U.S. Military Pullback Puts Pressure on Iridium Revenue

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PARIS — Mobile satellite services provider Iridium Communications on Nov. 1 said reduced voice calls by U.S. military forces and a drop in government-related engineering work put pressure on revenue for the three months ending Sept. 30.

In a conference call with investors, Iridium officials said they expect to return to higher growth rates in 2013 with a new U.S. government service contract and a planned increase in the per-minute charges to commercial customers using Iridium handsets.

Six weeks after announcing Canada’s civil-aviation authority, Nav Canada, as the first partner for Iridium’s Aireon global air-traffic-monitoring service, the company said it is still negotiating with the Canadian agency on its financial commitment.

Iridium Chief Executive Matthew J. Desch said during the conference call that an announcement about Nav Canada’s Aireon investment would occur soon. He said Nav Canada would be a principal investor in Aireon and the first customer for the service.

Aireon will use a payload to be attached to Iridium’s 66-satellite second-generation Iridium Next constellation to provide global data on aircraft location, permitting more-efficient routing of aircraft, notably by reducing the current spacing between aircraft.

Iridium expects to sell 50 to 60 percent of Aireon equity to outside investors, starting with Nav Canada. Iridium assumes Aireon will pay Iridium $200 million in a one-time fee to host the Aireon payloads on the Iridium satellites, plus an annual service fee to provide the aircraft data.

The Iridium Next satellites, part of a $3 billion investment in the second-generation system, are expected to clear their critical design review by June and to be launched starting in 2015.

Iridium’s current 66-satellite constellation, launched into low Earth orbit more than a decade ago and now well beyond its contracted service life, continues to operate without a hitch, Desch said. In August, an operational satellite failed and was replaced by an in-orbit spare. He said the constellation has four remaining in-orbit spares.

Desch said Iridium has gone without a price increase to its commercial voice service for several years. The company wanted first to see the market’s reaction to a lower-cost handset and service offered by competitor Inmarsat of London.

Inmarsat officials have said their ISatPhone Pro handset has reached its target market penetration goals and that prices would be increased.

Desch said Inmarsat’s price increase “have given us room to adjust prices up in 2013,” and that handset retailers favor selling Iridium phones over Inmarsat’s because there is more profit in them than in the Inmarsat product.

The price increases, of between $4 and $5 per month, will be applied starting in January, Iridium Chief Financial Officer Thomas J. Fitzpatrick said during the call. He said monthly commercial subscriber revenue in 2012 is likely to be down by an average of $3 per month, but that monthly revenue would stabilize in 2013 after the price increase.

Iridium said commercial subscribers in the three months ending Sept. 30 were paying an average $46 per month in airtime charges, down 8 percent from a year ago but up from $45 per month in the three months ending June 30.

Government voice subscribers, which totaled 49,000 as of Sept. 30, paid an average of $136 per month, down from $138 in the three months ending June 30. Iridium has lost about 3,000 government voice subscribers as U.S. troops withdraw from Iraq and Afghanistan, Fitzpatrick said.

Iridium reported that its total billable subscriber base was 595,000 as of Sept. 30, up 3.3 percent from three months earlier. This figure includes government and commercial customers, and both voice subscribers — who generate the most revenue — and subscribers to Iridium’s fast-growing machine-to-machine (M2M) service. M2M subscribers, many using the service to keep track of cargo and other assets, generally pay far less in monthly charges than do voice customers.

Iridium reported total third-quarter revenue of $100.4 million, down 2 percent from a year ago but a 3 percent increase over the previous three-month period. EBITDA, or earnings before interest, taxes, depreciation and amortization, was 57 percent of revenue.

One possible boost to revenue in 2013 will be the U.S. government. The company recently announced a Pentagon contract, valued at up to $47 million over five years, to adapt the Defense Department’s Iridium Earth station in Hawaii to Iridium Next.

Desch said the Defense Department’s principal Iridium five-year service contract is up for renewal in March. He said he assumed it would be replaced by another five-year commitment, but that it could be a one-year contract. The U.S. Defense Department in recent years has accounted for 20 to 25 percent of Iridium’s total revenue.