Iridium Stock and the Starlink Threat

Of the 99 disruptive tech special purpose acquisition companies (SPACs) we’ve covered, 65% of them have lost half their value. That dismal performance pales in comparison to space SPACs of which none of the twelve we have covered trade above the offering price of $10 a share and ten have lost at least half their value. Even the risk-hungry managers over at ARK Invest largely avoided risky space SPACs with just one being found in the ARK Space Exploration & Innovation ETF (ARKX) – Rocket Lab (RKLB).

ARK’s space ETF hardly seems compelling when it contains companies like Google, Amazon, Unity Software, and UiPath. However, there are some names of interest such as their second largest holding – Iridium Communications (IRDM) – a firm we covered in a piece titled 5 Billion-Dollar Satellite Operator Stocks. Since then, Iridium has taken steps to provide more detail as to where their revenues are coming from along with some key metrics to track progress.

About Iridium Stock

Iridium’s 2021 Investor Day deck isn’t available. In its place you’ll find a dreadful video – nearly three hours long – chock full of verbose monotone rambling from the executive team which slowly and painfully explains the company’s strategy. We suffered through about half of it and here’s their story in a nutshell.

Iridium’s business model involves building out a large constellation of satellites (lots of expenditures up front) and then reaping the rewards by selling services once everything has been deployed. The first time around it didn’t work out so well. After spending $5 billion putting up a constellation, their debt load became overwhelming, and Iridium declared bankruptcy in 1999. Ten years later, and the company is back after spending $3 billion over a decade upgrading their satellite constellation which they’re now reaping the rewards from.

The below table from Iridium’s 2021 annual report provides key metrics needed to monitor the company’s progress in selling their services and harvesting revenues from the 66 satellites in their constellation. With the hefty capital expenditures behind them, Iridium is focused on maximizing their subscriber base and decreasing the $1.6 billion in debt on their books.

Iridium’s 2022 revenue guidance of 5% to 7% growth translates to a compound annual growth rate (CAGR) of 6.6% over the past five years which isn’t overly exciting. Services make up 80% of total revenues leading to a 75% gross margin. As the cash pours in, Iridium has announced a $300 million share buyback which will help shore up some ratios associated with their debt covenants. The $1.6 billion in long-term debt becomes due in 2026, so it seems likely they’ll restructure a good chunk of it before then.

Iridium’s core value proposition is providing connectivity to devices located across 80% of the world’s surface that doesn’t have cellular service. People want to stay connected when they’re off grid, and devices such as that Garmin watch on your wrist communicate with satellites so they can track your exercise activity anywhere on the planet – even Antarctica. About a third of Iridium’s subscriber base represents personal communication devices, but the highest growth right now appears to be in IoT connectivity.

Iridium’s IoT data subscribers have grown at a 24% CAGR over the last five years, and now represent about 74% of Iridium’s commercial customer base. Their IoT devices have been adopted as standard equipment and as factory options by heavy equipment manufacturers such as Caterpillar Inc., Hitachi, Komatsu, and Doosan to provide telematics solutions for end users. One of their key competitors in this space is ORBCOMM, a company we covered back in 2018 in a piece titled Investing in IIoT and Newspace with ORBCOMM Stock.

ORBCOMM’s principal focus is low-cost data and IoT services, where it directly competes with our IoT offerings.

Credit: Iridium

Since then, ORBCOMM was taken private, so we have no insight into what they’ve been getting up to. We’re more interested in thinking about how Starlink’s 4,408 satellite constellation might represent a threat to Iridium.

The South African Elephant in the Room

Our L-band spectrum is also more resistant to weather interference than the K-band spectrum used by new entrants such as Starlink and OneWeb.

Credit: Iridium

The above sentence in their annual report is the extent to which Iridium addresses the Starlink competitive threat (more on this in a bit) which we can analyze further by looking at the below revenue segments.

Commercial service revenue makes up 63% of Iridium’s total revenues with “Broadband” being the newest revenue segment and the one that seems most vulnerable to Starlink’s broadband offering that’s spreading across the planet. It’s the smallest segment at 7% of total revenues, but it’s also the most lucrative.

Iridium’s Investor Day presentation more directly addressed the Starlink threat which the CEO describes as large pipes of data available at a fixed cost which is reflected in the infrastructure Starlink has built. Contrast that to Iridium which uses small data pipes representing kilobytes of data with billing for “just what you need.” This translates into smaller connectivity hardware and batteries, a configuration that’s ideally suited for IoT. Iridium talks about how Starlink could potentially enter this space, but isn’t likely to. We’d point to a piece we published last year titled SpaceX Takes on the Industrial Internet of Things which suggests that SpaceX may be perfectly capable of offering IoT data services of the type Iridium describes.

Iridium can argue that their primary use cases aren’t anything Starlink plans to threaten, but what exactly are the barriers to entry? Once the SpaceX constellation is fully deployed they’ll be selling solutions across a broad number of industries and use cases. Just days ago, SpaceX announced their Starlink Aviation offering which will enable “all passengers to access streaming-capable internet at the same time.” The company’s product offering now includes services to residential, business, RV, maritime, and aviation customers. It was SpaceX who helped launch Iridium’s satellites into space, and the company’s fearless leader knows no bounds when it comes to using first principles thinking to solve big problems. It’s a threat that can’t be ignored.

Our Take on Iridium

Starlink’s five-year lifespan means they’ll be putting new technology into space at twice the speed of Iridium which has a constellation that’s expected to last ten years. There’s more than enough room for more than one provider of satellite services, but we look to invest in growth companies that thrive, not just survive. To contrast how Starlink might pose a threat to Iridium, the temptation is to start digging into the technical differences between the two firms when the answer may be much simpler.

Iridium’s existing customer relationships won’t just evaporate if Starlink starts offering similar services, and what’s the likelihood of them starting to focus on use cases outside of broadband? Starlink’s aspirations to provide broadband to everyone on the planet is a sufficient goal representing a trillion-dollar opportunity. Iridium’s broadband offering could very well exist alongside Starlink with the opportunity being so big that the two companies won’t step on each other’s toes for decades.

Starlink’s mission to provide everyone in the world with broadband is disruptive, while Iridium seems to be offering solutions that are solving mainstream use cases. Iridium talks about how 76% of their subscriber base are IoT customers, but that segment only generates 18% of revenues.

Iridium’s future plans involve licensing their technology to smartphone providers so that people can at least have messaging capabilities when they’re outside coverage areas. They describe this goal as aspirational but feasible, though they better move quickly. This summer, SpaceX and T-Mobile announced “Coverage Above and Beyond” which should debut next year with Starlink Generation 2 satellites which will be almost an order of magnitude more capable than Starlink 1 in terms of useful data throughput. If everything goes as planned, T-Mobile customers will be able to access Starlink connectivity with their current phones and have coverage anywhere on the planet.

Conclusion

Iridium’s CEO tells us investors aren’t supposed to see or value Iridium as a normal satellite company, but when the 10-year capital expenditures holiday ends, that’s exactly what they’ll be. Putting a new constellation in space to satisfy their existing subscriber base and attract new customers will require another capital injection that will be made available on favorable terms only if they’re able to pay down their previous debt load. Sure, that’s a long way off, but we’re not convinced there is sufficient growth prospects to offset the risks.

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