The proliferation of wireless networks has pushed satellite communications into the background for most users, but a few key industries still require worldwide access where ground-based networks can't reach. Iridium Communications (NASDAQ:IRDM) has worked for years to build and improve its satellite network, yet coming into Thursday morning's second-quarter financial report, Iridium investors were nervous about its future prospects, having sent shares to their lowest levels in more than a year. Iridium's results showed solid progress during the quarter, but the company also cut its long-term forecasts in several key areas. Let's look more closely at how Iridium fared this quarter and why it isn't quite as optimistic about its future as it was.
Iridium climbs on the bottom line
Iridium's second-quarter results were mixed in the eyes of most investors. Revenue fell 1% to $101.9 million, and while shareholders had expected a decline in sales, they'd hoped for a slightly smaller one. Net income, however, posted a solid rise of 73% to $26.0 million, and that worked out to earnings of $0.21 per share, up by half from the year-ago quarter and beating the consensus forecast by $0.02.
Looking more closely at the numbers, Iridium posted solid gains in subscriber counts, with the current total of 766,000 up by 61,000 from the second quarter of 2014. Moreover, despite the drop in overall revenue, recurring revenue from subscription services rose 2%.
Within Iridium's segments, government services revenue was the big winner for the quarter, rising 12.5% due largely to the company's contract with the Department of Defense. The unit ended the quarter with a record number of subscribers, and data-subscription use continued to represent an increasing proportion of Iridium's overall government business. By contrast, the key commercial services division, which makes up more than half of Iridium's total revenue, saw flat sales for the quarter, with falling revenue per user offsetting higher customer counts.
Other parts of Iridium's business were weak. Equipment revenue dropped 8%, with the company blaming lower commercial handset sales for the decline, and Iridium doesn't expect the unit to grow during the rest of the year because of the strength of the U.S. dollar. Revenue from the engineering and support division also fell by 14%, as ongoing government projects were less extensive in their scope.
CEO Matt Desch commented on the tough environment that Iridium faces, saying that "2015 has shaped up to be a more challenging year than we expected." Nevertheless, Desch pointed to the ongoing progress on the Iridium NEXT project and is pleased with the performance of its existing satellite assets.
Why Iridium is reining back long-term expectations
Because of its unexpected challenges, Iridium cut back its guidance for 2015 as well as its long-range projections. The satellite specialist now expects 2015 service revenue growth of just 1% to 3%, down from a previous range of 3% to 6%. The company also believes that full-year operating earnings will come in around $230 million, at the lower end of its previous range.
Somewhat more troubling for long-term investors was Iridium's reduction of service-revenue projections for three years from now, by which time the company expects to have completed the full deployment of Iridium NEXT and to be moving forward with its long-range strategy. The satellite provider cut the top end of its revenue range for 2018 by $20 million to $465 million, and because it expressed its profit expectations in terms of operating margins, the push downward in revenue will also have an effect on earnings even though it kept its margin guidance unchanged.
Iridium still thinks that its main programs have a lot of potential. In addition to Iridium NEXT, the Aireon air-traffic monitoring joint venture continued to move forward, with Iridium reaching agreements with New Zealand and Iceland to add the two countries to its list of collaborating partners.
As disappointing as its downgraded long-range outlook is, Iridium still has huge potential to grow from the NEXT upgrade and from other as-yet-untapped applications for its satellite network. Still, in order to satisfy growth investors, Iridium will have to work harder to achieve the ambitious revenue and profit goals it has set over the long haul.