All; update on I* from Tom Watts, Merrill Lynch's satellite analyst.
WATCH IRIDIUM ROLL OUT SERVICE ON TIME, BUT BUILD UP SLOWLY
Iridium LLC [IRIDF] is approaching its self-imposed deadline to introduce service Sept. 23, but at press time the company awaited a successful launch of five additional satellites, software debugging and other positive developments to remain on track, amid investor wariness.
The proposed global, mobile satellite services company is showing no signs of backpedaling from its rollout date, but it is likely to proceed slower than initially planned during the first few months of operation, according to a research report last week from the New York-based investment firm Merrill Lynch. The company recently began accepting $500 deposits per phone from its prospective North American customers and taking other steps to commence its launch on schedule.
Part of Iridium's plan involved a successful launch last Friday (9/4) to bring its low-Earth-orbit (LEO) satellite network up to full strength with the deployment of five additional satellites. The Iridium birds will be carried aboard a Delta II from Vandenberg Air Force Base, Calif. The five-second launch window opens at 5:35:53 p.m. EDT.
The launch had been set for Sept. 1, but was delayed after the Aug. 26 failure of the inaugural Delta III launch from Cape Canaveral, Fla. Boeing Co. [BA] officials wanted to ensure no shared systems of their two rockets caused the disaster.
"The technical issues that we are focusing on with the Delta III investigation have also been evaluated on the Delta II launch vehicle," said Darryl VanDorn, Boeing's director of NASA and commercial Delta programs. "The results of this evaluation have shown that these issues do not apply to the Delta II. The Delta II that is ready to fly is of the same configuration which has already successfully placed 45 Iridium system satellites into orbit for Motorola [MOT] with nine launches between May 1997 and May 1998."
Iridium's first maintenance flight last month, when a Chinese Long March 2C/SD launched Aug. 19 from China's Taiyuan Satellite Launch Center, delivered two satellites into the Iridium constellation. That launch marked Iridium's 16th successful mission in 15 months and brought its number of operational satellites on-orbit to 67.
Iridium's system can work with the 67 birds in-orbit, company officials said. However, the five additional satellites would fill a hole in plane six where three birds have failed. A significant delay
in the Delta II launch also could limit Iridium's handset testing. It takes about two weeks for just-launched satellites to reach their orbits and the start of service is nearing.
...Stock Price Has Been Sliced In Half
Stock market jitters and the uncertainty about Iridium's prospects have contributed to a stock price drop of more than 50 percent since it reached a high of $70.625 May 5. The stock hit $32.875 Friday (9/4) at 12:30 p.m. Although Iridium is running a few weeks late in certain aspects of its plan, the company's ability to bring its mammoth $5 billion project even close to schedule proves Iridium's outstanding
execution capabilities, said Tom Watts, Merrill Lynch's satellite analyst. The company's rollout in the fall will culminate with all cylinders firing by year end, he added.
Among the pluses, Iridium's primary contractor, Motorola, should be able to replace all faltering satellites to complete the system. A 40 percent price cut since July has reduced Iridium's investment risk sharply, Watts said.
"At the same time, software testing appears to be progressing," Watts said. Despite the progress, Merrill Lynch rates Iridium "neutral" until remaining start-up risks dissipate and evidence of strong demand emerges.
Specifically, Iridium's software needs debugging and Iridium officials estimate that they are four to six weeks behind schedule, Watts said. However, that time lag is small for a project of such
massive proportions, he added.
Aside from the software glitches that need correcting, other short-term problems include an inability to offer all planned services by the Sept. 23 start date and the need to find additional customers. Limited initial equipment availability should ensure that the system's traffic loads remain low.
"We expect the company will begin satellite voice service on a soft roll-out basis until debugging is complete," Watts said. This could include free service for early subscribers, he suggested.
Expect Motorola to deliver 20,000 to 30,000 handsets by October, but to ramp up substantially by year-end, Watts said. City-to-city cellular roaming service should kick off Sept. 23 as well.
Also expect paging service to follow the introduction of satellite voice by 30-60 days, he added.
"We believe Iridium has broadened its initial market focus to emphasize industrial users, as well as business travelers," Watts said. These intensive users should raise monthly usage levels well
above an average of 40-50 minutes. A timely start may let Iridium top 40,000 subscribers by year-end.
Iridium's progress in other areas remains strong, Watts said. The company now holds 86 fully documented licenses worldwide and has received formal approval in 110 countries to provide services to an estimated 75 percent of its projected service area. No unlicensed nation individually represents more than 1.5 percent of projected demand. In addition, all gateways except China should be fully operational by Sept. 23. China should begin service a month later.
Phones can be obtained by potential customers who call 1-888-IRIDIUM. The price of the phones is an unexpectedly high $3,795, but is expected to fall over time, Watts said. Monthly fees for users will be waived for the rest of 1998.
Iridium's delays have not stopped it from maintaining a lead over all its competitors. Globalstar's [GSTRF] start date has slipped to second quarter 1999. Asia Cellular Satellite (ACeS) will commence service during the third quarter next year. Other competitors are slated for 2000 and beyond.
"We remain positive on Iridium's long-term prospects," Watts said.
Iridium's Three-part Customer Base:
1. The industrial market, which could hit 400,000 to 1.0 million users by 2002. These users in the mining, oil and gas, electricity, shipping, fishing, and news industries, offer heavy usage estimated at 400 minutes per month.
2. Business travelers who travel regularly to areas not served by cellular, estimated at 3 million to 10 million users by 2002, depending on price.
3. Casual users who occasionally travel outside cellular range. They require lower price phones and service, but could total more than 30 million by 2007.
Source: Merrill Lynch d. This could include free service for early subscribers, he suggested.
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