Iridium Communications Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Iridium provides global mobile voice and data communications through a low-Earth-orbit satellite network, selling services and equipment to commercial and government customers. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance
Amounts below are in millions of dollars, except per-share data and subscriber figures.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $184.1 | $162.2 | $527.2 | $458.6 |
| Operating income | $17.9 | $15.0 | $57.9 | $35.6 |
| Operating margin | 9.7% | 9.3% | 11.0% | 7.8% |
| Net income (loss) | $2.1 | $(2.1) | $9.5 | $(3.4) |
| Diluted earnings (loss) per share | $0.02 | $(0.02) | $0.07 | $(0.03) |
| Operating cash flow | Not separately provided | Not separately provided | $254.5 | $213.1 |
- Revenue mix: Q3 services revenue was $139.0 million, subscriber equipment $28.0 million, and engineering and support $17.1 million. Nine-month amounts were $397.9 million, $95.5 million, and $33.8 million, respectively.
- Cash and liquidity: Cash and cash equivalents were $218.8 million at September 30, down from $320.9 million at December 31, 2021. The company also had $100 million available under its undrawn revolving facility.
- Debt and interest: Term Loan principal was $1,608.8 million; its balance-sheet carrying amount, net of deferred financing costs, was $1,589.0 million. The loan matures in November 2026. Net interest expense was $17.6 million in Q3 and $47.0 million for nine months. The company reported covenant compliance and no borrowings under its $100 million revolver.
- Share repurchases: The company repurchased approximately $245.7 million of shares during the first nine months, with $187.2 million remaining under the expanded authorization at September 30.
Material changes versus comparable periods
- Revenue grew 14% in Q3 and 15% for the first nine months. Services growth reflected higher commercial voice/data, IoT, and broadband revenue; total billable subscribers were approximately 1.973 million, up 17% from a year earlier.
- Q3 commercial IoT revenue increased 12%, while IoT ARPU declined 8%, primarily due to a shift toward lower-ARPU plans. Broadband revenue increased 19% in Q3, supported by subscriber growth and a higher mix of Certus plans.
- Engineering and support revenue rose 129% in Q3 and 63% year to date, mainly from government contract work, including the Space Development Agency contract. Associated costs also rose.
- Nine-month operating income increased 62%, helped by higher revenue and lower interest expense versus 2021. Net income improved to $9.5 million from a $3.4 million loss; the comparison also reflects a $20.0 million tax benefit in the prior-year period versus $1.0 million of tax expense in 2022.
- Nine-month operating cash flow increased $41.3 million. Investing cash outflow rose to $94.8 million, including a $50.0 million Aireon investment and higher capital expenditures. Financing cash outflow was $263.8 million, mainly due to share repurchases.
Outlook, risks, contingencies, and unusual items
- Management expects SG&A expense to increase approximately 20% in 2022, primarily due to stock-based compensation. It expects depreciation and amortization to remain relatively consistent and engineering/support revenue and related expenses to remain above prior-year levels due to the SDA contract. The filing provides no specific overall revenue or earnings guidance.
- Management estimates next-12-month requirements include $16.5 million of required principal payments, approximately $70 million of interest at the current rate, and approximately $75 million of capital expenditures, depending in part on ground-spare satellite launch costs. It states available liquidity should cover requirements for at least 12 months and expects to refinance the estimated $1,555.1 million remaining Term Loan principal at or before 2026 maturity.
- Interest-rate exposure remains: the $1.0 billion notional interest-rate cap pays if one-month LIBOR exceeds 1.5%. Management estimates annual interest expense would increase approximately $12 million as rates rise from the loan floor to the cap level, and an additional $1.5 million annually for each 25-basis-point LIBOR increase above the cap level on the unhedged portion.
- The company committed to approximately $40 million for launch and related services for up to five ground-spare satellites, expected in mid-2023; $8.2 million had been paid and capitalized by quarter-end. It also disclosed approximately $63.4 million of non-cancelable inventory purchase obligations, all due in 2022.
- Russia operations face disruption from the invasion of Ukraine and related sanctions. Iridium ceased equipment shipments to Russia and warns that revenue there may be variable or cease entirely, with possible shutdown costs. Russia represented approximately 2.3% of 2021 total revenue.
- Other disclosed risks include satellite health and service continuity, reliance on a primary gateway and operations center, competition, regulation, supply-chain constraints and reliance on significant customers, including U.S. government agencies. The filing reports no material pending legal proceedings beyond ordinary routine litigation.
- Unrealized cash-flow-hedge gains increased other comprehensive income by $25.5 million in Q3 and $64.0 million for nine months; these gains are not equivalent to operating cash generation. There was no material debt extinguishment in 2022, unlike the $0.9 million loss recorded in 2021.
Important facts for investors to verify
- Whether subscriber growth, particularly in IoT, translates into durable service revenue despite lower IoT ARPU and changing customer mix.
- The profitability and cash-flow contribution of SDA and other government engineering contracts, including the associated cost growth.
- Term Loan interest-rate sensitivity, cap coverage and future refinancing capacity, along with liquidity after repurchases, investment and satellite-launch spending.
- Execution, timing and total costs for the planned spare-satellite launch and the company’s inventory purchase commitments amid supply-chain constraints.
- Potential revenue, asset or expense effects from sanctions, currency fluctuations or a possible cessation of Russian operations.
- The impact of share repurchases and stock-based compensation on share count and per-share results; the filing reports 125.6 million common shares outstanding on October 13, 2022.