IRDM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010, for Iridium Communications Inc. The Company, formed as a special purpose acquisition company (GHL Acquisition Corp.), acquired Iridium Holdings LLC on September 29, 2009. Iridium is a provider of global mobile voice and data communications services via satellite, serving government agencies, businesses, and consumers. The Company operates in a single segment and relies on a wholesale distribution network.

Key Financial Metrics

Margins: The filing does not explicitly state gross or operating margin percentages. However, operating expenses ($86.2 million) exceeded revenue ($81.7 million) in Q1 2010, resulting in an operating loss, whereas the predecessor entity reported an operating profit in Q1 2009.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 7.9% year-over-year, driven by a 14.3% increase in billable subscribers and growth in commercial and government services.
• Profitability Shift: The Company reported a net loss of $1.3 million compared to a net income of $9.7 million for the predecessor in Q1 2009. This shift is primarily due to the acquisition accounting treatment.
• Depreciation and Amortization: Expenses surged 512.5% to $22.5 million, with $19.1 million attributed to increased asset values from the acquisition.
• Cost of Sales: Cost of subscriber equipment sales increased 104.5% to $23.1 million, largely due to higher inventory values recognized under acquisition accounting.
• Interest Expense: Net interest income was $0.1 million in Q1 2010, a significant improvement from $4.6 million in interest expense in Q1 2009, as credit facilities were paid off post-acquisition.
• Research and Development: Expenses decreased 64.7% to $4.3 million due to the near completion of a new M2M data device and reduced Iridium NEXT expenses.

Outlook, Risks, and Contingencies

• Iridium NEXT Funding: The Company estimates $2.7 billion in costs to design, build, and launch the Iridium NEXT constellation through 2016. Funding is expected from internal cash flows, secondary payload revenues, and warrant exercises. However, many warrants are currently "under water" (exercise price exceeds stock price), creating uncertainty regarding capital availability.
• Legal Contingency (Motorola): Motorola filed a lawsuit on February 9, 2010, alleging the acquisition triggered a change of control requiring payments of at least $24.7 million. The Company has accrued an amount for this claim. A ruling could also impact intellectual property licenses and trigger additional payments up to $8.5 million.
• Government Revenue: Management expects government revenue to be slightly lower in 2010 due to the curtailment of engineering and support services contracts and potential reductions in U.S. defense spending.
• Customer Concentration: The U.S. government accounted for approximately 23% of revenue. The two largest commercial customers accounted for 20% of revenue.
• Supplier Reliance: The Company relies on a single manufacturer for subscriber equipment and Boeing for satellite operations and maintenance.

Investor Verification Checklist

• Verify the status and potential outcome of the Motorola litigation and the adequacy of the accrued liability.
• Assess the feasibility of securing financing for Iridium NEXT given the current stock price and "under water" warrants.
• Monitor the U.S. government contract renewals and the impact of defense spending cuts on revenue.
• Review the timeline for the measurement period ending September 29, 2010, for potential adjustments to acquisition accounting estimates.
• Confirm the sustainability of subscriber growth and the impact of the non-paying M2M customer on future ARPU.