Iridium Communications Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparison is with Q1 2013 unless otherwise stated. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions.
Business context and reporting period
Iridium provides global mobile voice and data communications through a satellite network, selling services and equipment through wholesale distributors. It reported approximately 674,000 billable subscribers at March 31, 2014, up 9% year over year. The company is investing heavily in Iridium NEXT, its next-generation satellite constellation.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior balance-sheet date |
|---|---|---|
| Total revenue | $98.0 million | $89.2 million; up 10% |
| Operating income | $28.3 million | $25.3 million |
| Operating margin | 28.9% | 28.4% (calculated) |
| Net income | $16.5 million | $14.9 million |
| Net income attributable to common stockholders; diluted EPS | $14.8 million; $0.19 | $13.2 million; $0.17 |
| Cash from operating activities | $42.5 million | $57.2 million |
| Capital expenditures | $58.5 million | $19.2 million |
| Cash and cash equivalents | $184.5 million | $186.3 million at Dec. 31, 2013 |
| Marketable securities | $70.7 million | $76.6 million at Dec. 31, 2013 |
| Restricted cash | $94.6 million | $81.2 million at Dec. 31, 2013 |
| Credit Facility borrowings | $1,064.5 million | $1,039.2 million at Dec. 31, 2013 |
Cash plus marketable securities totaled $255.2 million at quarter-end; restricted cash is additional but reserved for debt service. The Credit Facility had $735.5 million unused. Iridium reported $42.5 million of operating cash flow against $58.5 million of capital expenditures. Cash decreased $1.9 million during the quarter. Credit Facility interest incurred was $12.0 million and was capitalized during construction.
Material changes versus the prior comparable period
- Service revenue rose 7% to $73.4 million, supported by subscriber growth, prepaid revenue policy changes, price increases and the new government contract. Subscriber equipment revenue increased 16% to $20.2 million; engineering and support revenue rose 45% to $4.4 million.
- Commercial M2M subscribers increased 19% to 283,000; commercial voice and data subscribers reached 338,000. Government service revenue increased to $16.0 million from $15.1 million.
- Operating expenses rose 9% to $69.7 million, including higher subscriber equipment costs and depreciation and amortization. Depreciation and amortization included a $0.9 million impairment charge for a satellite with which communication was lost in January 2014.
- Operating income increased 12% and net income increased 11%. Higher income taxes, partly reflecting the expiration of research and development tax credits, offset some operating improvement.
- Operating cash flow fell $14.7 million, in part because prior-year hosted-payload customer deposits and a tax refund did not recur. Capital expenditures increased $39.3 million, principally for Iridium NEXT.
Outlook, management commentary, risks and contingencies
- Management anticipated continued commercial subscriber growth and expected 2014 government service, subscriber equipment, and engineering and support revenue to exceed 2013 levels. These are expectations, not guaranteed results.
- The company estimated Iridium NEXT and related infrastructure costs through 2017 at approximately $3 billion. It expected the first launch to be delayed from Q1 2015 to June 2015, citing satellite-manufacturer software delays; it identified Ukraine-related instability and restrictions affecting the planned initial Kosmotras launch as additional risks.
- Management said liquidity sources should be sufficient for at least 12 months, but expected to need additional debt or equity financing in connection with a planned Credit Facility amendment. The company had obtained lender waivers providing covenant headroom for specified periods and said it expected further covenant modifications for measurement dates beyond the next 12 months. Lender agreement and additional financing were not assured.
- Hosted-payload fees from Aireon were expected later than previously anticipated. Aireon’s ability to develop and market its service, obtain funding and make hosting payments is a material funding uncertainty.
- Other principal risks include cost overruns or delays in Iridium NEXT, launch or satellite failures, aging existing satellites, the January 2014 satellite loss, reliance on government customers and distributors, competition, regulation, and the Credit Facility’s restrictive covenants. A covenant default could lead to accelerated repayment and lender enforcement against substantially all company assets.
- Credit Facility debt was $1.0645 billion at quarter-end; the required debt-service reserve was $94.5 million and is expected to increase to $189.0 million by the anticipated 2017 start of repayment. The company reported covenant compliance, with specified historical covenant measurements affected by lender waivers.
- Iridium reported no material legal proceedings and no material off-balance-sheet arrangements. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Progress, cost and schedule for Iridium NEXT, including the revised launch timing and launch-provider risks.
- Status and terms of the planned Credit Facility amendments, future covenant requirements, lender waivers and any required capital raise.
- Aireon’s financing, customer commitments and timing of hosting payments, and the resulting effect on Iridium’s funding plan.
- Subscriber and service-revenue trends, particularly handset and Iridium Pilot demand, warranty claims and equipment profitability.
- Satellite constellation reliability, replacement capacity and any further impairments or service disruptions.
- Cash generation relative to Iridium NEXT capital spending, debt service requirements and preferred dividends.