Business Context and Reporting Period
Company: Iridium Communications Inc. (formerly GHL Acquisition Corp.)
Reporting Period: Year ended December 31, 2009
Key Event: On September 29, 2009, the company acquired Iridium Holdings LLC (the "Acquisition") and changed its name. The 2009 financial results reflect only three months of post-Acquisition operations (October–December 2009). The company is the second-largest provider of mobile satellite communications services and the only provider offering 100% global coverage via a constellation of 66 Low Earth Orbit (LEO) satellites.
Key Financial Metrics
Revenue (Post-Acquisition Only): $76.0 million for the year ended December 31, 2009 (reflecting only Q4 operations).
Combined Revenue (Pro Forma): $318.9 million for the full year 2009 (combining Iridium Holdings pre-Acquisition results with post-Acquisition results), a decrease of 0.6% from $320.9 million in 2008.
Net Loss: $44.2 million for the year ended December 31, 2009. This includes a $34.1 million non-cash charge related to the change in fair value of warrants classified as derivative instruments.
Operating Loss: $12.3 million for the year ended December 31, 2009.
Cash and Cash Equivalents: $147.2 million as of December 31, 2009.
Debt: $12.0 million in external indebtedness to Motorola as of December 31, 2009. All credit facilities assumed from Iridium Holdings were paid off in September 2009.
Subscribers: Approximately 369,000 worldwide as of December 31, 2009 (a 15.3% increase from 2008).
Material Changes vs. Prior Period
- Revenue Composition: Total revenue decreased slightly on a combined basis due to a 30.4% drop in subscriber equipment sales ($83.5 million vs. $119.9 million in 2008), offset by growth in commercial services (up 20.3%) and government services (up 11.0%).
- Operating Expenses: Combined operating expenses increased 8.1% to $265.8 million. This was driven by a 158.2% increase in depreciation and amortization ($32.4 million) due to acquisition accounting adjustments and higher asset values, as well as a 134.2% increase in transaction costs ($18.6 million) related to the Acquisition.
- Profitability: The company reported a net loss of $44.2 million in 2009 compared to a net income of $1.7 million in 2008 (pre-Acquisition entity). The loss was primarily driven by the $34.1 million warrant fair value adjustment and transaction costs.
- Subscriber Growth: Subscriber growth slowed to 15.3% in 2009 compared to 36.6% in 2008, attributed to the economic environment.
Guidance, Outlook, and Risks
Outlook and Capital Needs: The company is developing "Iridium NEXT," a next-generation satellite constellation expected to launch in late 2014. Estimated costs are approximately $2.7 billion. The company expects to fund this through internally generated cash flows, secondary payload revenues, and warrant proceeds, but acknowledges that some warrants are currently "under water" (exercise price exceeds stock price). Additional debt or equity financing will likely be required.
Management Commentary: Management expects future revenue growth rates to be slower than historical rates due to the economic slowdown and industry maturation. Government revenue is expected to be slightly lower in 2010 as engineering and support contract work curtails.
Material Risks and Contingencies:
- Motorola Litigation: On February 9, 2010, Motorola filed a complaint alleging the Acquisition constituted a "change of control," triggering payment obligations of at least $24.7 million under the Senior Subordinated Term Loan Agreement and potentially up to $8.5 million under the Transition Services Agreement. Motorola also holds the right to terminate intellectual property licenses or require the de-orbiting of the constellation if a change of control is confirmed.
- De-Orbit Rights: The U.S. government, Motorola, and Boeing hold unilateral rights to require the de-orbiting of the satellite constellation upon certain events, including bankruptcy, failure to maintain insurance, or breach of agreements.
- Customer Concentration: The U.S. government (primarily the Department of Defense) is the largest customer, representing 23.6% of total revenue in 2009. Contracts are subject to annual renewal and termination.
- Supplier Concentration: The company relies on a single manufacturer (Celestica) for subscriber equipment and Boeing for satellite operations and maintenance.
Investor Verification Checklist
- Verify the status and potential financial impact of the Motorola litigation regarding the "change of control" claim and potential license termination.
- Confirm the timeline and funding strategy for the $2.7 billion Iridium NEXT constellation, specifically the reliance on warrant exercises given the current stock price.
- Monitor the renewal status of U.S. government contracts (EMSS and GMSSA), which expire in March 2010 but have been notified for extension.
- Assess the impact of the 30% decline in subscriber equipment sales on future revenue mix and margins.
- Review the company's ability to secure additional financing in the current credit market environment to fund Iridium NEXT.