Iridium Communications Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the unaudited quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Iridium provides global mobile voice and data communications through a low-earth-orbit satellite network and a wholesale distribution system. It reported approximately 478,000 billable subscribers at quarter-end, up 24.8% year over year.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $95.9 million | $84.0 million | $187.2 million | $165.7 million |
| Operating income | $20.7 million | $6.0 million | $37.0 million | $1.5 million |
| Net income | $11.7 million | $3.2 million | $20.0 million | $1.9 million |
| Diluted earnings per share | $0.16 | $0.04 | $0.27 | $0.03 |
| Operating margin | Approximately 21.6% | Approximately 7.1% | Approximately 19.8% | Approximately 0.9% |
Revenue growth reflected subscriber gains, higher equipment sales and increased engineering and support work. Service revenue was $65.2 million in Q2, up 10.3%; subscriber equipment revenue was $21.9 million, up 8.1%; engineering and support revenue was $8.8 million, up 90.7%. The filing does not provide a single consolidated gross-margin figure.
- Cash flow, six months: operating activities provided $84.1 million, compared with $33.2 million in 2010. Investing activities used $170.9 million, mainly reflecting Iridium NEXT and other capital spending; financing activities provided $70.6 million.
- Cash and liquidity: cash and cash equivalents were $103.8 million at June 30, down from $119.9 million at year-end 2010. Restricted cash for debt service was approximately $13.6 million and is included in other assets. Current assets were $195.6 million and current liabilities were $118.0 million.
- Debt: borrowings under the $1.8 billion credit facility totaled $265.3 million at June 30; approximately $1.5 billion remained unused. The company had repaid its Motorola note in May. At August 5, borrowings were reported at $307.3 million.
Material changes versus the prior comparable period
- Q2 revenue rose 14.2%, while six-month revenue rose 13.0%; subscriber growth was a principal driver. Subscriber equipment and engineering/support revenue also increased.
- Operating income and net income improved substantially. Six-month operating expenses declined 8.6%, partly because 2010 equipment costs included a $10.9 million acquisition-accounting inventory step-up and research and development expense fell.
- For the six-month period, other expense was $7.5 million, versus $0.1 million of other income in 2010, primarily because of commitment fees on the credit facility’s undrawn balance. The 2011 tax provision was $10.1 million, compared with $0.03 million in 2010.
- Capital expenditures rose to $170.9 million from $48.2 million. Borrowings increased, and the debt-service reserve requirement began consuming cash that otherwise could be available for operations.
- In Q2, the company exchanged 14.1 million $11.50 warrants for approximately 2.95 million common shares through private exchanges and a tender offer. Approximately 277,000 of those warrants remained outstanding at June 30.
Outlook, commentary, risks and unusual items
- Management estimated Iridium NEXT and related infrastructure upgrades through early 2017 would cost approximately $3 billion. The company expected to fund the project with the $1.8 billion credit facility and internally generated cash flows, including potential hosted-payload revenue; management said liquidity sources were expected to cover requirements for at least the next 12 months. These plans are subject to borrowing conditions, cash-flow performance and project costs.
- The filing anticipated launches beginning in early 2015. Thales’s full-scale development contract was approximately $2.2 billion, with payments expected through Q3 2017. The SpaceX launch agreement had a maximum price of $492.0 million. A June 2011 Kosmotras agreement provides for up to six launches plus six options; exercising all options would cost approximately $184.3 million.
- Management expected lower commercial M2M and government voice ARPU as subscriber mix shifted toward lower-priced plans. It also expected subscriber equipment revenue in the second half of 2011 to be below the second half of 2010, citing pricing intended to encourage subscriber growth. No formal full-year earnings or revenue guidance is stated in the provided filing text.
- Key risks include access to credit-facility draws and additional funding, hosted-payload demand, execution and cost of Iridium NEXT, and the health and capacity of the aging current constellation. The filing states that eight satellites had been lost since commercial service began and fewer than 66 in-orbit satellites would be fully functioning at any time. It also discloses a satellite loss in August 2011, after the reporting date.
- The company depended on Celestica as manufacturer of all current devices; its contractual obligations were due to end January 1, 2012, and Celestica could terminate its relationship. Boeing provided significant satellite operations and maintenance services. U.S. government spending, annual contract renewals, competition, and reliance on distributors and sole-source suppliers were additional risks.
- A mass de-orbit could require a $16.8 million payment to Boeing plus estimated insurance of $2.5 million. Management considered exercise of the relevant rights remote and recorded an approximately $0.2 million asset-retirement obligation. The company reported no material legal proceedings and no material changes in internal control.
Important facts for investors to verify
- Progress and total funding needs for Iridium NEXT, including whether credit-facility covenants and draw conditions are being met and whether hosted-payload revenue materializes.
- Satellite fleet condition, service reliability, and the operating or financial effect of the August 2011 satellite loss.
- Subscriber growth alongside ARPU trends, particularly in commercial M2M and government voice, and the expected equipment-revenue decline.
- Manufacturing continuity after Celestica’s contractual term and continued availability of sole-source components and Boeing support.
- Future capital spending, debt-service reserve requirements, cash levels, commitment fees, and dilution or proceeds associated with remaining warrants and share-based awards.