Before the upgrade, came the contract.
As you may have heard by now, sat-com stock Iridium Communications (NASDAQ:IRDM) won a big upgrade this week when analysts at Sidoti and Co. rated the shares a "buy" and predicted that Iridium's revenue and free cash flow would soon take off.
What you may not have heard is that just last month, the U.S. Pentagon promised to help make that happen.
Iridium's near-billion-dollar defense contract
On September 16, the U.S. Air Force Space Command awarded Iridium a $738.5 million, seven-year, fixed-price contract "to provide unlimited satellite services from its unique Low Earth Orbit (LEO) constellation."
On the face of it, this "Enhanced Mobile Satellite Services" (EMSS) contract seems like a really big deal, valued at 135% of all the revenue Iridium collected through its business over the last 12 months. The question for investors, though, is whether even this is enough to make a difference, to "move the needle" on revenue growth and potentially turn Iridium into a profitable company.
So ... is it?
Well, there are a couple of clues contained in Iridium's press release announcing the award itself.
First and foremost, Iridium noted that this contract was granted for an "unprecedented seven-year term." On the one hand, it's certainly nice to have a guarantee that this revenue will keep flowing well into the next decade. On the other hand, though, to calculate the award's effect on annual revenue at Iridium, you need to divide the "headline number" by seven -- resulting in a contract worth about $105.5 million annually over seven years.
Of course, even $105.5 million is still a substantial sum, equal to about 19% of Iridium's annual revenue stream. If this were entirely new revenue Iridium was winning from the Pentagon, the contract would be a huge boost to the business to be sure. Most analysts who follow the company only expect Iridium to grow its revenue 6% next year, and 5% the year after that.
How happy should you be?
But here's the thing: This is not really new revenue for Iridium. Rather, the EMSS contract announced last month was really more like an extension of an agreement to continue providing services that Iridium is already providing to the Pentagon (albeit at an increased level).
We know this because Iridium refers in its press release to a "previous contract period" for these services -- and indeed, notes that Iridium has been providing these kinds of satellite services to the Air Force "over the past 20 years."
So how much bigger is this contract than the last one, which it presumably replaces?
Iridium's most recent full-length EMSS contract was awarded in 2013, and lasted five years at a $400 million contract price (so $80 million per year). In 2018 this contract was extended for six months in a $44 million deal ($88 million annualized).
Compared to the annual value of this latest EMSS award ($105.5 million), therefore, it looks like the Pentagon is indeed increasing the amount of business it is throwing Iridium's way by $17.5 million annually. That's a not insignificant sum, but in the broader scheme of things, it still only represents about 3% growth for Iridium's total revenue stream -- not 19%.
In other words, this $738.5 million contract is good news, not great news for Iridium. It will move the needle, but not enough to turn Iridium profitable -- or to make Iridium stock a "buy."