Iridium Returns from the Space of Disgrace
Iridium raised $200 million in a Sept. 29 initial public offering after reinventing itself and wringing $54 million in profit from $320 million in sales last year.
Originally the company had planned to sell go-anywhere phones to globe-trotting executives and provide calling with signals beamed from a constellation of 66 orbiting satellites, plus spares. But after spending $5 billion to get the equipment off the ground—and failing to anticipate the threat from coast-to-coast wireless networks—Motorola (MOT)-backed Iridium drew only a fraction of the customers it needed to stay in business. Setting a pattern repeated across the industry, Iridium filed for bankruptcy protection in 1999. Three years later, rival Globalstar followed suit, while Teledesic, founded by wireless impresario Craig McCaw and Microsoft (MSFT) founders Bill Gates and Paul Allen, shut its doors.
Covering Air, Sea, and Mountaintops The new Iridium still provides satellite calling but has a plan for tapping new markets and running its satellites more efficiently. It has 347,000 customers, up from about 50,000 when it filed for Chapter 11. "People understand much better what these things cost, how they work, and what they can and can't do," says Jonathan Atkin, an analyst at RBC Capital Markets, which has provided investment banking services to Iridium in the past year. "There's a much more realistic view across the industry."
For Iridium and other satellite companies, the challenge is to translate that realism into sustainable profits. Rather than position itself as an alternative to conventional wireless calling, the company wants to provide communication in parts of the world not reached by mobile networks. "Less than 10% of the earth's surface has wireless coverage after 25 years and it's never going to get much more than that," says Iridium CEO Matthew Desch. That includes airspace, the sea, and mountaintops—places where the military, defense contractors, and companies involved in shipping and logistics or oil and gas exploration will pay dearly for ways to communicate.
The U.S. military is Iridium's largest customer, accounting for about 21% of revenues and 9% of its user base. "This is the very definition of a niche product," says Chris Quilty, an analyst at Raymond James (RJF), which handled Iridium's IPO. "It's used by people who need to have it."
M2M: "Partners Do the Heavy Lifting" As hungry as those markets may be, Iridium's voice business may grow at a pace of less than 10% a year, Quilty says. That's why Iridium is also pursuing so-called machine-to-machine (M2M) communications, used by companies to monitor equipment in remote locations and to track shipments en route. Quilty reckons that in 2008, Iridium doubled its M2M user base to 71,000.
To rein in the costs of serving the M2M market, Iridium relies on 200 outside companies to incorporate its products into their own goods aimed at specific industries, including aviation, shipping, and oil and gas. For instance, Iridium sells a satellite data modem that such companies as Honeywell (HON) and Garmin (GRMN) add to their own aviation products, thereby saving Iridium the trouble of building them from scratch. "Our partners do the heavy lifting of research and development because they know their industries better than we do," Desch says.
The biggest costs Iridium faces stem from its aging satellites. The gear will have to be replaced, starting in 2014, at a cost of $2.7 billion. "This is a problem that everyone in the satellite industry faces," says Max Engel, head of the North Star Consultancy, a space industry research firm. Iridium will raise some funds from warrants issued amid the IPO, as well as cash from operations and capital raised in the debt markets.
If All Else Fails, the Pentagon Buys Another new source of funding that is gaining in popularity among satellite players is leasing space on satellites themselves. Iridium plans to leave capacity for government agencies and companies that need their own eyes and ears in space but lack the funds to launch their own equipment. The Australian Defence Force paid Iridium rival Intelsat $167 million to use for communications a portion of an Intelsat satellite orbiting above the Asia-Pacific region.
Other satellite players are striving for newfound relevance, too. Hughes Communications (HUGH) has carved out a niche providing satellite-transmitted Internet access to rural markets. Globalstar (GSAT) emerged from bankruptcy in 2004 and plans to begin launching a new constellation in 2010, says Ron Gherman, an analyst at research firm Frost and Sullivan.
If all else fails for Iridium, its systems remain essential to the customer whose demand is unlikely to flag for some time. "The military bought into the entire Iridium concept in the 1990s," says Raymond James' Quilty. "If everything hits the fan again, they'll still have their buddies at the Pentagon."