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

Oct. 25, 2018

Iridium Communications Inc. reported financial results for the third quarter of 2018 and updated its full-year 2018 outlook.  Net loss was $12.9 million, or $0.13 per diluted share, for the third quarter of 2018, as compared to net income of $29.3 million, or $0.23 per diluted share, for the third quarter of 2017.  This decrease in net income was primarily the result of a $39.2 million increase in depreciation and amortization expense from the year-ago period, reflecting an increased number of Iridium NEXT satellites in service.  Operational EBITDA ("OEBITDA")(1) for the third quarter was $79.4 million, as compared to $71.8 million for the prior-year period, representing a year-over-year increase of 11% and an OEBITDA margin(1) of 58%.  OEBITDA benefitted from higher commercial service revenue and continued strength in equipment sales.

Iridium reported third-quarter total revenue of $136.8 million, which consisted of $105.7 million of service revenue and $31.0 million of revenue related to equipment sales and engineering and support projects.  Total revenue increased 17% versus the comparable period of 2017, while service revenue grew by 18% 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 2018.

The Company ended the quarter with 1,092,000 total billable subscribers, which compares to 949,000 for the year-ago period and is up from 1,047,000 for the quarter ended June 30, 2018.  Total billable subscribers grew 15% year-over-year, driven by growth in IoT and government customers.

"Iridium continued to enjoy significant subscriber and sales momentum into the third quarter, which drove double-digit growth in revenue and operational EBITDA," said Matt Desch, CEO, Iridium.  Desch continued, "based upon the strong growth we are seeing from all commercial service business lines, we are raising our full-year guidance for total service revenue and operational EBITDA."

Commenting on Iridium® NEXT, Desch said, "The final launch of 10 Iridium NEXT satellites is scheduled for December 30.  These satellites will complete the Iridium NEXT mission and enable new service through Iridium's upgraded network with 66 operational Iridium NEXT satellites and 9 in-orbit spares.  Among the services to be delivered by Iridium's next-generation L-band constellation are superior IoT and broadband services powered by Iridium CertusSM."

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 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 $83.7 million, up 23% from last year's comparable period. 
  • Commercial voice and data subscribers totaled 367,000 in the third quarter, compared to 368,000 a year earlier.  Commercial voice and data average revenue per user ("ARPU") increased during the third quarter to $47 as a result of the rollout of new pricing plans earlier this year.  Commercial IoT data subscribers grew 26% from the year-ago period to 612,000 customers driven by continued strength in consumer personal communications and tracking devices.  Commercial IoT data ARPU remained steady at $13 during the third quarter.
  • Iridium's commercial business ended the quarter with 979,000 billable subscribers, which compares to 854,000 for the year-ago period and is up from 940,000 for the quarter ended June 30, 2018.  IoT data subscribers represented 63% of billable commercial subscribers at the end of the quarter, an increase from 57% at the end of the prior-year period.
  • Hosted payload and other data service revenue increased by $7.4 million, or 331%, 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 113,000 subscribers, which compares to 95,000 for the year-ago period and is up from 107,000 for the quarter ended June 30, 2018.  Government voice and data subscribers increased 14% from the year-ago period to 56,000 as of September 30, 2018.  IoT data subscribers increased 24% 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 $26.1 million during the third quarter, up 20% from the prior-year period.
  • The Company expects full-year equipment sales to exceed 2017 levels.

Engineering & Support

  • Engineering and support revenue was up slightly from the prior-year's quarter at $4.9 million and continues to reflect the episodic nature of commercial and government-sponsored projects.

Capital expenditures were $79.7 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 credit facility gross debt of $1.8 billion and a cash and cash equivalents balance of $381.5 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 $381.5 million of cash and cash equivalents, as well as $190.9 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 of approximately 14% for the full-year 2018 (previous outlook was for growth between 12% and 14%).
  • Full-year 2018 OEBITDA of approximately $300 million (previous outlook was between $290 million and $300 million).  OEBITDA for 2017 was $265.6 million.

Long-Range Outlook

The Company updated its long-range outlook for peak net leverage and affirmed its long-range outlook 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 between 5.5x and 5.75x OEBITDA in 2018 (previous outlook was for 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 (Loss) to Operational EBITDA

(In thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

2018

2017

2018

2017

GAAP net income (loss)

$                                (12,856)

$                                 29,253

$                         (5,802)

$                        91,979

Interest (income) expense, net

20,145

(1,246)

37,295

(2,911)

Income tax (benefit) expense

(1,657)

10,055

10,025

40,195

Depreciation and amortization

62,140

22,944

151,096

56,652

Iridium NEXT expenses, net

8,020

6,823

23,189

15,350

Share-based compensation

3,598

3,948

10,743

11,686

Non-cash gain on Boeing transaction

-

-

-

(11,003)

Operational EBITDA

$                                 79,390

$                                 71,777

$                      226,546

$                      201,948


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