Iridium Communications Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise. Iridium provides global satellite voice and data services, equipment, and engineering support. It reported more than 949,000 billable subscribers, up 13% year over year, and was deploying its next-generation Iridium NEXT constellation.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $116.5 | $112.8 | $332.6 | $326.2 |
| Operating income | $38.1 | $49.8 | $129.4 | $134.8 |
| Net income | $29.3 | $31.6 | $92.0 | $86.9 |
| Diluted earnings per share | $0.23 | $0.26 | $0.72 | $0.70 |
| Operating margin | 32.7% | 44.1% | 38.9% | 41.3% |
Q3 revenue rose 3%, led by subscriber equipment sales and services. Commercial M2M data revenue grew 14% in the quarter, supported by 22% subscriber growth; lower ARPU partly offset the increase. Government service revenue was flat. Q3 operating income fell 23%, principally due to higher depreciation and Iridium NEXT insurance costs. Nine-month net income increased 6%, including a one-time $14.2 million gain from the Boeing transition; operating income declined despite that gain.
For the first nine months, operating cash flow was $203.2 million, capital expenditures were $290.7 million, and investing cash outflow was $271.8 million. Cash and cash equivalents declined $41.1 million to $330.1 million. Marketable securities were $20.3 million and restricted cash was $102.1 million. Cash plus marketable securities totaled $350.4 million, excluding restricted cash.
At September 30, 2017, the credit facility was fully drawn: $1.8 billion gross borrowings and $1.696 billion net carrying value after deferred financing costs. Scheduled principal repayments begin March 2018. Total liabilities were $2.336 billion. The company’s available cash under the credit agreement was $336.0 million; management said liquidity sources should meet requirements for at least the next 12 months.
Material changes, outlook, and risks
- Iridium NEXT deployment continued: 30 satellites had launched in 2017; 13 were in service, seven were drifting to adjacent orbital planes, and 10 were undergoing testing. Completion was expected in 2018. Estimated design, build, launch, and related infrastructure costs through 2018 were approximately $3 billion.
- Management expected subscriber growth to continue through the remainder of 2017 and hosting and data revenue to increase as more NEXT satellites enter service. Hosting and data services revenue remained immaterial in the periods reported.
- The July 2017 credit facility amendment deferred $54.0 million of scheduled debt-service reserve contributions and refunded $33.0 million; a further $11.0 million refund may be available if the defined cash threshold is breached. The reserve must be fully funded to $189.0 million by March 2019. The amendment also requires a five-quarter suspension of Series A and Series B preferred dividends, beginning with payments due June 15, 2017.
- Thales amendments deferred approximately $100 million of expected 2017–2018 milestone payments to bills of exchange due in March 2019, with interest. Thales obligations scheduled for the 12 months ending September 30, 2018 were $247.2 million. The company expected no cash payments for delay claims absent substantial further delays.
- Aireon hosting payments were expected to remain delayed while Aireon pursued customer contracts and financing. The company cautioned that lower-than-expected internal cash generation or higher program costs could require additional financing or delay NEXT deployment.
- Launch and in-orbit insurance includes self-insurance and deductibles and does not cover lost revenue. Kosmotras had not obtained permission to launch; Iridium warned it might not recover amounts already paid. The fixed-price U.S. government EMSS service contract expires in October 2018, with pricing subject to renegotiation.
- Other execution risks include satellite health and transfer of service to NEXT, Aireon’s ability to fund payments, competition, reliance on distributors and suppliers, and concentration in significant government customers. The filing reported no material change to previously disclosed risk factors and no legal proceedings.
Important facts for investors to verify
- Whether Iridium NEXT launches and service transition remain on schedule and within the estimated $3 billion program cost.
- Whether Aireon secures funding and makes hosting payments on the expected timetable.
- Cash generation, capital spending, debt-service reserve requirements, covenant compliance, and the ability to meet principal payments beginning in March 2018.
- Whether higher depreciation and insurance costs continue to pressure operating margins, and whether projected hosting and data revenue materializes.
- Outcome of the October 2018 EMSS contract renegotiation and the timing of suspended preferred dividends and accumulated unpaid amounts.