Iridium Communications Inc. (“Iridium”) today reported financial results for the third quarter of 2017 and updated its full-year 2017 outlook. Net income was $29.3 million, or $0.23 per diluted share, for the third quarter of 2017, as compared to $31.6 million, or $0.26 per diluted share, for the third quarter of 2016. Operational EBITDA (“OEBITDA”) for the third quarter was $71.8 million, as compared to $69.7 million for the prior-year period, representing an OEBITDA margin of 62%. OEBITDA benefitted from continued growth in the Company’s Internet of Things (IoT) business and from higher equipment sales.
Iridium reported third-quarter total revenue of $116.5 million, which consisted of $89.9 million of service revenue and $26.6 million of revenue related to equipment sales and engineering and support projects. Total revenue increased 3% versus the comparable period of 2016, and service revenue rose by 3% from the year-ago period. Service revenue, which represents primarily recurring revenue from Iridium’s growing subscriber base, was 77% of total revenue for the third quarter of 2017.
The Company ended the quarter with 949,000 total billable subscribers, which compares to 838,000 for the year-ago period and is up from 912,000 for the quarter ended June 30, 2017. Total billable subscribers grew 13% year-over-year, driven by growth in commercial M2M and government customers.
“Iridium’s commercial service revenue grew a healthy 4% in the third quarter fueled by ongoing demand for satellite IoT services and a seasonal rise in equipment sales. Large storms in Florida, Texas and Puerto Rico demonstrated the criticality of Iridium’s communications network as thousands of Iridium devices were deployed by first responders and relief organizations to provide aid in impacted areas,” said Matt Desch, CEO, Iridium. Desch continued, “Based upon the momentum that our commercial business continues to enjoy, we are tightening our full-year OEBITDA guidance to the high end of our 2017 outlook.”
Commenting on Iridium NEXT, Desch said, “Our third batch of Iridium NEXT satellites successfully launched in early-October. All 10 satellites will be placed into service and enhance Iridium’s growing broadband capabilities ahead of next year’s rollout of Iridium Certus broadband.” Desch continued, “As previously announced, we are excited about our upcoming launch of 10 Iridium NEXT satellites, which SpaceX has scheduled for December 22 at 5:26 p.m. PST from Vandenberg Air Force Base.”
Iridium Business Highlights
Service – Commercial
Commercial service remained the largest part of Iridium’s business, representing 58% of the Company’s total revenue during the third quarter. The Company’s commercial customer base is diverse and includes markets such as maritime, aviation, oil and gas, mining, recreation, forestry, construction, transportation and emergency services. These customers rely on Iridium’s products and services as critical to their daily operations and integral to their communications and business infrastructure.
- Commercial service revenue was $67.9 million, up 4% from last year’s comparable period.
- Commercial voice and data subscribers were up 3% from the year-ago period to 368,000 customers. Commercial voice and data average revenue per user (“ARPU”) was $43 during the third quarter, compared to $44 in the prior-year period. Commercial M2M data subscribers grew 22% from the year-ago period to 486,000 customers. Commercial M2M data ARPU was $13 during the third quarter, compared to $15 in the prior-year period.
- Iridium’s commercial business ended the quarter with 854,000 billable subscribers, which compares to 756,000 for the year-ago period and is up from 821,000 for the quarter ended June 30, 2017. M2M data subscribers represented 57% of billable commercial subscribers at the end of the quarter, an increase from 53% at the end of the prior-year period.
Service – Government
Iridium’s voice and data solutions improve situational awareness for military personnel and track critical assets in tough environments around the globe, providing a unique value proposition that is not easily duplicated. The Company operates under two Defense Information Systems Agency (“DISA”) contracts, which include a $400 million, five-year, fixed-price agreement for satellite communications services and a $38 million multi-year contract to support and maintain the Department of Defense’s (“DoD”) dedicated gateway.
- Government service revenue was $22 million, consistent with the prior-year period, as the final step up in the fixed fee under the Company’s airtime services contract with DISA occurred in 2015.
- Iridium’s government business ended the quarter with 95,000 subscribers, which compares to 82,000 for the year-ago period and is up from 92,000 for the quarter ended June 30, 2017. Government voice and data subscribers increased 14% from the year-ago period to 49,000 as of September 30, 2017. M2M data subscribers increased 18% year-over-year and represented 48% of government subscribers, steady from 48% at the end of the prior-year period.
Equipment
- Equipment revenue was $21.8 million during the third quarter, up 9% from the prior-year period.
- In light of recent strength driven by hurricane-related activity, the company expects full-year equipment sales to be approximately flat to 2016 results.
Engineering & Support
- Engineering and support revenue was $4.9 million during the third quarter, compared to $5.6 million in the prior-year’s quarter, primarily due to the episodic nature of government-sponsored projects.
Capital expenditures were $122.5 million for the third quarter and primarily related to spending for the Company’s next-generation satellite constellation, Iridium NEXT. The Company ended the third quarter with a cash and marketable securities balance of $350.4 million and gross debt of $1.8 billion. Net debt was $1.4 billion, calculated as $1.8 billion of gross credit facility debt plus $28.9 million of vendor financing, less $350.4 million of cash and marketable securities, as well as $102.0 million in restricted cash.
2017 Outlook
The Company affirmed its full-year 2017 outlook for total service revenue growth and updated its outlook for OEBITDA. The Company expects:
- Total service revenue growth between 3% and 5% for the full-year 2017.
- Full-year 2017 OEBITDA between $260 million and $265 million. OEBITDA for 2016 was $254.2 million.
Long-Range Outlook
The Company also affirmed its long-range outlook for total service revenue growth, OEBITDA margin, cash taxes, peak net leverage and 2019 net leverage. Based on the expected 2018 Iridium NEXT system completion, the Company continues to expect:
- Total service revenue between $440 million and $465 million for the full-year 2019.
- OEBITDA margin of approximately 60% in 2019.
- Negligible cash taxes from 2017 to approximately 2020.
- Peak net leverage of 6.0x to 6.5x OEBITDA in 2017.
- Net leverage of approximately 4.5x OEBITDA in 2019.
Non-GAAP Financial Measures & Definitions
- In addition to disclosing financial results that are determined in accordance with U.S. GAAP, the Company provides Operational EBITDA and Operational EBITDA margin, which are non-GAAP financial measures, as supplemental measures to help investors evaluate the Company’s fundamental operational performance. Operational EBITDA represents earnings before interest, income taxes, depreciation and amortization, Iridium NEXT revenue and expenses (for periods prior to the deployment of Iridium NEXT only), loss from investment in Aireon, share-based compensation expenses, the impact of purchase accounting, and non-cash gain from the Boeing transaction. Iridium NEXT revenue and expenses are expected to be excluded from Operational EBITDA through 2017. In 2018, Iridium NEXT revenues are expected to exceed recurring Iridium NEXT expenses (recurring Iridium NEXT expenses are not part of the approximately $3 billion construction cost of Iridium NEXT (the “Construction Costs”)). Accordingly, the Company expects that beginning in 2018, Iridium NEXT revenues and these recurring expenses will no longer be excluded in calculating Operational EBITDA. U.S. GAAP requires that certain of the Construction Costs be expensed. These certain Construction Costs, which beginning in 2018 will principally consist of in-orbit insurance, will continue to be excluded from the calculation of Operational EBITDA through 2019. The Company also presents Operational EBITDA expressed as a percentage of GAAP revenue, or Operational EBITDA margin. Operational EBITDA, along with its related measure, Operational EBITDA margin, does not represent, and should not be considered, an alternative to U.S. GAAP measurements such as net income or loss, and the Company’s calculations thereof may not be comparable to similarly titled measures reported by other companies. By eliminating interest, income taxes, depreciation and amortization, Iridium NEXT revenue and expenses (for periods prior to the deployment of Iridium NEXT only), loss from investment in Aireon, share-based compensation expenses, the impact of purchase accounting, and non-cash gain from the Boeing transaction, the Company believes the result is a useful measure across time in evaluating its fundamental core operating performance. Management also uses Operational EBITDA to manage the business, including in preparing its annual operating budget, debt covenant compliance, financial projections and compensation plans. The Company believes that Operational EBITDA is also useful to investors because similar measures are frequently used by securities analysts, investors and other interested parties in their evaluation of companies in similar industries. However, there is no standardized measurement of Operational EBITDA, and Operational EBITDA as the Company presents it may not be comparable with similarly titled non-GAAP financial measures used by other companies. As indicated, Operational EBITDA does not include interest expense on borrowed money, the payment of income taxes, amortization of the Company’s definite-lived intangible assets, or depreciation expense on the Company’s capital assets, which are necessary elements of the Company’s operations. It also excludes expenses in connection with the development, deployment and financing of Iridium NEXT and the loss from investment in Aireon. Since Operational EBITDA does not account for these and other expenses, its utility as a measure of the Company’s operating performance has material limitations. Due to these limitations, the Company’s management does not view Operational EBITDA in isolation, but also uses other measurements, such as net income, revenues and operating profit, to measure operating performance. Please refer to the schedule below for a reconciliation of consolidated GAAP net income to Operational EBITDA and Iridium’s Investor Relations webpage at www.iridium.com for a discussion and reconciliation of this and other non-GAAP financial measures.
| Iridium Communications, Inc. | ||||||||
| Supplemental Reconciliation of GAAP Net Income to Operational EBITDA (In thousands) | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2017 | 2016 | 2017 | 2016 | |||||
| GAAP net income | $ | 29,253 | $ | 31,555 | $ | 91,979 | $ | 86,929 |
| Interest expense | 56 | 253 | 240 | 1,030 | ||||
| Interest income | (1,302) | (953) | (3,151) | (3,288) | ||||
| Income taxes | 10,055 | 18,647 | 40,195 | 49,287 | ||||
| Depreciation and amortization | 22,944 | 11,809 | 56,652 | 37,588 | ||||
| Iridium NEXT expenses, net | 6,823 | 4,775 | 15,350 | 12,118 | ||||
| Share-based compensation | 3,948 | 3,803 | 11,686 | 9,883 | ||||
| Non-cash purchase accounting | – | (215) | – | (621) | ||||
| Non-cash gain on Boeing transaction | – | – | (11,003) | – | ||||
| Operational EBITDA | $ | 71,777 | $ | 69,674 | $ | 201,948 | $ | 192,926 |
Conference Call Information
As previously announced, the Company will host a conference call to discuss its results at 8:30 a.m. ET on Thursday, October 26, 2017. Callers should dial (877) 334-1964 (U.S. only) or (631) 291-4574 (from outside the U.S.) to access the call. The conference call ID is 93129783. The conference call will also be simultaneously webcast on Iridium’s Investor Relations webpage at www.iridium.com. An archive of the webcast will be available following the live conference call.
