Iridium Communications (IRDM) Q2 2022 Earnings Call Transcript

Iridium Communications (IRDM 2.24%)
Q2 2022 Earnings Call
Jul 26, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Iridium Communications' second quarter earnings conference call. All participants will be in a listen-only mode. [Operator instructions] Please note this event is being recorded. I would now like to turn to the conference with Ken Levy, VP of investor relations.

Please go ahead.

Ken Levy -- Vice President, Investor Relations

Thank you, Anthony. Good morning, and welcome to Iridium's second quarter 2022 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 second quarter results, followed by a 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 would 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 facts 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, free 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 in 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.

Matt Desch -- Director and Chief Executive Officer

Thanks, Ken, and good morning, everyone. Both of you all saw the rating business outperformed nicely in the quarter recording record revenue and operational EBITDA. This momentum gives us the confidence to raise our top and bottom line guidance for the year. We're seeing sustained strength from our partner channel and signing up new customers in purchasing equipment, which is the result of Iridium's strong competitive position and unique offerings.

This underlying strength helps to shield us against changes in the global financial environment. We believe, we're positioned well to grow just as we have through past cycles, even if recent concerns of an economic downturn come to fruition. Our business remains vibrant and resilient. This is owed to the unique business Iridium is focused on, characterized by safety services and mission-critical applications, as well as the durability of our business model.

While no business is recession-proof, we've grown nicely through past downturns in large part due to the diversity of our customer base and the industries that we serve. Iridium continues to occupy a unique lane even among satellite companies, and today that lane is characterized by its strong demand, growth opportunities, and some pronounced areas of upside, which I like to call accelerators. Let me speak to each of these three areas. First, demand for Iridium equipment and services has never been stronger.

This has been driving hardware sales over the last 12 months and kept net subscriber additions near all-time highs in our commercial business. In the second quarter, we added 95,000 net subscribers, which means over the last year we've grown our subscriber base by 16% to almost 1.9 million users. I can't think of another satellite communications company that makes more connections to things from space than Iridium. We've continued to see momentum in our core handset business, in part due to ongoing demand and Ukraine's continued strong growth in Iridium Push-to-Talk services for global workgroups and governments and general acceptance by the market that our satellite phones and Iridium GO! smartphone hotspots are the gold standard for remote communications.

We also believe that our successful management of supply chain obstacles over the past year or so has allowed us to ship devices when others could not. Further, Iridium enjoys a global reputation for service reliability. This is particularly relevant to the recent demand we've seen in Ukraine. Partners and subscribers tell us that Iridium handsets work much better in battle zones where GPS is now being jammed because their devices do not rely on this location technology to connect like others do.

All these things are combined to create a very strong year of growth for these core product lines. And as Tom will go further, we believe commercial voice and data is a resurgent area of growth for us in the future. Moving on to IoT, our industrial partners continue to prosper and grow their subscriber counts, but it is the personal user that remains the real story lately. We've continued to ride a wave of demand for Iridium-connected personal satellite communication devices, as partners like Garmin, ZOLEO, Bivy, and others have developed new solutions.

These small lightweight consumer devices are great for mobility and offer users reliable two-way connectivity, which they often pair with their smartphones, even when they're off the grid. Our personal satellite communication services have gained in popularity, especially as the prices of these devices have fallen in recent years, and retail consumer awareness of them has grown. In maritime, we're pleased to see the growing adoption of Iridium service reach quarterly installation levels that we long have been expecting. Ship owners are realizing that Iridium service provides highly capable and reliable [Inaudible] service at a price point that makes it accessible and attractive to both small boat owners and large fleet operators.

Net activation of these terminals continued to expand. Quarter 2 was another strong quarter with subs up 12% from the same quarter last year. Overall, broadband revenue growth also remained strong, up 14% from a year ago. This is even before we have started to see widespread use of the new lower-cost Iridium Certus 200 Terminal that is just now getting into the channel.

I think it's quite clear that demand for our commercial satellite services is healthy and growing across the board. Now, in terms of opportunities, let me highlight three that I think you should keep a close eye on. First, within IoT, I discuss the momentum we're seeing for personal satellite communications. We already have more than 670,000 active users on our network, and that number appears to be accelerating with the introduction of new products and features from our partners.

We expect that these consumer-oriented devices will continue to be a long-term driver of IoT revenue and subscriber growth. Our next big opportunity is being fueled by Iridium Certus 100 service, which we call midband. It delivers a higher speed data connection than our legacy [Inaudible] offerings in a very small form factor, perfect for applications where size, weight, and power considerations like in segments of aviation where our partners are introducing new terminals for the growing unmanned aerial vehicle market. Our opportunity has only expanded in the last year, now that our technology partners have enabled efficient video transmission over the Iridium Certus platforms.

The intersection of these applications with the new Iridium Certus 100 devices should unleash a new wave of users and applications that have high ARPUs. Some of the early technical applications are now available to Iridium customers, and we expect these solutions to only grow in the quarters and years ahead. Lastly, I want to highlight our emerging opportunity in aviation broadband. We're expecting to finally see Iridium Service Aviation Terminal start activating on our network this year and next.

The timeline for aviation services has been necessarily long due to the regulatory testing and rigorous certifications required for each piece of equipment that enters the cockpit. As a pilot, this is one business opportunity that I remain very excited about and I can't wait to see come to market. Iridium has been working with a handful of partners who will be launching their respective products using Iridium Certus in the second half of this year. These partners are closing critical certification milestones, performing successful flight tests, and some will be entering service with first installations in the coming months in both rotary and fixed-wing applications.

In terms of my third theme on future upside accelerators, Iridium is always active and looking to expand beyond our traditional markets to grow even faster. I'd like to highlight three accelerators that hold great promise for us. One of these new business opportunities was awarded in late May when but when the Space Development Agency chose General Dynamics mission systems in Iridium to build and operate their ground operation system for their new LEO satellite network. The $324 million prime contract leverages Iridium's expertise in flying satellites and managing ground system operations to provide us entry into a new type of business with the US government.

We're proud of our capabilities and know that this contract with the Space Development Agency will enhance our knowledge of the advanced technology around an important network like this. The $133 million in revenue that we expect to receive over seven years from this award will be seen in our top-line results, but the strategic impact of a closer alignment with the SDA is what is most important. We're excited to begin work and are honored to see our capabilities, recognize and explore what else might become of this expanding relationship with the Department of Defense. Another accelerator for us is Arion and its continued product evolution and adoption.

In late June, Iridium augmented its position in the 10-year-old joint venture. Our new 50 million preferred equity investment will help accelerate Arion's development of its commercial data service business, which will allow Arion to monetize its high-quality [Inaudible] speed data set with customers beyond its core use in air traffic surveillance. Arion's data has value to commercial enterprises that assess, manage and interface with the commercial aviation industry. In fact, Boeing just signed up Arion to use its data for its own safety tool kit and advanced data analytics capabilities.

As Arion grows, the benefit to Iridium will be an increase in the value of our substantial equity stake in this enterprise, as well as dividends down the line. In another area of long-term promise to us today, you'll also see from the 8-K filing accompanying the press release that we furthered our vision of connecting millions of consumer devices to our network by entering into a development agreement with a strategic partner to enable Iridium's technology in smartphones. We likely won't have much more to say about this arrangement until the products are ready for market. But obviously, it's a demonstration that we're making good progress on the execution of our vision and something that can provide some significant upside in the future.

In total, all three of these partnership opportunities are additive to the Iridium business. Rest assured that we will provide additional details about each of them as the time is right. However, it is safe to say that they serve as accelerators to our story, which should further excite our shareholders. So to summarize, we are continuing to experience strong demand this year.

We are excited about the areas of growth we're developing and we are actively working on some accelerators for our business, which we believe will be material in the future. We feel very good about where we are and look forward to continued strong growth in 2022 and beyond. I think you'll have to agree, whether you're a longtime Iridium shareholder or you've only recently come to our story. We're a particularly interesting company to watch in the space industry, or any industry for that matter, given our unique potential.

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

Tom Fitzpatrick -- Chief Financial Officer

Thanks, Matt, and good morning, everyone. I'll get started by summarizing our key financial metrics for the quarter and providing some color on the trends we're seeing in our business lines. Now I'll recap our increased guidance for 2022 and close with a review of our liquidity position and capital structure. Iridium continued to execute well in the second quarter in an environment characterized by robust equipment demand, and meaningful subscriber growth.

We generated total revenue of $174.9 million in the second quarter, which was up 17% from last year's comparable quarter. The improvement reflects ongoing strength in our commercial business lines, a pickup in engineering and support work, and an unprecedented demand for subscriber equipment. Operational EBITDA hit a record $105.9 million in the second quarter. This was up 12% from the prior year's quarter and supported by strength across all business lines.

These trends give us confidence in raising our full year outlook to better reflect the ongoing demand for our L-band services, which we expect to continue in the second half of the year and drive incremental subscriber growth. On the commercial side of our business, service revenue was up 11% this quarter to $106.4 million. This increase reflected continued strength in voice services, IoT, and broadband. Commercial voice and data revenue grew by $5.2 million or 12% in the second quarter.

As you know, we have historically characterized this business as a low single-digit grower. As Matt noted, there were two contributors to this outsized growth this quarter. First, our newer service offerings, Iridium Go! and Push-to-Talk are really hitting their stride. We experienced combined growth of about 50% on these two products in the second quarter.

Together, they accounted for about a third of the growth in the voice and data business line. We expect continued strength, and strong growth from these products going forward. Second, we experienced materially higher sales of prepaid vouchers in the quarter. We believe this strength was driven by two factors.

The first, we have noted previously higher sales volumes associated with the conflict in Ukraine, while the second we attribute to increased sales volume resulting from our primary competitors not having handsets in stock to meet demand. Prepaid revenues accounted for about a third of the growth in our voice and data business this quarter. The balance of our growth in this business saw and came from our core service offerings, that also benefited somewhat in the competitive environment as described. So in summary, the new product growth will recur, but some of the other growth may wane a bit as circumstances change.

We expect the voice and data business line will generate high single-digit growth this year and we'll see where things settle out. But it now appears that this business is more like a solid mid-single-digit grower on average based on the latest trends. In commercial IoT, we continue to benefit from consumer demand for personal satellite communications. IoT revenue totaled $30.6 million in the second quarter, up 13% from the prior-year quarter.

While these subscribers generate lower ARPU than our traditional industrial IoT users, they remain very attractive contributors to our service revenue growth in light of the minimal comparative network resources they consume. As a result, IoT ARPU was $7.96 this quarter, compared to $8.69 in the prior year period. Commercial IoT subs grew 22% from last year's second quarter, fueled in part by 80,000 net new additions. This was the second best on record.

These data subscribers now represent 76% of Iridium's billable commercial subscribers, up from 74% in the year-ago period. Through June 30th, we had over 670,000 personal communication devices on our network. And we continue to believe that these consumer-oriented users will drive IoT growth for the foreseeable future. Commercial broadband revenue rose 14% from the prior year's quarter to $12.1 million.

Activations were driven by the ongoing adoption of Iridium Certus Terminals in maritime. Our partners are seeing good access to vessels which would keep subscriber growth strong in broadband where we continue to grow our offering and are seeing strong adoption of Iridium Certus as a companion to VSAT terminals. Hosting and other data services revenue was $15.2 million this quarter, up 5% from the prior year's quarter on higher data usage. Turning to our government service business, we reported revenue of $26.5 million in the second quarter, up 3% from $25.8 million in the prior year's quarter.

This increase reflects the contractual terms of our long-term EMSS contracts. Subscriber equipment continues to benefit from strong demand, rising 55% from the prior year period to 33.8 million. As Matt noted, we continue to receive new orders for equipment, which support our forecasts for full year equipment sales well above the 2021 level. We expect equipment margin dollars to be up materially as well.

Equipment margin as a percent of revenue is expected to decline this year to a range of between 35% and 40%. The reduction in margin percentage is primarily driven by a mix shift toward chipsets that have lower margins, which is widely utilized by our personal communication partners and driving significant subscriber growth. We are also, to a lesser extent, experiencing some cost increases as we manage through supply chain issues. Engineering support revenue was $8.3 million in the second quarter as compared to $6.8 million in the year-ago period.

The rise reflects activity related to the episodic nature of our contract work for the US government and commercial customers. In all, the trends we saw in the second quarter were quite strong. Accordingly, we are increasing our growth outlook for service revenue to between 7% and 9% in 2022. And raising our full year guidance for operational EBITDA to between $410 million and $420 million.

Some of the items helping to frame our thoughts on EBITDA include the recent SDA award in our outlook for SG&A, with the award of the Space Development Agency's contract to General Dynamics, Mission Systems, and Iridium in May, we anticipate that Iridium will receive $133 million in revenue under the award over its seven-year term, but this could grow with future opportunities. Revenue will vary from year to year and appear in our engineering and support line. We expect work under the SDA contract to generate small margins, which we view as acceptable given its strategic importance. This, in combination with the increase in equipment revenues and decrease in equipment margin percentage, will drive our EBITDA margin percentage below 60% this year.

On the expense side of the ledger, we continue to expect spending on SG&A to rise this year as we incur higher recruiting and development costs, accrue higher stock compensation expenses, and also make additions to our support infrastructure. I noted these items back in April and anticipate that in total they will result in SG&A being about 20% higher in 2022 compared to last year. Moving to our capital position, as of June 30, 2022, Iridium had a cash and cash equivalents balance of approximately $227 million. Iridium's growing cash flow is one of the reasons that our board upsized our share repurchase program with an additional $300 million earlier this year.

In the second quarter, Iridium purchased approximately 1 million shares of common stock at a total purchase price of 35 million. Into July, we have remained active in the market purchasing an additional 290,000 shares at a cost of approximately 11.2 million. And since the original authorization of our buyback program in 2021, we have retired approximately 9.4 million shares at a total price of about 344 million or $36.47 per share. At this time, the remaining capacity on our program is approximately 256 million.

We will continue to be disciplined in executing share repurchases. Net leverage was 3.4 times OEBITDA at the end of the second quarter. This was down from 3.9 times a year earlier and includes the impacts of our buybacks during the first half of 2022. Our long-term target for net leverage continues to be between 2.5 times and 3.5 times of EBITDA at the end of 2023.

We expect to be within this target range even after giving effect to all share buybacks authorized by our board. Capital expenditures in the second quarter were $17.5 million and included an initial spend of $7.5 million related to our launch of up to five ground spare satellites. You will recall that this launch of our ground spares is a one-time event with a total expected cost of about $35 million, which will be spent this year and next. We anticipate that the launch will take place in 2023.

We have previously indicated that we expect the annual capex to average about $40 million during our capex holiday. So inclusive of the launch of our ground spares, we do not expect our capex spending in 2022 to exceed $75 million. This spending can be comfortably supported by Iridium's strong cash, and cash equivalents balance, and ongoing expectations for strong free cash flow in 2022. If we use the midpoint of our 2022 EBITDA guidance and backlog, $66 million in net interest pro forma for our current debt structure, the maximum expected is $75 million in capex for this year, and $14 million and working capital inclusive of the appropriate hosted payload adjustment, we're projecting a pro forma free cash flow of approximately $260 million.

These metrics represent a conversion rate of 63% in 2022 and a yield of nearly 6%. I would note that Iridium put in place an interest rate cap in July of 2021 to hedge $1 billion of notional value on our term loan. This position does well to weather the current interest rate environment. A more detailed description of these cash flow metrics, along with a reconciliation to GAAP measures is available in a supplemental presentation under events on our investor relations website.

In closing, we're very excited about Iridium's business prospects and the new revenue streams, we will soon realize from the SDA contract awarded in June, as well as our entry into new markets. We have all worked hard through the challenges of the pandemic during the past two years to execute efficiently and get to this point. As Matt noted, we are enjoying strong demand trends today and executing on a number of promising business opportunities. As I look back on the dozen years I'd been with Iridium, I've witnessed accelerated pacing of growth and technological capabilities.

It took Iridium 18 years to get to 1 million subscribers, which occurred in 2018. We expect to reach 2 million subscribers as we exit this year, illustrating the acceleration of our business. It's very rewarding to see this progress and given the strength of our personal communications, business, and the current pace of growth we'll likely surpass 3 million subscribers in less than four years. This is an especially exciting time for our company, our partners, and our employees.

We're committed to returning capital to our shareholders while still investing in the business, and pursuing new vectors for growth. I truly believe that for Iridium, the best is yet to come. With that, I'll turn things back to the operator for the Q&A.

Questions & Answers:

Operator

[Operator instructions] The first question will come from Ric Prentiss with Raymond James. You may now go ahead.

Ric Prentiss -- Raymond James -- Analyst

Thanks. Good morning, everyone.

Matt Desch -- Director and Chief Executive Officer

Hey, Ric.

Ric Prentiss -- Raymond James -- Analyst

Obviously, I'd like to see the guidance raised, particularly in this economic environment. Matt, you talked a little bit about how you guys have weathered different economic situations. Help us understand where you're at today and look into this current environment, and how you see it playing out like your midterm guidance? Any thoughts about updating that guidance? Or, how these current market conditions are affecting that?

Matt Desch -- Director and Chief Executive Officer

Well, I think, we've been looking carefully at trends and everything and just haven't really seen much yet. You have to expect that there's some potential impact perhaps more on equipment than anything else just as people be more careful about purchases, though, we're not seeing that at this time yet, but kind of considering that going forward. I remember, 2008, and 2009 periods, we weren't in public until 2009. But even looking at 2008, we had -- we really grew our service revenue continue to grow well through that whole period.

We had a down year, one year in terms of equipment, I think in 2009, but it really pop back up in 2010 quickly too. And I think it's all just due to the nature of the highly diversified business that we have, the fact that most of our services are pretty life critical and important in the industries that they are. And so, we're not currently really expecting to change sort of our mid-term or even long-term look right now, for any reason right now. The signs aren't clear at this point.

Ric Prentiss -- Raymond James -- Analyst

And, you mentioned on your long-term accelerants, in 8-K you're talking about the development agreement to bring your technology to smartphones. We can't say a lot about that, but it's about the timeframe, we should be thinking about that. And we want to have enough time to get all two of the 8-K, any the extra language there that we should be particularly looking for?

Matt Desch -- Director and Chief Executive Officer

Well, you're right. There's not much more we can say about that. But it's I'm sure it's a little frustrating. But, I certainly wanted to -- we thought it was important to go some progress that we're making in that area.

Obviously important strategic relationship and stated about the potential there. But, the timing really is not something I can speak to. I think you'll just have to wait until products are introduced. Mainly in some ways, I can't talk about it because it's not really got much within our control at this point.

We have some work to do ourselves, but it's really up to our partner and others to execute that.

Ric Prentiss -- Raymond James -- Analyst

And obviously, some of the big news in satellite land over the last two days was a little operator, start-up OneWeb. Now officially announced the merger with GEO operator Eutelsat. Any thoughts about what that says for the industry or anything that it means for Iridium?

Matt Desch -- Director and Chief Executive Officer

Well, I don't think it means much for Iridium. I think it speaks to the competitive dynamics in that commodity broadband space that we've long talked about as a kind of ancillary to our business. There's a lot of competition in that space. There's a lot of concern about the future environments, I think.

There's a realignment of partners that we saw from Inmarsat and Viasat. I think perhaps there's some choosing of there's some consolidation, I guess this would be continued consolidation in sort of that market segment. I don't know that it speaks so much to orbital dynamics as it does the competition and other aspects there. But that's a story for others to really speak to besides us.

Ric Prentiss -- Raymond James -- Analyst

All right. Thanks, guys, stay well.

Matt Desch -- Director and Chief Executive Officer

Thanks, Ric.

Tom Fitzpatrick -- Chief Financial Officer

Thanks, Ric.

Operator

The next question will come from Landon Park with Morgan Stanley. You may now go ahead.

Landon Park -- Morgan Stanley -- Analyst

Great. Thanks for taking the questions. Everyone, good morning. I'll take one more swing at the smartphone announcement.

Can you say anything about what type of company you're partnering with on this agreement? And I guess, if we're looking out, five, ten years, do you think that this has the potential to be your single largest, revenue bucket over time if the technology is successful? And I guess what is your confidence level in being able to develop a successful integration of your technology into smartphones?

Matt Desch -- Director and Chief Executive Officer

Well, that was a good swing, Landon, and I'm not sure I can help much with either of those questions, and I'm sorry for that. But, we've been talking a little bit about this opportunity over the last couple of quarters. This is a good milestone, but it's not definitive, nor are we representing it in any specific way at this time as to what it means, when it means, and who it means with at this time. But I can say, there are over 1 billion new smartphones a year.

There are something like 7 billion smartphones out there in the coming years. Obviously, making a connection to those is something that others have hinted at and expect we'll try to do. I think it's going to be a sizable market to make any kind of connection to devices like smartphones. And I wouldn't even limit it to smartphones.

I mean, we're talking about the sort of things that consumers might have or might be contained in many other kinds of consumer devices. We believe that's our vision. That's what our network is very well-suited for. It's, I think what we've been doing over the last 23 years is preparedness for this kind of market.

And I don't want to speak to the size, but obviously, we don't think it's insignificant, so.

Landon Park -- Morgan Stanley -- Analyst

Right. I appreciate that. And can you -- can you speak at all to do the timeline that we should be looking for you, I guess, let me give you references from our agreement by the end of the year. Is that so the next milestone we should be looking at?

Matt Desch -- Director and Chief Executive Officer

I mean, yes, we do need to complete a service provider agreement. That's -- and even we do have an agreement are subject to that agreement. And but -- in terms of when this will affect our business, obviously, that that's out in the future. And it's really like I said, not in our control.

So I just don't want to -- I don't want to set any specific expectations about that, which I appreciate. It's frustrating and won't help your models much. But I believe we at least needed to announce that so that we're making definitive steps here.

Landon Park -- Morgan Stanley -- Analyst

Understood. And then, just the last one on this element. How should we think about the capacity of the next network in terms of if you do end up loading on a lot more sort of low usage subs here, how should we think about what does the capacity of your network really allow for over the next year decade? And then, just on a separate item, I'd love for you to opine just on the area of investment and how you're thinking about the TAM there, and the type of value thinking you can create out of your holdings?

Matt Desch -- Director and Chief Executive Officer

Yeah. I mean, our network is built for extreme -- very efficient short communications, which Iot is, as you can see by just sort of our performance is the key area of growth -- is a key area of growth in our area. And what we do deliver to even more devices, there's a lot more capacity still to be utilized for that because those are very efficient uses of our network. So kind of will break the model of how many millions of subscribers we would have on our network obviously with that.

But it's more about the kind of amount of messages or data transmissions they'd have through it, which our network is well-suited to support. So as far as Arion in terms of the addressable market, yeah, I mean obviously we're expand -- we believe Arion is expanding their addressable market, which we already thought was pretty significant in managing the air traffic management aspect of it. The surveillance, which frankly with people back on airplanes flying internationally is growing again and their revenues, I think internally are growing in that area as they recovered back to -- back to pre-pandemic levels and beyond, as they continue to expand their subscribers there. But as I said in the past, we were really quite interested in the progress that they're making, monetizing their data set in this commercial data services area.

They've already got a number of wins. They have a number of new products that they're -- that they have developed and they're marketing. And, with this additional investment, we saw them able to further out the offerings that they could make in terms of exploiting that data set in a number of new interesting ways. So it is expanding, the addressable market, can't speak to exactly the numbers.

I know, we've talked to the surveillance market in the past. There are a couple of others out there that are also trying to get into this market, but they don't have the same data that we do. They certainly talked a pretty big potential for the market and I [Inaudible] that. But it's still early days and we think there's a lot of growth potential there.

It's the reason why we kind of doubled down here and were able to sort of expand our investment in this because we really think over the next couple of years that's really going to pay off.

Tom Fitzpatrick -- Chief Financial Officer

And just in terms of sizing, Arion has estimated its TAM to be 750 million a year. So they've said that for some time, and we've said that we expect our dividends from Arion to exceed what we get out of -- have them hosting. So we get 37 million in hosting and data out of Arion. And so we expected dividends to eventually be greater than that.

So we're excited by this opportunity.

Matt Desch -- Director and Chief Executive Officer

I would only say that 750 million was sort of a pre-commercial data services sort of TAM, but it's hard to say exactly how much that adds to it in this case, so.

Landon Park -- Morgan Stanley -- Analyst

And on the dividends, when should we expect those to start flowing?

Tom Fitzpatrick -- Chief Financial Officer

We've said it. We've said eventually. We have [Inaudible].

Landon Park -- Morgan Stanley -- Analyst

Fair enough. I really appreciate the questions.

Operator

Our next question will come from Walter Piecyk with LightShed. You may now go ahead.

Walter Piecyk -- LightShed Partners -- Analyst

Thanks. So what is the process for, I guess, how technology gets enabled in smartphones? Meaning that, does the ultimate demand have to come from the device maker that who drives it? Whether any agreements with the device maker itself or a component guy or whatever it is? Like how does that typically manifest itself? Because I wouldn't imagine that if it's not the device maker that someone else would expend development dollars unless they knew that at the end of the day there was going to be a device maker that would actually want to put it in their phone?

Matt Desch -- Director and Chief Executive Officer

Yeah. I mean, answering that question well, and it's a good one, but it's just not something I can kind of go into at this time. I mean, that really goes beyond what we're really capable of saying today. But I don't disagree with you that there obviously you wouldn't sign agreements unless there was everyone viewed there to be a sizable opportunity in the future.

Walter Piecyk -- LightShed Partners -- Analyst

Thanks. Why does someone need a service provider agreement? Because, if I think about my AT&T phone and I have got a soft sim, I can be using AT&T in my terrestrial network. I go to Utah, whatever, and I can just flip to a soft sim that's another service provider. So why is there a need in this case for a service provider agreement?

Matt Desch -- Director and Chief Executive Officer

Yes, so I'm not going to go into the business model that we are anticipating for this. But, we are not the service provider. So any time we provide service through others, there has to be sort of an agreement on how it would be priced, and how it would be delivered, and that sort of thing. So it's more of our agreement with them about how it would be delivered.

Walter Piecyk -- LightShed Partners -- Analyst

I understand that. But presumably, a device maker themselves could say, hey, buy my phone. And then when it doesn't, when it roams off of the cellular provider that you're using it, then may Apple me, Samsung, whoever can say this phone's going to work in more places. So why -- I don't understand why you would need a service provider in that context?

Matt Desch -- Director and Chief Executive Officer

I assure you, we need a service provider agreement, and so that's why we're negotiating it.

Walter Piecyk -- LightShed Partners -- Analyst

OK. Just last question. In the share repurchase, it was down, obviously given the quarterly results and this announcement, is the reason you didn't buy as much stock back this quarter because you knew this announcement was coming? Or, is there another kind of factors that went into the share repurchase activity this quarter?

Matt Desch -- Director and Chief Executive Officer

I don't think we're going to go into exactly why and how we do that. Obviously, that's sort of disclosing. But I think that's probably all we can say about that. Is that --

Tom Fitzpatrick -- Chief Financial Officer

OK. Well, the reason wasn't that we would have liked to buy the stock at the levels that they saw in June. But that wasn't feasible.

Walter Piecyk -- LightShed Partners -- Analyst

Why wasn't this feasible, though?

Tom Fitzpatrick -- Chief Financial Officer

We're not going to go into that.

Walter Piecyk -- LightShed Partners -- Analyst

OK. Thank you.

Operator

Our next question will come from Hamed Khorsand with BWS Financial. You may now go ahead.

Hamed Khorsand -- BWS Financial -- Analyst

Thanks. Good morning. I just wanted to see how comfortable are you with channel inventory? How are you managing and making sure partners aren't pre-ordering too much ahead of expected installs?

Matt Desch -- Director and Chief Executive Officer

Yeah, that's been an ongoing, some sort of process that we've made our sales and marketing team has done, and in conjunction with our almost 500 partners. There's obviously been a lot of demand out there for us, as you can see, much higher than we were expecting at the beginning of the year. And we've been -- we've had -- we've been on sort of allocations for a number of our components, a number of our devices, really for the last 12 months or so here. And while we're catching up, we've had to go back and kind of work with each of them individually understanding, because a lot of them have supply issues of their own and everything.

So, trying to make sure that we allocated our devices to the places that could matter the most has been sort of a bit of art some science, but a lot of art and a lot of discussions. I feel good about how it's gone because our partners are telling us that, they feel that it's been an open transparent, and productive sort of process. We've been catching up in some areas here, still behind and some others could have an even better second quarter. But I think that we'll be catching up on a lot of this through the rest of the year.

Assuming we don't have any other big supply chain shocks or anything, but we seem to -- I mean, I really outstanding supply chain team who's done a -- I think, amazing job over the last year of managing quite a complex environment here to be able to continue equipment level growth through this sort of unprecedented demand and manage through all the kind of little issues that keep sort of popping up just due to the normal environment everybody's having to go through.

Hamed Khorsand -- BWS Financial -- Analyst

OK. And then, my other question was on these personal devices, is this predominately still a North American sales process or are you seeing partners come on board from different geographies?

Matt Desch -- Director and Chief Executive Officer

Well, it's never been just North America. I mean, obviously, North America has been a strong market for us, but we have partners in Europe, Asia, really everywhere around the world. I was just in a partner conference in Europe, and we have a strong group of -- and growing group of partners in Europe, and the Middle East. Definitely have quite a few and have been growing nicely in Asia.

I forget how many, I just saw the number that we added last year in Asia alone, which is, across the region there too. So, no, it's a global phenomenon of the partner base that we have.

Hamed Khorsand -- BWS Financial -- Analyst

OK. Great. Thank you.

Operator

The next question will come from Greg Burns with Sidoti & Co. You may now go ahead.

Greg Burns -- Sidoti and Company -- Analyst

Good morning. The hosted and data payload was up a little bit this quarter and it sounded like it was from growth from [Inaudible], is this like a new -- is there a new growth opportunity emerging for us to tell us? Should we expect that line item to continue to grow? Thank you.

Tom Fitzpatrick -- Chief Financial Officer

Yes, Greg, we expect that to grow over time.

Greg Burns -- Sidoti and Company -- Analyst

OK. And then, in terms of the SDA contract, what is the timing of -- it sounds like it's not like a straight-line revenue realization there. But what is the timing of when revenue -- we should start to see revenue from that hitting the PNL.

Tom Fitzpatrick -- Chief Financial Officer

It'll be heavier in the first two years, then it'll decrease for the final five years. It gets sort of there's a heavy lift in the first couple of years and then it just goes to maintenance in the back five.

Greg Burns -- Sidoti and Company -- Analyst

And revenues should start flowing this quarter like in the third quarter?

Tom Fitzpatrick -- Chief Financial Officer

Yes.

Greg Burns -- Sidoti and Company -- Analyst

OK. And then, in terms of the timing on Certus 100, it sounds like you're making progress there, bringing some new applications to market. When should we expect to see revenue start picking up from those new applications?

Matt Desch -- Director and Chief Executive Officer

Yeah. I mean, you're going to see the feedback flow into both voice and data online as well as the IoT line depending upon the sort of applications. I'm seeing, that there's a whole bunch of new products that are getting announced all the time. Fact, I just know Oshkosh is starting this week, and there's a couple of our partners are announcing some products for the general aviation market built on Certus 100 technology.

I think you're going to see some consumer devices in the coming quarters that are sort of built around that technology that supplies both voice and higher speed data services, which says UAV market is a number of different partners are going after that. But that all depends on, how the growth of their individual markets goes. But there's a lot of excitement about that. So we see surveillance devices out there, just a bunch of applications.

Also a lot of interest in the government for applications. But it's pretty [Inaudible] the military kind of applications as well. So it's a broad range. We're starting to see the first revenues already.

I think that's going to build over time like anything because there's often a lot of sort of other development required for a very tailored development around technology like this has never existed before. I mean, we've noticed this in other technologies like Push-to-Talk and other things that kind of grow slowly in the first year or two. And then, kind of gathers momentum and then really kind of take off as the solutions are well-established and, the sales channels are well established. So I'm expecting this will just be a -- it will kind of follow that same trajectory.

Greg Burns -- Sidoti and Company -- Analyst

OK. Ok. Great. Thank you.

Matt Desch -- Director and Chief Executive Officer

Yep.

Operator

Our next question will come from Caleb Henry with Quilty Analytics. You may now go ahead.

Caleb Henry -- Quilty Analytics -- Analyst

Thank you. Hi, guys. I just had a couple of questions about the Relativity of the launch deal. Think it's been a couple of years since it was announced.

So these are the launch that is happening in 2023. How many missions do you expect? I think this is all the smaller rocket, that Terran 1? And then, the original announcement was for up to six, and you said on the call, that these will be five satellites that are launching. So I'm just curious what the logic was behind launching five and keeping one ground spare? Thanks.

Matt Desch -- Director and Chief Executive Officer

Hey, Caleb. I think you're assuming a little too much there. We do have an arrangement with Relativity for future launches that have been prescribed. But the vehicle that we were talking about there can only launch really one of our satellites.

We haven't named the launch provider for our launch in '23, but you can probably figure out its five satellites instead of one. And that wouldn't necessarily fit the current profile for the launch provider you just suggested.

Caleb Henry -- Quilty Analytics -- Analyst

OK. So the spare launches are not going to involve Relativity then?

Matt Desch -- Director and Chief Executive Officer

Well, let's that's, as I said, we haven't named the launch provider, but I've given you a lot of information to figure that out, OK. I just haven't decided to name the launch provider yet.

Caleb Henry -- Quilty Analytics -- Analyst

OK. And, I guess just one follow-up, then I'll let it go. Do you still have an arrangement with Relativity to launch spares? Or has that been replaced by this future agreement?

Matt Desch -- Director and Chief Executive Officer

We do have an arrangement still. There hasn't been terminated it provides for the ability to launch satellites in the future at our discretion. But it was never -- it offered the opportunity to launch, but didn't require a specific number of satellites to launch. And we'll still have, a spare left after.

After this launch. So, we'll see.

Caleb Henry -- Quilty Analytics -- Analyst

OK. Thanks.

Matt Desch -- Director and Chief Executive Officer

OK.

Operator

Our next question will come from Louie DiPalma with William Blair. You may now go ahead.

Louie DiPalma -- William Blair and Company -- Analyst

Good morning, Matt, Tom, and Ken. What an action-packed earnings call.

Matt Desch -- Director and Chief Executive Officer

That's -- thank you, Louie. I agree.

Louie DiPalma -- William Blair and Company -- Analyst

First, I just wanted to commend Tom for hedging the floating rate debt. And then I cover another company who was downgraded recently because of floating rate debt exposure. So that was very savvy, Tom, and your team.

Matt Desch -- Director and Chief Executive Officer

I have to pay him more if you keep that up, Louie [Inaudible] that.

Louie DiPalma -- William Blair and Company -- Analyst

Second, related to the smartphone announcement and the seven or eight questions that followed, are you looking to be exclusive with a smartphone OEM? Or, are you going to be open to several smartphone OEMs?

Matt Desch -- Director and Chief Executive Officer

That's a great question and one I can't really answer at this time. But obviously, our goal long term is to address the market as broadly as we can.

Louie DiPalma -- William Blair and Company -- Analyst

Sounds good. And in response to, I think Ric's question, you mentioned other consumer devices potentially as part of the agreement. Just broadly, is it feasible for the Iridium technology to be embedded in a device as small as a smartwatch?

Matt Desch -- Director and Chief Executive Officer

Yeah. First of all, this development agreement doesn't cover anything but smartphones, as you can read in the 8-K. But it doesn't preclude us from addressing other applications and other devices. And, well I can't say definitively because we have not tested it specifically yet.

That's still to come. But it would be the physics seemed to suggest, with the right antenna, etc. And with the integration that we see in smartwatches that, yes, our technology is -- I mean, from LEO orbit using the L-band and technology, we're aware of what would be able to address -- we should be able to address smartwatches and other very small, small applications. If it's in a smart enough chip and the rest of the components allow it, it's obviously a low data rate, you can make a connection with us.

And the nice thing is I don't have to build a new network to do it either.

Louie DiPalma -- William Blair and Company -- Analyst

Right. And in terms of the term service provider agreement, you already have service provider agreements with Garmin, ZOLEO, and other partners, such that they pay you either a wholesale rate per message, per byte, or per month. And then, the service provider actually charges their end customers, whatever economic arrangement they set, right?

Matt Desch -- Director and Chief Executive Officer

Yeah, that's right. I mean, that's, that's how we go to market. I mean, obviously as a wholesale supplier, we don't -- we really don't develop retail prices. And we don't deliver the market to end consumers.

So, we always go to market through what we call a service provider agreement. And doing so in this kind of area would require the same thing. So it's an arrangement by which how is it that we would price, what it is that we would be delivering, and on what terms? And that's just a natural evolution. We do it all the time.

We just have to do it in this case as well.

Louie DiPalma -- William Blair and Company -- Analyst

Excellent. Thanks, Matt, Tom, and Ken.

Matt Desch -- Director and Chief Executive Officer

OK. Thanks, Louie.

Tom Fitzpatrick -- Chief Financial Officer

Thanks, Louie.

Operator

Our last question will come from Chris Quilty was  Quilty Analytics. You may now go ahead.

Chris Quilty -- Quilty Analytics -- Analyst

Thanks. Matt, can you give us the first letter of the name [Inaudible]?

Matt Desch -- Director and Chief Executive Officer

Well, that was -- that's an appropriate final question anyway, Chris. Thank you.

Chris Quilty -- Quilty Analytics -- Analyst

How about the second letter? You just didn't think somebody could come up with an original way to ask the question, right?

Matt Desch -- Director and Chief Executive Officer

Yeah, you can do better.

Chris Quilty -- Quilty Analytics -- Analyst

I actually -- I did have a legitimate technology question. So one of the reasons you've been so successful integrating with Garmin and GPS devices is because of the location of your spectrum and its adjacency, yes signals, and the ability to integrate with an internal antenna. And so from a technical perspective, as you look at smartphones. You have the same ability as sort of the existing hardware, their chipsets or antennas, which are kind of the two critical components for you to work with another device? Or does a device manufacturer more likely than not have to do some significant or even minor hardware adjustments to the existing?

Matt Desch -- Director and Chief Executive Officer

Yeah, that a little -- it goes in a little bit too much detail. Chris, it was a good try though.

Chris Quilty -- Quilty Analytics -- Analyst

It is a technical question.

Matt Desch -- Director and Chief Executive Officer

It is a technical question. I would just say that this is something because as you recognize because they've been talking about this for the last three quarters or so at least. There's been a lot of work done at this point. And we feel confident that, you can make a connection -- a usable connection between smartphones and low earth orbiting satellites.

And obviously, that shouldn't be a total surprise based on a sort of a lot of others who would love to be in this market as well. And by the way, I really do expect this will not be something exclusive to Iridium. I mean, others will want to be in this market, but it's such a huge market that if you can address it in multiple ways, there are a lot of opportunities to build a new network to support this, which I don't know if that will occur. But some expect to try or even use other existing technologies.

But what I feel good about is with a truly global network and one which is a very flexible system that can be demonstrated over many years to be very adaptable. And with a sort of, the physics are really pretty good about this right now. So it obviously won't be a stock device, but, I think the changes obviously must be manageable because they look very promising.

Chris Quilty -- Quilty Analytics -- Analyst

So I'll just a couple of real quick questions. Commercial broadband and ARPUs have been marching up, but you have some mixed changes in the few products. Tom, should we generally expect the ARPU, given your expectation of product shipments to kind of trend up, or flat, or down just generically?

Tom Fitzpatrick -- Chief Financial Officer

So that's the Certus 100, right? That's going to go into commercial voice and data and that should be accretive to those ARPUs, obviously, right? Because it's more data used. So we think we think in broadband that the addition -- additional Certus and the replacement of that in a legacy product open port should be accretive to ARPUs, as well.

Matt Desch -- Director and Chief Executive Officer

A lot of movers in that whole broadband area, there are higher ARPU applications coming and like commercial aviation. And some areas that we see there are lower, lower priced products like Certus 200 that might go into lower applications that might not have ever wanted as high as our ARPUs, I think that there's a broad range of ARPUs, but obviously, as we've moved up from sort of the traditional open port, lower speed stuff to higher speed stuff that typically drives higher usage. And I think we're going to see broad-based, continued. So, I can't tell you exactly where the ARPUs will end up in that whole area because it still seems to be fairly early in that whole stage.

But we like the trends we're seeing.

Chris Quilty -- Quilty Analytics -- Analyst

And, I know this doesn't really impact revenues, but your subs, your government subs have been kind of trending down. And you mentioned the Space Force transition, do you see a resolution in that? And that being a potential driver for equipment sales looking out over the next year.

Matt Desch -- Director and Chief Executive Officer

Well, we've had a lot of positive discussions and know that it's a recognized issue. It is being worked to be addressed. It's complicated like anything within a complicated environment like the US government. But there -- they see that they want to take more advantage of the contract that they have right now and just have to make some changes to ensure the incentives and other things internally sort of support that they recognize that it does not really demand going down at all.

There are a lot of applications and there are some really big programs coming that could drive significant volumes, depending upon their success and how fast they roll out and that sort of thing. So, we're still very bullish long-term on our relationship through this contract and through, eventually another contract out in the future on sort of our core business. As well, as continued growth in broadband, and other applications as well. Big demonstration coming out sort of in Asia this summer.

I'm excited to sort of showcase the applications, it's really a broad-based set of applications that potentially support them as well as many other allied -- many of their allies and everything. So, it's still a very long-term strategic relationship, just as is showing up in subscriber numbers. But fortunately, we have the right contractual environment that really doesn't sort of affect the revenue numbers much.

Chris Quilty -- Quilty Analytics -- Analyst

And, are you still discussing a separate service contract? And is that something we should expect in the medium term?

Matt Desch -- Director and Chief Executive Officer

But, we really -- it's not a specific -- the Certus will be delivered separately through a number of partners. We've signed up now, I forget six or so, around six somewhere between five and seven of our partners who are now going after sort of a number of different broadband applications. Some of which we've already seen come through on our commercial gateway. As the government gateway, they'll be increasingly coming through the government gateway, but those will really be per terminal, per pricing kind of applications as it goes.

So you'll see government broadband revenues, I think, grow over the coming years here and add to our broadband revenues that way. But it's not going to be like a contract for a specific thing with the government. They won't it won't be directly from us. The government will go through those designated government service partners.

Chris Quilty -- Quilty Analytics -- Analyst

Gotcha. So right now, any time you do international business, it flows through your commercial line because that's where your partners operate through. So you're saying any Certus business, at least for now, the way the business is running is also known would flow through the commercial line in those partners?

Matt Desch -- Director and Chief Executive Officer

Yeah, that's correct. it goes through our commercial broadband revenue line.

Chris Quilty -- Quilty Analytics -- Analyst

And, I do have one other clarification question on the handset thing in the [Inaudible] disclosure, Tom, had it had indicated that there's some reimbursement for expenses. So are we to assume that on a PNL basis, it sort of looks like revenue goes up and R&D goes up and they offset.

Tom Fitzpatrick -- Chief Financial Officer

So are you talking about the SDA?

Chris Quilty -- Quilty Analytics -- Analyst

No, no. This is for the handset.

Matt Desch -- Director and Chief Executive Officer

The 8-K.

Chris Quilty -- Quilty Analytics -- Analyst

The 8-K?

Tom Fitzpatrick -- Chief Financial Officer

Yeah. So that's going to be that will be in engineering and support revenues and engineering and support costs, so, OK. That's the line that they are the lines that will be affected by what the 8-K references.

Chris Quilty -- Quilty Analytics -- Analyst

Understand. OK. Great. Appreciate the color and congrats on a great quarter.

Matt Desch -- Director and Chief Executive Officer

Sure. Thanks, Chris. Appreciate it.

Operator

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

Matt Desch -- Director and Chief Executive Officer

Well, it has been an action-packed quarter. I appreciate that. So it's great to be in a good environment. We really are enjoying some strong demand and love the opportunities we're working on.

And we'll keep you updated on the progress of those accelerators as we've described them as. And appreciate you being on the call and see in the third quarter. Thanks.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ken Levy -- Vice President, Investor Relations

Matt Desch -- Director and Chief Executive Officer

Tom Fitzpatrick -- Chief Financial Officer

Ric Prentiss -- Raymond James -- Analyst

Landon Park -- Morgan Stanley -- Analyst

Walter Piecyk -- LightShed Partners -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Greg Burns -- Sidoti and Company -- Analyst

Caleb Henry -- Quilty Analytics -- Analyst

Louie DiPalma -- William Blair and Company -- Analyst

Chris Quilty -- Quilty Analytics -- Analyst

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