What's the idea?
Iridium provides satellite communications services, the market for which is expected to grow at a compound annual growth rate (CAGR) of 9.6% during 2024–2032 to reach $70.89 billion by the end of the forecast period. The enterprise segment of Internet of Things will reach $690 billion by 2030, projected to grow at a CAGR of 15%.
The company expects its service revenues to reach $1 billion per year by 2030, representing growth at a CAGR of 8% from current levels. The company has launched the Iridium Certus GMDSS service, which could drive additional demand for the company's services from the maritime industry.
The recent acquisition of Satelles allowed Iridium to enter a new market for GPS signal security. The company pays shareholders a dividend yielding 1.78% and repurchases shares from the market under a buyback program, the authorized amount of which is equivalent to around 18% of IRDM's market capitalization.
About Company
Iridium Communications (IRDM) is a major player in the satellite communications market, providing voice and data services to customers through a network of 66 interconnected satellites located in Low-Earth Orbit (LEO). The company utilizes a mesh architecture of cross-links between satellites, allowing it to provide services anywhere on the planet, regardless of the availability of nearby ground equipment. Iridium Communications was founded in 1987 and is headquartered in McLean, Virginia, USA.
Why do we like Iridium Communications Inc?
Reason 1. Growth of end markets
Iridium Communications is a major player in the satellite communications market that provides voice and data services to customers through a network of 66 interconnected satellites located in Low-Earth Orbit (LEO). The company uses a mesh architecture of cross-links between satellites, which allows it to provide services anywhere on the planet, regardless of the availability of nearby ground equipment.
Company satellite constellation
Iridium Communications divides its revenues into the following segments:
1. Services for the private sector (Commercial services):
Voice and Data — this sub-segment includes mobile and Internet communication services provided through the Iridium satellite group. Key customers include enterprises located in remote areas (oil platforms, mining operations, etc.) and various rescue services that face interference or lack of cellular communication while performing their professional duties. This segment also includes revenues from aviation communications services, where Iridium products are used in civil aviation safety navigation systems, on private jetliners to keep passengers connected to the ground, on helicopters and other small air transportation, and for navigation of unmanned aerial vehicles. In 2023, this business division accounted for 27.72% of the company's total revenue and 37.51% of its service revenue.
Internet of Things (IoT) Data — includes a set of products for maintaining constant communication with special equipment and businesses located in areas without cellular coverage. For example, Iridium provides connectivity to location trackers for truck drivers who must be in constant contact with dispatchers. The company's products also allow for remote control of heavy construction equipment, control monitoring of equipment and production processes anywhere in the world from a single office, control of automated fishing processes, etc. In 2023, this division accounted for 17.83% of the company's total revenue and 24.13% of its service revenue.
Broadband is a set of products and services provided to the maritime and river shipping industry. These include providing communications to seafarers for personal needs, as well as support for various safety and distress messaging systems. In 2023, this business accounted for 7.32% of the company's total revenue and 9.91% of its service revenues.
Hosted Payload and Other Data (payloads and other services) — within this segment, the company receives recurring revenue from partners who placed their equipment on any of Iridium's satellites prior to their launch into orbit, as well as revenue from certain development products. In 2023, this segment accounted for 7.63% of the company's total revenue and 10.32% of its service revenue.
2. Government Services — within this segment the company provides products and services similar to those described above, but with military and service specifics. These include battlefield communication services, remote control of military equipment, calibration of drones, etc. In 2023, this segment accounted for 13.41% of the company's total revenue and 18.14% of its service revenue.
3. Subscriber Equipment Revenue — in this segment, the company recognizes revenue from sales of any equipment necessary to receive its communication services (cell phones, signal reception terminals, etc.). In 2023, this segment accounted for 13.30% of the company's total revenue.
4. Engineering and Support Services — within this segment, the company acts as a subcontractor to General Dynamics Mission Systems, which develops communications infrastructure for the US Space Forces. In 2023, this segment accounted for 12.79% of the company's total revenue.
Structure of the company's total revenue and the company's revenue from services
As Iridium's revenue structure shows, the company's most important market today remains the mobile satellite communications sector, including services provided to the maritime and aviation industries. These markets are growing rapidly, which may allow Iridium to continue to increase revenues from these services in the future. For example, according to Fortune Business Insights, the global satellite communications (SATCOM) market will grow at a CAGR of 9.6% through 2032 to reach $70.89 billion by the end of the forecast period, up from $33.98 billion in 2023. Market growth will be driven primarily by increasing demand for communications in remote areas where it is impractical or impossible to deploy terrestrial network infrastructure.
The maritime and aviation satellite communications markets are also showing good growth rates. According to Global Market Insights forecast, the maritime satellite communications market in monetary terms will grow at a CAGR of 8.5% until 2032 to reach $12.4 billion, while the aviation market will grow at a CAGR of 5.7% until 2031. The latter market will exceed $7.5 billion by the end of the forecast period (according to Cognitive Market Research).
The IoT industry, which is a major consumer of Iridium's communications services, is also booming. At the same time, the company is a service provider for such major industries as oil and gas, mining and forestry, whose enterprises are often located outside the cellular coverage area. Thus, according to IoT Analytics, the corporate segment of the Internet of Things (excluding smart homes) will reach $690 billion by 2030, compared to $269 billion in 2023, which implies growth at a CAGR of 15%.
Dynamics of the corporate segment of the IoT market
Iridium forecasts that its existing product portfolio, as well as the effect of M&A and new agreements (see below), will allow the company to increase its services revenue to $1 billion by 2030, which implies a near doubling of current values. By comparison, the company's services revenue totaled $584.45 billion in 2023. This forecast assumes an annual increase of approximately 8% in the company's revenue from this segment.
Company forecast for service revenue
Thus, as economies evolve and the importance of quality communications grows, there is an increasing need for companies that can provide connectivity to even the most remote locations on the planet. By capitalizing on its global presence, Iridium is able to meet the growing demand of end markets, which could lead to increased revenues for the company in the future.
Reason 2. Expanding the functionality of the satellite constellation
To achieve its goal of stable growth in service revenues, Iridium actively pursues research and development activities that improve the company's competitive position. One of the company's innovations offered to the market was the upgrade of the Iridium Certus program to a fundamentally new level, now called Iridium Certus GMDSS.
Iridium Certus was originally a multi-service program for the maritime industry that provided the ability to use a satellite receiving terminal to get voice and data over the company's satellite constellation. Iridium Certus was used by customers as an alternative and more reliable means of L-band communications than Ku-band satellite communications.
Following an update to Iridium Certus GMDSS, the program has a wider range of features. In addition to providing communication, the program now allows:
- to send and receive distress signals;
- at the touch of a button, organize reliable voice communication with the dispatcher during a disaster;
- receive emergency information about deteriorating weather;
- support the LRIT (Long Range Identification and Tracking) system, which provides satellite tracking of ships (tracking), as well as some other functions.
Wouter Deknopper, Iridium's Vice President of Maritime, noted that Iridium Certus GMDSS is a new integrated offering for the shipping industry that combines stable satellite communications with all the security services required today. According to him, there are no analogs of Iridium Certus GMDSS on the market today, therefore the product can become a driver of customer base growth for the maritime segment of the company.
Another significant event in the history of Iridium development was the first acquisition of another company, Satelles, which was purchased for $125 million in April 2024. Satelles provides services to protect GPS signals from unauthorized spoofing and manipulation by intruders, and improves the accuracy of device location.
Satelles' suite of services, called Iridium Satellite Time and Location (STL), is becoming increasingly relevant as the Internet of Things evolves and infrastructure cybersecurity is required. Attackers can exploit imperfections in the GPS signal to manipulate it, which can lead to dire consequences. For example, a railroad accident can occur due to incorrect location identification. Sending false GPS signals can also lead to overloading of computing power in data centers, etc. Analysts note that recently the problem of GPS manipulation has become particularly acute in Europe.
The company's new product has already proven itself. Thanks to its closed satellite architecture, Iridium is 1,000 times more accurate in receiving and transmitting location and time signals compared to the GNSS (Global Navigation Satellite System) system, which is based on GPS.
As Iridium management noted at the last teleconference, during Q2 the company continued to integrate the new service with its own equipment. In addition, following the growth of GPS spoofing incidents in Europe and Asia, the company has made its STL service available in these regions from June 2024. Against this background, management expects STL revenue to reach $100 million by 2030, which looks very ambitious for a recently launched service.
Thus, while the business model is generally profitable, Iridium continues to invest in research and development, constantly bringing new products and services to market. This gives confidence in the company's ability to deliver consistent revenue and profit growth.
Reason 3. Large share buyback program and dividends
On the Q2 2024 investor call, Iridium management stated that it believed the company's market price was undervalued given its business and cash flow growth. In this context, the company accelerated its share buyback in Q2 2024.
With this in mind, Iridium's Board of Directors approved an increase in the buyback program limit of $500 million in September 2024. The company first announced the buyback in February 2021. At the end of Q2 2024, Iridium had $180.8 million remaining from the previous program, bringing the authorized repurchase amount after the limit increase to approximately $680 million, or about 18% of its market capitalization.
In addition, Iridium is paying shareholders a dividend that has been increased from $0.13 to $0.14 per share in Q2 2024. The company's current dividend yield is 1.78%.
Thus, we expect that, given the current undervaluation, Iridium's management will continue to increase the investment attractiveness of its shares by activating buy-backs and increasing dividend payments, which should lead to an increase in the market value of its stock.
Financial performance
Iridium Communications' financial results for the trailing 12 months (TTM) can be summarized as follows:
- Revenues totaled $797.26 million, up 0.83% from 2023.
- OEBITDA increased from $463.10 million to $464.39 million, with margins decreasing slightly to 58.25% from 58.57%.
- Net income was $88.37 million compared to $15.42 million at the end of last year.
The increase in revenue and profit was mainly due to higher commercial services revenue and new contracts with government agencies, which also had a favorable impact on the results for H1 2024
Dynamics of the company's financial performance
Iridium's results for H1 2024 are summarized below:
- Revenue increased 1.64% YoY to $404.92 million.
- OEBITDA increased from $227.76 million to $229.06 million.
- Net income was $51.99 million versus -$20.97 million a year earlier.
Dynamics of the company's financial results for H1 2024; source: compiled by author
- TTM operating cash flow decreased to $311.46 million versus $314.91 million at the end of 2023.
- Free cash flow increased to $256.26 million from $241.43 million.
The decrease in operating cash flow is mainly due to a reduction in working capital and adjustments for non-cash cost items. The increase in free cash flow is due to lower capital expenditures in H1 2024.
Company cash flow
Iridium has an increased debt load:
- The total debt is $1.65 billion.
- Cash equivalents accounted for $63.54 million.
- The net debt to Adj. LTM EBITDA ratio is 3.4x.
- The interest expense coverage ratio is 4.7x.
This level of debt indicates increased risks to the company's financial stability. However, the principal portion of the debt is not expected to be repaid before 2030, so we consider this risk to be insignificant.
Iridium expects positive financial results through 2024.
Company forecast of financial results
Thus, management's forecast supports our confidence in the company's value creation potential.
Stock valuation
Iridium Communications trades at a premium to the industry average based on EV/Sales of 6.73x, P/E of 43.69x, Fwd P/E of 32.57x and at a discount based on EV/EBITDA of 11.55x and P/FCF of 14.33x.
Comparable estimate
The average price target from Wall Street's top three investment banks is $41.7 per share, which is in line with our consensus and implies a potential upside of 41.1%.
Price targets of investment banks
Key risks
Increased competition. Despite a positive outlook for end-market growth, Iridium faces increasing competition. Launching and building satellites is becoming less capital intensive and new players are emerging in the satellite communications market as a whole or in specific market segments. Recent examples are Starlink and OneWeb. In this context, further intensification of competition may reduce the margins of the business or limit Iridium's revenue growth.
Limited ability to repair satellite infrastructure. Iridium estimates the lifetime of its satellite constellation at 17.5 years, which implies a long stay in orbit. In the event of an incident or malfunction, the satellite cannot be repaired, meaning that the company relies on the reliability of its design and proper assembly. If Iridium experiences a satellite failure, this could result in a negative investor reaction and a reduction in the company's market capitalisation.
Rapid technological evolution in the satellite industry. Despite the global reach of Iridium's services, the data rate of Iridium's satellites remains low compared to traditional cellular communications and does not exceed 704 kilobits per second. If technologies offering higher data rates enter the market, the company may face a reduction in its customer base or be forced to increase capital expenditures to launch new satellites.