by Matt Desch, chairman and CEO
2008: Despite worldwide economic uncertainty, 2008 has been a banner year for Iridium, marked by strong market demand, growth in revenues and subscribers, and the launch of several innovative products and services. A number of new strategic partnerships as well as recent certifications and regulatory approvals are opening new market opportunities. Iridium also announced a financial transaction that will help to secure its long-term path forward, and weve made major strides in the development of our next-generation satellite constellation. We believe that this level of success is a testament to Iridiums position as a global communications services provider and reliable, critical lifeline. Our companys unique status as the only provider of truly global voice and data communications continues to be a differentiating factor when it comes to growth in the mobile satellite services (MSS) market.
Iridiums ongoing leadership in this space is demonstrated by its momentum in a series of corporate developments over the last several months. At the time of this filing, mid-year performance numbers show that we have solidified our position as the fastest-growing voice and data MSS company. For six consecutive quarters, Iridium has posted double-digit increases in all major metrics revenue, earnings, and subscriber gains. This year, we benefited from strong usage in our key vertical markets as well as increased demand from enterprise organizations that depend on Iridium for global communications. Iridiums revenues grew 22 percent in the first half of this year over last year. Our subscribers increased 38 percent to more than 280,000 in the first half compared to last year. These gains spanned all geographic boundaries. Our usage has really grown in 2008 as well, and we havent seen a falloff in recent months. In the first half for example, voice traffic in Asia was up 82 percent, in North America 50 percent and in Europe it was up 45 percent.
The maritime industry has always been a primary market for Iridium and represents approximately 40 percent of our total commercial traffic. In an effort to further serve this important market, we launched a new enhanced bandwidth maritime satcom system this year, Iridium OpenPort. The new terminal is unique in that it provides multiple phone circuits, IP connections, and scalable data speeds with low equipment and airtime costs as well as being packaged with Iridiums global coverage and unmatched network quality. Iridium OpenPort supplies an unbeatable combination for the marine satcom market. In fact, the installed cost of an Iridium OpenPort terminal is much lower than competing marine satcom systems. Our per-megabyte prices for data are also substantially lower than other services on the market today. Customer return on investment can now be measured in months rather than years.
In conjunction with our new maritime satcom system, weve also launched a new crew-calling service, Iridium GoChat. This low-cost, high-value, prepaid crew-calling plan eliminates off-peak value pricing in favor of a single around-the-clock standard per-minute rate using larger denomination prepaid cards with progressive discounts. Iridium GoChat has proven to be very appealing to shipowners and managers who are facing the rising costs of attracting and retaining the shrinking number of qualified seagoing crew members. The Iridium GoChat program provides an important contribution to crew welfare and job satisfaction by making it easy for them to keep in touch with family and friends while at sea.
Since the creation of the Global Maritime Distress and Safety System (GMDSS) more than 20 years ago, Inmarsat has been the only mobile satellite provider certified to supply safety communication services. However, the International Maritime Organization (IMO) recently opened the way for other MSS providers to become certified for GMDSS communications. This process was driven largely by ship operators, concerned about the lack of competition in the marketplace, and by member states bordering on Arctic waters, which are beyond the footprint of Inmarsats geostationary satellites.
Increasingly, the eyes of the shipping industry are turning toward the Arctic as new sea lanes open in the far north. Iridium welcomes these IMO decisions, which will introduce an element of competition into the marketplace and also make an important contribution to safety at sea by providing GMDSS satellite coverage for the first time to ships operating in Region A4 (Polar Regions above approximately 70° latitude). Only Iridium can provide complete universal coverage over all GMDSS Regions with a single low-cost shipboard terminal to meet both the voice and data requirements of the GMDSS. We are currently moving forward as quickly as possible to achieve full GMDSS compliance and offer GMDSS-compliant ship terminals to the marine market as soon as the International Convention for the Safety of Life at Sea (SOLAS Convention) IV amendments come into force July 1, 2009.
Iridium actually had two exciting developments in maritime safety services this year. The IMO also adopted amended regulations to Chapter V of the SOLAS Convention requirements for the long-range identification and tracking (LRIT) of ships. The new rules will apply to all vessels of 300 gross tonnage and above on international voyages, including passenger ships, cargo ships, high-speed craft and mobile offshore drilling units, and will require global position reporting by these ships while at sea at regular intervals.
LRIT systems must be in operation by January 1, 2009 for all Sea Areas except Sea Area A4, and then by July 1, 2009 for Sea Area A4. Iridium meets or exceeds all IMO Maritime Safety Committee requirements for serving as a communications service provider for ships to transmit LRIT information, ensuring that every location on the globe is covered by one or more satellites at all times, including the open oceans and both poles. We are currently working with companies such as Transas Telematics, Collecte Localisation Satellites (CLS) and Pole Star Space Applications; in addition, a number of Iridium value-added manufacturers are submitting dedicated Iridium LRIT devices based upon the 9601 SBD modem for certification.
The scope of the Company's aeronautical services was changed after Iridium was certified to supply a service similar to GMDSS for aircraft. Until recently, only Inmarsat was approved for satellite safety communication services on commercial aircraft engaged in transoceanic flights. Earlier this year, the International Civil Aviation Organization (ICAO) Council approved standards and recommended practices that will permit Iridium to provide Aeronautical Mobile Satellite (Route) Services (AMS(R)S) for commercial aircraft on long-haul routes, many of which fly over the Polar Regions. The ICAO decision means that member states can now approve Iridium satellite equipment to meet the international requirements for communications on transoceanic flights. The initial certification trials began in the first quarter of this year.
The ICAO AMS(R)S approval opens a significant new market for Iridium in the international commercial aviation sector. Our dramatic double-digit growth in the aeronautical marketplace over the last few years has been largely driven by the business jet and helicopter sectors, but, as a result of the ICAO decision, we are seeing rapid adoption among popular long-haul commercial carriers this year. Iridium is the only MSS that provides ubiquitous reliable coverage over Polar Regions, which are used by aircraft on international flights. Iridiums lightweight, low-drag aeronautical satellite terminals are less costly to install and maintain than those needed for geostationary satellite systems.
The machine-to-machine (M2M) sector, which includes remote tracking, monitoring and sensing, is one of the worlds fastest-growing technology sectors. The tracking and monitoring of goods and resources as they are shipped all over the planet has become an important requirement of modern-day enterprise. Unfortunately, the existing GSM infrastructure is insufficient if constant, near-real-time updates are desired. This is particularly true over our oceans and airways.
Iridium is an attractive alternative that our value-added developers and manufacturers are exploiting as a means to bridge these gaps in coverage. Iridiums M2M data revenue grew 92 percent in the second quarter of this year while subscribers grew 154 percent, making Iridium an increasingly important player in this nascent market. In fact, we were named to M2M Magazines Top 100 list for the second consecutive year. These accomplishments are the result of strong relationships with key partners operating in this space. The breadth and variety of applications that are using our data services is rather astounding. Currently, the Iridium system is being used for everything from monitoring and warning of impending tsunamis, to aiding law enforcement in tracking stolen rental vehicles and construction equipment, to studying lion populations in Tanzania, and even monitoring wind farm operations. We are the real-time, reliable, low-latency satellite player in this fast growing space that still is in its infancy.
This year, Iridium expanded its base in the U.S. defense sector and government markets. For example, in addition to renewing our U.S. Department of Defense (DoD) Enhanced MSS contract, we are continuing to develop the Netted Iridium push-to-talk voice and data service funded under the DoD Distributed Tactical Communications Service (DTCS) program. DTCS is supported by the U.S. Navy and is designed to deliver enhanced Iridium voice and data services in support of Over the Horizon (OTH) tactical communication requirements. Were also seeing strong take-up starting to happen in DoD M2M applications.
Iridium also launched the new 9555 handset in October. It has been several years since the debut of the earlier model, the 9505A, which is the Company's smallest and lightest, yet most powerful handset ever developed. The innovative, all-new design of the 9555 is 30 percent smaller than previous models and offers a more hand-friendly form factor. With an intuitive user interface, the new phone features an internally stored antenna, enhanced short messaging service, mini USB data port, integrated speakerphone, a brighter screen, plus email capabilities. Both water- and shock-resistant, the 9555 is engineered to withstand and perform well in the worlds most rugged, remote and industrial environments. This new phone is yet another example of our continuing investment in our products, services and infrastructure. Weve seen good growth in the handset market over the last year, and with the 9555, we expect that to continue.
The public safety sector is another of Iridium's primary handset markets. First responders in North America had a particularly challenging year in 2008 with fires on the West Coast, floods in the Midwest, and several Gulf Coast hurricanes all this in addition to deadly cyclones in Myanmar, multiple instances of severe flooding across the globe and massive earthquakes in China, Japan, the Congo, and Eastern Europe. The 9555 is, by far, the phone that first responders will want to have on hand for backup emergency communications in case of natural or man-made disasters. Iridium phones are the only handsets that can be used in absolutely any location, in any condition, instead of cellular, landline or radio services that can become inoperable when towers go down or telecommunications infrastructure is compromised. Preorders are already pouring in from our service providers many of whom heavily serve municipalities as well as law enforcement and emergency services agencies.
A white paper released this year from Futron Corporation, which provides research and analysis for the aerospace and telecommunications industries, titled Mobile Satellite Services: Status Check for First Responders, evaluated satellite communications service options. The evaluation was based upon a range of dimensions such as cost, voice service, data service, interoperability, global coverage, asset tracking, support, and other factors. Across the board, Iridium fared far better than any competitor and the new 9555 adds to this list of positives increased portability and ease of use.
This past year, Iridium also made an effort to connect with this important market and express our appreciation for all that they do. In the first quarter of 2008, we launched the Trade-Up to Iridium program, a rebate promotion that provided pricing incentives for North American customers switching from competing MSS providers to Iridium. In recognition of the important contributions that first responders make to all our lives, Iridium donated $5 for every used satellite phone turned in under the Trade-Up to Iridium program to the Association of Public-Safety Communications Officials (APCO) International Silent Key Scholarship Fund. The scholarship provides current and future public-safety communications professionals with training and educational opportunities in honor of deceased APCO International members. In just nine months, the program yielded more than 4,700 new activations and more than $23,000 for APCO.
The FCC has recently changed the L-Band Spectrum Allocation, how does this affect Iridium services?
The L-band Spectrum Allocation by the FCC resulted in a license-modification order on October 15th giving Iridium exclusive access to 1.525 MHz of previously shared spectrum, and shared access to an additional 0.95 MHz. Under this ruling, Iridium is authorized to operate in the 1617.775-1618.725 MHz frequency band, and on a shared basis in the 1618.725-1626.5 MHz band. The FCC Order of Modifications confirms the spectrum sharing plan adopted by the Commission in November 2007. The FCC order specifically states that the license modifications apply globally, and not just in the U.S. This ruling gives Iridium long-term secure access to additional spectrum to meet its continuing rapid growth in traffic.
Regarding Iridium's current satellite constellation, independent studies have confirmed the constellation is in great shape, with a number of in-orbit spares, and expect this system will continue to operate at 100 percent through the launch of NEXT, in about 2014. For example, Frost & Sullivan, an independent research and consulting firm, ran two network quality analyses. The 2007 analysis revealed that while only 36.2 percent of a competitors calls were successfully connected and completed without being dropped during a three-minute period, more than 98 percent of those calls placed on the Iridium network were successfully connected and completed. 2008 results found a major North American competitors rate of connectivity to be just 26.7 percent, but calls placed using the Iridium network were connected and completed three and one-half times as often. These results clearly show that the Iridium network is the go to service for critical, time-sensitive applications, particularly for disaster recovery and public safety officials. That is why we continue to offer the Iridium Network Quality Guarantee to all of our new voice service customers.
2009: As far as the near future for the Company is concerned, last August, we selected two companies, Lockheed Martin and Thales Alenia Space, to participate in the final phase of the procurement process for Iridium NEXT, our next generation satellite constellation. We chose them on the basis of their initial, innovative constellation design concepts; demonstrated understanding of performance requirements and capabilities; and preliminary cost estimates for the manufacture and launch of Iridium NEXT. The final phase will last approximately nine months and we expect to award a full-scale development contract for Iridium NEXT with one prime contractor by the middle of 2009.
Through Iridium NEXT, we will offer a flexible array of new services in addition to continuing our current scope and high-level of service. Iridium NEXT will maintain the companys unique and advanced cross-linked satellite architecture. It will feature an IP-based architecture, leveraging broad-based technology enhancements from the industry, and will be 100 percent backward compatible with all existing satellite phone and data products currently in service.
There has also been significant interest within the industry for Iridium to host secondary payloads and, as such, we are working on a number of opportunities that we expect to come to fruition in the near future. Having one or more secondary payload partners in place could afford Iridium the opportunity to substantially offset the infrastructure cost of NEXT and deliver new revenue streams. Secondary payloads will also broaden the scope of the networks capabilities while providing an additional platform for applications such as sensing, Earth observation, and command and control.
Secondary payloads will help, but how is Iridium planning on funding the rest of the development costs for NEXT?
As far as funding the remainder of the development costs for NEXT, last September, we announced Iridium had signed a definitive agreement to combine with GHL Acquisition Corporation, a special-purpose acquisition company sponsored by Greenhill & Co., Inc. The proceeds of the transaction will enable Iridium to be debt free and provide significant new equity for the future. Coupled with our strong cash-flow position, it will provide key financial underpinning for developing and deploying our next-generation satellite network.
We are in the process of filing for regulatory approvals in relation to this merger and expect it to be finalized by mid-2009. The deal will make Iridium a publicly-traded company and will provide the resources to help facilitate the deployment of Iridium NEXT. We are focusing on serving new markets in addition to our important existing customer base as we build NEXT. We also remain dedicated to maintaining and advancing our position as the fastest-growing and best provider of global, reliable and critical MSS services.
About the author Matt Desch has more than 27 years of experience in telecommunications management, and more than 16 years in the global wireless business. Desch joined the company in 2006 as chairman and CEO of Iridium, and CEO of the parent company, Iridium Holdings LLC. Previously, he was CEO of Telcordia Technologies, a telecom software services provider. He spent 13 years at Nortel Networks, and before leaving in early 2000, was president for its fast-growing Wireless Networks business and was responsible for its global carrier customers in Europe, the Middle East, Asia and Latin America. Desch has served on a number of boards including SAIC, Inc., Flarion Technologies, Starent Networks and as the chairman of Airspan Networks. He has a Bachelor of Science in computer science from The Ohio State University and a Master of Business Administration from the University of Chicago.
About the company Based in Bethesda, Maryland, U.S.A., Iridium Satellite LLC, a privately held company, offers complete coverage of the entire Earth including oceans, airways and even Polar Regions. Iridium's constellation consists of 66 low-earth orbiting (LEO), cross-linked satellites operating as a fully meshed network and supported by multiple in-orbit spares. It is the largest commercial satellite constellation in the world. Iridium provides service to subscribers from the U.S. Department of Defense (DoD), as well as other civil and government agencies around the world. The company also designs, builds and sells its products, solutions and services through a worldwide network of more than 150 partners. Iridium manages several operations centers including those in Tempe, Arizona and Leesburg, Virginia, U.S.A. In addition, through its own gateway in Hawaii, the U.S. DoD relies on Iridium for global communications capabilities.