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Iridium Communications Inc  (NASDAQ:IRDM)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Iridium Communications Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Ken Levy, Vice President, Investor Relations. Please go ahead, sir.

Kenneth Levy -- Vice President, Investor Relations

Thanks, Carl. Good morning, and welcome to Iridium's fourth quarter 2018 earnings call. Joining me on this morning's call are our CEO Matt Desch; and our CFO, Tom Fitzpatrick. Today's call will begin with a discussion of our fourth quarter results followed by Q&A. I trust you've had an opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website.

Before I turn things over to Matt, I'd like to caution all participants that our call 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 disclosed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent our views only as of today and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change.

During the call, we'll also be referring to certain non-GAAP financial measures. These non-GAAP financial measures are not presented in accordance with Generally Accepted Accounting Principles. Please refer to today's earnings release in the Investor Relations section of our website for reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, let me turn things over to Matt.

Matthew J. Desch -- Chief Executive Officer

Thanks, Ken, and good morning, everyone. So, by my count, this is the 37th quarterly earnings call, we've held since going public in 2009. And it's certainly one of our most satisfying in terms of results and achieving our long-term goals.

As I'm sure you saw in our press release 2018 was an outstanding year for Iridium in terms of subscriber growth, financial performance and business execution. Our subscriber base grew 16% to over 1.1 million active users, top line revenue grew 17%, our highest rate of growth as a public company and operational EBITDA rose 14% our best in seven years. And, of course, shortly into the New Year, we realized our crowning achievement, the completion of Iridium NEXT.

As a result we entered 2019 with tremendous business momentum. We enjoy our best competitive position in corporate history and are now able to fully leverage our brand new powerful network platform. On February 5th, the final Iridium NEXT satellites went operational, completing our network of 66 new satellites.

This historic event completes a decade long design, construction and launch program, retires a lot of execution risk and allows Iridium to move from a period of capital investment to a new exciting area of free cash flow. As I reflect on this milestone, I'm reminded that nothing in space comes easily, and this journey has not been without its fair share of challenges.

In completing Iridium NEXT, we had to react to changes in technical plans, schedules and financial events along the way. Always keeping in mind our objective. Some would say we also got a few breaks along the way like the incredible resiliency of our original network. I would respond, however, that we made most of our own breaks, thanks in large part to the immensely capable and highly performing team we've assembled over the years.

I am proud of the roughly 470 Iridium employees who brought the Iridium NEXT mission to fruition. Many of them have supported the Iridium networks since its inception, and there isn't a better group of hard working committed people.

The final satellites only arrived to their operational orbit positions earlier this month, we have been managing controlling and living with these new Iridium NEXT satellites for over two years now. The satellites are operating extremely well, delivering better statistical performance than we'd ever -- even hope for.

We've had very few issues with the new satellites given the complexity of the whole project. And that gives us tremendous confidence in the long-term resilience of the network. With the completion of the constellation upgrade, we've also now launched our first new service, Iridium Certus and are already hearing a lot of good feedback.

The service formally launched in mid-January for the maritime and land mobile sectors. More than half of the 38 partners that signed up so far to offer the service globally have completed their interconnects and launched their sales activities and the rest are quickly on-boarded, are being quickly on-boarded. You can expect a few more new partner announcements this year as everyone we've talk to is excited about offering the service to their customers.

Early feedback on their sales pipelines and the first month of activations have been encouraging, although 2019 remains an introductory year and we've kept our expectations appropriately measured. We see Iridium Certus ramping in subscriber additions in revenue over the next three years, and as we've said before, we forecast an incremental $75 million in broadband revenue, leading to a $100 million run rate for Iridium's broadband revenue as we exit 2021. This year a number of aviation antenna suppliers like Collins Aerospace and Thales are working to bring their Iridium Certus offerings to market as well.

Given the regulatory work involved in aviation products, I expect that will take most of this year to occur. So, we remain excited about the revenue stream that Iridium Certus aviation will add to today's existing mix of maritime terrestrial and government customers. We positioned Iridium Certus to be a best-in-class solution for broadband users.

One of the benefits of our offering is that it scales very efficiently both up and down. This means that it has broad utility for a wide variety of current and emerging applications. Iridium Certus is being developed as a multi-product platform, which can be used for broadband applications, but it is agile enough to fit into more optimized packaging that's focused on low cost and small size rather than throughput.

Examples of these users might include new consumer devices, supporting feature-rich chat applications with pictures fully featured email or even low resolution video for security applications. Our network is optimized for and we see a tremendous market in highly mobile, low cost industrial grade applications. Frankly, not a market that other satellite network operators are designed to address.

Our users prioritize size, weight or power over throughput. Iridium Certus has been designed this way to get the most data possible through low cost smaller antenna. As a result, we believe our network will continue to appeal to a expanding base of developers and users.

You may have heard that we're working on a lower speed smaller device this year called the Iridium Certus 9770. This transceiver really target the highly mobile enterprise in IoT space hitting the sweet spot for a low cost, highly mobile applications in a variety of speed ranges between 22 kilo bits per second and about 100 kilo bits per second.

While we've been quite successful over the years with the product that uses only 2.4 kilo bits per second of data, a lot of user applications around the world are looking for a little more speed, but still want a small low cost and low power antenna and devices. We think our network in the Iridium Certus technology platform are the perfect solution for expanding into these opportunities.

Our new 9770 transceivers is actually the first of a new family of devices we will be introducing for partners, optimized for high volume consumer and enterprise application, which is a growing segment that should be a significant source of revenue in the future. Think of them as ways to expand our current voice and data business as well as our IoT revenue line well into the future.

Another big priority for us this year is the renewal of our enhanced mobile satellite services contract with the US government. I don't have a lot of specifics to report on this effort today except to say we remain very engaged and continue to have positive discussions toward making this new contract a win-win. Given the government subscribers grew 13% to a record 113,000 subs in 2018. The cost per user continues to fall under the EMSS contract.

We think we should be able to reach an agreement on a contract that continues to drive down cost per user for the government, while supporting overall revenue growth for Iridium. The management of Iridium's EMSS contract officially transitioned from the Defense Information Services Agency or DISA to the Air Force at the end of last year.

This move does not change anything regarding our negotiation, but seem so far to be a positive step for centralizing the management of commercial satellite with military satellite operations, and that should be a good thing for the industry. Aireon continues to make good progress. And in 2018 made some significant payments on its hosting fee obligation as it continued to pay its data services fee.

We believe that Iridium's equity stake in Aireon as well as its contributions to our cash flow will provide long-term benefits to our shareholders. As you know Aireon is creating a unique and powerful global air traffic surveillance service that we believe will revolutionize air traffic management.

With the FAA's and Europe's mandate requiring all aircraft to be equipped with ADS-B transmitters by the end of this year. We expect Aireon to increasingly be very busy this year with new customers and turning on commercial services for their initial customers this spring. Especially now that they have a 100% complete network.

I would also expect the company will continue to be a fixture in the media as these deadlines approach. As I reflect on the completion of the Iridium NEXT constellation, I'm reminded that we considered several dozen hosted payload opportunities for Iridium NEXT.

Aireon rose to become our top choice for the primary hosted payload due to its game-changing potential and strategic fit with Iridium. Clearly, we hit a home run. It's not often that you get to turn a good idea into a revolutionary service with global impact on an industry, the size of aviation with such significant potential for value creation.

So, we will be exciting to see Aireon go live this year, following the final testing and certification to the system, Aireon will begin operational use of the service with their first customers over the North Atlantic. I don't think investors really appreciate how successful Aireon should become. Aireon provides an essential air traffic surveillance service that is useful to every air navigation service provider in the world. In addition to utility in commercial aviation.

Together, this is a $750 million annual addressable opportunity. Given forecasts for Aireon's growth in margins, we believe that the company will ultimately generate substantial earnings that should generate significant dividends for Iridium in just a few years. So, I'm very excited about the record performance and strong progress we made in 2018. I continue to feel very good about the underlying strength of our business and the growth at our new broadband services will deliver.

We entered the era of Iridium NEXT as a technology leader with a strong track record of successful execution. 2018 was truly an historic year for Iridium and it's safe to say that 2019 will be equally exciting now that Iridium NEXT is fully operational.

With that, I'll turn it over to Tom for a review of our financials. Tom?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Thanks, Matt, and good morning, everyone. For nine years Matt and I have been predicting a financial transformation for Iridium at the completion of the Iridium NEXT capital campaign. That day has now come and the transformation is under way.

From this quarterly conference call forward, we expect to continue to talk about Iridium's EBITDA growth, but will also add new commentary on Iridium's levered free cash flow. With the completion of Iridium NEXT, Iridium has become a rare company.

One that is characterized by robust EBITDA growth and material levered free cash flow. In a few minutes, I'll introduce the measures of Iridium's levered free cash flow, we think investors should consider moving forward. Let me start however by summarizing Iridium's key financial metrics for the full year and provide some color on our fourth quarter results.

I'll then walk through the 2019 financial targets, we updated this morning and review our leverage, liquidity position and suggested levered free cash flow metrics. 2018 was a record year for Iridium. Total service revenue grew 16%, our best rate as a public company.

And full year operational EBITDA totaled $302 million. This strong performance was driven by continued momentum in our commercial business and a meaningful ramp in hosted payload revenue associated with the deployment of Iridium NEXT.

In the fourth quarter, Iridium reported total revenue of $132.2 million, which was up 14% from last year's comparable period. This growth was attributable to incremental hosting fee and data service revenue in conjunction with the strong trends in commercial voice and continued growth in commercial IoT.

In the fourth quarter, operational EBITDA rose 19% in the prior year's quarter to $75.5 million. The commercial side of our business remain strong in the fourth quarter, generating record revenue of $85.3 million. This was a 23% increase from the prior year's quarter and almost doubled the growth we enjoyed a year earlier. Strength was evident across every segment of the commercial business.

Revenue from commercial voice and data increased 9% from the prior year period reflecting an increase in ARPU related to price changes adopted early in the year. That said, subscriber growth in Iridium OpenPort was also strong as we continue to see Iridium services and brand tracked more maritime customers with the recent launch of Iridium Certus.

In commercial IoT revenue increased 12% to $21.8 million driven by a 27% increase in billable subscribers, which benefited from continued strong growth in consumer IoT in particular personal communication services sold by Garmin.

In all commercial subscribers grew 16% year-over-year and IoT subscribers now represent 64% of billable commercial subs up from 59% in the year ago period. Revenue from hosted payload and other data service was up $9.7 million year-over-year to $14.2 million in the fourth quarter. $7.7 million of this amount reflected hosting and data service fees paid to Iridium by its hosted payload partners.

This steady advance in payload revenue has continued as more Iridium NEXT satellites have been put into service. Also of note, in the fourth quarter, Aireon closed its financing and remitted a cash payment of $35 million for our hosting fees. Of the total payments of approximately $43 million in 2018, we recognized $14 million as hosting fee income this year. The balance of this payment is deferred revenue on our balance sheet.

In the fourth quarter, we also recognized a $4.5 million non-recurring item from satellite time and location services. Favorable developments at our partners at Thales caused us to recognize revenue earned in prior periods.

With the US government exercising its option to extend the EMSS contract for an additional six months at the prevailing rate, revenue from our government service business remained at $22 million in the fourth quarter. Government subscribers grew a robust 13% in 2018 and in the year at a record 113,000 subscribers.

We continue to make positive headway on a new EMSS contract and expect to update you in the second quarter of this year. Revenue from subscriber equipment grew by 4% in the prior year quarter to $20.1 million driven by demand for IoT equipment.

2018 was a record year for equipment sales driven by higher-than-expected demand for satellite handsets, which have now returned to more normalized levels. Moving to our 2019 financial guidance. In 2019, we forecast operational EBITDA in a range of $325 million to $335 million predicated on total service revenue of approximately $440 million for the fiscal year. The key element supporting this outlook are as follows.

First, we expect continued strength in IoT from heavy equipment manufacturers and customers providing reliable low latency telematics. We also expect continued strength in personal communication services. These factors make us quite confident in forecasting double-digit subscriber growth for this business line in 2019 and well beyond.

Second, we anticipate approximately $35 million to $40 million in revenue from hosted payloads in 2019. This revenue includes hosting fees and data service fees from Aireon and Harris Corporation, which are tied in part directly to the successful deployment of Iridium NEXT satellites and therefore will reach a steady state run rate given network completion.

Aireon's annual data service fee further steps up from $13 million to $23 million when they reach a customer contract milestone. We expect this milestone to be met sometime in the second half of 2019. Third, we expect an increase in revenue from our fixed price contract with the US government from 2018. Ongoing subscriber growth within the US government bodes well for our negotiation and should lead to a new contract that will be a win-win for both parties.

Fourth, we expect equipment revenues in 2019 to decrease from 2018 on lower handset sales. Fifth, we continue to expect negligible cash taxes in 2019. Based upon our most recent estimates, we now expect negligible cash taxes through 2023. This is a change from our prior long-term guidance of negligible cash taxes through 2020. We expect to exit 2019 with a net operating loss carry-forward of approximately $1.3 billion.

Finally, as Matt mentioned, Iridium Certus launched commercially last month. We expect a relatively small amount of revenue from Iridium Certus in 2019 as a service launches, but we continue to believe this new broadband service will be the major contributor to a $100 million revenue run rate for broadband services as we exit 2021 up from $25 million currently.

After the successful execution of eight launches and the flawless deployment of 75 brand new satellites, Iridium NEXT is complete and the associated capital spending will (inaudible). Investors can clearly see this transformation in our 2019 guidance. We expect total CapEx of approximately $95 million this year comprised of about $35 million in non-Iridium NEXT capital expenditures, and the final Iridium NEXT invoice payments of approximately $60 million in the first and second quarters. With our newly issued EBITDA guidance, investors can calculate the financial metrics that should be additional consideration for our valuation going forward.

Today, Iridium is a completely different company than the one you have known for the last nine years. Today, we have a very different risk profile with material free cash flow generation capability. I'd expect that investors will increasingly consider metrics like levered free cash flow, levered free cash flow growth.

Levered free cash flow yield, leverage fleet free cash flow conversion and CapEx intensity in assessing a fair market valuation. Investors who calculate and track these statistics will see that we are unlike any other satellite player and given our growth rate and competitive position, traditional satellite peers are not appropriate comparable.

We'd encourage investors to benchmark Iridium against the tower sector and fiber companies. Both industries that enjoy strong recurring cash flow, low revenue risk, and low maintenance capital expenditures. We think that you'll find that we stack up quite well.

We've also been clear that we intend to undertake debt refinancings in the short-term that will facilitate the payment of dividends and share repurchases. Given successful execution of our business plan, we estimate that Iridium's capacity for returns of capital through 2025 to be approximately $2 billion.

Compare that to our current market capitalization and you can see why we have such a unique financial profile. As of December 31st, 2018, Iridium had a cash and marketable securities balance of approximately $273.4 million. Late in 2018, Aireon closed its financing and remitted a cash payment of $35 million for Iridium's hosting fees.

As Aireon has disclosed the facility totals $200 million, quite impressive for a pre-revenue company. This is indicative of a robust operating model with firm contracts with high-quality customers, aggregating to hundreds of millions of dollars.

You'll note that Iridium's deleveraging has already begun. We closed the year with leverage at 5.2 times EBITDA down from a peak of 5.6 times in the first quarter. We continue to expect that net leverage will fall to approximately 4.5 times as we exit 2019.

This leverage would be impacted slightly should Iridium affect refinancing. We expect this impact to be approximately a quarter turn of leverage should it occur. In closing, I feel very good about the progress we made this past year, and the clear path we have shown for Iridium's financial transformation. We appreciate the support that our investors have provided during the capital intensive Iridium NEXT mission and look forward to rewarding this patronage and competence in our company.

With that, I would like to turn the things back over to the operator.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Matthew J. Desch -- Chief Executive Officer

We are ready for our first question.

Operator

And the first question comes from Ric Prentiss with Raymond James. Please go ahead.

Richard Prentiss -- Raymond James & Associates -- Analyst

Thanks. Good morning guys.

Matthew J. Desch -- Chief Executive Officer

Hey, Ric.

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Hey, Ric.

Richard Prentiss -- Raymond James & Associates -- Analyst

Hey. Obviously exciting times with the operational fully functional, so it's a good news. A couple of questions on the guidance side. Previously the operational EBITDA excluded the revenues and recurring costs associated with NEXT. Can you also update us like in your '19 guidance, are you expecting that adjustment will go away starting 1Q or is it go away starting in 2Q. Just what should we think about what's baked into the guidance as far as that NEXT adjustment?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Sure, Ric. Substantially all of the NEXT expenses in 2019 relate to the in-orbit piece of our launch insurance under GAP that needs to be amortized over the 12 months following launch because that's the coverage period.

So our launch is from 2018 the insurance associated with the in-orbit coverage get amortized into 2019 and since our last launch took place in January of '19 we'll have about less than $0.5 million that will also leak into 2020. That's substantially all of the NEXT expenses and that's about around $10 million, that will be excluded.

Richard Prentiss -- Raymond James & Associates -- Analyst

Okay. We also -- appreciate the update on the government contracts. Has there been any impact from the government shutdown? And I guess you said it's moved to where the Air Force is. Now, I'm doing the negotiations, just wondering should we expect the April dates going to hold?

Matthew J. Desch -- Chief Executive Officer

Yes, the April data is a sort of a firm ending that was -- there is a date in April, it has to be completed by. It's unlikely there would be an extension, but -- I'm sure they could ask for one, but it would have to be a appropriate new contract or some sort that would be appropriate for that sort of thing. But as far as like the shutdown effect Iridium, I would say, generally not especially since most of our interactions were with agencies that really weren't affected by that. I didn't really see any kind of necessarily business slowdown or anything from that perspective. So, we were sort of immune to that, I guess.

Richard Prentiss -- Raymond James & Associates -- Analyst

That's good. And the final one from me, Tom, you kind of touched on it obviously the balance sheet you mentioned debt refinancing in the short-term. Are there any provisions -- call provisions any penalty points? And how soon should we think that you might be able to go into the marketplace and obviously the pricing looks more attractive than maybe it would have been a couple of quarters ago?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

So, we're paying close attention to the market where the market backed up in December and it appears to be coming back. So, I've just characterized this as looking very closely at it, and couldn't rule out something happen as early as mid-year.

Richard Prentiss -- Raymond James & Associates -- Analyst

Okay.

Matthew J. Desch -- Chief Executive Officer

Ric, that will be a good topic obviously for March 7th as well, I mean, and I hope we'll be able to discuss that a little bit more fully than to.

Richard Prentiss -- Raymond James & Associates -- Analyst

Great. Thanks a lot guys.

Matthew J. Desch -- Chief Executive Officer

Thanks, Ric.

Operator

And our next question comes from Greg Burns with Sidoti and Company. Please go ahead with your question.

Gregory Burns -- Sidoti & Co. -- Analyst

Yes. Hi, just around Aireon, I guess, the market opportunity there. You've been talking about a $750 million TAM. I was just wondering based on the contracts they have in hand how penetrated are they? And I guess we can start there? How penetrated are they into that opportunity based on the contracts they have already signed?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

They have contracts in hand valued in the hundreds of millions of dollars, Greg, they're well down the road.

Matthew J. Desch -- Chief Executive Officer

It's still early days. So, I would say, I mean it's certainly probably less than a quarter. The opportunity so far, yeah, even though it's substantial that $750 million is computed by sort of taking the way that they price their service by flight region and sort of multiplying it based upon each of those flight regions, if it was sort of a 100% covered in the world, and might not even include completely the whole all the commercial opportunities that are sort of a spin out of having all this data available things like what they do with FlightAware and other kinds of services.

So, it's not an unreasonable expectation to see that the whole world someday will be using it. But it won't happen for quite a few years. But given they are fairly low costs in general, those are -- that's very, very high margin revenue. So, very high profit overall in terms of what it's able to support.

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

I think that the implications of them closing a $200 million credit facility should, investors should reflect on that in terms of this is a pre-revenue company that was able to close loan like that, and the use of proceeds was to pay Iridium $35 million that is a very strong indication of a robust operating model that was able to secure that type of financing.

Gregory Burns -- Sidoti & Co. -- Analyst

Okay. And in terms of the $2 billion in capital you expect to return to shareholders through 2025. Is that a reflection of your outlook for operational cash flow or is that also include maybe some dividends from Aireon, how do you get to that $2 billion number?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Sure. So, the building blocks are new disclosure around taxes. No cash taxes through 2023 , and let me say the statutory rate is probably 24%, 25%. It takes us years to get to that level. So, cash taxes sub after 2023 feathering very gradually, and think of '24 and '25 is being low single-digit kind of rates.

So, the tax is an important component. We see leverage between 2.5 times and 3.5 times in terms of the amount of leverage we have on the company. And, yes, we do expect a lot of things from Aireon, right. We expect the remainder of our hosting fees to be paid. We expect interest on that hosting fee. We expect dividend and we expect them to buy back the stock for $120 million.

Those are all components to our $2 billion expectation of capacity shall we say for shareholder returns. Obviously should strategic opportunity present itself that we think would be more beneficial to our shareholders. We would proceed accordingly, but that $2 billion is a capacity number and the operating assumptions around that are you know if you reflect on this business, since we came public we've got a CAGR of about an EBITDA of about 9.5%.

We've got some significant new revenue opportunities in the area of Certus that if Certus is what we think it is, we think we're on a path to putting up the same kind of results through 2025. I would say though one doesn't have to believe 9.5% CAGR and EBITDA to get to $2 billion when you consider things like Aireon dividends and that sort of thing. So, that's why we're comfortable with the $2 billion number as a capacity.

Gregory Burns -- Sidoti & Co. -- Analyst

Okay, great. Thanks.

Operator

And our next question comes from Hamed Khorstan with BWS Financial. Please go ahead.

Hamed Khorstan -- BWS Financial -- Analyst

Hi, good morning. So, first off, could you just talk about the inventory of equipment at the retail channel and how much of that is old stock versus new stock? And how are you going about as far as commercializing the Certus service to minimize the amount of people on the old legacy service as you go forward?

Matthew J. Desch -- Chief Executive Officer

Yes, I mean, if you just specifically talk about the say the maritime opportunity that we have now. First, we've had a product in the market called OpenPort for the -- for a number of years here, and it still continues to do well even as we move into this year. It isn't suddenly fallen off.

It's actually still being put on ships, because it works so well, and it's reliable, and a lot of people are comfortable with it. There is probably still quite a bit of inventory out there of OpenPort. It's hard to tell exactly how much. But we get the impression that there's still a fair amount of inventory, and I expect that will continue to be deployed even going on through this year and perhaps in the next year as well.

At the same time, you have these new Certus terminals are also now shipping from our primary suppliers of Cobham and Thales and we see a -- we can kind of get visibility to the number of transceivers we sent to them and how many they tell us that they've been shipping that a fair amount of those are now going into the roughly 38 partners that are out there distributing them to their distributors and those are starting to get into the channels now.

And so again we've seen some pretty good activations even over the first month of as that product starts to ramp into the market. So, I think, we're going to see both products continue to go for a while. But in the long run, I think, Certus given its performance value and everything else is going to do the predominant product.

Assuming, you're mostly talking about broadband as opposed to handsets and IoT Services because those are --- that's all new stock out there in the market, if you will.

Hamed Khorstan -- BWS Financial -- Analyst

Yes. Are you doing like a mandatory push to Certus service? How are you going about as far as managing the conversion and just getting people to convert to the new service?

Matthew J. Desch -- Chief Executive Officer

So, I would say, that this isn't about conversion. Well, it is about conversion. It's conversion of our competitors' products into our service because they've been the one for the last 20 years that have been the sole one to offer our service. And so there is a lot of interest in our regard of taking of converting those customers to our customers with a better product that has higher value and longer-term dynamics. We are not managing a conversion per se our partners naturally want to deploy that product because it's competitively superior. They like the idea that we are not a competitor to them. They see its performance and that it operates more globally than other products, the antennas are smaller and lighter and easier to operate et cetera.

So, it naturally is going to go into the market. As we said, we're trying to measure on our expectations about how fast that is, but based upon everything we've seen and talked about it makes us comfortable with sort of the guidance we've given on the next three years of deployment for it.

But we're really not trying to convert our existing 9,000 to 10,000 OpenPort subscribers. I'm expecting that over time that those will be upgraded and in fact given the fact that the speed and other things are faster. I would expect that ARPUs might even increase on the ships when those get converted. But I'd really rather more focus on converting my competitors' products in our own.

Hamed Khorstan -- BWS Financial -- Analyst

Okay, thank you.

Matthew J. Desch -- Chief Executive Officer

Thanks, Hamed.

Operator

And our next question comes from Chris Quilty with Quilty Analytics. Please go ahead with your question.

Christopher Quilty -- Quilty Analytics -- Analyst

Thanks. Tom, just a clarification on the guidance, the service revenue number you provided includes or excludes the -- any hosting fees? And can you also give us a breakdown of how the hosting fees would look in 2019 with the component pieces?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Sure. So, yes, the service revenue guidance has always included the hosting fees. And the hosting fees think of it in this way, Chris, they ramp to a steady state at full kind of full ramp of $47 million. This year we think we'll be somewhere in the $35 million to $40 million range as given effect to all the hosting revenues.

The only component that bridges from the $35 million to $40 million to $47 million at full ramp is as to the Aireon data fee. There is a customer contract sort of concentration milestone that takes that from $13 million annually up to $23 million.

And we're expecting that will occur in the second half of 2019 such that 2020, if you will would be a full $47 million up from the $35 million to $40 million we expect this year.

Christopher Quilty -- Quilty Analytics -- Analyst

Got you. And the other component of that if I remember correctly the host Aireon hosting fee is around $16 million or I think?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

That's right. So, Aireon, I think, in Aireon it's $16 million, $23 million and $16 million. $23 million in data, $16 million in hosting at full ramp and Harris about $8 million. So, that's where -- how you get the $47 million.

Christopher Quilty -- Quilty Analytics -- Analyst

Okay. Good. With the equipment you mentioned also equipment down. Is that down a little or down hard, I mean, as you begin to shift more of an outsourced model on pushing those equipment revenues down to your partners? How quickly does that come down and is it driven primarily by the adoption of Certus or are there other factors that button?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

No, it's nothing to do with that, Chris, it's just handsets were very strong this year. If you looked at a three year trend, the 18 handset shipments and sales jumps off the page. We've seen that softening to more historical levels in our guide have down reflects what we're seeing. I would say, it would be down. We wouldn't bring it up if -- it would be down not immaterially.

Christopher Quilty -- Quilty Analytics -- Analyst

Right.

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

But that's what the degree of decline is fully anticipated in our EBITDA guidance.

Christopher Quilty -- Quilty Analytics -- Analyst

Got you. And there seem to be a step down in the government voice business in Q4. Was that just kind of end of year house cleaning on their part?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

No, no. You mean the service revenue, it's $22 million, I mean, that's contractual.

Christopher Quilty -- Quilty Analytics -- Analyst

No, no. Number of subs?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Oh, number of sub?

Matthew J. Desch -- Chief Executive Officer

There was a cleanup. Actually, there was a good growth in the quarter, but there was one service that sort of had an optimization thing that was going on. And they over a period of just a week or two sort of cleaned out a number of subs that we're, they didn't think we're really active or we're in the field or anything like that just to optimize their sort of service numbers.

So, there was just a one-time sort of cleanup from one place that, I guess, affected sort of and made it look like it's flat even though there were still growth in other areas.

Christopher Quilty -- Quilty Analytics -- Analyst

And actually now that I think about it. Are we still dealing mostly with the old 9055 handset or has the new encrypted certified handset been approved and shipping out to the market?

Matthew J. Desch -- Chief Executive Officer

Yes. The -- what we call the 9575A, which is the secure device, I think, went into service early in the year. It's actually shipping quite well and quite a few of them went out in 2018. It's proven and it looks like a very popular device. We actually had a gap for a while. I think going back in 2017, when we almost ran out of the old 9505 that are used with secure devices, but now it's back into full operation within 9575A, which continues to be a popular service, but remember they are also now doing tactical radios, a lot of IoT business and we're already starting to see some Certus revenues from the government as particularly in the land mobile side they're driving a lot of the initial sales as they put things on certain vehicles and that sort of thing to provide broadband service.

Christopher Quilty -- Quilty Analytics -- Analyst

Okay. So, how are they paying for Certus. Did you haven't, if I recall, that contract for Certus services is going to be separate from the EMSS contract that you're negotiating obviously neither of those are in place. So, I'm assuming this is more a special operations using their funny money?

Matthew J. Desch -- Chief Executive Officer

Well, it is true that variable rate services particularly with higher speed data is always going to be a separate sort of contract in revenue stream from our fixed costs narrow-band services. So, Certus is new revenues. They are going to ultimately today those are, I think, flowing really primarily through our commercial business as opposed to the government line, until the government gateway gets fully in operation, which they're moving toward right now and that will give them complete secure capability, but because they have so much interest, they've been deploying some initial product using the -- going through our commercial gateway and through our commercial revenue lines, but those will be based upon how much service they deploy, what speeds they operate and how much data is flown -- flow through it and that will be independent of our EMSS contract.

Christopher Quilty -- Quilty Analytics -- Analyst

Okay. Sticking with the voice theme, an update on push-to-talk. Is that starting to gain traction either government or commercial, industrial?

Matthew J. Desch -- Chief Executive Officer

We have had some nice pickups lately, I would say, that we're really excited about a new terminal coming in the second quarter.

Many of you have heard that our partner, Icom, Japanese supplier that is very makes very good products. I'm really impressed with the initial device that I've seen going through certification, right now. It's on track to probably deliver in the next few months, and we think it's going to really, really make our push-to-talk service even more attractive, our previous handset which was built on our 9575 handset was good, but it really wasn't built to be a push-to-talk device.

And I think once we have a purpose-built device for that it's really going to help convert a lot of the opportunities we still see around the world. Still a lot of interest and we are getting new customers every month for that. I would say, overall, it's still small compared to our -- the rest of our business, but we still feel very positive about the future and potential of that business.

Christopher Quilty -- Quilty Analytics -- Analyst

And one final question. Shifting back to the commercial IoT business. Good numbers in Q4, but in terms of subs, on the consumer side, presumably if things were shipping for the Christmas season, they really don't show up as subs until the first quarter. Are you getting any good indication of consumer uptake for some of your devices. And notably that would be the Garmin inReach, which seem to get some good coverage from them and their earnings call?

Matthew J. Desch -- Chief Executive Officer

Yeah, I mean, that's a little forward leaning here in terms of sort of not hitting the 2018 results as you said, but I can tell you we continue to see a really robust IoT subscriber growth and have really good expectations for broad-based growth.

Garmin in particular really continues to execute extremely well. Just very impressed with them as a partner as they both expand their product lines and their distribution around the world. We clearly see in our results. I think you're going to continue to see it in the coming years in our results.

We're continuing to look to diversify even beyond that, but right now I'm pretty excited about future products that they have as well. It's clearly this is, I think, they have seen positive results from sort of connected devices in their channels as well, and I think that's going to be a great partner in the coming years.

Christopher Quilty -- Quilty Analytics -- Analyst

Great. Thank you.

Matthew J. Desch -- Chief Executive Officer

Thank you.

Operator

And our next question comes from Anthony Klarman with Deutsche Bank. Please go ahead with your question.

Anthony Klarman -- Deutsche Bank -- Analyst

Hi, thanks. Just a couple of questions. First, I apologize, if this came out in the text or the commentary and I missed it, but I wanted to just understand on the 2019 outlook. What that assumed in terms of the run rate for the government contract, and to the extent, it was the government contract at current rate. Would you envision providing us clarity on sort of what the new contract looks like when that is signed by revising guidance or sort of giving us what the incremental run rate might be?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Hey, Anthony. Our guide assumes what we expect to be the increase effective April '19. So, it would be a stub period. So, that we've put, we've included what we expect the increase to be. We haven't disclosed that and certainly the government contract would be material and that if terms will be disclosed and if it's materially different than our guidance we would update accordingly, but we have factored in what we think the rate -- the increase is going to be in our guide.

Anthony Klarman -- Deutsche Bank -- Analyst

Got it. So, it's essentially winds up being the current run rate for 1Q the stub period for 2Q and then the new run rate for the full period for the back half of the year?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

That's right.

Anthony Klarman -- Deutsche Bank -- Analyst

And then, I guess, if I look at that and then I look at the guidance around the $75 million incremental broadband opportunity. Can you just talk about what the path of that or what the rhythm of those numbers look like as they pace out because, I guess, if I just pull the current run rate of the business forward, and I layer in some incremental broadband opportunity plus some modest presume step up in government. The guidance certainly looks like it is on the conservative side. Can you help us just think about maybe if there are other one timers or puts and takes in there that we should consider or how the ramp of the EBITDA progresses throughout the year?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Yes. So, there is a one-timer that I did talk about in my commentary, which is on our satellite time and location, we had a $4.5 million true-up there. Thales is a start-up operation. We have a contract with them that GAP says should come into revenue at $5.1 million a year notwithstanding the fact that the payments are not level they are back ended as you would expect with the start-up.

And so in the early years, we could have recognized $5.1 million, but given the fact that the collection of that was not probable. We only collected what we got in cash. If our developments there this year that caused the certainty of the collection to cross the probable line.

And so that -- so we basically brought in the revenues that we chose not to recognize in prior periods. And that was a benefit to '18 that implicitly decrements the year over growth into '19. So, pro forma for that the '18 revenue growth looks like 16%, it would come down to 15%. And the '19 growth would not be 8%, would be more like 9.4%.

So, that's answer your question in terms of the one-timers. As we think about the growth, if you take the kind of pro forma 9% growth into '19. There's very little service in there. And so if you model or ramp to $100 million you see the Certus revenues into '20 and '21 to get to a $100 million exit rate. This material growth there that takes that 9.4%, '19 pro forma growth well into the double digits.

Anthony Klarman -- Deutsche Bank -- Analyst

Understood, thanks. And then, I know, we've covered this previously, but I was wondering if you could maybe remind us. You mentioned, Aireon, its remaining hosting fee account payable to Iridium. Can you just remind us, if there are any milestones that still need to be achieved that would trigger additional payment from Aireon to Iridium or whether it's just sort of the commencement of commercial operations on their end and that will change the revenue rack and then a reminder on what the timing is on the equity repurchase agreement?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Sure. So the facility that they just closed contemplates an additional payment to Iridium a $15 million pending them signing up some contracts that they are looking to do. What we have said is that we expect there is that payment and then facility could be expanded, but we expect it to be fully paid by 2021 as to the hosting fee. And then the buyback of the stock would be subsequent to that hosting fee payment in 2021.

Anthony Klarman -- Deutsche Bank -- Analyst

Got it. Okay. And then, Tom, just finally on the refinancing comment you made. I was wondering if -- when you talk about the refinancing, you're talking about just the BPI piece or if you're all talking about more of a holistic refinancing in light of, I think, you sort of mentioned that the refinancing could cost you about a quarter turn with respect to the net leverage target that you have?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Right. So, we think about it as a two step process with the first step would be to refinance the BPI facility. And then we have our eyes on the high yield bond when it becomes economical kind of in the April, May time-frame of 2020.

Anthony Klarman -- Deutsche Bank -- Analyst

Got it. So, you would imagine that the high yield bond probably stretches out somewhere close to the first call date?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Yes, that we have our eye on the first call date. Yes, we have our eye on the first call date there.

Anthony Klarman -- Deutsche Bank -- Analyst

So, I guess, I'm not aware of that, then I guess in mentioning the quarter turn impacted net leverage, I guess, other than just sort of normal fees and expenses. I'm wondering what the breakage costs are on the BPI. Is there a call protection on that facility or is it pre-payable and what would lead to that quarter turn in incremental leverage?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

There is -- there are -- it's not that we've assumed that there are things going both ways. There is money that's due back to us. And there's a swap fees that they can lay claim to in our quarter of a turn it's -- we're just purely dealing with the fees to put a range of $1.5 billion credit facility.

Anthony Klarman -- Deutsche Bank -- Analyst

Got it.

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

So, we model the exit costs, if you will from the BPI facility is kind of neutral, and we think we're being conservative there. And so our quarter turn of leverage is just because we have a formal guide out there or 4.5 times. We would be remiss if we didn't say, hey look, we're also thinking about a refinancing that could make that go wide by about a quarter of a turn should we do it.

Anthony Klarman -- Deutsche Bank -- Analyst

Got it. And when you say exit cost, I guess, my presumption was that you could probably refinance BPI into a normal way. First lien credit facility at an all-in rate that's below BPI. But are you assuming for modeling purposes that we should think about it as maybe flat? So is that something?

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

No, it's not . It will be -- the cost will be up because that's 5% money. So, we'd be, we fully anticipate that our interest costs will go up, but it's the right thing to do for the business. We need the flexibility of regular way financing to run our business. The BPI facility was a wonderful instrument to use during the construction period. But we need to run a business at this point and are focused on paying dividends and buying back shares, none of which we can do it with that facility.

Anthony Klarman -- Deutsche Bank -- Analyst

Yes, understood. Thank you.

Operator

(Operator Instructions) And our next question comes from Louis Depalma with William Blair. Please go ahead.

Louie DiPalma -- William Blair -- Analyst

Good morning, Matt, Tom, and Ken.

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Good morning, Louis.

Louie DiPalma -- William Blair -- Analyst

For the EMSS contracts, do you expect it to gradually increase from year one to yea five similar to the existing contracts?

Matthew J. Desch -- Chief Executive Officer

It's a little too early to give that kind of guidance to be honest with you. We are still in discussions. It could go, I think, that's the most likely approach, but we want as much flexibility as possible here.

Overall, the total value should go up because the usage and cost per user have come down so dramatically, and the expectations of future usage are really strong right now given all the different projects that the government has going to deploy the technology on.

But exactly how that will be profiled over the next number of years. I can only say broadly that's probably just a general expectation, but we'll know in a month or two.

Louie DiPalma -- William Blair -- Analyst

Okay. And also on the defense side you mentioned or I think you mentioned a new Department of Defense Certus gateway. Is that a separate gateway from their voice gateway in Hawaii?

Matthew J. Desch -- Chief Executive Officer

No. It's a additional equipment that would be built and installed at that location. So, that they can take and deliver basically Certus service through the same sort of approach, a secure global service. But that's actually been under development now for a while. They committed to deploying it and there is a plan right now to do that over the next year to deploy that technology.

Louie DiPalma -- William Blair -- Analyst

Okay. And I'm assuming it's necessary for that gateway to be completed before they establish a Certus contract with your partner Comset?

Matthew J. Desch -- Chief Executive Officer

No, I mean, they could have that, I mean, they just -- the revenues would maybe flow through Comset through the commercial -- our commercial broadband lines, if you will, and will account for it through the commercial service. So, they can deploy service and Comset can be involved. It just won't go through our government line, if you will and through that government gateway.

Louie DiPalma -- William Blair -- Analyst

Got you. And lastly your competitor Inmarsat, they are beginning to announce vendor contracts for their new sixth generation I-6 L-band constellation. Are you confident that your Certus services with Iridium NEXT will be able to achieve similar levels of performance relative to their future constellation?

Matthew J. Desch -- Chief Executive Officer

I believe our -- I believe very confidently in our business projections around what Certus will do for many years. Inmarsat or anyone else here deploying the service, it's not again about speed, add another megabits per second might be interesting. But, again, it's more about cost, size coverage, competitive dynamics, et cetera.

By any measure, we should never been able to sell an OpenPort device over the last 10 years because it was a fraction of the speed that's supposedly the headline speed of what Inmarsat did, and of course we did quite well with that. I think, Certus, is going to carve out of, by the way, not just exactly identical services to what they do, but I think it's going to expand the market.

For example they really can't do effectively what we can do with our Mission Link land mobile business right now because we're providing a highly mobile service broadband on the move instead of what you could call broadband on the pause where you really have to kind of set up or have a extremely expensive intended to do that.

Those kind of advantages are going to remain well into the future. And someone might come up with a higher headline rate than the megabit or so that we are doing, but just having two megabit terminal or a megabit and the half or whatever they want to call isn't really what is completely about because it's not just speed that really is going to be, I think, the competitive dynamic for the coming years.

So, I'm really confident with the really potential that we have for Iridium Certus well into the future, and you can also see that how excited we are at our area that I don't know that anyone can compete against this which would I call the 100 kilo bit per second and below using low cost small antenna.

And that's going to be a whole brand new market that I don't think anyone can touch us on, and no one looks like there even design in anything to go after that market.

Louie DiPalma -- William Blair -- Analyst

Sounds good. I look forward to hearing more about the 9770 on March 7th.

Matthew J. Desch -- Chief Executive Officer

And will be good to see you, Louie, and I think that will be a great chance for us to really expand and tell our story a bit more broadly. So, I hope everybody tunes in for that too, if you're not with us.

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Matthew J. Desch -- Chief Executive Officer

Well, obviously, it was a great year. And it's exciting to have a brand new network in service. I know you've been following us, as I said, for a number of times, I think, March 7th is going to give us an opportunity to really flush out the story, our strategy going forward, and how people should be looking at it, and it's going to be exciting year. So, thanks everybody for joining us again.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 60 minutes

Call participants:

Kenneth Levy -- Vice President, Investor Relations

Matthew J. Desch -- Chief Executive Officer

Thomas J. Fitzpatrick -- Chief Financial Officer and Chief Administrative Officer

Richard Prentiss -- Raymond James & Associates -- Analyst

Gregory Burns -- Sidoti & Co. -- Analyst

Hamed Khorstan -- BWS Financial -- Analyst

Christopher Quilty -- Quilty Analytics -- Analyst

Anthony Klarman -- Deutsche Bank -- Analyst

Louie DiPalma -- William Blair -- Analyst

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