Summary
- Iridium posted a growing top line, thanks to its increasing subscribers.
- However, it showed decelerating YoY revenue growth outlook and has decelerating margins, which puts pressure on its short-term valuation.
- Nonetheless, with its sustained growth in the top line and improving liquidity, pullbacks may improve its current risk/reward ratio.
Iridium Communications ( IRDM ) is one of the leading companies that operates a constellation of 66 cross-linked low-Earth orbit ("LEO") satellites that provide voice and data communication services, as well as ultra-low bandwidth video to a variety of businesses. IRDM ended FY'22 with an outstanding growth in its top line amounting to $721 million, up 17.34% from $614.5 recorded in FY'21. This is supported with positive catalyst about new partnerships. Despite the positive outlook from the management, including the projected 10% year-over-year growth in FY'23, it is difficult to justify the company's premium valuation. As a potential turnaround strategy, I suggest waiting for a decent pullback, which could provide a better risk/reward ratio.
Company Overview
IRDM boasted a record figure on its billable subscriber count of 1.99 million, up 16% over year ago. It ended the year with sustained average revenue per subscriber ("ARPU") in its commercial services. However, its commercial IoT, suffered a decrease of 8% (YoY) ARPU this FY'22. The company realized a decrease in ARPU for its commercial IoT services of an 8% YoY decrease. Despite this, IRDM remains well-positioned in the IoT market and has a strong track record of innovation and successful partnerships. The company is still at the forefront of the competition in the field of IoT.
…So I think we're going to remain very strongly positioned for many years in what I would call the premium IoT segment. And then we're going to look to participate in what I would call this lower end, but important in volume kind of business that has very low ARPUs likely but has very broad capability as well. We want to, because we have so many partners right now and we want to serve them even more broadly and don't want to necessarily devalue our current network in some way to do that. So we continue to stay very interested. We're very active. We're talking to all of them and we'll consider what we do in that sector. I don't think we're going to build our own network like EchoStar is looking to do, so you're not going to see us have a big capital outlay for that
In fact, as quoted above, IRDM is dealing with competition in a more conservative manner, which is quite impressive, especially in today's macro uncertainties. The company recently announced that they will launch as many as five of their remaining ground spare satellites in mid-2023. If this turns out to be a successful increase in operating satellites, it could potentially drive IRDM's total revenue growth. According to the management, the company's constellation networks remain healthy and will continue to provide reliable satellite communication services, as quoted below.
Our constellation is incredibly healthy; however, the spare satellites have no utility to us on the ground. We built extra satellites as an insurance policy, and with SpaceX's stellar track record, we look forward to another successful launch, which will position us even better to replicate the longevity of our first constellation Source: Here
Additionally, the partnership between Qualcomm and Iridium is expected to bring new capabilities to smartphones and other devices. This will enable new applications, such as emergency messaging and tracking, that are not currently available through traditional cellular networks. The partnership is expected to benefit both companies, as Qualcomm will be able to offer a new feature to its Snapdragon mobile platform, and Iridium will expand its reach into the consumer market beyond its existing satellite communications services. In fact, according to the management, they are expecting to see results as early as the second half of this year. Additionally, with their leading global satellite broadband and midband connectivity for mobile voice and data services, IRDM has secured the ability to serve the US government.
As you know, our team was awarded a sizable engineering contract with the U.S. government Space Development Agency in 2022. That contract has been going very well, with additional follow-on opportunities now becoming visible that will align us further with our largest customer. Source: Q4'22 Earnings Call Transcript
This acknowledges the positive outlook from the management for FY'23, however, the softer growth forecast as mentioned earlier and slowing margin - as illustrated in the image below - indicate that investing in the company could be risky at the moment.
IRDM: Slowing margins (Source: Data from Seeking Alpha. Prepared by the Author)
Trading Near 52-Week high
IRDM: Weekly Chart (Source: Author's TradingViewAccount)
After the strong breakout that occurred earlier this year, IRDM is showing some price action weakness, which could imply short-term pullbacks. This pullback will allow investors to accumulate more shares at a much better price than today. Looking at the chart above, the most logical support is around $55, which previously acted as a resistance zone. If this support fails and is further supported by negative earnings reports in the future, we might see IRDM fall further, potentially to around the $48 level. Today, the bulls are being supported by a bullish MACD sentiment. However, the current bearish macro environment and today's price action weakness suggest further upward momentum is risky and limit the potential risk/reward ratio as of this moment.
Aging Net PPE
Contrary to management's claims that their Constellation Network is in incredibly good shape, the aging net property, plant, and equipment (NET PPE) suggests a different sentiment.
IRDM: Aging Net PPE Trend (Source: Data from Seeking Alpha. Prepared by the Author)
If this trend continues, this might negatively impact IRDM's profitability. On the other hand, IRDM could easily capitalize and launch more satellites, however, this could potentially impact the company's improving liquidity, which will be discussed later. Furthermore, IRDM may face an unforeseen loss if their previously mentioned plan to launch five ground spare satellites fail, as there will be no insurance to cover expenses in the worst-case scenario, as quoted below.
We do not currently hold any active in-orbit insurance policies covering losses from satellite failures, and we do not expect to obtain in-orbit insurance covering losses from satellite failures or other operational problems affecting our constellation. We also do not plan to purchase launch insurance for the planned launch of our remaining spare satellites. Q4 2022 Final Report
Premium Valuation
IRDM: Seeking Alpha's Quant Valuation Grade (Source: Data from Seeking Alpha)
Another reason why I would wait for a significant pullback is its premium valuation. In fact, as shown in the image above, most of the metrics are graded as premium.
Takeaway
Overall, IRDM has numerous positive catalysts, especially considering its improving profitability, as shown in its first positive bottom line of $8.7 million in the past three years. It has also reduced its total debt from $1,621.3 million in FY'21 and $1,640.8 million in FY'20 to $1,506.8 million. As a result, its debt to EBITDA ratio has improved to 3.91x, which is better than its 5-year average of 5.03x. Moreover, IRDM has a strong CAPEX budget for FY'23, even excluding the planned expenditure for the launch of spare satellites, as quoted below.
We expect capital expenditures of about 75 million in 2023, including 15 million to 20 million related to this year's planned launch of spare satellites. Excluding launch costs, our CapEx this year will be between 55 million and 60 million. Source: Q4'22 Earnings Call Transcript
Additionally, despite the higher CAPEX for FY'23, management provided an outlook of growing free cash flow to $300 million, which is better than the current amount of $273.46 million. However, with no updates on the successful launch of IRDM's spare satellites and no improvements in its margins, the short-term outlook remains risky and could lead to a price correction.
Thanks for reading and good luck!
For further details see:
Iridium: Improving Moat, But Wait For A Pullback