Iridium conference call, 25 January 1999 [Part I] [big file]
ee.surrey.ac.uk
Much of the public information appearing on Iridium at the end of January 1999 resulted
from this Iridium, LLC fourth-quarter earnings conference call. The transcript of the call
is presented here.
Operator: This is for the Iridium fourth quarter earnings teleconference taking place
January 25th, 1999 at 9:00 a.m. Eastern Standard Time.
Good morning and welcome to the Iridium, LLC analyst conference call. Today's
call is being recorded. The call is being hosted by Dr. Edward Staiano, Chief
Executive Officer and Vice Chairman of Iridium LLC. Sitting in with Dr. Staiano are
Roy Grant, Vice President and Chief Financial Officer. And Kevin Lavin, Assistant
General Counsel.
At this time, I would like to inform you that this conference is being recorded for
rebroadcast and that all participants are on a listen-only mode. Following the
comments, a question-and-answer period will be made available to the callers. To
ask a question please press the numbers one followed by four on your pushbutton
phone. Should you wish to withdraw your question, please press the pound key.
Questions will be taken in the order they are received. Please hold all questions until
the question and answer period begins.
Before we begin, Kevin Lavin, Assistant General Counsel of Iridium LLC has a
brief statement. Mr. Lavin?
Kevin Lavin: Thank you. Many of the statements that management will make during
this call will be forward-looking. Accordingly, Iridium LLC, Iridium operating LLC
and Iridium World Communications LTD, wish to invoke the Safe Harbor for
forward looking statements provided by section 27A of the Securities act and 21E of
the Exchange Act. Examples of the forward looking statements that management may
make include, but are not limited to statements concerning Iridium's future operations
including projected subscriber ramp up, revenues, systems performance, and
regulatory approvals. These forward-looking statements are based on a number of
assumptions and actual results may be materially different from those expressed or
implied by such statements. For a description of the factors, which may cause
Iridium's results to differ materially from those expressed or implied by such forward
looking statements. Please consult the Securities and Exchange Commission filings of
Iridium LLC, Iridium Operating LLC, and Iridium World Communications Ltd.
I will now turn the call over to Dr. Ed Staiano, Chief Executive Officer and Vice
Chairman of Iridium LLC. Ed?
Edward Staiano: Thanks Kevin. Good morning. Welcome and thank you for
participating in today's call.
In the fourth quarter of 1998, Iridium made history, as we became the first truly
global mobile telephone company. Today, a single wireless network, the Iridium
Network, covers the planet. And we have moved into 1999 with an aggressive
strategy to put a large number of customers on our system, and quickly transform
Iridium from a technological event to a revenue generator.
We think the prospects for doing this are excellent. Our system is performing at a
level beyond expectations. Our initial shortage of Motorola subscriber products has
been resolved. Although Kyocera remains a problem.
Financing is now in place through projected cash flow positives. Customer interest
remains very high and a number of potentially large customers have now evaluated
our service and have given it very high ratings.
With all of this going for us, we are in position to sell the service and that is
precisely where we are focusing the bulk of our efforts.
We are working closely with our gateways to accelerate our marketing and
distribution efforts. We have identified some 600 very high usage industrial customers
around the world and have launched an aggressive campaign to have them try the
system and discover for themselves, how this technology can enhance their
communications capabilities.
Let me first brief you on network performance, before describing those efforts in
greater detail on the technical performance of the Iridium system, which as I said, is
now consistently excellent.
Last week for instance, system-wide testing showed a 94 percent call
establishment rate, with dropped calls at about 5 percent. We are now seeing paging
reception on the order of only one missed message per 1500 sent. Call establishment
for our cellular roaming service, is in the 98 to 99 percent range. The bottom line is
that from a technical standpoint, the Iridium system is performing at a level beyond
expectations and the refinements we are currently loading into the system will bring an
even higher level of performance, in terms of call establishment, dropped calls and
voice quality. And we are going to keep at it until this system is as close to perfect as
it can possibly be.
Let me now switch to subscriber products. As I indicated the initial shortage of
Motorola subscriber products is now over. Motorola has shipped nearly 40,000
Iridium phones from its factory in Illinois. Almost half of those have now made their
ways to the Gateways or their service providers, with the remainder now in the
distribution channels. Motorola is also shipping Iridium pagers, cellular cassettes, and
accessories in volume. Most importantly, Motorola now has the capacity to produce
whatever we need to satisfy customer demand.
Kyocera unfortunately has not yet shipped its single-mode and dual-mode satellite
phones. Those units are still undergoing testing with the Iridium constellation. The
latest results show that after considerable process, the Kyocera handsets are not yet
meeting the performance standards that we require for commercial release. Teams of
engineers from Kyocera and Motorola Sat Com are working together in Arizona to
clear up the remaining issues. And we anticipate that Kyocera will be shipping
handsets in volume before the end of the first quarter. System loading is suffering
somewhat because of this problem since customers who prefer Kyocera products
are waiting for their availability.
Let me switch now to our marketing efforts. With the Network performing well,
our primary focus as I said, is now on our sales and distribution activities. We
continue to see good demand for our service. Our advertising campaign generated a
quarter of a million leads, more than 130,000 qualified leads and nearly 18,000
phone reservations. The bulk of them from just four of our Gateways. One of our
major tasks right now is to work down through the lists of potential customers [amazing...] and
get them their equipment. I can tell you that the number one question coming into our
global customer care centers is when can I get my phone. [Hello?...] We are working to speed
up this process.
A major challenge we face is getting our service providers integrated on line and
selling Iridium products and services. Thus far, we have nearly 65 service providers
ready to sell our product, with 100 or more undergoing integration and coming on
line soon.
And our gateways continue to sign up service providers. For example, last week,
you may have heard that Sprint has signed on with Iridium North America to be a
service provider in the Sprint PCS service area for the direct sale of Iridium services
through their National Account Team. Sprint, of course, is the largest digital
nationwide wireless network in the United States.
In addition, last week Telecom Italia Mobile (unintelligible) commenced the sale of
Iridium services. TIM is one of the largest and most aggressive cellular operators in
the world.
We continue working with gateways to intensify our approach to the industrial
markets. These, as you know, are potentially large customers that will find the
capabilities of our phones and pagers especially useful. And who are likely to log
more minutes per user on the system. Right now we are getting phones and pagers
into the hands of these customers for their evaluation with an eye toward selling them
hundreds, perhaps even thousands, of handsets. These heavy users are from
companies or government institutions with extensive operations around the world.
Many of them in remote areas where satellite communications is the only way to keep
in touch with the rest of the world. I am talking about oil companies like Shell,
Arremco (phonetic), Exxon, Phillips, and Coastal Oil. Petrol Canada for example,
has ordered 200 phones. There are large construction companies like Becton
(phonetic), which just bought six Iridium phones for evaluation. American Electric
Power, Monsanto, Lock Heed, all have taken phones for evaluation. NATO has six
phones. And the list goes on and on.
Station 12, a broad-based international provider of mobile satellite services that is
known for its aggressive, industrial sales force has signed on with Iridium
Communications Germany to be a broad based service provider. This relationship
will further boost our efforts to reach the industrial markets.
In addition, we have always expected that the US government, which has its own
Gateway, would be a heavy user of our system. We are confident that a number of
agencies will soon be placing orders totaling thousands of phones.
The Y2K problem may give us an added opportunity in the market. Because the
Iridium system was built in the 1990's with an awareness of the millenium issue,
Iridium-to-Iridium phone calls, because they don't use terrestrial networks, are the
year 2K solution for global companies. Particularly those that are concerned about
the vulnerability of local communication networks serving their operations around the
world. A number of government entities have already approached us specifically with
regard to year 2K, communications to protect national security and public safety.
One of the real bright spots for us is the highly positive feedback that we are getting
from the evaluators of our system. These are the industrial customers who try our
service under the conditions they normally face, are truly impressed with Iridium
phones and with their capabilities. Let me share with you a few comments from a
report issued by a major US Government agency, after a comprehensive evaluation
of the Iridium satellite service.
The phones were tested all over the world under a variety of conditions from
November 21st to December 21st. Their extensive data is in a 22-page report of the
work done by this agency. Let me now quote from the report.
"Overall, the Iridium system truly introduces a significant new commercial service. Under
normal conditions, it provides excellent voice quality and excellent connectivity. This evaluation
finds Iridium highly satisfactory for most uses and applications evaluated."
I would add that this evaluation took place before the most recent major
improvements we have made to the system.
Another agency, the Airforce's Space Battle Lab (phonetic), has tested 130 Iridium
phones in the field including Bosnia. Listen to what they have to say according to an
article published last Friday.
Quote, "anyone who uses or hears about the capabilities of this phone wants one. We have
made calls from an Airforce plane flying at 30,000 feet, and another from 25 miles north of the
Arctic Circle. It is now possible that our special operations forces won't need to lug around
suitcase-size satellite phones like we have now. These small hand-held units will do. The
possibilities are endless."
We had a very positive review from a member of the Australian military who was
impressed by the performance of the Iridium phone during a cyclone. Quoting from
his letter.
"I am very appreciative of the chance to try the Iridium system out to help prove it though
some of Mother Nature's worst. I have no hesitation in recommending this system to any
interested parties."
As you know, back in November, Motorola and Iridium Central America sent
several dozen phones to the Central American governments in the aftermath of
Hurricane Mitch. With free airtime to the end of the year. By the end of November,
relief workers had logged a total of about 1800 minutes of use. One of the military
officers detailed to the Honduran President's office had this to say about the phones.
Quote, "We have crystal clear communications. With the freedom to use the Iridium phones
in helicopters and Army trucks, and area of total devastation and no electricity. We have had
continuous communications with our headquarters in (unintelligible). Our finance minister even
used an Iridium phone while in Germany to renegotiate our national debt."
So in sum, there is a lot of evaluation activity by potentially large customers. The
reviews we are getting are all highly positive and we are confident that as more of
these large customers evaluate our system, we will start to see the ramp up in our
subscriber base.
The Iridium Aeronautical Service continues to make strong process towards its
debut at the end of the first quarter, when the single channel radio for business aircraft
will be fully certified for commercial service. Trial units are now on board several
aircraft. They are working very well. And excellent call quality reported from trail
users.
I used the Iridium phone aboard the Iridium Aircraft this week and carried on a
20-minute conversation from the ground to take off and to flying. The airborne
Iridium phone has even been used aboard a NASA ER2 plane, the successor to the
U2, flying at an altitude of 70,000 feet.
The response from the business (unintelligible) aircraft community has been
fabulous. At the National Business Aviation Association Tradeshow in mid October,
our partner, Allied Signal took nearly 750 initial orders to install the Iridium Air Sat 1
(phonetic) system on business aircraft.
We are also moving very aggressively to market our multi-channel Iridium system
for in cabin use on commercial airlines. These units will be ready for installation
shortly after the first of next year. Initially, as a voice only version, but with fax and
data following in the second quarter of 2000. We are now in discussions with a
number of international airlines about providing Iridium services on their routes.
The aeronautical market is extremely important to us because it gets our service
and our brand in front of a large number of traveling professionals. One indication
about how serious we are about capturing this market was our acquisition of
Clarecom (phonetic) Communications Group from AT&T and Rogers Cantell
(phonetic) at the end of the fourth quarter. With its digital, air to ground network that
already serves seat back phones, on 1400 commercial jets in North America,
including American, Northwest, Alaska, Canadian, and Southwest Airlines,
Clarecom will bring Iridium branded in-flight telephony to thousands of airline
passengers every day. Many of these passengers are potential customers for other
Iridium services. Already a large part of our advertising is devoted to reaching global
travelers, through billboards in airports, through advertisements in airline magazines
and through in-flight videos.
Clarecom's installed base gives us immediate access to this market and you can be
sure we will be taking full advantage of it.
I have personally been out to Clarecom's Seattle headquarters to meet with most of
the company's employees and discuss this transaction with them. Let me tell you that
they are ecstatic about becoming part of the Iridium family, and they too see the great
future for airline telephony using the Iridium system.
Our market access activities moves solidly forward in the fourth quarter, and into
1999. Iridium is now authorized to provide satellite telephone service in more than
140 countries and territories around the world. Our paging is authorized in more than
200 markets. And we expect to continue to make progress and will have the Iridium
system authorized for use in virtually every country in 1999.
Additionally, nearly 60 of Iridium's 160 roaming partners have launched the Iridium
cellular roaming service and are ready to serve Iridium customers on local networks.
Together, these local cellular operators cover more than 300 major business travel
destination cities around the world. While this integration continues, we continue to
sign up new roaming partners around the world.
At this point, let me turn the conversation over to Roy Grant who will discuss our
earnings and our financial performance.
Roy Grant: Good morning. During the fourth quarter, we reported revenues of
186,000 and a net loss of 440 million. This compares to a third quarter net loss of
364 million. The primary cause of the increase relates to recognition of O&M
expense for the first time, and the issuance of warrants (phonetic) to our Gateways.
During the fourth quarter, we recognized 50 million of expense associated with our
O&M contracts and 38 million associated with the issuance of warrants to our
Gateways.
These results however don't tell the whole story. To offset smaller than anticipated
revenues, which we knew were going to result from a delayed start, we tightly
controlled expenses in all areas. In fact, compared to our internal approved budget,
we ended the year, under our cash budget by over 250 million dollars. Thus, we
think we have done a very effective job of controlling expenses during this period.
Let's turn to our financing. As you know, Iridium has been very successful at raising
capital in the public markets, and this was again the case in the fourth quarter and last
week. During the fourth quarter, Iridium raised 1.95 billion of new financing,
consisting of an 800 million senior secured credit facility, a 750 million guaranteed
credit facility, along with 400 million of vendor financing from Motorola. In fact, this
800 million senior secured credit facility started at 650 million, and based on positive
reaction to the financing, was increased in size to 800 million. These financings
provide Iridium with the required funding through anticipated positive cash flow.
Last week Iridium raised approximately 250 million through a very successful 7.5
million-share public offering. This offering had three major benefits. It provided 250
million of cash to our balance sheet. It increased our public float to approximately 20
million shares. And it freed up restrictions placed on 300 million of the 350 million of
Motorola guarantees. These restrictions were placed on that particular level of
guarantees by our bankers in our 800 million dollars secured credit facility.
With this 250 million, combined with the 350 million of additional guarantees from
Motorola, this means we have approximately 600 million of funds in excess of what
we need to break cash flow break even. This provides a significant contingency for
the company.
This finishes the review of the financial results, let me now turn it back to Ed for his
conclusion.
Edward Stainano: Thanks, Roy. The fourth quarter was an extremely exciting one
for our company. As we said we brought out network and our system to an excellent
level of quality, we were first to market it with a truly global mobile telephone and
messaging service. And we opened to rave reviews from potentially large customers
who have tried our service now under a variety of conditions.
Now we are moving forward into 1999 with a strategy aimed at quickly delivering
Iridium phones and pagers to what we believe is a vast market for our unique
services. I am confident that given the demand that is out there and the superb
performance of our product, we are going to have a very good year.
Thank you. And now to your questions.
Operator:At this time, we will begin our question-and-answer period. If you have a
question please remember to press the numbers one followed by four on your
telephone keypad. To cancel your question, press the pound key.
Our first question is from Cindy Mast from Credit Suisse First Boston.
Cindy: Hi. This is Cindy from Credit Suisse First Boston. I just had a couple of
questions. First I was wondering if you can talk a little bit more about the cycle of
getting the phones to the customers, how long have they usually been looking at to
trial the phones and then you know how long does it take to place the order and then
to receive the phones. And the secondly, how many phones do you think the
600,000 high usage customers that you have identified, how many phones could that
ultimately translate to? I realize that might be hard to say but how many actual
numbers could we be looking at here. And then lastly, do you have any sense of how
many minutes that people were using, individual users tend to use?
Edward Staiano: Cindy, it is a little early to try and get projections on all of those
things at this point in time. But, the time for trials is typically 30 to 60 days of actual
use of the phones. And then there is usually some time for reports to get written and
distributed. So, we are looking at something like, minimum 60 day cycle from when
we get phones into the hands of these large industrial users before we expect to see
orders starting to come in, in quantity for them. In a couple of cases that has moved
faster, but I think in general that is what we expect to see.
With regard to minutes of use, it is a little early for us to tell because when you are
going through all of these trials and tests and things like that, and the numbers we get
may be misleading. So, I wouldn't want to quote those at this point in time until we
have enough people that have settled into their normal usage patterns to be able to
give those to you. What we do expect though, is we expect that the industrial
customers will use some 70 minutes per month on average. I would only qualify that
by saying the latest Booze Allen (phonetic) report that we had called for significantly
higher number of minutes than that. I think on average across about 10 different
industrial markets, they estimated some 420 minutes of use per month. We really
aren't going to know where that number lies until we have another 90 days or so of
experience. So, I guess my answer to you is that you are going to have to have a little
patience with us as we go through this first quarter and get enough people on board
and enough measurement so that we can give you some statistics that have some
validity to them.
Cindy: And the 600,000 that you identified, about how many people could that
potentially be, or phone numbers I guess?
Edward Staiano: Well the 600,000 is the number of subscribers.
Cindy:Oh, okay. I thought that maybe that was corporate corporations.
Edward Staiano: No no, in my speech just now, I talked about 600.
Cindy: Oh, okay I thought you said 600,000.
Edward Staiano: No, it turns out there are two numbers. There is 600, is what I
talked about in terms of industrial companies that were looking that are high priority.
But it also turns out that we think there are about 600,000 satellite only customers in
our forecast over five years.
Cindy: Okay. That makes it clearer.
Edward Staiano: Okay. All right.
Cindy: Okay.
Operator: Thank you. Our next question comes from Les Levy with Chase
Securities.
Les: Hi. Just you said you are satisfied with the rate of production that Motorola has
finally achieved. What is that in terms of the number of handsets? The second
question is what is the time it takes for units to actually go from the production facility
into the hands of an end user and what are the steps that it gets there. And finally, you
know where are the bulk of your orders coming and what channels of distribution are
ultimately leading you to the most qualified leads and ultimately deposits?
Edward Staiano: Okay. Three questions. First of all with regard to Motorola
production. We really have to talk about different things. The satellite phone itself and
then the cassettes, the GSM cassettes, the CDMA cassettes, and cassettes that they
are going to be producing shortly, for TDMA and also CDMA at 1800. With regard
to the satellite phones, Motorola production capacity now is well in excess of 1,000
a day. So, they can really supply us with any number of satellite phones that we want.
With regard to the cassettes, they only began shipping in January and so a lot of
our orders from customers have been on hold until the cassettes get out there. We
are still backordered on GSM cassettes but those should all clear this month.
Motorola's forecast for the month is to build 42,000 of the CDMA, GSM cassettes,
total. So, production-wise, we are now out of the problem.
In terms of getting handsets from Motorola through to the end user, that varies an
awful lot depending upon where you are. And which country you are in. We have
had a substantial difficult, for example, in getting enough quantity of handsets into
places like Brazil, into some places out in Asia, that have been tied up in custom
issues. Russia has been a huge problem for us. In fact, I don't believe we have
production handsets into Russia yet because of problems with the currency there. We
think we have got that solved now. Our meeting last week I think got passed that.
So, it is a different answer for different countries. But I will give you an average. I
would guess that on average we are talking about 2 to 3 weeks from the time they
leave Motorola's dock until we can get them through to a service provider and
consequently available to go into the hands of an end user.
With respect to orders, you know I won't go though single orders for individuals
because those are obviously one at a time. But with respect to large orders, I listed a
variety of those companies that are in the process of evaluations. And we are
anticipating as a results of the evaluations that have now been completed at the US
government, that we should start to see large orders flowing in from the US
Government here very shortly. I will think we will see the orders coming in from the
oil companies and the others that have been going through the trials, the construction
companies, etc., in the next 30 days, we should start to see large orders. And as they
come in, we will announce them.
Les: Can you talk about the 18,000 handset deposits, when will that backlog -
Edward Staiano: We are working that off now. And there are two problems with
that. The first one is there are some number of those, roughly half that are for
Kyocera products. And as I mentioned in my comments Les, one of the places
where we are suffering a little bit on loading is that not having the Kyocera product, a
lot of people are just sitting and waiting for that product. So, we are going to satisfy
about half of that base, roughly, with Motorola product. The other half is sitting there
waiting for Kyocera product to come through.
Les: Okay. Thanks. |
