Satellite Telecom | Iridium Lowers Forecast on Warranty Claims, Slowing Sales

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PARIS — Mobile satellite services operator Iridium Communications on Aug. 1 said a defect in its OpenPort maritime communications units, combined with reduced satellite handset sales in North America and a reduction in its U.S. government business, will mean lower revenue and profit and higher debt than expected for the next couple of years.

In a conference call with investors, officials from McLean, Va.-based Iridium said the ripple effects of the maritime issue are forcing the company to renegotiate the terms of its credit facility. The facility, which is the financial cornerstone of Iridium’s $3 billion Iridium Next second-generation satellite constellation, was organized by the French export-credit agency, Coface.

Iridium said in an Aug. 1 filing to the U.S. Securities and Exchange Commission (SEC) that it is currently meeting the covenants of the credit facility but likely will be in violation of one or more of them as from next year.

The 81 Iridium Next satellites are under construction by Thales Alenia Space of France. Seventy-two of them are scheduled for launch between 2015 and 2017, with the remaining nine to serve as ground spares.

During the call, Iridium Chief Executive Matt Desch said a single component failure on the above-deck portion of OpenPort has been identified as the cause of the unit’s failure, which has increased Iridium’s costs under its product warranty and caused some customer defections.

Iridium has identified corrective action and will start shipping modified OpenPort units in August, Desch said.

“We started seeing the problem awhile ago and we’ve been working on it for awhile,” Desch said. “It’s been an all-hands-on-deck kind of thing, and we have made a number of improvements to the product.”

Iridium Chief Financial Officer Thomas J. Fitzpatrick said the company would take a $1.9 million charge against its second-quarter earnings for what he called “an unacceptable level of equipment failures” related to the OpenPort defect.

The OpenPort issue arrives at a time when Iridium is seeking international regulatory certification as a provider of Global Maritime Distress and Safety System (GMDSS), which is required gear on ships of a certain size.

Iridium competitor Inmarsat, which used to be an intergovernmental organization, is GMDSS-certified. Desch said he is hopeful that Iridium will be GMDSS-certified within two years.

OpenPort is not the only issue that caused Iridium to lower its revenue and profit forecast for the next couple of years, and raise its projected debt levels.

The company’s Iridium 9555 telephone handset sales dropped 17 percent in the three months ending June 30 compared to the same period a year ago. 

Desch, who in the past has said Iridium’s status as the high-end satellite telephone provider would be an advantage, told investors that a price war between lower-cost providers Inmarsat and Globalstar is now eating into Iridium’s handset sales in North America.

“Customers want lower-cost, lower-volume plans,” Desch said, referring to the general trend away from voice and toward data communications on smartphones. He said an Iridium price increase earlier this year may be a contributing factor, and that the company is addressing the problem with promotions.

For the three months ending June 30, commercial service revenue was up 8 percent, mainly because of the increasing subscriber base for machine-to-machine (M2M) connections. But average monthly revenue for commercial voice and data, and for M2M service, was down from a year ago.

Iridium is negotiating with the U.S. government, a major customer, on a renewal of two contracts that otherwise will expire later this year. In the meantime, U.S. government users are spending less for Iridium engineering and support services. Total government revenue dropped slightly in the three months ending June 30, with the service segment dropping by 7 percent.

Iridium is now projecting that its service revenue in 2013 will grow by 6-8 percent compared to 2012, and not by 8-10 percent, which it had forecast in May.

Operational EBITDA, or earnings before interest, taxes, depreciation and amortization, will be $210 million – it was $206 million in 2012 – and not the $215 million to $225 million Iridium had forecast in May.

The company had forecast debt would be five times its EBITDA by the end of 2015, after the start of the Iridium Next launches. It is now forecasting debt to be six times EBITDA then.

Desch said Iridium’s current constellation of 66 low-orbit satellites remains in good health, and that the Iridium Next program is on schedule and within budget.

In its SEC filing, Iridium said that in mid-June it exercised an option with ISC Kosmotras of Moscow for the launch of the first two Iridium Next satellites aboard a Kosmotras-operated Dnepr converted missile, for $51.8 million, or $25.9 million per satellite.

If Iridium exercises the five other launch options it has, its total payment to Kosmotras will be $184.3 million, or $15.4 million per satellite. Iridium has until the end of this year to exercise one or more of the launch options.