Iridium Communications Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. The company provides global satellite voice and data services and was investing heavily in its next-generation Iridium NEXT constellation.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $112.8 | $106.0 | $326.2 | $305.0 |
| Operating income | $49.8 | $46.5 | $134.8 | $122.3 |
| Operating margin | 44.1% | 43.9% | 41.3% | 40.1% |
| Net income | $31.6 | $29.5 | $86.9 | $76.6 |
| Net income attributable to common stockholders | $27.7 | $25.7 | $75.4 | $65.0 |
| Basic / diluted EPS | $0.29 / $0.26 | $0.27 / $0.24 | $0.79 / $0.70 | $0.68 / $0.62 |
Q3 service revenue rose 8% to $87.3 million; subscriber equipment revenue fell 6% to $19.9 million, while engineering and support revenue increased 53% to $5.6 million. Nine-month revenue grew 7%, led by service revenue (+7%) and engineering and support (+28%). At September 30, billable subscribers were approximately 838,000, up 7% year over year. Commercial M2M subscriber growth and higher U.S. government EMSS contract revenue were key contributors. Q3 included a $0.9 million one-time benefit from recognition of unused minutes on an expiring contract.
- Cash flow: Nine-month operating cash flow was $164.6 million, versus $162.9 million. Capital expenditures were $231.8 million, versus $251.8 million; operating cash flow less capital expenditures was negative $67.2 million, compared with negative $88.9 million (derived from reported figures). Investing activities used $81.4 million and financing activities provided $104.7 million. Cash and cash equivalents increased to $374.0 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $426.4 million; restricted cash was an additional $113.1 million and is not generally available for operating needs. Current assets were $531.2 million and current liabilities $114.7 million.
- Debt: Credit Facility borrowings were $1.6699 billion gross, or $1.5468 billion net of financing costs, with $130.1 million unused under the $1.8 billion facility. The debt-service reserve requirement was $113.0 million and is scheduled to rise to $189.0 million in 2017. Interest costs are capitalized during Iridium NEXT construction; some borrowing bears floating-rate interest.
- Margins and cost trends: Operating margin improved modestly year over year. Higher service and contract revenue more than offset increased operating expenses; lower depreciation partly reflected revised estimates of existing satellite useful lives.
Material changes and unusual items
- Q3 revenue increased 6% and net income increased 7% year over year; nine-month revenue increased 7% and net income increased 14%. The EMSS government contract’s price increase contributed $4.0 million of Q3 revenue growth and $12.0 million for the nine-month period.
- The company revised estimated remaining useful lives of its current satellites in Q3 to align with the expected Iridium NEXT deployment schedule. Depreciation expense decreased $1.5 million for the first nine months versus the prior year. Two satellites ceased operations in Q2 2016 and were impaired; the company said it did not consider those losses evidence of impairment of the remaining constellation.
- Iridium NEXT costs are estimated at approximately $3 billion through 2018. The company had paid Thales $1.672 billion and SpaceX $339 million by quarter-end, with amounts capitalized as construction in progress. Interest and paid-in-kind interest are also substantially being capitalized.
Outlook, risks and contingencies
- SpaceX suspended launches after a September 2016 rocket anomaly. Iridium expected launches to begin after SpaceX returned to flight and projected completion of the contracted SpaceX launches in 2018, subject to the investigation and schedule. Ten Iridium NEXT satellites were at Vandenberg; ground infrastructure was reported complete and ready.
- Kosmotras had not obtained permission to launch the contracted satellites. Iridium was exploring alternatives for additional launches and noted it might not recover amounts already paid to Kosmotras.
- The company expected the Credit Facility to be fully drawn in early 2017. It said liquidity should be sufficient for at least 12 months provided Aireon makes contracted hosted-payload payments or Iridium successfully adjusts its funding plan. Aireon’s sales efforts and fundraising had been delayed, and Iridium expected hosted-payload payments to be delayed. If Aireon could not begin payments in 2017, Iridium said it would need to revise its funding plan.
- Iridium was discussing debt-service-reserve timing with lenders and construction milestone timing with Thales. It might also consider temporarily suspending preferred dividends. Management said successful adjustments could avoid a liquidity shortfall through at least 2017; it did not expect to issue additional equity in connection with such an arrangement.
- Key risks include launch and deployment execution, funding availability and credit-facility covenant compliance, satellite-network health during transition, delayed hosted-payload receipts, and customer, supplier, competition and regulatory dependencies. The filing reported no material change to previously disclosed risk factors, no material pending legal proceeding, and effective disclosure controls.
- No formal financial guidance is provided in the supplied filing text. Management anticipated continued growth in billable commercial subscribers for the remainder of 2016.
Important facts for investors to verify
- Whether SpaceX’s return-to-flight and Iridium NEXT launch milestones support the stated 2018 completion expectation.
- Aireon’s funding, customer contracts and timing of hosted-payload payments, and the resulting effect on Iridium’s liquidity plan.
- Available borrowing capacity, covenant headroom, the 2017 reserve requirement and the timing of facility drawdown.
- Actual Iridium NEXT costs and cash requirements compared with the approximately $3 billion estimate, including any alternative launch or replacement-satellite costs.
- Whether subscriber growth, particularly in M2M, offsets pressure in telephony airtime and supports recurring service revenue and margins.