Operator: This is for the Iridium fourth quarter earnings teleconference taking place January 25th, 1999 at 9:00 a.m. Eastern Standard Time.
Good morning and welcome to the Iridium, LLC analyst conference call. Today's call is being recorded. The call is being hosted by Dr. Edward Staiano, Chief Executive Officer and Vice Chairman of Iridium LLC. Sitting in with Dr. Staiano are Roy Grant, Vice President and Chief Financial Officer. And Kevin Lavin, Assistant General Counsel.
At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all participants are on a listen-only mode. Following the comments, a question-and-answer period will be made available to the callers. To ask a question please press the numbers one followed by four on your pushbutton phone. Should you wish to withdraw your question, please press the pound key. Questions will be taken in the order they are received. Please hold all questions until the question and answer period begins.
Before we begin, Kevin Lavin, Assistant General Counsel of Iridium LLC has a brief statement. Mr. Lavin?
Kevin Lavin: Thank you. Many of the statements that management will make during this call will be forward-looking. Accordingly, Iridium LLC, Iridium operating LLC and Iridium World Communications LTD, wish to invoke the Safe Harbor for forward looking statements provided by section 27A of the Securities act and 21E of the Exchange Act. Examples of the forward looking statements that management may make include, but are not limited to statements concerning Iridium's future operations including projected subscriber ramp up, revenues, systems performance, and regulatory approvals. These forward-looking statements are based on a number of assumptions and actual results may be materially different from those expressed or implied by such statements. For a description of the factors, which may cause Iridium's results to differ materially from those expressed or implied by such forward looking statements. Please consult the Securities and Exchange Commission filings of Iridium LLC, Iridium Operating LLC, and Iridium World Communications Ltd.
I will now turn the call over to Dr. Ed Staiano, Chief Executive Officer and Vice Chairman of Iridium LLC. Ed?
Edward Staiano: Thanks Kevin. Good morning. Welcome and thank you for participating in today's call.
In the fourth quarter of 1998, Iridium made history, as we became the first truly global mobile telephone company. Today, a single wireless network, the Iridium Network, covers the planet. And we have moved into 1999 with an aggressive strategy to put a large number of customers on our system, and quickly transform Iridium from a technological event to a revenue generator.
We think the prospects for doing this are excellent. Our system is performing at a level beyond expectations. Our initial shortage of Motorola subscriber products has been resolved. Although Kyocera remains a problem.
Financing is now in place through projected cash flow positives. Customer interest remains very high and a number of potentially large customers have now evaluated our service and have given it very high ratings.
With all of this going for us, we are in position to sell the service and that is precisely where we are focusing the bulk of our efforts.
We are working closely with our gateways to accelerate our marketing and distribution efforts. We have identified some 600 very high usage industrial customers around the world and have launched an aggressive campaign to have them try the system and discover for themselves, how this technology can enhance their communications capabilities.
Let me first brief you on network performance, before describing those efforts in greater detail on the technical performance of the Iridium system, which as I said, is now consistently excellent.
Last week for instance, system-wide testing showed a 94 percent call establishment rate, with dropped calls at about 5 percent. We are now seeing paging reception on the order of only one missed message per 1500 sent. Call establishment for our cellular roaming service, is in the 98 to 99 percent range. The bottom line is that from a technical standpoint, the Iridium system is performing at a level beyond expectations and the refinements we are currently loading into the system will bring an even higher level of performance, in terms of call establishment, dropped calls and voice quality. And we are going to keep at it until this system is as close to perfect as it can possibly be.
Let me now switch to subscriber products. As I indicated the initial shortage of Motorola subscriber products is now over. Motorola has shipped nearly 40,000 Iridium phones from its factory in Illinois. Almost half of those have now made their ways to the Gateways or their service providers, with the remainder now in the distribution channels. Motorola is also shipping Iridium pagers, cellular cassettes, and accessories in volume. Most importantly, Motorola now has the capacity to produce whatever we need to satisfy customer demand.
Kyocera unfortunately has not yet shipped its single-mode and dual-mode satellite phones. Those units are still undergoing testing with the Iridium constellation. The latest results show that after considerable process, the Kyocera handsets are not yet meeting the performance standards that we require for commercial release. Teams of engineers from Kyocera and Motorola Sat Com are working together in Arizona to clear up the remaining issues. And we anticipate that Kyocera will be shipping handsets in volume before the end of the first quarter. System loading is suffering somewhat because of this problem since customers who prefer Kyocera products are waiting for their availability.
Let me switch now to our marketing efforts. With the Network performing well, our primary focus as I said, is now on our sales and distribution activities. We continue to see good demand for our service. Our advertising campaign generated a quarter of a million leads, more than 130,000 qualified leads and nearly 18,000 phone reservations. The bulk of them from just four of our Gateways. One of our major tasks right now is to work down through the lists of potential customers and get them their equipment. I can tell you that the number one question coming into our global customer care centers is when can I get my phone. We are working to speed up this process.
A major challenge we face is getting our service providers integrated on line and selling Iridium products and services. Thus far, we have nearly 65 service providers ready to sell our product, with 100 or more undergoing integration and coming on line soon.
And our gateways continue to sign up service providers. For example, last week, you may have heard that Sprint has signed on with Iridium North America to be a service provider in the Sprint PCS service area for the direct sale of Iridium services through their National Account Team. Sprint, of course, is the largest digital nationwide wireless network in the United States.
In addition, last week Telecom Italia Mobile (unintelligible) commenced the sale of Iridium services. TIM is one of the largest and most aggressive cellular operators in the world.
We continue working with gateways to intensify our approach to the industrial markets. These, as you know, are potentially large customers that will find the capabilities of our phones and pagers especially useful. And who are likely to log more minutes per user on the system. Right now we are getting phones and pagers into the hands of these customers for their evaluation with an eye toward selling them hundreds, perhaps even thousands, of handsets. These heavy users are from companies or government institutions with extensive operations around the world. Many of them in remote areas where satellite communications is the only way to keep in touch with the rest of the world. I am talking about oil companies like Shell, Arremco (phonetic), Exxon, Phillips, and Coastal Oil. Petrol Canada for example, has ordered 200 phones. There are large construction companies like Becton (phonetic), which just bought six Iridium phones for evaluation. American Electric Power, Monsanto, Lock Heed, all have taken phones for evaluation. NATO has six phones. And the list goes on and on.
Station 12, a broad-based international provider of mobile satellite services that is known for its aggressive, industrial sales force has signed on with Iridium Communications Germany to be a broad based service provider. This relationship will further boost our efforts to reach the industrial markets.
In addition, we have always expected that the US government, which has its own Gateway, would be a heavy user of our system. We are confident that a number of agencies will soon be placing orders totaling thousands of phones.
The Y2K problem may give us an added opportunity in the market. Because the Iridium system was built in the 1990's with an awareness of the millenium issue, Iridium-to-Iridium phone calls, because they don't use terrestrial networks, are the year 2K solution for global companies. Particularly those that are concerned about the vulnerability of local communication networks serving their operations around the world. A number of government entities have already approached us specifically with regard to year 2K, communications to protect national security and public safety.
One of the real bright spots for us is the highly positive feedback that we are getting from the evaluators of our system. These are the industrial customers who try our service under the conditions they normally face, are truly impressed with Iridium phones and with their capabilities. Let me share with you a few comments from a report issued by a major US Government agency, after a comprehensive evaluation of the Iridium satellite service.
The phones were tested all over the world under a variety of conditions from November 21st to December 21st. Their extensive data is in a 22-page report of the work done by this agency. Let me now quote from the report.
"Overall, the Iridium system truly introduces a significant new commercial service. Under normal conditions, it provides excellent voice quality and excellent connectivity. This evaluation finds Iridium highly satisfactory for most uses and applications evaluated."
I would add that this evaluation took place before the most recent major improvements we have made to the system.
Another agency, the Airforce's Space Battle Lab (phonetic), has tested 130 Iridium phones in the field including Bosnia. Listen to what they have to say according to an article published last Friday.
Quote, "anyone who uses or hears about the capabilities of this phone wants one. We have made calls from an Airforce plane flying at 30,000 feet, and another from 25 miles north of the Arctic Circle. It is now possible that our special operations forces won't need to lug around suitcase-size satellite phones like we have now. These small hand-held units will do. The possibilities are endless."
We had a very positive review from a member of the Australian military who was impressed by the performance of the Iridium phone during a cyclone. Quoting from his letter.
"I am very appreciative of the chance to try the Iridium system out to help prove it though some of Mother Nature's worst. I have no hesitation in recommending this system to any interested parties."
As you know, back in November, Motorola and Iridium Central America sent several dozen phones to the Central American governments in the aftermath of Hurricane Mitch. With free airtime to the end of the year. By the end of November, relief workers had logged a total of about 1800 minutes of use. One of the military officers detailed to the Honduran President's office had this to say about the phones.
Quote, "We have crystal clear communications. With the freedom to use the Iridium phones in helicopters and Army trucks, and area of total devastation and no electricity. We have had continuous communications with our headquarters in (unintelligible). Our finance minister even used an Iridium phone while in Germany to renegotiate our national debt."
So in sum, there is a lot of evaluation activity by potentially large customers. The reviews we are getting are all highly positive and we are confident that as more of these large customers evaluate our system, we will start to see the ramp up in our subscriber base.
The Iridium Aeronautical Service continues to make strong process towards its debut at the end of the first quarter, when the single channel radio for business aircraft will be fully certified for commercial service. Trial units are now on board several aircraft. They are working very well. And excellent call quality reported from trail users.
I used the Iridium phone aboard the Iridium Aircraft this week and carried on a 20-minute conversation from the ground to take off and to flying. The airborne Iridium phone has even been used aboard a NASA ER2 plane, the successor to the U2, flying at an altitude of 70,000 feet.
The response from the business (unintelligible) aircraft community has been fabulous. At the National Business Aviation Association Tradeshow in mid October, our partner, Allied Signal took nearly 750 initial orders to install the Iridium Air Sat 1 (phonetic) system on business aircraft.
We are also moving very aggressively to market our multi-channel Iridium system for in cabin use on commercial airlines. These units will be ready for installation shortly after the first of next year. Initially, as a voice only version, but with fax and data following in the second quarter of 2000. We are now in discussions with a number of international airlines about providing Iridium services on their routes.
The aeronautical market is extremely important to us because it gets our service and our brand in front of a large number of traveling professionals. One indication about how serious we are about capturing this market was our acquisition of Clarecom (phonetic) Communications Group from AT&T and Rogers Cantell (phonetic) at the end of the fourth quarter. With its digital, air to ground network that already serves seat back phones, on 1400 commercial jets in North America, including American, Northwest, Alaska, Canadian, and Southwest Airlines, Clarecom will bring Iridium branded in-flight telephony to thousands of airline passengers every day. Many of these passengers are potential customers for other Iridium services. Already a large part of our advertising is devoted to reaching global travelers, through billboards in airports, through advertisements in airline magazines and through in-flight videos.
Clarecom's installed base gives us immediate access to this market and you can be sure we will be taking full advantage of it.
I have personally been out to Clarecom's Seattle headquarters to meet with most of the company's employees and discuss this transaction with them. Let me tell you that they are ecstatic about becoming part of the Iridium family, and they too see the great future for airline telephony using the Iridium system.
Our market access activities moves solidly forward in the fourth quarter, and into 1999. Iridium is now authorized to provide satellite telephone service in more than 140 countries and territories around the world. Our paging is authorized in more than 200 markets. And we expect to continue to make progress and will have the Iridium system authorized for use in virtually every country in 1999.
Additionally, nearly 60 of Iridium's 160 roaming partners have launched the Iridium cellular roaming service and are ready to serve Iridium customers on local networks. Together, these local cellular operators cover more than 300 major business travel destination cities around the world. While this integration continues, we continue to sign up new roaming partners around the world.
At this point, let me turn the conversation over to Roy Grant who will discuss our earnings and our financial performance.
Roy Grant: Good morning. During the fourth quarter, we reported revenues of 186,000 and a net loss of 440 million. This compares to a third quarter net loss of 364 million. The primary cause of the increase relates to recognition of O&M expense for the first time, and the issuance of warrants (phonetic) to our Gateways.
During the fourth quarter, we recognized 50 million of expense associated with our O&M contracts and 38 million associated with the issuance of warrants to our Gateways.
These results however don't tell the whole story. To offset smaller than anticipated revenues, which we knew were going to result from a delayed start, we tightly controlled expenses in all areas. In fact, compared to our internal approved budget, we ended the year, under our cash budget by over 250 million dollars. Thus, we think we have done a very effective job of controlling expenses during this period.
Let's turn to our financing. As you know, Iridium has been very successful at raising capital in the public markets, and this was again the case in the fourth quarter and last week. During the fourth quarter, Iridium raised 1.95 billion of new financing, consisting of an 800 million senior secured credit facility, a 750 million guaranteed credit facility, along with 400 million of vendor financing from Motorola. In fact, this 800 million senior secured credit facility started at 650 million, and based on positive reaction to the financing, was increased in size to 800 million. These financings provide Iridium with the required funding through anticipated positive cash flow.
Last week Iridium raised approximately 250 million through a very successful 7.5 million-share public offering. This offering had three major benefits. It provided 250 million of cash to our balance sheet. It increased our public float to approximately 20 million shares. And it freed up restrictions placed on 300 million of the 350 million of Motorola guarantees. These restrictions were placed on that particular level of guarantees by our bankers in our 800 million dollars secured credit facility.
With this 250 million, combined with the 350 million of additional guarantees from Motorola, this means we have approximately 600 million of funds in excess of what we need to break cash flow break even. This provides a significant contingency for the company.
This finishes the review of the financial results, let me now turn it back to Ed for his conclusion.
Edward Stainano: Thanks, Roy. The fourth quarter was an extremely exciting one for our company. As we said we brought out network and our system to an excellent level of quality, we were first to market it with a truly global mobile telephone and messaging service. And we opened to rave reviews from potentially large customers who have tried our service now under a variety of conditions.
Now we are moving forward into 1999 with a strategy aimed at quickly delivering Iridium phones and pagers to what we believe is a vast market for our unique services. I am confident that given the demand that is out there and the superb performance of our product, we are going to have a very good year.
Thank you. And now to your questions.
Operator:At this time, we will begin our question-and-answer period. If you have a question please remember to press the numbers one followed by four on your telephone keypad. To cancel your question, press the pound key.
Our first question is from Cindy Mast (actually Motz) from Credit Suisse First Boston.
Cindy: Hi. This is Cindy from Credit Suisse First Boston. I just had a couple of questions. First I was wondering if you can talk a little bit more about the cycle of getting the phones to the customers, how long have they usually been looking at to trial the phones and then you know how long does it take to place the order and then to receive the phones. And the secondly, how many phones do you think the 600,000 high usage customers that you have identified, how many phones could that ultimately translate to? I realize that might be hard to say but how many actual numbers could we be looking at here. And then lastly, do you have any sense of how many minutes that people were using, individual users tend to use?
Edward Staiano: Cindy, it is a little early to try and get projections on all of those things at this point in time. But, the time for trials is typically 30 to 60 days of actual use of the phones. And then there is usually some time for reports to get written and distributed. So, we are looking at something like, minimum 60 day cycle from when we get phones into the hands of these large industrial users before we expect to see orders starting to come in, in quantity for them. In a couple of cases that has moved faster, but I think in general that is what we expect to see.
With regard to minutes of use, it is a little early for us to tell because when you are going through all of these trials and tests and things like that, and the numbers we get may be misleading. So, I wouldn't want to quote those at this point in time until we have enough people that have settled into their normal usage patterns to be able to give those to you. What we do expect though, is we expect that the industrial customers will use some 70 minutes per month on average. I would only qualify that by saying the latest Booze Allen (phonetic) report that we had called for significantly higher number of minutes than that. I think on average across about 10 different industrial markets, they estimated some 420 minutes of use per month. We really aren't going to know where that number lies until we have another 90 days or so of experience. So, I guess my answer to you is that you are going to have to have a little patience with us as we go through this first quarter and get enough people on board and enough measurement so that we can give you some statistics that have some validity to them.
Cindy: And the 600,000 that you identified, about how many people could that potentially be, or phone numbers I guess?
Edward Staiano: Well the 600,000 is the number of subscribers.
Cindy:Oh, okay. I thought that maybe that was corporate corporations.
Edward Staiano: No no, in my speech just now, I talked about 600.
Cindy: Oh, okay I thought you said 600,000.
Edward Staiano: No, it turns out there are two numbers. There is 600, is what I talked about in terms of industrial companies that were looking that are high priority. But it also turns out that we think there are about 600,000 satellite only customers in our forecast over five years.
Cindy: Okay. That makes it clearer.
Edward Staiano: Okay. All right.
Operator: Thank you. Our next question comes from Les Levy with Chase Securities.
Les: Hi. Just you said you are satisfied with the rate of production that Motorola has finally achieved. What is that in terms of the number of handsets? The second question is what is the time it takes for units to actually go from the production facility into the hands of an end user and what are the steps that it gets there. And finally, you know where are the bulk of your orders coming and what channels of distribution are ultimately leading you to the most qualified leads and ultimately deposits?
Edward Staiano: Okay. Three questions. First of all with regard to Motorola production. We really have to talk about different things. The satellite phone itself and then the cassettes, the GSM cassettes, the CDMA cassettes, and cassettes that they are going to be producing shortly, for TDMA and also CDMA at 1800. With regard to the satellite phones, Motorola production capacity now is well in excess of 1,000 a day. So, they can really supply us with any number of satellite phones that we want.
With regard to the cassettes, they only began shipping in January and so a lot of our orders from customers have been on hold until the cassettes get out there. We are still backordered on GSM cassettes but those should all clear this month. Motorola's forecast for the month is to build 42,000 of the CDMA, GSM cassettes, total. So, production-wise, we are now out of the problem.
In terms of getting handsets from Motorola through to the end user, that varies an awful lot depending upon where you are. And which country you are in. We have had a substantial difficult, for example, in getting enough quantity of handsets into places like Brazil, into some places out in Asia, that have been tied up in custom issues. Russia has been a huge problem for us. In fact, I don't believe we have production handsets into Russia yet because of problems with the currency there. We think we have got that solved now. Our meeting last week I think got passed that. So, it is a different answer for different countries. But I will give you an average. I would guess that on average we are talking about 2 to 3 weeks from the time they leave Motorola's dock until we can get them through to a service provider and consequently available to go into the hands of an end user.
With respect to orders, you know I won't go though single orders for individuals because those are obviously one at a time. But with respect to large orders, I listed a variety of those companies that are in the process of evaluations. And we are anticipating as a results of the evaluations that have now been completed at the US government, that we should start to see large orders flowing in from the US Government here very shortly. I will think we will see the orders coming in from the oil companies and the others that have been going through the trials, the construction companies, etc., in the next 30 days, we should start to see large orders. And as they come in, we will announce them.
Les: Can you talk about the 18,000 handset deposits, when will that backlog -
Edward Staiano: We are working that off now. And there are two problems with that. The first one is there are some number of those, roughly half that are for Kyocera products. And as I mentioned in my comments Les, one of the places where we are suffering a little bit on loading is that not having the Kyocera product, a lot of people are just sitting and waiting for that product. So, we are going to satisfy about half of that base, roughly, with Motorola product. The other half is sitting there waiting for Kyocera product to come through.
Les: Okay. Thanks.
Operator: Thank you. Our next question comes from Mark Kressman from JP Morgan.
Mark: Thanks. I had a couple of quick questions. The first is in regards to the US government. I thought the US government was ordering secured handsets and I just wanted to find out how Motorola was coming with the development of secured handsets.
Edward Staiano: As far as I know, that development is on schedule. And is still scheduled to occur sometime in the late third quarter. But they are also ordering standard handsets.
Mark: Is there going to be some kind of swap out then when the secured handsets are ready?
Edward Staiano: No. There are needs in the government that don't require security. And those can be satisfied with the current products.
Mark: And also then with a couple months of marketing the system under your belt, how do you feel in terms of the initial projections of, that you gave us I guess on the last conference call, for cash flow break even and net income break even?
Edward Staiano: Well, we still believe that we are going to get to cash flow break even this year. We haven't seen anything that indicates that should be any different. In fact the Gateway forecast that we have in hand, add up to allow that to happen with no problem. So, if we can achieve the forecast that the Gateways have sent to us, we are still well within the timeframe we had expected to get to cash flow break even. There is no doubt that the next 90 days will give us a much better handle on that Mark, because by then we will have completed the evaluations of a lot of these major customers. And we will see how fast the ramp goes. I think you also understand that when we talked about cash flow break even, we meant per month so that we will achieve a cash input that is greater than our cash burn rate before the end of the year.
Mark: Okay. Thanks.
Operator: Thank you. Our next question comes from John Kuntz of Solomon Smith Barney.
John: Hi good morning everyone. It is good to see the revenue line actually added to your press release's going forward. You have answered a couple of questions already but could you just give us a quick update on the regulatory front. Any important markets that you may have gotten access to since the end of the year please?
Edward Staiano: I guess we got Spain, John. I don't know that we got Mexico yet or not. It was eminent last week. But I haven't heard back from our man down there, Armando. But we have gotten about another 5 or 6 markets logged because the number is up to 140. I just don't happen to know which ones they are.
John: Okay. Thank you.
Edward Staiano: Okay John.
Operator: Thank you. Our next question comes from Ryad Syed with Freedman Billings.
Ryad: Good morning gentlemen. Most of my questions have been answered. But if you could follow up on Kyocera, can you give us a sense as to timing and any further milestones over the next month that will give more clarity with respect to your ability to ship full production by the end of the quarter?
Edward Staiano: There are three issues now that we have sorted it down to that we are working on with Kyocera. And now that the interaction with the Motorola Sat Con (phonetic) Group is detailed enough, we have a better handle on those issues. And they really boil down to two issues. One has to do with power control in the unit. And that has to do with if we allow the unit to go out without the correct use of power control, it could deplete the energy in the system over time. And we don't want that to happen. That could cause us to be able to handle fewer subscribers. So, we are very adamant that they have to meet all of the specs with respect to power control.
And the second area is the area with respect to dropped calls. The dropped call activity has gotten better and better. In fact, the last data I saw in their unit, it was down to about 7 percent, which makes it about double the rate of the current Motorola unit. And the Motorola unit to the best of our knowledge has no defects in it. So that is the level we expect them to get to. I think that one is less of an issue. I think the power control issue may be slightly more because it may involve some work that may have to be done on the antenna. And that is what we are about right now.
So, we have got the best people in Motorola working on that. I am involved with it, getting reports every day. Kyocera has a team of engineers in Arizona. We are all acutely aware of the importance of getting that fixed. There is no question in my mind that we will fix the issue. And the Kyocera handset will ship. I have already been a little optimistic on when I thought it would get done because I really thought we would get it done this month. But, we are running out of time for the month. So, it may take a little longer than that.
Ryad: Okay. Just to follow up on that. At what point would the Kyocera units need to be shipping this quarter in order for you by the end of the quarter to fulfill the current backlog and to actually be in full production?
Edward Staiano: They would have to ship by the end of February.
Ryad: Great. Thank you very much.
Operator: Thank you. Our next question comes from Steve Frye from Dean Witter.
Steve: Good morning Ed.
Edward Staiano: Good morning.
Steve: Can you talk briefly about the billing process and whether any actual bills for service have been issued and if so, what sort of usage you have seen from these paying subscribers?
Edward Staiano: We have billed in both November and December and what we have here is a - lets see, what is the average here in minutes? The average minutes per user per months was 90 minutes. And again I would only say that as you know, that is higher than our forecast by quite a bit. Our forecast in our business plan is at 50 minutes. But I would caution you not to take that to the bank yet since this is still from the first two months of use and may not be indicative of what the long-term use is.
Steve: Thank you.
Operator: Thank you. The next question comes from Tom Watts with Merrill Lynch.
Tom: Good morning, Ed and Roy.
Edward Staiano: Hi Tom.
Tom: Just to get more comfort on the handset production issue. If for some reason Kyocera didn't produce at all, would Motorola have capacity to meet everything that you were - everything you hoped to - everyone you hope to sign up?
Edward Staiano: The answer to that question is yes Tom. As I have said continuously now, having run that segment of the business for Motorola, I know when you are in a position to be able to crank out large volumes and Motorola is in that position. However, you know we are finding in our base, a strong preference, one way or the other. There are people who are very much in love with the Kyocera unit, that is to be able to have the separate handsets that they can carry around and leave the dual mode phone in their briefcase. There are others who prefer the Motorola cassette and they seem to be willing to wait until they get the unit that they want. In this case the Kyocera unit. So it is very important for us to go ahead and get that done.
Tom: And can you just comment on second generation systems and also (unintelligible) to increase capacity of the existing system if - which would be a wonderful problem to have, being capacity constrained.
Edward Staiano: Well, we have been doing things continuously to look at ways to increase the capacity of the system. In fact, the 1.5 billion minutes that we talk about now came about as a result of a number of enhancements that are currently underway by Motorola that will go into the constellation. Not the least of which is dynamic channel management software that we put in that added another 2 to 300 million minutes. And that is how we got the 1.5. And we will continue to look at that. We are optimistic that we will achieve the 1.5 billion and perhaps more with the system but we are confident about the 1.5. We are working on the next generation system. We are deep into that with Motorola. We expect to get the next phase of that contract, probably in the next 30 days to them, that is not a development contract that is a second phase design piece of the contact. And what we are looking at now Tom, is the transition between the current satellites and a next generation satellite. So, we are looking at a 15 year time span, at some juncture in the next 2 to 3 years, we would expect that we will stop putting up replacement satellites that are of the current vintage and we will put up replacement satellites that are capable of serving the current base but also capable of greatly expanding the base of customers we can serve. And we expect now to go the board for approval of that, most likely at the April board meeting that we have.
Tom: Okay. And do we have any - looking at that, how will - will part of the costs be taken into account under your existing O&M contract? Or would we see those amounts adjusted?
Edward Staiano: Well that would be, what we are looking at is we are looking at everything. We are looking at the O&M contract, we are looking at what the cost might be to enhance the satellite and how we should enhance it. And so all of those things could be affected. The critical issue here is spectrum. No matter what we do with the satellite in terms of improving the affectivity of the solar cells, the batteries, the main mission antennas, etc., there will be a lot of things that we can do on the satellite that will improve it. But there aren't things we can do that will give us 5 times the capacity with out spectrum. So, if we are restricted to stay within the spectrum that we are at, our increases are more on the order of 20/30 percent than they are on the order of multiples. So as you know, we have applied for an additional 15 megahertz of spectrum and that becomes extremely crucial in our ability to get more like a five times capacity improvement.
Tom: And when do you think that that issue would be - when would you know if you have that spectrum?
Edward Staiano: Well, you know that is the usual spectrum wars, right? It is going to go on at the FCC to start with. We have gotten a very favorable response from the FCC. We think that we have an excellent agreement that we are putting forth with the ITU. We have been over them, we visited with MR Stat (phonetic), I mean the essence of this argument, Tom, goes like this. Inmarsat (phonetic) today has 68 megahertz of spectrum. And they have about 120,000 customers. 68 megahertz of spectrum and about 120,000 customers. Iridium is going to have somewhere between 3 and 4 million customers, in 5.15 megahertz of spectrum. Given the incredible value of spectrum, it is hard and will be continually hard, for Inmarsat to justify the dedication of 66 megahertz of spectrum to serve such a small base of customers. And it is that argument that we are using with the FCC and with the ITU, and within Marsat themselves. And we have proposed and have met with our key folks who are in our industry, not just Iridium, but the others in our industry, and we have proposed a new band plan. A new way to reallocate this spectrum so that everyone would get considerably more spectrum available and we would still serve
So, I am optimistic that we have a good argument as to why we should get the spectrum. I am optimistic that we have put forth a solution that I think creates equality for all of the members of our community of satellite operators. And that it is a process that is probably going to take a couple of years.
Tom: Okay. Thanks very much.
Operator: Thank you. Our next question comes from Chris Merson with Prudential Securities.
Chris: Good morning - (interruption in taping) - in the first quarter, in terms of (unintelligible), or put it another way, how many phones were or what is the take rate on the people that are trailing and actually go to commercial usage. And then the second question, have you had any problems with customers bringing phones into countries where you have had problems with customs?
Edward Staiano: Okay. It really is pretty early for me to try to give you a forecast like that, Chris. You know, we are working on all of these issues. What I can tell you is I don't know of any bad evaluations we have gotten back from any of the customers that have evaluated it. Every one that I have seen so far, and we have a lot of them, have all been positive. But the take up rate, it varies. I mean probably the fastest on that was Petrol Canada who ordered 200 handsets immediately. But how quick the others will, we are expecting some major orders coming through as a result, I said of the government stuff, but it is still a little early for us to be able to talk to that specifically.
Chris: And have you had any customers that have had problems bringing their phones into -
Edward Staiano: Not that we have any report from the GCC on. We have a lot of calls at the GCC. And as I said, the bulk of those are how can I get a phone and when will I get my phone.
Chris: Great. Thanks a lot.
Operator: Thank you. Our next question comes from John Bench with Lehman Brothers.
John: Hi, John Benchi. I have a few questions. First kind of following up on Chris' inquiry. Is it safe to say that sort of a cap on subscribers in the first quarter would be the production volume of handsets and by my calculation I guess there is 35,000 were made, 3,000 generating revenue so there is 32,000 available, plus lets say another 90 they would manufacture in the quarter, would get me to around 120 as sort of the absolute upper bound, assuming Kyocera is still working at it or still loading the channel. If you could comment on that, as an upper bound for one. Two Roy, if you could tell us what the cap ex was in the quarter and some expectations for the year 99. And then lastly, I know it is early on the revenue number here, but I am trying to do some math on revenue per sub and I am only getting like 55 bucks a month as a sort of a wholesale arpu (phonetic) and if 90 minutes is the number, I'm getting sort of wholesale revenue to you of only 61 cents per minute, which is well below sort of what I had been modeling with that 250. Could you help me with some of those numbers?
Edward Staiano: Yes, let me have Roy help you with those numbers. With regard to the numbers on the handsets John, you know as I said, Motorola can build whatever we need. So, you shouldn't put handsets as a limitation in the first quarter because of Motorola. If there is a limitation, the limitation will come because we don't get enough Kyocera handsets because of the problems that we have.
Edward Staiano: Okay. Let me have Roy talk to those other numbers since -
Roy Grant: I didn't catch all the numbers John, but let me give you cap ex for the fourth quarter, we spent about 275 million on (unintelligible) system contract. 82 million on the TNDC contract. And as I said, we capitalized a portion of the O&M expense, I said we expensed 50 million so that left 36 million which we capitalized.
Looking forward to next year, if I remember the numbers, we have about 55 million left in the space system contract. About 130 left in the TNDC contract. A little bit extra cap ex for just running the business, maybe around 50 million. And then of course as I said, we will capitalize about half of the O&M contract on a cash basis of about 536 million. So half that will be capitalized.
I didn't catch the tail end of your other comment.
John: Okay, regarding kind of a normalizing the revenue to a per subscriber or a per minute basis, if I took the 186,000 divided by sort of a monthly average, I am getting 1125 subs a month and then divided by three months, I get 55 dollars per sub per month as a rough cut at an arpu (phonetic) number, if you will. And then 90 minutes per sub per month was what the bills were showing, that is revenue to you of 61 cents per minute. Those are well below sort of what I had been expecting. Can you help me with sort of what is missing in the math or is any of this revenue is differed or were there any reserves or anything?
Roy Grant: I think you need to look at the revenues in the fourth-quarter and say there is an awful lot of funny stuff going on there, we have credits going back and forth, and so forth. What we have said in the past, is that we anticipate that are average customer is going to result in revenues to us of about 200 dollars a month. And so we are still sticking to that, in terms of per minute fees, you have heard us say in the past as well, the average per minute is going to be around 210 for a satellite minute and 35 minutes for a cellular minute.
Edward Staiano: And John, there are all kinds of stuff here because for example, we are not collecting any fees for signing on, we are not collecting any monthly fees. We are running all kinds of specials.
John: (unintelligible) were you giving away maybe a month or -
Edward Staiano: We are giving away free ISU to ISU time through April. All right. So, that is one item. We are also not collecting any sign up fee or any registration fee at the Iridium LLC level. All right. The gateways may be doing that. But they are keeping all of that. We are not billing them anything there right now. Okay. So when you add up all the different programs that we have got, what you find out is that the revenue in the fourth quarter should not be used, -- and by the way, it is going to be even hard to do it in the first quarter, because we are running specials to get things cranked up. So I think you are probably better off right now, and we see no reason why you shouldn't be sticking to the 200 dollars per customer per month, is where we think we are going to be at. But, it is really going to be, -- I don't even think the first quarter numbers are going to let you have that because of the specials we are running.
John: But 200 on the longer term basis, at least for say 99 and 2000 -
Edward Staiano: That is where we think we are going to be at. Right.
Chris: Great. Thank you Ed.
Edward Staiano: Thank you, John.
Operator: Thank you. Our next question comes from Peter Tedway with Southeast Research.
Peter: Yes. Good morning, gentlemen. Two questions. One the shift, has there been - has this occurred over time, a shift towards marketing more toward the industrial government users as opposed to lets say the global travelers, am I perceiving this? And as sort of a follow up on that, on the government usage, I mean you have got owners all around the world and regarding military, for example, we saw some nice quotes, which you quoted some from the US military but can your system be used by all governments and all military, is that a market that is totally open to you without conflicts of interest or however you want to define it?
Edward Staiano: Okay. Let me deal with those two questions Peter. First of all with respect to the industry markets. We have been saying for some time now that at our initial launch we would focus heavily on marketing those first. We intend -- we have no change in our plan in terms of intending to market both to the general business traveler as well as to the industrial market. However, it has been cleared to us, or at least the last two years, that those industrial markets are the best ones for us to penetrate quickly because they will evaluate the systems, they will make decisions right away, they clearly need the equipment for the kind of the services they provide. And they tend to be heavy uses. The other thing about them is they also tend to make a lot of long distance calls, calling back to their home country, which is very positive revenue generation for Iridium. So, that is not a change in strategy. We have had that strategy now almost since the day I joined Iridium, as being the place where we were going to focus.
The second thing we know is that the marketing to the general business traveler is largely going to come through the cellular network operators who become our service providers. As you can tell from the comment I made, we are now finally seeing major cellular operators signing up as service providers, like Sprint PCS, in this country. Like Telecom Italia Mobile A in Italy, and so on. DDI in Japan. This is a longer process simply because these folks are already engaged in large businesses often multi-billion dollar businesses, putting a new product in their portfolio, getting their people trained to sell it and move it out to the street, just doesn't happen instantaneously. So, we have known for sometime that that will ramp more slowly then the vertical markets will. And that is the reason we have done it. In regards to governments. The way the Iridium system is built, we simply move bits and packets though the Iridium system. Virtually every government if they chose, could have their own encrypted service putting their own encryption on handsets on both ends. And still be able to operate through the Iridium network. So there is no problem with us servicing multiple governments in encrypted standards because of the architecture we have.
Peter: Including multiple militaries.
Edward Staiano: Including multiple militaries.
Peter: Okay. Thanks.
Edward Staiano: Right. Okay, I think we can have time for maybe one more question.
Operator: Thank you. Our next question comes from Gary Owen with Gartner Group.
Gary: Good morning. Could you tell me a little bit about the status of your satellites? Have you had any problems in the last 2 or 3 months, have you lost any satellites? And do you still think you might lose 8 or 9 satellites every year the next few years?
Edward Staiano: We have not lost any in the last couple of months. We have moved some satellites down to engineering, we moved a satellite down to engineering orbit to work on -- it has had an electronic failure but the satellite is not lost and Motorola is working on ways to work around that issue. Our expectation now is that we would lose maybe 6 satellites a year. So, the current proposals that Motorola passed for replacements are based on six per year, not eight or nine per year.
Gary: Okay. Thank you very much.
Edward Staiano: By the way, I would just add that we have all 66 satellites in mission orbit, operating excellent and providing superb service at this point in time and we have 8 spares not in orbit.
With that, I think we are going to have to conclude the conference. Roy do you have a final comment?
Roy Grant: hank you for participating in today's analyst conference call for Iridium LLC. Should you have any further questions following today's call, please contact (unintelligible) Jergens, director of investor relations at xxx- xxx-xxxx or xxx-xxx-xxxx. You may also contact John Windolf, executive director or marketing, (unintelligible) communications, at xxx-xxx-xxxx. Again, thank you. And this concludes today's conference call.
Operator: Thank you. This does conclude today's teleconference. Enjoy the rest of your day.