SSNLF - Iridium: Assessing Benefits From A Potential Samsung Deal

Summary

• After its arch-rival Apple partnered with Globalstar for the direct-to-satellite iPhone14, it is natural for Samsung to look for something similar for its Galaxy S23.
• For this matter, it could potentially have inked a deal with Iridium.
• Such a deal would help the Galaxy to better compete against the iPhone and would be a significant positive for the satellite constellation provider when considering the "capital light" perspective.
• Adopting a cautionary tone, the stock should be volatile as more traders flock to it due to deal catalysts with economic conditions also deteriorating as of 2023.
• Due to its significant overvaluation with respect to the communications services sector, this is no opportunistic buy, but more of a trading possibility.

After covering the Apple (AAPL) - Globalstar (GSAT) partnership to equip the iPhone 14 with a direct-to-satellite link in September, the aim of this thesis is to cover the deal Iridium Communications (IRDM) has potentially inked with Samsung (SSNLF) to similarly empower the Galaxy S23.

The lack of a meaningful upside at the end of November when news about the deal first transpired shows that investors are either unaware of the opportunities are may not be convinced.

Hence, the aim of this thesis is to show the potential sales benefits to the satellite company while also emphasizing the capital investments required for such types of ventures to work. At the same time, I elaborate on the risks to the stock of being associated with the South Korean IT giant.

First, I provide some insights as to the reasons why smartphones require direct satellite service when mobile cellular coverage is already so pervasive.

The Rationale for Direct-to-Satellite for Samsung's Galaxy S23

A few decades ago, when you were lost in the forest or stranded in the seas near the coast, you faced a serious risk of not emerging alive. Today, getting lost is a whole different story, as there are mobile phones. However, this is not completely true as in case you are stranded in an isolated environment, where there is no mobile network coverage, for example between two hills, no signal can reach you. Still, you may rest assured as technology has evolved considerably and you can avail yourself of satellite phones as pictured below.

Now, these are indeed handy devices when you are embarking on an adventure or you work as a ranger patrolling the border. However, these have their own SIM cards and are impractical when you have to handle both your satellite phone and smartphone, which may happen to be an iPhone or Samsung Galaxy.

Therefore, it is more about practicality.

This is precisely the reason why I think Apple worked out a deal with Globalstar in September to use the latter's satellite network for its latest iPhone 14 model subscribers to contact emergency services in regions deprived of conventional mobile (cellular) network coverage. For clarification purposes, the aim here is to enable SOS services, in the form of a text message sent to an emergency number, not to provide high bandwidth necessitating internet or video streaming services which is only feasible through telcos' 5G mobile networks.

Looking further, in order to connect to an orbiting body located thousands of miles in space, a phone requires appropriate modem chips. Now when it comes to modems or the components which enable your phone to connect either to a land-based cellular antenna or a satellite, there is Qualcomm (NASDAQ: QCOM ) which supplies both Apple and Samsung. For this purpose, the Galaxy S23 will include Qualcomm's Snapdragon 8 Gen 2.

Therefore, after its main competitor Apple looked towards space, it was logical for Samsung to do the same, but, choosing Iridium points to possibly more global ambitions.

Iridium's Competitive Advantage

With 66 satellites in LEO (low earth orbit) compared to only 48 for Globalstar which on top, has to invest $327 million for expanding coverage, Iridium appears to be in a better place when considering the capital expenditure or Capex perspective. Of course, all monies spent by Globalstar will be refunded by Apple, but, this will be spread over time as Globalstar delivers on performance obligations, in North America and Europe .

On the other hand, Iridium already has global coverage which also spans across oceans due to its technology, which in contrast to Globalstar's use of a ground-based phone network to relay phone signals between satellites, allows them to be relayed directly between satellites in space itself. Now, each provider has its own merits but the point here is that the way Iridium's LEO constellation is structured points to no additional capital expenses likely to be incurred at this stage while providing for wider coverage.

This is a very important point especially at this juncture when borrowing costs are likely to remain high in the foreseeable future. For this purpose, the company generated $88.9 million of cash from operations in the third quarter of 2022 (Q3) and an FCF of $70.8 million, obtained after subtracting capital expenses. On the other hand, it has debt totaling $1.6 billion which is well above the equity position.

Thus, a partnership with Samsung could represent a capital-light approach for Iridium to expand its business and generate more sales as part of its wholesale distribution model and partner ecosystem. Thus, the company should be valued accordingly.

Valuations and Growth Drivers

As for revenues, an analyst at William Blair, an investment firm has estimated that a potential deal could see Iridium obtaining $20 million in revenues. This may be on the conservative side given that in comparison Globalstar will rake in $185 million to $230 million from Apple, and that a single Iridium standard package can cost $1,049 annually plus the charges for the voice calls in dollars per minute.

Now, to provide investors with a sense of the scale, Iridium had 1.973 million subscribers at the end of Q3 with the majority (or 1.193 million) for commercial IoT. The rest are spread among Commercial Voice, Broadband, Hosted Payload, and other data services.

Now, assuming that it only manages to attract 100K Galaxy S23 users to use the Direct-to-Satellite service or approximately 5% of its subscriber base, revenues of $104.9 million (100,000 x 1,049) are obtained considering individual subscriptions priced at $1,049 each. Dividing this number by two considering that the deal with Samsung will most probably be a wholesale one where satellite service providers sell subscriptions in bulk in contrast to individual subscribers, I obtain roughly $50 million of additional sales for 2024. Adding this to the $807.84 million estimate by analysts for that year, I obtain $857.84 million, compared to the $807.84 million initially expected. As shown in the table below, this should boost Iridium's growth from 7.98% to 14.66%.

Now since sales are the denominator in the Price to Sales multiple, it means that the initial expected value of 7.94x should conversely be reduced by 14.66%, which gives a forward P/S of 5.44x. This is below Iridium's five-year average forward P/S of 6.46x but is still way higher than the current median for the communications sector of 1.19x. Therefore, Iridium is not an opportunistic buy at present, but for traders, there is a possibility that the stock, which enjoys a momentum grade of A+ could surge based on a potential deal catalyst with Samsung if/when the news is officialized.

Concluding with a Cautionary Note

This thesis has shown that a potential deal with the South Korean giant is financially advantageous to Iridium. Additionally, depending on whether there is any requirement for the company to expand its constellation, a deal should prove to be "capital light" and could also see the company improving on its EBITDA as serving Galaxy S23s for satellite connectivity would enable it to optimize capacity utilization out of its existing constellation. For this purpose, this is a company with a strong levered free cash flow margin or 431% above the sector median as shown below, and noteworthily, the company has initiated dividend payments at a forward yield of 1.05%.

On the cautionary side, investors will note that I have provided the December 2024 timeline, or two years from now, for the execution if such a deal was signed. The reason is based on the fact that the Apple-Globalstar collaboration has been in the making for more than one year , and has required stringent testing before actual deployment to subscribers. Moreover, adoption will also depend on the charging model which Samsung will opt for.

Pursuing further, this stock which has proven to be relatively immune to volatility compared to peers in the last month may become more prone to market fluctuations as the trading volumes surge due to its association with the Galaxy S23. Hence, in case the deal does not happen, there could be a significant downside and this is the reason I have a hold position on the stock. Along the same lines, also note that the market is likely to be volatile in the first half of 2023 as the probability of the U.S. entering a recession , albeit a mild one has increased implying that some investors may wait for a better margin of safety for this dividend-paying company.

Finally, with Apple dominating the North American market and already ahead with its iPhone direct-to-satellite connectivity, it makes sense for its arch-rival to partner with Iridium which has more of a global orientation. This said you may prefer to wait for some official confirmation before putting money at work here.

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