 2015, which again represents the natural operating leverage in our business. We continue to see negligible cash taxes from 2013 to approximately 2020, which is unchanged from our last update. We expect net leverage of approximately 3x at the end of this year and between 4x and 5x at the end of 2015, also unchanged from our last update. We expect the rate of deleveraging that equates to a half to a full multiple of operational EBITDA beginning from 2016. And finally, update on our capital structure and liquidity position. As of the end of the second quarter, we had drawn $568 million from the Coface facility relating to payments we've made to Thales for their successful completion of contractual milestones for Iridium NEXT. We had a cash and cash equivalents balance of approximately $166.7 million. As Matt noted, we also filed an 8-K last night that included several key amendments to our credit facility. Most importantly, the Coface agreement was modified to allow us to establish the Aireon venture to reflect changes in the expected timing of cash flows from hosted payloads and to accommodate the revised agreement with SpaceX. Given these important concessions, we agree to raise capital in the event that our expected $100 million in $7 warrant proceeds doesn't come in when the warrants expire in February of 2013. Specifically, by the end of April 2013, we'll be required to issue convertible preferred for common equity to the extent the amount received from the exercise of the $7 warrant is less than $100 million. In closing, I'd observed that our commercial business is in fine shape. We're recording double-digit, year-over-year growth rates in the M2M, OpenPort and aviation businesses, and we don't expect that to change anytime soon as market dynamics are in our favor. The rich and unique functionality of our network will give us an advantage here for the foreseeable future. We'll successfully defend and grow our beachhead in the handset market with an unmatched product portfolio. And we'll continue to navigate a couple of atypical challenges over the coming months in our government market before we return to something closer to our historical growth trajectory after our contract is renewed next year. With that, I'll turn things back to the operator for the Q&A portion.

[Operator Instructions] Our first question comes from James Breen with William Blair. James D. Breen - William Blair & Company L.L.C., Research Division: Just a couple questions. One, you obviously highlighted the strength you had in the commercial business and a little bit of a step-down in the government side. Can we talk about -- do you expect government to remain at the current level going forward? And then as a part of that, engineering and support services have been coming down over the last couple of quarters. Is that basically tied into and should move in step with the government revenue? And then secondly just, Tom, if you just go through what you just talked about in terms of some of the changes you made to the credit agreement in terms of potentially issuing some convert or preferred stock in the beginning next year, just can you outline for us what the potential dilution would be, or maybe the total number of debt that we have to be issued?

Okay. Do you want to take the...

Well I mean, I can speak to it. We've put the government services in -- it's sort of baked in that, in the new guidance that we've put into. As we said we sort of still see -- we now think we understand more the effect that the downturn in Afghanistan and Iraq and everything are causing in terms of the squeeze on a certain part of the business, but we still see a diversification of business into M2M and Netted and other things here. So overall, it's going to be on this path here for another little while, and that's why we baked that into our projections. But I think we can kind of get that back starting particularly later next year and into 2014, '15 to a more stable course.

Jim, on the engineering and support, no, that is not going to move. And let's just break government apart. The problem is with our legacy voice handset within the government. Our Netted business is growing. Our SBD business is growing as this larger piece of our business with them did decline on the back of handset deactivations. The government continues to spend with us on improvements to their...

The gateway...

To their gateway in Hawaii and we see -- would see increases in that. It's kind of episodic. They pay us for a certain functionality to deliver it, and so we're not calling that engineering support that happens to be down this quarter, but that's because they completed a project, and there's other projects in the queue that will represent additional investment there. So you can't think about government as just down. There's an element of it that is down, and that's our problem this year, but there are other elements of it that continue to grow.

And in fact, there's a considerable investment that has been planned and approved to upgrade that gateway, the NEXT capability. And it really just depends on what we're installing and doing in any -- in a specific quarter that relates to that, as well as some of the R&D that's being spent on some future projects and products that they want to have. Some of those gets slowed down a little bit. And I think they're a little slower than they might have otherwise been, but they're continuing to flow just at a slightly slower rate.

And then so the second question, Jim, about the issuance of capital. So as you know, in our prior filings, we've indicated that the proceeds from the $7 warrants were part of our -- how we thought about our funding plan for NEXT. And so the lenders thought of it the same way, and all this commitment essentially does was make sure that the capital from those warrants will come into the company. If those warrants are not exercised, we essentially have a May call to extend the warrants that will come in. So if it's less than $100 million, we'll have to issue the difference between what does come in, in a $100 million. James D. Breen - William Blair & Company L.L.C., Research Division: Okay. And it's your choice whether it's a convert or preferred stock or straight debt, or is there a certain...

It's the choices between a convert and equity. James D. Breen - William Blair & Company L.L.C., Research Division: Okay. And then just lastly on the revenue trends, it seem like last year, in 2011, a little bit of a slowdown in the second quarter in the commercial business. Is there any seasonality around the commercial business in the second quarter that you generally see?

No, actually, second and third quarter typically are our biggest quarters. Fourth quarter and first quarter are a little slower because of, what we call it, the northern hemisphere effect where a slight bit more of our traffic is in the northern than in the southern hemisphere and it's warmer, and fishing vessels are out in the summer more and people are outside more, et cetera. So there's -- this actually is usually part of our bigger quarters. And I think you'll see, if you go back over several years, including this year, the summer is -- or the summer and fall, if you will, are bigger quarters than the winter.

Our next question comes from Jim McIlree with Dominic and Dominic.

It's Jim McIlree. I'm not sure what name he said. Just wanted to make sure I understand the reduction in the guidance. You're saying it's mostly from government or all from government services?

Substantially all from government. We see our commercial business kind of on track with our historical growth rates.

Okay. And it seems like -- just backing into it, Matt, that you were saying that the government services is going to be, I forget the language you used, kind of like this for the next few quarters. And kind of like this in mind means that this $15 million, $16-ish million revenues for the next few quarters, is that a fair assumption?

Yes, I mean, the way we look at it really is, of course, since we really get paid by the subscriber, and as Tom said, and specifically that one part of the business, the core voice point-to-point handsets, there's going to potentially be a continued leakage I think over the coming quarters in terms of the absolute numbers of those. They're not that big in numbers and are still a substantial business there as we go along. But I think there will just continue to be some pressure over the next year on those numbers as we go forward, which puts pressure on the fact that the other growth areas really aren't quite making up for that yet. They will over time, but they aren't quite yet. So it's pushed our government business down a little bit because as I said, I think that's more of a short-term trend than a long-term trend. We really do see really based on all the activities many of which Tom and I talked about that are going forward as being positive long-term.

Okay. And given the changes that have taken place over the past few months with the hosted announcement to now, and now the government pushout and the change in the launches, et cetera, can you just summarize again that path you have to finance the NEXT constellation?

I'll let Tom reiterate that. I don't know what you meant by pushout in the launches. That's not -- there was no pushout in the launch actually.

Well, excuse me, the changes in the launches.

It's a different strategy that, as I said, just is actually smarter and a little less expensive, frankly, and still delivers 72 satellites over the same time but with less risk. So that really is just sort of a slightly reshuffling. You might say that there might have been a couple of months slip on the first Falcon 9 launch, but that's probably just a -- that's probably a benefit too in some ways, if anything. So we'll still get our first satellites up when we thought we would be, test them out thoroughly, and then still on beyond track to get all the satellites over the 2-year launch window. So -- but in terms of the total profile, it hasn't really changed.

Right. Yes, I mean, as Matt said, I mean, the changes to the SpaceX agreement are nothing but goodness to our -- to how we think about our plan for Iridium NEXT. It derisks our launch strategy. It was a savings, it's a savings to our approximate $3 billion plan. So there's nothing but goodness there. And so, as we said many times, our plan for the funding of NEXT, which is approximately $3 billion, has 3 elements to it. The first element is our $1.8 billion Coface facility. The second element is approximately $200 million to $300 million in hosted payload fees, and which Aireon is $200 million, and others that we're working kind of make up the balance. And finally our operational EBITDA, which on our current guidance is north of $200 million run rate and include that over 8 years of the construction of NEXT, that's what aggregates to our plan.

Our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I wanted to address some of the commercial voice ARPU issues. I think that was probably one of the bigger year-over-year declines you've seen in the voice ARPU in a while. I wanted to get a sense of what you think is driving that. Are there competitive issues with some maritime customers moving to VSAT solutions? Is it your much heralded Inmarsat competitor taking business with the Isatphone, or is it just a change in customer usage patterns moving from postpaid to prepaid that's impacting the near term?

Yes, Chris, it is not price of usage, and it's usage most acutely in our very high users of LBTs for circuit switch data, and they're moving to either OpenPort or to other solutions just because the price for many it is cheaper. And so that's where we see it. That's where it's most acute but just I would say generally a decrease in usage across the board is what the driver is there.

Yes, I agree with Tom. It's more -- these -- we have a number of very high users that were using the LBT in a maritime and aviation perspective that some of those are now moving to OpenPort but at a lower cost per bit, and that's part of the impact, or it's a good size of the impact. I don't think we see it really that much in the handset side of the business. Those sort of stayed pretty stable and really still don't see a lot of impact from any kind of competitive dynamic from anyone really in that case. If anything, we feel like we've strengthened a bit with the broadening portfolio that we have and additional solutions like access points and other things, which will help from that perspective, though our very early days really aren't contributing materially to the ARPU. But down the road, I think it would be helpful. So I really think it's about that really dynamic and primarily, I would say in more like the maritime market or specific applications of an LBT for some high users that are moving to other technologies. And I think those will get recovered over time. Chris Quilty - Raymond James & Associates, Inc., Research Division: M2M, I think you're still aiming to launch the new 9603 sometime in the near term and that launch doesn't seem to have slowed the growth rate in the near term. What are your -- what's your outlook on a go-forward basis for the impact of that product, either with an absolute growth rate or if you can discuss trend lines with new OEM customers?

The device side of the equation, the M2M is a very important piece of it. And so the fact is we're really diversifying our portfolio with the 9603. We're not -- it doesn't replace the 9602 like the 9602 replaced the 9601. It's 70% smaller and -- but it's about the same price. So more than anything else, the 9603 enables some new applications that probably wouldn't possibly have even gone to a satellite M2M solution because the tax on putting a satellite in a solution really is even less with a 9603 than a 9602. So we have both government and commercial customers. Specifically, consumer devices really are excited about the 9603, and while we did launch that in the spring, it's actually only starting to ship now to our initial customers and probably won't get into a lot of products until later this year and on into 2013 but it more broadens the range of applications that we can address as opposed to sort of changing any kind of dynamics. But overall, I mean as you can see our M2M business remains very healthy. We -- I think that there's been some good moves from some traditional players towards us because of the broadening portfolio but also just because of the -- they realized our network advantages and other advantages and I -- we got a lot of plans still in terms of continued development and things that we think will even give us more advantages going forward. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Switching to the government side. Can you give us a sense of where you think the Netted Iridium Phase III progress is, when you'll complete that development process, when you might see new orders for devices? And then more specifically, what you think the structure of the new 5-year contract will look like. Will it be very similar, just different pricing terms, or will this be a radically restructured contract from what you've seen in the past 2 cycles?

Yes to the first part, the Netted, what we call distributed tactical communication system, as the government calls it, you're right. As we've talked about before, we're in sort of a development cycle right now where they're not deploying as many Phase II radios because they're really waiting for the Phase III product to be available. And there is a development process right now. It's a little slower than we like because it's just sort of the R&D continues to flow but not quite at the rates that if we would, it would go faster. So we're sort of feeling that, that's not going to make as much of an impact until later next year. Or certainly 2014 is really when I think you'd see the impact of that. Simultaneously, that development also enables us to put Iridium into other existing tactical radios, either as an add-on or as a way form into those radios. And a lot of those discussions continue to progress and will be -- I think we'll see from parallel activities. So it won't just be our devices going out there. It would be existing devices that might otherwise have another technology and unloading Iridium into their library of technologies. So that's, that. And I think that will play itself out over the next year, 1.5 years. On the contract, I mean, I don't think we want to negotiate in public right now in terms of describing our contract process. So I'd rather not going into detail. Just the details of that, there is -- the current contract is up and so it has to be completed really into the first quarter or so of next year. I think it's in May, I think it is or is it...

March.

It's March. So March. Obviously we'll be talking with them throughout the rest of this year and early into next year. They can extend that 6 months if they want to, though, we've been already working around and actually working with them on what that new contract might look like. And -- but there's still work to be done, and I won't go in details other than we feel very positive about the potential there of what we can do in terms of, as Tom said, bringing more value and really shoring up our growth rate going forward here as we look at that. Chris Quilty - Raymond James & Associates, Inc., Research Division: Well, maybe just a clarification. I think Inmarsat's contract got folded into Fixa [ph]. And is it your understanding that the Iridium contract will still remain at some vehicle?

That's our strategy, yes. I mean that is our expectation.

Our next question comes from Glenn Tongue with T2.

A lot of good news embedded in this. I wanted to touch on the change in the depreciation schedule on the existing constellation, which I guess implies that it's going to be more longer-life than you expected. Is there any way to take advantage of the greater use for life?

If you mean in terms of stretching out the capital program, probably not nor would we want to. I mean, we're really pleased that our constellation is going to be healthy well into NEXT now, and that's been proven. We've always thought that but, frankly, now even external consultants that are independent and paid for by the banks view that in the same way. But the problem is you push out or you delay a big capital program in my experience from having done this a lot, it ends up costing more and has unintended consequences. So you drive and get it done, and the other reason for not doing it would be, we have some exciting new hosted payload businesses we'd like to start generating data service revenues from that would far outweigh any kind of benefit we'd get from it. So I think it's more flexibility, and it's great to have, but it's not something you really kind of take advantage of other than, I would say, depreciation schedules improve.

Well and I guess I'd say what are the risks of the table in terms of the gap between existing constellation and NEXT. In terms of the Aireon business, is there any more color on that you can add as far as what's going on there? Any thoughts of capitalizing that business independently in the relatively near future.

Well there's a number of kind of milestones that we are set to do through this year with our partners. We've got to finalize some of the initial contracts that we have with that, which includes with our first customer for that service, which should be Nav Canada, but a lot of work we're doing right now with the FA and continuing to sort of support the sort of analysis and effort that are going on with them. Fairly, we want to get a little bit further down the road on the technology. And as I said, we're feeling very good about sort of the launch of that and what that platform will be able to do for us. So I don't see anything, what I would call, near term from that perspective, but we're quite bullish about the potential for that business obviously. And as I said, it's only generating even more enthusiasm as now what had been obviously a rumor and discussed it now a lot more clearer as to how we are doing it, who we're doing it with, when it's going to do, what it's going to do. And I hope to be more fulsome in terms of our describing that business in the future as we clear a few of those milestones we want to have.

Our next question comes from Chris King with Stifel, Nicolaus. Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division: I just had one I guess kind of a follow-up to Chris's questions specifically on the voice side of things. It looks like in terms of the guidance that you're laying out that you do expect are going to be a re-acceleration or an acceleration, I guess, of specifically commercial services revenue growth to kind of get to your guidance in the 2013 to 2015 range versus what it is this year. Just was wondering how we should kind of look at that with respect to the voice versus the M2M split. Is that acceleration going to be almost entirely from an M2M standpoint, or do you expect the trends that we saw in the most recent quarter here on the voice side? Do you expect those to materially accelerate as well as you get more kind of OpenPort subscribers into the base and that type of thing?

Right. Chris, so we said that we expect a higher growth rate in our service revenues in 2013 than in 2012. And there are a number of reasons for that expectation. We expect accelerated growth in Netted Iridium within the government sector, given the rollout of our Phase III offering. We expect accelerated growth in SBD within the government sector. In our commercial business, we expect firming ARPU. In 2012, we've been experiencing about $3 year-over-year reduction in ARPU. We don't expect that to continue in 2013 for a number of reasons. We expect accelerated growth in OpenPort in 2013 based on growth we're already seeing in 2012 that will be accretive to ARPU. Similarly, our 2012 introduction of bands of Iridium will yield increased growth in the aviation sector in 2013. ARPUs in this product are approximately $250 and will be accretive to overall commercial voice ARPU. We expect that our prepaid revenue will increase. It will experience increase growth in 2013 and similarly, be accretive to commercial voice ARPU. We expect that more revenues will be recognized in 2013 than in 2012 due in part to a higher number of expiring minutes on prepaid plans in 2013 than in '12, which will trigger for revenue recognition. We also expect that our new product offerings in commercial push-to-talk, global data broadcast and Boeing location services or BTL will contribute modestly to 2013 and materially to 2014 and beyond. Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division: I guess just a quick follow-up then, in terms of the lower postpaid customer usage that you talked about in the press release, do you expect a material change there going forward in terms of the usage patterns for voice?

No, we do not but the changes that I discussed that are accretive to ARPU will dominate that.

[Operator Instructions] Our next question comes from Brian Ruttenbur with CRT Capital.

The main question I have is a question of why or what has driven the credit agreement change? Is that because of the change in the launch strategy? Is that the change in your guidance? What has -- and maybe just explain that a little bit better that triggered the change in the credit agreement.

It wasn't the change in the guidance. The ability to invest money in Aireon was basically the triggering event, and it happened at the same time as the renegotiation of the SpaceX agreement. So those were the 2 drivers.

And by the way, the announcement last night just happened because it was completed yesterday. And it happened to work out that it was the day before our earnings announcement. The 2 aren't really tied together in any way. We've been working on knowing we had to do the credit facility changed because of SpaceX, because of Aireon, frankly, for 6, 9 months anyway. And we've been working with the banks on that change that was always in the plan and had to happen underway for quite a while.

Yes, and the 8-K, we put that out last night just to give investors time to absorb it and be prepared for questions this morning. So it was really just kind of in your interest that we put it out that way.

Okay. The other thing is the change in launch strategy. How much are you going to save? I've heard some -- I haven't heard definitive numbers. Do you have a specific -- we're going to save $50 million or we're going to save x idea on hard numbers?

Yes, it's in the area of $15 million when you consider the reduction in SpaceX and the kind of what we'll pay to Kosmotras for the first 2.

Okay. So with that savings, the way it's going to work is the first launch will be early 2015, and then SpaceX will launch another group of satellites in '15, or is it going to be '16? When will the...

It would be mid-15. So the expectation before was that SpaceX would be our first launch of 9 satellites in, say, the first quarter. Now we're going to launch 2 satellites in that first quarter, test them out a bit more thoroughly and then in summer of 2015, we'll start our launch campaign on the Falcon 9 rocket, launching 10 at a time and literally, that launch campaign we have lunch slots confirmed and really, every quarter or so, quarter or 2, we launched 10 more satellites until it's complete about mid-2015. So it's a 2-year launch campaign of 7 launches over a 2-year spread somewhat evenly over that time. I just want to reiterate. I mean, the $15 million we talked about, this is already probably the most cost-effective launch campaign maybe in history when you think about the per kilogram to lower orbit. The deal we got was an excellent one to begin with. And obviously, we got that because we started very early with SpaceX before they were quite as popular and as cool as they are to everybody today. We knew them when they weren't quite as cool, and we worked with them very closely. And it's a very important campaign that I think we both wanted to be part of, so it was already a great deal. And I think this is just even better and reiterating even more how a great of a program this is going to be.

Our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I just want to circle back on a point that you made earlier on the Boeing launch services. I think this is the first time I've heard you talk -- or not launch, location services. But you haven't talked about that previously in terms of actually having a revenue contribution. Can you just quantify for us, is that the commercial or the government aspect of that GPS enhancement service that they're looking at?

Well specifically since it's probably not many people have been following this, there's 2 different capabilities. And they're not really -- they're not the same in any way. They're actually 2 different technologies, both though are developed in conjunction with Boeing, who really developed the invention, if you will, on both sides. But one is with the government, and it's called iGPS. It's really an anti-jam capability. And there's s a lot of activity continuing to underway it in terms of potential demo this year. And we really do see a value to that, but that still has its own sort of profile. And then the commercial capability, which Boeing created, and I'd say they're loosely related but it's been termed Boeing time and location or BTL. And it's a technology that can go in to commercial devices, that could go into smartphones, go into [indiscernible], we go in to all kinds of interesting things that would enable in-building coverage of in-building sort of navigation or location services in a superior way, and we support both of them. Boeing is really the lead on both of them in terms of sort of the technology. We get air times. There's a lot of other benefit that come out of this and really, I think Tom was sort of mentioning it not because there is a specific revenue stream, but we do see it and there's enough activity on that over the next couple of years that we'll see -- it will start contributing over the next couple of years here. I don't think it's going to be a big adder next year but 2014, 2015, those could add service revenues as we turn on those capabilities in our network over either continents or the whole world. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And a follow-up on the maritime business, which you seem pretty positive on. Can you talk about number of units installed, what you're seeing in ARPU trends and any impact you've seen from Inmarsat's change in pricing strategy.

We didn't call out numbers yet still, but we'll consider doing that here soon again. I'd say this has been a better year than last year, frankly, substantially better, which I think is due to a number of reasons. I mean, one, our Iridium Pilot has been really well received. It's even more capable and bulletproof, if you will, from a perspective than previous model. And I think our service providers really like it a lot. It's been out there only about 6 months or so, but it's really been well received. Inmarsat's helping a lot. There are price changes. They're competing with their customers. They're -- it's been a little confusing obviously what their strategy is, but I think it's confused the market quite a bit. I think they've clearly told the FFS market that they want to compete with them. I say FSS broadly, the VSAT market that has created some relationships and partnerships that we have because we think that's actually the best-in-class relationship between our completely global, low-latency L-Band solution, coupled together with Ku -- our Ka-band kind of technology with the best cost per -- throughput cost per bit. And you're seeing that right now, and we're starting to get into KVH. And a number of other different VSAT players are starting to deploy us along side almost other VSAT. And I think that's going to -- Inmarsat used to be used for that. We're going to be used for that probably more going forward. So the dynamics are good there. ARPUs are -- ARPUs I think they're all over -- coming down slightly there a little bit, but I think that's -- it's more of a mix issue. I mean, we still have very high ARPU users and fishing and some other vessels that are smaller. We have lower ARPU units that are more back up and component. So I think that's going to be -- that's going to move around but overall, the net effect of OpenPort is adding more and more every year to our bottom line. As we said, it's up to 10% now of our service revenues. I think that will continue to expand, but I think it's a really important leg. I know we focus on M2M, but I think Pilot OpenPort is going to be another really important leg as people see. And by the way both in the maritime and in the aviation business as well as we're starting to see it get on to aviation.

I'm not showing any further questions at this time. I'd like to turn the conference back to our host for closing comments.

Well, I appreciate everybody for joining us. We'll see you again next quarter. I think obviously we're glad to take any questions and support after this as usual. But thanks again for joining us.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.