Ken Levy - Investor Relations Matt Desch - CEO Tom Fitzpatrick - CFO and CAO.

Analysts:.

Good day, ladies and gentlemen. And welcome to the Iridium Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session and instructions will follow during that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Mr. your host for today's conference Mr. Ken Levy, Vice President of Investor Relations. Sir, please go ahead..

Thank you, Brian. Good morning and thanks for joining us today. I'd like to welcome you to Iridium's third quarter 2015 earnings call. Joining me on today's call are CEO, Matt Desch; and CFO, Tom Fitzpatrick. Today's call, we will begin with a discussion of our third quarter results followed by Q&A.

I trust you have 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 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 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 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 things over to Matt..

Thanks, Ken. And good morning, everyone. I want to begin my comments with an update on Iridium's launch schedule and the status of our credit facility amendment from our lending partners. Both of these topics have been top of mind to investors and we have development on each that we can share today.

After that I'll provide an overview on our quarterly business performance which was in line with our expectations. And give you an update on Iridium's networking key new strategic services. As you read in our press release this morning we have to delay the date of our first satellite launch into April of 2016 from December of this year.

Thales Alenia, our prime contractor for Iridium NEXT had an issue recently with one key hardware component on the satellite which requires rework and it's delaying the completion of the first two satellites. I'll go into more detail on this in a second.

I want to start however with the fact that overall our Iridium NEXT satellite program continues to make great progress.

With the exception of that one hardware component, the hardware qualification program has been very successful, system testing is going smoothly and demonstrated the design to be robust and rehearsals for launch in operations are going very well.

With all this progress being made I feel confident about the functionality and on orbit quality we will gain with the new Iridium NEXT satellite. So you will understand that I am quite frustrated about this late breaking issue found in testing that will now delay our first launch. I am glad we found this issue on the ground so they can be corrected.

We will not press the launch before satellites are ready. But in light of previous program delays Thales Alenia knows quite clearly my disappointment that the date of the first launch is moved out once again. The primary cause of this delay is not that complicated nor it is difficult to fix.

It is an extension of the VSAT Ku-band T/R module rework we called out last quarter. We had noted then that this supplier to Thales had experienced delays in manufacturing this particular component.

Thales now appears to have found an issue during post assembly testing of this same TR module, this specific issue is an RS spur that occurs at certain temperatures which could create performance problems in the K band downlinks to our earth station.

To address this RS spur our resistor need to be changed in the circuitry and then the component can be reinstalled on the first two launch vehicles and certify through another round of testing.

While this does not pose a significant manufacturing challenge Thales, it does require time and will delay the delivery of our first two satellite vehicles so that instead of shipping to Yasney in November as expected, they will now ship in March.

With the rest of the satellite qualification going smoothly, it is disappointing that this one component of K band hardware is causing us another delay. This is particularly frustrating that it should have been caught and resolved much earlier in development.

Regardless having high quality satellite in a high performing Iridium NEXT constellation is our primary objective. And as I said, we have no interest in launching satellite before they are ready. We have previously build flack in our overall launch timetable.

This most recent slip in the assembly and testing schedule means the current plan now has little margin left for any additional delays that still complete our network as we like in calendar year 2017.

While the timing of the first launch is driven by the TR model circuitry work later launches are driven by the availability of satellites in the rate of satellite production.

I am pleased to see the Thales has committed significant additional resources to our project and have a credible plan for high rate satellite production, but they still have to execute on this timeline in order for us to hit ours.

Thales will use the additional time ahead of the launch --April launch date to ensure that TR module component issue is resolved and we will also work to update the satellite launch software to a more future rich version which previously had been scheduled for upload to the satellite post launch.

I can assure that all extra time will be used to help ensure everything is ready for a successful and high quality first launch. As a result of Thales delay in finishing our first two satellite Kosmotras now plan to launch a Spanish satellite which is currently ready and available for launch in December.

Kosmotras will launch our first two satellites on a Dnepr rocket in April which would be their next launch as that allows the 30 days of prep time needed for our satellite, after our satellites arrive in March. We are working with SpaceX to reschedule the subsequent launch date so as to complete the Iridium NEXT constellation in 2017.

We anticipate that the first SpaceX launch will occur four months after our initial launch on Dnepr and the remaining six launches with SpaceX will follow about every two months out of Vandenberg Air Force Base. We are pleased that SpaceX have successfully resolved their Socket 9 issues and are schedule to return to launch in about a month.

This timeline will allow SpaceX to make a number of flights prior to our first Falcon 9 launch anticipated in August of 2016. And is in keeping with our insurance requirements and our own testing regimen which require four months of performance for the first two satellites once they are in space.

As it relates to the insurance requirements of our credit facility, I am happy to announce that Iridium has agreed with its credit facility lenders on material terms for amendment to our credit facility to modify the launch in orbit insurance requirements. We expect to execute this amendment in the coming weeks.

Tom will have more on the amendment and its implications and we will also update you on our insurance placement efforts where we've made significant progress since our last call, and in fact are now fully bound for our first launch on Nipper. Moving on to our business results. The second half of the year is unfolding much as expected.

Our financial performance in the third quarter was in line with earlier guidance as operational EBITDA and subscribers both grew at high single digit rate. Headwinds from the macroeconomic environment persist including softness in the energy sector and the continued FX pressures from the strong U.S. dollar.

We remain comfortable with our outlook for the full year and long term which allows us to reaffirm our guidance today. The performance in health of our existing satellite network remains very good.

We monitor and measure network performance on a daily basis through more than 1,000 calls, testing signal strength, call routing, connectivity and duration. Our existing constellation is proving remarkably dependable and gives us confidence that we will provide users with a high quality reliable service through Iridium NEXT coming online.

The area in joint venture remains the meaningful source of value creation for Iridium shareholders and continues to make good progress in advancing global aviation surveillance and securing strategic flight corridors.

Last week, the company announced a 12 year data services agreement with a Dutch Caribbean ANSP which provides air traffic services for the Curacao Flight Information Region. This oceanic airspace is centrally located on critical flight route, connecting the United States to South America as well as between Europe and Caribbean and South America.

DC-ANSP's leadership will provide for an optimization of a very busy flight quarter which is outside the range of traditional surveillance. Moving down to our major lines of business. In our legacy telephony market, usage in subscriber growth reflects challenges of the foreign exchange environment that subdued activity in the energy sector.

These effects were evident in our addition of a 1,000 net subscribers during the third quarter and 9% lower ARPU from the prior year's quarter. Our voice and data services are expected to benefit in future periods from new push-to -talk capabilities which were added to our commercial offering in July.

Sales have begun and we have received strong interest from foreign governments, public safety agencies and industrial customers. Despite headwinds M2M continues to be a bright spot for our long term growth.

We now have service in place with five of the top 20 heavy equipment OEMs and are in trials or contract discussions with more than five more which is great given that this is a fairly new area for us. We feel good about our array of M2M solutions and our position as mission critical provider of satellite date and climatory to the growing IT world.

This quarter South African based MiX Telematic, a global provider of fleet and mobile asset management solutions announced its new partnership with the Iridium for fleet communications. With a 0.5 million subscribers across a 120 countries, MiX offer its customers reliable global coverage by leveraging Iridium's network and M2M solutions.

This is another example of how Iridium's superior network and industry leading products will help us obtain long-term growth in the M2M sector. With regard to maritime the global market remains challenging. Marine prospects over the long term however look good as we plan for the launch of our Iridium Certus broadband service in 2017.

We continue to bring on new partners with global reach. In last week, we announced this strategic marketing partnership with the Japanese service provider Furuno. Furuno is a major player in maritime navigation and communications and was drawn to Iridium due to our network and robust suite of global customer solutions.

As I have discussed before, GMDSS is important to the future of Iridium's aspirations in the maritime market and is progressing nicely. We continue to anticipate certification in 2016. The committee evaluating Iridium for certification completed its operational assessment in September and will submit an official report to the IMO later this year.

We are very optimistic about this process and expect the GMDSS certification would expand our addressable market and give our new Iridium Certus broadband providers and other important service for the tens of thousands of SOLAS class ships so they can address the day with Iridium.

A little more than a week ago we announced the first successful voice and data call over the next generation Iridium Certus broadband network. The call demonstrated the voice and broadband capabilities of the new Iridium Certus service.

Iridium Certus' advance technology will fuel the development of smaller terminals for aeronautical and maritime and land mobile markets that will be capable of data speed that are initially three times what we offer today with open port service and will eventually reach speed of 10 times or 1.4 megabit per second.

Finally, Iridium's long standing relationship with the U.S. government continues to be at solid platform for innovation and provides incremental opportunities for collaboration and enhances capabilities.

We've realized record subscriber levels this quarter and posted 70,000 users under the EMSS program and we were awarded an $8.6 million task order for enhancement to the DoD dedicated gateway which continues to bode well for the future.

As I close my prepared remarks, let me underscore the high level of confidence we have in the Iridium NEXT program and the process we have in place today.

While I am disappointed at Thales' schedule performance to date we believe they are resolving their issues and are placing additional resources towards the Iridium NEXT project to avoid further delays.

I am pleased our current network is performing so well and that new revenue sources like Iridium Certus broadband and Arion continue to develop in advance and network completion in late 2017. That's only two years from now.

With 72 satellites expected to launch over the next two years, we are embarking on one of the most ambitious and exciting commercial launch plans in the industry. We are committed to maintain the highest standard achievable throughout our program and will not cut corners to meet deadlines at the risk of compromising that.

I look forward to keeping you updated and sharing our progress on our next earnings call in February. With that I'll turn it over to Tom for more detail financial review. .

Thanks, Matt. And good morning, everyone. I'll get started by summarizing our key financial metrics for the third quarter then outline the 2015 and long-term guidance we have affirmed this morning. I'll close with the review of our balance sheet and capital structure and finally provide a progress update when our launch insurance placement process.

I'll also describe the material terms we've agreed to with our lenders to amend our credit facility as it relates to launch in orbit insurance. Iridium generated third quarter total revenue of $106 million which was down 1% from last year's comparable period.

Similar to the second quarter the decline in commercial services and engineering and support revenue completed offset strength in government service revenue. Operational EBITDA remain strong at $63.8 million, a 9% increase from the prior year quarter. Lower product warranty cost and cost improvement continue to benefit our bottom line.

Our operational EBITDA margin also strengthened this quarter to 60% from 54% in the year ago period.

From an operating view point we reported commercial service revenue of $63.2 million in the third quarter; this was 4% lower than the prior year's quarter and tied primarily to the much stronger dollar, a weaker Ruble and weakness in the energy sector.

You also recall that we had a non recurring benefit from the prior year period associated with prepaid airtime vouchers in a higher level of activity from a major M2M customer that was testing a unique project.

This year-over-year change in usage was anticipated and we expect to realize the benefits of our M2M customers' project when it moves to full commercialization. We added 11,000 net commercial customers during the quarter with the gain coming almost entirely from our M2M customers.

Commercial M2M data subscribers now represent 49% billable commercial subscribers, an increase from 47% during the year ago period. Turning now to our government service business which recorded revenue of $18 million, representing 13% year-over-year growth driven by fixed price airtime services contract with the Department of Defense.

Government subscribers again grew at rapid clip posting 21% year-over-year growth. We reached another record with close to 70,000 total U.S. government users this quarter, up from 65,000 in June. We continue to find ways to bring value to this important relationship and this heighten activity bodes well for future contract renewals.

As Matt mentioned, Iridium was awarded $8.6 million in contract by the Department of Defense within the 2015 budget which will add to our engineering and support revenue in the coming year. In Equipment, revenue of $21.2 million was in line with our expectations and up modestly from the prior year's quarter.

We anticipate that the strong dollar and continued weakness in the energy sector will serve as headwind to equipment sales and so we don't expect growth for the full year 2015. Equipment margins expanded materially in the third quarter to 45% from 26% in the prior year's quarter. There were three drivers of this improvement.

First, as we previously discussed our Iridium OpenPort product is performing very well and as a result our warranty provision was lower by $1.6 million this quarter than a year ago quarter.

Secondly, we are seeing lower manufacturing cost on certain product lines driven primarily by newly developed chip technology and by capitalizing on other efficiency opportunities. Finally, our equipment revenue is benefited from a favorable mix composition versus the 2014 quarter.

Taken together, we think we will see equipment margins in the low to mid 40% range in 2016. Engineering and support revenue was $3.7 million in the third quarter, down from $5.4 million in the prior year quarter due to ebb and flow of this project oriented work.

We expect engineering and support revenue to be up materially in the fourth quarter both sequentially and year-over-year as we are busy with the couple of new project. Moving to our 2015 financial guidance which we've affirmed this morning.

We continue to expect operational EBITDA of approximately $230 million this fiscal year and total service revenue growth between 1% and 3%. This compares to service revenue growth at 6% in 2014 and operational EBITDA of $216.5 million.

As for our long range outlook, we continue to expect total service revenue between $420 million and $465 million for the full year 2018. Let me emphasis that the service revenue growth we've guide to for 2018 is somewhat resistant to the impact of launch delays. This is due to the structure of our payload contract.

Hosting fees will be recognized as revenue over the 12.5 year accounting use for life for Iridium NEXT satellite become operational. Data fees will be recognized as monthly revenue based on a contractual amount for operational Iridium NEXT satellite.

Even with the delay of our first launch to April of 2016, our current launch plan presumes that some satellites will become operational Dictation ends abruptly due to technical difficulty….

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