Q2 2024 Iridium Communications Inc Earnings Call
Participants
Kenneth Levy; Investor Relations; Iridium Communications Inc
Matthew Desch; Chief Executive Officer, Director; Iridium Communications Inc
Thomas J. Fitzpatrick; Chief Financial Officer and Chief Administrative Officer; Iridium Communications Inc
Ric Prentiss; Analyst; Raymond James & Associates, Inc.
Simon Flannery Flannery; Analyst; Morgan Stanley
Hamed Khorsand Khorsand; Analyst; BWS Financial
Chris Quilty; Analyst; Quilty Space
Mathieu Robilliard; Analyst; Barclays
Bryce Sandberg; Analyst; William Blair & Company
Presentation
Operator
Good morning, and welcome to the Iridium second quarter 2024 earnings conference call. (Operator Instructions) Please note this event is being recorded. I'd now like to turn the conference over to, Kenneth B. Levy, Vice President of Investor Relations. Please go ahead.
Kenneth Levy
Thanks, Drew. Good morning, and welcome to Iridium's second quarter 2024 earnings call. Joining me on the call this morning are CEO, Matt Desch; and our CFO, Tom Fitzpatrick. Today's call begin with a discussion of our second quarter results, followed by Q&A.
I trust, you've had the opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website.
Before 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 for 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 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 and the Investor Relations section of our website for further explanation of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP measures.
With that, let me turn things over to Matt.
Matthew Desch
Thanks, Ken. Good morning, everyone. As you saw in our earnings release this morning, we delivered another good quarter of revenue and subscriber growth and remain on track for our full year guidance. Our unique network and service continue to attract new customers and drive service revenue, allowing us to keep returning capital to shareholders.
We're also investing in our future with R&D and new partnerships to broaden our device and service lines and remain very confident in our competitive position and market offerings going forward.
We continue to believe that Iridium's growth in free cash flow generation, validate our strategy and make our shares at an attractive investment opportunity, especially at current market valuations.
The passage of time, will demonstrate the durability and strength of our business and provide investors more appreciation of Iridium's unique position in the satellite industry, particularly as service revenue growth accelerates and our progress in the emerging DTT and standard base IoT arena gets more attention.
Our global reach and specialized safety services will continue to be differentiators and allow us to achieve our long term guidance to 2030 and beyond.
Iridium's unique service offering is not a commodity, and our performance in the coming years will demonstrate to investors that we are very different from the (inaudible) companies that they continue to compare us to.
As I noted during our April call, we completed our first company acquisition with (inaudible) in the second quarter. And the integration with other parts of our business is going very well. This acquisition now makes Iridium the market leader in alternative [PNT] and we're excited about the business opportunities this new offering provides, especially given the growing threat to GPS signals around the world that support critical data and infrastructure.
Since our entry into PNT with us Satellite deal, we've already expanded that footprint or the service to Europe and Asia to allow our partners to more easily address opportunities with their customers for secure PNT and data centers, maritime, in-building wireless and other market areas.
I don't think investors completely understand the potential of our satellite-based time and location service yet, as there are many real competitors to us in this space and coverage of the growing threat to GPS or more frequent and conflict areas, which may seem quite distant at this time to consumers.
Our STL service solves a lot of important use cases as it uses our powerful paging channel to offer a secure position, navigation and timing signal that is 1,000 times stronger than GPS. This service has growing relevance beyond conflict areas as jamming and location spoofing become more prevalent. Our STL offering adds redundancy and protection to critical infrastructure and even in building networks.
We especially like the fact that Iridium's STL is a wide area broadcast service that supports an unlimited number of users while using minimal network resources. On the engineering support front, we continue to see our work and revenues expand with the US-based Development Agency as our team, along with General Dynamics Mission system builds the ground infrastructure to support the FDA's new LEO network.
That constellation should start launching in earnest later this year and into 2025. Our scope of work on this multi-year project has expanded over the past year, and we expect it to drive record engineering support revenue in 2024, all while continuing to expand the capability of our satellite operations team and give us great insight into cutting-edge LEO technologies to help inform our future plants.
In the second quarter, we also announced a new contract with US government to continue to secure and support the long-standing private network that we maintain in partnership with them, which many of you know as the EMSS program.
This new five-year contract expands our relationship with the Space Force and will produce greater than 50% more revenue than the previous support contract. That's more than $90 million in revenue to Iridium over five years.
This contract term also straddles the current EMSS contract and a successor contract we expect with the US government. On that front, we are starting to plan for those initial conversations and what we expect to be a favorable renewal at the end of the current contract term.
Moving to our capital market activities. Many of you saw that we completed the repricing of our term loan last month, which will save Iridium about $4 million in annual interest expense on a go-forward basis. The transaction underscores the support we have from credit investors and the durability with which they view our business and cash flows into the future.
Let me be clear, we share their optimism. We think our equity is undervalued in light of how we believe our business and our cash flow will continue to grow. As a result, we've been more aggressive with our share buyback activities.
You'll see we drew on our revolver in the second quarter to help repurchased 3% more of our outstanding shares during the quarter, and we expect this activity to continue. Tom will share more details on this activity shortly. I want to also highlight that we increased our quarterly dividend with June payments to $0.14 per share.
This increase reflects our confidence in Iridium's ability to grow free cash flow well into the next decade and will result in a 6% increase to our dividend for the full year. Overall, our business is performing well and we remain on track for our full year guidance for our full year forecast.
The quality, resilience and reach Iridium's network remains strong selling points to partners and their customers. We continue to add new commercial and government partners and deliver more services to our global network of resellers.
We've already certified a record 39 new partner devices just in the first half of this year, which matches 2023 full year total.
I think this shows the pace of investment that's taking place around our network by ratings partners, which will only add to our growth. Our business partners understand Iridium's differentiated service and reliability as well as the performance of our network services.
They're excited about our new IoT technology coming to market and how it will expand their applications. They are particularly looking forward to the prospects were even lower cost and user devices based on 3GPP standard narrowband IoT services, which we're developing to our project startups program.
While 2024, is a bit of a transition year for Iridium, I feel very good about our strong market position and growing opportunities as well as the investments we are now making. The align well with our unique brand position and extend the utility of our differentiated services to a broader set of industries and users. With that, I'll turn the call over to Tom for review of our financials. Tom?
Thomas J. Fitzpatrick
Thanks, Matt, and good morning, everyone. I'd like to start my remarks by summarizing our key financial metrics for the second quarter and providing some color on the trends we're seeing across the business. Then I'll recap the 2024 guidance, which we affirmed this morning and close with the review of our liquidity position and capital structure.
Iridium continued to execute on its annual plan, delivering 5% service revenue growth in the second quarter and generating strong subscriber growth with net additions of 80,000. Operational EBITDA was $114 million in the second quarter, with growth from commercial service revenue and engineering and support largely compensate for equipment sales returning to more normalized levels.
In our commercial business, service revenue was up 6% this quarter to $126 million, with the increase, reflecting continued strength in IoT. Voice and data revenue rose 3% from last year's comparable quarter to $56.5 million.
The increase was driven by subscriber growth as demand for Iridium's push to talk services remained healthy. Commercial IoT continued to benefit from demand for personal satellite communications as well as traditional industrial services.
Revenue rose 20% in the prior year quarter to $41.6 million in part reflecting the new two year contract we signed earlier this year with a large, fast growing partner. As I discussed during our April call, this new contract has the effect of materially increasing revenue from this customer in 2024 compared to 2023, which surpassed the tailwind to IoT to ARPU for the quarter in the first half of the year.
Revenue and commercial broadband fell 4% from the year-ago period to $13.5 million, even as we grew sales by 4% from the year-ago period. As we've previously noted, we're forecasting a reduction in broadband ARPU this (inaudible) related to vessels where Iridium was being used as a primary communications device.
During the quarter, we added 83,000 net new commercial subscribers. Commercial IoT data subscribers now represent 81% of billable commercial subscribers, up from 79% in the year-ago period. Hosting and other data service revenue was $14.4 million this quarter, down 4% from last year's comparable quarter.
As we've discussed previously, the decline from the year-ago quarter reflects lower revenue recognition from extending the useful life of our satellites.
The extension of the useful life has no bearing on cash flow and only impacts the time of for which we recognize revenues from the associated fixed price hosting contracts. As Matt noted, in the second quarter, we also started to recognize retail revenue from Meridian STL, the time and location business we acquired in the Satelles transaction that closed on April 1.
We see a tremendous revenue opportunity and broadening the base, the ability of Iridium's alternative position, navigation and timing service and believe it will generate over $100 million in annual service revenue by 2030.
Government Service revenue was stable during the quarter at $26.5 million, reflecting the terms of our EMSS contract with the US government. Subscriber equipment was $22.8 million in the second quarter and continues to return to more normalized levels following two years of heightened demand (inaudible) to supply chain constraints and customer inventory buildup.
Engineering and support revenue was $25.8 million in the second quarter as compared to $20.6 million in the prior year period. The rise reflects growing activity with the US government and increasing scope of work with a Space Development Agency.
As Matt noted, Iridium was also awarded an upsized contract with the government earlier this year to support maintenance and engineering work when our EMSS contract through 2029. In light of our second quarter results, we are affirming our full year guidance on service revenue and OEBITDA to (inaudible) financial models as we look to the second half of 2024, I would like to highlight some trends that provide contacts and to put our outlook.
We continue to expect service revenue growth of between 4% and 6%, primarily driven by momentum in commercial IoT. 2024 IoT revenue growth in the mid-teens represents an increase in the growth rate compared to both 2022 and 2023.
The Satelles acquisition, which we completed in April, will be additive to the service revenue growth, but the impact is expected to be limited this year at less than 100 basis points to our full year forecast. Revenue from EMSS contract with the US government will rise in the second half of the year, with the contractual step up in mid-September.
Full year revenue in our government business will be $106.3 million in 2024. As we previously discussed, equipment sales will moderate this year. We saw this moderation begin in the second half of 2023, which will make year-over-year comparisons easier as we move to the second half of 2024.
On the expense side of the ledger, our R&D will remain higher this year, up about $5 million as we make progress on our standard space initiatives to support narrowband IoT and directed device.
We had initially expected that SG&A would be in line with 2023 for the full year 2024. We now expect SG&A will be up about 15% in 2024 over last year. This change gives effect to the Satelles acquisition, which was not contemplated in our original guide. And to a reclassification of certain expenses from cost of service as originally modeled to SG&A.
This classification does not change our OEBITDA outlook as the increased SG&A is offset by lower cost of services than was originally modeled. Depreciation and amortization will be significantly lower than a year ago, as a result of the change in our satellite useful life. We would advise modeling 2024 D&A close to $200 million. Iridium still expect cash taxes of less than $10 million through 2026.
Lastly, on interest expense, I would highlight that we increase outstanding debt under the term loan, which we used for this to tell us acquisition and drew on our revolving facility in the second quarter. Iridium also repriced its term loan in the second quarter, which reduced the spread paid on the credit facility by 25 basis points to so for plus [225]
The repricing transaction, we'll say $4 million in annual interest expense. However, for 2024 the additional interest on the new borrowings will outpace the lower facility rate. Based upon the current outstanding term loan and prevailing interest rate, we expect interest expense to total about $86 million in 2024.
Taken together, this outlook allows us to reiterate our forecast for service revenue growth between 4% and 6% and operational EBITDA between $460 million and $470 million this year. Moving to our capital position. As of June 30, Iridium had a cash and cash equivalents balance of $63.5 million.
During the second quarter, we utilized cash from an upsize term loan to complete the acquisition of Satelles which closed on April 1. As of June 30, Iridium's term loan balance was $1.62 billion. We ended the quarter with net leverage of approximately 3.5 times to OEBITDA.
With our earnings update today, I would note that we have updated our interim guidance for net leverage to provide additional capacity for share repurchases in light of recent trading levels. We believe that Iridium stock is undervalued today and represents a compelling value at current levels.
In fact, during the second quarter, we drew $50 million on our revolver to facilitate additional open market purchases. While we had guided to net leverage of below 2.5 times OEBITDA. As a 2026 exit rate, we are increasing net leverage guidance to below 4 times OEBITDA through 2026.
This update reflects our plans to raise additional debt to facilitate increased share repurchases in the near term. We continue to forecast. Iridium's net leverage will fall below 2 times OEBITDA by the end of 2030. The rate at which we expect Iridium to naturally de-lever makes us very comfortable with this long term guide, notwithstanding the projected uptake and leverage in the near term.
In the second quarter of 2024, Iridium retired approximately 3.3 million shares of common stock at an average price of $29.25. This activity leaves Iridium with an outstanding balance of $180.8 million under our Board approved authorization through December 31, 2025. As I've noted, we believe that Iridium's equity offers a compelling investment opportunity at current levels. We will continue to execute on our buyback program, balancing the desire to maximize return on investment with our long-term objective for deleveraging.
During the second quarter, we made a quarterly dividend payment of $0.14 per share paid on June 28. This was up from $0.13 in the first quarter and will result in a full year increase of approximately 6% to Iridium's annual dividend from 2023.
Between our dividend program, which started in 2023 and the commencement of our share repurchases, Iridium has already returned more than $900 million to shareholders capital expenditures in the second quarter were $12.4 million. We expect capital expenditures to reach close to $70 million in 2024 as we invest in new product development initiatives like project Stardust. Thereafter, it will trend below $60 million in the latter part of the decade to average $60 million annually during the period from 2023 through 2030.
Turning to our pro forma free cash flow. If we use the midpoint of our 2024 OEBITDA guidance and backlog, $86 million in net interest pro forma for our current debt structure, approximately $69 million in CapEx for this year, $5 million in cash taxes and $6 million of working capital, inclusive of the appropriate hosted payload adjustment we're projecting pro forma free cash flow of approximately [$299 million] for 2024.
These metrics would represent a conversion rate of OEBITDA to free cash flow of 64% in 2024 and a yield of close to 10%.
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. Iridium continues to execute well on this year's plan, and we see meaningful growth ahead to support free cash flow generation and service revenue expansion.
We remain comfortable with our long-term guidance for $1 billion in service revenue by 2030 and our capacity to return $3 billion to shareholders from 2023 through the end of the decade.
With that, I'll turn things back to the operator and look forward to your questions.
Question and Answer Session
Operator
We will now begin the question and answer session. (Operator Instructions)
Ric Prentiss, Raymond James.
Ric Prentiss
Thanks. Morning, everybody. A couple of questions. First on the service revenue guidance, maintaining at 4% to 6% year-over-year increase, I think last quarter that you thought you might be heading to the higher end of the service revenue guidance. Any update from what you were thinking last quarter to what you're thinking this quarter for us in that range?
Thomas J. Fitzpatrick
Not really Rick. What I'd say, Telus was not contemplated in our original guide. So as much as we did the acquisition, it represented kind of goodness to that original guide, but we sized it at less than 100 basis points. So we kind of were in a similar circumstance as to where we were last quarter.
What I would say is we're very comfortable reiterating the original guide of [46] and more importantly in reiterating the 1 billion service revenue guide for 2030.
Ric Prentiss
Perfect. Obviously taking the leverage up see opportunity in your stock price. Is there something that goes on when leverage is above 3.5%, but less than 4% kind of on what happens with the debt or prepayments or cash sweeps. It was written through the 10-Q a little bit there?
Thomas J. Fitzpatrick
Not between 3.5% and 4%. And when you get over 4%, there's certain things happened there and when you get over 4%, they're manageable. But we just like we just like keeping it inside of 4 times. And that provides a lot of capacity for additional share repurchases.
Ric Prentiss
Okay. And last one for me is on the IoT. You did have that ARPU increase. You called it out a little bit in your prepared remarks. But talk to us a little bit about that competitive positioning of those IoT devices versus what's going on with direct device of other operators out there and should that ARPU trend upward and net adds. Just trying to think the competitive dynamics on that particular line item?
Matthew Desch
Well, in terms of competitive aspects, I mean, one of the reasons is trending upwards is that we're introducing new devices into the market that offer higher speeds, more capabilities, the ability to send and in consumer devices, pictures and voice snippets and things like that. And we think that that will help in terms of driving some ARPU in those kind of products.
But in addition, I mean, we really have a strong competitive advantage over everyone in IoT because we're a global service of day one. I mean, the other activities people have are either typically nonreal time or they are regional. We're expecting, for example, we don't really compete with cellular IoT. We supplement and we supported, but it only covers the low-teens part of the world.
And even with supplemental coverage from space coming that only adds a couple of points to sort of the IoT footprint. So we're expecting still to have an important kind of global role for that. And then you add on top of that, that we've been in service for many, many years in IoT and have hundreds of partners and potentially thousands of solutions out there today that are deeply embedded in all kinds of industries and expanding into more industries.
So we're real comfortable with our position in IoT. And in fact, it's that's even a particular strength right now in our results and what we're looking at going forward.
Ric Prentiss
As far as getting into to do yourself still a couple of years to get kind of designed through the standards body 3GPP. How should we think about kind of the cost and then the revenue curve of that effort?
Matthew Desch
Well, again, I think it will continue to add and support the growth that we're continuing to have as we're able to as we're able to add more use cases and lower the cost of our products. I mean we have plans to lower the cost of our products dramatically even before standard and then kind of seamlessly go into standards environments, which would allow consumer well would allow terrestrial devices that have already been sold in places to roam onto our network, which would then add kind of new revenue streams to us.
The development of start-ups is going very well we've selected a lot of our partners' development has occurred. We've already seen some sort of demonstrations of have narrowband IoT across our across our unique way form we well embedded into standard processes and discussions with chip vendors and all that sort of thing.
So we've gotten off to a great start on Stardust. It will be a couple of years before. I think it adds considerably, but nothing is going to decline in the meantime, and I think it's just added juice to our growth rate.
Thomas J. Fitzpatrick
Thanks, guys.
Matthew Desch
Thank you.
Operator
Simon Flannery, Morgan Stanley.
Simon Flannery Flannery
Great. Thank you very much. Good morning. If I could just come back to the leverage point it's a pretty significant increase out from the [3.5% to 4%]. And I understand that your stock is attractive one.
Is there anything else going into this? I think you confirm the CapEx guidance, but any other changes or is this all essentially on keeping leverage higher to return more capital to shareholders? And just what was the decision to you go to up 1.5 turns rather than, say keep it in that [3.5] or whatever I had. How do you balance that? And have you come up with this ratio?
Thomas J. Fitzpatrick
Good morning, Simon. So yes, the additional leverage is it exclusively to repurchase more shares. I would say the thinking is an evaluation of our circumstance competitively in the commitment to the $1 billion in service revenue. We think that's we've done a thorough review and think that the stock is undervalued and taken it up to just inside of 4 times OEBITDA and there's as I said, there's no implications on the credit facilities, just a little bit of additional interest.
And we can then --
Simon Flannery Flannery
You won't go over 4 times I think?
Thomas J. Fitzpatrick
We're going to stay inside of 4 times, but that's we think about the amount of capacity that frees up for share repurchases, you know, it's hard to imagine that we'd be less than $500 million in OEBITDA in 2026. So at a turning point, if you're talking about three-quarters of $1 billion in capacity for share repurchases on a company with a $3 billion market cap. So that's significant and we think it's appropriate at these trading levels.
Simon Flannery Flannery
Great. And then on commercial broadband, I think you sort of talked about this is going as expected, given some of the primary to complementary. Can you just help tell us what inning are we in on this ARPUs down $269 or we are near the bottom of this sort rate of percentage decline are a couple of more quarters before we can sort of say, we're seeing some sort of easing of that pressure?
Matthew Desch
Which sport do you want to use, baseball or I guess it was baseball? I think we're in the latter part of the game here, you know, maybe third or fourth quarter. I don't know what sport you like, but it definitely feels like we're mostly through a lot of that kind of get into the environment (technical difficulty)
I think the predominant use these days (technical difficulty) companion service and the development is going very well and is on track for and adding GMDSS to our broadband service. So that one terminal can really do all the safety as well as companion aspects, which we think is a real dynamite product. So I think we're really well positioned to sort of continue our broadband business there.
Simon Flannery Flannery
And where should that ARPU settle out in that kind of mid-200s
Thomas J. Fitzpatrick
I think that's fair.
Matthew Desch
I think that's about right.
Simon Flannery Flannery
And then just one last one. You talked about the $90 million in incremental revenue over the next five years from the US government, how does that flow through the next several years?
Matthew Desch
It's pretty.
Thomas J. Fitzpatrick
It's an engineering and support, Simon.
Matthew Desch
Yes, it's pretty flat. The previous contract, as we said was of lower than that, and it's pretty flat Europe each year. This went obviously stepped it up roughly 50% or so. So that will just be an increase over the next five years.
Simon Flannery Flannery
When does that start when's the first quarter, you got the step-up?
Matthew Desch
I think a little bit comes in this year and then into next year, it's sort of a full year effect. It's not a huge effect, but it's all positive and one of the many positive things.
Simon Flannery Flannery
Yeah. Appreciate it. All right, thanks a lot.
Matthew Desch
Thanks, Simon.
Operator
Walter Piecyk, LightShed.
Hi, guys. This is Joe on for what Walter. You stated maritime in terms of the area that's being impacted by or that's impacting broadband. Is there anything are there any other verticals that are at risk? So maybe you can describe a little bit what's going on in those other verticals in the broadband market?
Matthew Desch
Well, I mean, the two other main ones that -- well three, I guess you could say would be land, mobile, aviation and government. Governments still in the early days, and we're in the emergency or contingency anyway. They're in their PACE model of primary alternate contingency emergency, and we're still well positioned there.
Where mobile has been a small business for us is sort of an alternative for things like trains or remote assets. And we think that kind of it's been a niche. It hasn't really been impacted per se, but it's a small business overall for us that we think will, again of fit in and we're always a bit more in the alternative category.
And then aviation that's a safety business for us. That's where we're in the cockpit of airplanes. That work is completing right now and we're seeing the first sort of broadband terminals go out on helicopters and corporate jets and into commercial airliners will see that accelerate into the coming years as final safety sort of certifications come later this year and into next year for that and so that's an area where we have a unique position. There's really few that can do that.
And that isn't it sort of a service that a lower cost Ku-band service can do. So it's really pretty much it's been maritime has been the only impact that we have that we really kind of seen.
Okay. And then on SG&A. I know there was some reclass and there's some step-up for us to tell us. And then Tom mentioned that the guide year over year should be 15%-plus. So that implies I guess that SG&A will be a little lower in Q3 than it was in Q2 and Q4. So is there are some one-timer that's in that $47 million that was in Q2?
Thomas J. Fitzpatrick
In the second quarter there was the reclass that made the second quarter number higher. So there's a lot there. A lot of the year to date reclass occurred in the second quarter and you're right to observe that SG&A will move down sequentially in the third and the fourth, from where you sit in the second and modeled at [165 to 170], is that ought to be good.
Okay. And then what specifically was reclassed out of SG&A?
Thomas J. Fitzpatrick
Certain costs in support of our SG&A contract were we on reflection it was more appropriate for them to be shown as SG&A than on cost of service. So we just made that reclassification. And as I said, no impact on OEBITDA. It's just a bucketing, if you will.
And then last one on CapEx. It's been kind of, I guess, late in the first half. Is that expected to ramp each quarter into the end of the year to get to like the $70 million-ish guidance.
Thomas J. Fitzpatrick
Yes, that's our expectation.
Okay, thanks.
Operator
Hamed Khorsand, BWS.
Hamed Khorsand Khorsand
Good morning. So first off on the IoT front, I don't know, if you already answered this, but what drove the ARPU and IoT going up on that on that side was the consumer was industrial?
Thomas J. Fitzpatrick
Consumer and it's on the back of the new contract that were referred to with the large fast-growing customer.
Hamed Khorsand Khorsand
And then is that just going to be a one-time benefit, though or has there been any news on pricing?
Thomas J. Fitzpatrick
Contract is two years. So it's a tool that was not like a front load increase in like a one-time benefit. And then just tapers off All right. So the fundamental trend in IoT, if you look at it over a multiyear basis is personal communications is growing faster than industrial in terms of subs.
So there will be a natural, there'll be a natural move towards the ARPU of personal communications, which is in the $4 range, which is lower than your overall ARPU in the $7 range. So that's the fundamental that's what you've been seeing for years. And that will continue to be the case as personal comps continues to grow really fast.
Hamed Khorsand Khorsand
Okay. And then my last question is, is your partner the same partner we're talking about, are they promoting their product more than include you or are they doing anything to increase the units SOLD?
Matthew Desch
I mean they're heavily promoting their products. Obviously, that's the whole point to this. And why the revenue has gone up is that they've been very successful and are introducing new products to the market with new capabilities, et cetera, and we're working together to make that a success for them and for ourselves.
Hamed Khorsand Khorsand
Okay. Thank you.
Matthew Desch
Thanks.
Operator
Chris Quilty, Quilty Space.
Chris Quilty
Thanks. Tom, just quickly, what are we safe modeling sort of the high 30s margins for equipment and then what's sort of the range there for full year?
Thomas J. Fitzpatrick
I think that's about right, yeah.
Chris Quilty
Okay. On second question, did I hear you mention you have partners on the Stardust program. I hadn't heard you specifically mentioned that previously?
Matthew Desch
I [equipment] supply when you build into new equipment to support the standard of new equipment into gateway, that sort of thing. I don't know that I refer to them as partners as opposed to? Well, maybe I did we view them that way, I guess in some ways, but as we work together to implement the capability into our network. We are doing it all ourselves.
So there is some new hardware in the ground infrastructure that's required. And I've seen of software reprogramming in the satellites and that sort of thing. So that's really what I was referring to. We haven't announced the kind of partnerships. I expect you're really talking about.
Yes, though, we're talking to many companies about it and they're getting a lot of encouragement and support. And as we get closer two things, I think we're going to obviously be able to talk about some of those sort of things.
Chris Quilty
Okay. Just checking.
Matthew Desch
Yeah.
Chris Quilty
So I was looking at the your DoD subs so and they're still kind of fluctuating around and you kind of look at what's going on in the world and sort of what they call in the 90s, a revolution in military affairs that that's happening with drone warfare and currently there's sensor networks all around Ukraine that that pickup the drone signals.
It would seem to be the sort of market activity for secure communication devices that you would be seeing large activities or programs within the government you and I haven't seen anything the PLEO contract doesn't seem to be the vehicle for that. And two, could you give us an update on both the PLEO and what you're seeing out there?
Matthew Desch
Well, yes, our sub count is very -- it moves around a lot. I think we're in kind of a transition period right now with the government on sort of subscribers. There's both cleanups and additions and all kinds of stuff. But the trend going forward, we believe is going to be very positive.
There's a number of new contracts in areas that we're working with the government that would drive a lot of subscribers in the coming years. And so given it's a fixed price contract, we're not exactly worried about the day-to-day subscriber counts up.
But more focused on making sure that we are embedded in all the right activities that they have, that were an important technology in services and that we see kind of long term growth in that area, that's the most important thing for us. Continued good relationship with the government.
So you're right, you don't see it quite in the sub. You're not going to be able to see it right in the sub count in the in the short term. But I think that will that will turn positive, I think, in the coming years.
Chris Quilty
And do you still feel that the strategy selling service separate from the EMSS contract is that it still looks like a solid plan?
Matthew Desch
Yeah, I think so. I mean, I think we're continuing to see niches of things that we can do well that others can't, and it's a bit of a niche service. I think we're going to see it finally been installed at the government gateway soon, which will help continue to see sort of US ethanol as a contingency backup sort of service for other technologies there, too.
So I think we're still well positioned with that technology on the broadband side and then really well positioned and sort of the mid-band and what I call narrowband side of the service technology as well in application.
Chris Quilty
Final question. Don't ask why I was looking at a pre pandemic Inmarsat Annual Report and they were sizing, I think the aviation safety market that you had a share and I think like $250 million and growing to $1 billion whenever right. And I think our business there is still probably around $30 million. I think, Tom.
What do you think is the outlook for that market obviously, you need to get your certification in process in place, but is it really about getting equipment deliveries? Is it aircraft deliveries? Is it the OEM activity of getting all the STCs for aircraft? And how is that and activity being managed?
Matthew Desch
Yeah. I can't speak to the top of my head on the market forecast that you saw from them. I mean, I don't see it that way. We believe aviation is a growth vector for us, particularly given how well we're positioned and the new products and our partners having their product certified with us and getting them approved by the FAA and going through the safety certification stuff that that is going off.
We also know that we can address certain parts of that market that others can address from GEO because of things like, for example, rotorcraft, which we've always an advantage to our antennas are smaller than others.
So they really fit on a different kind of aircraft. We're really excited about the drone market, which still hasn't developed that significantly yet, but there's an awful lot of activity to fit drones into the national airspace system. And we think we're one of the few technologies do that and we're kind of at the heart of this beyond visual line of sight stuff and think that in the coming years will be a big, big growth driver as well.
So I can't put numbers on it other than it's bigger, nicely bigger than where we are today and think it's one of the contributors as we go out to 2030.
Chris Quilty
The incremental contributor next year?
Matthew Desch
Yes, I think so. Yeah, absolutely.
Chris Quilty
Alright. Thank you.
Matthew Desch
Yeah. Thanks, Chris.
Operator
Mathieu Robilliard, Barclays.
Mathieu Robilliard
Good morning. Thank you for the presentation. My first question was about the trajectory of the gross margin on service revenues?
Over the past years and quarters, we've seen the margin go down a bit. I understand part of that is explained by the fact that some of the government services come with lower margin. But I was wondering if there was anything else impacting the trajectory of the gross margin on the service revenues beyond the mix in revenues?
Thomas J. Fitzpatrick
Morning, Mathieu. No, the overall gross margin or OEBITDA margin is any reduction in that or decrease in that is exclusively related to engineering and support. So the SDA contract is large and it's lower margin business. And so that's what's causing the decrease in OEBITDA margin. The service revenue margin, if you will, is alive and well, and we'll continue to demonstrate operating leverage year on year in and year out. So they're showed if that's clear.
Mathieu Robilliard
So it's very clear. Second question was on your satellite phone business, the legacy part. I guess I was hoping to get a little bit more granularity about the kind of customer and usages you have there? Because obviously, the underlying question is, could it be impacted by all the initiatives on D2D? I understand that for some of your customers, I mean, going through a commercial network, even if it's enabled by satellite on their eye from doesn't work or it's not what they want.
But if we could maybe get a sense of what kind of clusters of customers and where you think there's maybe a little bit of risk from D2D and where there isn't. That would be super helpful.
Matthew Desch
We'll D2D right now as it's been proposed. I think most people are they think Starlink and perhaps some others down the road is only right now anyway been being proposed using terrestrial spectrum and terrestrial spectrum or what the FCC call supplemental communication from space at sort of how I've been describing it.
It is s really a coverage enhancer within specific markets where there is spectrum that can be used sort of border to border. And that's only a couple of countries right now. I mean, it's really a handful of countries where it's likely to happen, assuming the regulatory issues and technical issues and all that kind of get resolved.
And I expect that they ultimately will over time. So to extent that that makes your cellphone work a little bit better within a few markets, it really doesn't make it into a global service, which has been our brand. It's been the primary of a capability, especially if you talk about IoT, people use us for IoT because we their assets no matter where they are.
And the world will work very well and people have embedded us into many, many industries and applications and services because of our reliability anywhere in the world. And that's really not what our D2D is offering today. It is true that there will be some services and stuff when you're uncertain phones or that work better in certain markets.
But that really wasn't why people were buying our satellite phones. That wasn't why they were buying or using our devices have often said, you know, someone doesn't buy art, our satellite phone in Wyoming to use in Wyoming. They buy it because they're a first responder who might be dispatched to Haiti or someplace where there's a hurricane or we'll use it when they travel in the South American beyond where D2D isn't going to be offered anytime soon.
Nor will be offered any time soon in Africa or Europe for a number of other places and our services work, they're perfectly well. So it would be we believe it's really at the margins. We believe we understand what's happening in coming in D2D we think we've included that in our forecast and our expectations between now and 2030.
And I've said I will still deal with people who don't appreciate that and we'll be reading our press releases and stuff. But it will take some time and people realize that it's that we were very we can coexist and our growth is compatible really with that. And that we'll be able to participate in that market as well as a global kind of, I think, glue that we'll be able to put in products that will provide a certain level of services that can be dependent on globally because of our global L-band allocations. So hope that helps.
Mathieu Robilliard
Got it. It does. And then I'll turn to last one with regards to your new leverage target for year-end 2026, and that was discussed already in previous questions. I was wondering if the decision to move from [2.5 to 4] was maybe also linked to the fact you had been looking at some deals potentially and in the end you decided not to go for these and that's why you have this new flexibility?
Thomas J. Fitzpatrick
No, that's not it at all. We are taking a leverage guide up exclusively to repurchase shares given their current trading levels.
Mathieu Robilliard
Okay. So it's not like you were looking at stuff. I mean, it's not happening?
Matthew Desch
No, I mean, we are always looking at things and a separate aspect in that something can pay for itself will be interested in looking at that independently and there may be opportunities for that sort of thing in the future. But the focus on this was strictly a shareholder-friendly activities.
Thomas J. Fitzpatrick
Right. And the only interplay between doing deals and the leverage was when we acquired to tell us there was we had gotten questions about would we back off of the share repurchases given the funding of Telus. And we said absolutely not, we'll take leverage up because of where the stock is trading. So I think this this move is consistent with what we said there. And there we just think that the shares are at this level, we need to take the leverage up a bit.
Mathieu Robilliard
Okay. Thank you very much.
Operator
Bryce Sandberg, William Blair.
Bryce Sandberg
Matt, Tom, and Ken, good morning.
Thomas J. Fitzpatrick
Morning.
Bryce Sandberg
I just want to ask about the [Soraya] outage this quarter, if you saw any positive impact from that outage. And if you're able to quantify that impact at all?
Matthew Desch
There has been positive impact in the sense that that Asia Pacific customers are looking for alternate solutions. You know, Telus is really not going to be assuming that they have a successful launch and all that sort of thing are going to be kind of out of the market for two years here.
And I think the reliability of GEO solutions is it has been put to test here between themselves and Inmarsat outages in Asia as well. So we are getting a lot of positive reception and it takes time for that to kind of develop.
But we're seeing certainly, particularly around the handset, but in some cases, IoT of customers in that region are looking for different solutions. So it's certainly been supportive. Will it move the needle substantially? We'll see where certainly hope so, but it's a little too early to call that right yet.
Bryce Sandberg
Great. Thanks, Matt. That's all for me.
Matthew Desch
Thanks.
Operator
Chris Quilty, Quilty Space.
Chris Quilty
Anything update on Aireon, and if not, okay.
Matthew Desch
There are. the Board meeting a couple of months ago, as I remember and hearing Dan talk about it. There's a lot of bullishness in terms of the computer. I mean, the of the CTS business, the data services business, they have a number of new products they're developing. They're expanding their team because of the opportunities.
Continued sort of expansion of their footprint around other customers are renewing. We've been working with them on this sort of system engineering work around a possible global VHF service to ADS-B. I mean, that's something that they're kind of looking at long term have made decisions about it will take a long time to develop a service like that successfully.
But we would want to be part of that maybe with our next constellation. So I'd say only positivity right now, I think it was good that they got there financing sort of refinanced in a way that kind of took their cuts off a little bit and up until there. So there, things are quite positive over there right now.
Chris Quilty
Good. Good to hear. Thanks, guys.
Matthew Desch
Yes, thanks, Chris.
Operator
This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Matthew Desch
Nope. thanks for joining us. So we'll see you again in August and talk to you, I'm sure individually. Thanks for your time.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.