Description

In addition to the recent strong insider buying (CEO Matthew Desch’s $347K worth of stock and Greenhill’s Co-CEO Scott Bok’s $849K purchase), IRDM is a compelling LONG because:

Market’s misconception due to failures of IRDM’s predecessor, Iridium LLC, which filed for Chapter 11 in 1999

• IRDM is growing rapidly, generating profit and has been focusing on an indirect sales model to enter under-penetrated markets. IRDM’s revenues have grown at a 27% CAGR over the past five years.
• No longer exclusively focused on selling satellite phone service to retail customers (total revenue breakout: 42% = commercial services, 21% = U.S. gov’t services, 37% = voice and data equipment).

Differentiated and competitive satellite network

• Only provider with 100% global coverage of the earth’s surface. 
• Minimal reliance on ground infrastructure.  Better sound quality and lower failure rates versus high altitude satellites.
• Unique ability to provide real-time voice and data communications.

The market is overly concerned about IRDM’s “funding gap” for its next-generation satellite constellation

• External funding will not be required until 2012 as 80% of the capital expenditures for the new constellation do not occur until 2012 or thereafter.
• Conversations with former government and Iridium employees suggest that the U.S.gov’t will help finance IRDM’s “NEXT” satellite launch. The data/voice services provided are a necessity to the government because of security and safety concerns. U.S. military has invested over $200M into an Iridium-specific gateway and $100M+ for Iridium hardware.
• Cash flow from operations, vendor financing and hosting equipment for other companies/agencies on its satellites would significantly reduce the “funding gap” and reliance on additional equity/debt financing.

Multiple opportunities to expand into large and under-penetrated markets, products, and geographies

• Current penetration rates for the aviation, maritime and transportation industries is typically below 10%.
• The demand for “Machine-to Machine” (M2M) products and services that allow for tracking and controlling assets is growing rapidly. 
• IRDM is looking to enter China, Russia, India and Latin America to sell its services. The company first needs to acquire licensed approvals, which could be accomplished within the next two years. 
• “Netted Iridium” is the company’s new push-to-talk phone offering that was largely funded by the Department of Defense (approx $21M). This walkie-talkie-like device should increase commercial and military sales because of its flexibility. 

COMPANY DESCRIPTION: Iridium is a satellite operator that provides voice and data communications services. It is the only company to offer 100% global coverage and mostly provides its services to regions of the world that are not served by wireless or wireline networks. Its customer segments include maritime, aviation, government/defense, public safety, mining, forestry, oil/gas and transportation.

VALUATION:

IRDM trades at around 5x EBITDA and we feel that shares will start to trade more in-line with its closest competitor, Inmarsat (9x EBITDA), once IRDM begins to reduce its “NEXT” funding gap. The chart below highlights different financing scenarios and how we project the equity to perform. Not only should multiple expansion occur as its funding overhang clears, but also as the company continues to achieve over 30% annual revenue growth in key data-driven markets such as maritime and M2M.

MANAGEMENT

• Management’s direct ownership is approximately 3% 
• Greenhill & Co. (founders of the GHL SPAC that IPO’d IRDM) has approx. a 12% stake in IRDM.
• CEO Matthew Desch and his senior executive team have led Iridium to profitability over the last several years by entering new markets. CFO Eric Morrison has been involved with the Iridium project over the last 14 years.
• We expect that management will act rationally when deciding how to fund its new satellite constellation. It is unlikely that executives would significantly dilute their own equity holdings when presumably they could earn a good return by delaying the launch of “NEXT”. By 2014, IRDM could earn over $700M in free cash flow if we make the assumption that management does not provide any funding for “NEXT”. 

BALANCE SHEET

• Iridium has $137M in cash and $17M in debt.
• IRDM’s launch of its “NEXT” satellite constellation starting in 2014 is anticipated to cost $2.7 billion over the next 7 years (see Appendix). 

CATALYSTS

• Increased market penetration into maritime, aviation, transportation, and related industries.
• IRDM narrows “NEXT” funding gap via vendor financing, hosted payloads¹, U.S. gov’t funding and/or capital markets.
• 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.

RISKS 

• Satellite failures
• Lack of funding for “NEXT” satellite constellation.
• Increased competition from rival companies’ new satellite constellations.
• Decreased U.S. government spending on IRDM’s voice and data communications.

¹ Third-party paying customers who place their own equipment on satellites

Catalyst

• Increased market penetration into maritime, aviation, transportation, and related industries.
• IRDM narrows “NEXT” funding gap via vendor financing, hosted payloads¹, U.S. gov’t funding and/or capital markets.
• 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.