Iridium Loses Customer to Inmarsat, Nabs One from Orbcomm

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KOUROU, French Guiana — Mobile satellite services provider Iridium lost a big maritime customer to competitor Inmarsat in late 2012 and now has apparently snatched a big machine-to-machine (M2M) customer from rival Orbcomm with a multiyear agreement with heavy-machinery manufacturer Caterpillar, Iridium announced May 2.

In a conference call with investors, Iridium Communications Chief Executive Matthew J. Desch declined to put a value on the Caterpillar deal but said the machinery builder will be using mainly Iridium for new M2M installations on all Caterpillar products.

But Desch called the transaction “a watershed agreement” for Iridium, whose M2M business has been its fastest-growing in the past couple of years. M2M subscribers increased by 31 percent, and M2M revenue by 23 percent, in the three months ending March 31 compared to the same period a year ago, McLean, Va.-based Iridium said.

In an illustration of how different the model is for M2M compared to high-end satellite telephone use, M2M subscribers now account for 41 percent of Iridium’s total subscriber base, but 18 percent of its revenue.

Desch said Iridium is now hunting for M2M customers at the broader end of the market, where monthly subscriber payments are lower but the numbers much larger. He said Iridium’s new generation of M2M equipment is much less expensive to produce, allowing the company to go into markets that up to now it would have left to Rochelle, N.J.-based Orbcomm and its lower-cost service.

M2M customers on the Iridium system paid an average $16 per month for the first three months of 2013, compared to $18 per month a year ago. Desch said profit margins have been maintained in the M2M business as the cost to Iridium of the subscriber modules has dropped.

McLean, Va.-based Iridium operates a fleet of 66 satellites in low Earth orbit. The constellation is years past its scheduled retirement date, but Desch said the network’s call availability is “as good as it’s ever been in our recent history.”

A $3 billion second-generation constellation, Iridium Next, is scheduled for launch between 2015 and 2017. Desch said work on the new satellites is on schedule at Thales Alenia Space of France and Italy, and within budget.

Iridium has created a company called Aireon to sell services from a separate payload on the new satellites to give air traffic management authorities and airlines precise data on aircraft location, a way to reduce fuel use and calculate more-efficient routing.

Desch said that after agreements with Canada’s Nav Canada air traffic management service provider, which is an Aireon investor as well as its first customer, Iridium now believes Aireon will provide Iridium with $500 million in revenue over the constellation’s 15-year life.

This figure includes a $200 million one-time hosting fee, and a $20 million annual data-services payment from Aireon over 15 years. Not included is what Iridium hopes will be an upside opportunity from retaining a minority equity stake in Aireon. 

While Iridium’s constellation covers the entire planet, the company has large coverage holes due to uncertain profitability in certain markets and regulatory issues in others.

Iridium entered the Russian market only in 2012. It must spend up to $15 million to build a gateway ground station on Russian territory. Desch said the gateway and related investments will be made to enable Iridium to capture 40 percent of the estimated $70 million in annual mobile satellite services revenue in Russia.

India and China, which also require that gateways be built on their territory, are next, Desch said, although he did not say when the commercial partnerships and other investments in those countries would be made.

For the three months ending March 31, Iridium reported $89.2 million in revenue, down 5 percent from the previous year because of a 20 percent drop in equipment sales, meaning Iridium handsets. Commercial services revenue, which over time is more important for Iridium’s growth, was up 5 percent, to $53.7 million.

Iridium Chief Financial Officer Thomas J. Fitzpatrick said data revenue has risen to account for 42 percent of Iridium’s services, from 37 percent a year ago. 

Revenue from the U.S. government, a big Iridium customer, was down 4 percent, to $15.1 million. Voice services were down 6 percent, but here too, M2M revenue was up 42 percent from a year ago. Iridium’s tactical radio service to the military, called Netted Iridium, was up 11 percent from a year ago.

Fitzpatrick said Iridium had expected that the early part of this year would be less robust for the company than the later part of the year. He said Iridium is sticking with its forecast of a 7 percent increase in EBITDA, or earnings before interest, taxes, depreciation and amortization, compared to 2012, with service revenue growing 9 percent in the year.