Satellite telephone service is a glamorous industry that captured the imagination of investors in the 1990s. Thousands of people use satellite telephones today. Investors are bidding up Iridium stock more aggressively than at any time since the dot.com bubble. The Iridium business grabbed our attention in late 2014 when we saw the stock price surging from $6 to $10 per share. This was a weak company with a failed business model and huge financial obligations, but the stock price was rising rapidly. IRDM was behaving like a growth stock.
Have the prospects for this company improved significantly?
Will the old satellites continue to work until they are replaced in 2018?
Has Iridium raised all the funds for the Iridium NEXT replacement constellation?
How will Iridium fund the remainder of the construction and launch?
Why is Iridium reluctant to procure launch insurance?
Why has Iridium registered 23 million shares of stock in 2015?
Will Iridium continue to dilute its common stock to support the company?
What are the prospects for subscriber and revenue growth?
We investigated Iridium over the past six months, wrote several articles, and investigated more deeply to understand the complete story behind this company. Iridium disclosures provide all the information, but revealing the complete story was not as simple as we might have expected. Analysis was needed to make complete sense of the situation. This report reflects a solid analysis of the Iridium business. The pieces all fit together perfectly now, but there are many false rumors and misleading reports by “market analysts”.
Iridium (IRDM) registered 23 million shares for sale on May 15, 2015. It sold a 10 million last year and probably will issue similar stock sales over the next few years. The P/E is 16 heading for 22. Prospective investors could benefit from a complete understanding of this company.
This objective report has been prepared to provide investors with complete insight into the IRDM business and its future prospects. This is a balanced report that presents the strengths and weaknesses of this company and its standing within the satellite industry. The authors have over 50 years experience in the space industry and have been intimately involved in mobile satellite services since the beginning.
The report is entirely based on public information. It has been internally funded and is neither sponsored nor endorsed by Iridium nor its competitors. Neither TelAstra, Inc. nor any of its employees own securities in this or competing companies, nor do they hold any relevant short positions.
The 75-page report with extensive graphics is provided on a CD ROM disk. It includes Excel files, relevant SEC and FCC filings, news clippings and references. The report is based on complete data reported by Iridium over the past 25 years.
Comparisons of terrestrial and satellite communication capability
Iridium is a remarkable business in several respects: (1) In spite of fundamentally high CAPEX and operating costs, the management has convinced investors to fund a second generation of satellites. (2) 70% of the first generation of satellites continue to function and provide services long after their design life has ended, (3) Investors accept substantial stock dilution as a means for keeping the company alive.
Iridium has annual revenues of $408 M compared to $1,286 M for Inmarsat. 2014 Earnings were $72.8 M (17.8% margin).
Most of Iridium revenues come from commercial telephone subscribers (45%), government telephone (16%), M2M services (14%), user equipment (19%), and support services (5%).
Iridium commercial and government voice ad revenues are dominant but not growing. In fact, Iridium has been losing commercial voice and data subscribers and revenue for the past three quarters.
Iridium provides M2M services to 361,000 units. Competitors include 1,260,000 units for Orbcomm, 400,000 units for Omnitracs, and 243,448 terminals for Globalstar. M2M appears to be the only growth area but Iridium total revenue may have peaked already.
The ARPU of commercial voice, data, and M2M subscribers has been falling for the past five years. This might be due to reduced quality of service or competitive factors. This trend is likely to continue.
Iridium is not a contender for a more lucrative market segment, i.e., providing broadband services to airplane and cruise ship passengers. These services are provided by Inmarsat, Intelsat, SES, Eutelsat, Panasonic, and Viasat.
The original satellites are long overdue for replacement since they were launched into orbit in 1997 - 1998. The failure rate is increasing. The old satellites must be used for another two or three years.
The Iridium NEXT program is budgeted to cost $3.085 Billion. As of 31 December 2014, Iridium still needed to pay $1.5 Billion.
Funding for the project would be provided by COFACE guaranteed loans of $1.8 Billion, earnings of $554 million, and stock sales of $697 million (according to recent 10K reports and our analysis).
Stock sales have diluted the number of outstanding shares from 54 million in 2009 to 117 million shares as of the May 15, 2015 registration (23 million shares).
It appears that Iridium will continue to issue stock to raise the funds needed to complete construction of Iridium NEXT. The company will need to sell an additional $130 Million (13 million shares @$10) of common stock in 2016 and $132 M (13 million shares) in 2017.
Conversion of the Series A and Series B Preferred stock to common stock would further dilute the outstanding shares by 27 million shares.
Earnings growth has been modest, growing from $64.6 Million in 2012 to $72.8 Million in 2014, a CAGR of 6% per year. Growth has slowed over the past two quarters and is not likely to decline 6% per year until the entire Iridium NEXT constellation is launched.
The first launch of an Iridium NEXT satellite is scheduled for August 2015, but the second launch on a SpaceX Falcon 9 is unlikely before April 2017, two years from now. There are 26 Falcon 9 launches scheduled prior to the first Iridium NEXT launch. The entire constellation is unlikely to be completed on the schedule announced by Iridium management because it would require a much faster launch pace than SpaceX has demonstrated.
Starting in 2018 Iridium is required to begin repaying the COFACE loan. If the loan is amortized over 15 years @4.96% interest the required annual payments will be $172.9 Million, nearly double the present earnings. Therefore, additional stock sales will be needed for an extended period to pay back the COFACE loan.
The net consequence of gradual earnings growth and dilution is that the EPS has been falling from $0.84 per share 2012, to $0.65 per share in 2015 and will continue to fall for the foreseeable future.
The Aireon LLC package is a long-shot start-up that must compete with several regional traffic management solutions. It will not pay Iridium for hosting or begin service until the entire constellation is in place in 2018. Airlines remain reluctant to pay for a satellite service that will seldom be needed. The revenue from Aireon is estimated to be $20 million per year, but his is highly optimistic.
The growth of simple satellite telephone service is severely limited by the expansion of terrestrial cellular and the expectations of high data rate Internet access. M2M will continue to grow as long as the cost is very low and the data rates are respectable. The Iridium target markets are not high revenue growth areas.
Iridium will survive as long as there are investors willing to contribute $100M to $200M per year in equity and accept the dilution. It could happen. There are speculative investors that are looking for gems like Apple and Google in the refuse of the dot.com collapse.