You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , filed onFebruary 25, 2020 with theSecurities and Exchange Commission , or theSEC , 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. These risks and uncertainties may be amplified by the COVID-19 pandemic and its potential impact on our business and the global economy. The important factors described under the caption "Risk Factors" in this report and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 filed onFebruary 25, 2020 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 only commercial provider of communications services offering true global coverage, connecting people, organizations and assets to and from anywhere, in real time. Our unique L-band satellite network provides reliable communications services to regions of the world where terrestrial wireless or wireline networks do not exist or are limited, including remote land areas, open ocean, airways, 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, theU.S. and foreign governments, non-governmental organizations and consumers via our satellite network, which has an architecture of 66 operational satellites with in-orbit and ground spares and related ground infrastructure. We utilize an interlinked mesh architecture to route traffic across our satellite constellation using radio frequency crosslinks between satellites. This unique architecture minimizes the need for local 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. During the first quarter of 2019, we completed the Iridium® NEXT program, which replaced our first-generation constellation of satellites with upgraded satellites that support new services and higher data speeds for new products. We deployed a total of 75 new satellites on eight Falcon 9 rockets launched bySpaceX , with 66 operational satellites, as well as in-orbit and ground spares, maintaining the same interlinked mesh architecture of our first-generation constellation. Our new constellation also hosts the Aireon® system, which provides a global air traffic surveillance service through a series of automatic dependent surveillance-broadcast, or ADS-B, receivers on the upgraded satellites. We formedAireon LLC in 2011, with subsequent investments from the air navigation service providers, or ANSPs, ofCanada ,Italy ,Denmark ,Ireland and theUnited Kingdom , to develop and market this service. Aireon has contracted to provide the service to our co-investors in Aireon and to other ANSPs around the world, including theU.S. Federal Aviation Authority , orFAA . Aireon has also contracted to pay us a fee to host the ADS-B receivers on our constellation, as well as data service fees for the delivery of the air traffic surveillance data over the Iridium network. As ofMarch 31, 2020 , Aireon has made payments of$54.1 million for a portion of its hosting fees. Aireon also pays us power and data services fees of up to approximately$23.5 million per year in the aggregate for the delivery of the air traffic surveillance data over the Iridium system. In addition, we have entered into an agreement with L3Harris Technologies, Inc., or L3 Harris, the manufacturer of the Aireon hosted payload, pursuant to which L3Harris pays us fees to allocate the remaining hosted payload capacity to its customers and data service fees on behalf of these customers. We sell our products and services to commercial end-users through a wholesale distribution network, encompassing approximately 110 service providers, approximately 270 value-added resellers, or VARs, and approximately 95 value-added manufacturers, or VAMs, which create and sell technology that uses the Iridium network either 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 using our products and services to target specific lines of business. 17 -------------------------------------------------------------------------------- AtMarch 31, 2020 , we had approximately 1,332,000 billable subscribers worldwide, representing an increase of 16% from approximately 1,151,000 billable subscribers atMarch 31, 2019 . We have a diverse customer base, with end users in the following lines of business: land mobile, maritime, aviation, Internet of Things, or IoT, hosted payloads and other data services and theU.S. government.
We recognize revenue from both the provision of services and the sale of equipment. Over the past several years, service revenue, including revenue from hosting and data services, has represented an increasing proportion of our revenue, and we expect that trend to continue.
Recent Developments Term Loan OnFebruary 7, 2020 , we amended our term loan with various lenders and Deutsche Bank AG New York Branch as Administrative Agent and Collateral Agent, or the Term Loan, to borrow an additional$200.0 million in principal. OnFebruary 13, 2020 , we used these proceeds, together with cash on hand, to prepay all of the indebtedness outstanding under the senior unsecured notes, or the Notes, including premiums for early prepayment. The additional amount is fungible with the original$1,450.0 million , having the same maturity date, interest rate and other terms, but was issued at a 1.0% premium to face value.
COVID-19
The COVID-19 pandemic and measures taken in response are currently affecting countries, communities and markets around the world. Like many other businesses, we started to see a slowdown in the final weeks of March as a result of this widespread economic shutdown. Our distributors are also experiencing business and operational restrictions, which limit their ability to visit customers, complete new installations, and close on new business opportunities. These disruptions are occurring as we enter the second and third quarters, in which we normally experience higher subscriber additions and higher usage, driving much of our growth in a typical year. Accordingly, following analysis of the expected effects on our business, including lower equipment sales, lower levels of subscriber growth, and the potential for increased customer use of lower-cost plans, we have substantially reduced our previously announced outlook for the coming year. The ultimate effects of the COVID-19 pandemic are difficult to assess or predict with certainty at this time but may include additional risks. For further information on the potential effects of the COVID-19 pandemic on our business, financial condition and results of operations, see "Risk Factors" in Part II, Item 1A of this Form 10-Q. 18 --------------------------------------------------------------------------------
Material Trends and Uncertainties
Our industry and customer base have historically grown as a result of: • demand for remote and reliable mobile communications services;
• a growing number of new products and services and related applications;
• a broad wholesale distribution network with access to
diverse and
geographically dispersed niche markets; • increased demand for communications services by disaster and relief agencies, and emergency first responders;
• 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 ability to offer our services in additional countries. Nonetheless, we face a number of challenges and uncertainties in operating our business, including: • the effects of the COVID-19 pandemic on us and on Aireon, including on revenue, employee health and safety, employee productivity, and the financial health and effectiveness of our distributors and suppliers; • our ability to maintain the health, capacity, control and level of service of our satellites; • our ability to develop and launch new and innovative products and services; • changes in general economic, business and industry conditions, including the effects of currency exchange rates; • 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; • interference with our services caused by the repurposing of L-band satellite spectrum for terrestrial purposes;
• market acceptance of our products;
• regulatory requirements in existing and new geographic markets;
• rapid and significant technological changes in the telecommunications industry; • our ability to generate sufficient internal cash flows to repay our debt; • reliance on our wholesale distribution network to market and sell our products, services and applications effectively; • reliance on single-source suppliers for the manufacture of most of our subscriber equipment and 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, potentially including the COVID-19 pandemic; and • reliance on a few significant customers, particularly agencies of theU.S. government, for a substantial portion of our revenue, as a result of which the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable. 19
-------------------------------------------------------------------------------- Comparison of Our Results of Operations for the Three Months EndedMarch 31, 2020 and 2019 Three Months Ended March 31, Change % of Total % of Total ($ in thousands) 2020 Revenue 2019 Revenue Dollars Percent Revenue: Services$ 115,975 80 %$ 106,951 80 %$ 9,024 8 % Subscriber equipment 22,263 15 % 21,008 16 % 1,255 6 % Engineering and support services 7,049 5 % 5,726 4 % 1,323 23 % Total revenue 145,287 100 % 133,685 100 % 11,602 9 % Operating expenses: Cost of services (exclusive of depreciation and amortization) 21,978 15 % 22,521 17 % (543 ) (2 )% Cost of subscriber equipment 12,274 9 % 12,431 9 % (157 ) (1 )% Research and development 2,444 2 % 3,611 3 % (1,167 ) (32 )% Selling, general and administrative 20,825 14 % 23,841 18 % (3,016 ) (13 )% Depreciation and amortization 75,944 52 % 72,914 54 % 3,030 4 % Total operating expenses 133,465 92 % 135,318 101 % (1,853 ) (1 )% Operating income (loss) 11,822 8 % (1,633 ) (1 )% 13,455 (824 )% Other expense: Interest expense, net (26,444 ) (18 )% (25,597 ) (19 )% (847 ) 3 % Loss on extinguishment of debt (30,209 ) (21 )% (207 ) - % (30,002 ) 14,494 % Other expense, net 447 - % (326 ) - % 773 (237 )% Total other expense, net (56,206 ) (39 )% (26,130 ) (19 )% (30,076 ) 115 % Loss before income taxes (44,384 ) (31 )% (27,763 ) (20 )% (16,621 ) 60 % Income tax benefit 12,682 9 % 9,739 7 % 2,943 30 % Net loss$ (31,702 ) (22 )%$ (18,024 ) (13 )%$ (13,678 ) 76 % 20
-------------------------------------------------------------------------------- Revenue Commercial Service Revenue Three Months Ended March 31, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) ARPU (2)
Revenue Subscribers (1) ARPU (2) Revenue Subscribers
ARPU
(Revenue in millions and subscribers in thousands) Commercial voice and data$ 42.2 351$ 40 $ 41.8 348$ 40 $ 0.4 3 $ - Commercial broadband (3) 8.7 10.9 267 6.8 9.9 233 1.9 1.0 34 Commercial IoT data 23.8 830 9.71 22.5 678 11.32 1.3 152 (1.61 ) Hosted payload and other data services 16.3 N/A 13.9 N/A 2.4 N/A Total Commercial$ 91.0 1,192$ 85.0 1,036$ 6.0 156
(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. Billable subscriber and ARPU data is not applicable for hosted payload and other data service revenue items.
(3) Beginning with the three-month period ended
broadband service revenue separately from commercial voice and data
revenue, and prior year periods have been conformed to this presentation.
For the three months endedMarch 31, 2020 , total commercial service revenue increased$6.0 million , or 7%, as a result of increased revenue across all commercial services compared to the prior period. Hosted payload and other data revenue increased$2.4 million from the prior year period, which was primarily due to increased Aireon data service fees related to a contractual step-up and increased Aireon power fees. Commercial broadband revenue increased$1.9 million , or 28%, from the prior year period. This increase was principally due to sales of Iridium Certus® broadband services, which were commercially introduced inJanuary 2019 . Commercial broadband revenue, consisting of Iridium OpenPort® and Iridium Certus revenue, was previously reported within voice and data. Commercial IoT data revenue increased$1.3 million , or 6%, from the prior year period. This increase was principally due to a 22% increase in commercial IoT data billable subscribers, primarily from continued strength in consumer personal communications devices. These products comprised an increased proportion of total subscribers, contributing to a decline in related ARPU. Net activations of these IoT devices decreased significantly inMarch 2020 , and we expect activations to remain at these lower levels for at least the next two quarters. Commercial voice and data revenue increased$0.4 million , or 1%, from the prior year period, principally due to greater usage of our push-to-talk services. Government Service Revenue Three Months Ended March 31, 2020 2019 Change Billable Billable Billable Revenue Subscribers (1) Revenue Subscribers (1) Revenue Subscribers (Revenue in millions and subscribers in thousands) Government service revenue$ 25.0 140$ 22.0 115$ 3.0 25
(1) Billable subscriber numbers shown are at the end of the respective period.
We provide airtime and airtime support toU.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services contract, or the EMSS Contract. Under the terms of this agreement, authorized customers utilize specified Iridium airtime services provided through theU.S. government's dedicated gateway. The fee is not based on subscribers or usage, allowing an unlimited number of users access to these services. Prior to entering into the EMSS Contract inSeptember 2019 , we were providing services under our previous EMSS contract at an annual rate of$88.0 million per year. For the three months endedMarch 31, 2020 , government service revenue increased$3.0 million from the prior year period as a result of the higher pricing in the new EMSS Contract. 21 -------------------------------------------------------------------------------- Subscriber Equipment Revenue Subscriber equipment revenue increased by$1.3 million , or 6%, for the three months endedMarch 31, 2020 compared to the prior year period, primarily due to an increase in the volume of handset sales and higher average selling price on our L-band transceivers. Engineering and Support Service Revenue Three Months Ended March 31, 2020 2019 Change (Revenue in millions) Commercial $ 1.0$ 0.2 $ 0.8 Government 6.0 5.5 0.5 Total $ 7.0$ 5.7 $ 1.3 Engineering and support service revenue increased$1.3 million , or 23%, for the three months endedMarch 31, 2020 compared to the prior year period primarily as a result of an increase in the volume of contracted work for commercial customers, primarily related to the Aireon hosted payload operations center, as well as contracted work to enable services for theU.S. government. 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 by$0.5 million , or 2%, for the three months endedMarch 31, 2020 from the prior year period, primarily as a result of a decrease in in-orbit insurance costs, which are amortized over a one-year period from the in-service date, as we completed the placement of upgraded satellites in-orbit inFebruary 2019 . This decrease was offset in part by an increase in the volume of contracted engineering and support services, as noted above, and higher satellite operations support associated with higher levels of activity directed towards operating the completed system. 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 by$0.2 million , or 1%, for the three months endedMarch 31, 2020 compared to the prior year period primarily due to the improved margins on our L-band transceivers, as described above. Research and Development Research and development expenses decreased by$1.2 million , or 32%, for the three months endedMarch 31, 2020 compared to the prior year period due to decreased spend on devices for our upgraded network. Selling, General and Administrative Selling, general and administrative expenses that are not directly attributable to the sale of services or products include sales and marketing costs as well as employee-related expenses (such as salaries, wages, and benefits), legal, finance, information technology, facilities, billing and customer care expenses. Selling, general and administrative expenses decreased by$3.0 million , or 13%, for the three months endedMarch 31, 2020 compared to the prior year period, primarily due to a decrease in management incentives and a decrease in stock appreciation rights expense resulting from changes in our stock valuation between the respective reporting periods. Depreciation and Amortization Depreciation and amortization expense increased by$3.0 million , or 4%, for the three months endedMarch 31, 2020 compared to the prior year period, primarily due to the increased number of upgraded satellites in service during the current period as we completed the replacement of our first-generation satellites inFebruary 2019 . 22 -------------------------------------------------------------------------------- Other Expense Interest Expense, Net Interest expense, net increased$0.8 million for the three months endedMarch 31, 2020 compared to the prior year period. The increase in interest expense is primarily related to a decrease in interest being capitalized in the current period as compared to the prior year period, partially offset by the impacts of the refinancing of our debt including a decrease in the effective interest rate and lower average outstanding borrowings under our total debt obligations. Loss on Extinguishment of Debt Loss on extinguishment of debt was$30.2 million for the three months endedMarch 31, 2020 , compared to$0.2 million for the prior year period. DuringFebruary 2020 , we closed on an additional$200.0 million under our Term Loan and used these proceeds, together with cash on hand, to prepay all of the indebtedness outstanding under the Notes, including premiums for early prepayment. In conjunction with the prepayment of the Notes, we wrote off the remaining unamortized debt issuance costs, resulting in the$30.2 million loss on extinguishment of debt. In the prior year period, we used hosting fees received from Aireon to extinguish debt. Income Tax Benefit For the three months endedMarch 31, 2020 , our income tax benefit was$12.7 million , compared to income tax benefit of$9.7 million for the prior year period. The increase in income tax benefit is primarily related to an increase in loss before income taxes compared to the prior year, partially offset by a reduced stock compensation benefit compared to the prior year. Net Loss Net loss was$31.7 million for the three months endedMarch 31, 2020 , compared to a net loss of$18.0 million for the prior year period, primarily resulting from the$30.0 million increase in loss on extinguishment of debt and the$3.0 million increase in depreciation and amortization expense, partially offset by the$11.6 million increase in total revenues, the$4.9 million decrease in other operating expenses and the$2.9 million increase in income tax benefit, as described above.
Liquidity and Capital Resources
InNovember 2019 , we borrowed$1,450.0 million under our Term Loan, with an accompanying$100.0 million revolving loan, or the Revolving Facility. We used the proceeds of the Term Loan, cash in our debt service reserve account and cash on hand to repay in full all of the indebtedness outstanding under our previous loan facility with Bpifrance Assurance Export S.A.S., including premiums for early prepayment. InFebruary 2020 , we borrowed an additional$200.0 million under our Term Loan and used the proceeds and cash on hand to repay in full all of the indebtedness outstanding under our Notes, including premiums for early repayment. As ofMarch 31, 2020 , we reported an aggregate balance of$1,650.0 million in borrowings under the Term Loan, net of$26.6 million of net deferred financing costs, for a balance of$1,623.4 million outstanding in our condensed consolidated balance sheet. We have not drawn on our Revolving Facility. Our Term Loan contains no financial maintenance covenants. With respect to the Revolving Facility, we are required to maintain a consolidated first lien net leverage ratio of no greater than 6.25 to 1 if more than 35% of the Revolving Facility has been drawn. The Credit Agreement contains other customary representations and warranties, affirmative and negative covenants, and events of default. As ofMarch 31, 2020 , our total cash and cash equivalents balance was$67.3 million , and we had$100.0 million of borrowing availability under our Revolving Facility. In addition to the Revolving Facility, our principal sources of liquidity are cash, cash equivalents and internally generated cash flows. Our principal liquidity requirements over the next twelve months are principal and interest on the Term Loan.
We believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.
23 -------------------------------------------------------------------------------- Cash Flows The following table summarizes our cash flows: Three Months EndedMarch 31, 2020 2019
Change
(in thousands)
Cash provided by operating activities
$ (7,307 ) Cash used in investing activities$ (9,487 ) $ (44,643 ) $ 35,156 Cash used in financing activities$ (186,025 ) $ (1,360 )
Cash Flows Provided by Operating Activities
Net cash provided by operating activities for the three months endedMarch 31, 2020 decreased by$7.3 million from the prior year period principally due to a decrease in working capital of approximately$15.7 million . This decrease was primarily the result of less interest being capitalized as the average balance of satellites under construction decreased as satellites were launched and placed into service, which would've been recorded as an investing activity and is now recorded as an operating activity. Additionally, in November of 2019 and February of 2020, we replaced our Credit Facility and Notes, respectively, with the Term Loan, resulting in monthly interest payments compared to previous semi-annual interest payments. As a result, there is minimal interest payable in the 2020 working capital balance for the new Term Loan. This decrease in working capital was offset by lower purchases of inventory in 2020, compared to the prior year.
Cash Flows Used in Investing Activities
Net cash used in investing activities for the three months endedMarch 31, 2020 decreased by$35.2 million compared to the prior year period primarily due to a decrease in capital expenditures as we completed payments for the construction of our upgraded constellation in the prior year. Cash Flows Used in Financing Activities Net cash used in financing activities for the three months endedMarch 31, 2020 increased by$184.7 million compared to the prior year period. The increase in cash used in financing activities is a direct result of our deleveraging of our debt. In 2020, the combination of principal prepayment on the Notes and additional borrowings under the Term Loan resulted in net payments of$181.5 million . There were no prepayments or borrowings in the first quarter of 2019. See Note 5 to our condensed consolidated financial statements included in this report for further discussion of our indebtedness.
Off-Balance Sheet Arrangements
We do not currently have, nor have we had in the last three years, any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Seasonality
Our results of operations have been subject to seasonal usage changes for commercial customers, and our results will be affected by similar seasonality going forward. March through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales.U.S. government revenue and commercial IoT revenue have been less subject to seasonal usage changes. 24 -------------------------------------------------------------------------------- Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, useful lives of property and equipment, long-lived assets and other intangible assets, deferred financing costs, income taxes, stock-based compensation, and other estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as filed with theSEC onFebruary 25, 2020 . Recent Accounting Pronouncements Refer to Note 2 to our condensed consolidated financial statements for a full description of recent accounting pronouncements and recently adopted pronouncements. 25
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