Iridium Communications Management Discusses Q2 2012 Results - Earnings Call Transcript

Iridium Communications (IRDM)

Q2 2012 Earnings Call

August 02, 2012 8:30 am ET

Executives

Steve E. Kunszabo - Former Executive Director of Investor Relations

Matthew J. Desch - Chief Executive Officer and Director

Thomas J. Fitzpatrick - Chief Financial Officer and Executive Vice President

Analysts

James D. Breen - William Blair & Company L.L.C., Research Division

James Patrick McIlree - Dominick and Dominick Securities Inc., Research Division

Chris Quilty - Raymond James & Associates, Inc., Research Division

Glenn Hapgood Tongue - T2 Partners Management LP

Christopher C. King - Stifel, Nicolaus & Co., Inc., Research Division

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Iridium Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Steve Kunszabo, Head of Investor Relations. You may begin, sir.

Steve E. Kunszabo

Good morning, and thanks for joining us. I'd like to welcome you to our second quarter 2012 earnings call. Joining me on the call this morning our CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our 2012 second 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, Steve, and good morning, everyone. Thanks for joining us. This morning, we announced second quarter numbers, which is our 10th earnings report since going public in late 2009, and it's probably the first time we haven't lived up to or exceeded expectations as we lowered our service revenue and operational EBITDA outlook for 2012, and I'm obviously disappointed about that. However, I don't think you'll find this to be a trend. We remain very positive about our overall competitive position with the help of our current network and the progress we're making in replacing that with Iridium NEXT and our new hosted payload business and many other factors that give us confidence in our long-term growth path.

I'll first address why we fell short this quarter, which was primarily due to further weakness in our legacy government handset business before taking you through the strategic elements that will underscore our growth in 2013 and beyond. Let me be clear here. While we may have lowered our short-term expectations, I really like our long-term prospects. Tom will then run through the results in our revised financial guidance.

So to the government business. We've seen a higher number of deactivations by our traditional government handset customers largely due to reduced troop levels in the conflict areas. While we can't directly address its impact until we renew our long-term contract with the Department of Defense next year, we're confident that the strategic nature of our relationship with this anchored customer hasn't changed. They continue to spend with us on new product developments in a multiyear modernization plan for their dedicated gateway. And the feedback from senior, civilian and military leadership continues to be constructive about our long-term partnership.

On another issue, I think we found we can do better job managing our supply chain. While we believe that last quarter's Iridium recall was an isolated incident, we've intensified our focus in this area. We've diversified the manufacturing line for M2M device production, scrutinized supplier relationships and examined internal processes to improve efficiency. We're making some key improvements in this area because although our equipment revenue in the first half of 2012 was on track, we could have done even better in meeting what were seen as growing commercial demand.

Now if I step back and really take a complete top-down view of the business, we're in pretty good shape, especially on the commercial side but really, on the government side as well. It starts, of course, with a differentiated and very capable network. Our network is our greatest asset. Everything else we do comes from this sustainable competitive advantage. It impacts which markets we're successful in today, which markets we can enter tomorrow and ultimately, the quality of our revenue profile.

When you compare Iridium to the rest of the mobile satellite services space, no one else serves the breadth of business areas and vertical markets that we do, and no one else offers the same robust suite of products. So we're always focused on building upon the power of our most important asset, our unique satellite network. Thanks to its resilience and flexibility, that network continues to perform very well.

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