With the main payload of its next generation constellation already under way, Iridium CEO Matt Desch speaks to SatelliteFinance’s Jason Rainbow about the future landscape of the MSS sector. Desch outlines how Iridium is combating a decline in US…
With the main payload of its next generation constellation already under way, Iridium CEO Matt Desch speaks to SatelliteFinance’s Jason Rainbow about the future landscape of the MSS sector. Desch outlines how Iridium is combating a decline in US governmental spending, and how the group will compete with the upgraded capabilities of its MSS rivals.
Jason Rainbow: What is the environment like for MSS operators today, particularly for Iridium?
Matt Desch: At Iridium, we are still growing and we see a lot of opportunity to continue doing so. I expect you might get a different answer from other MSS operators based on how they are currently doing. We have traditionally done very well and are still growing, so we remain very positive and optimistic about the overall potential of our space. Even the macro-economic environment doesn’t change things that dramatically for us because of the critical service we offer which is well diversified by products, distribution channels and geography. Typically where we operate isn’t heavily consumer-oriented, and while our business has certainly been affected around the edges by factors such as governmental budgets, how many ships are at sea, whether corporate aircraft are being built, etc., our business model is primarily driven by recurring revenue, created by on-going subscriber growth, with lots of multi-year customer activity.
M2M, for example, isn’t an area where you just turn off units in the field if the economy declines, as they are usually providing an important service – not just mission critical, but also economically important to the businesses they are serving.
Because of this, we don’t ebb and flow with global macro-economics in quite the same way as other businesses. Our consistent success is driven by our unique and differentiated service. It’s more a matter of looking at the bigger picture. We believe that if we can offer a truly differentiated capability, we have a motivated channel that makes money, we can be successful and continue to grow. The trends in our business are longer term in some ways rather than a response to the global economy. We can look out a couple of years and see how things are moving, and it doesn’t change that rapidly.
JR: Is this variation in services how Iridium is planning to combat the decline in US governmental and defence spending?
MD: The overall strategy towards our government business has been diversification. When we started out we had one service with them, which was a secure handheld product that generated a lot of growing business for many years. And while activity overseas continues to drive growth, we also focused on expanding our business within the US DoD by teaming with key defence contractors and specialised system integrators. Our strategy was to be in more places with the government and to have them use us for activities other than just point-to-point voice.
That’s when we started working with them on tactical radios, and in fact they supplied a lot of the investment. Now they have deployed a product called Distributed Tactical Communications System (DTCS), or Netted Iridium, which has grown nicely and we believe will continue to do so in the future – particularly when they complete the next generation version.
M2M has started to grow in the government business as well; it lags the commercial sector slightly but is starting to accelerate as everything is becoming connected and being tracked for logistics and efficiency. Right now, the growth isn’t fast enough to offset the decline in voice services, but long-term we believe our government business will be a growth business again. Not at the same rates as three or four years ago, because that was during a rapid surge in deployment, but at least single digit growth.
The US government is only 23% of our total business, and even then the diversification is counteracting this decline.
JR: One area that is experiencing a lot of growth is the UAV sector. How big a market do you see this becoming?
MD: From a satellite perspective, UAVs are very important. They’re probably one of the biggest growth areas in the satellite space because of their insatiable capacity requirements to send HD video on the move anywhere on the planet. It looks like not just the US government but other governments are going to start deploying the big systems all the way down to very small systems. So those are growth drivers for particularly high bandwidth systems.
We’ll see more and more business come in from UAVs, but it will not be one of those things that become a primary focus point for us, like it might be for someone who is more of a FSS broadband player.
For example, you’ll see us as complementary to FSS for command and control of a UAV or even serving a primary role on smaller airframes when Iridium NEXT is available.
JR: How much of a threat do you see from FSS operators increasingly providing services that have traditionally been the hallmark of the MSS sector?
MD: We see zero threat. We were not architected originally to be a broadband supplier, we’ve only moved into this space in the last three to four years. And even then, our strategy is to be a value-based player that takes advantage of our unique attributes and excels at doing those things that we do best.
From our perspective, we didn’t set ourselves up, or have a business plan over the next 20 years, to be dependent upon in any way competing with FSS players. We see ourselves more complementary to FSS.
JR: Do you see a blurring of the lines between FSS and MSS generally?
MD: I have seen this in my experience in cellular/wireless and am now seeing it in satellite companies like Intelsat, who are making investments in the mobility space, just like we will be delivering higher bandwidth through Iridium NEXT.
While some companies might see this as competitive, we see potential to work together to bring the best attributes to a customer. We have complimentary capabilities. Users are not looking for L-band, Ku-band, Ka-band or C-band, they are looking for performance characteristics. Can the products they are buying achieve the results they need?
So you ask am I worried about FSS, and I say no – I am actually quite excited to put our “best of breed” solutions together. I feel like we’re actually going to participate in that market in ways we never have before.
We are going to play a very important and unique strategic role in that space – maybe not trying to play all sides like Inmarsat, but we can bring a unique and valuable capability to market to that will complement traditional Ku and Ka band players. It will be valuable to us, but it’s going to be more like a third of my business rather than all my business like some others are focused on.
I don’t know how the market shares will play out, but it will certainly be an interesting next three to five years as we prepare and launch Iridium NEXT.
JR: Speaking of Iridium NEXT, your next generation constellation, is everything on schedule? Are you looking to sign any early customer contracts and would these be new revenue streams for you?
MD: Iridium NEXT is on track. We’re almost halfway through the major development programme, and still plan to begin launching the constellation in 2015.
The advantage of Iridium NEXT is that, unlike many other systems, it is backward compatible. For our customers, this means that what they are selling today will continue to work over the coming years and throughout the lifetime of the Iridium NEXT constellation.
We are also starting to develop the end-user device technology for Iridium NEXT-ready devices that will provide additional capabilities and support higher speed services when all of the satellites are launched and Iridium NEXT is fully operational.
JR: Before the arrival of Aireon, your Canadian air traffic management joint venture, Iridium had been considering a number of hosted payload deals for a number of years – why did it choose to team up with NAV Canada?
MD: It was a realisation, and one I think the whole hosted payload industry is probably coming to understand, that federal governments in the US and around the world are not prepared to move as fast as the commercial industry.
In the end, we realised that by selling data to the government you can end up making far more than you would have if you just build a hosted payload to the specifications of the government customer and basically do a onetime sale. And the only way that would make sense for Iridium would be if we did something that was extremely important and that couldn’t be done by anybody else.
The concept came about a year and a half ago to relay air traffic control the real time positions of oceanic flights and across the globe. This service is not that expensive to implement, and it is something that can only be provided through Iridium’s unique Low-Earth Orbiting, cross-linked satellites.
From a financial investment, our contract with Harris for 72 payloads is US$114m. Some of the 20 or so other opportunities we explored were quite sophisticated and complicated, but would have cost upwards of US$1bn to put the payloads on our full Iridium NEXT satellite system. Given all of those factors, coupled with the value we see in the mission, space-based ADS-B is the best fit for our hosted payload and offers a very high probability of success.
This is the largest commercial hosted payload in history, and yet is also a very flexible platform. There is still a possibility of additional payload announcements, as we are still looking at a couple of different opportunities, although these will have to be nailed down before the end of this year to be feasible. We’ll be pretty much locked down.
JR: How much space is left on your constellation after Aireon?
MD: Aireon is the primary user of the hosted payload space, using approximately 80% of the hosted payload space on our next generation satellites, in terms of weight and power.
We still have one or two payloads that we’re working on right now that would use the remaining 20%.
JR: You recently unveiled a launch deal with Dnepr – can you outline why this decision was made?
MD: SpaceX’s Falcon 9 is fantastic, it will carry 10 of our satellites into space, but we really wanted to have an alternative that can complement it to carry a smaller number of satellites cost-effectively. We have been working with ISC Kosmotras; they are building a dispenser, and we’ve exercised the right for a first launch, which actually fits our new launch strategy better anyway. We are going to launch two satellites in our first launch instead of 10.
Despite all the testing they go through in the lab, you never know until they get into orbit. So it is better to shake out two in orbit for a couple of months before you launch your first big batch on a Falcon 9.
JR: With the SpaceX launch schedule, are there any requirements for them to have launched a certain number of commercial spacecraft before yourselves?
MD: We selected them knowing they had at least two dozen different launches that were going to be completed before ours. As you can imagine, our insurance plans, as well as our own comfort level, was built upon them building up a track record over time, well in advance of us launching our satellites.
We have a fixed launch schedule with SpaceX and we are highly confident that it will go according to plan.
JR: And how much headroom is there in your Coface facility for potential launch slippages?
MD: We just exercised an amendment to our Coface credit facility that did a number of things, which includes adjusting to the latest realities of our business.
This includes SpaceX’s current launch plans, and obviously there is headroom because the banks want to be sure that we have a reliable plan that won’t need to be changed often. We feel very comfortable with the current plans as described.
JR: On financing, how likely do you think that your US$7 per share warrants will be exercised by their February deadline, and Iridium will not need to raise equity to reach its US$100m target?
MD: It is very possible that all of the warrants will be exercised. In fact, some of the warrants have been exercised already and cash is coming in. But I won’t try to predict how the market will behave.
JR: Are you concerned by the current state of the capital markets?
MD: No. Not for a business like Iridium. We have been given a lot of confidence that if we had to go out there today with a convertible, preferred or even common offering, that a company that is as successful and that is growing the way ours is growing shouldn’t have a problem raising equity if required, at least in a reasonable market environment.
JR: Beyond the Coface deal, do you have any other debt that might need refinancing?
MD: No, the only debt we have is with our Coface facility. As of June 30, our outstanding balance on the facility was approximately US$568m. Our cash position at that time was around US$167m and our net debt was approximately US$360.6m. We believe by the time we are launching Iridium NEXT we’ll be in the 4-5 times debt/EBITDA range, which is pretty normal for a satellite company like Iridium.
Given where we think our business will be, we will deleverage pretty quickly after the launches are complete and we start to pay everything back.
JR: What kind of impact has Greenhill’s managed exit had on Iridium? Has another large institutional shareholder replaced them, or do you just have a larger free float?
MD: I don’t think Greenhill’s sale has affected us much. We are widely held by many different institutions, and they are buying Greenhill’s stake as it is sold. Our goal hasn’t been to find a single investment house to take their position, as our equity holders are well diversified.
But, what maybe people don’t appreciate is, whether or not Greenhill owns our stock I still have the benefit of my chairman of the board being one of the founders of Greenhill, and another director that is the CEO of Greenhill.
I get incredible business support, advice and very valuable expertise, which is all you can hope for. We don’t really need to replace their expertise with another single investment house. We want long-term shareholders and I think our shareholder base has been evolving from the original SPAC investors, who invested in us because they happened to own the previous equity that we merged into, to long-term believers of the Iridium growth story, and that is what is important to us.
JR: Has Iridium considered any horizontal or vertical market acquisitions prior to the launch of NEXT, as Inmarsat has done?
MD: We keep our minds open to possible M&A opportunities, and some have come along. But we are not interested in buying our partners. We’re not interested in vertical integration of our channels like our primary competitors have been.
While the opportunity may present itself for us to do that in the future, my board and I have very little interest at this point in changing the business model that has been very successful.
We think that an independent market channel of value added resellers and service providers, who know they can depend upon us as a wholesale supplier to them in a rational channel environment, has proven to work very well. Almost all of our 275-plus partners feel that they can sell without being disadvantaged by the supplier of their service somehow undercutting the market because of their better cost position. That is the situation that Inmarsat’s distribution base finds themselves in today. And a lot of them are struggling with that now because of the market power and position that Inmarsat has trying to play both sides. To us, that is not an environment we have ever worked in, nor do we have aspirations for in the future.
Our M&A targets are more around technology, and frankly we don’t really need a lot of that right now. Therefore, we’re not actively pursuing others in this space. We used to get a lot of questions about market consolidation, but I don’t think that makes much sense any more either. The only reason for doing that is to eliminate the operational cost of a network. Everyone seems to be building their own network, and so I don’t think that kind of thing makes sense.
Everybody looks like they’re going to compete on the basis of their own network, and I like my chances in that competitive reality.
JR: So you would expect to see the same number of MSS players this time next year?
MD: One could go bankrupt, but that’s about the only way it could change. And maybe somebody could take them out of bankruptcy, but it’s not the same situation as existed 12 years or so ago when that last happened. Today there would be a large amount of capital still required to get a high performing network.
This problem wasn’t there last time because networks were already fully launched and didn’t need any capital.
