Iridium Communications got its network of 66 satellites officially online in February and has now begun to see the first fruits of its multibillion-dollar investment, with a new Pentagon contract and a partnership with fellow satellite operator OneWeb.
A $738.5 million award from the Department of Defense, announced by Iridium on Monday, puts the company in a position to improve its financing and benefit its shareholders. The seven year contract expands upon a previous Pentagon award, under the Enhanced Mobile Services (EMSS) program, that Iridium won in 2013. This brings Iridium crucial capital, which it can use toward refinancing debt it took on when getting the satellites in orbit.
"This DOD contract sets the table for our refinancing which sets the table for our ability to do shareholder friendly type things," Iridium CFO Thomas Fitzpatrick told CNBC.
Iridium's previous EMSS contract was for $400 million over five years, making the latest award a notable expansion. Iridium's Executive VP of Government Programs Scott Scheimreif explained that the scope of the agreement is very wide, as civilian agencies – such as the State Department – are able to take advantage of the Department of Defense' contract. Government subscribers grew by 145% under the previous contract and Scheimreif expects that will accelerate further.
"We've created this framework that they can continue to build upon ... right now, we're roughly at 125,000 subscribers under the EMSS program. We can see that doubling and tripling easily over the next seven years," Scheimreif told CNBC.
Scheimreif said that Iridium has about 1.2 million total subscribers for its network, so government makes about 10% of those. Because Iridium's been "growing on the commercial side very fast," Scheimreif says that he doesn't see government subscribers making up more than 20% of the network even after it
While Iridium's stock ticked as much as 5% higher in premarket trading on Monday after the Pentagon announcement, it ended the day down nearly 5% at $25.22 a share. That's in part due to a lowered outlook for broadband revenue from Certus, the company's remote communications business. In the same filing that Iridium noted the Pentagon contract, the company also lowered its outlook for Certus 2021 revenue to $75 million from $100 million.
Even after the dip, Iridium shares are up nearly 36% so far this year.
Iridium isn't stopping there, as it sees demand for satellite bandwidth continuing to grow. Iridium announced on Tuesday that it will partner with OneWeb to look at creating a collaborative broadband service. OneWeb is building its own constellation of satellites. But unlike Iridium's network, OneWeb's operates in a different broadband frequency -- and will be made up of 650 satellites, rather than 66 satellites.
A combined offering from Iridium and OneWeb is branded as an opportunity for both companies' customers to access their services. The offering could "create a complementary, full-service option for applications such as heads of state comms, critical tactical services, maritime, disaster response and more," Iridium said in a press release.
"Our services are unique and complementary, and we know that customers are looking for the capabilities of both our low-Earth-orbiting networks," Iridium CEO Matt Desch said in a statement.
Iridium used export credit financing through the French agency Bpifrance Assurance Export to finance the construction of the $3 billion Iridium NEXT network of satellites.
"It was a great instrument for us during the construction period, and tailor made to our needs," Fitzpatrick explained. "But at the end of the construction period, all the benefits it has are outweighed by the attributes that it has, which called for significant principal payments."
Those principal payments would have been about $150 million a year through 2024. Moreover, it would have prevented Iridium from "doing shareholder friendly things like a dividend and buying into shares," Fitzpatrick said.
Given the company's now strengthened earnings, Fitzpatrick says "lenders are falling all over themselves" to loan to Iridium. He expects to replace the credit facility with a leverage loan that has about 1% principal amortization – or annual payments that are about $15 million, a tenth what Iridium was paying before.
"Having a long-term contract under our belt is very supportive of getting the new loan done on the best terms possible," Fitzpatrick added.