Iridium Communications Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Iridium provides global satellite voice and data communications, supported by a wholesale distribution network. It reported approximately 788,000 billable subscribers, up 5% year over year.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $104.2 million | $97.0 million; up 7% |
| Services revenue | $79.8 million | $75.4 million; up 6% |
| Subscriber equipment revenue | $17.6 million | $16.5 million; up 6% |
| Engineering and support revenue | $6.8 million | $5.0 million; up 35% |
| Operating income | $43.3 million | $33.5 million; up 29% |
| Operating margin | Approximately 41.5% | Approximately 34.5% |
| Net income | $28.5 million | $21.0 million; up 36% |
| Net income attributable to common stockholders | $24.7 million; basic EPS $0.26, diluted EPS $0.23 | $17.2 million; basic EPS $0.18, diluted EPS $0.17 |
| Cash from operations | $47.0 million | $51.5 million |
| Capital expenditures | $75.8 million | $50.1 million |
| Cash and cash equivalents | $287.2 million at March 31 | $185.7 million at December 31, 2015 |
| Marketable securities | $124.9 million at March 31 | $203.3 million at December 31, 2015 |
| Credit Facility borrowings | $1.594 billion gross; $1.460 billion net of deferred financing costs | $206.2 million of facility capacity remained |
Operating cash flow less capital expenditures was negative $28.8 million, compared with approximately positive $1.5 million in Q1 2015. Cash increased by $101.5 million in the quarter, principally reflecting facility borrowing and marketable-security maturities and sales. Restricted cash was $102.1 million. Current assets were $506.4 million and current liabilities were $81.6 million.
Material changes and management commentary
- Revenue growth reflected a $4.0 million increase in U.S. government service revenue, primarily from a contractual price increase under the Defense Information Systems Agency EMSS contract. Commercial M2M subscribers grew 9%; commercial voice and data revenue was nearly flat as increased push-to-talk subscriptions were offset by lower airtime usage.
- Operating expenses fell 4% to $60.9 million. Research and development declined $1.6 million, primarily due to lower Iridium NEXT project spending; SG&A declined $1.5 million. Higher service costs reflected increased U.S. Department of Defense contract activity.
- Management expects continued growth in commercial billable subscribers during the remainder of 2016. It expects seasonal strength in commercial voice services and related equipment sales from March through October. The filing gives no specific revenue or earnings guidance.
- Management expected Iridium NEXT launches to begin in summer 2016 and constellation deployment to be completed in 2017. Satellites and ground infrastructure were progressing through testing and production preparation; ground infrastructure upgrades were reported complete.
- Estimated Iridium NEXT design, build, launch and related infrastructure costs through 2017 were approximately $3 billion. The funding plan relies on most available Credit Facility capacity, cash and securities, and internally generated cash, including contracted hosted-payload revenue and potential Iridium PRIME revenue. Management expected the facility to be fully drawn in late 2016 and stated liquidity sources should cover requirements for at least 12 months.
- The current-satellite useful-life estimate was extended to align with the refined Iridium NEXT deployment schedule, reducing Q1 depreciation by approximately $0.4 million versus the prior year. The company will continue to reassess the estimate as deployment proceeds.
- Credit Facility covenants, including minimum cash and financial-performance requirements, constrain financing flexibility. Failure to comply after any cure period could permit acceleration and foreclosure on substantially all pledged assets. The minimum restricted-cash reserve was $102.0 million and is scheduled to rise to $189.0 million in 2017.
- Launch and in-orbit insurance was being arranged as required by the facility. The company expects to self-insure part of the risk using ground spares and a SpaceX relaunch right; replacing used spares could add costs not included in the $3 billion estimate.
Risks, contingencies, and unusual items
- Key disclosed risks include Iridium NEXT launch, deployment and funding; maintaining the existing network during transition; hosted-payload customer funding and cash flows; reliance on major government customers, wholesale distributors and single-source suppliers; competition, regulation, currency movements, and dependence on a primary gateway and operations center.
- The company reported no material pending legal claims, no defaults on senior securities, and no material changes to the risk factors in its 2015 Form 10-K.
- Credit Facility interest incurred was $18.2 million in Q1 2016, all capitalized during construction; $12.7 million was payable through deemed additional loans and $5.5 million in cash. The filing reports no interest payments during the quarter.
- Stock-based awards included approximately 1.335 million performance-based RSUs tied to 2016 performance goals. The company records expense when achievement is considered probable.
Important facts for investors to verify
- Whether launch timing, deployment milestones, insurance placement and the 2017 Iridium NEXT completion target remain achievable.
- Actual remaining facility availability and covenant headroom as borrowing approaches the expected late-2016 limit; confirm restricted-cash requirements and compliance at each measurement date.
- Whether hosted-payload and other internally generated cash flows materialize at levels sufficient to fund post-draw project spending and ongoing obligations.
- Progress against the approximately $3 billion Iridium NEXT cost estimate, including any additional satellite replacement or ground-spare costs.
- Whether subscriber growth and government contract revenue translate into sustainable service revenue, margins and operating cash flow, given elevated capital expenditures and seasonal patterns.