Closing Bell - Manifest Space: 25 Years of Service with Iridium Communications CEO Matt Desch 11/9/23

Episode Date: November 9, 2023

Iridium Communications is celebrating 25 years since its first entrance into commercial service. Since emerging from a Motorola research lab in the 1980s, going through bankruptcy in 1999 & expanding service into satellite, what’s next for the company? CEO Matt Desch, chief executive at the company for nearly 18 years, joins Morgan Brennan to discuss the evolution of the satellite communications industry, competition with SpaceX’s Starlink & its partnership with Qualcomm.

25 years ago, Iridium introduced its first commercial service, when Vice President Al Gore used its satellite network to call the great-grandson of Alexander Graham Bell. Born from a Motorola research lab in the late 1980s, Iridium is an old-timer in satellite communications, going through bankruptcy in 1999 and then transforming and expanding service through iterations of satellite constellations. We were probably responsible for creating what I would call, you know, Space 1.0. You know, it was the first low-Earth orbiting system, first one in commercial operation. It wasn't successful the first time around during the dot-com boom, but, you know, as it emerged from bankruptcy in 2000, 23 years ago, we've been really on kind of a rocket ship since then. And, you know, this is a chance for us to celebrate not just that we've survived, but that we've really thrived and become kind of a leader in the whole communication from space industry. Matt Desch has been CEO of Iridium Communications for nearly 18 years, a unicorn among publicly traded companies.

On this episode, Desch talks about the evolution of the SATCOM industry, why Iridium is not competing with SpaceX's Starlink, and when that Qualcomm partnership announced earlier this year will finally materialize as a service feature in Android smartphones. I'm Morgan Brennan, and this is Manifest Space. You have a lot of stuff afoot, but I do want to start with the fact that you are coming up on the 25-year anniversary of the company. So maybe we could just talk a little bit about what this milestone means, and we'll go from there. Well, it's certainly been an interesting ride for the company. We were actually conceived almost 35 years ago, back in the late 80s. And of course, we were probably

responsible for creating what I would call Space 1.0 space one. Oh, you know, it was the first lower low earth orbiting system. First one in commercial operation. It wasn't successful the first time around during the.com boom, but you know, as it emerged from bankruptcy in 2000, 23 years ago, we've been really on kind of a rocket ship since then. And, you know, this is a chance for us to celebrate not just that we've survived, but that we've really thrived and become kind of a leader in the whole communication from space industry. And a lot of people have taken our lead and have seen our success and have joined the industry over the succeeding years but we certainly have grown to be one of the largest and most

successful and it's all due to the great people that have been involved with this this program over the years so we're looking forward to celebrating it with them. Well congratulations on on that milestone. And to that point, the fact that you have been through and the company has been through different market cycles and these iterations of new technology and capability, just want to get your thoughts on how much the industry has changed and what that means in terms of this new moment where connectivity is such a key priority for every company, every government, every person really around the globe now.

Yeah, I actually started my career, early part of my career was in the early days of cellular phones and really saw that rocket to where it is today. And the expectations of us being connected everywhere on the planet have just even accelerated over the last 10 to 15 years. Still, even with all that growth, you know, cell phones only cover less than 15% of the planet's surface. And so satellites have been the way to connect the rest of the world. But they've always been big and expensive, big dishes and hard to manage until we came along and really focused on personal communications and boiling communication down to something you could fit in the size of your hand.

And so a lot of others have kind of joined us now, not necessarily competing with what we're doing, but they're certainly, I think, especially in the last 10 years, certainly SpaceX and a couple other companies demonstrated that it could be less expensive to get into space, that you could create a business from space. And our success now with all the cash flows we're generating, I think, I think has a lot of people, you know, really going after this other 85% of the world connection. Is this market getting crowded? And I ask that because you mentioned SpaceX. SpaceX also has Starlink, which is, you know, growing and growing rapidly. You had Amazon just launch their first two beta satellites for Kuiper. And I realize these are low Earth orbit constellations, but there does seem to be a very different competitive landscape

taking shape now than even just a couple of years ago. Yeah. Well, space is getting a little crowded, but fortunately it's very large. As far as a business, we're really fortunate that we've kind of stayed in our own lane. One of the things over the 17 plus years I've been here and Kuiper and quite a few others has been into broadband, what I call commodity broadband services, making a connection to the internet from your home or RV or that sort of thing. And that's not what Iridium was designed for. It's not what we focused on. We really focused on, you know, connecting people and things and in very small form with form factors, with battery powered, et cetera. So very different than what everyone else has done.

Our lane hasn't been very crowded. There certainly is competition coming, though it's still out of ways before it really has much of an impact. And we keep innovating and changing our offerings and expanding our approaches and doing different things. So we're kind of ahead of the people in our lane. So give me some examples of your lane and how, as you just mentioned, that you're changing and continuing to evolve your offerings, what that looks like and how that grows. Yeah, well, for example, I mean, I'm sure everyone remembers our original product, which was a satellite phone. It was the first one and still one of the very few that you can get, and they're still very popular. But over time, we've boiled that technology down to a Wi-Fi hotspot so that your iPhone or Android phone or your iPad could connect anywhere in the world. We've expanded it and now are really

the major players in satellite into what's called the Internet of Things, IoT. So putting small two-way connections in heavy equipment or oil and gas pipelines or on buoys or tracking animals and all those sort of things. You're certainly not going to track an endangered elephant in the wild and be able to see exactly where they're going using a big broadband satellite terminal. That just wouldn't work. You need a really small device. It's now going into delivery drones and other kinds of aircraft and autonomous vehicles. And the latest iteration has really been going straight into people's smartphones, making a two-way connection anywhere on the planet for emergency services or a message.

So that's been sort of the lane we've headed down. And people like Kuiper and Starlink and all those other companies really have really focused on those big dishes for internet connections, which is a large and interesting market. I'm not sure it's large enough for all the ones that are in it, but that's a whole different lane than we're in. Let's talk a little bit more about what that means in terms of emergency services and connectivity in the phones, because this has gotten a lot more attention because of the partnership between Apple and GlobalStar. You announced a partnership with Qualcomm earlier this year. How's that going? Well, it's definitely been very slow, slow to take off, which I think people have noticed.

You know, it needs to be embedded now into the devices, and that's just taking its time, and we're not really involved in that. That's really between Qual there, their OEM. So still, you know, the technology works very well. It's been tested. It's ready to go. And someday I expect we'll be deployed, you know, when the suppliers decide it's time. And frankly, now that it's been boiled down to a chip, it can also go into automobiles and potentially laptops and smartwatches, etc., as well. I think you're going to see that.

It is a growing market. There will be a market. Apple is kind of doing its own thing, and I think it's really driving the market right now. I think they've kind of paved the way, and now everyone else really wants to be involved as well. I kind of see three different approaches to it, though. You know, there is a smartphone-based approach, which we're kind of focused on. There is an approach where the cell phone companies are involved directly and using their own spectrum, that's going to take a little longer and be a very regional approach.

And then there's sort of maybe someday someone will build a direct-to-smartphone system from space, but that hasn't been announced or decided and the standards are really emerging. So that's 10 plus years to 15 years away. So it's happening. You know, I mean, we're going to see what we call directed device happening over time. It's just going to take some time and it's going to come in very different forms and in different ways. And we feel confident we're going to be one of those. So whether it's the smartphone market, whether it's some of these other markets, like I think, you know, connected machines,

autonomous driving, you know, aircraft, where do you see the most opportunity, I guess, in the near, near term versus over the medium and long term, just to break down how you're thinking about these markets and how connected everything is and still has to become. Well, you're right. It sort of started years ago in the connection for IoT and other things to the most valuable applications. You know, if you were tracking nuclear material, you know, traveling across the country or something, you know that you would spend any amount of money on that

and whatever you needed to. And that evolved into, you that evolved into large vehicles. We've been in 60,000 plus, 70,000 aircraft today were installed. We're installed in several hundred thousand ships. We're installed in almost 2 million devices of all, I mean, applications of all sorts around the world from energy and transportation, agriculture. I could go on and on. You know, the applications are numerous because we have something like 500 companies who have built us into their applications. The hot ones these days are more in autonomous things. Everybody wants to have

drones, whether they be delivering or say monitoring an oil pipeline or an oil rig, something maybe you would have used a helicopter for those technologies are coming and they need something lightweight and small to connect them, particularly when they're beyond visual line of sight. And so you need a small satellite radio to do that. And that's that's really our expertise. And those are going to be markets that are they're emerging. Certainly. Autonomous cars are coming. And, you know, many other applications right now, we're seeing the applications in the oceans right now with drones and autonomous maritime vehicles as well. And almost all of those are really kind of off the grid by definition. So satellite technologies are critical for them. How much of that becomes military applications versus commercial applications? Well, one of our largest single customer is the U.S. government, but it's still only about 20% of our business or really less right now. It's growing.

They've always been early adopters of technology and, you know, where they operate around the world, not just the military, but the state department and other agencies are all usually off the grid, you know, or not in reliable communication. So they've always been good customers, not just of us, but of other satellite technologies. And they're big users and will continue to be. We have a long-term contract with them in terms of supplying many of our technologies, and we see that going well out in the future and expanding.

In fact, they recently realized that with our 25 years of experience in flying a low-Earth orbiting constellation was more than anyone else in the industry, they selected us to build their ground network and operate their next generation satellite network themselves that's being built by the Space Force and the Space Development Agency. So we're really proud to be able to use our longstanding expertise in serving them in a different kind of way and helping them build their next generation networks, which are complementary to the services that they use from us today. One of the things that analysts have noted is the fact that you're in a CapEx holiday. from us today.

One of the things that analysts have noted is the fact that you're in a CapEx holiday right now, having put the most recent constellation up and having service to that and updated that. And one of the other things you flagged is a billion dollars in annual service revenue from 2030 in the midst of that. How do you get there? What does service revenue look like? And how does that prepare you for the next iteration

of the constellation next decade? Yeah, so we have a long track record of service revenue growth. I mean, just the last five years, it's been growing in high single digits. I think it's about 9% over the last five years. So it doesn't have to get extraordinary growth. I mean, but we expect it to continue out through 2030 when we made that expectations of growing our annual service revenue to a billion dollars.

You know, to the first part of that, we are unusual in the satellite industry these days in that when we built our second generation network, which was completed just a few years ago in 2019, we built satellites that would last 15 to 20 years. Just like our first generation Constellation did. And therefore, we don't have to build them like everybody else is doing. Most of the other networks you stated, I mean, those satellites they're building are kind of low-cost satellites that only last five to seven years for the most part. And so they're constantly launching satellites and they never have a CapEx holiday. We have a holiday that started in about 2020 here. And we said it's going to go through 2030 at least. And I've even said in investor day last month that we will have the capacity between now and 2030 to generate approximately $3 billion in cash that will be available for things like shareholder-friendly activities and other things. So that's a luxury. Now, it took us 30 years to get to that point.

And it does take a capital-intensive business and satellites a long time to be able to get to that high cash generation phase. And in our case, high growth phase as well at the same time. But when you can do it, it makes it all worthwhile. I mean, it's what we're all striving for. And it's what the expectations of a satellite constellation, a satellite operator should have. I am curious what you would make as somebody who's been in this industry for a while, running a company that's been in this industry really since the start, what you would make of the

current landscape. I mean, it was just a couple of years ago when the world was awash in capital and we saw so many startups and so many folks looking to create new companies and come into this market. We've seen the sharp reversal as the Fed has raised rates and liquidity has dried up a little bit. What is your sense of where we are in this so-called new space economy? Does this feel like previous cycles or are we in something new? We're definitely in a slowdown.

The last couple of years, really last five to 10 years have been sort of unprecedented in our industry. It's attracted so much investment around so many ideas. Many of them, I think now with a slowdown with investment, I think drying up for the next year or two for a lot of them is going to be a lot more challenge to complete some of those projects. And frankly, it made sense. I mean, a lot of us were scratching our heads when something like 150 different rocket companies announced that they were going to build a new rocket. I think there's still, you know, 30 or 40 of those still looking to raise money and we just don't need that many rockets. Same way with some of the networks and the ideas that, you know, I often have said one of the most important technologies we need in this industry is patience. That was really the challenge with the first Iridium incarnation in the 90s. It had, you know, so much excitement and enthusiasm around it, raised a lot of debt. And then in the dot-com and internet bubble that happened, it failed

because it just didn't have the patience. And you can see what's happened over the succeeding 25 years and how successful a company like us has been able to become. But you do need in these companies some level of patience in your capital and your investment thesis, and particularly to go through somewhat more trying times right now in the investment environment where investors are expecting quicker returns and they're expecting positive cash flows. And it's really difficult to give that with some of these ideas with too many companies being formed at the same time. So I think it's going to be a slow down for a while, but I think the prospects of our industry long-term are very positive. I think people have come to appreciate the potential

of what you can do from space and the opportunities there are. And while there'll be some weeding out of the weaker business plans in the industry, I think long term, I think there's going to be more iridiums out there. Are you acquisitive here? We've seen so much of the communication satellite industry move into M&A and dealmaking in the last year or two. Is this something that you're considering or no? Well, we're in a fortunate situation that we're growing and don't need to merge like some of the other companies you see doing that right now just to get growth. So our organic growth has been strong and is forecast to be strong over the coming years as well. So we don't have to, but we also are in a

unique situation in the industry with a really strong cash flows and growth. And so a lot of people are looking to us as a possible acquirer. I've told investors we're going to be opportunistic about it. We don't see any really big opportunities coming towards us at this point, but there could be some small ones that really make sense and fit our network very well and could benefit in what we're doing. So we're fortunate too, our network is extremely programmable. So we keep adding new things to it and again, don't have a lot of growth really into the network that we've just finished spending $3 billion on back in the last 10 years. And so there's a lot we're going to do really just ourselves and don't need to acquire for. And finally, just your thoughts on where the industry, where the space economy more broadly is five years, 10 years, 20 years from now?

Yeah, I think it's going to be much larger. It's going to be more mainstream. I think you're going to start seeing, I mean, one of the big trends, I think, around communications is there's going to be a lot more usage of standards long term. That happened, you know, I've been around a long time from the early days of, as I said, cellular communications, you know, from the 1G, 2G, 3G days. And, you know, there was a lot of innovation in those early days, but these days, as we move towards 5G and 6G, the real innovation isn't in the network, it's around the edges and the phones and the devices and things like that. And I think that's going to happen in the satellite industry over the next 10 to 15 years. You're going to see us becoming very much mainstream. We'll be embedded in things, but it will be much more standardized services.

We're going to start using 5G standards down the road in different applications. I think that will mean lower costs for consumers for being connected off the grid. And I think that's a great thing. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.