Despite a five-week service launch delay and continued handset production problems, Iridium L.L.C.
finished the fourth quarter with results that beat analysts expectations.
The quarter, ended Dec. 31, marked the long-
awaited launch of the company’s 66 low-earth orbit satellite global phone and paging system and for the first time, the
company registered actual operating revenue, totaling $186,000.
Iridium showed a fourth-quarter net loss of $440
million, or $3.12 per share. It raised additional financing needed to fund initial operations by securing a $1.95 billion
new credit facility and also sold 7.5 million shares of class A common stock at $33.50 per share, raking in $250 million
in added revenue.
The company reported 3,000 active and paying users on the satellite voice system. Figures for
global roaming and paging users were not available because devices for those services did not begin shipping until
early January.
“In the fourth quarter of 1998, Iridium made history as we became the first truly global mobile
telephone company,” said Ed Staiano, Iridium vice chairman and chief executive officer, in a conference call with
reporters. “We have moved into 1999 with an aggressive strategy to put a large number of users on our system
and quickly transform Iridium from a technological event to a revenue generator.”
He said the system’s
performance has continued to improve since the launch, to a call establishment rate of 94 percent and a 5-percent
dropped call rate.
Motorola Inc. had experienced some production delays early on, but Staiano said those have been
overcome, reporting the company has shipped more than 35,000 phones and 3,500 pagers and has ramped up
production to 1,000 phones a day and 8,000 pagers a month.
However, “Kyocera Corp. remains a
problem,” he said. “Kyocera, unfortunately, has not yet shipped single-mode or multimode satellite phones
… After considerable progress, they are not yet meeting the performance standards that we require for commercial
release.”
While Kyocera continues to fine tune and test its product, Iridium admitted the delay has affected its
business somewhat.
“System loading is suffering because of this problem, since customers who prefer
Kyocera products are waiting for their availability,” Staiano said, pointing most notably to customers in the
Japanese market, where the company is based.
Kyocera is expected to play a significant role in the Asia-Pacific
region, which Allied Business Intelligence estimates will make up about one-third of Iridium’s total
business.
Iridium expects Kyocera to negotiate the obstacles by the end of the first quarter. If so, Kyocera phones
likely would become commercially available by the end of the second quarter.
Despite the delay and its
consequences, Staiano dismissed speculation that Iridium would seek out an alternate handset manufacturer, citing the
$40 million investment needed to produce them.
“It’s very hard to justify a third manufacturer investing that
much money,” Staiano said. While the Kyocera problems were not expected, “it’s not a
disaster.”
Analysts agree. Salomon Smith Barney Inc. wrote a positive fourth-quarter analysis about Iridium
and essentially ignored the entire problem.
“The handset issue, in our opinion, is likely ephemeral as Motorola
has adequate capacity to produce more than enough phones even if Kyocera fails to get its act together,” the
report read.
ABI Senior Wireless Analyst Larry Swasey said by not seeking an alternate supplier, Iridium is
showing faith that Kyocera will deliver handsets soon.
“If they’re not looking for more manufacturers, then
they feel confident they can keep up with subscriber demand,” he said.
But despite the number of handsets
produced and shipped by Motorola, the demand exceeds Iridium’s ability to supply.
“A major challenge we
face is getting our service providers integrated, on-line and selling Iridium products and services,” Staiano said
during the teleconference. “We are working to speed up this process.”
Placed next to the highly
successful and much-publicized advertising and marketing campaign, this issue remains Iridium’s biggest failure to
date.
“I think that was a very big disappointment,” Swasey said.
Iridium conducted a $180 million
advertising and global branding campaign that has generated 130,000 qualified leads and 18,000 deposits for handsets.
Iridium also brought much attention it was taking on such a huge marketing effort.
Iridium created the demand,
exposed the demand, but ultimately failed to fulfill the demand.
“The lack of phones was very apparent to
those who wanted to sign on,” Swasey said. “After a large marketing campaign, they had nothing to show
for it.”
Staiano admitted the most frequent question asked by potential customers is “When can I get my
phone?”
“It was a huge marketing effort, and a huge effort to have that effort noticed,” Swasey
said. “Yet when you call, you can’t get the phone.”
“That’s a really bad marketing move,” he
continued. “It ended up being a little bit of an egg on their face. The worst thing is to promise a phone and a
service through this huge campaign, and not deliver.”
Worse yet would be to create a demand for a product
and watch potential customers opt for the alternate global phones becoming available, such as L.M. Ericsson’s i888
World Phone because Iridium phones are not immediately forthcoming.
Analysts say Iridium will have to solve
these problems quickly to meet its expected cash flow break-even goal late this year. Salomon estimates Iridium must
sign on about 600,000 subscribers paying $2.10 a minute for 70 minutes a month, plus the $45 monthly access fee, for
this to happen.
A Booz Allen Hamilton study said early adopters, such as industrial and government users, may use
as many as 400 minutes per month each on average.
Salomon forecasts 600,000 voice subscribers by the end of the
year-385,000 who will use the satellite network, and the remainder global roamers and paging users.
