Weak Equipment Sales Puts Downward Pressure on Iridium Revenue

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PARIS — Mobile satellite services provider Iridium Communications on Oct. 31 said weaker-than-expected handset sales combined with the previously disclosed hardware failure on its maritime units would put pressure on its 2013 revenue.

In a conference call with investors, Iridium officials expressed surprise at what they said appears to be a market-wide slackening of demand for satellite handsets.

How long it will last cannot be assessed at this point, they said, and the company declined to make any forecasts for its 2014 revenue beyond saying that gross profit would be higher than in 2013.

Iridium Chief Executive Matthew J. Desch said Iridium nonetheless expects “a meaningful turnaround” in its maritime business now that replacement hardware is shipping to maritime customers who had installed the defective gear.

In a filing with the U.S. Securities and Exchange Commission (SEC), Iridium said it paid an additional $3.6 million in warranty expenses in the three months ending Sept. 30, bringing to $5.5 million the total charges it has incurred since the hardware defect was discovered earlier this year. 

The defect had the effect of cooling market enthusiasm for Iridium’s maritime product. But Desch said 500 new units have now been shipped to customers, and that once Iridium gets past this episode its shipboard terminals’ advantages will cause sales to rebound.

Iridium is positioning its maritime OpenPort as an alternative to London-based Inmarsat’s Fleet Broadband product “as we regain the trust of the market” after the hardware glitch. Desch said that the OpenPort issue did not result in many Iridium customers quitting to sign up with competitors.

Desch said Iridium is impatient to begin shipping its new satellite handsets in the coming months, but that the lack of a fresh product alone does not explain why equipment sales fell far short of forecasts in the three months ending Sept. 30.

He said Iridium’s information on its direct competitors suggests that the downward trend is affecting all satellite telephone providers.

“We were a little surprised by that,” Desch said, adding that Iridium’s partners had led the company to understand that the handset market was stronger than it turned out to be. “It appears to be a market-wide pullback. I don’t think it’s saturation per se. The fourth quarter is shaping up to be down.”

Iridium’s fast-growing machine-to-machine (M2M) business also slowed in the third quarter, although it maintained double-digit growth.

Iridium recently concluded a $400 million, five-year contract renewal with the U.S. Defense Department for Iridium airtime. Desch said the contract has room to grow to the extent that military users will be testing new services that may generate future hardware sales.

The U.S. government accounts for about 20 percent of Iridium’s total revenue and is the company’s biggest customer. Government voice customers and revenue declined in the three months ending Sept. 30, by 8.6 and 9.6 percent, respectively.

Iridium’s total hardware sales in the period were down 23 percent, to $20.3 million, but service revenue was up 6 percent, to $75.4 million.

Commercial voice and data subscribers numbered 345,000 as of Sept. 30, up 3.6 percent from a year ago. Revenue from these users was up 7.3 percent, to $48.5 million.

Commercial M2M revenue grew 17 percent in the three months ending Sept. 30 compared with a year ago, to $12.8 million. The number of M2M subscriber units activated as of Sept. 30 was 259,000, up nearly 22 percent. 

Total revenue for the three-month period was $100.6 million, flat from last year. 

Desch said Iridium’s 66-satellite low-orbiting constellation, which is long past its contractual service life expectancy, continues to function with better than 99 percent availability. 

The company’s $3 billion Iridium Next constellation is scheduled to begin launching in the first half of 2015. Iridium reiterated in its SEC filing that it has enough financial resources for the coming year but after that may need to renegotiate the terms of its Iridium Next financial facility, which was backed by the French export credit agency, Coface.

 

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