PARIS — Mobile satellite equipment and services provider Iridium Communications on March 7 urged investors to view the coming decline in the company’s equipment sales and lower monthly per-subscriber revenue as a sign of Iridium’s broadening services offering to a much larger subscriber base.

McLean, Va.-based Iridium said ultimately it would like to evolve into a services-based business that provides chipsets or an air interface to be integrated into wholesalers’ hardware in exchange for royalty payments, with the vast majority of revenue coming from user-service charges.

Iridium Chief Executive Matthew J. Desch said during an investor conference call that the transition has already begun, especially as Iridium fields its machine-to-machine transceiver, called the 9602, which targets a market whose consumers number in the millions, each making relatively small hardware investments and paying low monthly charges.

As the transition occurs, Desch said, Iridium’s hardware sales revenue and average monthly subscriber revenue will drop, even as the number of subscribers increases.

Iridium said it had booked orders for more than 30,000 9602 units since Dec. 31. Desch said he has been “stunned” by the size and growth potential of the machine-to-machine market, where government and corporate users “seem to want to track everything.”

Iridium, whose core product remains its mobile voice handset, said it had 427,000 billable subscribers as of Dec. 31, up 24.9 percent since the end of 2009. These include 384,000 commercial subscriptions, of which 11,000 were for machine-to-machine services.

Some 16 percent of the 43,000 government subscribers at the end of 2010 were machine-to-machine users, an increase of 75 percent from the previous year, Iridium Chief Financial Officer Thomas J. Fitzpatrick said during the call. Government customers, mainly the U.S. government, accounted for 23 percent of Iridium’s total revenue in 2010.

As the mix of Iridium subscriptions widens to include small units affixed to cargo or other remote assets that communicate only as needed, the company is likely to continue to see monthly subscription revenue decline when measured per subscriber. For example, government users of Iridium’s voice service paid an average $141 per month in the last three months of 2010. This was a 7 percent decrease from the previous year, in part because of greater use of Iridium’s push-to-talk tactical radio service, called Netted Iridium, which features lower monthly fees.

But even this lower figure for late 2010 is more than six times the average revenue — $22 per month — from Iridium machine-to-machine subscribers in late 2010.

Iridium is forecasting that its equipment revenue will drop by 15 to 30 percent in 2011, with smaller declines continuing in later years. Desch said that the change in Iridium’s focus — lower-priced hardware and more focus on services — was the main reason for the drop. But he said Iridium has also lowered the prices of some of its handsets to meet the competitive threat posed by a lower-cost satellite telephone introduced in mid-2010 by Inmarsat of London.

Fitzpatrick said Iridium observers should focus on the big-picture figures including total revenue and, especially, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). “It would be a mistake to use this single metric [declining hardware revenue] alone in gauging the health of our business and our competitive standing,” Fitzpatrick said.

Iridium reported total revenue for 2010 of $348.2 million, up 9 percent from 2009. EBITDA was nearly 46 percent of revenue, and 48 percent for the last three months of the year. For 2009, EBITDA was just under 42 percent of revenue.

Fitzpatrick said the revenue and cash flow that Iridium expects to report in the coming years — the company forecasts it will reach recurring revenue of $400 million in 2015, with a 60 percent EBITDA margin — should enable it to eventually see EBITDA margins approaching the 80 percent level of the most profitable fixed satellite services operators. “There is no structural or competitive reason” why Iridium should not reach that profit level, he said.

Desch reiterated Iridium’s forecast that the total mobile satellite services market will grow by 10 percent per year, on average, through 2015.

Iridium operates a fleet of 66 satellites in low Earth orbit. Its $3 billion Iridium Next constellation, using the same basic architecture, is under construction by Thales Alenia Space of France under a $2.2 billion contract for 81 satellites including nine spacecraft that will remain on the ground unless needed following a launch failure.

Including in-orbit spares, Iridium plans to launch 72 satellites aboard eight Falcon 9 rockets built and operated by Space Exploration Technologies of Hawthorne, Calif. The launch services contract carries a maximum value of $492 million.

 

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Peter B. de Selding was the Paris bureau chief for SpaceNews.