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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Iridium Communications Inc.    IRDM

IRIDIUM COMMUNICATIONS INC.

(IRDM)
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IRIDIUM COMMUNICATIONS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

10/20/2020 | 07:05am EST
You should read the following discussion along with our Annual Report on Form
10-K for the fiscal year ended December 31, 2019, filed on February 25, 2020
with the Securities and Exchange Commission, or the SEC, as well as our
condensed consolidated financial statements included in this Form 10-Q.

This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Such forward-looking statements include
those that express plans, anticipation, intent, contingencies, goals, targets or
future development or otherwise are not statements of historical fact. Without
limiting the foregoing, the words "believe," "anticipate," "plan," "expect,"
"intend" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are based on our current
expectations and projections about future events, and they are subject to risks
and uncertainties, known and unknown, that could cause actual results and
developments to differ materially from those expressed or implied in such
statements. These risks and uncertainties may be amplified by the COVID-19
pandemic and its potential impact on our business and the global economy. The
important factors described under the caption "Risk Factors" in this report and
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019
filed on February 25, 2020 could cause actual results to differ materially from
those indicated by forward-looking statements made herein. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

Overview of Our Business


We are engaged primarily in providing mobile voice and data communications
services using a constellation of orbiting satellites. We are the only
commercial provider of communications services offering true global coverage,
connecting people, organizations and assets to and from anywhere, in real time.
Our unique L-band satellite network provides reliable communications services to
regions of the world where terrestrial wireless or wireline networks do not
exist or are limited, including remote land areas, open ocean, airways, the
polar regions and regions where the telecommunications infrastructure has been
affected by political conflicts or natural disasters.

We provide voice and data communications services to businesses, the U.S. and
foreign governments, non-governmental organizations and consumers via our
satellite network, which has an architecture of 66 operational satellites with
in-orbit and ground spares and related ground infrastructure. We utilize an
interlinked mesh architecture to route traffic across our satellite
constellation using radio frequency crosslinks between satellites. This unique
architecture minimizes the need for local ground facilities to support the
constellation, which facilitates the global reach of our services and allows us
to offer services in countries and regions where we have no physical presence.

In 2019, we completed the Iridium® NEXT program, which replaced our
first-generation constellation of satellites with upgraded satellites that
support new services and higher data speeds for new products. We deployed a
total of 75 new satellites on eight Falcon 9 rockets launched by SpaceX, with 66
operational satellites, as well as in-orbit and ground spares, maintaining the
same interlinked mesh architecture of our first-generation constellation.

Our new constellation also hosts the Aireon® system, which provides a global air
traffic surveillance service through a series of automatic dependent
surveillance-broadcast, or ADS-B, receivers on the upgraded satellites. We
formed Aireon LLC in 2011, with subsequent investments from the air navigation
service providers, or ANSPs, of Canada, Italy, Denmark, Ireland and the United
Kingdom, to develop and market this service. Aireon has contracted to provide
the service to our co-investors in Aireon and to other ANSPs around the world,
including the U.S. Federal Aviation Authority, or FAA. Aireon has also
contracted to pay us a fee to host the ADS-B receivers on our constellation, as
well as power and data services fees for the delivery of the air traffic
surveillance data over the Iridium network. Aireon has made payments of $54.1
million for a portion of its hosting fees since the inception of the contract.
Aireon also pays us power and data services fees of up to approximately $23.5
million per year in the aggregate for the delivery of the air traffic
surveillance data over the Iridium system. In addition, we have entered into an
agreement with L3Harris Technologies, Inc., or L3Harris, the manufacturer of the
Aireon hosted payload, pursuant to which L3Harris pays us fees to allocate the
remaining hosted payload capacity to its customers and data service fees on
behalf of these customers.

We sell our products and services to commercial end-users through a wholesale
distribution network, encompassing approximately 135 service providers,
approximately 285 value-added resellers, or VARs, and approximately 95
value-added manufacturers, or VAMs, which create and sell technology that uses
the Iridium network either directly to the end user or indirectly through other
service providers, VARs or dealers. These distributors often integrate our
products and services with other complementary hardware and software and have
developed a broad suite of applications using our products and services to
target specific lines of business.
                                       17
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At September 30, 2020, we had approximately 1,429,000 billable subscribers
worldwide, representing an increase of 13% from approximately 1,269,000 billable
subscribers at September 30, 2019. We have a diverse customer base, with end
users in the following lines of business: land mobile, maritime, aviation,
Internet of Things, or IoT, hosted payloads and other data services and the U.S.
government.

We recognize revenue from both the provision of services and the sale of equipment. Over the past several years, service revenue, including revenue from hosting and data services, has represented an increasing proportion of our revenue, and we expect that trend to continue.


Effects of the COVID-19 Pandemic on Our Business
The COVID-19 pandemic and measures taken in response are currently affecting
countries, communities and markets around the world. Like many other businesses,
we started to see a slowdown in the final weeks of March as a result of this
widespread economic shutdown. Our distributors have also experienced business
and operational restrictions, which limit their ability to visit customers,
complete new installations, and close on new business opportunities. This
slowdown continued during the second and third quarters, though we have seen
significant recovery in some markets, most notably IoT. Other markets, including
aviation and maritime, continue to suffer significant effects from reduced
activity during the pandemic. Aviation, in particular, may take years to recover
to pre-pandemic levels. In other industries, such as maritime, the effects are
significant, but vary by region and business model. In April, following an
analysis of the effects of the pandemic on our business, as well as expected
future effects, including lower equipment sales, lower levels of subscriber
growth, and the potential for increased customer use of lower-cost plans, we
substantially reduced our revenue and profitability outlook, and increased our
leverage outlook, for 2020 from the levels that we previously forecast in
February 2020. As we have seen recovery in some markets over the last two
quarters, we subsequently improved our revenue, profitability and leverage
outlook, to a level approaching what we initially forecast in February. The
ultimate effects of the COVID-19 pandemic are difficult to assess or predict
with certainty at this time but may include additional risks. For further
information on the potential effects of the COVID-19 pandemic on our business,
financial condition and results of operations, see "Risk Factors" in Part II,
Item 1A of this Form 10-Q.

                                       18
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Material Trends and Uncertainties


Our industry and customer base have historically grown as a result of:
•demand for remote and reliable mobile communications services;
•a growing number of new products and services and related applications;
•a broad wholesale distribution network with access to diverse and
geographically dispersed niche markets;
•increased demand for communications services by disaster and relief agencies,
and emergency first responders;
•improved data transmission speeds for mobile satellite service offerings;
•regulatory mandates requiring the use of mobile satellite services;
•a general reduction in prices of mobile satellite services and subscriber
equipment; and
•geographic market expansion through the ability to offer our services in
additional countries.
Nonetheless, we face a number of challenges and uncertainties in operating our
business, including:
•the effects of the COVID-19 pandemic on us and on Aireon, including on revenue,
employee health and safety, employee productivity, and the financial health and
effectiveness of our distributors and suppliers;
•our ability to maintain the health, capacity, control and level of service of
our satellites;
•our ability to develop and launch new and innovative products and services;
•changes in general economic, business and industry conditions, including the
effects of currency exchange rates;
•our reliance on a single primary commercial gateway and a primary satellite
network operations center;
•competition from other mobile satellite service providers and, to a lesser
extent, from the expansion of terrestrial-based cellular phone systems and
related pricing pressures;
•interference with our services caused by the repurposing of L-band satellite
spectrum for terrestrial purposes;
•market acceptance of our products;
•regulatory requirements in existing and new geographic markets;
•rapid and significant technological changes in the telecommunications industry;
•our ability to generate sufficient internal cash flows to repay our debt;
•reliance on our wholesale distribution network to market and sell our products,
services and applications effectively;
•reliance on single-source suppliers for the manufacture of most of our
subscriber equipment and for some of the components required in the manufacture
of our end-user subscriber equipment and our ability to purchase parts that are
periodically subject to shortages resulting from surges in demand, natural
disasters or other events, potentially including the COVID-19 pandemic; and
•reliance on a few significant customers, particularly agencies of the U.S.
government, for a substantial portion of our revenue, as a result of which the
loss or decline in business with any of these customers may negatively impact
our revenue and collectability of related accounts receivable.

                                       19
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Comparison of Our Results of Operations for the Three Months Ended September 30,
2020 and 2019
                                                               Three Months Ended September 30,
                                                                   % of Total                             % of Total                                            Change
($ in thousands)                                2020                 Revenue              2019              Revenue                                            Dollars       Percent
Revenue:
Services                                 $       116,914                  77  %       $ 115,853                  80  %       $  1,061                1  %
Subscriber equipment                              25,120                  17  %          21,375                  15  %          3,745               18  %
Engineering and support services                   9,438                   6  %           7,557                   6  %          1,881               25  %
Total revenue                                    151,472                 100  %         144,785                 100  %          6,687                5  %

Operating expenses:
Cost of services (exclusive of
depreciation
and amortization)                                 23,909                  16  %          23,581                  16  %            328                1  %
Cost of subscriber equipment                      15,429                  10  %          12,862                   9  %          2,567               20  %
Research and development                           3,116                   2  %           2,822                   2  %            294               10  %
Selling, general and
administrative                                    20,631                  14  %          22,934                  16  %         (2,303)             (10) %
Depreciation and amortization                     75,654                  50  %          74,575                  52  %          1,079                1  %
Total operating expenses                         138,739                  92  %         136,774                  95  %          1,965                1  %
Operating income                                  12,733                   8  %           8,011                   5  %          4,722               59  %

Other expense:
Interest expense, net                            (22,628)                (15) %         (30,493)                (21) %          7,865              (26) %
Other income, net                                    205                   -  %              26                   -  %            179              688  %
Total other expense, net                         (22,423)                (15) %         (30,467)                (21) %          8,044              (26) %
Loss before income taxes                          (9,690)                 (7) %         (22,456)                (16) %         12,766              (57) %
Income tax benefit                                 5,685                   4  %           4,444                   3  %          1,241               28  %
Net loss                                 $        (4,005)                 (3) %       $ (18,012)                (12) %       $ 14,007              (78) %



                                       20
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Revenue

Commercial Service Revenue

                                                                               Three Months Ended September 30,
                                                               2020                                                                                                  2019                                                        Change
                                                             Billable                                                     Billable                                                  Billable
                                       Revenue           Subscribers (1)           ARPU (2)          Revenue          Subscribers (1)          ARPU (2)          Revenue           Subscribers           ARPU
                                                                                                 (Revenue in millions and subscribers in thousands)
Commercial services:
Voice and data                       $    42.8                  352              $      41$  44.7                  360              $     41$  (1.9)                (8)            $    -
Broadband (3)                              9.1                 11.4              $     270              8.1                 10.6              $    260              1.0                0.8                 10
IoT data                                  25.4                  924              $    9.48             25.3                  767              $  11.36              0.1                157              (1.88)
Hosted payload and other data             14.5                         N/A                             12.0                         N/A                             2.5                      N/A
Total commercial services            $    91.8                1,287                                 $  90.1                       1,138                         $   1.7                149


(1)Billable subscriber numbers shown are at the end of the respective period.
(2)Average monthly revenue per unit, or ARPU, is calculated by dividing revenue
in the respective period by the average of the number of billable subscribers at
the beginning of the period and the number of billable subscribers at the end of
the period and then dividing the result by the number of months in the period.
Billable subscriber and ARPU data is not applicable for hosted payload and other
data service revenue items.
(3)Commercial broadband consists of Iridium OpenPort® and Iridium Certus®
broadband services, which were previously reported in commercial voice and data
revenue. Prior year periods have been conformed to this presentation.

For the three months ended September 30, 2020, total commercial services revenue
increased $1.7 million, or 2%, primarily as a result of the increase in hosted
payload and other data revenue of $2.5 million, or 21%. This increase resulted
from the increased Aireon data service fees related to a contractual step-up and
increased Aireon power fees. The increase in hosted payload and other data
revenue was largely offset by a decrease in voice and data services revenue of
$1.9 million, or 4%, from the prior year period. This decrease resulted from
reduced subscribers and a decrease in usage following mobility restrictions
associated with the COVID-19 pandemic. Commercial broadband revenue increased
$1.0 million, or 12%, from the prior year period principally due to sales of
Iridium Certus broadband services, which were commercially introduced in January
2019. Commercial IoT data revenue remained relatively flat for the three months
ended September 30, 2020, at approximately $25.4 million primarily due to a 20%
increase in commercial IoT data billable subscribers, primarily from continued
strength in consumer personal communications devices. The increase in IoT
related to subscriber growth was offset in part by a decrease in ARPU, driven by
the decrease in usage revenue related to COVID-19, particularly with aviation
customers, and an increase in the proportion of consumer personal communications
device users comprising IoT subscribers, as users of these devices typically
utilize lower ARPU plans.
Government Service Revenue
                                                           Three Months Ended September 30,
                                                    2020                                                       2019                                             Change
                                                           Billable                                 Billable                                Billable
                                       Revenue          Subscribers (1)         Revenue          Subscribers (1)         Revenue           Subscribers
                                                                    

(Revenue in millions and subscribers in thousands) Government services

                  $   25.1                        142       $  25.6                        131       $  (0.5)                11


(1)Billable subscriber numbers shown are at the end of the respective period.


We provide airtime and airtime support to U.S. government and other authorized
customers pursuant to our Enhanced Mobile Satellite Services contract, or the
EMSS Contract. Under the terms of this agreement, which we entered into in
September 2019, authorized customers utilize specified Iridium airtime services
provided through the U.S. government's dedicated gateway. The fee is not based
on subscribers or usage, allowing an unlimited number of users access to these
services. During the three months ended September 30, 2019, we operated under
month-to-month extension contracts while the EMSS Contract was being negotiated.

                                       21
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Subscriber Equipment Revenue
Subscriber equipment revenue increased by $3.7 million, or 18%, for the three
months ended September 30, 2020 compared to the prior year period, primarily due
to an increase in the volume of IoT and L-band transceiver device sales,
partially offset by a decrease in the volume of handset sales.
Engineering and Support Service Revenue
                                                                Three Months Ended September 30,
                                                                     2020                   2019              Change
                                                                                (Revenue in millions)
Commercial engineering and support services                  $             1.1          $     0.8$      0.3
Government engineering and support services                                8.3                6.8                 1.5
Total engineering and support services                       $             

9.4 $ 7.6$ 1.8



Engineering and support service revenue increased $1.8 million, or 25%, for the
three months ended September 30, 2020 compared to the prior year period
primarily as a result of an increase in the volume of contracted work to enable
services for the U.S. government, and an increase in the volume of work for
commercial customers, primarily related to the Aireon hosted payload operations
center.
Operating Expenses
Cost of Services (exclusive of depreciation and amortization)
Cost of services (exclusive of depreciation and amortization) includes the cost
of network engineering and operations staff, including contractors, software
maintenance, product support services and cost of services for government and
commercial engineering and support service revenue.
Cost of services (exclusive of depreciation and amortization) increased by $0.3
million, or 1%, for the three months ended September 30, 2020 from the prior
year period, primarily as a result of higher costs to support the new EMSS
Contract and increased volume of contacted engineering work to enable services
for the U.S. government. These increases were partially offset by a decrease in
in-orbit insurance costs, which were amortized over a one-year period from the
in-service date, as we completed the placement of upgraded satellites in-orbit
in February 2019.
Cost of Subscriber Equipment
Cost of subscriber equipment includes the direct costs of equipment sold, which
consist of manufacturing costs, allocation of overhead, and warranty costs.
Cost of subscriber equipment increased by $2.6 million, or 20%, for the three
months ended September 30, 2020 compared to the prior year period primarily due
to the increase in IoT and L-band transceiver device sales, as described above.
Research and Development
Research and development expenses increased by $0.3 million, or 10%, for the
three months ended September 30, 2020 compared to the prior year period due to
increased spend on new devices for our upgraded network.
Selling, General and Administrative
Selling, general and administrative expenses that are not directly attributable
to the sale of services or products include sales and marketing costs as well as
employee-related expenses (such as salaries, wages, and benefits), legal,
finance, information technology, facilities, billing and customer care expenses.
Selling, general and administrative expenses decreased by $2.3 million, or 10%,
for the three months ended September 30, 2020 compared to the prior year period,
primarily due to decreases in legal and consulting fees and decreased spending
on conferences as a result of COVID-19 travel restrictions.
Depreciation and Amortization
Depreciation and amortization expense remained relatively flat as we completed
the replacement of our first-generation satellites in February 2019. As the
upgraded satellites are the largest proportion of our asset base, we anticipate
depreciation and amortization expense to remain relatively consistent from
quarter to quarter based on our anticipated capital expenditures.
                                       22
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Other Expense
Interest Expense, Net
Interest expense, net decreased $7.9 million for the three months ended
September 30, 2020 compared to the prior year period, primarily related to the
impact of the refinancing of our debt including a decrease in the weighted
average effective interest rate and lower average outstanding borrowings under
our total debt obligations.

Income Tax Benefit
For the three months ended September 30, 2020, our income tax benefit was $5.7
million, compared to income tax benefit of $4.4 million for the prior year
period. The increase in income tax benefit is primarily related to an increased
stock compensation benefit, as well as the reduction in state net operating loss
valuation allowance compared to the prior year, partially offset by a decrease
in loss before income taxes compared to the prior year.
Net Loss
Net loss was $4.0 million for the three months ended September 30, 2020,
compared to a net loss of $18.0 million for the prior year period. The change
primarily resulted from the $7.9 million decrease in interest expense, net and
the $6.7 million increase in total revenues, as well as the $2.3 million
decrease in selling, general and administrative expenses and the $1.2 million
increase in income tax benefit, as described above. These increases were
partially offset by the $4.3 million increase in other operating expenses.

Comparison of Our Results of Operations for the Nine Months Ended September 30,
2020 and 2019
                                                                 Nine Months Ended September 30,
                                                                     % of Total                            % of Total                                              Change
($ in thousands)                                  2020                Revenue              2019             Revenue                                               Dollars       Percent
Revenue:
Services                                   $       346,239                 79  %       $ 333,601                 79  %       $ 12,638                   4  %
Subscriber equipment                                67,198                 16  %          65,803                 16  %          1,395                   2  %
Engineering and support services                    23,495                  5  %          22,166                  5  %          1,329                   6  %
Total revenue                                      436,932                100  %         421,570                100  %         15,362                   4  %

Operating expenses:
Cost of services (exclusive of
depreciation
and amortization)                                   69,021                 16  %          71,709                 17  %         (2,688)                 (4) %
Cost of subscriber equipment                        39,772                  9  %          38,663                  9  %          1,109                   3  %
Research and development                             7,940                  2  %          10,718                  3  %         (2,778)                (26) %
Selling, general and administrative                 62,556                 14  %          67,744                 16  %         (5,188)                 (8) %
Depreciation and amortization                      227,260                 52  %         222,617                 53  %          4,643                   2  %
Total operating expenses                           406,549                 93  %         411,451                 98  %         (4,902)                 (1) %
Operating income                                    30,383                  7  %          10,119                  2  %         20,264                 200  %

Other expense:
Interest expense, net                              (71,578)               (16) %         (85,076)               (20) %         13,498                 (16) %
Loss on extinguishment of debt                     (30,209)                (7) %            (207)                 -  %        (30,002)             14,494  %
Other income (expense), net                            332                  -  %            (926)                 -  %          1,258                (136) %
Total other expense, net                          (101,455)               (23) %         (86,209)               (20) %        (15,246)                 18  %
Loss before income taxes                           (71,072)               (16) %         (76,090)               (18) %          5,018                  (7) %
Income tax benefit                                  22,943                  5  %          21,948                  5  %            995                   5  %
Net loss                                   $       (48,129)               (11) %       $ (54,142)               (13) %       $  6,013                 (11) %



                                       23
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Revenue

Commercial Service Revenue

                                                                                 Nine Months Ended September 30,
                                                                2020                                                                                                    2019                                                        Change
                                                                Billable                                                     Billable                                                  Billable
                                         Revenue            Subscribers (1)           ARPU (2)          Revenue          Subscribers (1)          ARPU (2)          Revenue           Subscribers           ARPU
                                                                                                   (Revenue in millions and subscribers in thousands)
Commercial services:
Voice and data                       $   126.8                     352              $      40$ 129.6                  360              $     40$  (2.8)                (8)            $    -
Broadband (3)                             26.3                    11.4              $     263             22.3                 10.6              $    245              4.0                0.8                 18
IoT data                                  71.8                     924              $    9.25             71.7                  767              $  11.27              0.1                157              (2.02)
Hosted payload and other data             46.2                            N/A                             37.9                         N/A                             8.3                      N/A
Total commercial services            $   271.1                          1,287                          $ 261.5                       1,138                         $   9.6                149


(1)Billable subscriber numbers shown are at the end of the respective period.
(2)Average monthly revenue per unit, or ARPU, is calculated by dividing revenue
in the respective period by the average of the number of billable subscribers at
the beginning of the period and the number of billable subscribers at the end of
the period and then dividing the result by the number of months in the period.
Billable subscriber and ARPU data is not applicable for hosted payload and other
data service revenue items.
(3)Commercial broadband consists of Iridium OpenPort and Iridium Certus
broadband services, which were previously reported in commercial voice and data
revenue. Prior year periods have been conformed to this presentation.

For the nine months ended September 30, 2020, total commercial services revenue
increased from the prior year period by $9.6 million, or 4%, primarily due to
increased hosted payload and other data services revenue and increased
commercial broadband revenue. Hosted payload and other data service revenue
increased $8.3 million, or 22%, primarily due to increased Aireon data service
fees related to a contractual step-up and increased Aireon power fees.
Commercial broadband revenue increased $4.0 million, or 18%, from the prior year
period, principally due to sales of Iridium Certus broadband services, which
were commercially introduced in January 2019. The increases in hosted payload
and other data service revenue and commercial broadband revenue were partially
offset by a $2.8 million, or 2%, decline in commercial voice and data revenue
from the prior year period resulting from a decrease in subscribers and
decreased usage following mobility restrictions associated with the COVID-19
pandemic. Commercial IoT data revenue remained relatively flat for the nine
months ended September 30, 2020, at $71.8 million. This primarily reflects a 20%
increase in commercial IoT data billable subscribers, primarily from continued
strength in consumer personal communications devices, offset in part by a
decrease in ARPU, driven by the decrease in usage revenue related to COVID-19,
particularly with aviation customers, and an increase in the proportion of
consumer personal communications device users comprising IoT subscribers, as
users of these devices typically utilize lower ARPU plans.

Government Service Revenue
                                                            Nine Months Ended September 30,
                                                     2020                                                       2019                                              Change
                                                            Billable                                 Billable                                 Billable
                                        Revenue          Subscribers (1)         Revenue          Subscribers (1)          Revenue           Subscribers
                                                                      

(Revenue in millions and subscribers in thousands) Government services

                   $   75.1                        142       $  72.1                        131       $    3.0                 11


(1)Billable subscriber numbers shown are at the end of the respective period.


We provide airtime and airtime support to U.S. government and other authorized
customers pursuant to our Enhanced Mobile Satellite Services contract, or the
EMSS Contract. Under the terms of this agreement, authorized customers utilize
specified Iridium airtime services provided through the U.S. government's
dedicated gateway. The fee is not based on subscribers or usage, allowing an
unlimited number of users access to these services. For the nine months ended
September 30, 2020, government service revenue increased $3.0 million from the
prior year period as a result of the higher pricing in the new EMSS Contract.

                                       24
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Subscriber Equipment Revenue
Subscriber equipment revenue increased by $1.4 million, or 2%, for the nine
months ended September 30, 2020 compared to the prior year period, primarily due
to an increase in the volume of L-band transceivers and IoT device sales,
partially offset by a decrease in the volume of handset sales.
Engineering and Support Service Revenue
                                                                Nine Months Ended September 30,
                                                                    2020                   2019              Change
                                                                               (Revenue in millions)
Commercial engineering and support services                  $            3.3          $     1.9$      1.4
Government engineering and support services                              20.2               20.3                (0.1)
Total engineering and support services                       $           

23.5 $ 22.2$ 1.3



Engineering and support service revenue increased $1.3 million, or 6%, for the
nine months ended September 30, 2020 compared to the prior year period primarily
as a result of an increase in the volume of work for commercial customers,
primarily related to the Aireon hosted payload operations center.
Operating Expenses
Cost of Services (exclusive of depreciation and amortization)
Cost of services (exclusive of depreciation and amortization) decreased by $2.7
million, or 4%, for the nine months ended September 30, 2020 from the prior year
period, primarily as a result of a decrease in in-orbit insurance costs, which
were amortized over a one-year period from the in-service date, as we completed
the placement of upgraded satellites in-orbit in February 2019. This decrease
was offset in part by higher costs to support the new EMSS Contract and higher
satellite operations support associated with higher levels of activity directed
towards operating the completed system.
Cost of Subscriber Equipment
Cost of subscriber equipment increased by $1.1 million, or 3%, for the nine
months ended September 30, 2020 compared to the prior year period primarily due
to the increase in the volume of L-band transceivers and IoT device sales, as
described above.
Research and Development
Research and development expenses decreased by $2.8 million, or 26%, for the
nine months ended September 30, 2020 compared to the prior year period due to
decreased spend on new devices for our upgraded network.
Selling, General and Administrative
Selling, general and administrative expenses decreased by $5.2 million, or 8%,
for the nine months ended September 30, 2020 compared to the prior year period,
primarily due to a decrease in management incentive compensation and decreased
spend on travel and marketing related events as a result of COVID-19. We also
experienced a decrease in stock appreciation rights expense resulting from
changes in our stock valuation between the respective reporting periods. These
decreases were offset by an increase in wages associated with an increase in
headcount in our general and administrative functions.
Depreciation and Amortization
Depreciation and amortization expense increased by $4.6 million, or 2%, for the
nine months ended September 30, 2020 compared to the prior year period,
primarily due to the increased number of upgraded satellites in service during
the current period as we completed the replacement of our first-generation
satellites in February 2019. As the upgraded satellites are the largest
proportion of our asset base, we anticipate depreciation and amortization to
remain relatively consistent from period to period for the next several years.
Other Expense
Interest Expense, Net
Interest expense, net decreased $13.5 million for the nine months ended
September 30, 2020 compared to the prior year period, primarily related to the
impact of the refinancing of our debt including a decrease in the weighted
average effective interest rate and lower average outstanding borrowings under
our total debt obligations.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $30.2 million for the nine months ended
September 30, 2020, compared to approximately $0.2 million for the prior year
period. During February 2020, we closed on an additional $200.0 million under
our Term Loan and used these proceeds, together with cash on hand, to prepay all
of the indebtedness outstanding under the Notes, including premiums for early
prepayment. In conjunction with the prepayment of the Notes, we wrote off the
remaining unamortized debt
                                       25
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issuance costs, resulting in the $30.2 million loss on extinguishment of debt.
In the prior year period, we used hosting fees received from Aireon to
extinguish debt.
Income Tax Benefit
For the nine months ended September 30, 2020, our income tax benefit was $22.9
million, compared to income tax benefit of $21.9 million for the prior year
period. The increase in income tax benefit is related to the reduction in state
net operating loss valuation allowance compared to the prior year, as well as
prior year non-recurring adjustments to our deferred tax assets and liabilities
related to state law changes, partially offset by a reduced stock compensation
benefit compared to the prior year.
Net Loss
Net loss was $48.1 million for the nine months ended September 30, 2020,
compared to net loss of $54.1 million for the prior year period. The change
primarily resulted from the $15.4 million increase in total revenues, the $4.9
million decrease in total operating expenses and the $13.5 million decrease in
interest expense, net, partially offset by the $30.0 million increase in loss on
extinguishment of debt, as described above.

Liquidity and Capital Resources


In November 2019, we borrowed $1,450.0 million under our Term Loan, with an
accompanying $100.0 million revolving loan, or the Revolving Facility. We used
the proceeds of the Term Loan, cash in our debt service reserve account and cash
on hand to repay in full all of the indebtedness outstanding under our previous
loan facility with Bpifrance Assurance Export S.A.S., including premiums for
early prepayment. In February 2020, we borrowed an additional $200.0 million
under our Term Loan and used the proceeds and cash on hand to repay in full and
retire all of the indebtedness outstanding under our Notes, including premiums
for early repayment.

As of September 30, 2020, we reported an aggregate balance of $1,641.8 million
in borrowings under the Term Loan, before $24.9 million of net deferred
financing costs, for a net principal balance of $1,616.9 million outstanding in
our condensed consolidated balance sheet. We have not drawn on our Revolving
Facility.

Our Term Loan contains no financial maintenance covenants. With respect to the
Revolving Facility, we are required to maintain a consolidated first lien net
leverage ratio of no greater than 6.25 to 1 if more than 35% of the Revolving
Facility has been drawn. The Credit Agreement contains other customary
representations and warranties, affirmative and negative covenants, and events
of default.

As of September 30, 2020, our total cash and cash equivalents balance was $182.7
million, and we had $100.0 million of borrowing availability under our Revolving
Facility. In addition to the Revolving Facility, our principal sources of
liquidity are cash, cash equivalents and internally generated cash flows. Our
principal liquidity requirements over the next twelve months are principal and
interest on the Term Loan.

The Credit Agreement contains a mandatory prepayment mechanism with respect to a
portion of our excess cash flow (as defined in the Credit Agreement). It
provides for specified exceptions, baskets measured as a percentage of trailing
twelve months of earnings before interest, taxes, depreciation and amortization,
and unlimited exceptions in the case of incurring indebtedness and liens and
making investments, dividend payments, and payments of subordinated
indebtedness, as well as a phase-out of the mandatory excess cash flow
prepayments, based on achievement and maintenance of specified leverage ratios.
The Credit Agreement permits repayment, prepayment, and repricing transactions.

We believe our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.

                                       26
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Cash Flows
The following table summarizes our cash flows:
                                                                Nine Months Ended September 30,
                                                                   2020                   2019               Change
                                                                                  (in thousands)
Cash provided by operating activities                       $        179,137$  142,453$  36,684
Cash used in investing activities                           $        (29,267)$ (112,756)$  83,489
Cash used in financing activities                           $       

(188,480) $ (128,683)$ (59,797)

Cash Flows Provided by Operating Activities


Net cash provided by operating activities for the nine months ended
September 30, 2020 increased by $36.7 million from the prior year period. Net
loss, as adjusted for non-cash activities, improved by $24.0 million over the
prior year, primarily due to the non-cash $30.0 million increase in the loss on
extinguishment of debt and increased revenues. Net cash from operating
activities also increased related to working capital changes of approximately
$12.7 million. This increase was primarily the result of timing of accounts
receivable collections, as well as lower purchases of inventory in 2020,
compared to the prior year. In 2019, there was an increase in inventory
primarily associated with last-time purchases of manufacturers' discontinued
parts that did not recur in 2020. These improvements in cash were offset in part
by a decrease in interest payable compared to the prior year. In November 2019
and February 2020, we replaced our Credit Facility and Notes, respectively, with
the Term Loan, resulting in monthly interest payments and an increase in cash
used compared to previous semi-annual interest payments. As a result, there is
minimal interest payable in the 2020 working capital balance for the new Term
Loan.

Cash Flows Used in Investing Activities


Net cash used in investing activities for the nine months ended September 30,
2020 decreased by $83.5 million compared to the prior year period primarily due
to a decrease in capital expenditures as we completed payments for the
construction of our upgraded constellation in 2019. We estimate our capital
expenditures will average approximately $40.0 million per year until 2029.
Cash Flows Used in Financing Activities
Net cash used in financing activities for the nine months ended September 30,
2020 increased by $59.8 million compared to the prior year period primarily due
to utilizing our cash to pay down additional debt in the current year. This
resulted in net principal payments and related costs of $189.7 million for 2020,
compared to a $126.0 million principal payment on the Credit Facility in 2019.
See   Note 5   to our condensed consolidated financial statements included in
this report for further discussion of our indebtedness.

Off-Balance Sheet Arrangements


We do not currently have, nor have we had in the last three years, any
relationships with unconsolidated entities or financial partnerships, such as
entities referred to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.

Seasonality


Our results of operations have been subject to seasonal usage changes for
commercial customers, and our results will be affected by similar seasonality
going forward. March through October are typically the peak months for
commercial voice services revenue and related subscriber equipment sales. U.S.
government revenue and commercial IoT revenue have been less subject to seasonal
usage changes.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
is based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP. The preparation of these financial statements
requires the use of estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to revenue recognition, useful lives of property and
equipment, long-lived assets and other intangible assets, deferred financing
costs, income taxes, stock-based compensation, and other estimates. We base our
estimates on historical experience and on various other assumptions that we
believe to be
                                       27
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reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. There have been no changes
to our critical accounting policies from those described in our Annual Report on
Form 10-K for the year ended December 31, 2019, as filed with the SEC on
February 25, 2020.
Recent Accounting Pronouncements
Refer to   Note 2   to our condensed consolidated financial statements for a
full description of recent accounting pronouncements and recently adopted
pronouncements.
                                       28

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