Iridium Communications Inc. (IRDM) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Iridium Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to [indiscernible] this conference call to Steve Kunszabo. You may begin, sir.

Good morning and thanks for joining us. I'd like to welcome you to our third quarter 2013 earnings call. Joining me on the call this morning are CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 2013 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 facts 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 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, and good morning, everyone. Thanks for joining us. I'll get started by noting that we made strong progress in several critical areas of our business during the quarter while also continuing to tackle some challenges that led us to revise our outlook again last week. Now when I reflect on the to-do list we had heading into 2013, I can say that we checked some big and important boxes now that we're 3 quarters of the way done with the year. First, as I'm sure many of you have heard by now or seen by now, we announced the successful renewal of our agreements with the Department of Defense. Tom will spend more time on this during the call. But for now, it's enough to emphasize that these landmark agreements, worth $438 million in total, will provide us with growing and predictable cash flow from our single biggest customer for the next 5 years. Getting the deal done was a huge accomplishment for the company. I'm proud we achieved it on win-win terms, and I'm also happy to have visibility on an important chunk of our business through 2018. And when I say win-win, I think this contract will drive new and diverse usage of our network by the DOD, making us even a more strategic asset for this customer as we prepare to launch Iridium NEXT. Second, but no less important to our long-term profile, is the health of our current networking, keeping the Iridium NEXT program on budget and on schedule. We've done that, too. With true global coverage and a strong 99% availability this entire year, we have had the best network in the industry today. As for the next-generation constellation, we recently completed a Critical Design Review for the entire satellite system. This important step signifies a transition from the design phase to the fabrication and testing phase of our new space vehicles. From here, we'll embark on flight qualification and testing activities that will ultimately culminate in full-scale satellite production by mid-2014. All in all, we're on track for our first launch in about 15 months. Let me just add that we continue to be pleased with SpaceX's performance as our primary launch services provider. In late September, they had a successful commercial mission with the same upgraded version of the rocket we'll be using. For the first time, they also launch from the same base we'll be lifting off from, Vandenberg Air Force Base, and deliver satellites for the first time into orbit rather than a single capsule. SpaceX continues to stay on schedule and we expect they'll be ready for our first launch with them in mid-2015. Third, we made significant progress this year in standing up our Aireon-hosted payload business. Now Canada, our joint venture partner, has now invested $55 million of its planned $150 million investment as Aireon has hit a list of important milestones. Other potential international players also continue to show great interest, and a variety of discussions are still under way for both customer and investor relationships. For its part, the FAA remains fully engaged in the project, having made a commitment to Aireon by funding $10 million to support analysis and engineering work for its procurement decision process. Great overall progress for a strategic initiative, which remains a big piece of our funding profile in future growth. Finally, our M2M business continues to enjoy double-digit growth rates in 2013 in what is one of the most promising growth segments for our industry. We grew total M2M revenue by about 18% in the third quarter while growing M2M subscribers by over 20%. The growth trajectory can at times be choppier than we like given the evolving and somewhat fragmented nature of the business that's still in its early days. But with our network superiority and device functionality, we really like our prospects in this space. A growing funnel of large OEM customers gives us added confidence that we'll continue to be leaders in the satellite M2M market. From a business development perspective, we're in various stages of bringing new business on board, from initial discussions about our value proposition and field trials all the way to contract negotiations with brand name players in the agriculture, construction, energy and mining sectors. These large global enterprises look to Iridium as long-term technology partners for their telematics solutions, which allows us to stimulate demand for M2M services across the entire ecosystem. Signing up Caterpillar earlier this year was really just a first step in our broader OEM strategy, and we expect continued momentum here as we look ahead to 2014. Before I jump to the lingering short-term challenges we face in 2013, let me wrap up the positives by giving my perspective of our recently announced Iridium PRIME program. As the world's first turnkey hosted payload solution, we expect to carry third-party payloads on stand-alone satellites that will leverage the already significant investment we're making in Iridium NEXT. With the Iridium NEXT payload space fully utilized and many other missions having been left on the cutting room floor, we're open for business again to meet the growing demand for potential missions, including earth observation, space-based weather monitoring, tracking and other government missions. With more flexibility around launch schedules, mission scope and key technical requirements, such as mass and size, we can offer these missions at an estimated cost savings of 50% or more compared to current stand-alone solutions. We just kicked off this business in the quarter, but we like its long-term revenue potential, and we'll keep you updated on its progress. As for the issues we're facing that have weighed on our outlook this year, let me begin with an update on our maritime business line. I'll start by saying that we remain cautiously optimistic about a meaningful turnaround in 2014. The newly fielded improved units, of which we've already shipped almost 500 terminals, are performing well under strenuous, real-world conditions. We had to incur additional costs in the quarter to support our partners in moving to the improved equipment but feel like it's money well spent to regain our footing in the market. Our new customer activation rates remain reasonably strong, customer churn is starting to slowly turn around and we see a nice pipeline developing that supports a return to growth next year. It's very evident that our partners have been looking for alternatives to our primary competitor, given their price increases and distribution changes. They want us to succeed because we serve an important role in the value segment to this sector. Without us, the incumbent operator would have tremendous pricing power and market share, and our markets -- and our customers would be left with few alternatives. So the market dynamics are good and we like our competitive position. But as I said, we have more work ahead of us to get back on the right track. Another area where growth has slowed a bit in the last few quarters is the handset business. And with the passage of time, our viewpoint of the situation has evolved. As a wholesale distributor that goes to market through a partner channel, we don't always have clear and immediate visibility when you think of demand trends and customer behavior. What we heard from our distributors in the first half of the year initially suggested that while there was some increased competition at the low end of the market, they expected a rebound in the second half of the year, particularly during the peak selling season of the summer months. This was in part reinforced by the fact that our net additions in the second quarter weren't that far below what we did in the same period last year. We had 11,000 voice net additions this year in that quarter versus 13,000 voice net additions last year. We actually did okay during that period, but it masked the larger trend. After taking a deep dive with our partners and analyzing volume trends over the extended period, the broad consensus is now that we're seeing a market-wide pullback. Looking at our competitor's recent results for comparable subscriber growth also lends support to this position as their growth has similarly slowed. We still believe that the impact of direct competition on our handset results actually continues to be pretty marginal. So where do we go from here? To some extent, recently introduced dealer promotions and marketing campaigns has stimulated incremental demand, although it hasn't been able to offset our unit sales shortfall. We'll continue to tweak these offerings to get the most out of the channel, and we believe our upcoming data-centric product will help our trajectory in 2014. This product will allow our customers to connect to our network in easier ways and in the ways they want to connect. And on the most important metrics, subscribers and revenue share, I think we'll have overall stability despite a rough spot for the broader market. We're the leaders in this segment with a global low-latency network and robust product portfolio and have demonstrated we have a very defensible competitive position. Tom will have more on this topic during his remarks. But as we've said, the slowdown in our handset business strongly correlates to lower overall equipment sales and voice subscriber growth in our commercial market, which is why we further lowered our 2013 outlook last week. While we see growth in the next 2 years, we need to take our time and work with our channel partners to get a handle on our 2014 outlook, which is why we've taken long-term guidance off the table for now. In closing, let me take it back to where I started. We've had some important successes this year that keep us optimistic about our long-term prospects. The network is doing really well, and the Iridium NEXT program is coming along as we expect it. The Aireon business has been largely stood up, and Iridium PRIME represents long-term revenue potential in our hosted payload business that we're still working into our long-range plan. Our new deal with the U.S. government successfully answers one of the biggest questions we've had around our story all year. But we have to get parts of our commercial business back on more solid ground and we'll remain intently focused on all of this during the next several months. Overall, 2013 cash flow looks pretty -- looks like it will be pretty flat to 2012, but we don't think it has much to do with our longer-term view of growth. I look forward to updating you on what we speak -- when we speak again in early 2014. So with that, I'll turn it over to Tom for a more detailed financial review. Tom?

Thanks, Matt, and good morning, everyone. I'll first outline our key financial metrics, then step through the changes to our 2013 outlook and long-range guidance and wrap up with a review of our capital structure and a progress update on discussions with our credit facility lenders. Iridium reported third quarter total revenue of $100.6 million, which was unchanged from last year's comparable period. While commercial service revenue grew $5.2 million on a year-over-year basis, equipment revenue fell $6.1 million, eating up the entire gain. Our overall sales volumes have not recovered in the second half of the year as we anticipated, and I'll have more color on this topic later in my remarks. Operational EBITDA came in at $53.3 million, a decline of 7% from the prior year quarter. Our operational EBITDA margin was 53% for the third quarter, falling from 57% in the year-ago period primarily due to $3.1 million of Iridium OpenPort warranty-related costs. From an operating viewpoint, we reported commercial service revenue of $61.3 million in the third quarter, representing 9% growth over last year. We added 8,000 net commercial customers during the quarter, with 75% of that coming from the M2M business, compared to 18,000 net subscriber additions in the year-ago quarter. Commercial M2M data subscribers now represent 43% of billable commercial subscribers, an increase from 39% during the year-ago period. Building on Matt's discussion of the recent slowdown in the handset market, I'd like think about it in terms of how many net additions we're picking up as a percentage of last year's subscriber gain. Said differently, I'm comparing the strength of our net additions in a particular quarter versus the year-ago period given the significant seasonality in our business. It's a good comparative measure in assessing our ability to add new subscribers and where the market may be headed. On that basis, the second quarter of 2013 looked okay from a trend perspective, but the third quarter was notably weaker. Fourth quarter is also shaping up to be down now that we have October results. So it really feels at this point that the strength we saw in the second quarter was a false signal. When looking at this trend over a period of several quarters, it becomes clear that we're not adding as many net commercial voice customers as we have in the past, regardless of seasonality and other factors. We investigated this issue further by looking at our key competitor's results and observed that they're also adding fewer customers. So this analysis, along with the broad consensus we've reached with our partners, suggests that the handset market is in a period of slower growth for various reasons. But as Matt outlined, we're working to expand the market and capture incremental revenue by launching a data-centric product and by working with our partners to optimize promotional activity in marketing campaigns. Turning now to our government services business, where reviewing this quarter's financial results isn't terribly instructive, given the successful renewal of our key contracts with the Department of Defense a couple of weeks ago. So I'll spend my time discussing what these contracts mean for Iridium going forward. The fixed-priced, 5-year nature of the airtime deal gives both us and our defense community users much welcome stability, gives an even greater number of government subscribers low-cost access to our network and its full capabilities without concern for price increases based on usage changes or demand growth. Importantly, it provides us with a predictable and growing cash flow during the launch and construction period of Iridium NEXT when you consider that as our single biggest customer, they represented 20% of our revenue in 2012. We expect their need for commercial satellite services will grow in the future, and we're proud to be an optimal solution for their critical missions, no matter where our war fighters are around the globe. We've benefited from a valuable strategic relationship for many years and look forward to continuing to support them with global, secure, voice and data communications and enhanced services that will become available with Iridium NEXT. These 2 deals worth $438 million, $400 million for the services component and $38 million for supporting their dedicated gateway, are great success for both of us as we mark the next chapter of our partnership. Focusing next on the equipment line, which produced revenue of $20.3 million, a 23% year-over-year decrease resulting primarily from lower overall sales volumes. When laying out our second quarter results back in early August, we expected handset shipments to pick up in the second half of 2013 due to 2 factors. This recovery in unit sales didn't occur, and I want to pause here to reconcile those trends for you. First, we anticipated 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 were major accounts in prior years. Specifically, they delayed their orders in the first 2 quarters due to separate issues within their own organizations, and we thought all of their orders for 2013 would occur in the back half of the year. These service providers have now resolved their issues, but it came too late to have a meaningful impact on our unit sales volumes for 2013. Some of this volume will be displaced to 2014 as they continue to rebuild their inventories but it likely won't fully offset what appears to be the broader macroeconomic trend, the slower market. Second, we also expected higher unit sales in our Russian market and this geography continued to ramp up after being recently licensed. Our Russian partners have, in fact, generated significant handset sales when you measure it as absolute growth, but the shipments have ramped up more slowly than their forecast. Moving now to our recently updated 2013 guidance, which we reiterated this morning. We expect operational EBITDA of between $200 million and $205 million for the full year 2013, which compares to $206 million in 2012. Again, the primary reason for essentially flat cash flow this year can be traced to equipment revenue coming in below our initial projections and higher Iridium OpenPort warranty-related expenses. On the same basis for the full year 2013, you should also note the following. Total billable subscriber growth of approximately 10%, which is at the low end of our previous range and continues to be largely driven by our M2M business expansion, while also considering slower growth from core telephony and maritime subscribers. Further, we expect total service revenue growth of approximately 6%. We also gave one piece of guidance for 2014, which is that we expect full year 2014 EBITDA to increase from the full year 2013 level. As for our long-range guidance, we've decided to withdraw everything but the cash taxes piece for now as we assess the impact of lower commercial equipment sales and subscriber additions as well as the long-term revenue potential from our Iridium PRIME hosted payload program on our operating plan. As you heard throughout our call this morning, our fundamental path to value creation remains solid when you consider the attractiveness of the markets we operate in, our relative competitive position and network leadership. We still anticipate double-digit growth in the promising M2M sector while defending our revenue share, albeit in a slower market, in the handset business. We also forecast a meaningful recovery in 2014 for our maritime business as we continue to put our Iridium OpenPort issues behind us and capitalize on the need for a value product in this space. And finally, a review of our capital structure and liquidity position. As of the end of the third quarter, we had drawn $936.3 million from the Coface facility relating to payments we've made to TELUS for their successful completion of contractual milestones for Iridium NEXT. We've now invested over $1.2 billion in the last 3 years towards this approximately $3 billion project. We had a cash and marketable securities balance of approximately $270.3 million. As we shared last quarter, our operating plan is tighter now due to some of these moving parts. We've had productive discussions with our credit facility lenders during the last few weeks and have started the process of modifying certain financial covenants. Nothing specific to report on today, but I expect to have a full update around the time we report fourth quarter 2013 earnings in the early part of next year. In wrapping up my thoughts, we remain optimistic about our prospects for long-term value creation, despite the weaker-than-expected results we posted in 2013. Iridium NEXT will be transformational, not just in terms of network capabilities, but also for our financial results. Having the launches completely behind us in 2018, our annual capital expenditures are projected to fall below $30 million, while we expect our operating cash flow will rise meaningfully from current levels. Our new contract with the DOD, representing our single biggest customer, will provide for at least a $22 million service revenue increase in 2018 from what we'll see in 2014. In addition, recent developments with our Aireon joint venture only increase our confidence that it will become the standard for oceanic and remote airspace monitoring. This makes us optimistic that Aireon will have the ability to honor their contractual commitments to Iridium. Under these contracts, Iridium would recognize $14 million in recurring annual hosting revenue and an additional $20 million in recurring annual data service revenue in 2018. So adding these 2 important customers together, we have visibility to potential recurring service revenue growth of over $50 million during this period. When you combine this with the excellent attributes and competitive dynamics of our commercial business, we believe that Iridium's future is bright. With that, I'll turn the things back to the operator for the Q&A portion of this morning's call.

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

My first question is about the need to potentially raise capital. Is there a need to raise any more capital with your current financial situation?

Brian, as we've said in the past, we see issues with our financial covenants as we look in -- as in periods beyond 1 year, and we're in discussions with our lenders to address that. And that's as much as we can say at this point as far as that's concerned. We're talking to our lenders currently.

Okay. And then in terms of your guidance, as I look at it, it would -- in terms of revenue and earnings, it would be essentially flat revenue and earnings in '14 versus '13, looking at your guidance, your subscriber growth and your operational EBITDA. Is that the right ballpark to be thinking?

So let's be clear. In 2014, we had not issued any guidance in respect of service revenues or subscribers. We've issued guidance in respect of EBITDA and that is that it will be up from 2013.

Okay. But you didn't say how much it's going to be up, correct?

Did not.

Our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: I wanted to dial in a little bit on the M2M -- commercial M2M growth, which -- I think that's the weakest quarter you've seen in a number of years. Can you talk about some of the dynamics going on there?

Yes, Chris, it is a little weaker, I think, than we've seen in the past, and I think that's sort of been exhibited really for the last couple quarters as our partners, and you know we have a substantial group of partners, had forecast -- given us forecasts at the beginning of the year for certain net activation rates and equipment sales and it's really been all over the map. Some have been up from where they have, some have been down. But net, there's been -- it's been a little weaker this year than we have in past years. I can tell you, I don't -- we don't see anything -- any dynamics as it relates to sort of competitive dynamics. In fact, we believe we're growing market share. We think it's timing for the most part. We have new -- some new, very interesting opportunities coming on board that we think will be contributing -- did contribute this year, but will be contributing more in 2014 and '15. Our partners aren't telling us anything that there's unique about that. It's really just the fact of sort of what I would call general choppiness of quarter-by-quarter behavior. But in reality, we think we still have the best product in the space. Our partners are telling us that. And we're still attracting a very interesting and significant funnel of new opportunities that we think will be coming in over the next coming quarters. So it probably related a little bit to the partner -- a couple partners in particular that we might have brought on 1 year or 2 ago that sort of underperformed based upon their unique circumstances, but I really don't think it's any -- to be of any kind of general trend or anything. Chris Quilty - Raymond James & Associates, Inc., Research Division: Got you. And can you talk about the trend toward OEM customers, chipset sales, waveform integration, some of the opportunities to kind of move away from selling the traditional modem?

Well, there has been growth in that area. There is more chipset sales going on right now from a partner or 2 who've taken our chipset and are putting it in. There's not much waveform really right now going on except activity really going on towards the government. There's a lot of interest in the government of embedding a couple of different waveform or service types into various different opportunities. And by the way, most of those are all upside to the fixed-price contracts that we announced. But in terms of embedding chipsets, where a growing number of chipsets are going out there, and I think that will only help the dynamic as it makes our products even more competitive in the future for different things. When you mentioned OEMs, I mean, specifically, you're talking about a specific class of M2M customers, that's an area we had almost no visibility to about 12 to 18 months ago, and now I feel like that's a big part of our potential. We are engaged across-the-board in a number of players around the world in that area. Only really announced one to speak of, but I think you'll see more in the coming quarters. And I think that, that's a good area of growth, particularly of what I would call as more the low end, but there are some high-end business there, too, in terms of monitoring of equipment, engines, engine states [ph], that sort of thing. So I think you'll see across-the-board growth in the OEM space for us. Chris Quilty - Raymond James & Associates, Inc., Research Division: And on the OpenPort product line, can you talk about any impact you've seen from Inmarsat's recent price increases?

Yes, I was just reading a report this morning from the kind of the market team, and there does seem to be a lot of activity in the field right now as the partner base is kind of going after that opportunity. It's certainly created an opportunity because it's sort of pushing a whole class of customers. I think they're hoping to push them to fleet broadband, but I think we're going to be a very attractive alternative or opportunity for that, particularly with -- after -- as we regain the trust in the market for our product, which is occurring now. So I think that's a part of the dynamic because of that cautious optimism about a meaningful turnaround next year. We really didn't lose too many people really in the last 6 months and I'm really pleased with that. And I think it really goes with this dynamic where the market really likes the product. They like the dynamic of it. It was failing too often in the field, but with the new units going out there, I think there's a lot more enthusiasm about getting it on to more ships, so I think that will help us.

Our next question comes from James Breen with William Blair. James D. Breen - William Blair & Company L.L.C., Research Division: Just can you give us a little bit more color, maybe in terms of timing, on the OpenPort and when you think we'll sort of be through the drag that's -- from the equipment that had been repaired or getting repaired? And then secondly, on the voice market, do you think it's just a global slowdown in terms of penetration for the product? Or is it competition? Maybe a little bit of color there as well.

So in terms of OpenPort, I mean, obviously, the drag this year has been as we've built up our warranty reserve and costs to basically manage the move from the older units to newer units. And that is -- that wasn't planned necessarily, and certainly I expect that to be, for the most part, over at this point. So that at least takes that off the table. So going forward next year, we won't have that weighing against us. There was also a real slowdown really over the last couple of quarters as people were waiting for the new and improved units. And now that those are shipping in volumes, as I said almost 500 units have shipped, which is a significant number really off the bat, but there's still a lot more demand in pipeline for more, I think we're going to start seeing, through the end of this year still, that -- what we're forecasting. But 2014 really should start turning around the other way. And we're also starting to see some progress on the aviation side in that space. We also think you'll see some more activity on land in that as sort of something coming next year. So I think next year, hopefully, will be a pretty different year for OpenPort than it was this year. As far as handsets, look, like I said, we were a little bit surprised by that. I think our partners have been a bit surprised by that. Like I said it's been sort of a market-wide pullback, it feels like, because everyone -- I think it has to do a bit with uncertainty out there. It doesn't help when governments are -- who are big buyers for first responders and for emergency uses and for others, aren't really sure whether they're going to have the funds and whether their government is going to be open, and I think that hasn't helped. I don't -- like I said, I don't really think it's been so much competition, though I would like to have a new product in the market that would help a lot -- that would help us grow and stabilize that, and we're still planning on that coming in the next few months. So that will help a lot. But we're -- like I said, we're seeing, I think, a general slowdown, but I don't think it's saturation per se. But we've never ever really expected the handset market to be a big grower. We just thought it would be more of a stable, slow grower in our space, and I think that's what it will ultimately be, a sort of a long-term view. We still believe that's how it fits into our portfolio.

Our next question comes from Greg Burns with Sidoti & Company. Gregory Burns - Sidoti & Company, LLC: Just a question about prime and the pipeline of opportunities you see there. Is anything that is -- or maybe you can give us an idea of just the size, some of the things in the pipe, the stage of development or if we could expect any kind of announcement within a reasonable time frame around PRIME.

We were literally just kicked off that business in this quarter, so it's still early days. But I have to say it's gotten off with a bang. There is a significant and growing pipeline of engagements that we've had both with end customers for a lot people who suddenly realized that maybe they can get their missions up, since they didn't have the money to do them on their own and are now considering this as a better platform, maybe a more reliable platform that they can start planning towards. The first launch would still be in 20 -- at earliest, what late 2017 to more likely 2018 as we complete the NEXT program. So as you back up from that, you start needing to make sales 3, 4 years from then. So I'm not expecting you're going to hear something about that this quarter or next quarter, but I wouldn't be surprised if we won't be able to update you on some interesting ideas that we're engaged with in 2014. And as that sort of grows in 2015, that could also potentially bring some revenues as we do engineering and analysis work for people but possibly even engage with building some extra satellites, going beyond the 81 that we're going to be building for Iridium NEXT. But it is a -- the interest that's coming out just from end customers but it's also coming from system integrators and technology players. So some of the payload players in the industry who already are out there really talking to people about their missions are now talking to us about how can they can move towards PRIME as a more cost-effective platform for them and as I said, we'll update you as we hear more. Gregory Burns - Sidoti & Company, LLC: Okay. And in terms of Caterpillar, when do you, I guess, expect the first piece of equipment to go off the line with Iridium on them?

Well, it's very, very -- it's in testing stage right now, and it's in integration and testing through their technology partners and integration teams. And I would expect the ramp will really start up in 2014 and ramp through 2014. We've only announced the part of really what we believe our long-term business for Caterpillar to be. There'll be still more business, I think, to come there out of that, that you'll hear more of as the time comes, as they're looking for expanded partners for more applications as part of their business. But the stuff that we've announced so far, I think, will start rolling out really in -- early in 2014.

[Operator Instructions] Our next question comes from Jim McIlree with Chardan.

All right, do you have a guess on how long the weakness in the handset market might be? Do you guess this might be just a quarter or 2? Or is this something that you think might extend into the middle of next year?

Yes, I think it's too early to say. I mean, that's one of the reasons why we really want to take the next couple of months. So I would really like to come back with our fourth quarter results and talk about 2014 in more detail, and I think we'll have a lot more visibility to it then. As I said, we want to see how new products play into that as well as our existing products and how it relates to everything else and see how everyone else is still doing. But as I said, we wouldn't be in this situation if we had really great visibility this year. So we really want to expand that visibility here before we get in a lot more detail about it.

Okay, fair enough. And then on the government side, can you just remind me how these contracts might affect handset sales to the government? And then what is the implication of the contract on -- with NEXT? Does the government get access to the NEXT network as well?

Yes. Well, first, on the latter one, Iridium NEXT is sort of a seamless transition from the current products. So as it evolves to NEXT, they continue to get access to NEXT for all the products that they have bought. There will be new products coming with NEXT that aren't necessarily included in the current contracts. So those would be additive to the contract. And I should say, too, that I'm not sure everyone completely appreciates just how groundbreaking this contract is. We've been subject to ebbs and flows of demand depending upon how many devices the customer used. They were able to use unlimited usage but for only the number of devices that they were paying for each month, and that was clearly in a decline over the last 2 years almost that they've been declining in usage now. This is a 5-year, fixed contract, which really sort of takes off that whole issue off the table because, at least for a lot of core services, which includes paging, handsets, DTCS or the tactical radio usage -- it even includes the small part of OpenPort, which I'm excited about because it gives them a chance to sort of experience OpenPort, so there's upside there. And really then gives them the ability and, I think, an SBD, of course machine-to-machine, which I think is going to make them take a look at those services and consider in expanding some of those because it won't cost them incrementally more to, say, go after some M2M applications maybe that they were concerned about going after before. So equipment isn't in that fixed-price contract. So all equipment sales are above and beyond that. So to the extent that this generates incremental subscribers, it grows more M2M customers or handset customers, those will be products that we'll be selling them and will hit our equipment line separately. So that's all good. It also doesn't include a few things like waveform, as I mentioned, which is something we've working with them. We'd really like to embed this push-to-talk tactical radio service in a lot of their core terrestrial [ph] products, so there's some activity under way and that's sort of incremental to this business. And there are some other kind of projects that we're working together, which I think will even add. So it gives us a really solid base, it gives us visibility over 5 years to a big chunk of our revenue and gives us some upside that we can play off as well and could drive incremental equipment sales in the future.

Our next question comes from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: On that point, the push-to-talk or DTCS, I know that's been delayed a bit due to some R&D funding, with the government kind of back working. Are you seeing some of those R&D dollars starting to flow? And can you give us a sense of when you expect to see some product and network completion on that project?

Yes, it's a good question, and there is some kind of news to report there. You're right, over the last actually about 1 year to 18 months, R&D had started slowing down towards building what they really wanted, which they call -- which we call -- used to call Phase 3 service or they've been calling recently global services, which takes it from a satellite-based service, so under a really big footprint, having lots of devices, to a global footprint and lower latency and advanced capabilities. And everybody was in sort of a wait mode until that new product could be developed and implemented. And the R&D was slow because of the government uncertainty, et cetera, and contract uncertainty and everything else. That seems to have been unblocked in the last 2 or 3 months. R&D looks like -- there's more visibility to R&D now. There had been some confusion over who is really kind of driving the show on the government, which agency. That seems to have been sorted out, and the sort of the Phase 2 product, as it stands today, the evolution of it to Phase 3 seems to have been sorted out. So I'm encouraged by the fact that, that will -- I think that will start giving us some potential sales. Of course, most of the core sales are in the fixed-price contract, though it could still be some -- maybe some incremental equipment and everything. But it also -- it starts freeing up the potential for some of those waveform opportunities that could turn into incremental sales as well. Chris Quilty - Raymond James & Associates, Inc., Research Division: And correct me if I am wrong, but Phase 2 you didn't see any hardware revenue, but with Phase 3, you have a product and will be seeing hardware revenue?

That could potentially be true. That's still -- there's a couple of different opportunities for handset potential. We do have a handset, and we may be part of it. But there could be other handsets as well because we want to create a multiple opportunity for devices for the government there. Now this all, by the way, Chris, has been sort of a foundation for a commercial products as well, and we're still forecasting that to come out in 2014, too. And so as we sort of think about our handset business and voice and data business, that also gives us sort of another service that we can add to the mix that sort of helps us give confidence that, that area will be stable and possibly even growing in the future. Chris Quilty - Raymond James & Associates, Inc., Research Division: And how quickly can you turn the commercial product once the DOD product is launched? Is it a matter of months or quarters?

Well, actually, we've disconnected the 2 just to ensure that we really aren't tied -- the 2 had played off of each other. We had taken advantage of investment that the government had made in the past and built on top of it and vice versa. Really I think the government is now taking advantage of the work we're doing on the commercial product. But really, we now have a much more visibility to our timeline and availability of our product in 2014. And it won't really be guided on if there was any further slowdowns. We're -- we should be in trials sometime in 2014 and hope to see that ramp up towards later in 2014 and into 2015 and believe there's a fair amount of demand -- pent-up demand around the world for that application for both foreign militaries as well as search and rescue, public safety. A lot of activity around that area. Chris Quilty - Raymond James & Associates, Inc., Research Division: And in the absence of that product, which doesn't sound like is going to be much of a '14 contributor, I think you had some other commercial products that were supposed to launch in Q3. Presumably, you've had some slippage to the right. And without providing, I guess, discrete details, do you still see those as a potential revenue driver for '14?

We do. I don't know if I -- we might have initially hoped for it to be quarter 3. I think we were really more focused on quarter 4. I think it's going to be more quarter 1 now. We want to make sure that's the highest-quality product that we can have. We don't want to have any issues there. So we're in testing right now, and we'll make sure that is extremely robust and has the right value proposition for customers and is completely ready. But yes, I think it'll be -- should be ready early enough in 2014 to make contributions to 2014. Chris Quilty - Raymond James & Associates, Inc., Research Division: And a question for Tom. He had mentioned -- I just missed it, something about the CapEx being down $30 million.

The comments were relative to 2018 and that NEXT would be transformational not just in terms of the network capabilities but our financial results and when you look out to 2018 when the launches are behind, as CapEx goes to sort of a maintenance level of below $30 million. Chris Quilty - Raymond James & Associates, Inc., Research Division: Good then. So no change there?

No.

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

Okay. Well, thanks everyone for joining us. Have a nice Halloween. And we'll see you at the end of our fourth quarter. Thanks.

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