Business Context and Reporting Period
Company: Iridium Communications Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Iridium provides global mobile voice and data communications services via a constellation of low earth orbiting satellites. The company operates as a wholesaler to service providers, distributors, and government agencies. As of September 30, 2010, the company had approximately 413,000 billable subscribers, a 21.8% increase from the prior year.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $94,527 | $260,243 |
| Operating Profit | $20,836 | $22,324 |
| Net Income | $10,686 | $12,569 |
| Earnings Per Share (Diluted) | $0.14 | $0.17 |
| Cash and Cash Equivalents (Sep 30, 2010) | $104,636 | |
| Net Cash Provided by Operating Activities (9 Months) | $104,576 | |
| Capital Expenditures (9 Months) | $(134,259) |
Revenue Composition (9 Months 2010): Services (Government: $56.8M; Commercial: $134.3M) and Subscriber Equipment ($69.2M).
Effective Tax Rate: Approximately 49% for the nine months ended September 30, 2010.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.9% for the quarter and 7.1% for the nine-month period compared to the predecessor company's results for the same periods in 2009. Growth was driven by a 21.8% increase in billable subscribers and strong subscriber equipment sales.
- Operating Expenses: Total operating expenses increased significantly (11.5% for the quarter; 34.0% for nine months) primarily due to a 529.2% increase in depreciation and amortization. This spike is attributed to acquisition accounting adjustments following the September 2009 acquisition of Iridium Holdings, which increased the carrying value of assets.
- Profitability: The company reported a net income of $10.7M for the quarter, compared to a net loss of $39.4M for the same period in 2009. The 2009 loss was heavily impacted by a $34.1M charge related to the change in fair value of warrants, which did not recur in 2010.
- Cost of Services: Decreased 12.4% for the quarter due to a favorable renegotiation of the operations and maintenance agreement with Boeing.
Outlook, Risks, and Subsequent Events
Subsequent Events (Post-September 30, 2010):
- Financing: On October 4, 2010, the company finalized a $1.8 billion credit facility (the "Facility") to fund the design, build, and launch of the Iridium NEXT constellation. The first draw of $135.1 million occurred on October 29, 2010.
- Motorola Settlement: On October 1, 2010, the company settled litigation with Motorola for $46.0 million. This included $15.4M in debt repayment and $30.6M for expanded intellectual property licenses and termination of Motorola's distribution rights. $23.0M was paid immediately; the remainder is a promissory note.
- Contract Effectiveness: The Full Scale Development (FSD) contract with Thales Alenia Space and the launch agreement with SpaceX became effective upon closing the Facility.
Management Commentary & Risks:
- Iridium NEXT: Estimated total costs for the next-generation constellation are approximately $3 billion through early 2017. The company expects to fund this via the new credit facility and internal cash flows.
- Liquidity: Liquidity levels are expected to be lower in the coming year due to significant capital expenditures for Iridium NEXT. As of October 31, 2010, cash and cash equivalents were approximately $111.0 million.
- Key Risks: Risks include the ability to complete Iridium NEXT on time and budget, reliance on single-source suppliers (e.g., Celestica for manufacturing, Boeing for O&M), potential satellite failures or collisions, and the possibility that the U.S. government, Motorola, or Boeing may exercise de-orbit rights under specific conditions.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the financial covenants of the new $1.8 billion credit facility, including minimum cash requirements and debt service coverage ratios.
- Iridium NEXT Progress: Monitor the timeline and cost estimates for the Iridium NEXT satellite constellation, specifically the first launch scheduled for Q1 2015.
- Subscriber Growth vs. ARPU: Track the balance between subscriber growth and the declining Average Revenue Per User (ARPU) in both government and commercial segments.
- Supplier Concentration: Assess the risks associated with reliance on single-source suppliers for subscriber equipment (Celestica) and satellite operations (Boeing).
- De-orbit Rights: Review the conditions under which the U.S. government, Motorola, or Boeing can unilaterally require the de-orbiting of the current constellation.