Iridium Communications Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the three and nine months ended September 30, 2014, unless otherwise noted. Financial statements are unaudited.
Business context
Iridium provides global mobile voice and data communications through a satellite constellation and wholesale distribution network. At September 30, 2015, it reported approximately 781,000 billable subscribers, up 8% from approximately 726,000 a year earlier. Its major strategic project is Iridium NEXT, a replacement constellation intended to preserve service while adding hosted-payload opportunities.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $106.0m | $107.5m | $305.0m | $308.0m |
| Operating income | $46.5m | $33.0m | $122.3m | $91.1m |
| Operating margin | 44% | 31% | 40% | 30% |
| Net income | $29.5m | $20.4m | $76.6m | $52.0m |
| Net margin | 28% | 19% | 24% | 17% |
| Diluted EPS attributable to common stockholders | $0.24 | $0.17 | $0.62 | $0.49 |
| Operating cash flow | Not separately stated | Not separately stated | $162.9m | $153.3m |
| Capital expenditures | Not separately stated | Not separately stated | $251.8m | $144.9m |
Revenue mix and drivers: Services revenue was $81.2m in Q3 (down slightly year over year) and $234.6m for nine months (up 1%). Q3 commercial voice and data revenue declined $2.9m, reflecting lower device usage, a prior-year prepaid-voucher benefit and Russian currency effects; commercial M2M revenue rose $0.5m as subscribers grew, partly offset by lower ARPU. Government service revenue increased $2.0m in Q3 and $6.0m year to date, primarily from a contractual price increase under the U.S. government EMSS contract. Equipment revenue rose 3% in Q3 but fell 7% year to date; engineering and support revenue declined as modernization and other projects ended.
Profitability: Operating income increased 41% in Q3 and 34% year to date despite slightly lower revenue. Lower operating expenses drove the improvement, notably depreciation and amortization (down $6.7m in Q3 and $20.5m year to date) and equipment costs (down $3.7m and $10.9m, respectively). The depreciation decline included a change in estimated remaining lives of current satellites, reducing expense by $2.8m in Q3 and $9.1m year to date. Amortization also declined after certain acquired intangible assets became fully amortized. Lower warranty provisions contributed to lower equipment costs; the nine-month warranty provision was $6.2m below the prior-year period.
Cash, debt and liquidity
- At September 30, 2015, cash and cash equivalents were $290.7m, marketable securities $221.9m and restricted cash $88.6m. Cash plus marketable securities totaled $512.6m.
- Credit Facility borrowings were $1.444bn, with $356.0m unused. The facility bears floating-rate interest on a portion of borrowings; reported debt includes substantial capitalized interest and financing costs.
- For the first nine months, operating cash flow was $162.9m; investing activities used $213.3m, including $251.8m of capital expenditures; financing activities provided $130.7m. Cash increased $79.4m to $290.7m.
- The company reported $335.6m of available cash as defined by the Credit Facility. The required reserve was $91.0m; $88.6m was restricted at quarter end and the remaining $2.4m was deposited on October 2, within the permitted timeframe. The reserve requirement rises to $189.0m in 2017.
- Management said liquidity sources should meet requirements for at least the next 12 months. The company reported compliance with specified covenants at their latest measurement dates; those dates differ by covenant.
Material changes and outlook
- Revenue was down 1% in both the quarter and nine-month period, while net income rose 45% and 47%, respectively. The earnings gains were substantially supported by lower depreciation and amortization and equipment costs, rather than revenue growth.
- Iridium estimated Iridium NEXT design, construction, launch and related infrastructure costs through 2017 at approximately $3bn. It had paid Thales $1.474bn through September 30, 2015 under the $2.3bn satellite development contract. The funding plan relies on most of the $1.8bn facility, cash and securities, and internally generated cash, including potential hosted-payload and Iridium PRIME proceeds.
- Management expected initial Iridium NEXT launches in the first half of 2016 and full deployment in 2017. The filing also describes April 2016 as the expected start of launches. The first launch had been delayed from the first quarter of 2015 because of satellite-manufacturer delays.
- Management anticipated continued growth in commercial billable subscribers for the rest of 2015. No numerical earnings or revenue guidance was provided in the supplied filing text.
- The company had agreed material terms with lenders on a proposed amendment to launch-insurance requirements, but the amendment was not yet executed. Iridium said it had obtained insurance covering over two-thirds of the full launch program, with additional coverage for the first launch and partial coverage for the second and third. The proposed amendment would permit staged insurance procurement.
Risks, contingencies and other notable items
- Iridium NEXT could face further delays, cost overruns, launch or in-orbit failures, technical or compatibility problems, and regulatory or contractor issues. Insurance includes deductibles and self-insurance features and does not cover lost revenue.
- Failure to execute the insurance amendment or comply with existing facility requirements could trigger a credit-facility default and potential acceleration of outstanding debt. The company also warned that access to future facility draws depends on continued covenant compliance.
- Funding plans depend partly on Aireon, its primary hosted-payload customer. Aireon’s technical and commercial success, ability to obtain further investment and ability to pay Iridium hosting fees are uncertain; it had no FAA service contract as of the filing.
- Other disclosed risks include reliance on key equipment suppliers and Boeing for network operations, customer and government concentration, foreign-exchange exposure, and regulatory requirements across jurisdictions. Iridium said it had no pending legal proceedings expected to materially affect its financial condition or results.
- The useful-life estimate change for current satellites reduced reported depreciation and will affect future periods; management said it would continue reviewing useful lives as Iridium NEXT is deployed. No satellites were lost in 2015; prior-year satellite impairments contributed to the comparison.
- Disclosure controls were assessed as effective, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lender amendment on launch insurance was executed, and whether insurance coverage was secured for later launches on acceptable terms.
- Iridium NEXT launch timing, project costs, remaining facility availability and covenant compliance as construction and launch spending continue.
- Aireon’s progress in completing its payload, raising remaining capital, securing customers—including the FAA—and making expected payments to Iridium.
- Whether subscriber and service revenue growth can offset declining voice ARPU, equipment-sales variability and foreign-currency effects.
- The portion of reported earnings improvement attributable to sustainable operating performance versus revised satellite useful lives, completed intangible amortization and lower warranty provisions.
- Future liquidity after accounting for capital spending, interest, preferred dividends and the increasing restricted-cash requirement.