2023-07-26 08:45:00 ET
Summary
- Satellite operator Iridium Communications' shares dropped 15.6% after Q2 2023 results missed expectations when it came to both revenue and earnings per share.
- Revenue for Q2 2023 was $193.1m, a 10.4% increase from the previous year but $5.3m short of analysts' expectations. Net income was a loss of $30.7m, compared to a profit of $4.6m in Q2 2022.
- Despite the disappointing results, Iridium maintains its guidance for service revenue and EBITDA for the year.
- In the long run, the company is attractive, but IRDM stock is still a bit pricey to invest in at this time.
July 25th proved to be a painful day for shareholders of satellite operator Iridium Communications ( IRDM ). After management announced financial results covering the second quarter of the company's 2023 fiscal year, shares of the enterprise plunged, closing down 15.6%. This downturn seems to have been driven largely by the fact that management missed expectations when it came to both revenue and earnings per share. Even though this is not uncommon, the overall picture for the company is largely as management forecasted it would be earlier this year. So in a sense, this is an overreaction. This does not mean that downside for the company was not warranted. Frankly, the stock had gotten rather pricey. So to see shares come back down to earth is refreshing.
Iridium Communications Q2 results - A miss on the top and bottom
In an article that I published in May of this year, I talked about how shares of Iridium Communications had gotten rather pricey. Yes, I recognized the potential of the company as a cash cow that should grow at a slow but consistent rate for the foreseeable future. In the long run, I fully expect that shareholders will receive attractive value from the company. But the price paid for that value was a bit off. Even so, the high-quality nature of the company prevented me from rating it anything worse than a 'hold'. But in retrospect, I wish I had been a bit more bearish. With the 15.6% decline that shares experienced on July 25th, the stock is now down 20.3% compared to when I last wrote about it. That stacks up unfavorably against the 10.4% rise the S&P 500 experienced over the same window of time.
I think it's important to distinguish between shares deserving to come down because they are pricey and shares coming down because of fundamental performance issues. I believe that the former case justifies the stock falling. But this doesn't change the fact that the company did miss some on both its top and bottom lines. And at the end of the day, the failure to live up to analysts' expectations is what brought shares back down to earth.
Starting at the top, revenue for the company came in at $193.1 million for the second quarter of the company's 2023 fiscal year. This actually represents a sizable increase of 10.4% over the $174.9 million the company reported the same time last year. But unfortunately, the sales figure reported by management fell short of analysts' expectations by about $5.3 million. It's unclear exactly why analysts had such lofty expectations for the company. Management had previously forecasted overall service revenue for the business climbing at between 9% and 11% year over year. Achieving the target analysts set would have pushed sales up 13.4% year over year.
The growth that the company experienced during this time was driven by a couple of different factors. The most significant, undoubtedly, was a rise in the number of billable subscribers on the firm's platform. This number grew to 2.14 million by the end of the second quarter. That represents an increase of 14.1% over the 1.88 million that the company had as customers one year earlier. They're not as important, the company did also experience some pricing improvement when it came to a couple of its offerings. Voice and Data ARPU, for instance, went from $42 per month in the second quarter of 2022 to $46 per month the same time this year. Meanwhile, broadband revenue went from $292 per month to $296. The only weakness in ARPU involved the company's IoT Data subscriptions. This managed to fall from $7.96 per month to $7.48 per month.
The bottom line is a bit more difficult to understand. Net income went from $4.6 million in the second quarter of 2022 to negative $30.7 million the same time this year. This translates to a loss per share of $0.24 compared to the $0.04 per share in profit generated in the second quarter of last year. Analysts, meanwhile, were forecasting a profit per share of $0.04, so management fell far short in that regard. Even though this looks scary, it's important to note that the company booked a $37.5 million impairment charge involving construction in progress for one of its satellites. Basically, the company had planned to launch the remaining 6 spare satellites that it has into space so that they could easily replace damaged ones in its constellation in the future. The company successfully sent five of these into orbit but ultimately decided not to send the final one. So they are booking a loss on that.
There are other profitability metrics that more appropriately gauge how the company performed during the quarter. One of these is operating cash flow. Even though it plunged from $99.8 million to $47.1 million, it actually went from $92.3 million to $91 million if we adjust for changes in working capital. Meanwhile, EBITDA for the business expanded from $105.9 million to $115.8 million. In the chart above, you can also see financial results for the first half of the 2023 fiscal year compared to the same time of 2022. With the exception of adjusted operating cash flow, the overall trend from metric to metric remained largely consistent.
Outside of the fine financial details, there were some other interesting pieces of news that management offered up. As I mentioned already, guidance for service revenue for this year has remained unchanged. The company also said that EBITDA should come in between $455 million and $465 million for the year. That's also unchanged from guidance that the company issued during the first quarter earnings release. This would imply operating cash flow for the year of $374 million if the company reaches the midpoint of guidance. On top of this, Iridium Communications also stated that it repurchased an additional 1.1 million shares during the most recent quarter. That cost the business $66.1 million, leaving $60.4 million remaining under its $600 million share repurchase program. That will very likely be completed before the year is out.
Even though I was neutral on the company when I last wrote about it, I am not yet ready to adopt a more bullish outlook for shares. This is because the stock is still rather pricey. As you can see in the chart below, using the 2023 estimates I calculated, the firm is trading at a forward price to operating cash flow multiple of 17.6 and at a forward EV to EBITDA multiple of 17.4. These numbers are better than the 19.1 and 18.8, respectively, that we get using data from 2022. But they are still a bit pricey, all things considered.
Takeaway
Based on the data provided, I maintain my belief that the long-term picture for Iridium Communications will be positive. But this doesn't mean that investors should rush in and buy the stock. Frankly, I believe that shares are quite pricey, and I wouldn't be surprised to see the stock fall a bit further. But given the quality of the company, and my long-term outlook for it, I've decided to keep it rated a 'hold' for now.
For further details see:
Iridium Communications Stock Comes Crashing Down