Iridium Communications Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context
Iridium provides global mobile voice and data services through a satellite network and sells subscriber equipment and engineering services. It reported approximately 748,000 billable subscribers, up 11% from a year earlier. The company is developing Iridium NEXT, a replacement constellation expected to begin launching in October 2015 and reach completion in 2017.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $97.0 | $98.0 | Down 1% |
| Operating income | $33.5 | $28.3 | Up 18% |
| Operating margin | 34.5% | 28.9% | Up 5.6 percentage points |
| Net income | $21.0 | $16.5 | Up 27% |
| Net income attributable to common stockholders | $17.2 | $14.8 | Up 16% |
| Basic / diluted EPS | $0.18 / $0.17 | $0.19 / $0.19 | Down |
| Cash provided by operating activities | $51.5 | $42.5 | Up $9.1 |
| Capital expenditures | $50.1 | $58.5 | Down $8.5 |
Services revenue grew 3% to $75.4; subscriber equipment revenue fell 18% to $16.5, primarily on lower handset sales; engineering and support revenue rose 13% to $5.0. Commercial M2M subscribers increased 18%, while commercial voice and data revenue declined, reflecting lower airtime usage and the weaker Russian ruble. Government service revenue increased to $18.0, primarily under the fixed-price EMSS contract.
Operating expenses declined 9% to $63.5. Lower depreciation and amortization and subscriber-equipment costs more than offset higher research and development and SG&A. Operating cash flow less capital expenditures was approximately $1.5. Cash and cash equivalents were $217.8 at quarter-end, marketable securities were $270.4, and restricted cash was $88.6.
Liquidity, debt, and investment commitments
Borrowings under the Iridium NEXT credit facility totaled $1.314 billion, with $486.2 million unused. The facility requires a minimum debt-service cash reserve, $88.5 million at quarter-end, scheduled to rise to $189.0 million in 2017. Management stated that available liquidity should cover requirements for at least the next 12 months. The company reported compliance with specified financial covenants at the latest applicable measurement dates.
Iridium estimates Iridium NEXT design, build, launch, and related infrastructure costs through 2017 at approximately $3 billion. The Thales contract totals $2.3 billion, with $1.354 billion paid by quarter-end; SpaceX launch services total $453.1 million, with $164.3 million paid. The company expects to fund the program with the credit facility, cash and marketable securities, internally generated cash, and potential hosted-payload and Iridium PRIME proceeds.
Material changes, outlook, and risks
- Profitability drivers: Depreciation and amortization fell $6.9 million. This included a $3.0 million benefit from extending current satellite useful lives, a $3.0 million reduction from fully amortized acquired intangibles, and the absence of a $0.9 million satellite impairment recorded in Q1 2014. Management’s satellite-life estimate remains subject to review as Iridium NEXT is deployed.
- Other expense changes: Subscriber equipment cost declined $3.3 million, including a lower warranty provision. R&D rose $2.0 million, mainly for Iridium NEXT and faster data capabilities; SG&A increased $1.3 million.
- Management outlook: The company anticipated continued commercial subscriber growth in 2015, government service revenue above 2014, and growth in engineering and support revenue. These are expectations, not guaranteed results.
- Execution and funding risks: Launch timing, project costs, borrowing availability and covenants, and the ability to generate sufficient internal cash flow could affect Iridium NEXT funding. If funding is inadequate or costs exceed expectations, external financing may be needed and deployment could be delayed.
- Insurance: The credit facility requires launch and first-year in-orbit insurance for Iridium NEXT. Only part of the planned coverage had been placed; Iridium was discussing coverage structure with insurers and lenders and expected to seek a lender waiver of one or more requirements.
- Other risks and contingencies: Risks include satellite-network health during transition, dependence on key customers and wholesale distributors, competition, foreign-exchange exposure, and hosted-payload/Aireon execution and funding. A patent suit dismissed without prejudice in February 2015 may be refiled. Management reported no pending claims it expected to have a material adverse effect and no material changes to the risk factors in its 2014 Form 10-K.
Important facts for investors to verify
- Iridium NEXT launch schedule, total program costs, insurance placement, and lender waiver requirements.
- Remaining credit-facility capacity, covenant compliance, rising restricted-cash reserve requirements, and the ability to fund the program after the facility is drawn.
- Whether subscriber growth converts into service-revenue growth, particularly amid lower voice/data ARPU and weaker equipment sales.
- The effect of satellite useful-life estimates on future depreciation and reported earnings.
- Potential dilution and preferred-stock obligations: Q1 diluted weighted-average shares were 122.3 million versus 87.7 million a year earlier; preferred dividends totaled $3.9 million in the quarter.