Iridium connects both people and machines in remote locations to modern communications. Image source: Iridium Communications.

Iridium Communications Inc (NASDAQ:IRDM) announced second-quarter results on July 28, reporting strong growth in revenue and subscribers, particularly in its government and machine-to-machine (M2M) segments, a trend that's been building for the past several quarters, and seems likely to continue. At the same time, however, operating expenses increased 13%, taking a big bite out of the 7% jump in revenue, and holding profits relatively flat from the year-ago quarter. 

What should investors make of Iridium's results? Are higher expenses set to eat into profits going forward, or was this an aberration? Here's a closer look at the company's results, as well as what management had to say. 

Keys to the quarter

Iridium Communications reported $109.2 million in revenue, up 7%, and net income of $26.9 million, up 3.5%. Earnings per share was $0.22, up from $0.21 per share last year. Here's a breakdown of the results by segment.

Commercial service:

  • Commercial service revenue of $61.5 million was up 2%. 
  • Commercial voice/data subscribers were unchanged, at 359,000.
  • Commercial M2M subscribers were up 12%, to 384,000.
  • Commercial total billable subscriber count was 743,000, up from 701,000 one-year ago, and 713,000 at March 31.

Government service:

  • Government service revenue of $22 million was up 22%. 
  • Government voice/data subscribers were 43,000, up 16% from one-year ago.
  • Government M2M subscribers increased 32%, to approximately 37,000. 
  • Government total billable subscriber count was 80,000, up from 65,000 one-year ago, and 75,000 at March 31.

As you can see, growth in the government segment and machine-to-machine applications is driving growth, and the M2M space is becoming increasingly important to the company. On the earnings call, CEO Matt Desch said the following:

M2M remains a significant driver of growth, and beyond the current subscriber additions in the most-recent quarter. I can also report that we recently signed two noteworthy contracts, one with another top-five manufacture of construction and mining equipment, and a second, with a large global mobile asset-management solutions provider. ... These partnerships represent long-term new M2M revenue streams to Iridium, and solidify our strong and growing position in the vehicle telemetry space, especially with heavy equipment OEMs.

About those higher expenses

One of the biggest drags on net income growth in the quarter was higher sales, general, and administrative expense, which increased 19% -- almost $3.6 million -- to $22.3 million in the quarter. If expenses outpace revenue, profits would feel the pinch. When asked about this on the earnings call, CFO Tom Fitzpatrick addressed it directly:

I would just characterize it as timing, Ric [Prentiss, analyst who asked question]. SG&A was up year over year in the second quarter, was down year over year in the first. Think about SG&A on the full year as sort of 5%-ish growth. So there is not a lot to make of just a quarter; it's just up really largely timing.

Through the first half of the year, SG&A is up 5%, while revenue is up 7.3%. Total operating expense is up 4.3% so far in 2016. 

What's happening with NEXT?

The company's much-anticipated NEXT satellites have been in development and planning for years, and Iridium is finally getting ready to start putting them in orbit. According to the earnings release, the first of 10 NEXT satellites is scheduled to be launched from Vandenberg Air Force Base in California on September 19, a second in December, and another seven before the end of 2017. 

Iridium is counting on NEXT to help drive continued growth, particularly in high-speed data and M2M, but it's also expected to launch the company into a new phase. After seven years of development and hundreds of millions spent on capital expenditures over the past several years, Iridium is set to shift from development to monetization of the NEXT system. But it's still more than one year before NEXT is fully operational. 

Paying for it all

The company is moving into an extremely important phase, and will spend substantial capital over the next 18 months to launch and begin operation of its NEXT satellites. So far this year, the company has spent $156.8 million on capital expenditures, and is likely to spend as much or more before year-end due to its launch schedule, as well as other events related to scheduled payments to vendors, and potential delayed payments received from its Aireon partnership. On the earnings call, Fitzpatrick said the following:

At end of the second quarter, we had drawn approximately $1.7 billion from the COFACE facility, and had a cash and marketable securities balance of $443.1 million. As Matt mentioned, we've been working to obtain additional flexibility around our capital plan, regarding the potential timing of the $200 million in Aireon hosting payments we've been expecting in 2016 and 2017. I can report to you today that Iridium is in advanced negotiations with our credit facility lenders and our supplier Thales Alenia to delay certain scheduled payments in order to ensure sufficient liquidity for Iridium through 2017, should Aireon's hosting payments to Iridium be delayed.

I should also state that Iridium does not expect these modifications to include a capital raise in the event that Aireon's hosting payment. You should expect more detail about this matter as we finalize the deal by year-end 2016.

The company only has about $100 million available at quarter-end on its credit facility, so it had about $540 million in liquidity at quarter-end, and is counting on another $200 million from its Aireon partners sometime this year or next. The company will need that capital as it enters into a critical phase in commercializing NEXT.

Looking ahead

Iridium Communications is entering a critical phase with commercialization of its NEXT satellites. And while its capital position today should support its needs for the remainder of 2016, investors should continue to monitor the situation closely. At the same time, the company is also successfully growing its existing offerings, particularly M2M and government subscribers, even as global macroeconomic weakness -- especially in oil and mining industries -- limits the near-term growth opportunities in those key industries.

The biggest thing to watch? Iridium's ability to leverage its remaining capital, and to work with suppliers and creditors to make sure it's well-capitalized over the next 18 months. Once NEXT shifts from an expense to a revenue generator, Iridium could soar even higher. But there's still a lot of work to be done to get off the ground.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.