Iridium Communications Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Iridium provides global mobile satellite voice and data services, equipment, and engineering support. Its 66-satellite operational constellation also hosts Aireon’s air-traffic surveillance payload.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $145.3 million | $133.7 million; up 9% |
| Operating income (loss) | $11.8 million; 8% operating margin | $(1.6) million; approximately (1)% margin |
| Net loss | $(31.7) million | $(18.0) million |
| Net loss per common share | $(0.24) | $(0.18) |
| Cash from operating activities | $40.8 million | $48.1 million |
| Capital expenditures | $9.5 million | $34.6 million |
| Cash and cash equivalents at period-end | $67.3 million | $223.6 million at December 31, 2019 |
| Debt at period-end | $1.65 billion gross Term Loan borrowings; $1.623 billion net of financing costs | $353.0 million net senior notes at December 31, 2019, in addition to Term Loan debt |
Revenue was 80% services, 15% subscriber equipment, and 5% engineering and support. Services revenue rose 8% to $116.0 million. At March 31, billable subscribers were approximately 1.332 million, up 16% year over year. The company reported total assets of $3.391 billion and total liabilities of $1.977 billion.
Material changes versus the prior-year quarter
- Services revenue increased $9.0 million, including growth in government services, commercial broadband, IoT, and hosted payload and data services. The new government EMSS contract contributed to the $3.0 million increase in government service revenue.
- Subscriber equipment revenue rose 6% and engineering and support revenue rose 23%. Commercial IoT subscribers increased, but their mix lowered IoT average revenue per user.
- Operating results improved to positive operating income as revenue grew and operating expenses declined overall. Higher depreciation and amortization partly offset lower R&D and selling, general and administrative costs.
- Net loss widened primarily because the February refinancing generated a $30.2 million debt-extinguishment loss, including write-off of unamortized debt issuance costs. This was partly offset by revenue growth and lower operating expenses.
- Operating cash flow fell $7.3 million. Investing cash outflow declined as major satellite-constellation construction spending had largely concluded. Cash declined mainly alongside debt refinancing and repayment activity.
Debt, liquidity, and other notable items
In February 2020, Iridium borrowed an additional $200 million under its Term Loan and used those proceeds plus cash on hand to repay all $360 million principal of its senior unsecured notes, including early-redemption premiums. The Term Loan has a seven-year maturity and bears interest at LIBOR plus 3.75%, subject to a 1% LIBOR floor. The $100 million revolving facility was undrawn at quarter-end. Management stated that available liquidity was sufficient to meet needs for at least the next 12 months. The Term Loan has no financial maintenance covenants; the revolver has a leverage test if more than 35% is drawn.
A $1.0 billion interest-rate swap hedges a portion of variable-rate debt through November 2021; a swaption could extend the hedge through November 2026. The company recorded an $11.9 million after-tax unrealized hedge loss in other comprehensive loss during the quarter.
Outlook, risks, and contingencies
- COVID-19: Iridium reported a slowdown in the final weeks of March, with restrictions affecting distributors’ sales, installations, and customer access. The company substantially reduced its previously announced 2020 revenue and earnings outlook, citing expected lower equipment sales and subscriber growth and possible shifts to lower-cost plans. The filing does not provide a clear revised numerical outlook.
- Management expected lower IoT net activations to persist for at least the next two quarters. The normal seasonal peak for commercial voice services and equipment sales runs from March through October, heightening uncertainty about pandemic effects.
- Aireon: Reduced global air traffic may weaken Aireon’s revenue and ability to pay Iridium. Iridium expected about $39.5 million in annual hosting, data, and power-fee revenue from Aireon. A potential $120 million redemption of part of Iridium’s Aireon Holdings interest depends on a planned refinancing and available funds; the company did not expect it before early 2022.
- Spectrum interference: The FCC approved Ligado Networks’ waiver in April 2020. Iridium opposes the decision, warning that Ligado’s proposed terrestrial use of adjacent L-band spectrum could interfere with Iridium services; protective conditions may prove insufficient.
- Other material risks include dependence on distributors and a limited number of suppliers, reliance on significant government customers, satellite/network reliability, and the ability to generate cash to service debt. The filing reported no legal proceedings and no material changes in internal control over financial reporting.
Investor verification priorities
- Check the revised 2020 outlook and subsequent disclosures for actual COVID-19 effects on revenue, activations, equipment sales, and cash collections.
- Monitor Term Loan interest costs, required principal payments, covenant restrictions, and remaining liquidity after the refinancing.
- Assess Aireon’s financial position, payment performance, and the conditions and timing for any ownership-interest redemption.
- Follow developments in Ligado’s implementation and any resulting interference testing, regulatory actions, or customer impacts.
- Reconcile reported net loss with the one-time debt-extinguishment charge and track recurring operating cash generation after capital spending.