Iridium Communications Inc. (IRDM) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to Iridium Communications Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Rich Nyren. You may begin.

Thank you. Good morning, and thanks for joining us. I'd like to welcome you to our third quarter 2012 earnings call. Joining me on this call this morning are our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of the 2012 third 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, Rich, and good morning, everyone. Thank you, all, for joining us, particularly those of you who have been impacted here on the East Coast by Hurricane Sandy. For our part, we escaped the worst, but we really feel for those who didn't. It's been another reminder the world about the fragility of ground-based communication systems. As you probably heard, about 25% of the cell towers over 10 states were knocked out by the storm. We've seen a spike in usage in the Northeast, and it makes us feel good to know that our service is supporting first responders, emergency personnel and individuals recovering from the storm. So back to the order at hand, this morning, we reported third quarter numbers that were in line with our revised expectations. In the years that had both its the challenges and successes. We've had a few factors in 2012 that have caused us to grow a little more slowly than in past years, but as both Tom and I will discuss, we're confident that we'll regain our momentum in 2013 for a number of reasons: a new contract with the DoD, a pricing change taking effect in our handset business and the continued success of new products. While our subscriber numbers are a little different than we expected for the year, we are confident that we'll add more subs in 2013 than in this year, and of course, continue to grow both the top and bottom lines. One milestone to note this year, we expect to generate over $200 million in operating cash flow this year for the first time in our history, and we continue to be headed in the right direction on increasing cash flows. Many probably thought this was an impossible task in mid-2010 when we first announced our comprehensive plan for the 3 billion Iridium NEXT constellation, as our run rate cash flow was only $134 million then. Since then, we've also closed on a major credit facility with favorable terms, have hit all of our key milestones for the Iridium NEXT build, enhanced and improved our launch strategy with SpaceX, and kicked off our innovative area and venture for global aviation monitoring. So overall, I think we're in pretty good shape for the future. While 2012 has been a bit of a transition period due to short-term weakness in our traditional government handset business, it's important to me that we continue to meet or exceed our expectations. My focus is on getting every single subscriber dollar revenue we can both by maximizing the strong competitive position we have in our core markets and by innovating to bring new products to our customers. Iridium is an execution story, and that's where I'll continue to focus all of my energy. While our success hinges on executing well, it's important that we stay grounded in and briefly reinforce with all of you the key elements of our strategy. We compete in attractive and growing markets, which generally have low penetration and double-digit growth rate. The barriers to entry are high, and the competitive environment remains in our favor. We have a healthy network. That is the cornerstone of why we consistently win high-value customers. We have a low-cost innovative partner ecosystem that works for us because we're not trying to vertically integrate our distribution channel or compete against them for the same customers. We benefit from a largely recurring revenue business, with service revenue having reached a record 71% of total revenue during the third quarter. Data services now represent 42% of total service revenue. It's an all-time high, and shows that we're growing where it really counts. And finally, our growing operating leverage and largely fixed cost business model increases margins and consistently expand cash flow. The bottom line, when taken all of this altogether, is that I really like our long-term prospects. So with the stage set, I'll update you on our network status and Iridium NEXT development, the latest on our area and venture and key growth components for our commercial business lines in 2013 and beyond. Tom will then focus on our results, financial guidance and recent capital structure activities. So let me start with our current network, which continues to perform very well, as evidenced by our voice and data traffic performance statistics. While we did lose a satellite in late August and are using up one of our in-orbit spares, our constellation continues to be just as capable as it always been with 4 in-orbit spares still left, enough to comfortably make the Iridium NEXT transition. This really speaks to the superior and unique architecture of our network. It's redundant and resilient, giving us the flexibility to move around spares, co-locate satellites, and do many other things to enhance the customer experience. As for our Iridium NEXT program, we continue to hit all our major milestones at the half-way point of our 5-year build. The Iridium NEXT mission team has continued its great work these last few months, which will culminate in the completion of our critical designer view phase in the first part of 2013. Testing activities are also underway to validate design performance of key components, and we're moving ahead on upgrading our earth terminals and telemetry facilities around the world. All eyes are still on early 2015 for our first launch. I'd also like to take a minute here to address SpaceX cargo resupply mission to the international space station last month. As many of you know, SpaceX Falcon 9 platform is the primary delivery vehicle for our Iridium NEXT satellites, and we monitor their progress closely. While they experienced a malfunction in one of their 9 engines during the recent launch, they completed their primary mission successfully. This is a big confidence builder for us, as it shows they have built an adaptable and flexible rocket that got the job done even when there are glitches. We continue to have full confidence in the Falcon 9 system, and expected that the remaining 2000 or so launches on their manifest before Iridium NEXT, will also be successful. Also, we also have a capable platform in our supplemental launch service provider, Kosmotras. As we shared last quarter, we plan to exercise our option for our first launch in their highly reliable 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. It's a smarter strategy for in-orbit testing and provides us some additional cost savings. While we're in the space segment of our business, I'll jump to Aireon, and the important steps we continue to take in standing up this global aviation monitoring venture. For those of you who aren't as familiar with this leg of growth, this is a new business, with 3 new value streams to Iridium, that provides a critical service to the world's air traffic control agencies. The 3 sources of potential cash flow are: $200 million one-time hosting fees we expect to receive between 2014 and 2017, recurring service revenue associated with a long-term data contract we plan to have with Aireon once the system is operational, and a potential return on equity from being a 40% to 50% owner of what could be a very profitable enterprise. Nav Canada, the world's second largest air navigation service provider and the largest provider, Oceanic Services, by flight volume, continues to be a strong and active partner as Aireon's plan chief investor and first customer. Nav Canada is working closely with us on bringing in other customers, supporting technical development of the project and coordinating with regulators. The FAA also continues to be closely engaged with us from a system specification standpoint, while methodically moving to a formal financial assessment. Bottom line, we continue to believe that the FAA will be a significant customer of Aireon. Harris, our payload development partner, is also off to a good start, having successfully completed their system requirement review in the summer. The flexibility that Harris designed for Aireon payload continues to serve us well, and we still anticipate being able to accommodate one or more additional secondary payloads. We continue to work with Harris on submissions that include international space monitoring, which could add to the already $200 million in hosting fees we expect to receive from the Aireon venture, while also representing additional ongoing data service revenue. Now onto the key growth components of our commercial markets. Beginning with the aviation sector, where our systems are smaller and far less expensive than the alternatives, Airbus recently announced that it will begin offering Iridium's aviation services on its A320 family of aircraft. This solution combines our Iridium Core 9523 and Iridium 9602 devices and a comprehensive package that should generate hundreds of dollars in ARPU each month per aircraft. Recent data from the FAA also suggests that the number of flights in the U.S. using our aviation safety services hit a new record in August, and has roughly doubled from last year. Overall, this progress validate the adoption of our products by the aviation community for a business that we expect will generate millions of incremental service revenue in the coming years. As for the maritime market, we're staying a course we'd set years ago as a value-oriented provider. We hit 116% of our estimated 2012 order book for Iridium Pilot shipments by the end of September, and have doubled the number of partners now selling our second-generation maritime broadband platform. We continue to build on a strong and solid base in the historically, price-sensitive troop communication market, and have nicely grown our VSAT companion offering for ship's critical business. These partnerships are important when you consider that VSAT service revenue is expected to count for roughly 55% of the maritime market in 10 years. The introduction of the Iridium Pilot and vertical integration by our primary competitor has really shifted the momentum in our favor, with unit sales growing 59% year-over-year during the third quarter. At 10% of our commercial sales today, we still expect our OpenPort maritime business to double over the next 3 years. Onto the M2M market, where nothing is stopping us. Let me just quickly remind everyone how big and fast growing this market is. First, satellite M2M is expected to grow by about 1 million connections in the next 4 years. Second, not only do we expect to participate in double-digit market growth, but with just a 15% share of current sales, we have a lot of room to expand market share. In fact, we're doing a great job capturing customers in the asset tracking segment of this market, penetrating large fleets that often exceed 40,000 units, and millions of assets in the fleet and vehicle tracking, heavy equipment, container and energy industries still need to be connected. We're winning these customers and will continue to do so at a meaningfully higher ARPU than the rest of the industry because of the coverage functionality and size of our devices. Our centerpiece 9602 device continues to sell really well, as both subscribers and revenue grew more than 30% in the most recent quarter. We're also beginning to ship a meaningful amount of our significantly lighter and smaller third-generation 9603 transceivers for specialized applications. We continue to make investments in device hardware, network enhancement and unified interfaces, as well as the development of a centralized self-service portal for partners to manage customer M2M devices. These investments are well worth it, as once customers are added to the network by our partners, they typically stay with us for at least 5 years. And finally, there have been important changes in the handset market that set us up for sustained growth in 2013. Notably, we're at roughly 100% of where we expected to be in our 2012 budget for commercial handset shipments, despite the recall we experienced earlier in the year. We've also sold a couple of thousand units of our Wi-Fi hotspot accessory, and along with customer usage of our Iridium Extreme location-based services, are generating incremental service revenue. These products are still in the early stages of adoption by our customers, but nonetheless have the potential to improve our handset ARPUs over time. We also instituted a price increase in our commercial handset customers in recent months, which we expect will lift our service revenue by approximately 15 million next year. By way of background, we haven't really touched our prices in several years, and we held firm 2 years ago when our primary competitors in this market thought they could simply draw customers based upon being the lowest price point. That strategy hasn't worked, and they've raise prices this year in an effort to generate some return from the marginally profitable customers they attracted. In part, their actions have given us room to adjust prices up in 2013, maintaining our justified premium position in the market. As the premium services provider in the handset space, we'll continue to defend and grow our market share by being the price and service leader, and we generate the highest margins for our partner channel, who prefer to sell the product as a result. Customers buy our satellite phone for 100% global coverage and for the very best device form factor and functionality, and history has shown they're willing to pay more for that value and peace of mind, very simply that's why Iridium wins. In wrapping up my thoughts, I'd note that my confidence in our long-term prospects hasn't wavered a bit since we last spoke in August. Our commercial business is performing well with double-digit subscriber and revenue growth rates in most of our key business lines, and we're engaged with the Department of Defense as we look ahead to our long-term contract renewal next year. We'll add over $15 million to our run rate operating cash flow this year and 2013, for all the reasons we've outlined, will be a better year than 2012. So with that, I'll turn it over to Tom for a more detailed financial review.

Thanks, Matt, and good morning, everyone. We announced third quarter 2012 results that were in line with our performance during the first half of the year, reflecting that our commercial business and primary growth engine remains healthy, while we continue to absorb deactivations in our traditional government voice business. Overall, we're on track to achieve our service revenue and operational EBITDA target through the full year 2012. I'll first focus on our result, and then wrap-up by taking you through our recent capital structure changes and liquidity position. Iridium reported third quarter total revenue of $100.4 million, representing a decline of 2% from last year's comparable period. Total revenue declined largely due to lower engineering and support revenue, which remains an episodic low-margin revenue stream that represents engineering enhancements we are contracted to develop in support of our recurring service business. We have visibility to increase engineering and support revenue in 2013 due in part to the government contract we announced yesterday. Operational EBITDA came in at $57.7 million, yielding growth of 6% from the prior year quarter. Our operational EBITDA margin was 57% in the third quarter, which is an expansion from 53% in the year-ago period. Third quarter net income was $17.8 million. This represents 48% growth over the $12 million we posted for the year-ago quarter. Third quarter net income again benefited from a $6.5 million reduction in depreciation expense due to an extension in the estimated useful life of our current satellite constellation. This reduced level of depreciation expense in the third quarter will recur in future quarters through 2014. Let me also briefly address the financial restatement we announced this morning. In short, in the current quarter, we discovered an error that was made in 2009 in respect of a non-cash tax reserve that triggered the restatement of our financial statements for 2009 through 2011. The cumulative net effect of this restatement is an $800,000 increase to net income. I'd also reinforced that these errors were non-cash in nature, and had no impact on revenue, operating expenses or operational EBITDA. From an operating standpoint, we recorded commercial service revenue at $56.2 million in the third quarter, yielding 6% growth over last year. We had 18,000 net commercial customers during the quarter, resulting in a 19% year-over-year increase in subscribers. Approximately 11,000 of these net additions were in the M2M business, and 7,000 came from the voice market. Commercial M2M data subscribers now represent 39% billable commercial subscribers, an increase from 34% during the year-ago period. In addition to the core foundations of commercial growth that Matt laid out for our key business lines, we expect our entry into the Russian market and new products will further supplement our long-term revenue profile. After a lengthy licensing and regulatory approval process, we expect to actively sell our products and services in Russia through our partner channel soon. We've made significant technical progress, and are building our back office infrastructure to support our operations in the country, and we'll make capital investments, as we build out our required gateway. As we've discussed before, we expect to capture 40% share in a market that can ultimately be worth over $70 million in the next several years. As for expanding our product portfolio, we still see netted and global data broadcast services being at the top of the list. 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 the first to fuel this service in 2013 and 2014. Similarly, global data broadcast remains on track for the 2013 launch and if development has been fully funded by government customer. This product establishes the capability to quickly and simultaneously deliver data to a wide audience of subscribers, and could be offered as both on-demand or guaranteed bandwidth solution. Turning now to our government service business. During the third quarter, we reported government service revenue of $15.2 million, down 7% from last year's comparable period. We lost 3,000 government voice customers, but grew M2M data subscribers 27% over last year. We also grew net Iridium subscribers 11% from the year ago period, showing ongoing uptick of our beyond line of sight tactical radio service. We ended the period with a total 49,000 billable subscribers, with M2M data subscribers now accounting for 29% of the installed base. Our assessment of the situation is similar to what we described last quarter. Our push-to-talk tactical radio and M2M subscribers continue to grow at respectable double-digit year-over-year rates, but that's fighting against a steady pace of the deactivations in our highest ARPU traditional voice business, largely due to reduced troop levels in conflict areas. So we have a multi-prong course of action to renew growth for this business. First, we must continue to follow a decisive course of action that leverages the strategic nature of our relationship. The U.S. government continues to spend with us on a new product development and a multi-year modernization plan for their dedicated gateway, and we've enhanced our overall value proposition to them by expanding beyond core legacy services. In fact, we just announced a 5-year contract worth up to $47 million with the Department of Defense to upgrade their dedicated gateway to be ready for Iridium NEXT. This agreement demonstrates Iridium's long-term strategic importance to the government. It's also worth noting that they're committed to spend millions of dollars under this new contract, and we believe that this action supports our view that a favorable long-term services agreement will be put in place in 2013. We expect that this new contract will provide us the path to renewed growth in our government business while providing them with additional value. Moving now to our financial and operating outlook for the rest of 2012. As we noted in our press release this morning, we affirmed our guidance metrics with service revenue growth and operational EBITDA, while slightly lowering our outlook for total subscriber growth due entirely to a change in the timing of our M2M subscriber additions. We continue to expect operational EBITDA between $205 million and $210 million for the full-year 2012. On the same basis for the full-year 2012, we anticipate the following: total service revenue growth of approximately 6% and total billable subscriber growth of approximately 18%. This is down modestly from a range of 20% to 25%, solely reflecting M2M customer gains from certain value-added partners that we expected to occur in late 2012, but have shifted to early 2013. To that end, I'd like to reinforce in the strongest terms possible our confidence in the future health of this business. We expect the same robust subscriber growth rates from the M2M market that we've historically enjoyed with an even higher level of net subscriber additions in 2013 when compared to 2012. As we discussed last quarter, we expect at least 8% year-over-year service revenue growth in 2013. In giving that forecast, we've considered the following key elements: first, we expect a decline in U.S. government service revenue for the full year 2013 as compared to 2012; second, we anticipate a stable commercial voice ARPU. As you know, that has not been the case in 2012, as commercial voice ARPU declined by $3 or 6% through the third quarter due to decreased usage of voice and circuit-switched data services. While we expect the decreased usage strength to continue into 2013, they'll be dominated by the access price increase Matt mentioned earlier, and by higher maritime broadband for OpenPort revenue. We also expect continued robust subscriber growth that will be roughly in line with our performance in 2012. And finally, an update on our capital structure and liquidity position. At the end of the third quarter, we have drawn $588.9 million from the Coface facility, relating payments to be made to Thales with our successful completion of contractual milestones for Iridium NEXT. We had a cash and cash equivalent balance of approximately $189.4 million, which did not reflect the $96.7 million in net proceeds received from the convertible preferred offering in October. I'd also like to spend a minute on our recently closed convertible preferred offering and $7 warrant tender offer. In short, as many of you'll recall from our 2012 earnings announcement, we were required by our amended Coface credit facility to raise capital by April of 2013 to the extent that the proceeds from the exercise of our $7 warrant were less than $100 million. To satisfy this credit facility obligation and remove any overhang that may have existed from an uncertain future capital raise environment, we proactively issued $100 million preferred convertible instrument on favorable terms, and concurrently tendered for our $7 warrant. This not only solidifies our fully funded plan for Iridium NEXT, but as a risk management measure takes the potentially significant impact of an immediate and uncertain future capital raise off the table. Finally, I'll remind everyone that we extended our warrant tender offer until November 6, as a result of Hurricane Sandy. In closing, I echo Matt's sentiments on the health of our long-range revenue profile. 2012 has been a transition year for us in some respects and I, too, see better performance in 2013. With that, I'll turn things back over to the operator for the Q&A portion of this morning's call.

[Operator Instructions] Our first question comes from Jonathan Atkin of RBC Capital Markets.

I wondered if you could maybe elaborate a bit on the shift in demand that received in M2M from late 2012 and 2013, and with that considerably grow fast? And then real broadly, how do we think about longer-term subscriber growth rates, as you alluded to, an acceleration in 2013 to, I guess, in part to that shift. But normalizing for that and maybe looking beyond 2013, how do we think about in rough parameters the growth rates?

Well, overall, John, the M2M business remains very strong in terms of how we competitively match up in the industry. The new products we've introduced are being very well received. We have more partners delivering our products to more customers and more segments. So overall, we're still -- there's been no change in really how we view the business and how we view the potential future of the business, the M2M business. We are getting some new larger -- some new partners who are going after larger market segments and forecasting bigger numbers, actually, going forward. And so I think that, frankly, our -- I think big subscriber growth numbers should be the norm going forward. But the variability and what they communicate to us is to how many they'll have, of course, can vary a little bit. And we determined this quarter from some that -- that some their adds that they were doing were going to be more in 2013 than they were going to be in 2012 than they originally told us. So we've had to kind of readjust our estimates on 2012 to 2013, and they're relatively low ARPU subscribers, in general, because the bigger they are, often, they're going after asset tracking kind of markets that are typically a little lower ARPU, so they're not as financially affecting in most ways, but it does sort of change the absolute gross numbers of adds and of course, can change across quarters.

Yes, right. The most acute example is very low ARPU asset tracking customer that was anticipated coming late in 2012 is going to come in very early in 2013. So the combination of very late in '12 and very early in '13 and low ARPU is why -- while the subscriber statistic comes down is not a barometer of the health of the business, we see unbridled growth in M2M for some time to come based on this funnel.

Great. And then on the competitive environments, I mean, you reference the pricing move with Inmarsat, but I wondered if you could maybe provide just a bit more color on any incremental impact that you're seeing on the channel that will affect your business, and then any other kind of competitive moves with reference to that and any of the other MSS providers?

That's a pretty broad question, but I think our competitive position with Inmarsat stays very strong, and maybe we know is improved this year a little, particularly, with the moves that they've made to more directly integrate and go after the market directly as opposed to indirectly as they did in the past, and it's kind of created a lot of uncertainty in the market. Unexpected price increases, a lot of factors, really, are sort of are making that as positive or increasingly positive market for us, particularly as we look at, say, the broadband business and the continued strong performance of our handsets against theirs. Globalstar's network is improving, but there's still a lot of skepticism about Globalstar in the market, and their ability to -- I mean, and frankly, how long it will take for people to feel comfortable using their network again. It's also still a product from 5 years ago, and they reintroduced it, and really, that hasn't really affected our view of the market and certainly the short- to mid-term, and our partners don't seem to be doing a lot in that regard. So it hasn't really changed our outlook, and I think that's probably -- there hasn't been, really, many other competitive changes in the market that haven't -- that have led us to believe we're anything, but well-positioned as we always have been here.

Our next question comes from Chris Quilty of Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Going back through the specifics of the price increase, I just didn't catch the numbers in terms of the monthly service charge total contribution. And then give us a sense of what you think customer elasticity or any elasticity as relative to that price hike?

Sure, I'll give you the math, and maybe you can talk about the elasticity in that. So think about it, as Matt quoted, 15 million, and in broad numbers, it's sort of 300,000 affected subs. It will be somewhere between $4 and $5 a month, and it's effective January 1, and it's been announced.

Yes, so our partners are changing their billing systems and are adapting to it. It actually goes into effect in -- well, it's obviously, it's broad range, which isn't just simple on every customer. It depends upon lots of different factors, flight changes, the postpaid versus prepaid, et cetera. And Tom said it sort of averages, in effect, of about $4 to $5 a month, going into affect January 1. As far as elasticity, we're finding that the business is largely oriented towards access fees as opposed to usage anyway. We really don't think it's going to change our market dynamics much. In fact, since our -- I think the general feedback from our partner channels has been positive around it because their margins continue to stay strong. They continue to feel that we're extremely well-positioned compared to others and in fact, some of them, after about 3 or 4 years of not having any kind of pricing changes at all, have seen that frankly, our competitors, raising their prices over the last 2 years, thought that we had room to do this anyway, and keep our position in the market appropriately and our position. So we feel it will actually be a net significant positive for next year. Chris Quilty - Raymond James & Associates, Inc., Research Division: Is there a possibility that some of your maritime customers that are using the phone today might switch over to OpenPort, and if so, would that be, in your view, a net positive or negative?

It might be, but I think that the maritime handset users are typically extremely episodic. It's people who go on different ships at different times, and know they just need access wherever they happen to be. OpenPort is traditionally a sail by the ship owner or the ship service on behalf of its crew and ship's business, so it’s much more of a -- there's usually different decisions, if you will. I think the OpenPort business will continue to expand and grow on its own merits, and the handset business will -- it sort of got its own trajectory, if you will. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Speaking of the handset trajectory, I guess, overall, in the quarter, you had about 7,000 net adds, I think, on commercial voice that includes some of the OpenPort units so -- and a little bit lower than perhaps I was looking for. Can you talk about either seasonal or competitive trends in the handset business and whether potentially netted Iridium is holding back some customer purchases?

Well, netted Iridium is -- well, there is no commercial netted Iridium yet. That still is yet to be introduced, so netted Iridium is all in the government side and clearly, we're being impacted right now and the fact that even on the government side, they're not moving ahead that dramatically right now with netted customers because they're waiting for the next generation of the product that's still under development. So that slowed down the netted subscribers and of course, then there's been the headwinds, and sort of just the voice deactivations on the government side offsetting that. On the commercial side, yes, still growth in those areas on both sides it's -- it is growth. I wouldn't -- I don't know what you were expecting versus what we delivered. We've kind of delivered online with what we were expecting for the most part. It's been more to machine-to-machine area from a subscriber area that really kind of has a shift from 2012 to 2013, but we thought those were solid additions for the year. Tom, do you have any...

No. That's right, Matt. Chris Quilty - Raymond James & Associates, Inc., Research Division: On the government, the issue is primarily the availability of hardware for netted rather than the Phase 3 development or the new contract that gets renewed next year?

It's really the delivery of the underlying network capability that goes from both the network and the handset to deliver what's called Phase 3 capabilities to them because there isn't -- wasn't developed or it isn't being developed by the government and by our partners in such a way that there is a -- that you can just evolve Phase 2 to Phase 3, unlike most things, really, a Phase 3, Phase 2 current handset isn't evolvable into a Phase 3 architecture. They've been holding back on those for that reason, and waiting for Phase 3, and the development continues on Phase 3, but it's a substantial improvement in capability. It goes from nets that can be up to, say, 250 miles to global nets. It means almost unlimited net-net that can be active at a time. It means lower latencies from, say, roughly 0.5 second or a little longer in terms of the push-to-talk capability to far less than that. So it's a lot of value that they're looking forward to and want to build around, and on which, by the way, we're building around the capability for commercial public safety too, and which our commercial customers are looking forward to. So that development continues. It's substantial. It requires ground, operations and maintenance equipment, provisioning, changes in billing changes and a number of things, and that just has been a -- continued to be developed through 2013. So it just -- it slowed down a little bit, the government netted activations. But that's been going on, really, literally for the last couple of quarters, and I think we've been announcing that a number of times over the previous quarters. Chris Quilty - Raymond James & Associates, Inc., Research Division: So is it still possible to begin shipping a government-netted product, say, in the first half of next year? And then how quickly after that would you anticipate the availability of a commercial product?

Well, they're still activating some. We still think there is some of this Phase 2 because they have immediate requirements a lot of times in different parts of the world that they just can't meet with their own product. That's why they like what's called distributed tactical communication system, which is their name for netted. But really, the Phase 3 product isn't coming till later next year and into 2014. So 2013, all our -- the optimism that Tom and I described are kind of without a lot of netted growth, really, at this point. So we continue to see growth 2013 or to 2012, but netted isn't going to be one of the big adders for 2013. Chris Quilty - Raymond James & Associates, Inc., Research Division: Got you. And finally, on Russia, timing there for initial shipments?

Yes, so Russia continues to -- by the way, it's still a fairly big market sort of on the gray market, but it's going legitimate right now as the -- as all the activities are being completed for the requirements to make that a legal market in which partners can sell openly, if you will, in Russia, and sell the service to particularly what we think will be a good and attractive market as the Russian government customers, first responders, military, maritime, et cetera. So we're seeing a lot of that getting ready right now, but it will probably be a 2013 activity, actually very early in 2013 when, literally, everyone kind of goes live on those additional sales to 2013. There's kind of a transition going on right now, where all the current customers in country are registering themselves onto sort of a website to make them legal, and then they'll -- then partners will start, actually, selling the service, which will add, I think, to those rolls in 2013 and continue to support growth onward from there.

Our next question comes from James McIlree of Dominick and Dominick.

I just want to make sure that I understand your comments on the price increase in 2013 commercial service revenue. Tom, did you say that commercial service is going to grow at least 8% in 2013?

We said overall service revenue.

Overall service revenue, okay.

Overall service revenue will grow at least 8% so the comparable statistic to '12 is 6%. In '12, we'll grow -- we say we'll be at least 8%, and what we contemplate in that estimate is that government recurring service revenue will be down year-over-year in '13 versus '12. The commercial ARPU, which had been declining by about $3 in '12, will be stable in '13, as compared to '12. And there's the main elements that we will continue to see pressure in commercial usage that we've seen in '12 that caused the $3 or so decrease year-to-date in commercial ARPU, but the price increase will dominate that usage trend, and we will see stable ARPU in '13, which is different than we saw in '12.

So is it fair to say that a large portion of the commercial service growth in 2013 is driven by the price increase?

Certainly, the price increases enhances growth in '13, but it's growing without it. We're growing subs and we'll grow the revenue, but it'll certainly be a shot in the arm.

Okay. And I think in prior calls, you've made comments that you expected equipment revenue in 2012 to be flattish with 2011, is that still your expectation?

Yes, we actually don't guide on equipment sales. We said EBITDA margin derived from equipment sales will be close to what we generate in '11 and '12, and we reiterated that this morning.

Okay, thank you for that correction. You're correct. I misspoke. Great. And then lastly, on government contracts that you'll expect in 2013, you're expecting the contract to be signed in 2013, and then that would lead to the Phase 3 growth late '13, early '14, is that correct? And the reason you think that you'll be able to sign that contract is because of the communications you've had with the government as well as the IDIQ that was released yesterday?

I would say the general tenor of our relationship with the government, and the answer is, yes, we do expect to sign that contract in 2013.

The current 5-year contract we have expires in 2013 so there needs to be a new contract. So by definition, we'll be signing the contracts in 2013, and I think people can -- should get confidence from the fact that we're continuing to discuss that, have a critical service. They're expanding all the elements around it, including R&D and network upgrades, and we think that will be a successful conclusion of that. A new contract, at least, 1 year and probably 5 years, again, is what they typically would like to do with us is a new 5-year contract.

Our next question comes from James Breen of William Blair. James D. Breen - William Blair & Company L.L.C., Research Division: Just a couple of questions. One, can you give us an update on Aireon and any sort of movement you've seen there, potential interest from other outside agencies? And then, two, in the government side, just a follow-up on the question that you just answered, the contract expires in 2013, beginning 2013, are the provisions in place where if you don't come to an agreement, you just sort of work month to month until an agreement is reached?

On the latter question, it does expire in March of 2013. There's kind of -- there's an extension that the government can do, but it's not month to month. It's up to 6 months. I guess it's the maximum that they can extend the current terms of it, but then there needs to be a new contract at that time. As far as Aireon goes, it's only been positive, really, since we announced it in, I guess, it was June. We've had a lot of interests around the world. I'd say it's even expanded interest from other ANSPs to be part of it. We're actually in discussions, and continue to be in discussions with them about both the service and possibly being part of Aireon itself, as they've asked because they want to -- may want to get on the ground floor and the benefits and advantages of being on the ground floor of a development like this. We haven't announced specifically the investment of Nav Canada yet, but expect to do that shortly, I think, is reasonable to say. We are -- and obviously, there'll be a lot more to talk about when that happens, and expect them still to be our first customer, and we'll announce that in due course, as to what the -- what that looks like. And as I said, we fully expect the FAA to be a customer at some point here too, and we continue to work with them on that basis. So they sort of have their own processes and activities that they will continue to work with us sort of on some technical requirements, and that sort of thing while they work in terms of a longer-term commitments and their decision process on that to which just takes its own time. James D. Breen - William Blair & Company L.L.C., Research Division: Great. And then just one follow-up on the service revenue in general in the M2M space. Can you give us any granularity on what types of customers are signing up? Is it mainly maritime? Is it heavy equipment guys, things like that?

Yes, the maritime market is really diverse -- excuse me, the M2M market, I think you asked about, is very diverse. The product is being used in everything from oil and gas, to mining, to transportation, transportation management, scientific applications. There's maritime applications like tsunami buoys and tune-up buoys. There's aviation tracking applications. There's this new market that is sort of emerging this year that is growing in consumer devices like this -- like the number of 2-way personal locator beacon products, including sort of the most commercial one of that, the lowest cost one of that like the DeLorme inReach product. So it's a very broad range. I'd say the heaviest activity right now is more at, I would call, the lower higher volume and where assets are being tracked or monitored, particularly in the heavy machinery, oil and gas, mining, transportation markets. A lot of big, big equipment providers are going from being sort of a niche provider of satellite communications to being much more predominant in their thought process about wanting to not just track where assets are, but monitor the health of them, monitor the health of the engines, monitor the health of where they're being used to be able to track it across their customer wants to sell a big piece of equipment, where it might go later after it gets resold, assets like generators, things like that being tracked. It's a very, very diverse business. As I've said, it only expanded because each month, new partners come along with new applications that we find out that they're going to build our products into, and that's only generated even more as our products get smaller, less costly, more attractive pricing options, et cetera. So competitively, we remain, as we said, very, very well-positioned for future growth in that market.

Our next question comes from Chris King of Stifel, Nicolaus. Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division: Just had a quick question regarding SpaceX. Obviously, they had a successful rendezvous, I guess, with the international space station earlier this month, but there were some issues there, I guess, from a technical standpoint on their end with respect to that launch. I was just curious in terms of how much kind of day-to-day back and forth you have with those guys as they kind of analyze their data and figure out what went wrong, and is there any, I guess, role that you play in terms of discussing those issues with them as you guys prepare for Iridium NEXT?

We are very closely associated with more on the inside, if you will, in terms of information so we get full briefings and full discussions, and they've been -- their primary customer in this case is to explain it to NASA because that's their next launch, and the customer that they're currently servicing as they go to the international space station, so there's probably more activity there than with us. But we monitor it closely and certainly, will understand fully what exactly happened. I can only reiterate it again. I think they've designed a very flexible platform and system the fact that they can have an engine outage is -- doesn't exist on every rocket platform that is designed to basically loose 1 of 9 engines, and have the other successfully get a system into orbit. So I view it as a net confidence builder. Clearly, they'll find the problem and they'll fix it, and they've demonstrated their ability to fix things very quickly because of their control, unlike many others over almost all aspect of the sort of developments in manufacturing of those systems. So they're very responsive and flexible, and I think that they'll fix it pretty quickly. They'll be back on track, and there's still lots of launches before they get to us, and I'm sure that, that will be well behind them by the time we're launching our satellites in 2015.

Our final question comes from Brian Ruttenbur of CRT Capital.

First question, on the R&D, going forward, what level of R&D do you guys anticipate seeing?

We expect that we're not changing our R&D, the general levels of R&D that we're spending on the existing network that dramatically year-over-year, and that we have a lot of things we still think we can develop. I know that's one of the things that's a little unusual about us, but since our NEXT system is completely backward compatible with our current system, we can keep developing new capabilities on new devices and new systems, and bring new things to market on the current system, and they'll roll over into the NEXT system seamlessly. So we're going to continue to invest and see a lot of things to invest in. We've talked already about one of them, which is commercial netted, which we think the public safety and other markets have a lot of interest in. Tom mentioned global data broadcast, which is interesting, an innovative new capability that we're -- we'll find ways to exploit in 2013 and '14. But we have more things on the drawing blocks with our handset business. We have a whole strategy there that we think we can more effectively deliver value to the threshold Sat phone -- I mean, smartphone kind of market, extending its capabilities out. We have more to do, really, in terms of OpenPort. Lots still we can do with machine-to-machine, making that more efficient, less costly, more integrated and consistent with the threshold infrastructure to make it easier for people to build us into their applications where they're already using cellphone -- cell, if you will, threshold M2M and want to add satellite M2M to it. So there's a lot of things we still want to do so I don't expect that will decline much nor do I expect we need to add necessarily to it, but I think we have the right amount kind of going forward.

So is the dollar amount about $16 million, going forward, or about 4% of your revenue, is that, which -- is that the right number?

Yes, I think the gross number will probably stay more of same. It might actually decrease to a sort of a percentage of revenue. I don't think we'll kind of keep it as a percentage of revenue as much as more of a capability, going forward. But I wouldn't take that as to be a hard forecast or anything, but I kind of look at it as a general level of capability that we have an effective sort of R&D system as we both work internally and with our external partners, and we're also finding ways to work with our partner base. Our growing partner base also has some innovative ideas that they like to -- us to work and possibly even distribute and exploit. So we're doing some things with them, I think, going forward. It will be interesting. They will only expand, really, our -- the effective capability of that sort of type range of R&D.

Okay. And then in terms of diluted share count, fourth quarter, where you're going to be and then next year, what kind of diluted share count should we be looking for?

Well, it's going to be -- it's going to depend on the participation of warrants. So we're not going to give those specific number. You can make an estimate of that yourself, Brian.

Okay. And then just the last question I have is about the government services revenue. You mentioned that it should be down, I think, in '13. Do you have an estimate on how much, 10% down, 5% down, 1% down? Do you have any kind of broad range that you're thinking about in terms of the government services revenue?

All I would say is we'd endeavored to be conservative in our estimate.

I would say, that's all -- as Tom said, that's kind of captured into our overall assessment for 2013 and the service revenue growth we expect there. So we certainly expect it to continue. We don't have perfect visibility into exactly what it will be. The general trends we know will continue, but there's still a lot of -- as we said, it's general -- the general trends, well, are moving out of Afghanistan and Iraq. But overall, the continued use of our system in other places in the world, and in training and in other activities so not a major change, but we think we've accomplished -- taken into view what we think will continue into 2013 our overall projections.

Have you taken in anything with sequestration with that?

I would say that's certainly the thought process around sequestration, but anything specific about sequestration, no, I mean, I don't think sequestration -- I never felt sequestration would have a major impact on us overall. We're more of an operational day-to-day activity, and I think it's been very clear by every politician I've heard that they don't want to affect our -- the ability of -- they're certainly not going to pull from our existing soldiers, especially those who are in the field that need what they need to use. We're kind of a core capability of core communication and expense, as opposed to some major capital program that could be affected, perhaps, by sequestration.

I'm showing no further questions in the queue at this time. I'll hand the call back to management for closing remarks.

Well, thanks, everyone, for joining us, particularly in a very interesting week, especially those of you who are in the Northeast. I said it's a great advertisement for our service, but we hope we don't have to -- we hate to have our friends live through those kind of advertisement. So I hope you're all safe and well, and continue to be so, and we'll see you on our next call in the future. Thanks.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.