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IRDM > SEC Filings for IRDM > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for IRIDIUM COMMUNICATIONS INC.


2-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 5, 2013 with the Securities and Exchange Commission, or the SEC, as well as our condensed consolidated financial statements included in this Form 10-Q.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words "believe," "anticipate," "plan," "expect," "intend" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. The important factors discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on March 5, 2013 could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview of Our Business

We are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the second largest provider of satellite-based mobile voice and data communications services based on revenue, and the only commercial provider of communications services offering 100% global coverage. Our satellite network provides communications services to regions of the world where wireless or wireline networks do not exist or are impaired, including extremely remote or rural land areas, airways, open oceans, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters.

We provide voice and data communications services to businesses, the U.S. and foreign governments, non-governmental organizations and commercial end-users. We provide these services using our constellation of in-orbit satellites and related ground infrastructure, including a primary commercial gateway. We utilize an interlinked, mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks. This unique architecture minimizes the need for ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence.

We sell our products and services to commercial end-users through a wholesale distribution network, encompassing more than 70 service providers, more than175 value-added resellers, or VARs, and more than 50 value-added manufacturers, who either sell directly to the end-user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications for our products and services targeting specific vertical markets.

At March 31, 2013, we had approximately 621,000 billable subscribers worldwide, an increase of 14% from approximately 544,000 billable subscribers at March 31, 2012. We have a diverse customer base, with end-users in the following lines of business: land-based handset; machine-to-machine, or M2M; maritime; aviation; and government.

We recognize revenue from both the sale of equipment and the provision of services. We expect a higher proportion of our future revenue will be derived from service revenue than in the past. Revenues from providing voice and data service historically have generated higher gross margins than sales of subscriber equipment.

We are currently devoting a substantial part of our resources to develop Iridium NEXT, our next-generation satellite constellation, and on hardware and software upgrades to our ground infrastructure in preparation for Iridium NEXT, the development of new product and service offerings, upgrades to our current services, and upgrades to our information technology systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2017 to be approximately $3 billion. We believe our $1.8 billion loan facility, or the Credit Facility, together with internally generated cash flows, including cash flows from hosted payloads and proceeds from our recent sale of convertible preferred stock, will be sufficient to fully fund the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through early 2017. As of April 30, 2013, we had borrowed a total of $779.9 million under the Credit Facility. For more information about our sources of funding, refer to "Liquidity and Capital Resources."

Recent Developments

Expiration of Outstanding $7.00 Warrants

In connection with our initial public offering in February 2008, we issued warrants, referred to as the $7.00 Warrants, each of which entitled the holder thereof to purchase from us one share of our common stock at a price of $7.00 per share. As described elsewhere in this report, during 2012, we entered into privately negotiated warrant exchanges with the largest holder of the outstanding $7.00 Warrants and also initiated and completed a tender offer to exchange outstanding $7.00 Warrants, in each case for shares of our common stock. As a result of these transactions, an aggregate of 11,695,653 of the $7.00 Warrants were exchanged in 2012. On February 14, 2013, the remaining 655,499 outstanding and unexercised $7.00 Warrants expired in accordance with their terms.

U.S. Government Contract Extensions

We provide maintenance services for the U.S. Department of Defense, or DoD, gateway pursuant to our Gateway Maintenance and Support Services, or GMSS, contract managed by the DoD's Defense Information Systems Agency, or DISA. We entered into the GMSS contract in April 2008. The GMSS contract provides for a one-year base term and up to four additional one-year options exercisable at the election of the U.S. government. The U.S. government exercised all of the options and partially exercised its ability under federal acquisition regulations to extend the agreement for up to six months. As a result, the GMSS contract is currently scheduled to expire on May 31, 2013. The government has also informed us that it intends to fully exercise the extension, through September 30, 2013. We are pursuing a contract renewal with DISA to continue providing GMSS services after the current contract expires. The U.S. government may terminate the GMSS contract, in whole or in part, at any time.

We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services, or EMSS, contract managed by DISA. The contract, entered into in April 2008, provides for a one-year base term and up to four additional one-year options exercisable at the election of the U.S. government. The U.S. government exercised all of the options and exercised its ability under federal acquisition regulations to extend the agreement for six months. As a result of the election for extension, the EMSS contract will expire on September 30, 2013. We are pursuing a contract renewal with DISA to provide EMSS services after the current contract expires. The EMSS contract allows authorized customers to purchase Iridium airtime services, provided through DoD's dedicated gateway, under a set of rate schedules tailored for each of our services, including a fixed monthly per-user fee for voice and circuit-switched data, a fixed monthly per-user fee for paging services, a tiered pricing plan, based on usage per device, for short-burst data services, and a fixed monthly per-user fee for Netted Iridium usage plus a monthly fee for each active user-defined net. The U.S. government is not required to guarantee a minimum number of users under this agreement. While we sell airtime directly to the U.S. government for resale to end users, our hardware products are sold to U.S. government customers through our network of distributors, which typically integrate them with other products and technologies.

Material Trends and Uncertainties

Our industry and customer base has historically grown as a result of:

• demand for remote and reliable mobile communications services;

• increased demand for communications services by the DoD disaster and relief agencies and emergency first responders;

• a broad and expanding wholesale distribution network with access to diverse and geographically dispersed niche markets;

• a growing number of new products and services and related applications;

• improved data transmission speeds for mobile satellite service offerings;

• regulatory mandates requiring the use of mobile satellite services;

• a general reduction in prices of mobile satellite services and subscriber equipment; and

• geographic market expansion through the receipt of licenses to sell our services in additional countries.

Nonetheless, we face a number of challenges and uncertainties in operating our business, including:

• our ability to develop Iridium NEXT and related ground infrastructure, and to develop products and services for Iridium NEXT, including our ability to continue to access the Credit Facility to meet our future capital requirements for the design, build and launch of the Iridium NEXT satellites;

• our ability to obtain sufficient internally generated cash flows, including cash flows from hosted payloads, to fund a portion of the costs associated with Iridium NEXT and support ongoing business;

• Aireon LLC's ability to successfully fund, develop and market its space-based automatic dependent surveillance-broadcast, or ADS-B, global aviation monitoring service to be carried as a hosted payload on the Iridium NEXT system;

• our ability to maintain the health, capacity, control and level of service of our existing satellite network until and during the transition to Iridium NEXT;

• changes in general economic, business and industry conditions;

• our reliance on a single primary commercial gateway and a primary satellite network operations center;

• competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures;

• changes in demand from U.S. government customers, particularly the DoD;

• our ability to successfully negotiate a new contract with the DoD when it expires in September 2013;

• market acceptance of our products;

• regulatory requirements in existing and new geographic markets;

• rapid and significant technological changes in the telecommunications industry;

• reliance on our wholesale distribution network to market and sell our products, services and applications effectively;

• reliance on single-source suppliers for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events; and

• reliance on a few significant customers for a substantial portion of our revenue, where the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable.

Comparison of Our Results of Operations for the Three Months Ended March 31, 2013 and 2012

                                      Three Months Ended March 31,
                                       % of Total                    % of Total              Change
($ in thousands)           2013         Revenue          2012         Revenue         Dollars       Percent
Revenue:
Services                 $ 68,787               77 %   $ 66,848               72 %   $   1,939             3 %
Subscriber equipment       17,331               19 %     21,540               23 %      (4,209 )         (20 %)
Engineering and
support services            3,071                4 %      5,086                5 %      (2,015 )         (40 %)
Total revenue              89,189              100 %     93,474              100 %      (4,285 )          (5 %)

Operating expenses:
Cost of services
(exclusive of
depreciation and
amortization)              14,476               16 %     18,003               19 %      (3,527 )         (20 %)
Cost of subscriber
equipment                  11,120               12 %     13,342               14 %      (2,222 )         (17 %)
Research and
development                 1,659                2 %      5,689                6 %      (4,030 )         (71 %)
Selling, general and
administrative             18,365               21 %     18,148               20 %         217             1 %
Depreciation and
amortization               18,231               21 %     24,204               26 %      (5,973 )         (25 %)
Total operating
expenses                   63,851               72 %     79,386               85 %     (15,535 )         (20 %)
Operating income         $ 25,338               28 %   $ 14,088               15 %   $  11,250            80 %

Revenue

Total revenue decreased by 5% to $89.2 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease was primarily due to a decrease in equipment unit sales for the Iridium 9555 handset and the Iridium 9602 short-burst data transceiver and a decrease in revenue from government-sponsored engineering and support contracts. The decrease in revenue was partially offset by an increase in service revenue due to a 14% year-over-year increase in billable subscribers.

Service Revenue



                                  Three Months Ended March 31, 2013                  Three Months Ended March 31, 2012                              Change
                                                                           (Revenue in millions and subscribers in thousands)
                                              Billable                                           Billable                                          Billable
                              Revenue       Subscribers (1)       ARPU (2)       Revenue       Subscribers (1)       ARPU (2)       Revenue       Subscribers         ARPU
Commercial voice and data   $    42.4                   332     $       43     $    41.9                   313     $       45     $     0.5                 19     $      (2 )
Commercial M2M data              11.3                   238             16           9.2                   183             18           2.1                 55            (2 )
Total Commercial                 53.7                   570                         51.1                   496                          2.6                 74
Government voice and data        14.2                    34            136          15.1                    36            138          (0.9 )               (2 )          (2 )
Government M2M data               0.9                    17             19           0.6                    12             18           0.3                  5             1
Total Government                 15.1                    51                         15.7                    48                         (0.6 )                3
Total                       $    68.8                   621                    $    66.8                   544                    $     2.0                 77

(1) Billable subscriber numbers shown are at the end of the respective period.

(2) Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

Service revenue increased by 3% for the three months ended March 31, 2013, compared to the prior year period, primarily due to growth in billable subscribers partially offset by decreases in ARPU for both voice and data services.

Commercial voice and data revenue increased principally due to an increase in billable subscribers and an increase in access fee revenue resulting from targeted price increases. These increases were partially offset by a decrease in commercial voice ARPU due to a decline in average minutes of use per post-paid and Iridium OpenPortฎ subscriber. Future growth in commercial voice revenue may be negatively affected by reductions in non-U.S. defense spending and deployed non-U.S. troop levels. Commercial M2M data revenue growth was driven principally by an increase in the billable subscriber base. We anticipate continued growth in billable commercial subscribers for the remainder of 2013.

Government voice and data revenue decreased principally due to a reduction in billable subscribers and a decrease in ARPU. Government voice and data ARPU decreased due to a higher proportion of billable subscribers on lower priced plans for Netted Iridiumฎ, a service that provides beyond-line-of-sight, push-to-talk tactical radio service for user-defined groups. The increase in government M2M data revenue was driven primarily by billable subscriber growth. We expect government voice ARPU to be lower in 2013 compared to 2012 as usage of lower priced Netted Iridium continues to grow as a percentage of overall government voice subscribers. Future government voice and M2M data revenue may be negatively affected by reductions in U.S. defense spending and deployed troop levels, with a corresponding decrease in billable subscribers under our agreements with the U.S. government. In addition, our agreement with the U.S. government, as extended, will expire in September 2013. Future government voice and M2M data revenues will be dependent upon our ability to negotiate a favorable new agreement with the U.S. government.

Subscriber Equipment Revenue

Subscriber equipment revenue decreased 20% for the three months ended March 31, 2013 compared to the prior year period. The decrease in subscriber equipment revenue was primarily due to lower unit sales of the Iridium 9555 satellite handset and the Iridium 9602 short-burst date transceiver. This decline in unit sales is primarily driven by timing of orders. Future subscriber equipment sales to the U.S. government through non-government distributors may be negatively affected by reductions in U.S. defense spending and deployed troop levels.

Engineering and Support Service Revenue

Engineering and support service revenue decreased 40% for the three months ended March 31, 2013 compared to the prior year period due to a decline in scope of work for government-sponsored contracts. We anticipate an increase in the scope of work for government contracts during the remainder of 2013, resulting in overall growth in engineering and support service revenue compared to 2012.

Operating Expenses

Cost of Services (exclusive of depreciation and amortization)

Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services and cost of services for government and commercial engineering and support service revenue.

Cost of services (exclusive of depreciation and amortization) decreased 20% for the three months ended March 31, 2013 from the prior year period due to a decline in scope of work for government-sponsored contracts with corresponding impacts on revenue and cost of services.

Cost of Subscriber Equipment

Cost of subscriber equipment includes the direct costs of equipment sold, which consist of manufacturing costs, allocation of overhead, and warranty costs.

Cost of subscriber equipment decreased 17% for the three months ended March 31, 2013 compared to the prior year period. This decrease primarily resulted from the proportionate decline in subscriber equipment revenue.

Research and Development

Research and development expenses decreased by 71% to $1.7 million for the three months ended March 31, 2013 from $5.7 million for the prior year period primarily due to decreases in research and development associated with new subscriber equipment products and Iridium NEXT projects.

Depreciation and Amortization

Depreciation and amortization expense decreased 25% for the three months ended March 31, 2013 from the prior year period. During the second quarter of 2012, we updated our analysis of the current satellite constellation's health and the remaining useful life. Based on the results of this analysis, we estimate that our current constellation of satellites will be operational for longer than previously expected. As a result, the estimated useful life of the current constellation was extended and is consistent with the expected deployment of Iridium NEXT. This change in estimated useful life resulted in a decrease in depreciation expense for the three months ended March 31, 2013 when compared to the prior year period. We will continue to evaluate the useful life of our current constellation of satellites on an ongoing basis through full deployment and activation of Iridium NEXT.

Other Income (Expense)

Undrawn Credit Facility Fees

Commitment fees on the undrawn portion of the Credit Facility were $2.1 million for the three months ended March 31, 2013 compared to $2.8 million for the prior year period. The decrease of the commitment fee on the undrawn portion is directly proportionate to the increase in the amounts borrowed under the Credit Facility as we finance the development of Iridium NEXT.

Other Income (Expense), Net

We recorded other expense, net, of $1.4 million for the three months ended March 31, 2013 compared to other income, net, of $0.1 million for the prior year. The change from the prior year resulted primarily from our share of the loss from our equity method investment in an affiliate during the first quarter of 2013. As we did not invest in the affiliate until the second half of 2012, there were no similar amounts in the first quarter of 2012.

Benefit from (Provision for) Income Taxes

For the three months ended March 31, 2013, our income tax provision was $7.5 million compared to an income tax benefit of $0.9 million for the prior year period. Our effective tax rate was 33.6% for the three months ended March 31, 2013 compared to (8.3%) for the prior year period. The change in the income tax provision and rate is primarily related to the increase in our income before income taxes combined with a current period reduction in the benefit of the Arizona law changes compared to the prior year. This change was partially offset by the tax benefit of the 2012 research and development tax credit recorded in the current period as a result of the extension of the 2012 research and development credit by the U.S. Congress in the first quarter of 2013.

Liquidity and Capital Resources

As of March 31, 2013, our total cash and cash equivalents balance was $205.3 million and our marketable securities balance was $66.6 million. Our principal sources of liquidity are existing cash, cash equivalents and marketable securities, internally generated cash flows, and the Credit Facility. Our principal liquidity requirements are to meet capital expenditure needs, principally the design, build and launch of Iridium NEXT, as well as for working capital, international expansion, and research and development expenses.

We expect to fund $1.8 billion of the costs of Iridium NEXT with the Credit Facility, with the remainder to be funded from cash on hand, internally generated cash flows, including potential cash flows from hosted payloads on our Iridium NEXT satellites.

The Credit Facility contains borrowing restrictions, including financial performance covenants and covenants relating to hosted payloads, and there can be no assurance that we will be able to continue to borrow funds under the Credit Facility. There can also be no assurance that our internally generated cash flows, including those from hosted payloads on our Iridium NEXT satellites, will meet our current expectations. If we do not generate sufficient cash flows, or if the cost of implementing Iridium NEXT or the other elements of our business plan is higher than anticipated, we will require further external funding. Our ability to obtain additional funding may be adversely affected by a number of factors, including global economic conditions, and we cannot assure you that we will be able to obtain such funding on reasonable terms, or at all. If we are not able to secure such funding in a timely manner, our ability to maintain our network, to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and to pursue additional growth opportunities will be impaired, and we would likely need to delay some elements of our Iridium NEXT development. Our liquidity and our ability to fund our liquidity requirements are also dependent on our future financial performance, which is subject to general economic, financial, regulatory and other factors that are beyond our control.

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of $7.00 per share. Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. For each full quarter that the Series A Preferred Stock is outstanding, and assuming that no shares of Series A Preferred Stock have been converted into shares of our common stock, we would be required to pay cash dividends of $1.75 million. We expect that we would satisfy dividend requirements, if and when declared, from internally generated cash flows.

As of March 31, 2013, we had borrowed a total of $751.8 million under the Credit Facility. The unused portion of the Credit Facility as of March 31, 2013 was $1.0 billion. Under the terms of the Credit Facility, we were required to maintain a minimum cash reserve for debt service of $67.5 million as of March 31, 2013, which is classified as restricted cash on the accompanying condensed consolidated balance sheet. This minimum cash reserve requirement will increase over the term of the Credit Facility to $189.0 million at the beginning of the repayment period, which is expected to be in 2017.

We believe that our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.

Cash Flows

The following section highlights our cash flows for the three months ended March
31, 2013 and 2012:



                                                    2013          2012         Change
                                                             (in thousands)
Cash provided by operating activities             $  57,196     $  36,385     $  20,811
Cash used in investing activities                 $ (90,934 )   $ (34,791 )   $ (56,143 )
Cash provided by (used in) financing activities   $ (15,370 )   $   8,968     $ (24,338 )

Cash Flows from Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2013 increased by $20.8 million from the prior year period. This improvement was primarily due to a $14.1 million decrease in working capital and a $4.0 million decrease in research and development expenses compared to the prior year period.

Cash Flows from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2013 increased by $56.1 million compared to the prior year period due to the net purchase of marketable securities for $66.6 million and a $5.0 million . . .

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