Iridium CEO Matt Desch Gives Behind-the-Scenes Look at Iridium Next Financing, Launch Deals
[Satellite News 03-18-11] Iridium’s transformation over the last few years from a voice service company on the verge of bankruptcy to a diversified, well-funded and high-potential MSS entity has given industry analysts and investors more than a fair share of pleasant surprises.
When the company first announced its next-generation Iridium Next constellation, it was criticized as unrealistic and overambitious. Now that the company has secured a $1.8 billion ECA credit facility from Coface at a 4.6 percent interest rate and reported double-digit subscriber and service revenue increases over the past year, Iridium Next has become the operator’s bridge to long-term success in a plethora of new markets.
At the helm of these efforts is CEO Matt Desch, who gave Satellite News a behind-the-scenes look at Iridium Next’s development as well as a sneak peak into the operator’s future business model.
Satellite News: What were the circumstances that allowed you to secure such a low interest rate on your Coface financing?
Desch: We presented a viable financial situation for investors. We started the process in late 2009 by going public, which paid off our debt. At the time we were looking for financing, we were debt free and had a 10-year long track record of rapid growth. In a reasonable market, we would have been able to get normal financing, but 2009 and 2010 weren’t normal years. I will say that some luck was involved in the fact that global credit agencies were more attuned to support their industries and jobs during a recession and that we were able to take advantage of that enthusiasm and the market trends. It wasn’t luck that allowed us to get financing, but we were lucky with the rates and the terms that we got with the Coface deal. We would have been able to raise cash on our performance over a long period of time, but it was much better for us to have it all done at once at terms we would not have received commercially.
We also had good timing with the finance deal. Once we recognized the opportunity and we were right in the middle of selecting our satellite suppliers, we created a competitive environment by going to our financiers directly. Thales, in particular, did a great job of helping us secure the financing facility and create a competitive environment. It was a lot of work on everyone’s behalf between October 2009 and October 2010 and it really paid off. We’re building Iridium Next.
Satellite News: Do you consider the Coface deal you received for Iridium Next an indication that financial markets are healthy and stable for satellite?
Desch: The financing deals you saw this year were indicative of a healthy environment for satellite, especially in the situations where funding agreements were signed to satellite companies that allowed them to refinance debt even though they technically didn’t need the funding. Refinancing debt leads to lower costs, which also is healthy for the industry, but I don’t think any grand new ideas are coming as a result of financing. Fortunately, we don’t need too much more financing in the future as we have in previous years. I’m happy for anyone who achieves financing in this market, but I think we got a much better deal than our competitors, which are tapping mostly public markets that are not as stable or healthy.
Satellite News: What motivated Iridium to secure its launching partnership with SpaceX?
Desch: That story goes back over three years ago, when SpaceX was at a much earlier stage in its life. We looked at all the potential launch suppliers and recognized that everybody — from our perspective — was pretty expensive compared to what we wanted. SpaceX profiled very well in terms of size, and they were very proactive with their pricing because they were new. I think we were both just in the right place at the right time to negotiate a contract that was very advantageous to both of our companies. It was, after all, one of their first major commercial contracts. They offered us a price that was less than half of what it would have cost us with other alternatives.
I know that people talk about the risk involved with SpaceX. Of course, there’s always a risk in going with a new launcher. We were securing a service that we wouldn’t need for another four years. We had to carefully analyze whether or not they would be ready to launch Iridium Next in our timeframe, but the truth is that they’ve developed a lot faster than we expected. SpaceX is now in a good position, having launched two Falcon-9s and their Dragon [spacecraft], to mature over the next few years and 20 or so launches and become very stable as a supplier. I believe that by the time we’re ready, they will have a proven, outstanding platform.
Satellite News: How important was the timing of the Iridium Next launch during the service’s development phase?
Desch: We knew that early 2015 would be the appropriate time for us to establish a seamless transition from one network to the next. That was the primary rationale. While Iridium Next is much more powerful than our current system, the real value of the service is extending the current system that we have for another 15 years. When Iridium Next is launched, our current network will still be operating well and the new network can take over for it without a beat. The compatibility will be seamless for customers.
I also think early 2015 will be a good time to launch services in general. I’m excited about how hosted payloads will help develop the industry with higher speed services, but for us, that’s just icing on our cake. That’s not really what the Iridium Next business plan was built on. Next was built on continuing the growth that we have on our system and to expand into new markets and generate new recurring service revenues on top of it. I think that wondering what the market will be like in four years is more a task for operators like O3b, who are building from scratch. We’re already established and just transitioning to the next phase on what we’ve already built. Our customers can feel confident that they are buying a service that includes what they are getting now and what they will get when Iridium Next comes online.
Satellite News: How did you augment your business model to generate subscriber growth rates in an increasingly competitive MSS environment over the last year?
Desch: The key for us was diversity. We started out as a one-trick company providing a global voice network. That worked well for us for a few years, but the real growth happened as we expanded our portfolio of services and products and in the last year or two, it’s all been about both high- and low-speed data. Low-speed data, or machine-to-machine (M2M) data, however, is going to see the highest subscriber growth rates next year as it saw this year. We’re currently forecasting 20 percent M2M subscriber growth for 2011, and we’re going to go well beyond that. I think M2M is going to eclipse the market for us in terms of broad subscriber numbers. It already constitutes 25 percent of our total business.
Those low-speed data figures are going to be complimented by future high-speed subscribers as more users come on to the OpenPort system and as we continue to sell more handsets and modems. On top of that, our new Netted Iridium service this year is going to aggressively attack the radio comms market. We’re going to continue to expand into new markets, which is an effort that will culminate with the launch of Iridium Next.
Satellite News: What’s driving your M2M market growth?
Desch: It’s the global market trend moving away from connecting people to connecting assets and devices. It’s the same thing you hear when we talk about how the Internet is moving away from being a Web of people to a Web of things. The current overall satellite portion of that trend is only about 1 percent of connected devices. The remaining 99 percent is all new revenues for satellite. Only 7 percent to 8 percent of the planet has terrestrial coverage and that’s where we come into the picture. That’s a huge opportunity for us, as trends are also showing smaller and more efficient devices and lower costs going into the future. We’re riding the terrestrial wave and complimenting connections to devices.
Satellite News: With that much room in the market and fewer MSS players, where do you see competition heating up over the next year?
Desch: There has been a lot of discussion over LightSquared and that company’s effect on the MSS market. I want to clear this up: LightSquared, in my opinion, is totally unrelated to the MSS market. It’s an interesting concept and we can speculate all day on what the value of spectrum will be, but LightSquared is more a terrestrial matter.
I can only speak for what we’ll do over the next year. This year will be the most active year we’ll ever have on hosted payloads. This is the year where they all come together — where the rubber meets the road and we’ll see which payloads we’ll be taking with us when we launch Iridium Next and determining which services we’ll be providing to whom. This is really the first full-year for us building Iridium Next, which is quite exciting. We can now share what that design will look like with our partners and we’re able to talk more specifics and features of what’s coming in the future.