Good day, ladies and gentlemen, and welcome to the Iridium Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Ken Levy. Sir, you may begin.

Thank you, Nova. Good morning and thanks for joining us. I'd like to welcome you to our second quarter 2015 earnings call. Joining me on this morning's call is our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 2015 second quarter results followed by Q&A. I trust you've had the opportunity to review our morning's release on our website in the Investor Relations section. 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 our 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 our 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 disclosures. Our 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, Ken. Good morning, everyone. I'll begin by highlighting that based on our results through the first half of the year we've updated our full year guidance for service revenue and operational EBITDA. 2015 has shaped up to be a more challenging year than we expected with a number of largely macroeconomic headwinds impacting our results. Handset sales and related usage in our voice market remained pressured by a strong dollar and weakness in the energy sector. We're also now seeing reduced oil and gas activity curb near term growth in the M2M sector. Now while we have to manage through these hurdles, let me be clear the foundation of our long-term growth trajectory remains intact. Tom will have more on these trends during his remarks. For my part, I'll focus on the dimensions of our growth profile, the status of our network, developments in our Iridium NEXT program, recent news from our Aireon joint venture and an update on our major lines of business. Before I jump to these key strategic initiatives, it is important to underscore that our investment case is long term. We expect to see a financial transformation built through 2018 with great potential for the Company in the years ahead. Simply, we see much higher operational EBITDA and much lower CapEx combining to generate significant free cash flow and ultimately meaningful value to our stakeholders. The first topic which is usually the case is the performance and the resilience of our current network. Good news once again on that front. As it has been about one year since the satellite failure and our constellation continues to perform very well. Our operations team does a great job of getting the absolute best out of our current outwork first-generation system. We expect more of the same as…

Thanks Matt and good morning everyone. I'll get started by recapping our key financial metrics for the second quarter and will then outline the changes to our 2015 and long-range outlook. I'll close by taking you through the elements of our long-term growth profile and briefly reviewing our liquidity position and balance sheet. Iridium reported second quarter total revenue of $101.9 million which was down 1% from last year's comparable quarter. Service revenue grew 2%, but this was offset by an 8% decline in equipment revenue. Operational EBITDA came in at $61 million an increase of 12% in the prior year period. Operational EBITDA benefited from higher government service revenue and lower product warranty costs. Product warranty costs were down materially from the year ago quarter as or Iridium Pilot Maritime product continues to perform very well. Our operational EBITDA margin was 60% for the second quarter up from 53% in the year ago period. From an operating viewpoint we generated commercial service revenue of $60 million in the second quarter which was unchanged versus last year. We added 16,000 net commercial customers during the quarter with the gain evenly split between commercial voice and M2M customers. Commercial M2M data subscribers now represent 49% of billable commercial subscribers, an increase from 46% during the year ago period. I'm going to dig deeper on our M2M business as there are now additional headwinds in 2015 beyond the NATO [ph] customer usage profile change we discussed earlier this year. First, one of our key service providers has significant exposure to the oil and gas market and has absorbed increase subscriber cancellations as activity has been reduced in the energy space. We now expect revenue from this partner will decline by about $1.5 million in 2015. We've also proactively adjusted pricing for this…

[Operator Instructions] Our first question comes from the line of Andrew Degasperi of Macquarie Capital. Your line is open sir.

Thanks and good morning. I wanted to first know if you are seeing any other weakness in other sectors outside of oil and do you see some kind of trends are stabilizing at this point or should we wait a few more quarters before that turns around?

Yes that's a good question. Of course our business model is indirect, so we work through our many partners who address the M2M market segments and voice and maritime segments and the space. The real significant standout has been oil and gas. It's really clear and some of our earliest and largest partners had been in that sector and so of course that has sort of a very high over majority it seems like through the overall effects that we've been seeing. There does seem to be some weakness in other sectors as well, but it's sort of hard to pin them down as exactly what those might be. They are in specific market areas. Some of our partners continue to grow and do very, very well. It is just that net-net seems to be more of the oil and gas sector than anything else right now.

Got it, and secondly, can you comment…

Oh I'm sorry Andrew, you mentioned, I mean in terms of, you know, look nobody knows for sure it is a headwind, we think we fully accounted for it this year in terms of sort of the change in our expectations and what we're doing. What it does next year we're really not sure exactly how long it happens. I don't know what the market expectations are for that sector, but I think probably most of our partners have fully accounted for the downturn in terms of what they're telling us they think will happen. But certainly our hopes like anything else is that these headwinds will ultimately turn into tailwinds somewhere down the road. I don’t know exactly when, but I think we've accounted for it this year for the most part.

Got it and secondly, can you comment maybe on OneWeb [indiscernible] a few weeks ago. I just want to know what are your thoughts about it and do you think there is any chance that they might interfere with your network? Thanks.

Yes, so OneWeb for those who don’t know, it is a new startup in I'd say the broadband, global broadband space. It is a very interesting venture, and is talking about $500 million sort of equity investment that really kind of kicks off that venture. It is a Ku-band system so it is not L-band and it is meant to operate with an awful lot of small satellites in lower orbit. So I think it is a very interesting venture. It is hard to really tell much about the business or the business model right now. So I can't really speculate about its potential success. I feel for them. They have a lot of challenges. We've been through all that before and I wish them well, but I think it is going to probably take them a long time to really get up there. I look at them frankly more as a potential future partner, because you know what they plan to do is not what we really plan to do with Iridium Certus Broadband. We're focused on very specific market segments, very highly oriented towards safety applications and aviation, maritime and land. We plan to be more of a complimentary technology as opposed to always being the always being the primary technology. So when they get into operation in the early 2020s as a role player, I mean there is a real potential that you could see, complimentary kind of systems it is kind of hard to have those discussions with them now because I think they are really still in building mode. But it certainly is an interesting development. I keep saying we were Leo [ph], before Leo [ph] was cool, and I think we have to kind of demonstrate really the value sort of a little latency close to the Iridium kind of system in terms of what it can perform and I think they are inspired by that and will build a kind of a potentially complimentary system in the long run before that if they are successful.

Great, thank you.

Thanks.

Our next question comes from the line of James Breen of William Blair. Your line is open.

Thanks, just a couple of questions. One that you talked about take-or-pay contract and more of the timing, can you just give us a little color on that is it basically implying that you are getting the revenue, you're just going to get it further down the road? And then within the M2M space can you just talk about the competition there and any progress you've made with [indiscernible]? Thanks.

The competition you said in the M2M sector, have you been okay. So the first one, yes there was one of our service providers had a take-or-pay contract going out for a specific plea. As I said they had, they found themselves in a difficult position. We probably could have forced the take-or-pay on them, but I think that's really not the right thing to do from a partnership perspective long-term, particularly since we both plan to be in this industry a long time and in participation going after new business. So we did renegotiate that and just stretched the revenue out and so the revenue moves out a year or two down the road from what we had expected. So we have planned for it more in this year, some of that is coming out this year and that affects our short-term results, but long-term it is still, the contract the take-or-pay nature of it and the overall value of that contract has remained intact. On the second part in terms of the heavy equipment space, there is not a lot of change in that space. I'm pleased to see sort of characters trying to enroll the early customers. It takes time for them to build it into their systems. So these are longer than sometimes desired build ups, but the payoff long-term in terms of all the systems that will be out there using radium machine to machine are exciting. We continue to sort of expand the number of companies we're talking to. It is all moving in the right direction. I still feel like we're going to be closing some more contracts this year. Doosan is a great example as they move to their next generation system they are going to be moving with us and we're excited about that. I still think the dynamics are very much the same as they've always been and that's still kind of underpins really some of our growth in the machine- to-machine sector over the next couple of years.

Great, thanks and then just one last one just on the launch schedule, so with the initial launch moving to December and the formal testing, will that push the first SpaceX launch into the second quarter or are you still hoping for the end of the first quarter?

No it does push it to the second quarter and as I said I think they are going to be well ready for us. As I said, I think SpaceX has been very thorough. I think we agree with their initial assessment of what happened in terms of the instructed that failed and we're starting to get a sense of why that might be. I mean, I think they are not moving too fast on that. They have been extremely thorough about what they're doing and what I really liked SpaceX as a supplier they have a lot of control over their development and manufacturing processes. So when they want to fix something they can do it quite quickly because they don’t have to rely upon a real extensive development change. So they are feeling like they are going to get back to launching this fall and they'll still be a number of launches before we go in sort of the middle of the second quarter and we'll be able to get back on track quickly really to our launch schedule that completes our network in 2017.

Great, thank you.

And our next question comes from the line of Jim McIlree of Chardan Capital. Your line is open.

Thank you and good morning. Can you talk a little bit about OpEx specifically SG&A was down quarter-to-quarter, is that a seasonal thing or is that a new level of SG&A or is that expected to rise again as revenue growth accelerates?

Well sequentially it gets down largely on the back of lower incentives is what you're seeing in the current quarter. And as we said our guidance for the full year expects a lower level of operating expenses just as we trim and given lower service revenues.

Okay, great, and Matt can you refresh our memories on what it is you are exactly doing for Doosan?

I think we've talked about having, one an equipment supplier a while ago we're just announcing their name this quarter. But yes, Doosan is a major global player in the heavy equipment space with a very broad portfolio of systems that they produce every year. They had been operating with both terrestrial and satellite components in some way in their current generation but have planned the next generation sort of evolution of that system that is more comprehensive and all-encompassing. Now they've selected us as the supplier for that system and are building this now into their platforms and when they as they get built into platforms they will rollout and provide tracking, engine monitoring, engine services, I mean maintenance and warranty monitoring, all the types of things that really the heavy equipment space wants to use IOT4 [ph].

And are you aware if you are exclusive globally or regionally or in any other sense for this operation?

Yes, I know that has certain connotations to feed those words and I'd rather not try to use those at this point. And that's not the take away from the fact that you really can't very difficult to the multivendor on these things, but I do believe we will have an extremely strong position in the next session.

Great, and that's very helpful. Thank you.

And our next question comes from the line of Greg Burns of Sidoti. Your line is open.

Good morning. What is the timeframe that you expect Aireon to make their hosted payload fees, payments to your and do you think they have the necessary contracts in place to obtain funding or do you think they are going to require the FAA signing on to be able to make those payments?

So Greg, the Aireon payments were expected in the second half of 2016 and 2017 and those payments anticipate the FAA signing up a contract which we believe they are on schedule to doing in 2016.

Okay and the component issue that's causing this delay was that a design issue on the manufacturer's part or was there an issue with Iridium's design?

No, the design is really our manufacturer's design if you will, we validate and are sure and accept it and but no it is in the design. A subsystem component which is testing fine, I mean we're getting the testing results some yield challenges to it, but really it is in our initial satellite that are on the floor and there as you can tell from our testing is working. The problem is after testing and qualification we found or they found really some rework required for a long-term robustness of those components and then of course you have to turn that back around, get them back into the test vehicles, retest them to make sure that they meet all requirements et cetera and all that is now planned, but it really does affect the critical path again and moved the path out, the weeks it took to get that work redone. So there's still a lot of other things go into parallel with that, but that really is now the critical path item versus what had previously been the payload software testing which is progressing very well and will be done on time. Just this K-band component is really sort of the gaining item now.

Okay, and Tom on the insurance the 100 to 125 is that the full expense you expect or is that the 60% you've already contracted?

The 100 to 125 was our estimate of what insurance would cost and the 60% that we bound is in line with that estimate.

Okay, okay, thank you.

Our next question comes from the line of Chris Quilty of Raymond James. Your line is open.

Thanks, I just wanted to follow up on the component testing, is it fair to assume that you've done vacuum chamber and that was the only piece of hardware that showed up any issues?

I don’t know if I can make that definitive statement. I mean there could have been issues in the past that were issues but they have been resolved and any rework that was necessary to something failed in qualification it has been fixed. So it is the one issue we have right now. It is the issue that's on the critical path. And frankly much of the qualification is done, it is almost complete, but there are a few still things to be done. We really have put the satellite through thermal, thermal vac, acoustic, RF range testing and all kinds of other things and this is the component, a little disappointed if not, this is not a – it is a sophisticated component, but this is not something that real invention would be required to do cave in. And I'm sure the subsystem component vendor which you can figure out who it is, is fully capable of fixing this and meeting the rework schedules that they have, but these sort of things happen and are very in a very complicated satellite design process and despite everyone's efforts including the time that was sort of budgeted define these things, things kind of happen and it has delayed our schedule somewhat. But really I'm pleased it is delay in our schedule weeks not longer period of time. There is still a lot to be done before December, but we do have a solid plan for launch in December now and feel good about the potential for that now and have a plan that closes on that at this point. So we're going to keep monitoring it very closely and ensure that the rework happens and we get launched.

Great, the current difficult environment for heavy equipment manufacturers, how does that impact your discussions with existing or potential customers, does that benefit you, because they're focusing more on efficiency or does it slow things down because of no availability of capital?

I don’t think it has a lot of effect personally from my personal experiences with it because the heavy equipment sector is very long-term in their thinking. They have to make planning cycles over many, many years and so they don't, while it may impact sort of short-term decisions in terms of their product hurts things. But when you are talking about factors like moving to the Internet of Things and efficiency and providing more things to their customers they kind of seem to keep moving forward on that basis as opposed to just stopping activities. These are big companies with a lot of resources and I haven’t sensed sort of that for the near term sector by sector impacts sort of necessarily affect their long-term thinking about how we interact with them.

Okay and you announced the push-to-talk rollout last month. Can you give us a sense of what kind of impact you might expect in 2015 and how these deals will be structured, I think you indicated in the past that these tend to be large system rollouts, does that stagger the rollout impact with new customers?

Yes, I mean I think the impact in 2015, I mean our expectations that was really modest right now. I mean it really is more of a 2016, 2017 opportunity for us, but we do have a significant funnel of opportunities around the world. There are opportunities here in North America, but there's a number of opportunities with both public safety militaries and others. The funnel is with a number of our distribution partners who have all been trained on how to sell the system. It is certainly a longer-term sale and you don't just provide a phone or two to somebody and it happens, really there is sale into say a public safety agency or a friendly military or whatever it might be and they really have a lot of training and testing and administration kind of stuff that they go through to deploy it. Good news is when they do it they normally are tens or hundreds of sort of devices and they are long-term kind of contracts in which they, the value is really in that work group in that, the communication amongst those devices. So you really expect to see those to be very sticky kind of long-term kind of contracts. So it's still early days, starting to ramp. I'm starting to see devices and the customers sort of declaring come on board, but I really don't think it's going to be a real rapid revenue impact for us.

And any update on Iridium GO! and how that's selling after the initial channel fair?

Yes, it is slow. I'll have to be honest. Iridium GO! has - the customers really like it. It has been well received in the market by our partners and our customers. It seems to be an issue, I'm pleased that it is very different than a satellite phone and so it is sort of a different market segment for us so it is additive as opposed to sort of in any way competitive with what we're doing. It is a more complicated product in some way and I'd say that the experience that an end-user has with a device that is still fairly low speed as are all devices in these kind of cases right now, if their expectations are wrong then they won't be as pleased and I think when you hear Wi-Fi hotspot you immediately think you have a seamless experience with your smartphone. We've never said that's what it was, but I think we're repositioned now with our partners a little bit more so that they understand really what the value equation is, because when people do use it and have their expectation set appropriately they tell us they like it and in fact they use it a lot. They use it more than say a satellite phone would be used. So I think it is a great, great product to add to our portfolio. It is additive, but is not, love for it I think it will be a great product for us in the coming years. I think it is a great first effort. I am really looking forward to the Iridium Service version of it which will come in the coming years and I think more speed will give us a more seamless end customer experience with their smartphone which what way they want. The only other thing I'd add is one thing that kind of mitigates all that is when app developer sort of designs for the data system and that partner list is growing there, it is over 55 now I think or 55 now app developers who developed applications in the maritime, aviation, weather and other segments and those of course experiences are excellent because they've been designed into it and I think there is more and more of those come on that will also drive GO! sales.

Speaking voice sales do you expect any impact from the Inmarsat product recall that was announced recently?

Yes, we're aware of that. Apparently Inmarsat has kind of had to withdraw their satellite phones from the market for some technical issue. It is too early to tell in terms of what that means to us and expecting that that will have a positive impact on us a bit, but it is hard to tell what that ipact will be right now.

And a question for Tom, the equipment margins were very strong in the quarter, obviously that’s the lack of warranty effect. Are those margins sustainable at that level or should we expect them to fall back a little bit more to the longer term trend?

Yes right, so the answer is no, they are not sustainable. There is about a $2 million benefit. In the prior-year quarter there was a warranty expense and in fact this quarter that was there was a reversal of the reserve because their units were just not failing and so you should think about normalizing that to take that $2 million benefit out. Similarly the 60% EBITDA margin is on top of our long-term guidance for 2018 and so we don’t think about that as being sort of run rate. We think kind of the steady state where we are right now is 56, 57 really strong year-over-year at south of 300 basis points from culpable quarter last year, but you shouldn’t think about 60% as steady-state either.

And final question, Russia where do you stand in terms of building out the Gateway and just general comments on the demand environment in Russia?

Well in the Gateway it's progressing. We've made, in fact I think we've installed a lot of the pedestals and thermals right now we're still waiting on some equipment in the Gateway, but there's sort of a plan that completes the Gateway late this year or early next. It really kind of depends on an awful lot of factors of course that are completely within our control, but it is moving along well now. And as far as demand I would say that continues there. I mean no certainly the effects of the ruble, we've seen that in terms of re-pricing prepaid and that sort of thing, but that is a growth market and we do still see activations and good activations out of the Russian market right now. I don’t know if you have any more color on that Tom in terms of specifics there, but it's been, it hasn’t made a real big change actually overall in terms of the trajectory, I think.

I think you characterized…

After all it is a new growth market for us.

Yes, you characterized it right Matt. I mean our timing wasn’t great going into Russia, but that's going to be a perfect market for us and that's a perfect example of headwinds will become tailwinds and you are going to see it in Russia.

Great, thank you gentlemen.

Thanks Chris.

[Operator Instructions] Our next question comes from the line of Andrew Spinola of Wells Fargo. Your line is open.

Thanks. I was wondering if you could explain a little bit more your decision to proactively adjust the pricing for the energy customer that you have, just wondering, it would seem that your M2M product is a fairly small percentage of the cost of an energy installation. So is this a price reduction for a need to stay competitive or is this a situation where your customer is billing in local currency and paying in dollars and so their profitability has been squeezed.

It's really not a currency issue. The oil and gas, you saw M2M subscriber adds were very week in the quarter. This [indiscernible] had 5000 net deactivations there. So it's an acute issue and they basically came to us and said it is going to be more than that if we cannot adjust our contact. So we had a contract with them at a certain price and they came and said give us a lower price. And as we think about market right, so we don’t price the same for every SP it is going to depend on volumes, et cetera and so we just looked at the bare circumstance and adjusted their pricing because we because thought that that in fact they would de-install given their situation. We just made a proactive decision to say we want to retain this business and most don’t want to run the risk of a cancellation, so that's just how it went.

Got it.

You are generally right Andrew. I mean we're a small part of the overall cost is certainly in terms of installation. But on an ongoing basis if you are out there after a period of time the communications costs essentially or the one thing that they see after an installation over a period of time and that's really what I think the pressure is right now as to when assets are going inactive or dormant and the ability to turn those things off or maybe still keep them on track where they are and keep their monitoring the value of that sort of asset to the company is going way down. And so the communication cost does become a become part of it. So I just think it a hopefully cyclical kind issue really in that sector and one in which we have to continue the term. So we do have that kind of pressure in the M2M space. But I think they are somewhat balanced by the new opportunities we're seeing in this space not just with M2M but with competitive potential takeaways and other sectors and so long term we really don’t see this change in our optimism for our machine-to-machine sector as it still has sort of a short term headwind I think near term.

Makes sense. The reference in the press release to the power increase required by the Aireon payload is that the biggest driver of your increase, to your 2018 estimate of hosted payload revenue and how does that impact your ability to sell other hosted payload if the Aireon payload requires more power?

So, Aireon is way down the path on their equipment and the usage of their equipment and they concluded that they needed more power and they contracted with us when we signed up the deal. And so we had in them and there was willingness on their part to pay. So they are going to pay us something like $40,000 a satellite which aggregates $2.8 million a year for the life of the consolation. So over 12.5 year life which is our latest estimate of what our depreciable life will be, that's $35 million of incremental value from Aireon, that is a new positive development. Similarly we signed up a new payload with Harris and that worth $15 million bucks. And so the two of them are, were up six or seven million bucks in our guidance of '18. The two of them account for a little over $4 million of that increase and the other impact is we've finalized our accounting estimate of what our depreciable life is going to be and it is going to be 12.5 years which is that's the accounting estimate, obviously we think it's going to be longer than that if history is any guide, but accounting being conservative it is going to be 12.5 years and previously we have been using a 14-year estimate for purposes of calculating how the hosted payload revenue would come in and so that gives us a $2 million ballpark. So two new significant economic value that aggregates at least $15 million are driving it and then accounting through up it drives the balance.

The technical piece a little bit more power is a fungible thing on a satellite. As the satellite design matures actually sort of power budget somehow increases, people give up power. So we had a bit more to offer, but really it more reflects not much as a technical mounting much of the technical issue on the area payload because I think they've done a great job designing that, but that the opportunity for Aireon has sort of increased as they saw threshold uses for it. They customer base expanded around the world and the original expectations about where they would be using this service expanded at how much they really wanted to keep the receiver operating where they wanted to operate it. So it is good news on all fronts and since they needed some more power and really in some ways our contract with them was based on sort of what resources they were using on the satellite and made sense to expand that contract commensurately. It doesn't affect anything else of course the payload space is fully allocated right now. There isn't anything else in there at this point. Harris' AIS receivers are in there and they use that, but that is all this power budget was done in conjunction with knowledge about what they needed in terms of their payload. So it does not really affect anything else.

Got it, so the $47 million is likely as high as that number is going to go is that what you are saying, the capacity is mostly sold out?

That said and the $47 million represents contracted revenue, that's how you should think about that.

Yes, I think that's absolutely correct and it is great to see it is expanding, but there isn’t more, we're too late to put anything else on our systems right now.

Makes sense. And just last one, Tom you mentioned that 60% if the insurance is bound, I just want to, does the cash go out prior to the launch or has that already been paid for?

No that is prior to the launch.

Got it, all right, thank you very much.

Thanks Andrew.

And I am showing no further questions in the queue at this time. I'd like to turn the call back to Iridium for closing remarks.

Thank you all for spending the time with us. Look forward to following up with you and talking to you on our next quarter. Thanks a lot.