Participants

Kenneth Levy; Investor Relations; Iridium Communications Inc.

Matthew Desch; Chief Executive Officer, Director; Iridium Communications Inc.

Vincent O'Neill; Chief Financial Officer; Iridium Communications Inc.

Richard Prentiss; Analyst; Raymond James Ltd. (Canada)

Edison Yu; Analyst; Deutsche Bank

Colin Canfield; Analyst; Cantor Fitzgerald

Hamed Khorsand; Analyst; BWS Financial

Chris Quilty; Analyst; Quilty Space

Mathieu Robilliard; Analyst; Barclays

Louie DiPalma; Analyst; William Blair & Co.

Presentation

Operator

Good day and welcome to the Iridium Communications first-quarter conference call. (Operator Instructions) Please know that this event is being recorded.
I would now like to turn the conference over to Ken Levy. Please go ahead.

Kenneth Levy

Thanks, Sagar. Good morning and welcome to Iridium's first-quarter 2025 earnings call. Joining me on the call this morning are our CEO, Matt Desch; and our CFO Vince O'Neill. Today's call will begin with a discussion of our first-quarter results, followed by Q&A. I trust you've had the opportunity to review this morning's earnings release which is available on the Investor Relations section of Iridium's website.
Before we turn things over to Matt, I'd like to caution all participants that our 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 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 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 including operational EBITDA, pro forma free cash flow, fresh cash flow yield, and free cash flow conversion. 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 further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures.
With that, let me turn things over to Matt.

Matthew Desch

Thanks, Ken. Good morning, everyone. The first quarter came in pretty much as we expected. Service revenue continued to expand with the rollout of new services and subscriber growth over the last year. We continue to see and forecast growth across most of our product lines. And our partners continue to be bullish about opportunities with our new product offerings, including Iridium PNT.
Normally, the short window between our February call and the end of the first quarter doesn't allow much time for a lot of business surprises. That was not the case this year. The new tariff levels announced a few weeks ago that were implemented and then largely suspended have created more uncertainty than we had anticipated, particularly around equipment expense. We're working to mitigate as much of this impact as possible.
Most of our equipment is manufactured in Thailand at a contracted facility. The quality is outstanding. Last year, we only had about 100 items returned out of more than 850,000 individual things that we shipped to customers. That's an amazing quality level that we're very proud of and that my supply chain management team has delivered both during and in the aftermath of the recent pandemic.
With U.S. trade policy still in flux, let me share some of our considerations to ensure you understand how we're reacting to these new regulations and how they would affect our bottom line depending on how and when they are implemented.
Historically, Iridium has imported our finished goods from Thailand and to a far lesser extent to other countries to our Arizona distribution center where they have been inventoried and packaged with other components prior to being shipped on to partners, both in the U.S. and overseas.
Last year, however, we began working with a third-party logistics partner in Europe for regulatory reasons and began using their facility for shipments destined to the EU. In the current environment, we will be expanding this relationship quickly to mitigate as much of the new tariff costs as we can, utilizing it for almost all non-U.S. partner shipments which is about 75% of the total. Approximately a quarter of Iridium's annual equipment is shipped to U.S.-based partners. So any import tariff should only impact this portion testing for the United States.
We've been working for several years to avoid exposure in our supply chain to China and now source very little from there, so the very large tariffs there have a relatively small impact on our bottom line. We estimate that the current U.S. trade policies based upon a minimum tariff of 10% for Thailand would result in approximately $3 million of incremental cost to Iridium this year and flow through to our OEBITDA. At this time, we think we can absorb this lower level of tariffs within our currently guided OEBITDA range.
If tariff policies were to revert to originally proposed levels from April 2, Iridium would be subject to a 36% tariff rate for all equipment manufactured and imported from Thailand. Under this scenario, we estimate that Iridium would incur $6 million to $7 million in incremental costs this year. We have not included this scenario in our guidance assumptions in light of the uncertainty and ongoing discussions with countries like Thailand on tariff levels and exemptions.
While we could choose to mitigate some of the remaining import costs through equipment surcharges to our customers, at this time, we prefer not to undermine our strong market position and business and momentum. Today, there remains much uncertainty surrounding tariff levels, their timing, and how our partners' businesses will fare in the evolving economic climate. As a historical context, we know Iridium's business has been resilient in the face of prior economic shocks. We continue to grow service revenue through the 2008 recession as well as during the 2020 pandemic.
I hope this color and the additional information Vince will soon provide will help you better understand how we are thinking about the current environment. At this point, it's a pretty deterministic expense once we understand what the trade policies will ultimately be.
Turning back to our activities during the first quarter, we spent a lot of time with the industry and our partners at the Satellite Show in February and our Iridium Partner Conference in Florida. Despite the overall market disruptions and changes in our industry, our partners remain bullish on their businesses and opportunities with Iridium, particularly around next-generation IoT, alternate PNT from our Satelles acquisition, and D2D with our development of Iridium NTN Direct.
Our expansive partner ecosystem is unique in the satellite industry, and Iridium's partner network covers just about every industry that can use satellite communications. These partners understand and appreciate Iridium's unique capabilities including our high-quality and reliable satellite constellation, truly global coverage, and regulatory approvals. They give us a lot of visibility into their businesses, and we share with them our product roadmap and investments for the future which is why we remain confident about our growth outlook in the face of new market entrants like Starlink or regional D2D services like AST SpaceMobile. Our partners see us as complementary to these new entrants and continue to invest in new Iridium solutions based on our investments and plans to go after new markets.
I feel somewhat obligated to talk about Starlink and other startups as it's clear from short interest that investors still don't understand how Iridium is differentiated from them. Starlink, in particular, has done a great job expanding their network and attacking new markets. They've made strong inroads into the consumer sector and drawn share from established VSAT broadband players in areas like maritime and aviation. Starlink, however, does not have L-band spectrum nor the global coverage required to support mission-critical applications. Further, they do not have the ability to address safety applications in GMDSS on ships or air traffic control communications to the cockpit of airplanes.
While there is some overlap between us, specifically in maritime where Iridium has been used as a low-cost primary connection by some boaters, our distribution partners still see an important role for Iridium's weather-resistant global coverage as a complement to Starlink for their customers. The headwind we are experiencing on this small piece of our broadband business should normalize over time as more Iridium-serviced GMDSS maritime products reach the market to address market needs for low-cost safety applications, a niche within maritime where we excel.
As for direct-to-device, this industry segment is not a zero-sum game. We fully anticipate that satellite providers offering various levels of cellular-based services from space will develop regional services over time. But most of the services will be limited in geographic scope due to spectrum interference and regulatory issues, and we'll need to overcome service expectations with cellular customers.
When I talk to our partners, I continue to hear that their customers want uncompromising, highly reliable global service, and tailored solutions that address their unique business needs. They have preferences for purpose-built devices that remove uncertainty and obstacles from achieving customers' missions and objectives. As a result, we have no reason to believe that cellular-based D2D will replace the use cases that Iridium addresses.
However, there is a growing role for D2D in the marketplace, especially with casual users, which is why we're developing Iridium NTN Direct. Iridium's new IoT and direct-to-device service will be available on standard-based chip sets with 3GPP Release 19. We will be in live on air tests with Nordic Semiconductor and potentially others this summer. And prospective customers will then have the ability to experience what a global reliable D2D service really feels like.
For Iridium, standards-based chip sets will also have the benefit of lowering costs for manufacturers and customers who want to roam onto Iridium's global network for almost no additional cost beyond what they are spending for cellular hardware. This should be a boon to our IoT business and allow Iridium to find its way into new industries that had previously considered satellite technology too costly for integration. The IoT market is very large, and we expect Iridium NTN Direct to fuel material revenue growth for our company through the end of the decade.
Despite suggestions from some, mainly investors who are short Iridium, that D2D will compete with and cannibalize Iridium's legacy services, we find this storyline hard to follow. As current D2D solutions based on cellular frequencies improve, they will still only provide a small extension to the cellular world's 10% to 15% footprint of the globe, far from Iridium's ubiquitous coverage.
With all the excitement about D2D, it's worth highlighting that we continue to see growth for personal satellite communication devices. This is even as free D2D services have debuted in the U.S. and elsewhere with Apple on smartphones and with very public beta tests of Starlink services.
While there may someday be a large market for D2D, we believe that the relatively small investment we're making in Iridium NTN Direct will result in a robust service that will be complementary to others' D2D efforts and generate incremental IoT service revenue for us starting in 2026.
Continuing on this theme of incremental revenue, let me move on to position navigation and timing, an area in which Iridium has a big lean on competitors and which we believe holds a lot of opportunity. Our partners are really excited about integrating our satellite time and location services into their solutions, and we're seeing a lot of interest from new customers who want to solve GPS issues with Iridium STL.
As I've discussed before, the prevalence of GPS jamming and location spoofing is on the rise in exposing the vulnerabilities of organizations and critical infrastructure that rely on these services. Thanks to our acquisition of Satelles last year, we can provide them with a timing signal and trusted location that can be delivered cheaply anywhere in the world and is 1,000 times stronger than GPS. We've already seen a big pickup in engagements on PNT since the beginning of this year. And we believe Iridium STL will be a major driver of revenue growth in both civil and commercial applications through 2030 and beyond.
Before I turn things over to Vince, I want to take a moment to touch upon some investor inquiries we've received on the administration's efforts to reduce government expenditures and realize efficiencies. We do not believe that Iridium's existing contracts with the U.S. government will be impacted by these efforts and continue to believe that our long-term partnership with the government provides tremendous value.
Our EMSS contract with the DoD gives the government reliable global coverage for as many voice and data units as they care to add to our network. At about $65 per user per month, this may be among the most attractive deals in the satellite industry today.
We do, however, believe that the geopolitical environment will remain in flux. There's no disputing that international dynamics are changing. Between the new tariffs and U.S. government right-sizing and shifting priorities, we expect to see impact on our industry, some potentially positive as space remains a priority right now, but some negative as well. Foreign governments, agencies, NGOs, and even safety organizations may face funding challenges. We've seen examples of this in the last two months as USAID funding was cut to some international organizations who are apparently using satellite services to improve their internal security.
Right now, we have no reason to believe these changes will be material to our business. We believe Iridium is fairly insulated from the recent protectionism and nationalistic rhetoric. But like every company, we may face issues on the margin as we move through the year. We will continue to keep our ears open, mitigate issues that arise, and keep investors abreast of what we're seeing.
Despite recent global turbulence, as my team and I look out to 2030, we are highly confident in Iridium's ability to leverage our one-of-a-kind network to deliver new solutions and expand into new end markets. We have great technology; a strong spectrum position; and a clear path to grow our business, service revenues, and free cash flow.
Between our buyback program and quarterly dividends, we are also delivering additional value to shareholders. We continue to believe our stock to be undervalued, and we'll be active to capture this value with the remaining outstanding authorization on our share repurchase program.
These capital priorities, in addition to ongoing investments in our network, underscore our confidence in Iridium's business prospects and growth.
With that, I'll turn it over to Vince for a review of our financials. Vince?

Vincent O'Neill

Thanks, Matt. And good morning everyone. I'll start my remarks today by reviewing our financial results for the first quarter and some trends we're seeing in our major business lines. Similar to Matt, I'd also like to discuss the evolving business climate and how it colors our outlook for the year. I'll then close with a review of our liquidity position and capital structure.
Iridium executed well in the first quarter and continued to deliver on our full-year plan. Operational EBITDAwas up 6% in the first quarter to $122.1 million, driven by a combination of revenue from recurring commercial services and engineering and support. On the commercial side of our business, service revenue was up 4% to $127.5 million. This increase was led by strength in IoT and Iridium PNT. Voice and data revenue rose 2% from the prior-year quarter to $55.9 million and largely reflected subscriber growth in telephony services. As Matt mentioned, a small portion of the deactivations we saw during the quarter related to USAID and changes to program funding.
Commercial IoT revenue totaled $43.8 million in the first quarter, up 11% from the year earlier. As noted previously, this reflects a step-up in our two-year contract with our largest IoT partner, in addition to ongoing demand for personal satellite communication services.
As previewed in February, we have experienced and continue to anticipate structural subscriber deactivations associated with changes to an IoT partner's retail plans which are phasing out plans that allowed subscribers to toggle between active and inactive status throughout the contract year. These deactivations have no impact on revenue under the terms of the contract.
Revenue in commercial broadband was down 6% from the year-ago period to $12.9 million. This decline was driven by the increasing use of Iridium as a companion service and the conversion of certain primary customers to lower usage plans. We expect the ARPU headwinds from these conversions will become less pronounced over time, especially with the proliferation of new Iridium-serviced GMDSS terminals by our partners in the second half of the year and into 2026. Over time, we believe gains from subscribers' adoption of Iridium-serviced GMDSS will offset the ARPU pressures we are now experiencing from primary user conversions.
Hosting another data services revenue was $14.9 million this quarter, up 7% from last year's comparable quarter. We continue to see a pickup in Iridium PNT after having fully acquired Satelles in Q2 last year and remain very optimistic about demand for PNT services as global organizations increasingly address the vulnerabilities inherent to GPS and GNSS-based systems.
Government service revenue was up modestly in the first quarter to $26.8 million, reflecting the step-up in our EMSS contracts with the U.S. government this past September.
Subscriber equipment sales were $23.1 million in the first quarter. While down from Q1 last year, which was the high watermark for 2024, demand continues to track expected levels. We continue to forecast full-year equipment sales in line with 2024, though we will obviously be monitoring the impact that evolving tariff policies may have on equipment costs.
Engineering and support revenue was $37.5 million in the first quarter as compared to $30.4 million in the prior-year period. The increase reflected our growing work with the USG, including the Space Development Agency, and two new contract awards from the prior year. One of the ancillary benefits of being involved with the SDA program is the insights it provides our team on new and evolving satellite technologies which is informing our early-stage thinking on our next-generation network.
As you will have noted from our release, we are affirming our full-year guidance for both service revenue and OEBITDA, but I'll make a few points in a second about what that means.
Revenue in commercial voice and data is expected to accelerate from Q1 which is historically a seasonally soft quarter. As we move into the back half of the year, voice and data will also benefit from select price actions. These price changes will phase in starting in July on certain commercial services. These actions were contemplated in our full-year forecast and communicated to partners late last year. We hope this additional level of transparency will be helpful as you model our service revenue growth for the balance of the year.
We forecast double-digit commercial IoT growth in 2025. This is driven by a step-up in the two-year contract we entered into with our largest IoT partner and ongoing demand for personal satellite communications. We continue to see momentum in PNT and expect new work and contracts related to our satellite-based time and location service to support our forecast. Our government business benefits from a step-up in our EMSS contract which will result in full-year revenue of $108 million in 2025.
As Matt mentioned, there remains a high level of uncertainty on tariff policies. Even though the tariff policies were not contemplated in our February guidance, we estimate that if proposed tariffs of 10% on most of the world stay in place, while it would have a negative impact on our costs for the rest of the year which we quantify as approximately $3 million, it can still be absorbed within our current guided OEBITDA range especially in light of our mitigation efforts. However, if the original tariffs announced on April 2 were to be implemented, they would have a much more significant impact on our cost base, which at about $6 million to $7 million would likely cause us to be outside our OEBITDA guidance range.
Taken together, this outlook supports our forecast for service revenue growth between 5% and 7% and Operation EBITDA between $490 million and $500 million this year. We continue to feel good about Iridium's business prospects. However, we will continue to engage closely with our partners and we'll monitor for any significant changes in business climate that may potentially impact end user demand.
Moving to our capital position, as of March 31, Iridium had cash and cash equivalent balance of $50.9 million which was bolstered by a $20 million draw on our revolver this quarter. Our cash flow is ample to fund operations and support ongoing payments of quarterly dividends as well as our buyback program.
During the first quarter, Iridium retired approximately 2.4 million shares of common stock at an average price of $29.48. This left us with an outstanding balance of $360.3 million under our Board-approved authorization through December 31, 2027. Over the preceding 12 months, we've been able to retire approximately 12% of our outstanding share count. We will continue to execute on our buyback program, balancing the desire to maximize return on investment with our long-term objective for deleveraging.
During the first quarter, we also made a quarterly dividend payment of $0.14 per share paid on March 31. Beginning in the third quarter of 2025, Iridium's Board intends to increase our quarterly dividend to $0.15 per share, representing an increase of approximately 5% over the full year of 2024. This reflects our confidence in the company's business opportunities and prospects for continued strong free cash flow generation.
Capital expenditures in the first quarter were $24.5 million. We expect capital expenditures to rise in 2025 to support our work with 5G standards and moderate thereafter through the end of the decade.
Turning to our pro forma free cash flow, if we use the midpoint of our 2025 OEBITDA guidance and back off $91 million in net interest pro forma for our current debt structure, approximately $90 million in CapEx for this year, $6 million in cash taxes, and $6 million in working capital inclusive of the appropriate hosted payload adjustment, we're projecting pro forma free cash flow of $302 million for 2025. These metrics would represent a conversion rate of OEBITDA to free cash flow of 61% in 2025 and a yield approaching 11%.
A more detailed description of these cash flow metrics, along with the reconciliation to GAAP measures is available in a supplemental presentation under Events on our Investor Relations website.
Iridium continues to grow its business and make strong progress on new initiatives like Iridium NTN Direct and PNT. As I look at the competitive landscape, I feel very good about our positioning and prospects, and with that, our ability to achieve our long-term growth targets and continue to return capital to shareholders.
With that, I'll turn things back to the operator and look forward to your questions.

Question and Answer Session

Operator

Rick Prentiss, Raymond James.

Richard Prentiss

Hi. Good morning, everybody.

Matthew Desch

Hey Rick.

Richard Prentiss

Hey. I appreciate the color on on tariffs obviously a very fluid and volatile time that really helps us understand it on the cost side, but it sounded like mad, if you, if it's just the 10% tariff stuff you would prefer not to raise prices to the customer at the time, but as we think longer term, any thoughts on what the tariffs would do to sub growth or service revenue as an indicator.

Matthew Desch

It's too early to tell. As I said, we've had other economic shocks in the past, and given that we're a critical service in many cases, it usually doesn't.
Affect really demand very much for us. So I'm not expecting right now that's not the mood we're getting in the market today.
It's a, who knows if tariffs go up and they remain in place for a long time and global trade wars continue and definitely, no one knows what that territory looks like and and how that would affect the global economies and abilities, but Right now we don't see, demand.
Changes that are anything that concerns us, too highly right now.

Richard Prentiss

You're making the supply chain changes to to help mitigate some of that. Okay. The doge cuts and the government efficiency stuff might be a little more firm, since you've seen some of those changes. We did note this quarter the government subs were down. Was that the USAID or was that in the commercial side, and what maybe drove the change in government subs?

Matthew Desch

That doesn't really have much to do with those as much as it's just a government cleanup activity as they, I think, sort of position themselves for our next EMS or EMSS renewal in a couple of years, if they have units that they haven't been been utilizing, they, different services kind of turn them off to, change their relative positions with other services but it really. It really doesn't speak to anything related to doge or anything like that.

Vincent O'Neill

Yeah, and the the only thing I would add there, Rick is the USAID you'll see that in the commercial voice and data numbers so that's a driver there and there's also some conflict area drawdown as well there that you see in Q1.

Matthew Desch

Yes, we called that by the way out there, but it's one of the few things we've kind of seen that's been. Directly attributable that we could make a line to and as you can see it's pretty small and probably relatively deterministic so far again.
It's one of the few things that we could really draw a clear line to, and, but I don't see many other things like that.

Richard Prentiss

Okay, and then she called out that we should expect some.
Legacy voice of data, price actions in the second half. Historically you guys was like every 5 years it increase it maybe 10%. So we think this is kind of more in that low single digit increases, that might happen annually instead of just such a long wait step function long wait.

Matthew Desch

Yeah, a year or two ago we decided instead of having, like price increases every 5 years, a smaller price increase every 2.5 years would be, less noticeable really by the market and sort of in line with global inflation sort of things that are happening anyway. So not expecting a lot of reaction from it. We've had this in planning really for the last, 9 months so far. Obviously didn't communicate that. Publicly, so I'm sure you didn't have that in your models or anything, but it goes into effect as scheduled here a middle of the year and it's a little bit why our service revenues are a bit higher in the second half, than the first half, one of the reasons anyway.

Richard Prentiss

Makes. The last one for me is, you touched on obviously the directive device items. You might start seeing some service revenues. It sounds like in 26 as you go through the summer 25 trialing, but how should we think about how that ramps up and what line items would would that benefit your.
Directed device plans.

Matthew Desch

Well, it really affects IoT, which is a strength of ours anyway. In some ways, the earliest revenues I think will be.
IoT roaming revenues, coming from say a cellular device that has has the right chip set in and can just roam onto our network without any incremental investment or or really development by the end user partner. So how fast that goes, it's unclear. It depends on how fast release 19 chipsets get in the market and the MNOs that adopt us and that sort of thing.
All the interactions we've been having are are very positive. There's a lot of interest in having Iridium be a supplier.
In that marketplace, as I said, we feel good being this complimentary service that sort of supports that is kind of a global glue that is there to support all those places where D2D won't be, and even many places where it will be, where people want to use us. It'll take a little longer to get into. Phones and consumer devices, so I'm sure there's interest there as well. So that may not hit in 26 as much, it'll be more IoT but that will ramp out towards the latter part of this decade.
Great. Thanks, everybody.
Thanks for thanks for.

Operator

Edison Yu, Deutsche Bank.

Edison Yu

Hey, good morning. Thanks for taking our questions.
First, just At first, just on the tariff situation, I know you caught out the 3 million and 6 to $7 million. Is that an impact for basically half the year? And then if they continue, we'd have to roll it through for the full year next year? Or what's the, I guess, assumption on the timing of when that hits?

Matthew Desch

Well, the 3 million really kind of started already, so it's a 3 quarters of a year, kind of effect. The the 6 million to 7 million is, by the way, is not incremental. That's a total amount. So think of it as incremental 3 to 4 million on top of that.
That is.
Presumably at the end of the 90 day period if those things go into effect, and that would affect this year. We're not given guidance next year yet on this because, I mean, anybody who can forecast out next year what tariff policies will be, I think is well, there, there's not certainly on the outside like we are.
But I I don't think that the overall incremental impact that we see is much more than that, say 6 to $7 million on a full year basis right now. Because we think we can mitigate everything else. So, it's a tax on our business. It's it's a known yearly kind of tax as we see it, but hopefully it won't have much impact on, business momentum or other things as it relates to other things we're doing.

Edison Yu

And I said, higher level question, obviously, a lot of geopolitical shifts happening. I think for the most part, we see a lot on the caban side, especially in Europe, given the political developments.
I guess, how do you see that or how do you think this could manifest, if at all, in the, on the L band MSS side? I realize it's much different market dynamics, but curious if you have any views there.

Matthew Desch

Yeah, I mean, there is a bit of, protectionism.
There's a lot of investment in in in EU space companies and supply to provide an alternate to Starlink. We we see and hear that as well. A lot of people are being careful about getting too tied to US suppliers, etc. But so far, we seem to be more of an international global player, viewed.
As having a unique and trusted and valuable service from partners who are all over the world, we obviously haven't, allied ourselves with anybody specifically, and we support, governments all over the world in terms of critical.
First responder and other services, so, I don't think it has a lot of impact on us right now. We're obviously monitoring it and we'll.
We, and are sensitive to seeing if there's any kind of issues with that. But right now we're being, for example, put embedded into some of those European solutions as a backup, say, to support, to protect against GPS jamming and outages and really pleased to see that we're we're part of really what you could call an EU centric solution.

Edison Yu

Understood. And just last quick one on aviation service, do we have a, I guess what's the latest update there? Should we expect a ramp in the, in the second half?

Matthew Desch

Yeah, so I mean, it is growing, now that we have terminals that are available, we're right now, this is the year of flight trials to be certified for aviation safety services so they can put us on airplanes now to provide.
A voice and data to say a cockpit, but to certify it for air traffic control communications probably won't happen until early next year, according to the current schedules. It just takes a lot of time for, enough data to, fly on enough airlines for the FAA to kind of approve that application. But we are seeing a lot more applications. You've probably seen us on helicopters, some of our partners. Are ramping service and other non-safety applications and general aviation and and so it's happening also drones, which is still an early stage market, is very interested in our In our aviation applications, but that's also ramping slowly. So I don't think it's a big driver of our our second half service revenue growth, but it's a long term positive trend for our service revenue.
Great.
Thank you.

Operator

Colin Canfield, Cantor.

Colin Canfield

Apologies on mute there.
Matt, I thought your comment kind of comparing 2020, 2025 and 2008 was pretty prescient. So maybe if you could talk about kind of previous lessons and digging into lessons from 2008 around aidium's product portfolio act is somewhat of a consumer defensive.
And then maybe some commentary around 2020 discussing the the the trends you saw there regarding consumer electronic funds.
Relative to I think from maybe the perception of a a softening consumer environment, yeah.

Matthew Desch

Thanks for calling, yeah, 2008, obviously we're still on our first generation network.
Quite concerned about the economic shocks that were going around the world, the recessions and that sort of thing. And yet, I was really pleased, maybe not surprised that none of our product lines, actually changed their growth trajectory, almost at all because I think we found that in almost every case, what we were doing.
Was an extremely valuable part of an enterprise or a government or was a critical safety applications, I remember some Civil governments, maybe had to cut back on their safety budgets and maybe, had a few less phones, for example, in place, but we didn't notice it really in the total and the growth continued to grow beyond it. 2020 was a obviously had a similar reaction but was different because of just the the supply chain shocks that occurred. And in that case, again, I think my supply chain team really showed out in terms of their ability to Quickly manage the situation. We are actually the one with the most equipment and probably took up took share from other suppliers who were struggling, but again, it wasn't really a cutback in service. IoT continued to grow and other things, as well, new products that we're introducing also hit the market and grew as well. So, really.
This tariff situation has been an exciting last 10 weeks or so as we've been on lots of calls with my supply chain team scrambling, really glad we put in this third party logistics center last last year because that will enable us really in weeks to kind of move.
And mitigate the effects which would have been a lot higher than $6 to $7 million if we had kind of had a team that could respond so quickly and professionally, but I think we're kind of ready for this. No one knows for sure if things continue to get escalate or change around the world, but right now we're kind of responding to this in a fairly deterministic way.

Colin Canfield

Got it. Got it. And then maybe 11 exercise but kind of the way that you think about true government exposure for the total business, I think a lot of folks look at the engineering line and they look at the pure play government contract line but don't I guess particularly appreciate the the level of government exposure on the civil side, public safety stuff like that. So is is there a rough way to think about what the total government exposure for the businesses, not just direct the sales, but like what is the end the use case of all the products?

Matthew Desch

That's a good question. I can't say we've ever really analyzed it because as a wholesale supplier, we don't have precise, information about exactly whether a devices is in a civil, is in a government's hand or in a commercial or other kind of applications hands and in some cases, whether it's a firefighting department or it's a.
It's some regulatory, it's hard to tell whether it's military or non-military. Usually these are an IOT device tracking an assets difficult to tell. That being said, I think it's still a, it's a relatively small part, of our overall commercial business, if government is roughly.
20%, 20% or so, US government, I would say combined all the other governments in the world are much less than that, really. It's still small parts, it's dominated really by commercial IoT and other applications, but, they're solid PTT business and, by other governments, there's there's voice and data.
Services and there's IoT tracking and a lot of applications as well, even using personal communication devices as well as in is in the hands of other governments, but I still think it's, probably single digits.

Colin Canfield

Yeah.
Okay, and then lastly for me, but maybe conceptually talking through, I know this is like ster early innings on all PNT, but, conceptually talking through how you think about like pricing mechanics and pricing levers, I think that one of the things that people kind of focus on is the dynamic of assured access and how national security in this in this environment is very much kind of a priceless feature, right? So maybe talk about kind of what you're seeing from new adders in the government domain.
How you think about that mechanic works relative to a jam environment.
And then maybe like talking and trying to longer form view the business of how you think of like the functionality and you're a hot versus cold environment, from a war fighting perspective.

Matthew Desch

Well, I think we've talked a lot in the past about how the US government and other governments in the world don't have a single choice for a communication device, whether it's, in a vehicle or a dismounted soldier or whatever it is. They really want multiple things because even in good times, things can be thwarted, whether it's the GPS signal being jammed or communications, system. So, they talk in terms of pace, primary, alternative, contingency, emergency, like 4 different kind of categories.
Sometimes we're the primary, but almost always we're the alternate contingency or emergency sort of in a solution.
Connecting, an asset or soldier or, whatever it might be.
In that environment, I think we're quite resilient, around the world to a lot of things, even as new solutions come forward, obviously we're seeing a lot of interest in Starlink and StarShield, but that doesn't really do what we do. So again, we think that as as solutions like that and others, whether it's the one webs and Kuipers and others the world in KA and KU, they're also looking still for LBband solutions that are more resilient, more global, and provide an alternate connection really, or as backup or command and control or whatever it might be, particularly, given our size, weight and power is is different than a lot of those solutions as well. You talked about being denied, of course, I think you're referring to like our PNT solution. We do have a big advantage there and that we have.
I think the only global solution that can deliver, protection to a GNSS system, anywhere on the globe, very cost effectively and, provide even service, a timing signal inside a building or other asset. And on that basis, I think the whole world's realizing the importance of that application and really the interest has been exploding.
Really over the last year or two, but particularly since we bought Celis, I think we just have seen lots of applications where that's applicable to.
Got it.
Thank you for the color.
Yeah, thanks K.

Operator

Hamed Khorsand, BWS Financial.

Hamed Khorsand

Hey, good morning. First off, I just want to see, what kind of response you're seeing from your, partners as far as equipment goes. Are they stock you more, they want to stock more, and what kind of level of conversation you've been having with them?

Matthew Desch

Yeah, so far, we haven't seen nor do we encourage, any kind of.
Stocking up or anything like that from, I mean around the edges, I think we had an order on chip sets or something that was a little larger than expected and perhaps there was some of that involved but we don't see like a direct connection right now today, in our supply chains still see the demand, still see, sort of our expectations from a yearly perspective, the fact that we're not passing on.
These costs right now to these customers is probably appreciated if we would have told them that there'd be a big price increase or something on on hardware later this year, we might have changed that, but I don't think that's really the direction we wanted to be going so really haven't seen much much difference so far.

Hamed Khorsand

And and my other question was, as far as engineering revenue is concerned, this was the 2nd quarter in a row is 37 million, is that going to be the same going forward? I mean this revenue line used to be very lumpy. Could you just provide a little bit more details about that?

Vincent O'Neill

Yeah, what I would say, Hamid is there'll probably be some variation in that, going forward, but certainly that level or up close to that level is probably a good assumption moving through the rest of the year.

Matthew Desch

Yeah, a lot of that growth has been driven by our contract with the space development agency as we've built their ground. Infrastructure and and operation centers and we're manning the operation centers for their new proliferator war fighter network that they're launching right now and that's getting to a maximum sort of spend rate here soon because they're launching satellites and we'll be operating them before long. So we've been ramping up as we've been building that system and then we'll go a bit more of a steady state on that when we go into operational mode.

Hamed Khorsand

Great.
Thank you.

Matthew Desch

Thank you, Ahmed.

Operator

Chris Quilty, Quilty Space.

Chris Quilty

Thanks. Just to, follow on to that that last statement around the shift from, build out to, service is the margin profile or the I should just say the margin gross profit contribution change dramatically when when you shift from build out the service or the low margin build out equal high margin but smaller service revenue.

Matthew Desch

No, it's, I mean, the margins you can really charge on services or even equipment is pretty fixed, that's a, and so margins are going to stay pretty consistent, the government pays us for work we do with a profit and and and that's really the incremental margin we can get so it doesn't really change significantly.

Chris Quilty

Okay, great, circling back, sorry, 11 more question on equipment, customers have not been necessarily stocking inventory, but Vince, you guys kind of ran up your inventory which was historically like 30 to 40 million even post COVID up to the 80 to 90 million level in late 23 and it's kind of stayed at those levels.
Does does the that inventory and it's sort of comparative advantage of of the tariffs you paid become, a use or source of cash, you work that down, on your, from the inventory or does the build up of the 3PL in Europe sort of offset, any inventory optimization you might TRY.

Vincent O'Neill

No, that will definitely help, Chris. So, the fact that we have that equipment and inventory on hand certainly helps us as.
As we move forward here and negotiate negotiate our way through the tariffs in the short term. So, I don't know that it will be dramatic, but you probably see some drawdown in inventory as we go through Q3 and Q4.

Chris Quilty

And and one other sort of inventory hardware question as you move to the NTN direct I mean currently you know you source chip build board sell toams and bars that build stuff ostensibly as you move to an NTN model does the need for, hardware diminish or go away because these all become standard. D2D or IoT, devices that are that exist.

Matthew Desch

Yeah, that's, long term certainly in certain product lines that will affect like our IT product line which we make modules and devices which we sell as we move to more chip sets in general, whether it be by the way, proprietary, which we're kind of moving towards even a chipset sort of approach on.
Our SPD service down the road but as we move to standards-based solutions, certainly there's a lot less.
Revenue there in some cases, still good margins when it's our systems but it it's certainly higher volumes as well there so I think that kind of evens out a little bit.
But I, yeah, I think that covers.
But yeah, there, there's probably less hardware, as hardware equipment's never been.
A line we have focused on, it's a driver for service revenue, so the less.
The more equipment we can, send out with the least amount of margin is just great news because it just, gets more potential for service revenue for so that's definitely, in line with what our.
Approaches.

Chris Quilty

Great and final question, just related to the safety services both maritime and Aero where you know you've picked up certifications last year, is there any opportunity to to sort of jump start, customer adoption in those products? I think you're you would. Same relative advantage relative to your one competitor on sort of hardware and and throughput and whatnot or is that simply a market where customers don't replace existing terminals you're really just selling into you know the the new market of new things that are being configured and set up with the GMDSS or or aviation safety services.

Matthew Desch

We have some ideas about that. I'm probably a little too early to talk about them very publicly, but we have some ideas in which we think we can.
Expand our, both the adoption but also the kind of share of wallet that we can address in those areas, particularly around aviation where, we have a kind of a unique capability, it's differentiated.
The market really likes what we can do and others can't do as well as we can. So we have some ideas about how to move down the road, but it's still a little early for that to talk about.

Chris Quilty

Looking forward to it thank you.

Matthew Desch

Okay, thanks.

Operator

Mathieu Robilliard, Barclays.

Mathieu Robilliard

Yes, good morning.
Thank you for the presentation.
I had first one on the maritime and as you flagged in many quarters, there's a negative impact from from the fact that you're losing some pure connectivity revenues. And I wanted to understand when exactly you expect that to to disappear because when I look at the quarterly trends of things, it seems it was really a big impact in Q2 last year, a little bit in Q1, but or rather it started then and I was wondering if by Q3, Q4 this year we could see a stabilization both in our pool but also in terms of subscribers on that business line.

Matthew Desch

I hope so, but I mean we're not really forecasting a specific time for it, you know.
It's hard to, forecast precisely when that will end, but we do think that as more Iridium GMDSS terminals come out, there's like 9 total if I remember correctly, that are sort of forecasted with just a couple really are available now, 1 or 2, and we do see some of our partners kind of waiting for specific terminals that they from suppliers they particularly like working with and.
I think that's holding that transition up a little bit once that kind of and and those are all supposed to.
Get into our market this year sometime. So I really kind of am expecting, 2026 to be the year when it's definitely over or when we're normalized if you will, but exactly when it's hard to forecast, fortunately this is still marginally around the edges. This isn't, we're really looking more for stabilization, and maybe even some growth there, but this isn't like a key part of our overall growth story or.
Or driver to 20-30 revenues in cash, but we believe it's important enough and we have the market position and defensible market position to maintain a really solid position in this area, based on just the success of our GMDSS services.

Mathieu Robilliard

That's clear. So I guess, if we think about maybe some contribution from IRO as you flagged earlier, and some sort of stabilization, that's how you're happy to guide or, not a guidance but between decade in the previous quarter that broadband revenues would remain broadly stable year on year, which obviously can be fun that's one.

Matthew Desch

I think that's consistent or even going back to our investor day. This wasn't part of their drive or we, would have liked to grown it. Small amount by now, but the, I think that that's going to turn around and we really think we have a solid position that's important and critical and long term and have really kind of worked to make sure we had the best product and market position so that we could be that compliment to other KA and KU solutions and right now that's the way the market sees us and is encouraging us and is telling us we should play out long term.

Mathieu Robilliard

Thanks. And then I had a second question on D2D you made some comments at the beginning about, what coverage competing services or or new consolations could add, to the current terrestrial coverage and maybe I got that wrong, but I think you said 10 or 15% points of. Increasing coverage, which if that's the case, I was surprised it's so low because I understand some of these constellations don't cover, say the polls, but I would have thought it would be a much bigger extension of coverage for, regular smartphones.
Did I get your numbers right, or is there something you want to add on that one? .

Matthew Desch

What I was talking about is current cellular coverage of the whole world is 10 to 15%. That's how much of the world that it covers. I said that it would be incrementally pretty small, even though those networks have satellites that go all around the planet, and.
Even polar, it doesn't matter. They can't provide service on the ground unless the frequencies that they're able to use, using cellular frequencies are allowed by that government, by that land mass to be able to operate. And right now we believe there's really limited markets where currently cellular-based D2D will be operating. Certainly the US is one of them, and they can fill out the coverage in the US which It is very good today, but isn't 100%.
There are other kind of more island nations like Australia and Japan where I think it will also come into usage pretty quickly, but it won't cover, water, it won't cover, Europe, and it won't cover other areas. Because in a lot of countries, the interference environment between those cellular frequencies and adjacent markets where those cellular frequencies are also used, would create a lot of Interference and inability to really offer those services and so governments won't allow them to operate globally. So unlike mobile satellite service frequencies like our L band or even S-band frequencies that some others have, those are globally allocated. They don't cause interference, market to market because they're they're coordinated on a global basis, which is why our Iridium NTN direct service being global can be. Can be really differentiated and complementary to a regional solution that's providing kind of cellular infill in a specific market where it's where it's not causing interference and the regulatory agent approves this, and we can provide sort of the glue that provides a global service that complements that.

Mathieu Robilliard

That's very clear, thank you.

Matthew Desch

Okay, thank you.

Operator

Louie DiPalma, William Blair.

Louie DiPalma

Matt, Vincent, and Ken, good morning. Hey Louis.
Should IOT subscribers turn positive later in 2025 after the cleanup is done?

Matthew Desch

Yeah, I would hope so. I don't know if it's, it depends on when it kind of started as to when it ends. I think it was sort of, was it late last year or late last late last year, the.
The changeover that that that partner made to having customers go to a yearly to a monthly basis sort of affected so we expected sort of a one year transition and so I don't know how we'll see it in the fourth quarter, but I would certainly expect to see it in 26, where that affect, that's right.of anybody who.
Was, the deactivations really that were occurring on that sort of come out of it and then we'll be in a bit more volatile environment where people will see the subscribers on the network as they use it only the months that they use it as opposed to all the time whether they're using it or not but again as I said that that doesn't really affect our revenues since that a customer has a fixed price contract.

Louie DiPalma

Great and should that contract stay fixed price going forward, is that the expectation?

Matthew Desch

Well we're talking about that now you know you know I think you know what we want to do is just have a win win situation with that partner to.
Both encourage their growth and I'm sure they feel the same about us. So, we grow together and and we're having good discussions about that now.

Louie DiPalma

Great. And secondly, should the main capexs associated with NTN Direct be complete in in 2025 in terms of the software updates and and modifying your ground network?

Matthew Desch

Certainly, largely, the big, lump if you will, the, kind of incremental amount that would would probably and budget a couple of years for, is certainly going to be mostly completed this year, but there's always some kind of clean up afterwards, so it'll it'll leak into 27 as we get into sort of, 26 as we get into, further tweaks and upgrades and things like that, but largely this year is the biggest part of it.

Louie DiPalma

Great, and one final one, do.
Do, are all of the 75 original it idium next satellites or do they all remain functional? And you previously extended the accounting useful life, but is there the potential sometime that you also extend the CapEx holiday?

Matthew Desch

Yeah, so all, ALL80 satellites actually we have in space 66 and 14 spares are all healthy, operating fully well, haven't needed to use, knock on wood, a spare, probably would would have thought we would maybe by at least one by now, but actually the network is proven to be extremely resilient and healthy and and performing far greater than our expectations, original expectations or certainly.
What we what we bought them for, which is why we extended the useful life, and could there be other extent, yeah, if we continue to operate in this way, we'll we'll extend it again, certainly won't do it this year. I don't I don't think, but at some point in the future as the network continues to perform well and.
And we see that we have all these extra satellites in space then you know probably extend it further.

Vincent O'Neill

Yeah, and just to just to add to that Louis, we we extended the useful life from 12.5 to 17.5 years, which when you do the math takes you out to the middle of the next decade, and to Matt's point we'll continue to monitor the performance of the network and kind of go from there.

Matthew Desch

I think I've said before I'd be disappointed or or thanks.
Our last generation satellites, lasted over 20 years, and they weren't built to last anywhere the standards as the satellites today. So, we haven't projected that yet and may not, but right now I'd be disappointed if they don't extend at least the same length of time as the first generation satellites did.

Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back to the management for any closing remarks.

Matthew Desch

Thank you. I mean, obviously it's kind of crazy times globally right now and we're, as you can tell, we're one of the first to announce, so I'm interested in seeing what everybody else is doing. I feel, as I said, pretty proud of my team for how we're kinda managing the current environment, as business, continues to, track to our expectations and to our longer term expectations as well so. Look forward to talking to you individually but I hope this is helpful to you thanks.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may not disconnect.