Raging Bull article on I* (via I* thread)
N E W E C O N O M Y : 1 0 1
It's Lonely Being First
April 28, 1999 - 3:10 PM
By Claude P. d'Hermillon, Jr.
Does anybody know what's going on at Iridium LLC?
The satellite phone pioneer kicked off a $180 million ad
campaign last summer for its global wireless phone and paging
service, and as recently as this Spring was projecting
first-quarter targets of 52,000 subscribers and $30 million of
revenue. Investors kept the stock, which trades as Iridium
World Communications (IRID), priced above 40 until early
this year.
But the $5 billion venture's predictions turned out to be utterly
ridiculous. By the end of March, analysts were already
forecasting poorer results, estimating that Iridium's first-quarter
revenue would be near $4.5 million with a paltry 15,000
subscribers. When the Washington-based venture finally did
report Monday, the news was even worse. For the first quarter
ended March 31, Iridium reported revenue of just $1.5 million
from a customer base of about 10,000 users.
Investors reacted by pushing the stock down to near its
52-week low. It closed Tuesday at 15 3/8, down from a high
above 72 last May. That followed the earnings report as well as
the resignation of Vice Chairman and Chief Executive Edward
Staiano last week.
But the news was no longer a surprise for investors. Earlier this
month, Iridium had finally admitted publicly that its earlier
projections were off in a big way, conceding it won't break even
on a cash-flow basis anytime soon. On March 29, when its
chief financial officer resigned, the company was facing a
technical default on an $800 million secured loan which its
creditors scrambled to extend by 60 days. Simply put, Iridium
won't generate enough revenue this year to cover its expenses.
To do that, the company said, would require a staggering
500,000 customers, an inconceivable target considering
Monday's disclosure.
It is a long fall from initial expectations for the venture, whose
backers include Motorola (MOT) with a more than 20% stake,
as well as Lockheed Martin (LMT), Raytheon (RTNA,RTNB),
SK Telecom (SKM) and Sprint (FON).
Iridium was founded back in the late 1980s by a handful of
executives working in Motorola's Satellite Communications
Group, which spun the company out on its own in 1991.
Iridium's first satellite went into orbit in 1996, and the bulk of its
birds were launched the following year. That's the same year
that the well-funded company went public at $20 a share as
investors hungry for a piece of the world's first satellite-based
wireless communications network bid the stock up by more
than a factor of three in less than a year. It finally went online
last November through a constellation of 66 low-earth orbiting
satellites.
Outlook
The core question facing Iridium and its investors is whether
the company's problems stem from management turmoil or a
flawed business model. While most observers agree the
venture did a stellar job of getting its massive satellite network
in place, opinion is mixed when it comes to handicapping the
company's odds of success moving forward.
Skeptics say Iridium's goal of providing uninterrupted global
phone service from a single device may have looked good a
decade ago, but the dynamics of today's competitive wireless
landscape have changed. The market's chief concern is price,
which Iridium is not in a position to tweak.
With $5 billion worth of satellites circling the globe, it's not hard
to see why the company wants more than $3,000 for a handset
and as much a $7 a minute to place a call. Granted, AT&T (T)
and Bell Atlantic (BEL) won't work in the Gobi Desert or atop
Mt. Kilimanjaro, but how many customers find themselves in
such remote locations even once in their lives, let alone often
enough to justify such a massive outlay just to make a call?
That's an easy question for most consumers to answer,
especially when they can pick up a digital cell phone today for
about $50, and sign up for calling plans which charge pennies
per minute.
Still, the troubled company does have its boosters who say
Iridium's problems stem from its jettisoned CEO's inability to
take the company beyond the launch phase. In their opinion,
Staiano simply couldn't figure out how to market the company's
unique service. In short, they say, Iridium needs to focus its
attention on more targeted markets where demand, though
limited, definitely exists. Those markets include government
contracts, maritime and aeronautical industries as well as
far-flung companies engaged in natural resource extraction.
According to International Telecommunications Union, a
government and industry cooperative, mobile telephony is on
track to explode from 200 million users today to 500 million by
the turn of the century. Long-term projections are as high as
2.4 billion users by 2015, which means that today's market
represents just 10% of future demand. With numbers like that,
even the niche markets should prove profitable, and Iridium
backers expect their play will pay off. Indeed, with so much
capital already spent, the company's investors and lenders
have little choice but to stay the course.
Crunch Time
Right now, though, the minutes are ticking by. The company's
board appointed an interim CEO with the unenviable task of
meeting re-jiggered revenue and subscriber goals by May 31.
That's a very short-term hurdle which Iridium has to clear in
order to satisfy lending criterion. It's also an obstacle the
company must get past to regain lost momentum. Indeed, if it
does meet its new targets - still far from certain - some
analysts believe the company' stock will be vested with instant
upside.
Momentum will crucial as several other ventures prepare to
bring their own satellite-based services online in the coming
months. Among them is Globalstar Telecommunications
(GSTRF), which plans to launch its service in September with a
$1,000 phone and a calling plan averaging 65 cents a minute.
- Talk Back: Chat with Author Claude d'Hermillon:. |
