Iridium Communications Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unless otherwise noted, financial amounts are in U.S. dollars and millions. Iridium provides global mobile voice and data communications through its satellite network and is investing in its next-generation Iridium NEXT constellation.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $89.2 | $93.5 | Down 5% |
| Service revenue | $68.8 | $66.8 | Up 3% |
| Subscriber equipment revenue | $17.3 | $21.5 | Down 20% |
| Engineering and support revenue | $3.1 | $5.1 | Down 40% |
| Operating income | $25.3 | $14.1 | Up 80% |
| Operating margin | 28.4% | 15.1% | Up 13.3 percentage points |
| Net income | $14.9 | $12.4 | Up 20% |
| Net income attributable to common stockholders | $13.2 | $12.4 | Up 6% |
| Basic / diluted earnings per share | $0.17 / $0.17 | $0.17 / $0.16 | — |
| Cash from operating activities | $57.2 | $36.4 | Up $20.8 |
| Capital expenditures | $19.2 | $34.8 | Down $15.5 |
Operating expenses fell 20% to $63.9 million. Lower research and development expense and depreciation and amortization contributed to improved operating income; depreciation declined after the estimated useful life of the existing satellite constellation was extended. The income tax line changed from a $0.9 million benefit in Q1 2012 to a $7.5 million provision in Q1 2013; the company cited higher pretax income and a lower benefit from Arizona law changes, partly offset by an R&D tax credit.
Financial position and liquidity
- At March 31, 2013, cash and cash equivalents were $205.3 million, marketable securities were $66.6 million, and restricted cash was $67.7 million. Cash plus marketable securities totaled $271.9 million; restricted cash is separately held for debt-service requirements.
- Total assets were $1.98 billion and total liabilities were $1.08 billion. Credit Facility borrowings were $751.8 million, with approximately $1.0 billion of unused capacity. The required debt-service reserve was $67.5 million and is expected to rise to $189.0 million when scheduled repayments begin, expected in 2017.
- Cash and cash equivalents declined $49.1 million during the quarter. Investing activities used $90.9 million, including purchases of marketable securities and a $5.0 million investment in an equity-method affiliate. Financing activities used $15.4 million, including $1.8 million of preferred dividends. Operating cash flow increased from the prior year, primarily due to lower working-capital requirements and R&D spending.
- Credit Facility interest costs of $8.6 million were capitalized during construction; $2.6 million was payable in cash and $6.0 million through deemed additional loans. The filing states management believes liquidity sources are sufficient for at least the next 12 months.
Business changes and management outlook
- Billable subscribers rose 14% year over year, from approximately 544,000 to 621,000. Service revenue growth reflected subscriber gains, partly offset by lower average revenue per user in voice and data services. Commercial M2M subscriber growth supported revenue, while government voice and data revenue declined.
- Management attributed lower equipment revenue mainly to the timing of orders for the Iridium 9555 handset and 9602 transceiver. It expected continued growth in commercial billable subscribers and an increase in government-contract engineering work during the rest of 2013. It expected government voice ARPU to be lower in 2013 as lower-priced Netted Iridium plans grew.
- Iridium estimated design, build, launch, and related infrastructure costs for Iridium NEXT through 2017 at approximately $3 billion. Management expected the $1.8 billion Credit Facility, internally generated cash flow, potential hosted-payload cash flow, and preferred-stock proceeds to fund the program through early 2017. As of April 30, 2013, borrowings had reached $779.9 million.
- The U.S. government’s EMSS contract, as extended, was scheduled to expire September 30, 2013; Iridium was pursuing renewal. The GMSS contract was scheduled to expire May 31, 2013, with the government indicating it intended to exercise an extension through September 30, 2013. The company was pursuing a renewal. Government contracts may be terminated, and no minimum user count is guaranteed under EMSS.
- Iridium NEXT commitments included a $2.2 billion primarily fixed-price Thales development contract, with payments expected through Q3 2017. The maximum SpaceX launch-services price was reduced to $453.1 million. The Kosmotras agreement provided for up to six launches; if no launch is purchased by December 31, 2013, the agreement terminates and amounts paid above $15.1 million are refundable. The company renewed its Chandler technical support center lease through 2024.
Risks, contingencies, and unusual items
- Funding and execution risks include continued access to the Credit Facility, covenant compliance, sufficient internally generated and hosted-payload cash flows, and possible cost overruns. If funding proves insufficient or unavailable on acceptable terms, Iridium said it may need additional external financing and could delay Iridium NEXT work.
- Other stated risks include maintaining the existing satellite network until NEXT is deployed, reliance on a primary commercial gateway and network operations center, competition and pricing pressure, government spending and contract renewal, regulatory requirements, supplier dependence, and customer concentration.
- Aireon’s ability to fund, develop, and market its planned space-based aviation monitoring service is a risk relevant to expected hosted-payload cash flows.
- Management reported no material legal proceedings and no material changes to the risk factors in the 2012 Form 10-K. It also reported effective disclosure controls and no material change in internal control over financial reporting.
- Q1 included $1.75 million of Series A preferred dividends, reducing earnings attributable to common stockholders. The 7.00% preferred stock has a $100 liquidation preference per share and is convertible; the diluted EPS calculation included 10.6 million shares for the preferred stock.
Important facts for investors to verify
- Progress and remaining funding needs for Iridium NEXT, including actual project costs, borrowing availability, covenant compliance, and the rising restricted-cash requirement.
- Outcomes and timing of EMSS and GMSS contract extensions or renewals, and the effect of government spending or user changes on service revenue.
- Whether subscriber growth continues and offsets lower ARPU, equipment sales volatility, and declines in engineering and support work.
- Achievement of expected hosted-payload cash flows, including Aireon’s funding and development progress.
- How the extended useful life of the existing satellites affects depreciation and whether the network remains reliable through the NEXT transition.