Iridium says DoD’s new unlimited service contract renewal nearly complete

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WASHINGTON — After two short-term extensions to a 2013 contract, Iridium expects to complete negotiations with the U.S. government for a more lucrative connectivity agreement.

Iridium CEO Matt Desch said April 23 that the company expects to finalize a multi-year renewal of its Enhanced Mobile Satellite Services (EMSS) contract with the Defense Department in the next 30 days.

McLean, Virginia-based Iridium provides unlimited voice and data satellite communications services to the Defense Department through a five-year EMSS contract awarded in late 2013. When that $400 million contract expired in October, the Defense Information Systems Agency paid $44 million to add another six months. On April 9, two days before the extension expired, the Defense Department signed a one-month, $8.3 million extension to bridge the gap to a new multi-year agreement.

Desch, speaking during an April 23 earnings call, said there wasn’t any specific issue causing the protracted negotiations. The original 2013 contract “took till the last minutes” as well, he said.

Iridium officials have avoided estimating the value of the renewal beyond that it will be higher on an annual basis than the final year of the 2013 contract, which was $88 million. Desch said the new EMSS contract should result in “revenues increasing nicely and the DoD’s cost per user declining markedly.”

Analysts, using Iridium’s recent contracts as a barometer, said the company is well positioned in renewal negotiations.

“The total value of the contract is expected to increase nicely from the prior contract,” William Blair analyst Louie DiPalma wrote April 23. “Iridium has a competitive moat as the only operator of a global, dense, L-band [low-Earth orbit] satellite constellation. It is also firmly entrenched with the DoD, and is a line-item on the annual DoD budget.”

DiPalma, in an April 22 research note, said William Blair estimates Iridium’s new contract will likely generate $120 million in revenue by its fifth year.

“In our view, Iridium is likely aggressively negotiating with the government for substantial increases in the out-years, similar to the last contract,” he wrote. The 2013 contract was worth $64 million its first year and increased to $88 million as the number of supported users grew.

Iridium received a separate contract renewal from the Defense Department worth up to $54 million to upgrade a government-dedicated ground station in Hawaii in preparation for the new service contract. Though announced April 22, Iridium said in a filing to the U.S. Securities and Exchange Commission that it received the contract at least a month earlier.

Ric Prentiss, a Raymond James analyst, wrote that the ground station renewal bodes well for the larger service contract.

“[W]e believe this award underscores the importance the U.S. Government puts on using the Iridium network, and gives us confidence that the U.S. Government will reach an increased EMSS contract with Iridium,” he wrote.

Desch said upgrades to the DoD gateway should enable it to support Iridium’s new Certus connectivity products by 2020. Iridium began rolling out higher throughput connectivity services in January after the last launch of its second-generation satellites. Government customers are beginning to use Certus through Iridium’s commercial gateway, Desch said, with services arranged through Iridium partner Comsat.

Iridium tallied 115,000 government subscribers as of March 31, an increase of 11 percent over the same time last year. Government services counted for $22 million of Iridium’s $133.7 million in quarterly revenue. Government services revenue remained flat, while overall revenue increased 12 percent year over year.