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Iridium Communications Inc. Operational EBITDA Above Estimates

Iridium reported mixed third-quarter results; revenue was below consensus estimates, and EBITDA were above. The company’s top line declined as a result of a drop in engineering-and-support services related to government projects, but EBITDA beat estimates on strong growth in higher-margin commercial services, fueled in part by machine-to-machine data. In addition, the company affirmed its financial guidance for full year 2014, but lowered its outlook for growth in billable subscribers, as some customers expected from resellers are moving into early 2015.

Despite mixed results, we affirm our Outperform rating on the shares as several catalysts remain on the horizon, including potential for a NAV Canada contract announcement and potential for a reacceleration of government services revenue in 2014 as the Department of Defense has demonstrated that it remains firmly committed.

Third-quarter EBITDA above estimates. Iridium’s third-quarter sales of $100.4 million declined 1.6% year-over-year, but increased 3.2% sequentially. The increase in sequential revenue growth was driven by a sequential increase in commercial voice and machine-to-machine subscribers in the commercial revenue segment. While the commercial segment grew sequentially, annual growth decelerated to 5.9% from 7.9% in the second quarter and 12.8% in the first quarter. This decelerating commercial growth was not sufficient to offset government sales that declined sequentially, resulting in the annual sales decline. However, the increased mix of commercial sales from the government decline resulted in a year-over-year increase in EBITDA margin from 49.9% to 51.9%. Operational EBITDA of $57.6 million were above consensus of $55.7 million and $54.6 million last year for 5.6% growth. EPS of $0.23 were below our estimate and consensus of $0.25.

Government gateway contract positive for renewal of long-term agreement. This morning, Iridium announced a $47 million five-year contract to upgrade the Department of Defense’s dedicated gateway in Hawaii (Iridium’s key differentiator over competitors). We view the deal as significant, because Iridium is in negotiations with the U.S. government to renew the much larger five-year contract for satellite handsets and service. This gateway deal suggests that the U.S. government is firmly committed to Iridium, implying that renewal rates will be favorable when the contract is set in 2015. The previous government contract was for $155 per line.

Federal Aviation Administration expected to be a significant customer. Iridium management remains confident that the Federal Aviation Administration (FAA) will become a major customer for the Aireon joint venture, given its strategic importance and the pending contract announcement with NAV Canada. Management indicated that the FAA is moving through a formal review of the technology and its economic impact.

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