Iridium Communications (IRDM)
Q3 2012 Earnings Call
November 01, 2012 8:30 am ET
Richard P. Nyren - Principal Accounting Officer, Vice President and Controller
Matthew J. Desch - Chief Executive Officer and Director
Thomas J. Fitzpatrick - Chief Financial Officer and Executive Vice President
Jonathan Atkin - RBC Capital Markets, LLC, Research Division
Chris Quilty - Raymond James & Associates, Inc., Research Division
James Patrick McIlree - Dominick and Dominick Securities Inc., Research Division
James D. Breen - William Blair & Company L.L.C., Research Division
Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division
Brian W. Ruttenbur - CRT Capital Group LLC, Research Division
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Richard P. Nyren
Thank you. Good morning, and thanks for joining us. I'd like to welcome you to our third quarter 2012 earnings call. Joining me on this call this morning are our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. In today's call, we'll begin with a discussion of the 2012 third quarter results, followed by Q&A. I trust you've had an opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website.
Before I turn things over to Matt, I'd like to caution all participants that our call this morning may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact and include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations, and are subject to risks, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks.
Any forward-looking statements represent our views only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our expectations or views change.
During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release and the Investor Relations section of our website for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.
With that, let me turn things over to Matt.
Matthew J. Desch
Thanks, Rich, and good morning, everyone. Thank you, all, for joining us, particularly those of you who have been impacted here on the East Coast by Hurricane Sandy. For our part, we escaped the worst, but we really feel for those who didn't. It's been another reminder the world about the fragility of ground-based communication systems. As you probably heard, about 25% of the cell towers over 10 states were knocked out by the storm. We've seen a spike in usage in the Northeast, and it makes us feel good to know that our service is supporting first responders, emergency personnel and individuals recovering from the storm.
So back to the order at hand, this morning, we reported third quarter numbers that were in line with our revised expectations. In the years, its had both its the challenges and successes. We've had a few factors in 2012 that have caused us to grow a little more slowly than in past years, but as both Tom and I will discuss, we're confident that we'll regain our momentum in 2013 for a number of reasons: a new contract with the DoD, a pricing change taking effect in our handset business and the continued success of new products. While our subscriber numbers are a little different than we expected for the year, we are confident that we'll add more subs in 2013 than in this year, and of course, continue to grow both the top and bottom lines. One milestone to note this year, we expect to generate over $200 million in operating cash flow this year for the first time in our history, and we continue to be headed in the right direction on increasing cash flows. Many probably thought this was an impossible task in mid-2010 when we first announced our comprehensive plan for the 3 billion Iridium NEXT constellation, as our run rate cash flow was only $134 million then. Since then, we've also closed on a major credit facility with favorable terms, has hit all of our key milestones for the Iridium NEXT build, enhanced and improved our launch strategy with SpaceX, and kicked off our innovative area and venture for global aviation monitoring. So overall, I think we're in pretty good shape for the future.
While 2012 has been a bit of a transition period due to short-term weakness in our traditional government handset business, it's important to me that we continue to meet or exceed our expectations. My focus is on getting every single subscriber dollar revenue we can both by maximizing the strong competitive position we have in our core markets and by innovating to bring new products to our customers. Iridium is an execution story, and that's where I'll continue to focus on my energy.
While our success hinges on executing well, it's important that we stay grounded in and briefly reinforce with all of you the key elements of our strategy. We compete in attractive and growing markets, which generally have low penetration and double-digit growth rate. The barriers to entry are high, and the competitive environment remains in our favor. We have a healthy network. That is the cornerstone of why we consistently win high-value customers. We have a low-cost innovative partner ecosystem that works for us because we're not trying to vertically integrate our distribution channel or compete against them for the same customers. We benefit from a largely recurring revenue business, with service revenue having reached a record 71% of total revenue during the third quarter. Data services now represent 42% of total service revenue. It's an all-time high, and shows that we're growing where it really counts. And finally, our growing operating leverage and largely fixed cost business model increases margins and consistently expand cash flow. The bottom line, when taken all of this altogether, is that I really liked our long-term prospects.