Iridium Communications Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a standalone Q4 filing; Q4 figures below are unaudited quarterly results. Iridium provides global mobile satellite voice and data services and equipment through a wholesale distribution network. Billable subscribers reached approximately 523,000, up 22% year over year.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $384.3 million | $348.2 million | +10% |
| Services revenue | $262.3 million | $236.4 million | +11% |
| Subscriber equipment revenue | $94.7 million | $90.2 million | +5% |
| Engineering and support revenue | $27.3 million | $21.6 million | +26% |
| Operating income | $77.0 million | $37.4 million | +106% |
| Net income | $39.7 million | $22.7 million | +75% |
| Diluted EPS | $0.54 | $0.31 | +74% |
| Cash from operating activities | $183.5 million | $151.4 million | +$32.1 million |
| Capital expenditures | $359.4 million | $237.5 million | +$121.9 million |
Operating margin increased to about 20.0% from 10.7%; net margin rose to about 10.3% from 6.5%. Operating improvement reflected subscriber-led revenue growth and lower operating costs overall, including lower equipment costs and Boeing operations and maintenance costs. Depreciation and amortization rose 8% to $97.6 million. A $3.0 million satellite impairment was recorded after loss of communication with a satellite; an in-orbit spare replaced it.
Q4 2011: Revenue was $95.0 million versus $87.9 million in Q4 2010; operating income was $15.8 million versus $15.0 million; net income was $8.4 million versus $10.1 million. Quarterly basic/diluted EPS was $0.11/$0.11, compared with $0.14/$0.14 a year earlier.
Liquidity, debt and investment
- Year-end cash and cash equivalents were $136.4 million; restricted cash was $27.2 million, including a $27.0 million debt-service reserve.
- Credit Facility borrowings were $417.1 million at year-end, with approximately $1.4 billion undrawn. The $1.8 billion facility is secured by substantially all of the company’s and certain subsidiaries’ assets. Tranche A carries a 4.96% fixed rate; Tranche B bears LIBOR plus 1.95%. The company reported covenant compliance at year-end.
- Iridium NEXT is estimated to cost approximately $3 billion through 2017, with launches expected to begin in early 2015. The Thales satellite contract is approximately $2.2 billion; launch contracts include SpaceX and supplemental Kosmotras capacity. Year-end contractual obligations totaled approximately $2.9 billion, principally tied to NEXT.
- Management expected credit-facility availability, internally generated cash, potential hosted-payload revenue and warrant proceeds to fund NEXT, but warned these sources may not be sufficient. Warrants considered in the money at year-end could provide approximately $95.6 million if exercised in full.
Changes, outlook and significant risks
- Service growth was led by subscriber expansion in commercial voice, commercial M2M and government services. Commercial voice ARPU fell from $51 to $48 and commercial M2M ARPU from $20 to $18; management expected further M2M subscriber and revenue growth in 2012 alongside lower M2M ARPU. Management also expected continued commercial voice subscriber and revenue growth.
- U.S. government agencies generated 23% of 2011 revenue. The government notified Iridium of its intention to extend the principal EMSS and gateway-maintenance contracts through March 31, 2013; the government may terminate them at any time, and Iridium planned to pursue successor contracts.
- The current satellite fleet has exceeded its original design life and has experienced eight satellite losses since commercial service resumed, including one in 2011. Management expected acceptable service through the NEXT transition, but could not assure it. The company does not insure the current constellation against satellite failure or operational loss.
- Material execution and funding risks include NEXT cost overruns, delays or launch failures; dependence on continued Credit Facility draws and hosted-payload/warrant proceeds; and possible aging-satellite service deterioration. Launch insurance may be costly or unavailable and would not cover lost revenue.
- Specified events—including certain insurance, contract, default or regulatory failures—could give the U.S. government, Boeing or Motorola Solutions rights to require de-orbiting of the current constellation, which would end service. The required current in-orbit liability policy expires December 8, 2012; its coverage excludes third-party damages related to the 2009 satellite collision.
- Further risks include reliance on distributors and key suppliers (including Celestica for most devices and Boeing for satellite operations), customer and distributor concentration, regulatory and licensing constraints, and dependence on third-party intellectual property. The ten largest distributors represented 47% of revenue; the two largest commercial customers together represented about 21%.
- Commercial usage is seasonal, typically peaking March through October. Management cited economic conditions, competition and slower expected growth as uncertainties. No material legal proceedings were reported. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key investor verification points
- Track NEXT cost, schedule, launch-provider performance and hosted-payload commitments against the approximately $3 billion funding plan.
- Review liquidity, debt-service reserves, covenant compliance and conditions for future Credit Facility draws; assess whether expected warrant proceeds and operating cash materialize.
- Monitor satellite fleet health, service quality, insurance renewal and any developments affecting de-orbit rights.
- Confirm renewal or replacement of the principal U.S. government contracts after March 2013, and changes in government spending or subscriber activity.
- Test whether subscriber growth translates into durable service revenue despite declining ARPU, and monitor dependence on major distributors, customers and suppliers.