IRIDIUM COMMUNICATIONS INC IRDM
November 24, 2010 - 12:39pm EST by
spence774
2010 2011
Price: 9.59 EPS $0.60 $0.60
Shares Out. (in M): 70 P/E 16.0x 0.0x
Market Cap (in $M): 673 P/FCF na 0.0x
Net Debt (in $M): 0 EBIT 65 0
TEV ($): 569 TEV/EBIT 8.8x 0.0x

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Description

I am posting IRDM as a long again.  Last year I posted it as a long and Cross310 posted it as a short right afterwards, sparking a good Q&A. 

One year later some questions have been answered and some remain.  And it continues to be a company with a very strong bull-bear debate.  Please read both write-ups and Q&A to get a full sense of the issues.

Valuation:

EV: $578.9mm

2010 EBITDA(E): $155-160mm

EV/EBITDA: 3.7

Capex: about $10mm/year maintenance capex right now but all the free cash flow will go to building NEXT satellites.  The $10mm estimate is from the first 9 months of 2009 of the predecessor company, before the SPAC merger and before work for NEXT planning began.

Net Cash: $104.6mm but it too will all go to the NEXT build out.

Insider Buying:

Scott Bok continues to buy stock in the open market.  He just bought another $1mm of stock.

Revenue, EBITDA and Subscriber Growth:

 

Last quarter revenue, $94.5mm, grew 12% yoy.  EBITDA, $47.1mm, grew 22.3%.  Subscribers, 413K, grew 21.8%

 

For the year 2010 IRDM estimates it will have $155-160mm of EBITDA.

 

Here is the link to the press release: http://finance.yahoo.com/news/Iridium-Announces-pz-4213820451.html?x=0&.v=1

 

Financing:

 

Last year there was a lot of debate about if they would get financing for the NEXT satellites, the next generation of satellites they are going to launch.  They did, and on fantastic terms. Their financing is in two tranches: Tranche A $1,537,500,000 at a fixed rate of 4.96%; and Tranche B $262,500,000 at a floating rate equal to LIBOR, plus 1.95%.  There is no funding gap to pay for the new satellites. 

 

Here is the link to the press release: http://finance.yahoo.com/news/Iridium-Concludes-Financing-pz-1949516431.html?x=0&.v=1

 

Communication with Shareholders:

 

They have a great web site.  Their presentation from June 2010 is excellent. 

 

Here is the link: http://investor.iridium.com/events.cfm

 

Competitive Threat:

 

One of the short arguments that still remains is that Inmarsat will introduce a better phone for less cost, and a second short argument is that the government will stop using IRDM. 

 

The first point is addressed by IRDM’s continued growth, and by a recent survey done by Frost & Sullivan.  The survey was commissioned by IRDM so it may be biased.  Nonetheless, the results were strongly in favor of IRDM for usability and reliability. 

 

Here is a link to the report: http://www.iridium.com/About/IndustryLeadership/SatellitePhoneReport.aspx

 

The second point is unlikely given IRDM’s current role in government operations around the world, and also contrary to the government business revenue growing last quarter.  From the latest Q’s press release:

 

Government service revenue increased by 14 percent during the quarter, as the Company continued to serve as a mission-critical partner for the U.S. Department of Defense and its personnel around the globe.  Iridium's voice and data solutions are used by U.S. government customers for critical applications including asset tracking, specialized communications for the special operations and other defense communities and for distributed tactical communications services such as Netted Iridium.

 

 

       Government service revenue was $15.4 million, a 14 percent increase from the prior-year period, primarily driven by growth in satellite handsets and Netted Iridium subscribers.

       Government voice ARPU was $149 during the third quarter, a 1 percent year-over-year decrease. Voice ARPU was impacted by strong growth in Netted Iridium subscribers. Government M2M data ARPU was $22 during the period, a 5 percent increase from last year's comparable period.

       Iridium's government business ended the quarter with 42,000 billable subscribers, which compares to 33,000 for the prior-year quarter and to 38,000 for the previous quarter ended June 30, 2010. M2M data subscribers represented 14 percent of billable government subscribers, an increase from 9 percent during the prior-year period.

 

Satellite Failures:

 

One of the shorts’ theses was that the satellites were not intended to function after 2008 and would therefore fail before the NEXT satellites were launched.  In the Q&A string last year we discussed this and since then there is no new evidence that they will fail en masse and IRDM has signed a number of new deals, including expanding with the government, pointing to the health of their network.  Each of their new partners does diligence on IRDM and the health of the network, so we can infer that based on their research they believe the network to be sound.  And the Chairman, Scot Bok, is a very smart and successful professional and he would not have purchased an additional $1mm dollars of stock if there was a problem.

 

Risks

Satellite failures

Increased competition from rival companies’ new satellite constellations.

 

Decreased U.S. government spending on IRDM’s voice and data communications.

 

Third-party paying customers who place their own equipment on satellites

 

Catalysts

Increased market penetration into maritime, aviation, transportation, and related industries.

 

Rapidly expanding margins due to IRDM’s largely fixed cost of service and data communications offerings.

 

Licensed approvals to start providing service into China, Russia, and India.

Catalyst

Increased market penetration into maritime, aviation, transportation, and related industries.

Rapidly expanding margins due to IRDM’s largely fixed cost of service and data communications offerings.

Licensed approvals to start providing service into China, Russia, and India.

 

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