Iridium Communications Inc

NASDAQ:IRDM

Earnings Call Transcript 2018-Q3

[Operator]

Good day ladies and gentlemen, and welcome to the Iridium Third Quarter Earnings Conference Call. [Operator Instructions] Please note, that this event is being recorded.

I would now like to turn the conference over to Ken Levy, VP of Investor Relations. Please go ahead, sir.

[Kenneth Levy, VP, IR]

Thank you. Good morning, and welcome to Iridium's third quarter 2018 earnings call. Joining me on today's call are our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 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 today's call 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 forward-looking statements. Such risks are more fully disclosed 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 views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not presented in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release in the Investor Relations section of our website for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, let me turn things over to Matt.

[Matt Desch, CEO]

Thank you, Ken and good morning, everyone. So year-to-date, 2018 has been terrific; our financial performance has been outstanding, our subscriber growth has never been better, and we'll soon be launching Iridium service, our new broadband service which will serve as a significant driver of business growth for years to come. As we announced last week, the final launch of Iridium NEXT satellite is scheduled for December 30. This SpaceX launch will again be out of Annaberg airforce base and carry our final 10 satellites into orbit to complete the Iridium NEXT constellation. Of these satellites, 6 will be used to complete the constellation, and the balance will serve as the remainder of our 9 in-orbit spares.

Our satellite operations team has become really adept at processing these new satellites. We expect this final batch of satellites should be fully deployed within weeks of launch. So we'll soon have a completely new and finalized constellation quickly following this launch, including for our Aireon joint venture to begin their global aircraft tracking service. The completing our next-generation constellation will justify a great deal of celebration, especially given how long we've been working towards this day. But most importantly, it will usher in a new era of growth for our company and a 10-year or longer CapEx holiday that benefits our investors. This final launch will indeed be a great way to end the year.

Today a little over 90% of Iridium's global traffic is already managed by the new Iridium NEXT satellites, and while we eagerly await completion of our network upgrade, the truth is that our steady execution on Iridium NEXT mission has already begun to pay dividend. It's a fact that the Iridium NEXT satellite provide a better experience in areas like voice quality, network availability, and IoT latency for existing customers. They are also giving confidence to new partners who may have previously questioned Iridium's prospect. This performance has spurred new business relationships and sparked many existing and new partners to invest in and develop exciting new products and applications for our network. But you're not to take my word for it because you've seen it in our subscriber growth and our revenues for the several - for several quarters now. Iridium's brand equity has grown and the excitement surrounding this is surging, particularly as we prepare to introduce Iridium Certus broadband services.

As you saw in our press release this morning, we continue to enjoy accelerating subscriber momentum and strong sales growth, and I think a lot of this is due to the enthusiasm and support we have garnered from our expanding partner ecosystem. A few weeks ago, we hosted partners from around the world in Nashville for our Iridium Partner Conference. This was the first time we've held one of these events since we began launching Iridium NEXT satellite; and as you might expect it drew record attendance. You could really feel the excitement from partners and their enthusiasm for Iridium's future. I heard repeatedly from attendees how different Iridium is from other satellite operators, both in the way that we support and encourage our partners to succeed and how they like working with us because we don't compete with them. We have more than 400 individual partner relationships today and I'm proud of their confidence in Iridium and the trust they place in our network.

There is a lot of interest in particular from partners in the eminent launch of our new broadband service, Iridium Certus. We're currently in live operation on a number of ship, train, as well as dozens of ground vehicle. Our partners are testing it in real field conditions to fine-tune their installation practices, observe how customers use the higher speeds, and evaluate the integration of their provisioning building in value-added services. The feedback has been consistent that our network is working extremely well. We are timing our service launch with the completion of those partner beta trials which are expected to conclude in the fourth quarter. It's an exciting time for us to be coming to market with Iridium Certus, and we look forward to the broadband revenues and market growth it will bring in 2019 and beyond.

This most recent quarter was the third time this year our numbers have topped consensus estimates which should serve to underscore the strength of our core business. While Tom will cover the quarterly numbers in greater detail, our commercial segment is on pace to post another record year, and we don't see a slowdown any time soon in our IoT business. IoT has posted double-digit subscriber growth every year we've been a public company and enjoyed accelerating subscriber growth in each of the last 10 quarters. Revenue from commercial IoT continues to grow at an accelerating pace and I think it's notable that into 2018 we're experiencing that growth on what is now a much larger base of business. While we spend a lot of time speaking about Iridium's expanding relevance in maritime and aviation, particularly with the launch of a real broadband service, investors shouldn't overlook our growth opportunity in IoT nor discount the long-term recurring nature of revenue from this part of our commercial business.

Another noteworthy harbinger of growth has been the acceleration of equipment sales this year with revenue over the first nine months up 35% from a year ago period. These equipment delivery service near-term customer demand and also foreshadow our partners' expectations for continued growth on the Iridium network. Now within our government business, as expected, the U.S. government has officially notified us of its intent to exercise their option to extend the current EMSS contract for six months into April 2019. We will be continuing our negotiations with them for a new multi-year contract over that period. Our conversations on that front have been productive and we continue to work with them to finalize the length, scope and pricing of the new contract. Accelerating subscriber growth this past year, and the doubling of USG subscribers since the previous contract was signed in 2013 demonstrates the value of our services to the U.S. government and we want to work with them to support future growth.

Finally, on Aireon I'm proud to report that the FAA recently made a strategic decision regarding the path to adopt and deploy Aireon technology, and has informed Aireon that it is planning a phased rollout of space-based ADS-B before improved surveillance in aircraft control within their airspace footprint. This phased approach will start with an operational evaluation in the Caribbean in 2020 when the U.S. mandate to have ADS-B on every aircraft comes into effect. Subsequent phases provide a path to oceanic implementation, as well as a backup surveillance capabilities for the FAA's continental airspace. Now this is great news for the FAA, the airlines and Aireon as it sets the table for Aireon to be an important part of the FAA's air traffic management system in the coming years. We're happy with Aireon's continued progress and the FAA decision serves as another nod of confidence that Aireon's services becoming a global standard for satellite-based aircraft surveillance.

I'll let Tom talk about the state of Aireon's financing but will comment that Aireon is in good shape given their early contracts and the strength of their core investors; so we're looking forward to them starting global aircraft surveillance services in 2019 with the completion of Iridium NEXT.

So in closing, our business remains very strong ahead of the launch of our new broadband services. I'm quite confident that the completion of our satellite network will usher in a new era of growth for our company and bring to fruition the financial transformation and new revenue streams that we and our stakeholders have envisioned. As we peer into next year, we plan to host an Investor Day in early March. Please people lookout for this invitation and reach out to Ken if you're interested in attending. 2019 should be as pivotal and exciting year for Iridium as 2018 has been and believe me, that's a high mark.

So with that I'll turn it over to Tom. Tom?

[Tom Fitzpatrick, CFO]

Thanks, Matt, and good morning, everyone. Today I'd like to review our key financial metrics for the quarter and highlight some trends that continue to support this year's strong performance. Then I'll discuss our balance sheet and provide additional color on our updates to full year guidance.

This was another fantastic quarter, strong subscriber momentum, commercial revenue growth, and equipment sales all drove third quarter results. Iridium generated total revenue of $136.8 million which was up 17% from last year's comparable quarter. Operational EBITDA increased by 11% from the prior year period to $79.4 million, and our operational EBITDA margin this quarter was 58%. On the commercial side of our business, we delivered another quarter of double-digit revenue growth across all commercial lines. Commercial service revenue rose 23% from last year to a record $83.7 million in the third quarter. This increase reflects accelerating hosted payload revenue driven by an increase in Iridium NEXT satellites and service, and growth in IoT subscribers.

Voice and data revenue increased 11% this quarter driven primarily by price changes adopted earlier this year. As a result, voice and data ARPU increased to $47 in the third quarter from $43 in the year ago period; improving voice quality from satellite upgrades as well evolving competitive dynamics continue to support Iridium's premier position in the satellite phone market. During the quarter we added 39,000 net new commercial subscribers driven predominantly by growth in IoT. Commercial IoT data subscribers now represent 63% of billable commercials subscribers, up from 57% in the year ago period. Demand for personal location and asset tracking continue to fuel net subscriber activations which rose 44% from the comparable quarter last year.

Revenue from hosted payload and other data service was $9.6 million in the third quarter compared to $2.2 million a year earlier with 60 Iridium NEXT satellite operational through the third quarter hosting in data services revenue from Aireon and Harris contributed $6.9 million this quarter. Aireon has made excellent progress on it's financing and expects to close it's facility in the fourth quarter of this year. Under the terms of the facility Aireon will pay Iridium $35 million for hosting fees at the time of closing versus the contractual minimum payment of $6 million due in the fourth quarter. The facility will allow Aireon to make an additional payment of $15 million to Iridium in 2019 assuming expected new customer contracts are in place; this will bring cumulative hosting fee payment to Iridium to $58 million through December 31, 2019 versus the contractual minimum of $30 million.

Iridium's net leverage guidance of approximately 4.5 times EBITDA at year-end 2019 assumes the payment of only contractual minimum to Aireon hosting fees. As a reminder, all hosting fee payments from Aireon will go to reduce the outstanding balance of Aireon's facility with BPI [ph]. The Aireon facility can be expanded upon the execution of sufficient additional customer contracts. If the facility is expanded additional hosting payments above contractual minimums could be made to Iridium in 2020. Aireon expects it will have paid Iridium the full $200 million in hosting fees and accrued interest by 2021. Aireon is in a particularly strong position given the quality of their investors and recent favorable developments at the FAA.

Within our government service business subscribers grew at a strong 19% pace from a year ago to 113,000 subs at quarter-end. Revenue remained steady at $22 million under the terms of the EMSS contract. In equipment, revenue from subscriber equipment remained robust, up 20% from the year ago period to $26.1 million. Demand for satellite handsets has continued to be the leading driver of equipment sales this year. Engineering and support was $4.9 million in the most recent quarter and continues to reflect episodic work with commercial and government project. All-in-all, the third quarter was strong across the board. In light of continued subscriber momentum, particularly in IoT, we now expect service revenue growth to come in at the top of our previous range at approximately 14% in 2018 and our raise in our full year guidance for operational EBITDA to approximately $300 million, up from a range of $290 million to $300 million previously.

With the final launch of Iridium's NEXT satellite now scheduled for late December, we expect about $60 million to $65 million of capital expenditures tied to launch related activities and acceptance testing will now ship into the first quarter of 2019 rather than being incurred in fiscal 2018. As a result, we now anticipate full year 2018 CapEx of approximately $435 million versus our previous estimate of approximately $500 million. Consequently, excluding capitalized interest we expect total capital expenditures in 2019 of approximately $95 million to $100 million, comprised of $60 million to $65 million in Iridium NEXT carryover and $35 million in maintenance CapEx.

As you can see in this morning's 10-Q filings, Iridium enjoys a strong liquidity position with cash and cash equivalents totaling $381.5 million as of September 30. Given the improved EBITDA outlook and delayed Iridium NEXT capital spending, we now expect that net leverage will peak between 5.5x and 5.75x EBITDA in the fourth quarter, down from previous guidance of approximately 6x EBITDA.

In closing, I feel very good about the momentum in Iridium's business today. Our team continues to build many new partner relationships and is executing well on products and scales that will generate meaningful growth as we enter the Iridium service era.

With that, I'll turn things back to the operator for the Q&A.

[Operator]

[Operator Instructions] Our first question is from Ric Prentiss of Raymond James.

[Ric Prentiss, Raymond James]

Nice to have the final launch schedule and to hear Certus launching is imminent as well. Along the Certus lines, I think you've mentioned in the past that maybe you can see that ramp up to - I think it was $100 million exit rate in 2021. And update - is there any revenue in that line item expected in '18 or is it really go from zero to $100 million over that timeframe? And how should we think about how we from the outside are going to be able to track your progress of sales or financial reporting to help us watch that growth in Certus?

[Tom Fitzpatrick, CFO]

Let me just say Ric, it's not zero to $100 million, right, our existing broadband business is in the area of $25 million, so think about it that way, just to clarify that.

[Ric Prentiss, Raymond James]

Yes, I just wanted to make sure, that's why because some people are like - it goes from zero to $100 million, I just wanted to make sure I thought it was the $25 million to $100 million.

[Matt Desch, CEO]

Why don't you also address, Tom, sort of the Certus reporting essentially going forward as to whether expectations about breaking that out.

[Tom Fitzpatrick, CFO]

Yes, I think we recognize that Certus is important, it's important part of our growth story and we'll be transparent with how we're doing as we go through the quarters of 2019 to 2020.

[Matt Desch, CEO]

And then in terms of - you could say that we're already $25 million in '18, it's not going to really grow our revenues at all in '18 because the launch would be here and probably next month and month and a half, and so as that happens there’s just not enough time for putting on much. I mean our current expectations are actually not real high for 2019 because it just takes times for fleets and others to go even though we see high demand, it will just take time for it to rollout in the year and it certainly will be bigger in the second half than the first half and so a big percentage of that $100 million or that $75 million incremental won't come in 2019 but we think it will accelerate as it go into 2020 and then 2021, particularly, as we bring on aircraft because we're really just launching in maritime in land, the aviation parts are being developed, we've seen some terminals here at NBA and others that are going to get introduced in the middle of 2019 and as SPCs get on aircraft, we think that's another growth legs that really won't even pick-up till late in 2019.

And we're also really kind of excited about the government opportunity as well but that just always takes the government longer to put it into platform; so I think you're going to see it continue to accelerate. And as Tom said, we'll continue to be transparent about how we're doing and tell you about the progress because we're quite excited about what that will be.

[Tom Fitzpatrick, CFO]

We have estimated the opportunity, and it's going to sort of - our competitors installed base is around $700 million as best we can tell, and - but we've said, look, we don't underestimate, we think we have a better product, flat out, than the competition but we don't underestimate the fact that the incumbent is sort of a 30-year incumbent and we expect it to be highly competitive in each instance where we're unseating them.

[Matt Desch, CEO]

Probably one final thing Ric on that, just - and this goes to the $700 million kind of market opportunity. I think that there are certain areas because of the way our product works that it may even expand the opportunity set a little bit, particularly in the land environment, increasingly excited about the fact that our product is really an on the move kind of product where the current broadband products in that space are kind of on-the-pause as they say where you have to kind of set up and point in the right direction to get a land-based operation. So I'm seeing from some of the early trials, just a lot of interest in things being put on more vehicles like trains, like on military and first responder vehicles that can be operated on the move rapidly in this Thales MissionLINK terminal, it's like - it's dual-band and has cellular capability in it too; so I just think it's going to be a very popular item on the ground environment too.

[Ric Prentiss, Raymond James]

Great. Yes, all that transparency will really help watching the ramp there. Second question, obviously nice to see the peak leverage come down a little bit, EBITDA is up, CapEx maybe slipped out a little bit, it sounded like in the '19 but if we think about the balance sheet and the timing of when you might be able to refinance as you move from a construction in a launch company to a sales and operational company how should we think about what you guys are watching as far as the debt market? What would be important as far as leverage levels or other business targets to hit before you think about when you might refinance the lender-vendor financing?

[Tom Fitzpatrick, CFO]

Certainly, no later than the first quarter of 2020, and I would say the second half of '19 is entirely possible.

[Matt Desch, CEO]

I think we would look at the market conditions and when we think that the pricing and everything else would be optimal for it, and obviously the earlier the better because the positive nature of what that will do to our flexibility and ability to do shareholder friendly things; so we'll obviously be encouraged to move as fast as we can but we want the best conditions possible for the optimal refinancing.

[Ric Prentiss, Raymond James]

Final one for me, the hardware margin has really seemed to be doing quite nicely. Obviously, you've talked about hardware sales are coming up but also the margins, how should we think about the - I guess the price increases you've put in place and the abilities to stay in those kind of margins as you look into the new Certus world?

[Tom Fitzpatrick, CFO]

So no price increases have affected equipment Ric, that's all service, it's our access Ric. I mean, this year that - the headline of our equipment this year is handset. As you know, we don't live on the equipment margins or think about equipment margins as we as any - that I should say expanding equipment revenues and margins, we - we plan our business around recurring service revenues but we've had a particularly strong handset equipment year this year, and when the handset have the highest margins - so our blended margin is whatever was this quarter's 42% or so, handset margins are over 50%, and so when you sell a lot of handset it's very accretive to the margin. And so that's the kind of year we're having this year and we're very happy about it because we think it suggests strength for subscriber additions as we look into the next couple of years.

[Matt Desch, CEO]

Obviously, the handset side of things has been a little bit of a surprise to us this year, it's not the only year of strength as Tom said we're kind of doing pretty well across the board but with the price increase on the - we hadn't done one of those in a couple years, we sort of had modeled that that would mean flat or even maybe some declining of subscribers and in fact, we've had growing subscribers which has been a really nice thing. And I think that's the - it's the economic environment around the world, it's certainly the competitive dynamic in the EMSS space is different than a few years ago, and it's the improving network quality that I think all our customers are getting from a brand new satellite system; I mean they just keep telling us how great their voice sounds and how well the system is working. So we think that's generally sustainable, going forward too.

[Operator]

The next question is from Hamed Khorsand of BWS Financial.

[Hamed Khorsand, BWS Financial]

First off, could you clarify something for me. You've been mentioning that you have 60 satellites and I thought it would be 65 because in May you had 55 in your press release, then you launched another 10, so that gives me 65 and you're talking 60 right now.

[Matt Desch, CEO]

So couple of numbers started the confusing. Let me go through quickly, I mean carefully here; so 66 satellite is the number of operational satellites in our network, we have launched 65 new satellites but we have positioned 60 of them into - yes, 60 into position, so there are 6 old Block-1 [ph] satellites still in operation in our network. Of the 5 satellites that we've launched that aren't in operation, those are spares right now, they're set up in spares or drifting to their final position. So when we launch these final 10 satellites into the - into plane 3 which have those 6 Block-1 satellites, we'll use 6 of those 10 to replace the 6 operational satellites, and we'll use the other 4 as spares, so that will bring the 5 plus 4 spares into 9 in orbit spares. So, sorry for all the numbers but that's how the map works out.

[Hamed Khorsand, BWS Financial]

And could you just talk about what drove the ARPU increase in IoT this past quarter; there was a sequential increase in - and I thought it would trend down?

[Matt Desch, CEO]

No, there wasn't an increase in IoT, I think it was flat if I remember correctly.

[Tom Fitzpatrick, CFO]

Flat year-over-year. It sequentially would just be seasonality, the third quarter is seasonally stronger in terms of usage.

[Hamed Khorsand, BWS Financial]

And as far as seasonality is concerned, does - how much of a whether impact did you see at all with usage this year during the sum-up [ph]?

[Tom Fitzpatrick, CFO]

If you look at our commercial voice and data, we've said we saw kind of - stable at 45 on the back of the price increase which was up year-over-year on the price increase. And if you look at the current quarter, it was 47, that delta between kind of the 45 average for the second half think about that as kind of higher usage which is - has some seasonality drivers.

[Matt Desch, CEO]

And that's the ARPU answer, of course, the general answer on seasonality is that we have slightly more traffic in the northern hemisphere than we do in the southern hemisphere; so - and given that more ships are out in the summer, when there is less ice there is more people outside, there is more activity. We do have the strongest two quarters and sort of our second and third quarter, and then a slightly less usage in the fourth quarter and first quarters, and that's always been the trend. I think the trend is about the same or maybe even less I mean as we get bigger and bigger but that's just how our - how EMSS works.

[Hamed Khorsand, BWS Financial]

No, I understand that. What I was trying to understand was last year Q3 you had 368,000 voice subscribers, this year you have 367,000, so it's not really overcoming that level in last year's Q3; so I'm just trying to figure out what drove the numbers this quarter that you couldn't grow it further beyond last year's number?

[Matt Desch, CEO]

Year-over-year are you asking?

[Hamed Khorsand, BWS Financial]

Yes. And total subscribers.

[Matt Desch, CEO]

Total subscribers; our guidance of voice and data subscribers is low single-digit grower, this is a mature market where you see the increase in revenues not on the back of access - higher access fees on pricing action.

[Hamed Khorsand, BWS Financial]

No, I get that but last year you had 368,000 voice subscribers right, and this year in Q3 you ended with 367,000.

[Matt Desch, CEO]

We had - that subscriber base is largely handset but includes our LBT or L-band transceiver, there are still some of those in there that are unshipped in some other places on aircraft. It includes PTT devices that includes some open port devices on the voice side. All that being - you know, when you take the pluses and minuses, remember we had a service increase and that sort of depressed that a little bit, and of course there is a transition on those L-band transceivers to higher speed devices; and so net-net, that's about exactly where we expect that line item to be. The subscriber growth area is really going to be in the IoT area in particular, it's in the government area on terms of IoT and voice subscribers on that side and it's another area, it's never been forecast or expected to be in that area. And then, of course, it's all in the future going to be inserted which will break out and show you how those devices - those are much higher ARPU devices and they will also drive revenue growth.

[Tom Fitzpatrick, CFO]

Let me just amplify; so our characterization of voice and data is low single-digit growers [ph] I've said; what we've seen historically when we do a price increase is we get some attrition on the back of the price increase and that it settles out. But we've said is, in this year in 2018 the subscriber deactivations have been less than we've anticipated historically, and we're pleased with that and that drove some of our increase in our guidance every time. So we are not surprised by the slight step back in subscribers, we see that historically when we put a price increase there.

[Operator]

The next question is from Chris Quilty of Quilty Analytics.

[Chris Quilty, Quilty Analytics]

I think for about the last three or four quarters you've stated the personal fracking is one of the lead drivers for the IoT business. And I was wondering, I mean obviously Garmin is the lead force there in terms of driving volumes; can you talk about potential for expansion to other OEMs or other applications and where you are now in that process?

[Matt Desch, CEO]

I don't think that any will be as big as Garmin because Garmin really as a consumer brand and recognized one around the world is preeminent and they have really put a lot of effort, not just into the distribution and sales but also into the product as they've kind of optimized around a number of products. And I think they're going to expand into new SKUs and other things as well in the future which I think bodes really well for the future. But I'm really pleased that there are a lot of other products in this category including some really unique small and interesting ones that really are optimized around a number of other segments; just closed a deal recently with entisable [ph] partner who plans to develop kind of a unique product in this general space, maybe a bit more focused on enterprise than the consumer space but there is an awful lot of enterprise business still to come in this personal highly portable, highly mobile kind of tracking environment. But I think it's going to always be swapped by Garmin in terms of raw numbers but I do think that there is still a lot of other products in this category to come.

[Chris Quilty, Quilty Analytics]

Because I can't remember the actual unit designation, when do the next compatible hardware solutions become available and does - do those solutions with higher data rate become a driver for incremental growth? And when?

[Matt Desch, CEO]

And that was the big - that was probably the main discussion point at the Iridium Partner Conference as we talked to them about our new devices that are coming late next year, they're broadly around the banner of what we call the SFX, sort of the internal name for it but it will have numbers as well attached to individual devices that are roughly stance for small-form factor. Think of it as the initial broadband product which is called the BCX [ph], that's the core of the new Iridium Certus turn-rolls that [indiscernible] and others are making for introduction this year and into aviation next year, that's going to be cost reduced and reduced in size and power, it will not have the speeds that the broadband units have, it will go from 22 to 88 kilobits per second but it will be optimized for power, weight, antenna size and cost, and will be in a broad range of products we think going from portable products and IoT up to aviation and other applications that really are looking to cost optimize a connection to our network.

So we think we'll have units in partner's hand, say in the second of third quarter of next year so that they can start developing applications, we think that product becomes commercially available in wide distribution towards the end of next year; so 2020 will be a big growth year we think - first big growth year for sort of those expanded applications into a number of new markets in maritime aviation and IoT and land - really for higher speed services than our current - what we call Short Burst Data services or Burdick [ph] services are able to offer.

[Chris Quilty, Quilty Analytics]

And circling back to Garmin for a second, am I correct that the current - obviously, the end-reach [ph] device is not using a 9603 as you did in previous end-reach [ph] models but more of a chip there; so we shouldn't see any real hardware impact for Iridium from increasing sales but to the degree that that product is successful, we should expect to see it in the subscriber numbers, probably more in Q1 sort of post-Christmas; is that fair?

[Matt Desch, CEO]

Probably I think you're right, I mean I think that that's - for sure they are gearing up for a Christmas season everything and this has been an outstanding year on IoT and subscribers but I don't really know breaking out that exactly how much of that will come in the fourth quarter with their new products. But you're right, there is sort of a shift going forward with increasing chipsets sales - the revenue in that area is not as high as if we developed a whole device but of course the partner is able to really optimize their whole solution much more effectively, they are able to get cost out of their product which means they are more successful, which means more subscribers and more service revenues for us; so we're happy to see that kind of mix shift if you will as chipsets become prevalent.

And by the way, I missed this [ph] as an advanced point but that small form factor transceiver we will be producing a device in that regard, it will have a number - I can't remember what it's going to be and there will be a couple of variants of it but we also are already starting to talk with some partners about taking that eventually as a chipset sort of device. I mean we really want to see Iridium Certus technology embedded into a number of partners applications going forward and I'm - I do think that's our strategy long-term is to embed ourselves in as many of our partners capabilities because it optimizes the solution for the end customer and it really kind of embeds us into their strategy as well.

[Chris Quilty, Quilty Analytics]

And final question; saw the DOD contract award on the six month extension which is what you said you expected to happen, which gives them I think the April timeframe.

[Matt Desch, CEO]

That's right.

[Chris Quilty, Quilty Analytics]

So the question; are you - there is two separate discussion, there is around the existing EMSS service contract and service is being handled which is a separate discussion. Are you trying to do the two of those in parallel or given the fact that you're really not looking commercially to see an impact until 2020? Are you just taking the service discussion and kind of putting it aside for now in those discussions?

[Matt Desch, CEO]

No, we're not putting it aside, in fact it's been an independent discussion all along here. We announced the award of a distributor for the government and Comsat [ph], we've had discussions and have had contracts with the government to evolve the government gateway to put Certus technology into it and that part is underway. There are trial and - and actually there is activity right now underway for trials and services right now with the government, and with the service; so it's an independent activity of which there is frankly a lot of momentum and a lot of our partners are excited about building solutions for the government and Certus. It is not going to be part of the EMSS contract, we have no intention to putting together because we still anticipate that the EMSS contract would be a fixed price contract and we're still evaluating the scope and number of years we've set an exact price for that contract by year but that is really more traditional products where Certus cannot be a fixed price service being - you know, it's broadband it has to be sold by the byte - megabyte or gigabyte, and so that's completely independent and we will have a separate sort of distribution mechanism for that.

[Operator]

The next question is from Louie DiPalma of William Blair.

[Louie DiPalma, William Blair]

You originally had a multi-day partner conference, how was attendance relative to past years and how many partners now does Iridium have throughout this past years in the context of how you now have a multitude of Certus partners?

[Matt Desch, CEO]

Yes, I mean - I keep quoting exact numbers here and there but I can't keep up with the exact number of partners but it's been north of 400 partners; I don't know exactly whether it's 420 or 425 or what the exact number is but it continues to expand. We add really sometimes one or two or more a month at times, but I'm really more pleased that sort of the active number of partners, the ones that are growing seems to be expanding as well; so it's the health of our partner's base and how they're performing which is important too. We don't have a specific number for partners, we're looking more for the health of distribution channels, so certain areas we're not looking for partnerships but there are so many new areas, particularly in IoT where I think there's still a lot of areas - a lot of opportunities for growth and we'll continue to see that.

As far as this Partner Conference, it's open - in fact, this was one really targeted really by to more senior level partners than we had in the past, it wasn't just open, it was by invitation-only and yet we still had probably - almost 20% more attendance than we've ever had in the past, had - a big percentage of our partners were represented, and - it's like a trade show, so they not only come to listen to us but they actually work with each other and demonstrate each other's products to each other and that usually creates more distribution channels for solutions and licensing for solutions to other partnerships and that's all just healthy for our whole ecosystem.

But you're right, the - we haven't really necessarily grown the number of partners with Certus either because a lot of those have been existing partners who've done very well selling open port or selling the existing services, there have been a couple of new ones; for example, someone like NavReno [ph], we hadn't really been working with before that was a new one, that was at the Partner Conference and glad to see them join us, but really a lot of those are existing partners like AVH, and Speedcasts, and Marlink, and - I don't want to leave anybody out, there is an awful lot of big ones that are out there but those are the ones that have been licensed now to sell Certus and that's a limited group of the total group.

[Louie DiPalma, William Blair]

And you mentioned Garmin in response to the several questions, then you also implicitly referenced Amazon; I was wondering what Amazon brings to the table in terms of your IoT service?

[Matt Desch, CEO]

Yes, that was the big topic at the Partner Conference too because of the timing actually, we announced that during the Partner Conference and that's been something we've been working on for the last year with Amazon Web Services. We're quite excited about that relationship because as I've mentioned in previous earnings calls, IoT growth and even accelerating IoT growth is about making our services easier to deploy. I think we've learned as we've brought in more and more of these IoT partners that it takes a long time from the time that they sign-up to the time that revenue starts flowing because they had to develop not just the device sort of structure around that but their whole back office systems had to be designed to tie in uniquely into the Iridium system and that takes time and effort. But if we could lower the barriers to entry and lower the barriers to revenue then we can help them get into service faster and we can make their business cases better, and tying into AWS where AWS to basically put the Iridium toolset into their tool bag; that means that a lot of their existing customers - their partners around the world and they are the biggest cloud company today, it can add an Iridium component to their threshold services much more quickly than they could because it doesn't take them that much to talk to Iridium language that is embedded in sort of their tool kit already. And it also helps our new partners when we add someone, they might have already developed their back office using AWS already and it's not too hard to basically add the Iridium component.

So it's just going to accelerate time to revenue and time to subscriber growth for new partners and probably attract us to a number of partners, we thought it might be too costly to put a satellite component but they really wanted to expand their footprint beyond the 10%, 15% or so of the world that they currently have access to. So it's a good thing, there has been a lot of enthusiasm, our partners are excited about it and I think it's already starting to bring a few new partners into the mix as well.

[Louie DiPalma, William Blair]

And in the prepared remarks regarding Certus you mentioned several trials involving the land and maritime verticals; [indiscernible] industry right now there has been a shift towards small form factor, unmanned aerial vehicles and this would seem to be pretty conducive to Iridium and it's small form factor transponders. So I was wondering if there is any plans in the future for trials in terms of deploying Certus on drones or even military drone?

[Matt Desch, CEO]

Yes, a number of partners we've been talking to are in the drone space and there has been some interesting sort of discussions about how they would use both, the Certus broadband devices that can operate say next year upto 700 kilobits per second which gives streaming video kind of capability but there's a lot of excitement about that new SFX platform as well because for command and control aspects, for resiliency and redundancy, and small-sized power waves; that could really scale down into smaller drones as well. So yes, there is a lot of interest. As I said before, our goal isn't to be the high definition connection for those pictures and everything, that will be FSS type services and will remain that way with Ku-Band kind of systems but these drones increasingly want some sort of technology, both command-to-control and to maintain and manage and support that Ku-Band connection as well on a drone in the same way they want it on a ship or on an aircraft; so we could be in recent and more and more autonomous vehicles of all types.

[Operator]

[Operator Instructions] The next question is from Anthony [ph] of Deutsche Bank.

[Unidentified Analyst]

Most of the operating questions were answered, so I wanted to hit on a few financial ones. Maybe for Tom, you took the service revenue growth outlook upto the high-end of the range to 14% prior over 12% to 14% but you left service revenue guidance unchanged in the long range outlook at 440. I was trying to tie that out given that it seems like you're going to be ending the year at a higher run rate than when you introduced that. And then on the same line, I'm not sure if you've given this previously but can you remind us what is embedded in the 2019 service revenue outlook with respect to the government contract given that you'll have about three quarters of 2019 under a new contract?

[Matt Desch, CEO]

We haven't - you've got that right Anthony, we haven't said how much of a step-up we expect in the government, we do expect a renewal and we do expect a step-up but you're right to say that it's just going to affect the sub-period after the renewal in April. As far as the interplay of the short-term raise and the long-term affirm, I would just observe that we introduced that long-term guidance a few years ago when we had something like $100 million [indiscernible] the revenue to grow to get to the 2019 guide of 440, and so the performance here this year in 2018 makes us confidently reiterate that long-term guide which would seem like it was a long way away back when we introduced it a couple of years ago. So that's the - kind of explanation.

[Unidentified Analyst]

And then just on Aireon, I was hoping you could remind us, obviously - I think previously we had talked about the fact that the FAA would maybe be an important catalyst to Aireon, closing on it's financing and that's been going on for a while. I was hoping you could just remind us of the sequencing of payments that come to you with respect to Aireon, both as it relates to the completion of your constellation, as well as the contemplated completion of their financing at some point in the future?

[Matt Desch, CEO]

So let me just clarify; the FAA is not a driver of the Aireon financing closing, so that we've contemplated that the financial would close without the FAA, and then that remains the case. And so as you recall, last quarter we got an amendment to our hosting agreement to establish contractual minimum of payment that exactly equal our revenue recognition for hosting; so of the Aireon revenue of sort of $39 million at full ramp the data piece of that it is now - has always been cash pay and do. We amended the hosting agreement last quarter to establish contractual minimums which are $14 million in 2018 and then $16 million thereafter, and that is a firm commitment just like the data revenue is by Aireon to us.

So the financing essentially would enable Aireon to make payments over and above the contractual minimums as I said in my prepared remarks. And so that's - I don't know if that - does that answer your question, Anthony?

[Unidentified Analyst]

Yes, it does. So essentially these is two pieces; one is the stuff that Aireon pays you with its existing capital base or presumably it's equity financing, and then as the debt financing gets completed that triggers the second set of payments?

[Matt Desch, CEO]

Yes and it's backed up [ph] by a very healthy set of investors who basically signed up to say that no matter what happened that we would get those kind of payments going forward. And we'll be on-time, so just a reminder here too that as we said last quarter even though we've got these contractual minimums, anything above that then would go to pay down debt. I mean it goes straight to the Go-fast [ph] PPI facility and improves leverage I guess on that side but doesn't really affect our liquidity or any other factors, it doesn't affect our revenue recognitions. So I think we're in a really solid position around our relationship with Aireon financially and going forward, and it gives us a lot of clarity and consistency and visibility to really how we report and how we're going to be going forward.

[Tom Fitzpatrick, CFO]

I would characterize Aireon as being very - there is a tension, right, among the equity investors in Aireon excluding Iridium; they are happy to bridge whatever Aireon's operational needs are including the contractual minimums on the hosting. There happens to be financing, that expense of financing that's available that is a substitute for that bridge that gets Iridium additional payments over above our contractual minimum. Aireon is expected to close in that financing in the fourth quarter but there - as we just said, there is a tension and the expense of that facility as it's currently contemplated is acceptable to the investors, and as long as that stays that way they will close it. But there is not a kind of a desperate need on the part of Aireon for this financing because of - look at the equity investors in Aireon, they are very well healed [ph].

[Matt Desch, CEO]

And by the way, a great relationship too; I mean I have to say, we really got a home run here in terms of sort of building a strong team of both, users, customers and relationships here for the long-term which I think is really healthy for Aireon and that's why we're able to make these kind of decisions together about going forward on finance. It looks like that's what's going to be that will provide us additional hosting fees, that's great, that will help our leverage to pay down debt.

[Unidentified Analyst]

Tom, one last question; I think - you were coming up to the final constellation launch in December, I think previously you've indicated on this call that obviously CapEx drops-off precipitously after that happens and everything checks out. I think there are some interim payment that you have; either completion payments or other things that sort of happen after December 30 before you actually get to the Queen [ph] $35 million run rate. Can you remind us of what level of payments are still to get made after the last launch goes up?

[Tom Fitzpatrick, CFO]

To be clear, the last launch is now the 30th [ph] payments for the launch and final payment of [indiscernible], we estimate that there is probably 60 to 65 we'll fill into next year.

[Matt Desch, CEO]

So that doesn't increase the amount of CapEx in anyway, it just sort of smoothens out that - for that precipitous fall that looks kind of weird on the chart, it will just smooth a little bit, you know, a little less high this year and a little higher next year but it's the same amount of cash.

[Tom Fitzpatrick, CFO]

So I mean we've painted this picture of what the what the profile of the company looks like as we finish NEXT; and if you just think about it right, we had 9 years of capital expenditures of approximately $3 billion, so that's about $330 million a year. And what we said is if that number goes to average approximately 35, and that's our - that's what we've said and that's what we expect that 2019 will look like.

[Operator]

Thank you very much. Gentlemen, we have no further questions in the queue, so I'm going to hand the conference back to the Iridium management for some closing comments.

[Matt Desch, CEO]

Well, obviously great quarter and great to talk to all you. Looking forward to our final launch here in December, doing this for that. And then, we're really looking forward to seeing you again with the fourth quarter results when those happen. Have a good day. Take care.

[Operator]

Thank you very much. Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines.