Iridium Communications Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Iridium provides global mobile satellite voice and data services, equipment, and engineering support through a 66-satellite operational constellation and wholesale distribution network. It reported approximately 1.36 million billable subscribers at quarter-end, up 12% year over year.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $140.2 million | $143.1 million | $285.5 million | $276.8 million |
| Operating income | $5.8 million | $3.7 million | $17.7 million | $2.1 million |
| Net loss | $12.4 million | $18.1 million | $44.1 million | $36.1 million |
| Net loss per share | $0.09 | $0.16 | $0.33 | $0.34 |
| Operating cash flow | Not separately presented | Not separately presented | $104.5 million | $64.1 million |
- Q2 operating margin was approximately 4.2%, compared with 2.6% a year earlier; six-month operating margin was approximately 6.2%, compared with 0.8%. These percentages are calculated from reported revenue and operating income.
- Q2 revenue declined 2%, as 2% growth in services was offset by lower equipment and engineering revenue. For the first half, revenue rose 3%, led by services growth.
- Q2 net loss improved year over year, primarily from lower interest expense and operating expenses. The first-half net loss increased chiefly because of a $30.2 million debt-extinguishment loss, despite higher revenue and lower interest expense.
- At June 30, cash and cash equivalents were $119.1 million, down from $223.6 million at year-end 2019. First-half investing cash use was $18.7 million, primarily capital expenditures; financing cash use was $189.1 million, reflecting debt repayment. Operating cash flow less capital expenditures was approximately $85.9 million for the first half.
- Total assets were $3.37 billion and stockholders’ equity was $1.41 billion. Debt included $1.646 billion gross Term Loan borrowings ($1.620 billion net of deferred financing costs); the senior unsecured notes were fully retired. The $100 million revolver was undrawn, giving reported borrowing availability of $100 million.
Material changes and management commentary
- Commercial services increased 2% in Q2. Higher hosted-payload and other data revenue, including Aireon fees, and broadband growth were partly offset by lower voice and data and IoT usage. IoT subscribers grew, but lower usage and a greater mix of lower-ARPU consumer devices reduced IoT revenue per user.
- Subscriber equipment revenue fell 15% in Q2, primarily from lower handset and IoT device sales. Engineering and support revenue fell 21%, mainly due to reduced U.S. government-related contracted work.
- Management attributed weaker usage and sales to COVID-19 restrictions, reduced customer mobility, and distributor limitations on customer visits, installations, and new business. It said it had substantially reduced its 2020 revenue and profitability outlook from the levels forecast in February; the filing text does not provide a clear revised numerical forecast.
- In February 2020, Iridium borrowed an additional $200 million under its Term Loan and used the proceeds plus cash to retire the $360 million senior notes, including early repayment premiums. The transaction resulted in the $30.2 million first-half extinguishment loss. Management estimated long-term capital expenditures at approximately $35 million annually and stated liquidity was sufficient for at least the next 12 months.
Risks, contingencies, and unusual items
- COVID-19 may further weaken equipment demand, subscriber growth, usage, collections, and distributor health. One distributor sought bankruptcy protection, reducing the amount Iridium expects to collect; the filing does not state the amount.
- Aireon is a significant hosted-payload customer and source of hosting, data, and power fees. Reduced air traffic could impair Aireon’s finances and ability to pay Iridium. Iridium disclosed an expected $120 million redemption of part of its Aireon ownership, contingent on funds becoming available after a planned refinancing; management did not expect it before mid-2022.
- Iridium relies on distributors and a limited number of equipment manufacturers and component suppliers. Disruptions, financial distress, or reduced performance could affect sales and product availability.
- Iridium opposes the FCC’s April 2020 approval of Ligado’s L-band spectrum waiver, warning that terrestrial operations could interfere with Iridium services if protective conditions prove insufficient.
- The Term Loan bears interest at LIBOR plus 3.75%, subject to a 1% LIBOR floor. A $1 billion interest-rate swap runs through November 2021; a swaption could extend it through November 2026. Term Loan borrowings have no financial maintenance covenant; the revolver has a leverage test if more than 35% is drawn.
- The company reported no legal proceedings. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Updated 2020 revenue and profitability outlook, including the assumptions behind management’s reduction.
- COVID-19 effects on equipment sales, subscriber additions, usage, distributor collections, and the extent of the distributor bankruptcy exposure.
- Aireon’s ability to meet contractual payments and the conditions and timing for the proposed $120 million ownership redemption.
- Debt service, interest-rate exposure, and cash generation relative to the $1.646 billion gross Term Loan balance.
- Potential operational impact of Ligado’s spectrum use and the adequacy of interference protections.