*IBD. Satellite Phone Blast-Off Hitting Some Turbulence
Date: 4/12/99
Author: Reinhardt Krause
It's hard to call the start of the world's first satellite-based phone and paging service anything but awful.
It's even tougher to say whether Iridium World Communications Ltd. will recover.
Backed by the deep pockets of Motorola Inc., Iridium executives insist the company will rebound. Analysts
have doubts.
Lack of demand isn't the problem, Iridium maintains, even though it's signed up far fewer customers than
forecast and sales are growing slower than expected since its service began Nov. 1.
Its manufacturing and marketing partners have to do a better job, company executives say. Meanwhile,
Iridium is revamping its business plan and cutting costs.
Having spent $5 billion on its satellite system, Iridium is heavily in debt. And its bankers have given Iridium
until May 31 to meet growth targets.
Iridium may have to lower the prices of its service and of the special phones needed to get it, analysts say.
Each costs more than conventional cell phone service. The difference is that Iridium guarantees service
everywhere - even in the most remote reaches of the planet.
For global companies and some industries, that reach is important. That's why Iridium Chief Executive
Edward Staiano says doomsayers are wrong.
''Operationally, the network is performing better than expected,'' he told analysts at an industry conference in
New York last week. ''We'll come out of this with a business plan that doesn't require significant new
funding.''
The good news, Staiano says, is that the system is reliable and call quality is high. Iridium's complex billing
system also is working.
The bad news is that few people, perhaps as few as 15,000, are using the network. And the company hoped
for a fast start. The costly satellites may last only five to seven years before Iridium must replace them.
And it already has to start paying back the lenders on its first generation of satellites. It owes about $800
million in secured debt.
Iridium was formed by an 18-member consortium. Motorola owns about 20%. Other major shareholders are
Sprint Corp., Lockheed Martin Corp. and Germany's Veba AG .
Despite that impressive pedigree, confidence is sagging. The value of Iridium's high-yield junk bonds have
plunged. So has its stock price, from more than 70 in May to 20 3/4 at Friday's close. Iridium's chief financial
officer resigned last month.
Its travails also have lowered the share prices for the two other satellite phone services, which plan to begin
service later this year or next. They are ICO Global Communications Ltd. and Globalstar
Telecommunications Ltd. Globalstar is backed by Loral Space and Communications Ltd.
''Iridium's operating expenses are too high (at) $1.4 billion annually,'' said Robert Kaimowitz, an analyst at
ING Baring Furman Selz LLC. ''The revenue capability of the system is far too low. If you look at Iridium's
(high-yield) bonds, they're trading like they're already bankrupt.'' [ING seems to have the best handle on the MSS sector]
Iridium needs about 500,000 subscribers to break even in operating cash flow, analysts say.
Under its bank loan agreements, Iridium had targeted signing up 52,000 customers by March 31. The
company won't give a figure, but it could well have only about 15,000, says Thomas Watts, an analyst at
Merrill Lynch & Co.
Watts estimates that Iridium's loss in 1999 could swell to $11.96 a share from $8.91 last year, when it had
virtually no revenue. It's slated to report first-quarter results on April 26.
Iridium says slow production of phones by Motorola and Japan's Kyocera Corp. has hobbled its efforts.
Sprint, a distribution partner, has been unable to sell the satellite phones at its retail outlets for lack of supply.
That's true, analysts say. More than that, some of Iridium's overseas partners haven't aggressively marketed
the service.
Iridium hopes to land some big orders soon. Watts says companies testing Iridium's system include Shell Oil
Co. , Exxon Corp., Bechtel Group Inc., Fluor Corp. and Monsanto Co.
The U.S. Defense Information Systems Agency this month gave Motorola a three-year, $219 million contract
for Iridium equipment and services. Iridium expects to supply phones with built-in security features later this
year.
In an interview, Staiano said the government may emerge as Iridium's largest customer.
The military has built a link to Iridium's system that can support 120,000 users. He says other government
agencies also are expected to use Iridium's satellite phones.
But Iridium needs to sign up business travelers and others, analysts say. They point to geologists, field
scientists, relief agency workers and civil engineers who operate in remote areas. Iridium says it will step up
marketing to energy, construction and utility companies.
Observers haven't given up. Merrill's Watts estimates that Iridium may snag 240,00 subscribers by year's
end. That's about half of his earlier forecast. Still, he thinks Iridium can sign up 3.4 million subscribers by
2004.
That should be enough subscribers to keep Iridium humming. Yet people in the industry -including Staiano -
wonder if there's enough demand to support Iridium and its two rivals.
''We're all guessing to some degree as to where we think the sweet spot of the market will be,'' Staiano said.
But Iridium's services may still be priced too high, even if they provide broad coverage, analysts say.
''There's no market for global phones costing $5 or $6 per minute of use,'' said ING's Kaimowitz, who
acknowledges he's selling Iridium stock short. That's a bet that the stock price will fall.
He thinks ICO and Globalstar may be able to charge less for air time because their cost structures differ
from Iridium's.
(C) Copyright 1999 Investors Business Daily, Inc.
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E/IBD E/SN1 E/TECH
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