Tuesday, February 25, 2020

A Current AIM Small Cap Equity Holding: Iridium Communications (IRDM, $31.88): “Out of This World Opportunities”

Iridium Communications (IRDM, $31.88): “Out of This World Opportunities”
By Andrew Hoy, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


IRDM communications has secured a position as a leader in mobile voice and data communication services using a network of orbital satellites. They provide secure and reliable network access to regions not connected via traditional land network. Iridium derives much of its revenue from the provision of data transmission for governments and businesses, and the rest from selling and servicing equipment through a network of partners.

On January 28, 2019 Iridium announced the launch of CloudConnect, their satellite cloud based IoT application solution. The product combines with Amazon Web Services to extend customers’ reach to 80% of previously unreachable territory. Bryan Hartin, executive vice president of sales and marketing at Iridium described the project as “a direct, private connection between our gateway and AWS, making it secure and redundant. This is now a premier satellite cloud-based IoT service."
The company is undergoing a financial transformation. Management has indicated their commitment to de-lever the balance sheet after IridiumNext. The project’s implementation involved taking on a significant amount of debt, much of which they refinanced near the close of FY19. To date, they have reduced their obligation to the credit facility by $199M.

As of September 30, 2019, Iridium had 1,269 million subscribers globally, representing an increase of 16% YoY. The firm is riding out tailwinds from demand for reliable remote communication services, their growing portfolio of products and services, and their broad wholesale distribution network.

Key Points:

The launch of CloudConnect is designed to realize the benefits of management’s investment in the IridiumNext project. Completed in 2019, the project replaced the company’s first-generation satellites with new ones supporting new services and higher data speeds. The project involved nearly $3 billion in expenditures and is expected to be a significant contributor to growth.

To provide stability to their cash flows, Iridium has an agreement with third-party Aireon related to hosting fees of $200 million. The opportunity with respect to Aireon is significant because the Federal Aviation Administration has recently emerged as a likely end-market. Using Iridium’s network of satellites, Aireon provides the capability to track any ADS-B enabled aircraft in real-time. The FAA began field testing Aireon’s ADS-B tracking service this quarter.

The company’s core services segment, representing over 50% of revenues, is thriving. Investor sentiment was supported earlier this year by the company’s announcement of its GMDSS certification. Global Maritime Distress and Safety System provides a safety net for mariners in emergency situations. The process to get certified involved a multi-year review and positions IRDM to continue growing its portfolio. Further, the company renewed a contract with the U.S. government for unlimited voice, data, and access to their secure government gateway.

What has the stock done lately?

Iridium was recommended as an addition to the AIM Small Cap Portfolio on November 27, 2019 at a price of $23.80, and has since risen to a $31.88 valuation representing a 33% return to date. Lately, the stock has been trending up and broke above its 52-week high around $28.00. It is volatile with a Beta of 2.11.

Past year performance:

The company’s stock has returned 29% since the beginning of 2020, nearly doubling since January 2019. It is now trading above its previous valuation levels, reflecting the market’s bullish sentiment.

Source: FactSet 
My Takeaway:

The company’s earnings announcement on February 25, 2020 is likely to reflect the realization of benefits from the renewal of government contracts, investment in IridiumNext, the company’s contract with Aireon, a broad increase in voice, IoT data, data, and hosted payload demand. The company was pitched to the portfolio with the idea that these factors would ultimately drive growth, and they continue to do so.
Source: FactSet