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Iridium Announces Second-Quarter 2018 Results; Company Raises 2018 Outlook

July 31, 2018

Iridium Communications Inc. reported financial results for the second quarter of 2018 and raised its full-year 2018 outlook.  Net loss was $4.4 million, or $0.06 per diluted share, for the second quarter of 2018, as compared to net income of $24.8 million, or $0.20 per diluted share, for the second quarter of 2017.  This decrease in net income was primarily the result of a $30.3 million increase in depreciation and amortization expense from the year-ago period, reflecting an increased number of Iridium NEXT satellites in service, and a one-time $8.7 million, non-cash charge related to a state income tax law change that was enacted during the second quarter.  Operational EBITDA ("OEBITDA")(1) for the second quarter was $78.7 million, as compared to $65.8 million for the prior-year period, representing a year-over-year increase of 20% and an OEBITDA margin(1) of 58%.  OEBITDA benefitted from higher commercial service revenue and continued strength in equipment sales.

Iridium reported second-quarter total revenue of $134.9 million, which consisted of $104.0 million of service revenue and $31.0 million of revenue related to equipment sales and engineering and support projects.  Total revenue increased 21% versus the comparable period of 2017, while service revenue grew by 20% 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 second quarter of 2018.

The Company ended the quarter with 1,047,000 total billable subscribers, which compares to 913,000 for the year-ago period and is up from 996,000 for the quarter ended March 31, 2018.  Total billable subscribers grew 15% year-over-year, driven by growth in IoT and government customers.

"We delivered another strong quarter with excellent subscriber additions and revenue growth across all commercial revenue lines," said Matt Desch, CEO, Iridium.  Desch continued, "based upon sales momentum and the strong subscriber trends in the first half of the year, we are raising our full-year guidance for total service revenue and operational EBITDA."

Commenting on Iridium® NEXT, Desch said, "With three successful launches this year, we now have 65 Iridium NEXT satellites in orbit and expect to complete the launch program in the coming months.  We anticipate that the new constellation will be fully deployed this year and begin delivering superior L-band broadband through our new Iridium CertusSM service."

Iridium Business Highlights

Service – Commercial

Commercial service remained the largest part of Iridium's business, representing 61% of the Company's total revenue during the second 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 $82.0 million, up 27% from last year's comparable period. 
  • Commercial voice and data subscribers were up 1% from the year-ago period to 364,000 customers.  Commercial voice and data average revenue per user ("ARPU") increased during the second quarter to $45 as a result of the rollout of new pricing plans.  Commercial IoT data subscribers grew 25% from the year-ago period to 576,000 customers as a result of continued strength in consumer personal communications and tracking devices.  Commercial IoT data ARPU declined to $12 during the second quarter based upon the higher volume of lower ARPU plans.
  • Iridium's commercial business ended the quarter with 940,000 billable subscribers, which compares to 821,000 for the year-ago period and is up from 892,000 for the quarter ended March 31, 2018.  IoT data subscribers represented 61% of billable commercial subscribers at the end of the quarter, an increase from 56% at the end of the prior-year period.
  • Hosted payload and other data service revenue increased by $10.5 million, or 549%, from the prior year primarily due to increased hosting and data services and an increase in Satellite Timing and Location ("STL") services.

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 107,000 subscribers, which compares to 92,000 for the year-ago period and is up from 104,000 for the quarter ended March 31, 2018.  Government voice and data subscribers increased 13% from the year-ago period to 54,000 as of June 30, 2018.  IoT data subscribers increased 20% year-over-year and represented 50% of government subscribers, an increase from 48% at the end of the prior-year period.

Equipment

  • Equipment revenue was $25.9 million during the second quarter, up 37% from the prior-year period.
  • In light of continued strong demand for equipment in the first half of 2018, the Company now expects full-year equipment sales to exceed 2017 levels.

Engineering & Support

  • Engineering and support revenue was $5.1 million during the second quarter, compared to $6.1 million in the prior-year's quarter, primarily due to the episodic nature of commercial and government-sponsored projects.

Capital expenditures were $132.1 million for the second quarter and primarily related to spending for the Company's next-generation satellite constellation, Iridium NEXT.  The Company ended the second quarter with credit facility gross debt of $1.8 billion and a cash and marketable securities balance of $375.9 million.  Net debt was $1.6 billion, calculated as $1.8 billion of credit facility gross debt and $360.0 million of gross unsecured notes, less $375.9 million of cash and marketable securities, as well as $189.7 million in restricted cash.

2018 Outlook

The Company raised its full-year 2018 outlook for total service revenue growth and OEBITDA.  The Company now expects:

  • Total service revenue growth between 12% and 14% for the full-year 2018 (previous outlook was between 10% and 12%).
  • Full-year 2018 OEBITDA between $290 million and $300 million (previous outlook was between $280 million and $290 million). OEBITDA for 2017 was $265.6 million.

Long-Range Outlook

The Company updated its long-range outlook for peak net leverage, while affirming its guidance for total service revenue growth, OEBITDA margin, cash taxes and 2019 net leverage.  Based on the expected 2018 Iridium NEXT system completion, the Company expects:

  • Total service revenue of approximately $440 million for the full-year 2019.
  • OEBITDA margin of approximately 60% in 2019.
  • Negligible cash taxes through approximately 2020.
  • Peak net leverage of approximately 6.0x OEBITDA in 2018.
  • Net leverage of approximately 4.5x OEBITDA in 2019.

(1)   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 were excluded from Operational EBITDA through 2017.  In 2018, Iridium NEXT revenues and recurring Iridium NEXT expenses (recurring Iridium NEXT expenses are not part of the approximately $3 billion construction cost of Iridium NEXT (the "Construction Costs")) will no longer be excluded in calculating Operational EBITDA.  U.S. GAAP requires that certain of the Construction Costs be expensed.  These Construction Costs, which beginning in 2018 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.  We do not provide a forward-looking reconciliation of expected full-year 2018 Operational EBITDA guidance as the amount and significance of special items required to develop meaningful comparable GAAP financial measures cannot be estimated at this time without unreasonable efforts.

 


Iridium Communications Inc.


Supplemental Reconciliation of GAAP Net Income to Operational EBITDA


(In thousands)










Three Months Ended June 30,


Six Months Ended June 30,


2018


2017


2018


2017

GAAP net income (loss)

$                                  (4,418)


$                                 24,778


$                          7,054


$                        62,726

Interest (income) expense, net

12,985


(831)


17,150


(1,664)

Income tax expense

7,843


11,740


11,682


30,140

Depreciation and amortization

50,491


20,201


88,956


33,708

Iridium NEXT expenses, net

8,593


5,687


15,169


8,527

Share-based compensation

3,187


4,257


7,145


7,738

Non-cash gain on Boeing transaction

-


-


-


(11,003)

Operational EBITDA

$                                 78,681


$                                 65,832


$                      147,156


$                      130,172