Iridium Communications Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet figures are as of June 30, 2019. Unless stated otherwise, dollar amounts are in millions. Comparisons are with the corresponding 2018 periods.
Business context
Iridium provides global mobile voice and data communications through a low-Earth-orbit satellite network, selling services and equipment through wholesale distributors. Its completed Iridium NEXT constellation comprises 66 operational satellites, with in-orbit spares. The company reported approximately 1.213 million billable subscribers worldwide, up 16% year over year. Services represented 77% of Q2 revenue and 79% of first-half revenue.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $143.1 | $134.9 | $276.8 | $254.1 |
| Operating income | $3.7 | $16.3 | $2.1 | $35.8 |
| Operating margin | 2.6% | 12.1% | 0.8% | 14.1% |
| Net income (loss) | $(18.1) | $(4.4) | $(36.1) | $7.1 |
| Net income (loss) attributable to common stockholders per diluted share | $(0.16) | $(0.06) | $(0.34) | $0.01 |
| Cash provided by operating activities | Not separately stated | Not separately stated | $64.1 | $141.1 |
| Capital expenditures | Not separately stated | Not separately stated | $92.6 | $215.0 |
Q2 revenue comprised services of $110.8, subscriber equipment of $23.4 and engineering and support of $8.9. For the first half, the respective amounts were $217.7, $44.4 and $14.6. The filing does not provide a single consolidated gross-margin figure.
At June 30, cash and cash equivalents were $175.8; an additional $194.1 was restricted, principally for debt service. Current assets were $320.7 and current liabilities were $284.9. Debt included $1,630.9 of gross Credit Facility borrowings (reported net of financing costs at $1,561.8) and $360.0 of senior unsecured notes (reported net at $352.0). The notes bear 10.25% interest and mature in April 2023. The Credit Facility is scheduled to mature in September 2024, but may accelerate under specified conditions.
Changes versus prior comparable periods
- Q2 revenue rose 6%; first-half revenue rose 9%. Growth reflected higher service and engineering revenue, partly offset by lower equipment sales.
- Commercial IoT service revenue increased 15% in Q2 and 14% in the first half, principally as billable IoT subscribers grew 25%; the resulting customer mix lowered IoT ARPU. Government service revenue increased to $24.5 in Q2 and $46.5 for the first half.
- First-half hosted-payload and other data-service revenue increased $9.2, including revenue associated with Aireon and Harris. First-half engineering and support revenue increased $5.9, primarily from government work.
- Profitability weakened substantially: first-half operating income fell to $2.1 from $35.8, and the company moved from first-half net income to a net loss. Depreciation and amortization increased $59.1 for the first half as more upgraded satellites entered service. Net interest expense increased $37.6, primarily because less interest was capitalized as satellite construction was completed.
- First-half operating cash flow declined $77.0. Management cited working-capital effects, including higher receivables related to EMSS contract extensions, lower deferred revenue and lower accrued expenses. Capital spending fell as Iridium NEXT construction payments were completed.
- In May 2019, the company converted all outstanding Series B preferred stock into approximately 16.6 million common shares and paid $8.4 in current and cumulative dividends. Common shares outstanding increased to 130.8 million at June 30 from 112.2 million at December 31, 2018.
Outlook, commentary and risks
- Management anticipated continued commercial subscriber growth during 2019. It expected an Aireon customer milestone in the second half of 2019 to increase data-service fees; the anticipated step-up was not reflected in Q2 revenue.
- The EMSS government contract had been extended through August 21, 2019 while terms of a new long-term contract were being finalized. Management expected annual revenue under the new agreement to exceed the $88.0 earned in the last full year of the prior contract; this is an expectation, not a completed contract outcome. The government may terminate the contract under federal acquisition rules.
- Management intended to refinance the Credit Facility within the next 12 months, assuming favorable debt-market conditions, with the refinancing also permitting retirement of the notes.
- Credit terms require at least $200.0 in Aireon hosting fees by December 2023. Certain hosting receipts and cash above a specified threshold may be applied to Credit Facility prepayments; if notes remain outstanding on October 15, 2022, Credit Facility maturity may accelerate to that date. The company reported compliance with debt covenants at June 30.
- Key operating and financial risks include satellite health and service continuity, dependence on a primary gateway and network operations center, competition and technology change, reliance on distributors and certain suppliers, dependence on government and other significant customers, and the ability to generate cash for debt service. Satellite insurance has deductibles/self-insurance features and does not cover lost revenue.
- The company adopted lease accounting guidance on January 1, 2019, recording an estimated $27.1 increase in opening assets and $30.1 in opening liabilities. Management cited nonrecurring deferred-tax adjustments related to state-law changes as one factor affecting tax expense. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress and final terms of the replacement EMSS contract, including whether expected annual revenue exceeds $88.0 and whether the government exercises termination rights.
- Timing and amount of the anticipated Aireon data-fee milestone, cash collections under the hosting agreement, and progress toward the $200.0 hosting-fee covenant.
- Refinancing progress, debt-service requirements, covenant headroom and the potential 2022 acceleration condition.
- Whether subscriber and service-revenue growth can offset lower equipment sales and rising satellite operating costs.
- Future depreciation, interest expense and operating cash flow as the upgraded constellation moves from construction into full operation.
- Restricted cash availability and the effects of working-capital movements on reported cash generation.