The summer of 2019 was chock-full of big-sounding news headlines for Iridium Communications (IRDM +0.32%). It will continue to provide voice and data services through a Department of Defense contract; the company announced it was joining forces with satellite internet start-up OneWeb to collaborate on a global communications network offering; and it continued to add new partners in the aviation and maritime industries supplying voice and data hardware and services.
At the end of the period, the company reported a 6% year-over-year increase in revenues -- driven by a 10% rise in services revenue, offset by lower hardware sales -- and an 11% rise in operational EBITDA (earnings before interest, tax, depreciation, and amortization). The numbers may sound fairly pedestrian, but they were good enough to warrant a management upgrade on the full-year 2019 outlook.
The Internet of Things high in the atmosphere
Breaking down the numbers further, voice and data connections to Iridium's satellite network remain sluggish -- getting a slight boost as customers slowly upgrade to the new CERTUS broadband-speed offering. What's really moving the needle are new Internet of Things (IoT) connections; devices other than phones getting tracked via the network. Iridium's commercial customers span the aviation and maritime industries, energy and mining companies, forestry, and construction, all of which are using the technology to gain operational insight and so run more efficiently.
|
Service |
End of Q3 2019 Billable Subscribers |
End of Q2 2019 Billable Subscribers |
End of Q3 2018 Billable Subscribers |
|---|---|---|---|
|
Commercial voice and data |
371,000 |
368,000 |
367,000 |
|
Commercial IoT |
767,000 |
720,000 |
612,000 |
|
Government voice and data |
56,000 |
55,000 |
56,000 |
|
Government IoT |
75,000 |
70,000 |
57,000 |
Data source: Iridium Communications.
The only downside to all the new IoT hookups was that average revenue per user fell 11% from a year ago to $11.36. Nevertheless, the massive year-over-year increase in the IoT subscriber count (commercial up 25% and government up 32%) more than offset the average connection cost. As a result, new service revenue guidance was issued for full-year 2019. Set before at $440 million, management now expects service revenue of $445 to $450 million, compared with a 2018 service revenue of $407 million.
Image source: Getty Images.
Debt refinancing is on the way
In spite of the solid results, many investors may steer clear of Iridium because it's still running at a loss. Launching a new satellite constellation into orbit took years and cost a great deal of money, and Iridium's total long-term debt was $1.85 billion at the end of Q3. Year-to-date, that has cost the company $85.3 million in interest, and the total bill to debtholders is expected to be $120 million by year-end. That's a significant burden considering the revenue outlook.
Help is on the way. Iridium is set to announce a new term loan of $1.45 billion to replace the long-term credit facility it used almost a decade ago while it was launching its new satellite constellation (dubbed NEXT). CEO Matthew Desch expounded on the deal:
"[The new term loan] will replace and pay off our long-standing $1.8 billion French export bank facility that was instrumental in the construction and launch of our new constellation. The BPI facility as it's now called was put in place in 2010 and provided Iridium cost-effective financing for Iridium NEXT when debt funding for companies like ours was difficult to come by. While the facility was perfect for Iridium at that time, the completion of our new network allows us to take another step forward to a structure that is a better fit for our company today."
Put simply, the global economy was still reeling from the financial crisis a decade ago, and Iridium and its satellite plans were a high-risk endeavor. Both the economy and Iridium are in a different place now -- although the former keeps spooking investors with signs that a recession is looming. However, the resulting lower interest rates should bode well for Iridium. It's also a vote of confidence that the company is on solid footing.
As to the free cash flow (cash from operations less capital expenditures), Iridium was still operating at $18 million in the red over the last 12 months. The company is climbing toward free cash flow breakeven, though, and its steadily rising subscriber base will continue to help in this area.
Over the last 12-month stretch, the stock is up 31%, riding the news that the NEXT constellation had finally been completed in early 2019 and the company is now benefiting from the new possibilities the globe-spanning network opens up. Iridium Communications is a story of subscriber growth, and the numbers continue to roll in the right direction. This satellite provider is still worth keeping an eye on in the years ahead.
