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Coronavirus Causes Iridium's Satellite Customers to Tap the Brakes

By Nicholas Rossolillo - Apr 30, 2020 at 11:52AM

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Business was going well -- until March.

Digital-based communication services for consumers are surging due to shelter-in-place and work-from-home orders, but not all commercial services are faring as well. Satellite communications and data services company Iridium Communications (IRDM -0.84%) was off to another strong start early in 2020, but the outlook has clouded a bit due to the coronavirus pandemic. With planes grounded, oil and gas producers in tumult, and maritime shipping disrupted, Iridium waxed cautious during its first quarter 2020 update.

It wasn't all bad news, though. Iridium provides mission-critical voice, broadband, and data services to plenty of other companies and government organizations, and growth for the full-year period is still in the cards. Shares are down nearly 10% post-report as of this writing, and while I'm not going to start purchasing shares again quite yet, this satcom is back on my radar as a possible buy.

Earth viewed from space. The European continent is pictured.

Image source: Getty Images.

January and February were so promising

Iridium's first-quarter results mask a serious slowdown -- if not some contraction -- in business results. With its next-gen satellites now fully in operation, and supporting services like broadband internet that covers 100% of the globe and the satellite-based Aireon air traffic control system, net new connections and resulting revenue was especially strong in January and February. However, CEO Matt Desch commented:  

In March we began to see a reduction in the pace of subscriber additions, and heard from some of our many partners about varying levels of business impact depending on their industry. Into April, these trends accelerated.  

Nevertheless, the first two months of 2020 were good enough that Q1 ended with Iridium reporting 1.33 million billable subscribers, up from 1.15 million a year ago and 1.30 million at the end of 2019. Revenues grew 8.7% to $145.3 million, and operational earnings before interest, tax, depreciation, and amortization (EBITDA) increased 18% to $92.07 million. Not a bad start, considering the ongoing global crisis and Iridium's previous outlook for service revenue growth of 6% to 8% and operational EBITDA growth of 7% to 10% for full-year 2020.

Globe-spanning broadband is still important

But therein lies the reason for the sell-off in the stock, even though it exceeded previous financial guidance. As strong as Q1 looked, Iridium said comments from its customers have led it to pull any specific full-year 2020 guidance. While Desch and company said revenue and operational EBITDA growth is still expected, they're no longer certain how much growth they'll see. And if there's one thing markets hate, it's uncertainty.  

The good news, though, is that Iridium is now finished refinancing the loans it took out while it was building its now operational NEXT satellite constellation over the last decade (total long-term secured debt was $1.61 billion at the end of Q1). The company was $31.3 million free cash flow positive (what's left after cash operating and capital expenses are paid) during the quarter as well.

COVID-19 is going to cause some disruption, but investors can take solace in the fact that January and February were good and prove that Iridium's global network for voice, broadband, and data is still in high demand. Simply put, this is a publicly traded space stock that operates at a profit (a relative rarity for the speculative space industry) with future potential growth still in the cards. At 29 times 2019 free cash flow, investors still value Iridium as if the bottom line will continue to trend up (first-half 2019 free cash flow was still negative, thus the high valuation). But with shares trending back toward their March lows, I'm mulling another purchase in the not-so-distant future.

Nicholas Rossolillo and his clients own shares of Iridium Communications. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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