Iridium Communications Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results are compared with the corresponding 2018 periods. Iridium provides global mobile voice and data communications through its satellite constellation; it reported approximately 1.269 million billable subscribers, up 16% year over year.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $144.8 million | $136.8 million | $421.6 million | $390.8 million |
| Operating income | $8.0 million | $6.0 million | $10.1 million | $41.8 million |
| Operating margin | 5.5% | 4.4% | 2.4% | 10.7% |
| Net loss | $18.0 million | $12.9 million | $54.1 million | $5.8 million |
| Net loss per common share | $0.14 | $0.13 | $0.47 | $0.13 |
- Revenue mix: Q3 services revenue was $115.9 million, subscriber equipment $21.4 million, and engineering and support $7.6 million. For the first nine months, services rose 11% to $333.6 million; equipment fell 15% to $65.8 million; engineering and support rose 63% to $22.2 million.
- Cash flow: Nine-month operating cash flow was $142.5 million, investing cash outflow $112.8 million, and financing cash outflow $128.7 million. Capital expenditures were $102.8 million. Cash, cash equivalents and restricted cash together declined $98.5 million to $366.8 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $171.6 million and restricted cash was $195.1 million, including a required debt-service reserve. Gross borrowings were approximately $1.919 billion: $1.559 billion under the credit facility and $360 million of 10.25% senior unsecured notes. The company reported compliance with debt covenants.
Material changes and management commentary
- Nine-month revenue increased 8%, led by commercial services, hosted-payload and data services, and government services. Commercial IoT subscribers increased 25%; management said the growth in lower-revenue personal communication devices reduced IoT ARPU.
- Profitability weakened despite revenue growth. Nine-month operating income fell 76%, primarily as depreciation and amortization rose $71.5 million after the upgraded Iridium NEXT satellites entered service, and net interest expense rose $48.0 million as less construction interest could be capitalized. The company completed the constellation replacement in Q1 2019.
- Management anticipated continued growth in billable commercial subscribers through the remainder of 2019. The filing provides no broader full-year financial guidance.
- A new seven-year U.S. Air Force Space Command contract, effective September 15, has a stated total value of $738.5 million, with annual fixed prices ranging from $100.0 million to $110.5 million. The government may terminate it in whole or in part. Iridium expects to invest approximately $10–$12 million over three years to support enhanced government services.
- On October 21, 2019, after quarter-end, Iridium announced pricing for a proposed $1.45 billion term loan B and $100 million revolver to refinance its existing credit facility. The term loan was expected to bear interest at LIBOR plus 3.75%, subject to a 1% LIBOR floor, and mature in seven years; closing was expected November 4, subject to customary conditions. This was a planned transaction, not yet completed as of the filing.
- Debt terms require at least $200 million in Aireon hosting fees by December 2023 and provide for specified cash and hosting-fee prepayments. Iridium had received $43.1 million in hosting fees by September 30 and a further $11 million in October.
Risks, contingencies and unusual items
- Most upgraded satellites were no longer covered by launch and in-orbit insurance after their first 12 months; insurance does not cover lost revenue. Satellite failure or service disruption could therefore cause uninsured losses.
- The company cited risks including reliance on satellite and ground infrastructure, a primary commercial gateway and network operations center, wholesale distributors, single-source suppliers, and significant government customers. The new government contract is subject to termination rights.
- Iridium reported no pending legal matters expected to have a material adverse effect and no material changes to the risk factors in its 2018 Form 10-K.
- Q3 and nine-month net losses were affected by higher depreciation and interest costs; nine-month tax benefit of $21.9 million also reflected nonrecurring deferred-tax adjustments related to state law changes and stock compensation.
Key facts for investors to verify
- Whether the announced refinancing closed on the expected terms, and its resulting interest expense, maturities, covenants and liquidity effects.
- Progress toward the $200 million Aireon hosting-fee covenant and the timing and collectability of remaining hosting and data-service payments.
- Subscriber growth, commercial IoT ARPU, equipment sales trends and the performance of the new government contract.
- Satellite constellation reliability, insurance protection and the potential financial effect of service interruptions.
- Whether operating cash generation can support debt service and ongoing investment, given the substantial restricted-cash balance and elevated depreciation and interest costs.