Iridium Communications Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Iridium provides global mobile voice and data communications through a 66-satellite low-Earth-orbit network. The company reported approximately 1.875 million billable subscribers at quarter-end, up 16% from a year earlier.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $174.9 million | $149.9 million | $343.1 million | $296.5 million |
| Operating income | $20.8 million | $11.6 million | $40.0 million | $20.6 million |
| Operating margin | 11.9% | 7.7% | 11.7% | 7.0% |
| Net income (loss) | $4.6 million | $3.8 million | $7.4 million | $(1.4) million |
| Diluted EPS | $0.04 | $0.03 | $0.06 | $(0.01) |
| Operating cash flow | Not stated separately for the quarter | Not stated separately for the quarter | $165.6 million | $126.0 million |
| Capital expenditures | Not stated separately for the quarter | Not stated separately for the quarter | $31.0 million | $19.2 million |
Q2 revenue rose 17%; services increased 10%, equipment revenue 55%, and engineering and support revenue 21%. Commercial subscriber growth supported service revenue, while IoT revenue growth was partly offset by lower IoT ARPU from customer mix. Equipment costs grew faster than equipment revenue, reflecting product mix and higher inventory component costs. SG&A rose 20%, primarily on incentive and equity compensation and travel.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $227.2 million at June 30, 2022, down from $320.9 million at year-end 2021. The company attributed the decline principally to $169.2 million of share repurchases.
- Term Loan borrowings were $1.613 billion gross, or $1.592 billion net of deferred financing costs; $16.5 million of principal is classified as current. The loan matures in November 2026. The $100 million revolving facility was undrawn, leaving that amount available.
- Six-month cash flow was $165.6 million from operations, $81.0 million used in investing, and $180.8 million used in financing. Investing included a $50 million Aireon investment; financing included share repurchases.
- Management said available liquidity and internally generated cash flows should meet requirements for at least 12 months. Expected next-12-month needs include $16.5 million of principal, approximately $70 million of interest at then-current rates, and approximately $75 million of capital expenditures, depending on spare-satellite launch costs.
Changes, outlook, and notable items
- Six-month operating income nearly doubled year over year, while net income improved from a loss to a profit. Lower interest expense after 2021 Term Loan repricings helped; the prior-year comparison also included a material discrete state tax benefit, making tax expense higher in 2022.
- Management expects SG&A expense to increase approximately 20% in 2022, primarily due to stock compensation. Depreciation and amortization is expected to remain relatively consistent. The Space Development Agency subcontract is expected to contribute higher engineering revenue and associated expenses for the remainder of 2022 and in coming years.
- Capital expenditures are expected to average approximately $40 million annually through 2029, excluding ground-spare satellite launches. A second-quarter agreement covers launch and related services for up to five ground spares, expected to cost approximately $35 million; $7.5 million had been paid and capitalized, and launch is expected in 2023.
- In June, Iridium invested $50 million in Aireon for a 6% preferred interest. Its fully diluted ownership stake in Aireon Holdings was approximately 39.5% at quarter-end. Cash flow hedge gains of $38.4 million, net of tax, were recorded in other comprehensive income for the six-month period; this is not equivalent to operating earnings.
- Interest-rate exposure remains: the $1 billion notional cap pays if one-month LIBOR exceeds 1.5%, while the Term Loan rate is LIBOR plus 2.50% with a 0.75% floor. Management estimated that the July LIBOR move would increase annual interest expense by approximately $12 million; each additional 25-basis-point increase above the cap level was expected to add approximately $1.5 million annually on the unhedged portion.
- Russia-related sanctions and operational changes are expected to significantly reduce 2022 Russian revenue. Iridium ceased equipment shipments to Russia and may further limit or cease operations; a shutdown could also incur significant costs. Russia represented approximately 2.3% of 2021 total revenue.
- Other disclosed risks include satellite health and service continuity, reliance on key infrastructure and suppliers, supply-chain constraints, competition, foreign-exchange movements, and dependence on significant customers, including U.S. government agencies. The company reported no material pending legal proceedings beyond routine litigation and said it was in compliance with debt covenants.
Important facts for investors to verify
- Whether subscriber growth and service revenue gains continue, particularly given declining IoT ARPU and the equipment-cost/mix pressure on margins.
- The realized impact of higher LIBOR on interest expense and the extent to which the cap offsets variable-rate exposure.
- Cash use from repurchases, the Aireon investment, planned capital expenditures, and the potential $35 million spare-satellite launch.
- Execution, timing, and costs of the SDA subcontract and spare-satellite launch, as well as any further effects of Russia-related restrictions.
- Management’s liquidity assessment and expected ability to refinance the remaining Term Loan principal at or before its 2026 maturity.