Iridium Communications Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 3, 2012. Iridium provides global mobile voice and data communications through a low-Earth-orbit satellite network. The company reported approximately 544,000 billable subscribers, up 22% year over year.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $93.5 million | $91.3 million |
| Operating income | $14.1 million | $16.3 million |
| Net income | $12.4 million | $8.3 million |
| Diluted earnings per share | $0.16 | $0.11 |
| Operating cash flow | $36.4 million | $32.2 million |
| Capital expenditures | $34.8 million | $56.2 million |
- Revenue increased 2%. Service revenue rose 9% to $66.8 million, while subscriber equipment revenue declined 12% to $21.5 million and engineering and support revenue fell 11% to $5.1 million.
- Operating expenses increased 6% to $79.4 million; operating margin declined to approximately 15.1% from 17.9%. Research and development expense rose 33%, primarily due to Iridium NEXT.
- Net income increased despite lower operating income, reflecting a $0.9 million income tax benefit versus a $3.9 million tax expense a year earlier. The 2012 benefit included a $5.2 million effect from an Arizona tax-law change.
- Cash and cash equivalents were $146.9 million at quarter-end, with $40.6 million in restricted cash. Credit facility borrowings were $441.1 million, up from $417.1 million at year-end; $1.4 billion remained unused. Current liabilities were $195.9 million and total liabilities were $795.6 million.
- Operating cash flow less reported capital expenditures was positive $1.6 million, compared with negative $24.0 million in Q1 2011. The filing attributes lower cash capital expenditures partly to payment timing: property and equipment received but not yet paid totaled $107.1 million, up $87.3 million year over year.
Material changes and management commentary
- Commercial service subscriber growth supported revenue: commercial voice revenue increased to $41.9 million and commercial M2M data revenue to $9.2 million. Commercial voice ARPU declined from $47 to $45; M2M ARPU was flat at $18.
- Government service revenue was nearly flat at $15.7 million. Management expects government voice ARPU to be lower in 2012 as more subscribers use lower-priced Netted Iridium plans.
- Subscriber equipment sales were affected by lower Iridium 9555 handset volumes and the absence of bulk-order incentive pricing offered in Q1 2011; higher Iridium Extreme sales partly offset the decline. A $1.2 million warranty provision related to production issues with the Iridium Extreme handset contributed to the quarter’s warranty expense.
- Management estimates Iridium NEXT and related infrastructure upgrades will cost approximately $3 billion through 2017. It expects the $1.8 billion credit facility and internally generated cash flows, including potential hosted-payload revenue and warrant proceeds, to fund the program through early 2017, and believes liquidity is sufficient for at least the next 12 months. As of April 27, 2012, borrowings under the facility totaled $537.2 million.
- The company reported no material legal proceedings, no material changes to the risk factors in its 2011 Form 10-K, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Outlook, commitments, and risks
- Key funding uncertainties include continued access to the credit facility, its financial and other covenants, actual internally generated and hosted-payload cash flows, and whether outstanding warrants are exercised for cash. If expected funding is unavailable or project costs exceed estimates, additional financing may be needed and Iridium NEXT could be delayed.
- Iridium’s principal NEXT commitments include a $2.2 billion Thales development contract, a SpaceX launch agreement with a maximum price of $492 million, and a Kosmotras agreement for up to six launches totaling $184.3 million if all six are purchased. The filing reports payments to date of $480.5 million, $43.9 million, and $11.2 million, respectively.
- The credit facility’s required debt-service cash reserve was $40.5 million at March 31, 2012 and is scheduled to rise to $189 million when repayments are expected to begin in 2017. Management identifies risks including satellite-network reliability during the transition, government spending and contract renewals, competition, reliance on distributors and certain suppliers, and concentration among significant customers.
- Commercial voice services and related equipment sales are typically seasonal, with March through October as peak months. The filing states results for the interim period are not necessarily indicative of full-year results.
Investor facts to verify
- Whether subscriber growth, particularly in commercial M2M and voice, continues and offsets lower equipment revenue and declining commercial voice ARPU.
- Iridium NEXT’s cost, delivery schedule, remaining contractual payments, and the company’s ability to access credit-facility borrowings and other planned funding sources.
- The extent and cost of Iridium Extreme warranty remediation and whether related production issues recur.
- The effect of the Arizona tax-law change and other tax estimates on future reported earnings.
- Debt-service reserve requirements, unpaid capital-equipment obligations, and the impact of government spending or contract-renewal changes on revenue.