Iridium Communications Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless noted. Iridium provides global mobile satellite voice and data services through its 66-satellite operational constellation and related ground infrastructure. The company reported approximately 1.151 million billable subscribers, up 16% year over year, and said it had completed its Iridium NEXT satellite replacement program.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $133.7 million | $119.1 million |
| Operating income (loss) | ($1.6 million) | $19.4 million |
| Net income (loss) | ($18.0 million) | $11.5 million |
| Net income (loss) attributable to common stockholders per diluted share | ($0.18) | $0.07 |
| Cash provided by operating activities | $48.1 million | $58.3 million |
| Capital expenditures | $34.6 million | $83.0 million |
- Revenue increased 12%. Services revenue rose 19% to $107.0 million and was 80% of total revenue. Subscriber equipment revenue fell 19% to $21.0 million; engineering and support revenue rose 58% to $5.7 million.
- Service growth reflected higher hosted-payload and data-service revenue, including Aireon and Harris hosting, growth in commercial voice and data, and more IoT subscribers. Commercial IoT subscribers grew 26%, while related ARPU declined. Equipment sales fell partly because handset sales had been unusually strong in Q1 2018.
- Operating expenses rose 36% to $135.3 million. Depreciation and amortization increased 90% to $72.9 million as more replacement satellites entered service. Operating margin was approximately negative 1%, versus 16% a year earlier; net margin was approximately negative 13%, versus 10%.
- Net interest expense increased to $25.8 million from $4.2 million, principally because less interest was capitalized as satellites under construction entered service. The company recorded a $9.7 million income tax benefit, compared with $3.8 million of tax expense in Q1 2018.
Financial position and liquidity
- At March 31, 2019, cash and cash equivalents were $275.7 million; restricted cash, principally the debt-service reserve account, was $193.0 million. Operating cash flow less capital expenditures was approximately $13.5 million.
- Reported credit-facility borrowings were $1.6849 billion gross and $1.6106 billion net of deferred financing costs. The company also had $360 million principal amount of 10.25% senior unsecured notes due April 2023, reported net at $351.5 million. Total debt carrying value was approximately $1.962 billion. The notes’ reported fair value was $396.1 million.
- Current liabilities were $376.4 million, including $225.0 million under the short-term credit facility. Total liabilities were $2.440 billion. The company stated it was in compliance with credit-facility and notes covenants at quarter-end.
- Iridium expected less than $60 million of remaining costs to complete the upgraded constellation and related infrastructure through Q2 2019. The credit facility requires at least $200 million in Aireon hosting fees by December 2023 and includes cash-sweep/prepayment provisions. If the notes remain outstanding on October 15, 2022, the credit facility maturity may accelerate to that date from September 2024.
Changes, outlook, and risks
- The loss compared with prior-year profit was driven mainly by higher depreciation and amortization and interest expense, partly offset by revenue growth and a lower tax expense. Lower capital spending reduced investing cash outflow to $44.6 million from $91.2 million.
- Management anticipated continued commercial subscriber growth during 2019. It expected a new five-year U.S. government EMSS contract, with revenues in each year greater than the final year of the existing contract; at filing, a one-month bridge extension was in place at a fixed price of $8.3 million. The government may terminate the contract under applicable rules.
- Management said Aireon data-service fees would increase further upon a customer milestone, expected in the second half of 2019. The company had recognized $5.5 million of lessor lease income in Q1 2019, compared with $0.5 million in Q1 2018, primarily reflecting hosted payload arrangements.
- Series B preferred dividends remained suspended under the planned five-quarter deferral. The company recorded $2.1 million of undeclared dividends as a deduction in calculating the loss attributable to common stockholders. Management expected it might be able to cause conversion of the preferred stock subject to share-price and dividend-payment conditions; arrears must be paid before conversion.
- Key risks include satellite health and service continuity, reliance on a primary commercial gateway and network operations center, competition, customer and distributor concentration, government contract renewal and termination, and the ability to generate cash for debt service. Satellite insurance includes self-insurance and deductibles and does not cover lost revenue. The company said there were no material changes to the risk factors in its 2018 Form 10-K and no pending legal proceedings expected to have a material adverse effect.
- Effective January 1, 2019, lease accounting adoption added approximately $27.1 million of assets and $30.1 million of liabilities, with no cash-flow impact. Management reported no material change to critical accounting policies, effective disclosure controls, and no material change in internal control during the quarter.
Important facts for investors to verify
- Progress and terms of the replacement EMSS contract, including final revenue levels and renewal timing.
- Aireon hosting-fee receipts and progress toward the $200 million covenant requirement, as well as the timing of the anticipated customer milestone.
- Debt repayment, cash-sweep provisions, refinancing or acceleration exposure, and ongoing covenant headroom.
- Whether subscriber and service growth can offset higher ongoing depreciation, interest costs, and equipment-revenue variability.
- Series B dividend arrears, any conversion decision, and the associated cash or share dilution effects.