Iridium Communications Inc. (IRDM) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iridium Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Steve Kunszabo, Head of Investor Relations. Please go ahead.

Good morning, and thanks for joining us. I'd like to welcome you to our second quarter 2013 earnings call. On the call with me this morning are CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 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 result to differ from the forward-looking statements. Such risks are more fully discussed on 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 in 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 it over to Matt.

Thanks, Steve. Good morning, everyone. Thanks for joining us. So let me jump right into it. As you saw in this morning's press release, this was a tough quarter. Recent developments, primarily in our commercial business, led us to reconsider our view for the rest of the year. This reassessment of our growth plan has translated into us lowering our 2013 financial outlook today, while also revising some important elements of our long-range guidance. Taking all of this together, this was certainly a disappointing reporting period for us. Tom will give you a more detailed readout of our financial results and outlook, and I'll spend my time today on what's changed in our commercial business and what we're doing about it. But before I do that, I want to emphasize my confidence in our long-term prospects. We made meaningful progress during the quarter, with our Aireon business having significantly derisked one of the most critical elements of our funding profile for Iridium NEXT. Similarly, when you consider the excellent ongoing performance of our current network and the fact that our Iridium NEXT build remains on budget and on schedule, there's more positive news here. There's also positive news in the M2M sector, where we continue to deliver robust subscriber and revenue growth rates and have a good deal pipeline. And I'm hoping we'll be able to soon announce the successful renewal of our government services contract. So now, that I've laid out an outline for what you'll hear from us this morning. Let me share the details. I'll start with our commercial service revenue, which is growing slower than our target in a few areas. First, we haven't executed as well as we could in our maritime business. We first introduced our Iridium OpenPort service back in 2008, and as of the end of 2012, it had grown to $20 million or roughly 9% of commercial service revenue. Unfortunately, we've given some of this growth in -- some of this growth back in 2013 due to a product issue. Specifically, our above-deck units, which contain the antenna and radio equipment to connect with our satellites, have been failing at a higher-than-acceptable rate. We've identified the problem and the solution will be rolling out in all-new devices we shipped starting later this month. While we resolved the problem going forward, it's impacted our 2013 outlook, as customer deactivations have increased and we've had to reserve more for warranty costs to repair and replace older units. This has been especially disappointing as our partners and customers tell us they really like the product's value proposition and have been looking for alternatives to our primary competitor given their price increases and distribution changes. Looking ahead, we continue to see a big opportunity for the Iridium Pilot product. Despite our recent product issues that caused more deactivations, our new customer activation rate this year have actually grown significantly from last year. We're serving an important role in the value segment to this sector without, which the incumbent operator would have tremendous pricing power and market share. In short, our partners and customers want us to succeed and we expect to win back many of the ones we've lost, as we demonstrate the high quality of the new units and fill this niche at an attractive price. In fact, as a testament to this potential, we just signed this week a nearly 200 vessel order from one of the largest shipping companies in the world. Customers in the maritime market have also asked us to become GMDSS compliant and you might have seen that we've begun the process. GMDSS is a safety requirement for very large ships and is a space that has been dominated by Inmarsat since its establishment over 30 years ago. We're confident our network quality and global reach will allow us to be certified within a year or 2 and this gives fleets one reason to use our service. Another area where we've grown a little slower than last year is in our core handset market and it's really been as a result of 3 primary factors. First, we're seeing a bit more competition at the low end of the voice market, as less-intensive users opt for lower cost alternatives. This is a very recent phenomenon spurred by a price war in North America between 2 of our direct competitors. We think the impact has been fairly minor, as we had 9,000 voice net additions in the second quarter versus 11,000 for the same period last year, which isn't a dramatic change. However, at the same time, subscriber behavior is also shifting from voice to data applications like texting, which is really no different than the trend experienced by our terrestrial wireless peers. Second, Inmarsat, who traditionally has been our largest distributor as a result to their acquisition of Stratos 5 years ago, has essentially stopped promoting our handset devices. We see this as a transitional issue as other -- as our other partners have already begun soaking up the dislocated demand from their independent dealers, but nonetheless believe it will temper our growth in 2013 until that sorts itself out fully. And third, we've recently observed our prepay customers choosing lower costs, lower volume plans, perhaps in response to the price increase we rolled out earlier this year. We've implemented promotions around our pricing plans and volume tiers to address this emerging trend. So while it's not completely evident in the second quarter numbers, we've seen an impact on subscriber growth and usage patterns and have trimmed our forecast to reflect these recent trends. As has historically been the case, we'll continue to be the leader in the premium telephony segment, as the majority of our customers continue to seek the advantages of a low-latency global network with a robust and feature-rich product portfolio. While our competitors may have captured a few more handset subscribers in the last few quarters, we continue to outpace them in the most important metric, revenue market share. And we'll address these short-term challenges with new products and promotions later this year that recognize increased competition at the low-end, while also capitalizing on a greater appetite for data connectivity by our customers. I also want to stop here and briefly emphasize that the M2M business remains a jewel in our portfolio. We posted commercial M2M subscriber and revenue growth rates of 25% and 21%, respectively, during the quarter, and grew government subscribers 50% year-over-year. Low device penetration and rapid adoption rates across the industry vertical continues to make this an attractive market, and our network superiority and device functionality makes us leaders in the growing satellite M2M space. As for the deal we announced with Caterpillar back in May, we continue to make great progress on that front and with other large OEM customers. Caterpillar is in the testing phase of its deployment and we expect volumes with them to begin in 2014. I think we've said everything we could last quarter around the long-term impact of this deal for Iridium and I assure you that we're quite confident being described as the primary provider of their M2M satellite services going forward. Turning now to equipment line. Overall, we now expect our equipment margin to be down around 10% to 15% for the full year 2013 when compared to the full year 2012. While we had a strong order book early in the year, our unit sales didn't pick up in the way we anticipated they would from the first quarter. Tom will have more on that topic in his remarks. We also had a major new product planned for introduction in the third quarter of 2013, which has slipped out a few months into the fourth quarter. We're excited about the product and what it will do for our position in the handsets space and how it will help us focus on a growing data side, but it now won't make the same contribution this year that we had expected. Its impact will be more in 2014. Shifting gears, I'll end on a few of the steady stream of positive announcements we've had around our long-term initiatives including our global aviation monitoring venture, Aireon, and our Iridium NEXT build. In fact, let me pause here to remind everyone that our current constellation has been operating at greater than 99% availability this entire year, which is at or better than any time in recent memory, and that we're reemphasizing our network quality guarantee with partners and customer to drive home our strong reliability. I also want to reiterate that our Iridium NEXT program remains on budget and on schedule for the design and construction of the new satellites. We're more than halfway through the development cycle and have spent more than $1 billion to date. The design is complete. We're making strong progress testing and validating prototypes of all the satellite components. And our prime contractors is nearly done building the first full-scale test vehicle. One of the confidence builders for me is that we now have engineering models of the new onboard processor in our lab with the initial flight payload software and have started to validate its ability to communicate with our existing satellites through cross-links. The tests are going well, marking an important step in ensuring the compatibility of our 2 constellations, which will be fundamental to our success when we start our launch program in February 2015, only 1.5 year from now. As for Aireon, we continue to make great progress on all fronts, derisking this hosted payload venture. Our models to fully stand up this business is quickly becoming a reality and there's been a lot of activity even since we spoke last quarter. NAV CANADA, our joint venture partner and Aireon's first customer, made a second tranche investment of $40 million. They've now invested $55 million of their planned $150 million investment as Aireon has hit critical commercial, financial and regulatory milestones. They've been a great partner in shepherding our effort along in the year since we first announced this endeavor. Other air navigation service providers also continue to show strong interest in Aireon. And a variety of discussions are underway for both customer and investor relationships. The FAA remains fully engaged in its evaluation of the project, which is expected to continue over the next 18 months. Importantly, the FAA and NAV CANADA recently signed what they call a Declaration of Intent to collaborate on a range of technical and operational issues in support of space-based aviation monitoring. Also of note, and I don't think we've announced this before, the FAA recently expanded its current agreement with Aireon and has agreed to fund $10 million to Aireon for analysis and engineering work to support its procurement decision process. That $10 million contract has also allowed the FAA to become more directly involved in the development stage of the Aireon service, which is progressing really well. In fact on that front, Harris has completed its critical design review milestone for constructing the payload and is on track to be ready for the first scheduled launch in early 2015. Aireon has also signed a 17-year $42 million contract with ITT Exelis to provide the data processing and distribution components of the Aireon system, so all the team members are now in place. All in all we're very pleased with the big steps we've taken forward in 2 of the most critical elements of our long-term plan. In closing, we're going to have a tougher second half of 2013 than I anticipated and it's unfortunate we had to take our guidance down in several areas. We will fix the problems in our commercial business as they are manageable short-term risks and I'm confident we'll get through. As I just said, the long-term plan remains intact around our next-generation satellite constellation in the Aireon venture and the M2M market continues to deliver solid results. I know we can do better and look forward to reporting on our improvements in these areas in the quarters and years ahead. So with that, I'll turn it over to Tom for a more detailed financial review.

Thanks, Matt, and good morning, everyone. While our second quarter 2013 results did not materially miss expectations, we're clearly dissatisfied with having to take down our outlook, in part due to a product issue in the maritime business. Like Matt, I continue to believe that our long-term path to value creation is intact when you considered the development of our Iridium NEXT program and Aireon joint venture, but our short-term expectations have certainly taken a hit until we see improvement in some areas and recover from these operating challenges. I'll first outline our results and then wrap up by taking you through our revised 2013 and long-range financial outlook. Iridium recorded second quarter total revenue of $94.7 million, representing a 3% decline from last year's comparable period, driven largely by a reduction in equipment revenue on lower overall sales volumes. I'll discuss our full year projections for equipment margin later in my remarks. Operational EBITDA came in at $51.1 million, a decline of 2% from the prior year quarter. Our operational EBITDA margin was 54% for the second quarter, which was an expansion from 53% in the year-ago period. From an operating viewpoint, we reported commercial service revenue of $57 million in the second quarter representing 8% growth over last year. We added 26,000 net commercial customers during the quarter, contributing to a 13% year-over-year increase in subscribers. Approximately 15,000 of these net additions were in the M2M business and 11,000 came from the voice market. Commercial M2M data subscribers now represent 42% of billable commercial subscribers, an increase from 38% during the year-ago period. Of note, the second and third quarters are typically our seasonally strongest periods of the year and the second quarter, in fact, was a good pickup in subscribers and service revenue over the last couple of quarters. Despite the commercial business growing 8% during the quarter, a central reason for revising our growth forecast is due to a contraction in our maritime business. After posting a compound annual growth rate of about 75% for our Iridium OpenPort product dating back to 2009, we now expect this revenue stream to contract meaningfully in 2013 before we turn it low-double-digit growth rates in 2014 and 2015. To summarize the issue, we've had an unacceptable level of equipment failures with our Iridium OpenPort product. We addressed the problems associated with the failures in the last several weeks and will be implementing the solution in the third quarter. However, we booked a $1.9 million charge in the second quarter in anticipation of the costs we'll incur to repair and replace older units under the terms of our warranty. It's important to reinforce that our long-term prospects in the maritime sector remain bright. Despite our product issues it's a big market and our partners remain welcoming to an attractively priced alternative to the entrenched incumbent carrier. Turning now to our government service business. During the second quarter, we generated government service revenue of $14.4 million, down 7% from last year's comparable period. Government voice customers declined 8% but we grew M2M data subscribers 50% over last year. We ended the period with a total of 51,000 billable subscribers, up 6% year-over-year, with M2M data subscribers now accounting for 35% of the installed base. Softness in our traditional telephony business continues to disproportionately impact service revenue, while we're still benefiting from strong growth in the government M2M business. This is expected to carry on for 1 more quarter, at which point we anticipate signing a new services contract in late September. Our plan and approach with this significant customer has not changed. Nor has the unique value proposition we provide for them. It's also worth highlighting that yesterday, we received an award valued at approximately $11 million to support upgrade to their dedicated gateway and ensure Iridium NEXT readiness. We regard this as a very positive development. Focusing next on the equipment line, which produced revenue of $19.8 million, 17% year-over-year decrease resulting primarily from lower overall sales volumes. Our equipment line had a number of moving parts, which not only impacted our quarterly financials but also underpins pieces of our 2013 guidance revision. To start, we previously expected that our full year 2013 equipment contribution will be flat when compared to the full year 2012. We now expect that it will be down approximately 10% to 15% from last year due to a few drivers. First, as you heard a few minutes ago, we're seeing lower handset volumes as competition has increased at the low end of this market. Second, we estimated that our equipment revenue and margin in 2013 would be meaningfully impacted by a new handset product, which won't materialize as early as expected. We trimmed our estimates accordingly. Given these headwinds, we still believe that our equipment revenue will pick up significantly in the second half of 2013 due to 3 factors. First, we expect a notable increase in handset shipments from a few service providers, which did no business with us in the first half of the year but had been major accounts in prior years. Specifically, they delayed their orders in the first 2 quarters due to distinct and separate issues within their own organizations and all of their orders for 2013 will occur in the next 5 months. By way of reference, we forecast that these service providers will account for roughly 7,000 additional handset sales during this period. We also expect higher unit sales in our Russian market in the second half of 2013 as this geography continues to ramp up. And lastly, we anticipate a benefit from recently introduced dealer promotions and marketing campaigns. Moving now to our 2013 and long-range financial guidance, which we updated this morning. We expect operational EBITDA of approximately $210 million for the full year 2013, which would be 2% growth when compared to the $206 million we achieved in 2012. On the same basis for the full year 2013, you should also note the following: We expect total billable subscriber growth of between 10% and 15%, which will continue to largely be driven by ongoing success in our M2M business, while also considering slower growth from core telephony and maritime subscribers. We now expect total service revenue growth of between 6% and 8%. As for our long-range guidance, we've revised the targets we last shared with you in February. More specifically, we're now expecting average service revenue growth of between 8% and 10% in 2014 and '15, again, this anticipates slower maritime growth in the intermediate term for the reasons we outlined; new products including enhanced GPS services being rolled out later than we thought; reduced subscriber growth and usage from our core telephony offerings; and this still assumes a successful renewal of the U.S. government contract, which we believe will substantially boost 2014 government service revenue. We expect an operational EBITDA margin of between 55% and 60% in 2015, which continues to represent the operating leverage trajectory in our business. Further, we expect negligible cash taxes from 2013 to approximately 2020, which hasn't changed since we issued our guidance 2 years ago. We now expect net leverage of approximately 6x at the end of 2015, up from 5x in our prior guidance, which largely affects the revenue pressure I just discussed and the resulting impact in our cash flow over the next 2.5 years. We expect a rate of deleveraging equates to a half to a full multiple operational EBITDA beginning in 2016. And finally, a review of our capital structure and liquidity position. As of the end of the second quarter, we had drawn $853.6 million from the Coface facility relating to payments we've made to Thales for their successful completion of contractual milestones for Iridium NEXT. And we've now invested over $1 billion in the last 3 years toward the [indiscernible] $3-billion project. We had a cash and marketable securities balance of approximately $275.7 million. In consideration of all these moving parts, while we've made significant progress derisking Aireon's contribution to our overall funding profile. Our plan is much tighter now due to our operating issues. With that in mind, we've begun discussions with our credit facility lenders to discuss recent developments and start the process of modifying certain financial covenants. I'd note that our quarterly report on Form 10-Q filed this morning with the SEC has additional information on this topic. Wrapping up my thoughts, I expect several busy months for us as we addresses these commercial operating challenges and focus on a successful renewal of our agreement with the U.S. Department of Defense. We feel good about the strides we've made in standing up the Aireon business. Without question, this key component of our Iridium NEXT funding profile was meaningfully derisked during the second quarter. Similarly, we're keeping Iridium NEXT program on track, both in terms of schedule and cost, again, good news for our long-term plan. We are intensely focused on getting parts of our commercial business back on more solid footing. With that, I'll turn things back to the operator for the Q&A portion of this morning's call.

[Operator Instructions] Our first 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 talk about the new partnership with CalAmp? Can you just give us a little bit of color there, maybe in terms of scale. And then, on the equipment side, can you just talk a little bit about how you're mitigating that and then how that looks going forward?

Yes, the first question, CalAmp. We did announce that early this week. We've been working with them for a while. They've actually been a supplier through others in the past but they've kind of come to become a direct partner here recently and focused on one of our largest new customers. I think you saw that they're the ones putting the solution together for Caterpillar that we talked about earlier this year. We think that they're -- first of all, of they're a sizable company with great resources and capabilities and love to see them focusing on Iridium in the satellite world. And I think that's going to be valuable as we focus on the rest of the OEM market, which all has taken notice of our success with Cap. So it's great news to get CalAmp into the fold of our more than 300 partners. So the second question was ... James D. Breen - William Blair & Company L.L.C., Research Division: Just on the OpenPort products, you talked about just the some of the issues on the equipment side. How do you address that? And then, does that basically give you some stability there once it's addressed?

Yes, no, I said it's disappointing we've had this issue. It's an issue around one component, really, in our product that has caused more failures in the field than we expected. But we have fixed it. We've spent a lot of time on it and have uncovered the problem and solved it. And in fact it's going into production right now and it's going to be shipping to customers this month. And in fact, all-new customers and refurbishments and repairs and that sort of thing will be done with all the improvements made to the product. Our partners are telling us as soon as we get that done, in fact they've slowed down in the last quarter until waiting for that, that they are really interested in the product, really interested in selling it to their customers. And I really think starting strictly in 2014 and '15, you're going to start seeing us recover that equipment business and service revenues in that business to a lot closer to traditional levels, in growth. James D. Breen - William Blair & Company L.L.C., Research Division: And then just lastly. You talked about an order for a large vessel fleet. Can you just talk in general terms about, are there are a lot of these types of deals out there? Is it things that -- is it something you could see every few months, as more and more of these companies realize that services like you offer are a positive for them in terms of their operating?

Yes, it's a wide variety of opportunities in the maritime market, going from single vessels and small groups of vessels up to large fleets. 200 ship orders isn't very up. It doesn't happen necessarily every quarter but it's a -- that's not an unusual order. We've had even larger groups of vessels come in the past. That one's particularly positive for me, particularly given the troubles we've had in the last quarter or 2. I think it demonstrates that some of the largest companies in the world still are very interested in our value proposition and believe in us, want us and are going to work through us and, of course, want our new units out there. So it's a confidence builder that we will get back to recovery. But it's a regular. I wouldn't say we have pure visibility all the time to these. Sometimes it's the special kind of situations where we'll work with a partner and know the fleet they're going after. And we'll work with them on making sure that we can support them there. Sometimes they win things without us knowing and they just sort of happen and we find out about it a little bit sort of, if you will, after-the-fact. But in this case, it was an important one and timely.

Our next question comes from Jim McCleary [ph] of Chartering Capital [ph].

I think, Matt, you referred to greater competition in the North American market. Is part of that possibly related to LightSquared? I'm guessing that they were originally kind of deemphasizing the North American market with their plans to do their other business, and then maybe have come back into the North American market possibly with SkyBitz as well. Is there -- is part of that what you were referring to in terms of the North American business?

No, not really. We don't really see LightSquared coming back, to be honest with you. We have a little bit of visibility over there. They're really still not growing or doing anything significantly in their area. Their product is North American-based only and kind of limited to certain market segments. And they're still a spectrum company more than anything else and that's, I think, the way the market sees them. So they're a marginal player at best. And even to the extent that they supply to our transponder space to the M2M market like you mentioned, really frankly, most of those players are also moving off of them, even if they look like they'll be around a little longer. No one's very certain about their future from what I can tell. I'm more referring to what would look like more around Globalstar and Inmarsat sort of going after customers at the low end there. As I said it, we don't see a lot of effect from it. It seems marginal but we do see some effect because there has been some significant kind of price cutting going after that market. As you can tell from our numbers, it's not a huge impact, but it's one that's sort of new this year and I don't know if it's sustainable but we'll see. We think we have products and promotions that will address that low end, as well as address the usage situation. Unfortunately, as you've heard in the call, they're coming a little later than I'd like. Not too much later but a little later to at least make the impact in this year that we were expecting and that contributed to our guidance change. But we feel very positive about what they'll do to 2014 in mitigating these kind of issues.

Okay. And the SkyBitz relationship remains on track?

Yes, SkyBitz continues to be a really -- an exclusive partner of ours as we go forward. And they continue to go and focus on new business in this sector and are working with us. Not quite the volumes we originally expected from them for a variety of reasons. Really associated with them, but I don't think that's associated with any other competitor that they're using. I think that's just associated with the volume of business that they're doing right now.

Our next question comes from Brian Ruttenbur of CRT Capital.

Yes, first question is on the gross margins kind of going forward. They've been running in the mid-30s. I know it's all related to the -- I assume it's all related to the competition issue. So do you expect for the next several quarters to gross margins to run in that area, and am I making the right assumptions?

No, Brian, the gross margin in the quarter is artificially depressed by the approximately $2.4 million warranty reserve charge. So if you back that out of the quarter, you see margins are right in line with where we were in the comparable period last year, in the mid-40s. And that's how you should think about it going forward.

Okay. So that's helpful. Sorry about that. So mid-40s going forward and there should be no other charges that you anticipate related to any of these issues in the next couple of quarters, correct?

That's correct.

Okay. And then you mentioned that you're not going to have a cash tax rate yet on your income statement. You have roughly 40% taxes. What will be running through your income statement going forward?

Well, that's just deferred taxes.

Okay, and it should be at what rate?

In the area where it is now, I think what our effective rate was 38% or something like that. Right around there.

Okay. And then my other question related to the Aireon update on -- what's the next hurdle for NAV CANADA in order to fund you with a -- they just came through, as you said, with $40 million. What's the next tranche and what's your next hurdle in order to get additional funding from them?

Yes, I don't believe there's any more funding required this year. I don't think it's in the list. I mean, they're -- we haven't announced what those are. They're really more related just to the ongoing performance of Aireon and its relationship with the market, et cetera. I think given that they're $55 million into a $150-million program, I think they're definitely committed, if you will, to Aireon's success and I'd be surprise if that sort of same sort of focus didn't continue on into next year. They are fully engaged. They're extremely helpful around the world. They have great relationships with all the international ANSPs. They're viewed to be a leader in the world in terms of what they do. They're highly technically confident about ADS-B threshold as well as space-based processes. Their engagement with the FAA is very encouraging, the fact that they're really working now on sort of cross-border and cross-regional sort of performance issues is fantastic. So I think that, that's just going to continue sort of the path that they're on right now.

And then last question, on the DoD contract coming up this fall. Do you have an exact timing of that? And will you make a press release or should we be looking for Fed Biz Ops to make some kind of an announcement? How will we know when it happens, when the contract is renewed and the terms of that?

Well, it would be a material contract to us and so, of course, we would announce it. I mean, I think that's definitely a public announcement. I would expect we'd probably do a press release on it as well when time came. I don't have a defined time. I know when the current contract expires and, like everything else I think with the government these days, everything seems to come down to the wire when things have to happen. And I'm not expecting this will be any different. And so we're in discussions now, finally. It's taken a long time. We've sort of been engaging them for a long time in many levels. The sort of formalities of it really are just beginning, which is always been a little surprising to us given the size and importance of the contract. But more, they're very busy and distracted and know how important this is so I'm expecting we'll have a busy coming weeks and we'll have something to report to you before or shortly after it expires.

Our next question comes from Greg Burns of Sidoti & Company. Gregory Burns - Sidoti & Company, LLC: In terms of the M2M subscriber growth in the commercial side of the business, it looks like it's been decelerating over the last couple of quarters. Can you just maybe give us a little color on that and what you view as the kind of longer-term growth profile of that segment and maybe what you expect for the balance of the year in 2014?

Yes, it's -- there is definitely nothing fundamentally changed in terms of our view of the potential of the M2M, the satellite M2M segment or our position within it. I agree with you. It seems to be slightly decelerating in terms of numbers though our -- that is not due to any competitive or, frankly, market impact that we can ascertain. The same number of partners seem -- our actually growing number of partners seems to be going after a lot of opportunities. I would say, as I said in the last quarter or 2, we've had difficulty forecasting with accuracy, as you can tell, exactly because they tell us what they'll do and then they don't sometimes -- they don't seem to be following that. And one of the metrics we've often following in the past is equipment, when they buy equipment and when they activate that equipment. And one of the trends we have seen is it does seem to be taking longer between the time that they buy our equipment and the time that they activate it. And that maybe because of our equipment is getting less expensive. And so it doesn't cost as much to have in inventory or they like the flexibility of having it. It could reflect sort of a global market slowdown, outside in terms of the economics, where their partners are just not going quite as aggressively for whatever reason. Like everything else, it seems like everyone starts the year quite bullish and then sort of realizes that the economy hasn't quite support it. So companies end up just buying a little less or implementing a little less. And some of the reasons are these numbers are getting bigger, that some people are ordering from us. They went from thousands of units to tens of thousands of units and that's just inherently harder to forecast, I think, exactly how their customers will roll out, what implementation challenges they'll have, et cetera, as they get on to more and more things. So I still don't fundamentally see any changes there. We hear great things from our partners about our value proposition of our partners and how excited they are to move things. But then they don't quite activate as quickly as we were expecting and that's forecast. I think, as I said, we're getting better and better at that. So I think there'll be fewer and fewer surprises going forward, I hope, in that area. But that's been the nature of that business lately.

Just to qualify, Greg, you're right in observing that the add rates sort of in the first and second quarters, if you compare them to the same seasonal quarter in the prior years down a bit, sort of in the area of 70% of what the add rate was in the comparable quarter. Our expectation in the third and fourth quarters is that it will be over 100% of what we added in the comparable quarter in the prior year. So our confidence and bullishness around M2M is unwavering. Gregory Burns - Sidoti & Company, LLC: Okay, and in terms of netted on the government side, up 3%, I think, in the quarter. Can you just give us an update on kind of the adoption rate there and when we might expect to see that pace of growth pickup?

Yes, I've mentioned that in previous quarters and sort of the trend has continued. That they implement a lot of our Distributed Tactical Communications System or Netted Iridium in 2011 and somewhat in 2012. And then there's been a slowdown in the last several quarters, which continued into this quarter as they've been waiting for the next generation of the product, which they call Global Services. That allows them to go from regional nets to global nets. It allows them to have very low latency nets. It really expands the value of the service dramatically and that's been in development. It's been delayed a bit by sort of available R&D and timing of things and really doesn't sort of complete until next year significantly. So that's why I think this trend is going to continue the -- in terms of adopting a handset-based Netted Iridium now. On the other front, I think you're going to see much more activity on embedding Iridium into terrestrial tactical radio devices, that has heated up quite a bit. The ability to -- we have the ability to sort of support our modules or waveform into other people's devices and the government seems increasingly interested in that. That means higher volumes. That means even more embedded capabilities, as they take a threshold device that's line of sight and make it, basically, an online of sight and make it much more valuable. So there's a lot of activity around that. All that, though, doesn't translate until more 2014, 2015 kind of sales. And that's also, by the way, when our commercial push-to-talk service really ramps up, too, as later next year and then into 2015. And there's a lot of interest in that business as well from international, both international public safety operations as well as militaries in taking that business even further.

[Operator Instructions] Our next question comes from Chris Quilty of Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Matt, I think you've some serial problems with the OpenPort pilot product, how confident are you that you've got those hardware issues resolved with the latest hardware released?

We're very confident. I mean, we started seeing this problem a while ago, really more manifested itself, if you will, in the financial results this quarter and its implication in terms of say, the warranty provisions and how that hit this quarter. But we've been working on this a while and it's been an all-hands-on-deck sort of issue to insure that, not just that we fix the problem, but we fix anything possible really around the problems that -- and it could be in any way causing the problems. So yes, we -- not just 1 fix, it's actually a number of improvements to the product. We've shared that with our customers, who are up to speed on what's going on there. We're getting into detail with many of them in terms of making sure that they understand what that will be. And most of them look like they're, while they're holding back right now, they're excited to get the new products as soon as it starts shipping, so we have good demand in the fourth quarter to fill the pipeline again essentially for them to pick up the new unit. But yes, we feel very confident that we know what the issues are. Chris Quilty - Raymond James & Associates, Inc., Research Division: Great, and it sounds like in addition to the OpenPort, you kind of implied you've got the new M2M hardware, a new handset or voice products shipping later this year. Do you see most of those product releases as just evolutionary? Or do you have something that you think is really significant in the product pipeline that could move the needle?

Well, I position in the latter regard. Sure, I think it's a move-the-needle significant product. Rather not get into the details of it. I wasn't really meaning to preannounce anything but I think it was important for us in this call to explain one of the reasons for sort of the equipment guidance going down a bit, which was we did believe that, that product would fill the channel quickly and would help make sort of that comparable year-over-year equipment. But now because it's not going to be able -- I think people just can't buy it fast enough in the fourth quarter to do that. It's part of our downgrading the guidance in that area. But yes, we're quite excited about its impact on '14 and excited to talk more about it. But I don't think this is probably the time to do that. Chris Quilty - Raymond James & Associates, Inc., Research Division: And any new developments on the personnel tracking side?

Well, I mean, there's a number of partners in that area. The one that's probably the most visible to everyone is DeLorme because of their price point in the market and they're more consumer oriented. We've seen significant increases in their demand. I don't want to go into the specifics because that's really for DeLorme to do. But literally, it's been in the last month or 2 that, that's really moved the needle up with their new, I think they call the inReach SE product that's, obviously, is being well received because they're ordering a lot of 9603 modules from us and we're seeing a lot more activations in that front. So I'm real pleased with -- for them for their progress there. Chris Quilty - Raymond James & Associates, Inc., Research Division: And given the competition on the voice side, albeit modest, does that change your thinking in terms of product positioning for potentially developing a product that addresses that low end of the market?

It does. I mean a little bit. I mean we've been considering this for a long time, as you know. I -- we've monitored and evaluated the market significantly. In some ways, we felt instead of going down market, it's better to almost go up market, and that's been a successful strategy overall. But we have to address, what I would call, that down market, especially the more valuable high-end user who really wants a global product, who wants a product that doesn't have any compromises, which is what we offer. So we've been thinking about how to offer that and think we have some ideas there. But the other thing that we really want to focus on is usage. I think that's been across the board. That's not losing certain subscribers to other people. That's just everyone is using the product slightly less quarter-by-quarter over the last year or 2 and we've been noticing that. And I think that's an over global trend where people just like to text more and have shorter calls and aren't talking as much as they do. And that's true of smartphones and the way that the overall market is. But the trend is towards data, it's towards apps, it's towards doing that and we have to evolve with that as well. So that's more shaped our thinking, too, about future products and promotions and also pricing around encouraging that type of behavior as well, too. So that's where we're really kind of tailoring our strategy going forward.

And with no further questions, I'd like to turn the conference back over to Mr. Matt Desch.

Well thanks, all. It was not our best quarter but as we said, we're still very comfortable with our long-term plan and see a lot of good there. And look forward to talking to you in the third quarter. Thanks, everyone, for joining us.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.