Iridium Communications Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Financial amounts below are U.S. dollars unless stated otherwise.
Business context
Iridium provides global mobile voice and data communications through a satellite network and wholesale distribution partners. It reported approximately 869,000 billable subscribers, up 10% from a year earlier. The company began launching its replacement Iridium NEXT constellation in January 2017; eight of the first ten launched satellites had entered service by quarter-end. Completion was expected in 2018.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $104.4 million | $104.2 million, essentially flat |
| Services revenue | $81.8 million | $79.8 million, up 2% |
| Subscriber equipment revenue | $17.1 million | $17.6 million, down 3% |
| Engineering and support revenue | $5.5 million | $6.8 million, down 19% |
| Operating income | $55.6 million | $43.3 million; Q1 2017 includes a $14.2 million Boeing-related gain |
| Net income | $37.9 million | $28.5 million, up 33% |
| Net income per common share | $0.35 basic; $0.30 diluted | $0.26 basic; $0.23 diluted |
| Operating cash flow | $63.9 million | $47.0 million |
| Capital expenditures | $48.9 million | $75.8 million |
Operating income margin was approximately 53% of revenue, versus 42% a year earlier; the comparison is materially affected by the Boeing gain. Excluding that gain, Q1 2017 operating income was approximately $41.4 million. Management attributed higher net income primarily to the gain, partly offset by higher operating expenses and taxes.
At March 31, cash and cash equivalents were $386.2 million, marketable securities $32.9 million, and restricted cash $135.1 million. The credit facility was fully drawn in February 2017; reported borrowings were $1.8 billion gross, or $1.684 billion net of deferred financing costs. The debt-service reserve requirement was $135 million and, absent an agreed adjustment, was scheduled to rise to $189 million during 2017. Cash and marketable securities totaled $419.1 million, excluding restricted cash.
Material changes and operating trends
- Commercial service revenue rose $2.0 million. Commercial M2M revenue increased with subscribers up 18%, partly offset by lower ARPU as more subscribers used lower-usage plans. Commercial voice and data revenue was nearly flat, with lower telephony airtime partly offset by OpenPort services.
- Government service revenue was $22.0 million, unchanged year over year. The fixed-price U.S. government EMSS contract expires in October 2018, when pricing is subject to renegotiation.
- Engineering and support revenue declined primarily because a DoD handset-adaptation contract’s engineering phase was completed.
- Operating expenses increased $2.1 million, including higher service costs related to the Russian gateway and NEXT satellite insurance, and higher research and development spending.
- Effective January 2017, Iridium hired most of Boeing’s satellite operations and maintenance workforce and terminated prior Boeing agreements. The transition generated a $14.2 million accounting gain and created a new development-services commitment of at least $6.0 million annually through 2021.
- First-generation satellite useful lives were revised to align with the expected NEXT deployment; management said this affected depreciation estimates and will continue to be assessed through deployment.
Outlook, risks, and contingencies
- Management anticipated continued growth in commercial billable subscribers during the remainder of 2017 and higher hosting and data-services revenue as more NEXT satellites enter service. Hosting and data-services revenue was immaterial in Q1.
- Iridium expects Aireon hosting payments to be delayed. Aireon is seeking customer contracts, including with air navigation service providers, and additional financing; delayed receipts could affect Iridium’s ability to meet NEXT-related obligations.
- Iridium reported agreements in principle with lenders to defer or partially refund up to $98 million of reserve contributions through March 2019, and with Thales to defer approximately $100 million of construction milestone payments until March 2019. The arrangements were not described as finalized. Iridium said it still needs full Aireon payments or alternative financing by the end of Q1 2019 to repay Thales and fully fund the reserve.
- The contemplated lender amendment would change financial covenants, restrict use of some Aireon fees, and suspend Series A and Series B preferred dividends for five quarters. Management stated it believed liquidity would cover at least the next 12 months if the funding-plan adjustments succeed.
- Near-term disclosed obligations included $435.4 million to Thales, $121.3 million to SpaceX, and $85.6 million of launch and in-orbit insurance payments within 12 months. Launch and in-orbit coverage includes self-insurance and deductibles and does not cover lost revenue.
- Kosmotras had not obtained permission to launch Iridium satellites; the company cautioned that it may be unable to recover amounts already paid if permission is not obtained.
- Other risks include NEXT launch and deployment execution, maintaining the first-generation network until transition, customer and supplier concentration, competition, and compliance with credit-facility covenants. The filing reported no material change to previously disclosed risk factors and no material pending legal proceeding.
Important facts for investors to verify
- Whether the proposed lender and Thales amendments were finalized, and the resulting covenant, reserve, payment, and preferred-dividend terms.
- The timing and collectability of Aireon hosting payments and whether alternative funding is needed by Q1 2019.
- Iridium NEXT launch progress, cost to completion, insurance exposure, and the effect of any launch or satellite failures.
- Renewal or renegotiation of the U.S. government EMSS contract before its October 2018 expiration.
- Underlying operating performance excluding the $14.2 million Boeing gain, alongside subscriber growth, ARPU, and cash conversion.