Iridium Communications Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; compared with the three months ended March 31, 2017. Amounts are in U.S. dollars.
Business context
Iridium provides global satellite voice and data services, subscriber equipment, and engineering support to commercial, government, and other customers. At quarter-end it reported approximately 996,000 billable subscribers, up 15% year over year. The company was replacing its first-generation constellation with Iridium NEXT and expected deployment to be completed in 2018.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $119.1 million | $104.4 million |
| Operating income | $19.4 million | $55.6 million |
| Net income | $11.5 million | $37.9 million |
| Net income attributable to common stockholders | $7.6 million | $34.1 million |
| Basic / diluted EPS | $0.08 / $0.07 | $0.35 / $0.30 |
| Operating cash flow | $58.3 million | $63.9 million |
| Capital expenditures | $83.0 million | $48.9 million |
Revenue increased 14%. Operating margin was approximately 16% versus 53% a year earlier; the comparison is distorted by a $14.2 million Boeing-related gain included in Q1 2017. Net income fell 70%, principally due to sharply higher depreciation and amortization as Iridium NEXT satellites entered service and the absence of that prior-year gain. Depreciation and amortization rose to $38.5 million from $13.5 million. Subscriber equipment revenue rose 51% to $25.8 million; services revenue rose 10% to $89.7 million. Engineering and support revenue declined 35% to $3.6 million.
At March 31, cash and cash equivalents were $430.7 million, marketable securities $20.0 million, and restricted cash $189.2 million. Current assets were $572.2 million and current liabilities $213.5 million. Gross borrowings were $2.16 billion: $1.8 billion under the credit facility and $360.0 million of senior notes. The balance sheet reports debt net of financing costs. The company stated that available liquidity should meet requirements for at least the next 12 months.
Investing cash outflow was $91.2 million, mainly reflecting $83.0 million of capital expenditures; financing cash inflow was $264.6 million, principally from the notes offering. Cash, cash equivalents, and restricted cash totaled $619.9 million at quarter-end, compared with $388.3 million at the start of the period.
Material changes versus the prior period
- Services revenue growth included commercial IoT data revenue up 17%, hosted payload and other data services up $3.0 million, and government service revenue unchanged at $22.0 million.
- Operating expenses increased 58%, with depreciation and amortization the main increase. Higher equipment sales also drove higher equipment costs.
- Interest expense included a $4.0 million loss on extinguishment when Iridium repaid Thales bills of exchange.
- On March 21, Iridium issued $360 million of 10.25% senior unsecured notes due April 2023. The amended credit facility deferred some scheduled principal repayments and established additional cash and Aireon hosting-fee provisions.
- All Series A preferred stock converted into approximately 10.6 million common shares on March 20. Iridium paid $7.0 million of Series A and $8.4 million of Series B dividends, then began a five-quarter suspension of Series B dividends.
Outlook, commentary, and risks
- Management expected to complete Iridium NEXT deployment in 2018 and estimated total design, build, launch, and related infrastructure costs through 2018 at approximately $3 billion. Five of eight planned launches had been completed; 37 of 50 launched NEXT satellites were in service at quarter-end.
- Management anticipated continued growth in commercial billable subscribers and hosted payload/data revenue as more NEXT satellites entered service. Full-year subscriber equipment revenue was expected to be in line with the prior year.
- The U.S. government EMSS contract, providing $88 million annually, was due to expire in October 2018, with a possible six-month unilateral extension. Discussions on a new contract were underway.
- Key risks include completion and performance of NEXT, satellite failure and insurance gaps (insurance does not cover lost revenue), Aireon’s ability to deliver and pay hosting fees, customer concentration including government customers, and reliance on wholesale distribution and key suppliers.
- Debt and covenant risks are material. The facility requires at least $200 million of Aireon hosting fees by December 2023 and may require debt prepayments from specified excess cash and hosting receipts. If notes remain outstanding on October 15, 2022, the facility maturity may accelerate to that date. A covenant breach could permit acceleration and enforcement against substantially all pledged assets.
- Iridium adopted the new revenue recognition standard in 2018; management described the overall effect as immaterial. The filing reports a $12.3 million reduction to opening retained earnings on an adjusted basis. Tax Act accounting remained provisional, with completion expected during 2018.
Important facts for investors to verify
- Progress, launch schedule, costs, and insurance exposure for Iridium NEXT, including any satellite failures or need to purchase replacement spares.
- Cash generation and funding needs against remaining construction payments, scheduled credit-facility repayments, and 10.25% note interest.
- Aireon’s ability to meet hosting-fee commitments and the associated credit-facility covenants and prepayment terms.
- Renewal or extension of the EMSS government contract and the effect on government revenue.
- Final tax accounting and any subsequent adjustments to the provisional Tax Act amounts.