Iridium Communications Inc. (Nasdaq: IRDM) (“Iridium”) today reported financial results for the fourth quarter of 2018 and issued its full-year 2019 guidance. Net loss was $7.6 million, or $0.09 per diluted share, for the fourth quarter of 2018, as compared to net income of $141.9 million, or $1.10 per diluted share, for the fourth quarter of 2017. This decrease in net income was primarily the result of a reduced income tax benefit compared to the year-ago period and an increase in net interest expense. Operational EBITDA (“OEBITDA”)(1) for the fourth quarter was $75.5 million, as compared to $63.7 million for the prior-year period, representing a year-over-year increase of 19% and an OEBITDA margin(1) of 57%. OEBITDA primarily benefitted from the recognition of revenue from hosted payload and other data services, telephony pricing action and growth in the Company’s Internet of Things (“IoT”) data business.
Iridium reported fourth-quarter total revenue of $132.2 million, which consisted of $107.3 million of service revenue and $24.9 million of revenue related to equipment sales and engineering and support projects. Total revenue increased 14% versus the comparable period of 2017, while service revenue grew 17% from the year-ago period. Service revenue, which represents primarily recurring revenue from Iridium’s growing subscriber base, was 81% of total revenue for the fourth quarter of 2018.
The Company ended the quarter with 1,121,000 total billable subscribers, which compares to 969,000 for the year-ago period and is up from 1,092,000 for the quarter ended September 30, 2018. Total billable subscribers grew 16% year-over-year, driven by growth in commercial IoT.
Full-Year 2018 Iridium Business Highlights
For the full year, Iridium reported net loss of $13.4 million, or $0.22 per diluted share attributable to common stockholders, as compared to net income of $233.9 million, or $1.82 per diluted share attributable to common stockholders for 2017. This decrease in net income was primarily the result of a reduced income tax benefit compared to the prior year and a $95.9 million increase in depreciation and amortization expense. The Company reported 2018 total revenue of $523.0 million, which was up 17% from the year-ago period. Total revenue included $406.8 million of service revenue and $116.2 million of revenue related to equipment sales and engineering and support projects. OEBITDA for 2018 was $302.0 million, a 14% increase from $265.6 million in the prior year, representing an OEBITDA margin of 58%. Capital expenditures were $391.3 million for the full-year 2018.
“2018 was an outstanding year for Iridium. Our company delivered service revenue growth of 17% and equally impressive subscriber growth of 16% to end the year with more than 1.1 million active users. Our core business has never been stronger, and momentum in commercial IoT continues to fuel innovation and new applications, which are driving new commercial partnerships and subscriber growth. We achieved our highest revenue growth as a public company and our best OEBITDA growth in seven years,” said Matt Desch, CEO, Iridium. Desch continued, “With the completion of the Iridium NEXT upgrade of our constellation, our financial transformation is well underway. Having now completed an intense period of capital investment, we are turning our attention to a new growth phase for the company that should deliver new sources of revenue and OEBITDA growth, supporting significant free cash flow that can benefit shareholders.”
Commenting on Iridium CertusSM, Desch said, “Feedback on our new broadband service, Iridium Certus, which launched in January, has been overwhelmingly positive. This broadband service sets a new benchmark in L-band connectivity for performance and reliability and has already attracted new service providers to invest and build innovative applications for this global platform.”
Desch concluded, “We are proud to have completed our constellation upgrade. The expanded capabilities of these satellites bolster our market leadership position and extend our offering of new, more powerful satellite solutions to customers that depend on real-time, mission critical connectivity and remote information.”
Fourth-Quarter Iridium Business Highlights
Service – Commercial
Commercial service remained the largest part of Iridium’s business, representing 65% of the Company’s total revenue during the fourth 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 $85.3 million, up 23% from last year’s comparable period due to revenue from hosted payload and other data services, telephony pricing action and increased IoT revenues.
Commercial voice and data subscribers rose from the year-ago period to 361,000 customers. Commercial voice and data average revenue per user (“ARPU”) was $45 during the fourth quarter, compared to $42 in last year’s comparable period, as a result of the rollout of new pricing plans in 2018. Commercial IoT data subscribers grew 27% from the year-ago period to 647,000 customers, driven by continued strength in consumer personal communications and tracking devices. Commercial IoT data ARPU was $12 in the fourth quarter, compared to $13 in last year’s comparable period.
Iridium’s commercial business ended the quarter with 1,008,000 billable subscribers, which compares to 869,000 for the prior-year quarter and is up from 979,000 for the quarter ended September 30, 2018. IoT data subscribers represented 64% of billable commercial subscribers at the end of the quarter, an increase from 59% at the end of the prior-year period.
Hosted payload and other data service revenue increased by $9.7 million, or 212%, from the prior year primarily due to increased hosting and data services and an increase in satellite time and location service.
Service – U.S. 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 through two contracts previously managed by Defense Information Systems Agency (“DISA”) and now managed by Air Force Space Command, which include a $400 million, five-year, fixed-price Enhanced Mobile Satellite Services (“EMSS”) agreement for satellite communications services and a $38 million multi-year Gateway Maintenance and Support Services (“GMSS”) contract to support and maintain the Department of Defense’s (“DoD”) dedicated gateway. The EMSS contract has been extended for an additional six months to April 2019, at the rate that was in effect during 2018. The Company has begun discussions with the U.S. government on a new EMSS contract, which it expects to enter into in 2019 prior to the expiration of the extended agreement.
Government service revenue was $22.0 million, consistent with the prior-year period, as the final step up in the fixed fee under the Company’s EMSS contract with the U.S. government occurred in October 2015.
Iridium’s U.S. government business ended the quarter with 113,000 subscribers, which compares to 100,000 for the prior-year quarter and is unchanged from 113,000 for the quarter ended September 30, 2018. Government voice and data subscribers increased 4% from the year-ago period to 54,000 as of December 31, 2018. IoT data subscribers increased 23% year-over-year and represented 52% of government subscribers at year-end.
Equipment revenue was $20.1 million during the fourth quarter, up 4% from the prior-year period.
The Company forecasts lower equipment sales in 2019 as a result of a more normalized level of handset sales.
Engineering & Support
Engineering and support revenue was $4.8 million during the fourth quarter, up 3% from the prior-year quarter, primarily due to the episodic nature of government-sponsored projects.
Capital expenditures were $96.5 million for the fourth quarter and primarily related to spending for the Company’s next-generation satellite constellation, Iridium NEXT. The Company ended the fourth quarter with credit facility gross debt of $1.7 billion and a cash and cash equivalents balance of $273.4 million. Net debt was $1.6 billion, calculated as $1.7 billion of credit facility gross debt and $360.0 million of gross unsecured notes, less $273.4 million of cash and cash equivalents, and $191.9 million in restricted cash.
In December 2018, Aireon LLC, Iridium’s primary hosted payload customer, entered into a credit facility that enabled a $35.0 million hosting fee payment to Iridium. This is in addition to the $8.1 million payment that was made earlier in the year. Excluding accrued interest, Aireon’s remaining hosting fee account payable to Iridium was $156.9 million at December 31, 2018.
Iridium’s net leverage was 5.2 times OEBITDA at December 31, 2018. The company expects net leverage to improve to approximately 4.5 times OEBITDA at year-end 2019, assuming no change in the Company’s capital structure, after having reached a peak net leverage ratio of 5.6 times OEBITDA in the first quarter of 2018.
In 2018, Iridium completed its analysis of the effect of the Tax Cuts and Jobs Act of 2017. As a result of this analysis and other developments, the Company now expects it will have negligible cash taxes through approximately 2023. Thereafter, the Company’s cash tax liability is expected to gradually increase until Iridium reaches the statutory tax level. The Company’s previous outlook was for negligible cash taxes through approximately 2020.
The Company issued its full-year 2019 outlook for total service revenue, OEBITDA and net leverage and currently expects:
Total service revenue of approximately $440 million for the full-year 2019.
Full-year 2019 OEBITDA between $325 million and $335 million. OEBITDA for 2018 was $302.0 million.
Net leverage of approximately 4.5x OEBITDA at the end of 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 were excluded from Operational EBITDA through 2017. Beginning 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”)) were no longer 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 principally consisted of in-orbit insurance, will continue to be excluded from the calculation of Operational EBITDA through the first quarter of 2020. 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 2019 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.