Iridium Buys Time With Creditors Terms
zdnet.com
By Kathleen Cholewka and Kimberly Weisul
April 5, 1999 9:43 AM ET
Iridium sent the industry reeling last week with a
one-two punch of negative news. The company
announced it received a 60-day waiver from its
creditors, temporarily pardoning it from missing the
benchmarks it had agreed to as a condition of
financing. What's more, Iridium's chief financial officer
and vice president, Roy T. Grant, tendered his
resignation, effective April 16.
Iridium says that Grant resigned for personal reasons,
and that the company expects to find a replacement
before he officially leaves.
The Iridium network promises customers global
communications services, including the ability to unify
their phone and pager services with one phone
number and one monthly bill. Under the revised $800
million senior secured credit facility agreements,
Iridium's lenders require the satellite company to
make at least $4 million in revenue and $30 million in
cumulative accrued revenue by May 31. They also
require Iridium to sign up at least 27,000 Iridium World
Satellite Service customers and 52,000 total
customers by that date. The original covenants
required Iridium to have 30,000 subscribers by the end
of March 1999.
Iridium may hit the new marks, but analysts say it
won't be easy. The company only began commercial
operations at the end of 1998, and its most recent
financials, for the year ended Dec. 31, 1998, show
only $186,000 in revenue and about 3,000 subscribers
on the Iridium system.
Rayid Said, a senior analyst at Friedman Billings
Ramsey Group, estimates that by the end of March,
Iridium had about 20,000 customers, with about
15,000 or 16,000 of those signed up to use its World
Satellite Service. He expects revenue for the quarter
to be $7 million to $8 million.
But even a healthy quarter would be dwarfed by the
amount Iridium pays in interest on its accumulated
debt - about $92 million in the last quarter of 1998 and
$265 million for the whole year. Said expects 1999
interest payments to come in at a whopping $440
million.
In light of this, renegotiation of the $800 million bank
facility, which could conceivably add up to $8 million
per year to Iridium's debt service costs, is a drop in
the bucket.
Shortages of handsets have made it tough for Iridium
to sign up customers. Said says it's possible that by
the end of May the company could meet its
subscriber goals, but that it still could fail to meet
revenue goals if the bulk of the subscribers comes on
board at the end of the month.
Still, analysts say, that does not spell danger - yet.
"It's not likely they'll hit their targets, but it's not a
survival question," says Greg Caressi, research
manager for telecom at Frost & Sullivan, a research
firm. "They're not going to fold up house and go away
after putting up over 85 satellites."
In fact, the very nature of satellite companies has at
least something to do with their lack of success thus
far. "These are normal bumps. There are weaknesses
in satellite companies in general," Caressi says. He
adds that Iridium is having trouble launching a
captivating marketing campaign to the masses. That
requires expertise the satellite industry, with a long
history in government business, does not have.
Said expects Iridium to break even on a cash flow
basis once it has about half a million subscribers, a
figure he anticipates the company will reach by
mid-2000. Eventually - in about the year 2004 - he
expects cash flow margins to be in the 80 percent
range. "On the bottom line you're looking at fairly
healthy margins, but you don't get there overnight," he
says.
Originally, Iridium's services via satellite were to be
geared to the international business traveler. However,
the company may have to change its business plan,
since competitors are threatening to bring prices way
down. Imperial Capital analyst Greg Hermanski says
Globalstar is going after regional coverage in countries
where land-based service is spotty. Iridium, he says,
will market heavily to executives in the shipping and
mining industries, who can be expected to ring up
heavier per-minute charges than business travelers.
Globalstar will offer satellite access services at 65
cents per minute wholesale and about $1.50 retail.
Ellipso, which will launch its services in 2002, claims
it will sell at 15 cents per minute wholesale.
"That still may be an unfair comparison, since Iridium
is out there actually selling service," Caressi says.
"But it's tougher on [Iridium] because they're first."
Now focus is key for Iridium, since the satellites it has
launched will last for only five to seven years. "These
satellites are like melting ice cubes. Unless you get
your subscribers onto the network, you're losing
money every day," Caressi says.
Copyright (c) 1999 ZD, Inc. All Rights Reserved.
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