Merrill update on IRIDF (via IRIDF thread)
Talk : Communications : IRIDF - Iridium World Communications IPO Announced!
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To: Jack Morgan (1368 )
From: Larry L
Tuesday, Feb 23 1999 1:35PM ET
Reply # of 1371
To all: Merrill Lynch update:
- While the satellite system works well, Iridium continues to try to bring their distribution
channell up to speed. Many service providers unlikely to begin service until Q2.
- The company reports large orders pending. These appear to be too late to meet Q1
covenants but should come in Q2. While covenant violation should not affect
operations, the company's stock price is unlikely to recover until the company reports
subscriber numbers, expected in late April
- Many of the most important service providers such as Sprint, Skampi in the maritime
market and Stratos will not begin service until Q2. These should increase sales levels.
- We continue to believe the long-term market is sizable at lower prices for phones and
service. MCSI has already dropped its phone price $500. Our model assumes service
pricing 40% lower than the company's.
- While the stock may experience short-term weakness until subscriber
numbers are available, we expect to see positive subscriber developments in future
quarters. We maintain our intermediate term Accumulate and long-term Buy ratings.
KINKS IN THE SYSTEM
While Iridium's satellite system now works well, the company is still encountering many
kinks in their business system that have prevented subscriber growth from meeting
expectations. The probability appears to be growing that the company will miss the Q1
targets in the company's debt covenants. However, Q2 should bring many more
distributors, better phone availability, revised pricing, and subscriber growth that
validates Iridium's long-term market potential.
Phone availability is improving, but many subscribers cannot yet purchase the equipment
they want. CDMA cassettes to enable users of dual-model satellite/cellular phones to
use their phones in CDMA cellular mode began production only recently. We have
been unable to get delivery of phones with these cassettes. The company reports these
are now in full production and should be available shortly.
Kyocera, the second manufacturer of phones besides Motorola, should begin shipping
its first product this week. Kyocera had already produced a total of 20,000 handsets
for which the software can be updated immediately and that are ready for shipment.
Because Kyocera has not been manufacturing phones steadily until performance issues
were resolved, however, it is likely that additional Kyocera handsets made this quarter
won't reach subscribers until next quarter. As it ramps up, initial production rates for
Kyocera likely will be slow, but should approach 1,000 per day by the 2nd quarter, the
rate at which Motorola is currently producing. More than 9,000 users have already
placed deposits on Kyocera phones.
Many of the most important service providers of the Iridium service have not begun
marketing the service. In the U.S., Sprint is expected to launch its service in about 60
days. Currently, Motorola Cellular Services (MCSI) is the principal service provider of
Iridium, which does not have nearly the reach of Sprint.
Canadian-based Stratos,m who currently provides communication services to the oil
and gas and mining industries should also begin service in Q2. Skampi, the world's
leading provider of comm services to the maritime industry should also turn on in Q2.
MAY MISS Q1 COVENANTS
These delays may cause Iridium to miss the Q1 targest in their debt covenants. These
include: 27,000 satellite voice subscribers, 52,000 total subs, $30 M in accrued
revenues and $4 M in cash revenues. Management indicates it's too early to tell if they
will achieve these numbers. While many orders are pending, including a number of
orders for hundreds of phones and at least one for 3,000 phones, these may not come
in time for Q1.
If Iridium were to miss the bank covenant numbers, we do not believe it would have any
significant operating consequences. The primary impact of missing a covenant would be
limited to the company having to seek a waiver and possibly pay higher financing
expenses.
WE CONTINUE TO BELIEVE IN THE MARKET
The more important issue is the size of the market. We still believe it is large. To tap this
market, we expect Iridium to bring down the price of its service and for its service
providers to bring down the price of the phone.
On the service side, we have seen no reductions yet. Retail pricing for domestic calls in
major markets remains around $1.50 to $2.25 per minute. International calls typically
fall in a $4 to $7 range. The company expects this pricing to yield $2.10 per minute to
Iridium. Our models assume 40% lower levels of $1.25 per minute, falling to below
$1.00 within several years. [G* costs/pricing are much lower]
We have always assumed phone pricing would fall rapidly. MCSI already dropped
phone prices by $500 during February. Sprint is expected to launch a program in Q2
with very aggressive phone pricing. We expect phone prices below $2,000 by the end
of the year (down from $2,700+) with declines below $1,500 during 2000.
STAY THE COURSE
While the stock may experience continued short-term weakness until subscriber
numbers are available, we expect to see positive subscriber developments in future
quarters. We maintain our 12-18 month price objective of $64 and intermediate term
Accumulate and long-term Buy ratings. |
