Business context and reporting period
Iridium Communications Inc.’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The company provides global satellite communications services and equipment through wholesale distributors. Its Iridium NEXT constellation replacement program remained underway: six of eight planned launches were complete, with 55 NEXT satellites launched, 50 in service, two drifting to adjacent orbital planes and three serving as in-orbit spares.
Billable subscribers reached approximately 1.047 million, up 15% from 912,000 a year earlier.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $134.9 million | $111.6 million | $254.1 million | $216.0 million |
| Operating income | $16.3 million | $35.7 million | $35.8 million | $91.3 million |
| Net income (loss) | $(4.4) million | $24.8 million | $7.1 million | $62.7 million |
| Net income (loss) attributable to common stockholders | $(6.5) million | $20.9 million | $1.1 million | $55.0 million |
| Basic EPS | $(0.06) | $0.21 | $0.01 | $0.56 |
Q2 operating margin was approximately 12.1%, compared with 32.0% a year earlier; six-month operating margin was approximately 14.1%, versus 42.3%. Higher depreciation and amortization as NEXT satellites entered service, increased interest expense and, for the six-month comparison, the absence of a prior-year Boeing transaction gain weighed on earnings.
- Revenue mix: Q2 services revenue grew 20% to $104.0 million; subscriber equipment revenue rose 37% to $25.9 million; engineering and support revenue fell 17% to $5.1 million. Hosted payload and other data services increased to $12.4 million from $1.9 million.
- Cash flow: Six-month operating cash flow was $141.1 million, up from $119.9 million. Investing cash outflow was $403.1 million, including $215.0 million of capital expenditures and net purchases of marketable securities. Financing cash inflow was $239.6 million. Cash, cash equivalents and restricted cash ended at $365.9 million.
- Liquidity: June 30 unrestricted cash and cash equivalents were $176.1 million and marketable securities were $199.8 million. Restricted cash was $189.8 million, primarily for the debt service reserve account. Management said liquidity sources should cover requirements for at least the next 12 months.
- Debt: Gross consolidated indebtedness was $2.134 billion: $1.774 billion under the credit facility and $360 million of senior unsecured notes. The notes bear 10.25% interest and mature April 2023; the credit facility is scheduled to mature in September 2024, subject to acceleration provisions. The company reported compliance with debt covenants.
Material changes versus prior comparable periods
Q2 revenue increased 21%, while operating income declined 54% and the company moved from net income to a net loss. Six-month revenue increased 18%, but net income fell 89%. Depreciation and amortization rose to $50.5 million in Q2 and $89.0 million for the half-year as NEXT satellites were placed in service. Net interest expense shifted to $13.0 million in Q2 and $17.2 million for six months, compared with net interest income in the prior-year periods.
Commercial growth came from higher voice and data ARPU, IoT subscriber growth, equipment sales and hosted payload activity. Commercial IoT subscribers rose 25% year over year; government service revenue remained $22.0 million in Q2 and $44.0 million for six months.
In March, Iridium issued $360 million of notes, amended its credit facility and used proceeds in part to replenish the debt reserve and repay Thales bills of exchange. It also converted all Series A preferred stock into approximately 10.6 million common shares. Series B cash dividends were suspended for five quarters beginning with the June 2018 payment, as required by the credit facility.
Outlook, commentary, risks and unusual items
- Management expected to complete the NEXT launch campaign in 2018, anticipated continued commercial subscriber growth for the rest of the year, and expected full-year subscriber equipment revenue to exceed 2017.
- The $88 million-per-year U.S. government EMSS contract was due to expire in October 2018; the government could extend it unilaterally for six months. Iridium was discussing a new contract, expected later in 2018 or in 2019.
- Aireon’s $200 million hosting-fee obligation is a significant collection and covenant dependency. Iridium had received $8.1 million by June 30. A July 2018 amendment set additional scheduled payments, and the company recognized $6.9 million of cumulative hosting-service revenue based on the amendment and its updated collectability assessment. The credit facility requires $200 million in hosting fees from Aireon by December 2023.
- Q2 included a $4.0 million loss on extinguishment of debt tied to prepayment of Thales bills of exchange. Maryland tax-law changes increased the year-to-date income tax provision by $8.7 million through remeasurement of deferred tax balances. Accounting for the Tax Act remained provisional, with completion expected during 2018.
- Key risks include substantial leverage and debt-service needs, covenant compliance and potential acceleration, execution and reliability of NEXT deployment, satellite failures not fully covered by insurance, Aireon’s ability to pay, renewal of the government contract, competition, regulation and reliance on key customers and suppliers.
Important facts for investors to verify
- Progress, remaining costs and schedule for the final NEXT launches, and any satellite failures, insurance recoveries or need to replenish spare satellites.
- Aireon’s payment performance against the revised hosting-fee schedule and the company’s ongoing assessment of collectability and related revenue recognition.
- Terms and timing of the replacement EMSS government contract, including any extension of the existing agreement.
- Cash generation relative to remaining capital expenditures, debt principal and interest payments, and covenant thresholds, including the potential credit-facility maturity acceleration if the notes remain outstanding in October 2022.
- Series B accumulated unpaid dividends during the suspension period, and any implications for future distributions or preferred-holder rights.
- Final Tax Act accounting and any changes to deferred tax estimates or the reported tax provision.