Iridium Communications Inc. — Q3 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2011. Iridium provides global mobile voice and data services through a low-earth-orbit satellite network, and sells subscriber equipment and engineering and support services. It reported approximately 508,000 billable subscribers, up 23% from a year earlier.
Financial results and liquidity
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenue | $102.1 million, up 8% from $94.5 million | $289.3 million, up 11% from $260.2 million |
| Operating income | $24.2 million vs. $20.8 million; operating margin 23.7% vs. 22.0% | $61.2 million vs. $22.3 million; operating margin 21.2% vs. 8.6% |
| Net income | $11.3 million vs. $10.7 million; diluted EPS $0.15 vs. $0.14 | $31.3 million vs. $12.6 million; diluted EPS $0.42 vs. $0.17 |
| Operating cash flow | $131.9 million for the nine months, compared with $104.6 million | |
| Capital expenditures | $240.3 million for the nine months, compared with $134.3 million |
For the nine months, cash used in investing activities was $240.3 million and cash provided by financing activities was $113.3 million. Cash and cash equivalents increased $4.9 million to $124.8 million. The arithmetic difference between operating cash flow and capital expenditures was approximately negative $108.4 million.
At September 30, 2011, total assets were $1.245 billion, total liabilities $553.7 million and stockholders’ equity $691.4 million. The company had $325.3 million outstanding under its $1.8 billion credit facility, with approximately $1.5 billion unused. It also held $27.1 million of restricted cash, classified in other assets, to meet the facility’s debt-service reserve requirement. The reserve requirement is expected to rise to approximately $189 million at the start of repayments, expected in 2017.
Material changes versus the prior comparable period
- Service revenue rose 11% in both the quarter and nine-month period, led by subscriber growth. Subscriber equipment revenue fell 4% in the quarter but increased 4% year to date; engineering and support services revenue rose 44% in both periods.
- Quarterly operating expenses increased 6%, including an 18% increase in depreciation and amortization. For the nine months, total operating expenses declined 4%, and operating income increased 174%.
- Nine-month other expense was $10.6 million, versus $0.1 million of other income a year earlier, primarily reflecting commitment fees on the credit facility. The nine-month effective tax rate declined to approximately 39.1% from 44.9%.
- Capital expenditures increased substantially, principally for Iridium NEXT and related network and gateway equipment and software. Credit-facility borrowings and financing activity supported the investment program.
Outlook, management commentary and risks
- Management estimates approximately $3 billion in costs to design, build and launch Iridium NEXT and related infrastructure upgrades through early 2017. It expects to fund the program with up to $1.8 billion from the credit facility and internally generated cash flows, including anticipated hosted-payload revenue. Management said available liquidity was expected to cover requirements for at least the next 12 months, but warned that funding, cash-flow and cost assumptions are uncertain.
- The company expects future revenue to include a higher proportion of services, which historically carry higher gross margins than equipment. Management expects overall future revenue growth rates to be lower than historical rates, and anticipated lower commercial M2M and government voice ARPU in 2011 as lower-priced plans gain subscribers. It also expected substantially higher R&D expense in Q4 2011 than in Q3.
- In the quarter, the company lost communication with one satellite and recorded a $3.0 million impairment charge. An in-orbit spare was repositioned and service impact was described as minimal. Iridium reported eight satellite losses since commercial service resumed in 2001 and cautioned that further failures could impair service and results.
- Key risks include Iridium NEXT execution and funding, credit-facility covenants and draw conditions, uncertain hosted-payload demand, aging satellites, dependence on U.S. government customers and annual contract renewals, and reliance on key suppliers. Celestica was the sole manufacturer of current devices, with its contractual obligations ending January 1, 2012; Boeing provides satellite operations and maintenance services.
- The company disclosed no material legal proceedings and said disclosure controls and procedures were effective. It reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, total cost and funding plan for Iridium NEXT, including hosted-payload contracts and continued access to the credit facility.
- Credit-facility borrowing conditions, covenants, reserve requirements and the timing and amount of future draws.
- Satellite health, spare capacity and service reliability through the transition to Iridium NEXT.
- Subscriber growth and service revenue alongside ARPU trends, government customer renewals and defense-spending exposure.
- Continuity of device manufacturing after Celestica’s current contractual obligations end, and continued availability of other key vendors.