Iridium Investors Send Shares Higher Despite Disappointing 2013

by

PARIS — Mobile satellite services operator Iridium Communications on Feb. 27 asked investors to look beyond near-term headaches — including a recent in-orbit satellite failure in an aging constellation, a three-month delay in the launch of the second-generation satellites, a maritime hardware defect and debt-covenant renegotiations — and to focus on 2018, when the company expects to become a cash machine.

Investors apparently agreed to do just that. McLean, Va.-based Iridium’s stock price rose by more than 9 percent in Feb. 27 trading on the U.S. NASDAQ exchange, with most of the rise coming not with the early morning release of the annual results but after Iridium’s conference call.

During the call, Iridium Chief Executive Matt Desch conceded 2013 was not a great year. Revenue was flat at $382.6 million. Gross profit was slightly down on slower sales of Iridium handsets and the Iridium OpenPort/Pilot maritime hardware defect that caused subscriber defections. 

This year looks only marginally better. Iridium said revenue should grow by 2-4 percent, with operational EBITDA (earnings before interest, taxes, depreciation and amortization) growing by around 4.5 percent.

Iridium Chief Financial Officer Thomas J. Fitzpatrick said the company expects to complete negotiations with its lenders in the next few months on new loan covenants to accommodate the difficulties encountered in 2013. While declining to disclose possible new loan terms, he said the negotiations so far have gone well.

Iridium has spent about $1.3 billion of the total $3 billion it estimates as the cost of its second-generation Iridium Next constellation of 66 satellites in low Earth orbit, plus at least six spares. Much of the financing has been arranged through the French export-credit agency, Coface.

Desch said the current constellation, which is long past its contracted service life, continues to deliver high-reliability services to Iridium’s 664,000 voice and data subscribers. A satellite failure in January, which Desch said was the first in about 18 months, caused no customer service interruptions as the satellite was replaced by an in-orbit spare.

Desch said construction of the Iridium Next constellation is progressing without major delays but that software validation will push the first launch out by “a few months,” to the second quarter of 2015. The full constellation is still expected to be in orbit by late 2017, he said.

If that schedule holds, Iridium will enter 2018 with capital spending requirements of less than $30 million a year, Fitzpatrick said, compared with $404 million in 2013.

Also starting in 2018, Iridium spinoff Aireon LLC, also of McLean, will begin to generate revenue from its global air traffic management system, enabled by a payload being placed on all Iridium Next satellites.

Aireon recently signed agreements with three European air traffic authorities, which agreed to a combined $120 million investment in Aireon. The British air traffic service, NATS, more recently agreed to a multiyear data contract with Aireon but for the moment is not an investor in the company.

Any good news on Aireon is good news for Iridium, and not only because Iridium has a major share of Aireon equity. Aireon has agreed to pay Iridium $200 million in fees in return for Iridium hosting the Aireon gear on Iridium satellites. An Aireon data-provision contract with Iridium covering the second-generation’s 15-year in-orbit service life is valued by Iridium at $300 million.

Finally, Iridium expects Aireon to redeem $120 million in Iridium equity in 2018, after which Iridium will retain a 25 percent interest in the air-services company. The total of more than $600 million in cash payments “is a really interesting number when you consider Iridium’s current equity market capitalization,” Desch said.

Even after the 9.6 percent share-price increase on Feb. 27, Iridium’s market capitalization was $525 million.

Desch said it now appears clear that the market for satellite handsets has reached a plateau, especially in light of military disengagements in Iraq and Afghanistan. He said Iridium’s place as the high-end provider appears secure, and he reiterated earlier statements that the company has felt “only a marginal impact from direct competition.”

Iridium added 13,000 net voice subscribers in the nine months ending Sept. 30, a figure Desch said compares with the 7,900 subscriber additions in the same period reported by competitors Globalstar and Inmarsat, both of which are publicly traded and report quarterly results. Competitor Thuraya of the United Arab Emirates does not report its subscriber count.

Desch described the U.S. Defense Department’s five-year contract renewal as “a really big deal” that will increase Iridium’s government service revenue by 49 percent between 2013 and 2018. The U.S. government accounted for 19 percent of Iridium’s revenue in 2013.

Desch said the new-model Iridium Pilot maritime hardware is performing to specification and should enable that part of the business to rebound after the many subscriber defections in 2013 following the hardware defect.

 

Follow Peter on Twitter: @pbdes