Iridium Communications Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Amounts below are in millions of dollars unless noted. Iridium provides global mobile voice and data communications through its satellite network and is investing in its next-generation Iridium NEXT constellation.
Financial results
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $107.5 | $100.6 | $308.0 | $284.4 |
| Operating income | $33.0 | $29.5 | $91.1 | $83.6 |
| Operating margin | 31% | 29% | 30% | 29% |
| Net income | $20.4 | $16.6 | $52.0 | $46.9 |
| Net income attributable to common stockholders | $16.5 | $14.8 | $43.5 | $41.7 |
| Basic / diluted EPS | $0.18 / $0.17 | $0.19 / $0.19 | $0.51 / $0.49 | $0.54 / $0.54 |
- Q3 revenue grew 7%; service revenue rose 8% to $81.6 million. The company attributed growth chiefly to higher commercial subscriber counts and the government EMSS contract. Total billable subscribers were approximately 726,000, up 11% year over year.
- For the first nine months, revenue increased 8%. Commercial M2M subscribers rose 21%; government service revenue was $48.0 million, up from $43.5 million, and engineering and support revenue rose 38% to $15.8 million.
- Q3 net income increased 23%; nine-month net income increased 11%. Common-stockholder EPS declined year over year, reflecting preferred dividends and a larger share base following equity issuance.
- Operating expenses rose 5% in Q3 and 8% for the nine-month period. R&D increased 57% in Q3 and 79% year to date, principally for Iridium NEXT and faster-data development.
Cash flow, liquidity and debt
- At September 30, cash and cash equivalents were $307.1 million, marketable securities $216.0 million, and restricted cash $86.1 million. Total current assets were $638.4 million and total current liabilities $112.5 million.
- Credit Facility borrowings were $1.0895 billion, with $710.5 million unused. The facility commitment is $1.8 billion; required debt-service reserves were $86.0 million and are scheduled to rise to $189.0 million in 2017.
- For the first nine months, operating cash flow was $153.3 million; investing cash flow was negative $284.9 million, including $144.9 million of capital expenditures; financing cash flow was positive $252.4 million. Cash increased $120.8 million. Operating cash flow less capital expenditures was approximately $8.4 million.
- Iridium estimated approximately $3 billion of Iridium NEXT and related infrastructure costs through 2017. It reported compliance with financial covenants at the latest applicable measurement dates and said available liquidity was expected to cover requirements for at least 12 months.
Material changes, outlook and notable items
- In May 2014, the company raised approximately $219.7 million net through common-stock and Series B preferred-stock offerings to help fund Iridium NEXT and general corporate purposes. These transactions increased common shares outstanding and added cumulative preferred dividends: Series B carries a 6.75% annual rate and Series A a 7.00% rate.
- A May credit-facility amendment revised financial covenants and deferred $76 million of scheduled reserve contributions until 2017; $11 million of restricted cash was released following the amendment. The company still uses facility borrowings to fund most Thales satellite-development invoices and some interest and insurance costs.
- Management expected continued commercial subscriber growth for the remainder of 2014, full-year government service revenue and subscriber-equipment revenue above 2013, and growth in engineering and support revenue. These are expectations, not guaranteed results.
- The company changed the estimated useful lives of current satellites in September, reducing Q3 depreciation expense by $0.9 million; the estimate change affects future periods. It also recorded $1.3 million of Q3 and $2.2 million of nine-month impairment charges after losing communication with three satellites. Spare satellites were available, and management did not consider the losses an indicator of constellation impairment.
- On October 7, 2014, Kappa Digital filed a patent-infringement complaint seeking damages and injunctive relief. Iridium had not answered, discovery had not begun, and the company said it could not yet estimate the likelihood or amount of loss.
- Key risks include completing Iridium NEXT within budget and schedule, continued access to the credit facility, generating sufficient internal and hosted-payload cash flows, maintaining the existing network, dependence on a primary gateway, competition, and reliance on distributors and certain significant customers. Management noted that funding shortfalls or cost overruns could require additional financing or delay development.
Investor verification priorities
- Track Iridium NEXT milestones, remaining project costs, launch schedule, and the pace of facility draws and reserve requirements.
- Assess recurring service growth separately from prepaid-voucher effects, which management identified as partly non-recurring, and monitor subscriber growth and ARPU.
- Review the impact of preferred dividends and potential conversion dilution on common-stockholder earnings per share.
- Monitor satellite health, depreciation-life estimates, and any further impairment charges.
- Follow covenant compliance, liquidity generation, hosted-payload funding assumptions, and developments in the Kappa Digital litigation.